Debt Collection and Credit Rating Firms Face Broad New Scrutiny

The new Consumer Financial Protection Bureau (CFPB) is beginning to aggressively set its agenda. After long-delayed implementation and attempts to block the seating of a Director of the new agency, this watchdog’s newest focus will be on debt collection and credit reporting companies. Because these industries’ have a reputation for being abusive and unscrupulous, the CFPB recently announced that it will begin examination into debt collectors who profit more than $10 million a year and credit agencies that profit more than $7 million a year. Thus, the CFPB will set its sights on 175 debt collectors, who make up two-thirds of the debt collection market, and thirty companies in the consumer credit reporting spectrum.

According to the New York Times: “Debt collectors and credit reporting companies are bracing for intense scrutiny after the government’s consumer finance watchdog unveiled a broad plan to regulate financial firms that have largely evaded federal oversight.”

For the debt collection and credit reporting industries, the CFPB’s oversight will initiate a new era for both groups. According to Travis Plunkett, the legislative director for the Consumer Federation of America, these industries have been able to skirt federal regulations because the regulators lacked enforcement power, and the regulators only “reacted” to abusive industry practices. Now, the CFPB has the authority to be proactive. Says Plunkett: “You’re looking at problems on the front end rather than going in after the fact. You can actually prevent problems.”

As the CFPB continues to set its agenda, it appears that check cashing services will be the next industry that it seeks to regulate. As many believe that the 2008 mortgage meltdown exposed numerous financial companies that abused consumers “[t]his oversight [will] help restore confidence that the federal government is standing beside the American consumer,” said Mr. Richard Cordray, the new director of the CFPB. “Debt collectors and credit reporting agencies have gone unsupervised by the federal government for too long,” says Cordray. “It is time to provide the kind of oversight of these markets that will help ensure that federal laws protecting consumers in these financial markets are being followed.”

Three Years After Lehman: Assessing the Regulatory Reforms on the Next Financial Crisis

Today, Friday, February 24, 2012, the University of Utah S.J. Quinney College of Law is hosting a symposium aimed at assessing the current state of financial regulation and financial crises three years after the the collapse and damaging bankruptcy of Lehman Brothers. "Three Years After Lehman: Assessing the Regulatory Reforms on the Next Financial Crisis" features Anton Valukas as a keynote speaker (authored the Valukas report assessing the reasons behind the collapse of Lehman) and includes two panels that will focus on causes of the crisis and whether the Dodd-Frank reform act will protect against future crises. The two panels are entitled: (1) On the Ground: Reliving the Lehman Failure and its Aftermath; and (2) Assessing the Legislative and Regulatory Answers to Lehman.

The webcast can be viewed live here. Also the stream will be available for viewing following the conference.

The program will take place as follows at the Sutherland Moot Court room of the University of Utah College of Law:

CONFERENCE SCHEDULE, February 24, 2012

Three years after Lehman Bros. filed the largest Chapter 11 bankruptcy in U.S. history, world financial markets are still unsettled, unemployment in the U.S. remains stubbornly high, and Europe may be on the brink of financial disaster. This symposium considers the role Lehman Brothers’ failure played in the current economic downturn and whether reforms enacted in the wake of the failure are adequate to protect economic markets going forward.

9:30-10:30

Keynote Address – Anton Valukas, Lehman Brothers Bankruptcy Examiner, Chairman, law firm of Jenner & Block

10:30-12:30

On the Ground: Reliving the Lehman Failure and its Aftermath

Moderator: Professor Christian Johnson, S.J. Quinney College of Law at the University of Utah

Professor Ronald H. Filler, Director, Center on Financial Services Law, New York Law School, Managing Director in the Capital Markets Prime Services Division at Lehman Brothers

William F. Kroener, III, Sullivan & Cromwell, former FDIC General Counsel

Robert McLaughlin, partner, Fried Frank

George R. Sutton, partner, Jones Waldo, former Utah Commissioner of Financial Institutions

12:30-1:30

Lunch

1:30-3:30

Assessing the Legislative and Regulatory Answers to Lehman

Moderator and afternoon keynote speaker: Professor Jerry W. Markham, Florida International University School of Law, former secretary and counsel, Chicago Board Options Exchange, Inc.; chief counsel, Division of Enforcement, CFTC

Professor andré douglas pond cummings, West Virginia University School of Law

David Marshall, Senior Vice President, Associate Director of Research and Director of Financial Markets, Federal Reserve Bank of Chicago

Professor Steven Ramirez, Loyola University School of Law, Director Corporate Law Center

More Cowbell . . .

Several stories of particular interest to the Corporate Justice Blog have been featured in the financial news in recent days. Articles worth thinking about include:

(1) A Washington Post story discussing a recent Kaiser Family Foundation survey that found that women of color have been hit hardest by the Great Recession, stating "The Great Recession carried special pain for black women . . . .":

For Some Black Women, Economy and Willingness to Aid Family Strains Finances

(2) A Wall Street Journal article quoting Federal Reserve Chair Ben Bernanke as saying that new U.S. government policies need to be adopted to assist in the housing market recovery. Bernanke stated "We need to continue to develop and implement policies that will help the housing sector get back on its feet.":

Bernanke: U.S. Needs Policies to Help Housing Recovery

(3) Much controversy surrounds the proposed implementation of the Dodd-Frank Act's "Volcker Rule" (named after former Fed Chair Paul Volcker, pictured) which is slated to take affect in July 2012. Large Wall Street and international firms are lobbying fiercely for further emasculation of the rule which ostensibly prohibits investment and commercial banks from proprietary trading:

Boos, and Backers, For 'Volcker Rule'
"Foreign governments and financial-industry giants lined up Monday to throw one last roundhouse punch at a proposed rule that aims to limit risk-taking by U.S. banks. Dozens of international banks, foreign officials, insurance companies, law firms and money managers petitioned U.S. regulators ahead of a midnight-Monday deadline to delay or water down the pending restrictions on banks' trading activities."

Goldman: Seeks Volcker Rule Change
"Goldman argued the rule underestimates the complexity of the financial markets, diminishes the role of banks in making money flow around the world to companies and countries, and could wind up causing banks to lend less and charge more for their services. The company asked that regulators revisit its basic assumptions and definitions of proprietary trading, market making and investing."

The Volcker Diversion
"Could even Paul Volcker draft a Volcker Rule? Team Obama and Democrats in Congress couldn't figure out how to turn his sensible idea—prohibiting banks from gambling with taxpayer money—into law. Now Mr. Volcker seems to be acknowledging that federal regulators can't draft a Volcker Rule either, at least not without help from the same bankers who will be subject to it."

Angel Investors Rise

With many banks still hesitant to loan capital choosing instead to hoard it, and with venture capital firms targeting less risky companies that are in the later stages of growth, start-up businesses have had to look to new funding sources to launch. The trending wave: “Angel Investors.” These investors are wealthy investors who provide the capital to start-up firms with the potential for immediate growth.

A recent study by the Organization of Economic Cooperation and Development found that “[w]ith banks reining in all but the safest loans since the recession, and venture capital firms now targeting less risky late-stage business startups, angel investors are nearly alone in backing young, fast-growth companies.” Angel investors look at a “wider range” of companies to finance, and can be more creative in what they do, including not only giving money, but also advising the start-up business owners. In wake of the mortgage crisis and the need for a recovery, the OECD recommends providing tax breaks for angel investors. While banks might rally to revive their start-up funding in order to receive new tax breaks, the banks will likely not provide the same type of “service”—personalized attention and networking—that angel investors provide.

“Of the $8.9 billion in total investments by angels in the first half of 2011, 39% went into seed and start-up ventures, up from 26% of $8.5 billion in total investments over the same period in 2010 . . . . Many fast-growth, entrepreneurial ventures that attract angels are the same start-ups that create jobs. Led by start-ups, small firms have generated 65% of net new jobs over the past 17 years, according to the Small Business Administration.”

Whitney Houston and the Business of Music

Like so many others, I have been riveted by the news stories about Whitney Houston's death. I watched in disbelief as music industry executive Clive Davis went ahead with a huge party just a few short hours after her death. I've learned from this torrent of recent coverage about Houston's life, that Davis was her only daughter's godfather. Houston thought of Davis as a close friend, a mentor. Several executives are already planning to meet to figure out how to market her music and capitalize on her death.

Houston's death and the party that Davis held should stand as reminders to artists to be careful with the music executives who control so much of their lives. These executives are not family. It's just business.

Let's Make A "Deal"

Foreclosure “relief” has been announced as coming for millions of American homeowners as state attorneys general, federal officials, and bankers finally agreed to the details of a long-awaited mortgage crisis settlement worth $26 billion dollars a few days ago. The agreement purports to help pay down the principal on homes and provide relief—albeit fairly small—for families who were victims of improper foreclosure practices. Despite these measures, many argue that the settlement lets banks off too easily. Other critics argue that the settlement is nothing more than extortion as banks shareholders will end up footing the bill for little more than “sloppy” paperwork. Senator Sherrod Brown claims the measure will pass the cost to “middle-class Americans” and is too small; attorneys general Eric Schneiderman of New York and Martha Coakley of Massachusetts fought for the ability to hold banks accountable for other and future claims; Representative Brad Miller thinks that the government still needs to investigate the ugly predatory practices engaged in by many banks including Countrywide and Citigroup.

As it stands, the deal could affect 1 million homeowners by providing them up to $20,000 in debt reduction on their homes. On one hand, the multi-billion relief looks favorable for some homeowners, though most would likely argue that they are underwater on their homes significantly more than $20k. On the other hand, the settlement “pales in comparison with the fallout from the housing bust.” The banks are seeking to settle claims that they engaged in abusive foreclosure practices, including robo-signing foreclosure documents or fraudulent attempts to foreclose without the required deeds or documents. The settlement has left both Wall Street apologists and consumer advocates unhappy.

Obama's New Mortgage Fraud Unit

President Barack Obama announced, during his recent State of the Union Address, that his administration plans to aggressively pursue crimes that led the United States into the crippling housing crisis in 2008 by appointing a new mortgage fraud task force. President Obama stated, “This new unit will hold accountable those who broke the law, speed assistance to homeowners and help turn the page on an era of recklessness that hurt so many Americans.” The Residential Mortgage-Backed Securities Working Group will be overseen by the SEC and the Justice Department, whose track record in investigating past unscrupulous lending practices has not been very successful. Several criminal investigations followed the mortgage crisis, but most did not go anywhere because, as Obama says, the conduct may have been reckless, but was not illegal. Nonetheless, this latest task force provides evidence that the administration wants some accountability—and results.

This new accountability augers toward more than just the 25 cases the SEC has filed since 2009. And it means more than just window-dressing. While typical punishment for criminal fraud includes barring CEOs from director positions (for a limited amount of time) or monetary penalties, most reckless executives are still keeping the compensation that they received during the run-up to the crisis, and the penalties are typically being paid by the companies—the shareholders, and not the individual reckless executive.

A roadmap has been provided for this new task force from private litigants. Several have been successful in revealing unscrupulous practices, including in depositions of a Bear Stearns’ executive who had knowledge of the toxic risks or from another executive who said that Bear Stearns did not do its due diligence in evaluating its vendors. With the recent guilty plea of two Credit Suisse bond traders to fraudulent manipulation of bond valuations, perhaps the new Residential Mortgage-Backed Securities Working Group will begin an era of corporate executive accountability for the roles they played in crashing global markets.

Occupy Wall Street Is Alive and Well

Last semester, as the drama of Occupy Wall Street unfolded, I asked my students in my Business Organizations class (about 70 students are in the class) if they were following the movement. Only a few said they were. Some of them had not heard of OWS even though the New York occupation was about a month old at the time I asked. And when I asked if any of them had gone to the park where the Occupiers were camped out, only two students raised their hands. One of the students was Christopher Dekki. After that class, Chris and I had several interesting discussions about the OWS movement. Because I enjoyed hearing his insights, I am posting Chris’ observations about the movement in this post. Chris provides an update on the current status of OWS, and he brings to the discussion his perspective as a young man concerned about our nation’s future. What follows are Chris’ observations.

"Stop Mourning and Cancel the Funeral: Occupy Wall Street Is Alive and Well

By Christopher Dekki

When young people speak, the elite tends to look away. When young people shout, the elite covers it ears hoping the racket eventually stops. When young people take to the streets, the elite comes up with slanderous labels to delegitimize the struggle upon which the youth have embarked. All of this happened as Occupy Wall Street evolved from a mere urban pest buzzing around the ears of the leaders of the corporate-political industrial complex, to a veritable threat: a threat to an undeniably unjust status quo. From the very inception of the movement, those in the government and the corporate media have been utterly flustered by the commotion surrounding OWS. The Washington elite could not seem to muster enough negativity to describe the activists who have taken up the mantle of protest from earlier generations of progressives. In recent months, foolish pundits and conservative politicos derisively declared the OWS movement to be dead after several flummoxed mayors used abhorrent force to push protestors out of the public eye. Although these mayors managed to clear a few tents and take the heat off their embattled city streets, they have not been able to vanquish OWS. The ideas heralded into the political discourse by OWS have managed to infiltrate almost every level of the political realm of the United States. It was the cries of young OWS activists that awakened the long dormant beast that is populist political fervor. So contrary to what so many pundits believe to be absolute truth, OWS is alive, well, and unquestionably pervasive.

A good way to measure the success of OWS is to compare it to its parallel grassroots movement on the right, the Tea Party. The Tea Party was born in what appears to have been a racially charged response to a black man defiantly overcoming all social obstacles to win control of the White House. Although many in the Tea Party claim to be crusading against the excesses of the federal government, there is simply no denying the racial underpinnings of the entire movement. It is doubtful that if Joe Biden were the current president, the Tea Party would be as electrified as it has been over the past two years. Now, compare the establishment of that right wing movement to the birth of OWS. OWS gained strength at a time when the left was technically in control of some aspects of the government. OWS rose up against all sides of the very limited American political spectrum and made a bold and truly authentic statement that certain things simply need to change. So while the Tea Party appears to be a reaction to a so-called “uppity” black man rising to the highest political office in the United States, OWS sprang forth to combat a real threat to our republican system of government: the power and influence of money in politics.

Besides the issues that gave birth to the Tea Party and OWS, the legitimacy of both movements can be measured by their degrees of political independence. While OWS remains free from the control of the Washington establishment, the Tea Party was co-opted by the GOP long ago. This has made the Tea Party vulnerable to the vices that currently poison American politics. OWS was never transformed into a vehicle of the Democratic Party. OWS does not endorse politicians nor does it seek to take sides in partisan struggles. In addition, many within the Democratic Party have been afraid to directly support OWS. Of course, nobody in Washington wants to be branded a “liberal” since that apparently translates into political suicide. So as the Tea Party, through its elected officials in Congress, causes chaos and embarrassment for the country, OWS remains firmly autonomous and staunchly true to its principles.

OWS may have many detractors, but it can take pride in the fact that it has never been a source of political obstruction. It has not helped cause the US credit downgrade. It never helped spur embarrassingly cruel politicians like Allen West into elected office. It has never called for an apocalyptic war on Iran. It stands up to American jingoism and modern economic imperialism. It recognizes the flaws of American capitalism and realizes that corrupt politicians on both sides of the aisle continue to act as surrogates for omnipotent corporate interests. OWS has stepped up to bat and has turned political rhetoric on its head even as the effects of Citizens United take a devastating toll on society. As a result, the likes of Rush Limbaugh and Karl Rove are free to believe whatever they like. This is not the first time they have turned their backs on reality in order to further their destructive neoconservative agendas. Occupy Wall Street is a viable force in American society it is now the turn of the people to ensure that the American government ceases to be a puppet of the 1% and begins to serve the interests of the 99%."

Guilty! Bond Traders Plea

Yesterday, two former Credit Suisse bond traders pleaded guilty to criminal charges of conspiracy in connection with the mortgage bond market that spiraled out of control in 2007-08, precipitating the mortgage crisis of 2008. As discussed on the Corporate Justice Blog Wednesday, federal prosecutors have been preparing charges against these traders for several years. Former Credit Suisse traders David Higgs (pictured, courtesy of Bloomberg) and Salmaan Siddiqui pleaded guilty to conspiracy to falsify books and records and to commit wire fraud charges while Credit Suisse supervisor Kareem Serageldin remains charged and resides currently in the U.K.

According to the Wall Street Journal: "Federal prosecutors unveiled criminal charges against three former Credit Suisse Group AG employees, providing a window into the way traders allegedly invented inflated values for mortgage bonds during the financial crisis. Two of the three men pleaded guilty to criminal charges of conspiracy, admitting they attempted to conceal the scheme from managers in a bid to boost their bonuses.

The guilty pleas mark the first successful criminal case against Wall Street in relation to the financial meltdown. The case is a 'tale of greed run amok piggybacking on one of the worst economic dislocations our nation has ever experienced,' said Manhattan U.S. Attorney Preet Bharara. 'While the residential housing market was in free fall, and shock waves were reverberating throughout the economy, these defendants decided they were above the rules.'"

With these guilty pleas, the government has for the first time held parties accountable for some of the recklessness and fraud that permeated Wall Street during the run-up to the financial market crisis.

Mortgage Bond Traders to be Charged

Former Credit Suisse mortgage bond traders will reportedly be criminally charged in coming days. The criminal charges will purportedly allege that these Wall Street traders misstated the value of mortgage bonds, purposely misleading Credit Suisse investors, all in an effort to boost their own bonuses in the run-up to the mortgage crisis.

According to the Wall Street Journal: "Federal prosecutors are preparing to file criminal charges against former Wall Street traders alleging they misstated the value of mortgage bonds, an issue central to the 2008 financial crisis, according to people familiar with the matter.

The Manhattan U.S. Attorney's office is planning to allege in a criminal complaint that several former traders at Credit Suisse Group AG, a major global investment bank, misled the bank's investors by booking inflated prices of mortgage bonds to boost their bonuses, despite knowing the values of those securities had dropped, according to the people familiar with the matter. Credit Suisse itself won't be charged in the case, these people say. The names of the traders couldn't be determined. Charges could be filed as early as Wednesday, these people say."

Most agree that valuation of mortgage bonds and Wall Street's efforts to securitize and package these mortgages into collateralized debt obligations played a major role in the collapse of the global markets in 2008-2009. Misleading investors as to the accurate valuation of these mortgage bonds and the credit rating agencies failure to truly rate the mortgage backed securities as risky, amongst many other issues, led to near financial calamity.

Again, per the WSJ: "Wall Street valuations of mortgage securities were a major factor in the market turmoil of 2008. For years, financial firms had packaged hundreds of billions of dollars of subprime mortgages into securities. When those mortgages soured, investment banks resisted taking losses, fearing that their own investors and clients would panic.

They ultimately took big write-downs on their mortgage portfolios—totaling hundreds of billions of dollars—throwing markets into turmoil and triggering losses that toppled financial giants Bear Stearns Cos. and Lehman Brothers Inc."

Perhaps efforts to hold rogue traders accountable will be a first step in policing Wall Street excess and recklessness.

2012 Foreclosures Expected to Rise

With banks in “full-delay” mode in connection with foreclosures during 2011, California homeowners can expect a change—for the worst—in 2012 as banks look to aggressively pursue seriously delinquent mortgages this year. The foreclosure rate is expected to rise significantly, based on the second-half surge of initial default notices sent in 2011, but the rate should remain below the peak of 2010. Nonetheless, it remains disconcerting.

The Federal Reserve is working to stabilize the housing market. The Fed has urged Congress to help underwater borrowers by reducing their loan principal and it has requested that Fannie Mae and Freddie Mac rid themselves of the backlogged foreclosures in bulk sales. With increased foreclosures comes decreasing home values.

According to the Los Angeles Times: “California and other states are likely to see an enormous wave of long-delayed foreclosure action in the coming year as banks deal more aggressively with 3.5 million seriously delinquent mortgages. And experts said that dealing with the foreclosure process, from issuing notices of default to selling repossessed homes, is likely to push housing prices lower this year before the real estate market has a chance to recover."

Proxy Season Promises to Challenge Executive Pay

The Wall Street Journal reports that in a year where executive compensation has plateaued, Wall Street firms can still expect challenges from shareholders during the upcoming proxy season. According to the WSJ: "Investors ranging from charitable foundations to large state pension funds are preparing to challenge large financial firms on their pay practices. As a result, this year's 'proxy season'—the period, usually in the spring, when companies hold annual shareholder meetings—promises to be an eventful one in the financial sector, compensation consultants and corporate-governance experts say."

Activist shareholders in recent months have filed proxy proposals asking large Wall Street firms to study the potential negative impact that exorbitant executive compensation policies might have on the firm's reputation and growth potential. Again, according to the WSJ: "In December, the Nathan Cummings Foundation—a private charitable organization and institutional shareholder—filed proposals asking that directors at Goldman Sachs Group Inc. and J.P. Morgan Chase & Co. address potential reputational damage that big pay packages could bring to the banks, said Laura Campos, director of shareholder activities at the foundation. The proposals also request that they study how such awards could reduce banks' ability to spend money on other areas, and report those findings to shareholders."

The upcoming proxy season promises to be an interesting one as recent Dodd-Frank legislation requires firms to hold nonbinding shareholder votes on their executive pay policies (once every three years). Six of the largest Wall Street firms held these votes last year (J.P. Morgan, Wells Fargo, Citigroup, Goldman Sachs, Morgan Stanley and Bank of America), with all six receiving symbolic shareholder approval for their pay packages (as indicated in the chart above, courtesy of the Wall Street Journal). Each expects to hold nonbinding votes again this year.

"Three Years After Lehman" Symposium

Three years after Lehman Bros. filed the largest Chapter 11 bankruptcy in U.S. history, world financial markets are still wobbly, unemployment in the U.S. remains stubbornly high, and Europe may be on the brink of financial disaster. On February 24, 2012 the University of Utah S.J. Quinney College of Law will host a special symposium, “Three Years after Lehman: Assessing the Regulatory Reforms of the Next Financial Crisis,” that will consider the role Lehman Brothers’ failure played in the current economic downturn and whether reforms enacted in the wake of the failure are adequate to protect economic markets going forward.

"Symposium organizer Christian Johnson, Professor of Law at the College of Law, said, 'The conference attempts to put into perspective the Lehman failure (and the crisis generally) and to understand the effectiveness of the reforms that were enacted in the crisis’s aftermath. Given the general state of the U.S. and the global economy, such reflection and analysis becomes critical as regulators and policy makers further consider their options and responsibilities.'"

Corporate Justice Blog contributors Steven Ramirez and andré douglas pond cummings will be featured speakers at the symposium.

Post-Racial?

A favored argument by market fundamentalists is that capital markets are efficient, and will find equilibrium if left unfettered. For this argument to find root, issues of inequality, discrimination and racism must be ignored (or pushed aside), because, as the argument goes, efficient markets will themselves deal with discriminatory participants by eventually sifting them out of the system as inefficient market players. Additionally, law and economics proponents favor "post-racial" rhetoric that suggests that in 2012, the United States has entered a colorblind era of post-racialism. With an African American President and markets more advanced than at any time in history, issues of economic inequality and continuing racial division are simply no longer important considerations, per the post-racialist.

Several events in the past few weeks belie this post-racial sentiment, the following being one of the most egregious:

In Georgia this week, third and fourth grade students at Beaver Ridge Elementary School were given math problems, MATH PROBLEMS, that asked students to consider if a slave was beaten twice per day, how many beatings would the slave receive in one weeks' time? Another question on the elementary students' math homework asked them to calculate how many bushels of cotton Frederick picked? Outraged parents are meeting with school officials, who were quick to claim that nothing "malicious" was intended by these math questions, though they have opened an investigation into which teachers drafted the questions.

Post-racial?

Childhood Poverty in America 2012

The above chart graphically depicts the relative standing of the U.S. in terms of childhood poverty.  The U.S. simply cannot lay claim to economic greatness nor to being the land of economic opportunity in the face of this reality. With nearly 25 percent of our children living in poverty we are more on par with Bulgaria and Mexico than economically advanced nations such as Denmark, Australia, Luxembourg and Norway.

Interestingly, those advanced nations also sport far higher per capita income (in U.S. dollars) than the U.S.: Denmark produces $63,000 per capita, Australia $67,000, Luxembourg $122,000, and Norway $97,000 per capita. The U.S. suffers weak per capita GDP of $48,000 (and holding for about 15 years). While one can always nitpick the data (for example, should we really count incarceration costs as GDP, as we currently do, which fattens the weak U.S. performance) the picture suggests the creeping third world reality gripping the U.S., due largely to its laissez faire economic policies and corrupt politics where money rules over law.

Thus, Dr. King's commitment to fight against poverty and in favor of economic opportunity is as relevant today as ever, and is both morally and economically compelling. The U.S. cannot be either a moral or economic leader of the world with one in four children impoverished. Perhaps our new claim should be land of childhood poverty.

Professor Steven A. Ramirez
Loyola University Chicago
School of Law