Sunday, January 31, 2016

Will Those Who Led the Financial System Into Crisis Ever Face Charges?

The American Bar Association (ABA) Journal has just published an article that asks the question whether any of the individuals that crashed the housing market and engaged in fraudulent behavior leading up to the financial market crisis, will ever face charges?  This is particularly timely as the statute of limitations for securities fraud in many of those cases will run in 2016.  Corporate Justice Blog contributor Dean Steven Ramirez asks this question pointedly in his upcoming book with the NYU Press entitled "Corrupted Justice" where he along with his co-author Mary Kreiner Ramirez describe the behavior of corporate executives at Countrywide, Lehman Brothers, Bear Stearns, and AIG, amongst others, and conclude that fraud was one of the primary causes of the Great Recession of 2008.

According to the ABA Journal, quoting law professor William Black, big banks handed out lousy loans while selling to outsiders that the loans were quality products suitable for packaging into investment offerings.  From the article: 

"[Professor] Black has been a constant critic of the Justice Department’s failure to prosecute lenders with the same verve they’ve gone after borrowers, and his testimony reflected that concern. The lenders didn’t care about misstatements on loan documents, Black testified and the defense argued, because they intended to make the loans no matter what. They wanted to push through as many mortgages as possible and collect their fees and bonuses, and then claim the loans met rigorous underwriting standards, selling them in large lots to other financial institutions and investors."

The article continues: "In the years since the crash, federal prosecutors have used splashy press conferences to announce top banks’ multibillion-dollar settlements (typically paid by shareholders) in cases arising from the subprime mortgage mess. But criminal prosecutions have been reserved almost exclusively for the borrowers. . . . 'Not to excuse wrongdoing by some borrowers, but clearly these were the business plans of large financial institutions, undertaken by human beings within them and, I presume, at the direction of senior executives in furthering the business plan,' says Phil Angelides, a former California state treasurer who chaired the federal Financial Crisis Inquiry Commission’s probe of the causes of the meltdown of 2007-2010.  The Financial Crisis Inquiry Report, released in 2011, was particularly pointed in its criticism of Wall Street, which it found had taken advantage of unprepared regulatory agencies that had been methodically defanged through deregulation over several years. The report noted a term coined on Wall Street that captured the carefree wheeling and dealing in the run-up to the meltdown: “IBGYBG”—”I’ll be gone, you’ll be gone.” The term, the report states, “referred to deals that brought in big fees up front while risking much larger losses in the future.”

Whether any corporate leaders that engaged in loan writing while being influenced by IBGYBG thinking will be prosecuted may be one of the important questions of 2016.

Monday, January 18, 2016

Dodd-Frank Test Looms

Financial markets across the world plunged during the first two weeks of 2016. Global equity markets, for exmple, suffered the worst first two week loss in 20 years. The problem is continued signs of severe macroeconomic weakness which this blog highlighted starting in late 2014, and throughout 2015. Thus, RBS recently advised investors to sell everything to avoid a deflationary vortex.

China in particular has slowed down, dragging most other emerging markets down with it. Chinese stocks are down nearly 20% just in 2016. Emerging markets shares have shed 35% since their recent peak in 2014. Oil prices literally collapsed over the last year (see chart) along with commodities generally, suggesting chronically weak demand. Non-energy commodities crashed by 33% just since mid-2014. Thus, there will be massive financial losses arising from emerging markets, China, energy, and commodities, much of it debt.

In fact, as recently as last week, the megabanks started recognizing losses in their energy loan portfolios. While the losses remain contained right now, one wonders what lies buried in the derivatives books of the megabanks. One indication of the possible losses in derivatives related to energy and other non-performing debt is the fact that the megabanks lobbied successfully to continue selling FDIC-backed derivatives within their banking subsidiaries, as discussed in real time about a year ago on this blog. This indicates there are likely more losses buried in the derivatives markets that logically should end up hitting the capital of the megabanks. Further weakness will inevitably lead to further loss recognition at the megabanks.

The Fed's recent efforts to hike interest rates only exacerbates this global macroeconomic weakness. One commentator termed the Fed's rate hike a policy "blunder." The case for a deflationary vortex, first highlighted in late 2014 on this blog, now seems compelling. The Fed seems as oblivious as it was in mid-2007 to the potential for another financial crisis.

All of this led George Soros to recently raise the specter of a financial crisis like 2008. Soros, of course is a financial genius, with a long record of powerful financial insights and trading successes. Betting against Soros is not a path to success. Soros stated: "When I look at the financial markets there is a serious challenge which reminds me of the crisis we had in 2008.” Former US Treasury Secretary Lawrence Summers recently stated: "the global risk to domestic economic performance in the United States, Europe and many emerging markets is as great as any time I can remember. It is time for policymakers to hope for the best and plan for the worst."

Which brings me to the point of this post: Can policymakers count on the Dodd-Frank Act to save us from the horrors of 2008-2009? 

In my next post, I will explain why the answer to that question is a resounding NO!

Friday, January 1, 2016

Happy New Year

photo courtesy of Mark Lane/Wikimedia Commons

We wish all of our readers, followers, contributors, and commentators a happy and healthy 2016.  As always, it is our hope that 2016 will lead to saner and fairer economic polices across the nation and across the world so that crushing economic inequality becomes a distant memory.  Here is to a wonderful 2016.