"When I do good, I feel good; when I do bad, I feel bad. That's my religion."
—Abraham Lincoln, US President

Christmas Presents

Throwing out a Lifeline

JPMorgan Chase is heeding the Big O’s call to help distressed homeowners. Chase is opening up 24 more service centers nationwide to help with the mortgage modification process. The effort will make the process easier and more available to Chase home loan borrowers. It will also create new service center jobs in a time of high unemployment including Chase Homeownership Centers in markets that don't currently have a center: Cleveland; Dallas; Houston; Boca Raton, Fla.; Ft. Lauderdale, Fla., and Seattle. Eighteen other centers will open in short-staffed markets including New York.

Crain’s of New York reports:

 “Chase said it has approved more than 568,000 trial modifications this year under various programs, some led by the government. Chase services about 10.3 million loans. Chase's expansion of its mortgage aid program comes as the government seeks to speed up the pace of modifications to help offset spiking foreclosures. Last week, a federal report showed the Obama administration's mortgage relief plan has provided permanent help to only 4% of borrowers who have signed up.”

Charlie Scharf of Chase Retail Financial Services says the centers are focused on “reaching families who are facing financial hardship and have fallen behind on their mortgages.”

Sounds like progress….

Bah Humbug

“Fannie Mae is suspending all foreclosure evictions from December 19, 2009 through January 3, 2010.  All owner-occupants and tenants living in foreclosed properties the company holds will not be subject to evictions during the holiday time frame.  "We're taking this step in support of struggling families who have unfortunately found themselves facing foreclosure," said Michael J. Williams, Fannie Mae resident and Chief Executive Officer. "No family should have to face the prospect of being evicted during the holiday season.”

That is sooooo sweet!

Just a quick FYI: Fannie Mae is a quasi-government backed mortgage company that is one of the main perpetrators of the most reckless subprime mortgage loans made—the ones with zero underwriting standards that brought the financial system down. The ones that we are in turn all paying a high price for by losing our jobs, incomes, security, and access to credit. Fannie Mae’s former Chief Exec Frank Raines took home a record $38 million in salary on false profits. He was forced out before the collapse in an accounting scandal.

Well anyway, it is so nice of Fannie Mae to give distressed homeowners three weeks off for Christmas. Better have your bags packed on January 4th.

A Lump of Coal

Citibank who received a big fat “humungous” Christmas gift from the American taxpayer has decided to give back—at least for a brief moment.  Santa Ben and Tim Treasury just gave Citibank a big present this week! The insolvent and mismanaged bank has been forgiven for $38bn in taxes due and $25bn in loan repayment. That is a savings of $53bn just in time for year end bonuses. In return the bank is spreading some good cheer and letting 2,000 about-to-be-foreclosed on families get a 30 day reprieve. The bank will not start foreclosure proceedings until Jan 18, 2010. 

New York-based Citigroup said Thursday the suspension will run from Friday through Jan. 17. It applies only to borrowers whose loans are owned by Citi. Borrowers who make payments to Citi but whose loans are owned by other investors are out of luck.

"We want our borrowers to have a much less stressful time, to spend their time with their families during the holidays as opposed to worrying about their homes," Sanjiv Das, head of the company's mortgage division, said in an interview.”

Wow! That is touching. We can safely assume that Mr. Das has a job courtesy of the American people. So thank you on behalf of fellow citizens. Now, 2,000 families can spend their borrowed time crying and packing for the holidays.

It’s beginning to look a lot like Christmas! That is if you are a Citibank employee. Merry Christmas American homeowner gratis the American government.

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Hedge Fund Transparency Gets New Life

In 2005, the Securities and Exchange Commission (SEC) passed a rule that hedge funds and private equity fund advisors with more than 14 U.S. investors must register with the agency. In the midst of the hand-over-fist financial boom, there was little appetite for industry regulation or transparency. The rule was thrown out by a federal appeals court four months later.

In January 2009, bi-partisan legislation requiring funds with assets exceeding $50m to register with the SEC languished in the Senate. Another bill passed last week by the House Financial Services Committee allows funds a one-year “transition” period before mandatory registration with the SEC kicks in.

Critics claim that hedge funds and private equity are funded by “sophisticated” investors and do not require oversight. Ten years after the meltdown of hedge fund powerhouse Long Term Capital Management, and in the wake of the Great Financial Collapse of 2008, this argument has been shot-down.

Along with registration, funds will be required to declare assets under management and undergo compliance investigation. The mandatory registration is the first and historic step in regulating what has unofficially become known as “shadow banking.”  

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Breaking Up Is Hard to Do

Let no one say that the former Federal Reserve Chief (and Ayn Rand clone) Alan Greenspan is a slow learner. It only took him just shy of 80 years to learn that there was a “flaw” in his endorsement of unbridled market carte blanche.  After allowing the subprime mortgage industry to threaten the national and world economies and after encouraging the world’s superbanks to get bigger and bigger, the devil himself has retrenched.

Former Federal Reserve Chief, Alan Greenspan now thinks it might be time to break up the “too-big-to-fail” banks.  Oh my gosh, I need some air… Air!

Bloomberg reports: “Those banks have an implicit subsidy allowing them to borrow at lower cost because lenders believe the government will always step in to guarantee their obligations. That squeezes out competition and creates a danger to the financial system.” Mr. Greenspan stated, “"If they're too big to fail, they're too big. In 1911 we broke up Standard Oil -- so what happened? The individual parts became more valuable than the whole. Maybe that's what we need to do."

I would sing Hallelujah, only it is doubtful that anyone who is anyone is really listening to one of the key architects of the Big Banks. It is reminiscent of Dr. Frankenstein whose innovative experiment goes awry and instead he creates a dangerous monster he can’t control. The Big Banks created by the repeal of Glass Steagall in 1998, under Greenspan’s watch and encouragement, are economically dangerous and out of control.

Greenspan says that no bank should be considered “too-big-to-fail.” Yet when the Treasury Department under ex-Goldman CEO Hank Paulson and now Tim Geithner bailed out Fannie Mae, Freddie Mac, Bear Stearns, AIG, Goldman, Morgan Stanley, Merrill Lynch, Citigroup, and Bank of America, the government essentially changed the rules by not allowing the banks to fail and new ones to be formed. "Failure is an integral part, a necessary part of a market system," said Greenspan.

No matter what the government does in the wake of interfering with free market capitalism, their authority is undermined by their own actions.

"It's going to be very difficult to repair their credibility on that because when push came to shove, they (Treasury, Federal Reserve) didn't stand up," Greenspan said.

Although the former Fed chairman claims "just really arbitrarily breaking down organizations into various different sizes" is contrary to his belief system, the “too-big-to-fail” banking issue urgently needs resolution. "If you don't neutralize that, you're going to get a moribund group of obsolescent institutions which will be a big drain on the savings of the society," said Greenspan.

 
Should we say, “too little, too late Al” or “Better late than never? “

Greenspan’s remarks were presented last week at the Council on Foreign Relations in New York. Unfortunately, Greenspan’s own credibility has been damaged in the past year since the banking collapse.

This time, however, we can only hope that someone with real authority and basic common sense in our government was listening.

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  Judge Jed Sends SEC to Trial

U.S. District Court Judge Jed Rakoff rejected a proposal between Bank of America (BOA) and the Securities and Exchange Commission (SEC) for $33m to settle the Merrill Lynch bonus issue.

The SEC had brought the suit against BOA for failure to disclose the $3.6bn bonuses promised to Merrill Lynch executives before the merger of the two banking giants was approved. (Corporate executives of publicly traded companies have a fiduciary and legal responsibility for full disclosure to shareholders.) Influencing the Judge’s decision included the fact that management at Bank of America hid large losses from shareholders—a clear violation of its legal obligation. Judge Jed’s ruling declared shareholders did not receive the complete information available to make an informed decision about the Merrill Lynch acquisition.
 
The Judge accused the SEC and the Big Bank of colluding to create an inadequate agreement to mollify the U.S. government. The New York Times reports, “The SEC gets to claim that it is exposing wrongdoing on the part of Bank of America in a high-profile merger, he wrote, and “the Bank’s management gets to claim that they have been coerced into an onerous settlement by overzealous regulators.” Basically, he is saying the $33m of taxpayer money is “chump-change” for BOA and simply a way to get the unpleasant issue out of the public view while paying a negligible price.

The key factor in the court’s decision has more to do with whose money the settlement would use rather than the amount of the payment. Judge Jed, a law professor at Columbia and Stanford Universities, wrote his objection to “the very management that is accused of having lied to its shareholders to determine how much of those victims’ money should be used to make the case against management go away. “

The decision marks a clear message to the SEC and other government oversight agencies; the days of ignoring regulatory failures are over. If Congress doesn’t step in to force regulators to uphold the law, lawmakers will. New York State Attorney General Andrew Cuomo is currently gathering evidence to bring charges against Bank of America executives for violating securities law on the same issue of full disclosure.

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        Risky Business

Unregulated and unrestrained compensation for reckless bankers and finance professionals has been a hot point of debate for much of the past year. Banking chiefs who pulled in anywhere from $10m to $70m on phantom profits that evaporated along with housing values have been under the heated public glare. AIG execs loudly proclaimed their “hurt” feelings and errant journalists defended misunderstood millionaires by declaring the grave injustice of it all!

In Europe, overpaid and underwhelmed banking chiefs were hung in effigy. On the manicured lawns and well-groomed tennis courts of Connecticut, fat and fit bankers were threatened with physical harm.  Brokers blamed homeowners for falling for their scams and homeowners spit on the financial graves of Fannie Mae, Freddie Mac, Indy Mac, Wachovia, Countrywide, and Washington Mutual. It was all too ugly for an enlightened America to endure.

One thing agreed upon inside and outside of the industry is that runaway comp without responsibility has been named as a fundamental cause for the meltdown. Short-term profits over long-term health gave irresponsible finance pros voracious appetites for immediate cash pleasures.

How to resolve the problem of padding the pockets of cash-fat bankers while reining in public risk is not an easy dilemma in a free market system. A Federal proposal to stem the risks of unrestrained pay would require financial institutions to garner Federal Reserve approval of compensation policies before paying executives.

The Federal proposal is not met with happy faces on the Street. Many firms demanding free-market autonomy claim they have already implemented compensation incentive safeguards like “clawbacks” (return of pay if the market goes sour) and they don’t need the government to do it for them!

While maintaining autonomy is a reasonable and laudable goal for any business, the biggest banking institutions and global investment banks have created the climate for compensation overhaul themselves.  The actions of some of the world’s biggest financial institutions have been their own worst enemies by paying tens of millions of dollars to those who lost billions for their firm.  No one can deny that compensation incentives brought the American and global financial system to its knees one year ago, costing innocent Americans millions of home foreclosures, personal and corporate bankruptcies, and hundreds of thousands of job losses each month. It has become a matter of national and global economic security to stick our official noses where they should never have belonged.  Unfortunately, because the firms failed to do so themselves, the feds must now regulate short-term comp policies.

The current proposal before Congress names the central bank, The Federal Reserve, as the arbiter of good pay practices. The Feds would be able to demand payment through “restricted stock or other forms of long-term compensation designed not to reward short-term performance.”  According to the Wall Street Journal, “Pay is now seen as a factor that could make a firm, and more broadly the financial system as a whole, vulnerable to collapse.”   

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Private Equity Endorses "Responsible Investment"
 

After much discussion between major institutional investors at the United
Nations The Private Equity Council, an advocacy group for the private
equity sector, decided to adopt a set of "responsible investment
guidelines." These guidelines, which would encompass environmental, health,
safety, labor, governance and social issues, aims to improve the long-term
sustainability of companies while supporting the payment of competitive
wages and benefits to employees. Adopting such guidelines is important
because it helps "create a better society for this and future generations
[and] is an excellent way to maximize our investment returns," says Ted
Eliopoulous, Interim Chieft Investment Officer of the California Public
Employees Retirement Systems (CalPERS).

Read more:

Private Equity Council Adopts Responsible Investing Guidelines

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John Bogle: The Conscience of Wall Street

John C. Bogle aka “Jack” is the founder of the first index mutual fund and a long term advocate “on behalf of individual shareholders,” according to an interview in May 2009 at the Morningstar Investment Conference. Seventy-year-old Bogle cites the current financial crisis as the worst bear market in his “entire business career” due to a 55% overall decline. Bogle states this crisis is “much more catastrophic” than those of 1973-74 and the Dot Com bust due to the devastating economic consequences for ordinary people. Bogle calls the current financial collapse, an “analytic failure…analysts and managers failed in their responsibility.”

Bogle asserts this crisis is considerably worse than previous downturns due to the “financial misdeeds flowing over in to the general economy.” Bogle cites the tragedy of the current debacle as  ”the pain caused by the disgraceful behavior of so many of those in financial system that has spread over to very innocent people…Wall Street taking advantage of Main Street.”
 
Morningstar:
Are we learning the right lessons from this recent debacle?
 
Bogle:  “The extraordinary popular delusion and the madness of crowds go back to Ancient Greece…We make the same mistakes over and over again…Everyone should spend a little more time on history. Look at things that have occurred in the past; read things that have occurred in the past…History does not foretell the future, but it certainly can tell us what kind of mistakes have been made in times of boom and bust in the past.”
 

In his most recent book, Enough (Wiley 2008), Bogle explains our economic structure: “Central to the effective functioning of capitalism was the fundamental principle of trusting and being trusted—and that is disappearing. The problem now: No one is satisfied with having ‘enough’ money or enough success.”
 
In Enough, Bogle reveals “Our nation has been suffering from decades of unchecked financial excess, for which we are now paying the piper: excess in investment company fees; excess in financial speculation masquerading as diversification and innovation; excess in the salaries of top executives; excess in salesmanship; and most importantly, excess in the role played by the financial industry in our national economy and national life.” (William Bernstein, PhD, Amazon)

In The Battle for the Soul of Capitalism, published by Yale University Press in 2006, Bogle calls for the “restoration of integrity” in financial industry practices.

Unfortunately, his timely cry for change went unheeded. Still, it is not too late to learn these lessons of history. John C. Bogle stands out as a maverick sage and courageous leader perfect for our troubled times.

Video: Morningstar Investment Conference     May27-29, 2009 

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Socially Responsible Private Equity

The Private Equity Council bills itself as a hub for “private equity investments’ that “drive growth, innovation, value at American companies.” An organization made up of 13 private equity funds has answered the current call for social responsibility.

“Once considered an esoteric form of “financial engineering,” PE in recent years has become an important tool for driving growth and improving performance at hundreds of companies across the country and around the world.”

Private Equity, according to The Private Equity Council, supports Dunkin’ Donuts, Hilton Hotels, MGM Studios, Continental Airlines, Domino’s Pizza just to name a few. The council supports U.S. based businesses. In the current credit crisis, providing American businesses with financing is vital to rebuilding economic stability.

Here’s how it works: Private pension funds invest their money in private equity funds for growth. Two large pension funds, California Public Employees’ Retirement System and the California State Teachers’ Retirement System felt their retirees wanted their 401K monies invested in socially responsible companies. Teacher’s and California State Employees care about the environmental, labor, and ethics policies and practices that fuel their retirement accounts. In 2007, the two pension funds urged the Private Equity Council to follow the United Nation’s Principles for Responsible Investing.

The PE Council agreed. President, David Lowenstein stated the new policy was a “constructive way for us to engage with our investors.”

The United Nation’s Responsible Investing initiative is part of the larger tent of the United Nation’s Global Compact. The UNGC (see Human Rights on this site) was formed in 2000 under the innovative direction of Secretary-General of the United Nations, Kofi Annan. The Compact brings the private business sector, civil society and the United Nations’ together in a joint partnership to insure human rights in business endeavors. The Compact has exponentially expanded since its inception and includes the United Nation’s Financial Initiative and the UN Environment Programme.

The partnership between large well-capped private equity funds and large investors with the United Nations’ better business initiative marks an important turning point in the evolution of private equity. In continuing the economic decline and crisis of 2009, the recognition by any group on “Wall Street” to include socially responsible business practices in the pursuit of profit is vitally important in the restructuring of our national and global economies.

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