Teaching Men of Conscience a Lesson

[don]

here's an oldie but goldie . . . moral hazard

Michael Winston

A great many people around the county were rightfully shocked and horrified by the recent excellent and hard-hitting PBS documentary, The Untouchables, which looked at the problem of high-ranking Wall Street crooks going unpunished in the wake of the financial crisis. The PBS piece certainly rattled some cages, particularly in Washington, in a way that few media efforts succeed in doing. (Scroll to the end of this post to watch the full documentary.)

Now, two very interesting and upsetting footnotes to that groundbreaking documentary have emerged in the last weeks.

The first involves one of the people interviewed for the story, a former high-ranking executive from Countrywide financial who turned whistleblower named Michael Winston. You can see Michael's segment of The Untouchables at around the 4:20 mark of the piece. The story Winston told during the documentary is essentially an eyewitness account of the beginning of the financial crisis.

When I spoke to him last week, Winston was still as amazed and repulsed by what he saw at Angelo Mozilo's crooked subprime mortgage company as he was when he worked there. Winston, who had worked for years at high-level positions at companies like Motorola and Lockheed before joining Countrywide in the 2000s, described a moment in his first months at the company, when he rolled into the parking lot at the company headquarters.

"There was a guy there, a well-dressed guy, standing next to a car that had a vanity plate," he said. "And the plate read, 'FUND'EM.'"

Winston, curious, asked the guy what the plate meant. The man laughed and said, "That's Angelo Mozilo's growth strategy for 2006." Here's how Winston described the rest of the story to PBS – i.e. what happened when he asked the man to elaborate:

"What if the person doesn't have a job?"
"Fund 'em," the – the guy said.
And I said, "What if he has no income?"
"Fund 'em."
"What if he has no assets?" And he said, "Fund 'em."

Later on, Winston would hear that the company's unofficial policy was that if a loan applicant could "fog a mirror," he would be given a loan.

This kind of information is absolutely crucial to understanding what caused the subprime crisis. There are people out there still willing to argue that the government somehow "forced the banks to lend" to unworthy applicants. In reality, it was unscrupulous companies like Countrywide that were cranking out loans en masse, knowing that these loans would be unloaded down the line, first to banks and then to sucker investors like pension funds and foreign trade unions, almost as soon as they were created.

Winston was a witness to all of this. Eventually, he would be asked by the firm to present false information to the Moody's ratings agency, which was about to give Countrywide a negative rating because of some trouble the company was having in working a smooth succession from one set of company leaders to another.

When Winston refused, he was essentially stripped of his normal responsibilities and had his corporate budget slashed. When Bank of America took over the company, Winston's job was terminated. He sued, and in one of the few positive outcomes for any white-collar whistleblower anywhere in the post-financial-crisis universe, won a $3.8 million wrongful termination suit against Bank of America last February.

Well, just weeks after the PBS documentary aired, the Court of Appeals in the state of California suddenly took an interest in Winston's case. Normally, a court of appeals can only overturn a jury verdict in a case like this if there is a legal error. It's not supposed to relitigate the factual evidence.

Yet this is exactly what happened: The court decided that the evidence that Winston was wrongfully terminated was insufficient, and then from there determined that the "legal error" in the original Winston suit against Bank of America and Countrywide was that the judge in the case failed to throw out the jury's verdict:

In short, having scoured the record for evidence supporting the jury's verdict on the issue of causation, we have found none. It follows that the trial court erred in denying defendants' motion for judgment notwithstanding the verdict.

"I was flabbergasted," Winston says now. "Think of all the hard work the jury did, and [the court] overturns it just like that."

While it's impossible to say just exactly what a fair financial award should be for a person who reports bad corporate activity to the public, it's certainly true that when these whistleblower suits end in failure, it has a chilling effect on other people thinking about coming forward. Not many people are willing to risk their jobs if they think it will cost them every last dime in the end.

This is just one more example of how hard it is for whistleblowers to come out even, even if they win jury trials.

That decision came down on February 19th, and is the first of the two interesting post-Untouchables footnotes.

The other involves some of the comments made by the head of the Justice Department's Criminal Division, Lanny Breuer, who said (as he has on other occasions, including after the recent non-prosecutions of HSBC and UBS for major scandals) that his Justice Department has to weigh the financial consequences of bringing prosecutions. Quoting from the PBS show, Breuer explained:

But in any given case, I think I and prosecutors around the country, being responsible, should speak to regulators, should speak to experts, because if I bring a case against institution A, and as a result of bringing that case, there's some huge economic effect — if it creates a ripple effect so that suddenly, counterparties and other financial institutions or other companies that had nothing to do with this are affected badly — it's a factor we need to know and understand.

When Breuer said that, it raised a serious red flag on the Hill. A number of people in positions of power wanted to know just what "experts" people like Breuer had consulted with before deciding not to press charges in certain cases. Iowa Republican Senator Chuck Grassley and Ohio Democrat Sherrod Brown, specifically, sent Attorney General Eric Holder a letterasking a number of questions.

Among other things, the two Senators wanted to know if certain companies had been designated "Too Big to Jail." Then they had a series of very obvious and reasonable questions about those "experts":

4. Please provide the names of all outside experts consulted by the Justice Department in making prosecutorial decisions regarding financial institutions with over $1 billion in assets.
5. Please provide any compensation contracts for these individuals.
6. How did DOJ ensure that these experts provided unconflicted and unbiased advice to DOJ?

Well, at the end of last week, on February 27th, the Department of Justice sent Brown and Grassley a letter in return. The letter is, to describe it very generously, not terribly informative.

Most of the letter is just a long list of the many wondrous accomplishments the DOJ has secured under Eric Holder's watch, including felony manslaughter convictions against BP, or "fraud convictions for a board member of Goldman, Sachs," or the ongoing LIBOR investigation, or the prosecution in the Stanford Ponzi case. But the rest of the letter totally ignores the Brown/Grassley questions, particularly on the matter of which experts were and are being consulted.

On those questions, the DOJ would say only that "it is entirely appropriate for prosecutors to hear from subject matter experts at relevant regulatory authorities" and that . . .

When the Department consults with relevant regulatory authorities, or hears from companies who are targets of the Department's investigations and their counsel regarding potential collateral consequences of enforcement actions, neither those agencies nor the target companies receive any compensation from the Department.

That is one hell of a slippery piece of language. It's great that the Department of Justice is not paying, say, HSBC to consult with them on the question of whether or not HSBC should be prosecuted. What a relief! But that doesn't mean they're not paying someone else for that kind of advice.

The DOJ similarly blew off naming any individual experts and they refused absolutely to turn over information about any compensation they may have paid out to whomever it is who is whispering in their prosecutorial ears.

The two Senators late last week issued a blistering answer to the DOJ letter, saying, "the Justice Department's response is aggressively evasive," and that "the Department's only clear response was that it speaks to regulators and the banks themselves."

The Department of Justice is now saying that it misunderstood the two Senators, that it didn't know that they were asking for the actual names of those experts. Moreover, the Department claims it is working on answers to those queries.

In the meantime, Eric Holder is appearing before the Judiciary Committee this Wednesday, and it will be interesting to see how he handles questioning from Senator Grassley. It may get ugly before the answers actually come out, but it seems that someone is finally determined to get some real information.

http://www.rollingstone.com/politics...#ixzz2MgZNNE8y

[LorenS]

Re: Teaching Men of Conscience a Lesson

This kind of information is absolutely crucial to understanding what caused the subprime crisis. There are people out there still willing to argue that the government somehow "forced the banks to lend" to unworthy applicants. In reality, it was unscrupulous companies like Countrywide that were cranking out loans en masse, knowing that these loans would be unloaded down the line, first to banks and then to sucker investors like pension funds and foreign trade unions, almost as soon as they were created.

The government encouraged banks to lend to unworthy applicants. The government refused to investigate and prosecute fraud, both borrower and lender and securities.

Local governments were cheering as their property tax revenues went up.

State governments were cheering as their economies boomed.

The federal government was cheering as "home ownership percentages reached all time highs".

Yes, government was chest deep in responsibility for this mess and they still are.

Sarbanes-Oxley was a stupid response to corporate fraud.
Filling out more forms is the solution for this crisis?

Has anyone refinanced lately? Seriously, there are at least three new forms you have to fill out. None of them are useful.

Yes, government is part of the problem. We don't need more "regulation" we need more honesty.

[vt]

Re: Teaching Men of Conscience a Lesson

Don,

The government was just as responsible, and the congress was on the take. Those are the facts.

[don]

Re: Teaching Men of Conscience a Lesson

Don,

The government was just as responsible, and the congress was on the take. Those are the facts.

Is Washington corrupt, bought and paid for by FIRE?

Yup.

Has Washington in the past been at least in part in the pockets of other powerful interests, such as the railroads?

Yup.

Think of government as a gun. What it does is in the hands of its users.

Today there are no counterbalancing forces to FIRE, or more broadly, neoliberalism.

They appear to have merged with government, molding it - mainly in the strengthening of the executive - to their interests.

[jabberwocky]

Re: Teaching Men of Conscience a Lesson

Is Washington corrupt, bought and paid for by FIRE?

Yup.

Has Washington in the past been at least in part in the pockets of other powerful interests, such as the railroads?

Yup.

Think of government as a gun. What it does is in the hands of its users.

Today there are no counterbalancing forces to FIRE, or more broadly, neoliberalism.

They appear to have merged with government, molding it - mainly in the strengthening of the executive - to their interests.

Isn't this the face of fascism?

[vt]

Re: Teaching Men of Conscience a Lesson

Don't forget the government unions plus all the other unions paying huge campaign bribes to the Democratic party. And the main street media is feeding the same corruption.

Look at the stimulus which was susposed to help rebuild infrastructure, nothing went that way. It all was a political payoff for Democrat supporters.

Fascism is National Socialism, which has nothing to do with free markets.

I've said countless times that the Republicans are just as responsible. Both parties are captured by the special interests and corrupt. We need to replace both.

[gwynedd1]

Re: Teaching Men of Conscience a Lesson

Don,

The government was just as responsible, and the congress was on the take. Those are the facts.

Follow the money. The real money is made in the private sector. While a Senator's salary is nice, it does not make many multi millionaires and billionaires.

[vt]

Re: Teaching Men of Conscience a Lesson

So money made in the private sector is bad? How do you have anyone to pay taxes if no one makes any money? If there are no profits there are no jobs.

I don't know of any poor senators or ex presidents. A poor man never offered me a job.

[Thailandnotes]

Re: Teaching Men of Conscience a Lesson

Follow the money.

The Crédit Mobilier scandal of 1872 involved the Union Pacific Railroad and the Crédit Mobilier of America (no relation to the French Credit Mobilier) construction company in the building of the western portion of the First Transcontinental Railroad. In 1868 Congressman Oakes Ames had distributed Crédit Mobilier shares of stock to other congressmen, in addition to making cash bribes, during the Andrew Johnson presidency. The story was broken by the New York newspaper, The Sun, during the 1872 presidential campaign, when Ulysses S. Grant was running for re-election. The scandal's origins dated back to the Abraham Lincoln presidency, when the Union Pacific Railroad was chartered in 1864 by the federal government and the associated Crédit Mobilier was established.

The federal government in 1864–1868 had authorized and chartered the “Union Pacific Railroad,” with $100,000,000 capital, to complete a transcontinental line west from the Missouri River to the Pacific Coast. It offered to assist it by a loan of $16,000 to $48,000 per mile, according to location, for a total of more than $60,000,000 in all, and a land grant of 20,000,000 acres, worth $50,000,000 to $100,000,000. The offer initially attracted no subscribers for financing, as the conditions were daunting. The railroad would have to be built for 1,750 miles through desert and mountain, which would mean extremely high freight costs for supplies. In addition there was the likely risk of armed conflict with hostile tribes of Indians, who occupied many territories in the interior, and no probable early business to pay dividends.[1]

George Francis Train and Thomas C. Durant, a vice president of the Union Pacific Railroad, formed the Crédit Mobilier in 1864. The original company, Pennsylvania Fiscal Agency, was a loan and contract company chartered in 1859.[1] The creation of Crédit Mobilier of America was a deliberate attempt to falsely present to the Government of the United States and the general public the appearance that a corporate enterprise (independent of the Union Pacific Railroad and its principal officers) had been impartially chosen by the Union Pacific Railroad’s officers and directors to be the principal construction contractor and construction management firm for the Union Pacific Railroad project. It was created by the officers of the Union Pacific to shield the companies' shareholders and management from the then common charge that they were using the construction phase of the Union Pacific project (as opposed to the operating phase of carrying passengers and freight), to line their pockets in excess profits. They believed that profits could not be generated from the operation of the railroad. So, they created a sham company to charge the U.S. Government extortionate fees and expenses during construction of the line.

In simplified terms, the Crédit Mobilier fraud worked in the following manner. The Union Pacific made contracts with Crédit Mobilier, paid by check, to build the Union Pacific railway. The Crédit Mobilier used these checks to buy stock and bonds in the Union Pacific at par value, the crux of the fraud. They sold the bonds on the open market to make huge profits. These construction contracts brought high profits to the Crédit Mobilier, which was owned by Durant and the other directors and principal stock holders of the Union Pacific. The Crédit Mobilier split the outsize profits with the UP stockholders. The net result was that the U.S. Congress paid $94,650,287 and $50,720,959, respectively, to the Union Pacific and Crédit Mobilier. The deal generated $43,929,328 in profits, counting at par value the shares and bonds that Crédit Mobilier paid itself. The Crédit Mobilier directors reported this as a cash profit of only $23,366,319.81, a financial misrepresentation.[1][2]

If the Union Pacific’s corporate officers had openly undertaken the construction of the railroad, this scheme (to make windfall profits immediately through charges during construction), would have been exposed to public scrutiny. It would have provided proof to the opponents that the western transcontinental railroad plan was an unprofitable venture. The opponents believed that the whole project was an ambitious fraud by some capitalists to build a "railroad to nowhere" and to make tremendous profits doing so, all the while getting the United States Government to pay for it. They thought that the construction and its routing were being developed without regard for trying to create a valid and profitable transportation enterprise when the railroad line was completed.

The principal means of the fraud was the method of indirect billing. The Union Pacific presented genuine and accurate invoices to the U.S. Government for construction costs, which were generated by Crédit Mobilier of America and presented to the Union Pacific Railroad for payment. The railroad then prepared meticulously detailed invoices to the U.S. Government, requesting payment for these bills, accrued by the Union Pacific from Crédit Mobilier, for the construction of the line, with only a small additional fee over the cost stated on the Crédit Mobilier invoices, for the Union Pacific's overhead expenses.

Any audit of the Union Pacific and its invoices to the U.S. Government would have revealed no evidence of fraud or profiteering. Union Pacific was accepting for payment genuine Crédit Mobilier invoices and was applying an auditable overhead expense for management and administration during construction of the railroad.

The underlying fraud of a common and unified ownership of the two companies, as regards their principal officers and directors, was not revealed for years. Nor was it revealed that in every major construction contract drawn up between the Union Pacific and Crédit Mobilier, the contract’s terms, conditions and price had been offered (by Crédit Mobilier) and accepted (by the Union Pacific) through the actions of corporate officers and directors who were one and the same persons. The company sought, and was largely successful, in maintaining this fraud and its secrecy by giving discounted (well below the market value, of this highly profitable company) shares of stock (in Crédit) to those members of Congress who also agreed to support additional funding for the railroad. Because of its excessive charges for building the line, the company fully expected that the Union Pacific would have to return to Congress to gain appropriation of additional construction funds. For its time, it was a very sophisticated corporate scam, and it was, at the time, mostly legal.

In 1867, Crédit Mobilier replaced Thomas Durant as its head with the Congressman Oakes Ames.[3] In that year Ames offered to members of Congress shares of stock in Crédit Mobilier at its discounted value rather than the market value, which was much higher. The high market value of the stock was due to the superb performance of Crédit Mobilier of America as a corporation; which was in turn due to its major contract with the Union Pacific. Crédit Mobilier was the exclusive construction and management agent for the building of the Pacific Railroad. The Union Pacific "suspected" nothing, and they "paid" Crédit Mobilier (actually themselves) whatever "they" were asked to pay. Crédit Mobilier's corporate balance sheet regularly showed high earnings in excess of its expenses, and very high net profits in every quarter that it was engaged in the construction of the railroad. It also declared substantial quarterly dividends on its stock.

The Congressmen and others allowed to purchase shares at a discount could reap enormous capital gains simply by offering their discounted shares to a grossly under-subscribed market, where demand was high for shares of such a “profitable” company. These same members of Congress voted to appropriate government funds to cover the inflated charges of Crédit Mobilier. Ames' actions became one of the best-known examples of graft in American history.

[jabberwocky]

Re: Teaching Men of Conscience a Lesson

Is Washington corrupt, bought and paid for by FIRE?

Yup.

Has Washington in the past been at least in part in the pockets of other powerful interests, such as the railroads?

Yup.

Think of government as a gun. What it does is in the hands of its users.

Today there are no counterbalancing forces to FIRE, or more broadly, neoliberalism.

They appear to have merged with government, molding it - mainly in the strengthening of the executive - to their interests.

Don't forget the government unions plus all the other unions paying huge campaign bribes to the Democratic party. And the main street media is feeding the same corruption.

Look at the stimulus which was susposed to help rebuild infrastructure, nothing went that way. It all was a political payoff for Democrat supporters.

[

QUOTE]Fascism is National Socialism, which has nothing to do with free markets.

I've said countless times that the Republicans are just as responsible. Both parties are captured by the special interests and corrupt. We need to replace both.[/QUOTE]


I was imprecise. Language is like that!
We have a governing apparatus that is owned by special interests. Corporatism, syndicalism, legalism, etc., whatever you wish to call it. Buy a politician, write your own laws.
Our capital markets can not really be called free anymore as long as manipulation, overt and covert, is rampant. The Fed is preventing any correction by enacting fiscal policy "by other means".
I suspect that I am more discouraged than most here. I know of no society that has reversed this level of corruption and degeneracy. I think EJ is too optimistic.

[BadJuju]

Re: Teaching Men of Conscience a Lesson

At this point, I think it is inevitable that we will slide into being just like Russia. As you said, jabberwocky, the corruption is just too entrenched these days to purge. It exists at every level.

[Thailandnotes]

Re: Teaching Men of Conscience a Lesson

I know of no society that has reversed this level of corruption and degeneracy.

You're living in such a society. Written well before the bailout...

http://www.csmonitor.com/2007/0522/p16s01-bogn.html

[jabberwocky]

Re: Teaching Men of Conscience a Lesson

With respect, the gilded age excesses benefitted a relatively tiny portion of society. The democratization of finance and corruption now is part of the fabric of entire American society, as I see it. The American constitutional model was imperfect, and perfecting, long past the end of the gilded age. My sense is that the arc of America "peaked" with the civil rights movement, surely a triumph for the nation, and has been in decline since. Even the most tarred "Robber Barons" seemed animated but a drive to leave to posterity a better world. Carnegie. JDR, etc. They believed in "progress", and duty, despite their brutal conduct.
Do you think Jamie Dimon is J P Morgan? I don't.
I hope my narrative interpretation is utterly wrong. Futurity will see.
BTW, I much appreciate your insights, TN

[don]

Re: Teaching Men of Conscience a Lesson

With respect, the gilded age excesses benefitted a relatively tiny portion of society. The democratization of finance and corruption now is part of the fabric of entire American society, as I see it. The American constitutional model was imperfect, and perfecting, long past the end of the gilded age. My sense is that the arc of America "peaked" with the civil rights movement, surely a triumph for the nation, and has been in decline since. Even the most tarred "Robber Barons" seemed animated but a drive to leave to posterity a better world. Carnegie. JDR, etc. They believed in "progress", and duty, despite their brutal conduct.
Do you think Jamie Dimon is J P Morgan? I don't.
I hope my narrative interpretation is utterly wrong. Futurity will see.
BTW, I much appreciate your insights, TN

The key here isn't the magnitude of human greed and thirst for power - that's timeless - but the shift from a productive economy - which could and did include child labor, slave labor (Chinese on the railroads) etc. - and a FIRE economy. The former produces useful things, regardless of whose on top, and the latter produces a transfer of wealth, taken from the producers and their savings. Historical context here means everything.

[jabberwocky]

Re: Teaching Men of Conscience a Lesson

I agree, Don. I would go even further, to suggest that we are beyond just wealth transfer, but that our present paradigm encourages activities that destroy wealth.
To follow MSM is to observe willfull blindness on a scale not possible prior to the tech revolution. We are F***Booking ourselves into oblivion and calling growth. Germany in Weimar times was a beehive of activity.