Tag: bailout
‘Bond Predators’ On Puerto Rican Debt Want Their Bailout

‘Bond Predators’ On Puerto Rican Debt Want Their Bailout

Puerto Rico is sinking in $73 billion of debt. Mired in a long-running depression, the U.S. territory has already cut essential services to bare bones. Puerto Rico can’t fully pay its bondholders without setting off total economic collapse.

One of two things can happen, short of doing nothing and setting off a humanitarian crisis. One is to let Puerto Rico restructure its debt in a federal bankruptcy court. The U.S. Treasury recommends that route.

A Chapter 9 bankruptcy would cost American taxpayers about nothing. Losses would be borne by the speculators who made the risky investments. The Financial Times has called hedge funds wagering on distressed Puerto Rican debt “bond predators.”

The other option is to have U.S. taxpayers bail out the island with enormous transfers of aid.

Guess which path the hedge funds want to take? The taxpayer bailout, of course.

And guess which side Washington Republicans are on? The hedge funds’. Funny how fast these “fiscal conservatives” forget their distaste for bailouts when their Wall Street benefactors come knocking for theirs.

Puerto Rico’s government debt comes with various levels of government guarantees, but none of it is safe. That some tax-exempt Puerto Rican bonds have recently traded for an average yield of nearly 42 percent illustrates how little that guarantee means.

Has the island’s government been guilty of mismanagement? For sure. The investors knew that all along.

Wall Street’s time-honored strategy for recovering from a bet gone south is to move the risk onto America’s taxpayers. To pull it off here, the funds have to stop a Chapter 9 bankruptcy, whereby the negotiations would move where they belong — between them and the Puerto Rican government.

But Congress must first pass legislation letting Puerto Rico use the bankruptcy option. As the law now stands, American cities can go into bankruptcy court (Detroit was an example), but U.S. states and territories may not.

A bankruptcy proceeding would cost the bondholders, but a flattened Puerto Rico wouldn’t be able to pay them, either. So Republicans are riding to the rescue with sneaky ways to get the American taxpayers to bear the losses.

Senate Finance Committee Chairman Orrin Hatch did a clever two-step. He blocked a vote on the bankruptcy legislation while proposing that U.S. taxpayers spend $3 billion helping Puerto Rico meet its obligations. The bondholders think that’s a dandy idea.

Presidential candidate Marco Rubio initially showed interest in the bankruptcy bill and participated in the drafting. After all, huge numbers of Puerto Ricans fleeing the economic disaster on the island have settled in central Florida. They are now the U.S. senator’s constituents — and also an influential voting bloc in a presidential swing state.

But then the Monarch Alternative Capital hedge fund apparently got to him. Rubio abandoned support for the bankruptcy bill shortly after Monarch’s founder helped throw the first of two fundraisers for him.

The predators are now trying to confuse the public by calling the bankruptcy option — the true alternative to a taxpayer bailout — a “bailout.” The Tea Party Patriots fell for the line. (Not so the conservative Americans for Tax Reform, which sees bankruptcy as a preferred alternative to transferring more taxpayer money to the island.)

BlueMountain Capital Management wrote, “Chapter 9 proceedings bail out Puerto Rico on the backs of the very bondholders Congress incentivized to invest in Puerto Rican municipal bonds.”

Some bond predators have no shame.

Adding another chapter to the sob story, some Republicans are now arguing that a bankruptcy could hurt average Americans who invested directly in Puerto Rican bonds or through a mutual fund. Yes, this can happen when average Americans speculate.

That’s capitalism, the grown-up version.

Follow Froma Harrop on Twitter @FromaHarrop. She can be reached at fharrop@gmail.com. To find out more about Froma Harrop and read features by other Creators writers and cartoonists, visit the Creators Web page at www.creators.comCOPYRIGHT 2015 CREATORS.COM

Photo: A protester holding a Puerto Rico’s flag takes part in a march in San Juan, Puerto Rico, November 5, 2015.  REUTERS/Alvin Baez

A Whining Wall Street Banker Pleads For Pity

A Whining Wall Street Banker Pleads For Pity

J.P. Morgan was recently socked in the wallet by financial regulators who levied yet another multi-billion-dollar fine against the Wall Street baron for massive illegalities.

Well, not a fine against John Pierpont Morgan, the man. This 19th-century robber baron was born to a great banking fortune and, by hook and crook, leveraged it to become the “King of American Finance.” During the Gilded Age, Morgan cornered the U.S. financial markets, gained monopoly ownership of railroads, amassed a vast supply of the nation’s gold and used his investment power to create U.S. Steel and take control of that market.

From his earliest days in high finance, Morgan was a hustler who often traded on the shady side. In the Civil War, for example, his family bought his way out of military duty, but he saw another way to serve. Himself, that is. Morgan bought defective rifles for $3.50 each and sold them to a Union general for $22 each. The rifles blew off soldiers’ thumbs, but Morgan pleaded ignorance, and government investigators graciously absolved the young, wealthy, well-connected financier of any fault.

That seems to have set a pattern for his lifetime of antitrust violations, union busting and other over-the-edge profiteering practices. He drew numerous official charges — but of course, he never did any jail time.

Moving the clock forward, we come to JPMorgan Chase, today’s financial powerhouse bearing J.P.’s name. The bank also inherited his pattern of committing multiple illegalities — and walking away scot-free.

Oh, sure, the bank was hit with big fines, but not a single one of the top bankers who committed gross wrongdoings were charged or even fired — much less sent to jail.

With this long history of crime-does-pay for America’s largest Wall Street empire, you have to wonder why Jamie Dimon, JPMorgan’s CEO, is so P.O.’d. He’s fed up to the tippy-top of his $100 haircut with all of this populist attitude that’s sweeping the country, and he’s not going to take it anymore!

Dimon recently bleated to reporters that “banks are under assault.” Well, he really doesn’t mean or care about most banks — just his bank. Government regulators, snarls Jamie, are pandering to grassroots populist anger at Wall Street excesses by squeezing the life out of the JP Morgan casino.

But wait — didn’t JPMorgan score a $22 billion profit last year, a 20 percent increase over 2013 and the highest in its history? And didn’t those Big Bad Oppressive Government Regulators provide a $25 billion taxpayer bailout in 2008 to save Jamie’s conglomerate from its own reckless excess? And isn’t his Wall Street Highness raking in some $20 million in personal pay to suffer the indignity of this “assault” on his bank. Yes, yes and yes.

Still, Jamie says that regulators and bank industry analysts are piling on JPMorgan Chase: “In the old days,” he whined, “you dealt with one regulator when you had an issue. Now it’s five or six. You should all ask the question about how American that is,” the $20-million-a-year man lectured reporters, “how fair that is.”

Well, golly, one reason Chase has half a dozen regulators on its case is because it doesn’t have “an issue” of illegality, but beaucoup illegalities, including deceiving its own investors, cheating more than two million of its credit card customers, gaming the rules to overcharge electricity users in California and the Midwest, overcharging active-duty military families on their mortgages, illegally foreclosing on troubled homeowners and… well, so much more.

So Jamie, you should ask yourself the question about “how fair” is all of the above. Then you should shut up, count your millions and be grateful you’re not in jail.

From John Pierpont Morgan to Jamie Dimon, the legacy continues. Banks don’t commit crimes. Bankers do. And they won’t ever stop if they don’t have to pay for their crimes.

To find out more about Jim Hightower, and read features by other Creators Syndicate writers and cartoonists, visit the Creators Web page atwww.creators.com.

Photo: Steve Jurvetson via Wikimedia Commons

Book Review: ‘Too Big to Jail: How Prosecutors Compromise With Corporations’

Book Review: ‘Too Big to Jail: How Prosecutors Compromise With Corporations’

During the past few years, a plethora of headlines have proclaimed one “record fine” after another against the major banks at the heart of the 2008 financial crisis. After each settlement, Attorney General Eric Holder took a victory lap to show that, in America at least, no corporate misdeed would go unpunished.

But each of those compromises — from Citigroup’s $7 billion to JPM Chase’s $13 billion to Bank of America’s $16.65 billion settlements — left the public feeling increasingly shafted, not victorious. The question became not only whether certain offenders are too big to fail, but also whether they are too big, too complex, too powerful, and too expensively “lawyered up” to jail.

In Too Big to Jail, University of Virginia law professor Brandon L. Garrett explores this question with the sharp mind and attention to detail that exemplify his profession’s most positive attributes. Examining the intricacies of key federal cases and corporate bargains since the turn of the 21st century, Garrett considers Enron enabler and now nearly defunct accounting firm Arthur Andersen, international bribery convict Siemens, tax-shelter manufacturer KPMG, recidivist environmental and safety offender BP, drug-money-laundering colluder HSBC, tax-evader strategists Credit Suisse and BNP, and the Big Six U.S. banks at the heart of the recent financial crisis. Garrett paints a picture more disturbing than mere skepticism about the kid-gloves treatment these corporate villains have received. He portrays a justice system more likely to overlook a mega-billion-dollar crime (in return for tepid promises of reform) than a minor drug offense by a teenager.

Garrett characterizes corporate settlements as a game played between Goliath-sized corporations and David-sized prosecutors. The results aren’t Biblical. Rather, they are all-too-modern victories for the Goliaths. Fines are light when companies must pay them at all. When required as part of a settlement, even modest reforms are mostly ineffective or impossible to measure. Corporations can’t go to jail for their crimes, but lately, neither do their CEOs, who use techniques like the “ostrich” to bury their heads in the proverbial sand and are thus “blinded” to the misconduct of their employees. Notable exceptions to the successful ostrich defense include WorldCom’s former CEO Bernie Ebbers, who chose a trial over a settlement; Enron CEO Ken Lay and CFO Jeff Skilling; and Tyco’s Dennis Kozlowski. All of these men were convicted and sentenced in the early 2000s, though Lay died before serving prison time.

Garrett’s comprehensive and evidence-driven analysis probes widely held assumptions that federal prosecutors methodically coddle corporations and their executives with agreements that are not major deterrents against future crime. Often, he writes, they settle with these corporations because it’s better than nothing. However, to him, if there’s enough evidence to bring the cases to begin with, harsher penalties should be the result. In the past decade, as the number of cases against publicly traded companies has mounted, prosecutors have gone from extracting adequate punishment — recall the savings-and-loan crisis, when hundreds went to jail — to reforming companies as part of sweetheart deals. In the wake of this shift, Garrett questions whether prosecutors should or even can reform corporations, and how, given the rampant lack of corporate transparency, this effort could be practically tested. He concludes that if future settlements include reforms, they should be monitored much more effectively.

Another way prosecutors are increasingly letting companies slide is through deferred prosecution deals. If a company reforms itself by firing the relevant employees or implementing enhanced reporting or compliance mechanisms, it can soften its punishment or avoid a criminal conviction entirely. Another escape mechanism is the non-prosecution agreement, which is as slippery as it sounds. As Garrett says, such agreements “are far too important to avoid judicial review entirely.” Companies can also settle for fines, but even when they include restitution to victims, as in the case of the $1.7 billion JPM Chase forfeiture payment in the settlement surrounding Bernie Madoff’s Ponzi scheme, restitution doesn’t begin to equal the magnitude of the victims’ losses.

Garrett holds a soft spot for prosecutors and opts to address the larger issue of systemic weaknesses. His solutions include requiring prosecutors to pursue convictions except where collateral damage — for example, to innocent employees and shareholders — would be too severe. He would require judges to supervise deferred prosecution agreements, as too often they are not a part of the scrutinizing equation, though this may burden already overworked judges who may be unfamiliar with complex derivatives or pipeline safety measures. He suggests more detailed structural reforms when they are warranted; too often, settlements require none, or ill-conceived ones. He wants fines high enough to serve as deterrents, and harsher sentencing guidelines for repeat corporate offenders. Lastly, he believes the public and shareholders should know more about corporate crime. Prosecution agreements, detailed accountings of how fines are calculated, and progress reports describing compliance should be publicly available.

Garrett considers federal regulators as also contributing to the systemic problems and related recidivism arising from weak penalties. In July 2010, for instance, the SEC settled with Goldman Sachs on a $550 million fine for fraud charges related to one of its collateralized debt obligations. It also required Goldman Sachs to “reform its business practices” without eliciting any admission of wrongdoing. Six months later, Goldman completed an internal review of its policies and found only limited changes were necessary. The announcement preceded a series of lawsuits and settlements with five different regulators and a state attorney general. The charges included breaking securities laws, defrauding pension fund investors, and foreclosure abuses. Those settlements cost Goldman Sachs more than $4 billion, a fraction of the firm’s assets.

Garrett concludes that the problem of inadequate settlements usually comes down to size and might. The firms that receive the lightest federal treatment have grown so big — often because regulators approve their mergers — that holding them accountable for their crimes opens significant issues of collateral damage. And according to the federal government, because Wall Street banks are perceived to be so economically or systemically important to the country — a mantra propagated by Wall Street and accepted by the Washington elite — it is therefore risky to prosecute these firms too fervently.

This fear-steeped narrative is a critical piece of the legal compromise puzzle. How could the Department of Justice punish the very firms the government is subsidizing and protecting? This bias routinely benefits corporations at the expense of their victims. The CEOs go on to bigger bonuses or golden parachutes while the firms rack up new violations with impunity.

Garrett’s masterful book is as important as it is timely. Though he occasionally delves into legal history and jargon, he does so to deliver a more complete picture of indulgent settlements. Part of the rationale for weak settlements stems from various interpretations of the definitions of corporations and their constitutional rights, which he explains in detail. He balances this exposition with the specific elements of recent settlements, which usually leave the biggest corporations strong enough to commit new crimes. In the case of Siemens, the sole company that comes off as “reformed,” Garrett also discusses the positive role that corporate monitors can play to ensure compliance, though they often receive multi-million-dollar contracts in the process.

Garrett’s tone remains level throughout the book, as he lets the substantial facts and his legal analysis speak for themselves. As a result, his proposals for reform — stricter prosecution agreements, stronger and ongoing judicial review of compliance requirements, and greater corporate transparency — come off as evenhanded and eminently logical. Readers are left to experience their own emotions (mine tended toward anger) at the overly collaborative settlement process and whether there’s any hope for its redemption. I remain skeptical, especially after reading Garrett’s book.

We must be grateful to Garrett for compiling the most extensive database of corporate settlement information available today — the federal government’s own compilation is but a subset of Garrett’s — and for shining a light not only on the manner in which corporations skirt the law, but also on what must be done to curb them. Too Big to Jail is a cogent, exhaustively researched plea for saner and more equitable legal oversight. Garrett ends by noting that corporate crimes can overwhelm the limited resources of the justice system, but also that corporate prosecutions are themselves too big to fail.

Nomi Prins is the author of All the Presidents’ Bankers: The Hidden Alliances that Drive American Power. Her other books include It Takes a Pillage: An Epic Tale of Power, Deceit, and Untold Trillions (2009) and Other People’s Money: The Corporate Mugging of America (2004). She was a managing director at Goldman Sachs, a senior managing director at Bear Stearns, a strategist at Lehman Brothers, and an analyst at the Chase Manhattan Bank. She is currently a senior fellow at Demos, the public policy think tank.

Detroit’s Emergency Manager Says Settlement With Museum Avoided Costly Legal Fight

Detroit’s Emergency Manager Says Settlement With Museum Avoided Costly Legal Fight

By Brent Snavely and Matt Helms, Detroit Free Press

DETROIT — Detroit emergency manager Kevyn Orr said finding a way to settle the issue of ownership of the art held by the Detroit Institute of Arts was critical to avoiding a prolonged, costly legal battle.

One of the central issues in the city’s bankruptcy case, which began in July 2013, has been the ownership of the art held by the museum and whether Detroit could or should sell the art to raise money to pay off its creditors.

Orr testified Thursday in bankruptcy court in downtown Detroit that the city believed it owned the art and sought to find out how much the art was worth last year. Nevertheless, the city also realized quickly that attempting to sell the art could be difficult.

“The DIA said it would fight and litigate every piece of art that the city would sell. The intent was that they would make it a very lengthy and painful piece of litigation,” Orr said today in U.S. Bankruptcy Court. “It would have been very expensive for the city.”

Orr said the city’s investment banker, Ken Buckfire, and Jones Day attorney Bruce Bennett met with DIA officials several times starting in April 2013. The city also hired internationally renowned art auction house Christie’s to assess the value of the DIA’s collection.

“We felt it was our obligation to value our assets,” Orr said.

Orr said the city ruled out Sotheby’s because Alfred Taubman, a DIA honorary director, once served as chairman of Sotheby’s.

Orr’s testimony Thursday was the 17th day of a hearing about the city’s plan of adjustment, a restructuring plan that the city is asking Judge Steven Rhodes to approve. If Rhodes approves the plan, the city will be able to exit bankruptcy. Orr also said Detroit would have faced a major legal battle with Michigan Attorney General Bill Schuette.

“I met with Schuette a number of times and he expressed under no uncertain times that he felt it was his duty” to protect the DIA’s art, Orr said.

Questions about the fate of the DIA began to emerge in the spring of 2013 even before the city filed for bankruptcy because of the city’s unusual ties to the museum.

In 1919, with the Detroit Institute of Arts in dire financial straits and Detroit’s economy booming, museum leaders ceded ownership of the art and building to city hall in exchange for annual funding. However, people and institutions that have donated art to the museum did so with the understanding that the museum would take care of the art and protect it.

In order to settle the legal issues, and resolve the ownership issues, the city agreed to accept $100 million from the DIA as part of the so-called grand bargain that will help the city emerge from bankruptcy. In return, the DIA will be spun off into an independent charitable trust that would own the collection and building.

Orr said a number of other proposals were considered, including using the museum’s art as collateral to obtain a loan. Orr did not like that idea.

“We are trying to get the city out of the debt business,” Orr said.

Photo: ifmuth via Flickr