The settlement was not crafted to act as a deterrent to future wrongdoing or to give the investing public confidence that the SEC is looking out for their interests in this post-Madoff era.
U.S. District Court Judge Jed S. Rakoff had finally approved the settlement between the Securities and Exchange Commission and Bank of America. Our concerns seemed at least to have made an appearance in the courtroom, though they clearly did not carry the day.
As we set out here before the judgment, our greatest misgiving in the proposed settlement was the inherent unfairness surrounding the $150 million penalty, which effectively involved the transfer, without their consent, of money from one shareholder pocket to another. The main players in the abuse, which included key officers and directors, got a pass on making any payment proportionate to their responsibility. To us, the settlement could easily have been concocted by Groucho Marx. It was not crafted to act as a deterrent to future wrongdoing or to give the investing public confidence that the SEC is actually looking out for their interests in this post-Madoff era.
Judge Rakoff correctly focused on this shortcoming in his combined opinion and order:
An even more fundamental problem, however, is that a fine assessed against the Bank, taken by itself, penalizes the shareholders for what was, in effect if not in intent, a fraud by management on the shareholders.
Unfortunately, the specter of judicial deference to tribunals like the SEC was also looking over his shoulder and he was unable to do more than register his chagrin. That does not do a lot for investors who were victimized by the shell game Bank of America engaged in, but it may serve as further evidence that the SEC needs to seriously rethink what precisely it is seeking in such settlements. Too often, they seem cleverly designed to create the illusion that justice is being served, rather than fostering policies that promote investor confidence in the capital markets and stand the test of garden-variety common sense on Main Street.
Judge Rakoff gave his verdict on that score, calling the settlement “half-baked justice, at best.” We see it more like a pie in the face of shareholders, despite the efforts of a plain-speaking judge to do his best to prevent it.
Regulators and the investing public need to demand that boards of directors be placed on the front line of accountability and not be allowed to slip away from scrutiny like some escape artist in a circus act.
The SEC’s settlement with Bank of America, still to be approved by the court, raises another question beyond the shell game contrived to give the impression – entirely misleading in our view – of a fair financial settlement for shareholders. Our thoughts on the $150 million “penalty” were set out here.
The boards of both Bank of America and Merrill Lynch appeared to escape the scrutiny of regulators, as well. While some 25 management personnel and in-house lawyers were deposed by the SEC, no independent director of either company underwent such questioning. Though a great deal of attention was focused on emails to and from legal counsel and management, there is no evidence of any effort to look into what the board was thinking when it came to its role in the merger or in related compensation and disclosure issues.
The settlement makes reference to some rather cosmetic changes in respect of the compensation committee. One bars members from accepting “consulting, advisory or other compensatory fees from the Bank…other than routine compensation for serving as a Board member.” But the Commission has offered no evidence that any compensation committee director at Bank of America was receiving anything beyond normal compensation. In any event, the idea that such ancillary compensation might have played a role in compromising the independent judgment of compensation committee members has no antecedent in any of the SEC’s supporting documentation. It has, instead, the appearance of being included as a part of the settlement to make it look like something meaningful was done.
Finally, the settlement requires the Bank’s CEO and CFO to certify proxy statements along the lines set out under the Sarbanes-Oxley Act for quarterly and annual financial statements. But there is no requirement that any independent director, like the chairman of the board or the chairman of the audit committee, has to certify anything along SOX standards. This has always been a flaw in the existing SOX legislation from our perspective. It is one that could have been addressed in the settlement, as the certification process is intended to concentrate the mind of key shareholder guardians in a way that ensures that they have done their due diligence.
It is astounding that in the recent succession of corporate disasters of Depression-era proportions – which many feared would lead to a return of Depression-era misery – the SEC has not been moved to conduct a sweeping review of the generic failings of the board of directors. The often expressed discovery that it was the last to know of the problems, and that it had no idea what was really happening around it, is a common refrain on such occasions, as we remarked some years ago to the U.S. Senate Banking Committee when it was considering legislation in response to the Enron et al. debacle, and as we repeated in an appearance before Canada’s Senate equivalent later. It does not assist in investor confidence or society’s faith in its giant institutions of capitalism that boards either view themselves, or are viewed by regulators, as the junior partners in corporate performance and outcomes, as if they were some 1950s suburban housewife who by custom and design tended to be sheltered from having any knowledge of or responsibility for the business affairs of the household.
Time and again, in one corporate calamity after another, the question has been posed: Where was the board? If the world’s top securities regulator is not prepared to dig deeper to find out the answer, if it is unwilling to hold directors’ feet to the fire during major enforcement investigations like the one involving Bank of America, that question will persist like a great mystery. But as the world has been painfully reminded on too many occasions, boards have a role beyond being viewed as a riddle or the perennial focus of ridicule.
They are the governing authority elected by company owners to operate in their interests and according to the customs and standards of society. They are generally paid handsomely to perform their tasks, and when they fail, the consequences, in personal and financial terms, have been devastating. The only option, therefore, is for regulators and the investing public to demand that boards be placed on the front line of accountability and not be allowed to slip away from scrutiny like some escape artist in a circus act.
Under the so-called new and improved SEC settlement with Bank of America, the bank will pay $150 million to settle the charges. According to court records, the settlement only “contemplates” that the sum will be paid, at some future date, to shareholders who were harmed by the bank’s non-disclosure of material facts.
But where is this money coming from? Funny, that’s B of A’s shareholders, too. To add to the insult, no details are provided as to exactly when investors would receive such compensation (from themselves, that is). One sees the handiwork of Groucho Marks all over the SEC’s arrangement. We hope U.S. District Court Judge Jed Rakoff, a much respected figure on these pages who rejected the SEC’s previous deal, will see beyond the mustache and glasses that mask the “hello, I must be going” settlement.
The SEC has become famous over the years for this kind of shell game, where it looks like something significant is being done but where there is much less than meets the eye when all is said and done. If there is any payment of a penalty, all or at least a substantial part should be made directly by the officers and directors (past and current) on whose watch the bank’s failures to disclose material information occurred. It was shareholders who were deprived of the information to which they were entitled. It serves neither their interests, nor those of justice, to have their money taken from one pocket and put into the other.
We examine other weakness in the settlement in a further comment.
The czars and kings of Europe could not grasp why the people revolted against the high taxes, low wages, and hunger inflicted upon them by those who knew only opulence and self-aggrandizement. The Davos mentality still cannot fully understand the resentment of a public saddled with massive unemployment and a bill for bailouts and social costs that soars into the trillions.
The annual winter parade of the puffed-up peacocks of privilege has come and gone at Davos. The dire state of the world once again showed the courtesy not to intrude upon the gathering of major élites from business and government, permitting them to descend in their private jets and frolic at the best-catered parties in Europe. Reality, as it generally does at the World Economic Forum each January, seemed to pass by, as well.
Last year, they missed the extent of the global financial meltdown – a big miss given that it is widely seen as the worst crisis in 70 years. This year, they had trouble seeing what reforms are necessary to prevent such calamities in the future – or even that any are necessary. In 2000, Enron CEO Ken Lay declared to his fellow Davos participants that his company was the “21st century corporation.” In 2003, the gathering was abuzz over U.S. Secretary of State Colin Powell’s rock solid assertions that Saddam Hussein controlled “hidden weapons of mass destruction meant to intimidate Iraq’s neighbors.” In 2008, former Treasury Secretary John Snow announced at Davos that any U.S. recession would be ”short and shallow.”
Reality, to those inclined to view it from the cloud-fringed temples of great heights or beyond the attended gates of deference and privilege, often appears fuzzy and ill-defined.
As it was with the monarchs of early 20th century Europe who presided over one calamity after another, those responsible for the failures and excesses that led up to the great financial crisis of the 21st century lack the vision to figure out the solution. The czars and kings of that earlier era could not grasp why the people revolted against the high taxes, low wages, and hunger inflicted upon them by those who knew only opulence and self-aggrandizement. The Davos mentality cannot fully understand the resentment of a public saddled with massive unemployment and a bill for bailouts and social costs that soars into the trillions that stems directly from the abuses, failures and negligence of those in charge of the world’s financial ship. Like myopic despots who seldom bothered to read history, and inevitably stumbled into catastrophe over its unheeded lessons, these modern misguided princes of finance have already forgotten the events of the past year and seem headed for further anticipated collisions with the future.
Instead of striking an uplifting tone that shows the titans of Wall Street and its counterparts (or, perhaps, counterparties) actually “get it,” the spirit of Davos produced the grating sound of ingratitude and obliviousness. Josef Ackermann, CEO of Deutsche Bank AG, talked about the “noble role” of banks and announced that the world should “stop the bank bashing, the blame game.” Mr. Ackermann was chairman of this year’s forum at Davos. Billionaire Stephen Schwarzman, a regular attendee at Davos, warned there could be costs to the public’s jaundiced attitude toward the banking system. “My biggest concern is that, as a result of either proposals or tone, that financial institutions are going to feel under siege and their [sic] going to retreat with their extension of credit,” he told CNBC. Lord Peter Levene, chairman of Lloyd’s of London, mocked government’s role in bailing out the financial system: “I’m from the government — I’m here to help. You guys in the industry don’t know what to do, so we’re going to fix it for you.”
How quickly they forget. Citigroup, Bank of America, Wells Fargo, Bear Stearns, Lehman Brothers, Merrill Lynch, UBS, RBS, Lloyds, Fannie Mae, Freddy Mac, AIG and so many more, were all crumbling under the massive weight of writedowns and losses and a withering credit market that only government was able to repair.
Change, especially for those in the Davos world, often comes not in the reform that reality demands, but in the fantasy that overly indulged egos command. Not surprisingly, there is a resistance in the world of high finance to adopting or supporting widespread financial reforms. A reliance upon extended methods of liquidity and a zero Fed funds rate seems ingrained in business plans. And in a culture where obsession with bulging bonuses still prevails, you have to wonder what kind of screwy financial Frankensteins are being assembled that may once again place institutions, and the public, at risk. Paul Volcker, please take center stage.
Perhaps the irony is not entirely lost on the world that while many of its citizens shell out for the misjudgments of these Alpine participants, they also pay, as taxpayers, shareholders and customers, for this annual march into the snow drifts of élite folly.
When it comes right down to it, there are few thoughts the big players mount at Davos that could not be distilled into a simple Tweet. Their use of technology and methods of transportation have changed, but in most other ways they are little different than the princes and grand dukes who trotted themselves out every so often to remind the people that they still existed, confusing – as receding fragments of supremacy so often do – vanity with relevance.
The World Economic Forum may have found its way onto YouTube. But in most respects it is still a silent movie involving people whose attire might seem modern but whose sense of originality and connection with much of the world is as unfashionable and out of date as the Hapsburg dynasty. One might have thought that the most costly financial crisis since the 1930s and the highest unemployment rates in decades would have produced a paradigm shift at Davos, too. Instead, the world was treated to an encore performance of over-hyped élites desperately struggling to cling to any vestige of credibility and respect. They have forgotten even the most recent past. They have shown little vision for of the future. This is not leadership. It is an outrage.
As in previous years, we have included a YouTube film that gives an uncanny portrayal of the Davos mindset of another era.
In his sworn testimony today before the House Committee on Oversight and Government Reform, U.S. Treasury Secretary Timothy Geithner reasserted that he had recused himself from making any decision in connection with AIG payments to Goldman Sachs in November 2008. But he also testified that he was made aware by Fed officials that the payments had been made. He knew this at a time when it was not public information and even Congress itself had been kept in the dark.
Some scepticism has been expressed on these pages before about the credibility of this scenario.
I have had some experience over the years in advising government agencies and public officials about issues related to conflict of interest and when there is a need to step aside. When they do, they keep out of any aspect of the matter; they don’t get updates and briefings on the decision in which they did not take part.
The Committee needs to dig deeper into what the details of Mr. Geithner’s recusal were and what legal advice he had on that subject. It also needs to look more carefully at what the mechanism was by which he became aware of the AIG counterparty decision – and why he felt he should be kept in the loop on the decision from which he says he removed himself.
The Senate’s vote for the Fed’s Chairman will be viewed as a crucial test for who stands with Wall Street and who stands with Main Street.
After some slightly encouraging rumblings in the contrary direction, it appears that the Senate is poised to confirm Ben Bernanke to a second term as Chairman of the Federal Reserve. Certain senators may be putting their jobs on the line when they do, however.
More and more, Main Street wants to know who stands with it. Mr. Bernanke is not seen as one of those figures. Having been part of the Greenspan-era bubble and then, even as Fed chairman himself, still blind to the dark clouds of financial crisis that were forming, his response was to shove an incomprehensible amount of money and support at Wall Street and the major banks. But he failed to come clean on the Fed’s dealings with the financial institutions that have been taking advantage of these generous programs and, in fact, has aggressively moved to prevent transparency and public scrutiny of them in a landmark case involving Bloomberg News.
Mr. Bernanke’s role in the AIG bailout, and in permitting the secret (at the time) payment of billions to other banks, including Goldman Sachs, is still not fully explained. In the nearly two years since this crisis was apparent and more than 12 months since Lehman Brothers was allowed to collapse, the Fed under Mr. Bernanke has failed to conduct any meaningful internal review as to what went wrong, what signals were missed and what steps the Fed needs to take to address them. At the very least, a vote on confirmation would seem premature until all the work by TARP’s inspector general, Neil Barofsky, is completed, including questions about AIG’s Fed-approved counterparty payments.
But Mr. Bernanke’s statement to legislators that he did as much as possible to prevent paying 100 cents on the dollar to Goldman is revealing on its face. Can you imagine the legendary Arthur F. Burns, who ran the Fed under President John F. Kennedy, or William McChesney Martin Jr., who served under a record five presidents, ever being blown off by some bankers who did not want to cooperate at a time of national crisis? Or is it a matter that Mr. Bernanke has grown so close to the big banks and their Wall Street cousins over the seven years he has been at the Fed that he just can’t say no to them? There is a reason why Wall Street itself is voting overwhelmingly in support of Mr. Bernanke’s second term, and it’s not because it thinks he’ll be great for Main Street.
Mr. Bernanke is a little like the $700 billion TARP legislation which he co-authored (with then Treasury Secretary Henry Paulson) in the fall of 2008. In a voice trembling with urgency, he told Congress that if it were not passed and implemented immediately, the entire economy would likely collapse. But the TARP was never used for its intended purpose. It did not address the main problems, as we predicted at the time. No toxic assets were ever bought up with it. It rattled many in Congress who thought they had been sold a bill of goods. And more than a year later, a couple of hundred billion of it has not been spent and still many additional costly initiatives were required to get the economy moving.
Has the reconfirmation of Ben Bernanke itself become something of a TARP, where what is being sold is not quite what is needed and will not be used for the intended purpose? Will the world really end if Mr. Bernanke is not reappointed? Or is there more risk of the opposite happening because he will miss other disasters that are brewing, just as he missed the early signs of the current one. Worse, will his cozy relationship with Wall Street end with a hideous price tag that drops like a rock at the doors of Main Street? Already, trillions in liquidity have been unleashed and the Fed’s balance sheet – a key measure of its lending to the financial system – has ballooned into the record trillions.
A clean break from the past of tolerated bubbles, missed signals and overly generous policies directed at the players who caused the problems in the first place is what is needed. Mr. Bernanke’s priorities, loyalties and convenient evasions have made him a poster boy for the discontent of Main Street and a part of what drives the forces of turbo populism.
Four years from now, Mr. Bernanke may very well be in office. But will President Obama and the senators who vote for confirmation and against the perceived interests of Main Street? It’s a role of the dice that should cause wise lawmakers to think twice.
It’s encouraging to hear that our earlier comparison between Fed Chairman Bernanke and Titanic Captain Smith was not lost on some senators.
