Letting the Banking Rats Out of the Bag

The good judge smelled a rat.

"Was there some sort of ghost that performed these actions?" New York federal Judge Jed S. Rakoff demanded to know Monday in rejecting a deal that would let Bank of America off the hook in yet another banker bonus scandal. The Securities and Exchange Commission had charged the bank with covering up for outrageous bonuses given out at Merrill Lynch as the bank acquired the failed stockbrokerage, and now it was letting the bank off the hook with a chicken-feed fine.

"Do Wall Street people expect to be paid large bonuses in years when their company lost $27 billion?" the judge asked, and Lewis J. Liman, the lawyer for Bank of America, assured him they do: "My God! Bonuses on Wall Street? It is not a matter of surprise."

But for those of us less sophisticated in the ways of Wall Street, it is a surprise that Merrill Lynch executives were rewarded for failure at the same time Bank of America was using $45 billion in taxpayer funds to take over the brokerage house. Six hundred ninety-six executives who helped run Merrill into the ground were granted more than a million bucks each.

BofA lawyer Liman attempted to put an egalitarian spin on this government-sponsored welfare for the superrich by pointing out that all told, another 39,000 Merrill employees averaged only $91,000 in bonuses, but the judge wasn't having it: "I'm glad you think that $91,000 is not a lot of money; I wish the average American was making $91,000."

That's the point; the average American is paying for the banking debacle not only in taxes for the bailout but with lost jobs and homes. Yet the SEC, which is supposed to be protecting the ordinary citizen's interests, decided to give BofA execs a bye. The question is why Bank of America and Merrill failed to inform their shareholders that such payoffs were part of the deal. The details of the bonuses were known to BofA CEO Kenneth Lewis and other top bank executives but not mentioned in the merger agreement or proxy statements sent to the company's shareholders for approval.

The SEC complaint did accuse BofA of misleading its shareholders, but instead of digging deeply into how such decisions had been made and by whom, a deal was concocted in which BofA got off with a paltry $33 million fine. That is less than the bonus received by one of the Merrill execs. Yet the SEC deal would have closed the case on how that decision was made.

"You filed a rather uninformative, bare-bones complaint," Judge Rakoff told SEC lawyer David Rosenfeld, who lamely defended the decision to avoid going after the bankers involved, and it is instructive of whose interest he was serving that "[t]he lawyer for Bank of America periodically whispered what appeared to be suggestions to Mr. Rosenfeld," as a New York Times article put it.

Whispering between government regulators and the Wall Street honchos ostensibly being regulated is what got us into this mess in the first place. The SEC looked the other way as the banking bandits piled on hundreds of billions in toxic holdings, and its lawyers evidently still do not get the message that they are not supposed to be facilitators of financial rip-offs.

Thankfully, at least one judge had the courage to challenge the rules of the game and at least delay its predictable outcome. "I would be less than candid if I didn't express my continued misgivings about this settlement at this stage," Rakoff said. "When this settlement first came to me, it seemed to be lacking, for lack of a better word, transparency. I did not know much about the facts from the complaint, I did not know much, or really anything, about the basis of the settlement." He said that accepting the settlement "would leave uncertain the truth of the very serious allegations made" by the SEC and whether any of the bonus money was "derived directly or indirectly from the $20 billion" that BofA received from the government.

That is the only error the judge made; the figure is actually $45 billion in government bailout funds for BofA and $118 billion more in public money to guarantee its toxic assets. Given that enormous investment of taxpayer funds, and the trillions more put at risk because of the folly of those richly rewarded banking bonus babies, transparency would indeed seem to be required as the order of the day. As Judge Rakoff concluded, Bank of America and Merrill Lynch had not only "effectively lied to their shareholders" but the money to finance their bonus scam had come "from Uncle Sam."

Why has it been left to one stellar judge to sound the alarm, and why is Congress and the Obama administration looking the other way?

 

 

Comments

[mjc]

It's hard to extrapolate from one judge's analysis to the motives of Congress or Obama but any examination is certainly going to look rather sinister. The Obama administration has been playing fast and loose with the American public from the beginning, seeming to promise a NEW and fairer way to correct the economy and our society but those promises have turned to dust. Congress,, well, so many of them owe a great deal to some of the bankers for some time. The real problem, as I am sure you know, Mr. Scheer, is that there are no muckrakers these days willing to expose Congress or dig deeper into those the present administration is counting on for support. Plenty of brilliant economists have asked Obama to look into Summers' eyes, and Geithner's and others and discover plans that will really work without putting the foxes back into the hen house......but to no avail.

[Hoelder]

It always amazes me how anybody comes up with a formula to calculate salaries and bonuses in corporate America. What do you have to do to receive such enormous amounts? Is it the ideas and hard work of all productivity workers in the company or just: base compensation times worker time magic number equals salary?

[groovydave]

Amazingly, I just received to letters from financial institutions, my bank and American Express, informing me that they are raising rates. In fact, American Express has been so kind as to change my fixed rate on my card to a variable rate. That is a completely different account, not one I would ever sign up for. They leave me no choice but to cancel my business.

My bank has increased the minimum allowed that I must keep in my account to avoid fees. This is a discriminatory practice against poor and lower middle class people. The rich easily avoid such fees.

So let me get this straight -- they take my money, use it to play around with to increase their capital, they lose it, and now they want more? Plus they want to pay millions of dollars in bonuses for the pleasure of doing business with me. How is this not criminal?

[SangZe]

Why look the other way? What a stupid question. Congress is lining its pockets as fast as cash can be shoveled in its direction, and I am beginning to suspect the president is also on the corporate dole. I do not like the mob actions that have destroyed our chances for serious health care reform, but dammit, someone has to shake up these yahoos. Glib speeches by Obama no longer have any effect because they have proven shallow.

[gregczar]

"All it takes for evil to triumph is for GOOD MEN TO DO NOTHING"

If we ARE good men (and women), rather than do nothing...........

........What is the next step that EACH of us will take???????

[Eugene Skidmore]

the problem my dear citizens, is that corperate america has all the marbles. they control congress, they own the fed, and the threat of "we`ll take all the jobs away" is as rediculous as it is effective. how many americans actually profit from the "stock market"? just enough to solidify corperatist stranglehold on the economy. the truth is america is a rigged game.

[henryberry]

Despite the judge's acumen (probably not so much keener than many others') and his forthrightness (what is uncommon) and apparently intact social conscience (rare indeed), for all practical purposes the banking deal conceived and worked out by the Bush administration and implemented and clung to by the Obama administration is a done deal. There's a virtually nil chance of going back on it. Besides, the banksters already got what they were looking for--billions in government funds to tide them over a rough spot. So the banksters for the most part sailed over the rough spot. The bailouts saved the banksters without solving a problem. The problem remains. The problem is the way the banksters were doing business, certain mindlessly risky and incredibly profitable activities of theirs. Because of the way the Bush and Obama administrations approached the problem and worked hand-in-glove with the banksters, the problem and the possibility of all its ill repercussions has been magnified. The banksters must know they will not be able to get away with such plundering a second time (not in any time soon) without penalities and permanent reforms. So they are encouraged to go into overdrive in amassing money unto themselves because the next time there is such a crisis, that will be the end of the game for them. There will be no government bailout to give them a second chance. They won't be able to rerun the lame excuse "how were they to know?"

[Tecumseh]

The banksters have gotten away with thefts over and over again. If the judge sticks to his guns and forces prosecutions of individual banksters, they will have something to worry about before committing their next crimes. Sort of like China without the death penalties.

[zjr909]

I think what we have here is "a failure of communication." We the people think of words as having pretty much the same meaning wherever they're used. Obviously Wall Street thinks otherwise. To us, a "bonus" is something extra you earned because you did good work. To the "players" a bonus is something you negotiated for as part of your hiring contract - just another "perk" that's based entirely on who you are, not on what you do. See? We the "little" people have been brain-washed to think our performance counts for something in the grand scheme of things; and that if we're good little employees and go above and beyond what's expected of us, we'll be rewarded - with a "bonus." But the big guys are not even remotely interested in rewards; everything they get is theirs by right. Earn a bonus? What? Work - actually work - for a reward? Tsk, tsk. How quaint the people's concept of reality is. It just doesn't apply to them. Never has, never will.

[dynwit]

The best strategy at this point seems to be to take all our money out of banks and put it either in credit unions or under our mattresses, pay off our debt and never use credit cards again, and publicly ridicule the entire banking class on the media, on the streets, in the schools, etc. Come on, we're Americans. If our politicians are too corrupt to clean up their own mess, then we can deal with it in some very creative ways all on our own.

[Tom Langley]

The whole cheese is rotten indeed. When the inmates run the asylum, nothing ever really changes, does it? I wish it could be changed w/o revolution, but I don't think it can, and I don't think the US citizenry is capable of mounting a revolution. Not as long as there are some violent professional sporting events to watch for distraction. How can one afford time to be a patriot when there is the Michael Vick issue to debate?
Everyone is hypnotized or on anti-depressants, the gig is up folks. See it for what it is, a collar and a bell, You'll be called to slaughter at the needs of the market. Those markets function at the whim and fancy of the anointed few, not the cowering many.
Face it, full on gov't supported and protected capitalism generates unbelievable amounts of greed, and serves to concentrate power in the hands of the wealthy. It has never, ever, been any different. Now quit surfing and go to work.

[RichPort]

So I suppose this makes him a Constitution hating judicial activist, legislating from the bench...

[terramartom]

Politicians padding their own greedy pockets at every turn. Nothing can happen unless these politicians allow it to happen on their watch, because they make the laws. One set of laws for the average citizen and another set of the laws for the corrupt corporate rich, who donate to their political campaigns each year to buy favors and out and out fraud and criminal activity. At some point politicians will have to start worrying about their own safety. Americans are fed up with these crooks fleecing us Americans, always with a smile and a hand out.
That breaking point is at hand, and it is neither a political right or left issue. It is a tragedy in the making.

[biased2]

I read the NYT article first, and you should also.
He quotes accurately from that article and expands on it, like he's good at.
I ALWAYS make a point of reading Mr. Scheer's posts and you should too.
Don't forget to go to truthdig.com. (I should fan him eh?)

[schatsie]

When Genius Failed page 211. The Goldman lawyer demanded that JM and partners be stripped of day to day control, that they lose their indemnity from investor lawsuits and that they be stuck with full liability.....it DENIED THEM BONUSES, INCENTIVES, Liability Protection and Freedom to start anew, that it was INDENTURED SERVITUDE....They could not conceive of working for a salary of 250,000......

This is what the BANKSTERS did to LONG TERM CAPITAL MANAGEMENT less than 11 years ago and NOW look what the BANKSTERS are doing to US THE WORKING CLASS TAXPAYERS...

This is not right!!!

[baldmelon]

no investigations, not even a word about finding out who might have known what was going on all these years.
someone in our government needs to start finding out what happened before it's too late. all the banksters will take their loot and move to a tropical island.
in order that it never occurs again, things MUST be investigated!
if i were to damage the lawn ornament in a bankers yard i would be going to prison.

[Clem2]

Yes, kudos to Judge Rakoff.
But the whole cheese is rotten.... happened to see a repeat of the interview with John Bogel (Vanguard) by Bill Moyers.

He liked the US to Rome.... with the financial sector being a ridiculously huge sector and taking hundreds of billions of dollars OUT of the US economy, not contributing to it. Also not making money for stockholders or caring about the businesses, but caring about the top 5 CEO's or so.

He noted that big banks and insurance companies control most of the mutual funds, so they care about profits for their top people.... not advancing capitalism as it was meant to be..... a profit, sure, but a way to make life better.

He did mention that there is a possibility of violence as things become more and more unequal.

Wow, so Americans are actually gonna get off their butts to do something? Are there enough smart ones left even?

Spoke to a friend of mine and he just sees no way healthcare is gonna reform in this country. He's about ready to move to somewhere in Asia. And, yeah, he is an MD who says the system is just incredibly bad and won't be fixed.