September 16, 2009

The noncooperating judiciary

It will be interesting to see how the Kumbaya Kid and the financial section of his cabinet react to the legal hardball currently being played in New York. It's not the White House's style. Obama prefers to defer any sort of punitive measure till the next time that perpetrators do the same illegal things. Maybe the U.S. tortured people during the Bush Administration, but it's pointless to do anything about it now, he argues. One could hear a similar sentiment in his speech on Monday on Wall Street. The next time that investment banks melt the world's financial system down through unchecked, relentless greed, there will be hell to pay by the bank's stockholders and management. This time, however, the same fall guy winds up holding the bag: the American taxpayer. And if Goldman Sachs and others want to pay themselves record bonuses at the end of this year, all made possible by virtually free money from the Federal Reserve, well hell - that's American capitalism, sort of, and in January, 2010, the bonuses paid in December, 2009, will be in the past, where they are immune from scrutiny or prosecution. But Obama suggested that Wall Street bankers demonstrate now that their hearts are in the right place (or that they even have hearts) by putting such bonuses up to stockholder vote, because that may become the law in the future.

I sometimes wonder if Obama himself believes there is any chance whatsoever that his precatory appeals to the better angels of the Banksters can succeed. If he does, I'm sure that Ari Emanuel's brother convinces him quickly otherwise.

Other players on the scene are not quite so easygoing, such as the New York federal judiciary and Andrew Cuomo, the Attorney General of New York state. They're all over the SEC and the Bank of America like a pit bull on a poodle (h/t: Mr. Bookman, the library investigator from "Seinfeld.") It seems that the Bank of America high command was aware prior to its forced-march acquisition of Merrill Lynch that the investment bank had already paid itself massive bonuses (about $20 billion in a year in which Merrill Lynch had lost money) in advance of the "permission" that the BofA told its shareholders in a proxy statement that ML required from BofA as a condition of any such bonuses; and, the losses from ML's mortgage subsidiary were much larger than those anticipated when BofA was ordered at gunpoint by Henry Paulson to save Merrill Lynch. So much so that BoA attempted to back out of the deal, citing the Material Adverse Change (MAC) clause in the acquisition deal.

The Securities & Exchange Commission, arousing itself from the coma it had enjoyed during the Bernie Madoff years (nice work, Christopher Cox!), investigated and found that BofA had indeed misled its shareholders on the advisability of the acquisition/merger, and brought an enforcement action in the lower Manhattan federal court of Judge Jed Rakoff. Such bad luck for the SEC and the BofA; these two parties had worked out a sweetheart deal, a "fine" of $33 million (three orders of magnitude away from the amounts actually involved in the BofA/Merrill deal). They could not have drawn a worse judge, from the standpoint of getting away with this collusive wrist-slap. Rakoff's whole career has been about the detection and prosecution of white collar crime. He teaches a course on the subject at Columbia Law School. Here's what he had to say about the settlement:
“The S.E.C. gets to claim that it is exposing wrongdoing on the part of the 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.”
As it turns out, neither party will get to claim either thing. Rakoff threw the settlement out and told the SEC it was going to trial next year in his court against BofA. Which brings up a question: what will the SEC do? Dismiss the case altogether?

This whole fiasco must be a considerable source of consternation in the Oval Office, where everyone is seen as everyone else's friend, and stuff like war crimes and massive financial fraud must always be considered in context. Rakoff, as judge and private litigator, has seen enough civil RICO, mail fraud and other crime to know this is a very naive view. These were all pigs feeding at the public trough and stealing everything that wasn't nailed down. They used bailout money and anything else coming through the door for personal compensation, with the idea that a panicked public sector would fork over the cash, no questions asked.

It was all going swimmingly, but here come da judge. Now Cuomo is gearing up his state court action against the BofA for securities fraud, and will subpoena its top management in the near future. Can the depositions of Paulson & Bernanke be far behind? It looked so much like a clean getaway, the TARP, the bailouts, all of it. Now what?

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