April 19, 2021

DealBook: Selling the Home Brand: A Look Inside an Elite JPMorgan Unit

Johnny Burris, a former private client adviser at JPMorgan Chase, says he was fired last year because he refused to push investors toward the bank's in-house financial products.Joshua Lott for The New York TimesJohnny Burris, a former private client adviser at JPMorgan Chase, says he was fired last year because he refused to push investors toward the bank’s in-house financial products.

Everything is scripted for the brokers in an elite group at JPMorgan Chase: the sales pitches; the personal voice mail message; even the preferred desk candy, Glitterati Fruit Berry.

In a three-inch-thick training manual, the bank, the nation’s largest, details how to recruit clients, pitch products and, ultimately, close the deal — or, as JPMorgan puts it, “get to Yes!”

The manual is part of an intensive, weeklong training course. But it is only the beginning for JPMorgan’s army of top advisers, who are critical to the bank’s rapid expansion into wealth management, a fast-growing and highly profitable business. Interviews with more than 20 current and former JPMorgan brokers, as well as hours of recorded conversations between a former adviser and his bosses, portray a sales-driven culture that is unusually aggressive, even by Wall Street standards.

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While financial advisers at other firms are typically free to offer a variety of investments, JPMorgan pressures brokers to sell the bank’s own products, according to the current and former employees. Several advisers who resisted said they were told to change their tactics or be pushed out.

“We were not able to do the right things for our clients,” said Brad Scott, a financial adviser who quit JPMorgan in April 2012 and now works at LPL Financial. Mr. Scott said that an executive told the brokers on a conference call, “You are not a money manager; you are an asset gatherer.”

JPMorgan disputes the characterization. It says it puts its clients’ needs first and devotes considerable resources to assembling high-quality investments, which include a mix of mutual funds managed by JPMorgan and by third-party firms.

The inner workings of the prestigious program, known as Chase Private Client, provide rare insights into JPMorgan’s wealth management business, which is central to the bank’s growth strategy.

Current and former brokers in the program contend that the bank, at times, prioritized profit to the detriment of its clients. While such criticism is not uncommon in the financial industry or other sales-driven businesses, the brokers say JPMorgan took an extreme approach.

To bolster sales, said the advisers, many of whom spoke on the condition of anonymity because they feared retribution, JPMorgan largely pushes its own bank-branded investments, which include a mix of mutual funds. While the practice can be legal, competitors have moved away from such investments after facing perceived conflicts. The concern is that, driven by fees, banks will push their own products over lower-cost options with stronger returns.

Some JPMorgan brokers said that the bank did not allow them to disclose the performance of the investment portfolios they marketed until customers bought the products, so prospective clients did not have a clear understanding of what they were buying. JPMorgan says it does provide some performance information to potential clients, but the return figures do not take the fees into account.

Some advisers also worried that the in-house products lacked the usual safeguards from the Securities Investor Protection Corporation, the private, nonprofit group that helps the clients of defunct brokerage firms. While the chances of JPMorgan failing are remote, several brokers said they wanted the added layer of protection, especially for retirees.

Other advisers, though, noted the advantages of the Chase Private Client program, citing the extensive expertise of the bank’s money managers and investment professionals. “I’ve had the opportunity to work with many different groups and managers over these past years,” said Anthony Caravetta, who has been an adviser at Chase Private Client since 2011, “and I have never once felt pressure to sell” JPMorgan products.

A JPMorgan spokeswoman, Kristin Lemkau, said the bank’s products were “well diversified and designed by expert asset managers.” She added that brokers had the option to sell third-party products if it made sense for clients.

Still, some brokers who deviated from the program said they faced repercussions.

Johnny Burris, a former financial adviser in Sun City West, a retirement community in Arizona, was called into a meeting with his managers in early July to discuss why he wasn’t selling the bank’s products, he said. Mr. Burris said he favored traditional mutual funds with strong records and the usual protections.

“At the end of the day, obviously, we always do what is most appropriate for the client,” said Andrew Held, one of Mr. Burris’s managers, according to a recording that Mr. Burris made of the conversation, which was reviewed by The New York Times. But he went on to tell Mr. Burris that it looked “a bit odd” that he hadn’t “done any JPMorgan business” in the last three months.

Late last year, Mr. Burris was fired from JPMorgan. The bank said he “was terminated for not complying with regulatory requirements and not following firm procedure.”

Mr. Burris says JPMorgan fired him because of his resistance to selling the bank’s products. He has since filed an arbitration claim against JPMorgan for wrongful dismissal.

Ms. Lemkau, the JPMorgan spokeswoman, defended the bank’s practices, noting that Mr. Burris secretly taped his colleagues. “We believe it is unethical and unfair for Mr. Burris to use these piecemeal conversations to make his case,” she said. Mr. Burris said he recorded the conversations because he was concerned about his career after being pressured to sell JPMorgan products.

Within JPMorgan, Chase Private Client is considered a prestigious perch. The program’s customers typically must have $250,000 in deposits or $500,000 in investments.

In recent years, the bank has poured millions of dollars into the program, which offers retirement advice and investment products through a vast network of retail branches. By the end of 2012, Chase Private Client had 1,218 locations, up from 262 a year earlier. Mr. Caravetta said Chase Private Client investments gave clients “the ability to leverage our intellectual capital.” That way, he said, “clients don’t have to play adviser lottery as they do with some other investment firms.”

As JPMorgan expands the program, it is cutting back in less profitable areas and those crimped by new regulations, like trading. On Tuesday, the company said it would eliminate 4,000 jobs in consumer banking through attrition, largely from the lower-level positions in the bank’s branches, rather than from its pool of financial advisers.

To staff Chase Private Client, JPMorgan often looks within its ranks. Brokers with top sales records are routinely approached, the current and former financial advisers said.

When Mr. Burris was asked to join the program, one of his managers, Philip Haigis, indicated that there were a few “glitches,” according to tapes of the conversation. He said that Mr. Burris was not selling enough in-house products.

The bank, Mr. Burris’s bosses explained, examines the amount of JPMorgan-branded portfolios of mutual funds that brokers sell. “If you look at our firm, 50 percent of all our sales go” to those investments, Mr. Haigis said. Furthermore, he said, such products draw less scrutiny from the Financial Industry Regulatory Authority, which polices Wall Street.

“Chase makes investment recommendations based on what’s right for the client, not how heavily a product may be regulated, and managed products are subject to significant regulatory oversight,” said Ms. Lemkau, the JPMorgan spokeswoman.

Mr. Burris tried to explain to Mr. Haigis that his strategy achieved better returns.

“If you build all these individual portfolios, you also are the one that has to manage and tweak them and move them,” Mr. Haigis responded.

“That’s our job — that’s what we’re paid to do,” Mr. Burris said.

“Or you could be paid to let other people do it,” Mr. Haigis said.

JPMorgan would not make Mr. Haigis or Mr. Held, the other manager, available for comment.

Despite his bosses’ concerns, Mr. Burris was elevated to the elite program.

After joining the program, brokers attend training. The new recruits sit through sessions with titles like “Positioning JPMorgan Investments” and “Banking Product Overview.”

Mr. Burris and Mr. Scott, the former JPMorgan adviser who now works at LPL Financial, said that during their training, they were discouraged from discussing the returns of the bank’s products and told that they should focus instead on the overall story. “Chase Private Client is part of a firm with a proud history,” the training manual said. The bank played “an important role in helping manage the credit crisis through the acquisition of Bear Stearns.”

Shortly after his training, Mr. Burris was again called into a meeting about his sales.

In June 2012, Mr. Held acknowledged that the “bank-managed products are not the be-all, end-all.” But, he said, they are the same product offered “to clients that have $50 million. So there’s a lot of thought, a lot of intellectual capital and a lot of value.”

He added, “You need to be presenting the private-bank, JPMorgan products and managed investment solutions.”

“I’m not questioning your sales numbers,” Mr. Held said, according to Mr. Burris’s recording. “What I’m saying to you is you’re not embracing the JPMorgan private-bank platform,” he said, later adding: “You’re not doing the presentation that you were trained to do in New York.”

Mr. Burris, who now works at Oppenheimer Company, was fired four months later.

Article source: http://dealbook.nytimes.com/2013/03/02/selling-the-home-brand-a-look-inside-an-elite-jpmorgan-unit-2/?partner=rss&emc=rss

In Davos, Atmosphere for Bankers Improves

FRANKFURT — Two years ago, Jamie Dimon, chief executive of JPMorgan Chase, told an audience in Davos that people should stop picking on bankers. Mr. Dimon is still waiting for his wish to come true.

Bankers, always a big presence at the World Economic Forum in the Swiss city of Davos, arrive this year under less regulatory pressure and with better profits than in past years. But they are still on the defensive.

Mr. Dimon, scheduled to appear on one of the first panels when the Davos forum opens Wednesday, is again embroiled in controversy. Last week JPMorgan’s board cut his pay for 2012 in half, to $11.5 million, holding him accountable for a multibillion dollar loss in derivatives trading.

International bankers are under fire from the law enforcement authorities as well, and one does not have to go far from Davos to find examples.

UBS, based in Zurich, agreed to pay a $1.5 billion fine to the global authorities after admitting this month that it had helped manipulate a key benchmark rate used to set mortgage and other interest rates. Wegelin, a private bank based in St. Gallen, Switzerland, shut down earlier this month after admitting it had helped wealthy Americans evade taxes. The bank, founded in 1741, was the oldest in Switzerland.

And at a news conference last week in Washington, the managing director of the International Monetary Fund, Christine Lagarde, lamented a “waning commitment” to tougher financial regulation and called upon the banking authorities to finish the job of fixing the world’s banks.

For all that, though, bankers may find the atmosphere in Davos a bit more congenial than in some recent years. Among the government overseers who will also be flocking to the Swiss town, there seems to be a growing feeling that the banks have taken enough bashing.

Earlier this month, for instance, an international conclave of central bankers and bank supervisors, meeting in Basel, Switzerland, relaxed new rules that were intended to ensure that banks would be able to survive an event like the collapse of Lehman Brothers in 2008.

The rules, which are not binding but serve as a benchmark for national regulators, would require banks to maintain a 30-day supply of cash or liquid assets that are easy to convert into cash. But after the decision in Basel this month banks would have until 2019 to accumulate the additional cash and assets, instead of 2015. The regulators also broadened the kinds of assets that qualify, so that now they can include even some mortgage-backed securities—the same general class of security that was at the heart of the crisis.

Many analysts see the decision as a gift to the banking industry, which had insisted that planned new regulations will force them to curtail lending. Bank stocks in Europe rose after the decision.

“Most bankers I talked to breathed a huge sigh of relief,” said Cornelius Hurley, a professor at the Boston University School of Law and former counsel to the U.S. Federal Reserve board of governors.

Gavan Nolan, a credit analyst at Markit, a data provider in London, agreed that changes in the rules “went further than many had presumed, and in a direction that seems to favor the banks.” Still, in a note to clients he added, “the effects shouldn’t be overstated.” The rules “will still make it more difficult to make money, in comparison to the previous era.”

The discussions at Davos may offer clues about whether the Basel decisions foreshadow other concessions..

There is a risk that efforts to rein in financial risk could lose momentum as the Lehman trauma fades, Mr. Hurley said.

“We said to ourselves back in 2008, a crisis is a terrible thing to waste,” he said. “It seems the farther away we get the evidence is that we are wasting it.”

The World Economic Forum tends to be a place for talk rather than action, but it is one of the few events that reliably brings central bankers, regulators, economists, legislators and bankers under one snow-laden roof.

The discussions sometimes have been contentious, as in 2010 when U.S. policy makers like Representative Barney Frank met behind closed doors with top bankers including Brian T. Moynihan, then the chief executive of Bank of America.

Article source: http://www.nytimes.com/2013/01/21/business/global/21iht-davosbanks21.html?partner=rss&emc=rss

HSBC Will Pay $249 Million to Settle Foreclosure Review Case

HSBC agreed to pay $96 million to eligible borrowers who lost their homes to foreclosure in 2009 and 2010, and provide $153 million in other assistance, including loan modifications and forgiveness.

The bank said it was pleased to have reached the agreement and expected to record a pretax charge of $96 million in the fourth quarter of 2012 for the cash portion of the settlement. The bank said it expected to cover the loan assistance through existing reserves.

The settlement, with the Office of the Comptroller of the Currency and the Federal Reserve Board, is the 13th the agencies have reached this month.

The agreements stem from the reviews of individual loan files that regulators ordered in 2011 and 2012, after widespread mistakes were discovered in the way mortgage servicers had processed home seizures.

The reviews, initially expected to determine which borrowers were harmed and to compensate them based on their individual experiences, proved slow and expensive.

Ten banks, including Bank of America, Wells Fargo, Citigroup and JPMorgan Chase, agreed to pay a total of $8.5 billion — some in cash, and the rest in loan assistance — to end the reviews last week.

On Wednesday, Goldman Sachs and Morgan Stanley agreed to a similar $557 million deal.

About 112,000 borrowers whose homes were in foreclosure with HSBC Bank and other HSBC subsidiaries will receive some cash, regulators said.

Article source: http://www.nytimes.com/2013/01/19/business/hsbc-will-pay-249-million-to-settle-foreclosure-review-case.html?partner=rss&emc=rss

DealBook Column: Hold Your Applause, Please, Until After the Toasts

From left: Robert H. Benmosche of A.I.G., Marissa Mayer of Yahoo and Jamie Dimon of JPMorgan Chase.From left: Reuters; Chip Somodevilla/Getty Images; The New York TimesRobert H. Benmosche of A.I.G., left, Marissa Mayer of Yahoo and Jamie Dimon of JPMorgan Chase.

Gentlemen, ladies, please take your seats.

It is time for DealBook’s annual “Closing Dinner,” where we toast — and more important, roast — the deal makers of 2012 (and some of the still-hammering-out-the-fiscal-cliff-deal makers).

This year’s dinner is in Washington so that some of esteemed attendees can run back for negotiations.

We have a number of Wall Street deal makers at the front table: Jamie Dimon, Lloyd C. Blankfein and Warren E. Buffett. They may have an easier time negotiating than some of our elected officials because, as Mr. Buffett likes to say, “My idea of a group decision is to look in the mirror.”

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Across the way is Steven A. Cohen of SAC Capital. We sat him next to Preet Bharara, the United States attorney for the Southern District of New York, so they could get to know each other a little better. Steve, a little advice: don’t let Preet borrow your cellphone.

Greg Smith, the former Goldman Sachs banker who wrote a tell-all called “Why I Left Goldman Sachs,” is here. Mr. Smith managed to wangle a reported $1.5 million payday from his publisher, but his book sold poorly and his publisher was left with a huge loss. Nice to see you learned something from your years in banking, Greg.

Timothy F. Geithner and Ben S. Bernanke are sitting at the dais this year, as is Mario Draghi. Strangely, they are playing Monopoly under the table with real dollar bills. (I heard Mr. Bernanke tell Mr. Draghi, “We can always print more.”)

The board of Hewlett-Packard is at the table at the back. Senator Harry Reid and Senator Mitch McConnell, whatever you do, don’t ask Meg Whitman for pointers on how to make the numbers work.

Mario Draghi, the European Central Bank president, helped save the euro.Olivier Hoslet/European Pressphoto AgencyMario Draghi, the European Central Bank president, helped save the euro.

We’re pleased that Speaker John Boehner also decided to join us this year. We had asked him to invite some other senior members of his caucus, but as you can see from the empty seats at his table, none of them were willing to join him. So we’ve stuck him next to Vikram Pandit.

Mitt Romney just arrived and is sitting at the table sponsored by the Private Equity Growth Capital Council. He is with some of his supporters, among them Leon Cooperman of Omega Advisors and the Koch Brothers. And yes, Mitt, there is a hidden video camera in the floral arrangement in front of you.

Finally, a quick thank you to the folks from Barclays and UBS. Their teams who got caught up in the Libor scandal agreed to pay for tonight’s dinner. Apparently, there is some dispute with the caterer, however, because the bankers are trying to set the rate. (Rimshot.)

And now, before the humor runs out (if it hasn’t already), onto the official toasts and roasts of 2012:

Meg Whitman, the chief of Hewlett-Packard, has overseen a bad financial year at the company.Peter DaSilva for The New York TimesMeg Whitman, the chief of Hewlett-Packard, has overseen a bad financial year at the company.

TURNAROUND OF THE YEAR Robert H. Benmosche, A.I.G.’s chief executive, take a bow. The bailout of your company at the height of the financial crisis will probably never be popular, but it will be profitable. (And it should be a bit more popular, too.)

The Treasury Department sold its last shares in the company in 2012, racking up a profit of $22.7 billion for taxpayers. Mr. Benmosche, a tough-talking executive who at one point early in his tenure at A.I.G. threatened to quit because of efforts by the government to meddle in the business, revived a company that had been left for dead. Most of the media, the pundits and the speculators got it wrong. You got it right. We do all owe you a thank you.

LEADERSHIP LESSON: JAMIE DIMON Mr. Dimon, the biggest failure of your career happened in 2012 with the loss of more than $5 billion by a group of your traders, including one known as the “London Whale.” Many C.E.O.’s would have lost their jobs and certainly would not be given a toast.

But you did something most executives would not have done: you admitted to the mistake. In an age when it’s almost de rigueur on Wall Street to hide problems, obfuscate and shade the truth, you told it how it was: “We have egg on our face, and we deserve any criticism we get.”

That’s not to say the situation was handled perfectly; the lack of details about the loss and your continued pushback against regulations raised more questions than answers. But your insistence that “We made a terrible, egregious mistake” is a lesson in leadership for your peers.

CREDIT WHERE CREDIT IS DUE: MARIO DRAGHI Mr. Draghi, the economist and former Goldman Sachs banker turned president of the European Central Bank, nearly single-handedly saved the euro zone in 2012. In a master stroke, he said: “Within our mandate, the E.C.B. is ready to do whatever it takes to preserve the euro.”

That sentence will go down in history for the confidence it inspired in the markets and in countries like Greece, Spain and Italy that were thought to be on the precipice. Through behind-the-scenes shuttle diplomacy with leaders like Angela Merkel of Germany and Mario Monti of Italy, Mr. Draghi was able to convince reluctant politicians that it was in his purview to start buying up bonds if a country needed help — and requested it. So far, his comments alone have served as a remarkable backstop; no country has sought his help.

A BOARD IN NEED OF HELP, AGAIN Bashing the board of Hewlett-Packard is becoming boring. Its members, who have routinely turned over, had another tough year.

The company’s stock fell about 45 percent. H.P. disclosed that its $11.7 billion acquisition of Autonomy, in which it paid an 80 percent premium, had turned out to be a mess (which wasn’t exactly a secret) — or worse, a fraud. But in a strange twist, perhaps trying to remove some of the blame for the disaster of a deal, the board attributed at least $5 billion of the write-down of the deal simply to accounting chicanery.

Some have questioned H.P.’s math. Perhaps some of the write-down is the result of accounting problems, but $5 billion? C’mon. Hewlett’s board, however, still has some friends: It has paid an estimated $81 million to Wall Street to help orchestrate some its failed deals in recent years.

SEEKING FACEBOOK ‘FRIENDS’ Mark Zuckerberg, Facebook’s C.E.O., has been attending our “Closing Dinner” for years. (He wore Adidas flip-flops to his first.) Back then, he was the “It” boy — the one everyone in the room wanted to “friend.” This year, after Facebook pursued its I.P.O., some investors want to “unfriend” him.

As everyone knows, the market has not been kind to Facebook shares, which were sold at $38 a share and at one point this year dropped by half. The good news is that Facebook’s shares have rebounded and are now at about $26 a share; the bad news is that long-term shareholders are still down about 30 percent.

With questions about Facebook’s privacy policies and mobile strategy still at the fore, Mr. Zuckerberg has some work to do. Hopefully, when we reconvene next year, more investors will want to sit at your table. (My apologies for sticking you next to Andrew Mason of Groupon.)

YAHOO FINALLY GETS IT RIGHT For nearly the last five years, if not decade, Yahoo had clearly lost its luster. It went through a series of C.E.O.’s, its best engineers left to work at Google and Facebook, and its stock had tanked.

Enter Daniel S. Loeb, the activist investor. He saw value where others didn’t. He also used some clever powers of persuasion to get on the company’s board: He ousted Scott Thompson, Yahoo’s new chief (remember him?) for lying on his résumé by saying he had a computer science degree when, in truth, he had an accounting degree. That sleuthing, and the ensuing embarrassment for the board, gave Mr. Loeb an opening to get his slate of directors on the board.

But most important, once he got on the board, he did something nobody expected: He hired Marissa Mayer, a true Silicon Valley star from Google, to run the company. The jury is still out on the company’s future, but for the first time in ages, people are talking about the company as if it actually has a future. Kudos.

Article source: http://dealbook.nytimes.com/2012/12/31/hold-your-applause-please-until-after-the-toasts/?partner=rss&emc=rss

DealBook: Cravath Announces Bonuses for Its Associates

It is around this time of year that associates at the country’s largest law firms start wondering about their year-end bonuses.

Cravath, Swaine Moore kicked off the season on Monday by announcing bonuses for its associates that ranged from $10,000 for first-year associates to $60,000 for senior associates, according to a memo obtained by DealBook.

The numbers are a significant bump from last year, when bonuses at Cravath ranged from $7,500 to $37,500.

While the business environment across the Big Law landscape remains soft, Cravath, one of the nation’s most profitable law firms, has had a busy year. Large mergers-and-acquisition assignments included advising Hertz Global Holdings in its acquisition of Dollar Thrifty Automotive Group, and Grupo Modelo in its combination with Anheuser-Busch. On the litigation side, it is representing Credit Suisse and JPMorgan Chase in various lawsuits related to mortgage-backed securities.

“Thank you very much for your hard work during 2012,” the memo said. “We wish you a happy holiday season and new year.”

Here is the memo in full:

We are pleased to announce that the year-end bonus amount for each associate class is as follows:

Class of 2012 — $10,000 (pro-rated)
Class of 2011 — $10,000
Class of 2010 — $14,000
Class of 2009 — $20,000
Class of 2008 — $27,000
Class of 2007 — $34,000
Class of 2006 — $40,000
Class of 2005 — $50,000
Class of 2004 — $60,000

Bonuses will be paid on Friday, December 21. Absent special circumstances (approved by the Managing Partners), an associate must still be at the Firm on December 21 to be eligible for the bonus. The Firm does not apply any billable hour or similar criteria in determining eligibility for associate bonuses. As always, while receipt of the bonus for each individual attorney is dependent on suitable performance at that attorney’s experience level, virtually all of our associates will receive the full bonus.

Attorneys who were with the Firm for only part of the year or are working part-time will receive a pro-rated portion of the applicable class-level bonus. Bonuses for senior attorneys, specialist attorneys, discovery specialist attorneys and foreign associate attorneys will be determined on an individual basis.

Thank you very much for your hard work during 2012. We wish you a happy holiday season and new year.

Article source: http://dealbook.nytimes.com/2012/11/26/cravath-announces-bonuses-for-its-associates/?partner=rss&emc=rss

Today’s Economist: Simon Johnson: Money, Power and the Rule Of Law


Simon Johnson is the Ronald A. Kurtz Professor of Entrepreneurship at the M.I.T. Sloan School of Management and co-author of “White House Burning: The Founding Fathers, Our National Debt, and Why It Matters to You.”

Economic policy is always torn between helping the broader social interest – lots of ordinary people – and favoring particular special interests. Unfortunately, special interests typically win out in the kind of situation we have in America in 2012, when it’s all about spending money to win friends and influence people.

Today’s Economist

Perspectives from expert contributors.

The most effective way to push back against powerful special interests is to have the same rules for everyone – and to enforce those rules fairly, even when they are broken by the richest and most politically connected people in the land. Attorney General Eric Schneiderman of New York took a major step toward restoring the rule of law this week, by bringing a case against JPMorgan Chase. But it will be an uphill battle; the forces against him are incredibly strong, including some within the Obama administration.

Special interests always want to take over and organize society for their own benefit. In the terminology of economics, there are always some “rents” to be had – meaning some form of extra compensation that you get from tilting the playing field in your favor. Powerful people are always “rent-seeking,” another way of saying that they would like to feather their own nests. And such activities impose costs on society, lowering incomes and limiting opportunities for everyone else.

When money is the primary source of power, the special interests win hands down. They can create advantages for themselves. One way is through the market mechanism – as monopolists did with railroads and industrial sectors at the end of the 19th century.

Or they can capture the government and use state policies to help themselves – for example, by deregulating the financial sector and allowing excessive risk-taking in big banks. The ability to take such risks hurts all consumers and taxpayers while helping the special interests who get this advantage.

In a brilliant satire, Steven Pearlstein recently put his finger on a central problem: powerful people want one set of rules for themselves and different, less advantageous rules for everyone else. In modern America, Mr. Pearlstein points out, the rich and powerful also like to complain a lot.

Democracy can be a countervailing force. But if this is only about holding elections, and money buys votes, it is not much of a constraint on powerful people. At the beginning of the 20th century, the Senate was known as the “millionaires’ club” for a reason – most of its members were rich or very close to rich people.

In his classic book “The Logic of Collective Action: Public Goods and the Theory of Groups,” Mancur Olson articulated another central problem: it is hard to organize people around broader social interests, while special interests know exactly what they want and coalesce much more readily.

In this situation, it is essential to have elected officials who seek to enforce the law in an even-handed fashion. This was what Theodore Roosevelt did with antitrust law at the beginning of the century. J.P. Morgan (the man) was shocked that the Sherman Antitrust Act could possibly be applied to him, and he brought a great deal of political pressure against it.

Fortunately, Roosevelt was not prone to backing down, and we developed a broad and effective antimonopoly approach in the early decades of the 20th century.

In the case brought against JPMorgan Chase on Monday, Mr. Schneiderman’s complaint is straightforward: Bear Stearns (acquired by JPMorgan Chase in early 2008) misrepresented securities that it sold to the public before 2008.

“Bear Stearns led its investors to believe that the quality of the loans in its RMBS had been carefully evaluated and would be continuously monitored,” the summary of the complaint issued by Mr. Schneiderman’s office said, referring to residential mortgage-backed securities. “In reality, Bear Stearns did neither.”

As with the cheating by Barclays on Libor, or the recent money-laundering cases against HSBC and Standard Chartered, management was at best negligent (for background on those cases, see my Economix posts from the summer). More likely, in the case of Bear Stearns, misleading investors was a deliberate decision by top people.

The broader social costs of these reckless actions by Bear Stearns and others were enormous. If you have not already seen the recent report by Better Markets on the real costs of the financial crisis, you should read it, or its summary, immediately – it puts put total losses of gross domestic product at $12.8 trillion.

As Brian Kettenring of the Campaign for a Fair Settlement, Dennis Kelleher of Better Markets and others pointed out this week, this should be the first case of many to be brought by Mr. Schneiderman and presumably the relevant federal authorities. By all accounts, Bear Stearns behaved badly, and so did many other companies engaged in the business of issuing residential mortgages and turning them into securities that could be sold to investors.

The pushback against the New York attorney general is already intense, with bankers and their lobbyists mustering all possible political clout to prevent further cases and to force a small and inconsequential settlement when cases are brought.

The bankers assert that great damage will be done to the economy if they are held accountable. In fact, the greatest damage has already been done through their lack of accountability.

Since early 2009, the Justice Department and other government agencies have repeatedly declined to enforce the law as it applies to large financial sector companies. Jeff Connaughton provides chapter and verse in his compelling recent book, “The Payoff: Why Wall Street Always Wins,” which I wrote about in August. People at the very top of the Obama administration deferred excessively to the very largest Wall Street banks.

Have we now turned a corner? Watch carefully what Mr. Schneiderman is able to accomplish and what kind of political support he draws.

Article source: http://economix.blogs.nytimes.com/2012/10/04/money-power-and-the-rule-of-law/?partner=rss&emc=rss

DealBook: British Regulator Unveils Libor Overhaul

Martin Wheatley, Managing Director of the FSA, discusses changes to Libor.Carl Court/Agence France-Presse — Getty ImagesMartin Wheatley, managing director of Britain’s Financial Services Authority, said London’s reputation as a global center for financial services had been tarnished by the Libor scandal.

LONDON – A leading British regulator officially unveiled the government’s plan to overhaul the rate at the center of the manipulation scandal, but conceded that problems could still persist.

On Friday, Martin Wheatley, the managing director of the Britain’s Financial Services Authority, the British regulator, acknowledged that regulators should have stepped in sooner to fix the problems with the London interbank offered rate, or Libor. He also confirmed the broad strokes of the proposal, which came after a three-month review.
British authorities, which will provide more oversight, want to make it a criminal offense to alter the rate for financial gain. They also plan to implement new auditing systems to ensure traders cannot unfairly profit from small changes to Libor.

“There’s always a possibility for collusion,” Mr. Wheatley told an audience at Mansion House, the 260-year-old home to the lord mayor of London that is adorned with gilded statues and chandeliers. “But under the new regulatory structure, people would be taking a high risk.”

The proposed changes come amid an investigation into potential rate-rigging at big global banks like HSBC, UBS and JPMorgan Chase. In June, the British bank Barclays agreed to pay $450 million to settle allegations that some of its traders tried to manipulate Libor for financial gain. The firm was also accused of understating its rates submissions to make the bank appear healthier during the financial crisis.

Mr. Wheatley, who will lead the Financial Conduct Authority, a new British regulator that will become part of the Bank of England next year, said London’s reputation as a global center for financial services had been tarnished by the recent scandal.

In response, the country’s authorities have stripped the British Bankers’ Association, the London-based trade body that currently oversees Libor, from its powers to control the rate. A new administrator will be appointed over the next 12 months.

Organizations will be able to start pitching for the position next week. The data providers Bloomberg and Thomson Reuters, which collects the daily Libor submissions on behalf of the British Bankers’ Association, as well as NYSE Euronext have expressed interest in taking on the role. Users of Libor will still pay for the financial information, Mr. Wheatley said on Friday.

Regulators are aiming to improve the accuracy and reliability of Libor, which measures the rate at which banks lend to each other. To do so, they want banks to base the rate submission on actual market transactions whenever possible.

As part of that effort, authorities are planning to focus on fewer markets that are the most liquid. Five of the current 10 currencies, including the Swedish krona and Canadian dollar, will be removed over the next 12 months. The number of rates also will be reduced to 20, from 150.

British regulators will take a more hands-on approach with the rate. They plan to audit banks’ daily Libor submissions to avoid rate manipulation.

Even so, Libor will not be immune to manipulation. Because of limited interbank lending activity, Mr. Wheatley said, sometimes the rates would have to be based on a level of judgment from banks on what interest rates they would be able to secure from other firms.

“There’s still a risk,” he said.

Article source: http://dealbook.nytimes.com/2012/09/28/british-regulators-unveil-overhaul-to-libor/?partner=rss&emc=rss

DealBook: Goldman Makes Money for the Romneys

Mitt Romney's campaign stopped in Conway, S.C., earlier this month.David Goldman/Associated PressMitt Romney’s campaign stopped in Conway, S.C., earlier this month.

After a long, controversial wait, Mitt Romney released details of his federal tax returns on Tuesday, inciting a flurry of wide-eyed analysis from those curious to see exactly how Mr. Romney’s personal finances stack up.

DealBook perked up when it saw that many of the assets described in Mr. Romney’s returns were held in blind trusts managed by Goldman Sachs.

As beneficiaries of a blind trust, Mr. Romney and his wife, Ann, would not have picked the individual stocks contained in their trusts’ portfolios. But by examining the trusts’ 2010 returns, a picture emerges of how the Romneys have benefited from – and been hurt by – Goldman’s investment decisions.

In that year, two Romney trusts – the Ann and Mitt Romney 1995 Family Trust and the W. Mitt Romney Blind Trust – made nearly $2.8 million in combined capital gains from their Goldman investments, according to the trusts’ filings. Almost all of those gains, nearly $2.7 million, were long-term gains made by selling securities that the trusts had owned for more than a year.

The trusts sold a combined 7,000 shares of Goldman’s own stock, which was purchased in May 1999 when the firm went public. The shares, offered at the time of the I.P.O. to Goldman’s most important clients, including Mr. Romney, were issued at $53 a share. But they had zoomed up to $161.45 apiece by the time the trusts sold them in December 2010.

Aside from the Goldman I.P.O. shares, the Romneys’ trusts sold several financial stocks in 2010. A January 2010 sale of Bank of America and JPMorgan Chase stock produced a small loss and a small gain, respectively. More common were sales of retail companies like Target, Unilever and Apple.

Mr. Romney’s trusts made money on Research in Motion. His brokers bought shares in the BlackBerry maker in 2006 and 2008, long before the company’s stock began its precipitous slide. Before the worst hit last year, the trusts sold 1,027 shares in RIM, notching gains of more than $30,000.

Other investments didn’t work out so well. The trusts sold shares of Comcast class A stock in January 2010, near the stock’s multi-year low, for thousands of dollars in losses.

But the majority of the trusts’ sales in 2010 posted a profit. (This is not surprising – wealth managers often hold on to underperforming stocks in the hopes that they will recover in value.)

The Romneys’ trusts even owned shares of LVMH Moët Hennessy Louis Vuitton, which controls beverage brands like Dom Pérignon and Veuve Clicquot as well as fashion brands like Marc Jacobs and Fendi.

As a Mormon, Mr. Romney is prohibited from consuming the alcohol in Dom Pérignon. Luckily, his trusts were allowed to own its stock. A January 2010 sale of LVMH shares from the family trust produced a profit of around $20,000.

Article source: http://feeds.nytimes.com/click.phdo?i=df023b12d039e679373f90ff7faec4e6

A Deal on Foreclosures Inches Closer

But a final agreement remained out of reach Monday despite political pressure from the White House, which had been trying to have a deal in hand that President Obama could highlight in his State of the Union address Tuesday night.

The housing secretary, Shaun Donovan, met on Monday in Chicago with Democratic attorneys general to iron out the remaining details and to persuade holdouts to agree with any eventual deal. He later held a conference call with Republican attorneys general. But as he renewed his efforts, Democrats in Congress, advocacy groups like MoveOn.org and several crucial attorneys general said the deal might be too lenient on the banks.

The agreement could be worth about $25 billion, state and federal officials with knowledge of the negotiations said, with up to $17 billion of that used to reduce principal for homeowners facing foreclosure. Another portion would be set aside for homeowners who have been the victim of improper foreclosure practices, with about 750,000 families receiving about $1,800 each. But bank officials said Monday that the total amount of principal reduction and reimbursement would depend on how many states eventually sign on.

The government and bank officials would speak only on the condition of anonymity because the discussions were continuing.

Tom Miller, the attorney general of Iowa, said Monday that an agreement with the nation’s five largest mortgage servicers — Bank of America, JPMorgan Chase, Citigroup, Wells Fargo and Ally Financial — would not be reached “anytime this week.”

In a letter to administration officials, Senator Sherrod Brown of Ohio said the settlement as reported — its details were not fully known — was too small and would allow banks to pass on the cost of the settlement to “middle-class Americans” whose pension funds hold soured mortgage securities.

In addition to disagreements over the total amount, negotiations have been held up over the question of how much latitude authorities would have in pursuing investigations into mortgage abuses before the housing bubble burst in 2007. The banks are pushing for a broad release from future claims, but several attorneys general, including prominent figures like Eric Schneiderman of New York and Martha Coakley of Massachusetts, have demanded a tougher line on the banks.

Some state prosecutors have raised concerns that the settlement could prevent them from investigating broader claims.

Others have said that their citizens would be shortchanged if there were no guarantee that the relief would be distributed geographically.

This month, about 15 Democratic attorneys general who shared concerns about the course of the settlement talks met in Washington, including Ms. Coakley, Mr. Schneiderman, Catherine Cortez Masto of Nevada and Beau Biden of Delaware, who is a son of Vice President Joseph R. Biden Jr.

A week after the meeting, Mr. Donovan announced that a deal was “very close.” But none of those four attorneys general attended the meeting on Monday.

Neither did another important holdout, Kamala Harris, California’s attorney general, who opposed earlier proposed agreements.

In a bid to win support from California officials, Mr. Donovan proposed earmarking $8 billion in aid for beleaguered California homeowners, but that left other state attorneys general incensed, according to an official familiar with the negotiations.

“Attorney General Harris has consistently and repeatedly expressed concern about protecting her ability to investigate wrongdoing in the mortgage arena, and that remains a key lens through which she will evaluate any proposals,” her spokesman said Monday.

A spokesman for the Department of Housing and Urban Development declined to comment.

In a statement, Danny Kanner, a spokesman for Mr. Schneiderman, said “any settlement must not shut down ongoing investigations or release claims against the banks that must still be pursued.” Ms. Coakley also promised to continue to pursue her own lawsuit.

Whether California or other large states participate in an agreement will determine how much the banks agree to pay for the eventual settlement, according to bank officials.

Article source: http://feeds.nytimes.com/click.phdo?i=709dafbf9c7a9bd6416866ec5710c0d4

Stocks & Bonds: Daily Stock Market Activity

“This is going to destabilize a lot of those funding packages because they are all based on the AAA rating, and now you are going to have AA+ for France and Austria, and maybe down two notches for Italy,” said Alan Valdes, director of floor operations for DME Securities in New York.

The slide on Friday came as investors’ focus shifted back to the euro zone’s debt crisis.

After the markets closed in the United States, S. P. followed through with downgrades of France and Austria as well as seven other members of the 17-nation euro zone.

In recent days, the Standard Poor’s 500-stock index had reached five-month highs on the back of solid economic data in the United States. The tight relationship between American stocks and the euro has broken down in recent weeks, a sign investors have placed less emphasis on the euro zone’s woes.

The Friday sell-off shows Europe’s debt problems can still make American investors skittish, though indexes finished well higher than the day’s lows.

Banks led the decline, as the impending downgrades and lackluster earnings from JPMorgan Chase drove those shares lower. The S. P. financial index fell 0.8 percent, making it the worst performer of the 10 major sectors.

The Dow Jones industrial average dropped 48.96 points, or 0.39 percent, to close at 12,422.06. The S. P. 500 lost 6.41 points, or 0.49 percent, to 1,289.09. The Nasdaq composite index fell 14.03 points, or 0.51 percent, to 2,710.67.

For the week, the Dow rose 0.5 percent, while the S. P. 500 advanced 0.9 percent, and the Nasdaq gained 1.4 percent.

The Treasury’s 10-year note rose 16/32, to 100 5/32. The yield fell to 1.87 percent, from 1.93 percent late Thursday.

Investors will look to earnings next week for insight on how the euro zone’s debt woes may affect profits.

“If you get a weak recession or deep recession in Europe, it is going to hurt our companies and bring our market right back down,” Mr. Valdes said.

JPMorgan Chase slid 2.5 percent, to $35.92 after the bank said that its fourth-quarter profit fell as the European debt crisis weighed on trading and corporate deal-making. Jamie Dimon, its chief executive, expressed renewed concerns about the euro zone debt crisis.

The KBW index of bank stocks slipped 0.4 percent, after a streak of gains. The index was still up more than 10 percent for the year.

Bank of America shares fell 2.7 percent, to $6.61. Goldman Sachs lost 2.2 percent, to $98.96.

Volume was light with about 6.39 billion shares traded on the New York Stock Exchange, N.Y.S.E. Amex and Nasdaq, below the average of 6.68 billion.

The euro fell to a 17-month low on worries of the ratings cuts in the euro zone countries. The downgrade concerns overshadowed a successful sale of Italian debt.

“Things have not been improving in Europe. The timing is not perfect. It is sort of like kicking someone when they are down,” said William Larkin, fixed income portfolio manager at Cabot Money Management in Salem, Mass.

World stocks as measured by the MSCI World Equity Index slipped 0.6 percent after earlier falling more than 1 percent.

The pan-European FTSEurofirst 300 index of top shares fell 0.1 percent, to close at 1,017.84 points.

Underpinned by a flood of European Central Bank three-year loans to banks, Italy’s three-year debt costs fell below 5 percent for the first time since September in an auction, spurring hopes it would make it through a stretch of looming refinancing.

Gold fell as the dollar surged against the euro.

Spot gold was down 1 percent, to $1,630.40 an ounce.

“The dollar seems to be the main go-to safe-haven play at the moment,” said David Meger, director of metals trading at futures brokerage Vision Financial Markets.

Oil prices also fell. Oil futures for March delivery dropped 43 cents, to $98.88 in New York.

Article source: http://feeds.nytimes.com/click.phdo?i=5df0a44b51da6b0fdd7c4a931c22fdce