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In S.E.C. Fraud Cases, Banks Make Promises Again and Again

November 8, 2011 by Leave a Comment

To an outsider, the vow may seem unusual. Citigroup, after all, was merely promising not to do something that the law already forbids. But that is the way the commission usually does business. It also was not the first time the firm was making that promise.

Citigroup’s main brokerage subsidiary, its predecessors or its parent company agreed not to violate the very same antifraud statute in July 2010. And in May 2006. Also as far as back as March 2005 and April 2000.

Citigroup has a lot of company in this regard  on Wall Street. According to a New York Times analysis, nearly all of the biggest financial companies — Goldman Sachs, Morgan Stanley, JP Morgan Chase and Bank of America among them — have settled fraud cases by promising that they would never again violate an antifraud law, only to have the S.E.C. conclude they did it again a few years later.

A Times analysis of enforcement actions during the past 15 years found at least 51 cases in which the S.E.C. concluded that Wall Street firms had broken anti-fraud laws they had agreed never to breach. The 51 cases spanned 19 different firms.

On Wednesday, Judge Jed S. Rakoff of the Federal District Court in Manhattan, an S.E.C. critic, is scheduled to review the Citigroup settlement. Judge Rakoff has asked the agency what it does to ensure companies do not repeat the same offense, and whether it has ever brought contempt charges for chronic violators. The S.E.C. said in a court filing Monday that it had not brought any contempt charges against large financial firms in the last 10 years.

Since the financial crisis, the S.E.C. has been criticized for missing warning signs that could have softened the blow. The pattern of repeated accusations of securities law violations adds another layer of concerns about enforcing the law. Not only does the S.E.C. fail to catch many instances of wrongdoing, which may be unavoidable, given its resources, but when it is on the case, financial firms often pay a relatively small price.

Senator Carl Levin, a Michigan Democrat who is chairman of the Senate permanent subcommittee on investigations and has led several inquiries into Wall Street, said the S.E.C.’s method of settling fraud cases, is “a symbol of weak enforcement. It doesn’t do much in the way of deterrence, and it doesn’t do much in the way of punishment, I don’t think.”

Barbara Roper, director of investor protection for the Consumer Federation of America, said, “You can look at the record and see that it clearly suggests this is not deterring repeat offenses. You have to at least raise the question if other alternatives might be more effective.”

S.E.C. officials say they allow these kinds of settlements because it is far less costly than taking deep-pocketed Wall Street firms to court and risking losing the case. By law, the commission can bring only civil cases. It has to turn to the Justice Department for criminal prosecutions.

Robert Khuzami, the S.E.C.’s enforcement director, said never-do-it again promises were a deterrent especially when there were repeated problems. In their private discussions, commissioners weigh a firm’s history with the S.E.C. before they settle on the amount of fines and penalties. “It’s a thumb on the scale,” Mr. Khuzami said. “No one here is disregarding the fact that there were prior violations or prior misconduct,” he said.

But prior violations are plentiful. For example, Bank of America’s securities unit has agreed four times since 2005 not to violate a major antifraud statute, and another four times not to violate a separate law. Merrill Lynch, which Bank of America acquired in 2008, has separately agreed not to violate the same two statutes seven times since 1999.

Article source: http://feeds.nytimes.com/click.phdo?i=e2600bad3cee49ab54e3403005e529cb

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In Rush to Assist Solyndra, U.S. Missed Warning Signs

September 23, 2011 by Leave a Comment

“It’s here that companies like Solyndra are leading the way toward a brighter and more prosperous future,” the president declared in May 2010 to the assembled workers and executives. The start-up business had received a $535 million federal loan guarantee, offered in part to reassert American dominance in solar technology while generating thousands of jobs.

But behind the pomp and pageantry, Solyndra was rotting inside, hemorrhaging cash so quickly that within weeks of Mr. Obama’s visit, the company canceled plans to offer shares to the public. Barely a year later, Solyndra has become one of the administration’s most costly fumbles after the company declared bankruptcy, laid off 1,100 workers and was raided by F.B.I. agents seeking evidence of possible fraud.

Solyndra’s two top officers are to appear Friday before a House investigative committee where, their lawyers say, they will assert their Fifth Amendment right against self-incrimination.

The government’s backing of Solyndra, which could cost taxpayers more than a half-billion dollars, came as the politically well-connected business began an extensive lobbying campaign that appears to have blinded government officials to the company’s financial condition and the risks of the investment, according to a review of government documents and interviews with administration officials and industry analysts.

While no evidence has emerged that political favoritism played a role in what administration officials assert were merit-based decisions, Solyndra drew plenty of high-level attention. Its lobbyists corresponded frequently and met at least three times with an aide to a top White House official, Valerie B. Jarrett, to push for loans, tax breaks and other government assistance.

Administration officials lay the blame for Solyndra’s problems in part on the global collapse in the price of solar energy components, which forced the company to sell its innovative solar panels at less than it cost to make them. Some lawmakers on Capitol Hill question whether the firm’s executives may have engaged in a cover-up of their precarious financial condition, allegations the company denies.

But industry analysts and government auditors fault the Obama administration for failing to properly evaluate the business proposals or take note of troubling signs already evident in the solar energy marketplace.

“It was alarming,” said Frank Rusco, a program director at the Government Accountability Office, which found that Energy Department preliminary loan approvals — including the one for Solyndra — were granted at times before officials had completed mandatory evaluations of the financial and engineering viability of the projects. “They can’t really evaluate the risks without following the rules.”

The Energy Department’s senior staff has acknowledged in interviews the intense pressure from top Obama administration officials to rush stimulus spending out the door.

“We had to knock down some barriers standing in the way to get these projects funded,” Matthew C. Rogers, the Energy Department official overseeing the loan guarantee program, said in March 2009, just days before Solyndra got its provisional loan commitment. Mr. Rogers said Energy Secretary Steven Chu had been personally reviewing loan applications and urging faster action on them.

Two committees of Congress, the Department of Energy’s inspector general and the Department of Justice are now investigating what went wrong in the Solyndra case. In Washington, it has set in motion a highly partisan battle over the benefits or failings of Mr. Obama’s stimulus program.

Some Republican lawmakers have raised questions about political interference in the loan decision, pointing to the fact that George B. Kaiser, a billionaire from Tulsa, Okla., was a fund-raiser for Mr. Obama’s 2008 campaign and the backer of a foundation that is Solyndra’s leading investor. While he has met with top White House and administration officials multiple times, Mr. Kaiser and administration officials say they discussed issues related to his foundation, not Solyndra.

Article source: http://feeds.nytimes.com/click.phdo?i=bdef293c060197041303d5e3712f6a9e

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Economix Blog: Laura D’Andrea Tyson: Recovering From a Balance-Sheet Recession

August 26, 2011 by Leave a Comment

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Laura D’Andrea Tyson is a professor at the Haas School of Business at the University of California, Berkeley, and served as chairwoman of the Council of Economic Advisers under President Clinton.

Unprecedented volatility on global capital markets and a sharp correction in global equity prices are warning signs that the United States, Europe and Japan are teetering on the brink of a double-dip recession.

Today’s Economist

Perspectives from expert contributors.

In the United States, growth in the first half of the year was far slower than predicted, and forecasts for the full year have been marked down. Even if the economy does not slip back into recession, the jobs crisis will persist, because growth will be barely enough to absorb the flow of new entrants into the labor force and certainly not enough to make a significant dent in the unemployment rate.

To develop cures to ease the jobs crisis, its causes must be diagnosed correctly. The fundamental cause is the drastic breakdown in private-sector demand brought on by the 2008 financial crisis that burst the debt-financed housing and spending boom preceding it.

This boom displayed all of the features of a major financial crisis in the making — asset price inflation, rising leverage, a large current account deficit and slowing growth. And the recession that followed had all of the features of what Richard Koo called a “balance-sheet” recession — a sharp decline in output and employment caused by a collapse of demand resulting from vast wealth destruction and painful de-leveraging by the private sector.

The economy is now mired in an anemic balance-sheet recovery in which many consumers and businesses continue to curtail their spending relative to their income, increase their saving and reduce their debt even though interest rates are near zero. And the process of de-leveraging is only beginning.

Real per-capita net worth in the United States is back at its 1999 level. The real per-capita value of housing equity has fallen to its 1978 level, and housing prices are still slipping in many parts of the country.

Household debt has come down to about 115 percent of disposable income, largely as a result of foreclosures, 15 percentage points below its peak of 130 percent in 2007 but significantly higher than its 1970-2000 average of 75 percent. Household saving has risen to about 5 percent of disposable income, far above the 2005 low of 1.2 percent but far short of the 1970-2000 average of 8 percent.

Consumption is the major driver of aggregate demand in the United States economy, and since early 2008 it has grown at an average rate of 0.5 percent in real terms. Not since before World War II has consumption growth been this weak for such an extended period.

Despite misleading claims by Republican members of Congress and by Republican candidates on the presidential campaign trail that the size of government, regulation and excessive taxation have caused the jobs problem, business surveys repeatedly have identified weak demand as the primary constraint on job creation.

As one small-business owner told The Los Angeles Times, “If you don’t have the demand, you don’t hire the people.” And the majority of economists agree on this diagnosis. They also agree that the recovery from a balance-sheet recession can be agonizingly long, with significantly slower growth and a significantly higher unemployment rate for at least a decade.

Recent data indicate that the United States is on such a course, and many economists are now drawing comparisons between it and Japan during the two “lost decades” following Japan’s 1989-90 financial crisis and ensuing balance-sheet recession.

A recent study by the economist Robert Gordon confirmed that the shortfall in private-sector demand, especially the demand for consumer services, residential and commercial construction, and consumer durables, is the primary cause of shortfalls in production and jobs.

He also found that strong net exports, in response to growing aggregate demand abroad, has reduced the jobs gap by about one million jobs, but these gains have been offset by cutbacks in domestic spending, including spending by state and local governments.

In other recoveries during the last 50 years, public-sector employment increased. This time it is falling: during the last year the private sector added 1.8 million jobs while the public sector cut 550,000.

What should policy makers do to combat the large and lingering job losses that result from a financial crisis and balance-sheet recession? Mr. Koo, whose book on Japan’s experience should be required reading for members of Congress, showed that when the private sector is curtailing spending, fiscal stimulus to increase growth and reduce unemployment is the most effective way to reduce the private-sector debt overhang choking private spending.

When the Japanese government tried fiscal consolidation to slow the growth of government debt in response to International Monetary Fund advice in 1997, the results were economic contraction and an increase in the government deficit. In contrast, when the Japanese government increased government spending, the pace of recovery strengthened and the deficit as a share of gross domestic product declined.

The credit rating agencies gave Japan a lower credit rating than Botswana, but this had no impact on the yield on Japanese government bonds. Contrary to the rating “experts,” investors were worried about a prolonged stagnation, not about the ability of Japan’s government to roll over its debt — and they were willing to buy this debt with their growing savings surplus. (Richard Koo, “U.S. Credit Rating Finally Downgraded,” Nomura Equity Research Report, Aug. 9, 2011)

Investors have had a similar response to the downgrade of United States government debt by Standard Poor’s. To investors, the downgrade signaled the possibility of premature austerity and heightened the risk of a double-dip recession, and this drove the yield on 10-year government debt to levels not seen since the 1950s.

The market understands that the most important driver of the fiscal deficit in the short to medium run is weak tax revenues, reflecting slow growth and high unemployment, and that additional fiscal measures to put people back to work are the most effective way to reduce the deficit.

Every one percentage point of growth adds about $2.5 trillion in government revenue. An extra percentage point of growth over the next five years would do more to reduce the deficit during that period than any of the spending cuts currently under discussion. And faster growth would make it easier for the private sector to reduce its debt burden.

But what about the growth of public-sector debt that would result from more fiscal stimulus? Some economists worry that the growing government debt will itself become a constraint on growth. But that certainly is not the case now — with weak private-sector demand and a huge output gap, spending and borrowing by the government are not crowding out spending and borrowing by the private sector.

What about the fact that by some estimates the debt-to-gross domestic product ratio is approaching the 90 percent threshold identified by Carmen Reinhart and Kenneth Rogoff as likely to reduce growth by a percentage point a year? As Robert Shiller has pointed out, the causality between this ratio and growth runs in reverse when the economy has lots of slack as it has now.

Under these conditions, slow growth leads to a higher debt ratio, not vice versa.

The United States government can currently borrow funds and repay less than it borrows in constant dollars. Surely there are many job-creating investment projects in education, research and infrastructure that would earn a higher rate of return. I argued in favor of more government spending on such projects and the introduction of a capital budget in my previous Economix post.

Even Professor Rogoff acknowledged in a recent interview that he would support more government spending on infrastructure, and there is widespread bipartisan support for infrastructure investment in the Congress and in the business and labor communities.

Unfortunately, the current extension of the highway trust fund and surface transportation bill expires on Sept. 30, as does the authorization of the federal gasoline tax and highway user fees to finance them. Now there are signs that Republicans in Congress, egged on by Tea Party attacks on the size of government, may block both measures, precipitating more than 100,000 job losses a month.

In a balance-sheet recession caused by too much private-sector debt, the government should also use its resources to catalyze debt workouts and debt reductions.

In the United States, where mortgages account for most of the private debt overhang, the federal government should enact stronger measures to reduce principal balances on troubled mortgages and to make refinancing easier. These measures would help stabilize the housing market, would prevent future defaults and would free money for borrowers to use to pay down their debt or increase their spending.

This would translate into stronger private-sector demand and more jobs. Many economists, including me, warned in 2008 that the economy would not recover until the housing market recovered, and the housing market won’t recover until the debt overhang from the housing bubble is reduced through programs that shift some of the burden to creditors from debtors.

Increases in public spending along with housing relief and expansionary monetary policy helped the economy recover from the Great Depression in the 1930s. The same combination of policies can help the United States recover from the Great Recession now.

At the end of World War II, the federal debt-to-G.D.P. ratio was 109 percent, one and a half times what it is today. Yet after the war the economy thrived, and no one questioned the government’s ability to pay its debt over time.

We should now be fighting a war against unemployment and the waste of resources, poverty, inequality and the hopelessness it causes.

Government debt may rise as a result of this war effort, but no one will question the government’s ability to pay its debt provided Congress and the president commit now to a balanced multiyear plan to reduce the long-run deficit once the war against unemployment has been won and Americans are back at work.

Article source: http://feeds.nytimes.com/click.phdo?i=0dd3aad8b31d8779aaf704a3da0fbf3c

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Warning Signs in Citibank Scandals in Indonesia

July 17, 2011 by Leave a Comment

JAKARTA — When they first became public, the scandals that have affected Citigroup in Indonesia seemed perfectly calibrated to stir fascination and anger in a country that had for years been a particularly bright spot in the rapidly growing banking sector in emerging economies in Asia.

First came the tabloid-ready allegations in March that a glamorous wealth manager at Citibank, Inong Malinda, had for years been fleecing her rich clients of millions of dollars to fund an opulent lifestyle. Ms. Malinda, who is in police detention awaiting trial, denies any wrongdoing, said Batara Simbolon, her lawyer.

Then, just days later, a politician, Irzen Octa, died in suspicious circumstances after a visit to a Citibank branch. In the room with him just before he died were outsourced debt collectors, from an industry with a reputation in Indonesia for intimidating tactics and occasional violence. Five people, including two Citigroup employees, have been charged with offenses including torture and false imprisonment in relation to Mr. Irzen’s death.

On one level, Citigroup’s twin scandals — both of which are wending their way through the legal system — serve as a cautionary tale. Castigated by politicians, punished by the central bank and flayed in the news media, Citigroup has become an ugly example for banks seeking to expand aggressively in a country where strong economic growth has taken place against a backdrop of weak regulations and ineffective institutions.

But on another level, analysts say, it is a lesson that may go largely unheeded. The reason? There is just too much money to be made.

“I don’t think this is going to affect anyone’s interest in entering Indonesian banking,” said Hendri Saparini, the managing director of Econit, an Indonesian economics consulting firm. “If you ask me, hopes about this huge market are far bigger than any concern about weak regulations — especially if this weakness can be taken advantage of.”

In a country with economic growth of about 6 percent a year and a burgeoning middle class, the Indonesian banking sector has thrived, while deregulation has allowed foreign banks to flourish alongside local firms.

Total loans in Indonesia grew by an average of 20 percent a year between 2005 and 2010, with consumer banking accounting for the largest increase, according to Bain Co., a global consulting firm. In the emerging field of Islamic financial products that comply with Shariah law, growth has been even stronger.

Bankers within the country are also in fierce competition to persuade wealthy Indonesians to break their longstanding habit of moving their money — and the fees they pay — to Singapore, a regional hub for private banking.

“If you looked at the number of people in 2005 in Indonesia with a bank account, that was 25 percent of the population,” said Ed Lin, one of the global heads of Bain’s financial services practice. “If you look at that in 2010, that 25 becomes 40 percent. In our estimates, that will go to about 70 percent in 2015.”

In Citigroup’s case, problems apparently arose in two parts of the fast-growing world of Indonesian consumer banking: private wealth management and credit cards.

As a result of the scandals, the central bank, Bank Indonesia, has banned Citigroup from taking on new credit card customers for two years and has barred it from opening new branches or recruiting new priority banking customers for one year. A local bank, Bank Mega, has also received sanctions for a case of internal employee fraud.

The accusations against Citigroup are not rare in Indonesia, said Ms. Saparini, the economist. Rather, the two scandals — a “volley of nonstop problems,” in her words — have trained attention on an environment in which many banks have aggressively chased customers, with little oversight from Bank Indonesia. Citigroup simply got stung publicly for its apparent lack of internal oversight, she said.

The government is working to control the banking sector more closely, but it has encountered obstacles. An effort to establish a new regulator, the Financial Services Authority, has run into a tussle over its independence between President Susilo Bambang Yudhoyono and members of the Indonesian Parliament, who want two of the body’s nine commissioner positions to be filled by people chosen by lawmakers.

As politicians wrangle, ordinary Indonesians feel frustrated.

Sudaryatmo, the head of the Indonesian Consumers Organization, who goes by one name, said banking was the third most complained about industry in Indonesia, after telecommunications and housing. Of particular concern was the widespread experience of consumers who say they were drawn into unsustainable debt by major banks and then haunted by often thuggish third-party debt collectors.

Article source: http://www.nytimes.com/2011/07/18/business/global/warning-signs-in-citibank-scandals-in-indonesia.html?partner=rss&emc=rss

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Airlines, Now Flush, Fear a Downturn

June 11, 2011 by Leave a Comment

But with the economy slowing down again, the stock market sputtering and high oil prices cutting into household budgets, the airlines may be harder pressed to keep their fares up and planes packed, at least without resorting to significant cuts in capacity when the summer vacation season is over.

Some warning signs are already there. The airlines have failed to raise fares in six of their seven efforts since March, suggesting that some passengers may be balking at the higher ticket prices. “Airlines have overreached,” said George Hobica, the founder of AirFareWatchdog.com.

Still, the airlines’ aggressive pricing strategy has worked well for them. Every major airline has managed to squeeze more revenue out of its passengers this year, thanks not just to higher fares but also to a growing multitude of fees. In May, for instance, United Continental Holdings reported that its estimated revenue per passenger was 14 to 15 percent higher than a year ago, while Southwest Airlines said that measure had risen 11 to 12 percent.

It has not hurt that mergers have left fewer airlines and that they have taken a more disciplined approach to controlling capacity.

For the summer, traditionally the busiest air travel season of the year, demand for airline seats remains strong. The Air Transport Association, the airline trade group, expects 206 million people will fly in June through August, an increase of 1.5 percent over last year. The association even expects the number of passengers on international flights this summer to break last year’s record.

Fares, meanwhile, are at the highest seen since their peak in the third quarter of 2008, when the financial crisis hit, according to statistics compiled by the Department of Transportation.

While fares change daily, the cheapest nonstop round-trip flight from New York to Las Vegas for the July 4 weekend was selling on Friday for $597. The cheapest flight from San Francisco to Boston and back, operated by United Airlines, was selling for $664, but that included one stop. Southwest Airlines was charging $703.80 for the trip, and that was with a stop in both directions. A week in Paris is also expensive — with round-trip fares for nonstop flights starting at $1,442 on American Airlines out of New York.

And these figures do not count the extra fees the airlines now charge, for everything from checked bags to priority boarding to reservation changes or fuel surcharges in international flights.

“It’s getting ridiculously expensive,” said Kevin Currie, a representative with the Teamsters union, who said he might soon curtail visits to relatives in Florida if ticket prices kept rising. “There are more people flying right now, so shouldn’t their prices go down?”

Of course, the airlines do not think that way. Since more passengers are vying for every available seat, they can keep raising fares and still fill their planes.

But there are cheaper fares to be had. Mr. Hobica, of AirFareWatchdog.com, noted that travelers could still buy a $280 round-trip fare between Newark and Los Angeles between July 3 and July 11, for example. “If you are willing to be flexible, there are deals.”

Steven Tilston, the senior director for analysis at Expedia, an online travel agent, agreed. “Flights are getting a little more expensive but that is not happening uniformly.”

Given the steeper fares, some travelers may be tempted to drive instead, despite the rise in gasoline prices. One Web site, BeFrugal.com, developed an online application that helps travelers compute the total cost of flying versus the time needed to drive between any cities.

The Web site calculates that it would take four hours and 50 minutes to get from a specific location in Salt Lake City to downtown Los Angeles by air, and cost $762, including cab fares along the way. The same trip could be made by driving about 11 hours for a total round-trip cost of $292.

This certainly has not been an easy year for the airlines. While air travel has recovered from the recession, fuel prices have surged this year. In addition, the earthquake and tsunami in Japan and the instability in the Middle East cut travel to those places. As a result, the International Air Transport Association slashed its forecast for the global industry’s profitability this week. The global trade group said it expected airline profits to fall sharply this year. Profits for North American carriers will drop to $1.2 billion this year, from $4.1 billion last year, the group said.

This article has been revised to reflect the following correction:

Correction: June 10, 2011

An earlier version of this article referred incorrectly to the airline offering a $664 round-trip fare between San Francisco and Boston. It is United Airlines, not Airways.

Article source: http://feeds.nytimes.com/click.phdo?i=67b1b97fe2ff3331507ba58cd6828d7e

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