The Stone City

Words Made to Last

Tuesday, February 05, 2008

Feels Like Up To Me

Al Meyerhoff, Huffington Post blogger, has a rather coy by-line on a recent editorial in the Los Angeles Times: it says merely that he "is of counsel in a law firm specializing in securities fraud cases." [Sic.] In reading the editorial, "Financial forces run amok", this demonstrates substantial explanatory power. But it is not the full story; Mr. Meyerhoff is not merely of counsel, but a partner; and a partner at Lerach Coughlin, no less. One admires his humility in not advertising this fact. If I had helped to extract $45 billion from publicly owned companies -- in the name of protecting their shareholders, no less -- my pride would know no bounds.

I would have contented myself with a mere unpleasantry to this effect, but then I read the article more closely. It is a marvelous window into a looking-glass world... but let's let Mr. Meyerhoff describe it.

For about the last 30 years, our nation has been traveling the deregulation highway, a road with no rules or direction. We have let enterprise be free, business go unfettered, the good times roll. And roll they have, but to where? One stopping point: the current mortgage crisis.
The good times have indeed rolled; Mr. Meyerhoff has at least that much contact with reality. Thus we will refrain from criticizing his implicit denigration of freedom.

Recently, however, there has been a slight regulatory bump in the road. After its chairman acknowledged that "market discipline has in some cases broken down," the Federal Reserve released new mortgage lending rules "to protect consumers against fraud [and] deception." Banks making sub-prime loans will be required to actually consider the borrower's ability to pay and confirm a borrower's income before handing over the money. Now there's a radical notion.

Disclosure also will be required of those nasty little (actually not so little) "bonuses" that brokers receive for writing loans at rates higher than a poor, unwitting consumer can afford.

So "poor, unwitting" consumers will be protected by not being allowed to borrow.

To some, they may not be much, but the absence of such rules encouraged the predatory lending practices that have left millions of Americans facing foreclosure.

Let's take a look at how we got here before the deregulation highway takes us over a cliff.

The Reagan revolution was the beginning, when we started seeing rollbacks in government safeguards, such as those protecting food, drinking water and the environment. Then came the savings and loan crash in the 1980s, a pit stop that cost taxpayers $150 billion. President Clinton added the "bridge to the 21st century," along with his proclamation that the "era of big government was over." During his administration, Congress repealed a Depression-era law called Glass-Steagall, which kept banking and investment separate. Henceforth, banks could offer investment advice as well as loans -- one-stop shopping on the road to disaster.

I must grant that food, drinking water, and even an environment are good things, which is why Mr. Meyerhoff is attempting to associate his cause with them. The last two sentences, however, are the meat of the argument: like a dancer's arms circling to gain torque for the forthcoming pirouette. It should be noted that banks do not need investment banks to get into financial difficulties. Mr. Meyerhoff's long and distinguished career stretches back not only to the near-collapse of Manufacturers Hanover [dented in 1984, scrapped in 1992] but to the de facto government bailout of banks with substantial emerging-markets exposure [by lowering short-term interest rates, permitting them to ride the carry trade back to health] in 1982.

Let's also spare a thought for the liquidity crisis triggered by the collapse of Long-Term Capital Management. This was a trading, not a retail banking, crisis: at no point were Mom-and-Pop depositors threatened. Indeed, the deep pockets of the new universal banks, which Glass-Steagall had outlawed until its repeal, were crucial in preventing the downfall of the trading system. But where other observers might see triumph, Mr. Meyerhoff sees "disaster".

Next we have the pirouette itself: it seems that the real victims were not the "poor, unwitting" consumers of oversized houses, but the shareholders of immensely profitable banks:
However, deregulation of the markets really took hold in 1994 with the GOP's "Contract with America." The first to go were the nation's securities laws. Over a Clinton veto, Congress enacted the Private Securities Litigation Reform Act, making it far more difficult to prove securities fraud. Said to be necessary to free the markets of red tape and trial lawyers, it gave the green light to corporate chiefs such as Ken Lay and Dennis Kozlowski and led to the Enron, WorldCom, Tyco and HealthSouth fraud debacles. As a result, shareholders lost hundreds of billions of dollars from a wave of fraud unseen since the Roaring '20s -- and maybe not even then.

That explains why those foolish enough to buy shares in 1994 were so much poorer in 2000! Also, I am relieved to find out that Lay's and Kozlowski's actions were government-approved: I had been under the impression that something bad might have happened to them.
A declawed Securities and Exchange Commission, a neutered plaintiffs' bar and missing congressional oversight empowered Wall Street to push as far as it could. Facts were hidden, self-dealing was rampant and deceit rewarded. Congress finally intervened in 2002 by passing the Sarbanes-Oxley Act, imposing strict new accounting rules and other controls on business. That law is now under siege.
Emphasis mine.

The current sub-prime mortgage mess is simply the latest wreck on the highway. Banks have been left to their own devices, unchecked by government watchdogs or pesky regulations. Interest rates on millions of mortgages are set -- like time bombs -- to accelerate in 2008. Defaults of $1 trillion are predicted -- affecting not only large institutions such as pension funds, hedge funds and universities but also countless average Americans. Hand-wringing time? Just consider these recent events:

* Moody's and other such agencies have threatened to downgrade the ratings of securities that are based on mortgages that allow accelerated payment -- with far more bad paper still out there.

* To avoid bankruptcy after its stock plummeted because of record high foreclosures, Countrywide Financial is being acquired by Bank of America.

* Money managers including Bear Stearns and investment bankers Citigroup, Merrill Lynch and Washington Mutual are under investigation for fraud and allegedly making Enron-like off-balance-sheet transactions.

* Of the nearly 3 million sub-prime adjustable-rate loans surveyed by the Mortgage Bankers Assn., a record 18.81% are already past due.

What clearer evidence do we need that markets do not regulate themselves? Yet the government response has been mostly timid.

Let's review the bidding. Companies that made bad loans might lose money. Ratings agencies might change their ratings. Weak companies can be acquired cheaply by stronger ones able to buy during market downturns. Other lawyers, perhaps unlike Mr. Meyerhoff, allege that some losses were due to fraud -- not exactly an admission against interest. And yes, some bad loans are being repaid behind schedule; some far lesser fraction will actually default. Somehow we are meant to see this as evidence that we should have government intervention, modeled on the Sarbanes-Oxley act that costs shareholders $5,000,000,000 yearly.

The Fed's recent rules allow action against predatory lenders only on showing a "pattern and practice" of unlawful conduct; disclosures of "yield-spread premiums" -- kickbacks -- can still remain buried in a mountain of loan documents. Prepayment penalties make it nearly impossible for good-faith borrowers to get out from under bad loans. The Bush administration's voluntary mortgage rate "freeze" will reach less than 25% of borrowers.

Politicians of every stripe are running scared -- and for cover. Yet Republicans and some Democrats (lining up at the Wall Street trough) are actually still calling for less regulation of U.S. markets.

It is time -- it is past time -- to get off this deregulation highway. We need more government, not less, to protect us against banks and conglomerates and the sheer concentration of power they portend.

Calling for the heavy hand of government as an antidote to "concentration of power" is a feat of willful blindness.

We need the SEC to change from Wall Street lap dog to aggressive advocate for the public interest. Instead of holding round-tables with corporate lawyers to find ways to prevent shareholder lawsuits, it should act, for example, on an investors petition to require polluters to disclose their multibillion-dollar liability for climate change. And the Justice Department needs to be the people's law firm again -- not house counsel for big banks and corporations, as has been the case in every major fraud and antitrust lawsuit before the Supreme Court of late. And Congress needs to enact and send to the White House the proposed Mortgage Reform and Anti-Predatory Lending Act to strengthen consumer safeguards against rapacious bankers and their Wall Street enablers.

Change, it is said, is in the wind. There is no better place to start than reining in the robber barons of the 21st century.

Erm, Mr. Meyerhoff: that would be you.