The Audit
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February 09, 2010 11:35 AM
New Financial Sheriff in Town, Part III
Times highlights SEC’s latest crackdown—on an Estonian brokerage
The Times continues the business-press tradition of hailing new regulators as saviors from the previous bad regulators.
"S.E.C. Enforcers Focus on Avoiding Madoff Repeat"
The problem is, as we've said, that we usually hear about the badness of the previous regulators only after they're already gone.
Don’t get me wrong; the Times’s focus on the SEC’s new enforcement staff is welcome.
There was a time when the SEC’s Enforcement Division was actually feared on Wall Street and its chief a household name. That’s no longer true, and that’s to no one’s benefit.
Some will find the macho photos of the new chief Robert S. Khuzami and staff a bit over the top, but let’s give them all the benefit of the doubt. To his credit, the new chief seems to get it (my emphasis):
The S.E.C. has been criticized for meting out relatively light punishments in some recent cases. The commission also has not satisfied critics on Capitol Hill — and many ordinary Americans — who had hoped to see charges leveled at banking executives after the financial collapse.
Mr. Khuzami recognizes that the cases the S.E.C. brings, or does not bring, will define his tenure and, possibly, the future of the commission. “It’s all about the cases in the end,” he said.
True, it is a bit unnerving that the main anecdote supporting the idea of a new, tougher SEC involves a crackdown on an Estonian brokerage.
After poring over thousands of trading records, S.E.C. investigators found a pattern of rapid buying and selling a brokerage firm in Estonia. Then they mined trading data from the firm and discovered that two traders had hacked into Business Wire, letting them see news releases involving a wide range of companies before they were released. With enough evidence to charge the traders with securities fraud, the S.E.C. quickly froze more than $32 million in 200 accounts at the Estonian brokerage firm.
“We need to sustain what we learned from that case,” Mr. Hawke said.
That’s putting it mildly.
It's also not heartening to me that memories of the Madoff failure are the new leadership's guiding motivation. Madoff was surely bad, but you'd hope the financial system meltdown would be the agency's lodestar.
The Times story also wisely reminds readers that when the new SEC leadership presented its Bank of America settlement to a federal judge, it was embarrassingly rejected and continues to cause problems:
On Monday, what S.E.C. officials had hoped might be a quick victory in a prominent case instead turned into another potential headache. Mr. Khuzami and a squadron of S.E.C. lawyers filed into a New York courtroom where the commission was trying to end its long investigation into the takeover of Merrill Lynch by Bank of America. But District Judge Jed S. Rakoff — who last September rejected as too low an earlier $33 million settlement that the S.E.C. had reached with Bank of America — again raised questions about the commission’s handling of the case. If he rules against the second settlement, for $150 million, the case is set to go to trial on March 1.
It’s just that we’ve seen this kind of story before. As we’ve noted, when John Dugan took over as comptroller of the currency in 2005, he was treated as a savior, too, by the WSJ:
Bank Regulator Cleans House —- New Comptroller of the Currency Makes Supervision a Priority
Dugan was a savior only in comparison to his predecessor, John D. Hawke, and that’s not saying much. And like Hawke, Dugan, too, actively fought to block states from policing predatory lending. It is now fair to say in retrospect that the OCC, again, to the say the least, did not make "supervision a priority."
In October, the WSJ hailed the arrival of Daniel Tarullo to head the Fed committee that oversees bank supervision.
The rise of Daniel Tarullo, a lawyer with a longstanding interest in bank regulation appointed to the Federal Reserve Board by President Barack Obama, is a sign the era of light-touch bank regulation is over.
These stories, while fine, are no substitute for sustained regulatory coverage of the type that was lacking during the pre-crisis era, a time of virtual regulatory collapse amid many credible warnings from state officials and other credible sources.
Here’s hoping we’ll be hearing more of Khuzami, whatever happens.
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February 08, 2010 06:18 PM
Audit Notes: Bloomberg Backs the Buck; WSJ on Future State Taxes; Big Money vs. Student Loansharks; Mortgage Banker Schadenfreude, etc.
Treasury Secretary Tim Geithner did his best on ABC News’s “This Week” to shoot down Moody’s speculation that the U.S. government could lose its triple-A bond rating.
Bloomberg follows with a detailed analysis of the long-term strength of the dollar (based on the handy Bloomberg Correlation-Weighted Currency Indexes), and why the greenback retains its position as the world’s reserve currency.
The amount of America’s government debt held by investors outside the U.S. rose 17 percent to $3.6 trillion in 2009 through November, according to the Treasury Department.
Purchases may continue to rise as investors seek refuge from growing sovereign credit risk in the euro area. The dollar “will benefit from relative liquidity of the U.S. Treasury markets,” Barclays Capital currency strategists led by David Woo in London said in a Feb. 5 report.It’s a helpful bit of reporting amid a lot of wondering about whither the deficit, whither the debt, and whither the dollar. Basically, Bloomberg says the dollar is still as sound as, um, one.
--The Wall Street Journal surveys states struggling with their own budget shortfalls, and finds many considering an expansion of sales taxes to services such as lawn care, accountants' advice, even hot-air balloon operators.
Some tax experts long have argued the most effective way to broaden the sales-tax base was to expand it into the service sector. Purveyors of goods can easily move across state lines or online, though services can't easily do so. "You can't get your plumbing fixed over the Internet," said Michael Mazerov, formerly research director of the Multistate Tax Commission, an organization of state taxing authorities, and now at the Center on Budget and Policy Priorities, a liberal advocacy group in Washington.
Makes sense; no word yet on what happens when balloons cross state lines.
--The Hill updates on President Obama’s bold State of the Union pledge to double exports over the next five years, reporting the U.S. Trade Representative Ron Kirk met with business-friendly Democrats in Congress to talk about trade.
I still don’t know how he plans to double it.
--The Big Money paints a not-too-pretty picture of the student loan business, with a piece pointedly called Loan Shark U. It’s mostly built around this stunning fact: while college costs are soaring, “The amount that students can borrow in federally subsidized loans has remained almost unchanged for more than 15 years.”--Finally, in case you missed it over the weekend, we enjoyed this bit of mortgage schadenfreude courtesy of the WSJ’s James R. Hagerty and The Washington Post’s V. Dion Haynes:
In the Journal:
Mortgage Bankers Association Sells Headquarters at Big Loss
The story, noted by Ritholtz and CalculatedRisk, is subtle, but a fun irony-fest nonetheless. The Journal account seems to dig the knife in a little deeper; we’ll add a little emphasis:John Courson, chief executive officer of the trade group, declined in an interview Saturday to say whether the MBA would pay off the full loan amount. "We're not going to discuss the financing," he said. A spokeswoman for the MBA added that the MBA has reached "an agreement with all relevant parties" regarding the outstanding amount on that loan but declined to provide any details.
A spokesman for PNC, a banking company based in Pittsburgh, declined to comment.
Here’s another low blow: Looking up what the guy said last year:
In an interview late last year, Mr. Courson said he believed mortgage borrowers should keep paying their loans even if that no longer seemed to be in their economic interest. He said paying off a mortgage isn't only a matter of personal interest. Defaults hurt neighborhoods by lowering property values, Mr. Courson said. "What about the message they will send to their family and their kids and their friends?" he asked.
And one more twist: the old press release:
When the MBA announced the purchase of the building in early 2007, the trade group's president at the time, Jonathan Kempner, said: "We have come to the inescapable conclusion that owning our own building was the smartest long-term investment for the association." In October 2009, however, the MBA informed its members that it had put the building up for sale. At that time, the MBA said that continued ownership of the building, which was financed with $75 million of variable-rate debt, would be "economically imprudent."
The MBA spokeswoman said some members have since then concluded that the trade group shouldn't be in the business of owning real estate.
Great job on this. We enjoyed the Journal’s take especially.
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February 08, 2010 10:56 AM
The Wall Street End Game
Barry Ritholtz sees no new news in yesterday’s Times piece recreating the AIG/Goldman talks, which forced the insurer to hand over collateral, pushed it toward the edge of insolvency, and revealed the yawning size of its exposure to toxic securities.
And I can understand the point.
But just as the outlines of the AIG bailout story—the widest public window onto the financial crisis—start to sound familiar, new insights emerge.
For instance, one section of this, in fact, valuable piece, by Gretchen Morgenson and Louise Story, looks at some of the deals whose value would later be in dispute and helpfully names the traders who created them, including one Ram Sundaram. The sourcing, by the way, looks very strong (my emphasis):
Mr. Sundaram’s trades represented another large part of Goldman’s business with A.I.G. According to five former Goldman employees, Mr. Sundaram used financing from other banks like Société Générale and Calyon to purchase less risky mortgage securities from competitors like Merrill Lynch and then insure the assets with A.I.G. — helping fatten the mortgage pipeline that would prove so harmful to Wall Street, investors and taxpayers. In October 2008, just after A.I.G. collapsed, Goldman made Mr. Sundaram a partner.
Here we get a useful glimpse into how an ill subprime wind becomes an aftermarket whirlwind. Goldman borrows from fellow global banks to buy the better-quality assets of the insatiable Merrill Lynch, freeing Stan O’Neal’s wrecking crew to buy more predatory loans, incentivizing mortgage bucket shops, including its own First Franklin unit, in strip malls across the country to peddle ever more defective products on debt-strapped civilians. (And if you wonder how Wall Street compensation fits into all this, check out this stellar Story story from the Times storied "Reckoning" series from the end of 2008.)
And so it goes.
This is the fuel that stoked the boiler-room culture that overran mortgage lending in the early ‘00s and kept it going during the critical later years, especially, 2006, when subprime lending reached an unheard-of $600 billion, or 20 percent of the mortgage market. We’ve written that the business press never really got its arms around the radical transformation of the mortgage business, a press failing that has led to all sorts of public policy mischief today (the link only goes to the first page of the story; write to editors@cjr.org for a hardcopy).
Importantly, the Times story also offers a reminder about the later stages of the mortgage bubble, when the financial sausage-making was starting to get really ugly. For a refresher on late-stage aftermarket sleaze, check out this superb December 2007 WSJ piece by Carrick Mollenkamp and Serena Ng on “Norma,” the Merrill-sponsored CDO vehicle managed by a Long Island penny-stock impresario. As the Journal story reminds us, Merrill was the top CDO underwriter from 2004 to mid-2007. Wrap your mind around that for a second.
I see a couple of press lessons here.One is that it’s hard to have TMI about AIG.
Two, the story of AIG-Goldman wrangling is another reminder that what might be called Wall Street’s end game offers investigative opportunities that have yet to be exploited. This is the period beginning sometime in 2006 and extending deep into 2007, when even the dumb money on Wall Street knew that it was all going down in flames. Indeed, this first-rate Times graphic with yesterday's story reminds us that even AIG—now exposed as the dumbest of all dumb money, ever—had figured out that something was amiss in the mortgage market when it stopped writing CDO insurance in February 2006.
And yet the subprime boiler rooms and CDO factories churned on.
Remember, when Chuck Prince famously announced Citi was “still dancing,” it was in July 2007.
It’s also worth remembering that this was the period when the banks were storing some of their worst assets off their balance sheets in so-called special investment vehicles, as this July 2008 Bloomberg story says.
``The riskiest assets we had, our CDOs, weren't even on our balance sheet,'' Merrill Chief Executive Officer John Thain said on a June 11 conference call with investors. Merrill would have to provide $15 billion in financing for CDOs and related obligations under a ``severe stress scenario,'' according to a Merrill regulatory filing published in May.
Bloomberg’s Jon Weil, as usual, was onto it early. His columns shouldn’t be the last word on this kind of thing, but the first.
The Goldman/AIG action offers a window onto Wall Street’s pre-crash period, which involved mammoth, unexplored and highly questionable transactions that go beyond even the likes of Goldman Sachs and AIG. My sense is that readers have only begun to understand this period because the press has only begun to explore it.
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February 05, 2010 06:28 PM
Audit Notes: Wessel on Press Failure; Cohan On a Bailout Mystery Pair; NYT on Student Loans, etc.
--David Wessel, the WSJ's economics editor, displayed admirable candor to a roomful of his financial press colleagues, I thought, in talking about the press's performance before the crash.
"I can't find one check on the financial system that succeeded," said David Wessel, the economics editor of The Wall Street Journal. Not the rating agencies, not the vaunted risk management programs. "I think we failed, too," he added, looking around the auditorium.
Where the press fits into the crash has been a big topic around here, as our regular readers know. As far as I'm aware, we're still the only ones to study pre-crisis press coverage systematically, with our "Power Problem" story in CJR's May/June issue, which sifted through thousands of Wall Street and lender-related stories published between 2000 and mid-2007 in the nine most influential business outlets (note: the link only goes to the first screen; write to editors@cjr.org for a hardcopy). We also posted a color-coded spreadsheet of 730 stories—the good, the bad, the ugly—to give a flavor of what was and wasn't written during the period when warnings would have made a difference. Chris Roush got the discussion started with the case for the defense. Damian Tambini of the London School of Economics published an important press study in the wake of the crash. I'd love to see other work on the subject.
A couple of quick points.
This isn't about finger-pointing or, it goes without saying, media-bashing. It is about finding ways to close the knowledge gap between Wall Street and the broader public. I'm not talking about raising "financial literacy," like how to avoid getting raked on your credit card, and the other usual nostrums. I'm talking about boosting the public's general sophistication level about the players and the process.
My take in "Power Problem" was that the absence of investigative stories on bad banks and their Wall Street backers was the main reason everyone, including the press, was so caught off-guard. So there should be more of those. But I'd be interested in other approaches. Wessel deserves credit for understanding the stakes—"We're not covering sports," he says—and for bucking a view held by a surprising number of senior editorial figures who can find fault with the entire financial system but none with the financial press. (h/t Roush.)
--House of Cards author William D. Cohan zeroes in on a couple of important figures of the crisis who haven't received nearly enough scrutiny: Warren Spector, the former co-president and head of the fixed-income division at Bear Stearns, and Dan Jester, former Goldman Sachs banker turned Treasury official.
--The Times has a strong story on the power of the student-loan lobby. Boy, it was only last summer that that industry seemed flat on its back. Good for the Times for keeping tabs on it.
--Finally, as long as we're picking through the crisis rubble, economists are another group that hasn't gotten the scrutiny they deserve for their role in providing intellectual support for a system that crashed. That's why the Journal's annual survey's of top forecasters might provoke a doubletake. Still, these surveys are interesting and worth reading, if with a grain of salt. Some of the comments are interesting, too. -
February 05, 2010 02:21 PM
Bond Market Blow-Ups
If another reminder is needed that we should all pay more attention to the bond market, the Greek debt crisis provides one.
It's not like we really want to learn the ins-and-outs of the fixed-income business; just like we're not all that inclined to study the melting temperatures of Arctic sea ice or the design of Toyota's gas pedals. It's just that these lessons keep getting forced upon us. The financial crisis has given us all (pun warning) a crash course. Indeed, it's the gift that keeps on giving, in so many ways, like the unemployment rate for one, a chunk of the deficit for another.
After all, it was the bond market that went haywire first back in the spring of 2007, as this Wikipedia entry illustrates, long before the much-smaller stock market. Indeed, the Dow sleepwalked past 14,000 until mid-October and returned above 13,000 as late as May 2008. Google stock charts are here. We wish Google bond charts were as readily available, but they aren't.
This morning, Europe’s smaller-country sovereign-debt drama is big news all around, and with good reason. (I call it "Greek" above for short. The other name, PIIG, for Portugal, Ireland, Italy and Greece, isn't very nice; indeed, Barclays has stopped using it in its research notes.)
As The New York Times calmly states on page one:
Just as America’s recession begins to ebb, trouble is brewing in Europe that may prolong a downturn on the Continent and ricochet through the global economy as it struggles toward a recovery.
Ruh roh.
This is a terrific chart.
The FT strikes a scarier tone.
Fears of sovereign debt contagion across the eurozone sent European markets sharply lower on Thursday as negative sentiment spread to Wall Street with US markets also hit by worse than expected jobless data.
A truly educational slide show from the FT is here.
The Wall Street Journal even invokes the "S-word," which I think is apt:
Many are beginning to worry that Greece could be the next "subprime"—referring to a debt situation that appears initially to be contained but that quickly spreads. It also focuses attention on the massive amounts of debt racked up by governments around the globe, including the U.S.
That this is serious business, the Journal makes clear (my emphasis):
Behind the turmoil are worries that a collection of European countries including Portugal, Ireland, Greece and Spain, known derisively as PIGS, won't be able to finance budget deficits that have ballooned to around 10% of gross domestic product. That has sparked fears that Europe's decade-old monetary union could unravel.
This sentiment spilled over into markets on Thursday. Although the European Commission had signed off on Greece's budget plans the day before, confidence was shaken at the same time by a stumble in a Portuguese bond sale and Spain's raising of its budget-deficit forecasts.
Incredible.
In a week where we’ve read so much about federal budgets and projected deficits, it would be nice if there had been more explanation about how the U.S. situation compares.
Floyd Norris gets us started on putting the U.S. in the picture:
In the United States now, some states, including California, are in severe financial straits. California represents a larger part of the American economy than Greece does of the European one, but even if it did default it would not create a national debt crisis, and Washington could provide help.
And he provides such good background on the euro, and the great dilemma at the core of that structure, that it makes me wonder why I bothered with grad school.
At the heart of the problem is Europe’s unwillingness more than a decade ago to choose either unification or separation. It wanted economic unification and continued political independence of nation states.
Great points.
As a corollary to the above, the Greek drama also shows that as long as we're providing more scrutiny to the bond markets, we might as well do the same for credit default swaps, the insurance products that are supposed to provide protection against bond defaults, except when they don't.
It's clear the CDS market, even after the AIG bailout, still needs more scrutiny and transparency, not to mention regulating—look how procyclical it is, as the Journal reports:
The credit-default swaps on debt of Greece and Portugal soared, indicating more worries about a default, investors became more alarmed. That often sets off a cycle of more CDS buying. Prices of government bonds issued by Spain and Portugal sank along with their stock markets, while the cost to insure these bonds against default using credit-default swaps soared.
All good stuff.
I'd just point out that the bond market problems really moved to prominence only when the stock market caught on.
Global Markets Shudder
Doubts About U.S. Economy and a Debt Crunch in Europe Jolt Hopes for a Recovery
Many readers would assume, correctly, that the "markets" in the Journal headline refers only to stocks. Hopefully soon, we'll all know better.
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February 04, 2010 06:27 PM
Audit Notes: Bloomberg on Why It’s Hard Being Green; K Street Roll Call; Reuters on AIG’s latest, etc.
--Bloomberg has a smart take on the problem of subsidizing green jobs: a lot of them are created in China.
President Barack Obama is spending $2.1 million to help Suntech Power Holdings Co. build a solar- panel plant in Arizona. It will hire 70 Americans to assemble components made by Suntech’s 11,000 Chinese workers.
That gap shows the challenge Obama faces as he works to create “green” jobs. Asia makes more than half the world’s wind and solar energy equipment, and is gaining ground as U.S. factories lose out to cheaper labor and higher demand for clean energy.
It’s like pouring water into a bucket full of holes.
--Roll Call examines the well-worn path from Capitol Hill to the law firms and lobby shops on K Street, and assesses the prospects for lawmakers who are calling it quits this year. It’s a good story to keep an eye on.
--The Daily Caller reports that the Obama administration is considering a proposal that would give government contracting preferences to companies that go beyond existing labor laws and provide hourly workers with health insurance, paid sick days, and other benefits. The site, launched by Tucker Carlson last month, hasn’t established its street cred yet, but it’s nice to see some coverage of the Department of Labor.
--The New Republic takes a thoughtful look at one of our favorite themes, those Washington tasks that should be easy to accomplish, and usually are – but then “some unique brand of dysfunction intervenes.” The case in point this time is President Obama’s plan to phase out the Bush tax cuts for the wealthy.
--The WSJ’s Neil King Jr. profiles Kent Conrad, the North Dakota Democrat who chairs the Senate Budget Committee. Conrad is one of the fiercest deficit hawks on the Hill—don’t let that bichon frisé on his lap fool you. (The dog’s name is Dakota, of course.) But, as the piece illustrates with some nice irony, he’s also done better than most at bringing home the bacon.
While advocating fiscal responsibility at the national level, the senator has ministered adroitly to one of the most government-dependent states in the country: a vast swath of parched prairie that is home to needy military air bases, Indian reservations, an aging population of 639,000 and thousands of farmers who, over the last decade, have collectively gobbled up an average of $715 million a year in crop subsidies and disaster payments.
--The L.A. Times continues to kick Toyota's bumper, this time with a good column by Michael Hiltzik on the company’s history of denying problems.
--Matt Goldstein of Reuters reports that AIG has struck a deal in effect to borrow Barclay’s good credit rating to preserve some of the value of AIG’s derivative contracts. Good story there.
While it's startling to think that, even with $180 billion in U.S. government support, AIG still has to worry about its credit profile, Moody's says it bases its rating on AIG's prospects once the support is withdrawn. It now rates the company A3, far below its pre-crash heyday, with a negative outlook. And yes, we're still listening to the rating agencies. Don't ask us why.
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February 04, 2010 10:49 AM
The Journal Reveals Yet Another Mortgage Bug
This is just a good story by Carrick Mollenkamp in the Journal this morning, showing one more trapdoor in the mortgage products sold during the bad old days.
Mortgage-Index Quirks Prove Costly
That’s putting it mildly.
Apparently, adjustable rate mortgages sold during the period, besides their many other well-documented defects, also were pegged to different indices, and now some people, the Journal finds, are watching their payments rise 25 percent or more, while others’ payments stay the same or drop on loans that are otherwise identical.
This of course can be the difference between solvency and default.
Few homeowners have heard of or understand these indexes, which have acronyms like Cosi, Codi and Cofi, along with the better-known Libor. And few know how they are calculated or what they mean for borrowers.
Never mind what the acronyms mean or what they’re based on; you can read all about it in the Journal. But here’s the dilemma faced by one borrower (my emphasis) in a good anecdote:
Joseph Henning, of Huntington, Mass., borrowed $215,250 in January 2006 from Golden West unit World Savings Bank and was one of the customers who received a letter from Wachovia in August 2007 telling him he needed to choose between the Wachovia Cosi, which was replacing the Golden West Cosi, or Codi. "You scratch your head—OK, how do I make a wise choice?" said Mr. Henning, a heating and air-conditioning system salesman.
The Journal shows it would take more than a passing familiarity with the mortgage markets to choose between Columns A and B.
"In a rational environment, all of these indices, and especially Cosi and Codi, should be fairly closely correlated," said Ed Craine, the chief executive of Smith-Craine Real Estate Financing, a mortgage broker in San Francisco, in an email. "However, as you can see, Cosi has gone 'off the tracks.' "
Cosi is off the rails, ladies and gentlemen.
Mr. Craine said borrowers that opted for a loan tethered to Cosi are dismayed to find their mortgage costs are substantially higher than loans taken out by their friends that are tethered to other indexes.
I’m not sure how they could have known. Think about it. They would have first had to understand the fine print—then run to their Bloomberg terminals to crunch historical patterns of CD rates, which is what Codi is based on, versus their particular bank’s own savings rate, which is what the Cosi is based on. But even then they would have had trouble:
"Wells Fargo does not publish proprietary details of CD rates for competitive reasons," Wells Fargo spokeswoman Mary Eshet said. "But the Cosi index is audited by a third party and has been approved by our regulators." She added: "Historically, Codi has been higher than Cosi at times and Cosi has been higher at times than Codi depending on the interest-rate environment and trends."
This is not a transparent market. Then there’s the government, not being helpful.
A spokesman for the Office of Thrift Supervision said the agency must review and approve any index that isn't national or regional. The spokesman declined to comment on specific institutions.
The Journal story speaks to wild informational asymmetries that marked the mortgage market during the frenzy. The seller does this for a living; the buyer is an HVAC salesman. (I guess the asymmetry is also true when the roles are reversed and the HVAC salesman is selling an air conditioner to a mortgage broker. That must be why we have a Consumer Products Safety Commission. Hmm. This all gets very political very quickly.)
In the great free-for-all over the causes of the financial crisis, some, like me, believe that mortgage market changed fundamentally in the '00s, while others—the everyone-was-in-on-it school—believe there was a big cultural shift that toward irresponsibility that led people to take unreasonable risks.
The story doesn't prove anything, but it does add good information. I'll chalk it up as one for my side.
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February 03, 2010 06:03 PM
Audit Notes: WSJ v. Pay-to-Play; NIM(Budget)BY; Limousine Liberal, etc.
--Pay-to-play is a scourge of local and state government, and the Journal does a good job ferreting it out this morning in the area of securities-fraud lawyers and their campaign giving to the officials who run public pension funds.
I admit I was not thrilled to see another story banging the plaintiffs’ bar; they are a bit of a business-press piñata, an easier target than say, Toyota, and yet they’ve traditionally been excellent sources for important journalistic investigations over the years and, let’s face it, have done plenty of good, too.
Still, Mark Maremont, Tom Mcginty and Nathan Koppel deliver plenty of evidence that play follows play in public-pension funds' securities-fraud suits around the country.
Tiny Norfolk Count, Mass., has been involved in a dozen fraud suits since 2006, and its treasurer received 68 donations at the $500 limit from the partners and relatives of the New York law firm that handled ten of them. That's blatant.
The graphics are good, too.
I would have loved to have seen more context in this piece, though. Most of the defendants in these suits were no angels, either. Indeed, one of them, UnitedHealth, was front-and-center in the Journal's 2006 investigative series on executive-options backdating that won the Public Service Pulitzer the following spring. The probe was led in part by Maremont himself, whose work we've long admired. Read our interview with him here.
A paragraph would have done it.
--Politico does a nice bit of hypocrite hunting, calling out some lawmakers who talk tough when it comes to cutting government spending, but don’t want to see the budget axe fall too close to home.
--The Washington Post deftly shows just how hard it is, even for someone with humble roots like President Obama, to step off of Air Force One and seem like a middle-class guy.
--I'd never thought I'd see the day, but TimeWarner is doing better.
--Finally, it’s a column, but this Ruth Marcus piece really hits on an underplayed issue: just how tough peoples' working lives have become.
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February 03, 2010 02:05 PM
Toyota No Longer Attacking the L.A. Times
The business press has done well documenting Toyota’s spiraling problems, including this morning’s news that U.S. regulators are accusing the carmaker of dragging its feet on fixing defective gas pedals.
The Journal, for example, provides a good overview of Toyota’s safety and business troubles, including new problems cropping up with the Prius in Japan.
But while other papers did good work, only the Los Angeles Times can claim the distinction of having been attacked by the carmaker well before its troubles were widely known, back when the company was still vigorously defending its safety record and its many loyal fans were still howling over press accounts that called attention to safety concerns about the company.
On December 23, Toyota posted on its website this statement:
Today the Los Angeles Times published an article that wrongly and unfairly attacks Toyota’s integrity and reputation.
While outraged by the Times’ attack, we were not totally surprised. The tone of the article was foreshadowed by the phrasing of a lengthy list of detailed questions that the Times emailed to us recently. The questions were couched in accusatory terms.
Despite the tone, we answered each of the many questions and sent them to the Times. Needless to say, we were disappointed by the article that appeared today, and in particular by the fact that so little of our response to the questions appeared in the article and much of what was used was distorted.
Toyota has a well-earned reputation for integrity and we will vigorously defend it.The statement was signed by Irv Miller, group vice president for environmental and public affairs of Toyota Motor Sales U.S.A., Inc. and offered a link-through to its detailed replies to the LAT’s questions.
Miller was responding to a December 23 story, by Ralph Vartabedian and Ken Bensinger (an ex-colleague of mine from the Wall Street Journal), that ran under the headline:
Toyota found to keep tight lid on potential safety problems
A Times investigation shows the world's largest automaker has delayed recalls and attempted to blame human error in cases where owners claimed vehicle defects.
The story said that Toyota engineers found acceleration problems back in 2003, but only issued a recall last year.
During a routine test on its Sienna minivan in April 2003, Toyota Motor Corp. engineers discovered that a plastic panel could come loose and cause the gas pedal to stick, potentially making the vehicle accelerate out of control.
The automaker redesigned the part and by that June every 2004 model year Sienna off the assembly line came with the new panel. Toyota did not notify tens of thousands of people who had already bought vans with the old panel, however.It wasn't until U.S. safety officials opened an investigation last year that Toyota acknowledged in a letter to regulators that the part could come loose and "lead to unwanted or sudden acceleration."
In January, nearly six years after discovering the potential hazard, the automaker recalled 26,501 vans made with the old panel.
By then the paper and the carmaker already had a history. It's worth following the travel of this.
After Toyota recalled nearly four million cars in September, in the largest recall in the company's history, the Times began a series of stories, starting here in October, looking more deeply into safety concerns at the company. While the company was blaming mechanical problems, starting with defective floor mats, and driver error, the Times's reporting raised the possibility that safety issues went deeper than that. Eventually, in a November 29 story, by the same pair, the paper pointed to evidence that the problems centered on electronics:
Data point to Toyota's throttles, not floor mats
Amid widening concern over acceleration events, Toyota has cited 'floor mat entrapment.' But reports point to another potential cause: the electronic throttles that have replaced mechanical systems.
That prompted what diplomats might call a frank public exchange of views between newspaper and carmaker, starting with an LAT editorial on December 5 that called on Toyota to look more deeply into its accelerator problems:
Toyota's acceleration issue Blaming floor mats may not be enough; the automaker needs to look at its vehicles' electronics.
Toyota’s reply, “A Healthy Discussion on Safety,” offered a stout defense of its handling of the accelerator problem:
The issue of unintended acceleration involving Toyota and Lexus vehicles has been thoroughly and methodically investigated on several occasions over the past few years. These investigations have used a variety of proven and recognized scientific methods. Importantly, none of these studies has ever found that an electronic engine control system malfunction is the cause of unintended acceleration.
In fact, electronic throttle control, which has been adopted in some form by nearly all automakers, has several fail-safe features and enhances vehicle safety by making possible functions such as traction control, stability control, adaptive laser cruise control and snow mode power control on current or future vehicles.Based on the comprehensive investigation and testing, we are highly confident that we have addressed the root cause of unwanted acceleration -- the entrapment of the accelerator pedal.
The Times kept going, however, and on December 23 published its expose, which went well beyond safety issues and raised questions about the company's candor. That led to Toyota's tough repost.
Today, of course, the company is in full retreat.
Regulators are piling on, as the Journal reports:
"While Toyota is taking responsible action now, it unfortunately took an enormous effort to get to this point," Secretary of Transportation Ray LaHood said Tuesday in a statement. "We're not finished with Toyota and are continuing to review possible defects and monitor the implementation of the recalls."
And the company is admitting it may not have done enough after all:
Mr. [Shinichi] Sasaki, the Toyota executive vice president in charge of quality, said at a news conference in Japan the company may not have done enough to look at "how vehicle parts perform as a whole inside the car under different environmental conditions," and how that could cause system failures.
Here’s today’s unsigned press release:
Nothing is more important to us than the safety and reliability of the vehicles our customers drive. Since these issues first came to our attention, we have understood that the soonest possible action would be in the best interests of our customers and have acted accordingly. We are very grateful for the advice of all the government agencies involved and feel that through our handling of the recall we have a chance to regain the trust of our customers. We will continue to cooperate fully with NHTSA on all vehicle safety issues.
Then there's LaHood's testimony this morning:
LaHood tells owners of recalled Toyota cars to stop driving them
Attempts to reach Miller, who recently retired, via the carmaker’s (certainly swamped, I realize) media line proved unavailing.
This Motor Trend timeline credits the Times with helping to trigger the current revelations starting back in October:
October 18, 2009: The Los Angeles Times publishes the first of several stories concerning claims of unintended acceleration in Toyota vehicles. The Times article reveals there have been nine separate NHTSA investigations into claims of unintended acceleration by Toyota vehicles in the past decade.
The Journal’s Holman Jenkins noticed and credited the LAT’s work here and here.
This is not about calling for Toyota to take it back its earlier defenses. The issue of whether the problem is mechanical or electronic remains to resolved definitively, though one can see this is not heading in Toyota's direction.
Nor is this about calling a winner in the who-got-there-first newspaper contest.
Other outlets, as I say, have done good work, and I’m not here to hand out any awards.
But it is to recognize that it is harder for a news organization to be first and alone in tackling sensitive and difficult investigative projects. Put it this way, no one would have noticed if the Times hadn’t done its several investigations back in the fall and early winter.
And, bogus canards to the contrary, news outlets do indeed take corporate arguments, complaints, and denials very seriously. They have to. It is journalism at a higher level to publish in the face of denials and to see the main facts asserted vindicated by government investigations or corporate admissions.
In “Power Problem,” our review of pre-financial crisis lending and Wall Street coverage (the link only goes to the top of the story: for a hardcopy, please write editors@cjr.org) we praised the same paper for its lonely work on Ameriquest and found the absence of more reporting on abusive lenders and Wall Street backers to be the big reason the public was so caught off guard by the crash.
This kind of work is, as I say, hard and expensive, and we need more of it.
Also, other media outlets—and I’m not naming names here—ought to err on the side of generosity in crediting this kind of work. It seems to me that that kind of acknowledgment goes beyond courtesy and becomes a form of mutual support that can be returned later, when the other paper needs it.
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February 02, 2010 07:02 PM
Audit Notes: Reuters Withdraws; Leaving Las Vegas; Reregulation, etc.
--Talking Points Memo had a nice catch of Reuters pulling a story headlined "Backdoor taxes to hit middle class" after the White House pointed out "errors of fact." Reuters straightforwardly explains why here.
-- The Las Vegas Sun, via Calculated Risk, provides interesting local reporting from the heart of the housing bust:
In the last four months of 2009, the number of foreclosure sales has dropped and lenders have consented in greater numbers to short sales — in which they allow homes to be sold for less than the owner owes on the mortgage. That trend should continue in 2010, according to Realtors and housing analysts.
Compared to foreclosures, CR explains, this is a good thing.
--Regulators and deregulators alike should read this New Republic piece on Obama quietly beefing up the nation's regulatory agencies. We're big on regulatory coverage around here and don't think there's been enough of it. We also have noted that active regulation, including Congressional oversight, leads to a lot more information and generally better business journalism.
The TNR piece is smart to note the SEC is so far the exception that proves the new rule about heightened regulatory activism. (h/t TPM)
--Breaking Views offers a sobering perspective on McClatchy's prospects, even as earnings start to recover. Bottom line: Even if revenue declines slow to a rate of 10 percent a year (wow), the newspaper company could seen interest cost eating up 40 percent of operating income.
--The business press's attempts to gauge the economic climate is probably itself an economic indicator, and this WSJ story seems to echo the current press consensus on the economy:
"Data Hit Hopeful Notes for Economy"
Here's hoping.
--And Allan Sloan names the next bailout candidate: Social Security.
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February 02, 2010 02:34 PM
Target-Rich Environment
We’re all for flood-the-zone coverage of the budget, so a tip of The Audit’s green eyeshade to The Wall Street Journal, which unfurls the story in full glory, with charts, breakdowns, analysis for individual federal departments and agencies, plus, for no extra charge, a handy Q & A on what it all means for taxpayers.
The package is here.
The politics analysis is here.
Bloomberg also goes big and includes a look at U.S. companies that would see their taxes go up if the blueprint is approved and implications for municipal bonds.
And far be it from me to scoff at any opportunity to ogle the, um, photogenic director of the Office of Management and Budget (insert wolf whistle here).
But lost in the shuffle, I’m afraid, is the jaw-dropping number that Obama is requesting for the Defense Department next year: $708 billion.
That’s seven oh eight. Billion. Cash money.
I know, I know. The defense budget is Washington’s version of Groundhog Day. Year in and year out, pork barrel politics make it impossible for the Pentagon to cut programs that the Pentagon itself doesn’t want or need. Apparently, people outside of Washington think this is strange.
And this year, as The New York Times tells it, even defense contractors are surprised by the budget gusher.
“The defense industry is pleased but bemused,” said Loren Thompson, the chief operating officer at the Lexington Institute, a policy group financed partly by military contractors. “It’s been telling itself for years that when the Democrats got control it would be bad news for weapons programs. But the spending keeps going on.”
This isn’t exactly Mother Jones talking here.
The Times and others devote the usual attention to the fate of individual, big-ticket programs. And that’s fine. For today.
Slate’s Fred Kaplan brings some healthy skepticism to the broader defense spending numbers.
The Pentagon released its budget for fiscal year 2011 this afternoon, and it is enormous—much larger, even adjusting for inflation, than any budget since World War II. What's more, some numbers buried within the budget suggest that it's set to grow larger still in the coming years—to a greater extent than the White House or the Defense Department acknowledges.
But may we humbly suggest that today’s budget release mark not the end of reporting on defense spending, but the beginning? I mean, from a journalism point of view, this is what military types would call a target-rich environment.Speaker of the House Nancy Pelosi has already made clear that she disagrees with Obama’s decision to exempt military spending from his proposed budget freeze.
"I don't think that we have to protect military contractors, and I want to make that distinction very clearly," Ms. Pelosi said. "I do not think the entire defense budget should be exempted."
Sounds like a potential source to us.Another might the Secretary of Defense, last seen canning the Marine general in charge of the F-35 and rebuking the contractor, Lockheed Martin, which is clearly reeling, as the Times reports:
In a statement issued late Monday, Lockheed Martin said it had been working with military officials “on a plan to get the program back on track” and was “committed to stabilizing F-35 cost, affordability and to fielding the aircraft on time.”
He’s almost inviting reporters in for a look around.
The president may have taken defense spending off the table, for all sorts of reasons, some having nothing to do with sound risk-assessment, prudent budgeting, and competent administration. But that doesn’t mean the press has to go along with it.
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February 02, 2010 10:40 AM
Volcker Pushed Back
When Wall Street doesn’t like something, one thing is certain: the public will hear about it.
The pushback on the Volcker rule, which would ban proprietary trading at deposit-taking financial institutions and limit bank size, has been fast, furious, voluminous, and, some accounts would have you believe, fatal.
A news service called dealReporter created buzz last night reporting (the story was incorrectly attributed elsewhere to the Financial Times, but an FT spokeswoman tells me the news service is only owned by the same group and not linked editorially) that the Volcker rule isn’t going to make it after all:
A proposal by former Federal Reserve Chairman Paul Volcker to limit bank’s proprietary trading will be either be dropped or significantly modified in the Senate, lawmakers and staffers told dealReporter. Senate Banking Committee ranking member Richard Shelby (R-AL) said he opposes the so-called Volcker rule and the Obama administration’s call to levy a USD 90bn tax on banks. His comments come as House Financial Services Committee Chairman Barney Frank (D-MA) predicted the proposals outlined by President Obama could be law within six months.
Whether that negative forecast pans out remains to be seen.
Meanwhile, the Times’s Andrew Ross Sorkin and the Journal weigh in with stories that report on the Street's largely hostile response to Volcker's proposed trading rule and relay arguments about the difficulty of separating proprietary trading from trading or making markets for clients.
The Times:
A senior banker put it to me more bluntly: “I can find a way to say that virtually any trade we make is somehow related to serving one of our clients. They can go ahead and impose the rule on Friday, and I can assure you that by Monday, we’ll find a way around it. Nothing will change unless the definition is ironclad.”
The Journal:
Here is one example of how hard it can be to untangle proprietary trading from market-making: As a market maker, a bank buys from a customer $25 million of 10-year bonds issued by government-sponsored mortgage company Fannie Mae. To offset the risk of those bonds falling in value if interest rates rose, the bank might then sell $25 million of 10-year Treasurys. That sale could be considered a proprietary trade.
Got that? Good.
All this reporting is good. It shows plenty of sophistication about the technical problems in teasing out one kind of trade from another. The Volcker rule seems to make commonsense, but will it really help reduce systemic risk? Readers have plenty of information to make up their minds.
Reuters counters that it’s not as hard as all that:
U.S. prop trading ban? Tough, but not impossible
Naked Capitalism says the rule had too many loopholes anyway.
Volcker is scheduled to testify today, so we'll see what happens. Bloomberg reports he intends to stick to his guns.
Wall Street's concerns may indeed be legitimate, but what is striking is the megaphone it is provided to air them. The response among political figures in Washington to the media saturation is visible for all to see. Some industries (not to mention regular people) may have to suffer in silence. Wall Street is not one of them.
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February 01, 2010 06:24 PM
Audit Notes: Times Nicked; Defining Populism; Special Dividends; Intrepid Blogger, etc.
--NYTPicker, an anonymous site devoting to giving the Times a hard time, has an interesting item that says the paper overlooked a felony conviction in a lengthy profile Saturday about a small-business lender.
Making sure subjects are properly vetted is a real concern, obviously, especially in stories these days about lenders. And there's no question whatever of the relevance of the conviction—for breaking into a former employer's computer and deleting information—to the Times piece. For one thing, it lends irony to this passage:
Mr. Eitelberg says he learned the hard way about the importance of background checks for his customers.
The Times hasn't responded to NYTPicker.
--I'm grateful for this history-laced op-ed in Saturday's Journal looking at what is and isn't populism. That's a word that's been flung around to a fair-thee-well lately. I griped during the presidential campaign that it was being mistakenly applied to policies that were just plain old liberal—not the same thing.
What I think is missing in this latest piece—which identifies media stars as heirs to a strain of populist tradition—is the debtor/creditor divide that fueled both upper and lower-case populism. That divide would be a helpful frame for viewing today's political and economic climate.
--Here's a story I wish were longer—about HCA Inc. paying its private equity owners a $1.75 billion special dividend. The Journal writes:
Nevertheless, HCA's large dividend payment brings to mind the financial maneuvers made by private-equity firms during the go-go years. Buyout shops made a chunk of their profits through these "dividend recapitalizations," taking big cash payments out of companies they owned by paying themselves a dividend. These payments totaled $56 billion in 2006 and 2007 combined, according to Standard & Poor's.
Good stuff. But how HCA was able to do that is collapsed into a pretty small space in this 356-word story. That's here:
By improving HCA's performance and cash flow, the owners have paid down its debt.
HCA is a hospital operator. I would love to see a followup unpacking that sentence.
--Here's something that merits a combat medal, or at least a large pack of NoDoze:
"Blogging The Asset Securitization Forum"
All I can say is, God speed, Daniel Indiviglio! Hey, as a use of journalism resources, it beats blogging the Grammys, as both the Times and the Journal insist on doing. That, I don't get.
--Everyone by now should have read the Volcker op-ed in yesterday's Times on what he thinks financial reform should look like. If you haven't, several points will be deducted from your score.
--And if you're curious about how the political debate on financial-regulatory reform is going to go, check out HuffPo's report on what Republican guru Frank Luntz is planning. Nine months ago, HuffPo reminds us, Luntz "penned a memo laying out the arguments for health care legislation's destruction...." All righty, then.
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February 01, 2010 01:24 PM
On Paulson’s Sole-Source Account in the WSJ’s News Pages
On page 350 of Too Big To Fail, Andrew Ross Sorkin reports on how Hank Paulson reacted that fateful Sunday, September 14, 2008, upon learning that the British government was refusing to approve an emergency deal to have Barclay’s buy Lehman Brothers, a move that could conceivably have averted the catastrophe that instead ensued.
The general opinion in the room was that they had been blindsided. Paulson merely shook his head and declared that the British had “grin-fucked us."
This morning, The Wall Street Journal runs an excerpt of Paulson’s new book, On the Brink, in which Paulson quotes himself this way:
"The British screwed us," I blurted out, more in frustration than anger.
What did Paulson really say? Unknown. Sorkin’s source notes say Sorkin had received notes of the meeting "with Paulson’s remarks dictated.” I’m not sure what that means exactly, but if you had to choose, the tie would go to the person with the greater distance from the subject, the reporter.
Altering quotes is considered a grave journalism sin in some circles, but I’ve never been as concerned about the issue as some. It's also certainly possible that different people are remembering the same quote differently. The gist of the quote is identical. To me, that's the important thing.
Even so, this minor scrub—if that’s what it was—does raise larger questions about the decision by the Journal to publish a public figure's account of a major news event in its news pages.
Journal spokesman Robert H. Christie says in a note to me:
This was clearly marked a book excerpt. We ran a news story last week. It is hardly exceptional or even rare for a newspaper to run a book excerpt.
It’s true that it's not unusual for a newspaper to run book excerpts in its news columns, but those generally are from books written by staffers who adhere to normal journalism protocols. A recent example was an excerpt from longtime staffer Gregory Zuckerman’s The Greatest Trade Ever, on how investor John Paulson (no relation, one hopes) made billions betting against the housing market.
The Hank Paulson excerpt isn’t particularly long, less than 1,400 words (it's not that short, either), and it appears on page A6 of my print edition. So it's not overly prominent, but it is solidly in the news section.
It's worth considering whether some line has been crossed here.
On one hand, readers have to weigh the fact that the excerpt brings new information into the record, though, not, as far as I can tell, much of substance. These high-level tick-tocks are starting to run together at this point, and, as noted, details of U.S. officials’ account of the FSA’s decision not to back the Lehman deal have been reported elsewhere. Still, new information is good.
Second, new details aside, it can be argued that whatever Paulson says or writes about what happened back then is news, in and of itself. This is Paulson’s side of the story, right from the horse’s mouth.
Third, as Christie points out, the paper did run a news item on the book, viewing it from an appropriate distance: "Paulson, in Memoir, Defends Bailout."
Finally, it’s also true that readers are given plenty of disclosure and don’t need help from me to figure out that this is the sole-source account of a media-savvy public figure bent on protecting his reputation. In general, readers should be given the benefit of the doubt in sorting through such questions.
But, it's not all upside.
For one thing, there is a reason that news page are not typically open to sole-source accounts of major events by public officials involved in them—that's usually where you go for the paper’s best effort to find out what actually happened. This is not that.
Second, the intellectual distance between business-news organizations and their sources seems to be shrinking by the day, and this isn’t helping that perception. While it’s understood that the newspaper-source relationship is to some degree transactional, at least some of the time, this seems to take matters to another level.
Third, whether the quote is “screwed” or “grin-fucked," the passage implies that the British government backed out on some sort of commitment. But that commitment is never established in the passage, nor does anyone ask Alistair Darling, the British finance minister who is quoted, what he thinks happened. If you read carefully, Paulson never actually says British regulators had ever agreed to a deal in principle, either to him or even to Barclays. Emphasis is mine:
Tim [Geithner, natch] spoke with [Barclay’s President Bob] Diamond after the Barclays board meeting, at 7:15 a.m. New York time, and Bob warned him that Barclays was having problems with its regulators. Forty-five minutes later, I joined Tim in his office to talk with Diamond and [Barclay’s CEO John] Varley, who told us that the FSA (Financial Services Authority of the U.K.) had declined to approve the deal. I could hear frustration, bordering on anger, in Diamond's voice.
We were beside ourselves. This was the first time we were hearing that the FSA might not support the deal. Barclays had assured us that they were keeping the regulators posted on the transaction. Now they were saying that they didn't understand the FSA's stance. At 10 a.m., we met with the bank chiefs again, and I told them we had run into some regulatory issues with Barclays but were committed to working through them. The CEOs presented us with a term sheet for the deal. They had agreed to put up more than $30 billion to save their rival. If Barclays had committed to the deal, we would have had industry financing in place.
What seems to have happened is that Barclays believed the FSA was on board, or at least Paulson says Barclays led him to believe that. The question is what was the basis for that belief?
A bit more:
At 11 a.m., I went back upstairs, and soon got on the phone with (British Finance Minister) Alistair Darling, who wanted a report on Lehman. I told him we were stunned to learn that the FSA was refusing to approve the Barclays' transaction.
He made it clear, without a hint of apology in his voice, that there was no way Barclays would buy Lehman. He offered no specifics, other than to say that we were asking the British government to take on too big a risk, and he was not willing to have us unload our problems on the British taxpayer
The implication is that an apology is in order.
A paragraph later comes the "screwed" line, which is followed by a disclaimer of sorts:
I'm sure the FSA had very good reasons for their stance, and it would have been more proper and responsible for me to have said we had been surprised and disappointed to learn of the UK regulator's decision, but I was caught up in the emotion of the moment.
This is the point where a response from Darling would be useful.
It strikes me that the Paulson excerpt appearing in this space is a journalism departure of sorts. I hope we know where we're going.
Audit Feature
BAILOUT, STIMULUS—Your Essential Guide
In a specially commissioned study, The Audit offers a first-stop, comprehensive guide to the big federal spending programs. Read it. Love it. Use it daily.
The banking bloodbath and government efforts to combat it got quite a bit of newsprint in the days and weeks after they were announced, of course. But we have a sneaking suspicion that now is not the time for press watchdogs to call off the chase. What resources on the bailout and stimulus plan are actually useful in divining new stories from the available data? Look no further.
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Audit Arbiter
Audit Arbiter is CJR's Ombudsman for the business press: if you feel you've been wronged, write us and we'll weigh in on the matter.
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