The New York Times devotes its column one on A1 to a look at how the Justice Department has effectively gotten out of the corporate-prosecution game, relying instead on something called “deferred prosecutions” to slap the wrists of wrongdoers.
In a major shift of policy, the Justice Department, once known for taking down giant corporations, including the accounting firm Arthur Andersen, has put off prosecuting more than 50 companies suspected of wrongdoing over the last three years.Instead, many companies, from boutique outfits to immense corporations like American Express, have avoided the cost and stigma of defending themselves against criminal charges with a so-called deferred prosecution agreement, which allows the government to collect fines and appoint an outside monitor to impose internal reforms without going through a trial. In many cases, the name of the monitor and the details of the agreement are kept secret.
Deferred prosecutions have become a favorite tool of the Bush administration (former AG John Ashcroft’s firm has gotten more than $50 million to be an outside corporate cop for one company). But some legal experts now wonder if the policy shift has led companies, in particular financial institutions now under investigation for their roles in the subprime mortgage debacle, to test the limits of corporate anti-fraud laws.
Defenders of deferred prosecutions say they minimize the “collateral damage” that would result from convicting an entire company, as happened when it indicted accounting rogue Arthur Andersen for its crimes on behalf of Enron and 28,000 people lost their jobs.
The Times says most of the agreements end with charges dismissed within three years. It reports speculation about how Justice might apply them to “investigations against financial companies in the mortgage lending scandal,” and quotes Neil Power, the head of the FBI’s economics-crime unit sounding like a bug-eyed lefty raging at the corporate machine. This is a high-ranking Bush administration official, mind you, and thus gets our Mr. Power, Prepare Your Resume Quote of the Day:
Mr. Power said the investigations were a reflection of the “environment of greed” that allowed companies to package mortgages into securities they sold to investors without sufficient documentation of the borrower’s ability to repay. One line of criminal inquiry focuses on whether bond companies gave accurate information to investors.“What we’re looking at,” he said, “is the fact that they may be performing accounting fraud.”
Small-biz SOS
In economic news, an index of small-business sentiment plunged to its lowest level twenty-eight years. The WSJ puts the news on A6 and third in its A1 Business & Finance column, and Bloomberg says “companies are cutting back as sales and profits deteriorate, signaling the economic slump may worsen” and that “the slowdown may not help alleviate inflation as more respondents planned to boost prices to cover rising costs.”
Many small firms reported getting hurt by weaker sales, inflation and higher energy costs. Small businesses that reported weaker earnings outnumbered those with earnings gains by 33%. The survey found “no evidence” of NFIB members ailing from credit and cash-flow problems arising from the housing slump and tighter bank lending. “It is a Wall Street issue,” the survey states.
Pending home sales dropped twenty-one percent in February from a year ago and 1.9 percent from the month before, surprising economists who had predicted a small rebound.
A federal energy agency sharply raised its estimate for the average price of oil this year to $101 a barrel from $84 three months ago. The WSJ says the agency is “usually a price bear.”
Can the Fed go broke?
What if the Federal Reserve runs out of money? That’s what officials are now making contingency plans for in case the credit crisis fails to let up in the next few months, The Wall Street Journal reports in an A3 scoop.
The Fed has lent so much cash to banks and investment banks—about $300 billion of its $790 billion in Treasury bills and bonds—that Wall Street fears the central bank may hit a wall soon, as the values of junk assets it’s accepting as collateral continue to decline.
The Journal notes that the Fed can always effectively print its own money, but that would plunge the federal-funds rate, something it would “contemplate… only in dire circumstances. The Bank of Japan took this step this decade after years of economic stagnation.”
One way the Fed is planning to get around that is by having Treasury issue more debt than it needs to fund the government and deposit that with the Fed. Or the Fed might raise its own debt for the first time ever.
A subprime lawsuit
The Journal takes a front-page look at one of the earliest subprime lenders to fail and how depositors who lost just about everything are now suing the investment banks who packaged its loans.
The bank, American Business Financial Services,
funded its operation partly by selling notes directly to the public, pitching them in newspaper ads and mass mailings that promised high interest rates. When it went under, these notes, which carried no collateral and weren’t insured, became worthless.Now a bankruptcy trustee is trying to recover money from the investment banks that turned the lender’s loans into securities. His claim: They helped keep the lender alive—and paying them fees—by enabling it to overstate the value of assets on its books.
The list of defendants includes Bear Stearns and Morgan Stanley. The WSJ says the plaintiffs claim that Wall Street knew it was underwriting the securities incorrectly, implying that the bank would earn more money than the Street knew it would.
Crops v. conservation
The NYT has a good page-one story that says the commodities boom, which has seen soaring prices for everything from wheat, corn, oil, and more, is hurting a twenty-three-year-old conservation program that pays farmers not to farm land, preserving it for wildlife habitats. It notes about 8 percent of all cropland is in the Conservation Reserve Program.
