This is the stock market crash we had all worried about. It is happening now – tonight. This is what a stock market crash looks like. It has all the parameters of a major shift and it isn’t about to happen. It is happening.
Discrimination in mortgage lending is prohibited by the federal Fair Housing Act and HUD’s Office of Fair Housing and Equal Opportunity actively enforces those provisions of the law. The Fair Housing Act makes it unlawful to engage in the following practices based on race, color, national origin, religion, sex, familial status or handicap (disability):
* Refuse to make a mortgage loan
* Refuse to provide information regarding loans
* Impose different terms or conditions on a loan, such as different interest rates, points, or fees
* Discriminate in appraising property
* Refuse to purchase a loan or set different terms or conditions for purchasing a loan
Filing a Complaint
If you have experienced any one of the above actions, you may be the victim of discrimination. Recognizing the signs of lending discrimination is the first step in filing a complaint. HUD investigates your complaints at no cost to you. If you believe you have experienced lending discrimination, visit our housing discrimination complaint website to learn more about the complaint process.
HUD Fair Lending Studies
Pre-application inquiries about mortgage lending financing options represent a critical phase in the homebuying process. If potential homebuyers cannot obtain full and fair access to information about mortgage financing, they may give up on their pursuit of homeownership, their housing search may be restricted, or they may be unable to negotiate the most favorable loan terms. HUD has conducted a number of studies to determine whether minority homebuyers receive the same treatment and information as whites during the mortgage lending process. Read more on mortgage lending discrimination studies.
Subprime loans play a significant role in today’s mortgage lending market, making homeownership possible for many families who have blemished credit histories or who otherwise fail to qualify for prime, conventional loans. A recent HUD analysis, based on HMDA and related data, shows that the number of home purchase subprime applications increased from 327,644 in 1997 to 783,921 in 2000.
While the subprime mortgage market serves a legitimate role, these loans tend to cost more and sometimes have less advantageous terms than prime market loans. Additionally, subprime lenders are largely unregulated by the federal government. Data shows blacks are much more likely than whites to get a subprime loan, and many of the borrowers who take out these loans could qualify for loans with better rates and terms. As such, many have expressed fair lending concerns about the subprime market. Read more on Subprime Lending.
Some lenders, often referred to as predatory lenders, saddle borrowers with loans that come with outrageous terms and conditions, often through deception. Elderly women and minorities frequently report that they have been targeted, or preyed upon, by these lenders. The typical predatory loan is: (1) in excess of those available to similarly situated borrowers from other lenders elsewhere in the lending market, (2) not justified by the creditworthiness of the borrower or the risk of loss, and (3) secured by the borrower’s home. HUD is working hard to fight against predatory lending.
HUD is committed to increasing homeownership opportunities for all Americans. HUD is engaged in a special effort to boost the minority homeownership rate since the rate for black and Hispanic Americans lags behind that of others. Read more about HUD’s efforts to Increase Minority Homeownership.
NEW YORK (Reuters) – A former mortgage lender pleaded guilty on Thursday to conspiring to commit fraud in a $44 million theft of payoff proceeds for refinanced mortgage loans funded by Fannie Mae.
“When the fraudulent scheme was revealed, Fannie Mae held nearly $44 million in unpaid, but refinanced, underlying mortgage loans from Olympia Mortgage,” the U.S. Attorney’s office in Brooklyn said at the time of the indictment.
The Organized Crime Control Act of 1970 (Pub.L. 91-452, 84 Stat. 922 October 15, 1970), was an Act of Congress signed into law by U.S. PresidentRichard Nixon. It prohibits the creation or management of a gambling organization involving 5 or more people if it has been in business more than 30 days or accumulates $2000 in gross revenue in a single day. It also gave grand juries new powers, permitted detention of unmanageable witnesses, and gave the attorney general authorization to protect witnesses, both state and federal, and their families. This last measure helped lead to the creation of WITSEC, an acronym for witness security.
Indiana (and probably elsewhere – in the Secretary of State office)
The Prosecution Assistance Unit was created within the Enforcement Section of the Securities Division to assist law enforcement agencies in prosecuting white collar criminals. Currently the unit includes two attorneys and two investigators devoted exclusively to the enforcement of the criminal provisions of the Indiana Securities Act, the Indiana Loan Broker Act and related statutes. The Unit operates under the direction and supervision of the Securities Commissioner and the Senior Investigator. PAU Home page
– On April 24, 2006, Michael Boehm was sentenced by the St. Joseph Superior Court to eight (8) years imprisonment upon his guilty plea to four (4) counts of selling unregistered securities to residents of South Bend. In exchange for the guilty plea, twenty-six (26) remaining counts of securities fraud and transacting business as an unregistered broker-dealer or agent were dismissed.
The case was presented by St. Joseph County Prosecutor, Michael A. Dvorak, on a referral from the Prosecution Assistance Unit. Boehm caused his company, M & D Whirlwind to issue approximately $4.5 million in promissory notes with interest rates of up to thirty percent (30%) to 65 Indiana residents. Boehm used part of the proceeds to make high risk loans to persons who were not credit worthy and who ultimately defaulted on their loans to Boehm’s company.
Unlike some state courts, the power of federal courts to hear cases and controversies is strictly limited. Federal courts may not decide every case that happens to come before them. In order for a district court to entertain a lawsuit, Congress must first grant the court subject matter jurisdiction over the type of dispute in question. Though Congress may theoretically extend the federal courts’ subject matter jurisdiction to the outer limits described in Article III of the Constitution, it has always chosen to give the courts a somewhat narrower power.
The district courts exercise original jurisdiction over—that is, they are empowered to conduct trials in—the following types of cases:
Civil actions arising under the Constitution, laws, and treaties of the United States;
Certain civil actions between citizens of different states;
Civil actions within the admiralty or maritime jurisdiction of the United States;
Criminal prosecutions brought by the United States;
Civil actions in which the United States is a party; and
For most of these cases, the jurisdiction of the federal district courts is concurrent with that of the state courts. In other words, a plaintiff can choose to bring these cases in either a federal district court or a state court. Congress has established a procedure whereby a party, typically the defendant, can “remove” a case from state court to federal court, provided that the federal court also has original jurisdiction over the matter. For certain matters, such as intellectual property disputes and prosecutions for federal crimes, the jurisdiction of the district courts is exclusive of that of the state courts.
In addition to their original jurisdiction, the district courts have appellate jurisdiction over a very limited class of judgments, orders, and decrees..
Recent Convictions, Indictments and Investigations of Members of Congress and Executive Branch Officials
* = linked to Abramoff scandal
I. Congressional Members
Rep. Randy “Duke” Cunningham: pleaded guilty to conspiracy to commit bribery, mail fraud, wire fraud, and tax evasion; sentenced to 100 months in prison and $1.8 million in restitution.
*Rep. Bob Ney: pleaded guilty to conspiring to commit fraud and making false statements in connection with Abramoff; sentenced to 30 months in prison, $6,000 in fines, and 200 hours of community service.
Sen. Larry Craig: pleaded guilty to disorderly conduct in a sex solicitation case in Minneapolis; also under investigation by the senate ethics committee for covering up the case.
Rep. Tom DeLay: indicted by a Texas grand jury on charges of conspiracy and money laundering. A Texas county court judge threw out the charge that he violated state campaign finance laws, and the Texas Third Court of Appeals and Texas Court of Criminal Appeals upheld the ruling. Additionally, he was named in the Abramoff investigation when two of his staffers entered guilty pleas, but he was never indicted.
Rep. William Jefferson: indicted for wire fraud, soliciting bribes, violating the Foreign Corrupt Practices Act, money laundering, racketeering, and obstructing justice.
Rep. Rick Renzi: under FBI investigation for land-swap and military-contractor legislation that benefits his former business partner and his father’s employer, respectively. Indicted on 35 charges, including conspiracy and money laundering.
Former Rep. Mark D. Siljander: representative 1981-1987; indicted in 2008 for funding (possibly in a fraudulent manner) an Islamic charity accused of funneling money to an Islamic warlord during 2003-2004.
C. Under Investigation
*Rep. John Doolittle: under investigation by the DOJ in connection with Abramoff. Not seeking another term in 2008.
*Rep. Tom Feeney: under FBI investigation in connection with Abramoff; named as “Lawmaker #3” in Zachares’s guilty plea.
Rep. Mark Foley: under investigation by the House Committee on Standards of Official Conduct, FBI, and Florida Attorney General’s Child Predator Cybercrime Unit for “Pagegate.”
Rep. Jerry Lewis: under federal investigation for trading legislative favors for campaign contributions.
Rep. Allan Mollohan: under FBI investigation for receiving (but not reporting) campaign contributions from officials connected to organizations that profited from earmarks.
Sen. Ted Stevens: under FBI and IRS investigation for trading home renovation for congressional support for Alaskan oil giant VECO. He is also under FBI investigation for procuring $50 million in earmarks for the Alaska SeaLife Center in connection with his son and former aide.
Rep. Don Young: under investigation for taking bribes, illegal gratuities, and unreported gifts from VECO in connection with Stevens. Additionally, a senior staffer pleaded guilty in the Abramoff case, but he was never indicted.
Rep. Robert Menendez: under investigation for unfairly funding projects of a lobbyist / former aide.
Rep. Gary Miller: under investigation for allegedly using his congressional influence to evade taxes on a $10 million land deal, receiving a $7.5 million loan from a campaign contributor, and using his office to close an airport that affected a land development project of the campaign contributor.
Sen. Lisa Murkowski: a complaint with the senate ethics committee is pending regarding a sweet-heart land deal between Murkowski and a campaign contributor; Murkowski has since backed away from the land deal.
Rep. Ken Calvert: under investigation for sponsoring several different earmarks that increased the value of property owned by Calvert. One such earmark profited Calvert and a partner an estimated $500,000 in one year.
II. Congressional Staff
*John Albaugh: former chief of staff to Rep. Istook; pleaded guilty to conspiracy with Ring; sentencing scheduled for September 2008.
*William Heaton: Ney’s former executive assistant on the House Administration Committee and chief of staff; pleaded guilty to conspiracy to commit fraud in connection with Abramoff and sentenced only to community service and 2 years probation because of assistance provided to investigators.
Brett Pfeffer: former Jefferson aide; pleaded guilty to conspiracy to commit and aiding and abetting bribery; sentenced to 8 years in prison.
*Tony Rudy: former DeLay deputy chief of staff; pleaded guilty to conspiracy in connection with Abramoff; sentencing scheduled for September 2008.
*Michael Scanlon: former DeLay press aide; pleaded guilty to conspiracy to commit bribery in connection with Abramoff; sentencing late June 2008.
*Neil Volz: former Ney chief of staff; pleaded guilty to conspiracy in connection with Abramoff; sentenced to 2 years probation and fined $2,000.
*Mark Zachares: former Young senior staffer on the House Transportation and Infrastructure Committee; pleaded guilty to conspiracy to commit wire fraud in connection with Abramoff; sentencing September 2008.
Jim Ellis: former DeLay PAC executive director; indicted in Texas for violating election laws, criminal conspiracy, and money laundering in connection with DeLay’s PAC.
B. Under Investigation
*Ed Buckham: former DeLay chief of staff-turned-chairman of the lobbying firm Alexander Strategy Group; under investigation in connection with Abramoff. Rudy’s guilty plea includes Buckham as “Lobbyist B.” It also names him as a beneficiary of Rudy’s scheme to take other congressional aides on a trip to the Northern Mariana Islands.
Trevor McCabe: former Stevens aide; under FBI and Department of Interior investigation for a series of Stevens-sponsored earmarks that benefit the Alaska SeaLife Center, a nonprofit involved in a land deal with McCabe in connection with Stevens’ son.
Jeff Shockey: deputy staff director for Rep. Lewis; under investigation for participating in an earmarks-for-benefits scheme. Accepted a $2 million buy-out from the Copeland et al. lobbying firm as he returned to work for Rep. Lewis. Federal investigation ongoing.
Leticia White: former staffer for Defense earmarks; now employed as a lobbyist at Copeland et al., a lobbying firm alleged to be involved in an earmarks-for-benefits scheme. She accepted a cut in congressional salary allegedly to avoid the revolving door restriction as she moved back into the lobbying community.
III. Executive Employees
Claude Allen: former Assistant to the President for Domestic Policy; pleaded guilty to misdemeanor theft for a $5,000 refund scam; sentenced to $850 in fines and 1 month of probation.
Lester Crawford: former commissioner for the Food and Drug Administration; pleaded guilty to filing a false financial disclosure and conflict of interest for falsely claiming to have sold his stock in the companies that he was responsible for regulating; sentenced to $90,000 in fines and 3 years of probation.
*Robert Coughlin: former deputy chief of staff at the Justice Department’s criminal division; pleaded guilty to conflict-of-interest charge for accepting various gifts from Abramoff and Ring; sentencing September 2008.
Brian Doyle: former deputy press secretary for the United States Department of Homeland Security; pleaded no contest to sending sexually explicit IMs and clips to an undercover officer posing as a 14-year-old girl; sentenced to 5 years in state prison.
*Italia Federici: former political aide to Interior Secretary Norton; facilitated communication between Abramoff and Griles; pleaded guilty to obstruction of the Senate’s Abramoff investigation; avoided prison sentence due to cooperation.
Robert Fromm: former program manager at the Army’s National Ground Intelligence Center; investigated in connection with Cunningham; defense contractor Wade’s guilty plea identified from as the “Official” who traded Wade’s job offers for government contracts; pleaded guilty to violating lifetime post-employment ban; sentenced to 1 year on probation and fined $2,500.
*J. Steven Griles: former deputy secretary for the Department of Interior; pleaded guilty to obstruction of justice in connection with Abramoff; sentenced to 10 months in prison and $30,000 in fines.
Lewis “Scooter” Libby: former Assistant to the President, Chief of Staff to the Vice President, and Assistant to the Vice President for National Security Affairs; convicted of obstructing justice, perjury, and making false statements to federal investigators in the leak of CIA agent “Valerie Plame’s” identity; sentenced to 30 months in federal prison, $250,000 in fines, 2 years of supervised release, and 400 hours of community service. President Bush commuted the prison term.
*David Safavian: former chief of staff for the Office of Management and Budget; convicted of making false statements and obstructing justice in connection with Abramoff; sentenced to 18 months in prison.
*Roger Stillwell: former officer in charge of the Northern Mariana Islands Stillwell in the Office of Insular Affairs at the Department of Interior; pleaded guilty to filing a false financial statement in connection with Abramoff; sentenced to $1000 in fines and 2 years of probation.
Brent Wilkes: GOP fundraiser/Bush pioneer/finance co-chair for the Bush campaign in California; charged with fraud and other offenses in connection with Cunningham. Three months later, the indictment was expanded to include more than 30 charges against his dealings with Foggo, including fraud, conspiracy, and money laundering. Convicted on 13 counts; sentenced to 12 years in prison.
Kyle “Dusty” Foggo: former executive director of the CIA; charged with fraud and other offenses in connection with Cunningham. Three months later, the indictment was expanded to include more than 30 charges against his dealings with defense contractor Wilkes, including fraud, conspiracy, and money laundering.
Daniel Gonzalez: chief of staff for FCC chairman Kevin Martin; on board of energy company which participated in fraudulent Ponzi scheme.
C. Under Investigation
Alberto Gonzales: former Attorney General; under investigation for improperly firing at least seven U.S. attorneys. Numerous other administration officials are also under investigation in this matter.
Jose Rodriguez: former CIA official; under investigation for purposely destroying tapes depicting CIA torture of detainees.
IV. Abramoff Scandal Convictions
NOTE: not all Abramoff-related convictions are included on the above list, as businessmen and lobbyists do not fall into the categories under analysis; the list below is more complete. Most of the Abramoff-related corruption cases are being handled by Judge Ellen Segal Huvelle of the U.S. District Court for the District of Columbia.
Plead guilty Jack Abramoff
J. Steven Griles
Convicted David Safavian
Named but not charged Ed Buckham
Kevin A. Ring
Source: Matthew DuPont, Xenia Tashlitsky and Craig Holman
215 Pennsylvania Avenue, SE
Washington, D.C. 20003
Because Public Citizen does not accept funds from corporations, professional associations or government agencies, we can remain independent and follow the truth wherever it may lead. But that means we depend on the generosity of concerned citizens like you for the resources to fight on behalf of the public interest.
UNIFORM SECURITIES ACT
Act 265 of 1964
AN ACT to enact the uniform securities act relating to the issuance, offer, sale, or purchase of securities; to
prohibit fraudulent practices in relation to securities; to establish civil and criminal sanctions for violations of
the act and civil sanctions for violation of the rules promulgated pursuant to the act; to require the registration
of broker-dealers, agents, investment advisers, and securities; to make uniform the law with reference to
securities; and to repeal acts and parts of acts.
[ . . . ]
FRAUDULENT AND OTHER PROHIBITED PRACTICES
451.501 Offer, sale, or purchase of security; unlawful practices.
Sec. 101. It is unlawful for any person, in connection with the offer, sale, or purchase of any security,
directly or indirectly:
(1) To employ any device, scheme, or artifice to defraud.
(2) To make any untrue statement of a material fact or to omit to state a material fact necessary in order to
make the statements made, in the light of the circumstances under which they are made, not misleading.
(3) To engage in any act, practice, or course of business which operates or would operate as a fraud or
deceit upon any person.
451.502 Investment adviser; unlawful practices.
Sec. 102. (a) Except as otherwise provided in this subsection, an investment adviser, a federally covered
adviser, or a person who represents an investment adviser or a federally covered adviser shall not, directly or
indirectly, do any of the following:
(1) Employ a device, scheme, or artifice to defraud a client or prospective client.
(2) Engage in an act, practice, or course of business that operates or could operate as a fraud or deceit upon
a client or prospective client.
(3) Acting as principal for his or her own account, knowingly sell any security or purchase any security
from an investment advisory client, or acting as a broker for a person other than that client, knowingly effect
any sale or purchase of any security for the account of that client, without disclosing to the client in writing
before the completion of the transaction the capacity in which he or she is acting and obtaining the consent of
the client in writing to the transaction. The prohibitions of this subdivision do not apply to a federally covered
adviser or to any transaction with a customer of a broker-dealer if the broker-dealer is not acting as an adviser
in relation to the transaction.
(b) It is unlawful for any investment adviser to enter into, extend, or renew any investment advisory
contract unless it provides in writing all of the following:
(1) That the investment adviser shall not be compensated on the basis of a share of capital gains upon or
capital appreciation of the funds or any portion of the funds of the client.
(2) That no assignment of the investment advisory contract may be made by the investment adviser without
the consent of the other party to the contract.
(3) That the investment adviser, if a partnership, shall notify the other party to the investment advisory
contract of any change in the membership of the partnership within a reasonable time after the change.
(c) It is unlawful for any investment adviser acting as a finder to do any of the following:
(1) Take possession of funds or securities in connection with the transaction for which payment is made for
services as a finder.
[ . . . ]
(4) Participate in the offer, purchase, or sale of a security without obtaining information relative to the risks
of the transaction, the direct or indirect compensation to be received by promoters, partners, officers,
directors, or their affiliates, the financial condition of the issuer, and the use of proceeds to be received from
investors, or fail to read any offering materials obtained. This section does not require independent
investigation or alteration of offering materials furnished to the finder.
(5) Fail to inform or otherwise ensure disclosure to all persons involved in the transaction as a result of his
or her finding activities of any material information which the finder knows, or in the exercise of reasonable
care should know based on the information furnished to him or her, is material in making an investment
decision, until conclusion of the transaction.
Rendered Wednesday, October 22, 2008 Page 1 Michigan Compiled Laws Complete Through PA 300 of 2008
Ó Legislative Council, State of Michigan Courtesy of http://www.legislature.mi.gov
(State of Michigan)
To state an actionable RICO claim under 18 U.S.C. §1962, a private plaintiff must plead seven elements:
(I) that the defendant
(2) through the commission of 2 or more acts
(3) constituting a ‘pattern’
(4) of ‘racketeering activity’
(5) directly or indirectly invests in, or maintains an interest in, or participates in
(6) an ‘enterprise’ [undertaking]
(7) the activities of which affect interstate or foreign commerce
Plaintiff seeks treble monetary damages,
The RICO statute defines an “enterprise” as “any individual, partnership, corporation association, or other legal entity and any union or group of individuals associated in fact although not a legal entity. 18 U.S.C. §1961 (c).
* Under the statute, “racketeering activity” includes state offenses involving murder, robbery, extortion, and several other serious crimes punishable by imprisonment for more than one year and more than 70 serious federal crimes including extortion, interstate theft, narcotics violations, mail fraud, securities fraud, currency reporting violations and certain immigration offenses when committed for financial gain.
[However – ]
Counterfeiting, 18 U.S.C. §§ 471-73.
Mail & Wire Fraud, 18 U.S.C. § 1341.
Obstruction of Justice, 18 U.S.C. § §1503-1513.
Bribery, 18 U.S.C. § 201.
[ and ]
§1862(a) investing the proceeds of a pattern of racketeering activity or from collection of an unlawful debt in an enterprise affecting interstate commerce.
§1862(b) acquiring or maintaining an interest in an enterprise affecting interstate commerce through a pattern of racketeering or collection of an unlawful debt.
[ etc. ]
* In 1978, amended to add as predicate act cigarette bootlegging.
* In 1984, amended to add as predicate acts dealing in obscene matters, currency violations, and certain automobile-theft violations.
* In 1986, added provisions relating to tampering with and retaliating against witnesses, victims or informants, money laundering and forfeiture of substitute assets.
* In 1988, amended to provide for life sentence where predicate offense also carried life sentence and added new predicate offenses: murder for hire, sexual exploitation of children, certain narcotics offenses.
* In 1996, Civil RICO could not be predicated on the purchase or sale of securities, but could be based on immigration fraud and alien smuggling as well as various infringements on intellectual property.
From – A Brief Overview of Federal Racketeering Laws – US
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digg_title = “SEC Botches Another Case – January 3, 2008”;
digg_bodytext = “David Patch\r\n\r\n \r\n\r\nFederal Agencies typically try their best to not air dirty laundry but for the Securities and Exchange Commission the task is becoming rather difficult.\r\n\r\n \r\n\r”;
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Federal Agencies typically try their best to not air dirty laundry but for the Securities and Exchange Commission the task is becoming rather difficult.
For the second time in barely 2 months the SEC has lost a case in federal court regarding illegal short sales associated with a Private Placement in Public Entity (PIPE) offering.
To start the New Year a federal judge in Manhattan threw out, with prejudice, the SEC’s case against Gyrphon Partners brought forth by the Division of Enforcement. The SEC’s case alleged that between 2001 and 2004 Gryphon Partners had defrauded PIPE issuers and violated securities-registration rules by shorting shares ahead of a PIPE placement and later covering their short position with the shares received in that placement.
Gryphon, on the other hand, contested that they legally “naked short” the stock through Canada where the US laws pertaining to a stock locate and borrow did not exist.
Apparently the federal judge has agreed with Gryphon and has terminated the SEC’s case on those charges. The US Judge finding that the SEC based its claim on agency materials with “negligible support” for its view of the short sale regulations and that it quoted “selectively” and “misleadingly” from one of them to support their case. The judge allowed the charges of insider trading relative to those short sale trades to remain however.
It was last October that a federal judge in North Carolina dismissed the SEC’s case against John Mangan for similar short sale activities in 2001 involving a PIPE deal with a small Maryland based Security and Protection company called Compudyne.
Why the difficulty in bringing enforcement cases of this nature to fruition?
Consider first that the loophole used by Gryphon Partners was no secret to those that commit this type of fraud. In 2000 the NASD recognized the loophole identified where shorts executed through Canada would fail settlement to the US purchasers of those trades. Unlike the US where a locate to borrow was required prior to the execution of a short sale, Canada had no such rules and thus allowed for short sales to trade without an equity share backing the trade.
In the exact years that Gryphon Partners was trading through the use of this loophole the SEC sat on the NASD proposed rule change to NASD Rule 3370. It was not until October 2003 that the SEC approved the NASD proposal with a delayed incorporation date of April 2004. By June 2004 the rule became obsolete under the SEC’s newly released Regulation SHO.
The SEC has also had difficulties recognizing the damage the illegal short sale can have on the investing public and public issuer.
According to records, as early as 1995 the SEC, working with the federal agencies, provided immunity to short seller Anthony Elgindy for taking bribes to manipulate securities while working for boiler room operations. Instead of prosecution Elgindy was enlisted as an informant to aid the authorities on the identification of and enforcement against pump and dump operations.
As the SEC followed Elgindy’s leads Elgindy continued to engage in illegal activities and was soon arrested by the federal authorities in May 2003 on charges of stock fraud, manipulation, and racketeering. Elgindy was using a private pay web site he set up to disseminate illegal information obtained and to enlist a group trading strategy to manipulate markets. Elgindy was later sentenced in 2006 to 9 years in a federal prison for his illegal acts.
Similarly John Fiero, with links to organized crime, money laundering, and short sale fraud was also an informant of securities regulators after being found guilty of fraud and manipulation.
In 1995 John Fiero colluded to drive down the price of 10 Nasdaq securities underwritten by now-defunct Hanover Sterling & Co. through illegal short selling of those securities. In 1998 the NASD brought Fiero up on enforcement charges and in January 2001 barred Fiero, fined him $1 Million, and expelled his firm Fiero Brothers (FSCO) from the industry.
But on October 1, 2001 Elgindy posted on his private web site, where Fiero was a paying member that “the NASD which barred and banned FSCO and fined him 1,000,000 bucks, gave him machines and room to trade from at their offices.”
So Elgindy takes bribes to manipulate markets and is given immunity to become an informant and John Fiero illegally shorts stocks, puts a brokerage house Hanover Sterling out of business along with the clearing firm Adler Coleman and the NASD is setting him up an office in their facility.
Who were Fiero’s working associates, beyond Elgindy that is?
In September 2000 Richard H. Walker SEC’s Director, Division of Enforcement testified before a House subcommittee about the involvement of Organized Crime on Wall Street. Walked specifically addressed Hanover Sterling stating “In May 1997, a FBI sting operation led to charges by the U.S. Attorney for the Eastern District of New York against Louis Malpeso, Jr., a reported Colombo crime family associate, for conspiring to commit securities fraud. The indictment alleged that Malpeso conspired with stock broker Joseph DiBella and Robert Cattogio, one of the heads of the Hanover Sterling brokerage firm, to inflate the price of a penny stock.”
Hanover Sterling was a mobbed up brokerage and the firm Fiero executed his illegal trades through.
Could it be any clearer why the SEC couldn’t get this issue straight in 2000 when the NASD first presented it and in 2008 as reforms continue to lack teeth?
Will the SEC learn from their mistakes and draft rule making that is less ambiguous and more straightforward? Not likely.
Present reforms to the latest short sale loophole, the Options Market Making exemption, has been out for public comment for near 18 months now covering two separate comment sessions. The SEC’s offerings, beside the straightforward elimination, would require extensive tracking and complicated auditing to identify areas of abuse. The result will be more confusion, reason to claim ignorance when violations are identified, and compliance violation levels of enforcement instead of the premeditated fraud actions.
And this is exactly how the SEC likes it.
In October 2007, during a Q&A at the PIPES conference held in New York City by DealFlow Media, David Markowitz SEC’s New York Bureau Asst. Director of Enforcement informed the audience of PIPE players that there were no strict guidelines on when a trade was legal or illegal relative to a PIPE contract. Markowitz claiming, each case needed to be looked at as a case-by-case basis relative to the circumstances surrounding the trading.
It was clear in an interview I had with Markowitz afterwards that the attorney was out of touch with the audience reactions to his case-by-case, attorney-by-attorney responses. Markowitz fully believed that the audience was in full understanding of the laws and the consistent application of the laws.
Since that speech two separate SEC cases for illegal PIPE trading practices have been tanked by two separate US Federal Judges who believe the SEC interpretations of the law do not comply with the interpretations as understood by the plaintiff nor the judge.
I suggest the SEC print up more get out of jail free cards to the crooks and criminals. The agency should stick to the small compliance violations that yield little resistance. Anything bigger than that and the SEC attorney’s are outclassed and out lawyered by people who take this game much more seriously. Should they take me up on my suggestion there will be no need to worry, the collateral damage that will ensue are generally the ones that don’t carry a voice in the markets anyway, they being be the silent retail investors and small business issuers.
As financial institutions move towards an originate and distribute model of securitizing loans into asset-backed securities, the Basel II Accord just adopted by the Federal Reserve Board provides a new securitization framework with concomitant disclosure mandates. A central principle of Basel II is that external ratings for securitization exposures retained by an originating bank, which typically are not traded, are subject to less market discipline than rating for exposures sold to third parties,. In the Fed’s view, this disparity in market discipline warrants more stringent conditions. Thus, Basel II requires that two external ratings be obtained
Basel II also requires that banks disclose the amount of credit risk transferred and retained by the organization through securitization transactions and the types of products securitized. These disclosures are designed to provide users a better understanding of how securitization transactions impact the credit risk of the bank.
Generally, the Fed believes that banks will be able to fulfill some of their disclosure requirements by relying on disclosures made in accordance with accounting standards, SEC mandates, or regulatory reports. In these situations, banks must explain any material differences between the accounting or other disclosure and the disclosures required under Basel II.
As recently noted by Jean-Pierre Landau, Deputy Governor of the Bank of France, the current model of securitization has two distinctive features. One is the increasing complexity of customized derivatives, which has made valuation and risk assessment more difficult. The second is the fragility of off-balance sheet structures and vehicles which underpin securitization. Structured investment vehicles are not built to absorb shocks.
Their relationships with sponsor banks are sometimes very ambiguous, he noted, and there may be a gap between the legal commitments taken by the banks through liquidity support and credit enhancements and the true level of responsibility they felt obliged to take to protect their reputation. But the central banker predicted that the implementation of Basel II will bring significant improvements in risk management of securitization exposures. Had it been in place some years ago, he speculated, current problems may have been avoided.
Echoing these remarks, Fed Governor Randall Kroszner said that the enhanced public disclosures under Basel II should allow market participants to better understand a bank’s risk profile, adding that recent market events have underscored the importance of such transparency.
In his view, Basel II requires banks to assess the creditworthiness of borrowers and individual loans and investments, such as highly structured asset-backed securities, and to hold capital commensurate with that risk. This enhanced risk-sensitivity requires banks to hold a larger capital cushion for higher-risk exposures and thereby creates positive incentives for banks to lend to more creditworthy counterparties.
SecuritiesFraud and RICO (Racketeer Influenced and Corrupt Organizations) (From Techniques in the Investigation and Prosecution of Organized Crime – Materials on RICO, P 154-210, 1980, G. Robert Blakey, ed. See NCJ-78839)
Available in microfiche from NCJRS as NCJ-78839.
The application of the Racketeer Influenced and Corrupt Organizations Act (RICO) to securitiesfraud is discussed.
In securitiesfraud cases, the RICO law provides greater penalties for the perpetrator and greater monetary recovery for the victim than do the securities laws. Under RICO, defendants face a maximum criminal penalty of 20 years in prison, a fine of $25,000, or both. Offenders would also forfeit any interest obtained through securitiesfraud (the profits) or any interest or security in a business operated or controlled by securitiesfraud. RICO mandates that successful civil plaintiffs shall recover a monetary amount that triples their actual losses. Recovery of attorney fees is mandated rather than subject to a judge’s discretion. A civil court could also order the defendants to divest themselves of their interests in the defendant corporation, dissolve the corporation, or obey restrictions on future securities‘ activities. Recovery of triple damages under RICO requires proof of two instances of securitiesfraud. Such fraud occurs when a purposeful, knowing, or reckless misrepresentation or omission of a material fact is made in connection with an actual sale or purchase of securities. After securitiesfraud is established, the plaintiff must also satisfy the RICO law’s requirements. The acts of fraud must emanate from an enterprise that affects interstate commerce, be connected by a common scheme, and fall within the time limits of law. The case of King v. United States (10th Cir. 1976) is presented to illustrate the application of RICO to securitiesfraud. A total of 215 footnotes are listed. (Author summary modified)
Federal law violations ; Case studies ; Securitiesfraud ; Racketeer Influencd n Corrpt Org Act
The FTC works for the consumer to prevent fraudulent, deceptive, and unfair business practices in the marketplace and to provide information to help consumers spot, stop, and avoid them. To file a complaint or to get free information on consumer issues, visit ftc.gov or call toll-free, 1-877-FTC-HELP (1-877-382-4357); TTY: 1-866-653-4261. The FTC enters consumer complaints into the Consumer Sentinel Network, a secure online database and investigative tool used by hundreds of civil and criminal law enforcement agencies in the U.S. and abroad.
Do you feel that you have been taken advantage of by a mortgage lender involved in a predatory lending practice? Have you been pressured into accepting mortgage terms, or for that matter, have you been cornered into applying for a mortgage against your best interest or wishes? If you answered yes to any of the above questions then you are a victim of predatory lending.
A Predatory Lending Practice is any unfair and abusive practice whereby a mortgage broker or a mortgage lender uses any type of information about the borrower, to the borrower’s disadvantage, and then proceeds to convince the borrower to accept loan programs and or loan terms that were not in the best interest of the borrower. This practice also includes imposing higher interest rates, cost and fees, along with pre-payment penalties when more favorable terms could have been offered.
In response to the escalating trend in foreclosures Shelia Blair, Chairman of the Federal Deposit Insurance Corporation, recently expressed to the House of Representatives, “The time has come for national anti-predatory lending standards applicable to all mortgage lenders”. Furthermore, Blair indicated that regulations be imposed upon lenders to determine a borrower’s ability to repay a loan at its true cost, rather than on artificially low rates offered through aggressive advertising campaigns. Other areas needing immediate improvement include, Loan Flipping, Pre-Payment Penalties, Escrow of Taxes, and Fiduciary Obligations of Mortgage Originators.
Common Predatory Lending Practice Violations:
Foreclosure: Homeowners should not be misled about their rights and remedies when facing foreclosure.
Loan Flipping: Mortgage companies should not be engaged in the practice of persuading homeowners to refinancing their homes with little or no apparent significant improvement of the homeowner’s situation.
Red Lining: This would involve imposing higher interest rates and or steeper prepayment penalties in areas of a city considered to be less desirable.
Adjustable Rate Mortgages: Some lenders have steered homeowners into adjustable rate mortgages with low teaser rates without considering the borrowers capacity to reasonably meet future increases in the monthly payments.
Failure to Disclose: Each and every lender has the legal responsibility to fully disclose and completely explain each and every aspect of the mortgage for which you are applying.
Housing Discrimination: If you feel that your race, creed, religion, national origin, marital status, health status, sex or sexual orientation may have impacted your mortgage terms, your rights may have been violated.
The House of Representatives Financial Services Committee is facing estimates that 2.2 million homeowners are currently at risk of losing their homes. The subcommittee reviewed “predatory lenders” that gave loans to people who were either unaware or unable to repay the loans. The common concern is that this may be the most devastating real estate disaster since the Great Depression. Lenders are not allowed to take advantage of a homeowner’s circumstances to make excessive profits on a loan application. The law also precludes lenders from exploiting to their own advantage, the consumer’s lack of knowledge on various mortgage programs, offerings and qualifying guidelines. You do not have to settle for less than what you are entitled to. Do not allow any lender to take advantage of you or your situation.
Ex-Citigroup worker alleges illegal lending norms 15 June 2001
By F. Brinley Bruton
A Citigroup Inc. unit deliberately targeted low-income, uneducated borrowers for loans and insurance they did not need or understand, a former employee alleged in a government lawsuit. The financial services giant has consistently denied such practices.
The charges, filed in an affidavit by part-time branch assistant manager Gail Kubiniec of Citigroup unit CitiFinancial, are part of the lawsuit filed by the Federal Trade Commission (FTC) against Associates First Capital Corp., a consumer lending unit that is part of CitiFinancial. The suit alleges predatory lending and deceptive marketing.
“I and other employees would often determine how much insurance could be sold to a borrower based on the borrower’s occupation, race, age, and education level,” Kubiniec said in the affidavit, a copy of which was provided to Reuters by a New York-based consumer advocacy group.
“If someone appeared uneducated, inarticulate, was a minority, or was particularity young or old, I would try to include all the coverages CitiFinancial offered,” she said in reference to insurance and other products often tied to real estate or personal loans.
Citigroup has not admitted to predatory lending, but said in March it had dealt with the FTC’s concerns by putting into place a program that addresses lending practices at Associates First, which Citigroup bought last year.
CITIGROUP DENIES ALLEGED ABUSES
Citigroup on Thursday denied alleged abuses at CitiFinancial, a longtime Travelers Group unit known as Commercial Credit until 1999. The unit changed its name shortly after financial services group Travelers merged with global bank Citicorp to form Citigroup.
The company said the allegations are against Citigroup policy.
“Ms. Kubiniec’s allegations are an affront to the tens of thousands of CitiFinancial employees who strive every day to act in their customers’ best interest,” Citigroup spokeswoman Leah Johnson said. “If true, the unethical sales tactics she describes would constitute serious violations of the company’s policies and standards.”
Kubiniec’s affidavit was filed on May 16 in a case brought by the FTC against Associates First in federal court in Atlanta. The FTC has charged Associates First with systematic and widespread abusive loan practices, often described as predatory lending. They include deceptive marketing to induce consumers to refinance existing debts into home loans with high interest rates, costs and fees.
The suit, which also names Citigroup and CitiFinancial as successors to Associates First, seeks redress for all borrowers who were harmed as a result of the alleged practices.
Federal Trade Commission officials could not immediately be reached.
Citigroup merged Associates First into CitiFinancial in March, but Kubiniec’s affidavit covers practices at CitiFinancial before the two units were combined.
“As soon as we learned of her allegations, we commenced a thorough review that has reassured us that these alleged practices are in no way characteristic of how CitiFinancial employees treat their customers and sell products,” Citigroup’s Johnson said.
Last year, Citigroup said it would take steps to improve the consumer lending practices at Associates First.
The affidavit was provided to Reuters by Inner City Press/Community on the Move and Inner City Public Interest Law Center, which is campaigning against Citigroup over its takeover plans and lending practices.
Kubiniec, who could not be reached for comment on the affidavit, alleges that she saw CitiFinancial employees “harass and intimidate borrowers” who were behind with payments. “Managers condoned whatever tactics an employee used, as long as he obtained payment,” she said.
“Typically, employees would only state the total monthly payment amount in selling a proposed loan. Additional information, such as the interest rate, and the financed points and fees, closing costs, and ‘add-ons’ like credit insurance, were only disclosed when demanded by the borrower,” she said. “It was also common practice to try to sell borrowers the largest possible loan.”
Kubiniec worked for CitiFinancial and its predecessor from 1995 until February in Lansing, Michigan and the New York towns of Tonawanda and Depew.
The phrase “loan shark” came into usage in the United States late in the nineteenth century to describe a certain type of predatory lender. Earlier variations of this vernacularism include “land shark” and “money shark.” The lenders to whom these epithets were applied charged high rates of interest and designed their credit products in such a way as to make orderly retirement of the debt difficult. Borrowers became trapped by their loans and were unable to pay off the principal. The interest payments dragged on and many borrowers became virtual debt peons. As Cobleigh explains, “The real aim of loan sharks is to keep their customers eternally in debt so that interest (for the sharks) becomes almost an annuity.”
There are many registered and legal lenders that lend to people who cannot get loans from the most mainstream lenders such as large banks. They often operate in cash, whereas mainstream lenders increasingly operate only electronically, which means that they will not deal with people who do not have a bank account. Terms such as subprime lending and “non-standard consumer credit” are used for this type of lender. Payday loans are one example of this type of consumer finance. The availability of these products has made true loan sharks rarer, though some legal lenders have been accused of behaving in an exploitative manner.
Payday loan operations have also come under fire for charging inflated “service charges” for the service of cashing a “payday advance” — effectively a short-term (no more than one or two weeks) loan for which charges may run 3-5% of the principal amount. By claiming to be charging for the ‘service’ of cashing a paycheck, instead of merely charging interest for a short-term loan, laws which strictly regulate moneylending costs can be effectively bypassed.
A loan shark is a person or body that offers illegalunsecured loans at high interest rates to individuals, often backed by blackmail or threats of violence. They provide credit to those who are unwilling or unable to obtain it from more respectable sources, usually because interest rates commensurate with the perceived risk are illegal.
Today loansharking tends to be associated in the popular mind with organized crime. The stereotypical loan shark is thought to be a gangster who extorts repayment of the debt with threats of physical brutality. Such loan sharks do exist, but the first loan sharks were not linked to crime families and they did not beat delinquent debtors. The phrase was originally applied to salary and chattel mortgage lenders who operated at the turn of the twentieth century. These creditors dealt in small sums (most loans were less than $100) and they charged high rates of interest (between 10% and 20% a month, and sometimes more). Many of these cash advances were interest-only and required a lump-sum payment to retire the principal. As a result, loans that were supposed to be short term often dragged on for months and years. To pay one lender the debtor often took out another loan in a process that was called “pyramiding.” The loan sharks frequently colluded in encouraging this expanding chain of debt.
Usury (pronounced /ˈjuːʒəri/, comes from the Medieval Latinusuria, “interest” or “excessive interest”, from the Latin usura “interest”) originally meant the charging of interest on loans. This would have included charging a fee for the use of money, such as at a bureau de change. After countries legislated to limit the rate of interest on loans, usury came to mean the interest above the lawful rate. In common usage today, the word means the charging of unreasonable or relatively high rates of interest. As such, the term is largely derived from Abrahamic religious principles and Riba is the corresponding Islamic term. The primary focus in this article is on the Christian tradition.
The pivotal change in the English-speaking world seems to have come with the permission to charge interest on lent money: particularly the Act ‘In restraint of usury’ of Henry VIII in England in 1545 (see book references).
“When money is lent on a contract to receive not only the principal sum again, but also an increase by way of compensation for the use, the increase is called interest by those who think it lawful, and usury by those who do not.” (Blackstone’s Commentaries on the Laws of England, p. 1336).
In the United States, usury laws are state laws that specify the maximum legal interest rate at which loans can be made. Congress has opted not to regulate interest rates on purely private transactions, although it arguably has the power to do so under the interstate commerce clause of Article I of the Constitution.
Congress has opted to put a federal criminal limit on interest rates by the RICO definitions of “unlawful debt” which make it a federal felony to lend money at an interest rate more than two times the local state usury rate and then try to collect that “unlawful debt”.
It is a federal offense to use violence or threats to collect usurious interest (or any other sort). Such activity is referred to as loan sharking, although that term is also applied to non-coercive usurious lending, or even to the practice of making consumer loans without a license in jurisdictions that require licenses.
Usury statutes in the United States
Each U.S.state has its own statute which dictates how much interest can be charged before it is considered usurious or unlawful.
If a lender charges above the lawful interest rate, a court will not allow the lender to sue to recover the debt because the interest rate was illegal anyway. In some states (such as New York) such loans are voided ab-initio
Definition: Usury is defined as the act of lending money at an unreasonably high interest rate, this rate is defined at the state level. Repayment of loans at a usurious rate makes repayment excessively difficult to impossible for borrowers. This is also called “loan sharking” or “predatory lending”.
Usury has recently come back into legal conversations due to the emergence of payday loans and sub-prime lending. These types of loans are aimed at those who are at greater risk of defaulting, those with lower incomes. Payday loans are supposed to be used as short term loan to help people make it to their next paychecks by paying bills that are due before they receive it. Unfortunately these get abused and the lendees can get into further financial trouble.
Sub-prime loans, again, are for lower income individuals that are more at risk of not being able to fulfill their obligation in payments. These loans have higher rates, but obviously fall just below their state’s usury level to be legal.
Many are now asking for changes in how we define usury to eliminate these types of loans.
The usury laws, predatory lending, and loan sharking rules apply more to local banks. Since the passing of a federal law stating that the state usury laws do not apply to banks that label themselves with the words “national”, these banks have been able to offer loans above the state usury limit. These “national” banks are allowed to apply interest rates a number of points higher than the Federal Reserve Discount Rate. The Federal Reserve Discount Rate is the rate banks get when borrowing directly from the Federal Reserve Bank for short term funds.
However, at the Federal level, there is a criminal limit, as defined by Congress, for interest rates. This rate is twice the amount of the particular state’s usury limit.
here are a number of different lending tactics that are considered predatory lending. Some lenders dispute whether these are unethical, often citing that consumers have choices of who they get their loans from. Below are the most common practices labeled “predatory”.
Fees & APR. Common compaints on predatory lending involve fees incurred which are not included in the APR. Borrowers may not know they have a no-fee line of credit, or may not be able to get a no-fee line of credit. Lenders may take advantage of this by offering a reasonable interest rate, but tacking on a fee. The APR may appear attractive, but the fee is not considered in the APR, if it were the rate would appear significantly higher.
Risk-based lending. This is the practice of charging higher interest rates to the consumers who are labeled as high-risk, meaning there is a higher risk that the consumer will not be able to pay back the loan and thus default. Lenders argue they need the higher interest rates in order to offset the losses from those that default. Consumer groups, however, counter that the higher interest rates themselves make it more difficult for the individuals to pay back the loan, and the lenders are simply price-gouging.
Credit Insurance. Lenders will push single premium credit insurance stating that the insurance will pay off the loan if the homebuyer passes away. The cost of the insurance is often added to the loan, making it more appealing since it does not have to be paid in one lump sum. This makes the loan more expensive, and compounds the interest of the insurance over the life of the loan.
Interest Negotiation. Lenders often do not tell consumers that they may be able to negotiate the interest rate of the loan. By not communicating this to the consumer, the lending company increases profits.
Competition law, known in the United States as antitrust law, has three main elements:
prohibiting agreements or practices that restrict free trading and competition between business entities. This includes in particular the repression of cartels.
banning abusive behaviour by a firm dominating a market, or anti-competitive practices that tend to lead to such a dominant position. Practices controlled in this way may include predatory pricing, tying, price gouging, refusal to deal, and many others.
supervising the mergers and acquisitions of large corporations, including some joint ventures. Transactions that are considered to threaten the competitive process can be prohibited altogether, or approved subject to “remedies” such as an obligation to divest part of the merged business or to offer licences or access to facilities to enable other businesses to continue competing.
The substance and produce of competition Acts vary from jurisdiction to jurisdiction. Protecting the interests of consumers (consumer welfare) and ensuring that entrepreneurs have an opportunity to compete in the market economy are often treated as important objectives. Competition law is closely connected with law on deregulation of access to markets, state aids and subsidies, the privatisation of state owned assets and the establishment of independent sector regulators. In recent decades, competition law has been viewed as a way to provide better public services.
“The fact that secrets do not remain guarded
forever is the weakness of the secret society.”
-Georg Simmel, The Secret Society
“Free enterprise,” “open markets,” and
similar expressions are standard business
rhetoric, but in practice economic organizations
strive to limit, curtail, and restrict the
operation of competitive markets. Their tactics
include planning (Galbraith 1967), entry barriers
(Baker 1984; Porter 1980c), joint ventures,
mergers, director interlocks, political activity
(Pfeffer 1987; Pfeffer and Salancik 1978; Burt
1983), direct manipulation of market ties
(Baker 1990), and embeddeding business decisions
in social relationships (Granovetter
1985). These market-restricting tactics are legal,
but business organizations also indulge in
practices proscribed by law that flagrantly subvert
the market mechanism.
* Order of authorship is alphabetical to indicate
equal contributions. Direct correspondence to
Wayne E. Baker, Graduate School of Business,
University of Chicago, 1101 E. 58th Street, Chicago,
IL 60637. Funding was provided in part by
the Graduate School of Business, University of Chicago.
We benefited from the insightful and thorough
reviews provided by anonymous ASR reviewers.
We are grateful for comments received during
presentations at the 1992 annual meeting of the International
Sunbelt Social Network Conference
(San Diego, CA), the Decision Research Workshop
at the University of Chicago, and seminars at the
University of Michigan, Northwestern University,
and the Stanford Center for Organization Research.
We especially thank Elizabeth Knier, J.D., for meticulous
and diligent research assistance, and our
informants in the heavy electrical equipment industry
for sharing their insights and knowledge with
us. We thank Michele Companion and Timothy
Harrington for additional research assistance. We
appreciate the helpful comments provided by Gene
Fisher, Andy Anderson, Anthony Harris, Gerald
Platt, Doug Wholey, David Sally, and Paul Cowan.
WAYNEE. BAKER ROBERTR. FAULKNER
University of Chicago University of Massachusetts
We analyze the social organization of three well-known price-fixing conspiracies in the
heavy electrical equipment industry. Although aspects of collusion have been studied by
industrial organization economists and organizational criminologists, the organization
of conspiracies has remained virtually unexplored. Using archival data, we reconstruct
the actual communication networks involved in conspiracies in switchgeal; transformers,
and turbines. We find that the structure of illegal networks is driven primarily by the
need to maximize concealment, rather than the need to maximize efficiency. Howevel;
network structure is also contingent on information-processing requirements imposed by
product and market characteristics. Our i’ndividual-level model predicts verdict (guilt or
innocence), sentence, and fine as functions of personal centrality in the illegal network,
network structure, management level, and company size.
Collusive agreements in the heavy electrical
equipment industry go back to the 1880s, but
the price-fixing “schemes of the 1950s were
given special impetus when repeated episodes
of price warfare proved incompatible with top
management demands for higher profits”
(Scherer 1980, p. 170). Top executives imposed
unrealistic profit objectives in an industry
characterized by chronic overcapacity, increasing
foreign competition, and stagnating
demand (Ohio Valley 1965, p. 939). To cope,
managers decided to conspire rather than compete.
Their elaborate conspiracy involved as
many as 40 manufacturers and included more
than 20 product lines, with total annual sales
over $2 billion. The conspiracy was pervasive
and long-lasting; it became, insiders said, a
“way of life” (U.S. Senate Committee on the
Judiciary 1961, pp. 16879-84 [henceforward
The study of the organization of conspiracy
is important for both theory and policy. We
contribute to research on organizations by
studying illegal networks involving companies
and their agents (employees). Most knowledge
about interorganizational networks is based on
studies of legal practices. Interorganizational
conspiracies, however, are a perduring feature
of capitalist societies. Our study explores the
extent to which theories based on legal networks
can be generalized to illegal networks.
Most sociological knowledge about organizational
crime is based on studies of corporate
offenders and their offenses (Shapiro 1980, p.
29). We move beyond this focus by analyzing
the organization of criminal activity, as well as
its effect on outcomes.
Studies of the social organization of conspiracy
also provide new insights relevant to
public policy, especially regarding the investigation
of antitrust violations and the enforcement
of antitrust laws. The anticompetitive activity
we study here is so common that uncovering
it is a chief purpose of major “guardians
of trust” (Shapiro 1987) like the U.S. Department
of Justice. Price-fixing and other
anticompetitive practices reduce consumer and
societal welfare (Scherer 1980). Successful
conspiracies artificially raise prices above the
competitive norm (Lean et al. 1982; Scherer
1980; Ohio Valley Electric Corp. v. General
Electric Co. and Westinghouse 1965, p. 915
[henceforward Ohio Valley 19651).
+++ ++++ +++
The Tennessee Valley Authority’s (TVA)
planning in 1958 for the Colbert Steam Plant
exposed the conspiracy. The TVA complained
about possible bid rigging to the U.S. Justice
Department because it had received identical
or nearly identical bids for electrical equipment,
ranging from $3 for insulators to
$17,402,300 for a 500,000 kilowatt steam turbine
generator (Walton and Cleveland 1964,
pp. 24-29). The Justice Department’s investigation
in 1959 revealed extensive collusion and
grand jury indictments followed in 1960.
The Sherman Act defines neither the practices that constitute restraints of trade nor monopolization. The second important antitrust statute, the Clayton Act, passed in 1914, is somewhat more specific. It outlaws, for example, certain types of price discrimination (charging different prices to different buyers), “tying” (making someone who wants to buy good A buy good B as well), and mergers—but only when the effects of these practices “may be substantially to lessen competition or to tend to create a monopoly.” The Clayton Act also authorizes private antitrust suits and triple damages, and exempts labor organizations from the antitrust laws.
In referring to contracts “in restraint of trade,” or to arrangements whose effects “may be substantially to lessen competition or to tend to create a monopoly,” the principal antitrust statutes are relatively vague. There is little statutory guidance for distinguishing benign from malign practices. Thus, judges have been left to decide which practices run afoul of the antitrust laws.
An important judicial question has been whether a practice should be treated as “per se illegal” (i.e., devoid of redeeming justification, and thus automatically outlawed) or whether it should be judged by a “rule of reason” (its legality depends on how it is used and on its effects in particular situations).
To answer such questions, judges sometimes have turned to economists for guidance. In the early years of antitrust, though, economists were of little help. They had not extensively analyzed arrangements such as tying, information sharing, resale price maintenance, and other commercial practices challenged in antitrust suits. But as the cases exposed areas of economic ignorance or confusion about different commercial arrangements, economists turned to solving the various puzzles.
[ . . . ]
The recent era of antitrust reassessment has resulted in general agreement among economists that the most successful instances of cartelization and monopoly pricing have involved companies that enjoy the protection of government regulation of prices and government control of entry by new competitors. Occupational licensing and trucking regulation, for example, have allowed competitors to alter terms of competition and legally prevent entry into the market. Unfortunately, monopolies created by the federal government are almost always exempt from antitrust laws, and those created by state governments frequently are exempt as well. Municipal monopolies (e.g., taxicabs, utilities) may be subject to antitrust action but often are protected by statute.
About the Author –
Fred S. McChesney is the Class of 1967 James B. Haddad Professor of Law at Northwestern University School of Law and a professor in the Kellogg School of Management at Northwestern.
The basic goal of safety-and-soundness regulation is to protect “fixed-amount creditors” from losses arising from the insolvency of financial institutions owing those amounts, while ensuring stability within the financial system. Fixed-amount creditors are bank depositors, beneficiaries and claimants of insurance companies, and account holders at brokerage firms who are owed fixed amounts of money. Investors in a stock or bond mutual fund are not fixed-amount creditors because the value of their investments is determined solely by the market value of the fund’s investments. Financial institutions with fixed-amount creditors include banks, S&Ls, credit unions, insurance companies, stockbrokers, and money-market mutual funds (MMMF). Compliance regulation broadly seeks to protect individuals from “unfair” dealing by financial institutions and in the financial markets and to impede such crimes as “money laundering,” although this crime is hard to define.
Financial regulation in the United States is carried out by an alphabet soup of federal and state agencies. The federal bank regulators include the Federal Reserve System, the Federal Deposit Insurance Corporation (FDIC), the Office of the Comptroller of the Currency, the Office of Thrift Supervision, and the National Credit Union Administration. The Securities and Exchange Commission (SEC) regulates stockbrokers, MMMFs, stock and bond mutual funds, stock trading—including the stock exchanges—and financial disclosures by publicly traded corporations. State regulators oversee state-chartered banks, savings institutions, and credit unions as well as all insurance companies. State securities regulators are a junior partner to the SEC in that field.
Safety-and-soundness, or solvency, regulation seeks to prevent financial institutions with fixed-amount creditors from becoming insolvent. Because government regulation cannot prevent all insolvencies, however, governments have created mechanisms to protect at least small fixed-amount creditors from any loss when a depository institution, insurance company, or brokerage firm has become insolvent—that is, has “failed.” These mechanisms, such as deposit insurance, insurance guaranty funds, and investor protection funds, can properly be viewed as a product warranty for solvency regulation. That is, they protect fixed-amount creditors against losses when the “product,” regulation, which is supposed to protect fixed-amount creditors, fails to prevent a financial institution’s insolvency.
For the more than three centuries that banks and insurance companies have been chartered by governments, notably with the founding of the Bank of England in 1694, governments have imposed regulations to ensure that these institutions remain both solvent (the value of their assets exceeds their liabilities) and liquid (they can meet payment requests, such as checks and insurance claims, when presented). The principal solvency regulation today centers on capital regulation; that is, the financial institution must maintain a positive capital position (its assets exceed its liabilities) equal to at least a certain portion of its assets. Other solvency regulations force asset diversity by limiting loan and investment concentrations among various classes of borrowers or the amount of credit extended to any one borrower.
[ . . . ]
Solvency regulations are enforced by examiners who assess the value of an institution’s assets and determine the scope of its liabilities, a particularly important function in property and casualty insurance companies. A financial institution can become insolvent (its liabilities exceed the value of its assets) if it suffers a large sudden loss or a sustained period of smaller losses. Likewise, a seemingly solvent bank or insurance company can turn out to be insolvent if examiners find hidden losses—assets have been overvalued or liabilities have not been recognized. Quite often, fraud is the underlying cause of those losses.
Compliance regulation seeks to ensure “fair” and nondiscriminatory treatment for customers of financial institutions and to prevent financial institutions from being used for criminal or terrorist purposes. Compliance regulation has recently become a major responsibility for the regulators and a major cost burden for financial institutions.
Congress has enacted numerous protections for customers of federally regulated financial institutions; sometimes these protections extend to other types of financial firms, such as small-loan companies. These laws include the Truth in Lending Act, the Truth in Savings Act, the Fair Credit Reporting Act, the Real Estate Settlement Procedures Act, the Expedited Funds Availability Act, and various privacy protections, to name just a few. In recent decades, Congress also has enacted legislation barring discrimination in bank lending, including the Equal Credit Opportunity Act, the Home Mortgage Disclosure Act, the Consumer Credit Protection Act, and the Community Reinvestment Act. Each new law increases compliance costs for banks and other financial institutions.
Congress enacted the Bank Secrecy Act in 1970 not to enhance secrecy but to reduce it: the act’s intent was to prevent banks from being used as money-laundering conduits. Under this act, banks are required to submit Currency Transaction Reports to the Treasury Department for individual currency deposits and withdrawals exceeding ten thousand dollars unless the bank customer, such as a grocery store, regularly engages in large cash transactions with the bank. Banks also are required to submit Suspicious Activity Reports for any banking transaction that seems suspicious or out of the ordinary for that customer. According to Lawrence Lindsey, an economist and former governor of the Federal Reserve System, for the seventy-seven million currency-transaction reports filed between 1987 and 1995, the government was able to prosecute only three thousand money-laundering cases. The three thousand cases produced only 580 guilty verdicts. That amounts to more than 130,000 forms filed per conviction.
The USA PATRIOT Act, passed in the aftermath of the 2001 terrorist attacks, broadened the Bank Secrecy Act’s reach. Since then, the federal government has stepped up its enforcement of the Bank Secrecy Act, including the levying of multimillion-dollar fines against banks for violations. As a result, financial institutions of all types have increased their spending on compliance. Much of the cost of this spending is borne by customers of these institutions through higher fees and lower returns.
While financial institution regulation has changed dramatically over the centuries, its goal has not changed: to protect fixed-amount creditors against loss should their financial institution fail and to ensure timely payment of checks, insurance claims, and other obligations of these institutions as they come due. However, financial regulation has sometimes failed badly. Hence the need for a product warranty—in the form of deposit insurance, insurance guaranty funds, and the like—to protect depositors, insureds, and brokerage customers from regulatory failure.
About the Author –
Bert Ely, the principal in Ely & Company, Inc., is a financial institutions and monetary policy consultant in Alexandria, Virginia. In 1986, he was one of the first people to publicly predict the U.S. S&L crisis.
At an SEC roundtable that looked at lessons from the credit crisis, Chairman Cox discussed the need to give investors more useful, timely, and transparent information, and the need for Congress to fill a U.S. regulatory gap and provide statutory authority for government oversight of credit default swaps.
SEC Protecting Investors, Markets During Credit Crisis
During the current turmoil in the credit markets, the SEC has worked closely with other regulators in the U.S. and around the world to protect investors and the markets.
As the checks got cashed and consumer prices surged, however, large numbers of Americans spent the money in May and June on such basic needs as food, utilities, and gasoline. Sales at nearly all retailers—save for those selling low-cost food—were dismal. And that’s proving to be a source of deep worry for a broad array of retailers of everything from electronics and autos to home furnishings. “There are already too many building material suppliers than there are buyers, and auto dealers who have their parking lots full of SUVs they can’t sell,” says Brian Bethune, chief U.S. financial economist at Global Insight, a market analysis firm.
The bulk of the money, which started going out in May, has been disbursed, with the last checks already in the mail. Since May 1, the Treasury has pumped out $78 billion as tax rebates and transfers. But U.S. retail sales rose a mere 0.1% in June, after a 0.8% jump in May caused by the stimulus checks, according to the Commerce Dept. Specialty retail and department stores reported dismal sales: Limited Brands’ (LTD) sales fell 9% in June and 6% in May, J.C. Penney’s (JCP) fell 2.4% and 4.4%, while Abercrombie & Fitch’s (ANF) sales declined 3% and 1%, respectively.
[ and more . . . ]
by Pallavi Gogoi
Retailing July 21, 2008, 12:01AM EST
Gloomy Days Ahead for Retailers
If sales weaken further after the stimulus checks are spent, a wave of bankruptcies may be forthcoming
Ultimately, though, it’s all a question of control, says Elizabeth Warren, law professor at Harvard University. She says that the impact of store closings is bound to be felt across the broader U.S. economy in coming months. “This will have a ripple effect through communities with hundreds of job losses, loss of taxes, and suppliers going out of business,” says Warren, who in 2005 testified to Congress against changes to the bankruptcy law.
But mall owners don’t like to house bankrupt retailers. An extended, court-run reorganization can hurt the landlord’s chance of securing positive financing terms. The real estate industry lobbied successfully for the 210-day cap on how long companies have to assume or reject leases. “Macy’s got at least two Christmas seasons, but today if a company files in January, they don’t even have until Christmas to decide what they will do,” says lawyer Gottlieb.
For some chains, times are even more desperate, and the drumbeat of retail bankruptcies grows louder by the day. So far this year, 15 retailers with assets of $100 million or more have filed for Chapter 11 bankruptcy, up from seven for all of 2007, according to Bankruptcydata.com, which tracks such filings. On Aug. 4, Boscov’s, a department-store chain with 49 stores in the Northeast, filed for Chapter 11, just a week after the 177-store Mervyn’s chain in California filed for protection from creditors.
Retailers already face strong headwinds. Consumers’ appetite for discretionary purchases has dwindled sharply, and credit conditions are tight. That has led to shrinking sales month after month at most retailers and a string of store closings. Foot Locker (FL) is closing 140 stores; Wilson’s Leather is closing 160; Ann Taylor (ANN), 117; and jeweler Zales (ZLC) has closed 105.
The rapid dissolution of Sharper Image took many in the bankruptcy industry by surprise. But that chain isn’t alone. Several retailers that have filed for Chapter 11 protection (BusinessWeek.com, 7/21/08) since the economy started swooning have unraveled just as quickly: Wickes Furniture closed down its 36 stores. Friedman’s is in the process of selling off jewelry and is closing its 377 stores, while Whitehall Jewelers is liquidating its 300 stores. All these companies filed for bankruptcy reorganization in 2008. And in December 2007, Bombay Co. and Levitz closed all their stores.
by Pallavi Gogoi
Retail August 11, 2008, 12:01AM EST
Bankrupt Retailers: Pushed to the Brink
Changes in the law have sharply reduced retailers’ ability to reorganize, driving many to liquidate quickly
*** How could they have been allowed to run all or nearly all their operating costs on credit? That isn’t solvency – AND – what happened to all the money they did make already, where did it go?***
What happens when everyone is a seller and no one is a buyer? This isn’t a matter of credit – it is a matter of having devalued the actual foundation of the consumer, the US dollar and currency values in general.
And, I’m sick of hearing these people in government, news, stock market, banking and business, say that those people who’ve lost their homes “will just have to rent” – in a manner that is so cavalier that it is overtly obvious the degree of ignorance they have about it and about the ripples of loss being created.
Finally! I work for a company that manages and tracks gift cards, and I’ve been following this issue on savvywallet.com. If the FTC passes this new law, this would make gift cards a safer purchase for consumers. I’m just surprised it took this long. Gift cards are still the #1 gift and should be protected. I wonder how long it will take? After every retailer files? Consider this. Last year $100B was spent on gift cards and around $8B was lost. I’m sure the numbers will be higher this year.
Posted on: September 18, 2008 3:36 PM
The gift card issue is typically governed by a bankruptcy judge’s decision. The cards are treated as debts, and it is up to the company to decide whether or not it is willing or able to pay them. That means many times any Joe or Mary trying to get a piece of their $50 back would have to file a claim like any other unsecured creditor and hope for distributions, which, depending on the case, could end up happening months or years down the road, if at all. Such may be the case with Sharper Image, whose unused gift cards still have roughly $20 million of credit on them.
Championing the cause for those holders is the Consumers Union, which is petitioning the Federal Trade Commission in an effort to protect consumers from losing cash on gift cards when retailers file for bankruptcy.
The CU said it is trying to force retailers to maintain a reserve of funds from gift card sales so that they are always covered, regardless of a company’s fortunes. The agency even wants the FTC to stick its nose into Chapter 11 cases and petition bankruptcy courts to force debtors to honor gift cards at full value.
Gift cards are not the same as a creditor – these were cash paid products sold at the store. Their cash value has its face value as the cash that was paid when it was purchased. For these companies and the bankruptcy judges, the FTC and the Department of Commerce, the US Congress and Federal Judges to allow these companies to fail paying these out first from their available assets – it is criminal, grand larceny because of the millions of dollars it represents and embezzlement of the highest order.
It needs to be explained to the bankruptcy judges in terms they can understand. This represents fraud because these cards are sold as cash and are not being redeemable. It is also misrepresentation and stealing. That isn’t commerce – it is theft.
US economic crisis – foreclosure info and what has the housing bailout package done to help – created another agency that President Bush and US Congress appoints?
The number of total foreclosure filings rose from about 885,000 in 2005 to 1,259,118 in 2006.
U.S. Foreclosure Filings Up 42 Percent From 2005
Colorado, Georgia, Nevada Post Highest Foreclosure Rates
Colorado, Georgia, Nevada post highest foreclosure rates
Colorado documented the nation’s highest state foreclosure rate for the year, one foreclosure filing for every 33 households — or 3 percent of the state’s households. The state reported a total of 54,747 foreclosure filings during the year, an 85 percent increase from 2005 and the eighth highest total among all the states.
WASHINGTON (Thomson Financial) – The number of foreclosures filed by US homeowners increased sharply in December and left calendar-year 2007 foreclosures higher by nearly 1 mln compared with 2006, according to a private sector report released today.
The number of foreclosure filings for December was 215,749, up 6.8 pct from November, according to California-based RealtyTrac.
December foreclosure filings are 97 pct higher than the number of foreclosures seen in December 2006.
This rise led to a total of 2.2 mln foreclosures in 2007, up 75 pct from the roughly 1.26 mln the company reported in 2006. RealtyTrac said 1 pct of all US households was in ‘some stage of foreclosure’ in 2007, up from 0.58 pct in 2006.
AFX News Limited
US foreclosures rise in December; reach 2.2 mln in 2007, up 75 pct from 2006
01.29.08, 5:16 AM ET
Number of Foreclosure Filings Hits Record High in August
September 19th, 2008 by admin
When the numbers for August foreclosures were reported, it can not be considered as good news especially considering that there were actually 304,000 homes in default. To make this even more depressing, data gathered by RealtyTrac showed that about 91,000 American families lost their homes to foreclosure.
Including all the houses that were repossessed by the mortgage lenders since August last year, there is already a total of 770,000 homes. More can actually be expected as the problems in the credit industry culminated in the bankruptcy filing of Lehman Brothers and rescuing of AIG by the federal government this week.
For Fannie Mae, the record high numbers are not surprising since they are expecting the foreclosure crisis to bottom out during the last months of the present year. With the national economy suffering another huge blow and the number of unemployed reaching 400,000 every month, it is not surprising that the bottom is much deeper than anticipated.
Foreclosure starts are reported by the Administrative Office of the Courts
U.S. Foreclosures Hit Record in August as Housing Prices Fell
By Dan Levy
Sept. 12 (Bloomberg) — U.S. foreclosure filings rose to a record in August as falling home prices made it harder to sell or refinance homes to pay off the mortgage, RealtyTrac Inc. said.
Owners of 303,879 properties, or one in 416 U.S. households, got a default notice, were warned of a pending auction or foreclosed on last month. That was the most since reporting began in January 2005. Filings increased 27 percent from a year earlier,
[ . . .]
The worst housing slump since the 1930s shows little sign of abating. Home prices in 20 U.S. metropolitan areas declined 15.9 percent in June from a year earlier, according to the S&P/Case- Shiller index. Prices may fall another 10 percent through the end of 2009, according to analysts at Lehman Brothers Holdings Inc.
August filings were 11 percent higher than the previous record of 273,001 set in May, according to RealtyTrac. Filings rose 12 percent from July. Bank seizures, the last stage of the foreclosure process, known as real estate-owned or REO properties, more than doubled from a year ago to 90,893.
Defaults rose 10 percent and auctions rose 7 percent from August 2007, said RealtyTrac, which has a database of more than 1.5 million properties.
There are 3.9 million unsold existing single-family homes, the most since at least 1982, according to the Chicago-based National Association of Realtors.
To contact the reporter on this story: Dan Levy in San Francisco at email@example.com
Last Updated: September 12, 2008 05:00 EDT
Dan Levy, Bloomberg Published: Tuesday, April 15, 2008
U.S. foreclosure filings jumped 57% and bank repossessions more than doubled in March from a year earlier as adjustable mortgages increased and more owners gave up their homes to lenders.
More than 234,000 properties were in some stage of foreclosure, or one in every 538 U.S. households, Irvine, California-based RealtyTrac Inc., a seller of default data, said today in a statement.
[ . . . ]
About US$460-billion of adjustable-rate loans are scheduled to reset this year, according to New York-based analysts at Citigroup Inc. Auction notices rose 32% from a year ago, a sign that more defaulting homeowners are “simply walking away and deeding their properties back to the foreclosing lender” rather than letting the home be auctioned, RealtyTrac Chief Executive Officer James Saccacio said in the statement.
“We’re not near the bottom of this at all,” said Kenneth Rosen, chairman of Rosen Real Estate Securities LLC, a hedge fund in Berkeley, California and chairman of the Fisher Center for Real Estate at the University of California at Berkeley. “The foreclosure process will accelerate throughout the year.”
Rising foreclosures will add more inventory to an already glutted market, keep home prices down through at least next year and thwart efforts by Congress and President George W. Bush to help homeowners avoid default, Rosen said in an interview.
About 2.5 million foreclosed properties will be on the market this year and in 2009, Lehman Brothers Holdings Inc. analysts led by Michelle Meyer said in an April 10 report. U.S. home price declines will probably double to a national average of 20% by next year, with lower values most likely in metropolitan areas in California, Florida, Arizona and Nevada, mortgage insurer PMI Group Inc. said last week in a report.
Borrowers who owe more on their mortgages than their homes are worth may be buffeted by increasing job losses in a “very substantial recession,” Rosen said. About 8.8 million borrowers had home mortgages that exceeded the value of their property, Moody’s Economy.com said last week.
“At least 2 million jobs will be lost because of this recession, so we’ll get a cumulative negative spiral,” Rosen said. “A normal recession is 10 months. We think this one may be twice as long.”
Bank seizures climbed 129% from a year earlier, according to RealtyTrac
Some borrowers are “hanging on at the margins” in the face of resets, said Mark Goldman, a loan officer at Windsor Capital Mortgage Corp. in San Diego.
Goldman said one of his clients is a self-employed contractor whose adjustable-rate mortgage rose by two%age points two months ago. His mortgage payment has increased to US$7,200 from US$4,900.
The Federal Housing Finance Agency is an independent federal agency created as the successor regulatory agency resulting from the statutory merger of the Federal Housing Finance Board (FHFB) and the Office of Federal Housing Enterprise Oversight (OFHEO), absorbing the powers and regulatory authority of both entities, with expanded legal and regulatory authority, including the ability to place government sponsored enterprises into receivership or conservatorship.
The enabling law establishing the FHFA is the Federal Housing Finance Regulatory Reform Act of 2008, which is Division A of the larger Housing and Economic Recovery Act of 2008, Public Law 110-289, signed on July 30, 2008 by President George W. Bush. One year after the law was signed, the OFHEO and the FHFB shall go out of existence. All existing regulations, orders and decisions of OFHEO and the Finance Board remain in effect until modified or superseded. James B. Lockhart III, the director of OFHEO, is the director of the new FHFA.
The US banking sector’s short-term liabilities as of October 11, 2008 are 15% of the GDP of the United States or 43% of its national debt, and the average bank leverage ratio (assets divided by net worth) is 12 to 1.
Deregulation – 1980s
Legislation passed by the federal government during the 1980s, while the House of Representatives was under control of the Democratic party and President Jimmy Carter, such as the Depository Institutions Deregulation and Monetary Control Act of 1980 and the Garn-St. Germaine Depository Institutions Act of 1982, diminished the distinctions between banks and other financial institutions in the United States. This legislation is frequently referred to as “deregulation,” and it is often blamed for the failure of over 500 savings and loan associations between 1980 and 1988, and the subsequent failure of the Federal Savings and Loan Insurance Corporation (FSLIC) whose obligations were assumed by the FDIC in 1989. However, some critics of this viewpoint, particularly libertarians, have pointed out that the federal government’s attempts at deregulation granted easy credit to federally insured financial institutions, encouraging them to overextend themselves and (thus) fail.
A list of many commercial banks in the United States can be found at the website of the Federal Deposit Insurance Corporation (FDIC).. According to the FDIC, there were 8,430 FDIC-insured commercial banks in the United States as of August 22, 2008. Every member of the Federal Reserve System is listed here along with non-members who are also insured by the FDIC. This list does not include banks and investments that are not FDIC-insured.
50 largest banks / bank holding companies in the United States
Associated BancWest Bank of America Bank of New York Mellon BBVA USA BB&T BOK Financial Corporation Capital One Citigroup Citizens Financial Group City National Colonial Comerica Commerce Bancshares FBOP Fifth Third First BanCorp First Citizens First Horizon National First National of Nebraska Fulton Harris HSBC Bank USA Huntington JPMorgan Chase Key M&T Marshall & Ilsley National City New York Community New York Private Northern Trust PNC Popular RBC Bank Regions South Financial Group State Street SunTrust Synovus Taunus TCF TD Banknorth U.S. Bancorp UnionBanCal W Holding Wachovia Webster Wells Fargo Zions
Lenders Mortgage Insurance (LMI), also known as Private mortgage insurance (PMI) in the US, is insurance payable to a lender or trustee for a pool of securities that may be required when taking out a mortgage loan. It is insurance to offset losses in the case where a mortgagor is not able to repay the loan and the lender is not able to recover its costs after foreclosure and sale of the mortgaged property. Typical rates are $55/mo. per $100,000 financed, or as high as $1,500/yr. for a typical $200,000 loan.
This article deals with Salomon Brothers. For other uses of the name Salomon, see Salomon.
Salomon Brothers was a Wall Streetinvestment bank. Founded in 1910, it remained a partnership until the early 1980s, when it was acquired by the commodity trading firm then known as Phibro Corporation. This proved a “wag the dog” type merger as the parent company became first Phibro-Salomon and then Salomon Inc. and the commodity operations were sold. Eventually Salomon (NYSE:SB) was acquired by Travelers Group in 1998, and following the latter’s merger with Citicorp Salomon became part of Citigroup.
During this period however the performance of the firm was not to the satisfaction of its upper management. The amount of money being made relative to the amount being invested was small, and the company’s traders were paid in a flawed way which was disconnected from their true profitability (fully accounting for both the amount of money they used and the risk they took). There were debates as to which direction the firm should head in, whether it should prune down its activities to focus on certain areas. For example, the commercial paper business (providing short term day to day financing for large companies), was apparently unprofitable, although some in the firm argued that it was a good activity because it kept the company in constant contact with other businesses’ key financial personnel. It was decided that the firm should try to imitate Drexel Burnham Lambert, using its investment bankers and its own money to urge companies to restructure or engage in leveraged buyouts which would result in financing business for Salomon Brothers. The first moves in this direction were for the firm to compete on the leveraged buyout of RJR Nabisco, followed by the leveraged buyout of Revco stores (which ended in failure).
In 1991, Salomon was caught submitting false bids to the U.S. Treasury by Deputy Assistant Secretary Mike Basham, in an attempt to purchase more Treasury bonds than permitted by one buyer between December 1990 and May 1991. It was fined 290 million dollars, the largest fine ever levied on an investment bank at the time, weakening it and eventually leading to its acquisition by Travelers Group. The scandal is covered extensively in the book Nightmare on Wallstreet.
After the acquisition, the parent company (Travelers Group, and later Citigroup) proved culturally averse to the volatile profits and losses caused by proprietary trading, instead preferring more slow and steady growth. Salomon suffered a $100 million loss when it incorrectly bet that MCI Communications would merge with Sprint instead of Worldcom. Subsequently, most of its proprietary trading business was disbanded.
For some time after the mergers the combined investment banking operations were known as Salomon Smith Barney, but reorganization has renamed this entity as Citigroup Global Markets Inc. The Salomon Brothers name, like the Smith Barney name, is now a division and service mark of Citigroup Global Markets.
Salomon Brothers’ success and then decline in the 1980s is documented in Michael Lewis‘ book, Liar’s Poker. Lewis went through Salomons’ training program and then became a bond salesman at Salomon Brothers in London. In the work, Lewis portrays the 1980s as an era where government deregulation allowed less-than-scrupulous people on Wall Street to take advantage of others’ ignorance, and thus grow extremely wealthy.
He traces the rise of Salomon Brothers through mortgage trading, when deregulation by the U.S. Congress suddenly allowed Savings and Loans managers to start selling mortgages as bonds. Lewie Ranieri, a Salomon Brothers’ employee, had created the only viable mortgage trading section, so when the law passed, it became a windfall for the firm. However, Lewis believed that Salomon Brothers became too complacent in their newly-found wealth and took to unwise expansion and massive displays of conspicuous consumption. When the rest of Wall Street wised up to the market, the firm lost its advantage.
[ . . .]
Salomon Brothers’ bond arbitrage group was also the breeding ground for the core group of founders and traders (led by, along others, John Merriwether and Myron Scholes) for Long Term Capital Management, the hedge fund that notoriously blew up in 1998.