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Things Get Rough in Mr. Roger's Neighborhood

As reported in the current issue of The Pomerantz Monitor, Duke Energy recently acquired Progress Energy. When their proposed merger was announced 18 months ago, the two companies said that Johnson, head of Progress, would take over as chief of Duke. But hours after the deal was done on July 2, the board, dominated by continuing Duke directors, ousted Johnson and reinstalled former Duke CEO Jim Rogers in the top job. Johnson’s surprise dumping may be tempered a bit by the fact that he is due to receive up to almost $45 million in severance, pension benefits, deferred compensation, and stock awards. Utility regulators in North Carolina were investigating whether this bait and switch routine was a fraud on Progress shareholders.

Seizing Property to Unseize Property Markets

In the current issue of The Pomerantz Monitor, Jay Douglas Dean reports on the potential use of eminent domain to free up the stagnant housing market. Millions of home owners are still underwater, defaulting on a massive scale.  As foreclosures sweep across America, they depress real estate values for everyone.
 
Many economists have concluded that the best way out is to get lenders to reduce the principal balance on these mortgages to reflect the actual value of the real estate. The government has tried several times to push such a process along, but with very little success. Not only have lenders been reluctant to swallow losses on these mortgages, in many cases the banks don’t even own the mortgages. Millions of them have been sliced and diced into mortgage-backed securities, which are owned by thousands of investors. Getting them all to agree to modify particular mortgages in their portfolios is impossible. As “Irrational Exuberance” author Robert Shiller has said, owners of securitized mortgages “live all over the world and have no way of communicating with each other, let alone coming to an agreement to give homeowners a break.”

One possible way around this problem would be for local governments to employ a novel legal tactic: use their eminent   domain power to acquire these mortgages from the holders, a process that would not require their consent. Governmental entities would have to pay “fair value” for these underwater mortgages, but in this market fair value would be far less than the outstanding principal balance on them. Once the localities acquire the mortgages, with money provided by private investors, they could refinance them for the homeowners, letting them hold onto their homes while making more reasonable payments.  

According to a July 5 video on the online Wall Street Journal, some county and city officials in California are giving this “silver bullet” serious consideration. New investors can expect to be repaid by homeowners who are issued new mortgages and who are no longer underwater.

Credit for this idea probably belongs to Cornell Law Professor Robert Hockett.  Joe Nocera of The New York Times recently interviewed professor Hockett, who has served as an adviser to Mortgage Resolution Partners, a company consulting with California municipalities on the issue. Hockett told Nocera that to invoke eminent domain powers, the governmental entity has to show merely that it is paying fair value for the property, and that it is acquiring it for a legitimate public purpose.
 
Keeping people in their homes and salvaging real estate markets could well be construed as a legitimate public purpose. “This is a yoke around the American economy,” said Steven Gluckstern, the chairman of Mortgage Resolution Partners.
 
The eminent domain solution is already getting pushback from investors in mortgage backed securities who, obviously, don’t want to suffer the losses such transactions would impose on them. A draft of proposed rules circulating among members of the Securities Industry and Financial Markets Association, a trade association of mortgage bond investors, would threaten municipalities that are thinking of using eminent domain to acquire underwater mortgages. The rules would disqualify mortgages from those communities from being packaged into certain types of mortgage backed securities. Gluckstern called this maneuver “reprehensible and immoral,” and also “probably illegal.”

A Lawyer Looks at Obamacare

In the current issue of The Pomerantz Monitor, Brian Hufford, one of the most respected healthcare counsel in the country, writes about theJune 28, 2012 U.S. Supreme Court decision on the constitutionality of Patient Protection and Affordable Care Act, otherwise known as “Obamacare.”

The focus of the challenge to the bill was on its controversial “individual mandate,” whereby individuals would be subjected to a financial penalty if they did not purchase insurance. As soon as the bill was signed on March 23, 2010, 14 state attorneys general, with support from the Republican Party, filed suit to strike down the law, contending that this provision in particular was unconstitutional. Ironically, the individual mandate was originally a Republican idea, first raised in a 1989 proposal by the conservative Heritage Foundation, then, in 1993, as part of the Republicans’ proposed alternative to then-President Clinton’s health reform bill, and finally, and most famously, as an integral part of Governor Romney’s health care plan for Massachusetts. However, by the time President Obama’s proposed healthcare overhaul began to gain traction, every single Republican Senator went on record declaring the individual mandate unconstitutional.

In its landmark decision, written by Chief Judge John Roberts, the Court upheld the mandate by a 5-4 vote. The fact that Justice Roberts chose to find that the individual mandate exceeds federal authority under the Commerce Clause, but is indeed constitutional as a tax, has pundits shaking their heads. Some see this as proof of Robert’s alleged desire to gut the Commerce Clause – the clause that has provided national protection for civil liberties such as desegregated facilities and labor laws – and as such, a gift to conservatives and libertarians anxious to limit the role of the federal government. As Justice Ginsberg wrote in her opinion, “[Justice Robert’s] rigid reading of the [Commerce] Clause makes scant sense and is stunningly retrogressive.” The Court upheld not only the mandate but also the rest of the Affordable Care Act, including: eliminating exclusions based on pre-existing conditions for children up to age 19; allowing young people up to the age of 26 to be covered under their parents’ policies; phasing out annual and lifetime limits on most benefits; prohibiting cancellation of insurance policies based on honest mistakes in applications; requiring insurance companies to publicly justify rate hikes as a means to combat unreasonable increases; requiring that the bulk of insurance premiums be spent on health care, not administrative costs; permitting access to emergency care to hospitals outside the insurer’s network; and requiring preventive care at no cost to the subscriber. 

The one notable provision that was not upheld concerned the significant expansion of Medicaid, which will now cover anyone earning up to 138% of the federal poverty level (including individuals without children who previously were excluded). The Act sought to compel states to go along by threatening to withdraw federal funding of all Medicaid payments to any state that didn’t agree to the expansion. By a 7-2 vote, however, the Supreme Court found that, while expanding Medicaid was fine, the financial penalty imposed on the states was not. Thus, the federal government cannot take away current funding to compel states to accept expanding Medicaid coverage, but they can voluntarily agree to do so and accept additional funding.  A number of Republican Governors have already announced that they will not agree with the Medicare expansion in their states, leaving millions of people in an uncertain position as to what insurance coverage will be available to them.

In addition, the Affordable Care Act establishes ten categories of “essential health benefits” which must be included in the individual and small group market policies, including ambulatory patient services; emergency care; hospitalization; maternity and newborn care; mental health and substance use disorder services, including behavioral health treatment; prescription drugs; rehabilitative and habilitative services and devices; laboratory services; preventive and wellness services and chronic disease management; and pediatric services, including oral and vision care. According to the Department of Health and Human Services, these provisions will mean that 8.7 million Americans will gain maternity coverage; 4.8 million will gain substance abuse coverage; 2.3 million will gain mental health coverage; and 1.3 million prescription drug coverage.

The new law also allows the Department of Labor to adopt regulations to govern all claims processing, reimbursement, denials and appeals for nearly all healthcare claims accept those falling under Medicare. Thus, whereas current regulations under the Employee Retirement Income Security act of 1974 (“ERISA”) applies only to insurance policies issued by private employers, they now will extend to non-ERISA plans, including those issued by governments and individual policies. Regulations issued under the Act also establish that if health care plans fail to adhere strictly to all of the requirements, they will be entitled to file lawsuit immediately, rather than having to proceed through internal appeals first. This incorporates a “deemed exhaustion” provision previously applied under ERISA, but exchanges a strict compliance requirement for a previously permitted “substantial” compliance, which offered an easier hurdle for insurers to exceed.  As for Medicare, the Act expands rights there as well, by allowing free wellness exams; excluding preventive services, such as mammograms, bone scans and depression and diabetes screenings, from deductibles and copays; and gradually closing the current “doughnut hole” gap in drug coverage, including continued discounts on drug costs.

Love's LIBOR Lost

As Adam Prussin reports in the current issue of The Pomerantz Monitor, a few weeks ago news erupted of what may be the worst financial scandal in years: the systematic manipulation of interest rates by the largest banks in Europe and the U.S. On June 27 the Department of Justice and regulators in the U.S. and  England announced that they had reached a settlement with Barclay’s, the giant British bank, in a case involving the fraudulent fixing of the so-called LIBOR interest rate. LIBOR (short for “London interbank offered rate”) is the benchmark for trillions of dollars of loans worldwide – mortgage loans, small-business loans, personal loans, and interest rate derivatives contracts called swaps.

The regulators allege that Barclay’s made false daily submissions to the British Bankers’ Association – which calculates LIBOR – probably from 2005 to 2009. The submissions are not based on an actual market rate of interest for interbank loans. Rather, submitters estimate what they think they would have to pay. 

Obviously, since all the big banks submit data, Barclay’s normally could not manipulate LIBOR by itself; they would all have had to cooperate. And now, in its settlement agreement, Barclay’s has admitted that this is exactly what happened, with the result that LIBOR deliberately underestimated the interest rates that the banks were paying for loans.

This is no ordinary scandal, because this time there will likely be big-time consequences. Barclay’s has paid $453 million to settle the cases; and its Chairman, CEO and CFO have all been forced to resign. The four top executives of the firm reportedly voluntarily agreed to give up their bonuses this year. But that is only the tip of the iceberg.  

Here Comes the JOBS Act

As Fei-Lu Qian reports in the current issue of The Pomerantz Monitor, on April 5, 2012, President Obama signed into law the Jumpstart Our Business Startups Act (“JOBS Act”), with the purpose of spurring job creation by improving access to the public capital markets for “emerging growth companies” (“EGCs”). The JOBS Act classifies start-up companies as EGCs until, for example, they generate $1 billion in annual gross revenues, or the fifth anniversary of their initial public offering (‘IPO’).”

The main goal of the JOBS Act is to make it easier for start-up companies to go public. IPO registration statements will now need to include only two years of financial statements, and only selected financial data will have to be provided for any previous period.  Prior to an offering, an EGC will be able to expand communications and file with the SEC a draft IPO registration statement and amendments on a confidential basis, for its review and comment, and the EGC would not need to release those confidential filings to the investing public until just 21 days before the company’s IPO “road show.” Moreover, before filing a registration statement, an EGC will not be restricted to communicating only with qualified institutional buyers or institutional accredited investors. Perhaps most significantly, the EGC’s auditor will not have to certify the efficacy of internal controls and procedures under Section 404(b) of Sarbanes-Oxley.

Critics contend that the JOBS Act will lead to increased financial problems and fraud, and make it more difficult for shareholders to detect those problems.  For example, an EGC will be able to resolve issues with the SEC without investors finding out about them until only 3 weeks prior to an IPO.  Case in point: if the JOBS Act had been in effect prior to Groupon’s IPO, that company probably would have been able to resolve its accounting problems with the SEC without ever disclosing them to the public. Recently, Groupon disclosed that its executives failed to reserve enough money for customer refunds on expensive offers.

According to a survey conducted by the CFA Institute, a global association of investment professionals, only 29% of its members wanted the legislation to pass, and 63% believed that the bill “would create additional gaps in investor protection and transparency.” The Institute believes that the Act’s permission to allow brokerage firm analysts whose firms are underwriting an IPO to write and distribute research on companies “is a return to the kind of conflicted research that decimated investor confidence after the burst of the dot-com bubble.”

Dodd-Frank Struggles On

A group of approximately 100 public company CEOs, all of whom are members of the Business Roundtable, has asked President Obama to abandon several measures of the Dodd-Frank Wall Street Reform and Consumer Protection Act -- with the so-called “Volcker Rule” at the top of the list.  (Broadly speaking, this rule would prevent certain banking entities from engaging in proprietary trading.)  The group is alarmed at what it deems the “exorbitant costs” of compliance with Dodd-Frank, and wraps these concerns in a simple and appealing patriotic message:  “Let’s put the United States back on the path to strong economic growth.”  Andrew N. Liveris, chairman and CEO of the Dow Chemical Co., declares, “while America's political system remains frozen in gridlock, the rest of the world is not standing still.  Other nations around the world that compete with the United States for jobs, business investment and export markets are moving forward -- and we must too." 

This simple message may be too obvious for its own good, however.  Treasury Secretary Tim Geithner, in a recent Wall Street Journal opinion column available here takes business leaders and lawmakers to task for what he styles “financial crisis amnesia.”  “Are the costs of reform too high?” he asks.  “Certainly not relative to the costs of another financial crisis.”

Meanwhile, regulators have admitted that they will miss their July 21 deadline for finalizing the Volcker Rule, after having received some 17,000 comments during the open comment period.

SEC Charges Execs with Fraud at Fannie & Freddie

Following up on our September post "Big Bucks, No Whammies?" about the SEC's apparent inaction on the wells notices they had served to the execs of Fannie & Freddie. We write to report that Whammies finally came with  Friday's headlines . The SEC brought fraud charges after all, not just against Daniel Mudd, former CEO of Fannie Mae but also five others now charged with deliberately misleading government officials about the extent of their subprime exposure.

The NYTimes explores the charges in greater detail and there are new reports that an FBI investigation into the same conduct is underway which means the guys could face criminal charges.    Following the SEC announcement speculation had already begun that Mudd would soon step down as CEO at Fortress Investment Group (FIG).

“Can you really run a trading and investment firm with a guy accused of fraud in the corner office?”   a Fortress employee was reported to have asked.  Apparently not when the accusations become official. (UPDATE:  Mudd took leave as CEO of Fortress on Wednesday December 21)

Mudd has been on the board at Fortress since 2007,and was appointed CEO of Fortress when he left Fannie amid scandal after the bailout in 2008 Fortress is a publicly traded hedge fund which recently introduced new subprime mortgage bonds onto the market.... 

Wall Street’s “Moral Minority”

A New York Times article has revealed that long before Occupy Wall Street, the Sisters of St. Francis of Philadelphia were battling Wall Street over corporate responsibility. For the last thirty years, the Sisters have used the investments in their retirement fund to become Wall Street’s moral minority.

Using their status as shareholders, the nuns fought with Kroger over farm worker rights, with McDonald’s over childhood obesity, and with Wells Fargo over lending practices. They have met face-to-face with the heads of Lockheed Martin, BP, and General Electric. Most recently, they advised Goldman Sachs executives that the bank should protect consumers, rein in executive pay, increase its transparency, and remember the poor.

With their moral authority, the Sisters of St. Francis “can really bring attention to issues,” said Robert McCormick, chief policy officer of Glass, Lewis & Company, the proxy voting firm. “You haven’t seen shareholder activism until you see a nun battling it out with the CEOs. They can be devastating,” said Michael Passoff in a 2005 article on religious shareholder activists. Passoff works in the Corporate Social Responsibility Program for As You Sow, a leading organization in the strategizing and organizing of shareholder campaigns.

The nuns have been waging this war since 1980, when St. Francis Sister Nora Nash formed a committee with her community to combat troubling developments at the businesses in which they invested their retirement fund. The Roman Catholic order of over 500 nuns has teamed up with other orders and faith-based investing groups on shareholder resolutions. Much of Sister Nora’s activism takes place under the Interfaith Center on Corporate Responsibility, an umbrella group which includes Jews, Quakers and Presbyterians.

Sister Nora said that she and the order “want social returns, as well as financial ones.” She added, “when you look at the major financial institutions, you have to realize there is greed involved.”

The full New York Times article can be found here.

A Chance "To Talk About What's Broken" - Warren's take on Occupy Wall Street

Controversy surrounding Elizabeth Warren's position on Occupy Wall Street has been widely publicized this week, perhaps obscuring the simplicity and integrity of her words on the movement.    

Have you seen this powerful video yet? 

"I have been protesting Wall Street for a very long time. Occupy Wall Street is an organic movement, it expresses enormous frustration and gives a great faith all across the country for people to talk about what’s broken."

  

 



Unions Coming

In n+1, Penny Lewis, of the Murphy Institute for Worker Education and Labor Studies, writes about unions and Occupy Wall Street:

“It’s been a long time—since Seattle 1999—that so many US unions have thrown their support behind the kind of anti-corporate direct action we’re seeing in Zuccotti Park. Dozens, maybe hundreds, of locals; the internationals of AFSCME, SEIU, Teamsters, UAW, USW, among others; as well as the AFL-CIO itself—all have officially endorsed the protests. In its resolution of solidarity, TWU Local 100 hailed the courage of the protesters and described their occupation as a “dramatic demonstration of our own ideas.” And it’s true: runaway corporate greed, outrageous inequality, the corruption of our democracy—all are themes that have entered labor’s discourse these past few years since the economy went bust. The AFL-CIO has targeted banks, SEIU has spent millions in its Fight for a Fair Economy campaign, coalitions have fought foreclosures and marched on financial centers and conventions. Unionized Wisconsin graduate students and community allies demonstrated the power of an occupation, and in the process radicalized their brothers and sisters in the public sector there and beyond. Some of these public sector anti-austerity fights —like the one my own union has engaged—have challenged politicians and policies that give tax cuts to millionaires and just plain old cuts to us. These fights underscore why unions stand in solidarity with OWS.”

To read Lewis’ full article, Unions Coming, click here.

The article first appeared in n+1’s Occupy! An OWS-Inspired Gazette, that can be downloaded for free here.