Saturday, January 12, 2008

Nice Work If You Can Get It

Good News for Latter-Day Robber Barons ~ Social Darwinism Wreaks Havoc on the Economy Again

Wherein your Demon is inspired, Horatio Alger-style, to want to be CEO of Halliburton, KBR, any Oil Company, or a Mortgage Banker. All upside, no down, unless of course you're a working Joe (& who cares about you)

It's the roaring '20's again in Bushworld, kittens, & cause to celebrate ~ that is, if you were shrewd enough to maneuver yourself into a favorable position. (As for the rest of you ~ too bad ~ to the winners go the spoils. There's no public social safety net left, so you'll either be forced to compete with low-wage undocumented aliens forced North in desperation by NAFTA, or beg in the streets, & that's the way we like it. )
Another update: "Judicial Activism we like." Supreme Court decides "the most important business case in decades," ignores Bushco SEC interventions in favor of hampering investor actions against companies fraudulently inflating stock value. (Only government gets to play.) Justice Roberts sells stock in one of the alleged manipulator's parent company so as to be able to weigh in with a clear conscience.
Result: court ignores how manipulation really works & who is really hurt, Enron cases go down the drain ~ so sorry, suckas!
From Scotusblog:
"The Supreme Court, in one of the most important securities law rulings in years, decided Tuesday that fraud claims are not allowed against third parties that did not directly mislead investors but were business partners with those who did. The 5-3 ruling came in Stoneridge Investment Partners v. Scientific-Atlanta (06-43).
"Investors, the Court said, may only sue those who issued statements or otherwise took direct action that the investors had relied upon in buying or selling stock — whether that involved public statements, omissions of key facts, manipulative trading, or conduct that was itself deceptive. One impact of the decision is likely to be the scuttling of a massive $40 billion lawsuit against financial institutions growing out of the Enron scandal. The Court has a case on its docket involving that very dispute, and Tuesday’s ruling will be followed up soon, perhaps by next week, with action on that case — California Regents v. Merrill Lynch, et al. (06-1341).
"Justice Anthony M. Kennedy, who wrote the Stoneridge ruling, said the private right to sue for securities fraud 'does not reach the customer/companies' [who allegedly participated in perpetrating the fraud] because the investors did not rely upon their statements or misrepresentations.”
"The ruling upheld a decision by the Eighth Circuit Court rejecting claims against Scientific Atlanta, Inc., and Motorola, Inc. The investors contended that those two companies helped a giant cable TV firm, Charter Communications, inflate artificially its financial statements in order to bolster its stock’s price. The investors contended that the two companies should be treated as 'primary violators,' even though they had not themselves issued any public statements to advance the alleged manipulation plot.
"The scheme challenged in the case was carried out in the fall of 2000. Investors claimed that the plot was designed to improve the public appearance of an adequate opeating cash flow for Charter by getting its business partners in TV set-top boxes to engage in 'sham' deals under which Charter paid extra for the boxes, but the companies simply turned around and paid that money to Charter in advertising at above-market rates on its cable TV outlets. The result, the lawsuit contended, was to generate some $17 million in phony revenues, so that Charter’s cash position – in reality, a shortfall of $15 to $20 million — did not appear to be below the amount projected by the company and by stock analysts. After losing in the Eighth Circuit, the investors took the case to the Supreme Court, arguing that 'the simplicity of the scheme was trumped only by its brazenness.'
"The plot led to a federal indictment against two of Charter’s officers, and a cease and desist order against that company by the Securities and Exchange Commission. The Stoneridge investors’ lawsuit was also aimed at Charter and some of its officers. The appeal to the Supreme Court, however, only involved the dismissal of their claims against the vendors, Scientific Atlanta and Motorola. Also sued in the case was the now-defunct accounting firm, Arthur Andersen (which went under after its role in the Enron scandal), but it, like Charter, was not involved in the case before the Supreme Court.
"The case involved what has been called 'scheme liability'” in which everyone involved in a plot to deceive securities investors would be legally at fault, whether or not each of them had issued any public statements. The Securities and Exchange Commission had previously supported such liability, and wanted to enter the Stoneridge case to say so, but its participation was vetoed by the Bush Administration, with President Bush and Treasury Secretary Henry Paulson directly involved in the decision to keep the SEC out of the case. The Court took the case apparently to resolve a dispute among federal appeals courts on the issue.
"The private right to sue at issue is one that has been created by court decisions, not by a direct federal statute. Justice Kennedy said that Tuesday’s ruling limiting the range of such a lawsuit was 'consistent with the narrow dimenions we must give to a right of action Congress did not authorize when it first enacted the [Securities Exchange Act of 1934] and did not expand when it revisited the law.'

"In ruling Tuesday that Scientific Atlanta and Motorola could not be sued, Kennedy wrote that the two outside companies 'had no duty to disclose; and their deceptive acts were not communicated to the public. No member of the investing public had knowledge, either actual or presumed, of [the two companies’] deceptive acts during the relevant times. [Stoneridge], as a result, cannot show reliance upon any of [the companies’] actions except in an indirect chain that we find too remote for liability'
"Noting that the investors had argued that Scientific Atlanta and Motorola had done what they did with the aim, and the result, that a false appearance was created about Charter’s revenues, and that what Charter said publicly was 'a natural and expected consequence' of the suppliers’ deception, the Court said this was not a sufficient link in the chain toward liability.
“In effect,” Kennedy wrote, Stoneridge 'contends that in an efficient market investors rely not only upon the public statements relating to a security but also upon the transactions those statements reflect. Were this concept of reliance to be adopted, the implied cause of action would reach the whole marketplace in which the issuing company does business; and there is no authority for this rule'
However, your Demon adds, such a rule would have a salutary effect on the honesty of the market as a whole ~ tort law, after all, presumes that individuals will bear the consequences of their actions, deliberate or negligent. And if those actions have the potential to reverberate throughout the economy, well, is that not something we'd want to prevent, which is what the prospect of hefty damages are thought to accomplish? Where's the "party of personal responsibility" when you need them?
"The Court said that 'secondary actors,' like the two outside companies in this case, are subject to criminal penalties under a specific federal law, and civil enforcement action by the SEC. 'The enforcement power is not toothless,' Kennedy wrote, attempting to direct dispute a suggestion by the dissent.
"The Kennedy opinion was supported by Chief Justice John G. Roberts, Jr., and by Justices Samuel A. Alito, Jr., Antonin Scalia and Clarence Thomas. Justice John Paul Stevens dissented, joined by Justices Ruth Bader Ginsburg and David H. Souter. Justice Stephen G. Breyer took no part in the ruling; he reportedly owns stock in Cisco Systems, Inc., the parent company of Scientific Atlanta. The Chief Justice also was out of the case when the Court granted review on March 26, but got back into the case in September, presumably after selling stock — reportedly, he, too, owed stock in Cisco.
"Justice Stevens, in dissent, argued that Charter could not have inflated its revenues to cover up a cash flow shortfall 'absent the knowingly fraudulent actions of Scientific-Atlanta and Motorola.' Investors, he wrote, relied upon Charter’s revenue statements in deciding whether to buy its stock, and 'in doing so relied on [the two companies’] fraud, which was itself a ‘deceptive device’ ” under securities law. 'This is enough,” he concluded, to show a violation of the law against stock fraud.

"Congress passed that law, Stevens argued, 'with the understanding that federal courts respected the principle that every wrong should have a remedy. Today’s decision simply cuts back further on Congress’ intended remedy.”...'I respectfully dissent from the Court’s continuing campaign to render the private cause of action under [the fraud law] toothless.”
"In his dissent in Stroneridge ...Justice Stevens wrote...that the majority opinion's 'hostility' towards implied causes of action is not grounded in 'the first two centuries of this Nation's history...'Courts near in time to the enactment of the securities laws recognized that the principle in Rigsby [ -- the right to recover the damages from the party in default is implied -- ] applied to the securities laws,' and the decision 'simply cuts back further on Congress’ intended remedy.'"
Update: The true sweetness of it all ~ American taxpayers help finance BofA bailout of Countrywide ~ can it get any better for a robber baron? ~
"Guess who's helping Bank of America pay for its $4.1 billion purchase of Countrywide Financial? Answer: The taxpayers of the United States.
"That's because if all goes as planned, Bank of America, which is solidly profitable, will be able to offset part of its own taxable income with the losses Countrywide ran up before being acquired.
"The tax break could total about half a billion dollars over the first five years, according to an estimate by Robert Willens, Lehman Brothers' long-time tax expert who's now in business as Robert Willens LLC. The losses could be worth considerably more to Bank of America starting in the sixth year."
* * *
Money-pushing, the latest New Frontier for self-styled mortgage bankers & would-be Captains of Industry, was a very cushy gig as far as it went.
Witness in today's WaPo, the inspiring story of the enterprising fellow who built Countrywide Mortgage into all it is today, bringing the company to the verge of bankruptcy & extinction, only to bail with a very golden parachute when it is snapped up at bargain-basement rates by Bank of America:
"Angelo R. Mozilo has pocketed $410 million in salary, bonuses and stock-option gains since he became executive chairman of mortgage lender Countrywide Financial in 1999, according to the executive compensation company Equilar.
"Now, the man at the center of the national mortgage crisis stands to collect an additional $112 million in severance when Bank of America buys the company he helped found.
[...] most of Mozilo's compensation since becoming chairman -- $285 million -- has come from stock options. Mozilo has been criticized for selling pieces of his stake in Countrywide, cashing in tens of millions of dollars in options as the housing market dropped.
"His contract as chairman of Countrywide runs through the end of next year, and he is expected to continue as a non-employee chairman of the board until the end of 2011. During that time, he will receive a director's salary, plus $200,000 a year, office space and the use of the corporate jet for business trips. His country-club dues will also be paid.
"Even if Mozilo is fired as chairman, he would receive $400,000 a year to consult until the end of 2011. "
Countrywide clerks, tabulators, putters-of-labels on files & miscellaneous beancounters stand to lose their jobs in the transition. (I'm wondering whether a mortgage broker I know of will find herself faced with bankruptcy, & if so, whether she'll have to forfeit her perky breast implants & her Lexus SUV in a Chapter 13).
Lesson to all young enterepreneurs out there: slash-& burn capitalism is the American way, & you can expect to profit handsomely thereby, even though some annoying Congresscritters may say things like this for consumption of the gullible American press:
"In a written statement yesterday, House Financial Services Committee Chairman Barney Frank (D-Mass.) said Mozilo, 'who will be profiting from this transaction personally,' should 'donate a substantial portion of the $150 million he has collected over the last several years to nonprofits and other institutions that are helping us deal with the problem he helped to create.'
Even better, he should be investigated & made to do community service ladling goop-soup to poor people in community kitchens. Of course, your Demon is only kidding. There are no enforceable laws in this country by which to convict him of anything. He's already planning a nice retirement in a warm, sunny place far far away from Wall Street, we bet.
And in the meantime, we continue to read news like this in the NYT:
"Citigroup is turning to cash-rich foreign investors for a second time as it confronts mounting losses on mortgage-related investments.
"The financial giant is in talks to sell a large stake to a Chinese bank and several other investors, including foreign governments, in a deal that could raise $10 billion, people briefed on the plan said Friday.

"The China Development Bank, which is controlled by the Chinese government, is expected to invest at least $2 billion, these people said. Citigroup is also in talks with the Government of Singapore Investment Corporation and the Kuwait Investment Authority.
"Large investors like Prince Walid bin Talal of Saudi Arabia, who helped rescue Citigroup in the early 1990s, and Capital Research and Management, a money management firm that is the bank’s biggest shareholder, are being offered the chance to invest as well to avoid having their current stakes diluted, but it is unclear if they will choose to do so. Other investors may also be involved.

"While the deals may yet fall through, announcements are expected within days. The talks come as Citigroup is expected to disclose additional huge losses stemming from bad mortgage-related investments. Analysts project the company is likely to announce charges of $12 billion to $18 billion when it reports earnings on Tuesday."
Your Demon continues to predict that John Edwards, with his anti-corporate-money in politix "strident neo-populist stance" will gain a lot more traction despite Bush's headline-grabbing push to expand the War on Terra to Iran & Pakistan. Or at least influence other Democratic candidates to stop cheering themselves & start paying attention to the mess we're in here at home.

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