Category Archives: Business – 2008-10 Financial Crisis

Is Allen Stanford being railroaded?

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Sir Allen I recognize that he is not the most popular fellow in Houston investment circles these days, but is anyone else but me a tad uncomfotable that the federal government is running roughshod over R. Allen Stanford?

As everyone following the Stanford Financial Group scandal knows by now, at the request of the Department of Justice, U.S. District Judge David Hittner overruled a federal magistrate’s order last week that would have allowed Stanford to remain free on bond pending his trial on business fraud charges. As a result, Stanford is imprisoned in Houston’s Federal Detention Center pending his trial, which will probably not occur until sometime next year.

Meanwhile, the DOJ, the SEC, a federal court-appointed receiver and a British receiver operating in Antigua have frozen all of Stanford’s personal assets, as well as the assets of the Stanford Financial empire. Consequently, Stanford has no funds with which to retain counsel.

And now he doesn’t even have the freedom to help his attorneys prepare his defense.

However, it’s now become reasonably clear that the DOJ and the SEC’s repeated public allegations that Stanford was running a Ponzi Scheme through Stanford Financial are, if not outright false, at least misleading and irresponsible.

Stanford Financial clearly owned substantial assets, including the Antiguan Bank that also owned substantial assets itself. Perhaps those assets were over-valued and perhaps Stanford and his associates misled investors on the bank’s capability of repaying the certificates of deposit that the company promoted and sold. But that’s a far cry from running a Ponzi Scheme.

Moreover, the government’s efforts to prevent Stanford from paying for defense counsel are downright scary.

The fact that Stanford Financial is not in a position to pay them is not particularly surprising. The company would probably be in bankruptcy if it were not already in receivership, and it’s unlikely that either a bankruptcy judge or a U.S. district judge would allow the company to pay for Stanford’s criminal defense.

But putting aside for the moment the issue of Stanford not being allowed to use his personal assets to defend himself, Stanford Financial has a Director’s & Officer’s insurance policy that provides for payment of at least a portion of Stanford’s defense However,  the Stanford Financial receiver has threatened to seek contempt charges against the insurer (Lloyds) if it pays Stanford’s defense costs as it is contractually obligated to do under the policy. At the same time, the receiver, the DOJ, and the receiver are spending millions in preparing the case against Stanford. My conservative estimate is that the government’s tab is more than $25 million already (the receiver alone has a pending request for $20 million in fees).

Finally, Stanford has exhibited absolutely no inclination to flee from the charges against him. He has numerous family ties to Texas and the Houston area, and he has no prior criminal record. And it’s not as if Stanford can just walk away from the charges if he is allowed out on bond. He has no passport and, with the GPS tracking device that the U.S. Marshal’s Office requires criminal defendants to wear these days, the U.S. Marshals know immediately when a defendant is going somewhere that he is not supposed to be.

It’s easy to look the other way when this type of concerted effort by the federal government essentially strips an unpopular businessman of the capacity to defend himself against charges that could imprison him for the rest of his life.

But remember — if it can happen to R. Allen Stanford, then it can certainly happen to you and me.

A copy of Stanford’s motions seeking release of funds for his defense and for reconsideration of his detention order are below.

 

Stanford Mtn to Release Funds

The Chronicle’s Continuing Enron Hypocrisy

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Being generally an optimistic sort, I keep thinking that the financial crisis of the past year or so will eventually prompt the Houston Chronicle to reconsider its generally biased coverage of the demise of Enron over the past seven years.

After all, it’s not every day that the Fifth Circuit Court of Appeals concludes that a newspaper’s coverage of a particular event was a major factor in the creation of a presumption of community prejudice.

Nevertheless, the local paper’s recent coverage of disgraced financiers R. Allen Stanford and Bernard Madoff reflects that no such soul-searching is likely to emerge anytime soon down on Texas Avenue.

Take this recent Loren Steffy column in which he asks the following: “Why, then, does Madoff get a sentence six times that of [former WorldCom CEO Bernie] Ebbers or Enron’s Jeff Skilling?”

I mean, really. Is the answer to that question all that difficult?

Madoff turns himself in and admits from the outset that he was stealing money from investors for years by running a Ponzi scheme. Any wonder why he was hammered by the sentencing judge?

Ebbers was essentially convicted of covering up accounting fraud at WorldCom, but he at least put up a colorable defense that he was not responsible for such matters and had no knowledge of the fraud.

Moreover, Skilling wasn’t even accused of accounting fraud. He was convicted essentially of making too many rose-colored statements about Enron, notwithstanding that his belief in the truth of those statements was never seriously challenged.

Finally, neither Ebbers nor Skilling stole a dime from the investors of their respective companies. Yet, Steffy insists upon comparing them with the larcenous Madoff. who essentially stole tens of millions. The Greed Narrative prevails again.

But here’s my main point. Now that what happened to Enron has happened to numerous other trust-based Wall Street firms, shouldn’t the Chronicle be advocating that similarly aggressive criminal prosecutions be mounted against numerous executives of the Wall Street firms who made the same type of rosy statements about their wobbling companies as Skilling made about Enron?

Now, I don’t believe that there was widespread criminal fraud at Enron. The only true criminal fraud there was relatively small and isolated in Andrew Fastow’s Global Finance unit. Similarly, I don’t believe that there was widespread criminal fraud at the Wall Street firms that endured the same downward spiral that engulfed Enron.

But inasmuch as the Chronicle fanned the flames of criminal prosecutions against dozens of Enron executives and others involved in transactions with them, shouldn’t the Chronicle be taking the same position with regard to executives at the similarly-situated Wall Street firms?

Or at least shouldn’t the Chronicle be explaining why it threw dozens of Enron executives under the bus even though it now fails to advocate similar treatment for executives of the failed Wall Street firms?

It seems like the least that the local newspaper can do.

A small Austin brokerage house schools the big banks

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Amherst_Logo Tongues were wagging in financial circles around the world last week regarding this Wall Street Journal article about Austin-based Amherst Holdings’ amazing play in which they sold credit default swaps on mortgage bonds to a number of Wall Street and London’s biggest banks. Amherst then turned around and bought the mortgages underlying the bonds upon which the CDS were written to prevent a default that would have triggered Amherst’s obligation to pay on the CDS.

Thus, in short, Amherst sold CDS on bonds and then bought the security for the bonds, thereby rendering the CDS worthless. Although the amount of profit is somewhat unclear, Amherst reportedly pocketed tens of millions of dollars on the deal.

The Financial Times’ economist Willem Buiter does an entertaining job of explaining Amherst’s transactional plan in the context of gambling and the difficulties involved in regulating such transactions. In so doing, he makes the following observation:

"The scheme is beautiful in its simplicity, absolutely outrageous, quite unethical, deeply deceptive and duplicitous, indeed quite immoral, but apparently legal."

Geez, maybe these Amherst sharpies could have saved AIG?

Bad regulation vs. deregulation

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timothy_geithner Clear Thinkers favorite Niall Ferguson provides this timely reminder to those who believe that the financial turmoil of the past couple of years is the result of lax regulation of financial markets:

Human beings are as good at devising ex post facto explanations for big disasters as they are bad at anticipating those disasters. It is indeed impressive how rapidly the economists who failed to predict this crisis — or predicted the wrong crisis (a dollar crash) — have been able to produce such a satisfying story about its origins. Yes, it was all the fault of deregulation.

There are just three problems with this story. First, deregulation began quite a while ago (the Depository Institutions Deregulation and Monetary Control Act was passed in 1980). If deregulation is to blame for the recession that began in December 2007, presumably it should also get some of the credit for the intervening growth. Second, the much greater financial regulation of the 1970s failed to prevent the United States from suffering not only double-digit inflation in that decade but also a recession (between 1973 and 1975) every bit as severe and protracted as the one we’re in now. Third, the continental Europeans — who supposedly have much better-regulated financial sectors than the United States — have even worse problems in their banking sector than we do. The German government likes to wag its finger disapprovingly at the “Anglo Saxon” financial model, but last year average bank leverage was four times higher in Germany than in the United States. Schadenfreude will be in order when the German banking crisis strikes.

We need to remember that much financial innovation over the past 30 years was economically beneficial, and not just to the fat cats of Wall Street. New vehicles like hedge funds gave investors like pension funds and endowments vastly more to choose from than the time-honored choice among cash, bonds and stocks. Likewise, innovations like securitization lowered borrowing costs for most consumers. And the globalization of finance played a crucial role in raising growth rates in emerging markets, particularly in Asia, propelling hundreds of millions of people out of poverty.

The reality is that crises are more often caused by bad regulation than by deregulation. [.  .  .]

.  .  . Taxpayers, therefore, should beware. It is more than a little convenient for America’s political class to blame deregulation for this financial crisis and the resulting excesses of the free market. Not only does that neatly pass the buck, but it also creates a justification for . . . more regulation. The old Latin question is highly apposite here: Quis custodiet ipsos custodes? — Who regulates the regulators? Until that question is answered, calls for more regulation are symptoms of the very disease they purport to cure.

Stated another way, it’s not that rules are unnecessary for markets to perform efficiently. But what type of rules are better?

Rules that politicians enact and government bureaucrats enforce generally are far less efficient than rules that emerge as a result of the voluntary interactions of millions of individuals and companies. The successes and mistakes of those individuals and companies pursuing their own interests create rules that are the product of competition and personal responsibility. When those rules become sufficiently important in the fabric of a market economy, they become formalized as common law and precedent by courts. The distinction between inefficient government-imposed rules and the decentralized rules that facilitate productive market economies is an important one to understand as we wade through this current financial crisis.

The rules that the government is currently making up on the fly in connection with the Chrysler bankruptcy are a good example of rules that are destined to allocate resources inefficiently.

Remember Ken Lay?

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KenLayJoe Weisenthal and Henry Blodget over at Clusterstock have been all over the breaking story yesterday that, as many of us suspected, former Treasury Secretary Henry Paulson and perhaps other governmental officials threatened Bank of America CEO Ken Lewis and the BofA board if the bank exercised its right to terminate the Merrill Lynch acquisition based on a material change in Merrill Lynch’s financial condition.

Of course, this is not the story that Lewis and Paulson were telling to BofA shareholders. They were assuring the shareholders that the Merrill Lynch acquisition was a great deal for BofA.

A few years ago, former Enron chairman Ken Lay was prosecuted to death for promoting Enron even though he had a reasonable basis for believing that what he was saying about his company was true. In contrast, neither Lewis nor Paulson could even offer the defense in a criminal fraud trial that they thought that the good things that they were telling BofA shareholders about the Merrill Lynch deal were true. We now know that they knew that the assurances were false.

This is not to suggest that Paulson or Lewis should be prosecuted for criminal fraud. They were in an extremely difficult situation — they and others were concerned that the U.S. and world financial system might collapse if the markets became spooked by BofA backing out of the Merrill Lynch deal. I didn’t agree with that concern, but I understood the position of those that did. They may have been correct. At this point, we’ll never know for sure.

However, regardless of whether that view was correct, neither Paulson nor Lewis should be prosecuted for a violation of criminal law for their actions. Although they made false statements to the markets regarding BofA’s acquisition of Merrill Lynch, there is no question that they thought what they were doing was essential to saving the financial system and firms such as BofA.

If their actions make them responsible for damages to BofA shareholders, then let that liability be sorted out in civil court where liability can be allocated fairly to everyone who had a hand in causing those damages. What’s to be gained by throwing them in prison? They simply were not operating on the same fraud plane as Bernie Madoff.

But here is my other point — Ken Lay was prosecuted to death for conduct that was not even intentional. Now that what happened to Enron has happened to many of the biggest and most prestigious Wall Street firms, isn’t it about time that somebody in the federal government acknowledges that what was done to Ken Lay was a massive injustice?

And in the meantime, isn’t it about time that this barbaric injustice be rectified, too?

Dylan on Politics

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bob_dylan_l From Bill Flanagan’s recent interview with Bob Dylan:

What’s your take on politics?

Politics is entertainment. It’s a sport. It’s for the well groomed and well heeled. The impeccably dressed. Party animals. Politicians are interchangeable.

Don’t you believe in the democratic process?

Yeah, but what’s that got to do with politics? Politics creates more problems than it solves. It can be counter-productive. The real power is in the hands of small groups of people and I don’t think they have titles.

H’mm.

Henderson on the Nature of Government

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Was2165665 David Henderson makes an insightful point about the Ryan Moats/Robert Powell run-in in Dallas last week in which Powell (the policeman) exhibited an utter lack of common sense, much less prosecutorial discretion (and this incident is apparently not the first time that Powell has exhibited this type of behavior):

So what is the essence? The issue of control. Read the abridged transcript of the interaction or, better yet, watch the whole 20-minute video. What comes out loud and clear is that the policeman was upset because the driver, Ryan Moats, tried passionately to tell him the nature of the emergency, whereas what Robert Powell saw as being primary was that Moats wait patiently while Powell wrote him a ticket. Even once a nurse came out from the hospital and assured the policeman that Moats’s mother-in-law was dying, Powell, writing the ticket, said, "I’m almost done." Must get that ticket written no matter why Moats jumped a red light. [.  .  .]

This is the nature of government whether the government employees are policemen with guns on their sides or sometimes in their hands or are teachers in government-financed schools. The whole Powell-Moats incident reminds me of a passage from Steven E. Landsburg’s book, Fair Play: What Your Child Can Teach You About Economics, Values, and the Meaning of Life. Landsburg tells of the propaganda his daughter Cayley’s teachers subjected her to about the importance of not letting the water run when she brushed her teeth. Landsburg writes:

[.  .  .]

Where is the pattern, then? What general rule compels us to conserve water but not to conserve on resources devoted to education? The blunt truth is that there is no pattern, and the general rule is simply this: Only the teacher can tell you which resources should be conserved. The whole exercise is not about toothbrushing; it is about authority.

The Moats-Powell incident is a micro example of the government’s proclivity to exert power arbitrarily. That essential nature is being largely ignored as the Obama Administration runs headlong into seeking even greater governmental regulation over broad sectors of the economy.

Given that one of the clearest lessons of the 20th century is the capacity of large government to cause unspeakable evil, any effort to centralize more power in the federal government should be subject to the most careful scrutiny and not the type of superficial posturing that Congress has exhibited to date.

Count me as not confident that Congress will oblige.

Our Congress at work

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capital_hill-758994 I swear, you can’t make this stuff up.

As regular readers of this blog know, I thought the federal bailout of AIG and various other Wall Street firms was a bad idea from the start because it prevented our bankruptcy system from allocating the risk of loss among the creditors of the financially-troubled firms.

Nevertheless, after various forces stoked a climate of fear, Congress approved broad bailout legislation even though it was clear at the time that few of the legislators understood what they were approving.

Not surprisingly, various large creditors of the financially-troubled firms did very well for themselves under the bailout legislation. Can’t blame them for protecting their shareholders’ interests, now can you?

So now, confronted with the fact that the bailout primarily benefited these large institutional creditors, various members of Congress and New York AG ("Attorney General" or "Aspiring Governor," take your pick) Andrew Cuomo are starting investigations into why AIG did precisely what it was supposed to do — i.e., pay its bills — with the bailout funds.

A little late, don’t you think?