Bank of America's Shareholders (and All Wall Street Shareholders) Should Reject Bonus Plans (pdf) TSF – Opinion Commentary – January 12, 2010 - Click here to view at the Huffington Post By Janet Tavakoli In July 2009, New York Attorney General Andrew Cuomo reported that, among other things, the compensation structures at most banks were “a major impetus for the subprime fiasco.”* Shareholders fed up with the fact that key contributors to the global credit crisis plan to pay billions of dollars worth of cash and stock in bonuses to employees might consider following Goldman’s suit. Goldman Sachs’s shareholders brought separate actions against the Board of Directors for alleged breach of fiduciary duties in approving billions of dollars in bonuses. Bank of America and its acquisitions, Countrywide and Merrill Lynch, were neck-deep in the subprime crisis. In July 2008, Bank of America acquired Countrywide, which made $97 billion in subprime or high interest loans during the peak years of 2005 through 2007.** On October 6, 2008 (three days after TARP was approved), Bank of America agreed to settle a multi-state predatory lending lawsuit against Countrywide for $8.7 billion. Bank of America received its first $25 billion TARP injection around three weeks later. Bank of America proposes to pay billions of dollars worth of cash and stock bonuses to its Merrill Lynch employees. Merrill Lynch claims that the fact that it lost tens of billions of dollars on so-called super senior ‘investments” during the crisis is proof it innocently sold risky investments to others. Don’t believe it. Here’s what happened. Merrill was involved with a lot of subprime lending and packaging and knew or should have known exactly what it was doing. What is more, Merrill had other pockets of risk unrelated to subprime. For example, in December 2006, Ownit, a California-based mortgage lender partly owned by Merrill, declared bankruptcy. Its CEO, William Dallas, stated he was paid more to originate no-income-verification loans than for loans with full documentation. Michael Blum, then Merrill Lynch's head of global asset-backed finance, sat on Ownit’s board. (Blum left Merrill in mid 2008 after the securitization was cut back.) When Ownit declared bankruptcy—instead of demanding a fraud audit—Blum faxed in his resignation. After the bankruptcy, Merrill continued packaging Ownit’s loans. Following a multi-year pattern, Merrill disguised the risk. Merrill packaged Ownit’s risky loans in 2007, and failed to disclose that it was Ownit’s largest creditor. Within a year, the so-called “AAA” rated tranche was downgraded to a junk rating of B, meaning you are likely to lose your shirt. (A mutual fund was stuck with it.) This meant that “investment grade” tranches below the “AAA” were worthless or nearly worthless, because those investors agreed to take losses before the “AAA” investors. Losses were not simply due to fickle market prices. There was permanent value destruction. Merrill
Lynch further disguised risk by repackaging phony “investment
grade” tranches into new investments called CDOs and CDO-squared.
Credit derivatives amplified the problem, because one could sell
value-destroying investments more than once. This was only obvious
to professionals, because some mortgages took a couple of years
for payments to reset. By 2007, things were so bad that many
loans were total shams and began defaulting almost immediately.
This is the classic end of a Ponzi scheme. Bank of America kept
shareholders in the dark and took another
$20 billion in TARP money. The Slumbering Esquires Club (SEC)
may just now file a
new complaint to add the charge that Merrill
failed to disclose the enormous material losses before the December
2008 shareholder vote. ********** * Bank of America, Merrill Lynch (now part of Bank of America), Washington Mutual (now part of JPMorgan Chase), Wells Fargo, General Electric, JPMorgan Chase, Citigroup, Bear Stearns (now part of JPMorgan Chase), AIG, and Wachovia (now part of Wells Fargo) were participants or are now current owners of the top 20 subprime (or high interest loan) lenders during the period of the worst abuses from 2005 through 2007. In addition, these financial institutions, along with Goldman Sachs and Morgan Stanley, contributed funding through credit lines or sales without which the lending would not have been possible. (Click here for a list of subprime mortgage backed securities underwriters.) ** Countrywide was renamed Bank of America Home Loans in February 2009. Separately, BofA bought Merrill Lynch, which bought First Franklin from Nat City in September 2006. First Franklin was one of the top four subprime lenders with more than $68 billion in loans from 2005 to the end of 2007. The operation was closed in March 2008. *** Merrill
Lynch could not find enough demand from bond insurers to disguise
its risk. AIG stopped insuring Merrill’s CDOs
before the end of 2006. Merrill insured other CDOs with other
bond insurers: ACA (now bankrupt) and municipal bond insurer
MBIA, which was since downgraded from AAA to junk.
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