Levine on Wall Street: Hustles and Junkets

Countrywide hustled, regulators wrangled over fines, private equity funds are selling a lot of companies to each other, and brokers are going deep-sea fishing in Hawaii.

The Hustle went poorly.

A couple of weeks ago I wrote about Bank of America's endless river of mortgage settlements, including in particular its habit of reaching a $10-billion-ish settlement over mortgages it sold to Fannie Mae and Freddie Mac. And somehow I forgot about the Hustle case! It's not a settlement: Bank of America for some reason went to trial over a Countrywide program called "Hustle," which is a pronunciation of "HSSL," which stood for "High Speed Swim Lane," which honestly is not much better than "Hustle." The point of Hustle was basically to sell terrible mortgages to Fannie and Freddie, but quickly. Bank of America lost that trial because, come on, don't go to trial on mortgage cases. 1 And yesterday the judge in the case, Jed Rakoff, awarded a $1.27 billion penalty against Bank of America. His opinion calculating the penalty is a strange piece of work; the relevant statute (FIRREA, the law covering fraud against financial institutions like Fannie and Freddie) allows fines based on the fraudster's "gain" or the victim's "loss," and Judge Rakoff determined that the measure of loss (or gain) is the notional amount of the mortgages sold fraudulently. So if you sell Fannie Mae a $500,000 mortgage that does not meet its standards, and that mortgage performs throughout its life and is paid back in full, you still have to pay $500,000 for defrauding Fannie. If that's actually the law, then the banks that originated trillions of dollars of mortgages, y'know, hastily are in a bit of trouble.

Speaking of hustles.

I enjoyed this story about New York agencies wrangling over how to split the billions of dollars that they were getting from the BNP Paribas settlement. Originally Manhattan District Attorney Cyrus Vance was going to get something like $2.2 billion "for law enforcement projects," but then Governor Andrew Cuomo demanded $1.05 billion of that, in addition to the $2.24 billion that he was already getting, for the state's general fund. And since Cuomo's Department of Financial Services had the power to pull BNP's banking license, he also had the power to demand more money from his fellow regulators. There's nothing particularly wrong with that, and frankly I'm not sure why the Manhattan District Attorney needed the extra billion dollars, but this look at the sausage-making does highlight how little the recent bank penalties have to do with legal standards or calculated damages or measured culpability, and how much they have to do with raw power and negotiating skills and regulators' budgetary needs.

Speaking of BNP Paribas.

Bank earnings season continues, and BNP Paribas and Banco Espirito Santo both had rough quarters. But you knew that. And Lloyds had a so-so quarter, with an analyst saying "Notwithstanding the disappointment of further below-the-line charges, we believe that Lloyds continues to make good underlying progress," which is all you can hope for these days.

Private equity is buying a lot of companies from private equity.

"Transactions between private-equity firms have made up 60% of U.S. leveraged buyout volume through June, according to S&P," the highest on record. What is your model for this? One simple view might be that public ownership is not optimal for some (all?) corporations, so they should live in private hands for a long time. But corporations are eternal and private equity funds have limited lives, so the funds have to keep selling firms to each other just to maintain the status quo. Also there are probably fees.

Would you want to go on a broker junket though?

I mean the 2010 vintage sounds grim:

[S]ome top brokers at Merrill Lynch say they were rewarded with a trip to Detroit. One of the brokers who attended that gathering recalls coaching sessions and swapping of best-practice tips. For him, the rather muted highlight was bumping into actor Gerard Butler on the street, who was in town filming a movie.

The 2014 version is obviously better:

In late April, a few hundred of Morgan Stanley's top stockbrokers and their spouses jetted off to Hawaii for a gathering spiced with golf, deep-sea fishing and suntanning.

But they still "spent some of their time in Maui in business meetings and heard from top executives at the firm, including Chairman and Chief Executive James Gorman." More importantly I'm just not sure that, like, snorkeling with hundreds of my most competitive colleagues is how I'd want to spend my leisure time, but I guess it's free.

Stranger-originated life insurance is bad.

People die, and then life insurers pay out money on their life insurance, so if you can find people who are going to die soon and buy big life insurance policies on them, you'll get a lot of money. Life insurers don't like this and have rules to prevent it. Unscrupulous buyers and brokers sometimes work together to circumvent these rules and get big payouts from the insurance companies. Three of those unscrupulous brokers got sentenced to 6, 9, and an astonishing 12 years in prison yesterday, and that just seems like too much. Even the prosecutors struggle to explain why this scam is bad:

In pricing and underwriting universal life insurance, the Insurers relied on the basic premise that the people applying for the policies -- rather than professional investors -- were the ones seeking and planning to pay for these high-face-value policies. These assumptions permitted the Insurers to offer lower prices than they could have without the assumptions.

Oh so it messes with the actuarial models? Okay. I guess another bad thing about stranger-owned life insurance is that you might get tempted to bump the strangers off and collect your insurance, though that doesn't seem to have happened here.

Things happen.

Is Valeant's cost-cutting excessive? Are Allergan's special meeting bylaws reasonable? If corporations are people, why shouldn't corporations serve on the boards of other corporations? Hedge fund moguls avoid real estate brokers' fees too. Black card banter. Snapchat is maybe worth $10 billion. "The people dancing and talking and singing in beige rooms with 8' ceilings are surrounded by standards, physically and online." I guess I am a bit late to this, but I don't care; if you've already watched a man dump ice water on John Carney, just watch it again. How to Virtually 'Possess' Another Person's Body Using Oculus Rift and Kinect.

This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.
  1. Fun line from Judge Rakoff's damages opinion:

    Although at one point in the trial the Court, momentarily mesmerized by defendants' superb attorneys, commented that this was a "close case," Tr. 3169:10, the careful review of the evidence that the Court has conducted in connection with determining the penalty has convinced the Court, as it did the jury, that the evidence of the defendants' fraudulent scheme and fraudulent intent was ample.

    One way to read that is that this was a close case, but a jury is never going to find for Countrywide, and after the jury expressed its outrage Judge Rakoff couldn't help himself but do likewise. Or you could read it literally, but Judge Rakoff does not seem easily mesmerized.

To contact the author on this story:
Matthew S Levine at mlevine51@bloomberg.net

To contact the editor on this story:
Toby Harshaw at tharshaw@bloomberg.net

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