Politics: J.P. Morgan Chase's Ugly Family Secrets Revealed
By Matt Taibbi
March 13, 2012 | 9:18am
In a story that should be getting lots of attention, American Banker has released an excellent and disturbing expose of J.P. Morgan Chase's credit card services division, relying on multiple current and former Chase employees. One of them, Linda Almonte, is a whistleblower whom I've known since last September; I'm working on a recount of her story for my next book.
One of the things we were promised by the lawmakers who passed the Dodd-Frank reform bill a few years back is that this would be a new era for whistleblowers who come forward to tell the world about problems in our financial infrastructure. This story now looms as a test case for that proposition. American Banker reporter Jeff Horwitz did an outstanding job in this story detailing the sweeping irregularities in-house at Chase, but his very thoroughness means the news may have ramifications for Linda, which is why I'm urging people to pay attention to this story in the upcoming weeks.
The Cliff's Notes version of the story goes something like this: Late in 2009, Chase's credit card services division sold a parcel of nearly $200 million worth of credit card judgments to a debt collector at a discount. This common practice in the credit-card industry is a little like a bookie selling the outstanding debts of his delinquent gamblers to a leg-breaker for 25 cents on the dollar. If the leg-breaker gets half the delinquents to pay, the deal works out for both sides -- the bookie gets 25 percent of money he wasn't going to collect, and the leg-breaker makes a 100 percent profit.
In the case of credit cards, of course, you're selling the debts to collection agents, not leg-breakers, but aside from that unpleasantly minor distinction the process is the same. The most valuable kinds of sales in this world are sales of credit card judgments, in other words accounts in which the debtor has already been successfully brought to court. That, ostensibly, is what this bloc of accounts Chase sold in 2009 involved.
Almonte came to Chase in the summer of 2009 as a mid-level executive in the credit card services division's offices in San Antonio, and was quickly put in charge of preparing the documentation for this enormous sale of credit card judgments. When Chase regional offices from places like southern California and Illinois began sending in the papers for these "judgments," Almonte very soon found out that something was seriously wrong. From Horwitz's piece:
Nearly half of the files [Linda's] team sampled were missing proofs of judgment or other essential information, she wrote to colleagues. Even more worrisome, she alleged in her wrongful-termination suit, nearly a quarter of the files misstated how much the borrower owed.
In the "vast majority" of those instances, the actual debt was "lower that what Chase was representing," her suit stated.
Linda subsequently found an enormous range of errors. Some judgments, she told me, were not judgments at all. In some cases, she said, Chase actually owed the customer money.
When she brought these concerns to her superiors, what do you think their response was? They told her and others to shut up and just sell the stuff anyway. Her boss, Jason Lazinbat, allegedly told her "she had better go along with the plan to sell the misrepresented asset."
Think of the consequences of this: because Chase was so anxious to make money off this debt sale, countless credit card borrowers would now have collection agents chasing them for money they did not owe. The debt-buyer, too, was victimized by being sold accounts it could not collect on. It is almost impossible to estimate how many man-hours of pointless court proceedings would be lost because of this decision.
Anyway, when Linda refused to go along with the sale, she was fired. This was in November of 2009. She then went through a post-firing odyssey that is an epic tale in itself: her many attempts to get any of the major bank regulators interested in this case were disturbingly fruitless for a long time (although the Office of the Comptroller of the Currency is apparently looking into it now), and she struggled to find work in the industry.
She has been repeatedly harassed and has gone through all sorts of personal hardship as a result of this incident. She filed a whistleblower claim with the SEC as part of the new whistleblower program created by Dodd-Frank, but so far there's been no progress there.
When I met Linda last year, my first reaction to her story was that I was skeptical. The tale she told went far beyond the bank knowingly selling millions of dollars worth of errors into the financial system. She also recounted, firsthand, the bank's elaborate robosigning operation, which Horvitz, talking to other Chase employees, also discussed:
"We did not verify a single one" of the affidavits attesting to the amounts Chase was seeking to collect, says Howard Hardin, who oversaw a team handling tens of thousands of Chase debt files in San Antonio. "We were told [by superiors] 'We're in a hurry. Go ahead and sign them.'"
And there were other stories... suffice to say that the picture Linda painted of life inside Chase reminded me a little of Upton Sinclair's The Jungle: they were putting just about everything into those sausages. When I was writing it all up for my book I went through a period where I was waking up nights, seized witht he urge to close every credit account I had -- her story makes you think that most credit card companies are essentially indistinguishable from giant identity theft operations.
Again, though, when I first heard the story, I was skeptical -- until I found other people in the company who verified Almonte's account, all the way down the line. Horvitz, too, found numerous employees in Chase's credit card services division who confirmed the story of the company knowingly selling a mountain of errors into the market, and manufacturing robo-signed documents to the tune of thousands per week.
The financial crash wouldn't have happened if even a slim plurality of financial executives had done what Linda Almonte did, i.e. simply refuse to sign off on a bogus transaction. If companies had merely upheld their own stated policies and stayed within the ballpark of the law, none of these messes could have accumulated: fraudulent mortgages wouldn't have been sold, families wouldn't have been foreclosed upon based on robosigned documentation, investors wouldn't have been duped into buying huge packets of "misrepresented assets."
But most executives didn't refuse to go along, precisely because powerful companies make it so hard on people who come forward. Almonte, after being fired, entered into a modest settlement with Chase that prohibited her from coming forward publicly. At the time she entered into the settlement she was in an extremely desperate state, and she made a bad decision, taking a very bad deal.
Still, like Jeffery Wygand, the tobacco scientist from the movie The Insider, she was sitting on top of a story that, morally speaking, should not ever be protected by a confidentiality agreement -- and the subsequent lack of regulatory action eventually moved her to speak out to people like Horvitz and me. Of course, now that her story is out there in public, the concern is that the bank will move swiftly to take her to court.
This person does not have any money, so an action by Chase at this point would be purely punitive, to send a message to future whistleblowers. They'll be more likely to do it if they think no one is paying attention. I'll keep you posted on that score.
In the meantime, please check out Horvitz's piece. It should give everyone who has a credit card pause.
******************************************************************************
I guess I should have start a private equity company years ago.
It's good that Mitt Romney's fame has shone a new light on private equity. It's one of the great, ongoing financial scams of all time. Private equity is essentially a scheme for taking control of corporations and paying yourself hundreds of millions of dollars by borrowing against the business' assets.
Six months after private-equity firms Carlyle and Clayton Dubilier & Rice took Hertz Corp. private, they borrowed $1 billion and paid themselves a fat dividend, according to a Bloomberg story. Quite simply, they exposed their clients to additional debt risk to pay themselves a fortune.
The transaction is called a "dividend recap," and it's standard practice…
In 2010, Dunkin' Brands Group – the company that owns Dunkin' Donuts – borrowed $1.25 billion… so it could pay Carlyle, Bain Capital, and Thomas Lee Partners a $500 million dividend. Dunkin' went public last year with nearly $1.9 billion in debt. Dunkin' Brands shareholders got stuck with more risk so Carlyle, Bain Capital, and Lee could make obscene amounts of money.
The Washington, D.C.-based Carlyle Group is at it again… And this time, it's sticking it to Carlyle Group shareholders… Carlyle is set to go public this year. In late 2010, it borrowed $500 million that was supposed to be used for new investments. Instead, it paid $398.5 million of the proceeds to three of the company's owners as a dividend. Bloomberg says recent filings indicate it has the option to borrow and distribute another $400 million.
Carlyle's fat cat owners don't have to sell their shares to cash out. They can keep their shares when the company makes its initial public offering and still receive huge tax-advantaged paychecks. They're tax-advantaged because dividends are taxed more lightly than regular income. Also, the corporation can deduct the interest payments before paying taxes. So what's good for the corporation isn't necessarily good for shareholders, who would be better off with less debt, since debt claims (like all other claims) are senior to theirs. Clearly, these private-equity firms have huge incentives to take control of corporations, lever them up, and collect huge cash dividends out of them… before taking them public again.
******************************************************************************
I pulled this piece from Steve Sjuggerud's Monday DailyWealth essay. Following its 2008 bankruptcy, Iceland's currency – the krona – was destroyed. Now, the country is looking to adopt a new currency, and it's not interested in dollars…
Starting in 2008, these folks faced an epic banking crisis, which led to a massive currency devaluation – to the point where Iceland's currency hardly exists today. (It doesn't trade in world markets anymore.)
But according to recent reports, Icelanders don't want U.S. dollars.
For my adult lifetime, U.S. dollars have been "good" almost everywhere. In many countries, you haven't needed to change money when you travel. (Heck, in most Latin American countries, the people preferred to receive U.S. dollars instead of their local currency.)
So what's going on today?
Over the weekend, Iceland's prime minister said the currency situation in Iceland "can't remain unchanged," according to a Bloomberg article. The article's headline was: "Iceland Will Adopt Euro or Other Currency, Prime Minister Says."
Why is there no interest in the U.S. dollar in Iceland? And why is there any interest at all in the Canadian dollar?
It's because Icelanders know what it's like to face a debt crisis and a currency collapse… and they see those risks down the road in both the U.S. dollar and the euro. So Icelanders are looking for an alternative.
By pegging the krona to another currency, Iceland would adopt the exchange rate of that currency. Doing so would make it easier for foreigners to trade with Iceland. And it would show the world Iceland is serious about curbing inflation, making it more attractive to do business with.
It's beneficial for small countries, many of which get a lot of their GDP from exports. If you're desperate to show the world you're more republic and less banana, you peg to a stronger currency. The U.S. dollar would seem to be a natural choice, since it's the world's reserve currency. That Iceland is looking elsewhere speaks volumes about the dollar's outlook…
******************************************************************************
I wonder if Becky Quick will ask Warren Buffett about this next time he is pontificating on CNBC.
And Dan notes another much more well-known financial expert who has sounded off more than once about the potential for inflation in the U.S. His prognosis jibes with Reinhart's…
Over the weekend, I watched Warren Buffett's appearances on the Charlie Rose show in 2009 and 2011. I wrote down the following quotes, which follow hard upon Carmen Reinhart's observations this morning…
"When politicians face almost insuperable problems, and it looks like they can solve it by printing money, I think they will do it."
"There will be no tendency toward deflation in this country over time… All you know is the dollar is going to be worth less 10, 20 years from now."
Well said, Warren.
*******************************************************************************
This is my last negative comment today.
This chart speaks for itself. If you think what we are doing as a country is fixing things you are dead wrong.
Now on to what everyone really wants to talk about. The NCAA tournament! Here are a couple cool charts I found regarding seeds and mid-majors.
*******************************************************************************
I like Colbert and this video is classic.
The Colbert Report
Get More: Colbert Report Full Episodes,Political Humor & Satire Blog,Video Archive
Get More: Colbert Report Full Episodes,Political Humor & Satire Blog,Video Archive
*******************************************************************************
I can't believe the pull that the National Dairy Farmers have in Washington. They've started an all out war on fresh milk. The farmer gets bail at 10 times the amount of child rapist, Jerry Sandusky.
Gov't HORROR:
California has declared war on an unbelievable target
Tuesday, March 13, 2012
From Mark J. Perry's Carpe Diem:
"65-year-old senior citizen James Stewart, a California farmer with no criminal history, was nearly tortured to death in the LA County jail this past week.
He survived a "week of torturous Hell" at the hands of LA County jail keepers, who subjected him to starvation, sleep deprivation, hypothermia, loss of blood circulation to extremities, verbal intimidation, involuntary medical testing, and even subjected him to over 30 hours of raw biological sewage filth containing dangerous pathogens."
MP: What was his alleged criminal activity? Selling fresh, unpasteurized raw milk. Bail for "The Milk Man" was set at $1 million. By comparison, bail for alleged child rapist Jerry Sandusky, former Penn State sports coach, was set at $100,000.
"NaturalNews is calling upon Amnesty International and the American Civil Liberties Union to intervene in this extraordinary violation of basic human rights. For the record, James Stewart has no criminal record and is a permaculture farmer and fresh food advocate. His "crime" consists entirely of arranging for the distribution of raw milk to customers who actually line up to access this nourishing food (people love it!)."
No comments:
Post a Comment