Wednesday, June 1, 2011

Economic Consequences

   Two articles appeared on Market Watch today that I wanted to share.

   The first reports that the housing market is taking yet another dive, indicating no foreseeable economic recovery on the horizon:

May 31, 2011, 12:56 p.m. EDT
Housing in double-dip decline as prices fall again
S&P/Case-Shiller index shows U.S. values falling below 2009 trough
By Greg Robb, MarketWatch

WASHINGTON (MarketWatch) — U.S. home prices fell in March for the eighth straight month, confirming the beleaguered housing market has entered a double-dip recession, according to a closely followed index released Tuesday.

Home prices in 20 major U.S. cities declined 0.8% in March on a non-seasonally adjusted basis, according to the Case-Shiller home-price index released by Standard & Poor’s.

Prices fell in 18 of 20 cities in March on a monthly basis. Only Washington, D.C., and Seattle showed advances. Over the past year, only Washington, D.C., has seen prices advance.

Prices fell 3.6% on a year-over-year basis in March, compared with a 3.3% year-over-year drop in February.

The 20-city index is now below its April 2009 trough, meaning that home prices have fully retreated from gains posted from May 2009 through June 2010, putting housing in a double-dip downturn.

“Home prices continue on their downward spiral with no relief in sight,” said David Blitzer, chairman of the index committee at Standard & Poor’s.


   The second article really puts the economic problem in perspective. After three years of financial ruin, seems a lot of people want to point fingers but no one wants to take blame. Worse yet, there doesn't seem to be any entity interested in holding anyone -- except for the American tax payer, that is -- responsible...

May 31, 2011, 12:01 a.m. EDT
Why no jail time for Wall Street CEOs?
Commentary: Little reason to hope that justice will be served
By David Weidner, MarketWatch

NEW YORK (MarketWatch) — It’s probably the most asked question to come out of the financial crisis: why aren’t any Wall Street CEOs in jail?

It’s asked on the message boards, over dinner, in the media, in Washington and in schools. Most people shrug and agree, someone important — Lloyd Blankfein at Goldman Sachs Group Inc. GS -.00%  , Stan O’Neill, formerly of Merrill Lynch & Co., or Dick Fuld, the former CEO of Lehman Brothers — should go to jail, right?

A lot of us have tried to answer this question. Joe Nocera at the New York Times wrote in February that prosecutions were unlikely because “delusion is an ironclad defense.”

More recently, Roger Lowenstein, writing for Bloomberg BusinessWeek, concluded “risk-taking and stupidity aren’t criminal.” Lowenstein’s argument won praise from the Times’ Andrew Ross Sorkin who tweeted that Lowenstein was “probably right.”

Finally, Bill Black, the University of Missouri at Kansas City law school professor, and one of clearest-thinking minds on culpability in the financial crisis, wrote a blistering takedown of both Lowenstein and Sorkin on The Big Picture blog by quoting their previous writing on Wall Street against them. In Sorkin’s case:

“If the government spent half the time trying to ferret out fraud at major companies that it does tracking pump-and-dump schemes, we might have been able to stop the financial crisis, or at least we’d have a fighting chance at stopping the next one.”

Taking down the ‘Don’

The upshot of these assessments of legal culpability seems to be that while a successful prosecution may have long odds, it’s probably worth doing. Indeed, the Financial Crisis Inquiry Commission and the Senate Investigations Subcommittee report on Wall Street, the Levin-Coburn report, both suggest further investigations are in order.

“It is possible for certain senior executives at major financial firms and banks to be held liable for the credit crisis,” said Michael Chester, a partner at Skarzysnki Walsh & Black. “However, putting together a successful case will likely be much more problematic than most realize.”

For one, regulators just haven’t been keeping up, Chester said.

“Traditionally, these agencies have always amassed large amounts of information to use in subsequent criminal prosecutions. However, statistics show that these agencies have referred fewer financial cases to the U.S. Department of Justice in recent years.”

Also, a ruling in the case against former Enron Chief Executive Jeff Skilling about the “honest services” statute now strictly applies to bribes and kickbacks, Chester said.

Moreover, the statute of limitations has run out on a lot of securities law claims, said Max Gardner, a consumer advocacy lawyer who’s been working in the foreclosure space. He adds that it’s difficult to pursue claims against securities sold by the banks these CEOs ran, because common-law fraud claims require a showing of intent.

“There’s also the representations and warranties in the securitization documents themselves, including that there is good title to the mortgages and that they’re not in default,” he said. “”It’s important to emphasize, however, that there could be suits against mortgage-backed securities sponsors, MBS servicers, and MBS trustees.”

But those targets are admittedly below the executive suite for which we’re aiming. It’s hard, but not impossible, to believe those CEOs didn’t know how reckless their standards had become on the mortgage and securitization front. Again, the Coburn-Levin report suggests there are some smoking guns that could link high-level executives who testified that they just didn’t know what was happening.

Even if there was evidence enough to build a case, it probably wouldn’t satisfy us.

“For those who sold financial products that misrepresented their credit worthiness, how far up the chain do you want to go?” asked Brian Greenberg, an accountant and investor based in Marlton, N.J. “Do you want to take down the ’Don’?

“In that case start with the Federal Reserve that made credit plentiful and cheap without any regard to creditworthiness of the buyer. If their excessive policy of pushing cheap money did not exist, then Wall Street would not have been able to push the ’junk’ to the kids — er, public.”

Greenberg makes a fair point. There’s a lot of blame to go around.

It’s the ability to mete out punishment that has its limits.

David Weidner covers Wall Street for MarketWatch.


   We've all been much, much too complacent.

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