Richard Cordray, Ohio’s Democrat Attorney General, has a message for Wall Street: I’m coming.
Since taking office this January, the former Ohio Treasurer, State Representative, and Jeopardy! champion has been among the most aggressive attorneys general in the country on the bad boys of the financial crisis.
He’s gone after the rating agencies for their role in allegedly losing more than $457 million in Ohio retirement money. He’s won the lead plaintiff spot in the securities fraud case against Bank of America related to the Merrill bonus and losses debacle. And he’s already won big settlements from AIG ($115 million); Merrill Lynch ($475 million); and Marsh & McLennan ($400 million).
Quite a first year in office.
We spoke with Cordray this week about his Wall Street-related efforts. Here are excerpts from our conversation:
What’s happening on Wall Street today that’s hurting people in Ohio and other ordinary Americans?
Well, we certainly saw over the course of the sharp financial crisis that we have experienced that there were many questionable practices on Wall Street. Sloppy investing; inadequate disclosure of material matters to consumers and investors, [like] investors in retirement systems — people we represent. To us, many of these we think are classic violations of securities laws.
There wasn’t a lot of oversight from an SEC that wasn’t even detecting Bernie Madoff’s efforts — just a really lax system. We believe that there have been a number of different instances — which we have brought suit here in Ohio — where those lax practices violated federal laws or in other cases state securities laws — harmed our pension systems or harmed our retirees and investors. We’ve brought suit seeking compensation which we think is a traditional, bed-rock principle of the securities law system we have in this country.
Anything in particular that’s still hurting folks?
What you are seeing now is the SEC has woken up and they’re taking an interest in a number of different situations — of course you have some changes in personnel there and so on. Congress has taken an interest in looking at how to better or more effectively regulate some of these markets, like derivatives. And you have some of us in the states who are aggressively pursuing either investigations for those who have jurisdiction to do that, like New York, or lawsuits on behalf of our pension systems, which are the approaches available to us here.
What made you go after the rating agencies?
In discussions with our pension system here in Ohio, we had a strong reaction that the rating agencies really were derelict in their duty in terms of how they handled mortgage-backed securities, some of the asset-backed assets, some of the complicated derivative packages where most investors around the country relied heavily on the ratings agencies to do the due-diligence, to really investigate carefully and make a strong and a solid assessment of the risks involved with those securities.
In fact, we believe, as we investigated the matter in bringing the lawsuit, that much of what was done was not up to snuff. In fact, the ratings agencies knew that there was a great deal more risk that their ratings were indicating — the ratings were fraudulent or badly mistaken and that was incentivized by their financial arrangements in the marketplace.
But not much has changed with the rating agencies. What’s the solution?
Change has certainly been needed. We’re in the middle of a process where that change is occurring.
I do think that lawsuits that I and other states are bringing will result — we expect — in significant compensation for people who were harmed. That creates a deterrent effect; that helps change behaviour. That’s part of the picture. If you’re trying to change behaviour, the federal regulators — the SEC and others — and Congress’ ability to write the landscape is going to be critical to the success.
Has Washington lost its leverage on banks now that almost all have repaid their bailouts?
I don’t really agree with that. I don’t think anyone wanted or foresaw that Washington for many years would continue to be entangled with the banks.
I think that the desire and the effort all along of this initiative has been to save the financial system from ruin and put it back in a position where the banks could operate on their own. That they’re budgeting properly; they’re lending to middle America; and raising capital from middle-America; but also are making money. That’s what banks are supposed to be doing in a healthy system. I was never rooting against the banks, nor have I ever been rooting against Washington’s efforts to intervene in the financial system and make it well.
Nonetheless, that doesn’t prevent me from feeling that when there are legitimate lawsuits or violations of the law — and pensioners and others in my state have been damaged because of it — it’s also a very traditional part of our system that we are rooting for and fighting to save that there’s accountability under the law and everybody plays by the same rules. That also is very important.
If we save the system and also lose that principle, we will have lost a lot and will be setting ourselves up to fail again.
Will we get the truth about the Bank of America-Merrill Lynch merger?
We allege two things in particular. Number one, over the course of the pre-merger activity…Merrill Lynch was aware, and Bank of America was increasingly aware, that there were much greater losses on the books of Merrill Lynch than had been disclosed to investors and they deliberately chose to withhold that information from investors and did not disclose that very material information that people would have made judgments about and would have refrained from buying some stock or would have sold some stock — and that’s a clear violation of securities rules.
The other thing is that there were bonuses that the executives wanted before the end of the year — they apparently felt they were entitled to them. My understanding of a bonus is that it’s a special reward for superior performance. There wasn’t any superior performance for special reward; nonetheless, they wanted the bonuses. They ultimately, as best we know, got approval to pay out somewhere between $3 and $4 billion in bonuses, which was a very material element to the value of the merger. That was not disclosed to investors.
In those cases, we’ve also pursued some of the top executives — not just the corporations themselves. We do think that they bear their share of the blame — we think that they need to be held accountable as well. We think that that’s a principle that sends a message to other corporate executives on Wall Street that is a further disincentive for this kind of thing in the future.
What’s going on in Ohio that deserves more national attention?
We’re working on our “Holding Wall Street Accountable” project, which we’ve talked about. We also have a project this year that is growing in scope on the whole foreclosure crisis, focusing in on mortgage servicers, who are the entities who are supposed to be — and claim they are — working out reasonable loan modifications to keep people in their homes.
In fact, what we’re finding is very few are doing anything in the way of permanent loan modifications. They stall around; they give terrible customer service; they defeat people by the walls they put up that prevent people from getting any kind of real answer or resolution. They are either incapable of providing adequate customer service in doing loan modifications or they really don’t want to do it and and are just pretending to try…We have sued two of them thus far under Ohio consumer protection laws for failing to follow through on their commitments to customers.
We will continue with that effort, with what is, we consider, pretty minimal expectations. Number one, that they have good customer service, and number two, that they meet the terms of the [federal] program in a clean fashion without adding a lot of fees on people and doing the kind of loan modifications that many of them have purported to do, but in fact are not delivering.
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