Bank of America Shows That Wall Street Regulation Stinks From The Head Down

May 6, 2015

It is said that a fish stinks from the head down. As such, the failure to police Wall Street is rarely the fault of examiners, investigators, or staff lawyers; and the blame should more aptly be placed on the political appointees and the brown-nosers who wind up setting and implementing policy. As far as I'm concerned, things would immediately improve if we fired about 80% of those in senior management positions in regulation; and, thereafter, more regularly promoted from within based upon merit. 

Also, it's time to get Wall Street's cops back on a neighborhood beat. We must end the ever-expanding staffing of Washington, DC-based bureaucracies where there is no stock market, no commodities market, and, frankly, nothing beyond political waste and corruption. More seems to get done by District-based U.S. Attorneys' offices than by those in the home office at the Department of Justice; more gets done by those manning the SEC's regional offices and FINRA's districts than by the bulk of those sitting in the organizations' DC headquarters. Which is not to discount the valuable contribution of the lower-level staff working in our nation's capital  -- it is, as I admonished, a direct shot at those in senior management and their failed agendas. In the end, we are saddled by federal bureaucracies that sow dragon's teeth and reap a harvest of often useless executive titles. Take a gander at the chain of command at most DC-based bureaucracies: A Director, Assistant Director, Deputy Director, Assistant Deputy Director, Deputy Assistant Director, Acting Director, Special Assistant to the Acting Deputy Director, Special Deputy Acting Assistant Director, and so on. 

You are free to disagree with me; however, I ask that you reserve judgment and first join me for a brief stroll down memory lane.  I want you to consider the past successes that have been trumpeted by Wall Street's federal, state, and self-regulators and ask yourself -- honestly -- is this approach to regulation working?  Is it effective -- or, is it time to throw the baby out with the bathwater and bring in new management?  By way of example, let's look at the recent record of regulating Bank of America.

$137.3 Million 2010 DOJ Settlement

In 2010, Bank of America paid $137.3 million in restitution for bid rigging the municipal bond derivatives market:

Department of Justice
Office of Public Affairs


Tuesday, December 7, 2010

Bank of America Agrees to Pay $137.3 Million in Restitution to Federal and State Agencies as a Condition of the Justice Department's Antitrust Corporate Leniency Program

WASHINGTON - Bank of America entities have agreed to pay a total of $137.3 million in restitution to federal and state agencies for its participation in a conspiracy to rig bids in the municipal bond derivatives market and as a condition of its admission into the Department of Justice's Antitrust Corporate Leniency Program, the Department of Justice announced today.

Bank of America entered into agreements with the U.S. Securities and Exchange Commission (SEC), the Internal Revenue Service (IRS), the Office of the Comptroller of Currency (OCC), and 20 State Attorneys General. The global resolution with these federal and state entities provides for payment of restitution to the IRS and to municipalities harmed by Bank of America's anticompetitive conduct in the municipal bond derivatives market. In a related matter, Bank of America entered into a written agreement with the Federal Reserve Board to address certain remedial measures.

According to agreements announced today, Bank of America employees engaged in illegal conduct, including bid rigging and other deceptive practices, in connection with the marketing and sale of tax-exempt municipal bond derivatives contracts. . .

Disability Income Discrimination 2012 Settlement

Within two years of paying for its role in bid rigging the muni markets, Bank of America found itself settling with DOJ allegations of discrimination against those on disability income:

Department of Justice
Office of Public Affairs


Thursday, September 13, 2012

Justice Department Reaches Settlement with Bank of America to Resolve Allegations of Discrimination Against Recipients of Disability Income

Bank of America N.A. has agreed to maintain revised policies, conduct employee training and pay compensation to victims to resolve allegations that it engaged in a pattern or practice of discrimination on the basis of disability and receipt of public assistance in violation of the Fair Housing Act (FHA) and the Equal Credit Opportunity Act (ECOA). 

The settlement, which is subject to court approval, was filed today in federal court in Charlotte, N.C., where Bank of America is headquartered.  The terms of the settlement require Bank of America to pay $1,000, $2,500 or $5,000 to eligible mortgage loan applicants who were asked to provide a letter from their doctor to document the income they received from Social Security Disability Insurance (SSDI).  Applicants who were asked to provide more detailed medical information to document their income may be paid more than those who were asked to have a doctor verify their source of income. Bank of America will hire a third party administrator to search approximately 25,000 loan applications involving SSDI income to identify any other victims.  Under the settlement, Bank of America will conduct training of its underwriters and loan officers and will monitor loan applications to ensure that applications from disabled individuals are treated in a manner consistent with applicable law.

This lawsuit arose as a result of three complaints filed by loan applicants with the U.S. Department of Housing and Urban Development (HUD).  After investigating the complaints, HUD undertook a broader investigation into Bank of America's practices.  Bank of America revised its policies for documenting disability income during HUD's investigation.  The Assistant Secretary of HUD elected to have the case heard in federal court and referred the case to the Department of Justice. The HUD complainants will receive a total of $125,000 to their harm and compensate them for costs associated with their loan applications. 

"Loan applicants with disabilities should not be subjected to invasive requests for medical information from a doctor when they are applying for credit," said Thomas E. Perez, Assistant Attorney General for the Justice Department's Civil Rights Division.  "Today's settlement shines a light on a practice that violates the Fair Housing Act and the Equal Credit Opportunity Act." . . .

READ full DOJ September 13, 2012 Press Release

$16.65 Billion 2014 Settlement

As proclaimed, in part, by the Department of Justice ("DOJ"), we had this breathtaking settlement -- called the "largest civil settlement with a single entity in American history":

Department of Justice
Office of Public Affairs


Thursday, August 21, 2014

Bank of America to Pay $16.65 Billion in Historic Justice Department Settlement for Financial Fraud Leading up to and During the Financial Crisis

Attorney General Eric Holder and Associate Attorney General Tony West announced today that the Department of Justice has reached a $16.65 billion settlement with Bank of America Corporation - the largest civil settlement with a single entity in American history ­- to resolve federal and state claims against Bank of America and its former and current subsidiaries, including Countrywide Financial Corporation and Merrill Lynch. As part of this global resolution, the bank has agreed to pay a $5 billion penalty under the Financial Institutions Reform, Recovery and Enforcement Act (FIRREA) - the largest FIRREA penalty ever - and provide billions of dollars of relief to struggling homeowners, including funds that will help defray tax liability as a result of mortgage modification, forbearance or forgiveness. The settlement does not release individuals from civil charges, nor does it absolve Bank of America, its current or former subsidiaries and affiliates or any individuals from potential criminal prosecution.
"This historic resolution - the largest such settlement on record - goes far beyond ‘the cost of doing business,'" said Attorney General Holder. "Under the terms of this settlement, the bank has agreed to pay $7 billion in relief to struggling homeowners, borrowers and communities affected by the bank's conduct. This is appropriate given the size and scope of the wrongdoing at issue." . . .

READ full DOJ August 21, 2014 Press Release

$180 Million 2015 Forex Settlement

So . . . how's all that settlement stuff working for the investing public?  Is Bank of America, for example, getting the message?  Consider this recent news story: 
"Bank of America to Pay $180 Million to Settle Investors' Forex Lawsuit / BofA says cost of settlement will be covered by existing reserves" (Wall Street Journal, Christine Rexrode, Updated April 29, 2015):

Bank of America Corp. has agreed to pay $180 million to settle a lawsuit by private investors who accused the bank and others of manipulating foreign-exchange rates.

The bank's decision comes after rivals J.P. Morgan Chase & Co. and UBS AG had agreed to settle with the same investors. Other banks, including Citigroup Inc. and BarclaysPLC, are expected to settle soon, according to people familiar with the situation.

Regulators around the world have been examining whether banks improperly manipulated the forex rates, and half a dozen banks settled with U.S. and U.K. regulators in November. At the time, Bank of America paid $250 million to the Office of the Comptroller of the Currency, though its U.S. rivals Citigroup and J.P. Morgan paid more than $1 billion each in fines to various regulators. . .

Rule 15c3-3 Special Reserve Investigation In 2015

Whatever message Wall Street's cops think is being sent is just not getting delivered. Consider this latest manifestation from the cesspool, as reported in "SEC Investigating Whether Bank of America Broke Customer-Protection Rules / 
Bank questioned about potential use of funds that should have been off-limits
" (Wall Street Journal, April 28, 2015, Reporter Jenny Strasburg):

The Securities and Exchange Commission is investigating whether Bank of America Corp. broke rules designed to safeguard client accounts, potentially putting retail-brokerage funds at risk in order to generate more profits, according to people familiar with the inquiry.

For at least three years, the bank used large, complex trades and loans to save tens of millions of dollars a year in funding costs and to free up billions of dollars in cash and securities for trading that Bank of America otherwise would have needed to keep off-limits, these people said.

Now, the SEC is investigating whether the bank's unusual strategy violated customer-protection rules and whether the bank misled regulators about what it was doing, these people said.

. . .

Known in industry circles as Rule 15c3-3, a reference to the section where it is tucked within the Securities Exchange Act of 1934, the policy requires banks and other financial firms that handle customer trades to calculate at least once a week their net liabilities to clients-in other words, how much more banks owe to clients, in the form of deposits and other funds, than they are owed from clients, in the form of assets such as loans.

The greater the overall-or net-amount that the banks owe their clients, the more money the banks need to set aside in reserve funds, known as "lockup" accounts, to pay their customers in an emergency. Funds in those lockup accounts must be segregated from other accounts, including the banks' own.

Having billions of dollars idling in lockup is expensive for banks, partly because the money generally can't be put to other profitable but potentially risky uses such as trading.

New York-based executives in Bank of America's Merrill Lynch brokerage arm devised an array of complex trades and loans to reduce the amount of money trapped in lockup, according to people familiar with the trades.

One variety of the strategy, launched around 2009, was called "leveraged conversion." A small team from Bank of America's equities desk recruited a handful of clients, including wealthy individuals, to put up token amounts of their own money-a few million dollars in some cases-and in exchange receive loans of nearly 100 times those amounts, the people said.

Then Bank of America would arrange large trades, with those customers taking the opposite side, in ways that satisfied other financing needs at the bank. For example, if the bank needed to hedge its exposure to a multibillion-dollar position in, say, Apple Inc.'s shares, perhaps because of a trade with another client, the bank might arrange for one of the leveraged-conversion customers to do a big Apple-centric trade using the loan the bank had provided.

One result of the trades was to drastically increase the amounts of money that customers owed to the bank, thereby reducing the net amount that the bank owed its clients. That, in turn, reduced how much Bank of America had to stash in the 15c3-3 lockup.

Another benefit: Bank of America was able to curtail its use of more expensive funding from alternate sources such as the debt markets or other parts of the bank. . .

One Man's Kiting Is Another Too-Big-To-Fail's "Alternate Funding"

According to Strasburg's Wall Street Journal article, it seems that Bank of America is being investigated for what comes off as something akin to a kiting of funds. By that reference, I mean that, to some extent, the bank seems to be working the float and trying to create a situation where it gets the benefits of the funds at issue without having to take the hit to its reserves as mandated under 15c3-3.  Keep in mind that when we talk about the need to segregate funds in a "lockup," we're not talking about a discretionary process that's supposed to be amenable to a lot of creative accounting and bookkeeping ploys. 

Those running DOJ, the SEC, and FINRA don't seem to have a coherent, cohesive plan for redressing misconduct by Wall Street's big fish.  When you're a major too-big-to-fail financial conglomerate charged with egregious misconduct, the regulators and prosecutors seem to have but one arrow in their quiver: They impose grandiose fines, which make headlines but seem to have virtually no meaningful impact on curbing future misconduct.  

In contradistinction to how the too-big-to-fail get treated for violating the industry's rules, consider the Blog commentary below, which I published about four years ago. Note what happened to a Bank of America stockbroker  -- a solitary human being  -- who played loosey-goosey with his own financial obligations. Is any regulator ever going to suspend the operations of a financial institution for even one day?  Will a trading desk or line of business be forced to halt for any period of time?  Will a current member of the C-Suite, a man or woman who was on the job when the misconduct occurred and still on the job by the time of the settlement, ever be fined and suspended in a comparable manner to the almost daily sanctions handed down to the more lowly players in the biz?

For the purpose of settling rule violations alleged by the Financial Industry Regulatory Authority ("FINRA") and without admitting or denying the regulator's findings and without an adjudication of any issue of law or fact, Brandon Garrett Searcy submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted.  In the Matter of Brandon Garrett Searcy (AWC, 2011026299401, December 1, 2011).

In August 2001, Searcy first became registered in the securities industry and arrived at Bank of America Investment Services ("BOA") in June 2005.  On January 7, 2011, BOA terminated him.

NSF Checks

During the first two weeks of November 2010, Searcy allegedly wrote three checks totaling $400 from his BOA checking account that he deposited into his BOA savings account - on the same day that Searcy made the savings account deposits, he also withdrew the deposited amount using his debit card at an ATM.

FINRA alleged that Searcy deposited into his savings account each check knowing that there were insufficient funds to cover the amount of the drawn check;  and, similarly, there were insufficient funds in his savings account to cover the withdrawal.  As such, FINRA had Searcy coming and going:  He issued checks against insufficient checking account balances and he withdrew from his savings account sums attributable to those kited checks.

Violations and Sanctions

Not only was Searcy's alleged conduct contrary to BOA's  policy regarding personal accounts, but FINRA alleged it to be a violation of its Rule 2010 for failing to "observe high standards of commercial honor and just and equitable principles of trade."  In accordance with the AWC, FINRA imposed upon Searcy a three-month suspension with any FINRA member firm in any capacity and a $2,500 fine.

Bill Singer's Comment

Wall Street employees may be surprised - perhaps stunned - by this case.  After all, it's not as if Searcy's alleged misconduct involved either a public customer or securities fraud.  To the contrary, Searcy ran afoul of the purported "high standards of commercial honor" and "just and equitable principles of trade" that are supposedly hallmarks of Wall Street.

Wall Street's "high standards" and "just and equitable principles." Ummm, is FINRA really serious?  Just exactly when did the securities industry impose such vaunted standards and principles upon itself - maybe I missed that day?

Then of course, there's the whole BOA as victim scenario.  BOA - as in the firm that's trying to cut a settlement for hundreds of millions of dollars related to allegations of its role in mortgage market fraud and questionable overdraft fees on debit cards. Of course, the Department of Justice and the Securities and Exchange Commission don't always pound away at the  highly standarded and principled BOA but, hey, what else is new. BOA, Wells Fargo, UBS, Goldman Sachs, Morgan Stanley, Bear Stearns, Lehman Bros., JP Morgan, and, now Brandon Searcy. All in the same FINRA enforcement boat. All treated the same. Blind justice. Blind regulation.

Yeah, right.

So, the small fish Searcy gets a three-month vacation and a couple thou in fines as his punishment. Frankly, ho hum.  If there is anything remarkable about this case, it's that the zealous cops at FINRA managed to investigate and resolve this tempest in about one year - a very aggressive timeframe for a regulator that has come under fire in recent years for not being overly aggressive or successful.

If the outcome in this case is any harbinger, I'm sure Jon Corzine is quaking in his boots.  Wall Street's cops are hot on his MF Global heels.  Ready to pounce and close out the case within a year. After all, if FINRA comes after him and actually manages to establish credible allegations of misconduct, why, geez, Corzine could easily find himself with a three month suspension and a $2,500 fine.  I mean, you know, given all the high standards and principles stuff.

I'm sorry if my dripping sarcasm splashed you.  Can I lend you a towel?