This report, released in March of 2008, implied that this case was over yet the CEO and the 'ONLY' Ex-Executive that was acquitted had gone on trial.
Funny, the FBI assumed it was over.
Now, the Ex-Executive that was acquitted,James K Happ and last to go on trial early December 2008. Hmm.....
James K Happ , who by chance, arrived at National Century Finanacial Enterprises, Inc. in Columbus, Ohio from the CFO position at HCA/Columbia 'family and friends' along with Richard Rainwater in Ft. Worth, Texas.
Funny how that works. !!!
FOR IMMEDIATE RELEASE CRM
THURSDAY, MARCH 13, 2008 (202) 514-2007
WWW.USDOJ.GOV TDD (202) 514-1888
FORMER NATIONAL CENTURY FINANCIAL ENTERPRISES EXECUTIVES FOUND GUILTY ON ALL CHARGES IN $3 BILLION SECURITIES FRAUD SCHEME
Defendants Guilty of Conspiracy, Fraud and Money Laundering
WASHINGTON – A federal jury has found five former executives of National Century Financial Enterprises (NCFE) guilty of conspiracy, fraud and money laundering, following a six-week trial and less than two days of deliberation, Assistant Attorney General Alice S. Fisher and U.S. Attorney Gregory G. Lockhart of the Southern District of Ohio announced today. The Columbus, Ohio, jury returned the guilty verdict on all charges contained in a 27-count superseding indictment stemming from a scheme to deceive investors about the financial health of NCFE. The company, which was based in Dublin, Ohio, was one of the largest healthcare finance companies in the United States until it filed for bankruptcy in November 2002.
Donald H. Ayers, 71, of Fort Meyers, Fla., an NCFE vice chairman, chief operating officer, director and an owner of the company, was found guilty on charges of conspiracy, securities fraud and money laundering.
Rebecca S. Parrett, 59, of Carefree, Ariz., an NCFE vice chairman, secretary, treasurer, director and an owner of the company, was found guilty on charges of conspiracy, securities fraud, wire fraud and money laundering.
Randolph H. Speer, 58, of Peachtree City, Ga., NCFE’s chief financial officer, was found guilty on charges of conspiracy, securities fraud, wire fraud and money laundering.
Roger S. Faulkenberry, 46, of Dublin, Ohio, a senior executive responsible for raising money from investors, was found guilty on charges of conspiracy, securities fraud, wire fraud and money laundering.
James E. Dierker, 40, of Powell, Ohio, associate director of marketing and vice president of client development, was found guilty on charges of conspiracy and money laundering.
“These convictions send a clear message to corporate America that executives will be brought to justice for lying to investors and misrepresenting the actions taken in their normal course of business,” said Deputy Attorney General Mark Filip, chairman of the President’s Corporate Fraud Task Force. “These are the latest successes in our efforts to improve the integrity of our financial markets.”
“By holding accountable those who break the law, today’s convictions help restore some of the faith and trust the public loses every time corporate executives defraud their investors. The jury’s verdict demonstrates that the public will not stand by while company executives commit billion dollar frauds, leaving the honest investors to bear the losses they create,” said Assistant Attorney General Alice S. Fisher. “I would like to thank the trial attorneys from the Fraud Section and the U.S. Attorney’s Office as well as the FBI, IRS, Immigration and Customs Enforcement and U.S. Postal Inspection Service for their diligent and successful work on this case.”
“The jury convicted company executives of building a financial house of cards and deceiving investors using financial sleight of hand,” said Gregory G. Lockhart, United States Attorney for the Southern District of Ohio. “I commend the agents, investigators and prosecutors from the Fraud Section and our office for their hard work on this lengthy and complex case.”
“This case is one of the largest corporate fraud investigations involving a privately held company headquartered in small town America,” said Assistant Director Kenneth W. Kaiser of the FBI Criminal Investigative Division. “The FBI continues to leverage its corporate fraud expertise gained through large-scale investigations such as Enron and WorldCom, to ensure that corporations represent their true health. From Dublin, Ohio, to Houston, Texas to New York, New York, the message is clear that the FBI will not stand by as corporate executives manipulate their financial statements and conceal illegal activities from criminal and regulatory authorities.”
“IRS aggressively pursues corporations and their officers who use their positions of trust for illegal activities. This kind of fraud touches the lives of many unsuspecting citizens and the public should know that the government is serious about holding corporations and their executives accountable,” said Eileen C. Mayer, chief, Internal Revenue Service Criminal Investigation.
At trial, the government presented evidence that the defendants engaged in a scheme to deceive investors and rating agencies about the financial health of NCFE and how investor monies would be used. Between May 1998 and May 2001, NCFE sold notes to investors with an aggregate value of $4.4 billion, which evidence presented at trial showed were worth approximately six cents on the dollar at the time of NCFE’s bankruptcy in November 2002.
NCFE presented a business model to investors and rating agencies that called for NCFE to purchase high-quality accounts receivable from healthcare providers using money NCFE obtained through the sale of asset-backed notes to institutional investors. The evidence at trial showed that NCFE advanced money to health care providers without receipt of the requisite accounts receivable, oftentimes to healthcare providers that were owned in whole or in part by the defendants. The evidence further showed that the defendants lied to investors and rating agencies in order to cover up this fraud.
The evidence at trial showed that NCFE concealed from investors the shortfalls produced by this fraud by moving money back and forth between accounts, fabricating data in investor reports, incorporating false information into the accounting system, and making other false statements to investors and rating agencies. Moreover, the defendants’ compensation was tied to the amount of money they advanced to healthcare providers and those providers’ outstanding balance owed to NCFE. The government presented evidence at trial that showed that the defendants knew that the business model NCFE presented to the investing public differed drastically from the way NCFE did business within its own walls and that NCFE was making up the information contained in monthly investor reports to make it appear as though NCFE was in compliance with its own governing documents.
Defendants face the following maximum penalties: Donald H. Ayers, 55 years in prison and $2.25 million in fines; Rebecca S. Parrett, 75 years in prison and $2.5 million in fines; Randolph H. Speer, 140 years in prison and $4.25 million in fines; Roger S. Faulkenberry, 85 years in prison and $2.5 million in fines; James E. Dierker, 65 years in prison and $1.75 million in fines.
The case was prosecuted by Assistant U.S. Attorney Douglas Squires of the Southern District of Ohio, Senior Trial Attorney Kathleen McGovern and Trial Attorney Wes R. Porter of the Fraud Section, with assistance from Fraud Section Paralegal Specialists Crystal Curry and Sarah Marberg, FBI agents Matt Daly, Ingrid Schmitt, and Tad Morris, IRS Inspectors Greg Ruwe and Mark Bailey, U.S. Postal Inspector Dave Mooney and ICE Agent Celeste Koszut.
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Wednesday, December 31, 2008
In In re National Century Financial Enterprises, Inc. Investment Litigation, Lieff Cabraser serves as Lead Counsel for the New York City Employees' Retirement System, Teachers' Retirement System for the City of New York, New York City Police Pension Fund, and New York City Fire Department Pension Fund in a securities fraud and breach of fiduciary duties lawsuit against Bank One, JPMorgan Chase Bank, Credit Suisse First Boston LLC, and additional defendants.
The complaint charges that plaintiffs suffered $89 million in losses as a result of a massive Ponzi scheme orchestrated and implemented by National Century Financial Enterprises and defendants. To date, the funds have recovered approximately 60% of their losses through settlements and bankruptcy recoveries. Lieff Cabraser continues to prosecute the case against the non-settling defendants.
Likewise, Lieff Cabraser represented Kofuku Bank, Namihaya Bank and Kita Hyogo Shinyo-Kumiai (a credit union) in individual lawsuits against, among others, Martin A. Armstrong and HSBC, Inc., the successor-in-interest to Republic New York Corporation, Republic New York Bank and Republic New York Securities Corporation for alleged violations of federal securities and racketeering laws.
http://www.lieffcabrasersecurities.com/cases/madoff.htm
The complaint charges that plaintiffs suffered $89 million in losses as a result of a massive Ponzi scheme orchestrated and implemented by National Century Financial Enterprises and defendants. To date, the funds have recovered approximately 60% of their losses through settlements and bankruptcy recoveries. Lieff Cabraser continues to prosecute the case against the non-settling defendants.
Likewise, Lieff Cabraser represented Kofuku Bank, Namihaya Bank and Kita Hyogo Shinyo-Kumiai (a credit union) in individual lawsuits against, among others, Martin A. Armstrong and HSBC, Inc., the successor-in-interest to Republic New York Corporation, Republic New York Bank and Republic New York Securities Corporation for alleged violations of federal securities and racketeering laws.
http://www.lieffcabrasersecurities.com/cases/madoff.htm
Monday, December 29, 2008
MISSED THE BIGGER PICTURE FOLKS!!!!
"Happ’s trial is expected to last most of December..."
The ONLY EXECUTIVE TO WALK AWAY....hmmm.....
Really? Funny how that LAST trial went to fast? Did not matter that Happ came from HCA ---RICHARD RAINWATER'S 'pet' Columbia Homecare Group...he dumped those into the Bankruptcy Court 6 mos prior in Western Tennessee's Medshares PONZI SCHEME!!!
What a bunch of CRAP!!!
Monday, December 1, 2008
NCFE’s Happ starts his day in courtBusiness First of Columbus - by Kevin Kemper
The fourth and final criminal trial involving a former executive of National Century Financial Enterprises Inc. began Monday at U.S. District Court in Columbus as lawyers picked jurors to decide the fate of James Happ.
The government has accused Happ of a count each of conspiracy and money laundering conspiracy plus three counts of wire fraud.
He has pleaded not guilty to all of the charges.
The former executive vice president of Dublin-based National Century is standing trial on accusations he was part of an executive-level cabal at the medical financing company that defrauded investors out of $2.84 billion.
Happ’s trial began at 9 a.m. with jury selection, which was expected to last the day. It will be followed by opening arguments from government attorneys and then defense lawyers, likely to begin Tuesday.
Happ becomes the seventh National Century executive to stand trial on fraud charges and the 11th to be charged with crimes. Six other former executives, including company founders Lance Poulsen, Rebecca Parrett and her ex-husband Donald Ayers, were found guilty by juries earlier in the year.
A financier for health-care providers like doctors’ offices and hospitals, National Century’s bread and butter was buying accounts receivable from care providers at a discount, then securitizing the receivables into AAA-rated bonds for sale to investors. At its peak, the company employed more than 350 workers at its office campus in Dublin while recording annual revenue of more than $250 million.
The government has alleged the company collapsed into bankruptcy in 2002 after running a sophisticated pyramid scheme that fell apart.
In addition to purchasing legitimate accounts receivable, the government alleged National Century funded companies owned by its founders without getting receivables in return, effectively making risky unsecured loans with investor cash. The company charged its clients for those advances, the government has said, which inflated National Century’s revenue and generated bonuses for senior executives.
Happ’s trial is expected to last most of December.
The ONLY EXECUTIVE TO WALK AWAY....hmmm.....
Really? Funny how that LAST trial went to fast? Did not matter that Happ came from HCA ---RICHARD RAINWATER'S 'pet' Columbia Homecare Group...he dumped those into the Bankruptcy Court 6 mos prior in Western Tennessee's Medshares PONZI SCHEME!!!
What a bunch of CRAP!!!
Monday, December 1, 2008
NCFE’s Happ starts his day in courtBusiness First of Columbus - by Kevin Kemper
The fourth and final criminal trial involving a former executive of National Century Financial Enterprises Inc. began Monday at U.S. District Court in Columbus as lawyers picked jurors to decide the fate of James Happ.
The government has accused Happ of a count each of conspiracy and money laundering conspiracy plus three counts of wire fraud.
He has pleaded not guilty to all of the charges.
The former executive vice president of Dublin-based National Century is standing trial on accusations he was part of an executive-level cabal at the medical financing company that defrauded investors out of $2.84 billion.
Happ’s trial began at 9 a.m. with jury selection, which was expected to last the day. It will be followed by opening arguments from government attorneys and then defense lawyers, likely to begin Tuesday.
Happ becomes the seventh National Century executive to stand trial on fraud charges and the 11th to be charged with crimes. Six other former executives, including company founders Lance Poulsen, Rebecca Parrett and her ex-husband Donald Ayers, were found guilty by juries earlier in the year.
A financier for health-care providers like doctors’ offices and hospitals, National Century’s bread and butter was buying accounts receivable from care providers at a discount, then securitizing the receivables into AAA-rated bonds for sale to investors. At its peak, the company employed more than 350 workers at its office campus in Dublin while recording annual revenue of more than $250 million.
The government has alleged the company collapsed into bankruptcy in 2002 after running a sophisticated pyramid scheme that fell apart.
In addition to purchasing legitimate accounts receivable, the government alleged National Century funded companies owned by its founders without getting receivables in return, effectively making risky unsecured loans with investor cash. The company charged its clients for those advances, the government has said, which inflated National Century’s revenue and generated bonuses for senior executives.
Happ’s trial is expected to last most of December.
James K Happ...From Columbia HCA to NCFE....NO CONFLICT? NO SALE of Columbia to NCFE...via Bankruptcy Court in Western Tennessee
Wednesday, December 17, 2008
Final National Century exec acquittedBusiness First of Columbus
James Happ will not share his former work colleagues’ fate.
Happ, an accountant and former vice president of servicer operations for Dublin-based National Century Financial Enterprises Inc., has been found not guilty of a count each of conspiracy and money laundering conspiracy and three counts of wire fraud.
A 12-member jury at the U.S. District Court in Columbus returned the verdict Wednesday afternoon after a day-and-a-half of deliberations.
Happ was the seventh former executive from National Century to go to trial and the only one to be acquitted. Six former executives were convicted of fraud and four pleaded guilty. Happ was the eleventh and final National Century employee to face criminal charges.
Happ’s trial began Dec. 1 and ended just two weeks later after his defense attorneys declined to put any witnesses on the stand.
In opening arguments, attorney Craig Gillen told jurors that Happ never had a hand in any wrongdoing at the company.
“Jim Happ never told a lie to any investors. Period,” Gillen said.
Happ stood trial on accusations he was part of an executive-level cabal at the medical financing company that defrauded investors for years. A financier for health-care providers like doctors’ offices and hospitals, National Century’s bread and butter was buying accounts receivable from care providers at a discount, then securitizing the receivables into AAA-rated bonds for sale to investors. At its peak, the company employed more than 350 at its office campus in Dublin while recording annual revenue of more than $250 million.
The government has alleged National Century collapsed after running a sophisticated pyramid scheme that fell apart. In addition to purchasing legitimate accounts receivable, the government alleged National Century funded companies owned by its founders without getting receivables in return, effectively making risky unsecured loans with investor cash. The company charged its clients for those advances, the government has said, which inflated National Century’s revenue and generated bonuses for senior executives.
Government attorneys argued that Happ, as the firm’s chief accountant and head of servicer operations, was responsible for making sure that purchased accounts receivable were eligible. In a July 2007 indictment, the government alleged that Happ improperly advanced as much as $5.4 million to a company owned by NCFE founder Lance Poulsen.
The government also accused Happ of ordering a National Century subordinate to remove safeguards on the company’s computer system relative to a health-care provider he planned to join after leaving National Century.
Final National Century exec acquittedBusiness First of Columbus
James Happ will not share his former work colleagues’ fate.
Happ, an accountant and former vice president of servicer operations for Dublin-based National Century Financial Enterprises Inc., has been found not guilty of a count each of conspiracy and money laundering conspiracy and three counts of wire fraud.
A 12-member jury at the U.S. District Court in Columbus returned the verdict Wednesday afternoon after a day-and-a-half of deliberations.
Happ was the seventh former executive from National Century to go to trial and the only one to be acquitted. Six former executives were convicted of fraud and four pleaded guilty. Happ was the eleventh and final National Century employee to face criminal charges.
Happ’s trial began Dec. 1 and ended just two weeks later after his defense attorneys declined to put any witnesses on the stand.
In opening arguments, attorney Craig Gillen told jurors that Happ never had a hand in any wrongdoing at the company.
“Jim Happ never told a lie to any investors. Period,” Gillen said.
Happ stood trial on accusations he was part of an executive-level cabal at the medical financing company that defrauded investors for years. A financier for health-care providers like doctors’ offices and hospitals, National Century’s bread and butter was buying accounts receivable from care providers at a discount, then securitizing the receivables into AAA-rated bonds for sale to investors. At its peak, the company employed more than 350 at its office campus in Dublin while recording annual revenue of more than $250 million.
The government has alleged National Century collapsed after running a sophisticated pyramid scheme that fell apart. In addition to purchasing legitimate accounts receivable, the government alleged National Century funded companies owned by its founders without getting receivables in return, effectively making risky unsecured loans with investor cash. The company charged its clients for those advances, the government has said, which inflated National Century’s revenue and generated bonuses for senior executives.
Government attorneys argued that Happ, as the firm’s chief accountant and head of servicer operations, was responsible for making sure that purchased accounts receivable were eligible. In a July 2007 indictment, the government alleged that Happ improperly advanced as much as $5.4 million to a company owned by NCFE founder Lance Poulsen.
The government also accused Happ of ordering a National Century subordinate to remove safeguards on the company’s computer system relative to a health-care provider he planned to join after leaving National Century.
Wednesday, December 24, 2008
Go back to Grasso ....
SEC Chief Defends His Restraint
Cox Rebuffs Criticism of Leadership During Crisis
By Amit R. Paley and David S. Hilzenrath
Washington Post Staff Writers
Wednesday, December 24, 2008; Page A01
Christopher Cox, the embattled chairman of the Securities and Exchange Commission, is defending his restrained approach to the financial crisis, saying he has provided steady leadership as Wall Street's main regulator at a time when other federal regulators have responded precipitously to upheaval in the markets.
During his tenure, the SEC has watched as all the investment banks it oversaw collapsed, were swallowed up or got out of their traditional line of business. The agency, meanwhile, was on the sidelines while the Treasury Department and Federal Reserve worked to bail out the financial sector. And the SEC, by its own admission, failed to detect an alleged $50 billion fraud by Bernard L. Madoff that may be the largest Ponzi scheme in history.
But in his first interview since the Madoff scandal broke, Cox said he was not responsible for the agency's failure to detect the alleged fraud and that he had responded properly to the broader financial crisis given the information he had. Confronted with a barrage of criticism from lawmakers, former officials and even some of his staff, Cox said he took pride in his measured response to the market turmoil.
"What we have done in this current turmoil is stay calm, which has been our greatest contribution -- not being impulsive, not changing the rules willy-nilly, but going through a very professional and orderly process that takes into account unintended consequences and gives ample notice to market participants," Cox said. This caution, he added, "has really been a signal achievement for the SEC."
Taking a swipe at the shifting response of the Treasury and Fed in addressing the financial crisis, he said: "When these gale-force winds hit our markets, there were panicked cries to change any and every rule of the marketplace: 'Let's try this. Let's try that.' What was needed was a steady hand."
Cox said the biggest mistake of his tenure was agreeing in September to an extraordinary three-week ban on short selling of financial company stocks. But in publicly acknowledging for the first time that this ban was not productive, Cox said he had been under intense pressure from Treasury Secretary Henry M. Paulson Jr. and Fed Chairman Ben S. Bernanke to take this action and did so reluctantly. They "were of the view that if we did not act and act at that instant, these financial institutions could fail as a result and there would be nothing left to save," Cox said.
Although Cox speaks of staying calm in the face of financial turmoil, lawmakers across the political spectrum counter that this is actually another way of saying that his agency remained passive during the worst global financial crisis in decades. And they say that Cox's stewardship before this year -- focusing on deregulation as the agency's staff shrank -- laid the groundwork for the meltdown.
"The commission in recent years has handcuffed the inspection and enforcement division," said Arthur Levitt, SEC chairman during the Clinton administration. "The environment was not conducive to proactive enforcement activity."
Cox, 56, a former Republican congressman from California, became chairman in mid-2005 and plans to step down early next year before his full five-year term expires. President-elect Barack Obama has nominated Mary L. Schapiro, a former SEC commissioner, to replace him.
In a 90-minute conversation in his 10th-floor corner office last week, Cox said the SEC's emphasis on enforcement is as strong as ever. "We've done everything we can during the last several years in the agency to make sure that people understand there's a strong market cop on the beat," he said.
"That's why Madoff is such a big asterisk," he added. "The case is very troubling for that reason. It's what the SEC's good at. And it's inexplicable."
Cox argued that the agency has carefully defined responsibilities and that it was unfair to blame it for every problem on Wall Street.
"The public might not understand that that wasn't the SEC's job," he said, adding that the agency was not responsible for preventing investment banks from collapsing but rather for sheltering their securities trading units from problems in the broader corporation. "The SEC is not a safety and soundness regulator," he said.
Cox said that when he first took office he emphasized the importance of simplifying the rulemaking process and increasing transparency. Outside experts say he has succeeded.
"He's made it lot easier for the public to get information and made strong attempts at better disclosure," said Lee A. Pickard, a former director of the SEC's division of market regulation. "He unfortunately has had a couple of hurricanes that have evolved on this watch, like the credit crisis and the Bernie Madoff situation. But I'm not sure you can point to him as responsible for either one of those."
But former officials said enforcement has suffered during his tenure. A pilot program begun last year required enforcement staff to meet with the commissioners before beginning settlement talks in certain cases involving non-financial firms. Some former officials said the change was just one example of new bureaucratic impediments that slowed enforcement work. The commissioners also made clear that they thought staff members were being too aggressive in some cases, the officials said.
"I think there has been a sentiment communicated to rank-and-file staff, lawyers and accountants that you don't go after the establishment," said Ross Albert, a former special counsel in the enforcement division.
Another staffing shift was underway at the Office of Risk Assessment, formed by Cox's predecessor, William H. Donaldson, to spot emerging problems in the financial markets. But under Cox, the office, which once had slots for seven people, eventually dwindled to just one. "That office withered away," said Bruce Carton, a former SEC enforcement lawyer. "It died on the vine under Cox."
The agency's overall staff also began to drop during Cox's tenure, to 3,442 full-time employees in fiscal 2008 from 3,773 in fiscal 2005, according to agency data. The agency's budget over that time has increased 2 percent, to $906 million from $888 million, an amount that the National Treasury Employees Union, which represents SEC staff, says is far too small.
"There just hasn't been enough resources or staffing over the years for the SEC to oversee the number of companies it is responsible for," said Colleen M. Kelley, the union's president. "Cox needs to take responsibility that he failed as the leader of the agency to ask for what was needed."
SEC officials said the staffing cuts were required to stay within the constraints of the budgets approved by Congress.
Cox defended his record on enforcement and risk assessment. His aides said that risk assessment is done by staff spread throughout the agency and that the total number focused on it over Cox's tenure has increased from 26 to 37 people. He also said that the 671 enforcement actions brought last year was the second-highest number in the agency's history.
While the statistics look good, former SEC general counsel Ralph Ferrara said, "they put a huge bottleneck in the ability of that enforcement division to function. Cases would linger for months or years because they didn't have the guidance to get the cases done." Ferrara, now a partner with Dewey & LeBouef, added that the enforcement division "was roped to the ground like Gulliver by the Lilliputians."
An analysis by law firm Morgan, Lewis & Bockius, however, showed that the SEC's actions against broker-dealers, who serve as middlemen in financial trades, actually dropped about 33 percent, to 60 cases in fiscal 2008 from about 89 cases in fiscal 2007.
"In one of its core areas -- regulation of Wall Street firms -- its caseload was down significantly," said Ben A. Indek, a securities lawyer at the firm.
Under Cox, the SEC has taken particular heat for its oversight of the five major investment banks -- all finance titans synonymous with Wall Street.
It became the agency's responsibility to monitor them for financial and operational weaknesses under a program set up before Cox's tenure, but under his watch they got into such trouble that today they no longer exist as investment banks. Bear Stearns and Lehman Brothers failed, Merrill Lynch had to be taken over, and Goldman Sachs and Morgan Stanley converted themselves into bank holding companies.
The March collapse of Bear Stearns illustrated an array of agency shortcomings, according to a review by the SEC's inspector general. He concluded that agency officials had been aware of "numerous potential red flags" at Bear Stearns "but did not take actions to limit these risk factors."
"It is undisputable," the inspector general concluded, that the "program failed to carry out its mission in its oversight of Bear Stearns."
The SEC was aware that the firm's exposure to mortgage securities exceeded its internal limits and represented a significant risk, but the agency made no effort to reduce that exposure, the report found. The agency also knew about but failed to adequately address various weaknesses in Bear Stearns's management of mortgage risk, such as a lack of expertise, persistent understaffing and an apparent lack of independence between risk managers and traders. In violation of an SEC rule, agency officials also allowed Bear Stearns and other investment banks to entrust critical checks and balances to internal, rather than outside auditors, the report found.
Cox shut down the oversight program this year. "This voluntary regulation of investment bank holding companies was flawed from the inception," he said. Instead, he went to Congress and asked for the explicit authority to regulate investment bank holding companies. In the interview, he said he wished he had gone to Congress earlier to get the authority.
Outside securities experts and government officials said they were surprised this year to see the SEC and Cox on the sidelines after Bear Stearns collapsed in March and Lehman Brothers failed in September.
Treasury and Fed officials viewed Cox and his staff as nonplayers who had failed to foresee the brewing problems, according to people who were involved in those efforts but spoke on condition of anonymity because of the sensitivity of the matter. They said Cox was often brought in for consultation only after major decisions had been made by Treasury and Fed officials.
Cox said it was natural that the SEC would have less of a role once it became necessary to bail out the firms. "We don't have macroeconomic levers," he said. "That's not what we do."
At the moment, the agency's biggest problem is the Madoff scandal, Cox said. Last week, Cox ordered an internal investigation into the agency's failures to uncover fraud at Madoff's investment advisory firm despite multiple warnings.
Cox has declined to talk about the specifics of the investigation. He has said that concerns about Madoff's activities were never presented to the commissioners.
When Cox was asked whether he should be blamed for a culture of lax enforcement that allowed multiple warnings about the fraud to go undetected, he said: "Absolutely not. In fact, it's in the DNA here that people thrive on bringing big cases."
Staff writers Binyamin Appelbaum and Neil Irwin contributed to this report.
Cox Rebuffs Criticism of Leadership During Crisis
By Amit R. Paley and David S. Hilzenrath
Washington Post Staff Writers
Wednesday, December 24, 2008; Page A01
Christopher Cox, the embattled chairman of the Securities and Exchange Commission, is defending his restrained approach to the financial crisis, saying he has provided steady leadership as Wall Street's main regulator at a time when other federal regulators have responded precipitously to upheaval in the markets.
During his tenure, the SEC has watched as all the investment banks it oversaw collapsed, were swallowed up or got out of their traditional line of business. The agency, meanwhile, was on the sidelines while the Treasury Department and Federal Reserve worked to bail out the financial sector. And the SEC, by its own admission, failed to detect an alleged $50 billion fraud by Bernard L. Madoff that may be the largest Ponzi scheme in history.
But in his first interview since the Madoff scandal broke, Cox said he was not responsible for the agency's failure to detect the alleged fraud and that he had responded properly to the broader financial crisis given the information he had. Confronted with a barrage of criticism from lawmakers, former officials and even some of his staff, Cox said he took pride in his measured response to the market turmoil.
"What we have done in this current turmoil is stay calm, which has been our greatest contribution -- not being impulsive, not changing the rules willy-nilly, but going through a very professional and orderly process that takes into account unintended consequences and gives ample notice to market participants," Cox said. This caution, he added, "has really been a signal achievement for the SEC."
Taking a swipe at the shifting response of the Treasury and Fed in addressing the financial crisis, he said: "When these gale-force winds hit our markets, there were panicked cries to change any and every rule of the marketplace: 'Let's try this. Let's try that.' What was needed was a steady hand."
Cox said the biggest mistake of his tenure was agreeing in September to an extraordinary three-week ban on short selling of financial company stocks. But in publicly acknowledging for the first time that this ban was not productive, Cox said he had been under intense pressure from Treasury Secretary Henry M. Paulson Jr. and Fed Chairman Ben S. Bernanke to take this action and did so reluctantly. They "were of the view that if we did not act and act at that instant, these financial institutions could fail as a result and there would be nothing left to save," Cox said.
Although Cox speaks of staying calm in the face of financial turmoil, lawmakers across the political spectrum counter that this is actually another way of saying that his agency remained passive during the worst global financial crisis in decades. And they say that Cox's stewardship before this year -- focusing on deregulation as the agency's staff shrank -- laid the groundwork for the meltdown.
"The commission in recent years has handcuffed the inspection and enforcement division," said Arthur Levitt, SEC chairman during the Clinton administration. "The environment was not conducive to proactive enforcement activity."
Cox, 56, a former Republican congressman from California, became chairman in mid-2005 and plans to step down early next year before his full five-year term expires. President-elect Barack Obama has nominated Mary L. Schapiro, a former SEC commissioner, to replace him.
In a 90-minute conversation in his 10th-floor corner office last week, Cox said the SEC's emphasis on enforcement is as strong as ever. "We've done everything we can during the last several years in the agency to make sure that people understand there's a strong market cop on the beat," he said.
"That's why Madoff is such a big asterisk," he added. "The case is very troubling for that reason. It's what the SEC's good at. And it's inexplicable."
Cox argued that the agency has carefully defined responsibilities and that it was unfair to blame it for every problem on Wall Street.
"The public might not understand that that wasn't the SEC's job," he said, adding that the agency was not responsible for preventing investment banks from collapsing but rather for sheltering their securities trading units from problems in the broader corporation. "The SEC is not a safety and soundness regulator," he said.
Cox said that when he first took office he emphasized the importance of simplifying the rulemaking process and increasing transparency. Outside experts say he has succeeded.
"He's made it lot easier for the public to get information and made strong attempts at better disclosure," said Lee A. Pickard, a former director of the SEC's division of market regulation. "He unfortunately has had a couple of hurricanes that have evolved on this watch, like the credit crisis and the Bernie Madoff situation. But I'm not sure you can point to him as responsible for either one of those."
But former officials said enforcement has suffered during his tenure. A pilot program begun last year required enforcement staff to meet with the commissioners before beginning settlement talks in certain cases involving non-financial firms. Some former officials said the change was just one example of new bureaucratic impediments that slowed enforcement work. The commissioners also made clear that they thought staff members were being too aggressive in some cases, the officials said.
"I think there has been a sentiment communicated to rank-and-file staff, lawyers and accountants that you don't go after the establishment," said Ross Albert, a former special counsel in the enforcement division.
Another staffing shift was underway at the Office of Risk Assessment, formed by Cox's predecessor, William H. Donaldson, to spot emerging problems in the financial markets. But under Cox, the office, which once had slots for seven people, eventually dwindled to just one. "That office withered away," said Bruce Carton, a former SEC enforcement lawyer. "It died on the vine under Cox."
The agency's overall staff also began to drop during Cox's tenure, to 3,442 full-time employees in fiscal 2008 from 3,773 in fiscal 2005, according to agency data. The agency's budget over that time has increased 2 percent, to $906 million from $888 million, an amount that the National Treasury Employees Union, which represents SEC staff, says is far too small.
"There just hasn't been enough resources or staffing over the years for the SEC to oversee the number of companies it is responsible for," said Colleen M. Kelley, the union's president. "Cox needs to take responsibility that he failed as the leader of the agency to ask for what was needed."
SEC officials said the staffing cuts were required to stay within the constraints of the budgets approved by Congress.
Cox defended his record on enforcement and risk assessment. His aides said that risk assessment is done by staff spread throughout the agency and that the total number focused on it over Cox's tenure has increased from 26 to 37 people. He also said that the 671 enforcement actions brought last year was the second-highest number in the agency's history.
While the statistics look good, former SEC general counsel Ralph Ferrara said, "they put a huge bottleneck in the ability of that enforcement division to function. Cases would linger for months or years because they didn't have the guidance to get the cases done." Ferrara, now a partner with Dewey & LeBouef, added that the enforcement division "was roped to the ground like Gulliver by the Lilliputians."
An analysis by law firm Morgan, Lewis & Bockius, however, showed that the SEC's actions against broker-dealers, who serve as middlemen in financial trades, actually dropped about 33 percent, to 60 cases in fiscal 2008 from about 89 cases in fiscal 2007.
"In one of its core areas -- regulation of Wall Street firms -- its caseload was down significantly," said Ben A. Indek, a securities lawyer at the firm.
Under Cox, the SEC has taken particular heat for its oversight of the five major investment banks -- all finance titans synonymous with Wall Street.
It became the agency's responsibility to monitor them for financial and operational weaknesses under a program set up before Cox's tenure, but under his watch they got into such trouble that today they no longer exist as investment banks. Bear Stearns and Lehman Brothers failed, Merrill Lynch had to be taken over, and Goldman Sachs and Morgan Stanley converted themselves into bank holding companies.
The March collapse of Bear Stearns illustrated an array of agency shortcomings, according to a review by the SEC's inspector general. He concluded that agency officials had been aware of "numerous potential red flags" at Bear Stearns "but did not take actions to limit these risk factors."
"It is undisputable," the inspector general concluded, that the "program failed to carry out its mission in its oversight of Bear Stearns."
The SEC was aware that the firm's exposure to mortgage securities exceeded its internal limits and represented a significant risk, but the agency made no effort to reduce that exposure, the report found. The agency also knew about but failed to adequately address various weaknesses in Bear Stearns's management of mortgage risk, such as a lack of expertise, persistent understaffing and an apparent lack of independence between risk managers and traders. In violation of an SEC rule, agency officials also allowed Bear Stearns and other investment banks to entrust critical checks and balances to internal, rather than outside auditors, the report found.
Cox shut down the oversight program this year. "This voluntary regulation of investment bank holding companies was flawed from the inception," he said. Instead, he went to Congress and asked for the explicit authority to regulate investment bank holding companies. In the interview, he said he wished he had gone to Congress earlier to get the authority.
Outside securities experts and government officials said they were surprised this year to see the SEC and Cox on the sidelines after Bear Stearns collapsed in March and Lehman Brothers failed in September.
Treasury and Fed officials viewed Cox and his staff as nonplayers who had failed to foresee the brewing problems, according to people who were involved in those efforts but spoke on condition of anonymity because of the sensitivity of the matter. They said Cox was often brought in for consultation only after major decisions had been made by Treasury and Fed officials.
Cox said it was natural that the SEC would have less of a role once it became necessary to bail out the firms. "We don't have macroeconomic levers," he said. "That's not what we do."
At the moment, the agency's biggest problem is the Madoff scandal, Cox said. Last week, Cox ordered an internal investigation into the agency's failures to uncover fraud at Madoff's investment advisory firm despite multiple warnings.
Cox has declined to talk about the specifics of the investigation. He has said that concerns about Madoff's activities were never presented to the commissioners.
When Cox was asked whether he should be blamed for a culture of lax enforcement that allowed multiple warnings about the fraud to go undetected, he said: "Absolutely not. In fact, it's in the DNA here that people thrive on bringing big cases."
Staff writers Binyamin Appelbaum and Neil Irwin contributed to this report.
Monday, December 22, 2008
Fortune's 1999 list of the 50 most powerful women.....CREATOR of DIP FInanace
Moore -- president of the private investment firm Rainwater Inc. -- was recently named to Fortune's 1999 list of the 50 most powerful women. Along the way she has notched three different careers and earned such distinctions as "the queen of DIP" (debtor-in-possession financing, which Moore pioneered during her highly successful tenure at Chemical Bank), "the toughest babe in business" (emblazoned on a Fortune magazine cover story), and "the best investment I ever made" (attributed to husband Richard Rainwater).
Sunday, December 21, 2008
E. Stanley O’Neal, the former chief executive of Merrill Lynch, was paid $46 million in 2006, $18.5 million of it in cash.
By LOUISE STORY
Ben White contributed reporting.
Published: December 17, 2008
“As a result of the extraordinary growth at Merrill during my tenure as C.E.O., the board saw fit to increase my compensation each year.”
E. Stanley O’Neal, the former chief executive of Merrill Lynch, March 2008
For Dow Kim, 2006 was a very good year. While his salary at Merrill Lynch was $350,000, his total compensation was 100 times that — $35 million.
The difference between the two amounts was his bonus, a rich reward for the robust earnings made by the traders he oversaw in Merrill’s mortgage business.
Mr. Kim’s colleagues, not only at his level, but far down the ranks, also pocketed large paychecks. In all, Merrill handed out $5 billion to $6 billion in bonuses that year. A 20-something analyst with a base salary of $130,000 collected a bonus of $250,000. And a 30-something trader with a $180,000 salary got $5 million.
But Merrill’s record earnings in 2006 — $7.5 billion — turned out to be a mirage. The company has since lost three times that amount, largely because the mortgage investments that supposedly had powered some of those profits plunged in value.
Unlike the earnings, however, the bonuses have not been reversed.
As regulators and shareholders sift through the rubble of the financial crisis, questions are being asked about what role lavish bonuses played in the debacle. Scrutiny over pay is intensifying as banks like Merrill prepare to dole out bonuses even after they have had to be propped up with billions of dollars of taxpayers’ money. While bonuses are expected to be half of what they were a year ago, some bankers could still collect millions of dollars.
Critics say bonuses never should have been so big in the first place, because they were based on ephemeral earnings. These people contend that Wall Street’s pay structure, in which bonuses are based on short-term profits, encouraged employees to act like gamblers at a casino — and let them collect their winnings while the roulette wheel was still spinning.
“Compensation was flawed top to bottom,” said Lucian A. Bebchuk, a professor at Harvard Law School and an expert on compensation. “The whole organization was responding to distorted incentives.”
Even Wall Streeters concede they were dazzled by the money. To earn bigger bonuses, many traders ignored or played down the risks they took until their bonuses were paid. Their bosses often turned a blind eye because it was in their interest as well.
“That’s a call that senior management or risk management should question, but of course their pay was tied to it too,” said Brian Lin, a former mortgage trader at Merrill Lynch.
The highest-ranking executives at four firms have agreed under pressure to go without their bonuses, including John A. Thain, who initially wanted a bonus this year since he joined Merrill Lynch as chief executive after its ill-fated mortgage bets were made. And four former executives at one hard-hit bank, UBS of Switzerland, recently volunteered to return some of the bonuses they were paid before the financial crisis. But few think others on Wall Street will follow that lead.
For now, most banks are looking forward rather than backward. Morgan Stanley and UBS are attaching new strings to bonuses, allowing them to pull back part of workers’ payouts if they turn out to have been based on illusory profits. Those policies, had they been in place in recent years, might have clawed back hundreds of millions of dollars of compensation paid out in 2006 to employees at all levels, including senior executives who are still at those banks.
A Bonus Bonanza
For Wall Street, much of this decade represented a new Gilded Age. Salaries were merely play money — a pittance compared to bonuses. Bonus season became an annual celebration of the riches to be had in the markets. That was especially so in the New York area, where nearly $1 out of every $4 that companies paid employees last year went to someone in the financial industry. Bankers celebrated with five-figure dinners, vied to outspend each other at charity auctions and spent their newfound fortunes on new homes, cars and art.
The bonanza redefined success for an entire generation. Graduates of top universities sought their fortunes in banking, rather than in careers like medicine, engineering or teaching. Wall Street worked its rookies hard, but it held out the promise of rich rewards. In college dorms, tales of 30-year-olds pulling down $5 million a year were legion.
While top executives received the biggest bonuses, what is striking is how many employees throughout the ranks took home large paychecks. On Wall Street, the first goal was to make “a buck” — a million dollars. More than 100 people in Merrill’s bond unit alone broke the million-dollar mark in 2006. Goldman Sachs paid more than $20 million apiece to more than 50 people that year, according to a person familiar with the matter. Goldman declined to comment.
Pay was tied to profit, and profit to the easy, borrowed money that could be invested in markets like mortgage securities. As the financial industry’s role in the economy grew, workers’ pay ballooned, leaping sixfold since 1975, nearly twice as much as the increase in pay for the average American worker.
“The financial services industry was in a bubble," said Mark Zandi, chief economist at Moody’s Economy.com. “The industry got a bigger share of the economic pie.”
A Money Machine
Dow Kim stepped into this milieu in the mid-1980s, fresh from the Wharton School at the University of Pennsylvania. Born in Seoul and raised there and in Singapore, Mr. Kim moved to the United States at 16 to attend Phillips Academy in Andover, Mass. A quiet workaholic in an industry of workaholics, he seemed to rise through the ranks by sheer will. After a stint trading bonds in Tokyo, he moved to New York to oversee Merrill’s fixed-income business in 2001. Two years later, he became co-president.
Even as tremors began to reverberate through the housing market and his own company, Mr. Kim exuded optimism.
After several of his key deputies left the firm in the summer of 2006, he appointed a former colleague from Asia, Osman Semerci, as his deputy, and beneath Mr. Semerci he installed Dale M. Lattanzio and Douglas J. Mallach. Mr. Lattanzio promptly purchased a $5 million home, as well as oceanfront property in Mantoloking, a wealthy enclave in New Jersey, according to county records.
Merrill and the executives in this article declined to comment or say whether they would return past bonuses. Mr. Mallach did not return telephone calls.
Mr. Semerci, Mr. Lattanzio and Mr. Mallach joined Mr. Kim as Merrill entered a new phase in its mortgage buildup. That September, the bank spent $1.3 billion to buy the First Franklin Financial Corporation, a mortgage lender in California, in part so it could bundle its mortgages into lucrative bonds.
Yet Mr. Kim was growing restless. That same month, he told E. Stanley O’Neal, Merrill’s chief executive, that he was considering starting his own hedge fund. His traders were stunned. But Mr. O’Neal persuaded Mr. Kim to stay, assuring him that the future was bright for Merrill’s mortgage business, and, by extension, for Mr. Kim.
Mr. Kim stepped to the lectern on the bond trading floor and told his anxious traders that he was not going anywhere, and that business was looking up, according to four former employees who were there. The traders erupted in applause.
“No one wanted to stop this thing,” said former mortgage analyst at Merrill. “It was a machine, and we all knew it was going to be a very, very good year.”
Merrill Lynch celebrated its success even before the year was over. In November, the company hosted a three-day golf tournament at Pebble Beach, Calif.
Mr. Kim, an avid golfer, played alongside William H. Gross, a founder of Pimco, the big bond house; and Ralph R. Cioffi, who oversaw two Bear Stearns hedge funds whose subsequent collapse in 2007 would send shock waves through the financial world.
“There didn’t seem to be an end in sight,” said a person who attended the tournament.
Back in New York, Mr. Kim’s team was eagerly bundling risky home mortgages into bonds. One of the last deals they put together that year was called “Costa Bella,” or beautiful coast — a name that recalls Pebble Beach. The $500 million bundle of loans, a type of investment known as a collateralized debt obligation, was managed by Mr. Gross’s Pimco.
Merrill Lynch collected about $5 million in fees for concocting Costa Bella, which included mortgages originated by First Franklin.
But Costa Bella, like so many other C.D.O.’s, was filled with loans that borrowers could not repay. Initially part of it was rated AAA, but Costa Bella is now deeply troubled. The losses on the investment far exceed the money Merrill collected for putting the deal together.
So Much for So Few
By the time Costa Bella ran into trouble, the Merrill bankers who had devised it had collected their bonuses for 2006. Mr. Kim’s fixed-income unit generated more than half of Merrill’s revenue that year, according to people with direct knowledge of the matter. As a reward, Mr. O’Neal and Mr. Kim paid nearly a third of Merrill’s $5 billion to $6 billion bonus pool to the 2,000 professionals in the division.
Mr. O’Neal himself was paid $46 million, according to Equilar, an executive compensation research firm and data provider in California. Mr. Kim received $35 million. About 57 percent of their pay was in stock, which would lose much of its value over the next two years, but even the cash portions of their bonus were generous: $18.5 million for Mr. O’Neal, and $14.5 million for Mr. Kim, according to Equilar.
Mr. Kim and his deputies were given wide discretion about how to dole out their pot of money. Mr. Semerci was among the highest earners in 2006, at more than $20 million. Below him, Mr. Mallach and Mr. Lattanzio each earned more than $10 million. They were among just over 100 people who accounted for some $500 million of the pool, according to people with direct knowledge of the matter.
After that blowout, Merrill pushed even deeper into the mortgage business, despite growing signs that the housing bubble was starting to burst. That decision proved disastrous. As the problems in the subprime mortgage market exploded into a full-blown crisis, the value of Merrill’s investments plummeted. The firm has since written down its investments by more than $54 billion, selling some of them for pennies on the dollar.
Mr. Lin, the former Merrill trader, arrived late to the party. He was one of the last people hired onto Merrill’s mortgage desk, in the summer of 2007. Even then, Merrill guaranteed Mr. Lin a bonus if he joined the firm. Mr. Lin would not disclose his bonus, but such payouts were often in the seven figures.
Mr. Lin said he quickly noticed that traders across Wall Street were reluctant to admit what now seems so obvious: Their mortgage investments were worth far less than they had thought.
“It’s always human nature,” said Mr. Lin, who lost his job at Merrill last summer and now works at RRMS Advisors, a consulting firm that advises investors in troubled mortgage investments. “You want to pull for the market to do well because you’re vested.”
But critics question why Wall Street embraced the risky deals even as the housing and mortgage markets began to weaken.
“What happened to their investments was of no interest to them, because they would already be paid,” said Paul Hodgson, senior research associate at the Corporate Library, a shareholder activist group. Some Wall Street executives argue that paying a larger portion of bonuses in the form of stock, rather than in cash, might keep employees from making short-sighted decision. But Mr. Hodgson contended that would not go far enough, in part because the cash rewards alone were so high. Mr. Kim, for example, was paid a total of $116.6 million in cash and stock from 2001 to 2007. Of that, $55 million was in cash, according to Equilar.
Leaving the Scene
As the damage at Merrill became clear in 2007, Mr. Kim, his deputies and finally Mr. O’Neal left the firm. Mr. Kim opened a hedge fund, but it quickly closed. Mr. Semerci and Mr. Lattanzio landed at a hedge fund in London.
All three departed without collecting bonuses in 2007. Mr. O’Neal, however, got even richer by leaving Merrill Lynch. He was awarded an exit package worth $161 million.
Clawing back the 2006 bonuses at Merrill would not come close to making up for the company’s losses, which exceed all the profits that the firm earned over the previous 20 years. This fall, the once-proud firm was sold to Bank of America, ending its 94-year history as an independent firm.
Mr. Bebchuk of Harvard Law School said investment banks like Merrill were brought to their knees because their employees chased after the rich rewards that executives promised them.
“They were trying to get as much of this or that paper, they were doing it with excitement and vigor, and that was because they knew they would be making huge amounts of money by the end of the year,” he said.
Ben White contributed reporting.
Published: December 17, 2008
“As a result of the extraordinary growth at Merrill during my tenure as C.E.O., the board saw fit to increase my compensation each year.”
E. Stanley O’Neal, the former chief executive of Merrill Lynch, March 2008
For Dow Kim, 2006 was a very good year. While his salary at Merrill Lynch was $350,000, his total compensation was 100 times that — $35 million.
The difference between the two amounts was his bonus, a rich reward for the robust earnings made by the traders he oversaw in Merrill’s mortgage business.
Mr. Kim’s colleagues, not only at his level, but far down the ranks, also pocketed large paychecks. In all, Merrill handed out $5 billion to $6 billion in bonuses that year. A 20-something analyst with a base salary of $130,000 collected a bonus of $250,000. And a 30-something trader with a $180,000 salary got $5 million.
But Merrill’s record earnings in 2006 — $7.5 billion — turned out to be a mirage. The company has since lost three times that amount, largely because the mortgage investments that supposedly had powered some of those profits plunged in value.
Unlike the earnings, however, the bonuses have not been reversed.
As regulators and shareholders sift through the rubble of the financial crisis, questions are being asked about what role lavish bonuses played in the debacle. Scrutiny over pay is intensifying as banks like Merrill prepare to dole out bonuses even after they have had to be propped up with billions of dollars of taxpayers’ money. While bonuses are expected to be half of what they were a year ago, some bankers could still collect millions of dollars.
Critics say bonuses never should have been so big in the first place, because they were based on ephemeral earnings. These people contend that Wall Street’s pay structure, in which bonuses are based on short-term profits, encouraged employees to act like gamblers at a casino — and let them collect their winnings while the roulette wheel was still spinning.
“Compensation was flawed top to bottom,” said Lucian A. Bebchuk, a professor at Harvard Law School and an expert on compensation. “The whole organization was responding to distorted incentives.”
Even Wall Streeters concede they were dazzled by the money. To earn bigger bonuses, many traders ignored or played down the risks they took until their bonuses were paid. Their bosses often turned a blind eye because it was in their interest as well.
“That’s a call that senior management or risk management should question, but of course their pay was tied to it too,” said Brian Lin, a former mortgage trader at Merrill Lynch.
The highest-ranking executives at four firms have agreed under pressure to go without their bonuses, including John A. Thain, who initially wanted a bonus this year since he joined Merrill Lynch as chief executive after its ill-fated mortgage bets were made. And four former executives at one hard-hit bank, UBS of Switzerland, recently volunteered to return some of the bonuses they were paid before the financial crisis. But few think others on Wall Street will follow that lead.
For now, most banks are looking forward rather than backward. Morgan Stanley and UBS are attaching new strings to bonuses, allowing them to pull back part of workers’ payouts if they turn out to have been based on illusory profits. Those policies, had they been in place in recent years, might have clawed back hundreds of millions of dollars of compensation paid out in 2006 to employees at all levels, including senior executives who are still at those banks.
A Bonus Bonanza
For Wall Street, much of this decade represented a new Gilded Age. Salaries were merely play money — a pittance compared to bonuses. Bonus season became an annual celebration of the riches to be had in the markets. That was especially so in the New York area, where nearly $1 out of every $4 that companies paid employees last year went to someone in the financial industry. Bankers celebrated with five-figure dinners, vied to outspend each other at charity auctions and spent their newfound fortunes on new homes, cars and art.
The bonanza redefined success for an entire generation. Graduates of top universities sought their fortunes in banking, rather than in careers like medicine, engineering or teaching. Wall Street worked its rookies hard, but it held out the promise of rich rewards. In college dorms, tales of 30-year-olds pulling down $5 million a year were legion.
While top executives received the biggest bonuses, what is striking is how many employees throughout the ranks took home large paychecks. On Wall Street, the first goal was to make “a buck” — a million dollars. More than 100 people in Merrill’s bond unit alone broke the million-dollar mark in 2006. Goldman Sachs paid more than $20 million apiece to more than 50 people that year, according to a person familiar with the matter. Goldman declined to comment.
Pay was tied to profit, and profit to the easy, borrowed money that could be invested in markets like mortgage securities. As the financial industry’s role in the economy grew, workers’ pay ballooned, leaping sixfold since 1975, nearly twice as much as the increase in pay for the average American worker.
“The financial services industry was in a bubble," said Mark Zandi, chief economist at Moody’s Economy.com. “The industry got a bigger share of the economic pie.”
A Money Machine
Dow Kim stepped into this milieu in the mid-1980s, fresh from the Wharton School at the University of Pennsylvania. Born in Seoul and raised there and in Singapore, Mr. Kim moved to the United States at 16 to attend Phillips Academy in Andover, Mass. A quiet workaholic in an industry of workaholics, he seemed to rise through the ranks by sheer will. After a stint trading bonds in Tokyo, he moved to New York to oversee Merrill’s fixed-income business in 2001. Two years later, he became co-president.
Even as tremors began to reverberate through the housing market and his own company, Mr. Kim exuded optimism.
After several of his key deputies left the firm in the summer of 2006, he appointed a former colleague from Asia, Osman Semerci, as his deputy, and beneath Mr. Semerci he installed Dale M. Lattanzio and Douglas J. Mallach. Mr. Lattanzio promptly purchased a $5 million home, as well as oceanfront property in Mantoloking, a wealthy enclave in New Jersey, according to county records.
Merrill and the executives in this article declined to comment or say whether they would return past bonuses. Mr. Mallach did not return telephone calls.
Mr. Semerci, Mr. Lattanzio and Mr. Mallach joined Mr. Kim as Merrill entered a new phase in its mortgage buildup. That September, the bank spent $1.3 billion to buy the First Franklin Financial Corporation, a mortgage lender in California, in part so it could bundle its mortgages into lucrative bonds.
Yet Mr. Kim was growing restless. That same month, he told E. Stanley O’Neal, Merrill’s chief executive, that he was considering starting his own hedge fund. His traders were stunned. But Mr. O’Neal persuaded Mr. Kim to stay, assuring him that the future was bright for Merrill’s mortgage business, and, by extension, for Mr. Kim.
Mr. Kim stepped to the lectern on the bond trading floor and told his anxious traders that he was not going anywhere, and that business was looking up, according to four former employees who were there. The traders erupted in applause.
“No one wanted to stop this thing,” said former mortgage analyst at Merrill. “It was a machine, and we all knew it was going to be a very, very good year.”
Merrill Lynch celebrated its success even before the year was over. In November, the company hosted a three-day golf tournament at Pebble Beach, Calif.
Mr. Kim, an avid golfer, played alongside William H. Gross, a founder of Pimco, the big bond house; and Ralph R. Cioffi, who oversaw two Bear Stearns hedge funds whose subsequent collapse in 2007 would send shock waves through the financial world.
“There didn’t seem to be an end in sight,” said a person who attended the tournament.
Back in New York, Mr. Kim’s team was eagerly bundling risky home mortgages into bonds. One of the last deals they put together that year was called “Costa Bella,” or beautiful coast — a name that recalls Pebble Beach. The $500 million bundle of loans, a type of investment known as a collateralized debt obligation, was managed by Mr. Gross’s Pimco.
Merrill Lynch collected about $5 million in fees for concocting Costa Bella, which included mortgages originated by First Franklin.
But Costa Bella, like so many other C.D.O.’s, was filled with loans that borrowers could not repay. Initially part of it was rated AAA, but Costa Bella is now deeply troubled. The losses on the investment far exceed the money Merrill collected for putting the deal together.
So Much for So Few
By the time Costa Bella ran into trouble, the Merrill bankers who had devised it had collected their bonuses for 2006. Mr. Kim’s fixed-income unit generated more than half of Merrill’s revenue that year, according to people with direct knowledge of the matter. As a reward, Mr. O’Neal and Mr. Kim paid nearly a third of Merrill’s $5 billion to $6 billion bonus pool to the 2,000 professionals in the division.
Mr. O’Neal himself was paid $46 million, according to Equilar, an executive compensation research firm and data provider in California. Mr. Kim received $35 million. About 57 percent of their pay was in stock, which would lose much of its value over the next two years, but even the cash portions of their bonus were generous: $18.5 million for Mr. O’Neal, and $14.5 million for Mr. Kim, according to Equilar.
Mr. Kim and his deputies were given wide discretion about how to dole out their pot of money. Mr. Semerci was among the highest earners in 2006, at more than $20 million. Below him, Mr. Mallach and Mr. Lattanzio each earned more than $10 million. They were among just over 100 people who accounted for some $500 million of the pool, according to people with direct knowledge of the matter.
After that blowout, Merrill pushed even deeper into the mortgage business, despite growing signs that the housing bubble was starting to burst. That decision proved disastrous. As the problems in the subprime mortgage market exploded into a full-blown crisis, the value of Merrill’s investments plummeted. The firm has since written down its investments by more than $54 billion, selling some of them for pennies on the dollar.
Mr. Lin, the former Merrill trader, arrived late to the party. He was one of the last people hired onto Merrill’s mortgage desk, in the summer of 2007. Even then, Merrill guaranteed Mr. Lin a bonus if he joined the firm. Mr. Lin would not disclose his bonus, but such payouts were often in the seven figures.
Mr. Lin said he quickly noticed that traders across Wall Street were reluctant to admit what now seems so obvious: Their mortgage investments were worth far less than they had thought.
“It’s always human nature,” said Mr. Lin, who lost his job at Merrill last summer and now works at RRMS Advisors, a consulting firm that advises investors in troubled mortgage investments. “You want to pull for the market to do well because you’re vested.”
But critics question why Wall Street embraced the risky deals even as the housing and mortgage markets began to weaken.
“What happened to their investments was of no interest to them, because they would already be paid,” said Paul Hodgson, senior research associate at the Corporate Library, a shareholder activist group. Some Wall Street executives argue that paying a larger portion of bonuses in the form of stock, rather than in cash, might keep employees from making short-sighted decision. But Mr. Hodgson contended that would not go far enough, in part because the cash rewards alone were so high. Mr. Kim, for example, was paid a total of $116.6 million in cash and stock from 2001 to 2007. Of that, $55 million was in cash, according to Equilar.
Leaving the Scene
As the damage at Merrill became clear in 2007, Mr. Kim, his deputies and finally Mr. O’Neal left the firm. Mr. Kim opened a hedge fund, but it quickly closed. Mr. Semerci and Mr. Lattanzio landed at a hedge fund in London.
All three departed without collecting bonuses in 2007. Mr. O’Neal, however, got even richer by leaving Merrill Lynch. He was awarded an exit package worth $161 million.
Clawing back the 2006 bonuses at Merrill would not come close to making up for the company’s losses, which exceed all the profits that the firm earned over the previous 20 years. This fall, the once-proud firm was sold to Bank of America, ending its 94-year history as an independent firm.
Mr. Bebchuk of Harvard Law School said investment banks like Merrill were brought to their knees because their employees chased after the rich rewards that executives promised them.
“They were trying to get as much of this or that paper, they were doing it with excitement and vigor, and that was because they knew they would be making huge amounts of money by the end of the year,” he said.
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