I've said it before but it bears repeating: the multi-million dollar frauds uncovered in the past few years could never have occurred with at least tacit support of major Wall Street firms. Sometimes their support is a function of negligence, other times Wall Street is an active aider and abettor.
We received yet another example of this yesterday in the form of a settlement agreement between several Wall Street firms and a bankruptcy trustee looking after the interests of investors - many of whom are elderly retirees - who purchased paper issued by American Business Financial Services, (ABFS) Inc., a subprime lender that went bankrupt in 2005. Wall Street firms including J.P. Morgan Chase, Morgan Stanley, Bear Stearns and Credit Suisse will collectively pay the trustee $100 million without admitting guilt after it was alleged that they propped up the lender in order to charge the company fees.
ABFS's scheme was to make risky homes loans backed by debt that the company would then sell to retail investors through an aggressive advertising campaign. So long as they had a market for their debt, they could remain in business. Therefore, the company manufactured a false, healthy impression to stay afloat. Wall Street was all too eager to help out. Allegedly, as part of the agreement to lend ABFS hundreds of millions of dollars to create this impression, Wall Street firms required the company to continually issue debt, which they would underwrite, thus earning huge fees and bonuses. All the while, Wall Street executives were extremely skeptical about the company's future.
In an email from 2001 a Morgan Stanley managing director sounded alarms, "They apparently sell a lot of paper to old ladies in Florida (no joke). This could be a public relations nightmare in the making." Not only does this email show that a senior Wall Street executive had doubts about ABFS, but it shows clearly where his priorities lie. He was more concerned with damage control than those old ladies in Florida whose retirement accounts were at stake.
According to the Wall Street Journal's account of the settlement, the firms "not only had serious questions about the sales of the notes to these unsophisticated investors, they had serious doubts about the company's business model, profitability and solvency," said Steven M. Coren, an attorney for the trustee. "And yet they loaned hundreds of millions of dollars and underwrote billions of dollars of securities."
So here's an example of Wall Street knowing and acknowledging a company is in dire straights but continued to help that same company appear solvent so that elderly investors would continue to buy its worthless paper. Even a guaranteed PR disaster didn't deter them.
According to the trustee, investors still hold $600 million of worthless ABFS debt so the settlement won't do much for them, if anything. And it's certainly not a deterrent either. There isn't any reported investigation or fines so it appears everyone involved in this scheme will forge ahead as if nothing ever occurred. Everyone, that is, except those elderly ladies in Florida.
