Thursday, October 15, 2009
Banks and Borrowers
In a hierarchy every employee tends to rise to his level of incompetence.
— Laurence John Peter, The Peter Principle
The consumer doesn’t understand how hard it is to be a Big Bank and, therefore, expects the Big Bank to be just as concerned about its customers as was the little bank Big Bank swallowed. I was reminded of that by Bill Moyers’ Journal. It was a discussion of JPMorgan Chase (JPMC) that clients of mine had recently been taught was so big it could not possibly take care of its customers. In teaching them that lesson, it also taught them that it could charge tuition for the lesson. It was a very valuable lesson for me as well as for JPMC’s customers but I’ll share my lesson at the end of this column. First, Bill Moyers.
One of the participants in the Moyers interview was Marcy Kaptur (and the quotations herein are all taken from that interview). She is a member of Congress from Ohio. Serving her 14th term in Congress, she is the longest-serving Democratic Congresswoman in the history of the House. She discussed foreclosures.
Foreclosures in Toledo have gone up 94 percent. When Ms. Kaptur was home in Toledo she met with realtors and asked them what she should know about what was happening and they said: “Well, first of all, you should know the worst companies that are doing this to us.” Ms. Kaptur asked who the worst offender was and she was told it was JPMorganChase. That same night she had dinner with Jamie Dimon, the bank’s president and during the course of the evening said to him: “{Y]our company is the largest forecloser in my district. And our Realtors just said to me this morning that your people don’t return phone calls. We can’t do workouts.” In response Mr. Dimon told Ms. Kaptur that he talks to the Governor of Ohio frequently and also talks a lot to the Mayor of Columbus, an interesting, if irrelevant response, since it is unlikely any of those conversations pertained to the governor or the mayor trying to refinance his house in order to avoid foreclosure. Ms. Kaptur suggested he needed to talk to people in the Northern part of the state where foreclosures were abundant. His response was to give her his business card and tell her he’d have someone call her.
People at JPMorganChase are very busy. No one called Ms. Kaptur even though her office repeatedly called the bank. Then a funny thing happened. Ms. Kaptur was on a national news show and told the interviewer how her calls were not returned by JPMC. Within ten minutes the bank called her office and said: “Oh, we’ll work with you. We’ll try to do some workouts in your area.” As Ms. Kaptur explained: “We planned the first one after working with them for weeks and weeks and weeks. Their people never showed up. . . . We kept calling saying, ‘Where’s your person? Where’s your person? And they finally sent somebody down from Detroit by 3:00 in the afternoon. But our people had been waiting all morning . . . .”
Ms. Kaptur’s experience resonated with me and causes me to share with readers the Tale of Two Trusts. JPMorganChase was the trustee. This tale would never have made it into print but for the fact that it proves that JPMorganChase is no respecter of persons. It treats the mighty and the lowly alike-shamefully. The lowly in this tale were the three beneficiaries of two trusts worth less than $2 million. They were hardly worth noticing. JPMorganChase didn’t. It assigned them to a trust officer who, among other things, did not return phone calls, used the assets of one trust to pay the bills of the other, put money belonging to one trust into the other, failed to make required distributions and issued no reports. When asked to resign, the bank said it would if all beneficiaries joined in the request. They did. Then a sad thing happened. The bank changed its mind. (That may have been because its fortunes were declining. Less than two months after changing its mind it received a bailout of $25 billion dollars.) The bank said the beneficiaries would have to go to court if they wanted to compel it to resign. So the beneficiaries hired lawyers and the bank hired lawyers. After many months and thousands of dollars in legal fees, the bank corrected the errors it had made and agreed to resign. As part of its agreement to resign, however, it required the beneficiaries to agree that their trusts would pay the more than $12,000 in legal fees it had incurred after reneging on its agreement to resign.
JPMorgan Chase is a Big Bank. It is too bad that the writer and Ms. Kaptur don’t have a better understanding of the problems Big Banks face. If we did, this column would never have been written.
Wednesday, October 7, 2009
Lethal Injection Revisited
Hanging was the worst use a man could be put to.
— Sir Henry Wotton, The Disparity Between Buckingham and Essex (1651)
It is so easy to view the death penalty as nothing more than a means to an end that we sometimes overlook the fact that it should not be an unpleasant experience for the person involved. Thanks to Romell Broom we have been reminded of its niceties and the importance of administering it humanely. Not, however, that everyone agrees that it needs to be a pleasant experience. Indeed, in the death penalty’s most recent experience in the United States Supreme Court it was met with a somewhat callous approach by a majority of the members of the Court.
The case involved death by lethal injection and whether, as presently administered, it constitutes cruel and unusual punishment thus violating the prospective decedent’s rights. The issue was not complex and has been examined here and elsewhere over the years. At issue is the second drug that is administered in the three-drug cocktail that dispatches the participant. It is pancuronium bromide and it paralyzes the skeletal muscles but not the brain or nerves of the chemical’s recipient. Unable to move or speak, the participant cannot let onlookers know that contrary to appearances, what the participant is undergoing is extremely painful. In Tennessee its use is prohibited when euthanizing non-livestock animals because, as the American Veterinary Medical Association said in a 2000 report, “the animal may perceive pain and distress after it is immobilized.” The Court, and others are not troubled by this. Their position was neatly articulated in 2006 by New York Times reporter Denise Grady. In a column addressing the use of lethal injection she observes: “At the core of the issue is a debate about which matters more, the comfort of prisoners or that of the people who watch them die. A major obstacle to change is that alternative methods of lethal injection, though they might be easier on convicts, would almost certainly be harder on witnesses and executioners. With a different approach, death would take longer and might involve jerking movements that the prisoner would not feel but that would be unpleasant for others to watch.”
When considering Base et al vs. Rees, a Kentucky case involving the three drug cocktail, Chief Justice John Roberts observed that: “Some risk of pain is inherent in any method of execution . . . . It is clear, then, that the Constitution does not demand the avoidance of all risk of pain in carrying out executions. Simply because an execution method may result in pain, either by accident or as an inescapable consequence of death, does not establish the sort of ‘objectively intolerable risk of harm’ that qualifies as cruel and unusual.” Justice Antonin Scalia, ever compassionate, observed during oral argument: “This is an execution, not surgery. . .. Where does that come from, that you must find the method of execution that causes the least pain?” In a 7-2 decision the court upheld the use of all three drugs in lethal injections. And now an up-date, courtesy of Mr. Broom.
Mr. Broom was convicted of the 1984 of the rape and killing of a 14-year old girl abducted in Cleveland. He was convicted and sentenced to death, his execution to take place on September 15 2009. The attempted execution began at 2:01 PM with executioners searching in vain for the vein that would serve as a conduit for the magic liquor that would extinguish his life. Mr. Broom was cooperative and did everything he could to help including flexing his fingers and guiding the tube up his arm, all to no avail. After two hours the execution was called off. Shortly thereafter the governor of Ohio granted Mr. Broom a one-week reprieve, a reprieve that was followed by subsequent stays of execution.
In addition to giving Mr. Broom additional time to contemplate the error of his ways, the stays provide his attorneys the opportunity to attempt to halt all further attempts at execution. A report in the New York Times says his attorneys will argue that (a) he needs more than 7 days to recover from the physical and emotional trauma of the executioners’ failed attempt (a recovery that some might think would actually be helped by a successful subsequent and prompt execution), (b) that Ohio’s lethal injection system is critically flawed, and (c) that lethal injection is cruel and unusual punishment. (The Supreme Court decision in the Brees case may dispatch two of those arguments more swiftly than Mr. Broom will be dispatched.) As a result, Mr. Broom, who had no right to expect to see another day, may live to see another day in court.
The foregoing proves that although we are the only Western nation that believes the death penalty is the best cure for recidivism, we are also a compassionate people and want to make sure that recipients of its benefits are given every possible consideration before receiving them.
Wednesday, September 23, 2009
Life Insurance-Bankers' New Best Friend
A power has risen up in the government greater than the people themselves, consisting of many and various and powerful interests, combined into one mass, and held together by the cohesive power of the vast surplus in the banks.
— John C. Calhoun, Speech from 1836
The fun has not gone out of banking after all. Following the disastrous fall of 2008, conventional wisdom had it that many of the things that made banking fun, like amazing bonuses and fascinating (if not understood) financial instruments were going to follow the dinosaur into extinction. That, of course, did not happen. Bonuses are as big as ever and a recent announcement discloses that a new financial instrument that is far more interesting than a bundle of mortgages is about to hit the market. It involves life insurance.
For years life insurance was thought of as something to provide cash following its owner’s death to be used for a variety of purposes ranging from the payment of taxes to providing funds for young families to replace the lost earnings of the parent who died. As families grew older, in many cases the need for life insurance diminished. Owners of those policies took advantage of the cash value in the policy and accepted that amount from the company in lieu of keeping the policy in force. Since the cash value the policy holder received was much less than what the company would have to pay were the policy in force at the policy holder’s death, the insurance company was delighted to redeem the policy for its cash value instead of its face value.
Unfortunately for the insurance companies, a greedy group of people sprang up who said to policy holders that getting cash value from the life insurance policy was a rip-off. They offered to buy the policies for more than their cash value. The purchasers figured out how long the insured was likely to live and, adding in the policy proceeds payable at death, came up with a price they were willing to pay the insured. The insured, who no longer wanted the insurance, was delighted to have more than the cash value of the policy to spend before death. Sensing a good thing, Wall Street has figured out how to turn this practice into something that is even better than the collateralized debt obligations based on mortgages. (Those would have been a win-win situation for everyone if the unimaginable and unimagined had not occurred.) This latest financial instrument is a guaranteed win-win almost for sure. Here is how it works.
Assume that one thousand very old people all have $1 million life insurance polices with low cash values. Those people would not be tempted to cash in their policies for the cash value. Along comes a bank and agrees to pay each of them $700,000 for the policy. It names itself the beneficiary, begins paying the premiums and bundles the 1000 policies into a $700 million bond called “Death Pays” and sells interests in the bond to investors. If all the insureds die within 30 days, the investors will be thrilled because Death Pays will now be worth $1 billion, an increase in value for the investors of $300 million in 30 days. If, however, all the insureds take the money they got from selling their policies and go on a tour sponsored by AARP to a spa that has a treatment that gives them an additional 30 years of life, the holders of “Death Pays” will be less than thrilled. (Were that to happen the issuer of “Death Pays” bonds might hire hit men to accelerate events that would cause the policies to mature but that brings with it a completely different set of problems that are beyond the scope of this column to examine.)
Life insurance companies are not terribly happy with the idea that their policies will remain in force instead of being sold for cash value. If this new idea catches on, more and more of their policies will be bought and kept in force until the happy day the insured dies. Indeed, Kathleen Tillwitz, a senior vice-president at a firm that is rating 9 proposals for life-insurance securitizations from private investors told the New York Times that “our phones have been ringing off the hook with inquiries.” An investment banker not authorized to speak to the NYT (or other media) who spoke to the NYT said: “We’re hoping to get a herd stampeding after the first offering.”
Some analysts say that this is a wonderful new product since death is not related to the rise and fall of stocks. They are right, unless a dramatic fall in the stock market is accompanied by falls from window ledges as happened during the great depression. If that were to happen the amounts owed by the companies on the life insurance policies could exceed the insurance companies’ ability to pay, thus causing their insolvency and the need for a government bailout. Thanks to the sophistication of those constructing these new investments, that almost certainly will never happen.