NewsNotables – Issue 60

Fed Task Force Eyes Lenders and Wall Street in Subprime Mess

Associated Press, May 5, 2008

Federal authorities, responding to the subprime mortgage mess, have formed a task force to determine if lenders or Wall Street firms participated in fraud. The task force will be comprised of federal, state and local agencies. It will focus on the activities of mortgage lenders and Wall Street firms.

U.S. Attorney Benton Campbell said that it was too early to say if actions that led to the subprime crisis rise to the level of a crime. He also stated, “There are market forces in play in that area, and that doesn’t necessarily mean there is fraud.”

The task force includes representatives from the FBI, which announced earlier this year that it was investigating more than a dozen companies, from mortgage lenders to investment banks, for possible accounting fraud, insider trading and other potentially illegal actions related to subprime mortgage lending. One key question is whether Wall Street firms knew about the risks of mortgage securities backed by subprime loans, and if they hid risks from investors.

Comment: Once again, task forces and new regulations are created after a financial crisis, often cumbersome and expensive, hurting those who were not abusing the system. The article questions whether “Wall Street firms knew about the risks of mortgage securities backed by subprime loans, and if they hid risks from investors.” Of course they knew the risks, but how much they hid, or didn’t reveal to investors, will probably remain an unanswered question. Investors also have to take some responsibility and ask themselves why they received more interest income than AAA rated securities. It’s called risk/reward. They were rewarded with more interest income and took more risk.

Charges of Insider Trading for a Wall Street Luminary

The New York Times, May 30, 2008

Dr. John F. Marshall spent decades teaching at business schools and watching his students parley his lessons into fortunes on Wall Street. But when he and another professor reached for some of those riches themselves, events took a startling turn. Marshall, a retired professor at St. John’s University and a fixture on the Wall Street lecture circuit, was accused by the S.E.C. of passing inside information about a multibillion dollar corporate takeover to Alan L. Tucker, a professor at Pace University. Tucker made more that $1 million trading on the tips in 2007. The Justice Department has filed criminal charges.

These developments have stunned Marshall’s former colleagues and students, who describe him as a meticulous scholar and a generous, unassuming teacher. The accusations have also jolted Wall Street, where Marshall has been considered one of the wise men of financial engineering. Usual suspects are bankers, analysts and executives, not academicians like Dr. Marshall. His stature in the field of finance led to a board position at International Securities Exchange for stock options, a position the S.E.C. said he used to pass illegal tips to Dr. Tucker, a friend and business associate.

Comment: Dr. Manuchehr, a finance professor at California State University stated, “You know, sometimes greed takes over your knowledge and your skills and everywhere else. But he is not a greedy man. Really, the only conclusion I can come up with is it must have been an accident. I do not believe that a person of his stature would do this.” Another story of someone who spent his life building an impeccable reputation, losing it all in a moment of weakness.

Offshore-Account Holders Bite Their Nails

Wall Street Journal, May 21, 2008

As government officials intensify a multi-national crackdown of offshore bank accounts, many wealthy Americans who use them to illegally shield income are facing a difficult decision: whether to turn themselves in—and if so, how. Lawyers advising tax dodgers are saying their clients are struggling to decide among three alternatives:

  1. They can confess and plead for mercy.
  2. They can quietly file ended tax returns, pay up, make other required disclosures, and hope overworked government prosecutors won’t follow up.
  3. They could choose to do nothing and pray their names won’t turn up.

Tax dodgers are facing these stark choices as major cracks emerge in what once appeared to be an impenetrable wall of secrecy surrounding bank accounts in such well-known havens as Liechtenstein and Switzerland.

IRS officials are turning up the heat and consider combating offshore tax avoidance and evasion a high priority. IRS Commissioner Doug Shulman said, “Recent events show there is no safe hiding place for the proceeds of tax avoidance and evasion. Anyone with hidden income and gains would be well advised to make a prompt and complete disclosure to the IRS.”

Comment: Which alternative would you choose? The obvious answer is “none of the above.” If you are in a position to have to make a decision, you chose to put yourself there by being a “tax dodger” as mentioned above. If you are in this situation, the only answer is to confess, pay the income tax and penalties, then throw yourself on the mercy of the IRS.

By Roger Eigsti
Board President,
Institute for Business, Technology, and Ethics