I noted Time Magazine has come out with a list of the guilty in their 25 People to Blame for the Financial Crisis. This topic is special to me in a personal way and I’m reminded of a conversation I had with a reporter Tuesday as we discussed the now locally infamous Shred-it Trucks that became parking lot fixtures at the local State Farm offices in the spring of 2006. Steve took pictures but not for this blog as we had no concept of slabbed in those days. Rather he gave the pictures to former SKG lawyer Zach Butterworth. In that sense we feel some ownership for that piece of news, no doubt the same sense of ownership felt by the Rigsby sisters who saw from the inside what was being fed into the shredder.
Similarly Russell, Steve and I feel a similar ownership on that subprime thang as we were posters on the Countrywide Yahoo board at that time. It was Katrina that landed the company on my radar screen as I was surprised to learn some friends that had their mortgage with them could not get their insurance money released so they could repair their house. In fact Countrywide (CFC) was holding far more of their insurance money than they owed on their mortgage. I’m a sucker for this type of stuff so I alerted Steve and Russell and the cyber attack began. We made short work of CFC that day and my friend had their insurance money back the next day. Others saw those posts and one reporter asked some questions. Two weeks later this story appeared on page C-1 of the Wall Street Journal. Evidently someone at LSU thought enough of the article to copy it to a word doc where it resides today for all to see (it is still in the WSJ archives and a PDF I kept as well) and it is there we’ll begin as we explore what kind of company Senator Chris Dodd keeps:
Hurricane Victims Battle Banks — Gulf Coast Residents Complain Lenders Hold Insurance Money While Demanding Late Payments
The Wall Street Journal
April 27, 2006
By Valerie Bauerlein
AS HOMEOWNERS along the Gulf Coast try to recover from the devastation of hurricanes Katrina and Rita, some say mortgage lenders are refusing to turn over insurance proceeds while demanding immediate payment on overdue loans.
Hurricane victims in Louisiana and Mississippi have filed nearly 1,000 complaints with state regulators claiming mistreatment by mortgage lenders. About 800 of the complaints have been resolved, often as a result of mediation initiated by regulators.
Jim Wolf of Pass Christian, Miss., a DuPont Co. technician currently living in a company trailer, for example, wanted to use proceeds of an insurance settlement for a down payment on a new home. On Dec. 10, he sent his $40,000 insurance settlement check to giant Countrywide Financial Corp. to pay off $5,000 remaining on the mortgage of his destroyed home, expecting to get $35,000 back. He said he called Countrywide, based in Calabasas, Calif., every business day for a month, spoke to a dozen representatives and couldn’t get the balance returned.
Only after “an angel” in the Mississippi Department of Banking and Consumer Finance intervened, he says, did he get his money back. No one in California seemed to understand the desperation on the Gulf Coast, he says. “I knew other people in the same boat,” Mr. Wolf said. “They kept a lot of people hung out to dry a long time.”
“We had to have a serious talking-to” with some lenders, said John S. Allison, the Mississippi banking commissioner, in an interview. Still, while roughly 200 cases are open, no lenders have been fined or lost their licenses to operate in the two hurricane-ravaged states.
Following more than 40 accusations of wrongdoing by Countrywide, Louisiana Attorney General Charles C. Foti Jr. launched a probe of the company in December. Most complaints involved alleged delays in forwarding insurance-settlement checks to storm victims so they could rebuild or repair their damaged properties.
Countrywide said it received a letter from Mr. Foti earlier this month saying the probe had been closed. In an interview, Mr. Foti said he is satisfied with Countrywide’s response to his probe.
We now have hindsight to judge these older news stories but the next paragraph still leaves me scratching my head because Hurricane Katrina hit the Gulf Coast not California so the damage and devastation here should have had no impact in California and Countrywide’s ability to write checks as the story continues:
A Countrywide spokesman denied any wrongdoing by the lender and said the unprecedented damage from Katrina and Rita had resulted in “unfortunate and unusual delays.”
Last month, the company started canvassing cities with large numbers of hurricane evacuees to encourage borrowers to seek payment-postponement options and other assistance. Countrywide also said the company and its employees have contributed about $2 million to hurricane-recovery programs on the Gulf Coast.
Mr. Foti’s office has received about 400 storm-related complaints, while 547 additional complaints were reported to the Louisiana Office of Financial Institutions, which regulates state-chartered banks, thrifts and credit unions. The financial-services agency wouldn’t identify which lenders triggered complaints. It said about 25% of the cases haven’t been resolved.
Most lenders have ended initial grace periods encouraged by federal regulators that allowed borrowers to stop making regular monthly payments on their loans, and they now are working out procedures on a case-by-case basis. Some homeowners are using insurance proceeds to cover outstanding payments on destroyed homes, but because the insurance checks typically are made out to both the homeowner and the mortgage holder, homeowners often must send the full proceeds to the lender and wait for the balance to be returned.
In some instances, accusations of wrongdoing have been resolved through agreements giving borrowers more time to catch up on past-due payments. Donald E. Powell, federal coordinator for Gulf Coast rebuilding, said most problems appear to reflect the widespread destruction that displaced residents and initially overwhelmed most lenders and insurers in hard-hit areas.
Many homeowners are battling lenders on one front and insurers on another. State Rep. John Read, of Gautier, Miss., said he got calls from the mortgage arm of Citigroup Inc. asking when he was going to catch up on his payments almost a month after he’d sent an insurance settlement check to pay off the $160,000 balance.
Mr. Read, who is living in a trailer with his wife and daughter, has resolved his dispute with Citi but is in court against his insurance carrier, disputing the payout on his home and contents. “You do what you have to do and go from there, but it has not been easy,” he said.
With the benefit of hindsight can’t we all see what Nowdy later termed The Scheme, a series of posts we thought so much of that we created a special page to hold, in addition to our date sequenced blog entries. And while my Chapter 6.1 didn’t make the final cut on the special page, for me it represented one of those famous Sop Ah Ha! moments when it came to making sense of the terrible decisions made in the investment banks and across the financial services industry through the blind use of Enterprise Risk Management (ERM) software to drive the business.
Simply put Countrywide’s method of doing business did not differentiate between the who they were screwing by holding insurance money (and earning interest from the float). They were simply generating the best return on the money they could – for themselves. And whether we are talking about Countrywide, CitiBank, AIG, Allstate or State Farm the truth that people on the bottom see (and what money and greed blinds the decision makers at the top) is what our Katrina Brother Editilla would term “Soulas”, as in these companies have lost their souls as it was computers and automation driving the decisions downstream. Employees, incentivized in making the system happy by doing what they were told became the 21st century equivalent of Nazi concentration camp guards. Perhaps having to witness the human consequences of enforcing Mr Rust’s ERM directives in claims processing also explains why State Farm has a predilection for hiring socialologists and anthropologists as their team leaders. That topic is another post, however.
When we filter the current events of AIG bonus gate through the lens of the Scheme we’re left with the impression the engineer driving the runaway AIG freight train, Ed Liddy, remains asleep at the wheel. What we found in bonus gate however, is that Mr Liddy also remains a staunch defender of the system and status quo. And it was that Wall Street bonus entitlement mindset of getting something for nothing that lead he and Mr Geithner to jump off the cliff together.
This brings us to Senator Dodd’s buddy Angelo Mozilo who graces the number 3 position of Time’s list of the subprime 25. Mr Mozilo knows a thing or two about redirecting systems as he successfully legitimized the practice of making bad loans in the process creating a blueprint for the other money blinded Wall Street lemmings to follow:
The son of a butcher, Mozilo co-founded Countrywide in 1969 and built it into the largest mortgage lender in the U.S. Countrywide wasn’t the first to offer exotic mortgages to borrowers with a questionable ability to repay them. In its all-out embrace of such sales, however, it did legitimize the notion that practically any adult could handle a big fat mortgage. In the wake of the housing bust, which toppled Countrywide and IndyMac Bank (another company Mozilo started), the executive’s lavish pay package was criticized by many, including Congress. Mozilo left Countrywide last summer after its rescue-sale to Bank of America. A few months later, BofA said it would spend up to $8.7 billion to settle predatory lending charges against Countrywide filed by 11 state attorneys generals.
As our readers can no doubt tell Mr Dodd has an interesting choice of friends which brings us back to those hearings held earlier this week in the House of Representatives that Time also covered:
A few suggestions managed to emerge from the sea of anger, though it remains to be seen how feasible any of them are. Senator Evan Bayh, an Indiana Democrat, said he’d like AIG to enter some form of bankruptcy, “because when you go into bankruptcy, contracts are abrogated all the time.” He was referring to AIG CEO Edward Liddy’s claim that the bonuses were contractual and therefore had to be paid under the law.
Senate Banking Committee chairman Chris Dodd suggested one of the more severe solutions: that the government tax 100% of the bonuses, thereby recouping the losses. It may have been overcompensation, so to speak, on Dodd’s part. The National Republican Senatorial Committee was quick to point out that Dodd had amended the stimulus plan to make a specific “exception for contractually obligated bonuses agreed on before Feb. 11, 2009.” That exception gives cover to the AIG bonuses — though it should be noted, as Dodd’s aides do, that the Senator did not know about the AIG bonuses at the time the bill was being drafted. (Dodd is facing a tough re-election battle next year in Connecticut. He was the largest recipient, at $103,100, of AIG political contributions in 2008, according to opensecrets.org. The second largest recipient was President Barack Obama. John McCain and Hillary Clinton also received substantial amounts.)
This isn’t the first time our favorite Senatorial blowhard has tried to spin his double dealing with democratic faithful and perhaps that explains why Dodd is facing a tough re-election battle next year. I do know this, Rebecca Mowbray conveyed the outrage of this entire area with her column yesterday that Nowdy so well covered here on slabbed:
To many on the Gulf Coast, watching AIG chief executive officer Ed Liddy talk about the sanctity of contracts in defending the award of $220 million in bonuses to employees at the embattled insurer was an ironic moment.
If only Liddy held that same view of contractual obligations to policyholders after Hurricane Katrina when he was at the helm of Allstate, Louisiana’s second largest insurer.
“How about that?” quipped Bob Hunter, a New Orleans native who is director of insurance at the Consumer Federation of America and the author of a 2007 study documenting the decline of claims payout ratios at Allstate during Liddy’s tenure. “He’s always disregarded contracts to maximize profits.”
One thing I do believe now is that for at least a short time, the people making decisions understand a bit of the anger that was directed at certain Pols, AIG and Liddy. A young man named Dominic, whom Ed Liddy positively influenced as a teen, stopped in last night to tell us that in so many words. Positive change won’t come though if we leave this bunch of crooks to their own devices. Unfortunately we’re stuck with Dodd until next year or he is indicted for Mortgage Fraud whichever comes first. However that is also unfortunate for Dodd because this also means he is stuck with us until then too. To Mr Liddy I’ll add in the United States of America that I reside, when people are owed money, big business many times does not pay simply because the are big enough to make it stick. Perhaps now the American public outside this area understands why Representative Taylor compared these insurance types to child molesters wayyyy before it became fashionable. This brings us to the Op-Ed Mr Liddy penned for the WaPo. I often wondered while reading it if that widow lady in Picayune who lost her house to foreclosure because AIG played hardball with her husband’s life insurance was ever made whole?
No one knows better than I do that AIG has been the recipient of generous amounts of government financial aid. We are acutely aware not only that we must be good stewards of the public funds we have received but that the patience of America’s taxpayers is wearing thin. Where that patience is especially thin is on the question of compensation.
I am mindful of the outrage of the American public and of the president’s call for a more restrained compensation system. I am also mindful that every decision we make at AIG has consequences for the American taxpayer. We weigh decisions with one priority in mind: Will this action help or hurt our ability to pay money back to the government?
Although we have wound down more than $1 trillion in the portfolio of the AIG Financial Products unit that is at the root of the company’s troubles, there remains substantial risk in that portfolio. The financial downside for taxpayers is potentially very large, and that’s why we’re winding down this business.
To prevent undue risk exposure in the meantime, AIG has made a set of retention payments to employees based on a compensation system that prior management put in place. As has been reported, payments were made to employees in the Financial Products unit. Make no mistake, had I been chief executive at the time, I would never have approved the retention contracts that were put in place more than a year ago. It was distasteful to have to make these payments. But we concluded that the risks to the company, and therefore the financial system and the economy, were unacceptably high.
Where does that leave us?
Taxpayers should know that the government’s assistance to AIG has had a beneficial effect. The assistance has provided stability to the company and to the entire financial system.
Taxpayers should also know that AIG has a plan to return money to the government, and we are making progress. We have transferred to the government securities or equity interests that have real value and prospects for future appreciation. We are selling assets and significantly reducing our risk exposure. The business unit that was the source of our greatest losses is being shut down. And we have agreed with the Federal Reserve and the Treasury to pay off AIG’s existing loan through a combination of asset transfers, securitization of the cash value of certain life insurance businesses, and cash from the sale of businesses.
What lessons can we draw from AIG’s experience? There must be safeguards against the systemic consequences of failures of large, interconnected financial institutions. Where safeguards are lacking, such companies need to be restructured or scaled back so they no longer come close to posing a systemic risk. We have seen all too clearly where the brink lies; our corporate structures need to be pulled back from that edge.
In America, when you owe people money, you pay them. We are pressing forward with our plan to return money to taxpayers, protect policyholders, and give employees a vision of success and a path for achieving it. With the understanding and patience of the American people and the continued support of the Federal Reserve and the Treasury, we can resolve AIG’s challenges and help its businesses contribute to a global economic recovery.
I’ll close this post with the words of an Allstate agent from Florida that posts with us on the Yahoo! Allstate Finance Board and who tells everyone from a first hand perspective why Liddy’s baldfaced attempts to defend the indefensible are so much bull$hit.
All Liddy Ever Wanted Was Fame and Fortune
Be careful what you wish for, Ed.
Fame, fortune were all Ed Liddy ever wanted, and now he has both. Well, the fortune part, yes, but the fame he so craved has morphed into infamy.
The fortune part he stole whilst at the helm of Allstate. Stolen from 6,300 hardworking agents with employment contracts. Agents he maliciously denied their retirements – some being as close as twenty days to having enough time in to be awarded their vested early pensions and retiree health benefits at the magical age of 55—as per their employment contracts. A few poor souls actually begged to be allowed to work in other departments in order to make that early retirement-eligible age. Some even volunteered to become janitors. Yet Liddy said no to every single request. That was in June 2000, and in the intervening years many of these discarded employees have lost their homes and marriages, dozens have declared bankruptcy, and a few abandoned all hope and committed suicide. Ed Liddy knows this and still he doesn’t care.
In April 2008 he decided it was time for him to retire. He had already pocketed over $150 million in less than a decade on the job and life was very good. But wanting one more dive into the golden-lined executive trough on the Allstate campus, he had the board of directors—lap dogs all—grant him with the stroke of a pen an additional “13 years of credited service for retirement purposes.” This allowed Liddy to exit as a 65-year-old employee with thirty years of credited service to his already bloated pension plan—even though he was but 62 and could claim only 17 years of employment at Sears and Allstate. But, hey, you can get away with this let’s-rig-the-game when you’re a demigod in your own mind.
Now, as for finding the fame part he so coveted, that came upon Ed Liddy with the force of a tsunami hitting an unsuspecting deaf, dumb and bind man on his first visit to the beach. Everyone reading this knows that such a scenario can only have a bad ending.
This Monday past, (March 16, 2009) few people anywhere knew Ed Liddy’s name; but by Friday the whole world knew both his name and his face. And not in a good way. The man had become an overnight, international sensation, but for all the wrong reasons. His is the now the face of American corporate greed and incompetence, a poster boy recognized round the world. Even in China. The words Liddy and AIG are suddenly interchangeable, a part of the American lexicon. His outrageous stewardship at AIG will be studied in every B-School on every continent for untold decades to come.
So why do I now suspect that fame and fortune lies like bitter ashes upon Ed Liddy’s tongue? Why do I also suspect that if he could roll back the clock to a saner time he would do so in a heartbeat, and all the fame and fortune in the world be dammed!
And, lastly, I’ll bet anyone this morning that Ed Liddy would tell you it wasn’t worth it.
And now his tattered reputation will follow him to his grave.
Something I call poetic justice!
Spot on Olderagent, spot on.