AIG Bonuses – Now Is Not The Time For Irresponsible Rhetoric Senator Grassley

How many adjectives can we use to describe the feelings associated with the news that AIG paid $165 million in bonuses when the Federal Government spend over $170 Billion – yes, that is Billion, in bail out money to save the ailing giant?

There is outrage and many in government leadership are expressing their opinions about how they feel about the audicity of AIG to effect those payments.  That said, it is also important to make sure that leadership on both sides of the isle don’t get carried away with their comments.

CNN reported the following comments:

Republican Sen. Charles Grassley of Iowa didn’t appear to be joking, however, when he spoke with Cedar Rapids, Iowa, radio station WMT.

“I would suggest the first thing that would make me feel a little better toward them [AIG executives] is if they follow the Japanese example and come before the American people and take that deep bow and say, ‘I am sorry,’ and then either do one of two things: resign or go commit suicide,” he said.

“And in the case of the Japanese, they usually commit suicide.”

Now I know that emotions are high, but come on Senator Grassley – that is political rhetoric and frankly is uncalled for.  I can’t believe for a minute that Grassley would, in fact, want anyone to commit suicide.  After all – we are talking about money and money can be replaced – human life can’t.

Perhaps as the night wears on cooler heads will prevail.  The right and ethical thing to do is reconsider how and when bonuses should be paid to a company that – but for the help of the taxpayers – would be bankrupt and out of business.  Further, more – this whole scenario should serve as a less for other businesses that line up to receive their bailout money.

Bonuses should be paid for outstanding performance.  When performance is lacking and, in fact, when a company faces the very real possibility of not continuing, then different choices should be made.  As a business ethics speaker, I understand Grassley’s frustration, but would hope that he would be more careful with his words.   Now is the time for level headed leadership, not sound bites spoken to garner media attention.

YOUR COMMENTS ARE WELCOME!

Stanford Financial Group Chief Investment Officer – Laura Pendergest-Holt – Arrested! Stanford Won’t Go Down Alone…

The third ranking executive of the Stanford Financial Group – Chief Investment Officer Laura Pendergest-Holt was arrested by the FBI on charges that she obstructed a government proceeding.  Appearing before a federal magistrate in Houston on Friday, Pendergest-Holt is accused of making “several affirmative misrepresentations” to SEC investigators who were seeking to learn about a scheme to defraud investors and account-holders of billions of dollars in deposits.

The FBI and IRS are actively conducting a criminal investigation(s) of Stanford’s allegedly fraudulent dealings, which was confirmed in court documents.  A CNN article reports:

“Since June of 2008 I and others on behalf of the FBI, special agents with the Internal Revenue Service, and postal inspectors have been conducting an investigation into allegations that executives of Stanford Financial Group … have defrauded investors and account-holders of more than $8 billion in deposits,” said FBI agent Vanessa Walther in an affidavit filed with the charges against Pendergest-Holt.

“We have been conducting this investigation parallel to an investigation being conducted by the Securities and Exchange Commission,” the affidavit says.

Bloomberg reports:

The Securities and Exchange Commission sued Pendergest- Holt, Stanford Chairman R. Allen Stanford, and Stanford Chief Financial Officer James M. Davis on Feb. 17, accusing them of misleading investors about $8 billion in certificates of deposit in Antigua-based Stanford International Bank.

Keeping in mind an arrest is not a conviction, her attorney stated:

“She is extremely disappointed in the path the SEC and law enforcement are taking,” said Pendergest-Holt’s lawyer Dan Cogdell. “She has been cooperating for weeks, and now she is falsely charged for a crime she didn’t commit.”

The full Bloomberg report is here.

Thinking that at one time she might be the one to topple the house of cards and send Stanford to prison for a very long time, one might ask if her arrest is just a ploy to put pressure on her to provide exactly what the government wants.  Perhaps she did withhold data – which one can go to prison for – or perhaps it’s a power squeeze.  Either way, the choices made by Pendergest-Holt in the past are surely producing consequences today – and likely will for years to come.

As a business ethics and fraud prevention speaker, one this is sure – there will be more to come….

O.K. SO HERE IS SOME MORE…

The Wall Street Journal Law Blog reports on the Pendergest-Holt criminal charges.  Pulling from a story from the Northeast Mississippi Daily Journal, the WSJ Law Blog reports:

A bit strange, however, is the story’s several mentions of Pendergest-Holt’s looks. The story notes that while the Baldwyn, Miss., native, now 35, “had no financial services or securities industry experience” before joining SFG in 1997, “less than a decade later she was managing more than $15 billion in assets and running a worldwide team of equity, policy and sector anaylsts.”

According to the story, Pendergest-Holt had a “killer combination of beauty, brains and connections,” was was “an expert number-cruncher” and “has been described as strikingly beautiful and statuesque.”

Wow…I’ve heard that one should look the part, but $15 billion under management…well one would assume that there would be a string of credentials that would support such responsibility.  But then, reality check, it seems that it really was all part of a big illusion.  Maybe striking looks just makes the illusion easier to pull off.

YOUR COMMENTS WELCOME!

Bank of America – Taking Advantage of Youth – Is that Ethical?

As my fingers rest on the keys of this keyboard, I have heard from colleagues that I should avoid writing on this subject – as Bank of America – might elect to be a client and wouldn’t appreciate negative publicity. My question back to them was – as an ethics speaker and author – don’t I have a responsibility to speak the truth?

“Yes” was their reply “but at what peril?”

So…being honest I have debated for days whether to write or not. In the end…I have elected to as I feel that ethical choices – at times – may mean less money or less business – but in the end – doing the right thing will always pay off. If I am to discuss someone else’s ethics, I must stand behind mine.

THE STORY: My son, Alex, received his “check card” and bank account from deal ole dad (that would be me) sometime after he was 16 years old. Weekly I would place his allowance on it and tried to help him understand how to responsibly use this first intro into banking.

He kinda got the idea – in that he knew if he presented his card that if there were no funds it would not be accepted. Likewise, he knew that he could take the card to the ATM and check the balance anywhere. Simple – so he thought.

Quick Reality Check: What the bank shows as an available balance isn’t always THE available balance. You would think in this modern day of instant transactions that once you use the card the amount used would “immediately” be subtracted from your account. Most of us adults know – NOT SO. Young people don’t get that. Let me repeat – YOUNG PEOPLE DON’T GET THAT! They think that if you send a text (for example) and it arrives within seconds – then when you use your card the money is withdrawn in the same time. In their minds why would it not be?

Back to the story – So as Alex nears the end of his 17th year he overdraws his account. Seems that he didn’t know the balance in his account when he drove into the convenience store one weekend. He pumped gas and paid with his checkcard. A little later that day, he went to the Bank of America ATM and checked his balance. All seemed well. So he went to the movie, purchased some popcorn and a drink, later purchased a sandwich from Subway and got some gum from the convenience store. All purchases were made with his checkcard – against a balance he thought he had – afterall, the ATM told him his balance “after” he pumped his gas.

Adult readers know exactly where this is going. The gas purchase had not yet been removed from his account as it was done over the weekend…and all the other purchases exceeded the balance in his account. HE WAS OVERDRAWN.

Is that the ethical issue – Not a chance – that’s life. And at times life comes at you hard. For Alex the very real realization was that for each overdraft he owed $35. Yes – my son – you owe $35 for purchasing a $1.29 pack of gum. “That’s not right dad,” I remember him telling me. To which I replied, “Then take it up with the bank…you got yourself into this you can pay yourself out.”

HELP WITH AN INTERESTING TWIST: Up to this point the issue is my son screwed up. But, true to my suggestion he went to his local Bank of America branch to seek help. Oh, by this point he had turned 18.

He met with the Assistant Manager and told her his plight. She was kind in helping him (so it seemed) and “split the difference” on the overdraft charges – she forgave some and he paid the rest – then she suggested that he apply for a “STUDENT CREDIT CARD.” She told him that the credit card would provide him overdraft protection and keep him from having problems like he just had.

What do you think he did? He SIGNED UP! No questions asked…it just seemed like a good idea and (not knowing any better) he took her trusted advice. She did tell him that he would need to link it to his account when he got it. Reality check: Link it to an account when you’ve never had a card before doesn’t connect. That’s like telling a guy in his 20’s you need to have your PSA checked. They’ll look at you and say O.K., but not know what a PSA test is!

Reality Check: Likewise, she never told him that the suggestion she was offering was not “free.” Turns out that if the card is linked to the account it will advance funds to cover an overdraft (that’s what he was told). What he was not told was that there is a COST involved. Seems that Bank of America charges $10.00 per overdraft transfer. Hum…so let me get this straight – the $1.29 pack of gum which cost him $36.29 would now cost him $11.29. Great deal huh?

Back to the story… The card came in and he did exactly what he thought she told him to do. It said on the card – call this number to ACTIVATE your card. Well since it had been a week or so since he had been in the bank – he assumed that the instructions on the card were what she was talking about and so he did what he was told to do (or so he thought) and he activated the card.

BIG PROBLEM NOW: A month of so passes – no problems – then in July ‘08 he overdrew his account again – and again it was the weekend nightmare. Minor purchases were made – 10 in fact – that each were overdrawn from his checkcard. POINT OF INTEREST: For any readers, if your children have checkcards – do they maintain a check register? My guess is NO! Most of them have never written a check in their lives and don’t connect with the “write it down and keep the balance” mentality of adults. The rest of this story – YOU GOT IT – HE WAS CHARGED $350.00 in overdraft fees.

He was devastated and I was furious. He went back to Bank of America and once again talked with the same Assist Manager who encouraged him to get the credit card (without full disclosure – that begs and ethical question). She told him that he was to “link” it. He thought by “activating it” he had. No…per this Assistant Manager it was his fault. There was nothing she could do to help him. Well, she could transfer the OVERDRAFT charges to his credit card and clear his checking account.

Faced with no acceptable option he elected to have the fees transferred over to his credit card. NOW LET ME GET THIS IN MY HEAD. A bank officer with Bank of America suggests a kid get a credit card to help with overdrafts. She doesn’t follow up to link the account of have it automatically link, she assumes that kids who have ZERO experience will know what to do. She doesn’t tell him that there are continued charges if he does overdraft. Oh, and she suggests the transfer of $350 of fees (profits to Bank of America) into a credit card where they will get MORE FEES. Sorry, but that just seems irresponsible, greedy and UNETHICAL.

THE REST OF THE STORY: It’s early October ‘08 and my son is now in college. He and I visit another Bank of America branch seeking help for this situation. We met with another Assistant Manager who appeared to want to help. We shared the story and she was appalled. She said that anytime she suggested that a kid get a card – she would follow up to make sure the card was linked. That made sense to me.

With a Masters in Accounting – I understood the numbers. While I didn’t like the fact that my son was maneuvered into a credit card that still cost him should he overdraft his account, I accepted that fact.

So what would be a fair outcome? I suggested that if the card had been linked properly in the first place he would have been charged $10 for each overdraft incident or $100.00. He was charged instead $350.00. It would seem the fair, just and ethical response would be a $250.00 credit on his card. SIMPLE.

Nope…not so…you see there’s profit involved and which branch would “suck up” that loss? The branch in his college town called the branch in his home town. One Assistant Manager talked to the other Assistant Manager. At least the one in his home town told the truth – the facts are as I’ve stated. But she was unwilling to take the charge – afterall it would be charged against her branch. (And apparently Bank of American needs all the money it can earn from what ever source including unsuspecting young people). Of course, the Assistant Manager in his college town…well, she was sympathetic but unwilling to take the charge either – afterall she or her branch didn’t create the problem.

QUESTIONS: Does a bank have a responsibility to fully disclose all charges and possible pitfalls when suggesting to young people that they subscribe to a product of theirs?

Is it right to suggest to a young person that they should obtain a credit card for a specific purpose without first disclosing that there are fees for the application of that purpose?

Is Bank of America so motivated by profit at the branch level that they would elect to look past the obvious ethical choice in order to keep $250.00 profit from an 18 year old who knew no better?

Perhaps the last question: Am I the one off base here?

Oh…per the Bank of America Web Site related to their Code of Business Ethics the following is stated: The code, in effect, explains what we mean when we say one of our core values is “doing the right thing.” Somehow I can’t think that charging unsuspecting newly turned 18 year olds is “the right thing” – but perhaps I am off base?

Your comments are encouraged and welcome!

Virginia Banker – Rebecca Dawn Long – Charged with Embezzlement. Hard Economic Times Means More Fraud on the Way!

I suppose it will become a sign of the times – the economic times that is, but fraud will rise over the course of the next several years as we begin to see the “perfect storm” unleash its fury.  As the need to survive increases – or at least maintain as some see it – the inclination to find means to “have” will tempt otherwise honest people to make choices that will have far reaching consequences.  Fraud is being uncovered at increasing rates and, in my opinion, will only get worse.  Ethical choices are thrown out of the window when faced with severe need.

Facing a federal indictment, a southwest Virginia woman – 35-year-old Rebecca Dawn Long of Jonesville – has been indicted on federal charges that she embezzled nearly $488,000 from the bank where she worked.

HOW:  In Ms. Long’s case, she used “opportunity” as her method to create the fraud.  She is accused of falsifying loan documents.  According to the indictment she established a line of credit under a fictitious name.

According to the indictment, between December 2004 and September 2008 Long devised and executed a scheme to obtain money from The Peoples Bank of Ewing by establishing a line of credit under a fictitious name. After establishing the false credit line, Long allegedly withdrew $487,685.23.

The indictment also charges that Long created and faxed a fraudulent loan document to an office of The Peoples Bank for the purposes of disguising the fact that she had embezzled over $487,000 from that financial institution.

POINT OF INTEREST:  In many of the current mortgage fraud cases, falsification of loan documents is common and, has in the past, almost been encouraged in order to meet the qualification standards from the loan underwriters.  Underwriting standards have tightened significantly, but that does not stop the practice.

U.S. Attorney Julia Dudley said Tuesday that a grand jury in Abingdon indicted  on charges that included bank fraud, bank embezzlement, money laundering and making a false statement on a loan document. She faces a maximum penalty of 120 years in prison and a $3 million fine if convicted.

QUESTION:  Does anyone know Ms. Long and what might have motivated her to make such a foolish choice?  If so, please feel free to comment.

Every choice has a consequence.  In this case, Ms. Long is at the beginning of the phase of facing her consequences.  I know what she is facing.  I have faced it myself.  While I am not proud of my past, I have to be honest as an ethics speaker and writer – I, too, spent time in federal prison for embezzlement.  The experience was less than pleasant and the consquences linger to this day…and I have been out for 12 years.

While Ms. Long has made a grave mistake, as a wise man once said to me – You are not a mistake.  Neither is Ms. Long.  To all who seek justice…Ms. Long will stare justice in the face and likely face time of reflection in federal prison.  However, to her family and friends, let me say, my thoughts are with you and I know that with the right approach there is recovery after an event like this.

Twenty Million Dollar Mortgage Fraud Scheme – Osmond Decoteau Indicted Faces Prison – Business Ethics Speaker Chuck Gallagher Comments…

Well over a year ago, I along with others were writing profusely about mortgage fraud and the severe lack of business ethics that seemed rampant in the industry. It almost seemed like “money for nothing” and the house was free. Now, as we approach the time for our general election, things could not be worse. There is no doubt that this will be a disaster for the GOP when the election results come in.

October 23, 2008, an indictment was handed down in Brooklyn federal court charging OSMOND DECOTEAU with wire fraud for masterminding a scheme to defraud mortgage lenders and banks of more than $20 million in connection with the sale of several properties located in Brooklyn and Florida.

According to the indictment: DECOTEAU recruited straw purchasers for properties located in Brooklyn and Florida, and ensured that their mortgage applications would be approved by lenders by fraudulently misrepresenting the purchasers’ financial condition. Subsequently, at the closings on these properties, DECOTEAU presented phony payoff letters which indicated that three companies he controlled were the loan servicers for the properties. The closing attorneys then issued payoff checks to the DECOTEAU-controlled entities, instead of the actual loan servicers for the holders of the pre-existing mortgages. To conceal the fraud, DECOTEAU caused monthly payments to be made on the underlying mortgages so that those mortgages would not be declared delinquent. As a result of the defendant’s scheme, between April 2005 and January 2007, multiple fraudulent closings occurred resulting in a fraud exceeding $20 million, and each of the properties is now encumbered by two first-lien mortgages.

Mortgage Fraud has been rampant. It will take years for the majority of the crimes to be uncovered. No doubt Decoteau, if found guilty, is just one of thousands who will prosecuted for taking advantage of a system without substantial controls.

“In May of this year we announced the formation of a task force comprised of federal, state, and local law-enforcement agents and investigators to address the burgeoning problem of mortgage fraud,” stated United States Attorney Campbell. “This prosecution is one example of the results of that cooperative initiative, which includes the investigation and prosecution of mortgage fraud that has harmed investors, lenders, and homeowners across the country.” FBI Assistant Director-in-Charge Mershon stated, “Combating mortgage fraud is a priority because mortgage lending and the housing market have a significant overall effect on the nation’s economy. The FBI is committed to investigating and prosecuting criminals who exploit vulnerabilities and devise new methods or schemes to defraud.”

As a business ethics and white collar crime speaker, I understand first hand the effects of the choices we make. I served time in federal prison for poor choices I made 25 years ago and the consequences still follow to this day. If it takes three components to create a fraud: (1) need; (2) opportunity and (3) rationalization…then Decoteau had plenty of opportunity considering the lax state of oversight when it came to mortgages in the past five to eight years.

If you know Decoteau…perhaps you’ll comment on his motivation.

Your comments are welcome…

Business Ethics Alive in Small Banks – Strong Ethics Equal Healthy Banks

It’s easy to become cynical when all you hear in the media is bad news.  But not all news is bad.  In a recent CNN article there was some refreshing comments from small, but healthy, banks.  They were making loans and, for the most part, it was business as usual.

Here are some comments from the article:

Conservative lending practices seem to be a common denominator among banks that have remained strong and stable during the current banking crisis, and those banks are still making loans.

Peoples Bank President Todd McKee, left, chats with customer Tommy McVay on Friday in Lubbock, Texas.

The failures of behemoths such as Washington Mutual and IndyMac have drawn media attention, but not all big banks are in trouble — and smaller banks are not immune.

For sometime, as a business ethics speaker, I have said that the underlying problem related to the economic crisis we’re facing today has been founded in a lack of business ethics.  For those comments I have been the brunt of criticism.  But, if ETHICS is choosing good from bad with a moral obligation and duty…then I submit that what is reported in the CNN report supports my position.

“Our underwriting standards have tightened a little bit,” said Ronald Heaton, president of the Cedar City, Utah, bank. “… Our standards haven’t changed drastically, and we’re still loaning … but we’re watching our underwriting standards closely so that people are able to repay their loans.”

Mortgages that didn’t require borrowers to prove their income or make a down payment got many lenders into trouble, but his bank never offered those: “Didn’t make sense,” he said.

Some would-be borrowers “wanted us to do everything, and we said, ‘We don’t do everything. We have standards,’ ” Heaton added.

Nonbank mortgage lenders were able to generate substandard mortgages because they were not adequately regulated by the federal government, Heaton said.

Now those bad loans have come home to roost, the nonbank lenders are out of the game, and State Bank of Southern Utah’s mortgage business is picking up, Heaton said.

Folks…that’s just plain ole good ethics.  Heaton (whom I’ve never spoken to or met) is 100% accurate.  If you have standards (founded by sound business ethics) you won’t find yourself in major financial trouble.  I contend that lending practices, that were not founded with sound ethical principles, are in large part the root cause of why we are where we are today.

Another part of the CNN report states:

In Texas, the state Department of Banking says state-chartered institutions wisely stayed out of the subprime game.

“That’s not what we do. We’re not in the subprime market whatsoever,” said Todd McKee, president of Peoples Bank in Lubbock. “Lending here is the same as it’s always been.”

The way it’s always been is up close and personal. McKee said his bank’s customers prefer to do business with tellers face-to-face rather than through the drive-up window.

“I’m president of the bank, and I sit right by the front door, so I wave at every single soul that walks in the bank. Everybody has access to me,” he said. “My partner [Larry Allen] is the CEO. … He sits at the other door. So we know everybody that comes in the door.

May sound “hokey” but that is banking the way it was meant to be.  I recall my first loan when I was 18 years old (I’m now 51) was made – not by a credit score – (funny I don’t think they existed then), but rather the loan was made on character and the fact that the bank president trusted me to repay (and knew where my mama was if I didn’t).  I paid the loan back and was proud to do business with them.

This last comment from the article states it best – “You can look at credit all day, you can look at collateral, but if they can’t make that payment, there’s no sense in making that loan. And we’ve always done that. We’re all supposed to do that.”  That is business ethics!

Business Ethics – Fraud Awareness: There Is Definitely A Link!

My how times change.  Just a few short years ago the economy could do no wrong.  People commented about the large movement in the housing market “caused” by the Baby Boomers.  Baby Boomers were buying second homes, downsizing, and making room for the next wave of new home buyers – or so we thought.  But hind sight is 20/20.

Perhaps less of that was true that what we thought.  Looking back there were many artificial factors in play that were, in my opinion, a clear violation of what most people would say are sound business ethics.  As a business ethics speaker, I know as I consult with companies frequently who want to know how to get out of some of the messes that have been created.

No where is this more evident than in the mortgage and banking industries.  And let me be clear – WHERE THERE IS A BREACH OF BUSINESS ETHICS – THERE IS FRAUD.  When companies turn their back on maintaining a strong ethical foundation for themselves and their employees, they run the very real risk of exposing themselves to fraud.  And, no one that I know of wants to be on the back end of a very messy fraud investigation.

As an example, the Dallas Independent School District has been dragged through the mud with all that has taken place – FBI investigations for fraud and all.  Now the DISD is not a bad organization, in fact, it does good work and should be proud of its place in the community.  But, with lax controls and an environment that did not fully promote ethical behavior, it was clear that when temptation was presented the obvious outcome would be fraud.

Now the question is – what does the Dallas Independent School District have to do with mortgages and banking?  NOTHING!  Rather, it serves only as an easy example of how an otherwise good organization can be featured in a negative light – and that is because of the choices they made.

The larger question is – with the economy where it is today, which banking institutions will survive and which will implode under the weight of the poor choices made during what appeared to be more “healthy” times?  There wil be bank failures as this “recession” and, yes I called it a recession picks up steam.  We are no where close to the end with more unpleasant news to come.

WHAT NOW?

Frankly, that is the question that the business community should be asking!  It has been said over and over, only the strong will survive.

When there is an economic downturn there will be FRAUD.  Make no mistake that is a given.  There are three elements involved in most frauds: (1) need; (2) opportunity and (3) rationalization.  When the economy goes south…there is NEED!  That is the first step and if ever there has been a time when NEED is growing – it is NOW!

Here where the ethics equation comes into play.  NEED alone does not create fraud – it is just one component.  If the opportunity is eliminated then the fraud cannot happen.  That’s where a commitment to ethics and fraud awareness come into play.  As a business ethics speaker and fraud prevention consultant, I (and certainly I am not the only one) help businesses understand how to create a culture that supports “doing the right and ethical thing” – I call it MOTIVATIONAL ETHICS; and, looks carefully at methods to eliminate opportunity.  If the business promotes ethics and reduces opportunity there will a strong chance that it will survive and become stronger – even during poor economic times.

MORTGAGE FRAUD TWISTS:

CNN did a great article on several new twists in the ever changing mortgage fraud arean.  Bank and financial instititutions be aware.  The mortgage industry is in a state of disarray and as such there is definitly a NEED (one of the components of fraud).

Here are the three that CNN reported:

(1) under-appraising property values:

These schemes involve short sales, which come up when a struggling homeowner is “underwater,” or owes more on his mortgage than the home is worth.

When done legitimately, the owner sells the home for the lower market value, and the lender agrees to accept just that amount and forgive the difference.

When illegitimate, fraudsters fake very low appraisals for the homes and use those appraisals to justify low short-sale prices – well below true market values.

If busy bankers don’t check the appraisal closely, they may agree to sales of homes that should be worth $200,000, for $150,000 or even less.

The buyers – in cahoots with the owner – then flip them for a big profit.

Over the past four months I have seen, through my consulting work, a tremendous increase in “short-sale” interest – and that is something that many financial institutions are ill prepared to deal with.  It is new to them and an area ripe for fraud.

(2)  Liar Loans:

“Liar loans are now fully documented – but with really good fraudulent documents,” according to the CNN article.

In one case investigated by Interthinx, a New York man buying an investment property in Georgia provided documents that showed double his actual salary.

Advanced information technology and photocopying equipment have gotten so accurate that very convincing papers, including income statements, savings accounts and tax returns can be produced on demand.

Scams that misrepresent income or employment are still the most common type of fraud.

(3)  Buy and bail:

Example: You’re underwater on your mortgage and want a new, cheaper home down the block. You could just bail on the existing home, but no lender would give you a mortgage for the new one.  So you tell the bank you plan to rent out the current home – even though you have no intention of doing so.

“This is a very difficult scam to pin down,” said Jennifer Butts, a spokeswoman for MARI, because the rental agreements that borrowers proffer may not be scrutinized by lenders.

The Federal Home Administration announced in late September that it hoped to head off many buy-and-bails by no longer insuring mortgages if the homeowners had existing loans – unless they could show enough income to pay off both loans simultaneously.

Now, just because a home is rented does not mean a scam is taking place.  For example, my wife and I just sold a home in Dallas, TX and moved to Raleigh.  It is a “buyers” market there, so rather than make a hasty decision, we elected to rent a home.  Turns out that the landlord bought another home and was unable to easily sell the one we rented.  This is an example of a legitimate transaction.  However, the action by the FHA may add undue stress on an otherwise tight market – just in an effort to eliminate opportunity (the second part of the fraud equation).

WHERE FROM HERE?

(1)  Honestly evaluate you and/or your company’s commitment to ethics.  Everyone says they beleive but the real question is – what have you done to set the right tone?  By that question, I don’t mean what have you done to comply with the law, but is there a tone of ethics in the company?

(2)  Have you or the company done anything within the past year to raise ethics awareness or fraud awareness?  Seminars, workshops, team meetings, on-line awareness programs – to name a few – are visible symbols of a company’s commitment to a foundation of solid business ethics.

(3)  Has an evaluation been done to consider what opportunities for fraud may exist and more importantly – how to eliminate or reduce them?

Now is the time for businesses who want to survive to take action.  Failure could be catastrophic as the “perfect storm” is rising for business fraud and ethics failures.  One thing is true…YOU DON’T WANT TO BE IN THE HEADLINES ON CNN TOMORROW FOR AN ETHICS FAILURE!

Business Ethics be Damned…A Receipe for Disaster Led To This Banking Bailout Bandaid!

We ain’t seen nothing yet!  As a business ethics speaker, as I write those words I feel tension building in my shoulders and neck.  Stress for sure.  But unfortunately the worst is yet to come and for many, especially younger adults, it will be the first time you will have witnessed a severe financial correction.  This will not be a mild recession but a full blown catagory 4 storm, if you will.

Recessions:

Let’s first explore a little of the history of recessions.  A great article that is simple to read an understand was written not long ago which outlines the recessions in our past and the depth of their pain in months.  A portion of that article is reprinted here for reference:

The National Bureau of Economic Research, or NBER, is considered the official arbiter of recessions, but it doesn’t define a recessions by the school book measure of two or more consecutive quarters of economic contraction as measured by GDP. It states that “a recession is a significant decline in economic activity spread across the economy, lasting more than a few months.

The last recession, so declares NBER, was from March 2001 through November 2001.   Now most of us remember that time but not because of a declared recession, but because of 9/11.  The tragedy of 9/11 was so focused that we forgot how the economy felt and where we were before then – assuming that all that happened economically was a direct result of the 9/11 incident.

Now, when a country is in a recession there is a cry from the population to get it over with an get back on the track to economic health.  That is, in essence, just what we attempted to do.  However, we got so caught up in HEALTH that we looked past practical sensible medicine and pushed too hard.

What We Did:

Just like a doctor has skill, training, and tools to help restore health, from an economic perspective so does the government along with the Federal Reserve.  So, Dr. Fed to the rescue.  Surely we could not and would not stay in this ‘91 recession long.  Our pride was hurt along with our pocket books and we needed fast action.

#1 – in response to the 9/11 attacks our country went to war.  Now, within reason, up to that point there was a widespread concern about the national deficit.  However, that disappeared from the political scene, as we elected to go to war.  Do not assume I am against this action, I am looking at it, however, from an economic standpoint.  War changes perspectives and allows the government to increase spending and debt without much cry from the populous.   War increases productivity and we all witnessed many companies showing record profits.  Government spending changed dramatically – essentially an economic stimulus.

#2 – the Federal Reserve reached in its bag of goodies and began a systematic dramatic and unprecedented drop in interest rates.  Never in its history had the Fed dropped the interest rate to 1% – NEVER.  Over time it almost became “free” money.  Artificially low interest rates became a powerful economic stimulus.

#3 – not only does the Federal Reserve have the ability to set interest rates, but they also control the flow of money.  In other words, they control the printing press or just how much money is in circulation.  Another powerful tool to fight “recession” – access to money makes economic growth easier.  More money in circulation became an economic stimulus.

#4 – tax law change was also a factor that changed the face of our economic growth.  In the past when a person sold their home, they were taxed on the gain unless it was reinvested into something of equal or higher value.  In the mid nineties, that changed effectively eliminating tax on most home sale gains.  No taxes proved to be another economic stimulator.

How We Responded:

Now, while some would disagree – that is where the breech of ethics occurred. Let me us an example:  If you are a star baseball player and practice everyday – honing your skills and lifting weights, etc. in order to be your best, well that would be ethical.  Agree?  If, however, you do all of those things and take performance enhancing drugs, that would be unethical.  Agree?

How we responded was in a sense like doing all the right things, but too excess and assuming that there would be no consequence.  That assumption is unethical stupidity.

So we:

(1) took our eye off of living with a balanced budget, allowing the government to stimulate the economy through the war effort;

(2) we borrowed at a record pace (after all if there is free money wouldn’t you take it)?  We, as consumers, increased our credit card debt dramatically falling for most ever zero percent offer that was placed before us.  And, with that new found credit, we bought items that in the prior decade we might have postponed.  In fact, we believed that we didn’t have to pay the borrowed money back, all we had to do was “transfer balance” it.; and

(3) we used our homes as a credit card.  Up until then, there were reasonable rules in place for borrowing to buy a home.  But during that time, with lots of money in circulation and low rates, we were encouraged to borrow…borrow…borrow believing that our home was safe.

(4) now the straw that broke the camels back was unrealistic appreciation.  In many (not all) parts of the country we saw home prices skyrocket.  Heretofore, home prices increase at a steady 1% to 3% per year.  Our home was sacred.  Now, with double digit increases, homeowners and builders began to believe that with no taxes on the gain, there could not be a better investment.

Every choice has a consequence:

The example of the ball player up above ties into this perfectly.  If he/she had done the right things in moderation, they would have an outstanding career and perhaps make it in the baseball hall of fame.  But, once discovered for performance enhancing drugs, they would likely be banned from the sport or suffer some humiliating consequence that would cost them dearly.

That is just where we are today.  Ethically, the Fed knew better.  The economy needed to be stimulated only so much.  Those are sharp folks and I don’t believe for a minute that they could not have seen this coming.  Fairly enough, they did begin to raise rates several years ago, but by then the bubble was set to pop.  And pop it did!

Likewise, our financial institutions knew better.  You don’t make loans to people that you honestly know can’t repay them, just to turn a quick profit in order to meet analystists expectations on Wall Street.  That, to me, is unethical.  Nonetheless, it was done – DAILY!

Builders, gorged with profit, continued to build knowing that the supply was outstripping the demand based on any reasonable demographic study.  In one area in NC near Raleigh, on average 1.5 homes were sold per month, yet 6 new builders flocked to the area and began building multiple spec homes.  There were no buyers and today they sit on them – some having been on the market well over 600 days.  That is greed outstripping ethical sense.

What Now?

#1 – the government is scrambling to figure out what to do.  My prediction is the $700 Billion dollar bailout is more like $2 Trillion.  The US Government will use our money (wrong borrowed money) to buy up bad loans (doesn’t give me the warm and fuzzies inside) and they will buy equity interests into our banks.  To me that is historic – it appears almost like a nationalization of the banks -scarry…!

#2 – the Federal Reserve, will once again, lower interest rates in hopes that they will stimulate BORROWING so the economy will again move forward.  Sorry, but I don’t think we need more debt!

#3 – the housing market will see double digit declines in home prices.  What goes up must come down (at least to reasonable levels) and many home owners who bought at the top will find themselves foreclosed on and have ruined credit.

#4 – builders will go belly up and banks will be in the physical real estate business – something they no little about.

#5 – credit will freeze.  No longer will you see the “free money” ads from your credit card company.  In fact, when you pay your card off…they may reduce your credit limit – taking a more conservative approach.

#6 – Consumers faced with increased medical costs, gas costs and utility cost, will spend less and this Christmas buying season will be dismal.  Retailers will be forced out of business and the pain will be heard world wide.

#7 – many smaller banks will shut their doors with the FDIC taking them over; and

#8 – the market will go much lower than it is today.  There will be minor up turns, but the down will outweigh the up and we will see another loss of 20% before it is over.  As a result, we will be less wealthy as our retirement funds decrease.

Conclusion:

Every choice has a consequence.  We chose the route of performance enhancing programs to stimulate our economy (an unethical choice in my opinion) and today and for the near term we will face the consequences – painful as they may be.

Current DateTime: 11:08:17 15 Oct 2008
LinksList Documentid: 20499510

AIG’s Financial Crisis – Forget Business Ethics – We Need More Money!

$700 Billion for the banking bailout – $85 Billion for AIG (a private company) – these amounts are only a drop in the bucket of what it will truly cost before this financial fiasco is complete in the history books.  The sad thing is – in order to clean up the mess, the goverment will have to “borrow” money to correct – OVERBORROWING!

Now AIG says it needs more – almost $38 billion more!  Talking about missing a projection.  And the biggest question of all, where will it end?

Read the following according to CNN:

The New York Federal Reserve is lending up to $37.8 billion to American International Group to give the troubled insurer access to much-needed cash.

In exchange, AIG is giving the New York Fed investment-grade, fixed-income securities that it had previously lent out to other institutions for a fee. Those institutions are now returning these securities and want their money back.

The new program, announced Wednesday, is on top of the $85 billion the federal government agreed to lend to AIG last month to prevent the global company from collapsing. AIG said last Friday it had drawn down $61 billion.

To be sure none of us want to see a financial collaspe, but $38 billion on top of $85 billion – the question seems to be where will it end?  And what seems amazing is the magnitude of which the federal goverment is being the backbone of private “for profit” financial institutions.  Frankly put, if the issue were just you or I “Joe Citizen” and we were about to go under – we’d drown.  So why on the back of the taxpayers is the federal goverment backing institutions that have apparently thrown ethics to the wind when making financial desisions?

As a business ethics speaker, I am told daily that my phone should be ringing off the hook – “apparently Washington and Wall Street need your help.”  I can’t disagree with the sentiment, but they needed the help before they made poor business choices that have a clear unethical smell to them.

In a Forbes Article the following was stated:

AIG’s problems stemmed primarily from its insurance of mortgage-backed securities and other risky debt.

On Tuesday former top executives at AIG testified before the House Oversight Committee blaming everything but themselves for the company’s problems and subsequent bailout that cost taxpayers billions of dollars. (See “‘Wasn’t Us’ Former AIG Execs Say)

“Wasn’t us” my ass.  Sorry for the language, but if you’re an exec with a firm like AIG the buck stops with you.  Any person who runs a company has the power to make decisions that “should” be in the best interest of the shareholders.  With an equity decline of 95.4% – YES THAT IS 95.4% – who else to blame but the execs who set the course for the company.  Sure the market has changed, but it changed because “unethically” corporate executives have placed short term quarterly profits above common business sense.

My sense is – it will be a long cold financial winter that may practically last several seasons, if not years.  Your comments are always welcome!

Business Ethics, Bank Failures and Government Bailouts – Are They Compatable?

Just last night I was having dinner with with the head of a company and two retired physicians, none of whom I knew before my wife and I were seated.  As one might expect, the conversation turned to career as we played the get to know you game.

“What do you do,” one of the retired physicians asked?

“I speak across the country to businesses and associations on ‘ethics’,” I replied.

“Well,” the business exec at the table spoke up immediately, “you should be booked solid now.  I’ve never seen it so bad.  Seems that those guys on Wall Street and in Washington need your service desperately.”

With those comments the table broke into a sad sort of laughter, although the comment made was no laughing matter.  Rarely, if ever, in my lifetime (and I’m 51) have we seen a time in our country where the choices that have been made have had the potential for a more disastrous outcome.

Before the month of October begins in earnest the headline late on a Sunday night on CNN is: U. S. bank failures almost certain to increase in next year. Based on all that we’ve seen in the short scope of the last two months I tend to agree.  And here’s what is more baffling – people much smarter than I must have known that we would one day face this outcome.  The writing was on the wall.  You can’t extend credit to someone who can’t afford to pay you back and assume that everything will somehow work out.

Every choice has a consequence.  That is a universal law (although it seems that many people would prefer to ignor its existence).  All we heard for the past several years is how robust the US economy was.  The housing market was strong in most sectors of the nation and it would appear that we were set to continue to enjoy long term economic prosperity.  Really?  Here’s a segment of the CNN story:

Weakened by huge losses on risky home loans, the banking industry is now on the shakiest ground since the early 1990s, when more than 800 federally insured institutions failed in a three-year period. That was during the clean-up phase of a decade-long savings-and-loan meltdown that wound up costing U.S. taxpayers $170 billion to $205 billion, after adjusting for inflation.

Now, like many who read this, I was around during the Savings and Loan crisis.  It wasn’t pretty and friends, I hate to say this, but this is no savings and loan crisis.  That economic hardship pales in comparison to what we could face based on bad choices and business ethics gone awry.  The government bailout – hum, let me rephrase – the taxpayer bailout may preserve some of the “stronger” institutions, but there is a substantial belief that many more will fail, buried under the weight of their poor choices.

The following quote from the CNN article is very accurate:

“I don’t see why things will be that much different this time,” said Joseph Mason, an economist who worked for the U.S. Treasury Department in the 1990s and is now a finance professor at Louisiana State University. “We just had a big party where people and businesses overborrowed. We had a bubble and now we want to get back to normal. Is it going to be painless? No.”

I think it is interesting his choice of words, “people and businesses overborrowed.”   That statement is factual, but the more significant underlying question is how did that occur and why?  The answer to that is where – ETHICS – comes into play.

Now let me simply define ETHICS for the purpose of this discussion:  “Ethics is the discipline dealing with what is good and bad and with moral duty and obligation.”

So let me get back to the comment “people and businesses overborrowed.”  While the comment is true neither people or businesses had control of the purse strings.  People were “unethically” encouraged to overborrow.  Rarely a day would go by without the mailbox being filled with credit offers.  “Zero percent this and transfer balance that.”  We saw big burley viking men touting Capital One and God knows my college aged son received more offers for credit than he could count – even though he had no source of income.

While there is plenty of blame to go around, YOU CAN’T BLAME THE PEOPLE.  People did what people do – they responded to effective marketing campaigns and accepted offers made by many of those very banks who soon will be buried in the business grave yard of failure.  Poor business choices combined with poor business ethics will equal business failure.

We hear all too much about the mortgage crisis again with many stating that people over borrowed.  That may be true, but the bank or financial institution again controlled access to the money.  Now if a bank is so overzealous to prop up growth and earnings that they make loans to unqualified individuals or loan against property that is overvalued, I contend that is unethical.

Banks have more than a duty to earn money and grow, their greater duty is to do both of those things and (most importantly) survive!  Their moral duty and obligation (their ethical duty) is to survive while achieving success.  I agree with my dinner mates, if there is ever a time for ethical reflection it is now!

Another comment from the article that has alarming numbers attached:

Using statistics from the S&L crisis as a guide, Mason estimates total deposits in banks that fail during the current crisis at $1.1 trillion. After calculating gains from selling deposits and some of the assets of the failed banks, Mason estimates the clean-up this time will cost the FDIC $140 billion to $200 billion.

The FDIC’s fund currently has about $45 billion, a five-year low. But the agency can make up for any shortfalls by borrowing from the U.S. Treasury and eventually repaying the money by raising the premiums that it charges the healthy banks and S&Ls.

Perhaps next is the issue of Goverment Ethics.  By all accounts, Alan Greenspan reported to Congress many years back – talking in “Greenspeak” about what was likely to happen and how it could be avoided.  Did the government take action?  NO!  The concern, it seems, for most politicians is staying elected or getting elected, not making ethical decisions.  The moral duty and obligation that our elected officials have (or should have) is to represent those they govern and protect them from the disaster we are now facing.

And, not to be a cynic, but when have you known any financial projection to come in at or under the budget or estimate.  In my lifetime – never!  So by guess is the $700 billion will be more like $2 trillion when it is over.  The bailout here and proping up the FDIC there, not counting what else will arise that is undisclosed at this time.  It all adds up and is dumped on our shoulders.  In reality all we, as a nation, are doing is on a bigger scale exactly what the “people and businesses” did – borrow to pay off what we could not afford in the first place.

So back to the question – Bank Failure and Government Bailouts – are they compatable?  Neither represent good business ethics and yet both will happen.  Perhaps the comment was right at dinner, I need to camp out in Washington and NY – although now it might be too little too late.

For information about my presentations visit my web site.  Your comments, by the way, are welcome.