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Protecting Whistleblowers since 1977

BofA: The First Step toward Fixing a Problem is Admitting You Have One

Dylan Blaylock, December 06, 2013

Editor's Note, from GAP President Louis Clark: Michael Winston is a former executive at Countrywide Financial Corporation who blew the whistle on the company's clearly fraudulent activities that contributed to the 2008 financial crisis and subsequent recession. A guest on GAP's American Whistleblower Tour initiative and a close collaborator of ours, Winston has agreed to publish several entries on The Whistlebloggerregarding both his experience as a truth-teller in the finance industry, and the continued lack of accountability enforced by the government toward the officers of large-scale financial institutions. These entries are part of GAP's Know Your Rights covering the Banking Industry.

A year or so ago, Bank of America (BofA) announced that it, and certain of its current and former officers and directors, agreed to settle a class action lawsuit brought in 2009 on behalf of investors who purchased or held BofA securities at the time the company announced plans to acquire Merrill Lynch. The financial behemoth would pay $2.43 billion and institute certain corporate governance policies to settle claims that it and certain officers made false or misleading statements about the financial health of both the company and Merrill Lynch. As is their practice (and, seemingly, that of all financial “service” firms), BofA denied all the allegations.

Just a few days prior, a BofA vice president moonlighting as a National Football League temporary referee during last year's “lock-out” made a particularly contentious call during a Seahawks-Packers game – a call bad enough for President Obama, an avid sports fan, to weigh in on. That call was highly scrutinized in the following weeks, with many sports fans saying it was the worst call ever.

According to an NFL statement, the temporary referee was in the end zone when Seahawks wide receiver Golden Tate and Packers safety M.D. Jennings both went after a pass as time expired. In the fight for the ball, Tate can be seen shoving Packers cornerback Sam Shields to the ground.

Tate did catch the ball and was awarded possession of it, but his knockdown of Shields was offensive pass interference and should have ended the game with a Packers victory. Instead, the inexperienced BAC VP moonlighter called it as a touchdown, giving the Seahawks the win. The NFL stated that the call would stand.

The similarities of these two events are interesting. Neither BofA nor the NFL would admit to making a mistake.

The Securities and Exchange Commission won a $150 million settlement from BofA in 2009 to resolve charges that it misled shareholders when it acquired Merrill. The SEC had accused the company of failing to disclose to shareholders before they voted on the Merrill deal that it had authorized Merrill to pay as much as $5.8 billion in bonuses to its employees in 2008, though the investment firm lost $27.6 billion that year.

A major civil fraud suit stretched out against BofA and former CEO Kenneth Lewis from New York state, accusing them of failing to properly disclose the Merrill losses and bonuses before the acquisition closed. The suit was filed by former New York Attorney General Andrew Cuomo in February 2010, and current AG Eric Schneiderman continued pursuing it. Here again, BofA has said the charges are unfounded.

As a blatant example of failure to admit a mistake, the disgraced Countrywide Financial Corporation had spiraled into disaster as investors suddenly realized that many homeowners wouldn’t be able to repay mortgages that required no proof of income or down payment, and offered adjustable rates that made monthly payments unaffordable. The purchase of Countrywide in July 2008 made Bank of America a major player in the U.S. mortgage market. Regulators, meanwhile, portrayed Countrywide’s huge size as the result of its executives’ single-minded pursuit of market dominance, even if it meant taking disastrous risks.

In the legal aftermath, BofA entered an $8.4 billion settlement with 12 states over Countrywide’s lending practices. A class-action suit by former Countrywide shareholders cost the bank another $600 million and many other settlements were paid. Bank of America acknowledges paying out more than $13 billion for investor claims related to mortgages. Likely much more than $13 billion.

Just over the past few weeks, BofA and a former Countrywide executive were found guilty of fraud when a jury in federal court in New York ruled against the Charlotte-based bank.

Jurors concluded BofA, through its Countrywide acquisition, had fraudulently sold mortgages to Fannie Mae and Freddie Mac as part of an internal program called "The Hustle," according to The Wall Street Journal.

The case marks the first time a U.S. bank has been found guilty of wrongdoing for its actions in the financial crisis, the Journal says. The housing agencies lost more than $800 million as a result of the allegedly faulty mortgages.

The trial unfolded this summer with a whistleblower testifying about a Countrywide practice, known as High Speed Swim Lane (HSSL) or "Hustle," that allegedly included the lender quickly packaging and selling low-quality home loans to Fannie and Freddie. Countrywide portrayed them as first rate, premium loans, even while delinquencies were rapidly rising at the end of the subprime bubble.

Bank of America has denied the allegations and said the practices did not continue after BofA acquired the troubled California mortgage lender. Further, BofA has quite a track record of denial. So, too, did Countrywide.

While it has reserved funds to pay penalties related to the Hustle case, BofA's legal woes from its Countrywide acquisition continue to grow. Only weeks ago, federal authorities were reported to be seeking a $6 billion settlement with the bank over other Countrywide missteps. Meanwhile, three other probes into possible mortgage fraud have been opened against the bank.

Both acquisitions are "very troublesome" for BofA, which is again on record as denying Countrywide wrongdoing and stating that the charges were unfounded as well.

The First Step Toward Fixing a Problem

The key to fixing a problem is admitting you have a problem.  Said more emphatically, you can’t solve a problem unless you first admit you have one. So, titans of financial services firms, don’t deny it … fix it. Admitting your problem is the first step to fixing it. If you can’t see the problem, you can’t solve the problem.

Own up. Admit it. Fix your flaws. Come back with a cleaned-up, transparent business model. Become a force for good.

Bank of America has paid billions to “settle” cases. This is the same company that helped itself to $45B in taxpayer dollars during the bailout. Shouldn’t we be questioning this? Don’t we, the taxpayers, deserve more? At the least, don’t we deserve more transparency, fair dealing and honesty? By the way, whose money is settling all these suits; BofA's or the taxpayers?

In the settlement referenced at the start of this article, BofA also agreed to institute “certain corporate governance practices.” But isn’t that what they promised in 2009 and 2010? Sure looks that way from reading their Annual Reports for those years. In fact, the BAC Proxy from 2011 notes that “in combination with the risk management and clawback features of our compensation programs, we believe that our compensation policies and practices appropriately balance risks and rewards in a way that does not encourage imprudent risk-taking and does not create risks that are reasonably likely to have a material adverse effect on our company.”

However, the settlement suggests imprudent risk-taking occurred and clearly the restated earnings confirm these actions had a material adverse effect on the company. Third quarter earnings that year slid 28 cents per share. Can we assume that a significant “clawback” of monies occurred with culpable named executives? If not, why not? In fact, that very same proxy report goes on to state “Since October 2007, we have had a recoupment policy under which our Board can require reimbursement of any incentive compensation paid to an executive officer whose fraud or intentional misconduct causes our company to restate its financial statements.” The settlement was triggered by misconduct. Was this policy enacted? If yes, who was the executive, and how much did s/he turn back? If not, why not? If they promised it then and failed to keep their promise, why should anyone believe them now?

It is time to truly reform financial service practices. Not just in word, but in deed. There is precedent for such reform. But it is often slow in coming. In another industry, Toyota’s president, Akio Toyoda, apologized for the car company’s faulty gas pedals, finally bowing low before a press-conference to show humility and contrition. However, reportedly the car company knew of problems with its accelerators for over a year before finally acknowledging fault to regulators and customers. In the meantime, people died in accidents purportedly related to the flaw.

Perhaps it is time, Bank of America, to say you are sorry for all the havoc wrecked by Countrywide and Merrill; to acknowledge that CFC lost their business deservedly; to recognize that BofA did not and could not know that you were being duped by CFC which failed to disclose the extent of their corruption to you; to promise that BofA will try to make amends and that you intend to treat customers and prospective customers with dignity and respect.

The tide is turning. The corporation catching this wave will find that people want to do business with companies that have integrity and will “out” those that swindle them. The world is watching.

They are watching complicit government agencies as well.

 

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Michael G. Winston was formerly Managing Director, Enterprise Chief Leadership Officer for Countrywide Financial Corporation. Prior, over a thirty-three year career, he held similar positions at Motorola, Merrill Lynch, McDonnell Douglas and Lockheed Corporations.

This post is from a guest blogger, and not GAP staff. If you are interested in authoring a guest post related to whistleblowing, please email Blog Editor & GAP Communications Director Dylan Blaylock at dylanb@whistleblower.org with your idea.