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10.25.11

Which Bank Is the Worst?

Wonder why Occupy Wall Street is so angry with Bank of America and its brethren? Gary Rivlin names and shames the worst big banks.

If the Occupy Wall Street protesters want to target a single big bank, which should they choose?

The decision wouldn’t be easy, given the bad behavior of the country’s biggest brand-name banks. We look at the country’s four largest—Bank of America, JPMorgan Chase, Citigroup, and Wells Fargo—and throw in Goldman Sachs, a natural target of any protest. Here’s a taste of the deadliest sins committed by the banks, followed by a full account of all the gory details at each bank. Warning: It isn’t pretty

The Seven Deadliest Sins of the Big Banks

1.  JPMorgan Chase kicks 54 military families out of their homes—despite a law against doing so.

2. Wells Fargo gives bonuses to loan officers to put minority borrowers into high-priced subprime mortgages—internally dubbed “ghetto loans.”

3. Citigroup, Bank of America, and Goldman Sachs all pay huge fines to settle charges they duped their own clients.

4. Goldman Sachs assists in Europe’s economic collapse by helping Greece mask the truth about its finances.

5. JPMorgan turns a blind eye to Bernie Madoff’s deceptions.

6. Bank of America pays $137 million to settle government claims it rigged the municipal-bond market.

7. Despite these and other unpardonable sins, banks showers tens of millions of dollars in bonus money on top executives.

Customers of all the big banks complain that being behind on your payments means a Kafkaesque journey through a maze where straight answers are impossible to come by.

JPMorgan Chase

Jamie Dimon is “America’s least hated banker,” the financial writer Roger Lowenstein wrote in The New York Times Magazine at the end of 2010. But if JPMorgan Chase & Co. is the best of the bunch, then that speaks volumes about how horribly banks have acted in recent years.

Where to start?

There’s the $211 million fine JPMorgan paid in July to settle charges that it defrauded local governments in 31 states—along with the $130 million it returned to municipalities it was accused of duping.

There’s the $722 million in fines and restitution payments it made after JPMorgan confederates were caught paying off officials in Jefferson County, Alabama (home to Birmingham), to secure a municipal finance deal that nearly bankrupted the county.

There’s the fact the bank was in so great a rush to evict people from their homes that it admits that some of its people might have forged foreclosure documents—a problem so widespread that it felt compelled to suspend 56,000 foreclosures while it investigated its own behavior.

Or maybe the biggest sin is the central role JPMorgan has played—and continues to play—in the rise of what might be called the “poverty industry”: all those businesses that exploit the working poor, such as the payday-loan industry, where lenders charge 400 percent interest on short-term, small-denomination loans against a person’s next paycheck (or their Social Security or unemployment payments).

And don’t forget the Bernie Madoff connection. Perhaps it’s not fair to blame JPMorgan for Madoff’s sins just because the infamous fraudster used Chase to handle billions of dollars in investors’ cash. Nonetheless, Madoff trustee Irving Picard has pointed an accusing finger at the bank. He has sued the bank for $6 billion, claiming that not only should it have known about the fraud, it did know.  In June 2007, 18 months before Madoff’s fraud was exposed, an officer in the bank wrote an email to colleagues reporting that another bank executive “just told me that there is a well-known cloud over the head of Madoff and that his returns are speculated to be part of a Ponzi scheme.” The bank, the suit contends, had withdrawn all but $35 million of the $276 million it had invested in Madoff-linked hedge funds by the time the fraud was revealed. A JPMorgan spokesman “vigorously” denied Picard’s charges—and Picard has responded by tripling damages to $19 billion.

Goldman Sachs is widely reviled for duping its own clients by selling them shares in a mortgage-backed security the investment bank dubbed Abacus. But JPMorgan had its own Abacus. It was called Squared CDO 2007. And according to the Securities and Exchange Commission, JPMorgan’s behavior was just as contemptible as Goldman Sachs’s. It, too, let a hedge fund secretly choose the subprime loans in a product that the hedge fund wanted to bet against; it, too, failed to inform clients purchasing shares in Squared that it had let a hedge-fund manager rig the game.

In June, JPMorgan Chase (without denying or admitting guilt) paid $154 million to settle Squared-related charges filed by the SEC—equal to less than two days’ worth of company earnings that quarter. The bank also returned $126 million to clients who lost money on Squared and, for good measure, paid $57 million to investors who lost money in a second, similar deal called Tahoma CDO-I.

Yet a lack of candor in dealings with its own clientele is only one way JPMorgan contributed to the subprime disaster, causing so much misery for so many. Through its subprime arm, Chase Home Finance, the bank fed the subprime machine by originating billions of dollars of subprime home loans a year—$12 billion just in 2006, the year the subprime-mortgage orgy reached its peak.

And the bank, through JPMorgan Mortgage Acquisitions, was a huge player on the other side of the equation as well. JPMorgan Acquisitions snapped up $18 billion in subprime loans in 2006 alone, holding on to them long enough to pay a rating agency to stamp them Triple-A before selling them in bundles to pension funds, municipalities, and others.

JPMorgan’s treatment of active-duty members of the armed forces has been particularly shameful. The Servicemembers Civil Relief Act forbids a bank from foreclosing on a soldier fighting overseas, and caps home-loan interest rates at 6 percent for most active-duty personnel. JPMorgan has admitted to congressional investigators that it has overcharged 10,000 military families on their mortgages and foreclosed on 54 of them.

Then there are the multimillion-dollar lines of credit JPMorgan provides (according to “The Predators’ Creditors,” a report by National People’s Action, to Ace Cash Express and Cash America, two of the country’s larger payday lenders. JPMorgan has also been a central player in the rise of the instant tax-refund business. Until leaving the business last year under pressure from federal regulators, JPMorgan was the bank to 13,000 of these instant-refund mills, which cater to people so desperate for quick cash that they’ll pay triple-digit interest rates to get their tax refund immediately rather than waiting two weeks.

JPMorgan received $25 billion in TARP money at the end of 2008—but with financial reform on the horizon, the bank spent $6 million on lobbyists in 2009 and an additional $7 million in 2010. 2010 was a particularly good year for JPMorgan, which booked $17 billion in earnings, and for Jamie Dimon, who received $21 million in compensation—or 900 times more than the $23,000 a year the average Chase teller makes. Still, that was half the $42 million Dimon paid himself in 2006 and less than the $34 million he received in 2007.  It was slightly better than the $20 million Dimon made in 2008—but, then, 2008 was the year that Dimon and his fellow bankers nearly brought the global economy to its knees.

Wells Fargo

Wells might seem small, at least when compared to giants like JPMorgan or Bank of America, and therefore not as worthy of revulsion as the other big boy banks, but then looks are deceiving. Wells is the country’s second largest bank in terms of deposits and its stock is valued at more than that of JPMorgan Chase, Citi, Bank of America, or Goldman Sachs.

It’s also the bank with the most shameful record on race.

Don’t take our word for it. Consider the sworn affidavit of a whistleblower named Tony Paschal, who for 10 years worked in Virginia as a loan officer for Wells Fargo Financial, the bank’s subprime subsidiary. “They referred to subprime loans made in minority community as ghetto loans,” Paschal said in an affidavit he gave shortly after the subprime collapse. “The company put ‘bounties’ on minority borrowers. By this I mean that loan officers [like myself] were offered cash incentives to aggressively market subprime loans in minority communities.”

Another whistleblower, Camille Thomas, who reviewed loan papers at four Well Fargo offices in the Memphis area between 2004 and 2008, said in an affidavit she gave last year, “It was generally assumed that African-American customers were less sophisticated and intelligent and could be manipulated more easily into subprime loans.” Elderly blacks who were house rich but cash poor were particularly prized, given the profits the bank could make bamboozling them to refinance with a high-fee, high-interest loan crammed with expensive extras.

Doris Dancy, another former Wells Fargo Financial employee, spoke during a deposition of the pressures she felt to dangle deceptively low teaser rates in front of black homeowners to induce them to refinance into loans that, once the teaser rate expired, carried interest rates of between 11 percent and 17 percent. Dancy left Wells at the start of 2008, after just six months, she said, because “I thought this was an unethical and dirty trick… I knew it was going to cause folks to lose their homes.”

A fourth whistleblower, Michael Simpson, a former branch manager overseeing a Wells Fargo Financial office in Memphis, said “Money corrupted Wells Fargo and clouded the judgment of upper management. The enormous amounts of money coming in from subprime loans meant that unethical and dirty managers like my district manager were supported and rewarded.” In 2006 alone, according to data provided by a trade association covering the subprime-mortgage market, Wells made $28 billion in subprime home loans.

The city of Memphis and the local county government have sued Wells for “unfair, deceptive, and discriminatory” lending practices that officials there contend cost them tens of millions in tax dollars and caused rampant blight. The city of Baltimore has filed a similar suit, though a federal judge there has instructed the city to narrow its claims. In February, Wells paid $10 million to settle a separate class-action suit charging that it improperly added attorney’s fees to the refinancings of 60,000 or so military veterans.

The bank has also admitted to Congress that it illegally seized the homes of 17 active-duty combatants and overcharged more than 3,000 military families on their mortgages. It denies, however, the charges of a racial bias in its lending.

Just like JPMorgan Chase, Wells too has been a big player in the poverty industry. The bank provided much of the initial seed money to those behind Advance America, today the largest payday lender with more than 2,000 stores across the country, and it still provides multimillion-dollar lines of credit to Advance America and several other large chains. Wells has angered consumer advocates by offering its own payday product carrying a triple-digit interest rate.

In July, Wells agreed to pay (without denying or admitting guilt) $85 million to settle charges filed by the Federal Reserve that it pushed borrowers into high-interest subprime loans, even though they qualified for lower-rate loans, and for falsifying documents. The Fed touted the fine as the largest it had ever imposed in a consumer-enforcement case. But the fine seemed a pittance given the $4 billion in profits the bank booked in the previous quarter. In a prepared statement, the company’s CEO, John Stumpf, referred to “the alleged actions committed by a relatively small group of team members.”

Wells took $25 billion in TARP money at the end of 2008—and has spent more than $12 million on D.C. lobbyists in the 30 months since then.  Stumpf, a Wells man since 1998 and CEO since 2007, was in a top position when the worst of the bank’s practices occurred. But who cares about a raft of charges that they targeted black homeowners and falsified loan documents when Wells has booked $37 billion in pre-tax profits over the past two years? Stumpf is paid an annual salary of $6.6 million but received $12 million in additional compensation in 2009 and $14 million more in 2010—or just under $40 million in two years.

Citigroup

The sins of Citi start with Sandy Weill—the perfect poster boy for the subprime era. It was in 1986 that Weill, then a 53-year-old Wall Street castoff looking for his next act, bought a mangy, third-rate lender called Commercial Credit. You’re buying a loan shark, his otherwise loyal personal assistant said of this chain of storefront lenders in the business of gouging working-class customers looking for financing on small purchases like refrigerators and bedroom sets. But Weill saw its potential, aggressively moving Commercial Credit into subprime mortgages and then using the profits to go on a buying spree. A dozen years later, he merged his company with Citibank and took over as co-CEO.

It’s hard to overstate the destructiveness of Weill’s greed. By the time he made his play for Citi, Weill had already swallowed up Travelers Insurance, Smith Barney, and Salomon Brothers. Except a Depression-era law, the Glass-Steagall Act, dictated that banks, with their federally insured deposits, couldn’t take over insurance companies or Wall Street investment houses. But Weill put together this behemoth anyway and went about masterminding the repeal of Glass-Steagall, which happened in 1999.

The repeal of Glass-Steagall set the stage for the financial meltdown that would follow years later. The rationale for Glass-Steagall was never more clear than in the final months of 2008, when federal officials faced the potential for widespread bank failure largely because of the great risks taken by its investment-banking arms.

Yet the pain Weill inflicted on the world didn’t end with the role he played in the repeal of Glass-Steagall. There was Citi’s takeover in 2000 of The Associates, a subprime-mortgage lender widely considered the industry’s most predatory. Two years later, Citigroup paid a then-record $215 million to settle charges leveled by the FTC that The Associates, renamed CitiFinancial, used deception to convince customers to refinance at usurious interest rates—and agreed to reform its ways. Still, the company would set another record when in 2004 it paid the Federal Reserve $70 million (without admitting its guilt) to resolve new charges against CitiFinancial. But what did a few hundred million dollars in settlements matter when compared to the tens of billions of profits Citi was reaping? A top-five subprime lender, Citi made $38 billion in subprime home loans in 2006 alone, a year in which the bank reported $28 billion in profits.

It wasn’t just the origination of subprime home loans that drove profits. Like JPMorgan Chase and other goliaths born with the end of Glass-Steagall, Citi played the securitization game as well. The bank wrangled more than $20 billion in mortgage-backed deals in 2006 alone. On October 19, Citi agreed to pay $285 million (without denying or admitting guilt) to settle a complaint filed by the SEC charging that the bank had defrauded its own clients by selling them shares in a rigged mortgage-backed security.

It was just another slap on the wrist, really, given that two days earlier, the bank reported profits of $4 billion in the year’s third quarter.

Bank of America

Bank of America’s story is similar to that of the other big banks. It paid $137 million to federal and state authorities to settle charges that it rigged bids on municipal bonds, defrauding schools, hospitals, and a long list of municipalities, and it coughed up an additional $20 million to resolve claims by 160 or so military personnel claiming they had been illegally booted from their homes in a foreclosure.

Bank of America was the first major bank to get into the subprime-mortgage business when it purchased a multibillion-dollar subprime lender in 1992 (it bought a second huge player several years later). Its employees have as much explaining to do as any bank about the "robo-signing" scandal—which saw bank employees swearing they had done the necessary due diligence to prove the bank had the right to seize an individual’s home, when they had not. During a deposition, for instance, one Bank of America employee asked how she could be expected to actually look over the paperwork when she was signing 7,000 to 8,000 foreclosure documents per month.

Like the other banks, Bank of America is also an enabler of the poverty industry, giving Advance America, the giant payday chain, a $265 million line of credit—allowing it to borrow money at 3 percent interest and loan it out at 400 percent.

The bank paid $1.35 billion to Freddie Mac in 2010 to put to rest claims (largely inherited with its purchase of Countrywide at the start of 2008) that it misled Freddie about loans sold during the subprime boom—and then a report by the inspector general for the agency overseeing Freddie said that dollar figure didn’t come close to paying for Countrywide’s sins. Bank of America proposed a payment of $8.5 billion to settle claims by private investors that Countrywide deceived them in its sale of mortgage-backed securities—except the deal was blocked by, among others, the FDIC and the attorneys general of New York and Delaware.

Yet one way Bank of America stands out from its competitors: shareholders are suing the company over its purchase of Merrill Lynch, claiming company executives failed to disclose the worst about Merrill until after the deal had closed. The bank (without admitting or denying guilt) already settled SEC charges that it deceived its shareholders over the Merrill acquisition, paying $150 million—a dollar figure the federal judge approving the deal called “paltry.” Another way Bank of America stands out: its handling of its roughly 1.3 million mortgage accounts that are delinquent.

Customers of all the big banks complain that being behind on your payments means a Kafkaesque journey through a maze where straight answers are impossible to come by and the odds are high that you’ll need to send in your paperwork several times before the right person actually receives it. Still, Bank of America distinguishes itself even among this crowd. A study by Moody’s released at the end of last year found that Bank of America took longer than any of the other major banks to resolve a delinquent loan. And data from HAMP, the program the Obama administration set up to help homeowners avoid foreclosure, shows that Bank of America has the highest number of customers eligible for a loan modification under HAMP—but the lowest rate of success: it provided loan modifications to fewer than one in three homeowners eligible for the program. (Not that the other banks have done much better: Bank of America has granted permanent loan mods to 32 percent of those who have gone through the program, compared to 35 percent for JPMorgan Chase, 36 percent at Citi, and 39 percent at Wells.)

Bank of America received two bailouts from Washington totaling $45 billion—and since that time has spent more than $9 million on D.C. lobbyists. The bank was particularly generous to Ken Lewis, the deposed CEO behind the ill-conceived purchases of Countrywide and Merrill: he left the company with an exit package of nearly $64 million in retirement pay. It has been similarly munificent with Brian Moynihan, who took over the company at the start of 2010. Under his stewardship, BofA’s share price has fallen nearly 60 percent, but the board of directors awarded him $9.1 million in stock at the end of his first year on the job, above and beyond his $950,000 annual salary.

Goldman Sachs

Bank of America has admitted that its employees paid “kickbacks” to government officials to win deals in the lucrative muni bond market. The Goldman Sachs advantage, in contrast, is that so many of its former partners are the government. Henry Paulson, the CEO and chairman of Goldman Sachs before becoming George W. Bush’s secretary of the Treasury, let Lehman Brothers (a longtime Goldman rival) die because he believed in the free market. Several days later, however, Paulson helped save Goldman’s bacon when he spent $85 billion in government money to bail out the insurance giant AIG.

No financial institution was a bigger customer of AIG’s than Goldman, which had used AIG to “short” (in English, to bet against) the subprime market. And no institution outside AIG itself was as dependent on the insurance giant’s survival as Goldman was. AIG owed Goldman $13 billion in credit-default swaps—and, incredibly, the deal terms hammered out with the government had Goldman receiving all $13 billion (as opposed to the 13 cents on the dollar Merrill Lynch received from other failed insurers, according to New York magazine).

Today, Goldman faces a rash of lawsuits from aggrieved clients who feel betrayed—betrayed by an investment adviser that continued to sell billions of dollars’ worth of mortgage-backed securities to its customers even as it failed to inform them that the firm was making enormous bets that these would turn out to be terrible investments.

In mid-2009, Goldman paid $60 million—literally less than the amount of revenue booked in a half-day that year—to end an investigation by the Massachusetts attorney general into its subprime-mortgage activities. New York’s new attorney general is investigating the mortgage-backed securities operations at Goldman (and also Bank of America and Morgan Stanley).

And, of course, there’s Abacus and the $550 million the company paid the SEC (without denying or admitting guilt) because it failed to inform clients that it had allowed John Paulson, a prominent hedge-fund manager seeking to bet against its success, to handpick subprime home loans he thought had the greatest chance of failing.

Goldman didn’t originate subprime loans like the other big banks. Instead, it bankrolled top subprime lenders like New Century and (along with Citigroup and Merrill Lynch) financed CompuCredit, a top subprime credit-card issuer which, after it was sued by the FTC for engaging in “deceptive conduct in connection with marketing credit cards,” agreed to refund at least $114 million to customers.

Critics castigate other banks for abusing individual investors. Goldman they accuse of rigging whole markets. The German magazine Der Spiegel published a long piece last year charging Goldman Sachs of helping the Greek government mask the true extent of its debt (Goldman denied comment when contacted by the magazine). Harper’s ran a provocative article by Frederick Kaufman that essentially charged Goldman with messing up the world market for wheat simply to turn a buck—and inadvertently causing widespread hunger across the globe. (Again, Goldman declined comment.) Rolling Stone  political writer Matt Taibbi—he of the unforgettable description of Goldman as “a great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money”—lays much of the blame on Goldman for the spike in the price of oil several years back. 

Goldman received $10 billion in TARP money—and then seemed to spit in the face of those choosing to bail out Wall Street’s banks. It ended 2008 with $2.3 billion in profits but paid only $14 million in taxes that year—rather than the $800 million it would owe if paying the standard 35 percent that corporations even sometimes pay.  Goldman explains a tax rate of less than 1 percent by pointing to a change in its “geographic earnings mix”—or as Lloyd Doggett, a Democratic congressman from Texas, explained it, “With the right hand out begging for bailout money, the left is hiding it offshore." That left hand is also giving themselves huge bonuses, starting with CEO Lloyd Blankfein. Goldman’s reputation, and also its stock, is down, but Blankfein’s compensation is way up.  At the start of the year, the Goldman board bumped his base salary from $600,000 to $2 million annually and showered him $13 million in stock.

It’s enough to make you want to stuff your earnings under a mattress rather than trusting your money to one of these malefactors. But then you’d need to rely on a check casher to pay the rent and other bills—and Wells Fargo, JPMorgan Chase, and Bank of America are among the big banks profiting off the check-cashing business.

Research Assistance by David Graham