Wednesday, 17 July 2013

In 2011 Lee Farkas went to jail for financial fraud – John Key - his fellow Wall Street banker - became the Prime Minister of New Zealand – Was that fair?

Lee Farkas story first – followed by that of John Key.

It has become widely recognised that much of the cause of the 2008 Global Financial Crisis was financial institutions - in the pursuit of short-term profit - issuing more products based upon contracts of credit than there ever existed the natural resource collateral to ever clear.

First Major Criminal Conviction Related to the Mortgage Meltdown
The Justice Department is celebrating this week after finally landing a major criminal conviction in the aftermath of the mortgage meltdown. The Justice Department was able to stick 14 counts of fraud and conspiracy on Lee Farkas in what is reported to be a $2.9 billion mortgage fraud scheme. Mr. Farkas operated a huge mortgage business, known as Taylor, Bean and Whitaker.
Taylor Bean apparently sold billions of dollars of mortgages to Fannie Mae and Freddie Mac and obtained loans from large U.S. and foreign banks that were collateralized with fictitious mortgages or mortgages already sold to others.
As is common with many fraudsters, Mr. Farkas had an appetite for material possessions that led him to spend at least $20 million of other peoples' money on things like fancy homes, classic cars and even a private jet (see the photo to the right). Accordingto the NY Times,
"The scheme began in 2002, prosecutors say, when Taylor, Bean & Whitaker executives moved to hide the firm’s losses, secretly overdrawing its Colonial Bank accounts, at times by more than $100 million. To cover up the actions, prosecutors said that the lender sold Colonial about $1.5 billion in “worthless” and “fake” mortgages, some of which had already been bought by other institutional investors. The government, in turn, guaranteed those fraudulent home loans."
 In anotherNY Times article, it was reported that:
The fraud would last for seven more years, ending in 2009 because Taylor Bean’s principal bank, Colonial Bank of Montgomery, Ala., was itself in danger of failing. Mr. Farkas came up with a scheme to appear to recapitalize the bank, and thus get federal bailout money, but it did not work.  
Much of what Farkas was convicted for was creating fictitious mortgage loans and use the fictitious loans as collateral for obtaining financing from major banks including two large European banks, Deutsche Bank and BNP Paribas. For example, these two banks "thought their $1.68 billion in loans was fully secured by collateral. But only a tenth of that collateral was real." Apparently, the jury found that the scheme to create fictitious loans was ultimately Farkas's doing.

Interestingly, Farkas gave the jury a pretty clear cut case in that he essentially said that he thought he had the right to commit fraud.Accordingto the NY Times, Farkas said the following:
Patrick F. Stokes, a deputy chief of the Justice Department’s criminal fraud section, asked Mr. Farkas if he thought Taylor Bean’s agreement with Colonial Bank allowed the mortgage firm “to sell fraudulent, counterfeit, fictitious loans” to the bank.
“Yeah, I believe it does,” he replied.
“It’s very common in our business to, to sell — because it’s all data, there’s really nothing but data — to sell loans that don’t exist,” he explained. “It happens all the time.”
Seriously?! I don't know how to respond to a statement like that. Maybe I will try for the "understatement-of-the-year award" and say Mr. Farkas has a problem with his ethical compass?!

It sounds like he'll probably have the rest of his life behind bars to try to get it worked out...

John Key - The Unauthorised Biography
Weekend Herald Sat July 19 2008
Into the big time
It was 1995. Again Key blasted through the ranks. His confidence was legendary. London-based senior executive Steve Bellotti visited, and when he asked what the new recruit thought of the company's FX performance, he was direct. "It sucks!"
Bellotti, a fast-talking Australian from Gympie, near Noosa, said: "If you're so clever I'll send you up to head office in London, and if you don't make it in 12 months, I'll sack you."
Key shot back: "If I don't make it in 11 months, I'll quit."
Bellotti made him global head of foreign exchange and he revolutionised the "blue blood" investment banking sector. "There was this massive opportunity to cross-sell the firm," says Key.
"We'd go to these fund managers and we'd talk to them about equities, but we wouldn't necessarily leverage foreign exchange - and when we did, they'd say our capability wasn't that good.
"So I wandered up to London and said, 'we're going to go interbank FX - make prices to the other banks'. Morgan Stanley, Goldman Sachs and Merrill Lynch, the blue-blood investment banks, didn't do that," he explains. "We actually took on the big banks, Citibank, Chase, then we went and hired their staff and went to their clients and told them 'look, we've got all those same capabilities as Citibank in FX and options.
Plus we had this beautiful thing going because we were the first to supply margin trading to big hedge funds. We had the capability to cross-sell them several products using one bit of margin."
Remembers Bellotti: "I brought him to London and he shot the lights out there too. Within three to four years Merrill Lynch, London, was regarded as one of the premier businesses."
Key explains: "I had a whole lot of people working for me who were at the cutting edge of delivering quite complex and new and innovative products. They tended to either be a new product or into a new market, usually the emerging markets, Russia, Brazil, Argentina. I wasn't the guy sitting there dreaming it all up, but I was the guy who was responsible for those people." Did he foresee the problems which resulted in the sub-prime crisis? "Was it hard to predict? Not really."
The products which underpinned the sub-prime boom - then bust - were hatched in 2004-2005, long after Key had left Merrill. Indeed, he says when he went back to London in 2007 he was "horrified" at the level of risk Merrill was running. "It was enormous and I just didn't think that enough had changed to warrant that level of risk."
Back in the late 1990s Key was in his element, working at the centre of the universe for FX. He presided over around 140 dealers trading billions of dollars a day. The Asian markets came in in the morning and New York in the afternoon. "Within two years we went from being 43 in euromoney to number three," Key says.
"He never mucked up," says Bellotti. "Although they lost money, as you do, he never panicked, never stressed out, just did his job."
Geoff Massam, a New Zealander then running the IT part of Merrill Lynch's FX business, now with Deutsche Bank in Connecticut, remembers how Key would be on the phone to the Governor of the Reserve Bank, Don Brash: "Though he wouldn't do it in a name-dropping way - he was talking to people like that all the time."
Massam believes Key's knowledge of the global economy would give him a "huge advantage" in running the country.
Although a "great client person" responsible for serving the people who ran the world's biggest pension funds, Key, who worked 12-14 hour days, did not subscribe to the lap-dancing, carousing, money trader stereotype. "We didn't do that, condone that," says Bellotti. "It was all just good clean fun. Sure we'd go out drinking with clients, go on trips with them, skiing to Verbier and St Moritz - but apart from that it wasn't our thing."................Bellotti, like many other middle-aged former traders, now travels the world investing his money - in his case in luxury resort complexes.
He considers Key a world-beater."His career's a good lesson in life when it comes to risk management. Most people don't know what risk versus reward - or return - is about. John does. One weighs up the odds, balances the situation, measures the people, balances the evidence. John Key totally understands his environment and the outcomes. He transcends the market, geography and people. This guy is going to put New Zealand on the world stage."Bellotti remembers back to one winter's day, standing in the rain outside the office in the 3pm gloom of Ropemaker St, near Liverpool Street Station, and talking to Key: "There must be more to life than this?"
By 2001 Key was homesick. It was time for the next step of the plan: He flew to New York to see their ultimate boss, G. Kelly Martin, and resigned.
"Clearly John you're having a mid-life crisis, let's talk this through for God's sakes," said Martin, who has extricated himself from a business dinner in San Francisco to talk about his former employee. "John faced off some of the biggest clients in the world, including governments," he says. "He worked with the Government of Singapore, the Central Bank of China, some of the big Middle Eastern pension funds, Shell and US Fidelity and Capital. He had a very good handle on a variety of financial products: one of the most senior client people we had."
But Key was adamant. "No, I want to go. That's what I want to do."
"Was I upset to lose him? Oh no," says Martin. "Talented people want to do interesting things and it's kind of hard to hold them back."
But why send him to manage debt markets in Australia? Was he fired?
"No, no, no," says Martin.
"He was specifically asked by me to go down to Sydney and give Merrill Lynch another year and a half and help me find out what the strategy in Australia should be. He came up with some very good insights, helped us focus on certain areas, the right clients, and set up in a way that made a lot of sense."
"We joke with each other, we don't know what training we got at Merrill Lynch but we seem able to adapt to make an impact in other areas. But I think if you bring the basics: risk/reward; investment/return you can take those skills to other activities."
That same group at Merrill Lynch are now scattered over the world. One is an assistant secretary of defence in Asia, 25 are CEOs of different industries. Martin himself, now 49, is CEO and president of Dublin-based Elan, the largest biotech company in Europe developing drugs to fight multiple sclerosis and Alzheimers.
"And then there's John who's a very special and unique guy," says Martin.
"A lot of people have plans but very few execute them. John did."

Key chases luck o' the Irish
Wednesday Jul 20, 2005
By Fran O'Sullivan National MP John Key gets a gleam in his eye when he starts talking about New Zealand becoming the "Jersey of the South Pacific". "Why not have an offshore banking industry based here?" he asks.
"In the right conditions you could attract 200 banks to register here - each with a CEO and staff. You could attract insurance companies. Bring back lots of Kiwi accountants and lawyers. Single out clusters - such as high-class yachts - or other special sectors as the Irish did."
Key is clearly on a roll as he lists the options New Zealand could explore if it decided to abandon outdated ideology and take a more pragmatic approach to growing the economy.
The former investment banker knows what he is talking about.
As head of global foreign exchange for investment giant Merrill Lynch he shifted a considerable amount of his business to Ireland in the mid-1990s to take advantage of a 10 per cent tax rate for foreign investors.
The investment was a runaway success.
"We transferred across the aircraft leasing business, the complex interest rates derivatives business, the entire back office for global foreign exchange and a huge chunk of private clients' business," says Key.

By the time he left Europe to head home and stand for the 2001 election as a National candidate, Merrill Lynch had more than 400 staff in Dublin. It now has 700.
It was also paying the equivalent of about $250 million a year to the Irish exchequer for tax and indirectly propping up a swag of top-class Dublin restaurants and bars as its young money-men lived the life of Reilly.
The Merrill Lynch story was writ large across the economy by a raft of other big-name financial investors, and US computer and pharmaceutical firms, which ploughed investment into Ireland.
The example of how the Irish transformed their economy into one of Europe's pre-eminent investment destinations and lifted per capita GDP has stayed in Key's mind.
But as a former money-man, he is also interested in how Jersey built its economy on the back of offshore trusts.

And how Taiwan poured money into its existing industries through increased research and development, singling out particular sectors, such as nanotechnology or cellphone technology, to differentiate its economy.
Key believes too much of New Zealand's foreign investment has been based on investment in existing businesses - not on completely new ventures.
"From New Zealand's perspective there is the opportunity, if we wish to consider it, of saying how can we explore and grow new industries."
If National wins the election Key will be Minister of Finance. Already he is planning a feasibility study to see if some of Ireland's measures can be adopted here to fuel an economic transformation.
"Why not look at the success lessons from other small island economies?" he asks.
The Irish model is perhaps more easily understood here than the Jersey model, with its whiff of tax-haven activities. In post-Winebox days, this might get up the nose of New Zealand First Leader Winston Peters - a potential National coalition partner. Clearly Key's proposals are well ahead the ideas of many in his party who are still locked into the 1980s ideology of neutral tax regimes.
Or even those of his own leader, Don Brash, who retains a decidedly Presbyterian approach to meddling with the economic levers. His is basically an agnostic approach when it comes to playing with the country's balance sheet to obtain particular outcomes.
Key's point is that all options should at least be explored.
He claims the current Government is acting as an obstacle to business and needs to be more user-friendly.
Again drawing on the Irish model, he tells how the Industrial Development Agency "guys" used to attend Merrill board meetings and talk through issues affecting the business. The agency would come up with ideas and adjust rules to help the company - "as long as it was not intended to thwart the opposition".
"It was the complete opposite to the way we operate in New Zealand at moment," he says.

"The government sector was much more interactive, much more user-friendly, much more industry-based and less focused on grants."
He dismisses claims that Ireland's success was based on the republic's ready access to European structural subsidies ("they occurred well before Ireland took off").
The corporate tax rate and the huge investment in educational achievement were major factors, he says.
On top of that, Ireland's investment in a national broadband service to aid technical investment was a standout factor.
"If you get the framework of the economy right the market will sort it out."
Key will soon get a chance to test his ideas as the election gets past the phony stage. National will release its tax cuts package early on in the campaign. Debate will inevitably focus on the size and affordability of the package. But the initial tax cuts will not be radical.
Key has no plans to increase GST to 15 per cent (although he can quickly parrot off the numbers) to offset major personal tax cuts as Labour did in the 1980s. That would also involve adjusting benefit rates to offset the increased cost of consumption.
But it is apparent that Key believes there is plenty of room for a series of cuts, given the size of the Labour Government's spending pledges over the next three years.
Prime Minister Helen Clark and Finance Minister Michael Cullen will soon put their record in front of voters and campaign for a third term in Government based on their experienced handling of the economy.
"Clark and Cullen" - as the Prime Minister often says - have presided over a golden growth period.
But opinion polls indicate voter disenchantment with Labour's old firm. Debate is bound to get nasty as Cullen, in particular, tries to portray Key as an inexperienced politician who is prepared to buy off voters with tax cuts that a contracting economy cannot afford.
In political terms both Key and Brash are relative novices. They have been in Parliament for a mere term, compared with the Labour firm's eight terms.
But voters should be able to look past their relative political inexperience to their huge "real-world" experiences, as Merrill Lynch operative and a former New Zealand Reserve Bank governor.
In Key's case he can also point to the invitation he received in 1999 to join the Foreign Exchange Committee of the Federal Reserve Bank of New York as further evidence of his economic management credentials.
Game on.

John Key Says He Should Be Held To Account For His Part Of The Global Credit Crisis!

Afternoon of 5 Nov 2008
Willy Jackson and John Tamahere interveiwed John Key. Here is an answer given by John Key re what caused the credit crisis. It should be remembered that at about this time in the election campaign he was batting away questions from Labour in regard to his career at Merril Lynch 7 years ago as being that long ago there is no way he could be tied to having any contribution to the current Credit Crisis;
Caller Matty asked John Key what he thought got the world into this position(Credit Crisis) John Key replied;
“Relatively quickly, you had a massive expansion of credit over the last decade or two, so basically the banks have gone and leant miles of money engaged in very risky behaviour, they have done it to to much of an extreme and whats happened is that eventually the chickens have come home to roost and its all imploded and yup, you know Wall St its got to take rensponsibility for its own excesses and its got it wrong, the good news is from New Zealands point of view is our banks haven't really engaged in that kind of behaviour and dont have exposure to the kind of counter parties that fell over, but unfortunately Mum and Dad owe a lot of money, not the government, the governments not at all indebted really, but Mum and Dad are and whats happened is that liquidity to fund their borrowing is drying up”.
John Tamahere asks;
“Ok, oh, exposure to the Australian banks”.
John Key replied;
“Yeh, look I tell you the thing with the Australian banks is, it, um we need to, ah in one sense weve got a bit of strength funnily enough, I know people, I mean I support KiwiBank, we are not selling it, we never going to sell it, but, but I do support the fact that because the Australian banks have quite a big part of our market, because they a bigger, theyre just bigger organisations thay can actually weather these storms a little bit, theres some upsides, I know a lot of people dont like them, but there are some upsides to having them in our economy. Secondly, we just got to make sure that, that wholesale guarantee which allows the New Zealand subsidiaries in their own name to be able to raise capital to be able to operate and weve got work with, not because we are trying bailout the banks, no one should be under that illusion, but if they cant borrow they cant lend and our economy is going into depression if that is the case.”

1 comment:

  1. Key wants to entice offshore banking and investment systems into the country, just so he can do what he did when he was with Merrill Lynch. Make millions at the expense of others, ruin their economy, and get away with it all undetected. Unfortunately, Key can only get away with so much, and it's all going to catch up with him eventually, along with him losing everything.