From The Institutional Risk Analyst

The path of economic interest is strewn with casualties, what some analysts call collateral damage. In this issue, we look at the who is looking out for whom and ask the question of whether or not something other than the relatively narrow interests of central government and corporate management need to be taken into account in the greater scheme of restoring confidence in the financial system. — D.S. 

First we send kudos to the Federal Reserve Board for approving the acquisition of a UT based industrial lender by Green Dot Corp, as reported by American Banker. It is long past time for the Fed to encourage the entry of new capital investment and management talent into the banking sector

“Green Dot’s dominant partner is Wal-Mart Stores Inc., which is also a shareholder and relies on Green Dot to help run its own prepaid cards,” American Banker’s Dean Anason reports. Now federal regulators, however, face the near certainty that another large industrial corporation will challenge the non-bank moratorium that has been in effect, illegally, at the FDIC for many years. We repeat our call for Congress to repeal the ownership restrictions in the Bank Holding Company Act.

It is our strong preference to focus on the future and solutions, but we also need an accounting. Thus the continued discussion about the fitting punishment for the wrong doers in the subprime debacle. In their latest review, “Should Some Bankers Be Prosecuted?” November 10, 2011, The New York Review of Books, Jeff Madrick and Frank Partnoy review several congressional reports as well as the new book by William D. Cohan, Money and Power: How Goldman Sachs Came to Rule the World.

The question the reviewers ask: Should the bankers who helped to create the financial catastrophe we call the subprime debt crisis be held accountable at law? They conclude:

“If serious prosecutions of fraud by Wall Street firms are never brought, the public’s suspicion about Washington’s policies toward bankers will only grow, as will cynicism about the rule of law as it is applied to the rich and powerful. Moreover, if investing institutions and individuals come to believe that bankers cannot be trusted, the underpinnings of the market will be eroded. Without solid, well-functioning markets, the economy cannot adequately and efficiently allocate capital to high-valued uses and create jobs. Lack of ethics and corrupt behavior will channel the nation’s resources to uses that are wasteful and unproductive, as they arguably have for several decades now as too many unethical practices have gone unchallenged.”

Most of the readers of The IRA would probably agree with the statement above by Partnoy and Madrick. To read the related comment by IRA co-founder Chris Whalen on the review by Madrick and Partnoy of Reckless Endangerment: How Outsized Ambition, Greed, and Corruption Led to Economic Armageddon by Gretchen Morgenson and Joshua Rosner, click here.

But an important and almost equally important issue regarding professional malfeasance is the question of how, in practical legal terms, investors and other creditors pursuing bad actors and organizations for civil money damages. Here the situation is quite clear, but not the way you might think. Even with all of our collective experience and time spent on the housing finance mess, there are new details for investors and professional advisors to discover and evaluate every day.

The widespread assumption is that the government, in the case of the SEC and FDIC pursue such civil claims on behalf of investors, but that is not always or even mostly the case. Investors often unknowingly abandon billions of dollars in potential private tort claims against advisors and other professionals involved in the creation of fraudulent securities, as in the case of the class action litigations involving Bank of America and other large banks. Often times managers and advisors leave on the table big money that ought be pursued on behalf of their clients to offset losses.

Read more here