Bash the Bank

Saturday, February 19, 2011 by CommonDreams.org
by Christopher Brauchli

"A power has risen up in the government greater than the people themselves, consisting of many and various and powerful interests, combined into one mass, and held together by the cohesive power of the vast surplus in the banks."
—John Caldwell Calhoun, Speech 1835

For the last quarter of 2010, JPMorgan Chase (JPMC) had a 47% jump in profits and since 2010 was such a good year it set aside $9.73 billion for its investment bankers’ bonuses. It is easy for pundits to decry such bonuses and at the World Economic Forum in Davos the bank’s president, Jamie Dimon, struck back at critics. He deplored what he described as “banker bashing” and said that bankers have become political whipping boys. He doesn’t seem to know why that is. To figure it out he could go back to JPMC’s actions in the early days of the foreclosure crisis and its unwillingness to help homeowners, whose homes were in foreclosure, modify their mortgages, an unwillingness described here and in countless other publications.

Alternatively Mr. Dimon might have considered events that would be described by Stephanie Mudick, an executive vice president in JPMC’s Office of Consumer Practices when testifying before the House Committee on Veterans Affairs on February 9th. She testified that the bank had overcharged approximately 4,500 members of the U.S. military on mortgages and had “accidentally” foreclosed on 18 service members’ homes. Stephanie expressed the bank’s “deepest regret over the mistakes we’ve made in applying these protections [for service members]. I commit to you that we will get this right.” (On February 15th it was announced that the bank would make amends by, among other things, not foreclosing mortgages on any active-duty military personnel. This will, of course, not help those who “accidentally” lost their homes or were overcharged. As one lawyer representing service members who had been cheated by the bank observed: “When I was prosecuting cases, I never had a defendant who got caught breaking the law that didn’t want to give back what they took and promise to lead a better life.”)

When berating his critics, Mr. Dimon knew about the lawsuit that was filed against the bank by Irving H. Picard in early December 2010. Mr. Picard is the bankruptcy trustee who is making claims against those who were unjustly enriched by their dealings with Bernie Madoff. According to Bloomberg News, in his suit against the bank, Mr. Picard alleges that the bank knew of Madoff’s fraudulent operation and was, according to Mr. Picard’s attorney, “willfully blind to the fraud, even after learning about numerous red flags surrounding Madoff. JPMC was at the very center of that fraud, and thoroughly complicit in it.” Some people might think the allegations in the suit would have chastened Mr. Dimon. On the other hand, maybe not. After all, a plaintiff can say anything he or she wants in court pleadings and that does not make them true, even when Bernie Madoff says the banks knew what was going on. And if those episodes did not help Mr. Dimon understand why people bash banks, he might consider the matter of the Blackstone Hotel in Chicago and New Markets Tax Credits (NMTC).

The Department of the Treasury describes the NMTC program saying it “permits taxpayers to receive a credit against Federal income taxes for making qualified equity investments in designated Community Development Entities (CDEs).” The credit totals 39 percent of the cost of the investment and is claimed over a seven-year credit allowance period. An organization that wants to receive money under NMTC must demonstrate “a primary mission of serving, or providing investment capital for low-income communities or low-income persons as defined by the Department of the Treasury. The determination as to whether an area meets the requirements is based on the most recent census which is the year 2000. As Bloomberg Markets Magazine reported on February 11, 2011, because of the use of old census data many high-end developments have occurred with NMTC funds that were not supposed to be the beneficiary of those funds. The Blackstone hotel is one of them. It opened in 2008 after a $116 million dollar renovation. Rooms at the Blackstone today go for up to $699 a night. Very few low-income persons stay there.

Prudential Financial Inc. developed the property and got $15.6 million in tax credits. JPMC was the lender and handled construction financing receiving fees and interest from the project. A spokesman for JPMC told Bloomberg Markets Magazine “We think these projects help the community.” He’s probably thinking of employment opportunities since when it opened it hired 200 workers.

As Cliff Kellogg, a former senior policy advisor at Treasury discussing the Blackstone project told Bloomberg, “Things like luxury hotels are entirely contrary to what we set out to do.” It’s probably contrary to what Mr. Dimon’s bank set out to do when it participated in the project, helped Bernie Madoff cheat investors, cheated soldiers or accidentally threw them out of their homes. As the saying goes, bad things happen. That’s no reason to bash those who received $9.73 billion in bonuses. Just ask Mr. Dimon.

Grand Theft Economics

Veterans Agency Made Secret Deal With Prudential
Published on 09-22-2010 Source: Sott.net

The U.S. Department of Veterans Affairs failed to inform 6 million soldiers and their families of an agreement enabling Prudential Financial Inc. to withhold lump-sum payments of life insurance benefits for survivors of fallen service members, according to records made public through a Freedom of Information request.

The amendment to Prudential's contract is the first document to show how VA officials sanctioned a payment practice that has spurred investigations by lawmakers and regulators. Since 1999, Prudential has used so-called retained-asset accounts, which allow the company to withhold lump-sum payments due to survivors and earn investment income on the money for itself.

The Sept. 1, 2009, amendment to Prudential's contract with the VA ratified another unpublicized deal that had been struck between the insurer and the government 10 years earlier -- one that was never put into writing, Bloomberg Markets magazine reports in its November issue. This verbal agreement in 1999 provoked concern among top insurance officials of the agency, the documents released in the FOIA request show.

For a decade, until the contract was formally changed, Prudential wasn't fulfilling its obligations to survivors of fallen service members, says Brendan Bridgeland, an insurance lawyer who runs the non-profit Center for Insurance Research in Cambridge, Massachusetts.

'Violated Terms'

"It's very clear they violated the original terms of the contract," says Bridgeland, who is retained by the National Association of Insurance Commissioners to represent consumers.

"Every veteran I've spoken with is appalled at the brazen war profiteering by Prudential," says Paul Sullivan, who served in the 1991 Gulf War as an Army cavalry scout and is now executive director of Veterans for Common Sense, a nonprofit advocacy group based in Washington. "Now vets are upset at the VA's inability to stop Prudential's bad behavior."

That the VA allowed Prudential to issue retained-asset accounts for 10 years while the contract required lump-sum payouts is "more evidence that the VA was asleep at the wheel for a decade," says Sullivan, who was a project manager and analyst at the VA from 2000 to 2006.

"When grieving families check the box that they want a lump sum, they should get it. We remain disappointed and irate at the VA's failure to provide advocacy for veterans," he says.

State and U.S. Probes

Since July 28, when Bloomberg Markets first reported that Prudential sent checkbooks instead of checks to survivors requesting lump-sum payouts, state and federal officials have demanded the retained-asset system be investigated and reformed. The VA itself launched a probe of its life insurance program the day the first story was published.

The next day, New York Attorney General Andrew Cuomo launched what he called a "major fraud investigation" of Prudential and other life insurers over their use of retained- asset accounts. Since then, Cuomo's office has issued subpoenas to Prudential and at least 12 more insurance companies.

The insurance departments in Georgia and New York have also opened probes. The U.S. House Oversight and Reform Committee plans to hold hearings into Prudential's use of retained-asset accounts to pay money owed to fallen soldiers' survivors.

'News to Me'

U.S. Secretary of Defense Robert Gates -- who was in office when the 2009 agreement was signed -- said when the VA started its probe that he had been unaware that survivors were being sent retained-asset accounts.

"Until today I actually believed that the families of our fallen heroes got a check for the full amount of their benefits," Gates said at the time. "This came as news to me."

As a result of the VA probe, the agency announced today that it will change its insurance program, allowing survivors to request and receive lump-sum checks.

Under Prudential's original 1965 contract with the VA and a 2007 revised contract -- both of which were released as part of the FOIA response -- the insurer is required to send lump-sum payouts to survivors requesting them. The contract covers 6 million active service members, their families and veterans.

The checkbooks Prudential sends to survivors are tied to what the insurer calls its Alliance Account. The checkbooks are made up of drafts, or IOUs, and aren't insured by the Federal Deposit Insurance Corp. Prudential invests the survivors' money in its general corporate account, where it can earn the insurer as much as eight times as much as it currently pays in interest to beneficiaries.

Bond Income

Prudential held $662 million of survivors' money in its corporate general account as of June 30, according to information provided by the VA. Prudential's general account earned 4.2 percent in 2009, mostly from bond investments, according to regulatory filings. The company has paid survivors holding Alliance Accounts 0.5 percent in 2010.

Families that were supposed to receive lump-sum payments under the terms of the contract before it was amended in 2009 may be able to successfully sue Prudential for lost interest, insurance lawyer Bridgeland says.

"Survivors would have a very strong claim for interest earned by Prudential on their money," he says.

Prudential spokesman Bob DeFillippo says his company is following the terms of its agreement with the VA.

"Prudential is in compliance with its contract with the Department of Veterans' Affairs," he says.

DeFillippo declined to comment on whether Prudential was in compliance with its contract between 1999 and September 2009 or to answer any other questions. Prudential chairman and Chief Executive Officer John Strangfeld declined to comment for this story.

Useful Service

In July, DeFillippo said Prudential's retained-asset account was a useful service for bereaved relatives of soldiers. "For some families, the account is the difference between earning interest on a large amount of money and letting it sit idle," he said. Survivors can withdraw some or all of their money at any time, he said.

Veterans Affairs Chief of Staff John Gingrich says the agency approved use of the Alliance Account because it wanted to help survivors.

"We needed to give an option to individuals that allowed them more flexibility and time to react to the tragic family situation," Gingrich says.

Verbal Agreement

VA spokeswoman Katie Roberts declined to say when Veterans Affairs Secretary Eric Shinseki, who was appointed by President Barack Obama in January 2009, learned of the existence of the 1999 verbal agreement and the 2009 amendment. She also declined to make Shinseki available for comment.

The VA official who verbally agreed in 1999 to allow Prudential to change the terms of the 1965 contract and begin offering retained-asset accounts was Thomas Lastowka, the VA's director for insurance, according to Dennis Foley, a VA attorney. Prudential began sending Alliance Account kits to soldiers' beneficiaries in June 1999.

Foley says the VA and Prudential would have been better off if they had put their 1999 agreement in writing.

"Could that have been done better?" Foley asks. "Probably. Best practice would have been to legally memorialize it at the time."

Foley says the 1999 changes to the 1965 contract were valid, even if they weren't in writing, because they were made by mutual agreement by people empowered to make such decisions.

"It was changed by somebody who was authorized to change it," he says.

Contract Terms

The language of both the 1965 contract and the 2009 amendment make clear that Newark, New Jersey-based Prudential was required to adhere to the original terms until 2009, regardless of any handshake agreements in 1999, insurance lawyer Bridgeland says.

The 1965 contract says any alterations must be made in writing.

"No change in the Group Policy shall be valid unless evidenced by an amendment thereto," it says. "No Agent is authorized to alter or amend the Group Policy."

The VA and Prudential signed a revised contract in 2007, saying it was "amended in its entirety." That contract, with the exact same words as the 1965 agreement, required that Prudential pay survivors with lump sums.

The 2007 revision included the same procedures in the 1965 agreement requiring any changes be made in writing. It contained no mention of the retained-asset system, or of the verbal agreement struck in 1999.

2009 Amendment

It wasn't until Sept. 24, 2009, that the changes agreed to by VA official Lastowka and Prudential in 1999 were put into writing. The 2009 amendment allowing Prudential to hold onto death benefit payouts was made retroactive to Sept. 1, 2009, not back to 1999.

By putting in writing a change that was verbally adopted 10 years earlier, the VA is effectively trying to backdate the amendment, says Jeffrey Stempel, an insurance law professor at the William S. Boyd School of Law at the University of Nevada, Las Vegas, who wrote Stempel on Insurance Contracts (Aspen Publishers, 2009).

"They're trying to reinvent history," Stempel says. "You really can't do that. This is a blatant giveaway by the VA with nothing for the agency or the people in uniform."

Nine of every 10 survivors ask Prudential for lump-sum payments, the VA says. Prudential sends those families "checkbooks" instead of checks.

'Disasters Do Happen'

Documents released in the FOIA request show some signs of concern within the VA after Prudential proposed the retained- asset accounts in 1998. Lastowka, the official who allowed Prudential to introduce the Alliance Accounts, said that the insurer's "checkbook" system wasn't protected by the FDIC.

"Disasters do happen," wrote Lastowka, in an e-mail dated June 9, 1999, to Stephen Wurtz, the agency's deputy assistant director for insurance.

Lastowka said in his e-mail that the lack of FDIC coverage could backfire on survivors.

"Who is responsible if Alliance goes belly up?" Lastowka asked. "I think we have to also be prepared to defend the use of the Alliance Account."

Lastowka also asked whether Prudential had adequately disclosed to survivors that the Alliance Accounts weren't covered by FDIC insurance. "Did Pru alert us to the non-FDIC fact?" he wrote to Wurtz. "Or was it in small print as the notice to beneficiaries?"

Documents turned over by the VA didn't include a response from Wurtz.

'Aware of Issues'

Lastowka says his e-mail shows the decision to allow Alliance Accounts was carefully considered.

"This e-mail demonstrates simply that the VA's Insurance program was aware of issues that might be raised as we implemented the payment method and that we should be prepared to respond to inquiries," Lastowka says. "We were confident that we were making a decision which would benefit survivors."

The FOIA documents show that on June 10, 1998, Prudential gave a presentation to the VA. It included 10 pages of key points, saying the Alliance Accounts would benefit survivors because they would provide safety, flexibility in how and when to use their money, competitive interest rates and customer service.

In fine print, at the bottom of one of the pages, was this caveat: "Funds in the Alliance Account are direct obligations of The Prudential Insurance Company of America and are not insured by the Federal Deposit Insurance Corporation."

Sheila Bair

Twelve years later, the issue of the lack of FDIC protection in retained-asset accounts flared anew.

FDIC Chairman Sheila Bair said in August that consumers could incorrectly conclude that retained-asset accounts were insured by the FDIC.

"The insurance company must take care to avoid implying in any way that these accounts are in fact FDIC-insured," she wrote in an Aug. 5 letter to state insurance regulators.

Some families of veterans have taken their complaints to court. Five survivors filed a federal fraud lawsuit in Boston on Aug. 30 against Prudential claiming the insurer has earned as much as $500 million in profits by improperly keeping beneficiaries' money instead of paying it out in a lump sum.

The suit, Lucey vs. Prudential Insurance Co. of America, says the insurer fraudulently claims to beneficiaries that the Alliance Account is a lump sum.

'This Ruse'

"Initiation of this ruse does not constitute payment of anything to anyone," the suit says. "The Alliance Account is merely a bookkeeping device used by Prudential to hold on to beneficiaries' money."
Prudential hasn't yet filed a response in court. Spokesman DeFillippo says he can't comment on the case.

"It is important to note that several federal judges have rejected claims against accounts like our Alliance Account, concluding that beneficiaries are in virtually the same position they would be in had the insurer sent them a check," DeFillippo says. He cited the dismissal of a case against MetLife Inc. on Sept. 10.

Insurance contract professor Stempel says that regardless of the outcome of that lawsuit, it's clear that Prudential and the VA wrongly manipulated a federal contract at the expense of military members and their relatives. "At a minimum, survivors ought to be made whole with their missed interest," he says. "The VA really seems to have had the best interests of the insurance company at heart, instead of those of the soldiers and their families.

Insurance Companies Hold Billions In Fast Food Stock

Insurance Companies Hold Billions In Fast Food Stock
04-17-2010

The fast-food industry has long been under fire for selling high-fat, high-calorie meals that have been linked to weight gain and diabetes, but the financial health of the industry continues to attract investors -- including some of the leading insurance companies in the U.S., a new study reports.

According to Harvard Medical School researchers, 11 large companies that offer life, disability, or health insurance owned about $1.9 billion in stock in the five largest fast-food companies as of June 2009.

The fast-food companies included McDonald's, Burger King, and Yum! Brands (the parent company of KFC and Taco Bell). Companies from both North America and Europe were among the insurers, including the U.S.-based Massachusetts Mutual, Northwestern Mutual, and Prudential Financial.

The researchers say insurance companies should sell their fast-food stock or use their influence as shareholders to make fast food healthier, by pressuring big restaurant chains to cut portion sizes or improve nutrition, for instance.

There's a "potential disconnect" between the mission of insurance companies and the often-unhealthy food churned out by companies like McDonald's, they write.

"The insurance industry cares about making money, and it doesn't really care how," says the senior author of the study, J. Wesley Boyd, M.D., an assistant clinical professor of psychiatry at Harvard Medical School, in Boston. "They will invest in products that contribute to significant morbidity and mortality if doing so is going to make money."

Boyd and his colleagues used a database that draws on financial filings and news reports to estimate the fast-food investments of the 11 companies. Their findings appear in the American Journal of Public Health.

Massachusetts Mutual and Northwestern Mutual -- which both offer life, disability, and long-term care insurance -- owned $367 million and $422 million in fast-food stock, respectively, much of it in McDonald's, the authors report. Prudential, which offers life insurance and long-term disability coverage, held $356 million in fast-food stock, according to the study.

Insurance companies disputed these figures. Andrea Austin, the assistant director of corporate relations for Northwestern Mutual, in Milwaukee, says the company's investment in fast-food companies is only about $250 million, and was at the time the study was conducted. That amounts to about one-fifth of 1 percent of the company's portfolio, she adds.

Austin also disagrees that the company's fast-food investments represent a disconnect with its mission. "We have to determine what's going to give our policy owners value," she says. "We have to make sure we fulfill our obligations to them, and to do that we invest in a wide variety of industries. It's that diversification that enables us to return value to them."

In an e-mail, MassMutual spokesman Mark Cybulski called the study's findings "absolutely incorrect" and said that as of December 31, the company's holdings of fast-food-related stock amounted to just $1.4 million, which represents less than one-hundredth of 1 percent of the company's $86.6 billion in cash and total invested assets.

Austin says she has "no idea" why the figures differ and says that Northwestern Mutual doesn't use subsidiaries.

Theresa Miller, the vice president of global communications for Prudential Financial, said in an e-mail that she could not discuss the specifics of the company's portfolios. But she noted that the investments in the report are within index funds, and that "a large portion" are managed on behalf of third-party clients.

MassMutual, Northwestern, and Sun Life (another insurer mentioned in the report) have contested Boyd's findings in the past. Last year Boyd led a similar analysis, published as a letter to the editor in the New England Journal of Medicine, that found that seven insurance companies held some $4.5 billion in tobacco-company stock. Then, too, Cybulski said that MassMutual's holdings were just a fraction of what Boyd and his colleagues claimed.

According to Boyd, the discrepancy in his figures and those cited by MassMutual may be due in part to two factors: Insurance companies may invest in fast-food stocks through subsidiaries over which they have limited oversight (and therefore may not consider them direct investments), and some of the investments may be in index funds, a type of mutual fund tied to the collective performance of a large group of stocks, such as the S&P 500, which may include those of fast-food companies.

The database used in his analysis provides only the aggregate of a company's holdings, Boyd says.

Austin says she has "no idea" why the figures differ and says that Northwestern Mutual doesn't use subsidiaries.

Boyd and his co-authors emphasize that fast food -- unlike cigarette smoking -- can be safe in moderation.

However, a growing body of research has linked frequent fast-food consumption to weight gain, obesity, and type 2 diabetes.

As a result, the study notes, several cities and towns have restricted fast-food restaurants via zoning laws. And under the health-care legislation passed by Congress in March, chain restaurants will have to post calorie information on their menus, as is already required in New York City.

In their 2009 paper on tobacco, Boyd and his colleagues suggested that insurance companies profit twice over by investing in tobacco stocks, since they can charge higher premiums to smokers and also profit if the stock rises. A similar dynamic may be at work with fast food, according to Boyd.

"They can charge you more for life insurance if you have these negative health outcomes that people have as a result of eating fast food," he says.

But investing in unhealthy industries such as fast food and tobacco isn't necessarily a win-win for insurers over the long term, especially for health insurers, says Sara N. Bleich, Ph.D., an assistant professor of health policy and management at the Johns Hopkins Bloomberg School of Public Health, in Baltimore, Maryland.

"Health insurance companies get profits if they invest in tobacco and fast food, [but] these are some of the top drivers of mortality in the country," says Bleich, who researches obesity policy but was not involved in the current study.

"They are essentially killing off their consumer base, so it's not a sustainable model in the long-term. Long-term goals should be consistent with health, because that ensures a large population from which to draw consumers."

Robert Zirkelbach, the press secretary for America's Health Insurance Plans, a national association representing health insurers whose Web site lists three of the companies named in the study, declined to comment on the specifics of the study. "Our industry is strongly committed to prevention and wellness," Zirkelbach said in a statement.

"Health insurance companies are doing things across the country that are working to address obesity, to promote prevention, and to encourage people to live healthier lifestyles."

Gigi Kellett, the director of the anti-tobacco campaign of Corporate Accountability International, a Boston-based watchdog group, says that both tobacco and fast food are inappropriate investments for insurance companies.

"Tobacco remains the leading cause of preventable death around the world, and there is growing research that diet-related diseases could soon surpass tobacco," she says. "It's irresponsible for insurance companies to invest in companies that make people sick."

Corporate Accountability International recently launched a "Retire Ronald" campaign to pressure McDonald's to discontinue the Ronald McDonald clown character and rein in its marketing to children, Kellett adds.

For her part, Bleich says that while health insurance companies, specifically, should be encouraged to divest their fast-food investments, encouraging self-regulation and competition in the fast-food industry may be a more effective way to make the industry healthier