Guest Commentary by Ariane van Buren, Contributing Analyst, The Murninghan Post
The TakeAway: Public pension fund investors turn up the heat on big banks as outrage over lending and mortgage practices mounts.
With millions of families losing their homes – and fears that millions more are on the brink – there’s a groundswell of concern about exactly what banks were doing, efforts to create safeguards so it won’t happen again.
Shareholder resolutions calling upon bank boards to conduct independent reviews of mortgage and foreclosure practices at Citibank, Wells Fargo, and Bank of America won high votes this season as pressures mount for banks to come clean about their questionable loan and securitization strategies. (Vote tallies at JPMorgan Chase were unavailable at this writing.) The Citigroup proposal received 29.3 percent support (based on votes cast “for” or “against”); those filed with Wells Fargo and Bank of America were supported, respectively, by 23 percent and a 39.5 percent, according to figures provided to Murninghan Post by Heidi Welsh of Sustainable Investments Institute (Si2).
Led by the New York City pension funds, a $432 billion coalition of public funds – including the Connecticut Retirement Plans and Trust Funds, the Illinois State Board of Investment, the Illinois State Universities Retirement System, the New York State Common Retirement Fund, the North Carolina Retirement Systems, and the Oregon Public Employees Retirement Fund – claimed that widespread irregularities increased their risk exposure.
The coalition, which has $5.7 billion invested in these banks, called for board audit committees to launch independent examinations of their loan modification, foreclosure, and securitization policies and procedures. “This will help to prevent future compliance failures and restore the confidence of shareholders, regulators, legislators and mortgage markets participants,” the coalition advised in its letter to each bank, sent in January. Last November, the Congressional Oversight Panel estimated that banks’ potential mortgage liability could total $52 billion, borne largely by the four banks targeted by the pension funds. Together, these banks control more than half of both the mortgage servicing and home equity loan market. (Letters to each of the banks are available on the NYC Comptroller’s website.)
On Tuesday, hundreds of protesters descended upon JPMorgan Chase’s annual general meeting (AGM) in Columbus, Ohio, literally crossing the moat that surrounds the building to get their point across. Similar demonstrations occurred at the Wells Fargo AGM on May 3rd . On May 11th, religious investors demonstrated outside Bank of America’s AGM in Charlotte, North Carolina over its handling of foreclosures. And in April, they turned out in force for the Citigroup annual meeting.
This isn’t a new issue for religious investors. Led by the Interfaith Center on Corporate Responsibility (ICCR), they’ve engaged banks since the 1970s on a range of practices including predatory lending, modifications of housing loans, executive compensation, and lobbying. Last October, ICCR issued a white paper on “Faith and Finance” that rearticulated these positions, grounded in the principle of “the protection and promotion of the common good”.
Proxy proponents want to prevent future compliance failures and restore the confidence of shareholder, regulators, legislators, and mortgage market participants. They want independent audits to determine whether bank management allocated adequate staff to review mortgages before foreclosing, and addressed financial incentives to foreclose when other options posed better long-term solution. And they were not reassured by company assurances that these foreclosure issues are “mere clerical errors that will be resolved quickly”.
Proposals for independent audits are one of several weapons aimed at banks this year, the result of mounting public anger, regulator attention, and possible prosecution.
Shareholder efforts parallel those of attorneys general of all fifty states to seek redress for home borrowers. On March 3rd the AGs – joined by U.S. agencies including the Justice Department, Federal Trade Commission and Department of Housing and Urban Development – proposed a purported $25 billion settlement with top U.S. banks that outlines a code of conduct for mortgage servicing; critics charge that the settlement offer is too weak because it fails to reduce the principal amount on outstanding mortgages. The AGs are expected to conclude their negotiations in coming months.
In April the Office of Comptroller of the Currency and the Federal Reserve forced fourteen mortgage servicers to establish new foreclosure processes. The largest servicers signed consent orders in April pledging to modify their procedures, and halt foreclosures to correct affidavits signed en masse without the proper review of documentation as required by law.
Meanwhile, on Monday, the New York Times’ Gretchen Morgenson revealed that actions taken by New York’s Attorney General suggest a new investigation is underway into practices that contributed to billions in mortgage losses. On Sunday she wrote that this is just the beginning: the United States Trustee Program, the arm of the Justice Department that monitors the bankruptcy system, has found ample evidence of extensive and abusive servicing practices. ”It’s worth noting the immense pushback the banks have mounted against the trustee office,” she wrote.
This is a fresh breeze in the midst of odious economic destruction wrought by banks that engaged in reckless lending and relied upon unsustainable and incomprehensible mechanisms such as securitized loan portfolios. Thus far, no executive has been found guilty of specific wrongdoing. Their fiduciary abuse was bolstered by the notion of “too big to fail“, with most of us inadvertently or tacitly complicit.
The significance of shareholder votes is not so much in the amount of the vote, since votes themselves are not binding. Rather, votes above a minimum threshold of 10% cause an issue to stay on the table and require the continued attention of the Board of Directors, who are supposed to represent the shareholders. Shareholder resolutions are a vital means of leverage, causing corporate management to negotiate an outcome satisfactory to the shareholders and not just to themselves.
But it’s not just institutional investors who have clout. Individual investors can flex their ownership muscles, too, through an exciting new service. MoxyVote was set up to give individual shareholders a voice in company boardrooms. “We want to empower the little guy,” MoxyVote states on its website.
We want to bridge the gaps between the buttoned-up world of the corporate boardroom and shareholders in suburban office parks, union halls, church meeting rooms, and anywhere else that people with big ideas gather. We want to allow the free exchange of good information among shareholders, advocate groups, and public companies. MoxyVote will make it easy to get informed, get involved, and take a stand.”
Shareholder action, combined with broader citizen action, a more aggressive enforcement system, and dogged media coverage, may help avert such widespread damage from happening again. But first we need far more information about – and prosecution of – these horrible abuses in our capital markets.
Editor’s Note: Marcy Murninghan contributed to this post.