Cuomo's Code of Conduct: Troubled Times for the Student Loan Industry

by Tola Adewola April 24 2007, 12:43
In November of 2006, the office of the New York State Attorney General initiated an investigation into the financial agreements between New York universities and student loan providers as part of an effort to eliminate practices that created conflicts of interests in the lucrative $85 billion student loan industry. [1] However, this investigation did not receive a high degree of publicity or momentum until February of 2007 when the newly appointed New York Attorney General Andrew M. Cuomo expanded the investigation to include more than 60 universities nationwide and major student loan providers and banks. [2] Attorney General Cuomo's investigation revealed questionable practices within the student loan industry whereby universities were receiving illegal kickbacks for including certain lenders in their "preferred lender" list. [3] This discovery has led to a nationwide reaction and the student loan industry has been under significant probing from several lawmakers as well as the U.S. Education Department. [4] [More]

Problems With Interest Only Mortgages

by Tara Cunningham April 6 2007, 17:11
I. Introduction:

In the microwave generation, everybody wants things right away. Things that our elders used to dream of having and save up for are now available instantly using credit. Credit cards give buyers the option of purchasing more than they can presently afford and paying back only interest. But while it may sound like a good idea to have everything now, for most living at the edge of their means, credit gets out of control and they get stuck in bankruptcy. A buyer overextending himself using a credit card is chaos on a small scale compared to the abuses of credit going on now. [More]

Subprime Slump: Will the Economy Follow?

by Alicia Filter April 5 2007, 01:33
On February 7, 2007, the Senate Banking Committee heard testimony which indicated that nearly 20 percent of subprime mortgage loans obtained in the period from 2005-2006 will result in foreclosure, affecting over 2.2 million families in the United States over the next few years. [1] On Monday, April 2, 2007, the second largest provider of high-risk, subprime mortgages, New Century Capital Corporation of Irvine, California, filed for Chapter 11 Bankruptcy protection and fired 3200 employees in the wake of its own "financial missteps" and trouble with the SEC and U.S. Department of Justice over financial statements which failed to accurately account for financial losses the corporation was suffering, as well as mismanagement of the corporation. [2] With more than 25 subprime lending companies shutting down over the past few months [3], many are wondering about the implications for the future of both the subprime market and the economy.

Subprime mortgages are those given to consumers with credit scores below 620, indicating that these consumers are generally late in paying their bills and often have significant delinquencies in their credit reports indicating frequent late payments on obligations of 30 to 90 days. [4] Alternatively, subprime mortgages are issued to consumers with high debt-to-income ratios or with limited credit histories. [5] As compared to prime borrowers, "subprime borrowers are disproportionately minority and lower income, older, less well educated, less financially sophisticated, and less likely to search for the best interest rate." [6] This indicates that subprime mortgagees may not fully understand exactly what they are getting themselves into contractually and financially at the time they sign their mortgage documents. [More]

Loophole in the U.S.A. Patriot Act enables Financial Institutions to provide services to undocumented immigrants

by Tola Adewola February 21 2007, 12:47
Bank of America recently announced its plan to nationalize its pilot program which provides credit cards to individuals who do not have credit histories and social security numbers. These individuals only need to have maintained overdraft-free checking accounts with Bank of America for at least three months and have a taxpayer identification number.[1] This program, which has been the target of criticism, is the latest of a series of programs commenced by various financial institutions that allows undocumented immigrants and other non-U.S. resident aliens to obtain certain financial services that would not have otherwise been available to them. Although Bank of America has asserted that its program complies with U.S. banking and anti-money laundering laws, many critics argue that this program opens business to illegal immigrants and undermines the anti-money laundering efforts of the U.S.A Patriot Act of 2001. [2] [More]

Virtual Bank, Real Scam?

by Mark Cassidy February 12 2007, 23:51
    Second Life is a popular “virtual world” in which people across the real world interact with each other using “avatars.” [1]  Avatars are three-dimensional alter-egos that can be completely customized; users can change their avatar’s clothing, height, weight, and even add features like wings. [2]  Unlike other virtual worlds, which are basically interactive computerized versions of fantasy role-playing games, Second Life is not a game in the traditional sense. [3]  It does not have goal or end; there are no monsters to fight, mysteries to solve, or princesses to rescue. [4]  Rather, Second Life provides its users with a toolkit with which they can create items within the virtual world. [5]  Users can create pretty much anything they want: buildings, vehicles, clothing, even games. [6]     Much of the activity in Second Life centers on commerce with users “buying” and “selling” “land” and each other’s creations. [7]  When a user signs up he or she receives an initial allotment of “Linden Dollars,” Second Life’s currency, and may purchase more, using real dollars, from Linden Lab, the creators of Second Life. [8]  Users are encouraged to “buy” land from Linden Lab, build a home for their avatar, and develop businesses. [9]  Given Second Life’s commercial orientation it is no surprise that in-game banks developed.     The best known bank in Second Life is Ginko Financial. [10]  As of this writing, Ginko claims to hold 114,398,068 Linden Dollars, the equivalent of $420,581. [11]  Ginko promises 0.10 percent daily accrued interest, approximately a 44 percent annual return. [12]  No real banks pay anything close to 44 percent annual interest and even top investment mangers do not promise such a high return. [13]       The Chief Executive of Ginko Financial, who goes by the name Nicholas Portocarrero in Second Life, will not reveal his (if “he” is in fact a man) real name or where he is located. [14]  Nor will he reveal anything about how he is generating such amazing returns for his depositors. [15]  In an interview with Reuters, Portocarrero was evasive at best.  When asked if Ginko was generating its returns through lending, Portocarrero responded “No, the bank is essentially loaning the money to itself right now.” [16]  An assertion that direct contradicts Ginko’s website which states “Ginko Financial takes part of the total cash deposited and gives loans to various trustworthy entities and persons, to make the money necessary to pay the daily interest rate.” [17]       The combination of outsized returns and zero transparency has led some to conclude that Ginko is a Ponzi scheme. [18]  In a Ponzi scheme, the promoter promises huge returns to investors on short term investments. [19]  The scheme works by paying older investors with funds from newer ones. [20]  The first few people who invest in a Ponzi scheme usually receive the interest promised them, but Ponzi schemes eventually collapse as they do not actually generate money and require an ever increasing number of new investors to keep up the interest payments owed. [21]  When asked by Reuters whether he was running a scam and if he had a good way to rebut such an accusation, given that Ginko operates without any oversight or regulation, Portocarreo was once again evasive. [22]  He first tried avoiding the question, but when pressed, he finally stated that he did not know of a way to rebut the accusation and denied that Ginko was a Ponzi Scheme. [23]  According to Portocarreo, Ginko’s lack of disclosure is the risk investors take on in exchange for their large returns and that people are just going to have to trust him. [24]       When asked if Ginko was profitable, Portocarreo once again avoided the question, stating “I could say yes, but it wouldn’t be entirely accurate.  It depends on how things are calculated and (what) you count and don’t count.” [25]  This is a remarkable response for someone who is paying 44 percent interest to his investors.       Ginko’s promised returns, lack of transparency, and evasive answers should make investors suspicious or at least cautious.  Nevertheless, as the numbers show, people have deposited a great deal of money with Ginko.  More curious than people’s willingness to give their money to Ginko, is that Linden Lab does not seem to find anything worrisome about the venture. [26]  Linden Lab’s CEO and founder, Philip Rosedale, believes that banks can exist within the virtual world of Second Life without regulation. [27]  Rosedale likens banks like Ginko to Grameen Bank of Bangladesh which makes small unsecured loans to the very poor to help them start businesses and work their way out of poverty. [28]  Grameen works closely with its borrowers to help them become successful. [29]  By lending to groups, and requiring that the first few people in the group begin to pay back their loan before Grameen lends to the others in the group, Grameen creates social pressure on people to pay back their debts. [30]  Ultimately, Grameen’s loan policy comes down to trusting the people they lend to, and so far Grameen’s trust has been warranted as they have a very low rate of default and numerous success stories. [31]       Rosedale believes that Grameen’s trust based model of lending can be applied in Second Life and that fear of being ostracized by the Second Life Community will ensure that banks like Ginko behave ethically. [32]  However, Rosedale has things backwards.  Grameen makes no secret of who they are, what they are, or how the bank works.  Grameen is the one who trusts that borrowers will repay their loans.  The risk is borne entirely by Grameen and the relationship between Grameen and its borrowers is a close and active one. [33]  Ginko is the exact opposite.  Rather than Ginko trusting borrowers, depositors trust Ginko.  They are the ones bearing all of the risk as their deposits are not insured, Ginko is completely unregulated, and none of the depositors know who is behind Ginko or how the bank makes money. [34]  Unlike the people who Grameen lends to who cannot simply leave with Grameen’s money, there is nothing stopping someone like Portocarreo from simply taking people’s money and shutting off his Second Life account.  In his Reuters interview, Portocarreo stated “ [w]e keep a [Linden Dollar] reserve of about 5%, sometimes less . . .” [35]  This means that at least 95 percent of the Linden Dollar deposits Portocarreo has received have been converted to real currency.  As depositors have no idea what Ginko does with their money, it is possible that Portocarrero has spent the money or transferred it to a location unreachable by U.S. creditors.       Given Ginko’s complete lack of transparency, if it turned out to be a swindle, it would be very hard for depositors to track down the person or persons behind it.  Even if they were found, there is no guarantee that depositors would be able to obtain redress.  If this were to occur, it is likely that the depositors would sue Linden Lab for not protecting them from fraud.  By not taking efforts to ensure that commercial activity in Second Life is conducted in a transparent manner, Linden Lab is in essence putting their stamp of approval on ventures like Ginko.  Linden Lab of course absolves itself of any liability for the actions of Second Life users in its Terms of Service Agreement, but there is no guarantee that the Terms of Service Agreement will hold up in court. [36]  If a court determines that Linden Lab is liable for fraudulent activities that take place within Second Life, they may be overwhelmed with suits.  To avoid liability, and governmental regulation of the commercial activities within Second Life, Linden Lab should develop rules and policies that ensure commercial transactions between users are transparent and legitimate. [1] Second Life, What is Second Life?, (last visited Feb. 12, 2007); Second Life, Create an Avatar, (last visited Feb. 12, 2007). [2] Second Life, Create an Avatar, (last visited Feb. 12, 2007). [3] Second Life, What is Second Life?, (last visited Feb. 12, 2007). [4] See Id. [5] Second Life, Create Anything, (last visited Feb. 12, 2007). [6] See Second Life, The Creations, (last visited Feb. 12, 2007). [7] See Second Life, Economy, (last visited Feb. 12, 2007). [8] Second Life, Membership Plans, (last visited Feb. 12, 2007). [9] Second Life, Own Virtual Land, (last visited Feb. 12, 2007). [10] Adam Reuters, Ginko Financial – Pioneer or Pyramid?, Reuters Second Life News Center, Oct. 15, 2006, [11] Ginko Financial, (last visited Feb. 12, 2007); Second Life, LindeX Market Data, (last visited Feb. 11, 2007). [12] Reuters, supra note 10; (Ginko recently lowered its daily interest rate from 0.10 to 0.09). [13] Id. [14] Id. [15] Adam Reuters, INTERVIEW: Ginko CEO Nicholas Portocarrero, Reuters Second Life News Center, Oct. 12, 2006, [16] Id. [17] Ginko Financial, About Us, (last visited Feb. 12, 2007). [18] Reuters, supra note 10. [19] Id. [20] Id. [21] Id. [22] Reuters, supra note 15. [23] Id. [24] Id. [25] Id. [26] See Reuters, supra note 10. [27] Reuters, supra note 10. [28] Reuters, supra note 10; Grameen Bank, Breaking the Vicious Cycle of Poverty Through Microcredit, (last visited Feb. 12, 2007). [29] Grameen Bank, Breaking the Vicious Cycle of Poverty Through Microcredit, (last visited Feb. 12, 2007). [30] Id. [31] Id. [32] Reuters, supra note 10. [33] Grameen, supra note 29. [34] Reuters, supra note 10. [35] Reuters, supra note 15. [36] Second Life, Terms of Service, (last visited Feb. 12, 2007).

China Makes Plans to Diversify its Currency Reserves

by Mark Cassidy November 6 2006, 23:50
People’s Bank of China Governor Zhou Xiaochuan announced at a meeting of central bankers in Frankfurt this past Friday that his nation plans to diversify its $1 trillion currency reserves. [1] Zhou stated that China has a clear diversification plan that includes “currencies, investment instruments, [and] emerging markets,” but does not include the sale of any of its dollar denominated assets, which make up approximately 70% of China’s total reserves. [2] Despite Zhou’s assurances that China would not be selling off its dollar denominated assets, the dollar fell to a two and a half month low against the Euro and gold prices rose to a two month high. [3] Many analysts believe that China is unlikely to sell off a large amount of its dollar denominated assets; as to do so would be against China’s interests. [4] If China were to make such a sale, the sudden influx of U.S. debt on the world market would cause the dollar to plummet, devaluing the rest of China’s dollar denominated reserves. [5] Because it is unrealistic for China to sell off a large amount of its dollar denominated assets, many in the banking industry believe that the dollar will not continue to fall. [6] In fact, rather than dumping their dollar denominated reserves, most central banks are switching from traditional treasury bills to higher yield agency-debt, and securities issued by Freddie Mac and Fannie Mae, the sale of which recently hit an all time high. [7] The Bank for International Settlements reports that dollars accounted for 66% of world-wide central bank reserves at the end of March, a small change from 2001 when dollars accounted for 70% of reserves. [8] The Chinese want to diversify their reserves in order to have greater flexibility in their monetary policy. [9] Many analysts believe that given China’s trade surplus the Yuan is undervalued. [10] The Chinese want to adjust the Yuan’s exchange rate gradually because they fear a rapid re-evaluation of the Yuan could lead to a serious disruption of China’s internal economy that would result in bankruptcies and unemployment. [11] China’s concern about destabilizing its internal economy is good news for the U.S. as it means that China is unlikely to make any dramatic changes in its reserve policy. While a change in policy is bound to happen at some point, it will most likely happen gradually over a long period ensuring that both the U.S. and Chinese economies are not seriously disrupted. [1], Dollar Falls on China Diversification Talk, Nov. 10, 2006, [hereinafter Dollar Falls]. [2] Simon Rabinovitch, Reserve Shift Taps Forex, emerging Markets: China,, Nov. 10, 2006, [3] Id. [4] Matthew Benjamin & Christopher Anstey, Zhou Says China Will Diversify Reserves Without Dumping Dollars,, Nov. 10, 2006, [5] Rabinovitch, supra note 2; Id. [6] Dollar Falls, supra note 1. [7] Benjamin & Anstey, supra note 4. [8] Id. [9] Rabinovitch, supra note 2. [10] Id. [11] Id.

Banks Cheating Workers Out of Overtime Pay Are In Trouble

by Tara Cunningham October 26 2006, 15:08

There is a common practice among banks to classify their brokers in such a way that makes them ineligible to receive overtime pay, and now their brokers are fighting back to receive the pay that they feel is rightfully theirs. Morgan Stanley, Citibank, Wachovia, and Bear Steams have all been sued for failing to pay overtime to eligible employees. The U.S. Department of Labor is now chiming in to say which employees must be paid overtime, and it is not looking good for the banks. [More]

Bank of America Settles Money Laundering Suit for $7.5 Million

by Mark Cassidy October 16 2006, 23:49
The Bank of America recently settled a money laundering suit brought by Manhattan District Attorney, Robert M. Morgenthau for $7.5 million, $6 million in penalties and $1.5 million in costs, ending an almost three year investigation conducted in coordination with foreign authorities. [1] District Attorney Morgenthau said that a series of transfers, totaling more than $3 billion, prompted the investigation because they possessed some of the ear-marks of terrorist financing, much of which comes from South America. [2] The transfers originated in offshore shell companies owned by illegal Brazilian money services and were routed through the Bank of America account of a Uruguayan money remitter. [3] Although officials do not know the identity of many of the recipients, District Attorney Morgenthau believes that some of the transferred funds went to Mideast terrorist organizations. [4] Under the terms of the settlement, Bank of America admitted that it failed to adequately asses the risk of some of its customers, agreed to cooperate with ongoing investigations, and to improve its anti-money laundering program. [5] Even so, Bank of America admitted no wrong, stating that it takes money-laundering seriously and that it never has knowingly done business with parties engaged in illegal activities. [6] The Bank of America investigation was part of an on-going anti-money laundering program that has traced almost $19 billion in illegally transferred funds, and recovered $19.5 million for the city and state. [7] District Attorney Morgenthau also announced that thirty four individuals and sixteen British Virgin Island companies, all of whom were involved with illegal transmissions of money from Brazil, had been indicted for violation of New York’s banking laws. [8] As Brazilian authorities are criminally prosecuting the defendants, in it is unlikely that District Attorney Morgenthau will prosecute them in the United States. [9] However, the indictments were necessary to freeze their illegally transmitted assets, which total $17.4 million. [10] [1] David Enrich & Chad Bray, Bank of America Settles NYC Probe, Business Week online, Sept. 27, 2006, [2], Bank of America Will Pay Millions To Settle Money Laundering Probe, Sept. 28, 2006, [3] Enrich & Bray, supra note 1. [4], supra note 2. [5] Id. [6] Enrich & Bray, supra note 1. [7], supra note 2. [8] Enrich & Bray, supra note 1. [9] Enrich & Bray, supra note 1. [10] Enrich & Bray, supra note 1.

China Approves Citibank-led Consortium’s buy-into Guangdong Development Bank

by Mark Cassidy September 18 2006, 23:48
China’s approval of the Citibank consortium’s buy-into Guangdong Development Bank ends a year-and-a-half battle for control of the bank. [1] The Citigroup consortium, which includes China’s largest insurance company and one of China’s largest electricity distributors, offered approximately three billion dollars for an eighty five percent stake in Guangdong Bank. [2] The Citibank consortium beat out its closest rival a consortium led by France’s Societe Generale. [3] U.S. based, private investment firm, The Carlyle Group, pulled out of the bidding. [4] Despite a last minute attempt to get back into the race, Ping An Insurance's bid was hobbled when they tried to make large donations to the Guangdong provincial government a portion of their bid. [5] Despite their leadership position in the consortium, Citibank will only take a 19.9 percent stake in Guangdong Development Bank, as Chinese law currently forbid a single foreign bank from owning more than 20 percent of a Chinese bank. [6] Both Citibank and Societe Generale lobbied the Chinese government to make an exception to the limitations on foreign ownership of Chinese bank to no avail. [7] China’s entry into the World Trade Organization was conditioned in part on it opening its banking sector to foreign competition. [8] Nevertheless, China has been putting up obstacles to foreign banks that want to set up shop in China. [9] By allowing the Citibank led buy-in to go forward, China seems to be taking a somewhat less protectionist approach.  While Chinese companies will still be for the most part own Guangdong Development Bank, Citibank’s 19.9 percent share allows the bank to receive the benefits of being part of a large, well-financed, and experienced banking organization. [1] Citibank beats out Scoiete Genrale for China's Guangdong Development Bank,, Sept. 13, 2006, [2] Id. [3] Id. [4] China cabinet backs Citibank-led plan to take over Guangdong Devt Bank – UPDATE,, Sept. 12, 2006, [5] China’s Ping re-enters bidding for Guangdong Development Bank- source,, Sept. 5, 2006, [6] Citibank beats out Societe Generale for China’s Guangdong Development Bank, supra, note 1. [7] Id. [8] David Lague, China tries to limit access for foreign banks,, Sept. 5, 2006, [9] Id.

Insider Trading Scandal at Goldman and Merrill

by Mark Cassidy April 19 2006, 23:47
Prosecutors recently charged three employees at Goldman Sachs and Merrill Lynch with participating in a $6.7 million insider trading scheme. [1]  Authorities claim that Stanislav Shpigelman, an analyst at Merrill, sold inside information on upcoming mergers and acquisitions to Eugene Plotkin, an associate at Goldman, and David Pajcin, a former Goldman analyst. [2]  Plotkin and Pajcin then used this information to buy stocks before the public announcement of the deals and then sell them after the announcements for a significant profit. [3] The trio also recruited two employees of a printing plant in Wisconsin that publishes Business Week. [4]  The plant employees stole advance copies of the magazine and informed Plotkin and Pajcin of companies mentioned favorably in the “Inside Wall Street” column. [5]  As a favorable mention in the column usually leads to an increase in the price of those stocks, the conspirators were able to purchase the stocks prior to publication and then sell them for a profit. [6] Authorities became aware of the conspiracy when Pacjin’s aunt, Sonja Anticevic, a retired seamstress in Croatia, made more than $2 million on a two day investment in Reebok after the company announced its acquisition by Adidas. [7]  The SEC’s market surveillance department’s suspicion was aroused by of the unusually large number of options Ms. Anticevic had purchased prior to the announcement of the Reebok deal. [8]  Subsequent investigations led to her nephew David Pajcin who is cooperating with authorities against Shpigelman and Plotkin. [9] Both Goldman and Merrill have cooperated with authorities and warned their staffs about unethical behavior. [10]  Even though prosecutors have not charged either firm with complicity in the scheme, the fall-out for Merrill could be costly. [11]  Companies who had their information leaked by Shpigelman may decline to do business with Merrill in the future and the conspiracy may have compromised deals currently in development.  Going forward, Merrill will have to take additional measures to ensure security if it does not want to lose clients. This case is indicative of the security problems faced by businesses that handle sensitive and confidential information.  No matter what measures a business takes to prevent unethical behavior, employees still may engage in fraud; the fall out from which can greatly damage the business’ reputation and cost significant amounts of money. [1] Stephanie Kirchgaessner, Goldman and Merrill Staff Charged With Insider Trading,, Apr. 12, 2006, [2] Id. See also, Jenny Anderson, Wall Street Employees Charged With Insider Trading,, Apr. 12, 2006, [3] Kirchgaessner, Supra, Note 1. [4] Anderson, Supra, Note 3. [5] Id. [6] Id. [7] Id. [8] Id. [9] Id. [10] James Polti, Merrill Lynch Warns Staff on Ethical Behavior,, Apr. 12, 2006, [11] Anderson, Supra, Note 3.

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