According to Popular, Inc.’s January 27, 2011 press release (here), the Puerto Rican bank holding company has reached an agreement in principle to settle the subprime related securities lawsuit pending against the company, as well as in the related ERISA lawsuit. The securities suit has settled for $37.5 million, and the ERISA suit has settled for $8.2 million. The settlement is subject to court approval.
The plaintiffs’ complaint focused on the company’s accounting for a deferred tax asset. In the three years preceding the beginning of the class period (which went from January 24, 2009 to February 2009), the company had recorded tax loss carry forwards that totaled over $1 billion, largely as a result of the company’s U.S. subprime and other lending operations. The benefit of these deferred tax assets could only be realized if the company experienced sufficient U.S.-based gains within 20 years.
To offset the possibility the company might not fully realize the value of the deferred tax assets, accounting rules require reporting companies to take a valuation allowance, but the company recorded no material valuation allowance of this asset until late 2008. The company ultimately recorded an allowance for the full value of the asset. Following the announcement of this action, the company’s share price fell substantially.
The plaintiffs allege that the increasing, multiyear U.S.-based operating losses prevented it from anticipating sufficient taxable income to realize the full value of the deferred tax asset prior to the expiration of the 20-year period, yet failed to take a valuation reserve because doing so would have lowered the bank’s risk-based capital ratio below regulatory requirements. The financial picture the company’s treatment of the asset portrayed allowed the company to raise over $300 million in a May 2008 offering.
As discussed here, on August 2, 2010, District of Puerto Rico Judge Gustavo Gelpi granted in part and denied in part the defendants’ motion to dismiss.
According to the company’s press release, "management expects" that approximately $30 million of the $37.5 million securities class action settlement and all of the $8.2 million ERISA settlement will be funded by insurance. The parties expect to submit a joint motion for preliminary approval of the settlements within 45 days.
The press release also notes that the company has not yet reached settlement of the separate but related derivative lawsuit. As discussed here, on August 11, 2010, District of Puerto Rico Judge Jay Garcia-Gregory denied in part and granted in part the defendants’ motion to dismiss the derivative lawsuit.
Finally, the press release states that the company is aware of a separate lawsuit filed by individual claimants on January 18, 2011 but that the company has not yet been served.
The Popular securities lawsuit settlement is the first of subprime-related securities class action lawsuit settlement of the year. As I noted here, and as Cornerstone Research also noted in it recently released year-end securities litigation, the subprime-related securities suits have been taking longer to resolve than have securities cases generally.
Indeed, even though more than 220 securities class action lawsuits were filed between 2007 and 2010 as part of the subprime and credit crisis-related securities litigation wave, only 18 of the cases have settled so far, including the Popular settlement. My guess is that though the Popular settlement is first one this year, there will be many more before year end.
The Popular case is also the first subprime-related securities settlement involving a commercial bank. During the subprime-related litigation wave, a host of troubled and failed banks have been sued. A number of those cases have been dismissed, but others, like the Popular case have not been dismissed. Unlike many of the banks involved in these lawsuits, Popular’s banking operations remain functional, so the resolution of this case may have relatively little to say about the cases involving failed banks.
I have in any event added both settlements to my running tally of subprime and credit crisis-related case resolutions, which can be accessed here.
The Financial Crisis Inquiry Commission Report: On January 27, 2011, the Financial Crisis Inquiry Commission released its report, concluding that the 2008 Financial Crisis was an avoidable disaster caused by both private and public sector failings, including corporate mismanagement and excessive risk-taking on Wall Street and widespread failures in government regulation designed to preserve the safety and soundness of our financial system.
The Commission was established as part of the Fraud Enforcement and Recovery Act passed by Congress and signed by the President in May 2009. The Commission’s purpose was to "examine the causes, domestic and global, of the current financial and economic crisis in the United States."
I must confess that due to the fact that the report weights in at 633 pages, I have not yet had a chance to read the entire report. I will say, based on the parts I have read so far, that whomever is responsible for the authorial voice in the report has definite literary pretensions.
Thus, for example, in alluding to the report’s conclusion that the Federal Reserve had failed to adequately supervise subprime mortgage lending, the report rhetorically asks "What else could one expect on a highway where there were neither speed limits nor neatly painted lines?" And of the financial institutions’ recklessly willingness to take on risk, the report says "Like Icarus, they never feared flying ever closer to the sun." And in describing the sheer extent of blameworthiness, the report says "To paraphrase Shakespeare, the fault lies not in the stars, but in us."
Maybe the prose is not too high-falutin for a governmental Commission report, but the problem with the use of that kind of language is that it runs the risk of coming off like the work of, say, an over-wrought blogger. (Not that there are any of those around here.)
The Commission itself was intended to be bipartisan, but it would be difficult to try to characterize the report as bipartisan, owing to the fact that the only four Republicans on the Commission dissented from the report. The Commission’s inability to reach a consensus, at a minimum, dilutes the report’s persuasiveness, as it now appears more like an expression or a mere point of view, rather than a set of definitive findings.
While I intend to try to read the entire report at some point, I have to say that I find it odd that we are being given this report only now, half a year after Congress enacted its massive financial reform legislation. Am I the only one that thinks that the sequencing might have been improved if the reform legislation were only taken up after the Commission issued its report?
The one thing I think everyone should know is that the Commission’s website has a separate Resources page, here, that is stuffed with all sorts of useful and interesting graphics, reports, and fact sheets, as well as a glossary of terms and even a searchable document archive. A note on the webpage advises that the Commission will soon be adding to the page an interactive timeline, audio files, interview notes, as well as other materials gathered in the course of the investigation. The graphics library alone is well worth the time to visit the site.