Posts Tagged ‘fraud’
I know I’m somewhat late to the party on this one, but I wanted to point out to anyone who wasn’t aware that senior members of the Securities and Exchange Commission, our main regulatory body, watched hours of pornography per day, while on the job. This peak porn usage occurred during 2007-2008, at the height of our banks’ financial fraud.
From ComputerWorld, of all places:
Seventeen investigations involved senior SEC staffers earning between $100,000 and $222,000 annually. In many cases, the Kotz’s office obtained on-the-record admissions from the employees involved, though the report does not say how, or even whether, the employees were disciplined.
Kotz’s report lists several instances where SEC employees spent several hours daily on porn. One such case involved a senior attorney at the SEC’s Washington headquarters who sometimes spent eight hours a day surfing pornographic sites and downloading explicit images. The attorney apparently downloaded so much porn that he filled up all the available space on his government-issued computer. He then downloaded more images onto personal CDs and DVDs, which he stored in boxes in his office.
Enjoy the rest of your day.
Well, the big Goldman Sachs hearing just wrapped up 10 hours of grueling testimony, and I’m still reeling from the stupendous prevarications their executives offered. The financial bloggers were out in full form today with some great live-blogs here, here and here. I’m sure I’ll have more to say about this as the hearings progress, and I’d love to see how Goldman will justify its fraudulent deals with AIG once the Senate gets around to asking about them; but until then, a couple comments:
1) I really have to hand it to Sen. Carl Levin for his rigorous and adversarial line of questioning. Watching him tear these executives apart for knowingly engaging in outright fraud is gratifying, though of course some jail time for these executives would be even more so. Watch this video for the money shot (as it were).
2) I was really astounded by the total lack of contrition these executives showed. They defrauded investors to the tune of $500 million (at least) by selling them bonds which they knew were worthless and then betting against those bonds. The basic refrain from all these executives, particularly Mr. Sparks, was that “these bonds were traded on the open market and at market values” – but of course that’s an entirely spurious argument because Goldman was withholding valuable information from their clients (that the bonds were worthless). Amazingly, the Goldman executives don’t seem to think they were doing anything wrong! Fraud is totally acceptable in their world, just so long as it makes them money. Just don’t buy a used car from them – they’d probably sell you a death-trap and then take out car insurance and life insurance on you.
Before I get too gushy on Senator Levin, I should hasten to remind my readers that he voted for the Financial Services Modernization Act back in 1999 – the same act that allowed Goldman Sachs to trade unregulated (“over-the-counter”) derivatives. Without the FSMA, the sort of fraud Goldman engaged in would have been impossible, and any attempt to prevent this sort of behavior in the future is meaningless without repealing the FSMA. Needless to say such a repeal is not even being discussed.
Watching the hearings today gave me a strange, other-worldly feeling. Some of the same senators who took major campaign donations from Goldman Sachs were sitting there and grilling these executives. A cynical observer might have gotten the impression that this was all a bit of political theater designed to soothe the public’s anger, which by all accounts is badly in need of catharsis. Certainly when one remembers that the very behavior for which Goldman is now being indicted was standard practice for nearly all of the major banks, it seems strange that the Senate should decide to focus all of its ire on Goldman. But then again, they are, after all, the most visible symbol of Wall Street insanity.
Hats off to ProPublica for their phenomenal follow-ups to the SEC case against Goldman Sachs, and for revealing that what might have been a genuine move against corruption now merely seems like a politically motivated slap on the wrist, a show-trial, essentially, where big bad Goldman Sachs gets forced to pay a pittance of a fine and the rest of their compatriots who indulged in the exact same practices go off scot-free. Let’s not forget that they paid only 1% of their 2009 profits in taxes, so whatever restitution the SEC squeezes out of them won’t begin to cover their debt to the US Government.
For those of you who haven’t been following the byzantine hearings regarding the Goldman case, with their alphabet soup of acronyms and stern avocations from our media that these are “complex financial instruments” we’re dealing with – well, who can blame you? But the gist of the case is relatively easy to follow, and while Goldman may have been a particularly egregious offender, almost every investment bank bigger than a mom-and-pop outfit traded in Collateralized Debt Obligations (CDOs), the “complex instruments” that lie at the center of this case. Earlier this month ProPublica ran an extensive look at Magnetar, a hedge fund that traded exclusively in CDOs, and just a few days ago it revealed that Merril Lynch engaged in identical practices to the ones that got Goldman Sachs sued by the Securities and Exchange Commission.
CDOs are basically a bet that a given asset will perform well or perform poorly. In the Goldman Sachs case, Goldman put together securities (assets) that it knew would fail (the SEC hopes to show that a Goldman trader specifically picked the components of the securities for their especial toxicity), sold those securities to gullible investors, then secretly took out a collateralized debt obligation against that same security, betting, in essence, that its value would go to zero, which of course they knew would happen because they picked it specifically to do so. When, sure enough, the security did become worthless, Goldman hit paydirt.
This is called fraud, and it’s a pretty grievous sin in the world of finance (at least it was, once upon a time). So on one hand, it’s absolutely just for Goldman Sachs to come under the SEC’s gun, get its reputation tarnished a bit, and, with luck, get a few of its executives fired, where they can live the rest of their days in their Park Avenue penthouses, counting their ill-gotten gains. But on the other hand, what is the use of this symbolic prosecution if it doesn’t engender a shift in practices from the financial community?
The case of John Paulson and Goldman Sachs identified in the SEC indictment was neither the biggest nor the most blatant case of securities fraud during the run-up to the crisis. For the SEC to suddenly regain its regulatory muscle, and for them to focus on this one case to the exclusion of all else stinks of politics. President Obama’s approval ratings are dropping fast, and prior to this there had been no prosecutions of financial fraud at all. I could easily see President Obama instructing the SEC to move forward on the Goldman case so he could have something to show by November, especially since Goldman is the most visible and most reviled of all the Wall Street slimeball firms.
Finally, this case brings to light just how important the financial reform being discussed in the Senate is to prevent future such fraud. Currently most of the discussion seems to center around the politically popular “consumer protection”, but while overdraft fees and adjustable rate mortgages were pernicious side effects of the crisis, the real engine behind the financial meltdown was the widespread sale of over-the-counter (unregulated) derivatives like the CDOs mentioned in this case.
“Financial Reform” means nothing if not the outright ban of derivatives trading – or failing that, the erection of a structured derivatives exchange where fraudulent trades like the Goldman Sachs deal would be visible to the public and to investors. Without that, we’re literally back where we started.
Via Bloomberg, it looks like the Treasury Secretary has backed off on his previous stance that the derivatives market (which got us into this mess) does not need to be regulated. Today he says:
Geithner said the over-the-counter derivatives market should be subject to “substantial supervision and regulation,” while omitting support for the provision that would force banks like JPMorgan Chase & Co. and Bank of America Corp. to wall off trading operations from their commercial banks.
The Obama administration requires that all over-the- counter derivatives dealers and “major market participants” be subject to “conservative capital requirements, conservative margin requirements and strong business conduct standards,” Geithner said.
There is some very tricky parsing of words here that will probably escape most peoples’ attention.
One of the major factors in the credit freeze of 2008 was the widespread proliferation of so-called “over-the-counter” derivatives, which are debt obligations that were traded secretly between banks. Unlike the mortgage industry or the credit card industry, derivatives were largely unregulated and are not traded on an exchange. Thus, banks can package and sell derivatives to one another “over the counter” – that is, without any public record of the transaction having taken place. This became a serious concern in 2008 when Lehman Bros. failed; because the derivatives market was undisclosed, no bank knew how many assets the other banks had, or if the assets they did have were worthless. As such, lending between banks froze overnight – no one knew who was solvent and who was underwater.
Many have taken this as evidence that OTC derivatives are inherently dangerous and should be banned. This could be done by outlawing all asset-backed derivatives (like the mortgage securities that got us into this mess to begin with), or by simply mandating that derivatives be traded on an open, transparent exchange. Thus, they would cease to be “over the counter”. Geithner’s recent comments, while they sound impressive, make a derivatives exchange highly unlikely, and actually point to an extension of the policies that caused the 2008 crisis.
“Substantial supervision and regulation” can fail. While the OTC derivatives had been the subject of a massive push for deregulation, the problem was that even if there were regulators to look at the books, the instruments had become too complex for them to decipher. Simply adding another layer of regulation won’t change the underlying problem, which is that these instruments are basically impervious to regulation unless traded on a transparent exchange, something Mr. Geithner apparently does not support.
Similarly, the “provision that would force banks to wall off trading operations from their commercial banks” refers to the infamous Glass-Stegall Act of 1934, the repeal of which in 1999 Nobel Laureate Joseph Stiglitz gives an “especial role” in causing the 2008 crisis. I’ve written on Glass-Stegall in the past, and I don’t wish to repeat myself, but I should stress that so long as Lawrence Summers, the architect of the bill that repealed Glass-Stegall (and thus, a major architect of the crisis) stays in place, there is little hope of reducing the size of our Too-Big-To-Fails. Needless to say, Mr. Geithner is not even considering reinstating Glass-Stegall.
So basically, Timothy Geithner’s big plan to rein-in derivatives trading gives only a minor face-lift to the status quo. He’ll slap on a few regulatory outfits and say he’s done the job. Meanwhile, our Too-Big-To-Fail banks are getting even bigger, over-the-counter derivatives are still legal, and there won’t be any meaningful punitive action towards the banks that caused this crisis. The severe risks to the system remain.
The New York Times has an excellent article on former finance legislators now lobbying their old congressional buddies to make favorable legislation for the financial sector, a practice known affectionately as the “revolving door”. They cite enough examples to show that this sort of thing is a pretty widespread, and they focus on the particularly egregious case of an aide to Rep. Bernie Sanders who drafted financial legislation last summer and is now lobbying for a major bank.
I highly recommend this article
The recent WaMU collapse hearings have brought out some juicy revelations, all of which detail practices widespread among all mortgage lenders. I highly recommend Zach Carter’s Huffington Post piece for its explanatory power:
There are two types of financial outrages: acts that are outrageously illegal, and acts that are, outrageously, legal. Yesterday’s Senate hearing on the rise and fall of Washington Mutual was a rare examination of the former outrage, documenting the pervasive practice of fraud at every level of the now-defunct bank’s business.
All of Washington Mutual’s sketchy practices can be traced back to rampant fraud in its mortgage lending offices. The company repeatedly performed internal audits of its lending practices, and discovered multiple times that enormous proportions of the loans it was issuing were based on fraudulent documents. At some offices, the fraud rate was on new mortgages over 70%, and at yesterday’s hearing, the company’s former Chief Risk Officer James Vanasek described its mortgage fraud as “systemic.”
When most people think of mortgage fraud, they think of a clever borrower conning an unwitting banker into extending him a loan he cannot afford. But this isn’t really how fraud usually works in the mortgage business. According to the FBI, 80% of mortgage fraud is committed by the lender, so it shouldn’t be surprising that WaMu’s internal audits concluded that its widespread fraud was being “willfully” perpetrated by its own employees. The company also engaged in textbook predatory lending across all of its mortgage lending activities–issuing loans based on the value of the property, while ignoring the borrower’s ability to repay the loan.
These findings alone are pretty bad stuff in the world of white-collar crime. For several years, WaMu was engaged in fraudulent lending, WaMu managers knew it was engaged in fraudulent lending, and didn’t stop it. The company was setting up thousands, if not millions of borrowers for foreclosure, while booking illusory short-term profits and paying out giant bonuses for its employees and executives. During the housing boom, WaMu Chairman and CEO Kerry Killinger took home between $11 million and $20 million every single year, much of it “earned” on outright fraud.