Posts Tagged ‘Goldman Sachs’
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.
David Min over at Center for American Progress has one of the clearest and most concise explanations of our current banking system I’ve seen so far. And he’s honest enough to mention that the only true solution to our “too big to fails” is to nationalize them and break them up. This is a must-read article:
To address this problem, we first need to define “too big too fail” and how the problem can implode our financial system. “Too big to fail” is best understood as a bank panic problem, and has arisen as the result of two developments in the global financial markets over the past several decades. The first development was the tremendous growth of a “shadow banking system” operating outside of the rules that have governed depository banking since the Great Depression. This shadow banking system essentially performed the same functions as banking—attracting short-term investments and using them to finance long-term loans—but did so through the use of entities that were not depository banks, and the use of financing instruments (such as mortgage-backed securities, commercial paper, or short-term repurchase agreements) that were not deposits. Because of this nonbank, nondepository structure, the shadow banking system, which grew to an estimated $10 trillion in size, fell outside the rules and protections of the regulated banking system.
The second development was the concentration of risk within the shadow banking system, such that a small number of financial firms were and are responsible for the vast majority of its liabilities. Before the 2008 crash, the five major U.S. investment banks had a combined balance sheet size of approximately $4 trillion, and this may have understated the true level of liabilities they were holding. Witness the recent revelations about failed Wall Street investment bank Lehman Brothers, which raises questions about the extent to which shadow banks offloaded balance sheet risk through the use of dodgy transactions.
The plan seems to be that Germany and France will soak up some of this Greek debt via public markets and state-owned banks, due to a EU bylaw that prohibits member states from owning the debt of other members. What’s astounding to me is that no one is asking Wall Street to pony up any of this cash. They, after all, are almost entirely responsible for this Greek debt crisis, and they made hundreds of millions of dollars watching Greece go down in flames.
Goldman Sachs alone, who was arguably the single biggest catalyst for Greece’s downward spiral, paid out more than $21 Billion in sheer bonuses to its employees. AIG, another major player in this, paid out more than $100 million. I mean, shouldn’t some of this money go toward cleaning up the mess they caused? The Times printed an excellent series of articles on Wall Street’s complicity in this just one week ago.
Javier Hernandez even reported that major bank shares swung upward on rumors of a pending EU Bailout to Greece. So they’re blatantly profiting from their crimes. I mean, how is this legal?
Oh yeah, I keep forgetting. The banks own Congress. They make the laws.
One year into his prophesied presidency, Mr. Obama addressed the nation on the issues he thinks plague it the most. The speech was 5 parts economy, two parts health care, one part budget, and a few throwaway references to “national security” and Haiti thrown in as well (for spice). Unsurprisingly, the speech was a hit with the mainstream commentariat. The inimitable Joe Klein seemed to think this was “Obama at his best“; Yglesias, of course, thought it was “just great”; and Greg Sargent praised its “mix of charm and good humor”. As we all know, the main things our belaguered republic lacks at this juncture are “charm” (and/or) “good humor”.
I guess nobody took notes on what Mr. Obama said, as the reactions I’ve seen are based on qualitative nonsense (“How did he look? Was he friendly? Did he get the Republicans’ goat?”) A shame, because a close reading of the text of the speech reveals evasions, inconsistencies, and, at times, willful manipulation of data. Let’s dive in, shall we?
As Mr. Obama said early on, “It begins with the economy”.
Our most urgent task upon taking office was to shore up the same banks that helped cause this crisis. It was not easy to do. And if there’s one thing that has unified Democrats and Republicans, and everybody in between, it’s that we all hated the bank bailout. I hated it — (applause.) I hated it. You hated it. It was about as popular as a root canal. (Laughter.)
So I supported the last administration’s efforts to create the financial rescue program. And when we took that program over, we made it more transparent and more accountable. And as a result, the markets are now stabilized, and we’ve recovered most of the money we spent on the banks. (Applause.) Most but not all.
To recover the rest, I’ve proposed a fee on the biggest banks. (Applause.) Now, I know Wall Street isn’t keen on this idea. But if these firms can afford to hand out big bonuses again, they can afford a modest fee to pay back the taxpayers who rescued them in their time of need. (Applause.)
Did you really hate it so much, Mr. Obama? I mean, the largest contributors to your campaign were financial institutions, and they certainly didn’t hate it. And your Treasury Secretary, Timothy Geithner, was practically appointed by Goldman Sachs, and went on to distribute trillions of untraceable dollars to unknown banks. He certainly didn’t hate it. Especially when your read about how Geithner willfully colluded with AIG to defraud the taxpayers of billions, it just seems like you’re making up all this populist “oh I hated it but it had to be done” nonsense ex post facto.
You’re well aware that the largest banks consider your so-called “bank fee” a joke, and that the $90 billion you plan to extract from them doesn’t cover 1/100th of the total money their malfeasance lost our economy. Also, paying back the government was stipulated in the TARP to begin with. When the banks accepted the money back in September ’08, they did so with the knowledge that they’d eventually have to pay it back. So all this “fee” does is force the banks to uphold the contract they already signed.
Moreover, you are well aware what $90 Billion won’t even cover the current outstanding bank debt. As Propublica reports, the net outstanding in the TARP program is $316 Billion. Not $90 Billion.
Concerning the “Recovery Act”:
The plan that has made all of this possible, from the tax cuts to the jobs, is the Recovery Act. (Applause.) That’s right -– the Recovery Act, also known as the stimulus bill. (Applause.) Economists on the left and the right say this bill has helped save jobs and avert disaster. But you don’t have to take their word for it.
Talk to the small business in Phoenix that will triple its workforce because of the Recovery Act.Talk to the window manufacturer in Philadelphia who said he used to be skeptical about the Recovery Act, until he had to add two more work shifts just because of the business it created. Talk to the single teacher raising two kids who was told by her principal in the last week of school that because of the Recovery Act, she wouldn’t be laid off after all.
Or you can talk to this guy, who got a $24 million stimulus award after numerous accusations of bribery. Or you could talk to this crumbling school district unable to access its stimulus funds for “bureaucratic red tape”. Or, again, these six companies, currently under criminal investigation, who nevertheless received $30 million from your free money giveaway. As Mr. Obama says in his speech,
There are stories like this all across America.
But what about clean energy? Well, he’s glad you asked:
But to create more of these clean energy jobs, we need more production, more efficiency, more incentives. And that means building a new generation of safe, clean nuclear power plants in this country. (Applause.) It means making tough decisions about opening new offshore areas for oil and gas development. (Applause.) It means continued investment in advanced biofuels and clean coal technologies. (Applause.) And, yes, it means passing a comprehensive energy and climate bill with incentives that will finally make clean energy the profitable kind of energy in America. (Applause.)
You clearly aren’t a scientist, Mr. Obama, because those suggestions don’t make a lick of sense. As I’m sure you’re aware, no nuclear plant has ever been built on time or on budget. Ever. “Breeder Reactors” are still an experimental technology, and there is no safe way to dispose of the waste current reactors produce. What should we do with “zombie reactors” – those crumbling ’70s-era nuclear plants we can’t find the budget to inspect? They constantly break down, and constitute a major public health risk. Shouldn’t we do something about those, first? Oh yeah, “Spending Freeze”. Well, I guess we can do like the French and just dump our N-waste in Russia.
As for “Clean Coal”, your colleague Al Gore called that a “lie” months ago. There is no such thing as clean coal. You know it and I know it. But, as you and the coal lobby so fervently hope, the American public doesn’t know it. And let’s not even mention the world food crisis your vaunted “advanced biofuels” had a hand in creating. Or the massive deforestation now going on in Brazil and Indonesia to meet our “advanced biofuels” demand. That technology is wasteful, inefficient, and impracticable. Europe would have to use 70% of its landmass exclusively for biofuel crops in order to meet its energy demands. America doesn’t even have enough landmass to grow enough biofuels to meet its demands. And never mind that the distillation of biofuels requires orders of magnitude more energy than we get from them.
We move on to Health Care:
After nearly a century of trying — Democratic administrations, Republican administrations — we are closer than ever to bringing more security to the lives of so many Americans. The approach we’ve taken would protect every American from the worst practices of the insurance industry. It would give small businesses and uninsured Americans a chance to choose an affordable health care plan in a competitive market. It would require every insurance plan to cover preventive care.
It would also require every American to purchase health insurance, whether they want it or not (indeed, whether or not they can afford it) – but that’s not a popular aspect of the bill, so we better not mention that. In fact, given your recent defeat in Massachusetts, it’s probably better we move on altogether.
So now let’s talk about… the deficit!
Starting in 2011, we are prepared to freeze government spending for three years. (Applause.) Spending related to our national security, Medicare, Medicaid, and Social Security will not be affected. But all other discretionary government programs will. Like any cash-strapped family, we will work within a budget to invest in what we need and sacrifice what we don’t. And if I have to enforce this discipline by veto, I will. (Applause.)
So your plan is to cut everything but the three biggest contributors to the deficit? How is that a good idea? And is “national security” really something we “need” at this point? You are aware, I’m sure, that we spend on the order of $1 trillion per year prosecuting our misbegotten murder rampages in Iraq, Afghanistan, Pakistan, Yemen, Somalia, and whomever else wish to inflict misery upon.This spending benefits no one, and it demonstrably makes us less safe. You think that might be something we would “cut” if we were trying to save money. I really can’t stress this point enough. We spend the equivalent of South Korea’s GDP murdering Arabs. This is completely baffling to me. Would a “cash-strapped family” really refuse to “sacrifice” its largest and most wasteful expenditure that also happens to actively harm it?
But it’s not just a “deficit of dollars” – it’s also a deficit of… trust. Getting that trust surplus back is what Mr. Obama came to Washington, apparently, to do.
That’s what I came to Washington to do. That’s why -– for the first time in history –- my administration posts on our White House visitors online. That’s why we’ve excluded lobbyists from policymaking jobs, or seats on federal boards and commissions.
But we can’t stop there. It’s time to require lobbyists to disclose each contact they make on behalf of a client with my administration or with Congress. It’s time to put strict limits on the contributions that lobbyists give to candidates for federal office.
Actually, that bolded statement turned out not to be true. When you said “we have excluded lobbyists”, you might have added, “except for the ones I personally approve of.” You know you’ve given waivers to several former lobbyists to work for your administration. Why lie about it? Oh yeah, you’re doing the populist thing. But it kind of detracts from the whole “honesty” message if you have to lie while you’re making it.
So then while he’s on a roll, Mr. Obama attacks the Supreme Court bribery decision, even though the idea that “campaign donations are free speech” was a major reason why he got elected.
With all due deference to separation of powers, last week the Supreme Court reversed a century of law that I believe will open the floodgates for special interests –- including foreign corporations –- to spend without limit in our elections. (Applause.) I don’t think American elections should be bankrolled by America’s most powerful interests, or worse, by foreign entities. (Applause.) They should be decided by the American people.
Is this some kind of joke? You raised $680,000,000 in the most expensive presidential campaign ever. You took money from every major financial institution, including some of the biggest beneficiaries of the Geithner-Bernanke giveaway. I’m really at a loss for words here.
Finally we come to the part about terrorism. I think he’s almost done.
Since the day I took office, we’ve renewed our focus on the terrorists who threaten our nation. We’ve made substantial investments in our homeland security and disrupted plots that threatened to take American lives. We are filling unacceptable gaps revealed by the failed Christmas attack, with better airline security and swifter action on our intelligence. We’ve prohibited torture and strengthened partnerships from the Pacific to South Asia to the Arabian Peninsula. And in the last year, hundreds of al Qaeda’s fighters and affiliates, including many senior leaders, have been captured or killed — far more than in 2008.
No you haven’t. Well, maybe you have, but – wink! – we’ll never know, right? The “black site” at Bagram air base is expanding; Guantanamo hasn’t closed; you believe in extra-legal kidnapping and assassinations (even of American citizens!) And given that you refuse to prosecute Bush-era torturers, even though their actions constitute high crime under the Geneva Conventions, the Nuremberg Code, and our own World War II legal precedent, it’s hard to believe you’re really against torture. Oh, and by the way, I know of a massive plot to take American lives. In fact, it’s killed more than 5,000 Americans already, almost twice as many as 9/11 did. Do you know what it is?
Aaaaand that about does it. A few more references to the “heroic” American response to Haiti (our decidedly ‘un-heroic’ IMF loansharking, of course, went unmentioned), a throwaway reference to some random lady who says “we are tough, we are American”, one last “God Bless America!”, and we’re clear! Another logically inconsistent, factually dubious, rabble-rousing excuse of abuse that managed to tell us nothing. Congratulations, Mr. Obama.
Bloomberg gets the scoop on how Obama’s flimsy “Bank Tax” will affect Goldman Sachs:
Goldman Sachs, like many banks, is awarding more of its bonuses in stock to tie them more closely to performance. The firm priced those shares at $154.12, the closing level on Jan. 22, a person familiar with the matter said, after a two-day, 8.1 percent slide prompted by Obama’s plan.
“The unintended consequences of some of this craziness coming out of Washington are breathtaking,” said Michael Holland, who oversees more than $4 billion as chairman of Holland & Co. in New York. “In the process of trying to score political points, they have taken the target, in this case the so-called fat-cat bankers, and provided them with a reward.”
I wonder if we’ll ever realize that you can’t punish people who make the rules. In this case, Goldman Sachs regularly gets their first choice appointed to the Treasury Secretaryship, and as Rep. Dick Durbin had the courage to remark, so far as Congress goes, the banks “frankly own the place” .
Under these circumstances, finding a way to curb executive compensation or even castigate the banks for getting us into this stupid crisis isn’t just difficult. It’s well-neigh impossible. It would be like getting Obama to reduce his executive powers, or trying to convince Stalin to step down nicely after two terms.