Posts Tagged ‘propublica’
Fraud Didn’t End With Goldman Sachs
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.
75% of Americans Think Stimulus Was Wasted
CNN with a wince-inducing, yet on the whole, unsurprising report:
A CNN/Opinion Research Corporation survey released Monday morning also indicates that 63 percent of the public thinks that projects in the plan were included for purely political reasons and will have no economic benefit, with 36 percent saying those projects will benefit the economy.
Twenty-one percent of people questioned in the poll say nearly all the money in the stimulus has been wasted, with 24 percent feeling that most money has been wasted and an additional 29 percent saying that about half has been wasted. Twenty-one percent say only a little has been wasted and 4 percent think that no stimulus dollars have been wasted.
Pretty harsh. But then people are understandably upset – underemployment has been over 15% for almost a year and is now inching toward 20%; we’ve seen a year-long debate on “healthcare” which looks like it’s going down the toilet; we’ve seen the major financial institutions award their rascals of executives more money than a common man can expect to earn in three lifetimes; and we’ve seen utter complacency and disregard from our so-called “elected representatives”. Good news is hard to come by.
But at the same time, is the public right about this? Has the stimulus been a waste? Really, it’s quite hard to tell – the whole idea behind the bill was to create jobs and put a “bottom” on the economy, and this has only dubiously been achieved.
Joe Klein has a typically abusive response entitled “Too Dumb to Thrive” wherein he upbraids the bovine public for being too stupid to understand what’s going on; after all they all got $60 extra dollars in their paychecks! Why are they complaining?
Klein’s response lacks any real analysis – for that, I recommend ProPublica’s coverage of the stimulus, which would indicate that while the money hasn’t exactly been “wasted” per se, it has certainly been mis-allocated, and at times, completely mis-handled.
See, for instance this report on schools unable to access their stimulus funds:
After the federal stimulus passed in February, North Carolina school officials thought they had found a way to repair the 58-year-old gym and other crumbling school structures. The stimulus provided money for Qualified School Construction Bonds, which is intended to let school districts raise capital through interest-free bonds to fund construction.
The program also was expected to boost North Carolina’s construction industry. Ben Matthews, director of school support for North Carolina’s Department of Public Instruction, estimated it would create 11,000 jobs.
But the bond program has become entangled in financial and bureaucratic red tape. Only $2.3 billion of the $11 billion in bonds available this year have been sold as of last week, data compiled by Bloomberg show.
Well, that’s not good. Or again, take this report about stimulus funds going to contractors under federal criminal investigation:
The Department of Defense awarded nearly $30 million in stimulus contracts to six companies while they were under federal criminal investigation on suspicion of defrauding the government.
According to Air Force documents, the companies claimed to be small, minority-owned businesses, which allowed them to gain special preference in bidding for government contracts. But investigators found that they were all part of a larger minority-owned enterprise in Southern California, making them ineligible for the contracts.
Kickbacks, anyone? The point here is not that the stimulus was “totally wasted” as many Americans seem to think – only that there exists ample reason for them to feel that way. Maybe Joe Klein could keep that in mind next time he writes an abuse letter to America’s body politic.
Stimulus Fraud
Propublica continues its fantastic coverage of the Obama stimulus bill by drawing attention to a true face-palm moment:
The Kentucky transportation department has awarded $24 million in stimulus contracts to companies associated with a road contractor who is accused of bribing the previous state transportation secretary, according to an audit by the federal Department of Transportation [1] (PDF).The DOT’s internal watchdog used the case to highlight the significant delays in the time it takes for the Federal Highway Administration to suspend or bar someone from receiving government contracts. Though the agency is supposed to make such a decision within 45 days, federal highway officials waited 10 months after the indictment to put the men accused of bribery onto the list of banned contractors.
I think this happy little episode displays pretty succinctly the vast and systemic corruption with which the Government has dispensed this stimulus.
The shadowy underworld of government contract awards is mysterious indeed:
In the Kentucky case, at trial this week, prosecutors have alleged that longtime road contractor Leonard Lawson paid state employees for confidential engineering estimates that helped him get a leg up on bidding for contracts.
Paul Krugman, Matt Yglesias, Ezra Klein, and the rest of the “progressive” blogosphere have each chastised Mr. Obama for not providing a “big enough” stimulus, and while there may be theoretical reasons for thinking such, it seems clear that even the biggest “stimulus” will fail to stimulate if it’s handled with fraud and deceit.
Eye on the Stimulus
We’re tracking the stimulus from bill to building, and we’re organizing citizens nationwide to watchdog local stimulus projects. Our team includes editor Tom Detzel, lead reporter Michael Grabell, Jennifer LaFleur, Amanda Michel, Eric Umansky and Christopher Flavelle.
When Do You Ban a Stimulus Contractor?
Kentucky highway contractor Leonard Lawson heads to court where he faces charges related to bid-rigging on road construction projects in Lexington, Ky., on Jan. 11, 2010. (James Crisp/AP Photo)
The Kentucky transportation department has awarded $24 million in stimulus contracts to companies associated with a road contractor who is accused of bribing the previous state transportation secretary, according to an audit by the federal Department of Transportation [1] (PDF).The DOT’s internal watchdog used the case to highlight the significant delays in the time it takes for the Federal Highway Administration to suspend or bar someone from receiving government contracts. Though the agency is supposed to make such a decision within 45 days, federal highway officials waited 10 months after the indictment to put the men accused of bribery onto the list of banned contractors.
The combination of lengthy delays in the contractor suspension process and the rapid disbursement of billions of stimulus dollars “creates a ‘perfect storm’ for contractors intent on defrauding the government,” the inspector general audit said.
But the case also highlights a common tension in the contracting world that is now getting more attention with the nearly $800 billion stimulus package: What level of evidence is enough to justify suspending a company from receiving government contracts?
In the Kentucky case, at trial this week, prosecutors have alleged that longtime road contractor Leonard Lawson paid state employees for confidential engineering estimates that helped him get a leg up on bidding for contracts.
TARP: Unstated Losses
The Financial Press is busy crowing over the loss estimates for the Paulson Bailout, claiming that losses have been “cut” by $200 Billion dollars. Of course, this still leaves $500 Billion unaccounted for, but standards for good news have fallen to the extent that a $500 billion loss is considered a ray of hope.
Unfortunately, we will be spared even that brief ray. Research from ProPublica conclusively debunks the claim that TARP losses have been mitigated, if only for the fact that the program has not yet finished.
As they say:
The latest estimate accounts for only the first year of spending, and the TARP’s spending isn’t done. Treasury says it expects the ultimate cost to be higher. Treasury Secretary Tim Geithner extended [8] the TARP thru Oct. 3, 2010, the TARP’s second birthday, earlier this week. He said, though, that Treasury didn’t expect to deploy more than $550 billion of the $700 billion available. As of today, Treasury has committed a total of about $407.3 billion [2] (that’s excluding companies that have refunded their bailout money [6]).
The TARP still has a little less than half its funds to distribute; meanwhile bank failures haven’t even begun to slow (three more failed this Friday, bringing the total to 167 this year), and unemployment still hovers around 17-20 per cent. It seems a bit premature to be declaring victory for the TARP.
The Reasoned Review 