It will be interesting to see where things goes from here.
Even with all the the opprobrium directed at the firm (see the Taibbi quote below), the consensus was that they would skate, because they were “too powerful” for any meaningful action to be taken against them.
If this case cracks that shell, I think that we will see many more rocks overturned to see what lurks beneath.
My guess is that this will all end with a token fine and no admission of wrong-doing, but I would be happy to be wrong.
*Alas, I cannot claim credit for the bon mot describing Goldman Sachs as a, “great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money.” This was coined by the great Matt Taibbi, in his article on the massive criminal conspiracy investment firm, The Great American Bubble Machine.
Certainly, this is better than their strategy on healthcare reform, which was to let Senator Olympia Snowe (R-ME) sandbag them by engaging in extensive negotiations when she had not the slightest intention of voting for cloture.
The lead SEC attorney in the civil fraud case against Goldman Sachs, aka, “The great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money,”*is one Andrew Matthew Calamari.
As Dave Barry would say, “I’m not making this up.”
*Alas, I cannot claim credit for the bon mot describing Goldman Sachs as a vampire squid. This was coined by the great Matt Taibbi, in his article on the massive criminal conspiracy investment firm, The Great American Bubble Machine.
He’s not just the worst Fed chairman we’ve ever had, he’s the worst American we’ve ever had.
And it only goes up from there.
I would note that Schiff comes an extreme political philosophy, he is a wing-nut Randroid Libertarian,* but this does not mean that this does not bear watching.
It’s amusing, easily understood, and generally in accordance with the facts as we know them.
It also makes it clear just how unethical, and possibly illegal, these actions were.
Goldman Sachs deliberately crippled products that they created, and then took out insurance policies against them, “naked” Credit Default Swaps (CDS), even though they did not own what they were insuring, and made lots of money when the US government bailed out AIG, so that AIG could pay off the policies.
And Timothy “Eddie Haskell” Geithner, our Treasury Secretary, still has not backed down from his position that the “naked” CDS is essential for “price discovery.”
This is not true. It was Paulson & Co. Inc., run by John Paulson, the protagonist of the book The Greatest Trade Ever: The Behind-the-Scenes Story of How John Paulson Defied Wall Street and Made Financial History, about his fabulously successful shorting of the subprime market.
My guess is that he’s going to seem a Paulson, no relation to the former Treasury Secretary, will find his star dimmed a bit, particularly since the SEC has made it clear that he is under investigation as well.
I guess he sounds a bit less like a brave hero now.
The SEC has charged Goldman Sachs and one of its VPs with, “defrauding investors by misstating and omitting key facts about a financial product tied to subprime mortgages as the U.S. housing market was beginning to falter.”
It sounds to me like they assembled a particularly crappy CDO at the request of a hedge fund, most likely the now infamous Magentar:
The SEC alleges that Goldman Sachs structured and marketed a synthetic collateralized debt obligation (CDO) that hinged on the performance of subprime residential mortgage-backed securities (RMBS). Goldman Sachs failed to disclose to investors vital information about the CDO, in particular the role that a major hedge fund played in the portfolio selection process and the fact that the hedge fund had taken a short position against the CDO.
“The product was new and complex but the deception and conflicts are old and simple,” said Robert Khuzami, Director of the Division of Enforcement. “Goldman wrongly permitted a client that was betting against the mortgage market to heavily influence which mortgage securities to include in an investment portfolio, while telling other investors that the securities were selected by an independent, objective third party.”
So it sounds like Goldman Sachs assembled CDOs, a form of mortgage backed security, at the request and to the specifications of the hedge fund Magetar, which demanded that the CDOs that it funded be as crappy as possible so that it could win on bets against high rated tranches.
This was apparently fairly common knowledge on the street, and Goldman did it anyway, and then sold the instruments as being “rock solid”. Oopsie
Background, and links to Pro Publica‘s and This American Life‘s stories on Magnetar’s, “burn down your neighbor’s house for the insurance money,” investment strategy are here.
There are two potential outcomes:
A tepid settlement followed by an inconsequential fine.
That the string is being pulled, and a whole lot of stuff comes unraveled.
I hope for the latter, but I expect the former.
*Alas, I cannot claim credit for the bon mot describing Goldman Sachs as a, “great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money.” This was coined by the great Matt Taibbi, in his article on the massive criminal conspiracy investment firm, The Great American Bubble Machine.
Full complaint and embedded PDF of the filing are after break:
Washington, D.C., April 16, 2010 — The Securities and Exchange Commission today charged Goldman, Sachs & Co. and one of its vice presidents for defrauding investors by misstating and omitting key facts about a financial product tied to subprime mortgages as the U.S. housing market was beginning to falter. Additional Materials
The SEC alleges that Goldman Sachs structured and marketed a synthetic collateralized debt obligation (CDO) that hinged on the performance of subprime residential mortgage-backed securities (RMBS). Goldman Sachs failed to disclose to investors vital information about the CDO, in particular the role that a major hedge fund played in the portfolio selection process and the fact that the hedge fund had taken a short position against the CDO.
“The product was new and complex but the deception and conflicts are old and simple,” said Robert Khuzami, Director of the Division of Enforcement. “Goldman wrongly permitted a client that was betting against the mortgage market to heavily influence which mortgage securities to include in an investment portfolio, while telling other investors that the securities were selected by an independent, objective third party.”
Kenneth Lench, Chief of the SEC’s Structured and New Products Unit, added, “The SEC continues to investigate the practices of investment banks and others involved in the securitization of complex financial products tied to the U.S. housing market as it was beginning to show signs of distress.”
The SEC alleges that one of the world’s largest hedge funds, Paulson & Co., paid Goldman Sachs to structure a transaction in which Paulson & Co. could take short positions against mortgage securities chosen by Paulson & Co. based on a belief that the securities would experience credit events.
According to the SEC’s complaint, filed in U.S. District Court for the Southern District of New York, the marketing materials for the CDO known as ABACUS 2007-AC1 (ABACUS) all represented that the RMBS portfolio underlying the CDO was selected by ACA Management LLC (ACA), a third party with expertise in analyzing credit risk in RMBS. The SEC alleges that undisclosed in the marketing materials and unbeknownst to investors, the Paulson & Co. hedge fund, which was poised to benefit if the RMBS defaulted, played a significant role in selecting which RMBS should make up the portfolio.
The SEC’s complaint alleges that after participating in the portfolio selection, Paulson & Co. effectively shorted the RMBS portfolio it helped select by entering into credit default swaps (CDS) with Goldman Sachs to buy protection on specific layers of the ABACUS capital structure. Given that financial short interest, Paulson & Co. had an economic incentive to select RMBS that it expected to experience credit events in the near future. Goldman Sachs did not disclose Paulson & Co.’s short position or its role in the collateral selection process in the term sheet, flip book, offering memorandum, or other marketing materials provided to investors.
The SEC alleges that Goldman Sachs Vice President Fabrice Tourre was principally responsible for ABACUS 2007-AC1. Tourre structured the transaction, prepared the marketing materials, and communicated directly with investors. Tourre allegedly knew of Paulson & Co.’s undisclosed short interest and role in the collateral selection process. In addition, he misled ACA into believing that Paulson & Co. invested approximately $200 million in the equity of ABACUS, indicating that Paulson & Co.’s interests in the collateral selection process were closely aligned with ACA’s interests. In reality, however, their interests were sharply conflicting.
According to the SEC’s complaint, the deal closed on April 26, 2007, and Paulson & Co. paid Goldman Sachs approximately $15 million for structuring and marketing ABACUS. By Oct. 24, 2007, 83 percent of the RMBS in the ABACUS portfolio had been downgraded and 17 percent were on negative watch. By Jan. 29, 2008, 99 percent of the portfolio had been downgraded.
Investors in the liabilities of ABACUS are alleged to have lost more than $1 billion.
The SEC’s complaint charges Goldman Sachs and Tourre with violations of Section 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934, and Exchange Act Rule 10b-5. The Commission seeks injunctive relief, disgorgement of profits, prejudgment interest, and financial penalties.
# # #
For more information about this enforcement action, contact:
Lorin L. Reisner Deputy Director, SEC Enforcement Division (202) 551-4787
Kenneth R. Lench Chief, Structured and New Products Unit, SEC Enforcement Division (202) 551-4938
Reid A. Muoio Deputy Chief, Structured and New Products Unit, SEC Enforcement Division (202) 551-4488
In case you were living under a rock, this is why he left so quickly from his position managing the bailouts of GM and Chrysler:
New York Attorney General Andrew Cuomo confirmed his office is investigating former Obama administration auto industry advisor Steven Rattner, in a growing probe into illegal kickbacks involving the state pension fund.
Rattner, who helped craft the federal rescues of General Motors and Chrysler, left the Obama administration abruptly last year. This morning, the private equity firm he co-founded, Quadrangle Partners, agreed to pay $7 million to settle allegations it made illegal payments to a New York state official and a political consultant in exchange for millions of dollars in pension investments.
But the settlement specifically excludes Rattner, who Cuomo says is no longer with the firm and remains under investigation. What’s more, Quadrangle issued a scathing statement against its co-founder.
“We wholly disavow the conduct engaged in by Steve Rattner,” the statmement says. “That conduct was inappropriate, wrong and unethical.”
This is a guy who operated a corporate “chop shop,” and we are surprised to discover that he is a dirt bag.
This “experience” thing, which justified, Rattner, Geithner, Summers, etc. is highly overrated.
Ethics first, allegiance to the American public second, and only then consider experience.
Well, so much for a recovery in employment, initial unemployment claims rose by 24,000 to 484,000, with the 4-week moving average rising by 7,5000 to 457,750, and continuing claims rose by 73,000 to 4.64 million.
It seems that they think that it will cost, “13 of the largest banks $20 billion in annual earnings.”
This is probably right. When things are going well, going in hock up to your eyeballs is a good way to maximize your profits, and since the executives of these banks are paid largely on the basis of year to year profits, and the taxpayer bails them out when they fail, it means that they may have to forgo that 5th vacation for a year or so.
As to the dire consequences of such restrictions:
Standard & Poor’s said the new Basel rules could force some banks to change their business models.
“We expect smaller, deposit-funded retail banks to find it easier to comply with more stringent liquidity and capital requirements than larger wholesale-funded institutions with extensive trading operations or large loan books and securities holdings,” the credit rating company said in a report today. “For investment banks, the increase in capital requirements could be sizable.”
I don’t know about you, but it seems to me that this is a plus, not a minus.
I still favor a small (20-50 basis point) Tobin tax on all financial transactions and leverage, as well as a larger tax on M&A activity, but that is in addition to much larger capital requirements.
Blanche Lincoln (D-AR), as head of the Senate Agriculture Committee, has significant input on derivatives legislation, because one of the oldest of the derivatives are commodity futures, things like pork belly futures, which is why it manages the Commodities Futures Trading Commission (CFTC).
The word has been that Lincoln would be almost as much of a road block ad the Republicans on meaningful reform, seeing as how her record is one of doing the bidding of insurance companies and bank.
Goldman Sachs Group Inc., JPMorgan Chase & Co. and their biggest rivals would be forced to wall off derivatives trading operations from their commercial banks under a measure to be introduced by Senate Agriculture Committee Chairman Blanche Lincoln, a congressional aide said.
Lincoln, an Arkansas Democrat, will propose a “no-bailout provision” as part of an overhaul of derivatives regulation she plans to unveil today, according to the aide, who declined to be identified because the plan isn’t public. The measure aims to ensure banks don’t endanger depositors’ money with risky trading of over-the-counter derivatives, the aide said.
…………
Lincoln’s provision would bar swaps dealers from taking advantage of the Federal Reserve’s discount lending window, emergency liquidity functions and the Federal Deposit Insurance Corp.’s deposit guarantee. “It eliminates all of the advantages with the affiliation with an insured depository institution, which are profound,” said Karen Petrou, managing partner of Washington-based research firm Federal Financial Analytics Inc.
…………
It would also increase protections for clients by requiring swaps dealers to treat them as a fiduciary — obligating them to put customers’ interests ahead of the company’s, the aide said.
The measure requires most over-the-counter derivatives to be traded on exchanges or through clearinghouses. Companies that use swaps to hedge the cost of materials or other non-investment purposes would be exempted from the requirements, the aide said. Like the Volcker rule, which would ban commercial banks from proprietary trading, the wall-off provision would separate derivatives trading from traditional banking activities such as taking deposits and making loans.
Let’s be clear, this is very tough stuff, at least by the standards of the Congress, particularly the Senate.
“Proposals that I have seen from the administration have not gone far enough to prevent bailouts of ‘too big to fail institutions’ and could contain loopholes,” Lincoln said. “If we pass reform, it needs to be real reform. My proposal will go further than any other congressional or administration proposal to prevent future bailouts.”
I’m with David Dayen, this all happened within days of her primary challenger, Bill Halter (Reminder, he’s on My Act Blue Page) releasing ads saying that she was too close to the banking industry.
Everyone on Capitol hill know that her proposals will never go beyond a press release, and that behind the scenes, she will continue to do the big banks’ bidding.
This is just electoral politics, and a full court press from her Congressional Colleagues and the White House.
On the down side, the National Federation of Independent Business’ index of small business optimism fell in March, and since this is where most jobs are created, it does not bode well for jobs in the near term.
In real estate, mortgage applications fell for the 6th straight week, which is not surprising, as mortgage rates have been trending higher and the FHA has started to charge more for mortgage insurance to replenish its depleted reserves.
The good folks at Bloomberg, no group of raving socialists have some graph pr0n.
What they are showing is something very basic: That when profits (and not stated, remuneration) in the financial industry skyrocket, this is not a sign of health in the economy, this is a sign of sickness.
It means that enormous amounts of resources are being redistributed to non-productive activities, essentially bankers shafting their customers and pocketing the difference:
In July 2008, [Deutsche Bank AG strategist Jim] Reid said that U.S. banks had made “excess profits” of about $1.2 trillion in the previous decade, compared with how much they should have made based on economic growth, and that those excesses would be wiped out. Since then, U.S. financial firms have written down the value of their assets by about $1.15 trillion, according to Bloomberg data.
“We are now all well aware that rather than overhaul a financial system that arguably contributed to the problems of the last two to three years, the authorities have created the conditions for the industry to thrive,” Reid wrote this week. “Only time will tell how the regulators and politicians will decide to address these imbalances.”
You see, Mr. Kedrosky’s thesis is that with rates at 0%, and the finance industry still not supplying the lubricant that keeps the economy moving particularly well, that even bad bankers can make a profit.
Mr. Drum, and I agree, sees the role of the bankers somewhat differently :
Wall Street is only full of bad bankers if you think the role of bankers is to provide efficient financial services to the rest of the economy. If you adopt the more correct attitude that the role of bankers is to make lots of money for bankers, then America has the best bankers in the world. And they’re proving it yet again.
(emphasis mine)
This is, of course the problem: What is good for the banks is increasingly bad for the country, which is why the finance industry, and all of the FIRE sector (Finance, Insurance, and Real Estate) needs to be shrunk back to historic levels of society.
Until one of the goals of regulation is a recognition that the FIRE sector is basically parasitic once it expands much beyond the bare minimum required, then part of the solution is to shrink it, and this needs to be an explicit goal of any new regulatory regime.
*It’s a reference to Damon Knight’s (very) short story eripmaV. Read the story, or buy the T-shirt with the story printed in full on it.
It was like a hidden passage on Wall Street, a secret channel that enabled billions of dollars to flow through Lehman Brothers.
In the years before its collapse, Lehman used a small company — its “alter ego,” in the words of a former Lehman trader — to shift investments off its books.
The firm, called Hudson Castle, played a crucial, behind-the-scenes role at Lehman, according to an internal Lehman document and interviews with former employees. The relationship raises new questions about the extent to which Lehman obscured its financial condition before it plunged into bankruptcy.
While Hudson Castle appeared to be an independent business, it was deeply entwined with Lehman. For years, its board was controlled by Lehman, which owned a quarter of the firm. It was also stocked with former Lehman employees.
None of this was disclosed by Lehman, however.
Not surprised about their doing this, though I am surprised that this is, at least nominally, legal.
Note that there are 8 chapters, so you may want to link to the This American Life broadcast, (about 40 minutes) which is less encyclopedic, but rather more streamlined.
Basically, at the end of 2005, it appeared that the housing bubble was moderating, which made people were less interested in investing in the mortgage backed security known as the CDO, because without double digit increases in home prices, the risk levels were higher, and the potential rewards were less.
What Magnetar did was to get banks to write more CDOs by agreeing to buy the worst tranches, the riskiest 3-5% of these instruments, and then everyone else, seeing as how the scum at the bottom of the barrel was taken, would snap up the “higher quality” stuff.
At one point, Magnetar was covering about ½ of the CDO market, and betting against everything that they could get their hands on with credit default swaps (CDS).
And the financial industry noticed their moves into the field, even if they did not know of the CDS bets, to the degree that Business Week predicted that they would be, “shredded”.
So, why did Morgan do it anyway? Because the people who bought the CDOs generated commissions at the front end, and were then given huge bonuses based on this, so by the time it all went pear shaped, the individual traders had a few tens of millions of dollars in the bank.
This is deeply and perfidiously corrupt and well organized, and I cannot see why RICO isn’t being applied to anyone who touched this.
But seriously, read the whole thing. It is stunning in its scope and corruption, but this boggles the mind.
This is not taking out insurance on your neighbor’s house and burning it down. Paying for the road out to a sub development so that people will buy houses, and then using a squadron of B-52s to firebomb that development, only that development is our economy.
Major banks have masked their risk levels in the past five quarters by temporarily lowering their debt just before reporting it to the public, according to data from the Federal Reserve Bank of New York.
A group of 18 banks—which includes Goldman Sachs Group Inc., Morgan Stanley, J.P. Morgan Chase & Co., Bank of America Corp. and Citigroup Inc.—understated the debt levels used to fund securities trades by lowering them an average of 42% at the end of each of the past five quarterly periods, the data show. The banks, which publicly release debt data each quarter, then boosted the debt levels in the middle of successive quarters.
Excessive borrowing by banks was one of the major causes of the financial crisis, leading to catastrophic bank runs in 2008 at firms including Bear Stearns Cos. and Lehman Brothers. Since then, banks have become more sensitive about showing high levels of debt and risk, worried that their stocks and credit ratings could be punished.
Seriously, “business as usual” is better described as an “ongoing criminal enterprise.”
True Dat!
All of the big banks