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Friday, April 16, 2010

Goldman indictment chopping at branches

Woke today to the news that Goldman Sachs had been indicted. Needless to say, with all my writing about Goldman Sachs, all of it critical, I'd felt somewhat vindicated. Yet at the time of this writing, I can't be sure whether the indictment will expose wrong-doing at the top rungs at Goldman, kind of like how the prosecution of a few "bad apples" at Abu Ghraib did little to expose "harsh interrogations" authorized at the top of the military's chain of command--namely by Rumsfeld and Dick Cheney.

Currently a single employee--a Goldman Vice President stands under indictment for fraud, misrepresenting a basket of securities he was hawking. This rogue trader kind of stuff reminds me of the $7 billion fraud allegedly perpetrated by Jerome Kerviel at Societe Generale, who'd been arrested in January 2008.

What's so interesting about both cases is how a corporate with a pattern of fraud offers up a scapegoat for massive losses brought on by mismanagement and greed. Far easier it is to blame a single rogue trader than a slew of traders, or the actions of an individual despite the orders and permissions he'd been granted by his superiors. For an idea on how broadly fraud was being perpetrated, I'd recommend Peter Schiff's 2006 address to southern California mortgage brokers and a recent lecture by white collar criminologist and former bank regulator William Black.

In the minds of investors and clients--who are the most likely to react in an adverse way to Goldman's indictment, it's easy to dismiss what are company- and perhaps industry-wide examples of malfeasance by attributing them to a bad apple. The bad apple--in Societe's example, a young computer programmer--could redirect distrust away from the company who'd created the circumstances through which fraud on an unprecedented scale (at least by a single individual) could be committed.

Another benefit to scapegoating is to mollify the size of losses that occurred because of bad decisions by the financial entity. Societe had lost billions on dubious derivatives, not coincidentally the same type of product hawked by the indicted Goldman executive. Derivatives are essentially debt instruments whose present value reflects a large degree of future uncertainty about the credit-worthiness of borrowers and value of the underlying collateral.

Misrepresenting the sale of an orange is one thing. It's a tangible, physical object. Not so with the derivative, a financial project based on little more than the promise to be repaid. So shaky were CDOs (Collateralized Debt Obligations) that
many were sold with insurance attached--the infamous CDSs (Credit Defaults Swaps.)

What's so interesting about the CDS--which Buffett has labelled "insurance fraud"--is the fact they were created to insure the purchaser against the risk of loss. This would be like saying, "Hey, wanna buy some super-risky asset?"
"No," the client might retort. "Well, then what if add--for an additional cost--a clause that will compensate you in the event of loss?"

The client might bite at the possibility of a higher return. This was--after all--the age when hedge funds were making easy millions by borrowing cheap and earning big returns. This Wall Street attitude was part of the culture of greed, a Gordon Gecko-type construct where making more was naturally assumed to be a healthy, constructive attitude. Bush was in charge and the money-grab was on. Ethics were secondary, or irrelevant.

I digress. Back to our story of the day, which is how Goldman Sachs is facing legal charges for its misconduct. I'd said I'd felt vindicated, but I do possess some doubts about the effectiveness of the charges. Purely civil, they don't incur any criminal penalties.

A case could be made that the prosecution of a single employee could relieve pressure on the company for its participation in other forms of wrong-doing, a virtual laundry list assembled on blogs like mine and by investigative journalists like Matt Taibbi.

I hope that investors and clients will wake up to the reality that they've been betrayed by Wall Street in this most recent fraud. More importantly, investors need to understand that they've been intentionally defrauded, as part of a pattern of abuses by investment banks.

It's worth noting these same banks have crossed the threshold into positions of greater control and authority as a result of emergency reforms passed after the Lehman Brothers collapse. In what could be deemed a sweetheart deal, or example of disaster capitalism, Goldman and other investment banks were converted into bank holding companies, which greatly reduced their cost of capital. So excuse me for being somewhat cynical about the government's ability to reign in its close partners on Wall Street through a single indictment.

Now as long as Glass-Steagall remains de-constructed, I'd argue that the same risky behaviors and outright criminal deceptions related to the sale of derivatives will continue. And rather than interrupt the practices that led to the collapse of the credit bubble in 2008, a lack of criminal prosecutions for securities fraud will not only allow the practices to continue but actually foster greater acceptance for illegal conduct based on misrepresentation.

Wall Street, and not just the banks, should be particularly concerned about a loss of trust by the investing public. Any time a pattern of fraud emerges in any industry, it's credibility rightfully diminishes. And as a bursting of the credit bubble showed, it's not the initial losses that cause the most financial damage. Instead, it's the broader sell-off that occurs due to a loss of trust: the foundation of all relationships.

Sensitive to this PR damage, Wall Street responded by hiring the greatest of frontmen--Barack Obama. It funded our President's campaign to the tune of over $200 million and the pay-off has been large, with the first installment on the Obama investment a $308 billion loan to Citigroup (beyond TARP), made as the administration's first action, before even it'd taken office.

Don't blame the President exclusively. Congress has done its part to make sure Wall Street gains from the reaction to the crisis, or at least isn't hurt as badly as it would were the forces of non-intervention allowed to work their invisible hand on the marketplace. Instead we have a lame excuse for socializing the banks' losses--what Nouriel Roubini calls "lemon socialism."

It wasn't so long ago that everyone was acknowledging the importance of broad participation in stock market investing through mutual funds and IRAs in the 1990s. The investing public won, as did the brokerages, by increasing the pool of investment capital. Middle class Americans were investing, and we were all getting ahead.

Now we could say that the bursting of the 2008 credit bubble was different from past crises, but many of the conditions leading to it were easily preventable, predictable and predicted.

The end of the 90's bull market in equities came with the Dot Com Bust in 2000-1. What's far less widely known is that the SEC was in the process of investigating Wall Street for its role in fraudulently talking up Dot Com stocks. The investigations came to an abrupt halt on September 11th, 2001.

Numerous brokerages were being investigated by the SEC in 2001. The evidence ended up being stored in the SEC offices in--you can probably guess this--vaults of WTC 7, the third building at the complex to be destroyed on September 11th. Remember WTC 7 was the building whose collapse had been predicted twenty minutes beforehand, by BBC.

Add to that stupendous timing the fact that WTC 7 wasn't directly hit by any of the aircraft. WTC 7 also housed the operations command for the initial response--the Mayor's Office of Emergency Management. One witness, Barry Jennings, of the NYC Housing Authority actually stated that he'd heard bombs in the building. See his interview on his traumatic near-death experience at 911review.og. {Mr. Jennings was consistent with his testimony in the years after 9-11. He has since died. See the blog http://barryjenningsmystery.blogspot.com/ for more on his story}

Whatever you understanding of what went on 9-11, or your reaction to government reports on 9-11, it appears as if Wall Street has been unregulated and under-investigated for years. In the past two stock market corrections, we see the consequences of inadequate regulatory enforcement. Paradoxically, the financial damage from a loss of public confidence far exceeds the benefits granted to those who bent the rules to chase record profits like those at Goldman Sachs.

As I've written about, the company has so much influence with the White House, that a real investigation--one which expose criminal actions at the highest level--would be undermined or prevented. Therefore like the Valerie Plame investigation, we will see little more than a sacrificial lamb being offered for what are thoroughly illegal and criminal behaviors perpetrated at the highest levels. The result of the limited investigation will instill the attitude among Wall Street players that they are above the law, and therefore go on to commit additional illegal actions under the assumption they will never be held accountable.

For more, see wtc7.net

"Debunking NIST conclusions about WTC7..."

"9/11 and the Greenberg Familia" by Jerry Mazza

"SoGen reels from record $7 bln rogue trade fraud"


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  • At 9:36 PM, Blogger jbpeebles said…

    Here's my comment at Dean Baker's article "Squashing the Goldman Vampire Squid" at commondreams.org:

    I opened the comment stream article thinking I'd have something to add but it looks like most everything's been said--in about four comments. Turns out the real story is the media--those who get the truth from alternative sources, and those who rely on the MSM.
    What's remarkable is how much Commondreams.org readers know because they come to sites like this. The opposite is also true: those who don't have expose to alternative and Web-based news don't know how bad Goldman has been, nor about how far Obama's connected to Wall Street.
    I suspect most everyone has been suspicious if for no other reason than base instinct. So I guess the indictment isn't news necessarily, although many dependent on the MSM might consider it so. Dean Baker is occasionally given exposure, but nowhere near as much as pundits like Krauthammer on Fox. Taibbi has done a little better.
    I like being on the right side here. Whatever the courts decide, it's clear that justice will not be done. Like I said in my blog, it's unlikely the damage to Goldman would be so great considering the number of its former people it has working in Congress and the White House.
    My guess this indictment will end a lot like the Valerie Plame case, with one mid-level sacrificial lamb as the real evil-doers that constitute the vampire squid remain hidden, drooling over their looted treasures.
    /end comment

    Additional articles related to the original post:
    "Goldman Sachs charged by the SEC: A volcanic cloud over Wall Street" The Economist

    "For Goldman Sachs, a Deal’s Stakes Keep Growing" NYTimes.com

    "Goldman: We Are Not 'Vampire Squid Wrapped Around Humanity's Face' CommonDreams.org


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