Goldman Cracks | London Observer: Now we know the truth. The financial meltdown wasn’t a mistake – it was a con | + Other banks did similar deals as Goldman

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1

Washington’s Blog

April 19, 2010

Given the tremendous water pressure involved, even a small crack in a huge dam can lead to catastrophic failure.

Similarly, even a small breach in a seemingly invincible army’s defenses can lead to defeat.

The SEC’s fraud action against Goldman Sachs is really small potatoes. It alleges only civil –not criminal – fraud.

And it is against only one small player, not against his bosses or top management.

(And Goldman has done a lot worse.)

But Goldman has suffered a crack in its veneer of respectability.

More importantly, the SEC action may represent a crack in the company’s armor.

Before the SEC announced the charges, Goldman seemed unstoppable. It seemed like even countless tons of water pressure or scores of invading armies could not touch Goldman.

Now, there is a crack …

Even if the timing of the SEC’s announcement was wholly political (some commentators have called it bread and circuses or kabuki theater), and even if (as some writers have alleged) Goldman CEO Lloyd Blankfein himself approved the action as a way to diffuse pressure for bigger, criminal prosecutions against bigger players, tons of public pressure and hordes of lawyers are probably on their way.

Or perhaps Goldman is like the warlord hated – but feared – by all. If there is ever a crack in the warlord’s veneer of invincibility, the locals might realize that he is only human after all … and decide they can – together as a group – take him on.

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London Observer: Now we know the truth. The financial meltdown wasn’t a mistake – it was a con

Will Hutton
London Observer
April 18, 2010

Hiding behind the complexities of our financial system, banks and other institutions are being accused of fraud and deception, with Goldman Sachs just the latest in the spotlight. This has become the most pressing election issue of all.

The global financial crisis, it is now clear, was caused not just by the bankers’ colossal mismanagement. No, it was due also to the new financial complexity offering up the opportunity for widespread, systemic fraud. Friday’s announcement that the world’s most famous investment bank, Goldman Sachs, is to face civil charges for fraud brought by the American regulator is but the latest of a series of investigations that have been launched, arrests made and charges made against financial institutions around the world. Big Finance in the 21st century turns out to have been Big Fraud. Yet Britain, centre of the world financial system, has not yet levelled charges against any bank; all that we’ve seen is the allegation of a high-level insider dealing ring which, embarrassingly, involves a banker advising the government. We have to live with the fiction that our banks and bankers are whiter than white, and any attempt to investigate them and their institutions will lead to a mass exodus to the mountains of Switzerland. The politicians of the Labour and Tory party alike are Bambis amid the wolves.

Just consider the roll call beyond Goldman Sachs. In Ireland Sean FitzPatrick, the ex-chair of the Anglo Irish bank – a bank which looks after the Post Office’s financial services – was arrested last month and questioned over alleged fraud. In Iceland last week a dossier assembled by its parliament on the Icelandic banks – huge lenders in Britain – was handed to its public prosecution service. A court-appointed examiner found that collapsed investment bank Lehman knowingly manipulated its balance sheet to make it look stronger than it was – accounts originally audited by the British firm Ernst and Young and given the legal green light by the British firm Linklaters. In Switzerland UBS has been defending itself from the US’s Inland Revenue Service for allegedly running 17,000 offshore accounts to evade tax. Be sure there are more revelations to come – except in saintly Britain.

Full article here

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Other Major Banks Did Deals Similar to Goldman’s

Marian Wang
ProPublica
April 17, 2010

As you may have heard, Goldman Sachs is being sued for fraud [1] by the Securities and Exchange Commission [2] for allegedly misleading investors about a deal that Goldman helped structure and sell. In the civil suit, the SEC specifically faulted Goldman for failing to disclose that a hedge fund was helping create the investment while betting big the deal would fail.

According to the SEC, Goldman Sachs knew about the hedge fund’s bets, knew it played a significant role in choosing the assets in the portfolio, and yet did not tell investors about it. (Goldman Sachs has called the SEC’s accusations “completely unfounded in law and fact.” And in another more detailed statement [3], it said it “did not structure a portfolio that was designed to lose money.”)

As we reported at ProPublica last week, many other major investment banks were doing a similar thing [4].

Investment banks including JPMorgan Chase [5], Merrill Lynch [6] (now part of Bank of America), Citigroup, Deutsche Bank and UBS also created CDOs that a hedge fund named Magnetar was both helping create and betting would fail. Those investment banks marketed and sold the CDOs to investors without disclosing Magnetar’s role or the hedge fund’s interests.

Here is a list of the banks that were involved [7] in Magnetar deals, along with links to many of the prospectuses on the deals, which skip over Magnetar’s role. In all, investment banks created at least 30 CDOs with Magnetar, worth roughly $40 billion overall. Goldman’s 25 Abacus CDOs — one of which is the basis of the SEC’s lawsuit — amounted to $10.9 billion [8].

Full article here

4

MIKE WHITNEY
Counterpunch
April 19, 2010

There’s something fishy about the SEC’s suit against Goldman Sachs. The timing seems particularly odd. Why did the SEC decide to drop this bombshell on a Friday, just when the market had reached a 12-month high and the economy was showing signs of improvement? Was it because they thought they might need the weekend to change course if the market suddenly plummeted 400 points? And why was Goldman picked over the other Wall Street banks? Was it because Obama knew that by targeting the most hated bank on Wall Street he could garner support for his reform agenda? The whole affair smacks of a political maneuver. Yes, the momentum IS building for regulatory reform, but the congress is still stuck in the mud, which makes the SEC suit look particularly suspicious, like a clever public relations ploy designed to push Obama’s toothless bill over the finish line.

There’s little doubt that Goldman is guilty of fraud. According to the SEC filing, they failed to make material disclosures about the synthetic collateralized debt obligations (CDO) they sold to their clients. These kamikaze CDOs were designed to blow up just months after they were constructed (which they did). According to former regulator William Black, “Goldman did not just withhold information, they told people, ‘Hey, the investment decisions are being made by experts who would only choose good quality stuff’, when in fact, the stuff that was put in was chosen because it was considered the most likely to suffer near-term downgrades.” So they deliberately misled investors. That’s fraud. They also never told investors that the securities were selected (in part) by a prominent hedge fund manager, John Paulson, who planned to bet against the same CDO. That’s another no-no. So the suit looks reasonably straightforward. As SEC Director Division of Enforcement Robert Khuzami said, “The product was new and complex, but the deception and conflicts are old and simple.” Indeed. What’s most shocking, is that Goldman was caught shafting its own clients to make a buck, which will no doubt haunt them for a very long time. Their reputation has suffered a major hit.

The New York Times Gretchen Morgenson and Louise Story co-authored a groundbreaking piece on CDO’s back in December 2009, which revealed the details of Goldmans activities. According to the Times:

“Goldman and other firms eventually used the C.D.O.’s to place unusually large negative bets that were not mainly for hedging purposes, and investors and industry experts say that put the firms at odds with their own clients’ interests.

“’The simultaneous selling of securities to customers and shorting them because they believed they were going to default is the most cynical use of credit information that I have ever seen,’ said Sylvain R. Raynes, an expert in structured finance at R & R Consulting in New York. ‘When you buy protection against an event that you have a hand in causing, you are buying fire insurance on someone else’s house and then committing arson’…..

Goldman Sachs Bloody Nose 100210banner1

“In early 2005, a group of prominent traders met at Deutsche Bank’s office in New York and drew up a new system, called Pay as You Go. This meant the insurance for those betting against mortgages would pay out more quickly….Other changes also increased the likelihood that investors would suffer losses if the mortgage market tanked.

“Banks also set up ever more complex deals that favored those betting against C.D.O.’s…..At Goldman, Mr. Egol structured some Abacus deals in a way that enabled those betting on a mortgage-market collapse to multiply the value of their bets, to as much as six or seven times the face value of those C.D.O.’s. When the mortgage market tumbled, this meant bigger profits for Goldman and other short sellers — and bigger losses for other investors.” (“Banks Bundled Bad Debt, Bet Against It and Won”, Gretchen Morgenson and Louise Story, New York Times.)

So, Goldman is a serial arsonist that has turned betting against its clients’ interests into a science. The Times article makes it clear that shorting subprime and luring gullible investors into the trap, was standard operating procedure. Goldman’s CEO Lloyd Blankfein dismisses the criticism with a wave of the hand saying, “They were sophisticated investors,” which is the same as saying “buyer beware”. It’s worth noting that shorting subprimes exacerbated the pain in housing by creating incentives for originators to issue more mortgages to people with poor credit. This prolonged the housing boom and deepened the recession when the bubble finally burst. The eventual downturn was largely engineered by Wall Street.

Still, this doesn’t explain why the SEC chose Goldman over the other investment banks that were engaged in the same type of activities. Keep in mind, the Abacus CDO deal only cost about $1 billion, small potatoes compared to the $100 billion hijinx at Lehman Bros. So, why isn’t Dick Fuld in leg-irons?

This is not a defense of Goldman. (They should throw the book at them) But Goldman is no guiltier than anyone else. So, what gives? The public is not ready to answer that question because they’re too swept up in schadenfreude; i.e., malicious pleasure in the misfortune of others. Everyone is savoring this intoxicating moment of payback where the deep-pocket bunko-artists finally get their comeuppance. But there may be more to this than meets the eye, part of a strategy to pass Obama’s reform bill or to give him a Teddy Roosevelt-makeover and to boost the Dems’ prospects for the upcoming midterms. After all, the Rubin-clones, Geithner and Summers, still haven’t gotten their pink slips. And Obama’s position on the main issues– “Too big to fail”, OTC derivatives, off-balance sheet operations, securitization, ratings agencies and CFPA–hasn’t changed at all. Wouldn’t that be the logical place to start if Obama was serious about cleaning up Wall Street and reforming the system? Instead, all of the attention is focused the headline-grabbing slapdown of Goldman? Sorry, it doesn’t pass the smell test.

Many of the other banks were engaged in the same shenanigans as Goldman. Yves Smith at Naked Capitaism cites one example:

“The Wall Street Journal reports that Dutch bank Rabobank has filed a suit alleging that Merrill Lynch engaged in the same type of behavior as Goldman did with John Paulson, namely, devising a CDO on behalf of a hedge fund who was using it to take a short position, and not disclosing that fact to investors in the deal.”

Of course, compared to Lehman Bros. $100 billion “Repo 105″ off-balance sheet swindle, the Goldman scam looks trivial. So, where are the subpoenas, the indictments, the criminal prosecutions?

Last week, the Senate Subcommittee on Investigations exposed a veritable breeding-ground of larceny, malfeasance and fraud at Washington Mutual. Here’s a clip from Senator Carl Levin’s opening statement which sums up what was going on at WaMu:

“Tuesday’s hearing, shows how, over a 5-year period, from 2003 to 2008, Washington Mutual and its subprime lender, Long Beach, loaded up with risk. The bank dumped low-risk 30-year fixed loans in favor of high risk subprime, option ARM, and home equity loans. High risk loans grew from one-third to three-quarters of the bank’s home loan business.

“Those high risk loans were problem-plagued… In one instance, a year-long internal WaMu probe found that two of WaMu’s top loan producing offices were issuing loans with fraud rates of 58 per cent and 83 per cent…. At still another loan office, a sales associate admitted ‘manufacturing’ documents to support quick loan closings.

Washington Mutual’s shoddy lending practices affected more than its own operations. WaMu and Long Beach sold or securitized most of their loans. From 2000 to 2007, WaMu and Long Beach securitized at least $77 billion in subprime loans, stopping only when the subprime secondary market collapsed in September 2007. WaMu sold another $115 billion in Option ARM loans. Together, WaMu and Long Beach dumped hundreds of billions of dollars of toxic mortgages into the financial system like polluters dumping poison in a river.” (Opening Statement of Sen. Carl Levin, D-Mich.: U.S. Senate Permanent Subcommittee on Investigations Hearing on Wall Street and the Financial Crisis: The Role of Bank Regulators)

Fake documents, bogus loans, fraud rates of 83 per cent, and West Coast boiler rooms dumping toxic sludge into the secondary market where it was scooped up by credulous investors. This is industrial scale white collar crime, and yet it barely found a spot on the back-pages of the nations newspapers. Why? Goldman’s puny CDO doesn’t hold a candle to WaMu’s gigantic ripoff? Is this selective justice or just public relations?

And then there’s Citigroup, which appeared before the Financial Crisis Inquiry Commission in early April. Here’s how ex-regulator William Black summarized Citi’s testimony:

“Citicorp’s top mortgage credit officer, Richard Bowen, testified on April 7 that while Citi represented to Fannie and Freddie that the toxic mortgages it was selling them were ‘conforming’ — 60 percent were not.

“He warned Citi’s top managers, including Robert Rubin. They jumped right on the problem (which will cost the taxpayers hundreds of billions of dollars) — by allowing things to get worse.” (NY Times William Black, “So much we don’t know.”)

Bowen admits that Citi was deliberately defrauding Uncle Sam by using Fannie as a toxic landfill to unload non-performing garbage that it knew was only worth pennies on the dollar. And, after Bowden issued his warning, the dumping actually intensified. So, where are the handcuffs, the SWAT Teams, the orange jumpsuits?

Lehman, Citi and WaMu; three examples of corruption in a sector where corruption is the norm. Nothing about the Goldman case stands out, except for the fact that the Goldman logo fuels populist rage. Corruption on Wall Street is pervasive and deeply-rooted. It is not the purview of any one institution.

Obama has the wind at his back. Now that he’s bloodied Goldman’s nose and gotten the public riled up, his reform bill will probably pass. But Obama’s financial reforms are much like Obama’s health care; half-loaf remedies that translate into a few extra votes on election day, but merely transfer more middle class wealth to giant corporations. It’s pathetic. It looks like we’ve entered another era of “triangulation”.

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