So who said lending stopped? Charlotte News & Observer:
Bank of America vaulted into the top 10 banks for insider lending last year with an increase of more than $358 million, much of it coming as credit markets froze and mounting financial calamity threatened the industry's survival.
For at least seven years, the bank's quarterly insider lending never exceeded $300 million and was often less than half that. But by the end of 2008, it had jumped to $624 million.
The dollar gain was the biggest of any bank in the country, a 135 percent hike from a year earlier. The average for all banks with insider loans was 5.7 percent.
The bank wouldn't say what drove the doubling. The bank's lead director, Temple Sloan, did not respond to two calls for comment.
The bulk of the gain came in the third quarter, when the financial sector entered its meltdown.
By definition, insiders are banks' executives, directors and any very large shareholders, and their companies.
Bank directors typically account for the biggest insider borrowing because they are often top executives with major companies, which routinely need bank loans. ...
Every quarter, banks have to report insider lending to regulators, but they don't have to say much. They report the total amount and the number of large borrowers, typically those with loans or credit lines of more than $500,000. But no names are reported, except upon request. ...
Bank of America reported six major borrowers for each of the last five quarters. At The Charlotte Observer's request, the bank had to name the three who are executives. They are mortgage head Barbara Desoer, chief financial officer Joe Price and Keith Banks, head of global wealth and investment management.
Gee, it's great to be an insider! And don't you get a warm feeling inside, knowing that you personally bailed out Babs, Joe, and Keith? I know I do!
NOTE Sounds like a bus tour of the Charlotte area might be a propos ...
Since the Troubled Asset Relief Program was launched in October, banks bolstered by capital infusions have boosted charges on a wide range of routine transactions, hiked rates on credit cards and continued making loans criticised as predatory by consumer advocates.
The TARP funds are intended to open lending spigots and make it easier for people to borrow money.
Last week, for example, Bank of America told some customers that interest rates on their credit cards will nearly double to about 14 per cent. The bank, which got $US45 billion ($62.6 billion) in capital from the US Government, also is imposing fees of least $US10 on a wide range of credit-card transactions.
Citigroup, another recipient of government cash, is trying to entice customers to borrow at high rates.
“You could get $US5000 today,” Citigroup's consumer-finance unit wrote in fliers mailed to customers. The ads don't disclose that the loans often carry annual interest rates of 30 per cent ... Citigroup has received $US50 billion in capital from taxpayers, and the US government will soon own as much as 36 per cent of the company's common stock.
You know what I think we need? A mandate.
The best way to help the banksters out -- and to help them help us by continuing to live the lifestyle to which they have become accustomed -- would be to mandate borrowing.
That's right. The only way to really make a market for these guys is to force people into it. After all, that's what Obama's going to do for the health insurance companies, so why wouldn't that work for the banks? (Of course, for those who truly, truly couldn't afford to borrow at 30% interest, we'd subsidize the banksters to do it. After all, financial literacy is very, very important, as is "shared sacrifice"!)
NOTE Hat tip cal1942at TalkLeft.
Bank of America May Raise Investment Banker Salaries
Bank of America Corp. plans to increase some investment bankers’ salaries by as much as 70 percent following the takeover earlier this year of Merrill Lynch & Co., people familiar with the proposal said.
Bank of America, which has received $45 billion of taxpayers’ money, may raise the annual base pay for some managing directors to about $300,000 from $180,000, said the people, who declined to be identified because the final numbers are still under discussion. Salaries for less-senior directors would climb to about $250,000 from $150,000, and vice presidents would get $200,000, up from about $125,000, the people said.
“The concepts we are considering would not increase total compensation,” [oh, good] Brian Moynihan, Bank of America’s president of investment banking and wealth management, wrote in a memo to employees today, obtained by Bloomberg News. “Rather, we believe it is responsible, and consistent with the emerging public consensus, that a greater percentage of overall compensation come from fixed base salary.”
Bonuses will become a “smaller” portion of total compensation, Moynihan wrote in the memo.
No, no, no, no, no, no, no. You're not getting it. Here's the "emerging public consensus":
What we want is for banksters to be paid less money.
PAID LESS MONEY.
We don't want to decrease the bonuses, and then make up for it on the backside by increasing salaries (and, doubtless, other perks that we don't know about, like company hookers and blow).
I'd say... Let me generous. $75K? See, the object of the exercise should be to force bankster to find productive work -- say, as plumbers or electricians or chefs or taxi drivers -- instead of being paid absurd sums of money so that they can destroy people's 401(k)s and loot the economy. As Krugman says: They do more harm than good. For this, we pay them? Forcing them to seek gainful employment can be most readily achieved, banksters being what they are, by paying them less money.
PAYING THEM LESS MONEY.
FASB is the Financial StandardsMR SUBLIMINAL Snicker Accounting Board; its (privatized, bien sur) mission is:
[To serve] the investing public through transparent information resulting from high quality financial reporting standards developed in an independent, private-sector, open due process.
Keep those bitterly ironic words in mind as you read what follows. Willem Buiter:
How the FASB aids and abets obfuscation by wonky zombie banks
The Financial Accounting Standards Board (FASB), at its meeting on April 2, has once again relaxed mark-to-market accounting rules. This occurred after the House Financial Services Committee, a wholly owned subsidiary of the American Bankers Association, had, at hearings on March 12, 2009, effectively ordered the FASB to revise its guidance on fair value in inactive markets. The HFSC used the threat that, if the FASB were not sufficiently accommodating, Congress would legislate on the matter off its own bat to give the zombie banks what they wanted.
The FASB blinked and wimped under, as it had before. It made proposals less than a week after the House Financial Services Committee hearings. With some minor revisions, these proposals have now hardened into final guidance ...
Under FAS 157, the FASB’s standard on fair-value measurements, holders of financial assets recorded at fair-value must state what these values are based on. Three levels of information or assumptions are distinguished, corresponding to how “publicly observable” the information is. In level 1, the value of an asset or liability stems from a quoted price in an active market. In level 2, it is based on “observable market data” other than a quoted market price. In level 3, which often applies to asset valuations in illiquid markets or in “distressed” sales (or “fire sales”), fair value can be determined only by inputs that cannot be observed or verified objectively. Typically this means prices based on internal models or management guesses.
Guess which category The Big Shitpile falls into now? (Er, I mean, fell into, before the extremely independent and transparent FASB decided to all in with the bankster's belief that they shit pure gold.) That's right, level 2: The banksters are forced to mark to market, meaning that was is shit ends up being priced like shit.
Basically, the new guidance allows banks to shift a whole load of toxic and impaired securities from level 2 to level 3. Up till now, a frequent source of level 2 information were prices achieved by competitors’ asset sales to help determine the fair-market value of similar securities they hold on their own books. Banks are now allowed to ignore prices achieved in competitors’ asset sales when these transactions aren’t “orderly”. This includes transactions in which the seller is near bankruptcy or needed to sell the asset to comply with regulatory requirements. This is vague and broad enough to drive a coach and horses through fair-value accounting for most imperfectly liquid assets.
And if there's one thing The Big Shitpile is, it's "imperfectly liquid." That's why it's a pile.
Leaving the valuation of illiquid securities to managerial discretion will lead to systematic and systemic overvaluation. Banks with significant amounts of toxic assets and plain bad assets on their balance sheet have lied, lie and continue to lie about what they have on their balance sheets. This has now been made easier. No wonder bank stocks rose and bank credit default swap rates declined. Reported asset values will be boosted.
IIRC, this is one bullet point on the list of "good news" that the OFB have been pushing.
Analysts estimate that, now that banks can mark toxic assets using their own models (which are private information) rather than what they would fetch on the open market, quarterly profits at some banks could be boosted by up to 20 per cent.
Mission accomplished! (See also Bloomberg on the 20%).
There was a similar response of banks’ stock valuations and CDS rates last year when the FASB last allowed banks more scope to increase the opaqueness and lack of transparency of their accounts. This was when it allowed banks to reclassify securities held on its balance sheet between the three categories “held to maturity”, “available for sale” and “trading”. Basically, “held to maturity” securities can be valued in any way the management sees fit.
They're never going to tell us how big The Big Shitpile is, are they? Ask yourself why that would be. And ask yourself whether recovery can ever happen without even dealing with these classic first step issues:
This impairment of the informational content of the corporate accounts will be the inevitable consequence of replacing valuation using market prices (even illiquid market prices) with the judgment of the deeply conflicted managers of these corporations. Investors will be worse off. Corporate governance will suffer. Accountability of corporate executives and boards will diminish. And, because mark-to-myth is likely to prevent necessary corrective measures from being taken, or at least to delay them, the FASB’s encouragement of marking-to-myth is likely to increase future financial instability.
The FASB, like the rest of the American regulatory and standards-setting establishment, appears to have been captured lock stock and barrel by the vested interests of the large Wall Street zombie banks (management, shareholders and unsecured creditors). This may well have been another example of cognitive regulatory capture, like that which has afflicted the SEC and the Fed.
The wonderful LOLFed (from whom I fair used the picture above) puts matters more succinctly:
We posted about mark to market accounting a while back (you know, the notion that an asset should be valued based on what someone is willing to pay for it, rather than what you wish it was worth if everything went the way you wanted), and mark to market’s imminent [and now, via FASB, final] demise. ...
Mark to model makes sense if you trust the person creating the model, and it’s an asset that the owner plans to hang on to for a while. But these days, the trust is completely missing from the equation.
Of course, these measures will help with "confidence." After all, banksters need to be confident that they can keep shitting us that the shit they're shitting on us is not shit, because otherwise, they'd be in the shit. As the rest of us aleady are. And that would be bad.
NOTE For the last, oh, niine or so years, the watchword seems to have been "normalization." The criminal Bush regime normalized torture, election theft, and the destruction of the rule of law. The Obama administration is rapidly normalizing
financial chicanery, outright looting, and the largest transfer of wealth in American history. In each case, the lack of transparency and accountability is complete. Well done, all.
UPDATE See Yves on Geither's auction scam. The bottom line:
the very biggest misrepresentation is that this is merely "rearranging" the counters within the moneyed classes. This is massive dumping of losses from the investing class onto taxpayers, many of whom have little in the way of retirement savings. The costs the average taxpayer is absorbing is well in excess of what his bank related investments are worth.
The dishonesty of this crowd is just breathtaking. The Bushies were blatantly high handed, while Team Obama prefers the Big Lie and assumes we are all too dumb to see through it.
Yeppers. If only the Czar knew!
UPDATE See also Baseline scenario:
The new rule makes asset prices dependent on banks’ internal judgment, and each bank may apply different criteria. So from the investor’s perspective, now you have zero facts to go on. It’s as if auto companies were allowed to replace EPA fuel efficiency estimates with their own estimates using their own tests. We all know the EPA estimates are not realistic, but we can find out exactly how they were obtained and make whatever adjustments we want. If each auto company can use its own criteria, then we have no information at all.
That's not a bug, it's a feature. And there's this:
What if the function of these rule changes is to make it easier for banks to ignore the results of the PPIP auctions? For example, Bank A puts up a pool of loans for auction, but doesn’t like the winning bid and rejects it; Bank A doesn’t want to be forced to write down its loans to the amount of the winning bid. Or, alternatively, Bank B sells a security to a buyer, and Bank A holds the same security; Bank A doesn’t want to be forced to write down the security to the price of Bank B’s transaction.
Why don't we just turn the banks into regulated public utilities? Then maybe we could get their shit together for them.
After the mortgage business imploded last year, Wall Street investment banks began searching for another big idea to make money. They think they may have found one.
The bankers plan to buy “life settlements,” life insurance policies that ill and elderly people sell for cash — $400,000 for a $1 million policy, say, depending on the life expectancy of the insured person. Then they plan to “securitize” these policies, in Wall Street jargon, by packaging hundreds or thousands together into bonds. They will then resell those bonds to investors, like big pension funds, who will receive the payouts when people with the insurance die.
The earlier the policyholder dies, the bigger the return — though if people live longer than expected, investors could get poor returns or even lose money.
Wall Street is racing ahead for a simple reason: With $26 trillion of life insurance policies in force in the United States, the market could be huge.
Well, I guess that tells us what the smart money thinks about the health care effects of the Democrat's health
care insurance reform, right?
Look, I'm not saying that the banksters are planning for peasant die-back (as in Russia); what I am saying is that they're incentivizing themselves for it.
And then there are the details, like the usual rent-seeking behavior:
Either way, Wall Street would profit by pocketing sizable fees for creating the bonds, reselling them and subsequently trading them.
Because it's all about the fees*, baby!
And just because you might think The Big Fail is a FAIL -- like if you lost your house, your job, or your health -- that doesn't mean the banksters think it's a fail. At all. Why would they? Our pain is their pleasure:
The debacle gave financial wizardry a bad name generally, but not on Wall Street. Even as Washington debates increased financial regulation, bankers are scurrying to concoct new products.
In fact, the banksters are taking all the machinery they developed for mortgage-backed securities (remember "toxic assets"?) and applying them to this new, exciting line of business:
Some financial firms are moving to outpace their rivals. Credit Suisse, for example, is in effect building a financial assembly line to buy large numbers of life insurance policies, package and resell them — just as Wall Street firms did with subprime securities.
The bank bought a company that originates life settlements, and it has set up a group dedicated to structuring deals and one to sell the products.
And guess who's racing ahead? Why, our old friends:
Goldman Sachs has developed a tradable index of life settlements, enabling investors to bet on whether people will live longer than expected or die sooner than planned. The index is similar to tradable stock market indices that allow investors to bet on the overall direction of the market without buying stocks.
It's amazing that Goldman Sachs can do all that, and run the government, too!
And -- unlike the subprime mortgage business -- it's not like there's any fraud involved here. Oh, wait...
But the ["life settlement"] industry has been plagued by fraud complaints. State insurance regulators, hamstrung by a patchwork of laws and regulations, have criticized life settlement brokers for coercing the ill and elderly to take out policies with the sole purpose of selling them back to the brokers, called “stranger-owned life insurance.”
In 2006, while he was New York attorney general, Eliot Spitzer sued Coventry, one of the largest life settlement companies, accusing it of engaging in bid-rigging with rivals to keep down prices offered to people who wanted to sell their policies. The case is continuing.
“Predators in the life settlement market have the motive, means and, if left unchecked by legislators and regulators and by their own community, the opportunity to take advantage of seniors,” Stephan Leimberg, co-author of a book on life settlements, testified at a Senate Special Committee on Aging last April.
And look, it's not like the whole sca--scheme depends on ratings agencies with conflicts of interest, or deals so obfusc--complex it takes nuclear physicist to figure them out. Oh, wait....
While that idea was, in retrospect, badly flawed, Wall Street is convinced that it can solve the risk riddle with securitized life settlement policies.
That is why bankers from Credit Suisse and Goldman Sachs have been visiting DBRS, a little known rating agency in lower Manhattan.
In early 2008, the firm published criteria for ways to securitize a life settlements portfolio so that the risks were minimized.
Interest poured in. Hedge funds that have acquired life settlements, for example, are keen to buy and sell policies more easily, so they can cash out both on investments that are losing money and on ones that are profitable. Wall Street banks, beaten down by the financial crisis, are looking to get their securitization machines humming again.
To help understand how to manage these risks, Ms. Tillwitz and her colleague Jan Buckler — a mathematics whiz with a Ph.D. in nuclear engineering — traveled the world visiting firms that handle life settlements. “We do not want to rate a deal that blows up,” Ms. Tillwitz said.
No, no, of course not....
And it's not like the whole frau-innovation depends on computer simulations that may or may not line up with real world expectations, right? Oh, wait...
If the computer models were wrong, investors could lose a lot of money.
As unlikely as those assumptions may seem, that is effectively what happened with many securitized subprime loans that were given triple-A ratings.
And it's not like everything could all blow up at once, ever again, right? Oh, wait...
Despite the mortgage debacle [for whom?], investors like Andrew Terrell are intrigued.
Mr. Terrell was the co-head of Bear Stearns’s longevity and mortality desk — which traded unrated portfolios of life settlements — and later worked at Goldman Sachs’s Institutional Life Companies, a venture that was introducing a trading platform for life settlements. He thinks securitized life policies have big potential, explaining that investors who want to spread their risks are constantly looking for new investments that do not move in tandem with their other investments.
“It’s an interesting asset class because it’s less correlated to the rest of the market than other asset classes,” Mr. Terrell said.
Of course, of course.
And anyhow, the academic economists are giving it all the seal of approval!
“These assets do not have risks that are difficult to estimate and they are not, for the most part, exposed to broader economic risks,” said Joshua Coval, a professor of finance at the Harvard Business School. “By pooling and tranching, you are not amplifying systemic risks in the underlying assets.”
Of course, of course.
Well, back to paragraph one. Since the banksters make more money if people die earlier... Well, that's the incentive, right? With all the "risk management" stuff being so much window dressing?
[pounds head on desk]
NOTE I read this paragraph, and honest to gawd, I checked the calendar to see that it wasn't April Fool's Day:
But even with a math whiz calculating every possibility, some risks may not be apparent until after the fact. How can a computer accurately predict what would happen if health reform passed, for example, and better care for a large number of Americans meant that people generally started living longer? Or if a magic-bullet cure for all types of cancer was developed?
Well, they can't. But -- just to take a hypothetical example, here -- if a billionaire bet a whole lot of money that life expectancy was going to go down, what would he do to safeguard his investment? Pay the computer programmer to build a better model of the world? Or program the world by buying a Congress critter or two to make sure that health reform never happened, and making sure that Big Pharma put plenty of money into marketing, and little into basic cancer research? Reflexivity...
US banks that have taken billions of dollars in taxpayer bailouts are still shipping thousands of jobs overseas.
Earlier this month, Bank of New York Mellon, which received $3 billion in TARP funds, opened its third call center in Pune, India, where it now employs 1,300 people.
Doug Brown, who wrote "The Black Book of Outsourcing," said Bank of America, with $52.5 billion of TARP funds in the kitty, has expanded its India-based payroll to 5 percent of its 301,000 employees in 2009, about 15,000 people.
Citigroup, which got $50 billion in TARP funds plus $300 billion in government guarantees, plowed ahead with a program last fall to add as many as 1,000 call-center employees in the Philippines -- weeks after it got its first round of taxpayer relief.
Representatives for Citigroup and Bank of New York Mellon declined to comment on their outsourcing arrangements. A Bank of America spokesman said the firm has not announced any facility openings outside the US since last year.
Well, look. Let's be reasonable. These weren't jobs Americans even wanted, right?
NOTE Normally, I'm not big on outsourcing outrage -- workers everywhere are human, right? But when the banks use my own money against me, that changes the game.
Elizabeth Warren proposes four common factors for a workable bailout, based on success from the past. Transparency, assertiveness, accountability, and clarity. By these criteria, this from the Fed is a FAIL:
The U.S. Federal Reserve has told Goldman Sachs Group Inc., Citigroup Inc. and other banks to keep mum on the results of “stress tests” [based on existing financial models] that will [if the models are, now, accurate] gauge their ability to weather the recession [their putative solvency], people familiar with the matter said.
Jeebus, you know things are bad when they can't even release fake results. Or maybe they're just holding onto the results to the insiders can assume their positions and do a little trading. Who knows?
The Fed wants to ensure that the report cards don’t leak during earnings conference calls scheduled for this month. Such a scenario might push stock prices lower for banks perceived as weak and interfere with the government’s plan to release the results in an orderly fashion later this month.
CNBC really is running the country, isn't it? Why aren't we market timing all government reports, anyhow?
More transparency FAIL:
Banks should stay silent because a focus on the tests would be “a harmful distraction” from earnings, said Scott Talbott, senior vice president for government affairs at the Financial Services Roundtable in Washington.
“It is premature for banks to talk about the stress tests,” Talbott said yesterday. “They aren’t finalized yet [!!] and there is no framework to evaluate the results.”
Wells Fargo & Co. Chief Financial Officer Howard Atkins declined to discuss the tests yesterday after his bank reported a record first-quarter profit that beat the most optimistic Wall Street estimates.
“We haven’t commented on regulatory matters and we won’t start now,” Atkins said in an interview. “We don’t comment on the process.”
In a separate interview later, Wells Fargo spokeswoman Julia Tunis Bernard declined to say whether the bank had been told by regulators to keep silent. “We don’t comment on our discussions and conversations with regulators and officials,” she said.
Models that nobody understands, blew up the last time, with no framework to test the results, and a predetermined outcome (THE BANKSTERS NEED MORE MONEY SOON SOON SOON).
Where's the stress?
[Goldman Sachs] has instructed Wall Street law firm Chadbourne & Parke to pursue blogger Mike Morgan, warning him in a recent cease-and-desist letter that he may face legal action if he does not close down his website.
Florida-based Mr Morgan began a blog entitled "Facts about Goldman Sachs" – the web address for which is goldmansachs666.com – just a few weeks ago.
Speculation is mounting that Goldman Sachs is set to raise several billion dollars via a share sale, possibly next week, in order to pay down a $10bn (£6.8bn) US government loan, as revealed in The Sunday Telegraph last we
NOTE Via Yves, who is no doubt on their enemies list as well.
Quelle surprise! I mean, that's what being politically wired is for! An abstract of a study from the Ross School of Business at the University of Michigan:
Banks with strong political connections were more likely to receive bailout money from the government — and more of it — in the past year than those with weaker ties, say Ross researchers.
"Last year" being 2009, Year One Of The Hope And Change Era.
A new study by Ross professors Ran Duchin and Denis Sosyura found that banks with connections to members of congressional finance committees and banks whose executives served on Federal Reserve boards were more likely to receive funds from the Troubled Asset Relief Program, the federal government's program to purchase assets and equity from financial institutions to strengthen its financial sector.
Further, their research shows that TARP investment amounts were positively related to banks' political contributions and lobbying expenditures, and that, overall, the effect of political influence was strongest for poorly performing banks.
Which makes sense. It's easier to make money the old-fashioned way: By looting it. At least if your a bankster with no sense of ethics. Sorry for the redundancy.
"Our results show that political connections play an important role in a firm's access to capital," said Sosyura, assistant professor of finance.
We've got central planning! Run by thieves! Sorry for the redundancy.
"The effects of political ties on federal capital investment are strongest for companies with weaker fundamentals, lower liquidity and poorer performance — which suggests that political ties shift capital allocation towards underperforming institutions."
It's the magic of the marketplace -- where our elected representatives sell us!*
The researchers used four variables to measure political influence: 1) seats held by bank executives on the board of directors at any of the 12 Federal Reserve banks or their branches (the Federal Reserve is involved in the initial review of CPP applications from the majority of qualified banks); 2) banks with headquarters located in the district of a U.S. House member serving on the Congressional Committee on Financial Services or its subcommittees on Financial Institutions and Capital Markets (which played a major role in the development of TARP and its amendments); 3) banks' campaign contributions to congressional candidates; and 4) banks' lobbying expenditures.
They found that a board seat at a Federal Reserve Bank was associated with a 31 percent increase in the likelihood of receiving CPP funds, while a bank's connection to a House member on key finance committees was associated with a 26 percent increase, controlling for other bank characteristics such as size and various financial indicators.
It's almost like the insiders are looting the system for their own benefit!
In addition, the study found the amount of CPP investments was strongly related to banks' political contributions and lobbying expenditures. A one standard-deviation increase in political contributions to congressional candidates was associated with a $14.6 million increase in allotted CPP funds, while a one standard-deviation increase in lobbying amounts was associated with an additional $10.4 million in CPP funds.
Our elected representatives are cheap!** And the ROI is spectacular!
One can only wonder, what with the rot of corruption so thick from the fish's head in Versailles, when the stench will filter down, and we end up with mordida, baksheesh, or ?????? in our towns and neighborhoods? Since everyone else is a rent-seeker, why not?
NOTE * And why wouldn't they? For most of these guys, elective office is an unpaid internship on the way to real money!
NOTE ** Ian Welsh explains:
But it's the cheapness which used to puzzle me. No more though. My friend Eli pointed out what should have been obvious to me.
(They sell out cheap) because it's not their money. It's like selling your neighbor's car for twenty bucks.
America's politicians: cheap and crooked.
[Sorry for the mother of all paste-os, readers. I pasted the whole post in, instead of a YouTube. Fixed now. Multi-tasking... --lambert]
See Reuters and especially the comments at Zero Hedge for this incredibly Byzantine story on Goldman Sachs (who, in addition to running financial policy for the administration at Treasury and the Fed, are also members of the Plunge Protection Team (q.v.)).
Shorter: Sergey Aleynikov, VP of equity strategy of Goldman Sachs, was arrested at Newark airport Saturday, July 4 by the FBI. Aleynikov is alleged to have encrypted, compressed, and uploaded 32 megs of ultra top-secret Goldman Sachs quant trading proprietary code to a website in Germany, where it's been available for over a month to... Well, anybody that Aleynikov wanted to make it available to.
Even shorter: Somebody put the Goldman Sachs family jewels in a jar and sold the jar on eBay.
Yikes. Of course, if you want to put on the tinfoil hat -- and when the going gets tough, the tough get foily -- you might start wondering why the July 4 arrest: That's even better than 5:00 on a Friday. Or you might wonder whether Aleynikov was a mole of some sort, as opposed to just being a thief. Or you might wonder whether Goldman knew about the theft all along, but hadn't let the thieves know that they knew, and were manipulating the manipulators on that basis -- maybe by feeding false information through channels embedded in the software (and 32 megs of compressed source code is a lot of code; hard to imagine what couldn't be buried in there). Which would make Aleynikov not a mole, or a thief, but a double agent... So, you see. Complicated. Obfuscated*. Maybe -- from the perspective of one or two now extremely rich or richer people, not a FAIL but SUCCESS? Who knows?
For peasants like us, though, there are two main issues, which Durden raises:
First, exactly how manipulated has the market been and for how long?
Now the real question here is, does [GS?] feel lucky? Because the code has supposedly been in the hands of an outsider for over a month, one might suspect that anyone who wanted to has had ample opportunity - if the holder(s) wished to sell... Would that have anything to do with the even weirder than usual market action over the past 2-3 weeks: after all it is the very Goldman Sachs (which may or may not be the target of this program trading industrial espionage) which is the primary SLP on the world's biggest stock exchange.
Second, what about the national security implications?
Another major question: do Goldman and the NYSE not have a fiduciary responsibility to announce to both shareholders and any interested parties if there has been a major security breach in their trading operations? Certainly this seems like a material piece of information: given that program trading accounted for 49% of all NYSE trading last week, and Goldman as recently as one week ago represented about 60% of all principal program trading, will this be called an issue threatening the National Security of the United States. Shouldn't all market participants be aware that there is some rogue code in cyberspace that can be abused by the highest bidder, who very likely will not be interested in proving the efficient market hypothesis? What will happened when said bidder goes about trying to front run none other than the "Financial Institution"?
It's another FAIL, isn't it? Just one more FAIL in The Big FAIL....
NOTE * Fun fact: Aleynikov and his wife are competitive ballroom dancers, according to Reuters. Great metaphor. Here's the YouTube:
UPDATE See Clusterstock:
[T]he theft coincides with a breath-taking decline in the automated "program" trading activities of Goldman. In recent months, program trading--batches of trades of multiple stocks initiated by computer programs--on the NYSE has been dominated by Goldman Sachs. Just three weeks ago, the NYSE reported that program trades Goldman made for its own account represented 60% of all program trading. The following week, Goldman didn't even show up on the list of program traders.
Er, didn't Goldman Sachs have some kind of duty to tell somebody that their proprietary trading software had been stolen and exposed on a German server for a month? Maybe like the government? Or -- absurd as this may seem -- their clients?
NOTE I just talked to Max in Legal, who insisted that I put "allegedly" everywhere. Consider it done.
You read stuff like this, and you think that when our financial overlords piss all the money away it's the rule rather than the exception:
Concerns are switching from the residential to the commercial sector
Unlike other property busts, this [commercial real estate] downturn has not been driven by speculative overbuilding but by investors’ overenthusiasm. Commercial property was a popular asset class for much of this decade. Institutional investors who lost a lot of money when the dotcom bubble burst were persuaded that switching from the stockmarket into property would diversify their portfolios and reduce their risk. Cheap finance was plentiful. Investors could indulge in a version of the “carry trade”—borrowing at a low interest rate to buy buildings and counting on the rental yield and capital growth to more than cover their financing costs.
That strategy looked smart when rents and capital values were rising and vacancy rates were low. But as cheap financing has dried up and economies have tumbled into recession, investors have become badly exposed.
A year ago everyone was worried about losses on residential-property loans. If the latest data are any guide, both American and British house prices may be finding a bottom. Concerns are now switching to the commercial sector. History suggests downturns in that market last for years, rather than months. Almost 20 years have passed since the Japanese property market peaked. Prices still fell by 4.7% last year.
As danps remarks in another context: There is no remembrance of former things; neither shall there be any remembrance of things that are to come with those that shall come after.
NOTE Talleyrand said something quite similar about the Bourbons: "They have learned nothing, and forgotten nothing." Via Yves.
Laura Hecox was baffled when an officer from the San Diego County sheriff’s department came to her home in February and said she was being evicted. She hadn’t missed a rent payment on her four-bedroom house since moving there a year-and-a-half earlier.
“They told me to leave, to get a few things together,” said Hecox, 37, who lives with and supports her four kids and mother. “I got booted out just like that.”
Hecox didn’t know the home she was renting in Chula Vista, California, about 10 miles north of the Mexican border, was in foreclosure because her landlord was a year behind on mortgage payments. The new owner was a group of investors led by JPMorgan Chase & Co., the third-biggest U.S. home lender.
In California, home to the most foreclosures in the country last year and about 5 million renter households, residents who are current on rent payments face eviction by banks unwilling to be landlords. At least one-third of the state’s 267,000 foreclosure sales in 2008 were rental units, said Dean Preston, executive director of Tenants Together, a San Francisco-based non-profit group for renters’ rights.
Well, I'm sure they're happy to be doing their bit to restore "confidence"!
While thousands of tenants search for places to live, banks are losing out on the potential to collect monthly rent checks and flooding the market with empty houses that are declining in value. That’s because they don’t have the infrastructure or staff to deal with rental buildings, said William Acheson, an analyst at Benchmark Co. LLC in New York.
“Banks are notoriously bad property managers,” said Acheson, who tracks real estate investment trusts. “If they can sell them at a 60 percent discount, they will,” he said.
Too bad HOLC was never on the table, eh?
President Barack Obama told chief executive officers from some of the largest U.S. banks to “show some restraint,” [With what? Their 401(k)s? Their houses? Their health care?] even as he courted their support for his plans to stabilize the financial markets.
Way to leverage that "populist rage" (translation: "justified outrage"), there, big guy!
Then again, if you've invited the banksters to drive the bus, instead of throwing them under it, like the rest of us, it's hard to see what else could say....
Our leading financial institutions announced that they had actually made a profit in the year's first quarter through the creative manipulation of rules and regulations, lobbied Congress to preserve their ability to raise credit card interest rates just for the heck of it and opposed the administration's plan for restructuring Chrysler, which would save some jobs and honor pension obligations, in the hope that they can redeem the company's bonds at a higher level than they're trading at just now. And, to round out the picture, the Wall Street Journal reported this week that lending at the 19 largest TARP recipients was 23 percent lower in February -- by which time these banks had received hundreds of billions of dollars in public funds intended to enable them to lend more -- than it had been in October, before the floodgates of tax dollars had been fully opened.
This is what our major banks are up to at a time when it is our largess that is keeping them afloat.
This is like giving a teenager the keys to the car back, and then they go out and total the car again. Why are we doing this?
The Big Money Democrats running the administration really need to figure out why they want to keep working for, and why. Pitchforks don't discriminate between parties.
NOTE Mayerson wants to break the banks up. I think that's a half-measure. Why not turn the banks into regulated public utilities?
We said from the beginning the stress tests were a complete sham. Just look at the numbers. 200 examiners for 19 banks? When Citi nearly went under in the early 1990s, it took 160 examiners to go over its US commercial real estate portfolio (and even then then the bodies were deployed against dodgy deals in Texas and the Southwest). This is a garbage in, garbage out exercise. The banks used their own risk models to make the assessment, for instance, the very same risk models that caused this mess. And there was no examination of the underlying loan files.
No examination of the underlying loan files? Incroyable!
Yves now calls her shot:
So did you get that? They all will be declared to pass in some form, no matter how dreadful they really are (if the remedy is putting in more Federal dollars, rather than a receivership, then the fiction that the money is not being wasted must be preserved). But so as to look sufficiently tough, some banks will be treated harshly. If it winds up being, say, Fifth Third (which I am told by John Hempton is a very well run bank, publishes much more honest financials than its peers, but is in simply terrible geographies, Michigan*, Ohio. Florida**) and not Citi, then we know the process is not just hopelessly politicized, but shamelessly so.
Yep. Let's watch for this.
NOTE * Tinfoil hat time: I've forgotten the primaries at this point, but I seem to remember that MI played a role.
NOTE ** Ditto FL.
[Goldman Sachs fans might also like today's post on how 32 megs of Goldman Sachs proprietary trade code got uploaded to a German server. Researchers should also note the links at the bottom of this post, which lead to a table of contents that organizes all our contemporaneous posts on The Big FAIL (the current financial crisis) as it unfolded, going back to pre-TARP days. Note also the Goldman Sachs tag above. --lambert]
Here's the Matt Taibbi's article on how Goldman-Sachs helped bring about and profit from our current financial crisis, "The Big FAIL", found at Something Awful (via LOLfed). Despite the weapons-grade snark in the first paragraph, which I underlined, it's a Big Picture post, very analytical, and has a hypothesis of what is to come that we can test for. So I recommend you read the whole thing, even though it is quite long.
THE GREAT AMERICAN BUBBLE MACHINE
From tech stocks to high gas prices, Goldman Sachs has engineered every major market manipulation since the Great Depression - and they're about to do it again
By MATT TAIBBI
The first thing you need to know about Goldman Sachs is that it's everywhere. The world's most powerful investment bank is a great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money. In fact, the history of the recent financial crisis, which doubles as a history of the rapid decline and fall of the suddenly swindled-dry American empire, reads like a Who's Who of Goldman Sachs graduates.
By now, most of us know the major players. As George Bush's last Treasury secretary, former Goldman CEO Henry Paulson was the architect of the bailout, a suspiciously self-serving plan to funnel trillions of Your Dollars to a handful of his old friends on Wall Street. Robert Rubin, Bill Clinton's former Treasury secretary, spent 26 years at Goldman before becoming chairman of Citigroup - which in turn got a $300 billion taxpayer bailout from Paulson. There's John Thain, the rear end in a top hat chief of Merrill Lynch who bought an $87,000 area rug for his office as his company was imploding; a former Goldman banker, Thain enjoyed a multibillion-dollar handout from Paulson, who used billions in taxpayer funds to help Bank of America rescue Thain's sorry company. And Robert Steel, the former Goldmanite head of Wachovia, scored himself and his fellow executives $225 million in golden parachute payments as his bank was self-destructing. There's Joshua Bolten, Bush's chief of staff during the bailout, and Mark Patterson, the current Treasury chief of staff, who was a Goldman lobbyist just a year ago, and Ed Liddy, the former Goldman director whom Paulson put in charge of bailed-out insurance giant AIG, which forked over $13 billion to Goldman after Liddy came on board. The heads of the Canadian and Italian national banks are Goldman alums, as is the head of the World Bank, the head of the New York Stock Exchange, the last two heads of the Federal Reserve Bank of New York - which, incidentally, is now in charge of overseeing Goldman - not to mention ...
But then, any attempt to construct a narrative around all the former Goldmanites in influential positions quickly becomes an absurd and pointless exercise, like trying to make a list of everything. What you need to know is the big picture: If America is circling the drain, Goldman Sachs has found a way to be that drain - an extremely unfortunate loophole in the system of Western democratic capitalism, which never foresaw that in a society governed passively by free markets and free elections, organized greed always defeats disorganized democracy.
The bank's unprecedented reach and power have enabled it to turn all of America into a giant pump-and-dump scam, manipulating whole economic sectors for years at a time, moving the dice game as this or that market collapses, and all the time gorging itself on the unseen costs that are breaking families everywhere - high gas prices, rising consumer-credit rates, half-eaten pension funds, mass layoffs, future taxes to pay off bailouts. All that money that you're losing, it's going somewhere, and in both a literal and a figurative sense, Goldman Sachs is where it's going: The bank is a huge, highly sophisticated engine for converting the useful, deployed wealth of society into the least useful, most wasteful and insoluble substance on Earth - pure profit for rich individuals.
They achieve this using the same playbook over and over again. The formula is relatively simple: Goldman positions itself in the middle of a speculative bubble, selling investments they know are crap. Then they hoover up vast sums from the middle and lower floors of society with the aid of a crippled and corrupt state that allows it to rewrite the rules in exchange for the relative pennies the bank throws at political patronage. Finally, when it all goes bust, leaving millions of ordinary citizens broke and starving, they begin the entire process over again, riding in to rescue us all by lending us back our own money at interest, selling themselves as men above greed, just a bunch of really smart guys keeping the wheels greased. They've been pulling this same stunt over and over since the 1920s - and now they're preparing to do it again, creating what may be the biggest and most audacious bubble yet. ...
IF AMERICA IS NOW CIRCLING THE DRAIN, GOLDMAN SACHS HAS FOUND A WAY TO BE THAT DRAIN.
BUBBLE #1 - THE GREAT DEPRESSION
Goldman wasn't always a too-big-to-fail Wall Street behemoth, the ruthless face of kill-or-be-killed capitalism on steroids - just almost always. The bank was actually founded in 1869 by a German immigrant named Marcus Goldman, who built it up with his son-in-law Samuel Sachs. They were pioneers in the use of commercial paper, which is just a fancy way of saying they made money lending out short-term IOUs to small-time vendors in downtown Manhattan.
You can probably guess the basic plotline of Goldman's first 100 years in business: plucky, immigrant-led investment bank beats the odds, pulls itself up by its bootstraps, makes shitloads of money. In that ancient history there's really only one episode that bears scrutiny now, in light of more recent events: Goldman's disastrous foray into the speculative mania of pre-crash Wall Street in the late 1920s.
This great Hindenburg of financial history has a few features that might sound familiar. Back then, the main financial tool used to bilk investors was called an "investment trust." Similar to modern mutual funds, the trusts took the cash of investors large and small and (theoretically, at least) invested it in a smorgasbord of Wall Street securities, though the securities and amounts were often kept hidden from the public. So a regular guy could invest $10 or $100 in a trust and feel like he was a big player. Much as in the 1990s, when new vehicles like day trading and e-trading attracted reams of new suckers from the sticks who wanted to feel like big shots, investment trusts roped a new generation of regular-guy investors into the speculation game.
Beginning a pattern that would repeat itself over and over again, Goldman got into the investment-trust game late, then jumped in with both feet and went hog-wild. The first effort was the Goldman Sachs Trading Corporation; the bank issued a million shares at $100 apiece, bought all those shares with its own money and then sold 90 percent of them to the hungry public at $104. The trading corporation then relentlessly bought shares in itself, bidding the price up further and further. Eventually it dumped part of its holdings and sponsored a new trust, the Shenandoah Corporation, issuing millions more in shares in that fund - which in turn sponsored yet another trust called the Blue Ridge Corporation. In this way, each investment trust served as a front for an endless investment pyramid: Goldman hiding behind Goldman hiding behind Goldman. Of the 7,250,000 initial shares of Blue Ridge, 6,250,000 were actually owned by Shenandoah - which, of course, was in large part owned by Goldman Trading.
The end result (ask yourself if this sounds familiar) was a daisy chain of borrowed money, one exquisitely vulnerable to a decline in performance anywhere along the line ....
BUBBLE #2 - TECH STOCKS
Fast-Forward about 65 years. Goldman not only survived the crash that wiped out so many of the investors it duped, it went on to become the chief underwriter to the country's wealthiest and most powerful corporations. Thanks to Sidney Weinberg, who rose from the rank of janitor's assistant to head the firm, Goldman became the pioneer of the initial public offering, one of the principal and most lucrative means by which companies raise money. During the 1970s and 1980s, Goldman may not have been the planet-eating Death Star of political influence it is today, but it was a top-drawer firm that had a reputation for attracting the very smartest talent on the Street.
It also, oddly enough, had a reputation for relatively solid ethics and a patient approach to investment that shunned the fast buck; its executives were trained to adopt the firm's mantra, "long-term greedy." One former Goldman banker who left the firm in the early Nineties recalls seeing his superiors give up a very profitable deal on the grounds that it was a long-term loser. "We gave back money to 'grownup' corporate clients who had made bad deals with us," he says. "Everything we did was legal and fair - but 'long-term greedy' said we didn't want to make such a profit at the clients' collective expense that we spoiled the marketplace." ...
But then, something happened. It's hard to say what it was exactly; it might have been the fact that Goldman's co-chairman in the early Nineties, Robert Rubin, followed Bill Clinton to the White House, where he directed the National Economic Council and eventually became Treasury secretary. ...
Rubin was the prototypical Goldman banker. He was probably born in a $4,000 suit, he had a face that seemed permanently frozen just short of an apology for being so much smarter than you, and he exuded a Spock-like, emotion-neutral exterior; the only human feeling you could imagine him experiencing was a nightmare about being forced to fly coach. It became almost a national cliche that whatever Rubin thought was best for the economy - a phenomenon that reached its apex in 1999, when Rubin appeared on the cover of Time with his Treasury deputy, Larry Summers, and Fed chief Alan Greenspan under the headline THE COMMITTEE TO SAVE THE WORLD. And "what Rubin thought," mostly, was that the American economy, and in particular the financial markets, were over-regulated and needed to be set free. ...
The basic scam in the Internet Age is pretty easy even for the financially illiterate to grasp. Companies that weren't much more than pot-fueled ideas scrawled on napkins by up-too-late bong-smokers were taken public via IPOs, hyped in the media and sold to the public for megamillions. It was as if banks like Goldman were wrapping ribbons around watermelons, tossing them out 50-story windows and opening the phones for bids. In this game you were a winner only if you took your money out before the melon hit the pavement.
It sounds obvious now, but what the average investor didn't know at the time was that the banks had changed the rules of the game, making the deals look better than they actually were. They did this by setting up what was, in reality, a two-tiered investment system - one for the insiders who knew the real numbers, and another for the lay investor who was invited to chase soaring prices the banks themselves knew were irrational. While Goldman's later pattern would be to capitalize on changes in the regulatory environment, its key innovation in the Internet years was to abandon its own industry's standards of quality control.
"Since the Depression, there were strict underwriting guidelines that Wall Street adhered to when taking a company public," says one prominent hedge-fund manager. "The company had to be in business for a minimum of five years, and it had to show profitability for three consecutive years. But Wall Street took these guidelines and threw them in the trash." Goldman completed the snow job by pumping up the sham stocks: "Their analysts were out there saying Bullshit.com is worth $100 a share."
The problem was, nobody told investors that the rules had changed. "Everyone on the inside knew," the manager says. "Bob Rubin sure as hell knew what the underwriting standards were. They'd been intact since the 1930s." ...
Goldman has denied that it changed its underwriting standards during the Internet years, but its own statistics belie the claim. Just as it did with the investment trust in the 1920s, Goldman started slow and finished crazy in the Internet years. After it took a little-known company with weak financials called Yahoo! public in 1996, once the tech boom had already begun, Goldman quickly became the IPO king of the Internet era. Of the 24 companies it took public in 1997, a third were losing money at the time of the IPO. In 1999, at the height of the boom, it took 47 companies public, including stillborns like Webvan and eToys, investment offerings that were in many ways the modern equivalents of Blue Ridge and Shenandoah. The following year, it underwrote 18 companies in the first four months, 14 of which were money losers at the time. As a leading underwriter of Internet stocks during the boom, Goldman provided profits far more volatile than those of its competitors: In 1999, the average Goldman IPO leapt 281 percent above its offering price, compared to the Wall Street average of 181 percent.
How did Goldman achieve such extraordinary results? One answer is that they used a practice called "laddering," which is just a fancy way of saying they manipulated the share price of new offerings. Here's how it works: Say you're Goldman Sachs, and Bullshit.com comes to you and asks you to take their company public. You agree on the usual terms: You'll price the stock, determine how many shares should be released and take the Bullshit.com CEO on a "road show" to schmooze investors, all in exchange for a substantial fee (typically six to seven percent of the amount raised). You then promise your best clients the right to buy big chunks of the IPO at the low offering price - let's say Bullshit.com's starting share price is $15 - in exchange for a promise that they will buy more shares later on the open market. That seemingly simple demand gives you inside knowledge of the IPO's future, knowledge that wasn't disclosed to the day-trader schmucks who only had the prospectus to go by: You know that certain of your clients who bought X amount of shares at $15 are also going to buy Y more shares at $20 or $25, virtually guaranteeing that the price is going to go to $25 and beyond. In this way, Goldman could artificially jack up the new company's price, which of course was to the bank's benefit - a six percent fee of a $500 million IPO is serious money.
Goldman was repeatedly sued by shareholders for engaging in laddering in a variety of Internet IPOs, including Webvan and NetZero. The deceptive practices also caught the attention of Nichol as Maier, the syndicate manager of Cramer & Co., the hedge fund run at the time by the now-famous chattering television rear end in a top hat Jim Cramer, himself a Goldman alum. ...
"Goldman, from what I witnessed, they were the worst perpetrator," Maier said. "They totally fueled the bubble. And it's specifically that kind of behavior that has caused the market crash. They built these stocks upon an illegal foundation - manipulated up - and ultimately, it really was the small person who ended up buying in." In 2005, Goldman agreed to pay $40 million for its laddering violations - a puny penalty relative to the enormous profits it made. (Goldman, which has denied wrongdoing in all of the cases it has settled, refused to respond to questions for this story.)
Another practice Goldman engaged in during the Internet boom was "spinning," better known as bribery. Here the investment bank would offer the executives of the newly public company shares at extra-low prices, in exchange for future underwriting business. Banks that engaged in spinning would then undervalue the initial offering price - ensuring that those "hot" opening price shares it had handed out to insiders would be more likely to rise quickly, supplying bigger first-day rewards for the chosen few. So instead of Bullshit.com opening at $20, the bank would approach the Bullshit.com CEO and offer him a million shares of his own company at $18 in exchange for future business - effectively robbing all of Bullshit's new shareholders by diverting cash that should have gone to the company's bottom line into the private bank account of the company's CEO. ...
Such practices conspired to turn the Internet bubble into one of the greatest financial disasters in world history: Some $5 trillion of wealth was wiped out on the NASDAQ alone. But the real problem wasn't the money that was lost by shareholders, it was the money gained by investment bankers, who received hefty bonuses for tampering with the market. Instead of teaching Wall Street a lesson that bubbles always deflate, the Internet years demonstrated to bankers that in the age of freely flowing capital and publicly owned financial companies, bubbles are incredibly easy to inflate, and individual bonuses are actually bigger when the mania and the irrationality are greater.
GOLDMAN SCAMMED HOUSING INVESTORS BY BETTING AGAINST ITS OWN CRAPPY MORTGAGES.
Nowhere was this truer than at Goldman. Between 1999 and 2002, the firm paid out $28.5 billion in compensation and benefits - an average of roughly $350,000 a year per employee. Those numbers are important because the key legacy of the Internet boom is that the economy is now driven in large part by the pursuit of the enormous salaries and bonuses that such bubbles make possible. Goldman's mantra of "long-term greedy" vanished into thin air as the game became about getting your check before the melon hit the pavement.
The market was no longer a rationally managed place to grow real, profitable businesses: It was a huge ocean of Someone Else's Money where bankers hauled in vast sums through whatever means necessary and tried to convert that money into bonuses and payouts as quickly as possible. If you laddered and spun 50 Internet IPOs that went bust within a year, so what? By the time the Securities and Exchange Commission got around to fining your firm $110 million, the yacht you bought with your IPO bonuses was already six years old. Besides, you were probably out of Goldman by then, running the U.S. Treasury or maybe the state of New Jersey. (One of the truly comic moments in the history of America's recent financial collapse came when Gov. Jon Corzine of New Jersey, who ran Goldman from 1994 to 1999 and left with $320 million in IPO-fattened stock, insisted in 2002 that "I've never even heard the term 'laddering' before.")
For a bank that paid out $7 billion a year in salaries, $110 million fines issued half a decade late were something far less than a deterrent - they were a joke. Once the Internet bubble burst, Goldman had no incentive to reassess its new, profit-driven strategy; it just searched around for another bubble to inflate. As it turns out, it had one ready, thanks in large part to Rubin.
BUBBLE #3 - THE HOUSING CRAZE
Goldman's role in the sweeping disaster that was the housing bubble is not hard to trace. Here again, the basic trick was a decline in underwriting standards, although in this case the standards weren't in IPOs but in mortgages. ...
None of that would have been possible without investment bankers like Goldman, who created vehicles to package those lovely mortgages and sell them en masse to unsuspecting insurance companies and pension funds. This created a mass market for toxic debt that would never have existed before; in the old days, no bank would have wanted to keep some addict ex-con's mortgage on its books, knowing how likely it was to fail. You can't write these mortgages, in other words, unless you can sell them to someone who doesn't know what they are.
Goldman used two methods to hide the mess they were selling. First, they bundled hundreds of different mortgages into instruments called Collateralized Debt Obligations. Then they sold investors on the idea that, because a bunch of those mortgages would turn out to be OK, there was no reason to worry so much about the lovely ones: The CDO, as a whole, was sound. Thus, junk-rated mortgages were turned into AAA-rated investments. Second, to hedge its own bets, Goldman got companies like AIG to provide insurance - known as credit-default swaps - on the CDOs. The swaps were essentially a racetrack bet between AIG and Goldman: Goldman is betting the ex-cons will default, AIG is betting they won't.
There was only one problem with the deals: All of the wheeling and dealing represented exactly the kind of dangerous speculation that federal regulators are supposed to rein in. Derivatives like CDOs and credit swaps had already caused a series of serious financial calamities: Procter & Gamble and Gibson Greetings both lost fortunes, and Orange County, California, was forced to default in 1994. A report that year by the Government Accountability Office recommended that such financial instruments be tightly regulated - and in 1998, the head of the Commodity Futures Trading Commission, a woman named Brooksley Born, agreed. That May, she circulated a letter to business leaders and the Clinton administration suggesting that banks be required to provide greater disclosure in derivatives trades, and maintain reserves to cushion against losses. ...
Clinton's reigning economic foursome - "especially Rubin," according to Greenberger - called Born in for a meeting and pleaded their case. She refused to back down, however, and continued to push for more regulation of the derivatives. Then, in June 1998, Rubin went public to denounce her move, eventually recommending that Congress strip the CFTC of its regulatory authority. In 2000, on its last day in session, Congress passed the now-notorious Commodity Futures Modernization Act, which had been inserted into an 1l,000-page spending bill at the last minute, with almost no debate on the floor of the Senate. Banks were now free to trade default swaps with impunity.
But the story didn't end there. AIG, a major purveyor of default swaps, approached the New York State Insurance Department in 2000 and asked whether default swaps would be regulated as insurance. At the time, the office was run by one Neil Levin, a former Goldman vice president, who decided against regulating the swaps. Now freed to underwrite as many housing-based securities and buy as much credit-default protection as it wanted, Goldman went berserk with lending lust. By the peak of the housing boom in 2006, Goldman was underwriting $76.5 billion worth of mortgage-backed securities - a third of which were subprime - much of it to institutional investors like pensions and insurance companies. And in these massive issues of real estate were vast swamps of crap.
Take one $494 million issue that year, GSAMP Trust 2006-S3. Many of the mortgages belonged to second-mortgage borrowers, and the average equity they had in their homes was 0.71 percent. Moreover, 58 percent of the loans included little or no documentation - no names of the borrowers, no addresses of the homes, just zip codes. Yet both of the major ratings agencies, Moody's and Standard & Poor's, rated 93 percent of the issue as investment grade. Moody's projected that less than 10 percent of the loans would default. In reality, 18 percent of the mortgages were in default within 18 months.
Not that Goldman was personally at any risk. The bank might be taking all these hideous, completely irresponsible mortgages from beneath-gangster-status firms like Countrywide and selling them off to municipalities and pensioners - old people, for God's sake - pretending the whole time that it wasn't grade-D horseshit. But even as it was doing so, it was taking short positions in the same market, in essence betting against the same crap it was selling. Even worse, Goldman bragged about it in public. "The mortgage sector continues to be challenged," David Viniar, the bank's chief financial officer, boasted in 2007. "As a result, we took significant markdowns on our long inventory positions .... However, our risk bias in that market was to be short, and that net short position was profitable." In other words, the mortgages it was selling were for chumps. The real money was in betting against those same mortgages.
"That's how audacious these assholes are," says one hedge-fund manager. "At least with other banks, you could say that they were just dumb - they believed what they were selling, and it blew them up. Goldman knew what it was doing." I ask the manager how it could be that selling something to customers that you're actually betting against - particularly when you know more about the weaknesses of those products than the customer - doesn't amount to securities fraud.
"It's exactly securities fraud," he says. "It's the heart of securities fraud."
Eventually, lots of aggrieved investors agreed. In a virtual repeat of the Internet IPO craze, Goldman was hit with a wave of lawsuits after the collapse of the housing bubble, many of which accused the bank of withholding pertinent information about the quality of the mortgages it issued. .... But once again, Goldman got off virtually scot-free, staving off prosecution by agreeing to pay a paltry $60 million - about what the bank's CDO division made in a day and a half during the real estate boom.
The effects of the housing bubble are well known - it led more or less directly to the collapse of Bear Stearns, Lehman Brothers and AIG, whose toxic portfolio of credit swaps was in significant part composed of the insurance that banks like Goldman bought against their own housing portfolios. In fact, at least $13 billion of the taxpayer money given to AIG in the bailout ultimately went to Goldman, meaning that the bank made out on the housing bubble twice: It hosed the investors who bought their horseshit CDOs by betting against its own crappy product, then it turned around and hosed the taxpayer by making him payoff those same bets.
And once again, while the world was crashing down all around the bank, Goldman made sure it was doing just fine in the compensation department. In 2006, the firm's payroll jumped to $16.5 billion - an average of $622,000 per employee. As a Goldman spokesman explained, "We work very hard here."
But the best was yet to come. While the collapse of the housing bubble sent most of the financial world fleeing for the exits, or to jail, Goldman boldly doubled down - and almost single-handedly created yet another bubble, one the world still barely knows the firm had anything to do with.
BUBBLE #4 - $4 A GALLON
By the beginning of 2008, the financial world was in turmoil. Wall Street had spent the past two and a half decades producing one scandal after another, which didn't leave much to sell that wasn't tainted. The terms junk bond, IPO, subprime mortgage and other once-hot financial fare were now firmly associated in the public's mind with scams; the terms credit swaps and CDOs were about to join them. The credit markets were in crisis, and the mantra that had sustained the fantasy economy throughout the Bush years - the notion that housing prices never go down - was now a fully exploded myth, leaving the Street clamoring for a new bullshit paradigm to sling.
Where to go? With the public reluctant to put money in anything that felt like a paper investment, the Street quietly moved the casino to the physical-commodities market - stuff you could touch: corn, coffee, cocoa, wheat and, above all, energy commodities, especially oil. In conjunction with a decline in the dollar, the credit crunch and the housing crash caused a "flight to commodities." Oil futures in particular skyrocketed, as the price of a single barrel went from around $60 in the middle of 2007 to a high of $147 in the summer of 2008.
That summer, as the presidential campaign heated up, the accepted explanation for why gasoline had hit $4.11 a gallon was that there was a problem with the world oil supply. In a classic example of how Republicans and Democrats respond to crises by engaging in fierce exchanges of moronic irrelevancies, John McCain insisted that ending the moratorium on offshore drilling would be "very helpful in the short term," while Barack Obama in typical liberal-arts yuppie style argued that federal investment in hybrid cars was the way out.
GOLDMAN TURNED A SLEEPY OIL MARKET INTO A GIANT BETTING PARLOR - SPIKING PRICES AT THE PUMP.
But it was all a lie. While the global supply of oil will eventually dry up, the short-term flow has actually been increasing. In the six months before prices spiked, according to the U.S. Energy Information Administration, the world oil supply rose from 85.24 million barrels a day to 85.72 million. Over the same period, world oil demand dropped from 86.82 million barrels a day to 86.07 million. Not only was the short-term supply of oil rising, the demand for it was falling - which, in classic economic terms, should have brought prices at the pump down.
So what caused the huge spike in oil prices? Take a wild guess. Obviously Goldman had help - there were other players in the physical-commodities market - but the root cause had almost everything to do with the behavior of a few powerful actors determined to turn the once-solid market into a speculative casino. Goldman did it by persuading pension funds and other large institutional investors to invest in oil futures - agreeing to buy oil at a certain price on a fixed date. The push transformed oil from a physical commodity, rigidly subject to supply and demand, into something to bet on, like a stock. Between 2003 and 2008, the amount of speculative money in commodities grew from $13 billion to $317 billion, an increase of 2,300 percent. By 2008, a barrel of oil was traded 27 times, on average, before it was actually delivered and consumed.
As is so often the case, there had been a Depression-era law in place designed specifically to prevent this sort of thing. ... In 1936, Congress recognized that there should never be more speculators in the market than real producers and consumers. If that happened, prices would be affected by something other than supply and demand, and price manipulations would ensue. A new law empowered the Commodity Futures Trading Commission - the very same body that would later try and fail to regulate credit swaps - to place limits on speculative trades in commodities. As a result of the CFTC's oversight, peace and harmony reigned in the commodities markets for more than 50 years.
All that changed in 1991 when, unbeknownst to almost everyone in the world, a Goldman-owned commodities-trading subsidiary called J. Aron wrote to the CFTC and made an unusual argument. Farmers with big stores of corn, Goldman argued, weren't the only ones who needed to hedge their risk against future price drops - Wall Street dealers who made big bets on oil prices also needed to hedge their risk, because, well, they stood to lose a lot too.
This was complete and utter crap - the 1936 law, remember, was specifically designed to maintain distinctions between people who were buying and selling real tangible stuff and people who were trading in paper alone. But the CFTC, amazingly, bought Goldman's argument. It issued the bank a free pass, called the "Bona Fide Hedging" exemption, allowing Goldman's subsidiary to call itself a physical hedger and escape virtually all limits placed on speculators. In the years that followed, the commission would quietly issue 14 similar exemptions to other companies.
Now Goldman and other banks were free to drive more investors into the commodities markets, enabling speculators to place increasingly big bets. That 1991 letter from Goldman more or less directly led to the oil bubble in 2008, when the number of speculators in the market - driven there by fear of the falling dollar and the housing crash - finally overwhelmed the real physical suppliers and consumers. By 2008, at least three quarters of the activity on the commodity exchanges was speculative, according to a congressional staffer who studied the numbers - and that's likely a conservative estimate. By the middle of last summer, despite rising supply and a drop in demand, we were paying $4 a gallon every time we pulled up to the pump.
What is even more amazing is that the letter to Goldman, along with most of the other trading exemptions, was handed out more or less in secret. "I was the head of the division of trading and markets, and Brooksley Born was the chair of the CFTC," says Greenberger, "and neither of us knew this letter was out there." In fact, the letters only came to light by accident. Last year, a staffer for the House Energy and Commerce Committee just happened to be at a briefing when officials from the CFTC made an offhand reference to the exemptions.
"1 had been invited to a briefing the commission was holding on energy," the staffer recounts. "And suddenly in the middle of it, they start saying, 'Yeah, we've been issuing these letters for years now.' I raised my hand and said, 'Really? You issued a letter? Can I see it?' And they were like, 'Duh, duh.' So we went back and forth, and finally they said, 'We have to clear it with Goldman Sachs.' I'm like, 'What do you mean, you have to clear it with Goldman Sachs?'" ... [I]n a classic example of how complete Goldman's capture of government is, the CFTC waited until it got clearance from the bank before it turned the letter over.
Armed with the semi-secret government exemption, Goldman had become the chief designer of a giant commodities betting parlor. Its Goldman Sachs Commodities Index - which tracks the prices of 24 major commodities but is overwhelmingly weighted toward oil - became the place where pension funds and insurance companies and other institutional investors could make massive long-term bets on commodity prices. Which was all well and good, except for a couple of things. One was that index speculators are mostly "long only" bettors, who seldom if ever take short positions - meaning they only bet on prices to rise. While this kind of behavior is good for a stock market, it's terrible for commodities, because it continually forces prices upward. "If index speculators took short positions as well as long ones, you'd see them pushing prices both up and down," says Michael Masters, a hedge-fund manager who has helped expose the role of investment banks in the manipulation of oil prices. "But they only push prices in one direction: up."
Complicating matters even further was the fact that Goldman itself was cheerleading with all its might for an increase in oil prices. In the beginning of 2008, Arjun Murti, a Goldman analyst, hailed as an "oracle of oil" by The New York Times, predicted a "super spike" in oil prices, forecasting a rise to $200 a barrel. At the time Goldman was heavily invested in oil through its commodities-trading subsidiary, J. Aron; it also owned a stake in a major oil refinery in Kansas, where it warehoused the crude it bought and sold. Even though the supply of oil was keeping pace with demand, Murti continually warned of disruptions to the world oil supply, going so far as to broadcast the fact that he owned two hybrid cars. High prices, the bank insisted, were somehow the fault of the piggish American consumer; in 2005, Goldman analysts insisted that we wouldn't know when oil prices would fall until we knew "when American consumers will stop buying gas-guzzling sport utility vehicles and instead seek fuel-efficient alternatives."
But it wasn't the consumption of real oil that was driving up prices - it was the trade in paper oil. By the summer of2008, in fact, commodities speculators had bought and stockpiled enough oil futures to fill 1.1 billion barrels of crude, which meant that speculators owned more future oil on paper than there was real, physical oil stored in all of the country's commercial storage tanks and the Strategic Petroleum Reserve combined. It was a repeat of both the Internet craze and the housing bubble, when Wall Street jacked up present-day profits by selling suckers shares of a fictional fantasy future of endlessly rising prices.
In what was by now a painfully familiar pattern, the oil-commodities melon hit the pavement hard in the summer of 2008, causing a massive loss of wealth; crude prices plunged from $147 to $33. Once again the big losers were ordinary people. The pensioners whose funds invested in this crap got massacred: CalPERS, the California Public Employees' Retirement System, had $1.1 billion in commodities when the crash came. And the damage didn't just come from oil. Soaring food prices driven by the commodities bubble led to catastrophes across the planet, forcing an estimated 100 million people into hunger and sparking food riots throughout the Third World. ...
BUBBLE #5 - RIGGING THE BAILOUT
After the oil bubble collapsed last fall, there was no new bubble to keep things humming - this time, the money seems to be really gone, like worldwide-depression gone. So the financial safari has moved elsewhere, and the big game in the hunt has become the only remaining pool of dumb, unguarded capital left to feed upon: taxpayer money. Here, in the biggest bailout in history, is where Goldman Sachs really started to flex its muscle.
It began in September of last year, when then-Treasury secretary Paulson made a momentous series of decisions. Although he had already engineered a rescue of Bear Stearns a few months before and helped bail out quasi-private lenders Fannie Mae and Freddie Mac, Paulson elected to let Lehman Brothers - one of Goldman's last real competitors - collapse without intervention. ("Goldman's superhero status was left intact," says market analyst Eric Salzman, "and an investment-banking competitor, Lehman, goes away.") The very next day, Paulson greenlighted a massive, $85 billion bailout of AIG, which promptly turned around and repaid $13 billion it owed to Goldman. Thanks to the rescue effort, the bank ended up getting paid in full for its bad bets: By contrast, retired auto workers awaiting the Chrysler bailout will be lucky to receive 50 cents for every dollar they are owed.
Immediately after the AIG bailout, Paulson announced his federal bailout for the financial industry, a $700 billion plan called the Troubled Asset Relief Program, and put a heretofore unknown 35-year-old Goldman banker named Neel Kashkari in charge of administering the funds. In order to qualify for bailout monies, Goldman announced that it would convert from an investment bank to a bankholding company, a move that allows it access not only to $10 billion in TARP funds, but to a whole galaxy of less conspicuous, publicly backed funding - most notably, lending from the discount window of the Federal Reserve. By the end of March, the Fed will have lent or guaranteed at least $8.7 trillion under a series of new bailout programs - and thanks to an obscure law allowing the Fed to block most congressional audits, both the amounts and the recipients of the monies remain almost entirely secret.
Converting to a bank-holding company has other benefits as well: Goldman's primary supervisor is now the New York Fed, whose chairman at the time of its announcement was Stephen Friedman, a former co-chairman of Goldman Sachs. Friedman was technically in violation of Federal Reserve policy by remaining on the board of Goldman even as he was supposedly regulating the bank; in order to rectify the problem, he applied for, and got, a conflict-of-interest waiver from the government. Friedman was also supposed to divest himself of his Goldman stock after Goldman became a bank-holding company, but thanks to the waiver, he was allowed to go out and buy 52,000 additional shares in his old bank, leaving him $3 million richer. Friedman stepped down in May, but the man now in charge of supervising Goldman - New York Fed president William Dudley - is yet another former Goldmanite.
The collective message of all this - the AIG bailout, the swift approval for its bank-holding conversion, the TARP funds - is that when it comes to Goldman Sachs, there isn't a free market at all. The government might let other players on the market die, but it simply will not allow Goldman to fail under any circumstances. Its edge in the market has suddenly become an open declaration of supreme privilege. "In the past it was an implicit advantage," says Simon Johnson, an economics professor at MIT and former official at the International Monetary Fund, who compares the bailout to the crony capitalism he has seen in Third World countries. "Now it's more of an explicit advantage." ...
And here's the real punch line. After playing an intimate role in four historic bubble catastrophes, after helping $5 trillion in wealth disappear from the NASDAQ, after pawning off thousands of toxic mortgages on pensioners and cities, after helping to drive the price of gas up to $4 a gallon and to push 100 million people around the world into hunger, after securing tens of billions of taxpayer dollars through a series of bailouts overseen by its former CEO, what did Goldman Sachs give back to the people of the United States in 2008?
Fourteen million dollars.
That is what the firm paid in taxes in 2008, an effective tax rate of exactly one, read it, one percent. The bank paid out $10 billion in compensation and benefits that same year and made a profit of more than $2 billion - yet it paid the Treasury less than a third of what it forked over to CEO Lloyd Blankfein, who made $42.9 million last year.
How is this possible? According to Goldman's annual report, the low taxes are due in large part to changes in the bank's "geographic earnings mix." In other words, the bank moved its money around so that most of its earnings took place in foreign countries with low tax rates. Thanks to our completely hosed corporate tax system, companies like Goldman can ship their revenues offshore and defer taxes on those revenues indefinitely, even while they claim deductions upfront on that same untaxed income. This is why any corporation with an at least occasionally sober accountant can usually find a way to zero out its taxes. A GAO report, in fact, found that between 1998 and 2005, roughly two-thirds of all corporations operating in the U.S. paid no taxes at all.
This should be a pitchfork-level outrage - but somehow, when Goldman released its post-bailout tax profile, hardly anyone said a word. One of the few to remark on the obscenity was Rep. Lloyd Doggett, a Democrat from Texas who serves on the House Ways and Means Committee. "With the right hand out begging for bailout money," he said, "the left is hiding it offshore."
BUBBLE #6 - GLOBAL WARMING
Fast-Forward to today. It's early June in Washington, D.C. Barack Obama, a popular young politician whose leading private campaign donor was an investment bank called Goldman Sachs - its employees paid some $981,000 to his campaign - sits in the White House. Having seamlessly navigated the political minefield of the bailout era, Goldman is once again back to its old business, scouting out loopholes in a new government-created market with the aid of a new set of alumni occupying key government jobs.
AS ENVISIONED BY GOLDMAN, THE FIGHT TO STOP GLOBAL WARMING WILL BECOME A "CARBON MARKET" WORTH $1 TRILLION A YEAR.
Gone are Hank Paulson and Neel Kashkari; in their place are Treasury chief of staff Mark Patterson and CFTC chief Gary Gensler, both former Goldmanites. (Gensler was the firm's co-head of finance) And instead of credit derivatives or oil futures or mortgage-backed CDOs, the new game in town, the next bubble, is in carbon credits - a booming trillion-dollar market that barely even exists yet, but will if the Democratic Party that it gave $4,452,585 to in the last election manages to push into existence a groundbreaking new commodities bubble, disguised as an "environmental plan," called cap-and-trade.
The new carbon-credit market is a virtual repeat of the commodities-market casino that's been kind to Goldman, except it has one delicious new wrinkle: If the plan goes forward as expected, the rise in prices will be government-mandated. Goldman won't even have to rig the game. It will be rigged in advance.
Here's how it works: If the bill passes; there will be limits for coal plants, utilities, natural-gas distributors and numerous other industries on the amount of carbon emissions (a.k.a. greenhouse gases) they can produce per year. If the companies go over their allotment, they will be able to buy "allocations" or credits from other companies that have managed to produce fewer emissions. President Obama conservatively estimates that about $646 billions worth of carbon credits will be auctioned in the first seven years; one of his top economic aides speculates that the real number might be twice or even three times that amount.
The feature of this plan that has special appeal to speculators is that the "cap" on carbon will be continually lowered by the government, which means that carbon credits will become more and more scarce with each passing year. Which means that this is a brand-new commodities market where the main commodity to be traded is guaranteed to rise in price over time. The volume of this new market will be upwards of a trillion dollars annually; for comparison's sake, the annual combined revenues of an electricity suppliers in the U.S. total $320 billion.
Goldman wants this bill. The plan is (1) to get in on the ground floor of paradigm-shifting legislation, (2) make sure that they're the profit-making slice of that paradigm and (3) make sure the slice is a big slice. Goldman started pushing hard for cap-and-trade long ago, but things really ramped up last year when the firm spent $3.5 million to lobby climate issues. (One of their lobbyists at the time was none other than Patterson, now Treasury chief of staff.) Back in 2005, when Hank Paulson was chief of Goldman, he personally helped author the bank's environmental policy, a document that contains some surprising elements for a firm that in all other areas has been consistently opposed to any sort of government regulation. Paulson's report argued that "voluntary action alone cannot solve the climate-change problem." A few years later, the bank's carbon chief, Ken Newcombe, insisted that cap-and-trade alone won't be enough to fix the climate problem and called for further public investments in research and development. Which is convenient, considering that 'Goldman made early investments in wind power (it bought a subsidiary called Horizon Wind Energy), renewable diesel (it is an investor in a firm called Changing World Technologies) and solar power (it partnered with BP Solar), exactly the kind of deals that will prosper if the government forces energy producers to use cleaner energy. As Paulson said at the time, "We're not making those investments to lose money."
The bank owns a 10 percent stake in the Chicago Climate Exchange, where the carbon credits will be traded. Moreover, Goldman owns a minority stake in Blue Source LLC, a Utah-based firm that sells carbon credits of the type that will be in great demand if the bill passes. Nobel Prize winner Al Gore, who is intimately involved with the planning of cap-and-trade, started up a company called Generation Investment Management with three former bigwigs from Goldman Sachs Asset Management, David Blood, Mark Ferguson and Peter Harris. Their business? Investing in carbon offsets. There's also a $500 million Green Growth Fund set up by a Goldmanite to invest in green-tech ... the list goes on and on. Goldman is ahead of the headlines again, just waiting for someone to make it rain in the right spot. Will this market be bigger than the energy-futures market?
"Oh, it'll dwarf it," says a former staffer on the House energy committee. ....
"If it's going to be a tax, I would prefer that Washington set the tax and collect it," says Michael Masters, the hedge fund director who spoke out against oil-futures speculation. "But we're saying that Wall Street can set the tax, and Wall Street can collect the tax. That's the last thing in the world I want. It's just asinine."
Cap-and-trade is going to happen. Or, if it doesn't, something like it will. The moral is the same as for all the other bubbles that Goldman helped create, from 1929 to 2009. In almost every case, the very same bank that behaved recklessly for years, weighing down the system with toxic loans and predatory debt, and accomplishing nothing but massive bonuses for a few bosses, has been rewarded with mountains of virtually free money and government guarantees - while the actual victims in this mess, ordinary taxpayers, are the ones paying for it.
It's not always easy to accept the reality of what we now routinely allow these people to get away with; there's a kind of collective denial that kicks in when a country goes through what America has gone through lately, when a people lose as much prestige and status as we have in the past few years. You can't really register the fact that you're no longer a citizen of a thriving first-world democracy, that you're no longer above getting robbed in broad daylight, because like an amputee, you can still sort of feel things that are no longer there.
But this is it. This is the world we live in now. And in this world, some of us have to play by the rules, while others get a note from the principal excusing them from homework till the end of time, plus 10 billion free dollars in a paper bag to buy lunch. It's a gangster state, running on gangster economics, and even prices can't be trusted anymore; there are hidden taxes in every buck you pay. And maybe we can't stop it, but we should at least know where it's all going.
The bubbles don't come 'til the end of the program... Turn off the bubbles... Turn off the bubble machine!
NOTE Read it all here.
UPDATE Again, Goldman Sachs fans might also like today's post on how 32 megs of Goldman Sachs proprietary trade code got uploaded to a German server.
I'm not sure how I stumbled across Dating A Bank[st]er Anonymous, and I'm not even sure I'm glad that I did...
But isn't it reassuring to remember that with the lights out at Treasury these are the guys who are going to be making policy on health care, Social Security, and turning the banks into regulated public utilities?
NOTE Via Bronte Capital. Interesting datapoint: DABA's archives start in September 2008. So I guess this blog's startup makes a fine coincident indicator* for our own Minsky Moment, eh? Very suddenly, it became OK to kick the banksters. So they must have been down at that point, eh?
* [If my attempt to use economic jargon hasn't just caused somebody truly qualified to [pound head on desk]].
Pam Martens has an excellent article in Counterpunch that explains the whole process:
Three plain talking judges, in state courts in Massachusetts and Kansas, and a Federal Court in Ohio, have drilled down to the “straw man” aspect of securitization. The judges’ decisions have raised serious questions as to the legality of hundreds of thousands of foreclosures that have transpired as well as the legal standing of the subsequent purchasers of those homes, who are more and more frequently the Wall Street banks themselves. ....
The problems grew out of the steps required to structure a mortgage securitization. In order to meet the test of an arm’s length transaction, pass muster with regulators, conform to accounting rules and to qualify as an actual sale of the securities in order to be removed from the bank’s balance sheet, the mortgages get transferred a number of times before being sold to investors. Typically, the original lender (or a sponsor who has purchased the mortgages in the secondary market) will transfer the mortgages to a limited purpose entity called a depositor. The depositor will then transfer the mortgages to a trust which sells certificates to investors based on the various risk-rated tranches of the mortgage pool. (Theoretically, the lower rated tranches were to absorb the losses of defaults first with the top triple-A tiers being safe. In reality, many of the triple-A tiers have received ratings downgrades along with all the other tranches.)
Because of the expense, time and paperwork it would take to record each of the assignments of the thousands of mortgages in each securitization, Wall Street firms decided to just issue blank mortgage assignments all along the channel of transfers, skipping the actual physical recording of the mortgage at the county registry of deeds.
Astonishingly, representatives for the trusts have been foreclosing on homes across the country, evicting the families, then auctioning the homes, without a proper paper trail on the mortgage assignments or proof that they had legal standing. In some cases, the courts have allowed the representatives to foreclose and evict despite their admission that the original mortgage note is lost. (This raises the question as to whether these mortgage notes are really lost or might have been fraudulently used in multiple securitizations, a concern raised by some Wall Street veterans.)
(On the fraud, see William Black.)
Also, just supposing: Supposing that the trusts knew that the mortgages notes had, in fact, been used fraudulently. Isn't it likely that they'd back off, when challenged, if a demand to "produce the note" would expose the fraud?
For a snapshot of what’s wrong with our banking policy, look at the front page of the business section of today’s New York Times. On the left side: “U.S. in Standoff with Banks over Chrysler.” On the right side: “Banks Show Clout on Legislation to Help Consumers.”
On the left side, a consortium of banks holding Chrysler debt is refusing to agree to the current restructuring plan, which involves bondholders holding $6.9 billion in secured debt getting about 15 cents on the dollar - roughly where the bonds are currently trading, according to the Times.* The banks are playing the ongoing game of chicken with the government, betting that the government will cave and give them a better deal rather than take a risk on a bankruptcy.
On the right side, the banks are using their lobbying clout to block the administration’s proposals to help consumers and households, including the mortgage cram-down provision (which would allow bankruptcy courts to modify mortgages on first homes) and added consumer protections for credit card customers. They currently have all 41 Republican votes in the Senate tied up, which means nothing can pass.
The banks leading the charge over Chrysler: JPMorgan Chase and Citigroup. The banks opposed to cram-downs: Bank of America, JPMorgan Chase and Wells Fargo. The banks blocking credit card protections: American Express, Bank of America, Capital One Financial, Citigroup, Discover Financial Services, and JPMorgan Chase. All or almost all are bailout beneficiaries. But don’t blame them: they’re just doing what they can to maximize their profits at the expense of the taxpayer, which is perfectly legal (and even ethical, depending on your conception of shareholder rights). Instead, you should be wondering why they are in a position to be maximizing profits at the taxpayer’s expense.
Plus ça "change," plus c'est la même chose.... Why?
Because Big Money Democrats are the faction in control of the executive branch. My answer, anyhow.
If we're going to nationalize the banks, isn't that the right way to do it? Why shouldn't paying your mortgage, or your auto loan, or your student loan, be exactly like paying your light bill? None of those businesses should be hard, and none of them demand "complex," "innovative," "financial instruments," and they certainly don't require testesterone-driven Merry Banksters sucking enormous bonuses off the company tit. So cut the parasites out of the business and get back to basics.
President Barack Obama shouldn’t hesitate to nationalize the banks that need to be bailed out, Noble Prize-winning economist Paul Krugman said.
“If taxpayers are footing the bill for rescuing the banks, why shouldn’t they get ownership, at least until private buyers can be found?” Krugman wrote in a column in the New York Times published today.
Simple answers to simple questions:
Because they're not "entitled" to it!
“But the Obama administration appears to be tying itself in knots to avoid this outcome.”
Quelle surprise. I mean, since Obama whipped the caucus for TARP, which handed $700 billion dollars to the banks with no transparency and no accountability, why would anybody expect Obama to turn 180 degrees to nationalization?
His remarks echo those of [fellow DFHs and Cassandras] Nassim Nicholas Taleb and Nouriel Roubini, who said last week that nationalizations will be necessary to bring the U.S. banking system out of insolvency. Obama will require banks to bolster lending in return for government aid, lawmaker Barney Frank said yesterday, stopping short of taking full ownership.
Krugman said the U.S. government’s rescue plan appears to put banking risk with taxpayers when loans go bad while giving the rewards to executives and shareholders when things go well.
And he says that like it's a bad thing!
Treasury Secretary Timothy Geithner said on Jan. 28 that U.S. officials will “do our best” to preserve the banking system run by private shareholders.
Why? I thought the Obama administration was about pragmatism, not ideology?
Our financial system seems to me like the famous analysis of the Russian auto industry: It would have been better to leave the raw materials as steel, rubber, plastic and so forth -- because the Russian auto industry actually subtracted value from its inputs. The whole goal of the Conservative Movement over the last thirty years can be summed up in one sentence: "Cheap labor slaving for Big Money." Well, that's not working (at least not for us). So why try to preserve it? Why not get rid of it? It's subtracting value, not adding it.
NOTE One more advantage: Regulated public utilities tend not to fail, unless the privatizers get in and screw them up, and when they do, they're small enough to.