Democrats & Liberals Archives

Five Financial Monsters Strangulate Economy

The SEC - finally - took Goldman Sachs to court because Goldman Sachs exercised derivative fraud. Lehman Brothers evidently was involved in derivative fraud before it went belly up. We hear that Washington Mutual was involved in derivative fraud as well.

What's a derivative? Not being a financial expert I will not try to answer that. Suffice it to say that derivatives are complex, so complex that even many of those dealing with derivatives don't understand them. Evidently, this is the way the financial monsters dealing with derivatives like it. If derivatives are kept arcane, those in the know can swindle their way to billionaire bonanzas.

Who deals with derivatives? According to R.J.Eskow, a handful of financial monsters control the entire market:

The top five banks hold nearly 96% of the entire derivatives market. And we're not talking about small numbers here. The projected value of the market in over-the-counter derivatives is over $500 trillion dollars. (In "real" terms it's $3.3 trillion, which isn't chump change either. Here's a good explanation of what figures like these really mean. Short version: It's a lot of money.)

(If you are interested in how they get to $500 trillion or more, see here.)

It appears that the top 5 financial monsters have been "borrowing" our money and using it to play in the big derivatives casino, for which these chosen ones know the rules and the rest of us don't. So, they make their pile of money and we lose ours. They become so rich they don't know what to do with their money and we lose our jobs, our homes and our businesses.

Democrats say that the derivative market must be strongly regulated. Indeed, there is now a bill in the Senate on that subject. The Republicans, under the "guidance" of Mitch McConnell, has gotteen 41 Republicans to sign a letter to fight the bill, which he claims would encourage more bailouts. Of course, this is ridiculous: the purpose of the bill is to prevent bailouts in the future.

Before McConnell wrote this letter he had a big conference with officials of the top financial monsters. Could it be that McConnell wants these financial monsters to continue fleecing Americans so these banks could make a mint? Could it be that McConnell thinks this would make the banks so thankful they would continue pouring campaign cash into Republican coffers?

We must regulate derivatives. At the very least we should not allow any company that handles derivatives to work with other aspects of finance. Let's separate real banking (deposits and loans) from gambling casinos (derivatives).

President Obama just said he would veto any legislation that does not contain strong derivative regulation. That's the way to go. We can't allow 5 top financial monsters to strangulate the economy again.

Posted by Paul Siegel at April 16, 2010 7:43 PM
Comments
Comment #299092

Being charged with fraud and being guilty of it are two very different things.

I’m with Jim Cramer on this. Unless something new comes to light, this case seems pretty hollow.

Posted by: gergle at April 17, 2010 1:13 AM
Comment #299095

It is my understanding that Goldman is being charged with participating in a fraud on the market by failing to disclose that an investment instrument that it was marketing (CDO) was deliberately designed by a third party to be toxic and that the designer was shorting the instrument by purchasing CDS swaps on the instrument. In other words, Goldman knowingly sold swamp land to unsuspecting investors.

In my opinion, this is not a “hollow” case. It is an example of greed overcoming the type of fiduciary duty that is essential in the financial markets.

Posted by: Rich at April 17, 2010 6:45 AM
Comment #299096

If a tree falls in the forest….

….does it make a sound if Mitch McConnell is not there to deny that a sound was made?

http://www.tomdegan.blogspot.com

Tom Degan

Posted by: Tom Degan at April 17, 2010 7:17 AM
Comment #299098

Rich,

Goldman knew that Paulson was shorting the CDO, but had an independent analysis done on the CDO which was revealed to the client. The Client was a town in Germany.

CDO’s are sophisticated instruments, the client was a sophisticated investor.

Goldman is, by law, prohibited from telling another clients position to this buyer.

In 2006, if you believed the housing market was going to continue up, it was a good investment. If you believed it was a bust waiting to happen, it was a poor investment.

Two clients made different bets.

Posted by: gergle at April 17, 2010 7:39 AM
Comment #299100

gergle
I’ll guess we will see. In a case of this magnitude there must have been something there. What is different is that these things are usually worked out behind closed doors. The administartion has sent a clear signal that enforcement has toughened,watch out. This is a good thing.
The case hinges on the assertion that Paulson and Goldman conspired to sell a product they expected to go down. The buyers were banks,not towns.

Paul
Derivitives are the eqivelent of spinning straw into gold.They provide very little in the way of industry capitalization. You are correct that they need severe regulation and transparency as do hedge funds.There is a lobbiest push to build in loopholes and hiding places for the worst offenders of the proposed regulation. The BHO administration says they will veto legislation that contains these exceptions.

Posted by: bills at April 17, 2010 8:22 AM
Comment #299109

Hey! Guess who was financial advisor for Lehman Brothers was???? JEB BUSH!!!

Posted by: capnmike at April 17, 2010 10:38 AM
Comment #299115

Bush’s SEC Chair from 2005, Christopher Cox has a biography on the SEC web site. Want a laugh? His biography states:

During his tenure at the SEC, Chairman Cox made vigorous enforcement of the securities laws the agency’s top priority, bringing ground breaking cases against a variety of market abuses including hedge fund insider trading, …

And, if you really want the source of the Banking Fraud, take a look at this from Bush’s first term SEC Chairman, William H. Donaldson. I will quote a portion:

The discussion this morning has been excellent, and to my mind, helpful in making clear what the proposal before us today does not do.

First, this proposal would not require hedge funds to register as investment companies. These are not mutual funds, and we are not suggesting that they be regulated as if they were.

Second, this proposal would not extend Commission jurisdiction where it does not already exist. Hedge fund advisers are investment advisers for purposes of the Investment Advisers Act and the Commission is responsible for their oversight, even though we have, in the past, exempted them from registration. This proposal would simply close the information gap that opened because of that earlier Commission decision.

Third, this proposal does not establish a new regulatory scheme. Investment advisers have been regulated by the Commission for sixty years — the regulatory scheme is mature and well-developed. The only issue on the table is whether to continue to permit hedge fund advisers to be exempt from certain aspects of this scheme.

Fourth, this proposal would not in any way impede the legitimate operations of hedge funds and the vital role they can, and in many cases do, play in our financial markets. Hedge funds can and do contribute to market efficiency and liquidity; they play an important role in allocating investment risks by serving as counterparties to investors who seek to hedge risks; and they provide investors with greater diversification of risk by offering them exposure uncorrelated with market movements. Nothing in this proposal would impair any of these benefits to the marketplace.

There lies the roots of the problems which the SEC is now prosecuting Goldman Sachs for. The SEC itself, under GW Bush’s, turn the other eye away too, Chairmen.

Posted by: David R. Remer at April 17, 2010 12:59 PM
Comment #299116

For those not versed in the terms of hedge funds and derivatives: derivatives are used by investors to

* speculate and to make a profit if the value of the underlying asset moves the way they expect (e.g. moves in a given direction, stays in or out of a specified range, reaches a certain level)

among other things. Derivatives are an integral part of the Hedge Fund markets, and taken together constitute a leverage of investments to the tune of 605 Trillion Dollars. There isn’t that much money on the entire planet. Hence, the extreme danger Hedge Funds and derivatives, which are little more than legalize gambling, pose to the global and national economic structures.

The Republicans simply wanted more information about these funds, presumably so they could capitalize on them. The Democrats, well, at least Sen. Lincoln, is going after the regulation of these funds to diminish their potential threat to the economic structures of the human species. Watch out, though. Many Democrats in Congress are just as prone to advantage themselves of insider legislation and trading based on that information, as Republicans.

I think there will be bi-partisan resistance to this new regulation call, which will reveal the hand of those crooks in Congress in both parties.

Posted by: David R. Remer at April 17, 2010 1:16 PM
Comment #299122


“The Republicans simply wanted more information about these funds, presumably so they could capitalize on them.”

Perhaps they were tired of seeing the Democrats make so much money.

There will be a verbal battle but, not nearly as long or as intense as health care reform.

In the end, Democrats will pass a financial reform bill and tout it as the greatest piece of legislation since health care reform.

Just like health care, once it passes the industries involved will have very few complaints.

I haven’t heard one Democrat mention reinstating Glass Steagall or any of the other deregulations that took place.

We are still headed down the corpocracy road and IMO, everyone should be skeptical of what the government does and very cynical about these current politicians.

Posted by: jlw at April 17, 2010 3:30 PM
Comment #299125

jlw, you could very well be right. There is mounting evidence of it. Blanche Lincoln is on the right track, but, I have reservations as to whether most of the rest of her cohort will follow her lead.

Posted by: David R. Remer at April 17, 2010 4:52 PM
Comment #299127

What are derivatives?

They are an essential part of our financial system.

Let me give you an example.

Lets say you are a bakery in New York and you need to by supplies into the future. You want some constancy to you prices because you have to plan for wages for staff along with many other things. So you need some wheat but don’t need it for six months. Well you buy it now on conract to be delivered six months from now. You have bought a contract to purchase a certain amount of wheat in six months. That contract is a derivative.

Our world could not function without derivatives.

So if the price of wheat goes up, the price of the contract would go up. Let’s say the baker has a slow down in his business does not the wheat. Then the baker can sell the contract for in this case a profit.

So derivatives are absolutely essential for business to function. Derivatives have been around for centuries. They are a well established financial instrument.

The problem comes where the tail and the horse change places, and investors are focused on the derivative (tail) instead of the horse, (the commodity).

Posted by: Craig Holmes at April 17, 2010 5:07 PM
Comment #299130

Craig,

Futures contracts are only one type of derivative. Most of our recent problems came from other types of derivatives such as swaps and options. In these two types of derivative, nearly all the focus is on the “tail” (if I borrow your metaphor). I welcome more regulation and oversight on these things, but I haven’t read enough of the Democratic proposals to make a judgment yet.

Posted by: Warped Reality at April 17, 2010 5:57 PM
Comment #299133

Bills,

I agree that this is a political signal, but not necessarily a good one.

After reading some more on this charge, it appears Goldman may have colluded or assisted in setting up a particularly nasty CDO. If that’s true then they may have a case.

Again, though, they supposedly weren’t dealing with an unsophisticated investor.

It does seem that the buyer was a couple of Banks. Although I’ve heard different things on that. From Cramer saying it was a German City(Some cities do buy sophisticated investments), to Duestch Bank, to IKB and ABN-Amro.

This article seems fairly clear:

http://seekingalpha.com/instablog/394803-andrew-butter/63854-inside-the-goldman-cdo-affair-from-the-inventor-of-the-paulson-put

While I agree there needs to be more aggressive enforcement from the SEC and Bush did load the SEC with go-along guys (which Frontline did stories on years ago), I don’t want to see prosecution for just political points.

Posted by: gergle at April 17, 2010 7:40 PM
Comment #299134

Gergle,

The fact that Goldman commissioned an independent rating of the CDO, hardly justifies marketing it as AAA security. It had information that the rating agency didn’t have. Goldman knew that the CDO was influenced by a third party, Paulson, and designed to be toxic (high risk mortgages in Florida, California, Arizona, etc.). It knew that the third party designer, Paulson, had purchased CDSs on the instrument since it brokered the purchases. In short, it knew the scam. Yet, it went ahead with selling the CDO to investors without disclosing its knowledge. Seriously, would anyone have bought the security knowing the facts that Goldman had privy to?

It is also not a defense to argue prohibions on disclosure of another client’s position. It had highly significant adverse information on the worthiness of the security it was selling. If it didn’t wish to disclose this information, it should have declined to market it. Very simple! Otherwise, it breaches its fiduciary duty to a good faith investor and knowingly participates in a scam and a fraud. There was clearly a conflict of interest. Goldman chose to ignore the conflict in the interest of fees from the transactions to the detriment of the purchasers.

See no evil, hear no evil, is, in my opinion, not the way a broker of trillions of dollars of securities should allowed to function. This not the wild west. Thankfully, the SEC, albeit belatedly, is finally taking action to suppress the practice.

Posted by: Rich at April 17, 2010 7:48 PM
Comment #299142

Craig, air is essential to mammalian life too! But, polluted air will kill a person despite the presence of the oxygen in the air.

Derivatives Hedge Funds and derivatives total more money than exists in all the world, 604 Trillion dollars. That is a house of cards demanding to implode, without some serious scaling back, oversight, and enforced regulation.

Posted by: David R. Remer at April 17, 2010 9:05 PM
Comment #299143

Warped Reality:

Correct!! My point is simply to point out that derivatives have been common for a very long time.

We always need to be updating our regulation. Obviously Credit Default Swaps are one area that needs to be looked at.

My basic premise is that whenever my tax dollars are used to bail something out I have the expectation that Government will take a look and change things to reduce the risk of my tax dollars being needed again.

What I don’t like is that usually the reregulation boils down to more paperwork for the average people in the industry. These average people usually had nothing to do with the original problem.

Posted by: Craig Holmes at April 17, 2010 9:07 PM
Comment #299152

Rich,

You make a lot of assumptions in your analysis. Goldman was a broker that was long on these CDO’s.

The independent analysis was fair disclosure.

That Goldman had made a decision to unload it’s long position is not something it had to disclose. It may not be particularly fair to it’s clients, but even little old me knows to be wary of buying equities that brokers hold a position in.

Bets are made on markets all the time, the issue will be who knew what and when.

Letting Paulson make it’s own baskets and marketing them for them, is what brokers often do.

Again, it would have been illegal for Goldman to disclose Paulsen’s separate short position.

Goldman does high frequency trades all the time based on it’s ability to analyze market positions. It is not required to divulge to all it’s clients. I personally think this may have some illegal unfairness to it.

Business is often about information. Goldman makes money on it’s superior knowledge. So do others. It doesn’t have to let you in on it’s knowledge base, to sell you an instrument. Your assumption is that it hid material facts. Market positions are not material facts in this situation. That is proprietary information.

In equities or derivatives the game is about individuals making bets. There will be winners and losers.

IF Goldman did direct Paulsen in making these baskets, then there may be some liability, but as long as the analysis did evaluate the CDO’s properly, they didn’t hide material facts.

Most people, in fact, were betting on a rising housing market in late 2006 and early 2007. A high yield derivative would not be a bad bet, if that is what you believed then.

Posted by: gergle at April 17, 2010 11:07 PM
Comment #299155


“Arianna Huffington: Sunday Roundup
For companies putting profits over people, paying fines for breaking the law has become part of the cost of doing business. So, in the week following the deadliest mining accident in 40 years, it was business as usual for Massey Energy: the company received 130 “significant and substantial” safety violations — those that present a direct risk to the health and safety of workers. That’s why it was great to hear the president raise the possibility of criminal prosecutions resulting from the West Virginia tragedy. He should do the same for Wall Street. Otherwise Goldman Sachs will end up writing a big check for its investment fraud and quickly return to gaming the system. Only criminal prosecutions will finally bring true accountability to corporate America and restore the moral underpinnings essential for a healthy free enterprise system….”

About time. Anybody want to explain the difference between an employer ignoring safety and getting people killed to increase profit and murder for hire? Anybody want to explain difference between defruading a bank to the point of bankruptcy and robbing it at gunpoint?|

Posted by: bills at April 18, 2010 12:36 AM
Comment #299158

gergle,

If I read your comments correctly, they are wrong, wrong, and wrong. The facts set is wrong. The reasoning is wrong. And, therefore, your conclusions are wrong.

Fact, the case is made on the basis of memos and correspondence which indicate that Goldman was well aware of the extreme default liklihood on the underlying mortgage loans contained in the Paulsen’s baskets. The FACT that Goldman marketed these baskets as potential earning makers without telling its investors that of the extreme liklihood, a near guarantee, that these assets would devalue enormously at some point, is the basis for the allegation and indictment of fraud.

Paulsen was, and is, free to create whatever baskets of investments he wishes. He was up front with Goldman, apparently, about the potential demise of these assets. No crime and no foul. Goldman had the same obligation toward its investors in these baskets, but failed that requirement which the SEC indicates is enforceable and punishable for failure. We shall see. It will be up to the courts to decide whether the statutes and legal regulatory mandates for disclosure existed, and if so, whether Goldman premeditated to hide this information from the investors it marketed these assets to.

Intentional false advertising for profit is a crime in both state and federal statutes. Therefore, your reasoning that the banks don’t have to disclose their knowledge base is faulty, because those statutes do specify that certain portions of their knowledge base are required to be disclosed.

Your conclusion that liability rests on whether Goldman directed Paulsen’s basket makeup, is a faulty conclusion. There are other statutory liabilities involved.

Posted by: David R. Remer at April 18, 2010 4:37 AM
Comment #299159

A day late and a dollar short…

Bill has finally seen the error of his ways in the financial markets:

http://blogs.abcnews.com/politicalpunch/2010/04/clinton-rubin-and-summers-gave-me-wrong-advice-on-derivatives-and-i-was-wrong-to-take-it.html

It won’t do us any good, but I’m glad he finally shook off his blinders.

Posted by: Marysdude at April 18, 2010 5:09 AM
Comment #299161

David,

“extreme default liklihood”

If you are saying these loans were already in default, that is one thing. If you are saying these were NINJA loans that is another. I would like to see your source of information. Nothing I’ve read indicates this.

If these loans weren’t in default, then you are putting a crystal ball in Goldman’s hands. They had decided to dump their long positions, based on fears about the housing market. They were not required to share that insight.

If the independent analysis was faulty in not identifying risk, that is another issue.

Brokers are only required to offer a fair risk assessment, not tell you their investors opinions, unless that is what you are paying for. Frankly, I am very leery of buying any equity that the broker holds a position in, when offered, precisely because their motive may to be to unload their position. Unethical? Yes. Illegal? No.

If they intentionally skewed the basket, and did not get a specific analysis of that basket, that would be fraud, but they had a specific analysis done, from what I understand. The risk was layed out. The German banks were greedy idiots, who didn’t understand the market. I doubt that Golman’s relationship with these banks included investing for them. I understand it was simply a brokerage deal.

If Goldman or Paulsen were wrong in their assessment of the housing market they could have lost big time. In fact, Goldman did lose on other long positions in similar baskets.

Posted by: gergle at April 18, 2010 7:41 AM
Comment #299163

David,

It seems more and more info is leaking out.

The Lawsuit seems to be based on the idea that the CDO’s were offered by and selected for Paulsen rather than ACA.

I think this is going to be a tough case. ACA participated stupidly in this. It will come down to what was actually said in sales and discussions with Goldman’s clients.

ACA’s name was used with their permission. If their position was misrepresented, then there is fraud.

ACA appears incompetent.

http://www.marketwatch.com/story/goldman-charged-with-fraud-over-paulson-cdo-trade-2010-04-16

http://www.nydailynews.com/news/national/2010/04/18/2010-04-18_a_sacher_for_easy_money_goldmans_greed_leaves_its_clients_in_lurch.html

Posted by: gergle at April 18, 2010 8:01 AM
Comment #299164

Gergle,

I suggest that you read the complaint filed by the SEC against Goldman Sachs and one of its employees. It provides a detailed narrative of the factual and legal basis for the suit. Granted, these are only allegations at this point. However, if true, Goldman knowingly engaged in a fraud on the market. It wasn’t just a passive actor in the formation and marketing of the CDO. It knew that if Paulson’s participation in the formation of the CDO and his interest in shorting it via CDSs were known, there would not be a market for the security. It then arranged for an independent third party (ACA) to form the CDO based upon the toxic portfolio selections of Paulson and misled ACA that Paulson was taking a long position on some of the tranches. It then sold the CDO to some German investor banks without disclosing Paulson’s involvment in the formation and of Paulson’s actual short position.

In my opinion, the case clearly illustrates the dangers of “naked” credit default swaps. They provided Paulson and Goldman the opportunity to engineer a security disaster and massively profit from insurance (CDSs) taken out on the pending disaster. It would be like a car manufacturer producing, by design, a car that would explode, marketing it through a trusted entity and taking out insurance on all the purchasers of the cars. It is one thing to profit from the folly of the market, it is another to profit by outright deception, designed failure and mis-use of hedging options.


Posted by: Rich at April 18, 2010 8:26 AM
Comment #299169

Rich,

Agreed. In the article I linked they are saying that a misrepresentation was made to ACA during a lunch meeting with Paulson and ACA. If so, then Paulson may be liable as well. However, if ACA made it’s assumptions based on whether an investor was long or short, or that Goldman was steering the deal, then it failed in it’s fiduciary responsibility. This is going to be about passing around a hot potato. I’m doubting we have seen the whole story, yet.

Posted by: gergle at April 18, 2010 10:32 AM
Comment #299170

We now have 20/20 hindsight that these were “toxic” assets. This wasn’t true in late 2006 and early 2007 when these transactions took place, but the market WAS turning sour.

It was a bad bet, perhaps a rigged bet, but ACA didn’t see it, although they suggested changes. Why did they not drop out when those changes weren’t made? Maybe they didn’t look too hard. Goldman needed a short position to sell their long positions. Paulson provided them with that deal.

Did the German banks buy without any real analysis of the market or the tranches? Why?

Posted by: gergle at April 18, 2010 11:06 AM
Comment #299173

A few 2006/2007 real estate articles:

http://www.investmentu.com/IUEL/2006/20060302.html

http://money.cnn.com/2006/05/03/news/economy/realestateguide_fortune/

http://www.msnbc.msn.com/id/15198805/

I remember talking to a Speculation Home builder after Lehman’s failure. He stated he wasn’t really worried. He didn’t deal in sub prime loans. That was late 2008.

Posted by: gergle at April 18, 2010 11:37 AM
Comment #299174

gergle,

Caveat emptor, even if outright deceptions are prevalent? If I buy a step ladder that the manufacturer purposely fabricated of faulty materials, how deeply must I examine that ladder at purchase before holding the manufacturer responsible should I be hurt because of that flaw? Especially if the manufacturer advertised the product as safe, and got someone at ‘Good Housekeeping’ to seal the approval. Goldman provided just such a buy, according to current reports. Unless something comes out in the future that gainsays those reports, there is plenty of guilt to get conviction.

Posted by: Marysdude at April 18, 2010 12:01 PM
Comment #299175

History was ‘ignored’ in 1999, and we lost Glass-Steagall. In it’s place stood GLB, and the rest becomes the history for future Congresses to ‘ignore’.

History was ‘ignored’ because we forgot the ‘why’ of the G-S in the first place.

Why did we institute Child Labor Laws? Because children were dying of overwork…

Why did we disenfranchise sweatshops? Because women were dying of overwork…

Why did we create an OSHA to inspect workplace safety programs? Because workers were dying in unsafe work places…

Why did we pass the Sullivan Act? Because some businesses were forcing competitiveness out of the market…

Why did we pass Glass-Seagall? Because combining, some practices, that are at times at odds with other practices, under the same roof, creates too great an opportunity for 1. failure, and 2. deceptive practices. We have now had both.

All we had to do was refresh our collective memories, and GLB would never have become law, and we’d not be in this pickle. Goldman, AIG, BOA, Lehman and others have used and abused our financial house because we forgot to look at the why’s. Now Goldman wants to plea ignorance of deceptive manouvers? Bundling is in itself deceptive, and add that the package contained input from an entity whose sole purpose was to amke money off the failure of the sale.

That, my friends, is the ladder made of faulty materials, and the manufacturer asying the fault lies with the purchaser.

Posted by: Marysdude at April 18, 2010 12:27 PM
Comment #299178

Marysdude:

Sort of.

First of all, Goldman has been charged with Fraud. That is a serious offense. So obviously the current laws and regulations on the books from the SEC’s point of view have been violated. It is not like the world before now had no regulation.

A question that I have is (assuming Goldman is guilty), the current laws and regs were not enough to prevent Goldman Sachs from fraud, what will more laws and regs do to help us in the future?

I understand government needs to do something. However it is sort of like when someone commits a crime with a gun. The criminal may have broken many gun laws but legislatures will add a few more because of a need to “do something”.

Madoff broke many laws right under the nose of the SEC. The problem was not enough laws or regulations but enforcement.

I want to know that the future reform will not simply mean that instead of breaking “10” laws the Goldman Sach’s of the future will be breaking “11” laws, and the only real “change” is that our Congress and President feel better believing that have done something when they haven’t.

I also do not want what happens to simply be a new added burden to those in the industry who are ethical and just trying to do their job like everyone else. Typically these things end up with the average people needed to fill out more forms.


Posted by: Craig Holmes at April 18, 2010 12:51 PM
Comment #299181

Craig,

The Goldman matter highlights the need to regulate credit default swaps, particularly “naked” swaps. It was the opportunity to purchase those swaps on the toxic bait that made the deal so sweet for Paulson and allowed Goldman to make a substantial amount for structuring the deal. But for those swaps, Paulson would not have been able to short the CDO.

Posted by: Rich at April 18, 2010 1:51 PM
Comment #299183


I think that Goldman, guilty or not, is the scapegoat in the financial regulation scheme.

Oh look, the FED is doing it’s job; the economy is improving.

The SEC is doing it’s job; it is going after the bad guys.

If we have the Fed and the SEC straightened out and they are doing their jobs right, there is no need for major Glass Steagall type regulatory reform or an independent agency. The Congress can let these agencies do the regulating.

Unless Democrats in this country hold their politicians feet to the fire we are likely to see watered down reform.

Dodd’s committee is the focal point. Even if he would write a strong reform package, he needs all the Democrats on the committee to go along and they won’t unless the party demands it of them.

Like health care, this fight is not going to be between Democrats and Republicans, it will be Democrats vs Democrats.

Posted by: jlw at April 18, 2010 2:21 PM
Comment #299185

jlw,

That is my worry. That this is more about political timing than anything else.

Posted by: gergle at April 18, 2010 4:22 PM
Comment #299186

jwl.

That is the shame of it…but, the fight should not be between Democrats and Democrats…if the system was working, the fight would be between those who think reform is needed and those who don’t. Should reform then be what the majority wanted, the fight would be on policy grounds between the conservatives and progressives, and compromise could be achieved. As long as Republicans remain en bloc, anything that passes will be weak, and everyone will be praying for future improvements…much like HC Reform.

I would say the best answer to the problem is to vote all incumbants out, and start all over…but, many of our greatest problems, such as finance reform cannot wait for the turnover…and, turnover is unlikely to happen anyway.

Posted by: Marysdude at April 18, 2010 4:24 PM
Comment #299187

Craig,

The fraud that Goldman is being charged with did not bring down the house. The fact that what they were able to twist out of shape in the first place was the cause of our collapse. Goldman’s fraud just shows how far those in the industry are willing to go for a buck. Goldman, Madoff…one in the same for being dishonest, but with GLB, our house was failing even before all the crime entered the picture.

You can’t sell air, not give it a price, then insure it without presenting a value, then not reserve a backup for the insurance in case of failure, then place everything in jeopardy by bundling bad with good…still without naming a value, and expect it NOT to collapse. Bill Clinton’s greatest failure was killing Glass in favor of GLB.

Posted by: Marysdude at April 18, 2010 4:32 PM
Comment #299188

Marysdude,

Ladders are not equities, or derivatives. While both have inherent dangers, if you fall off a ladder thru your carelessness, you have no case The same is true for derivatives.

If your comparison is that Goldman hid defects in the derivatives, I think that may be a thin reed. Derivatives by their nature may go up in value or down. There is no guarantee. They are a bet made at the time of purchase.

While the housing market was cooling off, most saw it as a pause, not a melt down. It seems to me a case could be made that ACA did not do their due diligence, although I have not read their analysis, nor am I sure I would understand it. If the banks did not understand it, or did not have a good grasp of the market, they were foolish to buy the CDOs.
It is not the job of a broker to make the decision to buy or sell, it is the job of the broker to arrange a sale within the rules of honest brokering.

To bring Paulsen and ACA together with the banks to make a deal isn’t illegal, unless there was deception on Goldman’s part involved. Paulsen made the basket of trances and ACA claimed them as their own, or at least approved of them. Goldman used ACA’s reputation to make a market.

I see issues with ACA’s analysis and perhaps passivity, I see issues with Paulsen misrepresenting to ACA the risks. If Goldman participated in those things, then they are the big named fish holding the bag.

It is a reality of anyone trading in equities to apply caveat emptor.

Posted by: gergle at April 18, 2010 5:41 PM
Comment #299189

jlw said: “If we have the Fed and the SEC straightened out and they are doing their jobs right, there is no need for major Glass Steagall type regulatory reform or an independent agency. The Congress can let these agencies do the regulating.”

That is nonsense. These agencies CANNOT pass statutes, and limiting the scope and size of threat of behemoth banking institutions to the economy requires Statutory Law, which is not in the purview of the SEC or FED. The Gramm Leach Bliley Act made it legal for banks to cross all lines of business and become so large as to threaten the global economy in the event of failure. It is NOT the SEC’s or FED’s responsibility to prevent banks from failing from bad or threatening management decisions.

The scope of lines of business a bank of a particular kind can engage in has to become limited again as was the case with the Glass Steagal Act, and for the most important and fundamental of historical reasons. And, the failure of such banks cannot be allowed to fall consequentially upon the tax payers again. These requirements cannot be accomplished by the SEC or FED, but, require legislation to facilitate.

Posted by: David R. Remer at April 18, 2010 6:10 PM
Comment #299191

Craig,

Deception is the key. Goldman made sure it would win, no matter the outcome of the sale, but by using the one company that only makes money on shorts, and not disclosing that to the buyer initiated a fraud. I have no sympathy for the Germans as they had every opportunity to research far enough to determine not to buy, but Goldman used its reputation to deceive them into doing what they would not have done had Goldman been straight forward in their dealings. Goldman knew the likelihood of the failure because it knew the drafter to be depending on the failure, but went ahead with the deal anyway.

But, none of that has an impact on the real culprit, that being an unregulated derivatives market, being manipulated by cross purpose financial houses, leading to disaster. Those houses being too big to fail, created the necessity to bail them out or lose everything in one fell swoop. You may honestly believe we could have allowed them to fail, like Lehman, but, because Lehman’s failure made it obvious that more going down would have been catastrophic…and created the reason for a resumption of Glass or a assumption of a similar act.

Posted by: Marysdude at April 18, 2010 8:01 PM
Comment #299197

Marysdude,

I don’t agree with your assumptions of the manner of fraud, even though some may have occurred here, but I do agree that something similar to Glass Steagal needs to be considered. Care must be taken not to run legitimate markets overseas, and some considerations for newer financial realities must be made.

It creeps me out that the SEC is ignoring Paulson’s role and just going after Goldman.

Posted by: gergle at April 18, 2010 11:20 PM
Comment #299198

Marysdude,

I don’t agree with your assumptions of the manner of fraud, even though some may have occurred here, but I do agree that something similar to Glass Steagal needs to be considered. Care must be taken not to run legitimate markets overseas, and some considerations for newer financial realities must be made.

It creeps me out that the SEC is ignoring Paulson’s role and just going after Goldman.

Posted by: gergle at April 18, 2010 11:25 PM
Comment #299203

gergle,

You may be right about Goldman’s role not being as criminal as I have made it out to be, but the part about not driving legitimate markets overseas…well…it IS a world market place, both kinds are already over there, and if we are going to keep the ones that bring our house-of-cards down, would we actually be doing ourselves a favor?

My description of legitimate may vary from yours…derivatives, ie, the buying and selling of bundles of debt for which there has been no assessment of value, for real dollars, the insuring of those bundles without knowing their value, and then not having reserves in an insurance fund to cover loses should a failure occur…well…legitamate might be too strong a word for it in my way of thinking.

Posted by: Marysdude at April 19, 2010 5:30 AM
Comment #299204

gergle, John Paulson broke no laws, nor, from the fact set I have read, even done anything unethical. He made Goldman aware of what he was doing, and why, and what in his estimation was the real worth of the baskets he put together. I see nothing yet, in the fact set to warrant going after Paulson. Are you aware of some facts regarding illegal behavior on his part, that I am not aware of?

Posted by: David R. Remer at April 19, 2010 6:24 AM
Comment #299208

David,

IF he was approaching Goldman to sell something, as you contend, he KNEW would fail, while paying them fees in excess of 15 million, AND lied to ACA in meetings as articles I have linked to claim, and now is sheltered because he is being used by the SEC to witness against Goldman, then I think a fair argument can be made that there was conspiracy and criminal intent.

My basic point is that if Goldman is guilty, based on the things I’ve read, then all three players are guilty.

The problem I have is the claim that there was prescient knowledge that these tranches would fail. Believing that a market is going in a direction is not the same thing as KNOWING the outcome.

Posted by: gergle at April 19, 2010 10:58 AM
Comment #299209

David,

What doesn’t make sense is this. I’m Paulson. I probably know Goldman is long on these CDO’s. I may know they are looking to unload them. I offer them a scheme to rid themselves of them, and make a fortune.

An ethical Goldman would have told him there was no market.

Goldman and Paulson meet with ACA, as dupes or conspirators, claim he is going to go long on these intruments. ACA agrees to research them and package them under their name, suggesting other packages. They are ignored, and allow the package to be marketed under their name as is.

All three players had to be in on this. Paulson laid low, and perhaps was the smartest among the three, but he is a conspirator, too….if there was fraud.

If I have a junk car with sawdust in the transmission, and turn back the mileage, and go to you telling you about the sawdust and mileage, and you come up with a scheme to change the title to High Quality Motors to hide my name as the original owner, because I’m known to sell junk cars. Then I lie to the High Quality Motors, who base their opinion on what I tell them rather than checking out the car, then all three of us have conspired to sell a junk car.

Posted by: gergle at April 19, 2010 11:12 AM
Comment #299210

I personally think Goldman was chosen as a poster for Bad Boy capitalism.

http://rawstory.com/rs/2010/0419/goldman-sachs-pays-5-billion-bonuses-fraud-charges-loom/

Posted by: gergle at April 19, 2010 12:13 PM
Comment #299214

gergle, I just don’t see it that way. Paulson was up front and fully disclosing what he was doing, putting baskets together that he could make money on by betting they would collapse, to both Goldman and ACA. He committed no wrong, and his action was entirely illegal. UNLESS Paulson coerced Goldman to hide his speculation from Goldman’s customers, he is NOT a conspirator. He was simply a broker doing what brokers do, and quite legally.

Goldman on the other hand, initiated false advertising (allegedly), to its customers for these baskets, failing to disclose their anticipated collapse, explained to them by Paulson. There is where the crime is, and Paulson had no apparent part to play in this failure to disclose to Goldman’s customers according to the fact set.

Posted by: David R. Remer at April 19, 2010 4:10 PM
Comment #299225

Rich:

The Goldman matter highlights the need to regulate credit default swaps, particularly “naked” swaps. It was the opportunity to purchase those swaps on the toxic bait that made the deal so sweet for Paulson and allowed Goldman to make a substantial amount for structuring the deal. But for those swaps, Paulson would not have been able to short the CDO.

Agreed.


Posted by: Craig Holmes at April 19, 2010 11:46 PM
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