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Contents Bulletin Scripting in shell and Perl Network troubleshooting History Humor

In Goldman Sachs we trust: classic example of regulatory capture by professional financial system hackers

News The “Too Big To Fail” Problem Recommended Links Corruption of Treasury Corruption of SEC Corruption of FED
Corruption of Regulators High frequency trading Insider Trading CDS -- weapons of mass financial destruction Control Fraud Principal-agent problem
Senate Hearing on Goldman The Secret to Goldman’s Success AIG collapse Abacus Deal Settlement with SEC Commodities manipulation
Goldman CDS saga Buffet Saga Commodities manipulation Aleynikov   Lobbying and the Financial Crisis
Banking Bonuses as Money Laundering Naked short selling "These F#@king Guys" (GS humor) Financial Humor Goldman Sachs related humor Etc

Professional financial hackers have a lot of common with the organized crime. And  not only in respect to common addictions to cocaine and prostitutes. But there is a subtle difference: financial hackers make it daily (and very lucrative) business to figure out ways to abide by the letter of the law while violating its spirit. Although the claim that they do not break the law has very little credibility. They do break the law, but at the same time their political influence is big enough to keep them out of jail. In 2012 Lanny Breuer, then the head of the Justice Department's criminal division  openly admitted that. In a speech at the New York City Bar Association he said that he felt that it was his duty to consider the health of the company, the industry, and the markets in deciding whether or not to file charges.  Which in case of Goldman represents insurmountable obstacle to criminal prosecution.

In any case GS converted itself into a special type of TBTF  company, the company that specialized in hacking financial system. And in a large company internal politic can turn really destructive both to the firm and society at large. In fact, in large companies there are people with very high IQ at the top with personal traits that  makes them more dangerous in comparison with bosses of Mexican gangs. It also makes internal political battles more vicious.  BTW, a lot of psychopaths have above average IQ.

In a way the USA never had a subprime crisis. What we had was systemic, neoliberalism-induced  crisis that involves FED, government, congress, banking, ratings, insurance, investment and financial industries (the banks were at the center of this crime syndicate and they were the largest beneficiaries of the crimes committed), one manifestation of which was 2008 subprime crisis.  Large banks became huge, dominant political force and based on their political weight, they hacked the financial system in the same way computer hackers hack computers systems to suit their short term needs and first of all for enrichment of the brass (appetite for "make money fast" schemes was greatly raised during dot-com crisis).

As Simon Johnson wrote in May 2009 the USA had a The Quiet Coup with banks becoming the most favored and the most protected industry of the Congress. Financial system is essentially a system of rules. If a rich and powerful organization is directed toward hacking the rules: finding weaknesses and exploiting them it is undistinguishable from mafia in a very precise meaning of the term (organize crime syndicate with strong ethnic component), only more sophisticated.  Again they are not gangsters in traditional meaning of this word, they are of a hackers, and as such they are much more difficult to prosecute.  As a comment to blog post at EconomistView by "Eric" (Paul Krugman The Unwisdom of Elites) aptly stated:

Villains....who exactly? The principle reason that there have been few prosecutions of high level bankers is that not so much that got done was illegal. Reckless, maybe. But even here is it really reckless behavior if you have a belief -- which turns out to be true -- that public finances will bear the downside risks on your behalf?

In hindsight it feels like these things should have been illegal, but the available serious punishments, such as not bailing out AIG, not allowing various investment firms to become bank holding entites, not backstopping the GSEs (read their debt issues and you'll see that nowhere is a claim made for public backing), not taking first loss positions on Bear Stearn assets, etc., etc., were foregone by voluntary actions by public officials.

Make peace with the truth that there will be no sweeping prosecutions, least of all by the federal government of the USA.

Those are serious, well educated and well motivated guys which are paid good money for finding the flaws and based on this knowledge subverting existing system of rules, rules which are the essence of financial system.  Essentially they are professional financial system hackers.  Or a strange brand of Harvard trained Mafiosi (and again, Mafia is nothing more that a diversified criminal business with strong ethnic component ;-).  But unlike Mafia they have really good connections in government and essentially captured the government in a silent coup. In a way this organization behaves like cancer cells in a human body and prognosis is not that good, despite the fact that the patient survived one time:

Finanally, the Great Recession was brought on by a runaway financial sector, empowered by reckless deregulation. And who was responsible for that deregulation? Powerful people in Washington with close ties to the financial industry, that’s who....

Due to deregulation which was the important part of neoliberal doctrine, they become legislators of their own business...  Here is what  a telling quote from the post Overruled found on macrobusiness.com.au

But in global finance there are some things happening that are genuinely different. Dangerously so. It is becoming a hall of mirrors, money referring to itself in an infinite regress. Little wonder that people are attracted to gold, because gold seems to be a tangible, solid measure of value, something we can rest on in an environment where everything seems relative. Yet this, too, is an illusion. The yellow metal only has value because it has a history of being deemed to have value. It is no more an objective measure of value than the pieces of coloured plastic, notes, that make up legal tender.

To explain what I mean, let’s start with a definition of what money is. It is rules. Rules about value and obligation. Those rules are usually based on legally enforced structures, although that need not be the case. In the case of cross border capital markets, the enforcement is informal because there is no supranational government to impose penalties. Disputes are resolved by a handful of law firms, the main penalty is to be prevented from participating for a period.

Now if money is rules, then what does it mean to “de-regulate financial markets” as was claimed in the 1990s? Can you de-regulate rules? Obviously not. So what happened? The place where rules were set shifted.

Instead of government for the most part making the rules, the traders started making the rules. The logic was, as Alan Greenspan argued, that because everyone was acting in their self interest then nothing could possibly go wrong. Pricing would be accurate, the less formal self organisation of the market would be superior to the formal oversight of governments (what would governments, which are always bad, know?) and everyone would win. Free lunches as far as the eye can see.

So the rules proliferated, especially after the advent of the Black and Scholes pricing of risk, a clever piece of maths based on what is probably circular argument, but one that is sufficiently concealed to give traders the impression that they are handing off risk accurately. This led to the explosion of derivatives and securities markets, including such instruments as collateralised debt obligations, credit default swaps and endless hedging games (my personl favourite is a derivative on “volatility”).

Now the point about rules is that they are based on agreement, and their creation can be without any limit provided traders are prepared to agree, to trust each other enough to transact. They are not finite in the way that, say, gold is. And so the rule making exploded. The global stock of derivatives is $US600 trillion, about twice the capital stock of the world (all the shares, property, equities, bonds and bank deposits). Far from deregulation making the rules of finance more more streamlined and more efficient — as if the efficiency of money could be measured anyway, given that it would mean measuring money with itself — the rule making expanded wildly. And we all know what happened when the trust that underlies those rules collapsed.

Lloyd Blankfein personality (The Independent called him the prince of Casino Capitalism)  also suggests that GS might operate in the throes of an addiction to gambling. And they know they are controlled by their addiction, and so they hate themselves, like addicts typically do, for their lack of self-control. They also see what their addiction is doing to the nation and the world, and guilt collides with craving, making the addiction even more disturbing.

From the Wall Street Journal

In December 2007, after the firm distributed multimillion-dollar bonus checks in part thanks to bets on a mortgage meltdown, about 10 Goldman mortgage traders, surrounded by dozens of cheering colleagues, wolfed down the burgers, according to attendees. Bystanders wagered cash on how many burgers the traders could eat.

The annual event resembled a scene out of “Liar’s Poker,” a book depicting bawdy antics of bond traders at Salomon Brothers in the 1980s. In fact, the 2007 contest was held just a few floors away from where the Salomon traders worked when that firm leased space in the same Manhattan building.

It was a lower-stakes version of what went on every day in the group: aggressive, take-no-prisoners trading. Mortgage-backed bonds, including complex derivatives that tracked pools of risky loans, were traded for big money in Goldman’s 400-person mortgage unit.

Addicts used to hate their actions, hate the world that lets them act, and they dehumanize the victims who suffer from it in a way that the strong hate the weak.

The real question about Goldman is what constructive role in economy those guys play. Are they just government supported and government protected extortion gang operating mainly in developing market, but due to inertia ripping off home constituents? Is Goldman really such an indispensable financial intermediary? If one looks at the firm’s revenue breakdown it's clear that this is more of a casino than anything else, and some of GS moves are savagely predatory and put the economy in danger (they were instrumental in causing the collapse of AIG (see Janet Tavakoli- Goldman Sachs Nearly Bankrupted AIG); saving AIG was largely about saving the derivatives market, which is so big and unstable that the bankruptcy of a large and intertwined counterparty could mean the bankruptcy of all gamblers including Goldman). AS Karl Denninger noted on April 12, 2009:

Goldman (and other banks') "Hedges"

There is a rumor about Goldman Sachs flying around on the street - allegedly they are about to report their second-best quarter in history, +$12 billion or so.

In addition, there is this from Bloomberg:

A 47 percent gain for the company’s stock price this year and a return to profitability in the first quarter may help Chief Executive Officer Lloyd Blankfein raise new money, analysts said. That might let Goldman Sachs, the sixth-biggest bank, return the cash received in October from the Treasury’s Troubled Asset Relief Program and shake off compensation and hiring restrictions imposed on banks that took the U.S. aid.

Gee, you don't think being paid by the taxpayer through AIG's "conduit" for losses that didn't (yet) happen at 100 cents on the dollar might have anything to do with that, do you?

And further (and potentially much worse) there is the repeated statement by Goldman executives that they were "fully hedged" against a potential counterparty default by AIG.

One wonders - was that "hedge" to be short the equity on AIG itself, perhaps?

Why is this important?

Because if that's how Goldman hedged they got paid twice and the taxpayer literally got robbed.

Someone in Congress needs to look into this now; there are already rumblings of investigation. Those rumblings need to get a lot louder and turn into subpoenas, not "polite inquiries."

If in fact Goldman (or anyone else) was "hedged" against a possible credit loss from their CDS with AIG and they were able to collect on that hedge (no matter what it was) those payments through AIG need to be clawed back immediately as nobody is entitled to be paid twice for the same risk and reap what amounts to a windfall profit by quite literally engineering a multi-billion dollar transfer of funds from the Taxpayer to the firm!

This is not small potatoes either - we're talking $100 billion+ in aggregate with these various banks on a worldwide basis.

We the people deserve answers on this right now and if persons in our government handed these banks $100 billion dollars of our tax money for what was a covered bet, allowing them to collect twice on a risk that had not yet been realized (when at most they were entitled to collect once via their private hedging activity) every single person involved in that scandal must be immediately removed from office, prosecuted if possible, and every nickel of those funds must be clawed back by whatever means are necessary.

The fact that GS is run by a compulsive  gambler completes the picture. It’s a hybrid hedge fund and bookie, with an investment bank and asset management business attached to create some respectability. As NYT wrote (Clients Worried About Goldman’s Many Hats )

Goldman’s trading operation has grown so pivotal and influential that many analysts say the firm as a whole now operates more like a hedge fund than an investment bank — another benchmark of the firm’s internal evolution that can create new friction with clients.

Is we assume that GS is a parasite on the body of the society, the question arise who is protecting such a mass scale racket in comparison with which Russian mobsters are just children. “Great vampire squid" Goldman Sachs is a strange firm and sometimes it is difficult to figure where GS ends and government starts and vise versa.

Paulson continued to appoint Goldman Sachs alumni to positions of power after the AIG decision—he named Edward C. Forst, a former head of Goldman’s investment-management division, to help draft the $700 billion Toxic Asset Relief Program (of which $10 billion went to Goldman Sachs), and then Neel Kashkari, a former Goldman V.P., as the TARP manager. And of course Edward Liddy, former Goldman board member, was already serving as the new CEO of AIG. Suddenly, everywhere you looked, men who had passed through the Goldman gauntlet of loyalty and rewards were now in key positions overseeing the rescue of the financial system. The company was earning its nickname: “Government Sachs.”

Many observers suggest that it is the insider information from government connections that fuels GS profits. See FT Alphaville The not-so-subtle management of markets

"Goldman's activity is of negative social value. Its recent profits came from trading, which basically amounts to profiting from insider information at the expense of others," says Stiglitz.

GS is more like a hedge fund then an investment bank. While slimy business practices of Goldman Sacks flourished in the atmosphere of deregulation, the idea of milking fiat money system  with stock market is the central in GS business model. That's why a recent Rolling Stone article called the firm a "great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money." And a 2007 New York Times column likened its culture to the KGB, the former Soviet Union's secret police.

It's not as if Goldman escaped the financial crisis unscathed. There was a period of chaos last year when Blankfein admits he was willing to consider any option to survive, including merging with Citigroup, which by contrast is today considered one of the weakest financial institutions, 34%-owned by the government. Recently Goldman short selling of MBS during the time the other arm of the firm was packaging them caused a lot of outrage, but nothing was done so far by Obama administration to curb abuses. We will see if Blankfein will go to jail for perjury.

Some comments from Krugman column The Joy of Sachs - Readers' Comments - NYTimes.com

"When the people fear their government, there is tyranny; when the government fears the people, there is liberty." - Thomas Jefferson

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For more in depth analysis of Goldman Sachs' slimy business practices I recommend:

1. Matt Taibbi's "Vampire Squid" take on Goldman Sachs in the latest Rolling Stone: http://bit.ly/hwCbZ

2. CBC's 30 minute interview with Pulitzer-Prize-winning investigative reporter David Cay Johnston on Goldman Sachs & Gov't. Here's the MP3: Even Jack Bauer couldn't stop 'The Goldman Conspiracy' - MarketWatch

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Professor Krugman, other wise people have also noticed the same mind boggling phenomenon that you very well pointed out. What has this great country become now? Goldman Sachs and what it represents have shear contempt for each and everyone of those they have the Audacity to repeatedly and legally rob, the retirees, the pension funds of teachers and firefighters, 401ks of the workers and savings of all decent people.

Eliot Spitzer and Matt Taibbi on Goldman Sachs
http://www.zerohedge.com...
http://trueslant.com...
http://www.rollingstone.com...

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Your suggestion that Goldman worked its miracles by being clever is disingenuous. As the Times own Gretchen Morgenson demonstrated, Government Sachs worked it miracles by sitting down at the private table with goverment decision-makers -- like its old boss Hank Paulson --& hammering out recovery program that benefitted Goldman & whenever possible maimed or killed its competitors (bon voyage, Lehman brothers). If Goldman is corrupt, its Toadies in Treasury T-shirts are worse. Geithner & the top Goldman alum who run Treasury should all be fired, & Goldman should never again enjoy the special status it has acquired through well-placed veterans. There can never be honest & effective regulation when Goldman & its revolving bureaucrats decide what & who is to be regulated. The change we can believe in come from leaders who serve the people; not those who serve big banking.

The Constant Weader at 222.RealityChex.com

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I am on a completely different ideological plane than you are. I think your Keynesian economics are a complete and absolute fraud. BUT what you say about Goldman Sachs is fact. I do not think that you go far enough. Too many government players are involved with or developed from Goldman. They guided our policies in a way that helped Goldman. More than anything, a special prosecutor needs to be appointed to investigate this travesty of justice.

One quick side note, Asset Backed Securities and other derivatives are not inherently bad, they are bad in the hands of scummy New York investment banks. But otherwise they can help small entities raise capital and allow their business models to flourish and withstand the onslaught of larger entities.

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This isn't the American Dream anymore, but the great American Fraud! The US has now the best of both worlds: the privatisation of the profits, and the socialization of the losses!

I do hope that with their robust democracy the US will come out of this situation in a better manner.

10 reasons why Wall Street has absolute power over America's democracy
Paul B. Farrell, MarketWatch Last update: 7:13 p.m. EDT April 20,

ARROYO GRANDE, Calif. (MarketWatch) -- Two mind-numbing fast-paced dramas. Two parallel worlds. One real, one fiction, both deadly. Jack Bauer, mythic hero of "24." Dying from a deadly bio-pathogen leaked from weapons developed by Starkwood, a rogue mercenary army attacking the presidency, hell-bent on taking over America.

The other drama in play: "Hank the Hammer" Paulson, iconic Wall Street hero, a Trojan Horse placed inside Washington by Goldman Sachs as Treasury Secretary in control of America's $15 trillion economy. Goldman, a modern dynasty with vast financial powers much like those once used by the de' Medici, Rothschilds and Morgans to control nations.

One of the confounding aspects of bear market rallies is that the longer they last, the more likely investors are to expect a correction, says Barron's Bob O'Brien.

Both dramas play high-stakes games with financial WMDs that have lethal consequences. Jack compresses thrills, kills and chills into 24 hours. Hank, Goldman and their army of Wall Street mercenaries move with equally blinding speed, heart-pounding action.

Drama? You bet. Six short months ago Hank led an assault on Congress. The scene parallels one in "24:" Sangala War Lord Juma's brazen attack inside the White House. But no AK-47s necessary. The Hammer assaulted Congress with just a two-and-a-half page memo in hand. Like a crack special-ops warrior, he took down the enemy, demanding $750 billion, absolute control, total secrecy, no accountability and emergency powers to act immediately ... warning that inaction was not an option, that collapse of America's banking system was imminent, would bring down the global monetary system, pushing world's economies into a "Great Depression II." Congress surrendered.

Here's the whole plot:

Scene 1. American government is now run by the 'Goldman Conspiracy'

Oh, you really think just I'm plotting a television series? Or just paranoid, exaggerating this power grab? You better read "The Usual Suspects," Matthew Malone's brilliant article in Portfolio magazine: He "exposed" the "Goldman Sachs 'conspiracy' to take over the U.S. financial system." Read it in this context: America's financial sector has exploded from 19% of corporate profits in 1986 to 41% today, becoming a magnet for every wannabe billionaire. They know why Wall Street must control Washington.

Malone focuses on the incestuous "conspiracy" of Goldman alumni in Treasury, Bank of America, Merrill Lynch, AIG, Citigroup, Washington lobbyists and politicians.

Scene 2. Huge conflicts motivating Wall Street's 'Trojan Horse'

And just in case you think any emphasis on The Hammer's conflict of interest was invented purely to increase drama, please remember that he worked at Goldman for three decades after serving under Nixon. He got $38 million his last year as CEO in 2006 before becoming Treasury Secretary.

Then during the market meltdown six months ago the $700 million personal fortune he built at Goldman was threatened by Goldman's huge $20 billion derivatives exposure at AIG: Suddenly his responsibilities at Treasury merged with a strong self-interest in protecting his personal fortune. AIG was "saved."

Scene 3. Wall Street's 'quiet coup' also runs world's banking system

There's another equally disturbing expose in "The Quiet Coup," Simon Johnson's great article in Atlantic magazine. A former chief economist at the International Monetary Fund, Johnson also warns that America's "financial industry has effectively captured our government" and is "blocking essential reform."

Worse, he says that unless we break Wall Street's stranglehold (unlikely in the new Washington) we will be unable "to prevent a true depression," warning that "we're running out of time," echoing many of our predictions of the "Great Depression II" coming soon. See previous Paul B. Farrell.

Scene 4. Wall Street used the meltdown to take over America's government

Matt Taibbi, author of "The Great Derangement," captured this drama in a Rolling Stone piece, "The Big Takeover, how Wall Street insiders are using the bailout to stage a revolution." A must-read: "As complex as all the finances are, the politics aren't hard to follow. By creating a crisis that can only be solved by those fluent in a language too complex for ordinary people to understand, the Wall Street crowd has turned the vast majority of Americans into non-participants in their own political future. ... in the age of CDS and CBO, most of us are financial illiterates."

Wall Street "used the crisis to effect a historic, revolutionary change in our political system -- transforming a democracy into a two-tiered state, one with plugged-in financial bureaucrats above and clueless customers below."

Scene 5. How Obama is keeping alive Bush's 'disaster capitalism'

Back in 2007 at the start of the meltdown, Hank was misleading us in Fortune: "This is far and away the strongest global economy I've seen in my business lifetime." In the real world, Naomi Klein, author of "The Shock Doctrine: Rise of Disaster Capitalism," was warning us that "during boom times it's profitable to preach laissez faire, because an absentee government allows speculative bubbles."

But "when those bubbles burst, the ideology becomes a hindrance and goes dormant while big government rides to the rescue." Then, free-market "ideology will come roaring back when the bailouts are done. The massive debts the public is accumulating to bail out the speculators will then become part of a global budget crisis." TARP paybacks: Obama has a new "disaster capitalism."

Scene 6. Wall Street's CEOs rule like dictators in a banana republic

Seriously, here's how bad Taibbi sees it: "Paulson and his cronies turned the federal government into one gigantic half-opaque holding company, one whose balance sheet includes the world's most appallingly large and risky hedge fund, a controlling interest in a dying insurance giant, huge investments in a group of teetering megabanks, and shares here and there in various auto-finance companies, student loans, and other failing business."

And let's include $5.5 trillion in Fannie Mae and Freddie Mac. Wall Street's greed and stupidity resembles the self-destructive reigns of banana republic dictators.

Scene 7. Wall Street makes an un-American bet on 'disaster capitalism'

Today as you ponder buying some Goldman stock, remember, you're really betting that "disaster capitalism" is back, strong, tightening its stranglehold on Washington and on the American taxpayers, who will guarantee all Wall Street's future failures. Yes, this is un-American, but so what?

The "Goldman Conspiracy" is still probably a good short-term buy ... if you're interested in betting on America's new "democracy of capitalists, by capitalists, and for capitalists," with "The Conspiracy" leading the joint chiefs of this new mercenary army ... and it only took six short months for their "Quiet Coup!"

Scene 8. Banks recycle TARP money, pump earnings, cheat America

Here's how it worked: The Hammer conned a clueless Congress, then shelled out $350 billion of our taxpayer money (Helicopter Ben Bernanke helped by upping the ante with a couple trillion side-bet), buying toxic debt to save his ol' Wall Street buddies. They stopped lending and used the dough to doctor their balance sheets.

So no surprise that Goldman, Wells Fargo and J.P. Morgan Chase are now reporting "blockbuster" first-quarter earnings, says the New York Times, while just months ago "many of the nation's biggest banks were on life support."

Get it? They screwed taxpayers and borrowers so they can repay TARP with (you guessed it) our recycled TARP money. Now it's back to business-as-usual, with no restrictions on CEO pay and bonuses ... no thank-yous ... no admissions of guilt ... while some even arrogantly deny that they ever needed TARP money.

Scene 9. Wall Street's already set the stage for new disaster

Right after the election in November, at the peak of the banking crisis, when Hank, Goldman and the Wall Street mercenary armies were divvying up the $350 billion TARP money, we detailed 30 reasons for the "Great Depression II" likely coming around 2011. We quoted John Whitehead, former Goldman Sachs chairman, former chairman of the New York Fed, former Reagan deputy secretary of state. He warned America's problems will take years, burn trillions, result in massive deficits:

"This is a road to disaster," he said. "I've always been a positive person and optimistic, but I don't see a solution here." He did see a depression at the end of that road, one you can call the "Great Depression II."

Scene 10. Obama turned 'The Goldman Conspiracy' into a superpower

Do you see the parallels: Jack and Starkwood, Hank and Goldman? Jack's a great mythic hero. We need to believe a hero will defend the little guy, stand between us and total annihilation. But Jack Bauer's "dead." Yes, dead. Jack's not real. Never was "alive." Jack's a fiction, a figment of Main Street America's vivid imagination, the symbol of "hope" for a populist revolution. Hope that Jack, Barack or some other new hero will emerge, take power back from Wall Street and return it to the people.

Unfortunately that won't happen, folks. Yes, on TV Jack will come back from near-death, again. But in real life, Hank, Goldman and Wall Street's mercenaries are winning the war. Read and weep Portfolio's chilling finale: "Obama's victory and Geithner's appointment are the completion of Goldman's meticulously crafted plan to become a superpower. The firm now has the clout to impose its will on the financial markets, and the world."

GOP or Dems? Conservatives or liberals? It doesn't matter. We'll all controlled by "The Conspiracy." So why not surrender, let them have the power? The truth is, through their lobbyists and surrogates in Washington, they already rule America. Surrender is a mere formality.

Accept reality. Hold them accountable later. After the next crisis. After the next meltdown of disaster capitalism -- if there's anything left after the "Great Depression II" sweeps like a pandemic across the planet, consuming all economies, for a long time. But for now, Goldman and other banks may well be short-term buys. Just be ready to dump them in the near future ... a scenario that will be here sooner than you think.

See also Goldman Sachs aka "These F#@king Guys"


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Old News ;-)

[Oct 08, 2017] Financialization: theoretical analysis and historical perspectives by Costas Lapavitsas

Highly recommended!
The author introduces an important notion of 'financial expropriation' which is at the core of "casino capitalism". Role of finance as a mediator between people and privatized services led to extraction of new type of rent.
Notable quotes:
"... Financial capital permeates economic activity, and interacts with financial markets in ways capable of generating enormous profits but also precipitating global crises. ..."
"... The economic processes - and the social relations - characteristic of financialization represent a milestone in the development of capitalism. ..."
"... A long boom occurred, lasting until 1973-74, during which production became increasingly dominated by transnational monopolistic enterprises, while finance operated under a system of controls domestically and internationally. For nearly three decades, the US was the dominant economic force in global production and trade. ..."
"... . Since the 1970s, there have been profound changes in production methods deriving from information and telecommunications technologies. Transnational enterprises have become dominant over global production and international trade. The centre of gravity of global productive capacity has partly shifted from mature economies in the West toward rising economies in the East, primarily China. ..."
"... The most striking feature of the period, however, has been the rise of finance, the start of which can be usefully placed in the late 1970s. The financial sector had become progressively larger in the 1950s and 1960s, while still operating within the regulatory framework characteristic of the long post-war boom ..."
"... The three decades that followed have witnessed unprecedented expansion of financial activities, rapid growth of financial profits, permeation of economy and society by financial relations, and domination of economic policy by the concerns of the financial sector. At the same time, the productive sector in mature countries has exhibited mediocre growth performance, profit rates have remained below the levels of the 1950s and 1960s, unemployment has generally risen and become persistent, and real wages have shown no tendency to rise in a sustained manner. ..."
"... Bretton Woods had enforced the convertibility of the US dollar into gold at S35 to the ounce, thus fixing exchange rates during the long boom. Its collapse led to the gradual emergence of alternative international monetary arrangements based on the US dollar functioning as inconvertible quasi-world-money. The new arrangements have generated considerable instability of exchange and interest rates, thereby spurring the growth of international financial markets. ..."
"... Growth of international capital flows during the same period, partly in response to exchange and interest rate instability, has led to financialization in developing countries. ..."
"... The ascendancy of central banks is hardly surprising, since financialization in general would have been impossible without active and continuous intervention by the state. Financialization has depended on the state to deregulate the financial system with regard to prices, quantities, functions and cross-border flows of capital. Equally, financialization has depended on the state to regulate the adequacy of own capital, the management of risk, and the rules of competition among financial institutions. ..."
"... Ultimately, however, the rise of finance has resulted from changes deep within capitalist accumulation. Three characteristic tendencies of accumulation in mature countries have shaped financialization as a structural transformation of contemporary capitalism. First, non-financial enterprises have become increasingly involved in financial processes on an independent basis, often undertaking financial market trans-actions on own account. The financialization of industrial and commercial enterprises has affected their profitability, internal organization, and investment outlook. Non-financial enterprises have become relatively more remote from banks and other financial institutions. Second, banks have focused on transacting in open financial markets with the aim of making profits through financial trading rather than through outright borrowing and lending. At the same time banks have turned toward individual and household income as a source of profit, often combining trading in open markets with lending to households, or collecting household savings. Third, individuals and households have come increasingly to rely on the formal financial system to facilitate access to vital goods and services, including housing, education, health, and transport. The savings of households and individuals have also been increasingly mobilized by the formal financial system. ..."
"... Financialization reflects a growing asymmetry between production and circulation - particularly the financial component of the latter - during the last three decades. The asymmetry has arisen as the financial conduct of non-financial enterprises, banks and households has gradually changed, thus fostering a range of aggregate phenomena of financialization. A telling aspect of the transformation has been the rise of profits accruing through financial transactions, including new forms of profit that could even be unrelated to surplus value. This process is summed up as 'financial expropriation' in subsequent chapters. ..."
"... The most important development in the evolution of derivatives trading in recent years has been the move to cash settlement of the contract, thus freeing the counter- parties from the need to deliver the underlying asset. On this basis, derivatives have become essentially a punt on the future direction of the price of the underlying asset that is subsequently settled in cash. ..."
"... In effect, the derivative has become what could be called a contract-for-differences - an agreement between buyer and seller to exchange the difference between the current value of a share, currency, commodity, or index and its value at maturity of the contract. ..."
"... the core of the enormously expanded derivatives markets lie a few international banks, which have also been one of the driving forces of financialization. Banks are the pillar of contemporary of the 1980s to the end of the 2000s the notional outstanding appears to have doubled every two or three years for most of the period. ..."
"... These dealers werelarge global banks that were also fundamental to financialization. The same banks were among the largest participants in the exchange-traded markets, though data is hard to obtain for the latter. There is no doubt, however, that the large dealer banks were heavily involved in the management of the 'exchanges', including determination of risk management procedures and 'margin' levels. ..."
"... In short, the banks that dominate derivatives trading are also the banks that set the interest rate at which derivatives are traded and valued, although the banks are not obliged to trade at the declared rate. No wonder, then, that one of the most egregious scandals of financialization appears to be the manipulation of the LIBOR by large dealer banks, a matter which has been under police investigation since 2010. ..."
"... The problem is not a few 'rotten apples' amidst the LIBOR committee, criminally colluding with each other and with brokers to influence the LIBOR. Rather, a deeply flawed structure has allowed dealer banks to dominate derivatives markets while effectively manipulating the terms of derivatives trading. ..."
Jan 14, 2014 | www.amazon.com

Extracted from the chapter 1 of this book Profiting Without Producing How Finance Exploits Us All Costs

1. Introduction: the rise and rise of finance

The crisis of the 2000s will prove fertile ground for economic historians for decades to come with regard to both its causes and consequences. However, the crisis has already had one definite outcome: it has finally lifted the curtain on the transformation of mature and developing capitalist economies during the last three decades, confirming the pivotal role of finance, both domestically and internationally. Financial capital permeates economic activity, and interacts with financial markets in ways capable of generating enormous profits but also precipitating global crises. In terms that will be used throughout this book, contemporary capitalism is 'financialized' and the turmoil commencing in 2007 is a crisis of 'financialization'.

The economic processes - and the social relations - characteristic of financialization represent a milestone in the development of capitalism. The catalyst of crisis in 2007 was speculative mortgage lending to the poorest workers in the US during the 2000s, the loans being subsequently traded in 'securitized' form in global financial markets. It is hard to exaggerate what an extraordinary fact this is. Under conditions of classical, nineteenth-century capitalism it would have been unthinkable for a global disruption of accumulation to materialize because of debts incurred by workers, including the poorest. But this is precisely what has happened under conditions of financialized capitalism, an economic and social system that is much more sophisticated than its nineteenth-century predecessor.

Financialization has emerged gradually during recent decades, and its content and implications are the focus of this book. To be sure, capitalist economies are continually restructured due to pressures of competition and to the underlying drive to maintain profitability. However, some transformations have a distinctive historical significance, and financialization is one of those. The change that has taken place in mature capitalist economies and societies since the late 1970s requires appropriate attention to be paid to finance. Consider the following features of financialization to substantiate this claim. Context and structural aspects of financialization

Mature capitalism has been historically marked by deep transformations of economy and society. Toward the end of the nineteenth century, for instance, there emerged new methods of production in heavy industry, accompanied by the rise of monopolistic, joint-stock enterprises. The change coincided with a long depression, 1873-96, and led to a rebalancing of global productive power away from Britain and toward the US and Germany. Similarly, at the end of the Second World War, mass consumption emerged across several developed countries based on methods of mass production. A long boom occurred, lasting until 1973-74, during which production became increasingly dominated by transnational monopolistic enterprises, while finance operated under a system of controls domestically and internationally. For nearly three decades, the US was the dominant economic force in global production and trade.

The transformation represented by financialization is of a similar order of importance. Since the 1970s, there have been profound changes in production methods deriving from information and telecommunications technologies. Transnational enterprises have become dominant over global production and international trade. The centre of gravity of global productive capacity has partly shifted from mature economies in the West toward rising economies in the East, primarily China. Meanwhile, the institutional framework of capitalist activity has been altered as deregulation has prevailed in important markets, above all, for labour and finance. Throughout this period, accumulation has lacked dynamism in mature countries, inequality was exacerbated, and crises have become sharper and more frequent.

The most striking feature of the period, however, has been the rise of finance, the start of which can be usefully placed in the late 1970s. The financial sector had become progressively larger in the 1950s and 1960s, while still operating within the regulatory framework characteristic of the long post-war boom. However, even by the late 1970s, the domestic and international importance of finance remained modest.

The three decades that followed have witnessed unprecedented expansion of financial activities, rapid growth of financial profits, permeation of economy and society by financial relations, and domination of economic policy by the concerns of the financial sector. At the same time, the productive sector in mature countries has exhibited mediocre growth performance, profit rates have remained below the levels of the 1950s and 1960s, unemployment has generally risen and become persistent, and real wages have shown no tendency to rise in a sustained manner.

An asymmetry has emerged between the sphere of production and the ballooning sphere of circulation. The rise of finance has been predicated 011 a radical alteration of the monetary framework of capitalist accumulation, both internationally and domestically. International monetary conditions have been stamped by the collapse of the Bretton Woods Agreement in 1971-73. Bretton Woods had enforced the convertibility of the US dollar into gold at S35 to the ounce, thus fixing exchange rates during the long boom. Its collapse led to the gradual emergence of alternative international monetary arrangements based on the US dollar functioning as inconvertible quasi-world-money. The new arrangements have generated considerable instability of exchange and interest rates, thereby spurring the growth of international financial markets.

Growth of international capital flows during the same period, partly in response to exchange and interest rate instability, has led to financialization in developing countries. Domestic monetary conditions, in contrast, have been marked by the steady accumulation of power by central banks as controllers of credit money backed by the state. Central banks have emerged as the dominant public institution of financialization, the defender of the interests of the financial sector.

The ascendancy of central banks is hardly surprising, since financialization in general would have been impossible without active and continuous intervention by the state. Financialization has depended on the state to deregulate the financial system with regard to prices, quantities, functions and cross-border flows of capital. Equally, financialization has depended on the state to regulate the adequacy of own capital, the management of risk, and the rules of competition among financial institutions. Even more decisively, financialization has depended on the state to intervene periodically to underwrite the solvency of banks, to provide extraordinary liquidity and to guarantee the deposits of the public with banks.

Ultimately, however, the rise of finance has resulted from changes deep within capitalist accumulation. Three characteristic tendencies of accumulation in mature countries have shaped financialization as a structural transformation of contemporary capitalism. First, non-financial enterprises have become increasingly involved in financial processes on an independent basis, often undertaking financial market trans-actions on own account. The financialization of industrial and commercial enterprises has affected their profitability, internal organization, and investment outlook. Non-financial enterprises have become relatively more remote from banks and other financial institutions. Second, banks have focused on transacting in open financial markets with the aim of making profits through financial trading rather than through outright borrowing and lending. At the same time banks have turned toward individual and household income as a source of profit, often combining trading in open markets with lending to households, or collecting household savings. Third, individuals and households have come increasingly to rely on the formal financial system to facilitate access to vital goods and services, including housing, education, health, and transport. The savings of households and individuals have also been increasingly mobilized by the formal financial system.

The transformation of the conduct of non-financial enterprises, banks and households constitutes the basis of financialization. Examining these relations theoretically and empirically, and thus establishing the deeper content of financialized capitalism, is the main task of this book. Hie concepts and methods deployed for the purpose derive from Marxist political economy. To summarize, the capitalist economy is treated as a structured whole that comprises different spheres of activity - namely production, circulation, and distribution - among which production is dominant. Both production and circulation possess their own internal logic, even though the two spheres are inextricably linked. Production creates value; its motive is profit (surplus value) deriving from the exploitation of labour; its aim is the accumulation of capital. Circulation does not create value; it results in profits, but these derive mostly - though not exclusively - from redistributing surplus value. Finance is a part of circulation, but also possesses mechanisms standing aside commodity trading and its corresponding flows of money. The traded object of finance is loanable money capital, the cornerstone of capitalist credit. Production, circulation and distribution give rise to class relations, pivoting on the ownership of the means of production, but also determined by the appropriation of profits.

Financialization reflects a growing asymmetry between production and circulation - particularly the financial component of the latter - during the last three decades. The asymmetry has arisen as the financial conduct of non-financial enterprises, banks and households has gradually changed, thus fostering a range of aggregate phenomena of financialization. A telling aspect of the transformation has been the rise of profits accruing through financial transactions, including new forms of profit that could even be unrelated to surplus value. This process is summed up as 'financial expropriation' in subsequent chapters. New social layers have emerged as financial profit has burgeoned.

Financial markets and banks

It might seem paradoxical at first sight to associate financialization with the conduct of banks, given that the rise of finance has had far more extravagant aspects. Financializa- tion, for instance, appears to relate more to the global spread of financial markets, the proliferation of traded financial instruments, and the emergence of novel, market-re- lated financial transactions, rather than to the behaviour of banks. Compared to the expanding and rapidly changing world of financial markets, banks seem old-fashioned and even staid. And yet, as is shown in the rest of the book, banks have been a decisive factor in the financialization of capitalism. Banks remain the cornerstone of contempo- rary finance and several of the most visible market-related features of financialization emanate from banks. It is not accidental that the crisis of financialization in the late 2000s has revolved around banks rather than other financial institutions.

To establish the importance of banks in the course ot financialization consider some general features of the derivatives markets, arguably the most prominent finan- cial markets of recent years.1 Simply put, a derivative is a contract that establishes a claim on an underlying asset - or on the cash value of that asset - which must be executed at some definite point in the future. The underlying asset could be a com- modity, such as wheat; or another financial asset, such as a bond; or a financial price, for example the value of a currency; or even an entirely non-economic entity like the weather. The units of the underlying asset stated on the contract and multiplied by the spot price define the notional value of the derivative. Historically, derivatives have been associated with agricultural production: a forward or a futures contract would specify the quantity and price of an agricultural commodity that would be delivered at a definite point in the future. A forward contract would be a private agreement between two parties agreeing to trade some specific output at a certain price and time (e.g., the wheat produced by one of the contracting parties); a futures contract would also be a private agreement between two parties but the commodity traded would be generic (e.g., any wheat of a certain type and quality).

Capitalist farmers could use derivatives to hedge against unforeseen fluctuations in the price of output. In addition to hedging, derivatives could also be used to speculate on the future movement of prices, or to arbitrage among different markets exhibiting unwarranted price divergences in the underlying asset. Thus, the standard way of intro- ducing derivatives in textbooks is as instruments that make for hedging, speculation or arbitrage among market traders.* Derivatives markets are typically perceived as spontaneously emerging entities which supplement the services offered by the markets in underlying assets, and hence improve the efficiency of the capitalist economy. Even with this simple definition of derivatives, a key distinction is apparent - one between a contract that meets the specific conditions of two counterparties (a for- ward) and a contract that is more generic and could be traded freely in open mar- kets (a future). The former is similar to an over-the-counter derivative, the latter to an exchange-traded derivative. They represent two different ways of undertaking the trading process - the forward depends on the specific decisions of the trading parties, the future depends on the impersonal and 'third' institution of the 'exchange' which organizes the trading. The exchange' standardizes futures contracts, steps between buyers and sellers to clear purchases and sales by the counterparties and, critically, demands a daily 'margin' in cash as protection from failure to meet contracted obli- gations at maturity.

The most important development in the evolution of derivatives trading in recent years has been the move to cash settlement of the contract, thus freeing the counter- parties from the need to deliver the underlying asset. On this basis, derivatives have become essentially a punt on the future direction of the price of the underlying asset that is subsequently settled in cash. Consequently, the trading of derivatives has come to include underlying assets that could never be delivered, such as a stock market index.

In effect, the derivative has become what could be called a contract-for-differences - an agreement between buyer and seller to exchange the difference between the current value of a share, currency, commodity, or index and its value at maturity of the contract. If the difference is positive, the seller pays the buyer; if it is negative, the buyer is the one who loses money. Profit, in this context, depends on the difference between a fixed financial parameter and its uncertain value in the future.4

Spurred by cash settlement, the growth ol derivatives markets in the years of financialization has been breathtaking: from practical irrelevance in the 1980s, their notion- al sum in 2011 was in the vicinity of 700 trillion US dollars for over-the-counter and probably a similar sum for exchange-traded derivatives.' Yet, at the core of the enormously expanded derivatives markets lie a few international banks, which have also been one of the driving forces of financialization. Banks are the pillar of contemporary of the 1980s to the end of the 2000s the notional outstanding appears to have doubled every two or three years for most of the period.

Consider now the role of banks in these enormous markets. The importance of banks is most apparent in the over-the-counter market, which naturally lacks the organizing role played by the exchange' in the exchange-traded market. Banks func- tion as market-makers, that is, as agents that stand ready to buy and sell in the over- the-counter market; they are the dealers that are integral to market functioning. Banks also provide the necessary market infrastructure through vital market institutions such as the International Swaps and Derivatives Association (ISDA). Table 2 classifies over-the-counter transactions in terms of the counterparties, which are split into dealer banks, other financial institutions, and non-financial customers.8

... ... ...

Approximately US sjotn is not allocated either because it refers to commodity derivatives, or because it represents adjustments in BIS statistics. In practice, over-the-counter derivatives function as banking instruments. Almost a third of the trading in over-the-counter derivatives in 2011 took place in dealer-to-deal- er transactions, while all transactions had at least one dealer bank as a counterparty. There were, perhaps, seventy sizeable dealer banks in about twenty countries transact- ing with many thousands of end users of derivatives; indeed, concentration appears to have been even greater than that, and perhaps fifteen to twenty dealers controlled the overwhelming bulk of over-the-counter trading across the world."

These dealers werelarge global banks that were also fundamental to financialization. The same banks were among the largest participants in the exchange-traded markets, though data is hard to obtain for the latter. There is no doubt, however, that the large dealer banks were heavily involved in the management of the 'exchanges', including determination of risk management procedures and 'margin' levels.

Given the dominant presence of banks in the derivatives markets, it is hardly surprising that banks have encouraged the broadening of derivatives trading to include underlying assets with which they are most familiar - financial securities. Table 2 shows that less that ю percent of over-the-counter transactions actually involved non-financial enterprises: the great bulk comprised transactions that took place among financial institutions, and thus referred mostly to financial derivatives. In fact, growth in the derivatives markets has generally been dominated by inter- est-rate and foreign-exchange derivatives; since the early 2000s the strongest growth has been in credit default swaps (CDS), which are briefly discussed in Part III of this book.10

The price of financial derivatives depends, among other factors, on the rate of interest, and the rate that is typically used to value most financial derivatives is the London Interbank Offered Rate (LIBOR). The LIBOR is determined by a committee comprising several of the banks that dominate the derivatives markets; its determination involves the simple averaging of interest rates (excluding outliers) submitted by LIBOR committee banks daily. These are rates at which the LIBOR banks think that they can borrow from each other, although no LIBOR bank is obliged to undertake borrowing at the submitted rate. The LIBOR acts as a rate of interest that determines the value of derivatives, but it is not a rate of interest in the normal sense since no actual transactions need to take place at the rates declared by the committee banks.

In short, the banks that dominate derivatives trading are also the banks that set the interest rate at which derivatives are traded and valued, although the banks are not obliged to trade at the declared rate. No wonder, then, that one of the most egregious scandals of financialization appears to be the manipulation of the LIBOR by large dealer banks, a matter which has been under police investigation since 2010.

The problem is not a few 'rotten apples' amidst the LIBOR committee, criminally colluding with each other and with brokers to influence the LIBOR. Rather, a deeply flawed structure has allowed dealer banks to dominate derivatives markets while effectively manipulating the terms of derivatives trading.

Banks are at the heart of the derivatives markets which have been such a prominent feature of financialization. Derivatives markets rely on banks, in particular on the price-making skills and general organizational capabilities of banks. Indeed, banks are so dominant in derivatives markets that they are even capable of manipulating the key rate on the basis of which derivatives prices are formed. The vast growth of derivatives markets reflects in part the turn of banks toward trading in open financial markets, which is one of the fundamental tendencies of financialization. In sum, at the root of financialization lie the vast banks of mature and other economies. The theoretical and empirical analysis of financialization in the rest of this book, therefore, focuses on banks as well as non-financial enterprises and households.

[Oct 07, 2017] Finances hold on our everyday life must be broken by Costas Lapavitsas

Highly recommended!
Yves Smith's ebook is available free here. It covers the same set of topics and is useful add on to Costas Lapavitsas book.
Notable quotes:
"... Financialisation represents a historic and deep-seated transformation of mature capitalism. Big businesses have become "financialised" as they have ample profits to finance investment, rely less on banks for loans and play financial games with available funds. Big banks, in turn, have become more distant from big businesses, turning to profits from trading in open financial markets and from lending to households. Households have become "financialised" too, as public provision in housing, education, health, pensions and other vital areas has been partly replaced by private provision, access to which is mediated by the financial system. Not surprisingly, households have accumulated a tremendous volume of financial assets and liabilities over the past four decades. ..."
"... Financialisation has also created new forms of profit associated with financial markets and transactions. Financial profit can be made out of any income, or any sum of money that comes into contact with the financial sphere. Households, for example, generate profits for finance as debtors (mostly by paying interest on mortgages) but also as creditors (mostly by paying fees and charges on pension funds and insurance). Finance is not particular about how and where it makes its profits, and certainly does not limit itself to the sphere of production. It ranges far and wide, transforming every aspect of social life into a profit-making opportunity. ..."
"... Financialised capitalism is, thus, a deeply unequal system, prone to bubbles and crises – none greater than that of 2007-09. What can be done about it? The most important point in this respect is that financialisation does not represent an advance for humanity, and very little of it ought to be preserved. Financial markets are, for instance, able to mobilise advanced technology employing some of the best-trained physicists in the world to rebalance prices across the globe in milliseconds. This "progress" allows financiers to earn vast profits; but where is the commensurate benefit to society from committing such expensive resources to these tasks? ..."
"... The debate should focus on why neoliberalism was seen as the panacea to the relatively socialist post-War consensus. Neoliberalism is an ideology which has not even begun to be deconstructed. Like religion, the myths (concerning deficits and debt, for example) have been exposed here in CiF but not the global public -- and must be eventually. ..."
"... Big Brother=Neoliberalism=The Market=The Party=Enforcement ..."
"... Don't delude yourself. A capitalist "society" must have control over its citizens as intensive as a socialist one - just look at GCHQ/NSA. That it is exercised through markets and advertising instead of propaganda is neither here nor there. ..."
"... Thatcher's and Reagan's vicious, vile strikebreaking and the support they got from the supposedly free press and supposedly impartial judiciary in that is a good example. ..."
"... "The right way to think about it is that the financial industry must be doing something incredibly useful or it would not exist." What a ridiculous thing to say. By the same reasoning both bubonic plague and child abusers are both doing something incredibly useful, otherwise they would not exist. ..."
"... Classical economics generally sees things the way you do, and attempts to match up economics with reality. Neoclassical economics on the other hand, which is the system we're currently using, has little concern with reality. So the specific problem involves our economic system diverging from reality. ..."
"... Compounding factors involve the sociopathic nature of the individuals involved. For example, we think nothing about starting a war (generating profit for our military machine), then rebuilding the ravaged country (generating profit for our construction companies). In neoclassical economics that's just damned good business (the banks and corporations taking profits, the taxpayer footing the bill). ..."
"... There have always been alpha males and alpha females even, people who are very competitive, workaholics, who are leaders, who must be in charge. ..."
"... I think the difference in the last 30 years was Thatcherism and in very short order Reaganism. Adam Curtis says that Thatcher and her campaign manager were ardent anti-communists, they saw Britain in the grip of the unions as a kind of moral decay rotting the nation from the inside out (the enemy within) and they were both obsessed with Churchill, so they embarked on a Methodist 'the devil makes work for idle hands' market philosophy aimed at encouraging people to be self-sufficient, independent, have Victorian values, be as successful as possible and all that stuff. ..."
"... I think another thing is that capitalism then was still in its infancy of the turbo-on-steroids stage. For that cancer to truly metastasize we needed the personal computer network revolution that enabled globalisation, ..."
"... I agree that financialisation is a parasitic activity that will bring the body politic to its knees - and in the not too near future. This is capitalism that really doesn't give f**k about the environment or anyone who is not earning these obscene bucks shuffling electronic wizardry around to nobody's benefit but their own. ..."
"... Whose value system is overly competitive with the desire to win.. How can it be otherwise when we, ourselves, have brainwashed the children since the 1980s. We have given them Gameboys, Xboxes and the WoW where the emphasis is on winning. Play this for hours every day and the message becomes ingrained -- WIN ..."
"... The USSR had to be heavily militarized because its very existence depended on being able to defend itself against the aggressive USA and its little helpers, Nato-countries. It was surrounded by US military bases. That is the same US that went and murdered millions in SE Asia to "fight Communism". ..."
"... The article is about a global issue, not only your backyard. The people of UK can consider themselves lucky compared with billions of others. But what would you care. ..."
"... The financial sector, CEOs, oligarchs etc run on good old fashioned greed - a commodity not about to run out anytime soon. Is it even 'reversible' ? ..."
Jan 01, 2014 | www.theguardian.com

Finance's hold on our everyday life must be broken The rampant capitalism that has brought the market into every corner of society needs to be reined in 'Financial calculation evaluates everything in pennies and pounds, transforming the most basic goods – above all, housing – into "investments".'

The rampant capitalism that has brought the market into every corner of society needs to be reined in

The mature economies of the modern world, particularly the United States and Britain, are often described as "financialised". The term reflects the ascendancy of the financial sector. Even more important, it conveys the penetration of the financial system into every nook and cranny of society, including housing, education, health and other areas of life that were previously relatively immune.

Evidence that financialisation represents a deep transformation of mature economies is offered by the global crisis of 2007-09 . The crisis originated in the elephantine US financial system, and was associated with speculation in housing. For a brief period it led to serious questioning of mainstream economic theory and policy: how to confront the turmoil, and what to do about the diseased financial system; are new economic theories needed? However, after six years it is clear that very little has changed. Financialisation is here to stay.

Consider, for instance, the policies to confront the crisis. First, public funds were injected into banks to boost capital. Second, public liquidity was made available to banks to sustain their operations. Third, public interest rates were driven to zero to enable banks to make secure profits by lending to their own customers at higher rates.

This extraordinary public largesse towards private banks was matched by austerity and wage reductions for workers and households. As for restructuring finance, nothing fundamental has taken place. The behemoths that continue to dominate the global financial system operate in the knowledge that they enjoy an unspoken public guarantee. The unpalatable reality is that financialisation will persist, despite its costs for society.

Financialisation represents a historic and deep-seated transformation of mature capitalism. Big businesses have become "financialised" as they have ample profits to finance investment, rely less on banks for loans and play financial games with available funds. Big banks, in turn, have become more distant from big businesses, turning to profits from trading in open financial markets and from lending to households. Households have become "financialised" too, as public provision in housing, education, health, pensions and other vital areas has been partly replaced by private provision, access to which is mediated by the financial system. Not surprisingly, households have accumulated a tremendous volume of financial assets and liabilities over the past four decades.

The penetration of finance into the everyday life of households has not only created a range of dependencies on financial services, but also changed the outlook, mentality and even morality of daily life. Financial calculation evaluates everything in pennies and pounds, transforming the most basic goods – above all, housing – into "investments". Its logic has affected even the young, who have traditionally been idealistic and scornful of pecuniary calculation. Fertile ground has been created for neoliberal ideology to preach the putative merits of the market.

Financialisation has also created new forms of profit associated with financial markets and transactions. Financial profit can be made out of any income, or any sum of money that comes into contact with the financial sphere. Households, for example, generate profits for finance as debtors (mostly by paying interest on mortgages) but also as creditors (mostly by paying fees and charges on pension funds and insurance). Finance is not particular about how and where it makes its profits, and certainly does not limit itself to the sphere of production. It ranges far and wide, transforming every aspect of social life into a profit-making opportunity.

The traditional image of the person earning financial profits is the "rentier", the individual who invests funds in secure financial assets. In the contemporary financialised universe, however, those who earn vast returns are very different. They are often located within a financial institution, presumably work to provide financial services, and receive vast sums in the form of wages, or more often bonuses. Modern financial elites are prominent at the top of the income distribution, set trends in conspicuous consumption, shape the expensive end of the housing market, and transform the core of urban centres according to their own tastes.

Financialised capitalism is, thus, a deeply unequal system, prone to bubbles and crises – none greater than that of 2007-09. What can be done about it? The most important point in this respect is that financialisation does not represent an advance for humanity, and very little of it ought to be preserved. Financial markets are, for instance, able to mobilise advanced technology employing some of the best-trained physicists in the world to rebalance prices across the globe in milliseconds. This "progress" allows financiers to earn vast profits; but where is the commensurate benefit to society from committing such expensive resources to these tasks?

Financialisation ought to be reversed. Yet such an entrenched system will never be reversed by regulation alone. Its reversal also requires the creation of public banking that would operate with a new spirit of public service. It also needs effective controls to be applied to private banking as well as to international flows of capital. Not least, it requires new methods of meeting the financial requirements of households, as well as of small and medium enterprises. There is an urgent need for communal and associational ways to provide housing, education, health and other basic goods and services for working people, breaking the hold of finance on everyday life.

Ultimately, financialisation will not be reversed without an ambitious programme to re-establish the superiority of the social over the private, and the collective over the individual in contemporary society. Reversing financialisation is about reining in the rampant capitalism of our day.

Costas Lapavitsas's latest book is Profiting Without Producing: How Finance Exploits Us All

ATrueFinn -> Mizzentop , 3 Jan 2014 08:11

The Berlin Wall kept people in - that was its primary purpose.

Few people know what the Berlin Wall was. It was a wall around West Berlin, which was not a part of West Germany but an occupied territory within the GDR. An American president called himself a Berliner, which means a Berliner Pfannkuchen, i.e. a doughnut (technically, not by shape and content.)

But whatever. The good people of the UK nowadays seem to wish there was a Rumanian Wall and a Bulgarian Wall to keep people in. I gather quite a few in the former West Germany would like a wall to keep the Ossies in.

HolyInsurgent -> AhBrightWings , 2 Jan 2014 22:51

Why Reagan and Thatcher were allowed to gut functioning...societies so that a handful could prosper remains the great mystery.

On the contrary. Reagan and Thatcher were convenient advocates of a growing conservative consensus. The convergence of institutions must have begun before their tenure because neoliberalism became the dominant consensus by the time of their leadership.

The debate should focus on why neoliberalism was seen as the panacea to the relatively socialist post-War consensus. Neoliberalism is an ideology which has not even begun to be deconstructed. Like religion, the myths (concerning deficits and debt, for example) have been exposed here in CiF but not the global public -- and must be eventually.

Big Brother=Neoliberalism=The Market=The Party=Enforcement

Gegenbeispiel -> Mizzentop , 2 Jan 2014 17:19

Don't delude yourself. A capitalist "society" must have control over its citizens as intensive as a socialist one - just look at GCHQ/NSA. That it is exercised through markets and advertising instead of propaganda is neither here nor there.

Thatcher's and Reagan's vicious, vile strikebreaking and the support they got from the supposedly free press and supposedly impartial judiciary in that is a good example.

Mowglia -> JohnJohnJohnJohn , 2 Jan 2014 15:49

"The right way to think about it is that the financial industry must be doing something incredibly useful or it would not exist." What a ridiculous thing to say. By the same reasoning both bubonic plague and child abusers are both doing something incredibly useful, otherwise they would not exist.

Perhaps you could explain to me what exactly it is that these socialists are doing that is so useful?

Mowglia -> londongapp , 2 Jan 2014 15:40

It is the essential difference between wealth and money that is constantly missed by Politicians and Economists.

Classical economics generally sees things the way you do, and attempts to match up economics with reality. Neoclassical economics on the other hand, which is the system we're currently using, has little concern with reality. So the specific problem involves our economic system diverging from reality.

Compounding factors involve the sociopathic nature of the individuals involved. For example, we think nothing about starting a war (generating profit for our military machine), then rebuilding the ravaged country (generating profit for our construction companies). In neoclassical economics that's just damned good business (the banks and corporations taking profits, the taxpayer footing the bill).

Mowglia -> Claire Bouskill , 2 Jan 2014 15:25

isnt it amazing that Marx predicted over 150 years ago that the greedy capitalists would be their own gravediggers

I never read Marx, although it sounds like he knew a bit about human nature and simply took the system to its logical conclusion. I'm not anti-capitalism. I believe it was a useful development in human history, similar to religion and feudalism. But now it's time to say goodbye and find a new way of doing things. There's no point in flogging a dead horse, unless you're part of the 1%.
MereMortal -> ScroogeJr , 2 Jan 2014 14:47
I haven't really given that aspect of it much thought. When I was growing up, we played Monopoly or Risk or Cluedo, we went outside, we raced, played cowboys and indians and the rest.

There have always been alpha males and alpha females even, people who are very competitive, workaholics, who are leaders, who must be in charge.

I think the difference in the last 30 years was Thatcherism and in very short order Reaganism. Adam Curtis says that Thatcher and her campaign manager were ardent anti-communists, they saw Britain in the grip of the unions as a kind of moral decay rotting the nation from the inside out (the enemy within) and they were both obsessed with Churchill, so they embarked on a Methodist 'the devil makes work for idle hands' market philosophy aimed at encouraging people to be self-sufficient, independent, have Victorian values, be as successful as possible and all that stuff.

I can well believe that, it's just that they stirred up the whole thing without ever thinking through the terrible potential downsides. That's a major problem with politics, fanatical zealots who claim to have the solution for all the problems a nation faces.

I think another thing is that capitalism then was still in its infancy of the turbo-on-steroids stage. For that cancer to truly metastasize we needed the personal computer network revolution that enabled globalisation, partly because then, it was possible for people to source more and more and more income streams without the commensurate ability to truly monitor the quality of the investments or to manage the human relations that actually motivate people to feel appreciated and to do good work.

That's my sixpence worth anyway.

zavaell , 2 Jan 2014 14:34
Fighting talk. I agree that financialisation is a parasitic activity that will bring the body politic to its knees - and in the not too near future. This is capitalism that really doesn't give f**k about the environment or anyone who is not earning these obscene bucks shuffling electronic wizardry around to nobody's benefit but their own.

Maybe regulation per se is not the main answer, but it sure as hell needs a politician to stand up and say what is said in this article.

ScroogeJr -> MereMortal , 2 Jan 2014 12:46
Whose value system is overly competitive with the desire to win.. How can it be otherwise when we, ourselves, have brainwashed the children since the 1980s. We have given them Gameboys, Xboxes and the WoW where the emphasis is on winning. Play this for hours every day and the message becomes ingrained -- WIN
ATrueFinn -> Mizzentop , 2 Jan 2014 09:37

The failure of the USSR owed much to its militarism but don't you see that a society like that HAS to be heavily militarized because its very existence depends on having total control over its citizens.

The USSR had to be heavily militarized because its very existence depended on being able to defend itself against the aggressive USA and its little helpers, Nato-countries. It was surrounded by US military bases. That is the same US that went and murdered millions in SE Asia to "fight Communism".

TwoWolvesAndALamb , 2 Jan 2014 08:48
You are spot on with this:

Consider, for instance, the policies to confront the crisis. First, public funds were injected into banks to boost capital. Second, public liquidity was made available to banks to sustain their operations. Third, public interest rates were driven to zero to enable banks to make secure profits by lending to their own customers at higher rates.

Yet it seems you still blame the private sector for accepting the favorable situation rather than the state for causing it:

Ultimately, financialization will not be reversed without an ambitious program to re-establish the superiority of the social over the private, and the collective over the individual in contemporary society.

A shift towards the rights of the individual would see the state have less power to bail out the banks. Your solution is to give the source of the problem yet more power. The banks couldn't bail themselves out - they needed the state to take the funds from the citizens. Why do you find the state so blameless as to suggest they need more influence?

theonionmurders -> selfraisingfred , 2 Jan 2014 08:40

Remind me, because maybe I missed something, but which bit of the post-war German economic miracle had them seeking a bailout from the IMF?

I'll tell you. West Germany was allowed to default twice on massive post-war loans in 1946 and 1948 thereby requiring IMF loans to finance it's day-to-day running.

TheGreenLion -> Tenthred , 2 Jan 2014 08:40
My current company needs debt to pay for the machinery and running costs to create products. These are sold for profit and the debt repaid. Without the initial debt the products, the salaries, the taxable income would not exist. Debt is banned in Islamic countries – it is not a coincidence that from being streets behind 1000 years ago, the Western world is now considerably more developed
theonionmurders -> Trilbey , 2 Jan 2014 08:23
Yves Smith's ebook is available free here.
harlequinmod -> JohnJohnJohnJohn , 2 Jan 2014 08:09
I think what sticks in the craw of socialists is that these financial corporations and people working in finance would be out of work if it hadn't been for Government intervention and taxpayer money. There is a real irony in having had to listen how great Thatcher was for breaking the unions, smashing nationalized industries on the basis of free market principles only to have to bail out the biggest advocates of the free market. Especially when the cause of the longest and deepest recession in memory was caused by those financial corporations and people working in finance.

Do I envy these people? Not really, they are on the whole treated like sh1t and they are so attached to their money that they are like mewling, whimpering children when faced with the threat of losing their jobs.

Claire Bouskill -> Mowglia , 2 Jan 2014 07:16
Isn't it amazing that marx predicted over 150 years ago that the greedy capitalists would be their own gravediggers as they continue to pauperize the workers to extract more profit , drive down wages and replace jobs with machinery. Forgetting it is the workers who buy the commodities and if they cannot buy , the system will collapse in on itself
QueenBoadicea -> Tenthred , 2 Jan 2014 07:13
So will the likes of Wonga and other payday lenders should be closed down and the directors face court proceedings for usury?

This is an interesting article: http://unemploymentmovement.com/forum/chat-a-rap/5926-welcome-to-the-usury-kingdom

But seeing as the Anglican church has shares in Wonga, this made me wake up to the hypocrisy of the church http://cesc.net/scholarweb/swabey/swabey.pdf

Mizzentop -> Gegenbeispiel , 2 Jan 2014 06:28
Your problem is that that you may desire a non-aspirational society, but that's just not how people are. The human spirit is aspirational and competitive - whether you think that's desirable or not doesn't matter. Consequently, the type of society you want is only possible if that human spirit can be quashed and contained.

The failure of the USSR owed much to its militarism but don't you see that a society like that HAS to be heavily militarised because its very existence depends on having total control over its citizens. Without guns and walls, people would have just refused to be cowed and would have left.

In simple terms, human beings are imperfect individuals driven by passions, ambitions and desires which result in bad things happening but more often good things. Whether we like the fact that we are imperfect is immaterial - we are what we are and no enforced system which seeks to contain our individuality will ever succeed in the long run.

Yossarian247 -> Hikeybikeychick , 2 Jan 2014 05:47
As bullydoggy says - its land (and I would add debt too).

This Nationwide graph shows price rising 2.7 times adjusted for inflation from q3 1983 – q3 2007. This is 6.5 times in nominal terms.

Residential Land Prices
- Looking at figures for South East England from the same period aug 1983-july 07, it increases further, 13 times nominally - and this was an area with the 3rd lowest increase in nominal terms! (At the bottom of the page - 'download the full residential land value data')

The excellent film RealEstate4Ransom may help explain things, or the transcript may be quicker.

Also a less mentioned part of the increase in 'value' is as Positive Money point out the amount of debt created to purchase one.

succulentpork -> Febo , 2 Jan 2014 05:45
There is no reason that interest can't be paid from the existing stock of money. Play a game of monopoly and you will see that it is possible. Your argument has a false composition within it. The central bank is an arm of the government to all intents and purposes. To consider it as a case of the private sector holding the government over a barrel is silly. The state is the one with a monopoly over money.
Artusov , 2 Jan 2014 05:25
It's fairly simple. Split Banking into ' High Street ' stuff [ as in the good old days ] and the newer riskier stuff . You could even have a State Bank. If an investment company goes bust - let them - no bail outs - no public money. is lost. Have people who know what they are doing in the Treasury and FSA - This hasn't happened so far.

Have a sensible rate of higher tax , get them to spend it here and /or tax luxury goods at higher rates. Rich people like to spend money - encourage it. Encourage philanthropy, endowments to Universities etc.

EllisWyatt -> ATrueFinn , 2 Jan 2014 05:16

Communism has not been tried anywhere, so you don't know whether it works or not. Neoliberalism has now been tried quite enough for us to know that it does not

No what you call neoliberalism might have been tried but not true neoliberalism, that will work brilliantly, all you need to do is give me the reigns of power and let me get on with it, trust me...

Not convinced? about as convincing as your claim that communism has not been properly tried so maybe we should give it a go?

Artusov -> botany , 2 Jan 2014 04:22
' Tobin tax on financial transactions can be of help. '

Unless universally applied [ AND done properly ] this would be an extremely STUPID idea. Do you think for one moment that Wall Street [ or even, say, Moscow ] would ever do this ? The following points should be noted :-

1. Tried in Sweden - didn't work and abandoned

2. 70 % would come from the City - to disappear into the EU coffers never to be seen again apart from extra lunch portions for Van Rumpy Pumpy and his unelected catamites

3. A perfectly respectable international business may need to transfer collateral [ security ] from one subsidiary to another every day [ to cope with different trading zones ]. This sort of transaction happens hundreds of thousands of time a day in the City - twice a day at 0.1 % over 250 trading days for a £ 1 million, say, is a huge amount of money.

So what will happen ? - the tax will either get handed on to the customer [ which may well be a pensioner's or worker's Pension Fund ]

OR gets done in a more expensive way [ again , cost handed on to customer ]

OR Firm decamps elsewhere

IE - NO-ONE BENEFITS

The armchair anarchists and toy-town Trots may jump and down with glee but the City provides a significant chunk of GDP - If you want to be Greece but without the sunshine or being bailed out by the the Germans then so be it.

Febo -> succulentpork , 2 Jan 2014 04:18

If I understand you correctly, I think you are suggesting that to pay interest more money must be created as debt. I've seen this suggested quite often but I think it is a fallacy of composition.

If you were to think about money as a fixed quantity of gold you could pose the same question, how could interest be paid out on the gold in more gold? Quite easily, some of the gold just gets called interest payments as it changes hands, and that's it. No new gold is required.

Under a gold standard interest is paid by the "natural" growth in the money supply resulting from gold mining.
Under a fiat system the only way the intest could be paid would be if non-debt based money were issued which would require monetary reform. Yes, that's right, under our system the govt cannot issue money - it must borrow it from the central bank, which, in the case of the USA, is a group of private banks.

wh1952 -> ATrueFinn , 2 Jan 2014 04:17

The article is about a global issue, not only your backyard. The people of UK can consider themselves lucky compared with billions of others. But what would you care.

Quite. But do you think any one of the "socialists" raging on about nasty neo-liberals and capitalists have twigged that if a fairer system was applied that few in the UK would see any increase in their standard of living?

Freeport -> Mowglia , 2 Jan 2014 04:10

Sure thing mate, it'd be my pleasure! Are you REALLY sure you want to take the risk though?

It would mean you suddenly accumulate a rather large debt...

Nope the debts yours. I just want the cash, and money is bad. Apparently.

Of course we could... financialise the debt. You could roll the debt up and and sell it to people based on whether or not they think you'll pay it. Oh hang on... we've just killed the article because that's bad too.

Freeport -> someoneionceknew , 2 Jan 2014 04:08

It is a transfer.

No. Its an exchange. Each side gets something. Lets take a simple example. I buy a cake at a bakery. I get a cake, in exchange for money. The baker gets money for the cake. The baker (not being a moron) knows how much the ingredients, energy, time and so on the cake has cost. Some of that money goes to pay for these bits of the cake. The remainder is profit. The baker, in turn pays the suppliers. They also know what it cost to get their supplies ready for the baker, and add a little bit more for profit. So... show me the transfer, rather than the exchange.

Profit is income less spending. Somebody else's spending is your income.

Yes. Well done.

ATrueFinn -> Jonesey505 , 2 Jan 2014 03:49

Neither communism or crony capitalism work, so why not a free market system

Communism has not been tried anywhere, so you don't know whether it works or not. Neoliberalism has now been tried quite enough for us to know that it does not. Free market inevitably leads to neoliberalism, otherwise it is not free.

CaptCrash -> bilejones , 2 Jan 2014 03:44
That's right blame the only body which is accountable to you, and can be controlled by you, if only you'd get off your arse
frontalcortexes -> Denny O'Connor , 2 Jan 2014 03:43
It is always amusing to watch the rantings of someone living in the safest, most prosperous, more socially equal, society in the history of man ranting and raving for Communism or a Benevolent Dictator, or something; anything but this.

Were it in my power I would cheerfully transport you to the 12th Century where you could enjoy the benefits of living (shortly) free of Financialism.

Why not make it the 4th century and the collapse of the Western Roman Empire through excessive debt servitude? Or indeed fast forward into the 21st century with the decline of Western capitalist economies for the same reason and the undesirable triumph of Chinese Communist market capitalism through its use of Abba Lerner's Functional Finance?

Tenthred -> grauniadreader101 , 2 Jan 2014 03:40
"I think Christ's attack on the money lenders (which may have been a big part of what cost him his life) and the Islamic prohibition of usury falls into this category. Look what lending money at interest has done to our society."

I agree, and it surely lies at the root of the whole financial mess. if we hadn't allowed interest, the whole confection of finance divorced from enabling trade would not have arisen in the first place.

Diverting from the topic a bit, I'm not so sure about your first paragraph. I'm always struck by a thing the great traveller Freya Stark said:

"I think, with the possible exception of the act of love, water rights have caused more trouble than anything else in human history"

But I am not qualified to discuss the role of Sin - though I'm very grateful for your introduction of it to this threadlet, where it has born much fruit of useful points - so I'll have to leave the ethics there, I think!

ATrueFinn -> greensox , 2 Jan 2014 03:39
The Nordic countries did rather well until quite recently. Then the Neoliberalist religion arrived.
botany , 2 Jan 2014 03:37
Tobin tax on financial transactions can be of help.

We tax the food for children but not speculators play with money. France and Germany can take the lead to let the computers send a small sum on every transaction back to the people. That would be one of the few good things from EU. Otherwise let poor people starve and let the speculators play to death of our countries.

ATrueFinn -> wh1952 , 2 Jan 2014 03:37

So how many people rely on food banks? Is it half of us? One in ten, one in a hundred, one in a thousand?

The article is about a global issue, not only your backyard. The people of UK can consider themselves lucky compared with billions of others. But what would you care.

Daveinireland -> Diogenes44 , 2 Jan 2014 03:16

1. Public banking - it has no ties to corporate/international banking. N. or S. Dakota's "public bank" - begun about 90 years ago by a bunch of conservative farmers who despised the rise of bankster power.

How is this a model? The Bank of North Dakota operates more like the Bank of England than a retail bank, it doesn't offer retail services except for student loans.

2. Community-based markets - see the most famous one in Spain.
There are several one in all places, Ohio.

You may as well offer up the edinburgh bicycle cooperative as a model. Co-op exist all over the work, but they are a rounding error in the global economy. There is a place for them, but they are not going to take over from companies.

ATrueFinn -> KatieL , 2 Jan 2014 02:51

the capitalism which lets people pile up enough money to fund billion-dollar research programmes.

Such programmes are mostly funded by governments using tax money. Even in pharmaceutics the fundamental innovations and inventions are largely done in universities.

Little to do with your capitalism. Well, except that the profits of your benevolent pharmaceutical companies are exceptionally high.

hugaddict , 2 Jan 2014 02:48

Reversing financialisation is about reining in the rampant capitalism of our day.

The financial sector, CEOs, oligarchs etc run on good old fashioned greed - a commodity not about to run out anytime soon. Is it even 'reversible' ?

steverandomno , 1 Jan 2014 21:54
To summarize, you imply that capitalism and 'the market' are exemplified by government bailouts of massively overinflated banks, to allow them to continue benefiting from government created arbitrages of securitized debt and artificial regulatory economies of scale.

You go on to suggest that people's choices of dependence on large financial corporations is bad, but then imply that they would be better off if they were instead dependent on a single monopoly corporation to which they have no choice in belonging.

This is the problem with almost all attacks on capitalism and free markets. They incorrectly ascribe our present system to the same and fail to recognise the similarities between dysfunctional private and public corporate entities.

KSurin -> succulentpork , 1 Jan 2014 20:34

Making up a term - financialisation - and using to describe all use of money and also certain aspects of finance itself actual makes analysing problems harder. You are actually over generalising which makes you prone to creating narrative fallacies.

Porky, the term 'financialisation' has wide currency in economics, and refers to a specific set of transformations in the structure of accumulation. It is not used 'to describe all banking', etc. The Oxford-trained economist Thomas Palley provides this succinct definition of it:

Financialization is a process whereby financial markets, financial institutions, and financial elites gain greater influence over economic policy and economic outcomes.

Financialization transforms the functioning of economic systems at both the macro and micro levels.

Its principal impacts are to (1) elevate the significance of the financial sector relative to the real sector, (2) transfer income from the real sector to the financial sector, and (3) increase income inequality and contribute to wage stagnation. Additionally, there are reasons to believe that financialization may put the economy at risk of debt deflation and prolonged recession.

Financialization operates through three different conduits: changes in the structure and operation of financial markets, changes in the behavior of nonfinancial corporations, and changes in economic policy.

Countering financialization calls for a multifaceted agenda that (1) restores policy control over financial markets, (2) challenges the neoliberal economic policy paradigm encouraged by financialization, (3) makes corporations responsive to interests of stakeholders other than just financial markets, and (4) reforms the political process so as to diminish the influence of corporations and wealthy elites.

See http://www.levyinstitute.org/pubs/wp_525.pdf

paradise33 , 1 Jan 2014 20:30
The financialisation of UK society reached a farcical nadir when the DWP began describing benefit claimants as 'customers'.

Interestingly, in this case the 'customer' is frequently 'wrong' - and is punished accordingly.

Elephantmoth -> wh1952 , 1 Jan 2014 20:28
For some, 'Too much is not enough'. If you want the facts about who is paying for the worship of individual whims, see this:
http://www.poverty.ac.uk/sites/default/files/attachments/The_Impoverishment_of_the_UK_PSE_UK_first_results_summary_report_March_28.pdf
KSurin -> selfraisingfred , 1 Jan 2014 19:54

They used interest rates to control inflation, come what may, which is precisely what Maggie instigated after any ideas of cooperation had been rejected by the unions, during Callaghan's time in office.

Thatcher used interest rates to create unemployment, not control inflation.

Sir Alan Budd (a top Treasury civil servant and Thatcher adviser, a strong supporter of monetarism, who became Provost of The Queen's College, Oxford) let this cat out of the bag:

"The Thatcher government never believed for a moment that [monetarism] was the correct way to bring down inflation. They did however see that this would be a very good way to raise unemployment. And raising unemployment was an extremely desirable way of reducing the strength of the working classes. [...] What was engineered – in Marxist terms – was a crisis of capitalism which re- created the reserve army of labour, and has allowed the capitalists to make high profits ever since."

Quoted in Nick Cohen, "Gambling with our future", New Statesman, 13 January 2003, page 13.

Raytrek -> kimdriver , 1 Jan 2014 19:54
The way I see it is you have the elite class, made of leaders, executives, industrialists, experts, then you have the common hordes.

Common people are like a horse, the elite are like the rider, the horse doesn't mind the rider, the rider is firm with the reigns and keeps the horse controlled, but then if the rider starts to pull too firmly on the reins, the bridle causes discomfort, even pain, to the horse, with the crop whipping and the spurs digging in, you push the horse too far and it will throw you.

The rider will inevitably, albeit gingerly, get back in the saddle, a little wiser. I have no problem with this setup, but I know the rider has a short memory, and it is a case of taking care of all your horses, not just the one you ride, because nags are always trouble and they are worth a lot more when well taken care of.

This is a bad analogy, I know, but it is basically true; a phenomenal amount of problems in communities and the world are due to inadequacies, unfortunately the symptoms of these inadequacies are also big business and the economy would be disturbed by solving them, so we see "austerity" preserving what we should be curing.

mereEngineer , 1 Jan 2014 19:53
Make Bank executives personally responsible for the liabilities of the banks they are directors of. Just like entrepreneurs are often personally responsible for their companies debts.
londongapp , 1 Jan 2014 19:44
I am not sure I would use the description of 'Financialisation'. I would describe it more as the difference between wealth and money. Money is a means of exchange. It is not wealth. In London it is possible to buy a one bedroomed flat for over one million pounds. In some parts of the country a similar flat could be bought for forty thousand pounds or less. The wealth is the property and the money is the means of exchange. Just because my house goes up in value does not mean I have more wealth. My house is unchanged. It is true that if I sold my house and realised the money I might then be able buy a similar house for less money else where. Then with the surplus money I could exchange that for more wealth in the form of goods elsewhere. However as a society no wealth has been generated.
Only if money is used to create wealth in the form of goods and some services does wealth of society increase.
It is the essential difference between wealth and money that is constantly missed by Politicians and Economists.
Herbolzheim -> someoneionceknew , 1 Jan 2014 19:43
of course you are right

left and right, governments - ideally democratically elected - have bossed markets. sometimes rightly so.

Herbolzheim -> MawalTrees , 1 Jan 2014 19:40
good post mate. Thanks for taking the time

Raytrek -> kimdriver , 1 Jan 2014 19:39
Ideally it would be about drawing lines of decency between rights and responsibility; of course everyone wants more rights than responsibility and will fight for that, wether they are just an ordinary person or someone who actually has a high impact sphere of influence, and most people will allow that person that right because they view thing in terms relative to their own context and basically want the same thing.

It isn't about doing anything at gun point, it is about drawing clear lines of decency between rights and responsibility, at which point it becomes a case of people knowing what they and others can and cannot, should and should not, get away with. It isn't about punishment or forcing people to do this or that, it is about natural repercussion that comes from inconsiderate behaviour, it is about logically creating an environment that doesn't want to see you lynched.

[Oct 07, 2017] Goldman Sachs' Abacus Program had its banksters create designed-to-fail financial products for customers (they were called 'muppets'), so that GS could then bet against them!

Oct 07, 2017 | discussion.theguardian.com

KSurin -> Elysiumfire , 1 Jan 2014 19:12

I wondered how a bank could sell toxic assets to another financial institution, and even more, that other institutions would buy them.

Or flogging designed to fail financial products to one's own customers?

Goldman Sachs' Abacus Program had its banksters create designed-to-fail financial products for customers (they were called 'muppets'), so that GS could then bet against them!

[Oct 05, 2017] How Billionaires become Billionaires

Oct 05, 2017 | www.unz.com

Through favorable legal rulings and illegal foreclosures, the bankers evicted 9.3 million families. Over 20 million individuals lost their properties, often due to illegal or fraudulent debts.

A small number of the financial swindlers, including executives from Wall Street's leading banks (Goldman Sachs, J. P. Morgan etc), paid fines – but no one went to prison for the gargantuan fraud that drove millions of Americans into misery.

There are other swindler bankers, like the current Secretary of Treasury Steve Mnuchin, who enriched themselves by illegally foreclosing on thousands of homeowners in California. Some were tried; all were exonerated, thanks to the influence of Democratic political leaders during the Obama years.

[Oct 04, 2017] The Trump-Goldman Sachs Tax Cut for the Rich by Jack Rasmus

Notable quotes:
"... The Trump Plan is actually the product of the former Goldman-Sachs investment bankers who have been in charge of Trump's economic policy since he came into office. Steve Mnuchin, the Treasury Secretary, and Gary Cohn, director of Trump's economic council, are the two authors of the Trump tax cuts. They put it together. They are also both former top executives of the global shadow bank called Goldman Sachs. ..."
"... Given that economic policy under Trump is being driven by bankers, it's not surprising that the CEO of the biggest US banks, Morgan Stanley, admitted just a few months ago that a reduction of the corporate nominal income tax rate from the current 35% nominal rate to a new nominal rate of 20% will provide the bank an immediate windfall gain of 15%-20% in earnings. ..."
"... Big multinational companies like Apple, i.e. virtually all the big tech companies, big Pharma corporations, banks and oil companies, pay no more than 12-13% effective tax rates today -- not the 35% nominal rate. ..."
"... Tech, big Pharma, banks and oil companies are the big violators of offshore cash hoarding/tax avoidance schemes. Microsoft's effective global tax rate last year was only 12%. IBM's even less, at 10%. The giant drug company, Pfizer paid 18% and the oil company, Chevron 14%. One of the largest US companies in the world, General Electric, paid only 1%. When their nominal rate is reduced to 20% under the Trump plan, they'll pay even less, likely in the single digits, if that. ..."
"... Tax cutting for business classes and the 1% has always been a fundamental element of Neoliberal economic policy ever since the Reagan years (and actually late Jimmy Carter period). Major tax cut legislation occurred in 1981, 1986, and 1997-98 under Clinton. George W. Bush then cut taxes by $3.4 trillion in 2001-04, 80% of which went to the wealthiest households and businesses. He cut taxes another $180 billion in 2008. Obama cut another $300 billion in his 2009 so-called recovery program. When that faltered, it was another $800 billion at year end 2010. He then extended the Bush tax cuts that were scheduled to expire in 2011 two more years. That costs $450 billion each year. And in 2013, cutting a deal with Republicans called the 'fiscal cliff' settlement, he extended the Bush tax cuts of the prior decade for another ten years. That cost a further $5 trillion. Now Trump wants even more. He promised $5 trillion in tax cuts during his election campaign. So the current proposal is only half of what he has in mind perhaps. ..."
"... Neoliberal tax cutting in the US has also been characterized by the 'tax cut shell game'. The shell game is played several ways. ..."
"... To cover the shell game, an overlay of ideology covers up what's going on. There's the false argument that 'tax cuts create jobs', for which there's no empirical evidence. There's the claim US multinational corporations pay a double tax compared to their competitors, when in fact they effectively pay less. There's the lie that if corporate taxes are cut they will automatically invest the savings, when in fact what they do is invest offshore, divert the savings to stock and bond and other financial markets, boost their dividend and stock buybacks, or stuff the savings in their offshore subsidiaries to avoid paying taxes. ..."
"... All these neoliberal false claims, arguments, and outright lies continue today to justify the Trump-Goldman Sachs tax plan -- which is just the latest iteration of neoliberal tax policy and tax offensive in the US. The consequences of the Trump plan, if it is passed, will be the same as the previous tax giveaways to the 1% and their companies: it will redistribute income massively from the middle and working classes to the rich. Income inequality will continue to worsen dramatically. ..."
"... Nothing will change so long as the Corporate Party of America is allowed to continue its neoliberal tax giveaways, its tax cutting 'shell games', and is allowed to continue to foment its ideological cover up. ..."
Oct 04, 2017 | www.counterpunch.org

Contradicting Trump, the independent Tax Policy Center has estimated in just the first year half of the $2 trillion plus Trump cuts will go to the wealthiest 1% households that annually earn more than $730,000. That's an immediate income windfall to the wealthiest 1% households of 8.5%, according to the Tax Policy Center. But that's only in the first of ten years the cuts will be in effect. It gets worse over time.

According to the Tax Policy Center, "Taxpayers in the top one percent (incomes above $730,000), would receive about 50 percent of the total tax benefit [in 2018]". However, "By 2027, the top one percent would get 80 percent of the plan's tax cuts while the share for middle-income households would drop to about five percent." By the last year of the cuts, 2027, on average the wealthiest 1% household would realize $207,000, and the even wealthier 0.1% would realize an income gain of $1,022,000.

When confronted with these facts on national TV this past Sunday, Trump's Treasury Secretary, Steve Mnuchin, quickly backtracked and admitted he could not guarantee every middle class family would see a tax cut. Right. That's because 15-17 million (12%) of US taxpaying households in the US will face a tax hike in the first year of the cuts. In the tenth and last year, "one in four middle class families would end up with higher taxes".

The US Economic 'Troika'

The Trump Plan is actually the product of the former Goldman-Sachs investment bankers who have been in charge of Trump's economic policy since he came into office. Steve Mnuchin, the Treasury Secretary, and Gary Cohn, director of Trump's economic council, are the two authors of the Trump tax cuts. They put it together. They are also both former top executives of the global shadow bank called Goldman Sachs. Together with the other key office determining US economic policy, the US central bank, held by yet another ex-Goldman Sachs senior exec, Bill Dudley, president of the New York Federal Reserve bank, the Goldman-Sachs trio of Mnuchin-Cohn-Dudley constitute what might be called the 'US Troika' for domestic economic policy.
The Trump tax proposal is therefore really a big bankers tax plan -- authored by bankers, in the interest of bankers and financial investors (like Trump himself), and overwhelmingly favoring the wealthiest 1%.

Given that economic policy under Trump is being driven by bankers, it's not surprising that the CEO of the biggest US banks, Morgan Stanley, admitted just a few months ago that a reduction of the corporate nominal income tax rate from the current 35% nominal rate to a new nominal rate of 20% will provide the bank an immediate windfall gain of 15%-20% in earnings. And that's just the nominal corporate rate cut proposed by Trump. With loopholes, it's no doubt more.

The Trump-Troika's Triple Tax-Cut Trifecta for the 1%

The Trump Troika has indicated it hopes to package up and deliver the trillions of $ to their 1% friends by Christmas 2017. Their gift will consist of three major tax cuts for the rich and their businesses. A Trump-Troika Tax Cut 'Trifecta' of $ trillions.

1.The Corporate Tax Cuts

The first of the three main elements is a big cut in the corporate income tax nominal rate, from current 35% to 20%. In addition, there's the elimination of what is called the 'territorial tax' system, which is just a fancy phrase for ending the fiction of the foreign profits tax. Currently, US multinational corporations hoard a minimum of $2.6 trillion of profits offshore and refuse to pay US taxes on those profits. In other words, Congress and presidents for decades have refused to enforce the foreign profits tax. Now that fiction will be ended by officially eliminating taxes on their profits. They'll only pay taxes on US profits, which will create an even greater incentive for them to shift operations and profits to their offshore subsidiaries. But there's more for the big corporations.

The Trump plan also simultaneously proposes what it calls a 'repatriation tax cut'. If the big tech, pharma, banks, and energy companies bring back some of their reported $2.6 trillion (an official number which is actually more than that), Congress will require they pay only a 10% tax rate -- not the current 35% rate or even Trump's proposed 20%–on that repatriated profits. No doubt the repatriation will be tied to some kind of agreement to invest the money in the US economy. That's how they'll sell it to the American public. But that shell game was played before, in 2004-05, under George W. Bush. The same 'repatriation' deal was then legislated, to return the $700 billion then stuffed away in corporate offshore subsidiaries. About half the $700 billion was brought back, but US corporations did not invest it in jobs in the US as they were supposed to. They used the repatriated profits to buy up their competitors (mergers and acquisitions), to pay out dividends to stockholders, and to buy back their stock to drive equity prices and the stock market to new heights in 2005-07. The current Trump 'territorial tax repeal/repatriation' boondoggle will turn out just the same as it did in 2005.

2. Non-Incorporate Business Tax Cuts

The second big business class tax windfall in the Trump-Goldman Sachs tax giveaway for the rich is the proposal to reduce the top nominal tax rate for non-corporate businesses, like proprietorships and partnerships, whose business income (aka profits) is treated like personal income. This is called the 'pass through business income' provision.

That's a Trump tax cut for unincorporated businesses -- like doctors, law firms, real estate investment partnerships, etc. 40% of non-corporate income is currently taxed at 39.6% (the top personal income tax rate). Trump proposes to reduce that nominal rate to 25%. So non-incorporate businesses too will get an immediately 14.6% cut, nearly matching the 15% rate cut for corporate businesses.

In the case of both corporate and non-corporate companies we're talking about 'nominal' tax rate cuts of 14.6% and 15%. The 'effective' tax rate is what they actually pay in taxes -- i.e. after loopholes, after their high paid tax lawyers take a whack at their tax bill, after they cleverly divert their income to their offshore subsidiaries and refuse to pay the foreign profits tax, and after they stuff away whatever they can in offshore tax havens in the Cayman Islands, Switzerland, and a dozen other island nations worldwide.

For example, Apple Corporation alone is hoarding $260 billion in cash at present -- 95% of which it keeps offshore to avoid paying Uncle Sam taxes. Big multinational companies like Apple, i.e. virtually all the big tech companies, big Pharma corporations, banks and oil companies, pay no more than 12-13% effective tax rates today -- not the 35% nominal rate.

Tech, big Pharma, banks and oil companies are the big violators of offshore cash hoarding/tax avoidance schemes. Microsoft's effective global tax rate last year was only 12%. IBM's even less, at 10%. The giant drug company, Pfizer paid 18% and the oil company, Chevron 14%. One of the largest US companies in the world, General Electric, paid only 1%. When their nominal rate is reduced to 20% under the Trump plan, they'll pay even less, likely in the single digits, if that.

Corporations and non-corporate businesses are the institutional conduit for passing income to their capitalist owners and managers. The Trump corporate and business taxes means companies immediately get to keep at least 15% more of their income for themselves -- and more in 'effective' rate terms. That means they get to distribute to their executives and big stockholders and partners even more than they have in recent years. And in recent years that has been no small sum. For example, just corporate dividend payouts and stock buybacks have totaled more than $1 trillion on average for six years since 2010! A total of more than $6 trillion.

But all that's only the business tax cut side of the Trump plan. There's a third major tax cut component of the Trump plan -- i.e. major cuts in the Personal Income Tax that accrue overwhelmingly to the richest 1% households.

3. Personal Income Tax Cuts for the 1%

There are multiple measures in the Trump-Troika proposal that benefits the 1% in the form of personal income tax reductions. Corporations and businesses get to keep more income from the business tax cuts, to pass on to their shareholders, investors, and senior managers. The latter then get to keep more of what's passed through and distributed to them as a result of the personal income tax cuts.

The first personal tax cut boondoggle for the 1% wealthiest households is the Trump proposal to reduce the 'tax income brackets' from seven to three. The new brackets would be 35%, 25%, and 12%.

Whenever brackets are reduced, the wealthiest always benefit. The current top bracket, affecting households with a minimum of $418,000 annual income, would be reduced from the current 39.6% to 35%. In the next bracket, those with incomes of 191,000 to 418,000 would see their tax rate (nominal again) cut from 28% to 25%. However, the 25% third bracket would apply to annual incomes as low as $38,000. That's the middle and working class. So households with $38,000 annual incomes would pay the same rate as those with more than $400,000. Tax cuts for the middle class, did Trump say? Only tax rate reductions beginning with those with $191,000 incomes and the real cuts for those over $418,000!

But the cuts in the nominal tax rate for the top 1% to 5% households are only part of the personal income tax windfall for the rich under the Trump plan. The really big tax cuts for the 1% come in the form of the repeal of the Inheritance Tax and the Alternative Minimum Tax, as well as Trump's allowing the 'carried interest' tax loophole for financial speculators like hedge fund managers and private equity CEOs to continue.

The current Inheritance Tax applies only to those with estates of $11 million or more, about 0.2 of all the taxpaying households. So its repeal is clearly a windfall for the super rich. The Alternative Minimum Tax is designed to ensure the super rich pay something, after they manipulate the tax loopholes, shelter their income offshore in tax havens, or simply engage in tax fraud by various other means. Now that's gone as well under the Trump plan. 'Carried interest', a loophole, allows big finance speculators, like hedge fund managers, to avoid paying the corporate tax rate altogether, and pay a maximum of 20% on their hundreds of millions and sometimes billions of dollars of income every year.
Who Pays?

As previously noted, folks with $91,000 a year annual income get no tax rate cuts. They still will pay the 25%. And since that is what's called 'earned' (wage and salary) income, they don't get the loopholes to manipulate, like those with 'capital incomes' (dividends, capital gains, rents, interest, etc.). What they get is called deductions. But under the Trump plan, the deductions for state and local taxes, for state sales taxes, and apparently for excess medical costs will all disappear. The cost of that to middle and working class households is estimated at $1 trillion over the decade.

Trump claims the standard deduction will be doubled, and that will benefit the middle class. But estimates reveal that a middle class family with two kids will see their standard deduction reduced from $28,900 to $24,000. But I guess that's just 'Trump math'.

The general US taxpayer will also pay for the trillions of dollars that will be redistributed to the 1% and their companies. It's estimated the federal government deficit will increase by $2.4 trillion over the decade as a result of the Trump plan. Republicans in Congress have railed over the deficits and federal debt, now at $20 trillion, for years. But they are conspicuously quiet now about adding $2.4 trillion more -- so long as it the result of tax giveaways to themselves, their 1% friends, and their rich corporate election campaign contributors.

And both wings of the Corporate Party of America -- aka Republicans and Democrats -- never mention the economic fact that since 2001, 60% of US federal government deficits, and therefore the US debt of $20 trillion, are attributable to tax cuts by George W. Bush and Barack Obama: more than $3.5 trillion under Bush and more than $7 trillion under Obama. (The remaining $10 trillion of the US debt due to war and defense spending, price gouging by the medical industry and big pharma driving up government costs for Medicare, Medicaid, and other government insurance, bailouts of the big banks in 2008-09, and interest payments on the debt).

The 35-Year Neoliberal Tax Offensive

Tax cutting for business classes and the 1% has always been a fundamental element of Neoliberal economic policy ever since the Reagan years (and actually late Jimmy Carter period). Major tax cut legislation occurred in 1981, 1986, and 1997-98 under Clinton. George W. Bush then cut taxes by $3.4 trillion in 2001-04, 80% of which went to the wealthiest households and businesses. He cut taxes another $180 billion in 2008. Obama cut another $300 billion in his 2009 so-called recovery program. When that faltered, it was another $800 billion at year end 2010. He then extended the Bush tax cuts that were scheduled to expire in 2011 two more years. That costs $450 billion each year. And in 2013, cutting a deal with Republicans called the 'fiscal cliff' settlement, he extended the Bush tax cuts of the prior decade for another ten years. That cost a further $5 trillion. Now Trump wants even more. He promised $5 trillion in tax cuts during his election campaign. So the current proposal is only half of what he has in mind perhaps.

Neoliberal tax cutting in the US has also been characterized by the 'tax cut shell game'. The shell game is played several ways.

In the course of major tax cut legislation, the elites and their lobbyists alternate their focus on cutting rates and on correcting tax loopholes. They raise rates but expand loopholes. When the public becomes aware of the outrageous loopholes, they then eliminate some loopholes but simultaneously reduce the tax rates on the rich. When the public complains of too low tax rates for the rich, they raise the rates but quietly expand the loopholes. They play this shell game so the outcome is always a net gain for corporations and the rich.

Since Reagan and the advent of neoliberal tax policy, the corporate income tax share of total US government revenues has fallen from more than 20% to single digits well below 10%. Conversely, the payroll tax has doubled from 22% to more than 40%. A similar shift within the personal income tax, steadily around 40% of government revenues, has also occurred. The wealthy pay less a share of the total and the middle class pays more. Along the way, token concessions to the very low end of working poor are introduced, to give the appearance of fairness. But the middle class, the $38 to $91,000 nearly 100 million taxpaying households foot the bill for both the 1% and the bottom. This pattern was set in motion under Reagan. His proposed $752 billion in tax cuts in 1981-82 were adjusted in 1986, but the net outcome was more for the rich and their corporations. That pattern has continued under Clinton, Bush, Obama and now proposed under Trump.

To cover the shell game, an overlay of ideology covers up what's going on. There's the false argument that 'tax cuts create jobs', for which there's no empirical evidence. There's the claim US multinational corporations pay a double tax compared to their competitors, when in fact they effectively pay less. There's the lie that if corporate taxes are cut they will automatically invest the savings, when in fact what they do is invest offshore, divert the savings to stock and bond and other financial markets, boost their dividend and stock buybacks, or stuff the savings in their offshore subsidiaries to avoid paying taxes.

All these neoliberal false claims, arguments, and outright lies continue today to justify the Trump-Goldman Sachs tax plan -- which is just the latest iteration of neoliberal tax policy and tax offensive in the US. The consequences of the Trump plan, if it is passed, will be the same as the previous tax giveaways to the 1% and their companies: it will redistribute income massively from the middle and working classes to the rich. Income inequality will continue to worsen dramatically. US multinational corporations will begin again to divert profits, and investment, offshore; profits brought back untaxed will result in mergers and acquisitions, dividend payouts, and financial markets investment. No real jobs will be created in the US. The wealthy will continue to pump their savings into financial asset markets, causing further bubbles in stocks, exchange traded funds, bonds, derivatives and the like. The US economy will continue to slow and become more unstable financially. And there will be another financial crash and great recession -- or worse. Only this time, the vast majority of US households -- i.e. the middle and working classes -- will be even worse off and more unable to weather the next economic storm.

Nothing will change so long as the Corporate Party of America is allowed to continue its neoliberal tax giveaways, its tax cutting 'shell games', and is allowed to continue to foment its ideological cover up. More articles by: Jack Rasmus

Jack Rasmus is the author of ' Systemic Fragility in the Global Economy ', Clarity Press, 2015. He blogs at jackrasmus.com . His website is www.kyklosproductions.com and twitter handle, @drjackrasmus.

[Sep 19, 2017] Con Of The Century by Rod Dreher

Notable quotes:
"... Within the next 18 months, US Steel announced that the nation's largest steel producer was also shutting down 16 plants across the nation including their Ohio Works in Youngstown, a move that eliminated an additional 4,000 workers here. That announcement came one day before Jones and Laughlin Steel Corp. said they were cutting thousands of jobs at their facilities in the Mahoning Valley, too. ..."
"... Within a decade 40,000 jobs were gone. Within that same decade, 50,000 people had left the region, and by the next decade that number was up to 100,000. Today the 22 miles of booming steel mills and the support industries that once lined the Mahoning River have mostly disappeared -- either blown up, dismantled or reclaimed by nature. ..."
"... Candidate Trump promised to create millions of new jobs, vowing to be "the greatest jobs president that God ever created." Cohn, as Goldman Sachs's president and COO, oversaw the firm's mergers and acquisitions business that had, over the previous three years, led to the loss of at least 22,000 U.S. jobs, according to a study by two advocacy groups. Early in his candidacy, Trump described as "disgusting" Pfizer's decision to buy a smaller Irish competitor in order to execute a "corporate inversion," a maneuver in which a U.S. company moves its headquarters overseas to reduce its tax burden. The Pfizer deal ultimately fell through. But in 2016, in the heat of the campaign, Goldman advised on a megadeal that saw Johnson Controls, a Fortune 500 company based in Milwaukee, buy the Ireland-based Tyco International with the same goal. A few months later, with Goldman's help, Johnson Controls had executed its inversion. ..."
"... "There was a devastating financial crisis just over eight years ago," Warren said. "Goldman Sachs was at the heart of that crisis. The idea that the president is now going to turn over the country's economic policy to a senior Goldman executive turns my stomach." Prior administrations often had one or two people from Goldman serving in top positions. George W. Bush at one point had three. At its peak, the Trump administration effectively had six. ..."
"... Politically, 2016 would prove a strange year for Goldman. Bernie Sanders clobbered Hillary Clinton for pocketing hundreds of thousands of dollars in speaking fees from Goldman, while Trump attacked Ted Cruz for being "in bed with" Goldman Sachs. (Cruz's wife Heidi was a managing director in Goldman's Houston office until she took leave to work on her husband's presidential campaign.) Goldman would have "total control" over Clinton, Trump said at a February 2016 rally, a point his campaign reinforced in a two-minute ad that ran the weekend before Election Day. An image of Blankfein flashed across the screen as Trump warned about the global forces that "robbed our working class." ..."
"... It's Cohn's influence over the country's regulators that worries Dennis Kelleher, the financial reform lobbyist. "To him, what's good for Wall Street is good for the economy," Kelleher said of Cohn. "Maybe that makes sense when a guy has spent 26 years at Goldman, a company who has repaid his loyalties and sweat with a net worth in the hundreds of millions." Kelleher recalls those who lost a home or a chunk of their retirement savings during a financial crisis that Cohn helped precipitate. "They're still suffering," he said. "Yet now Cohn's in charge of the economy and talking about eliminating financial reform and basically putting the country back to where it was in 2005, as if 2008 didn't happen. I've started the countdown clock to the next financial crash, which will make the last one look mild." ..."
"... Trump ( and the GOP generally) are running the William Henry Harrison routine. Talk about the plain common working people, mix in some log cabins and hard cider, describe anyone who wants to raise wages as an effete elitist, and the downsize, merge, consolidate, offshore, the better to profit from the misery of others. ..."
Sep 17, 2017 | www.theamericanconservative.com
Michele Paccione/Shutterstock Salena Zito has a moving NYPost piece about the day that began the destruction of Youngstown, Ohio, and "sowed the seeds of Trump." Excerpts:

From then on, this date in 1977 would be known as Black Monday in the Steel Valley, which stretches from Mahoning and Trumbull counties in Ohio eastward toward Pittsburgh. It is the date when Youngstown Sheet and Tube abruptly furloughed 5,000 workers all in one day.

The bleeding never stopped.

Within the next 18 months, US Steel announced that the nation's largest steel producer was also shutting down 16 plants across the nation including their Ohio Works in Youngstown, a move that eliminated an additional 4,000 workers here. That announcement came one day before Jones and Laughlin Steel Corp. said they were cutting thousands of jobs at their facilities in the Mahoning Valley, too.

Within a decade 40,000 jobs were gone. Within that same decade, 50,000 people had left the region, and by the next decade that number was up to 100,000. Today the 22 miles of booming steel mills and the support industries that once lined the Mahoning River have mostly disappeared -- either blown up, dismantled or reclaimed by nature.

If a bomb had hit this region, the scar would be no less severe on its landscape.

More:

The events of Black Monday forever changed not only the Steel Valley, but her people and eventually American culture and politics. Just last year the reverberations were felt in the presidential election when many hard-core Democrats from this area broke from their party to vote for Donald Trump, a Republican who promised to bring jobs back to the Heartland.

Even today, after the election, the Washington establishment still hasn't processed or properly dissected its effects. Economic experts predicted that the service industry would be the employment of the future. Steel workers were retrained to fill jobs in that sector, which was expected to sustain the middle class in the same way that manufacturing did.

It did not. According to a study done by the Midwest Center for Research the average salary of a steel worker in the late 1970s was $24,772.80. Today, according to the most recent Bureau of Labor statistics, the medium household income in the Mahoning Valley is $24,133.

Now that they have the working man's champion in the White House, what's he doing for them? Here are Gary Rivlin and Michael Hudson, writing in The Intercept , about how Goldman Sachs more or less runs the Trump administration. Excerpts:

Trump raged against "offshoring" by American companies during the 2016 campaign. He even threatened "retribution,"­ a 35 percent tariff on any goods imported into the United States by a company that had moved jobs overseas. But [Gary] Cohn laid out Goldman's very different view of offshoring at an investor conference in Naples, Florida, in November. There, Cohn explained unapologetically that Goldman had offshored its back-office staff, including payroll and IT, to Bangalore, India, now home to the firm's largest office outside New York City: "We hire people there because they work for cents on the dollar versus what people work for in the United States."

Candidate Trump promised to create millions of new jobs, vowing to be "the greatest jobs president that God ever created." Cohn, as Goldman Sachs's president and COO, oversaw the firm's mergers and acquisitions business that had, over the previous three years, led to the loss of at least 22,000 U.S. jobs, according to a study by two advocacy groups. Early in his candidacy, Trump described as "disgusting" Pfizer's decision to buy a smaller Irish competitor in order to execute a "corporate inversion," a maneuver in which a U.S. company moves its headquarters overseas to reduce its tax burden. The Pfizer deal ultimately fell through. But in 2016, in the heat of the campaign, Goldman advised on a megadeal that saw Johnson Controls, a Fortune 500 company based in Milwaukee, buy the Ireland-based Tyco International with the same goal. A few months later, with Goldman's help, Johnson Controls had executed its inversion.

With Cohn's appointment [as his economic adviser], Trump now had three Goldman Sachs alums in top positions inside his administration: Steve Bannon, who was a vice president at Goldman when he left the firm in 1990, as chief strategist, and Steve Mnuchin, who had spent 17 years at Goldman, as Treasury secretary. And there were more to come. A few weeks later, another Goldman partner, Dina Powell, joined the White House as a senior counselor for economic initiatives. Goldman was a longtime client of Jay Clayton, Trump's choice to chair the Securities and Exchange Commission; Clayton had represented Goldman after the 2008 financial crisis, and his wife Gretchen worked there as a wealth management adviser. And there was the brief, colorful tenure of Anthony Scaramucci as White House communications director: Scaramucci had been a vice president at Goldman Sachs before leaving to co-found his own investment company.

Even before Scaramucci, Sen. Elizabeth Warren, D-Mass., had joked that enough Goldman alum were working for the Trump administration to open a branch office in the White House.

"There was a devastating financial crisis just over eight years ago," Warren said. "Goldman Sachs was at the heart of that crisis. The idea that the president is now going to turn over the country's economic policy to a senior Goldman executive turns my stomach." Prior administrations often had one or two people from Goldman serving in top positions. George W. Bush at one point had three. At its peak, the Trump administration effectively had six.

Ex-Goldmanista Steve Bannon's White House agenda was not in Goldman's interest, though. But now he's gone. More:

The Trump economic agenda, it turns out, is largely the Goldman agenda, one with the potential to deliver any number of gifts to the firm that made Cohn colossally rich. If Cohn stays, it will be to pursue an agenda of aggressive financial deregulation and massive corporate tax cuts -- he seeks to slash rates by 57 percent -- that would dramatically increase profits for large financial players like Goldman. It is an agenda as radical in its scope and impact as Bannon's was.

The story tracks Gary Cohn's impressive rise from an aluminum siding salesman to a Goldman Sachs top leader. In the mid-2000s, Goldman saw that the housing market was a bubble waiting to pop, and arranged its position to take advantage of the coming collapse. The Intercept continues:

Cohn was a member of Goldman's board of directors during this critical time and second in command of the bank. At that point, Cohn and Blankfein, along with the board and other top executives, had several options. They might have shared their concerns about the mortgage market in a filing with the SEC, which requires publicly traded companies to reveal "triggering events that accelerate or increase a direct financial obligation" or might cause "impairments" to the bottom line. They might have warned clients who had invested in mortgage-backed securities to consider extracting themselves before they suffered too much financial damage. At the very least, Goldman could have stopped peddling mortgage-backed securities that its own mortgage trading desk suspected might soon collapse in value.

Instead, Cohn and his colleagues decided to take care of Goldman Sachs.

Goldman would not have suffered the reputational damage that it did -- or paid multiple billions in federal fines -- if the firm, anticipating the impending crisis, had merely shorted the housing market in the hopes of making billions. That is what investment banks do: spot ways to make money that others don't see. The money managers and traders featured in the film "The Big Short" did the same -- and they were cast as brave contrarians. Yet unlike the investors featured in the film, Goldman had itself helped inflate the housing bubble -- buying tens of billions of dollars in subprime mortgages over the previous several years for bundling into bonds they sold to investors. And unlike these investors, Goldman's people were not warning anyone who would listen about the disaster about to hit. As federal investigations found, the firm, which still claims "our clients' interests always come first" as a core principle, failed to disclose that its top people saw disaster in the very products its salespeople were continuing to hawk.

What follows is an amazing, very detailed story about how Goldman maneuvered successfully through the rubble of the economic collapse, and came out on top. And then, get this:

Politically, 2016 would prove a strange year for Goldman. Bernie Sanders clobbered Hillary Clinton for pocketing hundreds of thousands of dollars in speaking fees from Goldman, while Trump attacked Ted Cruz for being "in bed with" Goldman Sachs. (Cruz's wife Heidi was a managing director in Goldman's Houston office until she took leave to work on her husband's presidential campaign.) Goldman would have "total control" over Clinton, Trump said at a February 2016 rally, a point his campaign reinforced in a two-minute ad that ran the weekend before Election Day. An image of Blankfein flashed across the screen as Trump warned about the global forces that "robbed our working class."

So Trump won -- and staffed up with Goldman machers -- Gary Cohn most important of all:

There's ultimately no great mystery why Donald Trump selected Gary Cohn for a top post in his administration, despite his angry rhetoric about Goldman Sachs. There's the high regard the president holds for anyone who is rich -- and the instant legitimacy Cohn conferred upon the administration within business circles. Cohn's appointment reassured bond markets about the unpredictable new president and lent his administration credibility it lacked among Fortune 100 CEOs, none of whom had donated to his campaign. Ego may also have played a role. Goldman Sachs would never do business with Trump, the developer who resorted to foreign banks and second-tier lenders to bankroll his projects. Now Goldman's president would be among those serving in his royal court.

Finally:

It's Cohn's influence over the country's regulators that worries Dennis Kelleher, the financial reform lobbyist. "To him, what's good for Wall Street is good for the economy," Kelleher said of Cohn. "Maybe that makes sense when a guy has spent 26 years at Goldman, a company who has repaid his loyalties and sweat with a net worth in the hundreds of millions." Kelleher recalls those who lost a home or a chunk of their retirement savings during a financial crisis that Cohn helped precipitate. "They're still suffering," he said. "Yet now Cohn's in charge of the economy and talking about eliminating financial reform and basically putting the country back to where it was in 2005, as if 2008 didn't happen. I've started the countdown clock to the next financial crash, which will make the last one look mild."

Read the whole thing. Please, do. It is staggering to think that here we are, a decade after the crash, and here we are.

Tonight (Sunday), PBS begins airing Ken Burns' and Lynn Novick's long Vietnam War documentary. I'll write more about it this week. I've watched it, and to call it landmark television is to vastly undersell it. It comes to mind reading the Goldman-Trump piece because it revealed, however inadvertently, how little we Americans learned from the Vietnam experience when it came time to invade Iraq.

Twenty, thirty years from now, don't be surprised if some American president proposes a "this time, it's different" invasion of another foreign country. And don't be surprised if we the people cheer for him. We're suckers for this kind of thing. Here's Kevin Williamson, on Trump's epic flip-flop on immigration and DACA:

What did they expect? Trump is a serial bankrupt who has betrayed at least two-thirds of the wives he's had and who lies compulsively -- who invented an imaginary friend to lie to the press on his behalf. He has screwed over practically everyone who has ever trusted him or done business with him, and his voters were just another in a long series of marks. They gave him that 280ZX with no down payment -- and no prospect of repossessing it until 2020 at the earliest. Poor Ann Coulter is somewhere weeping into her gin: "I bet on a loser," she explains.

It was a dumb bet.

With no market-oriented health-care reform and no hawkish immigration reform and the prospects of far-reaching tax reform looking shaky -- even though Republicans exist for no obvious purpose other than cutting taxes -- Trump is still looking for his big win. Even those who were willing to suspend the fully formed adult parts of their brains and give him the benefit of the doubt are coming around to the realization that he has no beliefs and no principles, and that he will sell out any ally, cause, or national interest if doing so suits his one and only true master in this life: his vanity. He didn't get rolled by Pelosi and Schumer: His voters got rolled by him. That's the real deal.

Cheers to you, Youngstown!

When Youngstown (so to speak) figures out what's been done to it, politics in this country is going to get very, very interesting. In the meantime:

Some of Trump's base is happy to let him cut deals with Pelosi and Schumer so long as he tweets gifs of Hillary and CNN logos. WWE BS.

! Ben Shapiro (@benshapiro) September 17, 2017

//platform.twitter.com/widgets.js 116 Responses to Con Of The Century ← Older Comments Newer Comments →

grumpy realist , says: September 18, 2017 at 10:30 am

Given Trump's history of betraying everyone he's been involved with (wives, businesses, family members) why are people surprised?

And no, I don't suspect Trump supporters to ever turn on him. Whatever he does, they'll find a way to excuse it and cast the blame of "the media", "those liberals", "those people", and "them" instead. It's easier for them to allow themselves to be ripped off, over and over again, than to admit to themselves that they were fools who fell victim to a con man.

(And no, I don't place much credence in Ann Coulter's hissy fit. She's just trying to keep the TV cameras on her as long as possible. Like usual.)

Roy Fassel , says: September 18, 2017 at 10:32 am
The world has changed. It used to be ."what is good for General Motors is good for America."

Multinational corporations tend to have most of their revenue growth outside of the USA today. Some companies like Apple manufacture their phones overseas, and most sales are overseas. This complicates all historical comparisons. The world is much more interconnected these days and we are all "God's children" living in all parts of the globe. Nationalism that is practiced by Trump eventually ends with a 1930s in Europe. BLAME creates hatred which then becomes to great uniter.

This all will not end on the plus side.

Sam M , says: September 18, 2017 at 10:33 am
Matt W

"Be charitable. It's VERY hard for someone to admit that they were fooled. It will be interesting to see all the mechanisms of denial."

Will it be interesting? Or entirely predictable? We have a model: All the ostensibly progressive people who for years voted Democrat and essentially ended up with a huge bait and switch. Which is not the divide in the Democratic Party, with the social justice left now ascendant and angry, because they got an awful lot of Dont Ask, Don't Tell and Clinton-era mass incarceration for their loyalty. While the union-wing got Goldman Sachs stuff.

All those people got rolled the same way Trump is rolling people now. So now we have BLM and Bernie Sanders and basically nothing in between.

So yeah. That's what we will get on the right.

Roger II , says: September 18, 2017 at 10:39 am
Trump has always been an ethically-challenged con man. I would still like to hear someone identify an actual policy that would help Youngstown. The truth is that steel industry jobs are gone, and they aren't coming back. Illegal immigration had nothing (or next to nothing) to do with that and has next to nothing to do with the fact that Youngstown has not developed other jobs for its citizens. Trump never proposed any concrete solutions, but quite frankly neither has JD Vance. Democrats have -- Obamacare, training programs, increased minimum wage, financial aid, more support for unions -- but by and large the white working class has rejected those policies. So maybe Youngstown should figure out what it wants from Trump or anyone else.
Allen , says: September 18, 2017 at 10:51 am
"The faithful man has perished from the earth, and there is no one upright among men. They all lie in wait for blood; every man hunts his brother with a net. That they may successfully do evil with both hands-the prince asks for gifts, the judge seeks a bribe, and the great man utters his evil desire; so they scheme together." Micah 7:2-3 (NKJV)

The more things change, the more they stay the same.

collin , says: September 18, 2017 at 11:14 am
Trump raged against "offshoring" by American companies during the 2016 campaign. He even threatened "retribution,"­ a 35 percent tariff on any goods imported into the United States by a company that had moved jobs overseas.

Again, can somebody explain to me how in the hell this is going to be done as free trade is 50%+ popular and any changes in a deal, such as NAFTA, will have serious negative economic consequences in certain parts of the nation. Rip up NAFTA, Iowas LOSES BIG!

Also, in terms of employment the steel industry is not that large anymore. It has about 80K workers today which is significantly about 90% less in the 1980s. And we produce almost (about ~95%) as much steel today as in the 1980s. So steel tariffs will increase steel jobs by 10% which is 8K workers and construction will lose 1% of 730K which is almost 8K workers. So somebody has to show me the benefit of steel tariffs as I don't see it.

Purple Tortoise , says: September 18, 2017 at 11:29 am
[NFR: But that's not really the point. The point is that Trump *specifically* ran against Goldman Sachs and what it represents. And now look. It simply won't do to say, "But Hillary would have been worse." Maybe so, but at this point, that strikes me as a way of rationalizing Trump's failure to keep his promises. -- RD]

Actually, I see it as rationalizing on the part of the NeverTrumpers for why they were justified in offering the voters a sh*t sandwich and why the voters were wrong to go with Trump in the hope of not being forced to eat a sh*t sandwich. Now that Trump has gone back on his promises, the NeverTrumpers are rationalizing that it proves they were right all along because the voters didn't escape the promised sh*t sandwich.

Jeff R , says: September 18, 2017 at 11:35 am
I would dearly love to help them out, and rebuild their cities. It would be the right thing to do. But as long as they keep voting for republicans (and yes, republicans are more corporate and Wall Street friendly then the democrats, Hillary Clinton notwithstanding), they are going to continue to decline.

As a Baltimore resident, I find this statement hilarious.

BlairBurton , says: September 18, 2017 at 11:37 am
http://www.thedailybeast.com/i-told-you-so-trump-is-a-conman-in-chief

"As members of the reviled Never Trump movement, it's not just an end-zone celebration play to say we warned you. We warned you over and over that Trump's brand isn't success; it's betrayal. We warned you that he believes in nothing, and so he will break any promise, shaft any ally, and abandon any position. Hate us all you want, but if you think this is the last time he'll shank his faithful, you might want to review the last 40 years of his personal and business behavior."

Donald , says: September 18, 2017 at 11:37 am
"There is a subset of voters who look upon their politician in an unhealthy God-like/3rd world fashion; much more tangible on the Left, but there on the Right as well."

This is correct, except for that ludicrous claim that it is worse on the Left. It's obvious on both sides and it's been that way forever.

I despise Trump. I am glad he is making deals with Democrats, but the Goldman Sachs thing is horrible. There was always a faint chance he could have governed as a populist, pushing massive infrastructure projects to create jobs, for instance. I thought that would appeal to his vanity as someone who builds things. No such luck.

Sawbuck , says: September 18, 2017 at 12:02 pm
It isn't just the steel industry. You underestimate the level of rage out there in flyover country – and the towns where the service workers live next to the towns where the 1% live because the workers cannot afford the uptown costs – they really will be fine if the whole system burns to ash.

They are used to being poor and will last longer.

Richard Morton , says: September 18, 2017 at 12:05 pm
VikingLS (at 10:19pm) hits the mark, IMO. I'd be interested to hear more. Playing the "con man" card gets stale & tiresome fast. Thanks also to Rob G for recommended reading (at 7:08am). So, Rod, won't a good shot of Ben Op faith and virtue also help make America industrious again? It is hard work, but is it impossible to imagine or too complex to do? If you think so, I think you underestimate us–and our Lord.
Captain P , says: September 18, 2017 at 12:15 pm
So long as the Clintonistas don't find a new figurehead, bet on Sanders winning in 2020. If anyone's a true opponent of neoliberal economic policies, he is.
Phillip , says: September 18, 2017 at 12:16 pm
Yes, Trump is bad, is going back on promises, etc. etc.

But what's the freaking alternative?

Give me an actual name that is not worse.

Siarlys Jenkins , says: September 18, 2017 at 12:31 pm
Trump ( and the GOP generally) are running the William Henry Harrison routine. Talk about the plain common working people, mix in some log cabins and hard cider, describe anyone who wants to raise wages as an effete elitist, and the downsize, merge, consolidate, offshore, the better to profit from the misery of others.

Now, what could have been done in 1977? That was the beginning of Jimmy Carter's term, his first year in office. At the time, he was a conservative southern Democrat, America's first born-again Christian president, despised by liberals, who tried to run Ted Kennedy against him in the 1980 Democratic primary, producing plenty of material for Ronald Reagan campaign commercials in the general election.

It would have taken a VERY comprehensive plan and some long-term investments. The steel plants were aging and uncompetitive. The companies laid off thousands because they didn't think it worth investing billions in new plants, new technology, etc. A few plants that employees pooled their hard-earned savings to buy turned out to be unsustainable too. A good stop TOWARD a more sensible socialist economy would have been a law providing that IF a company employing more than 1000 workers wanted to shut a plant, a government agency has first option to buy, at a price no greater than original investment minus all depreciation taken on corporate tax returns (that is, next to nothing).

Then it would have taken billions in federal financing to do the upgrade. Why do this? Well, considering the economic and social costs of all the crime, drug networks, drug treatment, alcoholism, etc. in the forty years since, it might have been a net cost savings. This is how socialism becomes a paying proposition, rather than "running out of other people's money."

But a sustainable program has to be geared to production people will actually need and use and want and buy. Production of stuff that piles up because there is no market for it is not sustainable. Something could have been done, but there was no will. Democrats were, then as now, afraid of their own shadow, and addicted to putting band-aids on long-term problems. Republicans, then as now, were addicted to "market forces," which, of course, are what triggered the catastrophe. What passed for a "left" at that time was too busy debating whether Deng or the Gang of Four were the true heroes of proletarian revolution and holding May Day picnics where 90 percent of participants were college graduates. They weren't reading the business pages.

It is also the case that Hillary Clinton was in bed with Goldman.

True, and relevant, but hardly in contradiction with what Dux Bellorum said.

Dux Bellorum, Austinopole , says: September 18, 2017 at 12:33 pm

[NFR: This is simplistic trolling and you know it. It is also the case that Hillary Clinton was in bed with Goldman. Remember the private Wall Street speech she gave, released by Wikileaks, in which she talked about how one needed to have "a public and a private position"? We would have been equally screwed by a Clinton.2 presidency, and a conventional Republican one. My anger at Trump over this is that he promised to be something different -- and, being fabulously wealthy, he didn't depend on the largesse of financial titans to make his living. He was in a position to change things -- yet on economic issues, he's turned out to be as bad or worse than those he ran against in both parties. -- RD]

It would be trolling if we were describing a single election, sure, but the comment refers to the very, very long alliance between social conservatives and business conservatives, which, in the south, goes back to the nineteenth century. Institutional Christian powers have been taking money and power from business interests to enforce their particular visions of what everyone should live like, and it's had the effect of giving them more and more power over an ever-shrinking and ever more miserable kingdom.

There's that lovely idea that by their fruits shall one know ideas, I think that Youngstown, in synecdoche, is a great example of the fruits of that particular idea.

$0.02,

DBA

Weldon , says: September 18, 2017 at 12:44 pm
The problem with this line of thought is that it would lead you to expect that Trump won Rust Belt voters whose chief concern was jobs and the economy. But he didn't; Clinton (narrowly) did. Trump won Rust Belt voters whose chief concern was "cultural decline".

Somehow the economic narrative got way off from what the data actually show: on election day, Trump underperformed recent Republican candidates in every economic cohort *except* households making $70K-$100K. This is the group you need to look at to explain his appeal.

Donald , says: September 18, 2017 at 12:45 pm
"Just shocking that a politician went back on a campaign promise. Throw the bum out. Shocking."

And this silly sort of cynicism is exactly why politicians think they can get away with breaking any and every promise they make.

Deplorable MD , says: September 18, 2017 at 12:50 pm
These can be true:

1. I am unhappy with certain (even "many") Trump decisions.
2. I remain happy I voted for Trump over Clinton.

What would it take for me to instead have wished I voted Clinton over Trump?..some combination of the following:

1. An increase in taxes on the working and professional class.
2. An offensive ground invasion of foreign country.
3. The nomination and Senate approval of a doctrinaire Liberal to the Supreme Court.
4. Policies that would lead to increased working class and poor immigrants to our country.

I imagine there are more, but these are some of the important points. I can muddle through a temporary ill mannered President and don't have a problem getting dirty to avoid the above.

BD , says: September 18, 2017 at 12:54 pm
Judging from the reaction of Trumpers in this comment thread it's pretty clear that there is literally nothing he could do that would cause them to abandon him. They will rationalize anything he does.

During the campaign, some of them said "well if he betrayed us on immigration then we'd leave him" and the biggest crimes committed by the Rubios of the world was that they cut deals far better (from restrictionist points of view) than this. So it's clear how they react to a betrayal–simply pretend it's not a betrayal, or that any non-Trump alternative would have been worse.

It's looking like they have become a cult.

Venice , says: September 18, 2017 at 12:56 pm
I'm always amazed at how loyal Trump supporters are. At times he was voted in to totally disrupt Washington, at other times he was supposed to make deals to keep the peace.
Look, Trump was always part of Wall Street. This was always going to happen. I don't think it's a bad thing but I do feel bad for the people who voted for him expecting anything different.
BD , says: September 18, 2017 at 1:01 pm
"It's not whether he makes deals. It's on whether they are good deals. The DACA deal would not be a good one if it follows what has been outlined."

That's not true. It's an excellent deal for the Democrats and Republican immigration doves.

For immigration restrictionists? Well, for them this puts them next on the long list of people who made the mistake of trusting Donald Trump.

BD , says: September 18, 2017 at 1:06 pm
"It's easy to criticize but a lot more difficult to say what they should have done. So tell me, who should they have supported? And don't say "Anybody but Trump" – that's not an answer."

This is a fair question, but they easily could have organized around another candidate who represented what they believed in (surely Trump is not the only person in the world who favored cutting back immigration–it's a very popular position in the GOP grass roots). Pat Buchanan ran on it in the '90s.

But to say "let's get behind the guy whose track record practically screams at you that you're going to get backstabbed" seems worse than even staying home. What are the chances now that next time a candidate runs on those issues anyone is going to believe him?

TR , says: September 18, 2017 at 1:13 pm
I suggest taking Wes seriously ("Could be better, could be much worse"). I have a suspicion his position is probably the norm.

In any case, some politicians pay for their "sins," some don't. I have an awful feeling, Trump will fall into the latter category.

TR , says: September 18, 2017 at 1:22 pm
A side note: John_M's correction of the steel plant closures makes sense. At the time they happened, it was not unusual to point out that American steel was uncompetitive even in a fair market (which didn't exist). Failure to modernize was a big factor.

And even if evil capitalism and elitist government may have been behind the closings, one should point out that a lot of less bright capitalists lost their shirts.

Potato , says: September 18, 2017 at 1:30 pm
They know they're getting screwed, in Youngstown and elsewhere. For some reason they don't care. They'll stick with Trump to the bitter end.
EngineerScotty , says: September 18, 2017 at 1:33 pm
And the standards keep getting lower and lower
Loudon is a Fool , says: September 18, 2017 at 1:46 pm
+1000 @ Old West

Any legislation. Congress doesn't need to pass some thing. They could pass any thing. Except they can't pass any thing. Not a single thing. They're incapable of governing. It's thoroughly depressing. As Williamson has noted previously, the wily McConnell is just the wrong man for the job. Trump's broken promises are nearly 100% McConnell's leadership failures. Could any other GOP president overcome McConnell's incompetence? Maybe. But that's a lot of incompetence to overcome. The Democrats are terrible human beings. But they know how to pass legislation. So if you want to pass some legislation and your choices are the Democrats or McConnell do you really have a choice as to the party you're going to approach?

Rosita , says: September 18, 2017 at 2:11 pm
Have to agree with all the Trump voters and supporters on this thread. None of them voted on principles; as they have stated, more on emotion, affinity and bread and butter issues. Your points about Trump's betrayals ring hollow. Everybody understood that Trump's positions are malleable and that was part of the package. Even when his policies begin to hurt his supporters, that will be a necessary evil to shore up the cultural and social solidarity that Trump represents. Plain and simple.
Polichinello , says: September 18, 2017 at 2:16 pm
All of this info was there–and being spouted loudly by the left–during the campaign.

This is the deal you (not you, Rod, since you didn't vote for him..) made for Gorsuch. We'll all get to see how bad a deal it was in the next years.

Given the Left's attitude to free speech these days and judicial overreach, totally worth it. Totally.

Hound of Ulster , says: September 18, 2017 at 2:23 pm
Everyone who voted for Trump based on ANYTHING he said during the campaign is a sucker. We warned you, but you wouldn't listen and just wanted to watch the 'libtards' cry.

Fools

Polichinello , says: September 18, 2017 at 2:25 pm
To be honest, I never understood how Trump was going to bring these jobs back as automation was the primary cause and the connection of Illegal Immigrants was not significant. Please show the direct lines of DACA Immigrants to manufacturing jobs in the Rust Belt?

They increase the labor pool that will compete with those people whose jobs have been eliminated by automation. Moreover, they require the same public spending (actually more), so now those people affected by automation are left with less government succour, as resource now have to be diverted to people who entered the country illegally.

I, for one, understand that some sort of compromise solution will need to be reached to deal with the Dacaritos, but let's not wave our hands and pretend this is all the fault of Skynet and that inflating the number of no- to low-skilled people in the pool will have no effect.

Be aware, too, that we're NOT discussing just a few hundred thousand people here, as the deals being thrown around will go up into the millions, once you factor in chain migration, as well as the knock on effect of encouraging yet more illegal immigration with the promise of future amnesties.

Alex Curbelo , says: September 18, 2017 at 2:26 pm
Mr. Dreher routinely gets into the pitfall of context denial when it comes to Trump.

Given the state of the country, and especially what the Republican and Democratic parties have given us for the last 40 years, no one (including Mr. Dreher) will ever be able to make the case that supporting Trump was not the rational way to go despite the risks. It was the right way to go under the circumstances and given the horrid alternatives that the GOP gave us in the primaries and the Democratic Party gave us for the general.

More importantly, just because Trump may be fake doesn't mean he did not tap into real issues. The reason Trump won is that, again, he tapped into very real issues.

YM , says: September 18, 2017 at 2:31 pm
Since I discovered your blog, Rod, I have wondered, why would you have your blog on such a lame website. Now I know – its your way or the highway. No choosing between imperfect choices.
ludo , says: September 18, 2017 at 2:39 pm
Just as the Clinton campaign disintegrated into a vacuous, visionless, vapor which the ultimately voters did not care to inhale, so too the Trump administration is in the premature process of decay into an amorphous, gelatinously unrecognizable politico-administrative life-form ("neither fish nor foul," "because you are lukewarm!neither hot nor cold "), perhaps to better camouflage and disguise the creedless (nihilistic) plutocratic pillaging of what remains of the non-oligarchically captured corpse (or, at least, despoiled and desecrated body) of a once proud and productively positive Middle Class government and state.
The Color of Celery , says: September 18, 2017 at 2:46 pm
Maybe Elizabeth Warren needs to be president if there is going to be something done about Goldman Sachs.

[NFR: If she weren't so fanatically down-the-line liberal on social issues, I'd strongly consider voting for her. -- RD]

Alex Curbelo , says: September 18, 2017 at 2:48 pm
A deal with Pelosi/Schumer would make sense on infrastructure but not DACA. Trump will not survive this betrayal on DACA. People aren't stupid.

There is a debate in the informed pro-Trump community -- is Trump a con artist, sell out, traitor, or man who means well but whose hands are tied. On one side, you have people bending over backwards to defend pretty transparently treacherous moves by Trump's on the grounds that he has little real choice. The argument is that because Trump's Jacksonian agenda is being monolithically and implacably opposed by the top leadership of both parties, the courts, the military, the IC, the banks and big corps, etc. (our true rulers), Trump has to bide his time, cut deals, and play Nth dimensional chess until he can move forward with his real populist agenda.

The other side of the argument is that Trump is just a con artist. When pro-Trump people try to argue to me that Trump's hands are tied, I also counter by pointing out the factors that are under Trump's control. Trump can't control Ryan, McConnell, etc. but what can he control. Trump can certainly control who works for him! Which means the strongest evidence that Trump never meant it can be found just by looking at who he has working for him. He gave top jobs to establishment figures like McMaster, Kelly and Cohn.

I can understand the claim that CIA and other deep state figures, McConnell, etc. won't go along with Trump and have been working overtime to sabotage Trump -- those things are true -- but what then is Trump's excuse for giving jobs to people like McMaster and Cohn?

Kushner and Cohn (and really most likely Lloyd Blankfein himself) have mostly neutralized Trump's economic, immigration and trade agenda in areas where the president has a lot to autonomy to act independent of the courts and Congress, while McMaster has done the same on the foreign policy front. And John Kelly, by all accounts, now has Trump under de facto house arrest, having reportedly cut off Trump from all of his remaining advisors that support the original MAGA agenda.

These are dark days for anyone who recognizes that the issues that propelled Trump to victory are real. Nothing ever changes because our true rulers are not the people we elect.

Finally, the idea that Trump pulled off the con of the century does not hold up. That honor belongs to the post-1980 Republican party for pulling off the longest and greatest con over the largest number of people ever. Trump can't come close.

Noah172 , says: September 18, 2017 at 2:52 pm
Who did Kevin Williamson favor in the 2016 primaries? Jeb? Rubio? Cruz?

Here is the reality that Williamson and his ilk refuse to acknowledge. If any of Trump's Republican rivals were in his position now:

The federal government would not be appreciably smaller.

Obamacare would not be fully repealed/replaced.

A bigger amnesty would be at least under consideration, if not already enacted.

The personal income tax would not be abolished or turned into a flat tax.

We'd be in a regime change war with Assad (and thus Putin).

Paul Ryan-ish "entitlement reform" would not be enacted.

Latinos and millenials would not love the Republican Party.

Homosexual marriage would not be rolled back.

These other Republicans (most to all of whom would have lost to HRC) would not have been so successful enacting the movement con agenda, which is unpopular and internally contradictory.

Voucherize Medicare + open borders + neocon wars + free trade + PC pandering = balanced budgets, prosperity for all, and a "permanent Republican majority"?

And Trump is the con man?

walking horse , says: September 18, 2017 at 2:54 pm
"Just shocking that a politician went back on a campaign promise. Throw the bum out. Shocking."

This is in fact shocking. It's shocking at least on the order of Bush the Elder's reversal of "read my lips: no new taxes", which cost him a second term.

I see that Trump has opened a US military base in Israel, the first ever, which is one of the stupidest acts in recent American history.

all of which suggests that Trump will soon be history himself

swb , says: September 18, 2017 at 2:59 pm
Given the comment section, there is no indication that his voters are judging his progress based on any criteria that is usually applied to normal politicians. Real benefits are not actually a criterion used by his voters. If trump can find enough scapegoats to blame for things, I believe that qualifies as progress for his voters because that makes them feel better. Since he is adapt at generating controversy and thereby creating appropriate new groups to blame I do not really see reason why this virtuous cycle could not continue for two terms.

I mean seriously, bush junior sent off their sons and daughters to vacation in the desert and thousands of them did not come back and he got two terms. Trumps voters are not going to be upset just because he lies to them.

lllurker , says: September 18, 2017 at 3:00 pm
"Or cancelling Obama regulations such as the one that required any buildings re-built with federal money needs to take rising sea levels into account?"

I didn't even know that was a thing. (The regs themselves.)

As I followed the Houston and then FL news, once I would get past all the human suffering my mind always seemed to end up in the same place: "We're not really so stupid that we're actually gonna rebuild in these same low-lying places?"

I know this only applies to certain areas, and that the storm over Houston was pretty freakish and perhaps a one-of-a-kind. But some of these areas are destined to flood so much over the coming decades that they will eventually have to be abandoned, at least as building sites. So in the meantime how many billions are we going to put on Uncle Sam's credit card, to be paid by coming generations, for rebuilding doomed structures?

I hope there are controls in place that at least force the people who in the worst places to move elsewhere.

Mike Alexander , says: September 18, 2017 at 3:05 pm
Kronstein1963 writes:
It's easy to criticize but a lot more difficult to say what they should have done. So tell me, who should they have supported?

They should have voted for Sanders in the primaries and then the GOP nominee in the general. By doing this they would have helped further the economic nationalist message by demonstrating significant support for a serious anti-Wall street message. By putting Trump in there they established empirically that

populist economic nationalism = Goldman Sachs.

Populist economic nationalism is now a dead letter

Noah172 , says: September 18, 2017 at 3:18 pm
I'm in holding mode on Trump right now. I'm wait-and-see on where DACA negotiations go, and I'll call my Representative and Senators to voice my opposition to amnesty (and support for some of the restrictionist bills pending). Here's the possibilities of what the past week's DACA drama means to me:

Looks, quacks like a duck: Trump sincerely wanted to agree to amnesty, with little in return, with the Democrats, got blowback from his troops, and backtracked by seeming to insist on tougher demands.

Total sellout: Trump will go for amnesty, with no meaningful concessions, base voters (and small donors) be damned.

4D chess: Trump was using talk of amnesty and delaying a fight over the wall to lure the Democrats into negotiation so he could then drop tougher demands on them (end to chain migration), which he knows they will reject, setting them up to look like extremists and have a government shutdown fight (which, e.g., Congressman Luis Gutierrez openly wants) right before Christmas.

In the first possibility, I'm upset and undecided for 2020, but at least Trump listened to his troops after only a few days of Breitbart and Twitter screaming at him. That's more than you can say for GWB, John McCain, or Paul Ryan.

In the second possibility, I'm through with Trump, for good.

In the third, I'm OK with political chess-playing in principle, but you gotta do it right. It's dangerous, especially for Trump, hated as he is by all TPTB, even in his own party, to demoralize and confuse your core fan base (and small donation base, I repeat) in attempt to lure the opposition into a political trap.

I can't tell if possibility 1 or 3 is the truth (2 is unlikely but frighteningly possible). In any case, I don't see a DACA amnesty happening because too few Republicans will risk it, Trump seems to be offering a trade which the Democrats will never ever accept (only DACA applicants for RAISE Act and maybe wall or some interior enforcement), and some Democrats (Gutierrez and company) are so stupid and greedy and fanatical that they think they are entitled to a massive amnesty with literally nothing in return, not even fake border enforcement (Schumer and Pelosi are trying to talk sense into their backbenchers, we'll see to what avail).

Rusty , says: September 18, 2017 at 3:23 pm
It's almost as though the last 40 years of Youngstown citizens felt *entitled* to having those good jobs replaced, in their town, w/o having to move or re-invent themselves.
cdugga , says: September 18, 2017 at 3:38 pm
I am not buying the we were fooled thing in the least. Like, the don is putting health care and DACA in the hands of republican legislators and all they have to do is legislate. They have not and cannot. Now we are reading about the don's betrayal of labor on TAC? This is not any sort of news whatsoever. Someday, maybe after some environmental disaster in appalachia, we will read about how the don betrayed the amerian people by crippleing regulations designed to protect their air and water. As if that was something new too. No, what we are seeing here is what I have been seeing since the rise of the don. If he is successful, it is because we supported and voted for him. If he does what anyone paying attention saw him doing already, then we can say, well, he never was a true conservative anyway. All this, is just more of the same ole lies of omission and lies to deny responsibility and place blame on anyone but ourselves. How many columns have I read here about how the don was the fault, not of the people that actually voted for him, but the fault of those gay transgender mexican muslim blacks and their secularist enablers. And the beat goes on.
Oh, and I was mortified when trump was elected but not at all surprised. He followed every standard GOP strategy including the tried and true decisive pander to the NRA. If he did do anything different, it was to claim in a much more outright manner that we were being victimized by immigrants and all those other non-deserving people. He even set the bait for people like me, by saying he would go after wall street and the hedge funds that shorted the whole world in the financial collapse.
But in this pile on, we should give the don credit where it is due. He has successfully exposed the republican party for what it has always been about. And putting healthcare and DACA into republican legislator's hands is going to be much more revealing about who has been fooling the fools than anything the don himself has done.
lllurker , says: September 18, 2017 at 3:39 pm
"Steel workers were retrained to fill jobs in that sector, which was expected to sustain the middle class in the same way that manufacturing did.

It did not. According to a study done by the Midwest Center for Research the average salary of a steel worker in the late 1970s was $24,772.80. Today, according to the most recent Bureau of Labor statistics, the medium household income in the Mahoning Valley is $24,133."

There seems to be some misperceptions regarding the wages that were paid in old-line manufacturing industries vs modern service jobs. The most important thing to understand is that the once strong wages and benefits in the steel and auto and other similar industries had nothing to do with the sort of work the people were doing. The pay and benefits were a direct result of the employees having strong unions and the unions having favorable federal legislation in place.

The truth is that the jobs themselves were often awful, especially in steel. And dangerous. But the jobs didn't require any more experience or ability from a new hire than the fast food industry requires today.

It is just a quirk of the way the industrialization of the country played out that the industrial sector ended up, at least for awhile, with employee-friendly compensation packages. In fact had it all gone the other way, and the service sector grown first, before manufacturing, many of the problems the non-college educated crowd face today wouldn't even exist. Manufacturing has become especially sensitive to labor costs because companies can choose to build factories in other countries where salaries are low. Most of the country's service industry isn't like that.

VikingLS , says: September 17, 2017 at 8:59 pm
"When Youngstown (so to speak) figures out what's been done to it, politics in this country is going to get very, very interesting."

Rod what are you going to do to change this? The Ben Op doesn't help.

[NFR: I dunno, Viking, I guess I'm waiting on you to tell me what to do. You know perfectly well that the Benedict Option is not about changing American politics, but about the life of the church. Besides, it is not the case that I or anybody else has to have a "solution" to offer before we can criticize what we see. I doubt very much you apply that standard to your own judgments of the world. -- RD]

Planet Albany , says: September 17, 2017 at 9:03 pm
Since I voted for Trump and you did not, doesn't that put me in a better position to judge whether Trump's willingness to make deals with Dems on DACA, taxes and infrastructure amounts to betrayal? Answer: It doesn't. It's what I want him to do. He campaigned on making deals, including with Russia, which I also want to see to keep the peace. Just hold the line on social issues, and we're good.
Trey , says: September 17, 2017 at 9:08 pm
But I thought we were a bunch of hicks that did not understand the constitutional checks and balances and the need for compromise and when we found out Trump was not able to be a dictator we would turn on him.
Corwin , says: September 17, 2017 at 9:35 pm
The problem is Youngstown won't figure it out. They, and so many other small and industrial towns across the country, are looking for a solution on their terms. They have had the last 30 plus years to update, and some have, like Pittsburgh. Meanwhile, the people who have figured this out left for greener pastures a long time ago.

I would dearly love to help them out, and rebuild their cities. It would be the right thing to do. But as long as they keep voting for republicans (and yes, republicans are more corporate and Wall Street friendly then the democrats, Hillary Clinton notwithstanding), they are going to continue to decline.

Francis E Blangeard , says: September 17, 2017 at 9:36 pm
To a large extent Goldman Sachs is the 'Deep State'.
Adamant , says: September 17, 2017 at 9:40 pm
I was in Youngstown just the other week. You could no more thoroughly destroy a city than if you had the Air Force flyover and reduce it to rubble via saturation bombing. You could say the exact same thing about 1000 other towns here in the Rust Belt. The main source of economic activity is methamphetamine production and heroin trafficking, and the ruination of generations yet unborn is baked in.

"So Trump won -- and staffed up with Goldman machers -- Gary Cohn most important of all"

As did Obama, and Bush, and Clinton, and on and on unti the heat death of the universe. Wall. Street. Always. Wins. Like the Military Industrial Complex always wins.

And they will continue to win until we can decide as a people to put our cultural distinctions and differences aside and defeat them. Because they are going to exsanguinate your tribe of traditionalist Christian conservatives as surely as they will my tribe. Say what you want about the political praxis of Occupy Wall Street, at least they were yelling at the right buildings.

I'd like to bring an old word back into our political currency: solidarity.

Wes , says: September 17, 2017 at 10:17 pm
Still a happy Trump supporter here; unphased by the presence of Goldman Sachs employees (the horror!) or of deals with Democrats. Could be better, could be much worse.
VikingLS , says: September 17, 2017 at 10:19 pm
[NFR: I dunno, Viking, I guess I'm waiting on you to tell me what to do. You know perfectly well that the Benedict Option is not about changing American politics, but about the life of the church. Besides, it is not the case that I or anybody else has to have a "solution" to offer before we can criticize what we see. I doubt very much you apply that standard to your own judgments
of the world. -- RD]

Actually I do try and hold myself to a standard along those lines. People don't always like my suggestions, but I do have them. I wouldn't have asked you that question if I didn't have an idea what I think you, or at least somebody at TAC, needs to do.

Someone needs to talk about what Trump getting elected as a Republican with his platform says about the voters, even if he himself seems to have pulled a bait and switch. Not what liberals say it means ("Clinton was a bad candidate" at best "America is racist" at worst.) This is conference worthy.

Nothing against you and Larrison, you're both fine writers, but is it possible to get the other writers here to write more? What's the difference between yourself and say, Bill Kaufman in TAC's structure?

Someone, it doesn't have to be you, but someone, needs to spend serious time looking at the Conservative movement in new media. That's looking like where the future is, not the New York Times op-ed page. There really are people who supported Trump who are both aware that Trump isn't keeping his campaign promises, and are discussing what their next move is going to be.

Try and resist the temptation to write variations of "Trump voters must feel stupid now". As opposed to what? Having Clinton as president? Do you honestly think if Clinton was president you wouldn't be writing some version of "Wow, I knew Clinton was going to be bad, but I didn't realize she'd be THIS bad." In a little over 3 years, it will be a different story, but for a lot of people a Clinton presidency where she kept her promises would be worse.

I am going to write you a personal email. I actually have taken a pretty serious personal professional hit because of this election, and I STILL don't regret my vote. This is not all academic for me.

Old West , says: September 17, 2017 at 10:41 pm
Trump would have signed any legislation a GOP controlled House and Senate passed.

ANY.

It wouldn't even need to have been good.

Making a deal with the Dems is his way of punishing the GOP for being incompetent.

At this point I'm still feeling betrayed by them. But I reserve the option of adding him to the list.

Sam M , says: September 17, 2017 at 10:42 pm
It's hilarious how selective people are about economics. Nothing to be done about the steel industry. Just how markets work. Too bad so sad Youngsville.

Unless you are cool. Like Amazon. And cities will slobber all over themselves to say to hell with the market, we need to subsidize development. And give the richest guy in the world free stuff:

https://www.google.com/amp/s/mobile.nytimes.com/2017/09/07/technology/amazon-headquarters-north-america.amp.html

Elon Musk has received at least $5 billion in subsidies:

https://www.google.com/amp/www.latimes.com/business/la-fi-hy-musk-subsidies-20150531-story,amp.html

Hmm. It's almost like it's only poor schmucks who have to suffer the ups and downs of the free market.

collin , says: September 17, 2017 at 10:51 pm
I am sorry but this happened almost 40 years ago and I remember when conservatives like Reagan were dancing on the death of union graves in the 1980s. Conservative loved when Reagan fired union air traffic controllers. And one reason why I voted for Bill Clinton because in 1992 he campaigned on the jobs of tomorrow as was honest to the American people that many of these jobs were not coming. (And the second fall in manufacturing was occurring in 1992 as well.) To be honest, I never understood how Trump was going to bring these jobs back as automation was the primary cause and the connection of Illegal Immigrants was not significant. Please show the direct lines of DACA Immigrants to manufacturing jobs in the Rust Belt?

Agreed, as long as he rub in his Grand Victory over HRC, conservatives will take anything from Trump.

The Sicilian Woman , September 17, 2017 at 11:16 pm
Just hold the line on social issues, and we're good.

Such was/is the hope of social conservatives with whom I share the same values but who voted for Trump and whom I suspect will be badly betrayed.

Purple Tortoise , September 17, 2017 at 11:16 pm
I didn't vote for or against Trump -- the election winner was foreordained in my state -- but I am surprised to hear these "I told you sos". Despite Trump's betrayals, I am not at all convinced that the situation would be any better now had Hillary Clinton or an establishment Republican been elected. In fact, being cozy with Wall Street and immigration amnesty is exactly what Hillary Clinton or an establishment Republican would have done. So I can see how Trump is now and always has been a worse alternative from the viewpoint of the Republican establishment, but I can't see how Trump even now is a worse alternative than the Republican establishment or Hillary Clinton from the viewpoint of the typical Trump voter.

[NFR: But that's not really the point. The point is that Trump *specifically* ran against Goldman Sachs and what it represents. And now look. It simply won't do to say, "But Hillary would have been worse." Maybe so, but at this point, that strikes me as a way of rationalizing Trump's failure to keep his promises. -- RD]

The Owners , says: September 17, 2017 at 11:19 pm
@Planet Albany – "Since I voted for Trump [ ] Trump's willingness to make deals with Dems on DACA, taxes and infrastructure amounts to betrayal? Answer: It doesn't. It's what I want him to do. He campaigned on making deals, including with Russia, which I also want to see to keep the peace. Just hold the line on social issues, and we're good."

I voted for him too. Making deals witn Dems on DACA isn't "holding the line on social issues", obviously.

Trump's a total prisoner of DC, Wall Street, and Silicon Valley now. We need a new president. Thanks for Neil Gorsuch, Donnie. 'Bye.

Kronsteen1963 , September 17, 2017 at 11:19 pm
So, who were the people of Youngstown supposed to support? Hillary Clinton and a Democratic party that is visciously hostile to their social values? Jeb Bush and a Republican Party that's indifferent to their plight, and considers them to be lazy losers? Both parties support immigration and trade policies that are killing these people because it benefits their corporate and Chamber of Commerce contributors. Only one guy spoke to their situation: Donald Trump.

I don't like Trump – never have. And I didn't vote for him. I lived in Maryland – Clinton was going to win that state easily. My vote didn't matter so I voted 3rd party as a protest vote. But, I understand why people voted for Trump. They were desperate and he was THE ONLY CANDIDATE in either party that talked to their struggles. This is not a failure of the voters. It's the criminally negligent failure of both political parties to address the problems facing ordinary America.

It's easy to criticize but a lot more difficult to say what they should have done. So tell me, who should they have supported? And don't say "Anybody but Trump" – that's not an answer.

Walter Sobchak , September 17, 2017 at 11:24 pm
Shapiro is right. Planet Albany is one of the Trumpeters who love the personality, and who would not care if Trump shot somebody in the middle of Fifth Avenue. Their problem is that Trump can flip the Bird at the Media and the Cultural elite all he wants, but he will not affect system in the slightest, because he has no understanding of its structure and no plane to affect it in any way.
Glaivester , says: September 17, 2017 at 11:32 pm
Since I voted for Trump and you did not, doesn't that put me in a better position to judge whether Trump's willingness to make deals with Dems on DACA, taxes and infrastructure amounts to betrayal? Answer: It doesn't. It's what I want him to do.

It's not whether he makes deals. It's on whether they are good deals. The DACA deal would not be a good one if it follows what has been outlined.

John_M , says: September 17, 2017 at 11:47 pm
Trump is taking his supporters for a ride.

When I got out of graduate school I was offered a job by a steel company research lab – so yes, I was somewhat of a steel metallurgist. I went into micro-electronics instead. When I turned down their job offer, I told them that they would survive the Japanese competition, but that I thought that the mini-mills would decimate them.

The research lab closed down 3 years later as the steel company restructured.

Even without import competition, the steel industry we knew in the 1970's was doomed. The facilities were antique and the development of the basic oxygen furnace and the sophisticated electric arc remelt furnaces obsoleted much of the existing infrastructure. If you look at a Nucor mill now, you won't see many employees.

Even without any import issues, there would not have been many employees left.

Imports were – and are – a problem. But the carnage was done by technology and automation. The politicians do not seem to be very willing to discuss this – automation doesn't give the simple villain of the Chinese, Indians, Ukrainians, .

Philly guy , says: September 17, 2017 at 11:53 pm
If you look at the present day, we are still fighting over theVietnam war, as the pro and con sides are roughly the same as 40 years ago, middle class hippies vs "working class whites".
ANDREW ALLADIN , September 17, 2017 at 11:53 pm
Hillary Clinton would have easily defeated Ted Cruz, Marco Rubio, or Jeb Bush. Cruz is still stuck in his Reagan impersonation; Rubio wants to go to war with Russia over Ukraine, Crimea, Georgia, Syria, etc; and Jeb couldn't even bring himself to criticize the war in Iraq because of family loyalty.

Ben Shapiro charges $10,000 to give the same speech over and over again to college students. It's always the same: SJWs are whiny children, Millennials need to grow up, socialism sucks, the Alt-Right are losers, blah! blah! blah! A nice living if you can get it and he's got it.

Trump was and is still the lesser of two evils. I think of Trump the same way Christians in Syria think of Assad. Or Christians in Iraq thought about Saddam Hussein. There's always someone worse waiting to take over.

Some fellow Christians are facing bankruptcy because they refuse to provide services for a gay wedding. This isn't some whiny college campus SJW showdown. That's where my concern is. I really couldn't care less about Goldman Sachs. I don't earn enough to care. Don't care about DACA or The Wall either. Sorry.

Christian liberty is the only issue I'm voting on. And Trump will always be the lesser of two evils. Always. Always. Always.

Alex Brown , says: September 17, 2017 at 11:54 pm
So Trump is a crook, and Hillary too. I suspect much of 'Youngstown' knew that. When other choice did the system offered, from 150 millions eligible potential candidates?

Yes, things may get even more interesting. Haven't tried Sanderistas yet, have we?

ADC Wonk , says: September 18, 2017 at 12:44 am
Just hold the line on social issues, and we're good.

@Planet Albany -- how do you feel about tax "reform" that blows the budget even more, and gives the bulk of the benefit to the top 1%-ers? Or cancelling Obama regulations such as the one that required any buildings re-built with federal money needs to take rising sea levels into account? Or p!ssing off Mexico so much that that they are turning to Argentina and Brazal to purchase their wheat and corn (NAFTA uncertainties).

cecelia , says: September 18, 2017 at 2:10 am
good Rod get angry see what is happening maybe when people see how they have been betrayed then maybe they will be open to something honest
KS , says: September 18, 2017 at 2:13 am
@planet Albany,

What would Trump have to do that would make you feel he has betrayed you? Don't worry he will do it, but somehow I suspect you and the rest of the Trump faithful will stick by him anyway. This is a cult, not a political following. He is one of 'you' and so anything he does is ok.

Dux Bellorum, Austinopole , says: September 18, 2017 at 3:09 am
Those people who are dying in Youngstown because of a government working in cooperation with corporate interests to enrich shareholders no matter the cost of American lives may take great solace in the knowledge that the people making those decisions and benefitting from them said some words sometimes about how gay relationships are objectively disordered, and those outside of the zones of suffering may feel sad for those deaths, but must understand that they are martyrs who gave their lives in the war to prevent gay people from getting health insurance for their families.

$0.02,

DBA

[NFR: This is simplistic trolling and you know it. It is also the case that Hillary Clinton was in bed with Goldman. Remember the private Wall Street speech she gave , released by Wikileaks, in which she talked about how one needed to have "a public and a private position"? We would have been equally screwed by a Clinton.2 presidency, and a conventional Republican one. My anger at Trump over this is that he promised to be something different -- and, being fabulously wealthy, he didn't depend on the largesse of financial titans to make his living. He was in a position to change things -- yet on economic issues, he's turned out to be as bad or worse than those he ran against in both parties. -- RD]

Deplorable MD , September 18, 2017 at 6:51 am
Con? We are always being conned by politicians. There is a subset of voters who look upon their politician in an unhealthy God-like/3rd world fashion; much more tangible on the Left, but there on the Right as well.

I voted Trump fully expecting to be conned, hopeful that one or two promises would become reality. So far I am pleased with the level of duplicity.

Ping Lin , says: September 18, 2017 at 6:55 am

Twenty, thirty years from now, don't be surprised if some American president proposes a "this time, it's different" invasion of another foreign country. And don't be surprised if we the people cheer for him.

20 or 30 years?? Try three. We're barreling towards war with North Korea and half the country will be cheering the President (whoever it is) on.

Sam (A Different One) , says: September 18, 2017 at 6:59 am
So because Trump has failed to deliver on promises to the working class, said working class should abandon Trump for whom? The Liberals, who hate them? The GOP types, like Williamson, who also hate them?
Rob G , says: September 18, 2017 at 7:08 am
re: Youngstown, etc., The New Minority by Justin Gest is worth a read. It's a sociological study of the white working class in two comparable areas, Youngstown and East London, and what happened when industry failed. The book was written before DT won the GOP nomination, but it does take Trump's primary run into consideration. The work that Gest did is based on survey results and interviews he conducted with residents during time spent as an "embedded" researcher.
Liam , says: September 18, 2017 at 7:18 am
None of which should be a surprise to anyone who paid even a modicum of critical attention.
markw , says: September 18, 2017 at 7:33 am
For many years we have heard U.S. politicians sanctimoniously intoning that Chinese politicians legitimacy depended on their creating jobs. This last election Jeb Bush and others found out this applies to them also, to their astonishment. Trump has the wind at his back on this front with the economy going forward, but can't count on this continuing thru the next election.
Michelle , says: September 18, 2017 at 7:34 am
For those of us who always thought Trump was a huckster with no principles other than self-aggrandizement, his behavior as president comes as no surprise. He's never made a promise he couldn't break. But, like all successful hucksters, he knows his mark and knows, on an instinctive level, how to appeal to their hopes and fears to close the sale. I'm not sure what it would take to break through the rationalizations of his base, but it would have to be something pretty spectacular.
markw , says: September 18, 2017 at 7:35 am
The comment that stuck with me in the first PBS segment was that Diem owned us. This seems to apply today to Israel, probably Saudi, and who else?
Matt W , says: September 18, 2017 at 7:38 am
Be charitable. It's VERY hard for someone to admit that they were fooled.

It will be interesting to see all the mechanisms of denial. I suspect that the reality of Trump will be dismissed in the same way as the reality of Climate Change.

1. God would never allow such a terrible event to happen to His beloved USA
2. It's all the fault of (NON-WHITE) foreigners
3. FAKE NEWS!
4. It's actually a good thing

Philly guy , says: September 18, 2017 at 7:40 am
As during the Vietnam war, the real battle continues, middle class hippies vs white working class.
Jack B. Nimble , September 18, 2017 at 7:42 am
' When Youngstown (so to speak) figures out what's been done to it, politics in this country is going to get very, very interesting .'

Republicans know what they are doing, and as long as there are more scapegoats available and more vote suppression techniques to be tried, they aren't worried about losing elections. Consider this example:

Mr. Dreher's own senior US senator is pushing a last-ditch ACA repeal and replace bill, called GCHJ, that would strip federal $$ from states like Louisiana that expanded Medicaid on the federal dime. How much money is involved?

In 2026 alone, La. would lose $3.2 billion while Texas, Mississippi and Alabama would collectively gain 11.3 billion in new federal $$. Put another way, La. with its 1.4% of the US population would shoulder 4% of the total cuts mandated by GCHJ in 2026. Then a tidal wave of more federal cuts arrives in 2027.

Why would Dr. Bill Cassidy, who formerly worked in Louisiana's notorious charity hospital system before entering politics and reaching the US Senate, seek to hurt his own constituents this way? In brief, many in Louisiana oppose Medicaid and food stamps because they see the federal benefits going mostly to 'those people.' If voters in La. are conned, it is because they have conned themselves.

Source: https://www.cbpp.org/research/health/like-other-aca-repeal-bills-cassidy-graham-plan-would-add-millions-to-uninsured

MH - Secular Misanthropist , says: September 18, 2017 at 7:54 am

When Youngstown (so to speak) figures out what's been done to it, politics in this country is going to get very, very interesting.

It will be Snowball's fault!

[NFR: Perfect! -- RD]

Prof. Woland , says: September 18, 2017 at 8:31 am
If any of this is surprising to people on the right, it's because of willful denial during the campaign.

All of this info was there–and being spouted loudly by the left–during the campaign.

This is the deal you (not you, Rod, since you didn't vote for him..) made for Gorsuch. We'll all get to see how bad a deal it was in the next years.

PS–Trump's base will never leave him. If he were to eat a live baby on TV, they'd find a way to justify it.

connecticut farmer , September 18, 2017 at 8:40 am
" how little we Americans learned from the Vietnam experience when it came time to invade Iraq."

Amen! As in the lyrics of that Pete Seeger song "Where Have All The Flowers Gone"?":

"When will they ever learn? When will they ever learn?"

Polichinello , says: September 18, 2017 at 9:06 am
He didn't get rolled by Pelosi and Schumer: His voters got rolled by him. That's the real deal.

This is the part where the Never-Trumpers are overplaying their hand. They act as if they were offering a better alternative. They were not. On trade, immigration and foreign policy, all other 16 candidates were worse–significantly worse. Each promised to re-run the Bush Administration, except they'd make Putin the new Saddam Hussein.

It's as if they were the team that lost conference championship, and then gloated when the the team that won it went on to lose the Super Bowl. How about they spend a little more time looking at their own positions and trying to figure out why a significant plurality (often a large majority in a number of states) outright rejected them?

None of them have done this. They dare not anger their Boomer donors, I guess. Got to keep those cruises going!

Again, even if everything they say about Trump is true, he is still better than them.

Philip Martin , September 18, 2017 at 9:12 am
The money power of Wall Street infiltrated and changed the Democratic Party sometime after the LBJ years. As a result, we have a one-party-system with a lib and a con wing. The wings differ on social issues, and they sweep the crumbs off the table to different constituencies.

However, after 40 years of this BS, can we really expect the children and grandchildren of displaced steelworkers (who symbolize all the outsourced, discarded workers in the U.S.) to rise in anger with torches and pitchforks? Sad to say, but the victims of this betrayal so far are passively standing by. I am not calling for violent revolution, but instead for a party that puts the needs and aspirations of the average person at the head of the table. If the Democratic Party won't do it, and yet won't go away, then a serious effort needs to made to foster a new party.

Polichinello , says: September 18, 2017 at 9:13 am
It's worth noting, too, that the Trump base has been melting down phone lines in Washington protesting Amnesty.

Obviously, it's your blog, Rod, so you can do what you like with it, but why not take a look at this issue itself instead of post after post taking victory laps about that Horrible Mr. Trump? What do you think would be a good deal? Should there be some limited amnesty (which I favor)?

Uncle Billy , says: September 18, 2017 at 9:19 am
Goldman Sachs is the fourth branch of government. They are indeed "too big to fail." Perhaps we should stop fighting them and try to somehow get them working for the common good. I don't know how this could be done, but it is worth a try.
Wes , says: September 18, 2017 at 9:20 am
[NFR: But that's not really the point. The point is that Trump *specifically* ran against Goldman Sachs and what it represents. And now look. It simply won't do to say, "But Hillary would have been worse." Maybe so, but at this point, that strikes me as a way of rationalizing Trump's failure to keep his promises. -- RD]

Putting things into context is precisely the point.

ROB , says: September 18, 2017 at 9:23 am
Just shocking that a politician went back on a campaign promise. Throw the bum out. Shocking.
KD , says: September 18, 2017 at 9:33 am
No Quarter, Rod!
Sheldon , says: September 18, 2017 at 9:36 am
I'm not remotely surprised to read in these precincts that the Democrats, particularly Clinton, are just as much in the bag for Wall Street as Trump and the Republicans. Too bad it's completely untrue. Even if Clinton were so inclined, which she certainly wouldn't be to nearly the same extent, major elements in the Democratic party and Congress would be pushing for policies far removed from the plutocratic – as they have for years, for increased financial and antitrust regulation, higher taxes on the 1%, limits on CEO pay, environmental controls, minimum wage, and on and on and on. There is no such significant political element among Republican officeholders, either at the state or federal level. The argument that "Democrats (especially evil Hillary) are just as bad" – all evidence to the contrary – is really just an after-the-fact rationalization to justify one's prior support for what is clearly one of the most financially and morally corrupt administrations in our history.
KingP , says: September 18, 2017 at 9:44 am
It is amazing how much research and
socio-political commentary is necessary in order to prove that an amoral, egomaniac MTV-era pseudo-celebrity apparently intends to govern the country like an amoral, egomaniac MTV-era pseudo-celebrity. In other words, he is a narcissistic goofball who will tell anyone anything in order to get press or money.

Who knew? Apparently not enough of us to prevent the cartoon presidency.

Daniel R. Baker , September 18, 2017 at 9:56 am
And when the people of Youngstown realize Trump has betrayed them, they will turn left, and turn hard. The next Bernie Sanders cannot be stopped, for the same reason Trump couldn't be stopped: because he will simply take the party away from the establishment. As I said last year, when you elect Marius, Sulla follows.

I'm not surprised that Trump can't see this coming. I am a bit surprised that Goldman Sachs apparently doesn't either.

KD , says: September 18, 2017 at 9:58 am
The politics of immigration restriction is interesting. The restrictionists have clear and strong preferences.

"Popular opinion" may be against restrictionism (or not given the media lens), but at the end of the day, most of public against restrictionism has a soft level of support mostly for virtue signalling purposes. They don't actually care.

The business lobby cares a lot, and the ethnonationalist/racialist wing of the Democrats, and that is about all.

Playing games with DACA is going to open the GOP to nasty primary battles, which judging from 2016, the Establishment candidates will be vulnerable. Also, supporting these schlock sentimental policies aren't going to win them any votes, anymore than giving money to refugee assistance or homeless shelters.

I don't think the Establishment has any idea of the level of dissatisfaction and discontent there is in the electorate, as their plan is short to mid-term doom. (Polling has 9% of Americans identifying as "Alt-Right" post-Charlottesville, and about another 30% you can describe as "Alt-Lite". These are mostly the people who will vote in GOP Primaries in 2018.)

[Feb 06, 2017] The problem with predatory behaviour of TBTF financial institutions is probably deeper then personality of Blankfein.

Feb 06, 2017 | economistsview.typepad.com
pgl : February 04, 2017 at 03:41 PM , 2017 at 03:41 PM
Not that Wikipedia gets everything right but here is a snippet of what it says about the Goldman Sachs CEO:

'Blankfein testified before Congress in April 2010 at a hearing of the Senate Permanent Subcommittee on Investigations. He said that Goldman Sachs had no moral or legal obligation to inform its clients it was betting against the products which they were buying from Goldman Sachs because it was not acting in a fiduciary role. The company was sued on April 16, 2010, by the SEC for the fraudulent selling of a synthetic CDO tied to subprime mortgages. With Blankfein at the helm, Goldman has also been criticized "by lawmakers and pundits for issues from its pay practices to its role in helping Greece mask the size of its debts". In April 2011, a Permanent Subcommittee on Investigations report accused Goldman Sachs of misleading clients about complex mortgage-related investments in 2007, and Senator Carl Levin alleged that Blankfein misled Congress, though no perjury charges have been brought against Blankfein. In August of the same year, Goldman confirmed that Blankfein had hired high-profile defense lawyer Reid Weingarten'

Weingarten helped in the defense of the Worldcom thieves. Why would anyone do business with a company led by such an ethically challenged CEO?

libezkova -> pgl... , February 04, 2017 at 07:12 PM
The problem here is probably deeper then personality of Blankfein.

There is such thing as system instability of economy caused by outsized financial sector and here GS fits the bill. Promotion of psychopathic personalities with no brakes and outsize taste for risk is just an icing on the cake.

> Why would anyone do business with a company led by such an ethically challenged CEO?

Why you are assuming the other TBTF are somehow better then GS?

[Feb 04, 2017] Fish rots from the head and in Goldman Sachs it rots from the head too.

Feb 04, 2017 | economistsview.typepad.com
pgl : February 04, 2017 at 03:41 PM
Not that Wikipedia gets everything right but here is a snippet of what it says about the Goldman Sachs CEO:

'Blankfein testified before Congress in April 2010 at a hearing of the Senate Permanent Subcommittee on Investigations. He said that Goldman Sachs had no moral or legal obligation to inform its clients it was betting against the products which they were buying from Goldman Sachs because it was not acting in a fiduciary role. The company was sued on April 16, 2010, by the SEC for the fraudulent selling of a synthetic CDO tied to subprime mortgages. With Blankfein at the helm, Goldman has also been criticized "by lawmakers and pundits for issues from its pay practices to its role in helping Greece mask the size of its debts". In April 2011, a Permanent Subcommittee on Investigations report accused Goldman Sachs of misleading clients about complex mortgage-related investments in 2007, and Senator Carl Levin alleged that Blankfein misled Congress, though no perjury charges have been brought against Blankfein. In August of the same year, Goldman confirmed that Blankfein had hired high-profile defense lawyer Reid Weingarten'

Weingarten helped in the defense of the Worldcom thieves. Why would anyone do business with a company led by such an ethically challenged CEO?

libezkova -> pgl... February 04, 2017 at 07:12 PM
The problem here is probably deeper then personality of Blankfein.

There is such thing as system instability of economy caused by outsized financial sector and here GS fits the bill. Promotion of psychopathic personalities with no brakes and outsize taste for risk is just an icing on the cake.

> Why would anyone do business with a company led by such an ethically challenged CEO?

Why you are assuming the other TBTF are somehow better then GS?

[Jan 13, 2017] Central bankers today irresistibly bring to mind the Wizard of Oz. Its the characters missing virtues that grab me: a heart, a brain, and courage. Central bankers today lack all three

Notable quotes:
"... First, the brain. Two generations ago, almost every economist knew what a catastrophe a deficiency of effective demand could create. And in a real crunch, they knew what to do about that. They realized you couldn't push on a string, so somebody - the government - had to borrow and spend when private markets would not. From the 1980s on, though, the fundamental Keynesian point - the Principle of effective Demand -disappeared in a cloud of statistical double-talk that, when you deconstruct it, turns out to imply estimating potential output as a lagged function of whatever foolish policy is being pursued. ..."
"... Central bankers didn't take this giant step backwards to pre-Keynesian economics by themselves. In that sense, it's unfair to say they have only themselves to blame. But they swallowed it whole, helped subsidize it, and cheered it on. Now that they have rediscovered that monetary policy can't levitate a broken economy, except by beggaring the neighbors, it's time they admitted their errors and stopped acting like they could control everything... ..."
"... Next, courage. In the good old days, central bankers were given to heady talk about "taking away the punch bowl" before the party really got going. That may have been mostly rhetoric, but it at least paid lip service to some value bigger than banking... ..."
Jan 13, 2017 | economistsview.typepad.com
JohnH -> Peter K.... January 13, 2017 at 08:31 AM

Thomas Ferguson: "Central bankers today irresistibly bring to mind the Wizard of Oz. It's the characters' missing virtues that grab me: a heart, a brain, and courage. Central bankers today lack all three.

First, the brain. Two generations ago, almost every economist knew what a catastrophe a deficiency of effective demand could create. And in a real crunch, they knew what to do about that. They realized you couldn't push on a string, so somebody - the government - had to borrow and spend when private markets would not. From the 1980s on, though, the fundamental Keynesian point - the Principle of effective Demand -disappeared in a cloud of statistical double-talk that, when you deconstruct it, turns out to imply estimating potential output as a lagged function of whatever foolish policy is being pursued.

Central bankers didn't take this giant step backwards to pre-Keynesian economics by themselves. In that sense, it's unfair to say they have only themselves to blame. But they swallowed it whole, helped subsidize it, and cheered it on. Now that they have rediscovered that monetary policy can't levitate a broken economy, except by beggaring the neighbors, it's time they admitted their errors and stopped acting like they could control everything...

Next, courage. In the good old days, central bankers were given to heady talk about "taking away the punch bowl" before the party really got going. That may have been mostly rhetoric, but it at least paid lip service to some value bigger than banking...

The Fed took risks to save the banking system, but is already telling us we are close to full employment and professing to be alarmed about "inflation," when anyone can see that banks, insurers, and pension funds are clamoring for rate rises, just as in the 1930s. Both institutions need to start thinking about someone besides the financial community. If they don't, I do not doubt that we will not have seen the last of the anger that Donald Trump and Senator Bernie Sanders mobilized in such disparate ways in the United States..."

Meanwhile 'liberal' worshippers of unsubstantiated 'crowding out' theories are eager to stifle fiscal stimulus by having the Fed take away the punch bowl before the party starts.

JohnH -> JohnH... , January 13, 2017 at 08:32 AM
Link: http://www.nakedcapitalism.com/2017/01/tom-ferguson-monetary-policy-cant-levitate-broken-economy.html

[Dec 09, 2016] Why Trade Deficits Matter

Dec 09, 2016 | economistsview.typepad.com
Jared Bernstein and Dean Baker:
Why Trade Deficits Matter, The Atlantic : However one feels about Donald Trump, it's fair to say he has usefully elevated a long-simmering issue in American political economy: the hardship faced by the families and communities who have lost out as jobs have shifted overseas. For decades, many politicians from both parties ignored the plight of these workers, offering them bromides about the benefits of free trade and yet another trade deal, this time with some "adjustment assistance."
One of Trump's economic goals is to lower the U.S.'s trade deficit-which is to say, shrink the discrepancy between the value of the country's imports and the value of its exports. Right now, the U.S. currently imports $460 billion more than it exports, meaning it has a trade deficit that works out to about 2.5 percent of GDP. Given that the job market is still not back to full strength and the U.S. has been losing manufacturing jobs-there are 60,000 fewer now than at the beginning of this year, according to the Bureau of Labor Statistics -economists would be wise to question their assumption that such a deficit is harmless. ...
Is the U.S. trade deficit a problem whose solution would help American workers? ...

anne -> sanjait... , December 08, 2016 at 06:10 PM
Looks to me like "global power" comes from a lot more than military spending, and if its jobs we want, then military spending is a decent short run stimulus but long run waste in terms of productive expenditure.

[ Very important argument. ]

anne -> anne... , December 08, 2016 at 06:38 PM
https://en.wikipedia.org/wiki/The_Great_Illusion

The Great Illusion is a book by Norman Angell, first published in the United Kingdom in 1909 under the title Europe's Optical Illusion and republished in 1910 and subsequently in various enlarged and revised editions under the title The Great Illusion.

Angell argued that war between industrial countries was futile because conquest did not pay. J.D.B. Miller writes: "The 'Great Illusion' was that nations gained by armed confrontation, militarism, war, or conquest." The economic interdependence between industrial countries meant that war would be economically harmful to all the countries involved. Moreover, if a conquering power confiscated property in the territory it seized, "the incentive to produce [of the local population] would be sapped and the conquered area be rendered worthless. Thus, the conquering power had to leave property in the hands of the local population while incurring the costs of conquest and occupation."

Angell said that arms build-up, for example the naval race that was happening as he wrote the book in the early 1910s, was not going to secure peace. Instead, it would lead to increased insecurity and thus increase the likelihood of war. Only respect for international law, a world court, in which issues would be dealt with logically and peaceably would be the route for peace.

A new edition of The Great Illusion was published in 1933; it added "the theme of collective defence." Angell was awarded the Nobel Peace Prize in 1933. He added his belief that if France, Britain, Poland, Czechoslovakia, etc. had bound themselves together to oppose all military aggression, including that of Hitler's, and to appeal to world justice for solution to countries' grievances, then the great mass of reasonable Germans would have stepped up and stopped Hitler from leading their country into an unwinnable war, and World War II would have been avoided.

New Deal democrat -> sanjait... , December 08, 2016 at 06:11 PM
Really, go screw yourself.

In 1909 a book was published saying that free trade would make the world prosperous forever. In the U.S. It was called "the Grand Illusion." Unfortunately Kaiser Wilhelm appeared not to get the message.

If China didn't have those $$$$trillions, they wouldn't feel empowered to change boundary lines by force. We wouldn't be worried about a new arms race.

As for solutions, a trade weighted tariff that kicked in after a certain period/percentage would work just fine, probably similar to the wage equalization tariff I suggested the other day. A VAT might accomplish a similar result.

But seriously, you and everyone who thinks like you can go screw yourselves. Your myopic elitism has gotten us here. I wish you nothing but pain.

DrDick -> sanjait... , December 08, 2016 at 07:06 PM
"then military spending is a decent short run stimulus"

No it is not. It is very ineffective and wasteful. You would get much better return on your investment by spending on repairing and upgrading civic infrastructure.

DrDick -> sanjait... , December 08, 2016 at 07:02 PM
Bull. What we need is enforceable labor and environmental standards and protections so that the corporate greed heads will have less incentive to outsource their production to places lacking any of those things. This is all about maximizing rents by ruthlessly exploiting vulnerable labor in the developing world and by being able to poison and devastate their countries at will.
Victory Lap Dancer : , December 08, 2016 at 05:27 PM

U.S. currently imports $460 billion more than it exports, meaning
"
~J B & D B~~

... meaning that We the People print up t-bonds valued at $460 then trade these bonds for Federal Reserve Notes printed up by FG-s worth $460 then use same notes to buy same amount of running shoes, shot glasses, etc.

We print up genuine t-bonds for their counterfeit products that look like the real thing. Huh! The question is :

How can we do more of this without those foreigner suckers catching on, getting wise to the scam?

For one, we can make sure that we don't print up more of our genuine paper than their demand for it. Get it? So long as their demand continues to be great enough to raise the price of our tiny slips of paper, we are cool.

When we are printing too much, the price of our paper falls, buys less, has less buying power. Less buying power is what we call inflation. More buying power is what we call deflation. Got it?

Print less thus keep popularity of our printed numbers up. Tell me something!

What happens when our workers lose jobs to foreigner suckers who dig our printed numbers?

Job loss to foreigners slows down the domestic development of robotics, artificial intelligence, and the singularity that will inevitably detonate all jobs globally. What will that detonation do to our life style of excessive overpopulation.

Don't ask, but don't
tell --

Donald A. Coffin : , -1
The usual response to a trade deficit is that the country running the deficit sees its currency decline in value. This lowers the effective price of its exports and raises the effective price of its imports. Assuming nothing peculiar about the price elasticities of demand for exports and import, this should lead to a shrinking trade deficit. From 1973 to 1998, the dollar appreciated steadily, and the (nominal) trade deficit expanded only slightly. From 1998 to 2005, the dollar continued to appreciate--but the (nominal) trade deficit exploded, increasing by a factor of (roughly) 10 by 2006. Then, as the dollar began depreciating (in 2002), the trade deficit began to shrink. Since about 2008, the dollar has been appreciating again.

What needs most to be explained is the explosion of the trade deficit between 1998 and 2006; about half of the increase in the trade deficit was between 1998 and 2002; the other half between 2002 and 2006.

[Dec 02, 2016] The incomes of the financial sector are mostly pure rents so there are fewer gains from trade possible here than there are for more productive sectors. Trade negotiations on this are therefore more win-lose rather than potentially win-win

Notable quotes:
"... The incomes of the financial sector are mostly pure rents so there are fewer gains from trade possible here than there are for more productive sectors. Trade negotiations on this are therefore more 'win-lose' rather than potentially 'win-win'. ..."
Dec 02, 2016 | crookedtimber.org

derrida derider 11.29.16 at 2:09 am 5

T's right – the economic impact of Brexit on the UK will overwhelmingly depend on how the EU "passport" entitlements for the banks are negotiated. And of course the Germans (with Frankfurt) and the French (with Paris) have a strong incentive to make sure that a good slab of the City's business goes to them.

The incomes of the financial sector are mostly pure rents so there are fewer gains from trade possible here than there are for more productive sectors. Trade negotiations on this are therefore more 'win-lose' rather than potentially 'win-win'.

I think the result will certainly be lower aggregate GDP for the UK but it might well be better distributed (eg London property prices may be less absurd). The City has long made the rest of the UK economy suffer from a form of Dutch disease through an overvalued pound sterling. So those Sunderland Brexit voters might prove ultimately correct in their assessment of their economic interests – just not in the way they think.

[Sep 12, 2016] Future Economists Will Probably Call This Decade the 'Longest Depression'

Sep 12, 2016 | economistsview.typepad.com
Brad DeLong:
Future Economists Will Probably Call This Decade the 'Longest Depression' : ... Back before 2008, I used to teach my students that during a disturbance in the business cycle, we'd be 40 percent of the way back to normal in a year. The long-run trend of economic growth, I would say, was barely affected by short-run business cycle disturbances. There would always be short-run bubbles and panics and inflations and recessions. They would press production and employment away from its long-run trend -- perhaps by as much as 5 percent. But they would be transitory.
After the shock hit, the economy would rapidly head back to normal. The equilibrium-restoring logic and magic of supply and demand would push the economy to close two-fifths of the gap to normal each year. After four years, only a seventh of the peak disturbance would remain.
In the aftermath of 2008, Stiglitz was indeed one of those warning that I and economists like me were wrong. Without extraordinary, sustained and aggressive policies to rebalance the economy, he said, we would never get back to what before 2008 we had thought was normal.
I was wrong. He was right. ...

[May 29, 2016] Goldman raised their price target (causing a rally in the stock) hours before underwriting a capital raise that cause a decline in Tesla's stock

peakoilbarrel.com
Brian Rose, 05/18/2016 at 6:34 pm
Toolpush,

I found it amusing that Goldman raised their price target (causing a rally in the stock) hours before underwriting a capital raise that cause a decline in Tesla's stock.

Although, to be fair there are SEC rules that are very explicit, with severe consequences, if Goldman Sachs' underwriting dept talked or leaked anything to their analysts.

Goldman Sachs does plenty of shady things to make a profit – like selling Mortgage Backed Securities as AAA investments, and simultaneously, knowing they're crap, betting on them going bad (covered in the critically acclaimed documentary "Inside Job"), or helping Greece hide their budget deficit with accounting magic… so they can sell them debt… that they know will go bad.

However, as odd as it is, none of those actions were illegal. THIS would actually be illegal, and Goldman Sachs is smarter than that. I'd guess it is a genuine coincidence.

On a separate note, I find it important to note that Tesla FIRST scouted out battery suppliers to supplement their battery supply 1 DAY before announcing the amount of their capital raise.

My hypothesis, Tesla's accelerated Model 3 ramp-up meant that they will need a large supply of additional batteries as the Gigafactory will not be able to accelerate it's schedule enough to match the accelerated vehicle production ramp.

This also tells me that Tesla is confident enough in their accelerated Model 3 production schedule that they needed to arrange a multi-million dollar contract with battery suppliers to supplement their capacity until the Gigafactory can meet demand.

likbez, 05/18/2016 at 11:00 pm
Although, to be fair there are SEC rules that are very explicit, with severe consequences, if Goldman Sachs' underwriting dept talked or leaked anything to their analysts.

This is all about corruption of regulators and impunity of TBTF financial institutions under neoliberalism - which is an immanent feature of neoliberalism aka "casino capitalism"…

Goldman's role in the growth of casino capitalism in the USA is similar to that of other players, except for one thing: Goldman didn't believe its own hype. The now famous Rolling Stone magazine article in 2009 by Matt Taibbi unforgettably referred to Goldman Sachs, the world's most powerful investment bank, as a "great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money." ( http://www.forbes.com/sites/jakezamansky/2013/08/08/the-great-vampire-squid-keeps-on-sucking/ )

https://www.bostonglobe.com/opinion/2016/05/12/the-age-impunity/LHBxamqFENCs3W6lvWnCIJ/story.html

Impunity is epidemic in America. The rich and powerful get away with their heists in broad daylight. When a politician like Bernie Sanders calls out the corruption, the New York Times and Wall Street Journal double down with their mockery over such a foolish "dreamer." The Journal recently opposed the corruption sentence of former Virginia governor Bob McDonnell for taking large gifts and bestowing official favors - because everybody does it. And one of its columnists praised Panama for facilitating the ability of wealthy individuals to hide their income from "predatory governments" trying to collect taxes. No kidding.

Our major institutions, the ones that should know better, are often gross enablers of impunity. Consider my alma mater, Harvard University, and its recent nuptial with hedge-fund manager John Paulson. Paulson was the co-conspirator with Goldman Sachs of one of the most notorious scams of the recent financial bubble.

http://www.softpanorama.org/Skeptics/Financial_skeptic/Casino_capitalism/Systemic_instability_of_financial_sector/TBTF/Goldman_Sachs/index.shtml

Professional financial hackers have a lot of common with the organized crime. And not only in respect to common addictions to cocaine and prostitutes. But there is a subtle difference: financial hackers make it daily (and very lucrative) business to figure out ways to abide by the letter of the law while violating its spirit. Although the claim that they do not break the law has very little credibility. They do break the law, but at the same time their political influence is big enough to keep them out of jail. In 2012 Lanny Breuer, then the head of the Justice Department's criminal division openly admitted that. In a speech at the New York City Bar Association he said that he felt that it was his duty to consider the health of the company, the industry, and the markets in deciding whether or not to file charges. Which in case of Goldman represents insurmountable obstacle to criminal prosecution.
In any case GS converted itself into a special type of TBTF company, the company that specialized in hacking financial system. And in a large company internal politic can turn really destructive both to the firm and society at large. In fact, in large companies there are people with very high IQ at the top with personal traits that makes them more dangerous in comparison with bosses of Mexican gangs. It also makes internal political battles more vicious. BTW, a lot of psychopaths have above average IQ.

In a way the USA never had a subprime crisis. What we had was systemic, neoliberalism-induced crisis that involves FED, government, congress, banking, ratings, insurance, investment and financial industries (the banks were at the center of this crime syndicate and they were the largest beneficiaries of the crimes committed), one manifestation of which was 2008 subprime crisis. Large banks became huge, dominant political force and based on their political weight, they hacked the financial system in the same way computer hackers hack computers systems to suit their short term needs and first of all for enrichment of the brass (appetite for "make money fast" schemes was greatly raised during dot-com crisis).
As Simon Johnson wrote in May 2009 the USA had a The Quiet Coup with banks becoming the most favored and the most protected industry of the Congress. Financial system is essentially a system of rules. If a rich and powerful organization is directed toward hacking the rules: finding weaknesses and exploiting them it is undistinguishable from mafia in a very precise meaning of the term (organize crime syndicate with strong ethnic component), only more sophisticated. Again they are not gangsters in traditional meaning of this word, they are of a hackers, and as such they are much more difficult to prosecute. As a comment to blog post at EconomistView by "Eric" (Paul Krugman The Unwisdom of Elites) aptly stated:
Villains….who exactly? The principle reason that there have been few prosecutions of high level bankers is that not so much that got done was illegal. Reckless, maybe. But even here is it really reckless behavior if you have a belief - which turns out to be true - that public finances will bear the downside risks on your behalf?
In hindsight it feels like these things should have been illegal, but the available serious punishments, such as not bailing out AIG, not allowing various investment firms to become bank holding entites, not backstopping the GSEs (read their debt issues and you'll see that nowhere is a claim made for public backing), not taking first loss positions on Bear Stearn assets, etc., etc., were foregone by voluntary actions by public officials.
Make peace with the truth that there will be no sweeping prosecutions, least of all by the federal government of the USA.

[May 19, 2016] The Great Vampire Squid Keeps On Sucking - Forbes

[Apr 24, 2016] Theres a new parliamentary group in UK on Limits to Growth that had its first meeting this week

Notable quotes:
"... 'There's an interesting theory – called the 'green paradox' – that low oil prices are in part the reaction of an industry fearful of the impacts of climate change policy on its future revenues. ..."
"... The German economist Hans-Werner Sinn has argued that "if suppliers feel threatened by a gradual greening of economic policies.. they will extract their stocks more rapidly" thus pushing their prices down' ..."
peakoilbarrel.com
George Kaplan , 04/22/2016 at 2:14 am
There's a new parliamentary group in UK on Limits to Growth that had it's first meeting this week.

'A 2015 analysis of the remaining fossil fuel resources in China, USA, Canada and Australia, which includes unconventional resources, suggests that overall oil production is in fact peaking already'

I hadn't heard this before:

'There's an interesting theory – called the 'green paradox' – that low oil prices are in part the reaction of an industry fearful of the impacts of climate change policy on its future revenues.

The German economist Hans-Werner Sinn has argued that "if suppliers feel threatened by a gradual greening of economic policies.. they will extract their stocks more rapidly" thus pushing their prices down'

http://limits2growth.org.uk/wp-content/uploads/2016/04/Jackson-and-Webster-2016-Limits-Revisited.pdf

[Mar 03, 2016] Barriers to Productivity Growth

economistsview.typepad.com
Chris Dillow:
Barriers to productivity growth : "The limits to productivity growth are set only by the limits to human inventiveness" says John Kay. This understates the problem. There are other limits. I'd mention two which I think are under-rated.
One is competition. Of course, this tends to increase productivity in many ways. But it has a downside. The fear of competition from future new technologies can inhibit investment today: no firm will spend £10m on robots if they fear a rival will buy better ones for £5m soon afterwards. ...
The second is that, as Brynjolfsson and MacAfee say , "significant organizational innovation is required to capture the full benefit of…technologies."
For example, Paul David has described (pdf) how the introduction of electricity into American factories did not immediately raise productivity much, simply because it merely replaced steam engines. It was only when bosses realized that electric motors allowed factories to be reorganized – dispensing with the need for machines to be close to a central power source – that productivity soared, as workflow improved and new cheaper buildings could be used. This took many years.
It's not just organizational change that's needed, though..., I suspect that if IT is to have (further?) productivity-enhancing effects, they require socio-organizational change. ...
However, there are always obstacles to the social and organizational change necessary for technical change to lead to productivity gains. These might be cognitive – such as the Frankenstein syndrome or "not invented here " mentality. Or they can be material. Socio-technical change is a process of creative destruction, the losers from which kick up a stink; think of taxi-drivers protesting against Uber.
Worse still, these losers aren't always politically weak Ludditites. They can be well-connected bosses of incumbent firms, or managers seeking to maintain their power base. ...
The big question facing us is, therefore: do we have the right set of institutions to foster the socio-organizational change that beget productivity growth? These require a mix of healthy markets, to maximize ecological diversity; a financial system which backs risky new-comers; property rights which incentivise innovation; and state intervention that facilitates all these whilst not being captured by Luddites. If our politics weren't so imbecilic, this question would be getting a lot more attention than it is.

Related: How concerned should we be about business investment and productivity growth? - Nick Bunker .

Posted by Mark Thoma on Thursday, March 3, 2016 at 10:51 AM in Economics , Productivity | Permalink Comments (97)

[Dec 19, 2015] The Enduring Relevance of "Manias, Panics, and Crashes"

Notable quotes:
"... Manias, Panics, and Crashes ..."
"... The New International Money Game ..."
"... Manias, Panics and Crashes ..."
"... Why Minsky Matters ..."
"... Manias, Panics and Crashes ..."
"... Manias, Panics and Crashes ..."
December 17, 2015 | Angry Bear

by Joseph Joyce

The Enduring Relevance of "Manias, Panics, and Crashes"

The seventh edition of Manias, Panics, and Crashes has recently been published by Palgrave Macmillan. Charles Kindleberger of MIT wrote the first edition, which appeared in 1978, and followed it with three more editions. Robert Aliber of the Booth School of Business at the University of Chicago took over the editing and rewriting of the fifth edition, which came out in 2005. (Aliber is also the author of another well-known book on international finance, The New International Money Game.) The continuing popularity of Manias, Panics and Crashes shows that financial crises continue to be a matter of widespread concern.

Kindleberger built upon the work of Hyman Minsky, a faculty member at Washington University in St. Louis. Minsky was a proponent of what he called the "financial instability hypothesis," which posited that financial markets are inherently unstable. Periods of financial booms are followed by busts, and governmental intervention can delay but not eliminate crises. Minsky's work received a great deal of attention during the global financial crisis (see here and here; for a summary of Minksy's work, see Why Minsky Matters by L. Randall Wray of the University of Missouri-Kansas City and the Levy Economics Institute).

Kindleberger provided a more detailed description of the stages of a financial crisis. The period preceding a crisis begins with a "displacement," a shock to the system. When a displacement improves the profitability of at least one sector of an economy, firms and individuals will seek to take advantage of this opportunity. The resulting demand for financial assets leads to an increase in their prices. Positive feedback in asset markets lead to more investments and financial speculation, and a period of "euphoria," or mania develops.

At some point, however, insiders begin to take profits and withdraw from the markets. Once market participants realize that prices have peaked, flight from the markets becomes widespread. As prices plummet, a period of "revulsion" or panic ensues. Those who had financed their positions in the market by borrowing on the promise of profits on the purchased assets become insolvent. The panic ends when prices fall so far that some traders are tempted to come back into the market, or trading is limited by the authorities, or a lender of last resort intervenes to halt the decline.

In addition to elaborating on the stages of a financial crisis, Kindleberger also placed them in an international context. He wrote about the propagation of crises through the arbitrage of divergences in the prices of assets across markets or their substitutes. Capital flows and the spread of euphoria also contribute to the simultaneous rises in asset prices in different countries. (Piero Pasotti and Alessandro Vercelli of the University of Siena provide an analysis of Kindleberger's contributions.)

Aliber has continued to update the book, and the new edition has a chapter on the European sovereign debt crisis. (The prior edition covered the events of 2008-09.) But he has also made his own contributions to the Minsky-Kindleberger (and now –Aliber) framework. Aliber characterizes the decades since the early 1980s as "…the most tumultuous in monetary history in terms of the number, scope and severity of banking crises." To date, there have been four waves of such crises, which are almost always accompanied by currency crises. The first wave was the debt crisis of developing nations during the 1980s, and it was followed by a second wave of crises in Japan and the Nordic countries in the early 1990s. The third wave was the Asian financial crisis of 1997-98, and the fourth is the global financial crisis.

Aliber emphasizes the role of cross-border investment flows in precipitating the crises. Their volatility has risen under flexible exchange rates, which allow central banks more freedom in formulating monetary policies that influence capital allocation. He also draws attention to the increases in household wealth due to rising asset prices and currency appreciation that contribute to consumption expenditures and amplify the boom periods. The reversal in wealth once investors revise their expectations and capital begins to flow out makes the resulting downturn more acute.

These views are consistent in many ways with those of Claudio Borio of the Bank for International Settlements (see also here). He has written that the international monetary and financial system amplifies the "excess financial elasticity," i.e., the buildup of financial imbalances that characterizes domestic financial markets. He identifies two channels of transmission. First, capital inflows contribute to the rise in domestic credit during a financial boom. The impact of global conditions on domestic financial markets exacerbates this development (see here). Second, monetary regimes may facilitate the expansion of monetary conditions from one country to others. Central bankers concerned about currency appreciation and a loss of competitiveness keep interest rates lower than they would otherwise, which furthers a domestic boom. In addition, the actions of central banks with international currencies such as the dollar has international ramifications, as the current widespread concern about the impending rise in the Federal Funds rate shows.

Aliber ends the current edition of Manias, Panics and Crashes with an appendix on China's financial situation. He compares the surge in China's housing markets with the Japanese boom of the 1980s and subsequent bust that initiated decades of slow economic growth. An oversupply of new housing in China has resulted in a decline in prices that threatens the solvency of property developers and the banks and shadow banks that financed them. Aliber is dubious of the claim that the Chinese government will support the banks, pointing out that such support will only worsen China's indebtedness. The need for an eighth edition of Manias, Panics and Crashes may soon be apparent.

cross posted with Capital Ebbs and Flows

[Nov 12, 2015] These 425 Goldman Bankers Just Hit The Jackpot

Zero Hedge

It's that time of year.... when the bank-that-does-God's-work chooses who to bless with mass affluence. This year 425 Goldman Sachs' employees were annointed "Managing Directors" which according to Emolumnet.com means an average annual comp of approximately $1 million.

[Oct 28, 2015] The Full Details Of How Goldman Criminally Obtained Confidential Information From The New York Fed

Zero Hedge
Two days ago we reported that the saga of Rohit Bansal, Goldman's "leaker" at the Fed is coming to a close with the announcement of a criminal case filed against Goldman's deep throat who had previously spent 7 years at the NY Fed, and was about to spend some time in prison, and who had been providing Goldman with confidential information sourced from his contact at the NY Fed for months, as a result of which Goldman would be charged a penalty.

Moments ago the NY DFS announced that the best connected hedge fund in the world would pay $50 million to the New York State Department of Financial Services and "accept a three-year voluntary abstention from accepting new consulting engagements that require the Department to authorize the disclosure of confidential information under New York Banking Law"

Goldman Sachs would also admit that a Goldman employee engaged in the criminal theft of Department confidential supervisory information; Goldman Sachs management failed to effectively supervise its employee to prevent this theft from occurring; and Goldman failed to implement and maintain adequate policies and procedures relating to post-employment restrictions for former government employees.

Below are the unbelievable, details of just how Goldman was getting material information from the NY Fed, from the FDS:

Violation of Post-employment Restrictions

On July 21, 2014, an individual began work at Goldman, Sachs & Co. as an Associate in the Financial Institutions Group ("FIG") of the Investment Banking Division ("IBD"). The Associate reported to a Managing Director and a Partner at Goldman.

Prior to his employment at Goldman, from approximately August 2007 to March 2014, the Associate was a bank examiner at the U.S. Federal Reserve Bank of New York ("the New York Fed"). His most recent position at the New York Fed was as the Central Point of Contact ("CPC") – the primary supervisory contact for a particular financial institution – for an entity regulated by the Department (the "Regulated Entity").

In March 2014, the Associate was required to resign from his position at the New York Fed for, among other reasons, taking his work blackberry overseas without obtaining prior authorization to do so and for attempting to falsify records to make it look like he had obtained such authorization, and for engaging in unauthorized communications with the Federal Reserve Board.

The Associate was hired in large part for the regulatory experience and knowledge he had gained while working at the New York Fed. Prior to hiring him, the Partner and other senior personnel interviewed and called the Associate several times, and the Partner took him out to lunch and dinner.

Prior to starting at Goldman, in May 2014, the Associate informed the Partner of potential restrictions on his work, due to his previous employment at the New York Fed, and specifically as the CPC for the Regulated Entity. The Partner advised the Associate to consult the New York Fed to obtain clarification regarding any applicable restrictions.

Accordingly, the Associate inquired with the New York Fed Ethics Office and was given a "Notice of Post-Employment Restriction," which he completed and signed with respect to his supervisory work for the Regulated Entity. The Associate provided this form to Goldman. This Notice of Post-Employment Restriction read that the Associate was prohibited "from knowingly accepting compensation as an employee, officer, director, or consultant from [the Regulated Entity]" until February 1, 2015.

On May 14, 2014, the Associate forwarded this notice of restriction to the Partner, the Managing Director, and an attorney in Goldman's Legal Department. In his email, the Associate also included guidance from the New York Fed, stating, in short, that a person falls under the post-employment restriction if that person "directly works on matters for, or on behalf of," the relevant financial institution.

Despite receiving this notice and guidance, Goldman placed the Associate on Regulated Entity matters from the outset of his employment. As further detailed below, the Associate also schemed to steal confidential regulatory and government documents related to that same Regulated Entity in advising that client.

Unauthorized Possession and Dissemination of Confidential Information

During his employment at Goldman, the Associate wrongfully obtained confidential information, including approximately 35 documents, on approximately 20 occasions, from a former co-worker at the New York Fed (the "New York Fed Employee"). These documents constituted confidential regulatory or supervisory information – many marked as "internal," "restricted," or "confidential" – belonging to the Department, the New York Fed or the Federal Deposit Insurance Corporation (the "FDIC"). The Associate's main conduit for receiving information from the New York Fed was his former coworker, the New York Fed Employee, who has since been terminated for this conduct. While still employed at the New York Fed, the New York Fed Employee would email documents to the Associate's personal email address, and the Associate would subsequently forward those emails to his own Goldman work email address.

On numerous occasions, the Associate provided this confidential information to various senior personnel at Goldman, including the Partner and the Managing Director, as well as a Vice President and another associate who perform quantitative analysis for Goldman. In several instances where the Associate forwarded confidential information to other Goldman personnel, the Associate wrote in the body of the email that the documents were highly confidential or directed the recipients, "Please don't distribute." At least nine documents that the Associate provided to Goldman constituted confidential supervisory information under New York Banking Law § 36(10). Pursuant to the statute, such confidential supervisory information shall not be disclosed unless authorized by the Department. The documents included draft and final versions of memoranda regarding and examinations of the Regulated Entity, as well as correspondence related to those examinations.

At least 17 confidential documents that the Associate had improperly received from the New York Fed – seven of which constituted confidential supervisory information under New York Banking Law § 36(10) – were found in hard copy on the desk of the Managing Director. Additional hard copy documents were found on the desks of the Vice President and the other associate, including at least one document constituting confidential supervisory information under New York Banking Law § 36(10).

On August 18, 2014, the Associate shared three documents pertaining to enterprise risk management with the Managing Director, writing, "Below is the ERM request list, work program and assessment framework we used for ERM targets. Again this is highly confidential as its not public and has not been issued a[s] guidance yet. Not sure where it is at anymore due to internal politics. I worked on this framework and guidance within the context of a system working group with the Fed system. We ran several pilots to test it was well. Please don't distribute." The Managing Director replied, "I won't. Will review on plane tomorrow to DC." The documents were marked as "Internal-FR" or "Restricted-FR."

Part of Goldman's work for the Regulated Entity included advisory services with respect to a potential transaction. A certain component of the Regulated Entity's examination rating was relevant to the transaction. The Regulated Entity's examinations were conducted jointly by the FDIC, DFS and the New York Fed. As described below, the Associate used confidential information regarding the Regulated Entity's examination rating – obtained both from his prior employment at the New York Fed and from his contacts there – and conveyed this information to the Managing Director, who then conveyed the information to the Regulated Entity on September 23, 2014, in advance of it being conveyed by the regulators.

On August 16, 2014, the Associate emailed the Managing Director regarding the regulators' perspective on the Regulated Entity's forthcoming examination rating, writing "You need to speak to [the CEO of the Regulated Entity] about scheduling a meeting with all 3 agencies ASAP. He needs to meet with them and display and discuss all the improvements and corrections they have made during the last examination cycle."

On September 23, 2014, the Associate attended the birthday dinner of the New York Fed Employee at Peter Luger Steakhouse, along with several other New York Fed employees. Immediately after the dinner, the Associate emailed the Managing Director, divulging confidential information concerning the Regulated Entity, specifically, the relevant component of the upcoming examination rating. The Associate wrote, "…the exit meeting is tomorrow and looks like no [change] to the [relevant] rating. I heard there won't be any split rating… [The Regulated Entity] should have listened to you with the advice…hopefully [the CEO] will now know you didn't have phony info."

In this email, the Associate also provided advice to relay to the Regulated Entity's management, stating that they should "keep their cool, not get defensive and not say too much unless the regulators have a blatant fact wrong" as it "will go off better for them in the long run. Believe it or not the regulator's [sic] look for reaction and level of mgmt respectiveness [sic] during these exit meetings." The Managing Director replied "Let's discuss . . . I'm seeing [the CEO of the Regulated Entity] tmw afternoon alone."

Later that night, the Associate followed up with another email to the Managing Director, writing, "I feel awful not being there to wrap up 2013. I would have been able to pull all this through. I was a real advocate for all the work they have done." He also offered to join a meeting with the CEO of the Regulated Entity if the Managing Director wanted.

On September 26, 2014, Goldman had an internal call regarding the calculation of certain asset ratios, during which there was disagreement over the appropriate method. During the call, the Associate circulated an internal New York Fed document – which the Associate had recently obtained from the New York Fed Employee – relating to the calculation, to the call participants, writing, "Pls keep confidential?" Following the group call, the Partner called the Associate to discuss the document, including where he had obtained it, and the Associate told him that he had obtained it from the New York Fed. The Partner then called the Global Head of IBD Compliance to report the matter and forwarded the document.

Compliance Failures, Failure to Supervise and Violation of Internal Policies

After receiving notice of the Associate's prohibition on working on matters for the Regulated Entity, Goldman, including the Partner and the Legal Department, failed to take any steps to screen the Associate from such prohibited work. Instead, Goldman affirmatively placed the Associate on matters for the Regulated Entity beginning on his first day, and added the Associate to the official Goldman database as a member of the Regulated Entity "Team" – a team led by the Partner.

Goldman failed to provide training to personnel regarding what constituted confidential supervisory information and how it should be safeguarded. While Goldman policies provided that confidential information received from clients should only be shared on a "need to know" basis, Goldman did not distinguish between this broader category of confidential information and the type of confidential supervisory information belonging to a regulator or other government agency, which is protected by law, such as confidential supervisory information under New York Banking Law § 36(10). Indeed, Goldman policies failed to adequately address Department confidential supervisory information.

As noted above, the Associate also violated Goldman's internal policy on "Use of Materials from Previous Employers," which states that work that personnel have done for previous employers, and confidential information gained while working there, should not be brought into Goldman or used or disclosed to others at Goldman without the express permission of the previous employer.

* * *

The Managing Director is safe, as are all other Goldman employees: nobody aside for Bansal who was merely trying to impress his superiors, has anything to worry about.

Anyone else found to have obtained at least "35 confidential documents" from the Fed on at least "20 occassions" would be sent straight to jail with a prison sentence anywhere between several decades and life.

Goldman's punishment? 0.6% of its 2014 Net Income.

Duc888

How could this happen? Seriously. Aren't the FED and GS separate entities?

Oh, wait.....

LetThemEatRand

The fact that these documents were sent via email only tells me how widespread this is. Most of these guys are probably smart enough to put a paper copy in their briefcase and deliver it to Goldman the old fashioned way bankers do things (over drinks and coke at a strip bar).

But when "everyone is doing it," a guy may get careless and start using email, figuring what the fuck.

Urban Redneck

Did Goldman's Marketing Department write that release for their FRBNY subsidiary??? They deserve the $50 million fine for being an embarrassment to scheming bankers everywhere. This is a company that has destroyed companies, entire economies, and countless (not so little) investors by placing their own financial interests above their clients and regularly using inside information and access to do so. Then Goldman is "caught" when they turn themselves in (not that they had a lot of choice given the amateur hour performance) for actually "helping" one of their clients (for once)... This whole thing stinks, in more ways than one.

Sudden Debt

What a joke!!!

GS and JPM ARE THE FED!!!

and that "fine"... THAT'S THEIR DONUT BUDGET!!

J J Pettigrew

Bagels....please!

Elliott Eldrich

"Feel sorry for the poor schmuck, cuffed and heading to a sallyport, to be booked, and serve 6 months in jail, for stealing a carton of ciggs..."

Little crimes are punished with great fervor, while the biggest criminals get their wrists slapped. This is outrageous, and I just have to ask how much more we are supposed to bear before breaking?

Lord Ariok

I Love my Country and Hate Our Government. But If our government isn't "Gangster" well believe it there will be another "Government" that is even more "Gangster" then ours to take the number 1 spot in the Syndicate. The way I see it if we have to do this in order to compete with China's Level of Corruption. Damn Chinese Efficiency. ~ Lord Ariok

venturen

they have Bill Dudley...they were worried that this underling would do something. Heck Goldman gives the orders not the other way around

Bay of Pigs

The William Dudley is the main man at the FED (and the BIS), not Yellin or Fischer.

"Prior to joining the Bank in 2007, Mr. Dudley was a partner and managing director at Goldman, Sachs & Company and was the firm's chief U.S. economist for a decade. Prior to joining Goldman Sachs in 1986, he was a vice president at the former Morgan Guaranty Trust Company. Mr. Dudley was an economist at the Federal Reserve Board from 1981 to 1983.

In 2012, Mr. Dudley was appointed chairman of the Committee on the Global Financial System of the Bank for International Settlements (BIS). Previously, Mr. Dudley served as chairman of the former Committee on Payment and Settlement Systems of the BIS from 2009 to 2012. He is a member of the board of directors of the BIS and chairman of the Economic Club of New York."

http://www.newyorkfed.org/aboutthefed/orgchart/dudley.html

[Sep 16, 2015] Bankers Will Be Jailed In The Next Financial Crisis

"...For the first time, I found routine agreement among delegates that the banking industry had become synonymous with organized crime. "
Sep 16, 2015 | Zero Hedge

Submitted by Mike Krieger via Liberty Blitzkrieg blog,

Jesus College, Cambridge hosted, once more, the world's leading Symposium on Economic Crime, and over 500 distinguished speakers and panelists drawn from the widest possible international fora, gathered to make presentations to the many hundreds of delegates and attendees.

What became very quickly clear this year was the general sense of deep disgust and repugnance that was demonstrated towards the global banking industry.

I can say with some degree of certainty now that a very large number of academics, law enforcement agencies, and financial compliance consultants are now joined, as one, in their total condemnation of significant elements of the global banking sector for their organised criminal activities.

Many banks are widely identified now as nothing more than enterprise criminal organisations, who engage in widespread criminal practice and dishonest conduct as a matter of course and deliberate commercial policy.

– From the excellent article: The Banking Criminals Exposed

My prediction is that bankers will be jailed in the next economic/financial crisis. Lots and lots of bankers.

It may seem to many that those working within this profession will remain above the law indefinitely in light of the lack of any accountability whatsoever since the collapse of 2008. It may seem that way, but extrapolating this trend into the future is to ignore a monumentally changed political environment around the world. From the ascendancy of Donald Trump and Bernie Sanders here in the U.S., to Jeremy Corbyn becoming Labour leader in the UK, big changes are certainly afoot.

I have become convinced of this change for a little while now, but we won't really see evidence of it until the next collapse. However, something I read earlier today really brought the point home for me. Rowan Bosworth-Davies recently attended the 33rd Cambridge International Symposium on Economic Crime and provided us with some notes in an excellent piece titled, The Banking Criminals Exposed. Here are a few excerpts:

Jesus College, Cambridge hosted, once more, the world's leading Symposium on Economic Crime, and over 500 distinguished speakers and panelists drawn from the widest possible international fora, gathered to make presentations to the many hundreds of delegates and attendees.

This Symposium has indeed become an icon among other international gatherings of its knd and over the years, it has proved to be highly influential in the driving and development of international policy aimed at combating international financial and economic crime.

What became very quickly clear this year was the general sense of deep disgust and repugnance that was demonstrated towards the global banking industry.

I can say with some degree of certainty now that a very large number of academics, law enforcement agencies, and financial compliance consultants are now joined, as one, in their total condemnation of significant elements of the global banking sector for their organised criminal activities.

Many banks are widely identified now as nothing more than enterprise criminal organisations, who engage in widespread criminal practice and dishonest conduct as a matter of course and deliberate commercial policy.

Speaker after speaker addressed the implications of the scandalous level of PPI fraud, whose repayment and compensation schedules now run into billions of pounds.

Some speakers struggled with the definition of such activity as 'Mis-selling' and needed to be advised that what they were describing was an institutionalized level of organised financial crimes involving fraud, false accounting, forgery and other offenses involving acts of misrepresentation and deceit.

One of the side issues which came out of this and other debates, was the general and genuine sense of bewilderment that management in these institutions concerned, (and very few banks and financial houses have escaped censure for this dishonest practice) have walked away from this orgy of criminal antics, completely unscathed. The protestations from management that these dishonest acts were carried out by a few rogue elements, holds no water and cannot be justified.

In the end, I sat there, open-mouthed while evidence against the same old usual scum-bag financial institutions, was unrolled, and a lengthy list of agencies, all apparently dedicated to dealing with fraud and financial crime, lamely sought to explain why they were powerless to help these victims.

This was followed by a lengthy list of names of major law firms, and Big 5 accounting firms who were willing to join with these pariah banks to bring complex and expensive legal actions against these victims, bankrupting them, forcing them from their homes, repossessing properties they had worked for years to create, while all the time, the regulators and the other agencies, including to my shame and regret, certain spineless police forces, stood by and sought to justify their inaction.

At one stage, we were shown how banks ritually and deliberately take transcripts of telephone calls made between complainants and the bank, and deliberately and systematically go through these conversations, re-editing them and reproducing them in a format which is much more favourable to the bank.

For the first time, I found routine agreement among delegates that the banking industry had become synonymous with organised crime. Many otherwise more conservative attendees expressed their grave concern and their repugnance at the way in which so many of our most famous banking names were now behaving. It is becoming very much harder to believe that the banks will be able to rely on the routine support they have traditionally enjoyed from most ordinary members of the public.

The election of Jeremy Corbyn to the leadership of the labour Party means that banking crime and financial fraud will now become an electoral issue.

But now, the new Labour leadership will focus the attention of the electorate on the relationship between the Tory party and their very crooked friends in the City, and the degree of protection that the Square Mile gangsters and their Consiglieri, their Capos, and their Godfathers will become much more identifiable. Bank crime will now become much more identifiable as a City practice and their friends in the Tories will be seen as being primary beneficiaries.

Things are moving in the direction of justice. At a glacial place for sure, but moving they are.

pot_and_kettle

When they're swinging from lamp posts lining Broadway and Water St,
*then * I'd call it progress.

Til then, same old same old...

11b40

There were over 1,000 felony prosecutions that came out of the Savings & Loan fiasco in the 80's, with a 90% conviction rate.

But, to your point, these were not the big Wall Street Bankers. Mostly just your local common banker thief and his cronies, with a few politicians thrown in for good measure. No big fish were prosecuted during the Depression era, either.

vincent

A reminder of how JPM saved its own ass in 2008. Worth bookmarking....

The Secret Bailout of JP Morgan

http://www.webofdebt.com/articles/banking-bailout.php

Ulludapattha

Dream on, Mike. Just who will jail the banksters? They own the governments of USA, Canada, and Western Europe. Not a chance in my lifetime.

GCT

Politicians and the judicial branch are in the banks pockets. I will believe it when I see it to be honest. I have yet to see real bankers or for that matter politicians go to jail. As long as the big fines are paid nothing will change. Must be nice to create money from nothing to pay these fines and fucking your customers over at the same time.

Fahque Imuhnutjahb

Wishful thinking. If any justice is to be meted out then the "little people" will have to take it upon themselves.

And by little people I mean the plebes, not dwarves; but the dwarves are welcome to help, unless of course

some of them are little bankers, then they're not welcome, but the rest are. Glad we got that cleared up.

[Aug 29, 2015] Mass Protests Sweep Malaysian Capital As Anger At Goldman-Backed Slush Fund Boils Over

Aug 29, 2015 | Zero Hedge

If we told you that thousands of protesters donning bright yellow shirts had taken to the streets to call for the ouster of a leader in an important emerging market, you'd be forgiven for thinking we were talking about Brazil, where President Dilma Rousseff is facing calls for impeachment amid allegations of fiscal book cooking and government corruption.

But on this particular weekend, you'd be wrong.

We're actually talking about Malaysia, where tens of thousands of demonstrators poured into the streets of Kuala Lumpur on Saturday to call for the resignation of Prime Minister Najib Razak whose government has been accused of obstructing an investigation into how some $700 million from 1Malaysia Development Berhad mysteriously ended up in Najib's personal bank account.

1MDB was set up by Najib six years ago and has been the subject of intense scrutiny for borrowing $11 billion to fund questionable acquisitions. $6.5 billion of that debt came from three bond deals underwritten by Goldman, whose Southeast Asia chairman Tim Leissner is married to hip hop mogul Russell Simmons' ex-wife Kimora Lee who, in turn, is good friends with Najib's controversial wife Rosmah Manso.

You really cannot make this stuff up.

What Goldman did, apparently, is arrange for three private placements, one for $3 billion and two for $1.75 billion each back in 2013 and 2012, respectively. Goldman bought the bonds for its own book at 90 cents on the dollar with plans to sell them later at a profit (more here from FT). Somewhere in all of this, $700 million allegedly landed in Najib's bank account and the going theory is that 1MDB is simply a slush fund.

So you can see why some folks are upset, especially considering Rosmah has a habit of having, how shall we say, rich people problems, like being gouged $400 for a home visit by a personal hairstylist. Here's The New York Times with more on the protests:

Tens of thousands of demonstrators in Malaysia defied police orders on Saturday, massing in the capital in a display of anger at the government of Prime Minister Najib Razak, who has been accused of corruption involving hundreds of millions of dollars.

The demonstration in central Kuala Lumpur, which has been planned for weeks, has been declared illegal by the Malaysian police, and the government on Friday went as far as to pass a decree banning the yellow clothing worn by the antigovernment protesters.

But the demonstrators, who represent a broad coalition of civic organizations in Malaysia, including prominent lawyers, asserted their right to protest on Saturday.

The government has acknowledged that Mr. Najib received the money in 2013 and said it was a donation from undisclosed Arab royalty.

One group of protesters on Saturday carried the image of a giant check in the amount of 2.6 billion ringgit, with a sign that read, "You really think we are stupid?"

The group organizing the protest goes by the name Bersih, which means clean in Malay

Calls for Mr. Najib to resign have come both from within his party, which is divided, and from the opposition. One junior member of Mr. Najib's party, the United Malays National Organization, filed a lawsuit against Mr. Najib on Friday asking for details of how the money was spent.

Of course the most prominent voice calling for Najib's ouster is that of the former Prime Minister Mahathir Mohamad. "I don't believe it is a donation. I don't believe anybody would give [that much], whether an Arab, or anybody," he says.

Meanwhile, Malaysia is facing a re-run of the 1997/98 financial crisis as the ringgit plunges amid broad-based pressure on emerging markets. With FX reserves now sitting under $100 billion some fear a return to capital controls (let's just call it the "1998 option") is just around the corner despite the protestations of central bank chief Zeti Akhtar Aziz. Here's BofAML:

Capital controls are not likely, but the possibility cannot be dismissed, despite <assurances from Zeti. Introducing controls will be a regressive move and a huge setback, hurting the economy and financial sector, and derailing any ambitions of becoming an international Islamic financial center. Malaysia's reputation and credibility remain tainted by the capital controls of 1998, even after almost two decades.

The ringgit has depreciated almost 13% year-to-date, the worst performing EM Asian currency. FX reserves fell to $94.5bn at mid-August, falling below the $100bn threshold and down by about $9bn in July alone. At the peak, FX reserves were $141bn in May 2013. Cover to short-term external debt is only 1x, while cover to imports stands at 5.9 months. Downside risks remain given looming Fed rate hikes, China's RMB devaluation and the political crisis over 1MDB. Malaysia's vulnerability is also heightened by high leverage (household, quasi-public and external) and a fragile fiscal position (heavy oil dependence, off balance sheet liabilities)

The current crisis has not reached the extreme stress seen during the Asian financial crisis, when draconian capital controls were eventually introduced in September 1998. During that episode, the ringgit collapsed by about 89% from peak to trough at its worst (to 4.71 from 2.49 against the USD). The ringgit has depreciated some 26% in the current crisis. During that episode, the KLCI fell by about 79% from peak to trough (from 1,271 to 263) at its worst. The KLCI today has fallen by only about 12% from its recent peak. Nevertheless, downside risks remain given looming Fed rate hikes, China's RMB devaluation and the political crisis.

So in short, Malaysia is on the brink of political and financial crisis, and it looks as though the nuclear route (capital controls) may be just around the corner, which would of course only serve to alienate the country's financial system at a time when the government looks to be on the brink of collapse. What's particularly interesting here is the timing. Mahathir Mohamad famously clashed with George Soros during the '98 crisis, going so far as to brand the billionaire a "moron". Now that the country's "founding father" is looking to oust Najib, it will be interesting to see what role he plays in shaping Malaysia's response to the current financial crisis and on that note, we'll leave you with a quote from Dr. Mahathir ca. 1997:

"I know I am taking a big risk to suggest it, but I am saying that currency trading is unnecessary, unproductive and immoral. It should be stopped. It should be made illegal. We don't need currency trading. We need to buy money only when we want to finance real trade."

[Aug 09, 2015] Goldman Hires Former Head Of NATO To Deal With DONG Scandal

"...Anders Fogh Rasmussen served as the 12th Secretary General of NATO." Now it serves Golman. Nothing essentially changed.
Zero Hedge
Back in January 2014, we reported that Goldman's merchant banking unit rushed to buy an 18% in Denmark's DONG Energy (that would be Danish Oil & Natural Gas) company for $1.5 billion. The result was an immediate grassroots resistance campaign, as hundreds of thousands of Danes refused to hand over their DONG to the vampire squid for various reasons, not the least of which was granting Goldman veto rights over changes to DONG's leadership and strategy, a right usually reserved for buyers of 33% of an entity. A bigger reason for the Danish anger at the Goldman DONG deal, was that as The Local reported a few months later, the sale "did not include a massive deal that both parties knew was imminent, shortchanging the company's value by as much as 20 billion kroner."

Which was to be expected: as we further said in January 2014, "if Goldman is involved, it guarantees future benefits for the Vampire Squid". Sure enough:

Denmark lost out on billions of kroner when it sold partial ownership of Dong Energy to American investment firm Goldman Sachs in January 2014, Politiken reported Wednesday.

When the Danish government sold an 18 percent stake of Dong to Goldman Sachs, the Finance Ministry calculated the company's value at 31.5 billion kroner ($4.6 billion).

But just three months later, Dong was granted the rights to instal a massive offshore wind park supported by the United Kingdom. According to Politiken, that deal shot Dong's value up to over 50 billion kroner but was not calculated into the Goldman Sachs sale despite both Dong and the investment firm being fully aware of it.

Politiken also reports that the looming deal was common knowledge throughout the wind industry.

As a result, the locals were less than delighted to learn the details of yet another Goldman pillaging of taxpayers, one which allowed Goldman to make a substantial return on its investment in just months courtesy of what was information which the government either did not have access to, or simply refused to notice.

Bloomberg further reports that "the Goldman deal left an indelible mark on Danish politics. Disagreement over the Wall Street bank's investment in state assets prompted a junior party in the former Social Democrat-led administration to quit the coalition in protest. Danes gathered in their thousands in front of the parliament to protest against the sale."

Indeed, the deal caused a rift in the former Social Democrat-led coalition, culminating in the departure of a junior member, the Socialist People's Party. The government of Helle Thorning-Schmidt that oversaw the Goldman deal was ousted in the June 2014 elections, paving the way for a Liberal government led by Lars Loekke Rasmussen. He served as finance minister under Fogh Rasmussen and was also prime minister from 2009 until 2011.

Fast forward over a year, and a shaken Denmark still refuses to let Goldman fully off the hook when recently the government decided to let lawmakers see secret documents on Goldman Sachs Group Inc.'s purchase of the 18% stake in DONG. However, as Goldman reports, this glimpse into the fine details of the Goldman decision making process will probably be a one-off. To wit:

"The government says it's making an exception in the case of Goldman's 2014 investment in Dong Energy A/S after lawmakers on a committee overseeing the sale complained they weren't given full access to the relevant files. Bjarne Corydon, who was finance minister at the time, said the information contained in the transaction papers was too sensitive even for the parliament committee."

Almost as "sensitive" as when Goldman's former employee and then Treasury Secretary Hank Paulson tried to pass an open-ended "three-page termsheet" bailout of, well, Goldman Sachs through Congress in 2008... and ultimately succeeded.

But while Goldman's domination of all legislative matters in the US is well known and nobody will dare to make much of a fuss over it, in Denmark things are different.

Finance Minister Claus Hjort Frederiksen said this month he will release the documents more than a year after the transaction went through as lawmakers continue to argue over the deal. Goldman and PFA have said they have no objection to the files being made public.

Would the deal be unwound if it is discovered that Goldman had conspired and manipulated (with significant kickbacks) the government of Helle Thorning-Schmidt to fast track the deal which Goldman knew would be a huge IRR in just a few short months? It is unlikely:

Rene Christensen, a spokesman for the Danish People's Party which lobbied to have the documents released, said there's no risk their contents might trigger political demands that a new deal be negotiated.

"Altering the deal isn't really what it's about," Christensen said by phone. "It's about having had a finance minister who said he couldn't trust the committee." Denmark's lawmakers deserve to know "what was so important about this deal that we weren't allowed to see more details," he said.

Martin Hintze, a partner at Goldman who sits on the board of Dong, was quoted by Berlingske as saying the bank has no objections to having the documents made public.

Of course it wouldn't - any objections would be seen as confirmation the sale process was improper.

Which is why Goldman decided to go for the "sure thing" jugular, and just to make absolutely sure it controls the DONG process, Goldman hired none other than Anders Fogh Rasmussen, the former Danish prime minister who governed Denmark from 2001 until 2009 "to help tackle the political hurdles the bank has encountered since buying into a state utility last year."

Why hire him? Because the current Danish prime minister, Lars Loekke Rasmussen, just happened to be the subordinate and finance minister under the "other" Rasmussen, the one Goldman just hired: Anders Fogh.

Because if buying current and former government leaders to control the decision-making process works in the US and every other developed nation, why not in Denmark.

But that's not all: in this particular case, Goldman gets bonus influence points because in addition to purchasing the former Danish PM, and by implication, the current PM and his former fin-min protégé, and assuring the DONG scandal quietly goes away, Goldman just hired the former head of NATO: from 2009 to 2014 Anders Fogh Rasmussen served as the 12th Secretary General of NATO.

In other words, with one hiring decision, Goldman not only assured its financial dominance over Denmark, but is now sure to capitalize on whatever military developments NATO unleashes in the coming weeks, which by the looks of things will involve Goldman funding every group in the upcoming Syrian invasion and the resulting latest and greatest war in the middle east.

Money Counterfeiter

'The central institution in almost every modern nation is its central bank. Here is where unofficial sovereignty lies (in both senses). Central bankers do not claim this authority; they merely exercise it. They let politicians take the hit for economic failures. They call the shots, because they control the central institution: money.

The mark of sovereignty never changes in history: coinage. There is usually a politician on a coin. This goes back to 600 B.C. Ethelbert Stauffer was a theologian, an historian, and an expert in numismatics. He wrote his great little book, Christ and the Caesars (1955), in terms of the history of the Roman Empire's coinage: the deterioration from precious metals to copper coins with fake silver. The coins had images of a god on one side and a Caesar on the other.

Today, we have paper money. Each nation's paper money has different politicians' pictures on the bills.

This is no longer so important, because most money is digital. We get our choice of credit cards. Here, there are bank logos, not politicians' pictures. The churches of America are MasterCard, Visa, and American Express. There is brand competition.

When politicians go to summits to do their deals, they always take the finance ministers. Their finance ministers are the liaisons between the politicians and the central banks. The politicians are on tight chains, not the other way around.

The public keeps its collective eye on the politicians. This is exactly what central bankers prefer.

The politicians are the Great and Powerful Oz. Central bankers are the little man behind the curtain."

Gary North

layman_please

not to sound like a broken record, but carroll quigley's writings tend to confirm your theory.

from tragedy and hope:

"In addition to these pragmatic goals, the powers of financial capitalism had another far-reaching aim, nothing less than to create a world system of financial control in private hands able to dominate the political system of each country and the economy of the world as a whole. This system was to be controlled in a feudalist fashion by the central banks of the world acting in concert, by secret agreements arrived at in frequent private meetings and conferences.

The apex of the system was to be the Bank for International Settlements in Basle, Switzerland, a private bank owned and controlled by the world's central banks which were themselves private corporations. Each central bank, in the hands of men like Montagu Norman of the Bank of England, Benjamin Strong of the New York Federal Reserve Bank, Charles Rist of the Bank of France, and Hjalmar Schacht of the Reichsbank, sought to dominate its government by its ability to control Treasury loans, to manipulate foreign exchanges, to influence the level of economic activity in the country, and to influence cooperative politicians by subsequent economic rewards in the business world."

but... the rabbit hole goes even deeper. who's behind the central bankers?

"It must not be felt that these heads of the world's chief central banks were themselves substantive powers in world finance. They were not. Rather, they were the technicians and agents of the dominant investment bankers of their own countries, who had raised them up and were perfectly capable of throwing them down. The substantive financial powers of the world were in the hands of these investment bankers (also called "international" or "merchant" bankers) who remained largely behind the scenes in their own unincorporated private banks. These formed a system of international cooperation and national dominance which was more private, more powerful, and more secret than that of their agents in the central banks. This dominance of investment bankers was based on their control over the flows of credit and investment funds in their own countries and throughout the world. They could dominate the financial and industrial systems of their own countries by their influence over the flow of current funds through bank loans, the discount rate, and the re-discounting of commercial debts; they could dominate governments by their control over current government loans and the play of the international exchanges. Almost all of this power was exercised by the personal influence and prestige of men who had demonstrated their ability in the past to bring off successful financial coupe, to keep their word, to remain cool in a crisis, and to share their winning opportunities with their associates."

Richard Chesler

As if the Goldman scumbags and their ilk had not already bought every other public figure, lol

SOME FUCKING NEWS...

Jumbotron

Welllll.....of COURSE Goldman hires the former head of NATO.

Fascist Corp./Gov. does what they are going to do.

The HEART of the world is money. The RULERS of the world are the bankers. The PRAETORIAN GUARD of the bankers are the governments of the world.

And just like the governments, bankers need INTEL as well.

Revolving Door Fascism on parade. Move along. Nothing to see here. And nothing can be done about it.

DeadFred

To give full credit where it's due one has to ask what were the chances of the wind farm deal going through if Goldman hadn't been sold a large stake in the company. There are benefits to selling your soul (or company) to the devil. It's not worth it but the benefits are tangible.


Lumberjack

https://consortiumnews.com/2014/07/09/nyt-protects-the-fogh-machine/

Lumberjack

His son owns a PR interest in Chicago.

http://www.rasmussenpa.com/leadership/

Here is a PR video he did.
https://m.youtube.com/watch?v=UxrArt0H_jw

[Jun 12, 2015]IMF to Alexis Tsipras: Do you feel lucky, punk?

"...Mr Eliot how you dare to call our prime minister a "punk"? Who do you think you are you or other journalist around the world? Why you don't write the truth that the hard working Greeks have lost the 60 % of their income and they can't live with less money. Your article as well as other around the world is called "bulling"."
.
"...If you had read even the anti-greek newspapers in the last 5 years you would understand that 90% of the "loans" Greece "took" - i.e. had imposed on them - went directly to German, French and Dutch banks."
.
"...The IMF is not only about money. They have an ideological mandate too. Now, you may agree with this ideological mandate or not. However, if you do not, then it is best to not borrow money from them! "
.
"...What I found entertaining, was the statement by Rice, which went "As our managing director has said many times, the IMF never leaves the table," except of course when the entire team gets called back to Washington, and errr... leaves the table... "
.
"...This entire situation is a foreshadowing of what's to come in a world that allows international banking cabals and corporate investors to dictate policies to sovereign states, regardless of the will of the people as expressed in open elections. "Give me control of a nation's money and I care not who makes it's laws" - Mayer Amschel Bauer Rothschild"
.
"...A very irresponsible and simplistic, really sensationalistic summary. The hallmark of a pseudointellectual, a journalist who has never held a real job and seen how money is made and value is created and lives in the imaginary world of movie one liners and simple messages."
.
"..."Mr Schauble is the proponent of a "velvet divorce" for Greece: an orderly exit from the euro and a return to the drachma, with the ECB playing a crucial role in stabilizing the new currency. Germany and other creditors would then step in with a "Marshall Plan" to put the country back on its feet within the EU. What Mr Schauble is not prepared to accept is a breach of contract by Greece on the terms of its previous "Troika" rescue, which he fears would lead to moral hazard and the collapse of fiscal discipline across Southern Europe. He is backed by much of the ruling Christian Democrat party (CDU) and its Bavarian allies (CSU)"
.
"...Wall Street tactics akin to the ones that fostered subprime mortgages in America have worsened the financial crisis shaking Greece and undermining the euro by enabling European governments to hide their mounting debts. "
Jun 12, 2015 | The Guardian

Hristos Dagres 12 Jun 2015 11:50

Basically, the IMF should officially admit their fatal errors in the development of the first MoU that "saved" Greece [well, we all know now that the first plan was nothing more than an attempt to save euro and the French-German banks that was cunningly presented as a token of "European solidarity" - in reality, they didn't give a sh..t about Greece].

These "errors" were immediately identified by other members of the IMF board, like Brazil, Argentina, China and .... Switzerland, according to the IMF documents presented by WSJ

[http://blogs.wsj.com/economics/2013/10/07/imf-document-excerpts-disagreements-revealed/ ]

I believe that Christine should pick up her pieces and crawl back to the table - and this time she should present a plan that will restore the damage done.

Or else, they should not get a single euro back - and we should start negotiating with the BRICS for a fair plan to restructure our economy.

MachinePork 12 Jun 2015 11:30

Make no mistake about it a Greek default is a calamity for the global financial system. Debt on the periphery is in the trillions. It is carried on the books in banks and treasuries at face value only because national administrators understand – with the blessing of the automatons at BIS -- what it would mean if this crap was subjected to a proper stress test or marked-to-market.

At stake in this battle is the entire global financial system. Should a NATO government summon the cheek to opt out of the prevailing international credit system, issue debt-free capital, invest in its people, grow exports and prove to succeed; the entire compound interest earning, system of rent-making privilege would collapse. My sense is the kingdom of Finance, its banking lords and its lickspittles in policy will never let this happen.

God bless the Greek people. This is going to get messy. They should be commended for their bravery in the face of endless threats of financial serfdom for intransigence.

The international debt monkey is a doppelgänger. He looks so inviting at first glance but is more than prepared to reach back and lob a compound interest bearing shit bomb your direction in a bid to save privilege in the global financial zoo.

Maria Christoulaki 12 Jun 2015 10:43

Mr Eliot how you dare to call our prime minister a "punk"? Who do you think you are you or other journalist around the world? Why you don't write the truth that the hard working Greeks have lost the 60 % of their income and they can't live with less money. Your article as well as other around the world is called "bulling". What do you think that Greeks are? all these articles except of bulling show a racism against us. You must ask an excuse for this article which offends both our prime minister and the Greek people, who voted him.

mgtuzairodtiiasn asiancelt 12 Jun 2015 09:08

It is funny! The German bankers stole your money, and you still believe that all this money went to the Greeks. This money went from the German banks to the German enterprises. Because they gave bribes to win contracts for useless military equipment. For example, Greece bought 4 submarines that doesn't need. Even today, only one has been delivered, because there were major design faults, although the German company has received the money. Regarding the loans of the previous years, do you believe that the total amount of the Greek debt was to expire in just 3 years? Obviously, the gang that rules EU today, gave 240 bn Euros to banks of Germany, France, Netherlands etc, and used Greece as a scapegoat to hide this fraud. Wake up!

mgtuzairodtiiasn Angkor 12 Jun 2015 08:55

Firstly, negotiation is not that you agree to what the institutions require. Secondly, you are right. The Greek economy and society have been carried many parasites until now.

Remember the German companies like Siemens, Ferrostaal, ThyssenKrupp which gave bribes to many politicians and Media owners. Or Hochtief, which still has not paid 500 mn Euros of VAT to the Greek state. It is time to get rid of all this parasites.

elenits -> Anton Brasschaat 12 Jun 2015 07:57

"Loans" imposed by IMF against its mandate = Odious debt.

Greeks shouldering 340 bn of EU, ECB, IMF "loans" to shore up foreign malinvesting banks = Odious debt

Loans to Greece that were not used by Greeks = Odious debt

IMF breaking its own rules to loan without debt restructure = Odious debt

This is without considering ECB acting outside its mandate, i.e. politically, from Feb 2015 by illegally cutting Greece from bond markets and out of QE.

elenits -> asiancelt 12 Jun 2015 07:49

If you had read even the anti-greek newspapers in the last 5 years you would understand that 90% of the "loans" Greece "took" - i.e. had imposed on them - went directly to German, French and Dutch banks. The 10% Greece was allowed to keep paid for the interests on these "loans" - topped up with money screwed out of the Greek taxpayers.

Apropos the IMF they acted illegally against their own rules by lending to a first world country [not a "developing" country] and by accepting a greek program that did not include debt restructure, i.e. the same German, French and Dutch banks having to accept some losses.

There is no such thing as "risk" anymore for banks, corporations or the 1%. Risk and poverty is only for ordinary people like yourself.

dawisner -> Constantine Alexander 12 Jun 2015 07:30

Constantine, as an American expat living in Greece for the past 21 years now (I was married in Thessaloniki in 1988), I, too, have frequently lamented how many armchair experts appear in these chat rooms. I published an e-book last year (Still at Aulis) with a view toward trying to explain to the casual observer how complex the local situation can be, and how worthy and hard-working my Greek peers often are. Keep up the good work.

seaspan -> Anton Brasschaat 12 Jun 2015 05:50

French and German banks were generously bailed out of any risk by "taxpayers" from the EU, including Greeks.

And Greek leverage is honesty: they have a clear understanding of current economic reality, and a better plan to payback their debts to Euro taxpayers. Anyone who says different is suspect as to their interests and intentions.

It isnt Syriza you should be questioning if you are sincere about your concern for the taxpayer. It is the financial advisers and ideologues backing austerity you should question. Are they merely driven by their egos and reputations as pro austerity hawks? Afraid for their secure positions as Yes Men in financial institutions?

And anyone in the negotiating process who has loyalties to Russia should be severely scrutinised, since Putin's interests are for a failure in negotiations, for a Grexit, all toward a long term desire of an EU breakup.

It could come down to questions of treason why there is no negotiated settlement,,, if such a word is applicable to the EU project...

Constantine Alexander -> Renato Timotheus 12 Jun 2015 05:43

My life's experiences - including beginning work at 8 years of age; 3 years military service; professional activities including U.S. investment banking, employment development in Eastern Europe (e.g. job creation at a Belarus agricultural production facility which is still thriving), 10 years devoted to my passion for wildlife conservation projects with worthy BirdLife Int'l NGO partners (not as you coyly suggested as a result of "untoward" behaviour); and having a doctor threaten to refuse to perform my father's surgery unless he receives a 10,000 euro cash bribe in addition to his customary doctor's fee and the hospital costs - have shaped my perspective on the factors that contribute to or undermine civil society.

If Greece exits the euro, the resulting cost of vital goods will soar due to the country's heavy reliance on imports. This will hit the middle class and the poor much harder than the current austerity measures -- most of which have not been implemented by any Greek gov (e.g. opening up business sectors to competition, privatization of debt-ridden public institutions, tax collection which has for decades suffered due to customary and widespread bribery demanded by tax officials, privatization of public assets).

The long term solution lies in the govt starting to do what most of us have to do - we prioritize spending based on worthiness and needs (food, health, education, etc), keep a reserve for contingencies, and spend in relation to our incoming revenue. But rather than contributing to long term stability and security for the country which benefits everyone's work activities, the society insists upon short term benefits (e.g. public sector hiring for my children, tax evasion) that it clearly cannot afford. The broader issue is not lender's conditions vs. austerity relief, but rather a way of organizing govt and society which, in the Greek model, has gotten way out of hand due to low interest rates for excessive borrowing by a series of governments. We'll see how the story unfolds.

PyrosT -> Enoch Arden 12 Jun 2015 05:32

destroyed economy was not an alternative to the IMF "help", it was its result, carefully planned and systematically implemented. It was in a way a remarkable achievement of IMF: to inflict a greater damage to the Soviet economy than WW2, with the help of the local compradors.

IMF will not do anything about your or anyone elses local corrupt elites or lack of governance. That is not within their mandate or nature.

If you think that it is possible to convert a centrally planned soviet style (the core of it to boot) to anything resembling a market economy without major disruption.

Even East Germany, despite the endless billions thrown into it, went through a period of high unemployment and hardships.

But I guess it is easier to "blame the IMF". Yes the interventions will almost always lower your GDP - for a quite simple reason that the previous GDP is probably bloated with G (government spending) and any significant restructuring always causes some depression. And yes, it typically isn't a "walk in the park". And some measures are probably misguided, inadequate or ineffective.

But...

Why does a country asks for the IMF help in the first place? Because it is sporting unsustainable policies? Sometimes it could even correct itself, but having an outside partner makes some policies easier to deploy.

DANIELDS 12 Jun 2015 05:10

Yesterday briefing by G.RICE of IMF

...Greek pension system is unsustainable. The Greek pension funds receive transfers from the budget of about 10 percent of GDP annually. Now, this compares to the average in the rest of the Euro zone of two-and-a-half percent of GDP. The standard pension in Greece is almost at the same level as in Germany and people, again on the average, retire almost six years earlier in Greece than in Germany. And GDP per capita increase, of course, is less than half that of the German level.......Terrible errors? reported to justify killing policies of troica and imf......Here is Greek butjet.

http://www.minfin.gr/?q=en/content/state-budget-execution-january-march-2015

......For pensions 6,3 billion eur.GDP OF 2014 179 bill euros and for pensions goes ONLY 3.5% OF IT.

This the big obstacle of negotiations.10% of GDP is 18 billion euros .3.5% is only 5.4 billions.They are killers of a country with false reports.

Angkor Renato -> Timotheus 12 Jun 2015 04:53

Renato on your checklist for Greece's solution to its current problems, a few questions:

1. Default. Well that's a given. It's going to happen anyway whether the Greeks want it to or not.

2. Secure Russian and Chinese support for the new currency
How will Greece secure Russian and Chinese support for its new currency? Aren't they going to do a credit check and find out that the Greeks don't honour their loans? They're bound to find out and its pretty unlikely that they'd be silly enough to line themselves up to be stiffed by the Greeks. They are not mugs you know.

3. Requisition all German and Luxembourg-owned property/assets in Greece in lieu of WWII reparation payments. Why stop at Germany and Luxembourg? Poland was part of Germany (the Governor Generalate) during WWII. As were Austria (the Anschluss), and the Czech Republic and Slovakia (the Munich Agreement). Why not seize all of the property owed by the nationals of those countries as well? It only seems fair. Also Italy had a role in the invasion of Greece in WWII. In fact the Germans would never have invaded but for the Italians botching the job. Shouldn't you be stiffing the Italians as well?

4. Massive drive to attract British and Russian tourists to a cheaper Greece. A few questions here. First the Russians. Where will their tourists come from given the parlous state of their economy? And why would they go to Greece now that they have lovely Crimea, the Pearl of the Black Sea, back in their hands? Now for the British. What has Greece got that a British tourist would want that Magaluf doesn't have? Don't say culture because Greece has little of it (and the Italians do it better anyway) and British tourists don't want it. If they wanted Greek culture they'd go to the British Museum where it's been sitting for the last 200 years.

5. Threaten to join the SCO, if NATO starts conspiring for a military coup. Don't you think that the SCO's dialogue partners, Turkey, may have something to say about that? Nothing kind, of course. That would be a bit too much to expect of the Turks when talking about Greek matters.

zchabj6 -> JimVxxxx 12 Jun 2015 04:37

The debt jubilee is a very old idea, mentioned in biblical times, but has also had plenty of implementation in medieval and later times where every 10 years or so all debt is wiped out and debt issuing starts again.

This was essentially to stop debt slavery where one class monopolizes resources and lends it out to others to do work for the asset owners to do nothing but live off of the interest on the loans, which is caustic to society.

As for no compound interest. It essentially is my own idea, based on say religious texts that ban interest or usury on loans because of the negative debt slavery consequences.

But the question is, who would then lend to business and people, where is the incentive? So there could be fixed interest on the original sum and no more, unlike today where you pay interest on the intiial sum and the interest on that.

And if you miss payments and there are delays to paying, interest breeds interest, rather than having a known fixed sum of interest to pay back which is much more just.

AER and other formulas are really eating up the entire economic structure, it seems to me there is merit to justice and prosperity too from religious texts, they seem to have a lot of experience in unseating entrenched oligarchs.

REDLAN1 12 Jun 2015 04:29

What I found entertaining, was the statement by Rice, which went "As our managing director has said many times, the IMF never leaves the table," except of course when the entire team gets called back to Washington, and errr... leaves the table...

We are meant to presume that this is a negotiating tactic, and that the IMF is Dirty Harry? In the final scene, Dirty Harry goads the perp into going for his gun so that he can legally kill him in self-defence. Although in the first scene where this is used Dirty Harry's gun is empty. So which is it?

Have they got an empty gun, or are they trying to goad Greece into defaulting, so they can blow them away?

REDLAN1 -> galava 12 Jun 2015 03:52

You can do the math yourself for the UK...

http://www.ukpublicspending.co.uk/uk_welfare_spending_40.html

I assume UK public spending on pensions at 8.6% of GDP. This 2% average sounds like nonsense.

Scipio1 -> Angkor 12 Jun 2015 03:27

In terms of purchasing power parity China does have the largest economy in the world. The US GDP is roughly $17 trn and China's is roughly $8trn, but a dollar in China goes twice as far as a $ in the US. Moreover China does not have the same debt levels as the US. US public debt is over 100% of GDP. When you count how rich a country is remember to factor in the LIABILITIES as well as the assets. The US is the world's biggest debtor country and China is the biggest creditor.

The US only enjoys (if this is the right word) its current living standards since it controls the world currency. But this is coming to and end as the BRICS nations are de-dollarizing and setting up their own institutions which circumvent the dollar. Institutions such as the AIIB and the BRICS investment bank.

The world is changing old chap, and of course the Americans don't like it; their dominant position is under threat which is why they are trying to arrest this development by any means - financial, economic, political and military - at their disposable.

Hypatia415 -> Quaestio 12 Jun 2015 03:07

Yes, Greece has been fleeced of so many of its assets. Prescient warnings over time of the world's anarchic banking system wreaking havoc and yet never held to account:
http://www.theguardian.com/business/2010/apr/18/goldman-sachs-regulators-civil-charges
http://www.alternet.org/economy/how-goldman-sachs-may-provoke-yet-another-major-financial-crisis

PeregrineSlim 12 Jun 2015 02:47

Leaving the negotiation table is negotiation.

The IMF are not going anywhere. They are just negotiating.

Greece can take heart. They'll do anything for a deal.

ShiresofEngland 12 Jun 2015 02:35

http://www.telegraph.co.uk/finance/economics/11654639/IMF-has-betrayed-its-mission-in-Greece-captive-to-EMU-creditors.html

This is the real problem. The IMF should never have been involved in the first place. They should stick to their mandate of only ever loaning money where that debt is sustainable.

For the IMF to walk out that might not be a bad thing, but they should walk out on Merkel and the EU for refusing an OSI, the debt writedown which Greece needs.

It has always been a solvency issue and not a liquidity issue. Until the Troika accept that then no progress can be made.

JimVxxxx -> madrupert 12 Jun 2015 02:35

The IMF is not only about money. They have an ideological mandate too. Now, you may agree with this ideological mandate or not. However, if you do not, then it is best to not borrow money from them!

The IMF would argue that they do put people before money; by increasing the competitiveness of a country they are ultimately benefiting everyone who lives there.

JimVxxxx -> zchabj6 12 Jun 2015 02:28

Some interesting points there... the IMF is a bank, just like any other, with a mandate to encourage free-market policies (as far as I know).

The ECB are far better positioned to provide tools which would lessen the impact for individual EU countries facing sovereign debt funding issues, however, it is not explicitly mandated to do so.

I have never come across the term 'debt jubilee' but it sounds fun; perhaps you could explain what it is? Also, how would abolishing compound interest help?

hermanmitt -> piper909 12 Jun 2015 02:22

This entire situation is a foreshadowing of what's to come in a world that allows international banking cabals and corporate investors to dictate policies to sovereign states, regardless of the will of the people as expressed in open elections.

"Give me control of a nation's money and I care not who makes it's laws" - Mayer Amschel Bauer Rothschild

This is just the money phase of a process that takes power away from elected government and hands it to a few bankers. The next stage is to hand the management of that power to the few who run the corporations.

That process is now well under way in the form of TTIP.
Q: Ever wondered how something this important could be discussed in secret?
A: Because these elites do not consider ordinary people to be part of the process, so why would they need to consult us.

Constantine Alexander 12 Jun 2015 02:16

It is very obvious that many of you who have commented have never lived in Greece. Although I have lived and worked in 5 countries, I was born, raised, served my military service and have returned to work in this country that I have always loved but ... the daily corruption, tax evasion on a massive scale, refusal to honour the terms of ordinary contracts that Greeks willingly sign only to later cherry-pick the terms by which they wish to abide and the inherent sense of always feeling victimized by the rest of the world are not productive features in civil society. Did you know that 29 billion (yes - Billion) euros of income tax were not paid by Greek professionals (doctors, lawyers, etc.) in 2009 according to Univ of Chicago researchers?

That figure does not include the tax evasion by the rest of (and the majority of) Greek working people. I am disappointed in the educational system that is ranked lowest in the EU and, most of all, in my fellow citizens who cling to this system of daily corruption and bribe-taking but refuse to recognise this behaviour in themselves. Please stop blaming financial creditors who have a right to request loan conditions (just as we have home loan conditions) that the Greeks could have declined. The financial mismanagement in this country is staggering, so, for those of you who criticize the lenders - don't forget there are two sides to every story and you may not be seeing everything that goes on here.

Renato Timotheus 12 Jun 2015 02:13

I think the solution for Greece is becoming clearer by the day.
1. Default.
2. Secure Russian and Chinese support for the new currency for a period of 2 years or so.
3. Requisition all German and Luxembourg-owned property/assets in Greece in lieu of WWII reparation payments (yes, Luxembourg was a part of Germany in WWII, so it too owes reparations, and many Luxembourg-registered companies have assets in Greece).
4. Massive drive to attract British and Russian tourists to a cheaper Greece.
5. Threaten to join the SCO, if NATO starts conspiring for a military coup.

eastofthesun -> Faith Puleston 12 Jun 2015 02:07

it is a country that thinks the EU is a source of income to make up for them not doing their sums at home

I'm thinking that if lenders have the right to enforce policy decisions, then maybe they ought also to bear a share of responsibility. By which I mean that when the IMF was busy throwing money at Greece's erstwhile administrations it must have been well aware of what was happening with its money (including that bled away into corruption), yet it tolerated it; certainly the IMF had more potential say in Greek policy at the time than the current administration.

If the politicians of earlier administrations abused their access to EU funding, they did so knowing that it would ultimately not be them to pick up the bill. Like most elected politicians they needed only a short-term perspective. The lenders indulged this when the money was being spent in the first place, now they're cracking down on the people who inherited the debt - not those who ran it up. (Of course, the lenders inherit the debt too.)

That's the nature of long-term debt. We need to learn that this lending process is dysfunctional - but both parties to the debt are complicit in that. This is why it is incumbent on the lenders to negotiate.

AlexLeo 12 Jun 2015 01:33

A very irresponsible and simplistic, really sensationalistic summary. The hallmark of a pseudointellectual, a journalist who has never held a real job and seen how money is made and value is created and lives in the imaginary world of movie one liners and simple messages. Holding a gun to his head - are you speaking to a juvenile delinquent trying to get a message across? Pathetic, Cannot see anyone paying money to read this analysis.


Chris Hindle 12 Jun 2015 01:23

IMF to Alexis Tsipras: 'Do you feel lucky, punk?'

Good to see this 'economist' sitting astride the neutral position

I thought everyone realised the Greek people are innocent in all this - that the debts were accrued illegally and probably only as little as 5-10% actually benefitted the Greek people - the rest, inevitably, benefitting Greek bent banksters and politicians.
I wonder if this 'economist' was trained in the dreamworld of neo-classical economics

To put it clearly - Bollox to the IMF -- People first!

Notaterrorist 12 Jun 2015 01:00

The best writing on this subject (not just a regurgitation of "she said, he said" like the above useless piece of "journalism") is by Ambrose Evans-Pritchard in the Daily Telegraph. Below is what he writes today.

If he is correct, I finally understand Schauble - and to my astonishment agree. Neither Greece nor the Eurozone can function while Greece remains in the Euro. It's time for Grexit and a Marshall Plan.

"Mr Schauble is the proponent of a "velvet divorce" for Greece: an orderly exit from the euro and a return to the drachma, with the ECB playing a crucial role in stabilizing the new currency. Germany and other creditors would then step in with a "Marshall Plan" to put the country back on its feet within the EU.

What Mr Schauble is not prepared to accept is a breach of contract by Greece on the terms of its previous "Troika" rescue, which he fears would lead to moral hazard and the collapse of fiscal discipline across Southern Europe. He is backed by much of the ruling Christian Democrat party (CDU) and its Bavarian allies (CSU)

Mrs Merkel appears to have concluded that "Grexit" is fraught with risk and would inevitably be blamed on Germany, leaving a toxic political and emotional legacy."

Quaestio -> MikeBenn 11 Jun 2015 23:00

Why? Because US investment banks were involved in the Greek debt.

Wall St. Helped to Mask Debt Fueling Europe's Crisis

By LOUISE STORY, LANDON THOMAS Jr. and NELSON D. SCHWARTZ
Published: February 13, 2010
The New York Times

Wall Street tactics akin to the ones that fostered subprime mortgages in America have worsened the financial crisis shaking Greece and undermining the euro by enabling European governments to hide their mounting debts.

As worries over Greece rattle world markets, records and interviews show that with Wall Street's help, the nation engaged in a decade-long effort to skirt European debt limits. One deal created by Goldman Sachs helped obscure billions in debt from the budget overseers in Brussels.

Even as the crisis was nearing the flashpoint, banks were searching for ways to help Greece forestall the day of reckoning. In early November - three months before Athens became the epicenter of global financial anxiety - a team from Goldman Sachs arrived in the ancient city with a very modern proposition for a government struggling to pay its bills, according to two people who were briefed on the meeting.

The bankers, led by Goldman's president, Gary D. Cohn, held out a financing instrument that would have pushed debt from Greece's health care system far into the future, much as when strapped homeowners take out second mortgages to pay off their credit cards.

It had worked before. In 2001, just after Greece was admitted to Europe's monetary union, Goldman helped the government quietly borrow billions, people familiar with the transaction said. That deal, hidden from public view because it was treated as a currency trade rather than a loan, helped Athens to meet Europe's deficit rules while continuing to spend beyond its means.

Athens did not pursue the latest Goldman proposal, but with Greece groaning under the weight of its debts and with its richer neighbors vowing to come to its aid, the deals over the last decade are raising questions about Wall Street's role in the world's latest financial drama.

As in the American subprime crisis and the implosion of the American International Group, financial derivatives played a role in the run-up of Greek debt. Instruments developed by Goldman Sachs, JPMorgan Chase and a wide range of other banks enabled politicians to mask additional borrowing in Greece, Italy and possibly elsewhere.

In dozens of deals across the Continent, banks provided cash upfront in return for government payments in the future, with those liabilities then left off the books. Greece, for example, traded away the rights to airport fees and lottery proceeds in years to come.

Critics say that such deals, because they are not recorded as loans, mislead investors and regulators about the depth of a country's liabilities.

Glen Killoran -> Pomario 11 Jun 2015 22:49

Based upon what?

Tourism? Tried that, it allowed the 1950 Greek economy to rocket into the 20's.

Shipping? Too late, that ship has already sailed.

Manufacturing, yeah, Greece will be #1, right after Bangladesh, Vietnam and Cambodia.

Agriculture? Equipment bought with what money, the Drachma? Hmm, that'll be a competitive business model.

Real-estate? Just how expensive do you think homes will be when the local populace is cash poor, in debt, and has no access to credit? Can you say buyers market? It will be the foreign fire sale buyer that buys low, sells high, not the Greeks.

And, all of this assumes the Greek economic model is reformed, and that is what the troika is trying to do right?

Seems to me default is really just the long hard road to reform, if it ever gets there because, there surely no demand for it now.

Mark Richardson 11 Jun 2015 22:46

It is kind of difficult for the new Greek government to give the IMF and its other creditors anything in new austerity measures considering that the Greek unemployment rate is over 25% and the youth unemployment rate is 60%. How much more pain would you be willing to force on your own people if you were a new reform leader considering that this entire crisis was caused when the previous conservative Greek government hid and failed to report half of its entire deficit? I don't see a viable future for Greece that includes having to repay the IMF and other major lenders as any more reforms will just drive the jobless rate and their GDP loss rate higher too.

Basically either the IMF and Germany agree to restructure the Greek debt or Greece will pull-out of the Eurozone, and right after that happens Italy and Spain will be next, which will cause another Great Depression in the major lending countries.

Andrew Paul -> Wood Pomario 11 Jun 2015 22:16

There probably won't be a tourism boom if Grexit triggers a global recession when the EU markets spin into chaos. So why can't they collect tax revenues from the wealthy now and clear up all their problems in the first place?

fflambeau -> Glen Killoran 11 Jun 2015 22:01

I agree that past Greek governments have made huge mistakes. But the main problem is not in pension funds, as you claim, but in military spending. In the 1980's the Greek government spent 6% of its GDP on military expenditures. That is now about 2% of GDP but that is still the second highest of all NATO countries, second only to America.

You seem to miss the point that the current Greek government had nothing to do with the mistakes made by former governments and has done a noble job of righting the ship.

As for your comments about the overly generous nature of Greek pensions, you are off base. Maybe that was the case many years ago, but not in the past couple of years.

fflambeau 11 Jun 2015 21:42

Let's compare the "bailouts" that President Obama worked out with huge Wall St. companies and corporations that failed in 2007-2009. They got enormous funding, trillions of dollars, at virtually no interest and no oversight.

General Motors took $6 billion of its $50 billion bailout and built an automobile manufacturing plant (in Thailand, no less!).

What did the USA's taxpayers make off the billions of dollars it gave GM, at the time the largest corporation in the world? Nothing. In fact, they LOST money.

Reuters and Time both report that the US government LOST money, $11.2 billion, by loaning $50 billion to GM. Source: http://www.reuters.com/article/2014/04/30/us-autos-gm-treasury-idUSBREA3T0MR20140430

Did the US government put pressure on GM to make them pay back the lost $11.2 billion? Nope.

So those complaining here about giveaways to a lazy Greek people should look at what is really happening in their countries and what the IMF and other international organizations are really doing.

AnhTay 11 Jun 2015 19:10

One possibility is obvious. Greece is prepared to default. They are, quite rationally, waiting to see if they can get a deal with the IMF that would be acceptable as an alternative to default. Even if they cannot, what is the harm in playing out their hand to see if it is possible? There is no point in getting childish about the issue. Negotiations are about business. If Greece chooses to default, so be it. No reason for the IMF to get all gnarly on the point.

fceska -> Bowhill 11 Jun 2015 19:07

That's not the only thing that's wrong. The whole article is completely one-sided. This paragraph for instance:

Up until now, the view in Athens has been that the troika – made up of the IMF, the European Central Bank and the European commission – has been bluffing. The view has been that there is always room for a bit more haggling, always time to cut a better deal that would avoid the need to make the changes to pensions, VAT and collective bargaining being demanded in exchange for fresh financial assistance.

could be rewritten as:

Up until now, the troika – made up of the IMF, the European Central Bank and the European commission – has been of the view that Athens has been bluffing. The view has been that there is always room for a bit more arm-twisting, always time to force a tougher deal that would ratify the need to make the changes to pensions, VAT and collective bargaining which they were demanding in exchange for yet more unsustainable financial assistance.


aretzios -> mariandavid 11 Jun 2015 18:37

You have it all wrong. You should read the IMF reports. The IMF actually urged the EU to write-off part of the Greek debt. The IMF felt that it was put in a bad situation, brought in by the EU to manage the problem without any of the tools usually allowed in these situations, such as debt write-off and devaluation. In its 2014 report, the IMF stated that the whole "bailout" deal was not to rescue Greece but to rescue the Euro. Now, knowing that it is not going to get any assistance from the EU, it is putting the pressure on Greece to get its funds from there. I think that the IMF feels trapped in a situation that it was not of its making.

The issue of the pensions is the most galling one. During the 2012 write-down, the EU protected all its assets; the 50 billion euros in Greek bonds held by the ECB were not subject to the write-down. However, all Greek pensions funds were forced (literally forced) to participate. They collected just 17 cents to the Euro (or thereabouts) in the bond exchange. Of course, now the EU claims that there is no money to service the current pensions, thus the pensions need to be reduced! Considering that the average pension is about 600 euros (and living costs in Greece are very much the same as in the UK), one can see how galling this is (and they already have gone down by 40% in the last five years). If you add to this the demanded tax increases, the whole thing almost sounds like a Mafia protection racket.

Even though the IMF is not "impressed" with the concessions that the Greek government has made thus far, this government would not really survive if it brings this package to the parliament. A good number of its MPs would not vote for it and many of its ministers would resign. The resulting turmoil would only deepen the political crisis.

At the end, the EU will find a very anti-EU militant country in its southeast corner with more to follow. Not really good for anybody

[Jun 12, 2015] Goldman Gets Serious About High-Speed Trading By Sam Mamudi

"...as risks were "amplified by the dramatic increase in the speed of execution and trading communications.""
And who amplified them ?
Jun 12, 2015 | finance.yahoo.com/ Bloomberg

Goldman Sachs Group Inc., which called for reform of high-speed stock trading before Michael Lewis's "Flash Boys" spurred an outcry last year, is diving back in.

... ... ...

The bank's electronic equity-execution unit is hiring executives including Keith Casuccio from Morgan Stanley and investing in software, trading infrastructure and its dark pool, according to people with knowledge of the plan.

Goldman Sachs emerged last year as an early supporter of the U.S. stock platform created by IEX Group Inc., portrayed in Lewis's book as an antidote to the perceived ills of the super-fast, multi-venue electronic trading in today's market. Now, after few major changes in the way stocks are traded, the investment bank is seeking to execute faster, catching up with competitors and leveling the playing field for its clients.

Goldman Sachs is one of the world's top equity-trading banks, climbing to No. 1 by revenue in the first quarter after ranking second in 2014, when it produced $6.74 billion. The latest push, which included hiring Raj Mahajan as head of equity electronic-execution services this year, shows it's focused on establishing itself as one of the top players in automated trading in particular.

In March 2014, Goldman Sachs President Gary Cohn wrote an op-ed in the Wall Street Journal calling for the industry and regulators to improve the market's structure as risks were "amplified by the dramatic increase in the speed of execution and trading communications."

Goldman Sachs said in a memo after the op-ed that markets would be well-served if IEX achieved "critical mass," even if that meant reduced volume at its own dark pool, Sigma X. The firm's focus had shifted away from the electronic business, with Greg Tusar, who had led the unit for Goldman Sachs, leaving in the first half of 2013.

Similar groups across Wall Street faced scrutiny because of concerns that their platforms were too opaque and that high-speed traders were siphoning off profits from everyday investors -- issues that have led to probes by New York's attorney general, the Securities and Exchange Commission and U.S. Justice Department.

... ... ...

Goldman Sachs's total trading revenue fell to $15.2 billion last year, the lowest since 2005, as activity in fixed-income markets declined in recent years and the firm sold units including its reinsurance business, which reported results within equity trading.

[Jan 03, 2015] Goldman Sachs paid senior UK staff top bonuses in 2013

January 02, 2015 | rt.com

US investment bank Goldman Sachs paid its senior executives the most lucrative bonuses of all UK-based banks in 2013, statistics compiled by Reuters suggest.

The bank's employees in key high-ranking executive and risk-taking roles were given bonuses of £2.57 million on average – approximately twice the amount awarded by other banks based in Britain.

Reuters' research, published earlier this week, contrasted salaries doled out by 13 prominent investment banks operating in London. The survey spanned a total of 2,600 City of London employees.

The study also revealed 2,600 City bankers were paid over £3.4 billion in 2013, almost 50 times the average yearly salary in Britain.

The Trade Union Congress (TUC), a federation of trade unions throughout England and Wales, criticized Goldman Sachs, insisting the time had come for its employees' bonuses to come "back to planet earth."

Royal Bank of Scotland (RBS), which is 79 percent owned by the British state, paid its staff more moderately. Reuters' research shows senior employees and key risk-takers working for the bank were offered on average £600,000.
Bonus cap or regulatory farce?

The City of London is billed as the investment banking capital of the world. Britain is home to the vast majority of large investment banks throughout Europe. In a highly competitive financial climate, analysts suggest Goldman Sachs paid its senior executives and risk-takers 100 percent more on average than rival banks such as JP Morgan and Citi in an effort to lure and keep the sector's leading talent.

Goldman's hefty bonuses in Britain were found to eclipse the average bonus the investment bank paid to its US-based employees. The discrepancy may cause tension within the firm when US staff realize they took home less in 2013 than their UK counterparts.

The bank's 2013 bonuses offered in Britain may mark the peak of City gratuities for the foreseeable future as the figures relate specifically to earnings prior to the introduction of an EU-wide bonus cap.

Following the policy shift, financial firms in Britain must adhere to EU rules that limit bonuses to the size of bankers' basic salaries. Should banks' shareholders collectively agree, however, higher bonuses may be issued in rare circumstances.

The Treasury, which sets the focus of UK economic policy, previously brought a legal challenge against the bonus cap to the European Court of Justice (ECJ). But it was unsuccessful in its attempt to overturn the regulatory shift.

Experts suggest the EU-wide bonus cap, which came into force at the start of 2014, will do little to tackle wage inequality in Britain. By driving the basic salaries of senior banking executives upward, it will merely reinforce the status quo – reaping astronomical salaries for elite financiers that are just as lucrative as ever.

Banks have also created controversial new allowances, which are allocated to their top employees in tandem with their regular wages and bonuses. These allowances generally take the form of shares, and allow banks to legally circumvent the EU's bonus caps.

In 2014 alone, the UK's largest four high street banks doled out £30 million in shares to at least 12 of their most senior executives.

Ross McEwan, the CEO of RBS, was the only UK bank boss not to accept an allowance last year in addition to his annual salary. McEwan will, however, be awarded an allowance in 2015 amounting to £1 million in shares.
Back to Earth?

While some of Britain's top bankers continue to take home as much as 50 times the nation's average pay, trade unions warn ordinary workers won't see their salaries recover to pre-2008 levels for almost a decade.

Economic policy campaigners calling for banks to pay a transaction tax warn the data compiled by Reuters proves financial firms like Goldman Sachs are not making a fair contribution to British society.

"Even in a financial sector with grossly inflated pay, Goldman Sachs manages to shock with what it gives its top brass. But Goldman's is the tip of the iceberg – an under-taxed financial sector continues filling the pockets of its own in a way that is out of proportion to the contribution it makes to society," a spokesman for the Robin Hood tax campaign told the Guardian.

TUC general secretary Frances O'Grady said a drastic shift in the salaries of elite UK bankers is paramount.

"Risk-taking banks caused the global crash, yet while pay for the many has fallen every year since 2008, top bankers are still raking it in."

"It's time their pay came out of the stratosphere and back to planet Earth. Let us make 2015 the year in which employees get a voice on remuneration committees."

Senate Spars With Goldman Sachs Over Commodities

NYTimes.com

Goldman Sachs executives spent Thursday locked in a testy public face-off with members of Congress, fighting suggestions that the bank had taken too large a role in the commodities market.

In a hearing in Washington, Senator Carl Levin, the chairman of the Senate's Permanent Subcommittee on Investigations, hammered away at Goldman's ownership of aluminum warehouses in Detroit, coal mines in Colombia and a uranium trading company in London, which he said put the firm in position to influence the prices of commonly used commodities. The hearings also touched on the large commodities businesses run by JPMorgan Chase and Morgan Stanley, but executives from both banks emphasized that they were generally planning to wind down their ownership of assets like power plants and oil tankers.

Goldman Sachs, on the other hand, has said it is not planning to exit the business. At the hearing, the firm's representatives defiantly rejected criticism of their operations, frequently leading to verbal sparring matches with Senator Levin.

"I'm glad that at least two of the three of you are pulling back significantly," Senator Levin said to a panel with executives from all three banks.

Until about 20 years ago, regulated banks faced tight constraints that barred them from owning physical commodities and limited them to trading in financial contracts that were linked to the prices of commodities. But a substantial relaxation of the rules allowed the banks to own actual commodities, known on Wall Street as physical assets.


Photo
Senators John McCain, left, and Carl Levin questioned bankers on their influence over commodities on Thursday.
Senators John McCain, left, and Carl Levin questioned bankers on their influence over commodities on Thursday.Credit Win McNamee/Getty Images

The biggest fireworks of the day came during the first of the hearing's three panels, which focused on Goldman's practices at aluminum warehouses it owns in Detroit.

The Senate subcommittee released a 400-page report on Wednesday, saying that Goldman had devised policies that made it hard to get aluminum out of the Detroit warehouses, which, in turn, pushed up the price of aluminum for American companies. The allegations were previously the subject of an article in The New York Times.

Christopher Wibbelman, the chief executive of the Goldman-owned warehouse called Metro International Trade Services, and Jacques Gabillon, a Goldman executive, both refuted the basic assertions in the report, along with many of the conclusions that Senator Levin drew from specific pieces of evidence.

This led to several terse exchanges in which Senator Levin, Democrat of Michigan, suggested that the Goldman representatives were dissembling to avoid admitting what it had done, and at a few points indicated that the Goldman testimony seemed to be untruthful.

"Come on," Senator Levin said at one point to Mr. Wibbelman. "I'm trying to just get you to acknowledge what is obvious."

After one particularly fiery exchange, Senator John McCain, the top Republican on the subcommittee, gave a rueful nod and said, "Remarkable."


Photo
From left, Janet Broeckel and Steven Bunkin of Goldman Sachs confer with their attorney, Abbe Lowell, at a Senate panel on Thursday.
From left, Janet Broeckel and Steven Bunkin of Goldman Sachs confer with their attorney, Abbe Lowell, at a Senate panel on Thursday.Credit Win McNamee/Getty Images

Goldman won some support from Senator Rob Portman, Republican of Ohio, who came into the hearing briefly and questioned whether there was really evidence that the issues in Detroit had any real world impact.

During the second panel of the day, two executives from the aluminum industry said that Goldman's practices were unusual and were costing aluminum users.

"The warehouse issue is having a profoundly negative impact on our customers' businesses," said Nick Madden, the chief supply chain officer at Novelis, a producer of rolled aluminum.

Mr. Madden said that when he first saw The Times article on Goldman's practices, he didn't understand why the warehouse company was encouraging long lines for customers wanting to remove their metal.

"Now I see it in black and white and I understand it," he said, in reference to the subcommittee's report.

"It's an extremely imaginative approach to maintaining a profitable warehouse company," he said.

Both he and Jorge Vazquez, the founder of Harbor's Aluminum Intelligence Unit, said that regulators or politicians should step in to stop the practices under review.

The hearing on Thursday is the latest in which Goldman employees sparred with Senator Levin and his investigative subcommittee. In 2010, a hearing about Goldman's practices in the mortgage market before the financial crisis exemplified Goldman's reputational problems after the crisis.

The Goldman executives who testified in the 2010 hearing were later criticized for resisting the committee's findings and showing exasperation with the line of questioning from the politicians.

During the hearing, the executive representing Morgan Stanley's commodities business, Simon Greenshields, managed to stay out of the spotlight by agreeing with most of the assertions made by Senator Levin.

Mr. Greenshields even concurred with Mr. Levin's suggestion that regulators put new rules in place to stop insider trading in the commodities markets.

The co-head of global commodities at JPMorgan Chase, John Anderson, put up more of a defense of his company's past activities. He fought particularly against the Senate report's accusation that, at one point, the bank went far above regulatory limits on the amount of commodities it could own.

But Mr. Anderson apologized for the bank's past role in manipulating electricity prices, something for which it has already paid $410 million in fines.

"We've highlighted today some very regrettable activities," he said. "Our business is a people business and people unfortunately make mistakes."

The Goldman executive on the same panel, Gregory A. Agran, was much less willing to concede to any of Senator Levin's accusations and a note of annoyance frequently crept into his voice. He said there was no evidence that any confidential information from the commodities infrastructure that Goldman owned had ever found its way to Goldman's trading desks.

Senator McCain said that the rules allowing Wall Street banks to own physical commodities gave the banks an unfair leg up in their trading operations. But his bigger complaint was that the ownership of coal mines and oil rigs seemed to go far beyond what people expected from banks.

"Most Americans believe you are financial houses that made a lot of money" Senator McCain said, before referring to the coal mines and power plants. "What's the point? Maybe you can help me out here."

When the panelists answered, Mr. McCain showed no sign of being satisfied.

pete, rochester 21 days ago

I am shocked, SHOCKED that GS is engaged in such a practice. Don't we have Antitrust laws that would address the manipulation aspects of this and, if so, why is Levin wasting our time with this grandstanding ? Actually, congress should be more worried about the potential downside of a bank using FDIC-insured deposits to own commodities which is another argument for reinstating Glass-Stegall.

Carlos Sant, Miami, USA 21 days ago

Apply the RICO Statutes to those organized hoodlums in Wall Street. They constantly rape the US public and get away with it.

A., Vermont 21 days ago

Goldman Sachs, Morgan Stanley, Barclays, Citi, Bank of America Merrill Lynch, Macquarie Bank and First Reserve Corp. are financing the $2.4 billion acquisition of debt-ridden First Wind by SunEdison (with its roots in Monsanto).

SunEdison is a major player in the global solar business, which uses a lot of aluminum. I wonder if Goldman Sachs market manipulation of aluminum benefited SunEdison, and if Goldman Sachs is invested in SunEdison.

Wind turbines use a lot of commodities, better watch for those markets to be manipulated.

EJS, Granite City, Illinois 21 days ago

Good for Senator Levin! Stick it to those unscrupulous fat cats. Maybe they can bring in the new Senator Joni Ernst in a bipartisan effort to make them squeal.

Stan Continople, Brooklyn 21 days ago

Once again, it's the "invisible hand" picking your pocket.

Anetliner Netliner, is a trusted commenter Washington, DC area

If the Senate report is correct, Goldman Sachs is engaged in outright aluminum market manipulation at Metro Warehouses. I suppose a bit of good can be traced to the trucking and storage jobs that Goldman creates at Metro, but this appears to be an ugly scheme in which federal deregulation is complicit.

In decades past, Goldman Sachs was dedicated to fair business dealings and put integrity first even if it cost them deals. Goldman Sachs was then a proud name. If this report is correct, it is a shame to see how low Goldman has sunk. That Goldman has been aided and abetted by an Obama-led federal government supposedly working to revive the fortunes of ordinary Americans is beyond sickening.

Kudos to Senator Levin and his Senate Committee staff for shedding light on Goldman's probable efforts to move aluminum prices.

Michael S, is a trusted commenter Wappingers Falls, NY 22 days ago

Until the day a high ranking Goldman partner is prosecuted and incarcerated; until the day confidential information stops leaking from former Goldman people in government to present Goldman people these hearings will be nothing but political theater. Senate committee calling the names, these guys are laughing all the way to the bank.

Jack McGinniss, Las Vegas 22 days ago

Goldman's representatives were coached by legal counsel to avoid straight answers. The 'Metro' CEO was a mess. So, Goldman pushes legal and ethical limits to gain maximum profit. This is what sociopathic profit fiends do. They have a contract with their shareholders, and clients, not you, or the U.S. Congress.

Goldman bought the warehouses to gain an advantage over the aluminum 'all in price' and to manipulate market intelligence. Of course, they deny any breach of their "just trust me" Chinese wall to their trading brethren. Ya right.

But, did they break the law?

This hearing is just another in a long line of circus acts that involves the repeal of Glass/ Steagall. It is also the Senate's recognition that they screwed this country by passing the Gramm–Leach–Bliley Act in 1999. (The law that repealed part of Glass / Steagall Act of 1933, and allowed commercial banks, investment banks, securities firms, and insurance companies to consolidate under a single roof (with Chinese Fire Walls below, of course)).

Brilliant! They also failed to give to the SEC or any other financial regulatory agency the authority to regulate large investment bank holding companies. More brilliance!

Goldman's, J.P. Morgan's, Bank of America and Morgan Stanley's reputations as bankster crooks, that game the broken regulatory system is legendary. Congress's reputation that is at the bottom of a sewer.

Reinstate the "New Glass/Steagall" and "End the Fed".

Pretty please, with sugar on top.

Left Behind Parent, San Marino

Aren't McCain and Levin the same people who unanimously confirmed Christopher Cox to run the SEC? I find it incredible that Senators with no experience can questions experts.

Like Barbara Boxer from CA who grilled GM's Mary Bara; as if Boxer could have done any better. Let McCain and Levin run a bank or Fortune 500 company for a month and see how they do.

Daniel DeGrandpre -> Left Behind Parent, Vancouver, Wa

If you have some better system for the legislative branch finding out how business leaders are raping the consumer please present it. FDR and congress put into law regulations that put a check on such banking practices after the great depression which had wreaked havoc on the world economy and created long term unemployment and poverty here. But of course rich people are never really rich enough so all the right palms were greased and Glass Stiegel was changed.

I would rather that these senators got their buddies to pass legislation that would reverse Citizen's United and get the billions of dollars now being spent on elections back out of them. We are now in a dangerous spiral that will encourage business practices that will help create new recessions and encourage multi-national corporations to continue to ruin our financial structure and our climate to boot. It's all tied together and getting worse. To top it off we're dumbing down our country because big business wants those education dollars and eventual control of the masses. Yeah, let's get mad at a couple of senators for trying to do something about it. Maybe we should hire some CEO's to investigate themselves.

[Nov 19, 2014] Senate Report Reveals Powerful Manipulative Positions of Goldman, JPM In Global Commodities

"We had to struggle with the old enemies of peace--business and financial monopoly, speculation, reckless banking, class antagonism, sectionalism, war profiteering.

They had begun to consider the Government of the United States as a mere appendage to their own affairs. We know now that Government by organized money is just as dangerous as Government by organized mob."

Franklin D. Roosevelt

"Why is JP Morgan getting so much heat? Maybe because it is a massive international crime syndicate."

Matt Taibbi, Talking JPM With Sam Seder

JPM and Goldman sought and obtained manipulative powers in global commodities, even while they were being bailed out on the back of the American people? Oh no, nothing like this could be true, or so the shills and toadies of the moneyed interests will say. Just get the government out of our way, and everything will be all right. The market is naturally rational and efficient, pure and pristine. No Bank would risk its reputation by doing anything illegal.

Especially when they buy off and intimidate enforcement, write the laws, and do what they will.

I doubt that anything meaningful will be done about this. The corruption runs deep. In corporatism the private and public elites are largely interchangeable. Different roles, similar objectives.

The politicians may make a good show of it, and talk harshly to their witnesses. And then take their money, and lick their hands.

But at least we know more about what is true, and what is not.

Perhaps this may help you understand those who do not wish to remain under the power of the Banking cartel, and may be in a better position to do something about it.

Related: Wiseguys: Drawing Parallels Between the Mafia and Wall Street

Dealbook

Senate Report Criticizes Goldman and JPMorgan Over Their Roles in Commodities Market

By Nathaniel Popper and Peter Eavis

November 19, 2014

A two-year Senate-led investigation is throwing back the curtain on the outsize and sometimes hidden sway that Wall Street banks have gained over the markets for essential commodities like oil, aluminum and coal.

The Senate's Permanent Subcommittee on Investigations found that Goldman Sachs and JPMorgan Chase assumed a role of such significance in the commodities markets that it became possible for the banks to influence the prices that consumers pay while also securing inside information about the markets that could be used by the banks' own traders

Bankers from both firms, along with other industry executives and regulators, will testify about the allegations at hearings on Thursday and Friday.

The 400-page report, which was made public on Wednesday evening, included case studies on nine different commodities in which banks have taken big positions, including the 100 oil tankers and 55 million barrels of oil storage that were owned by Morgan Stanley, and the 31 power plants owned by JPMorgan at one point.

The subcommittee discussed several reasons that these commodity operations could create problems. The potential for price manipulation and the unfair advantage that banks can gain in these markets were among the top concerns expressed by Senator Levin and Senator John McCain, the top Republican on the subcommittee.

But both senators also echoed previous warnings that the enormous holdings of oil, uranium and other hazardous materials could expose the banks to significant legal liability that could, in turn, lead to runs on the banks.

A 2012 study by the Federal Reserve, cited in the report, found that banks have not put aside enough money and insurance to adequately prepare for the "extreme loss scenarios" involving commodities...

Read the entire article here.

Goldman Sachs Puts 4 Employees On Leave After Trading Glitch FT

The Financial Times said about 80 percent of the mistaken contracts sent to the New York Stock Exchange were cancelled, limiting losses for Goldman. But the glitch "provoked a strong reaction" within the bank, which takes pride in a reputation for risk management, the paper said.(http://link.reuters.com/jeg62v)

The system, called a "trading axis", monitors the Wall Street bank's inventory to determine whether it should be a more aggressive buyer or seller in the market.

sandral105

The stock market isn't what it was pre-Obama. It's now the fed market. You don't really trade 100% in business and corporate stocks anymore as much as you trade in Bernanke chips and government forced directions. Anybody who still has money in stocks is flying in a plane with one wing and no fuel.

AlonzoQuijana .

Can we ban use of the word "glitch?" The other day NASDAQ was down for three hours, with $7 TRILLION in trades stranded, and it was described as just a "glitch."

"Glitch" minimizes the severity of these failure, as in, "well, stuff (glitches) happens" and glitches are really no one's fault, almost acts of God.

Let's bring back some value-laden words and phrases that hint at someone, somewhere is at fault, like, I don't know... serious mistake; crash and burn; disaster; failure; negligence; turning a willful blind eye to problems; incompetence; bad design; poorly written software; dereliction; failing to do due diligence.

brian farms

Goldman Sachs is one of few great American assets.

photo kimarkintl .

Does Goldman Sachs have any influence on the manipulation of oil prices as a broker?

mavpay

magic wands + invisible hands + technical errors = Malfeasance-Fraud-Criminality-and-Corruption

Replacing lower-level objects, polluting the public's airwaves with PR press releases, and hiding-in-plain-sight while the vessel continues to capsize, throwing others overboard while the captains don't get wet and remain on "stable footing," resemble the failed performances we've already experienced. ...new game, same winners, more losers...

wmsdrejka .

Before hurling all this vitriole at Goldman Sachs be aware that they have been careful stewards of personal assets and advisors to large pension funds where you critics may have assets. They have thousands of employees and some eff up. Jealousy for people and companies that do well confound me.

westend1 .

Gee thanks so much for criminally manipulating the market, packaging and selling mortgage backed securities that you then bet against, and for accepting fines that amount to less than 2 hours of business. Tell you what, make up the 14 trillion our economy lost and we will call it even.

ufopp

that's not a glitch, it's a fubar

[Aug 21, 2013] How financial hackers from GS (aks These F#@king Guys), J.P. Morgan and other usual suspects cornered commodities by Christian Berthelsen

If you hack somebody else computer and get caught you go to jail. If you hack financial system you reap profits and because you own the system you have no risk to be be put to the slammer ;-)
Aug 21, 2013 | The Wall Street Journal

Aluminum deliveries into warehouses run by big banks and trading firms have plunged this summer, highlighting Wall Street's retreat from the once-lucrative commodities business amid stagnant markets, new rules and regulatory scrutiny.

The slump marks the unraveling of a practice that boosted profits for several years at warehouse operators including Goldman Sachs Group Inc. and Glencore Xstrata PLC. Bank warehousing practices now are the subject of investigations by several U.S. authorities, including a Senate panel.

Fabrizio Costantini for the Wall Street Journal A metals warehouse in Detroit owned by Metro International Trade Services, a unit of Goldman Sachs Group.

The reversal underscores Wall Street's efforts to wring profits out of power plants, oil pipelines and metals warehouses. After spending billions of dollars in a decadeslong expansion into all corners of the raw-materials business, Goldman Sachs, J.P. Morgan Chase & Co. and Morgan Stanley are trying to sell commodities assets.

"The game as we know it seems to be over," said James Malick, a partner in the capital markets practice at Boston Consulting Group. "It's hard to see anything new that is bolder, bigger or better" in commodities.

In its heyday, the firms offered aluminum producers cash, rent discounts and other incentives to put metal into storage rather than selling to users such as brewers and soft-drink makers, according to analysts and traders. Meanwhile, the prolonged time in inventory generated hefty rental income for warehouse owners that more than made up for the incentives paid out.

Industrial aluminum users such as Coca-Cola Co. and aluminum sheet maker Novelis Inc. have complained to the London Metal Exchange that warehouses had artificially slowed the release of aluminum, limiting supply and driving up prices. A MillerCoors LLC executive testified in a Senate banking committee hearing last month that the practices were inflating consumer prices by billions of dollars.

Glencore, Goldman Sachs and J.P. Morgan declined to comment.

Average daily aluminum shipments to LME warehouses were down 79% in the first 19 days of August from two months earlier, according to data provided by New York-based metals consulting firm CPM Group Inc. August's daily average rate of aluminum deliveries is the lowest since November 2011, CPM Group said.

At the same time, the cash incentives dangled before producers by the banks and trading firms that own the facilities have recently dropped to $50 a metric ton from more than $200 this past spring, traders said.

As more metal comes back into the market, the premium charges for immediate delivery have fallen 7.2% from their record in July, according to Platts. On Tuesday, LME aluminum for three-month delivery closed at $1,914.50 a metric ton, down 7.6% this year.

Spurring the bank pullback: A decline in commodity profits amid more-placid markets that have limited trading opportunities and increased capital requirements that have made running these businesses more expensive. Commodity revenue at the 10 largest global investment banks in 2012 fell 57%, to $6 billion, compared with 2008, according to Coalition, a research consultant. In the first half of 2013, revenue fell 25% from the same period last year.

Raw-materials trading in 2008 generated as much as a third of revenue within large banks' market-making business, which matches buyers and sellers in the fixed income, currency and commodities markets; it now accounts for less than 7%.

"As things stand right now it's a very, very bleak picture," said Paul Johny, research director of Coalition.

Employment in commodity divisions at the 10 largest global investment banks dropped to 2,183 at the end of the first quarter from its peak of 2,775 at the end of 2010, according to Coalition.

J.P. Morgan plans to sell physical assets such as warehouses and power plants. The Wall Street bank has told potential buyers of its commodities assets that it expects to kick off sale efforts in early September, said people familiar with the sale process.

Goldman Sachs has explored a sale of its metal warehousing unit, Metro International Trade Services. Metro International has maintained a stockpile of more than 1.5 million tons of aluminum, or about 27% of the LME's global inventories of that metal, at its Detroit facilities. Metro operates 29 of 37 LME-licensed warehouses there.

UBS AG last year closed all of its commodity trading desks not tied to precious metals such as gold and silver.

At Morgan Stanley, a pioneer in the commodities business that doesn't own a warehouse unit, the pain has been acute. The Wall Street securities firm doesn't disclose specific results for the commodities unit, but people familiar with its performance said revenue has fallen to less than $1 billion last year from nearly $3 billion five years ago.

The firm sought to sell its commodities business last year, but talks broke down after the sovereign-wealth fund of Qatar said it wanted only certain parts of the business, principally oil, according to people briefed on the talks. The sides discussed different structures for a partnership to run the business together but couldn't reach an agreement, the people said.

The Commodity Futures Trading Commission last week subpoenaed a number of warehousing operators, and the Justice Department launched a probe into the matter last month, people familiar with the probes said. Separately, the Federal Reserve is examining whether banks should be allowed to own physical commodities assets such as pipelines, warehouses and power plants. Lawmakers also have questioned the role of banks in the physical raw-materials business. Goldman Sachs and Metro have been targeted in at least four federal lawsuits in recent weeks alleging abusive practices. The firm has denied wrongdoing.

Most banks are retaining units that make commodities-related trades for customers such as hedge funds, airlines and manufacturers seeking to bet on price changes or hedge risks. But the volume of such trading has fallen sharply, pressuring profits, thanks to rules limiting bank trading and a decrease in large market swings.

The pullback is compounding the challenges of a low-interest-rate environment that has cut into investment returns. The commodity business has been highly profitable but accounts for a small chunk of large banks' revenue.

The London Metal Exchange is the world's largest industrial metals trading bourse and is considered the global benchmark for aluminum prices. No U.S. exchange trades aluminum futures. The LME on July 1 announced a proposal to link the amount of metal entering and leaving warehouses that have long wait times, with the aim of reducing the queues that have prompted complaints from industrial consumers. If approved, the rule would go into effect in April 2014.

Write to Christian Berthelsen at christian.berthelsen@wsj.com and Tatyana Shumsky at tatyana.shumsky@wsj.com

[Aug 20, 2013] How Phil Falcone Won The Battle Against Goldman, But Lost The War (Or How Not To Manipulate Bonds)

Zero Hedge

As part of the SEC's consent order with Harbinger's Phil Falcone, we learned that in addition to the previously well-known stuff Falcone was engaging in (using the fund as his taxpaying piggybank, giving preferential gating terms to "friends and family", etc), perhaps what really scuttled the once legendary hedge fund manager is what ended up being an outright war with Goldman, when back in 2006 Harbinger tried to not only take the other side of a short bet put on by Goldman, but literally squeezed Goldman and its clients into absolutely misery with the result millions in profit to Falcone and unknown losses to Goldie. And as one knows, you never fight Goldman and win, without ultimately losing everything.

Read on, if for no other reason than to know how not to manipulate a short squeeze when Goldman (which just happens to be your prime broker) is on the other side.

The narrative from the SEC:

Early Transactions

Between April and June 2006, Falcone and the other Defendants purchased 108 million MAAX junior discount bonds (the "MAAX zips"), which constituted about 63% of the issue, for Harbinger Capital Partners Master Fund I ("Master Fund").

During the summer of 2006, Falcone heard rumors that Goldman Sachs, & Co. (the "Financial Services Firm"), a Wall Street financial services firm that provided prime brokerage services to the Master Fund, was shorting the bonds and encouraging its customers to do the same. Prime brokers provide a special group of services to certain clients, often hedge funds, including services such as securities lending, leveraged trade execution, cash management, and margin arrangements.

Defendants' Actions

In September and October 2006, Falcone retaliated against the Financial Services Firm [i.e. GOLDMAN] for shorting the MAAX Zips by causing the Master Fund and the newly created Harbinger Capital Partners Special Situations Fund ("Special Situations Fund") to purchase all of the remaining outstanding MAAX zips in the open market. (The Master Fund and the Special Situations Fund are collectively referred to hereinafter as the "Harbinger funds.")

By October 24, 2006, the Harbinger funds had purchased more than the available supply of bonds-its position stood at 174 million notes in a 170 million note issue.

Contemporaneously with these purchases, Falcone and the other Defendants arranged for the transfer of the 5027 Harbinger Defendants' MAAX positions from its prime brokerage accounts to a custodial account in a bank in Georgia. The principal purpose and effect of this was that it prevented the bonds from being lent out or used to cover short positions.

Falcone and the other Defendants then demanded that the Financial Services Firm settle its outstanding MAAX transactions and deliver the securities it owed. Defendants did not disclose at the time that it would be virtually impossible for the Financial Services Firm to acquire any bonds to deliver, as nearly the entire supply was locked up in the Harbinger funds' custodial account and the Harbinger funds were not offering them for sale.

Even though he had already purchased more than the available supply of bonds, Falcone and the other Defendants continued to cause the Harbinger funds to purchase the MAAX zips from apparent short sellers-taking the long side of short sales in the open market. By late January 2007, the Harbinger funds had acquired another 18 million MAAX notes, increasing their holdings to 113% of the issue. By this point, the Harbinger funds had purchased 22 million more bonds than had ever been issued. The total cost of the MAAX position was approximately $90.7 million.

Due to Falcone's and the other Defendants' interference with the normal interplay of supply and demand, the bonds more than doubled in price during this period.

In the spring of 2007, Falcone and the other Defendants ratcheted up the pressure on the Financial Services Firm by paying off the Harbinger funds' margin debt to the firm and demanding the return of any securities, including the MAAX zips, which it had borrowed. In an effort to meet its obligations to the Harbinger funds, the Financial Services Firm bid daily for the bonds, but could not find any to purchase.

In May 2007, the Financial Services Firm approached the 5027 Harbinger Defendants and asked if it had any MAAX zips to sell. Defendants replied that the Harbinger funds had such bonds and that the Financial Services Firm could have them at the price of 100, or par, despite the fact that the bonds had been selling at a deep discount to par. At the time of the offer, MAAX was in a dire financial condition, and the Harbinger funds were carrying the notes on its books at a price of 65.

On July 31, 2007, Defendants sold a block of the Harbinger funds' MAAX zips in the open market, effecting settlement from a short seller at 95-a price that resulted from the Harbinger funds' ownership of more than 100% of the issue. The same day, Falcone directed that the price of Harbinger funds' MAAX zip bonds be marked down from 55 so that they were carried on the funds' books at a price of

In late September 2007, the Financial Services Firm called Falcone to try to resolve the MAAX situation. During that conversation, Falcone claimed that a price at or above par for the MAAX bonds was reasonable and tried to induce the Financial Services Firm to buy-in the outstanding MAAX short positions at a price of 105. At the end of the conversation, Falcone informed the Financial Services Firm-for the first time-of the material fact that the Harbinger funds had acquired more than the whole issue of the MAAX zips. This was the first time anyone outside of the 5027 Harbinger Defendants knew the size of the funds' MAAX position. Several days later, the Financial Services Firm informed Falcone that the firm could make no further bids for the MAAX zips as long as the Harbinger funds' position in the MAAX zips was larger than the number of bonds issued. The Financial Services Firm refused to pay the prices asked by the 5027 Harbinger Defendants.

On December 24, 2007, in response to the Financial Services Firm's concerns about the size of the Harbinger funds' position in the bonds, Falcone and the other Defendants directed the funds to sell 25 million face amount of MAAX zips for $0.01 per $100 face amount (for a total of $2,500) to an off-shore retail account at a brokerage firm through a trader at an inter-dealer broker. The trader, who had a longstanding relationship with Falcone, executed the trade using trading discretion he had over the off-shore account. The brokerage firms involved in the transaction did not report it. For the next year, the trader made no effort to sell the bonds in the open market. Thus, the 25 million in MAAX zips were effectively unavailable to cover short positions in the bonds. As a result, while the sale of the 25 million in MAAX zips allowed Defendants to argue that they had reduced the Harbinger funds' ownership position below the total issue of MAAX zips, the sale did not diminish the impact of their ownership of MAAX zips.

At the end of the month, Falcone directed the Harbinger funds' investment adviser to write off the MAAX position as worthless. Falcone and the other Defendants, however, continued to press the Financial Services Firm to deliver the securities it owed.

In the first week of January 2008, Falcone informed the Financial Services Firm that the Harbinger funds had sold some of the MAAX notes and that their ownership position was below the total issue size. Falcone refused to identify the party to whom the Harbinger funds had sold the 25 million notes or give the Financial Services Firm any details of the transaction. The Financial Services Firm resumed bidding for the notes, but again could find none to deliver.

On January 11, 2008, the Financial Services Firm learned of two transactions in the MAAX zips at prices in the $60 range. In order to cover outstanding short positions, the Financial Services Firm purchased one million MAAX zips in the $60 range. When the Financial Services Firm subsequently learned that it had purchased the notes from the Harbinger funds, it became concerned that the $60 price was the product of the 5027 Harbinger Defendants' control of the position and again suspended the firm's trading in the security.

Between March and November 2008, the 5027 Harbinger Defendants adjusted or cancelled all of its unsettled MAAX trades.

* * *

And when the Financial Services Firm, aka Goldman, learned Falcone had taken it for the proverbial ride... well, the rest is history.

Oh, and since Harbinger owned 113% or more than the entire issue, that means Goldman was naked shorting MAAX. But we'll let that slide: last thing we want to do is bring attention to what the real crime here was...

VD

great way to obfuscate failure to deliver on a bum position.

gmrpeabody

Gang members killing gang members..., OK with me.

disabledvet

"Those are called bankers" and dinner is served.

Save_America1st

Fuck 'em all.

You know I always think about old Bernie Madoff...sittin' there all alone in his jail cell all these years now.

He must be getting the news too...maybe he even reads ZeroHedge now these days. He's gotta be wondering how in the hell he's the only fucking Wall Street scumbag who got pinched now that the whole world knows what total filthy criminal scum all of them are and that they should all burn for their corruption.

And there's Bernie...all alone and not one other fucker, not even the ultimate scum like John Corzine have been thrown in the slammer for what they've done.

venturen

Surprised they didn't put a horse head in his bed...typical mafia!

[Mar 13, 2013] Mistakenly Released Documents Reveal Goldman Sachs Screwed IPO Clients FDL News Desk

As noted in the Roundup, Goldman Sachs is once again being cited for ripping off its clients, this time in the IPO space. Goldman had already paid massive fines for causing the mortgage crisis by selling its own clients toxic assets. Later the firm would take considerable reputational damage when a former Goldman Sachs executive, Greg Smith, wrote an Op-Ed for the New York Times where he claimed Goldman employees routinely took advantage of the firm's clients and enjoyed mocking them afterwards – the birth of the "Muppet" meme.

Now Joe Nocera has obtained, due to a clerical error, documents detailing Goldman Sachs screwing its IPO clients. Goldman's clients, eToys, are in the midst of a lawsuit against Goldman. eToys is claiming Goldman conspired to keep the price of the IPO low to benefit their investment bank clients who gave Goldman a kickback in return. eToys later went out of business partly due to lacking capital that it could have raised in a more honest IPO.

Recently, however, I came across a cache of documents related to the eToys litigation that seem to tilt the argument in favor of the skeptics. Although the documents were supposed to be under seal, they were sitting in a file at the New York County Clerk's Office, available to anyone who asked for them. I asked.

What they clearly show is that Goldman knew exactly what it was doing when it underpriced the eToys I.P.O. - and many others as well. (According to the lawsuit, Fitt led around a dozen underwritings in 1999, several of which were also woefully underpriced.) Taken in their entirety, the e-mails and internal reports show Goldman took advantage of naïve Internet start-ups to fatten its own bottom line.

The documents detail that Goldman's focus was on using the eToys IPO to generate more business with its investment clients. After the investment clients profited the Goldman Sales force sprung into action calling the clients to secure more business gaining large commissions. A quid pro quo with eToys and other IPO clients losing out.

Goldman carefully calculated the first-day gains reaped by its investment clients. After compiling the numbers in something it called a trade-up report, the Goldman sales force would call on clients, show them how much they had made from Goldman's I.P.O.'s and demand that they reward Goldman with increased business. It was not unusual for Goldman sales representatives to ask that 30 to 50 percent of the first-day profits be returned to Goldman via commissions, according to depositions given in the case.

"What specifically do you recall" your Goldman broker wanting, asked one of the plaintiffs' lawyers in a deposition with an investor named Andrew Hale Siegal.

"You made $50,000, how about $25,000 back?" came the answer. "You know, you made a killing."

"Did he ever explain to you how to pay it back?" asked the lawyer.

"No. But we both knew that I knew how," Siegal replied. "I mean, commissions, however I could generate."

30-50%! Now that's an incentive structure.

Luckily for Goldman Sachs they were not so greedy they forgot to do another kickback, this one in the form of bribes to Congress and the President. Otherwise they might have to actually suffer for their misbehavior. But having bought protection from the Justice Department while getting massive subsidies and bailout guarantees from the Federal Reserve ensures Goldman's continued survival and dominance. And as long as Goldman has the government behind them they will have clients no matter how likely they are to treat them like Muppets.

Cynthia Kouril March 12th, 2013 at 7:53 am

One of the problems here is how you define a "successful" IPO. Traditionally, good IPO underwriting meant that you sold out on the first day. The ability to attract share subscribers in advance is what you go to a venerable house for.

The important pert here, is the kickbacks.

newcarguy

Luckily for Goldman Sachs they were not so greedy they forgot to do another kickback, this one in the form of bribes to Congress and the President. Otherwise they might have to actually suffer for their misbehavior. But having bought protection from the Justice Department while getting massive subsidies and bailout guarantees from the Federal Reserve ensures Goldman's continued survival and dominance

Nice having EVERYBODY in your pocket.

newcarguy:

In response to onitgoes @ 5

I can forgive some of the things Obama has done/not done, but his lack of making all these banksters pay, like the S&L crooks did in the 80′s is reprehensible. The Doj prosecutied almost 1,000 individuals for the manipulation and frau they perpertrated on the country. RIght now, only S&P seems like they'll pay for the fraud and avarice.

onitgoes March 12th, 2013 at 11:28 am

In response to newcarguy @ 7

Indeed. It makes one almost nostalgic for the S&L disaster, which, clearly was just the dress rehearsal.

Bastardos!

joanneleon

30-50% kickback on the first day's profits. I've never heard of that before. Amazing.

Teddy Partridge

All of finance is now one big ripoff casino. It serves no social purpose and should be outlawed.

[Mar 12, 2013] Janet Tavakoli Retracts Her Apology To Goldman Sachs, Calls For More Regulation Of The Government Backstopped Hedge Fund Zero

I Retract My Apology and Call for More Regulation of Goldman Sachs

TSF – Opinion Commentary – November 22, 2009 (see also Apology)

According to SIGTARP1, both the Federal Reserve and Treasury agreed that an AIG failure posed unacceptable risk to the global financial system and the U.S. economy. On March 24, 2009, Fed Chairman Ben Bernanke testified before the House Financial Services Committee [P.9]:

[C]onceivably, its failure could have resulted in a 1930's-style global financial and economic meltdown, with catastrophic implication[s].

From July 2007, AIG's financial situation deteriorated while so-called "AAA" collateralized debt obligations (CDOs) dropped in value. AIG sold credit default swaps (CDSs) on these CDOs and had to post more collateral, as the prices plummeted.

Goldman Sachs was AIGFP's (UK-based AIG Financial Products) largest CDS counterparty with around $22.1 billion, or about one-third of the problematic trades. Goldman underwrote some of the CDOs underlying its own CDSs, and also underwrote a large portion of the CDOs against which French banks SocGen, Calyon, Bank of Montreal, and Wachovia bought CDS protection. Goldman provided pricing on these CDOs to SocGen and Calyon. Goldman was a key contributor to AIG's liquidity strain and the resulting systemic risk. (See "Goldman's Undisclosed Role in AIG's Distress")

Apocalypse AIG

By mid September 2008, AIG's long-term credit rating was downgraded, its stock price plummeted, and AIG couldn't meet its borrowing needs in the short-term credit markets. According to SIGTARP, "without outside intervention, the company faced bankruptcy, as it simply did not have the cash that was required to provide to AIGFP's counterparties as collateral." [P.9] The Federal Reserve Board with Treasury's encouragement authorized a bailout. 2

The Federal Reserve Bank of New York (FRBNY) extended an $85 billion revolving credit facility, so AIG could make its collateral payments to Goldman and some of its CDO buyers. AIG also met other obligations, such as payments under its securities lending programs owed to Goldman and some of its CDO buyers. (See also: "AIG Discloses Counterparties to CDS, GIA, and Securities Lending Transactions.")

Goldman "Would Have Realized a Loss"

Fed Chairman Bernanke said AIG's crisis put the world at risk for a global financial meltdown. Goldman purchased little credit default protection3 against an AIG collapse. Even if Goldman escaped a collateral clawback of the billions it held from AIG4, the underlying CDOs posed substantial market value risk (SIGTARP P. 17). As for systemic risk, Goldman CEO Lloyd Blankfein worried about untold billions in losses. (Too Big to Fail, P. 382.)

On September 16, 2008, as the FRBNY arranged AIG's $85 billion credit line, Goldman CFO David Viniar said whatever the outcome, he would expect the direct impact of credit exposure to be "immaterial to [Goldman's] results." The CDOs' ($22.1 billion) value was down around $10 billion, and AIG still owed Goldman $2.5 billion in collateral (hedged and partly collateralized by CDSs on AIG). SIGTARP shows the CDOs' value fell another $2.5 billion in two months, and AIG's new credit line provided more collateral. The CDOs were losing market value. If AIG had collapsed, the value drop would have been swift and brutal with new protection either unavailable or too expensive, if past CDS market mayhem provided any information. As the Wall Street Journal put it, SIGTARP "throws cold water on [Goldman's] claim."

Before September 16, 2008, AIG tried to negotiate a settlement for forty cents on the dollar. Other insurers have negotiated even deeper discounts to settle their CDS contracts on CDOs. The SIGTARP report shows that the FRBNY's decision to pay 100 cents on the dollar to resolve $13.9 billion (part of Goldman's $22.1 billion) of credit default swaps by purchasing the underlying CDOs in Maiden Lane III was important to Goldman Sachs. "Goldman Sachs…did not agree to concessions, because it would have realized a loss if it had." [P.16]

Treasury Secretary Timothy Geithner, then President of FRBNY, is revealed in this New York Times article with apparent Stockholm syndrome rivaled only by Patty Hearst. He seems to echo Goldman's talking points after discussions with Goldman's CFO. In the fall of 2008, Henry ("Hank") Paulson was Treasury Secretary. Paulson was formerly CEO of Goldman Sachs and held that role when Goldman executed its trades with AIG. Stephen Friedman, a former Goldman Sachs co-chairman, was Chairman of FRBNY. Friedman owned shares of Goldman Sachs, and was a member of Goldman's board, while he held his influential Fed position. He resigned the Fed position in May 2009, but not before purchasing 50,000 shares of Goldman Sachs, when the public was still in the dark about the terms of the bailout.

Goldman's Turn to Apologize

In light of the SIGTARP report, I withdraw my earlier apology to Goldman. Public commitments to AIG are currently around $182 billion. If you wonder what Goldman CEO Lloyd Blankfein meant when he said: "[Goldman Sachs] participated in things that were clearly wrong and we have reason to regret and we apologize for them," think of Goldman's role in AIG's crisis, Goldman's bailout, and Goldman's ongoing heavy taxpayer subsidies. That way, one of you will be genuinely sorry about it.


1 The November 17, 2009 report of the Office of the Special Inspector General for the Troubled Asset Relief Programs, "Factors Affecting Efforts to Limit Payments to AIG Counterparties." The report does not address the risk of collateral clawbacks by authorities on behalf of AIG or the public, and it does not address the relative size of Goldman's CDS positions and CDO underwriting activity related to AIG's CDSs mentioned in the above commentary.

2 Fed and Treasury officials thought AIG's derivatives were "more risky and unbalanced than Lehman's." They were concerned about loss of confidence in AIG's subsidiaries, AIG's failure to perform on annuities and wraps, losses to state and local governments, global banks and investment banks, losses to 401k plans, and the credit markets. The Reserve Primary Fund had fallen below $1.00 per share after it wrote off Lehman's debt causing a run on the fund, and officials worried about an AIG failure causing further "breaking-of-the-buck." (P. 10)

3 SIGTARP says Goldman would have trouble collecting on the credit default protection it bought to protect against an AIG collapse-which by deduction seems to only be around $2.5 billion. It is usual to have mark-to-market collateral, but it is unlikely this position was 100% collateralized. In November 2008, it seems $1.2 billion of this hedge was allocated for illiquid assets that lack transparency. [P. 16, 17]

4 According to SIGTARP, private participants felt AIG's financial condition was so tenuous that on September 15, they refused to fund AIG making the Fed's bailout necessary. Their analysis showed AIG's liquidity needs exceeded the value of the company's assets. [P.8] Goldman's status in the event of an AIG collapse would have been that of a credit default swap counterparty during a global crisis with very special circumstances. Goldman thought it would get to keep the billions in dollars it received from AIG, if AIG collapsed. That would normally be the case, but these would have been extraordinary circumstances inflamed by value-destroying CDOs over which Goldman had pricing power, and Goldman had underwritten some of the CDOs. Authorities charged with resolving a collapse of AIG may have clawed back a substantial portion of the collateral.

***

Janet Tavakoli is the president of Tavakoli Structured Finance, a Chicago-based consulting firm to financial institutions and institutional investors. She is the author of a book on the cause global financial meltdown: Dear Mr. Buffett: What an Investor Learns 1,269 Miles from Wall Street (Wiley, 2009), Structured Finance & Collateralized Debt Obligations (Wiley 2003, 2008), and Credit Derivatives & Synthetic Structures (Wiley 1999 and 2001).

Greg Smith of Goldman Fame Walks Into the Wall Street Lion's Den

Stephanie Ruhle keeps stepping on the interview, often changing direction and hijacking the discussion, peppering Smith with multiple questions, but it is interesting nonetheless. And she does manage to ask some good questions, often which she attempts to answer herself. But that is the state of corporate advocacy journalism today.

As you watch this bear in mind that Goldman and other Wall Street firms have been acquiring mathematicians and physicists to concoct customised derivatives and algorithms that few others outside of a select group of quants can fully understand.

And remember the damage that Wall Street CDO's, that were specifically rigged against customers, had done to some of the major banks in Europe, who are not particularly unsophisticated although were perhaps too unsuspected of blatant fraud from name firms. And also let us not forget the cases of bribery of public officials and fund managers with money, sex, and drugs that have been disclosed, such we have seen in the case of Jefferson County, Alabama.

And then there is the ongoing front-running frauds that are the US equity and commodity markets with lax regulation, insider trading, and exchange enabled HFT computerized skimming and spoofing.

What I find almost astounding is that after one of the worst financial frauds in US history, Wall Street and its supporters are able to blithely act as though nothing had happened. And that is because there has been no real reform and no one has been prosecuted. That is what is known as 'moral hazard.'

I found Naked Capitalism's take on this to be very interesting. What Greg Smith Did Not Say and Some Guesses Why

I do think there is a point to be made in not doing business with Goldman at all. But as Greg points out, if one wishes access to certain types of products and the broader financial markets, there is much less choice now than there was even four years ago. And Wall Street has its hands in everyone's pockets, whether you do business with them or not, in this financialised economy.

I don't think Greg Smith is a whistleblower per se, or even puts himself out there as such in the manner of revealing the details of some very specific illegal act.

At the end of the day, Greg Smith is raising the same category of concerns about the financial system as Occupy Wall Street has done, the same alarm and even revulsion with a culture that has turned predatory rather than constructive, about organizations and a society that are losing their moral bearings to the point of undermining their own rational self-interest with short-term greed.

And Mr. Smith is being derided and dismissed in much the same manner as many of the same people dismissed OWS.

The problem with Wall Street is the essential conflicts that were created by merging the functions of customer-serving banks, which are essentially utilities, with the most aggressive and even abusive of investment banks acting as hedge funds for their own books. The repeal of Glass-Steagall was the watershed event, and it was the result of a massive lobbying effort that corrupted Washington with Wall Street money.

And when a speculative firm like the pre-IPO Goldman moved from a true partnership model, to publicly traded firms using other people's money and shifting liability to the corporation, Pandora's box was opened. And this is a despicable lapse in stewardship by the intellectual, financial, and political leadership of the country for which they should be ashamed.

Posted by Jesse at 12:43 PM

[Mar 14, 2012] Public Rebuke of Culture at Goldman Opens Debate

March 14, 2012 | NYTimes.com

Until early Wednesday morning, Greg Smith was a largely anonymous 33-year-old midlevel executive at Goldman Sachs in London.

Now everyone at the firm - and on Wall Street - knows his name.

Mr. Smith resigned in an e-mail message to his bosses at 6:40 a.m. London time, laying out concerns that Goldman's culture had gone haywire, putting its own interests ahead of its clients.

What the e-mail didn't say was that about 15 minutes later, an Op-Ed article he had written detailing his criticisms was to be published in The New York Times. "It makes me ill how callously people still talk about ripping off clients," he wrote in the Op-Ed article.

The Op-Ed landed "like a bomb," inside Goldman, said one executive who spoke on the condition of anonymity.

The article reignited a debate on the Internet and on cable television over whether Wall Street was corrupted by greed and excess. By noon, television crews crowded outside Goldman's headquarters in Lower Manhattan. More than three years after the financial crisis, the perception that little has changed on Wall Street - and that no one has been held accountable for the risk-taking that led to the crisis - looms large in the public consciousness. While it was an unusual cry from the heart of a Wall Street insider, many questioned whether it would prompt any change.

Goldman disagreed with the assertions in the Op-Ed article, saying that they did not reflect how the firm treated its clients. Top executives have previously said that despite some rough times of late, clients have stuck with the firm.

Friends of Mr. Smith, who had a list of Goldman's business principles taped on a wall by his computers in London, say they were not surprised by his public farewell. "He has a really high moral fiber and really cared about the culture of the firm," said Daniel Lipkin, a Miami lawyer who went to Stanford with Mr. Smith. Mr. Lipkin learned about the Op-Ed on Wednesday from Mr. Smith. "He sounded confident and felt good about his decision to go public," he said.

Although he isn't highly paid by Wall Street standards - earning about $500,000 last year, according to people briefed on the matter - Mr. Smith is part of what some Goldman staff members and alumni refer to as a sizable, yet silent contingent within the investment bank. These people are increasingly frustrated with what they see as a shift in recent years to a profit-above-all mentality.

Evidence of this shift, they say, can be seen in the accusations brought by the Securities and Exchange Commission in 2010 that the firm intentionally duped certain clients by selling a mortgage-security product that was designed by another Goldman client betting that the housing market would crash. More recently, a Delaware judge criticized Goldman over the multiple, and potentially conflicting, roles it played in brokering an energy deal. (In both cases, Goldman has denied any wrongdoing.)

The reaction on Wall Street to Mr. Smith's resignation ranged from those cheering him to others criticizing him for resigning in such a public way. Some within Goldman sought to portray Mr. Smith as a lone wolf - he did not manage anyone - who had failed to become a managing director. (There are about 12,000 executive directors, the equivalent of being a vice president in the United States, but only about 2,500 managing directors among Goldman's 33,300 employees.)

Still, the ripple effects were felt beyond Wall Street. Shares of Goldman fell 3.4 percent. And media coverage was worldwide. "Goldman Boss: We Call Our Clients Muppets," screamed the front page of The London Evening Standard.

Others were less surprised. One Goldman client who spoke on the condition of anonymity called the letter "naïve," saying that the firm had been trading against its clients for years. "Come on, that is what they do and they are good traders, so I do business with them."

Another Wall Street executive said it was "unforgivable" for Mr. Smith to make his opinions so public and he should have taken them privately to the firm's senior managers. While Mr. Smith may have tried to raise his concerns with his superiors in meetings, as a fairly junior employee, he did not have much of a voice.

Goldman's top two executives, Lloyd C. Blankfein and Gary Cohn, said in a letter to employees: "We were disappointed to read the assertions made by this individual that do not reflect our values, our culture and how the vast majority of people at Goldman Sachs think about the firm and the work it does on behalf of our clients. Everyone is entitled to his or her opinion. But it is unfortunate that an individual opinion about Goldman Sachs is amplified in a newspaper and speaks louder than the regular, detailed and intensive feedback you have provided the firm and independent, public surveys of workplace environments."

But questions about Goldman's culture persist at a time when the firm - and the rest of Wall Street - are undergoing a transition as the postfinancial crisis framework of regulations known as Dodd-Frank takes hold and as some profitable businesses show little sign of returning to their precrisis highs. It is not a hospitable environment for trading, yet Goldman remains very much a trading firm. Mr. Blankfein, a former gold salesman, comes from the trading business, as does the man who is seen as the most likely to succeed him as chief executive in the next year or two, Mr. Cohn.

Mr. Smith started at Goldman in sales. Born in Johannesburg, Mr. Smith is a grandson of Lithuanian Jews who emigrated to South Africa. His father is a pharmacist and his mother is pursuing a career in social work.

He won a full scholarship to Stanford and after graduating in 2001 landed a spot at Goldman, where he quickly worked his way up in the organization. A table tennis player, Mr. Smith won a bronze medal in the event at the Maccabiah Games in Israel.

He was sent to London about a year ago to sell United States derivative products to European and Middle Eastern investment funds.

What motivated Mr. Smith to come forward now? People close to him said he had high hopes for an internal report that came out after the S.E.C. case, which Goldman settled.

In 2010, Goldman embarked on an internal study that looked at the way it did business. The report reaffirmed the firm's principles and outlined changes aimed largely at bolstering internal controls and disclosure.

But Mr. Smith thought it fell on deaf ears among senior managers, his friends say.

"I think this was the ultimate act of loyalty," said Lex Bayer, a friend of Mr. Smith's from high school in Johannesburg, who went to Stanford with him. "He has always been an advocate for the firm, but he wanted Goldman to do things the right way. In his mind, this was the only way that he could change the culture of the firm."

He may not be alone inside Goldman. At staff meetings, Goldman's leadership has been peppered with questions about the firm's public reputation, say people who have attended those meetings, but who spoke on the condition of anonymity because they were not authorized to speak on the record.

Mr. Smith is making a considerable financial sacrifice in publicly criticizing Goldman. Most Wall Street employees sign nondisparagement and nondisclosure agreements before they join a firm. If Mr. Smith did, Goldman may take legal action and refuse to release stock options he has accumulated. Mr. Smith may also find it difficult to find work on Wall Street after such a public resignation. A spokesman said that Goldman tried to contact Mr. Smith on Wednesday. It is not known whether he responded.

Mr. Smith did not speak publicly about his decision to leave Goldman. On Wednesday, Mr. Smith received messages of support from clients of Goldman.

"You do not know me, but I am a client of Goldman Sachs," one of them said. "We trade a lot with Goldman and we know that we have to be very careful when we do so," the person said. "We understand your message."

People who have spoken to Mr. Smith said that he was flying back to New York on Wednesday night to see his family and friends. These people say Mr. Smith still has no concrete plan for what to do next. He tells friends that he wants to effect change in Goldman's business practices, although it is unclear what that change would be.

Recruiters say it may be tough slogging for Mr. Smith to find work again on Wall Street, at least in the near term.

"There is a rule of thumb when interviewing - you don't bad-mouth your old boss. No one wants to hear it," said Eric Fleming, the chief executive of the Wall Street recruiting firm Exemplar Partners. "You can argue something like this needed to be said, but if you hire the guy who said it you are taking the risk he will do it again."

[Mar 14, 2012] Why I Am Leaving Goldman Sachs By GREG SMITH

March 14, 2012 | NYTimes.com

TODAY is my last day at Goldman Sachs. After almost 12 years at the firm - first as a summer intern while at Stanford, then in New York for 10 years, and now in London - I believe I have worked here long enough to understand the trajectory of its culture, its people and its identity. And I can honestly say that the environment now is as toxic and destructive as I have ever seen it.

To put the problem in the simplest terms, the interests of the client continue to be sidelined in the way the firm operates and thinks about making money. Goldman Sachs is one of the world's largest and most important investment banks and it is too integral to global finance to continue to act this way. The firm has veered so far from the place I joined right out of college that I can no longer in good conscience say that I identify with what it stands for.

It might sound surprising to a skeptical public, but culture was always a vital part of Goldman Sachs's success. It revolved around teamwork, integrity, a spirit of humility, and always doing right by our clients. The culture was the secret sauce that made this place great and allowed us to earn our clients' trust for 143 years. It wasn't just about making money; this alone will not sustain a firm for so long. It had something to do with pride and belief in the organization. I am sad to say that I look around today and see virtually no trace of the culture that made me love working for this firm for many years. I no longer have the pride, or the belief.

But this was not always the case. For more than a decade I recruited and mentored candidates through our grueling interview process. I was selected as one of 10 people (out of a firm of more than 30,000) to appear on our recruiting video, which is played on every college campus we visit around the world. In 2006 I managed the summer intern program in sales and trading in New York for the 80 college students who made the cut, out of the thousands who applied.

I knew it was time to leave when I realized I could no longer look students in the eye and tell them what a great place this was to work.

When the history books are written about Goldman Sachs, they may reflect that the current chief executive officer, Lloyd C. Blankfein, and the president, Gary D. Cohn, lost hold of the firm's culture on their watch. I truly believe that this decline in the firm's moral fiber represents the single most serious threat to its long-run survival.

Over the course of my career I have had the privilege of advising two of the largest hedge funds on the planet, five of the largest asset managers in the United States, and three of the most prominent sovereign wealth funds in the Middle East and Asia. My clients have a total asset base of more than a trillion dollars. I have always taken a lot of pride in advising my clients to do what I believe is right for them, even if it means less money for the firm. This view is becoming increasingly unpopular at Goldman Sachs. Another sign that it was time to leave.

How did we get here? The firm changed the way it thought about leadership. Leadership used to be about ideas, setting an example and doing the right thing. Today, if you make enough money for the firm (and are not currently an ax murderer) you will be promoted into a position of influence.

What are three quick ways to become a leader? a) Execute on the firm's "axes," which is Goldman-speak for persuading your clients to invest in the stocks or other products that we are trying to get rid of because they are not seen as having a lot of potential profit. b) "Hunt Elephants." In English: get your clients - some of whom are sophisticated, and some of whom aren't - to trade whatever will bring the biggest profit to Goldman. Call me old-fashioned, but I don't like selling my clients a product that is wrong for them. c) Find yourself sitting in a seat where your job is to trade any illiquid, opaque product with a three-letter acronym.

Today, many of these leaders display a Goldman Sachs culture quotient of exactly zero percent. I attend derivatives sales meetings where not one single minute is spent asking questions about how we can help clients. It's purely about how we can make the most possible money off of them. If you were an alien from Mars and sat in on one of these meetings, you would believe that a client's success or progress was not part of the thought process at all.

It makes me ill how callously people talk about ripping their clients off. Over the last 12 months I have seen five different managing directors refer to their own clients as "muppets," sometimes over internal e-mail. Even after the S.E.C., Fabulous Fab, Abacus, God's work, Carl Levin, Vampire Squids? No humility? I mean, come on. Integrity? It is eroding. I don't know of any illegal behavior, but will people push the envelope and pitch lucrative and complicated products to clients even if they are not the simplest investments or the ones most directly aligned with the client's goals? Absolutely. Every day, in fact.

It astounds me how little senior management gets a basic truth: If clients don't trust you they will eventually stop doing business with you. It doesn't matter how smart you are.

These days, the most common question I get from junior analysts about derivatives is, "How much money did we make off the client?" It bothers me every time I hear it, because it is a clear reflection of what they are observing from their leaders about the way they should behave. Now project 10 years into the future: You don't have to be a rocket scientist to figure out that the junior analyst sitting quietly in the corner of the room hearing about "muppets," "ripping eyeballs out" and "getting paid" doesn't exactly turn into a model citizen.

When I was a first-year analyst I didn't know where the bathroom was, or how to tie my shoelaces. I was taught to be concerned with learning the ropes, finding out what a derivative was, understanding finance, getting to know our clients and what motivated them, learning how they defined success and what we could do to help them get there.

My proudest moments in life - getting a full scholarship to go from South Africa to Stanford University, being selected as a Rhodes Scholar national finalist, winning a bronze medal for table tennis at the Maccabiah Games in Israel, known as the Jewish Olympics - have all come through hard work, with no shortcuts. Goldman Sachs today has become too much about shortcuts and not enough about achievement. It just doesn't feel right to me anymore.

I hope this can be a wake-up call to the board of directors. Make the client the focal point of your business again. Without clients you will not make money. In fact, you will not exist. Weed out the morally bankrupt people, no matter how much money they make for the firm. And get the culture right again, so people want to work here for the right reasons. People who care only about making money will not sustain this firm - or the trust of its clients - for very much longer.

Greg Smith is resigning today as a Goldman Sachs executive director and head of the firm's United States equity derivatives business in Europe, the Middle East and Africa.

Paul Krugman The Unwisdom of Elites

Economist's View

EricT:

I am more than willing to extend blame to the Democrats, they have done a very good job at owning the mayhem put forth by the Republicans. But, the Democrats have convicted the CEO of Countrywide in massive fraud. The Republicans refused to endorse the Congressional investigation into Wall street to support their own conclusion that regulation was the cause of the financial meltdown. And it was the Bush administration that revived a law from the Civil war to keep the state attorney generals from prosecuting loan fraud and in turn do nothing( check out Elliot Spitzer's fate when he pushed the issue ) thus setting up the whole mess in the first place. I would have to say that the elites who control this country have a hand in both parties, but are mostly courted by the Republicans, who desire to be more elite than any Democrat.

kharris:

Concur with EricT and EMike. If you want to say bad things about Krugman and bad things about Democrats, go right ahead, by do try to say true things, as well. Democrats have sold their souls to the military-industrial complex and to corporate America in general, but there is still a substantial difference between Democrats and Republicans as they exist today. To say otherwise is to say something untrue. Similarly, it is simply untrue that Krugman has not take Obama to task. On bank rescue, the budget, and political tactics in general, Krugman has been quite vocal in opposition to Obama.

Let's hold Democrats to account, but let's do it with some sense of reality. Krugman, too, though that is a somewhat more complicated task, since a great deal of criticism of Krugman has been outright wrong, and apparently motivated by the desire to undermine his effectiveness as a critic.

M.G. in Progress:

Ok it's definitely policy elites' faults but one could wonder who elected or voted those elites in those places... I have one interpretation here, particularly for the case of Berlusconi. http://mgiannini.blogspot.com/2009/12/cognitive-dissonance-case-of-italy.html But it appeared that for years of Bush cognitive dissonance was not much better...

Another interpretation, definitely the case in Italy, is The Fundamental Laws of Human Stupidity. a stupid person is a person who causes losses to another person or to a group of persons while himself deriving no gain and even possibly incurring losses. There Prof.Cipolla further refines his definition of "Bandits" (B= Berlusconi or Bush I would say) and

"Helpless People" (H) by noting that members of these groups can either add to or detract from the general welfare, depending on the relative gains (or losses) that they cause themselves and society. A bandit may enrich himself more or less than he impoverishes society, and a helpless person may enrich society more or less than he impoverishes himself."

Then you have stupid persons who causes losses to another person or to a group of persons while himself deriving no gain and even possibly incurring losses. Where Prof. Krugman would put those elites and people who voted for them or agreed to let them stay in power?

paine:

if you figure the elite has learned to play the "open ballot" electoral shell game and the "open press" game at least well enough to stay in power so long as "the folk way type " rules of engagement" aren't changed why waste time detailing the whys ??

greg byshenk:

I wouldn't want to remove blame from the elites who actually implemented the insane policies, but that said, I don't want to totally remove blame from the voters who voted for Bush, given that his policies were in no way a surprise. (I will give a pass to Obama voters, as he promised change -- even though what he delivered was pretty much more of the same.)

Shouldn't we rather see 2001-2009 as the illustration of Mencken's theory of democracy? ("Democracy is the theory that the common people know what they want, and deserve to get it good and hard.")

paine:

"2001-2009 as the illustration of Mencken's theory of democracy? "

that suggests you could imagine democracy working differently if the people in its majority if it knew its best interests could vote in agents to that end

doesn't work that way

  • open ballot elected rep-gubs allow the subversion of the majority interests quite consistently even in the face of the majority demonstrating clearly at the ballot box its majority preference
  • one thinks of the 06 anti-iraq-war majority and the 08 anti-bankster majority
  • or the likely outcome of a national referendum on medicare for all

tinbox:

The theme of this column--holding elite policy makers accountable--is very important. Personally, I immediately thought of the moment of maximum leverage, October 2008, when any and all financial reform was possible. At that time, PK advised us to "hold your nose"--bailout now, reform later. It is hard to see how that was ever going to work in this country.

While the points PK makes today are valid, the opportunity for action has come and gone. Not only is banking more concentrated in the USA today, Geithner is even now lobbying for greater risks to be taken by these TBTF banks in international exposures. After all, what could possibly going wrong lending large amounts against real estate in China?

Eric:

Villians....who exactly? The principle reason that there have been few prosecustions of high level bankers is that not so much that got done was illegal. Reckless, maybe. But even here is it really reckless behavior if you have a belief - which turns out to be true - that public finances will bear the downside risks on your behalf? In hindsight it feels like these things should have been illegal, but the available serious punishments, such as not bailing out AIG, not allowing various investment firms to become bank holding entites, not backstopping the GSEs (read their debt issues and you'll see that nowhere is a claim made for public backing), not taking first loss positions on Bear Stearn assets, etc., etc., were foregone by voluntary actions by public officials. Make peace with the truth that there will be no sweeping prosecutions, least of all by the federal government of the USA.

JohnH :

Much as I like Krugman, he is noticeably loathe to talk about military spending, which increased 8.2% per year over the last decade. Added expenditures amounted to by $2.4 Trillion with no offsetting revenue increases. So we can conclude that increased military spending since 2000 is directly responsible for 30% of the government's additional debt.

And that doesn't even include "defense related" spending or homeland security.

kievite:

That's a very relevant observation.

I think that we need to analyze the current financial problems in a broader context then Krugman does.

So it might be that government, already captured by military-industrial complex saw in financial speculation along with deregulation a remedy that will increase tax flows and actively stimulated its expansion assigning it "the most preferable industry" status.

I feel there is definitely a link between problems that government run into in late 80 and subsequent huge expansion and deregulation of financial industry. Also the collapse of the USSR and growth of China created a huge opportunities of using financial industry as a Trojan horse for neo colonial policies based on the dollar status as a reserve currency.

So it looks more the larger goals were "not aligned" with the healthy economy and as a result we have what we have. This type of thinking suggest that the current economic problems are a side effect (blowback) of a larger policy goals and first of all imperial foreign policy. Andrew Bacevich wrote about this link in many of his publications. See for example http://www.washingtonpost.com/wp-dyn/content/article/2010/06/25/AR2010062502160.html

kievite:

I think one of the reasons for the current situation is that computer created multiple and very efficient ways of hacking the financial system regulations. This subversive role of computers in the hands of financial system hackers needs to be researched more deeply.

In a way firms like GS can be views as a bunch of highly qualified and highly paid hackers dedicated to subverting the financial system regulation for their own profit.

Or is we use more sinister analogy a cancer cells which goal is the growth without any concern of the health of the host.

[Apr 27, 2011] Why Does Reputation Count for So Little on Wall Street

Corruption of justice system is the key prerequisite of GS misdeeds.
April 27, 2011 | naked capitalism

There is a very peculiar article by Steven Davidoff up at the New York Times: "As Wall St. Firms Grow, Their Reputations Are Dying." It asks a good question: why does reputation now matter for so little in the big end of the banking game? As we noted on the blog yesterday, a documentary team was struggling to find anyone who would go on camera and say positive things about Goldman, yet widespread public ire does not seem to have hurt its business an iota.

craazyman:

I don't believe it's inconceivable that some financiers want Wall Street to be reigned in - although certainly not all, for sure.

They don't need the money they make for any useful and healthy life purpose. So they operate in the throes of an addiction. And they know they are controlled by their addiction, and so they hate themselves, like addicts will, for their lack of self-control. They also see what their addiction is doing to the nation and the world, and guilt collides with craving, making the addiction even more disturbing.

And so they hate their actions, they hate the world that lets them act, and they dehumanize the victims who suffer from it as a third means of rebellion - in that instinctive blood-level way that the strong hate the weak.

I doubt it is a very happy life they lead, seeking continuous distractions from the baubels of riches and ego, racing headlong at the gigantic void.

ambrit:

Dear Drip; The independant and nonconforming elements of society are always disproportionatly sanctioned as an "easy" way of enforcing the primacy of the top tier elites. It is always easier to demonize a group than tolerate it. Tolerance suggests alternate views of social organization, and thus threatens the elites "elite" status. Such narrow minded thinking generally leads to spectacular social meltdowns via systemic collapse. That's the beauty of it all. Today, socio-economic practicioners do the hard work of searching for models and methods to reduce this wild "boom and bust" cyclic system. All while working for people who don't want to understand, much less do anything signifigant about it. Oh my, what's a poor semi sentient bipedal critter to do?

Justicia:

If investors keep throwing their money at them regardless of their lack of ethics or integrity, then the banksters win. The sad truth is most investors don't care as long as they think they're getting good returns. Despite getting burned repeatedly, they still invest in the fraud economy. Pension fund fiduciaries - even the ones that are supposedly "responsible investors" (check out the PRI website)– are still clients of Goldman et al.

LeeAnne:

a documentary team was struggling to find anyone who would go on camera and say positive things about Goldman, yet widespread public ire does not seem to have hurt its business an iota.

There are no people in the equation, and Wall Street is Santa Claus to the people they actually hang out with. So, what's to care about? The guy with the most pricey toys wins.

As for wanting to be reined it, it should be obvious that in a land with no rules, killers, thieves and liars rise to the top.

Even their minions making millions might wish they could relate to a higher self in their work. But of course, there's always the charitable event to tell yourself you actually care.

Jim A:

At some level, the root of this is a part of many cons. You DON'T have to convince the mark that that you're not a con-man. You just have to convince him they you are partners and that somebody else is the mark. So people send money to the biggest crooks on Wall Street convinced that those crooks will leverage that money and savagely Rodger somebody else.

Main Street Muse:

  1. The loss of the partnership model is key. Not only are investment bankers no longer accountable for their mistakes, but they focus on short term gain to appease shareholders. This is a very dangerous combination, one that lately has torn down our economy.
  2. In "Liar's Poker," Michael Lewis talks about the freakishly voracious and greedy behavior he saw in the investment banking world – back in 1989. Our regulators unfortunately have blatantly ignored that voraciously greedy behavior for decades. Everyone on Wall Street knows they can get away with a lot of unethical behavior. (Except Martha Stewart, apparently.) Even after the collapse of our entire financial sector in 2008, the regulators have done nothing to change the voraciously greedy behaviors of our top bankers.

And correct me if I'm wrong, but I believe the only banker other than Madoff who's been charged with ANYTHING AT ALL following the collapse of our economy is the Fabulous Fabrice Tourre of Goldman Sachs, who was apparently acting as a 20-something lone gunman bent on destroying the financial sector.

IF true, that is an appalling failure on the part of our justice system. Absolutely appalling because it reveals that our financial/legal/regulatory system is built to uphold shysters and scam artists, not to protect the interests of the nation. This means there is absolutely no incentive for bankers to change their behavior; thus we will reach the brink once again soon enough.

Are you sure Goldman's business has not been affected? Or if unaffected, is it because customers have so little choice these days following the crash, which saw major consolidation and reduction in the number of banks who engage in that business?

It is eminently clear to everyone outside of Wall Street and Washington that the executives in our financial sector are devoted to growing just one thing – their bonus. They are not investing in the country. They absolutely are not "helping us rebuild" – as the new JP Morgan Chase ad campaign would have us believe. [NOTE TO JP MORGAN MARKETING DEPARTMENT - WE'RE NOT AS STUPID AS YOU THINK]

And FYI – this is a sentiment expressed not only by residents of Main Street, but by various C-level execs I've worked with. The business of America simply cannot trust our financial sector. That is a very, very serious issue, one that Alan Greenspan recently overlooked in his article on Activism.

[Nov 10, 2010] Goldman Sachs junk CDO trouble – again by Tracy Alloway

FT Alphaville

Goldman Sachs must be getting tired of this.

The bank duly revealed it's the subject of a(nother) class action lawsuit involving one of its Collateralised Debt Obligations (CDOs) in the 10-Q it filed on Tuesday - only to set-off another wave of reports - even though the court filing is old.

From the 10-Q:

On September 30, 2010, a putative class action was filed in the U.S. District Court for the Southern District of New York against GS&Co., Group Inc. and two former GS&Co. employees on behalf of investors in notes issued in 2006 and 2007 by two synthetic CDOs (Hudson Mezzanine 2006-1 and 2006-2). The complaint asserts federal securities law and common law claims, and seeks unspecified compensatory, punitive and other damages.

Quick background - the case involves two Goldman-constructed synthetic CDOs - Hudson Mezzanine Funding 2006-1 Ltd and Hudson Mezzanine Funding 2006-1 Corp., already the subject of an SEC investigation announced earlier this year.

Goldman was the sole buyer of protection on the entire $2bn of assets in the deals - which meant it stood to gain if the underlying (subprime) Residential Mortgage-Backed Securities (RMBS) deteriorated. Which of course ended up happening.

The lawsuit centres on the claim that Goldman didn't disclose to investors that the deal was structured by the bank but "doomed to lose value" or that Goldman "would profit enormously from proprietary short positions when the CDOs did lose value." It's about disclosure, in a very similar way to that other CDO-scandal, Abacus.

We wrote back in June, when the Hudson SEC investigation first came to light, that this case might end up being trickier for the bank to defend. It can't fall back on the argument of client confidentiality, which is what it used in the Abacus case. There's no Paulson equivalent in Hudson - it was Goldman all the way through.

Those still interested in structured finance errata, would do well to revisit the Senate subcommitee docs on Wall Street and the subprime crisis - which mention Hudson, Abacus and plenty of other deals too. We're particularly fond of this gem:

Full complaint in the usual place.

Related links:
Goldman's Hudson CDO – What lay beneath – FT Alphaville
A Hudson CDO primer - FT Alphaville

[Aug 08, 2010] Goldman Schools Students on Debt - BusinessWeek

Goldman Sachs made millions through its stake in EDMC, whose schools peddle arts degrees costing up to $100,000. Some debt-crippled students are crying foul

By John Hechinger

Carrianne Howard dreamed of designing video games, so she enrolled in a program at the Art Institute of Fort Lauderdale, a for-profit college part-owned by Goldman Sachs (GS). Her bachelor's degree in game art and design cost $70,000 in tuition and fees. After she graduated in December 2007, she found a job that paid $12 an hour recruiting employees for video game companies. She lost that job a year later when her department was shuttered.

These days, Howard, 26, makes her living in a way that doesn't require a college diploma: by stripping at the Lido Cabaret, a topless club in Cocoa Beach, Fla. "I didn't know what else to do," she says. "I've got a worthless degree. It's like I didn't attend school at all."

Like many investors, Goldman, owner of 38 percent of the Art Institute's parent, Education Management Corp. (EDMC), was drawn to for-profit colleges by their rapid growth and soaring stock prices. Now Goldman, which recently agreed to pay $550 million to settle U.S. civil-fraud charges related to the subprime mortgage meltdown, is invested in an industry under attack from Congress, the Obama Administration, and dissatisfied students. This week the Senate held a hearing featuring a Government Accountability Office undercover probe that found recruiters at EDMC's Argosy University in Chicago and 14 other for-profit colleges misled investigators posing as potential students about the cost and quality of their programs. Near their peak in April, Goldman's shares in EDMC were worth $1.39 billion. Since then they've fallen by 42 percent, to about $800 million.

A proposed government crackdown could have a disproportionate effect on EDMC. The U.S. Education Dept. could restrict taxpayer-funded grants and loans to for-profit colleges like EDMC that offer $50,000 associate's and $100,000 bachelor's degrees in such low-paying fields as cooking, art, and design.

Until recently the education business looked like a bonanza for Goldman. Pittsburgh-based EDMC, the second-largest U.S. chain of for-profit colleges after Apollo Group's (APOL) University of Phoenix, has 136,000 students-more than three times as many as the University of Michigan. Its annual revenue doubled over the last five years, to $2.4 billion. Goldman and two other firms bought EDMC in 2006 and took it public in 2009. Along the way they shared at least $70 million in advisory, management, and other fees, according to securities filings. Goldman also became EDMC's biggest stockholder.

Government grants and loans to students, combined with booming enrollment, have made for-profit colleges a rewarding investment. Federal aid to for-profit colleges jumped to $26.5 billion in 2009 from $4.6 billion in 2000, according to the Education Dept. EDMC currently receives almost 82 percent of its revenue from federal financial aid programs.

On July 23, the Obama Administration proposed restricting-and in extreme cases, cutting off entirely-programs whose graduates end up with the highest debts relative to their salaries and have the most trouble repaying their student loans. EDMC will be affected more than most other for-profit companies because of its focus on "passion" fields, such as art and cooking, rather than more practical accounting or business degrees, says Jeffrey M. Silber, an analyst with BMO Capital Markets in New York. Cooking, fashion, and arts jobs tend to have low starting salaries: A beginning cook, for example, earns an average of $18,000 a year, according to U.S. Bureau of Labor Statistics data, while a two-year culinary degree can cost $40,000 to $50,000. EDMC spokeswoman Jacquelyn P. Muller says Art Institute students tend to earn more, with those holding culinary degrees starting at $28,000.

EDMC also faces complaints from its own graduates and employees. A lawsuit filed in Texas state court by 18 students alleges they were misled about the accreditation status of their program, diminishing their degrees' value and leaving them with debts they can't repay. In another suit a former admissions officer claims the company engaged in high-pressure sales tactics, paying staff to sign up students. In July, dozens of faculty who tried, unsuccessfully, to form a union at one Art Institute campus complained that unqualified students were being let into their classes.

Goldman spokeswoman Andrea Raphael said in a statement that the company invested in EDMC "because of its leading position in the private higher-education space, its successful track record, and its demonstrated commitment to its students." She referred other questions to EDMC, which said that the student complaints don't reflect the quality of EDMC's academic programs or the success of its graduates. EDMC says it takes seriously any alleged shortcomings uncovered by the GAO. Declining to discuss individual students, EDMC denies the allegations in the lawsuits.

"The vast majority of our students" are "satisfied with their experience and go on to successful careers after graduation," Muller said in a statement. She also said EDMC's chain of institutes has illustrious alumni, including tennis star Venus Williams, who graduated with a fashion design degree from Fort Lauderdale in December 2007, on the same day as Howard; Logan Neitzel, a 2005 graduate of the Art Institute of Seattle and a 2009 contestant on television's Project Runway; and Carol Guzy, a 1980 graduate from Fort Lauderdale who is now a Pulitzer Prize-winning photographer at The Washington Post.

Over the last two years, Muller says, students have found work at companies such as Electronic Arts (ERTS), Neiman Marcus, and Sony (SNE). The company cites students such as David Suppe, who graduated in 2005 from the Art Institute of Las Vegas and now works as a chef at the MGM Resorts International's Excalibur Hotel. "I got so much out of my education," says Suppe, 41. "I never would have advanced in this career without it."

As evidence that EDMC's students are succeeding, Muller notes that the company's latest government student-loan default rate-which measures loans that go bust in the first two years students owe money-is 7.5 percent, vs. an average of almost 12 percent at all for-profit schools. EDMC's rate is twice that of four-year nonprofit universities-though many graduates of traditional schools find themselves with heavy debts and low-paying jobs as well.

Like some of its students, EDMC has substantial debt. In 2006, Goldman Sachs, Providence Equity Partners, and Leeds Equity Partners borrowed $2 billion when the group purchased the company for $3.4 billion, taking it private in a leveraged buyout. Goldman, which made the investment through GS Capital Partners, a private-equity fund that uses money from Goldman and outside clients, took EDMC public again last October. The company has reduced its debt to $1.53 billion.

The debt from the acquisition changed the culture of EDMC, according to Robert T. McDowell, who retired as EDMC's chief financial officer shortly after the buyout. Before the acquisition, McDowell says he and other executives resisted calls from Wall Street analysts to pursue growth opportunities that could undermine academic quality. "You take on that amount of private-equity debt, you need to earn high rates of return for these investors," says McDowell, who worked at the company for 18 years. "I was worried that the quality of the experience for employees and students was going to deteriorate."

Muller says the borrowing hasn't hurt employees, faculty, students, or programs. EDMC has invested more than $1 billion in campus buildings, technology, and other capital projects over the last 10 years-more than half over the last four years, she says.

At the New England Institute of Art in Brookline, Mass., administrators show off classes averaging 16 students using new computers and the latest software in the animation program. The school has a $500,000 sound studio, a 14,000-volume library, and a student-run art gallery.

In its promotional materials, EDMC highlights graduates such as Jonathan Lukason, who received his bachelor's in audio and media technology in 2008 from New England and has worked as a freelance audio engineer for NBC (GE) and ESPN (DIS). In an interview, Lukason calls the institute's program "the best one around." Still, Lukason complains, he earned $25,000 in his first year out of school, and he is struggling with $55,000 in student loans. "At this rate, I'll be dead before I pay it off," he says.

To sell students on degrees, EDMC de-emphasized their costs and offered sales incentives to employees for signing up prospects, says Brian Buchanan, a former admissions officer whose lawsuit against EDMC was unsealed in May. Top producers won spots in the "President Club," which entitled them to trips to foreign beach resorts, gift cards, and iPods, according to Buchanan's suit, which was filed in 2007 in U.S. District Court in Pittsburgh. Buchanan, a former waiter, worked as an admissions representative for EDMC's South University online from December 2005 until May 2007.

In an interview, Buchanan said EDMC gave admissions staff a matrix showing them how much money they would make for each enrollment. Generally, each student was worth $800, he said. To recruit students, EDMC told employees to use the "bring the pain" sales tactic, according to his lawsuit. For example, a single mother would be told, "How are you going to explain to your children that you cannot buy them the things they need because you couldn't be bothered to finish your education?" the complaint says. Buchanan's case is a whistle-blower suit that seeks to recover damages on behalf of the federal government with the plaintiff keeping a share. In a Securities & Exchange Commission filing, EDMC said the claims are "without merit."

In July, instructors at the Art Institute of Seattle raised questions about EDMC when they tried to join the American Federation of Teachers. The union lost in a 48 to 64 vote. Instructors objected to high-pressure marketing to students to take out loans they couldn't afford, says Sandra Schroeder, president of the AFT in Washington State. The institute encourages faculty to give passing grades to students who aren't making progress, she says, so the school can keep collecting federal aid money. EDMC administrators take the allegations seriously and "respect and promote the principles of academic freedom without fear of repercussion or interference," Muller says.

Students also object to EDMC practices. Argosy University in Dallas falsely told applicants to the clinical psychology doctoral program that the institution would get accredited by the American Psychological Assn., 18 former students claim in a lawsuit filed in Dallas County District Court last year. Stephanie Capalbo, one plaintiff, moved from suburban New York City to go to the Texas university. In an interview, Capalbo, who got her doctorate in 2008, says officials told her the school was in the process of getting accreditation, which it still hasn't achieved. Capalbo says she now owes about $130,000 in government loans for Argosy tuition and fees and another $150,000 in private loans for living expenses. Her payments are $1,500 a month, draining the $60,000 the 29-year-old makes each year working for a nonprofit that evaluates children for foster care in New York. Many employers turned her down for higher-paying jobs because she lacks a degree with APA accreditation, she says. "I love being a psychologist, but I have a family," she says. "I'll be working the rest of my life to pay off these student loans. It's an unbearable debt."

EDMC spokeswoman Muller says the allegations in the lawsuit against Argosy are "unfounded" and that APA accreditation isn't required for graduates to become licensed as clinical psychologists in most jurisdictions, including Texas. Argosy hasn't submitted an application to the APA and continues to prepare for the accreditation process, which takes time because of the data required, Muller says. She adds that colleges can't control the amount of debt that a student takes on.

Carrianne Howard, the Florida student, didn't borrow for her education. Instead her parents paid roughly $70,000 in tuition bills. Her mother, an airline data analyst, and her father, a computer engineer, sold their California home and moved to Virginia after her father lost his job and her mother retired. They used money from the sale to pay for tuition, and her parents are now struggling financially, Howard and her mother say.

Howard grew up in Valencia, Calif., a suburb of Los Angeles, and became drawn to video gaming during high school. One afternoon in 2004, an Art Institute ad popped up on her PC. "I was as excited as can be," she says. "I thought it was a dream come true." She and her mother toured the Fort Lauderdale campus, a bright, modern three-story building flanked by reflecting pools and palm trees. Her tour guide "just made it sound really exciting and a lot of fun, like I was going to make hundreds of thousands of dollars," Howard says. EDMC schools train representatives to make "no promise, implication, or guarantee" about employment, Muller says.

A couple of years into her studies, Howard says she grew disenchanted. Some classes consisted largely of playing video games, she says. She wanted to drop out but her mother insisted she finish because the family had spent so much already. She graduated in December 2007; in March 2009 she lost her first job, at GameRecruiter, a Fort Lauderdale-based gaming industry employment agency where she was making $12 an hour. Marc Mencher, GameRecruiter's president and CEO, says she was let go only because he closed down her entire department, and calls her "an exceptional performer."

She may be struggling to find work in part because of inadequate preparation from the Art Institute's gaming department, Mencher says. "It's a weak program because it's understaffed," says Mencher, who serves on the Art Institute's national advisory board for gaming programs. "I personally feel the students aren't getting their money's worth." After Bloomberg Businessweek asked EDMC for comment, Mencher sent a follow-up e-mail, saying that although the Art Institute is "not perfect and they have issues like any organization," it is "an excellent program built on input from respected industry professionals along with local employers." It has an "outstanding placement" record for graduates, he said.

Howard applied for dozens of jobs, not only in gaming but also in grocery stores and nursing homes, mostly for minimum wage, she says. In October 2009, Howard turned to adult entertainment by doing paid Web chats. In March she started dancing at Lido Cabaret, earning $400 to $1,000 a week, she says.

She now hopes to save enough to go back to college and get a business degree. As she considers returning to school, Howard also helps run an anti-Art Institute website, where she has collected more than 70 names in a petition to send to the U.S. Education Dept.

The private, nonprofit Florida Institute of Technology, where Howard would like to enroll, won't accept any of her credits from EDMC, according to spokeswoman Karen Rhine, because the Art Institute doesn't have the kind of accreditation the traditional college requires. In its school catalog and other documents, the Art Institute "does not imply or guarantee" that credits will transfer to other universities, says EDMC's Muller.

At 1 a.m. on a recent weeknight, Howard finished a shift at Lido. "This is what I do," she says. "When I'm in here, I try not to think about the Art Institute

[Aug 05, 2010] 8 Top Goldman Sachs Alumni Who are Shitting Their Pants Wall St. Cheat Sheet

[Aug 05, 2010] Ex-Goldman Sachs Employee Compares Working At Bank To Being A 'Fluffer' On A 'Porn Set'

If you're a fan of colorful financial metaphors and aren't satisfied with Matt Taibbi's "vampire squid" comparison, you'll want to check out Adgrok's blog, which has an interesting blog by an ex-Goldman Sachs employee. (Hat tip to The Business Insider.)

The blog is the work of Antonio Garcia-Martinez, a former "quant" at the bank, who quickly became disillusioned with Wall Street's "Boschian" culture . The title 'Why founding a three-person startup with zero revenue is better than working for Goldman Sachs," pretty much says it all.

Adgrok, which Garcia-Martinez formed with two partners, is backed by the influential seed stage venture fund Y Combinator, After leaving the physics program at the University of California, Berkley, Garcia-Martinez left to take a high-paying job at Goldman. Here, he describes the money-obsessed culture at the bank:

Wall Street is even simpler than religion. Your entire worth as a human is defined by one number: the compensation number your boss tells you at the end of the year. See, pay on Wall Street works as follows: your base salary is actually quite modest, but your 'bonus' is where the real money is...So, come mid-December, everyone on the desk lines up outside the partner's office, like the communion line at Christmas Mass, and awaits their little crumb off the big Wall Street table.

Even for someone trained in quantum mechanics, Wall Street's complex securities and deals were nearly incomprehensible. And at Goldman, the "quants" -- mostly failed scientists, the author writes -- were simply there to justify the money-making machine:

Peering into these deals was kind of like the zoomed-in penetration shot in a cheesy porn video: you could barely tell which end was up, which part was which, or, more importantly, who exactly was screwing whom. The quant aspect didn't really matter at the end, as one lacrosse-playing Penn graduate would agree on price via phone with another lacrosse-playing Cornell grad, and life would resume its speedy course to another deal.

The sad truth is: quants were the eunuchs at the orgy. The fluffers on the porn set of high finance. We were the ever-present British guy in every Hollywood WWII film: there to add a touch of class and exotic sophistication, but not really matter much to the plot (and maybe even conveniently take some bad guy's bullet).

[Aug 04, 2010] The Road to Serfdom Is Lawlessness: Inside Goldman Sachs

Jesse's Café Américain

"Giving sophisticated models and fast computers to traders is like giving handguns and tequila to teenage boys. Only complete mayhem can result (and as we saw recently, complete mayhem did result)."
Here is a piece I found interesting from a quant who left Goldman Sachs. It matches what I have seen first hand over the years doing business with the brokers and exchanges, and from friends who joined other high energy Wall Street firms including Lehman and Bear Stearns and Morgan Stanley.

The investment banks and brokers are an adolescent culture, high on macho and low on expansiveness in thinking to put it politely.

I do not have a problem with that, per se. I enjoyed hanging with most of these guys, their odd sense of irreverent cynicism and gallows humour, and the grab-asstic frat life style. It is fun, if you do not take it too seriously. I used to follow an annual race on the stairs among brokers in a large NY skyscraper with interest, a friend phoning in the results. Big money was bet on it. It's a good time, and a means of relieving the tremendous pressures of a high stress profession.

The difficulty is that over the past ten years the financial sector, including the once staid commercial banks, has been absolutely overwhelmed by the hedge fund and investment banking mentality, and that power in turn has been influencing serious policy discussions in Washington to the detriment of the nation, because money is power. Most of it had to do with deregulation.

Banks must keep up with their competitors, and if one does it, they all must do it to stay in business. That is why regulation is so vital in this highly competitive sector. One cannot be virtuous as a commercial entity with obligations to shareholders and customers under brothel rules.

Goldman Sachs is primarily a big hedge fund with a lot of political clout and an inside line with the Fed. They have a trading, hedge fund culture these days. It was not always like this. At one time a firm's reputation and their word was everything in a system founded on confidence. With a trading culture it's all about the bottom line, with profit as virtue, and deceit in the name of profit is no vice. You do not wish to have fellows with this mindset running any substantial part of your country.

Quite a bit of that came with their change in status from a predatory trader to mainstream bank in name only, with a predator's instincts and reward system. And this multiplied their potentially negative impact and influence on the entire financial system.

Even worse, their self-centered and short term thinking and clever manipulation of the rules has become the tail wagging the big dog of the country, because the political climate in Washington, and elsewhere, has been largely corrupted by money. And in a bubble economy, the financial centers are where the money is.

Wall Street is like the Gauls (or the Ferengi for the sci-fi fans), ruthlessly obvious and lacking in subtlety, wallowing in the raw and often ostentatious use of amoral power for gain. Washington, on the other hand, tends to effete decadence and studied pretense, the sly and subtle subornation of character and too often the law in the service of power. The mix of these two cultures is an antichrist on the rocks, a deadly cocktail indeed.

I had the opportunity to work with several congressional and even presidential campaigns and administrations starting with Nixon. I don't claim to be an insider, but I have seen a side of things that is transparent to most. I liked that culture as well. I used to go to Washington for the State of the Union message each year, to meet old acquaintances from the Staffs for drinks and chat at Bullfeathers or The Palm to catch up on things, while the big dogs were attending the show. You get the best view of things from the servants, especially if you are benign, an interested non-player.

The deterioration in Washington is evident. These men are not the brightest stars in the firmament, and at times they are downright ignorant of things we might take for granted because they often live a rarefied existence with access to people and information managed by staffs. That is a necessity because they are drinking from a firehose of information.

Their chief ability seems to be to know what to say and to whom, what levers to pull to get something done, making deals, gaining and trading power, and how to get elected. They are great at networking. But this leaves them terribly vulnerable to influence, and group think, and brother, inside the Beltway these days it is all about lawyers, guns (power) and money.

There has always been an element of this, but over the past twenty years, with the whole deregulatory movement, it has become supersized, like a feeding frenzy. I have had the opportunity to discuss this with some older friends in the business and they tend to agree that things have changed.

There are always creepy and seriously warped people who are attracted to the halls of power. I have met a few who were simply chilling. More common are the broken people, with drugs and drink and sex filling the holes in their being, hollowed out by the power and fame that lured them in. But these were always the exceptions.

In government there always had been an element of service to the country and a kind of dignity underpinning the system, a kind of shared camaraderie, that seems to have been tossed in a ditch of expediency and greed, and the lust for power on a mass scale.

What had been the exception is now the rule, at least beneath the urbane, often pietistic, veneer. You can still be tossed out of office in the government for doing things that would still make you a legend on Wall Street.

When the politicos were doing something wrong back then at least they knew it, and they were ashamed of it, despite the usual bluff and bravado. A stiff conversation with a federal prosecutor would make a Congressional staffer's blood run cold. Now it is more like business as usual, and even getting caught is not all that bad, given the current trend to bipartisan professional courtesy, mavericks excepted.

Greed is indeed the greatest good, the fatal flaw behind the decline of the 'me generation.'

The law, that much maligned government of regulations and restraints, abused and fallible as it may sometimes be, is the bulwark of society, and often the only thing standing between the people and packs of ravening wolves.

Those who would tear down the law in some misguided pursuit of reform, or of an adolescent anarchy or utopia of 'no rules' at all, might find it hard to stand when the cold winds of avarice and tyranny of power blow across the land, with no laws to stop or restrain them. The madness serves none, consuming all.

"Equal protection" under the law is the best safeguard that the average person enjoys. Remove the law and you remove the protection, and it is every man for himself, and the individual is irrelevant.

This is why the Banks must be restrained, and the financial system reformed, with balance restored to the economy, before there can be any sustained recovery. And underpinning all of this is the integrity of the regulatory and law enforcement process, and a serious pass at campaign finance reform and limitation of the power of large corporations and organizations to buy influence with other people's money.

The story of the 21st century will be the struggle of the individual versus the organization, the machine controlled by the elite few. A cyclical theme no doubt, but the powerful few seem to become more efficient in their promotion of tyranny on each iteration.

adgrok
Why founding a three-person startup with zero revenue is better than working for Goldman Sachs
By Antonio
23 Jul, 2010

I joined Goldman Sachs in 2005, after five flailing years in a physics Ph.D. program at Berkeley.

The average salary at Goldman Sachs in 2005 was $521,000, and that's counting each and every trader, salesperson, investment banker, secretary, mail boy, shoe shine, and window cleaner on the payroll. In 2006, it was more like $633,000.

In the summer of 2005, I took one look at my offer letter and the Goldman Sachs logo above it, another look at my sordid grad student pad, and I got on a plane to New York within the week. I packed my copy of Liar's Poker for reference.

My job on arrival? I was a pricing quant on the Goldman Sachs corporate credit trading desk1. We traded credit-default swaps, both distressed and investment-grade credit, and in the bizarre trading experiment assigned to me, the equity part of the corporate capital structure as well.

There were other characters in this drama. The sales guys were complete tools, with a total IQ, summing over all of them, still safely in the double digits. The traders were crafty and quick-witted, but technically unsophisticated and with the attention span of an ADHD kid hopped up on meth and Jolly Ranchers. And the quants (strategists in Goldman speak)? Mostly failed scientists (like me) who had sold out to the man and suddenly found themselves, after making it through two years of graduate quantum mechanics, with a bat-wielding gorilla peering over their shoulder (that would be the trader) asking them where their risk report was.

Wall Street is inward-looking and all-consuming. There exists nothing beyond the money game, and nothing that can't be quantified into dollars and cents...

[Jul 25, 2010] Goldman, Blackrock In Cross Hairs Again As Senator Grassley Digs Up Old Corpses

Submitted by Tyler Durden on 07/24/2010 13:53 -0500

Just as Goldman's hope that the BP gusher's taking front page priority, especially in the aftermath of the rather amusing settlement between the firm and the SEC, was finally appearing to bear fruit as for the first time in over a year there was nothing relevant on the news front regarding the 200 West company, here comes Senator Chuck Grassley lobbing a grenade full of provocative and very much unanswered questions directed at the GAO, at Elizabeth Warren, and at Neil Barofsky that demand clear and prompt answers. We are also quite content that Blackrock and AIG once again manage to get themselves dirty.

[Jul 25, 2010] Quiet Conflict With Goldman Helped Push A.I.G. to Precipice by GRETCHEN MORGENSON and LOUISE STORY

February 6, 2010 NYTimes.com

In just the year before the A.I.G. bailout, Goldman collected more than $7 billion from A.I.G. And Goldman received billions more after the rescue. Though other banks also benefited, Goldman received more taxpayer money, $12.9 billion, than any other firm.

In addition, according to two people with knowledge of the positions, a portion of the $11 billion in taxpayer money that went to Société Générale, a French bank that traded with A.I.G., was subsequently transferred to Goldman under a deal the two banks had struck.

Goldman stood to gain from the housing market's implosion because in late 2006, the firm had begun to make huge trades that would pay off if the mortgage market soured. The further mortgage securities' prices fell, the greater were Goldman's profits.

In its dispute with A.I.G., Goldman invariably argued that the securities in dispute were worth less than A.I.G. estimated - and in many cases, less than the prices at which other dealers valued the securities.

The pricing dispute, and Goldman's bets that the housing market would decline, has left some questioning whether Goldman had other reasons for lowballing the value of the securities that A.I.G. had insured, said Bill Brown, a law professor at Duke University who is a former employee of both Goldman and A.I.G.

The dispute between the two companies, he said, "was the tip of the iceberg of this whole crisis.""

It's not just who was right and who was wrong," Mr. Brown said. "I also want to know their motivations. There could have been an incentive for Goldman to say, 'A.I.G., you owe me more money.' "

...Still, documents show there were unusual aspects to the deals with Goldman. The bank resisted, for example, letting third parties value the securities as its contracts with A.I.G. required. And Goldman based some payment demands on lower-rated bonds that A.I.G.'s insurance did not even cover.

To be sure, many now agree that A.I.G. was reckless during the mortgage mania. The firm, once the world's largest insurer, had written far more insurance than it could have possibly paid if a national mortgage debacle occurred - as, in fact, it did.

Perhaps the most intriguing aspect of the relationship between Goldman and A.I.G. was that without the insurer to provide credit insurance, the investment bank could not have generated some of its enormous profits betting against the mortgage market. And when that market went south, A.I.G. became its biggest casualty - and Goldman became one of the biggest beneficiaries.

Longstanding Ties

For decades, A.I.G. and Goldman had a deep and mutually beneficial relationship, and at one point in the 1990s, they even considered merging. At around the same time, in 1998, A.I.G. entered a lucrative new business: insuring the least risky portions of corporate loans or other assets that were bundled into securities.

[Jul 25, 2010] Crisis Panel Hears of Goldman Push for A.I.G. Cash by GRETCHEN MORGENSON and LOUISE STORY

June 30, 2010 | NYTimes.com

But perhaps more revealing than the executives' explanations was the release of 500 pages of documents by the panel, the Financial Crisis Inquiry Commission, showing how Goldman's aggressive and repeated demands for billions in cash from A.I.G. drove the insurer to the brink of failure in September 2008.

The documents also revealed for the first time the dollar amounts behind Goldman's negative bet on A.I.G., which Goldman put in place to hedge its risk that A.I.G. might fail and not pay its obligations.

"Goldman was first going in the door asking for collateral. Goldman was by far the most aggressive in terms of the timing and amount asked for," Phil Angelides, the chairman of the commission, said. "You were way ahead of everyone else in terms of the amount being demanded and the timing for that."

The collapse of A.I.G., once the world's largest insurer, and its dealings with Goldman and other major banks in the months leading up to that failure, have been the subject of significant Congressional interest since it was bailed out by taxpayers in the fall of 2008.

Under the terms of the $182 billion rescue, which was overseen by the Federal Reserve Bank of New York and the Treasury, the banks that had insured mortgage securities with A.I.G. were made whole on those contracts when they agreed to unwind them. Some $46 billion of the A.I.G. bailout money went to those banks.

In his first public appearance since A.I.G.'s collapse, Joseph J. Cassano, the former chief executive of the unit that insured the mortgage securities, said that he had fought back against demands for cash from banks like Goldman until his retirement from A.I.G. in March 2008.

He told commission members that he could have saved taxpayers billions of dollars if he had stayed at the company as its "chief negotiator" because he knew the ins and outs of A.I.G.'s legal contracts with the banks.

"I would have gone to the counterparties, and I think even then I would have been able to negotiate substantial discounts by using the rights available to us, such that the taxpayer would not have had to accelerate the $40 billion to the counterparties," Mr. Cassano said.

A.I.G.'s battle with Goldman began in the summer of 2007 and, the documents show, centered on the value of the underlying mortgage securities that A.I.G. had insured. The documents include a timeline of Goldman's collateral calls and show that in the summer of 2008, Goldman at one point had received nearly half of all the cash A.I.G. gave to counterparties, even though Goldman's deals with A.I.G. made up only a fifth of the insurer's book of business insuring complex mortgage securities.

While Mr. Cassano remained at A.I.G., the insurer resisted when Goldman demanded cash to shore up deterioration in the securities; A.I.G. officials argued that the investment bank's valuations were inappropriately low and were well below those of any other dealer on Wall Street, the documents show.

For example, on Feb. 6, 2008, even as A.I.G.'s dispute with Goldman over valuations was escalating, the documents indicate that requests for cash from Société Générale, another large A.I.G. trading partner, used values that were in line with A.I.G.'s assessments.

After Mr. Cassano left A.I.G., Goldman succeeded in more of its demands for cash. When Mr. Cassano left, A.I.G. had put up $3 billion; six months later, A.I.G. had transferred $7 billion to Goldman.

The market for mortgage securities was declining during this period, but the commission documents indicate that Goldman's demands were far more aggressive than that of other banks.

When asked by commission members about this, Goldman's executives explained that their valuations came from actual trades at the time the cash demands were made.

Mr. Angelides of the commission asked Goldman to provide evidence that such trades had actually occurred.

[Jul 25, 2010] A.I.G. Failure Would Have Cost Goldman Sachs, Documents Show -

NYTimes.com

A Congressional document released late Friday lists those institutions and shows that Goldman was exposed to losses in an A.I.G. default because some of the investment bank's trading partners, such as Citibank and Lehman Brothers, were financially unstable and might have been unable to make good on large claims from Goldman.

The document details every institution that had sold credit insurance on A.I.G. to Goldman as of Sept. 15, 2008, the day before the New York Fed arranged the insurer's rescue with an $85 billion backstop. The document, supplied by Goldman Sachs, was released by Charles E. Grassley of Iowa, the ranking Republican on the Senate Finance Committee.

Goldman had purchased credit protection on A.I.G. worth $402 million from Citigroup and $175 million from Lehman Brothers, the document shows. As of the date of the document, Lehman had already filed for bankruptcy protection.

"This illustrates that the Goldman version of reality is not entirely accurate," said Christopher Whalen, managing director at Institutional Risk Analytics. "They did have exposure to A.I.G., and that is what drove their behavior in the bailout."

... ... ...

"It's as if the New York Fed used A.I.G. as a front man to bail out big banks all over the world," Mr. Grassley said in a statement. "It took nearly two years for the public to learn these details, and they only were revealed because Congress wouldn't take no for an answer. Taxpayers deserve to know what happened with their money."

[Jul 24, 2010] Goldman coughs up counterparties on AIG hedge - Yahoo! News

The article should probably have title Did Goldman have an incentive to act against AIG's interests? "AIG said in March 2009 that $93 billion had been paid to banks, including $12.9 billion to Goldman Sachs, which was the most received by any bank. The banks who sold Goldman protection against an AIG collapse were also AIG counterparties who received payouts as part of the taxpayer bailout, raising questions about the quality of the protection that Goldman purchased. The interconnectedness of major banks was a important factor in the spread of the financial crisis, and led the U.S. Congress in 2008 to authorize a $700-billion bailout package for the financial system." Commission members questioned whether Goldman had an incentive to act against AIG's interests.
WASHINGTON (Reuters) – Morgan Stanley (MS.N), Citigroup (C.N) and JPMorgan Chase (JPM.N) were among banks that sold Goldman Sachs (GS.N) protection against the risk of a collapse of giant insurer American International Group (AIG.N), a source familiar with the matter said on Friday.

Goldman Sachs has turned over a list of the counterparties, which also includes Deutsche Bank (DBKGn.DE) and Credit Suisse (CSGN.VX), to the Financial Crisis Inquiry Commission (FCIC) following a recent hearing exploring the links between Goldman and AIG, the source said.

The source spoke anonymously because the list has not been made public.

Goldman Sachs did not immediately respond to a request for comment, and Citigroup and JPMorgan declined comment. Credit Suisse also declined to comment, and Deutsche Bank did not immediately respond.

Goldman has long been criticized for benefiting from the U.S. taxpayer bailout of AIG. Taxpayers pledged up to $182 billion to address problems at AIG's financial products division.

The latest detail on Goldman's dealings in connection with AIG further highlights how the investment bank not only bought protection from AIG but also sought to protect itself against AIG.

U.S. and European banks that had purchased credit protection from AIG were quickly made whole after the U.S. government bailed out AIG.

Goldman, as a major trading partner of the insurer, was one of the biggest beneficiaries of the government rescue of AIG.

AIG said in March 2009 that $93 billion had been paid to banks, including $12.9 billion to Goldman Sachs, which was the most received by any bank.

The banks who sold Goldman protection against an AIG collapse were also AIG counterparties who received payouts as part of the taxpayer bailout, raising questions about the quality of the protection that Goldman purchased.

The interconnectedness of major banks was a important factor in the spread of the financial crisis, and led the U.S. Congress in 2008 to authorize a $700-billion bailout package for the financial system.

The tangled relationship between AIG and Goldman was the focus of a crisis commission hearing held three weeks ago.

Commission members questioned whether Goldman had an incentive to act against AIG's interests.

Goldman Sachs officials insisted their demands for billions of dollars from AIG ahead of the government rescue were based on legitimate market prices. They denied gaming values to get a massive payout and said Goldman got no special benefit from AIG's bailout.

(Reporting by Karey Wutkowski in Washington, with additional reporting from Steve Eder, Elinor Comlay and Maria Aspan in New York, editing by Tim Dobbyn)

[Jul 23, 2010] The SEC is harsher on Dell than on Blankfein Analysis & Opinion

Jul 22, 2010 | Felix Salmon

Dell's $100 million settlement with the SEC is notable for the fact that Michael Dell is personally being fined as well:

The SEC's allegations with respect to Mr. Dell and his settlement are limited to the alleged failure to provide adequate disclosures with respect to the company's commercial relationship with Intel prior to Fiscal 2008…

Under his settlement, Mr. Dell has consented to a permanent injunction against future violations of these negligence-based provisions and other non-fraud based provisions of certain federal securities laws and SEC rules. In addition, Mr. Dell has agreed to pay a civil monetary penalty of $4 million.

The size of the penalty, here, is less important than its existence: Dell is coughing up a $4 million fine for allegedly failing to provide adequate disclosures while chairman and CEO of the company.

Now cast your mind back to the Goldman Sachs settlement, where Goldman, too, was accused of failing to provide adequate disclosures. In that case, the chairman and CEO of the company, Lloyd Blankfein, paid no fine whatsoever.

A lot of people were expecting that Blankfein might have to resign as part of the SEC settlement. But in fact he didn't even get a Dell-style slap. Maybe there's no realistic way that Blankfein could stay on as chairman and CEO after paying the fine; Dell, as the founder of the company, is in a slightly different position. But this case does underline that the SEC wasn't nearly as tough on Goldman as it might have been.

[Jul 22, 2010] Seven Questions for the SEC regarding Goldman

July 17, 2010 | EconoSpeak

Today the Wall Street Journal has a very good article analyzing the Goldman victory over the SEC. The article is not yet gated, so I put the reference first.

Scannell, Kara and Susanne Craig. 2010. "SEC Split Over Goldman Deal." Wall Street Journal (17 July): p. A 1.

Question 1: Is Ms. Casey really asking if the agency caved? Probably not, but if so, that is interesting.

Republican Commissioner Kathleen Casey questioned the SEC staff Thursday on their decision to abandon the strongest fraud charge and strike a settlement involving a lesser allegation, and given that, how the SEC could justify such a large penalty on a lesser charge.
Question 2: Is Russell Ryan saying that the SEC did not have enough proof to charge Goldman with intentional fraud rather than giving incomplete information? After all, the fraud has been public knowledge for some time. Why did the SEC cave?
Russell Ryan, a former SEC enforcement lawyer, said the negotiation to drop the strongest fraud charge is "usually a strong indication the SEC had some doubt whether it could prove intentional fraud. Mr. Ryan, now a defense lawyer at King & Spalding, said the SEC typically insists a defendant settle on the strongest allegation made in its complaints. Watering down the toughest charge, as in this case, is unusual.
Question 3: Why would the fraud charges be dropped in the course of negotiations with Goldman?
The SEC initially alleged that Goldman violated a rule -- known as Rule 10b of securities laws -- which contains a sweeping antifraud provision covering trading in securities. The charge is one of the most serious the SEC can make, and carries greater stigma for a financial firm than the lesser charge included in the settlement. The lesser charge Goldman settled on comes under a rule known as 17a. These charges can involve intentional and unintentional fraud, as well as negligence. The SEC staff, led by Kenneth Lench, head of the agency's structured-products unit, told the commission the shift stemmed from the settlement negotiations, a person familiar with the matter said.
Question 4: The SEC suggests that lessening the charge did not make the offenses less serious. Then why lessen the charges?
Lorin Reisner, deputy director of the SEC's enforcement division, said "Section 10b and Section 17a1 are functional equivalents. Section 17a1 is a more appropriate claim in the context of a fraud in connection with the offering of securities." He declined to comment on why the agency dropped the 10b charge.
Question 5: How can anybody believe that the SEC did not cave?
The division in the settlement vote casts a cloud over what the SEC had claimed on Thursday was a major victory. Investors had expected any SEC fine in the case to be $1 billion or more. Goldman's shares have jumped since Thursday.
Question 6: Did Goldman hit a home run?
Combining a settlement of the SEC suit with a resolution of related SEC probes could calm Goldman's restive clients and investors, while shielding the firm from information that could be used against Goldman in private litigation. Goldman's paramount concern was removing the more serious fraud charge rather than knocking down the size of the fine, say people familiar with the matter.
Question 7: Why would the SEC be upset about Goldman leaving the cat out of the bag?
On Wednesday, upon learning The Wall Street Journal was preparing an article on catch-all settlement talks, SEC enforcement chief Robert Khuzami grew furious and blasted Goldman. He accused the firm of leaking a story that suggested Goldman had bested the SEC, a person familiar with the matter says.
Last question: How many staffers is Goldman going to hire and how many Goldmanites will join the SEC?

[Jul 19, 2010] Goldman's Settlement with the SEC by Linda Beale

On July 15, it was announced that Goldman had reached a settlement of the SEC's charges regarding material misrepresentations in an Abacus CDO deal, acknowledging that its materials were "incomplete". See Chan & Story, Goldman Pays $550 Million to Settle Fraud Case, NY Times (July 15, 2010).

Goldman sold the deal to buyers without informing them of the involvement of the counterparty to the deal. The counterparty was Paulson, a hedge fund manager, who had personally selected "most likely to fail" mortgages on offer and gotten Goldman to create a CDO package with those deals in it so that he could bet against the deal. The bet against the deal was a naked credit default swap. The person who bought the other side of Paulson was essentially buying a deck intentionally stacked against him, rather than a more diversified cross-section of subprime mortgages. Not surprisingly, that particular Abacus deal was particularly bad and went south within months of its creation and sale.

Now, in my view naked credit default swaps should be illegal. They are nothing but an insurance contract when the protected insurance buyer has no insurable interest in the reference property. As many have observed, such a situation presents a dangerous moral hazard-- it is like letting an arson take out an insurance contract on the most expensive house in the neighborhood and then reap the benefit of the payout after he burns the house down. Nonetheless, the financial lobby is extraordinarily powerful, and Congress did not yet bite the bullet to ban naked credit default swaps in the financial reform package. (I say "yet" because I am convinced that we must dampen the use of such derivatives or stand by to witness destruction of both financial system and economy through continuing crises fueled by rampant speculation.)

But even if naked credit default swaps aren't illegal (which is the current situation), that doesn't mean that a bank should be able to cater to one client to create a financial product stacked with the worst of the worst subprime mortgages and neglect to tell another client about that critical fact. The SEC might have had difficult proving fraud: Goldman is no dumbie, and it is adept at selecting facts to cast itself in the best life and working to obscure facts that do not. Anyone hearing Paulson's side of the story (read Michael Lewis, The Big Short) would want to know about his involvement in a deal, especially when those products were nonetheless rated AAA. (Yeah, rating agencies were in on the game too, but the banks were tailoring their synthetic CDOs to match the known rating agency procedures, sort of like stacking up a room full of people paid the average income and needing to boost it to make it look like incomes are higher, so adding a multimillionaire with just the right income to the mix to bring the average up to the desired goalpost and no more. Crapola.) And I for one suspect that the SEC could have rather easily proven material misrepresentation.

Goldman took a battering from having the suit out there and clearly wanted to settle. But Big Banks want to settle on terms that don't produce real pain. So Goldman got a deal with essentially a $550 million price tag, which, as the weekend Wall St. Journal editorial notes, is "a mere two weeks worth of recent trading profits." Goldman's Bailout Fee, Wall St. Journal, July 17-18, 2010, at A12. Too little, methinks, even with the concession not to seek a tax deduction for any part of the fine which might otherwise have been deductible. See Donmoyer, Goldman Sachs Waives Tax Deduction on SEC Settlement, Bloomberg.com (July 16, 2010). In my view, anything under 10% of Goldman's profits last year, plus no tax deduction, is de minimis. Anything smaller than that will be viewed by the financial industry as no more than a slap on the wrist. To be instructive and to spur more prudential banking from Big Banks, the penalty needs to be severe enough to be taken very seriously.
___________________________________________________

Update: Michael Perelman at Econospeak has Seven Questions for the SEC regarding Goldman

Lyle

Naked swaps should be regulated by the gaming commission since they are gambling. I suspect that you could find a bookie somewhere in the world willing to take a bet on the situation. In fact perhaps we should divide financial products into gaming products and useful products (A fairly narrow list of basically old instruments such as stocks bonds options and futures). The rest are called gambling, and in gambling one recognized that the position to be in is the house as they always win. So lets call a spade a spade and make it pure gambling.

[Jul 19, 2010] Its the Law, Bitches! The Big Picture#comments

mbelardes:

Again, you are still wrong because you only look at the statute and ignore what actually encompasses the "law".

What is a "Material Fact"?

Online Definition:
"A material fact is a fact that would be to a reasonable person germane to the decision to be made as distinguished from an insignificant, trivial or unimportant detail. In other words, it is a fact which expression (concealment) would reasonably result in a different decision."

There are two issues here:

1) The selection of the underlying securities in the CDO.

2) The statement by Fab that Paulson was long.

For #1, it is more than clear from the facts of the case that the counter party was more than aware that Paulson was helping select the securities underlying the CDO. You have Paulson's right hand man visiting the counter party to discuss the CDO. You also have the basket of underlying going back and forth between ACA/GS/Paulson. So the other party was aware that Paulson was involved in selecting the securities but ACA ULTIMATELY chose the basket and thus it would be very difficult to argue the materiality of Paulson's involvement in the selection process.

For #2, this is wide open to interpretation as to what Fab actually said, how it was interpreted, and whether or not the statement could have influenced the decision of ACA. The Prospectus clearly discloses the CDS and Paulson's people told ACA they were buying the CDS. This is where a good securities attorney goes to work with Wall Street terminology in complex transactions of synthetic CDOs with sophisticated investors. You could say Fab made a mistake in not clarifying Paulson was "long the CDS" and that was SIMILAR TO "shorting the CDO" (which is basically all that GS admitted to, a mistake in clarification of terminology during the transaction).

If you watch the 6 hours of the GS testimony before the Senate, it is incredibly clear to me this is how they were planning to set it up. That's why they spent the whole day using terms the Senators were mixing up. It's the ol' "You just don't speak or language and that's why it looks bad" defense. In a court, in front of a jury, Goldman would get to go over transactions like this in detail until the jury was so confused they wouldn't know whether Fab really misstated a fact and whether that fact was material.

And with the materiality, I am not sure that in 2007 the fact that an unknown hedge fund wanted to bet against what everyone thought was a booming market would have been material to the transaction. ESPECIALLY, because it was so common of these firms like ACA to buy the CDO and sell the CDS specifically because they wanted the extra return. It could be argued that they were happy there was an investor out there willing to buy the CDS and that's why they use Goldman.

NOW AS I KEEP SAYING, if you want some material misstatements that influence investment decisions look no further than Repo-105. 2008 has Lehman execs going on TV saying David Einhorn is wrong, they aren't hiding things off their balance sheet, reporting huge earnings, while issuing secondary offerings to cover the losses from their off balance sheet transactions. THAT IS A 10b-5 SLAM DUNK! Where is that case?

[Jul 18, 2010] Lloyd Blankfein The prince of casino capitalism

April 24, 2010 | The Independent

To his mind he might be "just a banker doing God's work", but in the popular imagination Lloyd Blankfein has become the devil incarnate.

The company he runs, Goldman Sachs, has come to epitomise everything wrong with Wall Street and investment banking generally. The Goldman chief executive has found himself in the uncomfortable position of lightning rod for much of the torrent of criticism aimed at "the firm".

Comments like Blankfein's quip in a newspaper interview that he was "doing God's work" have stoked the public fury that has engulfed the organisation. That's despite the fact that the line was not meant seriously. It was an off the cuff aside, made by a man whose humour usually serves as one of his saving graces.

Humour, of course, is one way the short, chubby, but clever kid can survive in a tough inner city school. And Blankfein certainly went to one of those. His rise to the top from humble origins is the sort of story Americans gush over, epitomising the concept of "the dream".

Lloyd Blankfein was born into a Jewish family of very modest circumstances in the South Bronx district of New York in September of 1954. When he was three, they moved to Brooklyn where his father took a job in the sorting office of the US postal service, after losing his job as a truck-driver. The younger Blankfein has described this as a clever move on Dad's part – such a job was all but impossible to lose. His mother was a receptionist for a company that sold burglar alarms, another solid position in the type of neighbourhood the Blankfeins called home.

Being raised in this environment, it is perhaps no surprise that Blankfein started working young. He got his first job at the age of 13, selling sodas at New York Yankees baseball games on commission. "I'd remember walking along and somebody in the upper part of the upper decks would raise his hands and say 'I'd like a soda'", he said in a TV interview. "And I'm thinking, this tray is unbelievably heavy, and the lids didn't work so well in the 1960s as they do today, and I'm going to walk all the way up there for two and three quarter cents? And guess what? I walked all the way up there for two and three quarter cents."

This work ethic and the willingness to do anything for a buck, or even a cent, were to serve him prodigiously well. Blankfein graduated from Thomas Jefferson High School as valedictorian – a title conferred in the US on the highest ranking student to graduate from an institution in any one year. This led him to Harvard, and then Harvard Law School, where his eye-popping fees were funded through the help of a combination of scholarships and government financial aid.

From there he joined an LA law firm, where he dealt with tax issues for the entrainment industry. However, overcoming the odds, as he did, did not immunise Blankfein from bad habits. The prince of "casino capitalism" used to indulge in a more prosaic form of gambling, driving out to Las Vegas with a friend to play Blackjack for relaxation. Goldman's PR people were, of course, horrified when this revelation emerged as Blankfein assumed the position of heir apparent to Hank Paulson, who was to become George Bush's Treasury Secretary.

He reached that position after what he has described as "pre-mid life crisis" that led him to see if he could break into investment banking. Initially rejected by Goldman's exhaustive selection process (it's not unusual for candidates to undergo 15 or more interviews to ensure they have the right "fit"), he got in through the back door, finding a role as a gold salesman with commodity trader J. Aron (his wife, also a corporate lawyer, cried when informed of the news). Aron was a rough and ready place, but had become one of Goldman's rare acquisitions the previous year. As a salesman, Blankfein was put in charge of traders, and made a success of it. He gained a lot of kudos by structuring a $100m bond for a Muslim client so that it complied with the prohibition Islam puts on earning money through interest.

And yet anecdotes from that time show he was aware of the firm's customer-centred approach, snatching a phone out of the hands of one trader who was preparing to yell at a client. In one interview he said he was "invisible for the first 24 of my 27 years here", before adding: "It's not like I asked for this." But getting to the top at an organisation like Goldman is not done easily. It requires sharp elbows and ruthless determination. So along the way, Blankfein also smartened up his act. Today he couldn't be further from the tubby, bearded, and sometimes rather dishevelled figure who nonetheless made such a big impression at Aron. While he's balding and has retained his slightly squeaky Brooklyn accent, he is now smartly dressed and trim. He sees himself as a communicator. He has eulogised in interviews over the firm's "flat" management structure and the encouragement staff are given to raise issues where something is "not right". He has a habit of leaving voice messages to staff: "It was up to about one a day during the crisis," he says.

Most recently, he used one to mount a defence of the firm and its decision to fight the fraud case brought against it by the Securities and Exchange Commission. After introducing himself ("this is Lloyd, in New York, on Sunday") he said: "The core of the SEC's case is the allegation that one employee misled two professional investors by failing to disclose the role of another market participant in a transaction. Importantly, we had assumed risk in the deal and we lost money, just like the other two long investors. I will repeat what you have heard me say many times in the past: Goldman Sachs has never condoned and would never condone inappropriate activity by any of our people."

His willingness to fight the watchdog shows another side of Blankfein's character. He is a different beast from his predecessor, Paulson, the urbane consensus builder who successfully made the transition into politics. The suits may have improved and the paunch may have been worked off, but there is still something of the street fighter about him. Another criticism that has been levelled at Blankfein is that he is only really comfortable with "his people" and has surrounded himself with a coterie of them from the now dominant trading side of the business, which has boomed as a result of people like Blankfein realising they could make more by using Goldman's own money to put its people's clever ideas into practice than clients would ever be prepared to pay.

Goldman knows that the firm has a public relations problem. The bank has done things like barring its staff from its lavishly appointed suite at the New York Yankees' palatial new stadium during the worst of the financial crisis. Blankfein, too, has taken a hit to his stupendous earnings. He took home an astonishing $68.5m in 2007, setting a record for a Wall Street CEO. That had been clipped to a more "modest" $9.8m by 2009. But such PR gestures have done little to assuage the firm's mounting army of critics. Perhaps that's because Blankfein doesn't acknowledge the business has rather wider issues to grapple with than just a poor public image.

He regularly repeats the firm's mantra that the client comes first, above everything. Critics say that what recent events have show is that what Goldman puts first, above everything, is Goldman, and the army of wannabe Blankfeins that work for it.

In fighting fraud charges levelled by the SEC, Blankfein, the man with a genius for analysing risk, has taken one of the biggest gambles of his life, violating what many financiers see as one of the unwritten golden rules of Wall Street: you don't take on the regulator. As one of them, from a rival firm, says: "Really they're in an impossible position; they lose if they fight and they lose if they don't. But if they do lose this case, Lloyd very probably will have to go."

[Jul 18, 2010] Guest Post Lloyd Blankfein's Days Are Numbered As Chairman Of Goldman Sachs zero hedge

Goldman's image has been battered, not as bad as say a company like BP, but not far behind.
Lloyd Blankfein's Days Are Numbered as Chairman of Goldman Sachs

It's a testament to the odd world in which we live that when a Wall Street firm pays a $550 million fine by conceding negligence in how it dealt with clients, its stock surges, adding billions of dollars in market value for the firm's shareholders.

But that's what's happening to Goldman Sachs, as it reached its long awaited settlement with the Securities and Exchange Commission over how it sold a basket of mortgage related debt to investors in 2007.

Back when the SEC brought the case, the conventional wisdom on Wall Street and the financial media was that Goldman didn't have to settle -- the case was weak and Goldman is, after all, Goldman.

As I wrote on these pages back then, Goldman would have to settle because: (a) the SEC dug up some real questionable activity; and (b) no Wall Street firm, not even one with the ties to government that Goldman possesses can go to war with its primary regulator.

Now that Goldman has indeed settled, the news is being spun, again mostly by the financial media, that the deal with the SEC was a victory for Goldman's CEO Lloyd Blankfein, who survived the investigation largely unscathed, paying a measly $550 million to the government (equivalent to a few days trading gains at Goldman) and without having to give up any power, such as relinquishing his role as chairman of the board, as senior executives both inside Goldman and at competing firms believed would be part of any settlement.

Well, if history is any guide, Blankfein may not go tomorrow, or even next month, but sometime in 2011, Blankfein will at the very least no longer be chairman of Goldman, and may also be forced out of the firm altogether.

If you don't believe me ask former Citigroup CEO Sandy Weill. Like Blankfein, Weill (at least on paper) was a good CEO from an operational standpoint. Following the creation of Citigroup in 1998, shares of the big bank soared. The bank was what's known as a Wall Street darling for its strong earnings and a surging stock price, and Weill was regarded as the King of Wall Street, having engineered the largest financial deal ever when he merged his company, the Travelers Group brokerage, insurance and investment banking empire, with commercial banking powerhouse Citicorp.

At the height of his power, Weill suddenly popped up on the radar screen of New York Attorney General Eliot Spitzer. Before Spitzer got involved with hookers and became a TV host, he was the sheriff of Wall Street, looking to right wrongs from the last great scandal, the internet bubble where firms sold worthless dotcom and tech stocks to unsuspecting investors. Emails he uncovered showed that Weill at least did something stupid, if not fraudulent: He pressured an analyst, Jack Grubman, to inflate his stock rating on telecom giant AT&T, which was an investment banking client (Weill also sat on AT&T's board, while AT&T CEO Michael Armstrong sat on Citi's board)

Grubman wrote in an email that as a favor for upgrading the stock, Weill got his kids in an exclusive pre-school. The scandal, was described by the Wall Street Journal, as a "kid pro quo."

Weill continued to deny wrongdoing and was never charged. Citigroup, however, was charged with fraud and ended up paying a $400 fine to settle the matter, but Weill appeared to have retained his control of the bank. The initial reaction in the press and among his peers in the financial business was that Weill had won, by having the bank pay a relatively small fine, and his status as CEO and the King of Wall Street secure.

Not quite. A few months later, Citigroup announced that Weill was stepping down as CEO, handing that job to Chuck Prince, who basically negotiated the settlement package. Citigroup maintained that the two moves were unrelated. But people in Spitzer's office told me they really weren't: While negotiating the settlement, Citigroup's board made it clear to investigators that Weill's days were numbered at the top of the firm that he founded. Spitzer was merely affording Weill a graceful exit in an effort to end the case.

Full disclosure: I have no knowledge that Goldman's board has tacitly agreed to pull a Weill on Blankfein and has plans for him to step aside, but the circumstances involving the two men are so remarkably similar. While Blankfein wasn't directly involved in the questionable trade that landed Goldman in trouble, he is responsible for remaking Goldman into predatory trading culture that has caught the attention of regulators, Congressional committees (recall Sen. Carl Levin badgering Goldman traders for selling "shitty" investments to their clients) and hurt Goldman's once stellar reputation, as Weill's actions hurt Citigroup's.

Some would say that's where the comparisons end; Citigroup deals with the general public that buys stocks through its brokerage unit (Smith Barney) and makes deposits in its branch banking offices. Goldman deals with large sophisticated investors who couldn't care less how Darwinian the company behaves.

That used to be true, but no more. Goldman's image has been battered, not as bad as say a company like BP, but not far behind. And image does count these days given the scrutiny and oversight placed on Wall Street and the banks following the financial collapse-induced bailouts.

Now that financial reform has been passed, Goldman will have to cut back on some of that aggressive trading that powered its earnings and was Blankfein's forte. That means it will have to devote more and more resources to developing its client business and relationships, convincing blue chip companies that it is the right firm to handle delicate negotiations involving mergers, acquisitions, and other corporate financing assignments.

More and more, these clients do care about image (ask yourself why has so many top companies embraced the useless but politically correct "green agenda"). In fact some have already jettisoned Goldman as scrutiny of the firm grew over the past year.

Who is the right guy to change Goldman's image to fit the new paradigm it faces? It's not Lloyd Blankfein and that's why he won't survive.

David Fiderer :

While Sandy Weill relinquished the CEO position, he remained Chairman of the sprawling financial conglomerate until 2006. That's not exactly being forced out. Plus, he was in his 70s and the scope of Citigroup's operations were such that it made sense to separate the CEO and Chairman functions.

The testimony of Goldman's CFO before the Financial Crisis Inquiry Commission indicates that Goldman is not about to concede that any of its standard practices were unethical.

The comparison seems strained.

poorold:

Goldman's Behaviour Exposes Fatal Systemic Structural Weaknesses
Debts Owed and Assets Pledged versus Maturity Level of Debts Owed

As witnessed during the S&P's decline to 666, the stock market significantly overstates the current value of wealth contained therein. From the DJIA high of XX,XXX, the decline to X,XXX represented a loss of XX trillion in wealth. However, only X trillion of cash was extracted, and that amount is overstated several multiples based on "trading activity (gambling)" versus actual "redemptions for cash."

The stock market represents a hope for future value, yet it is presented and perceived by most to be a store of value whose present value--measured by the number of shares you own multiplied by the last closing price--is equal to your current cash value.

If anything, the last two years should galvanize in every person's mind, the absolute fallacy in that way of thinking. The stock market trades on the margin. Wealth measured by such a vehicle is elusive at best.

The current recession was brought on because of the occurrence of a severe mismatch in debts owed versus the ability to pay off those debts-in CASH. Cash being the ultimate measure of the liquidation value of an asset.

When the debts owed were due (or called in) it became clear that nobody had the cash to make the repayment. Assets (those collateralizing the debts and all other assets for that matter) simply did not have the cash value people thought the assets represented..

Is this a ponzi scheme? No, not necessarily. It could be simply a mismatch of Debt Maturity Date versus the Economy's ability to repay those debts-in cash.

Except, of course, in this case the Debts Owed were and are based on Asset Values that are suspect at best. Faulty, and as time went on even criminally negligent valuations of Debt were put forth and Cash extracted from the Economy. This is self-evident because those who sold the Debt (whose valuation was criminally negligent) took out side bets indicating their belief the Debt they just sold would NOT be repaid.

What company in America manufactures a product and then makes a bet the product will FAIL? And, we are not talking about product liability insurance here, we are not even talking about running out and betting the number 8 horse at Aqueduct. We are talking about using a stacked deck to deal a lousy hand to your partner in a poker game and deal yourself a Royal Flush.

The net result of this has been to expose the system as broken. The widely held belief of Value which investors have held for years is shown to be seriously flawed. Your 401(k), your mutual funds, your stock portfolio, your municipal bond portfolio, your promised pension…they are, very simply, not worth what you think they are. And they are worth significantly LESS than you believe.

How much less? Probably much more than you can even imagine.

Does the Government understand what has happened and are they working to solve the problem?

The simple answer is NO. Government is expanding entitlement programs and ratcheting up their spending in the face of a private sector that is providing less tax revenue.

Simple, the government will raise taxes. Wrong answer. Raising taxes will certainly occur, but once again there is an obvious mismatch in the Maturity of Debts Owed and the ability to liquidate assets for CASH to pay those Debts.

Society will be forced to borrow from itself because there is simply not enough outside investment to provide the CASH owed to meet the Maturing Debts.

What happens at that point? In fact, what happens when it is clear that is the only path available to keep the system going?

This is where we are now.

And rest assured, the money will be printed to keep the system going.

My thoughts do not lead me to think inflation/hyperinflation. Instead, I think about printed dollars paying for more and more people's basic needs and from a wider economic perspective, average personal consumption declining and "assets" heretofore valued on a "cash basis" being generally recognized to be worth significantly less.

One real question is when people "admit" the "cash value" they believe their "asset" is worth is not a "valid" cash value, how many will decide they would prefer to have "cash" and see how events unfold.

The real black swan is likely to be a dash for cash more than anything else.

[Jul 17, 2010] Chris Whalen Blankfein's Days are Numbered

"A cynic is a man who knows the price of everything, and the value of nothing." -Oscar Wilde
The Big Picture

[Jul 16, 2010] Is the SEC Settlement Really a Win for Goldman

From comments: "Wouldn't it be bizarre if the USA had a recent Treasury Secretary who conmitted fraud?"
July 16, 2010 | naked capitalism

As a close observer of the cases and allegations made regarding problem CDOs, we imagine potential CDO investors will be mightily encouraged that Goldman ended up returning the full amount of investment to the one true third party investor in the deal – IKB. While Goldman was permitted to say that they did not admit any wrong doing, the settlement amounted to the same thing: they made inaccurate statements, which were misleading and led to losses for the investor. These losses were refunded in full by Goldman presumably because the inaccurate statements were material. In addition, from the perspective of the investor, Goldman effectively paid punitive damages, in the amount of $300 million (the amount in excess of the damages awarded to IKB and RBS/ABN).

Remember, this case was always going to be a settlement, only the terms were up for discussion. In the range of possible outcomes, this settlement came out tilted against Goldman. Many observers of the SEC's complaint against Goldman argued the case was weak: Goldman had no duty to disclose Paulson's role (after all, he was a nobody, "everyone" knew the other side of the deal was a short, and so on). However, in the settlement agreement, Goldman concedes that it was a "mistake" not to disclose Paulson's role in selecting the bonds and that Paulson's interests were adverse to the investors. This would seem to imply that the SEC's case was solid and that they played their cards well.

An investor considering bringing an action against a bank that sold them a CDO that failed (meaning virtually all 2006 and 2007 "mezzanine" CDOs) would probably be encouraged that a bank was required to pay such a large amount for making inaccurate statements about the true nature of the CDO.

1. While Goldman didn't "admit guilt", they said their statements misled Investors and caused them to lose money. Since Goldman's pitchbook and offering document were completely normal for the market, many other deals likely fit in this category. Even if the SEC doesn't bring more claims, litigants in private claims now have evidence that (a) Goldman will pay on CDOs for misstatements and (b) Goldman has admitted its misstatements misled Investors enough for Goldman to repay them in full (or pretty close).

2. The two remaining long Investors in the deal were in large measure paid back. IKB was reimbursed in full. RBS recouped a large portion of its share, since they stood in for ACA, who probably paid some amount and against whom ABN/RBS certainly had CDS protection.

So if Goldman was willing basically to fully reimburse Investors for their loss, disgorge all of their profits and pay effectively punitive damages for this "weak case", that seems to be a decent indicator for future actions. Plaintiffs who sue CDO sellers have good reason to be optimistic. If they believe they have a reasonable argument that they were misled in the selling process. The Goldman example suggests they can push for and win major damages.

Private litigants now have good reason to hope that banks that misled them in a material way that produced losses can be pressed to reimburse those costs.

3. Goldman escaped a fraud judgment, but will now be known as the bank that paid the largest SEC penalty ever. As stated earlier, Goldman was always going to settle. They settled paying off most investor losses, admitting misleading Investors and setting a new record. Not so good for Lloyd Blankfein.

4. All the analysis in the world won't matter if the deal seller makes materially inaccurate statements to an investor when he asks questions and does diligence. Goldman was not forced to admit they committed fraud but they admitted they make inaccurate disclosure and, by their actions (paying large amounts of money to the investors), Goldman conceded that the inaccurate disclosure was a cause of the investor losses. This stands in stark contrast to its claims in April when the SEC filed its lawsuit:

We believe the SEC's allegations to be completely unfounded both in law and fact, and will vigorously contest this action.

• The core of the SEC's case is based on the view that one of our employees misled these two professional investors by failing to disclose the role of another market participant in the transaction, namely Paulson & Co., and that the employee thereby orchestrated the creation of materially defective offering materials for which the firm bears responsibility.

• Goldman Sachs would never condone one of its employees misleading anyone, certainly not investors, counterparties or clients. We take our responsibilities as a financial intermediary very seriously and believe that integrity is at the heart of everything that we do.

• Were there ever to emerge credible evidence that such behavior indeed occurred here, we would be the first to condemn it and to take all appropriate actions.

• This particular transaction has been the subject of SEC examination and review for over eighteen months. Based on all that we have learned, we believe that the firm's actions were entirely appropriate, and will take all steps necessary to defend the firm and its reputation by making the true facts known.

Paulson, by implication, earned his money on the ACA trade thanks to Goldman's misrepresentations, rather than his shrewdness. The settlement thus tarnishes the popular myth that the subprime shorts were insightful outsiders who executed "the greatest trade ever". Paulson's purported $1 billion in profits from this ACA deal depended, in part, upon inaccurate statements made by Goldman for his benefit. In effect, Paulson's gain cost Goldman $550 million while the parties on the other side of Paulson's trade (the ones that are still around, since ACA is defunct) got most of their money back.

This implies that had Goldman not made the inaccurate disclosure about the deal, the investors might not have bought the bonds and Paulson would not have made such a killing. The settlement does nothing to discourage the notion that other CDO transactions had similar inaccuracies which resulted in ill-gotten gains for the shorts and unwarranted losses for the long investors.

attempter

I guess from the reformist point of view there'll be endless argument over whether or not this is a win for Goldman.

From the point of view of taking back our country from these gangsters, the only question is whether or not this was a significant step toward the complete destruction of Goldman and all casino banking.

It sure seems not to be. On the contrary, the "best" case scenario seems to be that gamblers outside the bank hope the settlement will circumscribe the way Goldman can rig the game to their disfavor going forward.

But the game itself, which is purely destructive from any broader point of view, is to continue in its full ferocity.

Indeed, if the perception here is that the game will be "less rigged" vs. the client gamblers, then the settlement is a retrograde step, since one of the few good trends we've been seeing is the growing realization that Goldman's a criminal against everyone including its own clients.

So anything that seems to improve the position of the clients is bad for the American people. From our point of view, it would've been better if the settlement had been more obviously a whitewash. Or if Goldman had fought all the way and won. This kind of insidiousness is always worse.

I agree that the corporate media will do all they can to spin this as a win for everyone. The SEC (Obama) got tough; "investors" will be better protected; but Goldman is also vindicated on the worst charges; and implicitly the casino is now in better shape, and the American people should have more confidence in it going forward.

We have to fight that propaganda.

ben there done that:

Attempter – I agree with you that we have to fight the propaganda. Nobody won on this one.

But, propaganda aside, I do think this settlement will have some modestly positive outcomes. There will be no pound of flesh but I predict there will be a (temporary) change in behavior because a new level of acceptability and accountability has been rendered. Just like your basic ole criminals, there will always be a bad lot and those too brazen or too stupid to get on the deterrent bandwagon. So as long as everybody plays fair for 3 years……….

That gives the brazen a couple of years to figure out how to come up with the next innovation!

Neil D:

Answer? Like every gambler, they alway believe they can beat the house and in this case, they almost always can because the "house" is the taxpaying public

ben there done:

The fundamental difference in this case was the outright misrepresentation by the disclosure party, Goldman, that ACA selected the assets. That is the only fact that matters in this case and Goldman was made to pay.

It is easy and tempting to get hung up on the ins and outs of complex CDO transactions, but at the heart of all good and successful litigation is a simple fact that cannot be denied. Perhaps to bring it home and slap Goldman around a little bit more, the SEC in the Consent precludes Goldman from arguing that it did not violate the federal securities laws as alleged in the Complaint (see para 6). Yes they also had to admit a "mistake" but they also are basically estopped from arguing they settled for the mere convenience of being done with it.

As for other potential loss claims by Investors in other CDOs, I am not convinced that this case opens the door any wider than it has always been. You basically cannot knowingly lie/misrepresent the material terms of a deal. Nothing new here. There will be a few more cases that emerge but not because the Goldman settlement reached too far. The settlement finally reached far enough.

lambert strether:

Randall Wray:

Goldman Sachs was fined $550 Million for duping customers. We do not need to recap the charges in detail. Goldman helped hedge fund manager John Paulson pick toxic waste sure to go bad for collateralized debt obligations (CDOs) that Goldman would sell to its own patsy clients. Goldman and Paulson then bet against the clients. Since Paulson had picked "assets" guaranteed to go bad, it was a sure bet that Paulson and Goldman would win and that Goldman's clients would lose. Oh, and by the way, although Goldman let Paulson meet the patsies, Goldman never told the patsies that Paulson arranged the deals and would win when they failed. Business as usual on Wall Street. In the SEC's settlement, Goldman agreed that this was "incomplete information"-ie the patsies might have liked to know that Goldman and Paulson worked together to ensure the bets were rigged and the patsies would lose. Duh. For Goldman it was a tiny slap on the wrist-it still controls the Obama administration, with its moles, Timmy Geithner and Larry Summers still in charge of fiscal policy, thus prepared to funnel whatever money is necessary to prop up their firm-and the fine amounts to just 14 days of Goldman's earnings. Time to celebrate-which Goldman did, as its stock rallied on the news that it had been found to have screwed its customers. Is there a better reason to party?

So, Is the SEC Settlement Really a Win for Goldman?

Simple answers to simple questions: Yes

Doug Terpstra:

Surely it was a rhetorical question, Lambert.

Ah, but nothing "in the settlement … would be negative for private parties considering lawsuits against sellers of CDOs."

The good news: there will be maximum employment in legal services and future employment for SEC collaborators, but sadly, little for the productive economy, the Main St commonwealth, or wealth creation overall. Parasitism* in society thus remains undiminished, and the corrupt system undaunted. Godman Blankfein shrugs off the cost-of-business fine representing a fraction of taxpayer-funded bonuses (14 days earnings?), while GS stock soars and he and the lawyers laugh all the way to the Treasury vault.

(*Apologies to bloodsucking leeches, vampires, and eels.)

[Jul 11, 2010] The Financial Con Of The Decade Explained So Simply Even A Congressman Will Get It by Tyler Durden

07/10/2010 | zero hedge

Sometimes, when chasing the bouncing ball of fraud and corruption on a daily basis, it is easy to lose sight of the forest for the millions of trees (all of which have a 150% LTV fourth-lien on them, underwritten by Goldman Sachs, which is short the shrubbery tranche). Luckily, Charles Hugh Smith, of oftwominds.com has taken the time to put it all into such simple and compelling terms, even corrupt North Carolina congressmen will not have the chance to plead stupidity after reading this.

Of course, to those familiar with the work of Austrian economists, none of this will come as a surprise.

1. Enable trillions of dollars in mortgages guaranteed to default by packaging unlimited quantities of them into mortgage-backed securities (MBS), creating umlimited demand for fraudulently originated loans.

2. Sell these MBS as "safe" to credulous investors, institutions, town councils in Norway, etc., i.e. "the bezzle" on a global scale.

3. Make huge "side bets" against these doomed mortgages so when they default then the short-side bets generate billions in profits.

4. Leverage each $1 of actual capital into $100 of high-risk bets.

5. Hide the utterly fraudulent bets offshore and/or off-balance sheet (not that the regulators you had muzzled would have noticed anyway).

6. When the longside bets go bad, transfer hundreds of billions of dollars in Federal guarantees, bailouts and backstops into the private hands which made the risky bets, either via direct payments or via proxies like AIG. Enable these private Power Elites to borrow hundreds of billions more from the Treasury/Fed at zero interest.

7. Deposit these funds at the Federal Reserve, where they earn 3-4%. Reap billions in guaranteed income by borrowing Federal money for free and getting paid interest by the Fed.

8. As profits pile up, start buying boatloads of short-term U.S. Treasuries. Now the taxpayers who absorbed the trillions in private losses and who transferred trillions in subsidies, backstops, guarantees, bailouts and loans to private banks and corporations, are now paying interest on the Treasuries their own money purchased for the banks/corporations.

9. Slowly acquire trillions of dollars in Treasuries--not difficult to do as the Federal government is borrowing $1.5 trillion a year.

10. Stop buying Treasuries and dump a boatload onto the market, forcing interest rates to rise as supply of new T-Bills exceeds demand (at least temporarily). Repeat as necessary to double and then triple interest rates paid on Treasuries.

11. Buy hundreds of billions in long-term Treasuries at high rates of interest. As interest rates rise, interest payments dwarf all other Federal spending, forcing extreme cuts in all other government spending.

12. Enjoy the hundreds of billions of dollars in interest payments being paid by taxpayers on Treasuries that were purchased with their money but which are safely in private hands.

Charles' conclusion does not need further commentary as it is absolutely spot on:

Since the Federal government could potentially inflate away these trillions in Treasuries, buy enough elected officials to force austerity so inflation remains tame. In essence, these private banks and corporations now own the revenue stream of the Federal government and its taxpayers. Neat con, and the marks will never understand how "saving our financial system" led to their servitude to the very interests they bailed out.

The circle is now complete: in "saving our financial system," the public borrowed trillions and transferred the money to private Power Elites, who then buy the public debt with the money swindled out of the taxpayer. Then the taxpayers transfer more wealth every year to the Power Elites/Plutocracy in the form of interest on the Treasury debt. The Power Elites will own the debt that was taken on to bail them out of bad private bets: this is the culmination of privatized gains, socialized risk.

In effect, it's a Third World/colonial scam on a gigantic scale: plunder the public treasury, then buy the debt which was borrowed and transferred to your pockets. You are buying the country with money you borrowed from its taxpayers. No despot could do better.

As for part two of this epic con we are all living through, Charles explains as follows:

The Con of the Decade (Part II) meshes neatly with the first Con of the Decade. Yesterday I described how the financial Plutocracy can transfer ownership of the Federal government's income stream via using the taxpayer's money to buy the debt that the taxpayers borrowed to bail out the Plutocracy.

In order for the con to work, however, the Power Elites and their politico toadies in Congress, the Treasury and the Fed must convince the peasantry that low tax rates on unearned income are not just "free market capitalism at its best" but that they are also "what the country needs to get moving again."

The first step of the con was successfully fobbed off on the peasantry in 2001: lower the taxes paid by the most productive peasants marginally while massively lowering the effective taxes paid by the financial Plutocracy.

One Year Later, No Sign of Improvement in America's Income Inequality Problem:

Income inequality has grown massively since 2000. According to Harvard Magazine, 66% of 2001-2007's income growth went to the top 1% of Americans, while the other 99% of the population got a measly 6% increase. How is this possible? One thing to consider is that in 2001, George W. Bush cut $1.3 trillion in taxes, and 32.6% of the cut went to the top 1%. Another factor is Bush's decision to increase the national debt from $5 trillion to $11 trillion. The combination of increased government spending and lower taxes helped the top 1% considerably.

The second part of the con is to mask much of the Power Elites' income streams behind tax shelters and other gaming-of-the-system so the advertised rate appears high to the peasantry but the effective rate paid on total income is much much lower.

The tax shelters are so numerous and so effective that it takes thousands of pages of tax codes and armies of toadies to pursue them all: family trusts, oil depletion allowances, tax-free bonds and of course special one-off tax breaks arranged by "captured" elected officials.

Step three is to convince the peasantry that $600 in unearned income (capital gains) should be taxed in the same way as $600 million. The entire key to the U.S. tax code is to tax earned income heavily but tax unearned income (the majority of the Plutocracy's income is of course unearned) not at all or very lightly.

In a system which rewarded productive work and provided disincentives to rampant speculation and fraud, the opposite would hold: unearned income would be taxed at much higher rates than earned income, which would be taxed lightly, especially at household incomes below $100,000.

If the goal were to encourage "investing" while reining in the sort of speculations which "earn" hedge fund managers $600 million each (no typo, that was the average of the top 10 hedgies' personal take of their funds gains), then all unearned income (interest, dividends, capital gains, rents from property, oil wells, etc.) up to $6,000 a year would be free--no tax. Unearned income between $6,000 and $60,000 would be taxed at 20%, roughly half the top rate for earned income. This would leave 95% of U.S. households properly encouraged to invest via low tax rates.

Above $60,000, then unearned income would be taxed the same as earned income, and above $1 million (the top 1/10 of 1% of households) then it would be taxed at 50%. Above $10 million, it would be taxed at 60%. Such a system would offer disincentives to the speculative hauls made by the top 1/10 of 1% while encouraging investing in the lower 99%.

Could such a system actually be passed into law and enforced by a captured, toady bureaucracy and Congress? Of course not. But it is still a worthy exercise to take apart the rationalizations being offered to justify rampant speculative looting, collusion, corruption and fraud.

The last step of the con is to raise taxes on the productive peasantry to provide the revenues needed to pay the Plutocracy its interest on Treasuries. If the "Bush tax cuts" are repealed, the actual effective rates paid on unearned income will remain half (20%) of the rates on earned income (wages, salaries, profits earned from small business, etc.) which are roughly 40% at higher income levels.

The financial Plutocracy will champion the need to rein in Federal debt, now that they have raised the debt via plundering the public coffers and extended ownership over that debt.

Now the con boils down to insuring the peasantry pay enough taxes to pay the interest on the Federal debt--interest which is sure to rise considerably. The 1% T-Bill rates were just part of the con to convince the peasantry that trillions of dollars could be borrowed "with no consequences." Those rates will steadily rise once the financial Power Elites own enough of the Treasury debt. Then the game plan will be to lock in handsome returns on long-term Treasuries, and command the toady politicos to support "austerity."

The austerity will not extend to the financial Elites, of course. That's the whole purpose of the con. "Some are more equal than others," indeed.

h/t Andrew

JR :

I remembered this from reading my dad's collect text, A History of England and The British Empire by Walter Phelps Hall, Princeton University, and Robert Greenhalgh Albion, Harvard University:

"The king (Edward) meanwhile cut off one old source of royal revenue in 1290, when he banished all Jews from England. The earlier kings (see page 86) had allowed them to make fortunes at lending money and then had fleeced them regularly. Edward's edict, which met with popular approval, kept the Jews banished until about 1650…" p. 151

Page 86:

"The pipe roll reveals some additional sources of revenue which throw little credit on the 'Lion of Justice.' In addition to the usual fines from regular and forest courts, Henry accepted bribes to influence court judgments. In a case where a Norman was being sued for a debt by three Jews, the king was offered £133 by the former and got £24 cash from the latter. We do not know who won the case, but it was understood that the loser's bribe would be returned. The Jewish moneylenders, who began coming to England in the Conqueror's wake, and whose usurious interest rates sometimes reached 86 percent a year, were called the 'king's sponges' because they were tolerated by Henry at the price of frequent heavy fines on trivial pretexts. They had a monopoly of moneylending in the early middle ages because the Church forbade Christians to lend money at interest."

aurum:

if you believe in an excecutive to non management compensation ratios of 300 or 400 to 1 then i can understand your feelings...theres absolutely no reason for the disparity other than greed. in the end (as we now see approaching) it is a contributor to the downfall of our society. if the ratio was cut in half or better yet to 100-1 at most and dispersed back to the employees which in turn would push the newly found earnings back into the economy, we would we all would be better off. greed at the top has provoked revolutions since the onset of civilization. if things do not change, the result will be the same.

trav7777:

You are both correct. A big problem is this income disparity. Outsourcing didn't lower costs for consumers. It increased profits for corporations which executives and their cronies decided to pay to themselves for gutting our industrial and economic base.

CEO payscales at 25:1 were sane and were what were the norm throughout most of the heyday of this nation.

But the answer is not government, it is actually unions. The problem now is that union leadership sold out to the executive class and now forms an interlocking directorate with corporations.

Another wrinkle is the fact that in reality, pensions and mooch funds truly own US corporations. Their directors have sat back and allowed this to occur when several companies own enough shares on behalf of 401ks that they could seat their OWN directors just by voting their beneficial shares. Yet, they sat and let companies like CSCO pay an entire DECADE's worth of profits to directors, instead of paying dividends.

It appears everyone got caught up in the stock ponzi; the share price appreciation was "good enough" for mgmt to provide to shareholders, as opposed to real cash flow and real income.

The executives TOOK the real cash and they left price ponzi gains to owners. Those gains have now been unwound and they are not coming back. Never ever trade ponzi price for real cashflow. Ever. I cannot fathom how supposedly conservative, professional investment managers the likes of John Bogle fell for this shit. He's Mr. Vanguard and he constantly talks about dividends and cashflow and income yet his funds own companies that pay meager or no dividends and he depends upon price ponzi for his gains despite knowing in his core philosophy that this .com phenomenon is total bullshit. I guess perhaps the mooch fund and pension directors are in on the scam in some way.

Honest unions were the only entities which forced disgorgement by directors and owners to employees of a greater share of profits. Unfortunately, the former have all now been corrupted. Consequently, there no longer remains any labor pricing power. Corporations these days will cut their own foot off and show you the door rather than pay you a growing wage, even for high-skilled work that cannot be replaced.

But, at the same time, executives constantly "negotiate" ever more lucrative "compensation" packages with their cronies on the boards. It's like pro athletes. Ticket sales are in the shitter but the salaries keep going up up up. Corporations make that up by cutting wages in the lower levels and by reducing staffing. Anything they can to keep the executive bonuses and payscales rising.

russki standart :

The congressmen are not stupid, they are bought and paid by the same banksters.

Goldenballs:

Capitalism is consuming itself, profit is destroying the very bedrock of a stable society which in turn makes its leaders ever more desperate to hide the truth and point the finger in other directions instead of being accountable themselves.

The truth will come out in the future as to whether the worlds financial systems are beyond repair or whether we are seeing the death spiral with each move ever more desperate than the last one.

SWRichmond:

Patrick Henry at the Virginia Ratification Debates:

"But we are told that we need not fear; because those in power, being our representatives, will not abuse the powers we put in their hands. I am not well versed in history, but I will submit to your recollection, whether liberty has been destroyed most often by the licentiousness of the people, or by the tyranny of rulers. I imagine, sir, you will find the balance on the side of tyranny. Happy will you be if you miss the fate of those nations, who, omitting to resist their oppressors, or negligently suffering their liberty to be wrested from them, have groaned under intolerable despotism! Most of the human race are now in this deplorable condition; and those nations who have gone in search of grandeur, power, and splendor, have also fallen a sacrifice, and been the victims of their own folly. While they acquired those visionary blessings, they lost their freedom."

[Jul 05, 2010] Self-fulfilling prophecy Panel pushes Goldman on AIG collapse McClatchy By Greg Gordon

Goldman Sachs executives first threatened to stop making exotic trades with the American International Group in July 2007 unless the insurance giant posted $1.8 billion in cash collateral to compensate for a slide in the mortgage securities market, internal AIG e-mails show.

When AIG refused to meet its demands, Goldman began betting hundreds of millions of dollars on the insurer's collapse, ramping up those wagers to $3.2 billion over the next 10 months in a strategy that put AIG under huge financial pressure, a congressional commission found.

While Goldman executives defended those tactics in testimony to the Financial Crisis Inquiry Commission Thursday, panel members took turns publicly pushing the embattled investment bank to fully disclose dealings that brought it hefty profits and might have helped force a $162 billion taxpayer bailout of AIG.

A central issue surrounding Goldman, panel Chairman Phil Angelides said, was whether the Wall Street titan turned the screws so tightly on AIG that it created a "self-fulfilling prophecy," forcing the insurer into a massive cash squeeze.

The commission, appointed by Congress to ferret out the root causes of the worst financial crisis since the Great Depression, was mostly docile in January in taking sworn testimony from Goldman chief executive Lloyd Blankfein.

However, with four Goldman executives and six present and former AIG officials under oath over two days this week, several panel members turned skeptical and confrontational in asking about AIG's management failures and Goldman's wagers against the housing market that drained the world's largest insurer of more than $15 billion.

The panel also heard from present and former state and federal officials also described gaping regulatory holes that allowed a London-based unit of AIG to build a $2.7 trillion book of exotic trades with little reserve capital, all but forcing the taxpayer bailout of the insurer to avoid systemic chaos.

David Viniar, Goldman's chief financial officer, told the panel that Goldman behaved toward AIG as it always does with insurance-like contracts known as credit-default swaps. When the housing market began to sour in the summer of 2007, he said, Goldman "tightly managed" contract provisions requiring AIG to post collateral to compensate for drops in the securities' value.

"We're pretty passionate about fair value accounting," Viniar said. " . . . We have 1,000 people in our controller's department. Probably half of them spend their time trying to verify marks," or securities' valuations.

In a lesson in how steel-knuckled Wall Street executives duke it out in high-stakes deals, commission investigators pieced together a chronology of Goldman's negotiations with AIG. Even in July 2007, the market for mortgage securities had begun to freeze, leaving few trades on which to gauge the market value of securities in the AIG deals.

Nonetheless, on July 27, Goldman jolted AIG with a demand for $1.8 billion in collateral, simultaneously making its first purchase of swaps that would pay $100 million if AIG went bankrupt.

The moves led to a series of tense exchanges over the ensuing days. After a conference call on Aug. 1, Tom Athan of AIG's Financial Products unit e-mailed Andrew Forster, a former AIG senior vice president for financial services, that Goldman had warned that AIG must honor the contract or it wouldn't do similar deals in the future.

Goldman executives promised to set a mid-market valuation of the securities to determine collateral requirements, AIG executives wrote, but that Goldman posed "a very credible threat" because it could influence market valuations.

For example, Athan wrote on Aug. 8, 2007, if Goldman asked rival Merrill Lynch to submit bids on 100 mortgage-backed bonds similar to those that AIG was insuring and prices them at 80 cents of face value, dealers could use the bid to set market prices.

By Aug. 10, investigators wrote, Goldman had bought $575 million in swaps that would pay off if AIG defaulted. AIG ultimately posted $450 million in response to Goldman's demands, but that was just round one.

On Aug. 16, Forster wrote that he'd heard rumors that Goldman was "marking down asset types that they don't own so as to cause maximum pain to their competitors."

The two companies haggled over the next year, as Goldman's collateral demands mounted and its swap "protection" reached $3.2 billion.

Viniar told the commission that Goldman was primarily an "intermediary" buying swaps with AIG after selling similar credit insurance to investors. When AIG posted collateral, he said, Goldman posted the same amounts in cash with investors.

However, Commissioner Byron Georgiou pressed Goldman executives about a McClatchy story published Tuesday describing Goldman making proprietary trades - wagers with its own money - on so-called bets with AIG in which neither party actually bought any mortgage securities.

When Viniar said he knew nothing about it, Angelides and Vice Chairman Bill Thomas told Viniar that the commission wants records of all such trades.

The commission, which recently subpoenaed documents from Goldman, wasn't through with its demands for information.

Georgiou asked Viniar to identify the companies that sold Goldman coverage on an AIG collapse, saying he was "incredulous" that other financial institutions could cover such huge bets if AIG couldn't during the meltdown of 2008.

"I do not know the specific names of the parties," Viniar said, but added that the bets "were predominantly with other major financial institutions."

In addition, Georgiou noted that Goldman likely sold swaps for higher fees than the typically modest amounts it paid to AIG, saying that Goldman's $2.1 million in fees for $1.76 billion in coverage in a 2004 deal amounted to 0.12 percent. He asked Goldman to provide details of all fees it charged clients for whom it was an intermediary with AIG.

Commissioner Brooksley Born, a former chairwoman of the Commodities Futures Trading Commission, said she found it odd that Goldman couldn't say how much profit it made on swaps and other exotic bets known as derivatives.

"Your risk officer said the other day you can't manage something that you can't measure," she said. "I am very skeptical that you can't measure these profits."

Born also demanded to know how Goldman and other swap partners of AIG wound up with releases of legal liability, meaning taxpayers would have a difficult time suing them for fraud, as part of settlements awarding them the full $62 billion face value of those contracts in late 2008.

Viniar said that Goldman would cooperate with the panel's requests.

[Jul 05, 2010] Goldman denies its collateral demands led to collapse of insurance giant AIG by Stephen Foley

July 2, 2010 | The Independent

Goldman Sachs denied responsibility for the collapse of insurance giant AIG in 2008, saying its demands for billions of dollars in collateral from the company were a prudent response to deteriorating financial conditions. Executives at the two companies traded accusations in front of the Financial Crisis Inquiry Commission yesterday, on the second day of a hearing into the role of derivatives in the credit crunch.

Goldman had earlier been accused by the FCIC chairman, Phil Angelides, of behaving like "a cheetah chasing down a weak member of the herd" as it demanded more and more money to protect itself from losses on AIG's mortgage trading with the bank.

Demands for collateral were generated mathematically, based on calculations about the market value of AIG's mortgage positions, Goldman's chief financial officer, David Viniar, said. AIG had insured trading partners such as Goldman against losses on hundreds of billions of dollars of mortgage derivatives. The insurer believed the eventual losses would be so small that it could make easy money from the premiums, but it did not count on clauses in the contracts that allowed trading partners to demand collateral.

It was those demands that crippled the company and forced it into a $180bn (£120bn) bailout by the US government. An AIG official, Elias Habayeb, told the panel that AIG tried to negotiate with Goldman and other counterparties to lower their demands, but with little success. "Unfortunately, AIG had little negotiating leverage," he said.

Even if AIG went bankrupt, the counterparties would get special protection under bankruptcy law. By March 2009, Goldman had received $12.9bn of the $93bn in money paid to AIG counterparties, the most of any bank. Mr Angelides again yesterday wondered if Goldman was deliberately driving prices down on the debt securities linked to the credit insurance sold by AIG. Mr Viniar and other Goldman officials insisted they based their collateral demands on the price of actual trades – trades the panel has asked for further details on.

Johann Hari How Goldman gambled on starvation - Johann Hari, Commentators - The

July 2 2010 | Independent

Speculators set up a casino where the chips were the stomachs of millions. What does it say about our system that we can so casually inflict so much pain?


By now, you probably think your opinion of Goldman Sachs and its swarm of Wall Street allies has rock-bottomed at raw loathing. You're wrong. There's more. It turns out that the most destructive of all their recent acts has barely been discussed at all. Here's the rest. This is the story of how some of the richest people in the world – Goldman, Deutsche Bank, the traders at Merrill Lynch, and more – have caused the starvation of some of the poorest people in the world.


It starts with an apparent mystery. At the end of 2006, food prices across the world started to rise, suddenly and stratospherically. Within a year, the price of wheat had shot up by 80 per cent, maize by 90 per cent, rice by 320 per cent. In a global jolt of hunger, 200 million people – mostly children – couldn't afford to get food any more, and sank into malnutrition or starvation. There were riots in more than 30 countries, and at least one government was violently overthrown. Then, in spring 2008, prices just as mysteriously fell back to their previous level. Jean Ziegler, the UN Special Rapporteur on the Right to Food, calls it "a silent mass murder", entirely due to "man-made actions."

Earlier this year I was in Ethiopia, one of the worst-hit countries, and people there remember the food crisis as if they had been struck by a tsunami. "My children stopped growing," a woman my age called Abiba Getaneh, told me. "I felt like battery acid had been poured into my stomach as I starved. I took my two daughters out of school and got into debt. If it had gone on much longer, I think my baby would have died."

Most of the explanations we were given at the time have turned out to be false. It didn't happen because supply fell: the International Grain Council says global production of wheat actually increased during that period, for example. It isn't because demand grew either: as Professor Jayati Ghosh of the Centre for Economic Studies in New Delhi has shown, demand actually fell by 3 per cent. Other factors – like the rise of biofuels, and the spike in the oil price – made a contribution, but they aren't enough on their own to explain such a violent shift.

To understand the biggest cause, you have to plough through some concepts that will make your head ache – but not half as much as they made the poor world's stomachs ache.

For over a century, farmers in wealthy countries have been able to engage in a process where they protect themselves against risk. Farmer Giles can agree in January to sell his crop to a trader in August at a fixed price. If he has a great summer, he'll lose some cash, but if there's a lousy summer or the global price collapses, he'll do well from the deal. When this process was tightly regulated and only companies with a direct interest in the field could get involved, it worked.

Then, through the 1990s, Goldman Sachs and others lobbied hard and the regulations were abolished. Suddenly, these contracts were turned into "derivatives" that could be bought and sold among traders who had nothing to do with agriculture. A market in "food speculation" was born.

So Farmer Giles still agrees to sell his crop in advance to a trader for £10,000. But now, that contract can be sold on to speculators, who treat the contract itself as an object of potential wealth. Goldman Sachs can buy it and sell it on for £20,000 to Deutsche Bank, who sell it on for £30,000 to Merrill Lynch – and on and on until it seems to bear almost no relationship to Farmer Giles's crop at all.

If this seems mystifying, it is. John Lanchester, in his superb guide to the world of finance, Whoops! Why Everybody Owes Everyone and No One Can Pay, explains: "Finance, like other forms of human behaviour, underwent a change in the 20th century, a shift equivalent to the emergence of modernism in the arts – a break with common sense, a turn towards self-referentiality and abstraction and notions that couldn't be explained in workaday English." Poetry found its break with realism when T S Eliot wrote "The Wasteland". Finance found its Wasteland moment in the 1970s, when it began to be dominated by complex financial instruments that even the people selling them didn't fully understand.

So what has this got to do with the bread on Abiba's plate? Until deregulation, the price for food was set by the forces of supply and demand for food itself. (This was already deeply imperfect: it left a billion people hungry.) But after deregulation, it was no longer just a market in food. It became, at the same time, a market in food contracts based on theoretical future crops – and the speculators drove the price through the roof.

Here's how it happened. In 2006, financial speculators like Goldmans pulled out of the collapsing US real estate market. They reckoned food prices would stay steady or rise while the rest of the economy tanked, so they switched their funds there. Suddenly, the world's frightened investors stampeded on to this ground.

So while the supply and demand of food stayed pretty much the same, the supply and demand for derivatives based on food massively rose – which meant the all-rolled-into-one price shot up, and the starvation began. The bubble only burst in March 2008 when the situation got so bad in the US that the speculators had to slash their spending to cover their losses back home.

When I asked Merrill Lynch's spokesman to comment on the charge of causing mass hunger, he said: "Huh. I didn't know about that." He later emailed to say: "I am going to decline comment." Deutsche Bank also refused to comment. Goldman Sachs were more detailed, saying they sold their index in early 2007 and pointing out that "serious analyses ... have concluded index funds did not cause a bubble in commodity futures prices", offering as evidence a statement by the OECD.

How do we know this is wrong? As Professor Ghosh points out, some vital crops are not traded on the futures markets, including millet, cassava, and potatoes. Their price rose a little during this period – but only a fraction as much as the ones affected by speculation.commodities trading have been stunningly sluggish. In the US, the House has passed some regulation, but there are fears that the Senate – drenched in speculator-donations – may dilute it into meaninglessness. The EU is lagging far behind even this, while in Britain, where most of this "trade" takes place, advocacy groups are worried that David Cameron's government will block reform entirely to please his own friends and donors in the City.

Only one force can stop another speculation-starvation-bubble. The decent people in developed countries need to shout louder than the lobbyists from Goldman Sachs. The World Development Movement is launching a week of pressure this summer as crucial decisions on this are taken: text WDM to 82055 to find out what you can do.

The last time I spoke to her, Abiba said: "We can't go through that another time. Please – make sure they never, never do that to us again."

Debunking Goldman's FCIC Testimony on AIG and Real Estate Shorts

The Financial Crisis Inquiry Commission grilled Goldman chief operating officer Jonathan Cohn and CFO David Viniar this week, with today's session focusing on AIG, and in particular, whether Goldman's collateral calls were abusive and damaged the insurer.

Readers know that I have perilous little sympathy for Goldman. However, it is important that investigations focus on matters likely to hit pay dirt. And despite the sabre rattling at the New York Times and various websites on the matter of Goldman's collateral marks, we think the ire is misguided, and this is one of the few cases where Goldman's defense is sound. By contrast, the Commission missed other smoking guns.

To recap: Goldman, like other major dealers, had bought credit default swaps from AIG to hedge against some CDO exposures. The case against Goldman, in simple terms, is:

1. Goldman was overly aggressive in marking down the CDOs it had insured with AIG. Remember, the bigger the losses reported on the CDOs, the more cash AIG would have to pony up to Goldman

2. Goldman's actions contributed to AIG's demise.

Tom Adams, a former monoline executive, and I have performed considerable, in-depth examination of the AIG CDS on CDOs that were bought out by the Fed at par (the CDOs wound up in a vehicle called Maiden Lane III). We debunked this thesis, presented in a New York Times article, in February:

There is a wee problem with this account. Goldman's marks were proven correct. With the benefit of hindsight, most players, particularly AIG, were in denial….

In late 2007 and early 2008, the monolines were facing similar issues to AIG….The rating agencies not long afterwards started downgrading AAA asset backed securities CDOs, verifying the "aggressive" position [monoline short Bill] Ackman and Goldman were taking.

The story also repeats the AIG/Fed flattering claim that these CDOs have "rebounded." We've discussed long form in other posts that given the continued, serious deterioration in the underlying mortgages, this notion is simply not credible. The decay in credit quality across the portfolio is severe, and there has been no "rebound" in prices of severely distressed CDOs….

The jig was up for AIG by January of 2008 and the debate was only one of timing, not of what the actual outcome would be. Coincidentally, Ambac, FGIC and XLCA were downgraded in January 2008 directly as a result of high expected losses in their CDO portfolios. Any case against Goldman for aggressive marks against AIG by the SEC or other parties would have take the market environment into consideration. Across the board, CDOs were causing losses and downgrades for the people who insured them. It therefore makes plenty of sense that Goldman would be requesting more collateral for their exposure with AIG.

Yves here. So why were the other AIG counterparties more generous in their marks than Goldman? They held considerable CDO inventory. If they were the packager and had marked down their AIG positions, they'd have to provide similar marks to any customer who had bought a long position in the same CDO from them. And more important, they might be required by auditors or regulators to reduce the prices of similar CDOs, which would result in losses.

While this line of inquiry looks misguided, others have been neglected. Why has no one questioned any of the banks of the absurdity of relying on guarantees from the monolines and AIG? Insurance on subprime was rife with what traders call "wrong way risk": if you needed to collect on your insurance policy, the very events that would lead you to put in a claim would be likely to damage the guarantor. (Goldman would assert it did recognize the risk and had bought CDS on AIG, but that is similalrly absurd: as we saw, an AIG default was a probable systemic event. Those contracts suffered from wrong way risk too). Put more bluntly, the idea that you could hedge subprime risk, particularly on the scale Goldman could likely have inferred was taking place, was almost certain to result in non-performance on the insurance. Did this occur to Goldman's vaunted risk management operation? It might be revealing to follow that thread.

The Independent highlighted another missed opportunity:

As well as diffusing the spat with the FCIC, Mr Cohn provided new numbers that he said proved the bank did not "bet against its clients" in the market for mortgage derivatives as the credit crisis unfolded, as has been alleged…..

He said Goldman had reviewed all the mortgage securities and derivatives it had created since December 2006, following fraud charges levelled by US regulators earlier this year. It underwrote $47bn (£31bn) of residential mortgage-backed securities and $14.5bn of collateralised debt obligations, and took short positions on the products – which would rise in value if the products fell – of less than 1 per cent of their value.

"During the two years of the financial crisis. Goldman Sachs lost $1.2bn in its residential mortgage-related business," Mr Cohn told the panel. "We did not 'bet against our clients', and the numbers underscore this fact."

Yves here. This smacks of being the sort of artwork that is technically accurate in its detail, but misleading in the picture it presents.

The role of a financial firm is to facilitate commerce, by helping companies raise money, by allowing investors and savers to deploy funds. But they have lost sight of their role, and many of their activites at best have no social utility and at worst are extractive and destructive. For instance, short sellers have a useful role to correct the pricing of instruments that were created for legitimate uses. But no one until recently would have considered creating positions anew to serve the interests of short sellers was a good idea. It is pouring talent and capital into purely speculative activities. Bear Stearns, far from a vestal virgin, refused to work with subprime short John Paulson to create synthetic CDOs designed to suit his interests.

Now let's look at Cohn's remarks. They aren't just a little misleading, they are a lot misleading.

1. Cohn isolates Goldman's shorting in 2007 and 2008. But Goldman's Abacus program, which was designed for the firm to establish short positions, started in 2004. Goldman had insured 5 2004 and 2005 Abacus trades with AIG, along with 22 2004 and 2005 CDOs structured by Merrill, 9 2004 and 2005 CDOs structured by other banks, and 2 of its own 2005 cash CDOs. So the roughly $15 billion that Goldman made from AIG is expressly excluded from Cohn's presentation.

2. The comparison is further misleading by comparing its activity over a period of time (underwriting over a two year period) versus its short position that was presumably measured at a single point in time

3. What does "short positions on the products" mean, exactly? Technically, if you take down the short sided of a synthetic CDO, you have short positions in tranches of subprime bonds and other assets. If you only kept the short side on particular RMBS in that CDO, not all, you are arguably not short the CDO, but short some bonds. Similarly, Goldman may also have used the ABX or the TABX indices to establish short positions, so it could be taking a view against the market without being short the specific transactions it was pedalling.

4. Pray tell, how was this "less than 1%" arrived at? The dollar amount of the short position was CERTAIN to be small because Goldman used credit default swaps. The cost of establishing a short position was only 100-140 basis points until spreads started blowing out at the end of 2006 (and they tightened again in March 2007). The proper comparison would be the notional amount insured versus the cash position.

The FCIC also bears other signs of being badly unprepared, witness this exchange reported in the Huffington Post (hat tip reader Francois T):

The panel created to investigate the roots of the financial crisis escalated the government's assault on Goldman Sachs on Thursday, criticizing the Wall Street firm for failing to turn over basic documents and accusing it nearly lying under oath.

For a second consecutive day, the bipartisan Financial Crisis Inquiry Commission reiterated its request for additional data from Goldman, namely figures regarding the firm's derivatives activities. And for a second consecutive day, Goldman's top executives demurred.

"We generally do not have a derivatives business," David Viniar, Goldman's chief financial officer, told the panel Thursday under oath.

Goldman Sachs holds more than $49 trillion in notional derivatives contracts, making it the third-largest derivatives dealer among U.S. banks, according to first quarter figures from national bank regulator the Office of the Comptroller of the Currency. The commission has found that Goldman is a party to more than 1 million different derivatives contracts, Commissioner Brooksley Born disclosed Thursday.

"We don't separate out derivatives and cash businesses," Viniar clarified under questioning. The derivatives units are "integrated" into the firm's cash businesses, making it difficult for the firm to isolate its derivatives data, he said.

In January, the panel asked Goldman chairman and chief executive Lloyd C. Blankfein for a breakdown of the firm's revenues and profits from its derivatives activities. He said the firm would comply. The commission reiterated that request Wednesday and Thursday.

Viniar said the firm doesn't "keep" records outlining its revenues from its derivatives dealing.

"I am very skeptical that you can't measure these revenues and profits," Born told Viniar. "I urge you to provide us with this information. It's been about six months we've been asking for it… and it makes one wonder also why Goldman has the incentive or impetus not to reveal this information.

"You're suggesting you don't give it to your regulators. You don't put it in your financial reports… so you don't give it to the market… [or to your counterparties]," Born continued. "And you're refusing to give it to us. I hope very much that we will see this very shortly."

Viniar took exception to that last comment.

"Commissioner, again, we're not refusing anything," Goldman's chief financial officer said. "We don't have a separate derivatives business."

Viniar then said that Goldman isn't alone in not breaking out its derivatives-specific revenues and profits.

Born quickly shot back.

"They don't," Born, the nation's former top derivatives regulator, conceded. "But some other firms have provided us with that data when we've asked for it, and Goldman Sachs hasn't."

Phil Angelides, the panel's chairman, could barely contain his incredulousness.

"Are you telling me you have no system at your company that tracks revenues or assets of contracts, and liabilities and payments under contracts?" Angelides asked. "You have no management reports, no financial reports that track these contracts?"

"I've never seen one," Viniar responded. Pressed further, Viniar added that the firm doesn't track these things because it's "not meaningful."

Viniar again was asked to provide the data.

Yves here. I have to tell you, this is a ridiculous line of questioning. What the hell is the FCIC trying to get at? There is NO SUCH THING as a "derivatives business". This in fact illustrates how industry lobbyists have managed to muddy policy debates, to the advantage of the industry, by lumping a lot of disparate activities under the derivatives banner.

Goldman no doubt has commodities futures businesses, FX and currency swaps, and corporate and asset backed credit default swaps activities. I'm sure it also engages in stock and bond index and futures trading in a number of markets. I'm a big believer in knowing what questions you are trying to answer when drilling into data, and I see no utility in having an aggregate figure across these activiites.

And some firms do manage the cash and derivatives businesses of related businesses on an integrated basis. In particular, it appears from the voluminous Goldman documents released by the Senate that Goldman ran its cash and synthetic CDO packaging business from the same business unit. This would not be unusual.

Now the flip side is Goldman clearly does have transaction level information and could no doubt provide analyses to address specific FCIC questions . But it isn't clear at all what the FCIC wants. This reminds me of the sort of exercise I'd fight tooth and nail as an associate at McKinsey, because it was a complete waste of client time and money, that of simply taking whatever data the client had and cutting it various ways to see if anything emerged. It would provide a lot of charts for a progress review, and if it produced any insight, it was completely random and could have been arrived at much more cheaply with a more deliberate approach.

So as much as Goldman is a deserving target, the FCIC appears to be quite overmastered by them, in part due to insufficient preparation (a function of insufficient budget, staffing, and unrealistic deadlines) and lack of well honed interviewing skills on behalf of its commissioners.

charles:

'We were gratified to hear that Brooksley Born left Viniar with the obligation to provide a P&L split. The second this document is public we will assist the FCIC in decoding it: we are certain that for Goldman, which derives the bulk of its profits by being the monopolist in wide bid/ask-spread OTC products, most notably CDS, about 80% of trading revenue will come precisely from unregulated derivatives trading.'

http://www.zerohedge.com/article/david-viniar-walks-thin-line-between-truth-and-perjury-todays-fcic-hearing

Francine McKenna:

We're getting closer to the question and maybe the answer of why AIG held onto high marks when others were writing things down. Davidowitz said it yesterday to Aaron Task on Yahoo's Techticker and I have been saying it on my site for years: The auditors allowed it so the executives could further an illusion for their own interests. Fraud occurred. The case of AIG/GS is particularly interesting because it is the same firm, PwC, on both sides. I've written about it extensively and you have linked to these stories. The crime of the century is that PwC is still AIG's auditor, earning 205 million from the engagement last year.

Independent Accountant:

Francine:

Agree! That's why I oppose the PCAOB's existence. Would PWC have had the nerve to do what it did without the SEC, Treasury and NY Fed running interference for it?

IA

David Viniar Walks A Thin Line Between Truth And Perjury At Today's FCIC Hearing zero hedge

by Tyler Durden on 07/01/2010 23:47 -0500

Today, during the FCIC's second day of hearings, Goldman CFO David Viniar was forced to provide additional data about the firm's AIG CDS trades. Luckily the firm kept a record of all entry and exit points, and thus will be able to confirm just what the P&L of the associated trades is (and if not, we are happy to teach Goldman's risk department how to use the Bloomberg CDSD function in conjunction with RMGR run scraping to build a real time CDS portfolio tracker)... Which is ironic, because when asked by Brooksley Born why the firm has not yet provided a break down of its derivative revenue Mr. Viniar by all accounts perjured himself. As Bloomberg reported: "We don't have a separate derivatives business," Viniar told the panel. "It's integrated into the rest of our business."

Uh... what?

Every evening, a firm's back office (and that most certainly includes Goldman) takes the EOD CDS and cash marks from every single prop trader, be they equity, fixed income, mortgage, FX, etc. and using its own integrated pricing system or an outsourced one, compiles a daily P&L which is immediately sent to the head of the risk division, the head of trading, and other various listserv participants. And most certainly the traders, who have every interest of knowing just how they did in any given day as they prepare their bonus speech at the end of the fiscal year. Traders, who combine cash and CDS trading simply look at a consolidated P&L on the basis of DV01 exposure, which makes the form of product used completely irrelevant, and is a process whereby every change in 1 basis point in interest rates is equivalent to a profit or loss. Every single derivative is presented in Goldman's daily risk summary on a DV01 basis to show not only maximum possible loss, but what the daily profit or loss may have been. This makes the tracing of both revenue from derivatives and cash products seamless.

Obviously even the FCIC panel was fully aware of this:

"When you tell us that you don't know how much you make in your derivatives business, nobody here really believes it," [Commissioner Byron] Georgiou told Viniar. "Nobody here believes that you don't know how much money you're making on the various aspects of your business, it doesn't make any sense."

And Goldman's very own documents confirm that the firm, as part of its daily P&L summary, tracks the revenue by every product line, most certainly including derivatives, as can be seen from the email by Ki-Jun Bin from July 20, 2007, obtained as part of the Abacus discovery process:

As for Goldman's claim that due to possible commingling of strategies between cash and synthetic legs, any P&L report will be distorted, you will pardon our French, but this is a pile of crap. Every time a trade ticket is punched, it is the responsibility of the trader and/or their supervisor to allocate a trade to a given strategy. In other words, in the P&L of a given group, the 20MM notional of XYZ CDS would be paired with the 5MM in cash bonds of the firm whose CDS are being referenced, and then the combined EOD P&L would be derived based on the change in DV01. But leave it to Moody's to not be aware of this most fundamental principle of how banks organize their risk by various strategies:

"Reporting a revenue number, just the profit on derivatives without looking at cash positions associated with hedging those, is going to be a highly imprecise exercise," Yavorsky said in an interview today.

Fine, so look at the cash positions which can all be reconciled. As for commingled legs, it is again the trader's responsibility to allocate portions of any given trade to various strategies on a pro rata basis. At the end of the day, it is the "view by strat" of any portfolio, and every single back office can do this, that provides precisely this data. And out of this view, the cash legs, if any even exist, can immediately be removed. Of course, Goldman knows this all too well.

Yet all of this is very much irrelevant. As the Abacus discovery taught us, Goldman rarely if ever actually hedges: recall that the firm's Mortgage group was almost exclusively short in trading daily derivatives (look at the P&L above and note how many various portiona have the same sign) in order to hedge existing legacy cash product balance sheet exposure. In other words a forensic analysis of all Goldman positions in a given period will indicate that the prop trades were mostly unidirectional and unhedged, making all of Viniar's and Moody's concerns moot. Typically traders put on one position via either cash or CDS, and on 10%, a combination of both, and wait for it to hit stops on either side. In other words, 90% of trades will be completely unhedged, with not confusion about what is attributable to derivatives and what to cash.

We were gratified to hear that Brooksley Born left Viniar with the obligation to provide a P&L split. The second this document is public we will assist the FCIC in decoding it: we are certain that for Goldman, which derives the bulk of its profits by being the monopolist in wide bid/ask-spread OTC products, most notably CDS, about 80% of trading revenue will come precisely from unregulated derivatives trading. Which, of course, is the real reason why David Viniar is stalling so hard and doing everything in his power to avoid disclosing that not only would derivative regulation massively impair the firm's profitability, but that the ongoing lie about Goldman generating just 10% from prop trading is blatantly false, and in reality the real number is the inverse. Which also explains why by the time the Fin Reg bill finally passes, the Volcker Plan will be gutted beyond all comprehension and Wall Street will be back to doing everything it used to do before, but this time with the Frank-Dodd stamp of approval.Until the next inevitable crash.

williambanzai7:

This is really obstruction of justice. Even if we assume they don't collate the information (which is absurd to even consider) you know that the Squids have the systems to spit it out every which way in any form imaginable. This is all consistent with their document dumping tactics.

Their behavior just confirms the obvious conclusion, as usual.

Someone should just nail their asses on this.

I'm not a crook...

Richard Nixon

JR:

Wall Street will be back to doing everything it used to do before, but this time with the Frank-Dodd stamp of approval-mainly because life support on government bailout will be kept within the country's financial oligarchy by those who run Wall Street-namely for those Wall Street bankers who have estates in the affluent enclave of North Salem north of New York City--courtesy of its leading member, Larry Fink of BlackRock.

Here is how in 2009 thesmartasset.com described "the Rescue Racket": "How do we repair the flattened hen house that used to be our economy? By hiring a fox - not just to guard it but to tell us how to rebuild it, carry out the actual repairs and then receive a welcome inside to feed off the newly fattened hens…

"BlackRock's role blares conflict of interest all over the place - it advises the government on how to fix the economy, gets huge federal contracts (some of them no-bid contracts) to fix the economy, and produces big profits for its investors on the changes in the economy. (BlackRock manages $1.3 trillion of assets.)"

Thus began its article, 'Crony capitalism': BlackRock's profitable conflict of interests in Obama's rescue plans-sorry it's called 'symbiotic.'

I also liked this take by Dwight Baker posted yesterday on Ambrose Evans-Pritchard's website regarding the man Vanity Fair's Suzanna Andrews said "may be the most powerful man in the post-bailout economy" in her April magnum opus, Larry Fink's $12 Trillion Shadow. Wrote Baker:

"MY TAKE ---- What is the shadow about those facts? Larry Fink, created mortgage backed securities; now the USA has hired his firm to get to the bottom of all the corruption in Fannie Mae and Freddie Mac. The wolf is in charge of our hen house. Try to figure that one out!!!"

There also are many BlackRock gems in Suzanna's highly laudatory and informative Vanity Fair article on the enormous power given by the government to Larry Fink, "the Wall Street Wise Man." Here are a few:

"If Larry Fink is currently 'at the hub of the wheel of American capitalism,' as his friend Ken Langone, the co-founder of Home Depot and a former director of the New York Stock Exchange, puts it, he has achieved this position largely in the shadows." (I liked that bit about capitalism.)

Or this take on Fink from former investment banker and author of House of Cards, William D. Cohan, as quoted by Suzanna: "He's like the Wizard of Oz. The man behind the curtain."

But best of all: "During the next decade (the 80s), Fink would become something of a legend on Wall Street. Along with Lew Ranieri, of Salomon Brothers, he would be credited with developing the multi-trillion-dollar debt-securitization market that transformed the face of finance. By 2008 this market-of mortgages, and car and credit-card loans, purchased from banks, sliced into pieces, repackaged, and sold to thousands of investors-would help bring the economy to its knees. But long before it spiraled out of control, it was considered an incredible innovation."

And, now, amidst a whirlwind of potential conflicts of interests and through an array of government contracts, "BlackRock has effectively become the leading manager of Washington's bailout of Wall Street"-- in charge of cleaning up all the Street's created messes, including some of its own, for the Fed, the Treasury, the government, and the TBTFs such as Goldman--with government taxpayer guarantees. BlackRock was selected specifically and noncompetively, as NYFed/US Treasurer Geithner put it, because "the interest of the American taxpayer would be best served."

Andrews ends her probe of Fink's "role in the crisis" and his "unique risk-assessment system"with these words: [If}there is indeed an American oligarchy today, it does seem as if Larry Fink wants to be the good oligarch."

The quadrillion dollar question is: Good for whom?

Read More http://www.vanityfair.com/business/features/2010/04/fink-201004?printable=true&currentPage=2#ixzz0sUd11xDU

williambanzai7:

LIAR VINIAR:

http://williambanzai7.blogspot.com/2010/07/liar-liar.html

Pike Bishop:

It was flat out perjury.

I have always contended that the SEC's best shot at discovery for gaming and outright ballistic risk is to follow individual compensation stats. When somebody or a business group starts pumping big comp numbers, something is going on.

And Viniar is going to tell us that a moneymaker is going to to accept comp which is a best guess by GS? And GS so loves and trusts their traders that a successful one who leaves to go to JPM is going to then thank GS by telling them exactly what he was doing?

Everybody knows, everybody would fuck them for nickle. Comp is massively and precisely fit to the business, and GS wants to be able to review the movement of every penny.

Instead of watching comp, (and the relatively small number of transactions of one trader) the SEC would rather wait until something is a mega-macro mess, and then confess there is too much data for them to figure it out in less than 6 months.

The problem with the SEC, besides their passive and aggressive incompetence, is that they are always 6 months to year behind the WS curve, until they can figure something out.

By then, WS has morphed it into something more "innovative".

stoverny:

Viniar might be the all-time master of obfuscation. I remember his conference call about the AIG payments, by the time he was done I don't think the analysts on the call knew what day it was.

It is a rather rare talent, one perfectly suited for his position.

Goldman can't say how much it made from housing crash McClatchyGreg Gordon

July 01, 2010 | McClatchy Newspapers

WASHINGTON - A congressional commission pressed Goldman Sachs executives Wednesday to spell out how much their company has earned from its exotic bets against the housing market, including $20 billion in wagers that helped force a $162 billion taxpayer bailout of the American International Group.

However, Goldman's president and chief risk officer told members of the Financial Crisis Inquiry Commission that their company never breaks out its figures that way.

"We can dig and dig and dig," Goldman President Gary Cohn said in sworn testimony. "We won't find that report."

Many of Goldman's trades with AIG offset protection it wrote for clients on mortgage securities, but McClatchy reported Tuesday that Goldman wagered its own money on some swaps purchased from AIG. A special Senate investigations panel disclosed in April that Goldman bet billions of dollars of its own money on a housing downturn.

The panel, which opened two days of hearings into Goldman's dealings with AIG, has been seeking information since February on how much the Wall Street giant reaped from bets against the housing market. Overall, Goldman posted profits of $2.32 billion in 2008, despite the meltdown, and $13.4 billion in 2009. Earlier in June, commission leaders subpoenaed Goldman, accusing the Wall Street giant of deluging them with 2.5 billion documents.

The commission also heard Wednesday from the man who oversaw AIG's disastrous decision to insure nearly $80 billion in subprime mortgage securities. Joseph Cassano, who recently was cleared of criminal wrongdoing after lengthy FBI and Securities and Exchange Commission inquiries, emerged publicly for the first time since the economic meltdown and said that his ouster might have cost taxpayers tens of billions of dollars.

Cassano contended that his departure as the head of London-based AIG Financial Products in March 2008 apparently left no one with the expertise to fend off Goldman's demands for billions of dollars in collateral - demands that helped put AIG into a cash squeeze.

"The taxpayers would have been served better," Cassano said, if the company's chief executive hadn't requested his resignation. Cassano said that he'd succeeded for months in paring Goldman's demands for cash and would have continued to assert the insurer's "rights and remedies" in private contracts, known as credit-default swaps, that effectively insured Goldman against losses on risky home mortgages.

The commission, which faces a December deadline to deliver a comprehensive report to Congress on the causes of the nation's financial crisis, has intensified its focus on Goldman and AIG while examining the role of swaps in mushrooming the dimensions of the economic collapse.

The panel released internal AIG e-mails and other documents tracing Goldman's demands for collateral, which ballooned from $1.8 billion in July 2007 to $10 billion, which stunned AIG executives. The two firms haggled for more than a year over the value of underlying mortgage securities as credit markets froze and the market for the securities shrank and all but disappeared.

Cohn said, however, that the parties' trading agreements stated "very specifically" that if there were declines in "fair value" on the insured securities, AIG would have to post cash collateral to make up for the loss. As the securities lost value, he said, eventually trades occurred and "we used those actual real-live trades as reference points."

Commission members, however, questioned Goldman's motives in pushing AIG. When then-Treasury Secretary Henry Paulson, a former Goldman chief executive, and other Bush administration officials committed as much as $182 billion for a taxpayer bailout, Goldman collected $12.9 billion, the most of any U.S. bank.

In an e-mail on Sept. 11, 2007, an AIG official reported after speaking with a representative of the French bank Societe Generale that Goldman had shared its "marks," or estimated values of offshore mortgage securities, with SocGen.

At first, SocGen disputed Goldman's estimates, which were lower than those of most banks, but by November, it, too, was demanding collateral from AIG. Goldman's value estimates ultimately proved accurate as the housing market continued to slide.

In pressing for more information from Goldman, Commission Chairman Phil Angelides told Cohn and Craig Broderick, the firm's chief risk officer: "It's pretty clear that you (Goldman) helped build the bomb. It's pretty clear that you built a bomb shelter. Now the question I want to get to is, did you light the fuse?"

The panel detailed one Goldman bet with AIG, dating to 2004, in which Goldman paid the insurer $2.1 million annually for $1.7 billion in insurance coverage on a so-called synthetic deal in which neither party actually bought any mortgage securities. In the deal, one of the first in a series known as Abacus, Goldman wound up collecting $806 million in a negotiated settlement with AIG, the commission said.

Cohn likened Goldman's bet to buying a fire insurance policy on a home.

Such deals, he said, are "leveraged on the probability your house is going to burn down."

Cassano defended AIG's swap-writing on mortgage securities, saying that none of the securities acquired on behalf of taxpayers by the Federal Reserve Bank of New York has yet soured.

"I still think that the underwriting standards we had set will support those transactions," he said.

Cassano, who was flanked by former AIG President and Chief Executive Martin Sullivan and current chief risk officer Robert Lewis, noted that AIG stopped writing swaps on securities backed by subprime mortgages to marginally qualified borrowers. The commission noted that AIG's swap exposure tripled that year from $17 billion to $54 billion and reached $78 billion by 2007.

The federal inquiries into the behavior of Cassano and two other AIG executives related to whether the company illegally failed to disclose the declining value of the insured securities to shareholders.

Commissioner Byron Georgiou traced the events surrounding a Dec. 5, 2007, investor conference in which Sullivan played down AIG's housing-related risks, despite a $1.5 billion adjustment due to collateral calls. Georgiou said commission investigators were told that Sullivan, Cassano and other executives had discussed risks reaching $5 billion days earlier, prompting Sullivan to remark at the time that he was "going to have a heart attack."

Sullivan testified that he didn't recall making such a comment.

After a review by AIG's auditor, PricewaterhouseCoopers, the insurer restated earnings two months later, making an $11.1 billion adjustment for mortgage risks. AIG's stock fell from $50 a share to $44.

Angelides told Sullivan that he found his "lack of knowledge, lack of recognition disturbing" and reflective of the "failure of leadership and management" at AIG.

[May 19, 2010] Goldman Profited on its Trades, Clients Lost on its Advice

Bloomberg

Goldman Sachs Group Inc. racked up trading profits for itself every day last quarter. Clients who followed the firm's investment advice fared far worse.

Seven of the investment bank's nine "recommended top trades for 2010" have been money losers for investors who adopted the New York-based firm's advice, according to data compiled by Bloomberg from a Goldman Sachs research note sent yesterday.

Clients who used the tips lost 14 percent buying the Polish zloty versus the Japanese yen, 9.4 percent buying Chinese stocks in Hong Kong and 9.8 percent trading the British pound against the New Zealand dollar.

[May 19, 2010] Clients Worried About Goldman's Many Hats

NYTimes.com

As the housing crisis mounted in early 2007, Goldman Sachs was busy selling risky, mortgage-related securities issued by its longtime client, Washington Mutual, a major bank based in Seattle.

Although Goldman had decided months earlier that the mortgage market was headed for a fall, it continued to sell the WaMu securities to investors. While Goldman put its imprimatur on that offering, traders in the same Goldman unit were not so sanguine about WaMu's prospects: they were betting that the value of WaMu's stock and other securities would decline.

Goldman's wager against its customer's stock - a position known as a "short" - was large enough that it would have generated at least $10 million in profits if WaMu collapsed, according to documents recently released by Congress. And by mid-May, Goldman's bet against other WaMu securities had made Goldman $2.5 million, the documents show.

WaMu eventually did collapse under the weight of souring mortgage loans; federal regulators seized it in September 2008, making it the biggest bank failure in American history.

Goldman's bets against WaMu, wagers that took place even as it helped WaMu feed a housing frenzy that Goldman had already lost faith in, are examples of conflicting roles that trouble its critics and some former clients. While Goldman has legions of satisfied customers and maintains that it puts its clients first, it also sometimes appears to work against the interests of those same clients when opportunities to make trading profits off their financial troubles arise.

Goldman's access to client information can also give its traders an advantage that many of the firm's competitors lack. And because betting against a company's shares or its debt can create an atmosphere of doubt about a company's financial standing, Goldman because of its size and its position in the market can help make the success of some of its wagers faits accomplis.

Lucas van Praag, a Goldman spokesman, declined to say how much the firm earned on its bets against WaMu's stock. He said his firm lost money on its bets against the other WaMu securities. In an e-mail reply to questions for this article, he said there was nothing improper about Goldman's wagers against any of its clients. "Shorting stock or buying credit protection in order to manage exposures are typical tools to help a firm reduce its risk."

WaMu is not the only Goldman client the firm bet against as the mortgage disaster gained steam. Documents released by the Senate Permanent Subcommittee on Investigations show that Goldman's mortgage unit also wagered against Bear Stearns and Countrywide Financial, two longstanding clients of the firm. These documents are only related to the mortgage unit and it is unknown what other bets the rest of the firm made.

Goldman also bet against the American International Group, which insured Goldman's mortgage bonds, and National City, a Cleveland bank the firm had advised on a sale of a big subprime mortgage lender to Merrill Lynch.

While no one has accused Goldman of anything illegal involving WaMu, National City, A.I.G. or the other clients it bet against, potential conflicts inherent in Wall Street's business model are at the core of many of the investigations that state and federal authorities are conducting. Transactions entered into as the mortgage market fizzled may turn out to have been perfectly legal. Nevertheless, they have raised concerns among investors and analysts about the extent to which a variety of Wall Street firms put their own interests ahead of their clients'.

"Now it's all about the score. Just make the score, do the deal. Move on to the next one. That's the trader culture," said Cornelius Hurley, director of the Morin Center for Banking and Financial Law at Boston University and former counsel to the Federal Reserve Board. "Their business model has completely blurred the difference between executing trades on behalf of customers versus executing trades for themselves. It's a huge problem."

Goldman has come under particularly intense scrutiny on such issues since the financial and economic downturn began gathering momentum in 2007, in part because it has done so well, in part because of the power it wields in Washington and on Wall Street, and in part because regulators have taken a keen interest in its dealings.

The Securities and Exchange Commission filed a civil fraud suit against the firm last month, contending that it misled clients who bought a mortgage security that the regulators said was intended to fail. Goldman has said it did nothing wrong and is fighting the case. Legislators in Washington are also considering financial reforms that limit potential conflicts of interest in the way that firms like Goldman trade and invest their own money.

Still, Goldman's many hats - trader, adviser, underwriter, matchmaker of buyers and sellers, and salesperson - has left some clients feeling bruised or so wary that they have sometimes avoided doing business with the bank.

[May 19, 2010] Goldman Clients Increasingly Wary of Firm's Conflicts and Trading Orientation " naked capitalism

When the SEC filed its civil suit against Goldman, the firm and its stalwarts argued that the firm would come through with its reputation intact.

Anyone who watched Goldman over the last decade had reason to doubt that cheery view. The firm has undergone a remarkable change, from one that was notoriously aggressive but had a keen sense of where the boundaries of propriety lay, to one out to maximize its bottom line with little regard to the long-term consequences. Greed and short-termism won in 1999 when the firm went public. At most times in the preceding 15 years, if not even earlier, Goldman could have gone public or sold itself, producing a nice killing for its current partners. But most saw Goldman as an institution and felt that selling it would be an act of opportunism, of cashing in on what others had built without compensating them fairly.

I would occasionally have dinner with a senior staff member, one in an influential position that put him regularly in front of the CEO and the management committee. He had been with the firm a very long time and had institutional memory, a very scarce commodity. He was always discreet, but his unhappiness with the devolution of the firm was palpable. He did not have much respect for Hank Paulson, but it appeared the other members of the management committee, particularly John Thornton and John Thain, were thoughtful and acutely aware of the tradeoff between short-term profits and maintaining the firm's franchise. By contrast, after Blankfein took the helm and the management team came to be dominated by traders, I could see him do everything in his power to steer our conversations away from Goldman, even the Goldman of long ago. And it became obvious why: the times we did wind up on that topic, he would be unable to contain his contempt for the people leading the firm, and the damage he was convinced they were doing to the firm's culture, which he was also certain would play out in its reputation. It has taken a few years for him to be proven correct.

The New York Times chronicles how some of the firm's corporate clients are increasingly uncomfortable with how Goldman will use the information the firm gains from its business dealings (meaning its corporate finance relationships and underwritings, where the banker is expected to treat its customers as a relationship, not a trade) for its own profit, particularly to bet against the client. This would have been completely unthinkable when I was briefly at Goldman (the early 1980s); Sidney Weinberg would spin in his grave if he could read this story.

The article describes in particular how the firm both represented WaMu as a manager of its mortgage-backed securities offerings, yet shorted its bonds and its stock. Goldman maintains, in effect, that the short wasn't "personal" but was part of a broader portfolio management strategy. If you believe that, I have a bridge I'd like to sell you.

The suspicions of WaMu's CEO Kerry K. Killinger appear well founded:

In that [e-mail] message, Mr. Killinger noted that he had avoided retaining Goldman's investment bankers in the fall of 2007 because he was concerned about how the firm would use knowledge it gleaned from that relationship. He pointed out that Goldman was "shorting mortgages big time" even while it had been advising Countrywide, a major mortgage lender.

"I don't trust Goldy on this," he wrote. "They are smart, but this is swimming with the sharks."

One of Mr. Killinger's lieutenants at Washington Mutual felt the same way. "We always need to worry a little about Goldman," that person wrote in an e-mail message, "because we need them more than they need us and the firm is run by traders."

Yves here. WaMu is not an isolated case. I have had a former financial firm executive tell me that when Goldman was pitching to manage an offering, its executives asked point blank, "Are you shorting our company?" They did not get a straight answer, which they took to mean, "Yes".

The article also contends that the firm encourages its staff to ignore conflicts of interest, a charge the firm's spokesman, Lucas Van Praag, denies:

When new hires begin working at Goldman, they are told to follow 14 principles that outline the firm's best practices. "Our clients' interests always come first" is principle No. 1. The 14th principle is: "Integrity and honesty are at the heart of our business."

But some former insiders, who requested anonymity because of concerns about retribution from the firm, say Goldman has a 15th, unwritten principle that employees openly discuss.

It urges Goldman workers to embrace conflicts and argues that they are evidence of a healthy tension between the firm and its customers. If you are not embracing conflicts, the argument holds, you are not being aggressive enough in generating business.

Yves again. The article alludes to two of the 901 pages of exhibits released by the Senate Permanent Subcommittee on Investigations. I'm puzzled that the web version did not point to them directly; they are a revealing example of Newspeak in action (click to enlarge, or see pages 259-260):

Picture 49

Yves here. Van Praag reportedly contends, "This policy and the excerpt cited from the training manual simply reflects the fact that we have a diverse client base and give our sales people and traders appropriate guidance."

Ahem. Anyone who has lived in Corporate America will recognize these pages as CYA. One thing Goldman has long-ago mastered is getting its story straight BEFORE it engages in questionable behavior. I saw that first hand when I worked for Goldman in the 1980s. For instance, I once walked into the Syndicate department well after normal hours for that group to find two junior staffers being briefed by one of the most powerful partners from Goldman's main law firm, Sullivan & Cromwell (i.e., someone who would normally never deal with people so far down the totem pole) walking them through the party line on an upcoming deal. It was an unusual type of underwriting; the head of Syndicate had crowed, "I'm going to make that stock sing!" but that was not the sort of thing you say to the SEC should they happen to come calling.

Similar legalistic positioning in the excerpt is obvious to anyone who has an operating brain cell. The Goldman argument is that trading decisions are not based on "any one piece of data" which seeks to claim that no one piece of information (which of course could come fro a client and hence constitute front running or simply abusing a presumed relationship) would lead to a trade. Huh? Traders often jump to take or lighten a position PRECISELY because they have gotten a SINGLE piece of information which they see as significant and believe the market does not have yet.

The story accounts other examples of less than savory conduct by Goldman. One case involved the auction rate securities market. Goldman refused to to waive a contract provision, as other banks had, after they abandoned the auction rate securities market. The article does not state as clearly as it might that the reason the issuer in question, a hospital, wanted a waiver was because it was paying a penalty rate precisely because Goldman and other firms who had once been willing to act as market makers, were refusing to do so. This is more serious than it might seem because an underwriter is expected to continue to make a market after an issue is sold; this is an important service to investors and issuers. But there is no contractual obligation, even though it is widely regarded as an essential part of the business. Hence the hospital's outrage when Goldman welshed on its part of the deal but insisted the hospital adhere to its contract.

Another juicy item: Goldman recommended shorting the debt of six states….the same year it had underwritten bonds for those states, which meant it sold them to (presumably) other investors.

The article describes more incidents: how Goldman sold a notoriously toxic CDO, Timberwolf, to a Bear Stearns hedge fund (the one that blew up in July 2007, ushering in the first acute phase of the credit crisis) and then shorted Bear's stock, and how aggressive collateral calls might have led to the demise of Thornburg Mortgage.

While Goldman is a sufficiently embattled firm these days it is well nigh impossible for outsiders to get candid answers, the firm's conduct in the Senate hearings and some of Lloyd Blankfein's star turns give the impression that the firm's moral compass is so badly broken that its leadership and many of its employees genuinely thinks there is nothing questionable about this type of conduct. And if that is true, the firm is beyond redemption.

More on this topic (What's this?)

[May 15, 2010] SEC Chief's Big Bet on Goldman

Vampire Squid is the product of fiat financial system and deregulation. They tried to hack financial system to extract parasitic rents and enjoyed success beyond imagination, but this is not a computer were damage is limited. This is a society that sustained damage. So they cut the branch on which they were sitting. Now they need to be shut down and perpetrators need to go to jail. But it's easier said than done. Those are Mafiosi, or financial terrorists in the most exact meaning of this word including the secrecy of the planned operations. To penetrate inner circle of those companies you need three letter agencies and covert agents. Regular investigations will be subverted.
WSJ.com

david b mullaney:

This whole thing was a fraud of absolutely massive proporions. Some charges need to come, and Goldman among others was very deep into alot of grey areas. If you have ever heard the term 'regulatory arbitrage' you know that these guys were playing a dangerous game. Whether that behavior is actually illegal needs to be tested in a court. By the way alot of these things need to regulated away. Synthetic CDOs provide completely useless leverage in most cases, they are not a mechanism of capital allocation and are not always used for risk mitigation, they were generally directional unhedged trades. Let the charges come, let the rules be tested in court and let the regulation come for poor products. No one wants to see this thing happen all over again.

JULIAN GAMMON III

Regulatory arbitrage occurred between insurance companies and Investment Banks. Insurance companies had different ways of valuing credit default protection, thus giving rise to the "Arb" which you refer to. The monoline insurance companies (AIG, AXA, ACE, AMBAC) always sold CDO tranche protection. I always thought it was underpriced. I noticed that AIG was on the other side of every single deal. When I raised this issue at Bank of America in 2001 I was told that I didn't understand this, AIG was AAA, and besides "we are making money". The guy who told me this was later fired for, among other things, selling equity CDO tranches to a retail Italian Bank - BoA settled for $80MM.

Peter Marlow:

Goldman is a criminal enterprise. The charges and investigations will make this obvious. And then, another obvious conclusion will follow:

Goldman Sachs must be SHUT DOWN!

Paul Shang

"a product of pure intellectual masturbation…which has no purpose, which is absolutely conceptual and highly theoretical and which nobody knows how to price."

I am wondering if the investors who bought the CDOs share his sexual fantasy?

david b mullaney

I wish people, media in particular, would stop with the buzzwords and stupid comparisons and tell people what really happened. CDOs have an implied default rate in them at which investors of different tranches break even. However since each underlying mortgage is its own universe those are very difficult to guess. But there are two big factors which really matter, one is the overall direction of the economy and employment in particular which dictates housing prices and cash on hand to make payments. The second is correlation between the different mortgages. These led to two fatal assumptions in the way these things are priced. The two assumptions were that the economy would stay strong and this would support housing prices and ability to pay, the second was that mortgages in different geographical areas would have largely uncorrelated default rates. So if people in AZ couldn't pay, your people in Florida probably could, your CDO is more robust because it is diversified. There is huge amounts of historical data available about default correlations, home price behavior during different phases of the business cycle, etc. What people didn't realize is that when they were making these products, they made so many that they fundamentally altered the forces that created the data they were using to price the securities. Basically they unwittingly created a circular system that put the economy into seemingly virtuous cycle of rising home prices, strong economic performance, high employment etc. this reinforced the original assumptions and people engaged in more of this behavior. Of course we all know now that it was a vicious cycle of increasing risk and artificial returns that created an ever more unstable system. finally the wind blew and the straw house fell down.

Until it all fell apart people thought they could price these things. The theory of it is all there, but the theory of it is only as good as the data that theoretical models employ, and in their circular would their own activities affected the integrity of the data.

Synthetic CDOs are much more theoretical because they were one more step removed from reality. They just became a numbers game where you customized an asset to beat a model that a ratings agency was using. It really is a problem when the fox and the hound get too cozy, they are supposed to be adversarial. It's what keeps us all safe.

George Macdonald:

It was neither Freddit not Fannie who knowingly wrote bad mortagages, securitized them, and then paid off the ratings agenicies to give them AAA ratings.

True, Freddie and Fannie were doing the bidding of the Bush administration to suck some of those bad mortgages --- but they were not the root cause of the problem. It was the criminals at Countrywide, GS, Citibank, etc....

George Macdonald:

The Wall Street Financial Houses committed fraud on a massive scale -- Goldman was just one of many. And, that massive fraud brought this nation to its knees -- and it may never recover from the damage that it (and the Bush Administration) have done to it...

The trouble is: NONE of them have admitted to doing anything wrong. And, most importantly, they are continuing the practices that got them and us into this financial crisis...

There is only one thing that will work: enforce the law: First, put some of the higher ups in jail and also take away the money that they stole from innocent investors who trusted the information that they were given when they bought into the scam these guys were running.

For those who cry" "Buyer Beware!" (i.e., that it is up to the buyer to figure out if he is being scammed): The NYSE cannot exist without some assurance that the representations made for the securities that are being sold are as they are represented to be. Anything else is fraud.

[May 14, 2010] Sergey Aleynikov 'Goldman Sachs Spy' INDICTED, Allegedly Stole Data On Bank's Secret Trading Platform

Aleynikov case represents certain danger for GS as he probably knows a lot about real usage of the platform. Information that can be leaked in this case might complicate GS other suits.
Feb 11, 2010 | The Huffington Post

The reputed "Goldman Sachs Spy," Sergey Aleynikov, was indicted today on charges that he stole the secrets to the bank's closely guarded high-frequency trading platform.

(Scroll down for a link to Aleynikov's wacky home videos and ballroom dancing clips.)

The platform, according to the indictment, gave Goldman Sachs a "competitive advantage" by executing high volumes of trades at breakneck speeds. Aleynikov, who could face 25 years in jail, was in charge of a group of computer programmers who maintained the bank's trading platform. The platform reportedly generated "many millions" in profits each year.

According to the indictment, Aleynikov went to work for Teza, a newly-formed firm in Chicago, in April of 2009, and was tasked with developing a high-frequency trading platform for the company. With a pay package totaling $400,000 at Goldman Sachs, Aleynikov was certainly already well-compensated. Teza, however, offered him a guaranteed salary of $300,000, a guaranteed bonus of $700,000 and a profit-sharing agreement that was worth about $150,000.

Prosecutors from the U.S. Attorney's office in Manhattan allege that Aleynikov, after 5 p.m. on his last day at Goldman Sachs, "executed the transfer of thousands of lines of source code for Goldman's high-frequency trading system." And, the indictment alleges, he skirted Goldman's security apparatus by uploading the source code files to a server in Germany.

Aleynikov then encrypted the files and, several days later, logged onto a computer from his home in New Jersey and downloaded Goldman's proprietary data. He then carried that data into a meeting with Teza workers, according to the indictment.

In November, the government indicated that it was discussing a plea deal with Aleynikov that might have resulted in little or no jail time, reported Reuters.

Zero Hedge wonders whether or not a trial will reveal some crucial details of Goldman Sachs's secret sauce:

"The indictment comes at a time when most observers had expected this case would be settled quietly, as the prevailing sense was the Goldman had no actionable case, especially after numerous months of court delays. The question now is how much information will be made available for discovery, and how much will be filed under Seal so that no additional Goldman HFT secrets enter the public domain."

[Apr 27, 2010] Why Do Business with GS, JPM, etc. -

Quote of the Day:

"In our experience, Buy Side investors today don't do business with GS or the other major Sell Side firms because they trust them. They do business with firms like GS because they believe that the firm has better access to information than do the other dealers in the marketplace.

The sad fact is that the trust that once made firms like GS and the old JP Morgan & Co special has long since been lost, leaving the marketplace that remains a hideous, barbaric place that is bereft of honor - and a source of infinite risk to the participants."

-Chris Whalen of IRA

bsneath:

Best quotes:

If Goldman Sachs settles or loses at trial, "people are going to ask, 'Am I one of the clients who Goldman does deals for, or am I one of the clients Goldman does deals against?' " Dombalagian said. "There's the saying that if you don't know who the mark at the table is, you're probably the mark."

Analysts say Goldman Sachs should settle
http://www.northjersey.com/news/business/92033704_Analysts_say_Goldman_Sachs_should_settle.html

Fredex:

The GS attitude toward their clients brings to mind Animal House where Otter (I think) said, "You f'ed up; You trusted us."

bacala:

Sounds kinda like Madoff. From what I understand, some clients knew he was a crook, but thought he was their crook…

Fritzskelly:

Having done considerable business with the Squid in the past, I can say with no hesitation that they will not be getting the phone calls in the future.

Trust is totally gone.

Mannwich:

They are likely to become as toxic as the crap they were peddling to their clients and betting against.

cleargulf:

The GS crowd reminded me of a bit of Roman history. Crassus was one the 1st Triumvirate.

From wikipedia:

Most notorious was his acquisition of burning houses: when Crassus received word that a house was on fire, he would arrive and purchase the doomed property along with surrounding buildings for a modest sum, and then employ his army of 500 clients to put the fire out before much damage had been done. Crassus' clients employed the Roman method of firefighting-destroying the burning building to curtail the spread of the flames.

Thor:

Manny – that would depend on whether or not the bulk of GS's "clients" are themselves trustworthy though right?

Rightline:

I am not trading this, but.. Is GS being unworthy of trust really a revelation? This too shall pass. Gee, I havent heard MSM burying Toyota once since this story broke. Something else will be orchastrated to get all hot and bothered about. It may take a litle longer, but the well timed hue and cry shall pass. The bill will pass and everyone will move on.

Interesting that the SEC incompetence and malfeasanece story lasted a nanosecond. Prosecute those SEC bastards for theft by getting paid for surfing porn all day long while the country went to hell. It is becoming all too common now for the self serving investigations and prosecutions being initiated. Chris Christie discovers corruption just in time to be elected. Cuomo miraculously gets the goods to make Paterson go away. Give me a break, this crap has been, and will continue to go on forever. The selective enforcement is almost as bad as the offfences.

Todd in SM:

The intriguing part of the quote for me is the final section "leaving the marketplace that remains a hideous, barbaric place that is bereft of honor - and a source of infinite risk to the participants." That has been the biggest/scariest revelation for a "small fish" like myself. How much more volatility this current secular bear market has in store for us keeps me up at night, so to speak.

RW:

I think I disagree with Walen's diagnosis. It is quite possible to argue that the exposure of GS, JPM et al helps restore the rationality of a market which has too long suffered from an inadequate appreciation of risk. The argument is here at http://tinyurl.com/2dfyubo (ht Robert's Stochastic thoughts and Brad DeLong). The money quote:

"Goldman Sachs has damaged its reputation as a fair broker with this scam. I think that is an excellent thing, because that reputation caused people to trade if they thought they were smarter than average. Fear of being cheated by Goldman Sachs makes up for irrational over confidence and will lead the economy towards where it would be if everyone were rational. To put it briefly, what's bad for Goldman Sachs is good for the world."

cognos:

So people like Fritzkelly, who says "they wont be getting calls in the future"… Hmm, this makes no sense. This seems like a comment from someone NOT in this business.

I have $1B of product, like keep it simple and call it a "stock", I want to buy… do I call Goldman? Why not… I just want the best price. I call 4 dealers and ask them to make markets in $1B lots of QCOM. Each gives me a buy/sell price. Say 37.50/38.50.

Someone on this board wants to give away your money and your clients money to some other firm because they dont like Goldman? Personally… I take the best price. Its commoditized.

Thing is… what GS is good at…. is being the best buyer when THEY want to be and being the best seller when THEY want to be. But bid/offer that is hit/lifted is just the BEST PRICE for each client. Why complain if GS gave you the best price?

I have NEVER worked with an institutional client that didnt get 3-5 markets made in most trades. Some clients hit every dealer (bc they want even more size). This basic "lack of honor" works both ways. Clients used to be clubby with firms and hand them constant deals with no price checking. It used to be an "honor" filled club of 10x the fees and 10x the liquidity spreads. Its a GOOD thing that this is gone.

NormanB:

Goldman works for Goldman, always has and always will. All else is commentary.

Casual Onlooker:

I'm wondering how much of this lack of honour has to do with the "arrogance of specialized knowledge"?

I was struck by a comment made by a wall street type when being interviewed by NPR about the president's recent finacial speech. With an obvious air of disdain the broker stated that (paraphrased) the president should stick to "talking about things he understands". The expertise of the president is immaterial and off-topic, what was striking and material was how apparent it was that the broker felt like he and those like him were superior in some fashion because he knew more about a specialized topic than someone else.

This is not unique to wall street, I've found it quite common in my profession (computers). When I was an IT Director a number of years ago, I had to deal with an arrogant tech who had very strong opinions about what programs a particular doctor should be able to access. His premise was that the doctor wasn't able to use the particular program, and that only someone that "was smart enough" should be able to access it.

The point was that the tech had specialized knowledge that the doctor didn't, so the tech's premise was that the doctor wasn't as smart as him. Of course this is ridiculous, knowledge and intelligence are different things. I doubt anyone would think a computer tech could step in and do surgery, but think of how many times we hear of people being called stupid, or idiots because they didn't understand something.

I can't tell you how many times I've seen this behaviour, it is quite common. What I have also seen is as people become more knowledgeable, the power of those those with specialized knowledge diminishes. The more transparent the knowledge, and the better those who don't understand become knowledgeable, the less arrogant those holding specialised knowledge are.

snapshot:

http://us1.institutionalriskanalytics.com/pub/IRAMain.asp

His entire post today is about trust.

Reputational Risk: In Goldman We Trust

"We all seem to suffer a common, self-inflicted wound that can be summed up simply as a lack of trust. The lack of trust, in our view, stems from the breakdown in the rules which once governed and also limited the actors in the world of finance, particularly the rules regarding the creation and sale of securities. Banks, funds and the rating agencies all share the blame, but none more than the politicians in Washington and the Congress who enabled this mess. Remember that as you watch the hearings before the Senate Permanent Subcommittee on Investigations this week."

cognos:

Hammer…. go try and trade $10B/wk in product with BBH. Doesnt exist. They dont have it, cant support it.

Lots of clients in this world run $100-500B portfolios. Insurance companies, large banks, foreign sovereigns, etc. These clients put $1-10B PER WEEK to work. This is why they trade things like "structured synthetic CDOs".

impermanence:

How it is possible that anybody in their right mind could actually trust anybody in financial services?

Transor Z:

Ah, yes, the "good old honorable days."

Gentlemen:

You have undertaken to cheat me. I will not site you, for law takes too long. I will ruin you.

Sincerely yours,
Cornelius Vanderbilt.

-----------–
Old Daniel [Drew]pulled out his proverbial red bandanna handkerchief to mop his brow before sitting down with some fellow speculators. A slip of paper bearing a 'point,' or tip, fell to the floor; a bystander put his foot on it. As Drew left, apparently not noticing the incident, the others pounced upon the piece of paper, which proved to be an order. They bought Erie stock in large quantities, and were soon gulled.
-----------–
http://www.time.com/time/magazine/article/0,9171,747147-3,00.html
-----------–

Whatever exists has already been named,
and what man is has been known;
no man can contend
with one who is stronger than he.

The more the words,
the less the meaning,
and how does that profit anyone?

Lloyd really needs to brush up on his Ecclesiastes.

constantnormal :

If you read some history, the thing that jumps out at you about the situation leading up to the Great Depression is that Wall Street and the financial industry were totally amoral, with attitudes like cognos' being the rule instead of the exception. As things came apart, all the convoluted beggar-thy-neighbor deals came apart and the entire economy collapsed into a jumble of distrust.

Trust is the necessary ingredient that makes economic transactions possible. If neither side in an economic transaction trusts the other, if fear overcomes greed, the transaction does not get made.

THAT, in a nutshell, is the thing that destroyed the economy in the 1930s. And when there is enough pain, evenly distributed over all the world, we will walk that path again, until people who are fearful and distrustful enough bond together and form a framework of protection, not out of trust, but out of distrust and fear.

We have some distance to go in that journey, but I have no doubt that we will get there. I don't know what the nature of the next fraud will be, whether it will be an individual fraud, some "rogue trader" or a con man like Madoff, or some corporate monster that sees only its own betterment, and ignores any rules that might get in the way. As we progress to the inevitable end point, more and more of the players (including the public at large) will join in the get-mine-while-the-gettin-is-good mentality. With a huge demographic bubble of boomers fast approaching retirement with their meager savings decimated, they will be the front-line troops, eager to do whatever it takes to "get well".

In the end, all there will be is failed frauds. Enjoy the ride.

constantnormal:

http://survivingthecrash.blogspot.com/2006/09/housing-bubble-vs-great-depression.html

http://www.gold-eagle.com/editorials_01/seymour062001.html

alfred e:

@constant: Correct x10. Simple and direct. But it's more like gangrene or diabetes than H1N1. A long slow process.

Great book a few years back "Trust" by Fukuyama (SP?). Made that point in great historical detail.

Leo Sands:

"They do business with firms like GS because they believe that the firm has better access to information than do the other dealers in the marketplace."

What kinds of information? Are they insider information? Clients will not consider where the information comes from. The clients' main objectives are to invest to have returns. They should also recognize that the investment banks' benefit is always in a higher place than their own benefits.

There are analysts, own trading desks, brokers, dealers, money management etc in an investment bank. Large chunk of money earned are from own trading(in the expense of shareholder & taxpayer), commissions(sometimes selling products seems to be AAA), management fees(regardless of performance)……

It is naive to believe that there are not conflicts of interest, client/client or bank/client.

The IBs are the financial armies of USA. They are essentials to US companies and federal government. Through them, the money from all over the world flows into government debts, corporate debts/funds. They are the heart and the blood vessels of USA.

In coming eras, government will even more depends on the help of the banks. As many regional banks and some large investment banks collapsed in the past years. The banks remained will even earns more money while the federal debts balloon.

The banks are greedy. However, I think the most immoral group of the Wall Street are the rating agencies!

constantnormal:

"Why complain if GS gave you the best price?"

This is the exact same argument that brought Bernie Madoff so much business - people suspected that he was doing something unsavory, front-running, whatever, they didn't care, so long as they got a "better deal". In fact, I suspect that many of the victims didn't want to know the details, but took some secret pleasure at getting some "unfair advantage" themselves. This is how it spreads.

Where they lacked imagination was in the ability to conceive that THEY might be the ones providing the consistent superior returns.

"Why complain", indeed? Go ahead and give an amoral monster your business, it's all good, right?

cognos:

You guys need to re-read your history… what caused the Great Depression was poor policy responses by the govt and central bank (many of which you guys seem to recommend regularly).

Specifically - interest rates too high, allowing banks to fail broadly, worrying about prices/inflation/gold.

So then a genius of a guy named Keynes wrote a book. Today we follow many of his best inventions and generally, they keep us from Great Depressions (pretty regular in the 1800s as well).

Its really easy to "witch hunt" on Wall Street after they sold people products THAT THEY WANTED! They did the same thing in the late 90s with dot coms. What about realtors? And real-estate developers? They seem like the real culprits. But who cares? People are adults. You guys are shocked, SHOCKED! that sometimes (especially right before a big economic crisis) Goldman Sachs and others sell products that perform poorly. Really?

Its ignorance of the most dangerous kind.

cognos:

Goldman sold plenty of "toxic assets" (as even BR still calls them) … 1 yr ago in early 2009… to clients who are up 300%, 500%, 1000% on the purchase.

I bet you can find emails saying certain companies and assets are "dogs" or "shitty deals" that are up 5-10x over the past year.

The difference is not Goldman… the different is NOT the quality of the deal… the difference is the timing in the cycle. Duh! Welcome to financial markets.

Leo Sands:

I think banks like GS have to be broken into smaller independent companies.

Regulations are also needed to cope with the products which the banks sells. Toxic assets are like drugs. Government entities have responsibilities to regulate them or even prohibit them.

The Obama's administration is in right direction to regulate not only the financial intermediaries but also the self-claimed independent credit agencies.

Personally, I think the reputation damage to the credit agencies are more severe than that of banks. Hey, who didn't know that bankers' reputation before they deal with them? They gets what they expected but at the same time, sadly, what they unexpected – risks which are understated by the bank itself and by the credit agencies.

RW:

"…what caused the Great Depression was poor policy responses by the govt and central bank …"

This is circular and specious: What were the govt and central bank responding to in the first place? A functional financial sector and an economy that is providing do not need "responses" so what was it? Just a matter of timing or a matter of the Ponzi finance boil bursting into its crescendo of pus and blood?

Timing is relevant to the game of musical chairs but economy is the structure of livelihood; best to learn the difference if only to fully understand GS et al's marginal relevance to the latter.

Pat G.:

It's Robin Hood in reverse. The banks want your money for profits. The government wants the banks money for contributions. And we are the schleps that grease the wheels which make it all happen. As long as it remains that way the banks and the government will do whatever is in their power to maintain that status quo. Pure and simple.

mister_x:

Levin is going to skewer them tomorrow:
http://www.bloomberg.com/avp/avp.htm?N=video&T=Levin+News+Conference+on+Goldman+Hearings+&clipSRC=mms://media2.bloomberg.com/cache/vyFK36UsG3xk.asf

I love this guy!

bsneath:

Quote in the New York Times:

Mr. Blankfein said. "We have been a client-centered firm for 140 years, and if our clients believe that we don't deserve their trust we cannot survive."

Goldman Faces New Mortgage Allegations
http://www.nytimes.com/2010/04/27/business/27goldman.html

troubled times:

I was lucky to get out of high school but with that said i have been watching and reading and i have been trying to "think" and not just repeat the thoughts of others……..We have LEH. We have AIG . We have Enron and now we have the most revered Goldman Sachs. …..We are in a state of anarchy yet we are to dumb and stupid to know it…..Its much like a "bubble" that we can't detect until it bursts. We need a TV special , maybe a PBS series modeled after the show " Meeting of the Minds " . We don't need a Senator Dodd or a Chris Cox…..We need the Einhorns and the Bill Flecks of the world. We need the small group , the correct group, that were warning all along…The business schools are lost, the law schools are lost. CNBC is lost and our government is lost . 60 minutes is lost…Ritholtz was the brains , energy and demeanor to act as host …just as Steve Allen acted as host of the PBS series " Meeting of the Minds"

cognos:

Troubled T –

Nah, were not "all lost" as you say.

Most people have a highly cyclical reaction function. 3 years ago they thought everything was great. Today everything is lost (federal debt, banks, housing, jobs). Thing is its already over and the next boom is on the way.

Get out of thinking like everyone else and you'll see opportunity in life and business just about everywhere.

troubled times:

Most people just repeat what they heard last…Most people vote party line…Most people watch stupid TV…Most look for leaders who use the same line " Follow me, accept my word. join my flock and i will show you never ending happiness and joy "..Wall street does that….Government does that…The church does that…Ali did that….They ALL do that… …….The next boom ?

Oh i see, more spending of other peoples money on crap you don't need……

nobetanofun:

"cleargulf : The GS crowd reminded me of a bit of Roman history. Crassus was one the 1st Triumvirate.

From wikipedia:

Most notorious was his acquisition of burning houses: when Crassus received word that a house was on fire, he would arrive and purchase the doomed property along with surrounding buildings for a modest sum, and then employ his army of 500 clients to put the fire out before much damage had been done. Crassus' clients employed the Roman method of firefighting-destroying the burning building to curtail the spread of the flames."

don't forget how Crassus met his end – he over-reached and took on the Parthians and lost. They decided to tailor his punishment and poured molten gold down his throat.

[Apr 26, 2010] FT.com - Financials - Blankfein fights back on SEC case

It looks like FT shills try to disorient public. There is just too much dirty underwear in this case for Goldman to fight it. There is just too much of anger against GS and "whose f*#king guys" (financial terrorists) as Jon Steward put it to be ignored even by the corrupt, controlled by Wall Street administration. Lloyd Blankfein will be extremely lucky just to lose his current position.

Lloyd Blankfein on Wednesday attacked the Securities & Exchange Commission's fraud charges in telephone calls to ­clients as Goldman escalated its campaign to stem the damage to the bank's reputation.

One person who received a call from the Goldman chief said he was told the regulator's case against the bank was politically motivated and would ultimately "hurt America".

Mr Blankfein mounted the campaign to bolster the confidence of its business partners in the wake of the SEC charges that the bank had sold investors a security designed to fail.

In conversations with private equity executives and others, Mr Blankfein left clients with the impression that he was eager to fight the charges in court. The SEC has requested a jury trial.

"He was very aggressive," said one person called by Mr Blankfein on Wednesday. "He feels that the government is out to kill them, that they are under attack and the whole thing is totally political."

Mr Blankfein said the SEC action "hurts America", this person said.

Mr Blankfein did not initiate talk about the politics or timing of the SEC charge, announced on Friday. A person familiar with the matter said: "Clients brought up the politics . . . and there was a discussion around the context of what happened."

The Goldman boss's charm offensive with clients came as it emerged that Fabrice Tourre, the employee also named in the SEC case, would appear with him next week before a US Senate panel investigating Wall Street's role in the financial crisis.

Mr Blankfein said a female staffer at ACA, the manager of the security, knew that Paulson & Co intended to bet against the transaction, according to a person who was called. This goes against the SEC charges that Goldman failed to disclose that Paulson was taking the opposite side of the deal. Paulson's short position yielded it a profit of about $1bn while investors who bought into the security lost $1bn, the SEC complaint says.

Goldman this week bolstered its legal team by hiring Greg Craig, a former counsel to the Obama White House. Though Mr Blankfein did not indicate on the calls whether he was considering settling the suit, some clients close to Goldman say they believe it is gearing up for a fight. "They will likely fight aggressively and hope to win clean," the person said.

SEC staff have said that regulators would seek disgorgement of Goldman's profits on the transaction as well as penalties and injunctive relief.

Goldman maintains that it made a loss on the transaction. But its argument was hurt by the disclosure on Wednesday that the loss resulted from a failure to sell some positions in the deal.

● The SEC also raised the verbal temperature on Wednesday, as Mary Schapiro, its chairman, issued a statement denying that the Goldman case was part of a political agenda and defending the commission's independence.

"We will neither bring cases, nor refrain from bringing them, because of the political consequences. We will be governed always and only by the facts and the law," she said.

Is Goldman Finally About to be Leashed and Collared?

Goldman may have made a fatal mistake. Fatal not to the existence of the firm, but to its standing, reputation, legitimacy, and ultimately, to the thing it covets most, its profits.

Power is most effective when it is used as sparingly as possible. Niall Ferguson, in book The Cash Nexus, stressed the importance of financing to military success (he argues that England was able to punch above its economic weight due to its superior tax collection apparatus and more highly developed bond markets). The Rothschilds, which among other things financed governments at war, went to some lengths to underplay their influence so as not to threaten their state patrons/clients.

The problem is that the behaviors that contributed to Goldman's commercial success have over time become unbalanced, and are putting it at odds with governments. It is one thing to abuse the likes of a Jefferson County, as JP Morgan has. As deplorable as that behavior is, they cannot retaliate. It is quite another to mess with bodies that really are, ultimately, bigger than you are.

When I was young and worked briefly at Goldman, the firm was a pig and let even the very junior staffers understand precisely how its pigginess worked so that they would improve upon it when they grew up. For instance, on the deals it lead managed Goldman managed its stock and bond syndicates so as to extract as much as possible, to the disadvantage of other members of the syndicate, who shared the underwriting risk. I was told that Goldman was far more aggressive than other firms in hogging the deal revenues than any other firm on the Street, but could get away with it as a major lead manager. Similarly, on another deal, I walked into the Syndicate department when one of the most powerful partners at Sullivan & Cromwell was on a conference call, instructing the younger members of the department what the right answers to questions would be when the SEC came in asking questions on what they were about to do on this particular transaction, an underwritten call (note: what made Goldman savvier than most firm was that everyone got the official rationale for technically legal but questionable behavior BEFORE they did it, which made it much easier to maintain party line, rather than after the fact, when some conversations and communiques might contain remarks that were decidedly unhelpful. Note that this practice was well established over two decades before e-mails became pervasive).

Anyone who has read Roger Lowenstein's account of the LTCM crisis, When Genius Failed, will recall how Goldman's lawyer is assigned to a key negotiating role, and proceeds to cut the transaction in ways that favor Goldman over the other rescue group members. It is almost an uncontrollable reflex, the sort you see a predator take when someone makes the mistake of standing between it and its kill.

Now this aggressiveness was tempered (somewhat) by the posture Goldman called "long term greedy", which basically meant not bleeding customers too much. One of the corporate accounts I worked on was a very reliable fee generator, and the M&A bankers were desperate to talk it out of a deal (on which they would have earned a fee) because they were convinced it was a turkey.

But the Goldman of the new millennium has kept the same relentless focus on the firm's financial interest, and has become utterly, hopelessly sociopathic, incapable of understanding right versus wrong. The firm's defense strategies vary among priggish and legalists reports (a Lucas van Pragg speciality), insincere, non-specific apologies (Blankfein), or stony silence. But the truth of how the members of the firm see things comes out again and again, through the many ways the Goldmanites keep maintaining that they really deserve what they make (starting with the heinous Blankfein "God's work" comment), revealing again and again their inability to see how sharp practices and numerous forms of government support are an integral part of their recent "success".

Every generation seems to have at least one financial firm that abuses its priviledges and power to the point when their pathological behavior brings about their downfall: Drexel, Salomon, Bankers Trust, Enron (Frank Partnoy argues that Enron was a "highly profitable derivatives bank"). It is too early to say for sure, but Goldman looks to be at risk of joining their ranks.

Although the Fed is far from an aggressive investigator, the fact that is has taken interest in Goldman's role in Greece is significant. And the FCIC is also probing Goldman's too clever by half strategy of using collateralized debt obligations to tee up short bets, since the buyers of the CDO would assume that they were purchasing a legitimate investment, not something that Goldman would have an incentive to design to fail.

From the Financial Times:

The US central bank is looking into Goldman Sachs's role in arranging contentious derivatives trades for Greece, which helped the country to massage its public finances, Ben Bernanke, chairman of the Federal Reserve, revealed on Thursday.

"We are looking into a number of questions relating to Goldman Sachs and other companies and their derivatives arrangements with Greece," Mr Bernanke said, apparently referring to Greek currency transactions structured by Goldman….

Mr Bernanke said default swaps are "properly used as hedging instruments" and that "using these instruments in a way that intentionally destabilises a company or a country is counterproductive".

The Securities and Exchange Commission is "examining potential abuses and destabilising effects related to the use of credit default swaps and other opaque financial products and practices", said a spokesman.

Separately, Phil Angelides, chairman of the US Financial Crisis Inquiry Commission, told the Financial Times he was concerned about the practice of creating securities and "fully betting against them" – and about Goldman's role in particular. Goldman declined to comment.

The US comments came as an official in German chancellor Angela Merkel's ruling Christian Democratic Union party said the G20 nations were discussing whether a ban on the speculative use of CDS was workable.

Matt Taibbi: Goldman is "Re-creating the conditions for another crash" (Wealth Daily, 2/18/10)

Top Hedge Fund Long & Short Positions: Goldman Sachs Report (market folly, 2/24/10)

  • Svend says:

    February 26, 2010 at 1:19 am

    Thanks for this.

    However, Goldman will survive. It is inside the government. It drives our economically disassociated equity "markets". It will do what it pleases. Maybe a small fine or stern talking to by Hope and Change. But, that's all.

    Stick a fork in us. We're done.

    :(

    Reply
    • jake chase says:

      February 26, 2010 at 11:13 am

      I agree. Goldman has been doing sociopathy since the Twenties. This post is extreme wishful thinking but will no doubt be picked up by timid reformers as a hope to cling to in our more robustly regulated financial future.

      Meanwhile, it is the simple existence of CDS and OTC derivatives that enable Goldman's endless chicanery. It is these toxic financial products unleashed as innovation that explode on the unsuspecting and produce all the profits of all the banks and corrupt all the toothless enablers and their flunkies in the regulatory agencies and the Congress and the White House too.

      Running after Goldman in search of instances of unethical conduct in the derivatives business is a supreme waste of time. It is the business itself which must be dismantled while those outside the financial sector still have anything left of which to be robbed by these financial innovations.

      Reply
  • Thomas Barton, JD says:

    February 26, 2010 at 1:20 am

    The extensive public relations blitz of the past year building up Diamond Jim Jamie Dimon at JP Morgan now makes more sense given that Goldman is the Squid du Jour of the Federales, especially when singled out in public by the Fountainhead of Liquidity Helioptrix Bernankex. Flippant remarks to be sure by me but the bus seems to have acquired a Toyota braking system and the preening arrogance of Blankfein will make a suitable speed bump. Also can you expand on the criminogenic term and elaborate on the possibility that the people of the elite create their environment as much or more than they exploit one created for them. Cheers. May we all enjoy some calamari soon.

    Reply
  • jjohannson says:

    February 26, 2010 at 1:36 am

    I mused today over the possibility that Goldman has positioned itself over the past several years to facilitate the collapse of the Euro, and - if the stars so aligned - benefit from the resultant disaster as the last bank standing in the West through its bipartisan presence in the White House.

    I hate these thoughts I have.

    Reply
  • Mogden says:

    February 26, 2010 at 1:42 am

    It really can't be good that quite normal, non-financial types like my parents know of Goldman and its CEO by name, and loathe them.

    Reply
    • chicago mike says:

      February 26, 2010 at 2:10 am

      I'm also amazed by the public's familiarity with Goldmans' executive ranks. But I think its a good thing.

      Who knows anything about Goldman's sub-senior executives? According to Kate Kelly's "Street Fighters", Gary Kohn brought along David Solomon & Don Mullen, two members of Goldman's management committee & former Bear employees, to examine Bear Stearns' ledgers before that firm collapsed.

      Mssrs. Solomon & Mullen worked at Drexel, Salomon Brothers, Bear Stearns, (are there others?) and now Goldman Sachs.

      What role have execs like these two played played at Goldman in recent years?

      Reply
  • Jesse says:

    February 26, 2010 at 1:44 am

    Lloyd may be playing Dutch Schultz to Jamie's Lucky Luciano.

    If a Tom Dewey ever shows, I think the G card will be dealt on cue.

    How do you want those chops cooked, Lloyd?

    Reply
  • Tom Hickey says:

    February 26, 2010 at 1:53 am

    The world situation is very precarious, and if there is a crash, Goldman will be crushed in the aftermath. This is the ending of a long financial cycle as described by Hyman Minsky and Irving Fisher, and I doubt that the climax has yet been reached. The only thing preventing it vary aggressive government intervention, and it remains to be seen if it will work. I have great doubts with players like Goldman afoot. But Bernanke seems to be figuring this out.

    Reply
  • nowhereman says:

    February 26, 2010 at 2:16 am

    Goldman owns this country, don't hold your breath. Geithner, Summers, Rubin and the rest will make sure that we all lose this bet.
    Wait, aren't we just envious?

    Reply
  • Hugh says:

    February 26, 2010 at 2:23 am

    I think of Microsoft. It never seems to have recovered from its run ins with the European bureaucrats. I have zero belief that our government will do anything but run interference for Goldman, but if German and French politicians don't get in the way of the Eurocrats, GS could be slowly inexorable chewed up by them. This process could be accelerated if the French and the Germans decide to sign off on a ban. The kicker is would Obama, Geithner, and Bernanke threaten retaliation in defense of GS. How likely is this? All I can say is that I have found it impossible to overestimate how bought our government is by GS.

    Reply
  • HereWeGoAgain says:

    February 26, 2010 at 2:39 am

    Yves, if you don't mind clarifying a few things:

    1. I assume the short term greedy Vs long-term greedy came about because Goldman went public–is that your take?

    2. Do you think the Fed is doing this for anything other than politically generating headlines? Is it really interested in investigating? Will anything come out of this?

    I can't read this very well–Goldman was not the only bank to make such deals with Greece; why did Bernanke single out Goldman, but not mention the other banks by name? Is it to placate Americans, or Europeans (or to placate the Europeans in the future if the US pays Goldman out on their Greek bets via AIG)? Or is it to warn the banks to fall into line?

    Sorry, I'm just really lost on how to interpret Bernanke's comments, and your comments about hitting GS in their profits–Bernanke said nothing to suggest this, so what are you getting between the lines?

    Same thing for the SEC–if they didn't want to be aggressive with BofA for something blatantly illegal that occurred within the borders of its jurisdiction (the US), how likely are they to go after GS for something borderline?

    Reply
    • Yves Smith says:

      February 26, 2010 at 3:06 am

      Other readers can probably add some insight, but let me take a stab.

      On your 1., my sense is there was a slide well before the firm went public, with the rise in importance of derivatives and fixed income as sources of profits. Both are lightly to almost unregulated. That led to a slide in standards in conduct across the industry in the 1990s. But yes, going public made a big difference. The firm was pretty balanced in its mix of business, according to its IPO documents, and the key bit was that investment banking and asset management were both large enough to have some clout. Those businesses have much longer time frames than trading, and reputation matters. Now something like 80% of the firm's profits come from trading. It's often described as a hedge fund with some client businesses attached.

      2. Normally, I'd be cynical, but this may be in response to pressure from the EU. I've heard from quite a few people that central bankers and international regulators are cooperating a lot in the wake of the crisis.

      Re profits, I'm not speaking in the immediate sense, but longer term. If someone with subpoena power goes into Goldman, I am sure they will find stuff that reflects badly on the firm. That is more likely to be the FCIC or SIGTARP.

      Remember, what hurt Bankers Trust was that Proctor & Gamble got its hands on some amazingly damaging tapes. Goldman is much more clever than BT was, but I am sure some of the business they did will not stand much scrutiny.

      Reply
    • carol says:

      February 26, 2010 at 9:38 am

      "We are looking into a number of questions relating to Goldman Sachs and other companies and their derivatives arrangements with Greece," Mr Bernanke said

      Herewegoagain, I had the same question you ask: why did Ben single out GS by name, and not naming others. I then answered our question: the outcome of the FED's looking into this is preordained. The FED has already concluded, and will inform the public both in the US and EU at a later date, that GS and others did nothing illegal. Anybody who from then on still laments GS, can be silenced by Lucas van Praag with: 'It has been studied and we did not do anything wrong'.

      Realize that the FED can not be audited. So how can anybody - be it the Greek prime minister, or Angela Merkel - ever proof that the FED looked into it with both eyes closed?!
      All critics on this particular matter will be silenced, hence 'Mission accomplished' as far as Government Sachs is concerned.

      Reply
  • attempter says:

    February 26, 2010 at 3:01 am

    It is historically that true that those who overreach relative to the actual balance of power eventually destroy themselves.

    But in this case those who in theory should want to smash Goldman seem self-hindered (by corruption, ideology, and preceived shared goals that allegedly outweigh conflicts) to an exceptional extent.

    Mr Bernanke said default swaps are "properly used as hedging instruments" and that "using these instruments in a way that intentionally destabilises a company or a country is counterproductive".

    Ya think? According to the things he says, Bernanke sure is the dunce of the class, given how long it takes him to learn lessons that were obvious from the beginning decades ago. You would think Fed chairman doesn't have a steep learning curve.

    (And of course it doesn't. Wingnut welfare means it's a flat, even downhill grade forever, as long as you're on board with the bankster party line. That's the only way it was both possible and desired that Heckuva Job Bennie, one of history's monumentally incompetent fuckups, could ever have even been considered for a second term.

    So speaking of structures overreaching and psychopathically defying reality, part of those goals/traits Goldman shares with bigger structures like the US government is that same unnsustainable aggression. Reappointing Bennie was certainly as belligerent a gesture of spitting in everyone's face as anything Goldman's done.

    The same "character" and quality of action is recursive at every level.)

    Getting back to what Bennie said, how it allegedly portends constructive action, while I'd love to see it, as always I'll believe it when I see it.

    The very quote betrays continued lunacy or more likely bad faith. Yes, the only possible proper "use" for these things would be legitimate hedging by those who have a real stake in some transaction and not a purely derivative, gambler's stake.

    But that was always true of all derivatives. So who is Bennie fooling when he singles out CDS as somehow different, and implicitly says that just in this case speculation is an abuse, when the entire system he so ardently fights to empower and whose main bagman he is is based upon that same speculation?

    Well, everything has to start somewhere, so maybe it's possible that Goldman went so far in this case that even its political connections have to "run for cover", as Tom warned Sonny (in "The Godfather") would allegedly happen if he went too far.

    But it's more likely this is just a mood with no will for action behind it. That's been the case every other time so far.

    Reply
  • Is Goldman Finally About to be Leashed and Collared? " naked capitalism - Viewsflow says:

    February 26, 2010 at 3:37 am

    [...] NCap: Is Goldman Finally About to be Leashed and Collared?: Goldman may have made a fatal mistake. Fatal not to the…Close [...]

    Reply
  • NYT says:

    February 26, 2010 at 8:43 am

    I'm surprised no one seems to have mentioned this on the blogs, but hasn't GS gone from a privately funded balance sheet to a government funded balance sheet since the October meltdown.
    They paid only $6.5B interest on only $500B of debt in 2009. Thats about 1.3%. Given that some of their debt is long term debt (e.g Buffet's 10% loan etc) issued prior to 2009, they must have replaced almost all of the $500B in debt with loans from the Fed.

    Looks like the financial crisis worked out very well for GS. They are paying $25B a year less in interest than they paid in 2008 and it looks like no one is even talking about why GS should not be given this huge and ongoing government subsidy.

    Reply
  • Ron C says:

    February 26, 2010 at 10:19 am

    Is Goldman Finally About to be Leashed and Collared?

    Thanks I needed a good laugh this morning!!!

  • McMike:

    The Goldman/Enron comparison is a good one. Enron was also heavily connected all the way to the top, and had flacks running interference for it at every level, including Congress writing custom legislation just to increase their profits. Enron also of course fleeced the entire state of California and created political crises by tampering with the power supply.

    They were untouchable, the golden boys held up as an example of the new anti-regulated economic alchemists, until they weren't.

    If (when) the worm turns (meaning a major political crisis at home), Goldman's visibility will become its liability. Overnight, no one will return Blankfein's calls, Treasury dept staffers will be shredding visitor logs, the media will discover a new villian faster than Donald Rumsfeld discovered that hils old business partner Saddam Hussein was an evildoer.

    The C-level leaders will face a few heated Congress hearings, a couple second-tier execs will do some time, and the firm will be dissolved into other firms. Geithner will end up as President of some third rate university and Paulson will retire to fly fish with Cheney. The GOP will campaign as the anti-wall street party and then the entire episode will dissapear down the memory hole.

  • Lyle says:

    If you read the Partnership a history of Goldman, you find that every few years it has a near death experience. Corzine got fired over one involving Goldman mimicking LTCM. In the 1920 Goldman Sachs trading nearly did the partnership in. It seems to be a human trait relating to the old pride goeth before a fall line. The culture mentioned leads every so often to someone being so motivated for money that they step over the line from the public point of view but not their own.
    As noted and reinforced by reading the book, its clear that Goldman sells its people that they are the best and can almost walk on water.
    As noted and reinforced again by the book, the long term view win win at goldman has been replaced by win and damn what happens to the customer (as much of wall street became the house of the great casino).

  • How Goldman secretly bet on the U.S. housing crash McClatchy By Greg Gordon

    | McClatchy Newspapers

    Goldman Sachs' secret bets.

    Never miss a McClatchy story

    WASHINGTON - In 2006 and 2007, Goldman Sachs Group peddled more than $40 billion in securities backed by at least 200,000 risky home mortgages, but never told the buyers it was secretly betting that a sharp drop in U.S. housing prices would send the value of those securities plummeting.

    Goldman's sales and its clandestine wagers, completed at the brink of the housing market meltdown, enabled the nation's premier investment bank to pass most of its potential losses to others before a flood of mortgage defaults staggered the U.S. and global economies.

    Only later did investors discover that what Goldman had promoted as triple-A rated investments were closer to junk.

    Now, pension funds, insurance companies, labor unions and foreign financial institutions that bought those dicey mortgage securities are facing large losses, and a five-month McClatchy investigation has found that Goldman's failure to disclose that it made secret, exotic bets on an imminent housing crash may have violated securities laws.

    "The Securities and Exchange Commission should be very interested in any financial company that secretly decides a financial product is a loser and then goes out and actively markets that product or very similar products to unsuspecting customers without disclosing its true opinion," said Laurence Kotlikoff, a Boston University economics professor who's proposed a massive overhaul of the nation's banks. "This is fraud and should be prosecuted."

    John Coffee, a Columbia University law professor who served on an advisory committee to the New York Stock Exchange, said that investment banks have wide latitude to manage their assets, and so the legality of Goldman's maneuvers depends on what its executives knew at the time.

    "It would look much more damaging," Coffee said, "if it appeared that the firm was dumping these investments because it saw them as toxic waste and virtually worthless."

    Lloyd Blankfein, Goldman's chairman and chief executive, declined to be interviewed for this article.

    A Goldman spokesman, Michael DuVally, said that the firm decided in December 2006 to reduce its mortgage risks and did so by selling off subprime-related securities and making myriad insurance-like bets, called credit-default swaps, to "hedge" against a housing downturn.

    DuVally told McClatchy that Goldman "had no obligation to disclose how it was managing its risk, nor would investors have expected us to do so ... other market participants had access to the same information we did."

    For the past year, Goldman has been on the defensive over its Washington connections and the billions in federal bailout funds it received. Scant attention has been paid, however, to how it became the only major Wall Street player to extricate itself from the subprime securities market before the housing bubble burst.

    Goldman remains, along with Morgan Stanley, one of two venerable Wall Street investment banks still standing. Their grievously wounded peers Bear Stearns and Merrill Lynch fell into the arms of retail banks, while another, Lehman Brothers, folded.

    To piece together Goldman's role in the subprime meltdown, McClatchy reviewed hundreds of documents, SEC filings, copies of secret investment circulars, lawsuits and interviewed numerous people familiar with the firm's activities.

    McClatchy's inquiry found that Goldman Sachs:

    The firm benefited when Paulson elected not to save rival Lehman Brothers from collapse, and when he organized a massive rescue of tottering global insurer American International Group while in constant telephone contact with Goldman chief Blankfein. With the Federal Reserve Board's blessing, AIG later used $12.9 billion in taxpayers' dollars to pay off every penny it owed Goldman.

    These decisions preserved billions of dollars in value for Goldman's executives and shareholders. For example, Blankfein held 1.6 million shares in the company in September 2008, and he could have lost more than $150 million if his firm had gone bankrupt.

    With the help of more than $23 billion in direct and indirect federal aid, Goldman appears to have emerged intact from the economic implosion, limiting its subprime losses to $1.5 billion. By repaying $10 billion in direct federal bailout money - a 23 percent taxpayer return that exceeded federal officials' demand - the firm has escaped tough federal limits on 2009 bonuses to executives of firms that received bailout money.

    Goldman announced record earnings in July, and the firm is on course to surpass $50 billion in revenue in 2009 and to pay its employees more than $20 billion in year-end bonuses.

    THE BLUEST OF THE BLUE CHIPS

    For decades, Goldman, a bastion of Ivy League graduates that was founded in 1869, has cultivated an elite reputation as home to the best and brightest and a tradition of urging its executives to take turns at public service.

    As a result, Goldman has operated a virtual jobs conveyor belt to and from Washington: Paulson, as Treasury secretary, sent tens of billions of taxpayers' dollars to rescue Wall Street in 2008, and former Goldman employees populate some of the most demanding and powerful posts in Washington. Savvy federal regulators have migrated from their Washington jobs to Goldman.

    On Oct. 16, a Goldman vice president, Adam Storch, was named managing executive of the SEC's enforcement division.

    Goldman's financial panache made its sales pitches irresistible to policymakers and investors alike, and may help explain why so few of them questioned the risky securities that Goldman sold off in a 14-month period that ended in February 2007.

    Since the collapse of the economy, however, some of those investors have changed their opinions of Goldman.

    Several pension funds, including Mississippi's Public Employees' Retirement System, have filed suits, seeking class-action status, alleging that Goldman and other Wall Street firms negligently made "false and misleading" representations of the bonds' true risks.

    Mississippi Attorney General Jim Hood, whose state has lost $5 million of the $6 million it invested in Goldman's subprime mortgage-backed bonds in 2006, said the state's funds are likely to lose "hundreds of millions of dollars" on those and similar bonds.

    Hood assailed the investment banks "who packaged this junk and sold it to unwary investors."

    California's huge public employees' retirement system, known as CALPERS, purchased $64.4 million in subprime mortgage-backed bonds from Goldman on March 1, 2007. While that represented a tiny percentage of the fund's holdings, in July CALPERS listed the bonds' value at $16.6 million, a drop of nearly 75 percent, according to documents obtained through a state public records request.

    In May, without admitting wrongdoing, Goldman became the first firm to settle with the Massachusetts attorney general's office as it investigated Wall Street's subprime dealings. The firm agreed to pay $60 million to the state, most of it to reduce mortgage balances for 714 aggrieved homeowners.

    Attorney General Martha Coakley, now a candidate to succeed Edward Kennedy in the U.S. Senate, cited the blight from foreclosed homes in Boston and other Massachusetts cities. She said her office focused on investment banks because they provided a market for loans that mortgage lenders "knew or should have known were destined for failure."

    New Orleans' public employees' retirement system, an electrical workers union and the New Jersey carpenters union also are suing Goldman and other Wall Street firms over their losses.

    The full extent of the losses from Goldman's mortgage securities isn't known, but data obtained by McClatchy show that insurance companies, whose annuities provide income for many retirees, collectively paid $2 billion for Goldman's risky high-yield bonds.

    Among the bigger buyers: Ambac Assurance purchased $923 million of Goldman's bonds; the Teachers Insurance and Annuities Association, $141.5 million; New York Life, $96 million; Prudential, $70 million; and Allstate, $40.5 million, according to the data from the National Association of Insurance Commissioners.

    In 2007, as early signs of trouble rippled through the housing market, Goldman paid a discounted price of $8.8 million to repurchase subprime mortgage bonds that Prudential had bought for $12 million.

    Nearly all the insurers' purchases were made in 2006 and 2007, after mortgage lenders had lifted most traditional lending criteria in favor of loans that required little or no documentation of borrowers' incomes or assets.

    While Goldman was far from the biggest player in the risky mortgage securitization business, neither was it small.

    From 2001 to 2007, Goldman hawked at least $135 billion in bonds keyed to risky home loans, according to analyses by McClatchy and the industry newsletter Inside Mortgage Finance.

    In addition to selling about $39 billion of its own risky mortgage securities in 2006 and 2007, Goldman marketed at least $17 billion more for others.

    It also was the lead firm in marketing about $83 billion in complex securities, many of them backed by subprime mortgages, via the Caymans and other offshore sites, according to an analysis of unpublished industry data by Gary Kopff, a securitization expert.

    In at least one of these offshore deals, Goldman exaggerated the quality of more than $75 million of risky securities, describing the underlying mortgages as "prime" or "midprime," although in the U.S. they were marketed with lower grades.

    Goldman spokesman DuVally said that Moody's, the bond rating firm, gave them higher grades because the borrowers had high credit scores.

    Goldman's securities came in two varieties: those tied to subprime mortgages and those backed by a slightly higher grade of loans known as Alt-A's.

    Over time, both types of mortgages required homeowners to pay rapidly rising interest rates. Defaults on subprime loans were responsible for last year's housing meltdown. Interest rates on Alt-A loans, which began to rocket upward this year, are causing a new round of defaults.

    Goldman has taken multiple steps to put its subprime dealings behind it, including publicly saying that Wall Street firms regret their mistakes. Last winter, the company cancelled a Las Vegas conference, avoiding any images of employees flashing wads of bonus cash at casinos.

    More recently, the firm has launched a public relations campaign to answer the criticism of its huge bonuses, Washington connections and federal bailout. In late October, Blankfein argued that Goldman's activities serve "an important social purpose" by channeling pools of money held by pension funds and others to companies and governments around the world.

    KNOWING WHEN TO FOLD THEM

    For investment banks such as Goldman, the trick was knowing when to exit the high-stakes subprime game before getting burned.

    New York hedge fund manager John Paulson was one of the first to anticipate disaster. He told Congress that his researchers discovered by early 2006 that many subprime loans covered the homes' entire value, with no down payments, and so he figured that the bonds "would become worthless."

    He soon began placing exotic bets - credit-default swaps - against the housing market. His firm, Paulson & Co., booked a $3.7 billion profit when home prices tanked and subprime defaults soared in 2007 and 2008. (He isn't related to Henry Paulson.)

    At least as early as 2005, Goldman similarly began using swaps to limit its exposure to risky mortgages, the first of multiple strategies it would employ to reduce its subprime risk.

    The company has closely guarded the details of most of its swaps trades, except for $20 billion in widely publicized contracts it purchased from AIG in 2005 and 2006 to cover mortgage defaults or ratings downgrades on subprime-related securities it offered offshore.

    In December 2006, after "10 straight days of losses" in Goldman's mortgage business, Chief Financial Officer David Viniar called a meeting of mortgage traders and other key personnel, Goldman spokesman DuVally said.

    Shortly after the meeting, he said, it was decided to reduce the firm's mortgage risk by selling off its inventory of bonds and betting against those classes of securities in secretive swaps markets.

    DuVally said that at the time, Goldman executives "had no way of knowing how difficult housing or financial market conditions would become."

    In early 2007, the firm's mortgage traders also bet heavily against the housing market on a year-old subprime index on a private London swap exchange, said several Wall Street figures familiar with those dealings, who declined to be identified because the transactions were confidential.

    The swaps contracts would pay off big, especially those with AIG. When Goldman's securities lost value in 2007 and early 2008, the firm demanded $10 billion, of which AIG reluctantly posted $7.5 billion, Viniar disclosed last spring.

    As Goldman's and others' collateral demands grew, AIG suffered an enormous cash squeeze in September 2008, leading to the taxpayer bailout to prevent worldwide losses. Goldman's payout from AIG included more than $8 billion to settle swaps contracts.

    DuVally said Goldman has made other bets with hundreds of unidentified counterparties to insure its own subprime risks and to take positions against the housing market for its clients. Until the end of 2006, he said, Goldman was still betting on a strong housing market.

    However, Goldman sold off nearly $28 billion of risky mortgage securities it had issued in the U.S. in 2006, including $10 billion on Oct. 6, 2006. The firm unloaded another $11 billion in February 2007, after it had intensified its contrary bets. Goldman also stopped buying risky home mortgages after the December meeting, though DuVally declined to say when.

    I'VE GOT A SECRET

    Despite updating its numerous disclosures to investors in 2007, Goldman never revealed its secret wagers.

    Asked whether Goldman's bond sellers knew about the contrary bets, spokesman DuVally said the company's mortgage business "has extensive barriers designed to keep information within its proper confines."

    However, Viniar, the Goldman finance chief, approved the securities sales and the simultaneous bets on a housing downturn. Dan Sparks, a Texan who oversaw the firm's mortgage-related swaps trading, also served as the head of Goldman Sachs Mortgage from late 2006 to April 2008, when he abruptly resigned for personal reasons.

    The Securities Act of 1933 imposes a special disclosure burden on principal underwriters of securities, which was Goldman's role when it sold about $39 billion of its own risky mortgage-backed securities from March 2006 to February 2007.

    The firm maintains that the requirement doesn't apply in this case.

    DuVally said the firm sold virtually all its subprime-related securities to Qualified Institutional Buyers, a class of sophisticated investors that are afforded fewer protections than small investors are under federal securities laws. He said Goldman made all the required disclosures about risks.

    Whether companies are obliged to inform investors about such contrary trades, or "hedges," is "a very hot issue" in cases winding through the courts, said Frank Partnoy, a University of San Diego law professor who specializes in securities. One issue is how specific companies must be in disclosing potential risks to investors, he said.

    Coffee, the Columbia University law professor, said that any potential violations of securities laws would depend on what Goldman executives knew about the risks ahead.

    "The critical moment when Goldman would have the highest liability and disclosure obligations is when they are serving as an underwriter on a registered public offering," he said. "If they are at the same time desperately seeking to get out of the field, that kind of bailout does look far more dubious than just trading activities."

    Another question is whether, by keeping the trades secret, the company withheld material information that would enable investors to assess Goldman's motives for selling the bonds, said James Cox, a Duke University law professor who also has served on the NYSE advisory panel.

    If Goldman had disclosed the contrary bets, he said, "One would have to believe that a rational investor would not only consider Goldman's conduct material, but likely compelling a decision to take a pass on the recommendation to purchase."

    Cox said that existing laws, however, don't require sufficient disclosures about trading, and that the government would do well to plug that hole.

    In marketing disclosures filed with the SEC regarding each pool of subprime bonds from 2001 to 2007, Goldman listed an array of risk factors that grew over time. Among them was the possibility of a pullback in overheated real estate markets, especially in California and Florida, where the most subprime loans had been made.

    Suits filed by the pension funds, however, allege that Goldman made materially false or misleading statements in its public offerings, failing to disclose that many loans were based on inflated appraisals and were bought from firms with poor lending practices.

    DuVally said that investors were fully informed of all known risks.

    "What's going to happen in the next few years," said San Diego's Partnoy, "is there's going to be a lot of lawsuits and judges will have to decide, should Goldman have disclosed more or not?"

    (Tish Wells contributed to this article.)

    (This article is part of an occasional series on the problems in mortgage finance.)

    COMING TOMORROW

    Since the economic collapse that swept millions of Americans out of their jobs and homes, Goldman Sachs has moved aggressively to recover its losses. The firm is pursuing marginally qualified borrowers into state courts federal and bankruptcy across the country and seeking to seize their homes. McClatchy examines one couple's multi-year attempt to get Goldman to admit that it had purchased their mortgage.

    [Dec 24, 2009] Goldman, Deutsche, and the Destructive Use of Synthetic CDOs Come Into Focus

    Gretchen Morgenson and Louise Story have a good article up at the New York Times on synthetic CDOs (or more accurately, synthetic ABS CDOs, for "asset backed securities" CDOs). The press is finally starting to turn some lights onto one of the activities that played an important role in the crisis, but has not gotten the attention it deserved.

    There has been a tendency to lionize subprime shorts, with no consideration to the destruction they left in their wake. While I am not opposed to stock shorting (all it takes is the uptick rule to prevent bear raids), shorting via CDS is quite another matter, particularly since, with CDS, the exposures are typically a multiple of the value of the cash bonds. Given the levered nature of a short via CDS, this creates a very big incentive for the CDS holders to see if they can take action to make events turn out their way.

    Now that may seem like a peculiar characterization; how could people who shorted subprime have done damage? After all, the housing market is huge. But CDS made the exposures to subprime going bad much bigger than the size of the market, and the parties on the wrong side of the bet were often highly levered players like big capital markets firms (per the BIS, with only 3-4% equity on average) and insurers.

    The part that has surprised me is that the John Paulson story, which Gregory Zuckermann attempted to tell glowingly in his book The Greatest Trade, is actually quite damning. Deutsche Bank and Goldman come off badly too. To make a much longer story short, credit default swaps on mortgages became possible starting in June 2005 when ISDA came up with a protocol. Zuckermann credits Greg Lippmann of Deutsche, a particularly aggressive derivatives salesman, as the moving force behind this effort:

    Lippmann's radical thought was, What if an investment could be created to mimic the existing mortgages? That way, new mortgages wouldn't have to be created to satisfy hungry investors; rather, a "synthetic" mortgage could be sold to them.[emphasis in original]

    In February, Lippmann called traders from Bear Stearns, Goldman Sachs, and a few other firms struggling with the same issues, inviting them, along with a battalion of lawyers, to a conference room at Deutsche. Sitting around a blond-wood conference table, they debated ideas into the night, while picking at take-out Chinese food. Their light-bulb idea: Create a standardized, easily traded CDS contract to insure mortgage-backed securities made up of subprime loans

    Yves here. Zuckermann contends that Paulson went to Wall Street to create synthetic CDOs so Paulson could short subprime. Paulson was open about his intention: he wanted to create the deal (by funding the equity tranche, typically 4-5%) and go short the ENTIRE deal, that is, buy all the CDS used in the synthetic CDO (well probably not all; even subprime CDOs had to have a certain potion be less drecky stuff). This was an out and out plan to toast the party on the other side, particularly since the party funding the equity layer had (at a minimum) veto rights (which in this case could be used to exclude better quality exposures!).

    Bear Stearns, ironically, thought the Paulson plan did not pass the smell test, but Deutsche and Goldman were eager. Paulson was responsible for creating $5 billion in synthetic CDOs, but in the end this was not his main mechanism for shorting the subprime.

    To the New York Times article. It's good yet odd. It does signal very clearly the destructive potential of synthetic CDOs. It presents Goldman's synthetic CDO program as first a way to lay off its exposures, later a way to get short for fun and profit. It has a graphic that shows a sampling of deals. Reading between the lines, it looks as if the authors are on the Goldman-AIG trial, but going where the story and their sources take them, which was into the bigger question of the use of synthetics:

    Pension funds and insurance companies lost billions of dollars on securities that they believed were solid investments, according to former Goldman employees with direct knowledge of the deals who asked not to be identified because they have confidentiality agreements with the firm.

    Goldman was not the only firm that peddled these complex securities - known as synthetic collateralized debt obligations, or C.D.O.'s - and then made financial bets against them, called selling short in Wall Street parlance. Others that created similar securities and then bet they would fail, according to Wall Street traders, include Deutsche Bank and Morgan Stanley, as well as smaller firms like Tricadia Inc., an investment company whose parent firm was overseen by Lewis A. Sachs, who this year became a special counselor to Treasury Secretary Timothy F. Geithner….

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

    The article also indicates that Goldman engaged in Paulson-like behavior, teeing up the deals (presumably providing the equity tranche) and took pretty much the entire short side (the reason we highlight this issue is we believe some firms were stealthier and teed up CDOs without buying all the CDS protection created by the deal):

    Rather than persuading his customers to make negative bets on Abacus, Mr. Egol kept most of these wagers for his firm, said five former Goldman employees who spoke on the condition of anonymity. On occasion, he allowed some hedge funds to take some of the short trades.

    The piece also indicates that official investigations are honing in on the key question:

    One focus of the inquiry is whether the firms creating the securities purposely helped to select especially risky mortgage-linked assets that would be most likely to crater, setting their clients up to lose billions of dollars if the housing market imploded.

    Yves here. Um, exhibit one is the Zuckermann book…I cannot believe Paulson gave out so much ammo to critics, and that no one in the officialdom (yet) seems to have decided to make use of it.

    The story also mentions how the dealers stacked the deck in their favor:

    In early 2005, a group of prominent traders met at Deutsche Bank's office in New York and drew up a new system, called Pay as You Go. This meant the insurance for those betting against mortgages would pay out more quickly. The traders then went to the International Swaps and Derivatives Association, the group that governs trading in derivatives like C.D.O.'s. The new system was presented as a fait accompli, and adopted.

    Other changes also increased the likelihood that investors would suffer losses if the mortgage market tanked. Previously, investors took losses only in certain dire "credit events," as when the mortgages associated with the C.D.O. defaulted or their issuers went bankrupt.

    But the new rules meant that C.D.O. holders would have to make payments to short sellers under less onerous outcomes, or "triggers," like a ratings downgrade on a bond. This meant that anyone who bet against a C.D.O. could collect on the bet more easily.

    "In the early deals you see none of these triggers," said one investor who asked for anonymity to preserve relationships. "These things were built in to provide the dealers with a big payoff when something bad happened."

    Yves here. The New York Times is running this as a front page story, but on one of the slowest business days of the year, which means it may have less impact than it should. Design or an accident of timing?

    Selected Comments

    Michael M Thomas:

    "So if it was synthetic, you were effectively a protection seller and stood to take a loss if the market cratered. The protection buyers were the shorts that made the synthetics possible."

    This is what needs to be understood. Goldman was buying protection from the same investors to whom it was flogging these synthetic CDOs. This would add X basis points of notional pass-through yield from the "underlying" CDOs. Probably while expressing a grudging willingness to do so in the interest of facilitating its customers' thirst for yield. And permitting GS to assert, when and if, that it was sharing the risk with its customers.

    This is a process that needs to be made comprehensible to an intelligent tenth-grader. It deserves more outrage than it can possibly generate if explications remain obtuse and confusing.

    Banks Bundled Bad Debt, Bet Against It and Won - Readers' Comments - NYTimes.com

    Jake Wagner

    Markets are regulated so that ordinary investors have a "level playing field" when they make their investments. You will recall that a few years back Martha Stewart went to jail because she traded on insider information that she had on Imclone shares.

    Now it appears that insider trading was standard practice for the large investment banks such as Goldman Sachs, who shorted CDO's that they themselves had created in order to make a small fortune when housing prices collapsed.

    I am outraged that Martha Stewart went to jail, yet insiders in Goldman Sachs and other Wall Street traders were able to manipulate the market to make a small fortune while retirement funds for millions of Americans took a hit. Many will be working far into their 70's to make up for losses in their retirement funds, in order that Goldman Sachs and other investment banks could make profits at their expense.

    Part of the problem must be that since they were poorly regulated, there are no explicit laws which send traders to jail when they trade CDO's and credit default swaps using insider information. Indeed, this lack of transparency is exactly what has made insider trading in these securities so profitable for insiders.

    We saw such financial engineering before in the case of Enron. In that case, CEO Jeff Skilling went to jail. We can only hope that vigorous prosecution in the current insider trading scandal will also result in jail time for the perpetrators.

    NYC Father

    Speaking as someone who worked in the IT and risk area for credit derivatives at one of the largest financial institutions -- it was fraud on a massive scale.

    Nobody really believed the risk management numbers for CDO's were anything more than so many angels dancing on the head of a pin. I'm talking about the quants/mathematicians, the traders and most of all the high level executives at the top of the fixed income food chain.

    What they did believe was that bonuses were paid out on an annual basis for performance that was measured largely by sales. Not the eventual value of the trades, which ended up being worthless.

    These bankers should be dressed in orange pajamas and sent down to Guantanamo. They are the real terrorists. Not the fake movie style terrorists and bank robbers that the government wants us to believe in -- who wear masks and carry guns.

    No, these are the real bank robbers who work inside the institution and would need tractor trailers to carry out all the money. Real bank robbers wear suits and have the money transferred directly to their own bank accounts.

    What a joke that Goldman pretends to be innocent, and claims to have "paid off their TARP money," while their biggest creditors -- including AIG -- were given huge amounts of taxpayer dollars to pay off trades they had with Goldman.

    The Goldman bonuses are our tax dollars at work. Plain and simple.

    I was a witness to history. I saw it happen. The mathematical models were so complex even the mathematicians made jokes about them.

    Well, the joke is on all Americans.

    KF

    I am a lawyer who used to work on some of these deals. The whole time I worked on synthetic CDOs (in 2006 and 2007) I kept wondering how it was possible that we made it seem like everybody was going to make money forever for that was the impression created by marketing materials referred to in the article. These deals were making money out of thin air, it seemed to me, so somoeone would have had to foot the bill. I kept asking my boss about it, but he just talked about the "equity tranche" (the lowest rated bonds) taking the hit if something happened to housing prices, but it being very unlikely that the highest rated bonds would be affected.

    Of course, billions of dollars of securities are not (ought not be be) bought by sophisticated investors based on a 20-page power point presentation by a sales guy. Investors agree to buying securities based on offering documents and other long and convoluted contracts drafted up by lawyers like I used to be. We made sure that every piece of disclosure and warning required by (the, admittedly, very few) applicable laws and regulations was there.

    The reality is, of course, that the Rating Agencies' seal of approval was all that mattered and these "sophisticated investors" were all too happy to promise to hand over the cash some time in the future for what seemed like a safe and lucrative investment. Some of them likely didn't truly understand that they were, in effect, selling protection on these risky securities and many of them probably didn't do all the research and investigation they implied they did by buying the securities.

    The banks did something that is clearly wrong. They should not be able to bet against the investments they are selling to their clients; that just doesn't feel right. BUT, I am not sure, unfortunately, that what they did was technically illegal. I will be curious to see what the SEC and FINRA come up with, but based on how these documents were drafted and the type of investors who bought the securities I think they will have a difficult time nailing down securities laws violations.

    Is The Market Rigged - By Simon Maierhofer

    December 18, 2009 | Yahoo! Finance

    A record winning streak and no taxes

    The Financial Times reported that Goldman Sachs suffered only one losing day during the 65 business days of the third quarter. On 36 separate days during the quarter, the firm's trades netted more than $100 million.

    In addition, Bloomberg reported that Goldman Sachs' effective income tax rate for 2008 was 1%. In dollars, Goldman's tax liability was $14 million. For the same year, Goldman reported a $2.3 billion profit and paid out $10.9 billion in bonuses.

    One could argue that a record of 90%+ winning trades and a 1% tax rate could only be accomplished with certain connections to high-ranking government personnel.

    Spitzer, Partnoy, Black Call for AIG Open Source Investigation (and Goldman Implications)

    An op-ed in the Sunday New York Times by former investigators and prosecutors Eliot Spitzer, Frank Parnoy, and William Black calls for AIG to put non-privileged e-mails, accounting documents, and financial models on line to allow for an "open source" investigation. The questions they want to examine include:

    As fraud investigators, we would like to examine the trading patterns of A.I.G.'s financial products division, and its communications with Goldman Sachs and other bank counterparties who benefited from the bailout. We would like to understand whether the leaders of A.I.G. understood that they were approaching a financial Armageddon, and whether they alerted their counterparties, regulators and shareholders to the impending calamity.

    We would like to see how A.I.G. was able to pay huge bonuses to its officers based on the short-term income they received from counterparties for selling guarantees that, lacking adequate loss reserves, the companies would never be able to honor. We would also like to know what regulators knew, and what they did with the information they had obtained.

    This idea no doubt will strike most readers as quixotic. But the authors point out that three individuals have the power to force this to take place:

    A.I.G.'s board of directors, a distinguished group of senior business executives, holds the power to decide whether to publish the e-mail messages and other documents. But those directors serve at the behest of A.I.G.'s shareholders. And while small shareholders of public corporations generally do not have the right to force publication of internal documents, in this case one shareholder - the taxpayer - holds an 80 percent stake. Anyone with such substantial ownership has effective control over corporate decisions, even if the corporation is a large public one.

    Our stake is held by something called the A.I.G. Credit Facility Trust, whose three trustees are Jill M. Considine, a former chairman of the Depository Trust Company and a former director of the Federal Reserve Bank of New York; Chester B. Feldberg, a former New York Fed official who was chairman of Barclays Americas from 2000 to 2008; and Douglas L. Foshee, chief executive of the El Paso Corporation and chairman of the Houston branch of the Federal Reserve Bank of Dallas.

    Ultimately, these three trustees wield all the power at A.I.G., and have the right to vote out the 11 directors if the directors are unwilling to publish the e-mail messages. In other words, if these three people ask A.I.G.'s board to post the messages and other documents, the board will have no choice but to comply. Ms. Considine, Mr. Feldberg and Mr. Foshee have the opportunity to be among the most effective and influential investor advocates in history. Before A.I.G. escapes, they should demand the evidence.

    This is a good proposal, but I have a far more basic question: why was no forensic work done as a requirement of the bailouts? The Swiss Federal Banking Commission required UBS to perform an extensive investigation of exactly what it did so wrong that it needed a government handout, and it hired (presumably at the insistence of the regulators) third parties to conduct the investigation. It provided considerably more detail than any bank has provided so far of how a firm with a solid franchise drove itself into an abyss.

    Why has there been NO serious investigation of ANY kind of the recipient of such extraordinary taxpayer largesse? Why has virtually NOTHING been demanded of them? Why the unseemly rush to let them off the hook and let them "pay back the TARP"? This is completely unwarranted in the case of AIG, which has had its deal with the government retraded in AIG's favor a full four times. Why has AIG at every turn gotten a better and better deal, each time at the public's expense, and is now allowed to lobby that it should be freed of its obligations? No private sector lender would allow a troubled borrower that could not meet its commitments to renegotiate and get IMPROVED terms. The inability to meet the terms of the original funding (one on terms private sector lenders were willing to consider, and that per Sorkin, AIG itself proposed) only strengthens the case to continue with the original plan, which is to break up AIG and sell the pieces for what they can fetch. This is the course that would yield the highest returns to the public, and that program will not produce a systemic event, which should be the ONLY offsetting consideration. There is no business rationale to have an agglomeration of diverse insurance businesses, particularly one that has been as badly managed as AIG (Sorkin's account also reveals a shocking lack of financial and operational controls).

    So why have there been no investigations? In AIG, the Goldman conspiracy theorists have a real case. Consider this commentary from a reader who was a senior executive at a monoline, on an article that looked like a PR effort to get ahead of a possible source of trouble for Goldman. The Wall Street Journal story noted that Goldman guaranteed $23 billion of CDOs with AIG and allegedly made a mere $50 million…. which is utter bullshit. Normal CDO originating spread are 1.25% to 1.5%. Its profits on these deals, separate on how it might have booked its trades with AIG, was at least $287.5 million. Even more important, a some of these trades were part of its Abacus program, which was a series of synthetic CDOs that it used to lay off its real estate risk (both RMBS and CMBS). In other words, the "short subprime" trade that everyone has lauded Goldman for was in part, if not in significant measure, borne by taxpayers.

    The most curious part of this pattern is that Goldman used ONLY AIG for its CDO guarantees; all other banks also used the monolines to a significant degree. So Goldman would benefit far more than other firms from an AIG rescue; they would all still lose out on their monoline exposures.

    The monolines started hitting the wall before Goldman did; in fact, their wobbly state played a direct role in the failure of the auction rate securities market (Feb 2008), when it became clear that Eric Dinallo's efforts to create a bailout for Ambac and MBIA were likely to come to naught (the monolines were major guarantors of municipal paper, and municipalities were major issuers of ARS). Both retail investors and municipalities suffered as a result (retail investors who needed access to their funds but could not get liquidity; issuers who had to pay penalty rates because their maturing paper could not be rolled). The monolines, who Goldman had not used, were allowed to twist in the wind, but AIG was rescued. And Goldman hands are far from clean. From a reader who was a senior executive at a monoline on the WSJ story:

    I find it amazing that after stuffing AIG with $23 billion of CDOs, which lead to AIG failing, Goldman's spokesman has the audacity to blame the problem on AIG. meanwhile, Goldman researchers and CFO were criticizing Merrill and Citi for taking on so much exposure to the other bond insurers and insisting that these insurers not get bailed out. It also highlights again how outrageous it was that Goldman and the others gold paid off at par for taking a combination of CDO and AIG risk while the rest of the world (investors and insurers) got burned for taking CDO risk. The Goldman spokesperson acts indignant at the suggestion that somehow they shouldn't have gotten this. This was the scam they played with the Fed.

    While the subprime deals and CDOs were obviously going bad, an argument was made by many people at the time that the aggressive mark downs by AIG acelerated the death spiral for the market. It is pretty clear, here and elsewhere, that Goldman was the one that initiated the mark downs of collateral value. it would be interesting to explore this all the way through. Though not discussed in this article, Goldman shorted subprime through the Abacus deals, and perhaps elsewhere. this gave them an incentive to force mark downs. the intermediation deals described in the article, combined with AIG's collateral posting, gave them another incentive to be agressive with mark downs. they were acting like they wanted to grab the money before anyone else could get their hands on it. this would have raised some issues in an AIGFP bankruptcy. (note – Hank Greenberg suggested that this was going on in his october 2008 testimony but there was a chorus of attacks on him for being a crook and unreliable, thanks to his problems with Spitzer.)

    So here we have the pattern:

    1. Goldman creates or sells $23 billion (or more) of CDOs and stuffs them into AIG.

    2. Goldman proclaims to the world they have no exposure to CDOs and warns that banks and insurers with CDO exposure will get downgraded.

    3. Goldman initiates the mark downs of CDOs with AIG and others, acelerating the market's downward spiral.

    4. Huge mark to market losses lead insurer and bank credit to freeze, short term markets to lock up, ABCP to collapse.

    5. AIG posts as much collateral as it has to Goldman, who has more aggressively marked down the exposure.

    6. Bond insurers are downgraded, banks begin commutations with them.

    7. AIG fails, Fed steps in, Goldman gets bailed out at par.

    Yves here. This looks like no accident. I suspect it was no accident. And no one in authority wants to find out where the truth lies.

  • Charles Frith:

    I was hugely impressed with Eliot Spitzer's interview on BBC Worldwide. He squirmed a bit on the personal stuff but with regard to his pursuit of truth and justice he came across as the real deal.

  • Blurtman:

    Any idea if Goldman bought CDS on AIG, and then destroyed the company?

  • Itamar Turner-Trauring:

    I started reading Richard Koo's "Holy Grail of Macroeconomics" about Japan's great recession; his description of how insolvent companies with positive cash flow proceed seems apropos. The management of the company will attempt to hide the insolvency from employees, creditors, suppliers, investors less they jump ship or cut off resources. Those creditors who do know about the problem try to keep quiet as well, so that the value of their investments doesn't crash. So long as the company is cash flow positive and can pay for its debt this can continue. Koo writes that "… balance sheet recessions [are] invisible and inaudible." Eventually Japanese corporations paid off their debt, and meanwhile government spending took the place of the reduced corporate spending caused by debt paydown.

    Keeping in mind that this is a book with an approving quote from Larry Summers on the cover, we can assume that the government has at least some knowledge of Koo's model. So quite possibly in this case we have a third party that is knowing but silent: the government, trying to help the insolvent banks earn their way out of the hole every way it can … and trying very hard to make sure no one notices how insolvent they really are.

  • mike:

    Finally, attention is being paid to the topic of who benefits from collateral valuation markdowns

    There's a bigger story to mine there. William Cohan discussed it too briefly in his book on Bear Stearns' collapse, which you can read here:

    http://money.cnn.com/2009/03/02/magazines/fortune/cohan_houseofcards5.fortune/index.htm

  • attempter

    Why has there been NO serious investigation of ANY kind of the recipient of such extraordinary taxpayer largesse? Why has virtually NOTHING been demanded of them? Why the unseemly rush to let them off the hook and let them "pay back the TARP"?
    So why have there been no investigations? In AIG, the Goldman conspiracy theorists have a real case.

    I don't see why anybody outside the establishent should call it a "conspiracy theory".

    To argue that Goldman has captured the government through many years of high-level infiltration of personnel and campaign contributions, so that by 2008 the (any) administration literally believes "what's good for Goldman is good for America" and enacts policy based on this principle, and that the proximate goal of the AIG bailout was to launder a bailout to GS, is the theory which best fits the evidence, while no other theory fits the evidence anywhere near as well.

    (Personnel placement far more systematic than the normal revolving door, campaign contributions, how Bear and Lehman were allowed to be destroyed, how GS itself may have helped engineer Bear's immediate collapse through a dubious novation refusal, all the tricky moves with AIG detailed above, how Blankfein was the only CEO seemingly deputized as a de facto government official to attend the Fed's consultations on AIG, yet how just days earlier Geithner had refused to discuss AIG at the Lehman conclave when JPM and Citi wanted to talk about it, and then of course the bailout and Goldman laundering itself, and all the subsequent AIG bailouts, and the psychotic secrecy about it all…)

    Occam's Razor itself demands this way of looking at it.

    The same is true of the bailout as a whole. Detractors and the people at large instantly and correctly recognized it as nothing but a massive loot job. Here too every subsequent piece of evidence has proven us 100% correct.

  • Adrian Burridge

    Great questions.

    From a foreigners point of view, one can only hope that America's leaders provide answers.

    Yours Sincerely,

    Adrian Burridge
    CanadianInvestors.com

  • Independent Accountant:

    YS:
    Amen! I've followed the AIG-Goldman story for over a year. It is clear to me that no one in the US government wants to expose what really happened at AIG. Why not? All roads lead to the Vampire Squid and its "former" executives like Hank Paulson.

  • Independent Accountant:

    The trio writes, "So far, prosecutors have been unable to build such evidence into anything resembling a persuasive case against any financial institution". This is an indictment of the SDNY US attorney's office. Preet Bharara (PB), are you listening? I can write the indictments for you. I accuse PB of "wilful blindness" in not handing out indictments like haloween candy in the AIG-Goldman scam. Yes, you PB. If you can't find the "ostrich instruction" West's Key, here it is: criminal law 772(5). Now read it and pull half of Vampire Squid's (VS) officers out of 85 Broad Street. In handcuffs. See how easy this is? I've even given you VS's address! Show us peasants that VS doesn't own the SDNY US attorney's office. No more crap from you and Benton Campbell like the Bear Stearns Two case. PB, we're watching you.

  • Peter T:

    Get over Eliot Spitzer's past minor transgression already and make him chief investigator of Wall Street past major sins.

  • Michel Delving :

    Monolines did not just hit the wall. They were smashed into it. Proprietary traders rigged their bets using a steady stream of servicing data from subsidiary servicers engaged in fabricating bogus mortgage defaults. MBIA is fighting back, citing inappropriate mortgage servicing by Credit Suisse subsidiary Select Portfolio Servicing
    in this recent suit: http://www.mbia.com/investor/publications/603751-09-complaint.pdf

    And yet, mortgage servicing fraud continues to feed CDS casinos and no doubt servicers are already ramping up for Markit's launch of ABX.PRIME which is certain to be another stacked deck. Just like ABX.HE, market makers will select reference entities, paint targets on them and servicers will go to work making those credit events happen.

    Goldman Fueled AIG Gambles: Wall Street Titan's Role Shown in Journal Analysis; Firm Says Problems Hidden

    By SERENA NG and CARRICK MOLLENKAMP

    Goldman Sachs Group Inc. played a bigger role than has been publicly disclosed in fueling the mortgage bets that nearly felled American Insurance Group Inc.

    Goldman was one of 16 banks paid off when the U.S. government last year spent billions closing out soured trades that AIG made with the financial firms.

    A Wall Street Journal analysis of AIG's trades, which were on pools of mortgage debt, shows that Goldman was a key player in many of them, even the ones involving other banks.

    [GSAIG_D]

    Goldman as Middleman

    Goldman originated or bought protection from AIG on about $33 billion of the $80 billion of U.S. mortgage assets that AIG insured during the housing boom. That is roughly twice as much as Société Générale and Merrill Lynch, the banks with the biggest exposure to AIG after Goldman, according an analysis of ratings-firm reports and an internal AIG document that details several financial firms' roles in the transactions.

    In Goldman's biggest deal, it acted as a middleman between AIG and banks, taking on the risk of as much as $14 billion of mortgage-related investments. Then Goldman insured that risk with one trading partner-AIG, according to the Journal's analysis and people familiar with the trades.

    The trades yielded Goldman less than $50 million in profits, which were mostly booked from 2004 to 2006, according to a person familiar with the matter. But they piled risks onto AIG's books, which later came to haunt the insurer and Goldman. The trades also gave Goldman a unique window into AIG's exposure to losses on securities linked to mortgages.

    When the federal government bailed out the insurer, Goldman avoided losses on its trades with AIG covering a total of $22 billion in assets.

    A Goldman spokesman says that up until AIG was rescued by the government, the insurer "was viewed as one of the most sophisticated financial counterparties in the world. It wasn't until the government intervened in September 2008 that the full extent of AIG's problems became apparent."

    "What is lost in the discussion is that AIG assumed billions of dollars in risk it was unable to manage," the Goldman spokesman added.

    An AIG spokesman declined to comment on the firm's trades with Goldman.

    More clarity has emerged recently over the roles that firms such as Goldman played, as complex deals carried out by banks are now being untangled in legal and regulatory inquiries. Last month a government audit of part of the AIG bailout described Goldman's middleman role.

    One of Goldman's trades with AIG involved a financial vehicle called South Coast Funding VIII. South Coast was one of many pools of bonds backed by individual homeowners' mortgage payments that Wall Street turned into collateralized debt obligations or CDOs.

    Merrill Lynch, now part of Bank of America Corp., underwrote the South Coast CDO in January 2006 by stuffing it with packages of home loans originated by firms such as Countrywide Financial Corp., the big California lender.

    Once a CDO debt pool is assembled, it is sliced into layers based on risk and return. Merrill sold the safest, or top layer, of deals like South Coast to large banks, including in Europe and Canada.

    The banks wanted protection in case the housing market tanked. Many turned to Goldman, which effectively insured the securities against losses. Then, to cover its own potential losses, Goldman bought protection from AIG, in the form of credit-default swaps.

    Goldman charged more than AIG for the protection, so it was able to pocket the difference, making millions while moving the default risks to AIG, according to people familiar with the trades.

    The banks eventually realized they didn't need to use Goldman as a middleman.

    The trades seemed prudent at the time given AIG's strong credit rating and the fact that AIG agreed to make payments to Goldman, known as collateral, if the value of the CDOs declined. The trades were also low risk for Goldman as long as AIG stayed afloat.

    Other banks also acted as middlemen, including Merrill Lynch, which did roughly $6 billion of these deals compared to $14 billion for Goldman, according to people familiar with the trades and the analysis of banks' exposures to AIG.

    "It seems shocking to me that Goldman would become so exposed to AIG and kept doing deals with them and laying on the risk," says Tom Savage, a former chief executive of AIG's financial products unit who left in 2001 before the explosive growth of insuring mortgage-debt pools.

    The middleman trades began to unravel in mid 2007 when the U.S. mortgage market started slumping. Goldman was the first of AIG's trading partners to notify AIG that the CDOs were losing value and demand collateral. Other banks including Société Générale and a unit of Credit Agricole that had bought insurance from AIG eventually did the same.

    A Goldman spokesman said that between mid-2007 and early 2008, Goldman showed AIG "market price levels" at which trades could be undone, allowing AIG to decrease its risk, but "AIG refused to accept that the market was deteriorating."

    When Goldman didn't get as much collateral as it wanted from AIG, in 2007 and 2008 it bought protection against a default of AIG itself from other banks.

    AIG officials were skeptical of the prices Goldman presented, according to the minutes of a February 2008 AIG audit committee meeting, which noted that Goldman was "unwilling or unable to provide any sources for their determination of market prices."

    Additional calls for collateral from Goldman and other banks eventually led to AIG's September 2008 bailout and led the New York Federal Reserve two months later to fully cover $62 billion of insurance contracts Goldman and 15 other banks had with the financial products unit of AIG.

    Goldman's other big role in the CDO business that few of its competitors appreciated at the time was as an originator of CDOs that other banks invested in and that ended up being insured by AIG, a role recently highlighted by Chicago credit consultant Janet Tavakoli. Ms. Tavakoli reviewed an internal AIG document written in late 2007 listing the CDOs that AIG had insured, a document obtained earlier this year by CBS News.

    The Journal analysis of that document in conjunction with ratings-firm reports shows that Goldman underwrote roughly $23 billion of the $80 billion in mortgage-linked CDOs that AIG agreed to insure.

    One such deal was called Davis Square Funding VI. That CDO, assembled by Goldman in March 2006, contained mortgage securities underpinned by subprime home loans originated by firms such as Countrywide and New Century Mortgage Corp., one of the first subprime lenders to fail in 2007.

    A big investor in Davis Square's top layer was Société Générale, which bought protection on it from AIG, according to the internal memo. The French bank was the largest beneficiary of the New York Fed's Nov. 2008 move to pay off banks in full on their AIG insurance contracts.

    A company financed largely by the New York Fed ended up owning both the Davis Square and South Coast CDOs. Société Générale received payments from AIG and the New York Fed totaling $16.5 billion.

    Goldman received $14 billion for its trades that were torn up, including $8.4 billion in collateral from AIG.

    A representative of Société Générale declined to comment.

    The special inspector general for the Troubled Asset Relief Program, which recently reviewed the New York Fed's effort to stanch collateral calls last year, said Goldman officials said the company believed it would have been fully protected had AIG been allowed to fail because of collateral it had amassed and the additional insurance it had bought against an AIG default.

    The auditor, however, questioned that conclusion. The report said Goldman would have had a difficult time selling the collateral and that the firm might have been unable to actually collect on the additional insurance.

    -Amir Efrati
    contributed to this article.

    Elliott Widaski

    When the federal government bailed out the insurer, Goldman avoided losses on its trades with AIG covering a total of $22 billion in assets."

    Isn't that an interesting coincidence. I wonder what Hank Paulson knew and when he knew it. GS has certainly done well, after all they are one of the most "financially sophisticated" companies on Wall Street.

    Sudhir V

    You mean the $17 Billion Bonus pool set by Goldman was funded by US Treasury? You mean US borrowed from China to pay GS wiseguys big fat bonuses? Surprised?

    Cate Long

    Excellent reporting on a complex topic.

    Treasury Secretary Geithner testified about the role of the NY Fed in the AIG bailout at the Congressional Oversight Panel yesterday.

    See here starting about 100 minutes: http://cop.senate.gov/hearings/library/hearing-121009-geithner.cfm

    Franklin Brock

    Let's also not forget that Hank Paulson allowed Lehman to fail, and pretty much pushed Merrill Lynch into the arms of B of A.

    So, Paulson bailed out Goldman Sachs, and destroyed their largest competitors.

    Will the readers of the WSJ finally wake up to the fact that we have Crony Capitalism / Socialism for the Rich in these United States?!?!?!

    DAVID LAWRENCE:

    Blaming Goldman is a bit like blaming a gas station attendant for Molotov cocktails. "Would you like matches with that sir?" The line can become blurry depending on what was known and when.

    Franklin Brock:

    In this case, Goldman ran the gas station, pumped the gas into the bottle, inserted the fuse, lit the match, and used flame retardant (Paulson and US taxpayer funds) to avoid the heat while the rest of us got burned alive.

    Allen Chambers

    What is perhaps even more interesting is that Goldman KNEW AIG wouldn't have the cash and couldn't encumber regulated, insurance assets in the event of default. It seems reasonable to conclude that Goldman developed a game plan in advance. More than bit curious why the other insurers were not bailed out and settled contracts for less than par.

    If we can investigate Clinton's sex life, we can certainly investigate this. The problem is that both parties are in on this one.

    Wayne Baimbridge

    Good point Allen, it speaks volumes about how politics run on the hill. It doesn't matter what party you gravitate toward anymore. Politicians are virtually owned by special interests and the special interests have nothing to do with the U.S. Constitution's definition of public funds and how they are suppose to be used.

    Special interests are about profits supported by government policy toward large corporations. While OB trashed the pharmaceutical companies they contributed 3 times more money into his campaign than they did John McCain. Why? Because, they knew that national health care was No.1 on his agenda. They had to calculate which of the two would wind up improving their bottom line. It wasn't McCain.

    What does that make O.B.? He's a politicians. And, ideology is not part of his agenda, it's how to best achieve his agenda and if sleeping with the devil is part of that, then so be it.

    OK, OK, I'll stop before this turns into a rant... actually it came pretty close to that....

    My two cents....

    SANORAN TRIAMESH

    We will never know the truth about GoldmanSach and AIG, since King Bernanke is being protected by Obama.

    But we can derive some conclusions. These guys were playing for Billions. They (GoldmanSachs) did make lots of money already. Some of that money must have ended up as kickbacks to Obama/Federal Reserve staff