New Geography

Tag: Goldman Sachs

  • Goldman Profited from Crisis – Shocking!

    If someone is just finding out last week that Wall Street is profiting from the crisis it created, then I have only one question for them – “what rock have you been living under for the last two years?”

    I’ve been shining a bright light on this since I first joined NewGeography.com to cover finance. From one of my first articles in November 2008, where I explained the nuances of financial innovations – “Who stands to gain? … Citigroup, Goldman Sachs, JP Morgan and Morgan Stanley …. You can do the math from there.” – to recent blogs on the impact of stimulus and bailout spending – “Goldman Sachs … even got transaction fees for managing the Treasury programs that funded the bailouts.” – I hope that it has been more obvious than painful that you have to take personal responsibility for your finances because you can’t rely on Wall Street to do it for you.

    Last week, the SEC charged Goldman Sachs with civil fraud. On Friday, a group of investors filed a lawsuit against Goldman’s executives for behaving in an “unlawful” manner and for “breaches of fiduciary duties” – meaning they were reckless with other people’s money. Goldman is also being sued by the Public Employee’s Retirement System of Mississippi for lying about the real value of $2.6 billion in mortgage-backed securities (MBS). I remind you that there’s a good chance that Goldman (and other Wall Street banks) were and are selling MBS that don’t have mortgages behind them – as I like to put it, there’s no “M” in their “BS”.

    In a nauseating twist to the story, AIG (according to sources for the Business Week article) insures Goldman’s board again investor lawsuits – so AIG may be paying the costs of defending Goldman’s executives in addition to any fines or settlements on the cases. AIG is still on bailout life support from US taxpayers. In December 2009, the Federal Reserve Bank of New York took $25 billion worth of AIG preferred stock as partial payback for the $182.3 billion bailout.

    Even less shocking to readers of NewGeography.com should be the story that the SEC lawyers were busy surfing the internet for pornography when they should have been preventing this stuff from happening in the first place. I wrote an article last February about bailed-out Wall Street bankers spending taxpayer money on prostitutes. Those SEC staffers will need to be up to date on all things unholy when they head for the door that leads them to more lucrative jobs on Wall Street.

    Like the arsonist who gets the insurance payoff after burning down his own house, the Wall Street bankers profited from transaction fees in creating the crisis, profited from the bailout payoffs funded by the U.S. taxpayers and they continue to profit from their credit derivatives as the whatever was left standing begins to collapse around us. Like most Americans, I think I’d get some sense of satisfaction from seeing someone in handcuffs over what has been done to the value of our savings and the global reputation of our capitalist system.

  • Goldman’s Failure to Disclose

    The big news in finance this week is that Goldman Sachs got busted – finally – for fraud related to those mortgage-backed bonds. At the heart of the Securities and Exchange Commission charges is the accusation that Goldman Sachs failed to disclose conflicts of interest it had on some mortgage investments. One of the charges that Michael Milken plead guilty to in the 1980s was the failure to disclose. “This type of non-disclosure has [not since] been the subject of a criminal prosecution,” according to his website. The charges against Goldman are for civil fraud. The difference between civil and criminal cases is that civil cases are usually disagreements between private parties; criminal cases are considered to be harmful to society as a whole. The judge in the Milken case found that his failure to disclose resulted in $318,082 of financial damage. The SEC is charging that Goldman’s failure to disclose resulted in a $1 billion loss to investors. The former resulted in criminal charges, the later in civil. One has to wonder, given Milken’s 10-year sentence for a relatively small dollar-valued infraction, what would be appropriate in this case.

    The only criminal case related to the financial crisis that has been brought against any Wall Street executive so far was against two Bear Stearns hedge fund managers. They were found not guilty in November of “falsely inflating the value of their portfolios.” Theirs was a crime of commission not omission – they were charged with actively lying to investors and not with failing to disclose information. The closest situation that might result in criminal fraud charges for failure to disclose will be if the Justice Department pursues charges against Joseph Cassano, the AIG accountant who failed to disclose information about the magnitude of the losses AIG had insured. Federal prosecutors have been investigating this since at least April 2009 – information about investigations is not made public, including if the investigation has been dropped, so we don’t know for sure that there aren’t charges in the pipeline.

    All this Wall Street activity that resulted in the US taxpayers forking over $3.8 trillion in bailout money – it’s really hard to imagine that some good-guy-with-a- badge somewhere can’t figure out who harmed our society as a whole.

  • Over-Charged and Under-Stimulated

    As we reported in July of last year, Goldman Sachs and other US bank bailout success stories are reaping big dollar benefits from the “nebulous world of public-private interactions.” Goldman Sachs – somehow always first in line for these things – even got transaction fees for managing the Treasury programs that funded the bailouts.

    Now, the senator in my neighboring state of Iowa is once again trying to wake up Congress to the facts. You may recall that Senator Chuck Grassley (D-IA) admitted almost a year ago that he and the other members of Congress were fooled into voting for the bailout because they thought former-Treasury Secretary Paulson actually knew what the hell he was doing when he asked for $750 billion in the fall of 2008. “When it’s all said and done, you realize he didn’t know anything more about it than you did.”

    Late last week, the Huffington Post called our attention to a letter that Senator Grassley sent to Goldman Sachs about the fees they will collect on the next bit of federal stimulus – bonds that are used to underwrite the latest jobs bill. Grassley points to a November 27 report from Bloomberg News for some evidence that Goldman may be over-charging local governments by more than 30 percent above what is normally charged for bond underwritings (i.e., handling the paperwork and rounding up some buyers).

    In Grassley’s letter, he includes a quote in the article to the effect that the local governments don’t care about the fees since there is a “large subsidy.” However, according to The Financial Times of London – and we agree with their assessment – Goldman and others are able to charge excessive fees because the financial crisis reduced their competition. When banks were required to raise more capital before they could pay back their bailout money, they did – and earned record fees for themselves in the process!

    It is eerily similar to the driving forces behind the “subprime crisis” that was repeatedly blamed for the financial crisis. The financial sector gains its profits from fees – issuance fees, trading fees, underwriting fees, etc. – unheeding of the impact on the real economy, taxpayers and the cost to the nation as a whole.

  • Goldman’s Gunslingers: 401k + 9mm = 666?

    In the new Wall Street math of the post-9/08 world, it seems that some people turn to humor and others to rage. First they burned down our 401k plans: some people found this funny and made jokes about their “201k” plans. The French got angry and took CEOs hostage. Now, Goldman bankers are buying semi-automatic weapons to protect themselves from the angry mob. Matt Taibbi is desperately seeking humor in this, currently rating it a 7 on a scale of 1 to 10. Alice Schroeder, the story’s originator, finds it humorless, suggesting there could (should?) be “proles…brandishing pitchforks at the doors of Park Avenue.”

    In true on-the-ground reporting, a Bloomberg reporter wrote a story after a friend told her that he had written a character reference so that a Goldman Sachs banker could get a gun permit. Alice Schroeder (author of “The Snowball: Warren Buffett and the Business of Life”) also recounts a few examples of Goldman bankers using their other-worldly prescience to protect themselves: Goldman Sachs Chief Executive Office Lloyd Blankfein – only too well known now for saying that Goldman is doing “God’s work” – got a permit “to install a security gate at his house two months before Bear Stearns Cos. collapsed.”

    All of this contributes to the view that Goldman Sachs is, indeed, “a great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money.” I’m certain that Rolling Stone and Bloomberg have taken action to protect their right to be critical of Goldman. I’ve spent plenty of time on the phone with their fact checkers to know they put a lot of effort into being able to support every word they print. Blogger Mike Morgan, who founded www.GoldmanSachs666.com, had to defend his right to be critical of Government Sachs by going to court last April when Goldman lawyers Chadbourne & Parke threatened him with trademark infringement.

    But it isn’t just Goldman and it isn’t just our 401k retirement plans that have been damaged. There are fundamental problems in the way our capital markets are being run. The people running the system have known about these problems since at least the Crash of 1987 – I warned the U.S. central depository for all securities (Depository Trust Company) about it in 1993. Brooksley Born warned a presidential working group about it at a Treasury Department meeting in 1998 – and it contributed to the crash of 2008. As you read this today, nothing has been done to stop it from happening again. The real question is: which group will be the first to turn to action? Those with a sense of humor, those with a sense of security provided by a handgunor those with the sense to make changes?

  • Brother Rabbit’s Bonuses

    New York State Attorney General Andrew Cuomo delivered a report to Congress on the bonuses paid to the employees of nine recipients of the TARP bailout money. He called it “The ‘Heads I Win, Tails You Lose’ Bank Bonus Culture.” (July 30) AG Cuomo concluded that even “in these challenging economic times, compensation for bank employees has become unmoored from the banks’ financial performance.” The report is only about banks, of course, since all the investment banks and brokerage firms changed their status to “bank” to become eligible for TARP bailout money last fall.

    Some of the banks that took the TARP money, like JP Morgan (NYSE: JM), Morgan Stanley (NYSE: MS) and American Express (NYSE: AXP), did what they could to return it as quickly as possible, including buying back the warrants. It will be very hard, indeed, for the financial institutions to change the public perception now that we have seen their willingness to take any risk, to make money at any cost – only to take a handout from the public coffers when things go badly so they can continue to “make money” for themselves. The banks are entities but they are run by people who have jobs and get bonuses and perks. Former-Treasury Secretary Hank Paulson’s plan to plunder the US Treasury on behalf of his former Goldman Sachs (NYSE: GS) mates on Wall Street set these banks up as the target of public scorn.

    Late Friday, July 31, the House of Representatives approved a bill that would allow regulators to limit executive compensation at financial institutions with assets greater than $1 billion if they find that the programs would “induce excessive risk-taking” behavior among bank executives. This comes a full eight months after Bank of America (NYSE: BAC) was first subpoenaed by AG Cuomo about executive bonuses. It is a far cry from anything that would create a sense of justice out of a system where two TARP recipients, Citigroup (NYSE: C) and Merrill Lynch, operated in a way that lost $54 billion in 2008, took $55 billion in TARP bailout money, and then paid $9 billion in employee bonuses.

    Despite the hue and cry of the public, these bonuses have continued. In my view they will continue into the future. Although we may think that sticking labels on the banks behavior, or asking Congress to legislate some discipline, will make a difference, it is unlikely to change anything. After the early 2009 bonuses were revealed, the banks claimed that the bonuses were required by contracts and could not be broken without violating the rule of law. They got away with this claim even as contracts with the United Auto Workers were being revised. It’s like a modern version of a folk story by Joel Chandler Harris. “Bred and born in a briar patch, Brother Fox, bred and born in a briar patch!” And with that Brother Banker skipped out just as lively as a cricket in the embers.

    Thanks to David Friedman for bringing the FT article on the report to our attention.

  • Bailout Success!!

    “I guess the bailouts are working…for Goldman Sachs!” The Daily Show With Jon Stewart

    Goldman Sachs reported $3.4 billion second quarter earnings. Mises Economics Blogger Peter Klein says these earnings are the result of political capitalism – earned in the “nebulous world of public-private interactions.” Klein points to an interesting perspective offered by The Streetwise Professor (Craig Pirrong at University of Houston): Moral Hazard. Goldman Sachs’ status as “too big to fail,” conferred on them by the United States Government, has allowed them to increase the money they put at risk of loss in one day’s trading by 33 percent since last May. Goldman received $10 billion in the TARP bailout on October 28, 2008; they returned the money on June 9, 2009. By April 2009, they had paid about $149 million in dividends on the Treasury’s investment – a negligible return. Goldman Sachs also will be receiving transaction fees for managing Treasury programs under contracts awarded to them during the Bailout and beyond. When Goldman Sachs changed its status to “bank” last year they also gained access to the FDIC safety net, which perversely provides incentives for banks to take risks by absorbing the consequences of losses.

    To underscore the importance of cronies in capitalism, Goldman Sachs is on track to dole out bonuses equal to about $700,000 per employee – a 17 percent increase over 2006, when bonuses were sufficient to “immunize 40,000 impoverished children for a year … throw a birthday party for your daughter and one million of her closest friends … and still have enough left over to buy a different color Rolls Royce for each day of the week.”

    Since employees of Goldman Sachs will one day be in charge of the U.S. Treasury, it only makes sense that the company has to keep them happy now – how else can they be assured of future access to capital? The House Oversight and Government Reform Committee seems to think that former Treasury Secretary Hank Paulson – himself a former Goldman Sachs bonus recipient – gave bailout money to his cronies after telling Congress the money was for Main Street homeowners.

    If it isn’t clear by now that the United States Government is picking the winners and losers in this economy, the experience of CIT Group Inc. – a lender to small businesses that is being allowed to fail – should remove any doubts you may have had until now.

    The United States Government passed an additional $12.1 billion to Goldman Sachs through the AIG bailout – money that won’t be returned unless AIG succeeds. To assure their success, AIG is preparing to pay millions of dollars more in bonuses to their executives this year under the premise that a contract is a contract and must be honored (unless it’s a UAW contract, of course.) JP Morgan Chase reported better than expected earnings; even Bank of America, still reeling from the Merrill Lynch merger and extensive mortgage losses in California, earned $3.2 billion in the second quarter of 2009. Citigroup reported $4.28 billion profit in the second quarter.

    With government money and government protection coming at them from all sides, it’s a wonder all the big banks and big bank employees aren’t rolling in dollar bills by now.