As readers may know, the Senate Permanent Subcommittee on Investigations just issued another report, Wall Street and the Financial Crisis. This is a far more focused and damning document than the Financial Crisis Inquiry Commission report, which was produced at considerably more expense and was undermined by dissent among its commissioners (which in fairness appears to have been by design).
I confess to having only gotten partway through the document and plan to issue a more thorough discussion in the next few days. However, some things are clear at this juncture. The committee took the approach of drilling into certain practices and players they regarded as key to see where that took them. On the one hand, that serves to provide far more concrete proof of the extent and nature of certain practices believed to be widespread that industry players have either denied or argued were based only on anecdotal evidence and were therefore simply isolated examples. It serves to demonstrate that the degree of institutional failure and fraud were widespread and played a direct and significant role in the crisis. On the other hand, it is not and cannot be a comprehensive account, and therefore misses other key elements which this writer along with other industry participants believe were serious and insufficiently examined drivers of the crisis (in particular collusive relationships among major players that were presented as independent). Thus it does not in the end do more to explain the crisis (all its research focused on issue, such as rating agency bad behavior and regulatory incompetence) that are widely accepted by the public and virtually all analysts of the crisis not operating on behalf of the financial services industry, but provides more support and color around some of the major issues. However, I suspect that some of its supporting evidence, which the subcommission also released, will point to issues that the report did not stress.
The report looks at WaMu (considered heretofore to be one of the better subprime lenders), the Office of Thrift Supervision (among other things, the hapless supervisor of AIG’s holding company) rating agencies, and Goldman’s and Deutsche Bank’s behavior in the RMBS and CDO markets. One presumes Goldman and Deutsche were put int the spotlight due to their role as innovators in the CDO market, particularly in developing credit default swaps on asset backed securities, and having the largest synthetic CDO programs (Goldman’s was called Abacus, Deutsche’s was named Start).
Senator Carl Levin, in releasing the report, took aim at Goldman’s truthiness in its testimony before Congress and called on Federal prosecutors to examine whether Goldman committed perjury. Two issues are at stake. First it the Goldman claim that it lost money on its housing bets and was not net short housing (or at least not for long). Second is the notion that the firm was acting merely as a market marker, which basically means caveat emptor, if clients made bad bets, Goldman was merely acting as a neutral middleman.
While Goldman made the usual pious denials, the evidence in the report supports the Levin charges. It notes:
Overall in 2007, its net short position produced record profits totaling $3.7
billion for Goldman’s Structured Products Group, which when combined with other mortgage
losses, produced record net revenues of $1.2 billion for the Mortgage Department as a whole.
2007 was the critical year when the market turned decisively south and all dealers were dumping mortgage-related inventory. Goldman had been further ahead in the process and appears to be the only firm to put on very sizeable short positions. The magnitude of the profits on the short side lend credence to the charge that Goldman was substantially and successfully net short.
The second major charge, that Goldman was merely a market maker, never passed the common sense test. The report delineates the aggressive measures the firm took to unload CDOs, with e-mails showing an aggressive, full bore sales push, including salesmen relying on their credibility with clients to get them to buy doggy deals and demanding extra sales credits in return.
This is contrary to the role of a market maker, which intermediates client orders. Goldman was acting in the role of a placement agent, and the case law in this area calls on the firm to disclose all material conflicts of interest. Since the three year statue of limitations for civil litigation under the securities law has passed, we are unlikely to see any new litigation, but Goldman’s statements about its role look to be gross misrepresentations.
But will the generally craven and bank-friendly Obama administration charge Goldman with perjury? Almost certainly not, and that will sadly serve to cement the notion that we have a two-tier standard of law in the US, one for banks, and one for the rest of us. And now with the industry populated by too big to fail banks, all operating at the same low level of conduct, large investors who trade in large sizes and therefore work with major players can’t effectively vote with their feet either. The crisis has cemented the role of a diseased oligopoly at the center of the global economy, and it looks certain to continue its looting until the next crisis creates another window of opportunity to bring it to heel. One can only hope that investigations like the Levin report will help stiffen the spines of the officialdom and the non-banking plutocrats next time around.
33 comments
Comments are closed.
The depth of corruption and oligarchic nature of banks and quasi-banking entities on Wall Street would be called “terrorists” in any other era in America.
If once [the people] become inattentive to the public affairs, you and I, and Congress and Assemblies, Judges and Governors, shall all become wolves. It seems to be the law of our general nature, in spite of individual exceptions.
-Thomas Jefferson
To see what is in front of one’s nose needs a constant struggle.
– George Orwell
Why does it take a crisis to reign in GS? Why cant regulation according to exising laws be business-as-usual?
“Why does it take a crisis to reign in GS?”
Who says they’re being reigned in?
Yves,
Nice post. Unfortunately, the regulators and politicians are never going after the major banks. As Gordon Brown confessed at the INET Conference, regulators and politicians do not understand how the financial system works and are reliant on the major banks to suggest reforms the banks can live with.
Richard
“As Gordon Brown confessed …”
Gordon Brown is either a liar or an idiot. If they can’t find any regulators who understand it, then the banks don’t understand it either. A good reason, aside from their obvious conflict of interest, to avoid taking suggestions from banks.
And we do know what works, as we had such a system (at least in this country – I’m less familiar with elsewhere) that worked for decades after the Great Depression. Notions that “it’s different now” so you can’t use the old approach are utter hogwash. Financial crises, once known as panics, are nothing new. Despite loud protestations about how “things have changed” so much, remarkably little has changed in the financial scam industry since the Commercial Revolution of the 17th and 18th centuries. It’s not like say science, engineering or medicine where actual progress is made. The only new things are the latest scams, which are often little more than slight twists on earlier scams.
The only thing lacking is a will to enforce appropriate legislation.
alex said: “…little has changed in the financial scam industry since the Commercial Revolution of the 17th and 18th centuries. It’s not like say science, engineering or medicine where actual progress is made.”
Really! If the disciplines of physics, chemistry, medicine and engineering had performed no better than the discipline of economics, we’d all be riding in style in horse-drawn carriages, or hoofing it, and the most common practice performed by doctors would still be blood-letting. The discipline of economics is hopelessly stuck in the 18th century.
I suppose there are some notable dissidents in the field, but 99% of economists still believe the earth is flat, the sun evolves around the earth and witches can use their special powers to cast magical spells.
I think we can find some fine young things to dope up over cracks in the ground and all will be forth coming.
Skippy…intentional complexity is the first sign of a control fraud.
Skippy, I’ve just got hold of Shaxson’s “Treasure Islands” and wow, that whole ‘complexity’ theme is on steroids when it comes to tax shelters — which were surely part of the ‘complexity’ involving CDOs. Hope you are able to get a copy of Shaxson’s book.
As for GS, a cursory reading of “The Big Short” or “Econned” make clear that the GS weasel words are not credible. The so-called MOTU at that Senate hearing looked like a pack of whining crybabies. (What a brat pack.)
The funny thing is these people would crack under very little pressure, most of their moxie is supported by their wealth (illusion) and not from an ethically / morally stoic vantage point (they know that, if not to far gone). So like Bernie and and his mini me, Stanford (last I saw not looking so good ie prison fight, SSRI addiction et al) it would take very little effort with in a few underlings to crack this wide open, which in its self is telling.
Skippy…will read Shaxson’s book soon, enjoy comparing notes. I’ve proffered Yves book to many select individuals and am awaiting feed back, tread fine line to get honest assessment, sore toes…lol.
Skippy,
Yes, this bunch would crack under a little pressure. And if the current mess resulted from some random lack of ethics on their part, then we would be in good shape once they did.
But if GS etc. are part of a broader elite-wide degeneration from productive activity to rent seeking, then these folks are no more than an opportunistic infection and we have an entire immune system to repair.
@Jessica, as you know, with out full discovery there is no solution.
Skippy…Too many cases of bad intel in my experience, if you have to run combat patrols instead of pure recon, well it ties up their resources and you still have discovery, until a granular picture can be had.
I would suppose perjury is the least of their offenses. But it does suggest awareness of their own odor.
One does not prosecute nobility easily.
“I confess to having only gotten partway through the document” she says.
It’s 650 pages long.
I confess to having reviewed the title page so far.
Yeah, sure, the same prosecutor who wasted five years and who knows how many millions scapegoating Barry Bonds can now turn his attention to America’s primary indoor sports, investment bank market rigging and securities fraud.
Unfortunately, one man’s lies to Congress is another man’s public relations campaign. Besides, why should lying to Congress be a crime when every member of Congress lies every time he/she opens his/her mouth?
Re: Bonds.
I almost puked when I was reading the story about Bonds actually. The agency charged with prosecuting him said the time (years) and money (tens of millions) was well spent because it sent a message to other athletes that they are serious about sporting integrity. They said that it was a long draw out process but by attacking a high profile figure such as Bonds they were showing that no-one was above the law. That the law applied to everyone equally. They felt that it would serve as a warning to the industry as a whole and regulate behaviour. Then they said “our next target is Goldman Sachs, because they are the biggest and most obvious criminals we can see out there today”…..nah….they didn’t say that last one actually. Just joking there.
There are incidents that sound like scenes from Michael Lewis’ Liars Poker.
I think the AG will find some reason not to prosecute GS actions.
Carl Levin and Debbie Stabenow voted to bail out AIG ( and GS)) and are just running for cover. Sounds like scenes from Lairs Poker. Is Lairs Poker. Or will be Liars Poker. What is good for Levin is good for the US of A.
Once you have Wall Street firms acting as principal taking positions against clients/customers, this is pretty much predestined. The only thing stopping this is legal counsel taking a pulse of the regulatory climate and possibly issuing a warning.
Wall Street needs to go back to the agency model of doing business. But we all know that this is increasingly unlikely. The nationals regulators and legislators are not likely to take up the cause.
Carl Levin and Debbie Stabenow voted to bail out AIG ( and GS)) and are just running for cover.
This may have been the right call. Certainly for AIG(which was too interconnected) if not for Goldman…
But, it never should’ve gotten to this. And now we need to take-away the tax-payer funded bank safety net and downsize the too big to fail banks.
Why would investors who trade in large sizes have to deal with these major players in particular? Isn’t there any competition at the global scale?
It’s easy to talk about international markets as if they are disassociated from the US markets, but its worth noting how intertwined these firms are. UBS, for instance, has or had major stake in AIG, and WikiLeaks cables revealed a powerplay thereof during the climax of the crisis between UBS and the Obama administration – specifically, UBS agreed not to dump MBSs in return for reassurance of a bailout (not sure if this bailout was laundered through AIG, though).
So, to what degree was UBS acting in support of the same kind of business practices criticized above? To what degree would they be willing to diverge from US market practices and provide greater value to investors? With a stake in firms that are dirtier, would competing with one’s own (more profitable) business model really make sense?
The relative market capitalization seems to imply that the US is the preeminent player when it comes to this issue. But that’s somewhat crude – what I think says a lot more is just how interwoven these firms are. If UBS felt that more honest practices were viable, I am willing to bet that AIG would have switched to that model long ago.
Good to point this out, but we shouldn’t act surprised. Does anyone remember the 7 executives of tobacco – “I believe that nicotine is not addictive.” It’s so cute – when the capitalists commit mass violence against Americans, all they have to say is that they “don’t believe” they are being harmful – and they can go right on back to the same business, with the same business models.
Yves, I generally love your posts, but this one is a downer. You are of course, right about Obama. Obama would not direct Holder to start a war with the banks, even after the banks have effectively declared war on us. The the Democratic Party took a drubbing in 2010. One might expect the party, particularly senators up for election, to start pushing back.
Let’s not assume that We the People are defeated – that leads nowhere. I’d like to buy you a drink, sing your praises, and cheer you up. Don’t give up. Your book is wonderful – even if the story it tells is disgusting. We need you.
There have been no prosecutions of banks because this administration has chosen not to prosecute the banks. The banks put friends of Barack and other politicians into high paying jobs. So you can’t be surprised that nobody gets prosecuted no matter how blatant or obvious the fraud is. Just look at how many Washington insiders are on the bank’s payroll.
It all reminds me of that line from Bob Dylan’s -My Back Pages-
“My pathway led by confusion boats
Mutiny from stern to bow”
All the congressmen and senators and prosecutors and presidents and reglators and advisers, they’re all sinking in confusion boats in the seas of their minds. And all their mutinous sailers are themselves echoing and echoing in their false dilemmas.
check out footnote #1325 on page 347 of the Levin Report which reprints an email by Deutsche Bank trader Rocky Kurita who conveyed his negative outlook on housing prices in an email with mock-lyrics to a song by Vanilla Ice entitled “CDO Oh Baby.”
It’s easily the funniest things I’ve read in either of the FCIC or Levin Reports.
wojo:
thanks, added to wikipedia.
http://en.wikipedia.org/wiki/United_States_housing_bubble
260 pages on Goldman?
seems unbalanced
This report says explicitly that it looked into a series of case studies. It is not about “balance” or comprehensiveness.
Goldman had the biggest synthetic CDO program and was also short the market while selling RMBS and CDOs to clients. And I suspect their conduct in the hearings last year (particularly their insistence that they were just market makers, which was clearly nonsense) led the investigators to keep them in their crosshairs.
The document makes quite clear that Goldman was acting at times as an underwriter, placement agent, and/or broker-dealer ( which Blankfein admits)and hence had greater obligation, buy law, to disclose conflicts of interest to the client than if were only a market maker and they failed to meet those obligations. There is a listing of twelve conflicts of interest ( Analysis of Goldman’s Conflicts of Interest) pages 602-603.
1. Shorting Its Own Securities
2. Failing to Disclose Key Information to Investors.
3. Misrepresenting Source of Assets.
4. Failing to Disclose Client Involvement.
5. Minimizing Premiums.
6. Selling Securities Designed to Fail.
7. Delaying Liquidation.
8. Misrepresenting Assets.
9. Taking Immediate Post-Sale Markdowns.
10. Evading Put Obligation.
11. Using Poor Quality Loans in Securitizations.
12. Concealing Its Net Short Position
Not only failed to disclose yet structured their investment, taking a nominal long position in order to be able to state to the buyer that Goldman were long the CDO., thus giving credibility to the sale in the sales literature, while at the same time taking whole the short side,to the tune of so many billion $ invested by the bank, and not disclosing the fact to the client.
This thing reads more intrigue than if it were written fiction.Thank You for posting the link.
Cheer up, naked EMOs.
You guys have been vindicated by the United States Fucking Senate.
Tom Coburn, whose main sources of campaign funds are oil, gas, and Jesus, has taken it upon himself to wade into this mess, team up with his mortal enemy, a liberal Democrat from a Blue state, and actually produce a halfway decent report.
Nobody will go to jail. But, maybe it’s like John McCain said about the torturers at CIA and Bush’s DOJ. “History will judge them.”. The first google search for Gregg Lippman, for the next few decades, is going to turn up his activities at Deutsche Bank. Alec Litowitz of Magnetar Capital is not going to be ‘Alec Litowitz, financier, with a fancy house and nice suits’. He’s gonna be ‘Alec Litowitz, from that nasty hedge fund that made everyone throw up in their mouth a little’.
The reason that people in the finance industry never used to get punished (ahem. John Meriwether) is because very few people knew what they were doing. Naked Capitalism is part of the movement to end that lack of transparency.
In 2009, I had no idea what the f@#$ a bond was let alone a ‘security’. In 2010 I read EConned, and a few dozen other books, and a few hundred web pages. Now, I feel like have an inkling of understanding. And I know I have talked with several people and seen the lights go off in their heads; what is a credit default swap? Their mouth drops when they start to comprehend it.
It probably doesn’t look like victory here, but all the ‘real financial journalists’ have done a great deal of good in the past 3 years.
Yes things are screwed up.
But what if this is not the beginning of the end?
Maybe it is the end of the beginning!
Didn’t someone else famous say that once? And it’s now 50+ years later. If this is a new beginning, it’s pretty frightening, and the future seems worse still.