Posts Tagged ‘Lehman Brothers’
by Tyler Durden
11/05/2011 22:49 -0500
Going back to the annals of brokeback Europe, we learn that gold after all is money, after the G-20 demanded that EFSF (of €1 trillion “stability fund” yet can’t raise €3 billion fame) be backstopped by none other than German gold. Per Reuters, “The Frankfurter Allgemeine Sonntagszeitung (FAS) reported that Bundesbank reserves — including foreign currency and gold — would be used to increase Germany’s contribution to the crisis fund, the European Financial Stability Facility (EFSF) by more than 15 billion euros ($20 billion).” And who would be the recipient of said transfer? Why none other than the most insolvent of global hedge funds, the European Central Bank.
Also, in addition to gold, the ECB had set its eyes on that other “fake” currency that DSK had succeded in protecting throughout his tenure, all his other undoings aside, “The Welt am Sonntag newspaper, citing similar plans, said 15 billion euros would come from special drawing rights (SDR) that the Bundesbank holds.” Naturally, these discoveries prompted a prompt and furious rebuttal from the very top of German authorities: “Germany’s gold and foreign exchange reserves, which the Bundesbank administers, were not at any point up for discussion at the G20 summit in Cannes,” government spokesman Steffen Seibert said. The WSJ adds, “A plan to have the International Monetary Fund issue its special currency as a powerful weapon in Europe’s efforts to contain the widening euro-zone debt crisis was blocked by German Chancellor Angela Merkel, according to a report in a German newspaper.”
There are three observations to be made here: i) when it comes to rescuing insolvent countries, Germany is delighted to sacrifice euros at the altar of the 50-some year old PIIGS retirement age; ask for its gold however, and things get ugly; ii) the Eurozone, the ECB and the EFSF are dead broke, insolvent and/or have zero credibility in the capital markets, and they know it and iii) due to the joint and several nature of the ECB’s capital calls, while Germany may have had enough leverage to tell G-20 to shove it, the next countries in line, especially those which are already insolvent and will rely on the EFSF for their existence once the ECB’s SMP program is finished, may not be that lucky, and in exchange for remaining in the eurozone, the forfeit could well be their gold.
WSJ brings details on how German SDRs would be used as a temporary (temporary as in European financial short selling ban, and temporary reduction of initial margin to maintenance for everyone to appease MF Global clients) backstop for Europe:
The idea of using SDRs to fight financial contagion isn’t new. When the collapse of Lehman Brothers in 2008 unleashed a financial crisis, the G-20 in 2009 approved a $250 billion SDR allocation to help backstop efforts to fight the spread of the crisis.
The European Central Bank has been buying euro-zone bonds in an effort to keep borrowing costs of weakened members from exploding. But the ECB’s efforts are considered by some experts to be outside of its central mandate to maintain price stability. And the ECB has said that its special measures – buying euro-zone debt — should be temporary and limited in scope. That is another reason why some people are advocating the IMF play a greater role in propping up weakened euro-zone members and become the lender of last resort.
Speaking to reporters at the close of the Cannes summit, Merkel indicated that G-20 leaders agreed in principle that the IMF and EFSF could work together, but the summit could not agree on any specifics.
“We have an interesting process ahead of us and the discussion is not yet concluded,” she said.
Reuters brings more on the the logical German reaction to the EFSF and ECB’s extortion attempts:
“We know this plan and we reject it,” a Bundesbank spokesman said.
Seibert said several partners had raised the question in Cannes whether SDRs could be used to strengthen the EFSF but Germany had rejected this plan and discussions at Monday’s Eurogroup on Monday would not discuss this topic.
The newspapers had said the issue was taken off the agenda at the G20 following Bundesbank opposition but that it would be debated on Monday at a Eurogroup meeting of euro zone finance ministers.
Why will it be debated? Because when at first you don’t succeed, try, try again. Germany may be crossed off the list, but here is who is next in order of appearance. Sooner or later, Europe will stumble on that one “leader” whose gold is less valuable than their political stability, because after all, a “united”, “EMUed” Europe has the biggest MAD trump card of all.
Read the entire article HERE.
by Phoenix Capital Research
While the world is awash in liquidity, no one seems to notice that it’s actually in the form of leverage or cheap debt, NOT real capital or equity.
The US banking system as a whole is leveraged at 13-to-1. While this is not horrible relative to Europe’s banking system (more on this in a moment), these levels still mean that an 8% drop in asset values wipes out ALL equity.
Then you have Europe’s banking system, which is leveraged at 26-to-1. Anecdotally, this is borderline Lehman Brothers (30 to 1). At these levels, even a 4% drop in asset prices wipes out ALL equity.
Japan’s banks are leveraged at 23 to 1. France’s are 26 to 1. Germany is 32 to 1.
You get the idea.
However, worse than any of these the US Federal Reserve. With $2.8 trillion in assets and only $52 billion in capital, the Fed is leveraged at 53 to 1. Yes, 53 to 1.
My question is: if the Fed prints money for itself… is it “raising capital?” More to the point… if that was true why doesn’t the Fed do it? Why maintain these leverage levels?
Only Bernanke can know… but the rest of us should feel a very serious shudder when we consider that THE bank that’s supposed to bailout the world/ fix the problems plaguing the financial system, is in fact even more leveraged that most of the institutions it’s helping.
Yes, stocks are rallying now based on the view that more QE 3 or monetary easing is on the way… but they’re missing the BIG picture here.
The BIG picture is that there is far too much debt in the financial system. Europe’s getting taken to the cleaners today… but these very same issues are going to spread to Japan and the US in short order. Even China, which is considered THE creditor nation of the world, is estimated to post a REAL Debt to GDP ratio of 200%.
Yes, 200%. China.
So the idea that somehow the world’s going to pass through this current chapter in its history without some MAJOR fireworks/ systemic failure, seems a little too optimistic.
Folks, something VERY bad is brewing behind the scenes. The Sarkozy- Merkel talks, the short-selling bans, the halted stocks, the leveraged EFSF, the hints of QE 3, all of this is telling us that the financial system is on DEFCON 1 Red Alert.
Ignore stocks, they’re ALWAYS the last to “get it.” The credit markets are jamming up just like they did in 2008. The banking system is flashing all the same signals as well.
Read the entire article HERE.
By Matt Taibbi
August 17, 2011 8:00 AM ET
Imagine a world in which a man who is repeatedly investigated for a string of serious crimes, but never prosecuted, has his slate wiped clean every time the cops fail to make a case. No more Lifetime channel specials where the murderer is unveiled after police stumble upon past intrigues in some old file – “Hey, chief, didja know this guy had two wives die falling down the stairs?” No more burglary sprees cracked when some sharp cop sees the same name pop up in one too many witness statements. This is a different world, one far friendlier to lawbreakers, where even the suspicion of wrongdoing gets wiped from the record.
That, it now appears, is exactly how the Securities and Exchange Commission has been treating the Wall Street criminals who cratered the global economy a few years back. For the past two decades, according to a whistle-blower at the SEC who recently came forward to Congress, the agency has been systematically destroying records of its preliminary investigations once they are closed. By whitewashing the files of some of the nation’s worst financial criminals, the SEC has kept an entire generation of federal investigators in the dark about past inquiries into insider trading, fraud and market manipulation against companies like Goldman Sachs, Deutsche Bank and AIG. With a few strokes of the keyboard, the evidence gathered during thousands of investigations – “18,000 … including Madoff,” as one high-ranking SEC official put it during a panicked meeting about the destruction – has apparently disappeared forever into the wormhole of history.
Under a deal the SEC worked out with the National Archives and Records Administration, all of the agency’s records – “including case files relating to preliminary investigations” – are supposed to be maintained for at least 25 years. But the SEC, using history-altering practices that for once actually deserve the overused and usually hysterical term “Orwellian,” devised an elaborate and possibly illegal system under which staffers were directed to dispose of the documents from any preliminary inquiry that did not receive approval from senior staff to become a full-blown, formal investigation. Amazingly, the wholesale destruction of the cases – known as MUIs, or “Matters Under Inquiry” – was not something done on the sly, in secret. The enforcement division of the SEC even spelled out the procedure in writing, on the commission’s internal website. “After you have closed a MUI that has not become an investigation,” the site advised staffers, “you should dispose of any documents obtained in connection with the MUI.”
Many of the destroyed files involved companies and individuals who would later play prominent roles in the economic meltdown of 2008. Two MUIs involving con artist Bernie Madoff vanished. So did a 2002 inquiry into financial fraud at Lehman Brothers, as well as a 2005 case of insider trading at the same soon-to-be-bankrupt bank. A 2009 preliminary investigation of insider trading by Goldman Sachs was deleted, along with records for at least three cases involving the infamous hedge fund SAC Capital.
The widespread destruction of records was brought to the attention of Congress in July, when an SEC attorney named Darcy Flynn decided to blow the whistle. According to Flynn, who was responsible for helping to manage the commission’s records, the SEC has been destroying records of preliminary investigations since at least 1993. After he alerted NARA to the problem, Flynn reports, senior staff at the SEC scrambled to hide the commission’s improprieties.
As a federally protected whistle-blower, Flynn is not permitted to speak to the press. But in evidence he presented to the SEC’s inspector general and three congressional committees earlier this summer, the 13-year veteran of the agency paints a startling picture of a federal police force that has effectively been conquered by the financial criminals it is charged with investigating. In at least one case, according to Flynn, investigators at the SEC found their desire to bring a case against an influential bank thwarted by senior officials in the enforcement division – whose director turned around and accepted a lucrative job from the very same bank they had been prevented from investigating. In another case, the agency farmed out its inquiry to a private law firm – one hired by the company under investigation. The outside firm, unsurprisingly, concluded that no further investigation of its client was necessary. To complete the bureaucratic laundering process, Flynn says, the SEC dropped the case and destroyed the files.
Much has been made in recent months of the government’s glaring failure to police Wall Street; to date, federal and state prosecutors have yet to put a single senior Wall Street executive behind bars for any of the many well-documented crimes related to the financial crisis. Indeed, Flynn’s accusations dovetail with a recent series of damaging critiques of the SEC made by reporters, watchdog groups and members of Congress, all of which seem to indicate that top federal regulators spend more time lunching, schmoozing and job-interviewing with Wall Street crooks than they do catching them. As one former SEC staffer describes it, the agency is now filled with so many Wall Street hotshots from oft-investigated banks that it has been “infected with the Goldman mindset from within.”
The destruction of records by the SEC, as outlined by Flynn, is something far more than an administrative accident or bureaucratic fuck-up. It’s a symptom of the agency’s terminal brain damage. Somewhere along the line, those at the SEC responsible for policing America’s banks fell and hit their head on a big pile of Wall Street’s money – a blow from which the agency has never recovered. “From what I’ve seen, it looks as if the SEC might have sanctioned some level of case-related document destruction,” says Sen. Chuck Grassley, the ranking Republican on the Senate Judiciary Committee, whose staff has interviewed Flynn. “It doesn’t make sense that an agency responsible for investigations would want to get rid of potential evidence. If these charges are true, the agency needs to explain why it destroyed documents, how many documents it destroyed over what time frame and to what extent its actions were consistent with the law.”
How did officials at the SEC wind up with a faithful veteran employee – a conservative, mid-level attorney described as a highly reluctant whistle-blower – spilling the agency’s most sordid secrets to Congress? In a way, they asked for it.
On May 18th of this year, SEC enforcement director Robert Khuzami sent out a mass e-mail to the agency’s staff with the subject line “Lawyers Behaving Badly.” In it, Khuzami asked his subordinates to report any experiences they might have had where “the behavior of counsel representing clients in… investigations has been questionable.”
Khuzami was asking staffers to recount any stories of outside counsel behaving unethically. But Flynn apparently thought his boss was looking for examples of lawyers “behaving badly” anywhere, including within the SEC. And he had a story to share he’d kept a lid on for years. “Mr. Khuzami may have gotten something more than he expected,” Flynn’s lawyer, a former SEC whistle-blower named Gary Aguirre, later explained to Congress.
Flynn responded to Khuzami with a letter laying out one such example of misbehaving lawyers within the SEC. It involved a case from very early in Flynn’s career, back in 2000, when he was working with a group of investigators who thought they had a “slam-dunk” case against Deutsche Bank, the German financial giant. A few years earlier, Rolf Breuer, the bank’s CEO, had given an interview to Der Spiegel in which he denied that Deutsche was involved in übernahmegespräche – takeover talks – to acquire a rival American firm, Bankers Trust. But the statement was apparently untrue – and it sent the stock of Bankers Trust tumbling, potentially lowering the price for the merger. Flynn and his fellow SEC investigators, suspecting that investors of Bankers Trust had been defrauded, opened a MUI on the case.
A Matter Under Inquiry is just a preliminary sort of look-see – a way for the SEC to check out the multitude of tips it gets about suspicious trades, shady stock scams and false disclosures, and to determine which of the accusations merit a formal investigation. At the MUI stage, an SEC investigator can conduct interviews or ask a bank to send in information voluntarily. Bumping a MUI up to a formal investigation is critical, because it enables investigators to pull out the full law-enforcement ass-kicking measures – subpoenas, depositions, everything short of hot pokers and waterboarding. In the Deutsche case, Flynn and other SEC investigators got past the MUI stage and used their powers to collect sworn testimony and documents indicating that plenty of übernahmegespräche indeed had been going on when Breuer spoke to Der Spiegel. Based on the evidence, they sent an “Action Memorandum” to senior SEC staff, formally recommending that the agency press forward and file suit against Deutsche.
Breuer responded to the threat as big banks like Deutsche often do: He hired a former SEC enforcement director to lobby the agency to back off. The ex-insider, Gary Lynch, launched a creative and inspired defense, producing a linguistic expert who argued that übernahmegespräche only means “advanced stage of discussions.” Nevertheless, the request to proceed with the case was approved by several levels of the SEC’s staff. All that was needed to move forward was a thumbs-up from the director of enforcement at the time, Richard Walker.
But then a curious thing happened. On July 10th, 2001, Flynn and the other investigators were informed that Walker was mysteriously recusing himself from the Deutsche case. Two weeks later, on July 23rd, the enforcement division sent a letter to Deutsche that read, “Inquiry in the above-captioned matter has been terminated.” The bank was in the clear; the SEC was dropping its fraud investigation. In contradiction to the agency’s usual practice, it provided no explanation for its decision to close the case.
On October 1st of that year, the mystery was solved: Dick Walker was named general counsel of Deutsche. Less than 10 weeks after the SEC shut down its investigation of the bank, the agency’s director of enforcement was handed a cushy, high-priced job at Deutsche.
Deutsche’s influence in the case didn’t stop there. A few years later, in 2004, Walker hired none other than Robert Khuzami, a young federal prosecutor, to join him at Deutsche. The two would remain at the bank until February 2009, when Khuzami joined the SEC as Flynn’s new boss in the enforcement division. When Flynn sent his letter to Khuzami complaining about misbehavior by Walker, he was calling out Khuzami’s own mentor.
The circular nature of the case illustrates the revolving-door dynamic that has become pervasive at the SEC. A recent study by the Project on Government Oversight found that over the past five years, former SEC personnel filed 789 notices disclosing their intent to represent outside companies before the agency – sometimes within days of their having left the SEC. More than half of the disclosures came from the agency’s enforcement division, who went to bat for the financial industry four times more often than ex-staffers from other wings of the SEC.
Even a cursory glance at a list of the agency’s most recent enforcement directors makes it clear that the SEC’s top policemen almost always wind up jumping straight to jobs representing the banks they were supposed to regulate. Lynch, who represented Deutsche in the Flynn case, served as the agency’s enforcement chief from 1985 to 1989, before moving to the firm of Davis Polk, which boasts many top Wall Street clients. He was succeeded by William McLucas, who left the SEC in 1998 to work for WilmerHale, a Wall Street defense firm so notorious for snatching up top agency veterans that it is sometimes referred to as “SEC West.” McLucas was followed by Dick Walker, who defected to Deutsche in 2001, and he was in turn followed by Stephen Cutler, who now serves as general counsel for JP Morgan Chase. Next came Linda Chatman Thomsen, who stepped down to join Davis Polk, only to be succeeded in 2009 by Khuzami, Walker’s former protégé at Deutsche Bank.
This merry-go-round of current and former enforcement directors has repeatedly led to accusations of improprieties. In 2008, in a case cited by the SEC inspector general, Thomsen went out of her way to pass along valuable information to Cutler, the former enforcement director who had gone to work for JP Morgan. According to the inspector general, Thomsen signaled Cutler that the SEC was unlikely to take action that would hamper JP Morgan’s move to buy up Bear Stearns. In another case, the inspector general found, an assistant director of enforcement was instrumental in slowing down an investigation into the $7 billion Ponzi scheme allegedly run by Texas con artist R. Allen Stanford – and then left the SEC to work for Stanford, despite explicitly being denied permission to do so by the agency’s ethics office. “Every lawyer in Texas and beyond is going to get rich on this case, OK?” the official later explained. “I hated being on the sidelines.”
Small wonder, then, that SEC staffers often have trouble getting their bosses to approve full-blown investigations against even the most blatant financial criminals. For a fledgling MUI to become a formal investigation, it has to make the treacherous leap from the lower rungs of career-level staffers like Flynn all the way up to the revolving-door level at the top, where senior management is composed largely of high-priced appointees from the private sector who have strong social and professional ties to the very banks they are charged with regulating. And if senior management didn’t approve an investigation, the documents often wound up being destroyed – as Flynn would later discover.
After the Deutsche fiasco over Bankers Trust, Flynn continued to work at the SEC for four more years. He briefly left the agency to dabble in real estate, then returned in 2008 to serve as an attorney in the enforcement division. In January 2010, he accepted new responsibilities that included helping to manage the disposition of records for the division – and it was then he first became aware of the agency’s possibly unlawful destruction of MUI records.
Flynn discovered a directive on the enforcement division’s internal website ordering staff to destroy “any records obtained in connection” with closed MUIs. The directive appeared to violate federal law, which gives responsibility for maintaining and destroying all records to the National Archives and Records Administration. Over a decade earlier, in fact, the SEC had struck a deal with NARA stipulating that investigative records were to be maintained for 25 years – and that if any files were to be destroyed after that, the shredding was to be done by NARA, not the SEC.
But Flynn soon learned that the records for thousands of preliminary investigations no longer existed. In his letter to Congress, Flynn estimates that the practice of destroying MUIs had begun as early as 1993, and has resulted in at least 9,000 case files being destroyed. For all the thousands of tips that had come in to the SEC, and the thousands of interviews that had been conducted by the agency’s staff, all that remained were a few perfunctory lines for each case. The mountains of evidence gathered were no longer in existence.
To read through the list of dead and buried cases that Flynn submitted to Congress is like looking through an infrared camera at a haunted house of the financial crisis, with the ghosts of missed prosecutions flashing back and forth across the screen. A snippet of the list:
PARTY MUI # OPENED/CLOSED ISSUE
Goldman Sachs MLA-01909 6/99 – 4/00 Market Manipulation
Deutsche Bank MHO-09356 11/01 – 7/02 Insider Trading
Deutsche Bank MHO-09432 2/02 – 8/02 Market Manipulation
Lehman Brothers MNY-07013 3/02 – 7/02 Financial Fraud
Goldman Sachs MNY-08198 11/09 – 12/09 Insider Trading
One MUI – case MNY-08145 – involved allegations of insider trading at AIG on September 15th, 2008, right in the middle of the insurance giant’s collapse. In that case, an AIG employee named Jacqueline Millan reported irregularities in the trading of AIG stock to her superiors, only to find herself fired. Incredibly, instead of looking into the matter itself, the SEC agreed to accept “an internal investigation by outside counsel or AIG.” The last note in the file indicates that “the staff plans to speak with the outside attorneys on Monday, August 24th , when they will share their findings with us.” The fact that the SEC trusted AIG’s lawyers to investigate the matter shows the basic bassackwardness of the agency’s approach to these crash-era investigations. The SEC formally closed the case on October 1st, 2009.
The episode with AIG highlights yet another obstacle that MUIs experience on the road to becoming formal investigations. During the past decade, the SEC routinely began allowing financial firms to investigate themselves. Imagine the LAPD politely asking a gang of Crips and their lawyers to issue a report on whether or not a drive-by shooting by the Crips should be brought before a grand jury – that’s basically how the SEC now handles many preliminary investigations against Wall Street targets.
The evolution toward this self-policing model began in 2001, when a shipping and food-service conglomerate called Seaboard aggressively investigated an isolated case of accounting fraud at one of its subsidiaries. Seaboard fired the guilty parties and made sweeping changes to its internal practices – and the SEC was so impressed that it instituted a new policy of giving “credit” to companies that police themselves. In practice, that means the agency simply steps aside and allows companies to slap themselves on the wrists. In the case against Seaboard, for instance, the SEC rewarded the firm by issuing no fines against it.
According to Lynn Turner, a former chief accountant at the SEC, the Seaboard case also prompted the SEC to begin permitting companies to hire their own counsel to conduct their own inquiries. At first, he says, the process worked fairly well. But then President Bush appointed the notoriously industry-friendly Christopher Cox to head up the SEC, and the “outside investigations” turned into whitewash jobs. “The investigations nowadays are probably not worth the money you spend on them,” Turner says.
Harry Markopolos, a certified fraud examiner best known for sounding a famously unheeded warning about Bernie Madoff way back in 2000, says the SEC’s practice of asking suspects to investigate themselves is absurd. In a serious investigation, he says, “the last person you want to trust is the person being accused or their lawyer.” The practice helped Madoff escape for years. “The SEC took Bernie’s word for everything,” Markopolos says.
At the SEC, having realized that the agency was destroying documents, Flynn became concerned that he was overseeing an illegal policy. So in the summer of last year, he reached out to NARA, asking them for guidance on the issue.
That request sparked a worried response from Paul Wester, NARA’s director of modern records. On July 29th, 2010, Wester sent a letter to Barry Walters, who oversees document requests for the SEC. “We recently learned from Darcy Flynn… that for the past 17 years the SEC has been destroying closed Matters Under Inquiry files,” Wester wrote. “If you confirm that federal records have been destroyed improperly, please ensure that no further such disposals take place and provide us with a written report within 30 days.”
Wester copied the letter to Adam Storch, a former Goldman Sachs executive who less than a year earlier had been appointed as managing executive of the SEC’s enforcement division. Storch’s appointment was not without controversy. “I’m not sure what’s scarier,” Daniel Indiviglio of The Atlantic observed, “that this guy worked at an investment bank that many believe has questionable ethics and too cozy a Washington connection, or that he’s just 29.” In any case, Storch reacted to the NARA letter the way the SEC often does – by circling the wagons and straining to find a way to blow off the problem without admitting anything.
Last August, as the clock wound down on NARA’s 30-day deadline, Storch and two top SEC lawyers held a meeting with Flynn to discuss how to respond. Flynn’s notes from the meeting, which he passed along to Congress, show the SEC staff wondering aloud if admitting the truth to NARA might be a bad idea, given the fact that there might be criminal liability.
“We could say that we do not believe there has been disposal inconsistent with the schedule,” Flynn quotes Ken Hall, an assistant chief counsel for the SEC, as saying.
“There are implications to admit what was destroyed,” Storch chimed in. It would be “not wise for me to take on the exposure voluntarily. If this leads to something, what rings in my ear is that Barry [Walters, the SEC documents officer] said: This is serious, could lead to criminal liability.”
When the subject of how many files were destroyed came up, Storch answered: “18,000 MUIs destroyed, including Madoff.”
Four days later, the SEC responded to NARA with a hilariously convoluted nondenial denial. “The Division is not aware of any specific instances of the destruction of records from any other MUI,” the letter states. “But we cannot say with certainty that no such documents have been destroyed over the past 17 years.” The letter goes on to add that “the Division has taken steps… to ensure that no MUI records are destroyed while we review this issue.”
Translation: Hey, maybe records were destroyed, maybe they weren’t. But if we did destroy records, we promise not to do it again – for now.
The SEC’s unwillingness to admit the extent of the wrong doing left Flynn in a precarious position. The agency has a remarkably bad record when it comes to dealing with whistle-blowers. Back in 2005, when Flynn’s attorney, Gary Aguirre, tried to pursue an insider-trading case against Pequot Capital that involved John Mack, the future CEO of Morgan Stanley, he was fired by phone while on vacation. Two Senate committees later determined that Aguirre, who has since opened a private practice representing whistle-blowers, was dismissed improperly as part of a “process of reprisal” by the SEC. Two whistle-blowers in the Stanford case, Julie Preuitt and Joel Sauer, also experienced retaliation – including reprimands and demotions – after raising concerns about superficial investigations. “There’s no mechanism to raise these issues at the SEC,” says another former whistle-blower. Contacting the agency’s inspector general, he adds, is considered “the nuclear option” – a move “well-known to be a career-killer.”
In Flynn’s case, both he and Aguirre tried to keep the matter in-house, appealing to SEC chairman Mary Schapiro with a promise not to go outside the agency if she would grant Flynn protection against reprisal. When no such offer was forthcoming, Flynn went to the agency’s inspector general before sending a detailed letter about the wrongdoing to three congressional committees.
One of the offices Flynn contacted was that of Sen. Grassley, who was in the midst of his own battle with the SEC. Frustrated with the agency’s failure to punish major players on Wall Street, the Iowa Republican had begun an investigation into how the SEC follows up on outside complaints. Specifically, he wrote a letter to FINRA, another regulatory agency, to ask how many complaints it had referred to the SEC about SAC Capital, the hedge fund run by reptilian billionaire short-seller Stevie Cohen.
SAC has long been accused of a variety of improprieties, from insider trading to harassment. But no charge in recent Wall Street history is crazier than an episode involving a SAC executive named Ping Jiang, who was accused in 2006 of enacting a torturous hazing program. According to a civil lawsuit that was later dropped, Jiang allegedly forced a new trader named Andrew Tong to take female hormones, come to work wearing a dress and lipstick, have “foreign objects” inserted in his rectum, and allow Jiang to urinate in his mouth. (I’m not making this up.)
Grassley learned that over the past decade, FINRA had referred 19 complaints about suspicious trades at SAC to federal regulators. Curious to see how many of those referrals had been looked into, Grassley wrote the SEC on May 24th, asking for evidence that the agency had properly investigated the cases.
Two weeks later, on June 9th, Khuzami sent Grassley a surprisingly brusque answer: “We generally do not comment on the status of investigations or related referrals, and, in turn, are not providing information concerning the specific FINRA referrals you identified.” Translation: We’re not giving you the records, so blow us.
Grassley later found out from FINRA that it had actually referred 65 cases about SAC to the SEC, making the lack of serious investigations even more inexplicable. Angered by Khuzami’s response, he sent the SEC another letter on June 15th demanding an explanation, but no answer has been forthcoming.
In the interim, Grassley’s office was contacted by Flynn, who explained that among the missing MUIs he had uncovered were at least three involving SAC – one in 2006, one in 2007 and one in 2010, involving charges of insider trading and currency manipulation. All three cases were closed by the SEC, and the records apparently destroyed.
On August 17th, Grassley sent a letter to the SEC about the Flynn allegations, demanding to know if it was indeed true that the SEC had destroyed records. He also asked if the agency’s failure to produce evidence of investigations into SAC Capital were related to the missing MUIs.
The SEC’s inspector general is investigating the destroyed MUIs and plans to issue a report. NARA is also seeking answers. “We’ve asked the SEC to look into the matter and we’re awaiting their response,” says Laurence Brewer, a records officer for NARA. For its part, the SEC is trying to explain away the illegality of its actions through a semantic trick. John Nester, the agency’s spokesman, acknowledges that “documents related to MUIs” have been destroyed. “I don’t have any reason to believe that it hasn’t always been the policy,” he says. But Nester suggests that such documents do not “meet the federal definition of a record,” and therefore don’t have to be preserved under federal law.
But even if SEC officials manage to dodge criminal charges, it won’t change what happened: The nation’s top financial police destroyed more than a decade’s worth of intelligence they had gathered on some of Wall Street’s most egregious offenders. “The SEC not keeping the MUIs – you can see why this would be bad,” says Markopolos, the fraud examiner famous for breaking the Madoff case. “The reason you would want to keep them is to build a pattern. That way, if you get five MUIs over a period of 20 years on something similar involving the same company, you should be able to connect five dots and say, ‘You know, I’ve had five MUIs – they’re probably doing something. Let’s go tear the place apart.’” Destroy the MUIs, and Wall Street banks can commit the exact same crime over and over, without anyone ever knowing.
Regulation isn’t a panacea. The SEC could have placed federal agents on every corner of lower Manhattan throughout the past decade, and it might not have put a dent in the massive wave of corruption and fraud that left the economy in flames three years ago. And even if SEC staffers from top to bottom had been fully committed to rooting out financial corruption, the agency would still have been seriously hampered by a lack of resources that often forces it to abandon promising cases due to a shortage of manpower. “It’s always a triage,” is how one SEC veteran puts it. “And it’s worse now.”
But we’re equally in the dark about another hypothetical. Forget about what might have been if the SEC had followed up in earnest on all of those lost MUIs. What if even a handful of them had turned into real cases? How many investors might have been saved from crushing losses if Lehman Brothers had been forced to reveal its shady accounting way back in 2002? Might the need for taxpayer bailouts have been lessened had fraud cases against Citigroup and Bank of America been pursued in 2005 and 2007? And would the U.S. government have doubled down on its bailout of AIG if it had known that some of the firm’s executives were suspected of insider trading in September 2008?
It goes without saying that no ordinary law-enforcement agency would willingly destroy its own evidence. In fact, when it comes to garden-variety crooks, more and more police agencies are catching criminals with the aid of large and well-maintained databases. “Street-level law enforcement is increasingly data-driven,” says Bill Laufer, a criminology professor at the University of Pennsylvania. “For a host of reasons, though, we are starved for good data on both white-collar and corporate crime. So the idea that we would take the little data we do have and shred it, without a legal requirement to do so, calls for a very creative explanation.”
We’ll never know what the impact of those destroyed cases might have been; we’ll never know if those cases were closed for good reasons or bad. We’ll never know exactly who got away with what, because federal regulators have weighted down a huge sack of Wall Street’s dirty laundry and dumped it in a lake, never to be seen again.
Read the entire article HERE.
What was Timothy Geithner thinking back in 2008 when, as president of the New York Fed, he decided to give Goldman Sachs a $30 billion interest-free loan as part of an $80 billion secret float to favored banks? The sordid details of that program were finally made public this week in response to a court order for a Freedom of Information Act release, thanks to a Bloomberg News lawsuit. Sorry, my bad: It wasn’t an interest-free loan; make that .01 percent that Goldman paid to borrow taxpayer money when ordinary folks who missed a few credit card payments in order to finance their mortgages were being slapped with interest rates of more than 25 percent.
One wonders if Barack Obama was fully aware of Geithner’s deceitful performance at the New York Fed when he appointed him treasury secretary in the incoming administration. The president was probably ignorant of this particular giveaway, as were key members of Congress. “I wasn’t aware of this program until now,” Barney Frank, D-Mass., who at the time chaired the House Financial Services Committee, admitted in referring to Geithner’s “single-tranche open-market operations” program. And there was no language in the Dodd-Frank law supposedly reining in the banks that compelled the Fed to reveal the existence of this program.
It was merely one small part of that reckless policy of throwing mad money at the banks while ignoring the plight of homeowners whom the banks had swindled, a plan pursued by both the Bush and the Obama administrations that set the stage for the current slide into a double-dip recession. On Tuesday it was reported that home values have continued an eight-month decline back to their lowest point since the recession began. With housing in deep trouble there can be no rebound of consumer confidence or job creation, and the first-quarter growth rate was an anemic 1.8 percent even as Wall Street profits and bonuses flourished. Wages are stagnant, unemployment claims have recently risen and, as The Wall Street Journal headlined on Tuesday, “Economists Downgrade Prospects for Growth.” That same edition of the Journal reported that 44.6 million Americans now survive on food stamps, an 11 percent increase in that misery index over the past year, while Geithner’s friends at Goldman are doing quite well.
Actually, Goldman wasn’t even a bank and was therefore ineligible for those massive government handouts until Geithner helped gain approval for the instant conversion of Goldman from an investment house to a commercial bank. Goldman was granted that status, and with it access to the Fed’s lending, soon after the privilege had been denied to the fellow investment bank Lehman Brothers (the $30 billion mentioned above was in addition to the $43.5 billion Goldman borrowed from other Fed programs). Although Lehman was allowed to go belly up, Geithner engineered the massive bailout of AIG, a move that turned out to be a cover for passing money to AIG’s clients, including the aforementioned Goldman Sachs. The man’s intentions were clear, even if all the secret details were not, when Obama picked him to be his point man in salvaging an economy that Geithner had done much to wreck.
Geithner’s priorities were all too obvious from his days in the Clinton administration’s Treasury Department when he worked first under former Goldman honcho Robert Rubin and then Lawrence Summers, who took six-figure speaking fees from Goldman and other banks while he was an adviser to candidate Obama. It was the recommendation of Rubin and Summers that landed Geithner the job as president of the New York Fed, where he faithfully followed the policy lead of Goldman-CEO-turned-Treasury-Secretary Henry Paulson.
It was back then and is now accurate to speak, as a New York Times headline once put it, of U.S. politics dominated by “The Guys From “Government Sachs’ “–but on an international scale. From the crisis in Greece, where Goldman manufactured toxic tax-based derivatives with abandon, to its betting against the success of the mortgage-based derivatives that Goldman designed and sold to others, the company was nothing short of a massive wrecking ball in the international economy.
Oh yes, what did Goldman do with that taxpayer money it borrowed back in 2008? It needed the money to cover the lousy bets of its Fixed Income, Currencies and Commodities trading unit, which had lost $320 million. Typical of the Goldman dealings in that arena was the $1.3 billion solicited from Col. Moammar Gadhafi’s Libya sovereign wealth fund, which according to a report in Tuesday’s Wall Street Journal lost 98 percent of its value and almost cost some Goldman executives doing business in Tripoli their lives.
But they survived, as the guys from Goldman always do. With the general “no banker left behind” program pursued by Geithner under both George W. Bush and Obama, the theory was that saving the banks would save the country. The first part worked out brilliantly, but the second act never occurred.
Read the entire article HERE.
04/01/2011 16:08 -0400
While it is no surprise that the day after Lehman failed, every single bank scrambled to the Fed to soak up any and all available liquidity after confidence in the entire ponzi collapsed, what is a little surprising is that of the 6 banks that came running to papa Ben, and specifically his Primary Dealer Credit Facility, recently upgraded, or rather, downgraded to accept collateral of any type, two banks (in addition to Lehman of course which at this point was bankrupt and was forced to hand over everything to triparty clearer JPMorgan), had the temerity to pledge bonds that had defaulted (i.e. had a rating of D). As in bankrupt, and pretty much worthless. Now that the Fed would accept Defaulted bonds as collateral: or “assets” that have no value whatsoever is a different story. What is notable is that the two banks that did so were not the crappy banks such as Citi or Morgan Stanley, but the two defined as best of breed: Goldman Sachs and JP Morgan. It is probably best left to the now defunct FCIC to determine if this disclosure is something that should also be pursued in addition to recent disclosure that Gary Cohn may have perjured himself by not disclosing truthfully his bank’s discount window participation. However, we can’t help but be amused by the fact that of all banks, the ironclad Goldman and JPMorgan would be the only ones in addition to bankrupt Lehman to resort to something so low.
PDCF collateral as of September 15, 2008. (Click on picture for larger view)
And further analysis indicates that a few weeks later, this practice became pervasive, with virtually every banker pledging defaulted bonds in exchange for money good cash with which to pretend these banks were doing just fine (not to mention that $71.7 billion in collapsing equities represented nearly half the total collateral of $164.3 billion pledged to receive $155 billion in cash.)
(Click on picture for larger view)
At some point people will inquire, perhaps not in the most peaceful of terms, just why this travesty of fiduciary responsibility was happening when it happened. But not yet. And certainly not while the Chairman continues to successfully levitate the market singlehandedly.
Imagine if you will that you are walking down the street flush with pay day cash when a mugger steals your wallet. Several people witness this theft, and all are willing to testify on your behalf. Unfortunately, the cop who apprehends our felon, rather than slap cuffs on him, suggests that he take the cash and the credit cards and pop into a nearby Tiffany’s to see if there is anything the wife might like. With a bagful of blue boxes in hand, the thief returns the cash empty wallet with maxed out credit cards to the cop. Our protector then turns to us and hands us a newly minted financial burden with a shrug.
A seemingly ridiculous scenario, but one that has occurred repeatedly in the last decade. Some thieves didn’t get away. Jeff Skilling, Dennis Kozloski, and Bernie Madoff, to name a few, are all doing time for their frauds. While their crimes hurt a lot of people, none participated in the near collapse of the financial system we experienced just a few short years ago. Those particular bandits have mostly escaped without prosecution and with a boat load of cash.
The following three crooks had an impact on your life, whether as a victim of deceptive lending practices, falling portfolio values, or by losing your job as a result of an economy that spiraled out of control when the methods they used to enrich themselves imploded …
“Listen, suckers were throwing money at us from both sides, you think I would turn a blind eye to that?”
Remember how the whole mess started in sub-prime mortgages, a large chuck of which were originated at Countrywide Financial (now owned by Bank of America) under the leadership of Angelo Mozilo. Mozilo co-founded Countrywide in 1969 along with the now defunct IndyMac Bank, both of which, for the most part, were standard mortgage originators until the housing bubble started inflating.
Mozilo and Countrywide did not create products like the option ARM, the 80-20 product, FlexPay, or any of the other dubious mortgage products that were developed in the early 2000s, but they swooped into the fray when it was clear that there was money to be made. In fact, according to the Center for Public Integrity, Countrywide was the top subprime lender between 2005 and 2007, originating $97 billion in loans at the peak of the housing market.
From 2001-2006, Mozilo is estimated to have received total compensation of $470 million. That includes $140 million in stock he sold prior to Countrywide’s demise. In fact, in a 2006 e-mail written just days after the massive sale, Mozilo is quoted as saying, “We have no way, with any reasonable certainty, to assess the real risk of holding these loans on our balance sheet.”
During the period that Mozilo disposed of chunks of his shares, Countrywide was engaged in an aggressive share buyback program. How can a CEO possibly justify a share buyback while unceremoniously dumping the stock?
Publicly, while reducing guidance for 2006 in October of that year, Mozilo continued to tout the strength of Countrywide and cited expected improvement of results from refinancing activity, while downplaying the real risk to the balance sheet.
For not disclosing the full extent of the risks a declining housing market posed to Countrywide’s portfolio, and for selling the stock while clearly in possession on material non-public information, Mozilo paid $67.5 million in fines, and the criminal investigation has been recently dropped. Not only is that a paltry sum for a man purportedly worth as much as $600 million, but $45 million of that is being paid by Bank of America as part of its obligations in the takeover of Countrywide.
It simply makes your head spin.
“I can’t hide myself very well, so how could I be hiding anything else?”
Cassano, former head of AIG Financial Products, is the man “credited” with the collapse of the insurance giant. Cassano amassed large returns for his division and AIG by writing insurance on bond portfolios in the form of Credit Default Swaps (CDS)– and that was fine, when he was winning. He bragged about his large, unhedged positions, fought internal audits that valued the swaps far below Cassano’s claims, and claimed that his products were so safe that investors would not lose as much as $1.
For a time the con was successful, but as the housing market began to crumble and the mortgages insured by Cassano’s CDS began to default, write offs began to mount. As late as December of 2007, Cassano still had AIG CEO Martin Sullivan convinced. Sullivan commented at the time that the probability of the housing crisis causing losses at AIG were “close to zero,” despite the fact that the company was witting off $1.1 billion as a result of CDS covering American mortgages. Two months later, that number became $11.1 billion, and the death spiral began.
For the eight year period from 2000-2008, Cassano earned roughly $315 million, including a $35 million bonus received after the collapse of the insurance giant and the $182 billion tax payer funded bailout. Despite clear evidence that he sought to conceal the massive problems in his division, no criminal charges have been filed.
How this cannot be considered fraud raises serious questions about the effectiveness of our legal system when it comes to financial crimes.
Fuld headed Lehman Brothers from 1994 until its collapse in 2008, and received total compensation in excess of $500 million, although he claims it was only $310 million. Under Fuld, Lehman engaged in some serious financial chicanery using what is known as “Repo 105″.
Repos, or Repurchase agreements, are used throughout the financial sector as a means of balancing the books for short periods. The Federal Reserve is active in the repo market, providing temporary funds collateralized by some securities (usually Treasuries) with an agreement that the receiver of the funds will repurchase the securities at a later date for a specified amount. All part of normal business, and the process basically amounts to a secured loan.
The thing that Lehman discovered is that, if you over collateralize a loan, you can treat it as a sale of assets, not a loan, despite the fact that you are contractually bound to repurchase your collateral. The name “Repo 105″ stems from the loop hole that allowed Lehman to use $105 of collateral for $100 in cash.
So at quarter end, when the company’s financials would come under scrutiny in coincidence with its earnings release, Lehman routinely “sold” assets under the repo agreement and used the proceeds to pay off some debt, thereby reducing leverage and “improving” its financial condition. A few weeks after earnings, Lehman would releverage by borrowing to repurchase the assets.
Fuld claims that he had no knowledge of the Repo 105 transactions, despite the fact that in one quarter Lehman used the transactions to “remove” as much as $50 billion of assets and debt from its balance sheet.
Now I am not the CEO of a large securities firm, but if I were, and my numbers changed for a few days by $50 billion, I think I might notice. So either Fuld is a complete idiot and should never have been doing anything more mentally strenuous than finger painting, or he is complicit in what amounts to fraudulent reporting.
As yet, no charges or penalties have been levied against Fuld.
Read the entire article HERE.
Last Modified: 26 Feb 2011 17:21 GMT
Hats off to Matt Taibbi for staying on the Wall Street crime beat, asking in his most recent report in Rolling Stone: “Why Isn’t Wall Street in Jail?”
“Financial crooks,” he argues, “brought down the world’s economy — but the feds are doing more to protect them than to prosecute them.”
President Barack Obama’s new chief of staff Bill Daley from JP Morgan Chase
True enough, but that’s only part of the story. The Daily Kos called his investigation a “depressing read” perhaps because it suggests that the Obama Administration is not doing what it should to reign in financial crime. Many of the lawyers he calls on to act come from big corporate law firms and buy into their worldview.
Kos should be more depressed by the failure of the progressive community to focus on these issues, and not pressing the government to do the right thing.
There is much more to this story. It’s also more about institutions than individuals, more about a captured system that enables and covers up crime and, then, deflects attention away from the deeper problem.
You could see that when television host Bill Mahrer pressed Taibbi to name the biggest Wall Street crooks, on his weekly political comedy show, he didn’t fully understand what we are really up against.
Here are ten of well-planned but flawed factors that help explain the procrastination and rationalisation for inaction. The government is not just to blame either. Several industries working together, through their firms associations, and well-paid operatives, collaborated over years to financialise the economy to their own benefit.
Personalising bad guys makes for good TV without offering a real explanation.
When financial institutions and services became the dominant economic sector, they, effectively, took over the political system to fortify their power. It was a done incrementally, over years, with savvy, foresight and malice.
First, many of those who might be charged with financial crimes and fraud invested in lobbying and political donations to insure that tough regulations and enforcement were neutered before the housing bubble they promoted took off.
After hundreds of bankers were jailed in the wake of the Savings and Loan crisis, financial fraudsters pushed for weakened regulations, guaranteeing that their colleagues wouldn’t be jailed in when the next crisis hit.
In effect, their deregulation strategy also deliberately “decriminalised” the environment to make sure that practices that led to high profits and low accountability would be permissible and permitted. What was once illegal soon became “legal”.
Former New York Federal Reserve Chief and current Secretary of the Treasury Timothy Geithner has close ties with JP Morgan and Goldman Sachs
The cops and watchdogs were taken off the beat. Anticipating and then dissolving restraints, they engineered a low-risk crime scene in the way the Pentagon systematically prepares its battlefields. This permitted illicit practices, to be encouraged by CEOs in a variety of control frauds to keep profits up so that the executives could extract more revenue.
Today’s proposed Republican cutbacks of the funding of regulatory bodies aims to undercut recently passed financial reforms. One Commissioner of the Commodity Futures Trading Commission said if the budget is slashed, “there would essentially be no cop on the beat…we could once again risk another calamitous disintegration.” He added, according to a New York Times report, “the process will mean nothing, squat, diddley … if we get cut we’re going to be in a world of hurt.”
Second, the industry invented, advertised and rationalised exotic financial instruments as forward looking “innovation” and “modernisation” to disguise their intent while enhancing their field to maneuver.
This was part of creating a shadow banking system operating below the radar of effective monitoring and regulation. Where is the focus on controlling the out of control power of the leverage-hungry gamblers at unregulated hedge funds?
Third, the industry promulgated economic theories and ideologies that won the backing of the economics profession which largely did not see the crisis coming, making those who favored a crackdown on fraud appear unfashionable and out of date.
As economist James Galbraith testified to Congress: “…the study of financial fraud received little attention. Practically no research institutes exist; collaboration between economists and criminologists is rare; in the leading departments there are few specialists and very few students. Economists have soft-pedaled the role of fraud in every crisis they examined, including the Savings & Loan debacle, the Russian transition, the Asian meltdown and the dot.com bubble. They continue to do so now.”
Fourth, prominent members of the financial services industry were appointed to top positions in the government agencies that should have cracked down on financial crime, but instead looked the other way. The foxes were indeed guarding the chicken coop guiding institutions that tolerated if not enabled an environment of criminality.
Alan Greenspan and Ben Bernanke were repeatedly warned by underlings at the Federal Reserve Bank about pervasive predatory practices in the mortgage and Subprime markets and they chose to do nothing. Now Greenspan acknowledges pervasive fraud but decries the lack of enforcement while Bernanke wants to run a Consumer Protection Agency after ignoring consumer complaints for years. Even as the FBI denounced “an epidemic of mortgage fraud” in 2004, their white-collar crime units were downsized.
Fifth, the media has been complicit, seduced, bought off and compromised. The housing bubble mushroomed in the very period that the media was forced to downsize. Dodgy lenders and credit card companies pumped billions into advertising in radio, television and the internet almost insuring that there would no undue media investigations.
Financial journalists increasingly embedded themselves in the culture and narrative of Wall Street by hyping stocks and CEOs. The “guests” routinely chosen by media outlets to explain the crisis were often part of it.
Bill Clinton signs into law the Gramm-Leach-Bliley Financial Services Modernization Act, November 12, 1999. Under the 1999 Financial Services Modernization Act, effective control over the entire US financial services industry (including insurance companies, pension funds, securities companies, etc.) had been transferred to a handful of financial conglomerates and their associated hedge funds.
Foxes guarding the chicken coop
“Many of the ‘experts’ whom I read or see on TV seem clueless, [and] full of hot air. Many of their predictions turn out wrong even when they seem so self-assured and well-informed in making them,” writes Jim Hightower,
His advice: “Don’t be deterred by the finance industry’s jargon (which is intended to numb your brain and keep regular folks from even trying to figure out what’s going on).”
Sixth, politicians and corporate lawyers fashioned settlements of abuses that were exposed rather than prosecutions. The government benefited by getting large fines while businessmen avoided jail.
Financial executives were often rewarded with bonuses and huge compensation for practices that skirted or crossed the line of criminality.
Intentional violations of the spirit and letter of laws were justified because “everyone does it” by high priced legal firms that often doubled as lobbyists. Conflicts of interest were sneered at. Judges, dependent on industry donations for reelection looked the other way.
Seventh, as the economy changed and industries that were once separated began working together, laws were not updates. Financial institutions worked closely with Insurance companies and real estate firms. Yet law enforcement did not recognised this new reality.
Financial crime was still seen almost entirely under the framework of securities laws that are designed to protect investors, not workers or homeowners who suffered far more in the collapse. Cases are framed against individuals with a high standard of proving intent, not under other kinds of laws used to prosecute organised crime and conspiracies.
By defining crimes narrowly, prosecutions became few and far between.
“Cases against Wall Street executives can be difficult to prove to the satisfaction of a jury because of the mind-numbing volume of emails, prospectuses, and memos involved in documenting a case,” Reuters news agency reported.
Convicted financial criminal Sam Antar who appears in my film Plunder is contemptuous of how government tends to proceed in these cases, in part because they don’t seem to understand how calculated these crimes and their cover-ups are. “Our laws—innocent until proven guilty, the codes of ethics that journalists like you abide by limit your behavior and give the white-collar criminal freedom to commit their crimes, and also to cover up their crimes,” he said.
“We have no respect for the laws. We consider your codes of ethics, and your laws, weaknesses to be exploited in the execution of our crimes. So the prosecutors, hopefully most prosecutors, are honest if they’re playing by the set of the rules; they’re hampered by the illegal constraints. The white-collar criminal has no legal constraints. You subpoena documents, we destroy documents; you subpoena witnesses, we lie. So you are at a disadvantage when it comes to the white-collared criminal. In effect, we’re economic predators. We’re serial economic predators; we impose a collective harm on society, time is always on our side, not on, not on the side of justice, unfortunately.”
Eighth, even as the economy globalises, and US financial firms spread their footprint worldwide, there was little internationalisation of financial rules and regulations.
Today, even as the French and the Germans propose such rules, Washington still opposes a tough global regime of codes of conduct.
Overseas, in Greece and England, and other parts of Europe, there has been an indictment of American corporate predators, especially Goldman Sachs. They are being denounced as “financial terrorists” and discussed in terms of their links to various elite business formations like the Bilderberg Group.
Ninth, With the exception of softball inquiries by a financial crisis inquiry commission, there has been no intensive investigations in the United States even like the tepid 9/11 Commission.
While Senator Carl Levin of Michigan did spend a day aggressively grilling Goldman Sachs on one deceptive practice, their defense was more telling about the real nature of the problem: “everyone did it”.
The case for criminality has still not achieved critical mass as an issue to become a dominant explanation for why the economy collapsed. In fact, it is still being sneered at or ignored.
Finally, tenth, a big problem in my countdown, are the progressive critics of the crisis who also largely ignore criminality as a key factor and possible focus for an organizing effort.
They treat the crisis as if they are at a financial seminar at Harvard, focusing on the complexities of derivatives, credit default swaps and structured financial products in language that ordinary people rarely can penetrate. They argue that banks should not be too big to fail, but rarely they are not too big to jail.
Few progressive activist groups stress the immorality of these practices, much less their criminality after all these years! There is little active solidarity even in the progressive community with the newly homeless or jobless.
Where is the active empathy, compassion and the caring for the victims of the financial crimes?
A populist response to the crisis has been muted. There is little pressure from below on the Administration and Justice Department—which has now created a financial crimes task force—to take real action. It is as if this crime crisis within the financial crisis does not exist.
Curiously, as they refuse to discuss the pervasive fraud that did occur, the Obama administration is considering a “global settlement” of all housing fraud to get the issue off the table. They a proposing a $20bn dollar deal to bury the problem.
By all means, workers should rally to protect their jobs and pensions as they have in Wisconsin, but they should realise that it is the banks who are ultimately to blame for the financial pressures behind the attack on them. Pension funds have lost billions because of Wall Street scams. State governments have taken a big hit.
Why have the unions and leftist groups been mostly silent on these issues?
Even after the markets melted down, even after Wall Street bonus scandals and bailout disgraces, Wall Street has hardly been humbled. It is still spending a fortune on PR and political gun slinging with 25 lobbyists shadowing every member of Congress to scuttle real reform.
Its arrogance is evident in an email the Financial Times reported was “pinging around” trading desks. It reads in part:
“We are Wall Street: It’s our job to make money. Whether it’s a commodity, stock, bond, or some hypothetical piece of fake paper, it doesn’t matter. We would trade baseball cards if it were profitable… Go ahead and continue to take us down, but you’re only going to hurt yourselves. What’s going to happen when we can’t find jobs on the Street anymore? Guess what: We’re going to take yours… We aren’t dinosaurs. We are smarter and more vicious than that, and we are going to survive.”
Perhaps it’s not surprising, that in an act of preemptive anticipation, some years ago, Wall Street firms began financing the construction and administration of privatised jails. They know how to profit from incarceration too.
When will we call a crime a crime? When will we demand a jail-out, not just more bail-outs. Unless we do, and until we do, the people who created the worst crisis in our time will, in effect, get away with the biggest rip-off in history.
Read the entire article HERE.
February 14, 2011, 9:36 pm
By ANDREW ROSS SORKIN
Legal/Regulatory | DealBook Column
New York Times
A new study backed by pro-business groups takes a harsh stance on rules intended to bring transparency to the $600 trillion derivatives market. The report, published on Monday, claims that proposed regulation could cost 130,000 jobs and could cut corporate spending by $6.7 billion.
The findings are clearly meant to scare politicians and drum up public support — just as financial regulators are set to testify on the issue before a Congressional committee on Tuesday. And at first blush, the study would seem to be good ammunition for the Chamber of Commerce and its other supporters.
The study was conducted by Keybridge Research, a seemingly independent economics and public policy consulting firm. The firm’s bona fides include an all-star roster of academics, including Joseph E. Stiglitz, a Nobel laureate in economic science; David Laibson, a professor of economics at Harvard, and Stephen P. Zeldes, a professor of economics and finance at Columbia’s Graduate School of Business.
But a closer look at the report raises some serious questions. For one, the findings seem oddly out of step with the views of some of the group’s luminaries, including Mr. Stiglitz, who is advertised on Keybridge’s site as an adviser.
How could that be?
Well, it appears that Mr. Stiglitz and many of the firm’s advisers are not advisers at all.
“This is the first I have heard about it,” said Mr. Stiglitz, who just returned home on Sunday after a five-week trip abroad. He said he was surprised to be listed on the group’s Web site. After reading the study, he said, “It’s not a very good report.”
Some of the firm’s other so-called advisers must have agreed with him.
As I made calls about the relationship between Keybridge and the academics, names mysteriously disappeared from the group’s site on Monday. By the end of the day, Keybridge’s list of affiliated advisers had shrunk to four, from seven.
When I called Keybridge’s president, Robert F. Wescott, who during the Clinton administration was a special assistant to the president for economic policy at the National Economic Council, he seemed slightly startled.
“It is true that David and Steve asked to be removed from the Web site,” he said. “These professors did not work on this project and were not aware of it, but they helped us with other projects.” He asserted that none of their names were attached to the study, just to the firm.
He also contends that Mr. Laibson and Mr. Zeldes were distancing themselves as a result of “what happened with the movie ‘The Inside Job,’ ” not the study. “That’s how it was presented to me,” Mr. Wescott said.
The movie, which focuses on the financial crisis, raises questions about economists and their consulting arrangements with big business. Shortly after the film’s release, the American Economic Association voted to establish a special committee to create a professional code of conduct.
Mr. Laibson and Mr. Zeldes both said in e-mails that they just learned about the report on Monday and were not advisers to the firm. The Chamber of Commerce did not return a call for comment.
Mr. Stiglitz said he had done “some work” for Keybridge, but not for a while. “The last thing I did for them was in May 2009.”
Clearly the substance of the study — and the regulations it takes aim at — matter in shaping the future of the derivatives market. The study was strategically released for high impact. Gary Gensler, the chairman of the United States Commodity Futures Trading Commission, and other financial regulators are scheduled to testify on Tuesday about proposed derivatives rules before of the House Financial Services Committee.
At issue is how the rules apply to so-called end users like airlines or food companies that often buy derivatives to hedge their commodity costs. The fear is that companies will be required to post extra capital against those complex securities, amounting to 3 percent of their value. The potential results: a hit to their bottom lines and, more broadly, the economy.
The study, whose proponents also include the Business Roundtable, was clearly in the camp that such legislation would be bad for the economy since companies would have to set cash aside for derivatives instead of spending the money on jobs or new factories.
But many economists derided the report within hours of its publication.
“This is not any kind of research. This is people who want to overleverage and risk the system — because, once again, they will get the upside and taxpayers/all citizens get the downside,” Simon Johnson, a professor at the Sloan School of Management of the Massachusetts Institute of Technology and a senior fellow at the Peterson Institute for International Economics, wrote on his blog. (Mr. Johnson also contributes to the Economix blog of The New York Times.)
Mr. Stiglitz was even more adamant, saying the study’s conclusions encouraged the equivalent of “free fire insurance,” in that companies could protect themselves from commodity price swings without paying up. “The argument they make is particularly foolish,” he said. Mr. Stiglitz also said the argument seemed ludicrous in light of corporate America’s already stingy ways: “Companies are sitting on $2 trillion of cash. It’s just an embarrassment that they’d use that argument in the current context.”
When I told Mr. Wescott of Keybridge about Mr. Stiglitz’s comments, he replied that “the client had asked us” to put the report together. “It was a hypothetical study.”
Correction: February 15, 2011
An earlier version of this article referred incorrectly to the size of the $600 trillion derivatives market.
Read the entire article HERE.
September 4, 2010
By Michael Hudson
The Angelides Committee Sidesteps the Mortgage Fraud Issue
What is the difference between today’s economy and Lehman Brothers just before it collapsed in September 2008? Should Lehman, the economy, Wall Street – or none of the above – be bailed out of bad mortgage debt? How did the Fed and Treasury decide which Wall Street firms to save – and how do they decide whether or not to save U.S. companies, personal mortgage debtors, states and cities from bankruptcy and insolvency today? Why did it start by saving the richest financial institutions, leaving the “real” economy locked in debt deflation?
Stated another way, why was Lehman the only Wall Street firm permitted to go under? How does the logic that Washington used in its case compare to how it is treating the economy at large? Why bail out Wall Street – whose managers are rich enough not to need to spend their gains – and not the quarter of U.S. homeowners unfortunate enough also to suffer “negative equity” but not qualify for the help that the officials they elect gave to Wall Street’s winners by enabling Bear Stearns, A.I.G., Countrywide Financial and other gamblers to pay their bad debts?
There was disagreement last Wednesday at the Financial Crisis Inquiry Commission hearings now plodding along through its post mortem on the causes of Wall Street’s autumn 2008 collapse and ensuing bailout. Federal Reserve economists argue that the economy – and Wall Street firms apart from Lehman – merely had a liquidity problem, a temporary failure to find buyers for its junk mortgages. By contrast, Lehman had a more deep-seated “balance sheet” problem: negative equity. A taxpayer bailout would have been an utter waste, not recoverable.
Only a “liquidity problem,” or a balance sheet problem of negative equity?
Lehman CEO Dick Fuld is bitter. He claims that Lehman was unfairly singled out. After all, the Fed lent $29 billion to help JP Morgan Chase buy out Bear Stearns the preceding spring. In the wake of Lehman’s failure it seemed to gain the courage to say, “Never again,” and avoided new collapses by bailing out A.I.G. – saving all its counterparties from having to take a loss.
Was this not a giveaway? Mr. Fuld implied. Why couldn’t the Fed and Treasury do for Lehman what they did with other Wall Street investment firms and stock brokers: let it reclassify itself as a bank so it could pawn off its junk mortgages at the Fed’s discount window for 100 cents on the dollar, sticking taxpayers with the loss? (And by the way, will these firms ever be asked to buy back these mortgages at the price they borrowed against from the government? Or will they be allowed to walk away from their debts in a Wall Street version of “jingle mail”?)
This is the soap opera that Americans should be watching, if only it weren’t conducted in the foreign language of jargon and euphemism. At issue is whether Lehman’s crisis was merely a temporary “liquidity problem,” that time would have cleaned up much like BP’s oil spill in the Gulf; or, did the firm suffer a more deep-seated “balance sheet problem” (negative equity), as Federal Reserve Chairman Ben Bernanke claims – a junk balance sheet, composed of assets that not only had no buyers at the time, but had no visible likelihood of recovering their market price even after the $13 trillion the Treasury and Federal Reserve have spent to bail out Wall Street.
Insisting that Lehman should have shared in Washington’s $13 trillion giveaway, Mr. Fuld testified that his firm was just as savable as Countrywide or A.I.G. – or Fannie Mae for that matter. Lehman was perversely singled out, he claims. Was it not indeed as savable as the Fed and Treasury claim the U.S. real estate sector is? Like over-mortgaged homeowners, all it needed was enough time to finish selling off its portfolio, given enough loan support to tide it over.
The problem, of course, is that the securities that Lehman hoped to pawn off were fraudulent junk. American homeowners are victims, not crooks. Wall Street bailed out crooks at Countrywide and its cohorts. The credit-rating agency Fitch has found financial fraud in every mortgage package it has examined. And these are the packages that have made Wall Street rich and powerful enough to gain Washington bailouts to establish them as a new ruling class, bailouts to use for buying up Washington politicians and lawmakers, and for buying out the popular press to tell people how necessary Wall Street financial practice is to “support” the economy and “create wealth.”
Could any other daytime telecast have a more typecast villain than Mr. Fuld? A novelist would be hard-put to better personify greed, arrogantly playing bridge with his boss while Lehman burned. Yet his testimony has a certain logic. If the negative equity suffered by a quarter of U.S. homeowners can be saved, as the Fed claims it can, where should the line be drawn?
Or to put this question the other way around, why are ten million American homeowners being treated like Lehman, if the Fed believes that they are as savable as Countrywide and A.I.G.?
Huge sums are at stake, because the bailout has left little for Social Security, and nothing to bail out the insolvent states and cities, or for more stimuli to pull the national economy out of depression.
Most relevant in Mr. Fuld’s self-pitying defense before the Angelides Committee is not what he said about his own firm, but his accusation that the Fed and Treasury rescued the rest of Wall Street. Weren’t other firms just as bad? Why was Lehman singled out?
The Fed’s witnesses gave a devastating reply. They drew a clear distinction between a temporary “liquidity problem” and outright negative net worth – the “balance-sheet problem” of insufficient assets to cover one’s debts. Lehman was so badly managed, the Fed claimed – so reckless and arrogant in its belief that it could cheat its customers by selling junk at a huge markup – that it could not have been rescued except by an outright taxpayer giveaway.
As the Fed’s Chief Counsel, Scott Alvarez, put matters: “I think that if the Federal Reserve had lent to Lehman?…?in the way that some people think without adequate collateral?…?this hearing and all other hearings would have only been about how we had wasted the taxpayers’ money – and I don’t expect we would have been repaid.” Like downtown Los Angeles, there was no “there” there.
Included in the hearings’ evidence is an exasperated e-mail sent by Treasury Secretary Hank Paulson’s chief of staff, Jim Wilkinson, on Sept. 9, 2008: “I just can’t stomach us bailing out lehman. Will be horrible in the press.” Five days later, on Sept. 14, he added that unless a private buyer could be found (e.g., as JP Morgan Chase stepped forward to buy Bear Stearns), “No way govt money is coming in … also just did a call with the WH [White House] and usg [U.S. Government] is united behind no money … I think we are headed for winddown.”
Lehman’s problem was not just temporary illiquidity. It had a fatal balance-sheet problem: Its assets were not worth anywhere near what it owed. So with poetic justice, it was in the same position as the subprime borrowers whose junk mortgages it had underwritten and sold to investors gullible enough to believe Moody’s and Standard and Poor’s AAA ratings. This fraudulent junk was supposed to be as safe as a U.S. Treasury bond. But it turned out to be only as safe as Social Security and state pension promises are in today’s “Big fish eat little fish” world.
Yet Mr. Fuld is correct in pointing out that not only Bear Stearns and A.I.G., but also Morgan Stanley and Goldman Sachs would have failed without state support. So the question remains: Why bail out these firms (and their counterparties!) but not Lehman?
This is too narrow a scope to pose the proper question. What needs to be discussed is the result of Washington arranging for Wall Street to repay its TARP, A.I.G. and other bailout money – including that of Fannie Mae and Freddie Mac – by “earning its way out of debt” at the “real” economy’s expense. Why has Washington refused to write down the bad debts of homeowners, states and cities, and companies facing bankruptcy unless they annul their pension promises to their employees? Why is Washington is treating the American economy like it treated Lehman and telling it to “Drop dead”?
The explanation is that a double standard exists. The wealthy get bailed out – the creditors, not the debtors. And even the fraudsters, not their victims.
Sidestepping the Fraud Issue: Bailing out fraudsters instead of saving America’s economic base
Recent federal bankruptcy proceedings have exposed Lehman’s deceptive off-balance-sheet accounting gimmicks such as Repo 105 to conceal its true position. No fraud charges have yet been levied, but this is the invisible elephant in the Washington committee rooms. “Everyone was doing it,” so that makes it legal – or what is the same thing these days, non-prosecutable in practice. To prosecute would be to disrupt the financial system – and it is Fed doctrine that the economy cannot survive without a financial system enabled to “earn its way out of debt” by raking off the needed wealth from the rest of the economy?
So the Fed, the Treasury and the Justice Department have merely taken the timid baby step of pointing out that Lehman suffered from such bad management that no firm was willing to buy it out. Barclay’s was interested, but Mr. Fuld was so greedy that he found its offer not rich enough for his taste. So he ended up with nothing. It is a classic morality tale. But evidently not fraud.
The fraud issue lies as far outside the scope of the financial committee meetings as does the question of how the economy should cope with its unpayably high mortgage, state and local debts in the face of its inadequately funded pension obligations. Fed Chairman Bernanke testified on Thursday, Sept. 2, that “the market” itself breeds what most people would call fraud. Widening the market for home ownership necessarily involves lowering loan standards, he explained. But as the Lehman failure illustrates, where should we draw the line between “illiquidity” and insolvency on the one hand, and higher risk and outright fraud?
The Fed argues that the economy cannot recover without a solvent financial system. But what about that large part of the financial system based on fraud? Would the economy fall apart without it – without mortgage fraud, without deceptive packaging of junk mortgages, and for that matter without computerized gambling on derivatives? What of the credit-ratings agencies whose AAA writings were as much up for sale as the conscience and honesty of politicians on the Senate and House Banking Committees? Do we really need them?
And does the economy need more credit (that is, debt)? Or does it need jobs? Does it need to un-tax the banks and give tax-favoritism to Wall Street (“capital gains” tax rates) to enable it to earn its way out of debt at the expense of the production-and-consumption economy?
The question that Washington financial committees should be asking (and economics textbooks should be posing) is whether wider home ownership is really dependent on easier and looser lending standards. After all, the effect of easy credit is to enable borrowers to bid up housing prices. Is this really how to make the U.S. economy more competitive – given the fact that industrial labor now typically pays 40% of its wage income for housing?
Or, does the Fed’s easy-money policy deregulation of oversight open the way for asset-price inflation that puts home ownership even further out of reach – except at the price of running up a lifetime of debt to the banks that write the loans on their keyboard at steep markups over their cost of funding from the compliant Fed?
Who is to benefit from the Fed’s easy money policy – consumers and homeowners, or Wall Street?
This is the broad issue that should be discussed. What would have happened without the bailout? (Remember, Republican Congressmen opposed it – before that fatal Friday when Maverick John McCain rushed back to Washington and said he would not debate Mr. Obama that evening unless Congress approved the bailout of is Wall Street backers.) What if debtors had been bailed out by a write-down of bad debts, instead of the lenders who had made bad loans and the large institutions that bought them?
The bailout has saddled taxpayers not only with $13 trillion that now must be sacrificed by the economy at large (but not by Wall Street), but with the cost of a decade-long depression resulting from keeping the bad debt on the books. This is what rightly should be deemed criminal.
Defenders of Wall Street insist that there was no alternative. And the committee hearings are carefully only listening to such people, because these are very respectable hearings. They are writing mythology, almost as if they are crafting a new religion. In this new ethic, Wall Street financial institutions – “credit creators,” that is, debt creators – are supposed to fund industry, not strip assets or make bad loans. Without rich people, who would “create jobs”? Such is the self-serving logic of Wall Street. For them, Wall Street is the economy.
The wealth of a nation is worth whatever banks will lend, by collateralizing the economic surplus for debt service.
What the Angelides Commission really should focus on is whether this is true or false. That would make it a soap opera worth watching. The Fed so far has stonewalled attempts to discover just who was bailed out in autumn 2008? But most important of all is, what dynamic was bailed out? What class of people?
The answer would seem to be, financial firms employing and serving the nation’s wealthiest 1%? Any and all fraudsters among their ranks? (There has not been a single prosecution, as Bill Black reminds us.) Or the remaining 99% of the population – their bank deposits and indeed, their jobs themselves?
Academic textbooks pretend that the economy is all about production and consumption – factories producing the things their workers buy. The distribution of wealth does not appear, nor is it regularly tracked in statistics. But in Washington and at the hearings, the economy seems to be all about lending and debt, all about balance sheets.
I believe that the beneficiaries were fraudsters, and that the system cannot be saved. Trying to save it by keeping the debts in place – and letting Wall Street banks “work their way out of debt” at the U.S. economy’s expense – threatens to lock the economy in a chronic debt deflation and depression.
At issue is the concept of capital. Does money that is made by short-term, computer-driven financial trades qualify as “capital formation” and hence deserving of tax breaks? Are the billions of dollars of “earnings” reported by Wall Street speculators to be taxed at the low 15% “capital gains” rate? That is only a fraction of the income-tax rate that most workers pay – on top of which is piled the 11% FICA wage withholding for Social Security and Medicare that all workers have to pay on their salaries up to the cut-off point of about $102,000 (This cut-off frees from this tax the tens of millions of dollars that hedge fund traders pay themselves).
Or should these trading gains – a zero-sum activity where one party’s gain is, by definition, another’s loss (usually one’s customers) – be taxed more highly than poverty-level income of workers?
A short while ago the Blackstone hedge fund’s co-founder, Stephen Schwarzman, characterized the attempt to tax short-term arbitrage trading gains at the same rate that wage-earners pay as analogous to Adolph Hitler’s invasion of Poland in 1939. It is a class war against fraudsters and criminals – an unfair war as serious as World War II.
In Mr. Schwarzman’s inspired vision the Democrats are re-enacting the role of Adolph Hitler by mounting a fiscal blitzkrieg to force billionaires to pay as high a tax rate as workers. Are not Wall Street firms doing “God’s work,” after all, as Goldman Sachs chairman Lloyd Blankfein, put it last fall? And if they are, then are not those who would tax or criticize Wall Street “God-killers”?
If religion can be turned on its head like this – where the Invisible Hand of Wall Street (invisible to the Justice Department, at least) is elevated to a faux-Deist moral philosophy – is it any surprise that economic orthodoxy and formerly progressive tax policy is succumbing?
The rentiers are fighting back – against the Enlightenment, against Progressive Era tax policy, and against hopes for U.S. economic recovery.
Given today’s florid emotionalism when it comes to discussing Wall Street finances, it hardly is surprising that the Angelides hearings do not dare venture into such territory as to ask whether the bottom 90% of the U.S. economy might need to be bailed out with debt relief just as Wall Street’s elites were.
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