Forget Bank Reform Lets Send Goldman Sachs To Prison Now
Goldman Sachs CEO Lloyd Blankfein was questioned by Senator Levin on April 27, along with other members of the Senate Subcommittee on Investigations. Blankfien was quested about his company’s activities regarding CDOs sales. When asked repeatedly if selling securities that the company considered worthless (as told in emails) is ethical, Blankfein would not answer the question and replied, “Senator, there is a lot in your question…and I am sure we will spend a lot of time on different parts of it.” Levin again questioned him, wanting Blankfein to take responsibility for what his company had done. Blankfein merely said, seemingly contemptuously, “In the context of market- making, that is not a conflict. Clients shouldn’t care what our views are.”
Congress wants Bank Reform, more laws that these bankers and brokerages will ignore. We already have laws against what Goldman Sachs did. The SEC needs to enforce the laws they already broke and send these people to prison. What they did was fraud, and people go to prison for fraud. Send them to prison now.
What exactly is the definition of fraud? Wikipedia says that fraud is “an intentional deception made for personal gain or to damage another individual.” How does fraud apply in this case? Look at what these banks and brokerages did. Brokerages and banks were selling CDOs. In its heyday in 2007, sales were over $500 billion. These sales were made to pensions funds, 401k’s, individuals, etc. As an example, the California Public Employees’ Retirement System, the largest public pension fund in the nation, invested $140 million. A retirement fund such as this must put its cash in conservative, low-risk investments. Afterall, these are retirement funds.
And what is a CDO? Wikipedia says that a CDO is “a type of structured asset-backed security (ABS) whose value and payments are derived from a portfolio of fixed-income underlying assets.” The relevant words are UNDERLYING ASSETS. Banks and brokerages had thousands of mortgages from individuals, both sub-prime and prime, the managers totaled their overall value, placed them into “packages,” and sold them to unsuspecting investors as AAA rated securities. These packages were “collateralized” because they had a collateral (asset) underlying them (mortgages). CDOs were first invented to give the economy liquidity by having banks and brokerages sell off their mortgage debts, thereby freeing up capital to loan. Seems ok, true?
Had banks and brokerages not oversold these CDOs, no one would have said anything. Package the debt and sell it off to another institutional investor. But greed is a human characteristic. Brokerages and banks took these same mortgages and packaged them over and over again into CDOs. For many of these CDOs, there were no assets underlying them. The fact that fewer and fewer CDOs were even able to find insurance should have been an alert to the banks and brokerages that CDOs should stop being issued and sold. And certainly do not sell these to pension funds, IRAs, or retirement accounts. When the mortgages that were associated with these CDOs defaulted because there were no real assets underlying them, smaller investors life savings were wiped out.
Packaging CDOs is not unique to banks and brokerages. Previously they had packaged student loans and sold them as AAA rate securities to pensioners, knowing full well that student loans default rate was exceptionally high. And only 2 years ago, brokerages and banks were caught selling auction rate securities to retirees. Auction rate securities were claimed to be tax-free money market accounts. Brokerages told their clients they were in cash! That was $300 million fraud with so many investors losing everything.
The problem with banks and brokerages is that no one goes to prison. Instead the SEC just fines them for violating the law. With auction rate securities, clearly fraud, the brokerages received expensive fines. Wachovia Securities paid $40 million in fines. But these brokerages and banks consider fines as a cost of doing business. Most companies consider payroll, rent, and advertising as a cost of doing business. Brokerages consider getting fined for fraud cost of doing business.
Put Goldman Sachs in prison. If the SEC put Goldman executives in prison, we wouldn’t need to pass bank reform. The laws are already there and being broken and ignored by these companies. Bank reform adds more laws brokerages like Goldman Sachs will get around. At the Senate Subcommittee hearing it was very clear that these firms have an “above the law” mentality. Why enact more laws these firms will just ignore. The answer is easy…send the executives to prison with Bubba as their cell mate. Bubba will show them the “extra-curricular activity” they need. The SEC should stand firm and put these guys in prison. Bank reform isn’t needed. We just need a few Bubbas in prison to put these bankers in their place.
Conspiracy Theory CDOs Anyone.
Today’s economics are not for the timid. Above and beyond knowing the basics of how money works, there is another layer which needs to be fathomed. That layer is called by many shadow banking.
The public would be wise to become very intimate to the games afoot. The alphabet soup of derivatives first must be made comprehensible to be controlled.
The author was fortunate to have been in banking in the mid 90s. That particular banking group was very concerned. It was very clear that swaps and derivatives could cause a financial meltdown. The underlying concern was that greed alone would drive the industry into wilder and wilder financial instruments with no underlying value. It did come to pass. As early as July 2007 the auction system for these kinds of instruments started to fail. Financial institutions backed away from taking on these “same as cash” instruments.
For the bankers the bigger fool theory was the rage by then. Systematically, the institutions such as Merrill Lynch, and Wachovia Securities dumped millions of dollars of these into the hands of unsuspecting companies, and even retirees to get them out of their holding before the wheels fell totally off the cart.
The instruments were created by companies such as Blackrock and Nuveen. By mid-February 08 the market for these seized up entirely. We are talking about a 300 billion dollar market freezing up.
When the CDOs froze, retirees among others found their economic lives were at a standstill. Complaints poured into the Office of Financial Regulation.
The players in the industry feigned innocence. The investigations continued. In the end many small investors got back their principal at least.
Was the press interested? Well, it didn’t boil down to a quick set of soundbytes. Besides, the perpetrators were some of the biggest financial institutions in the country.
Finally, when Bernanke and Paulson held the country ransom for 700 billion dollars the story got media attention.
It is not my ideal of accountability to have the taxpayer pay for the financial excesses of the financial institutions.
The rough condition of the stock market just after the last election was rumored to in part have been due to the rumor that “full bonuses” may not be forthcoming to the architects of the meltdown.
For example, Dick Fuld of Lehman Brothers was know to be facing a cut. His bonuses in 2007 had been a cool 34 million.
Alan Greenspan for one had believed in the Randian notion of enlightened self interest. That is the belief that any behavior will be restrained if it would kill a golden goose. Greed clearly trumped Objectivism much to the shock of Greenspan.
These “Too big to fail” are not national institutions. They are international. The idea of a sovereign nation is a thing of the past.
Is this to be the new world? Wait and see.
