roachboy

FT.com / Companies / Banks - Goldman accused of subprime fraud

here's a link to the full text of the sec complaint against goldman sachs:
http://media.ft.com/cms/9e6480f0-497...144feab49a.pdf

here an edito from the financial times on this fiasco, which outlines the situation pretty well:
FT.com / Comment / Editorial - SEC takes off the gloves on Goldman


i think this is interesting...the story is still taking shape and i am in the mines so haven't really time to develop as comprehensive op as i'd like, but i think the approach at once a good thing and also curiously limited in that there were systemic problems around the subprime/mortgage backed securities businesses...and going after goldman as the first move seems a version of the "bad apple" idea...the system is in itself legitimate/functional except for distortions introduced by a few rogue elements.
but at the same time, there seems from the material that's publicly available that the charges are merited.

and it's interesting to read the financial times arguing that if the charges are true that the book should be thrown at goldman.

what i am wondering is whether in their effort to defend themselves goldman will open this onto the systemic problems that attended this derivatives trading and in the process open the way to far more regulation of cowboy capitalism than is on the table already.

what are your thoughts?



===
addendum:

what the sec is, what it can and cannot do:
http://en.wikipedia.org/wiki/U.S._Se...nge_Commission

another bullet-pointy summary of the sec's charges against goldman:
http://www.marketwatch.com/story/sec...k=MW_news_stmp

and another, from truth out:
http://www.truthout.org/government-c...ith-fraud58633

i post all this stuff because it's not obvious what the charges are really about nor what the consequences of their being filed will ultimately be.
but it is a step.
my pollyanna side thinks, as i mentioned above, that the financial oligarchy could find itself being brought under the control of the legal apparatus that functions, particular under the rubric of "free markets," to protect them (and not regular people from them.)

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Derwood

there are a big string of great Rolling Stone articles about the subprime fraud, all worth reading. The big players on Wall Street were (and still are) all total cretins

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Cimarron29414

If the charges are true, then there is no doubt that there was wrongdoing and that goldman should get nailed.

This area of the meltdown is absolutely the part where corporate inpropriety existed. These subprime mortgages became, in essence, the hot potato of commodity trading. Everyone would buy them and then pass them on quickly before getting "caught" with them when it all tumbled down. To this end, few seemed ethical enough to resist the temptation of high profits for big fees and admit the risk was simply to great to take.

One has to consider that, if these loans had not been insured by "too big to fail" (FDIC, Freddie, Fannie) stuff, they would not have existed. No bank would have written these loans unless
a) they were forced to.
b) they knew they could sell them quickly.
c) they knew if they failed they would get bailed out.

The problem, at its core, is that loans were created which should have NEVER been written. There are more entities than just greedy banks responsible for these loans.

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roachboy

this is a systemic matter to my mind.

at the center of this farce were the ratings agencies. without moody's or standard and poor rating these devices as A or above the trade would not have been possible in anything like the way it was. and it's obvious from all research so far that no-one, including the people are these agencies, actually knew what the devices were that they were rating or buying or selling. and it didn't matter: velocity was the friend of every trading house.

don't forget that there was almost **nothing** in the way of oversight from the state and that a direct result of all that neo-liberal nonsense about "free markets" and "enlightened self-interest" and all that. hell, greenspan even opposed setting up a clearinghouse for derivatives that would have introduced a **little** transparency into the whole trade.

and it was driven by a real estate bubble that everyone knew was a bubble.
but somehow or another Neo-liberalism and greed allowed folk to convince themselves that this was unlike other bubbles, something much bigger that would unfold its bubbleness over an eternity.

this is the crux of my personal ambivalence about this. it seems a very narrow charge that is aimed at giving a sense of redress for a very very large event that seems very very criminal in that way that only contemporary capitalism can. you know, that bland criminality, the kind that wears suits with little american flags pinned on them.

__________________
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spinning dog. such faithfulness it hear

it make you sick.

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Cimarron29414

Ah, but capitalism was not at play here. It was the promise from the government to protect these companies that gave them the room to play. Take away the parachute, and no one jumps. To say this was "capitalism" isn't fair. Capitalism requires a risk/reward model to be relevant here. There was no risk for these companies - which is evident in the fact that all of them got huge bailouts as soon as they got caught with the hot potato. This revelation exposes the greed of some individuals, it can not be an indictment against a system which did not exist at the time of the event.

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roachboy

strange but i think there's a veneer of almost common ground in our basic hostility toward the contemporary american financial oligarchy...but as soon as we move off from there things diverge.

i think it's entirely crazy to see positive state action--something the feds actually did---an enabling condition here. it was much more that greenspan and the sec and alot of other folk actually bought into the washington consensus nonsense that capitalism---which is a form of ownership, a type of production---was self-regulating and that "government" introduced distortions.

there's no question but that this was capitalism.
your argument is an extreme version of another i think: the one that was talking about the "removal of moral hazard" during the final deathspin of the bush period when the free marketeer set was bewildered as to why wall street wasn't simply allowed to implode as if the problem was discrete--a limited market operating under conditions of information transparency like something hayek dreamed about---when the fact is that the entire gloablizing capitalist political and economic system was put into danger because it was not just wall street traders who had bought into derivatives--it was the transnational banking system and **alot** of governments, all of whom at one level or another bought into the same neoliberal delusion that capitalist markets are rational.

__________________
a gramophone its corrugated trumpet silver handle
spinning dog. such faithfulness it hear

it make you sick.

-kamau brathwaite

dippin

The FDIC has nothing to do with it, so I don't know what you are talking about there. Freddie and Fannie, while they had something to do with it, is far from being the main culprit.
Had it been about that, the bail out of Freddie and Fannie would have been enough to stop the crisis.

The problem that generated the crisis was strictly in the derivatives market and the underestimation of risk, in a system with a significant conflict of interest as the risk agencies are paid by those they are rating.

Derwood

it was the fact that their lobbyists were influencing (cough*writing*cough) the very policies that they were exploiting

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flstf

It does seem almost criminal doesn't it? I remember reading a while back that some of the people working at the rating agencies wanted to evaluate the underlying mortgages (tape) but were instructed by their bosses to just assume that all was in order and rate accordingly. Apparently there is a lot of pressure to rate high. I guess I don't understand how these rating agencies work; I use to think they were controlled by the government.

dippin

No, the ratings agencies are private companies which charge the companies being rated for their services. They used to charge subscribers for information, but now those being rated foot the bill. I.e., if company X wants to sell bonds or whatever, it pays a percentage of the total offering to the agency in exchange for the rating. Add to that the fact that these rating agencies often offer consulting to the companies they rate. Finally, the rating agencies sometimes rate an instrument without being requested to do so. So there is always this threat of an "unfriendly" rating in case a company decides to take their business elsewhere.

Frank Partnoy has written extensively on the subject, and though I think he stops short of some of the interesting questions, a google search should find several of his articles on rating agencies and the conflict of interest they face.

Cimarron29414

You are right. I typed FDIC, but meant FED. Although, I did think that HUD and/or HNA loans are somehow backed by the FDIC. Is that not correct?

Bottom line, the FED kept rates low and in line with the prevailing banking AND political wind of the time - the politicians wanted people who couldn't afford them to buy houses. The FED enabled the behavior by keeping rates low and creating a huge amount of cheap, available money for people to use. The bankers knew they could just sell the loan and dump the mortgage on Freddie/Fannie, then take the same money and go sell another mortgage. Freddie and Fannie would buy those loans because there was big money in the fees and they knew they would be bailed out by the Federal government because it was the federal government who wanted people who couldn't afford them to buy houses. The derivatives guys knew they were too big to fail and had lobbied for years to have the government look the other way while they wheeled along.

__________________
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dc_dux

It had more to do with the SEC than the Fed

A bit of recent history: Henry Paulson, former chairman of Goldman Sachs and later Bush Treasury Secretary, and Chris Cox at the SEC:
Gutting the SEC's regulatory oversight of the "net capital rule" was to blame, not the Fed.

The Financial Services Modernization Act, initiated by the Republican Congress and passed by Clinton in '99 that virtually repealed Glass-Steagall, tore down the wall between commercial banking and investment banking, and effectively de-regulated banking/financial services, also bears some blame.

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Seaver

This was a case of fraud, not capitalism.

Hang 'em High....

Ok maybe that won't happen. Hit Goldman Sachs with enough fines and restrictions to sink the company in the eyes of the public. This is the only way to prevent any other companies from attempting to get away with the same crap (which we all know they're doing).

How could (or should) a consulting company survive when it blatantly lies to the people they're consulting in order to profit betting against said customers?

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blktour

I personally think this was boiling from the law of 1913 to take away the gold backed dollar. This is what happens when you invent a private corporation to give loans to EVERYONE who uses the dollar. I feel that the Brenton Woods act was the nail in the coffin that came out and said, "look at what we are doing!" right in our faces. Our Keynesian economics that this country runs on, will have its issues.

This just shows why this type of economy is ok for a little bit but hard to sustain because our scales of who should always be on the top in our Republic, this type of economy flips that scale and us the people get the shaft. it goes against what this country was built on.


I also feel that a discussion like this of "who did what" or trying to find out the real culprit is why Keynesian economics was good for the uber rich to implement. No one really can pinpoint it because we live in a system that was a "theory."

my opinion of course.

mixedmedia

yes, there can be too much of a 'good' thing. it is totally an indictment of unchecked capitalism which is the stage name for unchecked greed. take the lumps and move on. hopefully we will have learned a lesson, which won't happen if we try to blame everyone other than those who were making the money. and, by default, the system that enabled them.

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Tully Mars

I'm currently, very slowly, working my way through Andrew Ross Sorkin's "Too Big to Fail." I saw him on the Daily Show and got the book from a friend. The book is freaking huge but it methodically walks you through how the lack of regulation allowed a select few to get very rich by screwing a whole bunch of people. Sorkin seems to be convinced every melt down we've had has been the result of lack of regulations. I think he's right. Until DC moves to make changes we'll keep having these melt downs from time to time complete with a select few walking away with a ton of cash.

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filtherton

It will be interesting to see whether the congressional republicans can pull off their faux populism now that they've come out against doing anything to prevent this type of thing from happening in the future.

Tully Mars

This hasn't stopped the good folks at Goldman's from handing sacks of cash...

Story here

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dippin

Huh? The gold standard was in place until the 30s, and Bretton Woods put in place a system that was very similar to the gold standard, the main difference being that the US took the role of guaranteeing the whole system by making the dollar the intermediary between other currencies and gold. But from the inception of Bretton Woods until 1971 it was basically fixed that 1 ounce of gold=35 dollars.

And I fail to see where Keynesianism comes in in any of this.

The basic problem here had was made worse by monetary policy, but it was not caused by it. The cause was excessive leveraging using CBOs as collateral, and the risk on those CBOs was vastly underestimated by private credit rating agencies because of conflicts of interest.

Of course, nevermind that the Bretton Woods system is no more, that there is very little in today's economic policy that is truly Keynesian, and that during the height of keynesianism there were no crisis like this one...

Tully Mars

Yea I'm lost on the gold standard issue or as it applies here. Seems like, from what I understand, this was cause by banks and lenders over leveraging. Sometimes to the point of 30-1, maybe more. In Goldman's case they put a bunch of loans into a bundles that they knew were over valued and or likely fail and sold shares in them without letting buyers know they we likely to fail or at least the full risk. Other clients were buying CDS (credit default swaps) on those loans, basically betting the loans would fail and thus making money off those failures. Who was advised to buy what and when along with how the mortgages were bundles appears to be the issue.

Here's a section of an article about it from the Guardian out of the UK-

Enitre Article Here

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Derwood

Wall Street's Bailout Hustle

This is absolutely worth the read. It explains not only all of the shenanigans that Goldman Sachs (and others) were pulling with these worthless credit swaps (etc.), but also how they gamed the federal bailout to make millions more

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mixedmedia

I remember a few years ago I had an argument with a co-worker (at work) who tried to tell me the responsibility for the collapse was on the shoulders of the people who asked for the loans. I almost lost it during that conversation...but it's that mindset that won't allow any aspersions to be cast against the gilded veneer of capitalism - as if to admit to anything other than its virtuosity is a death knell to their beloved ideas. I don't think of myself as a devoted anti-capitalist. On the other hand, I'm not too keen on greed, either. But the ideas that I do adhere to have their own weaknesses and potential for harm.

My mother believes it was mass insanity - and I think she has a point. I see it like a gang mentality only with Harvard MBAs and $1500 shoes. You surround yourself with enough like-minded people and you can convince yourself that anything is 'okay.'

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roachboy

so there's a p.t. barnum side to this whole business, the enlightened self-interest of a huckster selling in this case bundled debt, so holes in the ground, as if they were the newest and most fabulous item to yet appear in all human history. but as is the case with any such scam, there has to be the collaboration of forces beyond the mere barker to legitimate the object that is the center of the scam. in this case ratings agencies endorsed the snake-oil salesman claims and for a while there was a considerable and lucrative trade in snake-oil involving much of the transnational banking and insurance sectors and states and investors---you know the range of the usual suspects in capitalism, the social groups or forces for which the rest of us carry shit when we sell our labor power for a wage. but whatever. it's a giant shell game.

the only register in which the gold standard could possibly figure as an explanation for anything at all here is as a psychological association in the minds of some observers who look at the endless shell game that is capital circulation and are disconcerted by the relativity of value, by the degree to which this really is a consensus reality and that not at the level of opinions of groups about phenomenon X or Y, but in the making of phenomenon X or Y in an ontological sense, bringing it into being as, as, a bundled collection of holes (debt) that is now a speculative device because the return rates can be magnified if they're viewed a certain way and backed a certain way and vouched for a certain way and put into motion in certain ways--and these devices WERE valuable until they weren't. the gold standard represents a kind of nostalgia for a view of the world in which such relativity was not possible (i use relativity and not relativism intentionally. just to say) apparent values lean on "real" value like meanings of words have always existed in god's mind. essentialism they call it.

as for bretton woods and keynes...blktour's post is factually wrong and dippin already took care of that so there we are.

but this is capitalism, folks. the shell game...it's what people do. they "add value" that way.

__________________
a gramophone its corrugated trumpet silver handle
spinning dog. such faithfulness it hear

it make you sick.

-kamau brathwaite

blktour

I just thought that the way we handle our money has to do somewhat with this. Though I know my way of wording it sounded all over the place. hehe.

(one day I will be able to articulate myself like Roachboy.)

so basically what I was getting from most was that loose regulations with no oversight may have caused this?

dippin

It was loose regulations plus bad regulations.

Loose regulations meant that banks and institutions like goldman sachs could leverage their positions to ridiculous amounts, give shoddy advice, and insulate itself from bad loans by passing on the risk.

Bad regulations are the ones regarding acceptable risk. That is, on one hand they loosened financial regulations, on the other they made bad regulations regarding how to measure how much risk an institution was subjected to. I.e., the idea was "go crazy, do what you want, as long as your overall risk is low." How was that risk measured? By the so called "nationally recognized statistical research organizations"(NRSROs).

It was a sort of circular system: private financial institutions that did research (Standard and Poors, Moodys, Fitch's) had a lot of power on deciding what was acceptable risk due to these bad regulations. These research institutions made most of their money from the other financial institutions that were creating the financial instruments, either through receiving money from the ratings, or through consulting on how to lower the ratings. As you can imagine, the conflict of interest is enormous: banks needed the "blessing" of NRSROs to do certain transactions, but they were also the main clients and source of funds of the NRSROs. Kinda like relying on your bartender to keep you sober.

So it was this mixture of loose and bad regulation that created it all.

Monetary policy adds fuel to the fire, but doesn't generate the fire. People don't make bad investments simply because interest rates are lower. But people who were already making bad investments due to other reasons will make MORE bad investments when interest rates are lower.

aceventura3

These charges are 99% politically motivated. I am not a fan of Goldman Sach in terms of them adding value to our economy compared to companies that make real products or provide real services. Goldman to me is like "the house" a place were high rollers go to gamble. Goldman, as "the house" always gets their cut and on every bet there is a winner and a loser. Those that engage Goldman on one side or the other are typically sophisticated investors/speculators/Etc. Goldman is generally not involved in commercial consumer transactions for the general public. What we have is our government through the SEC attempting to protect billion dollar investors from each other, while they gamble. I would rather have our government focused on real fraud and abusive practices that iare perpetrated on real regular people every day. For example today thousands of elderly people are being sold annuities with extreme high fees, in accounts with extremely high fees totally inappropriate for their needs by incompetent and or corrupt so called financial advisers.

Goldman was able to profit from the "bailout", so instead of the government admitting the "bailout" was the wrong thing to do and that they got embarrassed, they make a case where there really is no case. It simply shows that if the government has you in their cross-hairs, they are going to get you one way or the other. Goldman lost $90 million of their money on the deal and pocketed $15 million in fees, that alone should be enough to show Goldman had no intent to defraud and that there could have been an up side to the instrument in question.

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Tully Mars

Sure it's almost all due to saving face for the bail outs. That's why other countries are also looking for compensation...

This has to do with bundling up a barrel of crap and selling it to investors all while telling them they were buying a completely different product. At the same time they let a select few investors decide what kind of crap went into the barrel and then bet against the success of said barrel of crap.

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Seaver

This is simply not true. Goldman Sachs was "advising" their customers to purchase stocks that they themselves were betting against.

Put simply: They advise their customers to buy stock A. They know pretty certain that stock A is a bad stock, but by getting their customers to buy the stock it will artificially inflate. They take futures out on the stock betting that it will drop. When the stock drops (because it's a bad stock and they knew it), the customers lose money and Goldman Sachs still makes money.

The last time this happened in Baseball an entire team was blacklisted, Shoeless Joe Jackson will probably never be in the Hall of Fame because of it. That was for a couple of hundred dollars.... this is for BILLIONS.

This is politically convenient to go after them but it doesn't mean it's not 100% fraud.

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Derwood

read the article I posted and tell me "there's no case here"

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ottopilot

This Goldman Sachs thing just came out of the blue!


CBS 1998


Glenn Beck 1999 ... hilarious, but true.

No coincidences to be found here Mr. President!

Will President Obama return the $994,795 in campaign contributions from GS?

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Tully Mars

Seriously? Glenn Beck?

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ottopilot

He may be a wing-nut, but I challenge you to disprove factually any of the events or associations he outlines relating to current and former GS employees now in key government positions, the timing of decisions made by their influence on direct competitors of GS, their redesignation as a "bank", the ties to federal government and both the Bush and Obama administrations.

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Tully Mars

You know when you start your defense of a source with “he may be a wing-nut, but…" I think that says a lot. I mean even a stopped clock is right twice a day.


To begin with I’d take issue with his opening bit alluding to how the health care bill is going to be potentially fatal for him so he’d better have that heart attack now. Yeah guys like Beck are going to be sent to death panels very soon due to their lack of ability to obtain health care. I think that’s in paragraph 3 on page 420 of the bill. So sad… so many wealthy people sent to their death with a stroke of Obama’s pen(s.)

Then he moves onto a rant that, well, is basically non coherent at times. When it does make sense he’s really just paraphrasing Matt Taibbi's RS article. When he doesn’t make sense he makes statements like “a web of bubbles” and other statements that really don’t make sense. Trying to follow his rant and accompanying caulk board diagram makes my head hurt.

So… I think you should have stopped with “he may be a wing nut.”

Using sources like Beck, Limbaugh et el is no different than people on the left sourcing Michael Moore, Randi Rhodes et el. These folks are all full of crap and wing nuts with a cause. I simply don’t see how sourcing them helps your position.

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aceventura3

A "case" can be made, but that is not my primary point. I think the "case" being made is being done for political reasons and I think government resources could be better used perusing fraud and abuse where there are real and innocent victims.

I put case in quotes because I think given vague legal concepts, like in the areas of financial regulation, a "case" could be made in just about any transaction where one party can gain financially and another party can lose financially. For example I was reading some financial information on Car Max the other day, they are making an average of $2,000 in profits on every car they sell, with no haggle pricing, they also provide financing and service contracts. Their margins are significantly higher than used car industry averages. A "case" could be made on every transaction, buying and selling, they participate in - today we live in a country where if someone in government with power gets a "bee in their bonnet" for Car Max, you can bet they will go down. I simply don't like this form of political prosecution. I think our government is getting out of control. That is my point.

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"It is useless for the sheep to pass resolutions on vegetarianism while the wolf is of a different opinion."
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roachboy

before everything goes skittering off down some private-language rabbithole, pivoting on some imaginary conflict between ace's wholesale erasure of the notion of fraud and reality, maybe this little summary will be useful:

FT.com / Companies / Banks - Goldman and SEC: The main arguments

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aceventura3

Your comment directed to me was not necessary. I initially posted my thoughts on this subject and I then responded to a question with a direct answer and further elaboration of my view.

Regarding the bullet points in your post:

The first one has the word "misled" - people who invest billions of dollars or "sophisticated" investors don't get "misled". Professionals have to be held to a high standard, "misled" is another way to question competence. We can not judge these people on the "reasonable man" standard in my view.

The second included the vague concept of "failure to disclose", good luck with an objective understandable standard for that. If you do not have all of my knowledge, I failed to disclose - if that is true what value does any expertise or intellectual property have?

Looking at this from a big picture point of view, it should be of concern to everyone. Goldman was a major benefactor of the financial bailout, they made record profits during the worst financial crisis in the history of the human race (if you believe Obama and his team), the paid record bonuses at a time when populism was against Wall St. fat cats, and they are smarter than the people who regulate them - now the government wants a pound of flesh. This matter is purely political and has nothing to do with justice in my opinion. It is humorous seeing so many try to rationalize our government's behavior.

__________________
"Democracy is two wolves and a sheep voting on lunch."
"It is useless for the sheep to pass resolutions on vegetarianism while the wolf is of a different opinion."
"If you live among wolves you have to act like one."
"A lady screams at the mouse but smiles at the wolf. A gentleman is a wolf who sends flowers."

roachboy

ace, had you framed it earlier as you did in this last post, i wouldn't have referenced you.

rather than continue that, here's an interesting move from the imf.
seems that the american monetarist right is about the only social sector on the planet that doesn't see a Problem with the current financial oligarchy:

http://www.guardian.co.uk/business/2...ning-out-banks

__________________
a gramophone its corrugated trumpet silver handle
spinning dog. such faithfulness it hear

it make you sick.

-kamau brathwaite

flstf

Watching these Wall Street guys profit even more during and after the economic freefall while my net worth is down about 30% makes me jealous of their ability to position themselves in a win/win situation. I guess there is nothing new under the sun and the wealthy will always figure out how to prosper while ignorant investors like myself take the hit.

With the revolving door between Wall Street and Washington, I am surprised that the SEC is filing any charges at all. I suspect the fraud is much deeper and involved with our politicians than anything that will be officially uncovered.

Tully Mars

One of the main players has been stripped of his ticket to ride...

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loquitur

Today's NY Times is illuminating about the nature of the SEC's suit: So this isn't much of a cut and dried case, and (as legal cases usually do) this will turn on the definition of legal terms like "material."