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Archive for April 24th, 2010

Wall Street Isn’t Afraid of the SEC

By Joanne Bamberger  Political/media analyst, author, founder of PunditMom political blog

You might say I have a little inside information about the SEC.

I spent several years there before I was a “recovering attorney” — first as lawyer in the Enforcement Division who investigated a variety of securities fraud cases and then as Deputy Director of Public Affairs, where I dealt with reporters all day about cases being brought and how the agency worked. Granted, it’s been a few years since I walked around the halls of the agency known as the Investor’s Advocate, but my guess is that for the most part things aren’t so different, except that this relatively small government agency is everyone’s favorite whipping boy right now.

But as cable news shows and newspaper headlines focus on Wall Street reform, Goldman Sachs, the mortgage crisis and the economy (that still isn’t so fine, thank you very much), I just wanted to weigh in on why the mess we’re in is less the fault of the Securities and Exchange Commission than it is of the lawmakers who are all pounding their fists, wanting you to believe that either they’re trying to change the status quo or that changing that status quo will only make things worse. The real problem is this –

Wall Street isn’t afraid of the SEC.

They never have been and they never will be as long as the agency is structured as it is — one that brings only civil, not criminal, cases. The handful of men who run our nation’s investment banking institutions aren’t afraid of consequences that they consider to be mere slaps on the hand from an inconsequential agency. The SEC can only take money from these Masters of the Universe. These guys make gobs of money all day, every day and know that they’ll make more money tomorrow (can you say credit default swaps?). Losing a little of it is just a cost of doing business to them, so you don’t even come close to getting their attention unless you can take away their ability to make more money — like when you say the word ‘prison.’ And the only ones who can bring criminal charges against them are the Justice Department and state Attorneys General.

The SEC might find a case and investigate it. The SEC might be the agency that does all the grunt work when it comes to digging for the dirt. But it can only stand by at the photo op when the criminal authorities start talking about the big house.

Think about it in this smaller, non-investment banking securities case — do you really think Martha Stewart batted an eyelash over her $30,000 fine after alleged insider trading? Or do you think she was more concerned about what five months in the slammer would do to her reputation, her business and the stock price of Martha Stewart Living Omnimedia?

So, when it comes to the fraud currently alleged against Goldman Sachs — and cases that the SEC investigates every day — is it any wonder that the Richard Fulds or the Lloyd Blankfeins of the investment world treat SEC investigations with about the same amount of disdain as they would a pesky mosquito?

The Securities and Exchange Commission has the authority to subpoena documents and testimony, but corporations can and do drag their feet for years to delay any actions. This tactic is a good one for those being investigated, because Wall Street also knows that: (1) it takes forever to enforce those subpoenas, and (2) that there’s a lot of staff turnover at the SEC. Corporations and Wall Street big wigs know that a staff attorney there is like the weather — if you don’t like it, you don’t have to wait too long for it to change. And when that happens — when underpaid staff attorneys leave to seek their fortune at a big law firm or one of those Wall Street banks — a new attorney inherits an old case they usually couldn’t care less about.

So, unless and until the SEC can find a way to instill some fear when it comes to enforcing the nation’s securities laws, few will believe there’s much to lose by failing to cooperate when civil cases are filed. It’s a Wall Street mindset that’s existed as we’ve moved from Den of Thieves to Liar’s Poker to the internet trading bubble to today’s mortgage investment crisis. Not to mention that when major investment banks are big contributors to lawmakers’ campaigns and former Goldman executives get plum jobs in the government, it doesn’t seem likely that there will be any fear on Wall Street in the near future.

That’s probably good news for Gordon Gekko and his real life counterparts.

Joanne Bamberger, a former SEC attorney and SEC Deputy Director of Public Affairs, is a writer and political/media analyst in Washington, D.C. She is the founder and author of the political site, PunditMom, and is at work on a book about the increasing political involvement of mothers in the age of social media (Fall 2010, Bright Sky Press).

 
Goldman Sachs Emails: Firm Had ‘The Big Short’ As Economy Fell

As homeowners were falling behind on their subprime mortgages, wreaking havoc for investors that owned slices of their mortgages in securities peddled by Wall Street, Goldman Sachs was “well positioned,” according to internal company emails by top executives.

The firm had “the big short,” declared chief financial officer David Viniar — Goldman Sachs was making money off the souring of the very securities they had peddled to the market.

The internal emails released Saturday by the Senate Permanent Subcommittee on Investigations paint a picture long known by most of the country, yet never before so vividly and explicitly articulated by Goldman officials. (Scroll down to see the full text of the emails.) As early as May 2007, as homeowners were being crushed under the weight of subprime mortgages, the most profitable firm on Wall Street had long taken out a form of insurance on those delinquencies.

The firm made money on the upside — originating, securitizing and selling subprime mortgage-based securities to investors — and on the downside, thanks to the insurance.

“Bad news,” a May 17, 2007, email began from one Goldman employee to another. A security the firm had underwritten and sold had just lost value, costing Goldman about $2.5 million.

Further down in the email, the employee, Deeb Salem, wrote “Good news…we own 10mm protection…we make $5mm.”

The firm made $5 million betting against the very securities it had underwritten and sold.

In a July 25 email that year, Gary Cohn, the firm’s chief operating officer, wrote Viniar to update him on the firm’s mortgage market activities. The firm lost about $322 million on residential mortgages — but it made $373 million on its bets against the market, bets that increased in value as the market tanked.

About 25 minutes later, Viniar wrote back, “Tells you what might be happening to people who don’t have the big short.” The firm made $51 million that day.

“There it is, in their own words: Goldman Sachs taking ‘the big short’ against the mortgage market,” subcommittee chairman Sen. Carl Levin (D-Mich.) said in a statement accompanying the release of the internal emails.

“Investment banks such as Goldman Sachs were not simply market-makers, they were self-interested promoters of risky and complicated financial schemes that helped trigger the crisis,” Levin said. “They bundled toxic mortgages into complex financial instruments, got the credit rating agencies to label them as AAA securities, and sold them to investors, magnifying and spreading risk throughout the financial system, and all too often betting against the instruments they sold and profiting at the expense of their clients.”

Levin’s panel points out that in the firm’s 2009 annual report, Goldman Sachs stated that the firm “did not generate enormous net revenues by betting against residential related products.”

“These e-mails show that, in fact, Goldman made a lot of money by betting against the mortgage market,” Levin said.

Top Goldman Sachs executives will testify before Levin’s panel on Tuesday to answer for their subprime activities. The panel is using the firm as a case study to focus on the role played by investment banks in contributing to the worst financial crisis and economic downturn since the Great Depression.

The nearly 18-month-long investigation has already netted impressive results. The panel exposed the subprime shenanigans at failed lender Washington Mutual, and how lax federal supervision allowed it to become the biggest bank failure in U.S. history, and this week it showed how the major credit rating agencies essentially worked with Wall Street in allowing the firms to peddle AAA-rated securities that had no business ever earning top ratings. That lulled investors into buying what they were told was gold but was really just lead.

Goldman Sachs is under a particularly harsh glare, as its profits have engendered the kind of enmity normally reserved for swindlers. The Securities and Exchange Commission filed charges against the firm April 16 for defrauding investors. Goldman vigorously denies that it did anything wrong.

In a Nov. 17, 2007, email, Goldman’s chief executive officer, Lloyd Blankfein, wrote to his top lieutenants in response to an upcoming New York Times story about how the firm had profited off the souring subprime market: “Of course we didn’t dodge the mortgage mess. We lost money, then made more than we lost because of shorts.”

Blankfein is one of the top executives to be questioned Tuesday by Levin.

In an Oct. 11 email that year, one Goldman employee, reacting to news that Moody’s Investors Service had downgraded $32 billion in mortgage-related securities, wrote to a colleague: “Sounds like we will make some serious money.”

“Yes, we are well positioned,” the colleague responded.

Most investors lost money off that downgrade. But Goldman had been shorting the market.

As of November 2007, Goldman had about $2.1 billion worth of long positions in subprime mortgage products, meaning it was betting that those securities would increase in value, according to the firm’s 2008 annual filing with the SEC.

But in a cautionary note to investors and regulators, the firm also noted that “At any point in time, we may use cash instruments as well as derivatives to manage our long or short risk position in the subprime mortgage market.”

See the full emails:
Goldman Sachs Emails