On Goldman, Securities Fraud, And Skepticism


On Goldman, Securities Fraud, And Skepticism

Posted by Karl Denninger

By now of course you know that Goldman Sachs was charged by the SEC with civil securities fraud Friday – unless you live under a rock.

The weekend has brought forth several interesting points, all of which I believe our political (and bankster) class had better pay attention to.  In no particular order:

  • The rest of the world is tired of this crap too.  Britain and Germany, to name two, are now looking at going after Goldman.  This will not end here by any stretch of the imagination.
  • Goldman may have violated more than one lawIsn’t receipt of a Wells Notice a “material event” that requires disclosure via an 8-K filing?  I’m sure they’ll claim “no”, but I wouldn’t be so sure of that.  Never mind their hasty response on Friday afternoon.  We’ll see how this plays out.
  • Goldman was not the only large bank involved in deceptive deals.  We should really talk about Magnetar, shouldn’t we, and the nine banks that enabled their piece of this (that would be Merrill, Citi, UBS and more.)  They were all involved in a number of deals that smell suspiciously like the one the SEC went after Goldman over.  Or shall we talk about Jefferson County, Alabama again?  You know, where JP Morgan was involved in a deal to “help” the county replace its aging sewer system, and wound up costing them 25 times the original (and actual) price of the work?  Oh, and let’s not forget that several government officials and private-sector folks have gone to prison already for their involvement in this scandal – for bribery and related acts, while not one indictment has issued against a bank executive or the banks involved themselves. 
  • Jamie Dimon is threatening governments (again), this time in Germany.  The people have had quite enough of extortion and blackmail, Mr. Dimon.  You might also want to consider that some of those “less-regulated” markets you might flee to, such as China, have a habit of solving regulatory problems not with indictments and juries but rather with summary imprisonment or even execution.  Consider the folks in the “basic materials” business who allegedly got caught gaming the system in China recently – and were summarily tried and convicted.  Others have simply been shot.  We claim to be more civilized here in this country, which is one of the reasons your threat rings rather hollow – in those “unregulated” markets you’re more likely to find a disgruntled investor wields an AK-47 rather than a summons or subpoena, and you know it.  I double-dog-dare you to take your capital and move to any of those places – I’ll be watching for the Youtube of your execution when you screw someone over in East Buoffo as a consequence of their “unregulated market”, and promise to chortle when it is posted.
  • The people don’t believe the SEC, Congress or the Obama administration.  Bill Clinton is now saying he took “wrong advice” from Larry Summers and Bob Rubin.  That “advice” included Gramm-Leach-Bliley, I might add, as well as derivatives.  Let the record show that Larry Summers took a clean shot at bankrupting Harvard University, losing $14 billion of its endowment in just over a year’s time.  I’m sure some of that has come back with the stock market “recovery” (engineered via more phony accounting) but the fact remains that as Harvard’s Corporation (in the legal sense) consists of seven members who are accountable to nobody but themselves.  Bob Rubin, for his part, was entangled in Citi at the time of the Gramm-Leach-Bliley act’s passage.  Oh, and Rubin is on Harvard’s board. 

The people have every right to be skeptical.  Indeed, perhaps cynicism is more appropriate than skepticism in this case, in that every step of the last ten years when it comes to financial firms and regulation appears to have been driven by one goal: to allow banksters and their cronies to loot and pillage the American people, who are then supposed to back them up when their fancy games go awry.

I’m tired of it – but I was tired of it back in 1998, 1999, 2000 and onward when I saw the pernicious and outrageous frauds being perpetrated against investors in so-called “new economy” businesses.  Nearly all of them went bankrupt in the .COM crash.  The simple fact of the matter is that almost none of these firms had any business going public in the first place – they were the starry-eyed dreams of some pimply kid barely out of business school (and sometimes not even that well-versed in the real world) backed by a private-equity or “angel” investor who knew how to game the system and pay off the investment banks via lots of fee-based business to issue “strong buys” on worthless securities.

As just one example I put forward the DSL providers of the day – Covad, Rythms and Northpoint.  I talked with all three.  All three presented me with a business model for “partnering” with them.  A bit of quick math led me to the inescapable conclusion that they didn’t have a prayer in hell of ever being profitable on an operating basis, say much less covering equipment depreciation and amortization.  I passed on getting involved with any of them for that reason and all three later blew up, vindicating what was in fact a fairly simple set of calculations.  So how did the investment banks and others who brought those firms public, all of whom clearly had at least as powerful a calculator as I did, justify their IPOs?

Virtually everyone got screwed by these games, not the least of which were the honest companies.  IPOs that doubled on the first day were seen as a strong endorsement of the company instead of what they really were, which is a rip-off of the firm who left literal millions, and sometimes hundreds of millions, on the table to be stolen by the investment banks who exercised their “overallotments” and then sold into the first-day ramps.  The underwriting institutions didn’t give a damn if there was a sustainable business behind the S-1, so long as that first-day ramp job materialized and they could both earn their fee and the override on the over-allotment – the second often being multiples of the first.

The game never changed in the 2000s – this time we had banks scamming people on the value of so-called “AAA” mortgages and the constructs put together both out of them and referenced off them.  Again the securities were worthless or nearly so, but the banks didn’t care so long as they got their fees.  And like the last time, they basked in the knowledge that they both would not wind up on the wrong end of an indictment and that if things got really bad (as they did this time) they could shove a gun up your nose and force you, the taxpayer, to bail them out.

The important point behind both of these tales is that without the fraudulent securities being issued NEITHER BUBBLE WOULD HAVE INFLATED.  That is, neither was simply an “accident” or “starry-eyed dreamers” that got in over their heads.  Both bubbles were INTENTIONAL scams fueled by Wall Street’s seemingly-unending ability to package up trash and sell it while extracting their fees and “overrides”. They then feign ignorance when what THEY KNEW was dead fish starts stinking up the place.

THIS MUST STOP and all the pretending won’t do it.  Nor will claims that we’re writing “euthanasia” bills “for the future.”  The fact of the matter is that all of these institutions are and have been exercising privileges – the privilege to issue credit on the sovereign wealth of the United States. 

That privilege is not the government’s to bestow, it is we the people’s, and we must withdraw that consent until the scamming is stopped by force of law.

Federally-guaranteed deposit-taking and transaction clearing is a ministerial function.  To a large extent so should be lending with guaranteed funds, which I have repeatedly argued should devolve down into “One Dollar Of Capital.”  Return home mortgages to a 28/36 ratio set and 20% down for all federally-guaranteed loans, and all held or originated by any depository or otherwise-insured institution (including those with access to Fed facilities.)

If people want to gamble – that is, take risk of any sort – let them do it with their own capital but never with the taxpayer’s.  This means full reinstatement of Glass-Steagall and everything that comes with it.  If Jamie Dimon and others don’t like these rules then let them take their capital to some other country that doesn’t mind having its economy detonated every five to seven years by these scoundrels.

Someone else will take his place and provide the necessary functions; a safe and solid 7-8% return isn’t bad, after all, especially when it’s government-guaranteed!

Our government and both political parties are severely miscalculating if they believe the anger in society right now is going to let this pass without real reform – not the cock-and-bull games being played by both sides of the aisle at present.

Faux “charges” and SEC “bluster and thunder” are not indictments.  We have plenty of information not only in the public record but now irrefutably in the hands of Congress, such as the WaMu disaster, for lawmakers to demand both that existing laws against fraud be enforced and that these institutions all be broken up right here and now, today, with every dollar they stole (that still exists anyway) being clawed back. 

There is even hard evidence that members of our government, in some cases, conspired with institutions to falsify accounting (e.g. IndyMac and backdated deposits), a toxic brew of corruption that threatens the vital trust between government and people on which civil order and stability rest.

The people will not sit for less than full enforcement of existing law, restitution for these acts and a reinstatement of Glass-Steagall’s proscriptions.  Over eight millions jobs were lost in this crash and more than five million additional people failed to find employment during the last so-called “recovery” as they entered the workforce.  Even more Americans had their jobs shipped overseas and had their hands (and sometimes head) stepped on as they tried to climb the income ladder.  The anger seething under the surface of society is not only palatable it is getting much worse by the day. I overhear conversations almost every time I’m out in public now and most of them are absolutely unsuitable for polite company.  This is a marked change from last year as the hope of Obama’s election has turned to the anger of recognition, even among Democrats, that we were conned – again.

The people are not talking about which brand of Girl Scout cookie to buy – that much I will assure you, and I’m talking about conversations overheard in the local supermarket – not exactly where you expect to find “nutjobs” of any persuasion talking about various things one doesn’t usually think, say much less speak of openly.  I shudder at the thought of what’s being said behind closed doors where folks like me, who have and continue to preach working within the law, have never been and never will be invited.

How much longer can government get away with the games before something – or someone – snaps?  I don’t have the foggiest clue, but Friday proved that the stock market hasn’t been rising as a consequence of an improving economy but rather on the belief by a handful of speculators that the looting and pillaging that was given free rein and license last spring when FASB was forced to change the accounting rules would not only be allowed to continue but would intensify.

The problem with this philosophy and course of action is that the American People in the main are literally being bled dry by the vampires on Wall Street.  The most dangerous man of all is one who has lost everything – home, job, family – and thus has nothing left to lose. 

Irrespective of the “pumpers” on Wall Street and in The Media the facts on the ground do not reflect the optimism – consumer “spending” has been held up by people not paying their mortgages, long-term unemployment has ravaged our states and communities while government has simply handed out more and more money via extensions of this and that program, papering over the rot in the economy with borrowed funds we cannot afford.

Government must step in and break these behemoths up.  Not because they’re too big to fail tomorrow, but because they did too much damage this time around and must not be allowed to get away with it, say much less prosper as a consequence.  These acts were not errors of judgment or accidents they were willful and intentional actions taken with full knowledge of the consequences. 

Bluntly, these banksters looted the public worldwide through two full cycles of boom and bust, they did it intentionally, and our nation cannot withstand another one of their attacks.

Those of you in Washington DC and State Governments who are reading this, get away from your insular world inside the beltway and state houses and meet with constituents – not as a Representative or Senator, but as an ordinary Joe.  Leave the armed goon squad behind and drive a chevy to the local eatery, your local store, the coffee shop or WalMart in your town.  Shut your yap for a week and just listen.  Note the marked deterioration in mood, attitude and words you hear.  That’s real, it’s dangerous, and you can only deal with it one way – by putting a stop to the looting and start with the prosecuting.

The people are pissed and they’re not going to sit still for this.  You will either stop it, right here and now, or you will lose your jobs.  If you try to lie your way out of it as you have for the last decade you are taking a horrible risk, as this nation and indeed the world is a tinderbox, and little would be required to set off civil unrest or, far worse – war. 

Remember, it wasn’t just Americans that got screwed and are pissed off.

Do the right thing while there is still time.