There comes a time when the rip-off schemes become so in your face that there is no longer any attempt to hide them with tricky 5,000 page contracts and inside deals (such as the CDO^2s that blew up in so many people’s faces — while the banks that created them designed them to do exactly that.)

This latest offering from the squid is such an example:

Goldman Sachs Group Inc. (GS) plans to issue four certificates of deposit linked to stocks as record low interest rates drive investor demand for the potentially higher-yielding CDs.

Why wouldn’t you just buy DIA (Diamonds) and be done with it?  That’s an ETF that closely tracks the DOW and has very low expenses.  If you want the risk of being in the market, then you should get both sides – the upside and the downside.

The problem is here:

The four-year CD tracks the monthly percentage change in the Dow, with gains capped at 1.5 percent to 2 percent and no floor on the declines. That means if the Dow advanced 5 percent, the monthly return would be recorded as no more than 2 percent, while a drop of the same amount would be taken in full.

In other words in the event of a big rally in the market on the month Goldman will keep much if not most of the profit.  In the event of a big crash, you will eat the loss.

Why would anyone buy such a product?  There’s no reason to do so, and if there’s any sort of fiduciary responsibility associated with the seller I’d love to see their argument justifying how this isn’t a raw violation of that responsibility.

Since this is listed as a “CD” I presume it falls under FDIC coverage if Goldman fails.  That too is an interesting premise since these “devices” are put together by combining zeros (a form of bond) with derivatives to create a “synthetic” financial construct that should (in theory) always provide them with more cash flow than the “CD” pays (thus, in theory, it is always a winner for The Squid)

The obvious problem of course comes when the derivative counterparty can’t pay…..

The not-so-obvious problem is that in the derivative market for every winner there is a loser.  So if Goldman is always the winner, who would be dumb enough to take an always-losing bet?  Well, nobody once they figure it out, which means that somewhere there is likely a scheme in here much like the old CDO games — we just haven’t found it yet.

The FDIC is supposed to protect depositors, not firms that set up hinky derivative structures with depositor funds…..

The graphic below pretty much sums up Goldman’s most recent quarter…

An unmitigated disaster, and worse than practically everybody on the Street anticipated, save that brash-ass blogging dude brandishing those old fashioned analytical weapons of choice… Two months or so ago (Monday, 22 August 2011), I penned the public blog post that also relased my most recent research on Goldman Sachs - The Squid Is A Federally (Tax Payer) Insured Hedge Fund Paying Fat Bonuses That Can’t Trade In Volatile Markets? Who’s Gonna Tell The Shareholders and Tax Payer??? -  as excerpted:

The chart below demonstrates how the volatility of the revenues from the trading and principal investments trickles down into volatility of the total revenues and profits of Goldman Sachs. I don’t call Goldman the world’s most expensive federally insured hedge fund for nothing!

And for those who haven’t been following my Squid Hunting series, there’s a lot more to come from those boys at 200 West Street. If you want to know what will happen next, just look at the first few pages of the lastest Goldman subscription docs (click here to subscribe):

• Goldman Sachs Q3 Forensic Review – Retail
• Goldman Sachs Q3 Forensic Review – Professional

After all, eventually someone must query, So, When Does 3+5=4? When You Aggregate A Bunch Of Risky Banks & Then Pretend That You Didn’t?

I’m Hunting Big Game Today:The Squid On The Spear Tip, Part 1 & Introduction	I’m Hunting Big Game Today: The Squid On A Spear Tip Summary: This is the first in a series of articles to be released this weekend concerning Goldman Sachs, the Squid! In this introduction (for those who do not regularly follow me) I demonstrate how the market, the sell side, and most investors are missing one of the biggest bastions of risk in the US investment banking industry. I will also…
Hunting the Squid, Part2: Since When Is Enough Derivative Exposure To Blow Up The World Something To Be Ignored?	Hunting the Squid, Part2: Since When Is Enough Derivative Exposure To Blow Up The World Something To Be Ignored? Welcome to part two of my series on Hunting the Squid, the overvaluation and under-appreciation of the risks that is Goldman Sachs. Since this highly analytical, but poignant diatribe covers a lot of material, it’s imperative that those who have not done so review part 1 of this series, I’m Hunting Big Game Today:The Squid On The Spear Tip, Part…
Reggie Middleton Serves Up Fried Calamari From Raw Squid: Goldman Sachs and Market Perception of Real Risks!	Hunting the Squid Part 3: Reggie Middleton Serves Up Fried Calamari From Raw Squid For those who don’t subscribe to BoomBustblog, or haven’t read I’m Hunting Big Game Today:The Squid On The Spear Tip, Part 1 & Introduction and Hunting the Squid, Part2: Since When Is Enough Derivative Exposure To Blow Up The World Something To Be Ignored?, not only have you missed out on some unique artwork, you’ve potentially missed out on 300%…
Hunting the Squid, part 4: So, What Else Can Go Wrong With The Squid? Plenty!!!	Hunting the Squid, part 4: So, What Else Can Go Wrong With Goldman Sachs? Plenty! Yes, this more of the hardest hitting investment banking research available focusing on Goldman Sachs (the Squid), but before you go on, be sure you have read parts 1.2. and 3:  I’m Hunting Big Game Today:The Squid On A Spear Tip, Part 1 & Introduction Hunting the Squid, Part2: Since When Is Enough Derivative Exposure To Blow Up The World Something To…
I actually show up in person!	Hunting the Squid, Part 5: Sometimes Your Local Superhero Doesn’t Look Like What They Show You In The Movies

My next post should also include research on the next bank that we have found that has been (again) overlooked by the market, the media and the sell side. Can we expect the same that we saw in BNP, Bear, Lehman, etc.? Well, paying subscribers shall find out forthwith.

I can be reached via the following channels, or directly via email:

Goldman Sachs is doing it again.  Goldman is telling the public that everything is going to be just fine, but meanwhile they are advising their top clients to bet on a huge financial collapse.  On August 16th, a 54 page report authored by Goldman strategist Alan Brazil was distributed to institutional clients.  The general public was not intended to see this report.  Fortunately, some folks over at the Wall Street Journal got their hands on a copy and they have filled us in on some of the details.  It turns out that Goldman Sachs secretly believes that an economic collapse is coming, and they have some very interesting ideas about how to make money in the turbulent financial environment that we will soon be entering.  In the report, Brazil says that the U.S. debt problem cannot be solved with more debt, that the European sovereign debt crisis is going to get even worse and that there are large numbers of financial institutions in Europe that are on the verge of collapse.  If this is what people at the highest levels of the financial world are talking about, perhaps we should all start paying attention.

There is a tremendous amount of fear in the global financial community right now.  As I wrote about the other day, the financial world is about to hit the panic button.  Things could start falling apart at any time.  Most of these big banks will not admit how bad things are publicly, but privately there is a whole lot of freaking out going on.

According to the Wall Street Journal, Brazil believes that “as much as $1 trillion in capital may be needed to shore up European banks; that small businesses in the U.S., a past driver of job production, are still languishing; and that China’s growth may not be sustainable.”

Perhaps most startling of all is what the report has to say about the debt problems of the United States and Europe.

For example, this following excerpt from the report sounds like it could have come straight from The Economic Collapse Blog….

“Solving a debt problem with more debt has not solved the underlying problem. In the US, Treasury debt growth financed the US consumer but has not had enough of an impact on job growth. Can the US continue to depreciate the world’s base currency?”

Remember, this statement was not written by some guy on the Internet.  A top Goldman Sachs analyst put it into a report for institutional investors.

The report also goes into great detail about the financial crisis in Europe.  Brazil writes about how the euro is headed for trouble and about how dozens of financial institutions in Europe could potentially be in danger of collapse.

But in any environment Goldman Sachs thinks that it can make money.  The following is how Business Insider summarized the advice that Brazil gave in the report regarding how to make money off of the impending collapse in Europe….

• Buy a six-month put option on the Euro versus the Swiss Franc, thus betting the Euro will drop against the Franc (the Franc being the currency that an official Goldman report recently referred to as the most overvalued in the world)
• Buy a five-year credit default swap on an index of European corporate debt—the iTraxx 9. This is a bet that some of these companies will default, and your insurance policy, the CDS, will pay off

This is so typical of Goldman Sachs.  They will say one thing publicly and then turn around and do the total opposite privately.

For example, prior to the financial crisis of 2008, Goldman Sachs was putting together mortgage-backed securities that they knew were garbage and marketing them to investors as AAA-rated investments.  On top of that, Goldman then often privately bet against those exact same securities.

The CEO of Goldman Sachs has even acknowledged that the investment bank engaged in “improper” behavior during 2006 and 2007.

For much more on the history of all this, please see this article: “How Goldman Sachs Made Tens Of Billions Of Dollars From The Economic Collapse Of America In Four Easy Steps“.

So will Goldman Sachs ever get into serious trouble for any of this?

No, of course not.

Yeah, they will get a slap on the wrist from time to time, but the reality is that the top levels of the federal government are absolutely littered with ex-employees of Goldman Sachs.  Goldman is one of the “too big to fail” banks and they are going to continue to do pretty much whatever they feel like doing.

Sadly, the power of the “too big to fail” banks just continues to grow.  At this point, the “big six” U.S. banks (Goldman Sachs, Morgan Stanley, JPMorgan Chase, Citigroup, Bank of America, and Wells Fargo) now possess assets equivalent to approximately 60 percent of America’s gross national product.

Goldman Sachs was the second biggest donor to Barack Obama’s campaign in 2008, so don’t expect Obama to do anything about any of this.

We have a financial system that is deeply, deeply corrupt and all of that corruption is a big reason why things are falling apart.

Sadly, the 54 page report mentioned above is right – we really are facing a global debt meltdown and we really are heading for an economic collapse.

You aren’t going to hear the truth from the mainstream media or from our politicians because “keeping people calm” is much more of a priority to them than telling the truth is.

The debt crisis in the United States is unsustainable and the debt crisis in Europe is unsustainable.  Right now we are in the calm before the storm, and nobody knows exactly when the storm is going to strike.

But let there be no doubt – it is coming.

The amazing prosperity that we have enjoyed for the last several decades has largely been a debt-fueled illusion.  It was a great party while it lasted, but now it is coming to an end and the aftermath of the coming crash is going to be absolutely horrific.

Keep watch and get prepared.  We don’t know exactly when the collapse is going to happen, but it is definitely on the way and now even Goldman Sachs is admitting that.

The Economic Collapse

Lloyd Blankfein, CEO Goldman Sachs

Shares of Goldman Sachs hit the skids in late trading so much so that people were asking “what’s up?”

GS – Goldman Sachs 15-Minute Chart

Reuters explains in Goldman CEO hires high-profile attorney

Goldman Sachs Chief Executive Lloyd Blankfein has hired Reid Weingarten, a high-profile Washington defense attorney whose past clients include a former Enron accounting officer, according to a government source familiar with the matter.

Blankfein, 56, is in his sixth year at the helm of the largest U.S. investment bank, which has spent two years dodging accusations of conflicts of interest and fraud.

The move to retain Weingarten comes as investigations of Goldman and its role in the 2007-2009 financial crisis continue.

The U.S. Securities and Exchange Commission scored a $550 million settlement against the bank in a fraud lawsuit in July 2010, but other investigations continue.

“Why do you bring in someone like that?” said the source, who was not authorized to speak publicly. “It says one thing: that they’re taking it seriously.”

Blankfein has not been charged in any civil or criminal case, and it was not immediately clear why he hired Weingarten.

One former federal prosecutor, who was not authorized to speak publicly, said Blankfein may have hired outside counsel after receiving a request from investigators for documents or other information.

The Senate report raised questions about inconsistencies between testimony from Blankfein and other Goldman executives to Congress and emails unearthed in the Senate investigation. The subcommittee’s chairman, Senator Carl Levin, has said the question of whether Blankfein and others committed perjury is up to the relevant federal agencies.

The former prosecutor cautioned that perjury cases were difficult to prove, adding that prosecutors would not bring charges unless they had a “rock solid case.

GS – Goldman Sachs Monthly Chart

Whatever the reasons, Goldman Sachs is revisiting a share price last seen in 2009.

I truly hope they nail Lloyd Blankfein and the New York Fed along with him. Do [not] count on it. No one has paid a price yet.

Note: That was supposed to say do “not” count on it. I accidentally left out the “not” and just added it in.

Mike  “Mish”  Shedlock

Global Economic Analysis

Representative Darrell Issa (R-CA)

This can’t be true…. can it?

Has Rep. Darrell Issa (R-CA) turned the House Oversight Committee into a bank lobbying firm with the power to subpoena and pressure government regulators? ThinkProgress has found that a Goldman Sachs vice president changed his name, then later went to work for Issa to coordinate his effort to thwart regulations that affect Goldman Sachs’ bottom line.

In July, Issa sent a letter to top government regulators demanding that they back off and provide more justification for new margin requirements for financial firms dealing in derivatives. A standard practice on Capitol Hill is to end a letter to a government agency with contact information for the congressional staffer responsible for working on the issue for the committee. In most cases, the contact staffer is the one who actually writes such letters. With this in mind, it is important to note that the Issa letter ended with contact information for Peter Haller, a staffer hired this year to work for Issa on the Oversight Committee.

Ok, so who is this guy?  Just a staffer, right?  Uh……

Haller, as he is now known, went by the name Peter Simonyi until three years ago. Simonyi adopted his mother’s maiden name Haller in 2008 shortly after leaving Goldman Sachs as a vice president of the bank’s commodity compliance group. In a few short years, Haller went from being in charge of dealing with regulators for Goldman Sachs to working for Congress in a position where he made official demands from regulators overseeing his old firm.

You’re joking right?

Oh, maybe you’re not.

Where’s my pitchfork and torch – or more importantly, where’s yours?

This nation deserves an all-on economic and political collapse.  I don’t want to see one, as I know that what comes from it will be horrifying, but we have no argument at a moral, ethical or for that matter Biblical level for avoiding it any longer.

PS: For those who think this is some sort of smear job by ThinkProgress click that link above on “adopted”.  That’s a saved copy of the web site from the law firm that publicly discloses the name change and guy’s CV.  He didn’t even try to hide it – as of this morning, the same content is there.  Yes, I looked.

And apparently, poses too much of a threat to the world’s economy.

From Bloomberg:

 Goldman Sachs Group Inc. won’t face criminal prosecution related to sales of mortgage-linked securities because such a move could threaten the U.S. financial system, according to Brad Hintz, an analyst at Sanford C. Bernstein & Co.

The U.S. Department of Justice, which is reviewing a Senate subcommittee report that alleged Goldman Sachs misled clients before the financial crisis, will avoid jeopardizing the fifth- largest U.S. bank by assets because it’s viewed as “too big to fail,” Hintz wrote in note to clients today.

“If an alleged violation is identified during a Goldman investigation, we expect a reasoned response from the Justice Department,” Hintz wrote. “In a worst case environment, we would expect a ‘too big to fail’ bank such as Goldman to be offered a deferred-prosecution agreement, pay a significant fine and submit to a federal monitor in lieu of a criminal charge.”

There you have it folks.  There isn’t really much to add to that, now is there?  There is one set of rules for us and another set of rules for them.  It also doesn’t hurt that if you are going to do something bad, make sure it is really, REALLY big and horrifying; preferrably something that could destroy the world.  You’ll be immune from prosecution for anything.

This should come as no surprise to those who have even remotely been paying attention.  I mean, unless you’ve been living under a rock for the past 3 years, it’d be hard to miss the massive fraud perpetrated by Goldman Sachs on a regular basis.  Who could forget such classics as, Goldman pressing for high ratings on its mortgage-backed securities (CDOs), then selling them off to clients (‘they’re triple-A, you know), while unbeknownst to the sucke….errr….client, took short positions against those very same CDOs.   Then, there’s everyone’s favorite, Hank Paulson denying (to Congress, no less) that he had any knowledge this was happening at Goldman Sachs…..when he was CEO of the firm at the time.  

Despite all this illicit behavior, the Vampire Squid still lives…..and it apparently continues its murderous rampage on clients’ portfolios.  According to The Street:

Goldman helped to catalyze the recent commodity sell-off as its researchers expected little upside when the economy hit a soft patch. Crude oil tumbled beneath $100 on that report. Then, two days ago, with few fundamental changes in the demand outlook, Goldman reversed its stance, advising clients to buy.

This flip-flopping from Wall Street’s most closely followed researcher is being perceived by some as client-fleecing since the bank is able to trade in proprietary accounts before it releases research and the markets react, as they often do to Goldman’s calls.

Heh…but it gets better…..

News broke yesterday, or rather, a blogger pulled data yesterday to show that Goldman dumped 1,260,802 shares of Apple(AAPL_) during the first quarter, even as its research division rated the stock “buy” and maintained its lofty $470 target. Little due diligence is done in the journalism community on the interplay between asset-management and research units.

To check up on the bank’s activities, we tracked its 58 Conviction Buy List stocks, which are the equities that the bank claims that it is most optimistic about to clients, to see if it sold any during the quarter. The results are intriguing. Of the 58 so-called Conviction Buy stocks that Goldman recommended to clients during the first quarter, it sold 31, or more than half, according to its 13-F filing. [We did not include Goldman mutual funds in these calculations].

Of the 31 Conviction Buys that Goldman sold, it sold more than 1 million shares of 12 of those stocks, begging the question: How does Goldman define “conviction”? To most investors, it means putting your money where your mouth is.

On the following page is a look at 12 Conviction Buys that Goldman sold in bulk.

Find out if you’ve been fleeced by going to The Street.

I guess one would have to ask the obvious at this point:  Exactly who still uses these guys for investing?  I mean, really?  How is it they have any clients left at this point?  If you’re thinking, ‘Oh, but I’m different, they only do that to the other guy,’ you really should have your head examined.

This is an adaptation from “Reckless Endangerment”, an exploration of the origins of the recent financial crisis, by Gretchen Morgenson and Joshua Rosner. The book will be published Tuesday by Times Books. This excerpt examines Wall Street’s role in the crisis and the relationship between Goldman Sachs, a leading investment bank, and Fremont, a freewheeling mortgage lender. Goldman declined to respond to detailed interview requests for this book.

Of all the partners in the homeownership push, no industry contributed more to the corruption of the lending process than Wall Street. If mortgage originators like NovaStar or Countrywide Financial were the equivalent of drug pushers hanging around a schoolyard and the ratings agencies were the narcotics cops looking the other way, brokerage firms providing capital to the anything-goes lenders were the overseers of the cartel.

Just as drug lords know that their products pose hazards to their customers, the Wall Street firms packaging and selling mortgage pools to investors knew well before their customers did that the loans inside the securities had begun to go bad.

It was a colossal breakdown in the duty Wall Street owed to its investing customers.

Years after the meltdown, investors began to understand how badly they’d been burned by Bear Stearns, Merrill Lynch, Lehman Brothers, Deutsche Bank, Greenwich Capital, Morgan Stanley, Goldman Sachs, and other smaller firms. Lawsuits against these firms alleging a dereliction of duty started cropping up in 2010 as investors began to realize that Wall Street’s secret loan assessments had identified severe problems in mortgages well before they stopped selling them.

Unlike many other firms, Goldman Sachs went negative on the mortgage market in the fall of 2006, well before others in its industry. Using its own money, the firm began amassing major bets against the same dubious loans it was peddling to investors at that time. Goldman, therefore, profited immensely from the losses its clients absorbed, losses its own practices helped to create.

It is unclear whether Goldman put on its hugely profitable and negative mortgage trades because of proprietary information turned up in its due-diligence reports. If that was indeed what happened, its failure to tell clients of the problems in the loans it was selling is even more disturbing.

Wall Street had financed questionable mortgages before, of course. But it was during the mania’s climactic period of 2005 and 2006 that these firms’ activities as the primary enablers to freewheeling lenders really went viral. No longer were the firms simply supplying capital to lenders trying to meet housing demand across America. Now Wall Street was supplying money to companies making increasingly poisonous loans to people with no ability to repay them. And the firms knew precisely what they were doing.

The relationship forged by Wall Street’s most prestigious firm, Goldman Sachs, with one of the nation’s most wanton mortgage originators — Fremont Investment & Loan — is a case in point. Fremont, a company with a regulatory rap sheet and a history of aggressive lending, received $1 billion in financing from Goldman in 2005, fully one-third of the total it received from all of its Wall Street enablers.

Goldman had begun financing Fremont’s workers’ compensation insurance unit in 2003 with a credit line of $500 million, but as the mortgage spree ramped up, it doubled that commitment. Goldman did so in spite of a serious run-in Fremont’s insurance unit had had with regulators just five years earlier.

With one of its units in operation since 1937, Fremont was no upstart lender like New Century or many of the other mortgage companies cropping up all over Southern California. Based in Santa Monica, Fremont boasted $8 billion in assets and declared its 100th consecutive quarterly cash dividend in November 2001.

The company was something of a family business, overseen by founder and patriarch Lee McIntyre, who had launched the company in 1963 with $800,000 in capital. Lee brought his two sons, David and James, into the business in the 1960s. David ran Fremont’s insurance operations while James ran the banking unit.

In 1969, James took up the task of decorating the company’s headquarters. He commissioned the world- renowned photographer/naturalist Ansel Adams to print 121 of his silver gelatin photographs of American parks and monuments to hang on Fremont’s walls. Some were massive, the size of murals, and Adams worked closely with McIntyre on the installation over five years. It was the largest private collection — much bigger than that of any museum — of Adams photographs.

The photographs sent a message to Fremont’s visitors that this was not just any financial concern — this was a classy enterprise that paid close attention to detail. When Fremont failed almost 40 years later, the artwork would become enmeshed in a fierce battle over the company’s assets.

Wall Street firms helped Fremont sell its loans and they were happy to further the company’s efforts to become one of the heavyweights of the subprime world. By 2000, Fremont was a giant in that world, originating $2.2 billion in mortgages. But this was only the beginning; in 2006, when the home-loan frenzy was peaking, Fremont would originate $28 billion in mortgages.

Although California insurance regulators accused Fremont executives of a scheme that boosted their pay but contributed directly to the collapse of its workers’ comp insurance unit’s collapse, few on Wall Street appeared to care about such problems.

* * * * *

Even as Fremont’s executives were sparring with the California insurance regulator, the company was rushing to get in front of the highly lucrative parade involving subprime mortgage securitization.

In 2001, mortgage lenders like Fremont understood that the low-interest-rate environment was driving investors to securities that yielded more than Treasury bonds and other relatively conservative fixed-income instruments. The Federal Reserve Board’s decision to slash interest rates to propel the economy was hurting investors who lived on the income generated by their holdings. Mortgages, with their relatively higher yields, provided a handy answer to this problem. Many investors still believed that home loans were relatively conservative instruments. Ratings agencies, blessing the majority of these securities with triple-A ratings, only confirmed this rosy view.

Teaming up with lenders, major brokerage firms like Bear Stearns, Lehman Brothers, Morgan Stanley, and Goldman Sachs pressed them for loans to feed the mortgage securities machine. It didn’t hurt that the fees generated by these securities made up for stagnant businesses — such as investment banking and stock trading — that were generating only paltry revenues on Wall Street.

With yield-hungry investors on the prowl for profits, and Wall Street eager to please, the subprime mortgage market started to rouse. The billions of dollars being dangled before cash-strapped lenders were mighty alluring; they knew that tapping those funds could juice their volumes and their profits.

In a world of tough sells, this wasn’t one. The race to the bottom had begun.

With the Fed on a rate-cutting rampage, demand for adjustable-rate mortgages with relatively low initial interest costs had become incendiary. One of a raft of “affordability” products that Countrywide and other lenders were peddling to counter the effects of the housing bubble, adjustable-rate mortgages with their low rates allowed borrowers who’d previously been shut out of homeownership to join the party.

It is not surprising then that 2003 was the year to remember in mortgage originations. A record 13.6 million mortgages worth $3.7 trillion were written that year; Wall Street’s issuance of mortgage-backed securities also peaked, reaching $463 billion in 2003. The top 25 lenders underwrote most of these loans. While these companies had accounted for only 28 percent of new mortgages written in 1990, by 2003, the top 25 were responsible for generating 77 percent of the $3.7 trillion in loans.

The bad news — for Wall Street, anyway — was that the blistering pace simply could not continue. Mortgage originations had been propelled by the Fed’s rate cuts, but with prevailing rates at 1 percent, there was little room for further declines. This was meaningful because borrowers who had reached for more home than they could afford would no longer be able to lower their costs by refinancing when rates fell again.

As 2004 dawned, therefore, it had become more and more evident that the mortgage lending machine was sputtering. By midyear, Citigroup, Bear Stearns, and Morgan Stanley had all reported serious declines in their mortgage-backed securities deals. Lehman’s volumes had fallen 35 percent from the previous year while Goldman Sachs’s had plummeted by more than 70 percent. But instead of serving as a warning to the banks, this hiccup in loan origination only made them redouble their efforts in the subprime arena.

It was a moment of truth for Wall Street, an industry not known for veracity. The firms that had made so much money on the American dream of homeownership were faced with a decision. Recognizing that the easy money days were over, the firms knew that continuing down the path of big mortgage profits was going to require a more concerted effort, greater creativity. Wall Street, always at the ready for such duty, concocted new types of loans to be offered to borrowers as well as new entities that would buy them.

But keeping the mortgage machine humming would also require that investment banks ignore numerous signs of wrongdoing along the way. This meant putting their own interests ahead of their clients’ at every turn.

While nobody mistook Wall Street banks for charity organizations, the degree to which these firms embraced and facilitated corrupt mortgage lending was stunning. Their greed and self-interest took the mortgage mania to heights (or depths, depending on your view) it could not possibly have reached without Wall Street’s involvement. And in so doing, Wall Street helped propel world financial markets to the brink of collapse.

The voraciousness of these firms would also push the nation’s economy into its most serious recession in more than 75 years. Their avarice would finally, and forcefully, demonstrate how a noble idea like homeownership could be corrupted into something that so poisoned the global economy it was left in a semi-vegetative state.

Recognizing how risky these loans were, Bear Stearns, Lehman Brothers, Goldman, and the rest were careful to bundle them with more traditional mortgages in the securities they were selling to investors. Prior to investing in the pools, prospective buyers were given only broad and generalized information about the loans inside them — details like average borrower credit scores and average loan-to-value ratios. That meant they rarely knew how many tricky loans they wound up owning. Until they started going bad, of course.

As usual, the ratings agencies were chronically behind on developments in the financial markets and they could barely keep up with the new instruments springing from the brains of Wall Street’s rocket scientists. Fitch, Moody’s, and S&P paid their analysts far less than the big brokerage firms did and, not surprisingly, wound up employing people who were often looking to befriend, accommodate, and impress the Wall Street clients in hopes of getting hired by them for a multiple increase in pay.

There were other impediments to good ratings at the agencies. They had a limited history with the newfangled mortgages that were filling these instruments. Their failure to recognize that mortgage underwriting standards had decayed or to account for the possibility that real estate prices could decline completely undermined the ratings agencies’ models and undercut their ability to estimate losses that these securities might generate.

The creation of collateralized debt obligations as a sort of secret refuse heap for toxic mortgages created even more demand for bad loans from wanton lenders. CDOs, which were essentially big bundles of pooled mortgages, prolonged the mania — vastly amplifying the losses that investors would suffer and ballooning the amounts of taxpayer money that would be required to rescue companies like Citigroup and the American International Group.

While the ratings agencies were snoozing, the CDO issuers were working overtime. In 2004, CDO issuance totaled $157.4 billion; by 2005, the figure had risen to a quarter trillion. Issuance peaked in 2006 when investors bought a staggering $521 billion of this dressed-up dross.

To Wall Streeters, CDOs had several amazing attributes. First, they were often compiled and overseen by veterans of Wall Street and these CDO managers worked hand in glove with the big firms who peddled them to customers. This meant the CDO managers were often in on the con, so instead of scrutinizing closely the loans that Wall Street and their friendly originators delivered, the managers waved dubious loans in by the billions.

But CDOs had another, major allure for the Wall Street firms that peddled them. Because of the way some were structured, they allowed the firms who were selling them to bet against the clients buying them. Among the first to embrace this concept was Goldman Sachs, the most esteemed of the nation’s investment banks and often the first mover in any profitable trade.

Goldman was founded in 1869 by Marcus Goldman, a German immigrant. In 1882, his son-in-law, Samuel Sachs, joined the small firm. In the early 20th century, Goldman specialized in initial public offerings, raising money for companies from public investors.

Over the years, Goldman grew into the preeminent investment bank. For decades it was run with one goal in mind — to do best by its customers. Goldman executives were known as Wall Street’s best and brightest and after serving out their time at the company often went into public service. Henry M. Paulson, the Treasury secretary during the early years of the mortgage meltdown, was the last in a long line of federal officials who came to Washington by way of Goldman.

But after Goldman gave up its private partnership structure, raising money from the public in 1999, the tone at the company changed. Profits took priority over customer care and trading desks soon dominated the firm’s previous power center — the investment banking arm. Lloyd Blankfein, a commodities trader who joined the firm when it bought J. Aron and Company, a trading house, was a driver of this shift at Goldman. He became its chief executive when Paulson left for Treasury.

Given that traders were in control at Goldman, it is not surprising that the firm’s mortgage desk convinced top company officials to make a major bet against the home-loan market. Recognizing that the market was overheated and starting to cool, Goldman quietly began wagering against the very securities it was selling to its clients. This dubious practice took hold at Goldman in the third quarter of 2006. Later, other CDO managers did the same thing, betting against the instruments they were charged with overseeing for the benefit of their clients.

Investors who relied on the ratings agencies to vet the CDOs never had a chance. The agencies did not see how toxic the loans in them were; in fact the largest ratings firms didn’t do loan-level analysis. Moreover, the instruments were far too complex to be analyzed by outsiders — some contained dozens of pieces of other loan pools referencing thousands of mortgages.

As CDO issuance soared, investment banks increased their cash commitments to small lenders, securing critical loan production. They also bought their own mortgage companies so they could be sure the supply of loans met the demand fueled by CDOs. With CDO managers lapping up all manner of mortgages, lenders soon found that their production targets were harder and harder to achieve. Countrywide, NovaStar, Fremont, and the rest responded by ramping up the profits generated in each loan. This meant steering borrowers who would otherwise qualify for lower cost mortgages into highly profitable but much more toxic loans.

Borrowers who could prove that their incomes and assets were ample were pushed into more expensive loans that required no documentation. Mortgage brokers peddled them as easy and hassle-free. These and other tricks hurt borrowers. But they increased the industry’s and investment banks’ profits. At the same time, lenders redoubled their efforts to refinance existing borrowers into more exotic mortgage products. The push for production fueled by Wall Street’s CDO factories fostered the massive growth in “liar loans,” for which borrowers did not have to produce any proof of income or assets.

Behind these creative bankers stood an increasingly powerful participant in the game: mortgage-backed securities traders employed by major investment banks. Generating immense profits to their firms, these traders gained more importance every day. They became drivers of the mortgage securitization process, making decisions that regularly overrode credit risk officers whose job was to prevent the disasters that resulted from trader excess.

* * * * *

In July 2005 the executives at Fremont Investment and Loan got some very good news. Fitch Ratings had announced it was upgrading Fremont’s subprime servicer rating on the strength of “notable improvements” in the company’s operations.

Like many mortgage originators, Fremont did not just write mortgages, it also serviced them, performing administrative tasks such as taking in borrowers’ monthly payments and tracking their escrow accounts and insurance obligations. Servicers also performed these duties for other lenders, for a fee, of course.

Read the rest here:  Huffington Post

Goldman Sachs Treachery

Matt Taibbi hits another homer….

They weren’t murderers or anything; they had merely stolen more money than most people can rationally conceive of, from their own customers, in a few blinks of an eye. But then they went one step further. They came to Washington, took an oath before Congress, and lied about it.

Of course they did.  Then again, remember this?

http://www.youtube.com/watch?v=mys2ocTbmAo

Was Bernanke held to account for lying to Congress?  Of course not.  So why should Goldman fear doing it?

Defenders of Goldman have been quick to insist that while the bank may have had a few ethical slips here and there, its only real offense was being too good at making money. We now know, unequivocally, that this is bullshit. Goldman isn’t a pudgy housewife who broke her diet with a few Nilla Wafers between meals — it’s an advanced-stage, 1,100-pound medical emergency who hasn’t left his apartment in six years, and is found by paramedics buried up to his eyes in cupcake wrappers and pizza boxes. If the evidence in the Levin report is ignored, then Goldman will have achieved a kind of corrupt-enterprise nirvana. Caught, but still free: above the law.

This is new…..how?  When?  Has it ever been new?

Let’s look back to Continental Illinois.  Did anyone go to prison?  Well, there were a few people who were investigated and looked at, but……

Then there’s the 2000s.  What’d we get – a handful (literally) of executives prosecuted?  How many thousands of bogus companies were brought to market?  How many people lost everything “investing” in a pig in a poke – a pig sold them by the very same banks that pulled this crap this time around?

To recap: Goldman, to get $1.2 billion in crap off its books, dumps a huge lot of deadly mortgages on its clients, lies about where that crap came from and claims it believes in the product even as it’s betting $2 billion against it. When its victims try to run out of the burning house, Goldman stands in the doorway, blasts them all with gasoline before they can escape, and then has the balls to send a bill overcharging its victims for the pleasure of getting fried.

Now Matt, that’s not quite accurate.  It appears that Goldman also billed the clients that got fried for the gas at five times the market price!

Read the rest folks, then go pray.

If we can’t see these guys prosecuted now, before the Statute of Limitations runs (which, incidentally, is exactly what they’re hoping for) then you may as well put a fork in this nation and our ability to actually attract honest capital, from here or elsewhere.

It’s done.

The Market-Ticker