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Archive for the ‘Goldman Sachs’ Category

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?

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

A Senate committee has laid out the evidence.  Now the Justice Department should bring criminal charges.

Lloyd Blankfein, chairman and CEO of The Goldman Sachs
Group, is sworn in while testifying before the Senate Homeland Security and
Governmental Affairs Investigations Subcommittee on Capitol Hill on April 27,
2010 in Washington, DC.

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.

Thanks to an extraordinary investigative effort by a Senate subcommittee that
unilaterally decided to take up the burden the criminal justice system has
repeatedly refused to shoulder, we now know exactly what Goldman Sachs
executives like Lloyd Blankfein and Daniel Sparks lied about. We know exactly
how they and other top Goldman executives, including David Viniar and Thomas
Montag, defrauded their clients. America has been waiting for a case to bring
against Wall Street. Here it is, and the evidence has been gift-wrapped and left
at the doorstep of federal prosecutors, evidence that doesn’t leave much doubt:
Goldman Sachs should stand trial.

The great and powerful Oz of Wall Street was not the only target of Wall
Street and the Financial Crisis: Anatomy of a Financial Collapse, the
650-page report just released by the Senate Subcommittee on Investigations,
chaired by Democrat Carl Levin of Michigan, alongside Republican Tom Coburn of
Oklahoma. Their unusually scathing bipartisan report also includes case studies
of Washington Mutual and Deutsche Bank, providing a panoramic portrait of a
bubble era that produced the most destructive crime spree in our history — “a
million fraud cases a year” is how one former regulator puts it. But the
mountain of evidence collected against Goldman by Levin’s small, 15-desk office
of investigators — details of gross, baldfaced fraud delivered up in such
quantities as to almost serve as a kind of sarcastic challenge to the curiously
impassive Justice Department — stands as the most important symbol of Wall
Street’s aristocratic impunity and prosecutorial immunity produced since the
crash of 2008.

To date, there has been only one successful prosecution of a financial big
fish from the mortgage bubble, and that was Lee Farkas, a Florida lender who was
just convicted on a smorgasbord of fraud charges and now faces life in prison.
But Farkas, sadly, is just an exception proving the rule: Like Bernie Madoff,
his comically excessive crime spree (which involved such lunacies as kiting
checks to his own bank and selling loans that didn’t exist) was almost
completely unconnected to the systematic corruption that led to the crisis.
What’s more, many of the earlier criminals in the chain of corruption — from
subprime lenders like Countrywide, who herded old ladies and ghetto families
into bad loans, to rapacious banks like Washington Mutual, who pawned off
fraudulent mortgages on investors — wound up going belly up, sunk by their own
greed.

But Goldman, as the Levin report makes clear, remains an ascendant company
precisely because it used its canny perception of an upcoming disaster (one
which it helped create, incidentally) as an opportunity to enrich itself, not
only at the expense of clients but ultimately, through the bailouts and the
collateral damage of the wrecked economy, at the expense of society. The bank
seemed to count on the unwillingness or inability of federal regulators to stop
them — and when called to Washington last year to explain their behavior,
Goldman executives brazenly misled Congress, apparently confident that their
perjury would carry no serious consequences. Thus, while much of the Levin
report describes past history, the Goldman section describes an
ongoing? crime — a powerful, well-connected firm, with the ear of the
president and the Treasury, that appears to have conquered the entire regulatory
structure and stands now on the precipice of officially getting away with one of
the biggest financial crimes in history.

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.

To fully grasp the case against Goldman, one first needs to understand that the financial crime wave described in the Levin report came on the heels of a decades-long lobbying campaign by Goldman and other titans of Wall Street, who pleaded over and over for the right to regulate themselves.

Before that campaign, banks were closely monitored by a host of federal
regulators, including the Office of the Comptroller of the Currency, the FDIC
and the Office of Thrift Supervision. These agencies had examiners poring over
loans and other transactions, probing for behavior that might put depositors or
the system at risk. When the examiners found illegal or suspicious behavior,
they built cases and referred them to criminal authorities like the Justice
Department.

This system of referrals was the backbone of financial law enforcement
through the early Nineties. William Black was senior deputy chief counsel at the
Office of Thrift Supervision in 1991 and 1992, the last years of the S&L
crisis, a disaster whose pansystemic nature was comparable to the mortgage
fiasco, albeit vastly smaller. Black describes the regulatory MO back then.
“Every year,” he says, “you had thousands of criminal referrals, maybe 500
enforcement actions, 150 civil suits and hundreds of convictions.”

But beginning in the mid-Nineties, when former Goldman co-chairman Bob Rubin
served as Bill Clinton’s senior economic-policy adviser, the government began
moving toward a regulatory system that relied almost exclusively on voluntary
compliance by the banks. Old-school criminal referrals disappeared down the
chute of history along with floppy disks and scripted television entertainment.
In 1995, according to an independent study, banking regulators filed 1,837
referrals. During the height of the financial crisis, between 2007 and 2010,
they averaged just 72 a year.

But spiking almost all criminal referrals wasn’t enough for Wall Street. In
2004, in an extraordinary sequence of regulatory rollbacks that helped pave the
way for the financial crisis, the top five investment banks — Goldman, Merrill
Lynch, Morgan Stanley, Lehman Brothers and Bear Stearns — persuaded the
government to create a new, voluntary approach to regulation called Consolidated
Supervised Entities. CSE was the soft touch to end all soft touches. Here is how
the SEC’s inspector general described the program’s regulatory army: “The Office
of CSE Inspections has only two staff in Washington and five staff in the New
York regional office.”

Among the bankers who helped convince the SEC to go for this ludicrous
program was Hank Paulson, Goldman’s CEO at the time. And in exchange for
“submitting” to this new, voluntary regime of law enforcement, Goldman and other
banks won the right to lend in virtually unlimited amounts, regardless of their
cash reserves — a move that fueled the catastrophe of 2008, when banks like Bear
and Merrill were lending out 35 dollars for every one in their vaults.

Goldman’s chief financial officer then and now, a fellow named David Viniar,
wrote a letter in February 2004, commending the SEC for its efforts to develop
“a regulatory framework that will contribute to the safety and soundness of
financial institutions and markets by aligning regulatory capital requirements
more closely with well-developed internal risk-management practices.”
Translation: Thanks for letting us ignore all those pesky regulations while we
turn the staid underwriting business into a Charlie Sheen house party.

Goldman and the other banks argued that they didn’t need government
supervision for a very simple reason: Rooting out corruption and fraud was in
their own self-interest. In the event of financial wrongdoing, they insisted,
they would do their civic duty and protect the markets. But in late 2006, well
before many of the other players on Wall Street realized what was going on, the
top dogs at Goldman — including the aforementioned Viniar — started to fear they
were sitting on a time bomb of billions in toxic assets. Yet instead of sounding
the alarm, the very first thing Goldman did was tell no one. And the
second thing it did was figure out a way to make money on the knowledge
by screwing its own clients. So not only did Goldman throw a full-blown “bite
me” on its own self-righteous horseshit about “internal risk management,” it
more or less instantly sped way beyond inaction straight into craven
manipulation.

“This is the dog that didn’t bark,” says Eliot Spitzer, who tangled with
Goldman during his years as New York’s attorney general. “Their whole political
argument for a decade was ‘Leave us alone, trust us to regulate ourselves.’ They
not only abdicated that responsibility, they affirmatively traded against the
entire market.”

By the end of 2006, Goldman was sitting atop a $6 billion bet on American home loans. The bet was a byproduct of Goldman having helped create a new trading index called the ABX, through which it accumulated huge holdings in mortgage-related securities. But in December 2006, a series of top Goldman executives — including Viniar, mortgage chief
Daniel Sparks and senior executive Thomas Montag — came to the conclusion that
Goldman was overexposed to mortgages and should get out from under its huge bet
as quickly as possible. Internal memos indicate that the executives soon became
aware of the host of scams that would crater the global economy: home loans
awarded with no documentation, loans with little or no equity in them. On
December 14th, Viniar met with Sparks and other executives, and stressed the
need to get “closer to home” — i.e., to reduce the bank’s giant bet on
mortgages.

Sparks followed up that meeting with a seven-point memo laying out how to
unload the bank’s mortgages. Entry No. 2 is particularly noteworthy. “Distribute
as much as possible on bonds created from new loan securitizations,” Sparks
wrote, “and clean previous positions.” In other words, the bank needed to find
suckers to buy as much of its risky inventory as possible. Goldman was like a
car dealership that realized it had a whole lot full of cars with faulty brakes.
Instead of announcing a recall, it surged ahead with a two-fold plan to make a
fortune: first, by dumping the dangerous products on other people, and second,
by taking out life insurance against the fools who bought the deadly cars.

The day he received the Sparks memo, Viniar seconded the plan in a gleeful
cheerleading e-mail. “Let’s be aggressive distributing things,” he wrote,
“because there will be very good opportunities as the markets [go] into what is
likely to be even greater distress, and we want to be in a position to take
advantage of them.” Translation: Let’s find as many suckers as we can as fast as
we can, because we’ll only make more money as more and more shit hits the
fan.

By February 2007, two months after the Sparks memo, Goldman had gone from
betting $6 billion on mortgages to betting $10 billion against them — a
shift of $16 billion. Even CEO Lloyd “I’m doing God’s work” Blankfein wondered
aloud about the bank’s progress in “cleaning” its crap. “Could/should we have
cleaned up these books before,” Blankfein wrote in one e-mail, “and are we doing
enough right now to sell off cats and dogs in other books throughout the
division?”

How did Goldman sell off its “cats and dogs”? Easy: It assembled new batches
of risky mortgage bonds and dumped them on their clients, who took Goldman’s
word that they were buying a product the bank believed in. The names of the
deals Goldman used to “clean” its books — chief among them Hudson and Timberwolf
— are now notorious on Wall Street. Each of the deals appears to represent a
different and innovative brand of shamelessness and deceit.

In the marketing materials for the Hudson deal, Goldman claimed that its
interests were “aligned” with its clients because it bought a tiny, $6 million
slice of the riskiest portion of the offering. But what it left out is that it
had shorted the entire deal, to the tune of a $2 billion bet against its own
clients. The bank, in fact, had specifically designed Hudson to reduce its
exposure to the very types of mortgages it was selling — one of its creators,
trading chief Michael Swenson, later bragged about the “extraordinary profits”
he made shorting the housing market. All told, Goldman dumped $1.2 billion of
its own crappy “cats and dogs” into the deal — and then told clients that the
assets in Hudson had come not from its own inventory, but had been “sourced from
the Street.”

Hilariously, when Senate investigators asked Goldman to explain how it could
claim it had bought the Hudson assets from “the Street” when in fact it had
taken them from its own inventory, the bank’s head of CDO trading, David Lehman,
claimed it was accurate to say the assets came from “the Street” because Goldman
was part of the Street. “They were like, ‘We are the Street,’” laughs
one investigator.

Hudson lost massive amounts of money almost immediately after the sale was
completed. Goldman’s biggest client, Morgan Stanley, begged it to liquidate the
investment and get out while they could still salvage some value. But Goldman
refused, stalling for months as its clients roasted to death in a raging
conflagration of losses. At one point, John Pearce, the Morgan Stanley rep
dealing with Goldman, lost his temper at the bank’s refusal to sell, breaking
his phone in frustration. “One day I hope I get the real reason why you are
doing this to me,” he told a Goldman broker.

Goldman insists it was only required to liquidate the assets “in an orderly
fashion.” But the bank had an incentive to drag its feet: Goldman’s huge bet
against the deal meant that the worse Hudson performed, the more money Goldman
made. After all, the entire point of the transaction was to screw its own
clients so Goldman could “clean its books.” The crime was far from victimless:
Morgan Stanley alone lost nearly $960 million on the Hudson deal, which
admittedly doesn’t do much to tug the heartstrings. Except that quickly after
Goldman dumped this near-billion-dollar loss on Morgan Stanley, Morgan Stanley
turned around and dumped it on taxpayers, who within a year were spending $10
billion bailing out the sucker bank through the TARP program.

It is worth pointing out here that Goldman’s behavior in the Hudson scam
makes a mockery of standards in the underwriting business. Courts have held that
“the relationship between the underwriter and its customer implicitly involves a
favorable recommendation of the issued security.” The SEC, meanwhile, requires
that broker-dealers like Goldman disclose “material adverse facts,” which among
other things includes “adverse interests.” Former prosecutors and regulators I
interviewed point to these areas as potential avenues for prosecution; you can
judge for yourself if a $2 billion bet against clients qualifies as an “adverse
interest” that should have been disclosed.

But these “adverse interests” weren’t even the worst part of Hudson. Goldman
also used a complex pricing method to turn the deal into an impressive
triple screwing. Essentially, Goldman bought some of the mortgage
assets in the Hudson deal at a discount, resold them to clients at a higher
price and pocketed the difference. This is a little like getting an invoice from
an interior decorator who, in addition to his fee for services, charges you $170
a roll for brand-name wallpaper he’s actually buying off the back of a truck for
$63.

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.

Matt Taibbi for Rolling Stone – Read The Rest

Litigation may be slowly doing the job missed or only partially completed by various governmental investigations into the financial crisis. The Valukas report on the Lehman bankruptcy was revealing, and numerous foreclosure defense attorneys have opened cans of worms that the powers that be would rather pretend simply don’t exist.

The New York Times reports tonight that a case filed last year was unsealed last week. It plumbs a continuing sore point with the public, namely the generous terms of the AIG bailout, both to the company (which defied the government and insisted on remaining largely intact when the plan had been to sell its various units to repay the government funding) and to its credit default swap counterparties. The litigation has the potential to be revealing, particularly if it goes into discovery (various depositions are likely to become public in pre-trial jousting, um, motions). The Times gives an overview:

The lawsuit, filed by a pair of veteran political activists from the La Jolla area of San Diego, asserts that A.I.G. and two large banks engaged in a variety of fraudulent and speculative transactions, running up losses well into the billions of dollars. Then the three institutions persuaded the Federal Reserve Bank of New York to bail them out by giving A.I.G. two rescue loans, which were used to unwind hundreds of failed trades.

The loans were improper, the lawsuit says, because the Fed made them without getting a pledge of high-quality collateral from A.I.G., as required by law.

“To cover losses of those engaged in fraudulent financial transactions is an authority not yet given to the Fed board,” said the plaintiffs, Derek and Nancy Casady, in their complaint, filed in Federal District Court for the Southern District of California.

The lawsuit names A.I.G., Goldman Sachs and Deutsche Bank as defendants, but not the Fed.

The lawsuit itself names other defendants, including Merrill and its successor Bank of America, SocGen, and “Does 1 through 100.”

White shoe types will likely look down their noses at the filing. It makes rather eccentric use of graphics (for instance, including company logos) and includes charts, some of which are very helpful (tables with tabulations and timelines), while others are visual representations of arguments made in the text and hence would be deemed by style snobs to be redundant. It also is somewhat sensationalistic, even heated at points in tone (which does make for more lively reading) and does not unpack its arguments as much as appears to be typical in court filings.

Nevertheless, despite the rough style, there’s some intriguing reading, and the case does a clever job of juxtaposing e-mails and Congressional testimony by AIG executives with various disclosures of the AIG bailout process and the terms of the loan facilities.

To my non-expert eye, the case appears to hinge on the argument that begins on p. 43, that the Fed loans were in violation of the Fed’s authority under the widely-cited “unusual and exigent circumstances” clause. I had taken the reading of former central banker, now Citigroup economist Willem Buiter on this, that it gave the Fed the authority to lend against a dead dog if it chose to.

That appears to be inaccurate, and I wonder if the focus upon this section will embolden the Audit the Fed crowd to have another go at the central bank.

Specifically, the “unusual and exigent” language includes other restrictions, which I read as all being operative:

1. The central bank can lend against “notes, bills, and other drafts of exchange when such notes, drafts, and bills of exchange are indorsed or otherwise secured to the satisfaction of the Federal reserve bank

2. The “notes, bills, and other drafts of exchange” must be discounted

3. The Federal reserve bank making the loan must obtain evidence that the non-bank party seeking the loan can’t get credit from other banks

4. “….five or more members of the Board of Governors must affirmatively vote to authorize the discount prior to the extension of credit.”

The case focuses on allegedly fraudulent representations made by AIG and the various major dealers in the course of obtaining the financing. But the part I find interesting is the Fed’s evident non-compliance with the requirements of this section, particularly the fact that the central bank lent 100% against the face value of the AIG CDOs, between taking out the CDS and then lending the bailout vehicle Maiden Lane III the funds to buy the CDOs. Interestingly, the SIGTARP investigation missed this issue. If this was at all considered, the argument may have been that the AIG equity in MLIII was tantamount to a discount, but the lawsuit argues that notion is bogus. Since AIG was broke, any money for the AIG equity came from the outside (in fairness, it’s a bit more complex, thanks to reserves set aside over the collateral dispute).

The suit argues that the initial loan was made under false premises, since the loan was secured by all assets of AIG, when the assets were already pledged (all the regulated subs have prior claims on them, both to creditors and policy-holders). The understanding, as depicted in various less-than-official accounts, like the Andrew Ross Sorkin Too Big Too Fail, is that the loans were secured by the equity of the subs. Fine in theory, but in practice, that isn’t what the loan document says, and as important (although not argued in the case) is the amount of the loan was based on what AIG needed to stay afloat, not on any effort to find a market value of the assets pledged and discount that.

In addition, the notion that it was acceptable to lend against stock appears to be based on the discount schedule that the Fed posts and revises from time to time as to the types of collateral that are accepted for lending and the various discount rates established for them. But note that schedule is for depositary institutions. The Fed acted as if it could simply lend against the same assets held by non-depositaries, but the language of the germane section does not appear to support that idea.

The various disclosures of how the Fed lent against pretty much anything the banks could round up, including defaulted securities, is troubling. Defenders of the central bank argue no harm was done since the securities have recovered from crisis lows (well save the ones that went to zero). The problem is that the logic is circular. In many cases, the value of the securities now depends on the fact that the Fed is willing to lend at super low interest rates. So the “market” values are fictive and dependent upon Fed intervention, which is coming at the expense of savers. The interdependence between the Fed’s rescue facilities and its continued interventions is given a free pass, but those of us who are not at the top of the food chain are continuing to pay the cost.

Naked Capitalism