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Goldman Sachs Remains in the Spotlight

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Goldman Sachs has become a magnet for bad publicity.  Last week, I wrote a piece entitled, “Why Bad Publicity Never Hurts Goldman Sachs”.  On March 14, Greg Smith (a Goldman Sachs executive director and head of the firm’s United States equity derivatives business in Europe, the Middle East and Africa) summed-up his disgust with the firm’s devolution by writing “Why I Am Leaving Goldman Sachs” for The New York Times.  Among the most-frequently quoted reasons for Smith’s departure was this statement:

It makes me ill how callously people talk about ripping their clients off.  Over the last 12 months I have seen five different managing directors refer to their own clients as “muppets,” sometimes over internal e-mail.

In the wake of Greg Smith’s very public resignation from Goldman Sachs, many commentators have begun to speculate that Goldman’s bad behavior may have passed a tipping point.  The potential consequences have become a popular subject for speculation.  The end of Lloyd Blankfein’s reign as CEO has been the most frequently-expressed prediction.  Peter Cohan of Forbes raised the possibility that Goldman’s clients might just decide to take their business elsewhere:

Until a wave of talented people leave Goldman and go work for some other bank, many clients will stick with Goldman and hope for the best.  That’s why the biggest threat to Goldman’s survival is that Smith’s departure – and the reasons he publicized so nicely in his Times op-ed – leads to a wider talent exodus.

After all, that loss of talent could erode Goldman’s ability to hold onto clients. And that could give Goldman clients a better alternative.  So when Goldman’s board replaces Blankfein, it should appoint a leader who will restore the luster to Goldman’s traditional values.

Goldman’s errant fiduciary behavior became a popular topic in July of 2009, when the Zero Hedge website focused on Goldman’s involvement in high-frequency trading, which raised suspicions that the firm was “front-running” its own customers.   It was claimed that when a Goldman customer would send out a limit order, Goldman’s proprietary trading desk would buy the stock first, then resell it to the client at the high limit of the order.  (Of course, Goldman denied front-running its clients.)  Zero Hedge brought our attention to Goldman’s “GS360” portal.  GS360 included a disclaimer which could have been exploited to support an argument that the customer consented to Goldman’s front-running of the customer’s orders.  One week later, Matt Taibbi wrote his groundbreaking, tour de force for Rolling Stone about Goldman’s involvement in the events which led to the financial crisis.  From that point onward, the “vampire squid” and its predatory business model became popular subjects for advocates of financial reform.

Despite all of the hand-wringing about Goldman’s controversial antics – especially after the April 2010 Senate Permanent Subcommittee on Investigations hearing, wherein Goldman’s “Fab Four” testified about selling their customers the Abacus CDO and that “shitty” Timberwolf deal, no effective remedial actions for cleaning-up Wall Street were on the horizon.  The Dodd-Frank financial “reform” legislation had become a worthless farce.

Exactly two years ago, publication of the report by bankruptcy examiner Anton Valukas, pinpointing causes of the Lehman Brothers collapse, created shockwaves which were limited to the blogosphere.  Unfortunately, the mainstream media were not giving that story very much traction.  On March 15 of 2010, the Columbia Journalism Review published an essay by Ryan Chittum, decrying the lack of mainstream media attention given to the Lehman scandal.  This shining example of Wall Street malefaction should have been an influential factor toward making the financial reform bill significantly more effective than the worthless sham it became.

Greg Smith’s resignation from Goldman Sachs could become the game-changing event, motivating Wall Street’s investment banks to finally change their ways.  Matt Taibbi seems to think so:

This always had to be the endgame for reforming Wall Street.  It was never going to happen by having the government sweep through and impose a wave of draconian new regulations, although a more vigorous enforcement of existing laws might have helped.  Nor could the Occupy protests or even a monster wave of civil lawsuits hope to really change the screw-your-clients, screw-everybody, grab-what-you-can culture of the modern financial services industry.

Real change was always going to have to come from within Wall Street itself, and the surest way for that to happen is for the managers of pension funds and union retirement funds and other institutional investors to see that the Goldmans of the world aren’t just arrogant sleazebags, they’re also not terribly good at managing your money.

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These guys have lost the fear of going out of business, because they can’t go out of business.  After all, our government won’t let them.  Beyond the bailouts, they’re all subsisting daily on massive loads of free cash from the Fed.  No one can touch them, and sadly, most of the biggest institutional clients see getting clipped for a few points by Goldman or Chase as the cost of doing business.

The only way to break this cycle, since our government doesn’t seem to want to end its habit of financially supporting fraud-committing, repeat-offending, client-fleecing banks, is for these big “muppet” clients to start taking their business elsewhere.

In the mean time, the rest of us will be keeping our fingers crossed.


 

No Justice For The Wicked

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Although the drumbeat continues, I remain skeptical as to whether any of the criminals responsible for causing the financial crisis will ever be brought to justice.  In the weeks before President Obama’s Inauguration, the foremost question on my mind was whether the new administration would take the necessary steps to change the culture of corruption on Wall Street:

As we approach the eve of the Obama Administration’s first day, across America the new President’s supporters have visions of “change we can believe in” dancing in their heads.  For some, this change means the long overdue realization of health care reform.  For those active in the Democratic campaigns of 2006, “change” means an end to the Iraq war.  Many Americans are hoping that the new administration will crack down on the unregulated activities on Wall Street that helped bring about the current economic crisis.

On December 15, Stephen Labaton wrote an article for the New York Times, examining the recent failures of the Securities and Exchange Commission as well as the environment at the SEC that facilitates such breakdowns.

At that time, I also focused on the point made in a commentary by Michael Lewis and David Einhorn, which appeared in the January 3 New York Times:

It’s not hard to see why the S.E.C. behaves as it does.  If you work for the enforcement division of the S.E.C. you probably know in the back of your mind, and in the front too, that if you maintain good relations with Wall Street you might soon be paid huge sums of money to be employed by it.

I concluded that piece with a rhetorical question:

Let’s hope our new President, the Congress and others pay serious attention to what Lewis and Einhorn have said.  Cleaning up Wall Street is going to be a dirty job.  Will those responsible for accomplishing this task be up to doing it?

By March 23, 2009, it had become obvious that our new President was more concerned about the “welfare” (pun intended) of the Wall Street banks than the well-being of the American economy.  I began my posting of that date with this statement:

We the people, who voted for Barack Obama, are about to get ripped off by our favorite Hope dealer.

On August 27 of that year, I wrote another piece expressing my disappointment with how things had (not) progressed.  My October 1, 2009 posting focused on the fact that H. David Kotz, Inspector General of the Securities and Exchange Commission, issued two reports, recommending 58 changes to improve the way the agency investigates and enforces violations of securities laws, as a result of the SEC’s failure to investigate the Bernie Madoff Ponzi scheme.  The reports exposed a shocking degree of ineptitude at the SEC.

After the release of the report by bankruptcy examiner Anton Valukas, pinpointing the causes of the collapse of Lehman Brothers, I lamented the fact that the mainstream media hadn’t shown much concern about the matter, despite the terrible fraud exposed in the report.  Nevertheless, by the next day, I was able to highlight some great commentaries on the Valukas Report and I felt optimistic enough to conclude the piece with this thought:

We can only hope that a continued investigation into the Lehman scandal will result in a very bright light directed on those privileged plutocrats who consider themselves above the law.

If only  . . .

By the eve of the mid-term elections, I had an answer to the question I had posed on January 5, 2009 as to whether our new President and Congress would be up to the task of cleaning up Wall Street:

One common theme voiced by many critics of the Obama administration has been its lack of interest in prosecuting those responsible for causing the financial crisis.  Don’t hold your breath waiting for Attorney General Eric Hold-harmless to initiate any criminal proceedings against such noteworthy individuals as Countrywide’s Angelo Mozilo or Dick Fuld of Lehman Brothers.  On October 23, Frank Rich of The New York Times mentioned both of those individuals while lamenting the administration’s failure to prosecute the “financial crimes that devastated the nation”:

The Obama administration seems not to have a prosecutorial gene.   It’s shy about calling a fraud a fraud when it occurs in high finance.
*   *   *
Since Obama has neither aggressively pursued the crash’s con men nor compellingly explained how they gamed the system, he sometimes looks as if he’s fronting for the industry even if he’s not.

The special treatment afforded to the perpetrators of the frauds that helped create the financial crisis wasn’t the only gift to Wall Street from the Democratically-controlled White House, Senate and Congress.  The financial “reform” bill was so badly compromised (by the Administration and Senate Democrats, themselves) as it worked its way through the legislative process, that it is now commonly regarded as nothing more than a hoax.

By the close of 2010, I noted that an expanding number of commentators shared my outrage over the likelihood that we would never see any prosecutions result from the crimes that brought about the financial crisis:

A recent article written by former New York Mayor Ed Koch began with the grim observation that no criminal charges have been brought against any of the malefactors responsible for causing the financial crisis:

Looking back on 2010 and the Great Recession, I continue to be enraged by the lack of accountability for those who wrecked our economy and brought the U.S. to its knees.  The shocking truth is that those who did the damage are still in charge.  Many who ran Wall Street before and during the debacle are either still there making millions, if not billions, of dollars, or are in charge of our country’s economic policies which led to the debacle.

Most recently, Matt Taibbi has written another great article for Rolling Stone entitled, “Why Isn’t Wall Street in Jail?”.  It’s nice to know that the drumbeat for justice continues.  Taibbi’s essay provided a great history of the crisis, with a particular emphasis on how whistleblowers were ignored, just as Harry Markopolos was ignored when (in May of 2000) he tried to alert the SEC to the fact that Bernie Madoff’s hedge fund was a multi-billion-dollar Ponzi scheme.  Here is a great passage from Matt Taibbi’s essay:

In the past few years, the administration has allocated massive amounts of federal resources to catching wrongdoers — of a certain type.  Last year, the government deported 393,000 people, at a cost of $5 billion.  Since 2007, felony immigration prosecutions along the Mexican border have surged 77 percent; nonfelony prosecutions by 259 percent.  In Ohio last month, a single mother was caught lying about where she lived to put her kids into a better school district; the judge in the case tried to sentence her to 10 days in jail for fraud, declaring that letting her go free would “demean the seriousness” of the offenses.

So there you have it.  Illegal immigrants:  393,000.  Lying moms:  one.  Bankers:  zero.  The math makes sense only because the politics are so obvious.  You want to win elections, you bang on the jailable class. You build prisons and fill them with people for selling dime bags and stealing CD players.  But for stealing a billion dollars?  For fraud that puts a million people into foreclosure?  Pass.  It’s not a crime.  Prison is too harsh.  Get them to say they’re sorry, and move on.  Oh, wait — let’s not even make them say they’re sorry.  That’s too mean; let’s just give them a piece of paper with a government stamp on it, officially clearing them of the need to apologize, and make them pay a fine instead.  But don’t make them pay it out of their own pockets, and don’t ask them to give back the money they stole. In fact, let them profit from their collective crimes, to the tune of a record $135 billion in pay and benefits last year.  What’s next?  Taxpayer-funded massages for every Wall Street executive guilty of fraud?

Wouldn’t it be nice if public opinion meant more to the Obama administration than campaign contributions from Wall Street banksters?