Two years ago, I was inspired to write a piece entitled, “Justice Denied” after seeing hedge fund manager, David Einhorn interviewed by Charlie Rose. I also discussed an essay Jesse Eisenger wrote for the DealBook blog at The New York Times entitled, “The Feds Stage a Sideshow While the Big Tent Sits Empty”. The piece reinforced my suspicion that the “insider trading” investigation which received so much publicity in December of 2010 was simply a diversionary tactic to direct public attention away from the crimes which caused the financial crisis.
Since that time, a good deal of commentary has been written, lamenting the fact that no criminal charges have been brought against the miscreants who caused the financial crisis. Unfortunately, Attorney General Eric Hold-Harmless has taken no action against those responsible, while the time for bringing those charges within the applicable Statutes of Limitations was allowed to tick away.
With the expiration of the relevant Statutes of Limitations, the next question becomes: Does the failure to prosecute those cases rise to the level of obstruction of justice? Although President Obama has repeatedly insisted that “no crimes were committed” which could have caused the financial crisis, we are now learning that such was not the case.
Jesse Eisenger recently wrote another piece for the Deal Book blog at the New York Times entitled, “Financial Crisis Lawsuit Suggests Bad Behavior at Morgan Stanley” which appeared on January 23. In that essay, Eisenger discussed how the discovery process in civil lawsuits against the Wall Street Banks involved in the creation of the collateralized debt obligations (CDOs) based on subprime mortgages, revealed that those CDOs were known to be toxic at the time they were marketed.
The Naked Capitalism website has provided and excellent roadmap to the skulduggery involving the role CDOs played in causing the financial crisis.
Matt Taibbi has written another magnum opus on the financial crisis, this time focusing on sleazy conduct which took place after the meltdown. In his article for Rolling Stone entitled, “Secrets and Lies of the Bailout”, we were reminded how the bank bailouts not only unjustly enriched the culprits who caused the problem – but they also provided the opportunity for those too-big-to-fail institutions to become even bigger while facilitating the cover-up of how the original mess occurred:
The public has been lied to so shamelessly and so often in the course of the past four years that the failure to tell the truth to the general populace has become a kind of baked-in, official feature of the financial rescue. Money wasn’t the only thing the government gave Wall Street – it also conferred the right to hide the truth from the rest of us. And it was all done in the name of helping regular people and creating jobs. “It is,” says former bailout Inspector General Neil Barofsky, “the ultimate bait-and-switch.”
Despite so many efforts to hide the truth from “the little people”, the truth is slowly leaking out as a result of the dogged investigation by journalists and bloggers. As discovery proceeds in the civil lawsuits against the megabanks, revealing the extent of criminal activity which brought about the most catastrophic economic disaster since the Great Depression, people will begin to ask: “How did they get away with this?” Perhaps the best way to answer that question would be to bring criminal charges against those who allowed the perpetrators to get away with it.
Matt Taibbi has done it again. His latest article in Rolling Stone focused on the case of United States of America v. Carollo, Goldberg and Grimm, in which the Obama Justice Department actually prosecuted some financial crimes. The three defendants worked for GE Capital (the finance arm of General Electric) and were involved in a bid-rigging conspiracy wherein the prices paid by banks to bond issuers were reduced (to the detriment of the local governments who issued those bonds).
The broker at the center of this case was a firm known as CDR. CDR would be hired by a state or local government which was planning a bond issue. Banks would then submit bids which are interest rates paid to the issuer for holding the money until payments became due to the various contractors involved in the project which was the subject of the particular bond. The brokers would tip off a favored bank about the amounts of competing bids in return for a kickback based on the savings made by avoiding an unnecessarily high bid. In the Carollo case, the GE Capital employees were supposed to be competing with other banks who would submit bids to CDR. CDR would then inform the bidders on how to coordinate their bids so that the bid prices could be kept low and the various banks could agree among themselves as to which entity would receive a particular bond issue. Four of the banks which “competed” against GE Capital in the bidding were UBS, Bank of America, JPMorgan Chase and Wells Fargo. Those four banks paid a total of $673 million in restitution after agreeing to cooperate in the government’s case.
The brokers would also pay-off politicians who selected their firm to handle a bond issue. Matt Taibbi gave one example of how former New Mexico Governor Bill Richardson received $100,000 in campaign contributions from CDR. In return, CDR received $1.5 million in public money for services which were actually performed by another broker – at an additional cost.
Needless to say, the mainstream news media had no interest in covering this case. Matt Taibbi quoted a remark made to the jury at the outset of the case by the trial judge, Harold Baer: “It is unlikely, I think, that this will generate a lot of media publicity”. Although the judge’s remark was intended to imply that the subject matter of the case was too technical and lacking in the “sex appeal” of the usual evening news subject, it also underscored the aversion of mainstream news outlets to expose the wrongdoing of their best sponsors: the big banks.
Beyond that, this case exploded a myth – often used by the Justice Department as an excuse for not prosecuting financial crimes. As Taibbi explained at the close of the piece:
There are some who think that the government is limited in how many corruption cases it can bring against Wall Street, because juries can’t understand the complexity of the financial schemes involved. But in USA v. Carollo, that turned out not to be true. “This verdict is proof of that,” says Hausfeld, the antitrust attorney. “Juries can and do understand this material.”
One important lesson to be learned from the Carollo case is a simple fact that the mainstream news media would prefer to ignore: This is but one tiny example of the manner in which business is conducted by the big banks. As Matt Taibbi explained:
The men and women who run these corrupt banks and brokerages genuinely believe that their relentless lying and cheating, and even their anti-competitive cartelstyle scheming, are all legitimate market processes that lead to legitimate price discovery. In this lunatic worldview, the bidrigging scheme was a system that created fair returns for everyone.
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That, ultimately, is what this case was about. Capitalism is a system for determining objective value. What these Wall Street criminals have created is an opposite system of value by fiat. Prices are not objectively determined by collisions of price information from all over the market, but instead are collectively negotiated in secret, then dictated from above
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Last year, the two leading recipients of public bond business, clocking in with more than $35 billion in bond issues apiece, were Chase and Bank of America – who combined had just paid more than $365 million in fines for their role in the mass bid rigging. Get busted for welfare fraud even once in America, and good luck getting so much as a food stamp ever again. Get caught rigging interest rates in 50 states, and the government goes right on handing you billions of dollars in public contracts.
By now we are all familiar with the “revolving door” principle, wherein prosecutors eventually find themselves working for the law firms which represent the same financial institutions which those prosecutors should have dragged into court. At the Securities and Exchange Commission, the same system is in place. Worst of all is the fact that our politicians – who are responsible for enacting laws to protect the public from such criminal enterprises as what was exposed in the Carollo case – are in the business of lining their pockets with “campaign contributions” from those entities. You may have seen Jon Stewart’s coverage of Jamie Dimon’s testimony before the Senate Banking Committee. How dumb do the voters have to be to reelect those fawning sycophants?
Yet it happens . . . over and over again. From the Great Depression to the Savings and Loan scandal to the financial crisis and now this bid-rigging scheme. The culprits never do the “perp walk”. Worse yet, they continue on with “business as usual” partly because the voting public is too brain-dead to care and partly because the mainstream news media avoid these stories. Our political system is incapable of confronting this level of corruption because the politicians from both parties are bought and paid for by the banking cabal. As Paul Farrell of MarketWatch explained:
Seriously, folks, the elections are relevant. Totally. Oh, both sides pretend it matters. But it no longer matters who’s president. Or who’s in Congress. Money runs America. And when it comes to the public interest, money is not just greedy, but myopic, narcissistic and deaf. Money from Wall Street bankers, Corporate CEOs, the Super Rich and their army of 261,000 highly paid mercenary lobbyists. They hedge, place bets on both sides. Democracy is dead.
Why would anyone expect America to solve any of its most pressing problems when the officials responsible for addressing those issues have been compromised by the villains who caused those situations?
In case you might be wondering whether the miscreants responsible for causing the financial crisis might ever be prosecuted by Attorney General Eric Hold-harmless – don’t hold your breath. At the close of 2010, I expressed my disappointment and skepticism that the culprits responsible for having caused the financial crisis would ever be brought to justice. I found it hard to understand why neither the Securities and Exchange Commission nor the Justice Department would be willing to investigate malefaction, which I described in the following terms:
We often hear the expression “crime of the century” to describe some sensational act of blood lust. Nevertheless, keep in mind that the financial crisis resulted from a massive fraud scheme, involving the packaging and “securitization” of mortgages known to be “liars’ loans”, which were then sold to unsuspecting investors by the creators of those products – who happened to be betting against the value of those items. In consideration of the fact that the credit crisis resulting from this scam caused fifteen million people to lose their jobs as well as an expected 8 – 12 million foreclosures by 2012, one may easily conclude that this fraud scheme should be considered the crime of both the last century as well as the current century.
During that same week, former New York Mayor Ed Koch wrote an article which 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.
“Accountability” is a relative term. If you believe that the imposition of fines – resulting from civil actions by the Justice Department – could provide accountability for the crimes which led to the financial crisis, then you might have reason to feel enthusiastic. On the other hand if you agree with Matt Taibbi’s contention that some of those characters deserve to be in prison – then get ready for another disappointment.
Last week, Reuters described plans by the Justice Department to make use of President Obama’s Financial Fraud Task Force (which I discussed last January) by relying on a statute (FIRREA- the Financial Institutions Reform, Recovery, and Enforcement Act) which was passed in the wake of the 1980s Savings & Loan crisis:
FIRREA allows the government to bring civil charges if prosecutors believe defendants violated certain criminal laws but have only enough information to meet a threshold that proves a claim based on the “preponderance of the evidence.”
Adam Lurie, a lawyer at Cadwalader, Wickersham & Taft who worked in the Justice Department’s criminal division until last month, said that although criminal cases based on problematic e-mails without a cooperating witness could be difficult to prove, the same evidence could meet a “preponderance” standard.
On the other hand, William K. Black, who was responsible for many of the reforms which followed the Savings & Loan Crisis, has frequently emphasized that – unlike the 2008 financial crisis – the S&L Crisis actually resulted in criminal prosecutions against those whose wrongdoing was responsible for the crisis. On December 28, Black characterized the failure to prosecute those crimes which led to the financial crisis as “de facto decriminalization of elite financial fraud”:
The FBI and the DOJ remain unlikely to prosecute the elite bank officers that ran the enormous “accounting control frauds” that drove the financial crisis. While over 1000 elites were convicted of felonies arising from the savings and loan (S&L) debacle, there are no convictions of controlling officers of the large nonprime lenders. The only indictment of controlling officers of a far smaller nonprime lender arose not from an investigation of the nonprime loans but rather from the lender’s alleged efforts to defraud the federal government’s TARP bailout program.
What has gone so catastrophically wrong with DOJ, and why has it continued so long? The fundamental flaw is that DOJ’s senior leadership cannot conceive of elite bankers as criminals.
In effect, equal enforcement of the law is not simply important for democracy or to ensure that economic activity takes place, it is fundamental to ensuring that capitalism works. Without equal enforcement of the law, the economy operates with participants who are competitively advantaged and disadvantaged. The rogue firms are in effect receiving a giant government subsidy: the freedom to engage in profitable activities that are prohibited to lesser entities. This becomes a self-reinforcing cycle (like the growth of WorldCom from a regional phone carrier to a national giant that included MCI), so that inequality becomes ever greater. Ultimately, we all lose as our entire economy is distorted, valuable entities are crushed or never get off the ground because they can’t compete on a playing field that is not level, and most likely wealth is destroyed.
Does the Justice Department really believe that it is going to impress us with FIRREA lawsuits? We’ve already had enough theatre – during the Financial Crisis Inquiry Commission hearings and 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. It’s time for some “perp walks”.
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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.
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My last posting focused on the widely-publicized research conducted by Stéphane Côté, PhD, Associate Professor of Organizational Behavior at the University of Toronto’s Rotman School of Management, who worked with a team of four psychologists from the University of California at Berkeley to conduct seven studies on a rather timely subject. Their article, “Higher social class predicts increased unethical behavior” was published in the February 27 issue of the Proceedings of the National Academy of Sciences (PNAS). The following excerpt from the abstract of their paper provides the general theme of what their efforts revealed:
. . . investigation revealed upper-class individuals were more likely to exhibit unethical decision-making tendencies (study 3), take valued goods from others (study 4), lie in a negotiation (study 5), cheat to increase their chances of winning a prize (study 6), and endorse unethical behavior at work (study 7) than were lower-class individuals.
I began my discussion of that paper by looking back at a Washington Post opinion piece entitled, “Angry about inequality? Don’t blame the rich”. The essay was written last January by James Q. Wilson (who passed away on March 2). On March 4, William K. Black took a deeper look at the legacy of James Q. Wilson, which provided a better understanding of why Wilson would champion the “Don’t blame the rich” rationale. As Bill Black pointed out, Wilson was a political scientist, known best for his theory called “broken windows” – a metaphor based on a vacant building with a few broken windows, which quickly has all of its windows broken because petty criminals feel emboldened to damage a building so neglected by its owners. Bill Black emphasized that Wilson was exclusively preoccupied with minor, “blue collar” crimes. Black noted that in a book entitled, Thinking About Crime, Wilson expressed tolerance for “some forms of civic corruption” while presenting an argument that criminology “should focus overwhelmingly on low-status blue collar criminals”. Bill Black went on to explain how Wilson’s blindness to the relevance of the “broken windows” concept, as it related to “white collar” crime, resulted in a missed opportunity to attenuate the criminogenic milieu which led to the 2008 financial crisis:
Wilson emphasized that it was the willingness of society to tolerate relatively minor blue collar crimes that led to social disintegration and epidemics of severe blue collar crimes, but he engaged in the same willingness to tolerate and excuse less severe white collar crimes. He predicted in his work on “broken windows” that tolerating widespread smaller crimes would lead to epidemic levels of larger crimes because it undermined community and social restraints. The epidemics of elite white collar crime that have driven our recurrent, intensifying financial crises have proven this point. Similarly, corruption that is excused and tolerated by elites is unlikely to remain at the level of “a few deals.” Corruption is likely to spread in incidence and severity precisely because it undermines community and the rule of law and it is likely to grow more pervasive and harmful the more we “tolera[te]” it.
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Taking Wilson’s “broken windows” reasoning seriously in the elite white collar crime context would require us to take a series of prophylactic measures to restore integrity and strengthen peer pressures against misconduct. Indeed, we have implicitly tested the applicability of “broken windows” reasoning in that context by adopting policies that acted directly contrary to Wilson’s reasoning. We have adopted executive and professional compensation systems that are exceptionally criminogenic.
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Fiduciary duties are critical means of preventing broken windows from occurring and making it likely that any broken windows in corporate governance will soon be remedied, yet we have steadily weakened fiduciary duties. For example, Delaware now allows the elimination of the fiduciary duty of care as long as the shareholders approve. Court decisions have increasingly weakened the fiduciary duties of loyalty and care. The Chamber of Commerce’s most recent priorities have been to weaken Sarbanes-Oxley and the Foreign Corrupt Practices Act. We have made it exceptionally difficult for shareholders who are victims of securities fraud to bring civil suits against the officers and entities that led or aided and abetted the securities fraud.
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In the elite white collar crime context we have been following the opposite strategy of that recommended under “broken windows” theory. We have been breaking windows. We have excused those who break the windows. Indeed, we have praised them and their misconduct. The problem with allowing broken windows is far greater in the elite white collar crime context than the blue collar crime context.
To find a “poster child” example for the type of errant fiduciary behavior which owes its existence to Wilson’s misapplication of the “broken windows” doctrine, one need look no further than Matt Taibbi’s favorite “vampire squid”: Goldman Sachs. One would think that after Taibbi’s groundbreaking, 2009 tour de force about Goldman’s involvement in the events which led to the financial crisis . . . and 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, the firm would at least try to keep a lower profile these days. Naaaaw!
Goldman Sachs has now found itself in the crosshairs of a man, formerly accused of carrying water for the firm – Andrew Ross Sorkin. Sorkin’s March 5 DealBook article for The New York Times upbraided Goldman for its flagrant conflict of interest in a deal where the firm served as an adviser to an oil (and natural gas) pipeline company, El Paso, which was being sold to Houston-based Kinder Morgan for $21.1 billion. Goldman owned a 19.1 percent stake in Kinder Morgan at the time. Andrew Ross Sorkin quoted from the script which Goldman CEO, Lloyd Blankfein read to El Paso’s CEO, Douglas Foshee, wherein Blankfein confirmed that Foshee was aware of Goldman’s investment in Kinder Morgan. It was refreshing to see a bit of righteous indignation in Sorkin’s discussion of the dirty details behind this transaction:
When the deal was announced, buried at the end of the news release was a list of Wall Street banks that had advised on the deal, including Goldman Sachs. Goldman received a $20 million fee for playing matchmaker for El Paso. The fee, of course, was not disclosed, nor was the Kinder Morgan stake owned by Goldman Sachs’s private equity arm, worth some $4 billion. Nor did the release disclose that the Goldman banker who advised El Paso to accept Kinder Morgan’s bid owned $340,000 worth of Kinder Morgan stock.
Now, however, a court ruling in a shareholder lawsuit has laid bare the truth: Goldman was on every conceivable side of the deal. As a result, El Paso may have unwittingly sold itself far too cheaply. Mr. Blankfein may have said he was “very sensitive to the appearance of conflict,” but the judge’s order ruling “reluctantly” against a motion to block the merger made it clear that Goldman’s conflicts went far beyond mere appearances.
Here’s just one example: In an effort to help mitigate its clear conflict, Goldman Sachs recommended that El Paso hire an additional adviser so that El Paso would be able to say that it had received completely impartial advice. Goldman did not say it would step down, and lose its fee, it simply suggested that El Paso hire one more bank – in this case, Morgan Stanley.
After explaining that Goldman included a provision in the deal that Morgan Stanley would get paid only if El Paso agreed to the sale to Kinder Morgan, Sorkin expressed this reaction:
Goldman’s brazenness in this deal is nothing short of breathtaking.
Goldman’s conflict of interest in the El Paso deal was also the subject of an article by Matthew Philips of Bloomberg BusinessWeek. Mr. Philips reminded us of whom we have to thank for “helping Greece dupe regulators by disguising billions of dollars’ worth of sovereign debt”:
New details have also emerged about Goldman’s role in helping Greece hide its debt so it could qualify for membership in the European Union. In a Bloomberg News story out this week, Greek officials talk about how they didn’t truly understand the complex swaps contracts they were buying from Goldman bankers from 2001 to 2005, and that each time Goldman restructured the deal, things got worse for Greece.
The story reads like a cautionary tale of a homeowner who keeps returning to the same contractor to repair the damage done by the previous fix-it job. At one point, Goldman prohibited Greece’s debt manager, Christoforos Sardelis, from seeking outside price quotes on the complicated derivatives Goldman was selling to Greece.
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Yet Goldman’s sullied reputation doesn’t appear to be negatively impacting its business. In fact, Goldman is outpacing its Wall Street competition recently in key areas of business. In 2011, Goldman was the top adviser for both global M&A and equity IPOs. A Bloomberg survey of traders, investors, and analysts last May showed that while 54 percent of respondents had an unfavorable opinion of Goldman, 78 percent believed that allegations it duped clients and misled Congress would have no material effect on its business.
In other words: Goldman Sachs keeps breaking windows and nobody cares. Thanks for nothing, James Q. Wilson!
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Two months ago, Barry Ritholtz wrote a piece for The Washington Post in rebuttal to New York Mayor Michael Bloomberg’s parroting of what has become The Big Lie of our time. In response to a question about Occupy Wall Street, Mayor Bloomberg said this:
“It was not the banks that created the mortgage crisis. It was, plain and simple, Congress who forced everybody to go and give mortgages to people who were on the cusp.”
Ritholtz then proceeded to list and discuss the true causes of the financial crisis. Among those causes were Alan Greenspan’s Federal Reserve monetary policy – wherein interest rates were reduced to 1 percent; the deregulation of derivatives trading by way of the Commodity Futures Modernization Act; the Securities and Exchange Commission’s “Bear Stearns exemption” – allowing Goldman Sachs, Morgan Stanley, Merrill Lynch, Lehman Brothers and Bear Stearns to boost their leverage as high as 40-to-1; as well as the “bundling” of sub-prime mortgages with higher-quality mortgages into sleazy “investment” products known as collateralized debt obligations (CDOs).
After The Washington Post published the Ritholtz piece, a good deal of supportive commentary emerged – as observed by Ritholtz himself:
Since then, both Bloomberg.com and Reuters each have picked up the Big Lie theme. (Columbia Journalism Review as well). In today’s NYT, Joe Nocera does too, once again calling out those who are pushing the false narrative for political or ideological reasons in a column simply called “The Big Lie“.
Purveyors of The Big Lie are also big on advancing the claim that the “too big to fail” beneficiaries of the TARP bailout repaid the money they were loaned, at a profit to the taxpayers. Immediately after her arrival at CNN, former Goldman Sachs employee, Erin Burnett made a point of interviewing a young, Occupy Wall Street protester, asking him if he was aware that the government actually made a profit on the TARP. Unfortunately, the fiancée of Citigroup executive David Rubulotta didn’t direct her question to Steve Randy Waldman – who debunked that propaganda at his Interfluidity website:
Substantially all of the TARP funds advanced to banks have been paid back, with interest and sometimes even with a profit from sales of warrants. Most of the (much larger) extraordinary liquidity facilities advanced by the Fed have also been wound down without credit losses. So there really was no bailout, right? The banks took loans and paid them back.
Bullshit.
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During the run-up to the financial crisis, bank managers, shareholders, and creditors paid themselves hundreds of billions of dollars in dividends, buybacks, bonuses and interest. Had the state intervened less generously, a substantial fraction of those payouts might have been recovered (albeit from different cohorts of stakeholders, as many recipients of past payouts had already taken their money and ran). The market cap of the 19 TARP banks that received more than a billion dollars each in assistance is about 550B dollars today (even after several of those banks’ share prices have collapsed over fears of Eurocontagion). The uninsured debt of those banks is and was a large multiple of their market caps. Had the government resolved the weakest of the banks, writing off equity and haircutting creditors, had it insisted on retaining upside commensurate with the fraction of risk it was bearing on behalf of stronger banks, the taxpayer savings would have run from hundreds of billions to a trillion dollars. We can get into all kinds of arguments over what would have been practical and legal. Regardless of whether the government could or could not have abstained from making the transfers that it made, it did make huge transfers. Bank stakeholders retain hundreds of billions of dollars against taxpayer losses of the same, relative to any scenario in which the government received remotely adequate compensation first for the risk it assumed, and then for quietly moving Heaven and Earth to obscure and (partially) neutralize that risk.
The banks were bailed out. Big time.
Another overlooked cause of the financial crisis was the fact that there were too many psychopaths managing the most privileged Wall Street institutions. Not only had the lunatics taken over the asylum – they had taken control of the world’s largest, government-backed casino, as well. William D. Cohan of Bloomberg News gave us a peek at the recent work of Clive R. Boddy:
It took a relatively obscure former British academic to propagate a theory of the financial crisis that would confirm what many people suspected all along: The “corporate psychopaths” at the helm of our financial institutions are to blame.
Clive R. Boddy, most recently a professor at the Nottingham Business School at Nottingham Trent University, says psychopaths are the 1 percent of “people who, perhaps due to physical factors to do with abnormal brain connectivity and chemistry” lack a “conscience, have few emotions and display an inability to have any feelings, sympathy or empathy for other people.”
As a result, Boddy argues in a recent issue of the Journal of Business Ethics, such people are “extraordinarily cold, much more calculating and ruthless towards others than most people are and therefore a menace to the companies they work for and to society.”
Professor Boddy wrote a book on the subject – entitled, Corporate Psychopaths. The book’s publisher, Macmillan, provided this description of the $90 opus:
Psychopaths are little understood outside of the criminal image. However, as the recent global financial crisis highlighted, the behavior of a small group of managers can potentially bring down the entire western system of business. This book investigates who they are, why they do what they do and what the consequences of their presence are.
Matt Taibbi provided a less-expensive explanation of this mindset in a recent article for Rolling Stone:
Most of us 99-percenters couldn’t even let our dogs leave a dump on the sidewalk without feeling ashamed before our neighbors. It’s called having a conscience: even though there are plenty of things most of us could get away with doing, we just don’t do them, because, well, we live here. Most of us wouldn’t take a million dollars to swindle the local school system, or put our next door neighbors out on the street with a robosigned foreclosure, or steal the life’s savings of some old pensioner down the block by selling him a bunch of worthless securities.
But our Too-Big-To-Fail banks unhesitatingly take billions in bailout money and then turn right around and finance the export of jobs to new locations in China and India. They defraud the pension funds of state workers into buying billions of their crap mortgage assets. They take zero-interest loans from the state and then lend that same money back to us at interest. Or, like Chase, they bribe the politicians serving countries and states and cities and even school boards to take on crippling debt deals.
Do you think that Mayor Bloomberg learned his lesson . . . that spreading pro-bankster propaganda can provoke the infusion of an overwhelming dose of truth into the mainstream news? Nawwww . . .
You can count me among those who believe that the non-stop Republican Presidential debates are working to President Obama’s advantage. How many times have you heard some television news commentator remark that “the big winner of last night’s Republican debate was Barack Obama”? As Julianna Goldman reported for Bloomberg BusinessWeek, two recent polls have revealed that Obama is no longer looking quite as bad as he did a few months ago:
Forty-nine percent of Americans approve of how Obama is handling his job, according to an ABC News/Washington Post poll and another conducted for CNN. The rate was the highest in both surveys since a short-lived bump the president got following the killing of al-Qaeda leader Osama bin Laden in May.
Nevertheless, there is an unstoppable wave of criticism directed against the President by his former supporters as well as those disgusted by Obama’s subservience to his benefactors on Wall Street. In my last posting, I discussed Bill Black’s rebuttal to President Obama’s most recent attempt to claim that no laws were broken by the banksters who caused the 2008 financial crisis.
The wave of disgust at Obama’s exoneration of the financial fraudsters has gained quite a bit of momentum since that outrageous remark appeared on the December 11 broadcast of 60 Minutes. Matt Taibbi of Rolling Stone focused on the consequences of this level of dishonesty:
What makes Obama’s statements so dangerous is that they suggest an ongoing strategy of covering up the Wall Street crimewave. There is ample evidence out there that the Obama administration has eased up on prosecutions of Wall Street as part of a conscious strategy to prevent a collapse of confidence in our financial system, with the expected 50-state foreclosure settlement being the landmark effort in the cover-up, intended mainly to bury a generation of fraud.
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In other words, Geithner and Obama are behaving like Lehman executives before the crash of Lehman, not disclosing the full extent of the internal problem in order to keep investors from fleeing and creditors from calling in their chits. It’s worth noting that this kind of behavior – knowingly hiding the derogatory truth from the outside world in order to prevent a run on the bank – is, itself, fraud!
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The problem with companies like Lehman and Enron is that their executives always think they can paper over illegalities by committing more crimes, when in fact all they’re usually doing is snowballing the problem so completely out of control that there’s no longer any chance of fixing things, thereby killing the only chance for survival they ever had.
This is exactly what Obama and Geithner are doing now. By continually lying about the extent of the country’s corruption problems, they’re adding fraud to fraud and raising such a great bonfire of lies that they probably won’t ever be able to fix the underlying mess.
John R. MacArthur, president and publisher of Harper’s Magazine, caused quite a stir on December 14, when an essay he wrote – entitled, “President Obama Richly Deserves to Be Dumped” – was published by the The Providence Journal (Rhode Island). For some reason, this article does not appear at the newspaper’s website. However, you can read it in its entirety here. MacArthur began the piece by highlighting criticism of Obama by his fellow Democrats:
Most prominent among these critics is veteran journalist Bill Moyers, whose October address to a Public Citizen gathering puts the lie to our barely Democratic president’s populist pantomime, acted out last week in a Kansas speech decrying the plight of “innocent, hardworking Americans.” In his talk, Moyers quoted an authentic Kansas populist, Mary Eizabeth Lease, who in 1890 declared, “Wall Street owns the country.. . .Money rules.. . .The [political] parties lie to us and the political speakers mislead us.”
A former aide to Lyndon Johnson who knows politics from the inside, Moyers then delivered the coup de grace: “[Lease] should see us now. John Boehner calls on the bankers, holds out his cup, and offers them total obeisance from the House majority if only they fill it. Barack Obama criticizes bankers as fat cats, then invites them to dine at a pricey New York restaurant where the tasting menu runs to $195 a person.”
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What’s truly breathtaking is the president’s gall, his stunning contempt for political history and contemporary reality. Besides neglecting to mention Democratic complicity in the debacle of 2008, he failed to point out that derivatives trading remains largely unregulated while the Securities and Exchange Commission awaits “public comment on a detailed implementation plan” for future regulation. In other words, until the banking and brokerage lobbies have had their say with John Boehner, Max Baucus, and Secretary of the Treasury Tim Geithner. Meanwhile, the administration steadfastly opposes a restoration of the Glass-Steagall Act, the New Deal law that reduced outlandish speculation by separating commercial and investment banks. In 1999, it was Summers and Geithner, led by Bill Clinton’s Treasury Secretary Robert Rubin (much admired by Obama), who persuaded Congress to repeal this crucial impediment to Wall Street recklessness.
I have frequently discussed the criticism directed at Obama from the political Center as well as the Left (see this and this). I have also expressed my desire to see Democratic challengers to Obama for the 2012 nomination (see this and this). In the December 20 edition of The Chicago Tribune, William Pfaff commented on John R. MacArthur’s above-quoted article, while focusing on the realistic consequences of a Democratic Primary challenge to Obama’s nomination:
John MacArthur’s and Bill Moyers’ call for the replacement of Barack Obama as the Democratic presidential candidate next year is very likely to fail, and any Democratic replacement candidate is likely to lose the presidency. As a veteran Democratic Party activist recently commented, this is the sure way to elect “one of those idiots” running for the Republican nomination. Very likely he is right.
However, the two may have started something with interesting consequences. Nobody thought Sen. McCarthy’s challenge was anything more than a futile gesture. Nobody foresaw the assassinations and military defeat to come, or the ruin of Richard Nixon. Nobody knows today what disasters may lie ahead in American-supervised Iraq, or in the dual war the Pentagon is waging in Afghanistan and Pakistan. The present foreign policy of the Obama government is fraught with risk.
As for the president himself, the objection to him is that his Democratic Party has become a representative of the same interests as the Republican Party. The nation cannot bear two parties representing plutocratic power.
The current battle over the payroll tax cut extension reminded me of a piece I wrote last August, in which I included Nate Silver’s observation that it was President Obama’s decision to leave the issue of a payroll tax cut extension “on the table” during the negotiations on the debt ceiling bill. My thoughts at that time were similar to William Pfaff’s above-quoted lament about the nation’s “two political parties representing plutocratic power”:
As many observers have noted, the plutocracy has been able to accomplish much more with Obama in the White House, than what would have been achievable with a Republican President. This latest example of a bipartisan effort to trample “the little people” has reinforced my belief that the fake “two-party system” is a sideshow – designed to obfuscate the insidious activities of the Republi-Cratic Corporatist Party.
It’s nice to see that the tsunami of disgust continues to flow across the country.
If a Democrat wants to challenge Barack Obama for the Democratic Party’s Presidential nomination, time is quickly running out. It takes a while to put a campaign together. Aside from rounding-up enough money to challenge an incumbent – who is expected to have a $1 billion war chest – there are other logistic challenges. For starters, a campaign team must be assembled, along with a network across the states. Messaging strategy and a campaign theme must be established. It’s a huge deal. Nevertheless, if the Democrats believe that they can just sit back and watch Obama swagger his way to re-election – they’re going to be in for a big disappointment.
As I pointed out in my last posting, Obama’s problems have expanded beyond weak polling numbers. The Solyndra scandal can be expected to receive at least as much television coverage as the Casey Anthony “Tot Mom” trial. Ron Suskind’s new book about the President’s handling of the economy, Confidence Men, has provided us with an abundance of insights on Obama’s leadership failings. Those observations will reverberate throughout the 2012 campaign until Election Day.
Obama’s mishandling of the economic crisis is useful only as evidence of the President’s ineptitude in the domestic policy arena. Has Obama done any better with his foray into foreign policy? Steve Clemons provided us with the answer to that question by way of an article which appeared in The Atlantic. The essay is also available at his own blog, The Washington Note. Mr. Clemons provided a great analysis of Obama’s influence on the Israel – Palestine peace process:
Obama continues to parrot the line that peace can only be achieved between the “two parties”, that only they can really bring this global ulcer to a close, when they decide to negotiate. The fact is that the status quo of frozen negotiations is benefiting the dominant, settlement-expanding Israel — and the US, in promising to veto at the UN Security Council Palestine’s bid for official state recognition, is playing guarantor to one side, undermining the aspirations of others on the other side of the equation. What if the US had said to Kosovo — no statehood, no recognition from the US until you resolve all of your ongoing issues with Russia?
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Obama is assuring the further emasculation and perhaps final demise of Palestine’s moderates. Obama is also treating the Israelis and Palestinians as if they are on equal footing, equally able to concede to each other’s demands. What Obama doesn’t get is that a substantial portion of Israel’s population loves not having a deal and never wants one. They are OK with a peace process to nowhere — but that is not acceptable for the less-endowed, less-powerful Palestinian side. Hamas is in the rejectionist corner as well, seeing its fortunes rise as earnest efforts at peace go nowhere.
The world watched Barack Obama lose a battle in the last two years with Israel Prime Minister Benjamin Netanyahu over Israeli settlement expansion in contested and occupied territories. This is like the Soviet Union having lost a war of wills at the height of its power with Cuba.
The client state trumped the President of the United States — telegraphing to many around the world that President Obama ultimately didn’t have the courage of his convictions and wasn’t able to deploy power and statecraft to achieve the outlines of what he called for in his lofty rhetoric. Obama’s UN General Assembly speech has done nothing to reverse the impression that Netanyahu is the alpha dog in the relationship with President Obama — and this is truly tragic and geostrategically consequential.
Well, at least Obama is consistent . . . equally inept and spineless on foreign policy issues as he is when challenged with domestic policy matters.
Will any Democrat step up to prevent the Republican Party from taking over the White House (any more than it already has with Obama in there)? The President’s apologists can no longer dismiss criticism of this administration by characterizing it as propaganda from Fox News. Matt Taibbi’s recent remark about Obama exemplifies how an increasing number of Americans – from across the political spectrum – feel about our current President:
I just don’t believe this guy anymore, and it’s become almost painful to listen to him.
Goldman Sachs is back in the spotlight. This time, there is a chorus of disgust being expressed about how Goldman conducts its business. Back in June of 2009, Matt Taibbi famously characterized Goldman Sachs in the following terms:
The world’s most powerful investment bank is a great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money.
The latest episode of predation by the Vampire Squid concerns an August 16 report prepared by Alan Brazil, a member of Goldman’s trading team. Brazil prepared the 54-page presentation for the firm’s institutional clients as a guide to the impending economic collapse with some trading strategies to benefit from that event. Page 3 of the report starts with the headline: “Here We Go Again”. The statement was prescient in that the report itself initiated a renewed, consensual effort to condemn Goldman. Page 4 has the headline: “The Underlying Problem May Be Structural And Created By the Housing Bubble”. The extent to which the underlying problem may have been caused by Goldman Sachs had been previously discussed by Matt Taibbi, who explained Goldman’s propensity to act the way it always has:
If America is circling the drain, Goldman Sachs has found a way to be that drain . . .
Shah Gilani of Forbes reacted to the publication of Alan Brazil’s report with the following statement, which was used for the title of his own article:
In my opinion, Goldman isn’t just a travesty of a mockery of a sham, it is a criminal enterprise and worthy of being stepped on itself.
Susan Pulliam and Liz Rappaport broke the story on Goldman’s “Dark View” for The Wall Street Journal:
The report, released by the Hedge Fund Strategies group in Goldman’s securities division, provides a glimpse into the trading ideas that are generated for hedge funds through strategists, such as Mr. Brazil, who are part of Goldman’s trading operation rather than its research group.
Such strategists sit alongside the traders who are executing trades for their clients. Unlike analysts in firms’ research divisions—who are supposed to be walled off from information about the activity of the firm’s clients—these desk strategists have a front-row seat for viewing the ebb and flow of clients’ investment plays.
They can see if there is a groundswell of interest among hedge funds in taking bearish bets in a certain sector, and they watch trading volumes dry up or explode. Their point of view is informed by more, and often confidential, information about clients than analysts’ opinions, making their research and ideas highly prized by traders.
The report itself makes note that the information included isn’t considered research by Goldman. “This material is not independent advice and is not a product of Global Investment Research,” the report notes.
The idea that such a gloomy assessment had not been shared with the general public has become a frequently-expressed complaint. Michael T. Snyder wrote a piece for Seeking Alpha, which provided this explanation for the lack of candor:
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 publicly admit how bad things are, but privately there is a whole lot of freaking out going on.
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You aren’t going to hear the truth from the media or from our politicians, because keeping people calm is much more of a priority to them than is telling the truth.
Henry Blodget of The Business Insider dissuaded the “little people” from getting any grandiose ideas after reading Brazil’s briefing:
Unfortunately, lest you think your knowledge of this semi-secret report will finally allow you to out-trade hedge funds, it won’t. The hedge funds got the report on August 16th. As usual, you’re the last to know.
Beyond that, there is Goldman’s longstanding reputation for “front running” its own clients, which must have inspired this remark in a critique of Alan Brazil’s report, appearing at the Minyanville website:
Coincidentally, he had some surefire trading strategies for clients interested in capitalizing on this trend. Presumably, Goldman’s own traders began bidding the various recommended hedges up some time earlier, a possibility Goldman discloses up front.
So this is what the squid is down to these days: peddling the obvious to the bottom-feeders below it in the financial food chain.
By now, those commentators who had criticized Matt Taibbi for his tour de force against Goldman (such as Megan McArdle) must be experiencing a bit of remorse. Meanwhile, those of us who wrote items appearing at GoldmanSachs666.com are exercising our bragging rights.
It’s becoming more obvious to people that our so-called, “two-party system” is really a just a one-party system. Last summer, I discussed how the Republi-cratic Corporatist Party is determined to steal the money American workers have paid into the Social Security program. While we’re on the subject, let’s take a look at an inconvenient law which the Beltway Vultures choose to ignore:
EXCLUSION OF SOCIAL SECURITY FROM ALL BUDGETS Pub. L. 101-508, title XIII, Sec. 13301(a), Nov. 5, 1990, 104 Stat. 1388-623, provided that: Notwithstanding any other provision of law, the receipts and disbursements of the Federal Old-Age and Survivors Insurance Trust Fund and the Federal Disability Insurance Trust Fund shall not be counted as new budget authority, outlays, receipts, or deficit or surplus for purposes of – (1) the budget of the United States Government as submitted by the President, (2) the congressional budget, or (3) the Balanced Budget and Emergency Deficit Control Act of 1985.
In a recent interview conducted by Anastasia Churkina of Russia Today, investigative reporter and author, Matt Taibbi described the American political system as a “reality show sponsored by Wall Street”. Taibbi pointed out that “… the problem is Wall Street heavily sponsors both the Republican and the Democratic Parties” so that whoever gets elected President “is going to be a creature of Wall Street”. After noting that Goldman Sachs was Obama’s number one source of private campaign contributions during the 2008 election cycle, Taibbi faced a question about the possibility that a third party could become a significant factor in American politics. His response was: “Seriously, I don’t see it.” Taibbi went on to express his belief that the “average American” is:
… seduced and mesmerized by this phony, media-created, division between blue and red – and left and right, Democrats and Republicans, and people are conditioned to believe that there are enormous, profound differences between these two parties. Whereas, the reality is: their differences are mostly superficial and on the important questions of how the economy is run and how to regulate the economy – they’re exactly the same – but I don’t think ordinary people know that.
At this point, the question is whether there can be any hope that “ordinary people” will ever realize that our “two-party system” is actually a farce.
The type of disappointment expressed by Matt Taibbi in his discussion of Barack Obama during the Russia Today interview, has become a familiar subject. I was motivated to characterize the new President as “Disappointer-In-Chief” during his third month in office. An increasing number of commentators have begun to admit that Hillary Clinton’s campaign-theme question, “Who is Barack Obama?” was never really answered until after the man took office. One person who got an answer “the hard way” was Professor Cornel West of Princeton University.
In a recent article for Truthdig, Chris Hedges discussed how Professor West made 65 appearances for Candidate Obama on the campaign trail. Nevertheless, Professor West never received an invitation to Obama’s Inaugural. Although he traveled to Washington for that historic occasion, Professor West ended up watching the event on a hotel room television with his family. As an adversary of Obama’s financial mentor, Larry Summers, Professor West quickly found himself thrown under the bus.
The following passage from Chris Hedges’ article presents an interesting narrative by Professor West about what I have previously described as Obama’s own “Tora Bora moment” (when the President “punted” on the economic stimulus bill). Professor West also lamented the failure of the Democrats to provide any alternative to the bipartisan tradition of crony corporatism:
“Can you imagine if Barack Obama had taken office and deliberately educated and taught the American people about the nature of the financial catastrophe and what greed was really taking place?” West asks. “If he had told us what kind of mechanisms of accountability needed to be in place, if he had focused on homeowners rather than investment banks for bailouts and engaged in massive job creation he could have nipped in the bud the right-wing populism of the tea party folk. The tea party folk are right when they say the government is corrupt. It is corrupt. Big business and banks have taken over government and corrupted it in deep ways.
“We have got to attempt to tell the truth, and that truth is painful,” he says. “It is a truth that is against the thick lies of the mainstream. In telling that truth we become so maladjusted to the prevailing injustice that the Democratic Party, more and more, is not just milquetoast and spineless, as it was before, but thoroughly complicitous with some of the worst things in the American empire. I don’t think in good conscience I could tell anybody to vote for Obama. If it turns out in the end that we have a crypto-fascist movement and the only thing standing between us and fascism is Barack Obama, then we have to put our foot on the brake. But we’ve got to think seriously of third-party candidates, third formations, third parties.
When one considers the vast number of disillusioned Obama supporters along with the number of people expressing their disappointment with the Republican field of Presidential hopefuls, the idea that 2012 could be the year when a third-party candidate makes it to the White House doesn’t seem so far-fetched.
TheCenterLane.com offers opinion, news and commentary on politics, the economy, finance and other random events that either find their way into the news or are ignored by the news reporting business. As the name suggests, our focus will be on what seems to be happening in The Center Lane of American politics and what the view from the Center reveals about the events in the left and right lanes. Your Host, John T. Burke, Jr., earned his Bachelor of Arts degree from Boston College with a double major in Speech Communications and Philosophy. He earned his law degree (Juris Doctor) from the Illinois Institute of Technology / Chicago-Kent College of Law.