Saturday, December 26, 2009

Crime Does Pay, for Goldman Sachs Banksters

This morning I found an interesting video at Crooks and Liars, about how Goldman Sachs screwed their customers to profit from the collapse of the housing bubble.


I followed the source and found this article providing far more detail.

Happy Rich Businessman In 2006 and 2007, Goldman Sachs Group peddled more than $40 billion in securities backed by at least 200,000 risky home mortgages, but never told the buyers it was secretly betting that a sharp drop in U.S. housing prices would send the value of those securities plummeting.

Goldman's sales and its clandestine wagers, completed at the brink of the housing market meltdown, enabled the nation's premier investment bank to pass most of its potential losses to others before a flood of mortgage defaults staggered the U.S. and global economies.

Only later did investors discover that what Goldman had promoted as triple-A rated investments were closer to junk.

Now, pension funds, insurance companies, labor unions and foreign financial institutions that bought those dicey mortgage securities are facing large losses, and a five-month McClatchy investigation has found that Goldman's failure to disclose that it made secret, exotic bets on an imminent housing crash may have violated securities laws.

"The Securities and Exchange Commission should be very interested in any financial company that secretly decides a financial product is a loser and then goes out and actively markets that product or very similar products to unsuspecting customers without disclosing its true opinion," said Laurence Kotlikoff, a Boston University economics professor who's proposed a massive overhaul of the nation's banks. "This is fraud and should be prosecuted."

John Coffee, a Columbia University law professor who served on an advisory committee to the New York Stock Exchange, said that investment banks have wide latitude to manage their assets, and so the legality of Goldman's maneuvers depends on what its executives knew at the time.

"It would look much more damaging," Coffee said, "if it appeared that the firm was dumping these investments because it saw them as toxic waste and virtually worthless."

Lloyd Blankfein, Goldman's chairman and chief executive, declined to be interviewed for this article.

A Goldman spokesman, Michael DuVally, said that the firm decided in December 2006 to reduce its mortgage risks and did so by selling off subprime-related securities and making myriad insurance-like bets, called credit-default swaps, to "hedge" against a housing downturn.

DuVally told McClatchy that Goldman "had no obligation to disclose how it was managing its risk, nor would investors have expected us to do so ... other market participants had access to the same information we did."

For the past year, Goldman has been on the defensive over its Washington connections and the billions in federal bailout funds it received. Scant attention has been paid, however, to how it became the only major Wall Street player to extricate itself from the subprime securities market before the housing bubble burst.

Goldman remains, along with Morgan Stanley, one of two venerable Wall Street investment banks still standing. Their grievously wounded peers Bear Stearns and Merrill Lynch fell into the arms of retail banks, while another, Lehman Brothers, folded.

To piece together Goldman's role in the subprime meltdown, McClatchy reviewed hundreds of documents, SEC filings, copies of secret investment circulars, lawsuits and interviewed numerous people familiar with the firm's activities.

McClatchy's inquiry found that Goldman Sachs:

  • Bought and converted into high-yield bonds tens of thousands of mortgages from subprime lenders that became the subjects of FBI investigations into whether they'd misled borrowers or exaggerated applicants' incomes to justify making hefty loans.
  • Used offshore tax havens to shuffle its mortgage-backed securities to institutions worldwide, including European and Asian banks, often in secret deals run through the Cayman Islands, a British territory in the Caribbean that companies use to bypass U.S. disclosure requirements.
  • Has dispatched lawyers across the country to repossess homes from bankrupt or financially struggling individuals, many of whom lacked sufficient credit or income but got subprime mortgages anyway because Wall Street made it easy for them to qualify.
  • Was buoyed last fall by key federal bailout decisions, at least two of which involved then-Treasury Secretary Henry Paulson, a former Goldman chief executive whose staff at Treasury included several other Goldman alumni.

The firm benefited when Paulson elected not to save rival Lehman Brothers from collapse, and when he organized a massive rescue of tottering global insurer American International Group while in constant telephone contact with Goldman chief Blankfein. With the Federal Reserve Board's blessing, AIG later used $12.9 billion in taxpayers' dollars to pay off every penny it owed Goldman.

These decisions preserved billions of dollars in value for Goldman's executives and shareholders. For example, Blankfein held 1.6 million shares in the company in September 2008, and he could have lost more than $150 million if his firm had gone bankrupt.

With the help of more than $23 billion in direct and indirect federal aid, Goldman appears to have emerged intact from the economic implosion, limiting its subprime losses to $1.5 billion. By repaying $10 billion in direct federal bailout money — a 23 percent taxpayer return that exceeded federal officials' demand — the firm has escaped tough federal limits on 2009 bonuses to executives of firms that received bailout money.

Goldman announced record earnings in July, and the firm is on course to surpass $50 billion in revenue in 2009 and to pay its employees more than $20 billion in year-end bonuses… [emphasis added]

Inserted from <McClachy DC>

Let me reiterate that  Henry Paulsen is a former Goldman Sachs CEO.  In case you are not aware, Paulsen is also Tim Geithner’s mentor.  Furthermore  Mark Patterson, Geithner’s Chief of Staff at Treasury id a former Goldman Sachs lobbyist.  Therefore I think it’s safe to say that they will get away with these crimes against the American people.  Once again, I encourage you to demand that Obama remove Tim Geithner from his post at DOT.


the walking man said...

The president needs to dump all of his new financial committee advisors as to a person they are from the institutions that caused this to happen. Until all of them are no longer a part of this administration AND the financials are banned from lobbying the Congress, especially the Senate there will never be reform.

There should by the fed be a two hundred percent clawback of all TARP monies aid out to any institution that was over leveraged in the credit default and sub prime markets.

TomCat said...

Mark, I agree with all of the above.

But I favor 100% public funding for elections.

Lisa G. said...

I favor 100% public funding of elections as well. It's the only way to get the lobbyists and corporate money out of the election process. Term limits, as many have suggested, won't do it. Only public funding will keep our politicians from being bought off. And all of K street needs to go too. The framers are rolling over in their graves as to what we've done to our election process and the amount of influence the lobbies and corporations have in it.

MadMike said...

I agree with everything said here...

Jolly Roger said...

Once in awhile, I see one that makes me so mad I can't omit the four-letter diatribe when trying to comment on it.

This was one such story. Started to do it 4 times, gave up.

rjs said...

there are links to a dozen articles about goldman, pro and con, on my weekly post, about a third of the way down...all ill add here is a piece of one of them: "the Center for Responsible Lending estimates that the bonus pool of just one of these big banks would have been enough money to prevent or significantly delay foreclosure for all 2.3 million people who lost their homes last year."

TomCat said...

Lisa, you echo what I have said for years. Thanks. :-)

Mike, so do I.

JR, you don't want to know how many times I edited this to delete such expletives.

I had read that RJ. It makes you stop and think about our priorities.