Weekly Audit: How Deregulation Fueled Goldman Sachs’ Scam

by Zach Carter, Media Consortium blogger

Last week, the Securities and Exchange Commission filed fraud charges against Goldman Sachs and underscored what most Americans have believed for some time: Wall Street has rigged the economy in its own favor, and will stop at nothing—not even outright theft—to boost its profits. What’s worse, Goldman’s scam could have been completely prevented by better regulations and law enforcement.

Goldman’s heist

Let’s be clear. “Financial fraud” means “theft.” Goldman Sachs sold investors securities that were stocked with subprime mortgages and had been cherry-picked by a hedge fund manager named John Paulson. Paulson believed these mortgages were about to go bust, so he helped Goldman Sachs concoct the securities so that he could bet against them himself.

Goldman Sachs, like Paulson, also bet against the securities. But when Goldman sold the securities to investors, it didn’t tell them that Paulson had devised the securities, or that he was betting on their failure. By withholding crucial information from investors, Goldman directly profited from the scam at the expense of its own clients. If ordinary citizens did what the SEC’s alleges Goldman did, we’d call it stealing.

As Nick Baumann emphasizes for Mother Jones, the SEC’s suit against Goldman is just the tip of the iceberg. During the savings and loan crisis of the late 1980s, literally thousands of bankers were jailed for financial fraud. Today’s crisis was much larger in scope, yet the Goldman allegations are among the first serious charges of legal wrongdoing to emerge (other complaints have been filed against Regions Bank and former Countrywide CEO Angelo Mozilo). If the SEC or the FBI are doing their jobs, we should see many more of these cases.

Bust ‘em up.

How do banks get away with these kinds of shenanigans and still secure epic taxpayer bailouts? It’s all about their political clout, as Robert Reich notes for The American Prospect. So long as banks are so enormous that they can ruin the economy with their collapse, the institutions will always carry tremendous political clout.

Even in the case of Goldman Sachs, which is too-big-to-fail by any reasonable standard, the SEC’s fraud case is being filed three years after the company’s alleged offense. That’s well after the company rode to safety on the Troubled Asset Relief Program, the AIG bailout and billions more in other indirect assistance—and only after multiple journalists made Goldman’s offensive transactions general public knowledge.

If we don’t break up the big banks, politically connected Wall Street titans will make sure they get bailed out when the next crisis hits, regardless of whatever laws we have on the books.

Fix the derivatives casino

If Congress doesn’t soon pass a bill to break up behemoth banks, it will be neglecting the gravest problem in our financial system today. But several other reforms are needed if Wall Street is ever going to serve a useful economic function again.

As Nomi Prins emphasizes for AlterNet, much of the Wall Street profit machine has been divorced from the economy that the rest of us live in. These days, banks make most of their money from securities trades and derivatives deals. Their actual lending business is taking a beating. That means big banks have very little incentive to promote economic well-being for every day citizens. We need to create these incentives by banning economically essential banks from engaging in securities trades, and make sure all derivatives transactions are conducted on open, transparent exchanges, just like ordinary stocks and bonds.

Better derivatives regulations could help protect against fraud. If Goldman Sachs’ sketchy subprime deal had been subject to market scrutiny on an exchange, it’s very unlikely that any investor would have bought into it. Goldman Sachs almost got away with it because the deal was secretive and beyond the scope of most regulatory oversight.

Protect whistleblowers

The Goldman case also raises significant questions about the government’s enforcement of existing financial fraud laws. Bradley Birkenfeld, a banker for Swiss financial giant UBS, helped the Department of Justice bring the largest tax fraud case in history against his company, which was helping rich Americans hide money from the IRS in offshore bank accounts.

For his cooperation, Birkenfeld was rewarded with a four-year prison sentence, even though nobody else at UBS—nobody—has been sentenced to prison over the scam. As Juan Gonzalez and Amy Goodman emphasize for Democracy Now!, Birkenfeld’s imprisonment could have something to with who exactly is hiding money with UBS.

Gonzalez discusses an interview with Birkenfeld, in which the former banker notes that the bank had a special office to handle the accounts of “politically exposed persons”— American politicians. Moreover, the top brass at UBS includes key advisors to top politicians in both parties. This is exactly the kind of influence smuggling that breaking up the banks would help fix. UBS is a multi-trillion-dollar institution with no less than 27 U.S. subsidiaries.

But protecting Birkenfeld would accomplish still more—by jailing him, the Justice Department is actively discouraging others from coming forward, and making it more difficult for regulators to enforce the law.

Greenspan’s failure

It’s abundantly clear that almost every major regulatory agency charged with curtailing financial excess failed to prevent the Crash of 2008. But that failure doesn’t mean that effective regulation is impossible—it only shows that the regulators in power failed. The top bank regulator in the U.S., John Dugan, was a former bank lobbyist.

As Christopher Hayes demonstrates for The Nation, former Federal Reserve Chairman Alan Greenspan has never had any interest in regulation whatsoever. After the crash, Greenspan insisted that nobody could have seen it coming. But as Hayes notes, many people did—Greenspan simply didn’t listen to them. These days, Greenspan is revising his story, claiming that he did in fact see the crisis coming, but that nobody could have prevented it. That is simply not credible.

Hayes draws a useful parallel Hurricane Katrina, a problem sparked by a natural event that became a catastrophe when regulators failed to take the necessary precautions. The lesson from both Katrina and the financial crash is not that government always screws up—we have plenty of examples of government preventing floods and economic calamity. The lesson we should learn is that people who don’t believe in government will never do a good job governing. As Hayes notes:

If Greenspan couldn’t figure things out, that doesn’t mean others can’t. In fact, developing systems for doing just that is called—quite simply—progress, and Alan Greenspan continues to be one of its enemies.

That is exactly the task that now presents itself before Congress: Developing a system to prevent and constrain economic destruction wielded by Wall Street. The U.S. had a system that did exactly this for more than fifty years. For the last thrity years, it has been systematically dismantled. How well Congress lives up to that challenge will define much of our economic future for decades to come.

This post features links to the best independent, progressive reporting about the economy by members of The Media Consortium. It is free to reprint. Visit the Audit for a complete list of articles on economic issues, or follow us on Twitter. And for the best progressive reporting on critical economy, environment, health care and immigration issues, check out The Mulch, The Pulse and The Diaspora. This is a project of The Media Consortium, a network of leading independent media outlets.

 

 

 

Doing Well By Doing Good.

Global stocks fell sharply last week on news of increasing inflation which will limit the Federal Reserves ability to continue cutting interest rates. On Tuesday the Dow Jones Industrials tumbled 294 points following the Fed's announcement of a quarter point cut to the Fed Funds rate. The financial industry is going through a major retrenchment, losing more than 25% in aggregate capitalization since July. The real estate market is collapsing.  You get the picture.

Take the case of Citigroup - a once- great bank brought near to ruin by a grossly negligent board of directors. The cost? A mere $351 billion - that is, only $1,000 for every man, woman and child in America. Blame abounds, but most of it must can be directed to the Citigroup directors - the men and women paid well to make corporate policy, and to oversee its proper execution. But that got me thinking about blame...  

Let's look at former Chairman of the Federal Reserve of the United States Alan Greenspan.

In his trademark opaque language; Greenspan tiptoes through the well-documented facts of his tenure as Fed chief to absolve himself of any personal responsibility for the ensuing disaster. Greenspan's apologia is a masterpiece of circuitous logic, deliberate evasion and utter denial of reality. He says: I do not doubt that a low U.S. federal-funds rate in response to the dot-com crash, and especially the 1 per cent rate set in mid-2003 to counter potential deflation, lowered interest rates on adjustable-rate mortgages (ARMs) and may have contributed to the rise in U.S. home prices. In my judgment, however, the impact on demand for homes financed with ARMs was not major. "Not major"? 3.5 million potential foreclosures, 11-month inventory backlog, plummeting home prices, an entire industry in terminal distress pulling down the global economy is not major? But Greenspan is partially correct. The troubles in housing cannot be entirely attributed to the Fed's "cheap credit" monetary policies. They were also nursed along by a Doctrine of Deregulation which has permeated US capital markets since the Reagan era. Greenspan's views on how markets should function were -to great extent -- shaped by this non-interventionist/non-supervisory ideology which has created enormous equity bubbles and imbalances. The former-Fed chief's support for adjustable-rate mortgages (ARMs) and subprime lending shows that Greenspan thought of himself as more as a cheerleader for the big market-players than an impartial referee whose job was to monitor reckless or unethical behavior...

Sheesh - shady crooks, ethical lapses that cost people there retirements and homes - its enough to get you all warm and cozy in time to enjoy the holidays.  Right?

Well... Instead let's look at Nobel Prize winner Muhammad Yunus.

Yunus founded the Grameen Bank in 1983 in Bangladesh on the theory that giving no-collateral loans to the poor would help them out of poverty by providing loans on terms suitable to them and by teaching them a few sound financial principles so they could help themselves. Because hardly any women in Bangladesh could qualify for a loan 32 years ago, Yunus saw to it that 50% of Grameen's borrowers were women.

Once he realized women were investing more of their loans into improving the lives of their families, the bank started lending to them almost exclusively.  Of Grameen's 7.5 million borrowers, 97% are women.  The bank lends about $1 billion a year, lending out individual amounts averaging less than $200. At first, the typical loan is for about $30.

Yunus' personal loan of small amounts of money to destitute basketweavers in Bangladesh in the mid-70s, the Grameen Bank has advanced to the forefront of a burgeoning world movement toward eradicating poverty through microlending.

"The majority of people on this planet do not have the opportunity to do banking at conventional banks," Yunus said. "They say all the time that the poor are not creditworthy. And we showed how creditworthy they are."

The bank has provided $4.7 billion dollars to 4.4 million families in rural Bangladesh. With 1,417 branches, Grameen provides services in 51,000 villages, covering three quarters of all the villages in Bangladesh. Yet its system is largely based on mutual trust and the enterprise and accountability of millions of women villagers.

Today, more than 250 institutions in nearly 100 countries operate micro-credit programs based on the Grameen Bank model, while thousands of other micro-credit programs have emulated, adapted or been inspired by the Grameen Bank. According to one expert in innovative government, the program established by Yunus at the Grameen Bank "is the single most important development in the third world in the last 100 years, and I don't think any two people will disagree."

So if you believe in Santa -- or if you just believe we all need to spread kindness around a bit -- consider the Yunis' in the world whilst remembering the Greenspan's.

Then go. Do something good. And make this a Merry Christmas, Happy Hanukah, Festive Kwanzaa and Killer New Year.

There's more...

Greenspan, bubbles, and responsibility

Cross-posted at River Twice Research.

We are now in the season of scapegoats. The brays for justice and villains grow daily, and this week has seen a walk of shame as various participants in the credit debacle sit in front of Congress to be scolded and upbraided for their sins. Many of the goats today, and none more than former Chairman of the Federal Reserve Alan Greenspan, were heroes only a short while ago - yet another vivid illustration of the ancient words of the mythical king Croesus: "Count no man happy till he's dead," or to put it another way, "it ain't over till it's over."

There's more...

Alan Greenspan Made Monkeys Out Of All Of Us

He proved you could reverse evolution...
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Turned a whole country into
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(wait for it)
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Sub-primates.........  

There's more...

A Poem for Alan Greenspan

So Greenspan let the hammer drop...
  This war is based on oil...
It's not about the terrorists
  Who threaten our fair soil...
It's not about democracy
  Like our Red, White and Blue.
Instead it is a way to keep
  The Oil revenue!

And Exxon says "Now don't blame us..."
  And BP claims with Shell
That there's no reason they're involved
  To send our boys to Hell...
And OPEC can get eighty bucks
  For barrels once so cheap...
But Bush wants us to think Al Q.
  Is why we're in this deep.

But I know what he really plans
  Beneath his hat of foil...
That sociopath will leave a swath
  Of our boys' blood... for oil!

Under The LobsterScope

There's more...

Diaries

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