The US Intelligentsia and Middle Class Are In the Firm Grip of Fear, Fraud and Denial:

Posted by Jesse at 11:27 AM May 16, 2010

http://jessescrossroadscafe.blogspot.com/2010/05/us-is-in-grip-of-fraud-and-denial.html

The lie is comfortable, an illusion easy to live with, familiar, and safe.

Writing from the 'disgraced profession' of economics, James K. Galbraith speaks of the unspoken, the many frauds and deceptions underlying the recent financial crisis centered in the US. Many will read this and shake their heads in agreement, but will be unable to take the next logical step and internalize the implications of the depth and breadth of the dishonesty that enabled it then, and continues to sustain it, even today. Galbraith is asking 'why' and framing a further inquiry into the consequences of this unwillingness to reform.

"Some appear to believe that "confidence in the banks" can be rebuilt by a new round of good economic news, by rising stock prices, by the reassurances of high officials – and by not looking too closely at the underlying evidence of fraud, abuse, deception and deceit. As you pursue your investigations, you will undermine, and I believe you may destroy, that illusion."
It is easier to go with the flow, relax, rationalize, and be diverted and entertained by 'the show.' The truth may set you free, but before that it can make you feel very insecure and uncomfortable, especially when it requires challenging the 'official story' and policy decisions. Better to say nothing offensive to the oligarchs, and even occasionally to utter intelligent sounding condemnations of those who dare to question the very things you wonder about, and fear, in order to prove your loyalty and to reassure yourself that you are a right-thinking, practical individual. For the disparity that is unavoidably noticed between what is seen and what is said makes one uneasy, fearful that they are losing their bearings, if not reason. And the vested interests play on those fears. See Techniques of Propaganda

The consequences of 'extend and pretend' will be to worsen the final outcome, the day of reckoning.

"The initial deviation from the truth will be multiplied a thousandfold." -Aristotle
The banks must be restrained, the financial and political system reformed, and balance restored to the economy, before there can be any sustained recovery.

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Why the 'Experts' Failed to See How Financial Fraud Collapsed the Economy:

By James K. Galbraith
May 16, 2010

Editor's Note: The following is the text of a James K. Galbraith's written statement to members of the Senate Judiciary Committee delivered this May.

Chairman Specter, Ranking Member Graham, Members of the Subcommittee, as a former member of the congressional staff it is a pleasure to submit this statement for your record.

I write to you from a disgraced profession. Economic theory, as widely taught since the 1980s, failed miserably to understand the forces behind the financial crisis. Concepts including "rational expectations," "market discipline," and the "efficient markets hypothesis" led economists to argue that speculation would stabilize prices, that sellers would act to protect their reputations, that caveat emptor could be relied on, and that widespread fraud therefore could not occur. Not all economists believed this – but most did.

Thus the study of financial fraud received little attention. Practically no research institutes exist; collaboration between economists and criminologists is rare; in the leading departments there are few specialists and very few students. Economists have soft- pedaled the role of fraud in every crisis they examined, including the Savings & Loan debacle, the Russian transition, the Asian meltdown and the dot.com bubble. They continue to do so now. At a conference sponsored by the Levy Economics Institute in New York on April 17, the closest a former Under Secretary of the Treasury, Peter Fisher, got to this question was to use the word "naughtiness." This was on the day that the SEC charged Goldman Sachs with fraud.

There are exceptions. A famous 1993 article entitled "Looting: Bankruptcy for Profit," by George Akerlof and Paul Romer, drew exceptionally on the experience of regulators who understood fraud. The criminologist-economist William K. Black of the University of Missouri-Kansas City is our leading systematic analyst of the relationship between financial crime and financial crisis. Black points out that accounting fraud is a sure thing when you can control the institution engaging in it: "the best way to rob a bank is to own one." The experience of the Savings and Loan crisis was of businesses taken over for the explicit purpose of stripping them, of bleeding them dry. This was established in court: there were over one thousand felony convictions in the wake of that debacle. Other useful chronicles of modern financial fraud include James Stewart's Den of Thieves on the Boesky-Milken era and Kurt Eichenwald's Conspiracy of Fools, on the Enron scandal. Yet a large gap between this history and formal analysis remains.

Formal analysis tells us that control frauds follow certain patterns. They grow rapidly, reporting high profitability, certified by top accounting firms. They pay exceedingly well. At the same time, they radically lower standards, building new businesses in markets previously considered too risky for honest business. In the financial sector, this takes the form of relaxed – no, gutted – underwriting, combined with the capacity to pass the bad penny to the greater fool. In California in the 1980s, Charles Keating realized that an S&L charter was a "license to steal." In the 2000s, sub-prime mortgage origination was much the same thing. Given a license to steal, thieves get busy. And because their performance seems so good, they quickly come to dominate their markets; the bad players driving out the good.

The complexity of the mortgage finance sector before the crisis highlights another characteristic marker of fraud. In the system that developed, the original mortgage documents lay buried – where they remain – in the records of the loan originators, many of them since defunct or taken over. Those records, if examined, would reveal the extent of missing documentation, of abusive practices, and of fraud. So far, we have only very limited evidence on this, notably a 2007 Fitch Ratings study of a very small sample of highly-rated RMBS, which found "fraud, abuse or missing documentation in virtually every file." An efforts a year ago by Representative Doggett to persuade Secretary Geithner to examine and report thoroughly on the extent of fraud in the underlying mortgage records received an epic run-around.

When sub-prime mortgages were bundled and securitized, the ratings agencies failed to examine the underlying loan quality. Instead they substituted statistical models, in order to generate ratings that would make the resulting RMBS acceptable to investors. When one assumes that prices will always rise, it follows that a loan secured by the asset can always be refinanced; therefore the actual condition of the borrower does not matter. That projection is, of course, only as good as the underlying assumption, but in this perversely-designed marketplace those who paid for ratings had no reason to care about the quality of assumptions. Meanwhile, mortgage originators now had a formula for extending loans to the worst borrowers they could find, secure that in this reverse Lake Wobegon no child would be deemed below average even though they all were. Credit quality collapsed because the system was designed for it to collapse.

A third element in the toxic brew was a simulacrum of "insurance," provided by the market in credit default swaps. These are doomsday instruments in a precise sense: they generate cash-flow for the issuer until the credit event occurs. If the event is large enough, the issuer then fails, at which point the government faces blackmail: it must either step in or the system will collapse. CDS spread the consequences of a housing-price downturn through the entire financial sector, across the globe. They also provided the means to short the market in residential mortgage-backed securities, so that the largest players could turn tail and bet against the instruments they had previously been selling, just before the house of cards crashed.

Latter-day financial economics is blind to all of this. It necessarily treats stocks, bonds, options, derivatives and so forth as securities whose properties can be accepted largely at face value, and quantified in terms of return and risk. That quantification permits the calculation of price, using standard formulae. But everything in the formulae depends on the instruments being as they are represented to be. For if they are not, then what formula could possibly apply?

An older strand of institutional economics understood that a security is a contract in law. It can only be as good as the legal system that stands behind it. Some fraud is inevitable, but in a functioning system it must be rare. It must be considered – and rightly – a minor problem. If fraud – or even the perception of fraud – comes to dominate the system, then there is no foundation for a market in the securities. They become trash. And more deeply, so do the institutions responsible for creating, rating and selling them. Including, so long as it fails to respond with appropriate force, the legal system itself.

Control frauds always fail in the end. But the failure of the firm does not mean the fraud fails: the perpetrators often walk away rich. At some point, this requires subverting, suborning or defeating the law. This is where crime and politics intersect. At its heart, therefore, the financial crisis was a breakdown in the rule of law in America.

Ask yourselves: is it possible for mortgage originators, ratings agencies, underwriters, insurers and supervising agencies NOT to have known that the system of housing finance had become infested with fraud? Every statistical indicator of fraudulent practice – growth and profitability – suggests otherwise. Every examination of the record so far suggests otherwise. The very language in use: "liars' loans," "ninja loans," "neutron loans," and "toxic waste," tells you that people knew. I have also heard the expression, "IBG,YBG;" the meaning of that bit of code was: "I'll be gone, you'll be gone."

If doubt remains, investigation into the internal communications of the firms and agencies in question can clear it up. Emails are revealing. The government already possesses critical documentary trails -- those of AIG, Fannie Mae and Freddie Mac, the Treasury Department and the Federal Reserve. Those documents should be investigated, in full, by competent authority and also released, as appropriate, to the public. For instance, did AIG knowingly issue CDS against instruments that Goldman had designed on behalf of Mr. John Paulson to fail? If so, why? Or again: Did Fannie Mae and Freddie Mac appreciate the poor quality of the RMBS they were acquiring? Did they do so under pressure from Mr. Henry Paulson? If so, did Secretary Paulson know? And if he did, why did he act as he did? In a recent paper, Thomas Ferguson and Robert Johnson argue that the "Paulson Put" was intended to delay an inevitable crisis past the election. Does the internal record support this view?

Let us suppose that the investigation that you are about to begin confirms the existence of pervasive fraud, involving millions of mortgages, thousands of appraisers, underwriters, analysts, and the executives of the companies in which they worked, as well as public officials who assisted by turning a Nelson's Eye. What is the appropriate response?

Some appear to believe that "confidence in the banks" can be rebuilt by a new round of good economic news, by rising stock prices, by the reassurances of high officials – and by not looking too closely at the underlying evidence of fraud, abuse, deception and deceit. As you pursue your investigations, you will undermine, and I believe you may destroy, that illusion.

But you have to act. The true alternative is a failure extending over time from the economic to the political system. Just as too few predicted the financial crisis, it may be that too few are today speaking frankly about where a failure to deal with the aftermath may lead.

In this situation, let me suggest, the country faces an existential threat. Either the legal system must do its work. Or the market system cannot be restored. There must be a thorough, transparent, effective, radical cleaning of the financial sector and also of those public officials who failed the public trust. The financiers must be made to feel, in their bones, the power of the law. And the public, which lives by the law, must see very clearly and unambiguously that this is the case. Thank you.

James K. Galbraith is the author of The Predator State: How Conservatives Abandoned the Free Market and Why Liberals Should Too, and of a new preface to The Great Crash, 1929, by John Kenneth Galbraith. He teaches at The University of Texas at Austin.

More Investigations on Wall Street:

Things are Heating Up for the Banks...Wall Street Probe Widens:

http://seekingalpha.com/article/204854-more-investigations-on-wall-street?source=yahoo

by Susan Pulliam, Kara Scannell, Aaron Lucchetti, and Serena Ng,WSJ:

Federal prosecutors, working with securities regulators, are conducting a preliminary criminal probe into whether several major Wall Street banks misled investors about their roles in mortgage-bond deals, according to a person familiar with the matter.

The banks under early-stage criminal scrutiny—J.P. Morgan Chase & Co., Citigroup Inc., Deutsche Bank AG and UBS AG—have also received civil subpoenas from the Securities and Exchange Commission as part of a sweeping investigation of banks' selling and trading of mortgage-related deals... Under similar preliminary criminal scrutiny are Goldman Sachs Group Inc. and Morgan Stanley, as previously reported by The Wall Street Journal. ...

At issue is whether the Wall Street firms made proper representations to investors in marketing, selling and trading pools of mortgage bonds called collateralized debt obligations, or CDOs. ...

Prosecutors so far are simply gathering evidence. ... It's possible the probe could end with no charges being brought against any of the firms. ...

And:

Prosecutors Ask if 8 Banks Duped Rating Agencies, by Louise Story, NY Times:

The New York attorney general has started an investigation of eight banks to determine whether they provided misleading information to rating agencies in order to inflate the grades of certain mortgage securities...

The investigation parallels federal inquiries into ... interactions between the banks and their clients who bought mortgage securities, this one expands the scope of scrutiny to the interplay between banks and the agencies that rate their securities. ... The inquiry ... suggests that ... the agencies may have been duped by one or more of ... Goldman Sachs, Morgan Stanley, UBS, Citigroup, Credit Suisse, Deutsche Bank, Crédit Agricole and Merrill Lynch...

The companies that rated the mortgage deals are Standard & Poor’s, Fitch Ratings and Moody’s Investors Service. ... Mr. Cuomo’s investigation follows an article in The New York Times that described some of the techniques bankers used to get more positive evaluations from the rating agencies.

Mr. Cuomo is ... interested in the revolving door of employees of the rating agencies who were hired by bank mortgage desks to help create mortgage deals that got better ratings than they deserved... His ... focus is on information the investment banks provided to the rating agencies and whether the bankers knew the ratings were overly positive...

Edmund Andrews says financial reform legislation is not yet a done deal, and could still be watered down to appease banking interests:

Financial overhaul, perils ahead, by Edmund L. Andrews:

It’s tempting to think that financial regulatory reform is already a done deal in Congress... Don’t be fooled. It’s true that the Senate is likely to pass some kind of bill. Unfortunately, the legislation is still at risk of death by a thousand cuts: scores of seemingly anodyne amendments that, if passed, turn the bill into a cynical joke.

You know the drill..., some people – on Wall Street, or at the banks -- want to spare us from “unintended consequences.”

Today, Senate Democrats managed to vote down a major Republican push to gut portions of the bill to regulate derivatives, like the credit-default swaps that blew apart AIG. ...

Tomorrow, Republican Sam Brownback will push an amendment to exclude car dealers from oversight by the new Consumer Financial Protection Bureau. ...

But I would like to focus on a third imminent that seems drier than derivatives or car loans but is at least as important: federal pre-emption of state financial regulations. And this time, it's moderate Dems who are carrying water for the banks.

In the run-up to the mortgage meltdown, federal bank regulators fought hard to pre-empt any state efforts to crack down on shady bank practices. A number of states, like North Carolina and New York, were trying to crack down on abusive mortgage practices by subprime lenders. But many of the lenders were subsidiaries of national banks, and the Office of the Comptroller of the Currency declared that states had no right to touch them whatsoever. ...

The amendment to watch out for in the days ahead actually comes from a Democrat: Tom Carper of Delaware. Carper’s amendment would forbid state attorney generals from prosecuting banks that violate national consumer laws, much as the fed’s blocked Elliott Spitzer and Andrew Cuomo of New York from investigating racial and ethnic targeting by subprime lenders. It would also allow the Feds to override state consumer laws...

Don’t let it happen.

The bill needs to be made stronger, not weaker, so let's hope that amendments to water down the bill's impact continue to lack the necessary support.

On a broader note, there seems to be a shift in the narrative about what caused the crisis. Fraud, deception, and other questionable if not illegal behaviors are beginning to take on a larger role in the story of what happened to bring about the problems in the financial sector. The turning point was, of course, the investigation of Goldman (GS), and the investigations have been growing more numerous ever since.

The shift in attitude has probably helped to stave off challenges designed to weaken the legislation, and if a smoking gun turns up in one of the investigations like those described above, that would likely make it even harder for banks get the political support needed to water down the legislation. But I'm not counting on that happening, and as noted above, the deal isn't done yet. It's still possible for the legislation to be weakened, and as pointed out above there's no shortage of attempts to do just that.

$GS - The Death of Goldman Sachs:

Steven G. Brant
Posted: April 27, 2010 06:58 PM

http://www.huffingtonpost.com/steven-g-brant/the-death-of-goldman-sach_b_554371.html

I saw something die today. It didn't die accidentally either. It was killed.

This was a very painful event to watch, not just because death is tragic and not because this death was intentional rather than accidental.

It was very painful to watch because the thing being killed didn't even know it was dying... and it didn't know it was actually participating in its own death. It didn't know it was helping the hangman not just put the noose around its neck but helping the hangman open the trap door under its feet.

What died today was Goldman Sachs. It has existed for 140 years. But today all that ended, as the head of Goldman Sachs, Lloyd Blankfein, in his prepared remarks before the Senate Governmental Affairs Subcommittee on Investigations, said "We have been a client-centered firm for 140 years and if our clients believe that we don't deserve their trust, we cannot survive."

That was Lloyd Blankfein putting the noose around Goldman Sachs' neck.

And then - in his opening exchange with Subcommittee chair Senator Carl Levin - Lloyd Blankfein proved that Goldman Sachs absolutely, positively does not deserve the trust of its clients.

That was Lloyd Blankfein helping open the door under Goldman Sachs' feet.

In his Senate appearance, Lloyd Blankfein participated in the death of his own company. It was really a stunning thing to watch.

I expect Goldman Sachs to be out of business by the end of this year and maybe before the November election. That's just my opinion, of course. But I'll justify it in a moment.

I will post C-Span's coverage of this testimony as soon as it's available. I predict it will be viewed for years to come by students of business ethics but also by students of famous moments in the civic life of America. I believe this moment will be seen on par with the famous incident in which Senator McCarthy was brought down with the simple question "Have you no sense of decency?"

Senator Carl Levin's simple question - the one that killed Goldman Sachs - was "Do you think it's proper for Goldman Sachs to bet against the security it is selling to a client without telling that client that it is making that bet?"

(I will check the transcript later, to make sure I have the wording of this question correct.)

Mr. Blankfein said over and over again that it was proper for Goldman Sachs to do what they had done. He even said at one point that the minute Goldman Sachs sells something to its customer, it no longer owns that security and has "the opposite interest" to its client regarding that security. This was just one of many breathtaking moments, as I could tell that Mr. Blankfein had no idea what he was doing to his firm.

In late 2001, the collapse of ENRON led to the death of the legendary accounting firm Arthur Andersen.

Arthur Anderson's reputation was unmatched in the field; but, in 2002, Arthur Andersen was found guilty of criminal charges related to its auditing of ENRON and gave up its license to practice accounting.

Criminal behavior. No trust. Reputation destroyed. No customers. Firm dead

Welcome to the Arthur Andersen reality, Goldman Sachs.

Civil charges of fraud brought, and there may be more coming. No trust. Reputation destroyed. No customers. Firm dead.

What a fascinating time we are living in. If things really do play out the way they did with ENRON and Arthur Andersen - and I think they will - I guess we'll be able to say that there is such a thing as white-collar justice in America.

Lloyd Blankfein's testimony is now available on C-Span's video page.

http://www.c-spanvideo.org/program/293196-3

Matt Taibbi: The Lunatics Who Made a Religion Out of Greed and Wrecked the Economy:

The SEC's lawsuit against Goldman Sachs is a chance to prevent greed without limits...

http://www.alternet.org/story/146611/taibbi:_the_lunatics_who_made_a_religion_out_of_greed_and_wrecked_the_economy__?page=entire



April 26, 2010

So Goldman Sachs, the world's greatest and smuggest investment bank, has been sued for fraud by the American Securities and Exchange Commission. Legally, the case hangs on a technicality.

Morally, however, the Goldman Sachs case may turn into a final referendum on the greed-is-good ethos that conquered America sometime in the 80s – and in the years since has aped other horrifying American trends such as boybands and reality shows in spreading across the western world like a venereal disease.

When Britain and other countries were engulfed in the flood of defaults and derivative losses that emerged from the collapse of the American housing bubble two years ago, few people understood that the crash had its roots in the lunatic greed-centered objectivist religion, fostered back in the 50s and 60s by ponderous emigre novelist Ayn Rand.

While, outside of America, Russian-born Rand is probably best known for being the unfunniest person western civilisation has seen since maybe Goebbels or Jack the Ripper (63 out of 100 colobus monkeys recently forced to read Atlas Shrugged in a laboratory setting died of boredom-induced aneurysms), in America Rand is upheld as an intellectual giant of limitless wisdom. Here in the States, her ideas are roundly worshipped even by people who've never read her books or even heard of her. The rightwing "Tea Party" movement is just one example of an entire demographic that has been inspired to mass protest by Rand without even knowing it.

Last summer I wrote a brutally negative article about Goldman Sachs for Rolling Stone magazine (I called the bank a "great vampire squid wrapped around the face of humanity") that unexpectedly sparked a heated national debate. On one side of the debate were people like me, who believed that Goldman is little better than a criminal enterprise that earns its billions by bilking the market, the government, and even its own clients in a bewildering variety of complex financial scams.

On the other side of the debate were the people who argued Goldman wasn't guilty of anything except being "too smart" and really, really good at making money. This side of the argument was based almost entirely on the Randian belief system, under which the leaders of Goldman Sachs appear not as the cheap swindlers they look like to me, but idealized heroes, the saviors of society.

In the Randian ethos, called objectivism, the only real morality is self-interest, and society is divided into groups who are efficiently self-interested (ie, the rich) and the "parasites" and "moochers" who wish to take their earnings through taxes, which are an unjust use of force in Randian politics. Rand believed government had virtually no natural role in society. She conceded that police were necessary, but was such a fervent believer in laissez-faire capitalism she refused to accept any need for economic regulation – which is a fancy way of saying we only need law enforcement for unsophisticated criminals.

Rand's fingerprints are all over the recent Goldman story. The case in question involves a hedge fund financier, John Paulson, who went to Goldman with the idea of a synthetic derivative package pegged to risky American mortgages, for use in betting against the mortgage market. Paulson would short the package, called Abacus, and Goldman would then sell the deal to suckers who would be told it was a good bet for a long investment. The SEC's contention is that Goldman committed a crime – a "failure to disclose" – when they failed to tell the suckers about the role played by the vulture betting against them on the other side of the deal.

Now, the instruments in question in this deal – collateralized debt obligations and credit default swaps – fall into the category of derivatives, which are virtually unregulated in the US thanks in large part to the effort of gremlinish former Federal Reserve chairman Alan Greenspan, who as a young man was close to Rand and remained a staunch Randian his whole life. In the late 90s, Greenspan lobbied hard for the passage of a law that came to be called the Commodity Futures Modernisation Act of 2000, a monster of a bill that among other things deregulated the sort of interest-rate swaps Goldman used in its now-infamous dealings with Greece.

Both the Paulson deal and the Greece deal were examples of Goldman making millions by bending over their own business partners. In the Paulson deal the suckers were European banks such as ABN-Amro and IKB, which were never told that the stuff Goldman was cheerfully selling to them was, in effect, designed to implode; in the Greece deal, Goldman hilariously used exotic swaps to help the country mask its financial problems, then turned right around and bet against the country by shorting Greece's debt.

Now here's the really weird thing. Confronted with the evidence of public outrage over these deals, the leaders of Goldman will often appear to be genuinely confused, scratching their heads and staring quizzically into the camera like they don't know what you're upset about. It's not an act. There have been a lot of greedy financiers and banks in history, but what makes Goldman stand out is its truly bizarre cultist/religious belief in the rightness of what it does.

The point was driven home in England last year, when Goldman's international adviser, sounding exactly like a character in Atlas Shrugged, told an audience at St Paul's Cathedral that "The injunction of Jesus to love others as ourselves is an endorsement of self-interest". A few weeks later, Goldman CEO Lloyd Blankfein told the Times that he was doing "God's work".

Even if he stands to make a buck at it, even your average used-car salesman won't sell some working father a car with wobbly brakes, then buy life insurance policies on that customer and his kids. But this is done almost as a matter of routine in the financial services industry, where the attitude after the inevitable pileup would be that that family was dumb for getting into the car in the first place. Caveat emptor, dude!

People have to understand this Randian mindset is now ingrained in the American character. You have to live here to see it. There's a hatred toward "moochers" and "parasites" – the Tea Party movement, which is mainly a bunch of pissed off suburban white people whining about minorities consuming social services, describes the battle as being between "water-carriers" and "water-drinkers". And regulation of any kind is deeply resisted, even after a disaster as sweeping as the 2008 crash.

This debate is going to be crystallised in the Goldman case. Much of America is going to reflexively insist that Goldman's only crime was being smarter and better at making money than IKB and ABN-Amro, and that the intrusive, meddling government (in the American narrative, always the bad guy!) should get off Goldman's Armani-clad back. Another side is going to argue that Goldman winning this case would be a rebuke to the whole idea of civilisation – which, after all, is really just a collective decision by all of us not to screw each other over even when we can. It's an important moment in the history of modern global capitalism: whether or not to move forward into a world of greed without limits.

On Goldman, Securities Fraud, And Skepticism:

http://market-ticker.org/archives/2214-On-Goldman,-Securities-Fraud,-And-Skepticism.html

By now of course you know that Goldman Sachs was charged by the SEC with civil securities fraud Friday - unless you live under a rock.

The weekend has brought forth several interesting points, all of which I believe our political (and bankster) class had better pay attention to. In no particular order:

The rest of the world is tired of this crap too. Britain and Germany, to name two, are now looking at going after Goldman. This will not end here by any stretch of the imagination.

Goldman may have violated more than one law. Isn't receipt of a Wells Notice a "material event" that requires disclosure via an 8-K filing? I'm sure they'll claim "no", but I wouldn't be so sure of that. Never mind their hasty response on Friday afternoon. We'll see how this plays out.

Goldman was not the only large bank involved in deceptive deals. We should really talk about Magnetar, shouldn't we, and the nine banks that enabled their piece of this (that would be Merrill, Citi, UBS and more.) They were all involved in a number of deals that smell suspiciously like the one the SEC went after Goldman over. Or shall we talk about Jefferson County, Alabama again? You know, where JP Morgan was involved in a deal to "help" the county replace its aging sewer system, and wound up costing them 25 times the original (and actual) price of the work? Oh, and let's not forget that several government officials and private-sector folks have gone to prison already for their involvement in this scandal - for bribery and related acts, while not one indictment has issued against a bank executive or the banks involved themselves.

Jamie Dimon is threatening governments (again), this time in Germany. The people have had quite enough of extortion and blackmail, Mr. Dimon. You might also want to consider that some of those "less-regulated" markets you might flee to, such as China, have a habit of solving regulatory problems not with indictments and juries but rather with summary imprisonment or even execution. Consider the folks in the "basic materials" business who allegedly got caught gaming the system in China recently - and were summarily tried and convicted. Others have simply been shot. We claim to be more civilized here in this country, which is one of the reasons your threat rings rather hollow - in those "unregulated" markets you're more likely to find a disgruntled investor wields an AK-47 rather than a summons or subpoena, and you know it. I double-dog-dare you to take your capital and move to any of those places - I'll be watching for the Youtube of your execution when you screw someone over in East Buoffo as a consequence of their "unregulated market", and promise to chortle when it is posted.

The people don't believe the SEC, Congress or the Obama administration. Bill Clinton is now saying he took "wrong advice" from Larry Summers and Bob Rubin. That "advice" included Gramm-Leach-Bliley, I might add, as well as derivatives. Let the record show that Larry Summers took a clean shot at bankrupting Harvard University, losing $14 billion of its endowment in just over a year's time. I'm sure some of that has come back with the stock market "recovery" (engineered via more phony accounting) but the fact remains that as Harvard's Corporation (in the legal sense) consists of seven members who are accountable to nobody but themselves. Bob Rubin, for his part, was entangled in Citi at the time of the Gramm-Leach-Bliley act's passage. Oh, and Rubin is on Harvard's board.

The people have every right to be skeptical. Indeed, perhaps cynicism is more appropriate than skepticism in this case, in that every step of the last ten years when it comes to financial firms and regulation appears to have been driven by one goal: to allow banksters and their cronies to loot and pillage the American people, who are then supposed to back them up when their fancy games go awry.

I'm tired of it - but I was tired of it back in 1998, 1999, 2000 and onward when I saw the pernicious and outrageous frauds being perpetrated against investors in so-called "new economy" businesses. Nearly all of them went bankrupt in the .COM crash. The simple fact of the matter is that almost none of these firms had any business going public in the first place - they were the starry-eyed dreams of some pimply kid barely out of business school (and sometimes not even that well-versed in the real world) backed by a private-equity or "angel" investor who knew how to game the system and pay off the investment banks via lots of fee-based business to issue "strong buys" on worthless securities.

As just one example I put forward the DSL providers of the day - Covad, Rythms and Northpoint. I talked with all three. All three presented me with a business model for "partnering" with them. A bit of quick math led me to the inescapable conclusion that they didn't have a prayer in hell of ever being profitable on an operating basis, say much less covering equipment depreciation and amortization. I passed on getting involved with any of them for that reason and all three later blew up, vindicating what was in fact a fairly simple set of calculations. So how did the investment banks and others who brought those firms public, all of whom clearly had at least as powerful a calculator as I did, justify their IPOs?

Virtually everyone got screwed by these games, not the least of which were the honest companies. IPOs that doubled on the first day were seen as a strong endorsement of the company instead of what they really were, which is a rip-off of the firm who left literal millions, and sometimes hundreds of millions, on the table to be stolen by the investment banks who exercised their "overallotments" and then sold into the first-day ramps. The underwriting institutions didn't give a damn if there was a sustainable business behind the S-1, so long as that first-day ramp job materialized and they could both earn their fee and the override on the over-allotment - the second often being multiples of the first.

The game never changed in the 2000s - this time we had banks scamming people on the value of so-called "AAA" mortgages and the constructs put together both out of them and referenced off them. Again the securities were worthless or nearly so, but the banks didn't care so long as they got their fees. And like the last time, they basked in the knowledge that they both would not wind up on the wrong end of an indictment and that if things got really bad (as they did this time) they could shove a gun up your nose and force you, the taxpayer, to bail them out.

The important point behind both of these tales is that without the fraudulent securities being issued NEITHER BUBBLE WOULD HAVE INFLATED. That is, neither was simply an "accident" or "starry-eyed dreamers" that got in over their heads. Both bubbles were INTENTIONAL scams fueled by Wall Street's seemingly-unending ability to package up trash and sell it while extracting their fees and "overrides". They then feign ignorance when what THEY KNEW was dead fish starts stinking up the place.

THIS MUST STOP and all the pretending won't do it. Nor will claims that we're writing "euthanasia" bills "for the future." The fact of the matter is that all of these institutions are and have been exercising privileges - the privilege to issue credit on the sovereign wealth of the United States.

That privilege is not the government's to bestow, it is we the people's, and we must withdraw that consent until the scamming is stopped by force of law.

Federally-guaranteed deposit-taking and transaction clearing is a ministerial function. To a large extent so should be lending with guaranteed funds, which I have repeatedly argued should devolve down into "One Dollar Of Capital." Return home mortgages to a 28/36 ratio set and 20% down for all federally-guaranteed loans, and all held or originated by any depository or otherwise-insured institution (including those with access to Fed facilities.)

If people want to gamble - that is, take risk of any sort - let them do it with their own capital but never with the taxpayer's. This means full reinstatement of Glass-Steagall and everything that comes with it. If Jamie Dimon and others don't like these rules then let them take their capital to some other country that doesn't mind having its economy detonated every five to seven years by these scoundrels.

Someone else will take his place and provide the necessary functions; a safe and solid 7-8% return isn't bad, after all, especially when it's government-guaranteed!

Our government and both political parties are severely miscalculating if they believe the anger in society right now is going to let this pass without real reform - not the cock-and-bull games being played by both sides of the aisle at present.

Faux "charges" and SEC "bluster and thunder" are not indictments. We have plenty of information not only in the public record but now irrefutably in the hands of Congress, such as the WaMu disaster, for lawmakers to demand both that existing laws against fraud be enforced and that these institutions all be broken up right here and now, today, with every dollar they stole (that still exists anyway) being clawed back.

There is even hard evidence that members of our government, in some cases, conspired with institutions to falsify accounting (e.g. IndyMac and backdated deposits), a toxic brew of corruption that threatens the vital trust between government and people on which civil order and stability rest.

The people will not sit for less than full enforcement of existing law, restitution for these acts and a reinstatement of Glass-Steagall's proscriptions. Over eight millions jobs were lost in this crash and more than five million additional people failed to find employment during the last so-called "recovery" as they entered the workforce. Even more Americans had their jobs shipped overseas and had their hands (and sometimes head) stepped on as they tried to climb the income ladder. The anger seething under the surface of society is not only palatable it is getting much worse by the day. I overhear conversations almost every time I'm out in public now and most of them are absolutely unsuitable for polite company. This is a marked change from last year as the hope of Obama's election has turned to the anger of recognition, even among Democrats, that we were conned - again.

The people are not talking about which brand of Girl Scout cookie to buy - that much I will assure you, and I'm talking about conversations overheard in the local supermarket - not exactly where you expect to find "nutjobs" of any persuasion talking about various things one doesn't usually think, say much less speak of openly. I shudder at the thought of what's being said behind closed doors where folks like me, who have and continue to preach working within the law, have never been and never will be invited.

How much longer can government get away with the games before something - or someone - snaps? I don't have the foggiest clue, but Friday proved that the stock market hasn't been rising as a consequence of an improving economy but rather on the belief by a handful of speculators that the looting and pillaging that was given free rein and license last spring when FASB was forced to change the accounting rules would not only be allowed to continue but would intensify.

The problem with this philosophy and course of action is that the American People in the main are literally being bled dry by the vampires on Wall Street. The most dangerous man of all is one who has lost everything - home, job, family - and thus has nothing left to lose.

Irrespective of the "pumpers" on Wall Street and in The Media the facts on the ground do not reflect the optimism - consumer "spending" has been held up by people not paying their mortgages, long-term unemployment has ravaged our states and communities while government has simply handed out more and more money via extensions of this and that program, papering over the rot in the economy with borrowed funds we cannot afford.

Government must step in and break these behemoths up. Not because they're too big to fail tomorrow, but because they did too much damage this time around and must not be allowed to get away with it, say much less prosper as a consequence. These acts were not errors of judgment or accidents they were willful and intentional actions taken with full knowledge of the consequences.

Bluntly, these banksters looted the public worldwide through two full cycles of boom and bust, they did it intentionally, and our nation cannot withstand another one of their attacks.

Those of you in Washington DC and State Governments who are reading this, get away from your insular world inside the beltway and state houses and meet with constituents - not as a Representative or Senator, but as an ordinary Joe. Leave the armed goon squad behind and drive a chevy to the local eatery, your local store, the coffee shop or WalMart in your town. Shut your yap for a week and just listen. Note the marked deterioration in mood, attitude and words you hear. That's real, it's dangerous, and you can only deal with it one way - by putting a stop to the looting and start with the prosecuting.

The people are pissed and they're not going to sit still for this. You will either stop it, right here and now, or you will lose your jobs. If you try to lie your way out of it as you have for the last decade you are taking a horrible risk, as this nation and indeed the world is a tinderbox, and little would be required to set off civil unrest or, far worse - war.

Remember, it wasn't just Americans that got screwed and are pissed off.

Do the right thing while there is still time.

John Paulson Needs A Good Lawyer:

Written by Simon Johnson
April 18, 2010 at 9:00 am

http://baselinescenario.com/2010/04/18/john-paulson-needs-a-good-lawyer/#more-7214

Of all the reactions so far to various dimensions of Goldman fraudulent securities “Fab” scandal, one stands out. On Bill Maher’s show, Friday night, I argued that John Paulson – the investor who helped design the CDO at the heart of the affair – should face serious legal consequences.

On the show, David Remnick of the New Yorker pointed out that Paulson has not been indicted. And since then numerous people have argued that Paulson did nothing wrong – rather that the fault purely lies with Goldman for not disclosing fully to investors who had designed the CDO.

But this is to mistake the nature of the crime here – and also to misread the legal strategy of the SEC.

The obvious targets are Goldman’s top executives, whom we know were deeply engaged with the housing side of their business in early 2007 – because it was an important part of their book and they were well aware that the market was in general going bad.

Either Goldman’s executives were well aware of the “Fab” and its implications – in which case they face serious potential criminal and civil penalties – or they did not have effective control over transactions that posed significant operational and financial risk to their organization.

They will undoubtedly pursue the “we did not know” defense – which of course debunks entirely the position taken by Gerry Corrigan (of Goldman and formerly head of the NY Fed) when I pressed him before the Senate Banking Committee in February. Corrigan claimed that Goldman’s risk management system is the best in the business and simply superb; the former may be true, but the latter claim will be blown up by Lloyd Blankfein’s own lawyers – they must, in order to keep him out of jail. (Aside to Mr. Blankfein’s lawyers: the people you are up against have already read 13 Bankers and may put it to good use; you might want to get a copy.)

And don’t be misled by the purely civil nature of the charges so far – and the fact that the announced target is only one transaction. This is a good strategy to uncover more information – for broader charges on related dimensions – and it allows congressional enquiries to pile on more freely.

As for John Paulson, the issue will of course be the “paper trail” – including emails and phone conversations. A great deal of pressure will be brought to bear on the people who have worked with him, many of whom now faced permanently broken careers in any case.

Here’s the legal theory to keep in mind. Mr. Paulson only stood to gain on a massive scale (or at all) if the securities in question were mispriced, i.e., because their true nature (that they had been picked by Mr. Paulson) was not disclosed. In other words, the Paulson transactions at this stage of the game only made sense if they involved fraud. The principals involved (Paulson and top Goldman people) are all super smart, with unmatched practical experience in this area; they get this totally.

John Paulson was not the trigger man – it was Goldman and its executives who withheld adverse material information from their customers. But if the entire scheme was Mr. Paulson’s idea – if he was in any legal sense the mastermind (obviously he was, but can you prove it beyond a reasonable doubt?) – then we are looking at potential conspiracy to commit fraud. And if he had conversations of any kind and at any time during this period with top Goldman executives, this will become even more interesting - so of course all relevant phone records will now be subpoenaed.

Mr. Paulson should be banned from securities markets for life. If that is not possible under current rules and regulations, those should be changed so they can apply. If that change requires an Act of Congress, so be it.

There is fraud at the heart of Wall Street. It is time to end that.

The Magnetar Trade: How One Hedge Fund Helped Keep the Bubble Going:

The Magnetar Trade:

http://www.propublica.org/feature/the-magnetar-trade-how-one-hedge-fund-helped-keep-the-housing-bubble-going

Source:
The Magnetar Trade: How One Hedge Fund Helped Keep the Bubble Going:
by Jesse Eisinger and Jake Bernstein
ProPublica – April 9, 2010

By Barry Ritholtz
April 11th, 2010, 9:30AM

Former WSJ reporter Jesse Eisinger teamed up with author and reporter Jake Bernstein at ProPublica.org. They spent 7 months investigating a series of hedge fund trades made against subprime mortgages, CDS, etc.

The result is this thorough detailed analysis of how this took place: The Magnetar Trade: How One Hedge Fund Helped Keep the Bubble Going (It is available at TBP Mirror)

Here’s an excerpt:

“How Magnetar pulled this off is one of the untold stories of the meltdown. Only a small group of Wall Street insiders was privy to what became known as the Magnetar Trade. Nearly all of those approached by ProPublica declined to talk on the record, fearing their careers would be hurt if they spoke publicly. But interviews with participants, e-mails, thousands of pages of documents and details about the securities that until now have not been publicly disclosed shed light on an arcane, secretive corner of Wall Street.

According to bankers and others involved, the Magnetar Trade worked this way: The hedge fund bought the riskiest portion of a kind of securities known as collateralized debt obligations — CDOs. If housing prices kept rising, this would provide a solid return for many years. But that’s not what hedge funds are after. They want outsized gains, the sooner the better, and Magnetar set itself up for a huge win: It placed bets that portions of its own deals would fail.

Along the way, it did something to enhance the chances of that happening, according to several people with direct knowledge of the deals. They say Magnetar pressed to include riskier assets in their CDOs that would make the investments more vulnerable to failure. The hedge fund acknowledges it bet against its own deals but says the majority of its short positions, as they are known on Wall Street, involved similar CDOs that it did not own. Magnetar says it never selected the assets that went into its CDOs”

The full piece is fascinating, and well worth your Sunday morning.

Also noteworthy: This is now how investigative journalism gets done in America. Its no0w about private funding of non-profit news organizations. They are insulated from ratings, news stand sales, and focus group reports.

Thank goodness ProPublica exists. They are the silver lining in the collapse of American journalism . . .

http://www.ritholtz.com/blog/2010/04/magnetar-trade/