(c) 2010 F. Bruce Abel
What was that in the NYT review of Reille Hunter and Oprah Winfrey? Click on title above (I'm going wild with "add enclosure links.")
Friday, April 30, 2010
Why Carlos Celdran Will Vote for Gilbert Teodoro
(c) 2010 F. Bruce Abel
Yes, I write and think about other topics than Wall Street. Carlos Celdran is "a man in full" in Manila. We talked around the pool on Corrigador during his break of his Walk With Me weekend tour.
The Pearl of the Orient is a Catholic Country. Just fascinating. Genny is there.
Click onto the title of this blog for his reasons for voting for Gilbert Teodoro, a name I did not know a 1/2 hour ago. You will learn a lot (maybe too much, but not too much for me.)
Carlos can write! He went to Rhode Island School of Design, etc.
Yes, I write and think about other topics than Wall Street. Carlos Celdran is "a man in full" in Manila. We talked around the pool on Corrigador during his break of his Walk With Me weekend tour.
The Pearl of the Orient is a Catholic Country. Just fascinating. Genny is there.
Click onto the title of this blog for his reasons for voting for Gilbert Teodoro, a name I did not know a 1/2 hour ago. You will learn a lot (maybe too much, but not too much for me.)
Carlos can write! He went to Rhode Island School of Design, etc.
Bruce Abel -- Hello Euro?
(c) 2010 F. Bruce Abel
Krugman worked; now see whether clicking on the title here gets you to my weblink.
Krugman worked; now see whether clicking on the title here gets you to my weblink.
Krugman -- Goodbye Euro?
(c) 2010 F. Bruce Abel
I'm experimenting by putting the link to Krugman's piece today as an "enclosure link." Click on the title to this blog and it will get to it I think.
Then there are 50 comments to Krugman's piece. Here's the best:
Paul Dorell
Evanston, IL
April 29th, 201011:07 pm
I wonder what the wealthy eurozone nations were thinking when they joined. It seems to me that they've already implicitly agreed to bail out Greece or any other eurozone member facing sovereign default. The U.K., Switzerland, Norway and Sweden look smart now for not joining. If Germany and France don't step up to the plate, as they've implicitly agreed to do by joining the eurozone, it may well collapse. It looks to me as if the economics profession has failed badly once again.
and here's another good one. By the way the work to save ourselves ("write me a check for $700 billion"-- Paulson to Congress) was begun in the Bush Administration. I say this as a hater of the Bush Administration. But if we forget this uncomfortable fact we will lose the November election.
Marie Burns
Fort Myers, Florida
April 29th, 201011:07 pm
The European situation is a good lesson in why American Democrats have made this country the strongest in the world, and why it's a bad idea to elect Republicans. Republicans these days act just like European countries intent on maintaining their own fiefdoms and reluctant to pull together in a crisis. As much as Americans dislike Henry Paulson and his "write me a check for $700BB, & don't ask any questions" solution to the U.S. financial crisis, we at least were lucky to have a Treasury Secretary who got around to recognizing a crisis & acting to avert it. (I hate to think what would have happened if John Snow were still serving as Treasury Secretary in late 2008.) Could the Democratic Congress have done a better job of rewriting Henry's blank-check legislation? Well, yes, but at least they too had the guts to act.
It appears Europe needs to follow American Democrats' lead and learn to pull together to save the economies of Portugal, Greece, Ireland and Spain (PIGS), and thereby the economy of the entire continent -- just as we did, no thanks to Republican small-bore thinking.
I'm experimenting by putting the link to Krugman's piece today as an "enclosure link." Click on the title to this blog and it will get to it I think.
Then there are 50 comments to Krugman's piece. Here's the best:
Paul Dorell
Evanston, IL
April 29th, 201011:07 pm
I wonder what the wealthy eurozone nations were thinking when they joined. It seems to me that they've already implicitly agreed to bail out Greece or any other eurozone member facing sovereign default. The U.K., Switzerland, Norway and Sweden look smart now for not joining. If Germany and France don't step up to the plate, as they've implicitly agreed to do by joining the eurozone, it may well collapse. It looks to me as if the economics profession has failed badly once again.
and here's another good one. By the way the work to save ourselves ("write me a check for $700 billion"-- Paulson to Congress) was begun in the Bush Administration. I say this as a hater of the Bush Administration. But if we forget this uncomfortable fact we will lose the November election.
Marie Burns
Fort Myers, Florida
April 29th, 201011:07 pm
The European situation is a good lesson in why American Democrats have made this country the strongest in the world, and why it's a bad idea to elect Republicans. Republicans these days act just like European countries intent on maintaining their own fiefdoms and reluctant to pull together in a crisis. As much as Americans dislike Henry Paulson and his "write me a check for $700BB, & don't ask any questions" solution to the U.S. financial crisis, we at least were lucky to have a Treasury Secretary who got around to recognizing a crisis & acting to avert it. (I hate to think what would have happened if John Snow were still serving as Treasury Secretary in late 2008.) Could the Democratic Congress have done a better job of rewriting Henry's blank-check legislation? Well, yes, but at least they too had the guts to act.
It appears Europe needs to follow American Democrats' lead and learn to pull together to save the economies of Portugal, Greece, Ireland and Spain (PIGS), and thereby the economy of the entire continent -- just as we did, no thanks to Republican small-bore thinking.
Brooks -- And FP&L
(c) 2010 F. Bruce Abel
Nerdy but worth reading for what FP&L can do for us.
By DAVID BROOKS
Published: April 29, 2010
In 1860, Samuel Curtis, a Republican congressman of Iowa, sponsored a bill to create a transcontinental railroad. The debate over that public-private partnership was long and messy. Democrats said the proposal was unconstitutional. Others rightly argued that it meant huge giveaways to the rich.
Times Topics: Climate and Energy LegislationReaders' Comments
Sha
Read All Comments (32) »
But the railroad effort, backed by Abraham Lincoln, swept forward. “Nations are never stationary,” Representative James Campbell told the House. “They advance or recede. We cannot remain inactive ... without the loss of trade, of commerce, and power.”
After the legislation was approved in 1862, there were continual setbacks. The Union Pacific Railroad languished. Scandals mounted. Yet despite it all, the final spike was hammered into place at Promontory Point, Utah, in 1869, linking the nation and heralding a new burst of prosperity.
When you read that history, you’re reminded that large efforts are generally plagued by stupidity, error and corruption. But by the sheer act of stumbling forward, it’s possible, sometimes, to achieve important things.
Energy innovation is the railroad legislation of today. This country is studded with venture capitalists, scientists, corporate executives and environmental activists atremble over the great opportunities they see ahead. The energy revolution is a material project that arouses moral fervor — exactly the sort of enterprise at which Americans excel.
As with all causes of this sort, the righteousness sometimes runs ahead of the reality. When you actually look at the details of global warming legislation, you run into myriad questions. Is cap-and-trade really the most appropriate policy tool to reduce carbon emissions? Do the benefits of the most ambitious global warming bills really outweigh the costs? I strongly recommend two essays by Jim Manzi — “Conservatives, Climate Change, and the Carbon Tax” from The New Atlantis and “Dunce Cap-and-Trade” from National Review — in which he presents data suggesting they do not.
Nonetheless, the vision is certainly right. To remain the world’s pre-eminent nation, the U.S. is going to have to develop energy sources that are plentiful, clean and don’t enrich the worst people on earth. That means in the short term, the U.S. has to unleash the tens of billions of dollars of potential energy investments now being pent up by uncertainty and regulatory hurdles. To make a difference in the long term, the U.S. is going to have to invest more and differently in energy research and development.
Technology companies spend 5 percent to 15 percent of revenue on research and development. Energy companies, on the other hand, spend only one-quarter of 1 percent. The federal government spends $30 billion on health research, but only $3 billion on clean energy research.
It’s clearly going to take legislative action to catalyze private investment and to increase federal research to where it should be — about $25 billion a year, according to Mark Muro of the Brookings Institution. It’s going to take some equivalent of the Pacific Railroad Acts to kick this into gear.
The best vehicle now is the American Power Act, drawn up by John Kerry, Joe Lieberman and Lindsey Graham. The bill, like all politically plausible bills these days, is larded with special-interest provisions and public giveaways to defuse opposition and win votes. But it does perform a few essential tasks. To boost innovation, it raises the price on carbon and devotes some of that money (though not nearly enough) to research and development.
In addition, it establishes a predictable price for carbon. Lew Hay, the chief executive of the power provider FPL Group, e-mailed me on Thursday to say that if he can get that certainty on the carbon price and if there can be a renewable energy standard to create a market for carbon-free energy, his company could boost investments right away:
“Regarding wind energy investment at our NextEra Energy Resources subsidiary, we think we might invest about $1.5 billion to $2 billion more per year. Regarding solar, we think NextEra Energy Resources might invest $500 million or more per year outside of Florida and that our Florida Power & Light subsidiary might invest about $1 billion a year inside Florida.” Last but not least, he wrote, a new law would be a “huge factor” in deciding whether to move forward with new nuclear units.
Similarly, David Crane, the C.E.O. of NRG Energy, wrote that with a new law, his company could double the number of clean energy projects, from 17 to 36; it could triple the megawatts of clean generating capacity it is planning to add; it could produce three times as much nuclear power and 40 times as much coal with carbon capture and sequestration.
You get the sense that this country is straining against the leash, eager for a new wave of energy development. There will be excess, stupidity and greed along the way. But it would be simply amazing if, through some set of narrow political gamesmanship, Washington continued to stand in the way of all this.
Nerdy but worth reading for what FP&L can do for us.
By DAVID BROOKS
Published: April 29, 2010
In 1860, Samuel Curtis, a Republican congressman of Iowa, sponsored a bill to create a transcontinental railroad. The debate over that public-private partnership was long and messy. Democrats said the proposal was unconstitutional. Others rightly argued that it meant huge giveaways to the rich.
Times Topics: Climate and Energy LegislationReaders' Comments
Sha
Read All Comments (32) »
But the railroad effort, backed by Abraham Lincoln, swept forward. “Nations are never stationary,” Representative James Campbell told the House. “They advance or recede. We cannot remain inactive ... without the loss of trade, of commerce, and power.”
After the legislation was approved in 1862, there were continual setbacks. The Union Pacific Railroad languished. Scandals mounted. Yet despite it all, the final spike was hammered into place at Promontory Point, Utah, in 1869, linking the nation and heralding a new burst of prosperity.
When you read that history, you’re reminded that large efforts are generally plagued by stupidity, error and corruption. But by the sheer act of stumbling forward, it’s possible, sometimes, to achieve important things.
Energy innovation is the railroad legislation of today. This country is studded with venture capitalists, scientists, corporate executives and environmental activists atremble over the great opportunities they see ahead. The energy revolution is a material project that arouses moral fervor — exactly the sort of enterprise at which Americans excel.
As with all causes of this sort, the righteousness sometimes runs ahead of the reality. When you actually look at the details of global warming legislation, you run into myriad questions. Is cap-and-trade really the most appropriate policy tool to reduce carbon emissions? Do the benefits of the most ambitious global warming bills really outweigh the costs? I strongly recommend two essays by Jim Manzi — “Conservatives, Climate Change, and the Carbon Tax” from The New Atlantis and “Dunce Cap-and-Trade” from National Review — in which he presents data suggesting they do not.
Nonetheless, the vision is certainly right. To remain the world’s pre-eminent nation, the U.S. is going to have to develop energy sources that are plentiful, clean and don’t enrich the worst people on earth. That means in the short term, the U.S. has to unleash the tens of billions of dollars of potential energy investments now being pent up by uncertainty and regulatory hurdles. To make a difference in the long term, the U.S. is going to have to invest more and differently in energy research and development.
Technology companies spend 5 percent to 15 percent of revenue on research and development. Energy companies, on the other hand, spend only one-quarter of 1 percent. The federal government spends $30 billion on health research, but only $3 billion on clean energy research.
It’s clearly going to take legislative action to catalyze private investment and to increase federal research to where it should be — about $25 billion a year, according to Mark Muro of the Brookings Institution. It’s going to take some equivalent of the Pacific Railroad Acts to kick this into gear.
The best vehicle now is the American Power Act, drawn up by John Kerry, Joe Lieberman and Lindsey Graham. The bill, like all politically plausible bills these days, is larded with special-interest provisions and public giveaways to defuse opposition and win votes. But it does perform a few essential tasks. To boost innovation, it raises the price on carbon and devotes some of that money (though not nearly enough) to research and development.
In addition, it establishes a predictable price for carbon. Lew Hay, the chief executive of the power provider FPL Group, e-mailed me on Thursday to say that if he can get that certainty on the carbon price and if there can be a renewable energy standard to create a market for carbon-free energy, his company could boost investments right away:
“Regarding wind energy investment at our NextEra Energy Resources subsidiary, we think we might invest about $1.5 billion to $2 billion more per year. Regarding solar, we think NextEra Energy Resources might invest $500 million or more per year outside of Florida and that our Florida Power & Light subsidiary might invest about $1 billion a year inside Florida.” Last but not least, he wrote, a new law would be a “huge factor” in deciding whether to move forward with new nuclear units.
Similarly, David Crane, the C.E.O. of NRG Energy, wrote that with a new law, his company could double the number of clean energy projects, from 17 to 36; it could triple the megawatts of clean generating capacity it is planning to add; it could produce three times as much nuclear power and 40 times as much coal with carbon capture and sequestration.
You get the sense that this country is straining against the leash, eager for a new wave of energy development. There will be excess, stupidity and greed along the way. But it would be simply amazing if, through some set of narrow political gamesmanship, Washington continued to stand in the way of all this.
Thursday, April 29, 2010
Goldman Sachs -- The People Go Above Congress
(c) 2010 F. Bruce Abel
It's gone beyond Congressional hearings, hasn't it? Slowly things get sorted out. Slowly.
It's gone beyond Congressional hearings, hasn't it? Slowly things get sorted out. Slowly.
Wednesday, April 28, 2010
Goldman Sachs -- "Sociopaths"
(c) 2010 F. Bruce Abel
The best comment yet on the Goldman hearings earlier this week, from "KT NY":
(Who else ever started a piece with the word "telling?" Very effective.)
April 28th, 2010 10:51 am
Telling to me was the fact that, although they most certainly had been warned by their attorneys to treat the hearing seriously and the Senators respectfully, the Goldman Sachs crew exuded contempt and smugness from every pore. "Our net worth is higher than yours," they seemed to be saying, "So you're stupid and we win."
What to do about these lunkheads? Clearly, it will not help to explain to them that not all smart people choose to devote their lives to making money: some design the Hadron Collider, identify the gene that causes breast cancer, write symphonies, and even become U.S. Senators. It will not help to explain, because to these guys, competition and its rewards -- status and cash -- are all that matter in life. Period. They're built that way, psychologically, and we're not going to change their minds.
What we can do, however, is recognize that while Wall Street culture -- the Goldman Sachs syndrome -- does in fact add value to our society, by allowing money to move through the system to those who need money to run businesses, that culture must be contained. That's because, as we saw in the Senate hearings yesterday, those who excel at the art of the deal are basically sociopaths, with few moral values and no ethical brakes. Their contributions to society might be analogized to nuclear energy: we build reactors, and the reactors make electricity. Yet those reactors have to be carefully monitored and controlled. If we let them blow up, we all die.
Because of its erroneous, free market ideology -- not to mention the money that it collects from Wall Street -- the Republican Party is incapable of recognizing that letting Wall Street operate without restraints is like building a nuclear reactor in Times Square and yelling "Let 'er rip!" In its own way, the GOP is as blind, and clueless, as the Goldman Sachs traders. That is why regulation is not merely needed, but will occur only if the public starts calling Senators -- like tomorrow -- to make its will known.
There is an election coming up. It's time to let your Senators know that the Era of the Poopy Deal must come to an end.
Globular and Mailer
(first the link to the New York Times article and comments above; too lazy to reformat above the title):
http://community.nytimes.com/comments/www.nytimes.com/2010/04/28/opinion/28dowd.html?scp=3&sq=sociopaths&st=cse
And some good from the Globe & Mail, especially the comments after the article, in today's Business section:
http://www.theglobeandmail.com/globe-investor/markets/markets-blog/the-casino-analogy/article1549918/?cid=art-rail-marketsblog
The best comment yet on the Goldman hearings earlier this week, from "KT NY":
(Who else ever started a piece with the word "telling?" Very effective.)
April 28th, 2010 10:51 am
Telling to me was the fact that, although they most certainly had been warned by their attorneys to treat the hearing seriously and the Senators respectfully, the Goldman Sachs crew exuded contempt and smugness from every pore. "Our net worth is higher than yours," they seemed to be saying, "So you're stupid and we win."
What to do about these lunkheads? Clearly, it will not help to explain to them that not all smart people choose to devote their lives to making money: some design the Hadron Collider, identify the gene that causes breast cancer, write symphonies, and even become U.S. Senators. It will not help to explain, because to these guys, competition and its rewards -- status and cash -- are all that matter in life. Period. They're built that way, psychologically, and we're not going to change their minds.
What we can do, however, is recognize that while Wall Street culture -- the Goldman Sachs syndrome -- does in fact add value to our society, by allowing money to move through the system to those who need money to run businesses, that culture must be contained. That's because, as we saw in the Senate hearings yesterday, those who excel at the art of the deal are basically sociopaths, with few moral values and no ethical brakes. Their contributions to society might be analogized to nuclear energy: we build reactors, and the reactors make electricity. Yet those reactors have to be carefully monitored and controlled. If we let them blow up, we all die.
Because of its erroneous, free market ideology -- not to mention the money that it collects from Wall Street -- the Republican Party is incapable of recognizing that letting Wall Street operate without restraints is like building a nuclear reactor in Times Square and yelling "Let 'er rip!" In its own way, the GOP is as blind, and clueless, as the Goldman Sachs traders. That is why regulation is not merely needed, but will occur only if the public starts calling Senators -- like tomorrow -- to make its will known.
There is an election coming up. It's time to let your Senators know that the Era of the Poopy Deal must come to an end.
Globular and Mailer
(first the link to the New York Times article and comments above; too lazy to reformat above the title):
http://community.nytimes.com/comments/www.nytimes.com/2010/04/28/opinion/28dowd.html?scp=3&sq=sociopaths&st=cse
And some good from the Globe & Mail, especially the comments after the article, in today's Business section:
http://www.theglobeandmail.com/globe-investor/markets/markets-blog/the-casino-analogy/article1549918/?cid=art-rail-marketsblog
Tuesday, April 27, 2010
My Picture, Goldman Sachs and Miscellany
(c) 2010 F. Bruce Abel
The banality of the system was on show yesterday. Ordinary looking monsters. Billions of other people's money. It seemed to me that focusing on the ACA company was a red herring that nobody exposed. They were not the party being deceived. Deutsches Bank was. And that entity was managing money for pension funds and little guys, albeit mainly Europeans.
The banality of the system was on show yesterday. Ordinary looking monsters. Billions of other people's money. It seemed to me that focusing on the ACA company was a red herring that nobody exposed. They were not the party being deceived. Deutsches Bank was. And that entity was managing money for pension funds and little guys, albeit mainly Europeans.
We all have to give our money to others to manage. So there's the "Friday afternoon problem." That is, What if my money manager gets caught up and flummoxed just like every other individual who is not the Goldman Sachs?
I call things "The Friday afternoon problem." Where your advisor just gives up because he wants to play golf. Stops thinking. Who's going to second-guess him? Certainly not the ultimate client.
At the hearings yesterday, it is said, everyone had been "lawyered up." The questions I saw were ridiculous. But still the NYT didn't ridicule the senators.
Oh, and Cramer? His stocks cratered yesterday along with everything else. Of course one of his books says "don't buy right away what I recommend." Wait a few days. So I blew it. Down $2000 in the blink of an eye.
Qty Change Open $ High Change Close $ Current Price Symbol Name Market Value Low Cost Basis Cost per Share P/L $ P/L $ per Share Bracket Sec Type Exp Strike Under
-10 $0.25 SUN 05/22/2010 34.00 C CALL SUNOCO INC $34.00 EXP MAY 22 '10 (24 DAYS) ($250.00) ($262.49) $26.25 $12.49 ($0.01) none Opt May 22 '10 (24 days) $34.00 SUN
300 $0.00 $18.38 $0.38 $18.35 WFT WEATHERFORD INTL LTD F $5,505.00 $18.00 $5,594.52 $18.65 ($89.52) ($0.30) none Eqty
245 $0.00 $0.00 $0.00 $28.89 CINF CINCINNATI FINANCIAL CP $7,078.05 $0.00 $7,358.95 $30.04 ($280.90) ($1.15) none Eqty
200 $0.00 $74.13 $1.40 $73.80 CMI CUMMINS INC $14,760.00 $72.45 $15,020.95 $75.10 ($260.95) ($1.30) none Eqty
500 $0.00 $30.45 ($0.01) $30.23 SUN SUNOCO INC $15,115.00 $30.23 $15,228.95 $30.46 ($113.95) ($0.23) none Eqty
Sub-Total $42,208.05 $42,940.88* -$732.83*
Cash $23,595.98
Total $65,804.03
That's what I was down on my existing positions as of the close of yesterday. In addition I closed out a trade of 200 SPY for a loss for $251. Glad I did that. And closed out a buy/write on 1000 Hershey for a $106.71 loss which had been a good-size ($850) unrealized gain Friday afternoon.
4/27/2010 Sell 200 SPY S P D R S&P 500 ETF TR EXPIRING 01/22/2118 $120.77 $24,144.64 $8.95 4/30/2010
Oh, and Cramer? His stocks cratered yesterday along with everything else. Of course one of his books says "don't buy right away what I recommend." Wait a few days. So I blew it. Down $2000 in the blink of an eye.
Qty Change Open $ High Change Close $ Current Price Symbol Name Market Value Low Cost Basis Cost per Share P/L $ P/L $ per Share Bracket Sec Type Exp Strike Under
-10 $0.25 SUN 05/22/2010 34.00 C CALL SUNOCO INC $34.00 EXP MAY 22 '10 (24 DAYS) ($250.00) ($262.49) $26.25 $12.49 ($0.01) none Opt May 22 '10 (24 days) $34.00 SUN
300 $0.00 $18.38 $0.38 $18.35 WFT WEATHERFORD INTL LTD F $5,505.00 $18.00 $5,594.52 $18.65 ($89.52) ($0.30) none Eqty
245 $0.00 $0.00 $0.00 $28.89 CINF CINCINNATI FINANCIAL CP $7,078.05 $0.00 $7,358.95 $30.04 ($280.90) ($1.15) none Eqty
200 $0.00 $74.13 $1.40 $73.80 CMI CUMMINS INC $14,760.00 $72.45 $15,020.95 $75.10 ($260.95) ($1.30) none Eqty
500 $0.00 $30.45 ($0.01) $30.23 SUN SUNOCO INC $15,115.00 $30.23 $15,228.95 $30.46 ($113.95) ($0.23) none Eqty
Sub-Total $42,208.05 $42,940.88* -$732.83*
Cash $23,595.98
Total $65,804.03
That's what I was down on my existing positions as of the close of yesterday. In addition I closed out a trade of 200 SPY for a loss for $251. Glad I did that. And closed out a buy/write on 1000 Hershey for a $106.71 loss which had been a good-size ($850) unrealized gain Friday afternoon.
4/27/2010 Sell 200 SPY S P D R S&P 500 ETF TR EXPIRING 01/22/2118 $120.77 $24,144.64 $8.95 4/30/2010
4/27/2010 Sell 1,000 HSY HERSHEY COMPANY $47.37 $47,360.24 $8.95 4/30/2010
4/27/2010 Buy to Close 10 HSY 06/19/2010 50.00 C CALL THE HERSHEY COMPAN$50 EXP 06/19/10 $0.66 ($667.50) $7.50 4/28/2010
4/27/2010 Buy 200 WFT WEATHERFORD INTL LTD F $18.62 ($3,729.77) $5.97 4/30/2010
4/27/2010 Buy 100 WFT WEATHERFORD INTL LTD F $18.62 ($1,864.75) $2.98 4/30/2010
4/27/2010 Buy 200 CMI CUMMINS INC $75.06 ($15,020.95) $8.95 4/30/2010
4/26/2010 Buy 245 CINF CINCINNATI FINANCIAL CP $30.00 ($7,358.95) $8.95 4/29/2010
4/26/2010 Buy 200 SPY S P D R S&P 500 ETF TR EXPIRING 01/22/2118 $121.94 ($24,396.95) $8.95 4/29/2010
4/26/2010 Sell 500 CAT CATERPILLAR INC $72.43 $36,205.93 $8.95 4/29/2010
4/26/2010 Buy 500 CAT CATERPILLAR INC $72.45 ($36,233.95) $8.95 4/29/2010
These are not official records and will not be reported to the IRS. Please use this information only as a tool to assist your financial management. Always refer to your Schwab statements, trade confirmations and/or IRS Form 1099 for a complete and accurate record of your transactions and holdings.
Exported from StreetSmart.com™ for account XXXX-xxxx on 4/28/2010 at 9:42 EDT
SPY 200 $24,396.95 $24,145.05 ($251.90) 04-26-10 - N/A 04-27-10 - 09:52:15 ET
HSY 06/19/2010 50.00 C 10 $667.50 $402.49 ($265.01) 04-22-10 - N/A 04-27-10 - 09:55:23 ET
HSY 1000 $47,418.95 $47,360.24 ($58.71) 04-22-10 - N/A 04-27-10 - 09:55:24 ET
Total $72,483.40 $71,907.78 ($575.62)
on 4/27/2010 at 9:56 EDT
Cramer -- Just Brilliant Last Night
(c) 2010 F. Bruce Abel
OK, so I stopped TIVOing and stopped watching Cramer for the last month or so. Went over to Fast Money guys, whom I like a lot. (Remember, complexity is your friend in trading. It keeps your eye off the ball -- so to speak.)
So Eunie was going to be out until 8 pm or so (she hates the clatter of Cramer and hates the thought that I might be losing a lot of money). So I watched Cramer last night. Awesome! A seminal segment. Or is it just me?
ed note: I just went onto No Hot Air,
http://nohotair.typepad.co.uk/no_hot_air/
and I am reminded that Cramer has been awful when predicting natural gas. So maybe he's not so good on oil either.
Anyway, herein his monumental call on oil stocks and also his withering take on why the analysts are not doing their jobs (they don't read his books is their basic fault).
Here is the beginning of Cramer's verbatim comments for the latter segment. For the former, scroll down to the very bottom of my blog and click on the lisk to "the best of the best" or whatever.
Jim: Surprise! Surprise! Over and over again people have been shocked, absolutely shocked by positive earnings surprises… that should not have been surprising to anyone… hence, my desire to give you a surprise party… in honor of these bogus surprises… they have become the theme of this earnings season… and we saw it play out again today with the surprise of Caterpillar… and the surprise of Whirlpool… two companies that baffled market players with their strength when they reported… standouts on a blah day when the Dow gained less than a point… the S&P was down about a half a percent… just as Netflix, Deckers, and Chipotle shocked, surprised and amazed so many investors with the greatness of their quarters last week...
The only thing surprising here besides my full dressed cake explosion… instead of a more scantily clad, perhaps even a bare-chested bust out… is that anyone was surprised by these fabulous numbers… in fact, they were all predictable… and all easy to see from a mile away if you are looking from the friendly confines of Cramerica… yet these quarters astonished so many people… that is how you get a 10 point single day move in a stock like Whirlpool… I mean a washer and dryer company, this is not no biotech… because some key institutional investors, including short selling hedge funds, just did not see the strength coming… if you watch the surprise party, it all seems very dated to me… the surprise, I mean come on, shocker… and you probably saw the good news coming if you follow the show.
So how come so many investors were genuinely blindsided? How is that possible? Did they just like the movie “Blindside” so much that they decided that blindside would make a good investing strategy? Even if it was a coining, grading cinema… well, anyway… no, no, the institutional investors who were bewildered by Netflix… bewildered by Deckers… bewildered by Chipotle… hey, bewildered by Caterpillar… and bewildered by Whirlpool… well, wait a second, all have one thing in common… they believe the Wall Street analysts who write and squawk on these stocks… and when things got better for the companies during the quarter, the earnings estimates proffered by those analysts were frozen in time from the last quarterly update.
You see these surprises were effectively created by the analysts because they have for the most part, abdicated and advocated their chief responsibility… and stopped entirely trying to calculate or gain estimates intra-quarter… that is not the way it was when I was running my half a billion dollars… uh-uh, see the old days before the adoption of regulation FD, there would have been a slew of repeated intra-quarter estimate bumps on these names… which would have eliminated the blindside surprise factor… but now the analysts have become static and predictable… all they do is extrapolate the last quarter once, right after it reports… and do not take into account anything that has happened in the last three months… that is the root of the surprise factor and the bogus surprise party that I am throwing… that is what propelled these stocks higher.
That is how Caterpillar and Whirlpool took so many people by surprise today… because the people are supposed to be trying to help you stay ahead of the game, weren’t paying attention to what has been happening over the last 3 months… the lift in the consumer, which of course benefited Netflix… Deckers, Chipotle… and Whirlpool… or the obvious return of the emerging markets that helped Caterpillar… were you really surprised? No, because you are not an analyst… these developments were clear to everyone but the analysts who is supposed to tell you what is going to do well… they are paid millions of dollars to do this but they cannot seem to model for the changes that are occurring… positive changes in the worldwide domestic economies… so they just wait for the companies to report before they update their numbers… they listen to their conference call and then they do a spreadsheet… that is all they do now.
And what is so crazy to me is that this almost fictional surprise based on sloth and paralysis, keeps happening over and over again… it keeps working… here look, take Whirlpool, for months now this company… for so many months this company has been telling anyone who would listen that they are really seeing the benefits of the Maytag acquisition… as well as incentives to buy new energy efficient washers and dryers… plus Brazil is a huge market for them… it has been since 1980.. .how could this stock have almost 10 days to cover a short ratio? How could someone bet against this? Given how often Whirlpool told you that things were going great guns… and that is how you rally 10 points when you report… short squeezes by those un, using the previously outdated analysts numbers that do not take into account the nation and the worlds changes since Whirlpool reported last.
Okay, how about Caterpillar? Which has told you again, and again, and again, that orders are coming back globally… and they are a global company… at the same time the domestic market has been so-so.. which is why the analysts seem to be keep missing the big picture… they are like domestic analysts… Caterpillar is a gigantic emerging market play… and emerging markets are incredibly strong… how can people be surprised at the Premier earth moving company is putting up huge numbers? Also, how many times did investors have to hear that you have to buy these stocks… on this show we have been saying it… when the earnings blossom? But before the revenue growth kicks in… people are saying, oh no until I see sales I am not buying… okay, now you have saw your sales… look at what price you had to pay… now, you see what happens when sales accelerate and you are just… well, let’s just say that you almost missed it… you got hurt if you waited for the all clear… if you are waiting for the bell to go off? You are in the wrong game…. go into boxing... unlike the analysts who had to anticipate the turn, you had to jump the gun.
Okay, then there is Deckers… this is one of my plus $100 stocks that I said will not quit… it has now entered the parabolic phase .. in part because the shorts pressed their bets and mistakenly believed that Ugg’s must have cooled off… maybe, look some day they will… but this is a $2b company with a potential Nike like franchise… Nike has a $35b market cap.
How about the Chipotle? It is worth talking about… it has the domestic model of good food… that is right, food that actually does not kill you for reasonable prices… I bet you that that is going to play perfectly overseas… they have a new kind of store, they call it the Model A.. it fits into all of those openings in the mall that are not doing well.. they used to just be in new malls… now next month they are opening in London… Europe soon after… this will be so easy for them because do you know what they do? They source food locally… they will become the first American company to not be an ugly American… they will be using French food… again, it is only $4.5b company… never mind McDonald’s which I own for ActionAlertsPlus.com, my charitable trust, is a $76b company… once again, polymeric move courtesy of the frantic short coverings by hedge funds who simply refused to believe how good this story is.. and you have to be cognizant of how Europe and possibly Asia can fuel international growth… even as there are many more places to put this 1,000 store chain in America without cannibalization… the analysts kept their numbers static… the short sellers believed it.
And finally there is one of my absolutely favorite plays, Netflix… which has the best subscriber growth of any… this stock is now up 30 points from last week… you know, I have got to tell you, there are myriad portfolio managers that love subscriber models for incredibly consistent cash flow and easy does it renewals… again this is only a $5.5b company… it could double in size at a rather rapid pace… no wonder this stock is galloping.
These moves, these so called surprises, were telegraphed in advance… they were telephoned for heaven’s sake… Lady GaGa/Beyonce style… but the analysts were not listening… the surprises? They are surprised because the analysts have allowed themselves to be surprised… I call them sanction surprises… we on Mad Money do the opposite… it is why these Cramer fave situations like Whirlpool, Netflix, Chipotle, Deckers and Cat might elude the incredibly overpaid Wall Street researchers… but they should have been anything but surprising to you at home.
Here is the bottom line…
▼ ▼ ▼ ▼ ▼
Now that you know what is behind the mystifying fact that anyone is mystified by these quarters, well, maybe you can anticipate better… analysts who do not update their numbers during the quarter… and do not nail the top down improvements in the consumer and emerging markets with the franchises that they cover, are the fodder for the moves in a Whirlpool, or a Deckers, or a Caterpillar, or a Netflix, or a Chipotle… the big non-surprise surprise party, no wonder these big money managers cannot beat you… they are relying on the people who are the most surprised… so they get blindsided... I do not want that happening to you.
OK, so I stopped TIVOing and stopped watching Cramer for the last month or so. Went over to Fast Money guys, whom I like a lot. (Remember, complexity is your friend in trading. It keeps your eye off the ball -- so to speak.)
So Eunie was going to be out until 8 pm or so (she hates the clatter of Cramer and hates the thought that I might be losing a lot of money). So I watched Cramer last night. Awesome! A seminal segment. Or is it just me?
ed note: I just went onto No Hot Air,
http://nohotair.typepad.co.uk/no_hot_air/
and I am reminded that Cramer has been awful when predicting natural gas. So maybe he's not so good on oil either.
Anyway, herein his monumental call on oil stocks and also his withering take on why the analysts are not doing their jobs (they don't read his books is their basic fault).
Here is the beginning of Cramer's verbatim comments for the latter segment. For the former, scroll down to the very bottom of my blog and click on the lisk to "the best of the best" or whatever.
Jim: Surprise! Surprise! Over and over again people have been shocked, absolutely shocked by positive earnings surprises… that should not have been surprising to anyone… hence, my desire to give you a surprise party… in honor of these bogus surprises… they have become the theme of this earnings season… and we saw it play out again today with the surprise of Caterpillar… and the surprise of Whirlpool… two companies that baffled market players with their strength when they reported… standouts on a blah day when the Dow gained less than a point… the S&P was down about a half a percent… just as Netflix, Deckers, and Chipotle shocked, surprised and amazed so many investors with the greatness of their quarters last week...
The only thing surprising here besides my full dressed cake explosion… instead of a more scantily clad, perhaps even a bare-chested bust out… is that anyone was surprised by these fabulous numbers… in fact, they were all predictable… and all easy to see from a mile away if you are looking from the friendly confines of Cramerica… yet these quarters astonished so many people… that is how you get a 10 point single day move in a stock like Whirlpool… I mean a washer and dryer company, this is not no biotech… because some key institutional investors, including short selling hedge funds, just did not see the strength coming… if you watch the surprise party, it all seems very dated to me… the surprise, I mean come on, shocker… and you probably saw the good news coming if you follow the show.
So how come so many investors were genuinely blindsided? How is that possible? Did they just like the movie “Blindside” so much that they decided that blindside would make a good investing strategy? Even if it was a coining, grading cinema… well, anyway… no, no, the institutional investors who were bewildered by Netflix… bewildered by Deckers… bewildered by Chipotle… hey, bewildered by Caterpillar… and bewildered by Whirlpool… well, wait a second, all have one thing in common… they believe the Wall Street analysts who write and squawk on these stocks… and when things got better for the companies during the quarter, the earnings estimates proffered by those analysts were frozen in time from the last quarterly update.
You see these surprises were effectively created by the analysts because they have for the most part, abdicated and advocated their chief responsibility… and stopped entirely trying to calculate or gain estimates intra-quarter… that is not the way it was when I was running my half a billion dollars… uh-uh, see the old days before the adoption of regulation FD, there would have been a slew of repeated intra-quarter estimate bumps on these names… which would have eliminated the blindside surprise factor… but now the analysts have become static and predictable… all they do is extrapolate the last quarter once, right after it reports… and do not take into account anything that has happened in the last three months… that is the root of the surprise factor and the bogus surprise party that I am throwing… that is what propelled these stocks higher.
That is how Caterpillar and Whirlpool took so many people by surprise today… because the people are supposed to be trying to help you stay ahead of the game, weren’t paying attention to what has been happening over the last 3 months… the lift in the consumer, which of course benefited Netflix… Deckers, Chipotle… and Whirlpool… or the obvious return of the emerging markets that helped Caterpillar… were you really surprised? No, because you are not an analyst… these developments were clear to everyone but the analysts who is supposed to tell you what is going to do well… they are paid millions of dollars to do this but they cannot seem to model for the changes that are occurring… positive changes in the worldwide domestic economies… so they just wait for the companies to report before they update their numbers… they listen to their conference call and then they do a spreadsheet… that is all they do now.
And what is so crazy to me is that this almost fictional surprise based on sloth and paralysis, keeps happening over and over again… it keeps working… here look, take Whirlpool, for months now this company… for so many months this company has been telling anyone who would listen that they are really seeing the benefits of the Maytag acquisition… as well as incentives to buy new energy efficient washers and dryers… plus Brazil is a huge market for them… it has been since 1980.. .how could this stock have almost 10 days to cover a short ratio? How could someone bet against this? Given how often Whirlpool told you that things were going great guns… and that is how you rally 10 points when you report… short squeezes by those un, using the previously outdated analysts numbers that do not take into account the nation and the worlds changes since Whirlpool reported last.
Okay, how about Caterpillar? Which has told you again, and again, and again, that orders are coming back globally… and they are a global company… at the same time the domestic market has been so-so.. which is why the analysts seem to be keep missing the big picture… they are like domestic analysts… Caterpillar is a gigantic emerging market play… and emerging markets are incredibly strong… how can people be surprised at the Premier earth moving company is putting up huge numbers? Also, how many times did investors have to hear that you have to buy these stocks… on this show we have been saying it… when the earnings blossom? But before the revenue growth kicks in… people are saying, oh no until I see sales I am not buying… okay, now you have saw your sales… look at what price you had to pay… now, you see what happens when sales accelerate and you are just… well, let’s just say that you almost missed it… you got hurt if you waited for the all clear… if you are waiting for the bell to go off? You are in the wrong game…. go into boxing... unlike the analysts who had to anticipate the turn, you had to jump the gun.
Okay, then there is Deckers… this is one of my plus $100 stocks that I said will not quit… it has now entered the parabolic phase .. in part because the shorts pressed their bets and mistakenly believed that Ugg’s must have cooled off… maybe, look some day they will… but this is a $2b company with a potential Nike like franchise… Nike has a $35b market cap.
How about the Chipotle? It is worth talking about… it has the domestic model of good food… that is right, food that actually does not kill you for reasonable prices… I bet you that that is going to play perfectly overseas… they have a new kind of store, they call it the Model A.. it fits into all of those openings in the mall that are not doing well.. they used to just be in new malls… now next month they are opening in London… Europe soon after… this will be so easy for them because do you know what they do? They source food locally… they will become the first American company to not be an ugly American… they will be using French food… again, it is only $4.5b company… never mind McDonald’s which I own for ActionAlertsPlus.com, my charitable trust, is a $76b company… once again, polymeric move courtesy of the frantic short coverings by hedge funds who simply refused to believe how good this story is.. and you have to be cognizant of how Europe and possibly Asia can fuel international growth… even as there are many more places to put this 1,000 store chain in America without cannibalization… the analysts kept their numbers static… the short sellers believed it.
And finally there is one of my absolutely favorite plays, Netflix… which has the best subscriber growth of any… this stock is now up 30 points from last week… you know, I have got to tell you, there are myriad portfolio managers that love subscriber models for incredibly consistent cash flow and easy does it renewals… again this is only a $5.5b company… it could double in size at a rather rapid pace… no wonder this stock is galloping.
These moves, these so called surprises, were telegraphed in advance… they were telephoned for heaven’s sake… Lady GaGa/Beyonce style… but the analysts were not listening… the surprises? They are surprised because the analysts have allowed themselves to be surprised… I call them sanction surprises… we on Mad Money do the opposite… it is why these Cramer fave situations like Whirlpool, Netflix, Chipotle, Deckers and Cat might elude the incredibly overpaid Wall Street researchers… but they should have been anything but surprising to you at home.
Here is the bottom line…
▼ ▼ ▼ ▼ ▼
Now that you know what is behind the mystifying fact that anyone is mystified by these quarters, well, maybe you can anticipate better… analysts who do not update their numbers during the quarter… and do not nail the top down improvements in the consumer and emerging markets with the franchises that they cover, are the fodder for the moves in a Whirlpool, or a Deckers, or a Caterpillar, or a Netflix, or a Chipotle… the big non-surprise surprise party, no wonder these big money managers cannot beat you… they are relying on the people who are the most surprised… so they get blindsided... I do not want that happening to you.
What Can Brown(-Kaufman) Do For You?
(c) 2010 F. Bruce Abel
How can people legislate in the dark? Call the White House and seek an up or down vote now.
Date: Monday, April 26, 2010 8:56 PM
From: The Baseline Scenario
To:
Subject: The Baseline Scenario
The Baseline Scenario
When Will Senator Dodd Start Taking Yes For An Answer?
Posted: 25 Apr 2010 06:12 PM PDTBy Simon Johnson, co-author of 13 Bankers
Senator Chris Dodd is a tactical legislative genius – keep this clearly in your mind during the days ahead. In terms of maneuvering for the outcomes he seeks, managing the votes, and controlling the floor, you have rarely seen his equal. Senator Dodd wants some financial reform – enough to declare victory – but not so much as to seriously undermine the prevalence of megabanks on Wall Street. You can take whatever view you like on his motivation – but Senator Dodd himself is quite open about his thinking and intentions.Given the mounting pressure from many sides – including Federal Reserve Bank presidents – to implement significantly more reform (see also David Warsh’s Sunday evening assessment), for example using some version of the Brown-Kaufman SAFE banking act, how exactly will Senator Dodd prevail?
1) He knows that the Republican leadership will mount a disinformation campaign, trying to muddy the waters by claiming that the Dodd bill “institutionalizes bailouts”. This top-down Republican line is complete and deliberate misrepresentation – designed purely to prevent real reform. Every time it is repeated, Senator Dodd’s position becomes stronger because people who really want reform need to rally to his defend his approach.
2) The Republican attacks also justify the Democratic leadership and various pro-reform groups telling people: Don’t confuse the message. Everyone in the center and on the left is lobbied to emphasize that Senator Dodd’s bill will completely “end too big to fail” – if you deviate from this line, you will be accused of falling in with Mitch McConnell’s dangerous views. Expect this pressure to intensify in coming days – requests for responsible and transparent debate on policy options will be drowned out and pushed aside by the pressure for conformity (underpinned by the desire not to undermine Wall Street campaign contributions too much).
3) As the White House pushes back against the Republicans, this will further strengthen Senator Dodd – he is the congressional standard bearer, after all. And everyone knows that he needs 60 senators on his side in order to prevail, so some weakening of the bill is presumed inevitable and must be accepted in the reasonable name of making some progress.But this is where the pure genius of Senator Dodd enters the equation – with an audacity that makes you whistle with appreciation for the art (although not the substance).The presumption is that Senator Dodd is negotiating with one or more Republicans who are the easiest to bring on board. This would make sense if Senator Dodd wanted the strongest bill possible.
Senator Chuck Grassley voted for strong derivatives reform in the Agriculture Committee; Senator Olympia Snowe also seems on board with that agenda.
Senators John Thune and Bob Corker are saying in public that Republicans want to vote for reform (although it’s a good question what this means exactly).
Senator Jim Bunning voted with Senator Bernie Sanders in the Budget committee – on what is being seen as a test vote on breaking up banks (Sanders’s press release; Huffington Post coverage).
Senator Scott Brown is wavering in broad daylight.
Senator George Voinovich is retiring and rumored to be flexible on financial reform issues. But Senator Dodd is closeted in negotiations with Senator Richard Shelby – who stands for the most pro-Wall Street bill possible.The goal is apparently not to give up as little as possible and still get a bill. The goal is to bring as many supporters of Wall Street as possible on board with the legislation, at the same time as framing the issues so the pro-reform camp looks bad when it presses for more.
As we head into what is likely to be the decisive week, Senator Dodd controls the clock, can determine what is debated on the Senate floor, and – whenever he feels hard pressed – remind everyone to toe his line or fear the extreme Republicans. At this point, only the White House can bring sufficient pressure for the Brown-Kaufman bill to get an up-or-down vote; the odds are against this being what the White House really wants to do. But keep calling the White House and the Senate Democratic leadership.
How can people legislate in the dark? Call the White House and seek an up or down vote now.
Date: Monday, April 26, 2010 8:56 PM
From: The Baseline Scenario
To:
Subject: The Baseline Scenario
The Baseline Scenario
When Will Senator Dodd Start Taking Yes For An Answer?
Posted: 25 Apr 2010 06:12 PM PDTBy Simon Johnson, co-author of 13 Bankers
Senator Chris Dodd is a tactical legislative genius – keep this clearly in your mind during the days ahead. In terms of maneuvering for the outcomes he seeks, managing the votes, and controlling the floor, you have rarely seen his equal. Senator Dodd wants some financial reform – enough to declare victory – but not so much as to seriously undermine the prevalence of megabanks on Wall Street. You can take whatever view you like on his motivation – but Senator Dodd himself is quite open about his thinking and intentions.Given the mounting pressure from many sides – including Federal Reserve Bank presidents – to implement significantly more reform (see also David Warsh’s Sunday evening assessment), for example using some version of the Brown-Kaufman SAFE banking act, how exactly will Senator Dodd prevail?
1) He knows that the Republican leadership will mount a disinformation campaign, trying to muddy the waters by claiming that the Dodd bill “institutionalizes bailouts”. This top-down Republican line is complete and deliberate misrepresentation – designed purely to prevent real reform. Every time it is repeated, Senator Dodd’s position becomes stronger because people who really want reform need to rally to his defend his approach.
2) The Republican attacks also justify the Democratic leadership and various pro-reform groups telling people: Don’t confuse the message. Everyone in the center and on the left is lobbied to emphasize that Senator Dodd’s bill will completely “end too big to fail” – if you deviate from this line, you will be accused of falling in with Mitch McConnell’s dangerous views. Expect this pressure to intensify in coming days – requests for responsible and transparent debate on policy options will be drowned out and pushed aside by the pressure for conformity (underpinned by the desire not to undermine Wall Street campaign contributions too much).
3) As the White House pushes back against the Republicans, this will further strengthen Senator Dodd – he is the congressional standard bearer, after all. And everyone knows that he needs 60 senators on his side in order to prevail, so some weakening of the bill is presumed inevitable and must be accepted in the reasonable name of making some progress.But this is where the pure genius of Senator Dodd enters the equation – with an audacity that makes you whistle with appreciation for the art (although not the substance).The presumption is that Senator Dodd is negotiating with one or more Republicans who are the easiest to bring on board. This would make sense if Senator Dodd wanted the strongest bill possible.
Senator Chuck Grassley voted for strong derivatives reform in the Agriculture Committee; Senator Olympia Snowe also seems on board with that agenda.
Senators John Thune and Bob Corker are saying in public that Republicans want to vote for reform (although it’s a good question what this means exactly).
Senator Jim Bunning voted with Senator Bernie Sanders in the Budget committee – on what is being seen as a test vote on breaking up banks (Sanders’s press release; Huffington Post coverage).
Senator Scott Brown is wavering in broad daylight.
Senator George Voinovich is retiring and rumored to be flexible on financial reform issues. But Senator Dodd is closeted in negotiations with Senator Richard Shelby – who stands for the most pro-Wall Street bill possible.The goal is apparently not to give up as little as possible and still get a bill. The goal is to bring as many supporters of Wall Street as possible on board with the legislation, at the same time as framing the issues so the pro-reform camp looks bad when it presses for more.
As we head into what is likely to be the decisive week, Senator Dodd controls the clock, can determine what is debated on the Senate floor, and – whenever he feels hard pressed – remind everyone to toe his line or fear the extreme Republicans. At this point, only the White House can bring sufficient pressure for the Brown-Kaufman bill to get an up-or-down vote; the odds are against this being what the White House really wants to do. But keep calling the White House and the Senate Democratic leadership.
Monday, April 26, 2010
RX From the Cursing Mommy
(c) 2010 F. Bruce Abel
The above piece "The Cursing Mommy," by Ian Frazier, appeared in last week's New Yorker. It is the funniest.
y
Rich -- Goldman Sachs
(c) 2010 F. Bruce Abel
Best of the weekend:
http://dealbook.blogs.nytimes.com/2010/04/26/rich-fight-on-goldman-sachs/?scp=1&sq=rich%20goldman&st=cse
Best of the weekend:
http://dealbook.blogs.nytimes.com/2010/04/26/rich-fight-on-goldman-sachs/?scp=1&sq=rich%20goldman&st=cse
Thursday, April 22, 2010
21 -- Better Than the Movie; 12 -- Better Than All
(c) 2010 F. Bruce Abel
Watch this trailer of "21." It's better than the movie, which we saw last night.
When her arms are crossed behind her chair, the table is hot. Bet big.
http://www.youtube.com/watch?v=PsK1c9ZBpuw
The book was good, the trailer is good.
Last week we watched "12." Best movie of all, (a Russian movie with subtitles, nominated for an Oscar), especially if you've been to Moscow and Tbilisi and have followed the past 20 years over there. Modelled on "12 Angry Men," this is better because in Russia there is little political correctness to blur the lines.
Watch this trailer of "21." It's better than the movie, which we saw last night.
When her arms are crossed behind her chair, the table is hot. Bet big.
http://www.youtube.com/watch?v=PsK1c9ZBpuw
The book was good, the trailer is good.
Last week we watched "12." Best movie of all, (a Russian movie with subtitles, nominated for an Oscar), especially if you've been to Moscow and Tbilisi and have followed the past 20 years over there. Modelled on "12 Angry Men," this is better because in Russia there is little political correctness to blur the lines.
Should There be (As There is Now) a Different Rule for Institutional Investors?
(c) 2010 F. Bruce Abel
My previous posts on this topic pointed out that banks and other "institutional investors" are just individuals running a lot of money. The corollary is that institutional money is just a collection of money entrusted by individuals, and corporations. Corporations are controlled by individuals, or other corporations. At the beginning there were ... are... er, individuals.
In this day and age a few Paulsons and Goldman Sachs vice presidents can blow up the system. So, remove from the Blue Sky Laws and the federal securities laws the exemptions for "institutional investors." My money manager isn't as smart as your money manager. Or visa versa. Either way, it isn't a good situation. Get rid of the "institutional investor" exemption.
My previous posts on this topic pointed out that banks and other "institutional investors" are just individuals running a lot of money. The corollary is that institutional money is just a collection of money entrusted by individuals, and corporations. Corporations are controlled by individuals, or other corporations. At the beginning there were ... are... er, individuals.
In this day and age a few Paulsons and Goldman Sachs vice presidents can blow up the system. So, remove from the Blue Sky Laws and the federal securities laws the exemptions for "institutional investors." My money manager isn't as smart as your money manager. Or visa versa. Either way, it isn't a good situation. Get rid of the "institutional investor" exemption.
Tuesday, April 20, 2010
Cramer Last Night
(c) 2010 F. Bruce Abel
Cramer was unable to convince 7th graders that Wall Street was worth it. Very sad. Then to say the answer to the salvation of Wall Street is "dividends." Pretty pathetic.
Cramer was unable to convince 7th graders that Wall Street was worth it. Very sad. Then to say the answer to the salvation of Wall Street is "dividends." Pretty pathetic.
Oh Oh!
(c) 2010 F. Bruce Abel
Of course it isn't easy.
This from Simon Johnson and one of his contributors:
The Baseline Scenario
(There are many valuable links within this piece which, at the moment, I am not able to reproduce easily; probably you can go to baselinescenerio.com and recreate them. One of them is here, though, and is probably worth 1/2 hour study:
http://www.marketoracle.co.uk/Article17403.html )
--------------------------------------------------------------------------------
The Discount Rate Mismatch
Posted: 19 Apr 2010 12:36 PM PDT
. . . or, how finance is like quantum mechanics.
This guest post is contributed by StatsGuy, an occasional commenter and contributor to this blog.
Many pundits like to discuss the issue of Maturities Mismatch – that banks borrow short (at low interest), lend long (at higher interest), take the profit and (allegedly) absorb the risk. We often hear talk about how the Maturities Mismatch is integrally linked to liquidity risk – the sometimes self-fulfilling threat of bank runs – which the FDIC is designed to fight. Rarely if ever do we see anyone making the connection to the Discount Rate Mismatch . . . In fact you’ve probably never even heard of it, and neither have I.
What is the Discount Rate Mismatch?
It is the difference between the risk-free return on investment that investors demand, and the risk-free return on investment that can be generated by real world investments. And by investors, I do not just mean individual retail investors or hedge funds. I also mean retirement accounts and state pension funds as well, which rely on massive 8% projected returns in order to avoid officially recognizing massive fiscal gaps between their obligations and funding requirements.
It has been well documented that the existence of these gaps implicitly forces state and municipal retirement agencies to engage in risky investments to hit target asset appreciation goals. This strategy sometimes works. And, sometimes, it does not – as Orange County well remembers.
What drives the Discount Rate Mismatch?
Many things drive it – including behavioral and cultural factors that deter savings and encourage short term time horizons – but it’s worth noting that it’s built into modern institutions. Recently, I helped assemble a couple business plans, and was (again) reminded of the fact that standard net-present-value calculations use a 5% or 6% discount rate. That’s a real rate (which translates into a 7%-8% nominal rate given typical 2% inflation assumptions).
What does this mean? Even after controlling for inflation, getting $100 next year is worth only $94 this year, and the value of $100 in thirty years (controlling for inflation) is a mere $15.6 dollars today. Of course, these calculations extend beyond money. The value of 100 megawatts of electricity in 30 years is only 15.6 megawatts today. The value of 100 lives lost in 30 years (holding age constant) is equal to only 15.6 lives today. Wow. Future life is cheap!
Yet that leaves a conundrum – with such dramatic needs for long term investments, how is it that my savings account is paying essentially 0% interest?
How does the Discount Rate Mismatch relate to Maturities Mismatch?
Let’s imagine a society where everyone demands 6% real returns before committing money to an investment, but society really needs some long term investments – things like the Hoover dam or the Golden Gate Bridge that pay out over 80 years. Let’s say these investments are truly risk free, that there’s a lot of money sitting in bank accounts unused, and that the broader economy has lots of unused productive capacity (e.g. low capacity utilization). Why is it unused? Because many people, given a choice between an illiquid investment with 3% real return and holding liquid cash, would rather hold liquid cash. That liquidity offers insurance against unforeseen needs (like losing a job, or a health expense). But if that cash sits in bank deposits, it takes a lot of money out of circulation, and that can cause problems with things like the price level. That’s where the banks come in.
If I were to ask you where the money in your savings deposit account is, you might say at the bank. That is not quite right. In truth, your money is in several places simultaneously. In this sense, finance is like quantum mechanics. Money is like Schrodinger’s cat – you never know where it is until you actually observe it. (And if everyone tries to observe their money at the same time, that’s called a bank run.)
But how can money be in multiple places at the same time? Simple – because you think you have the money, the bank agrees, and so does everyone else – and since everyone believes it, it’s true. The money you deposit is lent out, then deposited by borrowers, then lent out again – many times over until it eventually sits in vault cash or on deposit with the reserve or in your pocket. We called this fractional reserve banking, and there used to be a limit on how far this cycle could go (the reserve ratio), but this limit was rendered worthless by technological innovations like sweeping, and Bernanke recently hinted at getting rid of it altogether.
By pooling deposits and making loans, banks “borrow” from deposits at 0% and lend it for 3%, thus they make a profit even though the social discount rate (the rate a retail investor would charge for giving up their liquidity for a long period of time) is 6%. That’s because banks care primarily about the spread (sometimes known as the yield curve). Recently, the yield curve was as sharp as it’s ever been.
By engaging in inter-temporal arbitrage, banks allow society to continue to make investments even during periods of high discount rates – at least for a time. Banks essentially create temporary money to make investments without savings. So long as money is continually created, savings are not necessary to sustain investment – credit supplants savings. Citizens don’t need to buy municipal bonds or pay taxes to support public infrastructure – the banks can.
To the uneducated masses, replacing savings with credit may sound a bit frightening, but economists can demonstrate – mathematically – that this credit-based money system is far more efficient than injecting money through the crude process of “printing” and government spending. That’s because endogenous money creation is decentralized – anyone with an opportunity and willingness to take risks (and collateral) can (theoretically) get credit to fund an investment. This, presumably, is why Larry Summers is so infatuated with the credit system, and why Obama argues that credit – not money – is the lifeblood of a modern economy.
Astute readers have probably sensed some danger in the system described above. For example:
Doesn’t credit dependency to sustain investment give banks a lot of power?
If credit creation by banks is replacing cash printing by government, doesn’t this have distributional consequences?
Isn’t credit fueled, leveraged investment rather unstable?
Doesn’t this system punish cash-based savers? If banks no longer have a reserve requirement, then why should they pay anything for deposits? (Hint – they don’t.)
Doesn’t all of this mean that the only real limit on lending right now is capital-asset ratios, and willingness to absorb risk? What if weak regulation and financial innovation allow evasion of capital-asset ratios, and banks are not adequately pricing risk for any number of reasons (TBTF, agency problems, bad math, etc.)?
Yes, well, those are all valid concerns. But if there’s ONE THING we should have learned in the past 18 months, it’s that we the people are a lot less courageous when we’re facing unemployment, impoverished retirement, and foreclosure. It’s easy to curse Goldman Sachs and the credit-breathing financial dragon of Wall-Street, but what would we do without them when most people would rather consume or hold liquid cash than make investments in the future? Consider:
The huge level of debt means that if nominal GDP growth fails to hit targets, the system may collapse spectacularly.
The Discount Rate Mismatch problem is real – without relying on credit, how do we fix it?
Without the certainty of anticipated consumption, what will drive new investment? With the savings glut in countries like Japan, what will sustain global demand if the US decides to start saving more?
If our under-funded pension and retirement funds can’t hit their 8% returns, how do they meet obligations (especially when those obligations are indexed to inflation but not indexed to life expectancy or medical costs)? How do we cover the federal debt if tax revenues fall?
Make no mistake – until we solve the latter set of problems, we are stuck with the credit based system. Banks know this too, and they hope very much that we lack the political will to do what is necessary to fix our structural problems. That’s why any talk of financial reform rings hollow unless it’s accompanied by serious proposals to fix the discount rate mismatch problem and deal with unfunded obligations.
But maybe – if we’re lucky – we’ll get a modern day Pecora who will haul Lloyd Blankfein to the witness stand, and taunt him till he breaks. Imagine, for a moment, Mr. Blankfein losing his cool while ranting in Jack Nicholson’s voice . . .
“You want the truth? You can’t handle the truth. Son, we live in a country with an investment gap. And that gap needs to be filled by men with money. Who’s gonna do it? You? You, Middle Class Consumer? Goldman Sachs has a greater responsibility than you can possibly fathom. You weep for Lehman and you curse derivatives. You have that luxury. You have the luxury of not knowing what we know: that Lehman’s death, while tragic, probably saved the financial system. And that Goldman’s existence, while grotesque and incomprehensible to you, saves pension funds. You don’t want the truth. Because deep down, in places you don’t talk about at parties, you want us to fill that investment gap. You need us to fill that gap.
“We use words like credit default swaps, collateralized debt obligation, and securitization… We use these words as the backbone of a life spent investing in something. You use ‘em as a punchline. We have neither the time nor the inclination to explain ourselves to a commoner who rises and sleeps under the blanket of the very credit we provide, and then questions the manner in which we provide it! We’d rather you just said thank you and paid your taxes on time. Otherwise, we suggest you get an account and start trading. Either way, we don’t give a damn what you think you’re entitled to!”
As with any great villain, what makes Goldman Sachs so compelling is that their vision of the world is not entirely without a twisted kernel of truth.
Goldman Sachs: Too Big To Obey The Law
Posted: 19 Apr 2010 03:57 AM PDT
By Simon Johnson, co-author of 13 Bankers.
On a short-term tactical basis, Goldman Sachs clearly has little to fear. It has relatively deep pockets and will fight the securities “Fab” allegations tooth and nail; resolving that case, through all the appeals stages, will take many years. Friday’s announcement had a significant negative impact on the market perception of Goldman’s franchise value – partly because what they are accused of doing to unsuspecting customers is so disgusting. But, as a Bank of America analyst (Guy Mozkowski) points out this morning, the dollar amount of this specific allegation is small relative to Goldman’s overall business and – frankly – Goldman’s market position is so strong that most customers feel a lack of plausible alternatives.
The main action, obviously, is in the potential widening of the investigation (good articles in the WSJ today, but behind their paywall). This is likely to include more Goldman deals as well as other major banks, most of which are generally presumed to have engaged in at least roughly parallel activities – although the precise degree of nondisclosure for adverse material information presumably varied. Two congressmen have reasonably already drawn the link to the AIG bailout (how much of that was made necessary by fundamentally fraudulent transactions?), Gordon Brown is piling on (a regulatory sheep trying to squeeze into wolf’s clothing for election day on May 6), and the German government would dearly love to blame the governance problems in its own banks (e.g., IKB) on someone else.
But as the White House surveys the battlefield this morning and considers how best to press home the advantage, one major fact dominates. Any pursuit of Goldman and others through our legal system increases uncertainty and could even cause a political run on the bank – through politicians and class action lawsuits piling on.
And, as no doubt Jamie Dimon (the articulate and very well connected head of JP Morgan Chase) already told Treasury Secretary Tim Geithner over the weekend, if we “demonize” our big banks in this fashion, it will undermine our economic recovery and could weaken financial stability around the world.
Dimon’s points are valid, given our financial structure – this is exactly what makes him so very dangerous. Our biggest banks, in effect, have become too big to be held accountable before the law.
On a more positive note, the administration continues to wake from its deep slumber on banking matters, at least at some level. As Michael Barr said recently to the New York Times,
“The intensity, ferocity and the ugliness of the lobbying in the financial sector — it’s gotten worse. It’s more intense.”
This is exactly in line with what we say in 13 Bankers – just take a look at the introduction (free), and you’ll see why our concerns about “The Wall Street Takeover and the Next Financial Meltdown” have grabbed attention in Mr. Barr’s part of official Washington.
But at the very top of the White House there is still a remaining illusion – or there was in the middle of last week – that big banks are not overly powerful politically. “Savvy businessmen” is President Obama’s most unfortunate recent phrase – he was talking about Dimon and Lloyd Blankfein (head of Goldman). After all, some reason, auto dealers are at least as powerful as auto makers – so if we break up our largest banks, the resulting financial lobby could be even stronger.
But this misses the key point, which Senator Kaufman will no doubt be hammering home this week: There is fraud at the heart of Wall Street.
And we can only hold firms accountable, in both political and legal terms, if they are not too big.
It is much harder to sue a big bank and win; ask your favorite lawyer about this. Big banks can more easily hold onto their customers despite so obviously treating them as cannon fodder (take this up with the people who manage your retirement funds). Big banks spend crazy amounts on political lobbying – even right after being saved by the government (chapter and verse on this in 13 Bankers.)
When you really do want to take on megabanks through the courts – and have found the right legal theory and compelling lines of enquiry – they will threaten to collapse or just contract credit.
No auto dealer has this power. No Savings and Loan could ultimately stand against the force of law – roughly 2,000 S&Ls went out of business and around 1,000 people ended up in jail after the rampant financial fraud of the 1980s.
We should not exaggerate the extent to which we really have equality before the law in the United States. Still, the behavior and de facto immunity of the biggest banks is out of control.
These huge banks will behave better only when and if their executives face credible criminal penalties. This simply cannot happen while these banks are anywhere near their current size.
Fortunately there is precisely zero evidence that we need banks anywhere near their current size – we document this at length in 13 Bankers (in fact, this was a major motivation for writing the book).
Break up the big banks before they do even more damage.
Of course it isn't easy.
This from Simon Johnson and one of his contributors:
The Baseline Scenario
(There are many valuable links within this piece which, at the moment, I am not able to reproduce easily; probably you can go to baselinescenerio.com and recreate them. One of them is here, though, and is probably worth 1/2 hour study:
http://www.marketoracle.co.uk/Article17403.html )
--------------------------------------------------------------------------------
The Discount Rate Mismatch
Posted: 19 Apr 2010 12:36 PM PDT
. . . or, how finance is like quantum mechanics.
This guest post is contributed by StatsGuy, an occasional commenter and contributor to this blog.
Many pundits like to discuss the issue of Maturities Mismatch – that banks borrow short (at low interest), lend long (at higher interest), take the profit and (allegedly) absorb the risk. We often hear talk about how the Maturities Mismatch is integrally linked to liquidity risk – the sometimes self-fulfilling threat of bank runs – which the FDIC is designed to fight. Rarely if ever do we see anyone making the connection to the Discount Rate Mismatch . . . In fact you’ve probably never even heard of it, and neither have I.
What is the Discount Rate Mismatch?
It is the difference between the risk-free return on investment that investors demand, and the risk-free return on investment that can be generated by real world investments. And by investors, I do not just mean individual retail investors or hedge funds. I also mean retirement accounts and state pension funds as well, which rely on massive 8% projected returns in order to avoid officially recognizing massive fiscal gaps between their obligations and funding requirements.
It has been well documented that the existence of these gaps implicitly forces state and municipal retirement agencies to engage in risky investments to hit target asset appreciation goals. This strategy sometimes works. And, sometimes, it does not – as Orange County well remembers.
What drives the Discount Rate Mismatch?
Many things drive it – including behavioral and cultural factors that deter savings and encourage short term time horizons – but it’s worth noting that it’s built into modern institutions. Recently, I helped assemble a couple business plans, and was (again) reminded of the fact that standard net-present-value calculations use a 5% or 6% discount rate. That’s a real rate (which translates into a 7%-8% nominal rate given typical 2% inflation assumptions).
What does this mean? Even after controlling for inflation, getting $100 next year is worth only $94 this year, and the value of $100 in thirty years (controlling for inflation) is a mere $15.6 dollars today. Of course, these calculations extend beyond money. The value of 100 megawatts of electricity in 30 years is only 15.6 megawatts today. The value of 100 lives lost in 30 years (holding age constant) is equal to only 15.6 lives today. Wow. Future life is cheap!
Yet that leaves a conundrum – with such dramatic needs for long term investments, how is it that my savings account is paying essentially 0% interest?
How does the Discount Rate Mismatch relate to Maturities Mismatch?
Let’s imagine a society where everyone demands 6% real returns before committing money to an investment, but society really needs some long term investments – things like the Hoover dam or the Golden Gate Bridge that pay out over 80 years. Let’s say these investments are truly risk free, that there’s a lot of money sitting in bank accounts unused, and that the broader economy has lots of unused productive capacity (e.g. low capacity utilization). Why is it unused? Because many people, given a choice between an illiquid investment with 3% real return and holding liquid cash, would rather hold liquid cash. That liquidity offers insurance against unforeseen needs (like losing a job, or a health expense). But if that cash sits in bank deposits, it takes a lot of money out of circulation, and that can cause problems with things like the price level. That’s where the banks come in.
If I were to ask you where the money in your savings deposit account is, you might say at the bank. That is not quite right. In truth, your money is in several places simultaneously. In this sense, finance is like quantum mechanics. Money is like Schrodinger’s cat – you never know where it is until you actually observe it. (And if everyone tries to observe their money at the same time, that’s called a bank run.)
But how can money be in multiple places at the same time? Simple – because you think you have the money, the bank agrees, and so does everyone else – and since everyone believes it, it’s true. The money you deposit is lent out, then deposited by borrowers, then lent out again – many times over until it eventually sits in vault cash or on deposit with the reserve or in your pocket. We called this fractional reserve banking, and there used to be a limit on how far this cycle could go (the reserve ratio), but this limit was rendered worthless by technological innovations like sweeping, and Bernanke recently hinted at getting rid of it altogether.
By pooling deposits and making loans, banks “borrow” from deposits at 0% and lend it for 3%, thus they make a profit even though the social discount rate (the rate a retail investor would charge for giving up their liquidity for a long period of time) is 6%. That’s because banks care primarily about the spread (sometimes known as the yield curve). Recently, the yield curve was as sharp as it’s ever been.
By engaging in inter-temporal arbitrage, banks allow society to continue to make investments even during periods of high discount rates – at least for a time. Banks essentially create temporary money to make investments without savings. So long as money is continually created, savings are not necessary to sustain investment – credit supplants savings. Citizens don’t need to buy municipal bonds or pay taxes to support public infrastructure – the banks can.
To the uneducated masses, replacing savings with credit may sound a bit frightening, but economists can demonstrate – mathematically – that this credit-based money system is far more efficient than injecting money through the crude process of “printing” and government spending. That’s because endogenous money creation is decentralized – anyone with an opportunity and willingness to take risks (and collateral) can (theoretically) get credit to fund an investment. This, presumably, is why Larry Summers is so infatuated with the credit system, and why Obama argues that credit – not money – is the lifeblood of a modern economy.
Astute readers have probably sensed some danger in the system described above. For example:
Doesn’t credit dependency to sustain investment give banks a lot of power?
If credit creation by banks is replacing cash printing by government, doesn’t this have distributional consequences?
Isn’t credit fueled, leveraged investment rather unstable?
Doesn’t this system punish cash-based savers? If banks no longer have a reserve requirement, then why should they pay anything for deposits? (Hint – they don’t.)
Doesn’t all of this mean that the only real limit on lending right now is capital-asset ratios, and willingness to absorb risk? What if weak regulation and financial innovation allow evasion of capital-asset ratios, and banks are not adequately pricing risk for any number of reasons (TBTF, agency problems, bad math, etc.)?
Yes, well, those are all valid concerns. But if there’s ONE THING we should have learned in the past 18 months, it’s that we the people are a lot less courageous when we’re facing unemployment, impoverished retirement, and foreclosure. It’s easy to curse Goldman Sachs and the credit-breathing financial dragon of Wall-Street, but what would we do without them when most people would rather consume or hold liquid cash than make investments in the future? Consider:
The huge level of debt means that if nominal GDP growth fails to hit targets, the system may collapse spectacularly.
The Discount Rate Mismatch problem is real – without relying on credit, how do we fix it?
Without the certainty of anticipated consumption, what will drive new investment? With the savings glut in countries like Japan, what will sustain global demand if the US decides to start saving more?
If our under-funded pension and retirement funds can’t hit their 8% returns, how do they meet obligations (especially when those obligations are indexed to inflation but not indexed to life expectancy or medical costs)? How do we cover the federal debt if tax revenues fall?
Make no mistake – until we solve the latter set of problems, we are stuck with the credit based system. Banks know this too, and they hope very much that we lack the political will to do what is necessary to fix our structural problems. That’s why any talk of financial reform rings hollow unless it’s accompanied by serious proposals to fix the discount rate mismatch problem and deal with unfunded obligations.
But maybe – if we’re lucky – we’ll get a modern day Pecora who will haul Lloyd Blankfein to the witness stand, and taunt him till he breaks. Imagine, for a moment, Mr. Blankfein losing his cool while ranting in Jack Nicholson’s voice . . .
“You want the truth? You can’t handle the truth. Son, we live in a country with an investment gap. And that gap needs to be filled by men with money. Who’s gonna do it? You? You, Middle Class Consumer? Goldman Sachs has a greater responsibility than you can possibly fathom. You weep for Lehman and you curse derivatives. You have that luxury. You have the luxury of not knowing what we know: that Lehman’s death, while tragic, probably saved the financial system. And that Goldman’s existence, while grotesque and incomprehensible to you, saves pension funds. You don’t want the truth. Because deep down, in places you don’t talk about at parties, you want us to fill that investment gap. You need us to fill that gap.
“We use words like credit default swaps, collateralized debt obligation, and securitization… We use these words as the backbone of a life spent investing in something. You use ‘em as a punchline. We have neither the time nor the inclination to explain ourselves to a commoner who rises and sleeps under the blanket of the very credit we provide, and then questions the manner in which we provide it! We’d rather you just said thank you and paid your taxes on time. Otherwise, we suggest you get an account and start trading. Either way, we don’t give a damn what you think you’re entitled to!”
As with any great villain, what makes Goldman Sachs so compelling is that their vision of the world is not entirely without a twisted kernel of truth.
Goldman Sachs: Too Big To Obey The Law
Posted: 19 Apr 2010 03:57 AM PDT
By Simon Johnson, co-author of 13 Bankers.
On a short-term tactical basis, Goldman Sachs clearly has little to fear. It has relatively deep pockets and will fight the securities “Fab” allegations tooth and nail; resolving that case, through all the appeals stages, will take many years. Friday’s announcement had a significant negative impact on the market perception of Goldman’s franchise value – partly because what they are accused of doing to unsuspecting customers is so disgusting. But, as a Bank of America analyst (Guy Mozkowski) points out this morning, the dollar amount of this specific allegation is small relative to Goldman’s overall business and – frankly – Goldman’s market position is so strong that most customers feel a lack of plausible alternatives.
The main action, obviously, is in the potential widening of the investigation (good articles in the WSJ today, but behind their paywall). This is likely to include more Goldman deals as well as other major banks, most of which are generally presumed to have engaged in at least roughly parallel activities – although the precise degree of nondisclosure for adverse material information presumably varied. Two congressmen have reasonably already drawn the link to the AIG bailout (how much of that was made necessary by fundamentally fraudulent transactions?), Gordon Brown is piling on (a regulatory sheep trying to squeeze into wolf’s clothing for election day on May 6), and the German government would dearly love to blame the governance problems in its own banks (e.g., IKB) on someone else.
But as the White House surveys the battlefield this morning and considers how best to press home the advantage, one major fact dominates. Any pursuit of Goldman and others through our legal system increases uncertainty and could even cause a political run on the bank – through politicians and class action lawsuits piling on.
And, as no doubt Jamie Dimon (the articulate and very well connected head of JP Morgan Chase) already told Treasury Secretary Tim Geithner over the weekend, if we “demonize” our big banks in this fashion, it will undermine our economic recovery and could weaken financial stability around the world.
Dimon’s points are valid, given our financial structure – this is exactly what makes him so very dangerous. Our biggest banks, in effect, have become too big to be held accountable before the law.
On a more positive note, the administration continues to wake from its deep slumber on banking matters, at least at some level. As Michael Barr said recently to the New York Times,
“The intensity, ferocity and the ugliness of the lobbying in the financial sector — it’s gotten worse. It’s more intense.”
This is exactly in line with what we say in 13 Bankers – just take a look at the introduction (free), and you’ll see why our concerns about “The Wall Street Takeover and the Next Financial Meltdown” have grabbed attention in Mr. Barr’s part of official Washington.
But at the very top of the White House there is still a remaining illusion – or there was in the middle of last week – that big banks are not overly powerful politically. “Savvy businessmen” is President Obama’s most unfortunate recent phrase – he was talking about Dimon and Lloyd Blankfein (head of Goldman). After all, some reason, auto dealers are at least as powerful as auto makers – so if we break up our largest banks, the resulting financial lobby could be even stronger.
But this misses the key point, which Senator Kaufman will no doubt be hammering home this week: There is fraud at the heart of Wall Street.
And we can only hold firms accountable, in both political and legal terms, if they are not too big.
It is much harder to sue a big bank and win; ask your favorite lawyer about this. Big banks can more easily hold onto their customers despite so obviously treating them as cannon fodder (take this up with the people who manage your retirement funds). Big banks spend crazy amounts on political lobbying – even right after being saved by the government (chapter and verse on this in 13 Bankers.)
When you really do want to take on megabanks through the courts – and have found the right legal theory and compelling lines of enquiry – they will threaten to collapse or just contract credit.
No auto dealer has this power. No Savings and Loan could ultimately stand against the force of law – roughly 2,000 S&Ls went out of business and around 1,000 people ended up in jail after the rampant financial fraud of the 1980s.
We should not exaggerate the extent to which we really have equality before the law in the United States. Still, the behavior and de facto immunity of the biggest banks is out of control.
These huge banks will behave better only when and if their executives face credible criminal penalties. This simply cannot happen while these banks are anywhere near their current size.
Fortunately there is precisely zero evidence that we need banks anywhere near their current size – we document this at length in 13 Bankers (in fact, this was a major motivation for writing the book).
Break up the big banks before they do even more damage.
Send Up a Front
(c) 2010 F. Bruce Abel
As daughter Genny picked up the phone and said so confidently when we were settling into our room at the Rupp Arena Weston (?), "send up a front."
Now AIG is thinking of suing Goldman on the same theory as the SEC in the Abacus case:
http://www.cnbc.com/id/36656434
Read the comments as they seem knowledgeable.
As daughter Genny picked up the phone and said so confidently when we were settling into our room at the Rupp Arena Weston (?), "send up a front."
Now AIG is thinking of suing Goldman on the same theory as the SEC in the Abacus case:
http://www.cnbc.com/id/36656434
Read the comments as they seem knowledgeable.
Monday, April 19, 2010
The Institutional Investor -- Part 2
(c) 2010 F. Bruce Abel
This article and the comments are essential reading.
http://dealbook.blogs.nytimes.com/2010/04/19/the-goldman-defense-caveat-emptor/?hp
It contains Goldman Sachs's defense, given months ago.
This article and the comments are essential reading.
http://dealbook.blogs.nytimes.com/2010/04/19/the-goldman-defense-caveat-emptor/?hp
It contains Goldman Sachs's defense, given months ago.
The Institutional Investor or The Sophisticated Investor
(c) 2010 F. Bruce Abel
The argument is stated or implied that the "person" on the other side of the Goldman Sachs Abacus investment was Deutsches Bank, an "institutional investor" or "sophisticated investor," or some such. This, in Cramer's view, levels the playing field and renders blame meaningless.
Ohio law, and probably federal and other state law, also distinguishes buyers this way in its Blue Sky Laws, with much less regulation required for new issuances when an institutional investor is the buyer. A bank trust department is deemed sophisticated.
Of course we know that bank trust departments are peopled by ... people. People get all excited, even if it is not their own money. They make the same shortcuts that other humans make. They are impressed by the white-collar investment bankers from New York, etc.
So when we as individuals, or as managers of the municipality's pension fund, etc., place our faith in "institutions" to invest wisely we are just putting "people" in charge.
What we are doing, let's face it, is taking the onus off of ourselves (properly) so that the wife doesn't accuse us of wasting the family assets. But when the trust falls by 40% the wife says not a peep when it is managed by an "institution."
The argument is stated or implied that the "person" on the other side of the Goldman Sachs Abacus investment was Deutsches Bank, an "institutional investor" or "sophisticated investor," or some such. This, in Cramer's view, levels the playing field and renders blame meaningless.
Ohio law, and probably federal and other state law, also distinguishes buyers this way in its Blue Sky Laws, with much less regulation required for new issuances when an institutional investor is the buyer. A bank trust department is deemed sophisticated.
Of course we know that bank trust departments are peopled by ... people. People get all excited, even if it is not their own money. They make the same shortcuts that other humans make. They are impressed by the white-collar investment bankers from New York, etc.
So when we as individuals, or as managers of the municipality's pension fund, etc., place our faith in "institutions" to invest wisely we are just putting "people" in charge.
What we are doing, let's face it, is taking the onus off of ourselves (properly) so that the wife doesn't accuse us of wasting the family assets. But when the trust falls by 40% the wife says not a peep when it is managed by an "institution."
I Couldn't Resist
(c) 2010 F. Bruce Abel
This from No Hot Air:
Update: If your read French, well worthwhile to read this view from another monster producer here at Algeria's L'Expression DZ
A la différence du pétrole, on ne peut pas à proprement parler de marché mondial lorsqu’on évoque l’avenir du gaz naturel. Il s’agit plutôt de marchés régionaux, de celui de l’Amérique du Nord à celui de l’Asie en passant par l’Europe, qui déterminent l’avenir du gaz naturel. Ces trois principaux marchés du gaz sont en plein bouleversement. (..) Dans un premier temps, le développement du gaz naturel liquéfié (GNL) a ouvert un marché mondial, en parallèle avec les marchés traditionnels régionaux et a permis le développement de marchés spots aux côtés des contrats de long terme. Aujourd’hui, le développement des gaz non conventionnels aux États-Unis perturbe le marché en créant une bulle gazière.
Posted at 03:16 PM in Energy Prices
This from No Hot Air:
Update: If your read French, well worthwhile to read this view from another monster producer here at Algeria's L'Expression DZ
A la différence du pétrole, on ne peut pas à proprement parler de marché mondial lorsqu’on évoque l’avenir du gaz naturel. Il s’agit plutôt de marchés régionaux, de celui de l’Amérique du Nord à celui de l’Asie en passant par l’Europe, qui déterminent l’avenir du gaz naturel. Ces trois principaux marchés du gaz sont en plein bouleversement. (..) Dans un premier temps, le développement du gaz naturel liquéfié (GNL) a ouvert un marché mondial, en parallèle avec les marchés traditionnels régionaux et a permis le développement de marchés spots aux côtés des contrats de long terme. Aujourd’hui, le développement des gaz non conventionnels aux États-Unis perturbe le marché en créant une bulle gazière.
Posted at 03:16 PM in Energy Prices
Somehow This Reminds Me of Grisham's The Associate
(c) 2010 F. Bruce Abel
OK, go back to my earlier blogs whereby Grisham describes what the new associates at the biggest New York law firm, do in the "Document Review." Type on the label "Grisham," or "The Associate."
All the due-dilligence that was not done by the clients is now being done by the $800/hr boys. And their life is, essentially, over.
Somehow, somehow, this relates to the Goldman Sachs situation.
"Bespoke" deal just mentioned on CNBC. Paulson "only" did one. So?????
OK, go back to my earlier blogs whereby Grisham describes what the new associates at the biggest New York law firm, do in the "Document Review." Type on the label "Grisham," or "The Associate."
All the due-dilligence that was not done by the clients is now being done by the $800/hr boys. And their life is, essentially, over.
Somehow, somehow, this relates to the Goldman Sachs situation.
"Bespoke" deal just mentioned on CNBC. Paulson "only" did one. So?????
Sunday, April 18, 2010
Cramer Doing Better In the Light of This Sunday Morning
(c) 2010 F. Bruce Abel
As bad as Cramer was on Friday afternoon on CNBC, he does a lot better on his Mad Money gig Friday night, discussing the Goldman Sachs story. Study what he says after "The Bottom Line." This part is crap.
And the key part about Goldman having a duty never, never, to disclose the name of the party on the other side of the trade, is one thing; not disclosing that such a party, unnamed, chose the collateral, is the crux of the case of the SEC.
This from http://www.madmoneyrecap.com/
==========
Nor, do I condone the behavior of Goldman or the named in the matter that I am about to describe… it does not smell good to me… I do not want to be associated with it myself… but I am not sure that there was anything illegal… I am not sure that there was anything immoral, or even unethical about it, when you pull it apart… so let’s do so.
First, Goldman Sachs created a product for a firm, Paulson & Co… a hedge fund, that at the time, was not known as a particularly smart client…Paulson came to them and said, look I want to make a bet against the value of housing, I think housing has gone up too far… Goldman wanted to be sure that the piece of paper that was created to do that was vetted properly before Goldman sold it to others… so Goldman hired an independent firm that was supposed to investigate whether the product was defective… meaning if there was fraud in it… and the ADC did exactly that as a rating agency… they put out a document, this document actually… ABACUS 2007-AC1... I read it today… and I have to tell you, after looking at it, I do not think that I ever would have bought this piece of paper… never… but not everyone was as bearish on housing as I was in late 2006, when this basket was put together… and I could see where a less informed client might actually want to buy this.
Now, remember no one stuck a gun to the head of the client… a very sophisticated German bank, and said that you must buy this paper… however, a sucker was born the minute the trade was made… and the lost book soon after … did Goldman do something illegal when it put this booklet together? Showing everything that was in it, totally transparent… or did the very sophisticated German bank that bought it just do something really stupid when it made the purchase? I think the latter… oh, and memo to the Federal Government, you tell us that Goldman Sachs should have told the Germans, who was on the other side of the trade, that this genius Paulson was betting against the buyers? That Paulson was the seller? That is hogwash… you and I both know government that it is strictly forbidden to give up a clients name to the other side of the trade… it is forbidden… how can the Government not know that? How can that be part of the case?
Oh by the way, Paulson was a nobody back then… so who cared… but let’s put it in terms that are not as obtuse as collateralized debt obligations or credit default swaps… let’s go back, let’s say that it is 1999, remember the year of the top of the tech bubble… and let’s say that a hedge fund comes in, the hedge fund that requested to short this housing basket, and that hedge fund was negative on tech stocks in 1999... let’s say that the best way to play that short, to bet against those, the funds that own tech was to create a basket like this that was made up of actual tech mutual funds… and the funds endorsed that, they did not fight that… was there fraud in putting that basket together? Oh, I do not think so… in fact, the bet against tech would have actually gone bad two months later… incredibly, when I know very few people thought, the NASDAQ gained another couple of thousand points…like lightning… and it was only that run that it collapsed.
Housing was like that too… exactly like that going into 2007... enjoying an incredible run that most thought was totally sustainable… we now in hindsight say, what a bunch of jokers were those guys who owned the tech mutual funds in 1999, going into 2000... but before the dot.com crash, these people were making money hand over fist… more than I had ever seen in my life… just as the German bank thought it would back in 2007, when few believed that housing would collapse… this was a great piece of paper if you thought that housing was going to be sustainable… remember, only now do we regard the client who wanted this negative basket created, as the greatest investor of our lifetime… he could have been the goat… the goat, for heavens sake, just like the short sellers of tech… when NASDAQ went from 2500, to NASDAQ 5000 almost over night.
In fact, we learned today, that Goldman actually lost some of the money with this security… they lost $90m on ABACUS 2007-AC1... does that absolve them? I do not know… but I can tell you this… I think that before today Goldman looked to the world like they had figured everything out… and was the only genius in the room… today it seemed more like that Goldman had rigged the market in their favor… I know right now the SEC is under tremendous pressure to bring cases… I know that the government very much wants financial reform… which, by the way, even in its most arduous hard hitting reformers hitting proposals would we not have prevented this event from occurring… I favor financial reform… put simply, if you were in the SEC, it is a great time to bring this case… to expose the way the business works … to try to punish the firm perceived as the most arrogant and least reformed in the room… and while it may be a terrible personality trait, arrogance is not illegal.
Remember, when I see fraud, I am probably the only guy who goes on TV and tries to find these people guilty myself… every day I wish that I had subpoena power…I am the only one who has a Wall Of Shame… who has tried to hound and pursuit anyone who I thought did something that would hurt you… you know that about me… I do not think this was one of those cases… if I did, you must know that I would care less that Goldman Sachs helped me get my start… or if I have friends there… as I always say, this show is not about making friends… it is about making money.
The bottom line…
Still from http://www.madmoneyrecap.com/
In this case, you did not get hurt… and I do not think that the client who bought the product did either… No, I like a vigilant prosecution… but not an overzealous prosecution… yet, that is exactly what I think happened today against Goldman Sachs… and I believe that many of you will come to see that the client was unsophisticated and bought it wrong… that Goldman did the right thing as a middleman broker… that the guy who put it together just got real, real lucky… and I think that you will see it exactly as I do as time goes by.
As bad as Cramer was on Friday afternoon on CNBC, he does a lot better on his Mad Money gig Friday night, discussing the Goldman Sachs story. Study what he says after "The Bottom Line." This part is crap.
And the key part about Goldman having a duty never, never, to disclose the name of the party on the other side of the trade, is one thing; not disclosing that such a party, unnamed, chose the collateral, is the crux of the case of the SEC.
This from http://www.madmoneyrecap.com/
==========
Nor, do I condone the behavior of Goldman or the named in the matter that I am about to describe… it does not smell good to me… I do not want to be associated with it myself… but I am not sure that there was anything illegal… I am not sure that there was anything immoral, or even unethical about it, when you pull it apart… so let’s do so.
First, Goldman Sachs created a product for a firm, Paulson & Co… a hedge fund, that at the time, was not known as a particularly smart client…Paulson came to them and said, look I want to make a bet against the value of housing, I think housing has gone up too far… Goldman wanted to be sure that the piece of paper that was created to do that was vetted properly before Goldman sold it to others… so Goldman hired an independent firm that was supposed to investigate whether the product was defective… meaning if there was fraud in it… and the ADC did exactly that as a rating agency… they put out a document, this document actually… ABACUS 2007-AC1... I read it today… and I have to tell you, after looking at it, I do not think that I ever would have bought this piece of paper… never… but not everyone was as bearish on housing as I was in late 2006, when this basket was put together… and I could see where a less informed client might actually want to buy this.
Now, remember no one stuck a gun to the head of the client… a very sophisticated German bank, and said that you must buy this paper… however, a sucker was born the minute the trade was made… and the lost book soon after … did Goldman do something illegal when it put this booklet together? Showing everything that was in it, totally transparent… or did the very sophisticated German bank that bought it just do something really stupid when it made the purchase? I think the latter… oh, and memo to the Federal Government, you tell us that Goldman Sachs should have told the Germans, who was on the other side of the trade, that this genius Paulson was betting against the buyers? That Paulson was the seller? That is hogwash… you and I both know government that it is strictly forbidden to give up a clients name to the other side of the trade… it is forbidden… how can the Government not know that? How can that be part of the case?
Oh by the way, Paulson was a nobody back then… so who cared… but let’s put it in terms that are not as obtuse as collateralized debt obligations or credit default swaps… let’s go back, let’s say that it is 1999, remember the year of the top of the tech bubble… and let’s say that a hedge fund comes in, the hedge fund that requested to short this housing basket, and that hedge fund was negative on tech stocks in 1999... let’s say that the best way to play that short, to bet against those, the funds that own tech was to create a basket like this that was made up of actual tech mutual funds… and the funds endorsed that, they did not fight that… was there fraud in putting that basket together? Oh, I do not think so… in fact, the bet against tech would have actually gone bad two months later… incredibly, when I know very few people thought, the NASDAQ gained another couple of thousand points…like lightning… and it was only that run that it collapsed.
Housing was like that too… exactly like that going into 2007... enjoying an incredible run that most thought was totally sustainable… we now in hindsight say, what a bunch of jokers were those guys who owned the tech mutual funds in 1999, going into 2000... but before the dot.com crash, these people were making money hand over fist… more than I had ever seen in my life… just as the German bank thought it would back in 2007, when few believed that housing would collapse… this was a great piece of paper if you thought that housing was going to be sustainable… remember, only now do we regard the client who wanted this negative basket created, as the greatest investor of our lifetime… he could have been the goat… the goat, for heavens sake, just like the short sellers of tech… when NASDAQ went from 2500, to NASDAQ 5000 almost over night.
In fact, we learned today, that Goldman actually lost some of the money with this security… they lost $90m on ABACUS 2007-AC1... does that absolve them? I do not know… but I can tell you this… I think that before today Goldman looked to the world like they had figured everything out… and was the only genius in the room… today it seemed more like that Goldman had rigged the market in their favor… I know right now the SEC is under tremendous pressure to bring cases… I know that the government very much wants financial reform… which, by the way, even in its most arduous hard hitting reformers hitting proposals would we not have prevented this event from occurring… I favor financial reform… put simply, if you were in the SEC, it is a great time to bring this case… to expose the way the business works … to try to punish the firm perceived as the most arrogant and least reformed in the room… and while it may be a terrible personality trait, arrogance is not illegal.
Remember, when I see fraud, I am probably the only guy who goes on TV and tries to find these people guilty myself… every day I wish that I had subpoena power…I am the only one who has a Wall Of Shame… who has tried to hound and pursuit anyone who I thought did something that would hurt you… you know that about me… I do not think this was one of those cases… if I did, you must know that I would care less that Goldman Sachs helped me get my start… or if I have friends there… as I always say, this show is not about making friends… it is about making money.
The bottom line…
Still from http://www.madmoneyrecap.com/
In this case, you did not get hurt… and I do not think that the client who bought the product did either… No, I like a vigilant prosecution… but not an overzealous prosecution… yet, that is exactly what I think happened today against Goldman Sachs… and I believe that many of you will come to see that the client was unsophisticated and bought it wrong… that Goldman did the right thing as a middleman broker… that the guy who put it together just got real, real lucky… and I think that you will see it exactly as I do as time goes by.
Where Was Lynn A. Stout When Her Information Was Needed?
(c) 2010 F. Bruce Abel
Where was Lynn A. Stout when her information was needed?
http://roomfordebate.blogs.nytimes.com/2010/04/16/what-goldmans-conduct-reveals/#lynn
Over and over again there is nobody to present the other side of legislation that enabled the system to be destroyed. That's because there is nobody funding that side. Nobody called an expert to research the issue and report to Congress.
So as clear as Lynn A. Stout's piece is to us, where was she in 2000 when this information would have been relevant?
The information:
Sunday, April 18, 2010
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April 16, 2010, 3:31 pm What Goldman’s Conduct Reveals
By THE EDITORS
The Securities and Exchange Commission filed a civil lawsuit against Goldman Sachs for securities fraud on Friday, charging the bank with creating and selling mortgage-backed securities that were intended to fail.
According to the complaint, Goldman let John Paulson, a prominent hedge fund manager, select mortgage bonds that he wanted to bet against because they were most likely to lose value and packaged those bonds into the “Abacus” investments, which were sold to investors like foreign banks and pension funds. As those securities plunged in value, the Paulson hedge fund made money on the negative bets, while the Goldman clients who bought the investments lost billions of dollars.
Is this chain of events surprising? The S.E.C. is suing Goldman Sachs, but could regulation or monitoring of these financial instruments have prevented such losses? What kind of regulatory structure would need to be put in place?
Lynn A. Stout, professor of corporate and securities law, U.C.L.A.
Michael Greenberger, former commodities regulator
Nicole Gelinas, Manhattan Institute
Yves Smith, financial analyst
Nomi Prins, senior fellow, Demos
Edward Harrison, banking and finance specialist
Douglas Elliott, Brookings Institution
Megan McArdle, Asymmetrical Information
William K. Black, former banking regulator
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The Natural Result of Deregulation
Lynn A. Stout is the Paul Hastings professor of corporate and securities law at U.C.L.A. and an expert on corporate governance.
If the allegations against Goldman Sachs are true, then much of the blame for investors’ losses in the Abacus deal can be laid at the feet of an obscure statute passed by Congress in 2000, the “Commodities Futures Modernization Act.”
If we allow the unscrupulous to buy fire insurance on other people’s houses, the incidence of arson would rise sharply. In one dramatic move, that act eliminated a longstanding legal rule that deemed derivatives bets made outside regulated exchanges to be legally enforceable only if one of the parties to the bet was hedging against a pre-existing risk.
This traditional derivatives rule against purely speculative derivatives trading has a parallel in insurance law, because insurance, like derivatives trading, is really just a form of betting. A homeowner’s fire insurance policy, for example, is a bet with an insurance company that your house will burn down.
Under the rules of insurance law, you can only buy fire insurance on a house if you actually own the house in question. Similarly, under the traditional legal rules regulating derivatives trading, the only parties who could use off-exchange derivatives to bet against the Abacus deal would be parties who actually held investments in Abacus.
By eliminating this centuries-old rule in the name of “modernization,” Congress created enormous problems of moral hazard in the off-exchange derivatives market. Imagine, for example, if we allow the unscrupulous to buy fire insurance on other people’s houses; the incidence of arson would rise dramatically.
Similarly, by allowing an unscrupulous hedge fund to use derivatives to bet against an Abacus investment vehicle it didn’t own, the Commodities Futures Modernization Act invited that hedge fund to work with Goldman Sachs to make sure that Abacus would indeed fail — as it did.
Sadly, greed is a constant in human nature. We’re not likely to eliminate it soon. But we can at least keep it in check. It’s time for Congress to address the problem of moral hazard in derivatives betting by repealing the Commodities Futures Modernization Act.
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Accountability, at Long Last
Michael Greenberger is a professor at the University of Maryland School of Law and a former director of trading and markets at the Commodity Futures Trading Commission.
If Sept. 15, 2008, the day Lehman Brothers was allowed to fail, marks the Pearl Harbor or widely acknowledged onset of the present Great Recession (in Franklin Roosevelt’s words “a date which shall live in infamy”), April 16, 2010 may be deemed the equivalent of the U.S. victory in the crucial Battle of Midway in 1942 or the day the U.S. neutralized the Japanese fleet.
If the fall of Lehman was Pearl Harbor, the S.E.C.’s case against Goldman may be the Battle of Midway — a crucial victory.
.On April 16, 2010, the S.E.C. announced its enforcement action against Goldman Sachs alleging the improper marketing of what the S.E.C. alleges was the sale of two evenly matched, but highly conflicting, investments: essentially bets for and against the proposition that subprime (non-creditworthy) mortgage borrowers would pay back their loans. Goldman is alleged to have profited substantially from those who bet against subprime repayment while aggressively marketing to its other customers bets in favor of repayment.
Let’s be clear. Goldman Sachs vigorously denies the S.E.C.’s allegations, and doubtless it will fight the action with the utmost vigor. It is certainly entitled to do so.
Read more…
However, what makes the S.E.C. enforcement action a landmark is that it responds to a widely held desire on the part of the American taxpayer: accountability.
The underpinnings of that desire is that the present crisis, including high unemployment and devastating economic insecurity accompanied by skyrocketing deficits, was not caused by the average American. But, it is the average American who has had to foot the bill for restoring the economy.
What is especially aggravating is that those who unmistakably did cause the crisis, i.e., the “pillars of Wall Street,” are now stronger and more profitable than ever before. And the impression is that Wall Street has returned to “business as usual,” once again using the same investment strategies that brought on the fall 2008 deluge.
The case against Goldman shows that savvy insiders knew the financial crisis was coming, and profited from it.
.So the key question from Main Street is: where is the accountability? If the average American fails miserably in a business or professional enterprise, there are consequences, e.g., firing or bankruptcy. Up to today, it appeared that those traditional hallmarks of failure did not apply to Wall Street or those who were responsible for regulating Wall Street.
Just last week, Alan Greenspan, the former Fed chairman, and Robert Rubin, the former Treasury Secretary and Citigroup officer, said they were not to blame for the meltdown even though both prevented regulation of the kind of bets Goldman Sachs is now accused of misusing.
More galling is the constant refrain from both Wall Street C.E.O.s and former regulators that no one could have predicted the crisis. However, the S.E.C. allegations are premised on the fact that hedge funds and Goldman Sachs itself were so convinced of cataclysmic failure that they were looking for investment vehicles that would profit each time a homeowner defaulted on his or her mortgage.
In other words, there were competent and smart people making billions because they could foresee the obvious: people with poor credit would not be able to repay their home loans.
In short, it was not that no one knew. Savvy insiders knew.
We do not know the success of the S.E.C.s actions today. But, if successful, you can be sure that this will be the beginning of what those average Americans suffering during this Great Recession are desperately seeking: accountability.
As Winston Churchill said after early Allied victories in World War II: “This is not the end or even the beginning of the end; but it is the end of the beginning.” We may now be at the beginning of rewarding competence and sanctioning ineptness or worse.
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A Third Party Problem
Nicole Gelinas, a contributing editor to the Manhattan Institute’s City Journal, is the author of “After the Fall: Saving Capitalism from Wall Street — and Washington.”
The government’s charges against Goldman and its employees — if true — are not shocking. People lie. The Securities and Exchange Commission can do better at enforcing the laws that make liars think twice. But policing fraud cannot be our first line of defense against financial excess.
It’s simple: the German bank that bought the mortgage securities shouldn’t have relied on a consultant.
.The S.E.C. says that Goldman, in early 2007, told mortgage-bond buyers that the consultant who helped create their securities had their best interests at heart. The consultant was taking advice, at Goldman’s behest, from another investor who would profit when the securities went bust.
Synthetic collateralized debt obligations are hard, but dishonesty with clients is easy. Raking through the details of the case uproots far deeper problems, though.
Read more…
First, the obscure third parties that helped Goldman and other big banks sell complex deals encouraged investors to suspend necessary skepticism.
The German bank that bought the mortgage securities, IKB Deutsche Industriebank, fancied itself a sophisticated firm. So why did it rely on a Goldman consultant, ACA Management, as a “portfolio selection agent?” And why did sophisticated investors need third parties to “insure” the securities?
Just as Bernie Madoff’s investors would have done better not to rely on advisers to tell them that Bernie was O.K., IKB would have been better off performing its own analysis of American mortgage markets.
But obscure third parties were the spawn of Washington’s bank bailouts starting in the 1980s. The expectation of government support artificially fed Wall Street growth — so there was plenty of cheap money to trickle down from the too-big-to-fail banks to the ever-more-creative little guys.
Second, applying old trading and capital rules to new financial markets would have reduced hanky-panky.
Goldman was able to “customize” securities, allegedly committing fraud under cover of the opacity that customization provided, because the securities did not trade on a public marketplace. Such a marketplace would have demanded simplicity from Goldman in creating the securities. Thousands of investors, rather than a few hand-picked third parties, could have analyzed and priced them.
The same is true in credit-derivatives markets. Opacity serves only the banks, which reap higher fees from customers who remain in the dark.
Enforcing justice is vital to markets. But Washington should help investors, too, by reducing opportunities to thwart justice. We need a return to simplicity. Congress should direct regulators to impose trading, disclosure and capital rules consistently across financial firms and instruments — so that markets can smash the repositories for secrets that imperil the economy.
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Immoral, Destructive Behavior
Yves Smith writes the blog Naked Capitalism. She is the head of Aurora Advisors, a management consulting firm, and the author of “Econned: How Unenlightened Self Interest Undermined Democracy and Corrupted Capitalism.”
Strange as it may seem, the Securities and Exchange Commission’s lawsuit against Goldman Sachs for selling collateralized debt obligations (C.D.O.) designed to fail illustrates what a long and difficult haul it will be to reform the financial services sector.
This case should be a slam-dunk, but years of deregulation have narrowed the ground for lawsuits.
.Goldman allowed hedge fund manager John Paulson to sponsor a C.D.O. The sponsor can influence how the C.D.O. is constructed, the notion being that the sponsor will act in ways that help all the other investors. But this C.D.O. was allegedly a Trojan horse for Mr. Paulson to take a large short position, betting against the very same C.D.O. he was creating.
But his intent was not disclosed. And, not surprisingly, the deal was a complete wipeout, with Mr. Paulson collecting a billion dollars of winnings at the expense of investors who had been kept in the dark and would almost certainly have turned down the deal if they had had the full picture.
By any common sense standard, this case should be a slam-dunk. However, despite tough talk by the Obama administration on financial reform, it is not mounting a criminal case against Goldman.
Read more…
Moreover, the S.E.C. has long had a difficult time winning complex financial fraud cases. While critics like to argue that the S.E.C. is not up to the task, the situation is more complex. Years of deregulation have narrowed the ground for lawsuits considerably. What’s more, structured credit is a new area of litigation. Thus the S.E.C. is also mounting its case in an arena where there are few precedents to rely upon.
If the S.E.C. loses its case against Goldman, it will be too easy to draw the wrong conclusion: not that the S.E.C. failed, but that the financial services industry succeeds all too well in its campaign to tear down the rules needed to make markets safe for investors.
No matter what happens to this particular lawsuit, it’s critical not to lose sight of the fact that immoral, destructive behavior has become deeply entrenched on Wall Street, and it will take concerted action to root it out.
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Smelling the Deception
Nomi Prins is a senior fellow at Demos. She is the author of “It Takes a Pillage: Behind the Bailouts, Bonuses and Backroom Deals from Washington to Wall Street” and “Other People’s Money: The Corporate Mugging of America.” She was a managing director at Goldman Sachs.
It’s probably no coincidence that Goldman Sachs took such great pains to deliver a decisive “we don’t bet against our clients” statement right before the S.E.C. levied its charge that the firm “defrauded” its clients through “misstating and omitting key facts.”
The entire nature of the C.D.O. business invites firms to act for certain clients and against others.
.Indeed, under the particulars of this complaint, Goldman didn’t bet against its clients directly, it merely acted on all possible angles of a deal that facilitated one huge client betting against other clients, while obfuscating the specifics of its enabling and fee-taking role in the triangle.
That’s why it is dangerous to single out one member of Goldman (where the title of vice president is low on the totem pole) as the culprit. Collateralized debt obligations were very lucrative for everyone involved. The bad apple approach enforces an inaccurate representation of two main problems.
Read more…
First, it took the S.E.C. nearly three years to wake up and smell the deception. This was a large deal involving a major investment house and major hedge fund. Having some sort of priority examination of such deals would have been prudent.
Second and more important, is the lax regulatory structure itself. In our current regulatory framework, any issuing bank can act on all sides of a C.D.O. (or other complex security) — as creator, trader, hedger and seller. This inevitably means there will be conflicts of interest because the bank in the middle gets paid (handsomely) for all its services, no matter what the outcome of the deal’s performance. Plus, it has the benefit of insider knowledge.
Even without putting together a C.D.O. portfolio on behalf of the same client whose interest is served by shorting it as is the case here, the entire nature of the C.D.O. business invites firms to act for certain clients and against others. There is always the possibility of stuffing the worst assets into a C.D.O. and marketing them as the best.
Risk is shuffled around the market from those in the know (like Goldman or Paulson) to those who have far less access to information or fancy analytics (like pension fund buyers.)
That’s how spread, or profit, is created. And, as we’ll see if more such deals get investigated for their unique conflicts, that’s how loss is deferred to others, too. The best protection is to isolate securities creation from distribution.
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Is This Political?
Edward Harrison is a banking and finance specialist at the economic consultancy Global Macro Advisors. He is also the principal contributor to the financial Web site Credit Writedowns.
When Lehman Brothers collapsed in a heap in 2008, the financial world was thrown into turmoil. The financial calamity was entirely foreseeable for those who chose to look. Reckless borrowing, lending and speculation were an integral part of the breakdown in our financial system. But so too was fraud.
It seems unlikely that the Goldman legal case is better than a potential legal challenge to Lehman’s use of ‘Repo 105.’
.Since at least 2004, when the FBI warned of a mortgage fraud “epidemic,” it has been clear that deception, predatory lending and outright fraud have been rampant in the financial services industry. Yet regulators did nothing. Therefore, my initial reaction to the fraud charges against Goldman Sachs for misleading clients is largely positive. I have long felt that the government was treading lightly against large U.S. banks, perhaps for fear of our economy’s fragile state.
But, Goldman Sachs has often been accused of looking after its own interests rather than that of its clients. Allegations that Goldman bet against its own clients in derivatives deals involving American municipalities and European countries are examples of the purported double dealing. It is no wonder that former Washington Mutual Kerry Killinger recently testified before Congress that he was wary of engaging Goldman Sachs as an adviser for just this reason. To date, most of this behavior could have been construed as legal but unethical.
Read more…
Goldman Sachs may be the first major Wall Street firm to face criminal charges because it has been a lightning rod of populist discontent. Moreover, they do not fulfill a significant deposit-taking function. But, it strikes me as odd that Goldman has been charged when Lehman Brothers had a $150 billion hole in its balance sheet that, at a minimum, represented a potential Sarbanes-Oxley violation. To this non-lawyer, it seems unlikely that the Goldman legal case is better than a potential legal challenge to Lehman’s use of an accounting device, known as “Repo 105,” to temporarily move assets.
Much of this is likely political. I see the timing of the Goldman announcement as an attempt by President Obama to at once tell Americans that he is serious about financial reform and banks that he will resist their efforts to deter reform by any means necessary.
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The Current Regulatory Battle
Douglas Elliott, a former investment banker, is a fellow in the Initiative on Business and Public Policy at the Brookings Institution.
We will not know for some time how important this is, because it depends on the strength of the government’s case and the extent to which this is a forerunner of lawsuits against other firms.
This case will raise the level of public anger and help move the financial reform proposals through the Senate.
.It is important to remember that complicated securities fraud cases can be difficult to prove. But this could be a watershed event if the S.E.C. has a strong case and follows this suit with broadly similar lawsuits against other banks.
In the short run, the suit is likely to strengthen the hand of the Democrats who are pushing financial reform legislation. This case will raise the level of public anger still further, providing fuel to move the proposals through the Senate.
Read more…
I already thought the odds of passage were high; this increases the odds further. However, politics is always difficult to forecast. For example, the Democrats could overplay their hand and succeed in completely uniting the Republicans, leading to a successful filibuster that kills the bill, at least for now.
If Democrats play their hand right, though, the suit will make it harder for Republicans to hold all 41 members in a Senate filibuster vote or to break away one or more Democrats. This is not a good time for a politician to be seen as defending Wall Street.
It is not clear that a different regulatory structure would have made a difference in this case. If the S.E.C.’s allegations are correct, the actions were illegal under current law. The S.E.C. could, perhaps, have done a better job of catching such actions earlier, but that is a matter of execution not broad structure.
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Undermining Trust in Markets
Megan McArdle is the business and economics editor for The Atlantic.
In one respect, this is not shocking at all. Goldman Sachs is publicly perceived to have not merely weathered this crisis well, but to have actually profited by it. Public anger is high. It was only to be expected that prosecutors and regulators would go head-hunting. But the details of these particular charges are rather surprising.
Minimize insider dealing by pushing more transactions onto central clearinghouses and exchanges.
.If the allegations are true, Goldman Sachs allowed a third party with a material economic interest to determine the structure of securities it sold. By itself, this is not worrisome — but according to the S.E.C., Goldman did not disclose this relationship, instead allowing investors to think that it had been structured by a disinterested analyst.
One side of the transaction had dramatically more information than the other — a situation which most market regulation is supposed to prevent. If the S.E.C. is correct, this isn’t merely evidence of a crime, but of a distressingly cavalier attitude toward basic rules of market conduct.
Read more…
Critics have long accused the bulge-bracket banks of using their market position to self-deal at the expense of ordinary investors. But these charges suggest that heavy-handed use of market muscle may have slipped over the line into outright fraud.
It’s clear that the sort of thing described in the complaint shouldn’t happen. It’s less clear how we can prevent them. This sort of insider dealing is extremely difficult to police. We will never get to a market so well-regulated that bankers can’t cut deals for favored clients with a nudge and a wink.
What we can do is minimize the opportunities for such activity by pushing as many transactions as possible onto central clearinghouses and exchanges. These are no panacea — just witness the deals that equity desks were able to cut for special clients in the late 1990s. But the less transparency there is, the easier it is to cut special deals for favored clients at the expense of other investors.
This isn’t just bad for the investors; it’s corrosive to the trust that markets need to function well. It also erodes the public trust in the major investment banks. Those banks have fought fiercely against regulation designed to lessen their market power. As Congress moves towards passage of comprehensive financial reform, they, and the bankers, would do well to remember that without strong trust in markets, we’d all be a lot worse off.
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So Much We Don’t Know
William K. Black, an associate professor of economics and law at the University of Missouri–Kansas City, is a former top federal financial regulator. He is the author of “The Best Way to Rob a Bank is to Own One.”
It’s been a bad two weeks for our most elite financial leaders. Citicorp’s top mortgage credit officer, Richard Bowen, testified before Financial Crisis Inquiry Commission on April 7 that while Citi represented to Fannie and Freddie that the toxic mortgages it was selling them were “conforming” — 60 percent were not.
Why have there been no criminal charges?
.He warned Citi’s top managers, including Robert Rubin. They jumped right on the problem (which will cost the taxpayers hundreds of billions of dollars) — by allowing things to get worse.
The Senate Banking Committee released the findings from its investigation of Washington Mutual — the largest savings and loan and largest bank failure. My research specialty is “control fraud,” which involves fraudulent accounting. Lenders optimize accounting fraud through extreme growth; making bad loans at high interest rates; extreme leverage and trivial loss reserves. The Senate Banking Committee’s findings show that WaMu’s business operations followed this recipe.
Read more…
Lehman led the parade with the recent release of the bankruptcy examiner’s report. The report shows that Lehman had billions of dollars of losses on bad assets. But Lehman’s financial statements did not recognize the losses. In addition to this first-stage cover up of its losses, Lehman entered into huge quarter-end repurchase agreement transactions to further cover up its crippling losses. Both cover-ups could lead to criminal liability.
Now, we learn that the S.E.C. charges that Goldman Sachs should be added to the list of elite financial frauds.
It is a tale of two (unrelated) Paulsons. Hank Paulson, while Goldman’s chief executive, had Goldman buy large amounts of collateralized debt obligations backed by “liar’s loans” (low-grade mortgages). He then became U.S. Treasury Secretary and launched a successful war against securities and banking regulation. His successors at Goldman realized the disaster and began to “short” C.D.O.s.
It designed a rigged trifecta: (1) it turned a massive loss into a material profit by selling toxic C.D.O.s it owned, (2) helped make John Paulson, head of a huge hedge fund, a massive profit and (3) blew up its customers that purchased the C.D.O.s.
The S.E.C. complaint says that Goldman defrauded its own customers by representing to them that the C.D.O. was “selected by ACA Management.” ACA was supposed to be an independent group of experts that would “select” nonprime loans “most likely to succeed” rather than “most likely to fail.” The SEC complaint alleges that the representations about ACA were false.
The question is: did John Paulson and ACA know that Goldman was making these false disclosures to the C.D.O. purchasers? Did they aid in what the S.E.C. alleges was Goldman’s fraud? Why have there been no criminal charges? Why did the S.E.C. only name a relatively low-level Goldman officer in its complaint?
Goldman used American International Group to provide the insurance on the synthetic C.D.O. deals, and Hank Paulson used our money to bail out Goldman when A.I.G.’s scams drove it to failure. As we — Eliot Spitzer, Frank Partnoy and I — asked in our Op-Ed in the Times on Dec. 19, 2009 — why haven’t the A.I.G. e-mails and key deal documents been made public?
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.151 Readers' CommentsPost a Comment ».All CommentsHighlightsReaders' RecommendationsReplies..OldestNewest of 7Next ..1.R. Law
Texas
April 16th, 2010
4:32 pmIntegrity of the markets is sacrosanct to capitalism, on a pedestal equal to fiduciary responsibilities.
Firrms in charge of making markets and spreading the gospel of capitalism are doubly-charged with protecting both tenets.
Recommend Recommended by 53 Readers .2.Tom
Midwest
April 16th, 2010
4:33 pmConsidering the Republicans, maintaining their status quo, today unanimously vowed to oppose financial reform while at the same time President Obama vowed to veto any legislation that did not include regulation of derivatives which I believe are at the core of the financial collapse and problems. The Democrats, rightly or wrongly are proposing specific legislation while the Republicans propose nothing. That explains everything to me in a nutshell. Now tell me again which party is more beholden to the big financial companies and banks? The Republicans keep driving me farther and farther from the party I used to support. They used to have ideas, now they have only no.
Recommend Recommended by 303 Readers .3.greenmountain boy
burlington, vt
April 16th, 2010
4:33 pmLynn Stout has it exactly right. Bankers and investors will always be greedy. Trying to police a market of synthetic cdos is a waste of time. The traditional rule that you should only be hedging against your own actual risks needs to be reinstated.
Recommend Recommended by 151 Readers .4.Arin
Buffalo, NY
April 16th, 2010
4:37 pmThe politics of this plays very well. This lawsuit comes on the very day that the Republicans have unified to prevent debate of the financial reform bill in the Senate. It will hopefully shape the message of the Democrat party, that the Democrats stand for Main Street, and the Republicans stand for Wall Street. Whatever the outcome of this lawsuit, its intent has already paid dividends (no pun intended)
Recommend Recommended by 92 Readers .5.Mark O
Boston
April 16th, 2010
4:38 pmI was under the impression that the Federal government was in thrall to Goldman Sachs because the firm has until now been allowed to seek bilk the financial system with impunity. This lawsuit is both shocking and refreshing evidence of the government's independence.
Recommend Recommended by 65 Readers .6.jimmy
san francisco
April 16th, 2010
4:38 pmI think Professor Stout cleared it up for those on Wall Street. They burned the house down insured at 100 cents on the dollar with our bail out tax money in the hundreds of billions of dollars to AIG and they'll do it again. How can this not make anyone just completely sick. How many lives and careers have they ruined? And Obama says he's not out to get the bankers? I hope he was lying.
Recommend Recommended by 129 Readers .7.Atlanta Guy Making serious dough
Atlanta, GA
April 16th, 2010
4:46 pmWhy is Goldman Sachs only facing a civil suit? The allegation against them is criminal fraud and they should face criminal prosecution. This feeds the long standing view (held by many) that the rich get away with murder while the average joe is held to a higher standard. Though a civil case will indeed be very damaging to GS, it is NOT enough. You deceived investors and nearly destroyed the entire financial system and you're sitting there looking pretty (with billions in profit)
Recommend Recommended by 199 Readers .8.timfenton1
laura
April 16th, 2010
4:47 pmWhy didn't you request comment from Sen. Mitch McConnell who seems determined to sink financial markets reform?
Recommend Recommended by 83 Readers .9.GrammyofWandA
Maine
April 16th, 2010
4:47 pmThe teabaggers will surely point out that the Goldman Sachs employees who allegedly committed the fraud are extremely dedicated workers who should not be subjected to an income tax increase.
Recommend Recommended by 110 Readers .10.mark
Honolulu, Hawaii
April 16th, 2010
4:47 pmThe insurance analogy is spot on! We don't let people bet on whether other people's buildings will burn down for reasons that are so obvious they have been a part of insurance law forever. It's called the necessity of having an insurable interest. What do you think would happen if we allowed the mob to buy insurance on people's lives? When we allowed people to take out insurance without an insurable interest we converted a financial instrument predicated on personal risk avoidance into one predicated on profiting on other people's losses. The results are here in front of us for all to see. We need to reverse the mistake we made and reverse it quickly.
Recommend Recommended by 178 Readers .11.sara
oakland, ca
April 16th, 2010
4:47 pmi am waiting for the apologists for Market Innovation to begin the talking points that will crush litigation and effective reform.
Beneath the Goldman/Magnator shorting of these faulty CDOs with wildly high credit default swap pay-offs lies the RATIONALIZATION. Risk is diluted buy these derivatives, shorting keeps the market honest, capitalizing our realestate market bring poor folk into home ownership....ALL these arguments are either gross distortions of reality or cynical ways to preserve the looting of our economy by shallow wise guys. These short-term profiteers (thru millions in commissions from creating CDOs to the billions collected in crooked swaps as they failed) are now safely stashing away their fortunes; NO LESSON has been learned. And the law blocks retroactive taxation of windfall profits....or does it ?
Recommend Recommended by 37 Readers .12.jjcrocket
New Britain, Conn.
April 16th, 2010
4:48 pmDianna Farrell:
Obama Administration: Deputy Director, National Economic Council
Former Goldman Sachs Title: Financial Analyst
Stephen Friedman:
Obama Administration: Chairman, President’s Foreign Intelligence Advisory Board
Former Goldman Sachs Title: Board Member (Chairman, 1990-94; Director, 2005-)
Gary Gensler:
Obama Administration: Commissioner, Commodity Futures Trading Commission
Former Goldman Sachs Title: Partner and Co-head of Finance
Robert Hormats:
Obama Administration: Undersecretary for Economic, Energy and Agricultural Affairs, State Department
Former Goldman Sachs Title: Vice Chairman, Goldman Sachs Group
Philip Murphy:
Obama Administration: Ambassador to Germany
Former Goldman Sachs Title: Head of Goldman Sachs, Frankfurt
Mark Patterson:
Obama Administration: Chief of Staff to Treasury Secretary, Timothy Geitner
Former Goldman Sachs Title: Lobbyist 2005-2008; Vice President for Government Relations
John Thain:
Obama Administration: Advisor to Treasury Secretary, Timothy Geithner
Former Goldman Sachs Title: President and Chief Operating Officer (1999-2003)
http://the-classic-liberal.com...
Recommend Recommended by 129 Readers .13.Older but Wiser
Dallas
April 16th, 2010
4:48 pmIn a criminal trial most people withhold judgement until the verdict is reached. As civil cases turn far more on interpretations of rules it would be more seemly if the New York Times and its panelists waited until there is a conviction before crowing and trying to tell us what all this means.
Recommend Recommended by 5 Readers .14.smiths
ar
April 16th, 2010
4:48 pmI'm more concerned about Goldmans Sach's ownership of the Obama administration
Recommend Recommended by 95 Readers .15.RS Love
Palo Alto, CA
April 16th, 2010
4:48 pmJust a reminder that Frank Partnoy testified back in 2002 before a Senate committee that Enron was enabled to game and defraud investors using derivatives and that unless the law was corrected, more of the same was coming down the road. No one listened.
The culprit in the Enron crime wave was a recipe of CFMA 2000 mandated deregulation of trading exotics/synthetics, the corporate accountants serving no one, credit agencies for hire and our own lax Federal regulators too.
Roll tape forward to 2010. We are about to ignore the lessons of the past once again. Hard to admit that post-Depression banking legislation actually worked then and it worked up until the recent1990s while both parties dismantled it. There can be no real reform without separating the main street banking businesses from the casino bankers.
The mighty legends are headed to disgrace including Greenspan, Rubin, Summers, our Presidents (from Reagan to Obama), Paulson, Geithner, Gramm and the Senate Republicans who blindly took Wall Street's money; now it's the Democrats turn to pave the next road to financial ruin. They're right on schedule.
Recommend Recommended by 83 Readers .16.BTT
Wilkes-Barre, Pa.
April 16th, 2010
4:49 pmOne other point to Lynn Stout: you can't buy Home Insurance while the house is on fire! America at its worst! How immoral! BTT
Recommend Recommended by 32 Readers .17.Marcel Duchamp
Maine
April 16th, 2010
4:49 pmNext up: criminal prosecutions.
Let's go!
Recommend Recommended by 100 Readers .18.T.L.Moran
Idaho
April 16th, 2010
4:49 pmForget the SEC and its hunt through the dense weeds of microscopic regulatory law.
The attorneys general of many states facing bankruptcy, the many pension funds, university systems, and other public institutions, need only find one instance -- I'm sure there are many -- of death from heart attack or crisis-driven suicide and they have a perfect case against these corporations for depraved-heart murder.
The Wall St. thugs, driven by their addiction to complex scams and outsize profits, have demonstrated 'callous disregard' and 'extreme indifference' to the value of American lives with every million dollar profit they've made, every lavish bonus they've awarded themselves.
Never mind what slimy combination of congressional dopes and financial addicts undermined the laws protecting the country from this kind of daylight robbery. The intentions and the results speak clear: the executives of firms like this set aside all consideration for the continued life, health and happiness of everyday Americans in their adolescent race to see who could be the fastest, biggest looter of our national economy.
If corporations are people (thank you activist neo-con SCOTUS), then they are all guilty of depraved indifference. Prosecute, punish, and GET THIS COUNTRY'S MONEY BACK!
Recommend Recommended by 69 Readers .19.JVM Fan
Hollywood
April 16th, 2010
4:49 pmI just saw a movie on Sunset Blvd. called "Stock Shock" about all this Wall Street corruption and the audience was pretty shocked. It was the same story told through the eyes of Sirus XM investors that nearly went broke because of market manipulation. The movie is now sold on DVD just about everywhere, but cheaper at www.stockshockmovie.com
Recommend Recommended by 7 Readers .20.frank
providence, ri
April 16th, 2010
4:49 pmNone of this is news. Zuckerman in The Greatest Trade Ever (p.179) names Goldman, Bear Sterns, and Deutsche Bank (and others) as working with Paulson to create "controversial" CDO's (meaning this is not news) tailor made to fail. What can also be said it that mostly the banks were betting the other way, which is why they had so much losses, and the argument they were hedging really seems correct. But the fraud is ultimately about charges against an outside rating agencies, that maybe one didn't exist in this trade despite what was said. But all the rating agencies were also pushed and threatened no doubt NOT to rate the CDOs accurately. There is fraud everywhere, of course. The whole system was a fraud.
Recommend Recommended by 46 Readers .21.Docb
denver
April 16th, 2010
4:50 pmCome on folks --there has to be a market for these products...another IB or two or perhaps the street! They all did this created a market-- bought and sold against a fail...Go to the SEC site and pull up the Complaint--there is a firm mentioned , Paulson &Co---Hmmm could it be true? But this is just the tip...the SEC needs to be contacted and reminded that this is not isolated and not a case for fines and wrist slaps...1.888.732.6585 or the Sec of the SEC 1.202.551.5400
Recommend Recommended by 8 Readers .22.Dan
NYC
April 16th, 2010
4:50 pmI disagree with these rosy optimistic analysis of these so-called "experts."
This is the start of new chapter of regulations? Thats BS - These are civil charges, NOT criminal. Sure, Goldman will get hit with a settlement (probably around a million), which might sound big to the "main street average person" but in reality its not big at all to them. They will continue to do what they do and generate much much more money than that. Then, of course, Goldman Sachs will deny any wrongdoing, and Obama will praise the Justice System that we have. Every one wins! Except, of course, the people on main street and the people who GS fleeced.
Do you HONESTLY expect any better when the insane run the asylum?
Recommend Recommended by 55 Readers .23.pstgradny
New York
April 16th, 2010
4:52 pmWhat a shocker...dishonest and greedy investment bankers and traders. Sounds like fodder for a movie that might be entitled, Wall Street. I think Michael Douglas would be perfect for the lead role, and Charlie Sheen would be great as a conflicted young broker/trader. In the aftermath of the recent financial meltdown, this movie could be a huge hit, especially if done in 3D. Cameo performances might include Bernie Madoff, Jeffrey Skilling, Andy Fastow, Bernie Ebbers, Edward S. Digges Jr., etc.
Recommend Recommended by 16 Readers .24.Zenster
Manhattan
April 16th, 2010
5:13 pmIt seems every single person in the country knows for a fact that Goldman Sachs is a criminal organization, a white collar mafia - and still it took this long for the SEC to prosecute - and only this one charge, so amazingly egregious. What about the thousands and thousands of other crimes this giant vampire squid committed?
Recommend Recommended by 60 Readers .25.ron
new orleans
April 16th, 2010
5:14 pmI believe that the current banking crisis started out many years ago in Denver when the Silverado Bank and Neil Bush were bailed out by his father(Bush I) and his friends(Cheney,et al). Instead of starting a new wave of bank regulation at the time, Congress with the support of Bush, et al opened the flood gates to SEC deregulation. Being an optimist, I believe that everything that goes around, comes around. The American public will not be satisfied until the current group of creative criminals are exposed. Once they are indicted, historians should then revisit the first banking crisis.
Recommend Recommended by 63 Readers . of 7 Next ..Post a Comment
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Where was Lynn A. Stout when her information was needed?
http://roomfordebate.blogs.nytimes.com/2010/04/16/what-goldmans-conduct-reveals/#lynn
Over and over again there is nobody to present the other side of legislation that enabled the system to be destroyed. That's because there is nobody funding that side. Nobody called an expert to research the issue and report to Congress.
So as clear as Lynn A. Stout's piece is to us, where was she in 2000 when this information would have been relevant?
The information:
Sunday, April 18, 2010
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April 16, 2010, 3:31 pm What Goldman’s Conduct Reveals
By THE EDITORS
The Securities and Exchange Commission filed a civil lawsuit against Goldman Sachs for securities fraud on Friday, charging the bank with creating and selling mortgage-backed securities that were intended to fail.
According to the complaint, Goldman let John Paulson, a prominent hedge fund manager, select mortgage bonds that he wanted to bet against because they were most likely to lose value and packaged those bonds into the “Abacus” investments, which were sold to investors like foreign banks and pension funds. As those securities plunged in value, the Paulson hedge fund made money on the negative bets, while the Goldman clients who bought the investments lost billions of dollars.
Is this chain of events surprising? The S.E.C. is suing Goldman Sachs, but could regulation or monitoring of these financial instruments have prevented such losses? What kind of regulatory structure would need to be put in place?
Lynn A. Stout, professor of corporate and securities law, U.C.L.A.
Michael Greenberger, former commodities regulator
Nicole Gelinas, Manhattan Institute
Yves Smith, financial analyst
Nomi Prins, senior fellow, Demos
Edward Harrison, banking and finance specialist
Douglas Elliott, Brookings Institution
Megan McArdle, Asymmetrical Information
William K. Black, former banking regulator
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The Natural Result of Deregulation
Lynn A. Stout is the Paul Hastings professor of corporate and securities law at U.C.L.A. and an expert on corporate governance.
If the allegations against Goldman Sachs are true, then much of the blame for investors’ losses in the Abacus deal can be laid at the feet of an obscure statute passed by Congress in 2000, the “Commodities Futures Modernization Act.”
If we allow the unscrupulous to buy fire insurance on other people’s houses, the incidence of arson would rise sharply. In one dramatic move, that act eliminated a longstanding legal rule that deemed derivatives bets made outside regulated exchanges to be legally enforceable only if one of the parties to the bet was hedging against a pre-existing risk.
This traditional derivatives rule against purely speculative derivatives trading has a parallel in insurance law, because insurance, like derivatives trading, is really just a form of betting. A homeowner’s fire insurance policy, for example, is a bet with an insurance company that your house will burn down.
Under the rules of insurance law, you can only buy fire insurance on a house if you actually own the house in question. Similarly, under the traditional legal rules regulating derivatives trading, the only parties who could use off-exchange derivatives to bet against the Abacus deal would be parties who actually held investments in Abacus.
By eliminating this centuries-old rule in the name of “modernization,” Congress created enormous problems of moral hazard in the off-exchange derivatives market. Imagine, for example, if we allow the unscrupulous to buy fire insurance on other people’s houses; the incidence of arson would rise dramatically.
Similarly, by allowing an unscrupulous hedge fund to use derivatives to bet against an Abacus investment vehicle it didn’t own, the Commodities Futures Modernization Act invited that hedge fund to work with Goldman Sachs to make sure that Abacus would indeed fail — as it did.
Sadly, greed is a constant in human nature. We’re not likely to eliminate it soon. But we can at least keep it in check. It’s time for Congress to address the problem of moral hazard in derivatives betting by repealing the Commodities Futures Modernization Act.
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Accountability, at Long Last
Michael Greenberger is a professor at the University of Maryland School of Law and a former director of trading and markets at the Commodity Futures Trading Commission.
If Sept. 15, 2008, the day Lehman Brothers was allowed to fail, marks the Pearl Harbor or widely acknowledged onset of the present Great Recession (in Franklin Roosevelt’s words “a date which shall live in infamy”), April 16, 2010 may be deemed the equivalent of the U.S. victory in the crucial Battle of Midway in 1942 or the day the U.S. neutralized the Japanese fleet.
If the fall of Lehman was Pearl Harbor, the S.E.C.’s case against Goldman may be the Battle of Midway — a crucial victory.
.On April 16, 2010, the S.E.C. announced its enforcement action against Goldman Sachs alleging the improper marketing of what the S.E.C. alleges was the sale of two evenly matched, but highly conflicting, investments: essentially bets for and against the proposition that subprime (non-creditworthy) mortgage borrowers would pay back their loans. Goldman is alleged to have profited substantially from those who bet against subprime repayment while aggressively marketing to its other customers bets in favor of repayment.
Let’s be clear. Goldman Sachs vigorously denies the S.E.C.’s allegations, and doubtless it will fight the action with the utmost vigor. It is certainly entitled to do so.
Read more…
However, what makes the S.E.C. enforcement action a landmark is that it responds to a widely held desire on the part of the American taxpayer: accountability.
The underpinnings of that desire is that the present crisis, including high unemployment and devastating economic insecurity accompanied by skyrocketing deficits, was not caused by the average American. But, it is the average American who has had to foot the bill for restoring the economy.
What is especially aggravating is that those who unmistakably did cause the crisis, i.e., the “pillars of Wall Street,” are now stronger and more profitable than ever before. And the impression is that Wall Street has returned to “business as usual,” once again using the same investment strategies that brought on the fall 2008 deluge.
The case against Goldman shows that savvy insiders knew the financial crisis was coming, and profited from it.
.So the key question from Main Street is: where is the accountability? If the average American fails miserably in a business or professional enterprise, there are consequences, e.g., firing or bankruptcy. Up to today, it appeared that those traditional hallmarks of failure did not apply to Wall Street or those who were responsible for regulating Wall Street.
Just last week, Alan Greenspan, the former Fed chairman, and Robert Rubin, the former Treasury Secretary and Citigroup officer, said they were not to blame for the meltdown even though both prevented regulation of the kind of bets Goldman Sachs is now accused of misusing.
More galling is the constant refrain from both Wall Street C.E.O.s and former regulators that no one could have predicted the crisis. However, the S.E.C. allegations are premised on the fact that hedge funds and Goldman Sachs itself were so convinced of cataclysmic failure that they were looking for investment vehicles that would profit each time a homeowner defaulted on his or her mortgage.
In other words, there were competent and smart people making billions because they could foresee the obvious: people with poor credit would not be able to repay their home loans.
In short, it was not that no one knew. Savvy insiders knew.
We do not know the success of the S.E.C.s actions today. But, if successful, you can be sure that this will be the beginning of what those average Americans suffering during this Great Recession are desperately seeking: accountability.
As Winston Churchill said after early Allied victories in World War II: “This is not the end or even the beginning of the end; but it is the end of the beginning.” We may now be at the beginning of rewarding competence and sanctioning ineptness or worse.
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A Third Party Problem
Nicole Gelinas, a contributing editor to the Manhattan Institute’s City Journal, is the author of “After the Fall: Saving Capitalism from Wall Street — and Washington.”
The government’s charges against Goldman and its employees — if true — are not shocking. People lie. The Securities and Exchange Commission can do better at enforcing the laws that make liars think twice. But policing fraud cannot be our first line of defense against financial excess.
It’s simple: the German bank that bought the mortgage securities shouldn’t have relied on a consultant.
.The S.E.C. says that Goldman, in early 2007, told mortgage-bond buyers that the consultant who helped create their securities had their best interests at heart. The consultant was taking advice, at Goldman’s behest, from another investor who would profit when the securities went bust.
Synthetic collateralized debt obligations are hard, but dishonesty with clients is easy. Raking through the details of the case uproots far deeper problems, though.
Read more…
First, the obscure third parties that helped Goldman and other big banks sell complex deals encouraged investors to suspend necessary skepticism.
The German bank that bought the mortgage securities, IKB Deutsche Industriebank, fancied itself a sophisticated firm. So why did it rely on a Goldman consultant, ACA Management, as a “portfolio selection agent?” And why did sophisticated investors need third parties to “insure” the securities?
Just as Bernie Madoff’s investors would have done better not to rely on advisers to tell them that Bernie was O.K., IKB would have been better off performing its own analysis of American mortgage markets.
But obscure third parties were the spawn of Washington’s bank bailouts starting in the 1980s. The expectation of government support artificially fed Wall Street growth — so there was plenty of cheap money to trickle down from the too-big-to-fail banks to the ever-more-creative little guys.
Second, applying old trading and capital rules to new financial markets would have reduced hanky-panky.
Goldman was able to “customize” securities, allegedly committing fraud under cover of the opacity that customization provided, because the securities did not trade on a public marketplace. Such a marketplace would have demanded simplicity from Goldman in creating the securities. Thousands of investors, rather than a few hand-picked third parties, could have analyzed and priced them.
The same is true in credit-derivatives markets. Opacity serves only the banks, which reap higher fees from customers who remain in the dark.
Enforcing justice is vital to markets. But Washington should help investors, too, by reducing opportunities to thwart justice. We need a return to simplicity. Congress should direct regulators to impose trading, disclosure and capital rules consistently across financial firms and instruments — so that markets can smash the repositories for secrets that imperil the economy.
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Immoral, Destructive Behavior
Yves Smith writes the blog Naked Capitalism. She is the head of Aurora Advisors, a management consulting firm, and the author of “Econned: How Unenlightened Self Interest Undermined Democracy and Corrupted Capitalism.”
Strange as it may seem, the Securities and Exchange Commission’s lawsuit against Goldman Sachs for selling collateralized debt obligations (C.D.O.) designed to fail illustrates what a long and difficult haul it will be to reform the financial services sector.
This case should be a slam-dunk, but years of deregulation have narrowed the ground for lawsuits.
.Goldman allowed hedge fund manager John Paulson to sponsor a C.D.O. The sponsor can influence how the C.D.O. is constructed, the notion being that the sponsor will act in ways that help all the other investors. But this C.D.O. was allegedly a Trojan horse for Mr. Paulson to take a large short position, betting against the very same C.D.O. he was creating.
But his intent was not disclosed. And, not surprisingly, the deal was a complete wipeout, with Mr. Paulson collecting a billion dollars of winnings at the expense of investors who had been kept in the dark and would almost certainly have turned down the deal if they had had the full picture.
By any common sense standard, this case should be a slam-dunk. However, despite tough talk by the Obama administration on financial reform, it is not mounting a criminal case against Goldman.
Read more…
Moreover, the S.E.C. has long had a difficult time winning complex financial fraud cases. While critics like to argue that the S.E.C. is not up to the task, the situation is more complex. Years of deregulation have narrowed the ground for lawsuits considerably. What’s more, structured credit is a new area of litigation. Thus the S.E.C. is also mounting its case in an arena where there are few precedents to rely upon.
If the S.E.C. loses its case against Goldman, it will be too easy to draw the wrong conclusion: not that the S.E.C. failed, but that the financial services industry succeeds all too well in its campaign to tear down the rules needed to make markets safe for investors.
No matter what happens to this particular lawsuit, it’s critical not to lose sight of the fact that immoral, destructive behavior has become deeply entrenched on Wall Street, and it will take concerted action to root it out.
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Smelling the Deception
Nomi Prins is a senior fellow at Demos. She is the author of “It Takes a Pillage: Behind the Bailouts, Bonuses and Backroom Deals from Washington to Wall Street” and “Other People’s Money: The Corporate Mugging of America.” She was a managing director at Goldman Sachs.
It’s probably no coincidence that Goldman Sachs took such great pains to deliver a decisive “we don’t bet against our clients” statement right before the S.E.C. levied its charge that the firm “defrauded” its clients through “misstating and omitting key facts.”
The entire nature of the C.D.O. business invites firms to act for certain clients and against others.
.Indeed, under the particulars of this complaint, Goldman didn’t bet against its clients directly, it merely acted on all possible angles of a deal that facilitated one huge client betting against other clients, while obfuscating the specifics of its enabling and fee-taking role in the triangle.
That’s why it is dangerous to single out one member of Goldman (where the title of vice president is low on the totem pole) as the culprit. Collateralized debt obligations were very lucrative for everyone involved. The bad apple approach enforces an inaccurate representation of two main problems.
Read more…
First, it took the S.E.C. nearly three years to wake up and smell the deception. This was a large deal involving a major investment house and major hedge fund. Having some sort of priority examination of such deals would have been prudent.
Second and more important, is the lax regulatory structure itself. In our current regulatory framework, any issuing bank can act on all sides of a C.D.O. (or other complex security) — as creator, trader, hedger and seller. This inevitably means there will be conflicts of interest because the bank in the middle gets paid (handsomely) for all its services, no matter what the outcome of the deal’s performance. Plus, it has the benefit of insider knowledge.
Even without putting together a C.D.O. portfolio on behalf of the same client whose interest is served by shorting it as is the case here, the entire nature of the C.D.O. business invites firms to act for certain clients and against others. There is always the possibility of stuffing the worst assets into a C.D.O. and marketing them as the best.
Risk is shuffled around the market from those in the know (like Goldman or Paulson) to those who have far less access to information or fancy analytics (like pension fund buyers.)
That’s how spread, or profit, is created. And, as we’ll see if more such deals get investigated for their unique conflicts, that’s how loss is deferred to others, too. The best protection is to isolate securities creation from distribution.
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Is This Political?
Edward Harrison is a banking and finance specialist at the economic consultancy Global Macro Advisors. He is also the principal contributor to the financial Web site Credit Writedowns.
When Lehman Brothers collapsed in a heap in 2008, the financial world was thrown into turmoil. The financial calamity was entirely foreseeable for those who chose to look. Reckless borrowing, lending and speculation were an integral part of the breakdown in our financial system. But so too was fraud.
It seems unlikely that the Goldman legal case is better than a potential legal challenge to Lehman’s use of ‘Repo 105.’
.Since at least 2004, when the FBI warned of a mortgage fraud “epidemic,” it has been clear that deception, predatory lending and outright fraud have been rampant in the financial services industry. Yet regulators did nothing. Therefore, my initial reaction to the fraud charges against Goldman Sachs for misleading clients is largely positive. I have long felt that the government was treading lightly against large U.S. banks, perhaps for fear of our economy’s fragile state.
But, Goldman Sachs has often been accused of looking after its own interests rather than that of its clients. Allegations that Goldman bet against its own clients in derivatives deals involving American municipalities and European countries are examples of the purported double dealing. It is no wonder that former Washington Mutual Kerry Killinger recently testified before Congress that he was wary of engaging Goldman Sachs as an adviser for just this reason. To date, most of this behavior could have been construed as legal but unethical.
Read more…
Goldman Sachs may be the first major Wall Street firm to face criminal charges because it has been a lightning rod of populist discontent. Moreover, they do not fulfill a significant deposit-taking function. But, it strikes me as odd that Goldman has been charged when Lehman Brothers had a $150 billion hole in its balance sheet that, at a minimum, represented a potential Sarbanes-Oxley violation. To this non-lawyer, it seems unlikely that the Goldman legal case is better than a potential legal challenge to Lehman’s use of an accounting device, known as “Repo 105,” to temporarily move assets.
Much of this is likely political. I see the timing of the Goldman announcement as an attempt by President Obama to at once tell Americans that he is serious about financial reform and banks that he will resist their efforts to deter reform by any means necessary.
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The Current Regulatory Battle
Douglas Elliott, a former investment banker, is a fellow in the Initiative on Business and Public Policy at the Brookings Institution.
We will not know for some time how important this is, because it depends on the strength of the government’s case and the extent to which this is a forerunner of lawsuits against other firms.
This case will raise the level of public anger and help move the financial reform proposals through the Senate.
.It is important to remember that complicated securities fraud cases can be difficult to prove. But this could be a watershed event if the S.E.C. has a strong case and follows this suit with broadly similar lawsuits against other banks.
In the short run, the suit is likely to strengthen the hand of the Democrats who are pushing financial reform legislation. This case will raise the level of public anger still further, providing fuel to move the proposals through the Senate.
Read more…
I already thought the odds of passage were high; this increases the odds further. However, politics is always difficult to forecast. For example, the Democrats could overplay their hand and succeed in completely uniting the Republicans, leading to a successful filibuster that kills the bill, at least for now.
If Democrats play their hand right, though, the suit will make it harder for Republicans to hold all 41 members in a Senate filibuster vote or to break away one or more Democrats. This is not a good time for a politician to be seen as defending Wall Street.
It is not clear that a different regulatory structure would have made a difference in this case. If the S.E.C.’s allegations are correct, the actions were illegal under current law. The S.E.C. could, perhaps, have done a better job of catching such actions earlier, but that is a matter of execution not broad structure.
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Undermining Trust in Markets
Megan McArdle is the business and economics editor for The Atlantic.
In one respect, this is not shocking at all. Goldman Sachs is publicly perceived to have not merely weathered this crisis well, but to have actually profited by it. Public anger is high. It was only to be expected that prosecutors and regulators would go head-hunting. But the details of these particular charges are rather surprising.
Minimize insider dealing by pushing more transactions onto central clearinghouses and exchanges.
.If the allegations are true, Goldman Sachs allowed a third party with a material economic interest to determine the structure of securities it sold. By itself, this is not worrisome — but according to the S.E.C., Goldman did not disclose this relationship, instead allowing investors to think that it had been structured by a disinterested analyst.
One side of the transaction had dramatically more information than the other — a situation which most market regulation is supposed to prevent. If the S.E.C. is correct, this isn’t merely evidence of a crime, but of a distressingly cavalier attitude toward basic rules of market conduct.
Read more…
Critics have long accused the bulge-bracket banks of using their market position to self-deal at the expense of ordinary investors. But these charges suggest that heavy-handed use of market muscle may have slipped over the line into outright fraud.
It’s clear that the sort of thing described in the complaint shouldn’t happen. It’s less clear how we can prevent them. This sort of insider dealing is extremely difficult to police. We will never get to a market so well-regulated that bankers can’t cut deals for favored clients with a nudge and a wink.
What we can do is minimize the opportunities for such activity by pushing as many transactions as possible onto central clearinghouses and exchanges. These are no panacea — just witness the deals that equity desks were able to cut for special clients in the late 1990s. But the less transparency there is, the easier it is to cut special deals for favored clients at the expense of other investors.
This isn’t just bad for the investors; it’s corrosive to the trust that markets need to function well. It also erodes the public trust in the major investment banks. Those banks have fought fiercely against regulation designed to lessen their market power. As Congress moves towards passage of comprehensive financial reform, they, and the bankers, would do well to remember that without strong trust in markets, we’d all be a lot worse off.
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So Much We Don’t Know
William K. Black, an associate professor of economics and law at the University of Missouri–Kansas City, is a former top federal financial regulator. He is the author of “The Best Way to Rob a Bank is to Own One.”
It’s been a bad two weeks for our most elite financial leaders. Citicorp’s top mortgage credit officer, Richard Bowen, testified before Financial Crisis Inquiry Commission on April 7 that while Citi represented to Fannie and Freddie that the toxic mortgages it was selling them were “conforming” — 60 percent were not.
Why have there been no criminal charges?
.He warned Citi’s top managers, including Robert Rubin. They jumped right on the problem (which will cost the taxpayers hundreds of billions of dollars) — by allowing things to get worse.
The Senate Banking Committee released the findings from its investigation of Washington Mutual — the largest savings and loan and largest bank failure. My research specialty is “control fraud,” which involves fraudulent accounting. Lenders optimize accounting fraud through extreme growth; making bad loans at high interest rates; extreme leverage and trivial loss reserves. The Senate Banking Committee’s findings show that WaMu’s business operations followed this recipe.
Read more…
Lehman led the parade with the recent release of the bankruptcy examiner’s report. The report shows that Lehman had billions of dollars of losses on bad assets. But Lehman’s financial statements did not recognize the losses. In addition to this first-stage cover up of its losses, Lehman entered into huge quarter-end repurchase agreement transactions to further cover up its crippling losses. Both cover-ups could lead to criminal liability.
Now, we learn that the S.E.C. charges that Goldman Sachs should be added to the list of elite financial frauds.
It is a tale of two (unrelated) Paulsons. Hank Paulson, while Goldman’s chief executive, had Goldman buy large amounts of collateralized debt obligations backed by “liar’s loans” (low-grade mortgages). He then became U.S. Treasury Secretary and launched a successful war against securities and banking regulation. His successors at Goldman realized the disaster and began to “short” C.D.O.s.
It designed a rigged trifecta: (1) it turned a massive loss into a material profit by selling toxic C.D.O.s it owned, (2) helped make John Paulson, head of a huge hedge fund, a massive profit and (3) blew up its customers that purchased the C.D.O.s.
The S.E.C. complaint says that Goldman defrauded its own customers by representing to them that the C.D.O. was “selected by ACA Management.” ACA was supposed to be an independent group of experts that would “select” nonprime loans “most likely to succeed” rather than “most likely to fail.” The SEC complaint alleges that the representations about ACA were false.
The question is: did John Paulson and ACA know that Goldman was making these false disclosures to the C.D.O. purchasers? Did they aid in what the S.E.C. alleges was Goldman’s fraud? Why have there been no criminal charges? Why did the S.E.C. only name a relatively low-level Goldman officer in its complaint?
Goldman used American International Group to provide the insurance on the synthetic C.D.O. deals, and Hank Paulson used our money to bail out Goldman when A.I.G.’s scams drove it to failure. As we — Eliot Spitzer, Frank Partnoy and I — asked in our Op-Ed in the Times on Dec. 19, 2009 — why haven’t the A.I.G. e-mails and key deal documents been made public?
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.151 Readers' CommentsPost a Comment ».All CommentsHighlightsReaders' RecommendationsReplies..OldestNewest of 7Next ..1.R. Law
Texas
April 16th, 2010
4:32 pmIntegrity of the markets is sacrosanct to capitalism, on a pedestal equal to fiduciary responsibilities.
Firrms in charge of making markets and spreading the gospel of capitalism are doubly-charged with protecting both tenets.
Recommend Recommended by 53 Readers .2.Tom
Midwest
April 16th, 2010
4:33 pmConsidering the Republicans, maintaining their status quo, today unanimously vowed to oppose financial reform while at the same time President Obama vowed to veto any legislation that did not include regulation of derivatives which I believe are at the core of the financial collapse and problems. The Democrats, rightly or wrongly are proposing specific legislation while the Republicans propose nothing. That explains everything to me in a nutshell. Now tell me again which party is more beholden to the big financial companies and banks? The Republicans keep driving me farther and farther from the party I used to support. They used to have ideas, now they have only no.
Recommend Recommended by 303 Readers .3.greenmountain boy
burlington, vt
April 16th, 2010
4:33 pmLynn Stout has it exactly right. Bankers and investors will always be greedy. Trying to police a market of synthetic cdos is a waste of time. The traditional rule that you should only be hedging against your own actual risks needs to be reinstated.
Recommend Recommended by 151 Readers .4.Arin
Buffalo, NY
April 16th, 2010
4:37 pmThe politics of this plays very well. This lawsuit comes on the very day that the Republicans have unified to prevent debate of the financial reform bill in the Senate. It will hopefully shape the message of the Democrat party, that the Democrats stand for Main Street, and the Republicans stand for Wall Street. Whatever the outcome of this lawsuit, its intent has already paid dividends (no pun intended)
Recommend Recommended by 92 Readers .5.Mark O
Boston
April 16th, 2010
4:38 pmI was under the impression that the Federal government was in thrall to Goldman Sachs because the firm has until now been allowed to seek bilk the financial system with impunity. This lawsuit is both shocking and refreshing evidence of the government's independence.
Recommend Recommended by 65 Readers .6.jimmy
san francisco
April 16th, 2010
4:38 pmI think Professor Stout cleared it up for those on Wall Street. They burned the house down insured at 100 cents on the dollar with our bail out tax money in the hundreds of billions of dollars to AIG and they'll do it again. How can this not make anyone just completely sick. How many lives and careers have they ruined? And Obama says he's not out to get the bankers? I hope he was lying.
Recommend Recommended by 129 Readers .7.Atlanta Guy Making serious dough
Atlanta, GA
April 16th, 2010
4:46 pmWhy is Goldman Sachs only facing a civil suit? The allegation against them is criminal fraud and they should face criminal prosecution. This feeds the long standing view (held by many) that the rich get away with murder while the average joe is held to a higher standard. Though a civil case will indeed be very damaging to GS, it is NOT enough. You deceived investors and nearly destroyed the entire financial system and you're sitting there looking pretty (with billions in profit)
Recommend Recommended by 199 Readers .8.timfenton1
laura
April 16th, 2010
4:47 pmWhy didn't you request comment from Sen. Mitch McConnell who seems determined to sink financial markets reform?
Recommend Recommended by 83 Readers .9.GrammyofWandA
Maine
April 16th, 2010
4:47 pmThe teabaggers will surely point out that the Goldman Sachs employees who allegedly committed the fraud are extremely dedicated workers who should not be subjected to an income tax increase.
Recommend Recommended by 110 Readers .10.mark
Honolulu, Hawaii
April 16th, 2010
4:47 pmThe insurance analogy is spot on! We don't let people bet on whether other people's buildings will burn down for reasons that are so obvious they have been a part of insurance law forever. It's called the necessity of having an insurable interest. What do you think would happen if we allowed the mob to buy insurance on people's lives? When we allowed people to take out insurance without an insurable interest we converted a financial instrument predicated on personal risk avoidance into one predicated on profiting on other people's losses. The results are here in front of us for all to see. We need to reverse the mistake we made and reverse it quickly.
Recommend Recommended by 178 Readers .11.sara
oakland, ca
April 16th, 2010
4:47 pmi am waiting for the apologists for Market Innovation to begin the talking points that will crush litigation and effective reform.
Beneath the Goldman/Magnator shorting of these faulty CDOs with wildly high credit default swap pay-offs lies the RATIONALIZATION. Risk is diluted buy these derivatives, shorting keeps the market honest, capitalizing our realestate market bring poor folk into home ownership....ALL these arguments are either gross distortions of reality or cynical ways to preserve the looting of our economy by shallow wise guys. These short-term profiteers (thru millions in commissions from creating CDOs to the billions collected in crooked swaps as they failed) are now safely stashing away their fortunes; NO LESSON has been learned. And the law blocks retroactive taxation of windfall profits....or does it ?
Recommend Recommended by 37 Readers .12.jjcrocket
New Britain, Conn.
April 16th, 2010
4:48 pmDianna Farrell:
Obama Administration: Deputy Director, National Economic Council
Former Goldman Sachs Title: Financial Analyst
Stephen Friedman:
Obama Administration: Chairman, President’s Foreign Intelligence Advisory Board
Former Goldman Sachs Title: Board Member (Chairman, 1990-94; Director, 2005-)
Gary Gensler:
Obama Administration: Commissioner, Commodity Futures Trading Commission
Former Goldman Sachs Title: Partner and Co-head of Finance
Robert Hormats:
Obama Administration: Undersecretary for Economic, Energy and Agricultural Affairs, State Department
Former Goldman Sachs Title: Vice Chairman, Goldman Sachs Group
Philip Murphy:
Obama Administration: Ambassador to Germany
Former Goldman Sachs Title: Head of Goldman Sachs, Frankfurt
Mark Patterson:
Obama Administration: Chief of Staff to Treasury Secretary, Timothy Geitner
Former Goldman Sachs Title: Lobbyist 2005-2008; Vice President for Government Relations
John Thain:
Obama Administration: Advisor to Treasury Secretary, Timothy Geithner
Former Goldman Sachs Title: President and Chief Operating Officer (1999-2003)
http://the-classic-liberal.com...
Recommend Recommended by 129 Readers .13.Older but Wiser
Dallas
April 16th, 2010
4:48 pmIn a criminal trial most people withhold judgement until the verdict is reached. As civil cases turn far more on interpretations of rules it would be more seemly if the New York Times and its panelists waited until there is a conviction before crowing and trying to tell us what all this means.
Recommend Recommended by 5 Readers .14.smiths
ar
April 16th, 2010
4:48 pmI'm more concerned about Goldmans Sach's ownership of the Obama administration
Recommend Recommended by 95 Readers .15.RS Love
Palo Alto, CA
April 16th, 2010
4:48 pmJust a reminder that Frank Partnoy testified back in 2002 before a Senate committee that Enron was enabled to game and defraud investors using derivatives and that unless the law was corrected, more of the same was coming down the road. No one listened.
The culprit in the Enron crime wave was a recipe of CFMA 2000 mandated deregulation of trading exotics/synthetics, the corporate accountants serving no one, credit agencies for hire and our own lax Federal regulators too.
Roll tape forward to 2010. We are about to ignore the lessons of the past once again. Hard to admit that post-Depression banking legislation actually worked then and it worked up until the recent1990s while both parties dismantled it. There can be no real reform without separating the main street banking businesses from the casino bankers.
The mighty legends are headed to disgrace including Greenspan, Rubin, Summers, our Presidents (from Reagan to Obama), Paulson, Geithner, Gramm and the Senate Republicans who blindly took Wall Street's money; now it's the Democrats turn to pave the next road to financial ruin. They're right on schedule.
Recommend Recommended by 83 Readers .16.BTT
Wilkes-Barre, Pa.
April 16th, 2010
4:49 pmOne other point to Lynn Stout: you can't buy Home Insurance while the house is on fire! America at its worst! How immoral! BTT
Recommend Recommended by 32 Readers .17.Marcel Duchamp
Maine
April 16th, 2010
4:49 pmNext up: criminal prosecutions.
Let's go!
Recommend Recommended by 100 Readers .18.T.L.Moran
Idaho
April 16th, 2010
4:49 pmForget the SEC and its hunt through the dense weeds of microscopic regulatory law.
The attorneys general of many states facing bankruptcy, the many pension funds, university systems, and other public institutions, need only find one instance -- I'm sure there are many -- of death from heart attack or crisis-driven suicide and they have a perfect case against these corporations for depraved-heart murder.
The Wall St. thugs, driven by their addiction to complex scams and outsize profits, have demonstrated 'callous disregard' and 'extreme indifference' to the value of American lives with every million dollar profit they've made, every lavish bonus they've awarded themselves.
Never mind what slimy combination of congressional dopes and financial addicts undermined the laws protecting the country from this kind of daylight robbery. The intentions and the results speak clear: the executives of firms like this set aside all consideration for the continued life, health and happiness of everyday Americans in their adolescent race to see who could be the fastest, biggest looter of our national economy.
If corporations are people (thank you activist neo-con SCOTUS), then they are all guilty of depraved indifference. Prosecute, punish, and GET THIS COUNTRY'S MONEY BACK!
Recommend Recommended by 69 Readers .19.JVM Fan
Hollywood
April 16th, 2010
4:49 pmI just saw a movie on Sunset Blvd. called "Stock Shock" about all this Wall Street corruption and the audience was pretty shocked. It was the same story told through the eyes of Sirus XM investors that nearly went broke because of market manipulation. The movie is now sold on DVD just about everywhere, but cheaper at www.stockshockmovie.com
Recommend Recommended by 7 Readers .20.frank
providence, ri
April 16th, 2010
4:49 pmNone of this is news. Zuckerman in The Greatest Trade Ever (p.179) names Goldman, Bear Sterns, and Deutsche Bank (and others) as working with Paulson to create "controversial" CDO's (meaning this is not news) tailor made to fail. What can also be said it that mostly the banks were betting the other way, which is why they had so much losses, and the argument they were hedging really seems correct. But the fraud is ultimately about charges against an outside rating agencies, that maybe one didn't exist in this trade despite what was said. But all the rating agencies were also pushed and threatened no doubt NOT to rate the CDOs accurately. There is fraud everywhere, of course. The whole system was a fraud.
Recommend Recommended by 46 Readers .21.Docb
denver
April 16th, 2010
4:50 pmCome on folks --there has to be a market for these products...another IB or two or perhaps the street! They all did this created a market-- bought and sold against a fail...Go to the SEC site and pull up the Complaint--there is a firm mentioned , Paulson &Co---Hmmm could it be true? But this is just the tip...the SEC needs to be contacted and reminded that this is not isolated and not a case for fines and wrist slaps...1.888.732.6585 or the Sec of the SEC 1.202.551.5400
Recommend Recommended by 8 Readers .22.Dan
NYC
April 16th, 2010
4:50 pmI disagree with these rosy optimistic analysis of these so-called "experts."
This is the start of new chapter of regulations? Thats BS - These are civil charges, NOT criminal. Sure, Goldman will get hit with a settlement (probably around a million), which might sound big to the "main street average person" but in reality its not big at all to them. They will continue to do what they do and generate much much more money than that. Then, of course, Goldman Sachs will deny any wrongdoing, and Obama will praise the Justice System that we have. Every one wins! Except, of course, the people on main street and the people who GS fleeced.
Do you HONESTLY expect any better when the insane run the asylum?
Recommend Recommended by 55 Readers .23.pstgradny
New York
April 16th, 2010
4:52 pmWhat a shocker...dishonest and greedy investment bankers and traders. Sounds like fodder for a movie that might be entitled, Wall Street. I think Michael Douglas would be perfect for the lead role, and Charlie Sheen would be great as a conflicted young broker/trader. In the aftermath of the recent financial meltdown, this movie could be a huge hit, especially if done in 3D. Cameo performances might include Bernie Madoff, Jeffrey Skilling, Andy Fastow, Bernie Ebbers, Edward S. Digges Jr., etc.
Recommend Recommended by 16 Readers .24.Zenster
Manhattan
April 16th, 2010
5:13 pmIt seems every single person in the country knows for a fact that Goldman Sachs is a criminal organization, a white collar mafia - and still it took this long for the SEC to prosecute - and only this one charge, so amazingly egregious. What about the thousands and thousands of other crimes this giant vampire squid committed?
Recommend Recommended by 60 Readers .25.ron
new orleans
April 16th, 2010
5:14 pmI believe that the current banking crisis started out many years ago in Denver when the Silverado Bank and Neil Bush were bailed out by his father(Bush I) and his friends(Cheney,et al). Instead of starting a new wave of bank regulation at the time, Congress with the support of Bush, et al opened the flood gates to SEC deregulation. Being an optimist, I believe that everything that goes around, comes around. The American public will not be satisfied until the current group of creative criminals are exposed. Once they are indicted, historians should then revisit the first banking crisis.
Recommend Recommended by 63 Readers . of 7 Next ..Post a Comment
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