Tag: Goldman-Sachs

‘Make Wall Street traders and CEOs fear for their lives, or at least for their freedom to travel.’

Recall the unionists’ siege of the Maryland banker’s home the other day? Perhaps it was inspired in part by this screed on the world financial crisis that appeared a little while back on the blog New Deal 2.0, published by the left-leaning Franklin and Eleanor Roosevelt Institute. Other advice in the same piece on how to handle execs from Goldman Sachs and similar investment banks: “Build some Guantanamo-like facility to hold these enemy financial combatants until they can be tried, convicted, and properly punished.” And: “Post the names of all managers and traders on Interpol. Arrest anyone who tries to board a plane, train, or boat; confiscate their passports; revoke their visas and work permits; and put a hold on their bank accounts until culpability can be assessed.”

Tongue in cheek-ism, evidence of a genuine impulse to dispense with the rule of law, or some of both? Well, judge for yourself, bearing in mind what sorts of rhetoric serve in accusing, say, the Tea Party movement of extremism and worse. The “braintrusters” roster of the Roosevelt Institute, incidentally, boasts such respectables as Jonathan Alter, Hendrik Hertzberg, appeals court nominee Goodwin Liu, Joseph Stiglitz and Sean Wilentz.

As part of a symposium the other day, the recently launched blog Think Tanked asked me to help define what a think tank is and what it should do. My advice on the latter was to “let ‘em rip” – the scholars and thinkers, that is – but maybe in the case of the Roosevelt Institute I’d advise making an exception.

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SEC Incompetence

There has been much speculation that the Securities and Exchange Commission (SEC) released its charges against Goldman Sachs on the eve of a Senate vote on new finance regulation in order to help Democrats win that vote.  Perhaps that theory is wrong: It now looks more likely that the SEC timed its Goldman case in order to divert attention away from two SEC inspector general (IG) reports criticizing the commission.

In one of the reports, the SEC IG found that several of the top staffers at the SEC were spending their days surfing the web for porn, rather than looking for securities fraud.  One senior manager spent almost 8 hours a day looking a porn, getting to the point where he even filled up his government issued hard-drive with porn.  His actions were not some isolated incident.  Over 30 employees were found to have regularly used SEC computers to download and view porn.  Some of the senior employees had salaries as high as $222,000 a year.  Sounds like nice work, if you can get it.

But the porn charges are the least of the SEC’s worries.  Also released was the IG’s report on the SEC’s failure to stop the Stanford Ponzi scheme.  The report shows a clear pattern of incompetence at the SEC.  Given the SEC’s failure to act on the Madoff scheme, and the repeated warnings about Stanford, one has to wonder how good SEC investogators are at discovering fraud if they don’t even pursue the clear-cut cases brought to them.

The IG report does help explain the SEC’s poor track record.  The SEC’s head of enforcement made it very clear that the staff was “to bring more Wall Street types of cases.”  Perhaps ones like the recent Goldman case?  The head of enforcement even goes so far as to ask the staff working on the Stanford case, “What are you bringing these cases for?”  Clearly the SEC only seems to care about fraud if its catches a big headline.  Since the SEC was first warned about Stanford, investors placed about $8 billion more into the Ponzi scheme, far more than the damages alleged in the Goldman case.

If anything should expose the current financial regulatory bill being debated in the Senate as a fraud, it should be the fact that it leaves the SEC still standing.  Even worse, it reduces Congressional oversight of the SEC by removing it from the appropriations process.

SEC vs. Goldman Sachs: Legislation by Demonization

The Obama administration thinks it has discovered the perfect formula to cram legislation through in a hurry:  Demonize some prominent firm within an industry you plan to redesign, and then pass a law that has nothing to do with the accusation against the demonized firm.  They did this with health insurance and now they’re trying it with finance.

With health insurance, the demon was Anthem Blue Cross Blue Shield of California, which Obama accused of raising premiums by “anywhere from 35 to 39 percent.” Why didn’t some curious reporter interview a single person who actually paid 39% more, or quote from a letter announcing such an increase?  Because it didn’t happen.  Insurance premiums are regulated by the states, and California wouldn’t approve such a boost.  Yet the media’s uncritical outrage over that 39% rumor helped to enact an intrusive, redistributive health bill that has nothing to do with health insurance premiums (which remain regulated by the states).

Today, the new demon de jour is Goldman Sachs, a handy scapegoat to promote hasty financial rejiggering schemes  The SEC’s suspiciously-timed civil suit against Goldman looks as flimsy as the last month’s health insurance story.  It also looks unlikely to win in court.

As Washington Post columnist Sebastian Mallaby explains, “This is a non-scandal. The securities in question, so-called synthetic collateralized debt obligations, cannot exist unless somebody is betting that they will lose value.”  In such a zero-sum contest, big investors who went long knew perfectly well that other investors had to be taking the other side of the bet.  Goldman lost $90 million by betting this CDO would go up; John Paulson went short.

Columnists have moralized about the unfairness of the short investor (Paulson) negotiating the terms of this deal with a long investor, ACA Management, which had the last word. This too, notes Mallaby, “is another non-scandal.  An investor who wants to bet against a bundle of mortgages is entitled to suggest what should go into the bundle. The buyer is equally entitled to make counter-suggestions.  As the SEC’s complaint states clearly, the lead buyer in this deal, a boutique called ACA that specialized in mortgage securities, did precisely that.”

Like the earlier fuming about Anthem California, this new SEC publicity stunt is likewise irrelevant to the pending legislation.  Congress hopes to get standardized derivatives traded on an exchange. But synthetic collateralized debt obligations dealing with a customized bundle of securities could not possibly be traded on an exchange, and would therefore be untouched by reform.

Losses sustained by a few financial speculators on one exotic derivative had nothing to do with starting a global recession in December 2007 or the related financial crisis of September 2008. The core of the latter crisis was mortgage-backed securities per se, yet Goldman was only the 12th largest private MBS issuer in 2007.  Fannie Mae and Freddie Mac were and are the biggest risk; any reform that excludes them is a fraud.

The SEC’s dubious civil suit against Goldman is a wasteful diversion at best. It has nothing to do with the Obama administration’s suicidal impulse to impose more tough regulations and taxes on banks to encourage them to lend more.

[Cross-posted at NRO’s The Corner]

Too Risky to Continue

The profits being reported so far this year by the major financial firms appear to be driven by proprietary trading (trading for their own account, as opposed to those of their customers). The recent $3.44 billion profit of Goldman Sachs in the second quarter is a dramatic case in point.

Proprietary trading is a high-risk activity and signals the financial sector is returning to its bad old ways. Returns cannot be systematically high unless risk is correspondingly high.

None of this would matter if it were just private capital at stake. But Goldman, along with other major financial firms, is being guaranteed under the dubious doctrine that it is too-big-to-fail. Better there were no government guarantees. As long as these guarantees are in place, however, high-risk activity must be curtailed.

The simplest solution is that a firm should not be permitted to take insured deposits and operate what amounts to a hedge fund within the institution. Goldman is a difficult case because it is not currently relying on deposits (even though it has a bank charter). It should be told to return to a private partnership.

A firm too big-to-fail is too-big-to-exist (as a federally insured entity).