Yes, that's Abacus 2007-AC1. An very separate issue where it seems clear there was intent within some levels of the company to deceive clients. But not enough that the SEC wasn't willing to take a settlement.
Yes, that's Abacus 2007-AC1. An very separate issue where it seems clear there was intent within some levels of the company to deceive clients. But not enough that the SEC wasn't willing to take a settlement.
Hmmm I'll take "possible reasons for the SEC accepting a settlement" for 500mil Alex
"One day, we shall die. All the other days, we shall live."
All those 'separate issues' are tangled together in the complex world of synthetic derivatives and swaps. You admitted as much. Are you blind to the forest from all the trees?Originally Posted by Dreadnaught
Why do you continue to defend GS and brush this off as no-big-deal, after all the information showing valid reasons for prosecution? Do you think SEC should just make another deal behind closed doors, charge GS another large fine, and let the good times roll again?
Isn't that more special treatment for Goldman, like the sweet deal they got from exposure to AIG, and bank-holding status? Citi, Morgan Stanley, or BoA may also be sued for their WMD, conflict-of-interest, incompetence, or abrogation of fiduciary duty. Only then will it seem kosher to you?
Whoa whoa easy there tiger, says nothing about knowledge of the entire bank's operations, it's just about the rep deliberately offloading junk--as per orders from above--on a client while passing it off as something awesome. Hence the subject of the email. Of course it's possible that the subject actually means "wow guys I found a bunch of awesome people to take these truly awesome super-valuable extremely promising assets off of our hands, isn't that great? god i love bringing wealth to people who trust me with millions of dollars. don't you also love helping people?"
Yeah the point is that people at GS whose surnames begin with either "M" or "S" knew that their people were using deceit to peddle crap and if you'd read the rest of the article or I dunno seen the clips of the depositions or something else enlightening you'd know that they were enthusiastically encouraging the sales people to sell as much of that crap as they could as fast as they could. I'm just sayingAnd how two sentences later, he mashes-together e-mails from two different people who may never have been in the same room together (but whose names both start with M).
"One day, we shall die. All the other days, we shall live."
One thing we're saying is that regulatory law and enforcers are plainly insufficient and your defense is "well, the regulatory authority didn't care enough to do more than accept a settlement including a record fine, so everything is fine the way it is"?
Last night as I lay in bed, looking up at the stars, I thought, “Where the hell is my ceiling?"
They were doing God's work, minx. (One of the most arrogant statements ever made by Goldman.
Their ability to spin is one of their PR talents. Either they were oblivious to what they were doing, making billions in profit by sheer accident (and there's nothing illegal about successful dumb-luck)....or they knew exactly what they were doing, making billions in profit by expert talent (and there's nothing illegal about protecting corporate strategy). Like pinning jell-o to the wall. Criminal intent, or intent to defraud can be really hard to prove, and they are spinning that, too.
Seems Dread believes Goldman's claim to being "victimized", or scapegoated as the poster child for Big Boys Behaving Badly, despite all sorts of incriminating facts coming to light. Even follows their prescribed method of defense/offense: It's so complex and sophisticated only we experts can understand it; You don't know what you're talking about; You're just looking for someone to blame and we're the whipping-post; You just don't appreciate how smart and valuable we are; You're jealous of our success and wealth....etc.
I keep implying this, but I don't think people are getting it: Arguably securitized mortgages were overvalued, and Goldman clearly felt they were overvalued. But a lot of it arguably was not (and is not) "junk".
The two major MBS ETFs out there (MBB and MBG) have paid regular monthly dividends and maintained most of their capital value (though one was started in the middle of the crisis). While many Americans have foreclosed, in theory this isn't a total loss to the funds.
But the net impact has been underperformance compared to the performance implied by the market value of these securities. In that respect, securities buyers make these kinds of mistakes all the time.
Going to the salesman, citing their e-mail vaguely boasting about finding a buyer in a tightening market is no smoking gun. And pointing to historical returns is a legitimate sales tactic.
Regulatory enforcement hasn't come up in this discussion. And I made that statement about the settlement in relation to Abacus 2007-AC1, which I think is a separate issue from the crap argument being made in Rolling Stone article that people are eating up so readily.
Here's what you're not getting: no one ever said the entirety of MBS is contaminated, toxic junk. Or that performing loans aren't still paying dividends to funds. This isn't about traditional securitization in the secondary market that's been around for decades.
This relates to the synthetic CDOs, MBS amassed in tranches---bottom tier (Mezzanine level?) rated low non-investment grade junk, but assigned AAA investment-grade by being lumped as one security. (Pension funds and retirement plans got the green light to "invest" in these synthetics, because they're legally obliged to buy only investment-grade products.) This relates to the insurance created to bet against MBS, the infamous credit-default swap. Initially sold as protection from default (much like Private Mortgage Insurance), it became a hedging tool for guys like Paulson and Goldman. They were so complex and opaque that ratings-agencies didn't even know what they were, how they worked, or how to rate them. (They'd rate a cow if it came across their desk.) Goldman itself was holding these CDS, while also selling MBS they knew would fail. That's more than just a corporate hedge strategy. That's conflict-of-interest that appears as an insider-trade, exploiting investors, withholding information, collusion or fraud---whatever legal term used---it's the Intent that SEC and DoJ is looking at. And whether GS people perjured themselves in congressional testimony.
(AIG originated many of those insurance CDS for Goldman. Treasury gave them full valuation 100 cents/dollar when it all blew up, and Goldman went hat-in-hand to the gov't behind closed doors. These were insurance products sold as investment products, with oversight from SEC instead of insurance commissions.....but that's all for another thread.)
That was a civil case. It's not separate from the total picture of Goldman's behaviors or regulatory oversight/enforcement. I brought that up early on: deregulation was promised to work, the market actors wouldn't do anything that would harm, let alone blow up the global systemRegulatory enforcement hasn't come up in this discussion. And I made that statement about the settlement in relation to Abacus 2007-AC1, which I think is a separate issue from the crap argument being made in Rolling Stone article that people are eating up so readily.
/rant
The Big Short
http://www.bloomberg.com/news/2011-0...ig-target.htmlIt has been almost a year since Goldman Sachs Group Inc. (GS) agreed to pay $550 million in a settlement with the Securities and Exchange Commission relating to the creation and sale of Abacus 2007-AC1, a squirrelly synthetic collateralized-debt obligation that could only have been designed in the first decade of the new millennium. Now the firm is facing a whole new round of litigation.
This is potentially troubling not just for Goldman Sachs, but for all of Wall Street.
On May 10, Goldman Sachs said it had received subpoenas from unidentified regulators relating to the infamous Abacus deal and other CDOs the firm manufactured and sold during the housing bubble, which began to deflate in the last quarter of 2005. Goldman Sachs also said the Commodity Futures Trading Commission, the chairman of which is former Goldman Sachs partner Gary Gensler, is investigating the firm’s role in acting as a clearing broker for an unidentified broker-dealer and intends to "bring aiding and abetting, civil fraud and supervision-related charges" against the Goldman Sachs unit.
And on May 16, New York State’s attorney general, Eric Schneiderman, said he was investigating Goldman Sachs, Morgan Stanley and Bank of America Corp. over mortgage-securitization transactions completed before the financial crisis of 2008.
Unwelcome News
None of this is welcome news, of course, to the executives at Goldman Sachs’s new $2.4 billion headquarters in Lower Manhattan. They are still grappling with a wave of negative publicity –- a Bloomberg News poll on May 12 found that 54 percent of financial professionals had a negative view of the firm -- while the new Dodd-Frank law threatens some of the firm’s traditional free-wheeling, hugely profitable ways.
But the most potentially damaging recent threat to Goldman Sachs came in a May 3 letter from Democratic Senator Carl Levin of Michigan and Republican Senator Tom Coburn of Oklahoma to the Justice Department and the SEC. While the text of the letter hasn’t been made public, one can assume that it refers the two cops on the securities beat to the April 13 report that Levin’s Permanent Subcommittee on Investigations compiled on the causes of the financial crisis. Nearly 250 pages of the 640-page document are concerned with Goldman Sachs.
At a press conference when they released the report, the senators asked the agencies to investigate whether Goldman Sachs violated the law when it continued to sell mortgage-backed securities to clients and investors around the world while the firm made a large -- and hugely profitable -- proprietary bet against the mortgage market.
Levin said he was particularly upset that Goldman Sachs Chief Executive Officer Lloyd Blankfein and other Goldman Sachs executives may have perjured themselves. During their April 27, 2010, testimony in front of Levin’s committee, the senator asked Goldman executives about the firm’s proprietary bet against the mortgage market, beginning in December 2006. Blankfein and others repeatedly said -- under oath -- that the firm had never made such a bet.
Conflicts of Interest
"In my judgment, Goldman clearly misled their clients and they misled the Congress," Levin said at the press conference. Coburn said at the same press conference that the committee’s report shows "without a doubt the lack of ethics in some of our financial institutions who embraced known conflicts of interest to accomplish wealth for themselves, not caring about the outcome for their own customers. When that happens, no country can survive and neither can their financial institutions."
Not surprisingly, Goldman Sachs disagrees with the two senators; the firm still maintains that it was simply managing risk.
"The testimony we gave was truthful and accurate and this is confirmed by the subcommittee’s own report," Lucas van Praag, a Goldman Sachs spokesman, said in a statement. "The report references testimony from Goldman Sachs witnesses who repeatedly and consistently acknowledged that we were intermittently net short during 2007. We did not have a massive net short position because our short positions were largely offset by our long positions, and our financial results clearly demonstrate this point."
As Levin acknowledged, it is now up to the Justice Department and the SEC to determine "whether a crime was committed" and if Blankfein personally "violated the securities laws."
Goldman’s Credibility
But regardless of the outcome of those investigations, Goldman Sachs continues to damage its credibility and its reputation by insisting that it didn’t make a large proprietary bet against the mortgage market beginning in December 2006 and continuing throughout much of 2007. That claim flies in the face of evidence from its own files -- now, thanks to Senator Levin, in the public record –- which shows unequivocally that it did. The evidence is almost overwhelming, so a few examples will suffice.
According to Levin’s report, e-mail correspondence among Goldman Sachs’s senior executives routinely referred to the mortgage department’s net short positions as being in the "billions" of dollars. The phrase "net short" appears more than 3,400 times in the documents that Goldman Sachs produced for the subcommittee. At one point in 2007, David Viniar, Goldman Sachs’s chief financial officer, referred to the firm’s net short position in an e-mail as "the big short" and marveled at all the money the firm was making as a result. Blankfein, though, preferred to view it as nothing more than a prudent hedge. "The short position wasn’t a bet," he wrote in a September 2007 e-mail. "It was a hedge."
Not so, argued Josh Birnbaum, the trader on Goldman Sachs’s mortgage desk chiefly responsible for persuading the firm to establish the big short." In early October 2007, Birnbaum "contradicted that position," according to the Levin report. In a document he drafted to argue that his desk should be "compensated like hedge fund managers and not as ordinary participants in Goldman’s traditional bonus pool system," he "explicitly addressed and rejected the contention" that the profitable net short positions managed by his desk were hedges for long assets held by other desks."
The Levin report, which described Birnbaum as "one of the chief architects of Goldman’s big short," quoted from his October 2007 document in which he claimed "the shorts were not a hedge."
Glowing Self-Evaluations
Then there were the traders’ own self-evaluations, now also in the public realm, that show clearly that the mortgage desk’s strategy had paid off and they wanted to get fully compensated as a result. Birnbaum wrote that his desk "alone" generated profits of $3 billion in 2007 and was "#1 on the street by a wide margin" and "#2 in the world trading subprime risk (behind Paulson Partners)," a reference to hedge-fund manager John Paulson, who famously made $4 billion personally betting the mortgage market would collapse.
Michael Swenson, Birnbaum’s boss, added that "it should not be a surprise to anyone that the 2007 year is the one that I am most proud to date" because he built "a number one franchise that was able to achieve extraordinary profits (nearly $3bb to date)." Another trader on the same desk, Deeb Salem, wrote, "Obviously the most important aspect of my 2007 and my contribution to the firm has been on the desk’s P&L. Mike, Josh and I were able to learn from our bad long positions at the end of 2006 and layout the game plan to put on an enormous directional short."
Even accounting for the typical puffery found in Wall Street self-evaluation forms, there is no taking away from what these traders accomplished for Goldman Sachs, especially since the final profit tally for their desk in 2007 was closer to $3.7 billion.
A 900-Page Trove
Why Blankfein and Goldman Sachs won’t admit what is so obvious to the firm’s own traders -- and to anyone with the patience to wade through Levin’s report and the 900 pages of internal Goldman Sachs documents he released with it -- is simply baffling. If Goldman Sachs didn’t have a "big short" on the mortgage market in place in 2007, how else to explain its $17.2 billion in pretax profits that year and the bonuses paid to its top four executives of some $200 million?
Blankfein alone was paid around $70 million in 2007, the most ever for the CEO of a publicly traded Wall Street firm. This was at a time when Goldman Sachs’s competitors were losing billions of dollars and Stanley O’Neal, the CEO of Merrill Lynch, and Charles Prince, the CEO of Citigroup, were forced to quit.
Until Goldman Sachs comes clean on this topic -- preferably before the Justice Department or the SEC forces it to -- it is difficult to see how the cloud that hangs over the firm and the rest of Wall Street can be lifted.
Now, if you want to have a discussion on the merits of the current banking law allowing firms to market securities and invest in them...well that's a whole other (and entirely legitimate) discussion.
I probably created an old thread on proprietary trading and Fin-Reg that died of boredom.
Somewhat surprising post from Andrew Ross Sorkin.
JUNE 6, 2011, 10:01 PM
The Fine Print of Goldman’s Subprime Bet
By ANDREW ROSS SORKIN
Chris Kleponis/Agence France-Presse — Getty ImagesLloyd C. Blankfein, chief executive of Goldman Sachs, has said that the firm did not have a “massive short” on housing.
The vampire squid haters won’t like this column.
For the past several weeks, I have been trying to understand if Lloyd C. Blankfein, Goldman Sachs’s chief executive, could have perjured himself — as Senator Carl Levin has suggested — when he testified last year in front of the Senate’s Permanent Subcommittee on Investigations and declared, “We didn’t have a massive short against the housing market.”
Based on the subcommittee’s report, which was referred to the Justice Department, I wrote a column raising questions about Mr. Blankfein’s comments. At the time, his testimony seemed ridiculous in the face of evidence that Mr. Levin presented, which showed that the firm had regularly made large bets against the subprime market.
But upon further reporting — talking with executives at Goldman, who pointed me to other documents, and with officials in Washington, and then poring through the report, following the footnotes to the original sources and then cross-referencing them against other public records — I have come to a different and perhaps unsatisfying conclusion for those readers looking for a big scalp: Mr. Blankfein wasn’t lying.
That’s not to suggest Goldman always behaved well. There are other assertions in the subcommittee’s report that detail some pretty egregious activity by certain executives.
But after comparing the report with publicly available filings and documents, there are enough questions about the accuracy of certain parts of the Senate report to raise some red flags.
Take this example: The report unequivocally states that in 2007, Goldman “reported net revenues of $11.6 billion, of which $3.7 billion was generated by the structured products group in the mortgage department, primarily as a result of its subprime investment activities.”
The sentence was meant to show that Goldman’s shorting of the housing market had provided a large percentage of the firm’s revenue that year. The sentence in the report even included a handy citation for the information.
But in 2007, Goldman Sachs reported net revenue of $45.98 billion, not $11.6 billion. That’s a big difference.
When I spoke to Robert L. Roach, a counsel and chief investigator for the Senate subcommittee who helped draft the report, he said, “We made a mistake.” He said it was a “typo” and insisted that “we weren’t trying to cook anything.”
The figure was Goldman’s net earnings, not its net revenue. He pointed out that later in the report — 93 pages later in a different context — the report accurately described Goldman’s net revenue as $45.98 billion.
Mr. Roach protested that Goldman had never brought the mistake to his attention in the two months since the report was published. There has clearly been much antagonism between Goldman and the various bodies investigating the firm, even as Goldman says it is cooperating. Staff members of the Financial Crisis Inquiry Commission complained when Goldman dumped hundreds of thousands of documents on it; Goldman said privately that the commission was engaging in political theater.
Yet there are other sections in the Senate report that appear to go beyond sloppiness. The report says that Goldman’s structured products group made $3.7 billion, mostly by going short in 2007. That is correct. But the report omitted the total net revenue for the mortgage department, which included structured products.
According to a document Goldman Sachs provided to the subcommittee and made public on its Web site a year ago, Goldman had “less than $500 million of net revenue from residential mortgage-related products — approximately 1 percent of the firm’s overall net revenues.”
In other words, while one part of the department had gone short, another part had gone long.
So when Mr. Blankfein contended that the firm was “not consistently or significantly net ‘short the market’ in residential mortgage-related products in 2007 and 2008” the numbers — if you believe them — are on his side.
Mr. Roach said he was unaware of where the figure of less than $500 million came from, although in the document that Goldman provided the subcommittee, a series of bar charts broke down its exposure for every quarter of 2007 and 2008. Mr. Roach pointed to a different document that showed the firm had made $1.13 billion.
This isn’t meant to say that part of the firm didn’t go short — it did and the firm has repeatedly said so. But the suggestion that the short was a huge directional bet by the firm to profit off a real estate collapse may not completely stand up.
One document the subcommittee cited as evidence that Goldman had been “massively short” was a presentation by Josh Birnbaum. Mr. Birnbaum, a Goldman trader who ran the structured products group, tried to persuade his bosses that he and his group were deserving of a bigger bonus because of their successful short positions. To make his point, Mr. Birnbaum said that “the shorts were not a hedge,” a quote that Mr. Levin’s report brandished as proof that Goldman was lying about its short position.
But it’s hard to give much weight to the quote. Left out of the subcommittee’s report was the answer Mr. Birnbaum gave under oath during his testimony. When asked whether the shorts had been hedged, Mr. Birnbaum said, “I was not aware of what the firm as a whole was — what the firm’s position on mortgages was.”
After his testimony, when he realized that the government had him saying “the shorts were not a hedge” in a presentation, he doubled back. He tried to suggest in written testimony that he believed what he had originally written in his presentation but that his other testimony had also been accurate — a hard circle to square.
More important, if Goldman made only $500 million in net revenue from its residential mortgages when Mr. Birnbaum’s unit made $3.7 billion from shorts, it is clear that it also had huge long positions. Had it been “massively short,” the firm should have made much more than $500 million.
Mr. Levin’s office referred questions about the report to the permanent subcommittee.
The senator also made use of Goldman’s “top sheets” as evidence the firm was short the residential housing market. The report says that a top sheet from June 25, 2007, shows that the firm was short $13.9 billion. That would be quite a big short position.
But in studying the document, the subcommittee may have mixed apples and oranges. It added in $4.1 billion worth of short positions for commercial real estate to residential real estate. And the subcommittee ignored the footnote on the bottom of the document that the “top sheet” had not included long positions in other parts of the business that people close to the firm said were in excess of $5 billion.
Subtract those positions, and Goldman had a net short position of less than $5 billion in residential mortgages — not nearly triple that.
Goldman haters will think that this column is an apology or spin for the firm. That wasn’t the point. Of course, some of what Goldman and others did ahead of the financial crisis is deeply troubling — and possibly even illegal — and they should be punished if a crime was committed. But on this particular score — about Mr. Blankfein’s testimony — the evidence is far from convincing.
As even Mr. Roach acknowledged, “It’s about how you define ‘massive’ and ‘large’ — and I’m not trying to be cute.”
http://dealbook.nytimes.com/2011/06/...-subprime-bet/
As even Mr. Roach acknowledged, “It’s about how you define ‘massive’ and ‘large’ — and I’m not trying to be cute.”Large is Millions and massive is Billions? What's their definition of big or huge? That's how they're going to defend against legal charges, by saying it's not as bad as it looks? We didn't make nearly as much money as everyone thinks.More important, if Goldman made only $500 million in net revenue from its residential mortgages when Mr. Birnbaum’s unit made $3.7 billion from shorts, it is clear that it also had huge long positions. Had it been “massively short,” the firm should have made much more than $500 million.
Nice try with semantics, as done with defining hedge. Separating structured securities from mortgages, commercial RE from residential RE, departments being blind parts of the whole. Don't look at me, I was just doing my job to make money---go talk to that guy.
Of course, some of what Goldman and others did ahead of the financial crisis is deeply troubling — and possibly even illegal — and they should be punished if a crime was committed.
Well it's true, they've consistently called it "the big short" rather than "the huge short". You gotta give them that at least. Not sure what to make of the size assessment. In the RS article a couple of people said they felt it was big because more than half their risk was tied up in the mortgage stuff. Anyway, looking forward to seeing comments on these criticisms
"One day, we shall die. All the other days, we shall live."
Ok, so one of the claims here is an assumption that the firm had very large long positions also, as an explanation for why a certain revenue stream isn't larger, and saying that assumption, if true, constitutes a defense against outright lying. If Goldman did have those very large long positions, there is evidence for it. I see no reason to accept an assumption or line of conjecture, when there should be ample documentary proof of it. Let a Goldman PR person point that evidence out, since apparently it was never explicitly mentioned in the committee hearings.
Last night as I lay in bed, looking up at the stars, I thought, “Where the hell is my ceiling?"
@Minx and GGT- In 2007 about $3 trillion of mortgages were originated in the US. In 2008 it was about $2 trillion. The size of the US mortgage market is roughly $10 trillion.
A profit or loss of $500 million is sort of a drop in the bucket. That's what -- .0005%? The $3.7 billion in revenue from those transactions is a slightly higher-but-still-minuscule percentage.
That's like being a little bit pregnant.
It's really not at all.
Rumor has it the vampire squid saw $3 Billion of profits the first 3 months of 2011. Pretty sweet for aninvestment firm,hedge fund,casino, bank-holding company deemed TBTF and SIFI. They got special treatment from the federal reserve and treasury when the sky was falling and Hank Paulson's hair was on fire, but then pretty much everyone at the federal reserve and treasury came from Goldman Sachs, so it makes sense in a sick and twisted way.
Rumor also has it that they're cutting 1,000 strategic jobs from the US (mostly in NYC) and moving them to Singapore. Gotta follow the money, the profits, and exploit any emerging nation with so few regulations that the math quants and financial wizards can work their "magic" with new financial tools (they call that innovation) destined to explode/implode just like sub-prime or Alt-A or ARM loans, mortgage-backed securities, credit default swaps. For the shareholders, see. Must create a bubble, feed the bubble, profit from the bubble, give exorbitant bonuses to CEOs, pay legislators to keep the bubble growing....and when the bubble blisters finally burst and spew their pus all over the place----add salt to the wound by expecting middle class tax payers to stitch it all together. Add insult to injury by suggesting the US isn't "business friendly" when consumer protections are proposed, or that the gummint is killing jobs and freee market capitalism.
What a stinking load of dung (and expletives deleted).
Was going to post this as a new thread, but I'll add it here instead:
http://www.marketwatch.com/story/the...ink=MW_popularThe next, worse financial crisis
Commentary: Ten reasons we are doomed to repeat 2008
By Brett Arends, MarketWatch
BOSTON (MarketWatch) — The last financial crisis isn’t over, but we might as well start getting ready for the next one.
Sorry to be gloomy, but there it is.
Why? Here are 10 reasons.
1. We are learning the wrong lessons from the last one. Was the housing bubble really caused by Fannie Mae, Freddie Mac, the Community Reinvestment Act, Barney Frank, Bill Clinton, “liberals” and so on? That’s what a growing army of people now claim. There’s just one problem. If so, then how come there was a gigantic housing bubble in Spain as well? Did Barney Frank cause that, too (and while in the minority in Congress, no less!)? If so, how? And what about the giant housing bubbles in Ireland, the U.K. and Australia? All Barney Frank? And the ones across Eastern Europe, and elsewhere? I’d laugh, but tens of millions are being suckered into this piece of spin, which is being pushed in order to provide cover so the real culprits can get away. And it’s working.
2. No one has been punished. Executives like Dick Fuld at Lehman Brothers and Angelo Mozilo at Countrywide , along with many others, cashed out hundreds of millions of dollars before the ship crashed into the rocks. Predatory lenders and crooked mortgage lenders walked away with millions in ill-gotten gains. But they aren’t in jail. They aren’t even under criminal prosecution. They got away scot-free. As a general rule, the worse you behaved from 2000 to 2008, the better you’ve been treated. And so the next crowd will do it again. Guaranteed.
3. The incentives remain crooked. People outside finance — from respected political pundits like George Will to normal people on Main Street — still don’t fully get this. Wall Street rules aren’t like Main Street rules. The guy running a Wall Street bank isn’t in the same “risk/reward” situation as a guy running, say, a dry-cleaning shop. Take all our mental images of traditional American free-market enterprise and put them to one side. This is totally different. For the people on Wall Street, it’s a case of heads they win, tails they get to flip again. Thanks to restricted stock, options, the bonus game, securitization, 2-and-20 fee structures, insider stock sales, “too big to fail” and limited liability, they are paid to behave recklessly, and they lose little — or nothing — if things go wrong.
4. The referees are corrupt. We’re supposed to have a system of free enterprise under the law. The only problem: The players get to bribe the refs. Imagine if that happened in the NFL. The banks and other industries lavish huge amounts of money on Congress, presidents and the entire Washington establishment of aides, advisers and hangers-on. They do it through campaign contributions. They do it with $500,000 speaker fees and boardroom sinecures upon retirement. And they do it by spending a fortune on lobbyists — so you know that if you play nice when you’re in government, you too can get a $500,000-a-year lobbying job when you retire. How big are the bribes? The finance industry spent $474 million on lobbying last year alone, according to the Center for Responsive Politics.
5. Stocks are skyrocketing again. The Standard & Poor’s 500 Index SPX -0.70% has now doubled from the March 2009 lows. Isn’t that good news? Well, yes, up to a point. Admittedly, a lot of it is just from debasement of the dollar (when the greenback goes down, Wall Street goes up, and vice versa). And we forget there were huge rallies on Wall Street during the bear markets of the 1930s and the 1970s, as there were in Japan in the 1990s. But the market boom, targeted especially toward the riskiest and junkiest stocks, raises risks. It leaves investors less room for positive surprises and much more room for disappointment. And stocks are not cheap. The dividend yield on the S&P is just 2%. According to one long-term measure — “Tobin’s q,” which compares share prices with the replacement cost of company assets — shares are now about 70% above average valuations. Furthermore, we have an aging population of Baby Boomers who still own a lot of stocks, and who are going to be selling as they near retirement.
6. The derivatives time bomb is bigger than ever — and ticking away. Just before Lehman collapsed, at what we now call the height of the last bubble, Wall Street firms were carrying risky financial derivatives on their books with a value of an astonishing $183 trillion. That was 13 times the size of the U.S. economy. If it sounds insane, it was. Since then we’ve had four years of panic, alleged reform and a return to financial sobriety. So what’s the figure now? Try $248 trillion. No kidding. Ah, good times.
7. The ancient regime is in the saddle. I have to laugh whenever I hear Republicans ranting that Barack Obama is a “liberal” or a “socialist” or a communist. Are you kidding me? Obama is Bush 44. He’s a bit more like the old man than the younger one. But look at who’s still running the economy: Bernanke. Geithner. Summers. Goldman Sachs. J.P. Morgan Chase. We’ve had the same establishment in charge since at least 1987, when Paul Volcker stood down as Fed chairman. Change? What “change”? (And even the little we had was too much for Wall Street, which bought itself a new, more compliant Congress in 2010.)
8. Ben Bernanke doesn’t understand his job. The Fed chairman made an absolutely astonishing admission at his first press conference. He cited the boom in the Russell 2000 Index RUT -0.65% of risky small-cap stocks as one sign “quantitative easing” had worked. The Fed has a dual mandate by law: low inflation and low unemployment. Now, apparently, it has a third: boosting Wall Street share prices. This is crazy. If it ends well, I will be surprised.
9. We are levering up like crazy. Looking for a “credit bubble”? We’re in it. Everyone knows about the skyrocketing federal debt, and the risk that Congress won’t raise the debt ceiling next month. But that’s just part of the story. U.S. corporations borrowed $513 billion in the first quarter. They’re borrowing at twice the rate that they were last fall, when corporate debt was already soaring. Savers, desperate for income, will buy almost any bonds at all. No wonder the yields on high-yield bonds have collapsed. So much for all that talk about “cash on the balance sheets.” U.S. nonfinancial corporations overall are now deeply in debt, to the tune of $7.3 trillion. That’s a record level, and up 24% in the past five years. And when you throw in household debts, government debt and the debts of the financial sector, the debt level reaches at least as high as $50 trillion. More leverage means more risk. It’s Econ 101.
10. The real economy remains in the tank. The second round of quantitative easing hasn’t done anything noticeable except lower the exchange rate. Unemployment is far, far higher than the official numbers will tell you (for example, even the Labor Department’s fine print admits that one middle-aged man in four lacks a full-time job — astonishing). Our current-account deficit is running at $120 billion a year (and hasn’t been in surplus since 1990). House prices are falling, not recovering. Real wages are stagnant. Yes, productivity is rising. But that, ironically, also helps keep down jobs.
You know what George Santayana said about people who forget the past. But we’re even dumber than that. We are doomed to repeat the past not because we have forgotten it but because we never learned the lessons to begin with.
It's not just the US. #6....a recent figure I saw in other news puts Global Derivatives at $600 TRILLION, and they're still virtually unregulated and trading in the shadows.
Do you only take seriously people without an ounce of credibility?
Hope is the denial of reality
Excuse me? Is that your way of automatically discrediting anything not written by an academic?
*Better yet, Loki....if you disagree with any of those 10 points listed, nothing is stopping you from saying so, or explaining why. Using your own much more credible reference 'people', of course.
Last edited by GGT; 07-10-2011 at 03:43 AM.
Let's just say that you could write a more intelligent analysis than that.
Hope is the denial of reality
Gee, thanks?I have written my own view on all those 10 points, spread around the forum in different threads, at different times. But we all know I'm not very good at consolidating or organizing my posts
I agree with his "post"---we haven't learned the right things, we haven't fixed much of anything, none of the crooks have been prosecuted or punished, Congress is owned by lobbyists, borrowing and levering hasn't worked well, the Fed thinks propping up banks, financial firms and Wall Street will trickle down to Main Street jobs, but savers and non-borrowers are being hurt....and the next financial crisis will look like deja vu on steroids.
Sorry to be gloomy, but there it is.
What utter bullshit to argue that low intrest rates in the US haven't lead to cash flooding foreign markets and causing inflation in a variety of areas.1. We are learning the wrong lessons from the last one. Was the housing bubble really caused by Fannie Mae, Freddie Mac, the Community Reinvestment Act, Barney Frank, Bill Clinton, “liberals” and so on? That’s what a growing army of people now claim. There’s just one problem. If so, then how come there was a gigantic housing bubble in Spain as well? Did Barney Frank cause that, too (and while in the minority in Congress, no less!)? If so, how? And what about the giant housing bubbles in Ireland, the U.K. and Australia? All Barney Frank? And the ones across Eastern Europe, and elsewhere? I’d laugh, but tens of millions are being suckered into this piece of spin, which is being pushed in order to provide cover so the real culprits can get away. And it’s working.
That's what you gleaned from that passage? I think it's saying the bubble was bigger than GSE's or 'homeownership' incentives, and related to currency valuations (devaluations) and chasing real estate as a commodity profit. There was a helluvalot of global house flipping going on, and seeing housing as an investment tool.
Who said anything about currency valuations? Our Federal Reserve lowered interest rates to rock-bottom for years. This flooded the world with dollars, which had to chase something. Cheap credit becoming globalized, real estate was one beneficiary.
I did! Those low interest rates didn't originate from Fannie/Freddie or CRA. (Isn't that what your post suggested?
I'm talking on the global scale. Fannie/Freddie poured fuel on the fire domestically and help ensure cheap credit for homes, but cheap credit was nonetheless a global economic fixture of the early part of the last decade.
Well, yeah.
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