Sunday, August 12, 2012

Goldman: Too Big to Jail?

August 12, 2012, 11:50 a.m.

[For confirmation of the conclusion in this blog entry, see the discussion of CBS 60 Minutes' presentation of the issues in, "Lehman's 'Get Out of Jail Free' Card."]

"If You Can't Trust Your Banker"


Credit: "Shady Deal at Sunny Acres," Maverick, 2nd Season, 1958. The popular early television series, Maverick, "starring James Garner and Jack Kelly, remains the most famous and widely discussed episode of the Western comedy television series Maverick. Written by Roy Huggins and Douglas Heyes and directed by Leslie H. Martinson, this 1958 second season episode depicts gambler Bret Maverick (James Garner) being swindled by a crooked banker (John Dehner) after depositing the proceeds from a late-night poker game, then recruiting his brother Bart Maverick (Jack Kelly) to mount an elaborate sting operation to recover the money." It's also the source of two oft-quoted lines: "If you can't trust your banker, whom can you trust?" and "I'm working on it." See, "Shady Deal at Sunny Acres," And see "Terrorist Bankers," February 13, 2009.

Woody Guthrie (1912-1967) warned us there would be days like this, when he wrote in the story of "Pretty Boy Floyd,"
Yes, as through this world I've wandered
I've seen lots of funny men;
Some will rob you with a six-gun,
And some with a fountain pen.

And as through your life you travel,
Yes, as through your life you roam,
You won't never see an outlaw
Drive a family from their home.
Woody Guthrie, "Pretty Boy Floyd,"

If fountain pens and handguns are merely optional choices for bank robbers, why is it that those who choose handguns end up in jail, and those who choose fountain pens (as augmented with today's computers) end up living in multiple million dollar mansions? (See, e.g., "Homes: Weeks' Salisbury, Romney's Six," May 30, 2012.) Why is it those with handguns get less than $10,000, and those who use fountain pens are handed millions? Jason Koebler, "What You Should Know Before Robbing a Bank; Most bank robberies net just a few thousand dollars," US News, June 11, 2012 ("The vast majority of bank robberies are relatively unsuccessful affairs, having netted criminals just $7,500 in 2010 on average, according to the FBI.").

For our answer we must turn to a modern-day Woody Guthrie, Harry Shearer, who provides us some musical insight into the operations of Goldman Sachs. Here is a snippet from his song . . .

"Mr. Goldman and Mr. Sachs"
Harry Shearer
When Mr. Goldman met Mr. Sachs
Business ran on railroad tracks
The world was simpler, you can't forget
When Mr. Sachs and Goldman met

Said Mr. Goldman, "For years and years,
Our guys have got the most between the ears"
Said Mr. Sachs, "Let's unhook some reigns,
And find new ways to profit off our traders' brains"

Spinning gold out of flax,
Mr. Goldman and Mr. Sachs

Spinning gold out of flax,
Mr. Goldman and Mr. Sachs

"Up to the Clintons," says Sachs with glee,
"Our former chief now runs the Treasury"
Slapped Mr. Goldman to Mr. Sachs,
"Everything's OK, we can relax"
For the full lyrics and much more commentary and video clips, see "Goldman, Sachs and Shearer," August 14, 2010.

When Goldman Sachs folks were successful in persuading the House, Senate, Treasury, Fed and President that Wall Street banks were "too big to fail," I responded that those banks were "too big to bail" -- no entity should be permitted to become too big to fail, to merge and monopolize itself into such size that taxpayers are offered no other option than to privatize their profits and socialize their losses. They should be split into entities of such size that, like other American businesses, they can be permitted to fail.

Now, it turns out, they are also "too big to jail."

And so it is that we came to read this last week:
The Justice Department said Thursday it won't prosecute Wall Street firm Goldman Sachs or its employees in a financial fraud probe. . . .

"The department and investigative agencies ultimately concluded that the burden of proof to bring a criminal case could not be met based on the law and facts as they exist at this time," the department said. . . .

A Senate subcommittee chaired by Sen. Carl Levin, D-Mich., in April 2011 found that Goldman marketed four sets of complex mortgage securities to banks and other investors but that the firm failed to tell clients that the securities were very risky. The Senate panel said Goldman secretly bet against the investors' positions and deceived the investors about its own positions to shift risk from its balance sheet to theirs.

The Justice Department's decision capped a good day for Goldman as the Securities and Exchange Commission decided not to file charges against the firm over a $1.3 billion subprime mortgage portfolio. . . . The Senate panel probe turned up company emails showing Goldman employees deriding complex mortgage securities sold to banks and other investors as "junk" and "crap." Levin said . . . Goldman "gained at the expense of their clients and they used abusive practices to do it." . . . In 2010, Goldman agreed to pay $550 million to settle civil fraud charges by the SEC of misleading buyers of mortgage-related securities. The agreement applied to one of the four deals cited by the Senate subcommittee.
Pete Yost, "Government won't prosecute Goldman Sachs in probe," Associated Press/Google, August 10, 2012.

In other words, two years ago Goldman Sachs agreed they were sufficiently guilty of something to be willing to pay a $550-million-dollar fine, A year later the Senate committee sure thought they had engaged in "abusive practices" that made them guilty of something. And now the Department of Justice finds that "the burden of proof to bring a criminal case could not be met"?! So it's "case dismissed," even though Goldman Sachs has already confessed to the need for them to pay a fine in excess of one-half billion dollars for one of the four offenses that would make up that "criminal case."

Jill Treanor, "Goldman Sachs handed record $550m fine over Abacus transaction; Securities and Exchange Commission punishes bank over collateralised debt obligation," The Guardian, July 15, 2010 ("The [Goldman Sachs] Abacus case had called into question the integrity of Wall Street after the commission alleged Goldman had packaged up mortgages into Abacus and then sold the CDO [collateralized debt obligation] to investors without telling them one of its powerful clients, the hedge fund Paulson, had been taking a trading position intended to profit from a fall in the value of US house prices.").

It sounds to me like the "burden of proof" ought to be on those elected officials in Washington, and the Department of Justice, to justify this decision to those American, and global, citizens who have borne the burdens of the global economic collapse from which Goldman and others have profited.

It's also noteworthy, it seems to me, how little attention the mainstream media gave to this story. The Associated Press ran the story quoted, and linked to, above. But I didn't see any fragment of it in any of the local papers I read. The New York Times offered a short piece, but put it back on page B-5. Ben Protess and Azam Ahmed, "S.E.C. and Justice Dept. End Mortgage Investigations Into Goldman,", New York Times, August 10, 2012, p. B5.

But the Times is to be credited with informing us in the very same story of what may or may not be the coincidental fact that, on the very same day the Department of Justice dropped all charges, the U.S. Securities and Exchange Commission also did so:
Separately, Goldman Sachs announced early Thursday that the Securities and Exchange Commission had ended an investigation into a $1.3 billion subprime mortgage deal, taking no action. The move was an about-face for the commission, which notified the bank in February that it planned to pursue a civil action.
In other words, the U.S. Senate asks the Justice Department to investigate and prosecute what it considers very serious charges against Goldman Sachs. The SEC announces that it's going to go after Goldman in a civil action. And then, on Goldman's glorious day, both the DOJ and the SEC do what the Times calls "an about-face."

Of course, "a correlation is not a cause," but it's fair to note that this year, so far, Open Secrets reports that Goldman Sachs has made total political campaign contributions of roughly $5 million, plus $4.5 million on "lobbying," plus another roughly $1 million in "soft money." "Goldman Sachs Totals,"

It may have been a good day for Goldman Sachs, but it has not otherwise been a good year for all the other banks.
This hasn’t been a good year for Bank of America.

In February, the bank paid a $1 billion dollar fine to the Feds for defrauding the FHA by underwriting loans to unqualified buyers. Just last month Bank of America joined Visa, MasterCard and other large banks to settle a price fixing case brought by retailers over credit card swipe fees. The bank’s portion of that fine: $738 million. . . .

Mortgage investors, claiming that they were misled about the quality of the mortgages and mortgage-backed bonds the bank sold them, have filed claims that have cost the bank over $13 billion so far. The bank lost over $19 billion on their consumer real estate division last year. . . .

Part of Bank of America’s $2.46 billion dollar profit came from cutting their bad loans reserve, a rather neat accounting sleight of hand.

Most recently, Bank of America was the recipient of a subpoena and Request for Information from the U.S. Department of Justice regarding their role in the Libor benchmark interest rate scandal. Berkshire Bank likewise named Bank of America, Citigroup, and Barclays as some of the defendants in their lawsuit for damages, alleging that Libor fraud lowered the . . . interest payments . . . received from customers.

-- Karen Rogers, "Can Bank of America Survive Libor?" Motley Fool, August 8, 2012.

ING Bank has agreed to pay a $619 million penalty for moving billions of dollars through the U.S. financial system at the behest of Cuban and Iranian clients, acts that violated economic sanctions [and] falsifying the records of New York financial institutions . . .. "These cases . . . ultimately contribute to the fight against money laundering and terror financing," Manhattan District Attorney Cyrus Vance said . . ..

-- Charles Riley, "ING to pay $619 million for Cuba, Iran dealings," CNN/Money/Fortune, June 12, 2012

Barclays [Bank]’s record $451 million fines for interest rate manipulation sent bank shares plunging . . . amid speculation that lenders could face billions of dollars in lawsuits. . .. Traders at the U.K.’s second-biggest bank by assets routinely coordinated with counterparts from at least four other banks in an attempt to move interest rate benchmarks [including] the London interbank offered rate, or Libor, and Euribor . . . to generate profits on derivatives held by the banks, the agencies said. . . . Citigroup Inc., Royal Bank of Scotland Group, UBS, ICAP, Lloyds Banking Group and Deutsche Bank are among the firms regulators are investigating.

-- Joshua Gallu, Silla Brush and Lindsay Fortado, "Barclays Libor Fine Sends Stocks Lower as Probes Widen," Bloomberg, June 28, 2012.

If you can't trust your banker, whom can you trust?

It's reminiscent of the story of the father who places his young son on the mantlepiece of their fireplace, holds out his arms, and tells the son to jump. The father steps back, and lets his son fall on the tiles below. When the bewildered and bawling boy looks up and asks why his father did that, the father replies, "Son, that's to teach you the lesson that you should never trust anyone, not even your own father."

The sad conclusion: (1) No, you can't trust your banker. (2) Nor can you trust your elected officials to regulate banks effectively. (3) No matter how you vote this next November those truths will not change. Bank executives are just too big to jail.

Have a nice day.
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Jim said...

Kinda hard to "have a nice day" after reading that piece. I know you were just being a bit sarcastic. Besides all of the nasty, ugly things related to the DOJ's and SEC's abdication of their responsibility to the American people that you point out, is the "Enron Effect." The knuckleheads at Goldman Sachs will think they outsmarted the government (which they did). That leads them to continue to think they are the smartest guys in the room (which they are not). They are just the people most willing to do whatever evil deed is required to make more money. But if they can get away with these horrible things, they're thinking to themselves while sunning themselves on their yachts, they just have to put their enormous brains to work thinking of yet more abhorrent ways to separate us from our money. Harry Shearer is so right.

Maven said...

I losy my house to Deutsche Bank in February. They didn't have to prove that the note they held was legit either. They locked me out three months before evicting me and their agents stole property from me that was left there.