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How Wall Street Thieves, Led by Goldman Sachs, Took Down the Global Economy -- Their Outsized Influence Must be Stopped

If we don't bust up Big Finance, there soon will be another financial crisis that will destroy what's left of our middle-class way of life.
 
 
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For all the damning evidence you’ll ever need about Wall Street corruption, take a look at the recent report from the Senate Permanent Subcommittee on Investigations, “Wall Street and the Financial Crisis: An Anatomy of a Financial Collapse” (PDF). The 650-page indictment reveals the myriad of ways Wall Street lies, cheats, steals and defrauds on a routine basis. Arguably the report is as revealing as the Nixon tapes or the Pentagon Papers. Unfortunately, it’s too technical to get widely read. So here are the Cliff Notes.  

This study, broken into four case studies, forms a biblical tale of how toxic mortgages were born, nurtured and spread like the plague throughout the land, making money for the financial philistines every step of the way.  

The first case study focuses on Washington Mutual (WaMu), the nation’s largest savings bank, and its overt strategic decision to go big into selling high risk, high profit mortgages. Here you will find a detailed description of every type of dangerous mortgage foisted onto the public. Your blood pressure also will climb when you read how the bank used focus groups to help its mortgage brokers find better ways to sucker customers into risky mortgages even though the applicants had qualified for and wanted safer fixed-rate mortgages.

The report also details outright fraud committed by brokers – forging documents, making phony loans, stealing money – who then got rewarded again and again by the bank for their high sales records, even after they were caught! Nobody cared because the loans quickly were sold to Wall Street – the riskier the loan, the higher the interest rates and the more Wall Street would pay.   

The second case recounts the pathetic tale of the Office of Thrift Supervision, the regulatory agency that was supposed to halt WaMu’s shoddy and corrupt practices. The report shows that OTS knew of these deceptive practices in great detail for five full years and still failed to stop the pillaging. Why? Because OTS’s top regulators didn’t believe in regulations. Banks should regulate themselves. OTS only wanted to help. And one way it helped was by deliberately impeding other regulators like the FDIC from enforcing stronger regulations on WaMu. The OTS, which mercifully has been eliminated, believed it was partners with the banks it supposedly regulated --- a textbook example of regulatory capture combined with financial Stockholm syndrome. 

The third case study which focuses on the two largest rating agencies (Moody’s and Standard and Poor’s) is a story of prostitution. Here we learn how the rating agencies turned trick after trick for the big Wall Street banks, doling out favors (AAA ratings) to thousands of “innovative” securities based on the junk mortgages that WaMu and others originated and packaged. Then when it became obvious to everyone that the crap was still crap, the whores went virtuous by drastically downgrading thousands of toxic assets overnight. This forced pension funds and insurance companies, who by law could only hold investment grade securities, to dump their downgraded assets all at once. The result was a rapid and deep collapse of all financial markets. (You read this section of the report and you have to wonder how anyone in their right mind could take seriously S&P’s recent “negative outlook” rating on the U.S. Who are they shilling for now?)  

The last case study is the most pornographic as it strips bare two investment banks, Deutsche Bank and Goldman Sachs. The report accuses them of packaging and selling toxic securities while, at the same time, betting that those securities would fail. Furthermore, the report argues forcefully, that “Investment banks were the driving force behind the structured finance products that provided a steady stream of funding for lenders originating high risk, poor quality loans and that magnified risk throughout the U.S. financial system. The investment banks that engineered, sold, traded, and profited from mortgage related structured finance products were a major cause of the financial crisis.” (pg 19) 

The Case against Goldman Sachs

It’s obvious that the subcommittee is gunning for Goldman Sachs, and for good reason. This elite investment house, the envy of all Wall Street, is shown to be corrupt to its core. Not only is it accused of creating toxic assets and unloading them on its own customers, but also, the report accuses GS of betting that the very assets they were selling would fail. They profited by selling the junk and then profited even more when the junk they were selling lost value. The deeper the financial destruction, the more they made. And of course, they didn’t tell the buyers of the toxic assets about GS’s hidden bets or the fact that their internal research showed that the assets were totally toxic. The report is the most detailed account ever written about the Goldman Sachs profitable trail of deceptions including lies that were told to Senate committees again and again. 

Lie #1: 'Putting our Customers First'

The path of looting and destruction starts in 2006-'07 when the leadership of Goldman Sachs became convinced that the housing market was in decline and that they had to get rid of all their mortgage-related securities in a hurry. Well, how do you get rid of crap? You package it together, slice and dice it and get your favorite rating agency strumpets to kiss it with AAA-ratings. Then you send your sales force out on a mad scramble around the world to find customers. The problem was that by then most mortgage security buyers knew these assets were toxic AND that the ratings were phony. So GS told its sales agents to seek out customers who knew the least about mortgage-related securities. Nice. 

Lie #2: 'Our interests are aligned with our customer’s interests'

Once the junk was packaged and sold, GS placed billions of dollars of bets that the mortgages contained or referenced in the securities would crash and burn. The more they crashed, the more the bets paid off for Goldman Sachs. However, GS failed to reveal this crucial information to its customers. Rather it said that GS’s interests were aligned with that of its customers, implying that GS was buying into the deal and holding the same garbage as the customers were buying. The report details many cases where GS bet big against what they were selling without providing this material information to its buyers.  

The Goldman Sachs-Paulson Sting

The most egregious example of this swindle was the Abacus deal that GS cooked up with Paulson and Company, the hedge fund that bet billions that toxic mortgage-related assets would fail. Paulson approached GS with a plan to rig a bet that was sure to fail for the buyers and pay off big for Paulson. Without telling the buyers, Paulson was allowed to set the criteria for the selection of the toxic assets that were placed in the securities, and of course he picked the worst ones he could find. As the report says; 

    “With respect to Abacus, Goldman knew that the Paulson hedge fund wanted to take 100% of the short side and would profit only if the CDO lost value, yet allowed the hedge fund to play a major but hidden role in selecting the CDO assets.” (p 620) 

To hide Paulson’s role, GS needed an independent “portfolio selection agent” to pretend to be the final arbiter of what mortgage pools became part of the security. They hoped that GHC Partners would play that role. But, as a key Goldman Sachs executive reported to his colleagues, GHC found the deal too unsavory: 

    “As you know, a couple of weeks ago we had approached GSC to ask them to act as portfolio selection agent for that Paulson-sponsored trade, and GSC declined given their negative views on most of the credits that Paulson had selected.” (p 564)

They soon found another shill agent to hide Paulson’s role. Within a year, the buyers of the security lost a billion dollars and Paulson made a billion on his bet. Goldman Sachs got the fees for arranging the deal. However, they later had to pay a fine of $550 million to the SEC for failing to disclose Paulson’s role. Meanwhile, Paulson became the most prosperous hedge fund manager in world. In 2010 he earned $2.4 million an HOUR.  

Lie #3: 'Honest, we didn’t try to rig the market'

In order to place more and more bets against the toxic mortgages, Goldman Sachs wanted to purchase credit default swaps, which are like insurance policies. You pay a premium to buy a policy on a given toxic security. If that security fails, you get full value. And you don’t have to own the security to place this wager.  

Around the time that Bear Stearns started to fail in 2007, GS wanted to buy up more and more of these bets. But first they wanted to drive down the insurance policy prices so they could get them on the cheap and make even more money.  Well, it’s against the law to manipulate markets, but nevertheless GS tried to use its market power to “squeeze” the market downward. It didn’t work out because the cascading financial crash intervened. The Senate investigators found the following smoking gun (a self-evaluation from one of the key GS traders): 

    “In May, while we were remain[ing] as negative as ever on the fundamentals in sub-prime, the market was trading VERY SHORT, and susceptible to a squeeze. We began to encourage this squeeze, with plans of getting very short again, after the short squeezed [sic] cause[d] capitulation of these shorts. This strategy seemed do-able and brilliant, but once the negative fundamental news kept coming in at a tremendous rate, we stopped waiting for the shorts to capitulate, and instead just reinitiated shorts ourselves immediately.” (p 425). 

He later denied this was really a squeeze by claiming to investigators that they placed too much emphasis on “words.” But, think about what this reveals. This GS employee in a self-evaluation to his superiors thought it would make him look good if he bragged about trying to engage in obvious illegalities. What does that really say about the venerable Goldman Sachs culture?  

Lie #4: 'We’re only doing all this to make markets'

One of the biggest lies can be found in the concerted cover-up during the testimony before Congressional committees and investigators. After obvious coaching from their lawyers, GS executives stated again and again they are only trying to make markets so that sophisticated investors can make trades. The GS executives deny that they pushed the crap off their books onto investors. They were, instead, only trying to help investors find the deals they wanted.  Some, GS argues, wanted to bet that the toxic assets would pay off and others that they would fail, and GS, they claim, only gave them both what they wanted. (They said this repeatedly because the disclosure rules for market making are much weaker than if they are promoting and selling securities to investors.) 

Lies #5 ,#6, #7…….#101

The list goes on and on. GS manipulated assets to benefit themselves at the expense of their customers. They manipulated prices to benefit themselves at the expense of customers. As part of Abacus, they worked out a private deal with Paulson so that Paulson would pay less for his “insurance”, which in turn hurt the investors on the other side of the bet. And, even after all of these revelations, Goldman Sachs to this day continues to deny that it engaged in a strategy to bet big against the housing market.  

In the end you come to one and only one conclusion. Every time Goldman Sachs had an opportunity to profit by cheating its customers, it did so.  

What is to be done?

The Senate report calls for tighter regulations so that banks can’t play these games ever again. It calls for more effective regulatory agencies and rules, and it wants major reforms on the way the rating agencies work --- much of this already contained in the Dodd-Frank financial reform bill.  But in addition, the subcommittee obviously wants more federal prosecution of Goldman Sachs and others as it asks that “Federal regulators…. identify any violations of law…” (p 638).  

No way are these reforms and indictments going to work.  

We could put all the crooks in jail (and we should), but Goldman Sachs would still be there. We could tighten regulations more and more, but the big banks would still be armed with enormous wealth and power to subvert them.  Regulations and jail are not good enough unless we want to construct massive regulatory and enforcement agencies that rival the banks in size and scope.  

Rather, the report proves why the entire financial edifice must come down. Our nation cannot survive economically unless we do away with the large Wall Street banks and investment houses. It’s not just that they are too big to fail. They are too big – period!  

At a workshop I recently conducted, one student asked if I thought it possible to go back to a system of local and state banks. I had my doubts. But after reading this report I realized that the student was right. Congress should undo the 1994 bill that “explicitly authorized interstate banking, which allowed federally chartered banks to open branches nationwide more easily than before.” (p 15)  

We should break up the big banks and replace them with state and local ones. We should limit financial firms to no more than $10 billion in assets instead of the trillions they now control. We should heavily regulate the hedge fund gamblers. And we should shrink the size of Wall Street through a financial transaction tax. 

You just can’t read this report without concluding that big finance, by definition, is bad.  

I never make predictions, but this report offers a sure bet: If we don’t bust them up and limit their size, there soon will be another financial crisis that will eat away what’s left of our middle-class way of life.  

As this startling report makes all too clear, it’s us or them and there’s no way around it.  
 

Les Leopold is the executive director of the Labor Institute and Public Health Institute in New York, and author of The Looting of America: How Wall Street's Game of Fantasy Finance Destroyed Our Jobs, Pensions, and Prosperity—and What We Can Do About It (Chelsea Green, 2009).
 
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