Published In CommPRO,biz 2013.12.10

 

The Banksters Walk Free

In a breathtakingly clueless comment last month (2013.11.12 SIFMA) at an industry conference, Lloyd Blankfein, Goldman Sachs CEO, is reported to have expressed regret that they were part of the problem leading up to the recession. Not regret that his company’s actions helped to crash the world economy ruining thousands, putting millions out of work and causing unimaginable suffering. He expressed no regret for that at all. He just wishes they hadn’t engaged in “trading practices” that created an image problem for his firm.

Blankfein is reported to have told the conferees, “I wish the organization hadn't done complex CDOs circa '06 and '07." A CDO (collateralized debt obligation) is a fancy name for bundling up a bunch of mortgages and such and hustling them as investments. Goldman sold them to pension plans, banks and the like. After all, what could go wrong? Housing always goes up; even if the mortgage holders fail to make their payments, the property will cover the loss, right? We all know the answer to that now. It seems that Goldman Sachs knew the answer back then. They knew their CDOs were full of “Crap” (their terminology), and at the same time they were hawking them, Goldman was betting they would fail. Worse, when they failed the American taxpayers paid off on that bet. And all Lloyd Blankfein sees in this is a PR problem? 

The SEC saw fraud and brought civil charges against Goldman. The agency settled for a paltry $500 million, with no admission of guilt. For Goldman Sachs that’s pocket change. According to some reports they cleared well north of $10 billion double-dealing CDOs. Poor Lloyd, Goldman Sachs took a public relations hit while their actions destroyed the lives of millions. If there was any justice Blankfein and a flock of other money-changers like him would be in jail. Considering the suffering their fraudulent actions brought down on millions around the world, they should face prosecution. 

Surprisingly, only a few of these modern day money-changers have faced prosecution over the last few decades. A bunch of minor league hustlers were jailed in the 1980s and early 1990s over the Savings & Loan crisis, alongside closing down close to 800 S&Ls with assets in the $400 billion dollar neighborhood. Since then not much has happened to the banksters, mostly because our Justice Department has some illusion that these crooks are too-big-to-jail. In case after case the DOJ has allowed blatant criminal behavior on the part of big league banksters to go unpunished because they believe that jailing the top guys at these banks might rock the boat and cause problems in our economy. 

That shows an unimaginable lack of business knowhow. Nobody is irreplaceable, that’s especially true when it comes to replacing corporate leaders engaged in illegal activities. There are good people, honest people in most organizations ready to move up and do the right thing. If not, there are topnotch folks ready to come in and put them on the straight and narrow. Folks who understand that the ethical business model is not only the right path; it is the surest path to profitability.

Missing The Point

The Security and Exchange Commission (SEC) has broad powers to regulate our security markets and those who do business in this arena, commonly known as Wall Street. Last week (2012.10.02) the SEC convened a high-frequency trading panel to review this practice that creates as many as 70% of all investment market trades. We use the term investment loosely, that’s the last thing high-frequency traders practice; they could be more accurately described as pirates.

Using ever more sophisticated algorithms, the high-frequency traders search for various types of large trades, then race ahead of them buying up the target and less than a second later sell, raising the price and essentially stealing from the institutional buyer. That means that your 401K or Granny’s pension fund ends up paying more. While it’s legal larceny it’s neither ethical nor in any way beneficial to society. The traders will claim they have lowered the cost of trading. While that might be true, any savings vanish in the inflated pricing they add to the markets.

Given all the damage the traders flying the Jolly Roger inflict on the markets, there was great hope that last week’s meeting would bring some relief. Kiss that hope goodbye. The panel focused exclusively on the problems high-frequency traders encounter when their computer programs malfunction. In May of 2010 a trillion dollars in market value briefly disappeared. Three computer-gone-wild incidents have occurred this year. On August 1^st Knight Capital lost $440 million in the blink of an eye and the firm nearly went bust. Oh, those poor babies.

That triggered this SEC panel discussion, a discussion that focused on protecting the high-frequency traders from harm. There seems to be a consensus on creating “Kill-Switches” that could cut off destructive (to the Jolly Roger sector) computer glitches. The discussions centered on Kill-Switch access, who can push the button and should they be hair triggered or take a little longer. For its part the SEC has created an Office of Analytics and Research to study the issues. It will take time to get the office set up, hire the geeks to man it and give them enough time to study the issues – albeit all the wrong issues.

The issue the SEC should be studying is how to reign in this useless, destructive  practice. The stock markets exist to allocate capital. High-frequency traders do nothing to serve that purpose; actually they interfere with the underlying purpose of the investment markets. It’s time to send them packing.

Currently capital gains on investments held more than a year are taxed at the 15% level. We’d like to suggest some new tax brackets. For investments held twenty years or more, there would be no tax liability on capital gains. For ten to twenty years, 5%, five to ten years 10%, two to five years 15%, one to two years 25%, one month to a year 50%, one week to a month 75%, less than a week 95%. That will force these pirates to sail off into the sunset; or perhaps to Las Vegas where the odds are not stacked in their favor.

Too Big To Jail?

Last week (2012.08.22) William B. Harrison Jr. penned an OP-ED in The New York Times defending bankers. Harrison retired as Chairman of JP Morgan Chase in 2006 when he was rolling the dice with the best of the big banksters at the height of the Casino-i-zation of our banking sector. 

Harrison’s OP-ED would be laughable if he were not talking about a tragedy. A tragedy impacting nearly everyone in the world except the too-big-to-fail banks and the banksters who run them. They are back at their gaming tables doing fine since we bailed them out; safe in the knowledge that when they lose, we’ll be forced to bail them out again.

Harrison is wildly out of step with Sanford I. “Sandy” Weill, who suggested in a CNBC interview (2012.07.25) that it is time to break up the big banks. Not a new idea, but coming from Weill it exploded in the news cycle. Weill is the father of the very monster zombie banks that he now wants broken up. In 1997 he merged  Travelers Insurance Group and Citibank, creating the largest financial institution on the face of the earth. 

Like Harrison, Weill retired in 2006. However, unlike Harrison’s convoluted apologia, Weill takes a totally different tack. He wants the gaming tables out of our banks. Weill wants bankers focused on watching our money and making loans. It took a lot for Weill to step up and suggest that times have changed and it’s time to break up the big banks.

When Roger Clemens denied steroid use before a Congressional Committee, they went after him tooth and nail. The evidence against Clemens was pitifully weak and he was acquitted. Two years ago four Goldman Sachs executives appeared before a Committee led by Senator Carl Levin. 

Under oath they dodged and twisted and turned, but made statements that internal Goldman memos and emails showed were untrue; they lied. It’s difficult to prove that the “Wild West Wall Streeters” committed fraud. However, the arrogant banksters who lied under oath to Congress surely broke the law.

Senator Levin turned their testimony over to the Justice Department. While it’s tough to prove fraud, how tough can it be to show that the Goldman crowd lied? There’s a long paper trail to backup the charges. Where is the zeal displayed in prosecuting Clemens? Gone. The Department of Justice has advised the Sachs executives that they will not be prosecuted.   

There’s more. Six months ago Sachs, Wells Fargo and Chase all got SEC “Wells Notices” indicating the agency’s intent to look into their well-documented role in the current downtrend. In an abrupt about face the SEC let Sachs off the hook; they’re singing “Anything Goes.”

Well the lying dudes and the doubling dealing traders at Sachs are having a Cole Porter moment but not Sergey Aleynikov. He has been charged by NY State with stealing computer code when he worked at Sachs. This, only six months after Sergey was acquitted of the same charges in Federal Court. As one blogger noted, “The only way to get arrested when you work at Goldman Sachs, is to be accused of stealing from Goldman Sachs.”

Collapse of an Empire

The ethical cesspool at the center of the media colossus Rupert Murdoch created over the years since he arrived on London’s Fleet Street, is beginning to suck him into its vortex. Last week (05.01.12) a Parliamentary Committee released a 121 page report detailing some of the smarmy activities and behaviors the Murdoch culture has spawned. As widely trumpeted in the media, it branded Murdoch “not a fit person” to run an enterprise like his.

Apologists for the Murdoch clan are quick to point out that the “not-a-fit-person” phrase was opposed by four of the nine members of the Committee, all members of Prime Minister David Cameron’s Conservative Party. While the Conservative members of the Committee dissented on the fit-person wordage, they agreed with most of the report. Cameron is connected to Murdoch’s organization in a number of aspects. Foremost is his former Communications Director, Andy Coulson, who moved directly to 21 Downing Street from one of Murdoch’s London newspapers. Coulson has been arrested but not charged. Prime Minister Cameron described his own ties to the Murdoch organization as “too cozy.”

Phone hacking, police bribery, and who knows what else were unearthed by the inquiry. “Who knows,” because many areas in the report are left untouched. The Committee did not venture into the domain of Scotland Yard and the prosecutors who are still building the criminal cases. As a result they did not explore the role of more than forty Murdoch editors, private investigators, and reporters, along with police officers who have been arrested so far. That group includes Murdoch darling Rebecca Brooks and ten others whose connections to the hacking scandal were reportedly referred to prosecutors last month by Scotland Yard.

All of this and the disclosures unfolding before a separate British judicial inquiry, raises the question, why are there no similar queries into the Murdoch Oligarchy in the United States? Rupert Murdoch and his clan are all US citizens; News Corp is a US corporation. While his trashy newspapers in the UK are often seen as the face of his holdings, they’re but a tiny segment. In America he has a couple dozen television licenses, so where is the FCC? Combined, these stations, Fox News, The New York Post, The Wall Street Journal and his entertainment entities dwarf any similar organization.

Where are the Congressional investigations? Given the detailed bribery charges in the UK, where are the FCPA (Foreign Corrupt Practices Act) concerns? If the SEC is hot on Walmart’s tail (properly) for spreading the wealth among Mexican officials, how about Murdoch’s minions greatly enriching Scotland Yard types? If a parliamentary investigation in the UK finds Murdoch “not a fit person” to run a handful of newspapers, what does that say about the television properties our FCC has awarded him? Are the bureaucrats and the political types in Washington afraid of his attack dogs at The New York Post and Fox News?

Just in Time for Christmas

As day after day of misery goes by in the lives of the little folks crushed by the financial crisis, one question lies in the back of their minds. Who did this to us? Who’s looking for them and when will they be punished? We have known the answer to the first question for some time. The Wall Street investment banks’ sophisticated (read Crappy) investment packages whipped up a perfect storm.

They sold this Crap (their term not ours) to people who should have known better based largely on stellar ratings from the agencies charged with vetting these investments. The ratings agencies were pushed by their customers (big banks)  and did not look – as hard as they should – at the packages.

And it turns out that the bailout bucks we knew about (TARP) were nothing when compared to the zero interest loans the Federal Reserve was handing out to keep the banks afloat, trillions in secret loans. Bloomberg Markets Magazine blew the lid off this program. It was ten times the size of TARP.  By far the biggest hunk of these bucks (63% of the daily average) went to the same gang that got us into this mess – six humongous banks.

How did these half-dozen too-big-to-fail banks position themselves to come out of any crisis they might create covered in gold? Over a couple of decades they conned Congress into repealing the laws designed to prevent things like the 2008 crash. They even got “The Fools on the Hill” (AKA the Congress) to exempt banks from State Lottery laws. Who helped this along?  Clinton’s Secretary of the Treasury, Robert Rubin, fresh from 26 years and the top job at Goldman Sachs.

When the house of cards collapsed, who came up with the plan to save the banks? Bush Secretary of the Treasury Hank Paulson, fresh from the top job at Goldman Sachs, led the charge to save his comrades.  It gets even better; in 2006 Goldman Sachs was able to foresee that the crap was really crappy and likely to crash. Did they sound the alarm? Of course not, that might have interfered with their efforts to sell crap to their customers. Instead they bet it would crash and reaped a huge profit.

What ties this all together? Two of the key players, Rubin and Paulson, both came from Goldman at just the right moment to get rid of the pesky banking laws. So in addition to the efforts of all the banking lobbyists, you might say it was an “Inside Job.”

However, our wait to make those responsible pay may be nearly over. The SEC has charged six former Fanny Mae and Freddy Mac executives. More important, New York State Attorney General Eric Schneiderman and other State AGs are looking at criminal and civil charges. It would be nice to see a few of the arrogant bankers on their way to jail?  When you think about it, what they did was harmful than Bernie Madoff’’s scams. “Pants-on-Fire” Goldman CEO, Lloyd Blankfein has another view; bankers, he says, are “doing God’s work.”

Take Off The Kid Gloves

Take Off The Kid Gloves

The Securities & Exchange Commission (SEC) ended its fiscal year in September having filed a record number of cases (735), up almost 10% from their pace (677) last year. They collected nearly $3 billion in penalties both years. Meanwhile the annual Johnson Associates’ “Executive Compensation Study” shows an alarming drop in pay for the folks on Wall Street, as much as 20% - 30%. Alarming perhaps to the Wall Street types, but to those who are trying to make ends meet the Wall Street pay scale, that begins at a hundred grand and can escalate into seven or eight figures, still looks really good. 

Reuters reports that over the last two years the SEC has removed a management layer and restructured their enforcement division. And, they have created a new whistleblower bounty program alongside other incentives to encourage witnesses to cooperate. Given the two record years they have registered, it must be working.

Or is it? It appears that the SEC is still treading softly with the big banks and the individuals behind the misdeeds (AKA CEOs etc.).  A Federal District Judge, Jed Rakoff, doesn’t seem convinced that a proposed settlement with Citibank is tough enough on the bank. Citi is charged with fraud; selling customers crappy financial instruments at the same time the bank was betting they would fail. The very same double dealing that triggered the financial collapse we are enduring.

In a hearing last week Judge Rakoff questioned the SEC on the settlement: $95 million when the investors Citi ripped off lost $700 million. The judge has taken a similar position with several lowball settlements the SEC proposed in the past. Rakoff also questioned why only one individual in this case has been charged with wrongdoing.

We –along with many others, including State Attorney Generals across the country– have been wondering about the SEC slap-on-the-wrist penalty proclivity. A concern the Attorney Generals also direct toward the Justice Department; why has it not zealously prosecuted bankers who triggered the recession? We know who they are and what they did. Instead, after bailing them out we are forced to watch as they go back to the same risky stuff all over again, sure that we will bail them out again when it collapses. All the while taking home eight-figure bucks.

The banks’ reaction to the relatively mild restraints of the Dodd/Frank Act is to pile new fees on their customers. They have grown so accustomed to inflated profits from what are nothing more than risky gambling schemes that when a little of that revenue stream is cut off, they sock it to their customers instead of living lean. In the meantime we have to listen to Jamie Dimon, JPMorgan Chase “Whiner in Chief,” and Goldman Sachs CEO, Lloyd Blankfein (AKA The Artful Dodger) complain. They are so misunderstood and unappreciated after all they do for us, poor babies.

Alan Johnson, managing director of Johnson Associates, the firm that carried out the Wall Street wage study, put the ethical issue very succinctly, “Wall Street executives,” he said, “haven’t gotten the memo at all.”

The Goldman SEC Case

The merits of the SEC case against Goldman Sachs aside, the ethical issues are crystal clear. Pushing investments that have a high probability of failure is just plain wrong. Blaming the rating agencies for putting their stamp of approval on these bundles of soon to be worthless mortgages is disingenuous at best.

Given the “pay grade” of those selling these investments wouldn’t you think they would do some due diligence on their value? Instead, those peddling this junk were said to be relying on the idea that real estate prices were going to rise forever.

Even if that dicey concept were true, much of what was in these packages could not stand the light of day. People in houses miles beyond their means; a $14,000 dollar a year farm laborer in a $750,000 house, others all across the country enticed by no money down, no closing costs, low payments for a few months and then wham! a recipe for disaster. Anyone who cared enough to look could see these bundles were a time bomb waiting to explode.

The banks, pension funds and other “sophisticated” types who bought this junk; should they have done their due diligence? You bet. People on all sides of this deal who were being paid hundreds of thousands of dollars, sometimes millions each year should have seen the risk.

Truth is much of this marketplace has nothing to do with investing. It is pure and simple gambling. Those involved didn’t even own the bundles of mortgages; they just bet on their value. It’s like picking out a house you don’t own and betting someone it will burn down. Goldman’s position is that they were just the bookie. The SEC thinks Goldman knew the house on was on fire. Thereon lies the case; fraud or not.

Who cares, other than the little old ladies, retired workers and other pensioners who lost their savings, not to mention the taxpayers worldwide who had to bail Goldman and other banks out when the world economy went south in large part because of these –too big to fail- bank’s gambling problems. In case you are wondering, why banks and others in the wonderful world of stocks, bonds, commodities and such are allowed to gamble in this manner when the rest of us have to go to a casino, there is a reason. When it comes to these securities Wall Street really is a casino, a legal casino.

The Commodity Futures Modernization Act of 2000 along with a 1992 Act overturned reforms enacted following the 1907 bank panic. That turned our financial system noted for its transparency and security into –well– an unregulated casino. So it may very well be that Goldman Sachs –and perhaps other big banks– did nothing illegal. Fleecing the suckers may be perfectly legal. Ethics, however are another matter.

Everyone from the folks who coached the $14,000 a year farm laborer on how to get a loan he could never repay, to the bank that originated the loan, to those who sold and resold it and those who bundled it with a bunch of other bad loans, and finally those in the too-big-to fail banks who acted as bookies or bet the savings of pensioners on these loans, every single individual in that chain was ethically bankrupt.

Let’s move away from the smarmy little characters at the beginning of each of these human tragedies who pushed foolish dreamers into deals that would ruin them. Let’s move up to the six and seven figure folk in their $3,000 outfits who turned these individual travesties into a nightmare.

Take Goldman Sachs forinstance. As a publically traded company under Sarbanes-Oxley (SOX) they are required to offer ethics training to their employees. It would be hard to imagine how anyone involved in this high flying flimflam could have considered any part of it ethical. Let alone how Goldman Sachs’ management could believe they have fulfilled their SOX mandated ethics training obligations.