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How Deregulation Fueled Goldman Sachs’ Scam
Last week, the Securities and Exchange Commission filed fraud charges against Goldman Sachs and underscored what most Americans have believed for some time: Wall Street has rigged the economy in its own favor, and will stop at nothing—not even outright theft—to boost its profits. What’s worse, Goldman’s scam could have been completely prevented by better regulations and law enforcement.
Goldman’s heist
Let’s be clear. “Financial fraud” means “theft.” Goldman Sachs sold investors securities that were stocked with subprime mortgages and had been cherry-picked by a hedge fund manager named John Paulson. Paulson believed these mortgages were about to go bust, so he helped Goldman Sachs concoct the securities so that he could bet against them himself.
Goldman Sachs, like Paulson, also bet against the securities. But when Goldman sold the securities to investors, it didn’t tell them that Paulson had devised the securities, or that he was betting on their failure. By withholding crucial information from investors, Goldman directly profited from the scam at the expense of its own clients. If ordinary citizens did what the SEC’s alleges Goldman did, we’d call it stealing.
As Nick Baumann emphasizes for Mother Jones, the SEC’s suit against Goldman is just the tip of the iceberg. During the savings and loan crisis of the late 1980s, literally thousands of bankers were jailed for financial fraud. Today’s crisis was much larger in scope, yet the Goldman allegations are among the first serious charges of legal wrongdoing to emerge (other complaints have been filed against Regions Bank and former Countrywide CEO Angelo Mozilo). If the SEC or the FBI are doing their jobs, we should see many more of these cases.
Bust ‘em up.
How do banks get away with these kinds of shenanigans and still secure epic taxpayer bailouts? It’s all about their political clout, as Robert Reich notes for The American Prospect. So long as banks are so enormous that they can ruin the economy with their collapse, the institutions will always carry tremendous political clout.
Even in the case of Goldman Sachs, which is too-big-to-fail by any reasonable standard, the SEC’s fraud case is being filed three years after the company’s alleged offense. That’s well after the company rode to safety on the Troubled Asset Relief Program, the AIG bailout and billions more in other indirect assistance—and only after multiple journalists made Goldman’s offensive transactions general public knowledge.
If we don’t break up the big banks, politically connected Wall Street titans will make sure they get bailed out when the next crisis hits, regardless of whatever laws we have on the books.
Fix the derivatives casino
If Congress doesn’t soon pass a bill to break up behemoth banks, it will be neglecting the gravest problem in our financial system today. But several other reforms are needed if Wall Street is ever going to serve a useful economic function again.
As Nomi Prins emphasizes for AlterNet, much of the Wall Street profit machine has been divorced from the economy that the rest of us live in. These days, banks make most of their money from securities trades and derivatives deals. Their actual lending business is taking a beating. That means big banks have very little incentive to promote economic well-being for every day citizens. We need to create these incentives by banning economically essential banks from engaging in securities trades, and make sure all derivatives transactions are conducted on open, transparent exchanges, just like ordinary stocks and bonds.
Better derivatives regulations could help protect against fraud. If Goldman Sachs’ sketchy subprime deal had been subject to market scrutiny on an exchange, it’s very unlikely that any investor would have bought into it. Goldman Sachs almost got away with it because the deal was secretive and beyond the scope of most regulatory oversight.
Protect whistleblowers
The Goldman case also raises significant questions about the government’s enforcement of existing financial fraud laws. Bradley Birkenfeld, a banker for Swiss financial giant UBS, helped the Department of Justice bring the largest tax fraud case in history against his company, which was helping rich Americans hide money from the IRS in offshore bank accounts.
For his cooperation, Birkenfeld was rewarded with a four-year prison sentence, even though nobody else at UBS—nobody—has been sentenced to prison over the scam. As Juan Gonzalez and Amy Goodman emphasize for Democracy Now!, Birkenfeld’s imprisonment could have something to with who exactly is hiding money with UBS.
Gonzalez discusses an interview with Birkenfeld, in which the former banker notes that the bank had a special office to handle the accounts of “politically exposed persons”— American politicians. Moreover, the top brass at UBS includes key advisors to top politicians in both parties. This is exactly the kind of influence smuggling that breaking up the banks would help fix. UBS is a multi-trillion-dollar institution with no less than 27 U.S. subsidiaries.
But protecting Birkenfeld would accomplish still more—by jailing him, the Justice Department is actively discouraging others from coming forward, and making it more difficult for regulators to enforce the law.
Greenspan’s failure
It’s abundantly clear that almost every major regulatory agency charged with curtailing financial excess failed to prevent the Crash of 2008. But that failure doesn’t mean that effective regulation is impossible—it only shows that the regulators in power failed. The top bank regulator in the U.S., John Dugan, was a former bank lobbyist.
As Christopher Hayes demonstrates for The Nation, former Federal Reserve Chairman Alan Greenspan has never had any interest in regulation whatsoever. After the crash, Greenspan insisted that nobody could have seen it coming. But as Hayes notes, many people did—Greenspan simply didn’t listen to them. These days, Greenspan is revising his story, claiming that he did in fact see the crisis coming, but that nobody could have prevented it. That is simply not credible.
Hayes draws a useful parallel Hurricane Katrina, a problem sparked by a natural event that became a catastrophe when regulators failed to take the necessary precautions. The lesson from both Katrina and the financial crash is not that government always screws up—we have plenty of examples of government preventing floods and economic calamity. The lesson we should learn is that people who don’t believe in government will never do a good job governing. As Hayes notes:
If Greenspan couldn’t figure things out, that doesn’t mean others can’t. In fact, developing systems for doing just that is called—quite simply—progress, and Alan Greenspan continues to be one of its enemies.
That is exactly the task that now presents itself before Congress: Developing a system to prevent and constrain economic destruction wielded by Wall Street. The U.S. had a system that did exactly this for more than fifty years. For the last thrity years, it has been systematically dismantled. How well Congress lives up to that challenge will define much of our economic future for decades to come.
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20 Comments so far
Show AllHow much did the Vampire Squids bribe our Congressional Lawmakers to remove the regulations that had been preventing this plunder of America? This is worse than 'terrorism' this is High Treason!
In the last paragraph Carter tells us that Congress needs to "develop a system to prevent and constrain economic destruction wielded by Wall Street. The U.S. had a system that did exactly this for more than fifty years."
That system was the New Deal and all Congress needs to do is dust it off, restore it to law and add to it as needed to address more recent financial "products".
Obama's current "financial industry reform" proposals, even if they pass without any capitulation to the repugs, will not restore any of those New Deal regulations.
The corruption runs throughout the banking/political system. This is nothing new. BCCI was one the first banking criminal organizations connecting such diverse interests as Price Waterhouse, Bank of England, Bank of America, the ruler of Abu Dhabi, Sheikh Zayad, Marc Rich, later pardoned by President Bill Clinton.
This bank was a set up to be a criminal organization and operated as such under Reagan and Bush I. It is a first but not last of the criminal banks.
Today, these criminal organization run the US Government.
http://en.wikipedia.org/wiki/Bank_of_Credit_and_Commerce_International
James Reynolds Bath is a former director of Bank of Credit and Commerce International (BCCI), and also former part owner of Arbusto Energy with George W. Bush.
Bath's discharge from the National Guard and his relationships to the bin Laden family, the Bush family, and Arbusto were among the allegations discussed in Michael Moore's 2004 documentary film Fahrenheit 9/11.
http://en.wikipedia.org/wiki/James_R._Bath
Bath's connect is just one connection between our corrupt leadership and this banking empire.
FDR famously (or infamously) “saved capitalism from itself”.
Obviously, finance capitalism did not allow its mind to be "focused by the prospect of hanging in the morning" back in the last Great Depression --- and will hopefully get it just rewards this time --- along with the rest of this ruling-elite corporate/financial/militarist EMPIRE that controls ‘our’ country through the facade of a TWO-Party 'Vichy' sham of faux democratic government that would make Hitler and Goebbels' eyes tear-up with admiration.
Alan MacDonald
Sanford, Maine
Of course regulation is possible but not by law alone. This is clear.
Being somewhat out of my league, as almost all of us are, I put forward that we are witness to the collapse of goodwill, and there nothing more radical than that because is no value without goodwill. Laws take care of the exceptional but goodwill is the fundamental of wealth.
Staggering as it may sound, Goldman's billions and even trillions mean nothing: it is funny money. Perhaps they can stuff duvets with it and pray for cold weather.
Having waved a banner encouraging the dissolution of the USA as the only way forward (it is too big to succeed---inhuman) from my perspective now, and whatever happens to the ultimately peripheral Goldman Sachs, it seems clear that the USA has come apart like an exploding Guy, while Europe is desperately clinging to the resultant scraps, and England has but some threads in their white-clenched little fist. As to how low things have become it is clear that England and the USA manufacture never ending killing in the name of progress now and wish to make it a profitable industry. They are insane, of that I am certain; running their little elections and discussing guilt as if its all all right.
The forgotten 'prosperity' of Greenspan's fevered imagination was a recession and the recent 'recession' was a depression and the present is a debacle. The relative calm during those times and of the present rests in blood and promised theft and continued murder elsewhere. It is not a sign of future possibilities. It is a sign of catatonic shock where the only movements are to simultaneously strike out in mindless terror with the left and have a cup of tea as if nothing has happened with the right
The only way forward is in goodwill. We must use the law correctly and could of course impound the exceptional; the nuts or criminals as the case may be. The bases in Iraq will make good prisons or asylums. Or perhaps the Iraqis can live in them and the criminals can live in Fallujah behind a big fence with the Iraqis running the compound as a private enterprise.
More seriously now, something of this nature has got to happen if blood is not going to leak across the present shaky borders and become the common currency over much of the Western world.
Crazy for me to look at what I have written here, but somehow sensible.
*Comment deleted by site administrators for violating our Comment Policy*
see: http://www.commondreams.org/comment-policy
Birkenfeld is a glaring example of how Obama makes sure nobody breaks ranks. Obama regularly plays golf with the big honchos from UBS. His telephone calls to the CEO of Goldman Sachs tops all others in sheer volume. The amount he gleaned in "campaign contributions" from the health insurance companies and big pharmaceutical companies is nothing less than obscene.
I can't help but wonder if he banks with UBS?
Obama is a crook who is soaked in the culture of theft and lying.
I said this about Health Insurers to an Obama supporter, "I don't want to reign them in--I want to eliminate them." I feel the same for these financial institutions. Their assets and liabilities should be federalized and what ever legitimate functions they did perform should be rechartered in new institutions, new boards and new management. Those that have profited from these frauds should be imprisoned and their wealth stripped from them and their families. No one who was a part of the old scheme should be allowed to come back into the field. Schools which have taught how to commit fraud, most MBA schools of Business, should be decertified and their professors should lose tenure. And of course most of Congress should resign in shame for having let this happen. That of course is a daydream. In the real world will there be even one prosecution that sticks?
"The lesson we should learn is that people who don’t believe in government will never do a good job governing." This is the crux of the biscuit. Republicans are great at campaigning, and getting elected. They are unwilling to govern. This year, and again in '12, the Republicans will show pictures of Democratic candidates and scream, "see what they did?!" Conservatives I know still deny the Iraq and Afghan wars were being run off the books, with supplemental appropriations, on top of tax cuts for the wealthy. They blame Barney Frank for the banking/mortgage meltdown, as if he did it all by himself. There can be no substantive regulations put in force while the people doing the regulating, and the people in Congress, are so intimately connected to the bankers and their minions.
Yes its the wars. So much is said about the sickness but the wars are the expression of the sickness, and unless that is emphasised then what is said is worthless.
It is shockingly obvious that the USA is killing people to make a profit. The reality is that it is Privateering and it is overwhelming everything of value in the USA; turning it into a pirate ship; has already done so.
"These days, banks make most of their money from securities trades and derivatives deals. Their actual lending business is taking a beating. That means big banks have very little incentive to promote economic well-being for every day citizens."
And that is why individual States are seriously considering opening a "State-owned bank". Lots to read at this website: (http://publicbanking.wordpress.com/)....It really is worth looking at the benefits they have to offer.
This is the direct result of listening to the intellectual pond scum Milton Friedman and the rest of the basement dwellers of the Chicago School of economic terrorism, murder, bribery and corruption. These clowns need to be kicked to the curb and a real wordl economy developed.
Precisely. Milton Fraudman is at the very centre of a huge effective push that claimed that regulation was not necessary and in fact was the problem. That it was in big $$$ people's interest to be honest, cause gosh durn, that's what got the best results.
We all know that in a small community, the butcher will get a bad reputation for putting his thumb on the scale and shortchanging customers; they will figure it out and pass the word around soon enough. So he will tarnish his reputation and lose his clients.
Not so in monopoly capitalism of the last few hundred years. The meltdown of 2008 is the perfect example, but we don't need a meltdown; just business as usual makes it perfectly obvious that the people who most need to be controlled by the general population, are the sacks of scum who control and play with OUR money.
"But protecting Birkenfeld would accomplish still more—by jailing him, the Justice Department is actively discouraging others from coming forward, and making it more difficult for regulators to enforce the law."
This is exactly why Birkenfeld was jailed and also why Sibol Edmunds no longer works for the FBI and Ray McGovern the CIA. Anyone with a hint of honesty within the ranks is considered a party pooper.
This is an excellent summary of what went wrong on WallStreet and what is needed to fix it. I like the links also (cept the Robert Reich one is a little brief. Check out Simon Johnson, of 13 bankers fame, for more on why we need to break them up).
The CDS scam also needs to be addressed directly. First, they must be classified as insurance. Then, we need to make any insurance contract unenforceable if the counterparty does not suffer actual loss as a result of the realization of the risk.
In other words, you would not be able to insure a debt instrument you don't actually own and take a loss on when it goes into default.
Note that such a law would actually reduce the need for regulation. There's no need to regulate an unenforceable contract, and nobody can clog the courts with suits. It tends to reduce government rather than increase it. There aren't many laws that do that.
William Rood, patriotic citizen of the world
I like it. These banksters just developed sophisticated ways to gamble on anything. Enough! especially as it now seems obvious its with OUR money.
Think we need to keep this accusation in focus. It isn't criminal. The most Goldman stands to sacrifice is a piece of its ill-gotten profits.
Now we can pretend that Goldman will learn its lesson but we all pretty much know:
1) that it's got its hands (or as Taibbi said, squid tentacles) in everything it can going forward, and
2) the company is too big of a campaign contributor to face heat from Justice or the FBI, which are run by Obama appointees.
1) is the product of years of a revolving door between key economic positions in the White House and Goldman. The company has had a former employee in the #1 or #2 economic adviser positions for decades. Goldman is simply above the law when enforcement of the law entails criminal prosecutions or firm regulations that could impede the company's profits.
As for 2) political power translates into the authority to bend rules or rewrite them. Congress is full of former Goldman Employees who serve as staffers. We're seeing the Senate rewrite financial laws that won't punish the bankers.
I'm going on record as saying that this SEC charge is the equivalent of throwing a lamb on the sacrifice table for public amusement while the real perpetrators laugh at how weak our government and law enforcement has become. It's the Valerie Plame case all over again and instead of Scooter Libby we have some mid-level Goldman executive. And he won't even have to go to jail. (Then again, neither did Libby and that was a criminal case!)
They always make this stuff seem so complicated. Here's my take in layman's terms.
I'm the manager for Susan Boyle the singing phenomenon. While looking for some nice long term contracts for Ms. Boyle I secretly learn from her doctor that she's very likely to have throat cancer and pay him a few bucks to keep his mouth shut. She can probably survive this but will most likely lose her singing voice. I don't tell anyone and continue my search for a recording deal and finally land one with Sony Records. She signs on and I get a nice commission on the deal. At the same time I've taken out a life insurance policy on Ms. Boyle through AIG knowing that she may not survive her cancer. Sure I could have made more money buy staying her manager but I was a little concerned about my future earnings. I got my commission, and as it turned out, Ms. Boyle doesn't survive the throat surgery, so I collect on that policy making even more money.
So, I made money getting Sony to sign her on, knowing she may not have much time left to fulfill her recording contract, and took out an insurance policy knowing that she might die from throat cancer.
This is what Goldman Sachs did. Now compound this with the reality (in my fictional story) that it wasn't actually just throat cancer but a highly contagious virus spreading through the recording industry. Turns out lots of vocal artists had life insurance policies through AIG, and recording contracts with Sony. So much so that as the artist started dying Sony lost millions through unfulfilled contracts. AIG had to start dolling out millions for life insurance policies. Because so many people were effected Sony started heading toward bankruptcy along with AIG and the stock market started to take a hit as the ripples spread through all the connected businesses and subsidiaries started to follow them down the hole and the US taxpayer was required to give them money to save the entire economy.
How's that?