Wall Street Threatens Washington as Reform Vote Approaches; Europe Acts Pre-emptively Against Fraud

Naked shorting is illegal in the US, and for very good reasons. On a larger scale, it is used for price manipulation, and is the equivalent of counterfeiting. The removal of the uptick rule by the SEC on July 6, 2007, which had been created in 1938 as part of the New Deal regulatory reforms, cleared the way for its more heavy handed uses and control frauds.

The ban on naked short selling was not enforced by regulators who were willing to turn a blind eye to blatant market manipulation. Under the DTCC regime it turned epidemic. The alarm was raised by many whistle blowers who were either ignored or vilified by the corporate media.

Let me be clear on this. I am not opposed to short selling. It is a trade that has many legitimate uses. It is naked short selling that lends itself so readily to abuse, particularly when there are not limits on position sizes and massed selling to drive down prices. The deregulatory movement, based on such lofty principles, has become nothing more than a means to a fraud, systematically knocking down all the regulatory safeguards that were put in place to protect the public during the Great Depression.

And this was the result of a long and expensive campaign, led by the wealthy elite and the Wall Street banks, to lobby the Congress and dupe the people to energize their frauds. As such, it shows premeditation and deliberate intent, the organized corruption of one of the most connected of all global resources, the US financial system and control of the international monetary reserves.

It became so outrageous that the US had to intervene during its banking crisis that triggered this global financial crisis, and selectively enforce the law to protect its banks from each other and the packs of unregulated hedge funds led by Goldman Sachs.

Germany recently stepped in to ban NAKED short selling, which was being used to attempt to take down certain prices to trigger the highly lucrative and largely unregulated Credit Default Swaps.

And commentators were outraged and even hysterical over this action by Germany, which was the kind of responsible market regulation that the US reserves to itself, and only when it is in support of protecting its banking oligarchs.

This surprise and shock indicates how low our standards have fallen, and how given over to Stockholm syndrome so many otherwise intelligent people have become regarding the speculators and the banks. Death by professors, chief strategists, and the pampered princes of the corporate media.

I found it interesting that the heavy selling today in US equities, triggered by the selling of large tranches of SP futures near the open, in addition to news indicating the recovery is not gaining traction, and the threat of another flash crash was tied by traders this morning over ‘unease the the Congress has not yet killed Blanche Lincoln’s amendment to prohibit the banks from dealing in Credit Default Swaps.’

Regarding the recent gold action John Brimelow says:

"Waves of selling hit gold on Wednesday in the European and NY midmornings. As noted earlier, apparent CME volume pre-open was 90,000 lots, and estimated volume between 9AM and Noon NY, during which time gold dropped some $21, was a heavy 95,000 lots. ScotiaMocatta simply refers to gold being “bludgeoned down” and Reuters quotes a COMEX gold floor trader, “the big banks just put in sell orders that hit the market."

Anyone close to the market can see this manipulation. It is neither sophisticated nor clever. That is the shame of the regulators and insiders, who find their coverage in pleading ignorance. And what they do in gold they are doing in equities and other markets, while working their way up the food chain to the sovereign debt markets. None are safe when corruption partners with government.

All this pain and uncertainty is designed to maintain their impossibly perfect trading results for their proprietary accounts as their customers bleed for their bonuses. And what makes this such a perfect con is that they are bullying the public using the money taken from the Federal Reserve and the Congress, the public's own money.

I would that Obama and the Congress had half the courage of Merkel. And that commentators and the middle class would realize the sorry state that their economy is in, held hostage by a bunch of spoiled brats and well heeled thugs, and a government by and for the highest bidder.

"Gentlemen, I have had men watching you for a long time and I am convinced that you have used the funds of the Bank to speculate in the breadstuffs of the country. When you won, you divided the profits amongst yourselves, and when you lost, you charged it to the Bank... Beyond question this great and powerful institution has been actively engaged in attempting to influence the elections of the public officers by means of its money...

You tell me that if I take the deposits from the Bank and annul its charter, I shall ruin ten thousand families. That may be true, gentlemen, but that is your sin. Should I let you go on, you will ruin fifty thousand families, and that would be my sin. You are a den of vipers and thieves. I intend to rout you out, and by the grace of the Eternal God, I will rout you out."

Andrew Jackson on The Second Bank of the United States which was the Central Bank of his day.

A dangerously simplistic view? More like common sense, and the plain spoken truth, at last. You have been given a Republic, indeed, if you can keep it, if only for the honor of your fathers, and the sake of your children.

A Summary of the Goldman Sachs Fraud Case, and the Downfall of Icons

"Le secret des grandes fortunes sans cause apparente est un crime oublié, parce qu' il a été proprement fait."

(The secret of great returns which are difficult to explain is a crime that has not yet been discovered because it has been carefully executed."

Honoré de Balzac, Pere Goriot

There is quite a bit of spin surrounding the Goldman Sachs deal. The best debunking of the spin around the nature and quality of the SEC's case was written by Barry Ritholz.

One of the best summaries of what the deal actually encompassed is excerpted below by Rolling Stone journalist Matt Taibbi.

"Here's the Cliffs Notes version of the scandal: Back in 2007, Harvard-educated hedge-fund whiz John Paulson (no relation to then-Treasury secretary and former Goldman chief Hank Paulson) smartly decided the housing boom was a mirage. So he asked Goldman to put together a multibillion-dollar basket of crappy subprime investments that he could bet against. The bank gladly complied, taking a $15 million fee to do the deal and letting Paulson choose some of the toxic mortgages in the portfolio, which would come to be called Abacus.

What Paulson jammed into Abacus was mortgages lent to borrowers with low credit ratings, and mortgages from states like Florida, Arizona, Nevada and California that had recently seen wild home-price spikes. In metaphorical terms, Paulson was choosing, as sexual partners for future visitors to the Goldman bordello, a gang of IV drug users, Haitians and hemophiliacs, then buying life-insurance policies on the whole orgy. Goldman then turned around and sold this poisonous stuff to its customers as good, healthy investments.

Where Goldman broke the rules, according to the SEC, was in failing to disclose to its customers – in particular a German bank called IKB and a Dutch bank called ABN-AMRO – the full nature of Paulson's involvement with the deal. Neither investor knew that the portfolio they were buying into had essentially been put together by a financial arsonist who was rooting for it all to blow up.

Goldman even kept its own collateral manager – a well-known and respectable company called ACA – in the dark. The bank hired the firm to approve the bad mortgages being selected by Paulson, but never bothered to tell ACA that Paulson was actually betting against the deal. ACA thought Paulson was long, when actually he was short. That led to the awful comedy of ACA staffers holding meeting after meeting with Goldman and Paulson, and continually coming away confused as to why their supposedly canny financial partners kept kicking any decent mortgage out of the deal. In one ACA internal e-mail, the company wonders aloud why Paulson excluded mortgages issued by Wells Fargo – a bank that traditionally created high-quality mortgages. "Did [they] give a reason why they kicked out all the Wells deals?" the quizzical e-mail reads."

Matt Taibbi, The Feds Vs. Goldman

This is fraud, pure and simple. Goldman did not stand by and allow ACA to make its picks. Goldman and Paulson aggressively influenced the selection process, vetoing the good mortgages, and manipulating ACA, setting them up to be the fall guy in what is clearly a premeditated fraud.

The final defense being offered, after the smokescreens and misstatements of what happened have been pulled away, is that there can be no fraud when you are selling to a 'qualified investor' and making a market.

Goldman was not making a market. They were actively creating inherently dangerous products, and then recommending and selling them to their customers, qualified investors or not. It was fraud, and Goldman is a disreputable firm, that has been shown to engage in fraud across many markets and countries and venues. This particular scam with ACA is small change compared to the setting up of AIG, and the foul bailout ripped from the public with the collusion of the NY Fed.

Anyone who looked at their trading results, many standard deviations out of the norm, would have to know that there was some sort of fraud and market manipulation involved. It is the Bernie Madoff syndrome; the professionals all knew he was cheating somehow, but were more than willing to go along with it and turn a blind eye while it was to their advantage. And Goldman had the politicians in their pocket, and so they were powerful, not to be crossed. Almost as powerfully connected as the Fed's house bank, J. P. Morgan.

Warren Buffet and Charlie Munger have come out recently in defense of Goldman, attempting to paint this fraud as the work of a single rogue trader. That of course is a part of the spin, the carefully thought out and premeditated fraud which had ACA and then Fabrice Tourree as the designated scapegoats.

Warren holds quite a bit of Goldman Sachs stock. And all he and Charlie have shown is that once you strip away the trappings and the masks, the ornamentation and the legend, what you are left with is someone who is willing to lie down with pigs when the money is right. So the question is not what kind of man Warren Buffet is, but rather, what is his price.

When the tide goes out, we indeed see who is naked, and who is not. And it is not a pretty picture.

Retraining and Rehabilitation of Financial Sector Employees May Be a Daunting Task

Prospero: Mark but the badges of these men, my lords,
Then say if they be true...
These three have robb'd me, and this demi-devil—
For he's a bastard one, had plotted with them
To take my life. Two of these fellows you
Must know and own; this thing of darkness I
Acknowledge mine.

Caliban: I shall be pinch'd to death.

The Tempest Act 5, scene 1

"Even knaves may be made good for something."

Jean-Jacques Rousseau

According to the email below there is some concern among employees in the financial services sector about their future employment prospects if reform legislation should be enacted, and some tentative, but perhaps unrealistic plans, of coping with it if it happens are expressed.

I can always use a little help around the kitchen and the yard, cleaning up and minor repairs, and I would gladly pay a fair wage based on effort, moderated by experience and capability. My son and helper is leaving for university soon to begin his studies in engineering, which is the manipulation of real things for practical purposes with benefit to the customer. So it might be unfamiliar to you. And I am not getting any younger.

By the way, since most of the suburban teaching jobs are filled, have you considered going back to school to learn to be a Registered Nurse? There will be plenty of openings in nursing homes and hospices, and your selfless dedication to hard and sometimes distasteful work will be most useful and appreciated.

I suspect there will be a lot of cheap labor available from dislocated FIRE sector workers in the years to come, as well as from those serving out community service judgements. At least the highways will be cleaned of litter. Perhaps exposure to the common people and honest labor will do them some good.

I am a little concerned that this type of person probably has little or no practical skills, but they do claim to bring high energy and a willing spirit, so it could be put to work on the cleaning up of America and Europe, and the rebuilding of their infrastructure. They make themselves sound like teachers, firefighters, policemen, or even soldiers, but there are dimensions of duty and honor and self-sacrifice and service to others in those callings far beyond any monetary recompense of which they probably have little experience or even a vaguely realistic expectation.

His or her description of what it is like to teach elementary school is good for a laugh. Someone is in for a rude awakening.

All things considered, we can surmise that there is no excess of common sense in their portfolio, or an ability to listen well and learn about things which they think they know, but really do not understand at all. That speaks to the main question which is, 'are they educable' or will they be prone to recidivism?

I find it hard to believe, however, that this letter is anything but a hoax. But considering the imputed source of these sentiments is the "derivative of a human being," it could be genuine. I am a bit undecided, but will allow for it.

So grab a pair of gloves, my boy, and I will be glad to teach you how to prune a tree and clear some brush. But although you might be willing to do it more cheaply, don't expect to displace the little girls of their job of walking the dog to earn money to purchase new dollies. They can be more ruthless and determined than the most hardened union boss. And the nine year old tells me she is still the strongest person in her class, but boasts of it less of late, owing to a nascent attraction to a classmate known only as 'Will.' But you might be able to help them with the clean up.

And if you should happen to play any card or board games with them, I warn you beforehand, they cheat, obviously, clumsily and shamelessly, to win, with a somewhat cavalier regard for the written rules. Ah, but I forget, that has long been your raison d'etre, your hallmark, and a particular area of specialization and expertise.

Time, life and a benevolent and orderly society tend to teach children to be better, to be human, essere umano. But apparently it does not always at first succeed, and must try, try again.

The Reformed Broker
An Email Purported to be Making the Rounds of Wall Street

"We are Wall Street. It's our job to make money. Whether it's a commodity, stock, bond, or some hypothetical piece of fake paper, it doesn't matter. We would trade baseball cards if it were profitable. I didn't hear America complaining when the market was roaring to 14,000 and everyone's 401k doubled every 3 years. Just like gambling, its not a problem until you lose. I've never heard of anyone going to Gamblers Anonymous because they won too much in Vegas.

Well now the market crapped out, & even though it has come back somewhat, the government and the average Joes are still looking for a scapegoat. God knows there has to be one for everything. Well, here we are.

Go ahead and continue to take us down, but you're only going to hurt yourselves. What's going to happen when we can't find jobs on the Street anymore? Guess what: We're going to take yours. We get up at 5am & work till 10pm or later. We're used to not getting up to pee when we have a position. We don't take an hour or more for a lunch break. We don't demand a union. We don't retire at 50 with a pension. We eat what we kill, and when the only thing left to eat is on your dinner plates, we'll eat that.

For years teachers and other unionized labor have had us fooled. We were too busy working to notice. Do you really think that we are incapable of teaching 3rd graders and doing landscaping? We're going to take your cushy jobs with tenure and 4 months off a year and whine just like you that we are so-o-o-o underpaid for building the youth of America. Say goodbye to your overtime and double time and a half. I'll be hitting grounders to the high school baseball team for $5k extra a summer, thank you very much. (Note: How many moons are there on this guy's planet?)

So now that we're going to be making $85k a year without upside, Joe Mainstreet is going to have his revenge, right? Wrong! Guess what: we're going to stop buying the new 80k car, we aren't going to leave the 35 percent tip at our business dinners anymore. No more free rides on our backs. We're going to landscape our own back yards, wash our cars with a garden hose in our driveways. Our money was your money. You spent it. When our money dries up, so does yours.

The difference is, you lived off of it, we rejoiced in it. The Obama administration and the Democratic National Committee might get their way and knock us off the top of the pyramid, but it's really going to hurt like hell for them when our fat a**es land directly on the middle class of America and knock them to the bottom. (I would pay to watch that. There are a lot of former customers named 'Bubba' who would like to make your acquaintance.)

We aren't dinosaurs. We are smarter and more vicious than that, and we are going to survive. The question is, now that Obama & his administration are making Joe Mainstreet our food supply…will he? and will they?"

NY Fed Cited in Cover-Up By SIGTARP's Barofsky - Possible Criminal Charges

It's never the crime, it's always the cover up.

This is beyond a doubt the story of the week. Neil Barofsky has been a thorn in the side of the Treasury Department and the Fed since he first took office.

I doubt there will be criminal charges filed against Turbo Tim personally, since in his case the clueless CEO defense may obtain some traction. Unless, that is, they have wiretaps and/or emails showing collusion with some of the bailed out banks, in either insider trading or the manipulation of assets for extraordinary gains.

It is a boiling scandal, and emblematic of the hidden corruption that has pervaded financial regulation in Washington for the past ten years at least. It did not start with Obama, but it may still bring down key members of his Administration.

Reform the financial system, audit the Fed.

Bloomberg
Barofsky Says Criminal Charges Possible in Alleged AIG Coverup
By Richard Teitelbaum
28 April 2010

April 28 (Bloomberg) -- ...That tense relationship [between Treasury and Barofsky] has grown out of Barofsky’s mandate to monitor and root out fraud and waste in the management of TARP, the $700 billion program passed in October 2008 to remove toxic debt from the banks. The special inspector general, in a series of reports, interviews and congressional hearings, has heaped criticism on the Treasury Department’s operation of the program.

Barofsky’s most recent broadside came on April 20, when a SIGTARP report labeled a housing-loan modification program funded with $50 billion of TARP money as ineffectual.

...The TARP watchdog has also criticized Treasury Secretary Timothy F. Geithner in reports and in congressional testimony for his handling of the process by which insurance giant American International Group Inc. was saved from insolvency in 2008, when Geithner was head of the Federal Reserve Bank of New York.

The secrecy that enveloped the deal was unwarranted, Barofsky says, adding that his probe of an alleged New York Fed coverup in the AIG case could result in criminal or civil charges.

In Senate Finance Committee testimony on April 20, Barofsky said SIGTARP would investigate seven AIG-linked mortgage-related securities similar to Abacus 2007-AC1, the instrument underwritten by Goldman Sachs Group Inc. that is at the center of a U.S. Securities and Exchange Commission lawsuit filed against the investment
bank on April 16.

...Barofsky and Geithner’s offices have gone toe-to-toe over AIG, alleged lax oversight of TARP funds and even over the question of whom Barofsky reports to.

Barofsky, a former federal prosecutor who was once the target of a kidnapping plot by Colombian drug traffickers, says he’s also looking into possible insider trading connected to TARP. He says his agency would want to know if bankers bought stock in their companies before it was made public that their institutions would get TARP
money, for example.

“There was a time when, if you got that word the stock price would go up, and if you were to trade on that information prior to the public announcement, that would be classic insider trading,” Barofsky says.

A Democrat named by a Republican president, Barofsky says missteps by both the George W. Bush and Barack Obama administrations are to blame for TARP’s failures.

“There’s a reason there are Tea Partiers out there, and when you look at it, anger at the bailout is one of the first things they talk about,” says Barofsky, referring to the anti- Obama political movement. “This Treasury Department and the previous Treasury Department bear some of the responsibility for not being straightforward with the American people.”

Barofsky criticized Geithner’s predecessor, Paulson, in an October 2009 report, saying Paulson publicly described the initial nine TARP bank recipients as healthy when he knew that at least one of them risked failure.

...SIGTARP has more than 40 agents, including former Secret Service, Federal Bureau of Investigation and Internal Revenue Service investigators, who sport blue windbreakers emblazoned with the SIGTARP seal.

They are authorized by Congress to carry guns -- Barofsky does not --make arrests, and subpoena and seize records.

In its late-January report, SIGTARP said that the banks rescued by TARP remained “too big to fail.” They still have an incentive to make risky wagers in order to generate the profits that will reward their executives, the report says.

“The definition of insanity is repeating the same actions over and over again and expecting a different result,” Barofsky says. “If the goal of TARP was to make sure we don’t have another financial collapse, well, obviously it’s made the likelihood of that much, much greater.”

....In a December report, Barofsky showed how insurance giants Hartford Financial Services Group Inc. and Lincoln National Corp. bought tiny thrifts -- one with just $7 million in assets -- to qualify for the TARP Capital Protection Program, which is designed to encourage bank lending. Hartford and Lincoln used the more than $4.3 billion in TARP funds they received almost entirely to finance insurance operations,
according to the report.

“Treasury didn’t have to approve that,” Barofsky says.

Allison wrote SIGTARP that buying troubled assets from insurance companies was part of TARP.

Janet Tavakoli, founder of Chicago-based Tavakoli Structured Finance Inc., says Barofsky hasn’t been aggressive enough. She says SIGTARP should be running criminal probes of the bankers who underwrote and managed the collateralized debt obligations that were at the center of the financial meltdown.

CDOs are bundles of mortgage-backed bonds and other debt sold to investors. Tavakoli says the CDO managers sometimes replaced relatively high-quality securities with new ones that were more likely to default.

“It is securities fraud if you take securities and package them and knowingly pass them off with phony labels,” she says.

Barofsky says investigations related to the underwriting and sale of CDOs are ongoing.

...Barofsky says he’s battling an entrenched culture of secrecy in the Treasury and elsewhere.

“One of the important lessons that I hope will be learned from this entire financial crisis is that the reflexive reaction against transparency, that disclosure will bring
terrible things, has not been proven true,” he says.

He offers the AIG bailout as an example. For more than a year, the New York Fed kept key aspects of the AIG bailout secret, including details of its own involvement and its decision to have AIG pay the insurer’s bank counterparties 100 cents on the dollar on the credit protection they’d bought against about $62 billion in CDOs.

In a November report, SIGTARP criticized Geithner’s failed efforts to obtain discounts from the banks.

After the banks had been
paid in late 2008, a lawyer from the New York Fed sought to have AIG keep the banks’ identities under wraps, as well as data about the CDOs that would have revealed which firms had underwritten the toxic bonds and which ones had managed them.

“There’s a lot of things about AIG that were not disclosed, based on the assumption that the sky would fall,” Barofsky says. “Transparency does a lot more good than bad.”

Barofsky says the question of whether the New York Fed engaged in a coverup will result in some sort of action.

“We’re either going to have criminal or civil charges against
individuals or we’re going to have a report,” Barofsky says. “This is too
important for us not to share our findings.”

He won’t say whether the investigation is targeting Geithner personally.

In a statement, the New York Fed said: “Allegations that the New York Fed engaged in a coverup of its intervention in AIG are not true. The New York Fed has fully cooperated with the Special Inspector General.”

Control Frauds HyperInflate and Extend Bubbles Maximizing Damage - A Control Fraud at Work in the Silver Market Short Positions?

Here is a working paper by William K. Black about 'control frauds' and how they relate to the most recent credit crisis in the United States, a breakdown of stewardship that has placed the rest of the world's financial sector at risk as well.

Control frauds are by their very nature conspiratorial in that they involve the suborning of regulators, ratings agencies, exchanges, the media, and legislators to ignore and facilitate misrepresentation that enable white collar crime. They are difficult to prosecute because by their nature they involve twisting the legal into the extra-legal on a broad basis to achieve a particular financial effect, while limiting many specific aspects to the letter of the law, or at least the gray areas.

By and large they operate in the shadows, hiding behind secrecy and a general mindset towards short term greed and lapses in ethics. Investigations following the Crash of 1929 and the S&L crisis demonstrated that the existence of such pervasive lapses in stewardship do exist.

Personally I think the significant short positions in the silver market may be a form of control fraud. This is why so much effort and care is being taken by some individuals and groups to discover the extent and nature and holders of the short positions that are dominant. And this is why the participants are so vociferous and secretive regarding their activities.

To those who say that the commodity markets are too large, and too well regulated for this sort of thing to occur, this is the sort of fraud that Enron used to manipulate the energy markets, to the extent that they were able to cause significant social and commercial disruption to the state of California.

More on this another time. For now understanding how these frauds work is enough to study in instruments such as home mortgages. And most people do not need to understand this. But here is a good point for the average person to keep in mind.

Light is a good disinfectant. Fraud cannot bear exposure. While some confidentiality must be maintained in trading, obsessive secrecy regarding significantly large positions and collateral matters is often an indication that something is not right, that it is hidden from the market participants view for a particular reason that is deleterious to market pricing and efficiency.

The only way to settle this is by more transparency and disclosure. Rhetoric and supposition is often mere noise meant to distract from and promote the fraud if in fact it does exists. And if it does not, disclosure will reveal this as well.

Epidemics of 'Control Fraud' Lead to Recurrent, Intensifying Bubbles and Crises
William K. Black
University of Missouri at Kansas City - School of Law
April 15, 2010

Abstract:

“Control frauds” are seemingly legitimate entities controlled by persons that use them as a fraud “weapon.” A single control fraud can cause greater losses than all other forms of property crime combined.

This article addresses the role of control fraud in financial crises. Financial control frauds’ primary weapon is accounting. Fraudulent lenders produce exceptional short-term “profits” through a four-part strategy: extreme growth (Ponzi), lending to uncreditworthy borrowers, extreme leverage, and minimal loss reserves.

These exceptional “profits” defeat regulatory restrictions and turn private market discipline perverse. The profits also allow the CEO to convert firm assets for personal benefit through seemingly normal compensation mechanisms. The short-term profits cause stock options to appreciate. Fraudulent CEOs following this strategy are guaranteed extraordinary income while minimizing risks of detection and prosecution.

The optimization strategy causes catastrophic losses. The “profits” allow the fraud to grow rapidly by making bad loans for years. The “profits” allow the managers to loot the firm through exceptional compensation, which increases losses.

The accounting control fraud optimization strategy hyper-inflates and extends the life of financial bubbles. The finance sector is most criminogenic because of the absence of effective regulation and the ability to invest in assets that lack readily verifiable values. Unless regulators deal effectively with the initial frauds their record profits will produce imitators. Control frauds can be a combination of “opportunistic” and “reactive”. If entry is easy, opportunistic control fraud is optimized. If the finance sector is suffering from distress, reactive control fraud is optimized. Both conditions can exist at the same time, as in the savings and loan (S&L) debacle.

When many firms follow the same optimization strategy a financial bubble hyper-inflates. This further optimizes accounting control fraud because the frauds can hide losses by refinancing. Mega bubbles produce financial crises.

Download the complete working paper here.

William K. Black's Testimony to the Congress on Lehman's fraud

The recent US financial crisis is always and everywhere founded in regulatory capture, dissembling, influence peddling, and fraud.

The Financial Oligarchy in the US

If you do nothing else this week, read the transcript or watch this video.

I have a serious difference of opinion with the speakers with regard to Robert Rubin and his role, but they make up for it with their description of Jamie Dimon as close to the White House and one of the most dangerous men in America today.

And I thought it was interesting that Simon Johnson would say openly that the ONLY Senator who is speaking the truth plainly is Ted Kaufman from Delaware.

Other than that they are substantially putting out a very sound and realistic view of the root of the problems that created the financial crisis, and what requires to be done to rebalance the system and create a sustainable recovery.

BILL MOYERS: And you say that these this oligarchy consists of six megabanks. What are the six banks?

JAMES KWAK: They are Goldman Sachs, Morgan Stanley, JPMorgan Chase, Citigroup, Bank of America, and Wells Fargo.

BILL MOYERS: And you write that they control 60 percent of our gross national product?

JAMES KWAK: They have assets equivalent to 60 percent of our gross national product. And to put this in perspective, in the mid-1990s, these six banks or their predecessors, since there have been a lot of mergers, had less than 20 percent. Their assets were less than 20 percent of the gross national product.

BILL MOYERS: And what's the threat from an oligarchy of this size and scale?

SIMON JOHNSON: They can distort the system, Bill. They can change the rules of the game to favor themselves. And unfortunately, the way it works in modern finance is when the rules favor you, you go out and you take a lot of risk. And you blow up from time to time, because it's not your problem. When it blows up, it's the taxpayer and it's the government that has to sort it out.

BILL MOYERS: So, you're not kidding when you say it's an oligarchy?

JAMES KWAK: Exactly. I think that in particular, we can see how the oligarchy has actually become more powerful in the last since the financial crisis. If we look at the way they've behaved in Washington. For example, they've been spending more than $1 million per day lobbying Congress and fighting financial reform. I think that's for some time, the financial sector got its way in Washington through the power of ideology, through the power of persuasion. And in the last year and a half, we've seen the gloves come off. They are fighting as hard as they can to stop reform.

The Financial Oligarcy in the US - Bill Moyer's Journal

Goldman Sachs: A Pattern of Organized Criminal Behaviour?

Chris Whalen provides some excellent commentary on the Goldman Sachs fraud inquiry by the SEC at the beginning of his weekly newsletter, The Institutional Risk Analyst.

In addition to the information he provides about other deals, including those that specifically targeted AIG, he puts an interesting twist on this. He intimates that at times the Hedge Funds were acting in concert with the Big Banks as off-balance-sheet accomplices in crafting these complex frauds. And the Paulson - Goldman scandal may only be one of a type, and not perhaps the best or most flagrant example.

A reaction from many is that this is just the tip of the iceberg, a single point in a much larger picture of calculated fraud involving many more deals and significantly more money up to and including the bailout of AIG.

It is not enough to throw a few token fines on some selective deals, and then dismiss them as outliers, and then suggest we 'move on' to reform the market. The spin will be that what Goldman did was 'legal' but immoral. And for many today, morality is simply a matter of taste. And Paulson will be served up as the fall guy. It will take a serious investigation to uncover all the facts, and make the case stick. And the SEC is not competent to do this, for a variety of reasons.

And the reforms that the Congress will create as a result of this, at the least the ones permitted by Jamie and Lloyd, will quickly be circumvented with new fraudulent devices and it will quickly be business as usual. Its hard to say that the business has never stopped, even now. The Big Banks continue to manipulate markets and abuse derivatives as instruments of financial fraud.

The absolute worst place to conduct a serious investigation will be in front of the Congress is a show trial, designed to give some of the Senators and Representatives an opportunity to create sound bytes of anger, to be played in commercials for their re-election, and then at then end of the day, continue to collect fat campaign contributions, and then do nothing.

It does not require Republican permission for President Obama to direct the FBI and the Justice Department to begin a serious inquiry with an eye to RICO violations in what may be one of the largest financial frauds in history, dwarfing the Madoff Ponzi scheme in terms of value and number of victims.

Oh, and by the way, we hate to say we told you so, but please fire Larry Summers now that Bill Clinton has thrown him under the bus, and have him take Rubin's other protégé, Turbo Timmy, along with him.

My concern is that the American people even now do not understand how serious this crisis is. They are quickly distracted into ridiculous partisan spirit and frivolous diversions. This is the freedom and the welfare of their country that is at risk, and it is time to put aside childish things, and begin the serious work of reforming their financial system, the ownership of their media, and the political campaign process.

Institutional Risk Analyst
Goldman SEC Litigation: The End of OTC?
By Chris Whalen
April 19, 12010

Last Friday's announcement by the SEC of a civil lawsuit against Goldman Sachs (GS) for securities fraud did not surprise us. Nor were we surprised to see the markets
trade off large on the news, evidence to us that there is a certain lack of conviction in the financials.

Q: How can you have "normalized earnings" in an abnormal industry?

No, what surprised us about the SEC action is that it took as long as it did. Maybe surprised isn't precisely the right word, but you know what we mean. The inertia in the system seems to dampen reactions to extreme outlier behavior to a far too great a degree. This week in The IRA Advisory Service we discuss the implications of the SEC action and the likely impact on the OTC dealer community in the months and years ahead.

Readers of The IRA will recall back in 2004 when were started to talk about the regulatory focus on complex structured financial products and the perceived reputational risk to the big firms arising from these unregulated, OTC instruments. Big thank you to Chuck Muckenfuss at Gibson Dunn for the heads up. The "advice" issued by all of the regulators ("Interagency Statement on Sound Practices Concerning Complex Structured Finance Activities") was focused almost entirely on protecting the dealers from reputational risk and not on protecting investors.

The fact of the 2004 notice by the SEC and other regulators illustrates the problem. Regulators clearly knew that a problem existed back then, yet the SEC waited until April of 2010 to actually do something constructive to rebalance the equation, to lean just a bit more in the direction of investors and abit less in favor of the dealers. Keep in mind that it's not like the games played by GS and the Paulson organization were remotely unique. Just about every OTC dealer worthy of the description has at least one deal comp to this thing of beauty.

On March 31, 2010, Bob Ivry and Jody Shenn at Bloomberg published a very important article on American International Group and its losses from insuring collateralized debt obligations structured by, you guessed it, GS. Entitled "How Lou Lucido Let AIG Lose $35 Billion With Goldman Sachs CDOs," the article outlines the process whereby AIG was left on the hook for billions in losses on CDOs sold to TCW Group in Los Angeles.

Whereas in the trades with Paulson GS was helping a client create and then sell short a CDO that was being sold to another client, in the case of TCW the GS firm was helping a client buy toxic loans to be contributed to a CDO in the knowledge that doing so would cause losses to a regulated insurer, AIG. The activities of GS to harm AIG make the subsequent payments by AIG to GS, using money from the US Treasury, seem all the more outrageous.

But the other thing that really bothers us about both the TCW transactions and the more recent revelations about GS and the Paulson firm is the fact that the SEC apparently still does not fully understand the symbiotic relationship between the dealer and the hedge fund. In our view, the funds that were involved with these
transactions and many, many more examples in the OTC marketplace, did not have an arm's length relationship with the dealer. Hedge funds exist at the sufferance of the dealers, who finance and execute and act as custodian for their various strategies and use the funds as short-term storage for inventory.

In the case of Paulson, the information provided by the SEC makes it seem as though Paulson was the party which initiated these transactions and, according to the SEC, paid GS $15 million to arrange and market these CDOs to investors. Paulson was also apparently working as an advisor to GS and collaborating with GS regarding investment strategy. A spokesman for Paulson told The New York Times that all of their dealings with GS and other parties were on "an arm's length basis." We believe that reasonable people can differ on this issue. We also suspect that the nature and the extent of the relationship between GS and Paulson will be the subject of extensive legal and political inquiry in the weeks and months ahead.

But for us, the bottom line is that hedge funds often times are merely extensions of the dealers with which they interact. It is often difficult if not impossible to tell where the dealer's interests end and those of the hedge fund begin, especially when the dealer and the fund seem to be working in concert to create securities that are being sold to third parties. This episode is a terrible mess and, to us at least, illustrates why the OTC markets for securities and derivatives need to be regulated out of existence -- or at least into compliance with norms of disclosure and fair dealing that would render such strategies impossible. If the global financial markets have been reduced to nothing more than beggar thy neighbor, then we all have a big problem.

A Modern Tale of Financial Loss

A developer (Goldman) built houses that looked well built, but were in reality designed to be firetraps, using plans provided by an architect (Paulson). They were sold as conforming to code with certain characteristics represented and endorsed by the building inspectors (Ratings Agencies) and overseen by fire inspectors who did spot checks (the SEC).

After the sale, the developer and the architect bought huge amounts of fire insurance on the homes from a friendly insurance agent (AIG London) who was eager to collect the commissions. The amounts that were insured were sometimes well in excess of what a home might actually be worth. They even took out policies on nearby homes that they had not even built or sold.

The developer had also encouraged the city government to allow the firetrucks and safety equipment to fall into disrepair, and for too few inspectors to be hired to do spot safety checks. So when the houses inevitably burned, the fire department was unable to adequately respond. The fires became so bad that they destroyed entire neighborhoods and threatened whole sections of the city.

The developer and architect were able to submit their insurance claims for sums that were so staggering that the insurance company for which the London agent worked was itself facing bankruptcy. This would have placed at risk the holders of its other policies in completely unrelated areas such as life and auto insurance, and retirement annuities.

So the developer had government people, whom he had helped to elect, provide government backing for the insurance company, for the good of the public. The people who had lost their homes and those who were forced to help to pay the developer were very upset.

But the developer was a large advertiser in the local newspaper, and a old school friend of the owner, so it ignored the complaints, and reported on the story from every perspective except what had really happened. It blamed the people who had lost their homes for being foolish and not inspecting the homes more closely, and taking the developer and the housing inspectors at their word, and trusting the fire departments and its inspectors to do their jobs.

And anyone who complained too loudly was at first ignored, then ridiculed, and finally threatened with arrest. After all, the developer was one of the most important and influential people in the city, and had many powerful friends. Any suggestion that they had done anything wrong was simply unbelievable.

After all, it is inconceivable that an upstanding member of the commuity would ever endanger so many people's lives and homes like that just for personal profit.

The End (for now)