Saturday, April 17, 2010

Why Is It So Hard to Hold Wall Street Accountable? And Why They Won't Quit Lying About Their Culpability for the Financial Crisis.

If you haven't seen Bill Moyer's Journal of Friday, April 16, 2010, please click on the link and read/view the presentation by Simon Johnson and James Kwak who explain exactly what has happened with the complexity defense - that evaporates when you dissect it and understand the component parts (and how these were put together to create a "time bomb"). This was one hell of an impressive bit of PBS. Reminds me of the olden days. "The bankers were sorry that it happened; not that they did it, but that it happened." - James Krak "These bankers will not come out and argue with us about our conclusions. They know they will lose . . . Mr. Rubin designed this - it's by design . . . not accidental . . . or a conspiracy." - Simon Johnson (See below next item for the almost unbelievable chutzpahed details.) _ _ _ _ _ _ _ From our delightfully knowledgeable cohort John Cole at Balloon Juice we have the telling inside view about what was really going on inside Goldman Sachs:

Not sure how I missed this yesterday in the Goldman Sachs news, but this kind of gives you an idea of the kind of arrogance of these pricks:

Fabrice Tourre, the Goldman executive who helped set up Abacus, emailed a friend in January 2007:

“More and more leverage in the system, The whole building is about to collapse anytime now. . . . Only potential survivor, the fabulous Fab. . . standing in the middle of all these complex, highly leveraged, exotic trades he created without necessarily understanding all of the implications of those monstruosities”

Seriously - who calls himself the “Fabulous Fab?” And these guys knew EXACTLY what they were doing, so spare me the “hoocoodanode” nonsense.

And while we are at it, let’s revisit McMegan’s bizarre attack on Matt Taibbi’s Goldman Sachs piece, in which she agreed with all of his facts, coined the phrase “technically true but collectively nonsense,” and then had this gem of a paragraph defending Goldman, in which she impressively combined a “hoocoodanode” with an “everyone is doing it!”:

Even as an indictment of the system this thing is lacking, and showcases Taibbi’s lack of fundamental conceptual understanding. He complains about CDO’s on the grounds that Goldman hid the atrocious risks inside a fancy dan derivative package that no one could understand. But in fact, everyone was aware that CDO’s were repackaging crap mortgages — that was the point. The idea was pure portfolio theory, broadly agreed upon by everyone involved. Everyone knew a lot of the mortgages might go bad, either by defaulting or prepaying. (This is a risk for bankers, who don’t like the idea that if interest rates drop, their 7% mortgage might suddenly turn into a pile of non-interest-bearing cash which can only be invested at 5%.) But if you pool the risk, only some of the bonds will go bad, while others pay off. The result is a less risky, less volatile investment than any individual junk mortgage bond. And it would have worked, too, if it hadn’t been for those crazy kids a collapse in the housing market of a scale not seen since the Great Depression

Someone looks stupid in the aftermath of the SEC charging Goldman Sachs. It isn’t Matt Taibbi. And what exactly did Taibbi allege was going on:

Goldman used two methods to hide the mess they were selling. First, they bundled hundreds of different mortgages into instruments called Collateralized Debt Obligations. Then they sold investors on the idea that, because a bunch of those mortgages would turn out to be OK, there was no reason to worry so much about the lovely ones: The CDO, as a whole, was sound. Thus, junk-rated mortgages were turned into AAA-rated investments. Second, to hedge its own bets, Goldman got companies like AIG to provide insurance – known as credit-default swaps – on the CDOs. The swaps were essentially a racetrack bet between AIG and Goldman: Goldman is betting the ex-cons will default, AIG is betting they won’t.

Sound familiar?

_ _ _ _ _ _ _

April 16, 2010 (Bill Moyers' Journal)
The White House and Democrats in Congress have begun pushing in earnest for a package of financial reforms. But will it be enough to stop Wall Street from causing another meltdown? To find out what real financial reform needs to look like, Bill Moyers turns to Simon Johnson and James Kwak, the co-authors of 13 Bankers: The Wall Street Takeover and the Next Financial Meltdown. The problem, according to Kwak, is that the legislation currently doesn't address the central problem of the crisis, that America's banks have grown 'too big to fail.' In fact, the problem has gotten worse, with just six banks holding assets in excess of 63% of the U.S. Gross Domestic Product. Kwak explains that the crisis actually made the surviving banks more powerful, "I think what's remarkable is that it used to be maybe eight or nine banks. But what's happened over the last two years, as Simon is saying, is that these banks have gotten bigger, because they've bought each other. They've become more powerful. And they have an even stronger market position in some key markets like credit cards, mortgages, equity underwriting, and derivatives." Johnson argues that for reform to work, policy makers and regulators must reject the belief that Wall Street knows what's its doing, that its interests are always aligned with the nation as a whole, "The idea that we need Wall Street with its current structure — and a disproportionate economic power that implies — to somehow make this economy work and drive entrepreneurship, that idea is nonsense. This is why we wrote the book, all right? There's plenty of evidence on this issue. We go through it. If you want a faith based economy in this regard, you can disregard the evidence."
Senator Brown and the 'Volcker Rule'
Johnson and Kwak believe Congress should pass a law capping the size of the banks, to keep them from becoming so large that their failure threatens the world economy. This approach has been dubbed the 'Volcker Rule,' after Paul Volcker, the well-respected former Federal Reserve chairman who has pushed hard for its inclusion. Senator Sherrod Brown from Ohio has introduced an amendment to the bill that would do just that, reading in part that, "No bank holding company may possess non-deposit liabilities exceeding 3 percent of the annual gross domestic product of the United States."
The Six Big Banks
The names of the six banking behemoths are no doubt familiar to most Americans. The four largest by assets — Bank of America, JPMorgan Chase, Wells Fargo and Citigroup — hold 39 percent of American's deposits. The six biggest commercial banks by deposit:
  • Bank of America, $817.9 billion
  • JPMorgan Chase Bank $618.1 billion
  • Wachovia Bank $394.2 billion
  • Wells Fargo Bank $325.4 billion
  • Citibank $265.9 billion
  • U.S. Bank $151.9 billion
Source: FDIC
James KwakPhoto by Robin Holland James Kwak is the co-author, along with Simon Johnson, of 13 Bankers: The Wall Street Takeover and the Next Financial Meltdown, and the co-founder/co-author of The Baseline Scenario. Kwak is currently a student at the Yale Law School. Previously, he was a management consultant at McKinsey and Company and co-founder of a successful software company. Kwak received an A.B. in Social Studies from Harvard College and an M.A. and a Ph.D. in History from the University of California, Berkeley.
Simon Johnson
Photo by Robin Holland Simon Johnson is the Ronald A. Kurtz (1954) Professor of Entrepreneurship at MIT's Sloan School of Management, a position he has held since 2004. He is also a senior fellow at the Peterson Institute for International Economics in Washington, D.C., and co-founder of a Web site on the global economic and financial crisis, The Baseline Scenario and "The Hearing," a new economics blog at He is co-director of the NBER project on Africa and President of the Association for Comparative Economic Studies (term of office 2008-09). He is also a contributing editor at the Huffington Post. From March 2007 through the end of August 2008, Professor Johnson was the International Monetary Fund's economic counsellor (chief economist) and director of its research department. At the IMF, Professor Johnson led the global economic outlook team, helped formulate innovative responses to worldwide financial turmoil, and was among the earliest to propose new forms of engagement for sovereign wealth funds. He was also the first IMF chief economist to have a blog. In 2000-2001 Professor Johnson was a member of the US Securities and Exchange Commissions Advisory Committee on Market Information. His assessment of the need for continuing strong market regulation is published as part of the final report from that committee. Johnson is an expert on financial and economic crises. As an academic, in policy roles, and with the private sector, over the past 20 years he has worked on crisis prevention, amelioration, and recovery around the world, in both relatively rich and relatively poor countries. His work focuses on how policymakers can limit the impact of negative shocks and manage the risks faced by their countries. Johnson has worked with most of the leading research organizations focused on global economic stability. He remains a Research Associate at the NBER, a CEPR Research Fellow, a BREAD affiliate, a member of the Advisory Group at the Center for Global Development (CGD) in Washington D.C., a member of the International Advisory Board of CASE in Warsaw, and a non-resident Research Fellow at the Asian Institute for Corporate Governance of Korea University. In 2006-07, he was a Visiting Fellow at the Peterson Institute for International Economics in Washington, D.C. His Ph.D. is in economics from MIT, while his M.A. is from the University of Manchester and his B.A. is from the University of Oxford.
Charlie Rose, also on Friday evening (believe it or not), actually had a small segment of his program devoted to the latest efforts of the Security Exchange Commission to "spread the sunlight around" by prosecuting Goldman Sachs (and others). I guess as long as that sunlight doesn't alight on Charlie's great friend, Maurice "Hank" Greenberg, at AIG, huh? (I'm not kidding. That's what Charlie said when he introduced him to defend himself from charges of fraud and malfeasance in 2008 and 2009. Greenberg was a busy boy on ole Charlie's show.) One of my favorite women reporters, Gretchen Morgenson, is on center stage here as she has another opportunity to bring to light all the facts she has been documenting in her column in the New York Times for years now concerning the conflict of interest that occurs when you take advantage of the naivete of your clients, which is what Goldman Sachs is now finally charged with. Every panelist on this program thinks that the "new SEC" (under Obama) will disclose how these complexities were used to bring untold profits to the firm and its clients over the interests of other clients, which has previously been hidden behind a blind of intellectual bumfuddledment. And prosecute. It may be the beginning of the end of this incredibly arrogant, greedy cycle of the American Dream. We can dream anyway, can't we? Suzan ______________


RealityZone said...

IMO: This is all America needs to know.

Mayer Amschel Bauer Rothschild famously said in 1791:

“Allow me to issue and control a nation’s currency, and I care not who makes its laws."

G.S. is a main component of this. They are all related and intertwined.

mark hoback said...

The end? A pause, maybe, if we're lucky. And damnit to Hell, we haven't been on a lucky streak lately.

Oso said...

Hi Suzan,
nice post as usual!

I'd like to be hopeful, but the doglike trust the obamaphiles have in the Democrats seems to be peaking about now.

After detailing to one of them exactly how much Dodd has crushed any actual reform from the bill:

CFPA housed in the Fed,subject to veto.
Volcker Rule reduced to a Study then a Report.
Derivatives recommendations essentially shelved.

He came back with "it's not perfect, but it's incremental change and I'm satisfied".

Unfuckingbelievable, pardon my language but the herbalteabaggers are trustingly happy with the health insurance bailouts, they'll be happy with no financial reform. They're happy with the troops still in Iraq and Afghanis continuing to die, happy with Guantanamo still open, hating on Cindy Sheehan cause she is so naive she still opposes imperialism when the herbalteabaggers understand it's ok when the head imperialist is a Democrat whose antiwar credentials consist of branding the Iraq War as "dumb".

Sorry about the rant, I just wrote letters regarding the Dodd Bill to my two senators boxer and feinstein, had to make hella effort to control my language even though all I'll get back are letters thanking me for my support.

Voting Republican next year. I hate them even worse but at least it feels like I'm doing something to get back at what has become nothing more than another corporate party.