Goldman Sachs Busted

Goldman Sachs, Mortgage Backed Securities

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How Goldman Secretly Bet on the U.S. Housing Crash

Adjustable Rate Mortgages, Baba Booey, Bear Stearns, Citibank, Henry Paulson, TARP, Tim Geithner, Treasury, Wall Street, Washington Mutual

McClatchy Washington Bureau


Sun, Nov. 01, 2009

Greg Gordon | McClatchy Newspapers

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November 01, 2009 01:17:44 AM

WASHINGTON — In 2006 and 2007, Goldman Sachs Group peddled more than $40 billion in securities backed by at least 200,000 risky home mortgages, but never told the buyers it was secretly betting that a sharp drop in U.S. housing prices would send the value of those securities plummeting.

Goldman’s sales and its clandestine wagers, completed at the brink of the housing market meltdown, enabled the nation’s premier investment bank to pass most of its potential losses to others before a flood of mortgage defaults staggered the U.S. and global economies.

Only later did investors discover that what Goldman had promoted as triple-A rated investments were closer to junk.

Now, pension funds, insurance companies, labor unions and foreign financial institutions that bought those dicey mortgage securities are facing large losses, and a five-month McClatchy investigation has found that Goldman’s failure to disclose that it made secret, exotic bets on an imminent housing crash may have violated securities laws.

“The Securities and Exchange Commission should be very interested in any financial company that secretly decides a financial product is a loser and then goes out and actively markets that product or very similar products to unsuspecting customers without disclosing its true opinion,” said Laurence Kotlikoff, a Boston University economics professor who’s proposed a massive overhaul of the nation’s banks. “This is fraud and should be prosecuted.”

John Coffee, a Columbia University law professor who served on an advisory committee to the New York Stock Exchange, said that investment banks have wide latitude to manage their assets, and so the legality of Goldman’s maneuvers depends on what its executives knew at the time.

“It would look much more damaging,” Coffee said, “if it appeared that the firm was dumping these investments because it saw them as toxic waste and virtually worthless.”

Dylan Ratigan Breaks Down the TARP Fiasco

AIG, Bank of america, Bear Stearns, Citibank, Corporate Communists, Credit markets, Dylan Ratigan, FDIC, Federal Reserve Board, GDP, Goldman Sachs, Henry Paulson, Lehman Brothers, Merrill Lynch, Neil Barofsky, TARP, Tim Geithner, Too Big to Fail, Toxic Assets, Treasury Department, Wall Street

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The Quiet Coup :: Simon Johnson

AIG, Banking Crisis, CDS, Goldman Sachs, Hank Paulson, SEC, Simon Johnsin

The Quiet Coup


The crash has laid bare many unpleasant truths about the United States. One of the most alarming, says a former chief economist of the International Monetary Fund, is that the finance industry has effectively captured our government—a state of affairs that more typically describes emerging markets, and is at the center of many emerging-market crises. If the IMF’s staff could speak freely about the U.S., it would tell us what it tells all countries in this situation: recovery will fail unless we break the financial oligarchy that is blocking essential reform. And if we are to prevent a true depression, we’re running out of time.



One thing you learn rather quickly when working at the International Monetary Fund is that no one is ever very happy to see you. Typically, your “clients” come in only after private capital has abandoned them, after regional trading-bloc partners have been unable to throw a strong enough lifeline, after last-ditch attempts to borrow from powerful friends like China or the European Union have fallen through. You’re never at the top of anyone’s dance card.

The reason, of course, is that the IMF specializes in telling its clients what they don’t want to hear. I should know; I pressed painful changes on many foreign officials during my time there as chief economist in 2007 and 2008. And I felt the effects of IMF pressure, at least indirectly, when I worked with governments in Eastern Europe as they struggled after 1989, and with the private sector in Asia and Latin America during the crises of the late 1990s and early 2000s. Over that time, from every vantage point, I saw firsthand the steady flow of officials—from Ukraine, Russia, Thailand, Indonesia, South Korea, and elsewhere—trudging to the fund when circumstances were dire and all else had failed.

Every crisis is different, of course. Ukraine faced hyperinflation in 1994; Russia desperately needed help when its short-term-debt rollover scheme exploded in the summer of 1998; the Indonesian rupiah plunged in 1997, nearly leveling the corporate economy; that same year, South Korea’s 30-year economic miracle ground to a halt when foreign banks suddenly refused to extend new credit.

But I must tell you, to IMF officials, all of these crises looked depressingly similar. Each country, of course, needed a loan, but more than that, each needed to make big changes so that the loan could really work. Almost always, countries in crisis need to learn to live within their means after a period of excess—exports must be increased, and imports cut—and the goal is to do this without the most horrible of recessions. Naturally, the fund’s economists spend time figuring out the policies—budget, money supply, and the like—that make sense in this context. Yet the economic solution is seldom very hard to work out.

No, the real concern of the fund’s senior staff, and the biggest obstacle to recovery, is almost invariably the politics of countries in crisis.

Typically, these countries are in a desperate economic situation for one simple reason—the powerful elites within them overreached in good times and took too many risks. Emerging-market governments and their private-sector allies commonly form a tight-knit—and, most of the time, genteel—oligarchy, running the country rather like a profit-seeking company in which they are the controlling shareholders. When a country like Indonesia or South Korea or Russia grows, so do the ambitions of its captains of industry. As masters of their mini-universe, these people make some investments that clearly benefit the broader economy, but they also start making bigger and riskier bets. They reckon—correctly, in most cases—that their political connections will allow them to push onto the government any substantial problems that arise.

In Russia, for instance, the private sector is now in serious trouble because, over the past five years or so, it borrowed at least $490 billion from global banks and investors on the assumption that the country’s energy sector could support a permanent increase in consumption throughout the economy. As Russia’s oligarchs spent this capital, acquiring other companies and embarking on ambitious investment plans that generated jobs, their importance to the political elite increased. Growing political support meant better access to lucrative contracts, tax breaks, and subsidies. And foreign investors could not have been more pleased; all other things being equal, they prefer to lend money to people who have the implicit backing of their national governments, even if that backing gives off the faint whiff of corruption.

[video] A Look At Wall Street's Shadow Market

60 Minutes, Credit Default Swaps, Mortgage Crisis, Wall Street, Wall Street bailout, Wall Street Rescue, WAMU

A Look At Wall Street’s Shadow Market | 60 Minutes

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Paul Krugman With Bill Maher : "We Need Better Government"

AIG, Barack Obama, J.P. Morgan, Lehman Brothers, Merrill Lynch, Morgan Stanley, Mortgage Crisis, Politics, Subprime, Tullycast, Wall Street

Citicorp and Merrill Lynch Buy Back $17 Billion in Bunk Securities

August 7, 2008

2 Banks Will Buy Back $17 Billion in Securities

Two Wall Street giants agreed on Thursday to buy back more than $17 billion of auction-rate securities that were improperly sold to retail customers, likely paving the way for other banks and brokerage firms to take similar actions.

Citigroup reached a settlement Thursday morning with state and federal regulators, agreeing to buy back about $7.3 billion of auction-rate securities that it sold to retail customers and pay a $100 million fine for its conduct.

Merrill Lynch said it would buy back about $10 billion in auction-rate investments that it sold to retail investors, a move that gets ahead of regulators investigating the company.

Neither firm agreed to reimburse institutional investors, though both said they were trying to resolve similar problems with those customers.

Regulators have been investigating at least a dozen Wall Street firms for their role in the sales and marketing of so-called auction-rate investments, and analysts expect a wave of settlements in the next few months.

Bank of America, the largest retail bank, said Thursday that it had also received subpoenas from federal and state regulators related to sales of auction-rate securities. The investments are preferred shares or debt instruments with rates that reset regularly, usually every week, in auctions overseen by the brokerage firms that originally sold them.

The $300 billion market for the investments collapsed in February, trapping investors who had been told that the securities were safe and easy to cash in.

Citigroup’s settlement with state and federal regulators included a fine of as much as $100 million.

In a statement, the New York attorney general Andrew Cuomo said that Citigroup would buy back, by Nov. 5. auction-rate securities from individual investors, charities and small- and mid-sized businesses. These customers, about 40,000 nationwide, have been unable to sell their securities since Feb. 12, the statement said.

In a similar case in Massachusetts, Morgan Stanley reached an agreement with the attorney’s general office on Thursday to reimburse the cities of New Bedford and Hopkinton $1.5 million for the investments in the securities, the Massachusetts attorney general Martha Coakley said in a statement.

As part of the settlement, Citigroup agreed to a public arbitration process to resolve claims of consequential damages suffered by retail investors.

The bank, one of Wall Street’s biggest auction-rate securities dealers, will pay the $100 million to the New York attorney general’s office and a task force of 12 state regulators, led by the Texas State Securities Board. Each group would exact a $50 million penalty.

The federal Securities and Exchange Commission also participated in the settlement talks but elected not to exact a penalty, pending its own investigation.

The settlement follows several days of meetings between Citigroup and the state and federal regulators, and reflects Citigroup’s desire to put its auction-rate securities troubles behind it.

Thursday’s settlement has implications for other Wall Street firms, with the Citigroup deal serving as a benchmark for the industry. Two other banks, UBS and Merrill Lynch, are under investigation by several groups of regulators. But unlike Citigroup, UBS faces additional accusations that at least one of its executives engaged in insider trading.

Citigroup shares were down about 3.5 percent Thursday; Morgan Stanley shares were down less than one percent.

Jenny Anderson contributed reporting.

FBI Targets Mortgage Industry

FBI, Mortgage, Wall Street


From The Times Online UK

Shit, meet fan….

America’s Federal Bureau of Investigation is investigating senior banking executives for insider dealing and fraud as part of a criminal inquiry into the sub-prime crisis, the agent leading the inquiry said yesterday.

Neil Power, the head of the FBI’s economic crimes unit, is heading the most far-reaching criminal investigation into the practices of the mortgage industry since it began to melt down last year, after years of increasingly lax lending finally fed through into an increase in defaults on home loans.

The FBI is investigating every level of the conspiracy that it believes perpetuated the housing boom and ultimately resulted in millions of Americans losing their houses, investment banks losing billions of dollars and the chief executives of Citigroup, Merrill Lynch, Bear Stearns and UBS resigning.

Mr Power said: “We’re looking at the accounting fraud that goes through the securitisation of these loans. We’re dealing with the people who securitise them and then the people who hold them, such as the investment banks.”

He said he was also concerned that some banking executives might be guilty of insider trading, offloading collatoralised debt obligations (CDOs), pools of bonds and other securities backed by mortgages, before their true valuations came to light in the wake of the home loan meltdown.

The FBI suspects that the house price boom, once seemingly endless, encouraged mortgage lenders to take increasingly large risks, making loans to people with weaker and weaker credit histories as they sought new customers. These lenders, and the brokers that arranged the mortgages, often encouraged borrowers to lie about their income. They told borrowers that if they could not meet their repayments they could always refinance their property and use the proceeds.


The FBI also suspects that the Wall Street banks may have been complicit in the process, ignoring the risks posed by these home loans because they were making huge fees from packaging them into bonds and other securities and selling them on to investors.

Finally, the FBI is investigating whether the Wall Street firms, which kept many of the mortgage bonds they packaged on their own balance sheets, may have failed to warn their investors of the risks they posed.

The FBI is the main investigative arm of the US Department of Justice, working with the US Attorney General and sometimes state attorneys general to bring criminal cases to the courts. The Bureau will also share some of the information it uncovers during the course of its investigation with the Securities and Exchange Commission, which brings civil cases against alleged corporate criminals.

Adam Compton, an analyst at RCM Global Investors in San Francisco, said: “The fact that the FBI is conducting such a wide-ranging investigation shows just how seriously the is being taken. There are so many angles to pursue.”

Robert Mintz, a former federal prosecutor specialising in white collar crime, added: “Given the level of the losses associated with the sub-prime mortgage crisis, this investigation could turn out to be very significant.”

The FBI launched a mortgage task force in December as it sought to step up its investigation into the home loan industry.

In addition to the sub-prime inquiry covering 14 companies, the Bureau is investigating 1,200 separate cases of mortgage fraud. Many of these involve the sale of a house by one person, for an inflated price, to a “straw” buyer, who disappears from the scene, leaving the bank with a house worth less than the mortgage. The two people then split the proceeds.

In 2003, the FBI investigated 436 mortgage fraud cases, rising to 818 in 2006. Meanwhile, the number of so-called suspicious-activity reports the FBI receives from the banks grew from 35,000 in 2006 to 48,000 last year. The FBI expects the number to rise to about 60,000 this year.

The FBI investigation may be the most significant but it is only the latest in dozens of civil and criminal cases being prepared by the SEC, the attorneys general of various states, and class action law firms such as Coughlin Stoia Geller Rudman & Robbins and Brower Piven.

Many of these cover the same ground as the FBI investigation. Others are investigating the role played by the credit ratings agencies, which frequently granted the top AAA rating to CDOs.

Bond insurers are among the other targets of litigation. These firms, which guarantee the payment of interest and principal of the bonds they underwrite in the event of a default, stand accused of failing to inform their investors of the true extent of the dangers posed by the sub-prime securities they insured.


— The City of Cleveland is suing 21 Wall Street firms, including Goldman Sachs and

Morgan Stanley, claiming they encouraged mortgage lenders to keep making loans to people who could not afford them by buying even the most suspect and packaging them into bonds. As a result, the number of foreclosures in the city jumped from 120 in 2002 to 7,500 last year

— Andrew Cuomo, New York’s Attorney-General, has issued subpoenas to big banks as he seeks to determine whether they knew more than they let on about the risks posed by the mortgage bonds they underwrote