Goldman Sachs: Bullies on the Block
Courtesy of Janet Tavakoli, President, Tavakoli Structured Finance
Originally published in Huffington Post
Arianna Huffington’s new book, Third World America: How Our Politicians Are Abandoning the Middle Class and Betraying the American Dream
For most Americans, the Great Recession never ended, and for many of the 14.9 million unemployed Americans, it’s a 21st century Depression. Yet in December 2009, Larry Summers, director of the White House National Economic Council, told ABC news: "Today, everybody agrees that the recession is over, and the question is what the pace of the expansion is going to be."
The recession was over for bailed-out banks paying billions in bonuses. Taxpayers fund Wall Street with nearly zero-cost loans, and Congress changed accounting rules in April 2009 so that Wall Street firms could hide losses to create the illusion of "big profits," as they try to fill the gaping holes in their balance sheets.
Money Cartel’s Yes Men
The money cartel is as dangerous as the Mexican drug cartel. Its weapons of choice are taxpayer subsidized funds for swarms of Washington lobbyists, "money jobs" for politically connected yes men, and lucrative positions for former regulators and the law firms that hire them. Wall Street is winning the class war, and taxpayers supplied the arms.
[White House Chief of Staff] Rahm Emanuel famously declared, "Rule one: Never allow a crisis to go to waste. There are opportunities for big things." But since the financial meltdown, it is actually the very people who created the crisis who have taken advantage of it and achieved "big things" – especially big profits and bonuses.
Third World America P. 193
Wall Street’s PR spin, lobbying, money train to Congress, and bullying of fact finders have kept much of the truth away from the public. Frank Rich of The New York Times pointed out: "What we don’t know will hurt us, and quite possibly on a more devastating scale than any [Al] Qaeda attack. Americans must be told the full story of how Wall Street gamed and inflated the housing bubble, made out like bandits, and then left millions of households in ruin."
In my book on the the global financial meltdown, Dear Mr. Buffett: What an Investor Learns 1,269 Miles from Wall Street, I explain the relationship between failed mortgage lenders and Wall Street’s private-label multi-tenacled securitization process. It was a widespread interconnected Ponzi scheme. The bulk of toxic mortgages were the result of Wall Street’s private label securitization (loan packaging) machine. Fannie and Freddie were forced to buy hundreds of billions of "highly rated" Wall Street mortgage backed "assets," and they are now Wall Street’s ongoing mortgage dumping grounds. There should be thousands of felony indictments for accounting fraud and securities fraud. [See "President Obama: Bring Back Black,"Huffington Post, April 26, 2010.]
Taxpayers Bailout Goldman Sachs
Goldman Sachs is by no means the only offender, but it epitomizes the problem. Goldman enjoys many benefits and subsidies as a result of Congress’s massive bailout of Wall Street. [See "Goldman Sachs: Spinning Gold," Huffington Post, April 7, 2010.]
In August 2007, I publicly challenged AIG’s accounting for its "protection" (credit default swaps) on value destroying CDOs (collateralized debt obligations backed by mortgages and various other assets including credit derivatives). AIG said it had zero accounting losses; but its losses were material, and AIG had a serious problem. The potential for actual losses was so enormous that I called Warren Buffett and met with Jamie Dimon, CEO of JPMorgan Chase. Unbeknownst to me at the time, Goldman was already pressuring AIG for more than a billion dollars in collateral.
In the fall of 2009, I uncovered the fact that Goldman Sachs had a much larger role in the mortgage bets that nearly toppled AIG than the Treasury, the Fed, or Goldman itself publicly disclosed in September 2008, when AIG was first bailed out. Then Treasury Secretary Henry Paulson was Goldman’s CEO at the time the deals were done with AIG. He was also CEO when Goldman underwrote other value destroying CDOs against which foreign banks bought protection. Stephen Friedman, a former Chairman of Goldman Sachs and then Chairman of the New York Fed, concurrently sat on Goldman’s board. These men had serious conflicts of interest, and events played out very much to Goldman’s benefit at the expense of taxpayers.
By September 2008, AIG was drained of cash and close to imploding. At the time Fed Chairman Ben Bernanke testified AIG had to be saved lest AIG’s failure trigger a Great Depression. (In March 2010, Treasury Secretary (and ex-President of the NY Fed) Timothy Geithner and ex-Goldman CEO and ex-Treasury Secretary Hank Paulson also testified to this.) Instead of allowing AIG to fail with minimal intervention, Washington protected culpable bankers.
In September 2008, David Viniar, CFO of Goldman Sachs, said Goldman’s exposure to AIG was "immaterial whatever the outcome at AIG." Goldman CEO Lloyd Blankfein would later testify to Congress in that Goldman "facilitates customer transactions." After analyzing new information, on October 28, 2009, I issued a commentary, "Goldman’s Lies of Omission," stating that in my opinion, David Viniar, Goldman’s CFO, had lied.
Intimidation Tactics and Cover-Ups
Goldman’s response was to initiate an hour long phone conversation: a combination of a veiled threat (I don’t have a problem…but our lawyers might) and obfuscations. In response, I issued an "apology" to David Viniar. Viniar may not technically have lied; perhaps he is just unimaginative about risk. Either way, shareholders might ask why Goldman’s officers sucked tens of billions in bonuses out of the Goldman as they "hedged" value destroying CDOs with AIG–an entity that nearly collapsed, while it still owed billions to Goldman.
Goldman said it was only involved in AIG trades as an "intermediary." That wasn’t true. As a further response to Goldman’s pressure, I revealed Goldman’s key role in AIG’s crisis. At the time, I was confident that within a week, an expected SIGTARP (Special Inspector General for the Troubled Asset Relief Program) report would have similar findings, but inexplicably, it did not. My findings were sound, however. When Goldman blew smoke about only being an "intermediary," it didn’t know that I had information that had been suppressed by the Fed, AIG, Goldman, Treasury, and the SEC. [See: Goldman’s Undisclosed Role in AIG’s Distress, TSF, November 10, 2009.]
The AIG bailout benefited Goldman, the firm responsible for the largest share of many value destroying collateralized debt obligations (CDOs) against which AIG sold protection ($33 billion of the $80 billion). Goldman had already extracted $7.5 billion from AIG by September 2008, and Goldman’s cronies had extracted even more billions. When taxpayers bailed out AIG in September 2008, AIG still owed billions of dollars more on top of that.
Out of the approximately $20 billion CDOs Goldman protected directly with AIG, Goldman had structured and created $6 billion CDOs named "Abacus," against which it bought protection from AIG. (Abacus CDOs were backed by credit derivatives referencing value destroying mortgage backed assets, and some had hidden features that disadvantaged investors.) That goes far beyond merely acting as an intermediary.
AIG reportedly settled $3 billion (of the original $6 billion) Abacus related deals at a loss of $1.5 billion to $2 billion by April 2010. SIGTARP is now investigating these deals, which are similar to Abacus 2007-AC1, a CDO at issue in the U.S. Securities and Exchange Commission lawsuit against Goldman alleging failure to disclose material information to investors. The fraud suit was settled settled for $550 million, of which $250 billion was paid in reparations to two sophisticated foreign banks. Among other issues the SEC’s settlement swept under the rug was that the Abacus deal may have been used to unload other complex value-destroying CDOs Goldman created. [See: "Abacus might have had other benefits for Goldman," by Matthew Goldstein, Reuters, April 24, 2010.]
Goldman also knew or should have known the character of the risk of $14 billion third-party value destroying CDOs it protected with AIG. Goldman claimed it acted as an "intermediary," as opposed to say, exchanging favors in a complicated game of "you bury my bodies and I’ll bury yours." The Fed used taxpayer dollars to settle these transactions for 100 cents on the dollar, an appalling example of crony capitalism. [See: "Redacted AIG filing might have spotted worst deals," by Matthew Goldstein, Reuters, January 10, 2010.]
Moreover, Goldman had also created additional value destroying CDOs (some were backed by cash assets and credit derivatives referencing value destroying CDOs), against which other banks–including some foreign banks–bought protection from AIG. Crony capitalism bailed out Goldman’s trading partners for 100 cents on the dollar, even though other bond insurers were settling deals for much less than that, and many of these deals were worthy of thorough investigations and audits.
Goldman reneged on its offer to provide me with confirmation of the fact that it hadn’t bought credit default protection [for a potential default by AIG] on more than a small fraction of the full notional amount of the CDOs it hedged with AIG. Contrary to its assertions to Congress, Goldman Sachs was significantly exposed to AIG’s potential failure. It had both economic and reputation risk.
"Collateral" held by Goldman in September 2008 would likely have been clawed back by a sensible liquidator, after the nature of the CDOs was known. Even if Goldman got to keep the collateral, an AIG failure posed significant economic risk, since its hedges [credit default swaps on AIG] were relatively small, and the prices of the CDOs were plummeting. Goldman also had litigation risk on the CDOs it underwrote (Davis Square and more) and sold to foreign banks that bought protection from AIG. Taxpayer money later made that problem disappear when the Fed settled for 100 cents on the dollar. This information had been suppressed and kept from public view. [See: "I Retract My Apology and Call for More Regulation of Goldman Sachs," TSF, November 22, 2009, and "Congress Exposes Potential Profiteering in AIG Deals: Delay Enabled Further Cover-Up," Huffington Post, January 28, 2010.]
Goldman’s other big role in the CDO business that few of its competitors appreciated at the time was as an originator of CDOs that other banks invested in and that ended up being insured by AIG, a role recently highlighted by Chicago credit consultant Janet Tavakoli. Ms. Tavakoli reviewed an internal AIG document written in late 2007 listing the CDOs that AIG had insured, a document obtained earlier this year by CBS News. [CBS did not have the data to make the connection between the CDOs and Goldman’s large role as underwriter of CDOs backing its own trades and the trades of other banks.]
"Goldman Fueled AIG’s Gambles," by Serena Ng and Carrick Mollenkamp, Wall Street Journal, December 12, 2009.
Goldman was unsuccessful in misleading me, but what chance would non financial professionals have against Goldman’s hokum? Goldman misled many members of the press, Congress, and even "investigators" (unless investigators were going along for the ride) for a very long time.
Why did Goldman Sachs try to pass itself off as merely an "intermediary?" In my opinion, it was trying to make its role sound innocuous when it was not. In its role as a structurer and underwriter of CDOs, Goldman was responsible for a high standard of thorough due diligence.
Investigating a Criminal Cover-Up
On November 17, 2009 (a week after my report), SIGTARP released its report. Despite discussing AIG and its problematic protection on CDOs, the report did not mention Goldman’s key role as underwriter (creator) of many of the CDOs, including CDOs for which foreign banks were paid billions in the AIG settlement. It appears that either the well-staffed TARP investigators knew less than I did, or they didn’t understand the implication of information they had (if they had it), or there was a cover-up. In other words, the SIGTARP report contained information that was less damaging to Goldman’s fairy tales than what I had already put in the public domain on November 10, 2009.
That begs the question. When Goldman called me (before my November 10 report), did Goldman already know that the SIGTARP report would not contradict its story? In other words, did it know the SIGTARP report would fail to reveal its role as creator (underwriter) of many of the value destroying CDOs? Was SIGTARP part of a cover-up?
Documents filed with the SEC had been redacted so that the names of the CDOs backing credit default swaps, the size of individual deals, the fallen prices of the CDOs, and the names of the banks tied to each deal were not revealed. Was the SEC also part of a cover-up? [See "Treasury Cover-Up of Goldman’s Role in AIG Crisis?" Huffington Post, December 22, 2009.]
I sent my concerns to staffers on the Senate Banking Committee, the Financial Crisis Inquiry Commission, and other Congressional offices that had previously contacted me for information.
SIGTARP is now partly blaming Fed secrecy, yet why has SIGTARP been so slow to connect the dots? SIGTARP is now investigating a potential criminal cover-up. ["AIG Probe May Lead to Criminal Coverup Charges, Barofsky Says," by Richard Teitlebaum, Bloomberg News, April 28, 2010.]
Perhaps it’s also time to investigate SIGTARP’s process, since it reeks like three day old fish.
Dodd-Frank Reform Failure: "Customer Transactions" Were Behind the Meltdown
Goldman was responsible for huge systemic risk, even though it characterized its AIG trades as "customer transactions." It’s one thing to provide emergency relief for "troubled assets," and its quite another for Congress to delay so long in asking how these assets came to be so troubled in the first place. Congress has neither uncovered the truth nor mitigated the risk of even greater future devastation. The Dodd-Frank Bill does not provide necessary financial reform, because Wall Street lobbyists successfully tailored the language to suit bankers.
Senator Carl Levin (D. Mich.), Chairman of a senate investigative panel, issued a memo stating that Goldman "magnified the impact of toxic mortgages." In other words, it kept repackaging, reselling or protecting (buying credit default protection on) losers. It took the wrong kind of nerve for Goldman’s CEO to say he was doing "God’s work,"* when the reality includes this brand of malicious mischief.
In one case, a $38 million subprime-mortgage bond created in June 2006 ended up in more than 30 debt pools and ultimately caused roughly $280 million in losses to investors by the time the bond’s principal was wiped out in 2008, according to date reviewed by The Wall Street Journal.
"Senate’s Goldman Probe Shows Toxic Magnification," by Carrick Mollenkamp and Serena Ng, Wall Street Journal, May 2, 2010.
All of the large Wall Street banks generate huge risk in foreign exchange, commodities trading, interest rate derivatives, credit derivatives and more. The Dodd-Frank Bill’s so-called financial reform leaves the entire financial system at great risk from "customer transactions."
In Third World America, Arianna Huffington explains how Wall Street bought off Congress. America’s middle class is caught in the middle of a bi-partisan betrayal. Righting these wrongs will not be easy. Among other things, it may require an amendment to our Constitution to prevent money cartels from buying off our elected officials.
On April 20, 2009, Brian Lamb, CEO of CSpan, interviewed me about Wall Street’s Ponzi scheme, control in Washington, and influence over main stream media:
* Endnote: Goldman CEO Lloyd Blankfein’s quip that he is doing "God’s work," is put in its proper perspective by this apt quote at Jesse’s Cafe Americain :
"There will be hard times in the last days. People will love only themselves and money. They will brag and be proud, tearing others down. They will be without love, gratitude, respect, or forgiveness. They will tell lies and be out of control. They will despise what is good and betray friends. They will believe they are better than others, and will love only what pleases them. They will say they are serving God, but their actions will show they are not." 2 Timothy 3:1-5
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Janet Tavakoli is the president of Tavakoli Structured Finance, a Chicago-based firm that provides consulting to financial institutions and institutional investors. Ms. Tavakoli has more than 20 years of experience in senior investment banking positions, trading, structuring and marketing structured financial products. She is a former adjunct associate professor of derivatives at the University of Chicago’s Graduate School of Business. Author of: Credit Derivatives & Synthetic Structures: A Guide to Instruments and Applications, 2nd Edition, Collateralized Debt Obligations and Structured Finance : New Developments in Cash and Synthetic Securitization
