Tuesday, February 23, 2010

Did Goldman perpetrate one of the largest frauds in U.S. history?

Read this brilliant article by Professor Randall Wray on how Goldman not only bet against the junk it packaged and sold, but how it possibly perpetuated the greatest fraud in the history of American finance.

Please send this story to as many people as possible, including your Congressional representatives. Goldman MUST be shut down!! Obama MUST fire Tim Geithner!!

Worst Revelation Yet in the On-going Goldman-AIG-NYFed ScandalShare
By L. Randall Wray

Richard Teitelbaum reported today (here) that Timothy Geitner's New York Fed hid the smoking gun that proves Goldman played the key role in bringing down AIG. The only plausible explanation for hiding the document is that Geithner et.al. were protecting Goldman. Is this the worst scandal in US history? To ask the question is to answer it.

In brief, here is the story. Recall that securitization of mortgages was supposed to be a risk-reducing innovation that would move mortgages off the books of banks and into well-diversified portfolios of those better able to absorb risks. Mortgage originators would do the underwriting (verify credit-worthiness), securitizers would do the packaging, credit raters would do the rating, and investors would buy the securities and take the risks. Ah, but Wall Street was too clever for all that. So here is how it really worked. Banks owned mortgage lenders who made NINJA loans (no income, no job, no assets), then worked with credit raters to get the ratings desired. The raters did not actually examine any of the loans because the banks bought Credit Default Swap (CDS) "insurance" from AIG to guarantee safety of the Collateralized Debt Obligation (CDO) issued against the mortgages. Goldman and other banks would then either sell the CDO while using a CDS to bet on default; or they would hold the CDO and use the CDS bet against it to hedge risk. Of course, since Goldman had securitized toxic waste, the bet was not a gamble at all. It knew the CDOs would fail. But meanwhile, it got to book all sorts of fees and income so that it could reward its management with outsized bonuses.

As the subprime market began to crater—due to "unexpected" delinquencies and defaults on mortgages—AIG's own financial situation was down-graded. This led Goldman and other banks to demand collateral from AIG against their CDS bets. Goldman, in particular, played hardball with AIG—ensuring it would fail.

Here is how bad those CDOs were: losses are running as high as 78% on the toxic waste underwritten by Goldman. No wonder the firm bet against it! Yet, when Geithner's NYFed intervened to rescue AIG, it demanded that AIG pay Goldman 100 cents on the dollar—for the "insurance" AIG provided on the toxic waste created by—you betcha—Goldman. Timmy's office then ordered AIG to engage in a cover-up—telling it in November and in December 2008 to keep bank names out of documents filed. As late as January 27 2010 "the New York Fed was still arguing that the contents of Schedule A shouldn't be fully disclosed", Teitelbaum reports. Schedule A is the damning document that not only names names but also details the CDO deals.

It shows that Goldman underwrote $17.2 billion of the $62.1 billion in CDOs that AIG "insured"—the most of any bank. Goldman, in turn, received $14 billion from AIG as its share of the settlement (second only to Societe Generale, which got $16.5 billion). If you do the math, Goldman was paid over 80 cents for every dollar of CDO it wrote that got AIG insurance ($14B/$17.2B). The government has poured $182 billion into the rescue to date and now holds much of the toxic waste created by Goldman and others.

Why did Timmy do it? Why does the NY Fed still insist on secrecy? "They must have been trying to shield Goldman" says Professor James Cox of Duke.

And here is the most outrageous part of the story. As Marshall Auerback and I wrote (here) Goldman's top management was not only betting against the toxic waste they created, they also bet against Goldman:

top management unloaded their Goldman stocks in March 2008 when Bear crashed, and again when Lehman collapsed in September 2008. Why? Quite simple: they knew the firm was full of toxic waste that it would not be able to continue to unload on suckers—and the only protection it had came from AIG, which it knew to be a bad counterparty. Hence on March 19, Jack Levy (co-chair of M&As) sold over $5 million of Goldman's stock and bet against 60,000 more shares; Gerald Corrigan (former head of the NY Fed who was rewarded for that tenure with a position as managing director of Goldman) sold 15,000 shares in March; Jon Winkelried (Goldman's co-president) sold 20,000 shares. After the Lehman fiasco, Levy sold over $6 million of Goldman shares and Masanori Mochida (head of Goldman in Japan) sold $56 million worth. The bloodletting by top management only stopped when Goldman got Geithner's NYFed to produce a bail-out for AIG, which of course turned around and funneled government money to Goldman. With the government rescue, the control frauds decided it was safe to stop betting against their firm.

Goldman appears to be the classic case of what my colleague Bill Black calls a "control fraud". But the NY Fed and by implication the US Treasury (which is also captured by Goldman) is involved in the cover-up of the frauds perpetrated by Goldman's top executives—those "savvy businessmen" President Obama has praised. And that, dear reader, is what makes this rank among the worst scandals in US history.


Matt Franko said...


I remember at the time around when Lehman failed, I would listen to your casts and you would go over the situation and have guests on and talk with Warren and others about the govts options, how they could guaranty the payments system, how the Fed could lend to Lehman if they couldnt get funded as a last resort, etc...I personally felt that things could work out in a reasonable way with rational govt interventions, etc...based on what you were reporting. I felt basically confident and somewhat assumed that those in govt would figure this out (as 'we' had).

Now take Henry Paulson (former Goldman). WSJ from Paulsons recent book: "In September 2008, as the financial world was falling apart, Paulson writes that he admitted to his wife that he was scared. She encouraged him to pray and together they recited the Bible’s Second Book of Timothy, Verse 1:7 – “For God hath not given us the spirit of fear, but of power, and of love, and of a sound mind.”

So how is it that Paulson has to literally pray to God to lose his spirit of fear (although I dont think the Apostle Paul was talking to Timothy in the same context but I digress) when I (a nobody) had confidence and what I felt was a decent handle on the situation and the govts range of options to deal with this?

Our leaders are really failing us when they have to resort to prayer in response to a situation that only calls for a judicial application of man-made legal constructs. (Such as those you went over on your show) I really lost a lot of respect for Paulson when I read this.

mike norman said...


You may recall that in the early days of the market collapse and as the panic grew, I stayed optimistic and bullish about the prospects for stocks and, more generally, for the economy. I did this not just on my radio show, but on my appearances on Fox as well, because I never imagined in a million years that there would be such a monumental failure of policy on the part of men who were supposedly "Masters of the Universe."

What you and I and Warren and a few others took for granted, was the notion that the problems in subprime had absolutely ZERO ability to bring down the entire global financial system, but we ended up finding out that it could, when, ultimately, those who are in charge literally had no other way to deal wth the crisis than to pray.

Sadly, we are starting to see, all too clearly, I might add, that the current leadership is nothing more than vacuous sham. Those who have been held in high esteem for decades are being exposed as nothing more than privileged, over-educated, insecure primadonnas who have been sheltered by money and the fact that they have been members of the right "club."

At a time when we need leaders with assuredness, courage, intellect and the humility to admit when they are wrong, we get adult children more inclined to protect their careers, reputations and bank accounts than anything else. I don't blame them completely, however. They are a product or byproduct of the electorate. If ignorance runs rampant in the electorate, which I believe it does, then our leadership will reflect that. God help us!

MortgageAngel said...

I will never forget 2008! It was a "time of enlightenment" for me! In June 08 I stumbled on Mike's Economic Myths and Facts segment via itunes. That's the only segment I listened to at first. By the end of July I was religiously time blocking the full two hours, a segment at a time, into my daily calender.
I must say, one of the things I love about Matt's participation here is the element of nostalgia it brings to me personally. (Thank you!)

But, unlike Matt, Mike's optimism puzzled me rather than encouraged. What I learned from Mike's show began to negate my old paradigm bit by bit by bit. Now that I've come full circle on my thought in these matters I contend the the movers and shakers ARE in paradigm. I'm stunned everytime you (Mike AND Matt) give them (bankers charged with navigating our economy out of this mess.) benefit of the doubt. IMO it's incredibly naive to believe they just don't get it. Nobody can advance that far in a chosen profession and be that stupid.

(although I dont think the Apostle Paul was talking to Timothy in the same context but I digress)

I'm guessing you perceive this to be closer to a prayer for mercy rather than spiritual boldness.

hmmm, Maybe you're beginning to shed some of that naivete! (Just an observation.)

Only two know for sure - It is between Paulson and his Maker.

Time will tell!

In fondness,

MortgageAngel said...

One more thought re:
"IMO it's incredibly naive to believe they just don't get it. Nobody can advance that far in a chosen profession and be that stupid."

And they're erroring in their own favor! HEL-LO?!

Matt Franko said...

Mike's show was the best! It was an enlightening time for me also...maybe thats why Im often nostalgic...

I still lean towards the "incompetent" camp but take your point that these paople may all just be big time deceivers. I guess it has to be one way or the other, either they are being deceived or they are deceivers, neither one is good for the rest of us!

"spiritual boldness" yes! thats what I think it really means. (Paul wasnt talking to Timothy about his failing tentmaking franchise in Asia Minor!)

But I interpret Paulsons prayer as if he was sort of praying for the courage to screw over the country! Its like he was looking for the courage to figure out a way to politically manipulate/navigate the govt process to the unfair advantage of himself and those around him (his industry) by using Treasury balances to prevent a wipeout of all financial sector equity (or worse if you want to believe just certain Cos. equity!)

I will continue to consider your point of view...

Matt Franko said...

heres Mikes post then.

MortgageAngel said...

Thanks for grabbing some vintage from the cellar!