A couple of recent pieces on the late financial debacle have me puzzling over this stuff again—mostly because I still understand little of it (the big boys, naturally, like it that way). But here goes.
Too Big to Fail is a 2009 book by reporter Andrew Sorkin treating the agonizing days in September 2008 when the system almost collapsed. It’s a fascinating read, if for nothing else than the fact that it familiarizes us with the major mandarins of finance and government. We become chummy with then-Treasury Secretary Hank Paulson and NY Fed chairman Tim Geithner, the latter now Obama’s Treasury Secretary. Of the two, Paulson comes off as the better man—more capable, more sensitive to the personalities he had to deal with (and therefore more respected by them), more concerned to save the system. Geithner strikes us as a bit of a tyrant, jealous of his perks, prone to order his bankers to jump through the hoops he has set for them. Paulson, by contrast, always solicits the ideas of those he tries to persuade. We also get the feeling that the entire ordeal—having to bail out the free-market system he was and is so much a part of—was one Paulson would have avoided if he could. He was perfectly happy as CEO of Goldman Sachs. As Treasury Secretary, on the other hand, he has to persuade, cajole, and take crap from Congress; at various points, we are told that he actually vomits from the political tension he is under. No wonder. If all reports are to be believed, the financial system was on the very brink of collapse. The way Sorkin tells the story also indicates that the renowned TARP bailout of major financial institutions was actually a political/psychological ploy meant to calm markets and the American people—a plan that forced nine major banks to accept an infusion of billions of dollars each, whether they needed it or not. Many did: Citibank, Morgan Stanley, and AIG. Others, especially Goldman Sachs and Wells Fargo, did not. But in order to create the illusion of equality and stability, Paulson’s plan required all banks to accept the money.
The story begins with the impending collapse of Lehman Brothers. We feel almost sorry for the CEO, Dick Fuld, who had spent his life building the firm, and who, until the very end, thinks he can work a deal to get another bank to rescue his. Such a buyout is what Geithner and Paulson spend most of their time trying to arrange. But Lehman’s problems, coming after the bailout of Bear Stearns, suffered from bad timing: the public was already alarmed by the first bailout and it was clear another would ignite a firestorm of protest. So Lehman’s failure was political as much as financial. Indeed, one of the failings of this book is that we never really get a clear explanation of why any of these financial giants was hemorrhaging so badly. We learn about the fall in their stock prices; we hear that the “short sellers” are driving their price down; but we don’t really quite understand what the root problems or mistakes are. What we get mostly are vignettes dramatizing little episodes in the long series of near-mergers and deal collapses. Some of these vignettes are telling: Bob Diamond, CEO of Barclay’s Bank, approached by Geithner to buy Lehman, wants the Federal Reserve to guarantee the deal (it is amazing to realize how alergic these financial “geniuses” are to the free market economics they’re always preaching).
“We need to be seen, to be invited by you and shepherded by you,” Diamond insisted. “You guys asked me if there was a price at which we’d be interested and you asked me, if so, ‘What do you need?’ That doesn’t mean I’m gonna call Fuld. That’s completely different.”
Giethner, growing frustrated with his equivocation, asked again, “Why can’t you just call Fuld? Why can’t you do it?”
“I’m not going to ask a guy if I can buy him, you know, at a distressed price,” Diamond said. “It only works if you guys are looking to arrange a deal. If you’re not, fine, no hard feelings, we’re okay.”
Then comes Sorkin’s comment:
However much Barclays may have wished to avoid giving the impression that they might be taking advantage of someone else’s misfortune, it was, of course, precisely what they were seeking to do. (p. 262)
This is really the key to the entire skein of deals and deal-making that Sorkin portrays. All these pooh bahs knew each other, played golf with each other, sat on boards together, had dinners together (at the finest restaurants on the planet, of course). They wanted to appear to be friends; but, in fact, they were sharks, circling each other, keen always to detect the smell of blood from a wounded competitor.
Unfortunately, during those terrible days of September, there was a lot of blood in the water. Once Lehman was allowed to fail, fear ruled Wall Street and Washington as well. No one knew who would be next because all the firms were interrelated financially. AIG had written enormous amounts of insurance—credit default swaps—for Goldman Sachs and others. If banks tried to collect on these insurance policies, which many did, AIG was going down. It was this domino of collapses that Paulson and Geithner, in Sorkin’s telling, were so desperate to prevent. At one point, before Paulson promoted his TARP program, we listen in on one of his conversations with Steve Schwarzman, chair of private-equity giant, the Blackstone Group. Schwarzman says:
“I have to tell you, the system’s going to collapse in the next few days. I doubt you’re going to be able to open the banks on Monday….People are shorting financial institutions, they’re withdrawing money from brokerage firms because they don’t want to be the last people in—like in Lehman—which is going to lead to the collapse of Goldman and Morgan Stanley. Everybody is just pursuing his self-interest,” Schwarzman told him. “You have to do something.” (emphasis mine).
What strikes me here is the language: Everybody is pursuing his self-interest. Well now, isn’t that a damn shame! These are the people who have raised the individual pursuit of self-interest to the level of holy dogma: this is what makes capitalism, free markets great. But when it happens within the club, when the dogs turn on each other, then they cry foul! You have to do something! And of course, Paulson did do something, for it was right after this that he put together, and rammed through Congress, the TARP bailout program.
This is fascinating stuff. We actually find ourselves rooting for the Treasury Department, for financial leaders like Dick Fuld, to succeed. I liken this feeling to the similar feeling one gets when watching mafia movies: no matter how heinous their behavior, we root for the characters who are portrayed from the inside as protagonists. Their cause becomes our cause. Sadly, what Too Big to Fail leaves out are the series of fraudulent, near-criminal activities that led these Wall Street powerhouses to run aground: the sub-prime mortgages, the collateralized debt obligations, the credit default swaps, all the exotic instruments whereby they and their executives enriched themselves to obscene levels, and brought the entire financial system and the economy it supports to near ruin. A recent article, “Banks Self-Dealing Super-Charged Financial Crisis,” indicates just how culpable these guys were. What the analysis by ProPublica reveals is that when these Wall Street banks saw how the market for the mortgage-backed securities they’d been packaging at great profit was faltering, they “created fake demand.” They simply bought their own products—the worst of the mortgages in their CDOs—and put them together in new CDOs, which they then proceeded to sell. They knew these new CDOs were junk, because that’s why they’d separated them out in the first place. And when the new ones proved hard to sell in full, they created yet more CDOs to buy those. ProPublica calls this a “daisy chain that solved one problem but created another.” And when the daisy chain could no longer be hidden, when, as we learn in Too Big to Fail, the banks could no longer get away with valuing these toxic assets at the inflated levels they claimed for them, the banks started to collapse.
That’s when we American taxpayers came to the rescue: TARP, Toxic Asset Relief, means that the U.S. government was forced to buy the worst of these bank “assets” to get them off their books—because with them, the big banks would fail.
I don’t know about you, but this just gives me a warm feeling all over.
Lawrence DiStasi
Showing posts with label too big to fail. Show all posts
Showing posts with label too big to fail. Show all posts
Wednesday, September 01, 2010
Saturday, May 01, 2010
Goldman: Doing God's Work
I’ve just read over my last blog (July 19 last year) on Goldman Sachs, and it’s déjà vu all over again. Paul Krugman wrote shortly before then that Goldman had been selling toxic mortgage-backed securities to its customers, while at the same time making billions by “selling mortgage-backed securities short, just before their value crashed.”
The new twist in recent days is that Goldman Sachs was not only doing this, but that it neglected to tell its customers anything about its short selling. Just to keep you updated, “selling short” means that a stock trader bets that a given stock is about to go down—and when it does, he makes as much money as if he bet successfully on it going up. I first learned about this through a stock trader years ago, the new husband of an old friend, who the day I visited their New York apartment, happily informed me that he and his son had just made about $2 million dollars that day. His specialty, “selling short.” Though betting that a stock would go down seemed insane to me, Dick explained it was perfectly legitimate, and smart.
Apparently, the boys at Goldman think the same way. Only, again, they somehow forget to tell their customers about it, i.e., that the securities they’re pushing on them are, in their opinion, doomed and, as a result, they’re secretly selling those same securities short. Worse, in emails that have been made public by the Securities and Exchange Commission (which has brought legal action against Goldman for this type of fraud), Goldman managers have boasted of their cleverness in bilking widows and orphans out of their money. Fabrice Tourre, a Goldman trader, joked: “I’ve managed to sell a few Abacus (the name of the toxic portfolio) bonds to widows and orphans that I ran into at the airport, apparently these Belgians adore (them).” (quoted by AP, 4/24/10). Tourre also quoted Dan Sparks, manager of Goldman’s subprime business, as saying that the business “is totally dead, and the poor little subprime borrowers will not last so long!” Ho ho.
Evidently, a hedge-fund manager named John Paulson (his personal income in this hedge business during the crisis amounted to over $10 million a day! according to Gregory Zuckerman in “The Greatest Trade Ever”) helped Goldman select investments for Abacus knowing that it was going to go into the toilet (Paulson put the deal together as a hedge, i.e. betting that the securities would go down), and then pushed the deal to its customers. Those customers, kept in the dark, were mainly European banks who had no idea that the American housing market was so shaky. Goldman managers, like CFO David Viniar, referred to the Goldman strategy as “the big short.” Of course, Goldman is publicly denying that it had organized a strategy of going short, but the firm’s records show otherwise. Together with its role in bringing down AIG, its use of nearly interest-free government funds to make huge profits, and its use of exotic swaps to help Greece disguise its financial problems (while it bet against Greece by shorting Greece’s debt), this makes plain that the premiere investment bank in the world is indeed what Matt Taibbi called it last year: a “great vampire squid wrapped around the face of humanity.” As to the financial sector of which Goldman is the most shining example, its share of domestic corporate profits “never higher than 16 percent until 1986, hit 41 percent in the last decade” (Frank Rich, NY Times, 4/25/10). And you were wondering whatever happened to American manufacturing, to American firms which actually produce something other than fraud?
But the question I want to raise, again, is “who are these people?” What kind of flesh-devouring, soul-killing robots can bear to engage in this kind of criminality? From their point of view, it’s called “enlightened self interest.” From their CEO Lloyd Blankfein’s perspective, they are doing “God’s work.” I suppose if you believe that God is a sadistic, cruel, diabolical destroyer of hopes and dreams, lives and cities and whole countries, a deity who enjoys watching widows and orphans get screwed while wealthy dweebs (just watch them as they testify before the Senate Finance Committee) luxuriate in their pools and palaces, then perhaps it is God’s work. But if you question what kind of nation could allow this to go on, what kind of economic system could foster this kind of cruelty, fraud, inequality and sheer human suffering—then you may be thinking that something more than new regulations or new legislation is going to be needed. What that eventually turns out to be is still not clear. But I know one thing: if I were one of the executives in any of these so-called banks or brokerage houses, I wouldn’t walk too casually or conspicuously down the street these days.
P.S. In their testimony before the Senate yesterday, Goldman execs vigorously disputed the notion that they had an obligation to disclose anything whatsoever to their customers (suckers). Lloyd Blankfein insisted that Goldman was just acting as a marketer, selling the level of risk their customers wanted. In sum, these guys make used-car salesmen seem like (I was going to say Franciscans, but given the odor of priests these days, it might not be such a good metaphor) Mother Theresas.
Lawrence DiStasi
The new twist in recent days is that Goldman Sachs was not only doing this, but that it neglected to tell its customers anything about its short selling. Just to keep you updated, “selling short” means that a stock trader bets that a given stock is about to go down—and when it does, he makes as much money as if he bet successfully on it going up. I first learned about this through a stock trader years ago, the new husband of an old friend, who the day I visited their New York apartment, happily informed me that he and his son had just made about $2 million dollars that day. His specialty, “selling short.” Though betting that a stock would go down seemed insane to me, Dick explained it was perfectly legitimate, and smart.
Apparently, the boys at Goldman think the same way. Only, again, they somehow forget to tell their customers about it, i.e., that the securities they’re pushing on them are, in their opinion, doomed and, as a result, they’re secretly selling those same securities short. Worse, in emails that have been made public by the Securities and Exchange Commission (which has brought legal action against Goldman for this type of fraud), Goldman managers have boasted of their cleverness in bilking widows and orphans out of their money. Fabrice Tourre, a Goldman trader, joked: “I’ve managed to sell a few Abacus (the name of the toxic portfolio) bonds to widows and orphans that I ran into at the airport, apparently these Belgians adore (them).” (quoted by AP, 4/24/10). Tourre also quoted Dan Sparks, manager of Goldman’s subprime business, as saying that the business “is totally dead, and the poor little subprime borrowers will not last so long!” Ho ho.
Evidently, a hedge-fund manager named John Paulson (his personal income in this hedge business during the crisis amounted to over $10 million a day! according to Gregory Zuckerman in “The Greatest Trade Ever”) helped Goldman select investments for Abacus knowing that it was going to go into the toilet (Paulson put the deal together as a hedge, i.e. betting that the securities would go down), and then pushed the deal to its customers. Those customers, kept in the dark, were mainly European banks who had no idea that the American housing market was so shaky. Goldman managers, like CFO David Viniar, referred to the Goldman strategy as “the big short.” Of course, Goldman is publicly denying that it had organized a strategy of going short, but the firm’s records show otherwise. Together with its role in bringing down AIG, its use of nearly interest-free government funds to make huge profits, and its use of exotic swaps to help Greece disguise its financial problems (while it bet against Greece by shorting Greece’s debt), this makes plain that the premiere investment bank in the world is indeed what Matt Taibbi called it last year: a “great vampire squid wrapped around the face of humanity.” As to the financial sector of which Goldman is the most shining example, its share of domestic corporate profits “never higher than 16 percent until 1986, hit 41 percent in the last decade” (Frank Rich, NY Times, 4/25/10). And you were wondering whatever happened to American manufacturing, to American firms which actually produce something other than fraud?
But the question I want to raise, again, is “who are these people?” What kind of flesh-devouring, soul-killing robots can bear to engage in this kind of criminality? From their point of view, it’s called “enlightened self interest.” From their CEO Lloyd Blankfein’s perspective, they are doing “God’s work.” I suppose if you believe that God is a sadistic, cruel, diabolical destroyer of hopes and dreams, lives and cities and whole countries, a deity who enjoys watching widows and orphans get screwed while wealthy dweebs (just watch them as they testify before the Senate Finance Committee) luxuriate in their pools and palaces, then perhaps it is God’s work. But if you question what kind of nation could allow this to go on, what kind of economic system could foster this kind of cruelty, fraud, inequality and sheer human suffering—then you may be thinking that something more than new regulations or new legislation is going to be needed. What that eventually turns out to be is still not clear. But I know one thing: if I were one of the executives in any of these so-called banks or brokerage houses, I wouldn’t walk too casually or conspicuously down the street these days.
P.S. In their testimony before the Senate yesterday, Goldman execs vigorously disputed the notion that they had an obligation to disclose anything whatsoever to their customers (suckers). Lloyd Blankfein insisted that Goldman was just acting as a marketer, selling the level of risk their customers wanted. In sum, these guys make used-car salesmen seem like (I was going to say Franciscans, but given the odor of priests these days, it might not be such a good metaphor) Mother Theresas.
Lawrence DiStasi
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