Most of the time I am able to be even keeled and calm about most things. I have had occasion in life to be in tough, crisis and challenging situations, and have a reputation for being cool, calm and collected. I like to think of myself as even-keeled, balanced and consistent. I also do not swear. I don’t like profanity. But sometimes a story comes along that cannot be expressed in any other way than through sheer, incredulous, mind blowing, sputtering outrage. The story behind the story of the investigation into Goldman Sachs is one of those…
Both the SEC (America’s Securities and Exchange Commission) and the FSA (The UK’s Financial Services Authority) have announced investigations into fraud at Goldman Sachs. The SEC has actually laid a civil suit.
The SEC is charging that Goldman worked with Paulson & Co, a hedge fund, to create a package of risky subprime mortgages (called Abacus security) that was intentionally designed to fail. That’s obviously horrific – investment bankers and advisors creating a product that they knew would collapse and lose money. But that’s not the fraud. Read on.
Goldman took the package they had created and marketed it to other investors, giving it a credible rating, and telling investors that the hedge fund had also invested in it. This was deceiftul and shameless. But it’s still not the fraud. Read on.
Not only was the hedge fund not actually investing, it was actually picking the worst mortgages and then betting against the Abacus security. In other words, they took out insurance that would pay out if (or, in this case, when) the investment package collapsed. Bizarrely, you’re allowed to do all of this – as long as somewhere in the small print the hedge fund’s participation is mentioned. It seems this is the fraud. Goldman didn’t mention that fact.
All of this is enough to make you feel sick. But that’s not what caused my outburst at this story. Read on.
In an email that has recently come to light, Fabrice Tourre, a Goldman Sachs vice-president, boasted on January 23 2007, about what was about to happen to him and to the Abacus 2007-AC1 package. “More and more leverage in the system,” he wrote. “The whole building is about to collapse anytime now… Only potential survivor the fabulous Fab[rice]… standing in the middle of all these complex, highly leveraged, exotic trades he created without necessarily understanding all of the implications of those monstruosities [sic]!!!”. It’s not just him – various departments throughout Goldman signed off on the scheme, and promoted it to investors.
And, then, in the same week that the investigations were announced, Goldman announced that they had allocated $ 5.4 billion in staff bonuses. They announced in January that they had paid out over $ 16 billion in bonuses and compensation during 2009. Now, a quarter later, they announce $ 5.4 bn more? For what? And all of this to a company that required a bailout just 18 months ago? A company that is a “paragon” of the “free market” system? But, if you think all of this could force me to swear, you’re wrong. Read on. There’s more.
With everything I’ve outlined already, you’d think that regulating the financial system was a given – that no-one could argue that something was wrong with the current system, and that changes need to be made. You’d think it would be tough to say that the financial system could regulate itself. But, the Republicans have blocked attempts to reform financial regulations – they used a fillibuster to stop an attempt to propose the legislation, thus not even allowing it to come up for debate on the floor of the Senate.
Remember that these were the subprime loans that financed people’s homes. Many of those homes have been repossessed. More than $1 billion was lost by investors in the scheme.
That’s why I am swearing today! What’s up with these people? How can they sleep at night?
Thanks to Jon Stewart’s Daily Show for sparking this blog entry.