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Politics : American Presidential Politics and foreign affairs -- Ignore unavailable to you. Want to Upgrade?

To: DuckTapeSunroof who wrote (42801)	4/19/2010 1:06:22 PM
From: DuckTapeSunroof	Read Replies (2) \| Respond to of 71588

Looters in Loafers April 19, 2010 Op-Ed Columnist By PAUL KRUGMAN nytimes.com Last October, I saw a cartoon by Mike Peters in which a teacher asks a student to create a sentence that uses the verb “sacks,” as in looting and pillaging. The student replies, “Goldman Sachs.” Sure enough, last week the Securities and Exchange Commission accused the Gucci-loafer guys at Goldman of engaging in what amounts to white-collar looting. I’m using the term looting in the sense defined by the economists George Akerlof and Paul Romer in a 1993 paper titled “Looting: The Economic Underworld of Bankruptcy for Profit.” That paper, written in the aftermath of the savings-and-loan crisis of the Reagan years, argued that many of the losses in that crisis were the result of deliberate fraud. Was the same true of the current financial crisis? Most discussion of the role of fraud in the crisis has focused on two forms of deception: predatory lending and misrepresentation of risks. Clearly, some borrowers were lured into taking out complex, expensive loans they didn’t understand — a process facilitated by Bush-era federal regulators, who both failed to curb abusive lending and prevented states from taking action on their own. And for the most part, subprime lenders didn’t hold on to the loans they made. Instead, they sold off the loans to investors, in some cases surely knowing that the potential for future losses was greater than the people buying those loans (or securities backed by the loans) realized. What we’re now seeing are accusations of a third form of fraud. We’ve known for some time that Goldman Sachs and other firms marketed mortgage-backed securities even as they sought to make profits by betting that such securities would plunge in value. This practice, however, while arguably reprehensible, wasn’t illegal. But now the S.E.C. is charging that Goldman created and marketed securities that were deliberately designed to fail, so that an important client could make money off that failure. That’s what I would call looting. And Goldman isn’t the only financial firm accused of doing this. According to the Pulitzer-winning investigative journalism Web site ProPublica, several banks helped market designed-to-fail investments on behalf of the hedge fund Magnetar, which was betting on that failure. So what role did fraud play in the financial crisis? Neither predatory lending nor the selling of mortgages on false pretenses caused the crisis. But they surely made it worse, both by helping to inflate the housing bubble and by creating a pool of assets guaranteed to turn into toxic waste once the bubble burst. As for the alleged creation of investments designed to fail, these may have magnified losses at the banks that were on the losing side of these deals, deepening the banking crisis that turned the burst housing bubble into an economy-wide catastrophe. The obvious question is whether financial reform of the kind now being contemplated would have prevented some or all of the fraud that now seems to have flourished over the past decade. And the answer is yes. For one thing, an independent consumer protection bureau could have helped limit predatory lending. Another provision in the proposed Senate bill, requiring that lenders retain 5 percent of the value of loans they make, would have limited the practice of making bad loans and quickly selling them off to unwary investors. It’s less clear whether proposals for derivatives reform — which mainly involve requiring that financial instruments like credit default swaps be traded openly and transparently, like ordinary stocks and bonds — would have prevented the alleged abuses by Goldman (although they probably would have prevented the insurer A.I.G. from running wild and requiring a federal bailout). What we can say is that the final draft of financial reform had better include language that would prevent this kind of looting — in particular, it should block the creation of “synthetic C.D.O.’s,” cocktails of credit default swaps that let investors take big bets on assets without actually owning them. The main moral you should draw from the charges against Goldman, though, doesn’t involve the fine print of reform; it involves the urgent need to change Wall Street. Listening to financial-industry lobbyists and the Republican politicians who have been huddling with them, you’d think that everything will be fine as long as the federal government promises not to do any more bailouts. But that’s totally wrong — and not just because no such promise would be credible. For the fact is that much of the financial industry has become a racket — a game in which a handful of people are lavishly paid to mislead and exploit consumers and investors. And if we don’t lower the boom on these practices, the racket will just go on. Copyright 2010 The New York Times Company

To: DuckTapeSunroof who wrote (42801)	4/21/2010 3:14:32 PM
From: TimF	Respond to of 71588

The Argument for More Regulation April 21, 2010, 8:10 am I am confused by the recent argument for more financial regulation. The argument seems to go that because Goldman Sachs may have committed fraud, then we need more laws making more things illegal. But Goldman Sachs is accused of breaking existing laws. Isn’t that just an argument to enforce the laws we already have? In fact, the government so far is stopping short of its full power to go after Goldman over the Abacus securities — its seems like they would have a criminal fraud case but at the moment they are settling for a civil action. In a sense, the government is not using against Goldman all the power it already has. Of course, a cynical person could argue that the government has no real desire to go after Goldman, who after all is pretty deeply in bed with this Administration, and is pulling its punches in a show trial that will end up with Goldman fined .01% of its quarterly profit but with the Administration looking tough to fuzzy-headed voters and with Congress having something it can wave around to distract people while it passes another 1400 page bill no one has read. 5 Comments 1. Evil Red Scandi: The argument I always use in these cases is that the situation calls for less regulation, which at least throws people for a loop and gets their attention. What people desire from regulation is a feeling of security and a knowledge they will never get screwed. But no government regulatory regime – no matter how severe – can ever provide that. I have plenty of friends and family who grew up in the USSR where the government regulates every facet of existence and they had far less security and got screwed constantly. Regulations cause people to get screwed over more often because they provide a false sense of security. Regulators at best provide spot checks on things; that is, when they’re not being bought off either directly (with promises of cushy high-paying jobs in the industry after they retire) or indirectly though campaign contributions to the legislators that oversee them. At the end of the day we have to look out for ourselves. We can rely partially on private sources of information (friends, family, research services, brokers, etc) that earn our trust but the only rule that always applies is “life’s tough: wear a helmet.” April 21, 2010, 8:46 am 2. Methinks: “Of course, a cynical person could argue that the government has no real desire to go after Goldman, who after all is pretty deeply in bed with this Administration, and is pulling its punches in a show trial that will end up with Goldman fined .01% of its quarterly profit but with the Administration looking tough to fuzzy-headed voters and with Congress having something it can wave around to distract people while it passes another 1400 page bill no one has read.” Uh….no….that person would not be cynical. That person would have spent enough time working on Wall Street to know how things are done. This show trial makes for good political theatre – while they rob entrepreneurs of their ability to raise capital and threaten to take over any company they wish on the pretext that it is “systemically risky”. Nothing to see here except how we flog our own for show. April 21, 2010, 8:48 am 3. paul: This is the same logic (or lack of logic) that people use to argue for more gun-control laws. When someone commits a crime with a gun, people clamor for more gun laws, even if that person was illegally in possession of the gun. And whatever they did was against the law, but we need more laws to make it more illegal. When gun crimes rise, we need more gun laws. If gun crimes decrease, gun laws work. April 21, 2010, 9:17 am 4. morganovich: the SEC claims fail to hold up to even rudimentary scrutiny. they accuse goldman and ACA of designing a portfolio to fail and then buying it and holding it. why on earth would they do that? all they did was line up clients that wanted to bet on different things and arrange a transaction. how is this any different that vegas sportsbook making a book for a baseball game? if you bet on the giants, they even it out by getting someone to bet on the dodgers. if they can’t, they even out the money by changing the spread or the odds. they don’t want to be making directional bets on who wins. making a securities market works exactly the same way. mostly, goldman wants to arrange trades, take a fee, and have no exposure. that’s how the brokerage business works. in this case, they actually did make a direction bet by holding some of the securities, a bet that they lost. they were on the same side of the trade as the guy they are accused of screwing. if you bet on the giants and your bookie does too, why does it make any sense to blame him if the dodgers win? ACA is one of the most sophisticated debt investors in the world. they haven’t sued because they know there is no issue. this is just politics. in my view, deliberately mischaracterizing a situation and attacking a private actor to gain legislative traction is immoral. done by a private actor, this would be actionable as libel. NEW YORK (MNI) – The following is the text of a statement issued by Goldman Sachs late Friday: Goldman Sachs Makes Further Comments on SEC Complaint NEW YORK — April 16, 2010 – The Goldman Sachs Group, Inc. (NYSE: GS) said today: We are disappointed that the SEC would bring this action related to a single transaction in the face of an extensive record which establishes that the accusations are unfounded in law and fact. We want to emphasize the following four critical points which were missing from the SECs complaint. * Goldman Sachs Lost Money On The Transaction. Goldman Sachs, itself, lost more than $90 million. Our fee was $15 million. We were subject to losses and we did not structure a portfolio that was designed to lose money. * Extensive Disclosure Was Provided. IKB, a large German Bank and sophisticated CDO market participant and ACA Capital Management, the two investors, were provided extensive information about the underlying mortgage securities. The risk associated with the securities was known to these investors, who were among the most sophisticated mortgage investors in the world. These investors also understood that a synthetic CDO transaction necessarily included both a long and short side. * ACA, the Largest Investor, Selected The Portfolio. The portfolio of mortgage backed securities in this investment was selected by an independent and experienced portfolio selection agent after a series of discussions, including with Paulson & Co., which were entirely typical of these types of transactions. ACA had the largest exposure to the transaction, investing $951 million. It had an obligation and every incentive to select appropriate securities. * Goldman Sachs Never Represented to ACA That Paulson Was Going To Be A Long Investor. The SECs complaint accuses the firm of fraud because it didnt disclose to one party of the transaction who was on the other side of that transaction. As normal business practice, market makers do not disclose the identities of a buyer to a seller and vice versa. Goldman Sachs never represented to ACA that Paulson was going to be a long investor. Background In 2006, Paulson & Co. indicated its interest in positioning itself for a decline in housing prices. The firm structured a synthetic CDO through which Paulson benefitted from a decline in the value of the underlying securities. Those on the other side of the transaction, IKB and ACA Capital Management, the portfolio selection agent, would benefit from an increase in the value of the securities. ACA had a long established track record as a CDO manager, having 26 separate transactions before the transaction. Goldman Sachs retained a significant residual long risk position in the transaction IKB, ACA and Paulson all provided their input regarding the composition of the underlying securities. ACA ultimately and independently approved the selection of 90 Residential Mortgage Backed Securities, which it stood behind as the portfolio selection agent and the largest investor in the transaction. The offering documents for the transaction included every underlying mortgage security. The offering documents for each of these RMBS in turn disclosed the various categories of information required by the SEC, including detailed information concerning the mortgages held by the trust that issued the RMBS. Any investor losses result from the overall negative performance of the entire sector, not because of which particular securities ended in the reference portfolio or how they were selected. The transaction was not created as a way for Goldman Sachs to short the subprime market. To the contrary, Goldman Sachs’s substantial long position in the transaction lost money for the firm. April 21, 2010, 9:30 am 5. Methinks: Morganovich, you post irrefutable logic. Hence, the politicians will be in a mad rush to cram this bill down our throats to prevent anyone from doing anything productive in the future. April 21, 2010, 10:12 am coyoteblog.com