Fact: Goldman Sachs created, sold, invested in and profited from financial instruments betting that other financial instruments that Goldman sold clients earlier would fail. Basically, Goldman created “derivatives” that would rise in value to the extent that bundles of sub-prime mortgages sold to Goldman clients would drop in value. According to many financial pundits, this is just the tip of the iceberg at Goldman and indicative of the way Wall Street does business, regardless of the consequences. It certainly sound immoral, if not illegal, and the Securities and Exchange Commission filed an action for civil fraud against Goldman (and some key executives) based on this structure, one that apparently had blessings from the highest reaches of the company.
But we have huge financial institutions in this country, their profits literally form a tax base that supports the City and State of New York, and their lobbying/election contribution dollars are fundamental to state and federal lawmakers, from both sides of the aisle, such that it is hard to argue that Washington, D.C. is not run in fact from New York City. Amid the scandal, try this report on for size (from the April 20th NY Times): “Earnings for [Goldman Sachs] giant rose 91 percent in the first quarter of 2010, to $3.46 billion or $5.59 a share, up from $1.81 billion or $3.39 a share in the same period last year. Revenues increased 36 percent to $12.78 billion, up from $9.42 billion in the quarter a year ago.”
Wall Street’s machinations have decimated personal savings, destroyed jobs by the millions, crushed retirement accounts and rendered the real estate market a wasteland of death and destruction. The mechanism for raising money to fund worthwhile business opportunities has disappeared in a sea of market manipulation and values predicated on unfair advantage over any corporate value proposition that could provide products, services, jobs and values that actually have a benefit for society. On April 19th, Arianna Huffington (The Huffington Post) took this snapshot of what a rogue financial sector has perpetrated against America: “The SEC's action is a perfect moment for us to look at the bigger picture of how the American people were sold on the promise of never-ending prosperity while Wall Street was overseeing a massive transfer of wealth from the middle class to the richest Americans.
“The results have been devastating: a disappearing middle class, a precipitous drop in economic and social mobility, and ultimately, the undermining of the foundation of our democracy. [Dekom add: the collapse of local funding for public education and state universities/colleges eliminates the most important vehicle for upward social mobility that built the American middle class.]…Thirty years ago, top executives at S&P 500 companies made an average of 30 times what their workers did -- now they make 300 times what their workers make. And between 2000 and 2008, the poverty rate in the suburbs of the largest metro areas in the U.S. grew by 25 percent -- making these suburbs home to the country's largest and fastest-growing segment of the poor.”
Were Goldman’s actions – particularly the failure to inform buyers of the institution’s contrary bet – a violation of the law? Or are the laws so loose that such behavior passes judicial scrutiny? Goldman’s lawyers, many trained at the very SEC that is prosecuting this civil claim, along with many other Goldman lobbyists and consultants, some with training as legislative aides (if not as actual former members of Congress) on the Hill, will counter attack, and if a loss appears inevitable, will most likely cut a deal that makes little or no difference to their massive bottom line. Remember, the laws and regulations that govern the biggest financial institutions were often drafted or at least modified with significant input from these very same institutions. After all, all those campaign contributions and lobbying efforts are paying for something! And hence such laws and regulations are fraught with loopholes put there by the very persons and companies that the statutes or regulations were supposed to reign in.
Look at this SEC fraud allegation against Goldman. It’s not about a normal fraud claim: “Rather than asserting that Goldman misrepresented a product it was selling, the most commonly used grounds for securities fraud, the Securities and Exchange Commission said in a civil suit filed Friday that the investment bank misled customers about how that product was created… It is the rough equivalent of asserting that an antiques dealer lied about the provenance, but not the quality, of an old table.” NY Times, April 20th (different piece). Goldman was not required to provide market analysis as to the instruments it sold, but if it provided any information, then they would have to give full and complete analysis.
Goldman’s counsel, Sullivan & Cromwell, wrote to the SEC to explain the derivatives betting against the housing market saying, among many other things, that Goldman accurately and completely described the instruments being sold and: “It is this concrete information on the assets — not the economic interest of the entity that selected them — that investors could analyze and use to inform their decisions.” Trust me, this is not a slam dunk case for the SEC.
Republican lawmakers are claiming the SEC filing represents a manipulative attempt by the Obama administration to influence public opinion in favor of new financial regulations even though, they have stated, the existing schema are sufficient to oversee the financial sector. As I have blogged before, they have painted the pending Chris Dodd Senate bill as yet other “bailout” law,” even though the legislation is most importantly focused on consumer protection and there are no “bailout” provisions (only a fund – $50 billion – that would be used to shut down and liquidate failing companies in a manner that would minimize the shock to the system – a provision of the pending statute that Democrats are open to change).
It is time for Republicans Democrats to understand that in a hyper-changing world, statutes and regulations passed decades ago – long before computer-assisted “flash trading” was possible and long before hedge funds, private equity and derivative trading became mainstays in the financial world – simply do not work anymore. The big crash proves that beyond any doubt. Horse-and-buggy statutes, systems and regulations only provide an open field for well-educated technicians to tilt the playing field totally in their favor at the expense of not only average Americans, but our national interests as well. Any lawmaker who opposes significant change might as well opt for a clear and direct paycheck from Wall Street; we need to stop making up absolutely false reasons to oppose legislation – premises no sane legislator could ever embrace while taking a lie detector test – and deal with the fact that this country will live with an entirely lower standard of living, suffer through this prolonged impairment of our economy, because Congress sold us all out to people with Gucci loafers, homes in the Hamptons and bank accounts the size of many nations’ gross domestic product.
But perhaps this “opposition to the bill” tune may be changing in the face of public outrage; Republicans need votes as well as campaign contributions. The April 20th Washington Post: “After a week of attacking the pending legislation as a ticket to new taxpayer ‘bailouts,’ [Senate Republican Minority Leader, Mitch] McConnell is striking a different tone. [On April 19th] on the Senate floor, he called for lawmakers to move beyond ‘personal attacks and questioning each others' motives’ to ‘fixing the problems in this bill.’… And McConnell conceded, after being chastised by no less than President Obama in his weekly radio address, that ‘both parties agree on this point: no bailouts. In my view, that's a pretty good start.” Does Congress really have the stomach for the kind of change that is needed? Or is it a question of “make it look like we’re doing something, but change as little as you can”? I’m a skeptic, but we’ll see.
I’m Peter Dekom, and financial manipulation can never be a legitimate job description.
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