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According to the Collins English Dictionary 10th Edition fraud can be defined as: "deceit, trickery, sharp practice, or breach of confidence, perpetrated for profit or to gain some unfair or dishonest advantage".[1] In the broadest sense, a fraud is an intentional deception made for personal gain or to damage another individual; the related adjective is fraudulent. The specific legal definition varies by legal jurisdiction. Fraud is a crime, and also a civil law violation. Defrauding people or entities of money or valuables is a common purpose of fraud, but there have also been fraudulent "discoveries", e.g. in science, to gain prestige rather than immediate monetary gain
*As defined in Wikipedia

Tuesday, March 16, 2010

Goldman Sachs Links and News - March 16 , 2010 - With Larry's Corner

Note:  I am taking the liberty of putting Larry's Corner ahead of today's links and news.  Please pardon my indulgence. 
Larry's Corner
Comments on Michael Lewis' Interview
on CBS 60 Minutes...Part 2 - Goldman Sachs - The Facilitator

Today we will continue the comments on the 60 Minute interview with Michael Lewis and continue the debate as to whether the CEO's of Wall Steet along with Henry Paulson and Ben Bernanke "knew" what was going on.

Again, I do respect Mr. Lewis, his knowledge and experience as well as the research he does for his books.  He certainly has access to many on and off Wall Street and I am just an ordinary citizen attempting to connect the dots.  When they don't connect, I question why.  In the case of "they knew", many dots simply don't connect.  Some may call me a conspiracy theorist but I consider myself a seeker of truth.  As I mentioned in Part 1, there was one investor - Dr. Michael Barry - who made billions as a result of knowing what was going on.  Granted, the securitization fiasco had already begun but a bell rang loudly in his head saying there is something wrong here.

He then began researching and reading the prospectuses and analyzing the "mortgage pools" that were turned into securities in 2003.. He soon discovered that they were not as represented and that they were investments heading for disaster.  He did, the report said, what the rating agencies should have done but did not.

Why didn't the rating agencies look at the same documents he did before they gave them any rating at - all least of all a "AAA" rating - representing a near risk free investment.  One of the answers given is that "Wall Street is paid to delude itself" and "people are paid to not tell the truth.  Bingo, some dots are not connecting here.  If "people are paid to not tell the truth" those paying them don't want them to see what "they" know is there.  Someone or someones - at some very high levels of the corporate hierarchy - knew.

To protect himself he came up with the concept of insuring his investments.  He figured if he could insure against the losses of these sub prime security pools that he could protect his investment.  So he went to Wall Street and helped create the first Collateralized Debt Swap (CDO) - an insurance product that was not called insurance but would protect against the failure of the securitized bonds.

Now let's look at how our favorite Wall Street Banker with commercial banking status - given the ability to borrow almost interest free money from the Fed - helped to facilitate what I call the greatest fraud the world has ever or will ever see.  Oh, I know what some of you are thinking, there you go again, Larry.  More conspiracy theory of fraud.  Well, folks, I heard recently that due to this Wall Street fiasco, the world lost over 40% of its wealth.  Let me say this again, over 40% of the WORLD'S wealth has been lost due to this economic crisis caused by Wall Street.

So how was Goldman Sachs complicit in this scheme?  To enable continued sales of these mortgage pool bonds and with the potential of others learning what Dr. Barry learned, they needed to add an additional "real appearing" safety net in addition to the "AAA" ratings still being rubber stamped on all of these bond issues.  The safety net was more CDS instruments.

"They knew" that CDSs were insurance (without the label) so where would you logically go to get insurance?  An insurance company, of course.  And when you needed trillions of dollars worth of this "worthless" insurance who would have the legitimacy - not capacity - to issue these contracts?  Well, the largest insurance company in the world -AIG.

Now comes GS in to save the day.  "They" go to AIG and - per the report - "convinced AIG to insure billions of dollars of these bonds" -containing pools of bad sub prime loans - "without knowing what was in them.

I can just see how the conversation went.
 GS Exec speaking:  Listen Mr. High Level Exec of AIG, do I have a deal for you.  If you will issue insurance on these bonds we are selling all over the world, you will make billions in premium (cough, cough) I mean fee income.  I'm sorry, we can't call the money you will earn as premiums because we don't want you to call this insurance.
AIG Exec speaking:  Why not?
GS Exec:  Because if we don't call them insurance we can avoid all those insurance regulators and you know how they can be.
AIG Exec:  OK, So how good are these bonds you want us to (whisper) insure?
GS Exec:  Oh, don't worry about that.  They all contain mortages on residential real estate and you know how hot the real estate market is.  With the rate of appreciation skyrocketing every day, there's no way most of them will go bad.  You will probably never have to pay anything out on them and if you do, we will help you out.
AIG Exec:  OK, Great!  When can we start?
GS Exec:  How about tomorrow morning.  I can bring you a check for a few hundred million in the morning for the first prem...I mean fee.
AIG Exec:  Great, I'll see you then.  By the way, how's that new 10,000 square foot vacation home you bought in the islands?

No, I was not a fly on the wall during this meeting between GS and AIG but I am sure the conversation had to be pretty close to my fantasy script.

Again, dots are not connecting here.  If "they didn't know" then why convince AIG to "insure " them blindly as "they" had already convinced the rating agencies to do for years?  They Knew!

To further illustrate how GS was a facilitator in this crisis, Lewis does make the statement that "rating agencies were handmaidens of Wall Street" and that "Goldman Sachs helped rating agencies rate bonds".  What was there to do to help other then "stamp" the bond "AAA.  I guess Goldman owned the rubber stamp.

More dots not connecting here and something is beginning not to smell right either.  When you cover up, distort facts, hide the truth and overall lie to just about everyone about what you are doing then bet against your customers it can only be that you "know" that the product you are selling is no good.  After all, Dr. Barry knew.  When you hide, lie and distort the truth for your own financial gain it is called fraud and fraud is always committed with knowledge and intent.

The reasons above are why I disagree with Lewis on the topic of who knew and that he didn't think Wall Street exec's knew.  He says only 10-20 people possibly knew.  He does not say who, but add up all the CEOs of the top banks involved along with the Treasury Secretary, Chairman of the Fed, Chairman of the SEC and Timothy Geithner then President of the Federal Reserve Bank of New York and now our current Treasury Secretary and you might just find and identify those 10-20.

Here are the last few comments from Lewis and I do agree with him.
  • The losses due to sub prime are over $1.75 trillion.
  • The government are still supporting the banks.
  • Bonuses are a very efficient form of theft.
  • Without Government subsidies most banks would fail.
  • Business on Wall Street is divorced from  productivity.
  • CDS's - insurance that is not insurance - is ground zero of te economic collapse and it is still going on.

He (Lewis) believes that Wall Street has done itself in.  I hope so.

As Dennis Miller always says, "this is just my opinion, I could be wrong".
GS666  GS666  GS666

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