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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

Wednesday, January 19, 2011

Economics and Goldman Sachs...continued

Please revisit the post Economics and Goldman Sachs here
The comments and dialogue generated by this post were outstanding.  It opens the door for much more discussion.
Economics is just theory and as JoyceR puts it - at best is a 50/50 shot at being close to correct.  Every attempt at proving these theories for the most part have failed. that is why we are in this economic turmoil.   To argue or discuss economic theory makes for a good mind challenge but never leads to any concrete conclusions.  Economics is a glass half full or glass half empty conversation.  That is why with a room full of economists you will always get a room full of opinions (theories).

Good points were made in the post as well as by the poster and others who comments were published.  But to get to the point of an economic discussion is to get to the point of what will make our economy work.  

While economics makes for good discussion and conversation there are certain facts and realities that must be addressed.  Facts and realities will take us from theorizing to strategic planning and action.  So what are some of these facts and realities we should be addressing?  Let's take a look at a few.


Laws are made by our lawmakers.  Those people we have voted into office at any government level.  Some laws are good and functional and some are not but nevertheless, once they are law they are a given.  Our rule of law and our Democratic Republic dictates that we follow the law.  Either something is legal according to the law or it is illegal punishable by civil or criminal action.  These laws - good or bad - are made to be followed by everyone regardless of who they are.  The laws apply to individuals, corporations, governments and elected as well as appointed officials.  I have always maintained "The Law Is The Law For Everyone".  

Herein lies one of our major economic problems.  Not everyone feels they must follow the law and for some reason our legal system and our government allows "Get out of jail Free" cards to many.  Case in point, our TBTF banking and financial institutions.

We have seen man;y instances of how blatantly firms such as Goldman Sachs, JPMorgan, AIG, Citibank, et al have broken the laws.  And we have seen how our legal system has allowed this to happen with no consequences.  Take for instance the $550 million fraud case brought by the SEC against Goldman Sachs. It was shuffled -as I and many others expected - under the rug with an out of court settlement.  If fraud is against the law then it should be properly and legally prosecuted in a criminal court of law. However, the SEC did its best to not go there. They allowed GS to buy their way out.  Does this not set some precedence for other crimes - even murder?  But too many of our laws can be circumvented simply by who you are.

Note: ZeroHedge recently published an article that indicates that this case may be re opened against GS in a criminal court.  Read their article...Is The Criminal Case Against Goldman About To be Reopened, As Robert Khuzami's "Ethical" Reputation Lies In Ruins

If we applied the law equally to all it would be one step closer to solving our economic problems.  You see, the law is not economic theory it is fact.


Accounting is - or at least was when I took it in college - based on mathematical fact not theory.  If followed as it should be it would go a long way to solving our economic problems as well as disproving much economic theory.

Accounting by its name accounts for what actually is and exists not what could theoretically exist or be.  As the first commenter in the original post pointed out;
The banks are doing exactly the same thing that blew them up in 2007 and 2008, and it will end the same way.

What am I talking about?

Booking non-existent income that will NEVER be realized.
Yes, booking non existent income, keeping off balance sheet assets or liabilities and changing or "bending"  the accounting rules  (as another commenter pointed out) does not follow the science of accounting.

If income is reported that is not actually there or will never be there then the balance sheets and net worth of companies are false - fraudulent.  This distorts the actual financial position of the company falsely enhancing its balance sheet and net worth.    (I am not talking about accrual based accounting here whereby you can book real income to be received like when a company sells a product and invoices the customer who will pay in the future.  If they do not pay then the company can report that as a loss - which it really is.)  It also defrauds the public into doing business with them or investing in them.  Creative accounting is FRAUD and fraud is a crime.

This type of false accounting has and is used by all the banks and many other large corporations.  This used to be called "cooking the books", a crime Enron, Worldcom MCI, Tyco and many other large corporations had been convicted of.  Yet, today, our large banking firms like Goldman Sachs (who actually enjoys FDIC bank status but is not really a bank) are allowed to get away with this practice.  In fact, our two Government Sponsored Enterprises - Fannie Mae and Freddie Mac - were found to "cook the books" but no criminal actions were taken, only modest and meaningless monetary fines were levied on the crooks (executives) who committed the fraud.  This adds validity to and condones committing the crime.

Another violation of what used to be generally accepted accounting principals is the matter of off balance sheet items.  Again, when I took my basic accounting courses, I was taught that a balance sheet is a reflection of the financial health of a company at a given moment in time.  In other words, the balance sheet is supposed to reflect what assets there actually are as well as what liabilities there actually are.  If it is to do that then how in the world can any regulators approve of having assets and/or liabilities that are not reported on the balance sheet.  How can you hide what you have or what you really owe?  If you hide either of these items then you are again reporting false information - FRAUD.  If you tried to hide the same information from the IRS see how fast you would go to jail.


Here is another violation of basic accounting, legal and economic activity.  The Federal Reserve - a SECRETLY OWNED, PRIVATE COMPANY can do as it wants to our economy.  It can inflate it, it can deflate it, it can create money out of thin air and then charge each and everyone of us interest for that falsly created money.  They can do all of this with no accountability to us.  In other words, the Federal Reserve does not have to follow any accounting principals - they can create their own.  They do not have to account for anything they do which means they can operate outside of the law.  We don't know what they do, how they do it or if it is legal or not.  It matters not.

No transparency by this secret company who also shield the banks from having to provide full transparency.  In fact, some of these banks - like JP Morgan and Goldman Sachs - actually have a major role in this "other" private company -The Federal Reserve.  The Fed makes the rules for the banks, they give them money and allow their questionable activity.  

My theory of economics.

Make all companies - big and small - follow the laws that are established for them to operate within.  Have all companies follow basic, generally accepted accounting principals (report real factual numbers) and open the Federal Reserve to full disclosure or eliminate it turning its function over to the U.S. Treasury which should be accountable to the people.

The Rubinoff Theory of Economics is simple.  Apply all the same elements of law, accounting and reporting that applies to any of us individually.  Prosecute any of the TBTF companies as we would individually be prosecuted for criminal activity.  Stop the massive fraud by our banking industry and let the cards fall where they will.  In other words, Capitalism at its purest in a Democratic Republic.  Some will certainly fail - as they should.  Others will be there to pick up the slack.  If a large bank is found to be insolvent (and I believe most of our large banks are) then smaller regional banks will be there to pick up the pieces. They will grow, they will hire and they will lend.  All good for the economy.

Oh and one more thing that I will be harping on all year.  Prosecute the criminals who have been exposed.  Prosecute Goldman Sachs for the many seemingly illegal and fraudulent acts they have performed.  Enough information has come out that would warrant prosecution.  Let a court of law and a jury of Americans decide their guilt or innocence.  There is enough probable cause to initiate legal action on Goldman Sachs, JP Morgan, AIG, Citibank, Wells Fargo and Bank of America, their executives and the companies they acquired during the financial crash like Bear Stearns, Countrywide, Merrill Lynch and Wahsington Mutual.  So much over the past three years has been exposed but no action taken.  Why?

The Rubinoff Theory of Economics:  Economy driven by reality, truth and fact.  No gimmicks, creative (fraud) accounting or secrecy.  An economy for the people, by the people, of the people.

Of course, this is only my "theory" I could be wrong.  But then again there is a 50/50 chance I am not.

Read More on Bank Fraud Exposed by Janet Tavakoli  Blame the Victims and Enrich the Perpetrators in The Huffington
...the key drivers of our housing crisis were fraud perpetrated by mortgage lenders and securities fraud -- by some of our most revered financial institutions -- that provided money to fuel fraudulent mortgage lending. 
 In 2007, the state of Ohio kicked the California-based New Century mortgage lending carpetbaggers out of the state and barred New Century from doing business after despicable practices. A complaint of alleged fraud on the part of Goldman Sachs detailed its close relationships with Countrywide, New Century, and Fremont. The complaint showed Goldman knew of "an accelerating meltdown for subprime lenders such as New Century and Fremont." Despite known serious loan problems, Goldman continued to securitize the loans and sell them in packages of residential mortgage backed securities. (emphasis added)
"Countrywide Broke the Law"
In above mentioned complaint against Goldman Sachs, allegations of suspect practices from mortgage lenders, including Countrywide, now owned by Bank of America, were revealed. According to a former Countrywide employee: (emphasis added)
Read It here


Joyce said...

Larry, I like the way you gather up all the loose ends and tie them together to show that Goldman Sachs does not act with either integrity or honesty although they would like us to believe that they do. They do not act as a socially responsible bank but as a greedy hedge fund that works for the benefit of themselves alone by endeavoring to transfer the wealth of all to the coffers of the few, i.e., Goldman Sachs.

Joyce said...

The New Yorker has an excellent article by John Cassidy about Goldman Sachs entitled, "Goldman-Facebook: A Failure of Leadership."

Excerpt below:

"From a narrow financial perspective the Facebook scheme was hard not to like. Under its terms, Goldman would ante up about $450 million of its own money to the social network, which is quite a sum, even for Goldman. However, it was likely to reap much more money in return. A Facebook I.P.O. sometime in 2012 that raised $20 billion, which is far from beyond the bounds of possibility, would yield some $1.4 billion in underwriting fees, at least half of which would probably go to Goldman."

Is Goldman Sachs getting so confident that it is starting to make bigger and bigger mistakes?

Joyce said...

Counterpunch has an article about economists:

Joyce said...

Counterpunch also has a few thoughts on tax cuts:

Anonymous said...

They just seem to be having all kinds of problems lately. But they are not alone.

The truth is that we have gotten to the point where big Wall Street banks such as JP Morgan, Goldman Sachs, Citibank and Morgan Stanley just have way, way too much power.

The biggest Wall Street financial institutions had no trouble begging for bailouts from the U.S. government during the financial crisis, but when the American people have needed a little grace and mercy from them they have been less than helpful.

So what do you think about how the big Wall Street banks have been behaving?

Anonymous said...

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I am worried about my financial future. Is anyone else nervous out there?

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