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Fraud*
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, February 16, 2011

Bernanke on Goldman Sachs

When the Financial Crisis Inquiry Commission interviewed Ben Bernanke on November 17, 2009, about the causes of the crises, he had some interesting things to say about Goldman Sachs which I have excerpted below. Bernanke's responses were basically to identify three causes: 1. The Great Moderation which caused risk-taking; 2. Global Savings Glut which created large inflows of capital into the US and 3. the Monetary Policy of 2003 to 2005 which included low interest rates.

He also pointed out the usual suspects: lack of supervision and regulation, the shadow banking system, sub-prime mortgage lending, credit-rating agencies failures, conflict of interest, wrong models being used, etc. All the dialogue quoted is Bernanke's except were another speaker is named:

Financial Crisis Inquiry Commission
Closed Session
Ben Bernanke
Chairman of the Federal Reserve

November 17, 2009
***Confidential***

. . . .

So now we come to this very intense period in September and October. As a scholar of the Great Depression, I honestly believe that September and October of 2008 was the worst financial crisis in global history, including the Great Depression. If you look at the firms that came under pressure in that period. . . only one . . . was not at serious risk of failure. [] So out of maybe the 13 -- 13 of the most important financial institutions in the United States, 12 were at risk of failure within a period of a week or two. (page 24)

....

COMMISSIONER GEORGIOU: Back in last September, when you created -- you began to supervise Goldman Sachs as a single bank holding company at the Fed. Do you regard that as a temporary condition or a permanent one? And if temporary, you know, when would it end? If permanent, what steps are being taken to reduce the risk? How long will they have access to the Fed window and so forth, since it’s an institution that will be regarded as so large as to be required to be protected forever?

MR. BERNANKE: Okay, well, there’s several parts to that. So, first of all, under current law, Goldman Sachs is a bank holding company so under current law, the Fed is the umbrella supervisor of Goldman Sachs. Not under any special emergency provision, but under current law. And as long as they’re a bank holding company, as long as the law is not changed, we will do our best to be the umbrella supervisor of that company. And I have to say, given what’s out there, that we are the most qualified agency to supervise them. (page 35, 36)

....

You used the word “protection.” My view is that, going forward, that the firms that are systemically critical -- and Goldman Sachs is one of them -- should, on the one hand, receive tougher, more comprehensive oversight than other firms. Because not only are they -- not only do we need to protect them themselves, but because of the damage they would do to the broader system if they collapsed.

Moreover, tougher, more comprehensive oversight, including higher capital liquidity requirements and so on makes it less attractive to be big. And so only firms that have strong economic rationales to be big would therefore be big. And there would be an incentive to shrink if, in fact, you could escape some of this intrusive oversight.

The other part, though -- and, again, I just want to say this as strongly as possible -- the reform will be a failure if we could not contemplate the failure of Goldman Sachs. That is, there needs to be a system by which Goldman Sachs will go bankrupt and Goldman Sachs’ creditors could lose money. If we don’t have that, then we might as well treat them as a utility, because that’s what they are. (page 36, 37)

. . . .

MR. BERNANKE: I mean, how does Goldman Sachs look different today than it did ten, 15 years ago, and why?

CHAIR ANGELIDES: Okay.

MR. BERNANKE: And how did they manage the risks that –- the risks, liquidity issues, and so on -- how did that all change, and was it created by innovations of various kinds, was it a function of regulatory change, et cetera? What was happening to the regulatory framework over this period?

I would talk about the shadow banking system; I would talk about supervision. (page 49, 50)

....

MR. BERNANKE: So J.P. Morgan was never under pressure, to my knowledge. Goldman Sachs, I would say also protected themselves quite well on the whole. They had a lot of capital, a lot of liquidity. But being in the investment banking category rather than the commercial banking category, when that huge funding crisis hit alll the investment banks, even Goldman Sachs, we thought there was a real chance that they would go under. (page 71, 72)


Read the entire FCIC interview here

7 COMMENTS:

Anonymous said...

THIS IS OFF THE TRACKS OUT OF CONTROL....


Haw! The line drew snickers from the conference of millionaire lawyers. But the real fireworks came when Khuzami, the SEC's director of enforcement, talked about a new "cooperation initiative" the agency had recently unveiled, in which executives are being offered incentives to report fraud they have witnessed or committed. From now on, Khuzami said, when corporate lawyers like the ones he was addressing want to know if their Wall Street clients are going to be charged by the Justice Department before deciding whether to come forward, all they have to do is ask the SEC.

"We are going to try to get those individuals answers," Khuzami announced, as to "whether or not there is criminal interest in the case — so that defense counsel can have as much information as possible in deciding whether or not to choose to sign up their client."

Aguirre, listening in the crowd, couldn't believe Khuzami's brazenness. The SEC's enforcement director was saying, in essence, that firms like Goldman Sachs and AIG and Lehman Brothers will henceforth be able to get the SEC to act as a middleman between them and the Justice Department, negotiating fines as a way out of jail time. Khuzami was basically outlining a four-step system for banks and their executives to buy their way out of prison. "First, the SEC and Wall Street player make an agreement on a fine that the player will pay to the SEC," Aguirre says. "Then the Justice Department commits itself to pass, so that the player knows he's 'safe.' Third, the player pays the SEC — and fourth, the player gets a pass from the Justice Department."

http://www.rollingstone.com/politics/news/why-isnt-wall-street-in-jail-20110216?page=5

Anonymous said...

China’s Oligarchs Tighten Grip, With Assist From Goldman: Books

Walter and Howie have lived in China for 25 years and worked at banks including JPMorgan Chase & Co. and Morgan Stanley. They recognize that the country’s economic resurgence and opening to the world have lifted more than 300 million people out of poverty. They also understand that China’s Party bosses still control the economy, thanks partly to the ministrations of Goldman Sachs and other banks, they say.

“China is a family-run business,” not a market economy, they write. And the families are the political elite.


http://www.bloomberg.com/news/2011-02-16/goldman-doing-god-s-work-helps-chinese-oligarchs-tighten-grip-books.html

Joyce said...

Swarm USA has a series of articles on Bernanke and the Federal Reserve at

http://www.swarmusa.com/vb4/showthread.php/5294-What-Is-Wrong-With-The-U.S.-Economy-Here-Are-10-Economic-Charts-That-Will-Blow-Your-Mind

There are a myriad of links to follow to get the full picture. The information is enough to ruin your appetite!!

Joyce said...

The following is from the conclusions of the FCIC report (p. xxi):

• We conclude the government was ill prepared for the crisis, and its inconsistent response added to the uncertainty and panic in the financial markets. As part of our charge, it was appropriate to review government actions taken in response to the developing crisis, not just those policies or actions that preceded it, to determine if any of those responses contributed to or exacerbated the crisis.

As our report shows, key policy makers—the Treasury Department, the Federal Reserve Board, and the Federal Reserve Bank of New York—who were best positioned to watch over our markets were ill prepared for the events of 2007 and 2008.

Other agencies were also behind the curve. They were hampered because they did not have a clear grasp of the financial system they were charged with overseeing, particularly as it had evolved in the years leading up to the crisis. This was in no small measure due to the lack of transparency in key markets. They thought risk had been diversified when, in fact, it had been concentrated. Time and again, from the spring of 2007 on, policy makers and regulators were caught off guard as the contagion spread, responding on an ad hoc basis with specific programs to put fingers in the
dike. There was no comprehensive and strategic plan for containment, because they lacked a full understanding of the risks and interconnections in the financial markets.

Some regulators have conceded this error. We had allowed the system to race ahead of our ability to protect it.

See http://c0182732.cdn1.cloudfiles.rackspacecloud.com/fcic_final_report_conclusions.pdf

My question is Why is Bernanke still Fed Reserve Chairman if he did such a lousy job?

Joyce said...

From the same document of the FCIC Conclusions:

"Throughout the summer of 2007, both Federal Reserve Chairman Ben Bernanke and Treasury Secretary Henry Paulson offered public assurances that the turmoil in the subprime mortgage markets would be contained. When Bear Stearns’s hedge funds, which were heavily invested in mortgage-related securities, imploded in June 2007, the Federal Reserve discussed the implications of the collapse. Despite the fact that so many other funds were exposed to the same risks as those hedge funds, the Bear Stearns funds were thought to be “relatively unique.” Days before the collapse of Bear Stearns in March 2008, SEC Chairman Christopher Cox expressed “comfort about the capital cushions” at the big investment banks. It was not until August 2008, just weeks before the government
takeover of Fannie Mae and Freddie Mac, that the Treasury Department understood the full measure of the dire financial conditions of those two institutions. And just a month before Lehman’s collapse, the Federal Reserve Bank of New York was still seeking information on the exposures created by Lehman’s more than 900,000 derivatives contracts."

Joyce said...

From the conclusions reached by the FCIC (p. xxi):

"• We conclude the government was ill prepared for the crisis, and its inconsistent response added to the uncertainty and panic in the financial markets. As part of our charge, it was appropriate to review government actions taken in response to the developing crisis, not just those policies or actions that preceded it, to determine if any of those responses contributed to or exacerbated the crisis.
As our report shows, key policy makers—the Treasury Department, the Federal Reserve Board, and the Federal Reserve Bank of New York—who were best positioned to watch over our markets were ill prepared for the events of 2007 and 2008.
Other agencies were also behind the curve. They were hampered because they did not have a clear grasp of the financial system they were charged with overseeing, particularly as it had evolved in the years leading up to the crisis. This was in no small measure due to the lack of transparency in key markets. They thought risk had been diversified when, in fact, it had been concentrated. Time and again, from the spring of 2007 on, policy makers and regulators were caught off guard as the contagion spread, responding on an ad hoc basis with specific programs to put fingers in the
dike. There was no comprehensive and strategic plan for containment, because they lacked a full understanding of the risks and interconnections in the financial markets."

Joyce said...

More from the conclusions of the FCIC report:

"Throughout the summer of 2007, both Federal Reserve Chairman Ben Bernanke and Treasury Secretary Henry Paulson offered public assurances that the turmoil in the subprime mortgage markets would be contained. When Bear Stearns’s hedge funds, which were heavily invested in mortgage-related securities, imploded in June 2007, the Federal Reserve discussed the implications of the collapse. Despite the fact that so many other funds were exposed to the same risks as those hedge funds, the Bear Stearns funds were thought to be “relatively unique.” Days before the collapse of Bear Stearns in March 2008, SEC Chairman Christopher Cox expressed “comfort about the capital cushions” at the big investment banks. It was not until August 2008, just weeks before the government takeover of Fannie Mae and Freddie Mac, that the Treasury Department understood the full measure of the dire financial conditions of those two institutions. And just a month before Lehman’s collapse, the Federal Reserve Bank of New York was still seeking information on the exposures created by Lehman’s more than 900,000 derivatives contracts."

See: http://c0182732.cdn1.cloudfiles.rackspacecloud.com/fcic_final_report_conclusions.pdf

I think it is entirely appropriate to ask why any of the above-named persons is still working within the government.

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