How was Goldman Sachs chastised? They paid a small fine from petty cash and bought back some securities. How many times does Goldman Sachs get away with practices that transfer large sums of money from municipal pension funds into Goldman Sachs's coffers?
How Wall Street and Wisconsin Officials Blew Up the State's Pension FundRead the full article here
by Alain Sherter - bnet (CBS) commentary
Wisconsin state employees fighting for their jobs should ask Goldman Sachs (GS) CEO Lloyd Blankfein for their money back.
What’s the connection? During the dog days of the financial crisis in 2008, the investment bank advised clients to bet that Wisconsin and 10 other U.S. states would go broke by purchasing credit default swaps against their debt. For Goldman and other Wall Street firms that used this ploy, the beauty part was that they had also previously earned millions in fees by helping most of those states sell municipal bonds.
In other words, these banks made money by finding investors to buy state debt, then made more money by selling derivatives to other investors who wanted to short that debt. As Bloomberg reported at the time:
As part of a September presentation to institutional investors on “Best Long and Short Risk Strategies,” Goldman recommended buying credit-default swaps on “a basket of liquid State General Obligation credits with current and worsening fiscal outlooks,” including California, Florida, Nevada, Ohio, Wisconsin and Michigan.
The firm also recommended the derivatives on states with “significant unfunded pension” and other retiree obligations, including Illinois, Connecticut, Hawaii, New Jersey, Massachusetts and Nevada.
2008: A very bad year for Wisconsin
For states, growing concerns about their credit raised their borrowing costs. Estimates suggest that a one percent interest rate hike on a $1 billion bond issue would cost taxpayers roughly $10 million a year. In 2008, rates in Wisconsin more than tripled, reaching 15 percent.
Wisconsin, other states, and scores of town and cities around the country also lost big after going to Wall Street to buy variable-rate auction securities and other types of structured financial products. The market for auction-rate securities collapsed in early 2008, leaving states and municipalities holding the bag. Goldman and other Wall Street banks agreed that year to pay a total of $160 million in fines over and repurchase $15 billion worth these securities to settle several state probes into the transactions.
In another case of speculation gone awry, some Wisconsin school districts lost millions after purchasing so-called synthetic collateralized debt obligations. Wall Street banks sold CDOs to bet on the value of housing in the years leading up the financial crisis.
How the housing bubble killed pensions
Ancient history, you say? Not at all. Because whatever Wisconsin Governor Scott Walker says about the state’s pension problems — which, incidentally, are far less severe than he claims — they’re not the result of employees contributing too little to their retirement. Rather, Wisconsin’s shortfall stems largely from the state getting killed in the stock market during the financial crisis.
As the housing bubble was inflating in 2003, for instance, Wisconsin issued $950 million in auction-rate bonds to fund its pension plan. The bonds did well until mid-2007, when souring subprime loans began rippling into the auction-rate and other bond markets. That turned into a full-blown crisis early the following year, when Goldman, Citigroup (C) and other large Wall Street firms stopped supporting auctions.
The bottom fell out. As the state’s auditor told lawmakers last fall in explaining the long-term impact of Wisconsin pension funds losing nearly $24 billion in 2008:
[T]he value of Wisconsin Retirement System assets has fluctuated significantly over the past ten years as financial markets have experienced their worst decline since the 1930s. For example, losses in 2008 totaled $23.6 billion. While these losses were partially offset by gains of $13.5 billion in 2009, the combined value of the two retirement funds on December 31, 2009, was 17.1 percent below its peak in 2007. The losses of 2008 will significantly affect Retirement System participants and employers for the next several years.
and check out the chart that shows what would have happened if the pensions had been invested in Treasury bonds.