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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

Thursday, April 28, 2011

The Lies of Goldman Sachs

The author of the article below from AlterNet, Les Leopold, describes the four categories of case study in the report by the Senate Permanent Subcommittee on Investigations and the excerpts below have to do with Goldman Sachs and the lies they perpetrated about their role in the financial meltdown.

The report is not "too technical" in my opinion. Everything is explained well and terms can always be looked up. Everyone should have a go at reading the report here.

How Wall Street Thieves, Led by Goldman Sachs, Took Down the Global Economy--Their Outsized Influence Must be Stopped
If we don't bust up Big Finance, there soon will be another financial crisis that will destroy what's left of our middle-class way of life.
By Les Leopold - AlterNet

. . . .

The last case study is the most pornographic as it strips bare two investment banks, Deutsche Bank and Goldman Sachs. The report accuses them of packaging and selling toxic securities while, at the same time, betting that those securities would fail. Furthermore, the report argues forcefully, that “Investment banks were the driving force behind the structured finance products that provided a steady stream of funding for lenders originating high risk, poor quality loans and that magnified risk throughout the U.S. financial system. The investment banks that engineered, sold, traded, and profited from mortgage related structured finance products were a major cause of the financial crisis.” (pg 19)

The Case against Goldman Sachs

It’s obvious that the subcommittee is gunning for Goldman Sachs, and for good reason. This elite investment house, the envy of all Wall Street, is shown to be corrupt to its core. Not only is it accused of creating toxic assets and unloading them on its own customers, but also, the report accuses GS of betting that the very assets they were selling would fail. They profited by selling the junk and then profited even more when the junk they were selling lost value. The deeper the financial destruction, the more they made. And of course, they didn’t tell the buyers of the toxic assets about GS’s hidden bets or the fact that their internal research showed that the assets were totally toxic. The report is the most detailed account ever written about the Goldman Sachs profitable trail of deceptions including lies that were told to Senate committees again and again.

Lie #1: 'Putting our Customers First'

The path of looting and destruction starts in 2006-'07 when the leadership of Goldman Sachs became convinced that the housing market was in decline and that they had to get rid of all their mortgage-related securities in a hurry. Well, how do you get rid of crap? You package it together, slice and dice it and get your favorite rating agency strumpets to kiss it with AAA-ratings. Then you send your sales force out on a mad scramble around the world to find customers. The problem was that by then most mortgage security buyers knew these assets were toxic AND that the ratings were phony. So GS told its sales agents to seek out customers who knew the least about mortgage-related securities. Nice.

Lie #2: 'Our interests are aligned with our customer’s interests'

Once the junk was packaged and sold, GS placed billions of dollars of bets that the mortgages contained or referenced in the securities would crash and burn. The more they crashed, the more the bets paid off for Goldman Sachs. However, GS failed to reveal this crucial information to its customers. Rather it said that GS’s interests were aligned with that of its customers, implying that GS was buying into the deal and holding the same garbage as the customers were buying. The report details many cases where GS bet big against what they were selling without providing this material information to its buyers.

The Goldman Sachs-Paulson Sting

The most egregious example of this swindle was the Abacus deal that GS cooked up with Paulson and Company, the hedge fund that bet billions that toxic mortgage-related assets would fail. Paulson approached GS with a plan to rig a bet that was sure to fail for the buyers and pay off big for Paulson. Without telling the buyers, Paulson was allowed to set the criteria for the selection of the toxic assets that were placed in the securities, and of course he picked the worst ones he could find. As the report says;

    “With respect to Abacus, Goldman knew that the Paulson hedge fund wanted to take 100% of the short side and would profit only if the CDO lost value, yet allowed the hedge fund to play a major but hidden role in selecting the CDO assets.” (p 620)

To hide Paulson’s role, GS needed an independent “portfolio selection agent” to pretend to be the final arbiter of what mortgage pools became part of the security. They hoped that GHC Partners would play that role. But, as a key Goldman Sachs executive reported to his colleagues, GHC found the deal too unsavory:

“As you know, a couple of weeks ago we had approached GSC to ask them to act as portfolio selection agent for that Paulson-sponsored trade, and GSC declined given their negative views on most of the credits that Paulson had selected.” (p 564)

They soon found another shill agent to hide Paulson’s role. Within a year, the buyers of the security lost a billion dollars and Paulson made a billion on his bet. Goldman Sachs got the fees for arranging the deal. However, they later had to pay a fine of $550 million to the SEC for failing to disclose Paulson’s role. Meanwhile, Paulson became the most prosperous hedge fund manager in world. In 2010 he earned $2.4 million an HOUR.

Lie #3: 'Honest, we didn’t try to rig the market'

In order to place more and more bets against the toxic mortgages, Goldman Sachs wanted to purchase credit default swaps, which are like insurance policies. You pay a premium to buy a policy on a given toxic security. If that security fails, you get full value. And you don’t have to own the security to place this wager.

Around the time that Bear Stearns started to fail in 2007, GS wanted to buy up more and more of these bets. But first they wanted to drive down the insurance policy prices so they could get them on the cheap and make even more money. Well, it’s against the law to manipulate markets, but nevertheless GS tried to use its market power to “squeeze” the market downward. It didn’t work out because the cascading financial crash intervened. The Senate investigators found the following smoking gun (a self-evaluation from one of the key GS traders):

    “In May, while we were remain[ing] as negative as ever on the fundamentals in sub-prime, the market was trading VERY SHORT, and susceptible to a squeeze. We began to encourage this squeeze, with plans of getting very short again, after the short squeezed [sic] cause[d] capitulation of these shorts. This strategy seemed do-able and brilliant, but once the negative fundamental news kept coming in at a tremendous rate, we stopped waiting for the shorts to capitulate, and instead just reinitiated shorts ourselves immediately.” (p 425).

He later denied this was really a squeeze by claiming to investigators that they placed too much emphasis on “words.” But, think about what this reveals. This GS employee in a self-evaluation to his superiors thought it would make him look good if he bragged about trying to engage in obvious illegalities. What does that really say about the venerable Goldman Sachs culture?

Lie #4: 'We’re only doing all this to make markets'

One of the biggest lies can be found in the concerted cover-up during the testimony before Congressional committees and investigators. After obvious coaching from their lawyers, GS executives stated again and again they are only trying to make markets so that sophisticated investors can make trades. The GS executives deny that they pushed the crap off their books onto investors. They were, instead, only trying to help investors find the deals they wanted. Some, GS argues, wanted to bet that the toxic assets would pay off and others that they would fail, and GS, they claim, only gave them both what they wanted. (They said this repeatedly because the disclosure rules for market making are much weaker than if they are promoting and selling securities to investors.)

Lies #5 ,#6, #7…….#101

The list goes on and on. GS manipulated assets to benefit themselves at the expense of their customers. They manipulated prices to benefit themselves at the expense of customers. As part of Abacus, they worked out a private deal with Paulson so that Paulson would pay less for his “insurance”, which in turn hurt the investors on the other side of the bet. And, even after all of these revelations, Goldman Sachs to this day continues to deny that it engaged in a strategy to bet big against the housing market.

In the end you come to one and only one conclusion. Every time Goldman Sachs had an opportunity to profit by cheating its customers, it did so.

. . . .

Read the article to find out what remedies the author suggests here


Anonymous said...

They all made out like bandits...

Banks Play Shell Game with Taxpayer Dollars

The banks pocketed interest on government securities that paid rates up to 12 times greater than the Fed's rock bottom interest charges, according to a Congressional Research Service analysis conducted for Sanders.

"This report confirms that ultra-low interest loans provided by the Federal Reserve during the financial crisis turned out to be direct corporate welfare to big banks," Sanders said. "Instead of using the Fed loans to reinvest in the economy, some of the largest financial institutions in this country appear to have lent this money back to the federal government at a higher rate of interest by purchasing U.S. government securities."

"Instead of using this money to reinvest in the productive economy, however, it appears that JPMorgan Chase, Citigroup, and Bank of America used a large portion of these near-zero-interest loans to buy U.S. government securities and earn a higher interest rate at the same time, providing free money to some of the largest financial institutions in this country," Sanders said.

Anonymous said...

Goldman is really digging into worldwide power!


Joyce said...

Thank you for the links. Bernie Sanders is an honest politician. Would that there were more like him.

Anonymous said...

Listen to an expert and find out what the prosecutors are up against when they find corruption.

Imagine what you're up against as you go up the food chain.


Mar 25, 2011

New York University | School of Law
Anne Milgram spoke about her career in the law and prosecuting public
corruption cases.

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