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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

Saturday, August 6, 2011

Goldman Sachs is an SDI--a "Systemically Dangerous Institution"

A report in New Economic Perspectives by William K. Black entitled U.S. Subsidies to Systemically Dangerous Institutions Violate WTO Principles describes how the TBTF banks in the United States have become dangerous to society and the economy.

Goldman Sachs is a Systemically Dangerous Institution (SDI) as described by William K. Black insofar as

1. Goldman Sachs received large government subsidies
--via bailout programs
--via massive purchases by the Fed of poor quality mortgage paper
--via borrowing more cheaply and having greater leverage as TBTF:

2. Goldman Sachs is not properly regulated;

3. Goldman Sachs was badly run with (potentially) large losses which could have caused cascading failures without government bailout;

4. Goldman Sachs is a ticking time bomb;

5. Goldman Sachs committed accounting control fraud in its inadequate or non-existent underwriting of mortgage securities that it sold to investors as highly rated when they were actually junk;

6. Goldman Sachs contains the ingredients for a recipe for accounting control fraud by maximizing income, maximizing compensation and maximizing real risks and/or losses.

Goldman Sachs is not a "systemically important" institution or only a LCFI--a "Large, Complex Financial Institution" but an SDI--a "Systematically Dangerous Institution."

When you read Black's essay, please substitute Goldman Sachs every time you see SDI (and make some small grammatically changes) and you will feel right at home. Here are some excerpts from William K. Black's article:

U.S. Subsidies to Systemically Dangerous Institutions Violate WTO Principles
By William K. Black - New Economic Perspectives

. . . .
Economists Argue that Subsidizing SDIs make Free Markets Impossible

The destruction of competition and the creation of a perfect environment for accounting control fraud inherent with SDI subsidies mean that free markets are impossible. The Stern (2011) authors are blunt on this point: “there was nothing free about these markets” (p. 21). SDIs create extreme market concentration and enormous income inequality.

Akerlof & Romer and financial regulators and criminologists’ discovery of the recipe that the controlling officers use to maximize reported (albeit fictional) reported income concur that the optimal strategy is to make or purchase loans with a negative expected value. This makes “markets” profoundly inefficient. Accounting control frauds are engines of mass financial destruction that destroy wealth at a prodigious rate. Accounting control frauds also cluster in the most criminogenic industries, regions, and products. This, and each of the ingredients of the fraud recipe, makes them the ideal weapon for hyper-inflating financial bubbles. Financial bubbles are damaging as they grow because they systematically misallocate assets and capital, but they can be catastrophic when they collapse if they have been allowed to hyper-inflate.

Accounting Control Frauds Spawn “Echo” Epidemics

George Akerlof’s seminal 1970 article on “lemon” markets presents several examples of anti-customer control frauds in which the seller deceives the buyer about the quality of the good. He added the powerful insight that these frauds could produce a “Gresham’s” dynamic because dishonest sellers would gain a competitive advantage over their honest rivals. At the extreme, the market would become perverse and drive honest sellers out of the marketplace. Criminologists have employed Akerlof’s insights to explain how control frauds deliberately create Gresham’s dynamics suborn “controls” (e.g., appraisers) and agents (e.g., mortgage brokers) into fraud allies in manner that produces limited risk of detection and prosecution. The CEO running a fraudulent nonprime lender simply creates perverse financial incentives that create intense Gresham’s dynamics. It is insane for an honest lender to pay bonuses to loan officers and brokers based on volume with no penalty for making bad loans – but it is optimal for an accounting control fraud to do so. In criminological jargon: control fraud is criminogenic. In plainer English: fraud begets fraud.

Accounting Control Fraud Erodes Trust and Can Cause Market Collapses

Economists and scholars from multiple disciplines have increasingly begun to find how valuable trust is in many contexts. It is essential to finance. The defining element at law of “fraud” is “deceit.” To commit a fraud a perpetrator gains the victim’s trust – and then betrays it. This is why fraud is the most effective acid against trust. Fraud by elites is the most destructive assault on trust. Fraud can cause market collapses long before it becomes endemic because of its ability to harm trust. Consider attending a conference or concert where everyone is given a bottle of water. If the public health authorities announce that one bottle in a hundred is contaminated, how many of us will drink our bottle. Markets collapsed in 2008 because bankers no longer trusted other bankers to tell the truth about the value of the assets they were selling. That lack of trust was rational, for deceit was the norm in the sale of “liar’s” loans.

Vigorous Regulation Can Block SDIs from Causing Crises – but SDIs Destroy Regulation

The Stern (2011) authors stress that the SDIs inherently create a regulatory “race to the bottom” (p. 41). More broadly, they understand that economic domination of this degree not only destroys free markets but free democracies. The SDIs will use political contributions and lobbying power to try to emasculate regulation and criminal justice systems because they recognize that only these public sector bodies can possibly restrain or remove the SDIs. The good news is that economists broadly agree that the SDIs confer no real economic advantages. They are too large to be efficient. Their domination is due solely to their receipt of huge governmental subsidies. That means that shrinking the SDIs in size would simultaneously increase bank efficiency and market efficiency while dramatically reducing fraud and systemic risk and restoring more functional and democratic government.
. . . .
Read the whole article here


Anonymous said...

Think about in how many others have funneled $ to others...

Firm donates $1 million to pro-Romney PAC, then disappears

Big donors have found yet another way to anonymously funnel obscene amounts of money to political candidates.

Restore Our Future, a Super PAC supporting Republican presidential candidate Mitt Romney, received $1 million from W Spann LLC, one of the biggest donations of the 2012 campaign season so far. Months later, the firm dissolved, leaving few clues to the true identity of the donors.

Anonymous said...

Imagine if there was no tarp?...a lot of wall streeter's would have been joining these poor people

From "The Tent City of New Jersey:

Anonymous said...

Leech's is the word...

S&P Downgrades US To AA+, Outlook Negative

More broadly, the downgrade reflects our view that the effectiveness, stability, and predictability of American policymaking and political institutions have weakened at a time of ongoing fiscal and economic challenges to a degree more than we envisioned when we assigned a negative outlook to the rating on April 18, 2011The political brinksmanship of recent months highlights what we see as America's governance and policymaking becoming less stable, less effective, and less predictable than what we previously believed. Our opinion is that elected officials remain wary of tackling the structural issues required to effectively address the rising U.S. public debt burden in a manner consistent with a 'AAA' rating and with 'AAA' rated sovereign peers.

Anonymous said...

The Debt Ceiling Debate That Didn't Happen
War and Debt


But now that finance is the new form of warfare – domestically, not externally – where is the power to constrain Treasury and Federal Reserve power to commit taxpayers to bail out financial interests at the top of the economic pyramid? The Fed and other central banks claim that their political “independence” is a “hallmark of democracy.” It seems to be rather a transition to financial oligarchy. And now that finance has joined with the oil industry, major monopolies and privatizers of the public domain, the need for some kind of Congressional oversight is as necessary as was parliamentary power over military spending in times past.

Anonymous said...

Criminal Mortgage Probes Fizzle Out

Federal criminal investigations of IndyMac Bancorp and New Century Financial Corp. have stalled and could result in no charges being filed, said people familiar with the situation.

Separately, the U.S. Attorney's office in Seattle announced Friday it had closed its investigation of Washington Mutual Inc., another failed mortgage lender, with no criminal charges being brought.

The three separate investigations, among the first to weigh criminal charges against the companies and their executives at the heart of the housing crisis, each hit major stumbling blocks.



”It’s bad enough that the regulators allowed the bad behavior and practices to proliferate. But now it’s going to result in very few prosecutions.”

“This feeds into the idea that there are two sets of rules in America. There is one set of rules for people like you and me. And there is another set of rules for people who are powerful, who are politically connected, who have very high level jobs, who know the right people.”

Anonymous said...

Not goldman...but not good, either!

How JP Morgan Took Over All Kentucky's Financial Services, And Why You Should Be Scared
One of the major players in the global financial crisis is now in charge of all financial transactions in an entire state. Could this spread?

Joyce said...

Well, JP Morgan Chase has finally reached its goal. I'm sure the other banks are aiming to take advantage of the financial crisis (which they created) in order to buy up public property for their private use and to seek rent from the taxpayer while so doing. I'm sure there will be a lot more privatizing of the public sector where the banks always seem to have a key role, both coming and going.

The solution may be to create a public bank that serves the public interest and is regulated by a government that has the interests of the public as its mandate.

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