Goldman Sachs and Control Fraud

It is plain to see that the US Department of Justice believes, as do neo-classical economists like Alan Greenspan, that fraud cannot exist in the markets.  Thus we have the justice department's pronouncement that Goldman Sachs did not commit fraud as described in the Levin/Coburn report.

Poppycock!  Goldman Sachs is a "Super Predator."

This decision just shows how well Goldman has captured the government, the politicians and the regulators.

William K. Black has been investigating and writing about control frauds for a long time.

Here are a few excerpts from his paper (in bold and italics) and some comments on their use by Goldman:

"Control frauds have...shown the ability to get 'clean' opinions for financial statements that purport to show that the company is highly profitable and solvent when the company is in fact deeply insolvent and unprofitable and pervasively corrupt."

1.  Investment Bank Goldman was probably insolvent before it became a bank holding company in 2008;

2.  The Federal Reserve then gave Goldman access to about $800 Billion worth of short-term loans from its discount window;

3.  Goldman received $13 Billion in bailout money via AIG;

4.  Goldman received TARP money worth $10 Billion;

5.  Blankfein claims that he did not need the bailout money from TARP but he was very conversant with Paulson, a former Goldman guy;

6.  The Federal Reserve bought the toxic assets of banks to make the banks appear profitable and solvent.

 "...only the CEO can optimize the company for fraud.  He optimizes the company by having it invest primarily in assets that have no readily ascertainable market value."

1. Blankfein hired and paid the rating agencies to rate Goldman's junk CDOs made from sub-prime mortgages as AAA--as safe as Treasuries;

2.  Goldman created sub-prime securities that were grossly inflated in value which helped extend the life of the financial fraud to 2007;

3.  Goldman's toxic securities grew at a rapid rate until Blankfein realized that the mortgage market would collapse from bad securities;

4.  Blankfein made bets on the collapse of the mortgage market;

5.  Blankfein helped create the scheme to thus produce false assets, false sales and grossly inflated prices to produce additional profits from fees and from bets;

6.  Blankfein's claim on false profits were greater than any "real" profits;

7.  Goldman Sachs used robo-signing (forgery) to produce the paperwork for foreclosures.  They promised to never do that again!

". . . CEOs have the unique ability to convert company assets into personal funds through seemingly legitimate corporate mechanisms."

1.  Blankfein used accounting fraud for the conversion of false profits from toxic CDOs into "real" salaries and bonuses for his executives and employees;
2.  The accounting for large profits lead to the stock appreciation of Goldman;
3.  Blankfein had a percentage of his wealth invested in Goldman so he gained doubley through false profits and through holding stock that was priced higher because of those false profits;
4.  Blankfein is rewarded for his "ingenuity" by bonuses, additional perks and new stock options;
5.  In 2007, Blankfein made $60 million (including stock);

". . . the CEO has the unique ability to influence the external environment to aid his fraud. . . ."

1.  Goldman sends out its employees to do government "service" so that through this revolving door they have come to occupy positions in the Treasury (Robert Rubin), in the regulation of the banking system (William Dudley, president of the Federal Reserve Bank of New York), and in the regulatory system (the SEC, CFTC, etc.); 
2.  Lobbying politicians and spending huge sums on political campaigns helps banks get the kinds of "reform" they would like.
3.  The revolving door and lobbying help Goldman obtain the proper environment for its control frauds.

The following excerpts are from William K. Black:

When Fragile becomes Friable:  Endemic Control Fraud as a Cause of Economic Stagnation and Collapse

Paper given by William K. Black at an IDEAS Workshop:  Delhi, India in December 19-20, 2005

Abstract

Individual “control frauds” cause greater losses than all other forms of property crime combined. They are financial super-predators. Control frauds are crimes led by the head of state or CEO that use the nation or company as a fraud vehicle. Waves of “control fraud” can cause economic collapses, damage and discredit key institutions vital to good political governance, and erode trust. The defining element of fraud is deceit – the criminal creates and then betrays trust. Fraud, therefore, is the strongest acid to eat away at trust. Endemic control fraud causes institutions and trust to become friable – to crumble – and produce economic stagnation.

White-collar criminology emphasizes incentive structures. A criminogenic environment is one that has strong positive incentives to engage in crime. While economists stress incentive structures, economics ignores criminogenic environments. The weakness comes from three sources. Economic theory about fraud is underdeveloped, core neo-classical theories imply that major frauds are trivial, economists are not taught about fraud and fraud mechanisms, and neo-classical economists minimize the incidence and importance of fraud for reasons of self-interest, class and ideology.

Neo-classical economics’ understanding of fraud is so weak that its policy prescriptions, if adopted wholly, produce strongly criminogenic environments that cause waves of control fraud. Neo-classical policies simultaneously make control fraud easier and more lucrative, dramatically reduce the risk of detection and prosecution by maximizing “systems capacity” problems, and encourage crime by making it easier for fraudsters to “neutralize” the social and psychological constraints against deceit and fraud. Thus the paradox: neo-classical economic triumphs produce tragedy. Perverse policies led to four recent crises: the deregulation and desupervsion of the savings & loan (S&L) industry produced the 1980s crisis, “shock therapy” caused the collapse of the Russian economy, the “Washington consensus” produced a wave of control fraud in Latin America, and the desupervision of the U.S. economy in the 1980s and 1990s led to an epic wave of control fraud that contributed materially to the $9 trillion loss in U.S. stock market capitalization.’’ With globalization, these crises can transmit to other nations through “contagion” or by causing key international investors to fail.
. . . .

Control frauds are the optimal form of looting because the CEO has four unique advantages. First, the CEO can suborn internal and external controls and pervert them into allies. The principal external control against accounting fraud is supposed to the outside auditor. CEOs control the hiring and firing of internal employees and non-governmental external controls. They, therefore, have the unique ability to “shop” for an auditor that will aid their looting. This does not require any explicit conspiracy. The CEO simply looks for an audit partner that stresses his aggressiveness and sophistication. Control frauds have consistently, world wide, shown the ability to get “clean” opinions for financial statements that purport to show that the company is highly profitable and solvent when the company is in fact deeply insolvent and unprofitable and pervasively corrupt. Moreover, the CEOs that engage in looting control frauds do not merely “defeat” the internal and external controls – they almost invariably choose top tier audit firms and use their reputation and “blessing” of their financial statements as their primary means of deceiving creditors and shareholders.

Second, only the CEO can optimize the company for fraud. He optimizes the company by having it invest primarily in assets that have no readily ascertainable market value. Professionals must value such assets – this allows the CEO to hire an appraiser or accountant that will provide a grossly inflated asset value. Because the asset has no obvious market value it makes it extremely difficult for the regulator (much less prosecutor) to contest the valuation. Such assets are also optimal for extending the life of the fraud. I have explained that rapid growth extends the life of the fraud, and increases the “take”, by allowing a Ponzi scheme. The CEO has the unique ability to cause the firm to follow such a scheme. The CEO can also extend the fraud by arranging false “sales” of the troubled assets to “straws” or related parties – at grossly inflated prices that produce additional profits.

The combination of the first two factors means that the only real check on control frauds is often limited audacity. Audacious control frauds invariably get clean opinions for financial statements purporting to show record profitability. Indeed, the false profits claimed by audacious looters are far greater than the real profits produced by control frauds that target consumers or the public.

Third, CEOs have the unique ability to convert company assets into personal funds through seemingly legitimate corporate mechanisms. Accounting fraud is the key to this conversion. The record, albeit fictional, profits blessed by the top tier audit firm cause the stock to appreciate. The (U.S.) CEO will typically have a large percentage of his wealth invested in “his” company’s stock. The CEO can then a large block of shares and profit. The CEO will also be rewarded with a raise (very large in the U.S.), a bonus, additional perks and new stock options. The CEO will also gain in status and reputation.


Fourth, the CEO has the unique ability to influence the external environment to aid his fraud. . . .

Read the full paper here