Black and Spitzer on Lehman Fraud

by Dollars and Sense

More on the scandal that is brewing in connection with the last months of Lehman Bros.: Today's New York Times business section has an article, At Lehman, Watchdogs Saw It All, that goes further in suggesting complicity on the part of the NY Fed, under the leadership of one Timothy Geithner, in Lehman's efforts to disguise the depth of its problems.

Here's an interesting piece from Bill Black, former banking regular and occasional D&S author, and Eliot Spitzer, disgraced former governor of New York (has he been rehabilitated? or are there some topics that we just trust him on?); they are calling for an investigation of the Lehman revelations. It is from the Roosevelt Institute's New Deal 2.0 project; hat-tip to LP for bringing my attention to this.

Time for Truth: Three Card Monte is for Suckers

Tuesday, 03/16/2010 - 12:50 pm by Eliot Spitzer and William Black

Eliot Spitzer and William Black call for an immediate Congressional investigation of Lehman’s accounting deception and the release of relevant emails and internal documents.

In December, we argued the urgent need to make public A.I.G.'s emails and "key internal accounting documents and financial models." A.I.G.'s schemes were at the center of the economic meltdown. Three months later, a year-long report by court-appointed bank examiner Anton Valukas makes it abundantly clear why such investigations are critical to the recovery of our financial system. Every time someone takes a serious look, a new scandal emerges.

The damning 2,200-page report, released last Friday, examines the reasons behind Lehman's failure in September 2008. It reveals on and off balance-sheet accounting practices the firm's managers used to deceive the public about Lehman's true financial condition. Our investigations have shown for years that accounting is the "weapon of choice" for financial deception. Valukas's findings reveal how Lehman used $50 billion in "repo" loans to fool investors into thinking that it was on sound financial footing. As our December co-author Frank Partnoy recently explained as part of a major report of the Roosevelt Institute, "Make Markets Be Markets", such abusive off-balance accounting was and is endemic. It was a major cause of the financial crisis, and it will lead to future crises.

According to emails described in the report, CEO Richard Fuld and other senior Lehman executives were aware of the games being played and yet signed off on quarterly and annual reports. Lehman's auditor Ernst & Young knew and kept quiet.

The Valukas report also exposes the dysfunctional relationship between the country's main regulatory bodies and the systemically dangerous institutions (SDIs) they are supposed to be policing. The NY Fed, the regulatory agency led by then FRBNY President Geithner, has a clear statutory mission to promote the safety and soundness of the banking system and compliance with the law. Yet it stood by while Lehman deceived the public through a scheme that FRBNY officials likened to a "three card monte routine" (p. 1470). The report states:

"The FRBNY discounted the value of Lehman's pool to account for these collateral transfers. However, the FRBNY did not request that Lehman exclude this collateral from its reported liquidity pool. In the words of one of the FRBNY's on-site monitors: 'how Lehman reports its liquidity is between Lehman, the SEC, and the world'" (p. 1472).

Translation: The FRBNY knew that Lehman was engaged in smoke and mirrors designed to overstate its liquidity and, therefore, was unwilling to lend as much money to Lehman. The FRBNY did not, however, inform the SEC, the public, or the OTS (which regulated an S&L that Lehman owned) of what should have been viewed by all as ongoing misrepresentations.

The Fed's behavior made it clear that officials didn't believe they needed to do more with this information. The FRBNY remained willing to lend to an institution with misleading accounting and neither remedied the accounting nor notified other regulators who may have had the opportunity to do so.

The Fed wanted to maintain a fiction that toxic mortgage products were simply misunderstood assets, so it allowed Lehman to maintain the false pretense of its accounting. We now know from Valukas and from former Treasury Secretary Paulson that the Treasury and the Fed knew that Lehman was massively overstating its on-book asset values: "According to Paulson, Lehman had liquidity problems and no hard assets against which to lend" (p. 1530). We know from Valukas' interview of Geithner (p. 1502):

The challenge for the government, and for troubled firms like Lehman, was to reduce risk exposure, and the act of reducing risk by selling assets could result in "collateral damage" by demonstrating weakness and exposing "air" in the marks.

Or, in plain English, the Fed didn't want Lehman and other SDIs to sell their toxic assets because the sales prices would reveal that the values Lehman (and all the other SDIs) placed on their toxic assets (the "marks") were inflated with worthless hot air. Lehman claimed its toxic assets were worth "par" (no losses) (p. 1159), but Citicorp called them "bottom of the barrel" and "junk" (p. 1218). JPMorgan concluded: "the emperor had no clothes" (p. 1140). The FRBNY acted shamefully in covering up Lehman's inflated asset values and liquidity. It constructed three, progressively weaker, stress tests — Lehman failed even the weakest test. The FRBNY then allowed Lehman to administer its own stress test. Need we tell you the results?

We believe that the Valukas report cries out for an immediate Congressional investigation. As we did with A.I.G., we demand the release of the e-mails and internal documents from the New York Fed and Lehman executives that pertain to analyses of Lehman's financial soundness. What downside can there possibly be in making these records available for public analysis and scrutiny?

Three years since the collapse of the secondary market in toxic mortgage product, we have yet to see significant prosecutions of the kind of fraud exposed in the Valukas report. The SDIs, with Bernanke's open support, exorted the accounting standards board (FASB) to change the rules so that banks no longer need to recognize their losses. This has made the SDIs appear profitable and allows them to pay their executives massive, unearned bonuses based on fictional profits.

If we are to prevent another, potentially more devastating financial crisis, we must understand what happened and who knew what. Many SDIs are hiding debt and losses and presenting deceptive portraits of their soundness. We must stop the three card monte accounting practices that create the potential and reality of fundamental misrepresentation.

A.I.G.'s CEO, its board of directors, and the trustees that are supposed to represent the interests of the American people have failed to respond to our December letter calling on them to release to the public the AIG documents that would be the treasure trove (along with other SDI documents) that would allow our nation to uncover and end the gamesmanship that caused this financial crisis and will bring us recurrent crises. We call on them to act.

Eliot Spitzer is a former attorney general and governor of New York.

Roosevelt Institute Braintruster William Black is a professor of economics and law at the University of Missouri-Kansas City.

Read the original article.

Labels: AIG, Eliot Sptizer, Ernst and Young, Lehman Brothers, William K. Black

 

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3/16/2010 05:59:00 PM 0 comments links to this post

 

Synergy in Security

by Dollars and Sense

An article in yesterday's New York Times, Contractors Tied to Effort to Track and Kill Militants, traces the efforts of a Department of Defense official, Michael D. Furlong, to set up a network of private security contractors, some of them former CIA agents and Special Forces operatives, to "track and kill suspected militants" in Afghanistan and Pakistan:

While it has been widely reported that the C.I.A. and the military are attacking operatives of Al Qaeda and others through unmanned, remote-controlled drone strikes, some American officials say they became troubled that Mr. Furlong seemed to be running an off-the-books spy operation. The officials say they are not sure who condoned and supervised his work.

While this kind of "off-the-books spy operation" may count as beyond the pale for today's U.S. military, the use of private security contractors is becoming more and more commonplace, to the extent that, as Tom Barry argues in his feature article in the current issue of Dollars & Sense, the military-industrial complex "has morphed into a new type of public-private partnership—one that spans military, intelligence, and homeland-security contracting, and might be better called a 'national security complex.'"

We've just posted Tom's article to the website; read it here.

Labels: Afghanistan, Afghanistan war, CIA, Homeland Security, militarism, private security contractors, Tom Barry, U.S. military

 

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3/16/2010 05:30:00 PM 0 comments links to this post

 

Lehman: The Art of the 'Sale'

by Dollars and Sense

Friday saw the release of a mammoth official report on the demise of the late, lamented Lehman Brothers. Written by Anton Valukas, a court-appointed Chicago securities lawyer, the over 2,000 page report, which was based on a staggering 350 billion pages of documentation [hard to believe the "billions," but that's what's been reported], claims that practices designed by the megabank whose travails nearly took down the global financial system in September, 2008, "ranged from serious but non-culpable errors of business judgment to actionable balance sheet manipulation." Specifically, the report documents the use of a maneuver known as "repo 105" to disguise the fact that Lehman was supporting its own balance sheet, recently loaded up with subprime mortgages that were rapidly falling in value, with, well, almost nothing.

The way this deception worked involved a part of the finance industry that has become increasingly important over the years, but remains opaque to most people. The "repo," or "repurchase" market involves the transfer of bank assets, like bonds, to other financial firms, like broker-dealers, for extremely short periods of time (often just a few days), in return for cash. The securities, then, function as a sort of collateral. The banks, after the short period of time has elapsed, are required to take the collateral back, and pay a usually nominal amount by way of interest. In this way, the banks get ready cash, and the firms that take the securities are free to use the securities for potentially profitable short sales or to just to collect the interest.

In this case, however, Lehman tried to disguise what looked like repo transactions--to the tune of up to $50 billion a quarter--as a sale of securities. Funny kind of sale: they were "selling" something they were obligated to take back within days. And they were paying far above the rate of interest customary in such transactions. For "repo 105", for instance, Lehman was paying 5%; on "repo 108", 8%.

And why would Lehman do this? Well, repos remain on the bank's balance sheet. Lehman, as mentioned before, had, in the months running up to the crisis, piled into subprime loans. So this massive expansion of assets on the balance sheet was supposed to be offset by a similar build-up of equity, or of funds which might cover potential losses on the assets. Knowing that raising so much equity was impossible, Lehman asserted that the repo transactions were in fact sales, which, of course, constituted a permanent transfer of assets, and, therefore did not require booking on the balance sheet. But Lehman was not only taking these assets back in a few days, it was paying exorbitant amounts of money to offload the assets right at the time when they were supposed to be booked for quarterly results. It was as if a drug dealer sublet an apartment in which s/he had stowed away a a boatload far below the market rate, right when the landlord was supposed to come calling. Of course, this leads to the questions as to why so many of Lehman's counterparties were willing to go along with such unusual offers.

But it was worse than this. Ernst & Young, the accounting firm, signed off on Lehman's books, and, moreover, a venerable City of London law firm, Linklaters, was asked for advice on the legality of these little transactions. Funny that Lehman didn't even bother to ask for legal advice from any other law firm, especially in the Wall Street firm's own country, the USA, and that it let its European office do the dirty work. Then again, it was AIG's London office that was responsible for that firm's fate. Regulatory arbitrage, and the financial liberalization that enables it, is and remains a powerful force in financial markets, indeed.

Lehman did this three quarters in a row: in 4Q 2007 to the tune of $38.6 billion, in 1Q 2008 for $49.1 billion, and for $50.4 billion in 2Q.

Saturday's NYTimes had two articles on the Lehman revelations: one recounted many of the details above; the other added another wrinkle—the role of the New York Fed. The articles says that the Valukas report "raises fresh questions about the role of the New York Fed in supporting Lehman during the frantic months leading up to its collapse." It seems that the Fed was the main institution The paragraphs explaining the Fed's involvement bears quoting in full:

...it was that month [March 2008] that the Fed started a spwecial lending program open to Wall Street banks like Lehman that could not [otherwise] borrow directly from it [the Fed]. The Fed also lowered its standards for the kinds of collateral that it would accept against such short-term loans.

Lehman, desperate for financing, seized its chance. It packaged billions of dollars of troubled corporate loans into an investment called Freedom CLO. Then, in a series of transactions, it shifted Freedom back and forth to the New York Fed, in exchange for cash. Those moves helped make Lehman look healthier.

Read the full article.

CLO means "collateralized loan obligation", and is the corporate cousin of the collateralized debt obligations that served to repackage mortgages during the subprime debacle. CLOs are--or were, during the boom-times, an important source of finance for mergers and acquisitions. What happened here was that Lehman was swapping nose-diving corporate loans (the M&A had all but dried up) with the Fed for hard Federally-backed cash in repo. It was trading cash for trash. And you were paying the potential difference.

This has been a rapid and brief overview, but the main lesson from this is that, only a few short years after Enron, similar devices, far from being discouraged by the convictions in that case, were being employed on a far-larger scale, and using a government vehicle designed explicitly to save the offending firm from its own abuses. Financial reform, nonexistent in the last administration, and always half-hearted under the present one, had seemingly come to a kind of dormancy akin to that applying to healthcare reform in the weeks up to the publication of this report. If this doesn't force us to demand a complete and utter makeover of financial regulation, it is difficult to say what could. Is our broken economy so dependent on the distorted exaggerations of fictitious finance that we will sit back and allow the very same abuses that slapped us in the face a few years ago to knock us unconscious again and again? Perhaps the final word today should be that of a veteran Wall Streeter, who said: "I almost threw up when I read the report. It makes me sick of this industry." If they can't endure it anymore, can we?

Labels: anton valukas, Ernst and Young, Federal Reserve, federal reserve bank of new york, financial crisis bailout, financial reform, Lehman Brothers, linklaters, repurchase agreements

 

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3/14/2010 04:53:00 PM 0 comments links to this post

 

(Repost from March 9:) Items on Greece

by Dollars and Sense

A couple of items on Greece: First, Mike-Frank Epitropoulos, who is working on an article for us on the Greek debt/default situation, sent us this image. The German magazine Focus ran a cover story headlined "Cheats in the Euro Family," with an image of the Venus de Milo giving (the rest of Europe) the finger. The Greeks were outraged, with one newspaper, Eleftheros Typos, saying that Europe is "threatened by financial naziism," according to the Wall Street Journal's blog The Source. And then there was the magazine cover response. I can't find a translation of the headline, and my Greek is rusty (and was always archaic anyhow).


Then there's this juicy piece from last Friday's Financial Times. The FT's headline writers couldn't resist the term "Greek drama," but the photo that went with this article in the print edition was especially nice: a view of the sun-drenched rooftop restaurant at the Hotel Grande Bretagne in Athens, with the Parthenon in the background; it was not just a gratuitous shot of the Acropolis—this was actually where the hedge-fund managers met to plot their speculative exploits.

Funds' role in Greek drama examined

By Sam Jones, Hedge Fund Correspondent

Published: March 5 2010 02:00 | Last updated: March 5 2010 02:00

On January 28, a cloudy, drizzly day in Athens, Goldman Sachs played host to a hotchpotch group of 10 clients at the Grande Bretagne, a palatial belle epoque hotel overlooking Syntagma square and the old royal palace, now the home of the Vouli, the Greek parliament.At dinner on the rooftop—with an unimpeded panorama of the Acropolis as the backdrop—the clients; ten bankers, asset managers and hedge fund analysts, ruminated on the future of the Greek economy—and of course, how to make money from it.Events since—a vicious collapse of confidence in the Greek debt market—have made some of those present, millions. But there has been a price. The dinner and the two-day schedule of meetings it bisected, is now one of a handful of events at the centre of a growing political backlash against some of the biggest and most powerful traders in the debt markets. Hedge funds and more broadly financial 'speculators' are finding themselves under attack from politicians and regulators on both sides of the Atlantic, who accuse them—including some of those Goldman chaperoned around Athens in late January—of exacerbating the Greek credit crisis in an effort to spin a quick buck.

Read the rest of the article.

Labels: Acropolis, Athens, Greece, hedge funds, sovereign debt, speculation

 

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3/11/2010 03:12:00 PM 1 comments links to this post

 

(Repost from Feb. 25:) Goldman Sachs and Greece

by Dollars and Sense

Dear blog readers: This is a restored version of one of the posts, from Feb. 25, that we lost when our blog got !@#$%&ed up in the past couple of days. I have figured out how to fix the half-dozen posts that were broken, and how to post new ones, but it involves a laborious fix (posting; going onto our server; downloading the resulting html file; deleting a string of javascript code that is somehow being generated now but wasn't a week ago; re-uploading the html file). If anyone's an expert on blogger or wants to help us (pro bono?) migrate our blog to some better blogging software (e.g. WordPress would be my preference), give us a shout.

Today's New York Times has two stories about Greece: one on the front page about how banks, including some that helped the Greek government hide its bad debt, are now using credit default swaps to bet that Greece will default on its debt (thereby making this more likely to happen); and another, on p. A13, about the massive protests against budget cuts in Greece, including the country's second 24-hour general strike in two weeks. (In the second article, an accompanying photo appears to show tens or hundreds of thousands of protesters, but is accompanied by a caption mentioning "thousands" of protesters.)

We have been meaning to do a post about an interesting item posted to Naked Capitalism earlier this week, by fund manager Marshall Auerback and L. Randall Wray, from the UMKC economics department (one of the main heterodox departments in the United States):

Memo to Greece: Make War, Not Love, With Goldman Sachs

By Marshall Auerback, a fund manager and investment strategist and L. Randall Wray, a Professor of Economics at the University of Missouri-Kansas City | February 22, 2010

In recent weeks there has been much discussion about what to do about Greece. These questions become all the more relevant as the country attempts to float a multibillion-euro bond issue later this week. The Financial Times has called this fund-raising a critical test of Greece's credibility in financial markets as it battles with a spiraling debt crisis and strikes. (http://www.ft.com/cms/s/0/463b205e-1d93-11df-a893-00144feab49a.html ) The "credibility" of the financial markets is an important consideration in a country which has functionally ceded its sovereign ability to create currency, and thus remains dependent on the vagaries of the very banking institutions which helped create the mess in the first place.

Maybe Greece should secede from the European Union and default on its euro debt? Or go hat-in-hand to the International Monetary Fund (IMF) to beg for loans while promising to clean up its act? Or to the stronger Euro nations, hoping for charitable acts of forgiveness? Unfortunately, all of these options are going to mean a lot of pain and suffering for an economy that is already sinking rapidly.

And it is questionable whether any of them provide long term viable answers. Polls show that given the perception of fiscal excesses of Greece and the other countries on the periphery, the public in Germany opposes a bailout of these countries at its expense by a significant margin. Periphery countries such as Ireland that have already undertaken harsh austerity measures also oppose the notion of a bailout, despite—nay, because of–the tremendous pain already inflicted on their own respective economies (in Ireland's case, the banks are probably insolvent as well). The IMF route is also problematic, given that Greece probably doesn't qualify under normal IMF standards, and many euro zone nations would find this unpalatable from an ideological standpoint, as it would mean ceding control of EU macro policy to an external international institution with strong US influence.

The Wall Street Journal recently highlighted an article by Simon Johnson and Peter Boone, lamenting that the demands being foisted on Greece and other struggling Euronations would "massively curtail demand, lower wages and reduce the public sector workforce. The last time we saw this kind of precipitate fiscal austerity—when nations were tied to the gold standard—it contributed to the onset of the Great Depression in the 1930s" (http://online.wsj.com/article/SB10001424052748703525704575061172926967984.html ). Where we disagree with Johnson and Boone is the suggestion that the IMF be brought in to craft a solution. Any help from this organization will come with tight strings attached—indeed, with a noose around Greece's neck. Germany and France would be crazy to commit their scarce euros to a bail-out of Greece since they face both internal threats from their own taxpayers and external threats from financial vampires who are looking for yet another nation to attack.

Here's a more appropriate action: declare war on Goldman Sachs and other global financial firms that created this mess. Send the troops, the planes, the tanks, and the ships. Attack every outpost of the saboteurs on European soil. Blockade the airports and ports. Make Wall Street traders and CEOs fear for their lives, or at least for their freedom to travel. Build some Guantanamo-like facility to hold these enemy financial combatants until they can be tried, convicted, and properly punished.

Ok, if a literal armed attack on Goldman is too far-fetched, then go after the firm using the full force of the regulatory and legal systems. Close the offices and go through the files with a fine-tooth comb. Issue subpoenas to all non-clerical staff for court appearances. Make the internal emails public. Post the names of all managers and traders on Interpol. Arrest anyone who tries to board a plane, train, or boat; confiscate their passports; revoke their visas and work permits; and put a hold on their bank accounts until culpability can be assessed. Make life at least as miserable for them as it now is for Europe's tens of millions of unemployed workers.
We know that the Obama administration will not go after the banksters that created this global financial calamity. It has been thoroughly co-opted by Wall Street's fifth column—who hold most of the important posts in the administration. Europe has even more at stake and has shown somewhat more willingness to take action. Perhaps our only hope for retribution lies there.
Some might believe the term "banksters" is too mean. Surely Wall Street was just doing its job—providing the financial services wanted by the world. Yes, it all turned out a tad unfortunate but no one could have foreseen that so many of the financial innovations would turn into black swans. And hasn't Wall Street learned its lesson and changed its practices? Fat chance. We know from internal emails that everyone on Wall Street saw this coming—indeed, they sold trash assets and placed bets that they would crater. The crisis was not a mistake—it was the foregone conclusion. The FBI warned of an epidemic of fraud back in 2004—with 80% of the fraud on the part of lenders. As Bill Black has been warning since the days of the Saving and Loan crisis, the most devastating kind of fraud is the "control fraud", perpetrated by the financial institution's management. Wall Street is, and was, run by control frauds. Not only were they busy defrauding the borrowers, like Greece, but they were simultaneously defrauding the owners of the firms they ran. Now add to that list the taxpayers that bailed out the firms. And Goldman is front and center when it comes to bad apples.

Lest anyone believe that Goldman's executives were somehow unaware of bad deals done by rogue traders, William Cohan (http://opinionator.blogs.nytimes.com/2010/02/18/the-great-goldman-sachs-fire-sale-of-2008) reports that top management unloaded their Goldman stocks in March 2008 when Bear crashed, and again when Lehman collapsed in September 2008. Why? Quite simple: they knew the firm was full of toxic waste that it would not be able to continue to unload on suckers—and the only protection it had came from AIG, which it knew to be a bad counterparty. Hence on March 19, Jack Levy (co-chair of M&As) sold over $5 million of Goldman's stock and bet against 60,000 more shares; Gerald Corrigan (former head of the NY Fed who was rewarded for that tenure with a position as managing director of Goldman) sold 15,000 shares in March; Jon Winkelried (Goldman's co-president) sold 20,000 shares. After the Lehman fiasco, Levy sold over $6 million of Goldman shares and Masanori Mochida (head of Goldman in Japan) sold $56 million worth. The bloodletting by top management only stopped when Goldman got Geithner's NYFed to produce a bail-out for AIG, which of course turned around and funneled government money to Goldman. With the government rescue, the control frauds decided it was safe to stop betting against their firm. So much for the "savvy businessmen" that President Obama believes to be in charge of Wall Street firms like Goldman.

From 2001 through November 2009 (note the date—a full year after Lehman) Goldman created financial instruments to hide European government debt, for example through currency trades or by pushing debt into the future. But not only did Goldman and other financial firms help and encourage Greece to take on more debt, they also brokered credit default swaps on Greece's debt—making income on bets that Greece would default. No doubt they also took positions as the financial conditions deteriorated—betting on default and driving up CDS spreads.

But it gets even worse: An article by the German newspaper, FAZ, ("Die Fieberkurve der griechischen Schuldenkrise", Feb. 20, 2010) strongly indicates that AIG, everybody's favorite poster boy for financial deviancy, may have been the party which sold the credit default swaps on Greece (English translation here).

Generally, speaking, these CDSs lead to credit downgrades by ratings agencies, which drive spreads higher. In other words, Wall Street, led here by Goldman and AIG, helped to create the debt, then helped to create the hysteria about possible defaults. As CDS prices rise and Greece's credit rating collapses, the interest rate it must pay on bonds rises—fueling a death spiral because it cannot cut spending or raise taxes sufficiently to reduce its deficit.

Having been bailed out by the Obama Administration, Wall Street firms are already eyeing other victims (and for allowing these kinds of activities to continue, the US Treasury remains indirectly complicit, another good reason why one shouldn't expect any action coming out of Washington). Since the economic collapse is causing all Euronations to run larger budget deficits and at the same time is raising CDS prices and interest rates, it is easy to pick off nation after nation. This will not stop with Greece, so it is in the interest of Euroland to stop the vampires now.

With Washington unlikely to do anything to constrain Goldman, it looks like the European Union, which is launching a major audit, just might banish the bank from dealing in government debt. The problem is that CDS markets are essentially unregulated so such a ban will not prevent Wall Street from bringing down more countries—because they do not have to hold debt in order to bet against it using CDSs. These kinds of derivatives have already brought down an entire continent – Asia – in the late 1990s (see here), and yet authorities are still standing by and basically doing nothing when CDSs are being used again to speculatively attack Euroland. The absence of sanctions last year, when we had a chance to deal with this problem once and for all, has simply induced even more outrageous and fundamentally anti-social behavior. It has pitted neighbor against neighbor—with, for example, Germany and Greece lobbing insults at one another (Greece has requested reparations for WWII damages; Germany has complained about subsidizing what it perceives to be excessive social spending in Greece).

Of course, as far as Greece goes, the claim now is that these types of off balance sheet transactions in which Goldman and others engaged were not strictly "illegal" under EU law. But these are precisely the kinds of "shadow banking transactions" that almost brought down the global financial system 18 months ago. Literally a year after the Lehman bankruptcy – MONTHS after Goldman itself was saved from total ruin, it was again engaging in these kinds of deals.

And it wasn't exactly a low-level functionary or "rogue trader" who was carrying out these transactions on behalf of Goldman. Gary Cohn is Lloyd "We're doing God's work" Blankfein's number 2 man. So it's hard to believe that St. Lloyd did not sanction the activities as well in advance of collecting his "modest" $9m bonus for last year's work.

If these are examples of Obama's "savvy businessmen", then heaven help the global economy. The transaction highlighted, if reported that way in the private sector, would be accounting fraud. Fraud – "Go to jail, do not pass Go" fraud. That senior bankers had no problem in structuring/recommending/selling such deals to cash-strapped governments should probably not surprise us at this point. However, it would be interesting to know if the prop trading desks of those same investment banks, purely by coincidence of course, then took long CDS (short the credit) positions in the credit of the countries doing the hidden swaps. A proper legal investigation by the EU could reveal this and certainly help to uncover much of the financial chicanery which has done so much destruction to the global economy over the past several years.

In this country, we have had a "war on terror" and a "war on drugs" and yet we refuse to declare war on these financial weapons of mass destruction. We all remember Jimmy Carter's "MEOW"—the attempt to attack creeping inflation that was said to sap the strength of the US economy in the late 1970s. But Europe—and indeed the entire globe—faces a much more dangerous and immediate threat from Wall Street's banksters. They created this mess and are not only profiting from it, but are actively preventing recovery. They are causing unemployment, starvation, destruction of lives, and even violence and terrorism across the world. They are certainly more dangerous than the inflation of the 1970s, and arguably have disrupted more lives than Osama bin Laden—whose actions led the US to undertake military actions in at least three countries. That should provide ample justification for Greece's declaration of figurative war on Manhattan.

However, in an ironic twist of fate, it was just announced that Petros Christodoulou will take over as the head of Greece's national debt management agency. He worked as the head of derivatives at JP Morgan, and also previously worked at Goldman—the firm that got Greece into all this trouble!

Dimitri Papadimitriou has recently made what we consider to be an important plea for moderation of the hysteria about Greece's debt. Writing in the Financial Times, he complained that

The plethora of articles in your pages and others, some arguing in favour and other against a bail-out, contribute to market confusion and drive the country's financing costs to record levels. It is not yet clear that a bail-out is even needed, but this market confusion is rendering the government's ability to achieve its deficit goals ever more difficult.

Indeed, we suspect that the same financial firms that helped to get Greece into its predicament are profiting from—and stoking the fires of—the hysteria. He goes on, "what Greece really needs now is a holiday from further market confusion being created by contradictory, alarmist public commentary".

Greece, Euroland in general, and the rest of the world all need a holiday from the manipulation and destruction of our economies by Wall Street firms that profit from speculative bubbles, from burying firms, households, and governments under mountains and debt, and even from the crises that they create. Governments all over the globe should use all legal means at their disposal to ferret out the bad faith and even fraudulent deals that global financial behemoths are foisting on us.

Read the original post.

Labels: blogger, Credit Default Swaps, Goldman Sachs, Greece

 

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3/11/2010 02:36:00 PM 0 comments links to this post

 

Unemployment at 9.7%; Links on Jobs

by Dollars and Sense

The Bureau of Labor Statistics released the jobs numbers for February this morning; find the Employment Situation Summary here.

I apologize for not keeping up with the blog for the last few days—we have been busy rushing the March/April issue of Dollars & Sense to the printers (late, but by less than usual for us!).

I have just posted an article from the new issue on military Keynesianism; and here is the editorial note for the issue, whose theme is Guns (i.e., military spending) vs. Butter (i.e., spending on jobs):

Word is out about how bad the long-term unemployment situation is likely to be. The cover story in the current issue of the Atlantic Monthly, How a New Jobless Era Will Transform America, declares, plausibly, that "a whole generation of young adults is likely to see its life chances permanently diminished by this recession."

A recent working paper from the National Bureau of Economic Research, the same outfit that calls the start- and end-dates of recessions, found that people who come of age during a recession "tend to support more government redistribution, but they have less confidence in public institutions," and tend to believe "that success in life depends more on luck than on effort." In other words, people who grow up in a recession are more likely to wind up in depression.

In a New York Times article on long-term unemployment, Allen Sinai, chief economist for Decision Economics, gave a glimpse into how economic elites tend to think about unemployment: "American business is about maximizing shareholder value. You basically don't want workers." He continued, "You hire less, and you try to find capital equipment to replace them." Our vision of a future economy—one without bosses—somehow seems more sustainable than one without workers.

There is an alternative to a jobless future: government policies that support full employment, including direct job-creation by the federal government. How would this be funded? There are lots of options, including a tax on financial transactions (which John Miller assesses in this issue's Up Against the Wall Street Journal), restoring tax rates to the progressive levels of the mid-20th century, and slashing our bloated military and "security" budgets. Now is the time to push for (many) fewer guns and (much) more butter.

Labels: military Keynesianism, military spending, unemployment

 

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3/05/2010 01:44:00 PM 1 comments links to this post

 

Debt Vultures in Liberia (Greg Palast)

by Dollars and Sense

Greg Palast continues to follow the story of debt vultures who "buy up the loans of poor governments, wait for them to win debt relief from the international community, and then use courts to pursue the countries for assets," for BBC TV Newsnight and an article in the Guardian. Palast wrote about debt vultures for D&S back in 2007 (George Bush's Favorite Vultures). Here's an excerpt from the Guardian article:

Liberian leader urges MPs to back action against vulture funds

Liberia's president calls on MPs to support bill that would bar vulture funds from pursuing debts of poorer nations in UK courts.

Heather Stewart and Greg Palast | Thursday, February 25, 2010

Ellen Johnson Sirleaf, the president of Liberia, is urging MPs to back a bill banning vulture funds from using British courts to prey on poor countries when it comes to a vote on Friday .

Liberia lost a $20m (£13m) case in London last year against two so-called vultures. Such funds buy up the loans of poor governments, wait for them to win debt relief from the international community, and then use courts to pursue the countries for assets.

Sirleaf said: "We've been waiting for a parliament or an assembly to take this kind of hard decision. I hope the US Congress and maybe some others in Europe will pick up this gauntlet and will follow the example of Britain."

An investigation for BBC's Newsnight, to be broadcast tonight, has uncovered allegations that speculators subverted the international debt relief process for Liberia, in an attempt to gain more money from its government and international donors than 97% of its other creditors accepted.

Liberia received debt relief worth $4bn from the international community in 2007 under the heavily indebted poor countries initiative, including $2bn from private-sector bondholders. Insiders to negotiations allege that two US financiers, Eric Hermann and Michael Straus, allowed other creditors to accept a low payout from Liberia, then quietly transferred their holdings to two other firms, which then sued in Britain for the debt in full.

Read the full article.

Labels: debt vultures, Greg Palast, Liberia, vulture funds

 

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3/02/2010 03:42:00 PM 1 comments links to this post

 

A Titanic Budget (Jo Comerford)

by Dollars and Sense

A great piece from Jo Comerford of the National Priorities Project, recently posted at TomDispatch. Here is Tom Engelhardt's introduction:

If there were a prize for worst headline of the week, even the month, it would surely go to a February 23rd piece in the New York Times headlined online: "Gates Calls European Mood a Danger to Peace." The bellicose "mood," so undermining of global peace that our secretary of defense had to go after it, was (according to Brian Knowlton of the Times) the "public and political opposition to the military" spreading across Europe. Who wouldn't react similarly in the face of such an unnerving phenomenon? After all, should it grow stronger, peace on Earth will surely prove a chimera.

European publics are now, it seems, so totally peaceable that, while the thousandth American died "in and around Afghanistan" in Operation Enduring Freedom last week to next to no notice here, they continued to exhibit extraordinary "weakness." After all, this was also the week in which—speak of the devil—the Dutch coalition government collapsed over a dispute about the public's desire to get Dutch troops out of Afghanistan. What an example of that anti-peace bogeyman run riot! No wonder Gates was warning that the perception of weakness could lead hostile powers (unnamed) to a "temptation to miscalculate and aggression."

Fortunately, one country is still willing to sink its money (and lives) into the armed enhancement of peace globally: the United States. As Jo Comerford of the National Priorities Project points out, the latest federal budget opens the American public to yet more pain, while shielding the military and the rest of the national security establishment from the same. Fortunately, that "antiwar mood" seems not to have jumped the wide Atlantic, which means, for the time being, peace is safe in America. —Tom

Read Jo Comerford's article.

Labels: budget, Jo Comerford, military spending, National Priorities Project, Tom Engelhardt

 

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3/01/2010 11:00:00 AM 0 comments links to this post

 

Why Not End Homelessness Now?

by Dollars and Sense

Here is the press release for the 13th annual Homelessness Marathon, an annual overnight radio broadcast on homelessness and poverty. It is a truly amazing program--especially the moving testimony from homeless folks who call in or show up at the broadcast site. We encourage you to tune in for at least part of it. You can listen online or tune over the airwaves--it's carried on over a hundred radio stations across the United States and Canada. This year's marathon originate in Detroit. It starts in an hour and a half--tune in!

BROADCAST TO ASK, "WHY NOT END HOMELESSNESS NOW?"

13th Annual Homelessness Marathon begins 7 p.m., EST, Tues. Feb 23rd
and run for 14 hours until 9 a.m., EST, Wed. Feb. 24th

"We have a mindset in this country that homelessness is a problem that can wait," comments Jeremy Weir Alderson, founder of the Homelessness Marathon, "but it's a dire emergency for the people who are homeless, a drain on our economy, and a stain on our national honor. We ought to solve this problem, and we could if we would only turn our attention to it."

The Homelessness Marathon will address the problem of homelessness by speaking directly with homeless people, who will give their first-hand testimony on how they became homeless and the obstacles they face before they can be housed again.

Hundreds of homeless people will be brought by bus (in rotating shifts) so that they can participate in this event and speak directly to the nation. They will be brought by shelters, advocacy groups, and grass roots organizations formed by homeless people themselves.

The broadcast will feature, as well, such speakers as Senator Carl Levin; Ron Gettlefinger, president of the United Auto Workers; and two of America's most outstanding anti-poverty advocates, Cheri Honkala, director of the Poor Peoples' Economic Human Rights Campaign and Paul Boden, director of the Western Regional Advocacy Project.

Prominent advocates from Detroit will participate, including Rev. Faith Fowler, director of Cass Community Social Services and Maureen Taylor, the state chairperson of Michigan Welfare Rights Organization.

Experts from elsewhere in the country will also participate, including Kathleen Johnson, director of Katrina Relief in Mississippi and Mike Rhodes, editor of the Community Alliance newspaper in Fresno, California, arguably, the cruelest city in America towards its homeless citizens.

The broadcast will originate from 12025 Woodrow Wilson St., a "green gym" recently opened by Cass Community Social Services for the use of its homeless clients. Detroit area radio stations participating in the broadcast will include, WHFR in Dearborn, the broadcast's host station; WHPR in Highland Park and CJAM in Windsor, Ontario.

The Homelessness Marathon is a consciousness-raising not a fund-raising broadcast. There will be no on-air solicitations.

More information about the broadcast can be found here;

Acclaim for the broadcast can be found here;

To donate to the Homelessness Marathon go here.

Labels: affordable housing, homelessness, Homelessness Marathon, poverty

 

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2/23/2010 05:27:00 PM 2 comments links to this post