Busted: Bankers and The Global Economy

July 31, 2010

SEC Lets Citi Execs Go Free After $40 Billion Subprime Lie

The following news analysis was written by AlterNet.org’s economics editor Zach Carter.

What is the penalty for bankers who tell $40 billion lies? Somewhere between nothing and a rounding-error on your bonus.

The SEC just hit two Citigroup executives with fines for concealing $40 billion in subprime mortgage debt from investors back in 2007. The biggest fine is going to Citi CFO Gary Crittenden, who will pay $100,000 to settle allegations that he screwed over his own investors. The year of the alleged wrongdoing, Crittenden took home $19.4 million. That’s right. Crittenden will lose one-half of one percent of his income from the year he hid a quagmire of bailout-inducing insanity from his own investors. That’s it. No indictment. No prison time. Crittenden doesn’t even have to formally acknowledge any wrongdoing.

In 2007, as financial markets were freaking out about the subprime situation, Citi repeatedly told its investors that it owned just $13 billion in subprime mortgage debt. It was true – if you didn’t count an additional $40 billion in subprime debt that the company was also holding onto.

Citi’s CEO at the time, Chuck Prince, has not been charged with anything. As Yves Smith emphasizes, all of the top financial officers of every major corporation are responsible for the accuracy of their quarterly financial statements. Lying on those statements is a federal crime. This is the sort of thing that securities fraud cases are built around.

The SEC’s own statements about what went on at Citi are damning. If the agency can make this kind of information public, they ought to be pursuing criminal prosecutions. The SEC says that senior Citi management had been collecting information about the company’s subprime situation as early as April 2007, but repeatedly cited the $13 billion figure to investors over the next six months, waiting to acknowledge the additional $40 billion in subprime debt until November 2007. The SEC also says that Crittenden knew the “full extent” of Citi’s subprime situation by September at the latest, but the company continued to cite $13 billion in earnings reports through October.

Citi’s subprime shenanigans had consequences for taxpayers, pushing the company to the brink of total collapse and prompting one of the biggest bailouts of 2008.

Phil Angelides and the Financial Crisis Inquiry Commission deserve a lot of credit for highlighting the absurdity of Citi’s actions in a hearing on April 7 of this year (the key passage starts on page 368 of this pdf transcript). Angelides’ line of questioning revealed that even Citi’s board knew that the subprime exposure was much greater than what the company was claiming in public. Citi’s board at the time included Robert Rubin, former Treasury Secretary and architect of much of the deregulation that lead to the current crisis who took home $120 million for his work at Citi.

Either the SEC or the Justice Department could be pursuing criminal cases against Citi executives. What does it take to get the Justice Department’s attention on a financial fraud case? You have to launder $380 billion in drug money, and even then, DOJ lets you off with a slap on the wrist. The DOJ caught Wachovia doing just that, and the bank is getting off with a minor fine that won’t even make a dent in it’s second-quarter profits.

The Citi settlement is worse than a get-out-of-jail free card for Crittenden, Prince and their cohorts. The SEC actually fined Citi’s shareholders $75 million for the alleged wrongdoing of their executives. For some varieties of corporate misconduct, like Wachovia’s drug money laundering, hitting shareholders with the fine is appropriate. Wachovia’s money laundering operations directly enriched the company and its shareholders. This was not the case with Citi’s subprime scandal. Citi’s executives were hurting their own shareholders. Instead of meting out serious punishment to those executives, the SEC is fining Citi’s shareholders, the very people wronged in the incident.

This deference to the elites who wrecked the economy just keeps playing out. When Bank of America lied to its shareholders about billions of dollars in bonus payments it was about to make, the SEC decided to fine BofA shareholders and let the firm’s executives off the hook. The decision-makers at Wachovia, who allowed the firm to funnel drug money despite repeated warnings by whistleblowers, have not been indicted. Nobody at Washington Mutual has been indicted despite clear evidence of rampant mortgage fraud at the firm. Lehman Brothers’ repo 105 accounting scam is going unpunished, as are similar schemes at other banks including Bank of America. After much public relations flogging, the SEC let Goldman Sachs off easy.

More than 1,100 bankers went to jail in the aftermath of the savings and loan crisis. Massive financial crises simply do not occur without widespread fraud. The failure to prosecute that fraud poses systemic risks for the global economy. With too-big-to-fail behemoths dominating the financial landscape, the prospect of prison is the only serious check on executives interested in cannibalizing the economy for personal gain. If the SEC and the Department of Justice continue to let executives get away with outrageous acts without even taking the case to court, our financial system is doomed to repeat the same excesses and abuses we’ve seen over the past decade. If Crittenden did what the SEC claims he did, he screwed over his own investors and scored a huge bonus in the process. Everybody on Wall Street understands the implications: breaking the law is a great way to make a lot of money. When a class of elites can thumb its nose at the law with impunity, the result is not only a threat to the efficiency of our economy, but a threat to the basic functioning of our democracy.

You can read Mr. Carter’s news analysis in context here: blogs.alternet.org/speakeasy/2010/07/30/where-are-the-prosecutions-sec-lets-citi-execs-go-free-after-40-billion-subprime-lie/ Mr. Carter is a fellow at Campaign for America’s Future, and a frequent contributed to The Nation magazine.

April 28, 2010

Wall Street: Worse than Robber Barons

I’ve said it before. I’m going to say it again. Wall Street, the whole lot of them are self-deceived and full of themselves. They are worse than Robber Barons. Remember last November when Goldman Sachs chief Lloyd Blankfein told “adoring crowds” through The Times of London that he was, but a humble banker “doing God’s work”?

This nation and the entire world has had unscrupulous tycoons for some time now under the reign of corporatism. Now the nation takes full ownership of market manipulators and connivers, the most obnoxious and self-deceived weasels in recent history.  They hold the higher ground while admitting no wrong. They haven’t a clue what dishonest gain is about. Antisocial behavior simply consumes them. They live in their own self-made bubble of finance and privilege.

They are in bed with government minds of the same persuasion, a circle of self-dealing and wanton abandon of anything but self. Meanwhile, they pretend to tell the nation, even the world, what financial literacy is when they cannot balance, much less leverage their own checkbook.  For example, venerable chief of the Federal Reserve, Ben Bernanke applies this paradigm to you, but excludes himself, Wall Street and his banker cohorts.

An undergraduate student from Atlanta’s Morehouse College asked Bernanke what accounts for the enormous racial disparity in wealth in America. Bernanke responded that the source of the problem was the lack of “financial literacy” and “financial education” on the part of blacks, particularly with respect to savings decisions. While a scholar of Depression Era America, he clearly omitted his own knowledge of history. Bernanke never mentioned the notorious history of national violence that included the seizure, destruction and appropriation of black property, never mind the property and lives of others. The idea of financial literacy has nothing to do with principles and everything to do with who you are.

During 250 years of slavery, blacks as a people were both capital and financial assets for whites, and even after emancipation.  The national failure has been continual. At one time, the nation failed to endow black ex-slaves with a promised forty acres and a mule in any place in America. It doesn’t stop with the blacks. Today, through the Federal Reserve system of finance and government, all people have systematically have been denied the fruits of their labor. The national has simply switched gears, commandeered by the appearance of wealth, influence and power.  Land acquired between 1880 and 1910 frequently was taken by government complicity, fraud and outright seizures by terrorists. Our current reality is little different.

Regardless of race, creed or faith, few have any incentive to save in a world where Robber Barons, in this case the International Society of Bankers, simply consume any savings through the modern miracle of inflation. Inflation is the miracle of the system that regularly extracts the precious substance of American wealth because of the mindless fearful weasels that run amok in government and in finance. The real problem remains in the minds of Americans. We sit around and listen to this blather instead tarring and feathering them, even though this same judgment seems perfectly adequate in older times. Goldman Sachs is simply more of the same. Everyone else are the suckers. We’ve paid for their crimes, lock, stock and barrel.

September 15, 2008

No Wall Street Government Bailout, Sort of

With steely resolve, Henry Paulson, former Goldman Sachs investment banker has declined to cave in to pressure. There will be no investment banking bailout by Big Government today. Henry Paulson is prepared to let Lehman Brothers die on the vine, a sacrificial warning to bankers.

national banking snuggy?

national banking snuggy?

However, the Federal Reserve and the U.S. Treasury have designed a way to take some pressure from Wall Street investment firms as we clearly answer the question to yesterday’s post. Wall Street is awash in debt that previously could not be used for collateral. Starting tomorrow, the Federal Reserve will accept “investment-grade debt securities” as collateral in the Term Securities Lending Facility (TSLF) auctions and has expanded securities for the Primary Credit Dealer Facility (PCDF) based on what national clearing banks have on hand.

In essence, the Federal Reserve is accepting less secure banking instruments that bankers have in ample supply. This is subject, of course, to various conditions to “promote safety and soundness,” all good through January 30 of next year. It is hoped that this move will prevent any panic in the markets as authorities continue to dumb the system down. The investment banking system has been in worse shape than authorities have been willing to previously acknowledge. Outsiders have often assumed otherwise.

Former Fed Chairman Alan Greenspan said the market is the worst he has ever witnessed and predicted another major bank would close soon. Meanwhile, inflation is rising, real wages are declining, and the problems in the housing market persist.

~ E. Manning

August 3, 2008

False Confidence and Tough Times

You’ve probably heard the bad news and are likely to hear more based on underground information that isn’t public yet. Public information isn’t rosy either as otherwise tough line economists are finally admitting a “shallow recession”.

You’ve probably heard that the federal government admitted that 51,000 jobs vanished last month, with just over 1/2 million this year according to statistics. Growth has been reported as slow, but numbers have just been revised for an economic contraction in the last three months of 2007. The popular line is growing that data suggests a recession began late last year. That is really old news. The good news behind the bad news is that once you admit you have a problem, you stop trying to cover up for the problem that you don’t have. In fact, by simply admitting the truth collectively or individually, it is possible to look upward or at least past your situation. That is exactly what the economy really needs, a release from national credit addiction. Business and government need it more than consumers do.

Investment bankers like Goldman Sachs say the entire global economy is slowing, which makes any trade improvement opportunities unsustainable at best for the U.S. economy. Because of that many new opportunities in the U.S. economy are being cut off. Business is also worrying about Christmas sales and is reacting by importing less goods. Looking at the bright side, even if many Americans don’t have a traditional Christmas, we still have each other. The world isn’t over because of a disappointing holiday season except for unwise speculators.

For those businesses that must have an increase in sales, new ways to entice consumers must be discovered to garner what business there is. Otherwise, many businesses will be cutting back and closing stores. This move is expected before Christmas as business continues to contract, but many retailers will try to weather the storm. Panic may ensue, but rest assured that many businesses have simply reaped what they have sown. Let’s face the facts that Americans cannot continue to live on credits cards to finance cheap imported goods to make the business world ever larger profit margins. Inflation also continues to cut into margins on both sides for business. The beast of inflation is no longer reigned in.

Many Americans have decided to get down to brass tacks and quit fooling themselves. Even so, at the end of the year, the likes of Old Navy will still have tons of practically worthless stuff to sell at bargain basement prices in the new year that they paid pennies on the dollar for to manufacture overseas.

Tens of millions of Americans have for years borrowed aggressively against the value of their homes to finance trips to the mall, dinners out, vacations, medical bills and new cars. As housing values continue to fall and artificial financing possibilities wither, the cold reality of real life will finally begin to settle in. Expectations will have to be lowered, at least for now. Wages will have to increase to sustain the economy or prices will have to fall. Since most wages come from the halls of big business, you know that prices will fall.

Confidence is down and for good reason. But confidence is a short-term animal that economists and analysts put too much stock into. Business owners that have some common sense are not stockpiling goods like in days of old. Less stock and less sales mean less tax revenue, which will further hurt the cash that government craves. Confidence will continue to erode for a time and deficit will reign. In six months or more, we may actually know if the stimulus checks were effective in any way or not. Until then, speculation rules. Still, tough times don’t last forever, although getting through is no less difficult. Tough times is also what makes humans grow.

Aside from all the heavy spending, why is America in trouble? Never forget that our friends, the bankers and financiers have dumped the economic cart. Fraud and speculation has worn down the system where a little restraint and sense would have carried the economy a long way. Of course, government guarantees on virtually every financial measure and market don’t work and ultimately create more harm than good by further burdening the economy. We have nationalized banking, mortgage, finance and in some cases, business in general. You can’t take the risk out of business. Human nature mandates abusive practices where there is no risk or reason for accountability.

Happily, we have something to gain from the situation if we are collectively willing to learn from our mistakes and forbid the same behavior in the future. That would be incredible progress that has been slow in coming. Yes, this is a dismal science when times are tough. To some, times are never good enough as we race onward at breakneck speed to meet the rush of bills that are always coming due. That is the life of plenty that America has been sold.

If we are smart, we have other things that we can manage to do during the recovery besides continue to hurt others and the already ailing economy. Sitting still and taking stock may be the wisest move imaginable. We can trim back spending and expectations while looking for a new approach to life in America. Remembering who you really are is more important than false confidence.

While all of this is happening, the digital economy is really ready to take off in a big way with the next upturn. The powers behind the scenes, including the central bankers aren’t hurting. They continue to make it big during good times and bad. ~ E. Manning

April 16, 2008

The Politics of Selling Short

Filed under: banking, investment, money — Tags: , , , , , — digitaleconomy @ 11:10 am

Doubtless, hedge funds and mutual funds are going to be one of the future pivot points in investment banking, but in a different way from the past.

Goldman Sachs made billions of dollars last year by shorting the sub-prime mortgage bonds that its bankers were selling out in to investors in large volume. WaMu (Washington Mutual), Fannie-Mae and Freddie-Mac short calls made their investors money since all of the short calls made money for those that listened. Shares in these companies has fallen since the short calls.

Goldman Sachs has been perfectly willing to play both sides (more…)

March 21, 2008

Wall Street Investment Bankers Use Fed

wall-street.jpgBig Wall Street investment companies have been taking advantage of the Federal Reserve’s unprecedented recent offer to secure emergency loans. The new lending measures are part of a major effort by the Fed and the Bush Administration to guarantee the free flow of liquidity to keep order in the financial markets (see video for March 20). The Bush Administration is not taking any chances on any possibility of future failures. The likes of Goldman Sachs and Lehman are using the the funding. Wall Street banking firms have averaged $13.4 billion in daily borrowing since Monday from the Fed. In emergency meetings on Sunday with Treasury Secretary Henry Paulson, the Fed agreed to allow Wall Street investment houses to secure emergency loans directly from the central bank (see March 16 post). This new measure created a way for “financially strapped” investment firms to have regular access to a source of short-term cash at standard Fed interest rates. Investment bankers can also bid at Fed auctions in the immediate future. The Fed will allow investment firms to borrow up to $200 billion in Treasury securities by using risky investments on hand as collateral. This move could cost U.S. taxpayers if care is not exercised. However, it is clear that the Federal Reserve and the Bush Administration do not expect to fail in any measure regardless of the cost.

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