Tag Archive for Goldman Sachs

Some call them banks. We call them criminals.

Photo courtesy http://www.sxc.hu/photo/1136585In case you failed to notice, 2012 ended just like it began for many global too-big-to-fail banks: scandalously. Too-big-to-fail banks are those entities deemed so large that their failure could plunge the global economy into depression. Many of these players are the ones that allowed greed and compulsive gambling with borrowed money to nearly wreck the global financial system in 2008. Saving the system required U.S. taxpayers to bail out numerous big U.S. banks. Unfortunately, since the bailouts, these behemoths have become even larger, with more concentrated power over the global financial system. Therefore, too-big-to-fail banks are an even larger threat to international financial stability than in 2008. After you read the next paragraph, it will be clear that as they have become larger, the too-big-to-fail banks have also become too big to indict, even for the most egregious illegal and fraudulent behavior.

For those of you who have not followed the long parade of big banks that agreed to pay fines to avoid prosecution in 2012, here is a small sample of names, settlement amounts and offenses for which they settled. As you recognize these well-known names, remember, these are the large financial institutions on which the global financial system depends for economic growth and stability. The following are listed in the chronological order in which the settlements occurred: 1. Bank America, JPMorgan Chase, Wells Fargo, Citigroup and Ally Bank ($26 billion), fraudulent foreclosure practices; 2. Citigroup ($158 million) and Bank of America ($1 billion), misleading the Department of Housing and Urban Development; 3. Deutsche Bank ($200 million), misleading HUD; 4. ING ($619 million), money laundering; 5. Barclays ($450 million), interest rate rigging; 6. Capital One ($210 million), deceptive marketing credit cards; 7. Standard Chartered Bank of England ($340 million), laundering money for Iran and lying to regulators; 8. Bank America ($2.43 billion), misleading investors; 9. Goldman Sachs ($12 million), a “pay to play” scheme with a public official; 10. JPMorgan and Credit Suisse ($417 million), bundling and selling troubled mortgages to investors; 11. HSBC ($1.9 billion), money laundering for drug traffickers and terrorist institutions; 12. Morgan Stanley ($5 million), violating securities laws; and 13. UBS ($1.5 billion), manipulating interest rates. Only UBS was forced to admit guilt as part of its settlement. Although the settlement agreement shielded its charter to operate, UBS admitted guilt for a single act of felony wire fraud on behalf of its Japanese subsidiary. The remaining offenders were allowed to settle without admission or denial of guilt. Many of these banks are recidivists.

Prosecutors in the Justice Department and other bank regulators chose to settle these cases instead of prosecuting for fear conviction might cause the banks to fail, thus triggering a collapse of the global financial system. Therefore, with a slap on the wrist, the too-big-to-fail banks were not held accountable for charges of fraud, misleading federal regulators, money laundering, interest rate manipulation, deceptive marketing, misleading investors and violating securities laws. With prosecution off the table, big banks have no incentive to change their behavior. Settlement payments are just another cost of doing business. The U.S. banks named above were all considered too big to fail in 2008, so they received billions of dollars in TARP bailout support. These same banks are now spending huge sums to ferociously resist reasonable regulation under the Dodd-Frank financial reform act.

Since the global financial system is so dependent on a small group of large, interconnected banks (oligopolists) that are too big to fail, indict or prosecute, these institutions have no fear of being held accountable for the most egregious acts of lawlessness and fraudulent behavior. Therefore, they are too big to exist in their current form and must be right-sized into smaller entities. A large number of right-sized banks will ensure a vigorous, competitive financial sector that can efficiently provide the wide range of financial products necessary to support business formation and job creation. Officials at the big banks claim their institutions must be gargantuan to efficiently finance the economy. Empirical data to support such claims is hard to find; however, proof that too-big-to-fail banks are detrimental to global financial stability is abundant. Numerous banks agreeing to pay millions or billions of dollars to settle charges of outrageous illegal behavior in 2012 alone is quite telling. Until we eliminate too-big-to-fail banks, the world will constantly be on the edge of the next greed-induced financial calamity like we experienced in 2008.

Bank Collusion Under Investigation

Image courtesy of the Sunlight Foundation

“The $28 trillion credit default swaps market is under investigation by the European Union, adding to official pressures bearing down on a huge and opaque business that is widely blamed for aggravating the recent banking and euro zone debt crises,” according to a Reuters article (byline Brussels).

As described in the Reuters article, “Credit default swaps, or CDS, are derivatives that let a buyer transfer loan default risk to a seller, making them a kind of insurance against default. CDS can also be bought by speculators without direct interest in the debts involved.”

The derivative market, including credit default swaps, is a $600 TRILLION off-exchange market.

“It’s a banking function that’s been converted by this small group of banks into a trading instrument,” said Karen Shaw-Petrou, managing director at consulting firm Federal Financial Analytics. “It is not a transparent market,” said Shaw-Petrou. “… there’s no real proof of value other than moment-to-moment exchanges that are then impossible to verify because it’s not a public exchange.”

In some cases, the same entity that bundled the original loans into derivatives, subsequently purchased credit default swaps against the same bundled loans. Simply stated, they knew certain original derivatives were bogus investments and covered their backsides against the inevitable default with credit default swaps.

Credit default swaps played a central role in the near collapse of AIG in 2008, which led to a massive U.S. taxpayer bailout of the former insurance giant as well as the bailout of other U.S./multinational financial giants.

“The European Commission, the EU’s executive body, said it is probing whether major investment banks, including Goldman Sachs and JP Morgan, colluded in their operations in a market that is already under scrutiny by U.S. authorities and being subjected to broad, new regulations,” as reported by Reuters. The European Commission, which regulates competition in the EU, said it would investigate whether 16 investment banks had colluded or abused a dominant market position. The U.S. Justice Department in 2009 launched a more tepid inquiry into “anti-competitive practices” in the trading, clearing and pricing of CDS in the United States.

Analysts say that Credit Default Swap trading was too concentrated. “Eighty percent of derivatives transactions on both sides of the Atlantic are done by about eight banks,” said Karel Lannoo of the Center for European Policy Studies, a think tank.

The 16 banks being examined are: JP Morgan, Bank of America Merrill Lynch, Barclays, BNP Paribas, Citigroup, Commerzbank, Credit Suisse, Deutsche Bank, Goldman Sachs, HSBC, Morgan Stanley, Royal Bank of Scotland, UBS, Wells Fargo Bank/Wachovia, Credit Agricole and Societe Generale.

Former Goldman Sachs principals have held positions in the U.S. at the right-hand of U.S. presidents and in the Treasury Department:

Robert Rubin, employed for 26 years by Goldman Sachs and member of the Board, and Co-Chairman from 1990-1992; served from 1993 to 1995, as Assistant to President Bill Clinton for Economic Policy and in that capacity directed the National Economic Council.

Henry Paulson, Jr. served as the Chairman and Chief Executive Officer of Goldman Sachs and as U.S. Treasury Secretary under President George W. Bush. Paulson was Treasury Secretary at the time of the economic meltdown in 2008.

Lawrence H. Summers, a former top economic adviser to President Barack Obama and Timothy Geithner, U.S. Treasury Secretary in the Obama Administration also have strong ties to Goldman Sachs and other banking institutions under investigation.