The New Robber Barons Read online

  The Wall Street Journal missed a golden opportunity (“Top Broker Accused of $50 Billion Fraud,” December 12, 2008). It wrote that if Madoff’s alleged losses exceeded $50 billion, it would “dwarf past Ponzi schemes.” Yet, Madoff was a piker.

  The largest Ponzi scheme in the history of the capital markets is the relationship between failed mortgage lenders and investment banks that securitized the risky overpriced loans and sold these packages to other investors—a Ponzi scheme by every definition applied to Madoff. These and other related deeds led to the largest global credit meltdown in the history of the world.

  Investment banks raised money from new investors to pay back old investors (mortgage lenders' dividends to shareholders and investment banking creditors of mortgage lenders which often included themselves). When mortgage lenders imploded, investment banks sped up opaque securitizations to offload worthless tranches of CDOs mixed in with others to careless so-called sophisticated investors along with naive investors. Raising money from new investors to pay back old investors, even if you are the old investor covering up losses, is a Ponzi scheme.

  Bernard Madoff confessed—not the securitization “professionals” who work or worked for famous investment banks, certain CDO managers and certain hedge funds. One securitization professional gave an interview to Reuters in which he tried to claim that shady activity was not a Ponzi scheme since CDOs are legal. But using a legal financial instrument to commit fraud is still fraud. If you pawn off product by mixing it into a CDO portfolio, and you know or should know it is worthless (or even simply misrepresented), you must disclose that fact. But that is not what happened.

  Overpriced and overrated tranches of RMBS, CDOs and even CDO-squared, that on their own wouldn't get a decent bid from any knowledgeable securitization professional, were repacked to sell on to other investors. When new investors dried up, these products were held on the books as if the irresponsible ratings had meaning. This delayed the recognition of losses long enough to get through another bonus cycle.

  The SEC has been silent on the dodgy securitization activities it “regulated’ over the past several years. Congress and others agree claiming there will be time to find out who is responsible later. Bail now, scapegoat later.

  Legacy investment banks and other bailout recipients have hundreds of billions of dollars’ worth of assets in opaque accounting buckets known as Level 2 (mark-to-model) and Level 3 (mark-to-management assumptions). Good luck trying to find details. This makes the "stress tests" less meaningful than they already are.

  Self-proclaimed sophisticated investors like bond insurers are responsible for their own due diligence, and they may not be able to press claims against errant banks and investment banks. But now that the taxpayer has bailed out these entities, and now that the Fed is using taxpayer money to subsidize the funding costs of the banking system, the situation has changed. The U.S. housing market has been damaged along with the municipal bond markets. The net effect is a massive crime on the U.S. economy, and taxpayers, at least, may wish some form of satisfaction in the form of greater regulation and economic claw back.

  Some pundits want to claim the problem was mathematical outliers. The real problem is there were too many outright liars hiding behind the curtain of structured finance. Until we squarely face our problems, we cannot fix them. We had a financial Pearl Harbor, but investment bankers piloted many of the planes. We need to face that problem to restore confidence in the financial system. Once-over-lightly stress tests combined with regulatory capital window dressing will not solve our problem. What we need now is financial military police action combined with a financial Marshall Plan to restore our devastated financial system.

  Wall Street and Washington Hope You Are Gullible: Disappoint Them

  February 14, 2010

  If a high-on-crack driver crashed his speeding rental car into your house and killed your spouse, you would be outraged if law enforcers took bribes and gave the driver a pass on a blood test. If the judge then merely fined the killer and ordered you to pay it, you would appeal, wondering what happened to justice. If the government then handed the crack-driver keys to a bigger rental car and presented you with the rental bill, you would certainly protest.

  How is it, then, that you have remained largely silent in the face of the same sort of behavior by Wall Street and Washington? Bonus-seeking bankers careened off the right path and ran Ponzi schemes that nearly ruined our economy. Bureaucrats and elected officials bailed them out without demanding consequences. Bankers are revving their engines again.

  Bankers Get Bonuses, the USA Gets the Great Recession

  Taxpayers are asked to believe that over-borrowing by U.S. consumers created a global financial crisis. This myth aids and abets Wall Street. The economy was nearly destroyed because banks borrowed massively, and they borrowed many multiples more than they could afford. Wall Street pumped the Fed's cheap money through financial meth labs, and deceptive financial vehicles ran over securities laws at top speed.

  More than 20% of mortgage loans--including originally sound loans--are underwater, meaning the borrower owes more than the home is worth. Official unemployment numbers hover at around 10%. If you include underemployment, it is around 18%. In depressed areas where the nation's poorest--chiefly minorities--have been hurt the most, unemployment has soared past 30%. For this destitute group, unemployment combined with underemployment exceeds 50%.

  As U.S. soldiers fought wars in Iraq and Afghanistan, Wall Street flattened Main Street. Our foreign wars drag on, while the U.S. battles a crippling recession at home.

  Global Ponzi Scheme

  Fraud by borrowers, fraud on borrowers, and speculation by people who thought home prices would rise forever have all tarnished mortgage lending. Yet this pales compared to the epidemic of predatory lending.

  Predatory snipers committed financial murder as deliberately as British soldiers gave smallpox contaminated blankets to Native Americans. Honest homeowners were systematically targeted and actively misled into bad mortgage products. Loans were presented as gifts, but these Trojan horse loans hid destructive risk. "Disclosures" were acts of malice.

  When Wall Street packaged these loans and sold deceptive "investments," documents did not specifically disclose that credit ratings were misleading. If you know or should know a car's gas tank will blow up, you cannot use a misleading third-party consumer report as an excuse. Yet bonus-seeking bankers used this sort of excuse to get through a few more highly-paid bonus cycles, before it all fell apart. Only the elite crowd of insiders prospered.*

  This was the most massive Ponzi scheme in the history of the global capital markets. U.S. taxpayers became unwilling unsophisticated investors when we bailed out the financial system. We must hold Wall Street accountable for its fraud.

  More Bonuses for Bankers, a Deeper Recession for the USA

  Banks that contributed to our economic distress are heralded as geniuses at risk management, after taxpayers saved them from ruin. Wall Street escaped prosecution (so far), and Congress gave it a faster and more powerful car.

  Paul Volcker suggested reforms, and special interest groups successfully lobbied to make them meaningless. His proposal to limit "proprietary" trading--a small step in the right direction--has been thwarted by banks claiming they engage in high risk trades on behalf of customers. Washington seems to have already forgotten that AIG nearly went bankrupt--and nearly took the entire financial system down with it--because of Wall Street's "customer" trades. Wall Street and AIG insiders grew rich on bonuses based on a myth, and taxpayers funded AIG's $180 billion bailout.

  Wall Street now makes most of its "profits" from high-risk trading, and rewards risk with huge bonuses. It has unfettered access to more U.S. taxpayer money than in the history of the United States. Traditional banking suffers; it cannot generate enough revenue to "justify" massive bonuses. Bankers get billions in bonuses based on a myth, and U.S. taxpayers get a deeper recession and more risk.

  Ref
orm Starts with the President and Congress

  Congress has protected Wall Street and passed on the costs to hard-working taxpayers. "Too-big-to-fail" financial institutions are too big to exist, and it is past time to break them up. They currently enjoy around $13 trillion of taxpayer-funded support, including tens of billions of FDIC debt guarantees for each of the too-big-to-fail banks and more than $2 trillion in nearly zero-cost funding from the Fed.

  President Obama has not yet condemned Wall Street's massive fraud, and Congress's bailout methods rewarded Wall Street's malicious mischief. The House just passed a bigger bailout bill that will give too-big-to-fail Wall Street banks access to $4 trillion dollars the next time they crash the economy.

  Congress must start again from scratch, and give us real reform. Washington needs to get back in the driver's seat, and voters need to make Congress steer straight this time by calling and writing representatives and senators.

  * In a control fraud, only insider agents prosper. The losers are financial institutions' shareholders and debtors, investors, borrowers, and the U.S. taxpayer.

  Banks covered-up indefensible lending--enabled by complicit rating agencies, "creative" accounting at related mortgage lenders, crooked CDO "managers," venal hedge funds, crony accountants, and captured regulators. They parked the risk on their own balance sheets, on the balance sheets of Fannie Mae or Freddie Mac, in off-shore vehicles, or on unwary investors around the globe.

  Sometimes banks "transferred" risk with credit derivatives backed by phony securities that harmed "sophisticated" insurers like AIG, Ambac, MBIA, FGIC, and ACA--all of which were either bankrupted or damaged.

  2012: Voters Nix Incumbents, Demand Financial Reform and Fed Fraud Audit

  July 1, 2010

  The only part that needs to wait is the voting. Bloomberg News reported the "Fed made taxpayers unwitting junk bond buyers" (July 1, 2010):

  Federal Reserve Chairman Ben S. Bernanke and then-New York Fed President Timothy Geithner told senators on April 3, 2008, that the tens of billions of dollars in "assets" the government agreed to purchase in the rescue of Bear Stearns Cos. were "investment-grade." They didn't share everything the Fed knew about the money.

  By using its balance sheet to protect an investment bank against failure, the Fed took on the most

  credit risk in its 96- year history and increased the chance that Americans would be on the hook for billions of dollars as the central bank began insuring Wall Street firms against collapse. The Fed's secrecy spurred legislation that will require government audits of the Fed bailouts and force the central bank to reveal recipients of emergency credit.

  Congress's proposed financial reform bill would not have prevented the last disaster, fails to address current problems, and will not prevent the next disaster (more on this in a future post). Among other things, lawmakers are leaning to a provision to allow an audit of the Federal Reserve Bank, but this should be a thorough fraud audit, and there should be ongoing audits.

  Wall Street’s Advice to Joran van der Sloot (satire)

  June 8, 2010

  Before we get to your problem areas, we'd like to congratulate you on almost having "the right stuff." You are a manipulator and an unabashed liar. You have no remorse. You are a master at twisting things to suggest your victims had it coming, and you don't think of them as human beings.

  You suggest that Natalee Holloway threw herself at you when you weren't even interested. Stephany Flores "intruded" on your private life, after you escorted her to your room. She took your computer--presumably a computer that either didn't have logon password protection, or for which you gave her the password. She failed to acknowledge your greatness and recoiled in horror. How dare she? What an insult to your Weltanschauung! You couldn't allow her to roam free with that sort of judgmental attitude aimed in your direction. We appreciate your attitude and then some.

  Unfortunately, you are a piker and more than a little sloppy.

  Extorting money in exchange for information was truly inspired, but you only collected $25 thousand* of the $250 thousand you originally asked for. We are really big on extortion, and we know how to keep milking our victims. We threatened our government that the financial system would collapse, if it allowed shareholders to be wiped out and debt holders to accept debt for equity swaps. We had our government eating out of our hands, begging us to take hundreds of billions in TARP money, and hundreds of billions more in back-door bailouts and ongoing Fed subsidies.

  We deflected some blame to Fannie and Freddie, even though most of the problematic subprime mortgages were fueled by money raised from our private securitizations. We got Congress to pressure Fannie and Freddie to lower their standards and buy hundreds of millions of our "AAA" rot. After our Ponzi schemes unraveled, they were forced to pick up the slack. Meanwhile, we make money hand-over-fist funded by our victims, U.S. taxpayers.

  We pillaged entire neighborhoods driving millions into bankruptcy. We destroyed families and drove a few of our victims to suicide. As for lack of remorse, we've even propagated what Elizabeth Warren calls the "myth of the immoral debtor." We excel at shifting blame and kicking our victims when they're down. Fortunately for us, we devastated the finances of the least powerful people. The public outcry from our victims has been successfully muted.

  This brings us to the most important part, and here's where you really screwed up. If you kill an influential customer, don't get caught in unfriendly territory. If you forget that rule, don't confess.

  Notice how well things went for you in Aruba where your family had connections? Your friends and family sheltered you. The justice system seemed designed to protect you. The entire investigation was a farce to feed the media. It left you free to commit more crimes. In Peru, your victim's family has connections, and now the shoe is on the other foot. You don't see us vacationing in China do you? They take financial crimes seriously.

  We stay in friendly territory. "Investigations" and "financial reform" are designed to feed sensational--but harmless--content to the media. They love us! We've bought most of Congress, the SEC crafts lame complaints, the entire regulatory system is captured, rating agencies are in our pocket, the FBI's budget is a joke, and the Department of Justice can't seem to remember its purpose. We cratered the economy and got the financial equivalent of a traffic ticket. This has left us free to make a mockery of traditional banking and ramp up global systemic risk. We're rolling in more cash than ever before.

  You probably noticed that all of this good advice comes a bit too late to be helpful. We'd like to say it's because we have a conscience, and that you are a bigger creep than we are, except you'd see through that. The fact is we enjoy rubbing salt in wounds, and when it comes to creating havoc and misery, we just want you to know that we are better at it than you are.

  Endnote: Free Copies for the Grand Jury

  My book on the global financial meltdown, Dear Mr. Buffett: What an Investor Learns 1,269 Miles from Wall Street, (Wiley, January 2009) explains that the relationship between failed mortgage lenders and Wall Street securitization departments was a widespread interconnected Ponzi scheme, which is illegal in the United States, and names culprits: mortgage lenders, investment banks, CDO managers, credit rating agencies, monoline insurers, regulators, Congress, and more. Some were criminals, others were enablers. If the Department of Justice ever decides to prosecute, I will provide free copies for the first grand jury.

  CHAPTER 2

  Goldman Sachs’ Idea of “God’s Work”

  Jamie Dimon and Warren Buffett Were Warned AIG Had Serious Trouble One Year Before the September 2008 Crisis (and Goldman Sachs Knew Too)

  January 26, 2010

  In August 2007, the Wall Street Journal's David Reilly called for hot news.* I replied that AIG had material mark-to-market losses for the second quarter of 2007, yet it took no write-downs whatsoever for its credit default swaps on underlying mortgage related "super senior" collateralized debt obligations (CDOs). I looked at one aggre
gate position of credit default swaps (CDSs) amounting to more than $19 billion.** The mark-to-market losses were just one part of the problem. Since too many of the assets backing the position had high risk of severe principal losses, it also had a lot of "cliff risk," as in falling off of one. AIG had a grave problem just from this position alone, and AIG had other serious problems.

  Initially, I agreed to talk to Reilly on background, but I didn't want to be named or quoted. AIG vigorously denied it would ever take a write-down or a loss on the CDSs, much less one that was material to its earnings statement. Reilly called me again asking if I were sure. I said I was positive. He called AIG again and then me, asking for a quote this time. I didn't want to get into a fight with AIG in the "Heard on the Street" column and reminded Reilly that I only agreed to talk to him on background. Reilly's editor called me and said that given that AIG's denial was so forceful, the paper needed me to go on the record. I know and trust this editor, so I agreed. Reilly quoted me but omitted that I said the difference was material. Even the Wall Street Journal hesitates to use the word "material" to describe an accounting misstatement. It guarantees a conference call with lawyers.