The New Robber Barons Page 7

  Goldman responded to the New York Times saying many of these deals were the result of demand from investing clients seeking long exposure. In an earlier Huffington Post article, I wrote about Goldman's key role in the AIG crisis; it traded or originated $33 billion of AIG's $80 billion CDOs. AIG was long the majority of six of Goldman's Abacus deals. These value-destroying CDOs were stuffed with BBB-rated (the lowest "investment grade" rating) portions of other deals. These BBB-rated portions were overrated from the start. Many of them eventually exploded like firecrackers.

  Goldman said it suffered losses due to the deterioration of the housing market and disclosed $1.7 billion in residential mortgage exposure write-downs in 2008. These losses would have been substantially higher had it not hedged. Goldman describes its activities as prudent risk management. Many Wall Street firms wound up taking losses. The question is, however, how did they manage to get through a couple of bonus cycles without taking accounting losses while showing "profits?"

  The answer is that they sold a lot of "hot air" disguised as valuable securities. Goldman claims this was prudent risk management. In reality, Goldman created products that it knew or should have known were overrated and overpriced.

  If Wall Street had not manufactured value-destroying securities and related credit derivatives, the money supply for bad loans would have been choked off years earlier. Instead, Wall Street was chiefly responsible for the "financial innovation" that did massive damage to the U.S. economy.

  Earlier, Goldman denied it could have known this was a problem, yet acknowledged I had warned about the grave risks at the time. If Goldman wants to stick to its story that it didn't know the gun was loaded, then it is not in the public interest to rely on Goldman's opinion about the greater risk it now poses to the global markets.

  Goldman excuses its participation by saying its counterparties were sophisticated and had the resources to do their own research. This is a fair point if Goldman were defending itself in a lawsuit with a sophisticated investor trying to recover damages. It is not a valid point when discussing public funds that were used to bail out AIG, Goldman, and Goldman's "customers."

  Goldman claims the portfolios were fully disclosed to its customers. Yet at the time of the AIG bailout, Goldman did not disclose the nature of its trades with AIG, and Goldman did not disclose these portfolios to the U.S. public. If it had, the public might have balked at the bailout.

  The public is an unwilling majority owner in AIG, and public money was funneled directly to Goldman Sachs as a result of suspect activity. The circumstances of AIG's crisis were extraordinary and without precedent. I maintain that the public is owed reparations, and it would be fair to make all of AIG's counterparties buy back the CDOs at full price, and they can keep the discounted value themselves.

  Some similar CDOs currently trade for less than a dime on the dollar in the secondary market. Goldman's trades amounted to more than $20 billion (albeit Goldman traded or originated $33 billion of AIG's $80 billion of this ilk). If Goldman wants to claim it was "only following orders" for customers, that is between Goldman and the hedge funds or other "customers" involved. Goldman can fight it out with them if it wants its money back.

  Goldman's synthetic deals that are still on AIG's books can be settled at ten cents on the dollar. This is the value at which other bond insurers have settled similar deals. The excess money already paid to Goldman can used to pay down AIG's public debt.

  Endnote: There is nothing wrong with hedging or taking the opposite view to one's customers. There is nothing wrong with using credit derivatives to accomplish this goal. The underlying RMBSs and CDOs, however, were value-destroying and misrated. I and others said so at the time deals like this were created. GSAMP Trust 2006-3 is just one example. Tranches sold as "AAA," "super-senior," and "investment grade" did not deserve those labels at the outset, and any underwriter or securitization professional worth their salt knew it.

  AIG Continued to Write Risky CDO Protection After 2005 [Lewis and TIME are Incorrect.]

  March 20, 2010

  JT Note: Independent to the topic below, Stephen Gandel wrote an incorrect story for TIME. He didn't obtain updates from the rating agencies, and he either didn't hear or didn't understand what I said, because what he wrote does not represent my position regarding AIG. It is inexcusable, since there are already articles and facts in the public domain about the poor performance of CDOs underwritten by Goldman and protected by AIG. Read my position in the "News" section of this site, and this Wall Street Journal article is also a good place to start.

  Several people asked me this week whether AIG wrote credit default swap protection after 2005, since Michael Lewis wrote that AIG stopped writing protection at the end of 2005. Actually, AIG wrote protection after 2005 including protection on suspect residential mortgage products. In fact, AIG continued to write protection, even after I challenged its failure to take material write downs on its “super senior” CDSs in August 2007.

  One had to do analysis to know this, until Congress released details of AIG’s of Schedule A filing. The general public would not have had access to the necessary information, since AIG’s schedule A was redacted. Matthew Goldstein filed a FOIA for the redacted Schedule A data. When that didn’t work and Congress finally released the information, he summarized AIG’s post-2005 activity (“AIG Filing Casts Doubt on ‘Limited Exposure’ Claim,” Reuters, February 24, 2010).

  Some of AIG’s worst performing trades occurred after 2005. Notably, Mathew Goldstein points out in his article that Goldman Sachs was the biggest single purchaser of default protection from AIG on CDOs backed by residential mortgage backed securities after 2005. Goldman “purchased CDS on 10 securities with a face value of $6.54 billion.” Deutsche also bought protection on $7.4 billion of commercial real estate backed CDOs from AIG after 2005 (Max 2007-1 and Max 2008-1).

  [N.B. $8.2 billion of Goldman synthetic CDOs, including Abacus deals originated after 2005, were not assumed by Maiden Lane III. The risk of these credit default swaps remain AIG’s—and taxpayers’—obligation.]

  Less obvious is a secondary effect of managers at times trading very risky post-2005 CDOs into the CDO portfolios managed for AIG (“Congress Exposes Potential Profiteering in AIG’s Deals,” HuffPo Jan 28, 2010).

  The above does not address AIG’s securities lending, other long-dated derivatives exposures, or its mortgage related investments for its insurance portfolios.

  Goldman CEO Lloyd Blankfein to Treasury Secretary Hank Paulson: “OK, Now What?” (Humor)

  August 23, 2010

  It’s September 2008. Goldman and AIG are trading in the markets, and Goldman notices that AIG seems to be having very severe liquidity problems. AIG needs to renew repo agreements after investing the trades’ cash in plunging mortgage collateral bought from investment banks, and asks around for various other sources of funding.

  Recognizing an emergency, Blankfein whips out his cell phone and calls Hank Paulson. He gasps to the Treasury Secretary and former Goldman CEO: "AIG, one of my biggest trading partners is going under! This will cause a market meltdown! What should we do?"

  Paulson, in a calm comforting voice says: "Take a deep breath and pull yourself together. I can help. First, let's make sure AIG is really going under."

  There is a long pause, during which Blankfein checks the status of his credit default protection and other hedges against an AIG failure, yanks AIG’s credit lines, and presses AIG with calls for collateral on credit default swap agreements on plummeting CDOs.

  Blankfein’s voice finally comes back on the line. He says: "OK, now what?"

  Note: This is my takeoff on Spike Milligan’s Classic Joke:

  Two hunters are out in the woods when one of them collapses. He doesn't seem to be breathing and his eyes are glazed. The other guy whips out his phone and calls the emergency services. He gasps, "My friend is dead! What can I do?".

  The operator says "Calm down. I can help. First, let's make sure he's dead."<
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  There is a silence, then a shot is heard.

  Back on the phone, the guy says "OK, now what?"

  Goldman Sachs: Bullies on the Block

  September 13, 2010

  For most Americans, the Great Recession never ended, and for many of the 14.9 million unemployed Americans, it's a 21st century Depression. Yet in December 2009, Larry Summers, director of the White House National Economic Council, told ABC news: "Today, everybody agrees that the recession is over, and the question is what the pace of the expansion is going to be."

  The recession was over for bailed-out banks paying billions in bonuses. Taxpayers fund Wall Street with nearly zero-cost loans, and Congress changed accounting rules in April 2009 so that Wall Street firms could hide losses to create the illusion of "big profits," as they try to fill the gaping holes in their balance sheets.

  Money Cartel's Yes Men

  The money cartel is as dangerous as the Mexican drug cartel. Its weapons of choice are taxpayer subsidized funds for swarms of Washington lobbyists, "money jobs" for politically connected yes men, and lucrative positions for former regulators and the law firms that hire them. Wall Street is winning the class war, and taxpayers supplied the arms.

  Wall Street's PR spin, lobbying, money train to Congress, and bullying of fact finders have kept much of the truth away from the public. Frank Rich of The New York Times pointed out: "What we don't know will hurt us, and quite possibly on a more devastating scale than any [Al] Qaeda attack. Americans must be told the full story of how Wall Street gamed and inflated the housing bubble, made out like bandits, and then left millions of households in ruin."

  In my book on the global financial meltdown, Dear Mr. Buffett: What an Investor Learns 1,269 Miles from Wall Street, I explain the relationship between failed mortgage lenders and Wall Street's private-label multi-tenacled securitization process. It was a widespread interconnected Ponzi scheme. The bulk of toxic mortgages were the result of Wall Street's private label securitization (loan packaging) machine. Fannie and Freddie were forced to buy hundreds of billions of "highly rated" Wall Street mortgage backed "assets," and they are now Wall Street's ongoing mortgage dumping grounds. There should be thousands of felony indictments for accounting fraud and securities fraud. [See "President Obama: Bring Back Black," Huffington Post, April 26, 2010.]

  Taxpayers Bailout Goldman Sachs

  Goldman Sachs is by no means the only offender, but it epitomizes the problem. Goldman enjoys many benefits and subsidies as a result of Congress's massive bailout of Wall Street. [See "Goldman Sachs: Spinning Gold," Huffington Post, April 7, 2010.]

  In August 2007, I publicly challenged AIG's accounting for its "protection" (credit default swaps) on value destroying CDOs (collateralized debt obligations backed by mortgages and various other assets including credit derivatives). AIG said it had zero accounting losses; but its losses were material, and AIG had a serious problem. The potential for actual losses was so enormous that I called Warren Buffett and met with Jamie Dimon, CEO of JPMorgan Chase. Unbeknownst to me at the time, Goldman was already pressuring AIG for more than a billion dollars in collateral.

  In the fall of 2009, I uncovered the fact that Goldman Sachs had a much larger role in the mortgage bets that nearly toppled AIG than the Treasury, the Fed, or Goldman itself publicly disclosed in September 2008, when AIG was first bailed out. Then Treasury Secretary Henry Paulson was Goldman's CEO at the time the deals were done with AIG. He was also CEO when Goldman underwrote other value destroying CDOs against which foreign banks bought protection.

  Stephen Friedman, a former Chairman of Goldman Sachs and then Chairman of the New York Fed, concurrently sat on Goldman's board.

  These men had serious conflicts of interest, and events played out very much to Goldman's benefit at the expense of taxpayers.

  By September 2008, AIG was drained of cash and close to imploding. At the time Fed Chairman Ben Bernanke testified AIG had to be saved lest AIG's failure trigger a Great Depression. (In March 2010, Treasury Secretary (and ex-President of the NY Fed) Timothy Geithner and ex-Goldman CEO and ex-Treasury Secretary Hank Paulson also testified to this.) Instead of allowing AIG to fail with minimal intervention, Washington protected culpable bankers.

  In September 2008, David Viniar, CFO of Goldman Sachs, said Goldman's exposure to AIG was "immaterial whatever the outcome at AIG." Goldman CEO Lloyd Blankfein would later testify to Congress in that Goldman "facilitates customer transactions." After analyzing new information, on October 28, 2009, I issued a commentary, "Goldman's Lies of Omission," stating that in my opinion, David Viniar, Goldman's CFO, had lied.

  Intimidation Tactics and Cover-Ups

  Goldman's response was to initiate an hour long phone conversation: a combination of a veiled threat (I don't have a problem...but our lawyers might) and obfuscations. In response, I issued an "apology" to David Viniar. Viniar may not technically have lied; perhaps he is just unimaginative about risk. Either way, shareholders might ask why Goldman's officers sucked tens of billions in bonuses out of the Goldman as they "hedged" value destroying CDOs with AIG--an entity that nearly collapsed, while it still owed billions to Goldman.

  Goldman said it was only involved in AIG trades as an "intermediary." That wasn't true. As a further response to Goldman's pressure, I revealed Goldman's key role in AIG's crisis. At the time, I was confident that within a week, an expected SIGTARP (Special Inspector General for the Troubled Asset Relief Program) report would have similar findings, but inexplicably, it did not.

  My findings were sound, however. When Goldman blew smoke about only being an "intermediary," it didn't know that I had information that had been suppressed by the Fed, AIG, Goldman, Treasury, and the SEC. [See: Goldman's Undisclosed Role in AIG's Distress, TSF, November 10, 2009.]

  The AIG bailout benefited Goldman, the firm responsible for the largest share of many value destroying collateralized debt obligations (CDOs) against which AIG sold protection ($33 billion of the $80 billion). Goldman had already extracted $7.5 billion from AIG by September 2008, and Goldman's cronies had extracted even more billions. When taxpayers bailed out AIG in September 2008, AIG still owed billions of dollars more on top of that.

  Out of the approximately $20 billion CDOs Goldman protected directly with AIG, Goldman had structured and created $6 billion CDOs named "Abacus," against which it bought protection from AIG. (Abacus CDOs were backed by credit derivatives referencing value destroying mortgage backed assets, and some had hidden features that disadvantaged investors.) That goes far beyond merely acting as an intermediary.

  AIG reportedly settled $3 billion (of the original $6 billion) Abacus related deals at a loss of $1.5 billion to $2 billion by April 2010. SIGTARP is now investigating these deals, which are similar to Abacus 2007-AC1, a CDO at issue in the U.S. Securities and Exchange Commission lawsuit against Goldman alleging failure to disclose material information to investors.

  The fraud suit was settled settled for $550 million, of which $250 billion was paid in reparations to two sophisticated foreign banks. Among other issues the SEC's settlement swept under the rug was that the Abacus deal may have been used to unload other complex value-destroying CDOs Goldman created. [See: "Abacus might have had other benefits for Goldman," by Matthew Goldstein, Reuters, April 24, 2010.]

  Goldman also knew or should have known the character of the risk of $14 billion third-party value destroying CDOs it protected with AIG. Goldman claimed it acted as an "intermediary," as opposed to say, exchanging favors in a complicated game of "you bury my bodies and I'll bury yours." The Fed used taxpayer dollars to settle these transactions for 100 cents on the dollar, an appalling example of crony capitalism. [See: "Redacted AIG filing might have spotted worst deals," by Matthew Goldstein, Reuters, January 10, 2010.]

  Moreover, Goldman had also created additional value destroying CDOs (some were backed by cash assets and credit derivatives referencing value destroying CDOs), against which other banks--including some foreign banks-
-bought protection from AIG. Crony capitalism bailed out Goldman's trading partners for 100 cents on the dollar, even though other bond insurers were settling deals for much less than that, and many of these deals were worthy of thorough investigations and audits.

  Goldman reneged on its offer to provide me with confirmation of the fact that it hadn't bought credit default protection [for a potential default by AIG] on more than a small fraction of the full notional amount of the CDOs it hedged with AIG. Contrary to its assertions to Congress, Goldman Sachs was significantly exposed to AIG's potential failure. It had both economic and reputation risk.

  "Collateral" held by Goldman in September 2008 would likely have been clawed back by a sensible liquidator, after the nature of the CDOs was known. Even if Goldman got to keep the collateral, an AIG failure posed significant economic risk, since its hedges [credit default swaps on AIG] were relatively small, and the prices of the CDOs were plummeting.

  Goldman also had litigation risk on the CDOs it underwrote (Davis Square and more) and sold to foreign banks that bought protection from AIG. Taxpayer money later made that problem disappear when the Fed settled for 100 cents on the dollar. This information had been suppressed and kept from public view.