“Greed changed Goldman Sachs”
– A former Goldman Sachs’ partner
Sightings from The Catbird Seat
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From Webster’s New World Dictionary of the American Language, College Edition:
greed - n. excessive desire for acquiring or having; desire for more than one needs or deserves . . .
April 16, 2010
Goldman Sachs FRAUD Charges Filed By SEC
AP/Huffington Post
The government has accused Goldman Sachs of defrauding investors by failing to disclose conflicts of interest in mortgage investments it sold as the housing market was faltering.
The Securities and Exchange Commission announced Friday civil fraud charges against the Wall Street powerhouse and one of its executives. The agency alleges Goldman failed to disclose that one of its clients helped create -- and then bet against -- subprime mortgage securities that Goldman sold to investors.
In essence, Goldman is accused of pushing a mortgage investment that was secretly devised to fail.
Investors in the mortgage securities are alleged to have lost more than $1 billion, the SEC noted.
The SEC claims Goldman Sachs and one of its top officers misled investors by not disclosing that hedge fund manager John Paulson, who made billions betting against the housing market, selected the assets that went into a complex security called "Abacaus."
Paulson & Co. is one of the world's largest hedge funds, and paid Goldman roughly $15 million for structuring these deals in 2007.
"The simultaneous selling of securities to customers and shorting them because they believed they were going to default is the most cynical use of credit information that I have ever seen," finance expert Sylvain R. Raynes told the New York Times about such deals.
"When you buy protection against an event that you have a hand in causing, you are buying fire insurance on someone else's house and then committing arson."
Goldman Sachs shares fell more than 10 percent after the SEC announcement...
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January 7, 2010
Tim Geithner's NY Fed told AIG to keep
quiet about $105bn paid to banks
Tim Geithner's Federal Reserve Bank of New York urged American International Group (AIG) to remain silent on $105bn (£65bn) of payments made to banks including Goldman Sachs and Deutsche Bank at the height of the financial crisis.
By James Quinn, US Business Editor
The New York Fed, under Mr Geithner's leadership until he was appointed US Treasury Secretary in January 2009, instructed the troubled insurer to withhold details of the payments from the American public, which bailed out AIG by as much as $182bn at its financial nadir.
According to a series of emails obtained and made public by Congressman Darrell Issa, AIG had planned to inform investors in a regulatory filing published on December 24, 2008, that it had paid counter-party banks owed money at a rate of 100 cents on the dollar. The banks were owed the money for credit-default swaps they had entered into, mainly on behalf of clients.
However, according to the emails, an official from the NY Fed crossed out the reference ahead of publication, and there was no mention of the payments, which came to light five months later, in the filing.
"It appears that the New York Fed deliberately pressured AIG to restrict and delay the disclosure of important information," said Congressman Issa.
Publication of the potentially embarrassing emails comes two months after it emerged that it was the New York Fed that was behind a decision to pay the banks in full, rather than at a discounted rate.
"Our position has always been that if AIG's securities lawyers determine that AIG is legally obligated to make a particular filing or disclosure, then that is what AIG must do," said a spokesman for the New York Fed.
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December 30, 2009
Goldman's offshore deals deepened global financial crisis
By Greg Gordon | McClatchy Newspapers
NEW YORK — When financial titan Goldman Sachs joined some of its Wall Street rivals in late 2005 in secretly packaging a new breed of offshore securities, it gave prospective investors little hint that many of the deals were so risky that they could end up losing hundreds of millions of dollars on them.
McClatchy has obtained previously undisclosed documents that provide a closer look at the shadowy $1.3 trillion market since 2002 for complex offshore deals, which Chicago financial consultant and frequent Goldman critic Janet Tavakoli said at times met "every definition of a Ponzi scheme."
The documents include the offering circulars for 40 of Goldman's estimated 148 deals in the Cayman Islands over a seven-year period, including a dozen of its more exotic transactions tied to mortgages and consumer loans that it marketed in 2006 and 2007, at the crest of the booming market for subprime mortgages to marginally qualified borrowers.
In some of these transactions, investors not only bought shaky securities backed by residential mortgages, but also took on the role of insurers by agreeing to pay Goldman and others massive sums if risky home loans nose-dived in value — as Goldman was effectively betting they would.
Some of the investors, including foreign banks and even Wall Street giant Merrill Lynch, may have been comforted by the high grades Wall Street ratings agencies had assigned to many of the securities. However, some of the buyers apparently agreed to insure Goldman well after the performance of many offshore deals weakened significantly beginning in June 2006.
Goldman said those investors were fully informed of the risks they were taking.
These Cayman Islands deals, which Goldman assembled through the British territory in the Caribbean, a haven from U.S. taxes and regulation, became key links in a chain of exotic insurance-like bets called credit-default swaps that worsened the global economic collapse by enabling major financial institutions to take bigger and bigger risks without counting them on their balance sheets.
The full cost of the deals, some of which could still blow up on investors, may never be known.
Before the subprime crisis, the U.S. financial system had used securities for 40 years to help Americans finance their houses, cars and college educations, said Gary Kopff, a financial services consultant and the president of Everest Management Inc. in Washington. The offshore deals, he lamented, "became the biggest contributors to the trillions of dollars of losses" in 2008's global meltdown.
While Goldman wasn't alone in the offshore deal making, it was the only big Wall Street investment bank to exit the subprime mortgage market safely, and it played a pivotal role, hedging its bets earlier and with more parties than any of its rivals did.
McClatchy reported on Nov. 1 that in 2006 and 2007, Goldman peddled more than $40 billion in U.S.-registered securities backed by at least 200,000 risky home mortgages, but never told the buyers it was secretly betting that a sharp drop in U.S. housing prices would send the value of those securities plummeting. Many of those bets were made in the Caymans deals.
At the time, Goldman's chief spokesman, Lucas van Praag, dismissed as "untrue" any suggestion that the firm had misled the pension funds, insurers, foreign banks and other investors that bought those bonds. Two weeks later, however, Chairman and Chief Executive Lloyd Blankfein publicly apologized — without elaborating — for Goldman's role in the subprime debacle.
Goldman's wagers against mortgage securities similar to those it was selling to its clients are now the subject of an inquiry by the Securities and Exchange Commission, according to two people familiar with the matter who declined to be identified because of its sensitivity. Spokesmen for Goldman and the SEC declined to comment on the inquiry.
Goldman's defenders argue that the legendary firm's relatively unscathed escape from the housing collapse is further evidence that it's smarter and quicker than its competitors. Its critics, however, say that the firm's behavior in recent years shows that it's slipped its ethical moorings; that Wall Street has degenerated into a casino in which the house constantly invents new games to ensure that its profits keep growing; and that it's high time for tougher federal regulations.
In 2006 and 2007, as the housing market peaked, Goldman underwrote $51 billion of deals in what mushroomed into an under-the-radar, $500 billion offshore frenzy, according to data from the financial services firm Dealogic. At least 31 Goldman deals in that period involved mortgages and other consumer loans and are still sheltered by the Caymans' opaque regulatory apparatus.
Tavakoli, an expert in these types of securities, said it's time to start discussing "massive fraud in the financial markets" that she said stemmed from these offshore deals.
"I'm talking about hundreds of billions of dollars in securitizations," she said, without singling out Goldman or any other dealer. " . . . We nearly destroyed the global financial markets."
HEADS, I WIN; TAILS, YOU LOSE
Goldman's activities in the Caymans helped it unload some of its subprime-related risks on others and also amass tens of billions of dollars in protection against a U.S. housing crash that ultimately occurred. These deals have accounted for a sizeable share of the firm's $103 billion in revenues and more than $25 billion in profits since Jan. 1, 2007. At the end of 2009, Goldman had set aside more than $16 billion in cash and stock bonuses for its employees.
Many of Goldman's winning bets with other large U.S. banks raised the price tags of 2008's government bailouts of Citigroup, Bank of America, Morgan Stanley and others by sums that no one has yet determined because the contracts are private, according to people familiar with some of the transactions.
However, one billion-dollar transaction that Goldman assembled in early 2006 is illustrative. It called for the firm to receive as much as $720 million from Merrill Lynch and other investors if defaults surged in a pool of dicey U.S. residential mortgages, according to documents in a court dispute among the parties.
Securities experts said that deal is headed for a crash that's likely to cause serious losses for Merrill Lynch, which Bank of America acquired a year ago in a $50 billion government-arranged rescue.
Taxpayers got hit for tens of billions of dollars in the Caymans deals because Goldman and others bought up to $80 billion in insurance from American International Group on the risky home mortgage securities underlying the deals.
AIG, rescued in September 2008 with $182 billion from U.S. taxpayers, later paid $62 billion to settle those credit-default swap contracts. The special inspector general who's tracking the use of federal bailout money has reported that beginning in 2004, Goldman itself bought $22 billion in insurance from AIG for dozens of pools of unregistered securities backed by dicey types of home loans.
When the federal government saved nearly bankrupt AIG, Goldman got $13.9 billion of the bailout money, and it still holds more than $8 billion in protection from AIG.
Tavakoli said that Goldman's subprime dealings burned taxpayers a second way. She said that three foreign banks — France's Calyon and Societe Generale and the Bank of Montreal — bought protection against securities they purchased in Goldman's Caymans deals, using AIG as a backstop.
Those banks got a total of $22.6 billion from AIG (Societe Generale $16.9 billion, Calyon $4.3 billion and Bank of Montreal $1.4 billion), though not all of the money was related to investments in deals underwritten by Goldman.
Each of the 12 Goldman deals in 2006 and 2007 traced by McClatchy included credit-default swaps that reserved a chance for the firm to lay down modest wagers that could bring thousand-fold returns if a bundle of securities, in several cases risky home mortgages, cratered.
The investors wouldn't buy the securities, but would agree that the insurance would hinge on their performance. Goldman said that it or an affiliate would hold those bets, at least initially.
"This might look stupid in hindsight, but at the time the investors thought they were lucky to get a piece of low-risk (AAA-rated) bonds created by Goldman Sachs with above-market returns," said Kopff, the securities expert.
The Wall Street ratings agency Moody's Investors Service has lowered to junk status the bulk of the securities in all 12 of those deals, devaluing some positions that Moody's initially rated as investment grade by 80 percent.
One Wall Street market participant who watched the disaster unravel said that the bankers and traders who packaged subprime mortgage-related deals in the Caymans deals got paid based on volume and would "jam the stuff anywhere they had to close the deal."
This individual, who declined to be identified for fear it would hurt his career, said that the swaps gave the banks an unlimited supply of cash and the mistaken belief that they had "an infinite return on investment."
The insurance unit of ACA Capital Holdings Inc. wrote $65 billion in swaps coverage, mostly on the Caymans deals called collateralized debt obligations, or CDOs, before it folded and turned nearly all its assets over to the banks that had thought ACA would backstop them.
The documents obtained by McClatchy also reveal that:
Goldman's Caymans deals were riddled with potential conflicts of interest, which Goldman disclosed deep in prospectuses that typically ran 200 pages or more. Goldman created the companies that oversaw the deals, selected many of the securities to be peddled, including mortgages it had securitized, and in several instances placed huge bets against similar loans.
Despite Goldman's assertion that its top executives didn't decide to exit the risky mortgage securities market until December 2006, the documents indicate that Goldman secretly bet on a sharp housing downturn much earlier than that.
Goldman pegged at least 11 of its Caymans deals in 2006 and 2007 solely on swaps tied in some cases to the performance of a bundle of securities that it neither owned nor sold, but used as markers to coax investors into covering its bets on a housing downturn.
If Goldman opted to buy the maximum swap protection cited in the 12 deals in which McClatchy found that it sold both swaps and mortgage-backed securities, and if the securities underlying the swaps defaulted, its clients would owe the firm $4.1 billion. If all 31 deals were similarly structured, investors could be on the hook to Goldman for as much as $10.6 billion, according to Kopff, who assisted McClatchy in analyzing the documents.
From 2005 to 2007, Goldman says it invited only sophisticated investors to act as its insurers. In those CDOs, Kopff said, Goldman appears to have created "mini-AIGs in the Caymans," arranging for investors to post the money that would cover the bets up front.
Kopff charged that Goldman inserted the credit-default swaps into CDO deals "like a Trojan Horse — secret bets that the same types of bonds that they were selling to their clients would in fact fail."
Goldman's chief financial officer, David Viniar, has said that the firm purchased the AIG swaps only as an "intermediary" on behalf of its clients, first writing protection on their securities, and then buying its own protection to eliminate those risks.
If that were true of all of the swaps contracts, however, Goldman would have earned only the lucrative investment fees on the deals and any gains from selling protection to its clients.
In a Dec. 24 letter to McClatchy, Goldman said it sold those products only to sophisticated investors and fully informed them of which securities would be the basis of any swap bets. The investors, it said, "could simply decide not to participate if they did not like some or all the securities."
'WHY YOU HAVEN'T SEEN A LOT OF COMPLAINING'
It's impossible to tell without Goldman opening its books how much the firm bet against the housing market using only its own money.
Goldman said it disclosed $1.7 billion in residential mortgage losses in 2008, and that the losses "would have been substantially higher" without its contrary bets, or "hedges." It called those hedges "the cornerstone of prudent risk management."
The company declined, however, to reveal what share of its recent profits came from those secret bets and how much it stands to make if its Caymans deals continue to implode.
The new Caymans documents obtained by McClatchy, however, help peel back some of the shroud of secrecy around the market for more than 2,000 CDOs, the bulk of them peddled by six American and four European major banks, according to Dealogic.
As of Nov. 2, more than half of the 766 CDOs backed by risky mortgages and other consumer loans had experienced an "event of default," signaling a possible collapse, according to a report by Wells Fargo Securities. The default rate soared to 77 percent for 114 deals struck as the subprime mortgage market deteriorated in the second half of 2006, and to 86 percent for 148 deals in 2007, it reported.
Securities experts said that regardless of whose money Goldman used, investors on the losing end of the deals suffered the same effects.
Whether Goldman deceived investors with its secret bets depends partly on whether the courts or investigators conclude that disclosing the swaps would have dissuaded potential buyers from purchasing its registered mortgage securities, the experts said. Separate questions of disclosure could apply to clients who invested in the Caymans deals.
The Wall Street figure who insisted upon anonymity said that despite all the hoopla, there were few private investors in CDOs, and that banks have suffered most of the losses, one reason "why you haven't seen a lot of complaining."
Indeed, a computer match conducted for McClatchy by the National Association of Insurance Commissioners found no records of any insurance company investing in the 12 identifiable Goldman hybrid deals containing credit-default swaps.
However, other experts said that many of Wall Street's victims have chosen to remain silent. Douglas Elliott, a former investment banker at J.P. Morgan Chase who's a fellow at The Brookings Institution, a center-left policy organization in Washington, said that pension funds are loath to discuss investments that "blow up" because "it could potentially lead to lawsuits against them."
Christopher Whalen, a senior vice president and managing director of California-based Institutional Risk Analysis, said that foreign banks "got stuffed" in the Caymans deals, but that Wall Street dealers typically averted litigation by buying back failed securities at a discount to avoid court fights. Any investors who sued would face the threat of being "blackballed" — shunned by Wall Street firms, he said.
The CDO devastation, Whalen said, underscores the need to close a "disclosure loophole" that allows Wall Street to avoid publicly reporting these deals.
(This article is part of an occasional series on the problems in mortgage finance.)
MORE FROM MCCLATCHY
How Goldman secretly bet on the U.S. housing crash
Goldman takes on new role: taking away people's homes
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http://www.mcclatchydc.com/336/story/81465.html
October 9, 2009
BILL MOYERS: Welcome to the JOURNAL.
I sat in a theater packed with passionate moviegoers, every one of them seemingly aghast at the Wall Street skullduggery exposed by Michael Moore in his latest film. It's called 'Capitalism: A Love Story.' Here's an excerpt:
MICHAEL MOORE: We're here to get the money back for the American People. Do you think it's too harsh to call what has happened here a coup d'état? A financial coup d'état?
MARCY KAPTUR: That's, no. Because I think that's what's happened. Um, a financial coup d'état?
MICHAEL MOORE: Yeah.
MARCY KAPTUR: I could agree with that. I could agree with that. Because the people here really aren't in charge. Wall Street is in charge.
BILL MOYERS: That's the progressive Representative from Ohio, Marcy Kaptur, she's with me now. She has a Masters from the University of Michigan, did graduate study at M.I.T. and still lives in the same house in the Toledo working class neighborhood where she grew up.
She's in her 14th term in Congress, the longest-serving Democratic woman in the history of the House, and she's an outspoken financial watchdog on three important Committees: Appropriations, Budget and Oversight and Government Reform.
Also with me is a familiar face to viewers of this broadcast. Simon Johnson is the former Chief Economist at the International Monetary Fund. He now teaches Global Economics and Management at M.I.T.'s Sloan School of Management. He's one of the founders of the website Baselinescenario.com. I check it out daily for Simon's take on the economic and financial crisis.
It's been a year since the great collapse and both my guests are well equipped to assess what's happened since then. Welcome to you both.
MARCY KAPTUR: Thank you.
BILL MOYERS: Let's look at this story that I just read from the Associated Press this week about how Treasury Secretary Geithner is on the phone several times a day with a select group of very powerful Wall Street bankers, especially Citigroup, J.P. Morgan, Goldman Sachs. He will talk to them when Members of Congress have to leave a message on the answering machine. And these are the bankers who helped bring on this calamity and who are now benefiting from it. What does that say to you?
MARCY KAPTUR: That says to me that Wall Street and Washington is a circuit. And because Mr.Geithner headed the New York Fed that that historic relationship, unfortunately, continues. And it gives them special access and special power to influence policy.
SIMON JOHNSON: Well, I think it really tells you how the system works. The system is based on access and is based on what on Wall Street shaping Washington's view of what's important.
It's the people who are very close to Mr. Geithner before when he was the head of the New York Fed. Before he became Treasury Secretary. These people have unparalleled access. And in a crisis, when everything is up for grabs, you don't know what's going on, the people who will take your phone calls, right, in government and people who are going to be standing in the oval office, making the key decisions. That's the heart of the system. That's the heart of how you get your agenda through, by changing their worldview.
MARCY KAPTUR: And they also move people. In other words, Mr. Geithner came from the New York Fed, he came from Wall Street, and he becomes Secretary of the Treasury. His predecessor, Mr. Paulson, came from Goldman Sachs, and he becomes Secretary of Treasury. You can go back decades, and you will see that there's this revolving door between Wall Street and Washington.
And I recently asked Chairman Bernanke of the Federal Reserve, 'Let me ask you a question. Would you be willing to consider a reform where the Cleveland Fed would have equal power to the New York Fed, in terms of how the Fed is run?'
And his answer was, 'No.' ...
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http://www.pbs.org/moyers/journal/10092009/watch.html
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September 6, 2009
Back to Business
Wall Street Pursues Profit in
Bundles of Life Insurance
After the mortgage business imploded last year, Wall Street investment banks began searching for another big idea to make money. They think they may have found one.
The bankers plan to buy “life settlements,” life insurance policies that ill and elderly people sell for cash — $400,000 for a $1 million policy, say, depending on the life expectancy of the insured person. Then they plan to “securitize” these policies, in Wall Street jargon, by packaging hundreds or thousands together into bonds. They will then resell those bonds to investors, like big pension funds, who will receive the payouts when people with the insurance die.
The earlier the policyholder dies, the bigger the return — though if people live longer than expected, investors could get poor returns or even lose money.
Either way, Wall Street would profit by pocketing sizable fees for creating the bonds, reselling them and subsequently trading them. But some who have studied life settlements warn that insurers might have to raise premiums in the short term if they end up having to pay out more death claims than they had anticipated.
The idea is still in the planning stages. But already “our phones have been ringing off the hook with inquiries,” says Kathleen Tillwitz, a senior vice president at DBRS, which gives risk ratings to investments and is reviewing nine proposals for life-insurance securitizations from private investors and financial firms, including Credit Suisse.
“We’re hoping to get a herd stampeding after the first offering,” said one investment banker not authorized to speak to the news media.
In the aftermath of the financial meltdown, exotic investments dreamed up by Wall Street got much of the blame. It was not just subprime mortgage securities but an array of products — credit-default swaps, structured investment vehicles, collateralized debt obligations — that proved far riskier than anticipated.
The debacle gave financial wizardry a bad name generally, but not on Wall Street. Even as Washington debates increased financial regulation, bankers are scurrying to concoct new products.
In addition to securitizing life settlements, for example, some banks are repackaging their money-losing securities into higher-rated ones, called re-remics (re-securitization of real estate mortgage investment conduits). Morgan Stanley says at least $30 billion in residential re-remics have been done this year.
Financial innovation can be good, of course, by lowering the cost of borrowing for everyone, giving consumers more investment choices and, more broadly, by helping the economy to grow. And the proponents of securitizing life settlements say it would benefit people who want to cash out their policies while they are alive.
But some are dismayed by Wall Street’s quick return to its old ways, chasing profits with complicated new products.
“It’s bittersweet,” said James D. Cox, a professor of corporate and securities law at Duke University. “The sweet part is there are investors interested in exotic products created by underwriters who make large fees and rating agencies who then get paid to confer ratings. The bitter part is it’s a return to the good old days.”
Indeed, what is good for Wall Street could be bad for the insurance industry, and perhaps for customers, too. That is because policyholders often let their life insurance lapse before they die, for a variety of reasons — their children grow up and no longer need the financial protection, or the premiums become too expensive. When that happens, the insurer does not have to make a payout.
But if a policy is purchased and packaged into a security, investors will keep paying the premiums that might have been abandoned; as a result, more policies will stay in force, ensuring more payouts over time and less money for the insurance companies.
“When they set their premiums they were basing them on assumptions that were wrong,” said Neil A. Doherty, a professor at Wharton who has studied life settlements.
Indeed, Mr. Doherty says that in reaction to widespread securitization, insurers most likely would have to raise the premiums on new life policies.
Critics of life settlements believe “this defeats the idea of what life insurance is supposed to be,” said Steven Weisbart, senior vice president and chief economist for the Insurance Information Institute, a trade group. “It’s not an investment product, a gambling product.”
After Mortgages
Undeterred, Wall Street is racing ahead for a simple reason: With $26 trillion of life insurance policies in force in the United States, the market could be huge.
Not all policyholders would be interested in selling their policies, of course. And investors are not interested in healthy people’s policies because they would have to pay those premiums for too long, reducing profits on the investment.
But even if a small fraction of policy holders do sell them, some in the industry predict the market could reach $500 billion. That would help Wall Street offset the loss of revenue from the collapse of the United States residential mortgage securities market, to $169 billion so far this year from a peak of $941 billion in 2005, according to Dealogic, a firm that tracks financial data.
Some financial firms are moving to outpace their rivals. Credit Suisse, for example, is in effect building a financial assembly line to buy large numbers of life insurance policies, package and resell them — just as Wall Street firms did with subprime securities.
The bank bought a company that originates life settlements, and it has set up a group dedicated to structuring deals and one to sell the products.
Goldman Sachs has developed a tradable index of life settlements, enabling investors to bet on whether people will live longer than expected or die sooner than planned. The index is similar to tradable stock market indices that allow investors to bet on the overall direction of the market without buying stocks.
Spokesmen for Credit Suisse and Goldman Sachs declined to comment.
If Wall Street succeeds in securitizing life insurance policies, it would take a controversial business — the buying and selling of policies — that has been around on a smaller scale for a couple of decades and potentially increase it drastically.
Defenders of life settlements argue that creating a market to allow the ill or elderly to sell their policies for cash is a public service. Insurance companies, they note, offer only a “cash surrender value,” typically at a small fraction of the death benefit, when a policyholder wants to cash out, even after paying large premiums for many years.
Enter life settlement companies. Depending on various factors, they will pay 20 to 200 percent more than the surrender value an insurer would pay.
But the industry has been plagued by fraud complaints. State insurance regulators, hamstrung by a patchwork of laws and regulations, have criticized life settlement brokers for coercing the ill and elderly to take out policies with the sole purpose of selling them back to the brokers, called “stranger-owned life insurance.”
In 2006, while he was New York attorney general, Eliot Spitzer sued Coventry, one of the largest life settlement companies, accusing it of engaging in bid-rigging with rivals to keep down prices offered to people who wanted to sell their policies. The case is continuing.
“Predators in the life settlement market have the motive, means and, if left unchecked by legislators and regulators and by their own community, the opportunity to take advantage of seniors,” Stephan Leimberg, co-author of a book on life settlements, testified at a Senate Special Committee on Aging last April.
Tricky Predictions
In addition to fraud, there is another potential risk for investors: that some people could live far longer than expected.
It is not just a hypothetical risk. That is what happened in the 1980s, when new treatments prolonged the life of AIDS patients. Investors who bought their policies on the expectation that the most victims would die within two years ended up losing money.
It happened again last fall when companies that calculate life expectancy determined that people were living longer.
The challenge for Wall Street is to make securitized life insurance policies more predictable — and, ideally, safer — investments. And for any securitized bond to interest big investors, a seal of approval is needed from a credit rating agency that measures the level of risk.
In many ways, banks are seeking to replicate the model of subprime mortgage securities, which became popular after ratings agencies bestowed on them the comfort of a top-tier, triple-A rating. An individual mortgage to a home buyer with poor credit might have been considered risky, because of the possibility of default; but packaging lots of mortgages together limited risk, the theory went, because it was unlikely many would default at the same time.
While that idea was, in retrospect, badly flawed, Wall Street is convinced that it can solve the risk riddle with securitized life settlement policies.
That is why bankers from Credit Suisse and Goldman Sachs have been visiting DBRS, a little known rating agency in lower Manhattan.
In early 2008, the firm published criteria for ways to securitize a life settlements portfolio so that the risks were minimized.
Interest poured in. Hedge funds that have acquired life settlements, for example, are keen to buy and sell policies more easily, so they can cash out both on investments that are losing money and on ones that are profitable. Wall Street banks, beaten down by the financial crisis, are looking to get their securitization machines humming again.
Ms. Tillwitz, an executive overseeing the project for DBRS, said the firm spent nine months getting comfortable with the myriad risks associated with rating a pool of life settlements.
Could a way be found to protect against possible fraud by agents buying insurance policies and reselling them — to avoid problems like those in the subprime mortgage market, where some brokers made fraudulent loans that ended up in packages of securities sold to investors? How could investors be assured that the policies were legitimately acquired, so that the payouts would not be disputed when the original policyholder died?
And how could they make sure that policies being bought were legally sellable, given that some states prohibit the sale of policies until they have been in force two to five years?
Spreading the Risk
To help understand how to manage these risks, Ms. Tillwitz and her colleague Jan Buckler — a mathematics whiz with a Ph.D. in nuclear engineering — traveled the world visiting firms that handle life settlements. “We do not want to rate a deal that blows up,” Ms. Tillwitz said.
The solution? A bond made up of life settlements would ideally have policies from people with a range of diseases — leukemia, lung cancer, heart disease, breast cancer, diabetes, Alzheimer’s. That is because if too many people with leukemia are in the securitization portfolio, and a cure is developed, the value of the bond would plummet.
As an added precaution, DBRS would run background checks on all issuers. Also, a range of quality of life insurers would have to be included.
To test how different mixes of policies would perform, Mr. Buckler has run computer simulations to show what would happen to returns if people lived significantly longer than expected.
But even with a math whiz calculating every possibility, some risks may not be apparent until after the fact. How can a computer accurately predict what would happen if health reform passed, for example, and better care for a large number of Americans meant that people generally started living longer? Or if a magic-bullet cure for all types of cancer was developed?
If the computer models were wrong, investors could lose a lot of money.
As unlikely as those assumptions may seem, that is effectively what happened with many securitized subprime loans that were given triple-A ratings.
Investment banks that sold these securities sought to lower the risks by, among other things, packaging mortgages from different regions and with differing credit levels of the borrowers. They thought that if house prices dropped in one region — say Florida, causing widespread defaults in that part of the portfolio — it was highly unlikely that they would fall at the same time in, say, California.
Indeed, economists noted that historically, housing prices had fallen regionally but never nationwide. When they did fall nationwide, investors lost hundreds of billions of dollars.
Both Standard & Poor’s and Moody’s, which gave out many triple-A ratings and were burned by that experience, are approaching life settlements with greater caution.
Standard & Poor’s, which rated a similar deal called Dignity Partners in the 1990s, declined to comment on its plans. Moody’s said it has been approached by financial firms interested in securitizing life settlements, but has not yet seen a portfolio of policies that meets its standards.
Investor Appetite
Despite the mortgage debacle, investors like Andrew Terrell are intrigued.
Mr. Terrell was the co-head of Bear Stearns’s longevity and mortality desk — which traded unrated portfolios of life settlements — and later worked at Goldman Sachs’s Institutional Life Companies, a venture that was introducing a trading platform for life settlements. He thinks securitized life policies have big potential, explaining that investors who want to spread their risks are constantly looking for new investments that do not move in tandem with their other investments.
“It’s an interesting asset class because it’s less correlated to the rest of the market than other asset classes,” Mr. Terrell said.
Some academics who have studied life settlement securitization agree it is a good idea. One difference, they concur, is that death is not correlated to the rise and fall of stocks.
“These assets do not have risks that are difficult to estimate and they are not, for the most part, exposed to broader economic risks,” said Joshua Coval, a professor of finance at the Harvard Business School. “By pooling and tranching, you are not amplifying systemic risks in the underlying assets.”
The insurance industry is girding for a fight. “Just as all mortgage providers have been tarred by subprime mortgages, so too is the concern that all life insurance companies would be tarred with the brush of subprime life insurance settlements,” said Michael Lovendusky, vice president and associate general counsel of the American Council of Life Insurers, a trade group that represents life insurance companies.
And the industry may find allies in government. Among those expressing concern about life settlements at the Senate committee hearing in April were insurance regulators from Florida and Illinois, who argued that regulation was inadequate.
“The securitization of life settlements adds another element of possible risk to an industry that is already in need of enhanced regulations, more transparency and consumer safeguards,” said Senator Herb Kohl, the Democrat from Wisconsin who is chairman of the Special Committee on Aging.
DBRS agrees on the need to be careful. “We want this market to flourish in a safe way,” Ms. Tillwitz said.
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Exhibit in CV05-00030 - U S Dept of Justice vs Harmon
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July 24, 2009
Jersey Mayors Stung in Graft Probe
By AMIR EFRATI, SUZANNE SATALINE and DIONNE SEARCEY
New Jersey has never been short of corruption scandals, but the one that unfolded yesterday was surprising even by the standards of the state that inspired "The Sopranos."
Federal agents swept across New Jersey and New York on Thursday, charging 44 people -- including mayors, rabbis and even one alleged trafficker in human kidneys -- in a decade long investigation into public corruption and international money laundering.
The key to the investigation: a real-estate developer who became an informant after being arrested on bank-fraud charges in 2006, according to a person familiar with the case. The developer, Solomon Dwek, wore a wire for the Federal Bureau of Investigation while offering to bribe New Jersey mayors and other public officials, that person said.
A lawyer for Mr. Dwek didn't respond to requests for comment.
While the state has a long history of dirty politics -- in Newark alone, three ex-mayors have been convicted of crimes unrelated to the latest sweep -- the scale of the allegations shocked veterans of New Jersey's political crises....
The arrests place an added burden on Gov. Jon Corzine, a Democrat in his first term who is running for re-election this year. Mr. Corzine ran four years ago promising to quash corruption. "The scale of corruption we're seeing as this unfolds is simply outrageous and cannot be tolerated," he said in a statement....
http://online.wsj.com/article/SB124835404608875685.html
June 22, 2009
Goldman Sachs on pace for
record bonuses: report
NEW YORK (Reuters) – Goldman JULY 24, 2009
Jersey Mayors Stung in Graft Probe
By AMIR EFRATI, SUZANNE SATALINE and DIONNE SEARCEY
New Jersey has never been short of corruption scandals, but the one that unfolded yesterday was surprising even by the standards of the state that inspired "The Sopranos."
Federal agents swept across New Jersey and New York on Thursday, charging 44 people -- including mayors, rabbis and even one alleged trafficker in human kidneys -- in a decade long investigation into public corruption and international money laundering.
The key to the investigation: a real-estate developer who became an informant after being arrested on bank-fraud charges in 2006, according to a person familiar with the case. The developer, Solomon Dwek, wore a wire for the Federal Bureau of Investigation while offering to bribe New Jersey mayors and other public officials, that person said.
A lawyer for Mr. Dwek didn't respond to requests for comment.
While the state has a long history of dirty politics -- in Newark alone, three ex-mayors have been convicted of crimes unrelated to the latest sweep -- the scale of the allegations shocked veterans of New Jersey's political crises....
The arrests place an added burden on Gov. Jon Corzine, a Democrat in his first term who is running for re-election this year. Mr. Corzine ran four years ago promising to quash corruption. "The scale of corruption we're seeing as this unfolds is simply outrageous and cannot be tolerated," he said in a statement....
http://online.wsj.com/Goldman Sachs Group Inc is on pace to make record bonus payouts after a robust first half, the Guardian newspaper reported on Sunday.
Goldman staff in London were briefed on the outlook and told they could look forward to the bonus hikes if the company registers its most profitable year ever, the report said.
The surge in projected profit can be attributed to a lack of competition and increased revenue from trading foreign currency, bonds and fixed-income products, the newspaper said, citing insiders at the firm.
Bonuses have been a point of contention between the Obama administration and Wall Street, which last fall endured a credit crisis that paralyzed the financial markets. The U.S. Treasury responded with the Troubled Asset Relief Program, which made $700 billion in loans available to banks.
Goldman Sachs received $10 billion from TARP, which it repaid last week.
In letters to lawmakers last week, Goldman CEO Lloyd Blankfein said the firm is obligated to "ensure that compensation reflects the true performance of the firm and motivates proper behavior."
A Goldman Sachs spokesman in New York was not immediately available to comment on Monday.
(Reporting by Steve Eder; editing by John Wallace)
http://news.yahoo.com/s/nm/20090622/bs_nm/us_goldman_bonuses
May 22, 2009
Why Goldman Sachs Is the Greediest and Most Dastardly of the Wall Street Pigs
By Jim Hightower, AlterNet
No doubt you're going to feel terrible about this. Top executives of Goldman Sachs, the Wall Street powerhouse, are in a pout about how they're being treated by you and me -- i.e., the public.
These execs are used to being revered as financial geniuses, but having taken a $10 billion bailout from us taxpayers last fall, they're now widely viewed as ... well, as welfare recipients. Like other welfare checks, the big one that Washington doled out to Goldman Sachs came with some strings attached, causing the chieftains to get all huffy. Especially galling to these princes of privilege is the limit on salaries and bonuses that bailed out banks are allowed to give to those in the executive suites.
Thus, Goldman recently threw a little hissy fit and haughtily declared that it will pay back our $10 billion to get the blankety-blank government out of its private business. Bold move! At last, Wall Streeters are reasserting their rugged, free-enterprise ethic, right?
Uh, not exactly.
What Goldman officials fail to mention is that they'll still be clinging to several other lifeboats floated to them by those skinflint meanies in Washington. For example, when insurance giant AIG was given some $200 billion last year to save it from total collapse, $12 billion of it was actually a pass-through payment to Goldman Sachs. Best of all, this quiet handout did not come with any of those nasty restrictions on executive pay -- so Goldman is happily hanging onto this backdoor subsidy.
Then there's another $28 billion that was slipped to these hardy free-marketers in the form of special low-interest loans guaranteed by the Federal Deposit Insurance Corp. -- a subsidy that Goldman's chief financial officer concedes is vital to its survival. Far from foregoing this government underwriting, the bankers say they expect to ask for $7 billion more of it.
Additionally, Goldman has taken many more billions' worth of low-cost loans from Federal Reserve funds. How many more billions? The Fed and the bank say this is "proprietary" information, not for public disclosure, even though it is public money.
So, while these golden ones are loudly repudiating the $10 billion public subsidy they took from us, they are coyly retaining at least 40 billion of our dollars to stay afloat -- a tidy sum that does not include any restrictions on pay levels. Coincidentally, Goldman has since announced that it is setting aside nearly $5 billion to be distributed at the end of the year as compensation for its executives, including payments for outlandish bonuses for those at the top.
Saying that such-and-such is the greediest bunch of bankers on Wall Street is like someone claiming to have the biggest hairdo in Dallas -- the competition is fierce. But that's quite a head of hair atop Goldman Sachs. Well, sniff the executives, we merely play the game according to the rules we're given.
Sure, and the Mafia plays its game strictly according to Hoyle. The difference is that the Mafia must actually break the rules, while Wall Street simply hires lobbyists and politicians to write the rules.
Indeed, Goldman Sachs has been nicknamed "Government Sachs" by its rivals, for it always seems to have at least one of its top officials strategically placed inside government to bend federal financial rules to its benefit. In the 1990s, for example, two Goldman foxes -- Robert Rubin and Larry Summers -- were inside the Clinton administration henhouse, where they helped craft the deregulation scams that enriched their former banks, before the scams caused the crash of our economy.
Following that crash, up stepped Hank Paulson, who had been Goldman's CEO before George W. plucked him off the Street to run the very bailout that has now deposited so much of our money in his bank. With Bush's demise, Hank is gone, but not Goldman. That sly Goldman Fox from the Clinton years, Larry Summers, is back, this time in Barack Obama's henhouse, where he's top economic advisor.
Not surprisingly, our gold keeps flowing to Goldman Sachs -- but don't expect the bankers to be grateful to you.
To find out more about Jim Hightower, and read features by other Creators Syndicate writers and cartoonists, visit the Creators Syndicate web page at www.creators.com .
Jim Hightower is a national radio commentator, writer, public speaker, and author of the new book, "Swim Against the Current: Even a Dead Fish Can Go With the Flow." (Wiley, March 2008) He publishes the monthly "Hightower Lowdown," co-edited by Phillip Frazer.
© 2009 Independent Media Institute. All rights reserved.
View this story online at: http://www.alternet.org/story/140166/
April 17, 2009
A.I.G. Chief Owns Significant
Stake in Goldman
By MARY WILLIAMS WALSH, New York Times
Edward M. Liddy, the dollar-a-year chief executive leading the American International Group since its bailout last fall, still owns a significant stake in Goldman Sachs, one of the insurer’s trading partners that was made whole by the government bailout of A.I.G.
Mr. Liddy earned most of his holdings in Goldman, worth more than $3 million total, as compensation for serving on the bank’s board and its audit committee until he stepped down in September to take the job at A.I.G. He moved to A.I.G. at the request of Henry M. Paulson Jr., then the Treasury secretary and a former Goldman director.
Details about his holdings were disclosed in Goldman’s proxy statement and confirmed by an A.I.G. spokeswoman, who said they constituted “a small percentage of his total net worth.” Mr. Liddy had already owned some stock in Goldman Sachs before joining its board in 2003.
He has said that he considers his work at A.I.G. to be a public service, performed on behalf of the taxpayers, who ended up with nearly 80 percent of the insurance company. His goal is to dismantle the company and sell its operating units, using the proceeds to pay back the rescue loans. On Thursday, A.I.G. said it had sold its car insurance unit, 21st Century Insurance, to the Zurich Financial Services Group for $1.9 billion.
(Catbird Note: Sounds like a sweetheart deal for Zurich Financial Services to me...with U.S. taxpayers left sucking the hind tit of the pig....)
Along the way, Mr. Liddy has clearly disclosed that A.I.G. was serving as a conduit, with much of the rescue money passing through and ending up in the hands of A.I.G.’s trading partners.
Goldman has said in the past that it had collateral and hedges to reduce the risk of its exposure to A.I.G.
Still, his stake could represent a potential conflict and is likely to reignite questions about Goldman’s involvement in A.I.G., and about why taxpayer money was used to shield A.I.G.’s trading partners from losses, when asset values plunged everywhere and most investors suffered greatly.
Had A.I.G. simply declared bankruptcy, the financial institutions doing business with it would have ended up in court, as they did in the case of Lehman Brothers, fighting to get pennies on the dollar for their claims.
Instead, Goldman Sachs received $13 billion of the Federal Reserve’s rescue money to close out various contracts it had outstanding with A.I.G. It was one of the biggest beneficiaries of the government rescue.
A spokeswoman for A.I.G., Christina Pretto, dismissed any suggestion that Mr. Liddy’s financial ties to Goldman might have shaped his actions at A.I.G.
“A.I.G. is a large institution that engages in standard commercial activity with companies all over the world,” Ms. Pretto said. “These activities are handled in the normal, day-to-day course of business and rarely, if ever, rise to the level of the C.E.O.”
She said in particular that Mr. Liddy was not involved in the discussions of how to close out the contracts of A.I.G.’s counterparties in derivatives and other forms of trading.
“Discussions regarding these matters were handled exclusively by the Federal Reserve Bank of New York,” Ms. Pretto said.
According to Goldman’s proxy, Mr. Liddy holds 18,244 units of restricted stock, which would be worth about $2.2 million if they were sold at today’s market price. The rest of his holdings are in common stock. Restricted stock cannot be sold without incurring significant tax penalties, but the proxy said that Mr. Liddy’s restricted units would be converted to common shares on May 9.
Officials at the Fed, which initiated the bailout of A.I.G. last September, have said they were not happy about having to pour public resources into private sector companies, but felt that they had to do so to avoid a chain of losses at financial institutions all over the world.
http://www.nytimes.com/2009/04/17/business/17liddy.html?_r=1&em
Double feature
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GOLDMAN SACHS BRIBED SENATE
TO PASS BAILOUT BILL!
http://www.youtube.com/watch?v=Ek7zc0lJxbM
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WHERE $ US $ TAX $ BAILOUT $ WENT!
GOLDMAN SACHS, BIGGEST BENEFICIARIES OF PAULSON’S BAILOUT
http://www.youtube.com/watch?v=BEumrdHOq0w
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April 4, 2009
Financial industry paid
millions to Obama aide!
Summers earned cash last year from firms
over which he now has influence
By Jeff Zeleny, The New York Times
WASHINGTON - Lawrence H. Summers, the top economic adviser to President Obama, earned more than $5 million last year from the hedge fund D. E. Shaw and collected $2.7 million in speaking fees from Wall Street companies that received government bailout money, the White House disclosed Friday in releasing financial information about top officials.
Mr. Summers, the director of the National Economic Council, wields important influence over Mr. Obama’s policy decisions for the troubled financial industry, including firms from which he recently received payments.
Last year, he reported making 40 paid appearances, including a $135,000 speech to the investment firm Goldman Sachs, in addition to his earnings from the hedge fund, a sector the administration is trying to regulate.
The White House released hundreds of pages of financial disclosure forms, which are required of all West Wing officials. A White House spokesman, Ben LaBolt, said the compensation was not a conflict for Mr. Summers, adding it was not surprising because he was “widely recognized as one of the country’s most distinguished economists.”
Mr. Summers’s role at the White House includes advising Mr. Obama on whether - and how - to tighten regulation of hedge funds, which engage in highly sophisticated financial trading that many analysts have said contributed to the economic collapse.
Mr. Summers, a former president of Harvard University, was Treasury secretary in the Clinton administration. He appeared before large Wall Street companies like Citigroup ($45,000), J. P. Morgan ($67,500) and the now defunct Lehman Brothers ($67,500), according to his disclosure report. He reported being paid $10,000 for a speaking date at Yale and $90,000 to address an organization of Mexican banks.
While Mr. Obama campaigned on a pledge to restrict lobbyists from working in the White House, a step intended to reduce any influence between the administration and corporations, the ban did not apply to former executives like Mr. Summers, who was not a registered lobbyist. In 2006, he became a managing director of D. E. Shaw, a firm that manages about $30 billion in assets, making it one of the biggest hedge funds in the world.
“Dr. Summers was not an adviser to or an employee of the firms that paid him to speak,” Mr. LaBolt said.
He added, “Of course, since joining the White House, he has complied with the strictest ethics rules ever required of appointees and will not work on specific matters to which D. E. Shaw is a party for two years.”
A review of hundreds of pages of financial disclosure forms on Friday evening offered an extensive portrait of the wealth of top officials in the Obama administration. The forms detail the salaries, bonuses and investments of the president’s circle of advisers, many of whom took deep pay cuts from the private sector and sold their companies to work at the White House.
David Axelrod, who was the chief campaign strategist to Mr. Obama and now serves as a senior adviser to the president, reported a salary of $1 million last year from his two consulting firms. Over the next five years, according to his disclosure form, he will get $3 million from the sale of the two firms, which provide media and strategic advice to political clients. He listed assets of about $7 million to $10 million, and reported a long list of Democratic clients and a few corporate concerns, including AT&T and the Exelon Corporation, a nuclear energy company.
The disclosure forms also shed further light on the compensation received by a top Obama aide who previously worked for Citigroup, one of the largest recipients of taxpayer bailout money. The aide, Michael Froman, deputy national security adviser for international economic affairs, received more than $7.4 million from the company from January 2008 to when he joined the White House this year.
'Shameful'
That money included a year-end bonus of $2.25 million for work in 2008, which Citigroup paid him in January. Such bonuses have prompted political controversy in recent months, including sharp criticism from Mr. Obama, who in January branded them as “shameful.”
The White House had previously acknowledged that Mr. Froman received such a year-end bonus and said he had decided to give it to charity, but would not say what it was.
The administration said Friday that Mr. Froman was working on giving the $2.25 million to a combination of charities related to homelessness and cancer, which took the life of his son this year.
The remainder of Mr. Froman’s earnings from Citigroup included deferred compensation and bonuses for work performed in prior years, as well as a $2 million payment for waiving his carried-interest stake in several private equity funds.
The White House said Mr. Froman decided to take the buyouts to avoid having to recuse himself from foreign-policy issues related to the funds’ investments, like India infrastructure, which means he would be taxed at ordinary income rates on the money.
Millionaires work in a variety of positions across the administration, and they include Desirée Rogers, the White House social secretary. Ms. Rogers, a close Chicago friend of the Obama family, reported income of $2.3 million last year. She earned a salary of $1.8 million from People’s Gas & North Shore Gas, along with three other sources of income from serving on insurance company boards.
Thomas E. Donilon, the deputy national security adviser, reported earning $3.9 million as a partner at the Washington law firm O’Melveny & Myers. His disclosure form says major clients included Citigroup, Goldman Sachs and Apollo Management, a private equity firm in New York that specializes in distressed assets and corporate restructuring.
Mr. Donilon is also entitled to future pension payments from Fannie Mae, where he worked from 1999 to 2005.
Reporting was contributed by Peter Baker, David Johnston, David D. Kirkpatrick, Eric Lipton and Charlie Savage.
This story, Financial Industry Paid Millions to Obama Aide, originally appeared in The New York Times.
March 17, 2009
The Real AIG Scandal
It's not the bonuses. It's that AIG's counterparties
are getting paid back in full.
Everybody is rushing to condemn AIG's bonuses, but this simple scandal is obscuring the real disgrace at the insurance giant: Why are AIG's counterparties getting paid back in full, to the tune of tens of billions of taxpayer dollars?
For the answer to this question, we need to go back to the very first decision to bail out AIG, made, we are told, by then-Treasury Secretary Henry Paulson, then-New York Fed official Timothy Geithner, Goldman Sachs CEO Lloyd Blankfein, and Fed Chairman Ben Bernanke last fall. Post-Lehman's collapse, they feared a systemic failure could be triggered by AIG's inability to pay the counterparties to all the sophisticated instruments AIG had sold. And who were AIG's trading partners? No shock here: Goldman, Bank of America, Merrill Lynch, UBS, JPMorgan Chase, Morgan Stanley, Deutsche Bank, Barclays, and on it goes. So now we know for sure what we already surmised: The AIG bailout has been a way to hide an enormous second round of cash to the same group that had received TARP money already.
It all appears, once again, to be the same insiders protecting themselves against sharing the pain and risk of their own bad adventure. The payments to AIG's counterparties are justified with an appeal to the sanctity of contract. If AIG's contracts turned out to be shaky, the theory goes, then the whole edifice of the financial system would collapse.
But wait a moment, aren't we in the midst of reopening contracts all over the place to share the burden of this crisis? From raising taxes—income taxes to sales taxes—to properly reopening labor contracts, we are all being asked to pitch in and carry our share of the burden. Workers around the country are being asked to take pay cuts and accept shorter work weeks so that colleagues won't be laid off. Why can't Wall Street royalty shoulder some of the burden? Why did Goldman have to get back 100 cents on the dollar? Didn't we already give Goldman a $25 billion capital infusion, and aren't they sitting on more than $100 billion in cash? Haven't we been told recently that they are beginning to come back to fiscal stability? If that is so, couldn't they have accepted a discount, and couldn't they have agreed to certain conditions before the AIG dollars—that is, our dollars—flowed?
The appearance that this was all an inside job is overwhelming. AIG was nothing more than a conduit for huge capital flows to the same old suspects, with no reason or explanation.
So here are several questions that should be answered, in public, under oath, to clear the air:
What was the precise conversation among Bernanke, Geithner, Paulson, and
Blankfein that preceded the initial $80 billion grant?
Was it already known who the counterparties were and what the exposure was
for each of the counterparties?
What did Goldman, and all the other counterparties, know about AIG's financial
condition at the time they executed the swaps or other contracts? Had they done
adequate due diligence to see whether they were buying real protection? And
why shouldn't they bear a percentage of the risk of failure of their own counterparty?
What is the deeper relationship between Goldman and AIG? Didn't they almost
merge a few years ago but did not because Goldman couldn't get its arms
around the black box that is AIG? If that is true, why should Goldman get
bailed out? After all, they should have known as well as anybody that a big part
of AIG's business model was not to pay on insurance it had issued.
Why weren't the counterparties immediately and fully disclosed?
Failure to answer these questions will feed the populist rage that is metastasizing very quickly. And it will raise basic questions about the competence of those who are supposedly guiding this economic policy.
Article url: http://www.slate.com/id/2213942/
http://blogs.myspace.com/tom_heneghan_intel
March 16, 2009
AIG Outs Counterparties
Maurna Desmond, Forbes
AIG's collapse caused a lot of pain, but its bailout package offered sweet relief for some.
After months of stonewalling, government-controlled American International Group finally revealed the names of the counterparties that were funneled $108 billion in taxpayer funds. The largest recipients of AIG bailout funds were European banks, Wall Street firms and, to a lesser degree, municipal governments.
While some of the payments disclosed were run of the mill obligations for an insurance company, the $52 billion that was used to satisfy or exit credit default swaps, insurance contracts on securities, are at the center of a growing storm of controversy. Last week, Federal Reserve Chairman Ben Bernanke was grilled on Capitol Hill over AIG's refusal to divulge details about these transactions.
The fundamental concern is that favored firms may have been overpaid for assets using a large chunk of AIG's $170 billion bailout package. Though it is now known who the counterparties are, AIG refused to itemize what exactly it each of them brought to the table. As a result, it's impossible to know if some firms got better deals than others, or if taxpayers got a raw deal all together.
During the fourth quarter, AIG spent $27.1 billion of its bailout money trying to entice counterparties to exit their positions. European banks lead the list with Societe Generale receiving $6.9 billion; Deutsche Bank, $2.8 billion; and UBS, $2.5 billion. Meanwhile, stateside, Goldman Sachs and Merrill Lynch received $5.6 billion and $3.1 billion, respectively.
Per existing swap agreements, AIG had to post $22.4 billion in collateral where the underlying investments were downgraded. Societe General received $4.1 billion; Deutsche Bank, $2.6 billion; Goldman, $2.5 billion; and Merrill, $1.8 billion.
AIG also had to post $43.7 billion during the quarter to unwind its securities lending business (See "AIG's Play For Time") and $12.1 billion to different municipalities that had guaranteed investment policies. California and Virginia received $1 billion each.
AIG's main businesses involved insurance, but it got into trouble when it started guaranteeing risky financial instruments through credit default swaps. This was hugely profitable until AIG's swaps, many of which were written against mortgage-backed securities, turned into colossal losing bets amid the collapse of the mortgage market, and regulators had to pull it onto the federal balance sheet to save it from collapse. (See "Fed Rescues AIG")
In November, the New York Federal Reserve Bank used taxpayer funds to finance a special investment vehicle dubbed Maiden Lane III that would be used to buy up the underlying assets on these types of swaps, thereby canceling the contract. (See "AIG. CDO. CDS. It's A Mess.")
Since its September rescue, AIG's initial $85 billion bailout package has been restructured and sweetened several times. After losing $61 billion in its fourth quarter, Treasury pumped it up with an additional $30 billion on top of its existing $150 billion bailout package.
As AIG comes clean about some of its murkier dealings, it also needs to come up with a new game plan. The original strategy for the insurer to sell some of its best parts to pay back its taxpayer borrowings is proving more difficult than anticipated due to a worsening market. (See "Blowing Up AIG")
From wikipedia:
History
Goldman Sachs was founded in 1869 by German Jewish immigrant Marcus Goldman. The company made a name for itself pioneering the use of commercial paper for entrepreneurs and was invited to join the New York Stock Exchange in 1896. It was during this time that Goldman's son-in-law Samuel Sachs joined the firm which prompted the name change to Goldman Sachs.
In the early 20th century, Goldman was a major player in establishing the initial public offering market. It managed one of the largest IPOs to date, that of Sears, Roebuck and Company in 1906. It also became one of the first companies to heavily recruit those with MBA degrees from leading business schools, a practice that still continues today.
In 1929, it launched the Goldman Sachs Trading Corp., a closed-end fund with characteristics similar to that of a Ponzi scheme. The fund failed as a result of the Stock Market Crash of 1929, hurting the firm's reputation for several years afterward.
In 1930, Sidney Weinberg assumed the role of senior partner and shifted Goldman's focus away from trading and towards investment banking. It was Weinberg's actions that helped to restore some of Goldman's tarnished reputation. On the back of Weinberg, Goldman was lead advisor on the Ford Motor Company's IPO in 1956, which at the time was a major coup on Wall Street. Under Weinberg's reign the firm also started an investment research division and a municipal bond department. It also was at this time that the firm became an early innovator in risk arbitrage.
Gus Levy joined the firm in the 1950s as a well known securities trader, which started a trend at Goldman where there would be two powers generally vying for supremacy, one from investment banking and one from securities trading. For most of the 1950s and 1960's, this would be Weinberg and Levy. Levy was a pioneer in block trading and the firm established this trend under his guidance. Due to Weinberg's heavy influence at the firm, it formed an investment banking division in 1956 in an attempt to spread around influence and not focus it all on Weinberg.
In 1969, Levy took over as Senior Partner from Weinberg, and built Goldman's trading franchise once again. It is Levy who is credited with Goldman's famous philosophy of being "long term greedy," which implies that as long as money is made over the long term, trading losses in the short term are not to be worried about. That same year, Weinberg retired from the firm.
Another financial crisis for the firm occurred in 1970, when the Penn Central Railroad Company went bankrupt with over $80 million in commercial paper outstanding, most of it issued by Goldman Sachs. The bankruptcy was large, and the resulting lawsuits threatened the partnership capital and life of the firm. It was this bankruptcy that resulted in credit ratings being created for every issuer of commercial paper today by several credit rating services.
During the 1970s, the firm also expanded in several ways. Under the direction of Senior Partner Stanley R. Miller, it opened its first international office in London in 1970, and created a private wealth division along with a fixed income division in 1972. It also pioneered the "white knight" strategy in 1974 during its attempts to defend Electric Storage Battery against a hostile takeover bid from International Nickel and Goldman's rival Morgan Stanley. This action would boost the firm's reputation as an investment advisor because it pledged to no longer participate in hostile takeovers.
John Weinberg (the son of Sidney Weinberg), and John C. Whitehead assumed roles of co-senior partners in 1976, once again emphasizing the co-leadership at the firm. One of their most famous initiatives was the establishment of the 14 business principles that are still used to this day.
In the 1980s, the firm made a major move by acquiring J. Aron & Company, a commodities trading firm which merged with the Fixed Income division to become known as Fixed Income, Currencies, and Commodities. J. Aron was a major player in the coffee and gold markets, and the current CEO of Goldman, Lloyd Blankfein, joined the firm as a result of this merger. In 1985 it underwrote the public offering of the Real Estate Investment Trust that owned Rockefeller Center, then the largest REIT offering in history. In accordance with the beginning of the collapse of the Soviet Union, the firm also became largely involved in facilitating the global privatization movement by advising companies that were spinning off from their parent governments.
In 1986, the firm formed Goldman Sachs Asset Management, which manages the majority of its mutual funds and hedge funds today. In the same year, the firm also underwrote the IPO of Microsoft, advised General Electric on its acquisition of RCA and joined the London and Tokyo stock exchanges. 1986 also was the year when Goldman became the first United States bank to rank in the top 10 of mergers and acquisitions in the United Kingdom. During the 1980s the firm became the first bank to distribute its investment research electronically and created the first public offering of original issue deep-discount bond.
Robert Rubin and Stephen Friedman assumed the Co-Senior Partnership in 1990 and pledged to focus on globalization of the firm and strengthening the Merger & Acquisition and Trading business lines. During their reign, the firm introduced paperless trading to the New York Stock exchange and lead-managed the first-ever global debt offering by a U.S. corporation. It also launched the Goldman Sachs Commodity Index (GSCI) and opened a Beijing office in 1994. It was this same year that Jon Corzine assumed leadership of the firm following the departure of Rubin and Friedman. The firm joined David Rockefeller and partners in a 50-50 join ownership of Rockefeller Center during 1994, but later sold the shares to Tishman Speyer in 2000. In 1996, Goldman was lead underwriter of the Yahoo! IPO and in 1998 it was global coordinator of the NTT DoCoMo IPO. In 1999, Henry Paulson took over as Senior Partner.
One of the largest events in the firm's history was its own IPO in 1999. The decision to go public was one that the partners debated for decades. In the end, Goldman decided to offer only a small portion of the company to the public, with some 48% still held by the partnership pool. 22% of the company is held by non-partner employees, and 18% is held by retired Goldman partners and two longtime investors, Sumitomo Bank Ltd. and Hawaii's Kamehameha Activities Assn (the investing arm of Kamehameha Schools). This leaves approximately 12% of the company as being held by the public. With the firm's 1999 IPO, Henry Paulson became Chairman and Chief Executive Officer of the firm.
In 1999 Goldman acquired Hull Trading Company, one of the world's premier market-making firms, for $531 million. More recently, the firm has been busy both in investment banking and in trading activities. It purchased Spear, Leeds, & Kellogg, one of the largest specialist firms on the New York Stock Exchange, for $6.3 billion in September 2000. It also advised on a debt offering for the Government of China and the first electronic offering for the World Bank. It merged with JBWere, the Australian investment bank and opened a full-service broker-dealer in Brazil. It expanded its investments in companies to include Burger King, McJunkin Corporation, and in January 2007, Alliance Atlantis alongside CanWest Global Communications to own sole broadcast rights to the CSI franchise. The firm is also heavily involved in energy trading, including the oil speculation market, on both a principal and agent basis.
Its sizable profits made during the 2007 Subprime mortgage financial crisis led the New York Times to proclaim that Goldman Sachs is without peer in the world of finance. The firm's viability was later called into question as the crisis intensified in September 2008.
In May 2006, Henry Paulson left the firm to serve as U.S. Treasury Secretary, and Lloyd Blankfein was promoted to Chairman and Chief Executive Officer. Former Goldman employees head the New York Stock Exchange, the World Bank, the U.S. Treasury Department, the White House staff, and firms such as Citigroup and Merrill Lynch.
On September 21st, 2008, Goldman Sachs received Federal Reserve approval to transition from an investment bank to a bank holding company.
On 22nd September 2008, The last two major investment banks in the United States, Morgan Stanley and Goldman Sachs, will become traditional bank holding companies, bringing an end to the era of investment banking on Wall Street.
The Federal Reserve's approval of their bid to become banks ends the ascendancy of the securities firms, 75 years after Congress separated them from deposit-taking lenders, and caps weeks of chaos that sent Lehman Brothers Holdings Inc. into bankruptcy and led to the rushed sale of Merrill Lynch & Co. to Bank of America Corp.
Corporate Affairs
As of 2006, Goldman Sachs employed 26,467 people worldwide. It reported earnings of US$9.34 billion and record earnings per share of $19.69. It was reported that the average total compensation per employee in 2006 was US$622,000... The current Chief Executive Officer is Lloyd C. Blankfein.
The company ranks #1 in Annual Net Income when compared with 86 peers in the Investment Services sector. Blankfein earned a $67.9 million bonus in his first year. He chose to receive "some" cash unlike present United States Secretary of the Treasury Henry Paulson, his predecessor who chose to take his bonus entirely in company stock.
Recently Goldman Sachs has been increasingly involved in both advising and brokering deals to privatize major highways by selling them off to foreign investors. In addition to advising Indiana on the Toll Road deal, Goldman Sachs has worked with Texas governor Rick Perry's administration on privatization projects, and according to John Schmidt, the former adviser to the Chicago mayor's office, it was a Goldman Sachs representative who first pitched the city on the idea of leasing out the Skyway. Goldman Sachs has played a major role in advising states on how to structure privatization deals—even while positioning itself to invest in the toll road market. Conflicts of interest in such transactions are difficult to quantify.
Notable alumni
Joshua Bolten - current White House Chief of Staff
Erin Burnett - CNBC Host
Jon Corzine - Governor of the State of New Jersey.
Michael Cohrs - Head of Global Banking at Deutsche Bank
Emanuel Derman - Author of My Life as a Quant and co-developer of the Black-Derman-Toy model.
Jim Cramer - founder of TheStreet.com, best selling author, and host of Mad Money on CNBC
Henry H. Fowler - 58th United States Secretary of the Treasury (1965-1969)
Edward Lampert - Hedge Fund Manager of ESL Investments. Brought K-Mart out of Bankruptcy in 2003.
Ashwin Navin - President and co-founder of BitTorrent, Inc.
Abby Joseph Cohen - Perma-bull market forecaster formerly of Drexel Burnham Lambert
Sacha Baron Cohen - Despite reports by several independent media sources that this well-known comedian is indeed a Goldman alumnus, there has been some controversy over the original source of these claims, with speculation that the supposedly independent sources had themselves used Wikipedia as their own source. Goldman Sachs has never publicly denied having employed Cohen.
Ocado - 3 Founders of first UK online supermarket were all former Fixed Income Traders at Goldman Sachs London
George Herbert Walker IV - member of the Bush family and current managing director at Lehman Brothers
Robert Zoellick - United States Trade Representative (2001-2005), Deputy Secretary of State (2005-2006), World Bank President.
Mark Carney - Current Governor of the Bank of Canada
Henry Paulson - Current United States Treasury Secretary.
Robert Rubin - Former United States Treasury Secretary, ex-Chairman of Citigroup.
Charlie Haas - Wrestler, who is working for World Wrestling Entertainment.
Malcolm Turnbull - Australian politician, currently the federal leader of the Liberal Party of Australia. Former managing director and later a partner of Goldman Sachs in Australia.
John Thain - Chairman and CEO, Merrill Lynch, and former chairman of the NYSE.
Robert Steel - Chairman and President, Wachovia.
Criticism and controversy
On August 28, 2007, a former Goldman Sachs associate accused of being the mastermind behind an insider trading scheme, one that pocketed $6.7 million, pleaded guilty in Federal District Court in Manhattan.
The FBI reported on July 6, 2007, that they were investigating letters sent to newspapers nationwide that said "Goldman Sachs. Hundreds will die. We are inside. You cannot stop us." The letters were post-marked in late June from Queens, New York and were handwritten in red ink on loose leaf paper, signed by "A.Q.U.S.A.". A subsequent letter to New York Daily News claimed that the original threat was a hoax "conceived by three misguided teenagers", and pleaded for the investigation to be halted.
In 2005, the firm advised both the New York Stock Exchange and Archipelago, which owns an electronic trading platform, in merger talks. Controversy surrounded the deal as John Thain, who at that time headed the New York Stock Exchange, was a former Goldman Sachs Executive.
Also in 2005, Goldman Sachs received criticism from civic groups and New York City politicians when they received approximately $1.6 billion in taxpayer subsidies (mostly through Liberty Bonds) from New York City and state taxpayers to finance the Firm's new headquarters near the World Financial Center in Lower Manhattan in return for a commitment to keep at least 9000 employees and a major trading operation in Manhattan. It also comes with the expectation of the creation of at least 4000 new jobs by 2019.
In 1986, David Brown was convicted of passing inside information to Ivan Boesky on a takeover deal. Robert Freeman, who was a senior Partner, the Head of Risk Arbitrage, and a protégé of Robert Rubin, was also convicted of insider trading, with his own account and with the firm's.
In 2006, as a result of an SEC investigation, Eugene Plotkin, a former research analyst in the Fixed Income division of Goldman Sachs, and David Pajcin, a former employee of Goldman Sachs, were prosecuted for insider trading. The prosecution began after regulators noticed unusually high trading volume before a merger announcement and discovered that a retired seamstress in Croatia, the aunt of Pajcin, had made more than $2 million. Plotkin and Pajcin traded in at least 25 stocks within one year based on inside information obtained through these schemes. Plotkin was sentenced to 57 months in prison and was also ordered to pay a $10,000 fine and to forfeit up to $6.7 million, the amount of the scam's illegal profits. Pajcin, who cooperated with the government, was sentenced to time served by a federal district court judge on January 18, 2008.
Goldman in the mortgage market
Actions in the subprime mortgage crisis
Despite the 2007 subprime mortgage crisis, Goldman was able to profit from the collapse in subprime mortgage bonds in the summer of 2007 by selling subprime mortgage-backed securities short.
Two Goldman traders, Michael Swenson and Josh Birnbaum, are credited with bearing responsibility for the firm's large profits during America's sub-prime mortgage crisis. The pair, who are part of Goldman's structured products group in New York, made a profit of $4bn by "betting" on a collapse in the sub-prime market, and shorting mortgage-related securities. By summer of 2007, they persuaded colleagues to see their point of view and talked around skeptical risk management executives . The firm initially avoided large subprime writedowns, and achieved a net profit due to significant losses on non-prime securitized loans being offset by gains on short mortgage positions.
Goldman Sachs' newest acquisitions are to include the subprime portfolio of imploded mortgage company Popular Financial Holdings late in the third quarter of 2008.
Detractors believe that Goldman wasn't quite as careful with its clients' money as it was with its own — its flagship Global Alpha hedge fund tumbled 37% in the global credit crunch. As most individual investments of hedge funds are not made public, however, no one can know exactly what assets the firm traded during the period leading up to the credit crisis.
http://en.wikipedia.org/wiki/Goldman_Sachs
December 21, 2008
AP study finds $1.6B went to
bailed-out bank execs
By FRANK BASS and RITA BEAMISH, Associated Press
Banks that are getting taxpayer bailouts awarded their top executives nearly $1.6 billion in salaries, bonuses, and other benefits last year, an Associated Press analysis reveals.
The rewards came even at banks where poor results last year foretold the economic crisis that sent them to Washington for a government rescue. Some trimmed their executive compensation due to lagging bank performance, but still forked over multimillion-dollar executive pay packages.
Benefits included cash bonuses, stock options, personal use of company jets and chauffeurs, home security, country club memberships and professional money management, the AP review of federal securities documents found.
The total amount given to nearly 600 executives would cover bailout costs for many of the 116 banks that have so far accepted tax dollars to boost their bottom lines.
Rep. Barney Frank, chairman of the House Financial Services committee and a long-standing critic of executive largesse, said the bonuses tallied by the AP review amount to a bribe "to get them to do the jobs for which they are well paid in the first place....
The AP compiled total compensation based on annual reports that the banks file with the Securities and Exchange Commission. The 116 banks have so far received $188 billion in taxpayer help. Among the findings:
_The average paid to each of the banks' top executives was $2.6 million in salary, bonuses and benefits.
_Lloyd Blankfein, president and chief executive officer of Goldman Sachs, took home nearly $54 million in compensation last year. The company's top five executives received a total of $242 million.
This year, Goldman will forgo cash and stock bonuses for its seven top-paid executives. They will work for their base salaries of $600,000, the company said. Facing increasing concern by its own shareholders on executive payments, the company described its pay plan last spring as essential to retain and motivate executives "whose efforts and judgments are vital to our continued success, by setting their compensation at appropriate and competitive levels." Goldman spokesman Ed Canaday declined to comment beyond that written report.
The New York-based company on Dec. 16 reported its first quarterly loss since it went public in 1999. It received $10 billion in taxpayer money on Oct. 28.
_Even where banks cut back on pay, some executives were left with seven- or eight-figure compensation that most people can only dream about. Richard D. Fairbank, the chairman of Capital One Financial Corp., took a $1 million hit in compensation after his company had a disappointing year, but still got $17 million in stock options. The McLean, Va.-based company received $3.56 billion in bailout money on Nov. 14.
_John A. Thain, chief executive officer of Merrill Lynch, topped all corporate bank bosses with $83 million in earnings last year. Thain, a former chief operating officer for Goldman Sachs, took the reins of the company in December 2007, avoiding the blame for a year in which Merrill lost $7.8 billion. Since he began work late in the year, he earned $57,692 in salary, a $15 million signing bonus and an additional $68 million in stock options.
Like Goldman, Merrill got $10 billion from taxpayers on Oct. 28.
The AP review comes amid sharp questions about the banks' commitment to the goals of the Troubled Assets Relief Program (TARP), a law designed to buy bad mortgages and other troubled assets. Last month, the Bush administration changed the program's goals, instructing the Treasury Department to pump tax dollars directly into banks in a bid to prevent wholesale economic collapse.
The program set restrictions on some executive compensation for participating banks, but did not limit salaries and bonuses unless they had the effect of encouraging excessive risk to the institution. Banks were barred from giving golden parachutes to departing executives and deducting some executive pay for tax purposes.
Banks that got bailout funds also paid out millions for home security systems, private chauffeured cars, and club dues. Some banks even paid for financial advisers. Wells Fargo of San Francisco, which took $25 billion in taxpayer bailout money, gave its top executives up to $20,000 each to pay personal financial planners.
At Bank of New York Mellon Corp., chief executive Robert P. Kelly's stipend for financial planning services came to $66,748, on top of his $975,000 salary and $7.5 million bonus. His car and driver cost $178,879. Kelly also received $846,000 in relocation expenses, including help selling his home in Pittsburgh and purchasing one in Manhattan, the company said.
Goldman Sachs' tab for leased cars and drivers ran as high as $233,000 per executive. The firm told its shareholders this year that financial counseling and chauffeurs are important in giving executives more time to focus on their jobs.
JPMorgan Chase chairman James Dimon ran up a $211,182 private jet travel tab last year when his family lived in Chicago and he was commuting to New York. The company got $25 billion in bailout funds.
Banks cite security to justify personal use of company aircraft for some executives. But Rep. Brad Sherman, D-Calif., questioned that rationale, saying executives visit many locations more vulnerable than the nation's security-conscious commercial air terminals.
Sherman, a member of the House Financial Services Committee, said pay excesses undermine development of good bank economic policies and promote an escalating pay spiral among competing financial institutions — something particularly hard to take when banks then ask for rescue money.
He wants them to come before Congress, like the automakers did, and spell out their spending plans for bailout funds.
"The tougher we are on the executives that come to Washington, the fewer will come for a bailout," he said.
___
On the Net:
SEC Filings & Forms: http://www.sec.gov
Emergency Economic Stabilization Act: http://www.treas.gov/initiatives/eesa/
December 16, 2008
Goldman Sachs posts first loss
since going public
NEW YORK – Goldman Sachs Group Inc. on Tuesday reported its first quarterly loss since it went public in 1999, losing $2.29 billion during its fiscal fourth quarter.
The loss proves the turmoil in the financial markets has tripped up even the best-run financial institutions. The New York-based bank has long been considered the premier investment bank on Wall Street, and in recent quarters, the sturdiest bank amid the market turmoil.
The Wall Street firm lost $4.97 per share in the quarter ended Nov. 30. In the year-ago quarter, Goldman earned $3.17 billion, or $7.01 per share.
Analysts polled by Thomson Reuters, on average, forecast a loss of $3.73 per share for the latest quarter. Over the past several weeks, analysts sharply slashed their estimates amid ongoing concern about investment losses. Just a month ago, analysts predicted Goldman would lose just 28 cents per share, with some analysts still predicting a quarterly profit.
Investors shook off the disappointing news, sending shares higher by $7.95, or 12 percent, to $74.41 in afternoon trading. As of Monday's close, the shares were down 69 percent in 2008.
The investment banking sector was turned on its head in September when Lehman Brothers filed for bankruptcy and Goldman and Morgan Stanley became bank holding companies. Like most banks, Goldman was hurt by the plunging value of its investments, especially at its principal trading desk.
Goldman reported negative revenue of $4.36 billion in its trading and principal investments unit, which includes its fixed income, equities and principal investments divisions. Negative revenue occurs when a company must reverse some previously recognized revenue because its value has declined.
Overall, Goldman reported negative revenue of $1.58 billion, compared with revenue of $10.74 billion during the year-ago quarter. Analysts were expected quarterly revenue of $662.8 million.
The principal investments division recorded a net loss of $3.6 billion during the quarter. The division lost $2 billion on corporate investments, $961 million from real estate investments and $631 million tied to the firm's investment in Industrial and Commercial Bank of China. Goldman purchased a minority stake in the Chinese bank in 2006. The loss tied to that investment was due to a decline in ICBC's share price.
Negative revenue in the fixed income division totaled $3.4 billion. The weakness was attributed to losses on investments including corporate debt, private and public equities and trading in credit products. The division's losses included $1.3 billion from non-investment-grade credit origination activities and $700 million on commercial mortgage loans and securities.
Goldman's chief financial officer, David Viniar, said during a conference call that losses were widespread.
"This was really across the portfolio of equity assets and credit assets," Viniar said.
Goldman's quarterly loss was in line with Moody's Investors Service's expectations, but that did not stop the ratings agency from cutting its view of the bank Tuesday. Moody's cut its long-term senior debt rating for Goldman to "A1" — still investment-grade — from "Aa3." The ratings agency said the quarterly loss is just a further indication of vulnerabilities banks have to the ongoing credit crisis.
Goldman's quarterly loss came during a three-month period that brought sweeping changes to the bank and the investment banking sector — a sector that is essentially being rebuilt after the September collapse of Lehman Brothers Holdings Inc. and the sale of Merrill Lynch & Co. to Bank of America Corp.
With investors lacking confidence in the stand-alone banking model, both Goldman and Morgan Stanley quickly gained federal regulatory approval to become bank holding companies in an effort to remain independent.
Morgan Stanley is scheduled to report fiscal fourth-quarter results Wednesday. Analysts widely predict the bank will post a loss, though not as severe as Goldman.
The banking structure change allows the pair to build large deposit bases to help fund operations, which is considered vital amid the market uncertainty that has all but shut down the credit markets.
Viniar said Goldman will continue to build that deposit base through third-party distribution channels and its private wealth management business. He did add that Goldman is considering internet banking and would look at a possible acquisition in an effort to boost deposits. The bank is aiming to increase deposits to between $50 billion and $100 billion, from about $20 billion.
Also with the regulatory change, the banks now have wider and permanent access to a slew of funding options from the federal government, first and foremost the government's bank investment program that was launched in October.
Goldman was among the first banks to receive funds as part of the $700 billion government program. The government gave Goldman $10 billion in fresh capital in return for preferred stock and warrants to purchase common shares. The goal of the government program is to spur the credit markets and get banks lending to each other and customers again.
Goldman also received a boost when billionaire investor Warren Buffett invested $5 billion in capital and it raised an additional $5.75 billion through a public stock offering.
The security that comes with becoming a bank holding company — the structure that traditional commercial banks take — also could hinder future growth for Goldman as it looks to return to profitability. Goldman will come under closer regulatory scrutiny from the Federal Reserve and will have to ratchet down its leverage, which it parlayed into billions of dollars in quarterly profits amid the market boom earlier this decade.
For the full year, Goldman earned $2.04 billion, or $4.47 per share. Goldman had remained profitable through the beginning of the year, while other financial firms posted huge losses tied to the troubled housing and credit markets.
Amid the tumult, Goldman moved to cut costs like many other banks as well. Even those moves, though, were unable to keep it from the fourth-quarter loss. During the period, Goldman said it would be cutting about 10 percent of its work force as it looks to save on expenses. Goldman began notifying in early November roughly 3,200 employees they were being laid off.
Seven top executives at the firm, including Chief Executive Lloyd Blankfein, also agreed to forgo their annual cash and stock bonuses. Blankfein received total compensation of $54 million in 2007, according to calculations by The Associated Press, making him the sixth-highest-paid CEO of a Standard & Poor's 500 company in 2007.
December 16, 2008
THE FINTAG NEWSLETTER
Madoff part 2.
Last Thursday the news broke and it hardly registered a blip on the news radar. Today we face financial meltdown of the hedge fund industry and the loss of tens of billions of dollars and the destruction of livelihoods.
Yesterday I looked critically at the investors who had not read the prospectuses or carried proper due diligence. The problem with Madman Madoff's funds is you could only touch them by investing through feeder funds. These feeder funds were promoted by interested parties who put layers of fees on top and sold them as proper fund of funds.
Take the Fairfield Sentry fund. It has a proper Auditor - PWC, an administrator and a custodian - Citco. It is a BVI fund and is managed by a well known Investment Manager. So far, so good. Ok, the custodian only looks after 5% of the assets (the other 95% are looked after by Madoff) but unless you like reading small print it looks like fine.
The biographies of the managers are respectable, including Jeffrey Tucker who used to work as a lawyer for the SEC. The fund has a board including 2 directors located in risk adverse Switzerland. One of the directors is not paid which is strange but I guess he must be paid elsewhere. Thankfully, Goldman Sachs is a sub custodian although I think Refco must have been a misprint.
The Investment objective is "The Fund seeks to obtain capital appreciation of its assets principally through the utilization of a nontraditional options trading strategy described as "split strike conversion", to which the Fund allocates the predominant portion of its assets. This strategy has defined risk and profit parameters, which may be ascertained when a particular position is established ..." and sounds quite convincing.
I am not so sure about the Investment Restrictions including "e) no more than 10 percent of the Net Asset Value of the Fund may be invested in securities of countries where immediate repatriation rights are not available;" but I like the fact US citizens are excluded - "The Fund will require as a condition to the acceptance of a subscription that the subscriber represent and warrant that he has a net worth in excess of U.S. $1,000,000 and is not a U.S. person".
The 13 year track record averages in excess of 10% a year and its volatility is very low indeed. The fund has grown and subscriptions exceed redemptions so it must be a popular.
Excellent. So where did it go wrong? Well PWC have some explaining to do. It looks like they never validated the underlying investments. Madoff obviously just gave them the NAVs and they took them as red. Citco's care of duty is to look after the assets and it has done so. Shame it only looked after 5% but that is better than nothing. The manager should perhaps have carried out some proper due diligence on the underlying but then it made so much in fees it got a bit punch drunk.
So there you go. A sound investment run by people who didn't quite do their jobs. I take back all my negative posturing and instead tell you how I see it through a slew of crap cartoons and virals....
November 3, 2008
Propaganda is to a democracy what
violence is to a dictatorship.
In The Red, White, and GOLDman Sachs I wrote:
Remember that $85 $120 billion dollar government *bailout* that AIG got in September? Well the rumor mill had it that it was really a bailout of Goldman Sachs; that Goldman Sachs had $40 billion in AIG counterparty risk.
And then I went on to catalog all the Goldman cronies now shepherding the *bailout* funds.
Think my conspiracy theory is crazy?
There's more from the Washington Post last week:
Effectiveness of AIG's $143 Billion Rescue Questioned
A number of financial experts now fear that the federal government's $143 billion attempt to rescue troubled insurance giant American International Group may not work, and some argue that company shareholders and taxpayers would have been better served by a bankruptcy filing.
The deal that the Treasury and the Federal Reserve Bank of New York pressed upon AIG was intended to stop any domino effect of financial institutions falling because of their business ties to AIG. The rescue allowed AIG to provide cash to huge banks and other players who had invested in rapidly souring mortgages insured by the company.
Early this year, investors had begun privately demanding that AIG pay off its billion-dollar guarantees. But in mid-September, when the demands for cash reached a public crescendo, AIG had to admit that it didn't have enough cash on hand to meet the obligations.
In the first weeks of its federal rescue, AIG has used the loan money to post collateral demanded by these firms, sources close to those deals say.
The company may be forced to borrow additional federal funds for rising payouts to counterparties. Neither the government nor AIG is releasing information about the specific amounts paid to individual firms, but numerous credit experts say that the value of those mortgage assets is probably declining every week. That means AIG has to pay a higher price as part of its guarantees.
In February, internal notes show, board members discussed a growing dispute between AIG Financial Products and Goldman Sachs about the value of those assets when Goldman called for AIG to post collateral. AIG's chief financial officer warned of "Goldman's acknowledged desire to obtain as much cash as possible." But AIG's external accountants warned that it was they who alerted management to the dispute, not AIG Financial Products, and that the division was not properly considering the market in its pricing.
Rutledge warns that because there has been no public disclosure of AIG's payments to counterparties, it is impossible to know whether the pricing it is using now is proper....
Marginalizing Morons: More On The Secret Goldman Sachs Bailout
October 6, 2008
From Politics in the Zeros:
Apparently it’s the Goldman Sachs Bailout Act
Bob Morris
Category: Credit crisis Tags: bailout act, Neel Kashkari
Else how to explain that Neel Kashkari, a 35 year old protege of Paulson (former Goldman Sachs CEO), has been chosen to head the $700 billion bailout. Kashkari also used to work for Goldman, at a mere VP level and has a background in engineering. Wow, sounds like he’s just super-qualified for the job. I’m sure they looked long and hard before deciding, darn, no one in the entire country is better qualified than Kashkari.
Ethically, this stinks. The conflicts of interest are obvious. And the simple fact of the matter is that Paulson didn’t really spring into action until Goldman Sachs stock started plunging. Yes, there was and is a real crisis. But the sight of dear old Goldman cratering like all those plebian stocks was simply more than they could bear.
“Get ready to be disgusted by the coming investment bank / Goldman Sachs clusterfcuk,” I’m told…
2008 - November. From Marginalizing Morons:
In The Red, White, and GOLDman Sachs I wrote:
Remember that $85 $120 billion dollar government *bailout* that AIG got in September? Well the rumor mill had it that it was really a bailout of Goldman Sachs; that Goldman Sachs had $40 billion in AIG counterparty risk.
And then I went on to catalog all the Goldman cronies now shepherding the *bailout* funds.
Think my conspiracy theory is crazy?
There's more from the Washington Post last week:
Effectiveness of AIG's $143 Billion Rescue Questioned
A number of financial experts now fear that the federal government's $143 billion attempt to rescue troubled insurance giant American International Group may not work, and some argue that company shareholders and taxpayers would have been better served by a bankruptcy filing.
The deal that the Treasury and the Federal Reserve Bank of New York pressed upon AIG was intended to stop any domino effect of financial institutions falling because of their business ties to AIG. The rescue allowed AIG to provide cash to huge banks and other players who had invested in rapidly souring mortgages insured by the company.
Early this year, investors had begun privately demanding that AIG pay off its billion-dollar guarantees. But in mid-September, when the demands for cash reached a public crescendo, AIG had to admit that it didn't have enough cash on hand to meet the obligations.
In the first weeks of its federal rescue, AIG has used the loan money to post collateral demanded by these firms, sources close to those deals say.
The company may be forced to borrow additional federal funds for rising payouts to counterparties. Neither the government nor AIG is releasing information about the specific amounts paid to individual firms, but numerous credit experts say that the value of those mortgage assets is probably declining every week. That means AIG has to pay a higher price as part of its guarantees.
In February, internal notes show, board members discussed a growing dispute between AIG Financial Products and Goldman Sachs about the value of those assets when Goldman called for AIG to post collateral. AIG's chief financial officer warned of "Goldman's acknowledged desire to obtain as much cash as possible."
But AIG's external accountants warned that it was they who alerted management to the dispute, not AIG Financial Products, and that the division was not properly considering the market in its pricing.
Rutledge warns that because there has been no public disclosure of AIG's payments to counterparties, it is impossible to know whether the pricing it is using now is proper....
Marginalizing Morons: More On The Secret Goldman Sachs Bailout
September 22, 2008
Last major investment
banks change status
By MARTIN CRUTSINGER
It was the end of an era on Wall Street as the Federal Reserve granted permission for the last two major investment banks — Goldman Sachs and Morgan Stanley — to become bank holding companies in order to stay in business.
The Fed announced late Sunday evening that it had approved the request, which will allow Goldman and Morgan Stanley to create commercial banks that can take deposits, bolstering the resources of both institutions.
The change is the latest seismic shift on Wall Street as the financial system tries to cope with mounting problems that began more than a year ago with the subprime mortgage crisis.
The Fed had originally said Sunday night that the change in status from investment banks to bank holding companies would not take place for five days, pending review on antitrust grounds. The Fed announced Monday, however, that after discussions with the Justice Department, the status change for both institutions could take place immediately.
After weekend meetings where the Treasury Department, Fed and congressional staff ironed out the program's details, Sen. Christopher Dodd said Monday it's equally important to act responsibly as it is to move quickly on the legislation needed to stabilize the country's troubled financial markets.
Dodd, chairman of the Senate Banking committee, said on CBS's "The Early Show" that many members of Congress believe a legislative relief package also should be tailored to protect taxpayers in the best way possible.
Democrats in Congress said they will add provisions in the bailout measure to protect people in danger of losing their homes and measures to cap executive compensation at firms who get to unload their bad mortgages debt onto the government.
But the proposal is still expected to win quick congressional passage because both parties are concerned about the adverse reaction in financial markets should the measure look like it is being delayed.
The Fed's board of governors granted the investment banks' requests by unanimous vote during a late Sunday meeting in Washington.
The change of status means both companies will come under the direct regulation of the Fed, which oversees the nation's bank holding companies. The banking subsidiaries of the two institutions will face the stricter regulations that commercial banks are required to meet. Previously, the primary regulator for Goldman and Morgan Stanley was the Securities and Exchange Commission.
Shares of both institutions had come under pressure ever since the bankruptcy filing last week by investment bank Lehman Brothers and the forced sale of investment bank Merrill Lynch to Bank of America.
Three people familiar with the matter said Monday that Japan's largest brokerage Nomura Holdings is buying Lehman's Asian assets. Britains Barclay's Bank received bankruptcy court approval early Saturday morning to purchase Lehman's North American brokerage operations.
Shares of Morgan Stanley rose 3.5 percent on word of a possible investment by a Japanese bank while Goldman's fell 3.6 percent in afternoon trading on Monday. Overall, U.S. stocks pulled back Monday. In early afternoon trading, the Dow fell 245.71, or 2.16 percent, to 11,142.73. Broader stock indicators also declined.
Investors feared that the last remaining independent investment banks would not be able to survive in their current form, especially after hedge funds saw some of their funds at Lehman Brothers frozen as part of its bankruptcy. There had been speculation that both institutions would be acquired by commercial banks, whose ability to take deposits would give them a stable source of funding.
In the surprise announcement late Sunday, the central bank said Goldman and Morgan Stanley would be allowed during a transition period to get short-term loans from the Federal Reserve Bank of New York against various types of collateral.
The decision means that Goldman and Morgan Stanley will be able not only to set up commercial bank subsidiaries to take deposits, giving them a major resource base, but they will also have the same access as other commercial banks to the Fed's emergency loan program.
After the collapse of Bear Stearns and its forced sale to JP Morgan Chase last March, the Fed used powers it had been granted during the Great Depression to extend its emergency loans to investment banks as well as commercial banks. However, that extension was granted on a temporary basis.
http://news.yahoo.com/s/ap/20080922/ap_on_bi_ge/bank_change
The Center for Responsive Politics
Goldman Sachs
Goldman Sachs is one of Wall Street’s most prestigious investment banks. Like others in the securities industry, it advises and invests in nearly every industry affected by federal legislation. The firm closely monitors issues including economic policy, trade and nearly all legislation that governs the financial sector. It has been a major proponent of privatizing Social Security as well as legislation that would essentially deregulate the investment banking/securities industry.
In August 2002, following months of corporate scandals, congressional investigators launched a probe into whether stock analysts at Goldman Sachs issued biased investment advice in order to protect corporate clients. The firm tends to give most of its money to Democrats. Goldman Sachs' former chief executive, Jon Corzine, served in the U.S. Senate as a Democrat from New Jersey. He's now the state's governor.
Cycle |
Total |
Democrats |
Republicans |
% to Dems |
% to Repubs |
Individuals |
PACs |
Soft (Indivs) |
Soft (Orgs) |
2008 |
$4,301,151 |
$3,148,850 |
$1,152,061 |
73% |
27% |
$3,845,651 |
$455,500 |
$0 |
$0 |
2006 |
$3,492,716 |
$2,166,411 |
$1,292,355 |
62% |
37% |
$2,969,466 |
$523,250 |
$0 |
$0 |
2004 |
$6,426,438 |
$3,963,753 |
$2,444,185 |
62% |
38% |
$5,905,727 |
$520,711 |
$0 |
$0 |
2002 |
$3,510,035 |
$2,289,040 |
$1,219,995 |
65% |
35% |
$1,380,500 |
$581,000 |
$1,548,535 |
$0 |
2000 |
$4,432,977 |
$2,764,185 |
$1,662,292 |
62% |
38% |
$2,986,054 |
$433,573 |
$953,350 |
$60,000 |
1998 |
$1,938,166 |
$1,225,252 |
$683,914 |
63% |
35% |
$823,478 |
$299,483 |
$756,955 |
$58,250 |
1996 |
$1,816,563 |
$997,747 |
$816,316 |
55% |
45% |
$973,238 |
$187,250 |
$624,435 |
$31,640 |
1994 |
$1,026,235 |
$562,760 |
$462,675 |
55% |
45% |
$714,905 |
$190,500 |
$80,830 |
$40,000 |
1992 |
$1,660,310 |
$908,295 |
$751,515 |
55% |
45% |
$1,074,432 |
$235,558 |
$261,600 |
$88,720 |
1990 |
$717,621 |
$473,716 |
$243,905 |
66% |
34% |
$508,321 |
$209,300 |
N/A |
N/A |
TOTL |
$29,322,212 |
$18,500,009 |
$10,729,213 |
63% |
37% |
$21,181,772 |
$3,636,125 |
$4,225,705 |
$278,610 |
The numbers on this page are based on contributions of $200 or more from PACs and individuals to federal candidates and from PAC, individual and soft money donors to political parties, as reported to the Federal Election Commission. While election cycles are shown in charts as 1996, 1998, 2000 etc. they actually represent two-year periods. For example, the 2002 election cycle runs from January 1, 2001 to December 31, 2002.
NOTE: Soft money contributions were not publicly disclosed until the 1991-92 election
cycle and were banned after the 2002 cycle.
Data for the current election cycle was released by the Federal Election Commission on
July 28, 2008.
http://www.opensecrets.org/orgs/summary.php?id=D000000085
May 2008
Environmental Investment Can Pay Dividends says Mark Tercek
STANFORD GRADUATE SCHOOL OF BUSINESS —There are “huge opportunities for companies and other private sector players in the environmental area,” said Mark Tercek, an investment banker who spent the past 24 years at global giant Goldman Sachs. “We’re off to the races there.”
Tercek outlined Goldman Sachs’ efforts to encourage its business partners to adopt sustainable practices. His talk on April 24 was part of a lecture series organized by the student Environmentally Sustainable Business Club, at the Graduate School of Business.