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Re: Matt Taibbi/Rolling Stone
Nov 7, 2009 9:45 AM
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I've been saying all along that this is a depression, not a recession.
But our government spins the news and the facts....
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Re: Matt Taibbi/Rolling Stone
Nov 7, 2009 3:25 AM
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Memo to Obama: "For God's Sake, strap on a pair and get to it"
by Mike Whitney | November 6, 2009 - 9:24pm
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This is bad. 10.2% unemployment. 16 million people out of work. Payrolls have been slashed 22 months in a row. The real jobless rate is now 17.5%. These are Great Depression numbers. Unemployment benefits have been extended, but policymakers still resist jobs programs. Why? Why no federal work programs? Why no WPA?
The dot.com boom fizzled and the housing boom is kaput. Greenspan's bubblenomics has flopped. There's no driver for new jobs. We handed-over the economy to the private sector, and they blew it up. The supply-side, trickle-down, free market dogma turned out to be a fraud. We are all poorer and the economy is broken. Now we need jobs, good paying jobs with benefits. Government jobs. We need big government not big bubbles.
The Democrats are clueless. Their deepest convictions appear on the screen of a teleprompter and then vanish in a flash. It's a party of phonies led by a poseur. President Milquetoast, a charismatic orator with zero guts. What good is a man who believes in nothing? What good is a man who won't fight for what's right?
Consumer credit is shrinking at record pace, $14.8 billion in September alone, 7.2 percent annually. When credit shrivels and wages stagnate, the economy tanks. It's as simple as that. It doesn't matter how much liquidity the Fed pumps into the stock market, the patient is dying. The economy needs stimulus, and lots of it. Any fool can see it.
Consumer prices have been gobsmacked by deflation. The consumer price index (CPI) has declined for six straight months, the longest slide since 1954. And it's getting worse. The banks can't lend because (according to the IMF) they're still holding onto $2.8 trillion in rotten mortgage paper. The banks will be on the fritz for a decade or more. That means less demand, fewer jobs, more misery.
Obama's remedy? Expand the war into Pakistan.
We'd be better off with Bush.
The Fed has shoved $1 trillion under the housing market and still can't stop the bleeding. This week, Fed chair Bernanke announced that the Fed would phase out its purchase of mortgage-backed securities (MBS) and US Treasurys by the end of the 1 Quarter 2010. The Fed will start withdrawing some of the $1 trillion in excess reserves it's added to the banks reserves. Bernanke believes that private investors will resume purchasing MBS and provide sufficient financing to keep the housing market from crashing. It's a pipedream. Investors got burned big-time on securitzed garbage and they're not coming back. Securitization is dead. Here's a clip from McClatchy News:
"The foundation of U.S. credit expansion for the past 20 years is in ruin. Since the 1980s, banks haven’t kept loans on their balance sheets; instead, they sold them into a secondary market, where they were pooled for sale to investors as securities. The process, called securitization, fueled a rapid expansion of credit to consumers and businesses. By passing their loans on to investors, banks were freed to lend more.
Today, securitization is all but dead. Investors have little appetite for risky securities. Few buyers want a security based on pools of mortgages, car loans, student loans and the like. (McClatchy News)
And this is from the Wall Street Journal:
"According to reports issued by the major rating agencies, in 2007, $700 billion of asset-backed securities were underwritten. Only $10 billion has been issued in 2009. This has a significant knock-on effect across every sector of the economy."
2007 asset-backed garbage=$700 billion
2009 asset-backed garbage=$10 billion
The banks that received bailout money via the TARP reduced their lending by $54 billion in July. That doesn't hurt the big corporations--that can still get credit on demand--but the smaller and medium sized businesses are S.O.L.. Large businesses shed 60,000 jobs in August, but small and medium-sized and small businesses laid off 238,000 workers (4x as many) in that same period.
"Small and medium sized businesses account for 90 million jobs whereas, according to Ann Lee writing in the Wall Street Journal:
"Large businesses account for just 17 million. Without access to capital, these small and medium-sized businesses will continue to lay off their employees, creating a vicious cycle of shrinking consumer credit and demand." ("The Banking System Is Still Broken", Ann Lee, Wall Street Journal)
So why is the Fed helping the big boys when it's the mid-sized businesses that actually create jobs? Does anyone in the administration have the foggiest idea of what's going on?
Here's Wall Street analyst Meredith Whitney on the same topic:
"Anyone counting on a meaningful economic recovery will be greatly disappointed. How do I know? I follow credit, and credit is contracting. Access to credit is being denied at an accelerating pace. Large, well-capitalized companies have no problem finding credit. Small businesses, on the other hand, have never had a harder time getting a loan...Since the onset of the credit crisis over two years ago, available credit to small businesses and consumers has contracted by trillions of dollars, and that phenomenon is reflected in dismal consumer spending trends.
Small businesses primarily fund themselves through credit cards and loans from local lenders. In the past two years, credit-card lines have been cut by over $1.25 trillion. During the same time, 10% of all credit-card accounts have been canceled. ... 79% of small businesses surveyed tell the Small Business Association that credit-card lending standards have tightened drastically and their access to credit lines has decreased materially." ("The Credit Crunch Continues" Meredith Whitney, Wall Street Journal)
The Fed's programs are strangling mid-sized companies to divert a larger share of capital to politically-connected behemoths. The recovery plan is tantamount to suicide.
Wall Street is finally beginning to grasp that they've pulverized the US consumer and that demand will be weak for years to come. That's why policymakers are pushing China and India to "develop their domestic markets" to take up the slack in supply. What a joke. Americans consumed nearly $9 trillion last year while China's consumers tallied a mere $1.2 trillion and India about $650 billion. No one is going to replace the US consumer. The only way forward is government jobs programs, higher taxes for the rich, and price of living increases for workers across the board. A strong economy requires strong demand, that means aggressive redistribution policies that put more money in the hands of people who will spend it---workers!
All the deficit scaremongering is just more conservative blather so they can torpedo Social Security. Don't believe a word of it. It's 100% bunkum. The US has the advantage of paying its debts in its own currency. It can print as much money as it wants. And, if it needs to employ its people and put the country back to work, then it should damn-well use that ability. It's not a matter of whether "we can" or not. It's a matter of whether "we will". Whether we can find the leaders with enough moxie to take on the banks and the big corporations and bring them to heel.
Here's a clip from a speech by Franklin Roosevelt, a president who understood what leadership really meant.
FDR: “Appraising the situation in the bitter dawn of a cold morning after, what do we find? We find two-thirds of American industry concentrated in a few hundred corporations…We find more than half of the savings of the country invested in corporate stocks and bonds, and made the sport of the American stock market. We find fewer than three dozen private banking houses, and stock-selling adjuncts of commercial banks, directing the flow of American capital. In other words, we find concentrated economic power in a few hands…We find a great part of our working population with no chance of earning a living except by grace of this concentrated industrial machine; and we find that millions and millions of Americans are out of work, throwing upon the already burdened Government the necessity of relief…We find the Republican leaders proposing no solution except more debts, more conferences under the same bewildered leadership, more Government money in business but no Government attempt to wrestle with basic problems…I believe that our industrial and economic system is made for individual men and women, and not individual men and women for the benefit of the system.” (quote from Pam Martens, Why 2008 Feels Like 1932, counterpunch)
FDR was right. For God's sakes, Obama, strap on a pair and get to it, man.
_______
Mike Whitney
http://www.smirkingchimp.com/thread/24811
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Re: Matt Taibbi/Rolling Stone
Nov 2, 2009 12:36 AM
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* Posted on Monday, November 2, 2009
Goldman now seizing homes subprime mortgages bought
How one couple beat Goldman Sachs and saved their home
By Greg Gordon | McClatchy Newspapers
SAN JOSE, Calif. ? When California wildfires ruined their jewelry business, Tony Becker and his wife fell months behind on their mortgage payments and experienced firsthand the perils of subprime mortgages.
The couple wound up in a desperate, six-year fight to keep their modest, 1,500-square-foot San Jose home, a struggle that pushed them into bankruptcy.
The lender with whom they sparred, however, wasn't the one that had written their loans. It was an obscure subsidiary of Wall Street colossus Goldman Sachs Group.
Goldman spent years buying hundreds of thousands of subprime mortgages, many of them from some of the more unsavory lenders in the business, and packaging them into high-yield bonds. Now that the bottom has fallen out of that market, Goldman finds itself in a different role: as the big banker that takes homes away from folks such as the Beckers.
The couple alleges that Goldman declined for three years to confirm their suspicions that it had bought their mortgages from a subprime lender, even after they wrote to Goldman's then-Chief Executive Henry Paulson ? later U.S. Treasury secretary ? in 2003.
Unable to identify a lender, the couple could neither capitalize on a mortgage hardship provision that would allow them to defer some payments, nor on a state law enabling them to offset their debt against separate, investment-related claims against Goldman.
In July, the Beckers won a David-and-Goliath struggle when Goldman subsidiary MTGLQ Investors dropped its bid to seize their house. By then, the college-educated couple had been reduced to shopping for canned goods at flea markets and selling used ceramic glass.
Theirs is an infrequent happy ending among the hundreds of cases in which subsidiaries of Goldman, better known for sending top officers such as Paulson to serve in top Washington posts, have sought to contain bondholder losses by foreclosing on properties and evicting delinquent borrowers.
Goldman spokesman Michael DuVally declined to comment on individual cases or on the firm's new role in bankruptcy courts.
Joining other Wall Street firms that bought millions of subprime mortgages, Goldman companies have gone to courts from California to Florida seeking approval to foreclose on the homes of middle- and lower-income Americans who couldn't keep up with their loans' soaring monthly payments.
Some borrowers were speculators or homebuyers who exaggerated their incomes on loan applications, thinking they'd always have an escape hatch because housing prices would keep rising. Others, however, were victims of fast-talking mortgage brokers who didn't explain that the loans' interest rates could rise to as high as 15 percent. Many borrowers who defaulted on their mortgages may never qualify for a home loan again.
In court encounters, Goldman and other Wall Street firms have faced the impact of their own wheeling and dealing. Many of the families being put on the street never would've gotten their big mortgages if investment banks hadn't provided a seemingly insatiable secondary market for millions of loans to marginally qualified buyers.
Subprime borrowers were supposed to provide a safe income stream for investors who bought mostly high-grade, triple-A-rated bonds from Goldman and bigger subprime players, such as now-defunct Lehman Brothers and Merrill Lynch.
Now, millions of these borrowers have defaulted on mortgage payments, contributing to a historic slump in home prices and depressing the bonds' value. Half the homes in some California neighborhoods have been subject to foreclosures or short sales, in which a home is sold for less than the mortgage balance, and either the seller or the lender takes a loss.
Earlier this year in Los Angeles, the Wall Street giant took possession of the home of Gladys Aguirre, a housecleaner who's married to a construction worker. Together, the couple listed monthly earnings of $7,480, including $3,480 from a job she'd held for two months.
Aguirre originally took a $444,000 subprime mortgage on Sept. 1, 2005, from Argent Mortgage Co., a subsidiary of big subprime lender Ameriquest Mortgage Co., which shut down in 2007. The adjustable interest rate sent her monthly payments zooming to $3,800 from $2,479, and Aguirre couldn't keep pace on that loan or a $119,000 second mortgage. She filed for bankruptcy protection.
Aguirre's Los Angeles lawyer, Eber Bayona, declined to discuss her case, but said that subprime loans amounted to "setting up the person for failure" because interest rate adjustments hit borrowers with "shock payments."
For example, he said, loan agents promised applicants that they could buy a $600,000 house for payments of $1,200 a month, and the buyers "never read the fine print ... (and) didn't know their interest would increase and that eventually they would lose their house and their money."
In San Fernando, Calif., Dina Alfero-Pacheo qualified for two mortgages totaling nearly $500,000, with monthly payments starting at $2,004. By 2007, the payments had grown to $3,761. In a bankruptcy filing early this year, Alfero-Pacheo said she was a bartender earning $3,800 a month. Goldman bought her first mortgage from Argent and recently got title to the house, which had sunk in value to $280,000 from more than $500,000.
In Orlando, Fla., Adela Mendez seems to be someone who would've known the risks when she took a $164,000 mortgage from Argent on her home in 2005 and a $75,000 second mortgage a year later. In a bankruptcy filing this year, she listed her occupation as a loan specialist for Washington Mutual, a leading subprime lender that collapsed last year.
Not only did Mendez fall 11 months behind on her mortgage payments, but her home's value also plummeted to $100,000. Goldman Sachs Mortgage, which bought the Argent loan, took the house ? and at least a 50 percent loss.
Alfero-Pacheo and Mendez, whose cases are detailed in court records, couldn't be reached to comment.
The Beckers charged that in their case, Goldman engaged in years of obfuscation and resistance.
"In bankruptcy court, they tried to portray us as incompetent or deadbeats,'' said Celia Fabos-Becker, blinking back tears as she sat with her husband in their living room, with boxes of mortgage-related documents surrounding them.
The couple thought they'd made a safe bet in 2000 when they opened a retail jewelry business in two San Diego County areas populated mainly by military personnel.
The wars in Afghanistan and Iraq, however, brought big military call-ups, sapping their market. After a wildfire ravaged much of the area in 2002, the Beckers refinanced their house to generate some $70,000 in cash to prop up their two stores. They wound up with an adjustable-rate, subprime loan from WMC Mortgage Corp., an arm of General Electric's GE Money unit, and a 10.75 percent second mortgage with the same lender.
A second wildfire in 2003 all but killed their business and left the couple reeling financially as interest-rate adjustments pushed the mortgage payments higher.
"We'd gotten to the point where I was cutting my own hair. I was cutting his on occasion," Fabos-Becker said.
"And trolling the Goodwills," Tony Becker said.
Tony Becker, an engineer, took short-term contract jobs amid the technology bust. Celia Fabos-Becker, meanwhile, found a provision in the mortgages that allowed the borrower to push payments to the end of the loan term in the event of a disaster such as the two fires.
When she wrote to Paulson, however, lawyers for Goldman denied that it owned the Beckers' mortgages. So did Germany's Deutsche Bank, a trustee that was holding thousands of subprime mortgages Goldman had converted to bonds.
To stall foreclosure, the Beckers wound up negotiating "forbearance agreements" with Ocwen Loan Servicing, a Florida company, that required the couple to pay several thousand dollars under the threat that their house would be auctioned off in a week or a month, Fabos-Becker said. Their monthly payments rose to nearly $3,300 from $2,650.
The couple already had taken Goldman and Morgan Stanley, another Wall Street firm, to arbitration over their $325,000 in stock market losses, accusing the investment banks of misleading investors about public offerings.
On the same day in June 2006, Goldman sued to end the arbitration, and Ocwen filed papers seeking to foreclose on the Beckers' home.
In desperation, the couple filed for bankruptcy protection. With no money to hire an attorney, they acted as their own lawyers.
As the months dragged on, Fabos-Becker finally found a filing with the Securities and Exchange Commission confirming that Goldman had bought the mortgages. Then, when a lawyer for MTGLQ showed up at a June 2007 court hearing on the stock battle, U.S. District Judge William Alsup of the Northern District of California demanded to know the firm's relationship to Goldman, telling the attorney that he hates "spin."
The lawyer acknowledged that MTGLQ was a Goldman affiliate.
That was an understatement. MTGLQ, a limited partnership, is a wholly owned subsidiary of Goldman that's housed at the company's headquarters at 85 Broad Street in New York, public records show.
In July, after U.S. Bankruptcy Judge Roger Efremsky of the Northern District of California threatened to impose "significant sanctions" if the firm failed to complete a promised settlement with the Beckers, Goldman dropped its claims for $626,000, far more than the couple's original $356,000 in mortgages and $70,000 in missed payments. The firm gave the Beckers a new, 30-year mortgage at 5 percent interest.
That lowered their monthly payment to $1,900, less than half the maximum $4,000 a month their subprime loans could've demanded.
Fabos-Becker, 60, said that the trauma has left her hair "a lot grayer." Much of the stress would have been alleviated, she said, if a law required lenders to identify themselves, especially to borrowers facing hardships.
"I take solace," Tony Becker said, "in knowing that I was up against the worst possible opponent ? the biggest, strongest investment bank in the world."
(Tish Wells contributed to this article.)
(This article is part of an occasional series on the problems in mortgage finance.)
COMING TUESDAY
Goldman Sachs and other Wall Street firms turned to secret Cayman Islands deals to draw overseas investors, including European banks and other foreign financial institutions, to invest hundreds of billions of dollars in securities tied to risky U.S. home loans. Unlike U.S. investors that lost money on the securities, however, these overseas institutions have fewer legal options.
http://www.mcclatchydc.com/227/story/77841.html
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Re: Matt Taibbi/Rolling Stone
Nov 2, 2009 12:24 AM
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* Posted on Sunday, November 1, 2009
How Goldman secretly bet on the U.S. housing crash
By Greg Gordon | McClatchy Newspapers
WASHINGTON ? In 2006 and 2007, Goldman Sachs Group peddled more than $40 billion in 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.
Goldman's sales and its clandestine wagers, completed at the brink of the housing market meltdown, enabled the nation's premier investment bank to pass most of its potential losses to others before a flood of mortgage defaults staggered the U.S. and global economies.
Only later did investors discover that what Goldman had promoted as triple-A rated investments were closer to junk.
Now, pension funds, insurance companies, labor unions and foreign financial institutions that bought those dicey mortgage securities are facing large losses, and a five-month McClatchy investigation has found that Goldman's failure to disclose that it made secret, exotic bets on an imminent housing crash may have violated securities laws.
"The Securities and Exchange Commission should be very interested in any financial company that secretly decides a financial product is a loser and then goes out and actively markets that product or very similar products to unsuspecting customers without disclosing its true opinion," said Laurence Kotlikoff, a Boston University economics professor who's proposed a massive overhaul of the nation's banks. "This is fraud and should be prosecuted."
John Coffee, a Columbia University law professor who served on an advisory committee to the New York Stock Exchange, said that investment banks have wide latitude to manage their assets, and so the legality of Goldman's maneuvers depends on what its executives knew at the time.
"It would look much more damaging," Coffee said, "if it appeared that the firm was dumping these investments because it saw them as toxic waste and virtually worthless."
Lloyd Blankfein, Goldman's chairman and chief executive, declined to be interviewed for this article.
A Goldman spokesman, Michael DuVally, said that the firm decided in December 2006 to reduce its mortgage risks and did so by selling off subprime-related securities and making myriad insurance-like bets, called credit-default swaps, to "hedge" against a housing downturn.
DuVally told McClatchy that Goldman "had no obligation to disclose how it was managing its risk, nor would investors have expected us to do so ... other market participants had access to the same information we did."
For the past year, Goldman has been on the defensive over its Washington connections and the billions in federal bailout funds it received. Scant attention has been paid, however, to how it became the only major Wall Street player to extricate itself from the subprime securities market before the housing bubble burst.
Goldman remains, along with Morgan Stanley, one of two venerable Wall Street investment banks still standing. Their grievously wounded peers Bear Stearns and Merrill Lynch fell into the arms of retail banks, while another, Lehman Brothers, folded.
To piece together Goldman's role in the subprime meltdown, McClatchy reviewed hundreds of documents, SEC filings, copies of secret investment circulars, lawsuits and interviewed numerous people familiar with the firm's activities.
McClatchy's inquiry found that Goldman Sachs:
* Bought and converted into high-yield bonds tens of thousands of mortgages from subprime lenders that became the subjects of FBI investigations into whether they'd misled borrowers or exaggerated applicants' incomes to justify making hefty loans.
* Used offshore tax havens to shuffle its mortgage-backed securities to institutions worldwide, including European and Asian banks, often in secret deals run through the Cayman Islands, a British territory in the Caribbean that companies use to bypass U.S. disclosure requirements.
* Has dispatched lawyers across the country to repossess homes from bankrupt or financially struggling individuals, many of whom lacked sufficient credit or income but got subprime mortgages anyway because Wall Street made it easy for them to qualify.
* Was buoyed last fall by key federal bailout decisions, at least two of which involved then-Treasury Secretary Henry Paulson, a former Goldman chief executive whose staff at Treasury included several other Goldman alumni.
The firm benefited when Paulson elected not to save rival Lehman Brothers from collapse, and when he organized a massive rescue of tottering global insurer American International Group while in constant telephone contact with Goldman chief Blankfein. With the Federal Reserve Board's blessing, AIG later used $12.9 billion in taxpayers' dollars to pay off every penny it owed Goldman.
These decisions preserved billions of dollars in value for Goldman's executives and shareholders. For example, Blankfein held 1.6 million shares in the company in September 2008, and he could have lost more than $150 million if his firm had gone bankrupt.
With the help of more than $23 billion in direct and indirect federal aid, Goldman appears to have emerged intact from the economic implosion, limiting its subprime losses to $1.5 billion. By repaying $10 billion in direct federal bailout money ? a 23 percent taxpayer return that exceeded federal officials' demand ? the firm has escaped tough federal limits on 2009 bonuses to executives of firms that received bailout money.
Goldman announced record earnings in July, and the firm is on course to surpass $50 billion in revenue in 2009 and to pay its employees more than $20 billion in year-end bonuses.
THE BLUEST OF THE BLUE CHIPS
For decades, Goldman, a bastion of Ivy League graduates that was founded in 1869, has cultivated an elite reputation as home to the best and brightest and a tradition of urging its executives to take turns at public service.
As a result, Goldman has operated a virtual jobs conveyor belt to and from Washington: Paulson, as Treasury secretary, sent tens of billions of taxpayers' dollars to rescue Wall Street in 2008, and former Goldman employees populate some of the most demanding and powerful posts in Washington. Savvy federal regulators have migrated from their Washington jobs to Goldman.
On Oct. 16, a Goldman vice president, Adam Storch, was named managing executive of the SEC's enforcement division.
Goldman's financial panache made its sales pitches irresistible to policymakers and investors alike, and may help explain why so few of them questioned the risky securities that Goldman sold off in a 14-month period that ended in February 2007.
Since the collapse of the economy, however, some of those investors have changed their opinions of Goldman.
Several pension funds, including Mississippi's Public Employees' Retirement System, have filed suits, seeking class-action status, alleging that Goldman and other Wall Street firms negligently made "false and misleading" representations of the bonds' true risks.
Mississippi Attorney General Jim Hood, whose state has lost $5 million of the $6 million it invested in Goldman's subprime mortgage-backed bonds in 2006, said the state's funds are likely to lose "hundreds of millions of dollars" on those and similar bonds.
Hood assailed the investment banks "who packaged this junk and sold it to unwary investors."
California's huge public employees' retirement system, known as CALPERS, purchased $64.4 million in subprime mortgage-backed bonds from Goldman on March 1, 2007. While that represented a tiny percentage of the fund's holdings, in July CALPERS listed the bonds' value at $16.6 million, a drop of nearly 75 percent, according to documents obtained through a state public records request.
In May, without admitting wrongdoing, Goldman became the first firm to settle with the Massachusetts attorney general's office as it investigated Wall Street's subprime dealings. The firm agreed to pay $60 million to the state, most of it to reduce mortgage balances for 714 aggrieved homeowners.
Attorney General Martha Coakley, now a candidate to succeed Edward Kennedy in the U.S. Senate, cited the blight from foreclosed homes in Boston and other Massachusetts cities. She said her office focused on investment banks because they provided a market for loans that mortgage lenders "knew or should have known were destined for failure."
New Orleans' public employees' retirement system, an electrical workers union and the New Jersey carpenters union also are suing Goldman and other Wall Street firms over their losses.
The full extent of the losses from Goldman's mortgage securities isn't known, but data obtained by McClatchy show that insurance companies, whose annuities provide income for many retirees, collectively paid $2 billion for Goldman's risky high-yield bonds.
Among the bigger buyers: Ambac Assurance purchased $923 million of Goldman's bonds; the Teachers Insurance and Annuities Association, $141.5 million; New York Life, $96 million; Prudential, $70 million; and Allstate, $40.5 million, according to the data from the National Association of Insurance Commissioners.
In 2007, as early signs of trouble rippled through the housing market, Goldman paid a discounted price of $8.8 million to repurchase subprime mortgage bonds that Prudential had bought for $12 million.
Nearly all the insurers' purchases were made in 2006 and 2007, after mortgage lenders had lifted most traditional lending criteria in favor of loans that required little or no documentation of borrowers' incomes or assets.
While Goldman was far from the biggest player in the risky mortgage securitization business, neither was it small.
From 2001 to 2007, Goldman hawked at least $135 billion in bonds keyed to risky home loans, according to analyses by McClatchy and the industry newsletter Inside Mortgage Finance.
In addition to selling about $39 billion of its own risky mortgage securities in 2006 and 2007, Goldman marketed at least $17 billion more for others.
It also was the lead firm in marketing about $83 billion in complex securities, many of them backed by subprime mortgages, via the Caymans and other offshore sites, according to an analysis of unpublished industry data by Gary Kopff, a securitization expert.
In at least one of these offshore deals, Goldman exaggerated the quality of more than $75 million of risky securities, describing the underlying mortgages as "prime" or "midprime," although in the U.S. they were marketed with lower grades.
Goldman spokesman DuVally said that Moody's, the bond rating firm, gave them higher grades because the borrowers had high credit scores.
Goldman's securities came in two varieties: those tied to subprime mortgages and those backed by a slightly higher grade of loans known as Alt-A's.
Over time, both types of mortgages required homeowners to pay rapidly rising interest rates. Defaults on subprime loans were responsible for last year's housing meltdown. Interest rates on Alt-A loans, which began to rocket upward this year, are causing a new round of defaults.
Goldman has taken multiple steps to put its subprime dealings behind it, including publicly saying that Wall Street firms regret their mistakes. Last winter, the company cancelled a Las Vegas conference, avoiding any images of employees flashing wads of bonus cash at casinos.
More recently, the firm has launched a public relations campaign to answer the criticism of its huge bonuses, Washington connections and federal bailout. In late October, Blankfein argued that Goldman's activities serve "an important social purpose" by channeling pools of money held by pension funds and others to companies and governments around the world.
KNOWING WHEN TO FOLD THEM
For investment banks such as Goldman, the trick was knowing when to exit the high-stakes subprime game before getting burned.
New York hedge fund manager John Paulson was one of the first to anticipate disaster. He told Congress that his researchers discovered by early 2006 that many subprime loans covered the homes' entire value, with no down payments, and so he figured that the bonds "would become worthless."
He soon began placing exotic bets ? credit-default swaps ? against the housing market. His firm, Paulson & Co., booked a $3.7 billion profit when home prices tanked and subprime defaults soared in 2007 and 2008. (He isn't related to Henry Paulson.)
At least as early as 2005, Goldman similarly began using swaps to limit its exposure to risky mortgages, the first of multiple strategies it would employ to reduce its subprime risk.
The company has closely guarded the details of most of its swaps trades, except for $20 billion in widely publicized contracts it purchased from AIG in 2005 and 2006 to cover mortgage defaults or ratings downgrades on subprime-related securities it offered offshore.
In December 2006, after "10 straight days of losses" in Goldman's mortgage business, Chief Financial Officer David Viniar called a meeting of mortgage traders and other key personnel, Goldman spokesman DuVally said.
Shortly after the meeting, he said, it was decided to reduce the firm's mortgage risk by selling off its inventory of bonds and betting against those classes of securities in secretive swaps markets.
DuVally said that at the time, Goldman executives "had no way of knowing how difficult housing or financial market conditions would become."
In early 2007, the firm's mortgage traders also bet heavily against the housing market on a year-old subprime index on a private London swap exchange, said several Wall Street figures familiar with those dealings, who declined to be identified because the transactions were confidential.
The swaps contracts would pay off big, especially those with AIG. When Goldman's securities lost value in 2007 and early 2008, the firm demanded $10 billion, of which AIG reluctantly posted $7.5 billion, Viniar disclosed last spring.
As Goldman's and others' collateral demands grew, AIG suffered an enormous cash squeeze in September 2008, leading to the taxpayer bailout to prevent worldwide losses. Goldman's payout from AIG included more than $8 billion to settle swaps contracts.
DuVally said Goldman has made other bets with hundreds of unidentified counterparties to insure its own subprime risks and to take positions against the housing market for its clients. Until the end of 2006, he said, Goldman was still betting on a strong housing market.
However, Goldman sold off nearly $28 billion of risky mortgage securities it had issued in the U.S. in 2006, including $10 billion on Oct. 6, 2006. The firm unloaded another $11 billion in February 2007, after it had intensified its contrary bets. Goldman also stopped buying risky home mortgages after the December meeting, though DuVally declined to say when.
I'VE GOT A SECRET
Despite updating its numerous disclosures to investors in 2007, Goldman never revealed its secret wagers.
Asked whether Goldman's bond sellers knew about the contrary bets, spokesman DuVally said the company's mortgage business "has extensive barriers designed to keep information within its proper confines."
However, Viniar, the Goldman finance chief, approved the securities sales and the simultaneous bets on a housing downturn. Dan Sparks, a Texan who oversaw the firm's mortgage-related swaps trading, also served as the head of Goldman Sachs Mortgage from late 2006 to April 2008, when he abruptly resigned for personal reasons.
The Securities Act of 1933 imposes a special disclosure burden on principal underwriters of securities, which was Goldman's role when it sold about $39 billion of its own risky mortgage-backed securities from March 2006 to February 2007.
The firm maintains that the requirement doesn't apply in this case.
DuVally said the firm sold virtually all its subprime-related securities to Qualified Institutional Buyers, a class of sophisticated investors that are afforded fewer protections than small investors are under federal securities laws. He said Goldman made all the required disclosures about risks.
Whether companies are obliged to inform investors about such contrary trades, or "hedges," is "a very hot issue" in cases winding through the courts, said Frank Partnoy, a University of San Diego law professor who specializes in securities. One issue is how specific companies must be in disclosing potential risks to investors, he said.
Coffee, the Columbia University law professor, said that any potential violations of securities laws would depend on what Goldman executives knew about the risks ahead.
"The critical moment when Goldman would have the highest liability and disclosure obligations is when they are serving as an underwriter on a registered public offering," he said. "If they are at the same time desperately seeking to get out of the field, that kind of bailout does look far more dubious than just trading activities."
Another question is whether, by keeping the trades secret, the company withheld material information that would enable investors to assess Goldman's motives for selling the bonds, said James Cox, a Duke University law professor who also has served on the NYSE advisory panel.
If Goldman had disclosed the contrary bets, he said, "One would have to believe that a rational investor would not only consider Goldman's conduct material, but likely compelling a decision to take a pass on the recommendation to purchase."
Cox said that existing laws, however, don't require sufficient disclosures about trading, and that the government would do well to plug that hole.
In marketing disclosures filed with the SEC regarding each pool of subprime bonds from 2001 to 2007, Goldman listed an array of risk factors that grew over time. Among them was the possibility of a pullback in overheated real estate markets, especially in California and Florida, where the most subprime loans had been made.
Suits filed by the pension funds, however, allege that Goldman made materially false or misleading statements in its public offerings, failing to disclose that many loans were based on inflated appraisals and were bought from firms with poor lending practices.
DuVally said that investors were fully informed of all known risks.
"What's going to happen in the next few years," said San Diego's Partnoy, "is there's going to be a lot of lawsuits and judges will have to decide, should Goldman have disclosed more or not?"
(Tish Wells contributed to this article.)
(This article is part of an occasional series on the problems in mortgage finance.)
COMING TOMORROW
Since the economic collapse that swept millions of Americans out of their jobs and homes, Goldman Sachs has moved aggressively to recover its losses. The firm is pursuing marginally qualified borrowers into state courts federal and bankruptcy across the country and seeking to seize their homes. McClatchy examines one couple's multi-year attempt to get Goldman to admit that it had purchased their mortgage.
http://www.mcclatchydc.com/227/story/77791.html
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Re: Matt Taibbi/Rolling Stone
Oct 26, 2009 10:17 PM
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MP
I think Taibbi was mostly ranting/venting but it was a good rant! 
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Re: Matt Taibbi/Rolling Stone
Oct 26, 2009 9:01 PM
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MonkeyPaw;
Ah this is good, Monkeypaw, has the right reflection of someone working in the Government. We can't wish things to change, but people in the right places can be a revolution for us. So Monkeypaw has suggested that we promote the right people into the existing system.!!!!!
>> Elizabeth Warren for President
>My disappointment with O comes and goes. First I didn't have the expectations that he had magical powers. So it's easy to temper my expectation more in line with reality.
>She would be much better on Financial Crisis Inquiry Commission. Where she could wield subpoena power to investigate the Global Financial Crime Scene.
Hell I'd vote for Elizabeth!!! -Leffersmith
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Re: Matt Taibbi/Rolling Stone
Oct 26, 2009 2:44 PM
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> Matt Taibbi
> Taibblog
>
>
>
> Oct. 22 2009 - 10:16 am | 6,216 views
>
>
> Elizabeth Warren for President
>
This just shows the clueless side of Taibbi. Maybe he's got a little MILF crush.
My disappointment with O comes and goes. First I didn't have the expectations that he had magical powers. So it's easy to temper my expectation more in line with reality.
While Elizabeth Warren is a compelling figure, this hero worship is pretty lame. Let's take an academic and make her do the heavy lifting for the party. Regardless that she has no political experience and no apparent interest. I'm sure we could slice her up in a Palin-15minutes into socialist, elitist, latte drinking liberal.
She would be much better on Financial Crisis Inquiry Commission. Where she could wield subpoena power to investigate the Global Financial Crime Scene.
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Re: Matt Taibbi/Rolling Stone
Oct 24, 2009 9:22 PM
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monkeypaw
wow, that's sick
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Re: Matt Taibbi/Rolling Stone
Oct 24, 2009 4:22 PM
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> "We're in a place we haven't been since the
> Depression: Our economy is so completely fu**ed, the
> rich are running out of things to steal." - Matt
> Taibbi, "Rolling Stone," Oct 2009
Not true, there's plenty left to steal. And the fact that this got so little coverage is an indication how easy it is to keep stealing in broad daylight.
Under the programs, seniors and ill people sell their life insurance policies for cash, after which their policies are packaged together into bonds by investment bankers and resold to investors such as big pension funds. (Al Qaeda may want to by up some before the next attack)
Investors receive the policy payouts when the insured dies, and the earlier that happens, the bigger the return, though if people live longer than expected the investors could get nothing or even lose money, the report said.
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Re: Matt Taibbi/Rolling Stone
Oct 24, 2009 9:38 AM
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> "We're in a place we haven't been since the
> Depression: Our economy is so completely fu**ed, the
> rich are running out of things to steal." - Matt
> Taibbi, "Rolling Stone," Oct 2009
Geez, I really feel for them! I think we have to start stealing back!
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Re: Matt Taibbi/Rolling Stone
Oct 23, 2009 11:30 PM
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"We're in a place we haven't been since the Depression: Our economy is so completely fu**ed, the rich are running out of things to steal." - Matt Taibbi, "Rolling Stone," Oct 2009
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Re: Matt Taibbi/Rolling Stone
Oct 23, 2009 3:20 PM
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> Wicky
>
> I love Elizabeth Warren, she's turned out to be such
> a hero, advocate for us.
I agree.
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Re: Matt Taibbi/Rolling Stone
Oct 23, 2009 3:18 PM
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Wicky
I love Elizabeth Warren, she's turned out to be such a hero, advocate for us.
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Re: Matt Taibbi/Rolling Stone
Oct 23, 2009 3:12 PM
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>>Elizabeth Warren for President <<
I love it!
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Re: Matt Taibbi/Rolling Stone
Oct 23, 2009 3:08 PM
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Matt Taibbi
Taibblog
Oct. 22 2009 - 10:16 am | 6,216 views
Elizabeth Warren for President
Beyond monitoring how the government is mopping up after the financial crisis, Warren is pushing a proposal that could help prevent the next one: creating a Financial Product Safety Commission to protect consumers from abusive lenders. Mortgages and credit cards, she wrote in a 2007 journal article about the proposal, ?should be subject to the same routine safety screening that now governs the sale of every toaster, washing machine, and child?s car seat.?Straightforward as that sounds, it would represent a fundamental shift. ?Regulating financial products based on fairness, simplicity, and appropriate risk is an entirely new paradigm,? notes Reid Cramer, director of the New America Foundation?s asset building program. In the wake of the financial meltdown, the idea has gained traction in Washington, thanks in part to Warren?s plainspoken advocacy. ?Almost unique among people with deep financial insight, Professor Warren speaks a language that ordinary people can easily comprehend,? says Laurence Tribe, a colleague at Harvard Law. For example, when testifying before a congressional committee in June, Warren summed up the shift in banking this way: ?Today?s business model is about making money through tricks and traps.?
via Bank Buster: Elizabeth Warren is Wall Street?s Worst Nightmare, Mother Jones (via CommonDreams.org)
We?re coming up on the one- year anniversary of Barack Obama?s election. I think it?s maybe time that we asked ourselves how he?s doing.
He didn?t close Guantanamo Bay, and not only didn?t reject the idea of pre-emptive detention but added spice to his own new version of pre-crime prosecution, ?prolonged detention.? He promised health care reform and campaigned on a public option, and we all know how that is going to turn out.
But most importantly, he came into office amidst sweeping crises in the financial sector and did not do what needed to be done, and what had been done the last time the U.S. was sent careening into a depression because of Wall Street: he failed to push for tough financial reforms. Barack Obama needed to be the FDR figure who remade the American capital markets and made them fair again, and he barely laid a finger on the whole scene.
Instead, he put the people who created the problem in charge of fixing the mess, and ended up bailing them out instead of the rest of the country, at huge current and (presumably) future cost.The total bill for the Bush-Obama bailout is certainly above ten trillion at this point ? Inspector General Neil Barofsky thinks it might hit nearly $24 trillion ultimately ? and this went through without much fanfare. Meanwhile, the congress is stuck in the mud, panicked at the thought of paying three or four trillion over a decade or so for a health care program.
None of this is new news. What is new is the question of what to do about it. I?m personally of the opinion that our main problem lay with the fact that the Democratic Party as currently constituted is more afraid of losing the financial support of Wall Street and the health insurance industry and the pharmaceutical industry than it is of losing progressive voters. In fact, I think I?ve put that wrong, because it implies that the Democratic Party pushes the agenda of industry insiders out of fear. That is a misread of the situation, I think.
I think they prefer those people to their voters. I think they feel more comfortable with them. I heard a story recently from a Democratic Party operative who tells me that certain members of one of the president?s cabinet departments only got wind of how hard it is out there for ordinary people to pay their bills when they invited in a major corporation to give them a presentation about their financial outlook for the holiday season ? and through that report found out that this company?s prospective customers were spending less because large numbers of them had been laid off, or had huge medical bills, or had maxed out their credit, and so on.
Letters from customers, survey answers and such, were read to the cabinet group. And they were shocked. This is how they find out about the economic reality of this country ? accidentally, from a major campaign contributor! That?s how out of touch these people are.
On these financial issues, not just the issue of financial regulation on Wall Street but the larger issue of income distribution and what kind of country we want to be ? the Democratic Party no longer has a policy that makes any sense. They do not seem to understand or even recognize that real wages in this country have not grown for most people for decades. Or if they do understand, they refuse to imagine any solutions that are not in some way a compromise with their major campaign contributors. They talk about closing tax loopholes and phony corporate addresses in the Caribbean as solutions to economic problems, policy initiatives as absurd and inconsequential as then-comic Al Franken?s fictional decision (in the novel Why Not Me?) to run on a campaign promise of ?ending ATM fees.?
This is all a long-winded way of saying that we have problems whose solutions involve taking on powerful interests, political challenges that will necessarily involve prolonged and hard-fought conflicts, but what we have in the Democratic Party is an organization dedicated to avoiding such conflicts and resolving issues in the manner of a corporate board, in closed meetings with the chief cardholders where things get hashed out to the satisfaction of everyone present.
The problem from the standpoint of the typical voter is that he is not terribly present in those discussions. When Rahm Emmanuel met with Billy Tauzin and Merck and Pfizer in the Roosevelt Room (how ironic!) of the White House earlier this summer to work out the details of exactly how much of a bite the new health bill was going to take out of the pharmaceutical industry ? the answer turned out to be none, and all the insane subsidies of big Pharma are going to remain in the final bill ? were you there? Was anyone representing you there?
The Democrats feel safe in leaving you and me out of that room for two big reasons. One, our main electoral alternative is the party that put George W. Bush in office. Two, the last time significant quantities of Democrats decided to buck and send the party a message, they helped get George Bush elected by giving Ralph Nader the deciding votes of what turned out to be the tightest of elections. Or at least that?s the storyline that?s been popular since that incident. The Nader ?debacle? forever closed the notion of third-party progressive challenges to mainstream Democrats, at least in the minds of the Democratic Party bigwigs, anyway.
It seems to me then that the only hope of getting any of these problems is to get ourselves a national candidate who on the one hand is a mainstream politician and on the other is willing to embrace the notion of an open protest against the Democratic Party doctrine. We need for someone who has some legitimacy with both the media and the Democratic Party constituents themselves to come out and publicly campaign to re-seize the Party from the Wall Street interests that have come to dominate it. We need someone who understands the finance stuff (which automatically reduces the pool of possible applicants to a small handful), will know the difference between real regulatory reform and a dog-and-pony show, and will not be likely to fill a cabinet with bankers from Goldman Sachs and Morgan Stanley.
The question I have lately is, why not draft Elizabeth Warren to run for president? And I don?t mean in 2016, I mean in 2012.
This sounds like a crazy idea for a couple of big reasons. One, a primary challenge to Barack Obama will almost certainly fail and may hurt Obama enough to get a Republican elected to the presidency. The other is that if this is done as a third-party run, it?ll probably achieve the same thing.
That all might be true. And it may, indeed, be a terrible idea. If it is, I?m genuinely open to hearing the reasons why, and I?m sure it?s a long list.
But I?d like to see it get talked about anyway. The way I look at it, the problem with the Democratic Party is not the voters, it?s the 19 or 20 people who are paying for the campaigns and sitting in at those meetings with Rahm and Billy Tauzin. We have to get rid of those people, herd them all to the edge of a very tall cliff and push them off and be done with it. I think this can be done by electoral referendum if we actually put it all on the table openly and let people decide for themselves. And maybe it takes an electoral cycle or two to get it done, but it has to get done. This stuff won?t get fixed otherwise.
We need someone in there who is willing to run one this one issue: who owns the Democratic Party? Is it the voters, or is it Goldman Sachs and Morgan Stanley and United Health Care? There are plenty of candidates out there who?d fit ? Toledo?s Marcy Kaptur got a nice bounce from the Michael Moore movie, and Jan Schakowsky is another who comes to mind ? but Warren to me makes the most sense for the simple reason that it will be virtually impossible for the Democratic Party hacks to dismiss her as a fringe character, given that they themselves gave her such a big public position as chief of the Congressional Oversight Panel.
This is a woman who understands the finance issues as well as we can hope to expect from any politician and moreover seems to connect the dots when it comes to dissecting the problems on Wall Street:
I just don?t think we could talk yet in terms of a recovery. I think the right way to understand this is that we stabilized the patient. No one goes to bed at night wondering when you wake up in the morning and will this financial system have collapsed. We clearly are past that point, but we have to remember the way we stabilized it. We stabilized it by saying the American government is going to put its money, its guarantees, the taxpayers? money behind our financial system to hold it up?
And that may have given, you know, some cheery news to investors in the stock market who say I want to invest in some of those companies that have those sorts of government guarantees to back them up, but it doesn?t tell us that the economy itself is turning around. It doesn?t tell us that there are good jobs out there or even that we?re starting to build the infrastructure that?s going to produce those good jobs.
I think someone needs to put a scare into the Democratic Party leaders. Someone needs to make it clear that the progressives in the House might really kill the Health Care bill if it comes out of the Reid-Pelosi consult sucking as much as we expect it to, but even more importantly, someone needs to let Barack Obama know that someone else?s face is going to start being silk-screened on t-shirts at political rallies if he doesn?t get real on the finance stuff.
Barack Obama ran an incredible campaign last year, managing to turn himself into the stuff of political iconography ? he captured and owned amorphous and happy concepts like ?hope? and ?change? through a brilliant 18-month run of painstakingly careful imageering, and through the force of his own remarkably genial and patient personality. He took a country which historically has always been divided powerfully by race and he managed to win a hotly-contested race with grace and class and in that sense advanced the cause of racial tolerance to an incalculable degree. He made the racist electoral strategies of Karl Rove and Mark Penn outdated. And he gets credit for restoring respect for the American presidency abroad.
But he also inherited a terrible financial crisis and he completely whiffed on it, siding with the financial status quo, who happen to be the bad guys. And in general, policywise, he has turned out to be eerily in sync with the previous administration, even down to some of the more obvious and egregious stuff, like the Guantanamo business and his amazing, perhaps illegal, and completely inexplicable refusal to investigate the ICRC (Red Cross) claims of systematic torture there.
And because of that, he can now be attacked on the iconic level just as he as once elevated there, made now into a symbol of anti-change ? which in fact is beginning to be what he represents. We need some courageous politician to step up and offer us a symbol not of reassuring pablum but of that spirit which is needed at the moment, revolt and a return of political power to the voter. And when people coalesce around that image, it will throw the real meaning of the Obama phenomenon into relief. This will be too bad, given the historic import of Obama?s amazing run, but it?s just necessary, unfortunately.
We need someone who will run on one very basic principle ? the refusal to accept corporate money. That someone will have to be willing to be a symbol of voter empowerment. If someone like Elizabeth Warren doesn?t want that responsibility, well, she shouldn?t have gone into office and gone on TV making all that sense and shit. She?s pushed for transparency in the Fed, is openly furious about the misuse of bailout money, and seems to take personally the chicanery that credit card companies and banks use to game the suckers out there. I simply cannot see her suddenly flipping and holding $2000-a-plate fundraisers with Lloyd Blankfein and Jamie Dimon.
And sure, a good loyal party member would never step up and take an axe to a powerful and popular incumbent. Maybe that kind of disloyalty is not what Elizabeth Warren wants to be known for. But someone out there on the landscape has to be willing to take that step. Because really, what?s the alternative? How can we keep voting for these guys, when they never, ever deliver?
http://trueslant.com/matttaibbi/2009/10/22/elizabeth-warren-for-president/
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