Wednesday, July 28, 2010

Goldman's penny the utterly corrupt Beltway Bandits

Goldman's penny punishment...and much more....

This could very well be Keynesianism’s last hurrah. This may be the last inflationary episode, because those hundreds of ships cannot sit in the Middle East indefinitely. The re-issuance of massive amounts of government debt cannot and will not solve the problem. At this juncture there is no way that a devastating outcome can be avoided and those pulling the strings are well aware of that. No one will escape economic and financial pain. The degrees will just be different. Worst of all very little effort is being devoted to solving the problem and creating employment and prosperity. That is because our planners know the effort is futile. The real solution is to cut government expenses by 30%, stop deficit spending, lower taxes and let the problem solve itself, which entails a deflationary depression. Instead we are headed for a terrible fate and it was planned that way. This didn’t just happen.
As we have discussed before there is a massive misallocation of capital due to the Fed’s interest rate policy. The government pretends inflation is close to zero when in fact it is much higher. That is caused by government manipulation. We just saw the same thing in GDP figures.... This obfuscation isn’t fooling anyone. This inflation is caused in part by low interest rates and monetization by the Fed and to some extent by fiscal profligacy. The high inflation has been used for seven years to offset high deflation and it has not been too difficult to make inflation and GDP appear normal on the surface by just lying about the statistics. The problem the Fed has is that it must always create more inflation than deflation for fear they’ll lose control of the game and deflation, which once in command is impossible to stop. Underneath this game is a boiling cauldron of instability that could break loose at any time raising havoc with the system....

* US Treasury is Running on Fumes.....

By Hossein Askari and Noureddine Krichene
And he looked up, and saw the rich men that were casting their gifts into the treasury. And he saw a certain poor widow casting in thither two mites. And he said, Of a truth I say unto you, This poor widow cast in more than they all: for all these did of their superfluity cast in unto the gifts; but she of her want did cast in all the living that she had.
- Gospel According to St Luke
The Barack Obama administration and the US Securities and Exchange Commission (SEC) must have missed the lesson of the parable of the widow's mite in their upbringing and education. They should read the parable over and over again to get the message. The New York judge, the Honorable Barbara S Jones, who must still approve the settlement of the SEC's case against Goldman Sachs, should do the same before passing judgment....

The pending settlement of the case against Goldman Sachs, which was originally filed in April of this year, calls for a payment of US$550 million ($300 million to the US Treasury and $250 million to investors who lost in mortgage-backed securities that Goldman marketed) and does not require an admission of wrongdoing on the part of Goldman Sachs (normally the case in such settlements); instead, Goldman just admits that it gave "incomplete information" and that this was a "mistake" that it "regrets", and hands over the $550 million.

Now $550 million is a lot of money to mere mortals, that nobody can deny. But to Goldman Sachs? It is equivalent to just 4% of Goldman's net earnings for just one year, 2009 ($13.38 billion); or 3.4% of its bonus pool ($16.2 billion) for 2009. All this in one year, a year while the rest of the world was suffering.

These percentages aren't exactly equivalent to the pain felt by the widow in the parable. Just imagine, would you be in desperate straits and forced to change your ways if in one year of your life (note: not every year) you had lost 3-4% of your income? You get our drift. There is no pain in this settlement for Goldman. The financial markets gave their verdict, the price of Goldman's shares went up after the announcement was made: "Good deal Goldman Sachs, you did it again."

The $250 million of the $550 million destined for all those investors who lost in the mortgage-backed securities that Goldman marketed, represents only a fraction of the losses of one UK institution alone. Is this asymmetry between investor losses and Goldman payments fair? Is this just?

Now compare the aggregate pain inflicted on Goldman, its employees and its stockholders by this $550 million pending settlement to the aggregate pain inflicted on the millions of families in the United States and around the world who have suffered as a result of the financial crisis and the economic downturn.

Admittedly, the crisis was brought on by the misdeeds of other financial institutions and a host of other factors such as the failure of the US Federal Reserve policy, proliferation of debt and financial leveraging, misguided deregulation, inept supervision and more. But a key financial institution, Goldman Sachs, which was central to the excesses of Wall Street and received US government support when it was on the brink of collapse, has suffered almost nothing at all, while Main Street continues to bleed with no relief in sight.

What did the taxpayer do for Goldman? When Goldman was potentially on the brink of collapse, it was allowed by the Fed to convert its status from an investment bank to a bank holding company, affording it government support and protection. This resuscitated Goldman from near death. Goldman received TARP (Troubled asset Relief Program) funds (which it has since paid back with interest). It received 100 cents on the dollar from the insurance policies (more correctly, credit-default swaps) that it had purchased from what was a bankrupt company, AIG, which was given federal dollars to hand over to Goldman.

How much? $13 billion, that's how much. Now that's 23.6 times, or 2,360% of, the $550 million settlement. Some have even suggested that the amount might have exceeded this as Goldman may have received some indirect payments through other banks that received federal dollars from AIG. No bankrupt firm, such as AIG, pays off its creditors 100 cents on the dollar - but with taxpayer money and Goldman, anything goes.

This is the treatment that Goldman got. How did it treat the taxpayers? It turned around and paid its employees obscene bonuses while taxpayers suffered, with about 50 million Americans on food stamps. And as compensation for its excesses, Goldman set up a $500 million fund to assist small business and now this pending settlement.

Let's get back to the lawsuit and the settlement. Why did the SEC file the case? Presumably it thought it had a case. Presumably, it was seeking justice. And presumably an integral part of seeking justice was to cause enough pain to Goldman that it would never do the same again, or that at least it would think long and hard about any such transgression in the future, and hopefully in the process to send the rest of Wall Street a strong message.

Well, you be the judge. In retrospect, the SEC may not have achieved any of these goals and its actions may have, in fact, done more harm than good. Again, Wall Street signaled its reaction in the aftermath of the settlement; Goldman shares climbed. So the message to the rest of Wall Street is not exactly of a tough SEC, tough enforcement, or of changed oversight of Wall Street shenanigans.

Robert Khuzami, the SEC's chief enforcement lawyer and the man who represented the commission, has said the opposite of our conclusion. He has claimed victory because this is the largest fine in history. In this he clearly has not appreciated the parable of the widow's mite. Goldman Sachs feels little, if any, pain. Moreover, while the fine may appear large, the destruction caused by Wall Street and Goldman Sachs is significantly larger.

In support of Khuzami, we know what some legal minds have declared that this was the best that the SEC could get because its case was not tight and strong. If this were true, then the SEC should never have filed the suit, as it may have done more harm to Wall Street's perception of enforcement; before the suit and the settlement, Wall Street might have thought that the authorities had toughened their enforcement policies, but now the cat is out of the bag and they see that nothing has changed.

It would have been better for the SEC to fight and lose than to settle so. By fighting the case in court, the SEC would send a much stronger message (your reputation will be impaired as you will be in the headlines for months, not weeks) to Wall Street about future transgressions. Rest assured, future transgressions there will be; it's only a matter of time.

Let's face it - the US government and the two political parties are owned by the financial industry. US financial firms, such as Goldman Sachs, are having to pay back much more in Europe through higher taxes on bonuses than they will ever pay in fines and paybacks to the US, the country that rescued and resuscitated them. On July 20, 2010, Goldman reported that it had paid $600 million in such taxes in the UK alone.

What has the financial industry done for the real economy that we treat them so well? At a recent conference at the London School of Economics on July 14, the message of experts was clear. Quoting one of the authors, The Economist reported that the success of finance has been "as much mirage as miracle". The summary is not at all surprising: "The financial industry has done so well for itself, in short, because it has been given a license to make a leveraged bet on property ... The cost of that lesson is now being borne by the developed world's taxpayers."

The financial industry has received significant subsidies from governments; these subsidies have reduced their funding cost; and as result, over the past 30 or so years the financial industry has captured a growing share of the economy and it has prospered at the expense of the real economy.

It is now all up to the judge in New York. She is our last hope. If she approves the settlement, then the message that the SEC and the US government will be sending out to the financial industry is loud and clear: "No harm done, continue as you were."

Hossein Askari is professor of international business and international affairs at George Washington University. Noureddine Krichene is an economist with a PhD from UCLA.

* US Treasury is Running on Fumes


The White House is screaming like a stuck pig. CIA/DOD WikiLeaks’ release of the Afghan War Documents “puts the lives of our soldiers and our coalition partners at risk.”

What nonsense. Obama’s war puts the lives of American soldiers at risk, and the craven puppet state behavior of “our partners” in serving as US mercenaries is what puts their troops at risk.

Keep in mind that it was someone in the US military that leaked the documents to CIA/DOD WikiLeaks. This means that there is a spark of rebellion within the Empire itself.

And rightly so. The leaked documents show that the US has committed numerous war crimes and that the US government and military have lied through their teeth in order to cover up the failure of their policies. These are the revelations that Washington wants to keep secret.

If Obama cared about the lives of our soldiers, he would not have sent them to a war, the purpose of which he cannot identify. Earlier in his regime, Obama admitted that he did not know what the mission was in Afghanistan. He vowed to find out what the mission was and to tell us, but he never did. After being read the riot act by the military/security complex, which recycles war profits into political campaign contributions, Obama simply declared the war to be “necessary.” No one has ever explained why the war is necessary.

The government cannot explain why the war is necessary, because it is not necessary to the American people. Any necessary reason for the war has to do with the enrichment of narrow private interests and with undeclared agendas. If the agendas were declared and the private interests being served identified, even the American sheeple might revolt.

The Obama regime has made war the business of America. Escalation in Afghanistan has gone hand in hand with drone attacks on Pakistan and the use of proxy forces to conduct wars in Pakistan and North Africa. Currently, the US is conducting provocative naval exercises off the coasts of China and North Korea and instigating war between Columbia and Venezuela in South America. Former CIA director Michael Hayden declared on July 25 that an attack on Iran seems unavoidable.

With the print and TV media captive, why doesn’t Washington simply tell us that the country is at war without going to the trouble of war? That way the munitions industry can lay off its workers and put the military appropriations directly into profits. We could avoid the war crimes and wasted lives of our soldiers.

The US economy and the well-being of Americans are being sacrificed to the regime’s wars. The states are broke and laying off teachers. Even “rich” California, formerly touted as “the seventh largest economy in the world,” is reduced to issuing script and cutting its state workers’ pay to the minimum wage.

Supplemental war appropriations have become routine affairs, but the budget deficit is invoked to block any aid to Americans--but not to Israel. On July 25 the Israeli newspaper, Haaretz, reported that the US and Israel had signed a multi-billion dollar deal for Boeing to provide Israel with a missile system.

Americans can get no help out of Washington, but the US ambassador to the UN, Susan Rice, declared that Washington’s commitment to Israel’s security is “not negotiable.” Washington’s commitment to California and to the security of the rest of us is negotiable. War spending has run up the budget deficit, and the deficit precludes any help for Americans.

With the US bankrupting itself in wars, America’s largest creditor, China, has taken issue with America’s credit rating. The head of China’s largest credit rating agency declared: “The US is insolvent and faces bankruptcy as a pure debtor nation.”

On July 12, Niall Ferguson, an historian of empire, warned that the American empire could collapse suddenly from weakness brought on by its massive debts and that such a collapse could be closer than we think.

Deaf, dumb, and blind, Washington policymakers prattle on about “thirty more years of war.”

Paul Craig Roberts was an editor of the Wall Street Journal and an Assistant Secretary of the U.S. Treasury.

Even after the CIA/DOD/Wikileaks revelations, even though there is no logical reason to be in Afghanistan, even though the war won't help the economy, and even though most Americans want us to get out, Congress keeps increasing funding for the endless war.

And Alan Blinder (economist, banking consultant and former Vice Chairman of the Board of Governors of the Federal Reserve System) and chief Moody's economist Mark Zandi wrote a paper yesterday called How We Ended the Great Recession:

How We Ended the Great Recession

A source on Capitol Hill sent this to me, telling me that the paper is making the rounds on the Hill.

In the paper, Blinder and Zandi congratulate the Bush and Obama administrations for saving us from the Great Depression 2.0:
Eighteen months ago, the global financial system was on the brink of collapse and the U.S. was suffering its worst economic downturn since the 1930s. The Great Recession gave way to recovery as quickly as it did largely because of the unprecedented responses by monetary and fiscal policymakers.
In other words: "Mission Accomplished".

In the real world, however, the economy is on the second leg down of the crash, and the government's policies have not addressed the real problems. See this and this (no wonder consumer confidence is plunging but Wall Street is partying like it's 1999).

Indeed, while Blinder and Zandi and Congress are patting themselves on the back for a job well done, the facts simply do not bear out their claims. As just one example, they claim that the TARP bank bailouts helped the economy. But as I pointed out in March 2009, the bailout money didn't actually go to any productive economic uses:

The bailout money is just going to line the pockets of the wealthy, instead of helping to stabilize the economy or even the companies receiving the bailouts:

  • A lot of the bailout money is going to the failing companies' shareholders
  • Indeed, a leading progressive economist says that the true purpose of the bank rescue plans is "a massive redistribution of wealth to the bank shareholders and their top executives"
  • The Treasury Department encouraged banks to use the bailout money to buy their competitors, and pushed through an amendment to the tax laws which rewards mergers in the banking industry (this has caused a lot of companies to bite off more than they can chew, destabilizing the acquiring companies)
And as the New York Times notes, "Tens of billions of [bailout] dollars have merely passed through A.I.G. to its derivatives trading partners".


In other words, through a little game-playing by the Fed, taxpayer money is going straight into the pockets of investors in AIG's credit default swaps and is not even really stabilizing AIG.
The super-wealthy have been bailed out, and life is great for them. For everyone else, things are not so good.

The system is rigged to benefit the elites and their sycophants at the expense of the country. See this, this, this, and this.

And - because Congress members tend to be wealthy, and because they can engage in insider trading without having to worry about pesky things like the law - they continue (with only a handful of exceptions who challenge status quo thinking regarding finance and war) to make decisions which benefit their own bank accounts, instead of working for the American people.....

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