FAH-Q Wall Street

FAH-Q = For All to Hear & Question

__________________________________________________________________________________

source: http://dealbook.nytimes.com/2011/05/12/u-s-attorney-sends-a-message-to-wall-street/?scp=1&sq=preet&st=cse

EXCERPTS:

“‘Greed, sometimes, is not good,’ [Preet Bharara, the United States attorney for the Southern District of New York] said….

‘When sophisticated business people begin to adopt the methods of common criminals, we have no choice but to treat them as such,’ Mr. Bharara said weeks after revealing the use of wiretaps in building a case against Mr. Rajaratnam. ‘To use tough tactics in these circumstances is not being heavy-handed; it is being even-handed.’

He has taken that approach in other areas of financial crime.

His office secured convictions in two high-profile criminal cases against bank executives accused of stealing proprietary computer code related to high-frequency trading businesses, including a case against a former programmer at Goldman Sachs. More recently, Mr. Bharara’s prosecutors charged the operators of three popular online poker sites with fraud and money laundering.

And Mr. Bharara continues to pursue insider trading cases. Over the last 18 months, his office has charged 47 individuals with insider trading crimes, 36 of whom have pleaded guilty or been convicted. At a recent news conference, he indicated there was more to come.

‘I wish I could say we were just about finished, but sadly we are not.'”

_________________________________________________________________________________________

source: http://www.rollingstone.com/politics/news/the-people-vs-goldman-sachs-20110511

EXCERPTS below from Matt Taibbi’s report in Rolling Stone magazine:

“The People vs. Goldman Sachs

A Senate committee has laid out the evidence. Now the Justice Department should bring criminal charges

By Matt Taibbi

May 11, 2011 9:30 AM ET….
 

Timberwolf, the most notorious of Goldman’s scams, was another car whose engine exploded right out of the lot. As with Hudson, Goldman clients who bought into the deal had no idea they were being sold the “cats and dogs” that the bank was desperately trying to get off its books. An Australian hedge fund called Basis Capital sank $100 million into the deal on June 18th, 2007, and almost immediately found itself in a full-blown death spiral. “We bought it, and Goldman made their first margin call 16 days later,” says Eric Lewis, a lawyer for Basis, explaining how Goldman suddenly required his client to put up cash to cover expected losses. “They said, ‘We need $5 million.’ We’re like, what the fuck, what’s going on?” Within a month, Basis lost $37.5 million, and was forced to file for bankruptcy….

Goldman sales rep George Maltezos urged the Australians at Basis to hurry up and buy what the bank knew was a deadly investment, suggesting that the “return on invested capital for Basis is over 60 percent.” Maltezos was so stoked when he first identified the Aussies as a target in the scam that he subject-lined his e-mail “Utopia.”

“I think,” Maltezos wrote, “I found white elephant, flying pig and unicorn all at once.”

The whole transaction can be summed up by the now-notorious e-mail that Montag wrote to Sparks only four days after they sold $100 million of Timberwolf to Basis. “Boy,” Montag wrote, “that timeberwof [sic] was one shitty deal”….

Here is where the supporters of Goldman and other big banks will stand up and start wanding the air full of confusing terms like “scienter” and “loss causation” — legalese mumbo jumbo that attempts to convince the ignorantly enraged onlooker that, according to American law, these grotesque tales of grand theft and fraud you’ve just heard are actually more innocent than you think. Yes, they will say, it may very well be a prosecutable crime for a corner-store Arab to take $2 from a customer selling tap water as Perrier. But that does not mean it’s a crime for Goldman Sachs to take $100 million from a foreign hedge fund doing the same thing! No, sir, not at all! Then you’ll be told that the Supreme Court has been limiting corporate liability for fraud for decades, that in order to gain a conviction one must prove a conscious intent to deceive, that the 1976 ruling in Ernst and Ernst clearly states….

Leave all that aside for a moment. Though many legal experts agree there is a powerful argument that the Levin report supports a criminal charge of fraud, this stuff can keep the lawyers tied up for years. So let’s move on to something much simpler. In the spring of 2010, about a year into his investigation, Sen. Levin hauled all of the principals from these rotten Goldman deals to Washington, made them put their hands on the Bible and take oaths just like normal people, and demanded that they explain themselves. The legal definition of financial fraud may be murky and complex, but everybody knows you can’t lie to Congress.

“Article 18 of the United States Code, Section 1001,” says Loyola University law professor Michael Kaufman. “There are statutes that prohibit perjury and obstruction of justice, but this is the federal statute that explicitly prohibits lying to Congress.”

The law is simple: You’re guilty if you “knowingly and willfully” make a “materially false, fictitious or fraudulent statement or representation.” The punishment is up to five years in federal prison.

When Roger Clemens went to Washington and denied taking a shot of steroids in his ass, the feds indicted him — relying not on a year’s worth of graphically self-incriminating e-mails, but chiefly on the testimony of a single individual who had been given a deal by the government. Yet the Justice Department has shown no such prosecutorial zeal since April 27th of last year, when the Goldman executives who oversaw the Timberwolf, Hudson and Abacus deals arrived on the Hill and one by one — each seemingly wearing the same mask of faint boredom and irritated condescension — sat before Levin’s committee and dodged volleys of questions.

Before the hearing, even some of Levin’s allies worried privately about his taking on Goldman and other powerful interests. The job, they said, was best left to professional prosecutors, people with experience building cases. “A senator’s office is not an enormous repository of expertise,” one former regulator told me. But in the case of this particular senator, that concern turned out to be misplaced. A Harvard-educated lawyer, Levin has a long record of using his subcommittee to spend a year or more carefully building cases that lead to criminal prosecutions. His 2003 investigation into abusive tax shelters led to 19 indictments of individuals at KPMG, while a 2006 probe fueled insider-trading charges against the notorious Wyly brothers, a pair of billionaire Texans who manipulated offshore investment trusts. The investigation of Goldman was an attempt to find out what went wrong in the years leading up to the financial crash, and the questioning of the bank’s executives was not one of those for-the-cameras-only events where congressmen wing ad-libbed questions in search of sound bites. In the weeks leading up to the hearing, Levin’s team carefully rehearsed the moment with committee members. They knew the possible answers that Goldman might give, and they were ready with specific counterquestions. What ensued looked more like a good old-fashioned courtroom grilling than a photo-op for grinning congressmen.

Sparks, who stepped down as Goldman’s mortgage chief in 2008, cut a striking figure in his testimony. With his severe crew cut, deep-set eyes and jockish intransigence, he looked like a cross between H.R. Haldeman and John Rocker. He repeatedly dodged questions from Levin about whether or not the bank had a responsibility to tell its clients that it was betting against the same stuff it was selling them. When asked directly if he had that responsibility, Sparks answered, “The clients who did not want to participate in that deal did not.” When Levin pressed him again, asking if he had a duty to disclose that Goldman had an “adverse interest” to the deals being sold to clients, Sparks fidgeted and pretended not to comprehend the question. “Mr. Chairman,” he said, “I’m just trying to understand.”

OK, fine — non-answer answers. “My guess is they were all pretty well coached up,” says Kaufman, the law professor. But then Sparks had a revealing exchange with Sen. Jon Tester of Montana. Tester calls the Goldman deals “a wreck waiting to happen,” noting that the CDOs “were all downgraded to junk in very short order.”

At which point, Sparks replies, “Well, senator, at the time we did those deals, we expected those deals to perform.”

Tester then cannily asks if by “perform,” Sparks means go to shit — which would have been an honest answer. “Perform in what way?” Tester asks. “Perform to go to junk so that the shorts made out?”

Unable to resist the taunt, Sparks makes a fateful decision to defend his honor. “To not be downgraded to junk in that short a time frame,” he says. Then he pauses and decides to dispense with the hedging phrase “in that short a time frame.”

“In fact,” Sparks says, “to not be downgraded to junk.”

So Sparks goes before Congress and, under oath, tells a U.S. senator that at the time he was selling Timberwolf, he expected it to “perform.” But an internal document he approved in May 2007 predicted exactly the opposite, warning that Goldman’s mortgage desk expected such deals to “underperform.” Here are some other terms that Sparks used in e-mails about the subprime market affecting deals like Timberwolf around that same time: “bad and getting worse,” “get out of everything,” “game over,” “bad news everywhere” and “the business is totally dead”….

Another extraordinary example of Goldman’s penchant for truth avoidance came when Joshua Birnbaum, former head of structured-products trading for the bank, gave a deposition to Levin’s committee. Asked point-blank if Goldman’s huge “short” on mortgages was an intentional bet against the market or simply a “hedge” against potential losses, Birnbaum played dumb. “I do not know whether the shorts were a hedge,” he said. But the committee, it turned out, already knew that Birnbaum had written a memo in which he had spelled out the truth: “The shorts were not a hedge.” When Birnbaum’s lawyers learned that their client’s own words had been used against him, they hilariously sent an outraged letter complaining that Birnbaum didn’t know the committee had his memo when he decided to dodge the question. They also submitted a “supplemental” answer. Birnbaum now said, “Having reviewed the document the staff did not previously provide me” — his own words! — “I can now recall that … I believed … these short positions were not a hedge.” (Goldman, for its part, dismisses Birnbaum as a single trader who “neither saw nor knew the firm’s overall risk positions.”)

When it came time for Goldman CEO Lloyd Blankfein to testify, the banker hedged and stammered like a brain-addled boxer who couldn’t quite follow the questions. When Levin asked how Blankfein felt about the fact that Goldman collected $13 billion from U.S. taxpayers through the AIG bailout, the CEO deflected over and over, insisting that Goldman would somehow have made that money anyway through its private insurance policies on AIG. When Levin pressed Blankfein, pointing out that he hadn’t answered the question, Blankfein simply peered at Levin like he didn’t understand.

But Blankfein also testified unequivocally to the following:

“Much has been said about the supposedly massive short Goldman Sachs had on the U.S. housing market. The fact is, we were not consistently or significantly net-short the market in residential mortgage-related products in 2007 and 2008. We didn’t have a massive short against the housing market, and we certainly did not bet against our clients.”

Levin couldn’t believe what he was hearing. “Heck, yes, I was offended,” he says. “Goldman’s CEO claimed the firm ‘didn’t have a massive short,’ when the opposite was true.” First of all, in Goldman’s own internal memoranda, the bank calls its giant, $13 billion bet against mortgages “the big short.” Second, by the time Sparks and Co. were unloading the Timberwolves of the world on their “unicorns” and “flying pigs” in the summer of 2007, Goldman’s mortgage department accounted for 54 percent of the bank’s risk. That means more than half of all the bank’s risk was wrapped up in its bet against the mortgage market — a “massive short” by any definition. Indeed, the bank was betting so much money on mortgages that its executives had become comically blasé about giant swings on a daily basis. When Goldman lost more than $100 million on August 8th, 2007, Montag circulated this e-mail: “So who lost the hundy?”

This month, after releasing his report, Levin sent all of this material to the Justice Department. His conclusion was simple. “In my judgment,” he declared, “Goldman clearly misled their clients, and they misled the Congress.” Goldman, unsurprisingly, disagreed: “Our testimony was truthful and accurate, and that applies to all of our testimony,” said spokesman Michael DuVally. In a statement to Rolling Stone, Goldman insists that its behavior throughout the period covered in the Levin report was consistent with responsible business practice, and that its machinations in the mortgage market were simply an attempt to manage risk.

It wouldn’t be hard for federal or state prosecutors to use the Levin report to make a criminal case against Goldman. I ask Eliot Spitzer what he would do if he were still attorney general and he saw the Levin report. “Once the steam stopped coming out of my ears, I’d be dropping so many subpoenas,” he says. “And I would parse every potential inconsistency between the testimony they gave to Congress and the facts as we now understand them.”

I ask what inconsistencies jump out at him. “They keep claiming they were only marginally short, that it was more just servicing their clients,” he says. “But it sure doesn’t look like that.” He pauses. “They were $13 billion short. That’s big — 50 percent of their risk. It was so completely disproportionate.”

Lloyd Blankfein went to Washington and testified under oath that Goldman Sachs didn’t make a massive short bet and didn’t bet against its clients. The Levin report proves that Goldman spent the whole summer of 2007 riding a “big short” and took a multibillion-dollar bet against its clients, a bet that incidentally made them enormous profits. Are we all missing something? Is there some different and higher standard of triple- and quadruple-lying that applies to bank CEOs but not to baseball players?

This issue is bigger than what Goldman executives did or did not say under oath. The Levin report catalogs dozens of instances of business practices that are objectively shocking, no matter how any high-priced lawyer chooses to interpret them: gambling billions on the misfortune of your own clients, gouging customers on prices millions of dollars at a time, keeping customers trapped in bad investments even as they begged the bank to sell, plus myriad deceptions of the “failure to disclose” variety, in which customers were pitched investment deals without ever being told they were designed to help Goldman “clean” its bad inventory. For years, the soundness of America’s financial system has been based on the proposition that it’s a crime to lie in a prospectus or a sales brochure. But the Levin report reveals a bank gone way beyond such pathetic little boundaries; the collective picture resembles a financial version of The Jungle, a portrait of corporate sociopathy that makes you never want to go near a sausage again.

Upton Sinclair’s narrative shocked the nation into a painful realization about the pervasive filth and corruption behind America’s veneer of smart, robust efficiency. But Carl Levin’s very similar tale probably will not. The fact that this evidence comes from a U.S. senator’s office, and not the FBI or the SEC, is itself an element in the worsening tale of lawlessness and despotism that sparked a global economic meltdown. “Why should Carl Levin be the one who needs to do this?” asks Spitzer. “Where’s the SEC? Where are any of the regulatory bodies?”

This isn’t just a matter of a few seedy guys stealing a few bucks. This is America: Corporate stealing is practically the national pastime, and Goldman Sachs is far from the only company to get away with doing it. But the prominence of this bank and the high-profile nature of its confrontation with a powerful Senate committee makes this a political story as well. If the Justice Department fails to give the American people a chance to judge this case — if Goldman skates without so much as a trial — it will confirm once and for all the embarrassing truth: that the law in America is subjective, and crime is defined not by what you did, but by who you are.

END OF EXCERPTS from Matt Taibbi’s report in Rolling Stone magazine

Read more: http://www.rollingstone.com/politics/news/the-people-vs-goldman-sachs-20110511

___________________________________________________________________________________________________

Advertisements
  1. No comments yet.
  1. No trackbacks yet.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: