Banks Bundled Bad Debt, Bet Against It and Won

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In summary, authorities are investigating whether securities laws or rules of fair dealing were violated by firms like Goldman Sachs, which created and sold mortgage-linked debt instruments and then bet against the clients who purchased them in the run-up to the market's collapse. This likely fits under "What is wrong with the US Economy", but more information is needed to make a full judgement.
  • #1
Astronuc
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This probably fits under "What is wrong with the US Economy", but . . . .

NYTimes Dealbook said:
Authorities are investigating whether securities laws or rules of fair dealing were violated by firms like Goldman Sachs, which created and sold mortgage-linked debt instruments and then bet against the clients who purchased them in the run-up to the market's collapse, The New York Times reports.

http://dealbook.blogs.nytimes.com/2009/12/24/banks-bundled-bad-debt-bet-against-it-and-won/

In late October 2007, as the financial markets were starting to come unglued, a Goldman Sachs trader, Jonathan M. Egol, received very good news. At 37, he was named a managing director at the firm.

Mr. Egol, a Princeton graduate, had risen to prominence inside the bank by creating mortgage-related securities, named Abacus, that were at first intended to protect Goldman from investment losses if the housing market collapsed. As the market soured, Goldman created even more of these securities, enabling it to pocket huge profits.

Goldman’s own clients who bought them, however, were less fortunate, Gretchen Morgenson and Louise Story write in The New York Times.

Pension funds and insurance companies lost billions of dollars on securities that they believed were solid investments, according to former Goldman employees with direct knowledge of the deals who asked not to be identified because they have confidentiality agreements with the firm.

Goldman was not the only firm that peddled these complex securities — known as synthetic collateralized debt obligations, or C.D.O.’s — and then made financial bets against them, called selling short in Wall Street parlance. Others that created similar securities and then bet they would fail, according to Wall Street traders, include Deutsche Bank and Morgan Stanley, as well as smaller firms like Tricadia, an investment company whose parent firm was overseen by Lewis A. Sachs, who this year became a special counselor to Treasury Secretary Timothy F. Geithner.

How these disastrously performing securities were devised is now the subject of scrutiny by investigators in Congress, at the Securities and Exchange Commission and at the Financial Industry Regulatory Authority, Wall Street’s self-regulatory organization, according to people briefed on the investigations. Those involved with the inquiries declined to comment.

. . . .
A lot of questionable (read that high risk) debt was rated as AAA, when in fact it warranted 'junk bond' status or equivalent. It would appear some investment bank groups knew this, sold the high risk securities and then bet against their clients who bought that debt! And in some cases, it seems to go beyond risk given that some of the debt seems to have been guarateed to lose based on the rising defaults, foreclosures and bankruptcies, and asset depreciation.
 
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  • #2
caveat emptor - presumably the billion$ pension funds and investment houses buying these securities had highly paid professionals working for them as well?
 
  • #3
It would appear some investment bank groups knew this, sold the high risk securities and then bet against their clients who bought that debt!


Seems like a direct hedge. IMHO, it's a good strategy.
 
  • #4
General_Sax said:
It would appear some investment bank groups knew this, sold the high risk securities and then bet against their clients who bought that debt! Seems like a direct hedge. IMHO, it's a good strategy.

This is not a hedge.

It all depends what they told the clients who bought. If they said this is dangerous bad quality **** then they are guiltless. If they said this is safe good quality stuff and they knew at the time it was bad then they are guilty of fraud. If at the time they thought it was good and only later thought it was bad, well ... do you cash in first or warn the clients first? Not sure their is under the current liberal regulations a requirement to do so?
 
  • #5
edpell said:
This is not a hedge.

It all depends what they told the clients who bought. If they said this is dangerous bad quality **** then they are guiltless. If they said this is safe good quality stuff and they knew at the time it was bad then they are guilty of fraud. If at the time they thought it was good and only later thought it was bad, well ...
What if they knew it was inherently bad, but artificially good because of artificial demand created by Fannie Mae and Freddie Mac? After all, these government institutions were creating demand (for political purposes) for loans that banks would never make otherwise.

Should the banks consider the loans "bad" that government purposely wanted to be created? Of course the banks knew they would be toxic if Fannie/Freddie went under, but should they have anticipated that? And if they did, should they have told people they thought Fannie/Freddie would go under because of a government imposed mandate to lose money?

Some banks, including mine, refused to issue these loans despite losing out on being able to sell to Fannie/Freddie, and despite being labeled as "don't care about poor people" by power hungry politicians. Those banks did just fine, and are still doing just fine.
 
  • #6
Al68 said:
What if they knew it was inherently bad, but artificially good because of artificial demand created by Fannie Mae and Freddie Mac? After all, these government institutions were creating demand (for political purposes) for loans that banks would never make otherwise.

Should the banks consider the loans "bad" that government purposely wanted to be created? Of course the banks knew they would be toxic if Fannie/Freddie went under, but should they have anticipated that? And if they did, should they have told people they thought Fannie/Freddie would go under because of a government imposed mandate to lose money?

Some banks, including mine, refused to issue these loans despite losing out on being able to sell to Fannie/Freddie, and despite being labeled as "don't care about poor people" by power hungry politicians. Those banks did just fine, and are still doing just fine.

I guess it comes down to what the regulations say. If they say you must tell your customer the whole truth that you are aware of then I would say the seller must explain the artificial nature of the current demand and the risk that the bubble will eventually burst. If the regulation does not require full honest disclosure then you may "legally" withhold some of your knowledge and get the customer to buy things that are dangerous and in the long run worthless (some (like me) might call this fraud).

Maybe there should be a legal division between companies that sell securities and companies that invest in securities? I think this was called the second Glass-Steagall Act of 1933.
 
  • #7
Do other industries do this?
"Boeing today announce the first flight of it's 797 aircraft with it's revolutionary glass and rusty nail construction - In other news Boeing announced a $Bn investment in the makers of airport crash tenders, trauma room suppliers and funeral homes"
 
  • #8
edpell said:
I guess it comes down to what the regulations say. If they say you must tell your customer the whole truth that you are aware of then I would say the seller must explain the artificial nature of the current demand and the risk that the bubble will eventually burst. If the regulation does not require full honest disclosure then you may "legally" withhold some of your knowledge and get the customer to buy things that are dangerous and in the long run worthless (some (like me) might call this fraud).
I agree with that in principle, but since it was a political issue, the truth depended on who you ask.

It's not like the politicians who push the policy of encouraging banks to make bad loans were out telling everyone that. They were out telling everyone how great the policy was for making it easier for poor and lower middle class families to buy homes (that they couldn't afford). Then trying to blame someone else when they were foreclosed on for the same reason. And later trying to blame others when Fannie/Freddie went under from losing money for too long.

The funny thing about most political issues is that for the most part, the truth is completely irrelevant. Politicians don't care about the minority of people that know enough to know they're lying, they only care about the power they get by convincing enough of the rest of them to get elected.
 
  • #9
mgb_phys said:
Do other industries do this?
"Boeing today announce the first flight of it's 797 aircraft with it's revolutionary glass and rusty nail construction - In other news Boeing announced a $Bn investment in the makers of airport crash tenders, trauma room suppliers and funeral homes"
The real question is, if government were bribing them to switch to "glass and rusty nails" purposely for some claimed benefit, would Boeing take the bribe, make the switch, all the while claiming it's a bad policy while trying to sell it?

Any business that goes along with a government plan for profit isn't going to bad talk the plan at the same time. Wouldn't be prudent.
 
  • #10
It was more selling a client a product that you knew was so bad for it that you immediately then bet against that client's business.
 
  • #11
Al68 said:
The funny thing about most political issues is that for the most part, the truth is completely irrelevant. Politicians don't care about the minority of people that know enough to know they're lying, they only care about the power they get by convincing enough of the rest of them to get elected.

Yes, exactly.
 
  • #12
mgb_phys said:
It was more selling a client a product that you knew was so bad for it that you immediately then bet against that client's business.

There must be two types of customers
1) those you think are too stupid to remain in existence -- and so will not be valuable customers in the future
2) those you think are smart enough to survive -- and so will be valuable customers in the future

A business is free to "blow-up" (work against) the first group of customer. It is no lose to the business nor to the second group of customers. There is a time evolution to who is a valued customer and who is chum.
 
  • #13
mgb_phys said:
It was more selling a client a product that you knew was so bad for it that you immediately then bet against that client's business.

Or as they put it in Astro's article:

When you buy protection against an event that you have a hand in causing, you are buying fire insurance on someone else’s house and then committing arson.

What a ridiculously wonderful (and legal!) method of stealing.
 
  • #14
And their bonuses. Jeez Louise...

$23,000,000,000.00 for 30,000 employees.

Let's see, we loaned them $10,000,000,000.00, which they paid back with interest, thank you very much. Then we basically gave them $13,000,000,000.00 through an AIG kind of fix it thingy. Then we gave them a low interest loan of $52,000,000,000.00. (http://www.dailyfinance.com/story/g...or-charity-23-billion-for-banker-bo/19193897")

Hmmm... I've invested $1,300.00 in the stock market since December 08 at $100 per month and am ahead by about 25%. Hmmmm... If I'd had $75,000,000,000.00 instead of $1,300.00, I'd be ahead by, um, $19,000,000,000.00.

Pretty damn close. And I don't know nothin about the stock market. I'm going to have to be much more proactive the next time they're giving handouts. I could really put a big fat jabba the hut sized bonus to good use.


And I shouldn't let my hours worth of snooping at the SEC go to waist:
U.S. Securities and Exchange Commission
The Laws That Govern the Securities Industry
http://www.sec.gov/about/laws.shtml"

Often referred to as the "truth in securities" law, the Securities Act of 1933 has two basic objectives:

* require that investors receive financial and other significant information concerning securities being offered for public sale; and

* prohibit deceit, misrepresentations, and other fraud in the sale of securities.

I'd say the act of shorting their own clients definitely implies all three.

Time to get out the pitchforks again. :devil:
 
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  • #15
With regard to Fannie Mae and Freddie Mac, the CRA, and the recent financial crisis -

There are some critics who fault Fannie and Freddie and the CRA:
The Government Did It (Yaron Brook 07.18.08)
http://www.forbes.com/2008/07/18/fannie-freddie-regulation-oped-cx_yb_0718brook.html

All this overlooks a crucial fact: There has been no free market in housing or finance. Government has long exercised massive control over the housing and financial markets--including its creation of Fannie Mae and Freddie Mac (which have now amassed $5 trillion in liabilities)--leading to many of the problems being blamed on the free market today.
While it is true the Fannie Mae and Freddie Mac have amassed $5 trillion in liabilities, the rest of the statement is simply untrue - and dishonest. Yaron Brook is managing director of BH Equity Research and executive director of the Ayn Rand Institute.

Fannie and Freddie did encourage CRA-related mortgages, but it was low volume.

Fannie Mae's Targeted Community Reinvestment Act Loan Volume Passes $10 Billion Mark; Expanded Purchasing Efforts Help Lenders Meet Both Market Needs and CRA Goals
http://findarticles.com/p/articles/mi_m0EIN/is_2001_May_7/ai_74223918/

Fannie Mae (FNM/NYSE), the nation's largest source of financing for home mortgages, today announced that its acquisition volume of specially-targeted Community Reinvestment Act (CRA) loans passed the $10 billion threshold in the second quarter of 2001, reaching that milestone more than one and a half years ahead of schedule.

In the spring of 1999, Fannie Mae pledged to purchase at least $10 billion in CRA loans by the end of the year 2002.
. . . .

"Our approach to our lenders is 'CRA Your Way'," Gorelick said. "Fannie Mae will buy CRA loans from lenders' portfolios; we'll package them into securities; we'll purchase CRA mortgages at the point of origination; and we'll create customized CRA-targeted securities. This expanded approach has improved liquidity in the secondary market for CRA product, and has helped our lenders leverage even more CRA lending. Lenders now have the flexibility to use their own, customized loan products," Gorelick said.

. . . .

However -

Private sector loans, not Fannie or Freddie, triggered crisis
http://www.mcclatchydc.com/251/story/53802.html
[Some] Commentators [e.g., Yaron Brook] say that's what triggered the stock market meltdown and the freeze on credit. They've specifically targeted the mortgage finance giants Fannie Mae and Freddie Mac, which the federal government seized on Sept. 6, contending that lending to poor and minority Americans caused Fannie's and Freddie's financial problems.

Federal housing data reveal that the charges aren't true, and that the private sector, not the government or government-backed companies, was behind the soaring subprime lending at the core of the crisis.

Subprime lending offered high-cost loans to the weakest borrowers during the housing boom that lasted from 2001 to 2007. Subprime lending was at its height from 2004 to 2006.

Federal Reserve Board data show that:

• More than 84 percent of the subprime mortgages in 2006 were issued by private lending institutions [not subject to CRA or Freddie or Fannie].

• Private firms made nearly 83 percent of the subprime loans to low- and moderate-income borrowers that year.

• Only one of the top 25 subprime lenders in 2006 was directly subject to the housing law that's being lambasted by conservative critics.

. . . .
Fannie, the Federal National Mortgage Association, and Freddie, the Federal Home Loan Mortgage Corp., don't lend money, to minorities or anyone else, however. They purchase loans from the private lenders who actually underwrite the loans.

. . . .
Between 2004 and 2006, when subprime lending was exploding, Fannie and Freddie went from holding a high of 48 percent of the subprime loans that were sold into the secondary market to holding about 24 percent, according to data from Inside Mortgage Finance, a specialty publication. One reason is that Fannie and Freddie were subject to tougher standards than many of the unregulated players in the private sector who weakened lending standards, most of whom have gone bankrupt or are now in deep trouble.

. . . .
Fannie and Freddie, however, didn't pressure lenders to sell them more loans; they struggled to keep pace with their private sector competitors. In fact, their regulator, the Office of Federal Housing Enterprise Oversight, imposed new restrictions in 2006 that led to Fannie and Freddie losing even more market share in the booming subprime market.

What's more, only commercial banks and thrifts must follow CRA rules. The investment banks don't, nor did the now-bankrupt non-bank lenders such as New Century Financial Corp. and Ameriquest that underwrote most of the subprime loans.

Notice in 2008 which investment banks and mortgage companies are still issuing subprime mortgages - despite the fact that the subprime market had been collapsing during 2007. And actually defaults and foreclosures had been accelerating since 2005.


Goldman's offshore deals deepened global financial crisis
http://www.mcclatchydc.com/227/story/81465.html
NEW YORK — When financial titan Goldman Sachs joined some of its Wall Street rivals in late 2005 in secretly packaging a new breed of offshore securities, it gave prospective investors little hint that many of the deals were so risky that they could end up losing hundreds of millions of dollars on them.

McClatchy has obtained previously undisclosed documents that provide a closer look at the shadowy $1.3 trillion market since 2002 for complex offshore deals, which Chicago financial consultant and frequent Goldman critic Janet Tavakoli said at times met "every definition of a Ponzi scheme."
. . . .

In some of these transactions, investors not only bought shaky securities backed by residential mortgages, but also took on the role of insurers by agreeing to pay Goldman and others massive sums if risky home loans nose-dived in value — as Goldman was effectively betting they would.

Some of the investors, including foreign banks and even Wall Street giant Merrill Lynch, may have been comforted by the high grades Wall Street ratings agencies had assigned to many of the securities. However, some of the buyers apparently agreed to insure Goldman well after the performance of many offshore deals weakened significantly beginning in June 2006.
. . . .

These Cayman Islands deals, which Goldman assembled through the British territory in the Caribbean, a haven from U.S. taxes and regulation, became key links in a chain of exotic insurance-like bets called credit-default swaps that worsened the global economic collapse by enabling major financial institutions to take bigger and bigger risks without counting them on their balance sheets.
. . . .

Before the subprime crisis, the U.S. financial system had used securities for 40 years to help Americans finance their houses, cars and college educations, said Gary Kopff, a financial services consultant and the president of Everest Management Inc. in Washington. The offshore deals, he lamented, "became the biggest contributors to the trillions of dollars of losses" in 2008's global meltdown.

While Goldman wasn't alone in the offshore deal making, it was the only big Wall Street investment bank to exit the subprime mortgage market safely, and it played a pivotal role, hedging its bets earlier and with more parties than any of its rivals did.

McClatchy reported on Nov. 1 that in 2006 and 2007, Goldman peddled more than $40 billion in U.S.-registered securities backed by at least 200,000 risky home mortgages, but never told the buyers it was secretly betting that a sharp drop in U.S. housing prices would send the value of those securities plummeting. Many of those bets were made in the Caymans deals.
. . . .

In 2006 and 2007, as the housing market peaked, Goldman underwrote $51 billion of deals in what mushroomed into an under-the-radar, $500 billion offshore frenzy, according to data from the financial services firm Dealogic. At least 31 Goldman deals in that period involved mortgages and other consumer loans and are still sheltered by the Caymans' opaque regulatory apparatus.

. . . .


Community Reinvestment Act had nothing to do with subprime crisis
Posted by: Aaron Pressman on September 29
http://www.businessweek.com/investing/insights/blog/archives/2008/09/community_reinv.html

. . . .
The Community Reinvestment Act, passed in 1977, requires banks to lend in the low-income neighborhoods where they take deposits. Just the idea that a lending crisis created from 2004 to 2007 was caused by a 1977 law is silly. But it’s even more ridiculous when you consider that most subprime loans were made by firms that aren’t subject to the CRA. University of Michigan law professor Michael Barr testified back in February before the House Committee on Financial Services that 50% of subprime loans were made by mortgage service companies not subject comprehensive federal supervision and another 30% were made by affiliates of banks or thrifts which are not subject to routine supervision or examinations. As former Fed Governor Ned Gramlich said in an August, 2007, speech shortly before he passed away: “In the subprime market where we badly need supervision, a majority of loans are made with very little supervision. It is like a city with a murder law, but no cops on the beat.”

Not surprisingly given the higher degree of supervision, loans made under the CRA program were made in a more responsible way than other subprime loans. CRA loans carried lower rates than other subprime loans and were less likely to end up securitized into the mortgage-backed securities that have caused so many losses, according to a recent study by the law firm Traiger & Hinckley . . . .

Traiger & Hinckley Study
http://www.traigerlaw.com/publications/traiger_hinckley_llp_cra_foreclosure_study_1-7-08.pdf

Conclusion
Our study suggests that without the CRA, the subprime crisis and related spike in foreclosures might have negatively impacted even more borrowers and neighborhoods. Compared to other lenders in their assessment areas, CRA Banks were less likely to make a high cost loan, charged less for the high cost loans that were made, and were substantially more likely to eschew the secondary market and hold high cost and other loans in portfolio.
. . . .
Of course, CRA Banks, even in their own assessment areas, have a relatively small
portion of the mortgage market. In the 15 metropolitan areas analyzed, the CRA Bank market
share of all loan originations was less than 25 percent, limiting the law’s impact on the subprime
crisis.
. . . .

http://www.businessinsider.com/2008/10/oh-that-s-right-it-was-all-fannie-mae-s-fault


The vast majority of sub-prime mortgages and all the derivatives based on sub-prime mortgages (sometimes bundled with high risk consumer credit card debt and auto loans) were NOT subject to government regulation, but instead were subject to the vagaries of the 'free market'.

It now turns out that there was a lot of deception and fraud involved in addition to conflict of interest. Investment banks even went to the effort to move activities off-shore in order to avoid any possibility of regulation by the US government. Of course, the SEC under Cox decided not to bother performing their regualory duties vis-a-vis Bernard Madoff (~$60 billion Ponzi scheme) or regulation of Bear Stearns, Lehman, et al.

One can find more details in Andrew Ross Sorkin's "Too Big to Fail" and Charles Gasparino's "The Sellout".

In short, the government did not force any bank to make bad loans, but rather it was the decision of banks and mortgage companies (which are not banks) to make bad, in many cases fraudulent, loans.
 
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  • #16
Astronuc said:
This probably fits under "What is wrong with the US Economy", but . . . .



http://dealbook.blogs.nytimes.com/2009/12/24/banks-bundled-bad-debt-bet-against-it-and-won/

A lot of questionable (read that high risk) debt was rated as AAA, when in fact it warranted 'junk bond' status or equivalent. It would appear some investment bank groups knew this, sold the high risk securities and then bet against their clients who bought that debt! And in some cases, it seems to go beyond risk given that some of the debt seems to have been guarateed to lose based on the rising defaults, foreclosures and bankruptcies, and asset depreciation.

In a "Free Market", there should be consequences.
 
  • #17
HEADS, I WIN; TAILS, YOU LOSE

The Caymans deals were little more than fraud.

http://www.mcclatchydc.com/227/story/81465.html
 
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  • #18
Astronuc said:
In short, the government did not force any bank to make bad loans, but rather it was the decision of banks and mortgage companies (which are not banks) to make bad, in many cases fraudulent, loans.
There's too much in this post to respond to all of it, but a few things stand out:

Of course the government didn't force banks to issue "toxic" loans, they just effectively bribed them to do it. And many banks took the bait because they wanted the extra profit. Many banks, like mine, refused to go along and did just fine.

But claiming that private banks caused the problem, not Fannie and Freddie, because banks issued the loans is just wrong. Of course banks are to blame, but that doesn't relieve government of its share of the blame. And importantly, government, not the banks, was acting as our agent.

As far as the Community Re-investment Act of 1977, the relevant laws that amended that Act and greatly expanded it were passed by congress much later. Saying it's irrelevant because the original version was passed in 1977 is just fraudulent.

The idea that this was the result of a free market is absurd. There was no free market demand for toxic mortgages. There was artificial demand for them created by government. The fact that the demand was met by private entities doesn't make it a free market. That's like saying that government has nothing to do with F-16's existing because they're manufactured by private companies. "Free market at work", right?

Bottom line is that this problem was created by government. The fact that private entities participated in the problem doesn't relieve government of its responsibility.
 
  • #19
http://www.nytimes.com/2009/12/11/business/11goldman.html?_r=1&ref=business"
Dec 10, 2009

But Goldman’s initial insistence that it did not require a government rescue ... has set Goldman apart from many of its industry peers.

Cool. Let's collect on the money we gave and loaned them since they didn't need it in the first place.

That's $13 billion for AIG. Plus market profit, which I've shown takes no skill whatsoever, which totals, oh crap, math, $60/share vs $160/share: $35 billion dollars.

Then there are the low interest loans, which I am hard pressed to get an actual number for.
[PLAIN]http://money.cnn.com/2009/10/15/news/companies/goldman_taxpayer_gains.fortune/index.htm"
Oct 16, 2009

Critics charge that the lion's share of Goldman's profits comes from making big bets using cheap dollars printed by the Federal Reserve.

It appears to run somewhere between $22 and $52 billion dollars, depending on the source of information.

Let's give them the benefit of the doubt and say it's $22 billion.

Cha-Ching, Cha-Ching! From the above formula, 160/60, yields, $59 billion.

So I think they owe us 59 + 35 = $94 billion.

Hmmm... GS market cap = $84.93 billion. (http://finance.yahoo.com/echarts?s=GS#chart1:symbol=gs;range=2y;indicator=volume;charttype=line;crosshair=on;ohlcvalues=0;logscale=on;source=undefined")

hmm... this is odd

[PLAIN]http://money.cnn.com/2009/10/15/news/companies/goldman_taxpayer_gains.fortune/index.htm"
Goldman, by contrast, is sitting on $167 billion in cash, in the name of making sure it can withstand another market meltdown if that day comes.

Why is a company with $167 billion in cash valued at only $84 billion?

I must say, as I have in the past, that I do not understand Wall Street. Are they still sitting on trillions of dollars in debt? And if they are, why are they getting $20 billion in bonuses?

Lloyd Blankfein said:
We know from economic history that innovation, and the new industries and new jobs that result from it, require risk taking...
http://english.aljazeera.net/news/americas/2010/01/201011513753308571.html"

Right Lloyd, that's the same thing I said the last time I was in Vegas.

And, woo hoo! Look who's on your http://www.convictionbuylist.com/index.htm" : Dollar Tree Inc.

Real innovative there Lloyd. Real innovative.

(multiple expletives preemptively deleted...)
 
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  • #20
Post mortem on the collapse of the housing, mortgage and credit markets

UPDATE:Investors Sue BofA, Citi, Wells Over Mortgage-Backed Securities
http://online.wsj.com/article/BT-CO-20101105-715311.html
Banks are fighting mortgage investors on multiple fronts. Government- sponsored enterprises Fannie Mae (FNMA) and Freddie Mac (FMCC) have demanded, with frequent success, that banks buy back billions in mortgages that didn't meet "representations and warranties" made when Fannie and Freddie purchased them.

Bond insurers MBIA Inc. (MBI) and Ambac Financial Group Inc. (ABK) have sued several companies that originated home loans. Both contend the lenders provided false or misleading information to trick them into insuring mortgage-backed bonds.

Last month, investors including the Federal Reserve Bank of New York, Freddie Mac, Allianz SE's (ALIZF) Pacific Investment Management Co., manager of the world's largest bond fund, BlackRock Inc. (BLK) and Metropolitan Life Insurance Co. (MET) wrote to Bank of America, alleging poor underwriting by the bank's Countrywide Financial unit, and demanding that the bank make good their losses.
. . . .
Banks named by Schwab in its July 15 lawsuit include Citi, BNP Paribas SA (BNPQY, BNP.FR), Bank of America, Deutsche Bank AG (DB, DBK.XE), Goldman Sachs, Wells Fargo, UBS AG (UBS, UBSN.VX), and Morgan Stanley.
. . . .
 
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  • #21
Sometimes I wish people wouldn't point this stuff out to me.
http://www.rollingstone.com/politics/news/why-isnt-wall-street-in-jail-20110216?page=1"
Financial crooks brought down the world's economy — but the feds are doing more to protect them than to prosecute them
By Matt Taibbi
March 3, 2011 issue of Rolling Stone

Over drinks at a bar on a dreary, snowy night in Washington this past month, a former Senate investigator laughed as he polished off his beer.

"Everything's ****ed up, and nobody goes to jail," he said. "That's your whole story right there. Hell, you don't even have to write the rest of it. Just write that."
Matt fills six pages with facts, figures, and names. An interesting look at how SEC inspectors look the other way as wall streeters line their pockets, then go on to take multimillion dollar jobs on wall street. And who loses their jobs at the SEC? The people going after the biggest crooks of course.

The concluding paragraph:
The mental stumbling block, for most Americans, is that financial crimes don't feel real; you don't see the culprits waving guns in liquor stores or dragging coeds into bushes. But these frauds are worse than common robberies. They're crimes of intellectual choice, made by people who are already rich and who have every conceivable social advantage, acting on a simple, cynical calculation: Let's steal whatever we can, then dare the victims to find the juice to reclaim their money through a captive bureaucracy. They're attacking the very definition of property — which, after all, depends in part on a legal system that defends everyone's claims of ownership equally. When that definition becomes tenuous or conditional — when the state simply gives up on the notion of justice — this whole American Dream thing recedes even further from reality.
 
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  • #22
There's two errors in the premise there:
1. Some people did go to jail and others may yet.
2. Just being "f-d up" doesn't necessarily make something criminal.

That's Rolling Stone you're citing. I tried to read the article, but couldn't get through the first page, it's so awful.
 
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  • #23
russ_watters said:
There's two errors in the premise there:
1. Some people did go to jail and others may yet.
Interesting. I'd like to know who actually went to jail.
 
  • #24
The most obvious example is Bernie Madoff.
 
  • #25
Madoff is mentioned right at the top of that article as being the only one to see jail time. Were there any others?
 
  • #26
Gokul43201 said:
Madoff is mentioned right at the top of that article as being the only one to see jail time.
...yes, I know: right after it said several times that "nobody" went to jail.
Were there any others?
Frank Di Pascali and David Friehling. You can read about them on the wiki page of the Madoff scandal. It is not clear to me from the wiki if they are currently in jail due to the fact that trials and sentencing takes several years, but both are convicted and have spent at least some time in jail and will likely spend a lot of time in jail. This is in addition to the scads of civil cases coming from it. You may have heard the Mets are being sued for their role in the Madoff case (ignoring evidence of a crime and profiting): http://news.yahoo.com/s/ap/20110204/ap_on_sp_ot/us_mets_madoff

And this is in addition, of course, to numerous smaller, random fraud cases prosecuted in the last few years. A google for "securities fraud convicted" yields plenty of relevant hits of people you've probably never heard of. Here's the second one down (the first hit is to an older case), another Ponzi scheme.

http://www.floridacriminaldefenselawyerblog.com/2010/11/brooklyn_money_manager_convict.html

The point of all this, Gokul, isn't that "nobody" went to jail - when people say that, what they really mean is 'the people that *I wish* were in jail didn't go to jail.' They want to see CEOs in jail. This is flawed logic and reporting for several additional reasons:

3. Little of what 'those people' did was actually illegal.
4. It takes years to build a case from billions of pages of evidence and more people may yet go to jail due to financial crimes committed during the 2000s.

What it comes down to really is a generic complaint about the state of Wall Street: an unfocused lament, disconnected from the reality of the situation. Whenever something bad happens, people want someone to go to jail, regardless of if there really were any crimes committed. The title of the article is indicative of the tone and the flaw of the article: Wall Street is a street in New York. Streets can't go to jail. It only gets slightly less absurd after that.
 
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  • #27
russ_watters said:
3. Little of what 'those people' did was actually illegal.
But the companies did illegal things, overseen by 'those people'.
http://www.rollingstone.com/politics/news/why-isnt-wall-street-in-jail-20110216?page=4"

In 2003, Freddie Mac coughed up $125 million after it was caught misreporting its earnings by $5 billion; nobody went to jail. In 2006, Fannie Mae was fined $400 million, but executives who had overseen phony accounting techniques to jack up their bonuses faced no criminal charges. That same year, AIG paid $1.6 billion after it was caught in a major accounting scandal that would indirectly lead to its collapse two years later, but no executives at the insurance giant were prosecuted.
bolding mine.

4. It takes years to build a case from billions of pages of evidence and more people may yet go to jail due to financial crimes committed during the 2000s.

That's a big problem with a 5 year statue of limitations.

http://www.rollingstone.com/politics/news/why-isnt-wall-street-in-jail-20110216?page=3"
the agency finally got around to interviewing Mack, who denied any wrongdoing. The four-hour deposition took place on August 1st, 2006 — just days after the five-year statute of limitations on insider trading had expired in the case.

Page 3 is devoted to an insider trader deal between http://en.wikipedia.org/wiki/John_J._Mack#Insider_trading_accusations". Mack 'allegedly' tipped off Samberg that GE was going to buy Heller Financial, as Samberg had started buying shares of Heller Financial weeks before the sale to GE, netting him $18 million. Around the same time, a deal between Samberg and Mack, netted Mack $10 million.

The SEC investigator, http://en.wikipedia.org/wiki/Gary_J._Aguirre#Continuing_criticism", was fired for attempting to interview Mack regarding the circumstances.

On a brighter, and more recent note. Apparently there is now financial incentive for whistleblowers:
"[URL
Come Blow Your Horn for the S.E.C.[/URL]
July 26, 2010
On Friday, the S.E.C. announced that it had awarded $1 million to the former wife of David E. Zilkha for providing previously undisclosed e-mails that led to administrative charges for insider trading against Mr. Zilkha and a $28 million settlement with the now-defunct hedge fund Pequot Capital Management and its chief executive, Arthur J. Samberg.

It should be noted that $28 million dollar settlement was for insider trading related to Microsoft. The investigation on the Heller Investment/GE/Lucent 'deals' was dropped.

Samberg is now barred from working as an investment adviser, and Mack is currently Chairman of the Board at Morgan Stanley.
 
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  • #28
I thought the answer was clear? Individual banks and bankers don't always win, but in the end, BANKING always does. Too much money, power, and influence have gone into the creation of what is legal and what isn't for it NOT to pay off.

As for Bernie Madoff, how about the doubtless others who helped to make it possible for him to do what he did? We like to pretend that financial crime is somehow different from crimes agianst people, but for the people on the sharp end of that stick it pans out much the same. The upside for the crooks is that matters are complex, and that injects enormous doubt at the outset of their venture.

Caveat Emptor is advice for consumers, and in a time when revenge could be taken directly on cheats and theives. If you want to let everyone nailed by these gambles loose on the people who cheated them... caveat away. Caveat 'vendor' however, is going to be something to remember.
 
  • #29
russ_watters said:
Frank Di Pascali and David Friehling. You can read about them on the wiki page of the Madoff scandal. It is not clear to me from the wiki if they are currently in jail due to the fact that trials and sentencing takes several years, but both are convicted and have spent at least some time in jail and will likely spend a lot of time in jail. This is in addition to the scads of civil cases coming from it. You may have heard the Mets are being sued for their role in the Madoff case (ignoring evidence of a crime and profiting): http://news.yahoo.com/s/ap/20110204/ap_on_sp_ot/us_mets_madoff

And this is in addition, of course, to numerous smaller, random fraud cases prosecuted in the last few years. A google for "securities fraud convicted" yields plenty of relevant hits of people you've probably never heard of. Here's the second one down (the first hit is to an older case), another Ponzi scheme.

http://www.floridacriminaldefenselawyerblog.com/2010/11/brooklyn_money_manager_convict.html
One of the reasons I asked is that I remembered an NPR piece from back in the early days when the spit was hitting the fan, that discussed this very issue of whether people might see jail-time for what went down, and the speculation was that yes there would probably be people going to jail, but that in general it would be very hard to make a criminal case against most of the people that we have a bad feeling about, and that it would take a pretty long time for any comprehensive investigation to come up with anything conclusive anyway, so odds are, no one's going to jail in the next couple years, and after that, it comes down to how much interest there remains in proceeding with expensive investigations and trials.
 
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  • #30
nismaratwork said:
I thought the answer was clear? Individual banks and bankers don't always win, but in the end, BANKING always does. Too much money, power, and influence have gone into the creation of what is legal and what isn't for it NOT to pay off.

As for Bernie Madoff, how about the doubtless others who helped to make it possible for him to do what he did? We like to pretend that financial crime is somehow different from crimes agianst people, but for the people on the sharp end of that stick it pans out much the same. The upside for the crooks is that matters are complex, and that injects enormous doubt at the outset of their venture.

Caveat Emptor is advice for consumers, and in a time when revenge could be taken directly on cheats and theives. If you want to let everyone nailed by these gambles loose on the people who cheated them... caveat away. Caveat 'vendor' however, is going to be something to remember.

Please don't get me started on Bernie Madoff...

http://www.fiercefinance.com/story/madoff-clawback-activity-heats/2010-12-08"
December 8, 2010
Trustee Irving Picard is going after all the "winners," seeking to claw back as much of their profits as possible. In the end, people should realize it was all simply too good to be true. Carl Shapiro, an apparel magnate and long-time friend of Madoff's, has seen that light and agreed to give back $625 million, which will eventually be divvied up among victims.

Yay! They have to give back the money from a ponzi scheme! There is justice in the world!

"[URL
Winners, pay up! Madoff ‘clawback’ lawsuits going after Jewish groups, others[/URL]
December 14, 2010
...
She allegedly conspired with Madoff to lure investors, and reportedly withdrew some $423 million from Madoff’s fund just a month before Madoff was arrested in 2008. Representatives for Kohn have denied any wrongdoing.

Money! Money! Let's get all the money back!

Wow, wait, what the, Skreeeeeeeech!(that's the sound that tires made when you pushed on the brakes too hard before they had ABS)

http://online.wsj.com/article/BT-CO-20110217-716210.html"
FEBRUARY 17, 2011
WASHINGTON (Dow Jones)--Rep. Scott Garrett (R., N.J.) introduced legislation Thursday to prevent the court-appointed trustee for recovering assets for victims of Bernard L. Madoff's Ponzi scheme from claiming funds from other Madoff investors.

Yippie! Conspire with crooks to make nearly a half a billion dollars, and then have a congressman change the law so you can keep it all.

[multiple expletives deleted]
 
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  • #31
On a somewhat older side note, from the following article:
http://www.rollingstone.com/politics/news/wall-streets-naked-swindle-20100405"
A scheme to flood the market with counterfeit stocks helped kill Bear Stearns and Lehman Brothers — and the feds have yet to bust the culprits
By Matt Taibbi
April 5, 2010
Rolling Stone (again...)

"I personally went to senior management at *DTC in 1993 and presented them with this issue," she recalls. "And their attitude was, 'We spill more than that.'" In other words, the problem represented such a small percentage of the assets handled annually by the DTC — as much as $1.8 quadrillion in any given year, roughly 30 times the GDP of the entire planet — that it wasn't worth worrying about.

Does anyone know what that means? $1.8 quadrillion?

Is that the sum of all annual transactions?

http://en.wikipedia.org/wiki/Depository_Trust_%26_Clearing_Corporation"
 
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  • #32
OmCheeto said:
Please don't get me started on Bernie Madoff...



Yay! They have to give back the money from a ponzi scheme! There is justice in the world!



Money! Money! Let's get all the money back!

Wow, wait, what the, Skreeeeeeeech!(that's the sound that tires made when you pushed on the brakes too hard before they had ABS)



Yippie! Conspire with crooks to make nearly a half a billion dollars, and then have a congressman change the law so you can keep it all.

[multiple expletives deleted]

Sometimes I really wish we still lived in an age of reciprocal justice. I come out of it very quickly, but it's people like Madoff, who are clearly taking the fall for a number of others that really piss me off.
 
  • #33
OmCheeto said:
On a somewhat older side note, from the following article:


Does anyone know what that means? $1.8 quadrillion?

Is that the sum of all annual transactions?

http://en.wikipedia.org/wiki/Depository_Trust_%26_Clearing_Corporation"

that's what it sounds like. but why the churn rate would be a valid basis of comparison is beyond me.
 
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  • #34
Proton Soup said:
that's what it sounds like. but why the churn rate would be a valid basis of comparison is beyond me.

What is the "churn rate"?
 
  • #35
nismaratwork said:
What is the "churn rate"?

maybe it is the wrong term, but what i mean by it is simply the amount of money flowing through the system. which in this case is $1.8 quadrillion/year. but how much of that is just the same money changing hands over and over?
 

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