Forget Bank Reform Lets Send Goldman Sachs To Prison Now
Goldman Sachs CEO Lloyd Blankfein was questioned by Senator Levin on April 27, along with other members of the Senate Subcommittee on Investigations. Blankfien was quested about his company's activities regarding CDOs sales. When asked repeatedly if selling securities that the company considered worthless (as told in emails) is ethical, Blankfein would not answer the question and replied, "Senator, there is a lot in your question...and I am sure we will spend a lot of time on different parts of it." Levin again questioned him, wanting Blankfein to take responsibility for what his company had done. Blankfein merely said, seemingly contemptuously, "In the context of market- making, that is not a conflict. Clients shouldn't care what our views are."
Congress is trying to enact Bank Reform. That would just be more laws that these bankers and brokerages feel they can ignore. We have laws already against what Goldman Sachs did. The SEC must enforce the laws that were broken and send the Goldman Sachs executives to prison. They were involved in fraud. People go to prison for fraud. Send them to prison already.
What precisely is the definition of fraud? Wikipedia says that fraud is "an intentional deception made for personal gain or to damage another individual." How does fraud apply in the case of CDOs? Brokerages and banks were selling CDOs and in their heyday in 2007, sales exceeded $500 billion. CDO sales were made to 401k's, pensions funds, individuals, etc. The California Public Employees' Retirement System, for example, the largest public pension fund in the USA, invested $140 million in CDOs. A retirement fund must invest its cash in low-risk, conservative investments. After all, they are investing retirement funds.
What is a CDO? Wikipedia defines a CDO as "a type of structured asset-backed security (ABS) whose value and payments are derived from a portfolio of fixed-income underlying assets." The key words here are UNDERLYING ASSETS, remember assets. What did the banks and brokerages do? They took hundreds of mortgages from individuals, regardless of whether they were prime or sub-prime, totaled their value, put them into a "package," and sold them to investors as AAA rated securities. These packages were called collateralized because they had a collateral (asset) underlying them. CDO's were originally created to provide liquidity to the economy, by allowing banks and brokerages to sell off mortgage debts, freeing up capital to loan. Sounds ok, right?
Had banks and brokerages not oversold these CDOs, no one would have said anything. Package the debt and sell it off to another institutional investor. But greed is a human characteristic. Brokerages and banks took these same mortgages and packaged them over and over again into CDOs. For many of these CDOs, there were no assets underlying them. The fact that fewer and fewer CDOs were even able to find insurance should have been an alert to the banks and brokerages that CDOs should stop being issued and sold. And certainly do not sell these to pension funds, IRAs, or retirement accounts. When the mortgages that were associated with these CDOs defaulted because there were no real assets underlying them, smaller investors life savings were wiped out.
This is not the first instance of CDOs being packaged and sold as AAA investments. Banks and brokerages packaged student loans in the same fashion and sold them as AAA rate securities to pensioners, knowing that the student loans default rate was very high. Just 2 years ago, banks and brokerages were selling auction rate securities to retirees and claiming them to be tax-free money market accounts -- telling their clients they were in cash! That was a 300 million dollar fiasco.
What is the real problem with band and brokerage fraud? Simple...no one goes to prison. Instead, the SEC fines the banks for violating the law. With auction rate securities, for example, where fraud was clear, brokerages received expensive fines. Wachovia Securities had to pay $40 million in fines. But so what. Brokerages and banks believe fines are just the "cost of doing business." Non-financial companies believe that payroll, advertising, and rent, are the cost of doing business. But not brokerages and banks...they consider getting fined for fraud is the cost of doing business.
Put them in prison. If the SEC put them in prison, we wouldn't need bank reform. The laws are already in place and being broken by these firms. Bank reform just adds more laws they will get around. These firms have an "above the law" mentality. That was very clear at the Senate Subcommittee hearing. Why pass more laws they will just ignore. The answer is simple...send them to prison and have Bubba as their cell mate. Let Bubba show them a little "extra-curricular activity." The SEC should stand on its own 2 feet and put these guys in prison. We don't need bank reform, we just need a few lifers in prison to set these bankers straight.
Article Source: FxTradingStock.com
About the Author
Barbara Cohen has been a professional day trader for over 10 years. She has trained hundreds of students in trading futures with Shadowtraders trading strategies. As the CIO, Barbara moderates Shadowtraders daily online trading chatroom. Before you purchase any trading education, make sure you attend Shadowtraders Monday Night Webinar, and hosted by Barbara Cohen
by: Barbara Cohen
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Date: Thu, 6 May 2010
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