Awaiting Our Pecora Moment (II)

My friend Marshall Auerback (bio) wrote this stunning synopsis of the nefatious motivations of Goldman Sachs (and others) which adds to Simon Johnson's discussion of the SEC's recent allegation of fraud by Goldman Sachs (which I posted yesterday).  

Chuck Spinney

Goldman Sachs' Motivations

Marshall Auerback

Whether what they did was "legal" or not is a side issue.  The whole purpose of the deregulation of the last 25 years was to make what was once illegal, legal.  Read JK Galbraith on the Great Depression; you'll appreciate the historical echoes here.  Before 1999, Goldman (like the other investment banks) was a partnership—run by future Treasury Secretary Hank Paulson. The trouble with that arrangement is that it is impossible to directly benefit from a run-up of the stock market. Sure, Goldman could earn fees by arranging initial public offerings for Pets-Dot-Com start-ups, and it could trade stocks for others or for its own account. This did offer the opportunity to exploit inside information, or to monkey around with the timing of trades, or to push the dogs onto clients. But in the euphoric irrational exuberance of the late 1990s that looked like chump change. How could Goldman's management get a bigger share of the action?

Flashback to the 1929 stock market boom, when Goldman faced the same dilemma. Since the famous firms like Goldman Sachs were partnerships, they did not issue stock; hence they put together investment trusts that would purport to hold valuable equities in other firms (often in other affiliates, which sometimes held no stocks other than those in Wall Street trusts) and then sell shares in these trusts to a gullible public. Effectively, trusts were an early form of mutual fund, with the "mother" investment house investing a small amount of capital in their offspring, highly leveraged using other people's money. Goldman and others would then whip up a speculative fever in shares, reaping capital gains through the magic of leverage. However, trust investments amounted to little more than pyramid schemes—there was very little in the way of real production or income associated with all this trading in paper. Indeed, the "real" economy was already long past its peak—there were no "fundamentals" to drive the Wall Street boom. It was just a Charles Ponzi-Bernie Madoff scam. Inevitably, Goldman's gambit collapsed and a "debt deflation" began as everyone tried to sell out of their positions in stocks—causing prices to collapse. Spending on the "real economy" suffered and we were off to the Great Depression. Sound familiar?


So in 1999 Goldman and the other partnerships went public to enjoy the advantages of stock issue in a boom. Top management was rewarded with stocks—leading to the same pump-and-dump incentives that drove the 1929 boom. To be sure, traders like Robert Rubin (another Treasury secretary) had already come to dominate firms like Goldman. Traders necessarily take a short view—you are only as good as your last trade. More importantly, traders take a zero-sum view of deals: there will be a winner and a loser, with Goldman pocketing fees for bringing the two sides together. Better yet, Goldman would take one of the two sides—the winning side, of course--and pocket the fees and collect the winnings. You might wonder why anyone would voluntarily become Goldman's client, knowing that the deal was ultimately zero-sum and that Goldman would have the winning hand? No doubt there were some clients with an outsized view of their own competence or luck; but most customers were wrongly swayed by Goldman's reputation that was being exploited by hired management. The purpose of a good reputation is to exploit it.

The most famous shorter of MBSs is John Paulson, who approached Goldman to see if the firm could create some toxic synthetic CDOs that he could bet against. Of course, that would require that Goldman could find chump clients willing to buy junk CDOs—a task for which Goldman was well-placed. According to the SEC, Goldman allowed Paulson to increase the probability of success by allowing him to suggest particularly trashy securities to include in the CDOs. Goldman arranged 25 such deals, named Abacus, totaling about $11 billion. Out of 500 CDOs analyzed by UBS, only two did worse than Goldman's Abacus. Just how toxic were these CDOs? Only 5 months after creating one of these Abacus CDOs, the ratings of 84% of the underlying mortgages had been downgraded. By betting against them, Goldman and Paulson won—Paulson pocketed $1 billion on the Abacus deals; he made a total of $5.7 billion shorting mortgage-based instruments in a span of two years. This is not genius work—84% to 96% of CDOs that are designed to fail will fail.

Paulson has not been accused of fraud—while he is accused of helping to select the toxic waste, he has not been accused of misleading investors in the CDOs he bet against. Goldman, on the other hand, never told investors that the firm was creating these CDOs specifically to meet the demands of Paulson for an instrument to allow him to bet them. The truly surprising thing is that Goldman's patsies actually met with Paulson as the deals were assembled—but Goldman never informed them that Paulson was the shorter of the CDOs they were buying! The contempt that Goldman shows for clients truly knows no bounds. Goldman's defense so far amounts to little more than the argument that a) these were big boys; and b) Goldman also lost money on the deals because it held a lot of the Abacus CDOs. In other words, Goldman is not only dishonest, but it is also incompetent. If that is not exploitation of reputation by Goldman's management, I do not know what would qualify.

Awaiting Our Pecora Moment (I)

The military reformer, Colonel John Boyd used to say that sooner or later questions about the Pentagon's unethical shenanigans  boil down to questions of incompetence or corruption or both.  

Simon Johnson, the crusading former chief economist of the IMF, who wants to break up the big banks ends up with the same observation regarding the leadership of Lloyd Blankfein, the CEO of Goldman Sachs, a company now known popularly the great vampire squid (see Matt Taibbi's stunning essay, The Great American Bubble Machine, Rolling Stone, 5 April 2010).  The SEC allegation of fraud puts this issue in the forefront of our political culture and raises the question of whether Congress has the courage to live up to the precedent it established in the 1930s.  Don't bet your house on it.

Our Pecora Moment

By Simon Johnson, Baseline Scenario, 17 April 2010

We have waited long and patiently for our Ferdinand Pecora moment – a modern equivalent of the episode when a tough prosecutor from New York seized the imagination of the country in the early 1930s and, over a series of congressional hearings: laid bare the wrong-doings of Wall Street in simple and vivid terms that everyone could understand, and created the groundswell of public support necessary for comprehensive reregulation.  On Friday, that moment finally arrived.

There is fraud at the heart of Wall Street, according to the Securities and Exchange Commission.  Pecora took on National City Bank and J.P. Morgan (the younger); these were the supposedly untouchable titans of their day.  The SEC is taking on Goldman Sachs; no firm is more powerful. .... (continued)

Global Warming & the Question of Good Versus Evil

Advocates of the Global Warming Hypothesis (aka Climate Change) are quick to disparage the morals and the motives of anyone who disagrees with them.  Although there are legitimate scientific questions about the extent to which human activities contribute to the recent trend of climate changes or GW-related phenomena (here, here, and here, for example), the advocates of GW label their skeptics as antiscientific “deniers” (an emotional play on holocaust deniers or evolution deniers) who are slimeballs in the pay of industries that spew CO2 into the air, like the coal industry -- the subliminal implication being that conflicts of interest lie on only one side of the issue.  In this portrayal, anyone who disagrees with them would destroy the world in their selfish lust for money and power or is an unwitting pawn of such people.

But this Manichaean portrayal of good versus evil hides the fact that huge amounts of money are at stake on both sides of the issue.  Financial speculators stand to make hundreds of billions of dollars off of the unknowable economics of carbon trading, for example.   Think about the possibilities for new derivitives: Bundled mortgage instruments are far easier to understand than bundles of carbon credits derived from the carbon sucking characteristics of forest planting subsidies (bundles of trees whose carbon sucking power varies over time according to the weather and season and the age of the trees, inter alia).  If you think derivatives like credit default swaps were undecipherable and difficult to regulate, just wait until you try to understand or regulate bundled carbon swaps.  That vultures like Goldman Sachs are licking their chops at the financial carrion implicit in the emerging carbon trading market ought to be seen as a giant waving red flag in this regard. 

The attached article in today’s Observer shines a tiny ray of sunshine into one dark corner of the question of conflict of interests among these self-styled “good guys.”

--------------------------------

Carbon credit documentary should not have been shown, BBC admits

Corporation acts on Observer investigation into secretive trust  linked to socialite Robin Birley that funded film on his carbon credits firm, Envirotrade

Mark Olden and Michael Gillard, The Observer, Sunday 11 April 2010

A BBC documentary about socialite Robin Birley and his carbon credits business venture in Africa should never have been broadcast, an internal inquiry by the corporation has found. Millions of viewers were misled because the sympathetic documentary shown on BBC World News failed to declare that it was financed by a secretive trust that was linked to Birley.

The BBC acted in response to an Observer investigation into Birley's "philanthropy capitalism" venture in Mozambique. Taxpayers' money was used to subsidise poor farmers there to protect forests and plant trees that absorb carbon dioxide. Envirotrade, Birley's company, then sells "carbon credits" to celebrities and businesses wanting to offset their emissions. Customers who used Birley's venture to offset emissions included the agency that handles Brad Pitt and George Clooney.  (more)

More on the Meltdown Men in the Theater of the Absurd

Yesterday I posted Andrew Cockburn's withering review of the farce of financial reform that is being played out in the theater of Versailles on the Potomac.  Included in Cockburn's portrayal was the free ride given to the self-serving testimony of Mssrs Greenspan, Rubin, and Prince before the Financial Crisis Inquiry Committee.  The FCIC is Congress's faint shadow of the 1930s Pecora Commission, which ran the legendary inquiry into the causes of the 1930s economic meltdown.  

Of course, the farcical  testimony of today's Meltdown Men was entirely predictable.  Indeed, farce is now a central part of the political culture in Versailles the Potomac.  Much like the bloody spectacles in the Roman Colosseum, political theater and soundbytes, abetted by a compliant mass media, both entertain and dumb down the masses, while enriching the very charlatans who are leading them into ruin.  

A neat bookend to Cockburn's piece was written a few days before the hearing by my friend Jeff Madrick (below).  Jeff proves that the self-serving performance of the Meltdown Men was an entirely predictable reflection of the inner workings of our broken government.  Madrick also provides a clear albeit brief history of how unbridled greed unwound the regulations that evolved out of the Pecora Hearings to create our current condition.

Chuck Spinney

The Meltdown Men: Greenspan, Rubin, & Prince to Testify before Financial Crisis Commission

Jeff Madrick, New Deal 2.0, Monday, 04/5/2010

http://www.newdeal20.org/2010/04/05/the-meltdown-men-greenspan-rubin-prince-to-testify-before-financial-crisis-commission-9410/

The men who stoked the financial meltdown will testify before the Financial Crisis Inquiry Commission. Don’t expect any mea culpas.

This week, Robert Rubin, Chuck Prince and Alan Greenspan will testify before the Financial Crisis Inquiry Commission. We know that they will duck blame and likely slip past the courteous questions of their inquisitors. ... more

Financial Reform Collapses into Farce

A first rate tubesteak by my friend Andrew Cockburn ... I urge you to read it carefully

As Rahm Eyes Exit

Financial Reform Bids Collapse Into Farce

By ANDREW COCKBURN, Counterpunch, 8 April 2010

http://www.counterpunch.org/andrew04082010.html

Word from the White House is that Rahm Emanuel is still fishing around for a lucrative berth in the financial industry (“money first, then the deal” he reportedly barked at a recent industry caller discussing business possibilities in the private sector) so we needn’t hold our breath too hard waiting for the administration to bring law enforcement, or even its emasculated sibling “regulation reform,”  to Wall Street anytime soon.  Not that the banks have ever really felt threatened, given the contemptuous ease, which I described here last December,  with which they were able to gut the reform bill spawned last in the House of Representatives. ... more

Greenwashing the War on Terror & the Seven Sisters

In the preceding blaster (here), I raised a question of whether the Israelis were trying to hijack the Green Lobby or whether they were ready for the rubber room.  This was made in response to a report by Jonathan Cook that contended Israel was greenwashing war the on terror.  It turns out that I may have phrased this question in naive, simplistic terms, if my good friend Pierre Sprey (a justifiably well known weapons analyst, mathematician, and recording entrepreneur -- just google him) is correct, Israel's motives for  trying to hijack the Green Lobby can be viewed in a larger, longer range context.  Attached below is his most interesting analysis of Israel's motives for greenwashing the war on terror:

-----[Comment by Pierre Sprey follows]-----

Chuck,

I totally agree that the currently faddish alternate energy sources are ludicrously uneconomical and, for the most part, environmentally harmful. The only alternate source that could almost completely supplant oil and that actually makes economic and environmental sense, natural gas, is currently among the most unfashionable. [CS Note: Robert Bryce has an excellent discussion of natural gas in his important new book, Power Hungry: The Myths of Green Energy and the Real Fuels of the Future, Public Affairs Press, April 2010.] 

Nevertheless, there's an important larger perspective to Israel's dead serious push to raise huge amounts of capital (guess where?) to produce non-oil based energy from trendy green sources in large enough quantities to reduce worldwide oil demand significantly. 

That perspective is simple: unbeknownst to most, the absolute highest priority objective of Israeli foreign policy, from 1949 to today, has been to break the Seven Sisters oil cartel's stranglehold on world oil production in order to collapse the world price of oil. From Israel's point of view, that's a perfectly rational strategic objective--and, almost certainly, the only Israeli objective I know of that would be a major benefit to the world. 

Whether it's achievable is, of course, another question, given the huge, always-underestimated economic and political power of the oil cartel. In any case, the oil companies recognized the Israeli threat even before 1949 and, so far, have been successful in countering every Israeli move to break Big Oil's grip on the world's oil spigot. Superficially, but more or less correctly, the following paragraph's from Cook's article summarize the Israeli strategic interest in fomenting the Iraq war--and Israel's use of their neocon puppets to implement that strategy:

"There are strong indications that Israel's green technologies drive is related to plans developed by US neoconservative groups in the build-up to the attack on Iraq. Netanyahu is known to have maintained close ties to neoconservatives in the US.

Some of these groups lobbied the previous administration of George W. Bush to invade Iraq so that its oil fields could be privatized and the international markets flooded with oil.

According to the reasoning of officials at one influential think-tank, the Heritage Foundation in Washington, privatization would drive down oil prices, break up the Saudi-backed Opec oil cartel, and drain money away from "terror groups" and radical Islamic education.

Some neocons regarded this policy as particularly beneficial to Israel, because it would starve Hamas and Hizballah of funds and take the pressure off Tel Aviv to end the occupation."

Needless to say, the actual implementation of Israel's strategy to foment the Iraq War and then to use the fruits to tear down the world price of oil was far subtler and far more treacherous than the above simple-minded outline. The chronology is the following:

1. In June 1997, the neocon Project on the New American Century (PNAC)--fronting for Israel--published their manifesto calling for an Iraq invasion to overthrow Saddam. Quite brilliantly, they enlisted the support of the oil majors, as evidenced by getting Cheney and Rumsfeld to co-sign. The lure was the argument that Clinton's Gulf War I oil embargo was sure to end soon and then Saddam, overburdened with debt, would start selling oil and oil leases (to Seven Sister enemies like France, China and Russia, God forbid) as fast as he could. That, in turn, would collapse the world price of oil. So, according to PNAC, it was obviously in the interest of the US and the oil companies to invade Iraq, dump Saddam, and install a tame leader more amenable to leaving the US (read Exxon/Chevron) in control of Iraqi oil fields. Cheney, Rumsfeld and the oil companies went for it. 

2. At the first meeting of Bush's cabinet, end January 2001, President Bush, duly programmed by his oil company constituents, made it clear that invading Iraq was a foregone conclusion.

3. In late April 2003, Paul Wolfowitz, implementing the neocon-Israeli agenda, wrote a policy directive for the rapid privatization of all Iraqi state-owned enterprises including the oil sector. Masking this obvious back-stabbing of the neocons' erstwhile oil company allies, Wolfowitz sold the whole package as a principled free market approach to occupying Iraq and reforming the Iraqi economy--and Rumsfeld blithely signed off on this bombshell as the official DoD guidance to the new occupation government. The idea, of course, was to sell at open auction all the Iraqi oil fields piecemeal, thereby enabling all the non-cartel, oil-hungry countries to buy out a large percentage of the huge Iraqi reserves. These cartel enemies, of course, would do the opposite of the Seven Sisters' long-standing policy of keeping as much Iraqi oil off the market as possible. And thus, with one stroke of the Rumsfeldian pen, the world price of oil would crash and Israel would have achieved their coveted goal of strangling the flow of oil money to its Arab enemies.

4. Unlike Rumsfeld, the oil majors were not bamboozled. Moving very fast indeed, by May 6, 2003, they had arranged to have Philip Carroll, recently retired CEO of Shell, appointed as chairman of the occupation government's oil advisory committee. That was five days before Paul Bremer replaced Jay Garner as proconsul of Iraq. And Phil Carroll promptly arranged the demise of any piecemeal auctioning of Iraq's oil fields. Bremer's Coalition Provisional  government Order 39, directing the privatization of the entire Iraqi economy, specifically exempted oil extraction and refining. Score: Israel 0, Big Oil 1. 

Since that disappointing defeat, it appears that the Israelis have focused on the campaign to get the wealthiest supporters of Israel to finance anything that looks like a major non-oil producer of energy. You can imagine how delighted they are to have Obama financing huge expansions of nuclear electric power. And, as just one example of direct involvement, the Israeli government itself has given sizable seed money (apparently several hundred millions) to an American entrepreneur (a Zionist, of course) who is starting an ambitious venture  to establish a US-wide software-controlled network of super-quick battery charging stations for electric cars that his startup company would also design and manufacture.

What's so nutty about Israel propagandizing American Zionists into paying for gambles that might have a chance of taking a chunk out of Big Oil's market? Who cares if the ventures are a long shot, as long as Other People's Money is footing the bill?

Pierre  

Are AIPAC & Israel trying to hijack the Green Lobby ... or ... Are they Ready for the Rubber Room ... or Both

My guess is the answer is "both."  But read the attached article by Jonathan Cook and judge for yourself.

One thing that is becoming clear, however:  Global Warming can be used as a canonical fear to justify just about anything -- from Obama's plan to resurrect the nuclear power industry (while at the same time, he punts on the nuc waste issue by caving into political pressure to close the Yucca Mountain waste depository, after spending $17 billion since the 1980s) to Israel's crackpot plan to win the so-called war on terror by impoverishing the petro-states via the weaning the industrial world off hydrocarbons (see below).  If you want to get a realistic idea of the size of the energy numbers as well as the socio-economic implications of the policy transformations implied by displacing the West's reliance on hydrocarbons, I urge you read my good friend Robert Bryce's important new book, Power Hungry: The Myths of Green Energy and the Real Fuels of the Future, Public Affairs Press, April 2010.  You do not have to agree with his specific recommendations to accept the value of his important work.

Israel greenwashing "war on terror" 

Jonathan Cook, The Electronic Intifada, 30 March 2010 

Under cover of a sudden interest in developing new green technologies, the Israeli government hopes to weaken the Gulf states by making their oil redundant and thereby defeating "Islamic terror."

Uzi Landau, the national infrastructures minister, outlined a vision of a world without oil this week to Israel's most loyal supporters in Washington as he searched for wealthy American-Jewish investors and White House support for the strategy.

His message was that: "The West is addicted to oil, and so is bound by states that support terrorism ... Whoever wants to fight radical Islam and terrorist organizations should know that by purchasing gasoline, he's giving terrorists increased motivation."

Analysts say the plan's chief goals are to cripple the large oil-producing Gulf states, particularly Iran, which is seen as Israel's main rival in the region, and resistance groups that oppose Israel's long-term occupation of Palestinian land.

"Israel hopes that by repackaging the 'war on terror' in this way it can gain sympathy in the West and deflect increasing expectations that it make concessions to solve the conflict with the Palestinians," said Avner de Shalit, a politics professor at Hebrew University in Jerusalem.

Thousands of delegates at last week's annual conference of the American Israel Public Affairs Committee (AIPAC), the most powerful pro-Israel lobby group in the US, heard Landau describe the Israeli strategy as the best way to win the "war on terror."

The conference was also attended by many senior US politicians, including administration officials such as Hillary Clinton, the secretary of state.

Without Arab money from oil, Landau argued, Iran would fade as a regional power and "terror groups" like Hamas in Gaza and Hizballah in Lebanon would cease to exist. Instead Israel could serve as an alternative "powerhouse" in the Middle East for environmentally friendly energy sources.

Both Israel and the US are determined to isolate Iran, which they claim is trying to develop a nuclear warhead to rival Israel's own large nuclear arsenal. The White House is seeking to impose stiff sanctions, whereas Israel is believed to favor a military strike.

Israel failed to crush Hamas and Hizballah, two resistance groups that are backed by Iran, during attacks on Gaza last year and on Lebanon in 2006.

In a session entitled "Breaking the habit: Can US-Israel cooperation reduce our oil dependence?" Landau appealed to the US to join Israel in eradicating oil dependency as a way to defeat terror.

As he left Israel for the conference, he told local reporters he would try to persuade his audience that "by taking away its primary source of funding, we can defeat terrorism without firing a single bullet."

Landau is known to be acting on the direct instructions of Benjamin Netanyahu, the Israeli prime minister, who announced back in October a "national project" to end the world's reliance on oil within a decade.

At the same time Netanyahu gave responsibility to the National Economic Council, a think-tank inside his office, to develop "breakthrough" inventions that would eradicate the world's need for oil and coal-based electricity.

"Dependence on fossil fuels strengthens the dark regimes that encourage instability and fund terror with their petrodollars," Netanyahu told the cabinet as he unveiled the plan.

Gideon Bromberg, head of the Israeli green group Friends of the Earth, said Israel had a very poor record on environmental issues, but that he welcomed Netanyahu's belated interest "even if it is for the wrong reasons."

"He is an opportunist and recognizes that oil brings power," said Bromberg. "If you can find an alternative to it, you make yourself more powerful and make your enemies weaker."

Haaretz has reported that Netanyahu also hopes that new green technologies will allow Israel to strengthen its ties with China, which the government believes is the rising global power and less interested in the Palestinians and Israel's occupation than the US and Europe.

Although Israel has developed new solar energy and water technologies, Netanyahu is reported to want a revolution in fuels used in transport, which accounts for a large proportion of oil use. Israeli companies are already involved in researching battery technologies for cars.

There are strong indications that Israel's green technologies drive is related to plans developed by US neoconservative groups in the build-up to the attack on Iraq. Netanyahu is known to have maintained close ties to neoconservatives in the US.

Some of these groups lobbied the previous administration of George W. Bush to invade Iraq so that its oil fields could be privatized and the international markets flooded with oil.

According to the reasoning of officials at one influential think-tank, the Heritage Foundation in Washington, privatization would drive down oil prices, break up the Saudi-backed Opec oil cartel, and drain money away from "terror groups" and radical Islamic education.

Some neocons regarded this policy as particularly beneficial to Israel, because it would starve Hamas and Hizballah of funds and take the pressure off Tel Aviv to end the occupation.

In practice, however, the occupation of Iraq did not help Israel. Funding to Hizballah and Hamas instead appears to be provided by Iran.

The influence of neoconservative think-tanks on Landau has been indicated in recent weeks by the decision to share the stage with leading neoconservatives such as James Woolsey, a former head of the Central Intelligence Agency.

At a debate on ending global oil dependency at Israel's annual "national security" convention in Herzliya in February, attended by most of the Israeli cabinet, Woolsey urged the destruction of Opec, claiming that Saudi Arabia controlled 90 percent of Islamic education.

He said that when people filled up their cars "you are helping to finance the people who finance hatred, incitement and terror."

That view was echoed by other participants.

In December the United Nations criticized Israel for its poor record on using renewable energy sources. It ranked bottom for using solar sources to generate electricity, behind countries such as Senegal, Eritrea and Mexico, as well as Western countries with only a few hours of sunlight.

A government watchdog, Israel's state comptroller, issued a report the same month arguing that Israel had not taken even basic measures to address climate change.

Jonathan Cook is a writer and journalist based in Nazareth, Israel. His latest books are Israel and the Clash of Civilisations: Iraq, Iran and the Plan to Remake the Middle East (Pluto Press) and Disappearing Palestine: Israel's Experiments in Human Despair (Zed Books). His website is www.jkcook.net.

A version of this article originally appeared in The National, published in Abu Dhabi.