On April 27, CEO of Goldman Sachs, Lloyd Blankfein defended his company’s activities regarding sales of CDO’s while being questioned by Senator Levin and other members of the Senate Subcommittee on Investigations. When asked repeatedly if marketing securities you know may be worthless is right, Blankfein refused to answer the question. Blankfein responded, “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 asked him again, trying to get Blankfein to take some responsibility for his company’s conflict of interest, and Blankfein said, almost 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 exactly 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 this case? Look at what these banks and brokerages did. Brokerages and banks were selling CDOs. In its heyday in 2007, sales were over $500 billion. These sales were made to pensions funds, 401k’s, individuals, etc. As an example, the California Public Employees’ Retirement System, the largest public pension fund in the nation, invested $140 million. A retirement fund such as this must put its cash in conservative, low-risk investments. Afterall, these are retirement funds.
And what is a CDO? Wikipedia says that a CDO is “a type of structured asset-backed security (ABS) whose value and payments are derived from a portfolio of fixed-income underlying assets.” The relevant words are UNDERLYING ASSETS. Banks and brokerages had thousands of mortgages from individuals, both sub-prime and prime, the managers totaled their overall value, placed them into “packages,” and sold them to unsuspecting investors as AAA rated securities. These packages were “collateralized” because they had a collateral (asset) underlying them (mortgages). CDOs were first invented to give the economy liquidity by having banks and brokerages sell off their mortgage debts, thereby freeing up capital to loan. Seems ok, true?
Had banks and brokerages not sold these CDOs over and over, no one would have been harmed. Package the mortgage debt and sell it off to another institutional investor. But greed is truly a human characteristic. Banks and brokerages used these same mortgages in different packages over and over again in various CDOs. Ultimately, for many of these CDOs, there were no longer any assets underlying them, they had been packaged so many times. Fewer and fewer CDOs were able to find insurance. That fact should have signaled the banks and brokerages to stop selling CDOs. And selling these asset-less CDOs to pension funds, IRAs, or retirement accounts was unethical, to say the least. It was no wonder that when the mortgages associated with these CDOs defaulted (because there were no real mortgages underlying them), smaller investors life savings were obliterated.
Packaging CDOs is not unique to banks and brokerages. Previously they had packaged student loans and sold them as AAA rate securities to pensioners, knowing full well that student loans default rate was exceptionally high. And only 2 years ago, brokerages and banks were caught selling auction rate securities to retirees. Auction rate securities were claimed to be tax-free money market accounts. Brokerages told their clients they were in cash! That was $300 million fraud with so many investors losing everything.
The problem with banks and brokerages is that no one goes to prison. Instead the SEC just fines them for violating the law. With auction rate securities, clearly fraud, the brokerages received expensive fines. Wachovia Securities paid $40 million in fines. But these brokerages and banks consider fines as a cost of doing business. Most companies consider payroll, rent, and advertising as a cost of doing business. Brokerages consider getting fined for fraud cost of doing business.
Put Goldman Sachs executives in prison. If the SEC held their ground and put Goldman executives in prison, we probably would not need to enact bank reform. The laws are already in place but the banks are ignoring the laws. Bank reform only brings more laws that brokerages like Goldman Sachs will ignore. At the Senate Subcommittee hearing it was clear that Goldman Sachs had an “above the law” mentality. Why pass more laws Goldman et all will just ignore. The answer is obvious…send the senior executives to prison. Select Bubba as their cell mate. Bubba will give the executives the “extra-curricular activity” they have earned. The SEC should stand pat and put these executives in prison starting with the CEO. Bank reform is not needed. We just need Bubbas in prison to make sure these bankers don’t do it again.
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
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