Saturday, April 17, 2010

To whom much has been given: an update

Wall Street bank heads testify before Congress
Yesterday the SEC indicted Goldman Sachs for civil fraud. The specific trade cited is just one example of countless others done by GS and other TBTF Wall Street banks. In brief, GS is charged with selling sub-prime mortgage-backed financial instruments which it knew would soon turn into junk. It did not disclose this to buyers, however. Further, these were created at the request of a hedge fund client specifically so it could bet against them. GS is not (yet) accused of similarly "shorting" its own product but if it is later this would be much worse.

The one individual named in the indictment is a GS VP named Fabrice Tourre or "Fab" as he sometimes calls himself, as in this email. The brains behind this particular deal, in his own words he perfectly describes the use of intellectual gifts to create a device for fraud and deception build on sheer greed:

Goldman Sachs CEO Lloyd Blankfein
More and more leverage in the system. The whole building is about to collapse anytime now... Only potential survivor, the fabulous Fab[rice Tourre]... standing in the middle of all these complex, highly leveraged exotic trades he created without necessarily understanding all of the implications of those monstrosities!!!

Reportedly the Attorneys General of both New York and Connecticut are seriously considering criminal indictments against Wall Street bank executives. It's also assumed more action will be coming from the SEC and perhaps other Federal agencies. This is likely just the first chapter in what could be a very long saga--at least, let's hope so.

Update: LA Times columnist Michael Hiltzik has an excellent column on the SEC lawsuit against Goldman Sacks' and the financial chicanery that led to it. He zeroes in on the larger issue and why new federal financial regulation is essential to restore order in the world of TBTF banking:

The real issue isn't what Goldman knew or didn't know about the larger economy. The issue is that Wall Street's business model has become corrupted into one dependent on creating transactions that spin financial wheels to virtually no economic end, merely to generate fees and profits.

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