'God, What a Piece of Crap'
By Robert Scheer
Truthdig: April 28, 2919
It was the Perry Mason moment in the unraveling of what was left of Goldman
Sachs' reputation. Only in this case, it involved a grizzled former
prosecutor, Sen. Carl Levin, rather than a genial defense attorney. The case
was broken and the truth about the depth of Goldman's corruption revealed in
his startling cross-examination of Goldman Chief Financial Officer David
Viniar.
The Michigan Democrat, citing the language of the internal e-mails of
Goldman traders concerning the deceptive products they were selling, asked:
"And when you heard that your own employees in these e-mails are looking at
these deals said `God what a shitty deal. God, what a piece of crap,' when
you hear your own employees and read about those e-mails, do you feel
anything?"
Viniar's answer told us all we need to know about the banal but profound
immorality of Goldman's business culture: "I think that's very unfortunate
to have on e-mail."
A flabbergasted Levin cut in with "On e-mail? How about feeling that way?"
and Viniar, apparently moved by jeers of ridicule from the audience,
conceded "I think it is very unfortunate for anyone to have said that in any
form." Pressed further by Levin asking, "How about to believe that and sell
them?" the CFO finally conceded, "I think that's unfortunate as well." To
which Levin responded, "That's what you should have started with."
But Goldman's executives didn't start with any such moral qualms or end with
them, as was made clear in the testimony of Goldman Chief Executive Officer
Lloyd Blankfein that followed. Blankfein basically pleaded ignorance about
the company's scams, making it clear that offering the details of such
products was below his pay scale. That would be $68 million in 2007, the
highest in Wall Street history, when Goldman's bets against its customers
paid off so handsomely. What was clear is that his job was to ensure the
company's immense year-end profitability with no questions asked about the
methods used. "I did not know" he replied when asked about the details of
the company's trades, and at another point he added, "We're not that smart."
Then there was "I don't have any knowledge" on selling short, and finally,
"We did not know what subsequently occurred in the housing market."
What he did know is that the scoundrels in his mortgage betting rooms were,
as with that high-flying London operation that got AIG so much loot before
it exploded, raking in enormous profits. Such ignorance is bliss for a
Goldman CEO who apparently is rewarded in inverse proportion to what he
knows of the operation as long as he pays attention to the bottom line.
That was certainly the case for the man whom Blankfein succeeded the year
before, Henry Paulson, when Paulson went off to serve as George W. Bush's
treasury secretary. As Paulson admits in his memoir, he was unaware that
suspect mortgages were at the heart of the banking meltdown, even though he
was head of Goldman when those toxic mortgage securities were developed.
And then there is that other Goldman-honcho-turned-public-servant Robert
Rubin, who was a Goldman vice chairman before serving as Bill Clinton's
treasury secretary. In that Cabinet job, Rubin pushed through the Financial
Services Modernization Act, which demolished the wall between investment and
commercial banking. Ironically, that reversal of the New Deal regulations
that had operated successfully for 60 years, the Glass-Steagall Act, was
referenced by Blankfein in his Tuesday testimony explaining how Goldman and
other firms spun out of control.
When asked by Sen. Ted Kaufman, D-Del., how Goldman had morphed from a
traditional investment bank backing sound business ventures to a market
gambler in fanciful products, Blankfein attributed it, somewhat forlornly,
to "a change in the sociology of the business that took place over the last
15 to 20 years." He added, "I'm not sure that it was precipitated by the
fall of Glass-Steagall or it caused Glass-Steagall to fall. ."
Of course there was nothing inevitable about the fall of Glass-Steagall in
1999, since it was the result of decades of lobbying by the financial
industry. That change was followed by the total deregulation of financial
derivatives by the Commodity Futures Modernization Act, which Rubin had
pushed and which President Clinton signed into law.
Clinton recently conceded that he got bad advice from Rubin on derivatives
regulation, but he still holds to the notion that the reversal of
Glass-Steagall was not harmful. No one listening carefully to the day of
testimony by the various Goldman executives could accept the idea that these
folks can function decently without strict boundaries.
***
http://www.nytimes.com/2010/04/26/opinion/26krugman.html?th&emc=th
Berating the Raters
By PAUL KRUGMAN
Ny Times Op-Ed: April 25, 2010
Let's hear it for the Senate's Permanent Subcommittee on Investigations. Its
work on the financial crisis is increasingly looking like the 21st-century
version of the Pecora hearings, which helped usher in New Deal-era financial
regulation. In the past few days scandalous Wall Street e-mail messages
released by the subcommittee have made headlines.
That's the good news. The bad news is that most of the headlines were about
the wrong e-mails. When Goldman Sachs employees bragged about the money they
had made by shorting the housing market, it was ugly, but that didn't amount
to wrongdoing.
No, the e-mail messages you should be focusing on are the ones from
employees at the credit rating agencies, which bestowed AAA ratings on
hundreds of billions of dollars' worth of dubious assets, nearly all of
which have since turned out to be toxic waste. And no, that's not hyperbole:
of AAA-rated subprime-mortgage-backed securities issued in 2006, 93
percent - 93 percent! - have now been downgraded to junk status.
What those e-mails reveal is a deeply corrupt system. And it's a system that
financial reform, as currently proposed, wouldn't fix.
The rating agencies began as market researchers, selling assessments of
corporate debt to people considering whether to buy that debt. Eventually,
however, they morphed into something quite different: companies that were
hired by the people selling debt to give that debt a seal of approval.
Those seals of approval came to play a central role in our whole financial
system, especially for institutional investors like pension funds, which
would buy your bonds if and only if they received that coveted AAA rating.
It was a system that looked dignified and respectable on the surface. Yet it
produced huge conflicts of interest. Issuers of debt - which increasingly
meant Wall Street firms selling securities they created by slicing and
dicing claims on things like subprime mortgages - could choose among several
rating agencies. So they could direct their business to whichever agency was
most likely to give a favorable verdict, and threaten to pull business from
an agency that tried too hard to do its job. It's all too obvious, in
retrospect, how this could have corrupted the process.
And it did. The Senate subcommittee has focused its investigations on the
two biggest credit rating agencies, Moody's and Standard & Poor's; what it
has found confirms our worst suspicions. In one e-mail message, an S.& P.
employee explains that a meeting is necessary to "discuss adjusting
criteria" for assessing housing-backed securities "because of the ongoing
threat of losing deals." Another message complains of having to use
resources "to massage the sub-prime and alt-A numbers to preserve market
share." Clearly, the rating agencies skewed their assessments to please
their clients.
These skewed assessments, in turn, helped the financial system take on far
more risk than it could safely handle. Paul McCulley of Pimco, the bond
investor (who coined the term "shadow banks" for the unregulated
institutions at the heart of the crisis), recently described it this way:
"explosive growth of shadow banking was about the invisible hand having a
party, a non-regulated drinking party, with rating agencies handing out fake
IDs."
So what can be done to keep it from happening again?
The bill now before the Senate tries to do something about the rating
agencies, but all in all it's pretty weak on the subject. The only provision
that might have teeth is one that would make it easier to sue rating
agencies if they engaged in "knowing or reckless failure" to do the right
thing. But that surely isn't enough, given the money at stake - and the fact
that Wall Street can afford to hire very, very good lawyers.
What we really need is a fundamental change in the raters' incentives. We
can't go back to the days when rating agencies made their money by selling
big books of statistics; information flows too freely in the Internet age,
so nobody would buy the books. Yet something must be done to end the
fundamentally corrupt nature of the the issuer-pays system.
An example of what might work is a proposal by Matthew Richardson and
Lawrence White of New York University. They suggest a system in which firms
issuing bonds continue paying rating agencies to assess those bonds - but in
which the Securities and Exchange Commission, not the issuing firm,
determines which rating agency gets the business.
I'm not wedded to that particular proposal. But doing nothing isn't an
option. It's comforting to pretend that the financial crisis was caused by
nothing more than honest errors. But it wasn't; it was, in large part, the
result of a corrupt system. And the rating agencies were a big part of that
corruption.
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