Monday, April 26, 2010

US Taxpayers to give Swiss, French, and German banks $3,417,000,000 for wisely holding toxic Greek debt; More $/€ in the mail!

As if being on the hook for $23.7 Trillion in fascistic government bailouts of domestic and international banks is not enough, US taxpayers will very likely soon be footing the bill to bail out the bondholders of Greek debt through the World Bank(ster) operation known as the International Monetary Fund. US taxpayers will, once again, be the pawns paying for the irresponsible lending of foreign and domestic banks, and the irresponsible borrowing of Greek politicians--thanks to the eternally bankster-run IMF.

On Friday, April 23, Greece's PM George Papandreou officially requested IMF and EU aid to enable the government to cover some €8.5 Billion ($11.4 Billion) of payments on debt coming due May 19. This request is just a bare-bones minimum to meet the most urgent debt service demands which are due in weeks: Greece will need at least €54 Billion to cover its obligations on interest payments alone for this year alone. As would be expected, after the announcement, the market continued its many-weeks long hammering on Greek debt, and intensified the pounding over the weekend, a throttling which resulted in a push higher of yields on 2-yr Greek bonds to over 14% by Monday morning. In the last 24 hours, the situation has only deteriorated more.

Today, S&P downgraded Greek debt yet again--this time three full levels to BB+ junk status. The continued outright pummeling magnified, as Mish covered, and has today resulted in a sky-rocketing, incredible, and staggering yield on the 2-yr of over 18%. Of course, ratings cuts are always a trailing indicator, as the bondholders have long-since figured out the danger of the Greek debt they hold, but along with the ratings downgrade, S&P also assigned a "debt recovery" rating of 4 to Greece. This "debt recovery rating" is S&P's way of saying that the firm predicts bondholders will recover only 30-50% of what they are owed.

As it stands right now with no possibility of changing lest international aid comes to the rescue, Greece doesn't even have the money to front that 30%, and will only avoid an outright default if given EU and IMF help before its payments are due May 19. Greece has accrued a national debt of over €302 Billion ($404 Billion), the importance of which is only recognized when compared to GDP, and according to the ever-increasing and latest revised figures on Greece's debt-to-GPD ratio, that number is a staggering 115%. Simply put, this means that the total debt of the nation is 15% more than the value of all goods and services produced within the country in an entire year. This debt assessment is bad enough, but add in the interest and debt payments, and Greece's situation becomes the unsustainable mess it is today. As stated above, to service its €302 Billion national debt, the Greek government needs €54 Billion this year alone to make debt payments. It, of course, has to borrow to get the money to pay those from whom the government has borrowed previously--and, in most cases, not even to pay them off outright, but instead to simply make coupon payments on the debt still owed.

And to whom is the debt owed--who are these bondholders? Who else--BANKS, including commercial banks and even the ECB. The European Central Bank, which backs the euro, is itself compromised of the 16 member eurozone nations' respective central banks, which themselves print and issue euro. The Greek central bank is the Bank of Greece, and the largest and oldest commercial bank in Greece is the National Bank of Greece. Of course, the central bank is privately owned: in fact, it just announced a shareholder dividend of €2.40/share, and the largest shareholder of the central bank (Bank of Greece) is the National Bank of Greece. National Bank of Greece, in sync with the nation itself, had its credit rating cut today, as the bank-owned central bank and the central bank-owner commercial banks, including National Bank of Greece, are the largest holders of Greek government debt. A ratings cut has to be expected when one of your bank's biggest assets is losing value hourly. As the major debt holders, Greek banks are in big, big trouble, as those assets are no longer being accepted as collateral by other banks. But the Greek banks aren't the only holders of that toxic Greek debt: German, French, and Swiss banks, and the ECB are other significant players holding serious amounts of increasing toxic debt. When the money comes from the IMF and EU bailout--money billed to the taxpayers--it will be given to save the skin of these banks. Here's the a simple picture breakdown, which includes Citigroup data that places the exposure as:

French banks: over 25%
Swiss banks: over 20%
German banks: close to 15%
US banks: just above 5%
UK banks: 3%

Additionally, according to the Wall Street Journal:

"Greek banks aren't the only ones at risk. French banks have nearly $80 billion in exposure to Greece, followed by Germany at $45 billion, according to the Bank for International Settlements. Within Germany, Hypo Real Estate has the largest exposure at €9.1 billion. Commerzbank holds €4.6 billion in Greek bonds, according to Germany's bank regulator, while public-sector banks known as Landesbanken hold billions of euros in Greek bonds."

For whatever reason, the Journal article fails to mention the other major category of Greek bondholders: Swiss banks. According to the BIS (data which differs slightly from the above Citigroup data), Swiss banks share a near equal exposure with France of $79 Billion, and Switzerland is neither a part of the eurozone nor the EU. In fact, Switzerland is not even offering any contribution whatsoever to bailout efforts---none. The EU and even the IMF are stepping in, but the Swiss? No where to be seen until the check start getting stamped. Perhaps that's one of the perks of hosting the Basel headquarters.

Besides these Greek, French, Swiss, and German banks and their owners and shareholders who will get bailed out, the other big piece of the bankster pie is the central bank of Europe itself, the ECB. Since 2008, the ECB has been under "relaxed" collateral conditions that have allowed Greek banks to convert some of the Greek bonds they hold as collateral for loans from the ECB. The reason why the Greek banks would do this is simple: they can get a better rate from the ECB on loans than they can selling the bonds on the market, and this condition has only been exaggerated in the last six months. Greek banks have taken up the ECB on this generous offer, and Mr Trichet's ECB is now sitting on at least €68 Billion in Greek-bond backed loans extended to Greek banks. And here's the rub: like all loan collateral, the Greek debt is subject to margin calls when its value declines, which require the debtors to post more collateral, and thus only further increase the pressure on the Greek banks--including National Bank of Greece--as well as the ECB itself, because unlike the Federal Reserve's allocation of loan collateral to a secret off-balance sheet location, the ECB holds collateral on its balance sheet. As the value of that minimum €68 Billion in Greek bank loans/Greek bond collateral declines, it will impact that ECB directly. Additionally, this figure does not include the Greek debt that could have been offered up as collateral by those other than Greek banks, as the ECB and Mr Trichet will not comment on that total.

Therefore, though Mr Trichet knows, we don't know how much Greek debt has been offered by non-Greek banks as collateral to the ECB which the ECB has accepted for loans, but we do know how much Greek debt is out there ($404 Billion), and that only shorter-term debt is eligible. Based on this information, a Reuters article posted by the London Stock Exchange on December 16, 2009 speculated that:

"If Greece's debt were no longer accepted as collateral by the ECB, this would also leave banks in other European countries holding $235 billion of assets that they can no longer swap for an ECB funding injection should they need to."

Uh-oh: nearly a quarter trillion in assets that are suddenly a no-go? Perhaps all those zero's are why Mr Trichet recently said that a Greek default was "out of the question." What does a default do to a quarter trillion in collateral?

So, it looks like the French banks are quite lucky to have their man, former central bank governor of Banque de France and current BIS director, Mr Trichet, and his vehement assurances to protect them from the consequences of their irresponsible $80 Billion Greek debt bets. Indeed, Mr Trichet's got their backs, yo--even if it means, in classic bankster fashion, stealing from German taxpayers! Of course, the German banks, like Commerzbank and Deutsche Bank, are likewise getting the benefits of any bailout, and the Swiss banks--having contributed nothing--will be just rolling in it! When the bailout comes, those are the banks to whom the taxpayers' money will go--even after these same banks have already been given billions.

Americans might see this Greek thing as a far away, European problem that will have little or no impact on our nation, but unfortunately, such an assumption is wrong on both conclusions. Of the currently proposed €60 Billion Greek bailout, at least €15 Billion ($20.1 Billion) stands to come to the IMF. The IMF is, of course, headquartered in Washington, D.C. and majority owned by the United States: the US (read: "US Treasury which is under the total control of the FRS") "owns" over 17% of the fund's assets (or $56.7 Billion) and controls a veto-power 16.7% voting share. For perspective, the next closest nation is Japan, with just 6% share. Therefore, from just the initial bailout package likely to come within weeks, the US taxpayers will be transferring $3,417,000,000 to the coffers of European commercial and central banks. And that will likely only be the beginning. Bundesbank head Axel Weber said last week that Greece may need $112 Billion over the next couple of years. Other economists estimate the number even higher--€150 Billion or $200 Billion. We know how this goes: the bailout machine is just getting started.

As the ECB's contribution to the rescue will be larger than the IMF's, EU taxpayers will be hit even harder than us Americans, particularly the Germans. The notion of bailing out Greece is fantastically unpopular in Germany, where 85% of the populus oppose supporting Greece and are outraged at the idea that Germans should be paying for the profligacy of Greek politicians and their extensive public spending, spending which includes a fully-pensioned government retirement at age 50 for some 580 categories of jobs labelled "hazardous." These jobs include hairdressers (due to exposure to dyes), wind musicians (due to blowing in the wind instruments), and radio and television presenters (due to exposure to bacteria living in microphones, and no, I'm not making this up), among other legitimately hazardous occupations like mining. (Click here for more comparisions between Greek and German retirement, including the Greek "14-month year.") The retirement age in Germany, meanwhile, is 67, yet the German taxpayers are likely to front €8.4 Billion this year, and €16.8 Billion by 2012 to bail out the bankster Greek bondholders who financed the Greek spending spree. And please, note, that that figure excludes the additional contribution from Germany that would come through its 5.87% share in the IMF.

Mr Trichet's France, of course, is pushing Merkel and the Germans to agree to the bailout, which isn't surprising when you consider that French commercial banks are, again, on the hook for $80 Billion in toxic Greek debt. Currently, the French contribution would be €6 Billion ($8 Billion), or 28% less than Germany's, despite the exposure of French banks being 65% greater. Of course, it doesn't matter whether its German, Greek, Swiss, French, or American, the EU-IMF bailout will be yet another transfer of wealth to banks on the backs of taxpayers through this insane fraud called debt-based money.

The proper resolution of this mess is what the market is screaming for right now--with that Greek 2-yr at 18%--and that resolution is that the bondholders will have to take a loss. S&P's statement of 30-50% recovery of money owed might even be optismitic if the market is left to settle this, and no one should have any sympathy for reckless lenders who irresponsibly give money in return for interest to obviously and habitually irresponsible borrowers like Greece. Or the United States, for that matter. The bondholders need to be taught a lesson, as do central-bank-boot-lickin' politicians who believe they can think up "entitlements," print up "money," tax the people to pay off "interest" to the banks, and spend away until their re-election. Lending is risky, and should be coupled with premium on both sides that reflects that fact--and discourages and punishes irresponsibilty.

The bondholders absolutely must take a haircut, even if there is an outrageous wealth-transferring bailout. As Matthew Lynn aptly puts it (emphasis mine):

"First, it takes two sides to create a bond crisis. For every reckless borrower there is a reckless lender. The Greek government might have lied about its budget deficit and been needlessly extravagant during the boom years. But nobody was forced to lend the Greek government any money. Investors should have asked themselves where the money was going, and how sustainable Greek economic growth would be. They didn’t. Instead they just saw that yields were higher than on German or French debt, and jumped onto what looked like a gravy train."

Lynn advocates that the bondholders should take at least a 50% haircut as part of any bailout, and as he stated this before the S&P downgrade and assigment of a debt recovery rating of 4, I would guess that he would now agree with S&P's expectation of a 50- 70% haircut. Lynn further argues against bailouts in the first place, as they cause these very circumstances of "reckless lenders" lending to "reckless borrowers" by introducing implicit taxpayer-backed guarantees of risky debt purchases. The free market has little sympathy for the purchasers of debt, and no sympathy when those purchasers are the fiat counterfeiters who created the "money" in the first place, "sold" to the debtor, and the repurchased it at interest, as is the case in all central bank-backed currencies, including the dollar and the euro.

Tomorrow is another day closer the May 19 deadline, and somehow, I don't think the bondholders are sweatin' it.

Tuesday, April 20, 2010

SSA promises Bankster Report $10,066 a month!

Fantastic news arrived today as Keri, the operator of the Bankster Report, learned that she has been promised a whopping $10,066 per month from the Social Security Administration upon retirement.

"I'm rich!" friends reported Keri as stating, followed quickly by, "Not! I see right through your bankster pranks, you scoundrels! This is just yet more evidence against your master fraud derivative--your fiat money US dollar and its utter worthlessness! I'll stop you if it's the last thing I do!" Witnesses state she then sprung to her feet, grabbed her INFOWARS cap, and bolted off in the opposite direction.

Keri was last seen dashing across a nearby street to retrieve her laptop and start an immediate report, while muttering to herself something about the Bank for International Settlements and how "freakin' pissed" Andrew Jackson would be if he knew he was on a Federal Reserve note. People with knowledge of the matter indicate that she "refuses to believe that the SSA will even be in existence past 2025," and generally rejects any likelihood of the US dollar maintaining value over time. Keri did not respond to repeated requests for comment and phone calls were not returned by time of print.

The above story is only half-joke--and half true. As constant evidence of the inflationary cruelty of fiat money, I can report that I indeed have been promised an amazing $10,066 per month by the Social Security Administration when I retire at age 70. If you're curious about your own benefits, you can calculate them here through the SSA Benefits Calculator.

Try if for yourself--and if you're over 40, try if for your kids (starting age 21). You'll notice that after you input your information (birthday, annual earnings, month/year of retirement) that the calculator has one final option before submitting. This option is to select either "Today's Dollars" or "Future (inflated) dollars." Please note, those are exactly the SSA's terms--including the "inflated" part--not the Bankster Reports' terms, though I couldn't have said it better myself. According to my "future (inflated) dollars" benefits, I will be receiving $10,066 per month when I retire, from the SSA.

My comment when I retire would be: what SSA?

In today's terms, $10,066 is a very, very nice single monthly income, and is an income that is not hard on which to to live in even the more expensive parts of the Republic. But let's consider what value the SSA itself attributes to that $10,066 in "today's dollars." Here it is--and it is striking:

$10,066 when I retire at 70 = spending power of $2,365 today.

Chew on that for a minute.

Here are some other hypotheticals run through the calculator for different ages and different current incomes, all based on a retirement age of 70:

Today's 23-year old earning $30,000: $1,539 or $8,227 inflated.
Today's 25-year old earning $30,000: $1,539 or $7,619 inflated.
Today's 27-year old earning $40,000: $1,869 or $8,573 inflated.
Today's 30-year old earning $40,000: $1.869 or $7,639 inflated.
Today's 35-year old earning $40,000: $1,869 or $6,301 inflated.
Today's 35-year old earning $50,000: $2,200 or $7,418 inflated.
Today's 40-year old earning $40,000: $1,862 or $5,201 inflated.
Today's 40-year old earning $50,000: $2,191 or $6,123 inflated.
Today's 50-year old earning $40,000: $1,867 or $3,597 inflated.

It is startling: what this data is telling every American is that we are being constantly subjected to the hidden inflation "tax" that is reducing the value of every penny in our savings, every day of our lives, in a relentlessly cruel attack on the value of the US dollar spearheaded by the banksters at the printing press. It this is to be expected: the destruction of savings and decimation of value are collateral damage to the fiat money system. A 23-year old American can look forward to the future where when he retires, he'll need $8,227/month to equal the living standard of just $1,539/month. If you're 23, think about that for moment. If you're not, think about your kids, and then run your own numbers and realize that you're not much better off, either.

In March, the Congressional Budget Office reported that OUTGO on the SSA program will exceed INCOME this year, and that by year's end, the SSA will be $29 Billion in the red (see "Primary Surplus" line). As the New York Times ("Social Security Payout to Exceed Revenue this Year") subsequently reported, this is an essential threshold that was not expected to be breached until 2016, as submitted by Geithner's Treasury in 2009. Check out this visual representation from the NY Times.

According to the 2009 Treasury report mentioned above--which inaccurately predicts the threshold cross at 2016--the SSA outgo issue can be "fixed." How, you ask? From the report:

"Social Security could be brought into actuarial balance over the next 75 years with changes equivalent to an immediate 16 percent increase in the payroll tax (from a rate of 12.4 percent to 14.4 percent) or an immediate reduction in benefits of 13 percent or some combination of the two.

And, oh no, I'm sure that a 16% increase in payroll tax--which is born by both employees and workers, or entirely by the self-employed--would certainly not affect GDP growth, right? Wrong: the US is already suffering from an anemic GDP growth that would only be bled more with tax increases. The Treasury does not present any actuarial analysis of what the suggested fix of an increased tax burden would do the the economy. Nor does it explain how the 13% reduction of benefits would be compensated for by those on the other side of the SSA challenge--the recipients. It is clear that benefits must be cut, and I personally have zero confidence in the SSA even being in existence when I retire and thus view my contributions as a "Thank You" to our older Americans. It is clear to me that I am fully cut-out. As the report states:

"Ensuring that the system remains solvent on a sustainable basis beyond the next 75 years would require larger changes because increasing longevity will result in people receiving benefits for ever longer periods of retirement."

What might these "larger changes" be, and is it even possible to imagine that they would work? Bruce Bartlett, former Treasury Department economist and the author of Impostor: How George W. Bush Bankrupted America and Betrayed the Reagan Legacy, offered a detailed analysis in Forbes Magazine, which included the following death-nail:

"To summarize, we see that taxpayers are on the hook for Social Security and Medicare by these amounts: Social Security, 1.3% of GDP; Medicare part A, 2.8% of GDP; Medicare part B, 2.8% of GDP; and Medicare part D, 1.2% of GDP. This adds up to 8.1% of GDP. Thus federal income taxes for every taxpayer would have to rise by roughly 81% to pay all of the benefits promised by these programs under current law over and above the payroll tax."

Alert! He just said: "federal income taxes for every taxpayer woul dhave ot rise by roughly 81% to pay for all the benefits promise by the programs under current law over and above the payroll tax." Additionally, Bartlett points out that, according to the Treasury report, when combined, Social Security and Medicare liabilities equal at least $106.4 Trillion--an inconcievable number that is over twice the total amount of all private wealth in the entire nation. The number is worth viewing properly, with all the gasping zeros, and here it is:


You might be thinking of Greece. . . on crack? But while Greece is facing a smaller version of a similar situation, there are many differences between the US and Greece, and one especially important desparity. This difference is, that as a member of the euro zone, Greece gave up its monetary sovereignty when it adopted the euro a decade ago, thus its bank cannot inflate itself out of the problem. The US, on the other hand, has the ever-ready-to-lend-money-made-up-out-of-thin-air Federal Reserve, and the Fed not only has a printing press, it has a theory:

"In brief, the reason is that people know that inflation erodes the real value of the government's debt and, therefore, that it is in the interest of the government to create some inflation. Hence they will believe the government's promise not to "take back" in future taxes the money distributed by means of the tax cut."

Those are the words of then-Federal Reserve governor, current Federal Reserve Chairman Ben Bernanke, from his very famous "helicopter drop" speech in 2002. You see, with fiat money, inflation is not always the answer. Inflation is the only answer.

Given this, perhaps my "check" is not going to be $10,066/month afterall when I retire--maybe it will be $101,066 a month! And I really shouldn't be so concerned--maybe Mr Bernanke is right. I can handle an 81% income tax on top of my current 15%. That will leave me a whole 4% for myself. Now that I think of it, perhaps it won't be so bad: given my savings now, and my $101,066 SSA check when I retire, maybe I'll be able to afford that tasty Purina brand cat food!


Monday, April 19, 2010

Goldman fraud case impacts Commodites, Gold

Last Friday's SEC fraud complaint issued against Goldman Sachs had a noticeable impact on the market: as would be expected, Goldman shares took hit after the news escaped mid-morning--a steep 13% hit by close. But the impact didn't settle with equities. Commodities--especially oil, copper, silver, and gold--took a good hit, as well: Gold lost 2%, copper lost 2.3%, oil lost 2.7%, and silver got hit the hardest by whopping -4.1%. Why did this happen, and is it related to the Goldman case?

Well, yes . . . sorta, but it seems everything is related to Goldman. One current and popular circulating explanation for the hit to commodities in general is that the SEC action stirred up that all-important "market uncertainty" which translates to "sell and move to dollars" for investors holding what might be considered risky positions on commodities. Of course, you know this also as "risk aversion." Traders quoted by the Wall Street Journal expressed the opinion that the moves in commodities were the results of investors simply "dumping" riskier assets and moving to the dollar. For short-term investors in gold, which had been performing well since the early February lows, and was up almost $100 off those lows by last Friday, the surprise of the SEC lawsuit might have served as, one trader put it, "an excuse to sell." The same could be said of silver and copper, and oil. Silver just about always exaggerates whatever happens in gold (up or down), so a double-impact on silver seems about normal compared to the move in gold. The fact that all this was matched with a move higher in Treasuries lends credence to the market-uncertainty-based-risk-aversion-quick-run-to-the-dollar hypothesis.

Additionally, there are at least two other factors worth mentioning in regards to the moves in commodities, and the first is Goldman Sachs' itself. Goldman is a
major commodities player: the firm is involved internationally and heavily in oil, natural gas, precious metals, industrial metals, agriculturals, livestock, and, of course, energy trading and carbon (google J Aron & Company, and check out my super-long post on the "$10 Trillion carbon market"). Seeking Alpha reported that the Goldman's 2010 commodities outlook placed oil up 20%, copper up 15%, gold at $1350/oz and silver at $20/oz. The futures on commodities markets are fantastically skittish, and when some bullish players saw a fellow bullish player get slapped with a fraud suit, they became risk-averse and sold. Unfortunately, this demonstrates how fundamentally out-of-whack our so-called "commodities" markets have become that prices swings are more often prompted by press releases than supply/demand fundamentals, but we have all know that for some time. Thus, Goldman itself, ironically, is a factor in the hit on commodities. But considering that the firm knew full well of the investigation and intent to sue long in advance (though it didn't bother to tell shareholders), I'm sure Goldman had their Friday commodities positions very, very well hedged.

Another factor worth mentioning applies less to commodities generally, as the Goldman factor does, and more to gold, oil, and copper specifically. This is the fact that these commodities are heavily held by one of names dropped in the SEC complaint, the $32-Billion hedge fund Paulson & Co. Please note, Paulson & Co has not been indicted by the SEC and they are not the subject of the SEC complaint, nor are they accused of wrongdoing, but someone somewhere (
Reuters) is speculating that if put under pressure by the SEC case, Paulson will have to sell some of its oil and gold interests. Exactly what "pressure" that might be, considering that the SEC has not charged Paulson with any offenses, has not been determined, evidently. Still, when investors think gold, they think Paulson, and so bad news on Paulson can impact the metal.

Paulson's gold position is large--very large. After making $20 billion off accurate bets against the housing bubble, including $1 Billion from the Goldman contracts indicated in the SEC complaint, the Paulson fund has since made moves that seemed to express robust confidence in the long-term prospects of gold. Paulson's position in gold or gold-related investments had increased notably by
May 2009, when gold represented 30% of the long side of the Paulson portfolio. By November 2009, Paulson moved approximately 10% of its portfolio to gold and gold-related investments--including a stake in the SPDR Gold ETF of 31.5 Million shares. This move paid off fairly quickly, as gold hit the all-time high in USD at $1226 on December 3. Paulson is recognized as a major player in gold, and with those 31.5 Million shares, the fund is the largest single shareholder in the SPDR Gold Shares ETF.

As of today, Monday April 19, commodities moved lower slightly, and Goldman shares have
recovered 1.6% after initially falling 3.6%. Many have speculated that this partial Goldman price recovery is due to leaked information that the SEC vote was a "party-line" 3-2 decision to proceed. The Bankster Report would like to state that "party-lines" in regard to the investigation and prosecution of fraud are totally unacceptable, and commends Chairwoman Shapiro for proceeding against Goldman Sachs in enforcing the law, even as two others on the SEC board objected.

And finally, one last interesting note: while today gold moved down slightly 0.14%, the metal actually hit yet another all-time high in both euro and UK pounds. Indeed, gold closed today at US $1136 ($91 off the December high), but across the pond it hit record levels at
€865 and £754 . almost acting like a currency, isn't it?

Saturday, April 17, 2010

Goldman Sachs' "doing God's work" apparently includes FRAUD

(updated Sunday, April 18 with details on synthetic CDO due to questions from a reader)

Last year, in a statement that made me momentarily question my understanding of the English language while simultaneously wonder whether I had inhaled too many potent diesel fumes over the years, Goldman Sachs' CEO Lloyd Blankfein declared, in a detailed interview, to a reporter from the The Times (London) that he and Goldman were not only part of a "virtuous cycle" that serves a "social purpose, " but, in fact, that together with his holy $1 Trillion firm, he was actually "doing God's work" (pg 4 of article). Yes, you read that correctly.

It was, apparently, through "doing God's work" virtuously and with social purpose that Mr Blankfein and Goldman felt absolutely justified in taking $12.9 Billion from the American taxpayers during the AIG counterparty pay-out festival; through "doing God's work" that the former investment bank was miraculously converted to a bank-holding company by the FR in late 2008 so it could take $10 Billion more in taxpayer dough through TARP; and through "doing God's work" that it issued $1.1 Billion of taxpayer-backed debt through the FDIC program. That's $24,000,000,000 from the taxpayers--wow, "doing God's work" sure does pay, but who'd ever think it had $$$ in front of it!

And, who'd ever think that for Goldman, "doing God's work" includes screwing its own clients to the tune of $1 Billion and committing FRAUD? Indeed, that the market-shakingly big news that hit the fan yesterday (Friday, April 16). The long-speculated but heretofore unconfirmed SEC investigation into Goldman Sachs' sales of toxic CDO's to clients in 2007 has finally culminated in not only confirmation, but action: The SEC has officially alleged Goldman Sachs engaged in FRAUD.

Repeat: the SEC has filed a civil lawsuit against Goldman Sachs on behalf of investors who were, according to the SEC, defrauded of over $1 Billion by Goldman through what was really a complex double-crossing fraud operation. We've known about this for some time, thanks in huge part to the awesome McClatchy News multi-piece expose published last November, "
How Goldman Secretly Bet on the US Housing Crash." And, of course, those $1 Billion worth of investors--including pension funds, labor unions, insurance companies, etc--have long suspected that they were defrauded by these banksters. But that's not important--what's important is whether or not the SEC agrees, and on Friday they demonstrated that indeed they do.

Actually, its hard for the SEC not to agree: the evidence is overwhelming. Please read the
McClatchy piece from last year and then these current Bloomberg articles (first, second, third) the raw details, because my quick explanation is actually only a matchbook-cover overview. The SEC complaint is 22 pages long (pdf), but I'll try to boil it down a bit.

Basically, it's like this:

1.) GOOD TIMES: It's sometime between 2002 and 2006, and the housing bubble is booming: Goldman and everyone else begins purchasing securitized mortgages bundles--mortgage backed securities, or MBS--from underwriters who can't sell them fast enough. Goldman keeps the "assets" on their balance sheet, because in the good ole' days here in 2002 through 2006, these securities are performing very well and increasing in value. Everything is great, dude. Goldman sells some of the MBS to others at a profit, and keeps some for itself. This is so super--everyone has a house, and house prices
can't possibly fall. Uh, oh--what do you mean you can't make your house payment? What do you mean no one will buy that 600sq-ft shack for the $400,000 you paid for it? Oh, great, here we go. Enter the crisis.

2.) CRISIS: By mid-2006, some of the underlying mortgages of the various MBS begin to default, and by 2007, vastly overinflated home prices being to really reverse. A crisis is coming or here: suddenly, Goldman's dandy MBS are not only failing to pay the coupon, but are seriously losing value. Goldman tries Plan A: the firm decides to sell some while it can, but the over-saturated market is full of others doing the exact same thing. Plan A fails. Goldman moves to plan B. Enter ABACUS.

3.) ABACUS: Goldman starts issuing collateralized debt obligations (CDO's) by selecting bundles of MBS (collateral), securitizing them, and then selling them as securities (or debt) to clients (obligations). There are two types of CDO's that Goldman issues: "plain vanilla" CDO's and synthetic CDO's. Its an important distinction: plain vanilla CDO's are created when Goldman takes a portfolio of cash-flow producing assets (like MBS), bundles them up, and slices them into different risk-based tranches that each pay investors a different coupon. The higher the tranche, the lower the risk, and thus the lower the coupon payment. Conversely, the lower the tranche--that is, the more exposed to subprime loans--the riskier the bond, and thus the higher coupon. Goldman sells billions in plain vanilla CDO's, and seeing both the need to hedge itself further as well as the potential to profit from falls in the market as the bubble deflates faster, Goldman starts issuing synthetic CDO's by the name ABACUS. Unlike regular CDO's, synthetic CDO's do not require anyone to own a portfolio of asset-backed securities, but are instead "linked" to the performance of ABS through what is basically a contract bet (more details on this soon). On top of the billions of regular CDO's its already sold,
Goldman issues at least $7.8 Billion of these synthetic-CDO's under the name "ABACUS," but according to Bloomberg, the dollar-risk shuffled over to investors is actually "multiples higher" than $7.8 Billion. Like regular CDO's, the synthetic-CDO "investments" entitle the purchaser clients to payments from Goldman, but Goldman itself is able to vastly reduced its own exposure by getting some of the debt off its its balance sheet. Goldman, however, is still in the position to lose money, and so the firm needs to hedge. Enter the other side of ABACUS--CDS.

4.) CDS: Synthetic CDO's aren't based on the cash-flow from some underlying mortgages bundled into a security and divided into tranches like a regular CDO is--instead, they basically consist (and pay-out) of one each side betting against the other on the performance of an "associated" group of debt. Both the cash flow and the betting on the synthetic CDO is accomplished through credit default swaps, or CDS.
In a synthetic CDO contract, the seller (Goldman) is effectively shorting the associated assets by purchasing a credit default swap from the buyer (investors, clients), meaning that Goldman has to make regular payments to the buyer of the CDO (who is now the seller of a CDS). This creates the cash flow that makes a synthetic CDO look like a regular CDO, as the investors are recieving payments for the CDS "policy" that are much like the coupon payments they'd be recieving in a regular CDO. However, in the synthetic CDO, if the associated/linked assets go bad, the buyer of the CDO (investors) who is also the seller of the CDS now has to pay the buyer of the CDS (Goldman) who is also the seller of the CDO--and they have to pay the entire face value of the debt, even if Goldman doesn't own it, which in all cases of ABACUS, they didn't. The CDS coverage on the synthetic CDO's therefore make it more profitable for Goldman that the synthetic CDO's its selling to its clients fail than it does for them to succeed. If they fail, the clients are on the hook for debt to pay Goldman. While this is bad, and probably unethical, and insanity that anyone would make this agreement with Goldman, its not actually fraud yet. At least at this point, Goldman itself was selecting the underlying assets from its own portfolio, and so was at least partially co-investing, even though it was still covering itself with the CDS "insurance" and pushing the risk to investors in a fashion "multiples higher" than to itself. Where it starts to move towards fraud is when, for the last ABACUS synthetic CDO set, Goldman turns to some third parties to pick the collateral and create the portfolios, which it then will sells with not only zero liability of its own, but that it takes a bet out on to fail. The fraud part has to do with the third parties and the Goldman executives who know it. Enter Fabrice Tourre.

4.) FABRICE TOURRE: While Goldman had already sold billions in CDO's and ABACUS synthetic CDO's that consisted of portfolios it had itself chosen, in 2007, the firm decides to issue synthetic CDO's selected by a third-party group, ACA Management. The debt, sold as "ABACUS-2007 AC1," is under the principle supervision of Goldman executive Fabrice Tourre. Tourre delivers a portfolio of picks made by the $30-million-dollar hedge fund, Paulson & Co, to ACA to consider for selection, and tells ACA that Paulson & Co plan to invest $200 million in the portfolio. ACA itself will eventually take the majority position on the CDO--fronting some
$951 million--and so the group obviously has an interest to select collateral that will not fall in value. Goldman, meanwhile, is marketing the debt to clients, stating ACA's dual role as both majority holder and collateral selector as proof that the CDO will have a rock-solid base, and "leverag(ing) ACA's credibility and franchise" to sell the contracts (SEC complaint, pg 8). When ACA receives the Paulson picks from Goldman exec Tourre along with his assurance that the hedge fund will invest $200 Million, ACA is assuming that Paulson's interest must be in-line with their own, and so ACA accepts the Paulson picks. They assemble the ABACUS-2007 AC1 synthetic CDO, and Goldman starts selling with no exposure. By this time, Goldman is outright shorting the MBS market, and so the firm itself takes out more CDS on the ABACUS-2007 AC1 synthetic CDO's, even though they have no exposure: they aren't hedging by this time, they are betting. ACA, meanwhile, is still believing Tourre's statement to them that Paulson & Co plans to invest that $200 Million. The money never comes.

5.) PAULSON & CO: Not only is Mr Tourre's statement to ACA that Paulson & Co plans to invest $200 million in the portfolio totally untrue, it is actually the outright opposite of what the investment outlook of Paulson actually is. In truth, Paulson & Co has long since identified the housing market as an incredible bubble, and is shorting everywhere it can. Paulson & Co sees the new ABACUS synthetic CDO's, and, knowing it is very likely to fail--at least in part due to the fact that Paulson picked the underlying securities to which it was associated with the intent of those securities failing--the hedge fund piles up on CDS against the ABACUS 2007-AC1. What ACA, and all of the investors to whom Goldman was pitching and selling the ABACUS 2007-AC1, do not know is that Paulson & Co actually paid Goldman $15 Million to get ACA to somehow include the hedge fund's toxic picks into the ABACUS portfolio, and Mr Tourre with his made up stories, got the job done. Now, that, ladies and gentlemen, is fraud.

The rest--the implosion of the CDO and the pay-out of the CDS to Goldman and Paulson are now history, and the story is best summarized in the
SEC complaint by this statement (pdf pg 3):

"The deal closed on April 26, 2007. Paulson paid GS&Co approximately $15 million for structuring and marketing ABACUS 2007-AC1. By October 24, 2007, 83% of the RMBS in the ABACUS 2007-AC1 portfolio had been downgraded and 17% were on negative watch. By January 29, 2008, 99% of the portfolio had been downgraded. As a result, investors in the ABACUS 2007-AC1 CDO lost over $1 billion. Paulson's opposite CDS positions yielded a profit of approximately $1 billion for Paulson."

"Our clients always come first."
And so, that is were we stand this weekend. The flesh of the SEC suit is that Goldman not only allowed Paulson & Co to hand-pick mortgages to create the most toxic CDO's possible for Goldman to sell, but that Paulson & Co paid Goldman $15 million for the privilege to do this--and Goldman didn't bother to disclose these facts to the clients, nor did it bother to mention it was itself betting against the very CDO's Paulson's picks yielded. Additionally, the investors who bought the synthetic CDO's have claimed to the SEC that Goldman also did not disclose that the values of the underlying mortgages themselves were based "
on inflated appraisals and were bought from firms with poor lending practices, " despite the fact that Goldman knew this, as well.
On Goldman Sachs' site is a list of "Business Principles." The top one, in bold, states "Our clients' interests always come first." Obviously, Paulson & Co is very happy--a billion bucks worth of happy--that this core Goldman Sachs "business principle" is, apparently, only half-true.

Perhaps the words of one my favorite analysts, the hard-core researcher
Christopher Whalen of Institutional Risk Analytics, summarize it best. Whalen stated yesterday that “this litigation exposes the cynical, savage culture of Wall Street that allows a dealer to commit fraud on one customer to benefit another.” Yep, that's why we call 'em banksters, Mr Whalen. You can't trust them as far as you throw them soaking wet--and honestly, I don't have much sympathy for those that do. In my opinion, when you're dealing with a group of folks whose entire livelihood rests on the "legalized" counterfeiting of the American currency, you ought to expect fraud. And the beneficiary of the fraud in this case was both Goldman and its privileged client, Paulson & Co.

The idea that Goldman would accept a list of picks for an MBS-associated synthetic CDO from a hedge fund that was actively and passionately shorting the entire subprime MBS market is bad enough, but to get paid $15 Million by that same hedge fund to "oh, please, please please" use their toxic picks--bloody hell, man, that is just so bad. Top it off with Goldman's own bets against the "investments" that it was selling, and you've got a real whopper there. In his Rolling Stone piece, "The Great American Bubble Machine," Matt Taibbi colorfully declared Goldman Sachs "a great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money." With my very visual mind, I laugh every time I read that great description, but like the "Business Principles," its only half true--and you'd know it if your "humanity" was with Paulson & Co. In that case you'd be thinking, "Oh, vampire squid are so cute!"

Paulson & Co.
Please note, the
SEC has not charged Paulson & Co with any crimes, and likely will not, because as a private investment group, the hedge fund is under no legal obligation whatsoever to disclose anything, nonetheless to investors purchasing debt from another company. In response to the SEC complaint, Paulson & Co said the following in a released statement:

". . . we were not involved in the marketing of any ABACUS products to any third parties.
"ACA as collateral manager had sole authority over the selection of all collateral in the CDO, securities of which were subsequently rated AAA by both S&P and Moody's."

"Paulson did not sponsor or initiate Goldman's ABACUS program. . ."

Compare that to the following, from the
SEC complaint itself (pg 2):

"GS&Co marketing materials for ABACUS 2007-AC1 -- including the term sheet, flip book and offering memorandum for the CDO - all represented that the reference portfolio of RMBS underlying the CDO was selected by ACA Management LLC ("ACA"), a third-party with experience analyzing credit risk in RMBS. Undisclosed in the marketing materials and unbeknownst to investors, a large hedge fund, Paulson & Co. Inc. ("Paulson"), with economic interests directly adverse to investors in the ABACUS 2007-AC1 CDO, played a significant role in the portfolio selection process. After participating in the selection of the reference portfolio, Paulson effectively shorted the RMBS portfolio it helped select by entering into credit default swaps ("CDS") with GS&Co to buy protection on specific layers of the ABACUS 2007-AC1 capital structure. Given its financial short interest, Paulson had an economic incentive to choose RMBS that it expected to experience credit events in the near future. GS&Co did not disclose Paulson's adverse economic interests or its role in the portfolio selection process in the term sheet, flip book, offering memorandum or other marketing materials provided to investors."

"In sum, GS&Co arranged a transaction at Paulson's request in which Paulson heavily influenced the selection of the portfolio to suit its economic interests, but failed to disclose to investors, as part of the description of the portfolio selection process contained in the marketing materials used to promote the transaction, Paulson's role in the portfolio selection process or its adverse economic interests."

Those are strong statements from the SEC that Paulson did "play a significate role in the portfolio selection process" for its own "economic interests," and Goldman, of course, didn't bother to mention that. ACA Management, meanwhile, has long since drowned in the wake of the crisis, and is now under the ownership of its former counterparties. As for Goldman Sachs: the firm will likely declare a $4,000,000,000 first quarter profit when it reports next week.

Hey--its all about "doing God's work," son.

More posts on this to come!

Goldman Sachs hid fraud investigation from shareholders

As covered in the last post, "Goldman Sachs' "doing God's work" apparently includes fraud" Goldman Sachs was sued yesterday by the SEC for fraud. The lawsuit itself--and more aptly, what Goldman knew about the investigation--is bringing to the surface even more questions, and this time they aren't coming from Goldman clients, but instead, Goldman shareholders. It appears that on top of the fraud detailed in the SEC complaint, Goldman Sachs might very well have even been breaking the law yet again.

What is the crime? Well, despite the fact that the firm was informed that it was under investigation and warned of such by the SEC last July, Goldman has yet to mention any of that its to shareholders or disclose it in its company reports! A slew of SEC regulations require that publicly-traded companies disclose pertinent information--and SEC investigations certainly qualify as pertinent. Goldman had some 9 months to disclose this important information to its shareholders, and simply did not. As a result, Goldman shareholders took a 13% hit on Friday as the stock dropped upon news of the lawsuit, reducing the firms value by $10 Billion. As you can imagine, Goldman shareholders were as surprised as anyone else: while Goldman and the entire group of Goldman executives were warned by the SEC of this investigation and intent to sue last year, they just, well, seemed to have forgotten to mention it. Wow, I'd never expect that some a firm accused of $1 Billion worth of fraud--just shocking behavior.

Actually, its more likely calculating behavior. I just did a quick google search using the phrase "
discloses SEC investigation," and the very first page had headlines listing companies including Dell, SpongeTech,, Aetna, MicroStrageties, Terex, AETE and a number of others, each announcing the fact that they were under SEC investigation for various reasons--announcing this because it's required by law. Publicly-traded companies can get sued by shareholders or the SEC for failing to disclose pertinent information. Yet, as this Bloomberg article notes, Goldman Sachs received notice from the SEC last year, and made no mention whatsoever to its shareholders that the firm was under investigation by the SEC for fraud.

It would have been difficult for an investor to positively ascertain what Goldman already knew if that shareholder trusted the firm's SEC filings. As I mentioned in the first post, this lawsuit was speculated about for some time, but not confirmed until Friday. Shareholders inspecting Goldman's releases, statements, and report would have found no mention of it whatsoever. You can check out the firm's last
SEC form 10-K (pdf, 411 pages) for yourself. The section most relevant to the current scandal is tukced under the section titled "Risk Factors", subsection "Item 3: Legal Proceedings," which starts on pg 40 of the document (which is pdf pg 42). More precisely, what is relevant is that information which isn't there.

Check it out: you'll see that, according to Goldman itself, the firm is listed as a defendant in no less than 22 specific cases, and several more where the firm simply states that it is listed either in a "variety of lawsuits" or a "number of lawsuits." The specific actions include cases going back to Enron, eToys, and Refco, and more recenlty include suits regarding Washington Mutual, Fannie Mae, IndyMac, Montana Power, and even the City of Cleveland, which is suing Goldman directly. No mention of any SEC investigations for fraud are made whatsoever. In fact, the only possible phrase in the last 10-K that could even remotely be interpreted as a disclosure of any kind comes in the following perfectly couched language, under the heading "Mortgage Related Matters" (pg 47/pdf pg 49):

“GS&Co. and certain of its affiliates, together with other financial services firms, have received requests for information from various governmental agencies and self-regulatory organizations relating to subprime mortgages, and securitizations, collateralized debt obligations and synthetic products related to subprime mortgages. GS&Co. and its affiliates are cooperating with the requests.”

Okay, let me carefully double check, here: GS&Co. and certain...blah, blah, blah...nope, I don't see "investigation," "SEC," or "fraud" anywhere in that statement! As former SEC lawyer/law professor Adam Pritchard states in the
Bloomberg article, “The question is whether a general disclaimer like that is rendered misleading because you left out the specifics,” . . . “The prudent, conservative choice is to disclose more,” because omissions can lead to shareholder lawsuits, Pritchard said." Indeed, not to mention SEC lawsuits. The SEC will have its hands full with its current swing at Goldman, so a follow up by the SEC on these omissions will likely come much later, if it comes at all. If Goldman shares take more 13% single-day hits, its much more likely that shareholders will be first downtown to file suit.

And therein lies is a bit of irony: all things considered, Goldman shareholders are the beneficiaries of the often fraudulent and unethical "legalized" counterfeiting practices in which Goldman Sachs engages. They are the beneficiaries of the $24 Billion in bail-out dough Goldman received. They are the beneficiaries of the likely $4 Billion first-quarter profit to be announced soon. And as the saying goes, if you dance with the devil, except to get burned. I have no sympathy for Goldman shareholders because I would never in a million years support a group like that. I don't do dancing with the devil, thank you very much. But that's just my opinion, and that does notmmean that Goldman shareholders are not entitled to the same SEC-assured protections as everyone else is--because they are. Also, it certainly does not mean that Goldman can disregard the law--because it can't. Its just a little ironic, in my opinion. That's all. I'm just surprised that shareholders would expect a company like Goldman to be honest with them in the first place. Perhaps the SEC fraud case will bring some of those shareholders to the light, and they'll start to consider whether compromising themselves through Goldman Sachs is really worth it.

Okay, okay, you're right--FAT CHANCE.

More coverage on the Goldman fraud case to come!