Lying Sachs of....
Senators Levin & Coburn's press conference releasing their committee report on the financial crisis.
This story didn't get any coverage on several Livejournal communities, but let me remedy that now. A United States Senate committee is recommending several upper level managers of Goldman-Sachs be investigated for perjuring themselves during Congressional investigations into the 2008 financial crises. Additionally, Committee chairman Carl Levin (Michigan - D) wants the Justice of Department to investigate if Goldman-Sachs violated the law by misleading clients who bought the complex securities known as collateralized debt obligations without knowing the firm would benefit if they fell in value.
Goldman-Sachs executives testify before the Levin Committee
Much of the blame for the 2008 market collapse belongs to banks that earned billions of dollars in profits creating and selling financial products that imploded along with the housing market, according to the report. The Levin-Coburn panel levied its harshest criticism at investment banks, in particular accusing Goldman Sachs and Deutsche Bank AG (DB) of peddling collateralized debt obligations backed by risky loans that the banks’ own traders believed were likely to lose value. In other words, these institutions were knowingly lying to their customers in selling them toxic securities, and then were also betting against their own clients. Levin thinks the executives should also be indicted for perjury charges. As Matt Tiabbi writes:
Here is where the supporters of Goldman and other big banks will stand up and start wanding the air full of confusing terms like "scienter" and "loss causation" - legalese mumbo jumbo that attempts to convince the ignorantly enraged onlooker that, according to American law, these grotesque tales of grand theft and fraud you've just heard are actually more innocent than you think. Yes, they will say, it may very well be a prosecutable crime for a corner-store Arab to take $2 from a customer selling tap water as Perrier. But that does not mean it's a crime for Goldman Sachs to take $100 million from a foreign hedge fund doing the same thing! No, sir, not at all! Then you'll be told that the Supreme Court has been limiting corporate liability for fraud for decades, that in order to gain a conviction one must prove a conscious intent to deceive, that the 1976 ruling in Ernst and Ernst clearly states....
Leave all that aside for a moment. Though many legal experts agree there is a powerful argument that the Levin report supports a criminal charge of fraud, this stuff can keep the lawyers tied up for years. So let's move on to something much simpler. In the spring of 2010, about a year into his investigation, Sen. Levin hauled all of the principals from these rotten Goldman deals to Washington, made them put their hands on the Bible and take oaths just like normal people, and demanded that they explain themselves. The legal definition of financial fraud may be murky and complex, but everybody knows you can't lie to Congress. "Article 18 of the United States Code, Section 1001," says Loyola University law professor Michael Kaufman. "There are statutes that prohibit perjury and obstruction of justice, but this is the federal statute that explicitly prohibits lying to Congress."
The law is simple: You're guilty if you "knowingly and willfully" make a "materially false, fictitious or fraudulent statement or representation." The punishment is up to five years in federal prison.
What's interesting about the Matt Tiabbi piece is the historical background of how the banking industry and Wall Street were after the disaster of the Savings and Loan crisis in the late 1980s (e.g. over 1000 people were prosecuted and served jail time ), prosecutions and investigations of nearly 1000 cases per year dropped in the early 1990s. As Mr. Tiabbi remarks:
To fully grasp the case against Goldman, one first needs to understand that the financial crime wave described in the Levin report came on the heels of a decades-long lobbying campaign by Goldman and other titans of Wall Street, who pleaded over and over for the right to regulate themselves. Before that campaign, banks were closely monitored by a host of federal regulators, including the Office of the Comptroller of the Currency, the FDIC and the Office of Thrift Supervision. These agencies had examiners poring over loans and other transactions, probing for behavior that might put depositors or the system at risk. When the examiners found illegal or suspicious behavior, they built cases and referred them to criminal authorities like the Justice Department.
This system of referrals was the backbone of financial law enforcement through the early Nineties. William Black was senior deputy chief counsel at the Office of Thrift Supervision in 1991 and 1992, the last years of the S&L crisis, a disaster whose pansystemic nature was comparable to the mortgage fiasco, albeit vastly smaller. Black describes the regulatory MO back then. "Every year," he says, "you had thousands of criminal referrals, maybe 500 enforcement actions, 150 civil suits and hundreds of convictions."
But beginning in the mid-Nineties, when former Goldman co-chairman Bob Rubin served as Bill Clinton's senior economic-policy adviser, the government began moving toward a regulatory system that relied almost exclusively on voluntary compliance by the banks. Old-school criminal referrals disappeared down the chute of history along with floppy disks and scripted television entertainment
Some specific examples of Goldman-Sachs alleged perjury:
Goldman's chief financial officer David Viniar.
1. David Viniar insisted that Goldman's massive bet against mortgages was "not a large short." At work, he'd written an email in which he called Goldman's bet "the big short." Tiabbi: In late 2006 ... the top dogs at Goldman ... started to fear they were sitting on a time bomb of billions in toxic assets. Yet instead of sounding the alarm, the very first thing Goldman did was tell no one. And the second thing it did was figure out a way to make money on its knowledge by screwing its own clients. As the Levin report details, on December 14th, the Goldman's chief financial officer David Viniar (pictured) met with mortgage chief Daniel Sparks and other executives, and stressed the need to get 'closer to home' - i.e., to reduce the bank's giant bet on mortgages.
Daniel Sparks
2.
Daniel Sparks (pictured) followed up his meeting with Viniar with a seven-point memo laying out how to dump the bank's mortgages. Entry No. 2: "Distribute as much as possible on bonds created from new loan securitizations and clean previous positions." Taibbi:"The day he received the Sparks memo, Viniar seconded the plan in a gleeful cheerleading e-mail. 'Let's be aggressive distributing things,' he wrote, 'because there will be very good opportunities as the markets [go] into what is likely to be even greater distress, and we want to be in a position to take advantage of them.' Translation: Let's find as many suckers as we can as fast as we can, because we'll only make more money as more and more shit hits the fan."Daniel Sparks claimed that Goldman expected deadly mortgage deals like Timberwolf "to perform." At work, he'd approved an internal document warning that Goldman expected such deals "to under-perform."
Michael Swenson, Goldman-Sach's trading manager
3.Michael Swenson said Goldman had forfeited profits by refusing to bet against mortgages: "We left money on the table." At work, he had bragged about the "extraordinary profits" he made while betting against mortgages. Goldman specifically designed [an investment package called ] the Hudson deal to reduce its exposure to the very types of mortgages it was selling. One of its creators, trading chief Michael Swenson (pictured), later bragged about the "extraordinary profits" he made shorting the housing market. Goldman dumped $1.2 billion of its own "cats and dogs" into the deal - and then told clients that the assets had come not from its own inventory, but had been "sourced from the Street." Hudson quickly lost a ton of money. Goldman's biggest client, Morgan Stanley, alone lost nearly $960 million on the Hudson deal, which the bank turned around and dumped on taxpayers, who within a year were spending $10 billion bailing out the bank through the TARP program.
Thomas Montag, Goldman-Sachs senior executive
4. Thomas Montag
Goldman clients who bought into the deal had no idea they were being sold the "cats and dogs" that the bank was "cleaning" off its books. An Australian hedge fund called Basis Capital sank $100 million into the Timberwolf deal on June 18th, 2007, writes Taibbi, "and almost immediately found itself in a full-blown death spiral." In February 2007, Goldman mortgage chief Daniel Sparks and senior executive Thomas Montag (pictured) exchanged e-mails about Timberwolf.
MONTAG: "CDO-squared - how big and how dangerous?"
SPARKS: "Roughly $2 billion, and they are the deals to worry about."
In a conference call on May 20th that included Viniar, Sparks oversaw a PowerPoint presentation spelling out Goldman's concern about Timberwolf. In a later e-mail, he wrote: "There is real market-meltdown potential." Four days after Goldman sold $100 million of Timberwolf to Basis. "Boy," Montag wrote, "that timeberwof [sic] was one shitty deal."
The Senate report has a great deal more detail about the specifics of the case, way beyond the scope of this type of post. But the more fundamental question remains: if the Goldman-Sach's executives aren't prosecuted for securities fraud, or at the very least for perjuring themselves, Mr. Tiabbi notes:
Roger Clemens was indicted for charges of perjury in his testimony before Congress
When Roger Clemens went to Washington and denied taking a shot of steroids in his ass, the feds indicted him - relying not on a year's worth of graphically self-incriminating e-mails, but chiefly on the testimony of a single individual who had been given a deal by the government. Yet the Justice Department has shown no such prosecutorial zeal since April 27th of last year, when the Goldman executives who oversaw the Timberwolf, Hudson and Abacus deals arrived on the Hill and one by one - each seemingly wearing the same mask of faint boredom and irritated condescension - sat before Levin's committee and dodged volleys of questions. If the Justice Department fails to give the American people a chance to judge this case - if Goldman skates without so much as a trial - it will confirm once and for all the embarrassing truth: that the law in America is subjective, and crime is defined not by what you did, but by who you are.
For me, this is an issue that strikes at the heart of American justice: the idea that our laws apply to everyone, that class and distinction shouldn't matter; this is way beyond any notion of Democratic versus Republican. It's much more serious than that. And both parties have contributed to the issue, including Democrats that were pushing for less regulation of the financial markets under Presidents Clinton and Bush, with both parties in Congress being less than strident in oversight, being influenced unduly by either lobbyists or campaign contributions.
Resources for more in depth reading:
Senator Levin's press release highlighting specific findings of the investigation with recommendations for regulatory reform for oversight of Wall Street and investment banks.
The Levin - Coburn Report: Wall Street and the Financial Crisis: Anatomy of a Financial Collapse
Matt Tiabbi's article in last week's Rolling Stone: The People vs. Goldman Sachs.
In 2008, Goldman-Sachs paid an effective tax rate of one percent, on profits of nearly 2.5 billion dollars
Matt Tiabbi on Anderson Cooper explaining Goldman-Sach's alleged securities fraud.
Senator Levin during an interview about his committee report with Elliott Spitzer, former New York Attorney General and Governor.
**EDIT***
Shortly after I posted this, the New York Times has reported that New York Attorney's General has requested information and documents in recent weeks from three major Wall Street banks about their mortgage securities operations during the credit boom, indicating the existence of a new investigation into practices that contributed to billions in mortgage losses.