FacebookTwitterGoogle+RedditEmail

Make War on Goldman Sachs

by MARSHALL AUERBACK And L. RANDALL WRAY

In recent weeks there has been much discussion about what to do about Greece.  These questions become all the more relevant as the country attempts to float a multibillion-euro bond issue later this week.  The Financial Times has called this fund-raising a critical test of Greece’s credibility in financial markets as it battles with a spiraling debt crisis and strikes. The “credibility” of the financial markets is an important consideration in a country which has functionally ceded its sovereign ability to create currency, and thus remains dependent on the vagaries of the very banking institutions which helped create the mess in the first place.

Maybe Greece should secede from the European Union and default on its euro debt? Or go hat-in-hand to the International Monetary Fund (IMF) to beg for loans while promising to clean up its act? Or to the stronger Euro nations, hoping for charitable acts of forgiveness? Unfortunately, all of these options are going to mean a lot of pain and suffering for an economy that is already sinking rapidly.

And it is questionable whether any of them provide long term viable answers.  Polls show that given the perception of fiscal excesses of Greece and the other countries on the periphery, the public in Germany opposes a bailout of these countries at its expense by a significant margin. Countries such as Ireland that have already undertaken harsh austerity measures also oppose the notion of a bailout, despite—nay, because of–the tremendous pain already inflicted on their own respective economies (in Ireland’s case, the banks are probably insolvent as well).  The IMF route is also problematic, given that Greece probably doesn’t qualify under normal IMF standards, and many euro zone nations would find this unpalatable from an ideological standpoint, as it would mean ceding control of EU macro policy to an external international institution with strong US influence.

The Wall Street Journal recently highlighted an article by Simon Johnson and Peter Boone, lamenting that the demands being foisted on Greece and other struggling Euro-nations would “massively curtail demand, lower wages and reduce the public sector workforce. The last time we saw this kind of precipitate fiscal austerity—when nations were tied to the gold standard—it contributed to the onset of the Great Depression in the 1930s”.  Where we disagree with Johnson and Boone is the suggestion that the IMF be brought in to craft a solution.  Any help from this organization will come with tight strings attached—indeed, with a noose around Greece’s neck. Germany and France would be crazy to commit their scarce euros to a bail-out of Greece since they face both internal threats from their own taxpayers and external threats from financial vampires who are looking for yet another nation to attack.

Here’s a more appropriate action: declare war on Goldman Sachs and other global financial firms that created this mess. Send the troops, the planes, the tanks, and the ships. Attack every outpost of the saboteurs on European soil. Blockade the airports and ports. Make Wall Street traders and CEOs fear for their lives, or at least for their freedom to travel. Build some Guantanamo-like facility to hold these enemy financial combatants until they can be tried, convicted, and properly punished.

Ok, if a literal armed attack on Goldman is too far-fetched, then go after the firm using the full force of the regulatory and legal systems. Close the offices and go through the files with a fine-tooth comb. Issue subpoenas to all non-clerical staff for court appearances. Make the internal emails public. Post the names of all managers and traders on Interpol. Arrest anyone who tries to board a plane, train, or boat; confiscate their passports; revoke their visas and work permits; and put a hold on their bank accounts until culpability can be assessed. Make life at least as miserable for them as it now is for Europe’s tens of millions of unemployed workers.

We know that the Obama administration will not go after the banksters that created this global financial calamity. It has been thoroughly co-opted by Wall Street’s fifth column—who hold most of the important posts in the administration. Europe has even more at stake and has shown somewhat more willingness to take action. Perhaps our only hope for retribution lies there.

Some might believe the term “banksters” is too mean. Surely Wall Street was just doing its job—providing the financial services wanted by the world. Yes, it all turned out a tad unfortunate but no one could have foreseen that so many of the financial innovations would turn into black swans. And hasn’t Wall Street learned its lesson and changed its practices? Fat chance. We know from internal emails that everyone on Wall Street saw this coming—indeed, they sold trash assets and placed bets that they would crater. The crisis was not a mistake—it was the foregone conclusion. The FBI warned of an epidemic of fraud back in 2004—with 80 per cent  of the fraud on the part of lenders. As Bill Black has been warning since the days of the Saving and Loan crisis, the most devastating kind of fraud is the “control fraud”, perpetrated by the financial institution’s management. Wall Street is, and was, run by control frauds. Not only were they busy defrauding the borrowers, like Greece, but they were simultaneously defrauding the owners of the firms they ran. Now add to that list the taxpayers that bailed out the firms. And Goldman is front and center when it comes to bad apples.

Lest anyone believe that Goldman’s executives were somehow unaware of bad deals done by rogue traders, William Cohan reports that top management unloaded their Goldman stocks in March 2008 when Bear Stearns  crashed, and again when Lehman collapsed in September 2008. Why? Quite simple: they knew the firm was full of toxic waste that it would not be able to continue to unload on suckers—and the only protection it had came from AIG, which it knew to be a bad counterparty. Hence on March 19, Jack Levy (co-chair of M&As) sold over $5 million of Goldman’s stock and bet against 60,000 more shares; Gerald Corrigan (former head of the NY Fed who was rewarded for that tenure with a position as managing director of Goldman) sold 15,000 shares in March; Jon Winkelried (Goldman’s co-president) sold 20,000 shares. After the Lehman fiasco, Levy sold over $6 million of Goldman shares and Masanori Mochida (head of Goldman in Japan) sold $56 million worth. The bloodletting by top management only stopped when Goldman got Geithner’s NY Fed to produce a bail-out for AIG, which of course turned around and funneled government money to Goldman. With the government rescue, the control frauds decided it was safe to stop betting against their firm. So much for the “savvy businessmen” that President Obama believes to be in charge of Wall Street firms like Goldman.

From 2001 through November 2009 (note the date—a full year after Lehman) Goldman created financial instruments to hide European government debt, for example through currency trades or by pushing debt into the future. But not only did Goldman and other financial firms help and encourage Greece to take on more debt, they also brokered credit default swaps on Greece’s debt—making income on bets that Greece would default. No doubt they also took positions as the financial conditions deteriorated—betting on default and driving up CDS spreads.

But it gets even worse:  An article by the German newspaper, Handelsblatt, (“Die Fieberkurve der griechischen Schuldenkrise”, Feb. 20, 2010) strongly indicates that AIG, everybody’s favorite poster boy for financial deviancy, may have been the party which sold the credit default swaps on Greece (English translation here –  http://www.eurosavant.com/2010/02/21/cds-just-another-evanescent-bubble/ ).

Generally, speaking, these CDSs lead to credit downgrades by ratings agencies, which drive spreads higher. In other words, Wall Street, led here by Goldman and AIG, helped to create the debt, then helped to create the hysteria about possible defaults. As CDS prices rise and Greece’s credit rating collapses, the interest rate it must pay on bonds rises—fueling a death spiral because it cannot cut spending or raise taxes sufficiently to reduce its deficit.

Having been bailed out by the Obama Administration, Wall Street firms are already eyeing other victims (and for allowing these kinds of activities to continue, the US Treasury remains indirectly complicit, another good reason why one shouldn’t expect any action coming out of Washington). Since the economic collapse is causing all Euro-nations to run larger budget deficits and at the same time is raising CDS prices and interest rates, it is easy to pick off nation after nation. This will not stop with Greece, so it is in the interest of Euro- land to stop the vampires now.

With Washington unlikely to do anything to constrain Goldman, it looks like the European Union, which is launching a major audit, just might banish the bank from dealing in government debt. The problem is that CDS markets are essentially unregulated so such a ban will not prevent Wall Street from bringing down more countries—because they do not have to hold debt in order to bet against it using CDSs.  These kinds of derivatives have already brought down an entire continent – Asia – in the late 1990s, and yet authorities are still standing by and basically doing nothing when CDSs are being used again to speculatively attack Euro-land.  The absence of sanctions last year, when we had a chance to deal with this problem once and for all, has simply induced even more outrageous and fundamentally anti-social behavior. It has pitted neighbor against neighbor—with, for example, Germany and Greece lobbing insults at one another (Greece has requested reparations for WWII damages; Germany has complained about subsidizing what it perceives to be excessive social spending in Greece).

Of course, as far as Greece goes, the claim now is that these types of off balance sheet transactions in which Goldman and others engaged were not strictly “illegal” under EU law.  But these are precisely the kinds of “shadow banking transactions” that almost brought down the global financial system 18 months ago. Literally a year after the Lehman bankruptcy – MONTHS after Goldman itself was saved from total ruin, it was again engaging in these kinds of deals.

And it wasn’t exactly a low-level functionary or “rogue trader” who was carrying out these transactions on behalf of Goldman.  Gary Cohn is Lloyd “We’re doing God’s work” Blankfein’s number 2 man.  So it’s hard to believe that St. Lloyd did not sanction the activities as well in advance of collecting his “modest” $9m bonus for last year’s work.

If these are examples of Obama’s “savvy businessmen”, then heaven help the global economy.  The transaction highlighted, if reported that way in the private sector, would be accounting fraud. Fraud – “Go to jail, do not pass Go” fraud. That senior bankers had no problem in structuring/recommending/selling such deals to cash-strapped governments should probably not surprise us at this point. However, it would be interesting to know if the prop trading desks of those same investment banks, purely by coincidence of course, then took long CDS (short the credit) positions in the credit of the countries doing the hidden swaps.  A proper legal investigation by the EU could reveal this and certainly help to uncover much of the financial chicanery which has done so much destruction to the global economy over the past several years.

In this country, we have had a “war on terror” and a “war on drugs” and yet we refuse to declare war on these financial weapons of mass destruction. We all remember Jimmy Carter’s “MEOW”—the attempt to attack creeping inflation that was said to sap the strength of the US economy in the late 1970s. But Europe—and indeed the entire globe—faces a much more dangerous and immediate threat from Wall Street’s banksters. They created this mess and are not only profiting from it, but are actively preventing recovery. They are causing unemployment, starvation, destruction of lives, and even violence and terrorism across the world. They are certainly more dangerous than the inflation of the 1970s, and arguably have disrupted more lives than Osama bin Laden—whose actions led the US to undertake military actions in at least three countries. That should provide ample justification for Greece’s declaration of figurative war on Manhattan.

However, in an ironic twist of fate, it was just announced that Petros Christodoulou will take over as the head of Greece’s national debt management agency. He worked as the head of derivatives at JP Morgan, and also previously worked at Goldman—the firm that got Greece into all this trouble!

Dimitri Papadimitriou has recently made what we consider to be an important plea for moderation of the hysteria about Greece’s debt. Writing in the Financial Times, he complained that “The plethora of articles in your pages and others, some arguing in favor and other against a bail-out, contribute to market confusion and drive the country’s financing costs to record levels. It is not yet clear that a bail-out is even needed, but this market confusion is rendering the government’s ability to achieve its deficit goals ever more difficult.”

Indeed, we suspect that the same financial firms that helped to get Greece into its predicament are profiting from—and stoking the fires of—the hysteria. He goes on, “what Greece really needs now is a holiday from further market confusion being created by contradictory, alarmist public commentary”. Greece, Euroland in general, and the rest of the world all need a holiday from the manipulation and destruction of our economies by Wall Street firms that profit from speculative bubbles, from burying firms, households, and governments under mountains and debt, and even from the crises that they create. Governments all over the globe should use all legal means at their disposal to ferret out the bad faith and even fraudulent deals that global financial behemoths are foisting on us.

Marshall Auerback is a market analyst and commentator. He is a brainstruster for the Franklin and Eleanor Roosevelt Intitute. He can be reached at MAuer1959@aol.com

L. Randall Wray, a professor of economics at the University of Missouri at Kansas City (UMKC).

CounterPunch Magazine

minimag-edit

bernie-the-sandernistas-cover-344x550

zen economics

January 16, 2017
Paul Street
How Pure is Your Hate?
Jeffrey St. Clair - Alexander Cockburn
Did the Elites Have Martin Luther King Jr. Killed?
Robert Hunziker
Global Warming Clobbers Ocean Life
Patrick Cockburn
The Terrifying Parallels Between Trump and Erdogan
Kenneth Surin
The Neoliberal Stranglehold on the American Public University
Lawrence Davidson
Is There a Future for the Democratic Party?
Douglas Valentine
Who Killed MLK Jr?
Robert Fisk
The Foreign Correspondent in the Age of Twitter and Trump
Dale Bryan
“Where Do We Go from Here?”
David Swanson
The Deep State Wants to Deep Six Us
Dan Bacher
Obama Administration Orders Speedy Completion of Delta Tunnels Plan
Mark Weisbrot
Obama Should Make Sure that Haitian Victims of UN-Caused Cholera are Compensated
Winslow Myers
The Light of the World
Bruce Mastron
My Latest Reason to Boycott the NFL: Guns
Weekend Edition
January 13, 2017
Friday - Sunday
Gregory Elich
Did the Russians Really Hack the DNC?
Jeffrey St. Clair
The President Who Wasn’t There: Barack Obama’s Legacy of Impotence
Anthony DiMaggio
Ethics Fiasco: Trump, Divestment and the Perversion of Executive Politics
Joshua Frank
Farewell Obummer, Hello Golden Showers
Paul Street
Hit the Road, Barack: Some Farewell Reflections
Vijay Prashad
After Aleppo: the State of Syria
John Wight
Russia Must be Destroyed: John McCain and the Case of the Dodgy Dossier
Rob Urie
Meet the Deplorables
Patrick Cockburn
The Russian Dossier Reminds Me of the Row Over Saddam’s WMDs
Eric Sommer
U.S.-China War: a Danger Hidden from the American People
Andrew Levine
Are Democrats Still the Lesser Evil?
Linda Pentz Gunter
What’s Really Behind the Indian Point Nuclear Deal?
Robert Fantina
Trucks, ‘Terror’ and Israel
Richard Moser
Universal Values are Revolutionary Values
Russell Mokhiber
Build the Bagdikian Wall: “Sponsored News” at the Washington Post
Yoav Litvin
Establishment Narcissism – The Democrats’ Game of Thrones
David Rosen
Return of the Repressed: Trump & the Revival of the Culture Wars
Robert Koehler
War Consciousness and the F-35
Rev. William Alberts
The New Smell of McCarthyism Demands Faith Leaders Speak Truth to Power
John Laforge
Federal Regulator Halts Move to Toughen Radiation Exposure Limits
Norman Pollack
Farewell Address: Nazification of Hope
David Swanson
Imagine the Confirmation Hearing for Secretary of Peace
CJ Hopkins
Why Ridiculous Official Propaganda Still Works
Ron Jacobs
Striking in Reagan Time
Missy Comley Beattie
The Streep
Graham Peebles
Climate Change: The Potential Impacts of Collective Inaction
Uri Avnery
Confessions of a Megalomaniac
Kenneth Worles
Black Without a Home: King’s Dream Still Deferred
Geoff Dutton
The Russian Patsy
Jill Richardson
The Coming War on Regulations
Jeremy Brecher
Resisting the Trump Agenda is Social Self-Defense
FacebookTwitterGoogle+RedditEmail