The Secret Goldman Sachs Tapes

An anonymous reader writes: The radio program "This American Life" has published an extraordinary investigative report on how the U.S. government regulators in charge of keeping an eye on the banks actually interact with powerful financial institutions (podcast here). Financial journalist Michael Lewis describes the report thus: "The Fed failed to regulate the banks because it did not encourage its employees to ask questions, to speak their minds or to point out problems. Just the opposite: The Fed encourages its employees to keep their heads down, to obey their managers and to appease the banks. That is, bank regulators failed to do their jobs properly not because they lacked the tools but because they were discouraged from using them. The report quotes Fed employees saying things like, 'until I know what my boss thinks I don't want to tell you,' and 'no one feels individually accountable for financial crisis mistakes because management is through consensus.'"

Comments

is anyone really surprised here

[ganjadude]

most people here anyone have known for a long time that the banks and government have a symbiotic relationship. I guess its nice to see some proof for once. I cant say I am shocked in the least however.

Re:is anyone really surprised here

[afidel]

Yup, just like with the BLM/MMS it's a case of regulatory capture. In fact in the financial sector it was even worse as the banks were basically allowed to make minor changes to their operating and reporting structure to choose which regulatory agency(ies) they reported to so if one agency started to get too strict they'd just make changes and get a new regulator, and once enough banks switched there would be downsizing at the effected regulator so there were strong incentives not to go strong on enforcement.

Re:is anyone really surprised here

[Charliemopps]

most people here anyone have known for a long time that the banks and government have a symbiotic relationship. I guess its nice to see some proof for once. I cant say I am shocked in the least however.

So why is it, that when presented with evidence of some horrible thing, people tend to use it as a tool to act arrogant? "I always knew that was going on. You're a fool if you didn't."

You didn't know, you suspected. We all did. This is evidence. Get mad. Apathy is your enemy.

Re:is anyone really surprised here

[Anonymous Coward]

"the banks got the money to cover the bad loans (that the government mandated be made)"

The bad loans were not enough to cause the financial crisis. Total mortgage debt was something like $13 trillion, maybe half those were at risk of default. The banks (themselves, not because the government held a gun to their heads) inflated the mortgage debt by a factor of six, into something around $62 trillion. The instruments used to create some $40 trillion were RMBS and their deriviatives such as CDS. When a few defaults happened, as was expected in the high-risk, low tranche RMBSes, market groupthink and emotional overreaction occurred, and even mortgages which had been bundled into high tranche instruments, which hadn't defaulted and were not likely to default, lost value. Banks could no longer use hi tranche RMBS which had not experienced any defaults as collateral to roll over their funding. That's what CDS hedges were for, of course. But the CDS market was brand new and immature. So either banks didn't hedge enough, or the insurers (because they rightly thought there was no risk of default) didn't have enough to pay the insurance.

In conclusion, the "bad loans" were a very small part of the market and could have been absorbed. The banks who made the bad loans had the houses as collateral, right? The bad loans alone did not cause the crash. It was the market mechanisms that inflated house loans into many times their real value through the use of financial insturments, and then market groupthink which saw a few defaults and panicked wildly, spreading the asset price drop to assets that really were still good loans, and then the inabilityt of insurers such as AIG and Bear Stearns to pay on the insurance claims when the RMBSes dropped, that caused the crash.

The Fed should have bailed out individual homeowners instead of the banks.

One of the reasons cited in the SIGTARP Maiden Lane report ("Factors Affecting Efforts to Limit Payments to AIG Counterparties") for intervening in the financial system was: "FRBNY was concerned about the effects of bankruptcy on key sectors of the market, such as retirement accounts and the credit markets." Why doesn't the Fed bail out Detroit then, since retirement accounts are affected there, too?

Re:is anyone really surprised here

[Beeftopia]

Banning revolving door employment deals isn't a good solution either. The government already has enough trouble attracting good people. If you want people that know how the system works, you need to hire people that have worked in the system. After their stint in government is over, those people expect to continue in their profession.

This is a common misconception. The financial system is mathematical but nowhere near rocket science. The majors of Wall Street executives clearly indicate this (I knew a fellow who became a senior executive at GS. A hypercompetitive jock with average intelligence). Obfuscation has been the shield behind which Wall Street hid for many years during the 2000s. There are plenty of sharp people who can work as regulators. It is a different mindset from the money-at-any-cost Wall Street executive and they don't understand it. But it's there.

End the revolving door. With it, regulation becomes ineffectual. A farce.

Additionally, regulators need to be firewalled against politicians' retribution. The big donors give big money to politicians. They don't complain to the regulator, they complain to the politicians who defund and reassign departments pursuing the donor.

Re:is anyone really surprised here

[Beeftopia]

The financial collapse was a result of mistakes, not crimes.

Absolutely false.

-> In America there have been just a handful of criminal charges brought against senior executives of banks, and even fewer successful convictions. This is very different from the response of prosecutors in earlier banking crises, such as the meltdown of Savings & Loans institutions in America in the 1980s. In that case more than 1,000 bankers were convicted for their misdeeds.

-> William K. Black [senior regulator who pursued offenders during the savings and loan crisis] tells Bill Moyers on the JOURNAL that the tool at the very center of mortgage collapse, creating triple-A rated bonds out of "liars' loans" — loans issued without verifying income, assets or employment — was a fraud, and the banks knew it. And while there is no law against liars' loans, Black points out that there are, "many laws against fraud, and liars' loans are fraudulent. [...] They involve deceit, which is the essence of fraud. "

-> Winner of the Oscar for Best Documentary in 2010, The Inside Job chronicles the fraud behavior which led to the financial crisis of 2008 and the recession.

The key word is "control fraud."

Too big

[jhol13]

Isn't it nice ... if you destroy one persons life, you get penalty big enougf to ruin your life - if you ruin 100'000 you get a "golden parachute".
Number of prosecuted persons (from last bank breakdown - and one before that - and next) is just appalling.

Contact your senator

[Anonymous Coward]

Carmen Segarra was hired to to clean up the poor oversight of the banks. Instead, she was fired for doing her job. Read the prepublica articles. It's a shame. Contact your senator and tell them to launch an investigation into the retaliation against Carmen!

New Pledge

[Anonymous Coward]

I pledge allegiance to my share
of the United Stockholders of America
and to the profit for which it stands
one stock, Class-B non-voting, with a golden parachute for our CEO
Amen.

Re:Goldman Sachs All Throughout the Obama Admin

[raurau]

Obama or Biden a former GS executive ? I'd like to meet your crack dealer.

Re:Goldman Sachs All Throughout the Obama Admin

[Herkum01]

Warren Buffet, a government employee and/or consultant? Please

Warren Buffet has probably one of the few people who has always gotten the best of Goldman Sach's because whenever they really fuck things over, he squeezed them for top of the line deals. Pretty much what Goldman Sach's did to anyone else given half the chance.

summary

[Charliemopps]

I happened across this before it got on here and listened to the entire thing. Here's a brief summary:

1. This American Life is a great show. My favorite, you should listen to it often.
2. Managers at the fed seem to be terrified of the banks
3. The lady doing the recordings is aggressive and speaks her mind.
4. There are many "Old Guard" people at the fed that have a cozy, friendly relationship with the banks they work with.
5. The banks actively cultivate this relationship because they realize friendly regulators are less likely to press issues.
6. She uncovered the fact that GS had no formal definition for "Conflict of interest" which is a violation of Fed rules.
7. The fed worked for months gathering evidence and there was consensus that they needed to force GS into creating a policy
8. Suddenly one day her management agreed GS did have a policy just not a good one.
9. She was called in and her boss tried to bully her into changing her report to say they did have a policy.
10. Not too long after she was fired.
11. I believe the suggestion is that GS has control over management and who gets hired/fired at the fed.

The Fed is corrupt through and through

[Squidlips]

A friend of mine worked on Wall Street and said that her firm had a guy at the fed whom they slipped bribes to in exchange for information about the interest rates. Apparently this is widespread.

Re:Goldman Sachs All Throughout the Obama Admin

[smooth wombat]

Timothy Geithner never worked for Goldman Sachs and off the top of my head I can also see Warren Buffet never worked for Goldman Sachs or the Obama administration, Robert Rubin never worked for Obama, Rogert Altman has neither worked at Goldman Sachs or the Obama administration.

Might want to check that list again to see what other missteps are there.

Re:The Banks Own the Government.

[ebno-10db]

Our government clearly lacks the balls to regulate the banks and provide leadership. This is just sad.

I disagree. It's not lack of balls, but a combination of regulatory capture and (generally legal) bribery.

Re:Goldman Sachs All Throughout the Obama Admin

[Herkum01]

He did this in 2008, http://online.wsj.com/articles..., an easy $500 million that no one else would be able to get.

I went through the process to become an examiner

[LearningHard]

The biggest selling point they gave me was that if I played nice after 10 years I could leave the Comptroller's office and get a huge paycheck from one of the major banks.

The Fed is the national bank

[pupsocket]

Goldman Sachs has captured something much much bigger than a regulatory agency. The Federal Reserve is a massive financial operation with a charter from the people of United States to maintain the monetary conditions for a stable and robust market economy.

Goldman got the General Counsel of the New York Fed to force the dismissal of an investigator who was brought in specifically to stop the kowtowing. She was fired for asking follow-up questions and telling her superiors to change her reports themselves if they wanted them changed.

In the background of this scandal, Goldman Sachs was engaged in a transaction with the sole purpose of allowing a European bank to pretend that it was not overextended and so avoid recapitalizing to meet European-Union capital requirements. In other words, a European bank was risking an economic catastrophe that would have forced the EU to conduct a too-big-to-fail rescue, and Goldman Sachs enabled that bank to circumvent European banking authorities.

Every investment in securities involves risk, and risk reduces the price at which paper trades. The Fed is now a guarantor of financial investments, making them more valuable than they might be if true risks were incorporated into the pricing. And the Fed is just one of the sovereign assets controlled by Goldman's posse of financial institutions.

Meanwhile, we have neither a stable nor a robust economy. We just have incredible liquidity for investors in securities.

The wrong people are scared

[Morpeth]

Listened to segment on NPR this morning, what I got out of it was the Fed is afraid of the big investment banks, when it should be the other way around. I was honestly a bit shocked by how timid and afraid the Fed people were, it was embarrassing.

Paulson at Goldman-Sachs then Sec Treasury

[Required Snark]

Paulson, appointed to the Secretary of the Treasury by Bush in 2006, spent over 35 years at Goldman-Sachs starting in 1974 and ending up as chairman.

Can your say conflict of interest? I knew you could.

It has been pointed out that Paulson's plan could potentially have some conflicts of interest, since Paulson was a former CEO of Goldman Sachs, a firm that might benefit largely from the plan. Economic columnists called for more scrutiny of his actions. Questions remain about Paulson's interest, despite having no direct financial interest in Goldman, since he had sold his entire stake in the firm prior to becoming Treasury Secretary, pursuant to ethics law. The Goldman Sachs benefit from the AIG bailout was recently estimated as US$12.9 billion and GS was the largest recipient of the public funds from AIG. Creating the collateralized debt obligations (CDO's) forming the basis of the current crisis was an active part of Goldman Sach's business during Paulson's tenure as CEO. Opponents argued that Paulson remained a Wall Street insider who maintained close friendships with higher-ups of the bailout beneficiaries. If passed into law as originally written, the proposed bill would have given the United States Treasury Secretary unprecedented powers over the economic and financial life of the U.S. Section 8 of Paulson’s original plan stated: "Decisions by the Secretary pursuant to the authority of this Act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency." Some time after the passage of a rewritten bill, the press reported that the Treasury was now proposing to use these funds ($700 billion) in ways other than what was originally intended in the bill.

Although TIME Magazine had him as runner up for the Person of the Year in 2008 they also listed him as one of the "25 People to Blame for the Financial Crisis"