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It's interesting and
instructive to read The New York Times' lead story this morning, Top Goldman Leaders Said to Have
Overseen Mortgage Unit.
While it pretends to report all the particulars of the huge scandal growing
out of Friday's SEC action against Goldman Sachs, the story really comes off
as an attempt to create an alibi for the so-called "bank." It
pretends that some kind of an intellectual struggle was going on among GS
executives as to whether the housing market was doing just fine or poised to
tank -- therefore muddling the company's intent in setting up
investment deals based on sketchy mortgages designed to blow up so that a
favored big customer, John Paulson, could collect on the deal insurance known
as credit default swaps.
The truth is that anyone with
half a brain could see the securitized mortgage fiasco coming from
ten-thousand miles away. I said as much in Chapter Six ("Running on
Fumes: the Hallucinated Economy") of my book The Long Emergency,
which was published in 2005 but written well before that in 2002-4. And I had
had no work experience whatsoever in banking generally or Wall Street
investment banking in particular.
One week before the SEC action
against GS, the Pro Publica website published a
story about virtually the same kind of mischief being run out of the
Chicago-based hedge fund Magnetar led by a clever
young fellow named Alec Litowitz. Like Goldman
Sachs, Magnetar deliberately constructed
investments (bundles of bundled mortgage-backed securities called
collateralized debt obligations) that were certain to fail so that Magnetar could collect on credit default swaps that
amounted to a bet against products they themselves had participated in
creating. There was no question that Litowitz and
his employees did this absolutely on purpose. Nor is there any question that
they aggressively sold positions in these CDOs to credulous investors like
Thrivent Financial for Lutherans and others.
The question that now begs to be
answered is: why is this activity not being investigated and
prosecuted under the federal RICO statutes against racketeering? The
Racketeer Influenced and Corrupt Organizations Act was designed to punish
exactly this kind of behavior, whether the defendant's name ended in a vowel
or not. How is it not a racket to deliberately and
systematically construct investments designed to fail so you can collect what
amounts to insurance against them -- and then to sell those financial instruments
to customers without telling them that these investments were engineered to
blow up? At the very least it amounts to a failure to disclose material
information, which is the basis for distinguishing illegality. More to
the point, it almost certainly amounts to prosecutable criminal fraud and
insider trading.
Dylan Ratigan
at MSNBC asked pretty much this question on Friday when interviewing
Connecticut attorney general Richard Blumenthal (because the AIG company,
headquartered in his state, sold gobs of credit default swaps to Goldman
Sachs for dodgy CDOs, leading to a giant government bailout and incidental
huge payoffs to Goldman Sachs). Blumenthal's answer was lame, to put it
mildly -- that recent federal rules tied his hands, he claimed. He could have
at least publicly protested his hand-tying and applied pressure to the US
Department of Justice to enforce the anti-racketeering law.
So where is the DOJ's criminal
division in all this? The Goldman Sachs racket has been publicly known,
in one form or another, for several years. I wrote in this space several
times at least as far back as 2007 that Goldman was essentially shorting it's own issued securities, and
I'm neither a lawyer or a finance professional. Anyone could see this from
just reading the news. Magnetar's activity was so
notorious that the very business of engineering dodgy CDO investments to
collect insurance on their failure became known throughout the industry as
"the Magnetar Play."
The feigned cluelessness among
some the highest-profile figures in these rackets is something to behold. For
instance Citibank was among the companies that helped Magnetar
put together their CDOs-designed-to-fail. Citi's
chairman at the time, former US Treasury Secretary Robert Rubin, testifying
before the new Financial Crisis Inquiry Commission said, "Almost all of
us, including me, who were involved in the financial system -- that is to say
financial firms, regulators, rating agencies, analysts and commentators --
missed the powerful combination of factors that led to this crisis and the
serious possibility of a massive crisis." Bank of America's CEO,
Brian Moynihan, told a congressional hearing, "No one involved in the
housing system -- lenders, rating agencies, investors, insurers, consumers,
regulators, and policy-makers -- foresaw a dramatic and rapid depreciation in
home prices" [and therefore in investment instruments based on
mortgages].
Either they lie or they are
profoundly stupid and incompetent. If the former, then they might be induced
to spend some time talking to federal prosecutors; if the latter
then the US financial system is too hopeless to survive and we will all soon
be bartering hand tools and designer shoes for food. Evidence of the latter
is ample, for instance, in Citigroup's loss of 70 percent share value during
Robert Rubin's chairmanship -- for which, in the crash year of 2008 alone, he
was paid $17 million plus $33 million in stock options.
The Goldman Sachs SEC action and
the related Magnetar story seems to be a pretty big
deal and appear to be dragging public opinion to a crossroads where we
acknowledge the deep structural corruption of the financial system or watch
the legitimacy of both banking and government dissolve. At least, it throws
gouts of gasoline on the political fires lit by Tea Partiers and even more
extreme political factions. I don't see how President Obama can keep Robert
Rubin at his elbow or the hosts of other Goldman Sachs alumni in their
federal jobs. The whole episode is disgusting in the purest sense of the
word. If Obama doesn't shake these people loose, and if he doesn't pick up
the phone and direct his attorney general to execute the laws -- including
the RICO law -- then all the moonbeams issuing from his renowned smile will
not avail to keep him in office, or keep the financial underpinning of the
USA from collapse.
James Howard Kunstler
www.kunstler.com/
James Howard Kunstler’s
new novel of the post-oil future, World Made By Hand, is
available at all booksellers.
James Kunstler has worked
as a reporter and feature writer for a number of newspapers, and finally as a
staff writer for Rolling Stone Magazine. In 1975, he dropped out to write
books on a full-time basis.
His latest nonfiction book, "The Long
Emergency," describes the changes that American society faces in the 21st
century. Discerning an imminent future of protracted socioeconomic crisis, Kunstler foresees the progressive dilapidation of
subdivisions and strip malls, the depopulation of the American Southwest,
and, amid a world at war over oil, military invasions of the West Coast; when
the convulsion subsides, Americans will live in smaller places and eat
locally grown food.
You can purchase your own copy here
: The Long
Emergency .
You can get more from James Howard Kunstler -
including his artwork, information about his other novels, and his blog - at
his Web site : http://www.kunstler.com/
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