NYC DA Morgenthau Blasts Feds On Financial Investigations

imagesThe Wall Street Journal has a fascinating and free ranging interview of New York City District Attorney Robert Morgenthau in today’s edition. Morgenthau, as you may know, is the real live template for the original DA on NBC’s Law & Order, Adam Schiff. Still young at age 90, Morgenthau will retire next Thursday after over 35 years as the chief District Attorney for New York.

The entire piece is well worth the read, but of particular interest, in light of the financial meltdown we have just lived through, and may yet again the way the Wall Street Banksters are cranking their same old casino back up, is the broadside Morgenthau lands on the Federal oversight and investigation of financial fraud.

These big criminal forfeitures support his $80 million budget, but they are also the product of Mr. Morgenthau’s unique legacy among district attorneys: his national and global reach. Such resources have allowed him to prosecute complex international business cases. Combined with his jurisdiction in the world’s financial capital, he has become in a sense the world’s district attorney.

Thomas Jefferson would have liked this bastion of local power as part of a federal system, but it is not always celebrated by federal officials. “I’m sure it [annoys] the hell out of them,” Mr. Morgenthau observes.

The feeling is mutual. The D.A. says that while he’s had to deal with the federal bureaucracy for decades, “it has just gotten worse” and “they ought to burn it down and start all over again. It’s extremely worrisome.”

For example, he says, “We had a lot of trouble with the Treasury Department” in his recent case against Credit Suisse, in which the bank coughed up $536 million and admitted to aiding Iran and other rogue nations in violating economic sanctions. The feds, as they did in a similar settlement with the British bank Lloyds, wanted only civil penalties.

Mr. Morgenthau would have none of it. He says Credit Suisse had been “stonewalling us” and only struck a deal after he threatened to bring criminal charges to a grand jury. “We would have gotten an indictment,” he says. (emphasis added)

It is a great snapshot of a one of a kind force of legal nature, Robert Morgenthau, and there are several other interesting topics; I recommend reading the entire article.

As to the portion of Morgenthau I quoted though, “Feds only wanted civil penalties and not interested in using criminal charges” to crack open the case and bring accountability for the Wall Street Banksters; sound familiar? It should, it is the exact same conclusion that blew the mind of SDNY Judge Jed Rakoff in the BofA stockholder fraud matter. In that case, Rakoff blistered the Federal enforcement of potential financial crimes and said in his decision:

It is not fair, first and foremost, because it does not comport with the most elementary notion of justice and morality, in that it proposes that the shareholders who were the victims of the Bank’s alleged misconduct now pay the penalty for that misconduct.
…..
Overall, indeed, the parties submissions, when carefully read, leave the distinct impression that the proposed Consent Judgment was a contrivance designed to provide the S.E.C. with the façade of enforcement and the management of the Bank with a quick resolution to an embarrassing inquiry…

Rakoff went on subsequently to question the competence and good faith of the SEC for refusing to make referrals to DOJ for criminal investigations, on top of the sweetheart mere civil penalty deal they were trying to slide through for the Bankster BofA.

And here is where Mogenthau’s pointed criticisms, Judge Rakoff’s dismay and anger, and the complicit coddling of Master of The Universe Banksters (MOTUs) by the SEC all come to a focal point in current news. In an in-depth article detailing malevolent practices and schemes by Goldman Sachs bringing huge profits to the firm at the expense of their clients, Gretchen Morgenson and Louise Story report in the December 24 edition of the New York Times:

Pension funds and insurance companies lost billions of dollars on securities that they believed were solid investments, according to former Goldman employees with direct knowledge of the deals who asked not to be identified because they have confidentiality agreements with the firm.

Goldman was not the only firm that peddled these complex securities — known as synthetic collateralized debt obligations, or C.D.O.’s — and then made financial bets against them, called selling short in Wall Street parlance. Others that created similar securities and then bet they would fail, according to Wall Street traders, include Deutsche Bank and Morgan Stanley, as well as smaller firms like Tricadia Inc., an investment company whose parent firm was overseen by Lewis A. Sachs, who this year became a special counselor to Treasury Secretary Timothy F. Geithner.

How these disastrously performing securities were devised is now the subject of scrutiny by investigators in Congress, at the Securities and Exchange Commission and at the Financial Industry Regulatory Authority, Wall Street’s self-regulatory organization, according to people briefed on the investigations. Those involved with the inquiries declined to comment.

While the investigations are in the early phases, authorities appear to be looking at whether securities laws or rules of fair dealing were violated by firms that created and sold these mortgage-linked debt instruments and then bet against the clients who purchased them, people briefed on the matter say.

One focus of the inquiry is whether the firms creating the securities purposely helped to select especially risky mortgage-linked assets that would be most likely to crater, setting their clients up to lose billions of dollars if the housing market imploded.

Some securities packaged by Goldman and Tricadia ended up being so vulnerable that they soured within months of being created.
…..
But Goldman and other firms eventually used the C.D.O.’s to place unusually large negative bets that were not mainly for hedging purposes, and investors and industry experts say that put the firms at odds with their own clients’ interests.

“The simultaneous selling of securities to customers and shorting them because they believed they were going to default is the most cynical use of credit information that I have ever seen,” said Sylvain R. Raynes, an expert in structured finance at R & R Consulting in New York. “When you buy protection against an event that you have a hand in causing, you are buying fire insurance on someone else’s house and then committing arson.”

Again, the full tale in Morgenson and Story’s article is stunning and worth the full read. And who will investigate this malevolent behavior that has the clear appearance of potentially criminal conduct? The SEC of course; the same bunch that Jed Rakoff excoriated as incompetent and complicit. This is incredibly significant, especially in light of Morgenthau’s criticisms as well, because the SEC is the gatekeeper on the submission for a competent criminal investigation by the DOJ.

The “normal” chain of events is for SEC to investigate, if there is any wrongdoing of a civil or administrative nature found, then SEC takes care of it itself. If the SEC finds either something criminal, or something civil but exacerbated beyond their in house capability, they then refer the case over to the DOJ via submission to the US Attorney’s Office for that jurisdiction (for Wall Street crimes, that would be SDNY). Even when a US Attorney’s Office receives a tip directly and opens its own case from the start, the protocol is for it to still go to SEC for a “referral” in order to proceed. So the questionable Securities and Exchange Commission is right in the middle, as Robert Morgenthau adroitly complained of, even on the type of galaxy scale conduct such as Goldman Sachs is reported to have committed.

“Does not comport with the most elementary notion of justice and morality” were the words of the eminent Judge Jed Rakoff as to the complicity of the SEC with BofA. What are the odds it happens again with Goldman Sachs?

UPDATE: Much of the New York Times piece cited in the post is either based on, or parallel to, an ongoing investigative series by McClatchy that has been ongoing since November. The McClatchy series deserves praise and credit, not to mention a look. I had not seen the McCaltchy work at the time I originally wrote the post.

(photo h/t investorsally.net)

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68 replies
  1. person1597 says:

    Memeorandum has you up already!

    Cherry picker that I am…

    …in light of the financial meltdown we have just lived through, and may yet again the way the Wall Street Banksters are cranking their same old casino back up…

    I’d put the likelihood at just under 100%. Why? The bubble mentality dynamic is still firmly in control.

  2. earlofhuntingdon says:

    Mr. Morgenthau would have none of it. He says Credit Suisse had been “stonewalling us” and only struck a deal after he threatened to bring criminal charges to a grand jury. “We would have gotten an indictment,” he says. (emphasis added)

    The first thing Mr. Obama did was to take criminal investigations and penalties off the table. Even civil ones were too uncivil to contemplate.

  3. klynn says:

    But Goldman and other firms eventually used the C.D.O.’s to place unusually large negative bets that were not mainly for hedging purposes, and investors and industry experts say that put the firms at odds with their own clients’ interests.

    Why am I not surprised.

  4. PJEvans says:

    What are the odds it happens again with Goldman Sachs?

    I’d put them at somewhere between ‘quite likely’ and ‘lead-pipe cinch’.

    After all, we mustn’t embarrass our Glorious Leader and his minions. /s

  5. scribe says:

    Just disabuse yourself: no one will go to jail over this. No one will pay a single cent in penalties, other than the public who wind up holding the bag on these CDOS.

    • BoxTurtle says:

      I disagree. The FIRMS will be fined what will seem to be a lot of money, but it will be carefully designed to have no material effect on the firms bottom line or stock. Perhaps one of the MOTU’s will have to “resign to pursue other interests” and stay out of sight for a few months.

      Boxturtle (Before being nominated to an Ass’t Treasury Secretery or some such)

  6. bobschacht says:

    This is incredible. Thanks for pointing it out. Where is the best pressure point to push on this? Which of the various federal panels has the best chance of actually doing something worthwhile?

    Thanks,
    Bob in AZ

    • scribe says:

      There is no pressure point for this one.

      Remember. When Obama had the banksters down to the White House the other Monday to chew them out, Blankfein (the head of Goldman) blew off the meeting, claiming he was fogged in in NYC.

      A couple months ago, when Obama went to Wall Street to give a speech about increasing regulation and re-regulating the securities markets, Blankfein blew off that speech, too.

      You can blow off meetings if, in the raw calculus of power, you are more powerful than the guy calling the meeting or giving the speech. Blankfein, apparently, knows he is more powerful than, and has nothing to fear from, the President of the United States. This is not surprising, since he has placed his minions (or people he’s helped make rich) throughout the impotant economic offices of the Administration and could, if so desired, bring this thing cratering down any time he wants. In blowing off these meetings, he’s showing the rest of the world where he stands vis-a-vis Obama and Obama, by doing and saying nothing about it, is showing the world he acknowledges and accepts that state of affairs.

      Among these folks, it’s remarkably like training a dog. Over the last two days, I’ve taught my dog to “Come” energeicaly – at a full run – in response to a whistle through the expenditure of three dog biscuits and one “Beggin’ strip” (TM)(all these dispensed in pea-sized pieces). How? I know what she wants, and she wants anything edible and especialy the tasty stuff. She comes in response to the whistle, she gets praise and a good hard skritch behind the ears, and when she pulls up to a stop and sits next to me, a tiny bit of a treat. Soon, I’ll stop giving the treat uniformly, and excite her even more for the times she does get them, but still keep praising. Eventually, I’ll only have to toss her a treat once every twenty or so times and she’ll still come enthusiastically.

      Politicians are equally trainable, and well-trained. They lust after praise and campaign cash and cushy, grossly-overpaid “jobs” after leaving office.

      So, yes, in the end, it should be obvious to you that Obama is Blankfein’s bitch, and Obama will do nothing to overturn that state of affairs.

    • mattcarmody says:

      Probably Barney Franks’ committee in the House so I wouldn’t hold my breath waiting for things to change any time soon.

  7. Cynthia Kouril says:

    The SEC has become more of a library than an actual watchdog.. It is a repository for all the yearly and quaterly filings that publicily traded companies have to make.

    Of course those filings are made, basically, on the honor system. If you get caught makeing a false statement, it’s supposed to be under penalty of perjury, but SEC never seems to go after that–and for some minor and technical errors, it’s understandable; but the Rakoff opinion demonstrates that SEC has gone WAAAAAAy too far down the road of accomidation rather than regulation.

    The SEC has to be re-invigorated and put on steriods

    • Mary says:

      Yeah, but remember – they did get Martha Stewart and put her away.

      Which tells us about all we need to know about DOJ/SEC.

      • Jim White says:

        I think my Sugar Bowl tix just got more valuable. That one is a shocker. He’s citing health concerns and he did spend a little time in the hospital after the SEC Championship game.

        Why does my first thought go to substance abuse?

    • person1597 says:

      The GS conundrum continues to grow just as their profits approach pre-crisis levels…

      Taxpayers Help Goldman Reach Height of Profit in New Skyscraper

      “It’s just an unbelievably bad deal,” Black says. “We could hire any middle-tier guy or gal at Goldman, and they would tell us within 15 seconds that the deal we have made as a nation with Goldman is underpriced by many, many orders of magnitude and that we are insane.”

      Taxpayers submit to the Dominatrix of Capital Desire…

      During the past year, Goldman Sachs’s profits and compensation outstripped those of its rivals. The firm, now the nation’s fifth-largest bank by assets, reported a record $8.44 billion in earnings for the first nine months of 2009 after setting aside $16.7 billion to pay employees. That comes to $527,192 for each person on the payroll, almost eight times the median U.S. household income.

      The public teat, nipples erect shower the Dark Mistress with favor and comliness…

      The 140-year-old company received $10 billion in capital, guarantees on about $30 billion of debt and the ability to borrow cheaply from the Fed. The Fed’s bailout of American International Group Inc., and its decision to pay the insurer’s counterparties in full, funneled an additional $12.9 billion to Goldman Sachs.

      Is there no shame?

      “People are just really angry; you can see it on the left and the right,” says Andy Stern, president of the 2.1 million- member Service Employees International Union, who led about 200 protesters outside Goldman Sachs’s Washington office on Nov. 16 to demand that the firm cancel its year-end bonuses and repay taxpayers instead. Some carried “Wanted” posters with pictures of Chairman and CEO Lloyd Blankfein.

      But what about the wealthy clients? Don’t they deserve some ROI?

      What Goldman Sachs’s workforce produces is different from what employees do at other financial institutions, leading some people to question why the firm is entitled to taxpayer support. It doesn’t operate branches or automated-teller machines. Only millionaires can open checking accounts. Instead, Goldman Sachs exists to serve large corporations, governments, institutions and wealthy individuals.

      So the poor and undernourished can be proud of their sacrifice for the rich…

      “People who know the industry and know Goldman Sachs know that it is a giant hedge fund, but it’s wrapped in an investment banking wrapper,” says Samuel Hayes, a professor emeritus of investment banking at Harvard Business School in Boston. The public “would be horrified to think that their tax dollars were going to a hedge fund.”

      Scribe @ 10 sums it up pretty succinctly…

      So, yes, in the end, it should be obvious to you that Obama is Blankfein’s bitch, and Obama will do nothing to overturn that state of affairs.

      There may yet be a second wave of come-uppance if the bubble dynamic holds true… Geithner Rejects Goldman Sachs Assertion It Didn’t Need U.S. Help

      Goldman spokesman Lucas van Praag said the firm recognized that it would have failed had the financial system broken down.

      Government Action

      “If the financial system collapsed, we would have collapsed too,” he said. “We believe that government action averted a major systemic problem.”

      That breakdown may well occur within six months. Compensating for apparent time modulation in the bubble dynamic, I’d put it mid-April for the collapse to begin. Late March will be a great time to buy long dated US Treasuries at a discount. Soon after, as panic selling grips equities, watch the T-Bills soar in price.

      Wheee! GS will be caught short and the dirty fucking hippies will have rescued America through Treasury purchases.

      The revenge of patriots — coming soon to a vampire squid near you!

      • Stephen says:

        I sure would like to know what the Chinese think about all these shenanigans. Is it time to pull the pin?

        • Stephen says:

          OT- Fastest rail link in the world unveiled in China, 350 kph ( 217 mph ) between Guangzhou and Wuhan. Now thats a proper stimulus project.

  8. dugsdale says:

    Just one small voice hoping for a rapid rehabilitation (not that I think he particularly needs it) for Eliot Spitzer in the eyes of the goofball media we all have to put up with, and hopefully lots of face time for him on major media outlets. (well, one can dream, eh?) And thanks Bmaz for your post; this is a particularly heinous bit of bankster dirty-doings I wasn’t familiar with.

    My Senator is Schumer, and it seems appropriate to start hounding him, pushing for a special prosecutor to look into this (is it illegal? should be, but IS it?)

    • person1597 says:

      Thanks for the reference to Matt’s article. This link is where the vampire squid reference is taken.

      The first thing you need to know about Goldman Sachs is that it’s everywhere. The world’s most powerful investment bank is a great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money.

      Here is a good write-up of why GS will bet against Treasuries…
      Why Interest Rates Will Almost Certainly Rise in 2010

      The truth is the drivers of super-low interest rates are diminishing, and the forces of higher rates can no longer be restrained.

      [email protected] There is further linkage to China dumping treasuries…

      During 2009, China hasn’t been buying many Treasuries and has been unloading dollars in a way that makes Geithner shiver at night.

      There is an exchange traded fund TBT that shorts a long duration treasury proxy. The fund price goes up twice as fast as the price of treasuries goes down. Treasuries are sold by investors betting that interest rates will rise. Look at the last month — TBT has gone up from a low of $44 in November to $50 now. That’s a hefty boost in the expectation that interest rates will rise.

      My expectation is that the treasuries will sell-off in the short run causing long term interest rates to rise. The Fed has declared that they will stop buying MBS in April which implies that the banks will now carry the paper. The rates banks charge will be coupled to the price of the ten year treasury which will have climbed up beyond affordability and will throttle consumer mortgage demand. That impacts whats left of the housing market and the whole thing stalls — just like Oct. 2007 when things went poof.

      For now, the bet is that interest rates will rise due to selling pressure from Sovereign nations — China and Japan in particular combined with a massive short bet by GS. That will spike interest rates in a way that creates systemic dysfunction in a hurry. The runaway rate increases will cause mortgage flow to freeze and refinancing will cease. The ensuing collapse of the market for private debt will create renewed demand for treasuries. Folks looking for a good safe investment will discover the 10 year and 30 year treasuries to have the best interest rate with the most protection, albeit too late.

      If one times this “rotation” back into treasuries right, the resulting flight to safety will be a great opportunity to see the price of treasuries soar from the pre-collapse levels to much higher, post-collapse levels. Bond holders who get the timing right will see as much as a 20% return on their investment in the first year of the new downturn.

      At first I thought the new cap-less Fannie and Freddie would ameliorate this potential default catastrophe. But it won’t help to have a bigger balance sheet if the demand for debt stalls. Banks seeking to off-load bad debt may benefit in the short run, but economic activity will have stalled because monetary policy has no where to go and the new caps will only serve to over-price the next wave of toxic Mortgage Backed Securities. That is the same as making things worse because the real risk in mortgage paper will not diminish — it will be opaque.

      Now that the stimulus parade is nearly over, the only thing left to do is sweep up the shit.

        • person1597 says:

          It is pretty mind-bending to think about the fact that the taxpayers are back-stopping GS while GS is back-stabbing the taxpayer.

          Can you imagine the hubris of GS selling Treasuries short (causing taxpayers to fork over higher interest payments) while at the very same time strong-arming the government into sweetheart, low interest loans so that they can build their new playhouse? It wouldn’t surprise me if various Sovereign Wealth Funds engage GS to “optimize” their debt portfolios either. Ha! GS shorting Treasuries on behalf of the world’s wealthiest nations — all to make a buck.

          Maybe that is why the CEO of GS doesn’t come to call at the White House.

  9. person1597 says:

    The article I linked to above is the emerging conventional wisdom. This is what the traders/investors/bankers perceive:

    For those who think the newly frugal American household or corporation will step up and buy the $1.4 trillion in new debt and the $2 trillion in debt being rolled over each and every year–dream on.

    Today’s treasuries will diminish in value as interest rates rise exactly as the piece suggests. China stands to lose from this action however, so I can’t see them being too enthusiastic about shorting their own nest-egg. In fact, as the acceleration of long term rates exceeds a threshold, I expect the Bank of China to intervene with further purchases — perhaps at the expense of other reserve currency candidates like the euro.

    I think GS will try to screw the US taxpayer because they don’t care what happens to the little guy. They will likely front-run any shorting requested by their clients, too. That arrogance will backfire in their face if they can be caught red-handed with a big short position. That is why a coordinated purchasing action by the US public would really pay off both in terms of personal profits and patriotic schadenfreude.

    When long term interest rates spike due to oversold Treasury positions in our newly Fed-eralized but still unregulated investment banks, the economy will not function properly and there will be a devastating deflationary depression. The recovery pressure that is causing rate inflation now and during the next quarter year will climax, invert and then fall precipitously, excerbated by those who get caught in the short squeeze.

    I hope it is GS that wakes up on a late spring morning desperately covering their short US Treasuries position. And the frugal US public could be the reason why, conventional wisdom notwithstanding.

  10. Hmmm says:

    OT and crossposted to boot — Happy Boxing Day, all. BTW how come I am not seeing any mention at all of the Yemen strike in the coverage of the Northwest/Delta attack attempt, the one where the accused was trained in, and the incendiary/explosive device was sewn into his undies in… wait for it… Yemen?

  11. person1597 says:

    Let’s look at a chart of the iShares Barclays 7-10 Year Treasury (IEF)

    The pattern we want to look at covers the period from July 2007 to the present so the reader is politely requested to select the 5yr window on the Yahoo stock chart link above…

    What unfolds is what you might call a “head and shoulders” pattern starting from 7/07’s low of $80, climbing to 4/08’s first shoulder of $92 over to the peak of the “head” on Fitz’s birthday in 2008 at nearly $100. The second shoulder is the volume spike in October of 2009, again at $92 and now the index sells down towards what I’d expect to be near $80 again.

    During the upside price action, it took 9 months to hit the first shoulder, so it might seem reasonable to believe it will take 9 months to slope back down to $80 from the second shoulder.

    That would be conventional thinking.

    We are already three months into the process so that would put the bottom in June 2010 if the rate of price change tracked the CW. My thinking suggests the fall will be more rapid because the hedgies will be front-running the sell-off.

    If one were to phase-lock with the macro-economic indicators, the drag on the ability to manage the burgeoning debt service suggests a mid-April inflection point. I don’t think the hedgies will acknowledge the pain that the central banks will be experiencing when this $80 threshold is reached. That is why I’d be a buyer in late March. A “limit” order at $80 might work as a target price, but the BOC would likely be buying before that. The limit may not be breached and the chasing required to catch up would only exacerbate the squeeze. That is why I prefer the timing approach over the loss-limit approach.

    How the public comes to embrace this arcane point of view without the hedge funds catching on is a good question. It seems pretty absurd to expect everyone to go out and buy treasuries in anticipation of an inflection point when equities are in the middle of a 10% run-up.

    As it happens, that very same springtime rally which will levitate equities 10% will be the signal to rotate into treasuries. That will mark the end of the recovery phase and the beginning of the second part of this financial apocalypse… the so called double dip will commence with a spectacular equity sell-off and panic in the streets.

    I expect political consequences as well.

    Bottom line is that the US Treasury will be the only place to hide until the monster that ate the economy falls asleep, Until 2018 anyway.

  12. bobschacht says:

    OT, but of general interest at FDL:

    Project Censored: The top 10 stories not brought to you by mainstream news media in 2009
    What did you miss this year? Here’s a look

    23 DEC 2009 • by Rebecca Bowe
    Peter Phillips, director of Project Censored for 13 years, says he’s finished with reform. It’s impossible, he said in a recent interview, to try to get major news media outlets to deliver relevant news stories that serve to strengthen democracy.

    “I really think we’re beyond reforming corporate media,” said Phillips, a professor of sociology at Sonoma State University. “We’re not going to break up these huge conglomerates. We’re just going to make them irrelevant.”

    Bob in AZ

  13. fatster says:

    Hats off to a remarkable person who did remarkable things:

    “The son of a slave, Percy Sutton became a fixture on 125th Street in Harlem after moving to New York City following his service with the famed Tuskegee Airmen in World War II. His Harlem law office, founded in 1953, represented Malcolm X and the slain activist’s family for decades.”

    Link.

  14. fatster says:

    O/T, pls excuse me, but, bmaz, so you know if EW or someone else plans to attend this?

    “JPMorgan’s Jamie Dimon, Goldman’s Lloyd Blankfein, and Morgan Stanley’s John Mack will testify next month in Washington, Financial Crisis Inquiry Commission Chairman Phil Angelides said in a telephone interview yesterday. Bank of America Corp.’s incoming CEO, Brian Moynihan, has been invited and is expected to appear as well, Angelides said. ”

    Link.

    • bobschacht says:

      This is an important meeting, as this is supposed to be the modern equivalent of the Pecora commission. I am hoping that we can track what’s going on with this commission.

      Bob in AZ

      • readerOfTeaLeaves says:

        I think it’s absolutely essential, for all kinds of reasons — starting with whether there will be a functioning federal government. Or not.

        scribe’s point about Blankfein blowing off Obama is well taken.
        Here’s hoping that Obama is far more ingenious and determined than the CEO of GS.

        Meanwhile, bmaz:

        Again, the full tale in Morgenson and Story’s article is stunning and worth the full read.

        Yes, it was.
        However, klynn, EOH, scribe, Hmmm, pdaly, MadDogs and others around here have been connecting these dots for over a year now: these Wall Street winos put together megadeals, which they then bet against using CDOs and CDSs.
        How is that ‘stunning’?
        We’ve all been saying that on threads here at EW for a year (!).
        Yes, I’m glad to see real, verifiable numbers.
        And yes, I’m glad to see it get visibility in the NYT.
        And yes, I’m glad to see Morgenstern get a byline (along with Story).
        And yes, it’s a stunner.

        But haven’t we been speculating about precisely these dynamics around here for at least a year now?
        Am I missing something….?

        • bmaz says:

          You left out the one who has really been dissecting the CDOs – Masaccio. The stunning part is that it hit the NYT not only with point blank reportage like that, but in a full length in depth feature piece. Morgenson is very tied into a lot of the big financial press and TV folks. That is, unfortunately, still a bigger league than we are and, so, it counts for quite a bit. If we can gin them into staying on this story now that they have really hit it hard like this, then there is a chance for moving the ball toward accountability.

          • readerOfTeaLeaves says:

            Oh, masaccio is one of my personal heroes.
            He’s flat-out amazing; and frankly, some booksellers should give him kickbacks because I ended up spending literally hundreds of dollars in economics related books in 2009, largely out of interest sparked by his posts.

            Come to think of it… hmmmm… did I kick as much into EW’s till…?
            Shall ponder….

            But yes, the opportunity to read the posts, then ask for clarification and more information was phenomenal.

            And important.

          • readerOfTeaLeaves says:

            The stunning part is that it hit the NYT not only with point blank reportage like that, but in a full length in depth feature piece. Morgenson is very tied into a lot of the big financial press and TV folks. That is, unfortunately, still a bigger league than we are and, so, it counts for quite a bit. If we can gin them into staying on this story now that they have really hit it hard like this, then there is a chance for moving the ball toward accountability.

            Okay, I follow your point now.

            But who wouldn’t follow up on a story this riveting?!

            I mean, it’s jaw-dropper stuff.
            I just found myself dumbfounded day after day a year ago (or, should I say, ‘post after post’).

            We’re waking up to the fact that the people selling securities to state pension plans are — in cold, stark fact — then betting against those same ‘securities’ in a very rigged game.

            Which means that the word ‘security’ is an oxymoron; these should now be called “INSECURITIES”.

            It also seems that the attempted political kneecapping of Eliot Spitzer is more and more important — because he was on his way to testify about fraudulent activity designed to loot state pensions and state government funds, and how these funds were being sabotaged by AIG. (Whether he was on to Goldman Sachs’ activities, I don’t know.) Anyway, it is more than simply ‘suspcious’ that Spitzer was kneecapped the very day that he was going to testify about this problem.
            And that was within weeks of Bear Stearns melting down, so it’s all very, very strange.
            Which to me is simply confirming evidence that someone knew exactly and precisely what they were doing and did not want their system screwed with — this has premeditation written all over it.

            How is that not one of the biggest stories of our era?
            It may not be as ‘dramatic’ as planes hurtling into skyscrapers, but the impacts are at least as profound and long term.
            It’s economically diabolical.

  15. readerOfTeaLeaves says:

    Dammit, bmaz!
    I just landed on this post, and… well…. ‘there goes my Sunday afternoon’…

    grrrr ;-))

  16. readerOfTeaLeaves says:

    Goldman was not the only firm that peddled these complex securities — known as synthetic collateralized debt obligations, or C.D.O.’s — and then made financial bets against them, called selling short in Wall Street parlance. Others that created similar securities and then bet they would fail, according to Wall Street traders, include Deutsche Bank and Morgan Stanley, as well as smaller firms like Tricadia Inc., an investment company whose parent firm was overseen by Lewis A. Sachs, who this year became a special counselor to Treasury Secretary Timothy F. Geithner.

    How these disastrously performing securities were devised is now the subject of scrutiny by investigators in Congress, at the Securities and Exchange Commission and at the Financial Industry Regulatory Authority, Wall Street’s self-regulatory organization, according to people briefed on the investigations. Those involved with the inquiries declined to comment.

    bmaz, I’ve only got to this point in the post and will read the linked items later today, but after an early post by masaccio, I ended up scouring the toobz for more info about what a CDO was, how it was devised, and stumbled my way over to The Big Picture, and here is one post on a book that I found about over there: ‘Demons of our Own Design’, by Richard Bookstaber.

    As you know from the posts on engineering, I have a passing acquaintance, so the idea of looking at complicated equations might make me take a deep, weary breath but does intimidate.

    I do fear that Congress will wimp out at the mere whiff of an exponent, but it is their responsibility to call witnesses who can de-mystify this stuff. I hope that Bookstaber is among them — again. (As of Nov 2009, he’d put up a small item noting that he’d be working at the SEC, and that his blogposting would therefore be limited, which as far as I could assess is probably good news for the rest of us.)

    Links to his Congressional testimony can be located on the right side of his website for anyone else around here who might be interested.

  17. readerOfTeaLeaves says:

    At the risk of being a pain in the arse, question for bmaz:

    Didn’t Alice Fisher, who took over Chertoff’s spot at DoJ (overseeing Criminal Division) have some bizarre relationship with the non-prosecution of Credit Suisse or some other tax-and-money-laundering haven?

    B/c didn’t EW once note that during the DoJ tenure of Alice Fisher (who resigned DoJ near the end of DubyaCheney’s term around May 2008 when Obama was surging over Hillary and McCain had not yet sunk) the BAE investigations — which would involve Swiss bank accounts, eh? — went nowhere.

    Then Fisher resigns, and presto! someone in the US intercepts BAE execs and checks out their laptops.

    Doesn’t Alice Fisher fit in here somewhere on the DoJ end of things?

  18. person1597 says:

    I’m a cherry pickin’ fool!

    Stocks higher? Famed investor says don’t bet on it

    The investor says the recovery may be gaining steam but is no different than a kid who eats too much candy at one of the birthday parties his 6-year-old daughter attends.

    “We’re on a sugar high,” El-Erian says. “It feels good for a while but is unsustainable.”


    Sugar, honey honey, you are my candy girl

    What he’s saying now:

    Stocks will drop 10 percent in the space of three or four weeks, bringing the Standard & Poor’s 500 index below 1,000 — though he’s not predicting when.

    He isn’t saying when, but some commenter person on FDL is…

    As it happens, that very same springtime rally which will levitate equities 10% will be the signal to rotate into treasuries. That will mark the end of the recovery phase and the beginning of the second part of this financial apocalypse… the so called double dip will commence with a spectacular equity sell-off and panic in the streets.

    Will a meteor hit?

    You want to warn them. YOU WANT TO TELL THEM BEWARE OF THE IDES OF APRIL! But you know they won’t listen and that they’re probably in need of a thorough reaming financially as their government is still suffering from the corrupt practices of the past eight years. You hope for change but you realize that it will take another three years of depression before the system can be properly rebuilt… from scratch.

  19. person1597 says:

    More concern about H2 2010…

    Krugman: ‘Reasonably High Chance’ the Economy Will Contract

    On the “This Week” Roundtable, Krugman said he agreed with the assessment of fellow Nobel-winning economist Joseph Stiglitz that there is a significant chance the economy will shrink in 2010.

    “I would go with Joseph Stiglitz,” Krugman added, “I’m really worried about the second half.”

    You heard it first on FDL!

  20. person1597 says:

    Sovereign debt creates financial obligations for the taxpayers called bonds. These obligations are sold to investors who expect to be paid interest regularly, as well as receiving the full principal value upon maturity. The short maturity bonds have interest rates that reflect the will of the government authority to control the money supply. Lower interest rates allow borrowers to load up on debt because interest payments are modest and the money borrowed has more purchasing power. Bond buyers are reluctant to commit much investment capital to a low yield bond except in a crisis where the security of the government guarantee is of paramount concern.

    If the country selling bonds has too much debt (relative to its ability to service the debt) then the bond price is discounted to reflect the additional risk. The rating agencies have alot to do with the process of evaluating the creditworthiness of the sovereign debt. These ratings agencies are responsible for issuing opinions about the solvency of the debt issuer.

    These same ratings agencies made grossly inaccurate judgments about mortgage debt and commercial debt prior to the last meltdown. One wonders how they are rating the quality of sovereign debt. The ratings agencies defend their practices by claiming that they are “opinions” protected by the First Amendment. They don’t have to be right just because they issue an opinion about the financial stability of an issuer of debt.

    The implications of a misjudgment in the quality of sovereign debt is devastating in the sense that the country who gets a ratings downgrade will suffer an economic impact across its entire population. It is embarrassing and expensive to finance a budget deficit when the international creditors don’t show up at your debt auctions.

    Sovereign debt on red alert

    The UK and Greece have attracted most of the headlines because in both countries the yields on their government debt rose sharply (in the UK after the pre-Budget report and in Greece after the country’s debt was downgraded by a ratings agency).

    But there were also signs of investors in the US and Japan becoming more wary about those countries’ massive budget deficits.

    Folks in the US are getting nervous about the seemingly huge stimulus packages which were enacted to stem the financial collapse. As time goes on, the debt remains a red flag to creditors and debtors alike…

    For First Time, Plurality Believes Stimulus Plan Hurt the Economy

    A new Rasmussen Reports national telephone survey finds that 30% of voters nationwide believe the $787-billion economic stimulus plan has helped the economy. However, 38% believe that the stimulus plan has hurt the economy. This is the first time since the legislation passed that a plurality has held a negative view of its impact.

    The politicians needed this burst of funding to protect their constituencies and thier own jobs. Folks wonder if the results are worth it…

    The Political Class has a much different view than the rest of the county. Ninety percent (90%) of the Political Class believes the stimulus plan helped the economy and not a single Political Class respondent says it has hurt.

    If the investors in government debt feel the risks of insolvency are growing, there will be an increasing reluctance to fund the debt. This is what I’ve been talking about in this thread… (Was it off-topic?)

    There are particular sensitivities about government debt at the moment as bond issuance in many countries has reached record levels because of economic stimulus programmes, reduced tax revenues and bank bail-outs.

    This international debt crisis is washing ashore…

    Elsewhere, the US saw three poorly bid government bond auctions, while Japanese bond yields rose as the prime minister sparked concerns that he would not stick to his commitment to cap debt issuance next year.

    Some analysts say the bond markets are in a liquidity-fuelled bubble, brought about by exceptionally low interest rates and central bank support measures such as quantitative easing.

    So it seems a foregone conclusion that interest rates will be forced to rise due to a combination of excessive debt burden and other inflationary pressures (a recovery in process) as well as the competition for financing. This will dominate the financial news for the next three months. The equity rally will continue according to the notion that the recovery will take hold. But the tension between recovery and debt service lies at the crux of the bubble dynamic. When the debt service overwhelms the ability to grow, that signals the end of the growth phase. After that, the crisis will come to a head and …well…we’ll see what happens after that…

    • readerOfTeaLeaves says:

      The equity rally will continue according to the notion that the recovery will take hold. But the tension between recovery and debt service lies at the crux of the bubble dynamic. When the debt service overwhelms the ability to grow, that signals the end of the growth phase. After that, the crisis will come to a head and …well…we’ll see what happens after that…

      Ay, yi, yiiiiiiii…. you’re a real barrel of fun, I see… 8-0

      • person1597 says:

        Please accept my gratitude for the opportunity to post here, and for all the commenters… I adore this blog. If I come off as too troll-ish, my apologies. Your feedback is always appreciated.

        It’s fun to hold people accountable for their predictions because most mainstream publications only engage in navel-gazing at the beginning of a new year. I suppose that’s what I’m doing here. Sometimes the analyses are useful to the future reader in ways that aren’t apparent at the time. Here’s something I googled from FDL when folks were discussing the future of the party in 2006. It seems to explain the situation and is pretty accurate in terms of the interpretation of events. Plus, it allowed me to respond to a real troll…

        August 19th, 2006 at 12:13 am

        … After a fractious and blistering republican
        meltdown, your national unity meme could gain traction as the neocon backlash
        gives way to economic pessimism by the end of the 2008 recession. A democratic
        president, victorious in 2008, somehow yields to a new republican-style
        administration within a year and triggers a three year recession beginning in
        2010.
        After all that passes, another true democrat takes the reins and a nice
        recovery ensues (almost back to these levels).

        Best cherry pick evah!

        This post identified the political fortunes and economic trends for the future from that date in 2006. The timing seems pretty accurate too. You can’t get this kind of perspective from the mainstream pundits, although I certainly don’t follow them. There’s so more to like perusing FDL.

        • bmaz says:

          You are doing fine; good input everywhere I have seen. Thanks for contributing and keep it up. You don’t have to agree with us, just contribute to the dialogue, and you sure have done that.

        • readerOfTeaLeaves says:

          Please accept my gratitude for the opportunity to post here, and for all the commenters… I adore this blog.

          Oh, I second you on all points!
          (It sometimes baffles me they’ve not kicked me off yet, so I just keep typing away…)

          As to your pessimism about the economy, I happen to share it.
          However, my pessimism stems from a deep and profound unease about the current system; it’s simply not sustainable.

          In addition, at this point I figure that it’s a national security issue – Warren Buffett was right about those CDOs being financial WMDs. I assume that the Russians, Saudi’s, Iranians, the Mob, drug lords, off-books groups like Blackwater/Xe, and a passel of tinpot dictators were moving money in and out of London (esp. AIGFP), as well as assorted tax havens, shell corporations, and bogus accounts at least the past 20 years.

          Most economies have black markets and black money.
          But when legitimate businesses and pensions are hosed because of manipulation in ‘the markets’, that’s an unsustainable economic model.

    • Leen says:

      Too bad the U.S. and Israel did not supply the Gazans with the funds to get cameras and cell phones to document what went on one year ago when 1400 Palestinians were slaughtered. Instead Israel kept all journalist out . With the exception of Al Jazeera

      Really something how we are allegedly supporting the growth of Democracy in Iran now but did our best to take out a Democratically elected Iranian leader in the 50’s.

      http://www.foreignpolicyjournal.com/2009/06/23/has-the-u-s-played-a-role-in-fomenting-unrest-during-irans-election/
      Has the U.S. Played a Role in Fomenting Unrest During Iran’s Election?

      “The National Endowment for Democracy

      One mechanism by which the U.S. interferes in the internal political affairs of other nations is the National Endowment for Democracy (NED), a quasi-governmental agency with funding from both Congress and private individuals whose purpose is to support foreign organizations sympathetic to U.S. foreign policy goals.

      NED’s website states that its creation in the early 1980s was “premised on the idea that American assistance on behalf of democracy efforts abroad would be good both for the U.S. and for those struggling around the world for freedom and self-government.”[2]

      The idea behind NED was to create an organization to do overtly what the CIA had long been doing clandestinely, and the organization has developed its own history of foreign interference. “A lot of what we do today was done covertly 25 years ago by the CIA,” acknowledged Allen Weinstein, one of NED’s founders.[3]’

      WOULD BE GREAT TO SEE THE LIST OF THE DONORS TO NED ( National Endowment for Democracy)

      ————————————————————

      “A senior member of the House Appropriations Committee told me that he had heard about the new strategy, but felt that he and his colleagues had not been adequately briefed. “We haven’t got any of this,” he said. “We ask for anything going on, and they say there’s nothing. And when we ask specific questions they say, ‘We’re going to get back to you.’ It’s so frustrating.”

      The key players behind the redirection are Vice-President Dick Cheney, the deputy national-security adviser Elliott Abrams, the departing Ambassador to Iraq (and nominee for United Nations Ambassador), Zalmay Khalilzad, and Prince Bandar bin Sultan, the Saudi national-security adviser. While Rice has been deeply involved in shaping the public policy, former and current officials said that the clandestine side has been guided by Cheney. (Cheney’s office and the White House declined to comment for this story; the Pentagon did not respond to specific queries but said, “The United States is not planning to go to war with Iran.”)

      Read more: http://www.newyorker.com/reporting/2007/03/05/070305fa_fact_hersh#ixzz0b0UyQ2SU

      • readerOfTeaLeaves says:

        Oh, yeah – the neocons seem to be jonesing to bomb Iran.

        As if Iran doesn’t already have enough social fervor going on within it without any kind of push or shove from the same class of clowns that told the American public that ‘the Iraq War would be paid for out of [Iraqi] oil revenues’ (Cheney) and ‘be greeted with flowers on the streets of Baghdad’ (Rumsfeld).

        I do wish the Iranian people well.
        But I remain convinced that Cheney was punk’d by Chalabi-Iran.
        Why, remains unclear.

  21. Mary says:

    @34 – Thanks for that link, Bob. I thought the story on the “current” sidebar, titled something like “Afghan has zero chance of ever having a real army, so what’s DoD talking about?” has some interesting points. I’ll hit more of it later, thanks again for the link.

  22. fatster says:

    Signs of the times.

    The Recession Begins Flooding Into the Courts
    “New York State’s courts are closing the year with 4.7 million cases — the highest tally ever — and new statistics suggest that courtrooms are now seeing the delayed result of the country’s economic collapse. . . .

    “Contract disputes statewide in 2009 are projected to be up 9 percent from the year before. Statewide home foreclosure filings increased 17 percent, to 48,127 filings. Cases involving charges like assault by family members were up 18 percent statewide. While serious crime remains low, misdemeanor charges in New York City were up 7 percent and lesser violations were up 18 percent in 2009.

    “Judges and lawyers say the tales behind any number of cases, including low-level offenses like turnstile jumping and petty theft, are often a barometer of bad times. And they said that the data showed that courts nationally would be working through the recession’s consequences for years, much as they did with the flood of cases stemming from the crack cocaine epidemic of the 1980s, even after the epidemic had slowed.”

    Link.

  23. fatster says:

    As John Aravosis says, Cheney has some explaining to do (leaders released in 2007 to Saudi Arabia where they underwent “art therapy”):

    Two al Qaeda Leaders Behind Northwest Flight 253 Terror Plot Were Released by U.S.

    Link.

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