Lloyd Blankfein’s AAA Bridge He Wants to Sell You

Perhaps the most stunning part of the Goldman Sachs hearing the other day came at the end of the hearing, after most of the press had left for dinner. Carl Levin challenged Lloyd Blankfein on something he had said to staffers. Blankfein claimed that he “never thought” of the fact that AAA ratings were important to sales and that some buyers only buy AAA rated products.

Somehow I have a feeling this claim is going to come back to haunt Blankfein.

100 replies
  1. allan says:

    No more outrageous than John Roberts telling the SJC that he thinks of himself as an umpire.
    Both men have complete contempt for Congress.
    Blankfein just happens to also have complete contempt for his clients.

  2. JTMinIA says:

    I watched that exchange live. As the back-and-forth at the end makes clear, this is a great example of lousy follow-up questioning (during the deposition). It all hinges on the word “how.” Blankfein escapes having to defend the ridiculous claim by highlighting that he (originally) said “I don’t know how important a AAA rating is.” That should not have been left where it was. The person taking the deposition should have followed up and gotten a clearer response. Without a clearer response – for example, something along the lines of “what are the factors that make a AAA rating important?” – they don’t have anything on him.

    • DWBartoo says:

      It is amazing that questions that almost beg to be asked, are not asked.

      One suspects that “follow-up” questions are not asked, owing in part, but only in part, to “lousy” technique, more likely, the question is, intentionally, not asked because the answer is not really desired.

      If too much is revealed, then “something” will have to be done.

      The political class is of no mind to do anything, as they’ve, currently, the best “deal” possible. Kabuki is fine with Congress. Anything more serious than that is … well, serious. And definitely to be avoided. At whatever cost to the people and nation.

      Congress is talking about MONEY, with the high-priests of MONEY, after all, and Congress is most deferential (which comes from their training as lawyers) to money and power (this being the age of the Divine Right of Money and Power is always fashionable, of course), at these rarefied levels.

      Ollie North scared Congress, Lloyd Blankfein inspires them.

      After it is finished with MONEY, Congress will concern itself with the rule of law …


    • Leen says:

      That makes sense. Although Blankfein looked more uncomfortable during this questioning than at other times. Looked like his his head was starting to drip with sweat.

  3. JTMinIA says:

    Related to the above. Josh Birnbaum in particular was a smug and evasive b*st*rd at the hearing. In many cases he flat-out refused to answer a question. This made me wonder: has a committee ever stopped in the middle of a hearing and voted to hold a panelist in contempt of Congress? If I were Levin, I would have made the motion right then and there.

    Similarly, the oath requires not just the truth, but the whole truth. Has anyone ever been charged with perjury for omitting information? If so, have they ever tried to defend themselves by pointing out that a forced yes-or-no answer can sometimes force a person to violate their oath to provide the whole truth?

    Sorry to highjack the thread, but I’ve wondered these things for a while and this is the closest we’ve come to these issues.

    • BooRadley says:

      The hubris at GS was on full display.

      IMHO, if they had been more cooperative with the Senate, the SEC might not have made the criminal referral to DoJ. DoJ has not indicted, but a huge threshold was crossed.

      From the WSJ:

      ….Indeed, in the more than two-century history of the U.S. financial markets, no major financial firm has survived criminal charges. Securities firms E.F. Hutton & Co. and Drexel Burnham Lambert Inc. crumbled after being indicted in the 1980s. In 2002 Arthur Andersen LLP went bankrupt after it was convicted of obstruction of justice for its role in covering up an investigation into Enron Corp. The conviction was later overturned by the Supreme Court.

      In recent years, some financial firms have agreed to “deferred prosecutions,” in which they agree to a probationary period for which they won’t commit any future wrongdoing.

      That’s what Prudential Securities Inc. famously did in 1994 when that securities firm faced criminal charges that it misled investors about the risks and rewards of limited-partnership investments. Prudential agreed to a three-year deferred prosecution, as well as fines and restitution, to end a criminal securities-fraud investigation.

      • posaune says:

        I dunno know why, but something tells me that the only reason SEC referred to DOJ is that the Brits are making moves to do that, i.e. a criminal investigation. They just want to get out in front of it & spin. And they will. The assholes with their CT tagged Bentleys will keep on scamming.

  4. bobschacht says:

    I should think that it would be better to provide ratings based on a curve– That is, AAA rating should apply, say, to no more than 10% of the market, and that 10% should rate better on designated explicit criteria than all other products of the same kind.

    Perhaps we’ve had something like grade inflation in the bond market. My university says in the catalog that an average grade is a C, but woe betide any instructor who grades that way. There should be a rating that corresponds, publicly and explicitly, to an average grade.

    Bob in AZ

    • jdmckay0 says:

      Of course it was fraud. It was also well constructed legal fraud, w/various WS reps/lobbyists directing construction of fed law, as they desired, going back some years now. Some of the (IMO) most precise and well informed econ/security bloggers have been detailing this for some time, particularly re: rating agencies.

      A few references:
      David Merkel (Aleph Blog)
      In Defense of The Ratings Agencies

      FT (Financial Times: sub required)
      Do away with rating-based rules

      NOTE: on later (FT) link, it’s pointed out that regulators have institutionalized reliance on rating agencies for some time, and done so based on rules they (regulators) have made:

      Although poor policies and procedures are an appealing political target, requiring the agencies to file forms with even lower-paid regulators would not have prevented the crisis. Indeed, increased scrutiny would reinforce the oligopoly dominated by Moody’s and Standard & Poor’s. By making compliance more costly, regulators would increase the barriers to operating a rating agency and deter new competitors.

      The deeper problem is regulation itself: specifically, rules that depend on ratings. Many regulators do not want to confront this problem, given that they, or their predecessors, drafted these rules. Yet dozens of such rules distort the markets. Credit rating agencies are referenced under Basel II banking regulations. Many investment funds are permitted to buy only high-rated bonds. And so on.

      Looks to me like both Rating agency & GS fraud accusations are good political fodder, and (IMO) apt moral accusations. Unfortunately, their foibles are, from best I can tell, legal.

      And from your Dayden link, he concludes:

      This is basically securities fraud, and yet the SEC is statutorily barred from even conducting oversight on the rating agencies.

      The bigger problem here (IMO again) is that, from nearly every incident I’ve seen, overwhelming majority of money managers… especially various state investment/retirement officials, simply did not do their jobs. They relied on rating agencies, and that’s as far as their diligence went.

      Or in other words, lazy & incompetent MF’ers largely manipulated (yes, on state level) by high powered lobbyists to buy these securities. And over and over, huge sums were invested in this manner… w/no due diligence on buyer’s part. Now, several years after the thing unfolded (but several more after seeds were sown), the layers of onion only being peeled one at a time, mostly far from the core as of yet, w/a whole lot of folks in culpable positions of responsibility along the way in CYA mode.

      As others have mentioned here as well, among most telling to me in those hearings was questions that weren’t asked. And as with various torture hearings and so much more, my general impression is Levin and rest of his committee still don’t really comprehend what happened. And frankly, I’m not sure they want to.

      • Citizen92 says:

        Kudos. You have found the ‘curtain’ behind which the men were hiding.

        “Credit Rating Agency” is entirely a misnomer. The CRA’s are “agencies” in the sense of a “public relations agency.” They promote a product, and are paid handsomely for it. CRA’s are not government ‘Agencies.’ Far from it.

        And CRA’s charge handsomely for their stamp of approval. You want a rating? No problem, but you’ve got to pay for it. Like a company paying dues to the Better Business Bureau. Sure, you get a seal of approval. But does that really mean anything. It just means you’ve paid a stipend to get a rating.

        A little oversimplified, but you get my drift.

        Now, in terms of the ‘private label’ mortgage backed securities (which were stuffed with subprime notes), it was Fitch, Standard/Poor’s and Moody’s who really matter. Most of these MBS’ obtained three ratings – one from each agency, almost always AAA. Three AAA ratings sure made those MBS look good to pension funds, no?

        But were the ratings agencies even qualified to rate these products? As previously mentioned, you have the conflict of interest of the fee structure. Repeated AAA-ratings means repeated business from Wall Street. That’s the lifeblood of a CRA.

        But also consider the people researching and assigning the ratings. Rating agency folk are those who Wall Street’s brokerage houses would not hire… They’re Wall Street’s B-team… Packed with unqualified individuals — and also packed with aspirants to bigger things. Many saw a ratings agency job as a stepping stone into a brokerage firm (and the huge bonuses that only firms can deliver). Do “good” for your brokerage clients while at the agency, and get hired.

        Surely you catch my drift.

        Ratings agencies were the false stamp of legitimacy that Wall Street needed to sell their junk mortgages.

        • jdmckay0 says:

          I know a lot of money/investment managers, also CPA’s in firms that provide similar role. I had shouting matches w/some of ’em in late ’06/early ’07 when telling ’em what I thought was coming. To a (wo)man, every single one of ’em exclaimed that Ratings Agencies said I was wrong. Some were amongst most respected in this town (Albuquerque).

          • Citizen92 says:

            Indeed. One of those “no one could have anticipated..” moments. Kinda like the August 21 PDB warning about 9/11.

        • bmaz says:

          Not to mention that I highly doubt any of the three actually cracked open the black boxes they were rating and evaluated the individual parts inside with any detail. In fact the “black boxes were constructed in such a fashion, and of so many disparate parts, as to make it almost impossible to do without massive time, labor and cost.

          • Citizen92 says:

            They didn’t.

            They just assumed that the underlying collateral what Wall Street was issuing was the very same underlying collateral that Fannie Mae and Freddie Mac were issuing in their MBS’.

            Too bad it wasn’t.

            Wall Street packing liar loans into its securities.
            Fannie and Freddie were packing properly underwritten 30-year fixed mortgages into theirs.

            But the ratings agencies assumed it was all the same. And they rated it all AAA. Because they wanted the repeat business.

          • Citizen92 says:

            As to cracking the box open and examining the parts, well, the only way they could have done that would have been if Wall Street knew the specifications of what it was re-selling. Only it didn’t. But they did know it was crap.

  5. JTMinIA says:


    As not only a university prof but a statistics nut, I really can’t agree about curving. If what you want is an estimate of the value of a stock (or the understanding achieved by a student), then that’s what you should measure. If you want an estimate of the relative value of a stock (or understanding…yadda yadda yadda) then you curve against the other values etc for which you want a relative value.

    So, if you want to argue for curving ratings, you need to say that the purpose of ratings is to rank-order what’s currently available *regardless of whether all of them or none of them are worth anything at all*. (Same for the students.) Is that really what you want? Do you really want a ratings system that provides no information as to whether this stock is a “shitty deal” or the new Microsoft? … a system that only tells you whether a stock is above or below average? I doubt it.

    This is why I do not curve. My dean hates me, but I won’t do it. If and when they change what they mean by a grade – that it is only meant to reflect relative performance – then I’ll curve. But as long as they say a grade reflects what the student got from the course, I will not.

    • DWBartoo says:

      Hot damn! A REAL professor.

      [Students actually capable of original thought (and who can even spell words correctly, as well) are the “product” of the many “endeavors” and examples of such teachers.]


    • bobschacht says:

      Well, I’ve been a university prof. for more than 10 years of my academic career as well, and I’ve never liked any of the grading schemes. The main alternative to grading on a curve is grading on some absolute % thresholds, such as >90% is an A, 80-90% is a B, etc. But grading events, such as tests, provide only a sample of what students know, and their scores are based only on what the instructor decides to put on the exam, or on the way they grade essays. You must have a lot of confidence in your ability to determine what is important, and what is not. My problem was in choosing a seemingly arbitrary number to distinguish an A from a B, another to distinguish the Bs from the Cs, and so on. I never could get much confidence in those arbitrary numbers.

      With bond ratings, until now, we have wound up with a grading system like yours. If you graded like Moody’s graded bonds, your students would love you, but your grades would be meaningless.

      Bob in AZ

    • fatster says:

      Together with at least those Fab Four who were before the panel for hours: Sparks, Birmbaum, Tourre and Swenson.

  6. Leen says:

    Goldman Execs Grilled Over Role in Inflating Housing Bubble and Then Betting on Collapse

    Greg Gordon, investigative journalist with McClatchy Newspapers. In November, he published a multi-part investigation of Goldman Sachs and how it secretly bet against the housing market. See previous interview

    Rob Johnson, former economist at the Senate Banking Committee and the Senate Budget Committee. He’s now the director of the Economic Policy Initiative at the Franklin and Eleanor Roosevelt Institute



    “Plunder: The Crime Of Our Time”–Danny Schechter Takes on Wall St. in New Film

    We speak with investigative journalist, filmmaker, and author Danny Schechter, ‘the News Dissector.’ His latest film features interviews with industry insiders to reveal how the financial crisis was built on a foundation of criminal activity. It’s called “Plunder: The Crime Of Our Time.” [Includes rush transcript]

    • JTMinIA says:

      Yes, it’s outrageous, and, yes, this will cost Goldman a few clients, but if you think anyone at Goldman is going to be convicted of a crime then you’re in for disappointment.

      …Unless you include lying to congress or obstruction or some other “distract-the-Great-Unwashed-with-Scooter-Libby-while-Cheney-goes-free” crime. We might get one or two of those from all this. But you aren’t going to see anyone at Goldman going to jail for being slimier and smarter than the other banksters. Ain’t gunna happen.

      • Leen says:

        Said that awhile back. They will all walk. Senator Testor’s questioning of Blankfein said it all. Testor called Blankfein a “smart guy” and then went onto say that they would need his help to clean this mess up. All kiss ass. Blankfein answered “will sure help”.

        All of those fat cats know no one will do any time in an orange suit in our prison system for borrowing taxpayers money and making money on those loans or for putting the economy on the brink of collapse.

        They can take a few congressional tongue lashings. They walk out of there and get in hundred thousand dollar vehicles, go home to multi million dollar homes, take hundred thousand dollar vacations, and send their kids to Ivy league colleges where they are prepared to take their parents places on Wall Street.

        And then we have people like Senator Testor and Chris Matthews refer to them as “smart”. Instead of what they are, lying thieving thugs. I even heard Chris Matthews recently reference that some of these mostly guys on Wall Street might somehow be genetically smarter. What a crock. All about privilege and feeling entitled. Part of fat cats training.

  7. JTMinIA says:

    One last thought (then some work). When I watched those hearings, it was clear how criminology was never the issue. Levin did not seem to be trying to pin any crime on Goldman, maybe because he knew this would be a waste of effort. While it might have seemed on the surface to be about fraud, it was all about investor trust. Levin was trying to hurt Goldman’s business, not lock them up. And the upper-level Goldman folks (i.e., Sparks and up, but not Touree) seemed to know that this was the game. That’s why they fought against the idea that they were shorting the crap that they were selling in a concerted effort to get themselves out of the personal (i.e., firm-level) hole that they were in. They tried to make it look like one side of Goldman was just going with the flow (i.e., selling crap) while brilliant little Josh saved them all by shorting the heck out of the same. Josh didn’t talk to anyone else. Oh, no. Totally independent risk-management move. Therefore, all they need to do in the future is tell investors “we now all talk to each other, so, don’t worry, that won’t happen again; you can trust us.” It’s all about making sure that investors continue to use Goldman. This has nothing to do with avoiding being charged with a crime. Again, the only place where criminology comes into it is in terms of how much of a risk in terms of flat-out lying Goldman people will take in an attempt to keep some excuse strategy viable for keeping their clients’ trust.

  8. john in sacramento says:

    Anybody listen to Blankfein on NPR (National Propaganda Radio) on Thursday night? Don’t know if it was Marketplace or something else (I tuned into it towards the end, then they went into a pledge drive drive, and I turned it back to sports)

    … Anyway it sounded like a free commercial for Goldman with Blankfein doing a Sergeant Shultz impersonation

    I hear nothing

    I see nothing

    It was nothing but a few rogue underlings

    • JTMinIA says:

      Yes, so I wrote a letter. They referred me to their Planet Money blog which is just more pro-Wall Street propaganda. Worst of all is NPR’s widespread acceptance and even promotion of the “value” of all forms of shorting.

      Shorting is the evil. It has no value at all for anyone other than banksters. And before you give me any nonsense of shorting having grown out of crop insurance (what, with me being from Iowa and all), let me remind you that no farmer ever buys insurance on someone else’s crops.

      Shorting is buying life insurance on your neighbor’s life and then pretending that you now don’t have a vested interest in them dying early.

  9. tjbs says:

    Yo buddy, I call Bullshit.

    Someone said you could be fall down stumbling drunk and not forget that there those pension funds that are only allowed to buy AAA.

  10. prostratedragon says:

    Blankfein’s preposterous claim goes to the heart of the business model of that part of his firm’s business. I think everyone in the hearing room pretty much knew that. Since I thought he made it quite clear that a mere verbal challenge to this all-but-impossible fiction was not going to make him stand down, my own feeling would be that it was time for another venue to take the matter on.

    I sure hope that’s what the COI has in mind.

  11. earlofhuntingdon says:

    It would take the Heart of Gold’s improbability drive to calculate how unlikely it was that Lloyd Blankfein knew so little about the ratings issues that drive the marketability of investment products peddled by the brilliant organization he helped build and now runs. Failing that, one of his firm’s supercomputers might do. If those are busy computing, say, how to brew a really good cup of hot tea or how to keep Mr. Blankfein and his colleagues out of prison, I imagine Marvin might stop moping for a bit to help compute the odds of that highly improbable event.

    • PJEvans says:

      I think he knew that the ratings were BS. He just hopes that no one else does who is in a position to Do Something. (I think he’s whistling past the criminal courthouse; you don’t have to be a broker to understand the ratings and how they influence buyers (and sellers) of stocks and bonds. And you don’t have to be a genius to understand that when the raters are being paid to uprate the stuff, that it’s worse , and that when your company, mr Blankmind, is paying for those AAA ratings, you are responsible for it.)

      • earlofhuntingdon says:

        Blankfein’s use of the, “Gee, is that what those are for?” defense, as it applies to how ratings affect the marketability of investment products will be less convincing than Alberto Gonzales’ use of that defense. He could convincingly use it for pretty much anything.

        • PJEvans says:

          He might have had a better chance of getting away with it before 401(k)s and IRAs were the preferred (by corp-rats) retirement plan. He doesn’t seem to have noticed that the rest of us have learned more in the last 20 years than he has.

  12. ShotoJamf says:

    Somehow I have a feeling this claim is going to come back to haunt Blankfein.

    We can hope. So does anyone think the criminal probe will go anywhere? I would thoroughly enjoy watching a few of these gangsters twist in the wind.

    • earlofhuntingdon says:

      Oh, no. When your Bentley has a flat tyre, which it never will, one ought to call the AA or the RAC.

  13. dugsdale says:

    Wondering if the fruits of discovery as the civil action by the SEC unfolds, can end up yielding evidence of criminality that could drive/expand the criminal case?

    • masaccio says:

      Yes. Some of the MSM reportage has mentioned that prosecutors are free to sit back and wait for the case to fall into their laps.

  14. PaminBB says:

    I asked this on a seminal diary – do RICO statutes apply here? If not, why not?

    Thanks for any enlightenment.

    • masaccio says:

      I don’t think anyone has made a RICO case against a firm like GS. I don’t think it could be used here, where there is some colorable defense like lawyer and accountant approval and so on.

  15. BigJess says:

    Lloyd Blankfein has as much chance to be haunted by anything as I do to get pregnant. And even if the worst should come to pass, his buddy O will give him a full pardon, probably even before trial.

  16. MrWhy says:

    Q:How critical were those ratings (given by the CRAs) to the successful marketing and selling of RMBSs and CDOs?
    A: I don’t know what the standards are. I don’t know what drove the business. I don’t know how important they were in the business to investors.

    Q: Did you understand that at least there were certain classes of investors that could only invest in certain rated products?
    A: I never thought of it.

    Blankfein: If you are asking me whether I knew that some category is absolutely barred from buying it unless it had a tripleA, it’s just not within my scope to know that.

    This a-hat is Chairman and CEO of Goldman Sachs? How did he ever gain the confidence of the BoD?

    • 300SDL says:

      Looks like he’s using the “gosh, am I stupid defense.”

      At least he’s right about that. What a total incompetent. He can’t even lie worth a damn.

    • readerOfTeaLeaves says:

      Good one.
      I’m with JMinIA that this show was really about revealing GS as untrustworthy. But having said that much, I had not intended to watch it on Tuesday; I only turned it on for some ‘white noise’ in the background. Then, from almost the first minute, it turned into something strange; as if some quiet tectonic shift occurred during that hearing on Tuesday.

      Those GS employees probably showed up assuming they had to keep their heads down while the gasbags blathered on. Then they were confronted with evidence. Whoops.

      I’m with Boo Radley – I also suspect the unrepentant, evasive conduct of GS led to further charges. So yeah, I think that little exchange is already coming back to haunt GS and Blankfein.

  17. razorbrain says:

    I watched that live, and jumped on it immediately in the comments to the post-in-progress. I also said it should be the headline in every media outlet in the world the next day.

    Surprise!! Not one single mention of it anywhere, not in the business media that I constantly monitor, nor anywhere else.

    A sobering lesson in what we are up against any time we consider a strategy that depends in any part on the media to carry our message. Very demoralizing. You know they are in the bag, and you expect it, but to see it demonstrated to this degree is truly appalling.

    • emptywheel says:

      As I said, I think it was after the press went away for the day. It was 8:30 at night, after a long day with no significant breaks.

      • razorbrain says:

        You may be right, although God forbid the free press should stay for the grand finale of the biggest drama in recent history if it’s inconvenient to their dinner plans. But, I’ve seen no media reports on it in the following days, either.

        In any event, it was a bomshell, IMO. As a trader myself, I knew immediately that it was a lie, and also that the AAA rating is a pe-requisite primarily for money where a fiduciary or regulatory obligation is invloved, i.e, pension fund mney, insurance mnney. GS handled TONS of that money, and a lot of it came from the little people.

  18. browngregbrown says:

    “Somehow I have a feeling this claim is going to come back to haunt Blankfein.”

    One can only hope.

  19. jdmckay0 says:

    The bigger problem here (IMO again) is that, from nearly every incident I’ve seen, overwhelming majority of money managers… especially various state investment/retirement officials, simply did not do their jobs. They relied on rating agencies, and that’s as far as their diligence went.

    A little more specificity on that. GS is being charged w/lack of disclosure. From what I read, and not being security (or any other kind of) Lawyer, this stuff gets thick.

    But… in discussing w/people I know who are “in the know” on this stuff, they say GS charges ignore relevant statutes, particularly SEC rule 144a. There is a good explanation here (it’s long). I mention this because it ties back to legal notion of reliance on rating agencies addressed in Marcy’s post.

    The thing is, given notions behind rule 144a and it’s subsequent implementation, legal reliance on both rating agencies and issuing underwriter change in this rule. Mindful of what I said in previous post (eg: lack of due diligence by managers), the essential idea codifies less demand on disclosure, along w/less legal liability. The notion (from above link):

    The basic justification for the waiver of advance registration is the belief that large institutional buyers are sophisticated investors and do not need the SEC to examine each offering of securities in depth. Public issues of securities are required to be registered before they are offered for sale to individual investors, however, who are presumed to be less sophisticated and informed than large institutional buyers.

    So when you hear GS bigs talk about “sophisticated” investors in context removing GS from liability, it is under this rule. And from what I gather, ABACUS was constructed under 144A.

    What has also happened is that (again, the “due diligence vacuum), while keeping letter of 144a law, high powered sales have greatly influenced turning legal “sophisticated and informed” investors into informed-by-GS-sales-and-Ratings-agencies. Again, from above link:

    The Rule 144A market has been growing very fast. Annual issues of Rule 144A non-convertible debt have swelled from $3.39 billion in 1990 to $235.17 billion in 1998. In the meantime, the traditional private placement bond market has shrunk from $109.94 billion annually to $51.10 billion. Rule 144A issues have accounted for up to 80% of the high-yield bond market in recent years.

    In summary, (and again IMO) what’s happened is legal structure has been created to give justification for conditions (“sophisticated” and “informed”) which exist in law but not reality. To me, a corollary is notion behind birth of Miranda rights: eg. the “sophistication” exists mostly with the seller (GS), while law allows them to define responsibility of buyer to ferret out that sophistication while, in reality, every pressure in selling these things is sophisticated and well crafted procedure to keep buyer from being accurately informed.

  20. Loo Hoo. says:

    bmaz, Arpaio running for governor?

    Several high ranking sources within the Sheriff’s Department tell the ABC15 Investigators that all the necessary paperwork “has been filled out and is ready to file.”

    • bobschacht says:

      The only possible good I see here is for multiple conservatives to split the Republican vote, making it easier for Goddard to get elected, if there could be a three-way race, or for a right wingnut to win in the Republican Primary, making it easier for Goddard to get the centrist voters (or what passes for centrist voters in AZ).

      Bob in AZ

  21. orionATL says:

    with respect to this discussion generally, and working from memory,

    i recall news stories of large banks deep-sixing the risk analysis sections of their corporation – ignoring warnings from those departments and harassing, through transfers or firings, employees in those departments.

    i believe citibank’s top management was doing this;

    i don’t know about goldman-sachs, they’re usually a bit more analytical.

    as always with misconduct among the politically or economically powerful, very strong whistle blower legislation might have avoided the collapse by bringing credible warnings to public attention.

    and, of course, a wealth-worshiping media and a wealth-worshiping citizenry never help matters.

    • jdmckay0 says:

      i recall news stories of large banks deep-sixing the risk analysis sections of their corporation – ignoring warnings from those departments and harassing, through transfers or firings, employees in those departments.

      In IRA’s newsletter, Chris Whalen has written quite a bit on how WS more or less deep sixed appropriate software needed to manage just that.

  22. orionATL says:

    a little sure-stuck-in-my-mind fact from the krugman column cited above:


    AAA rated

    sub-prime mortgage backed secuities

    issued in 2006

    93% – that ain’t no typo,

    are now rated as junk.

    there’s your fraud.

  23. fatster says:

    Not that a damned thing will come of it, but at least it has occurred to one of them.

    Warner: Senate could vote to reinstate Glass-Steagall


  24. venusvictrix says:

    Levin should have asked Blankfein whether he thought the ratings had any effect on their ability to get CDSs from AIG. He’d have a harder time slithering through that one – since the firm is already on record about that point (as is AIG).

    Blankfein looks and sounds like an idiot, but perhaps he is telling the truth that he didn’t know AAA ratings were important for the firm to sell the securities. But since their big play was with the CDSs – they didn’t really need to sell the securities to make a huge windfall off them.

    • Citizen92 says:

      This account (http://ftalphaville.ft.com/blog/2010/03/02/162276/subprime-short-from-the-beginning/) has Goldman and Deutsche as the first two firms willing to sell CDS to hedge fund manager Michael Burry.

      Burry approached Goldman and DB because he suspected others in the market, like Bear Stearns and Lehman Brothers, were far too exposed on subprime and would likely be unable to pay him back when the market tanked.

      Others like UBS, HSBC didn’t even know what he was talking about.

      Turns out, both Goldman and DB decided to copy Burry’s strategy once they finally figure out what was going on. It’s an interesting account.

      Again, clients first.

      • venusvictrix says:

        I’ve read several of Michael Lewis’s “stories”, and I have to say that I don’t find him very credible. He’s peddling the version of events that Wall Street wants us to believe, rather than digging around for some real facts that might expose wrongdoing.

  25. orionATL says:

    fatster @57

    very interesting.

    never underestimate mark warner. he is a real political talent.

    alas, warner claims not to want to reimpose glass-steagall, so he may be engaged in a ploy.

    personally, i think the competitive disadvantage argument is suspect.

    it’s in the same category of argument as that used against workplace, health, or zoning regulations – oh jobs will be lost, jobs will be lost.

    i doubt that so much has changed in international investment or commercial banking in 11years (apart from that encouraged or permitted by gl-st) that gl-st could not be reimposed.

    unless one takes into account banking industry lobbying and contributions to national political figures.

    i’d be happy to see the nation take that risk.

    and happy to see how obama would justify vetoing it if it were to pass.

  26. orionATL says:

    i am interested in the bankers’ (mostly) argument that cds’s were great ’cause they helped “spread the risk around”.

    whose initial risk was being “shared” around?

    and by whom?

    why, it seems to me, it would be the risk of the organization initiating and selling a cds security based on some underlying entity (corp, etc.).

    so what might spreading the risk around mean, operationally?

    why attractively packaging your risk and then cleverly selling it to corporations, etc who had no initial interest in or liability for your money-printing cds “security” (funny word in this context).

    in short, an inducement to gamble your money on risk i generated.

  27. cregan says:

    Blankfein should never have said the statement about AAA ratings and sales. He obviously knew it does matter. I was a lowly banker once upon a time, and even I knew it.

    But, here is a more interesting piece of slight of hand. I heard some background noise on this, but saw more detail and confirmation today. It might be old news for others here.

    GM, which trumpeted it’s big loan payback in commercials and a US Treasury press release mislead the public. I even remember a thread on FDL where the poster crowed that the GOP likely were eating crow.

    I thought at the time, yeah, I guess they might be eating some crow.

    THEN, I find out the loan “payoff” was just a shuffle of funds from one TARP fund to another. Kind of like me boasting I paid off my credit card when all I did was a balance transfer.

    I can understand GM using such an underhanded trick, but worse, the US Treasury played along. They knew the press release and the GM commercial gave the public a very different impression of the situation than was the real truth. Yet, they not only said nothing, but actually supported and beefed up the ruse.

    To me, that is outrageous. A lot more Blankfein’s dumb statement.

    • bmaz says:

      Yeah, well, that is not quite right at all. GM did pay off their loan. I assume this baloney is premised on the fact GM was also infused with a much larger chunk of money from the government. But that money resulted in the government acquiring substantial stock and ownership in GM. That also will be covered and paid off through the revenue from a subsequent public stock offering or offerings. Strictly speaking however, the loan was separate from the ownership interest and GM did indeed pay it off and it is not “sleight of hand” in the least and it is not “underhanded” or a “ruse” in the least. Comparing it with Blankfein is absurd.

      • cregan says:

        Sorry, but I disagree.

        The commercial AND the Treasury note made it appear as if GM had paid off the loan from cash flow or profit. They paid it from other government TARP funds.

        As I said, exactly as if I boasted of paying off a loan when all I did was balance transfer.

        I am not saying it was illegal, but it was clearly meant to create an impression that was not true.

        I am certain that if you polled 100 people who saw the commercial as to what they thought it meant, you would find 99 of them thought it meant GM made bunch of money and paid the loan from sales revenue.

        So, it was deceptive and to me, far more than Blankfein making a statement about whether customers needed AAA rated items to invest. Why? Because it was intentionally deceptive, needing a lot of planning and effort to create the commercial. Blankfein’s statement, though I didn’t see it, as I understand, was made on the moment in a hearing in answer to a question.

        To have the Treasury participate, a whole elevated realm.

        • bmaz says:

          That is simply false and a mischaracterization of what occurred. The other pool of TARP money was already long ago assigned to and belonging to GM. As that pool of money was obtained by an arms length bargain where the government obtained stock in return, that money was effectively the property of GM. They did not take any additional loan or anything of the like from TARP or the government. You don’t have to like the deal that was made by the government, but a fair deal was made, with pretty onerous terms, and the funds have long been GMs to use as necessary at will. It is now their money, and when the government is cashed out of their stock through the planned public offerings, they will have been repaid every cent they invested in the GM stock, with a very healthy profit and any cash funds left in that account will be given to GM because, again, it is their money. It is not the government’s money any more. So, yes, GM did pay off the loan, which was a separate deal and this horse manure is just a contorted attempt to paint a false light on what is going on. It is pure conservative wingnut bullshit. GM did nothing deceptive.

          • cregan says:

            Don’t agree. First, they needed to get permission from Treasury to use the money for that purpose, so it was not entirely under their control.

            Second, the ad definitely tried to make it appear the payback was a “normal” payback from cash flow from sales. Same as if you or I had repaid a loan.

            And, the proof is in the pudding, as soon as the real facts were known, the ad stopped playing. They knew they were trying to be deceptive.

            Again, I didn’t say it was illegal, but both Treasury and GM attempted to make the “repayment” appear something it wasn’t. For the purpose of giving the public an impression that wasn’t true, and ultimately to gain a political point for the Treasury.

            Do you think they would have put out an ad saying, “We re-paid our government loan, with interest and 5 years ahead of time with money we originally got from the government after they gave us permission to use the money to repay them.” ??

            No, because they would have been laughed out of the park. And, that above is exactly what happened as testified by Neil (don’t recall the last name) the TARP overseer.

            So, it is not some odd idea. All I know is that if the Bush Treasury dept. had abetted something like this, commnittee chairmen would have been issuing subpoenas.

  28. AngryMan says:

    While this is outrageous, it looks to be a clever use of a technicality so that he little Lloyd can’t be found to have lied, or even misstated his answer.

    Senator Levin asked a general question regarding how important ratings are. Are AAA ratings important (yes or no)? Do some investors require AAA ratings (yes/no)? To reach these investors, does an investment banker want an AAA rating (yes/no)? Would a typical investor pay more for an investment with with a higher rating and equal returns (yes/no)?

    Sheisskopf Blankfein answered, instead, a technical question. How important are AAA ratings to clients, in quantitative terms? What specific price effect do they have? What percentage of the market can only invest in AAA rated instruments?

    The answers given up, would likely be truthful regarding these technical questions. But of course, that isn’t what Senator Levin was asking. Which is, of course, the point.

  29. orionATL says:


    you are a right-wing moron with an agenda!

    you didn’t “discover” any piece of info,

    you just heard ( probably) or read r-w propaganda and are now spouting it here.

    when you learn to think for yourself, if you ever do,

    and, based on my experience with r-wing loyalists, you won’t-

    come back and make a good-hearted contribution to emptywheel.

    • cregan says:

      You know, you really need to think before you write.

      I never said I personally “discovered” something–as in found some original information no one else had seen. In fact, I said it was something others here likely already knew. So, read and think carefully before you write or you will spoil the image of progressives being extra intelligent.

      What I saw was that the TARP overseer had testified as to the use of TARP funds to pay off the loan, thereby confirming what I had heard.

      My agenda is truth. Other than calling other’s names, what is yours? I haven’t discovered it yet. Oh, well, there is the thing of continually patting yourself on the back for being smart.

  30. orionATL says:

    [email protected]

    thanks for that fact-rich, informative comment.

    far more useful for readers of “emptywheel” than my angry cry, though i have no apology for the latter.

  31. orionATL says:

    razorbrain @71


    this got my attention

    “..,AAA is required where there is a fiduciary obligation involved ie pension or insurance monies…”

    (i apologize for lack of a precisely copied quote but my s. jobs itouch does not have copy and paste.)

    please DO follow up on this with more comments.

    what the SEC labelled as “only” civil is beginning to look to me more and more like it could turn criminal with the flick of a white-house wrist – or should i say “risk”.

    • razorbrain says:

      That is my understanding, and GS handled tons of that money. I think for PR reasons Blankface wanted to avoid the linkage betw GS actions and direct damage to small investors and working people, but I think he went too far in those efforts and may have put his head in the noose.

  32. orionATL says:


    the nytimes seems to have decided that somehow prez obama and the us gov are co-equally responsible for the british petroleum (bp) corporation’s oil spill in the gulf of mexico.

    the article the nytimes published was remarkably thin on convincing details but true to fox new’s “fair and balanced”.

    it’s coincidence of course that nytimes managing editor bill keller

    had a daddy who was a big cheese ( would that be “cheese head”?) in chevron oil corp.

    bill knows the oil industry and they know bill.

    of course, coincidences do happen, don’tcha know.

    • john in sacramento says:


      Something tells me, this won’t be on the frontpage anytime soon

      A documentary filmmaker says he will fight a request by Chevron to turn over hundreds of hours of footage he shot for a documentary about pollution in the Amazon rainforest in Ecuador.


      The movie, seen in a scene above, chronicles Ecuadoreans who sued Texaco, which is now owned by Chevron, saying the companies’ practices at the Lago Agrio oil field resulted in the contamination of their drinking and bathing water. Mr. Berlinger, who is scheduled to appear in United States District Court in Manhattan on Friday, said Chevron’s request violated his First Amendment rights.


      The trailer for the film

  33. orionATL says:

    john in sacramento @79

    that was interesting and disturbing.

    it’s not likely to show up in the nytimes without pressure, but you could write bill keller personally asking him to give an important media issue and an important environmental issue a little publicity.

    all the moreso, if you were to mention chevron to keller.


    i think this smacks of “corporate legal terrorism” ™,

    an increasingly common form of terroism- the corporate equivalent of barn burning.

    • bmaz says:

      I dunno, if I were Chevron’s attorney, I would request this too and, honestly, it might well be fair game for discovery if he was chronicling these plaintiffs and documenting their case as appears to be the fact from the article. The court will make a ruling based on the totality of circumstances, but I have no problem whatsoever in the discovery request.

  34. orionATL says:

    creagan @83

    “my agenda is truth”

    no, creagan, it is not; it patently is not.

    if you truely believe that, and i
    doubt you do,

    but if you do, you are a self-deluding fool.

    • cregan says:

      You know, when you can actually string together a coherent argument that doesn’t involve name calling, you might have some standing.

      I know you can do it.

  35. alinaustex says:

    [email protected]
    Yes it appears too -according to a pal who works for the Teacher Retirement Fund here in Austin that this fund – will be joining the law suit that Calpers and others are pursuiing against S&P and Moodys for knowingly representing the crap that was being sold as AAA . The important piece here- it apppears is that its illegal to invest certain pension monies in any deal that is not AAA. This story may have legs in that -in my capacity as a ground transport service – I did chat with three Fitch folks down here giving testimony in a closed deposition. While the Fitch employees would not reveal who they were being deposed by or what they said -one did offer this intriguing comment – “I will say -since this has been previously disclosed publicly -that Fitch declined to rate any deal AAA that we did have complete access too-because we did not want the presumed legal exposure that might accrue from falsely rating deals that used hard earned penisioners funds.”

  36. jdmckay0 says:

    “I will say -since this has been previously disclosed publicly -that Fitch declined to rate any deal AAA that we did have complete access too-because we did not want the presumed legal exposure that might accrue from falsely rating deals that used hard earned penisioners funds.”

    Well, if I were legal reps prepping these guys, that’s in line w/what I’d want them saying.

    Thing is, from what I know requirement that certain funds only do AAA doesn’t change culpability of GS, nor does it make rating agency’s product anything more than an “opinion”. And sadly, there is a certain legitimacy to that: eg. that these fund managers should’a/would’a/could’a do their own diligence which would have exposed all this junk in it’s infancy.

    Largely, they just didn’t do it. Rather, they make a couple phone calls, spoke w/a few lobbyists, issued their confident “expert” verdict then went out and had a “power lunch” w/some more “movers and shakers”.

    I currently expect this to be another “outrage” w/out recourse. Also seems to me that, for this saga to be accurately chronicled, it’s orgins lie in bribes/corruption of (mostly) lawmakers. And on this subject I sometimes feel like a broken record, but… my biggest disappointment in BO lies in his casting econ “recovery” w/the crooks who did all this, rather than call ’em out and detail it, as he most certainly could have. He missed, literally, an opportunity of a lifetime to clean things up.

    And for those who forgot or didn’t see ’em previously, CSPAN video of Ratings Agency chieftains congressional testimony (10/’08) is here. Pretty pathetic.

    What dumbfounds me beyond comprehension on all this: these guys (K-Street, Wall Street, Regulations & critical mass of similarly professionally-absent-bankers) brought world finance to the brink of disaster. It was littered w/fraud everywhere, and mechanisms of said fraud pretty understandable even to non-econ types. It has left EU/US economy on brink (lots of money printing and slight of hand accounting) and fueled a “jobless recovery”.

    Yet, despite the scope and cost, there seems no mechanism in US society to honestly confront and ask simple questions begging to be asked. And the first, most primary one: given these titans of finance were entrusted w/managing the collective savings of America, and given virtually every tool they had asked for (eg: deregulation/”free market principles”) going back decades, yet they squandered it all and richly rewarded themselves… all with money for which they were stewards, not owners.

    So given all this, and given economic weakness from the “hangover”, and given the large swaths of America still reeling from the drunken spree… why on earth has structure of US finance not been reorganized so the same crew no longer is pulling all the levers?

    All these arguments… failure of Rating Agencies, fraud on WS, incompetence of bankers (etc etc)… seems to me they are all argued and presented to public in narrow contexts which obscure the larger affect of the systemic dysfunction. I mean really… Blankenship’s declaration GS does “God’s Work” seems to carry more weight than the consequences of their behavior these recent years. Style triumphs over substance, and critical mass of US public seems to not only be supportive, but believes this is God’s good work done by real patriots.

    And on top of this, we now get “reports” of “increased productivity”. Go figure.

    My own “larger context” view is something like this: US enjoyed 8 years under Bush w/declining employment while his admin/Repub K-Street rubber stamped moving US manufacturing overseas and massively increasing H1-B domestic workers. The sum of this: dramatically diminished avg. worker income, less prospects for said workers to contribute/earn. Along w/this, the increased profit margins of US importers was not reinvested in US growth or anything close to it… period: it was taken as private profit and disappeared into all kinks of black-banking places.

    So… while BushCo kept Iraq costs off the books, and executed this “economic oversight” in stealth, they publicly cast their “prosperity” lot almost entirely in growing housing market… for nearly 8 yrs. The net affect was gross wealth of increasingly growing un/under employed (largely) middle class was relegated in huge and progressively growing proportions… into their home(s). So, what does a corrupt government do, but try and keep that up, right?

    Meanwhile, income to support these homes… going going going. Drying up.

    And all the while, building for years, with circular reinforcement of bankers lending more for homes to people who can’t afford them so WS has more mortgage bonds to sell as AAA, rinse & repeat, blah blah blah. Summary: declining US employment/on shore econ activity, more and more home loans bundled as “securities” and sold world wide as AAA.

    This seems pretty understandable to me… not so difficult to understand.

    Now somehow, deans of “free market” (cough) “principles”… eg. Greenspan, GS, Lehman etc., well, they are just dumbfounded that things kind’a fell apart, that the markets didn’t self-regulate and correct, and somehow this mess just kind’a crept up out’a nowhere and smacked ’em upside the head.

    I really marvel at the absurdity of it all. Rather incredible I think.

    Oh well.

    • razorbrain says:

      Agree with your comments overall, but would add, I believe the reqs for pension and insurance cos to get AAA ratings for their investments were STATUTORY in most or all cases, which makes that fact much more important.

      • jdmckay0 says:

        Agree with your comments overall, but would add, I believe the reqs for pension and insurance cos to get AAA ratings for their investments were STATUTORY in most or all cases, which makes that fact much more important.

        Yes. But if AAA is established, yet that AAA has no legal weight, it’s kind’a like pleading “but I received my first communion” at one’s murder trial.

        I don’t want to misrepresent myself… I am not legal authority on this. Nevertheless, I have dug into it substantially (I had good reason) and have good reason to conclude there’s little legal recourse.

        On a more fundamental level, there’s a lot of subplots in the various retirement fund arm twisting which resulted in purchasing various incarnations of rebranded mortgage CDS bonds. In our state (NM), exact same lobbyists who sold same crap to NY, NEVADA & (I believe) Florida funds did so here. They have been indicted in NY. Yet, whole thing represented in our (conservative) “paper of record” as corruption w/in Richardson Administration for the most part.

        Just before millenium I was living in Bay Area… had a business there.

        My dad retired from 38 yrs at Livermore Fed. Lab. All employees at that time payed into UC (Univ Ca.) Benefits for retirement fund & benefits. So I/dad had interest in observing health of this fund.

        There was a woman, headquartered in Berkley, who had managed w/integrity and great success for (from memory) 20+ years. She had avoided the bubbles, got better than average returns, and there was never a hint of scandal/corruption/nefarious influences etc etc.

        Around ’99, when Ward Connerly had gained head of UC Regents and was beginning his anti-affirmative action campaign. Connerly very quietly started smear campaign against this woman (I’ve got archives somewhere, don’t recall here name… sorry). It was weird, nobody could figure it out… why smear someone who’d been so good for so long?

        Long & short: smears were followed by her firing w/public statements from a lot of large Ca. state GOP donors that she had invested “too conservatively”, particularly stayed away from .COM wave. Management of UC Benefits funds was then awarded to a major donor… some right wing crackpot w/investment fund in LA somewhere. He dumped bunch of $$ into .COM stock just in time to catch the bubble burst.

        Bylaws were quickly rewritten so that losses need not be disclosed. His firm went stealth… nothing about, from regarding their activities managing all the dough.

        Since then, very similar processes have ocurred in various state fund management across the country, not mention exporting similar junk overseas.

        My point: big part of this current saga is process whereby, in very stealth fashion, (mostly) GOP contributors gave $$ and subsequently received access to manage large sums of capital. And just like in current situation, these guys creds were not expertise, rather political ties. And also just like current situation, there motive was not expertise or professionalism, rather quest for big profits w/other people’s $$… a characteristic which underlies almost everything gone wrong in current mess.

        Almost hand in hand w/corruption that came from tearing down wall between WSbanks, this same pervasive mentality also grew and metastasized. And it is core to corruption we now “enjoy”. The whole notion of access to capital traditionally required well considered merit: eg. accessed value that those entrusted to use of that capital could/would generate.

        This merit has been replaced by “the redemptive power of political contributions.”. And currently, it’s sucking the economic life out of things.

        • razorbrain says:

          I am a lawyer as well as a trader, so I’ve been living at the intersection of all these issues for the last 20 years, and have paid meticulous attention to all the details day-by-day as they unfolded.

          The whole process was visible long ago to those who wanted to see, and it was pretty much as you summarize. Only a revolution can unfuck this totally fucked situation, IMO, but it won’t happen.

  37. alinaustex says:

    razorbrain @ 92
    But if its statutory fraud will not the DOJ be obligated to take a criminal investigation . Is not DOJ already looking at Goldman Sachs for fraud ?

  38. razorbrain says:

    Yes, and I have it on good authority that the DOJ will undertake that “obligatory” prosecution as soon as they complete the “obligatory” prosecution of Bush, Cheney, et al for war crimes. /s

    Seriously, I haven’t taken the time to do a serious professional analysis of the rat’s nest of laws and regulations involved, and I have no clue what it might take to get Obama to see the virtues of looking backward rather than forward (for a change), but those laws were put in place to meet recognized fiduciary and regulatory obligations, and should be enforceable, criminally and civilly.. However, any case will immediately become a blizzard of re-defining words and blame-shifting. The material is complex.

  39. alinaustex says:

    razorbrain @ 97
    My hope is that Calpers and others vis a vis their ongoing civil lawsuit will force the DOJ to prosecute the fraudsters & force them to disgorge their ill gotten gains .
    And since the Durham investigation is ongoing I still hold hope that something will be done regarding the bushcheney war criminals …

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