Posts Tagged: DOJ

Banking / Business / Financial / Political — 0 Comments
22
Apr 10

Watershed Event in the Financial Crisis – SEC v. Goldman

There is an old saying on Wall Street: “no one rings a bell at the top.”  The same metaphor can apply to financial crises.  Plus, these aphorisms can lead to epiphanies: things are never going to be the same again.

In February 2007, HSBC issued a loss warning related to subprime lending, the first such announcement in its 142-year history.  See HSBC’s First Profit Warning Ushered in the Crunch.  CNBC tried to minimize the development pointing out this was only one bank and HSBC was responding to the problem by signaling a $10b write-off.  One month later, Ben Bernanke testified before Congress that “problems in the subprime markets seem likely to be contained.”  At the time I believed that this was a warning shot ushering in the financial crisis. In my own portfolio I acted accordingly, sold my stocks, and urged  family members to do the same.

The SEC v. Goldman lawsuit appears to be another watershed moment.

The Surprise Complaint

SEC v. Goldman is something other than business as usual.  Pertinent points:

  • Announcement of the complaint caught Goldman by surprise.
  • Wells Notice – The SEC sometimes issues a Wells Notice to inform a company that they may be the subject of an enforcement proceeding.  Companies usually disclose receipt of such a notice in a public 8-k filing.  Goldman did not do so, perhaps believing that it was not material or that they had defenses to the charge.  See Goldman Sachs Said to Have Been Warned of SEC Lawsuit.
  • Past SEC practice is to negotiate with the company and announce the action and the settlement simultaneously. It appears there were no serious settlement discussions.
  • This week Congress seriously moves financial reform legislation into law. Filing the fraud suit is a way to galvanize public support for reform.
  • Morgan Stanley was selected over the politically connected Goldman to underwrite the sale of the government’s position in Citicorp.
  • The German and UK governments have opened inquiries into Goldman’s CDO practices and have contemplated lawsuits to recover losses. See German,UK Demand Goldman Sachs Probe.
  • Special Inspector General for TARP, Neal Barofsky, is working with the Department of Justice to examine whether securities sold by Goldman to AIG constituted a fraud on US taxpayers.
  • Congresswoman Marcy Kaptur has written to US Attorney General Eric Holder  demanding a DOJ investigation of Goldman

Supporters and Detractors

Dick Bove, a bank analyst at Rochdale Securities, felt the lawsuit would be settled with a manageable fine and reiterated his buy recommendation on Goldman’s stock.  Unfortunately for Goldman, Mr. Bove was amazingly wrong on bank stocks throughout the financial crisis.  What Mr. Bove is not considering is the potential Pandora’s Box of lawsuits by defrauded investors.  It is too early to calculate the reputational damage to Goldman.  Perhaps the selection of Morgan Stanley to handle the Citicorp offering is a harbinger of other future Goldman underwriting losses. Also Mr. Bove did not consider a newly emboldened SEC.   Stung by public criticism   as a lapdog of the industry, the SEC may use this lawsuit to conduct further discovery implicating more senior executives at Goldman and other firms.

Goldman Was Not Alone

Unemployment remains high and credit remains limited for small business and individuals.   Wall Street continues to ignore the rising public mood of anger: Jamie Dimon lectures the German government on over regulating banks and blithely predicts bank crises every 5-7 years; Lloyd Blankfein  informs the public that  Goldman does the Lord’s work; CEO’s continue to receive record Wall Street bonuses, Wall Street still opposes financial reform legislation.

This is the wrong time in financial history to be tone deaf to the public.  Despite the pundit’s attempt to minimize the SEC complaint as a relatively minor matter, there is something more going on.  And come November, this public anger could very well threaten Democratic Congressional majorities and all incumbents.

The financial industry which has caused so much damage to the economy may have just met its match. None too soon.

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Justice System / Political — 0 Comments
14
Sep 09

Why are We Investigating CIA Officers Instead of Bankers?

There are times when the American populace needs to be put through a values clarification exercise. An example: when a charity solicits us for a contribution, we often respond that we cannot afford to give.  What we really mean is that we would rather spend money on a movie, new clothes or a couple of beers. On a macro, social policy basis we also have trouble clarifying our values.  We rail against excessive health care costs, but we do not ban cigarettes or alcohol, or mandate that overweight people all attend Weight Watchers. We have technology to prevent a drunken driver from starting an automobile while inebriated, but after a DWI conviction do we consider mandating that safeguard?

This brings us to the main point: why are we investigating CIA officers instead of bankers?  On Monday August 24th, the New York Times had a front page article heralding that Attorney General Eric Holder was naming a veteran prosecutor to investigate CIA interrogation techniques during the Bush Administration. The purpose of the investigation is to decide whether or not to bring criminal prosecutions. Here is the obligatory disclaimer so human rights advocates can move on and finish reading this piece.  If there are bona fide legal abuses of prisoners’ civil rights, then by all means the Department of Justice, the military or other governmental bodies should thoroughly investigate such abuses and bring criminal cases, if warranted.

The actions of CIA officers should be examined in context.  Post-9-11, the government adopted a philosophical stance on terrorism and the threat to the US homeland.  The stance was that the United States was in mortal danger from jihadists and other terror organizations and, unchecked, these terrorists had the capability of inflicting untold harm on the American public.  Thus, as always, the CIA mandate was to protect the country. Post 9-11, these were extraordinary times and the danger was real and imminent.  Possibly extreme measures were needed to obtain information and protect Americans.

Every intelligence gathering or law enforcement agency probably has a small minority of unbalanced individuals who go overboard in exercising authority. My guess is that 99.99% of CIA, FBI and other agents are professional, disciplined, well-trained patriots acting in good faith and with the highest motives and integrity. These are professionals who give up time with their families on a GS pay scale to protect us. How do we repay them?  Post-hoc, we investigate them.  The average citizen has no idea what this means.  These officials being investigated may have to hire their own attorneys, pay for their defense out of pocket and hope to be reimbursed for these expenditures if exonerated.  This does not take into account the psychological strain on the individual, the public humiliation, opprobrium of friends and neighbors and the strain on families.   Moreover, there is a chilling, trickle down, effect on others in the agency.  No risks will be taken and the best and brightest in the agency will avoid being involved in interrogations. DOJ investigations take a long time and that is one large cloud to be under.

Contrast the treatment of CIA officials with the treatment of the principals in the financial industry who caused the 2008 market meltdown:

  • Rating agencies received a fee from the institutions that were being rated and essentially conspired to inflate ratings to the detriment of investors;
  • Stock brokers did not disclose the riskiness of investment products being sold to investors;
  • Real estate brokers pushed clients into houses they could not afford and conspired with mortgage brokers, banks and clients to obtain bogus financing;
  • Purchasers knowingly falsified their applications as to income and assets to obtain a larger mortgage or any mortgage;
  • Investment bankers took the suspect paper, packaged the paper into collateralized debt obligations and sold them to pension funds;
  • Pension fund managers had a fiduciary duty to investigate what they were buying, but instead chose to reach for a few extra basis points of yield to earn a bigger annual bonus;
  • Lawyers willing created CDOs and derivatives on the CDOs.  They counseled clients to provide the skimpiest of disclosures and misled investors.

The mortgage and housing arena is but one part of the financial meltdown and there are more principals in the financial industry worthy of investigation. But the reality is that few individuals and companies are being investigated. The standard apology for this lapse is that investigations would disrupt the economy.  Who could have really understood the magnitude of these problems? This did not occur during my administration!  Let’s let bygones be bygones.

That approach is too facile and disingenuous for my tastes.  For the average working man the catastrophic result has been lost homes, depleted retirement accounts, broken families and lost dreams.

Who is more deserving of prosecution, members of the financial industry or members of the CIA?  Patriots versus Scoundrels.   People who tried to save lives versus people who destroyed lives. People earning a GS pay scale versus Goldman Sachs executives scheduled to share in $11.4 billion in bonuses for the first six months of 2009.  A values clarification moment –you decide!

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