Weekly Audit: How Deregulation Fueled Goldman Sachs’ Scam

Posted Apr 20, 2010 @ 8:58 am by
Filed under: Economy     Bookmark and Share

by Zach Carter, Media Consortium blogger

Image courtesy of Flickr user SEIU_International via Creative Commons LicenseLast week, the Securities and Exchange Commission filed fraud charges against Goldman Sachs and underscored what most Americans have believed for some time: Wall Street has rigged the economy in its own favor, and will stop at nothing—not even outright theft—to boost its profits. What’s worse, Goldman’s scam could have been completely prevented by better regulations and law enforcement.

Goldman’s heist

Let’s be clear. “Financial fraud” means “theft.” Goldman Sachs sold investors securities that were stocked with subprime mortgages and had been cherry-picked by a hedge fund manager named John Paulson. Paulson believed these mortgages were about to go bust, so he helped Goldman Sachs concoct the securities so that he could bet against them himself.

Goldman Sachs, like Paulson, also bet against the securities. But when Goldman sold the securities to investors, it didn’t tell them that Paulson had devised the securities, or that he was betting on their failure. By withholding crucial information from investors, Goldman directly profited from the scam at the expense of its own clients. If ordinary citizens did what the SEC’s alleges Goldman did, we’d call it stealing.

As Nick Baumann emphasizes for Mother Jones, the SEC’s suit against Goldman is just the tip of the iceberg. During the savings and loan crisis of the late 1980s, literally thousands of bankers were jailed for financial fraud. Today’s crisis was much larger in scope, yet the Goldman allegations are among the first serious charges of legal wrongdoing to emerge (other complaints have been filed against Regions Bank and former Countrywide CEO Angelo Mozilo). If the SEC or the FBI are doing their jobs, we should see many more of these cases.

Bust ’em up.

How do banks get away with these kinds of shenanigans and still secure epic taxpayer bailouts? It’s all about their political clout, as Robert Reich notes for The American Prospect. So long as banks are so enormous that they can ruin the economy with their collapse, the institutions will always carry tremendous political clout.

Even in the case of Goldman Sachs, which is too-big-to-fail by any reasonable standard, the SEC’s fraud case is being filed three years after the company’s alleged offense. That’s well after the company rode to safety on the Troubled Asset Relief Program, the AIG bailout and billions more in other indirect assistance—and only after multiple journalists made Goldman’s offensive transactions general public knowledge.

If we don’t break up the big banks, politically connected Wall Street titans will make sure they get bailed out when the next crisis hits, regardless of whatever laws we have on the books.

Fix the derivatives casino

If Congress doesn’t soon pass a bill to break up behemoth banks, it will be neglecting the gravest problem in our financial system today. But several other reforms are needed if Wall Street is ever going to serve a useful economic function again.

As Nomi Prins emphasizes for AlterNet, much of the Wall Street profit machine has been divorced from the economy that the rest of us live in. These days, banks make most of their money from securities trades and derivatives deals. Their actual lending business is taking a beating. That means big banks have very little incentive to promote economic well-being for every day citizens. We need to create these incentives by banning economically essential banks from engaging in securities trades, and make sure all derivatives transactions are conducted on open, transparent exchanges, just like ordinary stocks and bonds.

Better derivatives regulations could help protect against fraud. If Goldman Sachs’ sketchy subprime deal had been subject to market scrutiny on an exchange, it’s very unlikely that any investor would have bought into it. Goldman Sachs almost got away with it because the deal was secretive and beyond the scope of most regulatory oversight.

Protect whistleblowers

The Goldman case also raises significant questions about the government’s enforcement of existing financial fraud laws. Bradley Birkenfeld, a banker for Swiss financial giant UBS, helped the Department of Justice bring the largest tax fraud case in history against his company, which was helping rich Americans hide money from the IRS in offshore bank accounts.

For his cooperation, Birkenfeld was rewarded with a four-year prison sentence, even though nobody else at UBS—nobody—has been sentenced to prison over the scam. As Juan Gonzalez and Amy Goodman emphasize for Democracy Now!, Birkenfeld’s imprisonment could have something to with who exactly is hiding money with UBS.

Gonzalez discusses an interview with Birkenfeld, in which the former banker notes that the bank had a special office to handle the accounts of “politically exposed persons”— American politicians. Moreover, the top brass at UBS includes key advisors to top politicians in both parties. This is exactly the kind of influence smuggling that breaking up the banks would help fix. UBS is a multi-trillion-dollar institution with no less than 27 U.S. subsidiaries.

But protecting Birkenfeld would accomplish still more—by jailing him, the Justice Department is actively discouraging others from coming forward, and making it more difficult for regulators to enforce the law.

Greenspan’s failure

It’s abundantly clear that almost every major regulatory agency charged with curtailing financial excess failed to prevent the Crash of 2008. But that failure doesn’t mean that effective regulation is impossible—it only shows that the regulators in power failed. The top bank regulator in the U.S., John Dugan, was a former bank lobbyist.

As Christopher Hayes demonstrates for The Nation, former Federal Reserve Chairman Alan Greenspan has never had any interest in regulation whatsoever. After the crash, Greenspan insisted that nobody could have seen it coming. But as Hayes notes, many people did—Greenspan simply didn’t listen to them. These days, Greenspan is revising his story, claiming that he did in fact see the crisis coming, but that nobody could have prevented it. That is simply not credible.

Hayes draws a useful parallel Hurricane Katrina, a problem sparked by a natural event that became a catastrophe when regulators failed to take the necessary precautions. The lesson from both Katrina and the financial crash is not that government always screws up—we have plenty of examples of government preventing floods and economic calamity. The lesson we should learn is that people who don’t believe in government will never do a good job governing. As Hayes notes:

If Greenspan couldn’t figure things out, that doesn’t mean others can’t. In fact, developing systems for doing just that is called—quite simply—progress, and Alan Greenspan continues to be one of its enemies.

That is exactly the task that now presents itself before Congress: Developing a system to prevent and constrain economic destruction wielded by Wall Street. The U.S. had a system that did exactly this for more than fifty years. For the last thrity years, it has been systematically dismantled. How well Congress lives up to that challenge will define much of our economic future for decades to come.

This post features links to the best independent, progressive reporting about the economy by members of The Media Consortium. It is free to reprint. Visit the Audit for a complete list of articles on economic issues, or follow us on Twitter. And for the best progressive reporting on critical economy, environment, health care and immigration issues, check out The Mulch, The Pulse and The Diaspora. This is a project of The Media Consortium, a network of leading independent media outlets.

5 comments so far:

  1. On April 20th, 2010 at 12:01 pm, toboldlygo said:

    thats all fine and good to call this fraud

    But what if ………this was by design to steal and bankrupt the USA if you cant beat them with weapons… beat them with the one thing they can beat them with “GREED”
    there own financial sytem of deregulation.

    i personaly believe that the People of the USA are under attack by the very richest small persentage of the population
    all of there government in the highest places of power are all related
    President OBMA is directly related to Dickhead Cheny 11th cousins i believe
    everything your seeing is WAG THE DOG

  2. On April 20th, 2010 at 5:57 pm, uberVU - social comments said:

    Social comments and analytics for this post…

    This post was mentioned on Twitter by zachdcarter: Goldman’s scam, deregulation and bad regulation: http://bit.ly/cFrAML

  3. On April 20th, 2010 at 9:35 pm, Maven said:

    The WH has daggers out against efforts to correct the injustice done to Birkenfeld. After CBS scrubbed its detailed January 2010 interview of Birkenfeld and his lawyer from its website, the National Whistleblowers Center uploaded the segment to YouTube and embedded a link on its website. This was important because, at least according to Google, it can’t be found anywhere else. It was going fine until I made the mistake of publicizing the situation by posting a supportive petition on the “activist” site Change.org asking the President for clemency for Birkenfeld and also including an embedded link to the YouTube segment. Within an hour of the first signing of the petition, the interview was removed from YouTube (so of course no links to it on any website will function), and my petition was removed from Change.org’s “Most Recent” list. Now no one who is not specifically looking for Birkenfeld can happen upon the petition and learn about the case.

    I guess this is nothing like a typical Change.org petition asking, for instance, to deny drilling in Alaska, because inaction on that sort of issue is hidden in Congressional committees, hard to find out about and impossible to pinpoint responsibility, but failing to grant clemency in this case points clearly and solely to the President. It is his decision alone to acceed to what must have been extreme pressure from UBS officials who know exactly what and whose regulatory failures caused the 2008 bank crisis. They must have demanded prison for Birkenfeld as part of their settlement w/ the U.S. prosecutors to make sure no one will ever again cause them to pay 100’s of millions of dollars of fines, no matter what the bank hides.

    We need to push back for Birkenfeld for just this reason–to support future bank employees who are contemplating blowing a whistle on bank misbehavior that costs the budget of our gov’t $billions that could otherwise go to pay for our pressing needs. Money was funneled under the table to compensate UBS for its losses on the fraudulent mortgage derivatives. The least UBS can do in return is to refrain from retaliating against a whistleblower who had them dead to rights helping others steal from us.

  4. On April 23rd, 2010 at 10:50 pm, George Fellows said:

    “Free Market” fanaticism preached by the ruling elite, and the public’s susceptibility to such evangelic snake-oil pitches (gullible, greedy, intellectually lazy fools that we are), has resulted in the greatest ongoing heist and power shift in humankind’s history. Debt is slavery, and the oligarchy has sold us into it — privately, nationally, globally. All areas of America’s entire economy and infrastructure drop dead without the reliable issuance of debt on top of debt, and that is by design. Complete privatization of America is but an inflationary period away, and the wolves are howling at the gate.

  5. On May 6th, 2010 at 11:33 pm, The Simple Math Problem « Money is cent Everything said:

    […] Of course you can get much more complicated with exceptions and additions; especially if you are Goldman Sachs hiding money.  Debt would be included in the expenses of course.  You can expend a lot of energy […]