In a 16-minute video CNBC financial anchor Dylan Ratigan eviscerates the unholy trinity of hedge fund, insurance company & government players who colluded to reap huge insider profits, at the expense of outsiders unaware of clandestine collusion by those pushing complex financial instruments. There is more shocking news....
Here is a summary & comment on Goldman's role in this mess. Here is more detail on the hedge fund trading setup. This flip chart presentation on "the Magnetar Trade" (Magnetar is a hedge fund) further details the complex trading scheme. And yes, the government connection--Obama + Rahm Emanuel--mattered too.
Manhattan Institute scholar Nicole Gelinas writes that Chris Dodd's financial reform 1,336-page bill invites bailouts, even though not expressly provided for:
Dodd was the bluntest: "The bill as drafted ends bailouts. Nothing could be more clear."
In the 1,336-page text, though, Dodd left room for regulators to be generous with citizens' money. For example, the bill would direct the FDIC, which would wind down too-big-to-fail financial firms, to operate under only "a strong presumption that creditors and shareholders will bear the losses."
As for whether the bill puts taxpayers at risk: failed firms must repay "any amounts owed to the United States, unless the United States agrees or consents otherwise" (italics mine).
Why would the financial firm owe Uncle Sam money in the first place? Partly because of something else in the bill: an "orderly liquidation fund." Big or complex financial firms would have to pay upfront into a Treasury-controlled $50 billion pot of money that would bear the cost of liquidating a future AIG.
The FDIC would have the authority to use this money as it sees fit, including guaranteeing bondholders, uninsured lenders, counterparties and other creditors to a failed company just as the government did with AIG and Citigroup in 2008.
The idea that the financial industry can pre-fund its next arbitrary bailout with $50 billion is a pleasant fiction. How much would an "orderly liquidation fund" have needed to stem investor panic starting in 2008? Try $20 trillion.
Robert Samuelson sees a changed Wall Street:
Once upon a time, Wall Street's leaders saw themselves as arbiters of capital, helping allocate society's savings to productive uses. By contrast, Wall Street's major firms now see themselves as captains of "the market," navigating it—for themselves and sometimes their clients—for maximum gain. This is a distinction with a difference.
As arbiters of capital, Wall Street was paid to make judgments. It tutored investors on which stocks to buy. It advised companies on which mergers and acquisitions to pursue, and which to avoid. It decided which companies deserved capital through the sale ("underwriting") of new stocks and bonds to investors. Wall Street made money through fees and commissions. Now the prevailing model is very different. Wall Street firms still give advice and earn fees. But their main business is trading for their own accounts and creating trading opportunities for clients.
Just coincidentally, Goldman Sachs's recent profit report underlined the extent of the shift. In the first quarter of 2010 about 80 percent of Goldman's $12.8 billion in revenues came from its trading and proprietary investment accounts. The remainder represented underwriting, financial advice, and management.
Greed and shortsightedness aren't new. Wall Street's old model bred abuses. Brokers "churned" clients' accounts to generate commissions. Investment bankers earned fees by rubber-stamping dubious mergers. Underwriters blessed poorly managed firms or trendy companies with no real businesses (remember the dotcom bubble). And there were swindles. Before Bernie Madoff, Richard Whitney, the head of the New York Stock Exchange in the 1930s, went to prison for embezzling funds.
But under the old model, lapses were usually recognized—at least with hindsight—as moral as well as financial failures. They were "deviant." Wall Street's new model is more permissive.
But it is more different than that. In the old days, Wall Street firms played with their own invested money; today they play with funds raised from outside investors. And as Milton Friedman famously observed, "No one spends other people's money as carefully as they spend their own."
Samuelson cites this as one main factor behind the change:
Judgment was missing. Many factors moved Wall Street from the old model to the new: the end of fixed commissions on trades in 1975, which squeezed revenues; computer technology, which made rapid trading and exotic financial instruments possible; and the replacement of partnerships with publicly held corporations. When partners were individually responsible for a firm's losses and mistakes, they restrained excessive risk-taking. These changes won't be reversed. But if Wall Street can't control itself, someone else will.
A WSJ editorial warns that Chris Dodd's bill would encumber "angel" investors with a web of regulations that would undermine one fo the American economy's strongest financial engines. Meanwhile, President Obama's Wall Street angel contributors sent him $994K in campaign contributions. Some GOP lawmakers have returned the far lesser sums they collected from Goldman; the President, to date, has not done so. Goldman, for its part, supports the Dodd bill, which protects its position, writes Tim Carney in the DC Examiner. Michael Barone sees "gangster government" enshrined as a long-running series by Dodd's bill.
The WSJ editors see President Obama as the new Master of the Wall Street Universe.
There is perhaps one silver lining in this very dark cloud: Dan Henninger notes polls showing public distrust of government at an all-time high.
Bottom Line. I worked in Wall Street from 1969 to 1974, the first four years at Goldman Sachs, the final year at Drexel Burnham. Back then, it was a capital offense to trade against your customers. Rules were at times broken, even at the best firms. But those breaking them knew they were doing so, and were called to account. Had I taken any advantage of my position to trade at the expense of customers, I'd have been fired instantly--and rightly so. Today, it seems to me that the people abusing the system seem to think that there are NO RULES to break. No wonder they see themselves as having done nothing wrong. This is a cancer metastasizing on Wall Street. Washington will treat this cancer with financially carcinogenic regulation.
Letter from the Capitol, LFTC, 9/11, Economy, Conservative Politics