Posts tagged unforgivable
Bill Gross' February Investment Outlook- "This Isn't God's Work"
As regular readers know, Bill Gross runs PIMCO, and manages the Total Return Fund (the largest bond vehicle in the world). When he talks, people listen. So imagine our surprise here at The Scrambler when in this month’s investment outlook, Billy Bob starts spouting nonsense about finance NOT being God’s work.
Why does he hate America?
Even if it’s a joke, it’s not funny. He needs to knock it off.
#unforgivable. Excerpt below.
Money would also become the economic and political wedge for profound changes in American society. Fifty years ago, the highest paid and most prestigious professions were that of a doctor or a 707 airline pilot who flew the “golden” route from Los Angeles to Honolulu. Today the yellow brick road begins on Wall Street or the City. Aside from supernova innovators such as Steve Jobs or Mark Zuckerberg, the money is made from securitizing things instead of booting and rebuilding America. The tallest buildings in almost every major city are banks, with tens of thousands of people shuffling and trading paper for a living. One of this country’s premier investment banks paid each of its 26,000 employees an average of $370,000 in 2010, nearly ten times the take-home pay of other American workers. Almost a quarter of the 400 wealthiest people on Forbes annual richest list make their money from money, whereas only 8% could make that claim in its first issue in 1982, and probably close to 0% when I first read my economic primer in 1966.
Having been part of this process and even a member of the rogue’s gallery itself, I know one thing for sure: This is not God’s work – it has the unmistakable odor of Mammon. PIMCO, while Mammonesque, is a company to be proud of. I can say with confidence that there are very few clients who have not benefited from our investment management over the years. Some of the rest of this industry, however, I’m not so sure of: rating agencies that perpetually fail at commonsensical quality judgments, bankers that make loans to subterranean credits and then extend the beggar’s bowl for themselves, and 80% of active money managers that underperform the market. As a profession we have failed miserably at our primary function – the efficient and productive allocation of capital:The S&L debacle of the early 1980s, the Asian crisis, LTCM, dotcoms, subprimes, Lehman and the resurrection, instead of the reformation, of Wall Street, are major sins of the modern era of money. Hang your heads, moneychangers. And no, it is not yet time to move on, as many banking CEOs suggest. How can bond traders make ten, one hundred, one thousand times more money than an engineer or social worker given their dismal historical performance? Why is it that some of today’s doctors are using food stamps while investment banking executives complain about millions of dollars in compensation that might be deferred in case of a future bailout?
Financiers have lost their high ground and, if truth be told, we began to lose it a long time ago when we figured out that money was more than a medium of exchange or a poor substitute for a store of value. We figured out a turbocharged way to make money with money and proclaimed ourselves geniuses in the process. Well, we’re not. We may be categorized as “opportunists,” to be generous, but society’s “paragons” and a legitimate destination for a significant percentage of college graduates? Hardly. To paraphrase Paul Volcker, the only productive invention to come out of the banking industry over the past generation was the ATM.
This country desperately requires a rebalancing of priorities. After readjusting the compensation scales via regulation and/or free market common sense, America needs to anoint a new set of Mensans who can create something more than a cash machine and make this country competitive again in the global marketplace. We need to find a new economic Keynes or at least elect a chastened Congress that can take our structurally unemployed and give them a chance to be productive workers again. We must have a President whose idea of “centrist” policy is not to hand out presents to the right and the left and then altruistically proclaim the benefits of bipartisanship. We need a President who does more than propose “Win The Future” at annual State of the Union addresses without policy follow-up. America requires more than a makeover or a facelift. It needs a heart transplant absent the contagious antibodies of money and finance filtering through the system. It needs a Congress that cannot be bought and sold by lobbyists on K Street, whose pockets in turn are stuffed with corporate and special interest group payola. Are record corporate profits a fair price for America’s soul? A devil’s bargain more than likely.
#greatmomentsinbankinghistory, #sadmomentsinbankinghistory, #worldviewshattered, #whydoeshehatefreedom?
The CDO Daisy Chain
ProPublica bringing the heat today. A long piece on some GREAT MOMENTS IN BANKING HISTORY….
Having told the tale of hedge fund Magnetar in April, Propublica and Planet Money have gone after even bigger game in their latest investigative piece.
The new article by Jake Bernstein and Jesse Eisinger describes, in salacious detail, how the composition of CDO buyers shifted from “real” investors like pension schemes to other CDOs — prolonging the boom in these securities and exacerbating the eventual fallout for the banks.
And the banks have themselves to blame. From the article, emphasis ours in all excerpts:
As the housing boom began to slow in mid-2006, investors became skittish about the riskier parts of those investments. So the banks created — and ultimately provided most of the money for — new CDOs. Those new CDOs bought the hard-to-sell pieces of the original CDOs. The result was a daisy chain that solved one problem but created another: Each new CDO had its own risky pieces. Banks created yet other CDOs to buy those. …
And how bad did it get?
An analysis by research firm Thetica Systems, commissioned by ProPublica, shows that in the last years of the boom, CDOs had become the dominant purchaser of key, risky parts of other CDOs, largely replacing real investors like pension funds. By 2007, 67 percent of those slices were bought by other CDOs, up from 36 percent just three years earlier. The banks often orchestrated these purchases. In the last two years of the boom, nearly half of all CDOs sponsored by market leader Merrill Lynch bought significant portions of other Merrill CDOs.
And in a particularly impressive display of the lunacy that was Wall Street in the mid-2000s, CDOs started buying each others’ pieces:
The portion of CDOs owned by other CDOs grew right alongside the market. What had been 5 percent of CDOs (remember the “bucket”) now came to constitute as much as 30 or 40 percent of new CDOs. (Wall Street also rolled out CDOs that were almost entirely made up of CDOs, called CDO squareds.)
The ever-expanding bucket provided new opportunities for incestuous trades.
It worked like this: A CDO would buy a piece of another CDO, which then returned the favor. The transactions moved both CDOs closer to completion, when bankers and managers would receive their fees.
ProPublica’s analysis shows that in the final two years of the business, CDOs with cross-ownership amounted to about one-fifth of the market, about $107 billion.
Nor was there any shortage of bully tactics used by the banks to convince CDO managers to buy their crap bonds rather than another bank’s:
“I would go to Merrill and tell them that I wanted to buy, say, a Citi bond,” recalls a CDO manager. “They would say ‘no.’ I would suggest a UBS bond, they would say ‘no.’ Eventually, you got the joke.” Managers could choose assets to put into their CDOs but they had to come from Merrill CDOs. One rival investment banker says Merrill treated CDO managers the way Henry Ford treated his Model T customers: You can have any color you want, as long as it’s black.
The article goes on to names names, explains why the ratings agencies blew it, and gets into the wider fallout for the rest of the financial sector.
Worthwhile reading on a Friday afternoon.
The Economic Crisis: Lessons Unlearned
Thomas Frank signs off from the WSJ Opinion page. Needless to say, I’m disappointed. A pretty stinging assessment of the last 2 years. 50 hot ones, comin’ at ya.
This is my last weekly column for the Wall Street Journal, and writing it has naturally put me in mind of my first efforts in this space, back in the summer of 2008.
Those were the days when economic disaster was beginning to unfold; it hit a crescendo in September of that year when Wall Street teetered and the government came to the rescue with a TARP.
By November, the nation’s mood had soured enough that a senator from Illinois won the presidency even though he appeared to defy political convention in countless ways. And all the while, the front pages overflowed with shocking tales of the corruption of the old order, the gross venality of the subprime lenders, the sabotage of the regulators, and the manufacture of poisonous triple-A securities.
It was an awful time, but for someone in my situation there was also—please pardon the expression—hope to go along with the disaster. We were descending further into the worst recession I had ever seen, but at least we were finally going to be done with the farcical intellectual and political consensus of the preceding decades.
Never again, I thought, would journalists fall over one another to flatter CEOs, nor would pundits build careers by finding clever ways to equate the workings of markets to democracy itself. Management theorists would cease to be public intellectuals, and the political advice of stock pickers would henceforth be treated like the toxic sewage it clearly was.
“The market god has failed,” I wrote in this space in February 2009, and I thought its flop augured not only a massive reconfiguring of the relationship between investment banks and the rest of society but a complete overturning of the comfortable assumptions of the pundit class.
At first, there were reasons to believe such a thing might come to pass. Alan Greenspan’s famous October, 2008, confession of “shocked disbelief” at the lenders’ lapses sounded like a turning point to me, and it felt equally momentous when Richard Posner, a famous proponent of the Chicago school of economics, allowed that deregulation had gone “too far.”
But those were intellectuals, bound by a different code than politicians and pundits. Elsewhere, things scarcely changed at all. Yes, that new president and his partisans in Congress managed to pass an enormous health-care bill, but only after making sure that the big institutional players were on board and that the new law followed a business-friendly prototype. Then, a halfhearted stab at re-regulating Wall Street, and the audacity tank was just about dry.
As the right howled “socialism,” President Obama took pains to demonstrate his loyalty to the exhausted free-market faith. On trade issues and matters of economic staffing, he loudly signalled continuity with the discredited past. On the all-important issue of regulatory misbehavior—a natural for good-government types—he has done virtually nothing.
The real audacity has all been on the other side. Many Republicans chose to respond to the crisis not by renouncing the consensus faith of the last 30 years but by doubling down on it, calling for more deregulation, more war on government.
That they have partially succeeded with such a strategy in these years of financial crisis, mine disasters, and oil spills is testimony to their political brilliance—and to Democratic dysfunction. As is the burgeoning populist movement that now stands beside the GOP, transforming anger over unemployment into anger over the auto bailout and the good pensions enjoyed by public workers.
Where I most expected changes, though, was in the world of professional punditry, which had largely failed to raise questions about the disaster as it loomed. Today it’s two years on, and nobody has changed the water in the fish tank, as a friend of mine likes to say. Thomas Friedman of the New York Times still burbles about theories of creativity that were management clichés 10 years ago. The Washington Post prosecutes its undeclared war on Social Security by having former TARP czar Neel Kashkari explain why banks had to be bailed out but “entitlements must be cut.” The need to balance the federal budget is almost universally thought to be urgent. And bipartisanship still intoxicates the pundit mind with its awesome majesty.
On Wall Street, the road to hell is still lined with bonuses. And Washington feels the same as ever. The prosperous, well-educated people still tote their yoga mats around town, line up outside the special cupcake shops, and listen to NPR talk show hosts welcome the next generation of boring centrists into the glorious circle of the right-thinking. The lobbyists still gather at the tasteful restaurants du jour, doing their work on behalf of the forgotten men of the uppermost one percent.
As for me, it’s two cans of beer and the escape chute to terra firma. Goodbye and good luck.
House ethics trials for Reps. Charlie Rangel, D.-N.Y., and Maxine Waters, D.-Calif., threaten to darken an already-gloomy year for Democrats. Both of the accused have shaken off formal reprimands in favor of a public proceeding before a House subcommittee that can issue punishments as severe as expulsion. While it’s unlikely that either lawmaker will receive the ultimate punishment, there are plenty of Democrats who wish Rangel and Waters would do the party a favor and expel themselves. The question of what will persuade a given politician to resign when he or she is embroiled in a scandal hinges on complex political arithmetic. How vulnerable is the party in the next election? How vulnerable is the politician? Are there compromising photos? Is the politician in question given to moralizing about the very sin of which he or she stands accused? The path of political scandal being well-trodden, the patterns of human behavior in this realm are more predictable than you might suppose. What follows is a flow chart illustrating the various decision points that lead a scandal-ridden politician to stay or go. Slate breathlessly awaits the outcome of the Rangel and Waters affairs to complete the chart.
The Canseco Effect: Wherever he went, Jose Canseco made his teammates better power hitters. Can statistics be used to find juicers?
h/t Scott.
Gould and Kaplan are labor economists, not baseball fans. Their primary interest in studying Jose Canseco’s influence is in illustrating the sorts of pernicious behavior that can be learned in the locker room, by the water cooler, and in the workplace more generally. A few years ago, for example, there was a pair of scandals involving large numbers of false disability claims at the Long Island Railroad and the Boston Fire Department. (The Boston case broke when one of the purportedly disabled firemen placed eighth in a national bodybuilding competition.) In both cases, fraudsters possibly learned the benefits of cheating—and maybe even the details of how to do it—from their co-workers. Being around other cheaters also provides the ready excuse we’ve all heard before (and used ourselves): “Everyone’s doing it.” You’d be a chump not to get disability payments while everyone else is relaxing by the pool or to lose baseball games to competitors who have an unfair edge.
……
Can Gould and Kaplan’s approach be applied to other sports? There are striking parallels between the Canseco saga and the ongoing doping scandal in competitive cycling. This year’s Tour de France began under yet another cloud of controversy with the publication of former champion Floyd Landis’ detailed description of alleged doping with seven-time tour winner Lance Armstrong. According to Landis, Armstrong lorded over a complex and multi-faceted operation that included bike sales (to fund the doping program) and clandestine roadside blood transfusions for him and the rest of his U.S. Postal Service team. Not surprisingly, Landis’ interview, published by the Wall Street Journal, was followed by sharp denials from Armstrong and “no comments” from others implicated in the story.
Cap And Trade Is (All But) Dead
::::sad sigh:::::
Take it away Ezra Klein….
You can’t pass what you can’t say:
Senate Majority Leader Harry Reid played dumb last week when a reporter asked him if the energy and climate bill headed to the floor would come with a “cap” on greenhouse gas emissions.
“I don’t use that,” the Nevada Democrat replied. “Those words are not in my vocabulary. We’re going to work on pollution.”
One of my rules in politics is that whichever side is resorting to framing devices is losing. In 2004, when Democrats became obsessed with George Lakoff, it’s because they felt unpopular and looking for a quick fix. And in 2006, when they took the Congress back, it wasn’t because they found a new slogan. It was because the Iraq War and Jack Abramoff had made the Republicans toxic. In 2008, it was exhaustion with George W. Bush and a cratering economy. Post-9/11 frame theory wouldn’t have said run the black guy with the name “Hussein.”
If cap-and-trade is so unpopular that its primary legislative advocates can’t mention it, then it’s dead. The BP oil spill offered a chance to change the fundamentals on the issue and Democrats decided against trying to use the disaster as a galvanizing moment for climate legislation. Word games don’t offer a similar opportunity.
Photo credit: Drew Angerer/AP.
Lunchtime Read: Tim Geithner’s Ninth Political Life
Simon Johnson undresses Tim Geithner. 50 hot ones, comin at ya.
All jokes aside, if we don’t have the right people in place, it’s going to be a rough ride……
In modern American life, Treasury Secretary Tim Geithner stands out as amazingly resilient and remarkably lucky – despite presiding over or being deeply involved in a series of political debacles, he has gone from strength to strength. After at least eight improbably bounce backs, he might seem unassailable. But his latest mistake – blocking Elizabeth Warren from the heading the new Consumer Financial Protection Bureau – may well prove politically fatal.
Geithner was a junior but key member of the US Treasury team that badly mishandled the early days of the Asian financial crisis in 1997 and received widespread criticism (Life #1). He was promoted as a result and thereafter enjoyed a meteoric rise.
As President of the New York Federal Reserve from 2003, and de facto head of the government’s financial intelligence service, he completely failed to spot the problems developing in and around the country’s financial markets; nothing about this embarrassing track record has since stood in his way (Life #2). He subsequently became Hank Paulson’s Wall Street point person for one of the most comprehensively bungled bailouts of all time – the Troubled Asset Relief Program, TARP, which in fall 2008 first appalled Congress with its intentions and then wasn’t used at all as advertised (Life #3).
TARP and related Bush-Paulson-Geithner efforts were so completely and clearly unsuccessful in October/November 2009 that the crisis worsened and Geithner was offered the job of Treasury Secretary by President-elect Obama; the incoming team felt there was no substitute for “experience”. Nevertheless, he almost failed in the confirmation process due to issues related to his taxes (Life #4) and then stumbled badly with his initial public repositioning of the TARP (Life #5), which was going to buy toxic assets again but in a more complicated way (perhaps his most complete and obviously personal political disaster to date).
His next Great Escape was the stress tests in spring 2009 – it turned out, supposedly, that there was really no financial crisis. Most of the big banks really did have enough capital; all that had been missing was the government’s endorsement of this fact (this is the story, honest). If this seems too good to be true, look at the mass unemployment still around you and tell me if the financial sector really looks healthy (Life #6).
Life #7 was expended concurrent with the forceful arrival on the financial reform scene of Paul Volcker. The Geithner-Summers “financial reform” package from summer 2009 was weak to start with and weakened further as it was discussed in the House; the entire effort was rudderless. Volcker’s new proposals helped rescue the reform and restore momentum – but instead of (appropriately) discrediting the Geithner approach in the eyes of the White House, it actually helped the Treasury Secretary climb new pinnacles of influence. Go figure.
Life #8 is the blatant failure of the Geithner strategy to “just raise capital requirements” as the way to deal with distorted incentives and the tendency to take irresponsible risks at the heart of our financial system. Treasury insisted on “capital first and foremost” throughout the Senate debate this year – combined with their argument that these requirements must be set by regulators through international negotiation, i.e., not by legislation. But the big banks are chipping away at this entire philosophy daily through their effective lobbying within the opaque Basel process – as one would expect. The latest indications are that capital requirements will barely be raised in any meaningful sense.
Secretary Geithner likes to say, “Plan beats no plan” and in some positive interpretations this is the secret of his success. But it turns out that he had no plan really – the stress tests were a grand improvisation (ultimately implying scary sized government implicit guarantees), the initial financial reform proposals fizzled (the Volcker rescue was against Geithner’s wishes), and the much vaunted tightening of capital standards is completely illusory (doesn’t anyone in the White House read the newspapers?).
On top of all this, it now appears that Secretary Geithner will oppose Elizabeth Warren becoming the new chief regulator responsible for protecting consumers from defective financial products – despite the fact that she has led the way for this issue, on both intellectual and political fronts, over the past decade. The financial sector has abused many of its customers badly over the past decades. This simply needs to stop.
Throughout the Senate debate on financial reform, Treasury insisted that complex details regarding consumer protected need to be left to regulators – and thus the Geithner team pushed back against many sensible legislative proposals that would have tightened the rules. Treasury also promised – although in a nonbinding way – that the new generation of regulators would be an order of magnitude more effective that those who eviscerated whatever was left of our oversight system during the Bush years.
With his track record of survival, Geithner and his team apparently feel they can push hard against Elizabeth Warren and give the new consumer protection job to someone closer to their philosophy – which is much more sympathetic to the banking industry.
This would be a bad mistake – trying the patience of already exasperated Congressional Democrats. If the Obama administration can’t even complete the deal they implicitly agreed with Senators over the past months, this will set of a firestorm of protest within the party (and with anyone else who is paying attention).
Financial “reform” is already very weak. If Secretary Geithner gets his way on consumers protection, pretty much all of the Democrats efforts vis-à-vis the financial sector’s treatment of customers have been for naught.
Tim Geithner is sometimes compared to Talleyrand, the French statesman who served the Revolution, Napoleon, and the restored Bourbons – opportunistic and distrusted, but often useful and a great survivor with a brilliant personal career. In the end, of course, no one – including Talleyrand – proves indispensible. And everyone of this sort eventually pushes their luck too far.
If the Democratic leadership really wants to win in the November elections, they should think very hard about the further consequences of Mr. Geithner.
Goldman Settles S.E.C Fraud Charges For John Paulson's Pocket Change
Goldman Sachs has agreed to pay the SEC $550 million and “reform its business practices” to settle charges that it misled investors with regards in the marketing of the collaterized debt obligation known as “Abacus.”
Here’s the press release from the SEC:
FOR IMMEDIATE RELEASE 2010-123
GOLDMAN SACHS TO PAY RECORD $550 MILLION TO SETTLE SEC CHARGES RELATED TO SUBPRIME MORTGAGE CDO
Firm Acknowledges CDO Marketing Materials Were Incomplete and Should Have Revealed Paulson’s Role
Washington, D.C., July 15, 2010 - The Securities and Exchange Commission today announced that Goldman, Sachs & Co. will pay $550 million and reform its business practices to settle SEC charges that Goldman misled investors in a subprime mortgage product just as the U.S. housing market was starting to collapse.In agreeing to the SEC’s largest-ever penalty paid by a Wall Street firm, Goldman also acknowledged that its marketing materials for the subprime product contained incomplete information.
In its April 16 complaint, the SEC alleged that Goldman misstated and omitted key facts regarding a synthetic collateralized debt obligation (CDO) it marketed that hinged on the performance of subprime residential mortgage-backed securities. Goldman failed to disclose to investors vital information about the CDO, known as ABACUS 2007-AC1, particularly the role that hedge fund Paulson & Co. Inc. played in the portfolio selection process and the fact that Paulson had taken a short position against the CDO.
In settlement papers submitted to the U.S. District Court for the Southern District of New York, Goldman made the following acknowledgement:
Goldman acknowledges that the marketing materials for the ABACUS 2007-AC1 transaction contained incomplete information. In particular, it was a mistake for the Goldman marketing materials to state that the reference portfolio was “selected by” ACA Management LLC without disclosing the role of Paulson & Co. Inc. in the portfolio selection process and that Paulson’s economic interests were adverse to CDO investors. Goldman regrets that the marketing materials did not contain that disclosure.
“Half a billion dollars is the largest penalty ever assessed against a financial services firm in the history of the SEC,” said Robert Khuzami, Director of the SEC’s Division of Enforcement. “This settlement is a stark lesson to Wall Street firms that no product is too complex, and no investor too sophisticated, to avoid a heavy price if a firm violates the fundamental principles of honest treatment and fair dealing.”
Lorin L. Reisner, Deputy Director of the SEC’s Division of Enforcement, added, “The unmistakable message of this lawsuit and today’s settlement is that half-truths and deception cannot be tolerated and that the integrity of the securities markets depends on all market participants acting with uncompromising adherence to the requirements of truthfulness and honesty.”
Goldman agreed to settle the SEC’s charges without admitting or denying the allegations by consenting to the entry of a final judgment that provides for a permanent injunction from violations of the antifraud provisions of the Securities Act of 1933. Of the $550 million to be paid by Goldman in the settlement, $250 million would be returned to harmed investors through a Fair Fund distribution and $300 million would be paid to the U.S. Treasury.
The landmark settlement also requires remedial action by Goldman in its review and approval of offerings of certain mortgage securities. This includes the role and responsibilities of internal legal counsel, compliance personnel, and outside counsel in the review of written marketing materials for such offerings. The settlement also requires additional education and training of Goldman employees in this area of the firm’s business. In the settlement, Goldman acknowledged that it is presently conducting a comprehensive, firm-wide review of its business standards, which the SEC has taken into account in connection with the settlement of this matter.
The settlement is subject to approval by the Honorable Barbara S. Jones, United Sates District Judge for the Southern District of New York.
Today’s settlement, if approved by Judge Jones, resolves the SEC’s enforcement action against Goldman related to the ABACUS 2007-AC1 CDO. It does not settle any other past, current or future SEC investigations against the firm. Meanwhile, the SEC’s litigation continues against Fabrice Tourre, a vice president at Goldman.
The SEC investigation that led to the filing and settlement of this enforcement action was conducted by the Enforcement Division’s Structured and New Products Unit, led by Kenneth Lench and Reid Muoio, and including Jason Anthony, N. Creola Kelly, Melissa Lamb, and Jeffrey Leasure. Additionally, together with Deputy Director Reisner, Richard Simpson, David Gottesman, and Jeffrey Tao have been handling the litigation.
Three thoughts.
1. Great moments in banking history.
2. Business as usual.
3. Never bet against the house.
Interestingly, GS concedes that the marketing for Abacus was incomplete. Full and fair disclosure- what a quaint concept.
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