Tuesday, June 23, 2009

Strange Days ... by gimleteye

Last night I watched the CSPAN taping of the Senate Banking Subcommittee's hearing on Over-The Counter Derivatives. Not a bit of visible indignation from the Senators. I heard one Senator note that Goldman Sachs had benefited from the disastrous trade that sunk AIG on credit default swaps.

Never mind what credit default swaps are. But consider the following: the Senator noted that the AIG trades had benefited Goldman Sachs to the tune of $7 billion. In fact, the Goldman Sachs windfall-- that is leading to its "most profitable quarter ever" (meaning enormous bonuses, fees, compensation etc.) is many billions higher than $8 billion. Before the September bailout, Goldman received $5.9 billion from AIG as counterparty to trades sucking the life from the insurance giant. After the bailout, Goldman received a $25 billion capital infusion. Not only did the Senator have his numbers wrong, the subcommittee failed to note the distinguishing characteristic of the Goldman trades: at a time when bondholders have taken massive write-downs and shareholders wiped out by toxic debt, Goldman Sachs received 100 cents on the dollar with not a breath of talk renegotiating in the favor of taxpayers, who turn out to be the only suckers paying full price for debt flushed down the toilet of miscalculated risk and fiscal carnage.

The Senators did not appear to understand very much at all about the financial instruments that created an unregulated shadow economy that dragged the real economy into the worst crisis since the Depression.

The industry insiders on the panel did their usual credible job of puffing up derivatives as essential to the smooth working of the economy. Equity, fairness, and justice were nowhere in sight. And not, in Miami either.

Miami Today reports, "Misdemeanor please mark end to 'The Firm', Miami staffer criminal scheme saga". "Prosecution of a criminal scheme that may have cost the City of Miami tens of millions in project cost overruns has ended with no jail and light fines for the ex-city employees involved. The 14 city employees known as The Firm, mostly from the capital improvements department, were arrested in 2007 on organized fraud and racketeering charges for doing private design and consulting work on city time. Those involved recently received plea deals that reduced the charges to misdemeanors and required each to repay $11,908 to the city, the Miami-Dade State Attorney's office reports. Around the time the scheme was unfolding, project delays and $38.8 million in cost overruns in the city's bond program — initially blamed on market changes and unforeseen setbacks during planning and construction — were reported in the capital improvements department, where most of the employees worked. All the individuals pleaded guilty to two misdemeanor counts of unlawful use of a computer — after initially facing 23 to 95 years in prison — and agreed to pay court costs totaling $20,000, split evenly at $1,429 each, and receive a year of probation, said State Attorney's Office spokeswoman Terry Chavez."

The light sentence for criminal behavior was echoed, the same week, by news that a former US Army Corps of Engineers employee was sentenced to probation for taking bribes to allow illegal farming in the 8.5 Square Mile Area (Miami Herald, June 19, 2009). ''The Everglades is one of the nation's most important natural resources,'' said Maureen O'Mara, special agent in charge of criminal enforcement for the Environmental Protection Agency in Atlanta. "The work being undertaken to restore and revitalize it cannot be compromised by someone who violates the public trust for money.''

City Commissioner Tomas Regalado said the episode is "really embarrassing to the city and State Attorney's Office." But embarrassment doesn't begin to cover the damage to public confidence in government and its ability to protect citizens and taxpayers. A question: is today's fraud and corruption materially different than any other age or epoch in history? Yes. The difference is the shadow economy and its ruinous power.

Financial derivatives must be regulated, traded on open exchanges, and many forms of synthetic debt must be banned or taxed out of existence. But even if government does these things-- confronting the authority of Wall Street--, I wonder if that resolve has strength to stave off a Depression, and moreover, if fairness, equity and balance are so out of sync with the speed of fiscal carnage, what comes next?


andrew said...

Seacoast Banking Corp. of Florida, of Stuart, Fla., and Midwest Banc Holdings Inc., of Melrose Park, Ill., have also halted their TARP-related dividends, citing the banking industry's turmoil and a desire to fortify their balance sheets. Treasury spokeswoman Meg Reilly said Monday that "a number of banks" that got taxpayer-funded capital under TARP are no longer paying dividends to the government. "Treasury respects the contractual rights of [TARP recipients] to make decisions about dividend distributions, and that banks are best positioned to decide how to manage their own capital base."

andrew said...

Tania Azarchs, who covers the financial sector for S&P, agrees that the banks are facing a bleak future: "Regardless of how they are feeling now, and how the economy recovers, there are a lot more losses to come that the banks will have to realize."

andrew said...

Growing pessimism about the prospects for a global economic recovery sent stock and commodity prices tumbling on Monday while new data showed that leading US corporate executives were cashing out of their share holdings at a rapid pace.

andrew said...

Share sales by so-called company insiders are outstripping purchases so far this month by more than 22 times. TrimTabs, the investment research company, said insiders of S&P 500 listed companies have unloaded $2.6bn in shares in June, compared with $120m in purchases.

“The smartest players in the US stock market – the top insiders who run public companies – are not betting their own money on an economic recovery,” said Charles Biderman, chief executive of TrimTabs.

Geniusofdespair said...

You are scaring me Andrew...Gimleteye does that enough. I worry about my nesteggless

andrew said...

Judging by your handle, thought this stuff would be right up your alley, Geniusofdespair. Despair is right around the corner from fear.

Anonymous said...

Just for kicks, go here and listen to these tapes. You might learn a bit about the Fed Reserve that will surprise you.