Do economist, University of Missouri-Kansas City professor and white collar crime investigator William Black, former NY Governor and Attorney General Eliot Spitzer and University of San Diego professor of law Frank Portnoy have their eyes on the prize: federal indictments of former Treasury Secretary Henry Paulson and Goldman CEO Lloyd Blankfein? Or, saying it more accurately, finding the smoking gun that's the difference between indicting or not indicting former Treasury Secretary Henry Paulson and his successor at Goldman Sachs, current CEO Lloyd Blankfein. What am I referencing you ask? That'd be the "potential" bailout fraud, corruption and malfeasance story about AIG that just won't go away. More specifically, you may read all about it in a piece posted at Naked Capitalism, today; but, let's start with an Op Ed piece Spitzer, Black and Partnoy published this past Sunday in the NY Times: "
Show Us the E-Mail."
Show Us the E-Mail
By ELIOT SPITZER, FRANK PARTNOY and WILLIAM BLACK
Published: December 19, 2009
...A.I.G. was at the center of the web of bad business judgments, opaque financial derivatives, failed economics and questionable political relationships that set off the economic cataclysm of the past two years. When A.I.G.'s financial products division collapsed -- ultimately requiring a federal bailout of $180 billion -- those who had been prospering from A.I.G.'s schemes scurried for taxpayer cover. Yet, more than a year after the rescue began, crucial questions remain unanswered. Who knew what, and when? Who benefited, and by exactly how much? Would A.I.G.'s counterparties have failed without taxpayer support?
The three of us, as experienced investigators and prosecutors of financial fraud, cannot answer these questions now. But we know where the answers are. They are in the trove of e-mail messages still backed up on A.I.G. servers, as well as in the key internal accounting documents and financial models generated by A.I.G. during the past decade...
--SNIP--
...Once the documents are available for everyone to inspect, a thousand journalistic flowers can bloom, as reporters, victims and angry citizens have a chance to piece together the story. In past cases of financial fraud -- from the complex swaps that Bankers Trust sold to Procter & Gamble in the early 1990s to the I.P.O. kickback schemes of the late 1990s to the fall of Enron -- e-mail messages and internal documents became the central exhibits in our collective understanding of what happened, and why.
--SNIP--
Perhaps A.I.G.'s employees would also be judged not guilty. But we would like to see the record to find out. As fraud investigators, we would like to examine the trading patterns of A.I.G.'s financial products division, and its communications with Goldman Sachs and other bank counterparties who benefited from the bailout. We would like to understand whether the leaders of A.I.G. understood that they were approaching a financial Armageddon, and whether they alerted their counterparties, regulators and shareholders to the impending calamity.
--SNIP--
Congress wants answers, too. This month, during hearings on Ben Bernanke's nomination to a second term as chairman of the Federal Reserve, several senators fumed about being denied access to his A.I.G.-related documents...
Yves Smith, publisher of Naked Capitalism, was all over this story (before it even hit the newsstands) last Saturday evening, in: "Spitzer, Partnoy, Black Call for AIG Open Source Investigation (and Goldman Implications)."
Putting it simply, the question is: How could our government let the monoline insurance companies--the insurers of most "agency" paper and state and municipal bonds in this country--collapse while choosing to make an exception to this practice as they singled-out AIG for the largest corporate bailout, by far, in our country's history?
Spitzer, Partnoy, Black Call for AIG Open Source Investigation (and Goldman Implications)
December 20, 2009
Yves Smith
Naked Capitalism
...While the subprime deals and CDOs were obviously going bad, an argument was made by many people at the time that the aggressive mark downs by AIG acelerated the death spiral for the market. It is pretty clear, here and elsewhere, that Goldman was the one that initiated the mark downs of collateral value. it would be interesting to explore this all the way through. Though not discussed in this article, Goldman shorted subprime through the Abacus deals, and perhaps elsewhere. this gave them an incentive to force mark downs. the intermediation deals described in the article, combined with AIG's collateral posting, gave them another incentive to be agressive with mark downs. they were acting like they wanted to grab the money before anyone else could get their hands on it. this would have raised some issues in an AIGFP bankruptcy. (note - Hank Greenberg suggested that this was going on in his october 2008 testimony but there was a chorus of attacks on him for being a crook and unreliable, thanks to his problems with Spitzer.)
So here we have the pattern:
1. Goldman creates or sells $23 billion (or more) of CDOs and stuffs them into AIG.
2. Goldman proclaims to the world they have no exposure to CDOs and warns that banks and insurers with CDO exposure will get downgraded.
3. Goldman initiates the mark downs of CDOs with AIG and others, acelerating the market's downward spiral.
4. Huge mark to market losses lead insurer and bank credit to freeze, short term markets to lock up, ABCP to collapse.
5. AIG posts as much collateral as it has to Goldman, who has more aggressively marked down the exposure.
6. Bond insurers are downgraded, banks begin commutations with them.
7. AIG fails, Fed steps in, Goldman gets bailed out at par.
Yves here. This looks like no accident. I suspect it was no accident. And no one in authority wants to find out...
IMHO, this story is not going away; and it's due to the tenacity of the blogging community, people like Spitzer, Black and Partnoy, and the following folks, including a former member of the Board of Directors of two of this nation's largest monoline insurers (FGIC and Ambac), senior partner Thomas Adams of Paykin, Krieg and Adams, LLP. Here's a link to Adams' latest post about all of this over at Naked Capitalism, just today: "Body Count From Goldman Actions Crosses Into Criminal Territory."
Body Count From Goldman Actions Crosses Into Criminal Territory
Wednesday, December 23, 2009
By Thomas Adams, at Paykin Krieg and Adams, LLP, and a former managing director at Ambac and FGIC.
Readers may have noticed Janet Tavakoli's recent article at Huffington Post on Goldman Sachs and AIG. While much of it covers territory that Yves and I already wrote about previously, Ms. Tavakoli stops short of telling the whole story. While she is very knowledgeable of this market, perhaps she is unaware of the full extent of the wrongdoings Goldman committed by getting themselves paid on the AIG bailout. The Federal Reserve and the Treasury aided and abetted Goldman Sachs in committing financial and ethical crimes at an astounding level.
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To help hasten the housing market collapse, Goldman ran a huge mortgage lending and issuance program with low quality loans virtually designed to fail, including dozens of deals backed by completely toxic non-prime second lien loans (these loans help pump up the housing bubble and let borrower's suck the equity out of their homes). In soliciting AIG's insurance for the CDOs, Goldman was not disclosing that the transaction was highly speculative. Goldman was offering AAA, or even super AAA bonds. Goldman designed and sold these bonds and purchased a rating from the rating agencies that represented the risk to be AAA. In fact, the bonds did not provide real protection, despite their AAA rating, and when the housing market turned down, the AAA CDO bonds collapsed in value exactly as they were designed to do.
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Months before AIG received its bailout, Goldman was well aware of the risk that insurers would pay less the full amount of the CDOs - Goldman was advising FGIC in its restructuring efforts and FGIC negotiated a CDO commutation for ten cents on the dollar. Goldman mitigated the risk of downgrade by dealing exclusively with AIG, which was required to post collateral in the event of a downgrade.
Goldman also misled shareholders and investors by proclaiming that they were not exposed to toxic CDOs because they were hedged with AIG, even as the bond insurers (AIG's direct competitors in the CDO market), were getting downgraded.
--SNIP--
Goldman made a huge bet ...
--SNIP--
...Their bet only succeeded because they were able to force the government into bailing out AIG.
In addition, the Federal Reserve and the Treasury, by helping Goldman Sachs to profit from homeowner and investor losses, conceal their misrepresentations to shareholders, destroy insurers by stuffing them with toxic bonds that they marketed as AAA, and escape from the consequences of making a risky bet, committed a grave injustice and, very likely, financial crimes. Since the bailout, they have actively concealed their actions and mislead the public. Goldman, the Fed and the Treasury should be investigated for fraud, securities law violations and misappropriation of taxpayer funds. Based on what I have laid out here, I am confident that they will find ample evidence.
So, before you start defending that "pillar of American capitalism," Goldman Sachs, or defending the Federal Reserve--which many associated with this community are now doing--and telling me this is a conspiracy theory (which it clearly is NOT), I strongly suggest you review the commentary above, but in the context of these additional stories, below, as well. You see, Goldman did lie to the public about the extent of their exposure to the AIG matter, all along in fact, as is self-evident in this piece from the Wall Street Journal, just 11 days ago: "Goldman Fueled AIG Gambles."
Goldman Fueled AIG Gambles
by Seena Ng and Carrick Molenkamp
Wall Street Journal
December 12, 2009
...A Wall Street Journal analysis of AIG's trades, which were on pools of mortgage debt, shows that Goldman was a key player in many of them, even the ones involving other banks.
Goldman as Middleman
Goldman originated or bought protection from AIG on about $33 billion of the $80 billion of U.S. mortgage assets that AIG insured during the housing boom. That is roughly twice as much as Société Générale and Merrill Lynch, the banks with the biggest exposure to AIG after Goldman, according an analysis of ratings-firm reports and an internal AIG document that details several financial firms' roles in the transactions.
In Goldman's biggest deal, it acted as a middleman between AIG and banks, taking on the risk of as much as $14 billion of mortgage-related investments. Then Goldman insured that risk with one trading partner--AIG, according to the Journal's analysis and people familiar with the trades.
In fact, Pulitzer Prize winning NYT journalist Gretchen Morgenson has been calling former Treasury Secretary Hank Paulson's ethics into question for quite some time, as noted right here: "Paulson's Calls to Goldman Tested Ethics."
Paulson's Calls to Goldman Tested Ethics
By GRETCHEN MORGENSON and DON VAN NATTA Jr.
New York Times
August 9, 2009
...Constant Contact
In the ethics agreement that Mr. Paulson signed in 2006, he wrote: "I believe that these steps will ensure that I avoid even the appearance of a conflict of interest in the performance of my duties as Secretary of the Treasury."
While that agreement barred him from dealing on specific matters involving Goldman, he spoke with Mr. Blankfein at other pivotal moments in the crisis before receiving waivers.
Mr. Paulson's schedules from 2007 and 2008 show that he spoke with Mr. Blankfein, who was his successor as Goldman's chief, 26 times before receiving a waiver.
On the morning of Sept. 16, 2008, the day the A.I.G. rescue was announced, Mr. Paulson's calendars show that he took a call from Mr. Blankfein at 9:40 a.m. Mr. Paulson received the ethics waiver regarding contacts with Goldman between 2:30 and 3 the next afternoon. According to his calendar, he called Mr. Blankfein five times that day. The first call was placed at 9:10 a.m.; the second at 12:15 p.m.; and there were two more calls later that day. That evening, after taking a call from President Bush, Mr. Paulson called Mr. Blankfein again...
Then, of course, there's Matt Taibbi from Rolling Stone: "The Big Takeover."
The Big Takeover
Rolling Stone
MATT TAIBBI
Posted Mar 19, 2009 12:49 PM
...Freed from all capital restraints, sitting pretty with its man running the Treasury, Goldman jumped into the housing craze just like everyone else on Wall Street. Although it famously scored an $11 billion coup in 2007 when one of its trading units smartly shorted the housing market, the move didn't tell the whole story. In truth, Goldman still had a huge exposure come that fateful summer of 2008 -- to none other than Joe Cassano.
Goldman Sachs, it turns out, was Cassano's biggest customer, with $20 billion of exposure in Cassano's CDS book. Which might explain why Goldman chief Lloyd Blankfein was in the room with ex-Goldmanite Hank Paulson that weekend of September 13th, when the federal government was supposedly bailing out AIG.
When asked why Blankfein was there, one of the government officials who was in the meeting shrugs. "One might say that it's because Goldman had so much exposure to AIGFP's portfolio," he says. "You'll never prove that, but one might suppose."
Market analyst Eric Salzman is more blunt. "If AIG went down," he says, "there was a good chance Goldman would not be able to collect." The AIG bailout, in effect, was Goldman bailing out Goldman.
Eventually, Paulson went a step further, elevating another ex-Goldmanite named Edward Liddy to run AIG -- a company whose bailout money would be coming, in part, from the newly created TARP program, administered by another Goldman banker named Neel Kashkari.
V. REPO MEN
There are plenty of people who have noticed, in recent years, that when they lost their homes to foreclosure or were forced into bankruptcy because of crippling credit-card debt, no one in the government was there to rescue them. But when Goldman Sachs -- a company whose average employee still made more than $350,000 last year, even in the midst of a depression -- was suddenly faced with the possibility of losing money on the unregulated insurance deals it bought for its insane housing bets, the government was there in an instant to patch the hole. That's the essence of the bailout: rich bankers bailing out rich bankers, using the taxpayers' credit card.
This story is not going away. As time passes, more details are uncovered by even more credible sources and names. And, IMHO, that's a good thing...