subject: Who Needs Bank Reform...send Goldman Sachs To Prison [print this page] Goldman Sachs CEO Lloyd Blankfein was questioned by Senator Levin on April 27, along with other members of the Senate Subcommittee on Investigations. Blankfien was quested about his company's activities regarding CDOs sales. When asked repeatedly if selling securities that the company considered worthless (as told in emails) is ethical, Blankfein would not answer the question and replied, "Senator, there is a lot in your question...and I am sure we will spend a lot of time on different parts of it." Levin again questioned him, wanting Blankfein to take responsibility for what his company had done. Blankfein merely said, seemingly contemptuously, "In the context of market- making, that is not a conflict. Clients shouldn't care what our views are."
Congress is trying to enact Bank Reform. That would just be more laws that these bankers and brokerages feel they can ignore. We have laws already against what Goldman Sachs did. The SEC must enforce the laws that were broken and send the Goldman Sachs executives to prison. They were involved in fraud. People go to prison for fraud. Send them to prison already.
What exactly is the definition of fraud? Wikipedia says that fraud is "an intentional deception made for personal gain or to damage another individual." How does fraud apply in this case? Look at what these banks and brokerages did. Brokerages and banks were selling CDOs. In its heyday in 2007, sales were over $500 billion. These sales were made to pensions funds, 401k's, individuals, etc. As an example, the California Public Employees' Retirement System, the largest public pension fund in the nation, invested $140 million. A retirement fund such as this must put its cash in conservative, low-risk investments. Afterall, these are retirement funds.
Just what is a CDO? Wikipedia states that a CDO is "a type of structured asset-backed security (ABS) whose value and payments are derived from a portfolio of fixed-income underlying assets." The operative words here are UNDERLYING ASSETS. What did the brokerages and banks do? They had thousands of mortgages from individuals, prime and sub-prime, totaled their value, put them into "packages," and sold them to investors. labeling them as AAA rated securities. These packages were known as collateralized because they had a collateral (asset) underlying them (mortgages). CDOs were initially created to provide liquidity for the economy by enabling banks and brokerages to sell off their mortgage debts, thereby freeing up capital to loan. Seems ok, true?
Had banks and brokerages stopped there, no one would have said a word. Package your debt and sell it off to another institutional investor. Fine. But greed is a horrible human characteristic. Banks and brokerages took these same mortgages and packaged them again and again and again into CDOs, until finally, for many of these CDOs, there were no longer any assets underlying them. The fact that fewer and fewer CDOs were able to find insurance should have been a sign to the banks and brokerages that CDOs should not be sold, and certainly not sold to pension funds, IRAs, or retirement accounts. When the mortgages that were originally associated with these CDOs began to default because there were no real assets unlying them, so many smaller investors life savings were wiped out.
This is not the first instance of CDOs being packaged and sold as AAA investments. Banks and brokerages packaged student loans in the same fashion and sold them as AAA rate securities to pensioners, knowing that the student loans default rate was very high. Just 2 years ago, banks and brokerages were selling auction rate securities to retirees and claiming them to be tax-free money market accounts -- telling their clients they were in cash! That was a 300 million dollar fiasco.
The problem with banks and brokerages is that no one goes to prison. Instead the SEC just fines them for violating the law. With auction rate securities, clearly fraud, the brokerages received expensive fines. Wachovia Securities paid $40 million in fines. But these brokerages and banks consider fines as a cost of doing business. Most companies consider payroll, rent, and advertising as a cost of doing business. Brokerages consider getting fined for fraud cost of doing business.
Put Goldman Sachs in prison. If the SEC put Goldman executives in prison, we wouldn't need to pass bank reform. The laws are already there and being broken and ignored by these companies. Bank reform adds more laws brokerages like Goldman Sachs will get around. At the Senate Subcommittee hearing it was very clear that these firms have an "above the law" mentality. Why enact more laws these firms will just ignore. The answer is easy...send the executives to prison with Bubba as their cell mate. Bubba will show them the "extra-curricular activity" they need. The SEC should stand firm and put these guys in prison. Bank reform isn't needed. We just need a few Bubbas in prison to put these bankers in their place.
