The end of the beginning

[Cees Binkhorst]

REPLY TO: D66 at nic.surfnet.nl

200 West Street, Manhattan in trouble?

Hoe kun je een huis verzekeren, waarvan je weet dat het in de fik gaat?
Hoe kun je een huis verzekeren, waarvan je geen eigenaar bent?

Door de verzekeringspolis CDO te noemen en in plaats van het huis, de
hypotheek te verzekeren.
O ja, én de wet die bepaalt dat je een huis, waarvan je wéét dat ie in
de fik gaat, NIET MAG verzekeren buiten werking is gesteld.
Hiermee vervalt dan natuurlijk ook de polisvoorwaarde dat je een
brandend huis NIET KUNT VERZEKEREN (vóórwetenschap is dan normaliter
zelfs strafbaar).

Hoe kun je dat voorkomen?
Héél moeilijk, maar het helpt om te weten dat er een verzekeringspolis
bestaat en tussen wie die afgesloten is.
Een centrale clearing zou dus helpen.
Het zou zeker voorkomen dat een bedrijf als AIG achteraf blijkt voor
triljoenen dollars van die polissen afgesloten te hebben

Groet / Cees

- If we allow the unscrupulous to buy fire insurance on other people’s
houses, the incidence of arson would rise sharply.
- This case should be a slam-dunk, but years of deregulation have
narrowed the ground for lawsuits.
- This case will raise the level of public anger and help move the
financial reform proposals through the Senate.
- Minimize insider dealing by pushing more transactions onto central
clearinghouses and exchanges.


  April 16, 2010, 3:31 pm
What Goldman’s Conduct Reveals
http://roomfordebate.blogs.nytimes.com/2010/04/16/what-goldmans-conduct-reveals/
By THE EDITORS

The Securities and Exchange Commission filed a civil lawsuit against
Goldman Sachs for securities fraud on Friday, charging the bank with
creating and selling mortgage-backed securities that were designed to fail.

According to the complaint, Goldman let John Paulson, a prominent hedge
fund manager, select mortgage bonds that he wanted to bet against
because they were most likely to lose value and packaged those bonds
into the “Abacus” investments, which were sold to investors like pension
funds. As those securities plunged in value, Goldman and the Paulson
hedge fund made money on their negative bets, while the Goldman clients
who bought the investments lost billions of dollars.

Is this chain of events surprising? The S.E.C. is suing Goldman Sachs,
but could regulation or monitoring of these financial instruments have
prevented such losses? What kind of regulatory structure would need to
be put in place?

     * Michael Greenberger, former commodities regulator
     * Lynn A. Stout, professor of corporate and securities law, U.C.L.A.
     * Nicole Gelinas, Manhattan Institute
     * Yves Smith, financial analyst
     * Douglas Elliott, Brookings Institution
     * Megan McArdle, Asymmetrical Information
=============================================
Accountability, at Long Last
Michael Greenberger

Michael Greenberger is a professor at the University of Maryland School
of Law and a former director of trading and markets at the Commodity
Futures Trading Commission.

If Sept. 15, 2008, the day Lehman Brothers was allowed to fail, marks
the Pearl Harbor or widely acknowledged onset of the present Great
Recession (in Franklin Roosevelt’s words “a date which shall live in
infamy”), April 16, 2010 may be deemed the equivalent of the U.S.
victory in the crucial Battle of Midway in 1942 or the day the U.S.
neutralized the Japanese fleet.

On April 16, 2010, the S.E.C. announced its enforcement action against
Goldman Sachs alleging the improper marketing of what the S.E.C. alleges
was the sale of two evenly matched, but highly conflicting, investments:
essentially bets for and against the proposition that subprime
(non-creditworthy) mortgage borrowers would pay back their loans.
Goldman is alleged to have profited substantially from those who bet
against subprime repayment while aggressively marketing to its other
customers bets in favor of repayment.

Let’s be clear. Goldman Sachs vigorously denies the S.E.C.’s
allegations, and doubtless it will fight the action with the utmost
vigor. It is certainly entitled to do so.

However, what makes the S.E.C. enforcement action a landmark is that it
responds to a widely held desire on the part of the American taxpayer:
accountability.

The underpinnings of that desire is that the present crisis, including
high unemployment and devastating economic insecurity accompanied by
skyrocketing deficits, was not caused by the average American. But, it
is the average American who has had to foot the bill for restoring the
economy.

What is especially aggravating is that those who unmistakably did cause
the crisis, i.e., the “pillars of Wall Street,” are now stronger and
more profitable than ever before. And the impression is that Wall Street
has returned to “business as usual,” once again using the same
investment strategies that brought on the fall 2008 deluge.

So the key question from Main Street is: where is the accountability? If
the average American fails miserably in a business or professional
enterprise, there are consequences, e.g., firing or bankruptcy. Up to
today, it appeared that those traditional hallmarks of failure did not
apply to Wall Street or those who were responsible for regulating Wall
Street.

Just last week, Alan Greenspan, the former Fed chairman, and Robert
Rubin, the former Treasury Secretary and Citigroup officer, said they
were not to blame for the meltdown even though both prevented regulation
of the kind of bets Goldman Sachs is now accused of misusing.

More galling is the constant refrain from both Wall Street C.E.O.s and
former regulators that no one could have predicted the crisis. However,
the S.E.C. allegations are premised on the fact that hedge funds and
Goldman Sachs itself were so convinced of cataclysmic failure that they
were looking for investment vehicles that would profit each time a
homeowner defaulted on his or her mortgage.

In other words, there were competent and smart people making billions
because they could foresee the obvious: people with poor credit would
not be able to repay their home loans.

In short, it was not that no one knew. Savvy insiders knew.

We do not know the success of the S.E.C.s actions today. But, if
successful, you can be sure that this will be the beginning of what
those average Americans suffering during this Great Recession are
desperately seeking: accountability.

As Winston Churchill said after early Allied victories in World War II:
“This is not the end or even the beginning of the end; but it is the end
of the beginning.” We may now be at the beginning of rewarding
competence and sanctioning ineptness or worse.
=============================================

The Natural Result of Deregulation
lynn stout

Lynn A. Stout is the Paul Hastings professor of corporate and securities
law at U.C.L.A. and an expert on corporate governance.

If the allegations against Goldman Sachs are true, then much of the
blame for investors’ losses in the Abacus deal can be laid at the feet
of an obscure statute passed by Congress in 2000, the “Commodities
Futures Modernization Act.”

In one dramatic move, that act eliminated a longstanding legal rule that
deemed derivatives bets made outside regulated exchanges to be legally
enforceable only if one of the parties to the bet was hedging against a
pre-existing risk.

This traditional derivatives rule against purely speculative derivatives
trading has a parallel in insurance law, because insurance, like
derivatives trading, is really just a form of betting. A homeowner’s
fire insurance policy, for example, is a bet with an insurance company
that your house will burn down.

Under the rules of insurance law, you can only buy fire insurance on a
house if you actually own the house in question. Similarly, under the
traditional legal rules regulating derivatives trading, the only parties
who could use off-exchange derivatives to bet against the Abacus deal
would be parties who actually held investments in Abacus.

By eliminating this centuries-old rule in the name of “modernization,”
Congress created enormous problems of moral hazard in the off-exchange
derivatives market. Imagine, for example, if we allow the unscrupulous
to buy fire insurance on other people’s houses; the incidence of arson
would rise dramatically.

Similarly, by allowing an unscrupulous hedge fund to use derivatives to
bet against an Abacus investment vehicle it didn’t own, the Commodities
Futures Modernization Act invited that hedge fund to work with Goldman
Sachs to make sure that Abacus would indeed fail — as it did.

Sadly, greed is a constant in human nature. We’re not likely to
eliminate it soon. But we can at least keep it in check. It’s time for
Congress to address the problem of moral hazard in derivatives betting
by repealing the Commodities Futures Modernization Act.
======================================================

A Third Party Problem
Nicole Gelinas

Nicole Gelinas, a contributing editor to the Manhattan Institute’s City
Journal, is the author of “After the Fall: Saving Capitalism from Wall
Street — and Washington.”

The government’s charges against Goldman and its employees — if true —
are not shocking. People lie. The Securities and Exchange Commission can
do better at enforcing the laws that make liars think twice. But
policing fraud cannot be our first line of defense against financial excess.

The S.E.C. says that Goldman, in early 2007, told mortgage-bond buyers
that the consultant who helped create their securities had their best
interests at heart. The consultant was taking advice, at Goldman’s
behest, from another investor who would profit when the securities went
bust.

Synthetic collateralized debt obligations are hard, but dishonesty with
clients is easy. Raking through the details of the case uproots far
deeper problems, though.

First, the obscure third parties that helped Goldman and other big banks
sell complex deals encouraged investors to suspend necessary skepticism.

The German bank that bought the mortgage securities, IKB Deutsche
Industriebank, fancied itself a sophisticated firm. So why did it rely
on a Goldman consultant, ACA Management, as a “portfolio selection
agent?” And why did sophisticated investors need third parties to
“insure” the securities?

Just as Bernie Madoff’s investors would have done better not to rely on
advisers to tell them that Bernie was O.K., IKB would have been better
off performing its own analysis of American mortgage markets.

But obscure third parties were the spawn of Washington’s bank bailouts
starting in the 1980s. The expectation of government support
artificially fed Wall Street growth — so there was plenty of cheap money
to trickle down from the too-big-to-fail banks to the ever-more-creative
little guys.

Second, applying old trading and capital rules to new financial markets
would have reduced hanky-panky.

Goldman was able to “customize” securities, allegedly committing fraud
under cover of the opacity that customization provided, because the
securities did not trade on a public marketplace. Such a marketplace
would have demanded simplicity from Goldman in creating the securities.
Thousands of investors, rather than a few hand-picked third parties,
could have analyzed and priced them.

The same is true in credit-derivatives markets. Opacity serves only the
banks, which reap higher fees from customers who remain in the dark.

Enforcing justice is vital to markets. But Washington should help
investors, too, by reducing opportunities to thwart justice. We need a
return to simplicity. Congress should direct regulators to impose
trading, disclosure and capital rules consistently across financial
firms and instruments — so that markets can smash the repositories for
secrets that imperil the economy.
======================================================================

Immoral, Destructive Behavior

Yves Smith writes the blog Naked Capitalism. She is the head of Aurora
Advisors, a management consulting firm, and the author of “Econned: How
Unenlightened Self Interest Undermined Democracy and Corrupted Capitalism.”

Strange as it may seem, the Securities and Exchange Commission’s lawsuit
against Goldman Sachs for selling collateralized debt obligations
(C.D.O.) designed to fail illustrates what a long and difficult haul it
will be to reform the financial services sector.

Goldman allowed hedge fund manager John Paulson to sponsor a C.D.O. The
sponsor can influence how the C.D.O. is constructed, the notion being
that the sponsor will act in ways that help all the other investors. But
this C.D.O. was allegedly a Trojan horse for Mr. Paulson to take a large
short position, betting against the very same C.D.O. he was creating.

But his intent was not disclosed. And, not surprisingly, the deal was a
complete wipeout, with Mr. Paulson collecting a billion dollars of
winnings at the expense of investors who had been kept in the dark and
would almost certainly have turned down the deal if they had had the
full picture.

By any commonsense standard, this case should be a slam-dunk. However,
despite tough talk by the Obama administration on financial reform, it
is not mounting a criminal case against Goldman.

Moreover, the S.E.C. has long had a difficult time winning complex
financial fraud cases. While critics like to argue that the S.E.C. is
not up to the task, the situation is more complex. Years of deregulation
have narrowed the ground for lawsuits considerably. What’s more,
structured credit is a new area of litigation. Thus the S.E.C. is also
mounting its case in an arena where there are few precedents to rely upon.

If the S.E.C. loses its case against Goldman, it will be too easy to
draw the wrong conclusion: not that the S.E.C. failed, but that the
financial services industry succeeds all too well in its campaign to
tear down the rules needed to make markets safe for investors.

No matter what happens to this particular lawsuit, it’s critical not to
lose sight of the fact that immoral, destructive behavior has become
deeply entrenched on Wall Street, and it will take concerted action to
root it out.
======================================================================

The Current Regulatory Battle
Douglas Elliott

Douglas Elliott, a former investment banker, is a fellow in the
Initiative on Business and Public Policy at the Brookings Institution.

We will not know for some time how important this is, because it depends
on the strength of the government’s case and the extent to which this is
a forerunner of lawsuits against other firms.

It is important to remember that complicated securities fraud cases can
be difficult to prove. But this could be a watershed event if the S.E.C.
has a strong case and follows this suit with broadly similar lawsuits
against other banks.

In the short run, the suit is likely to strengthen the hand of the
Democrats who are pushing financial reform legislation. This case will
raise the level of public anger still further, providing fuel to move
the proposals through the Senate.

I already thought the odds of passage were high; this increases the odds
further. However, politics is always difficult to forecast. For example,
the Democrats could overplay their hand and succeed in completely
uniting the Republicans, leading to a successful filibuster that kills
the bill, at least for now.

If Democrats play their hand right, though, the suit will make it harder
for Republicans to hold all 41 members in a Senate filibuster vote or to
break away one or more Democrats. This is not a good time for a
politician to be seen as defending Wall Street.

It is not clear that a different regulatory structure would have made a
difference in this case. If the S.E.C.’s allegations are correct, the
actions were illegal under current law. The S.E.C. could, perhaps, have
done a better job of catching such actions earlier, but that is a matter
of execution not broad structure.
=======================================================================

Undermining Trust in Markets
megan mcardle

Megan McArdle blogs at Asymmetrical Information on The Atlantic magazine
Web site.

In one respect, this is not shocking at all. Goldman Sachs is publicly
perceived to have not merely weathered this crisis well, but to have
actually profited by it. Public anger is high. It was only to be
expected that prosecutors and regulators would go head-hunting. But the
details of these particular charges are rather surprising.

If the allegations are true, Goldman Sachs allowed a third party with a
material economic interest to determine the structure of securities it
sold. By itself, this is not worrisome — but according to the S.E.C.,
Goldman did not disclose this relationship, instead allowing investors
to think that it had been structured by a disinterested analyst.

One side of the transaction had dramatically more information than the
other — a situation which most market regulation is supposed to prevent.
If the S.E.C. is correct, this isn’t merely evidence of a crime, but of
a distressingly cavalier attitude toward basic rules of market conduct.

Critics have long accused the bulge-bracket banks of using their market
position to self-deal at the expense of ordinary investors. But these
charges suggest that heavy-handed use of market muscle may have slipped
over the line into outright fraud.

It’s clear that the sort of thing described in the complaint shouldn’t
happen. It’s less clear how we can prevent them. This sort of insider
dealing is extremely difficult to police. We will never get to a market
so well-regulated that bankers can’t cut deals for favored clients with
a nudge and a wink.

What we can do is minimize the opportunities for such activity by
pushing as many transactions as possible onto central clearinghouses and
exchanges. These are no panacea — just witness the deals that equity
desks were able to cut for special clients in the late 1990s. But the
less transparency there is, the easier it is to cut special deals for
favored clients at the expense of other investors.

This isn’t just bad for the investors; it’s corrosive to the trust that
markets need to function well. It also erodes the public trust in the
major investment banks. Those banks have fought fiercely against
regulation designed to lessen their market power. As Congress moves
towards passage of comprehensive financial reform, they, and the
bankers, would do well to remember that without strong trust in markets,
we’d all be a lot worse off.

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