B12 Solipsism

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Looters in Loafers

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Goldman Sachs, aka Gold Sacks, aka corporate criminals, are not having a good PR month. They are an easy target – so greedy, so arrogant that even their allies are keeping mum. Whether any real penalties will be levied against Goldman Sachs remains to be seen.

Financial Blues Brothers

Paul Krugman writes, in part:

Most discussion of the role of fraud in the crisis has focused on two forms of deception: predatory lending and misrepresentation of risks. Clearly, some borrowers were lured into taking out complex, expensive loans they didn’t understand — a process facilitated by Bush-era federal regulators, who both failed to curb abusive lending and prevented states from taking action on their own. And for the most part, subprime lenders didn’t hold on to the loans they made. Instead, they sold off the loans to investors, in some cases surely knowing that the potential for future losses was greater than the people buying those loans (or securities backed by the loans) realized.

What we’re now seeing are accusations of a third form of fraud.

We’ve known for some time that Goldman Sachs and other firms marketed mortgage-backed securities even as they sought to make profits by betting that such securities would plunge in value. This practice, however, while arguably reprehensible, wasn’t illegal. But now the S.E.C. is charging that Goldman created and marketed securities that were deliberately designed to fail, so that an important client could make money off that failure. That’s what I would call looting.

And Goldman isn’t the only financial firm accused of doing this. According to the Pulitzer-winning investigative journalism Web site ProPublica, several banks helped market designed-to-fail investments on behalf of the hedge fund Magnetar, which was betting on that failure.

So what role did fraud play in the financial crisis? Neither predatory lending nor the selling of mortgages on false pretenses caused the crisis. But they surely made it worse, both by helping to inflate the housing bubble and by creating a pool of assets guaranteed to turn into toxic waste once the bubble burst.

[Click to continue reading Op-Ed Columnist – Looters in Loafers – NYTimes.com]

Continuing to Talk

and the part that interests me, as a non-Wall Street banker, will the proposed financial reforms stop future meltdowns?

The obvious question is whether financial reform of the kind now being contemplated would have prevented some or all of the fraud that now seems to have flourished over the past decade. And the answer is yes.

For one thing, an independent consumer protection bureau could have helped limit predatory lending. Another provision in the proposed Senate bill, requiring that lenders retain 5 percent of the value of loans they make, would have limited the practice of making bad loans and quickly selling them off to unwary investors.

It’s less clear whether proposals for derivatives reform — which mainly involve requiring that financial instruments like credit default swaps be traded openly and transparently, like ordinary stocks and bonds — would have prevented the alleged abuses by Goldman (although they probably would have prevented the insurer A.I.G. from running wild and requiring a federal bailout).

Read the rest

Written by Seth Anderson

April 19th, 2010 at 6:57 am

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  1. […] lil’ Goldman Sachs didn’t get a memo from the S.E.C. before the case went public. Of course, when the police arrest a serial killer they give at least 48 hours to the suspect so […]

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