Goldman vs Congress


Hmm. Do you think Goldman saw THAT coming?

Markets all over the world reacted with red to Friday’s news that the U.S. Securities and Exchange Commission (SEC) had lowered the boom on Goldman Sachs. The SEC has technically accused Goldman of fraud. It alleges that Goldman helped create a collateralised debt obligation (CDO) made up of subprime mortgages.

Of course there’s no fraud in that. A lot of people were doing it back then. The alleged fraud comes from the fact that the security in question was partly designed by Paulson and Co., a hedge fund that then took an enormous position betting against subprime backed CDOs. Goldman did not disclose to investors that the people partially responsible for the securities selected in the CDO were themselves betting against the subprime market.

There are lots of ways of reading this. One is straightforward. Maybe it was fraud. Maybe not. The lawyers will sort that out.

Another way of reading it is that it’s Chicago-style politics on Wall Street. The Obama Administration would like to push a “tough” financial reform package through the Congress before the summer recess. That way, all those vulnerable Democrats who voted yes on Obamacare can change the subject and show how tough they’ve been on Goldman.

A third way to think about the move is that it roughly conforms to Bill’s theory that large organisations seek a way to destroy themselves. It works with Empires. But why not financial institutions as well? Or economies? Goldman may have crossed a line somewhere.

But will Washington, in its haste to get back in the public’s good graces, gut the rally in stocks that’s been on since March of last year? It would be ironic. And moronic. And thus fully consistent with standard public policy.

The final, more cerebral way to view the suit against Goldman is as a turf war between the financial oligarchs of Wall Street and the old line Nation State Builders in Washington. As our friend John Robb asked over the weekend, “Does this signal a reversal in the titanic life and death struggle between nation-states and the global financial oligarchy? No.”

“The amount of lawfare needed to reverse the course of this war before sovereign defaults litter the battlefield is immense: thousands of trials, trillions in assessed damages, and tens of thousands sent to jail. Even that might not be enough without a long campaign of financial COIN (counter insurgency) to pacify and disassemble the to-big-to-fail banks and hedge funds. “

Robb’s thesis, if we understand it correctly, is that the banksters of the world have gradually taken over a larger share of the economy’s profits (if not its productive aspects). They have also managed to socialise their losses while profiting immensely from the financialisastion of the economy (largely at the expense of manufacturing jobs and the Middle Class). So now the Feds are fighting back.

That all might be accurate. Personally, we’d view any attempt to put Goldman in its place with a grain of salt. The U.S. government is littered with former investment bankers. And for an institution that needs to sell over $3 trillion in debt in the next two years, Washington is going to need Wall Street on its side. Besides, who do you think funds the campaigns of national politicians? They know where their bread is buttered.

The Goldman story is important to Australia if it becomes the sort of thing that leads to another round of de-leveraging globally. Aussie indices are already trapped at the high end of a trading range they’ve been in for the last year. But if Wall Street is spooked about government stepping up its war on everything, so-called “riskier” assets may get sold.

It’s worth noting that gold fell nearly $23 on the day. We don’t view it as a risky asset. And you should have a look at Greg Canavan’s article below for what else is going on with gold. But other precious and base metals took a fall as well last week. And if there is a lot of leverage in commodity prices—as there was in 2007 and 2008—a general deleveraging (and a U.S. dollar rally) could do a lot of damage very quickly. And there’s China.

The Wall Street Journal is reporting that China’s State Council is cracking down even harder on speculative activity in the country’s red-hot property market. The Journal reports that, “In an indication that Beijing is increasingly worried about runaway property prices, the State Council, the country’s cabinet, said Saturday that local governments can take temporary measures to limit the number of property purchases each investor makes within a certain period.”

“The steps follow moves by the Chinese central government Thursday to raise minimum down-payment levels and mortgage rates for certain home buyers, after data showed property prices in 70 of China’s large and medium-sized cities rose 11.7 per cent in March from a year earlier, the fastest pace since China began releasing the data in July 2005. The government’s notice Saturday appears aimed at encouraging local governments and banks to even more strictly control credit for speculative property transactions.”

This all comes after the Council last week directed banks to raise the minimum down payment on second homes from 40% to 50%. But if you find it strange and ironic that a communist state has become addicted to the revenues from selling land (dare we call it private property) you are not alone. Maybe if the government wasn’t so busy subsidising non-competitive enterprises for the sake of gaining global market share, it wouldn’t be so revenue hungry that it would have to perpetuate a property bubble.

But hey, it is tough on governments everywhere these days, from the totalitarians to the corporatists to the mildly wanna-be social welfare Statists (here in Australia). The common problem: too many promises and not enough money.

Later this week we’re going to show you in exact detail why we think China is the bigger worry for Aussie investors and what, in very general terms, a grand economic survival strategy will be for the coming blow up.

Dan Denning
for The Daily Reckoning Australia

Dan Denning
Dan Denning examines the geopolitical and economic events that can affect your investments domestically. He raises the questions you need to answer, in order to survive financially in these turbulent times.


  1. I expect an apology from Bonner over his last story which was shilling for Goldman Sachs.

  2. Goldman Sachs, one of the biggest US banks ( I assume it is a US company ) is accused of fraud & the USD rallies? the same USD that is the obligation of the Federal Reserve & thus the US government which is, more or less, run by Goldman Sachs alumni?

    Is the entire world completely off its rocker!?

    I think not, something wicked this way comes.

  3. Well they couldn’t have picked a more hated institution, see also that Germany and the UK have joined the queue to have a bite at them if the evidence looks “strong enough”. Sure looks like governments wanting to show how tough they are on fraudulent banksters, but as that would include all of them sure looks like election time point scoring on the Squid. Then Goldman will pay some trivial fine, much lower than what they made on the deal, later when everyone has forgotten about it. Justice is served.

    The hypocrisy is stomach churning as no reform of any actual benefit or substance seems to be on the table, again as we know because of who buys the governments. One has to wonder at either the collective stupidity or total ignorance of the various suckered electorates.

  4. What a surprise. Seriously, they deserve it after helping themselves to the bail out money. Were they that stupid to think that government money comes with no strings attached? For a supposed “smart” firm that was monumentally stupid. Enjoy the show!

  5. A simple case of gamekeeper turned poacher, or a company making a market rather than playing in a market.
    This will be settled in time, and it will cost Goldman’s a pretty penny too, the U.K and German governments reckon Goldman’s owes them plenty and they will not give up until restitution has been paid. In the case of the U.K, it can’t afford not to. In the case of Germany with the liabilities of its Euro commitments to its’ partner nations, it can’t afford not to either.

  6. Don,

    Their cash wallet was empty at the time. Goldman’s needed bailout money to keep the lights on and selling into the market at depressed prices to other cash starved institutions that could not afford to buy them was out of the question. Needs must and at the time their need was mustered.

  7. @Joe – I don’t deny that they didn’t need the money but seriously, they should have let them go under. Their wallet was empty – who’s fault was that? No one forced them to back risky positions and assets, they chased the big return and incurred the big risk and then were bailed up right when they were going to get their comeuppance. Yes, it would have had a flow on effect and things would have gone downhill quickly but seriously is that a bad thing? Now you have Goldman out there indulging in the same risk taking as before, none the wiser and benefiting hugely as a result. Let me put it another way, if Goldman went to the wall then another would have taken their place. It’s like if a grocery store closes down in an area – that doesn’t mean there will never be another one, just not that one. As long as the demand for food is there, there will be a supplier of food. The same goes for Goldman, as long as people have a desire to back risky assets there will be a Goldman – unfortunately we are stuck with this one and I hope the government tears em a new one.

  8. @Don – you didn’t mention that one of the first scalps taken was Goldman’s arch-nemesis, Lehman Bros. So really, you could almost argue the GFC benefitted Goldman in the end – they came out alive and with a larger share of the market.

    I agree with Dan’s assessment, pollies just want to look like they’re tough on the banker’s corruption, while ignoring their own. I expect either a) Goldman will get a slap on the wrist, or b) get slapped in the face then have the government slip them a little something under the table afterwards. After all, who’s howling at Brown for selling gold in the trough? Or at Rudd for bribing through more centralisation of health?

  9. @Gary – couldn’t agree more. As far as the hospitals go, what a joke that was. Seriously, the papers should have put it in this light:

    States to Rudd:”Oh please Kevin, don’t take the hospitals off us!!! We love getting a hosing every time people complain about waiting lists, the nurses strike, incompetent doctors are found *cough* Patel *cough* and funding is found to be inadequate. Please, we don’t want to lose the smacking we take in the polls as a result.”

    Now they have ended up with the best possible outcome, they get to “run” them but they can blame the Federal government for most of the problems. A joke issue and the outcome was never in doubt and yes the net result will be Ka$ching$ more debt :(

  10. Dan,

    What I want to know now is, who is shorting the Australian housing market? We know the drill now: bank produces MBS; bank employs broker/dealer to sell MBS to rubes (errr…”clients”); bank sets up CDS’ for hedge fund drinking buddies (sorry…”clients”).

    The only step left in this set-up is for the broker/dealers arranging the sale of MBS’ on Australian housing, to warn the rubes that Australian housing is due for a correction. Then, they approach the Big Four Aussie banks and say, “Sorry, the appetite for Australian RMBS has dried up”.

    So, who is setting up the Aussie housing market for a replay of the US market? Is it Goldman again? And WHEN will the sting be executed?

  11. The major issue with health is that it is drowning in a deluge of bureaucracy, and that will not be improved by changing who controls the pursestrings. That seems to be what the government can’t get – injecting more money into an overly bureaucratic and inefficient system (ie public health in Australia) isn’t going to help, and may end up being even more damaging. Unfortunately the way things need to be changed – in terms of downsizing political input, radically modifying the culture of the health departments (so big screw-ups like Patel aren’t missed, then glossed over until it can’t be ignored) and indeed all the way through the professional associations associated with health (like the nurse’s unions, the AMA, all the specialty colleges, etc), and freeing up of the ridiculous training place restrictions (This morning Rudd offers 6000 new GPs. Where are they going to get trained? Who will train them? At the clinics with the doctors who are already slammed by trying to get through as many patients per day as possible, due to the huge need and the way medicare works? After all, they can’t practice in those superclinics you promised now can they Rudd? What if those doctors wanted to be pathologists? Shame that the attempts to downsize pathology hasn’t made much of a splash in the media, but hey, it’s in the background, the public won’t care) aren’t going to happen.

    Sadly, health is a field which has had far too much government interference for far too long, and the AMA and nurses’ unions play along, without realising their “friend” (and themselves) cause most of the problems.

    Finally, to wrap up my rant, Patel should not have been allowed entrance to practice. He didn’t submit the last page of some paperwork which held the disciplinary actions he’d been subjected to. The admin officer didn’t note this and ask for the list. Then when concerns were being raised by clinical staff, admin blocked it. It took someone spilling the beans to the papers that the government swung into action, I think they’d already been told by the staff at the hospital there were concerns.

    Sorry for the rant, but this doesn’t constitute any reason for hope to me. It’s going to be the same old rubbish, just more of it. Government progress, gotta love it.

  12. @Gary – one of the real concerns about Patel is that this was a black and white case of an incompetent surgeon, everyone he touched had massive complications or died. Yet it was swept under the carpet by admin and he managed to skip the country before the cr*p really hit the fan.

    I went out with a nurse for a few years and there are many “Patel Lites” out there, not quite that incompetent but butchers to a lesser degree. There is absolutely no chance of them being outed if it took that much to flush Patel out. So if you go in for surgery make sure you mark yourself clearly which leg/arm/spot needs attention and which one is perfectly healthy!

  13. @Don – Sorry, I work in health, so I already know.

  14. An “octopus wrapped around the face of humanity” as one journalist put it; the New World Banking Order has arrived. In 2009 speculative, uncontrolled derivatives were the Worlds largest market at an estimated 600 Trillion. The Worlds total economic output was an estimated 58.07 Trillion and the total World bond market was an estimated 82.2 Trillion. Yet, there is no “crime” that the bankers can be charged with as they bankrupt citizens and Nations into the New World Order?
    The appropriate criminal charge should be Treason to the American People and our Democratic Republic and Constitution. The members of the Trilateral Commission and the Bilderberg Group in government and banking who conspired to overthrow our soverenity as an independent nation, who conspired to bankrupt our Treasury with three unjust Wars and multinational corporate “rolling” bailouts, conspired to control mass media “free Press” propaganda, conspired and manipulated “financial crisis” for their own gain, conspired to “relocate” American manufacturing/industry and technology, conspired to offshore “American Income Tax”, and who have conspired to enslave American citizens with National debt (about $64,000 per citizen) and personal debt. Deserve the death sentence by firing squad for Treason.
    Obama, your New World Order is Totalitarian and we Patriots, American free citizens, will fight for our Democracy, Independence and Freedom.

    Lawrence Baker
    April 26, 2010

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