By Simon Johnson
Last week, Senator Ted Kaufman (D., DE) gave a devastating speech in the Senate on “too big to fail” and all it entails. A long public silence from our political class was broken – and to great effect. Today’s Dodd reform proposals stand in pale comparison to the principles outlined by Senator Kaufman. And yes, DE stands for Delaware – corporate America has finally decided that its largest financial offspring are way out of line and must be reined in.
Today, the Senator has gone one better, putting many private criticisms of the financial sector – the kind you hear whispered with conviction on the Upper East Side and in Midtown – firmly and articulately on the public record in a Senate floor speech to be delivered (this link is to the press release; the speech is in a pdf attached to that – update: direct link to speech, which will be given tomorrow). He pulls no punches:
“fraud and potential criminal conduct were at the heart of the financial crisis”
He goes after Lehman – with its infamous Repo 105 – as well as the other entities potentially implicated in those transactions, including Ernst and Young (Lehman’s auditors). This is the low hanging fruit – but have you heard even a squeak from the White House or anyone else in the country’s putative leadership on this issue?
And then he goes for the twin jugulars of Wall Street as it still stands: The idea that we saved something, at great expense in 2008-09, that was actually worth saving; and Goldman Sachs.
“[T]his is not about retribution. This is about addressing the continuum of behavior that took place – some of it fraudulent and illegal – and in the process addressing what Wall Street and the legal and regulatory system underlying its behavior have become.”
Our system has long been imperfect, but it used to work much better:
“When crimes happened in the past (as in the case of Enron, when aided and abetted by, among others, Merrill Lynch, and not prevented by the supposed gatekeepers at Arthur Andersen), there were criminal convictions.”
Here’s the most intriguing bit – he challenges the moral authority of those who think they are doing “God’s work” in finance.
“If we uncover bad behavior that was nonetheless lawful, or that we cannot prove to be unlawful (as may be exemplified by the recent reports of actions by Goldman Sachs with respect to the debt of Greece), then we should review our legal rules in the US and perhaps change them so that certain misleading behavior cannot go unpunished again.”
But that’s not all – he actually lays out the parameters of what should be, if our legal institutions still functioned, a compelling case against Goldman.
“Following these transactions, Goldman Sachs and other investment banks underwrote billions of Euros in bonds for Greece. The questions being raised include whether some of these bond offering documents disclosed the true nature of these swaps to investors, and, if not, whether the failure to do so was material.”
“These bonds were issued under Greek law, and there is nothing necessarily illegal about not disclosing this information to bond investors in Europe. At least some of these bonds, however, were likely sold to American investors, so they may therefore still be subject to applicable U.S. securities law. While “qualified institutional buyers” (QIBs) in the U.S. are able to purchase bonds (like the ones issued by Greece) and other securities not registered with the SEC under Securities Act of 1933, the sale of these bonds would still be governed by other requirements of U.S. law. Specifically, they presumably would be subject to the prohibition against the sale of securities to U.S. investors while deliberately withholding material adverse information.”
This sounds like a potential violation of Rule 10b-5 – you are simply not allowed to sell securities in the United States while withholding material adverse information, i.e., what any reasonable investor would want to know (like the true indebtedness of a government, when you are being pitched on a sovereign debt issue). In fact, such actions are frequently considered serious fraud – at least when the people involved aren’t as powerful as Goldman Sachs.
And after having just spent a considerable amount of time with Hank Paulson’s memoir, On the Brink, I have to ask: What did Hank Paulson know (as CEO of Goldman at the time), and when did he know it – regarding the potential misleading sale of Greek government securities to US entities? Goldman reportedly netted $300m from its Greek “swaps” and presumably more from managing subsequent Greek debt issues; this is the same order of magnitude as Mr. Paulson’s payout when he left Goldman (around $500m, tax-free).
Who is Senator Kaufman and what power does he have in this situation? He is not a member of the Senate Banking Committee – and if you think this is a regulatory issue, that reduces the weight of his voice.
But he is a member of the Senate Judiciary Committee and we are discussing here potential crimes – or what should be crimes if the legal system still functioned. He was also a cosponsor of the Fraud Enforcement and Recovery Act (FERA) – which was right on topic – and is an experienced Capitol Hill insider who has studied these issues long and hard. He has also worked closely, over many years, with Vice President Biden.
The tide is turning, but not primarily through the actions of Senator Dodd and his Banking colleagues. Rather the biggest and most unruly players in our financial system have behaved in such an egregious manner that they will be brought down by the law – either that, or they will further bring down the law.
The Baseline Scenario 
Biden’s involved, and the tide is turning? Somehow, I don’t think Biden was selected to do that.
Here is video of Kaufman’s speech over at Huffington Post. Not the most charismatic guy, but we don’t need charisma here, we need a substantive message, and Kaufman “brings his game”.
The first link here just under 4 minutes: http://www.huffingtonpost.com/2010/03/11/senator-calls-for-aggress_n_494699.html
Also at Huffington Post, you can find this link, in which a writer at the Columbia Journalism Review compares blogs such as Zero Hedge and Yves Smith’s nakedcapitalism to the WSJ. Guess who he says did a better job of journalism, covering the economic crisis, MSM or the blogs??? They even quote some guy named “James Kwak” in there. I’ll have to do a search and find out who that guy is…..
http://www.cjr.org/the_audit/blogs_beat_the_press_on_lehman.php
Just to make sure no misunderstandings, that’s an affectionate joke for our hero here, Mr. Kwak.
Mr. Johnston wrote:
“The tide is turning, but not primarily through the actions of Senator Dodd and his Banking colleagues. Rather the biggest and most unruly players in our financial system have behaved in such an egregious manner that they will be brought down by the law – either that, or they will further bring down the law.”
Mood Blues – Days Of Future Passed, 1967 – excerpt
“Cold hearted orb that rules the night,
Removes the colours from our sight,
Red is gray and yellow white,
But we decide which is right.
And which is an illusion?”
http://www.bobspixels.com/kaibab.org/moodies/mxdays.htm
Dream on.
Correction, (the gift of dyslexia)
Mr.” Johnson” wrote:
03-15-10 05:16 PM – Huff Post – excerpt
“The root cause of our economic crisis was a lack of consumer protection,” Dodd said, emphasizing that the current regulatory structure is “hopelessly inadequate…Dodd said that his set-up was the next best thing to an independent agency …”
http://tinyurl.com/yhleuvy
I’m a bit surprised that Simon is so happy about this speech. Ultimately, it is a major shift away from the problems that caused the crisis – bad lending and bubble mentality – toward re-examination of what was done to deal with the crisis climate. The latter task is certainly important, but sadly, it isn’t going to do much to help avoid the next giant mess.
Perhaps Simon is just optimistic that Kaufman will succeed in changing our culture to complete deference to the spirit of the law (which, of course, is only determinable in hindsight) rather than to the law’s letter. I rather doubt it.
The purpose of the Greco-Goldman Gambit was to get around regulations limiting the size of a government’s balance sheet. TBTF is a problem, but any attempt to limit or define size will just create big perverse incentives for non-transparent activity to subvert the regulations.
If you want to increase transparency for investors then first get rid of regulations that give banks and other institutions incentives to hide things from regulators. We can either let banks grow in the open or have them commit all kinds of shenanigans to keep their size hidden.
AJ wrote:
“….optimistic that Kaufman will succeed in changing our culture to complete deference to the spirit of the law (which, of course, is only determinable in hindsight)”
Real Live Preacher – April 22, 2003 wrote:
“It’s not foresight or hindsight we need. We need sight, plain and simple. We need to see what is right in front of us.”
RealLivePreacher.com Weblog,
TDM wrote:
” We can either let banks grow in the open or have them commit all kinds of shenanigans to keep their size hidden.”
SUN TZU ON THE ART OF WAR
– excerpt
“All warfare is based on deception.”
http://www.chinapage.com/sunzi-e.html
I thought Dodd’s comments on PBS tonight were sane and rational. Rather than discuss reform in committee forever, he has introduced legislation that seems to pragmatically meet most of the objectives of Simon Johnson, et al, if not in some utopian environment where the “perfect” will be so obvious it receives overwhelming support. Presumably, it will be debated on the floor in time to actually get something done. There should be ample opportunity for specific suggestions to improve what has been proposed, which seems to me to be a major step in the right direction that contains sufficient oversight and controls to make future changes as needed.
Full disclosure:
I lived in Connecticut in 1980 and probably voted for Dodd.
I once had a mortgage with Countrywide while I was also president of an insurance company. ( In Indiana, with no idea why my mortgage ended up with Countrywide.)
For 20 years, I ran my own small consulting/deal making company and while far from an “expert”, am not naive about what “finance” has become. There is a strong possibility that I have hired (and fired) more actuaries (who on balance do math very well) than I suspect most of the posters on this site have ever known.
In short, as much as I agree with and enjoy some of the observations on this site, FAPP ( as the quantum physicists say) many do not seem to desire to make the world a a better place but rather, in pursuit of some utopian dream, by denigrating progress to support those who seem intent on making it worse.
Dick is probably shaking in his boots.
Priority #1 should be to deal with the political crisis, because without dealing with the politics there will be no effective remedy to the financial/economic problems.
If Sen. Kaufman can walk the walk, it will be an enormous step in the right direction.
This is all very interesting. Coming from the state that has major credit card operations in Wilmington.
what’s sadder still is Kaufmann isn’t running and is giving his seat to Mike Castle an R.
Thanks for shining some light on Del Simon. Let me know if you want me to snap a picture of Mike Castle’s First floor office inside the CHASE Building in Wilmington. I would love to give you something to post
I believe we do “get it”….at least being able to pick up on the nuisances of this blog (contrary to any quantum physicists out there). If I were a Greek avatar (though, not having seen the movie yet), I’d be roiling over some of the news heard over the weekend about Germany (an EU member) owning most of Greek’s debts. There is a certain amount tolerance one puts up, as with those little encumbrances, but the line is drawn when EU adults speak a little too often of what was promised, only to whine, after-the-fact. Agreed, we all make mistakes (maybe more mistakes than personally deserved) but we also have the power to change with what was wrong, to something better – not looking at the past as some sort of prediction of future performance (all stock prospectuses include that disclosure – called forward-looking statements). Hopefully, we can agree that time helps gain better knowledge, if not, more wisdom, focusing on what matters most. Simon, just wanna say that sometimes your passion (on the topic) is only exceeded by your charm Worth reading again, your link to “doing “God’s work” in finance:” even Mr. Blankfein admits the collapse (no taxpayer bailout) would not be the end of the world as we know it (at least, not in Goldman Sachs’ world): “But Blankfein insists Goldman was “hedged” against any AIG losses, in the best possible way — with cash. So even if AIG had gone under, Goldman would not have suffered. Critics say that had AIG gone bust, the entire financial system could have collapsed, taking Goldman with it. What’s more, at the height of the crisis, the Federal Reserve broke with an 80-year-old tradition and let Goldman turn itself from a pure investment bank into a bank holding company.”
…..”There is a certain amount of tolerance one puts up with…”
Kaufman is being disingenuous. With him it most certainly is about retribution. That’s why he paints with such a broad brush.
Who committed fraud? No specifics – just Wall Street – one end to the other. Lehman’s 105 repos, of which there is no conviction, means Wall Street is stone-cold guilty. A report indications they were improper. Guess what, the accused will hire a lawyer and make it be proven. Not easy, since the transaction is not necessarily improper.
Sam Taylor wrote:
“FAPP (as the quantum physicists say)”
“For there is no general principle providing an absolute bar to extracting information from the environment…. Accordingly, such descriptions are referred to as FAPP [For All Practical Purposes]”
http://en.wikipedia.org/wiki/Quantum_decoherence
He didn’t say Biden is currently involved in this. He said that Kaufman has worked with him in fhe past.
I agree, mostly with Simon. This is an important speech, and must be followed with action. But what is now being considered for passage as financial reform is fairly puny. What are we doing allowing the CFPA near the Fed? The Fed is concerned with supporting the very banks that are the worse consumer offenders. Take away their ability to conduct legal fraud and obfuscation, and that will put them out of business.
Time to take down anyone and everyone who acted in any way illegally to take down this and the world’s economies. Time to regulate banks and financial institutions back to the 1950’s. We need Glass-Steagall, we need to make all banks be banks, and we need to regulate investment bankers, especially by making all derivatives be traded openly and publicly.
Finally someone with courage stands up against the predatorclass oligarchs wanton abuses and criminal activity. Bravo Senator ed Kaufman (D., DE) for having the courage to call a criminal a criminal. Now if only we pay attention, and demand a real investigation into the sordid dirtydealing of Goldman Sachs and the other predatorclass oligarch den of vipers and thieves in the UA finance sector.
We either right these horrible wrongs or we don’t. If we don’t – then woe to us for we will bequeath our children a lesser much more dangerous and hazardous America, and an Amerika where the people have no rights, or freedoms, or protections under the socalled alw, – and the PURCHASED government affords extraordinary rights, freedoms, and protections to the predatorclass and predatorclass oligarchs alone and exclusively. If we do – then the predatorclass is accountable and culpable for crimes, grotesque mismanagement, and wanton abuse!
There will be blood, and a reckoning and a balancing!!
My son says this is not the US he pledged allegiance to in the 60s, in the days of Martin Luther King, the Vietnam war protests, civil rights legislation, the women’s movement, marching for the marginalized in this country. The petty thief is locked up immediately; the rich thief seldom seldom stands in the dock, even as they have proliferated and blocked out the sun for the rest of us.
Why do Americans seem to have Stockholm Syndrome? Because too many would love to be rich, too, no matter how they got it? We’re supposed to admire a country full of thieves, taking from the lesser to give to the greedy, so many doing it willingly? We’ve become a nation that feels so bad about ourselves as individuals we’re willing to admire those with no character whatsoever and give them free rein? {shudder}
Simon,
If the invasion of Iraq or torture of human beings does not rise to the level warranting a full investigation, prosecution or war crimes, then don’t hold your breadth on meaningful financial reform. The rule of law is no longer blind. It is very much a two tier system: One for the wealthy and elite, the other for the rest of us.
Rob a bank with a gun and you get a minimum 5 years in federal prison. Rob a bank with using a computer and you get a job as a security consultant. Own a bank and rob everybody and you get a bail out and a bonus.
It may be no accident that Polanski has been vigorously prosecuted, for alleged crimes committed more than three decades ago, while he just produced a scathing condemnation of the dirty secret services manipulations, in cooperation with American plutocracy.
The Repo 105 transacations were borrowings.
A child could see that. Anybody who said anything else was being paid to say it, and was intentionally misleading the public.
If that isn’t criminal — and it probably is — it should be.
I wish someone with considerable resources would fund a “people’s” law firm to go after the bank, develop a class action.
The 14 trillion dollar american budget deficit, the trillion dollar spent so far on Iraq n Afghanistan, the 20 trillion dollar value drain / looting by the bankers, are all interlinked in iterating cycles of corruption at the highest places. The Goldman CEO got away with doing God’s work in terms of paying himself a paltry $9 million in bonus. Goldman and its employees remain top contributors to campaign finance. In one of my podcasts last year (on http://www.franconomics.com), I had thrown light on this: some congressman was circulating a memo against Goldman in the congress, but it was pulled in one hour by Dick Gephardt. Cokeley was defeated in Mass, but Obama needs to be humiliated more in 2010 before he realizes that firing Geithner and Summers is the least he can do to assuage the concerns of main street. And why does he keep continuing Bush appointee Gates as defence secretary?
We on mainstreet should feel sorry for ourselves. Hank Paulson got away with $300 million in Capital gains tax-free by unloading his Goldman stock at peak, and the conservatives are now lapping up his book. We better teach our kids to fit into these corrupt spirals, else they may discard us for not “educating” them? And look what these think tanks like CATO are doing? Peddling “greed” and giving a Milton “Mr. Greed” Friedman award for half-a-million dollars. No offence to Prof. Simon, but business schools keep teaching how to fit into the “system,” not overturn it. As unemployment keeps going up, and as foreclosures keep mounting, Goldman (and other banks) are surely doing God’s work… I don’t think Angelides & crew have the political and financial muscle to bring these crooks to justice.
Aaaah, I feel aweful again. Why should a few crooks eat up millions while millions are foreclosed homeless, and unemployed jobless? How can the rank-and-file American take this rape lying down???
Sam
Do you really not know James Kwak, who co-founded The Baseline Scenario with Simon Johnson? It’s required daily reading in my house!
Oh, OK…see it’s a funny.
It’s nice to see that a senator from DE is doing something noteworthy other than stonewalling the healthcare debate (Carper). But the sad truth is that if Kaufman was anything more than a placeholder in Joe Biden’s senate seat he wouldn’t dare speak this kind of truth to this kind of power. The fact is (as others have pointed out) he is essentially a lame duck. Also, Kaufman’s “close work” with Joe Biden consisted of running the then-senator’s staff while he was marching in lock-step with the credit card companies.
Recommended (re)reading for Mr. Johnson; A Short History of Financial Euphoria, By J K Galbraith. The bankers are not the only villains – they are simply the tulip traders.
It would have been better if someone from the Senate Banking Committee gave this speech and recognize the problem and had the power to actually do something about it. Ted Kaufmann gave a brave speech but I believe the speech fell on deaf ears.
[expletive deleted], Holmes, look at the infamous Casey Serin. Steals over $1.5 million using rather garden-variety fraud, squanders it, brags about his exploits on TeeVee, radio, interweb, and any other forum that will have him, and suffers no legal consequences more severe than a bad credit report.
Civic-minded folks were sending the IRS, FBI and any and all state and local law enforcement authority as well as the banks he defrauded ample documentation of Serin’s shenannigans, and their collective response was…nothing.
What do we learn from this?
1. Steal relatively small amounts of money at a time. Do not take too much money from any one bank in any one scam. This reduces the incentive to prosecute;
2. Scam in different states whereever possible. This presents local law enforcement with a collective action problem. While it opens our intrepid fraudster to more Federal charges, the Feds really only go after bigger fish;
3. Commit no violent crimes. Also, if you are coing to commit a crime, try not to be a black or brown person if at all possible. Prosecutors love to bring cases that play to the fears of solid citizens. Solid citizens do not live in terror of murse-toting meterosexuals who defraud banks like Casey.
Hogwash. That fact that Polanski pled guilty 30 years ago (and has not returned to the US at any time since then) should tell you something.
That and there are plenty of filmmakers of every stature pushing the same “dirty secret service manipulations” and walking the streets should tell you something.
Polanski drugged and raped an underage girl. He pled guilty in exchange for a prosecution agreement to recommend a relatively light sentence. This was in part because Polanski’s lawyers announced their intention to put the victim on trial. This strategy was permitted under the unfortunate laws of that time.
Advised by competent legal counsel, Polanski stated under oath during his guilty plea that he knew full well that the judge is not bound by a plea bargain or sentencing recommendation. He knew that the judge was perfectly free to impose any legal sentence. Polanski pled guilty.
After pleading guilty but before sentencing, Polanski proceeded to party, including being photographed with underaged girls. When he got word that the judge was not amused by his little stunts (remember, any alleged judicial misconduct occurred after he already pled guilty) he fled the United States to avoid his just desserts and to be feted by effete Europeans as a sort of misunderstood genius.
Bull.
Irony is, if he had tried his crap in France at the time, the result would have been harsher.
Mr. Johnson wrote:
“The tide is turning, but not primarily through the actions of Senator Dodd and his Banking colleagues.”
Jon Stewart said:
STEWART:” It’s taken you idiots two years during the worst financial collapse since the Great Depression to compile a list of regulations we should have put into place the next day? Well, better late than never, I guess. At least now we can have some legislation that’ll stop the next crisis from occurring.
DODD: [Video] This legislation will not stop the next crisis from coming.
STEWART: Hey, here’s another regulation! YOU CAN’T SHORT SELL YOUR OWN REFORM BILL.”
“Stewart goes on to segue to a segment in which he follows the life of “United Jonco International” in order to explain the many sketchy dealings that led to the crisis, including asleep-at-the-switch ratings agencies, transparency issues at the Fed, bogus corporate bonuses, overvalued toxic assets, rampant accounting fraud and a catch-all term for a host of other established Wall Street practices that I’ll simply call “dickery.”
It’s a very good explainer, one which you’ll want to have on hand to explain all of this to your children.”
http://tinyurl.com/ydhngpc