Best of the Week
Most Popular
1. TESLA! Cathy Wood ARK Funds Bubble BURSTS! - 12th May 21
2.Stock Market Entering Early Summer Correction Trend Forecast - 10th May 21
3.GOLD GDX, HUI Stocks - Will Paradise Turn into a Dystopia? - 11th May 21
4.Crypto Bubble Bursts! Nicehash Suspends Coinbase Withdrawals, Bitcoin, Ethereum Bear Market Begins - 16th May 21
5.Crypto Bubble BURSTS! BTC, ETH, XRP CRASH! NiceHash Seizes Funds on Account Halting ALL Withdrawals! - 19th May 21
6.Cathy Wood Ark Invest Funds Bubble BURSTS! ARKK, ARKG, Tesla Entering Severe Bear Market - 13th May 21
7.Stock Market - Should You Be In Cash Right Now? - 17th May 21
8.Gold to Benefit from Mounting US Debt Pile - 14th May 21
9.Coronavius Covid-19 in Italy in August 2019! - 13th May 21
10.How to Invest in HIGH RISK Tech Stocks for 2021 and Beyond - Part 2 of 2 - 18th May 21
Last 7 days
USDT Ponzi Scheme FINAL WARNING To EXIT Before Tether Collapses Crypto Exchange Markets - 22nd Jun 21
Stock Market Correction Starting - 22nd Jun 21
This Green SuperFuel Could Change Everything For the $14 Trillion Shipping Industry - 22nd Jun 21
Virgin Media Fibre Broadband Installation - What to Expect, Quality of Wiring, Service etc. - 21st Jun 21
Feel the Inflationary Heartbeat - 21st Jun 21
The Green Superfuel That Could Disrupt Global Energy Markers - 21st Jun 21
How Binance SCAMs Crypto Traders with UP DOWN Coins, Futures, Options and Leverage - Don't Get Bogdanoffed! - 20th Jun 21
Smart Money Accumulating Physical Silver Ahead Of New Basel III Regulations And Price Explosion To $44 - 20th Jun 21
Rambling Fed Triggers Gold/Silver Correction: Are Investors Being Duped? - 20th Jun 21
Gold: The Fed Wreaked Havoc on the Precious Metals - 20th Jun 21
Investing in the Tulip Crypto Mania 2021 - 19th Jun 21
Here’s Why Historic US Housing Market Boom Can Continue - 19th Jun 21
Cryptos: What the "Bizarre" World of Non-Fungible Tokens May Be Signaling - 19th Jun 21
Hyperinflationary Expectations: Reflections on Cryptocurrency and the Markets - 19th Jun 21
Gold Prices Investors beat Central Banks and Jewelry, as having the most Impact - 18th Jun 21
Has the Dust Settled After Fed Day? Not Just Yet - 18th Jun 21
Gold Asks: Will the Economic Boom Continue? - 18th Jun 21
STABLE COINS PONZI Crypto SCAM WARNING! Iron Titan CRASH to ZERO! Exit USDT While You Can! - 18th Jun 21
FOMC Surprise Takeaways - 18th Jun 21
Youtube Upload Stuck at 0% QUICK FIXES Solutions Tutorial - 18th Jun 21
AI Stock Buying Levels, Ratings, Valuations Video - 18th Jun 21
AI Stock Buying Levels, Ratings, Valuations and Trend Analysis into Market Correction - 17th Jun 21
Stocks, Gold, Silver Markets Inflation Tipping Point - 17th Jun 21
Letting Yourself Relax with Activities That You Might Not Have Considered - 17th Jun 21
RAMPANT MONEY PRINTING INFLATION BIG PICTURE! - 16th Jun 21
The Federal Reserve and Inflation - 16th Jun 21
Inflation Soars 5%! Will Gold Skyrocket? - 16th Jun 21
Stock Market Sentiment Speaks: Inflation Is For Fools - 16th Jun 21
Four News Events That Could Drive Gold Bullion Demand - 16th Jun 21
5 ways that crypto is changing the face of online casinos - 16th Jun 21
Transitory Inflation Debate - 15th Jun 21
USDX: The Cleanest Shirt Among the Dirty Laundry - 15th Jun 21
Inflation and Stock Market SPX Record Highs. PPI, FOMC Meeting in Focus - 15th Jun 21
Stock Market SPX 4310 Right Around the Corner! - 15th Jun 21
AI Stocks Strength vs Weakness - Why Selling Google or Facebook is a Big Mistake! - 14th Jun 21
The Bitcoin Crime Wave Hits - 14th Jun 21
Gold Time for Consolidation and Lower Volatility - 14th Jun 21
More Banks & Investors Are NOT Believing Fed Propaganda - 14th Jun 21
Market Inflation Bets – Squaring or Not - 14th Jun 21
Is Gold Really an Inflation Hedge? - 14th Jun 21
The FED Holds the Market. How Long Will It Last? - 14th Jun 21
Coinbase vs Binance for Bitcoin, Ethereum Crypto Trading & Investing During Bear Market 2021 - 11th Jun 21
Gold Price $4000 – Insurance, A Hedge, An Investment - 11th Jun 21
What Drives Gold Prices? (Don't Say "the Fed!") - 11th Jun 21
Why You Need to Buy and Hold Gold Now - 11th Jun 21
Big Pharma Is Back! Biotech Skyrockets On Biogen’s New Alzheimer Drug Approval - 11th Jun 21
Top 5 AI Tech Stocks Trend Analysis, Buying Levels, Ratings and Valuations - 10th Jun 21
Gold’s Inflation Utility - 10th Jun 21
The Fuel Of The Future That’s 9 Times More Efficient Than Lithium - 10th Jun 21
Challenges facing the law industry in 2021 - 10th Jun 21
SELL USDT Tether Before Ponzi Scheme Implodes Triggering 90% Bitcoin CRASH in Cryptos Lehman Bros - 9th Jun 21
Stock Market Sentiment Speaks: Prepare For Volatility - 9th Jun 21
Gold Mining Stocks: Which Door Will Investors Choose? - 9th Jun 21
Fed ‘Taper’ Talk Is Back: Will a Tantrum Follow? - 9th Jun 21
Scientists Discover New Renewable Fuel 3 Times More Powerful Than Gasoline - 9th Jun 21
How do I Choose an Online Trading Broker? - 9th Jun 21
Fed’s Tools are Broken - 8th Jun 21
Stock Market Approaching an Intermediate peak! - 8th Jun 21
Could This Household Chemical Become The Superfuel Of The Future? - 8th Jun 21
The Return of Inflation. Can Gold Withstand the Dark Side? - 7th Jun 21
Why "Trouble is Brewing" for the U.S. Housing Market - 7th Jun 21
Stock Market Volatility Crash Course (VIX vs VVIX) – Learn How to Profit From Volatility - 7th Jun 21
Computer Vision Is Like Investing in the Internet in the ‘90s - 7th Jun 21
MAPLINS - Sheffield Down Memory Lane, Before the Shop Closed its Doors for the Last Time - 7th Jun 21
Wire Brush vs Block Paving Driveway Weeds - How Much Work, Nest Way to Kill Weeds? - 7th Jun 21
When Markets Get Scared and Reverse - 7th Jun 21
Is A New Superfuel About To Take Over Energy Markets? - 7th Jun 21

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

Let Goldman Sachs Interrogate the SEC

Politics / Market Manipulation May 06, 2010 - 07:34 AM GMT

By: Fred_Sheehan

Politics

Best Financial Markets Analysis ArticleSince April 16, 2010, when the Securities and Exchange Commission (SEC) indicted Goldman Sachs on fraud charges, the bank must approach each day wishing it could stay in bed. New charges and rumors of lawsuits swirl around the firm. Goldman will have its day (or, years) in court, but the government agency that rolled the snowball down the mountain should also sit in the dock.


The SEC aided and abetted the credit bubble in several instances, one of which will be discussed here.

The Securities and Exchange Commission removed the 12:1 leverage limit on broker/dealers in 2004. (The 12:1 limit is a rough figure calculated from SEC Final Rule, 17 CFR Parts 200 and 240, "Alternative Net Requirements for Broker-Dealers That Are Part of Consolidated Supervised Entities.") When Wall Street collapsed in 2008, Goldman Sachs, Lehman Brothers, Merrill Lynch, Bear Stearns, and Morgan Stanley were leveraged at 30:1, and sometimes at over 60:1 between their quarterly financial reports.

In the whirlpool of bank reform discussion, the extent to which banks were leveraged before the deluge is underappreciated. (Nor, is current leverage appreciated, either.) Economists, for instance, did not - and do not - pay attention to leverage, and since the country is run by these specimens of constricted imagination, their holy models did not capture the inevitability of Wall Street's collapse (or, of the one to come.)

What follows is an exercise that turns the tables. Goldman Sachs is given the opportunity to interrogate its regulator. Goldman's legal counsel might recommend, if the firm were given such an opportunity, that the bank's line of questioning be more diplomatic. There is no need for that here:

"Why did you remove limits to our leverage when the whole economy was already operating as a highly leveraged carry trade? Houses, for instance, were being sold on terms that no bank in its right mind would offer - unless they could dump mortgages in our lap. Chairman Greenspan even gave a speech imploring Americans to buy adjustable-rate loans in February 2004.

"Our economists scratched their heads at the time: why did he need to do that? In the state with the most speculative housing market, California, the percentage of adjustable-rate mortgages (ARMs) had already risen from 2% in 2002 to 47% in when he spoke. Median house prices in California had shot up from $237,060 in 2000 to $443,148 at the time Greenspan made his plea. Median incomes had been falling, so more mortgages were being written with no money down. Nevertheless, ARMs jumped to 61% of California mortgages by the spring of 2005, and prices reached $542,720.

"You knew that Goldman Sachs and other brokers were securitizing these mortgages that the banks and mortgage brokers would not hold. Yet, you blew open our leverage constraints. You were practically ensuring we would increase the volume of securitization. What was left to securitize other than loans to borrowers with little chance of paying off their debt? Our more fevered participation inevitably raised the volume and prices of house sales.

"What else did you think we would do with this new freedom? Putting our investment banking hat on, what were we going to finance? Productive companies couldn't get out of the country fast enough. Manufacturing profits had fallen from $144 billion in 2000 to $96 billion in 2003. Corporate financing was being channeled into the [irresponsible, highly leveraged, destructive - Goldman legal counsel: leave this out!!!!] private equity market.

"The Bush administration wanted more jobs and housing was making them. In 2003, we found that over the previous two years 750,000 high-tech jobs had been lost and 125,000 Americans became real-estate agents. By 2006, at least 600,000 people were selling mortgages in California. Goldman Sachs was building a more employed, although highly distorted, America. Why did you encourage us to turn the United States into an ancient Egyptian pyramid-building empire?

"We will tell you why we thought at the time, and still think now, that you removed the leverage limit: you wanted us to securitize mortgages at a faster pace. Maybe this was not the SEC's goal, but you do what you're told in the political arena. The United States could no longer fund its trade deficit without shipping boatloads of mortgages overseas. In 2000, the U.S. imported about $400 billion more goods and services than it exported. By 2006, this doubled to $800 billion. How could Americans - with falling median incomes - spend at such an accelerating rate and how could foreigners finance our lifestyles?

"We will abbreviate the answers to these questions with two simple examples.

"In 2005, Americans withdrew $800 billion of home equity from the rising values of their houses, about half of this was spent on consumer purchases. We will add that if it were not for our highly innovative mortgage securities that had evolved from the simple asset-backed derivatives to CDOs, to synthetic CDOs, to CPDOs, to Russian-doll CDOs, [each innovation even more profitable to us, since they were more inscrutable to the hapless buyer - Goldman legal counsel - stop this!!!!!], we could not have attracted the wider customer base necessary to unload this garbage. [Goldman legal counsel - OK, the sloppiness is so obviously true and gives the impression of sincerity].

"In 2005, foreigners bought 53% more Fannie Mae and Freddie Mac securities than they had in 2004. They had to buy them if they wanted America to buy all their junk. (Given the poor quality of imported socks that ripped the first time we put them on, the poor quality of our exported subprime CDOs did not cost us much sleep.) Americans couldn't buy the debt securities we issued since we were spending at such a furious rate. Foreigners had pulled back from the U.S. stock market after the Internet bubble burst. The Treasury could not issue enough securities, so we had to unload subprime loans on them.

"In conclusion is Exhibit A. This is from Goldman Sachs Global Investment Research, 2007 Issues & Outlook, published on December 10, 2006. Your decision - or, indecision - to permit brokerage debt to keep spiraling upward is unforgivable. And, don't say we didn't warn you:

The world is flooded with too much capital. It is virtually impossible to find any asset class that offers attractive value to investors. When the little black dress that Audrey Hepburn wore back in 1961 as Holly Golightly in 'Breakfast at Tiffany's' sells at auction for $917,000, or the 1907 Gustav Klimt painting Adele Bloch-Bauer sells for $135 million, or a fully-occupied office building on 48th and Park Avenue in New York City with no leases expiring for ten years changes hands for $1.2 billion at a cash yield of 4% (Treasuries less 0.50% !) before deferred maintenance reserve, or the financial markets believe for a day that a major national retailer is about to receive a $100 billion LBO offer, then the touchstones and benchmarks of what represents value seem [like] anachronisms of a time long ago.

Frederick Sheehan is the author of Panderer to Power: The Untold Story of How Alan Greenspan Enriched Wall Street and Left a Legacy of Recession (McGraw-Hill, November 2009).

See his blog at www.aucontrarian.com

© 2010 Copyright Frederick Sheehan - All Rights Reserved
Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in