Friday, 15 April 2011

Greed laid bare for all to see!

I spent last night reading (selectively, its 650 pages long) the US Senate Panel’s report on the financial crisis (yeah party on!).

It stands as a stark contrast to the interim Vickers report on the structure of the UK banking industry which was released in this country earlier this week.

Where Vickers was polite and diplomatic, Senator Carl Levin and his committee reach for the baseball bat. Levin describes the market in Mezzanine Credit Default Obligations (CDOs), which were made up of thousands of individual mortgages that were traded around Wall Street and further afield, as “a financial snake pit rife with greed, conflicts of interest and wrongdoing”.

Levin also believes Goldman Sachs executives weren’t truthful about the company’s transactions in testimony before the subcommittee at an April 2010 hearing. “In my judgment, Goldman clearly misled their clients and they misled the Congress.”

There has long been a suspicion that Goldman Sachs artificially pumped the market in CDOs, making a killing before exiting the market, knowing full well it was about to crash. In Michael Lewis’ words, author of The Big Short, it was the equivalent of starting a fire in a theatre, sprinting for the exit and bolting the door behind you!

The Senate report, called Anatomy of a Financial Crisis, confirms all this to be true and lays bare the conflicts of interest at the heart of the scandal, which ultimately led to the collapse of Lehmans and the global financial heart attack. In fact, for me, the best bits are not until page 648 of the report when Levin details a timeline of Goldman Sachs’ activities, helpfully labelled the Hudson 1 Chronology.

8/9/2006: "ABX (the CDO market) continues to perform well but firm thinks it has run its course and will reduce exposures”

9/9/2006: “Continuing to reduce volatile ABX position. Trading desk is working to reduce position by reducing ABX longs with shorts” (in other words, Goldman’s knowing the market was shaky bets against it by taking short positions)

19/9/2006: Planning of Hudson begins (Hudson is a massive book of CDOs – in other words, not only does Goldman’s now have short positions in the CDO market which it believes will crash, it now starts marketing the CDOs to its clients)

3/12/2006: Goldman issues (Hudson) offering circular to investors … does not inform them that Goldman’s has $2 billion short position

4/3/2007: Value of Hudson falls significantly. “I think their (investors) likelihood of getting the principal (money) back is almost zero”

15/7/07: A number of Hudson’s assets ie. mortgages are downgraded and trigger liquidation requirements

22/7/08: Hudson goes into default

This staggering conflict of interest, knowing that a market is about to crash, taking a short position in it and then encouraging your clients to get into it, lies at the heart of the financial crisis.

I have long contended that if the general public really knew what the banks (including many of those based in the UK) had really been up to, no banker would dare call for an end to banker bashing.

It's thanks to people like Levin for casting some much needed light on their practices.


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