April 22nd, 2010
04:42 AM GMT
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America's biggest banks are rolling in dough again.  The U.S. President is going straight to Wall Street to pitch tough financial reforms to avoid future financial meltdowns.   The regulatory body, the S.E.C., is pursuing civil fraud charges against Goldman Sachs.  And some people are crying conspiracy.  In a rare statement, the head of the S.E.C. said the watchdog does not "coordinate" its "enforcement actions with the White House, Congress or political committees," re-asserting its independence in the face of criticism."

Extraordinary times continue in the financial world.  But what on earth is going on?   If you believe one analyst we featured on World Business Today, this moment in the global financial crisis may be an important one.  Richard Bove, Financial Analyst for Rochdale Securities, fears this could be the start of a pursuit of major financial institutions that could erode confidence in the U.S. financial system.

Bove calls the reaction to the banking crisis in 2008 "hysteria" and says the Goldman transactions may be complex, possibly unsavory, but they are not fraudulent.

"On one side you have a sophisticated investor who wants to short a bunch of mortgages. On the other side, you have two sophisticated investors who've gone through all these mortgages and decided which ones they want to keep, and which ones they don't want to keep.  And they made the decision to buy them. The government is not suing the guy who wants to short, or the guy who bought the mortgages.  The government is going after the middleman.  What's the logic in that?"

Media reports are questioning the strength of the SEC's case.  The agency says it has appropriate evidence that will be presented in court, at the appropriate time.

We should not be pre-trying this case in the media.  But the questions the case raises are important ones and the voices on it, divergent.

Did somebody hear Richard Bove defend Goldman Sachs as good for society? Yes, you did. And that derivatives, the exotic instruments everyone is so upset about here, are good for the economy because they help drive down risk?  Yes, you did.

It's a tough case to make in this climate, but Bove says Goldman should be defending itself as a business that does "societal good,"  because it "lowers taxes, and adds jobs and business opportunities."  However, because of the financial crisis and these charges it is viewed simply as a bunch of greedy bankers who do fraudulent things.

"The U.S. has to raise 1.3 trillion dollars this year to cover the deficit. It has to roll over 3 trillion dollars in existing debt.  Who is going to do that?  Are we going to have a bunch of small community banks to set up desks in front of their branches and sell savings bonds at 25 dollars a pop? Or do we need a very sophisticated company that can access capital markets all over the globe to raise that money? And if it doesn't raise that money what happens to taxes in the U.S. Somebody has to make that money."

Of course, the courts will decide whether Goldman did anything fraudulent.

Bove is firmly in the camp of those who believe the government's case is weak, but he's quick to add: "I would never defend Goldman Sachs. I would not defend their ethics.  I just think in this particular instance they were not guilty of any crime."

soundoff (19 Responses)
  1. Per Holmlund

    Power corruption

    Whenever you create power structures that involves monopolies and oligopolies corruption will prosper. And with a political and a financial market that both can bee characterized as oligopoly you shouldn’t bee surprised when crises occur.

    And if there are no understandings of the roots of crises the crises will roll over into new crises and ”blame games”. Today we can see how Obama is cutting the branch he – US – is sitting on. If US looses its financial power what will be left? Perhaps he should focus and prepare by articulating the next step: 2000 Stock Market crises, 2007 financial crises and 20XX when the deficit swamp transforms into a deficit crises. Make your pick for XX, 10,11 or 12…

    And who am I to shout. At least I wrote about of today yesterday: “…when we move in to the next pattern, the handling of crisis... a development that can lead us into hard recessions due to globalization. Because a down turn can become global when it hits. We’ll get a test when this (2003) economic upturn, that we expect to come, after some years turn down. …What we now can expect is a longer period of adaption when “the fundamental reality is catching up with the financial...“ ISBN 91-89420-12-8

    What kind of society do you want live in?

    Today it’s obvious for most people what kind of life the Soviet states created and few should choose that system to live in tomorrow. But what about “Soviet companies” like monopolies and oligopolies? Monopolies and oligopolies corrupt which can’t bee a surprise for anyone in today’s Google world.

    So the big reason for braking up big banks is to create a clean and competitive environment and to prevent corruption. Competition by breaking up big entities and form a tax system that punish monopolies and oligopolies and pushes competition. But in a global world it isn’t possible so just get used with more corruption!

    No brain no pain!

    And the problem in finance is only a problem for people with to much knowledge but not enough understanding. Basics in finance are R²C²: Return, Risk, Cash and Control. If you are building a system that can’t handle CASH – liquidity – when things turns sour you are smoked. It happened 2008, 2000 and during the LTC scandal.

    And too much RISK – leverage – creates the environment for cash drains. Leverage in its purest form, options and futures. Leverage that is driven by RETURN motives for the players in the market. For the buyers if you are living in a environment where money was given away – the “0 interest” – but most and all for brokers where the commissions from the purest speculation was like manna given from haven.

    And in a society with no understanding – CONTROL – crises will develop in a never ending stream. And lack of what? Control of leverage that politicians let reach levels of no return. Meaning that there wouldn’t bee enough cash if markets turned south. And markets always turn south.

    And in a system with monopolies and oligopolies there isn’t a pressure for control but for return. And in finance it means more leverage, options and futures! The story started with corruption and it looks like it ends with corruption – structural corruption. And if you don’t change the structure the corruption will bee and crises will follow!

    Per Holmlund
    (Zürich today)

    April 22, 2010 at 5:41 am |
  2. Shan Saeed

    This crisis clearly indicates that financial landscape needs an overhaul and some rectification. SEC has taken reactive measure and not proactive measures to prevent crises like Madoff, Stanford and now Goldman Sachs...This reflects poorly on SEC's performance...I still remember when Lehman Brothers went down on Monday i.e. 15th Sept,2008 and I was in chicago, people thought that it would be one-off financial demise of an institution . If you call recall and check records Goldman Sachs wrote off $20 billion from its books as AIG went down on 20th September 2008..So it illustrates and provides an idea that It was coined by Goldman along with other banks started these complex instruments which misrepresented the risks to investors. ..

    Employees of Goldman and Lehman exchanged emails stating the complexities and difficult to comprehend these financial instruments like CDO, MBS, ABS, CDS ...Whatever the outcome of the suit filed by SEC....This is just a start, 2010 will be much more dangerous with sovereign debt, Country fiscal and monetary policies disasters, PIIGS and debasement of currency [ printing of money] would led to bigger crisis...Investors can take Hedge against Chaos by investing in commodities like Gold, Silver, Natural Gas, Oil, platinum, palladium, copper, steel and lumber

    Shan SAEED
    MBA University of Chicago
    Graduated w/ honor roll

    April 22, 2010 at 7:46 am |
  3. relax

    Yeah, but I am sure Bove didn't lose his job like many people. Heck! the crisis probably affected him mildly. Reforms need to be made! He sounds just like G. Bush by portraying financial institutions as victims.

    April 22, 2010 at 8:40 am |
  4. Per Holmlund

    To Big to Function

    Not only banks that grows too big. Perhaps we should have the same focus on Big Government. Could “governments” that take over more than “XX” percent of the economy loose the power to CHANGE? And a government that can’t change can’t function. They have become To Big to Function.

    Look at the history! It is obvious that the problems we see today were known yesterday and not one of Cheney’s unknown unknowns. In 2004 we could read about the deficit problems. “Treasury Secretary Vows to Halve U.S. Budget Deficit by 2009 Treasury’s Snow calls global economic imbalances a shared challenge Treasury Secretary John Snow says the Bush administration is committed to cutting the U.S. budget deficit in half by 2009 to help address global economic imbalances that may threaten world growth.”

    But the Big Guy can always shoot the Small Guy – this times the banks.

    April 22, 2010 at 11:24 am |
  5. Anonymous

    Wherever there is monopoly there is corruption but the Big Crisis is not over, it has passed in the public debts of many countries...

    The crucial point, that very few want to see!, is that a really enormous amount of money is not... for it did not ever exist!


    April 22, 2010 at 12:28 pm |
  6. Phil

    Goldman can say anything he wants, but he is no better than all the owners of gambling casinos. Wall Street is the largest gambling Casino in the United States. Many have made money, but just like the casinos in Las Vegas, New Jersey and Connecticutt, 95% or more lose their butts. The only people making money are the CEOs and the Execs with the workers getting their share of the kickbacks called bonuses. The Government thats trying to take over the U.S. should control the Wall St. entirely. If anyone is to make money, let it be the greedy President, Congress and the House, and leave the peoples money and taxes alone.

    April 25, 2010 at 8:47 am |
  7. lisaweyn

    Sure where there is monopoly there is corruption, price fixing. The only way to tackle is to have a comperhensive regulations. And we have seen big companies,banks don't like that and complain of restricting their activities, which in fact means don't check on us.

    April 25, 2010 at 5:14 pm |
  8. bill

    So who do these hedge fund managers, money managers, quants work for-certainly not the individual investor, not the public interest and not the public good. They are just high rollers looking for the next buck on a Las Vegas weekend with our money and taking no risk of their own. Income should equal risk if it is your own money you are risking. What our financial system has become is neither moral or ethical and betting against the public good, if not illegal-should be. Our society will not endure long if all we want is the quick buck. These folks are not building anything lasting, with any positive effect on the general welfare of the society they plunder and use for their own gain. Between big business, big government and utilities and oil companies raping the planet and the populace, it is a bit more like the Vikings have landed than a stable financial system. This is how the wealth of a nation is measured unless you think Caligula was a good thing for Rome.

    April 25, 2010 at 5:19 pm |
  9. Renato Santos

    Media outfits have not been observing responsible journalism in covering this news report. Like common street tabloids, they have exploited every angle to grow and expand the case to make it as entertaining and interesting and gain as much ratings mileage (as they possibly can). With so much sub-plots and political and economic undertones, politicians and certain business firms have wasted no time in squeezing every ounce of propaganda to serve their personal interests and promote their hidden agendas. Pitting the government, business sectors, and great leaders from both arenas may make for a spectacle and lots of drama but it damages relationships, burdens the economic recovery efforts, and prolongs the agony of those caught in between. Respectable news agencies should know better than to lend themselves to be pawns of misinformation and smear campaigns. It is understandable for them to desperately attempt to fill in the gaps to constitute a clear picture or image of the story but to resort to and settle for hearsays, speculation, and fabrications will hardly uncover the real truths behind this story. It would be the height of public disservice to distort and contrive relevant facts just to sell this story. It ignites trial by publicity, evokes the public to pass hasty and partial judgments, influences the judiciary or the administrative bodies in the direction of public perceptions, and may very well contribute to failed investigations or miscarriage of justice as the case may be. Reputable media institutions must commit to denounce this practice, protect public trust and their hard earned reputation, and uphold only the highest standards of objectivity and integrity. They must stick to the facts, let justice take its natural course, and cease transforming news to soap operas.

    April 26, 2010 at 6:52 am |
  10. Chris

    The title alone made me laugh. Who the hell trusts Wall Street? It's just like Vegas but with less intelligent regulation. Hedge funds no longer hedge and investment banks don't invest. They all make big "bets" on the market, and they do it leveraged up with other people's money.

    April 27, 2010 at 2:00 am |
  11. Terry uche ejelonu

    the media should feel the pulse of the majority also and not be judgmental especially in cases that require expert handling. The very rich will always want much more most times at the detriment of the less priviledged. They will naturally not wellcome oversight functions which are essential to protect the little life savings of the poor citizens and will go to any lenght to frustrate attempts at it.

    April 27, 2010 at 6:01 am |
  12. Timothy

    The Challenge of Society

    I hereby challenge the world to make a world-wide global decision; allowing every person, no matter what station in live or what country they live in, to have a voice. I challenge the world media to distribute all of the information about this to the entire world very quickly using all of the social abilities on the internet, presenting all of the facts and every side of the argument equally. I challenge the powers-that-be to complete this vote in 4 months, 9/01/2010, which is easily accomplished with today's technology.

    The first question is of course do we want to change anything. If the majority vote no, then there would be no reason to continue. Nothing would have changed and everyone can go back to their everyday lives. However, it would guarantee that all citizens of this world would have access to the global conversation on the internet. Also, we would have decided something together as a species for the first time in history.

    However, there is the chance that the majority might say yes to the first question. There is no reason the following questions would have to be scary. They could be very simple basic human rights. Nothing complicated such as trying to enforce a specific government or social system on any unwilling group of people. There could however be simple questions that every citizen should have the right to answer for themselves. Weather or not a government has the fundamental right to execute a person, regardless of the reason? Do all of the citizens of this world have the right to freedom of speech? Nothing chaotic or crazy, just some questions that the populace needs to answer, not any small group of politicians.
    The answers given by the populace would of course have to be overseen by the UN. I realize this could be a very scary, but the majority might vote to leave everything just as it is in the very first question and nothing would happen. However, if the vote is for change, would it not be encouraging to know that it was a decision that we all made and had a voice in?

    April 27, 2010 at 9:48 pm |
  13. Gene

    Trust?????????? Fools, I never trusted "Wall Street" and I have even less trust in our Gov't. Let the free market be. The last thing I want is for Obama or ANY Gov't official (Rep/Dem) to control the market and banking.

    April 28, 2010 at 4:22 am |
  14. lisaweyn

    Trust has been shattered. It is time Wall street seek restore confidence.

    April 28, 2010 at 8:05 am |
  15. Bill S

    Finally, we get to see what the faces of the Goldman-Sachs over-egotistical, super-greedy, and ‘no law – moral or ethical can stop me mentality’ look like…

    Their excuses/justifications reek of cynicism for the millions of people who had trusted them to do business honestly, to grow their savings honestly, and to protect their investments honestly.

    Instead, the investments entrusted to them were used to deceive and ultimately defraud those with whom they were doing business. They, with their single-minded focus on greed as they represented their organization, hide behind the wall of a ‘Trusted Entity’ as they went about their devious work.

    They also performed their work with an eye on their huge, outrageous bonuses, justifing the mistrust that so many have of Wall Street. This ultimately cast a pall of mistrust on the entire financial community.

    Now, to see these individuals speak as if they had done nothing wrong, that all was done ‘within the law’ makes this event more poignant. In reality, they are attempting to justify stealing like any petty thief.

    Even their political defenders are rolling their eyes in shame that this behavior is now in the spotlight (whether for political circus or justified rage) at the attitude of the individuals being interviewed.

    Unfortunately, I believe all these individuals will go free to live on the money they have stolen. Proving once again that crime, deceit, and lying too often does pay. What a sad legacy this leaves for business history in this great country of ours.

    April 29, 2010 at 4:07 pm |
  16. grf67

    Why would anyone trust the totally self-serving criminals who control Wall Street?

    April 29, 2010 at 7:45 pm |
  17. Bosak

    We Can use Public ID`s fo keep privacy.

    May 2, 2010 at 5:44 am |
  18. Carlos

    Goldman Sachs may be guilty of non-disclosure with their CDO trading, but one thing remains, the underlying mortgages were “junk” because the people couldn’t pay their mortgages due to the central bank rates in 2005-2006. The first domino was pushed by the Fed. Goldman Sachs just didn’t want to be left standing with the hot potato once the music stopped. When you are playing musical chairs, maybe it’s the DJ’s fault (ie. the Fed) rather than the players’ reaction to do whatever it takes to get a chair.

    The fact of the matter is, the interest rates started to rise (via Fed’s decisions) very quickly in early 2004. The Fed reasoned that inflation was getting out of control, so they decided to slam on the brakes continuously over 2 years, increasing central rates fivefold from 1% to over 5%. This means interest expense on mortgages quintupled in 2 years, making it impossible for new homeowners to pay the mortgage, and making it “easier” to simply walk-away from their new homes.


    Goldman Sachs is not guilty of betting against the American homeowner – anyone should have seen this coming. Let’s remember, a fivefold increase in the interest expense of your new home, in under 2 years! This is impossible to adjust for if your salary hasn’t changed as well. The result is to try to desperately sell your home, even while making a loss, or simply walking away, leaving your equity there.

    The politicians should not be looking for blame for the crisis in the banks who traded CDO’s, but instead, we should consider reviewing the knowledge of the people running central banks, especially the Fed. While we are at it, let’s review the ECB (European Central bank), and the Bank of Canada (BOC) as well.

    It is evident that the Fed’s decision to raise interest rates on a monthly basis between 2004-2006 is ridiculous, not giving the over-heated economy enough time to REACT and absorb the increased debt burden from increased interest expenses, and thereby cool-off slowly. Some variable mortgages get interest rate adjustments on a monthly basis, other fixed-rate mortgages don’t get an adjustment for years, regardless of any changes in the market place. Adjusting central interest rates requires time for *everyone* to feel it’s impact and adjust accordingly. It’s like trying to stop an oil tanker on the high seas, it takes time to slow down. And like an oil tanker, if you apply the brakes on too much, once your realize it, you may end up losing all momentum. Getting the tanker to increase speed again takes time. It is important for central bankers to understand this time-lag in having interest rate changes affect the economy and underlying inflation rates.

    The over-braking in 2004-2006 in the USA’s Fed is evident, since in mid 2007, merely 1 year after reaching the recent peak of 5.25%, the US economy was stalling, requiring a virtual free-fall in interest rates from 5.25% to 0,25% in less than 1 year. In retrospect, the Fed looks like a new driving, getting the car to act like a wild bronco. Would it not have been better to have set a more realistic rate of 2 or 3% in 2005, and avoid such extremes in central rates?

    The Fed is not the only obvious incompetent driver at the helm of a central bank. If we look at the ECB rates (below), we pretty much the same error in judgment, where the ECB actually raised rates from 4% to 4.25% in July/2008 , just a few months before the free-all rates to 1% in early 2009! Where was the ECB looking in July/August? Why apply the brakes to them slam on the accelerator a few months later!?


    The same goes for the Bank of Canada (below), in terms of a crazy roller-coaster ride. However, what is interesting is that, unlike the Fed and ECB, between 2002-2005, rates didn’t stay at low levels for more than 6 months at a time, which has helped the Canadian economy from suffering a huge growth spurt in the mid-2000’s, and thereby avoid a huge downfall as other markets. That being said, the BOC (Bank of Canada) has followed the example of the Fed in the free-fall central rates, during 2008-2009, for reasons which may include avoiding a strong CAD$ against the USD$, in an attempt to maintain its trade balance with its largest trading partner.


    In conclusion, while committees sit and interview Goldman Sachs, in trying to understand the bank’s role in the crisis, it is evident that we need to go back to square one – central bank rates, and the legislation that may be needed to regulate the extremes allowed in central bank rates. Just as central banks look at keeping inflation within a range of 1%-3%, central banks should also consider keeping central rates within a range, or perhaps defining the acceptable changes in the central rate within a particular time frame, and thereby avoid over-stimulating or over-braking the economies that they are trying to control and improve.

    May 3, 2010 at 7:45 am |
  19. IM Gibson

    The leaders on Wall Street live in another world. They think their smarter than everyone else and shouldn't have to follow the rules. They will spend a fortune figuring out ways to get around any control and will continue to do as they please in the future. Why not.... the CEO's are making millions whether they win or lose. As long as there is no accountability there can be no trust.

    May 4, 2010 at 6:39 pm |

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