The Securities and Exchange Commission (SEC) has charged Goldman Sachs (GS), America’s largest investment bank with fraud. Before getting into details, the timing of these charges is at the least curious.
1. It is reported that the SEC’s GS investigations has be ongoing for about nine months. Why did they wait so long to file the charges?
2. The Progressives just past the healthcare reform bill making sweeping changes to the healthcare industry, about one sixth of the American economy.
3. The Obama Administration has jumped from one crisis another in its drive to fundamentally change America. As Rahm Emanuel, President Obama’s Chief of Staff said: “”Never let a serious crisis go to waste. What I mean by that is it’s an opportunity to do things you couldn’t do before.” We had the Stimulus Package crisis, the General Motors bailout crisis, the climate crisis, and the healthcare crisis. Starting to see a pattern?
Is President Obama going after GS now for the good of the country or in his never-end quest to grab power and bring more of the economy under federal government’s control? As they say, if it quacks like a duck it’s not a buffalo!
Irrespective of the President’s motivations, the larger investment banks’ greed has been out of control. These banks helped facilitate the dot.com bubble, then the datacom bubble and more recently the housing bubble. They gave us the creative financing and counter-party insurance that made highly risky investments look safe to many investors. While possibly not illegal, the obscene profits the banks made on the bubbles doesn’t pass the smell test.
OK, so we started questioning the government’s motives in prosecuting GS. Then we questioned the banks huge profits made on other peoples’ miseries. Now it’s time to go full circle and looked to the root causes of the meltdown, the actions that let the bankers act on their greed. This goes back to the same government now prosecuting the GS.
The government’s complicity on creating the modern bubbles goes back to the stock market crash of 1987. The Dow dropped 22% in one day. However, instead of letting the market sort itself out and rebalance itself naturally, the Federal Reserve (Fed) panicked and flooded the world with liquidity. This led to a positive short-term result with the Dow actually being up for the year, even with the crash. But there was a dark side to this intervention. It sent a message to investors that in the future the Fed would come to their rescue should there be further serious market disruptions. This inevitably made investors less diligent and got us started on a slippery slope that continues building ever larger bubbles.
In the late 1990’s we had other major disruptions in the economy; the dot.com and telecom bubbles were created and popped. Then 9/11 caused a rapidly forming recession. Instead of allowing this recession to rebalance the economy naturally, the Fed dropped interest rates to historic lows and kept them there for an extended time. This cheap money policy was directly responsible for the housing bubble, the largest one to date. It led to cheaper mortgages that facilitated the purchase of more homes than were needed with speculators entering the market. Also, since returns on safe investments went so low, investors were made easier prey for riskier investments that offered greater returns. Finally, the low Fed rates facilitated the investment banks’ quest to sell collateralized debt obligations to investors. It were these risky investments that were sold as safe and ultimately led to the implosion of economies worldwide.
There was another major way that government intervention into the markets helped create the housing bubble and its subsequent popping. By changing the charters of Fannie Mae and Freddie Mac to promote home ownership to people that could not afford mortgages, they created higher artificial demand for homes that led to higher prices, speciation and refinancing. The artificial demand was destined to evaporate during the next economic downturn; and it did just that. The rest is history.
Now back to the SEC’s charges against Goldman Sachs. The SEC complaint in essence states that GS did not properly disclose information about sub-prime mortage investments that they were packaging and selling to investors. The most damming charges include the claim that GS engaged a firm to put these investment packages together, who at the same time was betting that these same investments would go down in value. If true, such action does not pass the smell test in perfume shop.
What can be concluded from this convoluted story?
1. The Obama Administration is out for another power grab.
2. The investment banks used their size and greed to take advantage of investors.
3. The government is in a conflict position going after Goldman Sachs since they are complicit in costing investors billions.
What corrective actions should be taken:
1. The prosecution of GS should go forward full speed. However, it should be removed from the politicized SEC. They are biased not only because they ultimately report to the President, but because they misread the tea leaves so badly as the bubbles were growing. Need I mention Bernie Madoff?
2. Enforce the anti-trust laws already on the books to break the large banks into smaller ones that we allow to fail in the future. If these large banks were too large to fail in 2008, why hasn’t the Obama Administration taken this action by now? This lack of action indicate a more nefarious motivation on the Administration’s part.
3. A truly non-partisan team of outsiders needs to be formed to create a new regulatory environment for banks going forward. Incredibly, Senator Chris Dodd who got the sweetheart personal mortage from Countrywide Financial, another corporate player in this mess, and Congressman Barney Frank who played a key role in changing Fannie Mae’s and Freddie Mac’s charters, are currently in charge of creating new banking regulations. Talking about the foxes guarding the henhouse!
While prosecuting banks that broke laws must be done, it is being used by President Obama to cover up an even larger bubble that his Administration is in the midst of creating: the government debt bubble. This debt bubble is being created by bailing out industries and individuals who got burnt in the housing bubble, moving bad private debt onto the government’s balance sheet and printing money to pay for various programs. The housing bubble had to dwarf the dot.com and datacom bubbles that preceded it since only a larger bubble could prolong our false sense of economic prosperity. Similarly, this debt bubble is already dwarfing the housing bubble. It’s hard to see a larger bubble coming along that would bail us out from this latest bubble. And so the insanity continues!