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Posts Tagged ‘Anti-Trust Laws’

Lawsuit Alleges J. P. Morgan Complicit in Madoff Scheme

Posted by Steve Markowitz on February 3, 2011

A suit filed on December 2 2010, but just unsealed, alleges that the large bank, J.P. Morgan, had misgivings about Bernie Madoff’s activities, but continued doing business with him.  The suit was filed by the bankruptcy trustee, Irving H. Picard, who is responsible for gathering assets for victims of Madoff’s Ponzi scheme.  According to the Trustee’s attorney, David J. Sheehan, Madoff “would not have been able to commit this massive Ponzi scheme without this bank”.

The $6.4 billion lawsuit seeks the return of $1 billion in J.P. Morgan’s profits and fees, as well as $5.4 billion in damages.  According to the complaint, the bank offered products tied to Madoff through investment funds that fed money to him even after J.P. Morgan had concerns about Madoff’s activities.  The suit alleges that J.P. Morgan told the regulators of their Madoff concerns based on the “investment performance achieved by its funds which is so consistently and significantly ahead of its peers, year-on-year, even in the prevailing market conditions, as to appear too good to be true—meaning that it probably is.”

On a nearly daily basis, information is made public about the immoral behavior of the large banks.  There is no justification for bailing out these institutions that brought on the financial crisis the first place.  But that is past history.  These banks that were too big to fail before the crisis, are only bigger today given the demise of some of their comrade banks.  The government should use the Anti-Trust laws to insure that they are not too big to fail next time.


Posted in Banks, Bernie Madoff | Tagged: , , , , , , , , | Leave a Comment »

The Avoidable Financial Crisis

Posted by Steve Markowitz on February 1, 2011

The Financial Crisis Inquiry Commission was formed in 2009 to study the crisis that hit financial markets over two and a half years ago.  The Commission interviewed 700 witnesses that included bank executives, governmental officials and representatives from the rating agencies.  They have released their findings that are critical of many and concluded that the crisis was avoidable.

CNNMoney has reported on the following findings by the Commission.  Each finding is followed by comments, questions and/or conclusions referred to as “Issue”.

“Federal authorities, who failed to curb reckless behavior on Wall Street, bear much of blame for the turmoil that erupted in 2008 and 2009.”

Issue – This conclusion should surprise to no one.  Bureaucrats have proven many times that they are incapable of oversight over an extended period.  What starts as a good idea degenerates into a governmental boondoggle that puts more governmental workers on the dole.

“The crisis was also the product of “dramatic failures of corporate governance and risk management at many systemically important financial institutions,” according to one of the report’s nine conclusions.”

Issue – As long the large financial institutions run by executives with no long-term skin in the game they will make reckless decisions that benefit themselves via short-term bonus compensation plans.

“The commission faults policies under both Presidents Bush and Obama, as well as actions taken by the Federal Reserve under Alan Greenspan and the current chairman, Ben Bernanke.  Tim Geithner, the current Treasury Secretary who was president of the New York Fed during the crisis, and his predecessor, Henry Paulson, were also named in the report.”

Issues – Politicians like Bush and Obama, as well as those in the Congress, are incapable of foreseeing even the potential systemic problems within the financial system.  They are but politicians focused on elections.

Assuming that the professionals like Greenspan, Bernanke, Geithner and Paulson did not have more nefarious motivations, the fact that these financial elites did not see the train wreck coming should give pause to any expectation that their kind will see the next crisis coming.

The Commission faulted the shadow banking system including Lehman Brothers and Bear Stearns, and Goldman Sachs, Merrill Lynch and Citibank, as well as AIG.  “The commission also faults the lending practices of commercial banks such as Countrywide, now owned by Bank of America, Wachovia and JP Morgan Chase.”

Issue – While Lehman Brothers and Bear Stearns were destroyed by the crisis, governmental bailouts undoubtedly saved the remaining institutions and many of those that live off of them.  In other words the taxpayers bailed out the scoundrels that created the crisis.

“The report also criticizes the three main credit rating agencies – Moody’s, S&P and Fitch — as “essential cogs in the wheel of financial destruction””.

Issue – These for profit agencies are still in business.  Why?

“The Commission said: “As our report shows, key policy makers – the Treasury Department, the Federal Reserve Board, and the Federal Reserve Bank of New York – who were best positioned to watch over our markets were ill prepared for the events of 2007 and 2008”“.

Issue – Given that the Treasury Department, Federal Reserve Board, and Federal Reserve Bank of New York with all of their resources and brain-power were “ill prepared”, it is unreasonable to expect the government and their bureaucrats to protect the people from future crises.

Fannie Mae and Freddie Mac, two government-sponsored enterprises, were “the kings of leverage,” the report says.  By the end of 2007, the companies had a combined leverage ratio of 75 to 1.”

Issue – These enterprises became the “the kings of leverage,” because of their backing by the government and their executives being compensated based on short-term results.

In addition, the Congress forced these lending agencies to promote the government’s activist social programs that included giving mortgages to those that could not afford to pay them back.


You would think that with such a damming report that those in government would suggest a change in direction.  However, instead of admitting that government oversight only helps to keep honest people honest, the government is adding even more bureaucrats and regulations in the promise that the next time it will work.  How many times must this solution fail?

There are action that the government could take that would lessen the likelihood of similar systemic problems occurring again.  They include:

1. “Too big to fail” must not protect companies from failure.  Companies that fail must be left to go out of business, period; no exceptions.  Their owners, shareholders, employees and customers must share the pain of being involved with a failed business.  The fear of this draconian endgame is the best protector that society has towards bad business practices.

2. Anti-trust laws currently on the books must be enforced.  Companies that approach the level of being “too big to fail” must be broken into smaller pieces.

3. Make it easier to prosecute corporate managers, individually, for illegal behavior made at the corporate level.  While there are those that will claim this may limit corporations’ ability to attract managers, so be it.  The damage done to our economy as a result of immoral and illegal, behavior by professional mangers demands this action.

4. Term limits.  The professional politician class must be eliminated.  Our Country must be run by the People, as our Founders envisioned.

5. Conflicts of interests must be eliminated between government employees and the private sector by restricting those that can work at both sides of related positions.  Allowing Henry Paulson, a former head of Goldman Sachs to manage Treasury enabled him to decide which banks failed and which ones receive the benefits of the government’s bailout.  How ludicrous!

Those that continue proffering the thesis that only the goventment can protect the People from scoundrels are either ignoring history or are attempting to protect some parochial interest.  Even assuming that the lawmakers and bureaucrats had the best of intentions and the intellectual skills, which they do not always have, the dynamics of a complex economy and the resourcefulness of the greedy will always be one step ahead of the regulators.

Only the free market can govern and control reckless behavior.  The government’s role should be to insure that the market remains truly free and that must start with no bailouts for those that fail.


Posted in Bailouts, Free Markets, Governmental Intervention | Tagged: , , , , , , , , , , , , , , , , , , , , , , , , , | 1 Comment »

The Goldman Sachs Fraud Charges: Covering Up the Next Bubble

Posted by Steve Markowitz on April 19, 2010

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!

Posted in Bubbles, Debt, Deficits, Governmental Intervention, Mortgages | Tagged: , , , , , , , , , , , , , , , , , , , , , , , , , , , | 1 Comment »

Andrew Cuomo Acts Against Intel

Posted by Steve Markowitz on November 6, 2009

a cuomoNew York’s Attorney General Andrew Cuomo has filed an antitrust suit against Intel Corporation, complaining that certain of its practices were anti-competitive.  While this Blog is not familiar with the merits of the case, the timing of the action is not appropriate.

States’ Attorney Generals typically do not challenge national antitrust issues prior to the Federal government acting.  According to antitrust expert John DeQ. Briggs, “It is highly unusual for a state attorney general to take on a national monopoly case before the Feds have acted“.  It is likely that Mr. Cuomo’s motivations relate to his expected run for the Governor of New York in 2010. Read the rest of this entry »

Posted in Anti-Trust, Politics | Tagged: , , , , , , | Leave a Comment »

Banker Bonuses and the Anti-Trust Laws

Posted by Steve Markowitz on July 31, 2009

Let’s have a short course in Econ 101.  In the capitalistic system when a business has financial difficulties, all stakeholders are supposed to “pay the price” including shareholders, bondholders, executives and yes, employees.  Through this cleansing process, bad businesses will either correct their imbalances, or go out of business so that more efficient business can take their place.whole-hog_~wholeh_c

One of the first expenses that would go in a distressed business are executive bonuses.  That was not the case with Wall Street banks, as the following facts indicated:

  • Nine firms that received $32 billion in government bailout money paid about 5,000 traders and bankers bonuses of more than $1 million each during 2008, according to New York’s Attorney General.  Incredibly, these nine banks lost total of $81 billion that year.
  • Goldman Sachs paid more than $1 million to 953 people with 200 collecting nearly $1 billion.
  • At Morgan Stanley, 428 employees received $1 million or more with $577 million being shared by 101 people.
  • Citi Group’s revenue was the lowest since 2002, but they spent more on compensation than any one year between 2003 and 2006. Read the rest of this entry »

Posted in Capitalism, Governmental Intervention | Tagged: , , , , , , , , | Leave a Comment »