Impressions From The Flogging!

Not sure what this means but at 3:00PM the only major financial stock that was up on the day was……..Goldman Sacks!  The market is down 145.  

Consistent questions for the first panel revolve around four particular deals.  We don’t know how many other deals were done in the same timeframe.  Were these unusual, or a small percentage of what the firm was doing, large percentage?  It is hard to judge the overall context of activity.  

The technically orientated risk management for these deals is complex and changes with market conditions or a projection of market conditions.

Is Goldman engaged in some questionable stuff, yea probably, they do what they do and odds are they’re smarter than me, or you.  They play with numbers generally incomprehensible to the common man; small changes can mean big money, one way or the other.  They are involved in a lot of big dollar markets and handle massive amounts of capital.  They vary positions based on their internal analysis, long and short both played based on changing market analysis over time.  

Goldman owns what they trade and market.  They have every expectation of making money on those positions.  They are also selling to both sides of a deal, long and short.  As they participate in analyzing the deal you would expect them to play their own bias, without telling the other components of the deal where they were going with their hedge.  Apparently, under the law, the rules of fiduciary responsibility don’t necessarily apply if you’re the market maker as opposed to a financial advisor.

The question Senators shared was, it that Kosher, can you, should you be able to play both sides against the middle?  But the reality is lots of big guys with big money played this game.  I think many of us know in our gut: big players can and do dominate and sometimes manipulate markets!  Goldman is a big player.  Goldman is probably an essential player as well and that will be where the rubber meets the road.  How badly do you want them damaged?   

The Goldman guys are pretty smart.  Senator/Dr. Coburn is too.  The best of the floggings came courtesy of Dr. Coburn as he talks the lingo and may have identified the path forward for, at least a portion of the investigations.  Did Goldman, go short on collections of deal components that were kicked out of other deals?  That may bear the smell of a smoking gun.   

Senators were often frustrated with the refusal to answer general questions and the frustration took about five minutes to establish itself.  The G men kept insisting on a narrowing of the question and running out the clock.  The Chairman made it clear the clock would run as long as necessary.  The attempt at a tearful catharsis from the G men ended in disappointment, but they did seem to get a little more nervous. 

Some of the deals in question were current G-men working with former G-men.  You would assume that all the G-men knew what was going on and how to evaluate the investments. 

Senator McCaskill provided a reasonably accurate and generally colorful analogy to the G-men as being nothing more than bookies.  She even asked the G-men what their “vig” was for playing both sides of the deal; my nomination for best sound bite. 

But, it sounds like playing both sides of the deal is common practice to get the deal sold.  Protections are purchased related to investor positions and the market maker takes enough of an initial risk position to make it saleable and at what price. 

Ratings agencies will / should be the next in the flogging queue.

  • I’m not really sure how I feel at this situation. I mean on one end, it’s smart business, it makes them money. Plus me not knowing about the stock market, I don’t know who gets hurt by them playing both sides.

    So me personally, I’d love to play both sides and get rich.

  • Bill Hedges

    Bill is a DEMOCRAT ROGUES away from Democrat misdeeds and appearance as savior to America for November voters with this insufficient legislation…

    “Buffett lobbies against clampdown on derivatives”
    By Stephen Foley

    “Warren Buffett, the man who christened credit
    derivatives “financial weapons of mass destruction”, is lobbying against a proposed clampdown on existing derivatives contracts.”

    “His investment company, Berkshire Hathaway, has emerged as a key player on Capitol Hill as the minutiae of the Wall Street reform Bill is being finalised, and Mr Buffett has persuaded a senator from his home state, Nebraska, to go in to battle against provisions that could cost his company billions of dollars.”

    “David Sokol, the chairman of MidAmerican and the front-runner to succeed Mr Buffett as head of Berkshire Hathaway, has met senior lawmakers to argue that the rules should not apply to existing contracts, only to new ones.”

    “The Failings of Financial Reform: Fannie, Freddie, the Fed and Congress top the list”

    …“First, a brief examination of some of its key provisions is obliged: As reported by, it creates a Financial Stability Oversight Council to put into receivership—i.e. takeover—any financial institution it deems “too risky”; it puts the Federal Reserve in charge of a Consumer Financial Protection Bureau, with sweeping powers to regulate any institution with a portfolio exceeding $10 billion; it creates a permanent revolving $50 billion bailout fund; and “[u]pon a consensus by the Fed, the Treasury Department and Federal Deposit Insurance Corporation (FDIC), unstable institutions would be turned over to the FDIC.”

    “In short, the legislation is an extensive takeover of the nation’s entire financial system; a classic case of the “cure” being worse than the disease. Namely, it fails to address the root causes of the financial collapse of 2007 and 2008. Instead, it barely treats the symptoms of the problems—all of which government created.”

    “For example, the bill neither repeals the Community Reinvestment Act nor the Clinton-era regulations that executed it, forcing banks to offer mortgages to lower-income Americans. This essential weakening of credit was hailed at the time by then-HUD director Andrew Cuomo as an end to “discrimination in lending,” but we now know it was one of the principal causes of Americans receiving mortgages they could never afford.”

    “Last year alone there were 3.9 million foreclosure filings, as reported by Business Week, surpassing 2008’s 3.2 million foreclosures. And the pain is hardly over yet. RealtyTrac Senior Vice President Rick Sharga and Trulia CEO Pete Flint forecast as many as 4 million foreclosures in 2010.”

    …“the Fed’s lower-than-justified interest rates played a critical role in causing the housing boom to begin with. The Community Reinvestment Act regulations were bad enough, but on their own they would have never resulted in the record expansion of mortgages that was seen. The capital the Fed provided to the banking system did that. In 1990, outstanding mortgage debt held was $3.805 trillion. By the end of 2007, total mortgage holdings had risen to $14.568 trillion, a monumental 282 percent jump of $10.763 trillion in new mortgages.”

    “Now, we know that Congress was putting pressure on the Fed to keep interest rates down. As reported by Reuters, “Former Federal Reserve Chairman Alan Greenspan chastised critics on Wednesday by pointing out that Congress pushed the U.S. central bank to make sure lending to poorer Americans kept rising in the 2000s.”

    “Said Greenspan, “If the Fed as a regulator had tried to thwart what everyone perceived as a fairly broad consensus that the trend was in the right direction, homeownership was rising, and that was an unmitigated good, then Congress would have clamped down on us.”

    “In short, Greenspan’s excuse was, “Congress made me do it.” To a degree it appears to be a cop-out, but there is some substance there. First off, the Senate has its role in confirming members of Federal Reserve’s Board of Governors, and both houses of Congress share key oversight responsibilities of the nation’s monetary policy.”

    “Indeed, Congress was in on the racket. For example, promoting lending to lower-income Americans was a means of cultivating individual members’ political constituencies.”

    “Making matters worse, Congress repeatedly resisted attempts to rein in mortgage giants Fannie Mae and Freddie Mac, meanwhile taking lush campaign donations from company employees, as reported by We now know that Fannie and Freddie were responsible for securitizing about $4.7 trillion in mortgage —and then went on to sell them all over the world. As reported by the New York Times, that included some $1.5 trillion that was sold to foreign investors. As more securities were sold, more mortgages were underwritten by Fannie and Freddie.”

    “Unfortunately, the Dodd bill fails to address reining in Fannie and Freddie at all. Instead, it leaves the federal government in complete ownership of the Government Sponsored Enterprises, while the Treasury denies that taxpayers are backing up the mortgage giants, as ALG News has previously reported.”

    “Congress now pretends that simply regulating the derivatives trade and credit rating agencies will solve the problem. However, since the derivatives were not cause of the crisis but instead were a victim, restricting their trade will not prevent it from happening again. To be certain insurance giant AIG got in on the action, selling insurance policies on the securities, a multi-trillion dollar industry, and made a series of bad bets. But it was based on bad information Financial institutions all over the world bought those policies, attempting to protect their assets, and believing in the overstated quality of the Fannie and Freddie securities. “

    “What they did not know was the securities they were insuring were less-than-good. As it turns out, Fannie and Freddie defrauded the credit-rating agencies and insurers like AIG, as reported by American Enterprise Institute’s Peter Wallison. Writes Wallison, “New research by Edward Pinto, a former chief credit officer for Fannie Mae and a housing expert, has found that from the time Fannie and Freddie began buying risky loans as early as 1993, they routinely misrepresented the mortgages they were acquiring, reporting them as prime when they had characteristics that made them clearly subprime or Alt-A.”

    “Critically, Wallison writes that “this misrepresentation was a principal cause of the financial crisis.” Indeed. Because the securities were mislabeled, the anticipated default rates were miscalculated by the holders of securities and the companies that insured them. The rest was a predictable catastrophe.”

    “So how could that happen? Wallison states, “Why Fannie and Freddie did this is still to be determined. But the leading candidate is certainly HUD’s affordable housing regulations, which by 2007 required that 55 percent of all the loans the agencies acquired had to be made to borrowers at or below the median income, with almost half of these required to be low-income borrowers.”

    “So, loose lending and easy money, coupled with securitizing bad mortgages, and selling them around the world as if they were as good as gold, with the implicit backing of U.S. taxpayers, was the problem. It was a house of cards, a system that was designed as if the housing boom would never end. But when it did, and when the wave of foreclosures began, the pain was unmitigated.”

    “Rather than bringing the Fed, Fannie, and Freddie and the HUD regulations that helped cause the crisis to heel, and rather than accepting that the housing bubble was entirely government-created, Congress has almost completely avoided addressing a single one of the root causes of the financial crisis.”

    “Instead, Congress sticks to the myth that the “free market” caused the crisis and promotes the de facto takeover of the nation’s entire financial system. This is an example of avoiding responsibility by punishing others for one’s own misdeeds and in the meantime seizing unbridled power. Members must not be allowed get away with it.

    This is why this bill is a scam. The root of the problems is not addressed. As title of article points out.

    Bill Clinton ignited our political collapse:

    “Almost no one realizes that this entire subprime lending mess was created by the Community Reinvestment Act, which was passed by President Carter, a Democrat, in 1977. Later on in the 1990s, Bill Clinton, another Democrat, passed laws to enforce the original bill. The purpose of the CRA is to force banks to make risky loans to people who can’t afford to repay those loans.”

    Bush warning began year he became President
    “The White House released this list of attempts by President Bush to reform Freddie Mae and Freddie Mac since he took office in 2001.”
    Unfortunately, Congress did not act on the president’s warnings:
    “” 2001
    “April: The Administration’s FY02 budget declares that the size of Fannie Mae and Freddie Mac is “a potential problem,” because “financial trouble of a large GSE could cause strong repercussions in financial markets, affecting Federally insured entities and economic activity.”
    ** 2002
    May: The President calls for the disclosure and corporate governance principles contained in his 10-point plan for corporate responsibility to apply to Fannie Mae and Freddie Mac. (OMB Prompt Letter to OFHEO, 5/29/02)
    ** 2003
    January: Freddie Mac announces it has to restate financial results for the previous three years.
    February: The Office of Federal Housing Enterprise Oversight (OFHEO) releases a report explaining that “although investors perceive an implicit Federal guarantee of [GSE] obligations,” “the government has provided no explicit legal backing for them.” As a consequence, unexpected problems at a GSE could immediately spread into financial sectors beyond the housing market. (“Systemic Risk: Fannie Mae, Freddie Mac and the Role of OFHEO,” OFHEO Report, 2/4/03)
    September: Fannie Mae discloses SEC investigation and acknowledges OFHEO’s review found earnings manipulations.
    September: Treasury Secretary John Snow testifies before the House Financial Services Committee to recommend that Congress enact “legislation to create a new Federal agency to regulate and supervise the financial activities of our housing-related government sponsored enterprises” and set prudent and appropriate minimum capital adequacy requirements.
    October: Fannie Mae discloses $1.2 billion accounting error.
    November: Council of the Economic Advisers (CEA) Chairman Greg Mankiw explains that any “legislation to reform GSE regulation should empower the new regulator with sufficient strength and credibility to reduce systemic risk.” To reduce the potential for systemic instability, the regulator would have “broad authority to set both risk-based and minimum capital standards” and “receivership powers necessary to wind down the affairs of a troubled GSE.” (N. Gregory Mankiw, Remarks At The Conference Of State Bank Supervisors State Banking Summit And Leadership, 11/6/03)
    ** 2004
    February: The President’s FY05 Budget again highlights the risk posed by the explosive growth of the GSEs and their low levels of required capital, and called for creation of a new, world-class regulator: “The Administration has determined that the safety and soundness regulators of the housing GSEs lack sufficient power and stature to meet their responsibilities, and therefore…should be replaced with a new strengthened regulator.” (2005 Budget Analytic Perspectives, pg. 83)
    February: CEA Chairman Mankiw cautions Congress to “not take [the financial market’s] strength for granted.” Again, the call from the Administration was to reduce this risk by “ensuring that the housing GSEs are overseen by an effective regulator.” (N. Gregory Mankiw, Op-Ed, “Keeping Fannie And Freddie’s House In Order,” Financial Times, 2/24/04)
    June: Deputy Secretary of Treasury Samuel Bodman spotlights the risk posed by the GSEs and called for reform, saying “We do not have a world-class system of supervision of the housing government sponsored enterprises (GSEs), even though the importance of the housing financial system that the GSEs serve demands the best in supervision to ensure the long-term vitality of that system. Therefore, the Administration has called for a new, first class, regulatory supervisor for the three housing GSEs: Fannie Mae, Freddie Mac, and the Federal Home Loan Banking System.” (Samuel Bodman, House Financial Services Subcommittee on Oversight and Investigations Testimony, 6/16/04)
    ** 2005
    April: Treasury Secretary John Snow repeats his call for GSE reform, saying “Events that have transpired since I testified before this Committee in 2003 reinforce concerns over the systemic risks posed by the GSEs and further highlight the need for real GSE reform to ensure that our housing finance system remains a strong and vibrant source of funding for expanding homeownership opportunities in America… Half-measures will only exacerbate the risks to our financial system.” (Secretary John W. Snow, “Testimony Before The U.S. House Financial Services Committee,” 4/13/05)
    ** 2007
    July: Two Bear Stearns hedge funds invested in mortgage securities collapse.
    August: President Bush emphatically calls on Congress to pass a reform package for Fannie Mae and Freddie Mac, saying “first things first when it comes to those two institutions. Congress needs to get them reformed, get them streamlined, get them focused, and then I will consider other options.” (President George W. Bush, Press Conference, The White House, 8/9/07)
    September: RealtyTrac announces foreclosure filings up 243,000 in August – up 115 percent from the year before.
    September: Single-family existing home sales decreases 7.5 percent from the previous month – the lowest level in nine years. Median sale price of existing homes fell six percent from the year before.
    December: President Bush again warns Congress of the need to pass legislation reforming GSEs, saying “These institutions provide liquidity in the mortgage market that benefits millions of homeowners, and it is vital they operate safely and operate soundly. So I’ve called on Congress to pass legislation that strengthens independent regulation of the GSEs – and ensures they focus on their important housing mission. The GSE reform bill passed by the House earlier this year is a good start. But the Senate has not acted. And the United States Senate needs to pass this legislation soon.” (President George W. Bush, Discusses Housing, The White House, 12/6/07)
    ** 2008
    January: Bank of America announces it will buy Countrywide.
    January: Citigroup announces mortgage portfolio lost $18.1 billion in value.
    February: Assistant Secretary David Nason reiterates the urgency of reforms, says “A new regulatory structure for the housing GSEs is essential if these entities are to continue to perform their public mission successfully.” (David Nason, Testimony On Reforming GSE Regulation, Senate Committee On Banking, Housing And Urban Affairs, 2/7/08)
    March: Bear Stearns announces it will sell itself to JPMorgan Chase.
    March: President Bush calls on Congress to take action and “move forward with reforms on Fannie Mae and Freddie Mac. They need to continue to modernize the FHA, as well as allow State housing agencies to issue tax-free bonds to homeowners to refinance their mortgages.” (President George W. Bush, Remarks To The Economic Club Of New York, New York, NY, 3/14/08)
    April: President Bush urges Congress to pass the much needed legislation and “modernize Fannie Mae and Freddie Mac. [There are] constructive things Congress can do that will encourage the housing market to correct quickly by … helping people stay in their homes.” (President George W. Bush, Meeting With Cabinet, the White House, 4/14/08)
    May: President Bush issues several pleas to Congress to pass legislation reforming Fannie Mae and Freddie Mac before the situation deteriorates further.
    “Americans are concerned about making their mortgage payments and keeping their homes. Yet Congress has failed to pass legislation I have repeatedly requested to modernize the Federal Housing Administration that will help more families stay in their homes, reform Fannie Mae and Freddie Mac to ensure they focus on their housing mission, and allow State housing agencies to issue tax-free bonds to refinance sub-prime loans.” (President George W. Bush, Radio Address, 5/3/08)
    “[T]he government ought to be helping creditworthy people stay in their homes. And one way we can do that – and Congress is making progress on this – is the reform of Fannie Mae and Freddie Mac. That reform will come with a strong, independent regulator.” (President George W. Bush, Meeting With The Secretary Of The Treasury, the White House, 5/19/08)
    “Congress needs to pass legislation to modernize the Federal Housing Administration, reform Fannie Mae and Freddie Mac to ensure they focus on their housing mission, and allow State housing agencies to issue tax-free bonds to refinance subprime loans.” (President George W. Bush, Radio Address, 5/31/08)
    June: As foreclosure rates continued to rise in the first quarter, the President once again asks Congress to take the necessary measures to address this challenge, saying “we need to pass legislation to reform Fannie Mae and Freddie Mac.” (President George W. Bush, Remarks At Swearing In Ceremony For Secretary Of Housing And Urban Development, Washington, D.C., 6/6/08)”


    “July: Congress heeds the President’s call for action and passes reform of Fannie Mae and Freddie Mac as it becomes clear that the institutions are failing.”

  • Bill Hedges

    As the previously mysterious unknown Barack Hussein Obama is uncovered,





    “Barack Obama has slammed the banking industry for its predatory use of sub-prime mortgages, which are pushing millions of American homeowners toward foreclosure.”

    “But his campaign’s Finance Chair, Penny Pritzker, owned a failed Chicago thrift that helped pioneer sub-prime financial instruments and faced accusations of abuse.”

    “Superior Bank of Chicago went belly up in 2001 with over $1 billion in insured and uninsured deposits. This collapse came amid harsh criticism of how Superior’s owners promoted sub-prime home mortgages. As part of a settlement, the owners paid $100 million and agreed to pay another $335 million over 15 years at no interest…”

    “But this seven-year-old bank failure has relevance in another way today, since the chair of Superior’s board for five years was Penny Pritzker, a member of one of America’s richest families and the current Finance Chair for the presidential campaign of Barack Obama, the same candidate who has lashed out against predatory lending.”

    “But this seven-year-old bank failure has relevance in another way today, since the chair of Superior’s board for five years was Penny Pritzker, a member of one of America’s richest families and the current Finance Chair for the presidential campaign of Barack Obama, the same candidate who has lashed out against predatory lending.”

    “Though Superior Bank collapsed years before the current sub-prime turmoil that is rocking the world’s financial markets – and pushing those millions of homeowners toward foreclosure – some banking experts say the Pritzkers and Superior hold a special place in the history of the sub-prime fiasco.”

    “The [sub-prime] financial engineering that created the Wall Street meltdown was developed by the Pritzkers and Ernst and Young, working with Merrill Lynch to sell bonds securitized by sub-prime mortgages,” Timothy J. Anderson, a whistleblower on financial and bank fraud, told me in an interview.”

    “The sub-prime mortgages,” Anderson said, “were provided to Merrill Lynch, by a nation-wide Pritzker origination system, using Superior as the cash cow, with many millions in FDIC insured deposits. Superior’s owners were to sub-prime lending, what Michael Milken was to junk bonds.”

    “In other words, if you traced today’s sub-prime crisis back to its origins, you would come upon the role of the Pritzkers and Superior Bank of Chicago.”