Goldman Sachs: “Financial meltdown was a con”..Brown and Merkel go on the attack..top executives involved
The global financial crisis, it is now clear, was caused not just by the bankers’ colossal mismanagement. No, it was due also to the new financial complexity offering up the opportunity for widespread, systemic fraud. Friday’s announcement that the world’s most famous investment bank, Goldman Sachs, is to face civil charges for fraud brought by the American regulator is but the latest of a series of investigations that have been launched, arrests made and charges made against financial institutions around the world. Big Finance in the 21st century turns out to have been Big Fraud. Yet Britain, centre of the world financial system, has not yet levelled charges against any bank; all that we’ve seen is the allegation of a high-level insider dealing ring which, embarrassingly, involves a banker advising the government. We have to live with the fiction that our banks and bankers are whiter than white, and any attempt to investigate them and their institutions will lead to a mass exodus to the mountains of Switzerland. The politicians of the Labour and Tory party alike are Bambis amid the wolves.
Just consider the roll call beyond Goldman Sachs. In Ireland Sean FitzPatrick, the ex-chair of the Anglo Irish bank – a bank which looks after the Post Office’s financial services – was arrested last month and questioned over alleged fraud. In Iceland last week a dossier assembled by its parliament on the Icelandic banks – huge lenders in Britain – was handed to its public prosecution service. A court-appointed examiner found that collapsed investment bank Lehman knowingly manipulated its balance sheet to make it look stronger than it was – accounts originally audited by the British firm Ernst and Young and given the legal green light by the British firm Linklaters. In Switzerland UBS has been defending itself from the US’s Inland Revenue Service for allegedly running 17,000 offshore accounts to evade tax. Be sure there are more revelations to come – except in saintly Britain.
Beneath the complexity, the charges are all rooted in the same phenomenon – deception. Somebody, somewhere, was knowingly fooled by banks and bankers – sometimes governments over tax, sometimes regulators and investors over the probity of balance sheets and profits and sometimes, as the Securities and Exchange Commission (SEC) says in Goldman’s case, by creating a scheme to enrich one favoured investor at the expense of others – including, via RBS, the British taxpayer. Along the way there is a long list of so-called “entrepreneurs” and “innovators” who were offered loans that should never have been made. Lloyd Blankfein, Goldman’s CEO, remarked only semi-ironically that his bank was doing God’s work. He must wake up every day bitterly regretting the words ever emerged from his mouth.
A crisis gripping Goldman Sachs deepened today as Britain and Germany moved towards joining the US in pursuing a fraud investigation against the Wall Street bank for allegedly fiddling clients out of $1bn ($650m) through a misleading mortgage investment deal.
Gordon Brown ordered a special investigation into Goldman, accusing the bank of “moral bankruptcy”. He threatened to block multimillion-pound bonus payouts if the firm is found guilty of wrongdoing.
In Berlin, Angela Merkel‘s government said it had sought information from the US Securities and Exchange Commission with a view to evaluating “legal steps” against Goldman.
Goldman’s shares dived by 13% on Friday when the SEC charged the firm with collaborating with a hedge fund, Paulson & Co, to sell a deliberately skewed package of doomed mortgages in 2007, leaving clients including Royal Bank of Scotland and a German bank, IKB, nursing losses of more than $1bn. Paulson & Co made a fortune out of the deal by taking a short position to bet on the package’s demise.
A London-based Goldman Sachs director, Fabrice Tourre, who is accused of masterminding the fraud, is still working as usual, although efforts by Sunday newspapers to track the Frenchman down to his flat near Sadler’s Wells theatre in north London were unsuccessful. A Goldman spokeswoman said: “He’s still an employee. He hasn’t been suspended.”
The case against Goldman has sent a ripple through the financial services industry, with analysts predicting it could be the first of many against similarly structured mortgage instruments known as collateralised debt obligations. The SEC’s action took place amid wrangling in Congress over an overhaul of Wall Street regulation, where Republicans object to the scope of moves proposed by the administration.
Goldman could face fresh opprobrium on Tuesday, when it is due to publish its financial results for the first quarter of the year and is forecast to reveal revenue of more than $10bn – of which nearly $5bn could be earmarked for employee pay.
It was late 2006, and an argument had broken out inside the Wall Street bank’s prized mortgage unit — a dispute that would reach all the way up to the executive suite.
One camp of traders was insisting that the American housing market was safe. Another thought it was poised for collapse.
Among those who saw disaster looming were an effusive young Frenchman, Fabrice P. Tourre, and his quiet colleague, Jonathan M. Egol, the mastermind behind a series of mortgage deals known as the Abacus investments.
Their elite mortgage unit is now at the center of allegations that Goldman and Mr. Tourre, 31, defrauded investors with one of those complex deals.
The Securities and Exchange Commission filed a civil fraud suit on Friday that essentially says that Goldman built the financial equivalent of a time bomb and then sold it to unwitting investors. Mr. Egol, 40, was not named in the S.E.C.’s suit.
Goldman has vowed to fight the S.E.C. But the allegations have left many on Wall Street wondering how far the investigation might spread inside Goldman and perhaps beyond.
Pressure on Goldman mounted on Sunday as two members of Congress and Gordon Brown, Britain’s prime minister, called for investigations into the bank’s role in the mortgage market. Germany also said it was considering legal action against the bank.
Mr. Tourre was the only person named in the S.E.C. suit. But according to interviews with eight former Goldman employees, senior bank executives played a pivotal role in overseeing the mortgage unit just as the housing market began to go south. These people spoke on the condition that they not be named so as not to jeopardize business relationships or to anger executives at Goldman, viewed as the most powerful bank on Wall Street.
According to these people, executives up to and including Lloyd C. Blankfein, the chairman and chief executive, took an active role in overseeing the mortgage unit as the tremors in the housing market began to reverberate through the nation’s economy. It was Goldman’s top leadership, these people say, that finally ended the dispute on the mortgage desk by siding with those who, like Mr. Tourre and Mr. Egol, believed home prices would decline.
everyone is lining up to take some hits on the sacrificial lamb..like being slapped with a wet lettuce..wont hurt to much..mock indignation and the status quo will resume..
we all knew it was a con..it was manufactured from start to finish..as everything in the market is..