That Dastardly Banking Business
In its usual stuffy way the Irish Times editorial today trots out of the old nag of moral indignation, mounts it like a cavalry officer and proceeds to spout absolute garbage on the ethics of certain Wall Street banks.
What brought this on of course, is the indictment of Goldman Sachs for marketing as a good investment a collaterized debt obligation (CDO) from mortgage-backed securities that they knew were bad.
As the editorial puts it:
Legal arguments notwithstanding, there are huge questions raised both about Goldman’s ethics and the transparency of the derivatives market. To its credit and Goldman’s embarrassment it has emerged that Bear Sterns, now part of JP Morgan Chase, declined to participate in a similar Paulson venture because, as one of its traders put it, the proposal “didn’t pass the ethics test”.
Faith in obtaining transparency of the derivatives market appears laudable, but you can’t help but collapse into a heap of laughter at the idea that Bear Sterns, or any Wall Street bank somehow applies an ‘ethics test’ when touting for business, or that such standards exist outside of what is said by a bank’s (or a government’s) PR department.
Dean Baker, writing in the Guardian on Monday quotes Rolling Stone journalist Matt Taibbi who described Goldman in an article last year as “a great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money.”
“It turns out”, adds Baker, “that Mr. Taibbi was far too generous in his assessment of the huge investment bank”.
Baker describes the bank’s way of loaning money to the Greek government in the past, turning a loan into a ‘swap’ which meant that on the books, and to the EU, it didn’t appear as a loan at all. Of course, those chickens have come home to roost.
Goldman’s behavior can best be summed up in another anology that Baker provides, this time made by Phil Angelides, the head of the Financial Crisis Inquiry Commission.
“Angelides noted that Goldman has bought CDS on the CDOs that it had issued and sold. He compared this to selling a car with bad brakes and then buying insurance on the car. In fact, Goldman effectively cut the brake lines, sold the car to unsuspecting customers and then bought the insurance policy.
In fairness to Goldman, there is no reason to believe that they are any less ethical than any of the other big Wall Street actors, just more effective. The other big banks do the same sorts of deals, even if they aren’t able to pull off quite as many scams as Goldman.”
Which kind of puts the IT editorial about the good conduct of some banks in perspective.
Should any illusion remain it might be worth turning to Matt Taibbi’s most recent piece in Rolling Stone. It tells the story of how Wall Street banks fell over each other to help finance and more importantly re-finance a large public infrastructure project in Jefferson County. In order to get that business they had to bribe the middlemen that public officials had told them to contact in order to arrange for the financing of what Taibbi described as “the most elaborate, ecofriendly, expensive sewer system in the history of the universe”.
The story starts off looking at the story from the perspective of Lisa Pack, an administrative assistant in the roads and transportation department in Jefferson County, Alabama. She and a 1000 of her collegues had to take unpaid leave when the consequence of the $5 billion of refinanced debt finally hit the Jefferson County exchequer. One of the expenses that Pack would have to pay out of her reduced wages was a recently increased sewer bill which went from $14.71 a month in 1996 for a family of four to $64 a month now.
“The sewer bill, in fact, is what cost Pack and her co-workers their jobs. In 1996, the average monthly sewer bill for a family of four in Birmingham was only $14.71 - but that was before the county decided to build an elaborate new sewer system with the help of out-of-state financial wizards with names like Bear Stearns, Lehman Brothers, Goldman Sachs and JP Morgan Chase. The result was a monstrous pile of borrowed money that the county used to build, in essence, the world’s grandest toilet - “the Taj Mahal of sewer-treatment plants” is how one county worker put it. What happened here in Jefferson County would turn out to be the perfect metaphor for the peculiar alchemy of modern oligarchical capitalism: A mob of corrupt local officials and morally absent financiers got together to build a giant device that converted human shit into billions of dollars of profit for Wall Street - and misery for people like Lisa Pack.”
Clearly Bear Stearn forgot to do the ethics test on that one. It’s a fascinating story, colourfully told, jammed with Taibbi’s talent for B-Movie images. I’m quoting another chunk here to give more of a flavour.
“And once the giant shit machine was built and the note on all that fancy construction started to come due, Wall Street came back to the local politicians and doubled down on the scam. They showed up in droves to help the poor, broke citizens of Jefferson County cut their toilet finance charges using a blizzard of incomprehensible swaps and refinance schemes - schemes that only served to postpone the repayment date a year or two while sinking the county deeper into debt. In the end, every time Jefferson County so much as breathed near one of the banks, it got charged millions in fees. There was so much money to be made bilking these dizzy Southerners that banks like JP Morgan spent millions paying middlemen who bribed - yes, that’s right, bribed, criminally bribed - the county commissioners and their buddies just to keep their business. Hell, the money was so good, JP Morgan at one point even paid Goldman Sachs $3 million just to back the fuck off, so they could have the rubes of Jefferson County to fleece all for themselves.
Birmingham became the poster child for a new kind of giant-scale financial fraud, one that would threaten the financial stability not only of cities and counties all across America, but even those of entire countries like Greece. While for many Americans the financial crisis remains an abstraction, a confusing mess of complex transactions that took place on a cloud high above Manhattan sometime in the mid-2000s, in Jefferson County you can actually see the rank criminality of the crisis economy with your own eyes; the monster sticks his head all the way out of the water. Here you can see a trail that leads directly from a billion-dollar predatory swap deal cooked up at the highest levels of America’s biggest banks, across a vast fruited plain of bribes and felonies - “the price of doing business,” as one JP Morgan banker says on tape - all the way down to Lisa Pack’s sewer bill and the mass layoffs in Birmingham.”
Taibbi has been talking about his article far and wide since it was published at the end of March. You can hear him in Doug Henwood’s latest Behind the News podcast which I’ve embedded below (second interview, two thirds of the way through).
In that interview he also mentions the AIG scandal, which is the John Paulson-Goldman CDO story on a far grander, and more damning scale. While Goldman’s wasn’t the only bank that hedged insurance against a meltdown they are held as the most culpable, especially as they might have taken advantage of information they knew in advance of the AIG bailout.
Returning home for a moment, yesterday and today there was uproar about the pension which Bank of Ireland CEO Richard Boucher can look forward to earning. The point here is whether the money that would be used to pay for it is coming from the money the tax payer has put into AIB through various bailouts, or whether it comes from an AIB fund. Considering that with the Irish tax payer AIB has hardly any money to survive it would appear that the CEO’s pension fund relies on the stipend from the State.
However, P.O’Neill brings our attention to an important detail on Irish Election. First of all he quotes Brian Cowen’s response to Enda Kenny in the Dail yesterday in which he tries to suggest that ‘unlike public service pension’ the BoI one is ‘pre-funded’.
“Contrary to how this is being portrayed, this is a payment into an overall fund that provides for the pensions of most Bank of Ireland staff. If it wasn’t made, the fund would be short-resourced to meet its obligations to all Bank of Ireland pensioners and staff who retire in the future,” the Taoiseach said. “It’s a payment which was being paid to the bank staff pension fund in order to sustain agreed pension of the chief executive [Richie Boucher], a pension which is based on his salary and which is now controlled by Government under the Covered Institutions Remunerations Oversight Committee. “The payment is into the pension fund, because unlike public service pensions, obviously it must be pre-funded.”
This is not true, The National Pensions Reserve Fund website states, was founded to pre-fund public service pensions after 2025.
He then adds:
“But now it’s in a worse position to do that, because it was raided for the preference share funding for Bank of Ireland and AIB, capital which allowed those banks to stay in business and continue to fund their pensions.
By contrast, Waterford Crystal, which received no NPRF infusion, will leave its workers with about one-third of their promised pensions - which is a lot less than EU Directives were supposed to mean for insolvent companies.”
So okay, he’s waived the option to retire at 55, now that there has been some heckling on the matter. But the point above still stands. However, in tomorrows the Irish Times editorial, we’ll no doubt here all about the good qualities of certain bankers, who are ’sensitive’ to what is said in the media.
Discussion
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Comment by: Pope Epopt
Apr 22nd 2010 at 10:04
The indictment of Goldmann Sachs smells of a show trial cooked between them and Geithner. The Obama regime gets to look like tough regulators, Goldmann Sachs whinges mightily and pays a small (for them) fine, lawyers get their fees, and the financial ’services’ industry gets to own the US Treasury.
What’s not to like? Cue swoons or relief by editorial writers and financial journalists.
Comment by: Donagh
Apr 22nd 2010 at 10:04
You’re absolutely right, of course. And Taibbi seems to be making a career out of it.
I was reading a great bit out of that new book by Leo Panitch et al, In and Out of Crisis which I’ve mentioned on here before. Anyway, it provides a quote from Ralph Miliband, on the way that new administrations start to talk about ‘reform’. It was in the context of the uproar about the bonuses paid out to Goldman Sach’s execs from the bail out money provided by the US and why Geithner said before the Senate finance committee “People are right to be angry” over bonuses. He said that despite the fact that he’d earned many millions of dollars as Goldman Sach’s CEO and got many millions more when he left, to ensure his independence.
So, just like the Irish Times editorial it’s important to be seen to be saying ’something’ that reflects public outrage, but this is only done so that you don’t actually have to do anything about it.
Comment by: Pope Epopt
Apr 23rd 2010 at 08:04
More evidence of what lobby expenditure can buy:
Obama in January:
Yesterday:
Source: Nils Pratley in the Guardian April 22nd 2010.