REASONS FINANCIAL REFORM WILL HAVE AN EASIER PATH IN CONGRESS THAN HEALTHCARE REFORM
SEC VS GOLDMAN SACHS
Goldman Sachs CEO Lloyd Blankfein was scheduled to go before a congressional committee on Tuesday to talk about the investment bank’s role in the financial meltdown of 2008. Goldman received $10 billion in federal bailout money 18 months ago, and paid it all back last summer. However, the Securities and Exchange Commission’s civil case against Goldman filed last month sheds light on how the Wall Street titan manipulated an instrument known as a synthetic collateralized debt obligation, or CDO, to game the subprime mortgage market. The SEC alleges that Goldman created a security called Abacus 2007-AC1 in such a way that it was destined to fail. Goldman secretly bet against Abacus while encouraging its investors to sink their money into it. The result: the loss of $1 billion by private investors. The ripple effect on Main Street: loss of jobs, a credit crunch for small businesses and a lot of angry voters.
The mortgage-related security created by Goldman Sachs in 2007 lies at the heart of the SEC’s civil suit against the firm. “Goldman Sachs structured and marketed a synthetic collateralized debt obligation that hinged on the performance of subprime residential mortgagebacked securities,” an SEC press release states.
“Goldman Sachs failed to disclose to investors vital information about the CDO, in particular the role that a major hedge fund played in the portfolio selection process and the fact that the hedge fund had taken a short position against the CDO.” The hedge fund manager who picked the toxic assets and bundled them into Abacus? John A. Paulson.
HEDGE FUND MANAGERS WHO LIE TO INVESTORS
John A. Paulson is ranked No. 45 on the Forbes list of the world’s wealthiest billionaires, worth approximately $12 billion. He is also the man at the center of the SEC’s investigation into Goldman Sachs’ issuance of Abacus 2007-AC1. According to the SEC’s complaint, filed in the Southern District of New York, the marketing materials for Abacus told investors that the residential mortgage-backed securities that made up the CDO were hand-picked by ACA Management, when in fact, Paulson’s company selected the securities and then bet on them to fail. The moral and ethical abyss that is Wall Street has now been brought into the light of day, and we the taxpayers have paid the price. Collectively, Americans appear to be saying, “No more!”
OBSCENE EXECUTIVE COMPENSATION
AIG established a new low in unethical corporate behavior last year when it handed out $165 million in bonuses to executives after receiving $170 billion in federal bailout money. One could infer that when AIG executives were taking these huge risks in the subprime housing market in 2007 and 2008, they knew golden parachutes were available courtesy of the American taxpayer. Both Democrats and Republicans in Congress have heard from their constituents, and they realize if they don’t deliver significant finance reform and do so quickly, their jobs will be in jeopardy come November.
FOOLING SOME OF THE PEOPLE SOME OF THE TIME
The anti-healthcare reform forces failed in their attempt to derail the Obama administration’s efforts to help insure 30 million Americans without health insurance and to regulate an industry that comprises one-sixth of the nation’s economy. Lobbying groups like PhRma used every means at their disposal to convince us that reform meant a government takeover of the healthcare system, but to no avail. On the issue of financial regulation, even conservative Republicans appear to agree with Democrats and independents that Wall Street has run amok, and needs to be reined in. Wall Street has formidable lobbying strength, however, so Republicans are poised to block the Senate bill.
SIGNS OF BIPARTISANSHIP
Last week, the Senate Agriculture Committee approved new limits on derivatives, including a ban on most direct bank trading of the financial instruments that played a leading role in the financial meltdown of 2008. Sen. Chuck Grassley, a leading Republican, joined 12 Democrats in approving the bill — a good sign that the bill will gain Senate approval.
RATINGS AGENCIES EXPOSED
Last week Eric Kolchinsky, a former managing director at Moody’s Investor Service, told the Senate Permanent Subcommittee on Investigations that the ratings agency cared more about gaining market share than maintaining its good name among investors or committing securities fraud. “Recent rating activity indicates that market participants still prefer the most aggressive ratings,” Kolchinsky said. “Rating firms which have taken conservative positions have seen their market share tumble. We will no doubt see the results of this lesson when the regulatory spotlight is turned off.” Moody’s gave Abacus a triple-A rating The solution: a single set of public standards for regulatory purposes that will allow rating agencies to compete for clients without being forced to lower their standards, Kolchinsky said. During the hearing, Sen. Carl Levin (D-Mich.) hammered home the point that that credit-rating agencies did whatever was necessary to get lucrative fees, some as high as $1.4 million, for rating CDO’s and other complex financial instruments.
GLOBAL FINANCIAL MELTDOWN
In his film Capitalism: A Love Story, documentary filmmaker Michael Moore speaks with a number of clergy who point out that capitalism is antithetical to all Judeo-Christian values. A combination of human greed and financial regulations that have been consistently loosened for the past 30 years led to the financial meltdown of 2008. Unregulated freemarket capitalism, the kind championed by the late Milton Friedman, simply doesn’t work. We cannot trust Wall Street bankers to play by the rules, or have our best interests at heart. And the markets will not regulate themselves.
PEOPLE ARE HURTING
At the moment, 15 million Americans are out of work and the national unemployment rate is holding steady at 9.7 percent. In March, the US Bureau of Labor Statistics reported that the number of long-term unemployed, or those without jobs for 27 weeks or longer, increased by 414,000 to 6.5 million people. Currently, 44 percent of America’s unemployed have been jobless for more than six months. “We hold these truths to be self-evident, that all men are created equal, that they are endowed by their creator with certain unalienable rights, that among these are life, liberty and the pursuit of happiness,” the Declaration of Independence famously states. As long as Wall Street lobbyists have influence over our elected officials, the lofty ideals of our nation will be held hostage.
REVOLUTION IN THE AIR
People are angry at the system and they are beginning to stand up for their rights. Case in point: Republic Windows and Doors. When the company’s employees were told they were being laid off without compensation or extension of their healthcare insurance in December 2008, 200 workers staged a sit-in. Eight days later, Bank of America and JP Morgan Chase created a $1.75 million fund to pay the workers the wages they were owed and extend their healthcare insurance for two additional months. Financial reform is a small step in the right direction, but fundamental changes to an unfair economic system will require all of us to participate in the process.