Ask Goldman Sachs to Give it Back! RALLY AT THE TREASURY 6/7/2010! HUFFINGTON POST

WE WANT A REFUND!

Cenk UygurHost of The Young Turks
Posted: May 24, 2010 06:44 AM

Sometimes when you explain to people that some of the most complicated financial transactions in the country were just side bets, they don’t really believe you. They think it’s an oversimplification. We couldn’t have wrecked the global economy because some people made side bets. These are sophisticated bankers with sophisticated financial instruments, so it must be more complicated than that. It isn’t. They bet one another, whoever lost got paid by the American taxpayer.

To be fair, sometimes they had the money to pay off one another without government bailouts, but not often. That’s because they were largely betting with money they never had. AIG is the perfect example. Their executives made hundreds of millions of dollars in bonuses from the early wins in these bets, but then stuck the taxpayers with a $182 billion bill when they lost.

A credit default swap is when you bet that a certain asset is going to default. If you’re wrong, then you have to pay a little bit. If you’re right, you get paid a ton. So, AIG collected a lot of little winnings when they bet that mortgage backed securities would not go into default. But then when they did go into default, they lost big.

So, what does all of this have to do with us? Well, Hank Paulson, Tim Geithner and Ben Bernanke in their infinite wisdom decided that we should pay AIG’s bets for them. Did they go back and take the money the AIG executives got for their earlier so-called winnings? No, of course not. Did they even inquire into whether these bets were on actual assets that the other parties were on the hook for? Apparently not.

Let me explain that more. If you bought a package of mortgage backed securities and wanted to insure it in case anything went wrong, that’s a fairly normal derivative. That basically works as insurance for your security. So, if we paid off people who actually owned those securities, it still wouldn’t be right in my opinion but it would be a lot more understandable. The argument would be that it would destabilize the economy too much if all of the people holding the mortgages all of sudden lost most of their value.

But what if they didn’t hold the mortgages, they just bet on them? That’s like the difference between bailing out the Dallas Cowboys to help the local Dallas economy versus bailing out bookies who bet too much on the last Cowboys game. The latter is what we did with AIG. We paid off people’s bets for almost no reason.

I explain all of this because it’s very important that you understand that when we paid $62 billion to AIG “counterparties,” we weren’t saving the economy, we were paying off the bookies. The money we gave them didn’t go toward saving one house or one mortgage or even a package of mortgages or even investors who bought the packages of mortgages. It went to paying off people who made side bets on the mortgages (and even sometimes put down bets on a made up collection of mortgages that didn’t even exist in the real world called “synthetic” collateralized debt obligations).

This is insanity. When you understand what really happened, you have one natural reaction – I want my money back. It’s like we paid Donald Trump for a bet he made against Steve Wynn. Why did we do that? I don’t give a damn if The Mirage or Caesar’s Casino won. Why did you pay them with my money?

So, we’re now starting a campaign to get our money back. I’d love to get the whole $62 billion paid out to the AIG counterparties (let alone the whole $182 billion we’ve sunk into AIG all together). But, we’re going to start out nice and modest. We’d like to have Goldman Sachs pay us our $12.9 billion back that they got from AIG.

That’s all taxpayer money. All of it went to Goldman for some silly bet they made with a buffoonish company that never had the money in the first place. As “sophisticated investors” they should have realized that AIG never really had the cash to pay them.

It’s like making a million dollar bet with your deadbeat friend. Do you really expect to get paid when he doesn’t have ten bucks to his name? How sophisticated can you be if you don’t even realize that your counterparties are broke? So, sad day for you, you made a bet with the wrong guy. That’s capitalism, baby. Go home, lick your wounds.

Except as we all know, that’s not how it worked out. Instead the former CEO of Goldman Sachs, Hank Paulson decided to give them the money anyway, from the United States Treasury. Paulson had made $700 million dollars earlier when he made the same kind of deals as the head of Goldman before he became our Treasury Secretary. Not much bias there, right?

So, other than this enormous conflict of interest, why target just Goldman Sachs? Many reasons. They were one of the largest beneficiaries of this “backdoor bailout” from AIG. They were the ones who set up many of the securities in the first place. In fact, they sold $23 billion worth of this junk to AIG (they’re lucky we’re not asking for all of that back).They set them to blow and then bet against them. And they said they didn’t need the money away. Great, then we’ll take it back please.

Yes, they actually said they didn’t need the taxpayers to pay them. They said many times on the record that they were “properly hedged” and that they could have gotten paid off by other companies and didn’t need AIG to pay them. Fantastic! Out with it. We’re going to be generous and not charge much interest, so we’ll take a check for $13 billion made to the United States Treasury.

I’m not kidding. We are going to start applying pressure to both Goldman and the Treasury Department to return that money to its rightful owners, the American taxpayer. Of course, we need your help. We want everyone across the political spectrum to put pressure on the Treasury Department to ask for that money back and for Goldman to give it back.

I invite conservatives, libertarians and tea party activists to join us as well. Don’t you want your money back? Weren’t you angry about the bailouts? Don’t you have a sense that the people in Washington and Wall Street are screwing you? Well, this is how they’re doing it. Time to stand up and fight. Tell Goldman not to tread on you.

To show you how nonpartisan this is, the first protest will be aimed at one of the one guys most responsible for this atrocious decision – Tim Geithner. He is our Treasury Secretary and should be fighting for us and not for the bankers. He can fix his original mistake (he was at the New York Fed when they decided to give these backdoor bailouts at a hundred cents on the dollar when no one thought they were worth anywhere near that much) and get our money back from Goldman.

I have a question for the tea party participants, have you ever wondered why you’ve never protested the one guy in the Obama administration most responsible for the bailouts and the economy? That’s the Treasury Secretary. And the reason you’ve never protested him is because the corporate front groups who organize your protests love Geithner and want to look out for him. Isn’t it time you corrected your mistake, too?

Come join us. Let’s do a real protest of the people who caused this mess in the first place. And let’s get our damn money back.

Join us on Monday, June 7th at noon in front of the Treasury building to demand our $13 billion back from Goldman Sachs. First job is to get Geithner to recognize that he should have never given that particular money to that particular bank for that particular transaction. Or to come out and justify his actions. Let him step out, greet us and tell us why it was such a smart idea to pay off AIG’s side bets with Goldman. I’ll be looking forward to that.

And I’ll be looking forward to seeing you at the protest, no matter what your politics are. You can RSVP by going to the Facebook page for this event. See you there.

Join the Protest Here

UPDATE: Progressive Change Campaign Committee has joined our effort now and we are doing a joint petition to get our money back. Please sign the petition here so your voice can be heard on this even if you can’t make it out to the DC protest.

Everyone in the country should be able to agree to this. I was just on the Dylan Ratigan program on MSNBC and even the conservative on the panel agreed. Sign the petition and help get our money back.

Follow Cenk Uygur on Twitter: www.twitter.com/TheYoungTurks

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Dylan Ratigan does a great job explaining the con: GOLDMAN SACHS

The SEC’s complaint charges Goldman Sachs and Tourre with violations of Section 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934, and Exchange Act Rule 10b-5. The Commission seeks injunctive relief, disgorgement of profits, prejudgment interest, and financial penalties.

 

Many recall this post below:

Move over GOLDMAN SACHS…WE have a New Player to this Housing “Betting” Crisis…NASDAQ Presenting the Law Offices of David J. Stern, P.A. (“DJS”)

Glenn Beck on The Goldman Sachs Connection

So what does this ‘FRAUD” mean and the AIG bailout they received?

 

Fed Ends Bank Exemption Aimed at Boosting Mortgage Liquidity: Bloomberg

By Craig Torres

March 20 (Bloomberg) — The Federal Reserve Board removed an exemption it had given to six banks at the start of the crisis in 2007 aimed at boosting liquidity in financing markets for securities backed by mortgage- and asset-backed securities.

The so-called 23-A exemptions, named after a section of the Federal Reserve Act that limits such trades to protect bank depositors, were granted days after the Fed cut the discount rate by half a percentage point on Aug. 17, 2007. Their removal, announced yesterday in Washington, is part of a broad wind-down of emergency liquidity backstops by the Fed as markets normalize.

The decision in 2007 underscores how Fed officials defined the mortgage-market disruptions that year as partly driven by liquidity constraints. In hindsight, some analysts say that diagnosis turned out to be wrong.

“It was a way to prevent further deleveraging of the financial system, but that happened anyway,” said Dino Kos, managing director at Portales Partners LLC and former head of the New York Fed’s open market operations. “The underlying problem was solvency. The Fed was slow to recognize that.”

The Fed ended the exemptions in nearly identical letters to the Royal Bank of Scotland Plc, Bank of America Corp., Citigroup Inc., JPMorgan Chase & Co., Deutsche Bank AG, and Barclays Bank Plc posted on its Web site.

Backstop Liquidity

The Fed’s intent in 2007 was to provide backstop liquidity for financial markets through the discount window. In a chain of credit, investors would obtain collateralized loans from dealers, dealers would obtain collateralized loans from banks, and then banks could pledge collateral to the Fed’s discount window for 30-day credit. In Citigroup’s case, the exemption allowed such lending to its securities unit up to $25 billion.

“The goal was to stop the hemorrhaging of risk capital,” said Lou Crandall, chief economist at Wrightson ICAP LLC in Jersey City, New Jersey. “Investors were being forced out of the securities market because they couldn’t fund their positions, even in higher-quality assets in some cases.”

Using mortgage bonds without government-backed guarantees as collateral for private-market financing began to get more difficult in August 2007 following the collapse of two Bear Stearns Cos. hedge funds.

As terms for loans secured by mortgage bonds got “massively” tighter, haircuts, or the excess in collateral above the amount borrowed, on AAA home-loan securities rose that month from as little as 3 percent to as much as 10 percent, according to a UBS AG report.

Lehman Collapse

By February 2008, haircuts climbed to 20 percent, investor Luminent Mortgage Capital Inc. said at the time. After Lehman Brothers Holdings Inc. collapsed in September 2008, the loans almost disappeared.

“These activities were intended to allow the bank to extend credit to market participants in need of short-term liquidity to finance” holdings of mortgage loans and asset- backed securities, said the Fed board’s letter dated yesterday to Kathleen Juhase, associate general counsel of JPMorgan. “In light of this normalization of the term for discount window loans, the Board has terminated the temporary section 23-A exemption.”

The “normalization” refers to the Fed’s reduction in the term of discount window loans to overnight credit starting two days ago from a month previously.

The Fed eventually loaned directly to securities firms and opened the discount window to primary dealers in March 2008. Borrowings under the Primary Dealer Credit Facility soared to $146.5 billion on Oct. 1, 2008, following the collapse of Lehman Brothers two weeks earlier. Borrowings fell to zero in May 2009. The Fed closed the facility last month, along with three other emergency liquidity backstops.

Discount Rate

The Fed also raised the discount rate a quarter point in February to 0.75 percent, moving it closer to its normal spread over the federal funds rate of 1 percentage point.

The one interest rate the Fed hasn’t changed since the depths of the crisis is the benchmark lending rate. Officials kept the target for overnight loans among banks in a range of zero to 0.25 percent on March 16, where it has stood since December 2008, while retaining a pledge to keep rates low “for an extended period.”

Removing the 23-A exemptions shows the Fed wants to get “back to normal,” said Laurence Meyer, a former Fed governor and vice chairman of Macroeconomic Advisers LLC in Washington. “Everything has gone back to normal except monetary policy.”

To contact the reporters on this story: Craig Torres in Washington at ctorres3@bloomberg.net

Last Updated: March 20, 2010 00:00 EDT

HARVARD LAW AND ECONOMIC ISSUES IN SUBPRIME LITIGATION 2008

This in combination with A.K. Barnett-Hart’s Thesis make’s one hell of a Discovery.

 
LEGAL AND ECONOMIC ISSUES IN
SUBPRIME LITIGATION
Jennifer E. Bethel*
Allen Ferrell**
Gang Hu***
 

Discussion Paper No. 612

03/2008

Harvard Law School Cambridge, MA 02138

 

 ABSTRACT

This paper explores the economic and legal causes and consequences of recent difficulties in the subprime mortgage market. We provide basic descriptive statistics and institutional details on the mortgage origination process, mortgage-backed securities (MBS), and collateralized debt obligations (CDOs). We examine a number of aspects of these markets, including the identity of MBS and CDO sponsors, CDO trustees, CDO liquidations, MBS insured and registered amounts, the evolution of MBS tranche structure over time, mortgage originations, underwriting quality of mortgage originations, and write-downs of investment banks. In light of this discussion, the paper then addresses questions as to how these difficulties might have not been foreseen, and some of the main legal issues that will play an important role in the extensive subprime litigation (summarized in the paper) that is underway, including the Rule 10b-5 class actions that have already been filed against the investment banks, pending ERISA litigation, the causes-of-action available to MBS and CDO purchasers, and litigation against the rating agencies. In the course of this discussion, the paper highlights three distinctions that will likely prove central in the resolution of this litigation: The distinction between reasonable ex ante expectations and the occurrence of ex post losses; the distinction between the transparency of the quality of the underlying assets being securitized and the transparency as to which market participants are exposed to subprime losses; and, finally, the distinction between what investors and market participants knew versus what individual entities in the structured finance process knew, particularly as to macroeconomic issues such as the state of the national housing market. ex ante expectations and the occurrence of ex post losses; the distinction between the transparency of the quality of the underlying assets being securitized and the transparency as to which market participants are exposed to subprime losses; and, finally, the distinction between what investors and market participants knew versus what individual entities in the structured finance process knew, particularly as to macroeconomic issues such as the state of the national housing market. 

 continue reading the paper harvard-paper-diagrams

 
 

 

Michael Lewis’s ‘The Big Short’? Read the Harvard Thesis Instead! “The Story of the CDO Market Meltdown: An Empirical Analysis.”

March 15, 2010, 4:59 PM ET

Michael Lewis’s ‘The Big Short’? Read the Harvard Thesis Instead!

By Peter Lattman

Deal Journal has yet to read “The Big Short,” Michael Lewis’s yarn on the financial crisis that hit stores today. We did, however, read his acknowledgments, where Lewis praises “A.K. Barnett-Hart, a Harvard undergraduate who had just  written a thesis about the market for subprime mortgage-backed CDOs that remains more interesting than any single piece of Wall Street research on the subject.”

A.K. Barnett-Hart

While unsure if we can stomach yet another book on the crisis, a killer thesis on the topic? Now that piqued our curiosity. We tracked down Barnett-Hart, a 24-year-old financial analyst at a large New York investment bank. She met us for coffee last week to discuss her thesis, “The Story of the CDO Market Meltdown: An Empirical Analysis.” Handed in a year ago this week at the depths of the market collapse, the paper was awarded summa cum laude and won virtually every thesis honor, including the Harvard Hoopes Prize for outstanding scholarly work.

Last October, Barnett-Hart, already pulling all-nighters at the bank (we agreed to not name her employer), received a call from Lewis, who had heard about her thesis from a Harvard doctoral student. Lewis was blown away.

“It was a classic example of the innocent going to Wall Street and asking the right questions,” said Mr. Lewis, who in his 20s wrote “Liar’s Poker,” considered a defining book on Wall Street culture. “Her thesis shows there were ways to discover things that everyone should have wanted to know. That it took a 22-year-old Harvard student to find them out is just outrageous.”

Barnett-Hart says she wasn’t the most obvious candidate to produce such scholarship. She grew up in Boulder, Colo., the daughter of a physics professor and full-time homemaker. A gifted violinist, Barnett-Hart deferred admission at Harvard to attend Juilliard, where she was accepted into a program studying the violin under Itzhak Perlman. After a year, she headed to Cambridge, Mass., for a broader education. There, with vague designs on being pre-Med, she randomly took “Ec 10,” the legendary introductory economics course taught by Martin Feldstein.

“I thought maybe this would help me, like, learn to manage my money or something,” said Barnett-Hart, digging into a granola parfait at Le Pain Quotidien. She enjoyed how the subject mixed current events with history, got an A (natch) and declared economics her concentration.

Barnett-Hart’s interest in CDOs stemmed from a summer job at an investment bank in the summer of 2008 between junior and senior years. During a rotation on the mortgage securitization desk, she noticed everyone was in a complete panic. “These CDOs had contaminated everything,” she said. “The stock market was collapsing and these securities were affecting the broader economy. At that moment I became obsessed and decided I wanted to write about the financial crisis.”

Back at Harvard, against the backdrop of the financial system’s near-total collapse, Barnett-Hart approached professors with an idea of writing a thesis about CDOs and their role in the crisis. “Everyone discouraged me because they said I’d never be able to find the data,” she said. “I was urged to do something more narrow, more focused, more knowable. That made me more determined.”

She emailed scores of Harvard alumni. One pointed her toward LehmanLive, a comprehensive database on CDOs. She received scores of other data leads. She began putting together charts and visuals, holding off on analysis until she began to see patterns–how Merrill Lynch and Citigroup were the top originators, how collateral became heavily concentrated in subprime mortgages and other CDOs, how the credit ratings procedures were flawed, etc.

“If you just randomly start regressing everything, you can end up doing an unlimited amount of regressions,” she said, rolling her eyes. She says nearly all the work was in the research; once completed,  she jammed out the paper in a couple of weeks.

“It’s an incredibly impressive piece of work,” said Jeremy Stein, a Harvard economics professor who included the thesis on a reading list for a course he’s teaching this semester on the financial crisis. “She pulled together an enormous amount of information in a way that’s both intelligent and accessible.”

Barnett-Hart’s thesis is highly critical of Wall Street and “their irresponsible underwriting practices.” So how is it that she can work for the very institutions that helped create the notorious CDOs she wrote about?

“After writing my thesis, it became clear to me that the culture at these investment banks needed to change and that incentives needed to be realigned to reward more than just short-term profit seeking,” she wrote in an email. “And how would Wall Street ever change, I thought, if the people that work there do not change? What these banks needed is for outsiders to come in with a fresh perspective, question the way business was done, and bring a new appreciation for the true purpose of an investment bank – providing necessary financial services, not creating unnecessary products to bolster their own profits.”

Ah, the innocence of youth.

Here is a copy of the thesis: 2009-CDOmeltdown

Hank Paulson’s Memoir: The Inside Job

By Simon Johnson

If you’ve read, are reading, or plan to read Andrew Ross Sorkin’s Too Big To Fail, you also need to pick up a copy of Hank Paulson’s memoir, On The Brink.  Sorkin has the bankers’ story, in sordid yet compelling detail, of how they received the most generous bailout in the world financial history during fall 2008 – and set us up for great problems to come.  Paulson tells us why, when, and how exactly he let them get away with this.

Hank Paulson does not, of course, intend to be candid.  As I review in detail on The New Republic’s The Book site this morning, On The Brink is actually a masterpiece of misdirection and disinformation.

But still, he gives it all away – and if any details remain obscure, check them in Sorkin.  Paulson honestly believes that the financial sector as constructed is productive, makes sense, and should continue to operate in roughly its current form. 

Whether or not Paulson really understands the functioning of big banks in the US today is an interesting question – for example he never mentions how they treated customers during the boom, and there is not one word about the need for greater consumer protection moving forward.  On the other hand, perhaps this omission tells us that he understands the game all too well – and is keen for it to continue. 

He certainly did his best to make that happen.

Source: The Baseline Scenario