On April 27, Goldman Sachs CEO Lloyd Blankfein was questioned by Senator Levin and other members of the Senate Subcommittee on Investigations about his company’s activities regarding sales of CDO’s. When asked over and over again if selling securities you consider worthless is ethical, Blankfein refused to answer the question and responded, “Senator, there is a lot in your question…and I am sure we will spend a lot of time on different parts of it.” Levin repeatedly questioned him, attempting to get Blankfein to take responsibility for what his company had done, and Blankfein said, contemptuously, “In the context of market- making, that is not a conflict. Clients shouldn’t care what our views are.”
Now Congress is calling for Bank Reform. Bank Reform. That’s right. Let’s pass more laws that these bankers and brokerages will ignore. We already have laws against what Blanfein, Goldman Sachs, and so many other brokerages did. Let’s enforce the laws they already broke and send them to prison. What they did was fraud. F R A U D. People go to prison for fraud…send them to prison now.
What precisely is the definition of fraud? Wikipedia says that fraud is “an intentional deception made for personal gain or to damage another individual.” How does fraud apply in the case of CDOs? Brokerages and banks were selling CDOs and in their heyday in 2007, sales exceeded $500 billion. CDO sales were made to 401k’s, pensions funds, individuals, etc. The California Public Employees’ Retirement System, for example, the largest public pension fund in the USA, invested $140 million in CDOs. A retirement fund must invest its cash in low-risk, conservative investments. After all, they are investing retirement funds.
And what is a CDO? Wikipedia says that a CDO is “a type of structured asset-backed security (ABS) whose value and payments are derived from a portfolio of fixed-income underlying assets.” The relevant words are UNDERLYING ASSETS. Banks and brokerages had thousands of mortgages from individuals, both sub-prime and prime, the managers totaled their overall value, placed them into “packages,” and sold them to unsuspecting investors as AAA rated securities. These packages were “collateralized” because they had a collateral (asset) underlying them (mortgages). CDOs were first invented to give the economy liquidity by having banks and brokerages sell off their mortgage debts, thereby freeing up capital to loan. Seems ok, true?
Had banks and brokerages not sold these CDOs over and over, no one would have been harmed. Package the mortgage debt and sell it off to another institutional investor. But greed is truly a human characteristic. Banks and brokerages used these same mortgages in different packages over and over again in various CDOs. Ultimately, for many of these CDOs, there were no longer any assets underlying them, they had been packaged so many times. Fewer and fewer CDOs were able to find insurance. That fact should have signaled the banks and brokerages to stop selling CDOs. And selling these asset-less CDOs to pension funds, IRAs, or retirement accounts was unethical, to say the least. It was no wonder that when the mortgages associated with these CDOs defaulted (because there were no real mortgages underlying them), smaller investors life savings were obliterated.
Packaging CDOs is not unique to banks and brokerages. Previously they had packaged student loans and sold them as AAA rate securities to pensioners, knowing full well that student loans default rate was exceptionally high. And only 2 years ago, brokerages and banks were caught selling auction rate securities to retirees. Auction rate securities were claimed to be tax-free money market accounts. Brokerages told their clients they were in cash! That was $300 million fraud with so many investors losing everything.
What is the real problem with band and brokerage fraud? Simple…no one goes to prison. Instead, the SEC fines the banks for violating the law. With auction rate securities, for example, where fraud was clear, brokerages received expensive fines. Wachovia Securities had to pay $40 million in fines. But so what. Brokerages and banks believe fines are just the “cost of doing business.” Non-financial companies believe that payroll, advertising, and rent, are the cost of doing business. But not brokerages and banks…they consider getting fined for fraud is the cost of doing business.
Put them in prison. If the SEC put them in prison, we wouldn’t need bank reform. The laws are already in place and being broken by these firms. Bank reform just adds more laws they will get around. These firms have an “above the law” mentality. That was very clear at the Senate Subcommittee hearing. Why pass more laws they will just ignore. The answer is simple…send them to prison and have Bubba as their cell mate. Let Bubba show them a little “extra-curricular activity.” The SEC should stand on its own 2 feet and put these guys in prison. We don’t need bank reform, we just need a few lifers in prison to set these bankers straight.
Barbara Cohen has been a professional day trader for over 10 years. She has trained hundreds of students to trade the Futures Market with Shadowtraders trading strategies. As the CIO, Barbara moderates Shadowtraders daily online trading chatroom. Before you purchase any trading education, make sure you attend Shadowtraders Monday Night Webinar, and hosted by Barbara Cohen
