Archive for 04/20/2010

Goldman Sachs Eats Its Young

Posted: 04/20/2010 by Lynn Dartez in un

by Keith Johnson

This should be a lesson to all those young, aggressive, upwardly mobile Wall Street wannabes who think they are somehow going to fast track their way into the stratosphere of high finance.

Sorry, kids! There’s no room left at the top, and soon you’re going to see even those old money families tearing each other apart for what’s left of a collapsing fiat money system that has just about run its course.

I submit to you the unfortunate tale of Goldman Sachs’ naïve boy protégé, Fabrice Tourre, the so-called ‘Fabulous Fab’ who is alleged to be the mastermind behind a scheme to sell toxic mortgage investments that were deliberately designed to fail in the US housing market crash.

Fabrice Tourre, 31, is the classic patsy and the kind of villain the American people love to hate. He’s foreign (French), flamboyant, young, rich and shrewd. He was only 22 and fresh out of college when he started working for Goldman Sachs in 2001. Just five years into his employment, he found himself at the center of a scheme devised by one of the world’s richest billionaires, hedge fund manager John Paulson.

Paulson had presented a roster of sub-prime mortgage deals that he was betting would fail in the housing market. He paid Goldman Sachs $15 million to find clients that would bet the other way. The scheme was packaged into what has come to be known as an ‘Abacus Deal’.

Tourre is alledged to have taken this portfolio to potential investors and sell them as favorable risks while hiding the fact that he was working with Paulson, who was betting against them.

To help with pitching these toxic investments, they employed the services of ACA Capital Holdings, Inc. and convinced them that Paulson was actually investing in these mortgages. Tourre and Paulson then used ACA’s endorsement of the mortgages as a credible and sound investment. Everything went as planned and Paulson cashed in on a cool $1 billion while the Goldman Sachs investors took it in the shorts.

Now the SEC has been called in to restore their tarnished image with the public by bringing suit against the investment giant and taking aim, in particular, at the novice Tourre. So far, the SEC has conducted five interviews including one with the now notorious ‘Fabulous Fab’. They have not elected to interview any one of the top Goldman Sachs executives, including Tourre’s manager Jonathan Egol. They’ve also apparently found no need to trouble Mr. Paulson with any of their inquiries. Goes to show you that only the little minnows get swallowed up in the cesspool of Wall Street.

Tourre is said to have been well liked and popular at Goldman Sachs. He is known for his impecible charm and biting sense of humor. Up through and including 2008, he has reportedly been pulling in over $2 million a year. He has since moved to an office on Fleet street in London and has been “living it up” and throwing loud, lavish parties out of his luxurious bachealor flat. Apparently, Tourre has been laying low and ducking media interviews. But you can bet that the boys at Sachs have already sent their best attorneys to drape an arm around his back and rub his shoulders. You can probably imagine the scene: The poor kid (boo hoo) is probably cradling his face in his hands and shaking his head as the Sachs lawyers whisper in his ear that everything is going to be O.K. “Just keep quiet” they’re telling him—“We’ll do all the talking. You’re probably going to have to take the fall on this one, but we’ll do everything within our power to make sure you’re well taken care of when this thing blows over.”

Meanwhile, back in the States, his bosses are laying the groundwork for pinning all of the blame on this minor player. The most recent statement by Goldman Sachs CEO Lloyd Blankfein should convince you of that. In response to the allegations of misconduct, Blankfein told his employees Sunday “I will repeat what you have heard me say many times in the past: Goldman Sachs has never condoned and would never condone inappropriate activity by any of our people. On the contrary, we would be the first to condemn it and take immediate and appropriate action. Our responsibility as a financial intermediary requires it and our commitment to integrity and the firm’s business principles demand it.”

If that doesn’t convince you that Goldman Sachs is setting this kid up to take the fall, I don’t know what will. So you see what I mean when I say he’s the perfect “patsy”. This kid has been served up for American consumption. Your average “Sarah Palin-Tea Party” Republican, pissed off about the Wall Street bail-outs, will unwittingly accept this burnt offering as Goldman Sachs’ sacrificial lamb and will be just enough of a token gesture for the fence-sitting Democrats to come back around to Obama when he brings the whip down on this poor, hapless dupe.

The American people are a predictable bunch. As long as you frame everything in the context of a Hollywood script you could have them believing just about anything. It reminds me of the Neo-con (Jerry Bruckheimer) produced film Enemy of the State where rouge elements in the NSA cover up the killing of a US Congressman. In the end, the integrity of the NSA is upheld as we see the young agents held to answer for their crimes by our heroic government. You’re bound to see that same scenario unfold here. Goldman Sachs will throw this kid under the bus and claim that they were duped right along with the rest of their investors. Goldman Sachs will let this play out in a long, drawn-out court battle until it is all but forgotten in the American public’s mind. They’ll end up paying a fine, that sounds like a lot of money to most people, but in reality amounts to nothing more than a slap on the wrist. As for Tourre? Well, he’ll be flushed down the memory hole of oblivion after a royal screwing in the press as the rouge villain who besmerched the good name of Goldman Sachs.

But the more enlightened of us will know the real truth. It was Tourre’s superiors who really engineered this debacle. Anyone with half a brain knows that a novice like Tourre would never be left unattended to make deals with heavy hitters like John Paulson. Schemes of this magnitude don’t go forward without first being signed off by the guys upstairs. On Monday, the New York times cited eight confidential sources who made this point clear. The article stated that: “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. It was Goldman’s top leadership, these people say, that ended the dispute on the mortgage desk by siding with those who, like Tourre and Egol, believed home prices would decline…By early 2007, Goldman’s mortgage unit had become a hive of intense activity. In addition to Blankfein, Gary D. Cohn, Goldman’s president, and David A. Viniar, the chief financial officer, visited the mortgage unit frequently.”

This whole scandal couldn’t come at a better time for Goldman Sachs’ choice for President, Barrack Obama. He and the Democratic Party are reeling from public outcry against his sell out to the health insurance industry and the never ending bail-outs to their friends on Wall Street. This fiasco will help push through a regulatory bill that will actually concentrate more power to the FED (Goldman Sachs Alumni) and will only serve to make smaller firms vulnerable to absorption by the likes of Goldman Sachs and other giants. Obama will shake his fist, yell at Republicans who come to Wall Street’s defence, and come out looking like a maverick who took on those nasty ‘special interests’ that he loves to claim he’s a crusader against.

This is also an opportunity for the SEC to come out looking tough after their disgraceful conduct in the Bernie Madoff affair. Taking on Goldman Sachs will be a great boost to their image. But that could only happen under unusual circumstances like these. Right now, Goldman Sachs actually wants to be made to look like they’re no different from anybody else. They need to convince the American people that they are just as vulnerable and subject to public scrutiny as any other legitimate business. In other words, Goldman Sachs has given the SEC permission to take them on. Otherwise, the SEC would be just as ineffective and bias as they have always been.

The SEC is actually a public relations device for the FED. They go after the little guys to look like they’re doing something while turning a blind eye to the big investment firms that their agents hope to someday work for. Never was this more apparent than during the Madoff scandal. Madoff whistleblower Harry Markopolos repeatedly warned the Securities and Exchange Commission that Madoff was perpetrating a massive investment fraud and said that the regulatory agency that the SEC is inept, “financially illiterate” and far too cozy with the financial titans it is supposed to be regulating. Markopolos said “The SEC is also captive to the industry it regulates and it is afraid of bringing big cases against the largest most powerful firms. Cleary the SEC was afraid of Mr. Madoff.” It was also reported that agents who were dispatched to interview Madoff were so enamored with his lavish offices and lifestyle that they were tripping over themselves trying to get their resumes onto his desk. Such is the true reality of the SEC.

This is not to say that the bright and rosy future of Goldman Sachs is etched in solid granite. As the fractional reserve system of banking starts to collapse, we are bound to see the connoisseurs of fine dining resort to cannibalistic practices as they scramble to loot and plunder what’s left of the American economy. Bon Appétit.


Andrew W. Griffin
Red Dirt Report
April 19, 2010

OKLAHOMA CITY – While Oklahoma and the rest of the world respectfully remembers the 168 people who died in the bombing of the Alfred P. Murrah federal building here in Oklahoma City, one survivor of the April 19, 1995 blast, Jane Graham, wants her questions about what really happened that day answered once and for all.

Graham, a native of Chicago who was working for the HUD office on the ninth floor of the Murrah building that morning told Red Dirt Report that there was a lot of strange things going on in the weeks leading up to the bombing, things that she shared numerous times with federal agents, things she felt were ignored. This included the presence of maintenance workers she did not recognize, military people in the parking garage and more unusual activity.

But one of the key figures – the bomber himself – Timothy McVeigh, was spotted in the federal building on a number of occasions.

“It was a couple of weeks before the bombing. I had seen McVeigh in the building prior to the bombing, around the first week of April.”

McVeigh, Graham said, rode up in an elevator with her while she was heading to her office one morning.

“He was in military fatigues,” Graham told Red Dirt Report. “I looked at him and said ‘hi’ and he simply looked straight ahead. He got off on the sixth floor. I turned to someone else on the elevator and said, ‘Well, he’s certainly not very friendly.”

Read entire article

Next bubble: $600 trillion?

Posted: 04/20/2010 by Lynn Dartez in WND

Cities, states, universities could sink from monster derivatives meltdown

Posted: April 19, 2010
9:40 pm Eastern

By Jerome R. Corsi
© 2010 WorldNetDaily

Bank of International Settlements in Basel, Switzerland

As interest rates begin to rise worldwide, losses in derivatives may end up bankrupting a wide range of institutions, including municipalities, state governments, major insurance companies

, top investment houses, commercial banks and universities.

Defaults now beginning to occur in a number of European cities prefigure what may end up being the largest financial bubble ever to burst – a bubble that today amounts to more than $600 trillion.

The Bank of International Settlements in Basel, Switzerland, now estimates derivatives – the complex bets financial institutions and sophisticated institutional investors make with one another on everything from commodities options to credit swaps – topped $604 trillion worldwide at the end of June 2009.

To comprehend the relative magnitude of derivative contracts globally, the CIA Factbook estimates the 2009 Gross Domestic Product, or GDP, of the world was just under $60 trillion.

Derivative contracts, therefore, have now reach a level 10 times world GDP, meaning even a 10 percent default in derivatives would equal world GDP.

The small 800-year-old town of Saint-Etienne in France has just defaulted on a $1.6 million contract owed to Deutsche Bank. The city entered into a complex currency swap arrangement to reduce the cost of borrowing some $30 million.

To cancel all 10 derivative contracts Saint-Etienne currently holds would cost the town approximately $135 million, more than six times the amount initially borrowed, largely because no bank or institutional investor would want to purchase contracts that are now on the losing side of the bet.

Saint-Etienne is only one of thousands of EU municipalities that bought into derivative contracts as a way to cut the costs of municipal borrowing.

A key problem with derivatives is that in the attempt to reduce costs or prevent losses, institutional investors typically accepted complex risks that carried little-understood liabilities widely disproportionate to the any potential savings the derivatives contract may have initially obtained.

The hedge fund and derivatives markets are so highly complex and technical that even many top economists and investment banking professionals don’t fully understand them.

Moreover, both the hedge fund and derivatives markets are almost totally unregulated, either by the U.S. government or by any other government worldwide.

But losses on derivatives are not limited to government entities.

Harvard’s billions

Obama administration economic guru Larry Summers may end up being best remembered for having destroyed almost single-handedly the Harvard University endowment fund as a result of misguided instructions he gave the fund’s management during his tenure as Harvard University president from 2002 to 2006.

Summers, currently director of the White House National Economic Council, called for an aggressive investment strategy in which Harvard’ endowment fund engaged in risky strategies, including derivative strategies that have burdened the nation’ largest university endowment with billions of dollars in toxic assets.

As a result, the Harvard endowment, which peaked at $36.9 billion in June 2008, has since lost some 30 percent of its value, dropping to $26 billion, according to Bloomberg News.

In October 2009, Harvard University paid $497.6 million to investment banks to get out from $1.1 billion in interest rate swaps that were intended to hedge variable-rate debt for capital projects, Bloomberg reported.

In what amounted to Harvard’s biggest endowment loss in 40 years, the university also agreed to pay $425 million over the next 30 to 40 years to offset an additional $764 million in credit-swap deals gone bad.

Citing failed interest rate swaps that forced Harvard to pay banks $1 billion just to terminate the junk contracts, Bloomberg reported the Harvard endowment’s investments have become so toxic that even Summers won’t explain what happened during his watch.

The Boston Globe squarely put the blame on Summers’ doorstep, noting he came into office with a bold vision to expand the size of its science facilities by more than a third.

Average yearly expenditures for facilities jumped from under $150 million in 1995-2000 at Harvard, to $495 million from 2001-2005, to $644 million in 2009.

“Summers told the faculty not to think small,” the Globe wrote. “Its ambitions were limited only by its imagination, he said. “Harvard could always come up with more money from its ‘deeply loyal fans.'”

Unfortunately, deeply loyal fans and alumni with deep pockets were not enough to bail the university out from Sumner’s ill advised investment advice.

Bloomberg reported that cash-strapped Harvard recently asked Massachusetts for fast-track approval to borrow $2.5 billion.

The damage done to Harvard is not limited to plans to expand the science facility into blue-collar Allston. Now, the university is faced with slashing faculty and staff.

Last year, more than 1,600 of Harvard’s staff were offered early retirement, and more than 500 accepted.

“Loyal alumni have contributed generously to staunch the bleeding,” the Globe wrote, “but huge deficits remain in spite of all the reductions. Harvard will be a smaller place when the dust settles, with less educational and scholarly reach. It will employ fewer people and will contribute less to local and national prosperity.”

What are derivatives?

While the hedge fund market is small in comparison to derivatives, hedge funds in the U.S. are still a $1.5 trillion industry.

Hedge funds and derivatives share a common characteristic in that both were set up initially by professional investment advisers to assist them in managing the risk contained in institutional investment portfolios

, including mutual fund assets or pension funds that typically involved hundreds of millions of dollars.

One of the original ideas behind derivatives was the realization that professional money managers, including those in banks, investment companies and hedge funds, needed to make bets to offset the possibility of taking losses.

A popular form of derivative contracts was developed to permit one money manager to “swap” a stream of variable interest payments with another money manager for a stream of fixed interest payments.

The idea was to use derivative bets on interest rates to “hedge” or balance off the risks taken on interest-rate investments owned in the underlying portfolio.

If an institutional investment manager held $100 million in fixed-rate bonds, for example, to hedge the risk, should interest rates rise or fall in a manner different than projections, a purchase of a $100 million variable interest rate derivative could be constructed to cover the risk.

Whichever way interest rates went, one side to the swap might win and the other might lose.

The money manager losing the bet could expect to get paid on the derivative to compensate for some or all of the losses.

In the strong stock and mortgage markets experienced beginning in the historically low 1-percent interest rate environments of 2003 through 2004, the number of hedge funds soared, just as the volume of derivative contracts soared from a mere $300 trillion in 2005 to the more than $600 trillion today.

Bloomberg reported the number of hedge funds tripled in the last decade to a record of 10,233 at the end of June 2008, according to the Chicago-based Hedge Fund Research Inc.

More than one-third of those funds could be “wiped out” in the economic downturn that began in December 2008, Bloomberg said.

The Bank of International Settlements, or BIS, in Basel, Switzerland, makes no estimate of how much of the $604 trillion in outstanding derivative contracts are today vulnerable to collapse.

Losses in derivatives played a major role in the bankruptcies of both AIG and Bear Stearns.