Wall Street Will Stop at Nothing to Get What It Wants

Last week, the Securities and Exchange Commission filed fraud charges against Goldman Sachs and underscored what most Americans have believed for some time: Wall Street has rigged the economy in its own favor, and will stop at nothing—not even outright theft—to boost its profits. What’s worse, Goldman’s scam could have been completely prevented by better regulations and law enforcement.

Goldman’s heist

Let’s be clear. “Financial fraud” means “theft.” Goldman Sachs sold investors securities that were stocked with subprime mortgages and had been cherry-picked by a hedge fund manager named John Paulson. Paulson believed these mortgages were about to go bust, so he helped Goldman Sachs concoct the securities so that he could bet against them himself.

Goldman Sachs, like Paulson, also bet against the securities. But when Goldman sold the securities to investors, it didn’t tell them that Paulson had devised the securities, or that he was betting on their failure. By withholding crucial information from investors, Goldman directly profited from the scam at the expense of its own clients. If ordinary citizens did what the SEC alleges Goldman did, we’d call it stealing.

As Nick Baumann emphasizes for Mother Jones, the SEC’s suit against Goldman is just the tip of the iceberg. During the savings and loan crisis of the late 1980s, literally thousands of bankers were jailed for financial fraud. Today’s crisis was much larger in scope, yet the Goldman allegations are among the first serious charges of legal wrongdoing to emerge (other complaints have been filed against Regions Bank and former Countrywide CEO Angelo Mozilo). If the SEC or the FBI are doing their jobs, we should see many more of these cases.

Bust ‘em up.

How do banks get away with these kinds of shenanigans and still secure epic taxpayer bailouts? It’s all about their political clout, as Robert Reich notes for The American Prospect. So long as banks are so enormous that they can ruin the economy with their collapse, the institutions will always carry tremendous political clout.

Even in the case of Goldman Sachs, which is too-big-to-fail by any reasonable standard, the SEC’s fraud case is being filed three years after the company’s alleged offense. That’s well after the company rode to safety on the Troubled Asset Relief Program, the AIG bailout and billions more in other indirect assistance—and only after multiple journalists made Goldman’s offensive transactions general public knowledge.

If we don’t break up the big banks, politically connected Wall Street titans will make sure they get bailed out when the next crisis hits, regardless of whatever laws we have on the books.

Fix the derivatives casino

If Congress doesn’t soon pass a bill to break up behemoth banks, it will be neglecting the gravest problem in our financial system today. But several other reforms are needed if Wall Street is ever going to serve a useful economic function again.

As Nomi Prins emphasizes for AlterNet, much of the Wall Street profit machine has been divorced from the economy that the rest of us live in. These days, banks make most of their money from securities trades and derivatives deals. Their actual lending business is taking a beating. That means big banks have very little incentive to promote economic well-being for every day citizens. We need to create these incentives by banning economically essential banks from engaging in securities trades, and make sure all derivatives transactions are conducted on open, transparent exchanges, just like ordinary stocks and bonds.

Better derivatives regulations could help protect against fraud. If Goldman Sachs’ sketchy subprime deal had been subject to market scrutiny on an exchange, it’s very unlikely that any investor would have bought into it. Goldman Sachs almost got away with it because the deal was secretive and beyond the scope of most regulatory oversight.

Protect whistleblowers

The Goldman case also raises significant questions about the government’s enforcement of existing financial fraud laws. Bradley Birkenfeld, a banker for Swiss financial giant UBS, helped the Department of Justice bring the largest tax fraud case in history against his company, which was helping rich Americans hide money from the IRS in offshore bank accounts.

For his cooperation, Birkenfeld was rewarded with a four-year prison sentence, even though nobody else at UBS—nobody—has been sentenced to prison over the scam. As Juan Gonzalez and Amy Goodman emphasize for Democracy Now!, Birkenfeld’s imprisonment could have something to with who exactly is hiding money with UBS.

Gonzalez discusses an interview with Birkenfeld, in which the former banker notes that the bank had a special office to handle the accounts of “politically exposed persons”— American politicians. Moreover, the top brass at UBS includes key advisors to top politicians in both parties. This is exactly the kind of influence smuggling that breaking up the banks would help fix. UBS is a multi-trillion-dollar institution with no less than 27 U.S. subsidiaries.

But protecting Birkenfeld would accomplish still more—by jailing him, the Justice Department is actively discouraging others from coming forward, and making it more difficult for regulators to enforce the law.

Greenspan’s failure

It’s abundantly clear that almost every major regulatory agency charged with curtailing financial excess failed to prevent the Crash of 2008. But that failure doesn’t mean that effective regulation is impossible—it only shows that the regulators in power failed. The top bank regulator in the U.S., John Dugan, was a former bank lobbyist.

As Christopher Hayes demonstrates for The Nation, former Federal Reserve Chairman Alan Greenspan has never had any interest in regulation whatsoever. After the crash, Greenspan insisted that nobody could have seen it coming. But as Hayes notes, many people did—Greenspan simply didn’t listen to them. These days, Greenspan is revising his story, claiming that he did in fact see the crisis coming, but that nobody could have prevented it. That is simply not credible.

Hayes draws a useful parallel Hurricane Katrina, a problem sparked by a natural event that became a catastrophe when regulators failed to take the necessary precautions. The lesson from both Katrina and the financial crash is not that government always screws up—we have plenty of examples of government preventing floods and economic calamity. The lesson we should learn is that people who don’t believe in government will never do a good job governing. As Hayes notes:

If Greenspan couldn’t figure things out, that doesn’t mean others can’t. In fact, developing systems for doing just that is called—quite simply—progress, and Alan Greenspan continues to be one of its enemies.

That is exactly the task that now presents itself before Congress: Developing a system to prevent and constrain economic destruction wielded by Wall Street. The U.S. had a system that did exactly this for more than fifty years. For the last thrity years, it has been systematically dismantled. How well Congress lives up to that challenge will define much of our economic future for decades to come.

This post features links to the best independent, progressive reporting about the economy by members of The Media Consortium. It is free to reprint. 

More from Care2 on Goldman Sachs:

photo credit: Tim Pearce, Los Gatos via flickr
by Zach Carter, Media Consortium blogger

67 comments

Frank Mugford
Frank Mugford7 years ago

Lionel M is correct.
I would suggest that, what the World wants, no needs, is a World Revolution, when 'The meek shall inherit the Earth'; although I see no part in the future of Homo Sapiens for any sort of religious mumbo jumbo.
The USA needs its own revolution, a second War of Independence, to rid itself of the yoke of 'Those who would be king(s)'. Yanks replaced King George with a hegemony of families/robber barons.
Repugs and Teatards encapsulate everything that I despise in political activity: interesting how Repugs are Pro Life until after birth, then human beings are just cannon fodder/deltas for the use of.

SEND
Yulan L.
Yulan Lawson8 years ago

As we speak I'm watching my superannuantion being sucked dry by fees, charges, %'s, broker fees etc. Please sign my petition in the hope to get some laws changed to protect what we earned every dollar for.

http://www.thepetitionsite.com/1/save-our-supperannuationretirement
Thank you ahead of time, this is the reality folks. I'm trying to stop this from happening to anyone else and to protect what we have in our own right.

SEND
Lionel Mann
Lionel Mann8 years ago

And today we learn that the Republican puppets of the Manhattan robber barons have managed to frustrate efforts to put an end to their evil extortion that has plagued not only the great majority of Americans but the whole world for many decades. Big Business is holding the mindless populace of the U.S.A. in thrall through its “bread and circuses” policy, McDonalds, K.F.C., Hollywood, Superbowl, etc., etc. Take heart, however; throughout the ages such a ploy has eventually failed and with its protagonists called to justice, even to the guillotine in some cases. What a pity such a salutary custom has gone out of favour! Let’s see how the Goldman Sachs case proceeds – if at all.
More seriously, though, at school in the early forties, warfare around us, we studied the causes and the signs of impending disaster that should in the thirties have given warning of the approaching disaster. Many of those ominous portents exist today: economic turmoil; a “Master Race” claiming superiority of life-style and attempting aggressively to impose that upon others; its Abwehr and Gestapo (CIA, FBI); its “security” involving tight surveillance of its populace;
its open and secret concentration camps (Guantanamo, etc.) and imprisonment without trial; its insidious false propaganda. It is all very worrying. Those who gave warning in the thirties were mocked - until Europe exploded. What can Obama do? Another World War threatens.

SEND
Yulan L.
Yulan Lawson8 years ago

You cannot currently send a star to Lionel because you have done so within the last week.

SEND
Yulan L.
Yulan Lawson8 years ago

Oh boy does America have the wool pulled over their eyes. The bottom line is money and power for the few elite families in the world that are pulling all the shots. Don't forget about the Builderburg group either. Wall st's just a front.

SEND
Lionel Mann
Lionel Mann8 years ago

Michael,
“Those who cannot remember the past are condemned to repeat it” – Santayana.
In the 18th and 19th centuries, some even earlier, a number of European nations set about colonising, “enlightening primitive nations”, exploiting them and enriching the upper crust of their own societies whilst neglecting the needs of their own general populace. This resulted in a series of wars, culminating in two great 20th century disasters and also in rebellions, some through the ballot box others more violent, by the oppressed, impoverished, neglected majorities, wreaking great harm upon their own nations, releasing the curse of socialism upon the world. Rabid capitalism is just as harmful as rabid socialism and its results equally harmful. We now see the U.S.A. treading the same course that will lead eventually to world-wide conflict as well as to internal strife beside which 1861-5 will have been a damp squib.

SEND
Lionel Mann
Lionel Mann8 years ago

(Continuing:) The election of Obama is the first sign of a crack in your system, but far from being a socialist he is no more than a humanitarian capitalist trying to remedy and avoid the grave errors of past administrations. Call home your murderous military, force the robber barons of Manttan to heel and look to the grave injustices and abysmal ignorance that plague your own nation. It would be far better were all the world’s financial institutions subject to international control, but any supervision is better than none at all; for the moment unilateral control will have to suffice until a better system can replace it. Another fiasco such as the recent Great Depression cannot be allowed. Sure, your government is far from perfect but nevertheless far better than rule by an oligarchy of greedy vultures.
As regards history, I have studied and taught that for more than fifty years and can talk from personal witness for more than seventy. I am aware that what I wrote differs from the version produced by the U.S.A., but the latter is about as factual as the WMD that provided the excuse for the attack on Iraq matching well the Nazi onslaught on Poland in 1939. Regrettably U.S. pronouncements lack credibility; a long succession of prevarication proves that.

SEND
Margaret W.
Margaret W8 years ago

Gee I was living in Europe (Ireland and UK) on 9/11. I only saw faces of shock and despair and crying in the streets. Not one single person cheering at all. Maybe Lionel you confused some Greek ouzo-fueled party with a political statement?

SEND
Michael S.
Michael S.8 years ago

Lionel though you write so well - you got to be kidding me.
Perhaps too much time under the stairs your revisionist history makes me wonder if you were not at one time a writer for USSR propoganda machine or better yet presently a staff menmber for or our President.

I note with some interest that throughout your prose you refuse to look forward but instead fall back on your revisionist history where all that is bad would be the United States. You brush away anything to the contrary as being "a tissue of lies" - well how convenient. I just not sure how far you want to go to punish this country and to what end, personally. Please see youtube Congressman Hank Johnson - I am sure he can offer to you some clarity

SEND
Lionel Mann
Lionel Mann8 years ago

Michael,
Your last statement contains so many fallacies that I cannot correct them all in a single comment.
That you would in this twenty-first century challenge any cost of health care for the entire population when you spend billions of dollars on slaughtering innocent civilians in a “War On Terror” based upon a tissue of lies is a reversion to the Dark Ages.
I thought that you would come up with that “saving the world from totalitarianism”. When I was cringing under the stairs while bombers were cruising overhead releasing their loads, the U.S.A. was enriching itself by selling arms and munitions to both sides in order to be sure of pleasing the victors, whoever they might be. “The Great Champion of Democracy” bankrupted the U.K. while Hitler paid with funds looted from occupied countries. The Nazis were already on the road to defeat, Britain saved by the courage of “The Few” (including a small number of U.S. citizens) in 1940 and Europe by the Red Army’s desperate resistance and start of three-year thousand-mile advance from the gates of Moscow to the heart of Berlin, when Hitler foolishly declared war on the U.S.A. and merely hastened his demise by so doing. It is doubtful that U.S.A. would ever have killed the golden goose by declaring war on him. U.S. firms were still supplying him via neutral countries when Americans were being killed fighting. Hail Holy Dollar! Long live Manhattan.

SEND