Matt Taibbi reports: The average person had no way of knowing what a terrible deal the Chase settlement [reached in September, 2013] was for the country. The terms were even lighter than the slap-on-the-wrist formula that allowed Wall Street banks to “neither admit nor deny” wrongdoing – the deals that had helped spark the Occupy protests. Yet those notorious deals were like the Nuremberg hangings compared to the regulatory innovation that Holder’s Justice Department cooked up for Dimon and Co.
Instead of a detailed complaint naming names, Chase was allowed to sign a flimsy, 10-and-a-half-page “statement of facts” that was: (a) so short, a first-year law student could read it in the time it takes to eat a tuna sandwich, and (b) so vague, a halfway intelligent person could read it and not know anyone had done anything wrong.
The ink was barely dry on the deal before Chase would have the balls to insinuate its innocence. “The firm has not admitted to violations of the law,” said CFO Marianne Lake. But the deal’s most brazen innovation was the way it bypassed the judicial branch. Previously, federal regulators had had bad luck with judges when trying to dole out slap-on-the-wrist settlements to banks. In a pair of celebrated cases, an unpleasantly honest federal judge named Jed Rakoff had rejected sweetheart deals worked out between banks and slavish regulators and had commanded the state to go back to the drawing board and come up with real punishments.
Seemingly not wanting to deal with even the possibility of such a thing happening, Holder blew off the idea of showing the settlement to a judge. The settlement, says Kelleher, “was unprecedented in many ways, including being very carefully crafted to bypass the court system. . . . There can be little doubt that the DOJ and JP-Morgan were trying to avoid disclosure of their dirty deeds and prevent public scrutiny of their sweetheart deal.” Kelleher asks a rhetorical question: “Can you imagine the outcry if [Bush-era Attorney General] Alberto Gonzales had gone into the backroom and given Halliburton immunity in exchange for a billion dollars?”
The deal was widely considered a good one for both sides, but Chase emerged with barely a scratch. First, the ludicrously nonspecific language surrounding the settlement put you, me and every other American taxpayer on the hook for roughly a quarter of Chase’s check. Because most of the settlement monies were specifically not called fines or penalties, Chase was allowed to treat some $7 billion of the settlement as a tax write-off.
Couple this with the fact that the bank’s share price soared six percent on news of the settlement, adding more than $12 billion in value to shareholders, and one could argue Chase actually made money from the deal. What’s more, to defray the cost of this and other fines, Chase last year laid off 7,500 lower-level employees. Meanwhile, per-employee compensation for everyone else rose four percent, to $122,653. But no one made out better than Dimon. The board awarded a 74 percent raise to the man who oversaw the biggest regulatory penalty ever, upping his compensation package to about $20 million. [Continue reading…]
The idea that through a ‘$13 billion settlement’ the Justice Dept cracked down on Chase was a carefully contrived fiction
Bloomberg Businessweek reports: In October 2010, a Federal Bureau of Investigation system monitoring U.S. Internet traffic picked up an alert. The signal was coming from Nasdaq. It looked like malware had snuck into the company’s central servers. There were indications that the intruder was not a kid somewhere, but the intelligence agency of another country. More troubling still: When the U.S. experts got a better look at the malware, they realized it was attack code, designed to cause damage.
As much as hacking has become a daily irritant, much more of it crosses watch-center monitors out of sight from the public. The Chinese, the French, the Israelis — and many less well known or understood players — all hack in one way or another. They steal missile plans, chemical formulas, power-plant pipeline schematics, and economic data. That’s espionage; attack code is a military strike. There are only a few recorded deployments, the most famous being the Stuxnet worm. Widely believed to be a joint project of the U.S. and Israel, Stuxnet temporarily disabled Iran’s uranium-processing facility at Natanz in 2010. It switched off safety mechanisms, causing the centrifuges at the heart of a refinery to spin out of control. Two years later, Iran destroyed two-thirds of Saudi Aramco’s computer network with a relatively unsophisticated but fast-spreading “wiper” virus. One veteran U.S. official says that when it came to a digital weapon planted in a critical system inside the U.S., he’s seen it only once — in Nasdaq.
The October alert prompted the involvement of the National Security Agency, and just into 2011, the NSA concluded there was a significant danger. A crisis action team convened via secure videoconference in a briefing room in an 11-story office building in the Washington suburbs. Besides a fondue restaurant and a CrossFit gym, the building is home to the National Cybersecurity and Communications Integration Center (NCCIC), whose mission is to spot and coordinate the government’s response to digital attacks on the U.S. They reviewed the FBI data and additional information from the NSA, and quickly concluded they needed to escalate.
Thus began a frenzied five-month investigation that would test the cyber-response capabilities of the U.S. and directly involve the president. Intelligence and law enforcement agencies, under pressure to decipher a complex hack, struggled to provide an even moderately clear picture to policymakers. After months of work, there were still basic disagreements in different parts of government over who was behind the incident and why. “We’ve seen a nation-state gain access to at least one of our stock exchanges, I’ll put it that way, and it’s not crystal clear what their final objective is,” says House Intelligence Committee Chairman Mike Rogers, a Republican from Michigan, who agreed to talk about the incident only in general terms because the details remain classified. “The bad news of that equation is, I’m not sure you will really know until that final trigger is pulled. And you never want to get to that.”
Bloomberg Businessweek spent several months interviewing more than two dozen people about the Nasdaq attack and its aftermath, which has never been fully reported. Nine of those people were directly involved in the investigation and national security deliberations; none were authorized to speak on the record. “The investigation into the Nasdaq intrusion is an ongoing matter,” says FBI New York Assistant Director in Charge George Venizelos. “Like all cyber cases, it’s complex and involves evidence and facts that evolve over time.”
While the hack was successfully disrupted, it revealed how vulnerable financial exchanges—as well as banks, chemical refineries, water plants, and electric utilities—are to digital assault. One official who experienced the event firsthand says he thought the attack would change everything, that it would force the U.S. to get serious about preparing for a new era of conflict by computer. He was wrong. [Continue reading…]
AMY GOODMAN: Who was tougher on corporate America, President Obama or President Bush?
MATT TAIBBI: Oh, Bush, hands down. And this is an important point to make, because if you go back to the early 2000s, think about all these high-profile cases: Adelphia, Enron, Tyco, WorldCom, Arthur Andersen. All of these companies were swept up by the Bush Justice Department. And what’s interesting about this is that you can see a progression. If you go back to the savings and loan crisis in the late ’80s, which was an enormous fraud problem, but it paled in comparison to the subprime mortgage crisis, we put about 800 people in jail during—in the aftermath of that crisis. You fast-forward 10 or 15 years to the accounting scandals, like Enron and Adelphia and Tyco, we went after the heads of some of those companies. It wasn’t as vigorous as the S&L prosecutions, but we at least did it. At least George Bush recognized the symbolic importance of showing ordinary Americans that justice is blind, right?
Fast-forward again to the next big crisis, and how many people have we got—have we actually put in jail? Zero. And this was a crisis that was much huger in scope than the S&L crisis or the accounting crisis. I mean, it wiped out 40 percent of the world’s wealth, and nobody went to jail, so that we’re now in a place where we don’t even recognize the importance of keeping up appearances when it comes to making things look equal.
One simple phrase electrified the financial world this past week: high-frequency trading.
With the publication of his new book, Flash Boys, author Michael Lewis almost singlehandedly transformed the growing practice of high-frequency trading from an obscure form of financial wizardry cooked up in Wall Street’s mad laboratories into a fledgling scandal. What’s high-frequency trading? It’s when lightning-quick computers running complex algorithms race ahead of ordinary human investors — you know, those guys with the funny jackets waving and yelling on the floor of the New York Stock Exchange — to gain the slightest advantage in the trading of stocks. For high-frequency traders, speed means getting valuable market information a few hundredths or millionths of a second early, which in turn can mean millions in profit simply by beating the regular guys to the trade. If it sounds complicated, well, that’s the point. “The insiders are able to move faster than you,” Lewis said on 60 Minutes. “They’re able to see your order and play it against other orders in ways that you don’t understand. They’re able to front run your order.”
Lewis’s Flash Boys tells the story of a Canadian banker and do-gooder named Brad Katsuyama who, outraged over this “rigged” market, did something about it. Judging by the reaction in some corners of the financial world, you’d think Lewis had declared war on Wall Street itself. (See, for instance, this verbal slug-fest on CNBC involving Lewis, Katsuyama, and the CEO of one of the exchanges Lewis takes to task in his book.)
The opprobrium greeting Flash Boys wouldn’t be quite as ridiculous if we didn’t already know how dangerous high-frequency trading can be. As Nick Baumann wrote in Mother Jones magazine, high-frequency trading gone haywire can inflict huge damage, as was the case in the so-called flash crash of 2010, which wiped out almost $1 trillion in shareholder value in a few hours. If several flash crashes occur at the same time, former bank regulator Bill Black told Baumann, “financial institutions can begin to fail, even very large ones.”
If Wall Street’s need for speed doesn’t cause the next Great Crash, TomDispatch regular Laura Gottesdiener knows what might. As she wrote in November, massive investment firms are building a “rental empire,” buying up foreclosed properties by the thousands, renting them back to working people, and bundling up those properties to sell to Wall Street. It’s an ingenious scheme reminiscent of the subprime mortgage machine — and this scheme, too, has the potential to plunge us back into a crisis. Today, Gottesidener turns her sights to New York City, where the rental racket has been underway for years and the results have been instructively grim. Andy Kroll
When predatory equity hit the Big Apple
How private equity came to New York’s rental market — and what that tells us about the future
By Laura Gottesdiener
Things are heating up inside Wall Street’s new rental empire.
Over the last few years, giant private equity firms have bet big on the housing market, buying up more than 200,000 cheap homes across the country. Their plan is to rent the houses back to families — sometimes the very same people who were displaced during the foreclosure crisis — while waiting for the home values to rise. But it wouldn’t be Wall Street not to have a short-term trick up its sleeve, so the private equity firms are partnering with big banks to bundle the mortgages on these rental homes into a new financial product known as “rental-backed securities.” (Remember that toxic “mortgage-backed securities” are widely blamed for crashing the global economy in 2007-2008.)
All this got me thinking: Have private equity firms gambled with rental housing somewhere else before? If so, what happened?
Bloomberg reports: The U.S. Securities and Exchange Commission is examining the exposure of stock exchanges, brokerages and other Wall Street firms to cyber-attacks that have been called a threat to financial stability.
The SEC held a roundtable discussion of those risks in Washington today as it weighs a proposal to require stock exchanges to protect their critical technology and tell members about breaches of important systems. More than half of exchanges surveyed globally in 2012 said they experienced a cyber-attack, while 67 percent of U.S. exchanges said a hacker tried to penetrate their systems.
Dennis Fisher writes: Costin Raiu is a cautious man. He measures his words carefully and says exactly what he means, and is not given to hyperbole or exaggeration. Raiu is the driving force behind much of the intricate research into APTs and targeted attacks that Kaspersky Lab’s Global Research and Analysis Team has been doing for the last few years, and he has first-hand knowledge of the depth and breadth of the tactics that top-tier attackers are using.
So when Raiu says he conducts his online activities under the assumption that his movements are being monitored by government hackers, it is not meant as a scare tactic. It is a simple statement of fact.
“I operate under the principle that my computer is owned by at least three governments,” Raiu said during a presentation he gave to industry analysts at the company’s analyst summit here on Thursday.
The comment drew some chuckles from the audience, but Raiu was not joking. Security experts for years have been telling users — especially enterprise users — to assume that their network or PC is compromised. The reasoning is that if you assume you’re owned then you’ll be more cautious about what you do. It’s the technical equivalent of telling a child to behave as if his mother is watching everything he does. It doesn’t always work, but it can’t hurt.
Raiu and his fellow researchers around the world are obvious targets for highly skilled attackers of all stripes. They spend their days analyzing new attack techniques and working out methods for countering them. Intelligence agencies, APT groups and cybercrime gangs all would love to know what researchers know and how they get their information. Just about every researcher has a story about being attacked or compromised at some point. It’s an occupational hazard.
But one of the things that the events of the last year have made clear is that the kind of paranoia and caution that Raiu and others who draw the attention of attackers employ as a matter of course should now be the default setting for the rest of us, as well. As researcher Claudio Guarnieri recently detailed, the Internet itself is compromised. Not this bit or that bit. The entire network. [Continue reading…]
Last year, CSIS reported: After years of guesswork and innumerable attempts to quantify the costly effects of cybercrime on the U.S. and world economies, McAfee engaged one of the world’s preeminent international policy institutions for defense and security, the Center for Strategic and International Studies (CSIS) to build an economic model and methodology to accurately estimate these losses, which can be extended worldwide. “Estimating the Cost of Cybercrime and Cyber Espionage” posits a $100 billion annual loss to the U.S. economy and as many as 508,000 U.S. jobs lost as a result of malicious cyber activity.
Bloomberg reports: Wall Street leaders including Lloyd Blankfein and James Gorman, who have courted business in Vladimir Putin’s Russia, are facing a dilemma as tensions over Ukraine escalate.
Their scheduled attendance at Putin’s annual investor showcase in St. Petersburg in May is in doubt as sanctions imposed by the U.S. in response to Russia’s annexation of Crimea — and retaliatory moves by Putin — threaten the ties between Russia’s leader and businesses including Goldman Sachs Group Inc. and Morgan Stanley. Spokesmen for the New York-based banks declined to comment on whether the executives will attend.
Wall Street firms that have pursued deals in Russia for years are being forced by the dispute over Ukraine to reexamine their bet on friendlier relations between Putin and the West. U.S. President Barack Obama yesterday added to the list of Russians targeted by financial sanctions and a June Group of Eight meeting in Russia was scrapped. Russia banned entry by U.S. leaders including House Speaker John Boehner.
“If you’re a head of a major U.S. financial institution, you say, ‘President Obama’s not going to the G-8 meeting, should I go to St. Petersburg?’” said Edwin Truman, a senior fellow with the Peterson Institute for International Economics who was an assistant Treasury secretary for international affairs in the Clinton administration. “If they don’t ask themselves that question, they’re not doing their job.”
Obama yesterday ordered financial sanctions on OAO Bank Rossiya, a St. Petersburg-based lender owned by Putin associates, and on an increasing number of Russian officials, saying the incursion into Ukraine and continuing military movements carry “dangerous risks of escalation” and must be met by unified global opposition. Russia responded by barring entry by nine U.S. officials, including Boehner.
At stake are investments made over years and sometimes decades by global companies in Russia, where economic growth had until recently outstripped the U.S.
Goldman Sachs has made at least $1 billion in investments in Russian companies and won a three-year contract last year to advise the Kremlin on improving the nation’s image overseas and to help the country attract more investors. [Continue reading…]
IPS reports: An estimated 400 million acres of farmland in the United States will likely change hands over the coming two decades as older farmers retire, even as new evidence indicates this land is being strongly pursued by private equity investors.
Mirroring a trend being experienced across the globe, this strengthening focus on agriculture-related investment by the private sector is already leading to a spike in U.S. farmland prices. Coupled with relatively weak federal policies, these rising prices are barring many young farmers from continuing or starting up small-scale agricultural operations of their own.
In the long term, critics say, this dynamic could speed up the already fast-consolidating U.S. food industry, with broad ramifications for both human and environmental health.
“When non-operators own farms, they tend to source out the oversight to management companies, leading in part to horrific conditions around labour and how we treat the land,” Anuradha Mittal, the executive director of the Oakland Institute, a U.S. watchdog group focusing on global large-scale land acquisitions, told IPS.
“They also reprioritise what commodities are grown on that land, based on what can yield the highest return. This is no longer necessarily about food at all, but rather is a way to reap financial profits. Unfortunately, that’s far removed from the central role that land ultimately plays in terms of climate change, growing hunger and the stability of the global economy.”
In a new report released Tuesday, the Oakland Institute tracks rising interest from some of the financial industry’s largest players. Citing information from Freedom of Information Act requests, the group says this includes bank subsidiaries (the Swiss UBS Agrivest), pension funds (the U.S. TIAA-CREF) and other private equity interests (such as HAIG, a subsidiary of Canada’s largest insurance group). [Continue reading…]
Kevin Roose recounts what he witnessed when he sneaked into the annual black-tie induction ceremony of a secret Wall Street fraternity called Kappa Beta Phi — and then got caught: “Who the hell are you?” [billionaire Michael] Novogratz demanded.
I felt my pulse spike. I was tempted to make a run for it, but – due to the ethics code of the New York Times, my then-employer – I had no choice but to out myself.
“I’m a reporter,” I said.
Novogratz stood up from the table.
“You’re not allowed to be here,” he said.
I, too, stood, and tried to excuse myself, but he grabbed my arm and wouldn’t let go.
“Give me that or I’ll fucking break it!” Novogratz yelled, grabbing for my phone, which was filled with damning evidence. His eyes were bloodshot, and his neck veins were bulging. The song onstage was now over, and a number of prominent Kappas had rushed over to our table. Before the situation could escalate dangerously, a bond investor and former Grand Swipe named Alexandra Lebenthal stepped in between us. Wilbur Ross quickly followed, and the two of them led me out into the lobby, past a throng of Wall Street tycoons, some of whom seemed to be hyperventilating.
Once we made it to the lobby, Ross and Lebenthal reassured me that what I’d just seen wasn’t really a group of wealthy and powerful financiers making homophobic jokes, making light of the financial crisis, and bragging about their business conquests at Main Street’s expense. No, it was just a group of friends who came together to roast each other in a benign and self-deprecating manner. Nothing to see here.
But the extent of their worry wasn’t made clear until Ross offered himself up as a source for future stories in exchange for my cooperation.
“I’ll pick up the phone anytime, get you any help you need,” he said.
“Yeah, the people in this group could be very helpful,” Lebenthal chimed in. “If you could just keep their privacy in mind.”
I wasn’t going to be bribed off my story, but I understood their panic. Here, after all, was a group that included many of the executives whose firms had collectively wrecked the global economy in 2008 and 2009. And they were laughing off the entire disaster in private, as if it were a long-forgotten lark. (Or worse, sing about it — one of the last skits of the night was a self-congratulatory parody of ABBA’s “Dancing Queen,” called “Bailout King.”) These were activities that amounted to a gigantic middle finger to Main Street and that, if made public, could end careers and damage very public reputations.
After several more minutes spent trying to do damage control, Ross and Lebenthal escorted me out of the St. Regis.
As I walked through the streets of midtown in my ill-fitting tuxedo, I thought about the implications of what I’d just seen.
The first and most obvious conclusion was that the upper ranks of finance are composed of people who have completely divorced themselves from reality. [Continue reading…]
Euromoney: A year ago, Euromoney reported that the Libyan Investment Authority was preparing litigation against Goldman Sachs for disastrous trades the US bank had put the Libyan sovereign wealth fund into in early 2008.
Nothing happens fast in Libya, and the top management of the fund has changed since our story. But on January 28, its lawyers lodged a claim at London’s High Court, accusing Goldman of “deliberately exploit[ing] the relationship of trust and confidence it has established with the LIA.”
Euromoney has seen the Particulars of Claim document lodged with the High Court by Simon Twigden, a partner and commercial dispute resolution expert at Enyo Law, on the LIA’s behalf. It makes savage reading for Goldman; it says that equity derivatives trades implemented by the bank lost the fund more than $1 billion while earning Goldman $350 million in profits.
After incurring these losses, Libya asked Goldman for a remedy. In May, 2009, the bank suggested that Libya recoup its losses by investing $3.7 billion in Goldman.
Matt Levine writes: You get the sneaking suspicion that there’s a terrible story here, that there’s a gambler’s-fallacy sense that, since you lost a lot of money on risky bets, the only thing to do is to put even more money on even riskier bets.
You see what’s going on there? Libya pays Goldman $3.7 billion and in return gets securities with “THESE SECURITIES ARE WORTH $5 BILLION” on the front of them. Guess how much those securities are worth? If you guessed $3.7 billion … there’s a decent chance that you’re too high? I dunno. If you guessed $5 billion you should be kept well away from money.
Libya said no; they “prodded Goldman to recoup their losses faster” and “also worried about whether it was wise to invest in Goldman given the collapse of Lehman.”
Trends are easy to spot when you go looking for them and conspiracy theorists are trend-spotters par excellence. The trouble is, a lot of these trends only exist in the eye of the beholder.
Following a “spate” of recent suicides among investment bankers — a possible early warning sign of another financial crisis — John Aziz asks:
[I]s it really abnormal for the finance industry to experience seven possible suicides in the space of a month?
Let’s do a back-of-an-envelope calculation. The U.S. has a suicide rate of about 12 people per 100,000 per year. Roughly 5.9 million people are employed in the American financial sector. Assuming the industry has the same suicide rate as the rest of the population — even with higher-than-average stress levels — one would expect 708 suicides in any given year, or nearly 60 per month in the U.S. alone.
Given that just three of the seven incidents (some of which may not have been suicides) occurred in the U.S., this suggests that the number is not excessive or unusual. Seven hundred suicides perhaps would be cause for raising eyebrows. Not seven.
So this “trend” is more of a case of bloggers and writers conspiracy-mongering without looking properly at the evidence.
The idea that suicides on Wall Street provide a metric for accessing the health of the economy can be traced back to the 1920s, but then as now, it turned out to be an urban legend:
Tall tales about panicked speculators leaping to their deaths have become part of the popular lore about the Great Crash. But although jumping from bridges or buildings was the second-most-popular form of suicide in New York between 1921 and 1931, the “crash-related jumping epidemic” is just a myth. Between Black Thursday and the end of 1929, only four of the 100 suicides and suicide attempts reported in the New York Times were plunges linked to the crash, and only two took place on Wall Street.
Reuters reports: IBM Corp has been sued by a shareholder who accused it of concealing how its ties to what became a major U.S. spying scandal reduced business in China and ultimately caused its market value to plunge more than $12 billion.
IBM lobbied Congress hard to pass a law letting it share personal data of customers in China and elsewhere with the U.S. National Security Agency, in a bid to protect its intellectual property rights, according to a complaint filed in the U.S. District Court in Manhattan.
The plaintiff in the complaint, Louisiana Sheriffs’ Pension & Relief Fund, said this threatened IBM hardware sales in China, particularly given a program known as Prism that let the NSA spy on that country through technology companies such as IBM.
The Baton Rouge pension fund said the revelation of Prism and related disclosures by former NSA contractor Edward Snowden caused Chinese businesses and China’s government to abruptly cut ties with the world’s largest technology services provider.
It said this led IBM on October 16 to post disappointing third-quarter results, including drops in China of 22 percent in sales and 40 percent in hardware sales.
While quarterly profit rose 6 percent, revenue dropped 4 percent and fell well below analyst forecasts.
IBM shares fell 6.4 percent on October 17, wiping out $12.9 billion of the Armonk, New York-based company’s market value. [Continue reading…]
“One shitty deal.” “Shitty deal.” “Shitty.” The date was April 27, 2010, and Senator Carl Levin (D-Mich.) was pissed as he launched into a rant with those pungent quotes in it. As part of a Senate subcommittee investigation into the causes of the financial meltdown, Levin was grilling Goldman Sachs CEO Lloyd Blankfein and several other current and former Goldman higher-ups about their roles in that crisis and in particular the exotic, opaque investment deals they had created and peddled.
What had Levin steaming mad were internal emails revealing that, on the cusp of the financial crisis, Goldman staffers knew that they were selling crummy investments. Levin’s tirade was inspired by an email in which a Goldman staffer describes a product he’s selling as “one shitty deal.” That, of course, did not stop Goldman from selling such products. Not only that, but the firm’s traders later bet against those deals to make even more money! Contempt, thy name is Goldman.
At the heart of that April 2010 hearing, and at the heart of the financial crisis itself, were countless “shitty deals” in the form of so-called mortgage-backed securities. Remember those? It’s been a few years, so here’s a quick refresher. Wall Street firms like Goldman cooked up an idea to bundle together thousands of home mortgages — loans made to people from Fresno to Lubbock to Kalamazoo to Baltimore — and sell them to investors. Goldman profited off their sale and, as long as those homeowners made their mortgage payments, investors enjoyed a constant income stream.
But as we now know, many of those home loans were filled with tricks and trap-doors and, in some cases, were made to people who simply couldn’t afford them. First gradually, and later in cascades, millions of people stopped paying their mortgages, which meant that those mortgage-backed securities went sour. The losses were historic, plunging the U.S. economy into what we now call the Great Recession.
Five years later, the fallout from that mortgage-fueled meltdown and the bailing out of many of the financial institutions that profited from them is far from over. However belatedly, the feds continue to investigate the nation’s biggest banks for having sold shoddy mortgage-backed securities. On November 15th, JP Morgan Chase, one of the nation’s largest banks, agreed to a $4.5 billion settlement with 21 institutional investors who claimed they were wrongly sold bad mortgage-backed securities. Days later, the Justice Department announced a $13 billion settlement with JP Morgan — “the largest settlement with a single entity in American history” — for wrongdoing related to the packaging, marketing, and selling of those securities.
But as Laura Gottesdiener writes today, you can’t keep a bailed-out industry down. Wall Street and its masters of the universe are at it again. They’ve devised a new way to profit off the housing market — and this time it has nothing to do with risky mortgages. Now, Wall Street is securitizing something else: your rent check. Andy Kroll
The empire strikes back
How Wall Street has turned housing into a dangerous get-rich-quick scheme — again
By Laura Gottesdiener
You can hardly turn on the television or open a newspaper without hearing about the nation’s impressive, much celebrated housing recovery. Home prices are rising! New construction has started! The crisis is over! Yet beneath the fanfare, a whole new get-rich-quick scheme is brewing.
Over the last year and a half, Wall Street hedge funds and private equity firms have quietly amassed an unprecedented rental empire, snapping up Queen Anne Victorians in Atlanta, brick-faced bungalows in Chicago, Spanish revivals in Phoenix. In total, these deep-pocketed investors have bought more than 200,000 cheap, mostly foreclosed houses in cities hardest hit by the economic meltdown.
Wall Street’s foreclosure crisis, which began in late 2007 and forced more than 10 million people from their homes, has created a paradoxical problem. Millions of evicted Americans need a safe place to live, even as millions of vacant, bank-owned houses are blighting neighborhoods and spurring a rise in crime. Lucky for us, Wall Street has devised a solution: It’s going to rent these foreclosed houses back to us. In the process, it’s devised a new form of securitization that could cause this whole plan to blow up — again.
Chris Arnade writes: My first year on Wall Street, 1993, I was paid 14 times more than I earned the prior year and three times more than my father’s best year. For that money, I helped my company create financial products that were disguised to look simple, but which required complex math to properly understand. That first year I was roundly applauded by my bosses, who told me I was clever, and to my surprise they gave me $20,000 bonus beyond my salary.
The products were sold to many investors, many who didn’t fully understand what they were buying, most of them what we called “clueless Japanese.” The profits to my company were huge – hundreds of millions of dollars huge. The main product that made my firm great money for close to five years was was called, in typically dense finance jargon, a YIF, or a Yield Indexed Forward.
Eventually, investors got wise, realizing what they had bought was complex, loaded with hidden leverage, and became most dangerous during moments of distress.
I never did meet the buyers; that was someone else’s job. I stayed behind the spreadsheets. My job was to try to extract as much value as possible through math and clever trading. Japan would send us faxes of documents from our competitors. Many were selling far weirder products and doing it in far larger volume than we were. The conversation with our Japanese customers would end with them urging us on: “We can’t fall behind.”
When I did ask, rather naively, if this was all kosher, I would be assured multiple times that multiple lawyers and multiple managers had approved the sales. [Continue reading…]
Paul Krugman writes: Robert Benmosche, the chief executive of the American International Group, said something stupid the other day. And we should be glad, because his comments help highlight an important but rarely discussed cost of extreme income inequality — namely, the rise of a small but powerful group of what can only be called sociopaths.
For those who don’t recall, A.I.G. is a giant insurance company that played a crucial role in creating the global economic crisis, exploiting loopholes in financial regulation to sell vast numbers of debt guarantees that it had no way to honor. Five years ago, U.S. authorities, fearing that A.I.G.’s collapse might destabilize the whole financial system, stepped in with a huge bailout. But even the policy makers felt ill used — for example, Ben Bernanke, the chairman of the Federal Reserve, later testified that no other episode in the crisis made him so angry.
And it got worse. For a time, A.I.G. was essentially a ward of the federal government, which owned the bulk of its stock, yet it continued paying large executive bonuses. There was, understandably, much public furor.
So here’s what Mr. Benmosche did in an interview with The Wall Street Journal: He compared the uproar over bonuses to lynchings in the Deep South — the real kind, involving murder — and declared that the bonus backlash was “just as bad and just as wrong.”
You may find it incredible that anyone would, even for an instant, consider this comparison appropriate. But there have actually been a series of stories like this. In 2010, for example, there was a comparable outburst from Stephen Schwarzman, the chairman of the Blackstone Group, one of the world’s largest private-equity firms. Speaking about proposals to close the carried-interest loophole — which allows executives at firms like Blackstone to pay only 15 percent taxes on much of their income — Mr. Schwarzman declared, “It’s a war; it’s like when Hitler invaded Poland in 1939.”
And you know that such publicly reported statements don’t come out of nowhere. Stuff like this is surely what the Masters of the Universe say to each other all the time, to nods of agreement and approval. It’s just that sometimes they forget that they’re not supposed to say such things where the rabble might learn about it. [Continue reading…]
Gawker: David Petraeus’ road to redemption has reached its gilded destination. As we first reported in April, the disgraced former CIA director will join Kohlberg Kravis Roberts, the private equity giant best known for “large debt-fueled corporate takeovers.”
How exactly does experience designing failed counter-insurgencies translate to an expertise in high finance? “As the world changes and we expand how and where we invest, we are always looking to sharpen the ‘KKR edge,’” cofounder and co-CEO Henry Kravis said of his new hire.
Petraeus will sharpen edges as chairman of the newly-formed KKR Global Institute, where his team will include Ken Mehlman, the former Bush campaign manager and onetime chairman of the Republican National Committee, who has been with KKR since 2008.
George Anders writes: Petraeus’s new job calls for him to get into the “thought leadership” business. As my colleague Halah Touryalai reports, his global institute is expected to address “macro-economic issues like the role of central banks in the world since the crisis, changes in public policy, and other areas where KKR has interests.”
In essence, KKR wants Petraeus, a former four-star general with a uniquely intellectual bent, to help establish the private-equity firm as a citadel of big-picture insights. That would be a welcome change for Kravis and Roberts, who doubtless have grown tired of endless allusions to “Barbarians at the Gate,” an archly titled account of KKR’s 1988 takeover battle for RJR Nabisco.
Blackstone has always had a bit of geopolitical cachet, thanks to founding partner Pete Peterson’s days as Commerce Secretary and his ongoing interest in fiscal policy and Social Security. Carlyle at one time had former President George H.W. Bush as an adviser, helping to buttress that firm’s image as deeply connected to the political realm. Now it’s KKR’s turn to try.
Such has become the nature of power in government: that “service to the nation” turns out to merely be a stepping stone to the advancement of self interest. Whatever Petraeus’ precise value to KKR turns out to be, he will be establishing himself within what has become a transnational system of governance in which representation is limited to the interests of shareholders and power can freely be exercised without democratic irritations like the need for accountability and transparency.
Right-wing nuts who arm themselves in fear of the creation of World Government don’t seem to have noticed that it’s already here — even if it’s more amorphous and less centrally organized than conspiracy theorists might imagine.
Matt Taibbi writes: Conspiracy theorists of the world, believers in the hidden hands of the Rothschilds and the Masons and the Illuminati, we skeptics owe you an apology. You were right. The players may be a little different, but your basic premise is correct: The world is a rigged game. We found this out in recent months, when a series of related corruption stories spilled out of the financial sector, suggesting the world’s largest banks may be fixing the prices of, well, just about everything.
You may have heard of the Libor scandal, in which at least three – and perhaps as many as 16 – of the name-brand too-big-to-fail banks have been manipulating global interest rates, in the process messing around with the prices of upward of $500 trillion (that’s trillion, with a “t”) worth of financial instruments. When that sprawling con burst into public view last year, it was easily the biggest financial scandal in history – MIT professor Andrew Lo even said it “dwarfs by orders of magnitude any financial scam in the history of markets.”
That was bad enough, but now Libor may have a twin brother. Word has leaked out that the London-based firm ICAP, the world’s largest broker of interest-rate swaps, is being investigated by American authorities for behavior that sounds eerily reminiscent of the Libor mess. Regulators are looking into whether or not a small group of brokers at ICAP may have worked with up to 15 of the world’s largest banks to manipulate ISDAfix, a benchmark number used around the world to calculate the prices of interest-rate swaps. [Continue reading…]
Matt Taibbi writes: A great many people around the county were rightfully shocked and horrified by the recent excellent and hard-hitting PBS documentary, The Untouchables, which looked at the problem of high-ranking Wall Street crooks going unpunished in the wake of the financial crisis. The PBS piece certainly rattled some cages, particularly in Washington, in a way that few media efforts succeed in doing. (Scroll to the end of this post to watch the full documentary.)
Now, two very interesting and upsetting footnotes to that groundbreaking documentary have emerged in the last weeks.
The first involves one of the people interviewed for the story, a former high-ranking executive from Countrywide financial who turned whistleblower named Michael Winston. You can see Michael’s segment of The Untouchables at around the 4:20 mark of the piece. The story Winston told during the documentary is essentially an eyewitness account of the beginning of the financial crisis.
When I spoke to him last week, Winston was still as amazed and repulsed by what he saw at Angelo Mozilo’s crooked subprime mortgage company as he was when he worked there. Winston, who had worked for years at high-level positions at companies like Motorola and Lockheed before joining Countrywide in the 2000s, described a moment in his first months at the company, when he rolled into the parking lot at the company headquarters.
“There was a guy there, a well-dressed guy, standing next to a car that had a vanity plate,” he said. “And the plate read, ‘FUND’EM.'”
Winston, curious, asked the guy what the plate meant. The man laughed and said, “That’s Angelo Mozilo’s growth strategy for 2006.” Here’s how Winston described the rest of the story to PBS – i.e. what happened when he asked the man to elaborate:
“What if the person doesn’t have a job?”
“Fund ‘em,” the – the guy said.
And I said, “What if he has no income?”
“What if he has no assets?” And he said, “Fund ‘em.”
Later on, Winston would hear that the company’s unofficial policy was that if a loan applicant could “fog a mirror,” he would be given a loan.
This kind of information is absolutely crucial to understanding what caused the subprime crisis. There are people out there still willing to argue that the government somehow “forced the banks to lend” to unworthy applicants. In reality, it was unscrupulous companies like Countrywide that were cranking out loans en masse, knowing that these loans would be unloaded down the line, first to banks and then to sucker investors like pension funds and foreign trade unions, almost as soon as they were created.
Winston was a witness to all of this. Eventually, he would be asked by the firm to present false information to the Moody’s ratings agency, which was about to give Countrywide a negative rating because of some trouble the company was having in working a smooth succession from one set of company leaders to another.
When Winston refused, he was essentially stripped of his normal responsibilities and had his corporate budget slashed. When Bank of America took over the company, Winston’s job was terminated. He sued, and in one of the few positive outcomes for any white-collar whistleblower anywhere in the post-financial-crisis universe, won a $3.8 million wrongful termination suit against Bank of America last February.
Well, just weeks after the PBS documentary aired, the Court of Appeals in the state of California suddenly took an interest in Winston’s case. Normally, a court of appeals can only overturn a jury verdict in a case like this if there is a legal error. It’s not supposed to relitigate the factual evidence.
Yet this is exactly what happened: [Continue reading…]
Matt Taibbi writes: The deal was announced quietly, just before the holidays, almost like the government was hoping people were too busy hanging stockings by the fireplace to notice. Flooring politicians, lawyers and investigators all over the world, the U.S. Justice Department granted a total walk to executives of the British-based bank HSBC for the largest drug-and-terrorism money-laundering case ever. Yes, they issued a fine – $1.9 billion, or about five weeks’ profit – but they didn’t extract so much as one dollar or one day in jail from any individual, despite a decade of stupefying abuses.
People may have outrage fatigue about Wall Street, and more stories about billionaire greedheads getting away with more stealing often cease to amaze. But the HSBC case went miles beyond the usual paper-pushing, keypad-punching sort-of crime, committed by geeks in ties, normally associated with Wall Street. In this case, the bank literally got away with murder – well, aiding and abetting it, anyway.
For at least half a decade, the storied British colonial banking power helped to wash hundreds of millions of dollars for drug mobs, including Mexico’s Sinaloa drug cartel, suspected in tens of thousands of murders just in the past 10 years – people so totally evil, jokes former New York Attorney General Eliot Spitzer, that “they make the guys on Wall Street look good.” The bank also moved money for organizations linked to Al Qaeda and Hezbollah, and for Russian gangsters; helped countries like Iran, the Sudan and North Korea evade sanctions; and, in between helping murderers and terrorists and rogue states, aided countless common tax cheats in hiding their cash. [Continue reading…]