Sunday, February 25, 2018

The Not So Transparent, Not so "Free" Markets that Privatize Profits While Socializing Losses


On Friday the news media reported that the US Securities and Exchange Commission (SEC) is planning to eliminate an Obama-era rule that "compels disclosure of various asset types":
Michaels, Dave (2018, February 23). Regulator to ease curb on funds. The Wall Street Journal, B1, B2. 
Securities regulators plan to pare back Obama-era requirements that would require mutual funds to tell shareholders about large holdings of hard-to-sell assets, in which would be a significant concession to the industry... The SEC is preparing to allow finds to keep private their quarterly estimates of how much of their portfolio includes hard-to-sell debt or other securities... the data would still have to be shared with regulators.

Essentially, the SEC is allowing the financial industry to sell OBSCURE products.

This is fundamentally in contradiction to the demand of transparency required for efficient and fair market operations.

How can consumers make wise financial decisions if the sellers of financial instruments are legally allowed to hide poor performing assets?

Powerful financial industry actors work against transparency and strict reserve requirements in order to maximize their gains. We saw the logic of their operations in the comments made by Fabrice Tourre of Goldman Sachs.

Here is an except from my book Crisis Communication, Liberal Democracy and Ecological Sustainability exploring how the financial industry created and pedaled obscure financial instruments, such as Collateralized Debt Obligations (CDOs) with the intent to deceive consumers, including institutional investors such as pension funds.

CDOs were so packed with toxic debt that the banks that produced them purchased contracts known as credit default swaps (CDS) that payed out when the pedaled CDOs failed due to defaults on underlying assets (such as defaulted mortgages).

In the case described below, Goldman Sachs purchased credit default swaps from the Royal Bank of Scotland. The Royal Bank of Scotland had to be bailed out after paying out on the credit default swaps they sold to elite financial entities.

So, banks such as Goldman Sachs made money selling obscure financial products packed with bad assets and then made money, using credit default swaps, when the CDOs failed because of defaults in underlying assets:


Savvy financial players, such as Goldman Sachs, knew that many of the CDOs were backed by junk and yet they sold these to the staid institutional investors – particularly public pension funds – while betting on their default using credit default swaps (CDS).

EXCERPT FROM BOOK
Goldman Sach’s Vice President Fabrice Tourre’s division developed Abacus, a synthetic CDO, sold to unwitting clients who had no idea mortgages making up the CDO were expected to default.[i] Worse, Goldman Sachs and the hedge fund, Paulson & Co collaborated in betting that Abacus would default by purchasing credit default swaps on Abacus from the Royal Bank of Scotland.

The Royal Bank of Scotland suffered significant losses from its sales of credit default swaps, including an $850 million liability from backstopping securities designed by Goldman Sachs.[ii] The Royal Bank of Scotland was subsequently bailed out by the U.K. Government, illustrating the transfer of private losses to the public.

In an email to his girlfriend, Tourre referred to himself "fabulous Fab" and described creating "Frankenstein" products that were nothing more than "pure intellectual masturbation" sold to naive widows and orphans.[iii]

Goldman Sachs profited from selling CDOs it knew were infused with fraud. After selling the fraud-infused CDOs, Goldman then bet the underlying debt would default, rendering the securities valueless, by purchasing credit default swaps. In 2007 and 2008 Goldman and other CDS holders were profiting as the CDOs lost value in the torrent of home foreclosures.

Employee emails and whistleblower accounts establish the role of deliberate fraud in mortgage-backed securities. For example, JP Morgan Chase whistleblower Alayne Fleischmann described “massive criminal securities fraud' in the bank's mortgage operations” in her televised interview with Amy Goodman and Matt Taibbi on Democracy Now![iv]

Fleischmann tried to warn company officials, officials at the SEC and, subsequently Attorney General Eric Holder of the fraud she had uncovered at Chase in late 2006 in a group of mortgages originated from GreenPoint valued at about $900 billion. Fleischmann had unraveled a protocol for packaging and reselling “scratch and dent” mortgages, known to be at high risk of default, as “Alt-A” high-grade investment. Supervisors responded to concerns raised by Fleischmann and others by demanding that reports be rewritten, which they were until they met supervisors’ approval....

END
Why should we care? The lack of transparency and ethics in financial markets produces a lopsided transfer of wealth to the very richest among us:
Americans saw wealth plummet 40 percent from 2007 to 2010, Federal Reserve says. By Ylan Q. Mui, Published: June 11The Washington Post http://www.washingtonpost.com/business/economy/fed-americans-wealth-dropped-40-percent/2012/06/11/gJQAlIsCVV_story.html?wpisrc=nl_headlines_Tue

REFERENCES

[i] Andrew Clark, "Lloyd Blankfein Admits Goldman Sachs Failed to Raise the Alarm," The Guardian, April 27, 2010, accessed April 28, 2010, http://www.guardian.co.uk/business/2010/apr/26/goldman-sachs-sec-senate-hearing.

[ii] Zachary A. Goldfarb and Tomoeh Murakami Tse, "SEC Sued Goldman Sachs to Break an Impasse," The Washington Post, April 20, 2010, A1.

[iii] Andrew Clark, "Goldman Sachs Banker Fabrice Tourre Faces the Music," The Guardian, April 27, 2010, accessed, May 1, 2010, http://www.guardian.co.uk/business/2010/apr/27/goldman-sachs-fabrice-tourre.

[iv] Amy Goodman, “Matt Taibbi and ‘The $9 Billion Witness’ Who Exposed How JPMorgan Chase Helped Wreck the Economy,” Democracy Now, January 1, 2015, accessed September 13, 2015, http://www.democracynow.org/2015/1/1/matt_taibbi_and_the_9_billion.


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If you are wondering who's profiting from the stock market volatilityhttp://majiasblog.blogspot.com/2018/02/if-you-are-wondering-whos-profiting.html

 

Saturday, February 24, 2018

Fukushima Daiichi Still Steamy

Fukushima is quite steamy this morning, with weather conditions reported at 32 degrees, 40% precipitation, and 71% humidity: