*Lunatic*, n. One whose delusions are out of fashion.
According to The Sunday Telegraph, Alistair Darling will announce that Treasury-controlled Royal Bank of Scotland and Lloyds Banking Group are to be broken up. As part of a bid to increase competition and recoup taxpayers' cash following last year's bailout, some of the banks' assets will be sold off to leave three new-look high street chains. They will include the return of TSB - whose branches were taken over by Lloyds - and Williams & Glyn's, which is owned by RBS.
According to The Sunday Telegraph, Alistair Darling will announce that Treasury-controlled Royal Bank of Scotland and Lloyds Banking Group are to be broken up.
As part of a bid to increase competition and recoup taxpayers' cash following last year's bailout, some of the banks' assets will be sold off to leave three new-look high street chains.
They will include the return of TSB - whose branches were taken over by Lloyds - and Williams & Glyn's, which is owned by RBS.
With an 8% lower GDP in 2009, Romania gets in front of Lithuania, Latvia and Estonia in a central and Eastern Europe top 10, according to a World Bank analysis published on Wednesday, October 28. Regarding the budget deficit, Romania is only behind Latvia and Lithuania. The analysis also shows that Romania is the only country of the 10 considered which adopted only one measure in response to the economic crisis, addressing the labour market, out of a 9 measures set stipulated in the document.
AFP - Noisy crowds, long queues, and traffic jams plunged McDonald's restaurants in Iceland into a state of siege Saturday, as the chain served its final burgers on the island. Icelanders flooded the three branches of the US fast-food restaurant in Reykjavik several hours before the outlets shut for the last time, forced to close after the island's economic collapse caused running costs to soar.
AFP - Noisy crowds, long queues, and traffic jams plunged McDonald's restaurants in Iceland into a state of siege Saturday, as the chain served its final burgers on the island.
Icelanders flooded the three branches of the US fast-food restaurant in Reykjavik several hours before the outlets shut for the last time, forced to close after the island's economic collapse caused running costs to soar.
China's manufacturing sector grew last month at the fastest pace since April 2008, according to the country's official purchasing managers' index released on Sunday.Analysts said the survey results confirmed that the country's economic recovery was broadening as recovering export demand and consumption joined government stimulus as drivers of growth.The China Federation of Logistics and Purchasing said its index rose to 55.2 from 54.3 a month earlier, the eighth straight monthly reading above 50, the threshold marking economic growth.The index had dropped to 38.8 last November but moved back into positive territory in March this year.The reading for new export orders rose to 54.5 from 53.3 in September, and imports, which had lagged the overall index in showing recovery, jumped to 52.8 from 50.7 a month earlier.Zhang Liqun, an economist at a think tank under the State Council, China's cabinet, said the broad recovery in demand reflected in these readings was an indication that economic growth would accelerate. "The growth rate in the fourth quarter is likely to be 9.5 per cent," he said.The government has said that gross domestic product increased by 8.9 per cent in the third quarter and 7.9 per cent in the second.
Analysts said the survey results confirmed that the country's economic recovery was broadening as recovering export demand and consumption joined government stimulus as drivers of growth.
The China Federation of Logistics and Purchasing said its index rose to 55.2 from 54.3 a month earlier, the eighth straight monthly reading above 50, the threshold marking economic growth.
The index had dropped to 38.8 last November but moved back into positive territory in March this year.
The reading for new export orders rose to 54.5 from 53.3 in September, and imports, which had lagged the overall index in showing recovery, jumped to 52.8 from 50.7 a month earlier.
Zhang Liqun, an economist at a think tank under the State Council, China's cabinet, said the broad recovery in demand reflected in these readings was an indication that economic growth would accelerate. "The growth rate in the fourth quarter is likely to be 9.5 per cent," he said.
The government has said that gross domestic product increased by 8.9 per cent in the third quarter and 7.9 per cent in the second.
The International Monetary Fund has warned that it could cut financial assistance to Ukraine, one of the world's most recession hit economies, after the country veered "off track" by adopting populist wage and pension increases.The warning came after Viktor Yushchenko, Ukraine's president, on Friday signed the increases into law, ignoring warnings from the IMF and Yulia Tymoshenko, his prime minister and bitter rival. The standoff is rooted in a rivalry between Ukraine's political leaders ahead of a hotly contested presidential election to be held in January.Dominique Strauss-Kahn, the IMF head, said he was "very worried" over Mr Yushchenko's decision to sign the bill. Almost $11bn in IMF assistance received since the global financial crisis broke has kept Kiev afloat financially. The IMF is mulling whether to disburse an additional $3.8bn (€2.6bn, £2.3bn) in November. It is seen as crucial to keeping Kiev stable in coming months, but Mr Strauss-Kahn said the 20 per cent wage and pension increases should be cancelled first.
The warning came after Viktor Yushchenko, Ukraine's president, on Friday signed the increases into law, ignoring warnings from the IMF and Yulia Tymoshenko, his prime minister and bitter rival. The standoff is rooted in a rivalry between Ukraine's political leaders ahead of a hotly contested presidential election to be held in January.
Dominique Strauss-Kahn, the IMF head, said he was "very worried" over Mr Yushchenko's decision to sign the bill. Almost $11bn in IMF assistance received since the global financial crisis broke has kept Kiev afloat financially. The IMF is mulling whether to disburse an additional $3.8bn (€2.6bn, £2.3bn) in November. It is seen as crucial to keeping Kiev stable in coming months, but Mr Strauss-Kahn said the 20 per cent wage and pension increases should be cancelled first.
So what is behind this massive rally? Certainly it has been helped by a wave of liquidity from near-zero interest rates and quantitative easing. But a more important factor fuelling this asset bubble is the weakness of the US dollar, driven by the mother of all carry trades. The US dollar has become the major funding currency of carry trades as the Fed has kept interest rates on hold and is expected to do so for a long time. Investors who are shorting the US dollar to buy on a highly leveraged basis higher-yielding assets and other global assets are not just borrowing at zero interest rates in dollar terms; they are borrowing at very negative interest rates - as low as negative 10 or 20 per cent annualised - as the fall in the US dollar leads to massive capital gains on short dollar positions. Let us sum up: traders are borrowing at negative 20 per cent rates to invest on a highly leveraged basis on a mass of risky global assets that are rising in price due to excess liquidity and a massive carry trade. Every investor who plays this risky game looks like a genius - even if they are just riding a huge bubble financed by a large negative cost of borrowing - as the total returns have been in the 50-70 per cent range since March....But one day this bubble will burst, leading to the biggest co-ordinated asset bust ever: if factors lead the dollar to reverse and suddenly appreciate - as was seen in previous reversals, such as the yen-funded carry trade - the leveraged carry trade will have to be suddenly closed as investors cover their dollar shorts. A stampede will occur as closing long leveraged risky asset positions across all asset classes funded by dollar shorts triggers a co-ordinated collapse of all those risky assets - equities, commodities, emerging market asset classes and credit instruments.
Let us sum up: traders are borrowing at negative 20 per cent rates to invest on a highly leveraged basis on a mass of risky global assets that are rising in price due to excess liquidity and a massive carry trade. Every investor who plays this risky game looks like a genius - even if they are just riding a huge bubble financed by a large negative cost of borrowing - as the total returns have been in the 50-70 per cent range since March....But one day this bubble will burst, leading to the biggest co-ordinated asset bust ever: if factors lead the dollar to reverse and suddenly appreciate - as was seen in previous reversals, such as the yen-funded carry trade - the leveraged carry trade will have to be suddenly closed as investors cover their dollar shorts. A stampede will occur as closing long leveraged risky asset positions across all asset classes funded by dollar shorts triggers a co-ordinated collapse of all those risky assets - equities, commodities, emerging market asset classes and credit instruments.
Three months ago, the CIT Group barely averted what it considered to be a ruinous bankruptcy filing that would likely have put the 101-year-old lender out of business. On Sunday afternoon, the company is expected to file for Chapter 11 -- but under a so-called prepackaged bankruptcy plan that will enable it to emerge from court protection by the end of the year. Sunday's filing, to be made in a Manhattan federal court, caps months of efforts by CIT to stay alive. After being denied another bailout by the federal government, the company bargained with its creditors over a restructuring plan that would keep it operating and slash its heavy debt load, including $30 billion in bond debt. [...] CIT's filing will test whether a financial company can survive the Chapter 11 process. Bankruptcy has long been considered a death knell for lenders, whose very existence depends on the confidence of its creditors and customers. The company's struggles have been watched with interest and trepidation by analysts and the thousands of small and mid-sized businesses that borrow from CIT. Yet the filing will still mean much pain for many parties, beginning with taxpayers. CIT received $2.3 billion in government aid last year, a bailout that came in the form of preferred stock. That will almost certainly be wiped out in the bankruptcy process, the first definitive loss in the government's rescue of the financial system.
Three months ago, the CIT Group barely averted what it considered to be a ruinous bankruptcy filing that would likely have put the 101-year-old lender out of business.
On Sunday afternoon, the company is expected to file for Chapter 11 -- but under a so-called prepackaged bankruptcy plan that will enable it to emerge from court protection by the end of the year.
Sunday's filing, to be made in a Manhattan federal court, caps months of efforts by CIT to stay alive. After being denied another bailout by the federal government, the company bargained with its creditors over a restructuring plan that would keep it operating and slash its heavy debt load, including $30 billion in bond debt.
[...]
CIT's filing will test whether a financial company can survive the Chapter 11 process. Bankruptcy has long been considered a death knell for lenders, whose very existence depends on the confidence of its creditors and customers. The company's struggles have been watched with interest and trepidation by analysts and the thousands of small and mid-sized businesses that borrow from CIT.
Yet the filing will still mean much pain for many parties, beginning with taxpayers. CIT received $2.3 billion in government aid last year, a bailout that came in the form of preferred stock. That will almost certainly be wiped out in the bankruptcy process, the first definitive loss in the government's rescue of the financial system.
But prominent economist James Galbraith recently told Bill Moyers:JAMES GALBRAITH: The overwhelming emphasis, in the administration's program, I think, has been to return things to a condition of normalcy, to use a 1920s word, that prevailed five and ten years ago. That is to say, we're back to a world in which Wall Street and the major banks are leading, and setting the path- BILL MOYERS: To restore what was. JAMES GALBRAITH: To restore what was- BILL MOYERS: Instead of reform what is. JAMES GALBRAITH: And I don't think what was can be restored. BILL MOYERS: And you say that's the objective of the administration's policies? Geithner, Bernanke, Summers, the President himself? JAMES GALBRAITH: To the extent that there's a defined objective, that's it, yes. I think in the immediate day-to-day work, they've largely been preoccupied with keeping the existing system from collapsing. And the government is powerful. It has substantially succeeded at that, but you really have to think about, do you want to have a financial sector dominated by a small number of very large institutions, very difficult to manage, practically impossible to regulate, and ruled by, essentially, the same people and the same culture that caused the crisis in the first place.
JAMES GALBRAITH: The overwhelming emphasis, in the administration's program, I think, has been to return things to a condition of normalcy, to use a 1920s word, that prevailed five and ten years ago. That is to say, we're back to a world in which Wall Street and the major banks are leading, and setting the path- BILL MOYERS: To restore what was. JAMES GALBRAITH: To restore what was- BILL MOYERS: Instead of reform what is. JAMES GALBRAITH: And I don't think what was can be restored. BILL MOYERS: And you say that's the objective of the administration's policies? Geithner, Bernanke, Summers, the President himself? JAMES GALBRAITH: To the extent that there's a defined objective, that's it, yes. I think in the immediate day-to-day work, they've largely been preoccupied with keeping the existing system from collapsing. And the government is powerful. It has substantially succeeded at that, but you really have to think about, do you want to have a financial sector dominated by a small number of very large institutions, very difficult to manage, practically impossible to regulate, and ruled by, essentially, the same people and the same culture that caused the crisis in the first place.
BILL MOYERS: To restore what was.
JAMES GALBRAITH: To restore what was-
BILL MOYERS: Instead of reform what is. JAMES GALBRAITH: And I don't think what was can be restored. BILL MOYERS: And you say that's the objective of the administration's policies? Geithner, Bernanke, Summers, the President himself? JAMES GALBRAITH: To the extent that there's a defined objective, that's it, yes. I think in the immediate day-to-day work, they've largely been preoccupied with keeping the existing system from collapsing. And the government is powerful. It has substantially succeeded at that, but you really have to think about, do you want to have a financial sector dominated by a small number of very large institutions, very difficult to manage, practically impossible to regulate, and ruled by, essentially, the same people and the same culture that caused the crisis in the first place.
BILL MOYERS: You mean, the people who could have prevented the dam from breaking were too busy fishing above it, and reaping big rewards to want to fix the crack in it? JAMES GALBRAITH: Sure. The Federal Reserve, in particular, knew that the dam was cracking. Alan Greenspan, I think, almost surely knew this, and chose to wait until it had washed away. BILL MOYERS: Why? JAMES GALBRAITH: They let all of this run, because they were getting a superficially stronger economy out of it. The ownership society, all that was a scam, basically, designed to lure people who could never afford these mortgages into accepting them. And yes, I think they, any rational person, certainly people in the industry, knew that this was not going to last. There was a little industry code, I've learned, IBGYBG. "I'll be gone. You'll be gone."
The whole interview is worth reading. "Ce qui vient au monde pour ne rien troubler ne mérite ni égards ni patience." René Char
In 2006 and 2007, Goldman Sachs Group peddled more than $40 billion in securities backed by at least 200,000 risky home mortgages, but never told the buyers it was secretly betting that a sharp drop in U.S. housing prices would send the value of those securities plummeting. Goldman's sales and its clandestine wagers, completed at the brink of the housing market meltdown, enabled the nation's premier investment bank to pass most of its potential losses to others before a flood of mortgage defaults staggered the U.S. and global economies.Only later did investors discover that what Goldman had promoted as triple-A rated investments were closer to junk. Now, pension funds, insurance companies, labor unions and foreign financial institutions that bought those dicey mortgage securities are facing large losses, and a five-month McClatchy investigation has found that Goldman's failure to disclose that it made secret, exotic bets on an imminent housing crash may have violated securities laws.
Goldman's sales and its clandestine wagers, completed at the brink of the housing market meltdown, enabled the nation's premier investment bank to pass most of its potential losses to others before a flood of mortgage defaults staggered the U.S. and global economies.
Only later did investors discover that what Goldman had promoted as triple-A rated investments were closer to junk.
Now, pension funds, insurance companies, labor unions and foreign financial institutions that bought those dicey mortgage securities are facing large losses, and a five-month McClatchy investigation has found that Goldman's failure to disclose that it made secret, exotic bets on an imminent housing crash may have violated securities laws.
Hat tip naked capitalism "Ce qui vient au monde pour ne rien troubler ne mérite ni égards ni patience." René Char
Before AIG was seized, its executives had been negotiating for months with the banks, trying to get them to accept discounts of as much as 40 cents on the dollar, Bloomberg reported, citing people familiar with the matter.Then, late in the week of Nov. 3, the New York Fed took over the negotiations with the banks from AIG, together with the Treasury Department (at the time run by former Goldman boss Henry Paulson) and Chairman Ben Bernanke's Federal Reserve Board. Less than a week later, the New York Fed instructed AIG to pay the counterparties in full, Bloomberg reported.AIG wound up paying $32.5 billion to retire the swaps, $13 billion more than if it had paid, say, 60 cents on the dollar. The New York Fed also arranged to pay the banks $29.6 billion for collateralized-debt obligations backed by subprime mortgages and other loans, a tad less than half their face value. (The swaps were side bets by the banks that rose in value as the CDOs fell.)
Then, late in the week of Nov. 3, the New York Fed took over the negotiations with the banks from AIG, together with the Treasury Department (at the time run by former Goldman boss Henry Paulson) and Chairman Ben Bernanke's Federal Reserve Board. Less than a week later, the New York Fed instructed AIG to pay the counterparties in full, Bloomberg reported.
AIG wound up paying $32.5 billion to retire the swaps, $13 billion more than if it had paid, say, 60 cents on the dollar. The New York Fed also arranged to pay the banks $29.6 billion for collateralized-debt obligations backed by subprime mortgages and other loans, a tad less than half their face value. (The swaps were side bets by the banks that rose in value as the CDOs fell.)
As I have repeatedly written, the largest U.S. banks have repeatedly gone bankrupt due to wild speculation which was blessed by the Fed, and then the government covered up their bankruptcy. [Washington then quotes from James Gailbraith's on the occasion of the publication of a new edition of J. K. Gailbraith's The Great Crash, 1929]: BILL MOYERS: So what should we do? JAMES GALBRAITH: We need to find another path for economic expansion. We need to set a strategic direction. Our problem now, our big social and environmental problem, is energy. It's climate change. It's the greenhouse gas emission issue. If we built a set of institutions that could deal with that problem effectively, you could employ a large part of the labor force for a generation, dealing with that. And you'd then make that profitable for private enterprise to get into in a serious way. BILL MOYERS: The candidate Obama talked a lot about this, green energy, in the campaign. And he's talked a lot about it since he became president. Do you see signs that those aspirations are being implemented, in institutional ways? JAMES GALBRAITH: They made a start, and certainly in the stimulus package, there were important initiatives. But the stimulus package is framed as a stimulus, as something which is temporary, which will go away after a couple of years. And that is not the way to proceed here. The overwhelming emphasis, in the administration's program, I think, has been to return things to a condition of normalcy, to use a 1920s word, that prevailed five and ten years ago. That is to say, we're back to a world in which Wall Street and the major banks are leading, and setting the path-- BILL MOYERS: To restore what was. JAMES GALBRAITH: To restore what was-- BILL MOYERS: Instead of reform what is. JAMES GALBRAITH: And I don't think what was can be restored. [Thus, in James Gailbraith's view, the implicit goal of Obama Administration policy is to restore the un-restorable--public confidence in our financial system. Washington finishes with a killer quote from Mario Seccareccia - editor of the International Journal of Political Economy]: The Great Crash of 1929 taught us that a modern monetary market economy is governed by confidence. As John Maynard Keynes put it, monetary relations and, more precisely, asset values, are held up by one's belief in the future. Without it, the whole credit-driven economic system comes to a halt and economic agents scramble for cover by seeking to acquire liquidity. While in a non commodity-based monetary system a central bank can quite easily supply liquidity in its role as lender of last resort, a central bank cannot single-handedly instill confidence in the future. When confidence is lost, monetary policy is impotent in building up asset values, which can only be sustained if people believe in future revenue arising from future production. The economy remains trapped in a state of paralysis in which everyone is seeking to remain liquid. History tells the tale: Excessive optimism prior to the Great Crash turned to hopelessness during the early 1930s. Without a thorough investigation like the Pecora Commission, and without prosecuting those who are guilty, confidence and hope in the future will not be restored, consumer confidence will remain depressed, and we will remain in an economic slump.
[Washington then quotes from James Gailbraith's on the occasion of the publication of a new edition of J. K. Gailbraith's The Great Crash, 1929]:
BILL MOYERS: So what should we do? JAMES GALBRAITH: We need to find another path for economic expansion. We need to set a strategic direction. Our problem now, our big social and environmental problem, is energy. It's climate change. It's the greenhouse gas emission issue. If we built a set of institutions that could deal with that problem effectively, you could employ a large part of the labor force for a generation, dealing with that. And you'd then make that profitable for private enterprise to get into in a serious way. BILL MOYERS: The candidate Obama talked a lot about this, green energy, in the campaign. And he's talked a lot about it since he became president. Do you see signs that those aspirations are being implemented, in institutional ways? JAMES GALBRAITH: They made a start, and certainly in the stimulus package, there were important initiatives. But the stimulus package is framed as a stimulus, as something which is temporary, which will go away after a couple of years. And that is not the way to proceed here. The overwhelming emphasis, in the administration's program, I think, has been to return things to a condition of normalcy, to use a 1920s word, that prevailed five and ten years ago. That is to say, we're back to a world in which Wall Street and the major banks are leading, and setting the path-- BILL MOYERS: To restore what was. JAMES GALBRAITH: To restore what was-- BILL MOYERS: Instead of reform what is. JAMES GALBRAITH: And I don't think what was can be restored.
JAMES GALBRAITH: We need to find another path for economic expansion. We need to set a strategic direction.
Our problem now, our big social and environmental problem, is energy. It's climate change. It's the greenhouse gas emission issue. If we built a set of institutions that could deal with that problem effectively, you could employ a large part of the labor force for a generation, dealing with that. And you'd then make that profitable for private enterprise to get into in a serious way.
BILL MOYERS: The candidate Obama talked a lot about this, green energy, in the campaign. And he's talked a lot about it since he became president. Do you see signs that those aspirations are being implemented, in institutional ways?
JAMES GALBRAITH: They made a start, and certainly in the stimulus package, there were important initiatives. But the stimulus package is framed as a stimulus, as something which is temporary, which will go away after a couple of years. And that is not the way to proceed here. The overwhelming emphasis, in the administration's program, I think, has been to return things to a condition of normalcy, to use a 1920s word, that prevailed five and ten years ago. That is to say, we're back to a world in which Wall Street and the major banks are leading, and setting the path--
JAMES GALBRAITH: To restore what was--
BILL MOYERS: Instead of reform what is.
JAMES GALBRAITH: And I don't think what was can be restored.
Washington finishes with a killer quote from Mario Seccareccia - editor of the International Journal of Political Economy]:
The Great Crash of 1929 taught us that a modern monetary market economy is governed by confidence. As John Maynard Keynes put it, monetary relations and, more precisely, asset values, are held up by one's belief in the future. Without it, the whole credit-driven economic system comes to a halt and economic agents scramble for cover by seeking to acquire liquidity. While in a non commodity-based monetary system a central bank can quite easily supply liquidity in its role as lender of last resort, a central bank cannot single-handedly instill confidence in the future. When confidence is lost, monetary policy is impotent in building up asset values, which can only be sustained if people believe in future revenue arising from future production. The economy remains trapped in a state of paralysis in which everyone is seeking to remain liquid. History tells the tale: Excessive optimism prior to the Great Crash turned to hopelessness during the early 1930s.
While in a non commodity-based monetary system a central bank can quite easily supply liquidity in its role as lender of last resort, a central bank cannot single-handedly instill confidence in the future. When confidence is lost, monetary policy is impotent in building up asset values, which can only be sustained if people believe in future revenue arising from future production. The economy remains trapped in a state of paralysis in which everyone is seeking to remain liquid. History tells the tale: Excessive optimism prior to the Great Crash turned to hopelessness during the early 1930s.
Without a thorough investigation like the Pecora Commission, and without prosecuting those who are guilty, confidence and hope in the future will not be restored, consumer confidence will remain depressed, and we will remain in an economic slump.
Washington links to the October 30 Huffington Post article:"Roosevelt Institute Celebrates A New Agenda for America": Eliot Spitzer, Elizabeth Warren And 13 Others Reflect On The 80-Year Anniversary Of The Stock Market Crash Of 1929". The original articles can be found at The Roosevelt Institute's web site New Deal 2.0. The articles on New Deal 2.0 are shown in summary form with clicks for the full articles and the earlier articles in the series are on the second page, accessed by a click on "Previous Entries" at the bottom of page 1.
Huffington Post is one of the more widely read on-line progressive news sources in the US. I am glad to see the work of New Deal 2.0 and the Roosevelt Institute getting broader exposure.
As the Dutch said while fighting the Spanish: "It is not necessary to have hope in order to persevere."
But you cannot "restore" stability without changing the institutional arrangements underpinning the economy. En un viejo país ineficiente, algo así como Espańa entre dos guerras civiles, poseer una casa y poca hacienda y memoria ninguna. -- Gil de Biedma
WASHINGTON -- In 2006 and 2007, Goldman Sachs Group peddled more than $40 billion in securities backed by at least 200,000 risky home mortgages, but never told the buyers it was secretly betting that a sharp drop in U.S. housing prices would send the value of those securities plummeting. Goldman's sales and its clandestine wagers, completed at the brink of the housing market meltdown, enabled the nation's premier investment bank to pass most of its potential losses to others before a flood of mortgage defaults staggered the U.S. and global economies. Only later did investors discover that what Goldman had promoted as triple-A rated investments were closer to junk. Now, pension funds, insurance companies, labor unions and foreign financial institutions that bought those dicey mortgage securities are facing large losses, and a five-month McClatchy investigation has found that Goldman's failure to disclose that it made secret, exotic bets on an imminent housing crash may have violated securities laws. "The Securities and Exchange Commission should be very interested in any financial company that secretly decides a financial product is a loser and then goes out and actively markets that product or very similar products to unsuspecting customers without disclosing its true opinion," said Laurence Kotlikoff, a Boston University economics professor who's proposed a massive overhaul of the nation's banks. "This is fraud and should be prosecuted." John Coffee, a Columbia University law professor who served on an advisory committee to the New York Stock Exchange, said that investment banks have wide latitude to manage their assets, and so the legality of Goldman's maneuvers depends on what its executives knew at the time. "It would look much more damaging," Coffee said, "if it appeared that the firm was dumping these investments because it saw them as toxic waste and virtually worthless."
Goldman's sales and its clandestine wagers, completed at the brink of the housing market meltdown, enabled the nation's premier investment bank to pass most of its potential losses to others before a flood of mortgage defaults staggered the U.S. and global economies. Only later did investors discover that what Goldman had promoted as triple-A rated investments were closer to junk.
"The Securities and Exchange Commission should be very interested in any financial company that secretly decides a financial product is a loser and then goes out and actively markets that product or very similar products to unsuspecting customers without disclosing its true opinion," said Laurence Kotlikoff, a Boston University economics professor who's proposed a massive overhaul of the nation's banks. "This is fraud and should be prosecuted."
John Coffee, a Columbia University law professor who served on an advisory committee to the New York Stock Exchange, said that investment banks have wide latitude to manage their assets, and so the legality of Goldman's maneuvers depends on what its executives knew at the time. "It would look much more damaging," Coffee said, "if it appeared that the firm was dumping these investments because it saw them as toxic waste and virtually worthless."
