A world in economic crisis

Goldman Sachs is accused of misleading investors by U.S. Senate

Posted in dodgy swaps and derivatives, Goldman Sachs by Aussie on April 15, 2011

According to this BBC report, a US Senate probe says that Goldman Sachs had misled investors selling mortgage-backed investments it knew would fail.

The name Goldman Sachs has cropped up in a number of different places when it comes to the provision of misleading information. Greece comes to mind, because it was Goldman Sachs who helped the Greek government prepare reports that were meant to fool the European Economic Community so that they could gain access to the Euro zone.

The Senate Permanent Subcommittee on Investigations claims that Goldman Sachs lied in a testimony given in 2010.

Goldman had marketed four sets of complex mortgage securities to banks and other investors, but failed to tell them that the investments were risky.

According to Carl Levin the Democrat who heads the subcommittee Goldman had exploited the clients.

This might be true with regard to Goldman Sachs, and there is evidence that this is the case because Goldman Sachs settled a civil lawsuit relating to a large deal known as Abacus to the tune of $550 million,  but it seems that there are also a number of other issues that were not explored by this subcommittee, for example:

1. What was the impact of the act that removed the requirement to have a deposit before lending was approved?

2. What was the impact of lending to people who could not pay or would not pay back the mortgage?

In other words, it is more than likely that Goldman Sachs deserves to be called out for possibly lying to clients about the risk involved in taking on those investments.

 

 

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Greece – the canary in the Eurozone coalmine

Posted in dodgy swaps and derivatives, European Union, Greece by Aussie on May 5, 2010

The BBC reports that the European Commission expects Greece economy to shrink by 3% amid fears over that country’s debt problem.  The biggest fear for the European Commission is the spread of the crisis to other European countries including Spain and Portugal. (this of course, would not be surprising because Spain and Portugal are one of the STUPID countries).

The Commission said the eurozone countries as a whole would see growth of 0.9% – an improvement on the 0.7% forecast earlier this year.

But it admitted that the recovery in Europe “continues to be surrounded by high uncertainty”.

The commission cited “recent tensions” in the markets as a concern.

Greece has been in recession since the second quarter of 2009.

The euro fell to its lowest level against the dollar in more than a year, at $1.2935, with investors concerned that the Greek debt crisis could spread to other eurozone countries including Spain and Portugal.

The euro is also down against the pound, with one pound worth 1.167 euros.

European finance ministers had agreed a bailout for Greece but the deal has to be ratified by several EU states, including Germany. It also faces opposition amongst the Greek public.

Once again Greece is facing strikes and disruption due to the opposition to the austerity measures that are required as a result of the bail-out deal. However, one must question the reality of the Greeks because it seems that Greece has become the ultimate Welfare State.

Reuters had reported on some areas of waste in Greece with regard to welfare spending :

  • tens of thousands of unmarried or divorced daughters of dead civil servants continue to collect their pensions. This largesse is worth more than $500 euros per year.
  • civil servants are protected from dismissal and can retire from work in their 40s.
  • Greek expenditure on pensions is expected to rise to 12% of GDP by 2050

The Greek government has promised to overhaul pension spending by raising the retirement age and banning early retirement.

Other areas of waste in paying civil servants include:

  • being paid extra to use a computer
  • bonus for speaking a foreign language
  • bonus for turning up for work on time
  • in case of foresters they get a bonus for working out of doors
  • bonuses for Christmas and Easter.

The government attempt to trim these bonuses as austerity measures would amount to a saving of 1.7 billion euros. However, the Greeks are not happy about the attempt to implement these austerity measures and they have taken to the streets with rioting, as well as putting on general strikes.

Up until 2008 when it was finally sold, Olympic airways had been a loss making proposition for the Greek government. Even worse, the unions had foiled previous attempts to sell the airline so that they could fly themselves and their families for free around the world. When Olympic airlines was sold the 4600 members of staff were given a generous compensation package. However some of these staff recently took to the streets because they had not received all of the promised benefits.

The Greek government owns 74 companies, mostly in transport and utilities, many of which are over-staffed and loss-making entities. The railways are losing something like 800 million euros per year.

Another area of waste is the employment of committees, even though it is not clear what some of those committees do:

Hundreds of state-appointed committees employ staff though it is not clear what they all do. Greece has a committee to manage Lake Kopais, which dried out in the 1930s.

One Greek paper estimated that committees employ more than 10,000 people and cost over 220 million euros a year.

Coming through on a pre-election pledge to cut such waste, the government recently announced it would shut down or merge at least 200 such committees that have outlived their usefulness.

On top of this, Greece is expending on arms at a higher rate than other countries in the European Union – this is due to the tensions with Turkey.

Tensions with arch-rival Turkey have kept Greek military spending well above that of other EU members, reaching 14 billion euros, or 6 percent of GDP, in 2007 and 2009.

Budget woes have limited military procurements and the 2010 defence budget now stands at 6.7 billion euros ($8.92 billion).

But nearly 80 percent of Defence Ministry spending goes on administrative costs and payments of army staff. The government has said it will gradually reduce costs and spending on arms purchases will be contained to 1.8 billion euros (0.7 percent of GDP) this year

Lose some – but win more with shorts

Posted in dodgy swaps and derivatives, Goldman Sachs by Aussie on April 25, 2010

The Goldman Sachs subprime mortgage scandal is getting bigger and bigger as more information is provided regarding the activities of the group. The ABC online reports:

Goldman Sachs officials discussed making “serious money” in 2007 off the subprime crisis as mortgages were starting to falter in rapid numbers, according to a collection of emails released by a Senate panel on Saturday.

“Of course we didn’t dodge the mortgage mess. We lost money, then made more than we lost because of shorts,” Goldman Sachs chief executive Lloyd Blankfein said in an email dating from November 2007.

“Sounds like we will make some serious money,” said Goldman Sachs executive Donald Mullen in a separate series of emails from October 2007 about the performance of deteriorating second-lien positions in a collateralized debt obligation, or CDO.

The Senate Permanent Subcommittee on Investigations is holding a hearing on Tuesday with Mr Blankfein and other Goldman executives, scheduled to testify about the role Goldman Sachs played in the financial crisis.

The firm has been sued for civil fraud by the Securities and Exchange Commission over its marketing of a CDO.

Commenting on the emails, Senator Carl Levin, chairman of the subcommittee, said that they showed Goldman “made a lot of money by betting against the mortgage market.”

It is unquestionable that the executives at Goldman Sachs knew exactly what they were doing and that they intended to make money out of the subprime market, even though it was becoming toxic. It is really disgusting that Goldman Sachs has benefited so much out of TARP funds.

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The tumbling world of Goldman Sachs

Posted in dodgy swaps and derivatives, Goldman Sachs, Uncategorized by Aussie on April 24, 2010

The Global Economic Crisis was caused for a multiple of reasons including the behaviour of certain banks and hedge funds. One of those banks was Goldman Sachs. I have already mentioned their role in the present Greek crisis and I will return to that subject shortly. However, the big news concerns lawsuits against Goldman Sachs in the USA. It is only the beginning of a crumbling tumbling world for Goldman Sachs. BBC News reports:

Goldman Sachs’ chief executive, Lloyd Blankfein, is being sued by shareholders.

He and other company officials have been named in two new lawsuits filed on Thursday.

The cases are related to fraud allegations brought last week by the US federal government.

These latest complaints were filed in the New York State Supreme Court. Two shareholders accuse them of breaching their fiduciary duties.

They say the executives did this by allowing Goldman’s to enter into a series of transactions, known as Abacus, involving investments tied to subprime mortgages.

Abacus was the subject of a civil fraud lawsuit filed against Goldman on 16 April by the US financial watchdog, the Securities and Exchange Commission.

That concerns Goldman’s marketing of sub-prime mortgage investments just as the US housing market faltered.

The SEC said Goldman failed to disclose “vital information” that one of its clients, Paulson & Co, helped choose which securities were packaged into the mortgage portfolio.

These securities were sold to investors in 2007.

But Goldman did not disclose that Paulson, one of the world’s largest hedge funds, had bet that the value of the securities would fall.

Whilst Goldman Sachs seems to be taking the high ground over the issue, the fact remains that there was something very dodgy about these transactions. I certainly believe that the shareholders have a good case against the CEO of Goldman Sachs on the issue of fiduciary duty.

I must point out that the tale of Goldman Sachs and their involvement in these dodgy swaps and derivatives, is truly only a fraction of the story with regard to the global crisis. Paulson’s actions to my mind were unconscionable. However, there are other players, especially Franklin Raines and Barney Frank as well as those involved in Fannie Mae and Freddie Mac. The fact is that loans were being given to people who had no means to pay them back. The whole issue is extremely murky.

The stench that is Goldman Sachs

Posted in dodgy swaps and derivatives, European Union, Goldman Sachs, Greece, United Kingdom by Aussie on February 16, 2010

Over the past year I have heard the name of Goldman Sachs in less than flattering terms. It is for that reason that I have noted the involvement of Goldman Sachs with the Greek Government, and a cover-up of the financial deficit in Greece. This cover up really stinks.

The Mail Online makes the following comment about the activities of Goldman Sachs and Greece:

Goldman Sachs struck a secret deal with Greece to help it mask its vast debts, it emerged yesterday.

The Wall Street giant is claimed to have reaped as much as £192million in fees by entering a complex currency transaction in 2001 that helped Athens borrow cash without putting it on the books as a loan.

The so-called ‘swap’ deal, while permitted under EU rules, helped Greece meet eurozone limits on government borrowing.

However, it should be noted that other European countries have also been involved in similar activities. Now if one looks at the various European countries that are now in crisis, one has to ask the obvious question: Were they involved in a similar swap deal that had the intention of masking the size of the country’s budget deficit?
Countries such as the U.K. are still feeling the pain of the FGC in 2008. That collapse had a lot to do with derivatives and swaps. I am not in a position to talk about the use of these derivatives and swaps because they are new financial instruments. However, what seems to be clear is that their use has not been for a good purpose. What is also clear that a Wall Street firm such as Goldman Sachs has obtained huge amounts of benefit as a result of participating in these deals.
The fact that the swaps are not new, and they have been used all over Europe makes me question what happened to the other merchant bank Beare Stearns. Was it this kind of swap that then defaulted that caused the collapse of Beare Stearns? At this stage, until I can find more information, I have to say that I have no idea on that subject, but I do want to know more about why it collapsed.
This information regarding Goldman Sachs and their dealings with governments all over the world is quite relevant to the present economic crisis. This bank has been used to mask government debt. When this happens there is good reason to be suspicious about what is going on in any country which is about to end up in financial collapse.