How Goldman Secretly Bet on the U.S. Housing Crash

McClatchy Washington Bureau

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Sun, Nov. 01, 2009

Greg Gordon | McClatchy Newspapers

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November 01, 2009 01:17:44 AM

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.” [Read more…]

Dylan Ratigan Breaks Down the TARP Fiasco

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Matt Taibbi: “Wall Street’s Naked Swindle”

ShitiBank Appears To Have No Exit Strategy

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DEALSCAPE

Citigroup Inc. (NYSE:C) apparently doesn’t have an exit strategy to pay back the $45 billion in Troubled Asset Relief Program (TARP) funds the government gave it. Is this really a shocker?

Earlier this week, Bank of America Corp. (NYSE:BAC) and Wells Fargo & Co. (NYSE:WFC) both discussed ways to eventually pay back their bailout money. However, Citi has been pretty much mum on the subject, aside from having its shareholders approve the final arrangements giving U.S. taxpayers a 33.6% stake in the company

Now, Elizabeth Warren, chairwoman of the Congressional Oversight Panel for the TARP, is concerned that the silence is because Citi doesn’t have a plan. Warren told the New York Post that regulators don’t have any insight into how Citi’s management team plans on paying back its bailout loans.”Too big to fail and not strong enough to succeed is obviously no exit strategy at all,” Warren told the Post.

No wonder federal regulators forced the bank to hire outside consultant Egon Zehnder International to evaluate whether the current management team is cut out to lead the bank out the crisis. Like most investors, the government needs a bit of reassurance its investment is going to succeed.

Let’s hope CEO Vikarm Pandit’s right hand man, Lewis B. Kaden — the most famous banker you’ve never heard of and Citi’s vice chairman in charge of human resources, government affairs, and philanthropy — has some words of wisdom that will allow Pandit to keep his job. – Maria Woehr

Peter Schiff With Lawrence O’Donnell

Peter Schiff With Lawrence O’Donnell

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