Bank Whistleblowers United
Articles Written By
Actually, I had seen Mishkin squirm like that before. At the very beginning of the US financial crisis (April 2007)—when most still did not see it coming—Mishkin as member of the BOG gave a dinner speech. There was no indication in his speech that he “saw it coming”—he predicted moderate growth, emphasized some strong data in housing as well as low unemployment, and said the Fed would keep its interest rate target at 5.25. While it is hard to believe now, the Fed and most of the press was still worried about inflation at that time—even though anyone who was paying attention could see the economy was beginning to collapse into what would obviously be the worst crisis since the Great Depression. Still, commodities prices were being driven by a speculative boom coming mostly from pension funds—a story for another day. So Freddie was peppered with questions from the media present asking whether the Fed would be able to prevent an inflationary burst. Mishkin’s response was eerily similar to the response he gave in the video—you’ve got to trust the central bank. Do not worry, the Fed has ample ammunition to kill inflation.
When he returned to our table, we grilled him a bit more on that topic, and some of us also argued that the real danger facing the US was a financial crisis and deflation—not inflation. Let me interject that I liked Mishkin. He was a pleasant conversationalist, not at all arrogant, and even somewhat self-effacing. But when he gave his pat answer, “don’t worry, we are the Fed and we know what we are doing”, Jamie Galbraith pressed him for details: what are you going to do about inflation? And, if you raise interest rates now, when debt loads are so high, won’t that cause a wave of delinquencies on mortgages and consumer debt? That’s when we saw the same transformation you just witnessed in the video—from an easy, affable, confidence to sheer horror. Mishkin had been found out and was looking for the exits.
I must say that it was never clear exactly what that horror was. At the time I did not believe that Mishkin’s heart was in the inflation story. Surely he could not have believed, then, that the real danger was inflation. He’d been coached at the Fed about what he ought to say—and the Fed was riding the inflation story to divert attention away from the real danger. The Fed needed to keep the speculative bubbles going as long as possible—an election was around the corner and Republicans needed help. I was sure that he was actually afraid that we were right: the economy was going bust. And the Fed had nothing up its sleeve to prevent Armageddon.
Shortly thereafter, Mishkin left the Fed (August 2008—the second-shortest term ever served). That looked suspicious—and although I never tried to find out why, it fit with my interpretation that he knew what was coming, and so like Greenspan jumped the sinking ship before the Fed would be exposed as the impotent Wizard of Oz behind the curtain.
However, since then, Greenspan has publicly admitted that he had been clueless. His whole approach to economics was dangerously wrong. He never saw nothing coming. And after viewing this video, I am not so sure Mishkin had any clue, either.
Maybe his term at the Fed, like his research for Iceland, was nothing but marketing, too.
Columbia professor? Check.
NBER researcher? Check.
FDIC researcher? Check.
Highly paid consultant for international research? Check.
Vice President of NYFed? Check.
Former BOG member? Check.
Top selling money and banking textbook author? You betcha.
All he needed was a few months at the helm of the central bank, something he could add to the textbook blurb, to ramp up those sales.
Timmy and his staff are trying to carefully parse words: it all depends on what one means when one says that Timmy worked for Goldman. If you mean by work “on Goldman’s payroll”, then technically Timmy’s employment at Goldman is yet to come. It is future tense: Timmy “will work” for Goldman. He’ll take a top management position on Wall Street when and if President Obama ever wakes up to the scandal going on at Treasury.
Until then, Timmy is just carrying water for Goldman, funneling Uncle Sam’s money to the firm in the biggest wheelbarrows he can find. He’s not “working for” Goldman—just watching out for the firm’s interests—since he is not yet technically on the payroll.
Timmy has been fighting the perception that he worked for Goldman since his career in “public service” began, working in the Reagan administration. Most of his career has been in Treasury, where he worked for Treasury Secretary Rubin, and at the NYFed where he worked closely with Treasury Secretary Paulson—both of whom had been on Goldman’s payroll.
Even Rahm Emanuel’s wife remarked at a dinner party that Timmy must look forward to returning to Goldman.
Why does everyone think Timmy worked for Goldman? Because he did, and he does. Like a good CEO, he is taking his pay in deferred compensation. When he retires from “public service”, he will go to Wall Street and he will be richly rewarded for his many years of service.
Look, Timmy, the careful parsing of words just doesn’t work. Ask Bill Clinton, who famously tried this tack, after he had said in reference to Monica “there’s nothing going on between us”:
“It depends on what the meaning of the word ‘is’ is. If the–if he–if ‘is’ means is and never has been, that is not–that is one thing. If it means there is none, that was a completely true statement….Now, if someone had asked me on that day, are you having any kind of sexual relations with Ms. Lewinsky, that is, asked me a question in the present tense, I would have said no. And it would have been completely true.”
So, Timmy, is there anything going on between you and Goldman?
By L. Randall Wray
By L. Randall Wray
While investment banking today is often compared to a casino, that is not really fair. A casino is heavily regulated and while probabilities favor the house, gamblers can win abut 48% of the time. Casinos are regulated—by the state and presumably by the mob. Top executives who steal funds end up wearing very heavy shoes at the bottom of the ocean.
By contrast, the investment bank always wins, and its customers always lose. Investment banks are “self-regulated” (meaning, of course, they do whatever they want—sort of like leaving your 15 year old at home alone all summer with the admonition to “behave yourself” and keys to the liquor cabinet and the Porsche). Top management rakes off all the funds it wants with impunity. And then the CEOs go run the Treasury to bailout the investment banks should anything go wrong.
This summer I was lunching with a trader who works for one of these investment banks (hint: there are not many left, and he was not with Goldman). Speaking of Goldman he said “those guys are good”. Indeed they are so good, he said, “I don’t know why anyone would do business with them.”
He explained: When a firm approaches an investment bank to arrange for finance, the modern investment bank immediately puts together two teams. The first team arranges finance on the most favorable terms for the bank that they can manage to push onto their client—maximizing fees and penalties. The second team puts together bets that the client will not be able to service its debt. Since the debt cannot be serviced, it will not be serviced. Heads and tails, the investment bank wins.
Note that this is also true of hedge funds and the half dozen biggest banks that are bank holding companies providing a full range of financial “services”.
In the latest revelations, JPMorgan Chase suckered the Denver public school system into an exotic $750 million transaction that has gone horribly bad. In the spring of 2008, struggling with an underfunded pension system and the need to refinance some loans, it issued floating rate debt with a complicated derivative. Effectively, when rates rose, that derivative locked the school system into a high fixed rate. Morgan had put a huge “greenmail” clause into the deal—the school district is locked into a 30 year contract with a termination fee of $81 million. That, of course, is on top of the high fees Morgan had charged up-front because of the complexity of the deal.
To add insult to injury, the whole fiasco began because the pension fund was short $400 million, and subsequent losses due to bad performance of its portfolio since 2008 wiped out almost $800 million—so even with the financing arranged by Morgan the pension fund is back in the hole where it began but the school district is levered with costly debt that it cannot afford but probably cannot afford to refinance on better terms because of the termination penalties. This experience is repeated all across America—the Service Employees International Union estimates that over the past two years state and local governments have paid $28 billion in termination fees to get out of bad deals sold to them by Wall Street. (See Morgenson www.nytimes.com/2010/08/06/business/06denver.html)
Repeat that story thousands of times. Only the names of the cities and counties need to be changed. Analysts say that deals like that pushed onto Denver would never be accepted by for-profit firms. Investment banks preserve such shenanigans to screw the public. Michael Bennet, who was the head of the school district pushing for the deal had worked for the Anschutz Investment Company—so he knew what he was doing. He was rewarded for his efforts—he is now a US senator from Colorado.
Magnetar, a hedge fund, actually sought the very worst tranches of mortgage-backed securities, almost single-handedly propping up the market for toxic waste that it could put into CDOs sold on to “investors” (I use that term loosely because these were suckers to the “nth” degree). It then bought credit default insurance (from, of course, AIG) to bet on failure. By 1998, 96% of the CDO deals arranged by Magnetar were in default—as close to a sure bet as financial markets will ever find. In other words, the financial institution bets against households, firms, and governments—and loads the dice against them—with the bank winning when its customers fail.
In a case recently prosecuted by the SEC, Goldman created synthetic CDOs that placed bets on toxic waste MBSs. Goldman agreed to pay a fine of $550 million, without admitting guilt, although it did admit to a “mistake”. The deal was proposed by John Paulson, who approached Goldman to create toxic synthetic CDOs that he could bet against. Of course, that would require that Goldman could find clients willing to buy junk CDOs. According to the SEC, Goldman let Paulson suggest particularly risky securities to include in the CDOs. Goldman arranged 25 such deals, named Abacus, totaling about $11 billion. Out of 500 CDOs analyzed by UBS, only two did worse than Goldman’s Abacus. Just how toxic were these CDOs? Only 5 months after creating one of these Abacus CDOs, the ratings of 84% of the underlying mortgages had been downgraded. By betting against them, Goldman and Paulson won—Paulson pocketed $1 billion on the Abacus deals; he made a total of $5.7 billion shorting mortgage-based instruments in a span of two years. This is not genius work—an extraordinarily high percent of CDOs that are designed to fail will fail.
Previously, Goldman helped Greece to hide its government debt, then bet against the debt—another fairly certain bet since debt ratings would likely fall if the hidden debt was discovered. Goldman took on US states as clients (including California and New Jersey and 9 other states), earning fees for placing their debts, and then encouraged other clients to bet against state debt—using its knowledge of the precariousness of state finances to market the instruments that facilitated the shorts.
To be fair, Goldman is not alone — all of this appears to be common business procedure.
There is a theory that an invisible hand will guide unfettered markets to perform the public interest. In truth, unregulated Wall Street bets against the public and operates to ensure the public loses. Investment banks are now all corporations (and all have bank charters). Corporations and banks are chartered to further the public purpose. Why do we allow them the screw the public?