{"id":541930,"date":"2010-04-23T10:07:47","date_gmt":"2010-04-23T14:07:47","guid":{"rendered":"tag:www.southernstudies.org,2010:\/\/5.12236"},"modified":"2010-04-23T10:35:57","modified_gmt":"2010-04-23T14:35:57","slug":"the-investment-house-always-wins","status":"publish","type":"post","link":"https:\/\/mereja.media\/index\/541930","title":{"rendered":"The (investment) house always wins"},"content":{"rendered":"

\"gambling_chips.jpg\"<\/a><\/span>By Phil Mattera, Dirt Diggers Digest<\/a><\/i><\/p>\n

Goldman Sachs, which has long prided itself on being one of the
\nsmartest operators on Wall Street, has apparently decided that the best
\nway to defend itself against federal fraud charges<\/a> is to plead incompetence. The
\nfirm is taking the position<\/a> that it is not guilty of
\nmisleading investors in a 2007 issue of mortgage securities because it
\nallegedly lost money — more than $90 million, it claims — on its own
\nstake in the deal.<\/p>\n

In fact, Goldman would have us believe that it took a bath in the
\noverall mortgage security arena. This story line is a far cry from the
\none put forth a couple of years ago, when the firm was being celebrated
\nfor anticipating the collapse in the mortgage market and shielding
\nitself — though not its clients. In a November 2007 front-page article<\/a> headlined “Goldman Sachs Rakes in
\n Profit in Credit Crisis,” the New York Times<\/em> reported that the
\n firm “continued to package risky mortgages to sell to investors” while
\nit reduced its own holdings in such securities and bought “expensive
\ninsurance as protection against further losses.” In 2007 Goldman posted a
\n profit of $11.6 billion (up from $9.5 billion the year before), and CEO
\n Lloyd Blankfein took home $70 million in compensation<\/a> (not counting another $45 million in
\nvalue he realized upon the vesting of previously granted stock awards).
\nSome bath.<\/p>\n

Goldman is not the only one rewriting financial history. Many of the
\nfirm’s mainstream critics are talking as if it is unheard of for an
\ninvestment bank to act contrary to the interests of its clients, as
\nGoldman is accused of doing by failing to disclose that it allowed hedge
\n fund operator John Paulson to choose a set of particularly toxic
\nmortgage securities for Goldman to peddle while Paulson was betting
\nheavily that those securities would tank.<\/p>\n

In fact, the history of Wall Street is filled with examples in which
\ninvestment houses sought to hoodwink investors. Rampant stock
\nmanipulation, conflicts of interest and other fraudulent practices
\nexposed by the Pecora Commission prompted the regulatory reforms of the
\n1930s. Those reforms reduced but did not eliminate shady practices. The
\n1950s and early 1960s saw a series of scandals involving firms on the
\nAmerican Stock Exchange that in 1964 inspired Congress to impose
\nstricter disclosure requirements for over-the-counter securities.<\/p>\n

The corporate takeover frenzy of the 1980s brought with it a wave of
\ninsider trading scandals. The culprits in these cases involved not only
\nindependent speculators such as Ivan Boesky, but also executives at
\nprominent investment houses, above all Michael Milken of Drexel Burnham.
\n Also caught in the net was Robert Freeman, head of risk arbitrage at
\nGoldman, who in 1989 pleaded guilty<\/a> to criminal charges. When players
\nsuch as Freeman and Milken traded on inside information, they were
\nprofiting at the expense of other investors, including their own
\nclients, who were not privy to that information.<\/p>\n

During the past decade, various major banks were accused of helping
\ncrooked companies deceive investors. For example, in 2004 Citigroup agreed<\/a> to pay $2.7 billion to settle such charges
\nbrought in connection with WorldCom and later paid<\/a> $1.7 billion to former Enron investors. In 2005
\n Goldman and three other banks paid $100 million<\/a> to settle charges in connection
\nwith WorldCom.<\/p>\n

In other words, the allegation that Goldman was acting contrary to
\nthe interest of its clients in the sale of synthetic collateralized debt
\n obligations was hardly unprecedented.<\/p>\n

What’s not getting much attention during the current scandal is that
\nin late 2007 Goldman had found another way to profit by exploiting its
\nclients, though in this case the clients were not investors but
\nhomeowners.<\/p>\n

Goldman quietly purchased a company called Litton Loan Servicing, a
\nleading player in the business of servicing subprime (and frequently
\npredatory) home mortgages. “Servicing” in this case means collecting
\npayments from homeowners who frequently fall behind in payments and are
\nat risk of foreclosure. As I wrote<\/a>
\n in 2008, Litton is “a type of collection agency dealing with those in
\nthe most vulnerable and desperate financial circumstances.” At the end
\nof 2009, Litton was the fourth largest subprime servicer, with a
\n portfolio of some $52 billion (National Mortgage News<\/em>
\n4\/5\/2010).<\/p>\n

Litton has frequently been charged with engaging in abusive
\npractices, including the imposition of onerous late fees that allegedly
\nviolate the Real Estate Settlement Procedures Act. It has also been
\naccused of being overly aggressive<\/a> in pushing homeowners into
\nforeclosure when they can’t make their payments.<\/p>\n

Many of these complaints have ended up in court. According to the Justia database<\/a>,
\nLitton has been sued more than 300 times in federal court since the
\nbeginning of 2007. That year a federal judge in California granted class-action status<\/a> to a group of plaintiffs, but
\nthe court later limited<\/a>
\n the scope of the potential damages, resulting in a settlement in which
\nLitton agreed to pay out $500,000.<\/p>\n

Meanwhile, individual lawsuits continue to be filed. Many of the more
\n recent ones involve disputes over loan modifications. Complaints in
\nthis area persist even though Litton is participating in the Obama
\nAdministration’s Home Affordable Modification Program and is thus
\neligible for incentive payments through an extension of the Toxic Assets
\n Relief Program.<\/p>\n

There seems to be no end to the ways that Goldman manages to make
\nmoney from toxic assets.  On Wall Street, as in Las Vegas, the house
\nalways wins.<\/p>\n

BONUS FEATURE<\/strong>: Federal regulation of business leaves
\n a lot to be desired, but it is worth knowing where to find information
\non those enforcement activities that are occurring. The Dirt Diggers
\n Digest<\/em> can help with our new Enforcement
\n page<\/a>, which has links to online enforcement data from a wide range
\nof federal agencies. The page also includes links to inspection data,
\nproduct recall announcements and lists of companies debarred from doing
\nbusiness with the federal government.<\/p>\n","protected":false},"excerpt":{"rendered":"

By Phil Mattera, Dirt Diggers Digest Goldman Sachs, which has long prided itself on being one of the smartest operators on Wall Street, has apparently decided that the best way to defend itself against federal fraud charges is to plead incompetence. The firm is taking the position that it is not guilty of misleading investors […]<\/p>\n","protected":false},"author":4533,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[7],"tags":[],"class_list":["post-541930","post","type-post","status-publish","format-standard","hentry","category-news"],"_links":{"self":[{"href":"https:\/\/mereja.media\/index\/wp-json\/wp\/v2\/posts\/541930","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/mereja.media\/index\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/mereja.media\/index\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/mereja.media\/index\/wp-json\/wp\/v2\/users\/4533"}],"replies":[{"embeddable":true,"href":"https:\/\/mereja.media\/index\/wp-json\/wp\/v2\/comments?post=541930"}],"version-history":[{"count":0,"href":"https:\/\/mereja.media\/index\/wp-json\/wp\/v2\/posts\/541930\/revisions"}],"wp:attachment":[{"href":"https:\/\/mereja.media\/index\/wp-json\/wp\/v2\/media?parent=541930"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/mereja.media\/index\/wp-json\/wp\/v2\/categories?post=541930"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/mereja.media\/index\/wp-json\/wp\/v2\/tags?post=541930"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}