Did big banks break the law during our recent global debt-fuelled boom? The usual answer is: no - they just took advantage of loopholes and captured regulators. The world's biggest banks are widely supposed to be too sophisticated to be tripped up by the legal system.
But is this really true? The new Valukas report on Lehman suggests there are grounds for civil action, i.e., people can sue for damages. News reports give no indication of potential criminal charges, but this may change soon. The hiding of Lehman's true debt levels - through the so-called "Repo 105" structure - is strikingly reminiscent of how Enron's balance sheet was disguised through fake asset "sales" (as Senator Kaufman now points out).
And, of course, the people who ended up facing criminal charges and - in some prominent cases - going to jail, included not only Enron executives, but also responsible bankers from Merrill Lynch (see The Smartest Guys in the Room, Chapter 13). Arthur Anderson, Enron's accountant, was also effectively broken by the scandal. It is a serious crime for professional advisers and financiers to assist in securities fraud.
The failure of Lehman therefore opens a can of worms for close and potentially productive examination in coming weeks. But so does the issue of Greek government debt in April 2002.
According to an offering circular dated 22 April 2002, The Hellenic Republic offered 3.5 billion of bonds, due 22 October 2022, that "will bear interest from, and including, 24 April 2002 at the rate of 5.90 per cent". The joint lead managers include, from the international side, Goldman Sachs, Morgan Stanley, and Deutsche Bank.
Goldman has, of course, admitted it helped manage down reported Greek debt levels through off-balance sheet transactions in 2000 and 2001. Gerald Corrigan, a senior Goldman executive, speaking before the UK Treasury Select Committee recently, said that the reduction in reported Greek debt was "small but significant"; in fact, it was around 1.6 percentage points of GDP, which is not small.
(From the Bloomberg story on Corrigan's testimony: "The transactions reduced the country's deficit by 0.14 percentage points and lowered its debt as a proportion of gross domestic product to 103.7 percent from 105.3 percent, according to Goldman Sachs." See also the less forthright Goldman Sachs statement on the company's website.)
The April 2002 offering circular did not disclose the debt swaps. There may have been other documentation available to investors that did reveal true Greek debt numbers - and perhaps these were discussed in the relevant road shows. We are not here taking a position on what was and was not disclosed; this is a matter for a proper official investigation. We also do not know what the other involved banks knew and when they knew it.
If it were the case that Greece's true debt levels were known and not disclosed by the investment bankers involved, any reasonable investor - or the sovereign debt experts with whom we have discussed this matter - would regard this as withholding adverse material information.
Gerald Corrigan, who is also former head of the New York Fed, argued that Goldman did "nothing inappropriate" - but he was referring to the off-balance transactions of 2000-2001. He has not yet spoken in public about the potential nondisclosure of material information in April 2002 (and perhaps at other dates after the Greece-Goldman swaps).
As Senator Kaufman points out in his latest speech, there is nothing necessarily illegal about any non-disclosure in Europe - these bonds were issued under Greek law. And these bonds were definitely not registered under the US Securities Act of 1933; this is clear in the prospectus.
However, if any of these bonds were sold in the US to "qualified institutional buyers" (QIBs) under rule 144A (an exemption to registration requirements under the 1933 Securities Act), there is a potential legal issue (here I'm just rewording what Senator Kaufman said). Rule 10b-5, under the 1934 Securities Exchange Act, definitely applies to securities sold under 144A - i.e., selling securities to anyone in the United States while deliberately withholding material adverse information is not allowed.
Some people in the market think that around 10 percent of this Greek debt issue was sold under Rule 144A to QIBs; such sales may or may not have been handled by Goldman. Again, this can only be determined by an official investigation - hopefully the Senate Judiciary Committee, on which Senator Kaufman serves, can take this up.
Goldman could be sued by investors who feel they were misled in this fashion - although, realistically, it would only happen if the bonds default; the cost of annoying Goldman otherwise is too high. Most likely Goldman will reach an amicable agreement with any aggrieved parties. (Merrill's problem was that Enron failed - as with Lehman, this launched an extensive set of enquiries).
Whether the SEC or any attorney general (e.g., in New York) will take any action, civil or criminal, remains to be seen. It is obviously hard - for legal and political reasons - to take on and prevail against one of the world's biggest and most powerful banks. Too big to fail banks are also too big to sue successfully - unless they collapse (which is why we keep coming back to Lehman). (Among other things, in the Greece case there would likely be a big argument about whether the Statute of Limitations applies and to whom.)
In any case, it is time to close the loophole that effectively allows deception regarding securities sold into the United States. Rule 144A should be abolished -- US residents (individuals and institutions) should only be allowed to buy securities that are properly registered with the SEC.
If other countries are willing to have their people buy fraudulent securities, that is their problem. This is no longer acceptable in the United States.
Cross-posted from The Baseline Scenario.
John Houseman must be flipping in his grave and yelling, Goldman Sachs , they DON'T make money the old fashion way, and surely they don't earn it.
Is that why Goldman Sachs has reached such outrageous level of arrogance as to declare themselves doing "God's work?"
The price of annoying Goldman Sachs is too high to demand justice?!
It is not whether a bank is too big to fail. It is whether a bank is too powerful to be regulated.
...not tomorrow or next week but RIGHT NOW!!!
...and we need to find a bankruptcy court that can do a FAST TRACK CHAPTER 7 liquidation of all the worthless 'assets' on Goldman Sachs IMMEDIATELY!
Goldman Sach's off-balance sheets is full of this toxic garbage they call 'assets' and it's all designed to attack the economies of nations around the world not just Greece.
So let's quickly find this RECEIVER for Goldman and put it through bankruptcy asap.
What you say may appear the to be the case at the moment but once the music stops then you will have the same scenario that happened when Goldman Sachs took the first bail out money through AIG.
When that happens, they will rely on their off-balance sheets that even the Fed's own website says is more then 100 trillion in notional value on their derivatives contracts.
Much of those derivatives are made up of government debt bonds from around the world which they will try to collect regardless of what MASSIVE AUSTERITY is imposed upon the countries.
Therefore we have to find this RECEIVER to liquidate that off-balance sheet before that happens and revoke their bank charter so they are left to defend for themselves without the American taxpayer backstoping the credit-default swap market.
What Wall Street & the Banks did, with the consent of Washington, was wrong.
From the epic 'speed of light' which bankers and lobbyists for tax-races to the bottom were never hesitant to mention, we finally find that at least some lightbulbs might have to learn some US legalese before they burn to pass the torch of the ever-moving tons of capital.
It's one of those subliminal changes going on with this financial crisis: it just blows to pieces the entire blahblah that we had to endure for decades. That turns out to have been entirely made up to suit the purpose of some bankers' quick buck. Far from being inevitable, far from being the case, and still further from benefiting the general public, so that it makes every bit of sense to pass legislation and regulation to ensure said benefit of the public.
I really really really don't want to be a banker right now. I'd rather be Duffy Duck.
After all, this is the Land of Stupid.
I happen to KNOW that we live in the age of the end of the blahblah.
:-)
The reason is simple. In fact, it's terribly simple. The blahblah plain and simply doesn't have any future at all. No matter how you look at it.
That's why.
It's not a question of gullibility of clients or regulators or lawmakers. It results from the fact that we have entered a range in which individually optimal decisions DO NOT imply overall optimality. What this means is that the bankers lose credibility big time with every day they continue in their old ways. So, you're right: it's going to get worse and more ugly.
But it's going to stop as well. Not even bankers can defy the laws of financial gravity.
HP, are you in doubts?
http://www.washingtonsblog.com/2010/03/dopamine-wall-street-and-financial.html
Don't forget the copious quantities of coke these guys go through in the 24 hour world of finance.
Isn't it grand knowing your nations finances are controlled by hopheads?
But, what they don't say in the article is the sociological factors, that the psychos have to endure. For example, the amount of energy they put into their behaviors.
As a pacifist, when I confronted them; I had to simply be in better mental and physical shape then my adversary (the psycho-bankers) because by the time we are in the ring, I have them exhausted – by making it appear to be so easy for them to win.
Thus, when I was better prepared, they turn into vegetables; because, the financial psycho has the personality of a coward, and is exhausted (lazy) most of the time.
Psychotherapy should do some research into pacifism; we study abnormalities in violent group behaviors, rather then the individual.
Simple drug tests will be a thing of the past.
Current state of genetic knowledge may soon be the determining factor in much of life, ie: insurance premiums, suitability for a job.
I tell ya, this is looking like brave New World more and more every day.
Keep up the good fight though!!!
Many of us are Daniels in the modern lions den.
GS is the fence who bough the family jewels. If GS is to be punished, so must Greece. The previous leaders and, perhaps, Greece, itself, to be tossed from the EU.
Greeks must assume their tax burden, but also, the burden necessary to reduce their debt.
The Greeks got Greased by Goldman then royally Greeced...anyway you look at it The Hell-enic Republic
got screwed by the devil...
And where is the AG Holder or the NYC AG in all this...Holder has made a lot of noise about terrorists but not one word about companies that have brought this country to its knees...
Hows that Hopey Changey thingy feeling now...
If not, we are on a fast track back to the Dark Ages and a globalized version of Robber Baron rule.
never knew what was going on, and or turned a blind eye..
and were surprised when we crashed in september 2008.
funny, others, realized the name of the game...........
and those we were supposed to trust....did not.
worse yet, they are part of Obama's team.
http://modonjon.blogspot.com/2010/02/goldman-in-titanic-struggle-to.html
When history is written these bankers will be the bad guys. It is time we nationalize the Federal Reserve and demand the banks serve the People.
DonJon.
http://www.molochtheplutocracy.us
Yes, investors can sue. But risk must have been explained in purchasing contracts.
I'm just an average house wife, so this might be a bit over my head today.