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Saturday, April 30, 2011

Fraud Exposed in Credit Card Arbitration (2009 article)

In case you doubt me, (which you should really never do as it is futile and foolish, Since when I predicting something bad I am always 100% correct. I make Nostradamus look like an amateur. You really don't want me to dream about you dieing btw) Look at this post from lawyer Ed Harness from 2009.


Fraud Exposed in Credit Card Arbitration

Arbitration for consumer credit cards may well be over.  The National Arbitration Forum entered a Consent Decree to no longer conduct arbitration for consumer credit cards.  Today, the Wall Street Journal is reporting the American Arbitration Association will follow NAF and get out of the debt collection, consumer credit card arbitration business.  Consumer advocates have long argued there is rampant fraud associated with the process and the providers.  NAF & AAA’s decisions are the proof in the pudding.  Below see an article from Pam Martens

Heralded by the Supreme Court as Fair, Vast Private Judicial System Exposed as Fraud

Judicial Apartheid

For the past 18 years, a motley mix of corporate law firms, Wall Street powerhouses and private justice providers have been serving up false testimony to the highest court of our land that mandatory arbitration is “inexpensive, fast and fair” and a proper substitute for the public court system.  And for 18 years a majority of the U.S. Supreme Court has been cozying up to these brazenly preposterous statements while gutting our Constitution’s Seventh Amendment guarantee to a jury trial.  In doing so, wittingly or unwittingly, the Supreme Court had aided and abetted the key linchpin of a wealth transfer system that has brought the nation to its knees.
Today, everything from Wall Street brokerage accounts, employment contracts, credit cards, mortgages, even cell phone contracts have routinely removed the individual’s constitutional right to file a claim in court to seek redress of a grievance or fraudulent action.  Instead, the individual’s claim is forced into one of the privately run arbitration organizations where conflicts are rampant, discovery is limited, and the right to appeal is typically impossible because the arbitrators are not required to explain the rationale for their decisions in writing.
In a saner era, these mandatory arbitration contracts would be thrown out by courts as contracts of adhesion because they were offered on a take it or leave it basis.  Under any rational interpretation of contract law, contracts must be a meeting of the minds, freely entered into, between parties of equal bargaining power.
But just as profits have been privatized on Wall Street and losses socialized, the right to a jury trial in a court system paid for by individual taxpayers is now increasingly reserved for corporations, not people.  It’s a form of judicial apartheid not dissimilar to the way the Supreme Court rationalized the segregation of blacks in its Plessy v. Ferguson decision in 1896, promising “equal” facilities, just separate.
Last week, a lone female state attorney general put the lie to mandatory arbitration.  And when she pulled back its dark curtain, what we saw was a grand theft of both justice and wealth perpetuated by the U.S. Supreme Court against the American people.
Lori Swanson, Attorney General of Minnesota, charged the National Arbitration Forum with consumer fraud, deceptive trade practices and false advertising.  The National Arbitration Forum is a private justice provider that adjudicates upwards of  200,000 consumer claims a year and acknowledges that it has been appointed as the arbitrator in “hundreds of millions of contracts.”
Swanson’s lawsuit charges that the National Arbitration Forum, which masquerades as  functioning like an independent judge and jury, is in fact financially shackled to debt collection law firms representing major credit card companies.  The lawsuit states that:
“Beginning in 2006 and through 2007, Accretive LLC…engineered two transactions.  In the first transaction, Accretive formed several private equity funds under the name ‘Agora’ (meaning ‘Forum’ in Greek), which in turn invested $42 million in the National Arbitration Forum and obtained governance rights in it.  In the second transaction, three of the country’s largest debt collection law firms (Mann Bracken of Georgia, Wolpoff & Abramson of the District of Columbia, and Eskanos & Adler of California) merged into one large national law firm called Mann Bracken, LLP.  Accretive then formed and funded (partly using federal money from the U.S. Small Business Administration) a debt collection agency called Axiant, LLC, which acquired the assets and collections operations of Mann Bracken.  Through these transactions, the Accretive hedge fund group simultaneously took control of one of the country’s largest debt collectors and became affiliated with the Forum, the country’s largest debt collection arbitration company.”
In announcing the suit, Swanson was joined at the press conference by Richard Neely, retired Chief Justice of the West Virginia Supreme Court of Appeals.  One suspects that Mr. Neely, who worked for a brief stint as an arbitrator for the National Arbitration Forum, may have assisted in providing research for the lawsuit.  Here are the choice words Mr. Neely had to say about the organization in the September/October 2006 issue of The West Virginia Lawyer:
“A few years ago I answered a request from the National Arbitration Forum to join their panel of arbitrators.  I thought I was invited because I was a former state supreme court judge.  Stupid me!  I was just another piece of raw meat…Thus I learned how Godless bloodsucking banks have converted apparently neutral arbitration forums into collection agencies to exact the last drop of blood from desperate debtors…Banks and other bloodsuckers make campaign contributions and single moms don’t.  That accounts for the current Federal system…”
Another insider glimpse at the National Arbitration Forum came on April 2, 2009 when Deanna Richert, a former employee, filed a lawsuit for employment discrimination, deceptive trade practices and consumer fraud in the U.S. District Court for the District of Minnesota.  Ms. Richert’s lawsuit alleges:
“During the course of plaintiff’s employment at defendants, she witnessed fraudulent and corrupt practices in the administration of arbitration cases by defendants which draw into question the neutrality of any arbitrator associated in any way with defendants and which practices make any alleged requirement of arbitration fraudulent and unconscionable, and thereby null, void and unenforceable.  The NAF and Forthright had regular business users of their arbitration system who were referred to in-house as the ‘Famous Parties.’  These ‘Famous Parties’ were repeat filers for arbitration who did not pay for defendants’ services as they filed like sporadic filers, but used the arbitration service so commonly that they paid on account to defendants.  Among the fraudulent and corrupt practices witnessed by plaintiff with respect to these ‘Famous Parties,’ were the following:
Management meetings in which personnel were instructed to call arbitrators and tell them, prior to the release of the decision to the parties to the arbitration, to change decisions they had issued that found against the Famous Parties;
Management meetings in which personnel were instructed to make sure that certain arbitrators who had decided cases against a Famous Party did not get any more cases;
Defendants drafting the claim forms and fictitious affidavits of service for the Famous Parties, including the placement of stored electronic signatures for the Famous Parties on these documents…
Arbitrators calling defendants to ask its attorneys how they should rule on a particular matter…
The disallowance by defendants of responses by consumers to claims filed against them simply because the consumer did not carbon copy the filer of the claim on their correspondence, thereby putting the consumer into default on an arbitration claim they had attempted to answer.”
According to Ms. Richert’s attorney, Daniel E. Warner, a motion to compel the lawsuit “into arbitration is pending in the federal district court, which we are actively resisting.”
Who are these so-called “Famous Parties?”  According to Attorney General Swanson’s lawsuit, the National Arbitration Forum has among its clients, MBNA/Bank of America, JPMorgan Chase and Citigroup; those same “infamous” parties deemed too big to fail by the Federal government, thus entitling them to the public purse as a lifeline.
Nine years ago, on March 1, 2000, Caroline E. Mayer, writing in the Washington Post, put the deception of this so-called neutral forum right under the nose of the Supreme Court justices, Congress and the Department of Justice.  Ms. Mayer had obtained documents filed in a class action lawsuit against First USA.  The documents showed that the bank prevailed in “99.6 percent of the cases that went all the way to an arbitrator” at the National Arbitration Forum.  “Since First USA implemented its arbitration clause in early 1998, it has filed 51,622 claims against consumers with the forum. The forum has made 19,705 awards: First USA prevailed in 19,618, card members in 87.”
That did not stop the U.S. Supreme Court from continuing to embrace the virtues of mandatory arbitration.  Justice Ruth Ginsburg even gave the National Arbitration Forum a plug in a partial dissenting opinion when she said:  “Other national arbitration organizations have developed similar models for fair cost and fee allocation.” Adding in a footnote: “They include National Arbitration Forum provisions that limit small-claim consumer costs to between $49 and $175 and a National Consumer Disputes Advisory Committee protocol recommending that consumer costs be limited to a reasonable amount. National Arbitration Forum, Code of Procedure, App. C, Fee Schedule (July 1, 2000).”
Ginsburg made her remarks in a case called Green Tree Financial Corp. v. Larketta Randolph where the mandatory arbitration clause left open ended the amount of fees the consumer might have to pay for the arbitration.
Former Chief Justice William Rehnquist wrote the opinion for the court, stating:
“…we have recognized that federal statutory claims can be appropriately resolved through arbitration, and we have enforced agreements to arbitrate that involve such claims…We have likewise rejected generalized attackson arbitration that rest on ‘suspicion of arbitration as a method of weakening the protections afforded in the substantive law to would-be complainants…’ These cases demonstrate that even claims arising under a statute designed to further important social policies may be arbitrated because  `so long as the prospective litigant effectively may vindicate [his or her] statutory cause of action in the arbitral forum,’  the statute serves its functions.”
The above twisted logic together with the phrase “liberal federal policy favoring arbitration agreements” has become the mindless mantra of a high court that has evinced willful blindness toward their role of enablers to a creeping corporate fascism.
Particularly egregious in Green Tree was the mountain of evidence the Supreme Court majority ignored.  Amici for the respondent, Larketta Randolph, submitted the following facts supporting the charge that
“many individuals asserting statutory claims against corporations have confronted arbitration fees that amounted to thousands of dollars in settings where these fees would discourage the individuals from pursuing those claims: In Brower v. Gateway 2000…an arbitration clause required individuals to pay an advance fee of $4000 (which the court noted exceeded the cost of most of the defendant’s products)…In Patterson v. ITT Consumer Financial Corp….the court found that a borrower would have to pay at least $850 to get a participatory hearing over debts as small as $2,000 and that these fees (along with other procedures) ‘become oppressive when applied to unsophisticated borrowers of limited means…In Cole v. Burns Int’l Sec. Servs…the court noted that arbitrators’ fees range from $500 to $1,000 per day.  In Jones v. Fujitsu Network Communications…the Arbitration Policy require[d] Plaintiff to pay one-half of the arbitrator’s fee, the court reporter’s fee, the fee for the arbitrator’s copy of the transcript, and facility costs….In the Matter of Arbitration Between Teleserve Sys., Inc. and MCI Telecomm. Corp…the court noted that the arbitration filing fee alone for the claimant in an antitrust dispute would amount to more than $200,000.”
In September 2007, Public Citizen published a comprehensive 74-page study of mandatory arbitration with a sharp focus on the National Arbitration Forum. The report is titled “The Arbitration Trap.”  Among its many startling findings related to the National Arbitration Forum, Public Citizen found that in California between January 1, 2003 and March 31, 2007 “…a small cadre of arbitrators handled most of the cases that went to a decision.  In total, 28 arbitrators handled 17,265 cases – accounting for a whopping 89.5 percent of cases in which an arbitrator was appointed – and ruled for the company nearly 95 percent of the time…Topping the list of the busiest arbitrators was Joseph Nardulli, who handled 1,332 arbitrations and ruled for the corporate claimant an overwhelming 97 percent of the time.”
This is known as the “repeat player” defect in arbitration and is one of the darkest secrets among private arbitral forums.  Corporate antagonism to a trial by a jury of our peers is the randomness of jury selection.  Juries are typically culled from massive voter or motor vehicle registrations.  They are not highly paid, repeat players hearing claims involving the same corporation.
And the National Arbitration Forum is not an aberration. On July 20, 2000 the Public Investors Arbitration Bar Association (PIABA) issued a press release accusing the National Association of Securities Dealers (NASD) of rigging its computerized system of selecting arbitrators.   The opening text reads as follows: “In direct and flagrant violation of federal law, the NASD systematically evaded the Securities and Exchange Commission approved ‘Neutral List Selection System’ arbitration rule requiring arbitrators to be selected on a rotating basis.  Instead, the NASD secretly programmed its computers to select some arbitrators on a seniority basis – just what the rule was designed to prevent.”
The Public Investors Arbitration Bar Association discovered the manipulation when a team of its attorneys demanded a test of the selection system at an NASD/PIABA meeting in Chicago on June 27, 2000.  PIABA predicted that “this rule violation tainted hundreds or even thousands of compulsory securities arbitration – many still ongoing.  In every such instance, the substantive rights of public investors to a neutral panel have been cynically violated.  Many public investors were thus twice cheated: first, by an NASD member firm that fraudulently conned them out of their life’s savings, and second by the NASD Arbitration Department’s rigged panels.”
The industry bias of arbitrators hearing claims against Wall Street firms is legendary.  On June 9, 1994, Margaret Jacobs exposed the systemic bias in a feature article in the Wall Street Journal on the case of  Helen L. Walters:
“Helen L. Walters says her boss called her a ‘hooker,’ a ‘bitch’ and a ‘streetwalker.’ Sometimes he brandished a riding crop in front of her and once he left condoms on her desk.
Ms. Walters, then a trading-room secretary at a California brokerage firm, filed a complaint against him alleging sexual harassment.  In a formal hearing, he readily admitted to the whip and the condoms, and to using all of those epithets.  Her case, legal scholars agree, seems a textbook example of illegal harassment as defined by the Supreme Court: a situation in which a ‘reasonable person’ would find the work environment ‘hostile or abusive.’
So why did Ms. Walters lose?
Ms. Walters slammed into a little-known, but extraordinarily daunting, roadblock facing many women in the securities industry: Bias complaints, like any other employee dispute, must go through the industry’s mandatory-arbitration system.  That means victims’ complaints can’t be heard in court by judge or jury, no matter how strong their merit.”
Ms. Walters’ case is indicative of the final dark secret that seems to have escaped the U.S. Supreme Court, whose occupants make their deliberations in a taxpayer funded building inscribed with the words “Equal Justice Under Law.”  Arbitration cannot be a fair substitute to court because arbitrators are not bound to follow the law or legal precedent.  The big lie in Plessy of separate but equal is the big lie in Supreme Court rulings on mandatory arbitration.
In the case of Delfina Montes v. Shearson Lehman Brothers, involving a claim for overtime pay under the Fair Labor Standards Act (FLSA), the lawyer for this Wall Street brokerage firm argued as follows during the arbitration:
“I know, as I have served many times as an arbitrator, that you as an arbitrator are not guided strictly to follow case law precedent… I know it’s hard to have to say this and it’s probably even harder to hear it but in this case this law is not right.  Know that there is a difference between law and equity and I think, in my opinion, that difference is crystallized in this case.  The law says one thing.  What equity demands and requires and is saying is another….You know as arbitrators you have the ability, you’re not strictly bound by case law and precedent.  …as I said in my Answer, as I said before in my Opening, and I now ask you in my Closing, not to follow the FLSA if you determine she’s not an exempt employee.”
From defective consumer products, to denial of overtime pay, to gutting the civil rights laws, to unconscionable mortgages, derivatives, obscene rates and bogus fees on credit cards, the corporations have had quite a run over the past decade with their judicial apartheid and anointed blessing of a majority of the U.S. Supreme Court.  And just where did it get them?  Those with the most egregious mandatory arbitration contracts are either bankrupt or zombie firms struggling for survival on the taxpayer’s dime.
Pam Martens worked on Wall Street for 21 years; she has no security position, long or short, in any company mentioned in this article.  She writes on public interest issues from New Hampshire.  She can be reached at
Stolen from Ed expressly without his permission:

Injustice of the week: Supreme Court Give Big Business License to Steal

Injustice of the week: Supreme Court Give Big Business License to Steal...

The Corporate Supreme Court is getting good at this. You would  better with a Taliban Tribal Council than with the "gang of five" on almost any civil justice issue. I am serious you really would as one of the Taliban courts guiding principles is equity and justice. These guys are the "Goldman Sachs" of the judicial world. Never meet a monied interest they didn't like. Dark days are ahead for the few rights left for average AAmerican citizens. Maybe it is time to start dusting off the court stacking plan, or at least maybe we can get with the tea party and just eliminate 90% of their budget. If some of these guys actually had to live in the real world and maybe be forced to sign about 20 of these things a day, maybe they would have a different view point. I doubt it though as when you have no empathy for average Americans it doesn't matter.  I just hope they don't put giving up your religion, right to vote, or habeus corpus on an arbitration clause cause or these guys will damn sure go for it. In Minnesota a major corporation is already arguing that you can arbitrate out of a Federal Sherman anti-trust violation. (criminal abuse of monopoly power) This will soon be law of the land I have no doubt. Rather than give you a full analysis I am just going to be lazy and post my favorite articles. Basically ATT got caught screwing customers for a few dollars a month on bogus tax charges. (Do you really all those tax and access charges on your cell bill are correct) They got sued in a class as no way you can litigate a case over 60 bucks, but 60 times 1000 or 1000000 you can. ATT has a provison in its agreement as does Cellular South, Comcast, Your bank, Blue Cross and everyone other big Corporation saying they can not be sued in a class or any collection of cases and each claim must be arbitrated individually. As arbitrations are not free and cost a minimal of $1,500 a piece any one taking these cases would lose at least $1400 dollars even if they won.  Get it, it is a license to steal. (Unless you happen to live in California or Washington as theses Supreme Courts have said such provision violate their state constitutions. (Until Big Business finds a way to get this in front of the "gang of five" on Federal Due process or something.

This is the print preview: ack to norma view »
David Arkush

David Arkush


U.S. Supreme Court to Major Corporations: You Write the Rules

Posted: 04/28/11 05:06 PM ET
On Wednesday the U.S. Supreme Court sided with AT&T in AT&T Mobility v. Concepcion -- a decision with devastating consequences for consumer protection and civil rights. In essence, AT&T asked the court to allow it to use the fine print of contracts to eliminate class actions, a practice that flouts the laws of 20 states. In a 5-4 decision, the court granted AT&T's request.
The case's potential impact is breathtaking. Corporations can now prevent consumers and small business owners from exercising what is often their only real option for challenging companies that defraud them by millions or even billions of dollars: banding together to file class action lawsuits. The case could be equally devastating to millions of non-union employees, who need class actions to challenge systemic discrimination by their employers. The Supreme Court has given major corporations the green light to engage in nearly limitless wrongdoing against others, so long as they do it in relatively small dollar amounts, which ensures that no one can afford to challenge the misconduct without a class action.
A sudden demise of class actions will shock the markets and the legal system. It will dramatically increase the market power of major corporations over ordinary Americans and small business owners, who are already outmatched. Innumerable laws that protect the public will become irrelevant because few people can enforce them.
Yet for all these far-reaching implications, AT&T's achievement is remarkably ordinary. The company has secured a state of lawlessness similar to the one that allowed banks to foreclose on millions of homeowners without showing evidence that they had the right to do so. It has achieved a deregulatory regime similar to those that tanked the economy and destroyed millions of jobs, devastated the Gulf of Mexico with oil, allow thousands of preventable workplace deaths every year and threaten untold upheaval through climate change. Like the big banks, the oil and coal companies and the mine operators, AT&T simply wants to write its own rules. It's doing just that, through a practice that has become so ordinary we hardly notice the absurdity and injustice anymore: writing one-sided contracts and imposing them on others.
Why corporations are permitted to do anything important through standard-form contracts is somewhat of a mystery. Companies hire armies of lawyers to draft and redraft these contracts, claiming every new advantage they can wring out of legal developments. They secure "consent" by holding our credit cards or cell phones for ransom, saying we must submit to the new terms or immediately stop using them. Some companies even do this with people's jobs, telling employees they must sign new contracts or be fired (never mind that contract law is supposed to be based on mutual consent).
The average American is deluged with hundreds of thousands of fine-print words each year that no one reads and no one understands -- but that everyone is bound by. Avoiding these contracts is impossible unless one eschews most consumer products and services. Courts uphold adhesion contracts with a breeziness that is astonishing, especially since judges themselves don't read the fine print (John Roberts, chief justice of the U.S. Supreme Court, has said he doesn't read it). The effect is nothing short of privatization of the law, with major corporations writing the rules and imposing them on the rest of us.
If recent crises have taught us anything, it's that disaster follows quickly when companies have too little oversight. AT&T is pushing the outer limits of deregulation, seeking a world in which companies can use one-sided contracts to grant themselves immunity from accountability for a vast range of wrongdoing. Concepcion represents a giant leap toward a dystopian legal system that the Supreme Court should have rejected out of hand -- lawlessness for major corporations and corporate-made law for the rest of us.
But the Court rubber-stamped AT&T's scheme, so we need the Congress and administrative agencies to protect us. The Dodd-Frank Wall Street Reform and Consumer Protection Act gives the new Consumer Financial Protection Bureau (CFPB) and the Securities and Exchange Commission (SEC) the authority to eliminate abuses like AT&T's within their jurisdictions. The CFPB and SEC should get to work quickly. To solve the problem in every industry, not just financial services, Congress should pass the Arbitration Fairness Act, which Sens. Al Franken (D-Minn.) and Richard Blumenthal (D-Conn.) and Rep. Hank Johnson (D-Ga.) plan to introduce next week.
Sign a petition to support the Arbitration Fairness Act.

Nan Aron


AT&T Mobility v. Concepcion: The Corporate Court Does it Again

Posted: 04/29/11 11:46 AM ET
The Corporate Court is at it again. This time the case is AT&T Mobility v. Concepcion, and this week's 5-4 decision in favor of the cell-phone giant is yet another far-reaching betrayal of some of the most fundamental principles of American justice.
In this case, big business, with AT&T as its stalking horse, asked the Supreme Court to protect it from all those cheeky consumers and impudent employees who might have the temerity to complain that they're being ripped off or discriminated against. The ultra-conservative majority on the Court found a way to keep all those annoying individuals from banding together in group arbitration or in the courts, where they would have the benefit of lawyers and all those pesky constitutional rights and rules of civil procedure.
The result of the decision by Justices Scalia, Roberts, Thomas, Alito, and Kennedy is to make sure that when people like you enter the legal arena against a corporation, you go all by yourself into a system that's rigged against you.
Even if your name isn't Concepcion or you don't have an AT&T cell phone, this case is about you. Almost all of us operate in a world filled with employment agreements or corporate contracts for things like cell phones, credit cards, or online accounts. But if at some point you discover you've been cheated or your civil rights have been violated, you'll find that that you've signed away your ability to enter a courthouse to fight back. In this country, you can't buy a cell phone or take a job without agreeing to disempower yourself.
The culprit is right there in the fine-print or in the lengthy agreement you scroll through without reading before you click on the button that says, "I agree." The contract mandates that if the company does you wrong, you're absolutely forbidden to get together with others similarly harmed and sue in court or demand group arbitration. If you still want to complain, you have to submit to binding arbitration for your case alone. And who sets up the arbitration system? Why, the corporation, of course!
California had a rule that agreements that compel consumers or employees to give up their rights to form class actions are "unconscionable," and therefore invalid, when they protect companies that try to cheat lots of people out of small sums. The Supreme Court this week said that the Federal Arbitration Act was in conflict with California's rule, even though all of the Court's past rulings and the long-standing interpretation of the statute said otherwise. (So much for conservatives' belief in states' rights. When the conflict is between profits and principles, this Court has a clear favorite.)
Thanks to the Court, corporations are now free to write contracts that legally bar you from challenging them in class-action lawsuits or even group arbitration, no matter what they do to harm you. There is no mystery why the Chamber of Commerce and several large corporations filed briefs in this case.
The upshot is that corporations will now be able to decide on their own which civil rights and consumer protections they want to obey, knowing that there will be no effective means available to their victims to find redress. Even worse, not only has the radical conservative majority damaged the ability of consumers or employees to find justice, it has effectively removed any incentive for corporations to behave within the law in the first place. Why act lawfully if your victims are helpless, especially in cases like this when the harm to each individual is small but the potential for profit is huge?
This case, after all, was about a $30.22 charge for a "free" cell phone. That amount is so small that almost no one would go through the hassle and expense of fighting it out with the company one-on-one, especially in a system that's rigged by the corporation. AT&T counted on that. You can make a lot of money taking $30 at a time from hundreds of thousands of people. But if those people are able to unite with others who were similarly ripped off, suddenly the cost/benefit equation changes. With enough money at stake to make a class-action suit feasible, not only can lots of consumers get justice who otherwise might not bother, but the prospect of a big payout provides an incentive for the company to act responsibly.
But as of yesterday, that possibility is gone.
This Corporate Court, at the behest of big-business interests, is systematically draining away the rights of everyday Americans. This misguided decision must not be allowed to stand. Congress should act swiftly to end forced arbitration in civil rights, consumer, and employment disputes and restore the ability of every citizen to use the courts to find justice.

An Alliance for Justice report summarizing the facts and issues of the case, "AT&T Mobility v. Concepcion: Will the Supreme Court Give AT&T a License to Steal?" can be downloaded here.
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Supreme Court ruling is bad news for consumers

It went nearly unnoticed in a week of royal matrimony and birth certificates. The Republican-appointed majority on the Supreme Court gave corporations a major victory at the expense of consumers. The ruling bars class action lawsuits that allow unhappy customers to band together to fight unfair business practices.
The case came from California, where a couple had bought a discount cell phone and were surprised by a $30 fee based on the full purchase price. They sued on behalf of other ill-treated customers, but the cell phone firm, AT&T Mobility, fought it all the way to the high court, which ruled in favor of the company.
Not to worry, said the court majority, because each case can go to arbitration, as provided by a 1925 federal law. The bundling of complaints into class action lawsuits isn't allowed under the statute.
But that reading was simplistic and naive, the dissenting judges said. The law allowed for exceptions to the arbitration-only rule. More important, it put consumers in an impossible position: spend time and effort to go through arbitration for a small sum, knowing that no lawyer will take a case for the measly amount at stake.
The case blesses shady business tactics. Firms can get away with credit card overcharges, unauthorized fees or a phony bill because a showdown class action lawsuit isn't allowed. The ruling casts a shadow on another case before the high court in which 1.5 million women are seeking to bring a class action case against Wal-Mart for sex discrimination.
Congress could fix the situation by mending the arbitration law to allow for group lawsuits. But that's hard to imagine given the pro-business GOP majority in the House, no doubt delighted by the ruling.
Another path could be rules put forward by the new federal Consumer Financial Protection Bureau, created as part of a package of Wall Street reforms. That route will take time as the new agency, appointed by the Obama White House, establishes itself.
But the need should be clear. Consumers demand protections, not a runaround, when unfair treatment occurs. The court decision shouldn't be the last word.
This article appeared on page A - 9 of the San Francisco Chronicle

Read more:

Supreme Court: AT&T can force arbitration, block class-action suits

The Supreme Court on Wednesday ruled that AT&T—and indeed, any company—could block class-action suits arising from disputes with customers and instead force those customers into binding arbitration. The ruling reverses previous lower-court decisions that classified stipulations in AT&T's service contract which barred class arbitration as "unconscionable."
The particular case at hand, AT&T Mobility LLC v. Concepcion, stemmed from a California couple (the Concepcions) that had been charged sales tax on mobile phones that AT&T had advertised as "free." The couple believed the charges were unfair and constituted false advertising and fraud on the part of AT&T. They filed a lawsuit against AT&T, which was later promoted to class-action status. AT&T attempted to have the case dismissed on the grounds that its service contract requires individual arbitration and bars "any purported class or representative proceeding."
AT&T and others have similarly tried to have class-action cases dismissed on these grounds, though state supreme courts in both California and Washington have held that contractual waivers for class arbitration or litigation are "unconscionable" and therefore void based on those states' consumer protection laws. Using this reasoning, courts have allowed class-action lawsuits to proceed despite the contractual requirement for individual arbitration.
AT&T appealed the case to the Ninth Circuit, though the court noted that section 2 of the Federal Arbitration Act states that arbitration agreements "shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract." Since California consumer protection laws allow "unconscionable" contract clauses to be vacated, and the FAA includes the provision that arbitration agreements could be ruled unenforceable if law provided for the revocation of the contract, the Ninth Circuit ruled that the class-action case could proceed.
In a 5-4 ruling, the Supreme Court disagreed with the lower court's decision. In his majority opinion, Justice Scalia argued that the purpose of the FAA was designed to promote arbitration over more costly and lengthy litigation. Quoting an earlier ruling by the court, Scalia explained that "[a] prime objective of an agreement to arbitrate is to achieve ‘streamlined proceedings and expeditious results,'" and that requiring the class-action litigation to proceed would be at odds with the intent of the FAA and the benefits that arbitration agreements ostensibly provide.
Justice Breyer, in his dissenting opinion, noted that the saving clause in the FAA left ground for individual states to determine how a contract or its clauses may be revoked. "[R]ecognition of that federalist ideal, embodied in specific language in this particular statute, should lead us to uphold California's law, not to strike it down," he wrote.
The decision, which fell precisely along ideological lines, could have far-reaching effects on consumers' ability to challenge corporations in court over future disputes. In cases where an unfair practice affects large numbers of customers, AT&T or other companies could quietly settle a few individual claims instead of being faced with larger class-action settlements which might include punitive awards designed to discourage future bad practices.
Tried to find someone to defennd this injustice but couldn't. Please email me if you can find rational defense of the onion. Soo here is WSJ, best I can do right now.

After AT&T Ruling, Should We Say Goodbye to Consumer Class Actions?

goodbyepartyLast November, we ginned up this blog post about a Supreme Court case that, were it ruled on in favor of AT&T, could spell the death-knell of consumer class actions.
Well, on Wednesday, the Supreme Court rendered its decision in the case, AT&T Mobility v. Concepcion, with AT&T garnering a winning five votes.
And should we prepare that going-away party? It’s too soon to know, of course, but this is the outcome predicted by Vanderbilt Law Professor Brian Fitzpatrick last year. Wrote Fitzpatrick:
If the court goes down AT&T’s path, the consequences could be staggering. It could be the end of class action litigation. . . . [V]irtually all class actions today occur between parties who are in transactional relationships with one another: shareholders and corporations, consumers and merchants, employees and employers. Because they are in transactional relationships, they are able to enter arbitration agreements with class action waivers.
Once given the green light, it is hard to imagine any company would not want its shareholders, consumers and employees to agree to such provisions.
Okay, okay. But we just might be getting ahead of ourselves. Let’s back up.
Vincent and Liza Concepcion sued AT&T for deceptive practices because the company allegedly advertised discounted cell phones but charged sales tax on the full retail price. So the Concepcions sued on behalf of a class of consumers who’d also allegedly overpaid.
Thing is, the contract with AT&T, as such contracts typically do, required all claims to be resolved through arbitration, and that the arbitration could not move forward as a class.
Both a California federal district court and the Ninth Circuit struck down the contract, ruling that it was imposed upon consumers and therefore violated public policy.
AT&T appealed, arguing that that the Federal Arbitration Act pre-empts state contract law and allows class-action exemptions when they’re combined with arbitration.
On Wednesday, the Supreme Court, in an opinion written by Justice Antonin Scalia, agreed with that analysis, ruling that the company can enforce a contract provision that requires customers to arbitrate their disputes individually. Click here for the 39-page opinion (18 of which compose Scalia’s opinion); here for the WSJ story; here for Scotusblog’s page on the case.
Joining Scalia were Chief Justice John Roberts and Justices Anthony Kennedy, Clarence Thomas and Samuel Alito. Justice Stephen Breyer penned a dissent, which was joined by Justices Ruth Bader Ginbsurg, Sonia Sotomayor and Elena Kagan.
Scalia said allowing the case to proceed as a class action would run afoul of a federal law that promotes arbitration. “States cannot require a procedure that is inconsistent with the FAA, even if it is desirable for unrelated reasons,” Justice Scalia wrote.
In his dissent, however, Breyer said requiring consumers to arbitrate cases on an individual basis could lead claimants to abandon small-money cases rather than litigate.
“What rational lawyer would have signed on to represent the Concepcions in litigation for the possibility of fees stemming from a $30.22 claim?”

Bet some of you nonlawyers are looking at the cable bill contract, huh. We lawyers know it is there. (LOL)

Wednesday, April 27, 2011

Great article by NYT on Farkas .....Mortgage fraud very common he says

As if this is a surprise to anyone in America but Mortgage industry is rife with Fraud according to ex Taylor Bean & Whititaker CEO. Word is that he is cooperatingg with the Government now. More indictments coming soon.
April 21, 2011

After Years of Red Flags, a Conviction

In 2002, when Lee B. Farkas was running a relatively small mortgage company, it got caught selling eight fraudulent mortgages to Fannie Mae. To make things even worse, the mortgages — all of which defaulted without a single payment being made — listed Mr. Farkas as the borrower.
Fannie Mae stopped doing business with the firm, called the Taylor Bean & Whitaker Mortgage Corporation.
For Taylor Bean, it was a crisis. Its checks bounced.
But Mr. Farkas scrambled, and Taylor Bean survived to commit more frauds.
This week, Mr. Farkas, 58, was convicted of 14 counts of fraud and conspiracy in what had become a $2.9 billion scandal.
Testifying in his own defense in federal court in Alexandria, Va., Mr. Farkas explained that in 2002 Taylor Bean had sold eight real loans to a lender who resold them to Ginnie Mae, the government agency that buys loans guaranteed by the Federal Housing Administration. When the loans were found to be ineligible for F.H.A. guarantees, Ginnie Mae demanded its money back.
Taylor Bean did not have the cash. So it created fictitious loans and used them as collateral to get the money from a bank. The loans were not supposed to be sold, he said, but a subordinate mistakenly put them in a group of loans to be sold to Fannie Mae.
“I had no intention of paying payments on those loans,” he testified. “It wasn’t my obligation. It was simply a way to keep track of it, and it was, it was an idea I had that probably wasn’t a great idea, but it was an idea that I had how to do it.”
It was also an idea that indicated something very strange was happening at Taylor Bean. It should have been the end for the company.
But it was not. Fannie Mae would no longer do business with Taylor Bean, but there was still Ginnie Mae as well as the other government-sponsored enterprise, Freddie Mac.
“Ginnie Mae did not do anything,” Mr. Farkas testified. “Freddie Mac came down and sent the head of, head of the division that dealt with us and all these other people, and they decided that they would let us, let us live.”
The fraud would last for seven more years, ending in 2009 because Taylor Bean’s principal bank, Colonial Bank of Montgomery, Ala., was itself in danger of failing. Mr. Farkas came up with a scheme to appear to recapitalize the bank, and thus get federal bailout money, but it did not work.
Fannie escaped unscathed. Freddie and Ginnie did not. Two major European banks, Deutsche Bank and BNP Paribas, thought their $1.68 billion in loans was fully secured by collateral. But only a tenth of that collateral was real. Colonial had lent hundreds of millions on the security of mortgage loans that were either nonexistent or had already been sold to someone else.
Mr. Farkas was the seventh person convicted in the case. The witnesses against Mr. Farkas included the other six — four executives from Taylor Bean and two from Colonial Bank, all of whom pleaded guilty. Mr. Farkas was sent to jail and is awaiting a sentence that is almost certain to leave him imprisoned for life.
The Justice Department, which has been criticized for the paucity of criminal charges stemming from the financial crisis, celebrated the verdict. “His shockingly brazen scheme poured fuel on the fire of the financial crisis,” an assistant attorney general, Lanny A. Breuer, said. The United States attorney in Alexandria, Neil H. MacBride, said Mr. Farkas had orchestrated “one of the longest and largest bank fraud schemes” ever seen.
Mr. Farkas did not prove to be a very good witness on his behalf. He insisted no crime had been committed, but his understanding of the law seemed to be a little unusual.
Patrick F. Stokes, a deputy chief of the Justice Department’s criminal fraud section, asked Mr. Farkas if he thought Taylor Bean’s agreement with Colonial Bank allowed the mortgage firm “to sell fraudulent, counterfeit, fictitious loans” to the bank.
“Yeah, I believe it does,” he replied.
“It’s very common in our business to, to sell — because it’s all data, there’s really nothing but data — to sell loans that don’t exist,” he explained. “It happens all the time.”
The second-most important player in the fraud, after Mr. Farkas, was Catherine Kissick, the head of Colonial Bank’s Mortgage Warehouse Lending Division. Her division was in Ocala, Fla., which was also Taylor Bean’s headquarters, and she appears to have been hired by Colonial to enable it to get Taylor Bean’s business, which she had handled for her former employer, SunTrust.
It was Ms. Kissick who came up with a plan in 2002 to hide overdrafts when Taylor Bean began to get into trouble, and then came up with ever more elaborate ways to fool her Colonial colleagues. Ms. Kissick, who is awaiting sentencing, testified that Mr. Farkas repeatedly promised he would find the money to make it right. By the time she realized that could never happen, she was in too deep.
Ms. Kissick had a lot of authority at Colonial.
“One day she was at the McDonald’s drive-in, and I asked her for a hundred — which meant a hundred million — more, and she was in the middle of ordering a Happy Meal,” Mr. Farkas testified.
“She said, ‘A hundred?’ I said, ‘Yeah.’ She said, ‘O.K., fine. Hold on.’
“She called Colonial, and we had a hundred million before she paid for her Happy Meal,” Mr. Farkas said.
Taylor Bean was audited by Deloitte & Touche, which failed, year after year, to spot the fraud. But Deloitte grew suspicious in early 2009, and never completed the 2008 audit. At Deloitte’s request, the board hired an outside counsel to investigate. The company collapsed before that investigation was completed.
For connoisseurs of financial scandals, this one has a link to the old savings-and-loan crisis. Taylor Bean was once owned by a savings bank in Peoria, Ill., and that bank’s failure left the company in the hands of the Resolution Trust Company, which the government created to manage the refuse of that crisis. Resolution Trust sold it to a Michigan bank as part of a bundle of assets.
“I’m not sure they realized really that they even owned it,” Mr. Farkas said of the Michigan bank. When the bank did figure it out, it decided to close the operation. Instead, Mr. Farkas bought it for $75,000, but was allowed to take two-thirds of the money from the bank’s own assets.
That financing arrangement was an eerie forerunner of his plan to recapitalize Colonial Bank by investing $300 million. That would qualify the bank for $553 million in federal bailout money through the Troubled Asset Relief Program. Mr. Farkas testified that he planned to pay for half of the investment by selling securities owned by Taylor Bean. It would no longer need the securities, he explained, because they were bought to hedge risks inherent in other assets, and he planned to sell those assets to Colonial, which would pay for them with the TARP money.
To pull off the deal, Mr. Farkas needed to find $150 million from other investors. He told Colonial and the Treasury Department that he had done so, but that turned out to be a lie. He attributed the misinformation to an innocent mistake, but the jury did not believe him.
The mortgage party probably would have gone on even if Mr. Farkas had been put out of business in 2002. But perhaps the sins that could have been discovered then — fraudulent loans hidden in masses of data that no one had bothered to carefully review — would have persuaded someone, whether regulators, rating agencies or investors, to be more careful.
But Taylor Bean survived and grew to make 14,500 loans a month and service $80 billion in mortgages.
Eventually Desiree Brown, a former receptionist, rose to corporate treasurer and collected more than $1.5 million in bonuses, including $66,500 just before the company failed. She admitted to faking documents that enabled Taylor Bean to fraudulently obtain more than $400 million from Colonial Bank, and is awaiting sentencing.
Mr. Farkas took at least $20 million out of his company, in addition to millions in salary. He amassed a large collection of classic cars and bought a private jet by taking out mortgages on nonexistent condominiums.
And in 2008 he boasted, according to a co-conspirator’s testimony, that he “could rob a bank with a pencil.”
This article has been revised to reflect the following correction:
Correction: April 23, 2011
The High & Low Finance column on Friday, about the fraud conviction of Lee B. Farkas, a mortgage lender, misspelled part of the name of his firm. It is Taylor Bean & Whitaker, not Whittaker.

Article that should be required reading by all Americans that invest in Wall Street

From all damn places...Rolling Stone magazine. I also added links to the responses. Wish I could expanded upon this but legally I cant. Vampire Squid have hired good lawyers and will prosecute for defamation if I continue to compare them, the great gentle and caring creature of the sea to the blood sucking souless bastards of Goldman Sacs. Did I mention that they are cause for high gas prices too.

The Great American Bubble Machine

lambert's picture
[Goldman Sachs fans might also like today's post on how 32 megs of Goldman Sachs proprietary trade code got uploaded to a German server. Researchers should also note the links at the bottom of this post, which lead to a table of contents that organizes all our contemporaneous posts on The Big FAIL (the current financial crisis) as it unfolded, going back to pre-TARP days. Note also the Goldman Sachs tag above. --lambert]
Here's the Matt Taibbi's article on how Goldman-Sachs helped bring about and profit from our current financial crisis, "The Big FAIL", found at Something Awful (via LOLfed). Despite the weapons-grade snark in the first paragraph, which I underlined, it's a Big Picture post, very analytical, and has a hypothesis of what is to come that we can test for. So I recommend you read the whole thing, even though it is quite long.
From tech stocks to high gas prices, Goldman Sachs has engineered every major market manipulation since the Great Depression - and they're about to do it again
The first thing you need to know about Goldman Sachs is that it's everywhere. The world's most powerful investment bank is a great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money. In fact, the history of the recent financial crisis, which doubles as a history of the rapid decline and fall of the suddenly swindled-dry American empire, reads like a Who's Who of Goldman Sachs graduates.
By now, most of us know the major players. As George Bush's last Treasury secretary, former Goldman CEO Henry Paulson was the architect of the bailout, a suspiciously self-serving plan to funnel trillions of Your Dollars to a handful of his old friends on Wall Street. Robert Rubin, Bill Clinton's former Treasury secretary, spent 26 years at Goldman before becoming chairman of Citigroup - which in turn got a $300 billion taxpayer bailout from Paulson. There's John Thain, the rear end in a top hat chief of Merrill Lynch who bought an $87,000 area rug for his office as his company was imploding; a former Goldman banker, Thain enjoyed a multibillion-dollar handout from Paulson, who used billions in taxpayer funds to help Bank of America rescue Thain's sorry company. And Robert Steel, the former Goldmanite head of Wachovia, scored himself and his fellow executives $225 million in golden parachute payments as his bank was self-destructing. There's Joshua Bolten, Bush's chief of staff during the bailout, and Mark Patterson, the current Treasury chief of staff, who was a Goldman lobbyist just a year ago, and Ed Liddy, the former Goldman director whom Paulson put in charge of bailed-out insurance giant AIG, which forked over $13 billion to Goldman after Liddy came on board. The heads of the Canadian and Italian national banks are Goldman alums, as is the head of the World Bank, the head of the New York Stock Exchange, the last two heads of the Federal Reserve Bank of New York - which, incidentally, is now in charge of overseeing Goldman - not to mention ...
But then, any attempt to construct a narrative around all the former Goldmanites in influential positions quickly becomes an absurd and pointless exercise, like trying to make a list of everything. What you need to know is the big picture: If America is circling the drain, Goldman Sachs has found a way to be that drain - an extremely unfortunate loophole in the system of Western democratic capitalism, which never foresaw that in a society governed passively by free markets and free elections, organized greed always defeats disorganized democracy.
The bank's unprecedented reach and power have enabled it to turn all of America into a giant pump-and-dump scam, manipulating whole economic sectors for years at a time, moving the dice game as this or that market collapses, and all the time gorging itself on the unseen costs that are breaking families everywhere - high gas prices, rising consumer-credit rates, half-eaten pension funds, mass layoffs, future taxes to pay off bailouts. All that money that you're losing, it's going somewhere, and in both a literal and a figurative sense, Goldman Sachs is where it's going: The bank is a huge, highly sophisticated engine for converting the useful, deployed wealth of society into the least useful, most wasteful and insoluble substance on Earth - pure profit for rich individuals.
They achieve this using the same playbook over and over again. The formula is relatively simple: Goldman positions itself in the middle of a speculative bubble, selling investments they know are crap. Then they hoover up vast sums from the middle and lower floors of society with the aid of a crippled and corrupt state that allows it to rewrite the rules in exchange for the relative pennies the bank throws at political patronage. Finally, when it all goes bust, leaving millions of ordinary citizens broke and starving, they begin the entire process over again, riding in to rescue us all by lending us back our own money at interest, selling themselves as men above greed, just a bunch of really smart guys keeping the wheels greased. They've been pulling this same stunt over and over since the 1920s - and now they're preparing to do it again, creating what may be the biggest and most audacious bubble yet. ...
Goldman wasn't always a too-big-to-fail Wall Street behemoth, the ruthless face of kill-or-be-killed capitalism on steroids - just almost always. The bank was actually founded in 1869 by a German immigrant named Marcus Goldman, who built it up with his son-in-law Samuel Sachs. They were pioneers in the use of commercial paper, which is just a fancy way of saying they made money lending out short-term IOUs to small-time vendors in downtown Manhattan.
You can probably guess the basic plotline of Goldman's first 100 years in business: plucky, immigrant-led investment bank beats the odds, pulls itself up by its bootstraps, makes shitloads of money. In that ancient history there's really only one episode that bears scrutiny now, in light of more recent events: Goldman's disastrous foray into the speculative mania of pre-crash Wall Street in the late 1920s.
This great Hindenburg of financial history has a few features that might sound familiar. Back then, the main financial tool used to bilk investors was called an "investment trust." Similar to modern mutual funds, the trusts took the cash of investors large and small and (theoretically, at least) invested it in a smorgasbord of Wall Street securities, though the securities and amounts were often kept hidden from the public. So a regular guy could invest $10 or $100 in a trust and feel like he was a big player. Much as in the 1990s, when new vehicles like day trading and e-trading attracted reams of new suckers from the sticks who wanted to feel like big shots, investment trusts roped a new generation of regular-guy investors into the speculation game.
Beginning a pattern that would repeat itself over and over again, Goldman got into the investment-trust game late, then jumped in with both feet and went hog-wild. The first effort was the Goldman Sachs Trading Corporation; the bank issued a million shares at $100 apiece, bought all those shares with its own money and then sold 90 percent of them to the hungry public at $104. The trading corporation then relentlessly bought shares in itself, bidding the price up further and further. Eventually it dumped part of its holdings and sponsored a new trust, the Shenandoah Corporation, issuing millions more in shares in that fund - which in turn sponsored yet another trust called the Blue Ridge Corporation. In this way, each investment trust served as a front for an endless investment pyramid: Goldman hiding behind Goldman hiding behind Goldman. Of the 7,250,000 initial shares of Blue Ridge, 6,250,000 were actually owned by Shenandoah - which, of course, was in large part owned by Goldman Trading.
The end result (ask yourself if this sounds familiar) was a daisy chain of borrowed money, one exquisitely vulnerable to a decline in performance anywhere along the line ....
Fast-Forward about 65 years. Goldman not only survived the crash that wiped out so many of the investors it duped, it went on to become the chief underwriter to the country's wealthiest and most powerful corporations. Thanks to Sidney Weinberg, who rose from the rank of janitor's assistant to head the firm, Goldman became the pioneer of the initial public offering, one of the principal and most lucrative means by which companies raise money. During the 1970s and 1980s, Goldman may not have been the planet-eating Death Star of political influence it is today, but it was a top-drawer firm that had a reputation for attracting the very smartest talent on the Street.
It also, oddly enough, had a reputation for relatively solid ethics and a patient approach to investment that shunned the fast buck; its executives were trained to adopt the firm's mantra, "long-term greedy." One former Goldman banker who left the firm in the early Nineties recalls seeing his superiors give up a very profitable deal on the grounds that it was a long-term loser. "We gave back money to 'grownup' corporate clients who had made bad deals with us," he says. "Everything we did was legal and fair - but 'long-term greedy' said we didn't want to make such a profit at the clients' collective expense that we spoiled the marketplace." ...
But then, something happened. It's hard to say what it was exactly; it might have been the fact that Goldman's co-chairman in the early Nineties, Robert Rubin, followed Bill Clinton to the White House, where he directed the National Economic Council and eventually became Treasury secretary. ...
Rubin was the prototypical Goldman banker. He was probably born in a $4,000 suit, he had a face that seemed permanently frozen just short of an apology for being so much smarter than you, and he exuded a Spock-like, emotion-neutral exterior; the only human feeling you could imagine him experiencing was a nightmare about being forced to fly coach. It became almost a national cliche that whatever Rubin thought was best for the economy - a phenomenon that reached its apex in 1999, when Rubin appeared on the cover of Time with his Treasury deputy, Larry Summers, and Fed chief Alan Greenspan under the headline THE COMMITTEE TO SAVE THE WORLD. And "what Rubin thought," mostly, was that the American economy, and in particular the financial markets, were over-regulated and needed to be set free. ...
The basic scam in the Internet Age is pretty easy even for the financially illiterate to grasp. Companies that weren't much more than pot-fueled ideas scrawled on napkins by up-too-late bong-smokers were taken public via IPOs, hyped in the media and sold to the public for megamillions. It was as if banks like Goldman were wrapping ribbons around watermelons, tossing them out 50-story windows and opening the phones for bids. In this game you were a winner only if you took your money out before the melon hit the pavement.
It sounds obvious now, but what the average investor didn't know at the time was that the banks had changed the rules of the game, making the deals look better than they actually were. They did this by setting up what was, in reality, a two-tiered investment system - one for the insiders who knew the real numbers, and another for the lay investor who was invited to chase soaring prices the banks themselves knew were irrational. While Goldman's later pattern would be to capitalize on changes in the regulatory environment, its key innovation in the Internet years was to abandon its own industry's standards of quality control.
"Since the Depression, there were strict underwriting guidelines that Wall Street adhered to when taking a company public," says one prominent hedge-fund manager. "The company had to be in business for a minimum of five years, and it had to show profitability for three consecutive years. But Wall Street took these guidelines and threw them in the trash." Goldman completed the snow job by pumping up the sham stocks: "Their analysts were out there saying is worth $100 a share."
The problem was, nobody told investors that the rules had changed. "Everyone on the inside knew," the manager says. "Bob Rubin sure as hell knew what the underwriting standards were. They'd been intact since the 1930s." ...
Goldman has denied that it changed its underwriting standards during the Internet years, but its own statistics belie the claim. Just as it did with the investment trust in the 1920s, Goldman started slow and finished crazy in the Internet years. After it took a little-known company with weak financials called Yahoo! public in 1996, once the tech boom had already begun, Goldman quickly became the IPO king of the Internet era. Of the 24 companies it took public in 1997, a third were losing money at the time of the IPO. In 1999, at the height of the boom, it took 47 companies public, including stillborns like Webvan and eToys, investment offerings that were in many ways the modern equivalents of Blue Ridge and Shenandoah. The following year, it underwrote 18 companies in the first four months, 14 of which were money losers at the time. As a leading underwriter of Internet stocks during the boom, Goldman provided profits far more volatile than those of its competitors: In 1999, the average Goldman IPO leapt 281 percent above its offering price, compared to the Wall Street average of 181 percent.
How did Goldman achieve such extraordinary results? One answer is that they used a practice called "laddering," which is just a fancy way of saying they manipulated the share price of new offerings. Here's how it works: Say you're Goldman Sachs, and comes to you and asks you to take their company public. You agree on the usual terms: You'll price the stock, determine how many shares should be released and take the CEO on a "road show" to schmooze investors, all in exchange for a substantial fee (typically six to seven percent of the amount raised). You then promise your best clients the right to buy big chunks of the IPO at the low offering price - let's say's starting share price is $15 - in exchange for a promise that they will buy more shares later on the open market. That seemingly simple demand gives you inside knowledge of the IPO's future, knowledge that wasn't disclosed to the day-trader schmucks who only had the prospectus to go by: You know that certain of your clients who bought X amount of shares at $15 are also going to buy Y more shares at $20 or $25, virtually guaranteeing that the price is going to go to $25 and beyond. In this way, Goldman could artificially jack up the new company's price, which of course was to the bank's benefit - a six percent fee of a $500 million IPO is serious money.
Goldman was repeatedly sued by shareholders for engaging in laddering in a variety of Internet IPOs, including Webvan and NetZero. The deceptive practices also caught the attention of Nichol as Maier, the syndicate manager of Cramer & Co., the hedge fund run at the time by the now-famous chattering television rear end in a top hat Jim Cramer, himself a Goldman alum. ...
"Goldman, from what I witnessed, they were the worst perpetrator," Maier said. "They totally fueled the bubble. And it's specifically that kind of behavior that has caused the market crash. They built these stocks upon an illegal foundation - manipulated up - and ultimately, it really was the small person who ended up buying in." In 2005, Goldman agreed to pay $40 million for its laddering violations - a puny penalty relative to the enormous profits it made. (Goldman, which has denied wrongdoing in all of the cases it has settled, refused to respond to questions for this story.)
Another practice Goldman engaged in during the Internet boom was "spinning," better known as bribery. Here the investment bank would offer the executives of the newly public company shares at extra-low prices, in exchange for future underwriting business. Banks that engaged in spinning would then undervalue the initial offering price - ensuring that those "hot" opening price shares it had handed out to insiders would be more likely to rise quickly, supplying bigger first-day rewards for the chosen few. So instead of opening at $20, the bank would approach the CEO and offer him a million shares of his own company at $18 in exchange for future business - effectively robbing all of Bullshit's new shareholders by diverting cash that should have gone to the company's bottom line into the private bank account of the company's CEO. ...
Such practices conspired to turn the Internet bubble into one of the greatest financial disasters in world history: Some $5 trillion of wealth was wiped out on the NASDAQ alone. But the real problem wasn't the money that was lost by shareholders, it was the money gained by investment bankers, who received hefty bonuses for tampering with the market. Instead of teaching Wall Street a lesson that bubbles always deflate, the Internet years demonstrated to bankers that in the age of freely flowing capital and publicly owned financial companies, bubbles are incredibly easy to inflate, and individual bonuses are actually bigger when the mania and the irrationality are greater.
Nowhere was this truer than at Goldman. Between 1999 and 2002, the firm paid out $28.5 billion in compensation and benefits - an average of roughly $350,000 a year per employee. Those numbers are important because the key legacy of the Internet boom is that the economy is now driven in large part by the pursuit of the enormous salaries and bonuses that such bubbles make possible. Goldman's mantra of "long-term greedy" vanished into thin air as the game became about getting your check before the melon hit the pavement.
The market was no longer a rationally managed place to grow real, profitable businesses: It was a huge ocean of Someone Else's Money where bankers hauled in vast sums through whatever means necessary and tried to convert that money into bonuses and payouts as quickly as possible. If you laddered and spun 50 Internet IPOs that went bust within a year, so what? By the time the Securities and Exchange Commission got around to fining your firm $110 million, the yacht you bought with your IPO bonuses was already six years old. Besides, you were probably out of Goldman by then, running the U.S. Treasury or maybe the state of New Jersey. (One of the truly comic moments in the history of America's recent financial collapse came when Gov. Jon Corzine of New Jersey, who ran Goldman from 1994 to 1999 and left with $320 million in IPO-fattened stock, insisted in 2002 that "I've never even heard the term 'laddering' before.")
For a bank that paid out $7 billion a year in salaries, $110 million fines issued half a decade late were something far less than a deterrent - they were a joke. Once the Internet bubble burst, Goldman had no incentive to reassess its new, profit-driven strategy; it just searched around for another bubble to inflate. As it turns out, it had one ready, thanks in large part to Rubin.
Goldman's role in the sweeping disaster that was the housing bubble is not hard to trace. Here again, the basic trick was a decline in underwriting standards, although in this case the standards weren't in IPOs but in mortgages. ...
None of that would have been possible without investment bankers like Goldman, who created vehicles to package those lovely mortgages and sell them en masse to unsuspecting insurance companies and pension funds. This created a mass market for toxic debt that would never have existed before; in the old days, no bank would have wanted to keep some addict ex-con's mortgage on its books, knowing how likely it was to fail. You can't write these mortgages, in other words, unless you can sell them to someone who doesn't know what they are.
Goldman used two methods to hide the mess they were selling. First, they bundled hundreds of different mortgages into instruments called Collateralized Debt Obligations. Then they sold investors on the idea that, because a bunch of those mortgages would turn out to be OK, there was no reason to worry so much about the lovely ones: The CDO, as a whole, was sound. Thus, junk-rated mortgages were turned into AAA-rated investments. Second, to hedge its own bets, Goldman got companies like AIG to provide insurance - known as credit-default swaps - on the CDOs. The swaps were essentially a racetrack bet between AIG and Goldman: Goldman is betting the ex-cons will default, AIG is betting they won't.
There was only one problem with the deals: All of the wheeling and dealing represented exactly the kind of dangerous speculation that federal regulators are supposed to rein in. Derivatives like CDOs and credit swaps had already caused a series of serious financial calamities: Procter & Gamble and Gibson Greetings both lost fortunes, and Orange County, California, was forced to default in 1994. A report that year by the Government Accountability Office recommended that such financial instruments be tightly regulated - and in 1998, the head of the Commodity Futures Trading Commission, a woman named Brooksley Born, agreed. That May, she circulated a letter to business leaders and the Clinton administration suggesting that banks be required to provide greater disclosure in derivatives trades, and maintain reserves to cushion against losses. ...
Clinton's reigning economic foursome - "especially Rubin," according to Greenberger - called Born in for a meeting and pleaded their case. She refused to back down, however, and continued to push for more regulation of the derivatives. Then, in June 1998, Rubin went public to denounce her move, eventually recommending that Congress strip the CFTC of its regulatory authority. In 2000, on its last day in session, Congress passed the now-notorious Commodity Futures Modernization Act, which had been inserted into an 1l,000-page spending bill at the last minute, with almost no debate on the floor of the Senate. Banks were now free to trade default swaps with impunity.
But the story didn't end there. AIG, a major purveyor of default swaps, approached the New York State Insurance Department in 2000 and asked whether default swaps would be regulated as insurance. At the time, the office was run by one Neil Levin, a former Goldman vice president, who decided against regulating the swaps. Now freed to underwrite as many housing-based securities and buy as much credit-default protection as it wanted, Goldman went berserk with lending lust. By the peak of the housing boom in 2006, Goldman was underwriting $76.5 billion worth of mortgage-backed securities - a third of which were subprime - much of it to institutional investors like pensions and insurance companies. And in these massive issues of real estate were vast swamps of crap.
Take one $494 million issue that year, GSAMP Trust 2006-S3. Many of the mortgages belonged to second-mortgage borrowers, and the average equity they had in their homes was 0.71 percent. Moreover, 58 percent of the loans included little or no documentation - no names of the borrowers, no addresses of the homes, just zip codes. Yet both of the major ratings agencies, Moody's and Standard & Poor's, rated 93 percent of the issue as investment grade. Moody's projected that less than 10 percent of the loans would default. In reality, 18 percent of the mortgages were in default within 18 months.
Not that Goldman was personally at any risk. The bank might be taking all these hideous, completely irresponsible mortgages from beneath-gangster-status firms like Countrywide and selling them off to municipalities and pensioners - old people, for God's sake - pretending the whole time that it wasn't grade-D horseshit. But even as it was doing so, it was taking short positions in the same market, in essence betting against the same crap it was selling. Even worse, Goldman bragged about it in public. "The mortgage sector continues to be challenged," David Viniar, the bank's chief financial officer, boasted in 2007. "As a result, we took significant markdowns on our long inventory positions .... However, our risk bias in that market was to be short, and that net short position was profitable." In other words, the mortgages it was selling were for chumps. The real money was in betting against those same mortgages.
"That's how audacious these assholes are," says one hedge-fund manager. "At least with other banks, you could say that they were just dumb - they believed what they were selling, and it blew them up. Goldman knew what it was doing." I ask the manager how it could be that selling something to customers that you're actually betting against - particularly when you know more about the weaknesses of those products than the customer - doesn't amount to securities fraud.
"It's exactly securities fraud," he says. "It's the heart of securities fraud."
Eventually, lots of aggrieved investors agreed. In a virtual repeat of the Internet IPO craze, Goldman was hit with a wave of lawsuits after the collapse of the housing bubble, many of which accused the bank of withholding pertinent information about the quality of the mortgages it issued. .... But once again, Goldman got off virtually scot-free, staving off prosecution by agreeing to pay a paltry $60 million - about what the bank's CDO division made in a day and a half during the real estate boom.
The effects of the housing bubble are well known - it led more or less directly to the collapse of Bear Stearns, Lehman Brothers and AIG, whose toxic portfolio of credit swaps was in significant part composed of the insurance that banks like Goldman bought against their own housing portfolios. In fact, at least $13 billion of the taxpayer money given to AIG in the bailout ultimately went to Goldman, meaning that the bank made out on the housing bubble twice: It hosed the investors who bought their horseshit CDOs by betting against its own crappy product, then it turned around and hosed the taxpayer by making him payoff those same bets.
And once again, while the world was crashing down all around the bank, Goldman made sure it was doing just fine in the compensation department. In 2006, the firm's payroll jumped to $16.5 billion - an average of $622,000 per employee. As a Goldman spokesman explained, "We work very hard here."
But the best was yet to come. While the collapse of the housing bubble sent most of the financial world fleeing for the exits, or to jail, Goldman boldly doubled down - and almost single-handedly created yet another bubble, one the world still barely knows the firm had anything to do with.
By the beginning of 2008, the financial world was in turmoil. Wall Street had spent the past two and a half decades producing one scandal after another, which didn't leave much to sell that wasn't tainted. The terms junk bond, IPO, subprime mortgage and other once-hot financial fare were now firmly associated in the public's mind with scams; the terms credit swaps and CDOs were about to join them. The credit markets were in crisis, and the mantra that had sustained the fantasy economy throughout the Bush years - the notion that housing prices never go down - was now a fully exploded myth, leaving the Street clamoring for a new bullshit paradigm to sling.
Where to go? With the public reluctant to put money in anything that felt like a paper investment, the Street quietly moved the casino to the physical-commodities market - stuff you could touch: corn, coffee, cocoa, wheat and, above all, energy commodities, especially oil. In conjunction with a decline in the dollar, the credit crunch and the housing crash caused a "flight to commodities." Oil futures in particular skyrocketed, as the price of a single barrel went from around $60 in the middle of 2007 to a high of $147 in the summer of 2008.
That summer, as the presidential campaign heated up, the accepted explanation for why gasoline had hit $4.11 a gallon was that there was a problem with the world oil supply. In a classic example of how Republicans and Democrats respond to crises by engaging in fierce exchanges of moronic irrelevancies, John McCain insisted that ending the moratorium on offshore drilling would be "very helpful in the short term," while Barack Obama in typical liberal-arts yuppie style argued that federal investment in hybrid cars was the way out.
But it was all a lie. While the global supply of oil will eventually dry up, the short-term flow has actually been increasing. In the six months before prices spiked, according to the U.S. Energy Information Administration, the world oil supply rose from 85.24 million barrels a day to 85.72 million. Over the same period, world oil demand dropped from 86.82 million barrels a day to 86.07 million. Not only was the short-term supply of oil rising, the demand for it was falling - which, in classic economic terms, should have brought prices at the pump down.
So what caused the huge spike in oil prices? Take a wild guess. Obviously Goldman had help - there were other players in the physical-commodities market - but the root cause had almost everything to do with the behavior of a few powerful actors determined to turn the once-solid market into a speculative casino. Goldman did it by persuading pension funds and other large institutional investors to invest in oil futures - agreeing to buy oil at a certain price on a fixed date. The push transformed oil from a physical commodity, rigidly subject to supply and demand, into something to bet on, like a stock. Between 2003 and 2008, the amount of speculative money in commodities grew from $13 billion to $317 billion, an increase of 2,300 percent. By 2008, a barrel of oil was traded 27 times, on average, before it was actually delivered and consumed.
As is so often the case, there had been a Depression-era law in place designed specifically to prevent this sort of thing. ... In 1936, Congress recognized that there should never be more speculators in the market than real producers and consumers. If that happened, prices would be affected by something other than supply and demand, and price manipulations would ensue. A new law empowered the Commodity Futures Trading Commission - the very same body that would later try and fail to regulate credit swaps - to place limits on speculative trades in commodities. As a result of the CFTC's oversight, peace and harmony reigned in the commodities markets for more than 50 years.
All that changed in 1991 when, unbeknownst to almost everyone in the world, a Goldman-owned commodities-trading subsidiary called J. Aron wrote to the CFTC and made an unusual argument. Farmers with big stores of corn, Goldman argued, weren't the only ones who needed to hedge their risk against future price drops - Wall Street dealers who made big bets on oil prices also needed to hedge their risk, because, well, they stood to lose a lot too.
This was complete and utter crap - the 1936 law, remember, was specifically designed to maintain distinctions between people who were buying and selling real tangible stuff and people who were trading in paper alone. But the CFTC, amazingly, bought Goldman's argument. It issued the bank a free pass, called the "Bona Fide Hedging" exemption, allowing Goldman's subsidiary to call itself a physical hedger and escape virtually all limits placed on speculators. In the years that followed, the commission would quietly issue 14 similar exemptions to other companies.
Now Goldman and other banks were free to drive more investors into the commodities markets, enabling speculators to place increasingly big bets. That 1991 letter from Goldman more or less directly led to the oil bubble in 2008, when the number of speculators in the market - driven there by fear of the falling dollar and the housing crash - finally overwhelmed the real physical suppliers and consumers. By 2008, at least three quarters of the activity on the commodity exchanges was speculative, according to a congressional staffer who studied the numbers - and that's likely a conservative estimate. By the middle of last summer, despite rising supply and a drop in demand, we were paying $4 a gallon every time we pulled up to the pump.
What is even more amazing is that the letter to Goldman, along with most of the other trading exemptions, was handed out more or less in secret. "I was the head of the division of trading and markets, and Brooksley Born was the chair of the CFTC," says Greenberger, "and neither of us knew this letter was out there." In fact, the letters only came to light by accident. Last year, a staffer for the House Energy and Commerce Committee just happened to be at a briefing when officials from the CFTC made an offhand reference to the exemptions.
"1 had been invited to a briefing the commission was holding on energy," the staffer recounts. "And suddenly in the middle of it, they start saying, 'Yeah, we've been issuing these letters for years now.' I raised my hand and said, 'Really? You issued a letter? Can I see it?' And they were like, 'Duh, duh.' So we went back and forth, and finally they said, 'We have to clear it with Goldman Sachs.' I'm like, 'What do you mean, you have to clear it with Goldman Sachs?'" ... [I]n a classic example of how complete Goldman's capture of government is, the CFTC waited until it got clearance from the bank before it turned the letter over.
Armed with the semi-secret government exemption, Goldman had become the chief designer of a giant commodities betting parlor. Its Goldman Sachs Commodities Index - which tracks the prices of 24 major commodities but is overwhelmingly weighted toward oil - became the place where pension funds and insurance companies and other institutional investors could make massive long-term bets on commodity prices. Which was all well and good, except for a couple of things. One was that index speculators are mostly "long only" bettors, who seldom if ever take short positions - meaning they only bet on prices to rise. While this kind of behavior is good for a stock market, it's terrible for commodities, because it continually forces prices upward. "If index speculators took short positions as well as long ones, you'd see them pushing prices both up and down," says Michael Masters, a hedge-fund manager who has helped expose the role of investment banks in the manipulation of oil prices. "But they only push prices in one direction: up."
Complicating matters even further was the fact that Goldman itself was cheerleading with all its might for an increase in oil prices. In the beginning of 2008, Arjun Murti, a Goldman analyst, hailed as an "oracle of oil" by The New York Times, predicted a "super spike" in oil prices, forecasting a rise to $200 a barrel. At the time Goldman was heavily invested in oil through its commodities-trading subsidiary, J. Aron; it also owned a stake in a major oil refinery in Kansas, where it warehoused the crude it bought and sold. Even though the supply of oil was keeping pace with demand, Murti continually warned of disruptions to the world oil supply, going so far as to broadcast the fact that he owned two hybrid cars. High prices, the bank insisted, were somehow the fault of the piggish American consumer; in 2005, Goldman analysts insisted that we wouldn't know when oil prices would fall until we knew "when American consumers will stop buying gas-guzzling sport utility vehicles and instead seek fuel-efficient alternatives."
But it wasn't the consumption of real oil that was driving up prices - it was the trade in paper oil. By the summer of2008, in fact, commodities speculators had bought and stockpiled enough oil futures to fill 1.1 billion barrels of crude, which meant that speculators owned more future oil on paper than there was real, physical oil stored in all of the country's commercial storage tanks and the Strategic Petroleum Reserve combined. It was a repeat of both the Internet craze and the housing bubble, when Wall Street jacked up present-day profits by selling suckers shares of a fictional fantasy future of endlessly rising prices.
In what was by now a painfully familiar pattern, the oil-commodities melon hit the pavement hard in the summer of 2008, causing a massive loss of wealth; crude prices plunged from $147 to $33. Once again the big losers were ordinary people. The pensioners whose funds invested in this crap got massacred: CalPERS, the California Public Employees' Retirement System, had $1.1 billion in commodities when the crash came. And the damage didn't just come from oil. Soaring food prices driven by the commodities bubble led to catastrophes across the planet, forcing an estimated 100 million people into hunger and sparking food riots throughout the Third World. ...
After the oil bubble collapsed last fall, there was no new bubble to keep things humming - this time, the money seems to be really gone, like worldwide-depression gone. So the financial safari has moved elsewhere, and the big game in the hunt has become the only remaining pool of dumb, unguarded capital left to feed upon: taxpayer money. Here, in the biggest bailout in history, is where Goldman Sachs really started to flex its muscle.
It began in September of last year, when then-Treasury secretary Paulson made a momentous series of decisions. Although he had already engineered a rescue of Bear Stearns a few months before and helped bail out quasi-private lenders Fannie Mae and Freddie Mac, Paulson elected to let Lehman Brothers - one of Goldman's last real competitors - collapse without intervention. ("Goldman's superhero status was left intact," says market analyst Eric Salzman, "and an investment-banking competitor, Lehman, goes away.") The very next day, Paulson greenlighted a massive, $85 billion bailout of AIG, which promptly turned around and repaid $13 billion it owed to Goldman. Thanks to the rescue effort, the bank ended up getting paid in full for its bad bets: By contrast, retired auto workers awaiting the Chrysler bailout will be lucky to receive 50 cents for every dollar they are owed.
Immediately after the AIG bailout, Paulson announced his federal bailout for the financial industry, a $700 billion plan called the Troubled Asset Relief Program, and put a heretofore unknown 35-year-old Goldman banker named Neel Kashkari in charge of administering the funds. In order to qualify for bailout monies, Goldman announced that it would convert from an investment bank to a bankholding company, a move that allows it access not only to $10 billion in TARP funds, but to a whole galaxy of less conspicuous, publicly backed funding - most notably, lending from the discount window of the Federal Reserve. By the end of March, the Fed will have lent or guaranteed at least $8.7 trillion under a series of new bailout programs - and thanks to an obscure law allowing the Fed to block most congressional audits, both the amounts and the recipients of the monies remain almost entirely secret.
Converting to a bank-holding company has other benefits as well: Goldman's primary supervisor is now the New York Fed, whose chairman at the time of its announcement was Stephen Friedman, a former co-chairman of Goldman Sachs. Friedman was technically in violation of Federal Reserve policy by remaining on the board of Goldman even as he was supposedly regulating the bank; in order to rectify the problem, he applied for, and got, a conflict-of-interest waiver from the government. Friedman was also supposed to divest himself of his Goldman stock after Goldman became a bank-holding company, but thanks to the waiver, he was allowed to go out and buy 52,000 additional shares in his old bank, leaving him $3 million richer. Friedman stepped down in May, but the man now in charge of supervising Goldman - New York Fed president William Dudley - is yet another former Goldmanite.
The collective message of all this - the AIG bailout, the swift approval for its bank-holding conversion, the TARP funds - is that when it comes to Goldman Sachs, there isn't a free market at all. The government might let other players on the market die, but it simply will not allow Goldman to fail under any circumstances. Its edge in the market has suddenly become an open declaration of supreme privilege. "In the past it was an implicit advantage," says Simon Johnson, an economics professor at MIT and former official at the International Monetary Fund, who compares the bailout to the crony capitalism he has seen in Third World countries. "Now it's more of an explicit advantage." ...
And here's the real punch line. After playing an intimate role in four historic bubble catastrophes, after helping $5 trillion in wealth disappear from the NASDAQ, after pawning off thousands of toxic mortgages on pensioners and cities, after helping to drive the price of gas up to $4 a gallon and to push 100 million people around the world into hunger, after securing tens of billions of taxpayer dollars through a series of bailouts overseen by its former CEO, what did Goldman Sachs give back to the people of the United States in 2008?
Fourteen million dollars.
That is what the firm paid in taxes in 2008, an effective tax rate of exactly one, read it, one percent. The bank paid out $10 billion in compensation and benefits that same year and made a profit of more than $2 billion - yet it paid the Treasury less than a third of what it forked over to CEO Lloyd Blankfein, who made $42.9 million last year.
How is this possible? According to Goldman's annual report, the low taxes are due in large part to changes in the bank's "geographic earnings mix." In other words, the bank moved its money around so that most of its earnings took place in foreign countries with low tax rates. Thanks to our completely hosed corporate tax system, companies like Goldman can ship their revenues offshore and defer taxes on those revenues indefinitely, even while they claim deductions upfront on that same untaxed income. This is why any corporation with an at least occasionally sober accountant can usually find a way to zero out its taxes. A GAO report, in fact, found that between 1998 and 2005, roughly two-thirds of all corporations operating in the U.S. paid no taxes at all.
This should be a pitchfork-level outrage - but somehow, when Goldman released its post-bailout tax profile, hardly anyone said a word. One of the few to remark on the obscenity was Rep. Lloyd Doggett, a Democrat from Texas who serves on the House Ways and Means Committee. "With the right hand out begging for bailout money," he said, "the left is hiding it offshore."
Fast-Forward to today. It's early June in Washington, D.C. Barack Obama, a popular young politician whose leading private campaign donor was an investment bank called Goldman Sachs - its employees paid some $981,000 to his campaign - sits in the White House. Having seamlessly navigated the political minefield of the bailout era, Goldman is once again back to its old business, scouting out loopholes in a new government-created market with the aid of a new set of alumni occupying key government jobs.
Gone are Hank Paulson and Neel Kashkari; in their place are Treasury chief of staff Mark Patterson and CFTC chief Gary Gensler, both former Goldmanites. (Gensler was the firm's co-head of finance) And instead of credit derivatives or oil futures or mortgage-backed CDOs, the new game in town, the next bubble, is in carbon credits - a booming trillion-dollar market that barely even exists yet, but will if the Democratic Party that it gave $4,452,585 to in the last election manages to push into existence a groundbreaking new commodities bubble, disguised as an "environmental plan," called cap-and-trade.
The new carbon-credit market is a virtual repeat of the commodities-market casino that's been kind to Goldman, except it has one delicious new wrinkle: If the plan goes forward as expected, the rise in prices will be government-mandated. Goldman won't even have to rig the game. It will be rigged in advance.
Here's how it works: If the bill passes; there will be limits for coal plants, utilities, natural-gas distributors and numerous other industries on the amount of carbon emissions (a.k.a. greenhouse gases) they can produce per year. If the companies go over their allotment, they will be able to buy "allocations" or credits from other companies that have managed to produce fewer emissions. President Obama conservatively estimates that about $646 billions worth of carbon credits will be auctioned in the first seven years; one of his top economic aides speculates that the real number might be twice or even three times that amount.
The feature of this plan that has special appeal to speculators is that the "cap" on carbon will be continually lowered by the government, which means that carbon credits will become more and more scarce with each passing year. Which means that this is a brand-new commodities market where the main commodity to be traded is guaranteed to rise in price over time. The volume of this new market will be upwards of a trillion dollars annually; for comparison's sake, the annual combined revenues of an electricity suppliers in the U.S. total $320 billion.
Goldman wants this bill. The plan is (1) to get in on the ground floor of paradigm-shifting legislation, (2) make sure that they're the profit-making slice of that paradigm and (3) make sure the slice is a big slice. Goldman started pushing hard for cap-and-trade long ago, but things really ramped up last year when the firm spent $3.5 million to lobby climate issues. (One of their lobbyists at the time was none other than Patterson, now Treasury chief of staff.) Back in 2005, when Hank Paulson was chief of Goldman, he personally helped author the bank's environmental policy, a document that contains some surprising elements for a firm that in all other areas has been consistently opposed to any sort of government regulation. Paulson's report argued that "voluntary action alone cannot solve the climate-change problem." A few years later, the bank's carbon chief, Ken Newcombe, insisted that cap-and-trade alone won't be enough to fix the climate problem and called for further public investments in research and development. Which is convenient, considering that 'Goldman made early investments in wind power (it bought a subsidiary called Horizon Wind Energy), renewable diesel (it is an investor in a firm called Changing World Technologies) and solar power (it partnered with BP Solar), exactly the kind of deals that will prosper if the government forces energy producers to use cleaner energy. As Paulson said at the time, "We're not making those investments to lose money."
The bank owns a 10 percent stake in the Chicago Climate Exchange, where the carbon credits will be traded. Moreover, Goldman owns a minority stake in Blue Source LLC, a Utah-based firm that sells carbon credits of the type that will be in great demand if the bill passes. Nobel Prize winner Al Gore, who is intimately involved with the planning of cap-and-trade, started up a company called Generation Investment Management with three former bigwigs from Goldman Sachs Asset Management, David Blood, Mark Ferguson and Peter Harris. Their business? Investing in carbon offsets. There's also a $500 million Green Growth Fund set up by a Goldmanite to invest in green-tech ... the list goes on and on. Goldman is ahead of the headlines again, just waiting for someone to make it rain in the right spot. Will this market be bigger than the energy-futures market?
"Oh, it'll dwarf it," says a former staffer on the House energy committee. ....
"If it's going to be a tax, I would prefer that Washington set the tax and collect it," says Michael Masters, the hedge fund director who spoke out against oil-futures speculation. "But we're saying that Wall Street can set the tax, and Wall Street can collect the tax. That's the last thing in the world I want. It's just asinine."
Cap-and-trade is going to happen. Or, if it doesn't, something like it will. The moral is the same as for all the other bubbles that Goldman helped create, from 1929 to 2009. In almost every case, the very same bank that behaved recklessly for years, weighing down the system with toxic loans and predatory debt, and accomplishing nothing but massive bonuses for a few bosses, has been rewarded with mountains of virtually free money and government guarantees - while the actual victims in this mess, ordinary taxpayers, are the ones paying for it.
It's not always easy to accept the reality of what we now routinely allow these people to get away with; there's a kind of collective denial that kicks in when a country goes through what America has gone through lately, when a people lose as much prestige and status as we have in the past few years. You can't really register the fact that you're no longer a citizen of a thriving first-world democracy, that you're no longer above getting robbed in broad daylight, because like an amputee, you can still sort of feel things that are no longer there.
But this is it. This is the world we live in now. And in this world, some of us have to play by the rules, while others get a note from the principal excusing them from homework till the end of time, plus 10 billion free dollars in a paper bag to buy lunch. It's a gangster state, running on gangster economics, and even prices can't be trusted anymore; there are hidden taxes in every buck you pay. And maybe we can't stop it, but we should at least know where it's all going.
The bubbles don't come 'til the end of the program... Turn off the bubbles... Turn off the bubble machine!
NOTE Read it all here.