The US Senate’s report on the banking crisis – but will anyone be charged?
Among the more memorable news events of last year were the US Senate Subcommittee on Investigations’ hearings into the financial crisis.* This April, the Subcommittee published its 650 pages report on the crisis, Wall Street and the Financial Crisis: Anatomy of a Financial Collapse, focusing on four aspects:
High Risk Lending
Regulatory Failure
Inflated Credit Ratings
Investment Bank Abuse
The report concludes that a severely compounding factor in the crisis was investment bank abuse. Case studies in the report relate to the cooperation between Goldman Sachs and Deutsche Bank. Quite interesting since I firmly believe that the contacts between Deutsche Bank and the Icelandic banks merit some attention (hope to clarify this on Icelog in the near future).
Summaring, the report points out:
The four causative factors examined in this Report are interconnected. Lenders introduced new levels of risk into the U.S. financial system by selling and securitizing complex home loans with high risk features and poor underwriting. The credit rating agencies labeled the resulting securities as safe investments, facilitating their purchase by institutional investors around the world. Federal banking regulators failed to ensure safe and sound lending practices and risk management, and stood on the sidelines as large financial institutions active in U.S. financial markets purchased billions of dollars in mortgage related securities containing high risk, poor quality mortgages. Investment banks magnified the risk to the system by engineering and promoting risky mortgage related structured finance products, and enabling investors to use naked credit default swaps and synthetic instruments to bet on the failure rather than the success of U.S. financial instruments. Some investment banks also ignored the conflicts of interest created by their products, placed their financial interests before those of their clients, and even bet against the very securities they were recommending and marketing to their clients. Together these factors produced a mortgage market saturated with high risk, poor quality mortgages and securities that, when they began incurring losses, caused financial institutions around the world to lose billions of dollars, produced rampant unemployment and foreclosures, and ruptured faith in U.S. capital markets. (P. 12.)
Professor William Black (the link is to an interview with Black on the S&L crisis vs now) and others have been calling out for criminal investigations into the role of the major banks during the crisis, comparing the situation now with investigations into the Savings & Loan crisis of the ‘80s when a number of lenders actually went to jail. An article in the latest issue of Rolling Stones Magazine, based on the Senate’s report argues that the report has laid out the evidence. Now the Justice Department should bring criminal charges against the bankers responsible for what the banks did.
As often pointed out earlier on Icelog, the Icelandic Special Investigative Committee outlined many cases in its report now being investigated in Iceland. The SIC informed the Office of the Special Prosecutor of findings it found to be suspicious. The UK Serious Fraud Office is conducting an investigation into Kaupthing’s operations.
*The hearings can still all be watched on C-Span, ideal to watch while you cook or do other things that leave your mind mostly free. Senator Carl Levin was the absolute star, some memorable moments when he was questioning the squinting Goldman Sachs CEO Lloyd Blankstein.
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Thanks for that C-Span link, Sigrun.
It was quite amazing to see a so-called CEO fail to be able to answer a simple and endlessly-repeated yes-or-no question for a quarter of an hour.
It’s a text-book case of a fundamentally dishonest man working for a fundamentally dishonest company.
Will Iceland be able to hammer away at the same question for a quarter of an hour when it confronts its dubious financial characters…?
wardropper
17 May 11 at 5:22 pm
Wardropper, and others who might be interested,
Presuming you mean Goldman Sachs CEO Lloyd Blankfein when you refer to the “so-called CEO” who “fail[s] to be able to answer a simple…question…”, in fact he did answer the questions put to him, and accurately. The problem was of what was under discussion — by each. Blankfein was answering per a different set of operating rules, and with a different purpose-focus.
For example, where the questions were in regard to screwing clients, the overhanging question, that needed to be nailed down to begin, but was not, was “who are the ‘clients’ each is speaking of?” Goldman Sachs is owned by shareholders and serves investors. Blankfein was answering as someone serving shareholder ‘clients’ interests by serving investors as ‘customers’, stocking and selling them what they would buy, stocking his “service” and “parts” departments per his recognition that what he was selling his customers was shoddy. He was earning for his shareholder ‘clients’. Levin was questioning from a customer-client perspective, since it was pension-plans and pensioners who were asking him why they were screwed.
Consider, too, the case where Levin questioned Goldman Sachs skimming off bailout funds, which Matt Taibbi makes note of. Blankfein’s answer, that it would have got that money anyway, from AIG insurance, is accurate: The bailout money was, in fact, pass-through that AIG got from U.S.Taxpayers to pay debts it had incurred selling CDS insurance policies speculatively. As insurance policies should NEVER be sold, as any idiot knows.
The reason regulation has to be MAINTAINED, not brought up after as all are trying to do now, is because a scam let be to become a business model becomes the rule and has to be “respected” even if not honored. Blankfein’s argument was that Goldman Sachs was only doing what it had to do to keep up. His argument is correct. Goldman Sachs’ failure was that it was a big enough player to set or reset the ‘rules’, and it had assumed responsibility to when it, and others in American finance, pushed the officials regulators off the field and assured them they, the players, could adhere to the rules.
To anser your last paragraph question, Yes, they probably will hammer. But who are the “dubious characters”? So far Iceland’s officialdom is behaving dubiously, doing as bad as U.S. officialdom, worse than the better than average Levin represented, mostly because Icelandic officials know even less about the industry they are wanting to catch-up regulate. And they are that stupid that they don’t think they have any need to learn about it. They assume they have sufficient knowledge, absorbed through some kind of moral-osmosis. Naturally absorbed by way of their superior self-righteousness. Until they stop imagining and back up and learn what they are dealing with, and why things were done as they were done, for what reasons, they will continue to screw up for imagining they know when they don’t. The same reason, the SIC screwed up its “investigation”.
R.L.Dogh
19 May 11 at 2:49 am
Sigrun,
Here are some points that may help you when you analyze the relationship of the world financial crisis to the Icelandic banks.
1. The crisis came out of the United States, and out of Britain. Britain may have picked up from the U.S., but I don’t have enough data to proof that. Major European banks elsewhere than Britain, appear to have played by the “new rules”, which you will find is the norm in banking.
2. The primary causative instruments were the regulatory failure, credit default swap (CDS) being made “investment”instruments, the collateralized debt obligation (CDO), abuse of the CDO (treating these as transfers of debt instrument ownership), the computer becoming ubiquitous (which “realified” virtuality, permitting the edge between investing and gambling, always thin, to ‘seem to sort of melt’ for many players), failures of peer ethic imposition and supervision, plain old omnipresent inclination to swindle if it looks safe to, and larger players playing on the swindling, instead of refusing to.
The primary failure was of regulators. They are the officials on the field, to compare to sports, who prevent cheating. The players always say they can play fair and don’t need the officials, but, with rare exceptions, usually in non-professional pick-up games, competitors, being competitive, always push over the lines. The CDS made it possible to make money from failure (insure and destroy, collect the insurance [Northern Rock is the classic example, Singer and Friedlander was being run down for profit when Kaupthing bought it]) permitting speculative buying of insurance (CDS) permitted multiple insurings and multiple collectings of “winnings” from destroying, not building. Risky loans became the norm because they were “sure bets” to insure.
It does not look like the Icelandic banks were involved in, or caught by, the swindlers. They were broken by Britain for British financial interests, in whose games they were interfering.
Review the 11 April, 2006 Barclay Capital analysis that Mike the Nordic Analyst provided, that you linked to in your 16 April, 2011 blog. It is full of evidence of the early spring, 2006 market-assault against the Icelandic banks that almost took them down. Notice the word “still” used, and “protection”, which means CDS insurance, in the barcap recommendations. Note that _everyone knows_ that subsidiaries are independent and _not_ taken down by a parent going down: What Northern Rock’s manipulators did was transfer assets to subsidiaries and then bankrupt the parent, leaving the government to cover the costs. The barcap report reference to the obvious fact, in reference to the Icelandic banks, if done by Monty Python would have had a “Wink, wink, nudge, nudge, know what I mean, know what I mean?” attached. It was in the report as pure innuendo, to suggest The Icelandic banks, who in April, 2006, were winning the market war, were dishonest and preparing to do a bunk. The barcap report was part of the warfare.
Good luck with your analyzing. It is interesting, but more work to do the job right, instead of as the SIC did.
R.L.Dogh
20 May 11 at 2:51 am
As per the usual request, do you have any backing for your carefully constructed theories? Specifically this:
“They were broken by Britain for British financial interests, in whose games they were interfering.”
I’d also be interested to know why you believe the SIC report to not be as good as whatever source you’re using.
Bromley86
20 May 11 at 4:40 pm
Bromley86,
There is a good deal of evidence. Most is readily available, and known to you already. The trick is to know how to read it, what to look for, what to sift out, what what you read means, what it was meant ot mean, the perspective of its perspective, how it ties to other evidences, and, of course, how it stands against, and emerges from its background. In other words, you have to know the rudiments of investigation, and to derive a little more, know a little more. In this last regard it helps to remember the hunter-gatherer’s explanation that “to hunt the deer you must know the deer. You must know how a deer thinks and be able to think like a deer (not be a deer, you are a deer-hunter).
In the case of investigating (instead of hunting) banking, you have to learn the procedures of banking. How and why bankers do what they do, what the norms are, how norms are exceeded and why, etc. This has not been done by almost all attempting to investigate the Icelandic banks situation. You have to also do the same for regulators and regulating.
Also key to investigating is knowing to not conclude. Real investigators NEVER conclude: In real investigation only the evidences are permitted to draw conclusions. The investigator, and the investigative analyst, ride along, being carried by the evidence, testing it, looking for holes, weak spots, etc. I deprecate the SIC “investigators” because they, very obviously and worse than amateurishly, drew conclusions, not even from evidences, but _before_ beginning, and then went “investigating” to prove their conclusions.
For this one of the sources I recommend is the SIC Report. You just have to ignore all the SIC-stuff and read the evidences they gathered, analyzing it as an– well, as an investigator. You will find evidence of the Feb.-March market assault and evidence how near it came to succeeding. You can determine, or obtain support for a previous determination, that two reasons the attack failed were the Icelandic banks being perceived by savers their honest saving option, and the British banks offered no alternative: British savers _had_ to take their savings back, which ended the run you can read some of the stampede efforts impelling in the margins in the English portions of the SIC Report. In the SIC Report also you can find the evidence for my statement that the Icelandic banks were given what I called a ‘Roman Imperial choice’, to commit suicide or be killed by the FSA. The SIC, tunnel-focused on finding evidences for their pre-drawn conclusions breezed right by the obvious evidences, entirely missing their imports.
The 11 April 2006 barcap report that Mike the Nordic Analyst provided, that Sigrún has a link to, is a smoking-gun: It evidences that Barclay Capital was active in the assault push, and was counting on it succeeding. barcap, on 11 April, was “still” recommending shorting Icelandic banks, and buying “protection”. The “still” indicates it had been through the crisis period. Read its CDS “protection” purchase recommendation: Buy protection on Glitnir, because its seen the most stable so its spread is narrow, which makes it cheapest to insure, since if we can succeed in making one Icelandic bank fail, the nervous ripple will take them all down… Cynical? Yes. Business-like? Yes. It was good ‘profit by destroying, profit from destruction’ business-model advice. I have covered the barcap analysis emphasis on subsidiaries being independent, before. For more study up on special purpose vehicles (SPV)s and the uses of them to shift assets to. The barcap nudge-wink was certain to make the FSA jump, wasn’t it? In fact, the Joly investigation was entirely for evidences of that British banking standard operating procedure having been practiced by the Icelandic banks, wasn’t it?
Also, study up on shorting, especially naked-shortselling, where virtual shares are sold short to punters posing as hedgers or speculators. For a quick catch-up, if your company has 100,000 shares marketed and all are taken, I can short your shares by selling 100,000 naked shares, no more than my numbers on a receipt-betting slip. Then, because my naked shares cost nothing, if I sell another 100,000, for a third less, to make my first 100,000 and your legitimate 100,000 worth a third less (33% buy-back profit for my short) I have ‘made’ money and run your shares’ value down. You would then have to force a market transaction to counter my deprecation, like arranging for a friend to “buy” if you loan him to…
You see how it goes?
R.L.Dogh
21 May 11 at 12:51 am
Not really no. You use a lot of words to say that you’ve read between the lines, but you provide no direct examples of what you’re talking about.
It is surely pure coincidence that your current position, after all this extensive research, is precisely the same as your original opinion back before you’d looked into it when you were repeating what someone had told you?
Bromley86
22 May 11 at 9:55 am
Bromley86,
First, pardon my delay responding, and the disjointed nature of my explanation of evidence. I’m in and out and the Icelandic situation isn’t a large part of anything I do, though it has grown more interesting.
If you have my previous communications re the Icelandic banks situation relative to Iceland, you are in a position to learn one of the ways I vet info in follow-up. Since I begin at beginnings I began before querying any bankers, learning how banking was done in the pre-economic-meltdown environment (you can’t apply today’s ways to before the meltdown, since things like risk are calculated per entirely different criteria [no one trusts as was previously common], for example). Then I sought relevant information, vetting what I received for apparent legitimacy.
What I received that appeared plausible I flew by others, in my own repetition, as you will have read in what you call my “repeating what someone else had told”. My repetitions I then flew by my sources, so I could receive input and reaction from both my source and others. This process vets both what I am told and what I hear told, so I can correct, if necessary, to assure against reinterpretation.
There is not any coincidence. The system is to distill to eliminate coincidence. If product today is congruent to product of my previous repetition/interpretation it means the information successfully vetted. It was confirmed by evidences and further and third-party sources. The purpose of the whole business is to define events and actions to solid and most likely bases. The defined bases continue to be subject, of course, since distilling to what proofs is the ultimate object.
The banker source who provided the most plausible information about the sojourns of the Icelandic banks in Britain has shown consistently well. Some elements are his own opinions, and necessarily remain so. That the Icelandic banks were providing an honest banking alternative in Britain, for example, and that their business model was positive, building to value, instead of destroying to, though these assertions are supported by the remarkable continuation of the ‘failed’ Icelandic banks remainders’ values.
Doesn’t it seem to you remarkable that Landsbanki in Britain, sitting doggo in the receivership the FSA forced it into, is growing, without growing, in an economic climate where others, including ones the FSA thought healthy, have been requiring life-line after lifeline be thrown them?
Extrapolating, what do you think? Could there have been justification for, say, Deutsche Bank to have some confidence in them then? Remember, we are talking about the old era, when old era rules and levels of trust were effective, before all learnt the hard way (once again) that it only takes a few shysters taking advantages to throw a balanced system into careen. None would trust that way today.
But note, too, that Landsbanki’s business model did not include investing in the phoney and false-bottomed CDO securities American investment banks were selling, as other victims, like the Bank of Scotland, for trusting the Americans, were doing. The whole banking world was trusting before. Different ones simply invested differently. To differentiate on irrelevant criteria would produce irrelevant, and incorrect, data. This, too, is part of vetting.
R.L.Dogh
28 May 11 at 12:49 am
Continuing the disjointed conversation, I thought this pretty much still covered it:
“You use a lot of words to say that you’ve read between the lines, but you provide no direct examples of what you’re talking about.”
On one specific point you made, I have to ask what you’re talking about.
“Doesn’t it seem to you remarkable that Landsbanki in Britain, sitting doggo in the receivership the FSA forced it into, is growing, without growing, in an economic climate where others, including ones the FSA thought healthy, have been requiring life-line after lifeline be thrown them?”
There is no Landsbanki in Britain sitting doggo in receivership. There are assets that may (may!) contribute to covering the total of deposits, but only because of a chance in Icelandic law that means that bondholders get nothing (the shareholders never had a chance of recovering a penny). So how is that an example of prudent management and growing wealth?
Landsbanki’s business model may well not have included investing in CDOs, but it certainly did include making massive loans to related parties without taking due care or ensuring that there was collateral. It turns out that this is not a good idea (unless you’re the beneficiary of one of those loans).
Bromley86
5 Jun 11 at 6:19 pm