A Book, Some Crooks, And a Fraud

        I sometimes make book recommendations based on my belief that others might simply enjoy the book. Sometimes my recommendation is also based on the belief that the book might also have something instructive to offer. Such a book is John Kenneth Galbraith's "The Great Crash 1929." In this case, I would like to offer the suggestion that this book, first printed in 1955 and continuously in print (deservedly so) and with periodic updates ever since, is instructive in its analysis of market and economic conditions then and now.

         Unlike "the Big Short" which, while a great read, (also my recommendation) could sometimes make the reader go to a reference source for a definition or explanation, Mr. Galbraith gives an even handed, clearly stated analysis of conditions leading to the Great Crash and subsequent economic collapse. What is especially interesting is that in his analysis, he discusses conditions which are not temporally isolated, but which have repeated cyclically both before and after the late 20s. 

       Anyone reading this book in 2008, with its analysis of wealth concentration (worse today), speculation and leverage based solely on the illusion that growth is infinite, should have looked at the housing bubble, exclaimed, "Oh shit!" and gotten out of the market. Alas, we don't learn or, perhaps more appropriately, those who control monstrous sums of other people's money continue to hope we don't learn from history, driven instead by the illusion that something can be created from nothing indefinitely. One simple (not “shining”) example: Galbraith discusses at length the massive problems at Goldman Sachs. I know, we all saw that in 2008-9, but I'm referring to the same greed and lack of sense exhibited 80 years earlier by the same investment bank.

        On December 4, 1928, the firm launched the Goldman Sachs Trading Corp, a closed-end and hugely speculative fund. The fund failed during the Stock Market Crash of 1929, amid accusations that Goldman had engaged in share price manipulation and insider trading. Professor Galbraith is gentler than the company probably deserves in his detailed analysis.

        Another financial crisis for the firm occurred in 1970, when the Penn Central Transportation Company went bankrupt with over $80 million in commercial paper outstanding, most of it issued through Goldman Sachs. This huge bankruptcy resulted in numerous lawsuits, many based on accusations of manipulation for Bank gains even though they should have known the issue was suspect. Notably, suits filed by the SEC threatened the partnership capital, life and reputation of the firm. As a personal aside, I think it unfortunate that Goldman Sachs survived.

        During the 2007 Subprime mortgage crisis, Goldman was able to profit from the collapse in subprime mortgage bonds in the summer of 2007 by short-selling subprime mortgage-backed securities. Two Goldman traders, Michael Swenson and Josh Birnbaum, are credited with being responsible for the firm's large profits during the crisis. The pair, members of Goldman's structured products group in New York City, made a profit of $4 billion by "betting" on a collapse in the sub-prime market and shorting mortgage-related securities.

        By summer 2007, they had persuaded colleagues to see their point of view and convinced skeptical risk management executives, most of whom had marginal understanding if any, (see “The Big Short”) of the issue.  G-S avoided large subprime write-downs at first, even turning a net profit due to significant losses on non-prime securitized loans being offset by gains on short mortgage positions. The firm's viability was later called into question, however, as the crisis worsened in late 2008.

        On October 15, 2007, as the crisis had begun to unravel, Allan Sloan, a senior editor for Fortune magazine, wrote:

   “So, let's reduce this macro story to human scale. Meet GSAMP Trust 2006-S3, a $494 million drop in the junk-mortgage bucket, part of the more than half-a-trillion dollars of mortgage-backed securities issued last year. We found this issue by asking mortgage mavens to pick the worst deal they knew of that had been floated by a top-tier firm – and this one's pretty bad. It was sold by Goldman Sachs – GSAMP originally stood for Goldman Sachs Alternative Mortgage Products but now has become a name itself, like AT&T and 3M. This issue, which is backed by ultra-risky second-mortgage loans, contains all the elements that facilitated the housing bubble and bust. It's got speculators searching for quick gains in hot housing markets; it's got loans that seem to have been made with little or no serious analysis by lenders; and finally, it's got Wall Street, which churned out mortgage "product" because buyers wanted it. As they say on the Street, "When the ducks quack, feed them."

        So, did G-S fold their tents and get out of town? Of course not, we (the US Government) loaned them $10 billion of our tax dollars under the TARP program (you remember “W” referring to G-S, AIG and others as being “Too big to fail?” As yet one more slap at reason, consider Goldman's decision to pay 953 employees year end bonuses of at least $1 million each after it received TARP funds in 2008. Yep, just under 10% of the TARP bailout was to go to some of those who were involved in the “bad mortgage” fraud. Fortunately, then New York Attorney General Andrew Cuomo, called “bullshit”, and when he shone the light on them, the larger G-S roaches decided it might not be all that good an idea.

        In the aftermath of the bubble collapse and the long slow recovery, President Obama and key advisers introduced a series of regulatory proposals in June 2009. The proposals addressed  consumer protection, executive pay, bank financial cushions or capital requirements, expanded regulation of the shadow banking system and derivatives, and enhanced authority for the Federal Reserve to safely wind-down systemically important institutions, among others. Then U.S. Treasury Secretary Timothy Geithner testified before Congress on October 29, 2009. His testimony included five elements he stated as critical to effective reform:

·       Expand the Federal Deposit Insurance Corporation (FDIC) bank resolution mechanism to include non-bank financial institutions;

·       Ensure that a firm is allowed to fail in an orderly way and not be "rescued";

·       Ensure taxpayers are not on the hook for any losses, by applying losses first to the firm's investors and including the creation of a pool funded by the largest financial institutions;

·       Apply appropriate checks and balances to the FDIC and Federal Reserve in this resolution process;

·       Require stronger capital and liquidity positions for financial firms and related regulatory authority.

        The Dodd–Frank Wall Street Reform and Consumer Protection Act was signed into law by President Obama in July 2010, addressing each of these topics to varying degrees.

         A similar directive, and to my lights almost as basic as regards fair dealing, is the Obama-era Labor Department rule requiring brokers to act in a client’s best interest when providing retirement advice. That rule is not explicitly part of Dodd-Frank. Understand this, Trump has stated his desire to void this regulation, even though doing do would allow a broker to place their own fiduciary interests above those of the client. This constitutes license for brokers to gamble with retirees’ life savings!

        So, we fixed those other issues, though, right? Not so much, perhaps. Enter the Trump administration, headed by a man not only not “too big to fail”, but who has “failed” (declared bankruptcy) six times! Among other things, Mr.  Trump has stated: “We expect to be cutting a lot out of Dodd-Frank, because frankly, I have so many people, friends of mine that had nice businesses, they can’t borrow money,” Mr. Trump stated during a 2017 meeting with business leaders. “They just can’t get any money because the banks just won’t let them borrow it because of the rules and regulations in Dodd-Frank.” These "rules" of course are silly things like collateral, ability to repay, etc.

        These intentions, publicly stated early in 2017, constitute an extensive effort to loosen regulations on banks and other major financial companies, even though the Mr. Trump campaigned as a champion of working Americans and as a critic of Wall Street elites. While speaking from both sides of his face Mr. Trump then made some interesting (you may use another word) appointments.

        Steven Mnuchin became Treasury secretary; Gary Cohn, the chairman of his national economic council; and the since disgraced Stephen K. Bannon, Mr. Trump’s former chief strategist. The common thread?  All had worked at Goldman-Sachs, Mnuchin as CEO.

In summary: Read J.K. Galbraith’s "The Big Crash 1929." Consider Galbraith’s evaluation of conditions and attitudes in the investment banking industry which eroded market and economic stability then, 2008, and (?). Then note Trump’s continuing erosion of Dodd-Frank. Finally, be afraid, be very afraid!