Marcellus Wallace, a character from the film Pulp Fiction, made in my opinion an excellent suggestion in dealing with a sadistic rapist. He said to get “medieval” on him. With most of the Wall Street con artists continuing to do no hard time, I decided to see what justice meant for financial crooks of the past. Jason Zweig of the Wall Street Journal has compiled some great insights.
Let’s go way back, 3700 years ago, when the Code of Hammurabi was the law of the Mesopotamian land. If anyone violated the terms of any financial contract they were “put to death as a thief.” Mesopotamia had a vibrant commodities market where commodities futures were exchanged.
In medieval Catalonia, a banker who went under most certainly did not get money from the TARP program or below market interest rates from their Uncle Ben Bernanke. First, the failed banker was humiliated by town criers who shouted the facts of his failure in public squares throughout the land. Second, the banker had to live on nothing but bread and water until he paid off his depositors in full. If, after a year he was unable to repay he would be executed. Nowadays you get a golden parachute and get a job at a hedge fund. Also in Catalonia, if any banker was caught lying about their books, they could be put to death.
In England, counterfeiting was punishable by death starting in the 14th century, and altering the coinage was declared a form of high treason by 1562. Bernanke and his buddies at the Federal Reserve sure must be happy that they are born today where printing money is celebrated by the unenlightened masses. In the 17th century, the British really started to crack down on financial crimes. Criminals were often sentenced to London’s Newgate prison (not a white-collar country club prison). Some offenders were dragged on planks through sewage filled streets and were hanged. Another option was to smear the criminal with tar and set them on fire. In the late seventeenth century the top financial cop in London was none other than Sir Isaac Newton, who sent hundreds to the gallows. Contrast that with the grand fraud that was Eliot Spitzer who couldn’t get a single guilty plea.
The fact is, despite our efforts, it is the golden age for financial crooks.
The Financial Industry Regulatory Authority (FINRA) fined Citigroup Global Markets, Morgan Stanley, UBS, and Wells Fargo $7.3 million, plus $1.8 million in restitution for selling unsuitable Exchange Traded Funds to their customers.
Market Watch reported that the agency came out with standard rhetoric about how the complexity of leveraged and inverse ETF’s “makes it essential that brokerage firms have an adequate understanding of the products and sufficiently train their sales force before the products are offered to retail customers.” For all intents and purposes they were instructing firms to figure out a better way to sell what virtually every public watchdog agency, from the Securities and Exchange Commission to the North American Securities Administrators Association to countless fund-research firms and consumer groups has stated that investors should steer very clear as they have serious potential to be a portfolio time bomb.
By coming up with a suitable basis for sale, these firms would be off the hook from lawsuits. This is a great example of why one needs their head examined if they are working with a broker from a major firm. They are not fiduciaries. They do not have to put their clients interests first. They just need to give reasonable basis for sale. Pathetic and sad are a couple of words that come to mind.
The Teflon Firm
The Justice Department will give Goldman Sachs a pass for financial fraud related to the mortgage crisis. “Based on the law and evidence as they exist at this time, there is not a viable basis to bring a criminal prosecution with respect to Goldman Sachs or its employees in regard to the allegations set forth in the report.”
The U.S. Senate’s Permanent Subcommittee on Investigations authored the report they are referring. In the piece, it accuses Goldman Sachs of Being a major player in the financial crisis, breeding a greedy culture and running conflict- laden businesses; putting their own interests above their clients. The report showed how Goldman Sachs and other firms sold billions of dollars in securitized mortgages, and told clients how wonderful they were, and how they couldn’t own enough, the firms used words like “crap” and “flying pig” to describe their products. Goldman also did not inform investors that they worked hand-in-hand with the hedge fund Paulson & Co. to help pick extra crappy underlying securities in a deal that they sold and bet that it would blow up.
I want everyone to thoroughly understand that it is not criminal to knowingly rip-off and harm your clients if you are a too big to fail Wall Street firm. If you recall this is basically the same exact thing that happened during the whole dotcom boom. You know what, it will happen again; unfortunately people are dumb enough to still work with these outfits.
Crime Does Pay
Morgan Stanley worked out a settlement with the Justice Department over claims that it used derivative to manipulate electricity prices. Morgan Stanley agreed to pay $4.8 million, and like usual did not admit any wrongdoing. What a deal! Morgan Stanley made $21.6 million on the shady derivatives deal, which is about a 350% return on ripping people off.
From my July 2002 column Slap On The Wrist…
Imagine what would happen if the punishment for robbing a bank was modeled after what Eliot Spitzer is now expecting out of the major brokerage firms like Merrill Lynch. In the future all get-a-way vehicles must be at least 100 yards away from all banks. This is in order to give the overweight security guards an opportunity to catch the perpetrators. In an effort to remain fair, all would be bank robbers must now use only semi-automatic weapons. MACHINE GUNS ARE STRICKLY PROHIBITED. If caught 1/10th of 1% of money stolen must be taken to the state where said monies were taken, 50% of that will be shared among the remaining 49 states. Also, if caught the perpetrators must make a statement to the general public to help clear up damaged image. However, this does not mean admitting or denying wrongdoing.
My intuition leads me to believe that if this were the punishment for robbing a bank, we would have a new career choice here in America. I would think that the bank robbing arts would be a vocation taught in every high school around the country. The remedy that the New York State Attorney General Eliot Spitzer has proposed is equally as ridiculous and will lead to more criminal action.
Are you not ecstatic over the dramatic improvement in white-collar criminal prosecution over the past ten years?
What A Surprise
The powers that be are putting the finishing touches on their criminal investigation of the failed brokerage firm MF Global. Despite the fact that they made over a billion dollars of their customer’s funds take the trip to money heaven; nobody at the firm will face criminal charges. The ten-month investigation has led prosecutors to believe there is not enough evidence to charge any of the firms executives including CEO and former Democrat Governor/Senator/CEO of Goldman Sachs Jon Corzine with any fraud.
The firm went out and bought more than $6 billion worth of European debt, when the market turned against their moronic bet, the firm decided to take money (steal) from the supposedly segregated accounts from their clients in a blown attempt to save the firm. The regulators are saying incompetence is not fraudulent therefore not criminal. The reality of this situation is that a week-one entry-level employee at a brokerage firm knows that you DO NOT MINGLE CLIENT FUNDS WITH THE FIRMS FUNDS. One would think the former head of Goldman Sachs might also be aware of this fact. Corzine is connected at the highest levels of power and there is no way he is going down. Remember VP Joe Biden campaigning for Corzine saying that the first person he and Barack called when they won the election, seeking his advice was none other than Jon Corzine. On the bright side, if you are a Democrat, Corzine is currently hard at work bundling money for Obama and Democrat candidates around the country.
What do you do if you cannot find enough good collateral to back trillions of dollars in derivative trades?
Wall Street’s latest dive in putting the proverbial “lipstick on a pig” is about ready to yield some big numbers for the big firms. Bloomberg reported that JP Morgan and Bank of America are helping their clients conjure up capital to back $2.6 trillion in derivatives trades. I have a sinking suspicion that this is not going to end well.
New rules that are set to take effect next year, that are designed to help prevent another cascade meltdown effect that we dealt with in 2008, would force traders to post top-rated securities to guarantee their bets. I want to remind everyone that the derivatives market is estimated to be about $648 trillion in size. Due to the obscene size of the market, there are not enough top-rated assets in our solar system to back the trades. That won’t deter the big firms in keeping their ever so-profitable businesses of paper pushing and creating obscure assets out of thin air.
The firms are now allowing customers to swap lower rated securities that don’t meet standards in return for a loan of Treasuries or similar holdings that do qualify. Who cares about the repercussions of a collateral call, we have some money to make. This magical collateral transformation market will more than likely generate billions of dollars in fees. JP Morgan and Bank of America are already marketing their shiny brand new collateral-transformation desks. I should try this at Markowski Investments. I could take in baseball cards, Cabbage Patch Kids, Beanie Babies, Dot Com bust stock, Enron and Solyndra and declare that they are all worth billions. Abracadabra!
The Nuns of Sisters of Charity of Jesus and Mary and the Holy Faith Sisters have fallen victim to Morgan Stanley. Morgan Stanley felt the need to put complex bond products in the Sister’s portfolio. The suit filed against Morgan Stanley states that the investment product structured by the firm, handled the Nun’s mounting losses “carelessly,” causing them “substantial losses.” I have been covering rip offs and scams by the big brokerage firms for close to twenty years. We have reported on firms targeting and scamming senior citizens with Alzheimer’s, children’s college accounts, active military and veterans, and Main Street investors, but Nuns, I have to say is a first. I guess it is firm policy to not discriminate.
Greg Smith, the man who penned an op-ed/resignation letter from Goldman Sachs in the New York Times in March of 2012 has released his tell-all book Why I Left Goldman Sachs: A Wall Street Story. He recently appeared on 60 Minutes to discuss his claims that Goldman Sachs along with the other big investment firms are taking advantage of their clients to further their bottom line and bonuses.
“Clients that didn’t understand complex investments or how Goldman Sachs structured its fees are a boon to the company. Many of these clients include pension funds that put ordinary Americans’ retirement savings at risk when they invest with Goldman and other banks. Getting an unsophisticated client is the golden prize. The quickest way to make money on Wall Street is to take the most sophisticated product and try to sell it to the least sophisticated client.”
The book contains allegations that Goldman Sachs advises clients to make specific investments while at the same time Goldman bets against them. Smith worked in the London office of Goldman Sachs where clients were referred to as Muppets. The term is used as slang in England to describe someone as an idiot. One product that Smith discusses was an investment they called Clorox, but had nothing to do with getting your shirts whiter. The complex asset allocation product skims off $2-$3 million dollars at the outset of the trades. Their target Muppets for this so- called product, philanthropies and university endowments.
A side note to this story that was not the least bit surprising, was the speed and ferocity of the business press in the targeting and attempt to destroy the credibility of the whistleblower, Greg Smith. These media outlets are well aware of who butters their bread and will defend their advertisers to the very end.
Jaffe Chuck FINRA’s Fine Way To Do Business MarketWatch 5/1/12
Albergotti Reed & Rapport Elizabeth U.S. Not Seeking Goldman Charges Wall Street Journal 8/9/12
Durden Tyler On Wall Street Crime Pays A 350% IRR To Be Exact Zero Hedge 8/7/12
Markowski Christopher Slap On The Wrist Markowski Monthly 7/02
Bennett Dashell No One Will Be Charged With a Crime For MF Global Collapse Atlantic Monthly 8/17/12
Keoun Bradley Big Banks Hide Risk Transforming Collateral For Traders Bloomberg 9/10/12
Kelly Kate Morgan Stanley Defends Itself Against Nuns Lawsuit CNBC 8/10/10
Young Jeffrey Getting An Unsophisticated Client Is The Ultimate Prize Huffington Post 10/21/12
Editors Wall Street Is Eat What You Kill System CNBC 10/24/12
Zweig Jason Should Crimes of Capital Get Capital Punishment? Wall Street Journal 7/27/12