The Public Whippings of Goldman Sachs

The pillory or public whipping post went out of fashion in England and Europe by the 1830’s but non-public whippings, usually in prisons, occurred until the 1960’s in various jurisdictions including the US[see wikipedia for back-ground reference here]. However, the US has not abandoned Verbal Whippings in Congress. Congress has used its Congressional Hearings mechanisms to whip verbally and chastise publicly various targets stretching back to the Credit Mobilier case of post Civil War Reconstruction through the Teapot Dome scandal of the 1920’s to the more recent Army-McCarthy, Watergate, Iran Contra among others. But with decline of Congress to some of the lowest poll ratings in decades [only Wall Street,  law firms, and HMO’s have the same or lower ratings], action has to be taken. Hence the rise in Public Verbal Whippings by various Congressional Committees.


One can hypothesize a number of reason behind these  Congressional public floggings:
1)Uncover the truth behind the alleged misdeeds of the parties involved;
2)Galvanize political support for further Congressional actions against offending parties;
3)Embarrass the opposition party that does not prosecute the witnesses as profusely.
One only has to look at the recent Goldman Sachs hearings before Senator Levin’s financial investigation committee to see all three of the above points in operation. But I would like to add 2 more reasons for the current Congressional outrage against Goldman Sachs and by extension the top tier banks:
4)This is public humiliation and grovelling by some of the bankers instead of  and in lieu of real Congressional financial reforms and sanctions against the financial community. This bit of Kabuki Theater Playing is the price to be paid by some unlucky members of the financial community whose general gambling habits [all parties involved, not just Goldman Sachs] have brought the economy to the brink of economic disaster and  have inflicted  a tripling of effective unemployment, a doubling of the national debt as a percentage of GDP to 65%, and lost $5-7 trillion in national wealth. So the question of whether the bankers deserve some reprimand both in financial reforms and tougher regulations plus legal prosecutions and sanctions for financial malfeasance is not much in doubt. Which leads to –
5)Much of the Congressional Hearings actions by Congress, the Kabuki Theatre of Outrage at Financial Misdeeeds,  can be thought of as a defense mechanism called redirection, where the cause of the real problem, a whole segment of the financial industry  gets away with Economic Murder absolutely  Scott  and  nearly Reregulation Free while Congress and the President have to play their subordinate and subservient roles of pretending to care and doing something of substance for the country. And this reversal of roles comes about because most Members of Influence in Congress and the Presidents Office have been bought out  by the banksters. And so as proof of no hush money being paid,  Senators and Congressmen and Congress women get to shout outrage directly at those nastily rich Goldman Sachs-ers.However, there is a litany of market mavens that say Washington has indeed been bought out. None is more direct than Dow Jones/MarketWatch columnist Paul Farrel. Here is his observations:

So Congress enacts financial reforms. Big deal. Wall Street must be drunk on Dom Perignon, celebrating the huge paid-offs from their successful $400 million investment in “kill reform” lobbyists. And that GOP concession? Phony. Wall Street will reward them for the loopholes denuding Dodd’s financial reforms.

And even with all his rants about fat-cats, Obama wins. Expect Wall Street to spend another $400 million to keep Obama in office for a second term.”Change? Yes we can?” That’s funny today. Obama is now Wall Street’s best asset, their new Trojan Horse replacing Hank Paulson, a troika with Ben Bernanke, Tim Geithner. Wall Street always gets what it wants.

And you can bet they’ll cough up yet another $400 million keeping lawyers and lobbyists busy fighting SEC regulations, to make sure its back to business-as-usual with free-market Reaganomics capitalism. Spending $400 million is chump change compared to the hundreds of billions Wall Street gets cheap from the Treasury and Fed, by playing us taxpayers for suckers after screwing up the economy and triggering the 2008 meltdown.

Accept that Wall Street money calls the shots in Washington. Period!

Seriously, you stop fighting Wall Street. They won. Admit it. You join with Wall Street in spirit. You flow with this new reality, without being tortured by inner anger because it’s eating you up, worse than marching with the Tea Party. Acceptance works for the President, he’s obviously “at one” with Wall Street. Peace of mind is more important.

Besides, if you think about it, there’s nothing you can do about it. Voting out the bums? That’ll just increase gridlock. Wall Street loves gridlock, makes Washington even easier to manipulate. But if you’re one of the new enlightened investors you accept this new reality even if you’re certain Wall Street’s insatiable greed will eventually destroy America’s cherished democracy and capitalism (which it will).

Think this is too radical? Note the amounts just below for  just campaign financing contributions  – and these  figures do not include  all the  lobbying funds  while other   funding is disguised because payments by lawyers often have their origins in another industry. Also see what other financial pundits have to say.
1)Finance/Insurance/Real Estate Contributions 2008 election cycle: $477Million  for 2008, $117Million for 1Q 2010 so far
2)James Pethokoukis AFX-UK – Apr 28 no substantial difference between Republican and Democratic reform proposals, so why do the Republicans hold up reform other than to signal to their benefactors that they tried. Meanwhile  Republican Senator Corker’s Clawbacks are not part of GOP Financial Reform Proposal.
3)Gretchen Morgenson, NYTimes – Financial reform is gaining traction in Congress, but the leading proposals would create a system with big advantages for the largest banks.
4)Forbes – Given the importance of Wall Street  the window for financial reform is diminishing
5)Booman Tribune – why financial reform is faltering with new-found business opposition
6)The Economist – if the bill that passes ends up being an effective change to the regulatory environment, it will mainly be by accident.
7)Economix – Whose afraid of a Bank Tax?
8)Atlantic Council – Restore managers and stakeholder liability on derivative trading. Similar to Corkers Clawback amendment to get bankers skin in the game.
9)Washington Post – Want to save capitalism? Better regulate it.
10)Paul Krugman, NYTimes – Don’t cry for Wall Street
The tenor of these commentaries are something will be enacted; but don’t be surprised if a)its packed with loopholes and b)it doesn’t quite work as expected. Now partially, this is because Wall Street lobbyists don’t want it too. But also there is a great deal of difference among experts[again see proposals above for a small sampler of diverse views] in how to regulate Wall Street effectively. The constant criticism is that the regulations  in place from 2000 should have mitigated but regulators were asleep or handcuffed from doing anything [see 4) and 8) above].


So now given this sober, if not utterly resigned assessment by the financial mavens – the question is what to do. Well look for signs that reforms are actually being effectively implemented and overdue prosecutions are going forward. If they are not, then Paul Farrell is right – tokenism is the name of the game. Otherwise if there is real bite in the legislation and prosecutions, then maybe the Farrell view is too gloomy. Here is my top five list of signs that real reforms are being made. Look for the final financial reform legislation to have these features and the following prosecutions to move forward:
1)Get top financial institution managers, their board’s and their shareholders skins in the game –   Contingency capital in the form of publicly traded debt that has specific debt to equity ratio [and/or other risk measures] triggers which causes the debt to be converted into capital. This would dilute the value of existing shares and would act as clear signal that the institution is in danger and thus shareholder and clients would take note. Managers could easily game this by various share options schemes and immediate cashouts. So Corkers Clawbacks from financial institutions top managers and board members [SEC or Fed clawsback 90% of total compensation for the past 5 years from the point of a financial institution’s failure for  all  existing and  one-time managers in that period]. This should work like the Sarbannes Oxley provisions – with top managers total compensation on the line, accounting shennigans have declined sharply – ditto for the gambling ethos that permeates Wall Street now. A third skins-in the game mechanism, original lenders must retain 10% of the debt amount which cannot be covered by derivative and other write-off the books mechanisms. This reduces the “toxic acid” hot potato game that was and is still so prevalent in the current “money game”.
2)Eliminate Shadow Markets with substantial derivative reforms – Synthetic derivatives in which neither party has any exposure to the underlying financial securities [open financial gambling currently in the multi-trillions of dollars]would be prohibited. All remaining derivatives would have to be traded on open exchange[s] where all parties, terms and conditions for both parties would be available for public scrutiny. Every effort would be taken to make both of these provisions an international standard. International financial institution and any of their subsidiaries that do persist in trading synthetic derivatives or outside public derivative exchanges would be banned from all US and other cosigners financial  markets.
3)Reduce the too big to fail exposure – Institute  2 Bank Taxes. There would be two bank taxes. The TBTFT-Too Big ToFail Tax would be levied on all banks and financial institutions with total assets [including all subsidiaries] greater thaat amount to more than 4% of US GDP[thats all of the top ten banks in the US]. These monies would be used to first initiate the Resolution Trust Fund [whose assets would be devoted medium to small business loans] and then maintain it overtime. This is equivalent to the G20 IMF proposed FSC -Financial Security charge tax being proposed by the IMF to the G20 first ministers. The second bank tax should be the IMF FAT-Financial Actvities Tax which each country could target to their  most pressing financial needs
4)Eliminate Investment Banks access to the Fed Discount rate Window – this was a rushed provision of the TARP bailout that clearly then Treasury Secretary Hank Paulson as a former Goldman Sachs CEO should have but did not put an expiry date and limited access on. This was a mistake and the Fed Window should be closed as soon as possible to   Investment Banks.
5)Expand the Financial Bailout Prosecutions – There are  3 most trying cases. First is that  Goldman Sachs fraud charges are the tip of the iceberg – they could easily be applied to the other 7 major banks [especially their hastily attached subsidiaries as in the case of Household Finance and Washington Mutual]. Second, is the malfeasance on the part of the major credit rating agencies that left AAA ratings on junk toxic assets to the point that they were practically defaulting. How, when and why were such toxic ratings allowed to persist is the most pressing investigation of the these financial times. Third, Lehman Brother up to its moment of failure was able to transact some Balance Sheet funny business that has both grave accounting and financial implications if the misdeeds are allowed to go unprosecuted. Despite the defunct nature of Lehman, the parties involved should be brought to a reckoning to guarantee that such manipulations are not perpetrated again.


So watch these five financial reforms over the next few months. Add your own financial reforms. See which ones come to pass – and which are totally bypassed. Then decide if Paul Farrel is right – the Financial Hearings are just Kabuki Theater with a Whipping Boy.  Washington has been bought out  by the Financial Institutions. And remember SCOTUS has put its judicial seal of approval on these proceedings. After all the Supreme Court has deemed it right and proper that any amount of money can be used to “talk” to any politician.

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