Goldman makes financial reform passage certain

April 16, 2010

— John Kemp is a Reuters columnist. The views expressed are his own —

It is now virtually certain financial reform legislation will go sailing through the Senate, following the complaint filed against Goldman Sachs  and an employee in the U.S. District Court for the Southern District of New York by the Securities and Exchange Commission this afternoon.

Filing a complaint is not the same as proving it. Goldman Sachs has already stated that “The SEC’s charges are completely unfounded in law and fact and we will vigorously contest them and defend the firm and its reputation”.

But in the current environment, no one in Washington, certainly not the 41 Republican senators who would all be needed to block the bill’s progress or force significant amendments, will want to go on record defending the big banks.

Industry lobbyists will have their hands full handling the fallout from today’s actions.

The unintended consequence of the complaint is that financial reform is now effectively through Congress.

The various versions should be reconciled in conference in time for the bill to land on the president’s desk sometime before the legislature adjourns for the mid-term elections.


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Posted by ajpetros | Report as abusive

Goldman makes financial reform passage certain.
As Lenin said the capitalist will sell you the rope to hang him with.

Posted by The1eyedman | Report as abusive

How about this.Subject: An Easily Understandable Explanation of Derivative Markets

An Easily Understandable Explanation of Derivative Markets

Heidi is the proprietor of a bar in Detroit . She realizes that virtually all of her customers are unemployed alcoholics and, as such, can no longer afford to patronize her bar. To solve this problem, she comes up with new marketing plan that allows her customers to drink now, but pay later.

She keeps track of the drinks consumed on a ledger (thereby granting the customers loans). Word gets around about Heidi ‘s “drink now, pay later” marketing strategy and, as a result, increasing numbers of customers flood into Heidi ‘s bar.
Soon she has the largest sales volume for any bar in Detroit .

By providing her customers freedom from immediate payment demands, Heidi gets no resistance when, at regular intervals, she substantially increases her prices for wine and beer, the most consumed beverages. Consequently, Heidi ‘s gross sales volume increases massively.

A young and dynamic vice-president at the local bank recognizes that these customer debts constitute valuable future assets and increases Heidi ‘s borrowing limit. He sees no reason for any undue concern, since he has the debts of the unemployed alcoholics as collateral.

At the bank’s corporate headquarters, expert traders transform these customer loans into DRINKBONDS, ALKIBONDS and PUKEBONDS. These securities are then bundled and traded on international security markets. Naive investors don’t really understand that the securities being sold to them as
AAA secured bonds are really the debts of unemployed alcoholics.

Nevertheless, the bond prices continuously climb, and the securities soon become the hottest-selling items for some of the nation’s leading brokerage houses.

One day, even though the bond prices are still climbing, a risk manager at the original local bank decides that the time has come to demand payment on the debts incurred by the drinkers at Heidi ‘s bar. He so informs Heidi .

Heidi then demands payment from her alcoholic patrons, but being unemployed alcoholics they cannot pay back their drinking debts. Since, Heidi cannot fulfill her loan obligations she is forced into bankruptcy.. The bar closes and the eleven employees lose their jobs.

Overnight, DRINKBONDS, ALKIBONDS and PUKEBONDS drop in price by 90%. The collapsed bond asset value destroys the banks liquidity and prevents it from issuing new loans, thus freezing credit and economic activity in the community.

The suppliers of Heidi ‘s bar had granted her generous payment extensions and had invested their firms’ pension funds in the various BOND securities. They find they are now faced with having to write off her bad debt and with losing over 90% of the presumed value of the bonds. Her wine supplier also claims bankruptcy, closing the doors on a family business that had endured for three generations, her beer supplier is taken over by a competitor, who immediately closes the local plant and lays off 150 workers.

Fortunately though, the bank, the brokerage houses and their respective executives are saved and bailed out by a multi-billion dollar no-strings attached cash infusion from the Government. The funds required for this bailout are obtained by new taxes levied on employed, middle-class, non-alcoholics.

Now, do you understand?

Posted by fred5407 | Report as abusive

While “filing a complaint is not the same as proving it”, it can be just as effective. Just ask Arthur Anderson.

Posted by bono-zoffa | Report as abusive

It’s been pointed out elsewhere that, should the whole financial re-regulation thing stall out, the Democrats might look at doing something dramatic to break the logjam. Certainly charging the vampire squid with fraud fills the bill. Seeing as this whole thing will drag out in the courts for years, it would allow the Democrats to pose as defenders of the little investor while painting the Republicans (who’ve opposed this financial regulation bill) as stooges of Wall Street. Obama wouldn’t do something like that, now would he?

Posted by Gotthardbahn | Report as abusive

The proper legislative response to this situation would be a bill with no riders attached, as clear and easy to comprehend as Goldman Sachs orgies are not.

Don’t tell me the will of the people can’t be done.

Posted by HBC | Report as abusive

Fred that Heidi story was entertaining but that’s not entirely what happened.

The part you’re missing is the synthetic part: while Heidi may have issued, through her bank, $100 in Pukebonds, the bank then issued Pukebond Default Swaps (PDS) to anyone that wanted them. Eventually there were 100 times as many PDS as there was the notional amount of the original Pukebonds. Because the PDS was much larger market than the puny $100 of Pukebonds originally issued, the spreads on the PDS became the barometer of Heidi’s Pukebond credit, not the Pukebonds themselves. In fact, while Heidi’s customers included a fair number of deadbeats, there were many who still held a job and could manage to make their payments (if just barely).

But that was a finely balanced, high wire credit act and when the PDS spreads started soaring, based on the leveraged bets of investors seeking to whip and drive the price of those PDS, it caused Heidi’s credit to dry up, the issuing bank to crash putting lots of people out of work and creating a panic.

If the only thing that had existed was Heidi’s Pukebonds, the only business to fail (or not) would have been Heidi’s pub; and it would have lived or died on the basis of its own creditworthiness and cashflow, not the highly leveraged bets of traders with absolutely no ownership whatsoever in Heidi’s Pukebonds. Heidi would have likely survived the downturn, and her investors too, or if they didn’t the loss would have been $100 total. But when you magnify by 100x that with synthetic securities the losers are everywhere in lots and lots of portfolios.

Posted by PapaDisco | Report as abusive

1eyedman, you see better than all the rest of us.

Posted by coyotle | Report as abusive

Nice, short, and highly sarcastic article, by a writer who specializes in energy and commodity markets, writing about politics and banks…..
Won’t happen. The GOP will block any and all necessary reforms, as they and those who support them, would lose their livelihood…
Won’t happen. Too much politics inside Government Sachs to allow anyone to dare to challenge their economic and financial clout and superiority.
Won’t happen. Lobbyists will never allow anything that cuts into their power to set the agenda for the US Congress.
Nice try at sarcasm Mr. Kemp… But it won’t happen.

Posted by edgyinchina | Report as abusive

is it a coincidence that a california health insurer increased its rates by 37% just as the healthcare debate was at a critical juncture?followed by sec investigating goldman (doing gods work)just as financial reform is entering a critical moment.the timing seems to change the narrative.

Posted by mortgage1phiri | Report as abusive

I want to see financial reform. But more importantly, I want to see all of the bad actors who manipulated the financial system for personal and corporate gains punished severely.

They should be tried for their crimes when appropriate, punished in non-country club prisons with sentences similar to Bernie Madoff’s sentence, and ALL of their assets should be stripped and applied to America’s national debt.

There should also be many who would meet the criteria for charges of treason.

Build a fire and make it so very, very hot that MBA students around the world learn to fear the flame.

Posted by breezinthru | Report as abusive