Congress is debating a huge overhaul in the multi-trillion dollar derivatives market.  Just eight years ago Warren Buffet lectured us on the evils and dangers of these finacial instruments:

“I view derivatives as time bombs, both for the parties that deal in them and the economic system. Basically these instruments call for money to change hands at some future date, with the amount to be determined by one or more reference items, such as interest rates, stock prices, or currency values. …In my view, derivatives are financial weapons of mass destruction, carrying dangers that, while now latent, are potentially lethal.”

Yesterday it was reported that Buffet has asked the Senate authors of the financial legislation to add a loophole for companies that currently have these “weapons” on their books:

“[Warren Buffett) Berkshire would like a provision to the [finance reform] bill ensuring that existing derivative contracts would not be affected by the proposed rules. Berkshire has $63 billion worth of derivatives on its books, according to Barclays Capital, The Journal reported.”

You can bet the Senators took his call.  Money talks.   Hypocrites.

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Goldman Sachs’ tentacles reach far and deep into the body politic.  It may have us in a death grip.  Do we dare strike at it?  Can we, the host organism, survive it’s extermination?  Good question.  Goldman is everywhere. 

A nation so addicted to debt as ours is a nation that can’t live without its ‘too big to fail’ banks.

The seriousness of this predicament hit me today as I read about its entry into the campaign for governor in California.  (See L.A. Times) .

A week ago it was reported that Meg Whitman, frontrunner for the republican nomination, has received $105,000 from Goldman Sachs.  A former director of Goldman Sachs herself, she resigned her postion when it became public that directors were handed sweetheart IPO (initial public offerings) deals during the dot.com bubble.

Through a spokeman, Ms. Whitman denies improprieties and promises to sell all her current investments in Goldman Sachs should she win the election.

The democratic frontrunner, Jerry Brown should be free from all of this crony capitalism, right?  Wrong. While he was mayor of Oakland, his sister was hired by Goldman Sachs as its western director of “municipal finance”.   Her hiring took place right after a highly lucrative (for Goldman) interest rate ‘swap’ deal was struck with Oakland. 

The crashing economy and falling interest rates turned the deal into a bust for the city, a bust that keeps on giving…to Goldman.  Oakland continues to pay Goldman $5 Mil a year.  Oakland is trying to “re-negotiate” the deal. 

Hundreds of cities across the country were lured into similar deals.  They also want out. 

Multiply this political race times the hundreds of other races throughout the country,not to mention the 2008 presidential race, and you have a democracy in crisis.

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At least now they have an excuse for missing the Madoff and Stanford scandals, not to mention all the other frauds committed by the banks and others leading up to the financial crash. The government employees charged with protecting us were busy with porn!

Congressman Darryl Issa of California was shocked and appalled, saying it was all “nothing short of disturbing that high-ranking officials within the SEC were spending more time looking at pornography than taking action to help stave off the events that brought our nation’s economy to the brink of collapse.”

The report of the Inspector General discovered the following:

- A senior attorney at the SEC’s Washington headquarters spent up to eight hours a day looking at and downloading pornography. When his government computer ran out of hard drive space, he burned the files to CDs or DVDs. He later agreed to resign.

- An accountant was blocked more than 16,000 times in a single month from visiting “sex” or “pornography” sites, but still managed to amass a collection of “very graphic” material by using Google to bypass the SEC’s internal filter. He wound up with a 2-week suspension.

- Seventeen of the randy employees were “at a senior level” earning salaries of up to $222,418.

- The number of cases jumped from two in 2007 to 16 in 2008. The cracks in the financial system emerged in mid-2007 and spread into full-blown panic by the fall of 2008.

Congress is now considering a new agency and set of regulations to ‘police’ the financial system to protect us from the next financial crisis. This porn scandal should give them pause.  It should give us pause as well, lest we invest too much faith in government’s ability to protect us from anything.

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Less than a week after being sued on civil fraud charges, Goldman Sachs reported a 90% increase in profits. Less than a year ago, they needed government bailout funds.  How do they do it?

We may never know all of their secrets. But the majority of their profits have come from gaming the markets, day after day.  Using strategically placed computers near the exchanges, allows them to capture micro-profits on billions and billions of dollars every day in “high frequency trading.”   Low interest rates, thanks to the government, allow them to borrow cheaply and finance this activity.  Trading profits represented 57% of their profits last quarter.

And after more than a year of investigation, the SEC files charges accusing Goldman with civil fraud relating to an arguable ‘misrepresentation’ in an obscure transaction between sophisticated investors over the packaging of subprime loan securities?  Come on!

It’s like the SEC wanted to simply pose as tough regulators while letting the politically connected bank completely off the hook for real crimes against the country.

It’s like they simply wanted Obama to have a hot headline to support his effort to pass landmark legislation giving the government more regulations and regulators to lord over the financial industry.   Of course, the current crop of regulations and regulators have performed stupendously, if you don’t count letting Bernie Madoff get away with his billion dollar ponzi scheme despite the clear warnings.

It’s like they wanted to divert attention from a scathing report released the same day lambasting the SEC for failing to stop the Allen Stanford billion dollar ponzi scheme, again after receiving several warnings over several years.

Goldman’s big crime, according to the SEC?   They may not have told professional investors and money managers that someone was betting against them.  Apparently, the investors should have been told there was someone out there who believed the housing market was due for a crash. 

Really, ladies and gentleman of the SEC, is this the best you can do?  Next time, go back to doing what you do best.  Nothing.

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From the “harder they fall” department, please take note of these widely known facts about Goldman Sachs:

“Since 1989, the company’s employees have contributed $31.6 million to federal political candidates, more than any financial firm, the nonpartisan Center for Responsive Politics said. About two-thirds of that money has gone to Democrats, including nearly $1 million to Obama during his 2008 presidential campaign, the company’s top recipient during that election cycle.”  (LA Times 4-17-10)

 “Democrats and Republicans have tapped former Goldman executives for key financial positions. Robert Rubin, a former Goldman co-chairman, served as Treasury secretary under President Clinton. Former Goldman Chief Executive Henry M. Paulson held the Treasury post under President George W. Bush from 2006 to 2009.”  (Los Angeles Times, 4-17-10)

Is it any wonder they’ve got away with gaming the financial system for so long?  Who is to say they won’t continue to get away with it?  They’ve only been charged now with civil fraud.  These cases end in fines and a few slaps on the wrist to a few scape-goated employees. 

If there is to be any justice, it will come in the endless lawsuits from its victims that will dog this company for years.  I thought I’d never say this:  Bring on the lawyers!     

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This criminal enterprise, better known as Goldman Sachs, has been charged with defrauding its own customers.  Surprised?  Not if you’ve been paying attention:  receiving billion dollar taxpayer bailouts and spending them on obscene bonuses, high frequency trading, political and policy influence peddling through campaign contributions and key ex-employees staffing the White House, Treasury and Federal Reserve. 

There is nothing this priviliged bastion of greed will not do in service of its higher purpose, and I don’t mean God’s work.

Here is the scheme du jour:  

“Washington, D.C., April 16, 2010 — The Securities and Exchange Commission today charged Goldman, Sachs & Co. and one of its vice presidents for defrauding investors by misstating and omitting key facts about a financial product tied to subprime mortgages as the U.S. housing market was beginning to falter.” (S.E.C. Press Release)

In sum, Goldman Sachs pitched and sold to its customers an investment that was designed to fail.  Goldman knew this because it helped design the investment for another customer, billionaire John Paulson, who made billions more when the investment in fact failed.

I’m pleased the S.E.C. is finally getting around to doing something, even this little thing.  Hopefully they are just warming up.  We can only hope.   

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The world’s 8th largest economy is considered a worse credit risk than Kazakhstan?  California’s treasurer is outraged by this news, and he fired off a letter to Goldman Sachs.  Agreed, this is hard to believe, except when you consider the facts:

“On paper, California’s debt of $85bn supported by 37m citizens and the world’s eighth largest economy looks more manageable than Kazakhstan’s nearly $100bn heaped on its poorer population of 16m. Go beyond headline figures though and Kazakhstan, with the world’s 11th largest oil reserves, an economy that grew more than 8 per cent annually from 2002 through 2007 and unemployment of just 6.7 per cent looks positively vibrant next to the Golden State’s joblessness of 12.4 per cent.”

“Meanwhile, Kazakhstan’s modest budget deficit and $25bn rainy day fund make it a paragon of fiscal virtue compared to a state forced to pay bills with IOUs last year and possibly again this summer. Unlike US states, Kazakhstan has its own currency and central bank. If it were to raise taxes or cut public services, wealthy Kazakhs could hardly defect to Kyrgyzstan the way Californians, already facing some of the highest levies and worst schools in the nation, might decamp to, say, Utah.”

“But such head-to-head comparisons do not even begin to spell out the relative woes of American states compared to many developing nations. In addition to their headline borrowings, equal to almost a quarter of national output, states and cities have made trillions more dollars in promises to current and future retirees….” (See Financial Times)

To begin climbing out of its seemingly bottomless pit of debt, California will have to get it’s citizens back to work.  It’s unemployment rate exceeds 12%, far above the national average. 

How does California now pay unemployment benefits?  Taking out more debt, of course.  California has borrowed $8.4 billion for this alone, which is more than any other state and more than the total budgets of a lot of states. 

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With various credits, exemptions and deductions handed out to lucky ‘taxpayers’, more and more Americans find themselves paying nothing in federal income taxes.  Yet we keep spending far more than we take in.  We need more rich people.  Fast. 

“About 47 percent will pay no federal income taxes at all for 2009. Either their incomes were too low, or they qualified for enough credits, deductions and exemptions to eliminate their liability. That’s according to projections by the Tax Policy Center, a Washington research organization.”  (Yahoo Finance 4-7-2010) 
  
My prediction:  Taxes are going up.  No doubt about it.  When America has it’s moment of truth and foreigners stop lending money, and we’re forced as a nation to live within our means, spending cuts and taxes will be on the table.  Unfortunately, we do not have enough rich people with enough money to even make a dent in that ever increasing $14 trillion dollar national debt. 

The half of America not paying taxes will no doubt vote to raise taxes…on everyone else.  Count on it.

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Trumpeted today by Obama and the financial media was the news that the economy created 162,000 new jobs in March.  Before jubilation overwhelms us, please consider the following:

Included in the 162,000 new jobs are 48,000 temporary census workers.  Further, the unemployment rate remained unchanged at 9.7% or 15 million. 

Also, the number of long-termed unemployed increased by 414,000 to reach a grand total of 6.5 million.  The number of persons working part time who want full time jobs increased from 8.3 million in January to 9.1 million in March.

Clearly, the 162,000 jobs are a ‘drop in the bucket’ considering we have lost 8 million jobs since the recession began in late 2007.  The 48,000 census workers hired in March, and all the other government jobs ‘created or saved’ by massive stimulus spending, are not proof of a vital, growing economy.  Quite the opposite.

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Applied Materials just sent its chief technology officer to Xi’in, China.  Permanently.  Check out the New York Times.   Applied Materials, a Silicon Valley technology company, is the largest supplier of equipment to make of semi-conductors, solar panels and flat panel displays.  President Obama and California Governor Schwarzenegger talk endlessly about high tech ‘green jobs’ pulling us out of our great recession. 

Why have so many jobs, even green jobs, gone to China?  Again, check out the New York Times.  Buried deep in the article is the reason: 

“Xi’an — a city about 600 miles southwest of Beijing known for the discovery nearby of 2,200-year-old terra cotta warriors — has 47 universities and other institutions of higher learning, churning out engineers with master’s degrees who can be hired for $730 a month.”

Yes, you read that right.  China is ‘churning’ out engineers with master’s degrees who will work for $730 a month.  No one can blame Applied Materials for moving its technology division to China.  How does America compete with $730 a month? 

In 1994, Sir James Goldsmith warned America and Europe against plunging into free trade deals with Asia.  He predicted that huge foreign labor pools, ready to work at a fraction of US wages, would overwelm western economies.  These workers would be irresistable to western corporations, who would outsource more and more of their manufacturing operations. 

In this 1994 clip from You-Tube, Sir James states the obvious:  American corporations can hire 45 workers in India for the same cost as one in the US.  Economists now have a term for this phenomenom:  “wage arbitrage”.

Clinton Adminstration economists scoffed at the notion that our great economy could ever be pinched by these impoverished, desperate economies. Today, China continues to prove them wrong.

The wizards of Wall Street and their Federal Reserve servants will never figure this one out.  Repos, Credit Default Swaps and ZIRP’s (Zero Interest Rate Policies) will not do the trick here.  The weight of billions of impoverished, desperate laborers will continue to pull jobs overseas.

America needs to downsize its expectations of empire and downsize its spending.  President Obama, do you have a better idea?  We could sure use a good speech about now.      

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