Goldman’s Cayman casino Pt.2


Greg Gordon: Will the Financial Crisis inquiry Commission ask the real questions?

Story Transcript

PAUL JAY, SENIOR EDITOR, TRNN: Welcome back to The Real News Network. I’m Paul Jay in Washington, DC, and joining us again is Greg Gordon. He is an investigative journalist for the Washington bureau of McClatchy Newspapers. Thanks for joining us again.

GORDON: My pleasure.

JAY: Let’s pick up from segment one. We are trying to understand Goldman Sachs’s deals in the Cayman Islands. And just let me recap really quickly. You describe one deal for $1 billion, where you have Goldman, for $280 million, puts together a bunch of mortgages, subprime mortgages, and puts them in a package which people can buy into as a sort of—sharing the risk in buying into the—buying the mortgage return, in theory. And then $780 million of that billion goes in a straight gamble on whether another package, fictitious package, really, that Goldman picks, they can bet does it go up or down, and Goldman pays them $100,000 a month if it stays up, and if it crashes they owe Goldman $720 million.

GORDON: It was more like $100,000 a year.

JAY: A year?

GORDON: A year. It was generally less than 1 percent.

JAY: Then it makes no sense to me. Why does a Merrill Lynch do something like this, or pension fund managers? These are not dummies.

GORDON: The word I’ve gotten so far is not too many pension funds were doing this, but we’re not going to know until we see, if we ever do, who these investors were. I would say two things. One, a lot of the decision-making was hinged around the fact that US housing prices had gone pretty much in one direction for about a half a century, and that is up. And so there was a—sort of placating concerns about housing: don’t worry if the mortgage goes bad; you’ll be able to—.

JAY: But these guys are already buying insurance at AIG, waiting for the market to go south, so they all know sooner or later it’s going to crash.

GORDON: Well, I’m not sure that—I think what you’re talking about is sort of simultaneous with when these deals were being done. They might have been buying insurance on the very same stuff that they were covering the bets on, so that they were basically an intermediary collecting a fee, and maybe in the Cayman deal they got $100,000 a year in premiums for that bet, but they only paid the big insurer, American International Group, $80,000 or $70,000 for this. I think it was eight basis points—well, eight basis points, to make it simple, is less than 1 percent; it’s 0.8 percent.

JAY: That Goldman’s paying.

GORDON: That anybody, any of these banks, would be paying to the insurer, AIG. The market rate, apparently, was around 0.8 percent to cover a large amount of money. And AIG made the bonehead play of the decade, or the century, because AIG did not backstop itself. It did not take any of the protections that it wrote and turn around and hedge itself or buy protection itself on some of that so that it could reduce its own risk—and it took massive amounts of risk. Basically, $80 billion in these credit default swaps or these bets in the Cayman Islands were protected by AIG contracts.

JAY: So what you have, probably, is what Jim Crotty, a professor we interviewed a few days ago, says is "structural blackmail". They kind of all know that eventually, when it hits the fan, the government’s going to have to step in or the whole thing’s going to unravel.

GORDON: That’s one theory.

JAY: They’re essentially all gambling on that.

GORDON: That’s one theory. So Goldman was secretly betting in the Cayman Islands that the US housing market was going to turn south. But at the very same time, in 2006 and 2007, it was selling US-registered securities backed by risky mortgages, worth more than $40 billion, and it was not telling the investors that it was trying to coax into buy those securities that it was betting the other way secretly, and the Caymans were one of the platforms for doing that.

JAY: In your article you quote a financial expert, Janet Tavakoli in Chicago, who says that what was going on in the Cayman Islands has all the elements of a Ponzi scheme. Well, Ponzi schemes are supposedly illegal. Bernie Madoff, you know, went to jail because of a Ponzi scheme. Why isn’t all of this criminal?

GORDON: Well, we’re going to find out whether any of it’s criminal. There’s a lot less reach for US law enforcement agencies, such as the Securities and Exchange Commission and the Justice Department, when your deal is in the Cayman Islands and a lot of the investors that you’re trying to coax into buying your securities are in Europe or elsewhere. But there are, under the 1933 or 1934 Securities Act, US Securities Act, there are antifraud statutes that do give the Securities and Exchange Commission some ability to investigate this stuff. So we’ll have to see whether they go anywhere with it, number one. And number two, of course, all criminal law is based on intent and proving intent, and that’s a little trickier. But one of the big issues here is: were the people who were packaging these deals, were they even paying very much attention to all the risk that they were creating in the system, which all came crashing down and caused our global financial crisis? Because every time they did a deal, the investment bank got more fees and they got more bonuses.

JAY: So coming up in the next few days there’s going to be an inquiry. I think it’s called the Financial Crisis Inquiry Commission, set up by Congress. What are they going to look into? And is it possible that they will actually find that some of this was criminal?

GORDON: Well, this would be a very big—the Financial Crisis Inquiry Commission has got basically a mandate of about a year, I think, to investigate what went wrong, what caused the financial meltdown, and maybe make some recommendations to try to avoid a recurrence. And they’re going to have a host of witnesses from—starting with none other than Lloyd Blankfein, the chairman and CEO of Goldman Sachs, but also the chiefs of JPMorgan, Morgan Stanley, and Bank of America will be the leadoff witnesses. So it’s going to start off with a bang. But they’re going to look at not just Wall Street’s role in this meltdown but all the way down to, I gather, the mortgage companies that were submitting fraudulent loans.

JAY: And if you were sitting on the inquiry and you got to ask the first few questions to Goldman Sachs, what would you say?

GORDON: Well, I would want to know a lot about these credit default swaps that Goldman Sachs was arranging in the Cayman Islands, and I would want to know about these secret bets and how any major Wall Street bank could be betting one way on the housing market over here, and over here be selling securities that were tied to the success of the housing market, and I would want to try and pin that down. So we’ll have to see where they go with these questions.

JAY: And, as I said, in your article your expert says this is a Ponzi scheme. And Ponzi schemes are illegal. So I guess we’re going to have to see whether this inquiry really goes after this with some vigor.

GORDON: To be fair, Janet Tavakoli, when she talks about a Ponzi scheme, was talking about a lot of different kinds of deals, and these get very complicated. These instruments in the Cayman Islands were called CDOs, which stands for collateralized debt obligations. But there came to be a deal called a CDO-squared, and there were all kinds of different sort of variations of these CDOs.

JAY: That’s part of the scheme, to make them complicated, isn’t it?

GORDON: Well, one could argue that. One could argue that, you know, the more arrows that are in the deal, the harder it is for an investor to decipher exactly what’s there. But what they were doing was, you know, creative investment banking, to say the least, and whether this crossed the lines was a good question. Whether this crossed legal lines and there’ll be some accountability will have to remain—we’ll have to watch and see. This commission is mostly going to make recommendations. It just does not have the time and the manpower to do a full-scale investigation of all of the elements of what hit the global economy.

JAY: Well, it will be interesting to see whether at the very least, for public opinion, expose what really went on, or if all the emphasis is one year of kind of gobbledygook, at the end of which maybe there’ll be some talk about new regulations [which] then can get watered down in the Senate. So—.

GORDON: This is just their first hearings, though, and this’ll go on, and they have until December 15 of this year to finish their work. So it’ll be interesting to see how far they get.

JAY: Well, let’s revisit this after they’ve had the first few days of hearings.


JAY: Thanks for joining us.

GORDON: My pleasure.

JAY: And thank you for joining us on The Real News Network.