 | | The Daily Reckoning | Wednesday, August 15, 2012 | |  |
- When Goldman can longer separate fools from their money...
- Dodging two bullets in one day...
- Plus, more on the Whiskey Rebellion and why it’s still important today...
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| | | Quote of the Day... | Don’t judge each day by the harvest you reap, but by the seeds that you plant.
— Robert Louis Stevenson
| | | Muppets Flee Manhattan | | Why Goldman Sachs May Have Trouble Maintaining its Business Model | | |  | | Eric Fry |
Reporting from Rancho Santana, Nicaragua...
“There’s nothing to see here, folks... Move along... Move along... Nuthin’ to see here... Just another little pile-up of victimless financial crimes.” That’s what the beat cops on Wall Street barked repeatedly last week just after the Justice Department and the SEC dropped their separate criminal investigations of Goldman Sachs.
Last Thursday, the Justice Department announced that it would not pursue criminal charges against Goldman Sachs or its employees over its “big short” on the housing market several years ago. Nevertheless, as Bloomberg’s Jonathan Weil observes, “the details of Goldman’s appalling behavior and role in the financial crisis will live on forever in the public record. The department’s investigation began last year after Senators Carl Levin of Michigan and Tom Coburn of Oklahoma, a Democrat and a Republican, released the findings of a two-year inquiry by the Senate Permanent Subcommittee on Investigations into Goldman’s sales and trading practices.
“At a press conference last year,” Weil continues, “Levin said he wanted prosecutors to examine whether Goldman violated the law by putting customers into disastrous mortgage bonds that it was shorting — without telling the customers about its short positions. Levin also said prosecutors should review whether Goldman officials who testified before the panel committed perjury, including Goldman’s chief executive, Lloyd Blankfein.”
The Justice Department took the bit in its mouth for a while, but spit it out last week, having “determined that, 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.”
Gosh that’s lucky! But here’s double-lucky: On the very same day that Justice dropped its case, Goldman announced that the SEC had decided to drop its case also.
“The SEC extracted a $550 million settlement from Goldman in 2010 over a deal called Abacus,” Weil explains “which had a prominent role in the Levin-Coburn report. It may have been perfectly legal for Goldman to sell doomed investment schemes of the bank’s own invention to Goldman customers, while its employees denigrated the same deals in e-mails to colleagues as ‘crap’ and other bad words we can’t use on a family website. The conduct was exposed, and Goldman’s slogan of putting customers first was debunked.”
Interestingly, Levin was not content to quietly accept the non- actions of the Justice Department and SEC. He responded in a statement:
Our investigation of the origins of the financial crisis revealed wrongdoing and failures among mortgage lenders, banking regulators, credit rating agencies and investment banks. One of those investment banks, Goldman Sachs, created complex securities that included ‘junk’ from its own inventory that it wanted to get rid of. It misled investors by claiming its interests in those securities were ‘aligned’ with theirs while at the same time it was betting heavily against those same securities, and therefore against its own clients, to its own substantial profit. Its actions did immense harm to its clients, and helped create the financial crisis that nearly plunged us into a second Great Depression. |
Wow!...It’s getting harder to hang a felony charge on a past or present Goldman exec than it is to hang panties on a porn star. The darn things just keep sliding off.
“Whether the decision by the Department of Justice is the product of weak laws or weak enforcement,” Weil concludes, “Goldman Sachs’ actions were deceptive and immoral.”
Remember, the Justice Department is one of the same government agencies that can’t bring itself to pose a single embarrassing question to John Corzine, former CEO of Goldman Sachs, former New Jersey Senator, former CEO of the fraudulently destroyed M.F. Global and perennial scumbag.
In particular, the Justice Department can’t bring itself to ask Corzine what happened to the $1.6 billion of customer funds that he (allegedly) “disappeared” while overseeing M.F. Global.
How embarrassing these charades of justice must be for President Obama! Here you’ve got Goldman Sachs, the largest contributor to President Obama’s 2008 election campaign — as well as the largest contributor the Democratic Party itself in 2008 — slipping charge after charge from federal agencies.
Coincidences like that might give folks the wrong idea...like the idea that American Justice sometimes peeks through her blindfold.
Better for outward appearances if the Justice Department had impounded Goldman CEO, Lloyd Blankfein’s car for parking at an expired meter and then dropped its investigation...and better for appearances if the SEC had fined Goldman $100,000 for omitting a comma in a regulatory filing and then dropped its case. But that’s not what happened.
Such a shame. Folks can be so judgmental. [For the record, Goldman Sachs has become a major supporter of the Republican Party. Based on campaign contributions-to-date, Goldman employees have tossed nearly $5 million to Republican campaign efforts — that’s tops among contributors from private companies. Perhaps Goldman senses a change in the wind and wishes to sail with it, rather than into it].
Poetically, even though the Justice Department and the SEC can’t find any wrists to slap at Goldman Sachs, the financial markets are finding plenty. Goldman’s trading revenues are falling even faster than its reputation, especially proprietary trading revenues — the high-octane fuel that has long-powered Goldman’s profitability.
Goldman’s prop trading profit plummeted 80% in the second quarter of 2012, continuing a multi-quarter trend of mostly dismal trading results. Since trading profits often account for one- to two-thirds of Goldman’s overall profit, the company would miss them if they took a sabbatical.
What’s that saying? You can fool some of the people some of the time [and you might even be able to fool some of the people all of the time], but you certainly can’t fool all of the people all the time.
Just maybe, Team Goldman is struggling to find enough folks to fool — “Muppets,” I believe, is Goldman’s technical term for these individuals — to keep their “business model” thriving.
The same could be said of the Federal Reserve’s monetary policy, relying as it does on the gullibility of the Muppetinvestoriat. The Fed’s policies succeed only to the extent that the masses trust them. But if the Fed loses the faith of the masses, it loses everything...including its power over the currency it purports to “control.”
Faith in the Fed — and in central banking generally — may not yet have slipped into a genuine bear market, but as Jim Grant often asserts, the bull market has ended.
If Grant is correct, therefore, we Muppets may want to begin pledging our allegiances to assets that Goldman Sachs cannot manipulate and that the Federal Reserve does not “control.”
The list of such assets is very short...and most of them glisten in direct sunlight.
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| | The Daily Reckoning Presents | | The Whiskey Rebellion, Part II: Enforcing the Wealth Tax | | |  | | Byron King |
To enforce the whiskey tax, the federal government, then seated in Philadelphia, appointed tax collectors in every region of the country. Aside from a small stipend, the tax collectors’ pay was based on commission, calculated against the total amount of tax collected.
Thus, for the most part, when the tax collectors commenced their rounds, riding along the roads and trails of the western frontier to levy tax notices on settlers and their stills, they met the usual resentment that tax collectors have encountered since time immemorial.
Tax collectors were often threatened, shot at, beaten up, robbed, or even tarred and feathered. On occasion, the tax collector returned to his homestead and found instead a smoldering ruin. The job of the whiskey tax collector was, to say the least, dangerous and thankless. As a consequence, federal tax collections on whiskey were minimal.
When the whiskey taxes were not paid after collector’s levy, federal marshals were instructed to issue writs of citation against still owners. In Pennsylvania, these writs were answerable within 30 days at the federal court in Philadelphia. For a resident of western Pennsylvania at that time, traveling 280 miles or more to Philadelphia would have required a 10-day ride across difficult, mountainous terrain in the best of circumstances. (On today’s Pennsylvania Turnpike, things have improved marginally.)
Due to the difficulty and expense of travel, most federal tax writs went unanswered. Thus the federal court in Philadelphia issued numerous contempt citations against individuals, as well as executions against their stills and other property. The contempt citations often led to citizens being jailed, their property being seized and sold (as often as not, to some out-of-town, swindling, East Coast speculator...), and evictions from their homes, all by federal authorities and in the name of the government of the United States.
Thus, it is difficult to overstate the sense of unfairness, the resentment, and the bitterness that many frontier dwellers felt towards the new government. Within a very short time, it was costing the federal government more to administer the whiskey tax than the government was receiving in revenue. Even worse than the shortfall of revenue, however, was the failure of the new federal government to demonstrate its ability to enforce its tax laws.
This was widely perceived, both domestically and abroad, as the beginning of the end of the Constitutional experiment. A number of influential people in western Pennsylvania began to advocate secession from the Commonwealth, as well as from the new federal republic. They proposed to set up a state called “Westsylvania.” Some of the more zealous secession advocates made contact with emissaries from Britain regarding creation of an association with Canada. Others made contact with agents of France, regarding setting up a relationship with that nation’s vast and mostly uncharted Louisiana holdings that included a significant presence in the Ohio Valley.
When word of this seditious talk reached President George Washington, he was appalled. In the spring of 1794, President Washington appointed a man named John Neville as federal tax collector for western Pennsylvania. Neville was a former Revolutionary War general and a close acquaintance of Washington’s. Neville set up his tax office at his family’s farm, just south of Pittsburgh.
On July 15, 1794, a group of local residents gathered at Neville’s house to protest the seizure of a neighbor’s property for unpaid whiskey tax. They demanded Neville’s resignation, and also that he turn over his tax records to be burned. Neville’s home was guarded by a unit of federal marshals. After a period of standoff, one of the farmers began to approach Neville’s house under a white flag of truce, and he was shot and killed, presumably by one of the marshals.
Word of the killing rapidly spread, and on July 17, a group of local militia mustered, marched on Neville’s house, and burned it to the ground. Their intent was to deliver some frontier justice to Neville and his “murdering marshals.” Neville and his entourage fled to Old Saint Luke’s Church, on the site of an old British garrison dating back to the days of the French & Indian War, where the pastor offered them sanctuary until the pursuing militia dispersed.
President Washington was outraged at what he considered a personal insult to his old friend and war comrade Neville. Washington and Treasury Secretary Hamilton decided that they had to make an example of these “western insurrectionists.” Washington referred to the burning of Neville’s farm as a “rogue, unprincipled challenge to authority” and resolved to crack down and bring discipline “to the lower classes of western Pennsylvania.”
The area was already well known to Washington from his younger days as a surveyor and from fighting for the British side in the region during the French & Indian War. Also, there was at least a reasonably good road on which troops could march from Philadelphia to Pittsburgh.
The American Army of 1794 hardly merited the name. It had dwindled to a few hundred older veterans of the Revolutionary War, with outdated equipment and next to no supplies on hand. Washington was faced with the need to call out the militia if he was going to impose the federal will on the rebels of western Pennsylvania. Not trusting the reliability of Pennsylvanians, most of the militia called to muster were from Virginia and New Jersey.
The Secretary of War was away on family business in Maine, so it fell to Hamilton to organize the expedition. Hamilton, whose tax policies had precipitated the matter, was desperate for success and viewed the confrontation with the whiskey rebels as his personal struggle to stop America from sliding into anarchy and ruin.
President Washington actually led his army of 13,000 troops as they marched west from Philadelphia in August of 1794, the only time in American history that a president has actually served in the role of “commander in chief” in the field. The trek across Pennsylvania took the better part of a month, and many a hotel and tavern was thereafter able to place a sign on the door that “George Washington Slept Here.”
The ill-discipline, lack of proper equipment, and general lack of military professionalism in the ranks of the militia troops appalled both Washington and Hamilton, the latter a former artillery officer under Washington during the Revolution.
To be continued...
Regards,
Byron King,
for The Daily Reckoning
Joel’s Note: This article was originally published in the inimitable Whiskey & Gunpowder newsletter back in 2004. As we mentioned in yesterday’s issue, Whiskey, Agora Financial’s “rough and tumble” idea crucible, is joining forces with Laissez-Faire Books this coming Monday.
To be absolutely clear, the Whiskey name isn’t going anywhere. Nor is the website. Nor is the indomitable spirit of Whiskey.
The idea behind this “free-market marriage” is to combine the refined, intellectual sensibilities of Laissez-Faire Books with the bare-knuckled, editorial gumption ofWhiskey. The team is excited and looking forward to fulfilling all your “Salon-meets-Saloon” liberty-minded needs.
So, what does this all mean?
If you’re an existing Whiskey reader, you don’t need to do a thing. Your Laissez-Faire Today subscription, and all the goodies that entails, will begin automatically next Monday.
If you are not an LF Today or Whiskey reader, we invite you to either sign up for LF Today (it’s free at) Lfb.org...or proceed directly to Club membership, here.
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Here at The Daily Reckoning, we value your questions and comments. If you would like to send us a few thoughts of your own, please address them to your managing editor atjoel@dailyreckoning.com
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