Goldman 101: What's going on?
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Annalyn Censky
CNNMoney.com
In a 22-page complaint filed Friday, the Securities and Exchange Commission charged Goldman Sachs with defrauding investors on real estate securities likely to go bust.
The legal document reads less like a court filing, and more like a twisted story of how actions by Wall Street's most notorious investment bank allegedly caused losses of $1 billion for investors.
Here's what it said:
The opportunity: real estate bubble
In late 2006 and early 2007, when the United States housing market is beginning to show signs of distress, hedge fund Paulson & Co. takes a "bearish view on subprime mortgage loans," according to the SEC complaint.
The fund - run by John Paulson - identifies more than 100 bonds with the lowest credit ratings, which are likely to experience defaults. Paulson cherry-picks these bonds by favoring adjustable rate mortgages, borrowers with low credit scores, and mortgages in states like Arizona, California, Florida and Nevada, where the real estate bubble hit the hardest.
Financial Dispatch: Banks – Laughing all the way to the....
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Jennifer Rizzo
Assignment Editor
CNN New York
Earnings season heats up this week with Citigroup powering past analyst expectations for the first quarter. The major banking firm reported net earnings of $4.4 billion, the highest income its reported since second quarter 2007. The results for the bank, one of the hardest hit institutions in the financial crisis, suggest that the firm may finally be recovering.
The latest numbers from Citi and other top banks, including Bank of America and JPMorgan Chase, have far beat industry analyst expectations, due in large part to strong performances from their trading divisions. Several other key banks are due to report this week, including Goldman Sachs on Tuesday.
Investors have their eye on Goldman Sachs, but not just for its earnings report due out tomorrow morning. Two members of Congress called for an investigation into the bank’s role in the mortgage market collapse on Sunday. The Securities and Exchange Commission accused Goldman Sachs of fraud related to the sub-prime mortgage collapse in a civil lawsuit on Friday. The news sent stocks tumbling. Shares of Goldman Sachs plunged nearly 13 percent. JPMorgan Chase and Bank of America both lost about 5 percent. And more backlash from Europe. Britain’s Prime Minister, Gordon Brown, accused the investment bank of “moral bankruptcy”, echoing calls for an investigation. Germany also said it was considering legal action against the bank.
Financial Reform: Far from a done deal in Congress
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Michael Grunwald
Time
It's funny how fast the Beltway consensus can change. A few months ago, health care reform was dead. Then it got undead. Financial regulatory reform was supposedly dead too, but now that Republicans have supposedly learned that pure obstructionism is a losing play, it's being treated as a done deal. Democrats like Obama's economic adviser Larry Summers and Senate Banking Committee chairman Christopher Dodd are saying it's going to pass, perhaps as early as next month. So are key Republicans like Senator Judd Gregg of New Hampshire, who recently put the odds of passage at "100%."
Let's just say that seems high.
Excerpt: Too Big To Fail
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Editor's Note: A financial crisis inquiry commission held its second day of hearings today to investigate the cause of the financial crisis. Former Citigroup executives are testifying today. Tonight at 10 p.m. ET Anderson talks to Andrew Ross Sorkin, author of a book on the financial crisis, ‘Too Big Too Fail,’ about what happened, who knew what and who’s ultimately responsible for the near-collapse of the financial industry.
PROLOGUE
Standing in the kitchen of his Park Avenue apartment, Jamie Dimon poured himself a cup of coffee, hoping it might ease his headache. He was recovering from a slight hangover, but his head really hurt for a different reason: He knew too much.
It was just past 7:00 a.m. on the morning of Saturday, September 13, 2008. Dimon, the chief executive of JP Morgan Chase, the nation’s third largest bank, had spent part of the prior evening at an emergency, all-hands-on-deck meeting at the Federal Reserve Bank of New York with a dozen of his rival Wall Street CEOs. Their assignment was to come up with a plan to save Lehman Brothers, the nation’s fourth-largest investment bank—or risk the collateral damage that might ensue in the markets.
To Dimon it was a terrifying predicament that caused his mind to spin as he rushed home afterward. He was already more than two hours late for a dinner party that his wife, Judy, was hosting. He was embarrassed by his delay because the dinner was for the parents of their daughter’s boyfriend, whom he was meeting for the first time.
“Honestly, I’m never this late,” he offered, hoping to elicit some sympathy.
Trying to avoid saying more than he should, still he dropped some hints about what had happened at the meeting. “You know, I am not lying about how serious this situation is,” Dimon told his slightly alarmed guests as he mixed himself a martini. “You’re going to read about it tomorrow in the papers.”
'Too Big To Fail': Still a Problem Too Big to Solve?
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Stephen Gandel
Time
Too big to fail, it appears, may be too big to solve.
Connecticut Senator Christopher Dodd's recently proposed financial reform bill creates a team of regulators with the authority to shut down troubled institutions. It calls for capital and liquidity requirements. It requires banks to fund a $50 billion bailout fund, as well as draft so-called living wills — detailed plans drawn up in advance of how the firms should be shut down if they run into trouble.
Yet, policy experts and economists from both ends of the political spectrum say the bill does little to end the problem of banks becoming so big that the government is forced to bail them out when they stumble. Some say the proposed financial reform may even make the problem worse.
Now to explain the party favors
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Andrew Ross Sorkin
New York Times
On Thursday, two of the biggest — and among the most tarnished — names on Wall Street will testify in front of the Financial Crisis Inquiry Commission in Washington: Charles O. Prince III, the former chairman and chief executive of Citigroup, and Robert E. Rubin, a former top adviser and director of the bank. On the watch of these men, Citigroup lost more money than almost any company in history, requiring an extraordinary government bailout.
There are, of course, many important questions for the commissioners to ask these men about how and why the bank filled its balance sheet with so many bad subprime loans, taking on enough risk to nearly topple the system.
But there is one small question, not so obvious, that has been crying out for an answer for years, and it has nothing to do with exoticisms like C.D.O.’s or C.D.S.’s. Instead, this question is about incentives and compensation on Wall Street and a mind-set — a group-think really — that pervaded not just Citigroup but the entire industry.
Excerpt: 'The Big Short: Inside the Doomsday Machine'
Program Note: Don't miss Anderson's conversation with Michael Lewis tonight on AC360° at 10 p.m. ET.
Michael Lewis
The Big Short: Inside the Doomsday Machine
Chapter One: A Secret Origin Story
Eisman entered finance about the time I exited it. He’d grown up in New York City, gone to yeshiva schools, graduated from the University of Pennsylvania magna cum laude, and then with honors from Harvard Law School. In 1991 he was a thirty-year-old corporate lawyer wondering why he ever thought he’d enjoy being a lawyer. “I hated it,” he says. “I hated being a lawyer. My parents worked as brokers at Oppenheimer securities. They managed to finagle me a job. It’s not pretty but that’s what happened.”
Oppenheimer was among the last of the old-fashioned Wall Street partnerships and survived on the scraps left behind by Goldman Sachs and Morgan Stanley. It felt less like a corporation than a family business. Lillian and Elliot Eisman had been giving financial advice to individual investors on behalf of Oppenheimer since the early 1960s. (Lillian had created their brokerage business inside of Oppenheimer, and Elliot, who had started out as a criminal attorney, had joined her after being spooked once too often by midlevel Mafia clients.) Beloved and respected by colleagues and clients alike, they could hire whomever they pleased. Before rescuing their son from his legal career they’d installed his old nanny on the Oppenheimer trading floor. On his way to reporting to his mother and father, Eisman passed the woman who had once changed his diapers. Oppenheimer had a nepotism rule, however; if Lillian and Elliot wanted to hire their son, they had to pay his salary for the first year, while others determined if he was worth paying at all.
Financial Dispatch: Clear as mud
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caption="In February, President Obama unveiled the Hardest Hit Fund, which pumped $1.5 billion into state housing agencies."]
Andrew Torgan
CNN Financial News Producer
In the words of every crabby kid wedged in the backseat of a station wagon between a suitcase and his little sister, “Are we there yet?”
Bad news buddy… Dad’s lost and the GPS is busted.
Wall Street this week is a study in hits, misses and rare twists in timing. Readings on income and spending, consumer confidence, housing and a spate of job reports dot the economic calendar, but a clear picture of the economy has yet to emerge.
Consumer confidence, for example, bounced back sharply this month – but only to a level that shows people are just less pessimistic about the economy and the job market.
Those numbers came on the heels of a separate report showing personal spending rose for a fifth straight month in February. As consumer spending accounts for two-thirds of U.S. economic activity, this should be good news, right? Yes, but the increase was so small (0.3%) that’s it’s hardly worth celebrating.
Then we got the latest snapshot of the housing market, which essentially dashed any hopes for a sustained early recovery.
After a five-month run-up in home prices starting last spring, prices have now fallen for four consecutive months, according to the S&P/Case-Shiller Home Price Index. Prices in January were down 0.4% compared with December and have fallen 0.7% from a year ago.
And today, the first of several employment reports hit the wires.
Payroll-processing firm ADP said private-sector employers cut payrolls by 23,000 jobs in March. That was far less than the gain of 40,000 jobs that was expected - although it was the smallest monthly decline since February 2008.
This comes just two days ahead of the government’s official jobs report for March, which is due out Friday morning. The expectation there is for a gain of about 190.000 jobs, which would be the biggest gain in three years.
Friday is also Good Friday and the stock market will be closed, so investors will have to wait until the opening bell Monday to react to the Labor Department’s numbers.
Housing aid on the way for 5 more states
Five more states will receive federal funding to help troubled homeowners avoid foreclosure, the White House announced earlier this week.
Last month, President Obama unveiled the Hardest Hit Fund, which pumped $1.5 billion into state housing agencies in California, Arizona, Florida, Nevada and Michigan. These five were originally identified because they had been hardest hit by the housing bust, with prices declining more than 20%.
Now, an additional $600 million is being doled out to the five states that have the largest number of counties suffering unemployment rates above 12%: North Carolina, Ohio, Oregon, Rhode Island and South Carolina.
The program, which is funded with money from the TARP bank bailout, allows each of the states' agencies to propose foreclosure solutions that address local conditions.
You owe the IRS 99 days of hard work
This year, it's going to take the average American 99 days to earn enough money to pay the IRS. That's one day longer than last year.
"Tax Freedom Day" marks the date that most Americans have earned enough money to pay their federal, state and local taxes, and this year that day arrives on April 9, according to the Tax Foundation's annual calculation, which is based on government tax and income data.
Tax Freedom Day arriving one day later than it did last year means most Americans will have to work that much harder - for more than three months - just to pay their 2010 taxes.
Follow the money… on Twitter: @AndrewTorganCNN
Financial Dispatch: Fed holds the line
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Andrew Torgan
CNN Financial News Producer
The Federal Reserve today held its key interest rate steady at near 0% and said rates should stay this low for the foreseeable future.
Central bank policymakers repeated their prediction that economic conditions are likely to result in “exceptionally low levels of the federal funds rate for an extended period.” That promise of an easy-money policy has been in place since March 2009.
It was not a unanimous decision, however, as Kansas City Fed President Thomas Hoenig voted against keeping this language in place for the second straight meeting. He and some Fed critics worry that the central bank could be creating new bubbles in financial markets by keeping rates so low.
Read the Fed’s statement here.
Housing starts drop
Construction of new homes and applications for building permits fell in February, but both readings beat economists' expectations.
Housing starts dropped nearly 6%, but remember that snow storms pounded much of the East Coast last month, putting a damper on new construction projects. And building permits, which are considered a good barometer of future building activity, fell 1.6%.
Mexican mogul Slim beats Gates as world's richest person
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Jason Kessler
CNN
Forbes magazine released its annual list of the world's richest people Wednesday, and for only the second time since 1995, Microsoft founder Bill Gates' name was not at the top.
This year, the title of "World's Richest" went to Mexican telecom mogul Carlos Slim, with a net worth of $53.5 billion.
Slim, whose holding company America Movil contains a sprawling collection of telecom assets, is the first non-American to be declared Forbes' richest person since 1994, when Japanese real estate kingpin Yoshiaki Tsutsumi held that honor. (He has since disappeared from the list entirely).
But Slim's financial edge over Gates is, well, slim, at least by billionaire standards - just $500 million. A $1 increase in Microsoft shares, the compilers of the Forbes list noted at a press conference Wednesday, could send Gates' net worth ahead of Slim's.
Also, were it not for his extensive philanthropy, Gates would have a net worth in the ballpark of $80 billion, Forbes' Matthew Miller estimated.
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