Barry Rotholtz at
The Big Picture has a
great find today, a McClatchy
article by Greg Gordon, published December 30. From the Gordon article:
McClatchy has obtained previously undisclosed documents that provide a closer look at the shadowy $1.3 trillion market since 2002 for complex offshore deals, which Chicago financial consultant and frequent Goldman Sachs critic Janet Tavakoli said at times met “every definition of a Ponzi scheme.”
Another astounding statement from the article is:
In some of these transactions, investors not only bought shaky securities backed by residential mortgages, but also took on the role of insurers by agreeing to pay Goldman and others massive sums if risky home loans nose-dived in value — as Goldman was effectively betting they would.
If these statements are true, then it seems to me that criminal action is called for in the first case, since Ponzi schemes are illegal (unless perpetrated by governments that can print money).
And if criminal action has not occurred in the second case, laws are deficient. It is inconceivable to me that a situation should exist where an investment is sold that could legally require the investor to pay more money if the investment declined in value. The only situation that I can see where that could be legitimate would be if the investment was sold on margin. Then a decline in value could trigger a margin call. However, if that was the case (margin call), then McClatchy would be guilty of gross misrepresentation of facts and, I would think, liable for slander unless a retraction was issued.
Another
piece by Ritholtz carries a video in which former U.S. Senator, New Jersey Governor and Goldman Sachs executive John Corzine says that the unpopularity of Goldman Sachs is a matter of envy. When paired with McClatchy article, the opinion seems ludicrous.
All this brings me to the
March Investment Outlook newsletter from Bill Gross of PIMCO. He raises the question of whether added debt can solve a debt crisis. He has some thoughts about when this might be a viable strategy and when not. But what he comes around to is the thought that as sovereign debt becomes more and more used to resolve private debt issues, shouldn't the yields of the two classes of debt converge? Gross says:
It is interesting to observe that over the past few months when investors have begun to question the ability of governments to exit the debt crisis by “creating more debt,” that increases in bond market yields have been confined almost exclusively to Treasury/Gilt-type securities, and long maturities at that. There has even been a developing debate in the press (and here at PIMCO) as to whether a highly-rated corporation could ever consistently trade at lower yields compared to its home country’s debt. I suspect not, but the narrowing in spreads since late November solicits an interesting proposition: Government bailouts and guarantees such as those evidenced and envisioned in Dubai and Greece, as well as those for the last 18 months with banks and large industrial corporations across the globe, suggest a more homogeneous “unicredit” type of bond market. If core sovereigns such as the U.S., Germany, U.K., and Japan “absorb” more and more credit risk, then the credit spreads and yields of these sovereigns should look more and more like the markets that they guarantee. The Kings, in other words, in the process of increasingly shedding their clothes, begin to look more and more like their subjects. Kings and serfs begin to share the same castle.
Note: The underlining represents Gross's emphasis.
Gross goes on to say:
This metaphor doesn’t really answer the critical question of whether a debt crisis can be cured by issuing more debt. The answer remains: It depends – on initial debt levels and whether or not private economies can be reinvigorated. But it does suggest the likely direction of sovereign yields IF global policymakers are successful with their rescue efforts: Sovereign yields will narrow in spreads compared to other high-quality alternatives. In other words, sovereign yields will become more credit like. When sovereign issues become more credit-like, as evidenced in Greece, Spain, Portugal, and a host of others, they move closer in yield to the corporate and Agency debt that supposedly rank lower in the hierarchy. That process of course can be accomplished in two ways: high-quality non-sovereigns move down to lower levels or governments move up. The answer to which one depends significantly on future inflation, the aftermath of quantitative easing programs, and the vigor of the private economy going forward. But the contamination of sovereign credit space with past and future bailouts is a leveler, a homogenizer, a negative for those sovereigns that fail to exert necessary discipline. Only if global economies stumble and revisit the recessionary depths of a year ago should the process reverse direction and place Treasuries, Gilts, et al. back in the driver’s seat.
All this provokes the following questions:
1. If some of the debt securities created by the investment banks are in fact Ponzi schemes and "heads I win tails you lose" deals with the banks' customers, how can a convergence of credit rating between sovereign debt and these securities possibly put Treasuries, Gilts, etc. back in the driver's seat under any circumstance if the dubious private securities are, in effect, government guaranteed?
2. Wouldn't repeating the recessionary depths of 2009 be a disastrous outcome? Wouldn't the driver's seat be in a flaming wreck?
3. Isn't the failure to address the TBTF (too big to fail) problem in a timely way just compounding the exposure to risk of a "super nova" end game?
4. Why is it that the potential here that seems so terrifying to me is apparently not on the radar screens of the various governments around the world, the central banks and the investment banking behemoths that seem to have resumed the operations that preceded and led to the collapse in the fall of 2008?
5. How can John Corzine, a man who presumably has great insight into the inner workings of the investment banking world, both from within and as an elected official for more than a decade, have such a dismissive attitude toward the situation?
6. Am I stupid?
