Federal judge Jed Rakoff, a former prosecutor with the U.S. Attorney’s office here in New York, is fast becoming a sort of legal hero of our time. He showed that again yesterday when he shat all over the SEC’s latest dirty settlement with serial fraud offender Citigroup, refusing to let the captured regulatory agency sweep yet another case of high-level criminal malfeasance under the rug.
The SEC had brought an action against Citigroup for misleading investors about the way a certain package of mortgage-backed assets had been chosen. The case is very similar to the notorious Abacus case involving Goldman Sachs, in which Goldman allowed short-selling billionaire John Paulson (who was betting against the package) to pick the assets, then told a pair of European banks that the “designed to fail” package they were buying had been put together independently.
This case was similar, but worse. Here, Citi similarly told investors a package of mortgages had been chosen independently, when in fact Citi itself had chosen the stuff and was betting against the whole pile.
This whole transaction actually combined a number of Goldman-style misdeeds, since the bank both lied to investors and also bet against its own product and its own customers. In the deal, Citi made a $160 million profit, while its customers lost $700 million
Category: Investing
Immelt on America going “all-in”
I had breakfast this week with Jeffrey R. Immelt, the chief executive of General Electric, and the main dish on the menu was tough love. In an interview before a packed hall in Times Square, the boss of the more than a century-old $177 billion global behemoth told me that Americans can still win in the global economy — but that they need to fight harder.
“We are not trying that hard,” Immelt said. “We haven’t really tried as hard as we can to compete, educate and sell our products around the world and I think we can do better.
“The world just plays harder than we play,” he said. “Whether it is on exports or whether it is on foreign direct investment, the rest of the world plays for keeps. And we just don’t have a similar philosophy.”
Chancellor Angela Merkel of Germany has her own reasons for feeling grim, but she can take some comfort from the fact that Immelt pointed to Germany, whose version of capitalism Americans are accustomed to dismissing as plodding and inflexible, as one nation that is outselling the Yanks.“Chancellor Merkel flies from Berlin to Beijing, there’s 25 German C.E.O.’s that get off the plane right behind her. And they connect the dots. They play hard, they play to win, they play for exports,” Immelt said. “We’re not all-in the same way that the Germans are all-in.”
The Germans certainly play the world much better than we Americans.
The advent of the global brain
Get ready for the global brain. That was the grand finale of a presentation on the next generation of the Internet I heard last week from Yuri Milner. G-8 leaders had a preview of Milner’s predictions a few months earlier, when he was among the technology savants invited to brief the world’s most powerful politicians in Deauville, France.
Milner is the technology guru most of us have never heard of. He was an early outside investor in Facebook, sinking $200 million in the company in 2009 for a 1.96 percent stake, a decision that was widely derided as crazy at the time. He was also early to spot the potential of Zynga, the gaming company, and of Groupon, the daily deals site.His investing savvy propelled Milner this year onto the Forbes Rich List, with an estimated net worth of $1 billion. One reason his is not yet a household name is that he does his tech spotting from Moscow, not a city most of us look to for innovative economic ideas.
Milner was speaking in the Ukranian city of Yalta, at the annual mini-Davos hosted by the Ukrainian pipes baron and art collector Victor Pinchuk (disclosure — I moderated at the event). What was striking about Milner’s remarks was how sharply his tone differed from that of the other participants.
Patenting the Ponzi: the extraordinary growth of Ponzi schemes
“Two world poker champions and other leaders of one of the largest internet card gaming sites turned the company into a massive Ponzi scheme, wrongly taking out more than $440m from player accounts, US officials alleged on Tuesday.”
Office of Charles Ponzi & Sons:
“Mr Ponzi, have you seen what the US Justice Department is saying about this poker website?”
(Sighs) “Don’t tell me, Massimo: they say it’s a Ponzi scheme?”
“You’ve got it in one, Mr Ponzi.”
Was Julian Assange Right About Facebook?
OK, that headline is probably over the top, but after reading Dave Winer and Nik Cubrilovic’s warnings this past weekend about Facebook’s new “frictionless sharing” system, I was left wondering if Julian Assange of WikiLeaks wasn’t on to something when he said that “Facebook in particular is the most appalling spying machine that has ever been invented.”
Assange was talking about how Facebook collects information that people actively share about their relationships with each other (thus making such data prey to US intelligence prying), whereas Winer is raising the alarm about Facebook’s new policy of proactively sharing information about what websites people are visiting, without them even affirmatively entering any kind of data onto their Facebook page. Winer offers this hypothetical scenario:
Holders of Sovereign Debt
Here’s a great chart just released by the International Monetary Fund. Note that almost half — 47 percent – of the US$14.7 trillion U.S. federal government debt is held by the Federal Reserve and the government itself, such as the Social Security trust fund. Add to that the 22 percent foreign official holdings (mainly central banks) and almost 70 percent of the debt of the U.S. government is held by non-market/non-profit oriented investors. Stunning!
US Treasury Secretary’s Debt Advice to Europe Generates Some Blowback
Joshua Chaffin and Alex Barker in Wroclaw and Kerin Hope in Athens:
However, some eurozone finance ministers hit back at Mr Geithner’s comments, questioning the usefulness of his visit.
“I found it peculiar that even though the Americans have significantly worse fundamental data than the eurozone, that they tell us what we should do and when we make a suggestion … that they say no straight away,” said Maria Fekter, Austria’s finance minister.
Sweden’s Anders Borg said: “we need to make progress, but it’s quite clear the US has a big debt problem and the situation would be better if the US could show a sustainable way forward.”
Amazing.
Germany’s Choice
Germany is the world’s #2 exporter, very close behind China. In 2010 it exported a total of 960 billion euro, amounting to 42% of its GDP. Its trade surplus came to 153 billion euro, almost 7% of GDP. Impressive stuff, no doubt, and an achievement that Germans are justly proud of.
But, not all surpluses are created equal… 35 billion of that surplus, a whopping 23%, was accounted by just four countries: Italy, Spain, Greece and Portugal. Yes, to a very large extent the PIGSs’ munching at the trough was what kept Germans working in their factories. And if you just add France, another country that is currently screeching towards the borderline of fiscal probity – at least according to financial markets – the numbers get even more interesting. Germany’s PIGS+F trade surplus jumps to 64 billion, a full 42% of Germany’s entire trade surplus. In GDP terms (trade surplus is GDP-additive), PIGS+F surplus accounts for nearly 3% of Germany’s economy.
Taibbi, the SEC & Wall Street
A whistleblower claims that over the past two decades, the agency has destroyed records of thousands of investigations, whitewashing the files of some of the nation’s worst financial criminals.
Imagine a world in which a man who is repeatedly investigated for a string of serious crimes, but never prosecuted, has his slate wiped clean every time the cops fail to make a case. No more Lifetime channel specials where the murderer is unveiled after police stumble upon past intrigues in some old file – “Hey, chief, didja know this guy had two wives die falling down the stairs?” No more burglary sprees cracked when some sharp cop sees the same name pop up in one too many witness statements. This is a different world, one far friendlier to lawbreakers, where even the suspicion of wrongdoing gets wiped from the record.
That, it now appears, is exactly how the Securities and Exchange Commission has been treating the Wall Street criminals who cratered the global economy a few years back. For the past two decades, according to a whistle-blower at the SEC who recently came forward to Congress, the agency has been systematically destroying records of its preliminary investigations once they are closed. By whitewashing the files of some of the nation’s worst financial criminals, the SEC has kept an entire generation of federal investigators in the dark about past inquiries into insider trading, fraud and market manipulation against companies like Goldman Sachs, Deutsche Bank and AIG. With a few strokes of the keyboard, the evidence gathered during thousands of investigations – “18,000 … including Madoff,” as one high-ranking SEC official put it during a panicked meeting about the destruction – has apparently disappeared forever into the wormhole of history.Under a deal the SEC worked out with the National Archives and Records Administration, all of the agency’s records – “including case files relating to preliminary investigations” – are supposed to be maintained for at least 25 years. But the SEC, using history-altering practices that for once actually deserve the overused and usually hysterical term “Orwellian,” devised an elaborate and possibly illegal system under which staffers were directed to dispose of the documents from any preliminary inquiry that did not receive approval from senior staff to become a full-blown, formal investigation. Amazingly, the wholesale destruction of the cases – known as MUIs, or “Matters Under Inquiry” – was not something done on the sly, in secret. The enforcement division of the SEC even spelled out the procedure in writing, on the commission’s internal website. “After you have closed a MUI that has not become an investigation,” the site advised staffers, “you should dispose of any documents obtained in connection with the MUI.”
Many of the destroyed files involved companies and individuals who would later play prominent roles in the economic meltdown of 2008. Two MUIs involving con artist Bernie Madoff vanished. So did a 2002 inquiry into financial fraud at Lehman Brothers, as well as a 2005 case of insider trading at the same soon-to-be-bankrupt bank. A 2009 preliminary investigation of insider trading by Goldman Sachs was deleted, along with records for at least three cases involving the infamous hedge fund SAC Capital.
It’s Negotiation Time
It doesn’t seem like it’s been four years since the last time Detroit automakers and the United Autoworkers Union negotiated a new contract. You may remember the discussions and agreements that, from the date of that contract, gave the automakers the right to hire many categories of workers and pay them $14 an hour, plus lesser benefits. Of course, the auto companies were facing the same issues as any other major industry in America; the issue squeezing their corporate bottom lines most painfully was the incredible rise in the cost of workers’ health care.
Then many national media outlets were reporting that Detroit was paying their workers more than $73 an hour for their labor. Yet not only did an influx of autoworkers not buy new homes in Westover Hills or Monticello, but that simplistic look at the net cost of factory work ignored more pertinent realities of car production and corporate accounting.
Well worth reading.