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Gee, We Don't Talk About Self-Dealing? - Denniger

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.... especially when it comes to banks?

Over the last two years of the housing bubble, Wall Street bankers perpetrated one of the greatest episodes of self-dealing in financial history.

Faced with increasing difficulty in selling the mortgage-backed securities that had been among their most lucrative products, the banks hit on a solution that preserved their quarterly earnings and huge bonuses:

They created fake demand.

I've been talking about this for, oh, what - three years now?

The investigation by Propublica is pretty damning - and complete. It points out what I've been saying for a while - that these "CDO" and other complex securities were used as a means to create false claims of prosperity and "great times."

But what Propublica has uncovered, and what should be enough to get people indicted, is what appears to be a clear "pay to play" game - that is, an inducement game of tying that looks to this blogger to be a raw violation of the law.

It is not, in the general sense, legal to condition the sale of one thing on the sale of a second, unrelated thing, unless the second thing is literally free. This is known as a "tied sale" and when it has the effect of reducing competition it is illegal.

IBM got nailed doing this with their mainframes - to buy their mainframe you also had to buy their maintenance. No maintenance contract, no sale. Period. You couldn't use a third party contractor and you also couldn't decide to "go naked" and just pay for broken parts and service as was required on a piecemeal basis.

It appears that Propublica has uncovered evidence of this in the CDO market!

An executive from Trainer Wortham, a CDO manager, recalls a 2005 conversation with Ricciardi. "I wasn't going to buy other CDOs. Chris said: 'You don't get it. You have got to buy other guys' CDOs to get your deal done. That's how it works.'" When the manager refused, Ricciardi told him, "'That's it. You are not going to get another deal done.'" Trainer Wortham largely withdrew from the market, concerned about the practice and the overheated prices for CDOs.

Oh oh.

Yeah, this sort of thing isn't that uncommon in business. And some of it is not illegal - it's just a bare-knuckle business tactic. But some of it is, especially when you have market power, or if you collude with others in an attempt to acquire market power. Then you're breaking the law.

What's worse is the "folding back" of these deals into new deals where the buyers weren't told in a clear and conspicuous fashion what they were buying. What they didn't (apparently) know is that they were buying, in no small part, the poison parts of previous deals that the banks couldn't sell!

That left the middle layer, known on Wall Street as the "mezzanine," which was sold to new CDOs whose top 80 percent was ultimately owned by ... the banks.

"As we got further into 2006, the mezzanine was going into other CDOs," says Credit Suisse's O'Driscoll.


Remember, many of these CDOs had offering circulars that referenced a "data package" that was, in some cases, one hundred thousands pages once completely "unfolded." It was literally impossible for anyone to know what was in there - except for the people who designed and built the thing.

The only defense against this was an independent manager - which these deals claimed to have. The independence in theory would prevent games, by having someone who was not "the bank" that put the deal together responsible for selection of the instruments and the integrity of the process.

Of course if you corrupt the manager, well.....

Some of the few outside investors remaining in the market believed that the manager would do a better job if he owned a small slice of the CDO he was managing. That way, the manager would have more incentive to manage the investment well, since he, too, was an investor. But small management firms rarely had money to invest. Some banks solved this problem by advancing money to managers such as Harding.

Oh yeah, that's independent. We have a so-called "independent" manager who gets a loan from the very bank that structures the deal, and in fact that loan is part of the deal, and we still call them "independent." This gets even better, of course, if the reason the manager needs the loan is that they don't have any capital, and thus if the deal goes bad the manager doesn't lose (which is the presumption the buyers of these deals would have) - the bank does, as they wind up eating the so-called "loan."

Crooked? You decide.

But it didn't end there. As Propublica alleges, apparently these managers had even more pressure put on them. Not only did they get "tied loans" to "buy" (that is, "invest in") the so-called deals they were "independently managing and advising on", in some cases it is alleged they were actually told what to buy - "or else" - totally destroying any claim of independence at all!

"'You don't have to buy the deal but you are crazy if you don't because of your business,'" an executive at the management firm recalls Margolis telling him. "'We have a big pipeline and only so many more mandates to give you.' You got the message." In other words: Take our stuff and we'll send you more business. If not, forget it.

Nice, right?

So answer this for me folks: Why isn't this all over the front page of the newspapers? Why isn't it on the evening news? Why isn't CNBS running this on a daily basis?

More importantly, why would anyone - including municipal governments and private businesses - do business with institutions that stand accused of this behavior until and unless the people responsible are identified and, where violations of the law are apparent, they are investigated and prosecuted?

I think those are all good questions.

Why isn't anyone asking them?


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So answer this for me folks: Why isn't this all over the front page of the newspapers? Why isn't it on the evening news? Why isn't CNBS running this on a daily basis?
cos the banksters "own" the gubmint? Edited by Sir John Steed
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