14-Jan-10 News - Senior bankers may be headed for prison - 14-Jan-2010 - Generational Dynamics

Watching the bank CEOs testify before Congress on Wednesday, I was immediately struck by the remarks of Lloyd Blankfein, CEO of Goldman Sachs, the man who said that bankers are doing "God's work."

He agreed that Goldman Sachs could have done some things better, and indicated that he might have misled an investor or two, but he said of the things that Goldman Sachs did that "these are typical behaviors" and they are "standards of the times didn't work out well."

Phil Angelides, chairman of the Financial Crisis Inquiry Commission, responded to Blankfein by saying, "It sounds to me a little bit like selling a car with faulty brakes, and then buying an insurance policy on the buyer of those cars."

He's referring to the fact that Goldman created securities that are now known as near-worthless "toxic assets," and at the same time made other investments that bet against those securities, expecting to make money when those securities became worthless.

William K. Black is a professor at the University of Missouri, and was the senior regulator investigating the savings and loan crisis of the 1980s. He compares today's investigations to those he led in the early 1990s. I saw him being interviewed on Bloomberg TV on Wednesday afternoon.

He's extremely criticial of regulators who, he said, have done almost nothing. In the savings and loan crisis, regulators were very aggressive in prosecuting the CEOs of the offending savings and loans banks, but nothing like that is happening today.

This shouldn't be a surprise to anyone, especially after the revelations about how regulators treated Bernie Madoff, the man who defrauded hundreds of investors of $65 billion. The SEC was warned several times that Madoff was likely conducting a Ponzi scheme, but the SEC never did anything about it. The SEC management was absolutely pathetic, and they proved it last September when they published a report of their own investigation that absolved themselves of all blame. (See "Laughable SEC report on Madoff absolves SEC management of blame.")

What we see here is the generational pattern that I've been writing about for years. Blankfein referred to the "standards of the time" giving rise to this crisis. Well, the standards of the time are fraud and extortion being practiced by almost every financial and real estate organization in the country -- or in the world.

Once the Silent Generation disappeared, the world was managed by a lethal combination of greedy, nihilistic Generation-Xers, managed by greedy, incompetent boob Boomers. A generational explanation is the only one that explains why fraud and extortion has become "the standards of the time," and why fraud and extortion is still going on as bad as ever.

On his tv interview, William K. Black was asked why he thought bank CEOs and senior management should go to prison. Here's what he said (my transcription):

"We haven't learned anything, and it's clear from the testimony of the four top executives, it's clear that they haven't learned the fundamental lessons.

William K. Black <font face=Arial size=-2>(Source: Bloomberg TV)</font>

William K. Black (Source: Bloomberg TV)

We still get this dribble [from them] about "it's the 100 year flood" type of thing, "so there really ARE no lessons to learn. It's just bad luck that happened on my watch." ...

Many, many of those CEOs and senior officers should be in prison.

The shocking thing about the current crisis is that the regulators, the treasury, the prosecutors, and at least to this point, Congress and the Angelinis Commission have not gotten that information. [He adds that the prosecutors have only begun to get information -- emails, models, accounting books, etc.]

Here's what we know empirically. The FBI warns in Sept 2004 of an epidemic of mortgage fraud. It finds that 80% of the losses occur when lender personnel are involved. So it's not primarily borrowers -- it's coming from the lending institutions.

We know that when Fitch [Ratings agency] finally looks in Nov 2007 at the underlying mortgages on these CDOs, the collateralized debt obligations, it finds that the results are "disconcerting," and that there's the appearance of fraud in nearly every file. Now that means we have massive fraud at that level.

That inherently produces accounting and securities fraud all the way up the line, because of course these are not really assets - these are really net liabilities.

Every time, on average, a "liar's loan" was made, the bank that made the loan lost money.

And so all of this paper is underlying this roughly $2 trillion in non-prime paper.

Now we know what happened next. because there are Standard & Poors memos. Where the professional rater asked to see the underlying files, and he's told by his boss, "It is totally outrageous to ask to see the underlying files," which is the only way to rate risk, and he's ordered not to do that, and to produce a rating.

We know that those ratings are AAA for product that isn't even C. These are not small errors. ...

There are only two choices. Let's take a Goldman Sachs, that under [Hank] Paulsen, when he was still running them, went deeply into this toxic paper.

Either they DID underwriting, which is what an investment banker is supposed to do, and they found that nearly every file was fraudulent, in which case, if they sold it, that's a fraud; or they're telling us they never did any underwriting, in which case they're the most incompetent and unbelievable people in the world, and should be removed from office. And certainly shouldn't get bonuses."

This is an excellent statement why many of these bankers will be going to jail, just as bankers went to jail in the 1930s when they did similar things.

Here's something that I wrote years ago: "If you're an economics expert, journalist, investment broker, mortgage lender, analyst, regulator, pundit or politician whom the public decides is blameworthy for the major coming crisis, then I suggest that you'd better have your underground bunker picked out, because people are going to be coming after you, and the guillotine is going to seem mild compared to the punishment that they're going to want to inflict on you."

The fact that bankers are going to be paying themselves tens of billions of dollars in bonuses during the next few weeks means that they're too dumb to take that advice.

Pan-Arab nationalism in the 1940s and 1950s

A MEMRI translation of a television interview with Dr. Rashid Al-Khayoun, an Iraqi scholar and author, tells how Jews were driven out of Iraq.

According to Al-Khayoun, Iraqi Jews of the 1940s were not much interested in going to Israel, because they had lived in Iraq for centuries, and considered it to be their home.

But Al-Khayoun says that Jews were coerced to move to Israel by a wave of pan-Arab nationalism within Iraq.

"[P]an-Arab nationalism grew stronger in Iraq, from the late 1940s to the early 1950s," says Al-Khayoun. "The Jew began to be the target of deliberate affronts. Iraqi Jews are known for their patriotism. They have nothing to do with Israel."

The rise of pan-Arab nationalism in the late 1940s is very interesting from the point of view of Generational Dynamics.

In North America and Europe, it's common to refer to "Boomers" and "Generation-X" and their specific behaviors, but those behaviors don't seem to apply to Russia, Turkey and Mideast countries such as Lebanon, Iraq and Iran.

There's a good reason for that. For the West, the most cataclysmic event of the 20th century was World War II. But for Russia, Turkey and the Mideast, the most cataclysmic events surrounded World War I, including the Bolshevik Revolution and the destruction of the Ottoman Empire.

Thus, the people born in Russia and the Mideast in the 20 years following WW I would have attitudes and behaviors similar to the West's Boomers, and the next generation would be similar to the West's Generation-X.

Iraq's crisis war at that time was the the Great Iraqi Revolution of 1920. According to Al-Khayoun, the movements to expel Jews from Iraq began in 1941. This was in Iraq's generational Awakening era, about the same point in Iraq's generational timeline as America's 1967 Summer of Love or Iran's political upheavals of 2009.

What happens in all of these cases is a great deal of political turmoil, followed by a sharp change in political direction. In the case of Iraq in the 1940s, this meant a change from the secularism imposed by the end of the Ottoman Empire, and a resurgence of Arab nationalism to the exclusion of other ethnic and religious groups. Hence, the expulsion of the Jews from Iraq.

There have been new crisis wars 60-70 years after the end of the Ottoman Empire, including the Lebanese civil war and the Iran/Iraq war of the 1980s. These countries are now, once again, in generational Awakening eras, going through the same kind of political turmoil as they did in the 1940s.

Generational Dynamics Web Log for 14-Jan-2010
14-Jan-10 News - Senior bankers may be headed for prison

William Black: Many senior bankers should be in prison

Pan-Arab nationalism in the 1940s and 1950s

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Generational Dynamics Web Log for 14-Jan-2010 14-Jan-10 News - Senior bankers may be headed for prison

William Black: Many senior bankers should be in prison

Pan-Arab nationalism in the 1940s and 1950s

Web Log Pages

Generational Dynamics Web Log for 14-Jan-2010
14-Jan-10 News - Senior bankers may be headed for prison