Wednesday, December 23, 2015

Signs of the next economic meltdown

At the end of the excellent movie "The Big Short" it is mentioned that the big banks are still recklessly gambling with unregulated derivatives. It points to this Bloomberg article that points out that Goldman Sachs is selling collateralized debt obligations (CDOs) under the name "bespoke tranche opportunity."

Goldman Sachs was also the subject of a fascinating episode of This American Life from a year ago that I missed, The Secret Recordings of Carmen Segarra. It demonstrates the immense regulatory capture of the Federal Reserve years after the 2008 meltdown. From the transcript:
In 2009, David Beim wrote in his report on how the New York Fed must change to prevent the next financial crisis. Quote, "Because so many seem to fear contradicting their bosses, senior managers must now repeatedly tell subordinates that they have a duty to speak up, even if that contradicts the boss." Evaluation of employees at yearend might include specific categories like "willingness to speak up," "willingness to contradict me." 
Mike Silva was actually part of a team that worked with Beim to come up with these recommendations. The following week he had Carmen in for a meeting. 
Mike Silva
Carmen, let me tell you that you've been released-- 
Jake Bernstein
And he fired her.

Bernie Sanders also mentions Goldman Sachs in his editorial in today's NYTimes:
What went wrong at the Fed? The chief executives of some of the largest banks in America are allowed to serve on its boards. During the Wall Street crisis of 2007, Jamie Dimon, the chief executive and chairman of JPMorgan Chase, served on the New York Fed’s board of directors while his bank received more than $390 billion in financial assistance from the Fed. Next year, four of the 12 presidents at the regional Federal Reserve Banks will be former executives from one firm: Goldman Sachs. 
These are clear conflicts of interest, the kind that would not be allowed at other agencies. We would not tolerate the head of Exxon Mobil running the Environmental Protection Agency. We don’t allow the Federal Communications Commission to be dominated by Verizon executives. And we should not allow big bank executives to serve on the boards of the main agency in charge of regulating financial institutions.

Clearly Goldman Sachs is a huge problem, and Wall Street reforms are still needed or we will certainly have another huge meltdown.