good afternoon and welcome to capital account i'm lauren lister here in washington d.c. here are your headlines for march fourteenth two thousand and twelve goldman sachs is out in a bathing resignation on the new york times op ed page from an executive director but what is this employees claim say about the priorities of goldman and other big banks today and the power they have over the global financial system. there are people who one of the guys who own the nuclear power reactor and we don't have much the way of other sources of power and nobody wrong knows how to run the nuclear power reactors so we're hostage to the guys who run the nuclear power reactors

we'll hear more from eve smith author of the popular blog naked capitalism an banks resized up her stress in a financial crisis an area of fifteen of the nineteen big banks the house the feds passed but when you look at all of the factors that would really pressure banks in a crisis isn't this a more accurate depiction of what it would actually look like. thanks . will write down exactly why you should be worried about what you just saw an ben bernanke hero or villain it's the question explored in a cover story of the atlantic we'll tell you what we think let's get to today's capital account.

what a special day it is not every day you get to see a goldman sachs executive director telling everyone why he's leaving goldman in a new york times editorial by now everyone probably knows who greg smith is it really does tell you what he says is the formula for being a leader at goldman so we can read this execute on the firm's axis which is goldman speak for persuading your clients to invest into stocks or other products that we're trying to get rid of because they are not seen as having a lot of potential profit or be elephants which basically just means to trade whatever will bring the biggest profit to goldman or see find yourself sitting in a seat or your job is to trade any illiquid opaque product with a three letter acronym yeah we know those m.b.a.'s c.d.'s c.d.o.

that kind of thing but we just want to say wow how far we have come since the days after the financial crisis when goldman was being accused of knowingly selling clients investments they knew were bad and profiting like in a temporal transactions to twenty two is the date of this e-mail. that timberwolf was one q how much of that deal did you sell to your clients after june twenty to two thousand and seven. mr chairman i don't know. yeah they always pled the fifth earlier i spoke about all of this there with smith she's author of the very popular financial blog naked capitalism an author of econ how unenlightened self interest undermine democracy and corrected capitalism this executive director of goldman sachs who has been there twelve years and comes out with this just scathing review of the firm very publicly which is

kind of counter to what traditionally is the culture acknowledgement sacks so i'm told let's read a little bit of it and then i want to ask your input so he says one of the experts to put the problem in the simplest terms the interest of the client continue to be side land line in the way the firm operates and thinks about making money goldman sachs is one of the world's largest and most important investment banks and it is to ensure girl to global finance to continue to act this way now of course the question that comes about you know there was plenty of evidence in the wake of the financial crisis they called in sacks seemed to be putting making money above all of any other concerns you had temper wolf you had advocates you had these deals that had evidence that look like goldman was bundling and selling bad investments and then betting against them does this show this resignation letter show that this is still going on and if so this is kind of like a blood clot that is stopping that movement in the circulatory system of the global financial system will basically and he was in the derivatives or he was the head of

equity derivatives and one of the things that people don't quite appreciate is the way that you can effectively steal from clients with complicated derivatives in fact there was a one of them spoke on this is by started you called traders guns and money and then he's got a formula for derivatives were no matter what you punch into it it's going to pay out zero and you'd never sort of know that if the client was paying a large amount of money for this to rid of every known thinking it was giving them something so there's a lot of ways that you can you can load risk or load extra fees into derivatives or clients just don't understand the more complicated ones you have exchange traded ones are pretty simple and you know if you buy you know you know calls or pullups that's a different story we'll talk about the customized ones. and those are those are just in a very big profit machine for wall street and they've been full of abuses so i'm not surprised that somebody from that area would particularly have been in a position to see you seem to be party to a lot of abuses also then definitely on that is this limited or is this more

reflective of more widespread practices with end of a.o.l. it's reflective of why it's turning around this is now in fact the you know i want one of the leading were i have my back in the early one nine hundred ninety s. o'connor and associates they're one of the leaders in over the counter derivatives and they were extremely upset in the days when their partnership. you know cared about the value of their franchise about the way their leading competitor bankers trust was ripping off clients i mean they could see in the way that their their trains were prize they were loading in a lot of what they called edge that was the profit margin and they said that just the way these trades can work out and it is going to be bad for the market long term approved not to be you know partly because it took a what would take a while for the customers to hurt themselves over bankers trust went down over that very type of scandal where some customers customers were indeed as o'connor kind of foresaw hurt so badly that they were out of suing him out of a commitment to the demise of bankers trust but you know just because bankers trust was the outlier or is it mean that that pattern wasn't common even back in the

early ninety's when over the counter derivatives started to become a big business well let's talk about if it's getting worse because that brings me to another part of his op ed where he says i can honestly say that the environment now is as toxic and destructive as i have ever seen it so my question is do you think the environment has gotten actually worse since the financial crisis as banks perhaps have to go further to get the same profits because before the financial crisis you know you had this huge credit bubble and banks could just extract wealth off the top and now do they have to be more creative or innovative or whatever and order to get these same profits you know that's a good hypothesis it's really hard to know but you're right that basically because banks you know they're complaining now about regulation. that hasn't even taken effect on the practice of blowing up a lot of our customers and to your point we're deal leveraging which means a lot of the products they sold are rolling off or in some parts of the market it's moved to the higher quality companies and being able to finance there's less margin

in that so you've got so derivatives are going to remain in businesses and it's not hard to imagine they are pushing the envelope even harder they're trying to compensate for the profits they lost in the other businesses interesting and then i just want to bring up something else he said because he was talking about the evolution evolution of leadership he thought leadership used to be about ideas setting example and doing the right thing today if you make enough money for the firm and are not currently an axe murderer which i think is key you will be promoted into a position of influence i'm wondering if you think this eight those guys making money above all else maybe even overlooking past transgressions as long as you're not currently metaphorically an ax murderer is this more widespread then perhaps goldman is this is a bigger oh the in the there's been this way for a very long time in that we've had a big producer syndrome where if i mean you can sort of point to key figures i mean for example frank quattrone the first people you know in the last cycle had frank

quattrone where they were they were putting all kinds of basically requiring customers that got the pos to do trades with the firm and massively either massively off market prices or massively inflated commissions to pay them back and that just wasn't you know so they were effectively charging more than the published advertising gross underwriting gross margin through this you know you have to direct other business to us because we're giving you these live pos and you also have the example in the the other example just of the royalist conflicts that you know do get prosecuted to some degree we've had this if this is hardly new i mean it's really hardly new and the difference is that we're supposed to be an environment where people are supposed to be behaving more law and and you know the goldman executives suggest it's not and so. and you know goldman did at least have a culture of it my dear went to work through the early eighty's and you know there could be some perform totally took around the margin when the customer was making

money to save so if they actually figured it out they would really be very upset and it's just degraded over time but the big change does appear to be pushed appears to go good when they went public in one thousand nine their peers to be a shift because the traders started becoming much more powerful if you look at goldman sachs of profits it shifted away from investment banking we have to care about reputation much more of the trading side and i think you saw mentored when blankfein. when blankfein became c.e.o. there were other traders to became more influential in the management group and i know people who were senior at goldman who interesting we left around that time who said there was a big there was a big change that at least you know hank paulson was was technically the head of the firm john thing and john ford were were pretty influential management most of the things were actually thoughtful and caring about the franchise and it was going fine cohort came in there was just a big degree i mean there really was all we care about was profits and we don't really care about tomorrow we just care about making money you know and that's something that greg smith says in his off that is that this is really deteriorated

under the watch of lloyd blankfein i mean he calls him out by name question though if this is the broader and we know that making money is the number one goal and we've seen recent instances where it appears that people are willing to steal at least in the evidence that's been laid out in an equitable there was an investigative journalist i interviewed yesterday who had an e-mail she did a story a long time ago about an executive at bear stearns all of these e-mails indicating he was a defrauding is has been has essentially went on to have an executive position at goldman so if we have these instances where it looks like. bankers are willing or traders are willing to go to any lengths does this result in kind of a death of capitalism because nothing's moving there's no circulation there's no no . oxygen there is no none of that circulation that you need for a banking system to work properly well we still have people doing a lot of trading but you're right the question is is this are these transactions

predatory that they ultimately extract so much that it's that we're not having the money flow to the right places in the bank it's just taking out too much that's one and the second is we've had areas of the market where the behavior has been so predatory that they've effectively shut down one is the private mortgage securitization market there was one deal done last year gone and why is that significant explain for people that maybe you can understand ok because before the crisis sixty percent of the market was was actually of the mortgage market was actually private label securitizations about forty percent was government guaranteed and partly because of the underwriting you know all the predatory lending but also because frankly the services have also been engaging in abuses regarding the foreclosures don't just hurt the look the homeowners they also hurt the investors they're dragging out the foreclosure timetables because they don't want to take losses on second mortgages that they own and if they drag out the foreclosure process they can charge more late fees if they ultimately recoup on the

house they sold and they charge more servicing fees so you have more extraction exactly it's not as dramatic. in the mortgage space as it is in derivatives but it's the same behavior pattern and i've had and i've spoken to mortgage investors and they said basically they want to touch it this is they so big because going to be ten years before private mortgage securitization market comes back and so that's why we're having so much government involvement you know it basically expanding freddie in the f.h.a. now are that market. i'll have more with you smith and still ahead the chairman of the federal reserve with a cover story of the atlantic april it posits ben bernanke you think of the global economy so why does everyone hate him i will give you our three cents but first your closing market numbers.

just put a picture of me when i was like nine years old i like to tell the truth. i'm a confession i am a total get of friends that i love rap and hip hop music and pretty. but it was kind of the jester day. i'm very proud of the world with its place. you know sometimes you see a story and it seems so silly is if you understand it and then you glimpse something else and cheers you some other part of it and realize that everything is ok if you don't i'm trying hard welcomes the big picture of.

what drives the world the fear mongering used by politicians who makes decisions completely. made who can you trust no one who is you who with a global missionary see where we had a state controlled capitalism was called sessions when nobody. eristic ass we do our tea question more. welcome back and we're talking about this the goldman sachs op ed. resignation in the new york times we're talking about this what it means for the banking system now one thing that stands out in all of this and looking back to the financial

crisis in the aftermath is that despite the whole of these things that clouded public opinion in her it propelled and sacks we saw abacus we saw the vampire squid pieces lloyd blankfein grilled in senate hearings again and again on the hill despite all of those things that have hurt public opinion for goldman it hasn't translated to losing business according to media reports and here is someone on c.m.t. see today talking about this whole issue in light of this op ed the one thing i would take issue with in this fascinating amazing story poppy is the idea that they will lose clients because at this point they haven't even though most of the clients i spoke to are fully aware about goldman plays them and they still do business with them because they feel they have to so i asked the smith author of the blog naked capitalism and the book who i should mention she did work at goldman in her career back in the eighty's i asked how it is possible because one has not lost business through all of this and what we change that. i hate to say it it's

because good remember goldman used to be the firm with a good reputation so goldman has basically as much as ever no goldman does it that's it of dollars for everybody else does it too and you know a golden goes some things like i hate to say i'll have guys there four o'clock on friday in the summer you know if you want to bid on friday the summer they'll be golden guy on the desk to take your pitch and they're very big and very big in prime brokerage they're going to a lot of hedge funds to do business with them because there aren't that many firms that have the back office and the processes to be and will lend the money that's another big part of the prime brokerage business is providing credit so particularly hedge funds don't have that many you know firms that are perceived to be good at crime brokerage get to go to and then for institutions despite all of this information coming out goldman is still one of the i.b.m. you know that you use you know they're very powerful network effects in trading markets and so that you people want to go with the firm that executes

a lot of order flow even if they know there's some a predatory solomon was in the same position in the bond markets in the one nine hundred eighty s. they were known as being on the one hand they would make very aggressive bids even when the markets were bad but the flip side is they were also known as being you know for their own account and very rough and tumble and you know and yet and yet and yet they were the big you know the powerful bond trading from its days so getting these over the counter markets you know and i think the customers also have to flatter themselves. you know their you know they can't take credit for. iraq or mark here ok so even though they're too big to fail it sounds like they're also too big to not do business with as well i think that's right very they're monopolists moving on though because that speaking of business models that these firms have the stress test of course came out and fifteen and nineteen banks passed is there any way to believe that these banks are healthy if we don't know what and realize losses on loans they have or what kind of overstating it assets they've done that's

my question for you. well no i think the person i'm very skeptical i've long been very skeptical of these stress tests and here the fed went through this exercise and this time we have a really serious in our it was sort of built off of the idea as your euro zone crisis the stock market would go down fifty percent and so forth and so when you have these banks pass i'm sorry you know we don't buy it now i mean if you have if you had a european bank fail which would probably happen in that would be one of the consequences of the dire scenario the markets are so interconnected that it's very difficult to imagine it would that some u.s. bank wouldn't be caught with his underwear down i mean that's just very hard to imagine and one of the problems with the way a lot of these stress tests are are designed is they're really looking more at the asset side of the balance sheet and that's important you know it seems like investments that they have and things you know and things like the things i've been very critical of it's the way of the biggest banks have very large second lien on mortgages that probably should be written down a lot more than they are ok they have. a have

a mark to market and that so they've got air and that but on top of that i have my doubts as to how tough they are on the liability side of the balance sheet remember these banks have lots of exposures you know that you know they have derivatives positions that they have supposedly matched but they're all based on assumptions of dynamic hedging you know so that they're not these are like they put in a hedge and they can go like forget it they have to keep we just ahead just during the day and markets seize up they suddenly lose their ability to adjust the hedge and they start losing money on the underlying and start losing money on the head suddenly something that looks matched doesn't match and i sincerely doubt the fed was looking at that and we saw that and that appears to be why the losses that lehman got to be so big i mean every time i believe in a six hundred sixty billion dollars bank with roughly half of it in collateralized exposes with the other half was unsecured creditors they lost they lost i think they've come to the eight and half cents on the other half of their money so they

lost in. they were still quoting the go last numbers i saw were there so i estimated that the numbers were over two hundred billion six hundred billion dollars plan they've only triggered at seventy five we're talking only seventy five billion so only right at seventy five billion to disorderly collapse and i saw i've gone through the numbers in great detail in terms of what it could have been on the asset side of the balance sheet because everybody knew the marks were too high a lot of stuff and you still have a at least a fifty billion dollars. it's not if not more like one hundred thirty billion dollars depending on where you put the numbers and that was all the liabilities side so like i was stressed that's not right they were stressing the fact that i've driven by exposures all were assets go down the derivatives it's just a blow out too so still way too many moving parts and this is. what banks and really do understand is exactly. think about that was these smith author and writer for naked capitalism end of the book on and be sure to check out our you tube page

in the coming days because i spoke with her more we will have more in the form of a web exclusive with eve on the mortgage settlement with the bank that twenty five billion dollar one because she has been covering that extensively and she really breaks down for us how it is that banks came out so well in that deal and homeowners also investors did not. all right time now for loose change so we can give you our three cents on some important stories dimitri and shannon are here to stay on this goldman sachs thing because there's just so much and we've got to hash it out one of the big takeaways on why greg smith is leaving goldman sachs one of those little nuggets in another

excerpt he describes managing directors at the firm who refer to their clients like this. muppets if you have a call them up it says the excerpt over the last twelve months i have seen five different managing directors refer to their own clients as lot but it's sometimes over internal e-mail even after the ses the calculus out because god's work carl levin vampire squids no humility. no no humility that's the takeaway they don't care they're so removed from it that they don't have to care if you're making that kind of money what incentive is there to care i think it's more than a pleasure from actually screwing their clients and if you talk to people on wall street if you ever work on wall street people have an attitude especially on treating this which is i'm going to we're going to screw this guy we're going to

take his money and we're going to go and do it and that kind of its height the stock from aggressive attitude so i think it's part it's part of the game that all they want to take some money but they want to they want to be true to the ground when they do it well greg smith gives a little love you know he throws us a bone on that psychopath story the one in ten people on wall street being psychopaths where he notes that in order to be a leader you just don't have to be you just can't be a current axe murderer you know it's ok if you have an axe murderer just to let us know make money you're good to go out that's all that matters i mean it's about making money there's nothing new here and like this like there's like five or so there was a b. c. their clients know that at the end of the issue is that they feel like the kid good thing about it that's why we make the comparison of the mafia because it's pretty much their being strong are what you suggested a lot to that point to now one thing i want to point out is that greg smith is being totally like a lamb in the blogosphere i saw one form posting where they said this is a guy having a public midlife crisis and basically posting his resume on the new york times what

do you think of that because one thing that doesn't really help this guy's case is that he throws in there that he you know one table tennis wish olympics and that's one of his you know starring harvey examples of his hard work throughout his life time that's a really help your case if anything over the years he admits and yeah i mean i grew to actually i think it's kind of weird i was several a list like material no yeah i mean kind of playboy reading. it so it doesn't really sound that who is your typical bankers playing table tennis real tennis like you know i don't know shannon what do you think so i'm going to have to get. on the table. thomas not included but i haven't read enough in quite a long time and if we can bring this because. i think you have much more as the point that we're going on a lot not often you see how something this valuable in the new york times office that's for sure speaking of things people are writing about ben bernanke he is the cover story of the april edition of the atlantic and the story is entitled hero ben

bernanke you save the global economy so why does everybody hate him well let's just take a look back to give a little bit of context to two thousand and nine when he was named time magazine's person of the year. ben bernanke first glance might seem like kind of a colorless bureaucrat in fact he's a powerful he's a mensch thoughtful you see in the interview in time magazine he's someone who recognized storch importance of what he was doing and the chairman whether it is greenspan or bernanke he they can do no good they cause our troubles they cause the inflation they cause the bubbles and therefore the but the correction is always there for yes dr paul and even in this article it points out that bernanke has always referred to bubbles in quotation marks that just kind of sums it all up a guy that doesn't even believe that bubbles really exist except you know we in

this case bernanke is always scared me because it's not like greenspan greenspan you he was king was compromised he was wrong to compromise ideology and he was he was on a power trip but i actually believe that he truly is as described a madman ok during the cold war we've got we have rational actors to negotiate with on the side of the russia of the u.s. and the russians right but in the case of ben bernanke you know he's a rational he literally believes what he's doing he actually believes in the phillips curve he believes that he's rated zero that the economy going right was recover when he was in fact an arsonist and he's letting all the fires and losers absolute joy and let me just point out how crazy this sounds because one of the things that talking about is bernanke you say yeah you have to get bank balance sheets healthy but individual consumers are important subject in a system to high unemployment high rates of bankruptcy and foreclosure is a very ineffective way to get there can't o'kane the value doing everything it just props up the banks and not that's an unemployment doesn't help these things i mean none of that has really changed and of course greenspan knew that he was probably the best when i could think of this help me just three years thing up front that is

what scares me a twilight zone it's the twilight i do do do with that it's all we have time for that's our show today thanks so much for tuning in don't forget to follow me on twitter at lauren lyster and go give us comments and feedback at youtube dot com capital accounts from everyone here. thanks so much for watching now great night. culture is that so much as i'm going to which of course he's right on it comes up here in any of the lessons of the two thousand and eight five system learn the speculation control the markets and can free markets do better things than regulate . wealthy british style. sometimes the title of.

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