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the news today violence is once again flared up. these are the images the world has been seeing from the streets of canada. trying to hope for a show to rule the day the big. good afternoon and welcome to capital account i'm lauren lyster here in washington d.c. here are your headlines for march fourteenth two thousand and twelve goldman sachs gets outed in a scathing 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 they pull 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 reactor we'll hear more from eve smith author of the popular blog naked capitalism and banks were sized up first stressed in a financial crisis scenario fifteen of the nineteen big banks passed the fed's task 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 break down exactly why i used to be worried about what you just saw am and bernanke he hero or villain it's the question explored in the cover story of the atlantic we'll tell you what we think let's get to today's capital account.

but bestial 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 let me just tell you what he says is the formula for being a leader at goldman so we can rehash this they execute on the firm's axis which is goldman speak for persuading your clients to invest in the stocks or other products that we're trying to get rid of because they're 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 c find yourself sitting in a seat were job is to trade any illiquid opaque product with

a three letter acronym yeah we know those m.d.'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 in them were often in like in the temporal transactions to twenty two is the theory of this email. 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 i don't know. yeah they always plugged in earlier i spoke about all of this there with eve smith she's author of the very popular financial blog naked capitalism and author of econ how unenlightened self-interest undermine democracy and corrupted 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 of apple and saks 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 excerpts to put the problem in the simplest terms the interests of the client continue to be side land lines 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 and sachs seemed to be putting making money above all of any other concerns you had temper wolf you had out because 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 yes and you know 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. book on this is. 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 a client was paying a large amount of money for this riveted everyone 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 want to exchange traded ones are pretty simple and you know if you you know just you know calls or puts the that's a different story we're talking of the customized ones. and those are just 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 telling on that is this limited or is this more reflective of more widespread practices within a day oh it's reflective of widespread practices no in fact the you know i work with one of the leading we were i had my back in the early ninety's of color and so since 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 leaving competitor bankers trust was ripping off clients and they could see in the way their their their trains were prize they were loading in a lot of what they called edge that was the profit margin and they said there's just no way these trades can work out so it's going to drive better for the market long term not to be you know partly because it took a what would take a while for the customers to hurt themselves or the bankers trust went down over the very type of scandal where some custom customers were indeed as o'connor kind of for software so badly that they wound up suing him out alternately led to the demise of bankers trust but you know just because bankers trust was the outlier

doesn't mean that bad 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 it's getting worse because that brings me to another part of his op ed where he said 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 takes tracked wealth off it's hot and now do they have to be more creative or innovative or whatever and order to get the 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 in the factories have blown up a lot of our customers and to your point were 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 math so you've got so derivatives are one of the many 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 and trysting and then i just want to bring up something else he said because he was talking about the evolution evolution of leadership he said leadership used to be about ideas set in a vamp poll and doing the right thing today if you make enough money for the firm and are not currently an actual murder which i think is key you will be promoted into a position influence i wonder if you think this eat those of 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 a bigger eco's over in the water because there's been this way for a very long time in the group had a big producer syndrome where if i mean the sort of point to two key figures i mean

for example of frank quattrone first but you've heard people you know in the last like we 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 at a 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. 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 example in the other example just of the royals conflicts that you know do get prosecuted to some degree would have this is this is hardly new i mean it's really hardly new and the difference is it was supposed to be an environment where people are supposed to be behaving more law and you know the goldman executives suggest it's not and. second you know goldman did at least have a culture of it my dear but there were three million aiden's and you know there

could be something for him to look at only 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 ok and it's just degraded over time but the big change does appear to be pursed appears to go boom it went public in one thousand nine their peer to peer 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 of much more of the trading side of the market came cemented when blankfein. blankfein became c.e.o. there were other traders who became more influential in the management group and i know people who were senior goldman who interestingly left around the time who said there was a big there was a big change that at least hank paulson was was technically the head of the firm john thing and john. were pretty influential management basically were actually thoughtful and cared about the franchise and that was the blankfein cohort came in that was just a big i mean that really was all we care about was profits and we don't really care

about tomorrow we just care about making money and that's something that greg smith says in his op ed is that this is really deteriorated under the watch of lloyd blankfein and he calls him out by name question though if this is the broader ecosystem 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 m.f. global right there was an investigative journalist i interviewed yesterday who had it by e-mail she did a story a long time ago about an executive at bear stearns all of these e-mails and he caving he was engaging in defrauding its customers 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 going 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 end 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 banking system taking out too much that's one and the second is we have areas of the market where the behavior has been so predatory respectively shut down one is the private mortgage securitization market there was one deal done last year wow gone and why is that significant explain for people that now 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 when you know all the predatory lending but also because frankly the servicers 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 separate mortgages that they own and if they drag out the foreclosure process they

can charge more late fees that they ultimately recoup on the house they sold and they charge more servicing fees so so they have like mark structure and more extraction exactly it's not as dramatic. in the mortgage space as it is a derivative but it's the same behavior pattern and i've had and i've spoken to mortgage investors and they said basically they won't touch it with you this is basically going to be ten years before private mortgage securitization market comes back as about why we're having so much government involvement you know it basically expanded freddie in the f.h.a. now are that market. but more what is meant and still ahead the chairman of the federal reserve and the cover story of the atlantic for april it posits ben bernanke you save the global economy so why does everyone hate him i will give you our three cents the first your closing market numbers.

you just put a picture of me when i was like nine years old i like to tell the truth. i'm a contestant i am a total get over friends that i love driving is a planned trip. but it was kind of the jester day. i'm very proud of the world without you it's place. you know sometimes you see a story and it seems so. you think you understand it and then you've lived something else here's some other part of it and realize that everything you thought you knew you don't i'm sorry is

a big. what drives the world the fear mongering used by politicians who makes decisions to break through get through if you have made who can you trust no one who is you who with a global missionary see where we had a state controlled capitalism is called sessions when nobody dares to ask. yes 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 to the financial crisis in the aftermath is that despite all 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 side 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.n.n. you 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 op-ed is the idea that they will lose clients because that 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 on who i should mention she did work at goldman in her career back in the eighty's asked how it is possible they called in

has not lost business through all of this and what were change that. i hate to say it it's because remember goldman used to be the firm with a good reputation so goldman has basically as much as i read goldman does it that's an acknowledgement that everybody else does have to and you know it and golden does some things like i hate to say it to have guys there four o'clock on friday in the summer you know if you want to believe cork off on friday the summer they'll be going guy on the desk to take your bit 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 that can go to and then for institutions despite all this information coming out goldman is still one of the i.b.m. you know they use you know their 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 of predatory and solid 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 be very aggressive bids even when the markets were bad but the flip side is they were also known as being you know out 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 for of it's day so getting these over the counter markets you know and i think the customers also have to flatter themselves even though they're you know they're you know they can take. care 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. that's right very their monopoly moving on though because that speaking of business models that these firms have the stress tests 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 way and realize losses on loans they

have or what kind of overstating of assets they've done that's my question for you . well no i think of course i'm very skeptical of long and very skeptical of these stress tests and here the fact 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 yet these banks will pass i'm sorry you know we don't buy it no i mean if you have if you had a european bank fail which would probably happen in that would be one to consequences of a dire scenario the markets are so interconnected that it's very difficult to imagine what would the u.s. bank would be caught with its 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 designed is that they really look 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 one of things i've been very critical of it's the very thing the biggest banks have very large second lien books

on mortgages that probably should be written down a lot more than they are ok and mark kimmitt they happen to have a mark to market and that's so that they've got air and map 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 reduced positions that they have supposedly matched but they're all based on assumptions of dynamic hedging you know so that they're not these aren't like they put in a hedge and they can go up or get it they have to keep we just in hedges during the day and markets seize up they suddenly lose their ability to adjust the hedge and they start losing money on the underlying them start losing money on the hedge and 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 rival losses lehman got to be so big i mean every time the lehman a six hundred sixty billion dollars bank with roughly half of it in in collateralized exposes with the other half was unsecured creditors they lost they

lost i think we've come to the right half cents on the other half of their money so they lost in. they were still putting the go last numbers i saw or they're still estimating but the numbers were over two hundred billion six hundred billion dollars plan they're going to get 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. if not if not more like one hundred thirty billion dollars depending on where you put the numbers and that was all the while building so i'm still not i can tell these stress tests that's not what they were stressing the fact that i've driven exposures on were assets go down the river to blow out to so still way too many moving parts and this is the do you have any idea what that what base and really do understand exactly. think about that was you smith author and

writer for naked capitalism and of the book econ 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 bug exclusive with eve on the mortgage settlement with banks that twenty five billion dollars 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

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 they call the muppets here's the excerpt over the last twelve months i have seen five different managing directors refer to their own clients as it's sometimes over internal e-mail even after the ses the fabulous found out they can't gods work carl levin vampire squid no humility no no humility that's the take away they don't care they're so removed from it that they don't have to care for making that kind of money what incentive is there to care for this more than a pleasure from actually screwing their clients and if you talk to people on wall street ever worked on wall street people have an attitude

a special interest 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 we're good and that the stock from aggressive attitude so i think it's part that's part of the game not only want to take the money but they want to they want to be true to the ground they do it well greg smith gives a little love you know he throws us a bone on us psychopath story the one in ten people in los risking 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 that's all that matters i mean it's about making money there's nothing new here and like there's like there's like five or so there was if you see their clients know that at the end of the issue is that they feel like the good thing about it that's why we make the comparison of the mafia because it's pretty much they're being strong armed well and eve smith had a lot to that point to now one thing i want to point out is that greg smith is being totally like liam in the blogosphere i saw one form of 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 if you wish olympics and that's one. you know. examples of his hard work throughout his lifetime that's a really help your case if anything over your homeowners he admits honest yeah i mean i grew to actually i think it's kind of weird i was seven. material no yeah i mean. this was a really known that who is typical bankers playing table tennis real tennis like you know i don't know shannon when you think so i'm going to have to get. on the table tennis not included but i've been reading up quite a long time and if we can bring this up because. i think you have much more as the point that we're going on now on a lot of not often you have something that's valuable in the new york times op ed page that's for sure. 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 bernanke was named time magazine's person of the year. ben bernanke you first glance might seem like kind of a colorless bureaucrat in fact he's a mensch. he's an immensely thoughtful you see in the interview in time magazine he's someone who recognized this. what he was doing and the chairman whether it is greenspan. 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 he has always referred to bubbles in quotation marks that just kind of sums it all up like i did doesn't

even believe that bubbles really exist except you know well in this case. bernanke is always scared me because he's not a greenspan greenspan you he was king was compromised he was wrong to compromise ideology and he was he was on a power trip but bernanke he actually believes it and he truly is as scribed a madman ok during the cold war we thought we had rational actors going to go through with on the side of the rush of the u.s. and the russians right but in the case of ben bernanke you know he's irrational he literally believes what he's doing he actually believes in the thoughts he believes that if you keep rates at zero that the economy's going to recover well he's in fact an arson there's a new lead in the fires and looters are so ridiculous 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 subjecting the system to high unemployment high rates of bankruptcy and foreclosure is a very ineffective way to get there yet ok so via doing everything it just props up the banks and not doesn't help unemployment doesn't help these things i mean none

of that is really change and of course he was probably the banks were not actually thinking is helping the crime which is the freakiest thing our plan very still scares me twilight zone it's the trial is doodoo doodoo doodoo 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 you've got us capital accounts from everyone here. thanks so much for watching an hour a night.