Goldman-Sachs Announces it Will Fight the SEC Lawsuit

With the scandal at Goldman-Sachs, all you hear from American financial "experts" these days is excuses. Former President Bill Clinton told an interviewer today that he'd been given the wrong advice about derivatives from Obama economic advisor Larry Summers and former Clinton Treasury Secretary Robert Rubin.

Before becoming Treasury Secretary, Rubin worked for 26 years at Goldman-Sachs, where he acquired CDO and SWAP and other contagious derivative enthusiasm. There were some sensible people who sensed something was off kilter in the manufacture of "synthetic derivatives." The Commodities Futures Trading Commission was trying to mitigate the dangers of synthetic derivatives during the Clinton administration. Derivatives were essentially a popular new product way back in 1998. Summers and Rubin said "Hey, Bill...no problem!" and Clinton turned his attentions to 'ahem'....other matters.

Do you think it's odd that Barak Obama is advised by the same people? Of course, President Obama has added "Turbotax Tim" Geithner to the team. But isn't Tim Geithner the same Goldman protege who relied so much on Goldman-Sachs economists for advice while Chairman of the New York Federal Reserve Bank, the premier bank of Wall Street financiers?

The argument used by Summers and Rubin in convincing government that derivatives were good is well known and often heard:

1. Only wealthy sophisticated investors take long or short positions on CDOs and SWAPs.

2. This new and seemingly limitless flow of cash will stimulate the economy is so many positive ways you can't imagine!

The first premise is true but the second is more unrealistic than a Spielberg fantasy film. By continuously lowering federal funds rates, Alan Greenspan had already flooded the housing and other financial markets with enough cash to float Noah's Arc. There was no more need for the cash provided by synthetic derivatives then there is for abacuses to equip program traders. Derivatives were just a newly invented and "creative" way to make money of thin air.

Yeah, it's true that only million dollar investors can participate in such things as exotic CDOs (Collaterized Debt Obligations). But the CDO that's now biting at the Goldman-Sachs hamstrings from the SEC lawsuit, was made up of thousands of bad mortgages which were headed for default. To not know that means you have to think that a company like Goldman had never heard of cash flows, liquidity, interest rates, interbank relationships, off-balance sheet financing, velocity of money and a whole lot of other even more boring economic terms.

So Goldman had to know the "basket" of mortgages put together by their boy John Paulson were in the shape of a children's park sliding board. Moreover, the SEC suit alleges that lower risk mortgages were deliberately excluded from the "basket." John Paulsen was betting on the decline of this basket of currencies, while Goldman was selling them to investors taking "long" positions expecting high interest payments.

Goldman-Sachs was also making nice commissions by selling the CDOs to gullible investors around the world. British PM Gordon Brown condemned the transactions and the Germans are conducting their own investigations to see if any of their investors were defrauded. Lawsuits are flying. Investigations are continuing. Other shoes may drop. The stock market is uncertain, in spite of other positive economic news-mainly for banks.

We have a message from the White House, though it is implicit, not explicit. "People, we are relying on your stupidity." Translated into government-speak, the phrase would read: "Don't worry, America; we have financial reform bills in both the House and Senate."

In today's government, there is no such thing as reform, financial, health care wise, or otherwise. It's all about political cover and taking every opportunity to increase governmental power. Didn't we already have the train wreck in late 2008? Isn't the United States embarked on a voyage toward banana republic status with our children in the dingy behind it? Didn't the government prop up Goldman-Sachs by covering AIG insurance policies on bad derivative mortgage debt? Isn't unemployment still at 10 percent? Aren't the bailed out financial institutions seeing their stock prices rise as the result of the taxpayer bailouts?

Here's all you need to know about the economy: The whip comes down, the dogs start barking, the caravan keeps rolling.