A Note on Wall Street Corruption

Porter Stansberry is one of the sharpest financial analysts out there. His most recent claim to fame (that got notice from places like CNBC, Bloomberg, and the Financial Times, was his call several years ago that GM was going to go broke. He was widely jeered and hated for this “clearly anti-American” call, but history proved him to be correct.

A couple of years ago he set his sights on one of America’s most corrupt institutions: Goldman Sachs. This week he offered a mea culpa on his analysis of Goldman, not because he was wrong, but because he so completely underestimated the fraud going on. Here’s an excerpt from his comments. (The article is proprietary, so I can only quote short excerpts.)

As was subsequently revealed in the spring of 2009, my report was right on the money. Goldman had roughly $20 billion in exposure to AIG and received roughly $14 billion of money the federal government used to bail out AIG.

But I completely missed one big part of the story… And once this fact becomes common knowledge, it will probably mean jail time for several leading Goldman executives and the end of the firm. What did I miss? The entire Goldman-AIG relationship was a complete sham. Let me explain…

Goldman eventually admitted it had insured roughly $20 billion worth of subprime CDOs with AIG and had major exposure to the firm. But the New York Federal Reserve and Goldman Sachs never revealed this critical fact: Goldman didn’t merely buy insurance on a bunch of random subprime CDOs. It actually bought insurance on special CDOs it had put together and sold to its own clients. In other words, Goldman knew more about these CDOs than anyone else. Goldman bought insurance on these CDOs because it knew they’d collapse.

This is tantamount to building a house, planting a bomb in it, selling it to an unsuspecting buyer, and buying $20 billion worth of life insurance on the homeowner – who you know is going to die!

These facts all came to light because of research done by the office of Darrell Issa, the ranking Republican on the House Committee on Oversight and Government Reform. These new documents will certainly lead to a full investigation of the Goldman-AIG dealings and the subsequent $180 billion bailout led by the New York Federal Reserve. My bet? Heads will roll. If you own Goldman Sachs, you’d better sell.

Notice who else evidently knew of the corruption and turned a blind eye: The New York Federal Reserve. I agree with Porter that someone at Goldman is likely going to jail, but somehow I suspect everyone at the Federal Reserve will be just fine. We Americans trust the government, after all, and don’t go after the regulators.

The Stansberry Research web portal is http://www.stansberryresearch.com/

Inflation? Deflation? Inflation!

There’s been a debate going on as to whether the global economic problems and boneheaded government responses are inflationary or deflationary. On the deflation side: people are losing jobs and have no money – prices have to go down. On the inflation side: governments are printing money like never before in history – prices have to go up.

Allan Meltzer, Fed-watcher par excellence (he’s literally writing the book on the Federal Reserve, a 2 vol tome of which the first vol. is out) makes the case for inflation here. In my opinion, the deflation argument is strictly academic and completely out of touch with both Main Street and Wall Street, but who wants to listen to me!

But Allan Meltezer’s “The Fed’s Anti-Inflation Exit Strategy Will Fail” hits the nail on the head, and he’s worth listening to.

Source: Gary North.