March 14, 2012

Greg Smith is leaving Goldman Sachs because it "makes me ill how callously people talk about ripping their clients off."

He writes, in a NYT op-ed:
Over the last 12 months I have seen five different managing directors refer to their own clients as “muppets,” sometimes over internal e-mail. Even after the S.E.C., Fabulous Fab, Abacus, God’s work, Carl Levin, Vampire Squids? No humility? I mean, come on. Integrity? It is eroding. I don’t know of any illegal behavior, but will people push the envelope and pitch lucrative and complicated products to clients even if they are not the simplest investments or the ones most directly aligned with the client’s goals? Absolutely. Every day, in fact.

You don’t have to be a rocket scientist to figure out that the junior analyst sitting quietly in the corner of the room hearing about “muppets,” “ripping eyeballs out” and “getting paid” doesn’t exactly turn into a model citizen.
Here's a follow-up article in the NYT:
Mr. Smith’s criticism, much more than stories about bonuses or brickbats from the likes of Occupy Wall Street, could be especially painful for Wall Street now.

Wall Street, of course, has always sought profits — but if greed were to be countenanced, it should be long-term greed, not short-term greed, in the words of Gus Levy, who led Goldman Sachs in the 1960s and ’70s. With long-term greed, money was made with clients, not from them. 

102 comments:

ricpic said...

No greed in gubmint cause dat where duh good guys be. Eveybody know dat.

Rick67 said...

In a way they're imitating and reflecting the mentality of our government overlords.

And no I'm not being entirely flippant. I think there really is a relationship between what our government has become and how that mentality trickles down to the general populace.

Fleece the sheep!

Alex said...

I call bullshit on Greg Smith. Where are the emails that prove his allegation?

Michael said...

If true this is a very bad indictment of Goldman's culture which was once noted for its collaborative and energetic focus on client needs.

TCB-n-a-Flash said...

Brokers and Financial Advisers: We'll help you come up with a financial plan based on your goals, but we won't tell you which funds are winners and losers, even though we're the ones with the information.

TCB-n-a-Flash said...

John Corzine was a Goldman guy before his political career, and his subsequent raping of MF Global investors.

Wonder where he got his ethics?

phx said...

~~You know, capitalism is above the law
It say it don't count unless it sells~~

Jay Retread said...

Mitt is not going to like his Wall Street buddies being atacked!

Alex said...

I still want proof. Sure anyone who works as a high level executive is going to be arrogant, but that is not a crime.

ElPresidenteCastro said...

I love the push back that Smith is a loser that never made over three quarters of a million dollars... "'he didn’t make the MD cut' within Goldman, and 'never made more than $750,000 a year.'"

http://www.valuewalk.com/2012/03/goldman-sachs-inc-gs-lloyd-blankfeis-and-greg-smith-status/

I Callahan said...

Well timed - during an election year. You think this guy is just a dem operative, a al Susan Fluke? I wouldnt' be surprised.

edutcher said...

And Goldman has been mobbed up with the Feds since Willie.

Jay Retread said...

Mitt is not going to like his Wall Street buddies being atacked!

Willie and GodZero will like theirs being dissed even less.

After all, Milton earned his money.

ElPresidenteCastro said...

Jay, Stating that Goldman folks are Friends of Mitt is pretty laughable. It is the home of million dollar bundlers and the on deck circle for policy advisers to the Obama administration.

chuck said...

They're all encyclopedia salesmen now. Brittanica is no longer sold door to door, draw the connection.

phx said...

Nathan Vardi from Forbes says it's the investor's fault:

"If what Smith is saying today is true, then the biggest problem remains the “muppets.” Not Kermit or Gonzo, but the investors that Smith claims continue to buy garbage from Goldman. Until those clients start to take responsibility for themselves, Goldman will remain incentivized to sell stuff to them."

Alex said...

phx - if Goldman isn't giving competitive ROI to their investors, then they'll go somewhere else. You think these "muppets" are a bunch of geezers who don't know any better?

Quayle said...

Once Goldman's partners' money wasn't at stake, but rather shareholders, the motivation to keep the firm clean was lost.

phx said...

Why call them geezers when we have the perfectly good "muppets" already in use?

PatCA said...

He could always go to work at the New York Times. No bonus grabbing there! Janet Robinson made a paltry $20 million when she failed to rescue the paper.

Alex said...

phx - I'm just saying that there's a lot of judgin' going on without much facts. Maybe this guy Smith was humiliated by a co-worker and this is his revenge.

roesch/voltaire said...

If you read Matt Taibbi's article on The Great American Bubble Machine, this would come as no surprise, what is surprising is the man who resigned actually has a sense of ethics.

X said...

I thought the term was mullets

Geoff Matthews said...

It comes down to trust. Do you trust your financial adviser to have your best interests at heart?
If you don't, then you are going to leave them.
Do you trust your government to have your best interests at heart? If you don't, suck it, because you still have to pay your taxes.

Michael said...

El Presidente: My first suspicion was that this guy was miffed at his pay. $750,000 at GS is insignificant and he was probably leaving before they gave him the shove. This could account for his bitterness and willingness to go public. No top level investment banker would burn a bridge like that if he thought he could land somewhere else. this guy shot himself in the foot with this article if he is looking for work on WS.

AJ Lynch said...

RV:

Taibbi is just another America hater like you and Robert Cook.

phx said...

AJ Lynch - good point.

Revenant said...

I believe him when he says Goldman Sachs does this stuff.

I do NOT believe him when he says this is a new thing, and that he didn't participate in it. It all sounds like the standard stuff Wall Street insiders have been doing since the 19th century.

Bob Ellison said...

Alex, I share your skepticism, though not to the same extent. The drama and populism of Smith's essay and his chosen venue (the NYT) are making my BS warning lights blink a bit. But there could be a lot of truth in it.

John Stodder said...

Oh yeah, Wall Street is going to just crumble now. Take your money out of the market while you can. They'll never recover from this... op-ed.

phx said...

You can always tell someone who hates America. They're LIBERAL!

Bob Ellison said...

Just a thought: maybe "Greg Smith" is really Arlen Specter.

Bryan C said...

And yet this administration, in particular, has done everything it can to make short-term greed more effective and make long-term planning less workable. Ask the former bondholders at GM about that.

How can you plan a decades-long strategy around businesses and industries that some random government entity could cripple or extinguish on a whim tomorrow afternoon?

Carnifex said...

This could not possibly be true. After all Godzero and the D's passed all those financial reform bills. I just know that everything is sunshine and lollipops on Wall Street. Barney Frank said so! Actually he said "Wall Stweet", I assumed he meant street.

ElPresidenteCastro said...
This comment has been removed by the author.
Kurt said...

I'd agree with both Alex and Revenant. This is BS, but it's not necessarily false. I find it hard to believe that the Goldman Sachs of today is significantly different than the Goldman Sachs of 25 years ago or from the Salomon Brothers of the 1980s famously chronicled in Liar's Poker.

If Greg Smith felt comfortable at Goldman Sachs when it was bundling bad mortgages and everything else it did to contribute to the housing collapse, if he felt comfortable at Goldman Sachs when it took TARP money and other bailouts and handouts, why does he suddenly feel a tinge of conscience now. It's not like the place changed. No, chances are that after so many years he managed to do well enough to leave the firm without having to compromise his lifestyle too much without the sort of lavish compensation packages to which he has become accustomed.

garage mahal said...

Saul Alinsky has his hands on this somehow.

ElPresidenteCastro said...

Michael, I totally agree. You have to be a total under achiever to 'only' earn $750K after 10 years at Goldman Sachs. I'm surprised he lasted that long.

ElPresidenteCastro said...

Kurt, Exactly right. There is no way Smith spend 10 years up to his neck and just got religion. I believe in the redemption of souls but this looks a lot more like intentionally burning his bridge to garner attention to himself.

I foresee a book or regulatory posting. If Smith gets any real regulatory power Goldman will be very sorry. Nothing like a wannabe plutocrat scorned.

rehajm said...

I have no question there was talk of muppets around Mr. Smith- the family resemblance is uncanny...

Greg Smith

Waldorf

phx said...

Corporate suicide bomber. Tick tick boom.

Alex said...

I guess this is just another data point in how the MSM will do anything to besmirch the good name of capitalism.

MadisonMan said...

Too big to fail!

rhhardin said...

Trades are generally between somebody who thinks it's worth less than the price and somebody who thinks it's worth more than the price.

The price is what clears the market, equalling buyers and sellers.

Each side of a voluntary trade comes out ahead, for the moment.

Blue@9 said...

"If what Smith is saying today is true, then the biggest problem remains the “muppets.” Not Kermit or Gonzo, but the investors that Smith claims continue to buy garbage from Goldman. Until those clients start to take responsibility for themselves, Goldman will remain incentivized to sell stuff to them."

This. This is a market problem, not a government one.

Michael said...

R-V: I am not sure we know anywhere near enough to say that this guy is ethical. To bad mouth your ex employer is bad form in every industry. His exposure to the overall culture of a 30,000 plus enterprise, apparently from a pretty low level, suggests that he might have limited experience and a bone to pick. It is ethical only if not a rant on some anecdotal experiences that are unrepresentative of the organization as a whole.

phx said...

Barney Frank said so! Actually he said "Wall Stweet"

I have no question there was talk of muppets around Mr. Smith- the family resemblance is uncanny...

You guys let your kids see you mock people that way? Mingya, sometimes you gotta take a bath after jumping into the Althouse comments.

Carol said...

GS worked my state over, midwifing the destruction of our venerable old power company. Poof, into oblivion.

These masters of the universe are the cognitive elite that Charles Murray writes about.

Carnifex said...

@phx

Err no, I have no children, but if I did, yes I would make fun of a pompous lying blowhard with an infamous lisp. I would hope my children would be smart enough to know that making fun of any politician is the finest sport an American can engage in.

If your objection is making fun of lispers, no, I don't do that. Only those that try to preach at me, or denigrate me. Both Mr. Frank has participated in. He becomes fair game then. Then I become thimply ferothciousth.

Robin said...

I'm far from a Goldman Sachs fan, but Smith's piece is vacuous nonsense.

Charlie Martin said...

It's good this dope never went to medical school. He'd seize.

David said...

I carry no water for Goldman Sachs, because the logical, carefully constructed arguments of the Occupy movement have taught me to hate large powerful corporations and rich people, but aren't all Goldman Sachs clients large powerful corporations and rich people? Who deserve what they get?

I get so confused when meme's collide.

Sigivald said...

I don’t know of any illegal behavior, but will people push the envelope and pitch lucrative and complicated products to clients even if they are not the simplest investments or the ones most directly aligned with the client’s goals?

So, there's a new rule that an investment must be the simplest one available or the most directly aligned?

(Note that he does not say "opposed to the client's goals", or "not aligned", just "[not] most directly aligned".

When you have to weasel like that to get your "ripping off", you're selling something.

Call them callous? Sure, assuming what he's said is accurate. But I ain't seein' the "ripping ... off".)

TCB: Which funds are losers? All of them, really. Mutual funds as a group underperform the market slightly, and which ones overperform changes all the time.

Advisers don't tell you "which ones are winners" because if they're honest they don't know either - not telling you "X is a winner" is honesty, not a plot.

Roger von Oech said...

I'm just waiting for the announcement that the Goldman Sachs quitter dude has been given a show on MSNBC in the slot right after Rachel Maddow. #FullCircle

n.n said...

Smith is describing corruption in the exception, which is resolved through the rule of law. While it may mimic fundamental corruption, the latter is propagated through coercion, including redistributive and retributive change. Both need to be controlled and subdued for a society to remain stable, but especially the latter. Still, it would be interesting to know the dynamic which exists between the private and public sectors, between private citizens and civil servants.

That said, many, if not most, people, from the poorest to richest, were seeking instant gratification (i.e. physical, material, ego), for various reasons. We know that Wall Street was enabled to support this fiscal profligacy. That the government (especially federal), and its GSEs, were principal channels for transferring enormous amounts of wealth out of America. However, we know that the relationship was not necessarily conspiratorial or voluntary. That there were private institutions coerced to act against their managers' best judgment through the force of law or threat of litigation. In any case, assuming that the authority granted by several hundred million people to civil servants is meaningful, then the primary responsibility rests with them.

I'm guessing that corruption in the exception will not be corrected due to the MAD principle and coercion. We seem to be experiencing an uncontrolled reaction. And people thought nuclear Armageddon was the greatest threat to our civilization. No, it's far more likely we will experience a progressive decline as more of our citizens succumb to the corruption sponsored by dreams of instant gratification.

Tim said...

This is different from billable hours,how?

Eric said...

If you read Matt Taibbi's article on The Great American Bubble Machine, this would come as no surprise, what is surprising is the man who resigned actually has a sense of ethics.

It's also possible he resigned one step ahead of the ax, and the whole diatribe falls in "disgruntled ex-employee" land with no connection to ethics or even truth. I suppose the details will come out in time.

phx said...

If your objection is making fun of lispers, no, I don't do that. Only those that try to preach at me, or denigrate me.

You don't owe me any excuses.

traditionalguy said...

Another divide and conquer insertion of rumors about A is cheating B. That is the Progressive playbook. They are so noble, that they must be on our side...just trust them.

Back in reality, everyone who invests knows that the banks and the brokers are their natural enemies. That is how it has always worked.

The one who abuse their Clients the less are the recommended ones to use.

Or you can invest using Ameritrade and abuse yourself.

Henry said...

The sad fact is that this is nothing new. Kurt, upstream, references Michael Lewis's classic Liar's Poker. What Lewis points out is the huge conflict of interest in Goldman Sachs' own internal structure. There are traders who make money by doing trades with the company's own money. There are agents who make money by managing client money. Traders are lionized. Agents are bottom feeders. Traders with bad positions will happily tell agents to sell them to clients. It is in their interest to make money because their managers don't care if the clients get screwed.

Liar's Poker was written in 1989. There is nothing new under the sun.

Robert Cook said...

I'd guess Mr. Smith is lying when he asserts he does not know of any illegal behavior by his GS colleagues.

Paddy O said...

I think the clients really need to do some soul searching after this news.

Paddy O said...

Next we're going to be shocked to learn that car mechanics do the same sort of thing.

Maguro said...

Guess Obama will be returning all that filthy GS lucre now that this is out is in the open,




No?

roesch/voltaire said...

Illuminating to read blogs from all the millionaire investors questioning someone who has worked on the inside of the industry for years. If you look at his title, he was hardly low level, and I suspect did not have much time to tweet for post comments, but had enough of ripping off customers for Goldman's profit. This is not an attack on capitalism, but an attack on what a unregulated capitalism has morphed into-- it almost brought the country into another depression.

John Lynch said...

Eh... good candidate for "Bottom Story of the Day."

This man was in the wrong line of work. I doubt the world of high finance has ever been about doing right by everyone.

Didn't he see Wall Street?

Sounds like a troubled conscience... or something else happened that we aren't hearing about.

This is a very competitive man and I have trouble buying into the idea that the world of finance was a shock to him -especially since he spent so much time there.

Next up: "Used car dealer quits over dishonest sales techniques."

Paco Wové said...

"Illuminating to read blogs from all the millionaire investors questioning someone who has worked on the inside of the industry for years."

Got any examples? I'd like to read them.

Analogously, I'd assume everybody in the medical professions knows the meanings of 'GOMER' and 'P5T'.

Peano said...
This comment has been removed by the author.
John Lynch said...

It's exactly because this man worked in the industry for years that I'm so skeptical.

And I agree with RC- he really doesn't know of any illegal activity? Want to swear to that? And what about legal but unethical activity? When and where? Who?

Seeing the comment that he immediately landed a job at MSNBC shows that his level of integrity has, um, matured. He gets paid by GS for years for doing the same things he's denouncing now, then gets paid by the media by playing the whistleblower.

But he has no concrete examples or any evidence! That's not whistleblowing!

How.. honorable. If you switch sides, you need to name names. Otherwise, you're just an opportunist.

Is MSNBC this stupid?

Robert Cook said...

"1. The feds said to lending institutions: 'Ye SHALL extend more home loans to people who can't afford home loans. Else ye shall be punished.'"


Baloney, the lending institutions come by their greed and duplicity and rapacity and eargerness to defraud their customers honestly...they did this all on their lonesome.

Hagar said...

Goldman Sachs and the Democrats go back to Lewis Strauss and FDR, and the U.S. Treasury is generally headed by a former Goldman Sachs partner.
The firm's power is largely due to its political connections, and that had ought to be stopped, which also had ought to have a beneficial effect on its attitude to the clients.

John Lynch said...

How long until the book deal? He could ask Scott McClellan for pointers.

Maguro said...

Baloney, the lending institutions come by their greed and duplicity and rapacity and eargerness to defraud their customers honestly...they did this all on their lonesome.

All on their lonesome, really? No help from the Feds deciding whether to extend credit to borrowers with less than spectacular credit histories? Wonder the Obama administration bothers with stuff like this if the evil banks are so determined to throw money at poor people all on their own. Puzzling.

Michael said...

Robt Cook. I gather you are one of the unlucky ones trapped by a wily banker and forced to borrow a lot of money you didnt want at low interest rates. A lot of unsuspecting citizens had the same thing happen to them and the next thing you know the bankers wanted monthly payments on their home loans they took out and used the extra proceeds to buy bass boats and cars with. Filthy bankers. Ill bet you wont fall for that trick twice!

Ken Pidcock said...

Smith's account supports one of Michael Lewis's insights: Investment banks' going public has had some profound consequences. A public investment bank is not responsible to its clients. It is responsible to its shareholders. If meeting that responsibility involves screwing clients, well, then, that is the responsible thing to do.

Michael said...

Ken pidcock. What you wrote is nonsense.

Maguro said...

By the way, aren't GS's clients mostly other financially savvy players - hedge funds, institutional investors, etc? I assume they're all trying to rip each other off, aren't they?

SiriusNews said...

I can only hope the main stream media will finally investigate and report about the new movie that has the Goldman Sachs evidence. The documentary shows how Goldman Sachs sold FAKE stock into pension funds. The movie is www.TheWallStreetConspiracy.com let me repeat that again. " Goldman Sachs sold FAKE stock into the pension funds and stock market. All clearly explained in the new documentary called " The Wall Street Conspiracy "

Richard
SiriusNews

Michael said...

Maguro. You are correct in that GS clients are not widows and orphans. As to "ripping off" one another you are mistaken. Sophisticated investors dont "rip off" each other. Each weighs the value of any transaction, does the level of due diligence they feel necessary and then decide to do the deal. Or not. There are no one sided trades. Each side would like a profit. Rarely are there wildly uneven outcomes. It is,however,an ill wind that doesnt blow some good and sometimes a stressed player's desperation for capital results in unequal trading leverage and one side gains more than the other. But often the bad outcome could have been worse so the weakened party was not "ripped off."

Mark said...

"You think these "muppets" are a bunch of geezers who don't know any better?"

Alex, you would really be surprised.

JohnBoy said...

I actually work on Wall Street.

A couple of points, if I could. First of all, this guy was fairly junior. Second, let's see what his next move is - I am guessing he will enter a field where his moral preening will be seen as an asset. Politics, perhaps?

He won't be working in finance anytime soon. As valid as his points may be, no one will hire a snitch.

Hagar said...

van Susteren's financial expert this evening made some of the same points as K.P. above, that these late scandals on Wall St., not just Goldman Sachs, has a lot to do with all the re-organizing that Congress' legislation allowed the Wall St. firms to do, so that investment banks went into stocks and stockbrokers went into banking, etc., so that no one really knew what business they were in or what regulations they fell under. People are people, and you put temptations in their way, that's where they are going to go.

Hagar said...

and anyway, the revolving door between Goldman Sachs and the U.S. Government should be welded shut.

John Lynch said...

JohnBoy-

How will he invest his thirty pieces of silver?

John Lynch said...

Goldman loses 2 BILLION dollars.

I wonder if anyone shorted them?

John Lynch said...

Smith writes op-ed. Goldman stock tanks the next day. Say someone with advance knowledge of the content of that op-ed shorted the stock the day before...

Goldman gets hosed, someone gets very rich.

Goldman can't even sue for defamation. Imagine lawyers doing discovery...they can't afford it.

This is the perfect scam!

All speculative, of course. I'm not naming names. Just pointing out the lack of moral fiber I see on Wall Street...

John Lynch said...

Darth Vader speaks: Why I am leaving the Empire.

JohnBoy said...

There is a Christian doctrine known as "Cheap Grace."

This is when you try to get credit for being a moral exemplar without doing the hard work of changing your behavior and making restitution for your sins..

If Mr. Smith really wants to Set an Example, he will give his ill-gotten gains to the poor and spend the rest of his days in service to mankind.

I am waiting.....

Rusty said...

TCB-n-a-Flash said...
John Corzine was a Goldman guy before his political career, and his subsequent raping of MF Global investors.

Wonder where he got his ethics?



Perhaps he brought it with him to Goldman Sachs.

ElPresidenteCastro said...

Almost as funny as the original. And personally I believe that Darth Vader's renunciation of the empire is more heartfelt.

http://www.thedailymash.co.uk/news/society/why-i-am-leaving-the-empire,-by-darth-vader-201203145007/

Peter said...

I don't know why anyone would be shocked that an investment advisor will help you manage your money- until it's gone.

The Agency Problem is that the agent- any agent- is supposed to represent the client's interests, yet invariably puts the agents interests first.

It's not just investment advisors. Think, for example, of, umm, lawyers. Surely you'd have to be insanely idealistic to think "your" legal counsel will always put your interests before theirs.

Joe said...

How is any of this news? People are shocked, SHOCKED that financial people who make money selling crap are contemptuous of their customers who are generally dumb as shit and even more greedy. That's news?

Greg Smith wanted out of a high paying job and had to find a moral excuse. He did. But, as has been pointed out, he's a hypocrite for not leaving earlier.

Michael said...

Peter: You do not appear to know what Goldman Sachs does.

Rusty said...

or lawyers

Methadras said...

And yet these muppets still come to Goldman-Sachs seeking the same thing that the sellers are pushing. Profit and more money. Shocking. This weakling just doesn't like the battlefield it plays out on. Pussy.

BarryD said...

Oh, cool. At least this didn't degenerate into a totally unrelated argument about abortion.

Stephen A. Meigs said...
This comment has been removed by the author.
Stephen A. Meigs said...

Also disconcerting is recent evidence that Google is going to pot. And it's not merely a matter of putting advertisement ahead of what people are looking for. It's striking how the youtube interface has of a sudden gotten very awkward and dumbed down. I have noticed several places lately where having superficially a minimalist Apple look seems to be considered by interface developers to be more important than usefulness and coherence. Take the new comment system for blogger. As I type this, Why is the right 55% of my browser window totally empty? And why can't I ever post directly from preview? And why after noticing a mistake in the url syntax of my previous post did Google give me an error message saying their system was busy when I tried to delete it (without telling me whether it will indeed get deleted)?

As for Goldman Sachs, their deserved reputation for evil probably mostly ensures that respectable and therefore honest people will try to avoid dealing with them. So one would expect their clients to not be the most honest people in the world. And dishonest people tend to be the easiest to fool, because having deceptive ancestors tends to be associated with having deceived ancestors (who were deceived by the deceptive ancestors).

Michael said...

Stephen A. Meigs: The fact is that Goldman has the smartest and hardest working people in investment banking and trading. No amount of bullshit press about pouting underlings is going to steer clients away from the best. As to honesty, you cannot get far in their line of work if you are not honest and nothing, by the way, in the quitter's commentary alluded to dishonesty. What he did say is that GS people said mean things about clients behind their backs. Just as teachers say mean things about students, employees about their bosses, and so on. If you know what investment bankers do, or traders do for that matter, you will know that misrepresenting something does not get you a chance at bat again. And if no one will trade with you you are out.

Goldman doesn't represent disgruntled academics or journalists

Tarzan said...

You guys let your kids see you mock people that way?

What? A politician is being mocked?

Say it isn't so!

Crash helmets ON, kids, and TIGHTEN THOSE CHIN STRAPS!

Peano said...

Robert Cook said ... Baloney, the lending institutions come by their greed and duplicity and rapacity and eargerness to defraud their customers honestly...they did this all on their lonesome.

From Investor's Business Daily (Oct. 31, 2011):

Rewind to 1994. That year, the federal government declared war on an enemy — the racist lender — who officials claimed was to blame for differences in homeownership rates — and launched what would prove the costliest social crusade in U.S. history.

At President Clinton’s direction, no fewer than 10 federal agencies issued a chilling ultimatum to banks and mortgage lenders to ease credit for lower-income minorities or face investigations for lending discrimination and suffer the related adverse publicity. They also were threatened with denial of access to the all-important secondary mortgage market and stiff fines, along with other penalties.

The threat was codified in a 20-page “Policy Statement on Discrimination in Lending” and entered into the Federal Register on April 15, 1994, by the Interagency Task Force on Fair Lending. Clinton set up the little-known body to coordinate an unprecedented crackdown on alleged bank redlining.

The edict — completely overlooked by the Financial Crisis Inquiry Commission and the mainstream media — was signed by then-HUD Secretary Henry Cisneros, Attorney General Janet Reno, Comptroller of the Currency Eugene Ludwig and Federal Reserve Chairman Alan Greenspan, along with the heads of six other financial regulatory agencies.

“The agencies will not tolerate lending discrimination in any form,” the document warned financial institutions.
Ludwig at the time stated the ruling would be used by the agencies as a fair-lending enforcement “tool,” and would apply to “all lenders” — including banks and thrifts, credit unions, mortgage brokers and finance companies.

[...]

“HUD is authorized to direct Fannie Mae and Freddie Mac to undertake various remedial actions, including suspension, probation, reprimand or settlement, against lenders found to have engaged in discriminatory lending practices,” the official policy statement warned.
The regulatory missive, which had the effect of law, advised lenders to bend “customary” underwriting standards for minority homebuyers with poor credit.

“Applying different lending standards to applicants who are members of a protected class is permissible,” it said. “In addition, providing different treatment to applicants to address past discrimination would be permissible.”

To that end, lenders were directed to “make changes in marketing strategy or loan products to better serve minority segments of the market.” They were also advised to “change commission structures” to encourage brokers and loan officers to “lend in minority and low-income neighborhoods” — a practice Countrywide Financial, the poster boy of the subprime scandal, perfected. The government now condemns the practice it once encouraged as “predatory.”

FDIC warned banks that even unintentional discrimination was against the law, and that they should be proactive in making “multicultural” loans. “An ounce of prevention is worth a pound of cure,” the agency said in a separate advisory.

Confronted with the combined force of 10 federal regulators, lenders naturally toed the line, and were soon aggressively marketing subprime mortgages in urban areas. The marching orders threw such a scare into the industry that the American Bankers Association issued a “fair-lending tool kit” to every member. The Mortgage Bankers Association of America signed a “fair-lending” contract with HUD. So did Countrywide.

More here.

Stephen A. Meigs said...

Blah-hah-hah, Michael. Like Hank Paulsen, the former head of Goldman Sachs was being honest about the necessity of TARP to sustain the economy. Or how about Abacus:

Goldman told investors the securities in Abacus had been chosen by ACA Management LLC, a firm managing 22 CDOs with assets of $15.7 billion.

The Securities and Exchange Commission says this is where Goldman lied. According to the SEC's complaint, the underlying portfolio was put together by John Paulson, a hedge fund manager who hand-picked the worst possible assets in hopes that they would default. He rightly anticipated that the housing market would soon crash, and that people put into mortgages they couldn't afford would default when they lost the ability to simply refinance based on rising home values.


And the funny thing is that for all your encouraging me to be careful about what Smith said, somehow I actually never formally said Goldman was dishonest, just that their clients were likely to be so.

But do let's be careful about what Smith said. So whatya call (in reference to how to get ahead at Goldman)

"...persuading your clients to invest in the stocks or other products that we are trying to get rid of because they are not seen as having a lot of potential profit...",

an actual quote from Smith's op-ed at the Times.

To non-investment-banker folk, I'd say that's dishonesty. It's not as though it's likely that Goldman clients enjoy losing money or that they view Goldman as an appropriate charity.

CWJ said...

Thank-you Peano. I am familiar with the CRA from my days in retail banking in the '80s. I almost did a spit take reading Robert Cook's earlier post. Greed may come naturally, but it takes coercion like this to distort the market that badly. Stick on the front end; Fannie/Freddie carrot on the back end.