Thursday, December 25, 2008


Merry Christmas Hawaii but no Happy New Year—Wall Street is betting against us with “credit-default swaps”

by Larry Geller

Eleven states, including Hawaii, are the target of a new investment bank scheme to actually drive our economy into distress for their own profit.

Christmas came early on Wall Street for financial firms whose stockings were overstuffed with billions of dollars of taxpayer money. It was an unprecedented handout (formerly called a “bailout”) that assured CEOs their holidays would be merry and that champagne would flow freely aboard their yachts today.

So, with their narrow escape from yachtlessness, did the CEOs learn not to play with derivatives and mortgage-based securities? No, they seem unrepentant.

For those of us in Hawaii wondering where our next manapua will come from, it was not good news to read that Wall Street is not only betting against our state economy, they are investing in its failure. In order to make their investments pay off, they have to work to see that we fail. Hey, it’s the free market, either you believe in it or you don’t.

Goldman Sachs, which received a $10 billion bailout, is using that money for a variety of investments (other than helping out homeowners facing foreclosure, of course). They are still playing with derivatives. In fact, they are using these exotic instruments to enrich themselves by worsening a recession that they, of course, helped to bring about.

They are pushing “credit-default swaps” that will work if they can find a way to drive 11 states farther into the economic dumps.

Here’s how it works.

As part of a September presentation to institutional investors on “Best Long and Short Risk Strategies,” Goldman recommended buying credit-default swaps on “a basket of liquid State General Obligation credits with current and worsening fiscal outlooks,” including California, Florida, Nevada, Ohio, Wisconsin and Michigan.

The firm also recommended the derivatives on states with “significant unfunded pension” and other retiree obligations, including Illinois, Connecticut, Hawaii, New Jersey, Massachusetts and Nevada.

The practice of betting against such states is “distasteful,” said Frank Hoadley, Wisconsin’s director of capital finance in Madison. [Bloomberg News, Goldman Draws Ire for Advising Default Swaps Against New Jersey, 12/10/2008 ]

The same article notes that Morgan Stanley and Merrill Lynch have also recommended using swaps to bet against state credit. That’s how it works. Wall Street “talks down” state credit worthiness in an effort to make these derivatives succeed. The more firms that get on this bandwagon, the faster it will move.

New Jersey was the first to react.

The advice would cost state taxpayers if investors believe New Jersey bonds appear riskier than they actually are -- and force the state to pay higher interest rates on future bonds.

While not illegal, it is troubling Goldman Sachs almost simultaneously marketed New Jersey bonds to one set of investors, while suggesting to others they would be smart to buy insurance from the investment bank because those bonds may not be repaid, according to Geoffrey M. Heal, professor of public policy and business responsibility at Columbia University. [Pro Publica, Goldman Sachs Sells New Jersey Bonds, Then Warns of Default, 11/24/2008]

These Wall-Street firms talk down Hawaii and the other ten states in order to assure their derivatives pay off, but of course it is at taxpayer expense:

Goldman’s strategy of shorting municipal bonds of fiscally depressed states could ultimately result in even more problems for taxpayers. Concerns about a state’s credit quality often means bond prices go down. In turn, that can drive up the interest rate states and municipalities must pay to borrow money. And it all affects taxpayers. An increase of one percentage point on a $1 billion bond issue translates into a cost to taxpayers of an additional $10 million a year in interest. [Maddox Hargett & Caruso website, Goldman Sachs Profiting From Financial Problems Of Some States, 12/10/2008]

There were no new regulations put in place that would prevent this and other shenanigans on the part of those firms our government chose to bail out. Bush has never been in a regulatory mood. Will Obama do what’s necessary?

If you see him around Kailua, maybe mention this to him. Thanks.


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