News about bankrupt brokerage firm MF Global continues to be grim. Today, Nov. 21, 2011, the trustee administering the firm’s bankruptcy said that more than $1.2 billion in customers funds might be missing from customer’s supposedly segregated accounts.

MF Global May Have Helped Itself to More Than $1.2 Billion in Customer Funds

If true that would amount to about double the amount of funds originally reported missing by the trustee. MF Global filed for bankruptcy last month after it disclosed $6.3 billion exposure to the ongoing European debt crises by gambling on purchasing stressed sovereign debt. Unfortunately, for MF Global and its investors, the sovereign debt became even more stressed. As investors found out about the exposure many went into a panic and withdrew funds from the firm. This led to an old-fashioned style “run on the bank” event with the ensuing lack of funds forcing MF Global into bankruptcy.

“The apparent shortfall in what MF Global management should have segregated at U.S. depositories may be as much as $1.2 billion or more,” the office of trustee James Giddens said in a statement. MF Global was managed (apparently mismanaged) by former New Jersey Governor Jon Corzine who is also a former US senator from New Jersey as well as a former director of Goldman Sachs. Jon Corzine is an extremely high-profile guy to be up to his neck in the issue of missing customer segregated funds.

Customer Segregated Funds are Never to be Co-mingled with a Firm’s Operating Accounts

One of the mainstays of ethics and regulations of brokerage firms is that customer funds are to remain segregated no matter how difficult financial conditions may become for the firm. Apparently, in a failed effort to remain in business GF Global violated this most strict rule. It is highly unlikely that as president of the firm Jon Corzine would have been unaware that such a violation occurred if in fact substantial funds are missing from customer accounts.

If customer segregated funds are indeed missing then the well-connected Jon Corzine will put the US justice system to a real test. If such a misdeed has occurred Corzine will eventually be facing jail time or crony capitalism will once again triumph over the justice system.

In the meantime, many customers of GF Global are really suffering. Not only are substantial funds missing but they have had to post additional margin at brokerage firms that served as counter-parties or clearing firms for GF Global trades. Many customers have suffered forced liquidations even though they thought they were properly margined.

The sad story of GF Global’s bankruptcy has hit the commodity futures and brokerage industry hard. If a firm run by a man of Jon Corzine’s background is helping itself to customer segregated funds who can you trust with your money? For traders large and small that has become a serious question.

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November 3, 2010 is widely expected to be a day to remember in the stock, commodity, and Forex markets. Traders will focus on the Fed’s action as further quantitative easing is expected. The announcement from the Federal Reserve Bank is expected at 2:15 Eastern Standard Time. All markets will likely go through a period of wild volatility leading up to the announcement with even greater volatility to follow immediately after the Fed minutes are released.

Most market analysts expect that the Ben Bernanke led Fed will announce another round of quantitative easing. The initial round of easing is expected to be in the $500 billion range to start, with language in the meeting minutes indicating that additional rounds of easing may take place over the next several months should economic indicators still appear to be sluggish with little growth taking place in the economy.

Quantitative easing is just a recently coined term used by the Fed and economists to mean the creation of money without any backing. Today, the Fed doesn’t even have to speed up the printing presses. Quantitative easing can be accomplished with just a few keystrokes entered into computers. Then magically, the money supply is increased within the banking system and quantitative easing has been accomplished.

The Fed has started down a very slippery and dangerous path. In the entire history of civilization and Fiat money creation there is not a single example of the experiment working well. In fact, in almost every case the experiment has ended in tears and disaster.

The debasement of a nation’s currency does not go unnoticed by other nations and currency traders. The possibility of an exercise in quantitative easing running out of control is quite real. For example, just look at the recent bout of hyperinflation released in Zimbabwe where a $1 trillion note will no longer buy even a cup of coffee.

One has to wonder if the ivory tower based Ben Bernanke and his fellow Fed gang of bureaucrats have any idea about the fatal nature of the fire they are playing with? With typical Washington arrogance they seem to think that they can keep the dangerous quantitative easing genie on a short leash and under control. I wish them good luck but am extremely skeptical that the creation of additional currency without any backing for it will in the long run lead to anything but disaster for the US dollar and economy.

Since the stock market has had an extended run in the expectation of quantitative easing it is highly likely that after an initial pop, should quantitative easing indeed be announced, the market will turn around very abruptly and sell off heavily. Similar price action will likely be seen in the Forex and commodity markets.

A weak dollar going into the Fed announcement period will probably get even weaker for a short period of time and then snap back in the opposite direction. As commodity markets often trade off the direction of the dollar similar price action will probably be seen in markets that are already overextended to the upside. That is, the initial price action will probably be to the upside followed by a fast and substantial reversal.

Trading the markets will probably be an exciting and dangerous affair immediately after the Fed announcement. The most drastic action would likely take place should the Fed not announce an additional round of quantitative easing. In fact, markets have extended their move so far in advance of the Fed meeting it is likely that any announcement of less than $1 trillion in immediate quantitative easing will be met with widespread disappointment.

Market traders are on edge waiting for the 2:15 PM announcement. About 22 hours from now one can expect a period of extremely high volatility as traders sort out the likely market impact of the news. Stand by for an exciting day in the stock market, Forex market, and commodity futures market. Let’s just hope that the excitement is manageable and doesn’t interfere with successful trading. Tomorrow could be a brutal trading day.

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Canada’s Globe and Mail has the following story which should make candidates for the midterm election, whether Democrats, Republicans, Independents, Tea Party members, or anyone else who runs for office in this zany election, hope that they are lucky enough to lose come November 2.

According to this story the actual US government debt is so much greater than reported there is not any realistic hope that the government will be able to control a series of unpleasant events that the debt explosion will likely precipitate. Those politicians in office at the time the debt bomb explodes may find that the American political scene takes on certain characteristics of the French Revolution. To refresh your memories, the phrase “off with their heads” was very much in vogue those grim days.

Boston University economist Laurence Kotlikoff says US government debt is not $13.5-trillion (US), which is 60 per cent of current gross domestic product, as global investors and American taxpayers think, but rather 14-fold higher: $200-trillion – 840 per cent of current GDP. “Let’s get real,” Prof. Kotlikoff says. “The US is bankrupt.”

Writing in the September issue of Finance and Development, a journal of the International Monetary Fund, Prof. Kotlikoff says the IMF itself has quietly confirmed that the US is in terrible fiscal trouble – far worse than the Washington-based lender of last resort has previously acknowledged. “The US fiscal gap is huge,” the IMF asserted in a June report. “Closing the fiscal gap requires a permanent annual fiscal adjustment equal to about 14 per cent of US GDP.”

This sum is equal to all current US federal taxes combined. The consequences of the IMF’s fiscal fix, a doubling of federal taxes in perpetuity, would be appalling – and possibly worse than appalling.

Prof. Kotlikoff says: “The IMF is saying that, to close this fiscal gap [by taxation], would require an immediate and permanent doubling of our personal income taxes, our corporate taxes and all other federal taxes.

“America’s fiscal gap is enormous – so massive that closing it appears impossible without immediate and radical reforms to its health care, tax and Social Security systems – as well as military and other discretionary spending cuts.”

He cites earlier calculations by the Congressional Budget Office (CBO) that concluded that the United States would need to increase tax revenue by 12 percentage points of GDP to bring revenue into line with spending commitments. But the CBO calculations assumed that the growth of government programs (including Medicare) would be cut by one-third in the short term and by two-thirds in the long term. This assumption, Prof. Kotlikoff notes, is politically implausible – if not politically impossible.

One way or another, the fiscal gap must be closed. If not, the country’s spending will forever exceed its revenue growth, and no one’s real debt can increase faster than his real income forever.

Prof. Kotlikoff uses “fiscal gap,” not the accumulation of deficits, to define public debt. The fiscal gap is the difference between a government’s projected revenue (expressed in today’s dollar value) and its projected spending (also expressed in today’s dollar value). By this measure, the United States is in worse shape than Greece.

Prof. Kotlikoff is a noted economist. He is a research associate at the US National Bureau of Economic Research. He is a former senior economist with then-president Ronald Reagan’s Council of Economic Advisers.

He says the US cannot end its fiscal crisis by increasing taxes. He opposes further stimulus spending because it will simply increase the debt. But he does suggest reforms that would help – most of which would require a significant withering away of the state. He proposes that the government give every person an annual voucher for health care, provided that the total cost not exceed 10 per cent of GDP. (US health care now consumes 16 per cent of GDP.) He suggests the replacement of all current federal taxes with a single consumption tax of 18 per cent. He calls for government-sponsored personal retirement accounts, with the government making contributions only for the poor, the unemployed and people with disabilities.

Without drastic reform, Prof. Kotlikoff says, the only alternative would be a massive printing of money by the US Treasury – and hyperinflation.

For the complete story visit The Globe and Mail.

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Laurence Copeland is the author of an article titled, “Waiting for the Next Shoe to Drop” and is professor of finance at Cardiff University Business School. The opinions expressed are his own and do not constitute investment advice.

A few of his colorful but all too true quotes from the article are as follows:

1. How can you fail to be pessimistic when the world economy is still dominated by the U.S. – a basket case, becoming weaker every day, with a political class too blind or too scared to admit in public the obvious fact that the country cannot carry on living beyond its means?

2. The Americans remain in denial, with monetary and fiscal authorities primed to pick up any slack created by U.S. consumers unable to make their mortgage repayments and maxed out on their credit cards.

3. As long as the markets continue to see the dollar as a safe haven, it remains strong and U.S. competitiveness suffers accordingly, making it impossible to generate the export-led recovery the U.S. so desperately needs.

4. First, remember that, with the exception of the Canadian and Australian dollars, and Swiss franc, all the world’s major convertible currencies are priced on the Manure Standard: the dollar is viewed as slightly higher grade organic fertilizer than the euro, the yen is somewhat less disgusting than the dollar.

5. All are malodorous to a degree which would have made them near-worthless only a few years ago. No wonder gold – useless, but odourless – is riding high. If I am right, it has far further to go.

To review the entire article “Waiting for the Next Shoe to Drop” and to gain some insight as to just how clueless the Obama administration is about the probable disaster to come go to Shoe to Drop

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US Treasury Secretary Timothy F. Geithner expressed confidence that Europe will resolve the sovereign debt crisis that is expanding across the region and said the U.S. economy is strong enough to withstand any fallout.

“Europe has the capacity to manage through this,” Geithner said in an interview on Bloomberg Television’s “Political Capital With Al Hunt,” set to air this weekend. “And I think they will.

Haven’t we heard all this before? Geithner’s predecessor, Hank Paulson, expressed full confidence in the US financial system about two weeks before the bottom fell out with the demise of Lehman Brothers. And of course, President George Bush used to brag about the increasing numbers of Americans that were purchasing homes, while failing to mention that many of the homes were being financed by liar loans to people that absolutely lacked the ability to repay.

More recently, President Obama’s financial team, and the President himself, have been talking about how the economy is turning the corner and that soon enough happy days will be here again. As Treasury Secretary, Timothy Geithner, has been one of the Obama’s administrations chief cheerleaders.

There appears to be only one honest man, former Federal Reserve Bank Chairman Paul Volker, giving advice to the present administration. When asked if he agreed with Obama economic adviser Paul Volcker that there is a risk of “disintegration” of the euro, cheerleader Tim Geithner said Europe is “committed to fix this problem.”

Of course, I recognize how difficult it is for politicians to acknowledge and to speak truthfully about problems that confront their countries. No politician anywhere wishes to appear that any situation is beyond their ability to remedy. That is one inherent weakness in the democratic form of government. Politicians fear to say anything that may cost them votes no matter how true the statement may be.

Politicians are unwilling to speak truthfully about difficult situations that would require sacrifice and frugality on the part of voters in order to solve the problems. Politicians seem to prefer to engage in a confidence game whereby no real solutions are offered but speechs proliferate that they have taken appropriate action and that things will soon get better. The belief for politicians seems to be that if only we are confident enough that difficult situations will improve they will in fact improve. That is, with enough confidence problems will be solved, even if we don’t know exactly what caused the problems in the first place or refuse to acknowledge the source of the problem.

Therefore, we have Timothy Geithner responding to skepticism in financial markets about Europe’s efforts to tackle its debt by saying “it’s very natural that people want to see what Europe does. By acting, they will have the chance to earn people’s confidence over time.”

What Obama, Geithner, Summers, and the other administration cheerleaders probably don’t realize is that time is fast running out. The financial bailouts of the last two years have in effect transferred trillions of dollars of bad debt from the private sector, think bank bailout loans to Goldman Sachs, AIG, Citigroup, and others, to the public sector.

Governments around the world have taken on trillions of dollars of additional debt in an effort to revitalize their economies. The debt burdens of nations such as Greece, Spain, Portugal, Ireland, and Italy have probably become unmanageable. In our interconnected world sovereign debt issues are now spreading from these nations to effect stock markets and financial markets in the United States, the UK, Japan, and elsewhere.

Politicians around the world are strong believers in the “kick the can down the road” method of governing and managing economies. However, time is rapidly running out for the politicians favorite game. Not only are they running out of time but they are running out of road. Nations cannot save each other by simply creating Fiat currencies and loaning what passes for money to each other. The idea that you can solve problems of excessive debt by creating additional debt is ludicrous.

In the end, sovereign debt issues can only be solved by the reduction of debt. Nations must reduce expenses while increasing revenues. The problem for politicians and for the citizens of many nations around the world is that the austerity measures necessary to reduce unmanageable debt loads will cause a deflationary environment that will lead to tremendous hardships.

Certainly, it is difficult for any politician to speak of increasing taxes at a time when many people are already struggling just to stay alive. There is the fear, absolutely justified, that austerity measures, including the increase of taxes, will lead to civil unrest and disorder. This has already occurred in Greece and will likely spread throughout Europe and beyond as government cutbacks in expenses and services become more pronounced.

The more vocal that confidence cheerleaders like Timothy Geithner become the more you can be assured that we have entered the end game. Sovereign debt issues are measured in the trillions of dollars. I see no way that the issues can be satisfactorily resolved without going through a long term period of depression, hardship, and despair as the implosion of the Mount Everest of debt leads to a massive scale of bankruptcies and loan defaults, not only among individuals and corporations but among sovereign nations.

When Timothy Geithner says relax, all is under control, it’s time to take cover.

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Goldman Sachs CEO Lloyd Blankfein is experiencing a rough week. Goldman Sachs and Blankfien have over the years enjoyed significant political cover due in large part to the significant contributions made to both Democrat and Republican politicians and to the numerous Goldman Sachs alumni that served, and still serve, at the highest levels of government. However, in a midterm election year, and with a majority of voters yelling “off with his head”, his sunny day friends in government are joining in the populist sentiment of “off with all the Wall Street big shot’s heads”.

Public sentiment is now so strong over the reckless, greedy, immoral, behavior of the big swinging dicks Masters of the Universe at a time when Main Sreet America was and still is severely hurting that surely it will be a temptation for vote seeking politicians to let a few heads roll. Who can forget that almost immediately after the government bailed Wall Street out, including Goldman Sachs, with billions of dollars of taxpayers funds that the Wall Street unrepentant tone deaf executives paid themselves multimillions of dollars in bonuses, even after running their firms into near bankruptcy?

Lloyd Blankfein, as the head of the most powerful investment bank in the world, Goldman Sachs, is a prime head to go after. This Tuesday he faced a blistering cross-examination from U.S. lawmakers about the company’s ethics and behavior toward its clients.

In Tuesday’s interrogation by Senator Carl Levin, Blankfein was constantly interrupted, told to answer the question and stick to the point. He often looked extremely disoriented and uncomfortable. He often squinted as if puzzled by the questions. No doubt, a man who makes multimillions of dollars per year, whether his firm or economy is doing well or not, is not used to being interrogated and treated with disrespect.

“You’re going short against the very security (you’re selling) … many of which are described as crap by your own sales force internally.” said Levin, chairman of the Senate Permanent Subcommittee on Investigations.

“How do you expect to deserve the trust of your clients, and is there not an inherent conflict here?”

The SEC has brought fraud charges against Goldman Sachs for the way in which it conducted its business in structuring and marketing of CDO’s during the run-up to and during the housing mortgage crises of 2007 and 2008. The initial charges by the SEC were filed as civil charges only and charged Goldman Sachs and only one employee with fraudulent misrepresentation of the quality and nature of the CDO securities marketed by the firm.

Goldman has also been charged with basically favoring a large hedge fund, Paulson and company, by allowing Paulson to select poor quality mortgages to be included in a CDO offering and then marketing the junk CDO portfolio to less sophisticated Goldman clients. The SEC has charged that the transaction was fraudulent, that basically the CDO was designed to fail, and that Goldman Sachs knew full well that money in effect would be transferred from the “chump” clients to Paulson & Co.

The SEC has now given a clear indication that additional charges will be filed, probably against a number of high-ranking Goldman Sachs executives, including CEO Lloyd Blankfein, by referring its investigation of Goldman to The Justice Department for possible criminal prosecution, according to several media reports, including one by the Wall Street Journal, Thursday night.

In this case, the standard top level executive defense of “a few bad apples” and “gee, we didn’t know” are unlikely to stand up as from the recent Senate hearings it is apparent that the SEC and congressional staffers have quickly assembled volumes of Goldman’s internal e-mails and documents that indicate immoral and possibly illegal behavior on the part of top level Goldman executives.

It appears that Goldman Sachs and its top executives, especially CEO Lloyd Blankfein, are about to find out just how fickle their politician former friends can be when the voting crowd starts shouting “off with his head”.

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From James Kunstler’s blog:

“George W. Bush was onto something in the fall of 2008 when he remarked apropos of the Lehman collapse: “…this sucker could go down.”
It’s my serene conviction, by the way, that this sucker actually is going down, right now, even as I clatter away at the keys — perhaps in slow motion, so that not many other bystanders have noticed yet, and the few who have noticed are mostly too crosseyed with nausea to speak.”

Love him or hate him James Howard Kunstler most definitely has a way with words and can turn a mean and colorful phrase. A couple of examples follow from this week’s article entitled “A Still Moment”.

“”Going down” will mean a society with no money and an infrastructure for daily life that requires gobs of money to run, and a populace too dazed, confused, and inflamed to do anything useful in the way of organizing new infrastructures for daily life for their new circumstances. In retrospect, the Great Depression of the 1930s will look like “The Philadelphia Story” compared to what we wake up to ten years from now.”

“President Obama’s speech at Cooper Union last week was a remarkable performance. It managed to appear forceful and serious without containing any really serious or forceful proposals to discipline a banking system that is running a hostage-and-ransom racket on civilization. If this is finally what the Obama Experience is all about than his detractors have been right all along: he is a tool.”

“Personally, I believe that the damage was mostly done during the tenure of poor dim George W. Bush, and his predecessor Bill Clinton. I suspect that Mr. Obama learned at the height of 2008 election campaign — during those days of the Lehman collapse and the TARP — just how completely the government — and the people of the USA — were in fact hostage to the banking system, and that it has been his unfortunate role to pretend that there is some other fate to bargain for besides this sucker going down. It is probably why he continues to smoke so much. He must be lighting one Marlboro off the tip of another, one after another, in whatever inner sanctum he repairs to when the midnight chimes toll around the White House. It’s sad to think of this graceful, still rather young man going down in history as the chump-of-the-century, a reincarnation of Herbert Hoover on steroids, with sugar on top.”

As I said James Kunstler has a way for words. However, it was one of the comments to this week’s article that really grabbed my attention. The comment referred to a story that was told by Christopher Lawford, as reported in the Wall Street Journal on October 27, 2008, of musings made by his uncle, Teddy Kennedy, at a family gathering shortly before Kennedy’s death. The story is as follows:

“Ted Kennedy and a few family members had gathered one night and were having a drink in Mr. Lawford’s mother’s apartment in Manhattan. Teddy was expansive. If he hadn’t gone into politics he would have been an opera singer, he told them, and visited small Italian villages and had pasta every day for lunch. “Singing at la Scala in front of three thousand people throwing flowers at you. Then going out for dinner and having more pasta.” Everyone was laughing. Then, writes Mr. Lawford, Teddy “took a long, slow gulp of his vodka and tonic, thought for a moment, and changed tack. ‘I’m glad I’m not going to be around when you guys are my age.’ I asked him why, and he said, ‘Because when you guys are my age, the whole thing is going to fall apart.’ ”

Mr. Lawford continued, “The statement hung there, suspended in the realm of ‘maybe we shouldn’t go there.’ Nobody wanted to touch it. After a few moments of heavy silence, my uncle moved on.”

Lawford thought his uncle might be referring to their family–that it might “fall apart.” But reading, one gets the strong impression Teddy Kennedy was not talking about his family but about . . . the whole ball of wax, the impossible nature of everything, the realities so daunting it seems the very system is off the tracks.

And–forgive me–I thought: If even Teddy knows . . .”

The big question becomes “how can you save a system that is structurally unsound?”. Unfortunately, the short answer is that you cannot.

Much of the developed world created the Bretton Woods monetary system near the end of World War II. In 1945 after a sufficient number of countries had ratified the agreement the system was activated. Basically, the Bretton Woods system of monetary management established the US dollar as the world reserve currency and the United States was required to back that currency with gold. On August 15, 1971, while Richard Nixon was president, the United States unilaterally terminated convertibility of the dollar to gold. That placed the world on a Fiat monetary system that is backed by only one thing, a very fragile thing called trust.

In the history of civilization Fiat monetary systems have never lasted very long. The monetary system that allowed the issuance by nations, led by the United States, of trillions of dollars of sovereign debt without any real backing other than a promise to repay is now breaking down. The amount of debt created by the United States, the United Kingdom, Japan, Spain, Portugal, Iceland, Italy, Dubai, and the current poster child, Greece, to name a few, is just too great and is no longer sustainable. Even with the effort made by the US Federal Reserve Bank, the Bank of Japan, and other central banks to keep short-term interest rates low sovereign debt can no longer be properly serviced.

The fuse to the ticking time bomb has become much shorter with the situation that is developing in Greece. While a nation may be able to manipulate short-term rates and keep them low for an extended time it is rates in the long-term bond market that cannot be controlled by a central bank. For example, during just the last week ten year bond rates in Greece have more than doubled to above 10% as investors fear that Greece may eventually default and be forced to restructure its debts.

At this stage of the crisis investors are beginning to fear a haircut, which means that they fear they will not even receive all of their principal back much less continue to receive interest payments as originally agreed with their creditors. Investors are no longer willing to lend funds to Greece unless they receive a huge risk premium. This creates a situation that could quickly spin out of control. Should Greece decide to borrow money at extremely high interest rates that makes the debt load just that much more difficult to service and makes an eventual default all the more certain.

A positive feedback loop could be created that in the end leads Greece with only one option, which is to default on its debt. Since Greece is a member nation of the Euro zone even the possibility of default casts a long shadow upon the Euro currency. A worldwide financial panic could easily take place as the contagion from Greece spreads across the Euro zone, and could quickly lead to severe problems in the United States, the United Kingdom, and certainly all of the Euro zone member nations.

The sovereign debt crisis is only one of many that face the developed and developing nations. However, the fallout from sovereign debt not being repaid as originally promised may be enough to trigger an entire series of unfortunate and disastrous consequences that will rock not only Greece but as the world’s largest debtor nation, the United States of America.

As James Howard Kunstler says, and we are told Teddy Kennedy alluded to in 2008,”this sucker is going down”. James Howard Kunstler’s blog Clusterfuck Nation is updated every Monday morning. The blog usually has a fresh article that is of interest to those concerned about the path of self-destruction that the United States and much of the world seems to be on and what, if anything, can be done to change the course or mitigate the consequences of an US federal government led debt bomb disaster that is now spinning madly out of control.

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As early as 2007 homeowners were falling behind on their subprime mortgages, causing huge losses for investors that owned slices of their mortgages in collateralized securities peddled by Wall Street. According to internal company emails by top Goldman executives Goldman Sachs was “well positioned” to profit from a decline in the value of these offerings and as the economy tanked expected to make a financial killing.

What well-positioned meant is that the the firm had “the big short,” on as was declared by chief financial officer David Viniar — Goldman Sachs was making money off the souring of the very securities they had peddled to the market. Goldman Sachs in effect became the most profitable Wall Street investment banking firm in history by selling toxic assets in the form of CDO securities to their worldwide client base and then placing big bets against those securities which they were convinced were garbage and would fail.

Thus far, the SEC has only brought fraud charges against Goldman Sachs for one of the many CDO’s that they brought to the market during 2007 and 2008. The SEC charges allege that Goldman failed to properly disclose pertinent information about the quality of the securities that they were selling to their clients and about how those securities were selected.

Apparently, Goldman allowed a large hedge fund client to handpick the mortgages that were placed in the offering. The client, Paulson & Co., structured the CDO in a manner that guaranteed failure by selecting sub-prime mortgages that had been entered into by weak credit mortgagees. Goldman Sachs and Paulson & Co. both took short positions against the CDO and profited handsomely as the value of the mortgages collapsed. The SEC charges that fraud occurred in that one large client was favored with information that was not disclosed to other Goldman clients that purchased securities in the offering and that the quality of the securities was misrepresented.

Up to now, only civil charges have been filed against Goldman Sachs by the SEC. Probably, only a small amount of the evidence against Goldman Sachs has been publicly released by the SEC. As the case proceeds the SEC prosecutor will likely slowly release additional evidence of fraudulent behavior on the part of Goldman Sachs. I have little doubt that additional charges will be filed by the SEC as the case proceeds. Very likely, Goldman’s fraudulent behavior was not limited to only one of the CDO offerings that it marketed but extended to a number of them.

Let’s think for a moment about what type of behavior Goldman Sachs was involved in. In order to market securities Goldman must have told its clients that the securities were good investments. That’s the job of securities salesman and Goldman high powered salesman are some of the most aggressive and best in the business. Wth the collusion of the credit rating agencies, such as Moodys and Standard and Poors, securities that Goldman Sachs allegedly knew were pure garbage were marketed as AAA securities. Goldman then in effect took short positions against the securities, fully expecting them to drop in value, by purchasing credit default swap insurance from big insurance companies such as AIG.

As has been stated by Senators who are now investigating the actions of Goldman Sachs, and how their actions contributed to the financial meltdown, this is much like selling to one of your clients a house that you know has dangerous defective electrical wiring, then taking out an insurance policy that would pay you handsomely after the house burned to the ground.

As additional e-mails, internal documents, and perhaps even telephone conversations between Goldman Sachs executives, are presented by the prosecutor as evidence of Goldman’s fraudulent activities, it is highly likely that Goldman’s attorneys will strongly suggest that they settle the case with the SEC before going to trial. I expect that as Goldman has become the very symbol of Wall Street greed and excessive compensation to executives, even though those executives were apparently engaged in fraudulent activity, Goldman’s attorneys would realize that selecting a jury that didn’t hate Goldman Sachs would be a challenge.

Therefore, Goldman will probably escape from the fraud charges by not admitting to any wrongdoing on their part and by the payment of some fairly substantial monetary fine. Thanks in large part to the generosity of the federal government towards providing Goldman Sachs with emergency money when they needed it Goldman has once again returned to being an extremely profitable company and could pay a large fine without any difficulty. In light of the companies present strong cash position if I were a top level Goldman executives my real worry would not be about the payment of a fine. No, my concern would be that at some point criminal charges are added to the civil charges which have to date been filed.

It seems to me, that Goldman Sachs, and undoubtably other Wall Street firms, have become little more than criminal organizations when as a normal course of business they package and market securities to clients, thereby collecting substantial fees and commissions, when they know full well that the securities that they are marketing will more than likely lose substantial value. The criminal nature of the transaction becomes evident when the Wall Street firms take short positions against the very securities that they are representing to their client’s as being sound moneymaking investments. Certainly, this type of behavior is immoral and just plain wrong.

Hopefully, Goldman Sachs and other Wall Street firms will learn that placing “the big short” against security products of your own structuring and against your own clients in a deliberate effort to profit as your clients lose money is not only immoral but is in fact criminal behavior. If the top executives of Enron and WorldCom went to prison for defrauding investors and clients why should top executives of Goldman Sachs be spared the same punishment? However, I do not think that no matter how damaging the evidence may be against Goldman Sachs executives that criminal cases will ever be filed.

I expect that if Goldman Sachs executives are spared from criminal prosecution it will be because of the close ties that Goldman Sachs enjoys with the federal government and the need for the services that the firm provides to the government. No doubt, Goldman is THE major player in not only the stock market, but in the bond market and commodities markets. Bringing real heat against Goldman Sachs may place all of these markets as well as the economy in some jeopardy. In the present financial environment, our government may have a desperate need for Goldman Sachs services, especially in the bond market, and limit any prosecution to a civil suit or two that after some protest on the part of Goldman as to their innocence would be settled by merely a slap on the wrist and the payment of a fine.

Even with financial reform legislation being championed by the Obama administration Goldman Sachs will probably be deemed too important to the operation of the government’s fund raising efforts in the bond market and to the economy to punish in any meaningful way. Once again, we are likely to see just how relevant the Golden Rule is in a society that has misplaced its moral compass.

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President Obama flew to New York on Thursday to deliver a tough stern address focused on financial regulation reform to an audience that included a large number of prominent financial executives, telling them that greater government oversight is in the best interest of the financial industry — and the country. “Unless your business model relies on bilking people, there’s little to fear from these new rules,” he said standing near the Wall Street epicenter and speaking to many financial executives who consider themselves to be “masters of the universe”.

In his statements, Obama, emphasizing the connection between Wall Street and ordinary citizens, recalled a speech he gave two years earlier at the same spot. “I believe in a strong financial sector that helps people to raise capital and get loans and invest their savings. That’s part of what has made America what it is,” the president said.

“But a free market was never meant to be a free license to take whatever you can get, however you can get it,” he said. “That’s what happened too often in the years leading up to this crisis. Some — and let me be clear, not all — on Wall Street forgot that behind every dollar traded or leveraged, there is a family looking to buy a house, pay for an education, open a business, save for retirement. What happens on Wall Street has real consequences across our country, across our economy.”

The real question for president Obama and members of Congress is just how tough a bill on financial regulation reform can be passed into law and yet not greatly offend financial executives who have for years been their most generous campaign contributors? For example, president Obama reportedly received over $900,000 from Goldman Sachs, which arguably is the most profitable Wall Street firm as well as being by Main Street Americans the most hated firm in America.

Certainly, the Wall Street firms have proven through their use of reckless excessive leverage and casino like trading patterns that they are not capable of policing their own trading activities. Wall Street brokerage firms and banks seem to have lost interest in making loans to individuals and small businesses when trading activities have been so profitable. In addition, the extremely generous compensation packages paid to top Wall Street executives based upon their firm’s performance makes casino like gambling difficult for the top guns to resist. Should their humongous bets pay off the executives pocket millions of dollars in performance bonuses.

Should their reckless management of money turn out to be disastrous, as it was in 2007 and 2008, the executives have come to expect that the American government, which means taxpayer, will bail them out. Not only that, but they have come to believe that even when their firms perform in disastrous fashion they are still entitled to multi-million dollar bonuses. There is no evidence of shame or contrition among the ranks of Wall Street executives.

American taxpayers really do hate the too large to fail banks and the Wall Street casino firms. President Obama and his political team realize that in view of the large amount of populist support for financial reform on Main Street it will be tough for the Republicans to oppose a financial reform bill as they opposed health care legislation. The political dynamics of health care and financial reform are completely different and in the president’s favor.

For one thing, people love their doctors and were very suspicious, in many cases hostile, of any changes in healthcare that might interfere with their existing doctor/patient relationship. However, when it comes to financial regulation reform voters are nearly unanimous in their hatred for Wall Street, the too big to fail banks, and the Wall Street executives who ripped off millions of dollars in bonuses as their firms lost billions in 2007 and 2008, and are now making billions for their firms and huge bonuses for themselves due to the nearly free money provided to them by the Federal Reserve Bank and U.S. Treasury.

Of course, ultimately this extremely low-cost source of funds was and is being provided to Wall Street by the American taxpayer. No wonder Wall Street is hated so much by the typical American. At a time when many Americans are still under a great deal of financial stress Wall Street executives are raking in multi-million-dollar bonuses.

The bottom line is this. President Obama has the opportunity to get through Congress meaningful financial reform regulation, including the regulation of the current wild wild West derivatives market. But will he and Congress have the courage and guts to in effect bite the hand that has for so many years been generously feeding them by passing and signing into law really tough financial reform regulation?

I sincerely hope that I am wrong but what I expect to occur is this. Democrats and at least a few Republicans will pitch in and pass tough sounding legislation. President Obama will make a big deal of signing the bill and of putting the legislation on the books. However, a close reading of the legislation will reveal that powerful financial lobbying groups have been effective in watering down the bill as it makes its way through Congress. President Obama and Congress will make a big deal of passing effective legislation, but Wall Street and the Masters of the Universe will once again prove the validity of the Golden rule.

As a brief reminder, the Golden rule states that he who has the gold makes the rules. The United States has become more of a third world like Kleptocracy rather than a Republic or Democracy and even with an enraged Main street demanding real change in how our government works those in positions of power will probably do little more than occasionally throw a few crumbs in the direction of Main Street.

President Obama may talk tough about financial reform legislation but will he carry and be willing to use a big stick? It’s tough for anyone to severely beat up on the hand that has been so generously feeding them and their buddies with campaign contributions. This is president Obama’s opportunity to ram through meaningful reform legislation. But will he hang tough throughout the process in what is sure to be massive pushback by the powerful financial industry lobbying groups and the long money laden octopus like arms of Goldman Sachs? We will soon find out.

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With recent fraud charges being brought by the SEC against Goldman Sachs as to its structuring and marketing of collateralized debt obligations (CDOs) the exotic and toxic investment instruments that were financially engineered by Goldman Sachs and other Wall Street firms are back in the news. Yet few investors outside of financial market specialists fully understand just what a collateralized debt obligation financial instrument is and how the collapse of the real estate housing market could bring such financial grief to the world investment community.

Finally, a video has been created that explains in simple terms how a CEO is structured and managed and why they were and are still financial instruments of mass destruction.

The insanity of the Wall Street financial engineers is clearly shown as so-called synthetic CDOs were created by assembling portions of previously created CDOs into new CDOs which contained the most risky segments of the existing financial instruments. These highly risky investments, which apparently in some cases were actually structured to fail, were then sold to unsuspecting investors in every corner of the globe by an army of Wall Street salesman. The Wall Street investment banks and brokerage firms, such as Goldman Sachs and Merrill Lynch, generated hundreds of millions of dollars in commissions from marketing these toxic financial instruments.

However, some of the clever Wall Street favored hedge funds, such as Paulson and Co., that were at least partially responsible for the structuring of the CDO’s, made billions of dollars as the housing market collapsed in 2007 and 2008 and the mortgages providing interest payments to the CDOs went into default. As the video clearly shows once the stream of income from the underlying mortgages was reduced, or in extreme cases stopped altogether, the value of the CDOs plummeted, even reaching zero.

How could this be? How could a hedge fund that owned part of a CDO that lost most if not all of its value stand to make massive profits as the CDO collapsed? The answer lies in the hedge funds ability to purchase credit default swaps from poorly managed firms such as AIG, that depended upon CDO ratings of risk issued by rating firms like Standard & Poors rather than completing its own due diligence. The credit default swaps work much like an insurance policy. The hedge fund use the credit default swaps to insure against losses that might occur from a loss of value by the CDO.

As an example, let’s say that the hedge fund took an equity position of $50 million in a $1 billion CDO. Should the value plunge to zero the hedge fund would lose the $50 million. However, depending upon the amount of the credit default swap purchased and upon how quickly the CDO lost value the hedge fund might make hundreds of millions of dollars from the transaction as it could purchase protection on the entire CDO, not just the $50 million portion that it had purchased. Therefore, it was highly profitable to participating hedge funds and Wall Street investment banks, which also purchased credit default swaps, when the highly risky structured to fail CDO’s completely blew up.

The current SEC charges against Goldman Sachs barely expose the tip of the CDO iceberg. Trillions of dollars of collateralized debt obligations and credit default swaps were engineered by Wall Street. The practice of marketing CDO financial instruments to investors who, even though they may be sophisticated, didn’t understand the investments, perhaps because they relied far too much upon the reputation of Goldman Sachs and other Wall Street firms to protect their investors against abuse, was wide spread and earned billions of dollars in commissions for the Wall Street firms.

The CDO cancer quickly spread throughout the Wall Street community. The probability of making out sized profits was just too great for top Wall Street executives to resist. Wall Street has always engaged in corrupt, immoral, and completely selfish behavior. Greed is a powerful emotion and has not been washed away by the financial meltdown of 2007 and 2008. With housing foreclosures expected to reach record rates in 2010 we will more than likely hear far more about collateralized debt obligations and credit default swaps during 2010. It is highly unlikely that any of the news will be pleasant.

It will be interesting to see just how serious the SEC is in its fraud charges against Goldman Sachs. No doubt Goldman Sachs top executives will engage in a “we didn’t know” and “a few bad apples” defense. Certainly, they will push back with all of the firepower that politically well connected wealthy executives who are also major political campaign contributors can muster. There is a real possibility that at the end of what is likely to be a drawn out investigation Goldman Sachs will receive little more than a slap on the wrist.

In my opinion, in recent years Goldman Sachs and other Wall Street firms have degraded to being little more than criminal organizations. They seem to think that it is quite okay to plunder and pillage the very investors they are supposed to serve. Unfortunately, at times it appears that the cooperation between the United States government and the Wall Street firms is so close and orchestrated that the entire relationship is designed to fleece investors wherever they may reside as well as the American taxpayer.

So how do collateralized debt obligations work? Technicalities aside they have worked to transfer trillions of dollars from investors around the world, including huge amounts of funds from pension funds and retirement accounts, to Wall Street bankers and to hedge funds that bet that the investments would fail. The SEC fraud charges against Goldman Sachs will be a test as to just how cozy the relationship is between the Wall Street fraudsters and the United States government.

In the much smaller in scale Enron and WorldCom scandals of a few years ago the top executives were given prison terms. If the SEC and government are really serious about curbing fraud and financial abuse the top executives at Goldman Sachs and other Wall Street firms will eventually be given free room and board at a federal prison. Not that that will recover funds lost by investors but it might make them feel a tad better about their losses.

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