Convergence: Green Edition

We can't help but think of how we've already started the new year. We've been talking about space exploration & scientific research (& how austerity screws up both), "The Cleantech Crash" that only exists on "60 Minutes", and Southern Nevada Water policy. OK, so what? How do all these topics converge?

Here's the answer: climate change. Yes, climate change is happening. Yes, it's settled science. And yes, we really need to do something about it ASAP.

Never mind the latest fad of Polar Vortex TEA trolling. Wintry weather does not mean the end of climate change. In fact, 2013 may turn out to be the 7th hottest year on record. And the trend going forward is at least as disturbing.

Meanwhile on Capitol Hill, the G-O-TEA run House has gone out of its way to try to undermine efforts to curb climate change. Never mind that this anti-environment crusade does nothing #4jobs and has no chance of getting past the Senate (let alone President Obama). The TEA drinking party animals there would rather celebrate their "ideological purity" than do anything productive.

And speaking of productive, let's talk about Goldman Sachs' decision to abandon a 49% stake in a plan to build the West Coast's largest coal terminal. Finally, Goldman Sachs is starting to take its own advice. And it's not alone. More and more major banks are pledging not to finance new coal power projects. This may be due to coal becoming less cost effective and the trend of municipalities ditching coal and other fossil fuels for cleaner energy. We just wonder when "60 Minutes" will do a segment on "The Coal tech Crash".

With climate change becoming an unavoidable reality and renewable energy becoming an irresistible business opportunity, now is the perfect time to act. So why can't we? Why shouldn't we?

We've discussed this before, but we might as well bring it up again now. Here in Nevada, we've seen both the promise of action and the perils of inaction. Anyone who still wants to deny reality should come here and get a real taste of it. And in the mean time, we can only hope the progress we see here will eventually encourage a big, green solution for the entire nation.

Reno Isn't Goldman Sachs' Only ARS Victim

Yesterday, News 4 Reno did a quick piece on it.



But as we discussed yesterday, there's far more to this story than what initially meets the eye. Apparently, Goldman Sachs convinced Reno to issue $210 million in "auction rate securities" that ultimately cost the city far more than Goldman told them once the 2008 financial crisis hit and the "auction rate securities" (ARS) market turned out to be far less stable than Goldman claimed it was. In fact, it looks like Goldman has run into trouble on this issue before.

Last year, Goldman Sachs had to settle a law suit with Colorado's Division of Securities and buy back over $5 million worth of ARS after investors there complained about their inability to sell once the ARS market was frozen. And after New York's Attorney General began investigating Goldman in August 2008 over concerns that they pushed Fidelity Investments to sell Goldman underwritten ARS to investors, Fidelity agreed less than a month later to buy back $300 million worth of ARS from its customers.

Back in February 2008, just as the entire ARS market was starting to crash, The New York Times probed what was happening behind the scenes... And did this story that sounds awfully prophetic today.

In 2006, the Securities and Exchange Commission reached a $13 million settlement with 15 investment banks, and the industry agreed to impose a voluntary code of conduct for the auction-rate market.

The S.E.C. investigation centered on how bidding was conducted for these securities. Critics complain that investment banks have the upper hand in bidding because they can bid after seeing what other investors have bid.

Brokerage firms are not legally obligated to make a market in auction securities, or give clients a price even if there is not one in the market. But clients who are unable to sell are likely to argue that they were wrongly put into long-term securities when their intention was to buy shorter-term debt.

“If these were pitched as cash equivalents, if that is what the broker said they were, the banks may be held responsible for losses and clients’ inability to get their money out,” said Jacob H. Zamansky, a securities lawyer who represents individual investors.

Goldman Sachs and Merrill Lynch declined to comment.

The situation is an awkward one for investment banks and brokers that have had to tell clients that their cash is frozen until at least the next auction — if not longer. One affluent New Jersey family has sued Lehman Brothers for the declining value of its cash in auction-rate securities. Lehman has said it acted properly.

Money managers, chief executives and individual investors have been swept up by the latest turmoil in the credit markets. One wealthy investor said Goldman Sachs had sold him auction-rate securities and had described the instruments as equivalent to cash.

“It’s a moral outrage,” said this investor, who asked not to be named because he still has to deal with the bank. “Their pitch was, keep your cash with us, we get a higher rate.”

And this brings us back to Reno. Remember that in 2005 and 2006, Goldman Sachs was telling the City of Reno that ARS were essentially as good as gold when Goldman convinced Reno to issue that $210 million in ARS for the events center and railroad trench projects.

The city is seeking arbitration against the bank through the Financial Industry Regulatory Authority (basically, a private court for financial institutions), “to recover the damages it sustained due to Goldman’s misrepresentations and omissions” when the city issued the bonds in 2005 and 2006 for its downtown events center and railroad trench projects, according to complaint filed in February. Those bonds were issued on the so-called “auction rate securities” market, which collapsed amid the global financial meltdown in February 2008. [...]

Cities figured that would result in lower interest rates over time and investors thought they could get a liquid investment at higher interest rates compared to other liquid investment options like money market funds.

What cities and investors didn’t know, according to state and federal court filings against banks involved in the auction rate securities market, was the extent the market relied on the financial institutions to keep it running.

In other words, the banks were keeping the market alive by bidding on the bonds, too — and didn’t tell anyone. So when the banks stopped making those bids in February 2008 as the credit crunch began to squeeze the financial system, Reno’s interest rates spiked on the downtown events center bond and forced the city to drain a $5 million reserve fund to cover interest payments that jumped to 15 percent overnight. The city was also forced to pay millions of dollars in fees to the bank to refinance the debt.

Reno’s filing with FINRA says had the city known the market was so dependent on banks like Goldman Sachs — the Biggest Little City’s big bank of choice throughout much of aughts — it would have thought twice about issuing the debt on the auction rate securities market.

“…Goldman’s actions, misrepresentations and omissions demonstrate that it dd not deal fairly with Reno, and as a result Reno sustained extensive damages,” according to Reno’s filing.

So Reno thought that ARS would save them money over a traditional bond sale while still providing the city with needed funding for its infrastructure projects because Wall Street powerhouse firm Goldman Sachs told the city so. And investors thought ARS were "solid and safe" because Goldman Sachs told mutual fund providers like Fidelity to tell them so. What neither side knew was that both sides were being played as "Muppets", as former Goldman Sachs insiders Greg Smith and Jacki Zehner would later admit.

Here's Greg Smith in his own words (from his own New York Times Op-ed):

What are three quick ways to become a leader [of Goldman Sachs]? a) Execute on the firm’s “axes,” which is Goldman-speak for 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. b) “Hunt Elephants.” In English: get your clients — some of whom are sophisticated, and some of whom aren’t — to trade whatever will bring the biggest profit to Goldman. Call me old-fashioned, but I don’t like selling my clients a product that is wrong for them. c) Find yourself sitting in a seat where your job is to trade any illiquid, opaque product with a three-letter acronym.

Today, many of these leaders display a Goldman Sachs culture quotient of exactly zero percent. I attend derivatives sales meetings where not one single minute is spent asking questions about how we can help clients. It’s purely about how we can make the most possible money off of them. If you were an alien from Mars and sat in on one of these meetings, you would believe that a client’s success or progress was not part of the thought process at all.

It makes me ill how callously people talk about ripping their clients off. 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.

So the City of Reno may just be one of a multitude of ARS victims played by Wall Street "vulture capitalists" like Goldman Sachs. The Reno case just may be the first time that a municipality convinced into selling ARS seeks compensation for subsequent losses. And strangely enough, Reno may now be providing the Occupy/99% movement with something far more valuable than a pool complex to organize around.

Reno v. Goldman Sachs

We know Reno is still enduring some tough times. Gaming has been struggling (although the February gaming numbers suggest a turnaround may finally be underway), and employment recovery seems to be lagging behind Southern Nevada. And even the city itself has had to struggle with its finances. However, the City of Reno is now claiming that its financial problems were caused by something deeper than just the business cycle.

Yesterday, Reno announced its plans to sue Wall Street powerhouse Goldman Sachs over $210 million in supposedly "safe" bonds that Goldman persuaded Reno to issue... $210 million in "auction rate securities" that ended up essentially junked once the 2008 Global Financial Crisis triggered "The Great Recession".

Joe Peiffer, an attorney with the New Orleans-based law firm Fishman Haygood Phelps that was hired in December to represent Reno, said Wednesday those damages could total into the “multiple millions” of dollars.

He said Goldman Sachs withheld key information when it told Reno to issue bonds on the $330 billion “auction rate securities” market that ultimately fizzled in 2008 amid the global financial crisis.

“The problem was they weren’t told everything (they) needed to know to understand the risk,” Peiffer said. “It was something the banks knew and didn’t tell the cities.”

As a result of the market crash, Reno’s interest rates spiked, forcing the city to scramble to refinance through Goldman Sachs, which also served as Reno’s underwriter and broker-dealer for the bonds.

That resulted in millions in extra fees and interest payments.

This included the city draining a $5 million reserve fund to cover interest payments on the event center debt after the interest rate jumped to 15 percent and an $8 million termination fee it paid Goldman to fix the downtown trench debt.

So what exactly happened? Let me... No, I'll let RGJ's Brian Duggan explain.

So what exactly is an “auction rate security”?

It’s a relatively complex financial instrument that has been around since the 1980s (and first introduced to the municipal market in 1988 by Goldman Sachs, according to the New York Times). It allowed municipalities to issue long term debt at short-term interest rates by resetting the rate every seven to 35 days in a formalized bidding process.

Cities figured that would result in lower interest rates over time and investors thought they could get a liquid investment at higher interest rates compared to other liquid investment options like money market funds.

What cities and investors didn’t know, according to state and federal court filings against banks involved in the auction rate securities market, was the extent the market relied on the financial institutions to keep it running.

In other words, the banks were keeping the market alive by bidding on the bonds, too — and didn’t tell anyone. So when the banks stopped making those bids in February 2008 as the credit crunch began to squeeze the financial system, Reno’s interest rates spiked on the downtown events center bond and forced the city to drain a $5 million reserve fund to cover interest payments that jumped to 15 percent overnight. The city was also forced to pay millions of dollars in fees to the bank to refinance the debt.

Reno’s filing with FINRA says had the city known the market was so dependent on banks like Goldman Sachs — the Biggest Little City’s big bank of choice throughout much of aughts — it would have thought twice about issuing the debt on the auction rate securities market.

So long story short, this was just another one of Wall Street's "Get rich quick!" schemes that had municipal governments thinking they were getting a great deal on bond revenue when they were really just getting hosed. And believe it or not, a former Goldman Sachs executive has at least suggested that his former employer hosed Reno. In fact, Greg Smith, the former Goldman Sachs executive director who ran the firm's US equity derivatives business in Europe, the Middle East, and Africa took to The New York Times' Op-ed page last month to blow the whistle.

It makes me ill how callously people talk about ripping their clients off. 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.

It astounds me how little senior management gets a basic truth: If clients don’t trust you they will eventually stop doing business with you. It doesn’t matter how smart you are.

These days, the most common question I get from junior analysts about derivatives is, “How much money did we make off the client?” It bothers me every time I hear it, because it is a clear reflection of what they are observing from their leaders about the way they should behave. Now project 10 years into the future: 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.

Shortly after Smith left Goldman Sachs, Jacki Zehner, the youngest trader and first female trader to make partner in the firm, stepped forward to confirm Greg Smith's account of what happened at Goldman Sachs. And Zehner actually expressed regret over Goldman Sachs' creation and sale of "so much junk" in the form of "mortgage backed securities", credit default swaps, and auction rate securities that duped so many clients and investors and led to the 2008 financial collapse.

So much junk was created that should never have been with disastrous consequences and that will be a black mark on the whole industry for a long time, as it should be. That in and of itself is testimony to the industry in general having lost its way. When you create toxic waste and market it as if it is was not, you are indeed harming your moral fiber. I know many people who were in ‘that business’ who quit because they could not in good faith sell the crap they were being asked to create and market.

Last year, the Occupy/99% movement sprouted as a protest against Wall Street greed run amok. Back in October, Occupy Las Vegas famously made a mark on the CNN/Western Republican Leadership Conference Presidential Debate.



And of course, this was the same week that Mitt Romney infamously declared that no one should try to stop home foreclosures. Romney and his affiliated PACs have received over $1 million from Goldman Sachs so far this cycle, and he's responded with calls to repeal the kind of financial regulations that curb the kind of "so much junk" that Goldman Sachs has profited from.

Until last month, Goldman Sachs was becoming controversial because of its role in the mortgage meltdown and real estate collapse. But now, we're seeing another way that Goldman made money while putting people at risk. Now, we're seeing an entire city in crisis.

I'm sure we'll be hearing about Reno's "reckless fiscal policy" in the coming days. And yes, the City of Reno may not entirely be blameless in green-lighting this scheme to score "easy money" and avoid making tough decisions on revenue. However, I also have a hard time seeing how Reno could have done this on its own without Goldman Sachs "whispering sweet nothings" in city leaders' ears. It's increasingly looking like Wall Street's top financial powerhouse had a key role in Reno's present crisis at City Hall. We'll have to see how liable Goldman is ultimately held for this, but for now we're reminded again of what happens when we carelessly brush off regulation and oversight to let the financial industry make up its own rules.