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.

2012: The #Occupy Election?

Last fall, attention quickly turned to the Occupy Wall Street protest/encampment that (at least temporarily) radically reshaped civic life in Lower Manhattan... And then the thousands of supportive Occupy protests that arose all over the country. Soon, we were talking about "The American Autumn". And then, all of a sudden, by November they seemed to lose steam and close up shop (either due to inclement wintry weather or by police force). At the end of last year, I was wondering how #Occupy would reemerge in 2012.

Now, we have our answer.

Inequality. Fairness. Cracking down on CEOs. These could be hand-painted slogans on Occupy movement signs.

Or they could be the takeaways from President Obama’s latest State of the Union address and his subsequent tour across several swing states. In yet another sign that the Occupy movement’s call for a focus on the income gap has solidified Democratic messaging, the President’s first big political moment of 2012 has a decidedly Occupy Wall Street tinge. [...]

“I think you can empirically say that [Occupy] has brought the issue of income inequality and basic fairness into focus in a way nothing else had for a long time,” the strategist said. “But as for the President, he has been saying the same things about fairness and rules of the road that everyone has to follow, for a long time.”

Think about it. Especially since last fall, President Obama has been talking more about economic inequality. And this subject has become front and center on voters' minds. And progressives finally seems to have a common theme to rally around.

Oh yes, and it also helps that as Democrats have (re)discovered the message of the 99%, the G-O-TEA has embraced the "mystique" of the top 1%.

Furthermore, there’s an increasing focal point for these messages: Mitt Romney. True, the polls done on Newt Gingrich’s negatives are such that most Dems go to bed at night dreaming of running against the former House Speaker. However, in their heart of hearts most believe it’s just not going to happen, and that Romney will emerge as the nominee. Even a few months ago that thought caused some to tremble: after all, at that point Romney’s path to the nomination apparently ran through taking down Rick Perry and his tea partying talk on Social Security, then presenting himself to the public as the moderate who’d taken on the extremists within his party and won. As it panned out, Romney’s had to run increasingly to the right, and the fact that he tallies so perfectly with OWS’s messages about economic unfairness is the icing on the cake. Don’t expect to see Democratic bigwigs donning Guy Fawkes masks, but do expect to hear their rhetoric draw nearer to that of the protestors.

Remember this?



And remember: Mitt Romney said that while he was here in Nevada to pander to TEA-nut extremists.

And especially as 2012 has begun, Mittens keeps reminding us why he's "Mr. 1%". Even his fellow G-O-TEA contenders are using matters of economic justice to attack Mittens!



Perhaps Occupiers weren't able to convince the Reno City Council to pass their resolution rebuking Citizens United, but they may end up influencing something far bigger: this year's Presidential Election. Again, matters of economic justice are now at the forefront of national discussion. And especially here in Nevada, we need answers on these questions. And at least thanks in part to The 99% Movement pushing to redirect focus onto economic inequality and economic justice, we may finally get them.

10 of 11: #Occupy

After "The Arab Spring" and Europe's summer of discontent, many were wondering why America couldn't protest what we supposedly couldn't stand. Well, we all now know what happened next...



"The American Autumn" began, and it came here in full force.

It probably doesn't help that despite economists marking the official end of "The Great Recession", household income continued to fall nearly 7%. No matter how much we say the recession is over, for many Americans, and a whole lot of Nevadans, it rages on as they live in fear of losing everything. But in the last couple of years, that fear has been turning into anger. In the beginning, "Tea Party, Inc." was hoping to co-opt that anger and direct it at "LIB-RULZZZ!!!" But now that Occupy Together is offering a non-corporate alternative to the "tea party" corporate front groups, people are realizing they now have a chance to redirect their anger at the forces that really caused this mess. [...]

This is why Americans are angry, and this is why Occupy Wall Street may become more than just one protest. People want jobs, but Congress does nothing. People are feeling ignored. Even while the 99% suffer, no one cares as long as the top 1% continues to prosper. Though people are demanding real economic solutions now, all they're seeing on Capitol Hill is more bickering about policies that do nothing to help formerly middle class workers.

This is why Americans are angry. They feel like the system is broken. And really, can we blame them? Can we blame them for being angry at Koch Industries buying as much "free speech" as they want with each upcoming campaign while they were continually ignored?

It even came here and reached us locally. Down south it seemed to hit a climax in October, when the G-O-TEA thought they were just going to see a debate and do a conference inside. They didn't expect an uprising outside.

Yes, there were a few conspiracy nuts. And there were some Ron Paul fans. And there were some genuine socialists.

However, there were also unemployed workers. And there were frustrated students. And there were union workers. And there were angry seniors. And there was an amazing cross-section of Southern Nevada present outside The Venetian. For all of Wall Street's efforts to smear and denigrate the Occupy/99% movement, there's obviously far more to it than just the small radical fringes that's really resonating with the strong majority of Americans. And that scares the corporate powers that be.

This is what scares them.

They just can't lump together all the Occupy/99% protesters as "crazies". It's easy to zoom in on one person and try it, but it's not so easy to dismiss this kind of crowd. And it's not easy to dismiss the policy ideas that most in Occupy support that most Americans also support, such as making the super-rich pay their fair share so we can make better investments in taking care of our seniors, putting people back to work, and educating our future leaders. The big corporate powers that be simply can't spin that as "fringe" or "extreme", and that scares them.

It seemed like The 99% Movement was about to "go big" and reshape American politics, but then it hit a snag. Winter was fast approaching (btw, Happy Solstice!), and so were the cops. And in the process, it seemed like Occupy was losing steam. Honestly, I was getting concerned.

However, I am concerned about The 99% Movement going forward. Is apathy laced diaspora the best approach to this next election? An election that can take this country in a radically different direction? An election that will again prominently feature the Supreme Court? An election that may feature [Mitt Romney or Paul-Gingrich-Perry-???], both of whom holding nothing but contempt for the 99%, as the Republicans' Presidential Nominee? An election that will either get Congress working for the 99%, or result in a Congress that's even more hostile to the 99%? When much is at stake here, I don't see the use in progressives sitting out this election to engage in street theater... While "Tea Party, Inc.", is set to spend however much it takes to take full control of the government.

If one wants to change the system, one can't just sit back as a bystander. One must work to create that change. And while protests are fine and dandy and a great way to express one's right to free speech, protests alone will not solve our problems. We have to remember to vote, too.

But then this happened, she came back, and I saw reason to hope again.

It can be quite easy to become discouraged by the whole process. And it can be quite easy to become distracted by the endless media hype and speculation over meaningless "dog and pony shows". And it be quite easy to become disgusted by all the dirty corporate money thrown around. Sometimes, it's quite difficult to remember what really matters.

However, we just can't forget. We can't forget the importance of getting involved, contacting our members of Congress, building a real movement, and ultimately using our votes to change what we don't like. That's the beauty of our system, and that's something we should never feel compelled to give up.

We can't wait for job creation. And we can't wait for an end to Congress' charade games that keep threatening middle class families. We need real, bold action on job creation. And if the current G-O-TEA House majority prevents Congress from acting, then we need to change Congress by occupying the vote.

Hopefully, this will finally come to fruition in 2012.