TBR News April 19, 2010

Apr 18 2010

The Voice of the White House

Washington, D.C. April 18, 2010: ” The website is being reconstructed under a new Webmaster after the sudden departure of the original one. I think we have a much nicer format and expect to see daily postings instead of weekly ones. There will be more interaction from readers (but no blog conversations, please!) and now to business. I have been saying for many months now that the economic collapse was rigged and that the American public has been royally screwed by the big bankers, working hand in hand with members of the bureaucracy.

I have said this on a small scale and the New York Times has been on it on a much larger scale. Now, we can learn, that the mighty, and arrogant, Goldman Sachs has been deliberately allowing its investors to be ripped off, only as long as they and their immediate, and crooked, friends, can prosper. What the mainline media has not dared to mention is this: As a direct result of the deliberate frauds in the mortgage business, caused by the thoroughly crooked Mosilla and company at Countrywide Mortgage (quickly bought up, bad mortgages and all, by the Bank of America), millions of “good” mortgages were bundled together with fakes, turned into a sort of investment sausage and quickly shoved off all over the world by large American banking houses who were fully aware they were selling junk.

China and the Arab countries were the prime, and deliberate, target in this rip off in the billions. But what no one wants to talk about is that because of this enormous, and still-ongoing, fraud, at least 50 million honest, punctual and hardworking Americans are paying on MERS-controlled mortgages. No one knows, or ever could know, who owns which of the chopped and sausaged mortgages so that when the times comes when the mortgages pay off said mortgage, they will never, ever get a clear title.

MERS was designed to hide this terrible fact but now, suspicious Americans in growing numbers have been discovering the MERS connection and, when they are unable to learn who owns their paper, going to the courts for redress. And in 90% of the cases, the courts rule for the mortgagee and they get their title from the courts with no further payments to anyone.

This is what no American paper wants to address because of the terrible consequences if it does. At this point in time, the public has become so dissatisfied with official indifference and, worse, total corruption, that the final straw would be to discover that they have been screwed to the wall and that no one wants to talk about it. We have included here a discussion by Mr. Trotter, who himself was a victim of the MERS scam, and who runs an excellent website that is packed with useful and often vital information.  Read on, children, read on!”


Watch This Case

April 16, 2010

New York Times

Months ago, Gretchen Morgenson and Louise Story of The Times exposed Goldman Sachs’s practice of creating and selling mortgage-backed investments and then placing financial bets that those investments would fail. While appalling, it wasn’t clear whether the practice was also fraud. The Securities and Exchange Commission has now decided that it was, charging Goldman on Friday. We urge everyone to keep a close eye on this case. If it is handled correctly, it should finally answer the question of whether malfeasance — and not merely unbridled greed, incompetence and weak regulation — was also responsible for the financial meltdown.

Goldman insists that what it was doing was prudent risk management. In a letter published in its annual report, it argued that “although Goldman Sachs held various positions in residential mortgage-related products in 2007, our short positions were not a ‘bet against our clients.’ ” The bank also insists that the investors who bought the structured vehicles were sophisticated professionals who knew what they were doing.

The S.E.C. is now charging just the opposite.

It accuses Goldman of intentionally designing a financial product that would have a high chance of falling in value, at the request of a client, and lying about it to the customers who bought it. It says that Goldman allowed that client — John Paulson, a hedge fund manager — to pick bonds he wanted to bet against, and then packaged those bonds into a new investment.

Goldman then sold this investment to its clients, telling them the bonds were chosen by an independent manager, and omitted that Mr. Paulson was on the other side of the trade, shorting it, in the industry vernacular.

Five months after Goldman sold the investments, 83 percent of the bonds contained in the packaged securities were downgraded by rating agencies.

Goldman vigorously denies any wrongdoing, calling the S.E.C.’s charges “completely unfounded in law and fact.” It will undoubtedly assemble a daunting legal team and mount a vigorous defense. But if the S.E.C. makes its case, it will be a watershed moment, changing the dominant narrative of the financial crisis.

Up to now, the bankers have argued that the financial crisis was like what insurers call an “act of God,” an unforeseeable cataclysm over which they had no control. This has allowed them to shrug off responsibility, even as taxpayers bailed them out. It has allowed them to sleep soundly after collecting their huge bonuses. Goldman is not the only bank to have sold mortgage-backed securities and then bet against them. We suspect that after Friday, others on Wall Street may have a harder time sleeping.

S.E.C. Accuses Goldman of Fraud in Housing Deal

April 16, 2010

by Louise Story and Gretchen Morgenson
New York Times

Goldman Sachs, the Wall Street powerhouse, was accused of securities fraud in a civil lawsuit filed Friday by the Securities and Exchange Commission, which claims the bank created and sold a mortgage investment that was secretly intended to fail. The move was the first time that regulators had taken action against a Wall Street deal that helped investors capitalize on the collapse of the housing market.

The suit also named Fabrice Tourre, a vice president at Goldman who helped create and sell the investment.

In a statement, Goldman called the commission’s accusations “completely unfounded in law and fact” and said it would “vigorously contest them and defend the firm and its reputation.”

The focus of the S.E.C. case, an investment vehicle called Abacus 2007-AC1, was one of 25 such vehicles that Goldman created so the bank and some of its clients could bet against the housing market. Those deals, which were the subject of an article in The New York Times in December, initially protected Goldman from losses when the mortgage market disintegrated and later yielded profits for the bank.

As the Abacus portfolios in the S.E.C. case plunged in value, a prominent hedge fund manager made money from his bets against certain mortgage bonds, while investors lost more than $1 billion.

According to the complaint, Goldman created Abacus 2007-AC1 in February 2007 at the request of John A. Paulson, a prominent hedge fund manager who earned an estimated $3.7 billion in 2007 by correctly wagering that the housing bubble would burst. Mr. Paulson is not named in the suit.

Goldman told investors that the bonds would be chosen by an independent manager. In the case of Abacus 2007-AC1, however, Goldman let Mr. Paulson select mortgage bonds that he believed were most likely to lose value, according to the complaint.

Goldman then sold the package to investors like foreign banks, pension funds and insurance companies, which would profit only if the bonds gained value. The European banks IKB and ABN Amro and other investors lost more than $1 billion in the deal, the commission said.

“Goldman wrongly permitted a client that was betting against the mortgage market to heavily influence which mortgage securities to include in an investment portfolio,” Robert Khuzami, the director of the commission’s enforcement division, said in a written statement.

The lawsuit could be a sign of a revitalized Securities and Exchange Commission, which has been criticized for early missteps in assessing the causes of the financial crisis. The agency appears to be tracing the mortgage pipeline all the way from the companies like Countrywide Financial that originated home loans to the raucous trading floors that dominate Wall Street’s profit machine.

At a conference in New Orleans on Friday, Mr. Khuzami indicated that he was scrutinizing other deals involving mortgage securities. “We’re looking at a wide range of products,” he said at a news conference. “If we see securities with similar profiles, we’ll look at them closely.”

Shares of Goldman Sachs plunged more than 10 percent in just the first half-hour of trading after the suit was announced Friday morning. They closed down 13 percent, at $160.70, wiping away more than $10 billion of the company’s market value.

Investors sold other bank stocks, as well, as rumors swirled about which other firms might become embroiled in the commission’s investigation. Next to Goldman Sachs, Deutsche Bank’s American shares had the steepest decline, falling 7 percent.

Goldman issued a second statement after the market closed saying that the firm had lost money on the deal in the S.E.C. case and that it provided investors with extensive disclosure on the deal. The firm said the losses in the deal came from the overall collapse of the mortgage market, not from the way the deal was structured.

The accusations amount to a black eye for the once-untouchable Goldman Sachs, a money machine that is the epicenter of Wall Street power. For decades, its platinum reputation has attracted top investors and stock underwriting deals.

Several of its former chief executives have gone on to high public office, among them Henry M. Paulson Jr., the former Treasury secretary, and Jon Corzine, the former New Jersey governor. (Henry Paulson and John Paulson are not related.)

In recent months, Goldman has been defiant in the face of criticism, repeatedly defending its actions in the mortgage market, including its own bets against it. In a letter published last week in Goldman’s annual report, the bank rebutted criticism that it had created, and sold to its clients, mortgage-linked securities that it had little confidence in.

“We certainly did not know the future of the residential housing market in the first half of 2007 any more than we can predict the future of markets today,” Goldman wrote. “We also did not know whether the value of the instruments we sold would increase or decrease.”

The letter continued: “Although Goldman Sachs held various positions in residential mortgage-related products in 2007, our short positions were not a ‘bet against our clients.’ ” Instead, the trades were used to hedge other trading positions, the bank said.

Goldman was one of many Wall Street firms that created complex mortgage securities — known as synthetic collateralized debt obligations — as the housing wave was cresting. At the time, traders like Mr. Paulson, as well as those within Goldman, were looking for ways to bet against the overheated market.

For months, S.E.C. officials have been examining mortgage bundles like Abacus that were created across Wall Street. The commission has been interviewing people who structured Goldman mortgage deals about Abacus and similar instruments. The commission advised Goldman that it was likely to face a civil suit in the matter, sending the bank what is known as a Wells notice several months ago.

The S.E.C. action is a civil complaint, but it could be referred to criminal prosecutors who would have to prove that individuals intended to defraud investors.

The S.E.C. focused on only one Abacus deal in its complaint, but Mr. Khuzami said in a conference call on Friday that the commission continued to look at the rest. All told, $10.9 billion of Abacus investments were sold.

Mr. Tourre, the Goldman vice president named in the lawsuit, was one of the firm’s top workers running the Abacus deals, selling the investment to investors across Europe. Mr. Tourre was raised in France and moved to the United States in 2000 to earn his master’s degree in operations at Stanford. The next year, he began working at Goldman, according to his profile on the LinkedIn social network.

He rose to prominence working on the Abacus deals under a trader named Jonathan M. Egol. Mr. Egol, who is now a managing director at Goldman, is not named in the S.E.C. suit.

Goldman structured the Abacus portfolios with a sharp eye on the credit ratings assigned to the mortgage bonds contained in them, the S.E.C. said. In the Abacus deal cited in the S.E.C. complaint, Mr. Paulson pinpointed those mortgage bonds that he believed carried higher ratings than the underlying loans deserved.

Goldman placed insurance on those bonds — called credit-default swaps — inside Abacus, allowing Mr. Paulson to bet against the bonds while clients on the other side of the trade wagered that they would make money.

But when Goldman sold shares in Abacus to investors, the bank and Mr. Tourre disclosed only the ratings of those bonds and did not disclose that Mr. Paulson was on the other side, betting those ratings were wrong.

Mr. Tourre at one point complained to an investor who was buying into Abacus that he was having trouble persuading Moody’s to give the deal the rating he desired, according to the investor’s notes, which were provided to The Times by a colleague who asked for anonymity.

In seven of Goldman’s Abacus deals, the bank went to the American International Group for insurance on the bonds. Those deals have led to billions of dollars in losses at A.I.G., which received a $180 billion taxpayer rescue. The Abacus deal in the S.E.C. complaint was not one of them.

That deal was managed by ACA Management, a part of ACA Capital Holdings, which changed its name in 2008 to Manifold Capital.

Goldman told investors the mortgage bond portfolio would be “selected by ACA Management,” according to the deal’s marketing document, which was given to The Times by an Abacus investor. That document says Goldman may have long or short positions in the bonds. It does not mention Mr. Paulson.

ACA was not named in the suit. That firm was led to believe that Mr. Paulson was positive on mortgages, not negative, and so it did not see a problem with his involvement, the S.E.C. said. Mr. Tourre was aware of ACA’s misconception, the commission said.

In February 2007, Mr. Tourre met with both ACA and Mr. Paulson, and he sent an e-mail message to a Goldman colleague acknowledging the awkwardness of the situation. “This is surreal,” Mr. Tourre wrote.

Nine days later, a Goldman colleague wrote Mr. Tourre and said, “the C.D.O. biz is dead. We don’t have a lot of time left.”

The Abacus deals deteriorated rapidly when the housing market hit trouble. For instance, in the Abacus deal in the S.E.C. complaint, 83 percent of the mortgage bonds underlying it were downgraded by rating agencies just six months later, and 99 percent had been downgraded by early 2008, according to the S.E.C.

It takes time for such mortgage investments to pay out for investors who make bets against them. Each deal is structured differently, but generally, the bonds underlying the investment must deteriorate to a certain point before those who bet against the bonds get paid. By the end of 2007, Mr. Paulson’s credit hedge fund was up 590 percent.

Investor Who Made Billions Is Not Target of Suit

April 16, 2010
by Gretchen Morgenson and Louise Story
New York Times

Three and half years ago, a New York hedge fund manager with a bearish view on the housing market was pounding the pavement on Wall Street.

Eager to increase his bets against subprime mortgages, the investor, John A. Paulson, canvassed firm after firm, looking for new ways to profit from home loans that he was sure would go sour.

Only a few investment banks agreed to help him. One was Deutsche Bank. The other was the mighty Goldman Sachs.

Mr. Paulson struck gold. His prescience made him billions and transformed him from a relative nobody into something of a celebrity on Wall Street and in Washington.

But now his brassy bets have thrust Mr. Paulson into an  uncomfortable spotlight. On Friday, the Securities and Exchange Commission filed a civil fraud lawsuit against Goldman for neglecting to tell its customers that mortgage investments they were buying consisted of pools of dubious loans that Mr. Paulson had selected because they were highly likely to fail.

By betting against the pool of questionable mortgage bonds, Mr. Paulson made $1 billion when they collapsed just a few months later, the S.E.C. said. Investors, who bought what regulators are essentially calling a pig in a poke, lost the same amount.

Mr. Paulson, 54, was not named as a defendant in the S.E.C. suit, but his role in devising the instrument that caused $1 billion in losses for Goldman’s customers is detailed in the complaint. Robert Khuzami, the director of enforcement at the S.E.C., explained that, unlike Goldman, the manager of the hedge fund, Paulson & Company, had not made misrepresentations to investors buying the security, known as a collateralized debt obligation.

“While it’s unfortunate that people lost money investing in mortgage-backed securities, Paulson has never been involved in the origination, distribution or structuring of such securities,” said Stefan Prelog, a spokesman for Mr. Paulson, in a statement. “We have always been forthright in expressing our opinion as to the quality of the underlying mortgages. Paulson has never misrepresented our positions to any counterparties.

“There’s no question we made money in these transactions. However, all our dealings were through arm’s-length transactions with experienced counterparties who had opposing views based on all available information at the time. We were straightforward in our dislike of these securities, but the vast majority of people in the market thought we were dead wrong and openly and aggressively purchased the securities we were selling.”

Still, the details unearthed by the S.E.C. in its investigation show a deep involvement by Mr. Paulson in the creation of the investment, known as Abacus 2007-AC1. For example, he approached Goldman about constructing and marketing the debt security.

After analyzing risky mortgages made on homes in Arizona, California, Florida and Nevada, where the housing markets had overheated, Mr. Paulson went to Goldman to talk about how he could bet against those loans. He focused his analysis on adjustable-rate loans taken out by borrowers with relatively low credit scores and turned up more than 100 loan pools that he considered vulnerable, the S.E.C. said.

Mr. Paulson then asked Goldman to put together a portfolio of these pools, or others like them that he could wager against. He paid $15 million to Goldman for creating and marketing the Abacus deal, the complaint says.

One of a small cohort of money managers who saw the mortgage market in late 2006 as a bubble waiting to burst, Mr. Paulson capitalized on the opacity of mortgage-related securities that Wall Street cobbled together and sold to its clients. These instruments contained thousands of mortgage loans that few investors bothered to analyze.

Instead, the buyers relied on the opinions of credit ratings agencies like Moody’s, Standard & Poor’s and Fitch Ratings. These turned out to be overly rosy, and investors suffered hundreds of billions in losses when the loans underlying these securities went bad.

Mr. Paulson personally made an estimated $3.7 billion in 2007 as a result of his hedge fund’s performance, and another $2 billion in 2008.

He was also treated like a celebrity by members of a Congressional committee that invited him to testify in November 2008 about the credit crisis. At the time, none of the lawmakers asked how he had managed to set up his lucrative trades; they seemed more interested in getting his advice on how to solve the credit crisis.

A Queens-born graduate of New York University and the Harvard Business School, Mr. Paulson went to Wall Street in the early 1980s just as the biggest bull market in history was starting. He joined Bear Stearns in 1984 as a junior executive in the investment banking unit.

Ten years later, he started his hedge fund with $2 million of his own capital. During the technology-stock bubble of the late 1990s, Mr. Paulson took a negative stance on high-flying shares and profited handsomely for himself and his clients.

By the end of 2008, Mr. Paulson’s assets under management had risen to $36.1 billion. In an early 2009 interview with The New York Times, Mr. Paulson talked about his success. “We are very proud of our performance last year,” he said. “We provided an oasis of profitable returns for our investors in a year where there were few sources of gains.”

His investors, which included pension funds, endowments, wealthy families and individuals, were huge beneficiaries of his strategy, Mr. Paulson added. “They made four times as much as we did,” he said.

Mr. Paulson and his investment program was the subject of the 2009 book by Gregory Zuckerman “The Greatest Trade Ever.” Mr. Zuckerman wrote that Mr. Paulson did not think there was anything wrong with working with various banks to create troubled investments that he could then bet against.

“Paulson told his own clients what he was up to and they supported him, considering it an ingenious way to grow the trade by finding more debt to short,” Mr. Zuckerman wrote. “After all, those who would buy the pieces of any C.D.O. likely would be hedge funds, banks, pension plans or other sophisticated investors, not mom-and-pop investors.”

Late last year, Mr. Paulson donated $20 million to the Stern School of Business at New York University and $5 million to Southampton Hospital in Long Island’s East End, where he bought a $41 million home in early 2008. He lives with his wife and two daughters on the Upper East Side of Manhattan.

Amid criticism of investment strategies that profited from mortgage defaults, home foreclosures and other miseries, Mr. Paulson has also given $15 million to the Center for Responsible Lending for a center devoted to providing foreclosure assistance to troubled borrowers.

At the time of the donation, Mr. Paulson said of the center and its work, “We are pleased to help them provide legal services to distressed homeowners, many of whom have been victimized by predatory lenders.”

Now we know the truth. The financial meltdown wasn’t a mistake – it was a con

Hiding behind the complexities of our financial system, banks and other institutions are being accused of fraud and deception, with Goldman Sachs just the latest in the spotlight. This has become the most pressing election issue of all

April 18, 2010

byWill Hutton

The Oberver

The global financial crisis, it is now clear, was caused not just by the bankers’ colossal mismanagement. No, it was due also to the new financial complexity offering up the opportunity for widespread, systemic fraud. Friday’s announcement that the world’s most famous investment bank, Goldman Sachs, is to face civil charges for fraud brought by the American regulator is but the latest of a series of investigations that have been launched, arrests made and charges made against financial institutions around the world. Big Finance in the 21st century turns out to have been Big Fraud. Yet Britain, centre of the world financial system, has not yet levelled charges against any bank; all that we’ve seen is the allegation of a high-level insider dealing ring which, embarrassingly, involves a banker advising the government. We have to live with the fiction that our banks and bankers are whiter than white, and any attempt to investigate them and their institutions will lead to a mass exodus to the mountains of Switzerland. The politicians of the Labour and Tory party alike are Bambis amid the wolves.

Just consider the roll call beyond Goldman Sachs. In Ireland Sean FitzPatrick, the ex-chair of the Anglo Irish bank – a bank which looks after the Post Office’s financial services – was arrested last month and questioned over alleged fraud. In Iceland last week a dossier assembled by its parliament on the Icelandic banks – huge lenders in Britain – was handed to its public prosecution service. A court-appointed examiner found that collapsed investment bank Lehman knowingly manipulated its balance sheet to make it look stronger than it was – accounts originally audited by the British firm Ernst and Young and given the legal green light by the British firm Linklaters. In Switzerland UBS has been defending itself from the US’s Inland Revenue Service for allegedly running 17,000 offshore accounts to evade tax. Be sure there are more revelations to come – except in saintly Britain.

Beneath the complexity, the charges are all rooted in the same phenomenon – deception. Somebody, somewhere, was knowingly fooled by banks and bankers – sometimes governments over tax, sometimes regulators and investors over the probity of balance sheets and profits and sometimes, as the Securities and Exchange Commission (SEC) says in Goldman’s case, by creating a scheme to enrich one favoured investor at the expense of others – including, via RBS, the British taxpayer. Along the way there is a long list of so-called “entrepreneurs” and “innovators” who were offered loans that should never have been made. Lloyd Blankfein, Goldman’s CEO, remarked only semi-ironically that his bank was doing God’s work. He must wake up every day bitterly regretting the words ever emerged from his mouth.

For the Goldmans case is in some ways the most damaging. The Icelandic banks, Anglo Irish bank and Lehman were all involved in opaque deals and rank bad lending decisions – but Goldman allegedly went one step further, according to the SEC actively creating a financial instrument that transferred wealth to one favoured client from others less favoured. If the Securities and Exchange Commission’s case is proved – and it is aggressively rebutted by Goldman – the charge is that Goldman’s vice-president Fabrice Tourre created a dud financial instrument packed with valueless sub- prime mortgages at the instruction of hedge fund client Paulson, sold it to investors knowing it was valueless, and then allowed Paulson to profit from the dud financial instrument. Goldman says the buyers were “among the most sophisticated mortgage investors” in the world. But this is a used car salesman flogging a broken car he’s got from some wide-boy pal to some driver who can’t get access to the log-book. Except it was lionised as financial innovation.

The investors who bought the collateralised debt obligation (CDO) were not complete innocents. They had asked for the bond to be validated by an independent expert into residential mortgage-backed securities – a company called ACA management. ACA gave the bond the thumbs-up on the understanding from Fabrice Tourre that the hedge fund Paulson were investing in it. But the SEC says Tourre misled them, a pivotal claim that Goldman denies. The reality was that Paulson was frantically buying credit default swaps in the CDO that would go up in price the more valueless it became – a trade that would make more than $1 billion. Worse, Paulson had identified some of the dud sub-prime mortgages that he wanted Tourre to put into the CDO. If the SEC case is true, this was a scam – nothing more, nothing less.

Tourre could see what was coming. In one email in January 2007 he wrote: “More and more leverage in the system. The whole building is about to collapse anytime now… only potential survivor, the fabulous Fab[rice Tourre] .. standing in the middle of all these complex highly leveraged exotic trades he created without necessarily understanding all of the implications of those monstrosities”. Fabulous Fab, like his boss, will not be feeling very fab today.

The cases not only have a lot in common – using financial complexity allegedly to deceive and then using so-called independent experts to validate the deception (lawyers, accountants, credit rating agencies, “portfolio selection agents,” etc etc ) – but they also show how interconnected the financial system is. In Iceland Citigroup and Deutsche Bank covered the margin calls of distressed Icelandic business borrowers, deepening the crisis. Lehman uses the lightly regulated London markets and two independent British experts to validate that their “Repo 105s” were “genuine” trades and not their own in-house liability. The American authorities pursued a Swiss bank over aiding and abetting US nationals to evade tax.

Bankers will complain these cases all involve one or two misguided individuals, but that most banking is above board and was just the victim of irrational exuberance, misguided belief in free market economics and faulty risk management techniques. Obviously that is true – but, sadly, there is much more to the crisis. Andrew Haldane, executive director of the Bank of England, highlights the remarkable reduction in the risk weighting of bank assets between 1997 and 2007. Put simply, Europe’s and the US’s large banks exploited the weak international agreement on bank capital requirements in the so-called Basel agreement in 2004 to reclassify the risk of their loans and trading instruments. They did not just reduce the risk by 5 or 10%. Breathtakingly, they claimed their new risk management techniques were so wonderful that the riskiness of their assets was up to half of what it had been – despite property and share prices cresting to new all-time highs.

Brutally, the banks knowingly gamed the system to grow their balance sheets ever faster and with even less capital underpinning them in the full knowledge that everything rested on the bogus claim that their lending was now much less risky. That was not all they were doing. As Michael Lewis describes in The Big Short, credit default swaps had been deliberately created as an asset class by the big investment banks to allow hedge funds to speculate against collateralised debt obligations. The banks were gaming the regulators and investors alike – and they knew full well what they were doing. Simon Johnson’s 13 Bankers shows how the major American banks deployed vast political lobbying power and money to create the relaxed regulatory environment in which all this could take place. In Britain no money changed hands. Gordon Brown offered light-touch regulation for free – egged on by the Tories, who wanted to go further.

This was the context in which Goldman’s Fabulous Fab created the disputed CDOs, Sean FitzPatrick allegedly moved loans between banks and Lehman created its Repo 105s along with the entire “debt mule” structure revealed this weekend of inter-related companies to shuffle debt around its empire. London and New York had become the centre of an international financial system in which the purpose of banking became making money from money – and where the complexity of the “innovations” allowed extensive fraud and deception.

Now it has all collapsed, to be bailed out by western taxpayers. The banks are resisting reform – and want to cling on to the business practices and business model that has so appallingly failed. It is obvious why: it makes them very rich. The politicians tread carefully, only proposing what the bankers say is congruent with their definition of what banking should be. Labour and Tories alike are united in opposing improved EU regulation of hedge funds, buying the propaganda those operations had nothing to do with the crisis. Perhaps Paulson’s trades at Goldman, and the hedge funds’ appetite for speculating in credit default swaps, may disabuse them.

It is time to reframe the question. Banks and financial institutions should do what economy and society want them to do – support enterprise, direct credit to where it is needed and be part of the system that generates investment and innovation. Andrew Haldane – and the governor of the Bank of England – are right. We need to break up our banks, limit their capacity to speculate and bring them back to earth. Britain should also launch an official investigation into what went wrong – and hand the findings to the Serious Fraud Office. This needs to become this election campaign’s number one issue – not one which either a compromised Labour party or a temporising Conservative party will relish. The Lib Dems, the fiercest critics of the banks, have begun to get very lucky.

Crisis timetable

  • September 2007 Funding problems at Northern Rock triggers the first run on a British bank. It is nationalised in February 2008.
  • April 2008 Bear Stern faces bankruptcy after a run on the company wipes out cash reserves in less than two days. Backed by the Federal Reserve, JPMorgan buys up shares at far below market value.
  • September 2008 Lehman Brothers files for bankruptcy protection, becoming the first major bank to collapse since the start of the credit crisis.
  • December 2008 Bernard Madoff arrested for operating the largest Ponzi scheme in history.
  • January 2009 The Bank of England launches £200bn quantitative easing.
  • March 2010 Former chairman of Anglo Irish bank Sean Fitzpatrick is arrested in Dublin after failing to disclose details of loans worth millions from the bank.
  • April 2010 Northern Rock former directors, David Baker and Richard Barclay, are fined £504,000 and £140,000 for deliberately misleading analysts prior to nationalisation.
  • April 2010 The US Securities and Exchange Commission accuses Goldman Sachs of “defrauding investors by misstating and omitting key facts”.

It Was the Housing Bubble: Not the Damn CDOs

April 17, 2010

by Dean Baker


The folks who got it wrong when the housing bubble was growing seem determined to prove to the world that they are incapable of learning anything. The latest tales of Goldman designing CDOs are fascinating in that they reveal the incredible level of corruption at Goldman and on Wall Street more generally, but it was not the CDOs that gave us 10 percent unemployment.

Unemployment soared because demand collapsed. And the reason that demand collapsed is because housing bubble wealth disappeared. And housing bubble wealth disappeared — well, because it was a bubble that was not supported by the fundamentals.

For the 87,865th time, the collapse of the bubble led to a falloff in annual construction (residential and non-residential) spending of more than $600 billion. The loss of $6 trillion in housing wealth led, through the housing wealth effect (this isn’t radical — it is as old an economics doctrine as you’ll find) to a loss of close to $400 billion in consumption demand. That gives a combined loss in demand of more than $1 trillion and hence a really bad recession.

This story has nothing directly to do with CDOs. Insofar as CDOs and other games helped to drive the bubble beyond the levels it would have otherwise attained then they made the crash worse than it otherwise would have been, but the CDOs were not directly the problem. It was the bubble.

The folks who played games on Wall Street should be put safely behind bars for long periods of time, but it is important to know that the real story of this crisis was not the complex shenanigans of the Goldman gang. The real story was a huge bubble that was easy to see and guaranteed to burst. The fact that those involved in making and reporting on economic policy somehow did not see the bubble was a failure of immense proportions that should cost many, many people their jobs.


Everyone knows the banks have been sucking the life blood out of the nation like a tick for many years.   Matt Taibbi of the Rolling Stone likens them unto an octopus stuck to the face of the body politic.   They are the ones who are ultimately responsible for shipping our jobs overseas,  they are the ones who destroyed the S&L industry in the 80’s,  they are the ones who are responsible for the dot com boom/bust,  they are the ones who are responsible for the mortgage/foreclosure crisis.  They know no shame,  no honor;  their only concern is profit and woe unto those who stand in their way.  They own the Congress,  they own the President,  they own the country and they have mortgaged us to the hilt while setting us up to fail. They made money as things went up,  they are making even more money as it crashes to the ground.  Everyone knows it,  some are bold enough to say it.

Yesterday,  a story broke about how Goldman Sachs set up investors to fail by facilitating the sale of known fraudulent securities.  Right now,  the talking heads are squabbling amongst themselves over the meaning.   What they don’t talk about are the actual charges which lay out in detail exactly what it is they did.  As you study the current mortgage crisis,  you come to understand that what the SEC did with their filing was to shine a light on one small aspect of what is truly going on in this mortgage/foreclosure crisis which is cutting such a huge swath through communities and families.

But like so many who are so clever,  they sowed the seeds of their destruction into the core of their being.  In this case,  the issue is MERS,  Mortgage Electronic Registration Service.  MERS is the chink in the armor of the big banks.  MERS is where all the players came together to pull off the largest fraud in the history of the Republic.  MERS is the crucible in which the scam simmered.  MERS is the vehicle which will destroy them.  It is their feet of clay.

ChinkintheArmor.net is a website dedicated to showing any who will look how they can do their part in pulling this monstrosity of a parasite down from the inside.  It shows how each individual can fight back in their own little way and do their part to put a stop to the raping and pillaging which has been going on for so many years.  But it is static.  That’s why there is a newsletter attached to the website.  The newsletter keeps track of current stories as well as shares gossip and inside information as it is being developed.  It is a chance to stay abreast of cutting edge information of just what is going on in the battle between us,  the little ones,  and them,  the monstrous parasite which so dominates our lives.

The purpose of this email is to invite you to subscribe.  It is $5/month,  $50/year,  payable by PayPal,  cancel at any time.  Publication is by midnight every Wednesday so it will be in your inbox by Thursday morning.  Four issues for $5.  On a per issue basis,  that’s less than a good cup of coffee and it is equally as satisfying.

We used to applaud these vultures as they engorged themselves on the economic body of this country.  It is time to stop them.  Go to www.ChinkintheArmor.net.  Discover for yourself the weak spot and join the growing body of individuals hitting the chink.  Subscribe to the newsletter to stay abreast of what is happening in this battle.   Individually,  we are powerless,  collectively,  we are the most powerful force known to man.  And what makes it so delicious,  so ironic is that we beat them by playing their game using the same rules they set up for themselves.

Vermont Trotter



Fraud charge deals big blow to Goldman’s image

April 18, 2010

by Stevenson Jacobs

Associated Press

NEW YORK (AP) — While Goldman Sachs contends with the government’s civil fraud charges, an equally serious problem looms: a damaged reputation that may cost it clients.

The Securities and Exchange Commission’s bombshell civil fraud charge against Goldman has tarnished the Wall Street bank’s already bruised image, analysts say. It could also hurt its ability to do business in an industry based largely on trust.

Damage from the case could hit other big banks as well. The SEC charges are expected to help the Obama administration as it seeks to more tightly police lucrative investment banking activities.

Goldman has denied the SEC’s allegation that it sold risky mortgage investments without telling buyers that the securities were crafted in part by a billionaire hedge fund manager who was betting on them to fail. A 31-year-old Goldman employee is also accused in the civil suit that was announced Friday.

The charges could result in fines and restitution of more than $700 million, predicted Brad Hintz, an analyst at Sanford Bernstein. Yet, even if Goldman beats the charge, the hit to its reputation could carry a greater cost.

The company, founded in 1869, grew a one-man outfit trading promissory notes in New York to the world’s most powerful, most profitable and arguably most envied securities and investment firm. From its 43-story glass-and-steel headquarters in Lower Manhattan, Goldman oversees a financial empire that spans more than 30 countries and includes more than 30,000 employees.

It has long attracted some of the world’s best and brightest. Some have gone on to lofty careers in public life, enhancing the firm’s aura of mystique and influence. Goldman alumni include former Treasury Secretaries Henry Paulson and Robert Rubin and former New Jersey Gov. Jon Corzine.

In its corporate profile, the company says its culture distinguishes it from other firms and “helps to make us a magnet for talent.” That culture is summed up in the firm’s “14 Business Principles,” which preach an almost militant philosophy of putting the client before the firm.

Now, that very philosophy that has been questioned by the government.

So far, no Goldman clients have publicly condemned the bank’s alleged actions. But the negative publicity and regulatory scrutiny could cause some to distance themselves, said Mark T. Williams, a professor of finance and economics at Boston University.

Goldman earned a record $4.79 billion during the fourth quarter of last year and is expected to report blowout first-quarter results on Tuesday. A big chunk of its profits are from fee-based client businesses, such as investment advising, underwriting securities and brokering billion-dollar mergers.

“Goldman can really only truly be effective in the marketplace if it maintains a strong reputation,” Williams said.

Morgan Stanley, the No. 2 U.S. investment bank after Goldman, could be in a position to poach some Goldman clients, which include hedge funds, pension funds and other big institutional investors. Overseas, European rivals such as Deutsche Bank AG and UBS could benefit.

Investors are already betting the legal troubles will hurt Goldman’s finances. The company’s shares plunged 13 percent after the charges were announced Friday, erasing a staggering $12.5 billion in market value.

“Reputation risk is the biggest issue in our view,” Citigroup analyst Keith Horowitz wrote in a note to clients. He predicted the fraud case won’t be a “life-threatening issue” but that it “clearly seems like a black eye for Goldman.”

It’s not the first. The company came under criticism for receiving billions in bailout money that the government funneled into crippled insurer American International Group Inc. at the height of the financial crisis in 2008. Goldman was owed the money, but critics argued it should’ve been treated like other creditors and be forced to accept less.

Goldman CEO Lloyd Blankfein angered the bank’s critics last year after The Times of London quoted him as saying he was “doing God’s work” running the firm and handing out big employee bonuses. Blankfein himself got a $9 million stock bonus for 2009.

Mishaps like those have been surprising given how much attention Goldman pays to its image. “Our clients’ interests always come first,” the company says on its website under the heading, “Goldman Sachs Business Principle No. 1.”

It’s a sales pitch that few Wall Street firms always live up to. Some analysts blame that on a shift in the industry’s business model from traditional investment banking to one that focuses on making big bets for itself or clients.

That shift culminated in the rise of Blankfein, a former commodities trader, to the position of CEO in 2003. Today, trading accounts for nearly 70 percent of Goldman’s revenue. Most of that trading is done on behalf of clients, though Goldman generates about 10 percent of its revenue by trading for itself.

The heavy reliance on trading and Goldman’s peerless performance have left the firm open to criticism that it uses its market knowledge to game the system to benefit itself and a select group of clients.

The SEC charges seemingly support that assertion. Fabrice Tourre, the 31-year-old Goldman executive accused of shepherding the deal in question, boasted about the “exotic trades” he created “without necessarily understanding all of the implications of those monstrosities!!!,” according to the SEC complaint.

In another e-mail, he describes as “surreal” a meeting between his hedge fund client and another firm that allegedly wasn’t told that the bundle of securities it was buying were chosen with input from a third party who was betting they would fail.

“Once upon a time, Wall Street firm protected clients,” said Christopher Whalen, managing director of financial research firm Institutional Risk Analytics. “This litigation exposes the cynical, savage culture of Wall Street that allows a dealer to commit fraud on one customer to benefit another.”

In a lengthy rebuttal to the SEC charges Friday, Goldman insisted it was a middleman in the transaction and did nothing wrong by not disclosing bearish bets against the pool by Paulson & Co., a major hedge fund led by billionaire investor John Paulson. Goldman said it lost $90 million on the deal.

The SEC said Goldman had a duty to inform buyers of the mortgage investments that Paulson had played a major role in choosing the securities that went into the derivatives product and then bet that they would go bust.

Derivatives are complex financial products whose value is based on an underlying asset like mortgages or other types of debt. They’re not traded on a public exchange, allowing firms like Goldman to generate fees by brokering deals between buyers and sellers.

The charges strengthen the government’s case for increased regulation of derivatives like those Goldman is accused of using, analysts said.

Regardless, Goldman ability to weather the storm should not be discounted, said Janet Tavakoli, president of Tavakoli Structured Finance, a Chicago consulting firm.

“The benefits of the crisis have so far swamped the reputation risks for Goldman,” she said.

“If anything,” she added, “they may wind up getting more customers if people can’t avoid doing business with them.”


AP Business Writer Chip Cutter contributed to this report from New York.

Great Power Rivalry. China’s Role as America’s Creditor

“From Export Juggernaut to a Credit Addict”

April 18, 2010

by Mike Whitney

Global Research

There’s no doubt that China manipulates its currency to gain an unfair advantage over its competitors. There’s also no doubt that Treasury Secretary Timothy Geithner will do everything in his power to avoid a confrontation with China’s President Hu Jintao when he arrives in Washington in two weeks. That’s why Geithner has decided to shelve Treasury’s mandated currency manipulation report for the time-being and diffuse a potential imbroglio with Hu. But the Treasury Secretary’s unwillingness to embarrass his guest, has angered members of congress who think the administration needs to take a tougher stand on China to protect American workers and U.S. exporters. Senators. Charles Schumer (NY-D) and Lindsey Graham (SC-R) are demanding that China be labeled a “currency manipulator” so that punitive action can be taken. That could lead a full-blown trade war with America’s biggest creditor.

There’s no chance that the Geithner will openly challenge Hu or that the administration will take any action that would jeopardize relations. China’s President will get the red carpet treatment for the length of his visit and Geithner will spend the bulk of his time pressing the leader for concessions that will allow greater access to China’s market for his buddies in the financial services industry. That’s the “hidden agenda” that both the congress and the media fail to see. From Geithner’s point of view, the confab is not really about “strategic dialogue” on “mutual economic and security issues”. That’s just a smokescreen. Geithner is backed by powerful Wall Street constituents who could care less about exchange rates or jobs. What they care about is markets and profits.  And for that, they need greater access.

During his term as Treasury Secretary, Henry Paulson spent more time in Beijing than he did in Washington. But his goals were the same as Geithner’s; to do whatever it takes to pry-open the biggest consumer market on earth. That basic policy hasn’t changed.

No one believes that Geithner is going to fight to save American jobs. It’s laughable. From his perspective, the currency flap is just stick for beating up on China when groveling doesn’t work. But it’s too early to put the stick to work, just yet. For now the policy is all “carrots”, although that could change in an instant if Wall Street doesn’t get it’s way.

Americans have a fundamental misunderstanding about the US/China relationship. China is not in the driver’s seat and neither is the United States. There’s a third party involved, but that party remains mostly invisible. And that’s how they like it. Here’s an excerpt from the Washington Post which explains the whole thing:

“If the United States does decide to impose tariffs on China, Chen said, American companies operating in China, which account for more than 60 percent of China’s exports to the United States, would surely be hurt the most. ‘In the end,’ Chen said, ‘America is the one that needs to adjust.’

“While some analysts have predicted that China would soon start to let the yuan appreciate, Chen’s interview illustrated the fact that there is a strong lobby in China opposing revaluation. One reason why a revaluation would be dangerous for China, Chen said, is that profit margins for Chinese exporters are tiny — ranging from 1.7 to two percentage points.” (“China’s commerce minister: U.S. has the most to lose in a trade war” Washington Post)

To repeat: “American companies…. account for more than 60 percent of China’s exports to the United States.” That means, the head honchos of the biggest multinationals are calling the shots. China is not the villain here. After all, they’re only getting a measly 1.7 on their investment. If the renminbi strengthens at all; they’re in the red. China’s back is against the wall. What are they supposed to do; work for nothing and let the voracious multinationals walk off with 100 percent of the profits?

The truth is, China’s currency policy was probably just one of the many perks demanded by foreign corporations before they relocated to China. Naturally the CEOs would want to make sure they’d have an edge on the competition, so they (probably) persuaded Hu into gaming the system before they even broke ground. China has always gone the extra mile to accommodate the interests of the multinationals. Unfortunately, that’s the only way to entice them to relocate.

Now it looks like China is headed for a hard landing whether it tweaks the exchange rate or not. Its $600 billion fiscal stimulus and massive lending programs have inflated a  credit bubble that is about to burst. Here’s a blurp from the Independent Strategy’s latest report titled, “China’s credit bubble: the missing piece in the jigsaw”:

“We now know that much of the credit explosion in 2009 that boosted economic growth went into local government entities where it was wasted on unproductive real estate and infrastructure projects. These entities are mostly insolvent and will create huge bad debts for the banks as credit is tightened this year….

Debt is big enough to be a potential source of major macro-economic instability. …This Local Government Financing Vehicles (LGFV) edifice will not survive credit tightening, because it is a Ponzi-type pyramid built upon borrowing more to service existing borrowings….the problem is economically huge. LGFVs are not going to be borrowing and spending any more. And if infrastructure investment drove 90% of 2009 GDP growth and 70-80% of this was down to insolvent LGFVs, where will the growth in credit and GDP come from now?”

The lethal combo of non-performing loans and falling real estate prices are likely to trigger a  broader crisis that could spill over the borders and push the global economy back into recession. This is a real concern.  Here’s an excerpt from hedge fund manager Hugh Hendry who predicts even tougher times ahead:

The composition of China’s growth has undergone a potentially treacherous change: in the absence of expanding foreign demand for its exports, it has instead come to rely on a massive surge in domestic bank lending to fuel its growth rate. Indeed, when measured relative to the size of its economy, the 27pc point jump in bank loans to GDP is unprecedented; at no point in history has a nation ever attempted such an incredible increase in state-directed bank lending.

What a turnaround: from an export juggernaut to a credit addict. Who would have thought it necessary back in 2001, the year everything all started to work out for China?….China has become the world’s biggest creditor, after amassing nearly $2.3 trillion of foreign exchange claims on us. However, the specter of a creditor nation running persistent trade surpluses has ominous historical portents. It has happened only twice before, with the US economy in the Twenties and with the Japanese economy in the Eighties. (“China: Hugh Hendry warns investors’ infatuation is misguided” UK Telegraph)

China is headed for trouble. Its economy is reeling from over investment, under consumption, and razor-thin profit margins. That’s a tough mix in the best of times; and these aren’t the best of times. When the bubble starts to unwind; defaults will increase, consumption will drop and economic activity will slow to a crawl. That will force the renminbi to rise whether the Party bosses like it or not.

China’s business model is deeply flawed. The domestic market needs to expand so there’s less dependence on exports. Personal consumption is the key, which means that wages and living standards will have to rise. The government needs a wealth-distribution plan–like the New Deal–to increase demand and create a thriving middle class.  And that’s the rub, because the class war goes on in China just as it does in United States.

Google vs China: the endgame
April 14, 2010

By John Parker

Asia Times

Although the dispute between the Chinese government and Google continues to evolve, there were signs at the beginning of April that a ceasefire may be taking hold, one that could allow both sides to plausibly claim victory. At the end of March, Google failed to renew its Internet Content Provider (ICP) license in China; since an ICP license is required for all China-registered commercial websites, this effectively sounded the death knell for Google’s simplified-Chinese search engine, google.cn.

All requests for the google.cn website are now redirected to Google’s Hong Kong site, www.google.com.hk. The pullout has obviously damaged Google’s business prospects in China, but it is not clear how much, since the company continues to conduct research and development work in China, as well as serving mainland Chinese customers for the company’s numerous other products, including mail, translation, online ads, and so on. At the same time, the Mountain View, California-based company could reasonably claim that it had stuck to its well-known “don’t be evil” slogan: the company’s leaders clearly chose principle over profit by pulling out of China, the world’s fastest-growing Internet market.

As for the Chinese government, it sought to force compliance with its policy of censoring the Internet; in this it has succeeded, at least in the short term, since Google’s unwillingness to cooperate with the censorship policy led to the company shutting the door, in spite of its arguably great importance to Chinese Internet users.

As of April 12, the Hong Kong site was freely available to mainland Internet users (ie, without requiring special circumvention measures such as proxy servers). The company had set up a special page (http://www.google.com/prc/report.html) to track the availability of various Google pages on the mainland. The relative stability of this table (there have been few changes the last two weeks except for a blip on March 30, the cause of which remains unclear) shows that the standoff between China and Google seems to have stabilized, at least temporarily.

Youtube sites and Blogger are completely blocked, but that is a reflection of longstanding policy – the Chinese government blocks every blog service that it knows about and can’t control, and the censorship axe fell on Youtube many months ago. In some respects, the table is actually overly generous towards the Chinese firewall; for example, it reports Google Image Search as fully functional, but in reality the service has been effectively unusable in mainland China for years because images unpredictably fail to load.

Interestingly, although google.com.hk, like Google’s other Hong Kong-specific websites, uses traditional Chinese characters instead of the simplified versions preferred in mainland China, the page has a set of buttons allowing users to search for results in simplified Chinese only, suggesting that Google intends to continue serving mainland search customers as well as it can.

Nonetheless, it was not clear how long Google’s Hong Kong gambit would last; as Google has acknowledged from the beginning, Beijing could block access to the Hong Kong site anytime it chooses, even though Google’s site redirection violates no Chinese laws. This raises two interesting questions: first, will the government block the Hong Kong site, or not? And second, if it decides not to (so far it hasn’t), why not?

This writer’s own view is that a block is likely eventually because the switchover to the Hong Kong page is embarrassing for the government; the Chinese Communist Party (CCP) is not used to hearing the word “no” from anyone, especially from foreign companies eager to do business on the mainland, and it was clearly caught flat-footed by Google’s defiance. In addition, the sudden ubiquity of the Hong Kong page on mainland computer screens raises awkward questions about why, 61 years after the founding of the People’s Republic of China (PRC) and 13 years Special Administrative Region (HKSAR) after Hong Kong’s return to China, there are still such drastic differences in political freedoms between the Hong Kong and mainland China.

However, one Western expert on the Chinese firewall interviewed for this article predicted that the Hong Kong page would not be interfered with. To elaborate, the main point of contention between Google and China was the state requirement for search filtering (ie, “forbidden” pages omitted from search results); Google’s unwillingness to do this for google.cn led directly to the company’s pullout. This expert argued that search filtering is only one aspect of the Chinese firewall and not the most important one. The government’s basic goal is to prevent Chinese Internet users from encountering “forbidden” information, such as information about the Tiananmen Square massacre of 1989 (aka the June 4 incident). But in order to encounter such information, users must first know about it from another source, otherwise they would not know to search for it in the first place; in contemporary China, where many Chinese under 25 (perhaps most) have never even heard of the June 4 incident, this is a surprisingly effective first line of defense for the CCP.

The second line of defense is the blocking of web pages with “forbidden” content. This line arguably remains intact even if mainland users are conducting unfiltered searches because any “forbidden” page thrown up by the search engine will still be unavailable (without countermeasures). If this view is correct, the status quo may persist indefinitely, since the government may conclude that search filtering is simply not important enough to insist upon. Another argument against blocking of the Hong Kong page is political, related to the “one country, two systems” formula which governs the PRC-HKSAR relationship, and its relevance to the unresolved status of Taiwan.

If the CCP takes a hard line with Google and blocks the Hong Kong site from mainland users or even forces its shutdown in Hong Kong, then the government would become vulnerable to allegations that it had broken its promises to Hong Kong; such an outcome could be used in Taiwan by the Taiwan independence faction, which would point to the interference with Hong Kong’s Internet access as an example of what would await Taiwan in the event of reunification.

Regardless of whether such arguments are actually being heard in Beijing, it is clear that the issues raised by the Google dispute are complex and involve high stakes, and that a decision on the case will necessarily involve the highest levels of the PRC government. This is almost certainly the reason why it seemed to take so long for Beijing to make a decision on the Google issue.

At almost the same time that Google began redirecting mainland search traffic to its Hong Kong site, it introduced another measure: the company began encrypting traffic to its gmail email system with the https protocol, so that gmail users in China now have an encrypted connection to the mail server by default. The same expert cited above felt that this measure is more significant, in the long run, than the Hong Kong site redirection.

Since https was intended for e-commerce and electronic banking use, the level of encryption is very high – far too high to be decrypted on the fly, and even decrypting the email messages of a single individual using https would require a major effort. Therefore, in a sense, the government’s attempt to spy on gmail traffic may have backfired, since Google responded by protecting its customers’ email accounts much more heavily than before. Of course, the government could counter this by blocking all https traffic, but this would be spectacularly counterproductive, since the vast majority of e-commerce sites worldwide would instantly become unusable within China.

The media and public response

Most media commentary on the case focused on the startling asymmetry of the confrontation between the Chinese government and a Western company, which superficially seemed to confirm notions of large corporations as independent political actors; it was as if Google had its own foreign policy. The idea of Google as an independent quasi-state entity was further reinforced by the muddled response to the incident in Washington; so far, concrete action from the US has been lacking, aside from some fairly strong supportive statements by Secretary of State Hillary Clinton. In China, there was a range of responses. The most interesting of these was the hundreds of Chinese Internet users who left flowers and gifts at Google’s offices in Beijing and Shanghai. Beijing blogger Song Han, an editor for a financial industry magazine, described the scene at the Beijing office on his Facebook page:

A couple of dozen people gathered there already and the Google logo were covered by bouquets of followers, fruits, farewell notes, a bottle of soy sauce and other wish-well souvenirs. The various notes read, “Thanks Google for the Free Flow of Info”, “In Google We Trust – See You on the Other Side”, “It was a mistake to come here at the first place but it is honorable to choose to leave”, and my personal favorite, quoting Alexander Dubcek, the late Czech leader, in response to the Soviet invasion in the wake of Prague Spring pro-democratic movement: “They may crush the flowers, but they can’t stop the Spring.”

It is unlikely that the government has missed the disturbing (to them) parallels between these overtly funereal gestures and the spontaneous public mourning for liberal party leader Hu Yaobang. Hu’s death in April 1989 closely preceded, and directly led to, the Tiananmen Square protests of that year, which nearly triggered the end of Chinese Communist Party rule.

On the other hand, the xenophobic nationalist contingent was also heard from; for example, many Chinese comments on stories about the Google dustup argued that Google’s decision was just an excuse for the pullout and the real reason was commercial failure. In favor of this theory was the popularity of Google’s domestic competitors in China, especially Baidu.com, which has generally held a greater search engine market share than Google within the country. But according to web analytics company StatCounter, Google had been closing the gap with Baidu in recent months, increasing its share to 43% from 30% last summer. Many comments have appeared on overseas media websites suggesting other conspiracy theories or otherwise defending the government’s stance. But given the Chinese government’s well-known practice of paying Internet users to post pro-regime comments around the Internet (these employees are known as the “fifty-cent brigade” or “fifty-cent party” in reference to the payment they receive for each post), it is, at the very least, questionable whether the comments are a true reflection of public opinion.

Ultimately, Google’s competition with Baidu would not have been sufficient to trigger a pullout; in terms of market share, the company was holding its own in what is rapidly becoming the most important Internet search market in the world. Furthermore, Google is not just another website; it has become a utility in modern life, like electricity or gas service, used on a daily basis by a large segment of the population. Also, the most net-savvy Chinese are well aware of the deficiencies of Google’s domestic competitors, as shown by a 2006 study which found that the wealthiest, best-educated Chinese Internet users strongly preferred Google.

Immediate and root causes

What pushed Google over the edge was a hacking attempt on its gmail email service, which originated in China and compromised the accounts of human rights activists focused on the country. For a company with a “don’t be evil” philosophy, this was too much to stomach, especially given the personal background of company co-founder Sergey Brin, who was born in Moscow and lived there until he was six.

According to Brin, his anti-authoritarian inclinations began during his Soviet childhood; he has recalled throwing pebbles at a police car. When his father’s career plans were derailed by anti-Jewish prejudice, the family began to consider emigrating. Brin’s mother wanted to stay in Russia despite the political situation; what tipped the scales in the decision to leave was Sergey’s future – the Brins believed that he would have better opportunities in the US.

This proved to be wise, given that Brin is now a billionaire 17 times over. In dealing with Google, it appears that the Chinese government believed its own propaganda that “China is an indispensable market”. The Chinese market is indeed very large, and countless companies, and governments, have kowtowed before it. But in Google’s case, the google.cn business was just a tiny fraction of Google’s global revenues. Brin had “agonized” over the earlier decision to censor search results, which he characterized as “appeasement”. In an interview, he told Fortune magazine, “we felt that by participating there … that it will be better for Chinese web users, because ultimately they would get more information, though not quite all of it.” The hacking incident, coupled with moderate-at-best success of Google’s China ventures, was apparently enough to reverse this earlier decision.

Moreover, although China’s efforts to attract foreign companies have been very successful, there is a strong sense in the expatriate business community (which this writer is a part of) that the companies are not competing on a level playing field; that they will only be tolerated until their technology can be extracted and then the system will collectively see to it that their market share is transferred to a Chinese imitator. To Google’s management, it may have seemed that this exact scenario was playing out. Realistically, a conflict between Google and the CCP was inevitable sooner or later; the difference in mindset between these two organizations could not be more fundamental.

The culture of the information technology (IT) industry in general, and Google in particular, is heavily influenced by liberal, multicultural California and the Massachusetts Institute of Technology “hacker” ethos (“information wants to be free”). The culture of the CCP, by contrast, is deeply paranoid and suffused with fear of conspiracies against it, exactly as one would expect for an unelected ruling clique which originally took power by force and continues to hold it by the same means. Apparently, Google cooperated with the Chinese government’s censorship grudgingly and in the hopes that it would be temporary. Instead, during the President Hu Jintao years, even as China’s economy has raced ahead and a wealthy, sophisticated middle-class has arisen from nowhere, the repression of free speech and other basic freedoms guaranteed by China’s constitution has only increased, consistent with the nearly total lack of political reform during this period.

In the long run, the crucial issue raised by the Google dispute is not what happens to Google’s China business. In Chinese politics, Google is an outside party that ultimately has little influence (how many armored divisions does Google have?). The power struggle that really matters in the long run is the tacit negotiation between the CCP and the Chinese people which determines what the government is going to be allowed to get away with. Just because this conflict does not take a form that would be recognizable to observers, who too often falsely assume the existence of a Western, democratic paradigm, does not mean that the conflict doesn’t exist.

In fact, the conflict manifests itself in many forms, including widespread (and growing) riots over official abuses of power, and anti-government sentiment on the Internet appearing in responseto controversial issues ranging from the 2008 milk contamination case to the February 2009 CCTV fire in Beijing and the Google dispute. It is obvious that the Chinese government couldn’t care less about freedom of speech as a principle; its paramount goal is to preserve itself in power, but it needs to produce economic development in order to do this, and the IT industry, including Google, is a necessary ally in that overall objective.

There is overwhelming popular support for economic development, and one factor staying the government’s hand in dealing with Google is that it fears the public will ask: “How are we going to develop our economy and catch up with the West if those guys in Beijing can’t even get along with Google?”

Another factor, which many commentators have missed, is the government’s fear that Google’s exit may start a broader trend that could seriously impact economic growth if it gets out of hand; Western IT companies in China collectively employ hundreds of thousands of Chinese workers, and many of these workers are university-educated technical experts, which means that their sudden unemployment would have a disproportionate political impact. Godaddy.com, one of the biggest domain registration companies in the US, announced recently that it would no longer accept registration requests originating in China. Much more ominously for the PRC, media reports have said that Dell is considering moving some of its manufacturing operations to India.

Certainly, it is hard to exaggerate how deeply the expatriate community in China loathes the Great Firewall; the author can personally testify that the changes in the firewall, and methods for evading it, are perennially popular topics of conversation among expats here. Among businessmen leaving China for greener pastures, especially in the IT field, the Internet controls are cited as one of the most common reasons, suggesting that there is a significant economic cost to the firewall.

In addition, it is not difficult to find evidence of dissatisfaction with the censorship within the elite circles of Chinese society, if one looks for it. At the end of March, during an “IT Leader Summit” in the southern city of Shenzhen, several Chinese business leaders, including Ma Huateng of QQ (an instant messaging service) and Wang Zhidong of the web portal Sina.com.cn, complained about various aspects of the current Internet control system. Wang and Ding Jian, another leader present at the summit, even proposed that Shenzhen be made into a “special zone” with respect to Internet monitoring (the city, as a “special economic zone”, already has various commercial freedoms that are not available to mainland China proper).

The prospect of losing access to Google has also caused grumbling among Chinese scientists; a Nature News survey found that 84% said being cut off from Google would “somewhat” or “significantly” hurt their work. One Chinese scientist told Nature, “Research without Google would be like life without electricity.”

Having said that, it must be acknowledged that the bulk of the Chinese population, including Internet users, is fundamentally indifferent to the issues raised by the Google case. The famous Chinese blogger Han Han, a Shanghainese high school dropout who became a race-car driver and then an unlikely literary celebrity, assessed the case on his blog with his usual lacerating sarcasm; as often happens, the comment was quickly deleted, but has since been reposted elsewhere. The following excerpt gives the main points (using the danwei.org translation):

Still, how many real Chinese people actually care about the “opening up” of the “censored results”? In a normal country, the few that do could move people’s reason, but in China they probably aren’t much use. China has 200 million netizens. If Google asked them whether they want to see uncensored content, I’d bet 200 million – minus certain Internet commentators – would answer in the affirmative. Of course, this is just like buying food. People are always happier when you give them more. However, if Baidu offered to give netizens 10 yuan (about US$1.50) as long as they not only installed a new browser that blocked Google, but also used a search engine whose results entirely met – or even exceeded – China’s laws and regulations, I bet more than half would accept. Do Chinese people seek out dangerous universal ideals? Chinese people seek them, but they seek them at their convenience … Perhaps Google thought that freedom, truth, justice, and other such things would mean a lot to a large portion of Chinese netizens. But in reality, these things are nothing compared to a finding a 100 yuan bill on the street. Really, Google would have been better off saying that it was leaving because China Central Television was framing it. That would be a bit more effective. Google’s stated reasons for leaving do not resonate with the majority of Chinese citizens – there’s nothing there for them to identify with. This is a race of people who can eat genetically modified grain and oil distilled from recycled food scraps, drink melamine-infused milk, and take inferior vaccines. Their tolerance is higher than you can imagine. Their needs are lower than you can imagine.

Based on personal experience, this writer concurs with Han Han’s key points that, first, most Chinese place a far lower value on political freedoms than most Westerners (although I do think that the 10 yuan figure is too low), and second, when a Western company (or government) is called upon to explain its actions to the mainland Chinese public, a convoluted conspiracy theory is much more likely to be believed than an open and truthful explanation.

The first fact is largely due to historic poverty, which created a zero-sum mentality about money that routinely leads to vicious struggles over tiny sums; this is a ubiquitous characteristic of daily life for large swaths of China’s population, even after 30 years of rapid economic growth. The second fact is entirely attributable to CCP rule (as shown by the sharply reduced prevalence of conspiratorial thinking in Taiwan and Hong Kong); basically, the Party’s paranoid bunker mentality and policy of systematic deception have percolated downward to the Chinese people over time, warping China’s national culture.

Nevertheless, the long-term importance of the “annoyance factor” should not be underestimated. To the extent that China’s post-1978 government has been successful, that success has been largely based on the government’s willingness to remove itself from people’s private lives – their relationships, careers, and hobbies – and allow the population to basically go about its business as long as certain red lines are not crossed.

From this standpoint, the problem with Internet censorship is that it intrudes on private space. It irritates Chinese Internet users in countless ways: it breaks links; it destroys useful technology like Google Image Search, Facebook and Youtube; it forces people into wild goose chases for “technical problems” that are actually caused by the firewall; and most of all, it practically compels serious surfers to become experts in firewall evasion technology.

The amount of time China’s Internet users waste mastering the various methods for “climbing the wall” is staggering; one could even say that evading the censorship has become a kind of extreme sport for in-the-know Chinese hipsters. Recently, a humorous image called “the Desktop of a Great Firewall Climber” has been circulating on Chinese websites: it shows a Windows desktop with no fewer than 32 separate methods for surmounting the firewall. The fact that five of these methods were already known to the author, and he also is aware of at least three other methods that do not appear in this image, is quite indicative of the general level of knowledge about firewall evasion in China. Of course, from an economic standpoint, all the time spent learning how to defeat the firewall is completely nonproductive and acts as a drag on the economy. Observing this phenomenon, writer Tu Zifang commented (China Digital Times translation):

For so many years, the busiest people on the Chinese Internet are those who make the Wall software and the “Climbing the Wall” software. It has been said that those people all have something in common: 1 – They are all Chinese; 2 – They all made a fortune; 3 – They all have studied in the US. The only difference is that those who write the Wall software have come back from the US and those who write the Climbing the Wall software are still in the US. This is we Chinese: We will help whoever pays the salary. As long as it makes money, we can do anything. It only hurts ordinary people: So much money spent on “the Wall” and “Climbing the Wall”!”

The leaked Google censorship directive

Given that the Great Firewall is essentially an elaborate edifice intended to conceal information, it is curious that the nature of the information being concealed is known in great detail. This is because the directives of the Internet Affairs Bureau, the state agency that oversees all Chinese news websites, are frequently leaked by insiders. In the Google case, on March 23, two sets of instructions were issued. The first only mentioned Google as part of a list of various other forbidden topics, including a highway accident in Sichuan that killed several villagers and an essay or article entitled “Wen Jiabao’s ‘solo’ Democracy Performance”. This first directive told editors to “only use the Xinhua general text, don’t play it up”. The second directive, which was issued later in the day, was much more detailed. It describes the case as a “high-impact incident” and gives extensive instructions intended to minimize that impact and ensure that all domestic media outlets toe the party line (China Digital Times translation):

Google has officially announced its withdrawal from the China market. This is a high-impact incident. It has triggered netizens’ discussions which are not limited to a commercial level. Therefore please pay strict attention to the following content requirements during this period:

A. News Section
1. Only use Central Government main media (website) content; do not use content from other sources
2. Reposting must not change title
3. News recommendations should refer to Central government main media websites
4. Do not produce relevant topic pages; do not set discussion sessions; do not conduct related investigative reporting;
5. Online programs with experts and scholars on this matter must apply for permission ahead of time. This type of self-initiated program production is strictly forbidden.
6. Carefully manage the commentary posts under news items.

B. Forums, blogs and other interactive media sections:
1. It is not permitted to hold discussions or investigations on the Google topic
2. Interactive sections do not recommend this topic, do not place this topic and related comments at the top
3. All websites please clean up text, images and sound and videos which attack the Party, State, government agencies, Internet policies with the excuse of this event.
4. All websites please clean up text, images and sound and videos which support Google, dedicate flowers to Google, ask Google to stay, cheer for Google and others have a different tune from government policy
5. On topics related to Google, carefully manage the information in exchanges, comments and other interactive sessions
6. Chief managers in different regions please assign specific manpower to monitor Google-related information; if there is information about mass incidents, please report it in a timely manner.

We ask the Monitoring and Control Group to immediately follow up monitoring and control actions along the above directions; once any problems are discovered, please communicate with respected sessions in a timely manner.

Additional guidelines:
– Do not participate in and report Google’s information/press releases
– Do not report about Google exerting pressure on our country via people or events
– Related reports need to put [our story/perspective/information] in the center, do not provide materials for Google to attack relevant policies of our country
– Use talking points about Google withdrawing from China published by relevant departments. [1]

Is this leaked document genuine? Of course, the mere existence of information on the Internet has no necessary relationship to provenance or truth value. Having said that, the document’s consistency with known PRC policy; its high level of detail and thoroughness; its stilted, bureaucratic language (“relevant departments”, “managers in different regions”); and the reporting about it by high-profile media organizations including the Daily Telegraph (UK), BBC, and the Washington Post argue that it is genuine. A definitive proof would require the cooperation of Twitter, which was reportedly used for the original leak; Twitter presumably knows the identity of the leaker, at least in the form of a DNS number, but the company has made no public statement about the leak.

Assuming the document is genuine, what does it mean? First, it clearly shows that the CCP itself perceives the Google case as important, and a potential source of public unrest. Second, it shows that Chinese journalists and intellectuals investigate, or comment on, controversial topics at their own peril. Third, it shows that the censorship goes far beyond text articles and includes images, sound and video clips. (Technically, because of the inferior capabilities of image searching technology compared to text search technology, the blocking of images is quite difficult, which suggests a possible strategy for anyone wishing to post forbidden material.) Fourth, it is remarkably explicit about the state policy of completely suppressing alternative views; the “additional guidelines” make it quite clear that as far as the Chinese government is concerned, no Chinese person has the right to hear Google’s statements on the issue, insofar as those views differ from the CCP’s. In these guidelines, one could easily substitute “The Dalai Lama”, “Taiwan”, “Wei Jingsheng”, or even “Barack Obama” for “Google”, and they would still be perfectly applicable. Simply stated, in China, no one is allowed to publish an opinion different from the CCP party line; the difference from democratic societies is quite stark, however much some might not wish to hear this.

Humorous aspects

Historically, when a country tries to suppress free speech, one of the most common ways that country’s citizens respond is by disguising forbidden opinions; there are many ways to do so, ranging from fictionalized accounts of current events, to symbolic protests, to artwork, to humor. One of the most remarkable phenomena on the Chinese Internet is the use of humor, especially homonymic puns, to vent frustration over unpopular government policies, and the Google affair has provided additional examples of this.

The most famous is the appearance of the Gu Ge, or “Google Dove”. The “Google Dove” is the latest in a series of “Internet mythical creatures”; inventing and naming such creatures as a form of protest has become very popular among Chinese netizens. [2] To understand the “Google Dove”, one must first know that Google’s Chinese name is pronounced “Gu Ge”, but these same two syllables (with different tonal inflection) can also mean “old dove”. To satirically protest Google’s departure, a number of Chinese netizens began posting pictures of Gu Ge, using dove images overlaid with a rainbow of primary colors reminiscent of the Google logo. As the coinage spread, an entire natural history of the faux-species was elaborated. One such essay is replete with sly references to government policy and past “mythical creatures” but maintains a dry birdwatching-guide-like narrative voice, complete with ornithological terminology (translated by the author with the help of Google Translate):

The “Old Dove” is currently endangered in China. The birds originated in North America, according to biologists, who have found their ancestors living in the equivalent of today’s Santa Clara County, California, near Mountain View. During the late 20th and early 21st century, the species spread all over the world, but starting on March 23, 2010, a huge flock suddenly began migrating along the coast to a port in southern China, to avoid extinction in mainland China. This has puzzled scientists. … According to American Indian legend, this bird has a very important habit, described in an Indian language as “don’t be evil”; translated into Chinese, it means “afraid of River Crabs”. When the species encountered an environment with too many river crabs, they could not survive as well as grass-mud horses, so instead, they went south. Some animal lovers around the world have called this a disgrace to the biosphere. The “Old Dove” has a gentle personality, flies fast and has accurate navigation capabilities, sharp vision, and a strong ability to find things … along with poultry, it is one of the species most beloved by the masses, and has made an indelible contribution to the development of human civilization.”

It may be necessary to explain the two previous “mythical creatures” referred to in this piece, the “River Crab” and the “Grass Mud Horse”. Since the CCP justifies curtailed freedoms in China by invoking the need to maintain a “harmonious society”, victims of Internet censorship are popularly said to have been “harmonized”. In Chinese “harmonized” is pronounced “hexie”; the same syllables with different inflection can mean “river crab”. The word for “crab”, in countryside slang, can also mean a bully who maintains power using violence. So the “River Crab” has become a symbol for crude censorship backed by the threat of force. “Grass Mud Horse” is also a homonym; in this case of the phrase cao ni ma, which can also mean “f— your mother”, depending on the tones used. The “Grass Mud Horse” has become probably the best-known symbol of defiance to the censors, and its massive popularity was only enhanced by the unprintably profane nature of the homonym. Countless essays and blog postings were made about the “Grass Mud Horse” (most deleted as soon as they were found), and the creature has appeared on T-shirts and even limited-edition plush toys. Blogger Zhan Bin, a teacher at the Beijing Institute of Fashion Technology, created a brand-new Chinese character for it, using the radicals for “grass”, “mud”, and “horse”, and proposed this as the 2009 “character of the year”.

A number of videos, including mock documentaries, also appeared; the most notorious of these, a “Song of Grass Mud Horse” music video with deliriously obscene lyrics and a children’s song-like refrain, supposedly received 1.4 million hits. [3] As Song Han described it, the somber atmosphere when he and other sympathetic Chinese delivered flowers to Google’s Beijing office ended on an upbeat note when one young man led the group in a rousing chorus of the “Song of Grass Mud Horse”. More than just discontent over Internet policy, the “mythical creatures” phenomenon represented a kind of generalized rage at the state of the nation amongst younger Chinese, strikingly reminiscent of the punk-rock movement in the West. To the extent that the UK in the 1970s was also a money-obsessed society in moral crisis, swept by disturbing social changes, the comparison may be quite apt.

Westerners also milked the Google/China confrontation for humor, especially on April 1, when a piece appeared on the eSarcasm website asserting that the entire dispute was “a hoax” and quoted Brin as supposedly saying: “Really, we’re just kidding. Did you honestly believe we’d abandon a market with 1.3 billion people in it for Falun Gong and the Dalai Lama? I don’t think so. As of April 2 we are relaunching our Google.cn site, with full content-filtering in place … Boy did we have you guys fooled.” The same day, a Jeremy Goldkorn piece on danwei.org claimed that Google planned to redirect the energies of its entire staff towards the development of geothermal energy technology. Another relevant eSarcasm contribution was entitled “Sweet China o’ Mine”, parodying the 80s hit Sweet Child o’ Mine by Guns N’ Roses. A short sample:

They’ve got some smiles that it seems to me
Are there for the sake of the tyranny
That tells them they can’t look at Internet porn, oh my

Now that Sergey’s expressed disgrace
The rest of the world is so keen to embrace
Google sayin’ so long
And waving Jintao bye-bye

Oh, oh oh oh, sweet China o’ mine
Oh, oh, oh, oh, sweet commies of mine

China and the Western left

Quite possibly, the most lasting consequence of the China/Google dispute may be to deepen a breach between the Chinese government and the political left in the West. Grumbling about CCP rule on the left side of the aisle has been evident for some time, but the chorus seems to be growing louder in the last few years.

Historically, Western progressives were sympathetic to the Chinese government because of its officially socialist alignment, which included support for many leftist positions such as equal rights for women, supporting workers over “bosses”, protecting minority cultures (supposedly), and so on. However, there is an increasing awareness that in modern China as it actually exists, these positions are being heavily eroded.

Women’s rights advocates have uncomfortably noted the return of rampant prostitution and concubinage, with CCP officials among the most prominent perpetrators. Labor groups have noticed that not only does Beijing instantly crush any attempt to form a labor group independent of the government, but also, since the introduction of former president and general secretary Jiang Zemin’s “Three Represents” political philosophy in the early 2000s, it has even accepted businessmen as Party members. Since the Party already has a vise-like grip on economic opportunities due to its control of land and commercial financing, this measure has had the effect, in the real world, of creating an incestuous class of untouchable kleptocrats, within which there is little distinction between capitalist exploitation and CCP-cadre exploitation.

As for the protection of minorities, it hardly needs to be said that for Uyghurs, Tibetans, and others, such policies have long since been revealed as a cruel joke masking the reality of Han domination. One symbolic example occurred during this year’s Chinese New Year celebration gala, when a government-approved group of Uyghur folk singers joylessly praised CCP rule with lyrics like “The Party’s policies are yakexi” (yakexi is the Uyghur word for “good”). The song’s inanity quickly became the object of derision among Chinese netizens; Han Han’s response was to suggest that yakexi could become the new Internet meme of 2010, replacing “Grass Mud Horse”. He then organized a contest to suggest snarky replacement lyrics for the song, with cash prizes for the winners.

In the eyes of the left, however, the most damning argument against Beijing may be the increasingly close relationship between it and large Western corporations, who adore China’s huge population of docile, intimidated workers. The involvement of these firms in China has grown so much so quickly that even today, after years of articles about China’s imminent rise, very few Westerners realize the vast size and range of corporate investments in China. The Google case might be seen as evidence against this thesis, but in reality, it is the exception that proves the rule: Google left precisely because it is an atypical US corporation, one that takes liberal principles far more seriously than most. The list of multinationals with no such scruples is very, very long.

As if to underline the point, a few days ago, singer Bob Dylan, an icon of the 1960s counterculture, was denied permission to perform in China. Most observers attributed this to a new suspicion of foreign artists that arose two years ago, when Icelandic singer Bjork shouted support for Tibet at a concert in Shanghai. But an incident that more starkly revealed the vast gap in basic beliefs between the Western left and the CCP government would be hard to imagine; for Beijing, protest songs are fine – but only when they are directed against what it sees as its foreign adversaries.

Note: 1. to read one posting of the document, click here
2. An example of Gu Ge as illustrated in Chongqing Evening News
3. Song of The Grass-Mud Horse

John Parker is a China-based freelance writer.

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