Thursday, April 29, 2010

God's Own Work@Goldman Sach

This is unending love story of capitalist economy called “Financial Crisis”. How the Wall Street and biggies of Wall Street loves money, and how much they love it. They have given this name “God own work”. They are doing God’s own work by cheating and defrauding. Making richer more rich and poor …………… poorer. This is called God’s Own Work in their words. But unfortunately this is exactly the definition of Capitalism. The whole concept of free money, free economy, without control and restriction and governance is what Capitalist Want.

If we look at whole financial crisis we can very easily say that the core reason is manipulation, and cheating, which they named structuring. Structuring of financial product, derivatives and swaps in such a way which nobody can understand.

Goldman Sach is being investigated for fraud, but the list is very long. The Greek debt by Goldman Sach should also be considered as cheating and their role in collapse of Lehman Brothers must also be investigated.

When I have gone through whole document of evidence and financial crisis I came to the following conclusion.

Financial Crisis

Financial Crisis, world has seen the big names of finance and banking no more exists, they are gone and gone for ever. Because of the financial melt down, more people has gone into poverty and more people finding it difficult to meet the both ends. What is problem and who is responsible for, and what is the alternative and long term solution.

What is problem?

The problem lies in the system where making money from money at any cost is sole objective called as capitalism. The specific reason related to the financial crisis is as below.

Institution and Product

  • Financial Crisis and collapse of financial industry, moral hazard is the core of the causes.
  • Securitization eliminates the incentive for the originator of the loan to be credit sensitive... With securitization, the dealer (almost) does not care as these loans can be laid off through securitization.(called a ‘‘moral’’ hazard). The originating banks replenished their funds, enabling them to issue more loans and generating transaction fees.
  • Credit rating agencies having given investment-grade ratings to MBSs based on risky subprime mortgage loans. However, there are also indications that some involved in rating subprime-related securities knew at the time that the rating process was faulty. ( moral hazard)

· The Bank of International Settlements, which seems to be the only institution that tracks the derivatives market, has recently reported that global outstanding derivatives have reached 1.14 quadrillion dollars: $548 Trillion in listed credit derivatives plus $596 trillion in notional/OTC derivatives. And a look at their massive exposure shows that even a small miscalculation or stumble in the capital markets could be a recipe for unprecedented disaster. The majority of the $1.28 quadrillion in derivatives are “owned” on somewhere near 95 percent margin!

“Reason for Financial Crisis in Short”

o Unethical Practices and Moral Hazard

o Securitization and speculation

o Paper Currency

o Derivatives and Structured Products

If we look at the core of the financial crisis, it all started with unethical practices of lenders/banks to lend the money who can not afford it. These bankers are only interested in getting processing fees and placement fees and making money on it. They bundled these entire low quality loan into securities, and sold to the market. Most importantly rating agencies rated these securities wrongly to get good rating. Then market players sold CDS and Interest rates swaps on them based on these rating. Then speculators played on these securities to generate profits.

When it comes to commodities I can say securitization of commodities market and derivatives played by the speculators are the sole reason for the high prices of commodities across the world. Derivatives are the other reason of collapse. Role of paper currency is another very important issue at the center of financial crisis. These papers currencies which do not have any weight themselves has become most important tool of the speculators, derivatives, currencies and their casino’s has played key role in financial crisis. Securitization and securities market has become the 24 hour casinos for the speculators who play on 95% barrowed money. (Commodities, currencies and derivatives)

Why not Auditors and Credit Rating Agencies?

But a crucial question remains that has not had much exposure: where were the auditors? Unqualified audit reports up to the collapse had concluded that the directors’ reports and accounts reasonably reflected reality.

Role of auditors:

Auditors have contributed to the crisis by accepting directors’ “mark-to-market” valuation of trading assets, when some basic questions would have shown them that those directors (i) hadn’t the remotest clue what was in the mortgage / loan packages they had acquired; (ii) were utterly bemused by the nature of the complex derivatives on which their asset valuation rested; and (iii) knew that there was no market to “mark” to.

Derivatives are central to the demise of Lehman. Its annual accounts mention derivatives contracts with a face value of $738bn and fair value of $36.8bn.

UK forensic accountant Richard Murphy says: "The fundamental question is how accountants got away with changing rules of accountancy, which state they don't have to assess the valuation of assets underlying the assets on a balance sheet. How did they get away with changing the audit rules?"

The Role Played by Credit Rating Agencies

Flaws in rating methodologies were the major reason for underestimating the credit default risks of instruments collateralized by subprime mortgages.

The governance of credit rating agencies did not adequately address issues relating to conflicts of interests and analytical independence.

Rating process needs to be optimized
Looking back at market developments and rating activities during the past few months, it becomes clear that a number of factors have adversely affected the quality of the work done by CRAs: