Where's Rico? (James Howard Kunstler)

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James Howard Kunstler -- World News Trust

Apr. 19, 2010 -- It's interesting and instructive to read The New York Times' lead story Monday morning, Top Goldman Leaders Said to Have Overseen Mortgage Unit. While it pretends to report all the particulars of the huge scandal growing out of Friday's SEC action against Goldman Sachs, the story really comes off as an attempt to create an alibi for the so-called "bank." It pretends that some kind of an intellectual struggle was going on among GS executives as to whether the housing market was doing just fine or poised to tank -- therefore muddling the company's intent in setting up investment deals based on sketchy mortgages designed to blow up so that a favored big customer, John Paulson, could collect on the deal insurance known as credit default swaps.

The truth is that anyone with half a brain could see the securitized mortgage fiasco coming from ten-thousand miles away. I said as much in Chapter Six ("Running on Fumes: the Hallucinated Economy") of my book The Long Emergency, which was published in 2005 but written well before that in 2002-4. And I had had no work experience whatsoever in banking generally or Wall Street investment banking in particular.

One week before the SEC action against GS, the Pro Publica website published a story about virtually the same kind of mischief being run out of the Chicago-based hedge fund Magnetar led by a clever young fellow named Alec Litowitz. Like Goldman Sachs, Magnetar deliberately constructed investments (bundles of bundled mortgage-backed securities called collateralized debt obligations) that were certain to fail so that Magnetar could collect on credit default swaps that amounted to a bet against products they themselves had participated in creating. There was no question that Litowitz and his employees did this absolutely on purpose. Nor is there any question that they aggressively sold positions in these CDOs to credulous investors like Thrivent Financial for Lutherans and others.

The question that now begs to be answered is: why is this activity not being investigated and prosecuted under the federal RICO statutes against racketeering? The Racketeer Influenced and Corrupt Organizations Act was designed to punish exactly this kind of behavior, whether the defendant's name ended in a vowel or not. How is it not a racket to deliberately and systematically construct investments designed to fail so you can collect what amounts to insurance against them -- and then to sell those financial instruments to customers without telling them that these investments were engineered to blow up? At the very least it amounts to a failure to disclose material information, which is the basis for distinguishing illegality. More to the point, it almost certainly amounts to prosecutable criminal fraud and insider trading.

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