Does this man never learn?!

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On 22 November 2008, Prime Minister-elect, John Key, presented a speech to an APEC meeting where he told a gathering of some 500 business leaders from 21 countries,  that financial regulation was urgently needed to pull the world out of the global financial crisis.

Key said, in part,

“... It is no news to anyone that the global economic outlook for 2009 is weak.

Not since the Great Depression has the world experienced such a significant financial crisis as we have seen in recent months. We have seen an expansion of credit and leverage at levels that were so unprecedented and arguably so uncontrolled that they now threaten the very stability of the world’s banking system…

… To understand the potential scope of the changes that may be required is to understand the changes in the global economy over the past 10 to 15 years.

Over the past decade or so the global economy was fuelled by a private sector credit boom made possible by a combination of large macroeconomic imbalances with and between economies, relatively low global inflation, new waves of financial innovation, and huge amounts of leveraging by hedge-funds and other financial institutions.

These forces were, in turn, fuelled by excessive optimism in asset markets, and a more relaxed, and in many cases, recklessly complacent attitude to risk…

… Our banks have, in large part, escaped significant exposure to the destructive products such as the sub-prime market that has wreaked havoc in other jurisdictions…

… Beyond our ability to trade and interact with each other, the second and most obvious effect of the financial changes of the past 10 to 15 years has been a large increase in asset prices, greatly increased demand and, most crucially, a huge expansion in credit.

This in itself isn’t new. The difference is in the magnitude and scale relative to the real economy and the inability to quantify the risk due to a lack of transparency.

This has led to two new challenges. First, relating to the effectiveness of monetary policy in dealing with asset cycles and price bubbles in particular, and second, relating to the adequacy of regulation of financial institutions... “

It is abundantly obvious that Key was well aware of the part played by hedge funds and other financial institutions in the mess that was the Global Financial Crisis (GFC). That crisis led to massive taxpayer-funded bailouts of corporations deemed TBTF – To Big To Fail.

The ‘side effects’ were millions losing their jobs; their homes; and governments cutting back on expenditure and state services.  Many likened the 2008 Great Recession to the Depression of the 1920s/30s.  Only because 21st century Western nations have a well-developed social welfare system did we not have a repeat of the soup-kitchen lines; entire homeless families living in the streets; and shanty towns springing up to offer some semblance of shelter.

In Europe, the effects of the Crisis continues to worsen, and we are seeing another dangerous sign that social stresses are beginning to impact; the rise of neo-nazi political organisations.

The greed of Wall Street, and the unfettered power of  neo-liberal Globalist-Corporatism  is dragging the world to the precipice. It is a precipice that even  distance will not protect us, here in New Zealand.

Just as we were not exempt from the Great Depression in the 1920s/1930s; the rise of fascism; and it’s awful consequence; World War Two.

Key continued,

“In recent months the world has focused on the spectacular collapses of companies like Lehman Brothers and my old firm, Merrill Lynch.

What is now apparent is that as the pressure to boost profits grew, Wall Street assumed more and more risk. The quantity, and also the complexity, of this risk saw investment banks evolve into pseudo hedge funds with balance-sheets and risk exposures well beyond what anyone would have previously deemed acceptable.

But leverage wasn’t, and hasn’t been, the sole preserve of the banks.

The hedge-fund community has mushroomed in size and significance. Gone for the most part is the traditional macro hedge fund, where risk was based on the views of an individual trader who undertook conviction trades that bore some sense of balance when compared to the overall size and structure of the market.

Today, hedge-fund leverage is for the most part unregulated, opaque and, arguably, globally unmanageable. The regulation that does occur is for the most part focused on the fitness of the manager to report to their investor.

All of these factors have helped contribute to the explosion in credit, completely out of proportion to the real economy, with cheap equity leveraged to the hilt.

So now the party is over and the taxpayers of the world are left to underwrite – in one form or another – the liabilities and obligations of banks and, by extension, their hedge-fund clientele.

We can no longer afford to ignore the fact that the amount of risk that hedge funds are able to take through the leverage of their funds is arguably completely disproportionate to the real economy.

These realities and the associated bailout of financial institutions are expected to prompt a widespread review of financial regulation. This is entirely appropriate.

I emphasise, however, that this will require a change of mindset and a global approach – especially as the home of many financial institutions, including hedge funds, is no longer the traditional economies.

We must proceed with caution.”

Indeed: “We must proceed with caution.“

Which is why it totally beggars belief that Key was planning to invite those very same Global Corporatists to New Zealand  to set up some kind of  “zero tax rated financial services hub”. The proposal was led by banker, Craig Stobo, who  told National’s 2009 Jobs Summit that “an economic boost would result if the Government created a zero tax rating for foreign investors who invested in international funds” in New Zealand.

The then-Economic Development Minister Gerry Brownlee, appointed Stobo as chairman of an advisory group the following year to determine what incentives would draw  financial corporates  to New Zealand to participate in the proposed “financial hub” proposal.    Brownlee paid  Stobo’s group  fees ranging up to $655 a day, on top of an up-front allocation of $500,000.

(Maybe that’s why prescription charges are going up from $3 to $5 each?  Advisors don’t come cheap.)

As this media report further outlined,

“ Stobo’s appointment came after the Government’s Capital Markets Taskforce expanded the initial zero-tax idea into an ambitious plan to compete directly with tax havens Luxembourg, the Cayman Islands and Ireland to host international funds investing in the Asia-Pacific region.

However, Treasury comment on a draft version of Stobo’s report in July 2010 said it did “not present a convincing case that the funds domicile industry could be effectively developed in New Zealand and that it would provide net economic benefits to New Zealand”.

Confidential research by Oliver Wynam, conducted for the Capital Markets Taskforce which was charged with reviving New Zealand’s capital markets after the finance company crash and recession, were withheld from the Sunday Star-Times.

However, summaries of the research seen by this paper estimate New Zealand could secure 17 per cent of the Asia-Pacific market for fund domiciles, generating annual revenues of $1 billion by 2015 and providing up to 5000 high-quality jobs.

Official advice later poured cold water on these numbers. A February 2010 Treasury report noted: “The benefits appear overstated, including the estimate of the number of sustainable jobs.”

But the Wyman report went global, and plans were drawn up for Key to discuss the proposal with senior international bankers when he visited New York in September 2009.

That was the trip when the prime minister made headlines with a turn on The Late Show with David Letterman, but Treasury documents show during this visit he was briefed for proposed meetings with the chief executives of Goldman Sachs and Citibank where the hub was to be discussed.

In December 2010 Key said that a major international bank offered to shift business to New Zealand if tax policy changes were forthcoming. ” –  Key backs off ‘hub’, 13 May 2012

Note the last paragraph; “…Key said that a major international bank offered to shift business to New Zealand if tax policy changes were forthcoming“.

Oh indeed?! And where have we heard that before? Changing legislation to encourage a business to invest here?  Warner Bros? Sky City?

It apprears that Dear Leader has been making rather a habit of selling our  legislation for deals!

Key’s meeting with Goldman Sachs is also disturbing.

Goldman Sachs has been implicated in dubious dealings on Wall St, and benefitted from selling many of the dodgy “products” that led to the GlobalFinancial Crisis in 2008,

As  Allan Sloan, a senior editor for ‘Fortune’  magazine, said on 15 October 2007,

“ So let’s reduce this macro story to human scale. Meet GSAMP Trust 2006-S3, a $494 million drop in the junk-mortgage bucket, part of the more than half-a-trillion dollars of mortgage-backed securities issued last year. We found this issue by asking mortgage mavens to pick the worst deal they knew of that had been floated by a top-tier firm – and this one’s pretty bad.

It was sold by Goldman Sachs – GSAMP originally stood for Goldman Sachs Alternative Mortgage Products but now has become a name itself, like AT&T and 3M.

This issue, which is backed by ultra-risky second-mortgage loans, contains all the elements that facilitated the housing bubble and bust. It’s got speculators searching for quick gains in hot housing markets; it’s got loans that seem to have been made with little or no serious analysis by lenders; and finally, it’s got Wall Street, which churned out mortgage “product” because buyers wanted it. As they say on the Street, “When the ducks quack, feed them”. ” –  Source

In 2010,  Goldman Sachs faced legal action from the US Federal financial watchdog,

” On April 16, 2010, the Securities and Exchange Commission (SEC) announced that it was suing Goldman Sachs and one of its employees, Fabrice Tourre. The SEC alleged that Goldman materially misstated and omitted facts in disclosure documents for a synthetic CDO product it originated called Abacus 2007-AC1. Goldman was paid a fee of approximately $15 million for its work in the deal.

The allegation is that Goldman misrepresented to investors that an independent selection agent, ACA, had reviewed the mortgage package underlying the credit default obligations, and that Goldman failed to disclose to ACA that a hedge fund, Paulson & Co., that sought to short the package, had helped select underlying mortgages for the package against which it planned to bet.

The SEC further alleged that “Tourre also misled ACA into believing that Paulson invested approximately $200 million in the equity of ABACUS 2007-ACI (a long position) and, accordingly, that Paulson’s interests in the collateral section [sic] process were aligned with ACA’s when in reality Paulson’s interests were sharply conflicting.”  Goldman Sachs stated that the firm never represented to ACA that Paulson was to be a long investor, and that as normal business practice, market makers do not disclose the identities of a buyer to a seller and vice versa.

The complaint states that Paulson made a $1 billion profit from the short investments, while purchasers of the materials lost the same amount. The two main investors who lost money were ABN Amro and IKB Deutsche Industriebank.IKB lost $150,000,000 within months on the purchase.ABN Amro lost $840,909,090. ” – Source

Barely three months later, Gioldman Sachs settled out of Court. Three months!?!?

For the American judicial system, where cases like this can take years, or even decades – this is the legal system’s version of travelling in a spaceship at the speed of light,

”  Goldman Sachs has agreed to pay $550 million to the Securities and Exchange Commission, one of the largest penalties ever paid by a Wall Street firm, to settle charges of securities fraud linked to mortgage investments.

The S.E.C. filed a lawsuit against Goldman in April, accusing the bank of securities fraud. The settlement came just days before Goldman is scheduled to report its second-quarter earnings.

Under the terms of the deal, Goldman will pay $300 million in fines to the Treasury Department, with the rest serving as restitution to investors in the mortgage-linked security. Goldman will not admit wrongdoing, though it will admit that its marketing materials for the investment “contained incomplete information”. ” – Source

John Key was to meet this man, Goldman Sachs CEO Lloyd Blankfein, in New York,

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CANCELLED: John Key was to meet Goldman Sachs CEO Lloyd Blankfein in New York.

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The proposed meeting with Blankfein was to take place during the same visit to New York when Key appeared  on ‘Letterman’, in September 2009, for that cringeworthy appearance, “Top Ten Reasons to visit New Zealand“.

Treasury analysis of  Stobo’s report in July 2010 stated,

” [It did] not present a convincing case that the funds domicile industry could be effectively developed in New Zealand and that it would provide net economic benefits to New Zealand” . – Source

Treasury warned that the proposal could risk,

“… a wealth transfer from New Zealand taxpayers to overseas financial institutions.“

Treasury also noted that the OECD was “cracking down” on tax havens in Europe (Luxembourg, Ireland, etc) so it remains to be seen why New Zealand would put itself in a similar position.

This blogger considers Key’s plans for a “tax haven” and his plans to draw Goldman Sachs into the equation as apalling bad judgement on his part.

Considering that Goldman Sachs was one of the financial corporations that Key had railed against in November 2008,

“We must proceed with caution.“

What is even more mind-boggling and incredible is that Key himself advocated for reforms at that same APEC meeting, when he stated,

”  What we all know, however, is that transparency is possible and must be demanded…

… My Government is firmly committed to working with other governments and businesses like yours to not only grapple with the immediate pressures on our economy but to, in turn, address the underlying issues that led to today’s financial crisis. ” – Source

Turning New Zealand into a tax haven for companies to hide their fortunes, and shield them from legitamate taxes, and dealing with one of the prime movers in the Global Financial Crisis, which had been sued by a US Government financial watchdog – is not “addressing  the underlying issues that led to the global financial crisis”.

Thankfully, this harebrained scheme went nowhere. When the  ‘Sunday Star-Times‘  approached Key on this issue, evidently he “distanced the government from the controversial aspects of the plan“. (In plain english: he ducked for cover.)

But it should serve as ample warning that the man who is our Prime Minister deserves the hard scrutiny that the media have been according him.

Thankfully, we still have a reasonably critical and independent media in this country.

And thankfully, they can keep an eye on John Key.

God knows someone needs to.

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Postscript:

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Full Story

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Acknowledgement

Dominion Post/Sunday Star Times

Additional

Junk mortgages under the microscope

Goldman Sachs  SEC  Fraud Civil Lawsuit

Goldman Settles With S.E.C. for $550 Million

Key blames ‘reckless’ money men for crisis

Address to the CEO Summit, APEC Business Advisory Council (ABAC)

Key backs off ‘hub’

JPMorgan CEO offers blunt apology

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