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Matt Taibbi, the Rolling Stone magazine contributing editor who in March wrote a brilliant and searing piece on the collapse of insurance giant AIG ("The Big Takeover'), now turns his attention to Goldman Sachs Group.
If you've read or heard Taibbi before, you know he's not writing a profile that is likely to be excerpted in the next Goldman annual report to shareholders.
Here's how his story in the latest issue of RS begins:
"The first thing you need to know about Goldman Sachs is that it's everywhere. The world's most powerful investment bank is a great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money."
The theme of Taibbi's takeout on Goldman is that the firm has, by design, been at the center of the biggest investment bubbles since the Depression. He includes the tech-stock bubble of the late-1990s, the housing bubble of this decade, and the oil bubble of the first half of 2008.
He writes:
"The formula is relatively simple: Goldman positions itself in the middle of a speculative bubble, selling investments they know are crap. Then they hoover up vast sums from the middle and lower floors of society with the aid of a crippled and corrupt state that allows it to rewrite the rules in exchange for the relative pennies the bank throws at political patronage. Finally, when it all goes bust, leaving millions of ordinary citizens broke and starving, they begin the entire process over again, riding in to rescue us all by lending us back our own money at interest, selling themselves as men above greed, just a bunch of really smart guys keeping the wheels greased."
Of course, he's describing the modus operandi of Wall Street in general. His assertion is that no one does it better than Goldman, and that no firm has enjoyed the political clout of Goldman, given how many of its alumni have landed in positions of power in government -- from Robert Rubin, who was Bill Clinton's Treasury secretary, to Henry M. Paulson, who held the same post under George W. Bush, to William Dudley, now president of the Federal Reserve Bank of New York.
 Taibbi isn't trying to be even-handed in his analysis, beyond acknowledging that there were "other players" besides Goldman involved in the run-up in oil prices a year ago, for example.
Conveniently for Taibbi's purposes, Goldman doesn't try to fight back. He says in the piece that the firm "refused to respond to questions for this story."
Goldman does have an official response to the story, however: "The article is a compilation of just about every conspiracy theory ever dreamed up about the firm," spokesman Lucas VanPraag said in an email. "It's a grotesque distortion of facts, commingled with fiction and spiced up with hyperbole. The only things missing seem to be allegations that we were responsible for assassinating President Kennedy and faking the first lunar landing."
Taibbi's style of writing will be too over-the-top for some readers, but he does a masterful job connecting the dots for anyone who has had trouble understanding how the Internet, housing and commodity bubbles developed one after another -- whether or not you believe Goldman really was the prime conspirator.
As Taibbi notes:
"Instead of teaching Wall Street a lesson that bubbles always deflate, the Internet years demonstrated to bankers that in the age of freely flowing capital . . . bubbles are incredibly easy to inflate, and individual bonuses are actually bigger when the mania and irrationality are greater."
Rolling Stone isn't making Taibbi's full story available online, but Tyler Durden at the Zero Hedge blog has put up screen grabs of the complete story, here.
-- Tom Petruno
Photo: Matt Taibbi. Credit: Trueslant.com
The Federal Reserve signaled that it won't try to do more than it previously planned to pull down mortgage rates and other long-term interest rates.
That has caused some mild disappointment in the Treasury bond market today, pushing up longer-term yields. The 10-year T-note yield, a benchmark for mortgages, was at 3.70% at about 1:15 p.m. PDT, up from 3.63% on Tuesday.
For homeowners hoping to refinance at a lower interest rate, the Fed didn’t offer any fresh encouragement.
In their statement after finishing a two-day meeting, Fed Chairman Ben S. Bernanke and cohorts sounded a bit more upbeat about the economic outlook, saying that information received since their last meeting in April "suggests that the pace of economic contraction is slowing."
 Still, they reiterated that they expected to keep their key short-term interest rate at "exceptionally low" levels "for an extended period." The Fed’s target for the rate now is between zero and 0.25%.
Nobody expected the Fed to make a change in its short-term rate. But some on Wall Street had hoped that the central bank would boost the $1.75 trillion it plans to spend to buy mortgage-backed bonds and Treasury securities for its own portfolio this year.
The Fed’s purchases, which began earlier this year, were aimed at keeping a lid on long-term bond yields and mortgage rates. But those rates have risen anyway, in part because of the Treasury’s unprecedented borrowing to fund rescue programs for the economy and the financial system.
Some bond investors also have been spooked by the Fed’s moves to pump massive sums into the financial system. The fear is that all that money will eventually fuel rising inflation, brutalizing fixed-rate bonds.
The 10-year T-note yield jumped as high as 4% two weeks ago from a record low of 2% at the end of December.
The average 30-year mortgage rate rose from 4.78% in early April to 5.38% as of last week, according to Freddie Mac. That has crushed refinancing activity.
Bernanke may have decided there was too much risk in trying to boost efforts to push long-term rates down, with the market leaning in the other direction. Besides, the Fed has said it views rising long-term rates as a sign that the economy is getting better.
"The Fed is not going to take further action, like ramping up asset purchases, to forestall rising long-term interest rates at this time," said Scott Anderson, senior economist at Wells Fargo & Co. "They see the rate increases so far as a return to normalcy, the taking out of the depression scenario, so to speak."
Policymakers also may be figuring that long-term Treasury yields aren’t likely to go much higher, anyway. When the 10-year T-note yield hit 4% on June 10, buyers rushed in and the yield fell back.
For now, the Fed appears content to let the market find its own levels on long rates, said George Goncalves, a bond strategist at Cantor Fitzgerald.
Could mortgage rates dive again? Sure -- if the economy crumbles.
As Scott Simon, a bond portfolio manager at Pimco in Newport Beach put it: "Be careful what you ask for."
-- Tom Petruno
Photo: Fed Chairman Ben S. Bernanke. Credit: Carol T. Powers / Bloomberg News
Wall Street today went back to feeling better about the economy, and that dashed hopes for a sustained drop in mortgage rates.
Treasury bond yields jumped on some surprisingly upbeat economic reports -- including the first decline since January in the number of Americans drawing unemployment benefits, and a bigger-than-expected rise in May in the index of leading economic indicators.
What’s more, the Treasury put a number on the amount it will borrow next week in new two-, five- and seven-year notes. The total of $104 billion in planned note sales was above expectations, reviving worries about supply swamping the market as the government’s borrowing needs continue to soar, said John Spinello, a market strategist at Jefferies Group in New York.
 The 10-year T-note yield, a benchmark for mortgage rates, surged to 3.83% from 3.69% on Wednesday and 3.67% on Tuesday.
Once again, with the economic data pointing to improvement, the Treasury market sold off while the stock market got a lift, though only a modest one. The Dow Jones industrial average added 58.42 points, or 0.7%, to 8,555.60, the first advance after three days of losses that clipped 3.4% off the index.
The 10-year T-note yield had reached an eight-month high of 3.99% on June 10, then quickly pulled back amid some disappointing economic reports and on market relief as the government finished that week’s borrowing of $65 billion.
Spinello figures the T-note yield may be headed back to 4% soon as the supply of new bonds balloons again and investors demand a higher return to take the debt. That could put fresh upward pressure on mortgage rates, which had spiked higher earlier this month before receding a bit in recent days.
George Goncalves, interest rate strategist at bond dealer Cantor Fitzgerald in New York, said he believes that investors are too optimistic about the economy, and that current Treasury yields will prove to be good returns for investors.
But for now, the Treasury market is again losing the battle with stocks, commodities and other markets that typically attract money when people believe that things can only get better.
"There’s still too much love for ‘risk’ markets," Goncalves said.
-- Tom Petruno
Photo: The Treasury Department in Washington. Credit: J. Scott Applewhite / Associated Press
Federal regulators responded inadequately from 2005 on as billions of dollars in high-risk mortgages piled up at weakly managed Downey Savings and Loan, the U.S. Treasury Department inspector general said in a report on last year’s failure of the Newport Beach thrift.
The Office of Thrift Supervision, the Treasury arm that regulates S&Ls, began warning Downey management in 2002 about its heavy issuance of pay-option adjustable-rate mortgages but failed to rein in the practice, the report said.
These option ARMs, often written without verifying borrowers’ income and assets, allowed homeowners to pay so little that their loan balances went up. The loans have emerged as a major contributor to the nation’s foreclosure crisis.
 Yet despite the warnings, "OTS examiners did not require Downey to limit concentrations in higher-risk loan products," said the 71-page inspector general report, posted Tuesday on the Treasury Department’s website.
"We believe that in light of the OTS’s repeated expressions of concern and management’s unresponsiveness to those concerns, OTS should have been more forceful, at least by 2005, to limit such concentrations," the report said.
Even after Downey, operated by parent Downey Financial Corp., was downgraded in regulators' confidential ratings from a strong 2 to a so-so 3 in 2006, the OTS took only an informal enforcement action against the thrift. The agency’s guidelines required a formal enforcement action, the Treasury's inspector general said.
An OTS spokesman did not immediately respond to a request for comment today.
U.S. Bancorp acquired Downey on Nov. 23 along with PFF Bank & Trust of Pomona, a savings and loan hammered by bad loans to Inland Empire developers and home builders. The Federal Deposit Insurance Corp. said Downey’s collapse would cost the deposit insurance fund about $1.4 billion and PFF’s failure an additional $729 million.
A series of large OTS-supervised thrifts, including Washington Mutual Inc., IndyMac Bancorp and Downey, failed last year after suffering large losses on option ARMs and other risky loans.
As part of its overhaul of the nation’s financial regulation, the Obama administration is recommending that Congress abolish the OTS and force S&Ls to switch to commercial bank charters.
-- E. Scott Reckard
Photo credit: Lori Shepler / Los Angeles Times
The slide in Treasury bond and mortgage bond yields stalled out today.
The 10-year T-note yield ended at 3.69%, up slightly from 3.67% on Tuesday. The yield had tumbled for four straight sessions after reaching an eight-month high of 3.99% a week ago.
The stock market's pullback in recent sessions had helped drive some investors into the relative haven of Treasury issues. But the rally in government bonds ran out of steam despite another weak day for Wall Street overall.
Some traders said potential bond buyers were looking ahead to another load of securities that will hit the market next week, when the Treasury will auction two-, five- and seven-year notes. Supply concerns had been one of the factors driving Treasury yields sharply higher in May and early June.
Mortgage bond yields, benchmarks for lenders setting home loan rates, also rose today. The yield on 30-year Fannie Mae mortgage-backed bonds ended at 4.66%, up from 4.58% on Tuesday but still down from 5.07% a week ago.
The surge in home loan rates early last week pushed mortgage refinancing activity to its lowest level since November, the Mortgage Bankers Assn. said today. The group’s index of refi applications plunged 23% in the week that ended Friday, the fourth straight decline.
But mortgage rates have begun to ease since Thursday.
-- Tom Petruno
U.S. Treasury bond yields continued to ease today from their recent peaks, putting more downward pressure on mortgage rates -- and reopening the door for some potential homebuyers and for homeowners hoping to refinance.
Treasury bonds attracted buyers as fresh worries about the economy helped trigger selling in the stock market for a second straight session. The Dow Jones industrial average lost 107.46 points, or 1.3%, to 8,504.67, bringing the two-day loss to 3.3%.
The 10-year T-note yield, a benchmark for home loan rates, fell to 3.66% from 3.71% on Monday. The yield has fallen for four straight trading days after reaching an eight-month high of 3.99% last Wednesday.
 Thirty-year conventional mortgage rates nationwide were averaging about 5.55% today plus 0.33 of a point in upfront fees, said Keith Gumbinger, a principal at rate tracker HSH Associates in Pompton Plains, N.J. The loan rate average is down from a peak of 5.81% last week, he said.
Jeff Lazerson, head of mortgagegrader.com in Laguna Niguel, was quoting a 5% rate for a conventional loan with 0.75 of a point.
Treasury bond yields had been rising for most of the spring as increasingly optimistic investors found better ideas for their money, including stocks. Yields spiked last week as the government sold $65 billion more in bonds to finance the federal deficit, leaving the market awash in securities.
But the jump in Treasury yields has been luring buyers who believe the economy is likely to continue to struggle, traders say.
The 10-year T-note yield could fall as low as 3.5% in the near term as investors rethink the economic and interest-rate outlooks, said Mike Kastner, head of fixed-income at Sterling Stamos Capital Management in New York.
Some bond investors are holding out hope that the Federal Reserve will announce new efforts to bring down long-term interest rates when policymakers meet June 24.
Gary Pollack, head of fixed-income trading at Deutsche Bank Private Wealth Management in New York, agreed that the 10-year T-note might slide to about 3.5% this month. But he figures that’s where it will stop, given the still-massive load of debt the Treasury has to sell this year.
"The only thing that could get it below 3.5% would be if the stock market collapses again," he said.
-- Tom Petruno
Some economic green shoots are showing signs of wilting, giving Wall Street an excuse to take profits from the spring stock market surge.
The Dow Jones industrials were off 185 points, or 2.1%, to 8,613 at about 12:40 p.m. PDT. It was just on Friday that the Dow had erased the last of its 2009 losses.
A Federal Reserve index of manufacturing activity in the New York region showed a decline this month from May levels, the Fed said today. The index came in at minus 9.41, compared with minus 4.55 in May. The trend had been improving in April and May, after a horrendous reading of minus 38.23 in March.
A reading below zero indicates manufacturing in the region is contracting.
 Still, the report wasn’t as bad as it looked, as Bloomberg News notes:
"Factory executives in the New York Fed’s district, which encompasses New York state, northern New Jersey and one county in Connecticut, turned more optimistic about the future. A gauge measuring the manufacturing outlook climbed to 47.8, the highest since July 2007, from 43.8.
"A measure of employment improved to minus 21.8 from minus 23.9.
"Although the main reading was 'disappointing from the perspective of the stabilization story, the details of the report were not as weak as the headline,' John Ryding, chief economist at RDQ Economics in New York, wrote in a note to clients."
Separately, the National Assn. of Home Builders/Wells Fargo index of builder confidence slipped this month, the first reversal since January. The confidence index eased to 15 from 16 in May. It had hit bottom at 8 in January. Any reading below 50 indicates poor housing-market conditions.
“As expected, the housing market continues to bump along trying to find a bottom,” said NAHB Chief Economist David Crowe.
Builders’ stocks are getting pounded today. KB Home was down 84 cents, or 6%, to $13.25; Pulte Homes was down 26 cents, or 3%, to $8.56.
But investors have been pulling back from many of the builders since early May, when KB Home got as high as $19.50 and Pulte reached $12.30.
-- Tom Petruno
Photo: Will green shoots keep pushing through in the economy? Credit: Carlos Chavez / Los Angeles Times
Blogger CalculatedRisk took a look at the Federal Reserve's latest estimate of the equity Americans have in their homes and found it overly optimistic on its face. And not by a little.
The Fed’s quarterly tally of U.S. households’ aggregate balance sheet, issued Thursday, as usual included an estimate of homeowner equity -- the market value of houses minus mortgage debt owed.
In the quarter ended March 31, the Fed’s data put net equity at a record low of 41.4% of market value, down from 42.9% the previous quarter and down dramatically from 58.5% at the end of 2005.
 Still, a 41.4% equity stake, after the unprecedented plunge in housing prices, might seem like a decent average cushion against more homeowners deciding to just walk away from a declining investment.
But the Fed’s figure, as CalculatedRisk notes, is simple math -- too simple. The Fed subtracts estimated household mortgage debt ($10.46 trillion) from the total estimated market value of homes ($17.87 trillion) to get $7.4 trillion in equity.
That market-value total of $17.87 trillion, however, includes the estimated 32% of homes that have no mortgage debt at all (i.e., those owners, most likely older folks who've been in their homes for decades, have 100% equity).
The more telling number, CR notes, is the remaining equity of people who have mortgages.
Crunching Census Bureau data, CR estimates that the average net equity of mortgage-encumbered homes is just 20.4%, or less than half the overall equity cushion as figured by the Fed. Go here for the full post explaining the calculations.
Of course, any aggregate number is going to include people who still have a lot of equity and the millions of others who are underwater in their homes. But the 20.4% estimated equity average for mortgaged homes is a much thinner cushion than the Fed's overall equity figure suggests.
-- Tom Petruno
Photo credit: Justin Sullivan / Getty Images
The latest sell-off in Treasury bonds may have peaked, as a steep jump in yields finally has lured buyers off the sidelines.
That could end the upward pressure on mortgage rates, at least for the time being.
Bonds are rallying today, driving interest rates lower, after the Treasury sold $11 billion in 30-year securities at a yield of 4.72% -- the highest auction rate in nearly two years but well below the 4.8% predicted by bond dealers in a survey by Bloomberg News.
"Something seems to have changed here" in terms of the market’s mentality, said Charles Comiskey, head of Treasury trading at HSBC Securities in New York. "The price action is telling you" that rates have reached at least a short-term high, he said.
The 10-year T-note yield, a benchmark for mortgage rates, has dived to 3.85% today, down sharply from the 3.99% that investors demanded on the $19 billion of new 10-year securities the Treasury sold Wednesday.
The surge in yields in recent days "has brought out a lot of value investors," said George Goncalves, fixed-income strategist at bond dealer Cantor Fitzgerald in New York.
Longer-term Treasury yields have been rising steadily in recent months amid growing hopes for an economic recovery in the second half of the year. Some investors have been dumping low-yielding Treasuries in favor of stocks, junk bonds, commodities and other assets.
Treasury yields spiked on Friday after the Labor Department said the economy lost fewer jobs than expected in May, feeding upbeat sentiment about a recovery.
The government’s relentless borrowing -- to fund its economic and financial-system bailout programs -- also has put upward pressure on bond yields as the supply of new securities has swamped the market.
The 30-year T-bond sale today caps a total of $65 billion in bond sales by the Treasury this week. With this round of sales complete, the pressure is off the market for a bit, giving buyers more incentive to come in, traders note.
Still, there’s plenty more supply in the pipeline to fund a federal deficit expected to reach $1.7 trillion this year alone.
-- Tom Petruno
The Treasury bond market just can't catch a break. Interest rates jumped again today after investors demanded a higher-than-expected yield at the government’s auction of $19 billion in 10-year notes.
This is more troubling news for the housing market, because mortgage rates take their cue from longer-term Treasury yields. Home loan rates surged again this week.
The new T-notes were sold at a yield of 3.99%. That wasn’t much above the 3.975% average expected by bond dealers surveyed by Bloomberg News, and there was ample bidding for the securities. But the market was hoping for a lower yield to signal that investors believed bond yields were peaking after their sharp advance of recent months.
Instead, "The yield rally is gaining new fuel every day," said Chris Rupkey, financial economist at Bank of Tokyo-Mitsubishi in New York.
 At 3.99%, the yield on the new 10-year T-notes was up from 3.85% on Tuesday on previously issued 10-year notes, and is knocking on the door of 4%. The yield hasn’t been above 4% since Oct. 14.
The market may be drawing a line here: In trading at about 11:35 a.m. PDT, buyers were coming out of the woodwork, pushing the 10-year note down to 3.94%. The Treasury faces another test Thursday, when it will sell new 30-year bonds.
As chronicled ad nauseam by now, investors have been pushing up longer-term Treasury bond yields all year from what were generational lows. Some of the increase simply reflects that people are feeling better about the economy and are shifting money to other assets, including stocks and junk bonds. Investors are beginning to think about the possibility of the Federal Reserve tightening credit down the road, too.
But the jump in yields also is a function of the massive supply of new bonds as the U.S. borrows record sums to fund the bailouts of the economy and financial system.
At the same time, some of America’s foreign creditors are signaling that they’ve had their fill of Treasuries. Today, Russia’s central bank warned that it may reduce its holdings of U.S. bonds.
If it were only an issue of a higher interest bill for Uncle Sam, that might be manageable. But the rise in Treasury yields threatens to hammer down any housing market recovery by boosting mortgage rates. The average 30-year home loan rate hit 5.57% last week, up from 5.25% a week earlier, the Mortgage Bankers Assn. said today.
That’s shutting down the recent refinancing boom: The association’s index of mortgage refi activity dived again last week, the third straight weekly decline, and now is the lowest since mid-November.
-- Tom Petruno
Photo: The Treasury Building in Washington. Credit: Scott Robinson / Los Angeles Times
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Tom Petruno
Tom Petruno has been chronicling financial markets' highs and lows since 1979, and has been the Times' financial columnist since 1990. He writes on markets, corporate finance and the economy, and how it all ties in to individual investors' portfolios.
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