Scandalmania 2012 Heats Up With Fighting Words From Goldman
Jul 20th 2012 7:06PM
Updated Jul 20th 2012 7:14PM
Ladies and gentlemen! Boys and girls! Welcome to Scandalmania 2012, the premier global financial scandal throwdown, where banks and other financial companies around the globe compete to see who can do the most damage to the world's financial system!
To catch you up on the action, Barclays (NYS: BCS) is currently in control of the Scandalmania belt. Investigators found that traders at the British banking giant had been blatantly submitting fudged numbers for LIBOR calculations to help their own trading positions, and make the bank look like it was in a better financial position. The fraud here scored big points because LIBOR is the benchmark rate used for trillions of dollars of loans and derivatives around the world.
Bonus points: Awarded to Barclays because of the sheer audacity of the traders involved as they exchanged virtual hi-fives, and promised each other coffees and bottles of champagne.
Not to be outdone, fellow U.K. heavyweight HSBC brought a flying elbow drop via the finding that its controls over money laundering were woefully inadequate, and likely allowed billions of dollars of Mexican drug cartel and al-Qaida terrorist money to flow into the U.S. financial system.
Bonus points: HSBC scores further for the potential of a cool movie version of the disaster, replete with cartel toughs in white suits.
And then, out of nowhere, there was the flying clothesline from small-fry Peregrine Financial, also known as PFGBest. The commodities and futures broker supernovaed into liquidation after the founder, Russ Wasendorf Sr., unsuccessfully tried to commit suicide, and left a suicide note owning up to nearly two decades of fraud!
Big bonus points: Though the size of the scandal is small compared to the two above, Wasendorf and PFGBest get major bonus points for the way that he absolutely -- as the kids say -- pwned regulators. Not only did the scam go on for 20 years, but in his note, he said that fooling regulators was "relatively simple" and that he didn't "feel bad for deceiving the regulators." Pow!
Danger from outside of the ring: Lloyd Blankfein!
What does the CEO of Goldman Sachs (NYS: GS) have to do with all of this? On Wednesday, Blankfein gave a speech at the Economic Club of Washington. During the speech, he called out the LIBOR scandal, in particular, saying that it "is once more undermining the integrity of a system that is already undermined substantially." He continued, "There was this huge hole to dig out of in terms of getting the trust back, and now it's just that much deeper."
You've got to love that. You couldn't script it better!
This, or course, is the same Goldman Sachs that:
- paid a massive $550 million fine to settle the civil case over the infamous Abacus deal. That was the deal where the bank slapped together sliced-and-diced mortgage securities that hedge-fund giant John Paulson wanted to bet against, and then sold them off to other investors without disclosing that they were essentially ticking time bombs
- was hit with a $27 million fine in 2010 for not telling the U.K.'s Financial Services Authority that the bank was being investigated over said Abacus debacle
- agreed to compensate victims of wrongful foreclosures after the Federal Reserved slapped its wrist over the actions of its then-subsidiary Litton Loan Servicing
Heck, it's the same Goldman Sachs that just three months ago was fined $22 million by the SEC because its analysts were sharing upcoming research changes with certain preferred clients in special "huddles," before the changes were released publicly. In The Wall Street Journal, SEC head Robert Khuzami was quoted saying this was "the largest penalty ever ordered... for this type of violation."
The brashness, the cheekiness, the sheer ballsiness of Blankfein to wag fingers over what's going on with LIBOR. It's ... it's ... well, let me just say, my hat is off to you Mr. Blankfein.
Lloyd's got a point
Here's the thing though: I can't blame Blankfein one bit. After all of the negative press that Goldman has gotten over the past few years, it's got to feel nice to have a major financial scandal blowing up with relatively little chance that Goldman is going to get roped in.
Why do I say this? Because Goldman is not among the many banks involved in setting LIBOR rates. For U.S. dollar LIBOR, Barclays is involved, as well as Bank of America (NYS: BAC) , Citigroup (NYS: C) , JPMorgan, HSBC, and 13 other banks. There are 15 banks -- including all of the above, except B of A -- that are involved in setting the Euro version of the benchmark. But guess what? No Goldman. No Morgan Stanley either. Or Wells Fargo (NYS: WFC) , for that matter.
So here's your investing takeaway: If you're thinking about bank stocks, but don't want to get wrapped up in the fallout from LIBORgate, consider simply avoiding the banks that were involved with setting LIBOR (the British Bankers' Association helpfully lists them all on its website). There are other potential risks with non-LIBOR-submitting banks but, hey, if we take a cue from Lloyd Blankfein, it feels pretty darn good to stand on the sidelines and do a bit of tsk-tsking.
Now for the points
In classic Who's Line Is It Anyway fashion, it's now time to dole out points thus far for Scandalmania 2012. For laziness in internal controls, I award HSBC with 750 points. As a small-fry getting right up into the fray Lucha libre style, I'm giving PFGBest 2,685 points. For the sheer size of the scandal, and being on the leading edge of something that promises to get even bigger, Barclays scores 6,442 points. Finally, for extreme chutzpah, and proving to pots all over the world that they can call the kettle black, Goldman Sachs gets 10 billion points.
Now, if you want a bank stock that's highly unlikely to find its way into Scandalmania 2012, you probably want to check out The Motley Fool's free special report "The Stocks Only the Smartest Investors Are Buying." It unveils a small bank that those "smartest investors" might love to buy if they weren't managing so much darn money.
Of course, Scandalmania is far from over, so keep following along by adding the banks below to your watchlist:
The article Scandalmania 2012 Heats Up With Fighting Words From Goldman originally appeared on Fool.com.The Motley Fool owns shares of JP Morgan Chase, Citigroup, and Bank of America. Motley Fool newsletter services have recommended buying shares of Goldman Sachs Group and Wells Fargo. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.Fool contributor Matt Koppenheffer owns shares of Bank of America, Barclays, and Morgan Stanley, but does not have a financial interest in any of the other companies mentioned. You can check out what Matt is keeping an eye on by visiting his CAPS portfolio, or you can follow Matt on Twitter @KoppTheFool or Facebook. The Fool's disclosure policy prefers dividends over a sharp stick in the eye.
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