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Thursday, May 26, 2011

Indoor Dairy Farms

There has been much "to do" about a proposal to have indoor dairy farms down in MacKenzie Country in New Zealand.  Many are up in arms about spoiling this beautiful  environment of desert and bunch grass.  Others are concerned about animal welfare and still others about pollution of streams.  I haven't much to say about the spoiling of the appearance of the area.  I'm not even sure if what we see, is the original, pre-human face of this area or it is simply the face that people alive today first saw and hence have become attached to.  However, with respect to problems to do with animal welfare and stream pollution, as Porgy said, "It ain't necessarily so".

I worked for more than a year in two dairy farms in Israel.  Let me first describe how they work. The cows are housed in huge, open sided sheds.  This is necessary due to the high temperatures and almost constant sunshine in the Middle East.  Lengthwise, down the middle of these sheds is a raised cement driveway wide enough for a tractor.  Along both edges of the driveway there is a shallow cement trough with its upper lip level with the roadway.  Outside of the troughs is a fence made of vertical galvanized pipes.  It is constructed so that the cows can put their heads through the bars.  By moving a lever at the end of the fence, their heads are trapped and the cow has to stay there until released.  This is needed because otherwise, dominant cows scoff their own food and then drive weaker cows away and eat their food.

The farmer drives his tractor down the middle of the shed distributing the various feeds that they give the cows.  Feeds consists of waste products from vegetable processing, fruit processing and  brewery waste (lees)* and grass which they grow nearby and harvest with a special cart that both harvests and, with the press of another button, spreads the grass behind the cart when they drive down the roadway in the middle of the shed.  The farmer then sweeps the grass or other feeds into the troughs on both sides of the driveway so that the cows can get at it.

*This is their favorite.  You should see the excitement when they smell the beer wagon  coming.

They milk 3 times a day and in one  Kibutz that I worked at, when I visited last year, they were averaging 45l of milk per cow per day with their prize cow giving 75l.  In some of the farms they are now installing methane generators using the manure and they can generate more than enough electricity to power the operation with lots of power left over to feed into the grid.  Critical is that they now have almost all the waste from the cows and from the milking parlour to use, making the generation of methane worthwhile. 

The heat from the diesel generator which now is primarily powered by bio-gas, heats the water for the dairy*.  So what are the advantages of having the cows housed indoors. (I'll leave you to comment on the disadvantages ((yes, I will publish them))).

*The over all energy efficiency of biogas when you generate electricity and utilize the waste heat approaches 75%.

Protection from the Weather
When the weather is harsh, cows are better off inside.  This includes intense heat or cold, flood,  deep snow and muddy conditions after heavy rain.  All these conditions occur at various times in various places in New Zealand.

Control of the manure and Urine
A cow pat*  kills a largish patch of grass and makes the adjacent grass unpalatable to cows.  A full urination in well drained soil can go down through the root zone of the grass into the water table.  Manure, urine and spiled milk are full of energy and shouldn't be wasted by simply applying them to the land.  After energy extraction through methanogenesis, the waste from the methane generator is excellent fertilizer, apparently better than the raw manure.    If cows are kept inside, all their manure and urine plus any wastes from the milking process can be used and don't interfere with grass production.

The material from the methane generator can be spread evenly on the land at the optimal dose rate and at the best time. This eliminates environmental pollution.   Bio gas can be fed directly into a diesel generator.  The electricity can be used in the farm and the excess electricity fed into the grid to generate another revenue stream.  The heat from the diesel generator is  used to directly heat water which is used for cleaning in the dairy and thus, saving the electricity for more important uses

* Individual deification by a cow is typically the size of a large dinner plate and stays around for weeks until the worms or scarab beetles have broken it down.
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Less land needed
Because of all of the above, less land is needed to produce the necessary pasturage for the cows.  More of the farm can be left in riparian zones*.  Cattle do not trample over their food source.  During wet conditions, indoor cattle don't wreck soil structure.  Soil remains healthier and better aerated when it is not trampled by cattle.

*The area adjacent to streams.  For the protection of our water resources, a wide zone along streams should be vegetated and domestic grazing animals should be denied access to this area.

Possibility of using  various waste products for food
With the cows in a shed, it is convenient to utilize a wide variety of waste products from other agricultural processing industries.  Cows, with their huge bacterial processing vats (rumen) are the perfect animals to turn otherwise wasted products into valuable milk.

Cows under closer observation
Cows kept indoors are under the observation of the farmer more of the time than cows that are only seen during milking.  With outdoor farming the farmer only sees the under side of outdoor cows and then only for a short time.  One day, while feeding the cows in Israel, I saw that one of the cows had become asymmetric.  The farmer, seeing this, quickly got a hollow needle from the office, punctured the correct place in the rumen between two of the ribs and let off the gas pressure that would have killed the cow if this hadn't been done.   

Lack of need for Riparian fences
With cows kept indoors, there is no need to fence off riparian zones.  This is a saving to the farmer.

Another model
If one objects to cows being always confined to a shed, one can have an open sided shed where the cows can come when they want to get away from adverse weather conditions.  They can also be fed any supplements in the shed and waste products from other agricultural enterprises and have water available for drinking.  This way a great deal more manure and urine is collected than if the cows only come indoors for milking.  This makes biogas generation worthwhile and eliminates the negative effects listed above of having cows in the fields.


It is clear that cow welfare and environmental protection can gain in many ways when cows are kept partially or completely indoors.  It must be pointed out that this is not always so.  It is possible to make the conditions better for cows indoors than outdoors or with giving the cows a choice but the opposite is possible.  Careful design and operation is necessary.  The devil is in the details.


Sunday, May 15, 2011

Goldman Sachs

 I always thought that the American media was in the pocket of big business.  If this is true, this article from Rolling Stone is the exception that proves the rule.  In it, Tabibbi and Michael Lewis describe the findings of the Levin Report.  In this report Senator Levin, who is well known for extremely competent, in depth analysis of business scams, uses Goldman Sachs  as an example of the way such companies are rorting the public and by doing so, led to the financial collapse of 2008.  

These are the guys that fought tooth and nail to be deregulated, claiming that they were the best guardians of the public fiscal morality (yeh right!!!).  I think we have put that bit of fiction to bed.

Despite the ground work having been done and the managers of this company having being hauled before a Congressional  hearing, the Justice Department seems curiously unable to take up the job and put these guys in jail.  Steal an apple from a store and you  will find your sorry ass in jail.  Steal millions from your own customers and the general public, bring down the economy of the world and it is business as usual.

I find the inns and outs of high finance very mysterious.  The colorful language and analogies of the authors have begun to give me an inkling of how it works.  

 The final sentence of this article is telling.  It says    "the law in America is subjective, and crime is defined not by what you did, but by who you are."

 

 

The People vs. Goldman Sachs

A Senate committee has laid out the evidence. Now the Justice Department should bring criminal charges


Goldman Sachs CEO Lloyd Blankfein tesifies before the Senate in April 2010
Mark Wilson/Getty Images
They weren't murderers or anything; they had merely stolen more money than most people can rationally conceive of, from their own customers, in a few blinks of an eye. But then they went one step further. They came to Washington, took an oath before Congress, and lied about it.
Thanks to an extraordinary investigative effort by a Senate subcommittee that unilaterally decided to take up the burden the criminal justice system has repeatedly refused to shoulder, we now know exactly what Goldman Sachs executives like Lloyd Blankfein and Daniel Sparks lied about. We know exactly how they and other top Goldman executives, including David Viniar and Thomas Montag, defrauded their clients. America has been waiting for a case to bring against Wall Street. Here it is, and the evidence has been gift-wrapped and left at the doorstep of federal prosecutors, evidence that doesn't leave much doubt: Goldman Sachs should stand trial.
This article appears in the May 26, 2011 issue of Rolling Stone. The issue is available now on newsstands and will appear in the online archive May 13.
The great and powerful Oz of Wall Street was not the only target of Wall Street and the Financial Crisis: Anatomy of a Financial Collapse, the 650-page report just released by the Senate Subcommittee on Investigations, chaired by Democrat Carl Levin of Michigan, alongside Republican Tom Coburn of Oklahoma. Their unusually scathing bipartisan report also includes case studies of Washington Mutual and Deutsche Bank, providing a panoramic portrait of a bubble era that produced the most destructive crime spree in our history — "a million fraud cases a year" is how one former regulator puts it. But the mountain of evidence collected against Goldman by Levin's small, 15-desk office of investigators — details of gross, baldfaced fraud delivered up in such quantities as to almost serve as a kind of sarcastic challenge to the curiously impassive Justice Department — stands as the most important symbol of Wall Street's aristocratic impunity and prosecutorial immunity produced since the crash of 2008.
Photo Gallery: How Goldman top dogs defrauded their clients and lied to Congress
To date, there has been only one successful prosecution of a financial big fish from the mortgage bubble, and that was Lee Farkas, a Florida lender who was just convicted on a smorgasbord of fraud charges and now faces life in prison. But Farkas, sadly, is just an exception proving the rule: Like Bernie Madoff, his comically excessive crime spree (which involved such lunacies as kiting checks to his own bank and selling loans that didn't exist) was almost completely unconnected to the systematic corruption that led to the crisis. What's more, many of the earlier criminals in the chain of corruption — from subprime lenders like Countrywide, who herded old ladies and ghetto families into bad loans, to rapacious banks like Washington Mutual, who pawned off fraudulent mortgages on investors — wound up going belly up, sunk by their own greed.
Read Matt Taibbi on Goldman Sachs, the 'great vampire squid'
But Goldman, as the Levin report makes clear, remains an ascendant company precisely because it used its canny perception of an upcoming disaster (one which it helped create, incidentally) as an opportunity to enrich itself, not only at the expense of clients but ultimately, through the bailouts and the collateral damage of the wrecked economy, at the expense of society. The bank seemed to count on the unwillingness or inability of federal regulators to stop them — and when called to Washington last year to explain their behavior, Goldman executives brazenly misled Congress, apparently confident that their perjury would carry no serious consequences. Thus, while much of the Levin report describes past history, the Goldman section describes an ongoing? crime — a powerful, well-connected firm, with the ear of the president and the Treasury, that appears to have conquered the entire regulatory structure and stands now on the precipice of officially getting away with one of the biggest financial crimes in history.
Read Taibbi's 2010 piece on how bailed-out banks are recreating the conditions for a crash
Defenders of Goldman have been quick to insist that while the bank may have had a few ethical slips here and there, its only real offense was being too good at making money. We now know, unequivocally, that this is bullshit. Goldman isn't a pudgy housewife who broke her diet with a few Nilla Wafers between meals — it's an advanced-stage, 1,100-pound medical emergency who hasn't left his apartment in six years, and is found by paramedics buried up to his eyes in cupcake wrappers and pizza boxes. If the evidence in the Levin report is ignored, then Goldman will have achieved a kind of corrupt-enterprise nirvana. Caught, but still free: above the law.
To fully grasp the case against Goldman, one first needs to understand that the financial crime wave described in the Levin report came on the heels of a decades-long lobbying campaign by Goldman and other titans of Wall Street, who pleaded over and over for the right to regulate themselves.
Before that campaign, banks were closely monitored by a host of federal regulators, including the Office of the Comptroller of the Currency, the FDIC and the Office of Thrift Supervision. These agencies had examiners poring over loans and other transactions, probing for behavior that might put depositors or the system at risk. When the examiners found illegal or suspicious behavior, they built cases and referred them to criminal authorities like the Justice Department.
This system of referrals was the backbone of financial law enforcement through the early Nineties. William Black was senior deputy chief counsel at the Office of Thrift Supervision in 1991 and 1992, the last years of the S&L crisis, a disaster whose pansystemic nature was comparable to the mortgage fiasco, albeit vastly smaller. Black describes the regulatory MO back then. "Every year," he says, "you had thousands of criminal referrals, maybe 500 enforcement actions, 150 civil suits and hundreds of convictions."
But beginning in the mid-Nineties, when former Goldman co-chairman Bob Rubin served as Bill Clinton's senior economic-policy adviser, the government began moving toward a regulatory system that relied almost exclusively on voluntary compliance by the banks. Old-school criminal referrals disappeared down the chute of history along with floppy disks and scripted television entertainment. In 1995, according to an independent study, banking regulators filed 1,837 referrals. During the height of the financial crisis, between 2007 and 2010, they averaged just 72 a year.
But spiking almost all criminal referrals wasn't enough for Wall Street. In 2004, in an extraordinary sequence of regulatory rollbacks that helped pave the way for the financial crisis, the top five investment banks — Goldman, Merrill Lynch, Morgan Stanley, Lehman Brothers and Bear Stearns — persuaded the government to create a new, voluntary approach to regulation called Consolidated Supervised Entities. CSE was the soft touch to end all soft touches. Here is how the SEC's inspector general described the program's regulatory army: "The Office of CSE Inspections has only two staff in Washington and five staff in the New York regional office."
Among the bankers who helped convince the SEC to go for this ludicrous program was Hank Paulson, Goldman's CEO at the time. And in exchange for "submitting" to this new, voluntary regime of law enforcement, Goldman and other banks won the right to lend in virtually unlimited amounts, regardless of their cash reserves — a move that fueled the catastrophe of 2008, when banks like Bear and Merrill were lending out 35 dollars for every one in their vaults.
Goldman's chief financial officer then and now, a fellow named David Viniar, wrote a letter in February 2004, commending the SEC for its efforts to develop "a regulatory framework that will contribute to the safety and soundness of financial institutions and markets by aligning regulatory capital requirements more closely with well-developed internal risk-management practices." Translation: Thanks for letting us ignore all those pesky regulations while we turn the staid underwriting business into a Charlie Sheen house party.
Goldman and the other banks argued that they didn't need government supervision for a very simple reason: Rooting out corruption and fraud was in their own self-interest. In the event of financial wrongdoing, they insisted, they would do their civic duty and protect the markets. But in late 2006, well before many of the other players on Wall Street realized what was going on, the top dogs at Goldman — including the aforementioned Viniar — started to fear they were sitting on a time bomb of billions in toxic assets. Yet instead of sounding the alarm, the very first thing Goldman did was tell no one. And the second thing it did was figure out a way to make money on the knowledge by screwing its own clients. So not only did Goldman throw a full-blown "bite me" on its own self-righteous horseshit about "internal risk management," it more or less instantly sped way beyond inaction straight into craven manipulation.
"This is the dog that didn't bark," says Eliot Spitzer, who tangled with Goldman during his years as New York's attorney general. "Their whole political argument for a decade was 'Leave us alone, trust us to regulate ourselves.' They not only abdicated that responsibility, they affirmatively traded against the entire market."
By the end of 2006, Goldman was sitting atop a $6 billion bet on American home loans. The bet was a byproduct of Goldman having helped create a new trading index called the ABX, through which it accumulated huge holdings in mortgage-related securities. But in December 2006, a series of top Goldman executives — including Viniar, mortgage chief Daniel Sparks and senior executive Thomas Montag — came to the conclusion that Goldman was overexposed to mortgages and should get out from under its huge bet as quickly as possible. Internal memos indicate that the executives soon became aware of the host of scams that would crater the global economy: home loans awarded with no documentation, loans with little or no equity in them. On December 14th, Viniar met with Sparks and other executives, and stressed the need to get "closer to home" — i.e., to reduce the bank's giant bet on mortgages.
Sparks followed up that meeting with a seven-point memo laying out how to unload the bank's mortgages. Entry No. 2 is particularly noteworthy. "Distribute as much as possible on bonds created from new loan securitizations," Sparks wrote, "and clean previous positions." In other words, the bank needed to find suckers to buy as much of its risky inventory as possible. Goldman was like a car dealership that realized it had a whole lot full of cars with faulty brakes. Instead of announcing a recall, it surged ahead with a two-fold plan to make a fortune: first, by dumping the dangerous products on other people, and second, by taking out life insurance against the fools who bought the deadly cars.
The day he received the Sparks memo, Viniar seconded the plan in a gleeful cheerleading e-mail. "Let's be aggressive distributing things," he wrote, "because there will be very good opportunities as the markets [go] into what is likely to be even greater distress, and we want to be in a position to take advantage of them." Translation: Let's find as many suckers as we can as fast as we can, because we'll only make more money as more and more shit hits the fan.
By February 2007, two months after the Sparks memo, Goldman had gone from betting $6 billion on mortgages to betting $10 billion against them — a shift of $16 billion. Even CEO Lloyd "I'm doing God's work" Blankfein wondered aloud about the bank's progress in "cleaning" its crap. "Could/should we have cleaned up these books before," Blankfein wrote in one e-mail, "and are we doing enough right now to sell off cats and dogs in other books throughout the division?"
How did Goldman sell off its "cats and dogs"? Easy: It assembled new batches of risky mortgage bonds and dumped them on their clients, who took Goldman's word that they were buying a product the bank believed in. The names of the deals Goldman used to "clean" its books — chief among them Hudson and Timberwolf — are now notorious on Wall Street. Each of the deals appears to represent a different and innovative brand of shamelessness and deceit.
In the marketing materials for the Hudson deal, Goldman claimed that its interests were "aligned" with its clients because it bought a tiny, $6 million slice of the riskiest portion of the offering. But what it left out is that it had shorted the entire deal, to the tune of a $2 billion bet against its own clients. The bank, in fact, had specifically designed Hudson to reduce its exposure to the very types of mortgages it was selling — one of its creators, trading chief Michael Swenson, later bragged about the "extraordinary profits" he made shorting the housing market. All told, Goldman dumped $1.2 billion of its own crappy "cats and dogs" into the deal — and then told clients that the assets in Hudson had come not from its own inventory, but had been "sourced from the Street."
Hilariously, when Senate investigators asked Goldman to explain how it could claim it had bought the Hudson assets from "the Street" when in fact it had taken them from its own inventory, the bank's head of CDO trading, David Lehman, claimed it was accurate to say the assets came from "the Street" because Goldman was part of the Street. "They were like, 'We are the Street,'" laughs one investigator.
Hudson lost massive amounts of money almost immediately after the sale was completed. Goldman's biggest client, Morgan Stanley, begged it to liquidate the investment and get out while they could still salvage some value. But Goldman refused, stalling for months as its clients roasted to death in a raging conflagration of losses. At one point, John Pearce, the Morgan Stanley rep dealing with Goldman, lost his temper at the bank's refusal to sell, breaking his phone in frustration. "One day I hope I get the real reason why you are doing this to me," he told a Goldman broker.
Goldman insists it was only required to liquidate the assets "in an orderly fashion." But the bank had an incentive to drag its feet: Goldman's huge bet against the deal meant that the worse Hudson performed, the more money Goldman made. After all, the entire point of the transaction was to screw its own clients so Goldman could "clean its books." The crime was far from victimless: Morgan Stanley alone lost nearly $960 million on the Hudson deal, which admittedly doesn't do much to tug the heartstrings. Except that quickly after Goldman dumped this near-billion-dollar loss on Morgan Stanley, Morgan Stanley turned around and dumped it on taxpayers, who within a year were spending $10 billion bailing out the sucker bank through the TARP program.
It is worth pointing out here that Goldman's behavior in the Hudson scam makes a mockery of standards in the underwriting business. Courts have held that "the relationship between the underwriter and its customer implicitly involves a favorable recommendation of the issued security." The SEC, meanwhile, requires that broker-dealers like Goldman disclose "material adverse facts," which among other things includes "adverse interests." Former prosecutors and regulators I interviewed point to these areas as potential avenues for prosecution; you can judge for yourself if a $2 billion bet against clients qualifies as an "adverse interest" that should have been disclosed.
But these "adverse interests" weren't even the worst part of Hudson. Goldman also used a complex pricing method to turn the deal into an impressive triple screwing. Essentially, Goldman bought some of the mortgage assets in the Hudson deal at a discount, resold them to clients at a higher price and pocketed the difference. This is a little like getting an invoice from an interior decorator who, in addition to his fee for services, charges you $170 a roll for brand-name wallpaper he's actually buying off the back of a truck for $63.
To recap: Goldman, to get $1.2 billion in crap off its books, dumps a huge lot of deadly mortgages on its clients, lies about where that crap came from and claims it believes in the product even as it's betting $2 billion against it. When its victims try to run out of the burning house, Goldman stands in the doorway, blasts them all with gasoline before they can escape, and then has the balls to send a bill overcharging its victims for the pleasure of getting fried.
Timberwolf, the most notorious of Goldman's scams, was another car whose engine exploded right out of the lot. As with Hudson, Goldman clients who bought into the deal had no idea they were being sold the "cats and dogs" that the bank was desperately trying to get off its books. An Australian hedge fund called Basis Capital sank $100 million into the deal on June 18th, 2007, and almost immediately found itself in a full-blown death spiral. "We bought it, and Goldman made their first margin call 16 days later," says Eric Lewis, a lawyer for Basis, explaining how Goldman suddenly required his client to put up cash to cover expected losses. "They said, 'We need $5 million.' We're like, what the fuck, what's going on?" Within a month, Basis lost $37.5 million, and was forced to file for bankruptcy.
In many ways, Timberwolf was a perfect symbol of the insane faith-based mathematics and blackly corrupt marketing that defined the mortgage bubble. The deal was built on a satanic derivative structure called the CDO-squared. A normal CDO is a giant pool of loans that are chopped up and layered into different "tranches": the prime or AAA level, the BBB or "mezzanine" level, and finally the equity or "toxic waste" level. Banks had no trouble finding investors for the AAA pieces, which involve betting on the safest borrowers in the pool. And there were usually investors willing to make higher-odds bets on the crack addicts and no-documentation immigrants at the potentially lucrative bottom of the pool. But the unsexy BBB parts of the pool were hard to sell, and the banks didn't want to be stuck holding all of these risky pieces. So what did they do? They took all the extra unsold pieces, threw them in a big box, and repeated the original "tranching" process all over again. What originally were all BBB pieces were diced up and divided anew — and, presto, you suddenly had new AAA securities and new toxic-waste securities.
A CDO, to begin with, is already a highly dubious tool for magically converting risky subprime mortgages into AAA investments. A CDO-squared doubles down on that lunacy, taking the waste products of the original process and converting them into AAA investments. This is kind of like taking all the kids who were picked last to play volleyball in every gym class of every public school in the state, throwing them in a new gym, and pretending that the first 10 kids picked are varsity-level players. Then you take all the unpicked kids left over from that process, throw them in a gym with similar kids from all 50 states, and call the first 10 kids picked All-Americans.
Those "All-Americans" were the assets in the Timberwolf deal. These were the recycled nightmare dregs of the mortgage craze — to quote Beavis and Butt-Head, "the ass of the ass."
Goldman knew the deal sucked long before it dinged the Aussies in Basis Capital for $100 million. In February 2007, Goldman mortgage chief Daniel Sparks and senior executive Thomas Montag exchanged e-mails about the risk of holding all the crap in the Timberwolf deal.
MONTAG: "CDO-squared — how big and how dangerous?"
SPARKS: "Roughly $2 billion, and they are the deals to worry about."
Goldman executives were so "worried" about holding this stuff, in fact, that they quickly sent directives to all of their salespeople, offering "ginormous" credits to anyone who could manage to find a dupe to take the Timberwolf All-Americans off their hands. On Wall Street, directives issued from above are called "axes," and Goldman's upper management spent a great deal of the spring of 2007 "axing" Timberwolf. In a crucial conference call on May 20th that included Viniar, Sparks oversaw a PowerPoint presentation spelling out, in writing, that Goldman's mortgage desk was "most concerned" about Timberwolf and another CDO-squared deal. In a later e-mail, he offered an even more dire assessment of such deals: "There is real market-meltdown potential."
On May 22nd, two days after the conference call, Goldman sales rep George Maltezos urged the Australians at Basis to hurry up and buy what the bank knew was a deadly investment, suggesting that the "return on invested capital for Basis is over 60 percent." Maltezos was so stoked when he first identified the Aussies as a target in the scam that he subject-lined his e-mail "Utopia."
"I think," Maltezos wrote, "I found white elephant, flying pig and unicorn all at once."
The whole transaction can be summed up by the now-notorious e-mail that Montag wrote to Sparks only four days after they sold $100 million of Timberwolf to Basis. "Boy," Montag wrote, "that timeberwof [sic] was one shitty deal."
Last year, in the one significant regulatory action the government has won against the big banks, the SEC sued Goldman over a scam called Abacus, in which the bank "rented" its name to a billionaire hedge-fund viper to fleece investors out of more than $1 billion. Goldman agreed to pay $550 million to settle the suit, though no criminal charges were brought against the bank or its executives. But in light of the Levin report, that SEC action now looks woefully inadequate. Yes, it was a record fine — but it pales in comparison to the money Goldman has taken from the government since the crash. As Spitzer notes, Goldman's reaction was basically, "OK, we'll pay you $550 million to settle the Abacus case — that's a small price to pay for the $12.9 billion we got for the AIG bailout." Now, adds Spitzer, "everybody can just go home and pretend it was only $12.4 billion — and Goldman can smile all the way to the bank. The question is, now that we've seen this report, there are a bunch of story lines that seem to be at least as egregious as Abacus. Are they going to bring cases?"
Here is where the supporters of Goldman and other big banks will stand up and start wanding the air full of confusing terms like "scienter" and "loss causation" — legalese mumbo jumbo that attempts to convince the ignorantly enraged onlooker that, according to American law, these grotesque tales of grand theft and fraud you've just heard are actually more innocent than you think. Yes, they will say, it may very well be a prosecutable crime for a corner-store Arab to take $2 from a customer selling tap water as Perrier. But that does not mean it's a crime for Goldman Sachs to take $100 million from a foreign hedge fund doing the same thing! No, sir, not at all! Then you'll be told that the Supreme Court has been limiting corporate liability for fraud for decades, that in order to gain a conviction one must prove a conscious intent to deceive, that the 1976 ruling in Ernst and Ernst clearly states....
Leave all that aside for a moment. Though many legal experts agree there is a powerful argument that the Levin report supports a criminal charge of fraud, this stuff can keep the lawyers tied up for years. So let's move on to something much simpler. In the spring of 2010, about a year into his investigation, Sen. Levin hauled all of the principals from these rotten Goldman deals to Washington, made them put their hands on the Bible and take oaths just like normal people, and demanded that they explain themselves. The legal definition of financial fraud may be murky and complex, but everybody knows you can't lie to Congress.
"Article 18 of the United States Code, Section 1001," says Loyola University law professor Michael Kaufman. "There are statutes that prohibit perjury and obstruction of justice, but this is the federal statute that explicitly prohibits lying to Congress."
The law is simple: You're guilty if you "knowingly and willfully" make a "materially false, fictitious or fraudulent statement or representation." The punishment is up to five years in federal prison.
When Roger Clemens went to Washington and denied taking a shot of steroids in his ass, the feds indicted him — relying not on a year's worth of graphically self-incriminating e-mails, but chiefly on the testimony of a single individual who had been given a deal by the government. Yet the Justice Department has shown no such prosecutorial zeal since April 27th of last year, when the Goldman executives who oversaw the Timberwolf, Hudson and Abacus deals arrived on the Hill and one by one — each seemingly wearing the same mask of faint boredom and irritated condescension — sat before Levin's committee and dodged volleys of questions.
Before the hearing, even some of Levin's allies worried privately about his taking on Goldman and other powerful interests. The job, they said, was best left to professional prosecutors, people with experience building cases. "A senator's office is not an enormous repository of expertise," one former regulator told me. But in the case of this particular senator, that concern turned out to be misplaced. A Harvard-educated lawyer, Levin has a long record of using his subcommittee to spend a year or more carefully building cases that lead to criminal prosecutions. His 2003 investigation into abusive tax shelters led to 19 indictments of individuals at KPMG, while a 2006 probe fueled insider-trading charges against the notorious Wyly brothers, a pair of billionaire Texans who manipulated offshore investment trusts. The investigation of Goldman was an attempt to find out what went wrong in the years leading up to the financial crash, and the questioning of the bank's executives was not one of those for-the-cameras-only events where congressmen wing ad-libbed questions in search of sound bites. In the weeks leading up to the hearing, Levin's team carefully rehearsed the moment with committee members. They knew the possible answers that Goldman might give, and they were ready with specific counterquestions. What ensued looked more like a good old-fashioned courtroom grilling than a photo-op for grinning congressmen.
Sparks, who stepped down as Goldman's mortgage chief in 2008, cut a striking figure in his testimony. With his severe crew cut, deep-set eyes and jockish intransigence, he looked like a cross between H.R. Haldeman and John Rocker. He repeatedly dodged questions from Levin about whether or not the bank had a responsibility to tell its clients that it was betting against the same stuff it was selling them. When asked directly if he had that responsibility, Sparks answered, "The clients who did not want to participate in that deal did not." When Levin pressed him again, asking if he had a duty to disclose that Goldman had an "adverse interest" to the deals being sold to clients, Sparks fidgeted and pretended not to comprehend the question. "Mr. Chairman," he said, "I'm just trying to understand."
OK, fine — non-answer answers. "My guess is they were all pretty well coached up," says Kaufman, the law professor. But then Sparks had a revealing exchange with Sen. Jon Tester of Montana. Tester calls the Goldman deals "a wreck waiting to happen," noting that the CDOs "were all downgraded to junk in very short order."
At which point, Sparks replies, "Well, senator, at the time we did those deals, we expected those deals to perform."
Tester then cannily asks if by "perform," Sparks means go to shit — which would have been an honest answer. "Perform in what way?" Tester asks. "Perform to go to junk so that the shorts made out?"
Unable to resist the taunt, Sparks makes a fateful decision to defend his honor. "To not be downgraded to junk in that short a time frame," he says. Then he pauses and decides to dispense with the hedging phrase "in that short a time frame."
"In fact," Sparks says, "to not be downgraded to junk."
So Sparks goes before Congress and, under oath, tells a U.S. senator that at the time he was selling Timberwolf, he expected it to "perform." But an internal document he approved in May 2007 predicted exactly the opposite, warning that Goldman's mortgage desk expected such deals to "underperform." Here are some other terms that Sparks used in e-mails about the subprime market affecting deals like Timberwolf around that same time: "bad and getting worse," "get out of everything," "game over," "bad news everywhere" and "the business is totally dead."
And we indicted Roger Clemens?

Another extraordinary example of Goldman's penchant for truth avoidance came when Joshua Birnbaum, former head of structured-products trading for the bank, gave a deposition to Levin's committee. Asked point-blank if Goldman's huge "short" on mortgages was an intentional bet against the market or simply a "hedge" against potential losses, Birnbaum played dumb. "I do not know whether the shorts were a hedge," he said. But the committee, it turned out, already knew that Birnbaum had written a memo in which he had spelled out the truth: "The shorts were not a hedge." When Birnbaum's lawyers learned that their client's own words had been used against him, they hilariously sent an outraged letter complaining that Birnbaum didn't know the committee had his memo when he decided to dodge the question. They also submitted a "supplemental" answer. Birnbaum now said, "Having reviewed the document the staff did not previously provide me" — his own words! — "I can now recall that ... I believed ... these short positions were not a hedge." (Goldman, for its part, dismisses Birnbaum as a single trader who "neither saw nor knew the firm's overall risk positions.")
When it came time for Goldman CEO Lloyd Blankfein to testify, the banker hedged and stammered like a brain-addled boxer who couldn't quite follow the questions. When Levin asked how Blankfein felt about the fact that Goldman collected $13 billion from U.S. taxpayers through the AIG bailout, the CEO deflected over and over, insisting that Goldman would somehow have made that money anyway through its private insurance policies on AIG. When Levin pressed Blankfein, pointing out that he hadn't answered the question, Blankfein simply peered at Levin like he didn't understand.
But Blankfein also testified unequivocally to the following:
"Much has been said about the supposedly massive short Goldman Sachs had on the U.S. housing market. The fact is, we were not consistently or significantly net-short the market in residential mortgage-related products in 2007 and 2008. We didn't have a massive short against the housing market, and we certainly did not bet against our clients."
Levin couldn't believe what he was hearing. "Heck, yes, I was offended," he says. "Goldman's CEO claimed the firm 'didn't have a massive short,' when the opposite was true." First of all, in Goldman's own internal memoranda, the bank calls its giant, $13 billion bet against mortgages "the big short." Second, by the time Sparks and Co. were unloading the Timberwolves of the world on their "unicorns" and "flying pigs" in the summer of 2007, Goldman's mortgage department accounted for 54 percent of the bank's risk. That means more than half of all the bank's risk was wrapped up in its bet against the mortgage market — a "massive short" by any definition. Indeed, the bank was betting so much money on mortgages that its executives had become comically blasé about giant swings on a daily basis. When Goldman lost more than $100 million on August 8th, 2007, Montag circulated this e-mail: "So who lost the hundy?"
This month, after releasing his report, Levin sent all of this material to the Justice Department. His conclusion was simple. "In my judgment," he declared, "Goldman clearly misled their clients, and they misled the Congress." Goldman, unsurprisingly, disagreed: "Our testimony was truthful and accurate, and that applies to all of our testimony," said spokesman Michael DuVally. In a statement to Rolling Stone, Goldman insists that its behavior throughout the period covered in the Levin report was consistent with responsible business practice, and that its machinations in the mortgage market were simply an attempt to manage risk.
It wouldn't be hard for federal or state prosecutors to use the Levin report to make a criminal case against Goldman. I ask Eliot Spitzer what he would do if he were still attorney general and he saw the Levin report. "Once the steam stopped coming out of my ears, I'd be dropping so many subpoenas," he says. "And I would parse every potential inconsistency between the testimony they gave to Congress and the facts as we now understand them."
I ask what inconsistencies jump out at him. "They keep claiming they were only marginally short, that it was more just servicing their clients," he says. "But it sure doesn't look like that." He pauses. "They were $13 billion short. That's big — 50 percent of their risk. It was so completely disproportionate."
Lloyd Blankfein went to Washington and testified under oath that Goldman Sachs didn't make a massive short bet and didn't bet against its clients. The Levin report proves that Goldman spent the whole summer of 2007 riding a "big short" and took a multibillion-dollar bet against its clients, a bet that incidentally made them enormous profits. Are we all missing something? Is there some different and higher standard of triple- and quadruple-lying that applies to bank CEOs but not to baseball players?
This issue is bigger than what Goldman executives did or did not say under oath. The Levin report catalogs dozens of instances of business practices that are objectively shocking, no matter how any high-priced lawyer chooses to interpret them: gambling billions on the misfortune of your own clients, gouging customers on prices millions of dollars at a time, keeping customers trapped in bad investments even as they begged the bank to sell, plus myriad deceptions of the "failure to disclose" variety, in which customers were pitched investment deals without ever being told they were designed to help Goldman "clean" its bad inventory. For years, the soundness of America's financial system has been based on the proposition that it's a crime to lie in a prospectus or a sales brochure. But the Levin report reveals a bank gone way beyond such pathetic little boundaries; the collective picture resembles a financial version of The Jungle, a portrait of corporate sociopathy that makes you never want to go near a sausage again.
Upton Sinclair's narrative shocked the nation into a painful realization about the pervasive filth and corruption behind America's veneer of smart, robust efficiency. But Carl Levin's very similar tale probably will not. The fact that this evidence comes from a U.S. senator's office, and not the FBI or the SEC, is itself an element in the worsening tale of lawlessness and despotism that sparked a global economic meltdown. "Why should Carl Levin be the one who needs to do this?" asks Spitzer. "Where's the SEC? Where are any of the regulatory bodies?"
This isn't just a matter of a few seedy guys stealing a few bucks. This is America: Corporate stealing is practically the national pastime, and Goldman Sachs is far from the only company to get away with doing it. But the prominence of this bank and the high-profile nature of its confrontation with a powerful Senate committee makes this a political story as well. If the Justice Department fails to give the American people a chance to judge this case — if Goldman skates without so much as a trial —

The People vs. Goldman Sachs

A Senate committee has laid out the evidence. Now the Justice Department should bring criminal charges


Goldman Sachs CEO Lloyd Blankfein tesifies before the Senate in April 2010
Mark Wilson/Getty Images
They weren't murderers or anything; they had merely stolen more money than most people can rationally conceive of, from their own customers, in a few blinks of an eye. But then they went one step further. They came to Washington, took an oath before Congress, and lied about it.
Thanks to an extraordinary investigative effort by a Senate subcommittee that unilaterally decided to take up the burden the criminal justice system has repeatedly refused to shoulder, we now know exactly what Goldman Sachs executives like Lloyd Blankfein and Daniel Sparks lied about. We know exactly how they and other top Goldman executives, including David Viniar and Thomas Montag, defrauded their clients. America has been waiting for a case to bring against Wall Street. Here it is, and the evidence has been gift-wrapped and left at the doorstep of federal prosecutors, evidence that doesn't leave much doubt: Goldman Sachs should stand trial.
This article appears in the May 26, 2011 issue of Rolling Stone. The issue is available now on newsstands and will appear in the online archive May 13.
The great and powerful Oz of Wall Street was not the only target of Wall Street and the Financial Crisis: Anatomy of a Financial Collapse, the 650-page report just released by the Senate Subcommittee on Investigations, chaired by Democrat Carl Levin of Michigan, alongside Republican Tom Coburn of Oklahoma. Their unusually scathing bipartisan report also includes case studies of Washington Mutual and Deutsche Bank, providing a panoramic portrait of a bubble era that produced the most destructive crime spree in our history — "a million fraud cases a year" is how one former regulator puts it. But the mountain of evidence collected against Goldman by Levin's small, 15-desk office of investigators — details of gross, baldfaced fraud delivered up in such quantities as to almost serve as a kind of sarcastic challenge to the curiously impassive Justice Department — stands as the most important symbol of Wall Street's aristocratic impunity and prosecutorial immunity produced since the crash of 2008.
Photo Gallery: How Goldman top dogs defrauded their clients and lied to Congress
To date, there has been only one successful prosecution of a financial big fish from the mortgage bubble, and that was Lee Farkas, a Florida lender who was just convicted on a smorgasbord of fraud charges and now faces life in prison. But Farkas, sadly, is just an exception proving the rule: Like Bernie Madoff, his comically excessive crime spree (which involved such lunacies as kiting checks to his own bank and selling loans that didn't exist) was almost completely unconnected to the systematic corruption that led to the crisis. What's more, many of the earlier criminals in the chain of corruption — from subprime lenders like Countrywide, who herded old ladies and ghetto families into bad loans, to rapacious banks like Washington Mutual, who pawned off fraudulent mortgages on investors — wound up going belly up, sunk by their own greed.
Read Matt Taibbi on Goldman Sachs, the 'great vampire squid'
But Goldman, as the Levin report makes clear, remains an ascendant company precisely because it used its canny perception of an upcoming disaster (one which it helped create, incidentally) as an opportunity to enrich itself, not only at the expense of clients but ultimately, through the bailouts and the collateral damage of the wrecked economy, at the expense of society. The bank seemed to count on the unwillingness or inability of federal regulators to stop them — and when called to Washington last year to explain their behavior, Goldman executives brazenly misled Congress, apparently confident that their perjury would carry no serious consequences. Thus, while much of the Levin report describes past history, the Goldman section describes an ongoing? crime — a powerful, well-connected firm, with the ear of the president and the Treasury, that appears to have conquered the entire regulatory structure and stands now on the precipice of officially getting away with one of the biggest financial crimes in history.
Read Taibbi's 2010 piece on how bailed-out banks are recreating the conditions for a crash
Defenders of Goldman have been quick to insist that while the bank may have had a few ethical slips here and there, its only real offense was being too good at making money. We now know, unequivocally, that this is bullshit. Goldman isn't a pudgy housewife who broke her diet with a few Nilla Wafers between meals — it's an advanced-stage, 1,100-pound medical emergency who hasn't left his apartment in six years, and is found by paramedics buried up to his eyes in cupcake wrappers and pizza boxes. If the evidence in the Levin report is ignored, then Goldman will have achieved a kind of corrupt-enterprise nirvana. Caught, but still free: above the law.
To fully grasp the case against Goldman, one first needs to understand that the financial crime wave described in the Levin report came on the heels of a decades-long lobbying campaign by Goldman and other titans of Wall Street, who pleaded over and over for the right to regulate themselves.
Before that campaign, banks were closely monitored by a host of federal regulators, including the Office of the Comptroller of the Currency, the FDIC and the Office of Thrift Supervision. These agencies had examiners poring over loans and other transactions, probing for behavior that might put depositors or the system at risk. When the examiners found illegal or suspicious behavior, they built cases and referred them to criminal authorities like the Justice Department.
This system of referrals was the backbone of financial law enforcement through the early Nineties. William Black was senior deputy chief counsel at the Office of Thrift Supervision in 1991 and 1992, the last years of the S&L crisis, a disaster whose pansystemic nature was comparable to the mortgage fiasco, albeit vastly smaller. Black describes the regulatory MO back then. "Every year," he says, "you had thousands of criminal referrals, maybe 500 enforcement actions, 150 civil suits and hundreds of convictions."
But beginning in the mid-Nineties, when former Goldman co-chairman Bob Rubin served as Bill Clinton's senior economic-policy adviser, the government began moving toward a regulatory system that relied almost exclusively on voluntary compliance by the banks. Old-school criminal referrals disappeared down the chute of history along with floppy disks and scripted television entertainment. In 1995, according to an independent study, banking regulators filed 1,837 referrals. During the height of the financial crisis, between 2007 and 2010, they averaged just 72 a year.
But spiking almost all criminal referrals wasn't enough for Wall Street. In 2004, in an extraordinary sequence of regulatory rollbacks that helped pave the way for the financial crisis, the top five investment banks — Goldman, Merrill Lynch, Morgan Stanley, Lehman Brothers and Bear Stearns — persuaded the government to create a new, voluntary approach to regulation called Consolidated Supervised Entities. CSE was the soft touch to end all soft touches. Here is how the SEC's inspector general described the program's regulatory army: "The Office of CSE Inspections has only two staff in Washington and five staff in the New York regional office."
Among the bankers who helped convince the SEC to go for this ludicrous program was Hank Paulson, Goldman's CEO at the time. And in exchange for "submitting" to this new, voluntary regime of law enforcement, Goldman and other banks won the right to lend in virtually unlimited amounts, regardless of their cash reserves — a move that fueled the catastrophe of 2008, when banks like Bear and Merrill were lending out 35 dollars for every one in their vaults.
Goldman's chief financial officer then and now, a fellow named David Viniar, wrote a letter in February 2004, commending the SEC for its efforts to develop "a regulatory framework that will contribute to the safety and soundness of financial institutions and markets by aligning regulatory capital requirements more closely with well-developed internal risk-management practices." Translation: Thanks for letting us ignore all those pesky regulations while we turn the staid underwriting business into a Charlie Sheen house party.
Goldman and the other banks argued that they didn't need government supervision for a very simple reason: Rooting out corruption and fraud was in their own self-interest. In the event of financial wrongdoing, they insisted, they would do their civic duty and protect the markets. But in late 2006, well before many of the other players on Wall Street realized what was going on, the top dogs at Goldman — including the aforementioned Viniar — started to fear they were sitting on a time bomb of billions in toxic assets. Yet instead of sounding the alarm, the very first thing Goldman did was tell no one. And the second thing it did was figure out a way to make money on the knowledge by screwing its own clients. So not only did Goldman throw a full-blown "bite me" on its own self-righteous horseshit about "internal risk management," it more or less instantly sped way beyond inaction straight into craven manipulation.
"This is the dog that didn't bark," says Eliot Spitzer, who tangled with Goldman during his years as New York's attorney general. "Their whole political argument for a decade was 'Leave us alone, trust us to regulate ourselves.' They not only abdicated that responsibility, they affirmatively traded against the entire market."
By the end of 2006, Goldman was sitting atop a $6 billion bet on American home loans. The bet was a byproduct of Goldman having helped create a new trading index called the ABX, through which it accumulated huge holdings in mortgage-related securities. But in December 2006, a series of top Goldman executives — including Viniar, mortgage chief Daniel Sparks and senior executive Thomas Montag — came to the conclusion that Goldman was overexposed to mortgages and should get out from under its huge bet as quickly as possible. Internal memos indicate that the executives soon became aware of the host of scams that would crater the global economy: home loans awarded with no documentation, loans with little or no equity in them. On December 14th, Viniar met with Sparks and other executives, and stressed the need to get "closer to home" — i.e., to reduce the bank's giant bet on mortgages.
Sparks followed up that meeting with a seven-point memo laying out how to unload the bank's mortgages. Entry No. 2 is particularly noteworthy. "Distribute as much as possible on bonds created from new loan securitizations," Sparks wrote, "and clean previous positions." In other words, the bank needed to find suckers to buy as much of its risky inventory as possible. Goldman was like a car dealership that realized it had a whole lot full of cars with faulty brakes. Instead of announcing a recall, it surged ahead with a two-fold plan to make a fortune: first, by dumping the dangerous products on other people, and second, by taking out life insurance against the fools who bought the deadly cars.
The day he received the Sparks memo, Viniar seconded the plan in a gleeful cheerleading e-mail. "Let's be aggressive distributing things," he wrote, "because there will be very good opportunities as the markets [go] into what is likely to be even greater distress, and we want to be in a position to take advantage of them." Translation: Let's find as many suckers as we can as fast as we can, because we'll only make more money as more and more shit hits the fan.
By February 2007, two months after the Sparks memo, Goldman had gone from betting $6 billion on mortgages to betting $10 billion against them — a shift of $16 billion. Even CEO Lloyd "I'm doing God's work" Blankfein wondered aloud about the bank's progress in "cleaning" its crap. "Could/should we have cleaned up these books before," Blankfein wrote in one e-mail, "and are we doing enough right now to sell off cats and dogs in other books throughout the division?"
How did Goldman sell off its "cats and dogs"? Easy: It assembled new batches of risky mortgage bonds and dumped them on their clients, who took Goldman's word that they were buying a product the bank believed in. The names of the deals Goldman used to "clean" its books — chief among them Hudson and Timberwolf — are now notorious on Wall Street. Each of the deals appears to represent a different and innovative brand of shamelessness and deceit.
In the marketing materials for the Hudson deal, Goldman claimed that its interests were "aligned" with its clients because it bought a tiny, $6 million slice of the riskiest portion of the offering. But what it left out is that it had shorted the entire deal, to the tune of a $2 billion bet against its own clients. The bank, in fact, had specifically designed Hudson to reduce its exposure to the very types of mortgages it was selling — one of its creators, trading chief Michael Swenson, later bragged about the "extraordinary profits" he made shorting the housing market. All told, Goldman dumped $1.2 billion of its own crappy "cats and dogs" into the deal — and then told clients that the assets in Hudson had come not from its own inventory, but had been "sourced from the Street."
Hilariously, when Senate investigators asked Goldman to explain how it could claim it had bought the Hudson assets from "the Street" when in fact it had taken them from its own inventory, the bank's head of CDO trading, David Lehman, claimed it was accurate to say the assets came from "the Street" because Goldman was part of the Street. "They were like, 'We are the Street,'" laughs one investigator.
Hudson lost massive amounts of money almost immediately after the sale was completed. Goldman's biggest client, Morgan Stanley, begged it to liquidate the investment and get out while they could still salvage some value. But Goldman refused, stalling for months as its clients roasted to death in a raging conflagration of losses. At one point, John Pearce, the Morgan Stanley rep dealing with Goldman, lost his temper at the bank's refusal to sell, breaking his phone in frustration. "One day I hope I get the real reason why you are doing this to me," he told a Goldman broker.
Goldman insists it was only required to liquidate the assets "in an orderly fashion." But the bank had an incentive to drag its feet: Goldman's huge bet against the deal meant that the worse Hudson performed, the more money Goldman made. After all, the entire point of the transaction was to screw its own clients so Goldman could "clean its books." The crime was far from victimless: Morgan Stanley alone lost nearly $960 million on the Hudson deal, which admittedly doesn't do much to tug the heartstrings. Except that quickly after Goldman dumped this near-billion-dollar loss on Morgan Stanley, Morgan Stanley turned around and dumped it on taxpayers, who within a year were spending $10 billion bailing out the sucker bank through the TARP program.
It is worth pointing out here that Goldman's behavior in the Hudson scam makes a mockery of standards in the underwriting business. Courts have held that "the relationship between the underwriter and its customer implicitly involves a favorable recommendation of the issued security." The SEC, meanwhile, requires that broker-dealers like Goldman disclose "material adverse facts," which among other things includes "adverse interests." Former prosecutors and regulators I interviewed point to these areas as potential avenues for prosecution; you can judge for yourself if a $2 billion bet against clients qualifies as an "adverse interest" that should have been disclosed.
But these "adverse interests" weren't even the worst part of Hudson. Goldman also used a complex pricing method to turn the deal into an impressive triple screwing. Essentially, Goldman bought some of the mortgage assets in the Hudson deal at a discount, resold them to clients at a higher price and pocketed the difference. This is a little like getting an invoice from an interior decorator who, in addition to his fee for services, charges you $170 a roll for brand-name wallpaper he's actually buying off the back of a truck for $63.
To recap: Goldman, to get $1.2 billion in crap off its books, dumps a huge lot of deadly mortgages on its clients, lies about where that crap came from and claims it believes in the product even as it's betting $2 billion against it. When its victims try to run out of the burning house, Goldman stands in the doorway, blasts them all with gasoline before they can escape, and then has the balls to send a bill overcharging its victims for the pleasure of getting fried.
Timberwolf, the most notorious of Goldman's scams, was another car whose engine exploded right out of the lot. As with Hudson, Goldman clients who bought into the deal had no idea they were being sold the "cats and dogs" that the bank was desperately trying to get off its books. An Australian hedge fund called Basis Capital sank $100 million into the deal on June 18th, 2007, and almost immediately found itself in a full-blown death spiral. "We bought it, and Goldman made their first margin call 16 days later," says Eric Lewis, a lawyer for Basis, explaining how Goldman suddenly required his client to put up cash to cover expected losses. "They said, 'We need $5 million.' We're like, what the fuck, what's going on?" Within a month, Basis lost $37.5 million, and was forced to file for bankruptcy.
In many ways, Timberwolf was a perfect symbol of the insane faith-based mathematics and blackly corrupt marketing that defined the mortgage bubble. The deal was built on a satanic derivative structure called the CDO-squared. A normal CDO is a giant pool of loans that are chopped up and layered into different "tranches": the prime or AAA level, the BBB or "mezzanine" level, and finally the equity or "toxic waste" level. Banks had no trouble finding investors for the AAA pieces, which involve betting on the safest borrowers in the pool. And there were usually investors willing to make higher-odds bets on the crack addicts and no-documentation immigrants at the potentially lucrative bottom of the pool. But the unsexy BBB parts of the pool were hard to sell, and the banks didn't want to be stuck holding all of these risky pieces. So what did they do? They took all the extra unsold pieces, threw them in a big box, and repeated the original "tranching" process all over again. What originally were all BBB pieces were diced up and divided anew — and, presto, you suddenly had new AAA securities and new toxic-waste securities.
A CDO, to begin with, is already a highly dubious tool for magically converting risky subprime mortgages into AAA investments. A CDO-squared doubles down on that lunacy, taking the waste products of the original process and converting them into AAA investments. This is kind of like taking all the kids who were picked last to play volleyball in every gym class of every public school in the state, throwing them in a new gym, and pretending that the first 10 kids picked are varsity-level players. Then you take all the unpicked kids left over from that process, throw them in a gym with similar kids from all 50 states, and call the first 10 kids picked All-Americans.
Those "All-Americans" were the assets in the Timberwolf deal. These were the recycled nightmare dregs of the mortgage craze — to quote Beavis and Butt-Head, "the ass of the ass."
Goldman knew the deal sucked long before it dinged the Aussies in Basis Capital for $100 million. In February 2007, Goldman mortgage chief Daniel Sparks and senior executive Thomas Montag exchanged e-mails about the risk of holding all the crap in the Timberwolf deal.
MONTAG: "CDO-squared — how big and how dangerous?"
SPARKS: "Roughly $2 billion, and they are the deals to worry about."
Goldman executives were so "worried" about holding this stuff, in fact, that they quickly sent directives to all of their salespeople, offering "ginormous" credits to anyone who could manage to find a dupe to take the Timberwolf All-Americans off their hands. On Wall Street, directives issued from above are called "axes," and Goldman's upper management spent a great deal of the spring of 2007 "axing" Timberwolf. In a crucial conference call on May 20th that included Viniar, Sparks oversaw a PowerPoint presentation spelling out, in writing, that Goldman's mortgage desk was "most concerned" about Timberwolf and another CDO-squared deal. In a later e-mail, he offered an even more dire assessment of such deals: "There is real market-meltdown potential."
On May 22nd, two days after the conference call, Goldman sales rep George Maltezos urged the Australians at Basis to hurry up and buy what the bank knew was a deadly investment, suggesting that the "return on invested capital for Basis is over 60 percent." Maltezos was so stoked when he first identified the Aussies as a target in the scam that he subject-lined his e-mail "Utopia."
"I think," Maltezos wrote, "I found white elephant, flying pig and unicorn all at once."
The whole transaction can be summed up by the now-notorious e-mail that Montag wrote to Sparks only four days after they sold $100 million of Timberwolf to Basis. "Boy," Montag wrote, "that timeberwof [sic] was one shitty deal."
Last year, in the one significant regulatory action the government has won against the big banks, the SEC sued Goldman over a scam called Abacus, in which the bank "rented" its name to a billionaire hedge-fund viper to fleece investors out of more than $1 billion. Goldman agreed to pay $550 million to settle the suit, though no criminal charges were brought against the bank or its executives. But in light of the Levin report, that SEC action now looks woefully inadequate. Yes, it was a record fine — but it pales in comparison to the money Goldman has taken from the government since the crash. As Spitzer notes, Goldman's reaction was basically, "OK, we'll pay you $550 million to settle the Abacus case — that's a small price to pay for the $12.9 billion we got for the AIG bailout." Now, adds Spitzer, "everybody can just go home and pretend it was only $12.4 billion — and Goldman can smile all the way to the bank. The question is, now that we've seen this report, there are a bunch of story lines that seem to be at least as egregious as Abacus. Are they going to bring cases?"
Here is where the supporters of Goldman and other big banks will stand up and start wanding the air full of confusing terms like "scienter" and "loss causation" — legalese mumbo jumbo that attempts to convince the ignorantly enraged onlooker that, according to American law, these grotesque tales of grand theft and fraud you've just heard are actually more innocent than you think. Yes, they will say, it may very well be a prosecutable crime for a corner-store Arab to take $2 from a customer selling tap water as Perrier. But that does not mean it's a crime for Goldman Sachs to take $100 million from a foreign hedge fund doing the same thing! No, sir, not at all! Then you'll be told that the Supreme Court has been limiting corporate liability for fraud for decades, that in order to gain a conviction one must prove a conscious intent to deceive, that the 1976 ruling in Ernst and Ernst clearly states....
Leave all that aside for a moment. Though many legal experts agree there is a powerful argument that the Levin report supports a criminal charge of fraud, this stuff can keep the lawyers tied up for years. So let's move on to something much simpler. In the spring of 2010, about a year into his investigation, Sen. Levin hauled all of the principals from these rotten Goldman deals to Washington, made them put their hands on the Bible and take oaths just like normal people, and demanded that they explain themselves. The legal definition of financial fraud may be murky and complex, but everybody knows you can't lie to Congress.
"Article 18 of the United States Code, Section 1001," says Loyola University law professor Michael Kaufman. "There are statutes that prohibit perjury and obstruction of justice, but this is the federal statute that explicitly prohibits lying to Congress."
The law is simple: You're guilty if you "knowingly and willfully" make a "materially false, fictitious or fraudulent statement or representation." The punishment is up to five years in federal prison.
When Roger Clemens went to Washington and denied taking a shot of steroids in his ass, the feds indicted him — relying not on a year's worth of graphically self-incriminating e-mails, but chiefly on the testimony of a single individual who had been given a deal by the government. Yet the Justice Department has shown no such prosecutorial zeal since April 27th of last year, when the Goldman executives who oversaw the Timberwolf, Hudson and Abacus deals arrived on the Hill and one by one — each seemingly wearing the same mask of faint boredom and irritated condescension — sat before Levin's committee and dodged volleys of questions.
Before the hearing, even some of Levin's allies worried privately about his taking on Goldman and other powerful interests. The job, they said, was best left to professional prosecutors, people with experience building cases. "A senator's office is not an enormous repository of expertise," one former regulator told me. But in the case of this particular senator, that concern turned out to be misplaced. A Harvard-educated lawyer, Levin has a long record of using his subcommittee to spend a year or more carefully building cases that lead to criminal prosecutions. His 2003 investigation into abusive tax shelters led to 19 indictments of individuals at KPMG, while a 2006 probe fueled insider-trading charges against the notorious Wyly brothers, a pair of billionaire Texans who manipulated offshore investment trusts. The investigation of Goldman was an attempt to find out what went wrong in the years leading up to the financial crash, and the questioning of the bank's executives was not one of those for-the-cameras-only events where congressmen wing ad-libbed questions in search of sound bites. In the weeks leading up to the hearing, Levin's team carefully rehearsed the moment with committee members. They knew the possible answers that Goldman might give, and they were ready with specific counterquestions. What ensued looked more like a good old-fashioned courtroom grilling than a photo-op for grinning congressmen.
Sparks, who stepped down as Goldman's mortgage chief in 2008, cut a striking figure in his testimony. With his severe crew cut, deep-set eyes and jockish intransigence, he looked like a cross between H.R. Haldeman and John Rocker. He repeatedly dodged questions from Levin about whether or not the bank had a responsibility to tell its clients that it was betting against the same stuff it was selling them. When asked directly if he had that responsibility, Sparks answered, "The clients who did not want to participate in that deal did not." When Levin pressed him again, asking if he had a duty to disclose that Goldman had an "adverse interest" to the deals being sold to clients, Sparks fidgeted and pretended not to comprehend the question. "Mr. Chairman," he said, "I'm just trying to understand."
OK, fine — non-answer answers. "My guess is they were all pretty well coached up," says Kaufman, the law professor. But then Sparks had a revealing exchange with Sen. Jon Tester of Montana. Tester calls the Goldman deals "a wreck waiting to happen," noting that the CDOs "were all downgraded to junk in very short order."
At which point, Sparks replies, "Well, senator, at the time we did those deals, we expected those deals to perform."
Tester then cannily asks if by "perform," Sparks means go to shit — which would have been an honest answer. "Perform in what way?" Tester asks. "Perform to go to junk so that the shorts made out?"
Unable to resist the taunt, Sparks makes a fateful decision to defend his honor. "To not be downgraded to junk in that short a time frame," he says. Then he pauses and decides to dispense with the hedging phrase "in that short a time frame."
"In fact," Sparks says, "to not be downgraded to junk."
So Sparks goes before Congress and, under oath, tells a U.S. senator that at the time he was selling Timberwolf, he expected it to "perform." But an internal document he approved in May 2007 predicted exactly the opposite, warning that Goldman's mortgage desk expected such deals to "underperform." Here are some other terms that Sparks used in e-mails about the subprime market affecting deals like Timberwolf around that same time: "bad and getting worse," "get out of everything," "game over," "bad news everywhere" and "the business is totally dead."
And we indicted Roger Clemens?

Another extraordinary example of Goldman's penchant for truth avoidance came when Joshua Birnbaum, former head of structured-products trading for the bank, gave a deposition to Levin's committee. Asked point-blank if Goldman's huge "short" on mortgages was an intentional bet against the market or simply a "hedge" against potential losses, Birnbaum played dumb. "I do not know whether the shorts were a hedge," he said. But the committee, it turned out, already knew that Birnbaum had written a memo in which he had spelled out the truth: "The shorts were not a hedge." When Birnbaum's lawyers learned that their client's own words had been used against him, they hilariously sent an outraged letter complaining that Birnbaum didn't know the committee had his memo when he decided to dodge the question. They also submitted a "supplemental" answer. Birnbaum now said, "Having reviewed the document the staff did not previously provide me" — his own words! — "I can now recall that ... I believed ... these short positions were not a hedge." (Goldman, for its part, dismisses Birnbaum as a single trader who "neither saw nor knew the firm's overall risk positions.")
When it came time for Goldman CEO Lloyd Blankfein to testify, the banker hedged and stammered like a brain-addled boxer who couldn't quite follow the questions. When Levin asked how Blankfein felt about the fact that Goldman collected $13 billion from U.S. taxpayers through the AIG bailout, the CEO deflected over and over, insisting that Goldman would somehow have made that money anyway through its private insurance policies on AIG. When Levin pressed Blankfein, pointing out that he hadn't answered the question, Blankfein simply peered at Levin like he didn't understand.
But Blankfein also testified unequivocally to the following:
"Much has been said about the supposedly massive short Goldman Sachs had on the U.S. housing market. The fact is, we were not consistently or significantly net-short the market in residential mortgage-related products in 2007 and 2008. We didn't have a massive short against the housing market, and we certainly did not bet against our clients."
Levin couldn't believe what he was hearing. "Heck, yes, I was offended," he says. "Goldman's CEO claimed the firm 'didn't have a massive short,' when the opposite was true." First of all, in Goldman's own internal memoranda, the bank calls its giant, $13 billion bet against mortgages "the big short." Second, by the time Sparks and Co. were unloading the Timberwolves of the world on their "unicorns" and "flying pigs" in the summer of 2007, Goldman's mortgage department accounted for 54 percent of the bank's risk. That means more than half of all the bank's risk was wrapped up in its bet against the mortgage market — a "massive short" by any definition. Indeed, the bank was betting so much money on mortgages that its executives had become comically blasé about giant swings on a daily basis. When Goldman lost more than $100 million on August 8th, 2007, Montag circulated this e-mail: "So who lost the hundy?"
This month, after releasing his report, Levin sent all of this material to the Justice Department. His conclusion was simple. "In my judgment," he declared, "Goldman clearly misled their clients, and they misled the Congress." Goldman, unsurprisingly, disagreed: "Our testimony was truthful and accurate, and that applies to all of our testimony," said spokesman Michael DuVally. In a statement to Rolling Stone, Goldman insists that its behavior throughout the period covered in the Levin report was consistent with responsible business practice, and that its machinations in the mortgage market were simply an attempt to manage risk.
It wouldn't be hard for federal or state prosecutors to use the Levin report to make a criminal case against Goldman. I ask Eliot Spitzer what he would do if he were still attorney general and he saw the Levin report. "Once the steam stopped coming out of my ears, I'd be dropping so many subpoenas," he says. "And I would parse every potential inconsistency between the testimony they gave to Congress and the facts as we now understand them."
I ask what inconsistencies jump out at him. "They keep claiming they were only marginally short, that it was more just servicing their clients," he says. "But it sure doesn't look like that." He pauses. "They were $13 billion short. That's big — 50 percent of their risk. It was so completely disproportionate."
Lloyd Blankfein went to Washington and testified under oath that Goldman Sachs didn't make a massive short bet and didn't bet against its clients. The Levin report proves that Goldman spent the whole summer of 2007 riding a "big short" and took a multibillion-dollar bet against its clients, a bet that incidentally made them enormous profits. Are we all missing something? Is there some different and higher standard of triple- and quadruple-lying that applies to bank CEOs but not to baseball players?
This issue is bigger than what Goldman executives did or did not say under oath. The Levin report catalogs dozens of instances of business practices that are objectively shocking, no matter how any high-priced lawyer chooses to interpret them: gambling billions on the misfortune of your own clients, gouging customers on prices millions of dollars at a time, keeping customers trapped in bad investments even as they begged the bank to sell, plus myriad deceptions of the "failure to disclose" variety, in which customers were pitched investment deals without ever being told they were designed to help Goldman "clean" its bad inventory. For years, the soundness of America's financial system has been based on the proposition that it's a crime to lie in a prospectus or a sales brochure. But the Levin report reveals a bank gone way beyond such pathetic little boundaries; the collective picture resembles a financial version of The Jungle, a portrait of corporate sociopathy that makes you never want to go near a sausage again.
Upton Sinclair's narrative shocked the nation into a painful realization about the pervasive filth and corruption behind America's veneer of smart, robust efficiency. But Carl Levin's very similar tale probably will not. The fact that this evidence comes from a U.S. senator's office, and not the FBI or the SEC, is itself an element in the worsening tale of lawlessness and despotism that sparked a global economic meltdown. "Why should Carl Levin be the one who needs to do this?" asks Spitzer. "Where's the SEC? Where are any of the regulatory bodies?"
This isn't just a matter of a few seedy guys stealing a few bucks. This is America: Corporate stealing is practically the national pastime, and Goldman Sachs is far from the only company to get away with doing it. But the prominence of this bank and the high-profile nature of its confrontation with a powerful Senate committee makes this a political story as well. If the Justice Department fails to give the American people a chance to judge this case — if Goldman skates without so much as a trial — it will confirm once and for all the embarrassing truth: that the law in America is subjective, and crime is defined not by what you did, but by who you are.

Monday, May 9, 2011

The Next New KiwiSaver*

*(like the next new Whole Earth Catalogue)

In New Zealand we have a pension plan called KiwiSaver. It was set up as a long term saving plan.  With a couple of notable exceptions, it can only be accessed by the contributor at retirement.  You would think that since it is meant to be from when you start work, to the age of 65, there would be great reluctance to change it by successive governments.  Of course, no one would object to a change for the better.  But No, the present National Government (on the right) has already made a couple of changes, neither of them beneficial to the participant.

National has now announce that at the coming budget they will make some further changes to KiwiSaver.  The first part of this blog is being written before these announcements.  The second part will be after they come out.

Part 1
I have long argued that KiwiSaver, in its present form is a scam.  I define a scam as a system that makes the mark think he is getting something for nothing and hence make him willing to part with his money.  My objections to Kiwi Saver in its present form are the following

Firstly, the government contributes a matching amount up to a little over a thousand dollars a year.  Sounds good doesn't it.  But whose money is this they are giving you.  You guessed it.  It is your money, previously collected through taxes with the act of collection siphoning part of it off*.   If the government incurs this added expense  it has three options.  It can a) raise taxes, it can b) reduce services or it can c) borrow more money resulting in us and future generations of Kiwis going further into debt. Note that in this connection, we are at present borrowing huge amounts of money sometimes quoted at about $300m per week and our GST has just gone up from 12.5% to 15%.

*People are needed to administrate the collection and distribution of taxes.  The more different taxes you collect and the more different ways you distribute it, the more people you need.  Lets say, for the sake of argument, tax collection is 90% efficient.  That means for every $1000 you collect you only have $900 in the government coffers for doing the government work.

My second objection is the employee contribution.  Any CEO worth his inflated salary will simply calculate how much the great privilege of having you work for him is worth and deduct the KiwiSaver contribution from your salary.  Again making you think you are getting something for nothing.

My third objection and the way KiwiSaver could be made worthwhile without the bribes is as follows.

At present KiwiSaver contributions are after taxes.  If you are in the 33% tax bracket, you have to earn $150 in order to have $100 to contribute.  This means you already start well behind the starting line.  The interest on your KiwiSaver investment has to get you back up to $150 before you even start to get ahead*.

*I can just hear the critics say, but you are getting capital gains.  I don't know what you think but I am a little jaded with the promise of long term capital gains after that events of the last few years.

You are also taxed on dividends and interest and to add insult to injury, you are taxed on the whole amount you earn, not the part that is above inflation.  Who controls inflation.  There are many outside influences but in so far as it can, the government does.  We have about 3% inflation in New Zealand so at the end of the first year with your investment of $100, you have to have $103 in the bank just to have the same buying power.  Your dividends are also taxed at your marginal rate so if you get an investment that earns 6%, you have $106 at the end of the year.  Since you have earned $6, you are taxed $2.  You are left with $104.  This is a real earning of only $1 on an investment of $100.  It turns out that at this 1% true interest*, it will take you about 40 years to get back to the buying power of the original $150 that you earned.

*It is actually 0.97% interest but let's not quibble

Clearly the solution is   a) to let you invest before taxes and  b) to be allowed tokeep your earnings or at the very least, pay tax on your true earnings.

End of part 1.  We wait in great anticipation for the announcement.

Part 2 
We now have the new version.  The government contribution is halved and the minimum contribution from the worker and his boss is 3% rather than 2%.  The government contribution is still a fiction.  They are taking money from us in taxes so that they can give it back in KiwiSaver.  The Employer contribution is still a fiction.  Your boss will still reduce your salary (or not let it rise as fast as it otherwise would) so he can pay this contribution and for the individual, the scheme is less worthwhile an investment.  No reduction in taxation on the portion you contribute has been made and your dividends and interest are still taxed at your marginal rate with no allowance made for inflation.  Not a pretty picture.

Sunday, May 8, 2011

Eric's Beavers

One of my favorite books is Three Against the Wilderness, which describes how Eric Collier, his wife Lily and his son Veasy trekked up to the headwaters of Meldrum Creek not far from Williams Lake, BC, Canada and trapped furs for a living.  When they got there, the land was  desolate and there was not much of fur bearing use except coyotes. It was Lily's ancient Grandmother, a full blooded Indian, who suggested they go to that area.  Eric recounts:

    One evening while I squatted by her campfire, studying her wrinkled face, I said, "No trout stop now, Lala.  Just suckers and squawfish.  And now the Indians never bring beaver pelts to the store to make trade"
     She shook her head.  Her scraggy hand sought and found my arm.  Her fingers gouged into it's flesh.  Lifting her blank eyes to my face, she said swiftly.  "No, Not'ing stop now".  Her fingers relaxed their grip.  Suddenly she demanded. 

     "You know why?"
     I pondered this a moment, then hazarded, "Is it because of the beavers?"
     "Aiya, the beavers!"  I filled her pipe from the sack of tobacco I had fetched her from the store, passed it over to her and held a faggot to its bowl.  She sucked deeply at the stem, imprisoned the smoke in her mouth and then slowly expelled it.  "Until white man come," she then went on to explain, "Indian just kill beaver now an' then s'pose he want meat, or skin for blanket.  And then, always the creek is full of beaver.  But when white man come and give him tobacco, sugar, bad drink, every tam' he fetch beaver skin from creek Indian go crazy and kill beaver all tam'.  Again her fingers clawed my arm.  Harshly she asked.  "What's matter white man no tell Indian --  some beaver you must leave so little one stop next year?.  What's matter white man no tell Indian s'pose you take all beaver, bimeby (by and by) all water go too.  And if water go, no trout, no fur, no grass, not'ing stop?"
     After a few contemplative moments she suggested, "Why you no go that creek (Meldrum) and give it back the beavers?  You young man, you like hunt and trap. S'pose once again the creek full of beavers, maybe trout come back.  And ducks and geese come back too, and big marshes be full of muskrats again all same when me little girl.  And where muskrat stop, mink and otter stop too.  Aiya!  Why you no go that creek with Lily and live there all tam', and give it back the beavers."


That ancient Indian lady knew a thing or two that wildlife and fisheries biologists are only just reluctantly coming to terms with now.



Hand built dam is now overgrown with poplars*.
Of course there were no beavers around.  They had been  exterminated from all but the most remote corners of North America by the fur trappers.   Eric and family got busy rebuilding the beaver dams by hand.  The results were spectacular but you will have to read the book to see what resulted.  Chapter 18 makes the hair stand up on my neck.  It describes how, after 10 years of living in the area, building dams by hand and in so doing, restoring the environment, they acquired their first two pair of beavers which then took over the work of keeping the dams repaired and building new ones.  Below is part of chapter 18.

*Click on picture to enlarge

From Three Against the Wilderness

R.M. Robertson, a native of Glasgow, Scotland migrated to Canada in 1910.  He homesteaded on the flat plains of Saskatchewan in 1914, owner of one hundred and sixty acres of untiled prairie, his home a small hut with a sod roof.  If it had not been for World War I, Mr Robertson might today have been a prosperous prairie farmer, the hut with its sod roof a memory of a day when he hitched his team of horses to the doubletrees of a walking plow and turned the very first furrow in his rich Saskatchewan loam

     But by May 1919, when he stepped out of khaki, all he had in his pocket was a month or two of back pay, plus a hundred or so dollars of gratuity money.  He took a two-bit piece from his pocket, flipped it into the air and closed his eyes.  Heads he went back to the plow, tails he sought other employment.  Tails it was, so with a shrug of the shoulders, the ex-machine gunner turned his back on Saskatchewan's sod and pushed westward into British Columbia.  Outdoor life had ever had a magnetic attraction for Robertson's keen mind and in 1920 he joined the staff of the British Columbia Game Department with the rank of game warden.

     Game warden R.M. Robertson never limited his activities to enforcement of regulations alone, or to apprehension and prosecution of offenders under the Game Act.  He was more interested in what led a pair of Canada geese back to the few acres of water in which the hen bird had nursed her brood to maturity since first she laid an egg.  Of the horns and skull of a bighorn sheep, now crumbling to dust before the indifferent stare of weather, yet still visible on the slope of a hillside that had not been trodden by the species within the memory of living man -- what catastrophe, natural or man -made, had wiped these big game animals from the face of the land?  These and a host of similar questions were ever demanding explanation from the game warden, who whenever other duties allowed, was out on moraine-littered slopes or in sombre conifer forests, eyes searching for some clue that might lead him to the answers.


     The divisional inspector followed many a stream bed from source to mouth, examining the foliage that still clung tenaciously to the banks seeking answers as to why they were now dry.  And he too sensed that in the prostitution of the beavers lay at least part of the answer.

     Remote though we were in our lonely isolation, not too much touching  upon wildlife matters in his division went unheeded by Inspector Robertson.  Though no game warden had ever set foot upon it -- at least not since we had come to it -- not only its existence but also something of our activities to do with its beaver dams had reached the inspector's ears.  And believing that secondhand knowledge is a sorry substitute for that gained from personal observation, Robertson wrote me that he had decided to visit us and learn of our goings-on for himself.

     One day in late June of 1941 I saddled up my own horse and trailing a spare behind me, rode out to Riske Creek to meet the divisional inspector and guide him back to our cabin at Meldrum Lake.  For at that time it never occurred to me that any mechanical vehicle could possibly navigate the rock-littered track.

     He was cooling his heels at the trading post when I arrived with the horses.  About five feet nine, graying slightly at the temples, his one hundred seventy-odd pounds of well-knit flesh told of a body well tuned to vigorous outdoor exercise.  "He knows what the drag of snowshoes was on a soft day in March.


     Robertson fitted perfectly.  His left hand holding the reins was at the cheek strap of the bridle as it should be, his right on the saddle horn and not fumbling with the cantle.  When he hosted up he came lightly to rest in the seat, right foot instantly finding the stirrup.  The inspector was as used to the unpredictable manners of horseflesh as any cowpuncher working for the ranchers hereabouts.

     Not too much talk flowed between us as now at a trot, now at gallop, with the occasional walking gait between, our horses put the miles behind them.  That was another thing I liked about the man; instead of bothering me with small talk, he held his breath and gave all his attention to the countryside, marking a deer track when one crossed the road or the dusting place of a grouse whenever we passed one.

     Before getting back to Meldrum Lake, one minor incident took place that told me much of the mettle of the man who rode thoughtfully at my side.  We were skirting a small lake whose shoreline was fringed with a waving growth of foxtail grass, now heading out.  I was watching a brood of young ducks swimming parallel to the far shore.  Suddenly the ducklings huddled together and in close formation moved in toward the shore and the foxtail grass.  there they turned and swam parallel to the shore again for a few yards; then, breaking formation, two of them began moving toward dry land.

     The divisional inspector too had his eyes on the ducks.  Suddenly he braced back on his stirrups, brought his horse to a stop and sang out, "
Whoa!"
     After staring intently at the other side of the lake, he breathed softly "over there in the foxtail, fifty feet from those two ducks -- can you see it?"
     Then I did see it, something that might have been a clump of foxtail grass waving in the wind but wasn't.  "Coyote", I announced.

     "The tail of one, anyway, " agreed the inspector.  "The rest of him is hidden in the grass."
     The bushy tail of the coyote was waving gently to and fro like a flag fluttering in the breeze, as the coyote tails have been waving in the long grass at the waters edge ever since there have been coyotes -- and ducks in the nearby water foolish enough to fall for the trick.

     "Curiosity," observed the inspector, "killed a darned sight more than the cat.  The owner of that tail is trying to bring one of those ducks within pouncing distance of its jaws by the simple trick of lying flush on his belly and using his brush as a decoy.  Inquisitive things, ducks, especially young ones."

     One of the ducklings was now out of the water perched on one leg, watching the movement of the tail.  Then at  a clumsy waddle it started toward the grass and the predator that lurked there.

     "This," the inspector murmured "we can not allow." And taking a deep breath, he got rid of it in one noisy shout.

     The Coyote heaved upright and for a split second stood broadside to us, ears in our direction.  Then his keen eyes spotted us, and wheeling, he streaked off through the grass.

     Quacking noisily, the inquisitive duckling scrambled for the water and splashed out to the others.  And breasts low to the water the brood moved into a clump of bulrushes out of our sight.
    "Ever see that type of hunting before?" Robertson asked.
     "Only once, I replied.  "that time it was a young goose, and the coyote nailed it."

     "I wonder," he mused "how many ducks and geese have fallen for that shabby trick since coyotes first got on to using it?"

     The divisional inspector spent close to a week riding out trapline with me.  He fitted into the life as a shoe fits the foot of a well shod horse.  Come time to wash the supper dishes, he was out of his chair with the dish towel drying a Lillian washed the.  He fired questions at Veasy, hot only those relating to muskrats or mink, or deer and moose, but also may others to do with mathematics and geography and history and other subjects, usually talked of in a schoolroom. 
And to Lillian he said with a wink, "The adage 'spare the rod and spoil the child' doesn't apply here."

      On the final day of his stay with us, while staring thoughtfully out across one of the marshes, he said musingly, "It seems to me you could well use a bit of help in looking after all these dams.  Did it ever occur to you that if one happened to go out, the sudden rush of water would likely take a few others out below?'

     The thought of that had been bothering us for quite some time now.
At the time of spring freshet, or indeed when swollen by summer thundershowers, Meldrum Creek now more resembled a young river than any minor creek.  A river, moreover, that was barricaded here and there by some twenty-five dams lacking any proper spillway.  So far, none of the dams had been badly breached, thanks mainly to the mass of spruce boughs re-enforcing them.  But eventually the boughs must rot, and the dams settle, as some were doing already.  And if one of the major dams were to give, it was a highly debatable question, whether those below it could withstand the sweep of water that would come pressing in on them.

     As if arriving at some major decision within his own mind, but saying nothing of it to me, he repeated, "Yes, you obviously need some help."  But of what such help might consist of or where it was to come from he offered no clue at all.  Nor were we to be enlightened for a little while yet.

     Later in the year, writing in the Report of the Provincial Game Commission, Inspector Robertson had this to say:  "While on a recent patrol of inspection covering the trapline of Eric Collier, of Meldrum Lake, the potentialities of wildlife propagation were amply demonstrated on this trapline.  With use of only a pick, shovel, and wheelbarrow, Mr Collier dammed up some twenty-five of the old disused swamp lands which were once the habitat of beavers, muskrats, and other fur-bearers.  These areas ranged in size from eighty to five hundred acres each.  The runoff of the winter snows were held and the swamps re-flooded.  This was followed by the rapid appearance of muskrats and other fir bearers, waterfowl and big game, as numerous tracks testified.  In fact the whole situation and appearance of the country changed from one of apparent stillness and dearth of life to animation and restoration of its pristine condition.  The irrigation problems of an area contiguous to the Collier Trapline have been largely solved as a result of the above project.  The Collier project on the headwaters of Meldrum Creek is a brilliant example of what can be done in this very fertile field of endeavour."

     These then were the thoughts of Inspector Robertson of the British Columbia Game Department concerning the events that had befallen Meldrum Creek since we came to its headwaters.  But not until early the following September was I again reminded of his suggestion that "you could well do with a bit of help in maintaining all these dams."

     It was 10:30 A.M.  Lillian was busy with her sewing, stitching her winter mittens.  Veasy was hunched over the table, exploring the mysteries of algebra.  And I was checking traps to make sure their triggering was alright before we set them out in the woods.

     Suddenly Veasy's back straightened and he sat bolt upright, listening.  "What's that?" he exclaimed.

     I too listened a moment, then shrugged my shoulders indifferently as the faint hum of a motor came to my ears.  "Only a plane following the Frazer River north." I said.  For Canadian Pacific Airlines was now operating a plane service between Vancouver, B.C. and Whitehorse in the Yukon, and their aircraft often passed high over our cabin.
     "That's no airplane," Veasy insisted.
     "Then what the heck is it?"
     "A car."
     "A car?  Back here in this neck of the woods!"  I shook my head.  It was inconceivable.

     "It is a car," persisted Veasy, now from the open door.  "It's back there in the jack pines yet, but it's a car and it's coming in here."
     Lillian was at my heels as I heaved out through the door, and together we stood there, gawking in amazement.
     "Veasy's right," I said slowly.  "it couldn't be , but it is a car."

     The uneven throb of an automobile motor, hauling its chassis over a track that was far more suited to steel-tired wheels than one moving on rubber, was now certainly no trick of imagination.  A car was out there on our road, still perhaps a half -mile or more from the cabin but getting closer by the minute.  Soon we caught a flash of its blue body among the jack pines, moving very slowly and cautiously but moving just the same.  And we stood there, blinking and wondering.

     The automobile eased to a stop alongside us, and its driver lurched out of the seat, staggering a little as one is likely to stagger who suddenly finds his legs after being seated far too long.  He was lean and tall, between forty-five and fifty, his eyes for want of sleep, and yesterday's stubble still on his chin.  But who was he, and what was he doing back here?

     The stranger himself quickly answered that question.  "Game Warden Mottishaw, Quesnel Detachment, B.C. Game Department," he introduced himself crisply.  "You're Eric Collier --- right?"
     I inclined my head.  "Himself.  And this is my wife and son -- Lillian and Veasy."

     The game warden touched his cap, smiled a little and said.  "I've already heard about Lillian and Veasy."  Then his eyes went to his car.  He frowned.  "What a road!  Two blowouts, a broken spring, a buckled fender and a leak in the radiator.  I stopped that with chewing gum.  Why in heck don't you move some of those rocks and roots out of the right-of-way?" he barked.
     We've only been back here ten years," I grinned.  "Never got around to fixing up the road yet.  Hope to someday, though."

     The game warden dropped down on a block of wood and pushed back his cap with a slow, tired movement.  He wasn't wearing any uniform, just an old pair of tweed  pants and a coat of a similar material.  "Never mind," he said.  "I got here even if I did have to drive all night to do it.  But they're still breathing, and that's all that counts."

     Veasy's every attention was being devoted to the automobile.  he was fascinated by it.  He walked slowly around it, examining its tires, fenders and springs.  then he went down on his hands and knees, looking at its underbelly.  He peeked into the cab, at the instrument panel and the gearshift.  Then he stepped away, nodding his head, as if all that he'd seen was good.

     Making wild guesses as to who "was still breathing," I said to our visitor. "Step inside; it'll only take Lillian a jiffy to brew a pot of coffee and to get you a bite to eat."  He certainly seemed in need of food and drink.

     But apparently he didn't hear me.  He was at the rear of the car, fiddling with the handle of the trunk.  "Well, where are you going to put them? he asked sharply.
     I looked at him in bewilderment.  "Put what?"
     "Haven't got the faintest idea, eh?"  he said.  "Here, maybe that'll explain."  And he tossed a somewhat soiled envelope over to me.
     I tore open the flap and unfolded the single sheet of paper inside.  The words danced at me as I slowly read them, and their full meaning sank in.

     "Guard them and care for them as if they were children.  They're worth their weight in gold and if anything happens to these, you'll not be getting any more from us."

That's what the paper said and the brief note was signed R.M. Robertson, I/C C Game Division.
     I dropped down on a fender of the car, trying to steady my voice and my thoughts.  You mean they are----"  I began falteringly.  Then I broke off trying to collect my wits, eyes glued on the open trunk of the car.  "Beavers?" I gulped, scarce daring to utter the work.

     "Two pairs,"  the game warden affirmed crisply.  "Live trapped at the Bowron Lake Game Reserve for liberation on Meldrum Creek.  And I'd have you know that game reserve is two hundred and fifty miles north of here, and those beavers have been cooped up in the trunk of the car too long now.  We've got to get them into the water, and the sooner the better.  Where are you going to liberate them?"

     The irrigation dam was the closest and most logical spot in which to set the beavers free.  Each beaver had an oblong tin box all to itself,and one at a time we carried the boxes onto the dam.

     "One pair are two-year olds, the other three," the game warden informed us as he opened the drop doors of the cages.  Each box had to be tilted on end before its prisoners would come out.

     One at a time the beavers were coaxed away from their containers, and one by one they crouched low to the ground, eyes blinking stupidly at the sudden light, nostrils working.  Then the largest one of the lot, a male, I judged, went erect on the webbing of its hind feet, forepaws doubled against its chest, as if in prayer.

     Smells mighty good, doesn't it big boy?" chuckled the game warden.  "And it'll feel a darned sight better than it smells.  So get going."
     Now that he winded the nearby water, the buck beaver waddled clumsily along the dam a few feet and then slid into the pond.  And with scarcely a telltale ripple vanished into its depths.  One at a time the others took to the water at the selfsame spot, and in  a few seconds, not a trace of them was to be seen.

If you want to read about the effect those beavers had on the area, you will have to get the book but let me assure you the effects were profound.  Another chapter that I find particularly amazing, chapter 27ff,  describes the flood of 1948 which inundated the Frazer Delta - but I don't want to spoil the story for you.