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How the Teamsters Beat Goldman Sachs?
Submitted by Leo Kolivakis, publisher of Pension Pulse.
Andrew Cockburn wrote an excellent article in counterpunch, How the Teamsters Beat Goldman Sachs (hat tip, Tom Naylor):
Among
the causes of the ongoing financial meltdown, many experts cite the
Commodity Futures Modernization Act, smuggled through Congress late on
a December evening in 2000. The law exempted Credit Default Swaps.(CDS)
which are essentially bets on the value of securities from all
regulation, including state gambling laws. This allowed Wall Street to
conclude that any risk could be hedged with a bet. The result, of
course, was disaster, with economic consequences that we will be
feeling for a very long time.“When I wrote part of that
legislation with these hands on my little keyboard,” a former financial
industry lobbyist who helped craft the law recently told me, “I didn’t
realize that this was going to make people lose their jobs, pension
funds their reserves, universities their endowments. But that’s what
happened”There are now shelves full of books describing the
disaster caused by the enabling of Wall Street as a wide open casino.
But amidst the wreckage and plaintive cries for “reform,” Wall Street
is full tilt in the business of destroying companies and throwing
thousands of men and women out of work in order to turn a quick profit
on a CDS trade.In recent weeks the 30,000 employees of YRC
Worldwide, one of the nation’s largest trucking companies, discovered
that they had unwittingly been drafted as chips in the casino. The
company, built up through a series of misguidedly overpriced takeovers
in the years of the credit bubble, had hit a financial wall thanks to
the fall off of business in the recession. Unless investors holding the
company’s bonds could be persuaded to swap their debt for equity, the
company would go bankrupt and its employees thrown out of work.In
a sane world the bondholders would have had little trouble in seeing
the wisdom of the plan and signing on. But the world we live in does
things differently. We have, for example, the practice known as “basis
packaging” in which a company such as YRCW, while attempting to
restructure its debt, discovers that some of the bondholders have
simultaneously bet, through the use of credit default swaps, on the
company going bankrupt. As bondholders, they can sabotage any rescue
operation by refusing to cooperate and thus collect on their winning
bets even as the truck drivers begin collecting unemployment.This
was exactly what was happening in the case of YRCW. According to
Michael Greenberger, the University of Maryland law professor who
headed Trading and Markets at the Commodity Futures Trading Commission
in the Clinton Administration, this was a case of “Goldman (Sachs) et
al seemingly forcing the country’s biggest truck company into
bankruptcy in order to get pay-offs under CDS, with 50,000 jobs at
stake.Hedge fund entrepreneur David Einhorn, who denounced the
malign practice at an investors’ conference earlier this year, claims
that “basis packaging” has already been a major contributor to the
bankruptcy of companies such as Abitibi-Bowater, General Growth
Properties, Six Flags and even General Motors. Deriding calls for
regulation of the CDS business, he declared that “trying to make safer
CDS is like trying to make safer asbestos. How many real businesses
have to fail before policy makers decide to simply ban them?”Waiting
for policy-makers to do the right thing will take a while. Credible
reports indicate that Rahm Emanuel is counting on Wall Street cash to
get the Democrats through the 2010 election. But fortunately the YRCW
workers had the backing of their union, the Teamsters.With
strategic input from Greenberger, the Teamsters were able to identify
whom they were up against. “We picked up intelligence that Goldman
(Sachs) was making markets (in CDS) and then we got some direct
evidence,” Teamster spokesman Ian Gold tells me. But Goldman was not
alone. “All of Wall Street” was trying to bring the company down.In
response, the union made it clear that they were prepared to name
names. “We would make it our mission to hold people accountable,” says
Gold. Following advice from Greenberger on strategy, Teamster President
James Hoffa wrote to relevant Senators, Congressmen, State Attorneys
General and regulators detailing how “Certain financial firms, have
been or are marketing and/or underwriting a strategy where bonds in
YRCW would be bought by investors with the intent of voting against the
exchange, thereby triggering a bankruptcy that would pay the investors
and possible other financial firms huge profits from the high CDS
payments which would be triggered by a YRCW bankruptcy or liquidation.
The profit from the YRCW CDSs would far outweigh losses from the failed
YRCW bonds.”Widely reviled as “the vampire squid” of the
financial world, Goldman proved unwilling to be charged with throwing
30,000 truckers out of work. The bank not only caved, but offered its
help. “As well it should have,” notes Greenberger. In a sudden
turnabout, the company began cooperating in an effort to recruit
bondholders who would do the right thing and vote for the
restructuring. Even so, time was running out.YRCW was forced to
postpone the crucial vote on the structuring no less than six times. By
December 30, Brigade Capital, a $5 billion New York hedge fund, was the
last major holdout. Only when the Teamsters prepared to picket
Brigade’s Park Avenue offices did the fund fold.Just this once,
a powerful union stopped the casino operators in their tracks.
Meanwhile, too many other workers are left simply to fulfill their role
as chips on the tables.
Andrew Cockburn is the co-producer of the feature documentary on the financial catastrophe American Casino. You can watch the trailer below.
Here in Canada, Diane Urquhart who noted that CDS were being sold at a large public pension fund, has just finished updating a detailed study on bankruptcies and employee claims pertaining to the Nortel case.
Unlike YRCW, Nortel employees do not have the backing of a powerful
union. Their fate lies in the hands of politicians who will hopefully
see that abuses of CDS can lead to severe economic fallout.
American Casino movie trailer from Leslie and Andrew Cockburn on Vimeo.
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The United States government along with Goldman Sachs et al, need to be sued for insider trading and collusion. First the Government allows these various investment bankers to rob the public blind thru abandoning prudent banking securities law at the request of these bankers (along with the usual well placed contributions to Republicans and Democrats alike). Then when these bankers bring the world to the brink, robbing people of their 401’ks, retirement plans and hard earned savings, the Government uses our tax funds purported for Social Security, ect to bail the same investment bankers out, AND THEN, as the Government gives these investment bankers the market play book, allows them to again rob the public blind thru bonuses and stock market manipulation. Everyone had the right to this insider information. Is this the United States of America or the Mob (or just God’s work)? They are hell bent on destroying our system with their brand of crony capitalism, and the American Public has been left holding the bag again.
The way I see it, there's a lot of big money that belongs to various cut throat entities floating around in banks, stocks, bonds, T-bills and all sorts of shit.
These people would not be happy to lose their money, like in Russia when they called up this billionaire mob boss and told him 'We're sorry but we lost all your money' and he went to their offices with a bunch of fellas and said 'No, you didn't' and they returned to him ALL his money.
Goldman Sachs may fly the black helicopters but it's merely a coinky dink that their moral conscience became insufferable thinking about all those poor gun and tire iron wielding union guys hiding in every alley, pizza joint, and street corner with wives and families out there in the coldest winter in 60 years here on planet earth. Those poor hard working guys. Goldman Sachs just had to help them somehow. Ghiardelli hot chocolate for everyone, on the house.
Can't wait till the Police find out their pension funds be missing, yo.
-MobBarley
Tataglia is a pimp. It was Barzini all along.
Earlier I make comments about jobs being saved. Should have said "jobs saved or created", my sincerest apologies to the author.
If CDS didn't exist, then 2 things would happen: 1- rather than buying CDS to protect against the downside, credit investors will simply sell the cash bonds and loans in the secondary market; 2- banks and other investors will buy less credit in the primary market if theres no way to hedge it. Credit would be less available. Period.
I'm totally okay with that as I think that no one should depend on credit (savings, people). But union sob stories are a joke and trying to paint the friggin Teamsters union (run by Jimmy Hoffa Jr...just to make the corruption of unions so much more obvious) as David vs. the Goldman Sachs Goliath is asinine.
This is an obvious case of trying to hitch your wagon to a movement that has absolutely nothing to do with your cause (particularly if you feel like I do that under this administration the union bailouts to come will make even AIG look puny). Cheap Politics by the unions or more pointedly by the author. The unions are just after the money; the author is the one painting this ridiculous picture.
The author, Andrew Cockburn, might have his own agenda (don't know, seems sensible to me). I am not against CDS but will remind you that for years we lived fine without them. As long as nobody abuses them, they can serve as important hedging instruments. The problem is that EVERYONE abused them, including pensions, and the whole system went crazy drunk on credit derivatives. As for unions making their share of mistakes, totally in agreement with you. One big mistake is that while they go after GS, they dropped the ball on pension governance and it will come back to haunt them. Much, much bigger fish or squid to fry than Goldman.
Can't wait for this baby to rally again,so I can load up on puts to fund my retired dumb Yrc truckin ass
Golden Rule---Do NOT do to others what you, yourself, would find distasteful if done to you. All the rest of law is commentary. This Golden Rule proscribes what is NOT to be done. It cannot be used to justify doing any act.
The Golden Rule Lite: "Do unto others what you would have them do unto you" can be, and is,used to justify any act via "clever strokes" and other trickery. It underlies the tricksters' tradecraft.
IMHO; Or so it seems; I think...
The charts were warning of a major sell off in early 2007 and so was I.
http://www.zerohedge.com/forum/market-outlook-0
And so, YRCW will restructure, and likely shed thousands of jobs anyway.
Goldman perhaps was denied today, but it'll get theirs tomorrow.
And Rahm will be laughing all the way to the Vampire, Squid bank (sorry, The Bank Holding Company.)
What's the Republicans' and Democrats' job #1 - get reelected, dammit! ANd that requires Wall St. cash. As long as that's the case - forget 'bout the reforms
There are so many unemployed right now that i'd bet that a lot of people who do the unionized jobs for a lot less than the minimum wages and benefits mandated by the union contracts. If the company goes bankrupt, the union contracts could get broken, providing more employment opportunities for the currently unemployed. Why are the employed union members more important than the unemployed?
Its pretty much a given that the players using CDS have far more talent and imagination at their disposal than the people writing regulations. Factor in the motivations of the two sides and its game, set, match.
Given the potentially devastating ends to which CDS may be abused, and the difficulty in uncovering such abuse, is it realistic to expect that their use may be effectively regulated without an impossible burden of ongoing oversight?
I am sorry,while most of the time I am on the opposing camp of Wall st. products,for once I find my self not in the sympathy camp for YRCW. It is the practice of cheap capital for big well known companies,which enables them to conduct ill adviced takeovers(promoted by the same Wall st.that later turn around and sell the cds betting on their bankruptcy),that is contributing to stagnant growth and teeting companies on the bankruptcy threshhold. Capital is a limited resource,and any efficient market capital allocation,would not have commited capital for the said company to conduct its failed takeovers. The idea of too big of a debt is actually safe because debtors are stuck with the indebted,is only enriching ceos who make more money with a bigger company,thinking that in a downturn,they would reach a conclusion with bond holders in restructuring the debt. Especially when we know that probably most of the debt is held by some incompetent(or competent but fraudulant)pension funds money managers,basically "other's people money".I wish we see more of these cases so just may be supid main st companies ceos can look a little bit more carefully at the next well dressed M&A Wall St. guy who steps into their office and ask him/her: So when are you going to start selling CDSs on our bonds?. Only a thought. However,with the way things are going,those ceos will probably proceed with the merger,and when things turn sour,they will buy those cdsc on their company's bonds. And that will be probably the next product for Wall St. I wonder why didn't Fuld and Thain buy CDSs on their respective companies?or may be they did. Who is asking after all?????
Laughable article. Where is the evidence the company deserves to be saved. How do we know that more jobs wouldn't be saved by a sale of the company in bankruptcy than the alternative? The unions are destroying companies, municipalities and states with their ridiculous defined benefit pensions and other egregious benefits. The reason why the unions are tring to save this company is to keep the gravy train coming. No other reason.
And a horribly run company all the way around.
Why don't the teamsters buy default swaps on all their companies and then go on national strike, forcing bankruptcy at their companies and then collect on the winning tickets (default swaps) from Wall Street, thus giving them financing to employ their members.
Irony would be sweeter.
Why can't the lawyers figure out how to enforce a massive 'defective product' recall?
You can rest assured that the teamsters made very clear to GS that they would pursue an out of court settlement.... In a alley, park, shopping mall, restaurant, golf course etc..
Thou Marla does not condone this method, i'll side with the 30,000 working stiffs and their new type of restraining order.
Nikki.
Publicity is what got Goldman to back down. Sites like this one. Goldman isn't worried about a bunch of union thugs. Think about it. What happened to Sergi. Yea, that's right, less than 24hrs the FBI had him in handcuffs. Nobone has really heard much of anything since have they? Goldman's thugs fly those black helicopters. Watch and see what happens. when the unions keep whining about wanting special tax treatment with health care. And while your at it keep an eye on what happens to those 30,000 jobs. It's my guess the union has bled that company so far into debt that, those jobs are history. Healthy Co's don't need CDS's. A good example of what happens when unions get involved is G.M., the postal service, the public school system. Just like the Government, everything the unions touch turns to shit.
Your ZeroHedge handle should be 'Threats', like that character from Dave Chappelle.
You guys are funny as hell. Try this, make us good GS et al, and we will not cave in your face and grind your wives and children up into dog food.
We're here to collect for the widow's and orphan's fund. You got a problem with that?
The whole system would be a lot more transparent and simple without Derivatives. The negatives far outweigh the positives. I have to agree with Warren Buffet "Derivatives are financial weapons of mass destruction"
Hedging risk is important. No matter what they trade, every serious portfolio manager hedges risks. I am not against CDS or derivatives; in fact, when used wisely, they can mitigate downside risk, which is crucial. Nonetheless, we need more transparency in OTC derivatives and we need to put a stop to abuses that routinely take place in the stock market, like naked short-selling to profit off CDS positions. Don't shoot the instruments; shoot the abusers.
Here's where I disagree with you, Mr. K.
Fundamentally, the entire securitization/credit derivatives process has been the fundmanetal price driver, which only a handful of economists truly grasp (Michael Hudson, Steve Keen, and several others). House, autos, and numerous other items have been priced out of the market at one time or the other due to the establishment of articifial markets, and the entity who sets the prices on these artificial markets (not the "market" itself) is the one who drives the prices...onwards and upwards.
You can't throw the baby out with the bathwater. Michael Hudson is right but I think it's wrong to say credit default swaps or securitization per se were the main problem of the financial system imploding. It became a huge Ponzi scheme, but the problem wasn't the concept of securitization or credit derivatives, the problem was the lax regulations, the mypopic pursuit of profits by unscrupulous sharks and pushing leverage to the nth degree (what the fuck did we need CDO cubed for???).
I know how these investment bankers think. All they care about is their big fat bonus; they couldn't care less about the banks they work for, the financial system, or the collateral damage they cause on the economy. Not a care in the world.
Leo, you reference Nortel, are you suggesting that bondholders take a place behind employees' claims?
Nortel was a monumental fraud. If it were up to me, I'd haul every single CEO, including John Roth, up to testify at the Standing Committee of Finance and answer some very tough questions. Pensioners and disabled workers shouldn't take a backseat to bondholders. That is simply wrong. I am aware of a few Canadian pension that directly bought CDS on Nortel bonds and indirectly owned them through their hedge fund holdings. This really stinks, and I wonder what would have happened if Nortel employees had a powerful union like the Teamsters backing them up on their pension and disability claims. I'm also wondering if the big hedgies didn't deliberately attack Nortel's stock to profit of their CDS positions. We will never know.
CDS, hedged positions etc are a red herring
It would seem that you are suggesting that a bondholder effectively has an obligation to the employees of the company. The car bailouts certainly put the bondholders along with the taxpayers behind the employees. Of course those who depended on those bonds as a source of income and the taxpayer that does not enjoy pension benefits are SOL.
Only when the Teamsters prepared to picket Brigade's Park Avenue offices did the fund fold.
Guess they were reluctant to have their heads bashed in.
Unions rock!
Uh, if you execute a CDS, the bondholder has to turn over his bond. The only thing that happens is that the ownership of the bond changes. The new owners will then vote on the plan. This article is B.S.
The main problem is whether this company makes sense and is profitable. If it is not profitable, then it should be bankrupted. Either reorganized, or liquidated.
Did the teamsters agree to wage and pension concessions? If not, this company will be back in bankruptcy court (like GM) in a few years.
Kindly name all the types of CDSes, halfwit?
DOJ should be charging the bondholders and Goldman Sachs venomous traitors to their country, under RICO, 18 USC. These folks could also be charged with "Treason".
What stopped the teamsters from proceeding to "name names" after stopping Goldman Sachs from destroying their livelihood?
Just like GM.
The teamsters killed the host it just doesn't know it's dead yet.
Goldman Sachs. The vultures in the food chain that come to pick the bones....
+1 There are no "good guys" in this tale.
The Obama Administration Wants to Annuitize Your 401k's and IRA's
Instead of "Yes We Can" the slogan for the Obama Administration should be "Over One Million Fat Cats Served." And the only difference in the Republicans is the breed of the fat cats whose desires they seek to fulfill. The public has lost its advocacy in Washington, and therefore the democratic republic is in peril.
http://tinyurl.com/ybd2poq
Leo, Leo, Leo...stop with the CDS bashing. Your comments clearly indicate a lack of rel understanding of the dynamics involved and blaming CDS for the lack of tender success is preposterous! Just look at DTCC volumes/open interest, think of the minimal basis involved and the risk, think of the decision to take assets rather than equity. Why oh why do you need to keep using the CDS market as your crutch?
To be clear, you normally have good stuff to say and while combining CDS, Teamsters, and YRCW (blue collar baby) may make for easy headlines, it really is nonsense.
One last note, in general, unless there is a significant negative cash-CDS basis then bondholders buying protection get no significant benefit from bankruptcy. As a pension fund guy, I am sure you appreciate the stickiness of investment decisions, the illiquidity of the bond market (especially distressed) and the benefit of a CDS contract to risk management.
Remember, in active bond management it ain't about spotting winners, it's about avoiding losers since the loss from losers far outweighs the gain from winners...CDS provide some semblance of control over this asymmetric distribution (no matter how many set-fire-to-your-neighbors-home-for-the-insurance analogies people throw out there - it ain't free to buy protection and mark-to-market and margin can BK you very quick - just look at RESCAP for an idea of pain).
Rant Over!
Hey, why don't we all sell multiple life insurance policies on some of your family members into the open market and then hint that maybe a car crash is about to happen? Sound like a good idea? Oh yeah, I forgot, we can't do that because THAT kind of insurance is a regulated business....
"Remember, in active bond management it ain't about spotting winners, it's about avoiding losers since the loss from losers far outweighs the gain from winners"
What was Ben Grahams number one rule? Don't lose.
Goldman Sachs seems to have taken this to heart, shame that we little people don't have the various advantages that they do.
It is as if Anon 188476 just read what a CDS is on wikipedia then regurgitates it as reason why the article is wrong without addressing any substance of the article.
It was not just a rant; it was a useless rant.
Do you think I'm an idiot? I know what CDS are and how they can be properly used to hedge a bond portfolio. I also know how hedge funds can manipulate stocks, short-sell them to profit off their CDS holdings. Read Diane Urquhart's paper very carefully and tell me what she's missing.
Please, Mr. K, don't humor these Anon. idiots. This poster obviously doesn't even understand the basic principles of securitization.
Wall Street was *not* a casino. In a casino, if you scam the house, you get the shit beat out of you. In a casino, if you go broke, you are done. In a casino, you can't bet -- for pennies on the dolllar -- that you are wrong, thus winning whether you were right or wrong.
Wall Street was a RACKET. A Scam. A grift. Calling it a casino implies that there was real risk, and as we've seen, the only risk was for anyone who expected the casino to act like a fucking casino.
Wall Street is a casino, and we're the patrons. Fortunately, we can keep on playing thanks to the debt they're willing to give us so we can stay in the game.
Major props and kudos. The term risk and bets simply don't apply, as anyone familiar (that is, has actually read Keynes) with Keynes realizes, uncertainty should always be differentiated from risk.
They were betting on uncertainty, never on risk.....
Correct. There were no catastrophic outcomes in the cards for the big banks*, which they damn well knew was the case when they strapped hundreds of trillions of dollars worth of financial explosives around the world's economy. They may have had uncertainty, but no fucking risk. Risk is for suckers on main street.
(* Well, except for one big bank. But the banksters had to light the fuse somehow. Sorry Lehman.)
I did enjoy this article tho... :-D