ABSTRACT
The Treasury department sold most of its securities to a handful of large investment houses such as Merrill Lynch and Goldman Sachs who, in turn, sold the securities to banks, insurance companies, and pension funds. This provided an opportunity for smaller dealers like ESM Government Securities, Inc. (ESM) to enter the market. In addition to buying government bonds for resale, ESM also engaged in speculative trades—buying securities with the hope that their value would increase. The ESM’s ability to continue in business depended on Novick’s ability to hide the losses. Novick made ESM look profitable by recording fictitious transactions with a related entity, ESM Financial Group, Inc. The ESM’s collapse led directly to the failure of Cincinnati–based Home State Savings & Loan. The tax returns showed that ESM had been insolvent since 1977, but Hersh never questioned his firm’s clean audit opinions on ESM’s financial statements.
