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Archive for the ‘Goldman Sachs’ Category

My brother-in-law pointed out this post on the WSJ blog and it made me laugh. It has a  fair bit of truth: John Q. Public does not understand the extent to which derivatives and banks support business as usual during good times.  I think the quote is from the movie “A Few Gold Men.”

You want the truth? You can’t handle the truth. Son, we live in a country with an investment gap. And that gap needs to be filled by men with money. Who’s gonna do it? You? You, Middle Class Consumer? Goldman Sachs has a greater responsibility than you can possibly fathom. You weep for Lehman and you curse derivatives. You have that luxury. You have the luxury of not knowing what we know: that Lehman’s death, while tragic, probably saved the financial system. And that Goldman’s existence, while grotesque and incomprehensible to you, saves pension funds. You don’t want the truth. Because deep down, in places you don’t talk about at parties, you want us to fill that investment gap. You need us to fill that gap.

We use words like credit default swaps, collateralized debt obligation, and securitization? We use these words as the backbone of a life spent investing in something. You use them as a punchline. We have neither the time nor the inclination to explain ourselves to a commoner who rises and sleeps under the blanket of the very credit we provide, and then questions the manner in which we provide it! We’d rather you just said thank you and paid your taxes on time. Otherwise, we suggest you get an account and start trading. Either way, we don’t give a damn what you think you’re entitled to!

 

Source here.

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On April 20, David Letterman read the Top Ten Goldman Sachs Excuses.  Oddly, the list includes all three of Goldman’s main arguments against the SEC charges.  See if you can guess which three (answers below):

(Link) Tuesday, April 20, 2010
Top Ten Goldman Sachs Excuses

10.Huh?

9.You’re saying “fraud” like it’s a bad thing

8.Planned on using money to buy everyone in America delicious KFC Double Down sandwich

7.Distraught over George Lopez’s move to midnight

6.We were framed by evil menswear company Goldman Slacks

5.Since when are financial institutions not allowed to screw their customers?

4.Hey sport, how much to make these questions go away?

3.America needed a villain both Republicans and Democrats can hate

2.Everyone we ripped off got an “I Got Cheated By Goldman Sachs” tote bag

1.Uhh, it’s Obama’s fault?

Answers: 9 and 5 (and a little 10).  Seriously.  The defenses so far center around the idea that not disclosing that short interest selected the mortgages to put into this particular synthetic CDO deal was not illegal. The argument is that their customers should be aware that they may be trying to screw them. And the company seems to be fine with what happened, as long as they were making a buck without doing something illegal (yet to be determined of course).

Question: what is better for Goldman, 1) claiming this was a terrible mistake, that Goldman seeks to always disclose any and all pertinent information to clients, and that the company will build stronger internal safeguards to protect its clients, or 2) the current strategy?  Question: what is better for America?

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The SEC’s suit against Goldman has clobbered the bank’s stock, and energized the public so as to shift the balance of power  away from the banks towards the government.  It is now much harder to oppose significant regulation because of the populist impact of the documentation of Goldman salesmen making like con men. This has raised a question from the House Oversight and Government Reform Committee Republicans. They ask of the SEC: was there “any sort of pre-arrangement, coordination, direction or advance notice” from the SEC to the Administration or Congressional Democrats. Justice should not be about PR, and while the Republicans are not contending that the enforcement of laws has been compromised, I guess the timing looks fishy. But fishy timing is a minor issue. This is a reminder that regulators are not independent of those who want more regulation or those who want less – they have bosses who will seek to use or badger them for their own political goals. Just maybe, this was the goal of the question in the first place.

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The SEC action against Goldman again has me asking whether the industry might not actually be better off with some serious regulation of adverse selection. Goldman sold an asset hand-picked to fail as if it were just the average security. The retail investors has lots of protection, and so does the consumer. Imagine buying a car, and then being sold one off the lot that the mechanic who just tuned the engine is betting will break down. And not being told this. If car dealers could do this, cars would be hard to sell (this is the model and application for which George Akerlof won the Nobel prize in economics). Adverse selection makes assets illiquid. The more disclosure is required in simple, transparent ways, the more easily assets can be traded. If Goldman can hide the adverse selection behind tens of thousands of pages of “disclosure,” surely it makes it harder for any bank to securitize?

And this need not be regulation. Why doesn’t some bank start a private initiative of this sort?  In the car market, dealers provide guarantees.  Suppose that one of Goldman’s competitors made a pledge and provided a money back guarantee on losses directly caused by a listed set of shady practices. Wouldn’t that that bank almost never have to pay off and wouldn’t it gain a huge amount of business? Is the industry colluding to keep things opaque so they all decrease liquidity and increase profits?  I thought innovations that provided greater liquidity were the source of securitization and the financial boom, but maybe not . . .

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According to ProPublica (source) “Magnetar worked with major banks, including Merrill Lynch, Citigroup, and UBS. At least nine banks helped Magnetar hatch deals. Merrill Lynch, Citigroup and UBS all did multiple deals with Magnetar. JPMorgan Chase, often lauded for having avoided the worst of the CDO craze, actually ended up doing one of the riskiest deals with Magnetar, in May 2007, nearly a year after housing prices started to decline. According to marketing material and prospectuses, the banks didn’t disclose to CDO investors the role Magnetar played.” And “Magnetar pressed to include riskier assets in their CDOs that would make the investments more vulnerable to failure. The hedge fund acknowledges it bet against its own deals but says the majority of its short positions, as they are known on Wall Street, involved similar CDOs that it did not own.” What differs from the Goldman-Paulson situation is: “Magnetar says it never selected the assets that went into its CDOs.”  Fine line between “pushing for what is riskier” and “selecting” but it might be the difference between basing selection on broad ratings/public information and private analysis of what assets were more likely to fail.  Also, I should note that

And I just see that this is what Bloomberg thinks the case hinges on: article here.

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Housing prices and securitization, and their collapses, are the central causes of the Great Recession, and the debate now rages over their deeper causes and, related and more forward-looking, how to reform the regulation of financial markets to avoid future meltdowns without killing the goose that lays the Goldman Eggs.  The latest news is the extent to which plain old securities fraud seems to have played a role. The headlines have recently been grabbed by the SEC’s indictment of Goldman Sachs and their role in selling Abacus 2007-AC1 (e.g. here). This deal was for one billion dollars. This is a lot of money, but far short of the amount of the financial crisis. Remember, the total losses on sub-prime and alt-A mortgages in early 2008 given pretty bad scenarios were around 500 billion, an amount much smaller than that lost in the stock market decline following the internet boom in the 1990’s. The problem was the location of the debt instruments – hidden in banks and being held by all sorts of institutions that should have been holding only very safe assets. That and the cast that synthetic CDO’s seem to have been created with adverse selection in mind – picked to consist of the worse MBS and then sold as if they were the average MBS (see Pro Publica on the Magnetar CDO’s here). Some buyers did not check whether or not the dice were loaded.

But the important fact to keep in mind as the legal saga unfolds is that, so far, while one should always and everywhere prosecute securities fraud, this is chump change relative to the real causes of the financial crisis and should not be the primary focus of the new financial architecture. Although there is an important caveat. There may be many more instances of fraudulent sales of MBS. If this is the case, do we need to try to protect large financial institutions that manage other people’s money?  Are they really so unsophisticated as to get up and dance just because everyone else is? I hope not.

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An impish grin spreads across [Goldman CEO Lloyd] Blankfein’s face. Call him a fat cat who mocks the public. Call him wicked. Call him what you will. He is, he says, just a banker “doing God’s work” — The Sunday Times, November 8, 2009

Goldman Sachs is in the headlines again, this time for a transaction that helped the Greek government report artificially low debt. When you ponder this case, it is hard not to think about Enron.

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