SEC Charges Goldman Sachs With Fraud(sec.gov)
sec.gov
SEC Charges Goldman Sachs With Fraud
http://www.sec.gov/news/press/2010/2010-59.htm
27 comments
These are the civil charges, it will be interesting to see if there are criminal charges. A civil verdict against GS just costs money. A felony conviction would destroy the bank, like it did to Arthur Andersen.
The Times article says that the SEC has been investigating those deals for months. Has this been in the news and I just missed it?
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Goldman's activity sounds a lot like the trade that UBS, Merrill, Citi, and 6 other IBs helped Magnetar perform. http://www.propublica.org/feature/all-the-magnetar-trade-how...
Thanks for linking to a great story. The documents that they reference are part of a project I'm working on (DocumentCloud). Here's a direct link to Magnetar's response to the investigation:
http://www.propublica.org/documents/item/magnetars-responses...
http://www.propublica.org/documents/item/magnetars-responses...
FYI this was featured on This American Life last week:
http://www.thisamericanlife.org/radio-archives/episode/405/i...
http://www.thisamericanlife.org/radio-archives/episode/405/i...
Goldman was in a similar role to UBS, Merrill, Citi, etc., and Magnetar was in a similar role to Paulson & Co. I think that's probably what you meant, but just wanted to clarify.
The difference is that these were synthetic CDOs so they didn't generate more demand for residential mortgage backed securities, rather they piggybacked off pre-existing ones. This likely did nothing to expand the bubble.
They didn't directly generate more demand, but the existence of deals like this generated a market for the low quality bonds in deals, which made the hardest part of structuring those deals much easier.
So no, it didn't directly expand the bubble. But this kind of activity indirectly did so. (Though this particular deal came late enough that the bubble was about to collapse anyways.)
So no, it didn't directly expand the bubble. But this kind of activity indirectly did so. (Though this particular deal came late enough that the bubble was about to collapse anyways.)
I'm not sure this is true. If the packagers of the non-synthetic CDOs realized no benefit from Synthetic CDOs being made off of theirs why would they have incentive to cater to the Synthetic CDO creators.
The market for synthetic CDOs like this only arose because the demand for low quality debt exceeded the available supply. Evidence that demand exceeds supply is encouragement to create more low quality debt.
So no, it is not a direct connection. But it is indirect encouragement.
So no, it is not a direct connection. But it is indirect encouragement.
I don't think that makes much sense. Consider a music analogy: samplers and sequencers didn't kill demand for new music. If anything, they spawned a whole new sub-industry dedicated to simply finding and selling new interesting snippets of sound.
Doesn't anyone else think this is a just a short-term measure to appease public opinion? It was obvious something like this had to happen, there is still a lot of blame to be attributed. Alas, it's the easy way out. Of course, some of the things that happened have to be brought to court, as there definitely was at least misrepresentation, if not fraud, involved.
That doesn't change the fact that there are much larger things amiss.
1. Regulators who are ill-suited and ill-willing to enforce existing standards, not to mention any kind of additional authority that gets bestowed on them soon. There are numerous cases of whistles rightly being blown where regulators didn't do anything. Selective enforcement is worse than no enforcement at all.
2. Too much governmental interference in markets and backstopping of market actors to let markets function properly - but blame it all on the markets afterwards and cover up all kinds of fraud at Fannie/Freddie. This encourages fraud in markets which the government kindly looks down upon (it's housing, after all)
3. No consistent policy regarding bail-outs. If you bail-out market actors, you have to split up 'too big to fail'-institutions; otherwise it's just a game of waiting for the next tax-payer-sponsored bail-out.
That doesn't change the fact that there are much larger things amiss.
1. Regulators who are ill-suited and ill-willing to enforce existing standards, not to mention any kind of additional authority that gets bestowed on them soon. There are numerous cases of whistles rightly being blown where regulators didn't do anything. Selective enforcement is worse than no enforcement at all.
2. Too much governmental interference in markets and backstopping of market actors to let markets function properly - but blame it all on the markets afterwards and cover up all kinds of fraud at Fannie/Freddie. This encourages fraud in markets which the government kindly looks down upon (it's housing, after all)
3. No consistent policy regarding bail-outs. If you bail-out market actors, you have to split up 'too big to fail'-institutions; otherwise it's just a game of waiting for the next tax-payer-sponsored bail-out.
No, it doesn't solve all the deep-seated problems in our financial/political system. But it's still good news, because:
- Court cases tend to make public previously secret information. Witness the recent publicity of banks under-reporting their debt levels. That pretty much came out of the Lehman bankruptcy proceedings. Lehman's accounting tricks came out in court, and people started wondering if other banks were still doing it.
- It keeps the issue in the spotlight so that politicians feel pressure to do something about it. Perhaps this will help strengthen the Senate's reform bill.
- The SEC is finally doing its job again! It's a small step, yes, but it's a start. Go Schapiro!
- Court cases tend to make public previously secret information. Witness the recent publicity of banks under-reporting their debt levels. That pretty much came out of the Lehman bankruptcy proceedings. Lehman's accounting tricks came out in court, and people started wondering if other banks were still doing it.
- It keeps the issue in the spotlight so that politicians feel pressure to do something about it. Perhaps this will help strengthen the Senate's reform bill.
- The SEC is finally doing its job again! It's a small step, yes, but it's a start. Go Schapiro!
Totally agree - this feel like "security theatre" at the airport - except it's SEC theatre.
The SEC has largely failed in it's mission to prevent things like this happening in the first place - going back and arguing over whether it was technically fraud or not with the benefit of 20/20 hindsight isn't going to prevent stuff like this from happening again.
People get sold bad investments all the time - the onus is on you as the buyer to make good decisions and do your research. If you feel it's fraud, the courts are available to you as a private party. The SEC doesn't add any benefit to this equation that I can see. It does perhaps add one negative to the equation by encouraging people to take these investments "on faith" because they believe (incorrectly) that the SEC is effective at watching out for them.
The SEC has largely failed in it's mission to prevent things like this happening in the first place - going back and arguing over whether it was technically fraud or not with the benefit of 20/20 hindsight isn't going to prevent stuff like this from happening again.
People get sold bad investments all the time - the onus is on you as the buyer to make good decisions and do your research. If you feel it's fraud, the courts are available to you as a private party. The SEC doesn't add any benefit to this equation that I can see. It does perhaps add one negative to the equation by encouraging people to take these investments "on faith" because they believe (incorrectly) that the SEC is effective at watching out for them.
This whole problem had two starting points.
1. The repeal of the Glass-Steagal act. This allowed banks to undertake the business of commercial banks, investment banks, and insurance agencies. That means that, banks were able to build these complex derivatives, use money from people's savings accounts to partake in risky investments, and then insure them with high standards. All from under one roof.
2. The investment firms went public. This was a fundamental change in the 80's where Goldman, Morgan Stanley, and many others where they became officially owned by the public. That ment that the risk of all their losses was owned by the shareholders as well as profits. Risky investing became the norm, because if you lost a ton of money for Goldman, you may have gotten chewed out or lost your job. But if you made a ton of money for Goldman, you had a very large bonus waiting for you.
Now this mindset has just grown out of hand. It's greed that is driving our financial center, Wall Street.
1. The repeal of the Glass-Steagal act. This allowed banks to undertake the business of commercial banks, investment banks, and insurance agencies. That means that, banks were able to build these complex derivatives, use money from people's savings accounts to partake in risky investments, and then insure them with high standards. All from under one roof.
2. The investment firms went public. This was a fundamental change in the 80's where Goldman, Morgan Stanley, and many others where they became officially owned by the public. That ment that the risk of all their losses was owned by the shareholders as well as profits. Risky investing became the norm, because if you lost a ton of money for Goldman, you may have gotten chewed out or lost your job. But if you made a ton of money for Goldman, you had a very large bonus waiting for you.
Now this mindset has just grown out of hand. It's greed that is driving our financial center, Wall Street.
Also known as the Gramm-Leach-Bliley Act. http://en.wikipedia.org/wiki/Gramm–Leach–Bliley_Act
That Gramm guy is Phil Gramm, who later went on to say that the recession was all in our head's and that we're a nation of whiners. http://www.huffingtonpost.com/2008/07/10/mccain-adviser-amer...
He also happened to be McCain's chief economic advisor and a co-chair of McCain's national campaign during the 2008 Presidential campaign. http://money.cnn.com/2008/02/18/news/newsmakers/tully_gramm....
Too bad we elected a socialist to the White House. Think how much better we'd be off with McCain and Palin right now! Goldman Sachs would be just fine! The economy would be great! Phil Gramm would be vindicated!
Or we'd be living in the economic equivalent of the Weimar Republic right now. Yeah, that's probably more likely.
That Gramm guy is Phil Gramm, who later went on to say that the recession was all in our head's and that we're a nation of whiners. http://www.huffingtonpost.com/2008/07/10/mccain-adviser-amer...
He also happened to be McCain's chief economic advisor and a co-chair of McCain's national campaign during the 2008 Presidential campaign. http://money.cnn.com/2008/02/18/news/newsmakers/tully_gramm....
Too bad we elected a socialist to the White House. Think how much better we'd be off with McCain and Palin right now! Goldman Sachs would be just fine! The economy would be great! Phil Gramm would be vindicated!
Or we'd be living in the economic equivalent of the Weimar Republic right now. Yeah, that's probably more likely.
This is exactly like an arsonist burning down a building to collect insurance. It's plain old fraud.
Upvoted. But there's a difference - the arsonist is only allowed to get an insurance policy on buildings he owns.
It's more like an arsonist taking out insurance policies on other people's buildings, THEN burning them down.
Except we don't allow crazy antics like that with insurance. And the insurance companies have to keep money reserved to pay out claims. And it has to go on their balance books.
So what we have here is "a building just burned! Oh crap, who has insurance on that? Who sold it? Who's going to go broke? Who shouldn't we lend money to? Nobody knows!"
It's more like an arsonist taking out insurance policies on other people's buildings, THEN burning them down.
Except we don't allow crazy antics like that with insurance. And the insurance companies have to keep money reserved to pay out claims. And it has to go on their balance books.
So what we have here is "a building just burned! Oh crap, who has insurance on that? Who sold it? Who's going to go broke? Who shouldn't we lend money to? Nobody knows!"
It's more like a doctor being able to take out a $M life insurance policy on a patient before he operates!
Or, while we're on the analogy train, a doctor taking out a $MM life insurance policy on a terminal patient before he performs an operation (which will in no way help the patient live longer), collecting the patient's health insurance dollars along the way.
I've always viewed CDO's as being similar to "pointer-based" securities. GS sold the value of the pointer rather than the value of the data at the location.
Like any memory crash, when the value at the location is wiped out, any pointer to it is useless.
Shorting the value of the pointer makes sense when you know ahead of time that the value at the location will soon be clobbered.
Like any memory crash, when the value at the location is wiped out, any pointer to it is useless.
Shorting the value of the pointer makes sense when you know ahead of time that the value at the location will soon be clobbered.
I particularly enjoyed this quote from Tourre (the named VP defendant), talking about how they have to move fast:
More and more leverage in the system, The whole building is about to collapse anytime now…Only potential survivor, the fabulous Fab[rice Tourre]…standing in the middle of all these complex, highly leveraged, exotic trades he created without necessarily understanding all of the implications of those monstruosities!!!
Fabulous Fab indeed!
More and more leverage in the system, The whole building is about to collapse anytime now…Only potential survivor, the fabulous Fab[rice Tourre]…standing in the middle of all these complex, highly leveraged, exotic trades he created without necessarily understanding all of the implications of those monstruosities!!!
Fabulous Fab indeed!
Will they have the guts to fine Goldman even one millionth of the amount they earned through the fraud? I seriously doubt it. For all intents and purposes, Goldman Sachs IS the United States economy.
Goldman is so powerful. I'm shocked the SEC is brave enough to do this.
Let's not count the chickens before they hatch. The SEC is known for filing highly public cases just to get pressure off their a. This case might very well be discarded 6mo down the line and be reported in a footnote in the last page of the WSJ business section.
Yea..the unfortunate and unjust reality sets in
this is pretty instructive:
CARY LEAHEY, SENIOR MANAGING DIRECTOR, DECISION ECONOMICS, NEW YORK:
"The SEC has come out swinging, going after the biggest, most recognized name on Wall Street with regard to alleged abuses in the credit derivatives market. This will be a difficult case to prove, particularly to the laymen on the jury, as even supposed experts on Wall Street with years of experience in this area are still scratching their heads trying to figure out who did what to whom and when."
CARY LEAHEY, SENIOR MANAGING DIRECTOR, DECISION ECONOMICS, NEW YORK:
"The SEC has come out swinging, going after the biggest, most recognized name on Wall Street with regard to alleged abuses in the credit derivatives market. This will be a difficult case to prove, particularly to the laymen on the jury, as even supposed experts on Wall Street with years of experience in this area are still scratching their heads trying to figure out who did what to whom and when."
1) Create hand-picked collections of assets a favored investor wants to bet large sums against.
2) Sell those packages as investments to other clients, with clear statements that they were chosen by independent parties.
Doesn't sound too difficult to prove to me.
2) Sell those packages as investments to other clients, with clear statements that they were chosen by independent parties.
Doesn't sound too difficult to prove to me.
Rabobank (NL) has an active civil suit against Merill Lynch (now owned by Bank of America). According to their attorney, ML employed the same mechanism as GS on behalf of Magnetar (discussed below).
http://www.businessweek.com/news/2010-04-16/merrill-lynch-us...
http://www.businessweek.com/news/2010-04-16/merrill-lynch-us...
The great american bubble machine. Excellent article about GS by Matt Taibbi on the Rolling Stones magazine:
http://www.rollingstone.com/politics/story/29127316/the_grea...
This American Life had a program on this last weekend: http://www.thisamericanlife.org/radio-archives/episode/405/i...
I think breach in http://en.wikipedia.org/wiki/Chinese_wall in GS is responsible for the subprime crisis
It'll be interesting to see which political campaigns Goldman contributes to in this year's election.
What everybody here is forgetting, is that this is a civil suit. Why not charge them criminally?
Bottom line, this has been staged to defang them in front of next weeks house hearings on banking reform. It's theater. That's not to say it might not be true, but if you really think the administration wants to clean things up, ask why this is a civil action.
Bottom line, this has been staged to defang them in front of next weeks house hearings on banking reform. It's theater. That's not to say it might not be true, but if you really think the administration wants to clean things up, ask why this is a civil action.
The SEC lacks authority to bring criminal prosecutions. The DoJ has to do that, although the SEC may assist them. Not sure what role they can or do play in criminal proceedings brought by the State of New York.
Perfect example of the deck being stacked against the little guy
would anyone know what would be the fall out from these charges?
I'll hazard a guess (and it is no more than that - IANAL), based on the complaint and the cited statute:
- about $2 million in direct fines
- return of the $15-20 million GS made in brokerage fees
- return of any bonuses made by 'Fab' Tourre
- 'equitable relief...appropriate or necessary for the benefit of investors'
This last is extremely open-ended and the nature of such relief is up to the court. It can take many possible forms and I have no idea what the norm is in such cases, only that it is technically complex.
It does strike me, however, that the complaint specifically mentions two investors; IKB, a german bank, lost $150m; and ACA (who may or may not be considered 'investors' in this context) fell into the arms of Royal Bank of Scotland, who ended up paying ~$860 million to GS, most of which went to Paulson & co. This figure is mentioned explicitly in the complaint.
Now, RBS got into trouble themselves (partly as a result of this), and at this point are ~80% owned by the British government. Fabrice Tourre, the Goldman VP at the center of the complaint, currently an executive director of Goldman Sachs International, based in London.
This coincidence might or might not have a bearing on the outcome. Knowing the British tabloid press, I'm willing to bet that at least one of tomorrow's front pages will feature a picture of Mr Tourre with a caption along the lines of 'have you seen this man?'
- about $2 million in direct fines
- return of the $15-20 million GS made in brokerage fees
- return of any bonuses made by 'Fab' Tourre
- 'equitable relief...appropriate or necessary for the benefit of investors'
This last is extremely open-ended and the nature of such relief is up to the court. It can take many possible forms and I have no idea what the norm is in such cases, only that it is technically complex.
It does strike me, however, that the complaint specifically mentions two investors; IKB, a german bank, lost $150m; and ACA (who may or may not be considered 'investors' in this context) fell into the arms of Royal Bank of Scotland, who ended up paying ~$860 million to GS, most of which went to Paulson & co. This figure is mentioned explicitly in the complaint.
Now, RBS got into trouble themselves (partly as a result of this), and at this point are ~80% owned by the British government. Fabrice Tourre, the Goldman VP at the center of the complaint, currently an executive director of Goldman Sachs International, based in London.
This coincidence might or might not have a bearing on the outcome. Knowing the British tabloid press, I'm willing to bet that at least one of tomorrow's front pages will feature a picture of Mr Tourre with a caption along the lines of 'have you seen this man?'
GS is a good buy today.
I disagree. If you want to invest, you have to look at your investments in the context of your entire portfolio. Money invested in GS is money that can't be invested elsewhere. There's a good chance that GS will trade down or sideways over the next month. During that time, you could have invested in something with better short term prospects.
The following blog post goes in to more depth on this idea, with Massey Energy's recent mine explosion as an example.
http://www.fundmymutualfund.com/2010/04/massey-energy-mee-st...
The following blog post goes in to more depth on this idea, with Massey Energy's recent mine explosion as an example.
http://www.fundmymutualfund.com/2010/04/massey-energy-mee-st...
Too bad VCs haven't figured out a way to short startups yet.
1. Sell doomed products to stupid clients
2. Short those products
3. Profit X 2 !
3a. If fail, have taxpayer pay for it
2. Short those products
3. Profit X 2 !
3a. If fail, have taxpayer pay for it
3a. If fail, have taxpayer pay for it
That's the most disturbing part of all this: profits are kept private, but losses are socialized.
It's the equivalent of "heads, I win; tails, you lose".
That's the most disturbing part of all this: profits are kept private, but losses are socialized.
It's the equivalent of "heads, I win; tails, you lose".
"Corporation, (Noun). An ingenious device for obtaining individual profit without individual responsibility." - Ambrose Bierce
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You'd think banks paid no tax.
When banks profit, society gets its share of those profits. Taxes, spending by the organization, spending by employees, their taxes. The government bailed out Detroit, why's this any different?
When banks profit, society gets its share of those profits. Taxes, spending by the organization, spending by employees, their taxes. The government bailed out Detroit, why's this any different?
The government should have allowed the weakest auto company to fail. Instead it pumped in many times its total worth to prop it up.
How does that make sense? Coercing the rest of us to take on debt so they can continue an enterprise that doesn't make economic sense?
You're absolutely right when you say there's no difference between subsidizing banks and auto companies. Both actions were wrong.
How does that make sense? Coercing the rest of us to take on debt so they can continue an enterprise that doesn't make economic sense?
You're absolutely right when you say there's no difference between subsidizing banks and auto companies. Both actions were wrong.
Not sure why you inferred that anyone above supported the auto company bailouts (or the airline bailouts, etc.).
Taxes are not paid in exchange for bailouts... at least if they are tell that to all the other companies that have failed over the years and not had the government swoop in to help.
Taxes are not paid in exchange for bailouts... at least if they are tell that to all the other companies that have failed over the years and not had the government swoop in to help.
That's true, but the assertion that that there's no contribution to the economy and society from bank profits is a false one.
I don't disagree with that, but simply asserting they pay taxes doesn't prove anything. If they more or less stole the money, paying back 20% is hardly contributing. Not saying they did, the verdict is still out there, but just pointing out that taxes alone don't say much.
There really isn't that big of one. A bank is an entity that uses an unsustainable business plan, fractional reserve banking, and has to rely on a federal subsidy (FDIC insurance) to make it work.
They are getting a subsidy to mindlessly arbitrage the yield curve and profit by making riskier loans than they would normally be capable of making. Fractional Reserve lending is NOT necessary for a financial intermediary to function. Look at hedge funds or VC firms. They are investing the amount of money they have received from investors and are not allowed to invest 10X they amount they have without raising that extra amount from somewhere.
Banks are not doing anything intelligent that adds significant value, the majority of their profits come from mindlessly arbitraging the yield curve due to a federal subsidy.
They are getting a subsidy to mindlessly arbitrage the yield curve and profit by making riskier loans than they would normally be capable of making. Fractional Reserve lending is NOT necessary for a financial intermediary to function. Look at hedge funds or VC firms. They are investing the amount of money they have received from investors and are not allowed to invest 10X they amount they have without raising that extra amount from somewhere.
Banks are not doing anything intelligent that adds significant value, the majority of their profits come from mindlessly arbitraging the yield curve due to a federal subsidy.
I do not disagree with your tax argument in theory, and I'm all for capitalism and free enterprise.
If i-banks like GS want to pay large salaries and bonuses to their employees, that is fine by me, as long as they also accept the negative consequences of the risks they take.
I'm also not a fan of the automobile bailouts; to paraphrase Plato, two bailouts do not make a right.
If i-banks like GS want to pay large salaries and bonuses to their employees, that is fine by me, as long as they also accept the negative consequences of the risks they take.
I'm also not a fan of the automobile bailouts; to paraphrase Plato, two bailouts do not make a right.
"The government bailed out Detroit, why's this any different?"
Here are some differences: - The bank bailouts are turning out to be at least a 100 times as expensive as the Detroit bailout. Detroit is not even worth mentioning in the same breadth as the banks.
- In the detroit bailout, most people that were responsible for the failure did not benefit. CEOs were sacked, all equity holders lost their money, debt holders lost most of their money too. In the bank case most people responsible kept their jobs and many of them are now back to getting multi million dollar bonuses (supported by government loans). Some banks wiped out their equity holders, some banks had only temporary drops in stock price. But pretty much all of the bank debt was guaranteed by the government.
Here are some differences: - The bank bailouts are turning out to be at least a 100 times as expensive as the Detroit bailout. Detroit is not even worth mentioning in the same breadth as the banks.
- In the detroit bailout, most people that were responsible for the failure did not benefit. CEOs were sacked, all equity holders lost their money, debt holders lost most of their money too. In the bank case most people responsible kept their jobs and many of them are now back to getting multi million dollar bonuses (supported by government loans). Some banks wiped out their equity holders, some banks had only temporary drops in stock price. But pretty much all of the bank debt was guaranteed by the government.
Can you and others please stop implying that people are getting paid bonuses directly out of taxpayer money/loans? It's completely false.
They are getting bonuses because of the loans. The issue whether they are getting the money directly out of the loans or not is impossible to decide because once the bank gets the money it treats it like any other money.
But if the loans did not exist, many of these people would not be getting these bonuses either because their employers would not exist either, or because their employers would not have sufficient capital to generate the profits from which the bonuses come.
But if the loans did not exist, many of these people would not be getting these bonuses either because their employers would not exist either, or because their employers would not have sufficient capital to generate the profits from which the bonuses come.
No, it's not impossible, they've paid back the loans, so it's not coming out of that money, period. Goldman in particular:
a) didn't want the money, they were forced to take it
b) paid it back as soon as they were allowed
So yes, they would have gotten those bonuses regardless, and no, you can't say they would have failed without it.
So yes, they would have gotten those bonuses regardless, and no, you can't say they would have failed without it.
This has been covered million time before, but even though Goldman repaid the tarp loans, they are still getting loans through the fed since they decided to buy a consumer bank for that exact purpose.
Also, the bailout of AIG was really a bailout of Goldman. In other words, AIG got bailed out so that they could pay Goldman their enormous losses on securities that they bought from Goldman.
Also, the bailout of AIG was really a bailout of Goldman. In other words, AIG got bailed out so that they could pay Goldman their enormous losses on securities that they bought from Goldman.
The bailout of AIG helped quite a few others as well.
Know of any good reading on the consumer bank point?
Know of any good reading on the consumer bank point?
The broken window strikes again.
That is true in many aspects of the crisis, sadly. However, in this case, there is no public loss to speak of from the transaction itself. Rather, it served to further inflate the bubble that ultimately triggered the crisis.
Goldman did receive TARP funds, and used those funds to correct losses from maneuvers like this one. Regardless of whether or not Goldman Sachs considers that it paid back all of its TARP loans with interest, having the government prop up the company with a bottomless loan made of taxpayer money for any period of time is a public loss. It practically sponsors bad behavior on the part of Goldman and other large financial firms, because there is now a precedent for the government saving them from bearing the consequences of massively horrific choices as long as they would also cause horrific potential damage to the entire economy. The moral hazard incurred by these sort of transactions in light of the government's response is a significant and unresolved risk.
You should read some of the actual accounts of how/why GS took the tarp funds. Paulson basically told them to take it, or the government would suck up all of their oxygen.
Goldman received aid from the taxpayer through the AIG bailout. AIG was responsible for the insurance and CDSes that covered any bad assets at Goldman. Had AIG gone under, Goldman would not have gotten paid for those CDSes that were on derivatives of bad mortgages, and would have had a few billion in losses in 2008-2009. Maybe not lethal damage, but it's on the back of the taxpayer that Goldman has been profitable these last 2 years.
Gotta second this. I know more than a couple people at Goldman, and they weren't happy about being made to take the funds, and were especially unhappy that they've been vilified for it, when they didn't want it. It's kind of annoying reading all the uninformed mob anger directed at them.
The media has made them into a scapegoat out of them in particular, and for some reason, everyone is following along.
The media has made them into a scapegoat out of them in particular, and for some reason, everyone is following along.
Please share them, I'd love to.
Yes. This renews my fury about the bank bailouts.
You know what's REALLY too big to fail? Capitalism. And rewarding market failure is the surest way to take it down.
You know what's REALLY too big to fail? Capitalism. And rewarding market failure is the surest way to take it down.
Exactly! We should file suit against the US Treasury for propping up Goldman and others with our tax money. They defrauded us by forcing us bankroll the bailout while providing limited upside for the massive risk we took.
I think the real loss to the public occurred when AIG was bailed out and GS got paid over $10 billion they would not have gotten if AIG had been allowed to fail.
And it should have been allowed to fail in my opinion. There would have been a lot of pain and other failures, but those are the risks of playing these games.
If you protect people from all of the ultimate costs of doing things that are rewarding in the short term most of the time, but incredibly risky overall, they will keep doing them!
And we will all pay a huge price for these parasites eventually if we don't wake up and stop subsidizing them.
And it should have been allowed to fail in my opinion. There would have been a lot of pain and other failures, but those are the risks of playing these games.
If you protect people from all of the ultimate costs of doing things that are rewarding in the short term most of the time, but incredibly risky overall, they will keep doing them!
And we will all pay a huge price for these parasites eventually if we don't wake up and stop subsidizing them.
Letting a massive insurance company fail, and then letting dependant, blameless companies explode in a wave of secondary explosions throughout the economy as a result is not good national-level policy. There's a reason the govt. didn't let that happen, and it's not that they wanted to bail out their buddies.
I'm for criminal charges for those that committed fraud, investigations, more regulation, and so forth, but this "We should have let them crash and burn, damn the consequences" idea was not likely the best course of action, though it seems to be a pretty common attitude for some reason.
I'm for criminal charges for those that committed fraud, investigations, more regulation, and so forth, but this "We should have let them crash and burn, damn the consequences" idea was not likely the best course of action, though it seems to be a pretty common attitude for some reason.
Its not about blame. Its about taking risks and suffering the consequences.
When you pick a vendor, a bank or insurance company, there's a chance that entity will fail. You're the one who has to judge that. It's not the government's job to protect you from failing to do that, especially when others took the time to assess the vendor and decided to use a more stable, smarter company.
And its certainly not the job of government to take the consequences from those that misjudged their bank or insurance company and assign those consequences to others that had nothing to do with the decision.
I am not "damning the consequences". The consequences are unavoidable. Its just a question of who should pay for them. Do we leave the consequences with those making the decisions that led to them? Or do we dump them off on everybody else?
When you pick a vendor, a bank or insurance company, there's a chance that entity will fail. You're the one who has to judge that. It's not the government's job to protect you from failing to do that, especially when others took the time to assess the vendor and decided to use a more stable, smarter company.
And its certainly not the job of government to take the consequences from those that misjudged their bank or insurance company and assign those consequences to others that had nothing to do with the decision.
I am not "damning the consequences". The consequences are unavoidable. Its just a question of who should pay for them. Do we leave the consequences with those making the decisions that led to them? Or do we dump them off on everybody else?
With regard to "I am not "damning the consequences". The consequences are unavoidable."
This is not a zero-sum game within the US. Some courses of action have much larger consequences overall than others, and the one you are advocating seems likely to have had a relatively high overall cost to the system of the economy compared to the one the govt. chose, at least in the short term.
The government has been trying to keep the ship sailing as smoothly as possible, as is their general responsibility, despite the unsavory nature of bailing out some of those responsible. I believe that was viewed as a necessary evil.
This is not a zero-sum game within the US. Some courses of action have much larger consequences overall than others, and the one you are advocating seems likely to have had a relatively high overall cost to the system of the economy compared to the one the govt. chose, at least in the short term.
The government has been trying to keep the ship sailing as smoothly as possible, as is their general responsibility, despite the unsavory nature of bailing out some of those responsible. I believe that was viewed as a necessary evil.
How many companies got AIG to insure there junk mortgages though fully expecting them to default? Wouldn't exactly call them blameless.
Except for corporation and income tax.
If I read it correctly, it's not that they sold doomed products to stupid clients.
It's that they represented the products as awesome, when they knew they were structured specifically to be doomed.
It's that they represented the products as awesome, when they knew they were structured specifically to be doomed.
Its the job of Goldman's investment bank to broker product not take one side or the other. It didn't matter to Goldman if they were "doomed" or not (in fact when Goldman structured them Goldman may have even thought Paulson & Co were the fools) they were trying to find pairs of parties willing to take bets against each other and make a commission.
"The scandal here is not that Goldman was short the subprime market at the same time as marketing the Abacus deal. The scandal is that Goldman sold the contents of Abacus as being handpicked by managers at ACA when in fact it was handpicked by Paulson; and that it told Abacus that Paulson had a long position in the deal when in fact he was entirely short."
http://blogs.reuters.com/felix-salmon/2010/04/16/goldmans-ab...
http://blogs.reuters.com/felix-salmon/2010/04/16/goldmans-ab...
This. I've undergone FSA mandated financial crime training while working for several financial institutions and lying about positions held in order to make a sale is the only thing that's clearly illegal here.
There's a very thin line between what's legal and what's illegal, and the reason banks have compliance departments is to check over things which are borderline. In a lot of cases not only can the bank be fined but the individuals involved can also face jail time. But with borderline issues typically if they're done in good faith (full honestly, going through compliance departments) the regulatory bodies don't get too involved because they don't want to scare people away from the large number of legitimate activities which are beneficial to the system but are borderline.
However in the case where someone lied outright (presumably without the knowledge of their compliance department) that's a much clearer cut-case for prosecution. It's deception for the purpose of making money, and saying "I didn't know it was illegal" doesn't wash, because it obviously is.
There's a very thin line between what's legal and what's illegal, and the reason banks have compliance departments is to check over things which are borderline. In a lot of cases not only can the bank be fined but the individuals involved can also face jail time. But with borderline issues typically if they're done in good faith (full honestly, going through compliance departments) the regulatory bodies don't get too involved because they don't want to scare people away from the large number of legitimate activities which are beneficial to the system but are borderline.
However in the case where someone lied outright (presumably without the knowledge of their compliance department) that's a much clearer cut-case for prosecution. It's deception for the purpose of making money, and saying "I didn't know it was illegal" doesn't wash, because it obviously is.
In the process of structuring and pairing willing parties they just forgot to mention one party had privileged information about what the product actually was. That is not what a supposedly neutral broker does.
"Sure, sure, we'll take your horse bets. You think the horse will win, this guy thinks the horse will lose. Place your bets and we keep the fees.
Oh, you lost? Too bad. Yeah, we forgot to tell you that the other guy knew your horse was poisoned. Yeah. He poisoned it himself. We saw him do it - we helped him, really. Oh well.
Security guards? Oh, they work for the other guy. He pays 'em. Tough luck for ya, though, kid, real tough luck.
You win some, you lose some, eh?"
Oh, you lost? Too bad. Yeah, we forgot to tell you that the other guy knew your horse was poisoned. Yeah. He poisoned it himself. We saw him do it - we helped him, really. Oh well.
Security guards? Oh, they work for the other guy. He pays 'em. Tough luck for ya, though, kid, real tough luck.
You win some, you lose some, eh?"
Is that from a movie? Because if not , you really need to start being a screenwriter!
Sorry, you're wrong. Both parties had access to the mortgages in the pool. Paulson & Co. just had a more accurate analysis of what they were actually worth because they had done in depth macroeconomic research on the residential mortgage market.
Please read the complaint (relevant part starts on p.9). This has nothing to do with Paulson's superior research. This is Paulson telling ACA which RMBS to put into the portfolio, ACA signing off on it, and GS telling investors that ACA selected the portfolio, which it did not.
GS structured this whole deal from the beginning because Paulson wanted to short specific RMBS portfolios; ACA was just engaged in order to have a "brand-name" signing off on it.
GS structured this whole deal from the beginning because Paulson wanted to short specific RMBS portfolios; ACA was just engaged in order to have a "brand-name" signing off on it.
warfangle was talking about the representation of the products. Yes, they misrepresented who put them together, but they were completely up front about the underlying assets. In fact you can see in the pitch deck (http://www.scribd.com/doc/30036962/Abacus-2007-Ac1-Flipbook-...) on slides 56 and 57 a list of the assets the CDO was based off of.
This is true, but it must be balanced against:
a) the ~32 slides (almost 50%) explaining why ACA was such a reliable and reputable sponsor of the issue, and
b) the fact that ACA's participation was secured with the help of blatantly false statements from GS VP Fabrice Tourre about Paulson's intended positions in those assets (which were represented to ACA as long when they were actually short).
ACA thought that Paulson & Co. were going to buy the equity (riskiest) tranche, and that they, ACA, were only taking on the risk of the mezzanine tranches. GS knew that not only did Paulson not intend to buy in, they intended to bet against the CDO.
ACA thought that Paulson & Co. were going to buy the equity (riskiest) tranche, and that they, ACA, were only taking on the risk of the mezzanine tranches. GS knew that not only did Paulson not intend to buy in, they intended to bet against the CDO.
I don't know this specific situation, but NPR's This American Life just did an episode about a hedge fund called Magnatar. IF the description was accurate (authorities will have to determine that), this was the scenario:
Magnatar aggressively bought the crappiest traunches of CDOs so that banks would be convinced to create more CDOs. The banks could then sell them, saying "even the crappiest traunches are selling like hotcakes - you can confidently buy these less-risky traunches."
But actually, even the least-risky traunches were VERY risky, and Magnatar was pushing to have riskier stuff included in the higher-level traunches, setting them up to fail. Meanwhile, Magnatar's inevitable losses on the crappy traunches were nothing compared to the bets (CDOs) they were taking against the CDO as a whole.
They might invest $10 million in the crappy traunches and effectively put an $100 million insurance policy on the CDO as a whole.
A good analogy would be if you bought houses next to a dam you thought would burst, thereby convincing developers to build more such houses, and you then took out large insurance policies on all the houses in the neighborhood. Except that you're not allowed to take out insurance on houses you don't own, which is sane, but you ARE allowed to buy credit default swaps on CDOs you don't own, which is a recipe for disaster.
So to the CDO investors in THOSE deals, at least, what the brokers told them was "these investments are rated as super-safe and everybody is buying them - the magic of bundling takes away the risk of the underlying mortgages."
When the reality was, the brokers KNEW that the CDOs were created with the help of someone who wanted them to fail, and the ratings agencies were being paid by the people who wanted the investments rated well. (Another insane situation - it would be like if the food safety inspectors were paid by McDonalds when they came out to check things. How can they be objective?)
Yes, there were investors who saw the crisis coming. But the banks did completely omit the fact that the investments were created, in part, by people who WANTED them to fail. If they had been up front about that, nobody would have bought them. So they lied, and had ratings agencies to back their lies.
Not exactly a situation where the investor has a reasonable chance to make informed decisions.
Magnatar aggressively bought the crappiest traunches of CDOs so that banks would be convinced to create more CDOs. The banks could then sell them, saying "even the crappiest traunches are selling like hotcakes - you can confidently buy these less-risky traunches."
But actually, even the least-risky traunches were VERY risky, and Magnatar was pushing to have riskier stuff included in the higher-level traunches, setting them up to fail. Meanwhile, Magnatar's inevitable losses on the crappy traunches were nothing compared to the bets (CDOs) they were taking against the CDO as a whole.
They might invest $10 million in the crappy traunches and effectively put an $100 million insurance policy on the CDO as a whole.
A good analogy would be if you bought houses next to a dam you thought would burst, thereby convincing developers to build more such houses, and you then took out large insurance policies on all the houses in the neighborhood. Except that you're not allowed to take out insurance on houses you don't own, which is sane, but you ARE allowed to buy credit default swaps on CDOs you don't own, which is a recipe for disaster.
So to the CDO investors in THOSE deals, at least, what the brokers told them was "these investments are rated as super-safe and everybody is buying them - the magic of bundling takes away the risk of the underlying mortgages."
When the reality was, the brokers KNEW that the CDOs were created with the help of someone who wanted them to fail, and the ratings agencies were being paid by the people who wanted the investments rated well. (Another insane situation - it would be like if the food safety inspectors were paid by McDonalds when they came out to check things. How can they be objective?)
Yes, there were investors who saw the crisis coming. But the banks did completely omit the fact that the investments were created, in part, by people who WANTED them to fail. If they had been up front about that, nobody would have bought them. So they lied, and had ratings agencies to back their lies.
Not exactly a situation where the investor has a reasonable chance to make informed decisions.
@dsplittgerber (won't let me directly reply) I'm not sure that who picked the bonds necessarily qualifies as "privileged information". The underlying assets were the same so if they were analyzed properly why would it matter who picked them?
Analysis of mortgages, especially tranches of slices of portions of thousands of mortgages, just isn't that easy. That's the entire reason that companies like ACA, who Goldman claimed picked the mortgages, exist: to act as an impartial third party that can analyze and rate the risk of the underlying assets when there are too many for the investor to do it herself.
If I sold you one diamond, and you were a shrewd buyer, you'd probably take it somewhere, perhaps to two people, to get it examined and ensure its authenticity. But if I offered to sell you a big ol' bag full of thousands of assorted gemstones, and claimed that everything in the bag was either pure diamond, ruby, emerald or opal, 25% each, you probably wouldn't have the time or money to go through each one and analyze its authenticity. Even if you did, my offer may have expired by the time you do. So instead, I say that the gems were all hand-picked and inspected by the American Gem Trade Association, and that they all checked out to be 100% authentic. If you trust me and the AGTA, you might buy the bag at this point. However, when you get home & find out that they're all rhinestones, I guarantee that you will consider my false assertion that they were picked by the AGTA to be both material and criminal.
If I sold you one diamond, and you were a shrewd buyer, you'd probably take it somewhere, perhaps to two people, to get it examined and ensure its authenticity. But if I offered to sell you a big ol' bag full of thousands of assorted gemstones, and claimed that everything in the bag was either pure diamond, ruby, emerald or opal, 25% each, you probably wouldn't have the time or money to go through each one and analyze its authenticity. Even if you did, my offer may have expired by the time you do. So instead, I say that the gems were all hand-picked and inspected by the American Gem Trade Association, and that they all checked out to be 100% authentic. If you trust me and the AGTA, you might buy the bag at this point. However, when you get home & find out that they're all rhinestones, I guarantee that you will consider my false assertion that they were picked by the AGTA to be both material and criminal.
Actually showing how this comment is wrong (it's not) would be greatly appreciated instead of downvoting.
This has been happening to me a fair amount as well. It would be nice if downvoting required a reason.
I'll bet the principle of 'buyer beware' wins out. This is about giving Goldman a PR hit, not a judicial one. It'll settle.
Incorrect. Goldman didn't just broker this product, they helped construct it. During this process, they allowed Paulson and Co. to add RMBS's to the product that they knew Paulson was short on. It is not their job to take one side or the other, but it is absolutely their job to represent the true nature of the product they are selling. And the fact that the product was constructed specifically so that its creators would profit hugely from its demise is incredibly important material information.
> Goldman may have even thought Paulson & Co were the fools
Wrong. The entire point of this case is that GS knew two facts: Paulson & Co. helped construct the fund, and they also held a short position. GS is smart enough to know that someone who shorts their own product is not a fool, they're a con man. Or as Goldman probably saw it, a shrewd businessman.
> Goldman may have even thought Paulson & Co were the fools
Wrong. The entire point of this case is that GS knew two facts: Paulson & Co. helped construct the fund, and they also held a short position. GS is smart enough to know that someone who shorts their own product is not a fool, they're a con man. Or as Goldman probably saw it, a shrewd businessman.
If you actually read the complaint, you will find that Goldman Sachs was intent on using ACA's brand as a critical means through which to sell the CDOs to their clients, and kept ACA in the game by misrepresenting Paulson's position. Had ACA known, they would have been far less likely to be willing to enter into the deal.
Goldman: “One thing that we need to make sure ACA understands is that we want their name on this transaction. This is a transaction for which they are acting as portfolio selection agent, this will be important that we can use ACA’s branding to help distribute the bonds.”
ACA: “I certainly hope I didn’t come across too antagonistic on the call with Fabrice [Tourre] last week but the structure looks difficult from a debt investor perspective. I can understand Paulson’s equity perspective but for us to put our name on something, we have to be sure it enhances our reputation.”
Goldman: “One thing that we need to make sure ACA understands is that we want their name on this transaction. This is a transaction for which they are acting as portfolio selection agent, this will be important that we can use ACA’s branding to help distribute the bonds.”
ACA: “I certainly hope I didn’t come across too antagonistic on the call with Fabrice [Tourre] last week but the structure looks difficult from a debt investor perspective. I can understand Paulson’s equity perspective but for us to put our name on something, we have to be sure it enhances our reputation.”
Correct.
Here’s Goldman Sachs’ pitch book for ABACUS, the synthetic collateralized debt obligation at the heart of the SEC charges. http://www.scribd.com/doc/30036962/Abacus-2007-Ac1-Flipbook-...
You should know, GS was basically forced to take the bailout money by Paulson, and were the first to pay it back.
Are you thinking of former Treasury Secretary and GS CEO Henry Paulson? The Paulson in Paulson and Co. is John Paulson, no relation.
This isn't an accurate depiction of what happened. The banks that failed did so because they were the ones holding on to the doomed products. In fact, the banks that shorted the products in volume were the ones that survived and didn't need bailouts (GS being one of them).
Setting aside the question of whether they needed a bailout, which I'm not qualified to answer, Goldman Sachs did receive federal assistance. The best link I can find is a reference to them paying it back:
http://www.businesswire.com/portal/site/home/permalink/?ndmV...
http://www.businesswire.com/portal/site/home/permalink/?ndmV...
Also, GS would have been in a world of hurt if AIG wasn't bailed out.
If the government didn't bail out AIG, GS would've gone down. And Hank Paulson is the former CEO of GS. So yes, GS needed the bailout desperately and got it.
http://www.capital-chronicle.com/2008/09/nyt-report-on-goldm...
http://www.capital-chronicle.com/2008/09/nyt-report-on-goldm...
That has nothing to do with whether GS themselves needed a bailout. In fact it speaks to the fact that they probably didn't see this crisis coming. If they had, then as the biggest trading partner of AIG they would have known their counterparty exposure and tried to reduce it ahead of time.
"In fact, the banks that shorted the products in volume were the ones that survived and didn't need bailouts (GS being one of them)."
So you're saying
1.) GS never needed bailed out
2.) GS was a bank before and after the crisis.
Goldman Sachs takes $12B Bailout, Hands out $14B Bonuses http://www.dailymail.co.uk/news/worldnews/article-1081624/Go...
So you're saying
1.) GS never needed bailed out
2.) GS was a bank before and after the crisis.
Goldman Sachs takes $12B Bailout, Hands out $14B Bonuses http://www.dailymail.co.uk/news/worldnews/article-1081624/Go...
Yes, they were forced to take bailout money: http://www.businessinsider.com/uncovered-tarp-docs-reveal-ho... and paid it back as soon as they could.
"Goldman Sachs released its 2009 annual report today. In its shareholder letter, Goldman says it repaid TARP money, but did not mention the massive new taxpayer subsidies it continues to enjoy."
http://www.huffingtonpost.com/janet-tavakoli/goldman-sachs-s...
http://www.huffingtonpost.com/janet-tavakoli/goldman-sachs-s...
That's not completely accurate. What bank would refuse to take money its competitors were getting?
Goldman was the healthiest (best capitalized relative to the systemic risk of the crisis) of US iBanks, and thus if there had been no bailout, it's strategy would have been to wait for things to get worse and then acquire various less healthy banks at a huge discount.
To prevent it from attempting this strategy, the government instead bailed out most of its competitors, but Goldman conceded to the deal as long as it was officially "forced" to participate. This was done only for PR reasons so that it could retain the perception of being the healthiest bank while not having to resort to a fire-sale buying binge fueled by an influx of capital that might very well have been from foreign governments -- do you think China wouldn't have sent over $20B in exchange for a huge stake in one of two remaining US iBanks?
The AIG risk was a big factor, but AIG too would have probably taken capital from abroad.
The US Government bailout was partially to retain stability and partially to avoid having the firms that survived become too powerful and foreign funded.
Goldman was the healthiest (best capitalized relative to the systemic risk of the crisis) of US iBanks, and thus if there had been no bailout, it's strategy would have been to wait for things to get worse and then acquire various less healthy banks at a huge discount.
To prevent it from attempting this strategy, the government instead bailed out most of its competitors, but Goldman conceded to the deal as long as it was officially "forced" to participate. This was done only for PR reasons so that it could retain the perception of being the healthiest bank while not having to resort to a fire-sale buying binge fueled by an influx of capital that might very well have been from foreign governments -- do you think China wouldn't have sent over $20B in exchange for a huge stake in one of two remaining US iBanks?
The AIG risk was a big factor, but AIG too would have probably taken capital from abroad.
The US Government bailout was partially to retain stability and partially to avoid having the firms that survived become too powerful and foreign funded.
@startuprule (won't let me reply directly to you). That article talks about counterparty risk, has nothing to do with whether GS themselves needed a bailout. In fact it speaks to the fact that they probably didn't see this crisis coming, as the biggest trading partner of AIG they would have known their counterparty exposure and tried to reduce it ahead of time.
GS needed a bail-out. Pleae read Too Big To Fail by Andrew Ross Sorkin, or any other detailed book about the financial crisis, and you will learn that GS had massive trust issues in the market. The 'bail-out' for GS got done primarily for the supposed trust in the stability and balance sheets of financial institutions it signaled - it was mostly for bridge financing (disregarding banks who actually were in deep shit all along, which GS was not one of). Yes, the exact details of the bail-out were shoved down their throat. Question being if GS would have made it at all if Treasury had waited any longer.
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4. goto 1
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Seven words: Federal Pound-Me-in-the-Ass Prison.
OK, yeah, I know, they're only civil charges. But a boy can dream.
OK, yeah, I know, they're only civil charges. But a boy can dream.
Too little. Too late.
Disagree. I would rather the delay than the SEC going on a fishing expedition and being unable to make the charges stick and undermining its own credibility in the process.This is a very high-profile target and my [i]hope[/i] is that SEC investigators are taking a 'measure twice, cut once' approach.
Agreed, I think anybody that has watched the history of major banks and their political chums for the past oh, 200 years or so, knows that this will amount to a slap on the hand, much less than they gained through their various activities of the sort, and will prove to be little deterrence or punishment.
Dow, Nasdaq and SP50 are sliding down. I wonder how much this will affect the economy.
This is a novel legal theory. Goldman is being sued because they did not disclose that people on the opposite side of a trade had opposing opinions. Basically, they facilitated a transfer of wealth from the stupid to the smart, and now they're getting punished.
If Goldman made some kind of material misstatement about the quality of the products, that's a different matter. But so far, there's no indication of that. They helped execute a deal between two consenting, informed parties; suing them is like suing a condom manufacturer because they facilitated the one-night stand that turned into an unpleasant relationship.
If Goldman made some kind of material misstatement about the quality of the products, that's a different matter. But so far, there's no indication of that. They helped execute a deal between two consenting, informed parties; suing them is like suing a condom manufacturer because they facilitated the one-night stand that turned into an unpleasant relationship.
The SEC alleges that GS committed fraud by not informing investors that the "3rd party objective manager" who cherry-picked the assets that were packaged in the CDO was at the same time betting against the very assets he picked.
That, and recorded conf calls show that GS analysts as trying to convince rating agencies to inflate the ratings of the underlying assets in the CDO.
That, and recorded conf calls show that GS analysts as trying to convince rating agencies to inflate the ratings of the underlying assets in the CDO.
> That, and recorded conf calls show that GS analysts as trying to convince rating agencies to inflate the ratings of the underlying assets in the CDO.
What happened to winking, nods and understanding looks on golf courses?
What happened to winking, nods and understanding looks on golf courses?
That's just plain stupid. If you're buying, don't count on the seller having your interests at heart.
That's part of Goldman's job. They want the transaction to happen; if they can get a good rating, they should. The entity that's responsible for making the rating agencies rate things well is... the rating agency.
That's part of Goldman's job. They want the transaction to happen; if they can get a good rating, they should. The entity that's responsible for making the rating agencies rate things well is... the rating agency.
There is a massive difference between expecting the seller to have your best interest at heart, and expecting that the seller will give you accurate information regarding what product they are selling you.
The first is naivete. The second is Federal securities law.
The first is naivete. The second is Federal securities law.
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If this is indeed similar to the ProPublica report (referenced in another post in this thread), then this isn't a case of someone in the "opposite side of a trade". The trade would not have existed without the hedge fund committing to buy the worst parts of it - the party buying the worst tranche was called the "sponsor" for a reason.
Not only that, but the sponsor wasn't short on just their portion of the trade. They were short on the entire CDO. They've got a bet that pays off if you crap out. Without that bet, you don't even get the prospectus - you don't even know about the security in the first place.
I recommend reading the ProPublica article.
Not only that, but the sponsor wasn't short on just their portion of the trade. They were short on the entire CDO. They've got a bet that pays off if you crap out. Without that bet, you don't even get the prospectus - you don't even know about the security in the first place.
I recommend reading the ProPublica article.
I've read the ProPublica article. This is even more of a stretch.
Deals exist when there is demand on both sides. There can only be demand for both sides of the deal when there's disagreement about how the deal will perform. Goldman is being sued because one of their customers was right, and one of their customers was wrong. If the mortgage bubble had not collapsed, would credit default swap sellers and CDO buyers be penalized for profiting from the shorts' demise?
Deals exist when there is demand on both sides. There can only be demand for both sides of the deal when there's disagreement about how the deal will perform. Goldman is being sued because one of their customers was right, and one of their customers was wrong. If the mortgage bubble had not collapsed, would credit default swap sellers and CDO buyers be penalized for profiting from the shorts' demise?
The issue wasn't a disagreement in valuation, this is totally valid as you point out. The fraud allegation is because they were an advisor to their clients, and supposedly they misrepresented the valuation of products when then knew the value was something else.
If they had misrepresented their deal, then yes. If Goldman Sachs lied about matters material to the valuation of the deal then they've committed fraud.
Deals also exist when the parties have different risk tolerances or time preferences for money. If I sell you my car because I need a down payment for a condo, that doesn't mean I think the car isn't actually worth what you're paying. If I know it isn't worth what you're paying because evil mechanics swapped all the working parts with bad ones, and I hide that from you, that's fraud.
Or deals can exist because the stuff being traded is simply worth different amounts to different people. Like the gentleman who made his money selling ice to India in an article earlier this week.
No, that's not the problem. The problem is that the mortgage securities were, in large part, designed by people who would benefit if they failed. It's like selling someone a lock that was designed by burglars.
Thats the definition of any zero sum bet though. Puts are also designed by people who will benefit if stocks drop in price, that doesn't necessarily make it wrong or bad. The counterparties had access to all the same info Paulson & Co. did, they just didn't analyze it correctly or in as much detail.
The counterparties had access to all the same info Paulson & Co. did, they just didn't analyze it correctly or in as much detail.
You have to separate issues here. Paulson & Co. were counterparties on a credit default swap with Goldman Sachs. That is fine. Goldman Sachs failed to disclose information to investors about Paulson & Co's role, and lied about their position. That is what the SEC is upset about.
You are right that the credit default swap was a zero sum bet between equally informed counterparties. It so happens that one side analyzed the deal better. (Actually that is questionable. The bankers on the Goldman Sachs side knew that they would get large personal bonuses no matter what happened to Goldman Sachs. So they may have analyzed it correctly and done what was in their best interest. But let's not get into perverse incentives.)
The issue that the SEC has with the scenario is that not only did Goldman Sachs fail to disclose Paulson & Co's involvement (instead saying that ACA had selected all of the bonds), they told investors that Paulson & Co had $200 million in equity in the deal, without disclosing the credit default swap position that meant Paulson & Co were actually significantly net short. This was a lie, and that is why Goldman Sachs is in trouble here.
Edit I had the parties wrong. Fixed.
You have to separate issues here. Paulson & Co. were counterparties on a credit default swap with Goldman Sachs. That is fine. Goldman Sachs failed to disclose information to investors about Paulson & Co's role, and lied about their position. That is what the SEC is upset about.
You are right that the credit default swap was a zero sum bet between equally informed counterparties. It so happens that one side analyzed the deal better. (Actually that is questionable. The bankers on the Goldman Sachs side knew that they would get large personal bonuses no matter what happened to Goldman Sachs. So they may have analyzed it correctly and done what was in their best interest. But let's not get into perverse incentives.)
The issue that the SEC has with the scenario is that not only did Goldman Sachs fail to disclose Paulson & Co's involvement (instead saying that ACA had selected all of the bonds), they told investors that Paulson & Co had $200 million in equity in the deal, without disclosing the credit default swap position that meant Paulson & Co were actually significantly net short. This was a lie, and that is why Goldman Sachs is in trouble here.
Edit I had the parties wrong. Fixed.
OK, yes there was clear misrepresentation of who put together the CDO, that seems to be obvious from the available information. What I just don't see is why it that is material. By nature of buying a Synthetic CDO the buyers had to know someone was short, why should it matter who it was?
They should have been buying based off the assets in the investment not based off of the counterparty.
They should have been buying based off the assets in the investment not based off of the counterparty.
> By nature of buying a Synthetic CDO the buyers had to know someone was short, why should it matter who it was?
Because the party who was short on the product was the same party who created the product, and Goldman did not inform investors of this fact. It's not a matter of just buying and selling. The RMBS's underlying the CDO were packaged by a party who had significant interest in seeing the package blow up.
An Oversimplified Analogy:
Imagine that I come to you and say, "I have a document that represents 100 mortgages and I'd like to broker a sale. If you buy this document, as long as less than ten of these mortgages go into default, you make money. If more than ten of them go into default, your counterparty in the sale (not me) will make money."
"Okay," you say, "that sounds interesting. So where did all these mortgages come from?"
"Oh, we got an independent company to pick a bunch of mortgages that they consider fairly safe and that they believe are a good representation of the overall U.S. mortgage market."
"Great!" you say, and you buy a billion dollars worth. More than ten mortgages end up defaulting and you lose a shit ton of money. Imagine your dismay when you learn that the mortgages were not packaged by some third party as I claimed, but hand-picked by the very counterparty you were betting against. OBVIOUSLY if they were going to benefit from more than ten mortgages defaulting, they would have filled the entire document full of mortgages they expected to fail! This is fraud in its most basic form!
Because the party who was short on the product was the same party who created the product, and Goldman did not inform investors of this fact. It's not a matter of just buying and selling. The RMBS's underlying the CDO were packaged by a party who had significant interest in seeing the package blow up.
An Oversimplified Analogy:
Imagine that I come to you and say, "I have a document that represents 100 mortgages and I'd like to broker a sale. If you buy this document, as long as less than ten of these mortgages go into default, you make money. If more than ten of them go into default, your counterparty in the sale (not me) will make money."
"Okay," you say, "that sounds interesting. So where did all these mortgages come from?"
"Oh, we got an independent company to pick a bunch of mortgages that they consider fairly safe and that they believe are a good representation of the overall U.S. mortgage market."
"Great!" you say, and you buy a billion dollars worth. More than ten mortgages end up defaulting and you lose a shit ton of money. Imagine your dismay when you learn that the mortgages were not packaged by some third party as I claimed, but hand-picked by the very counterparty you were betting against. OBVIOUSLY if they were going to benefit from more than ten mortgages defaulting, they would have filled the entire document full of mortgages they expected to fail! This is fraud in its most basic form!
That's an excellent explanation of the underlying issues. Now let's hope the prosecution does as good a job as you just did of explaining this to the jury, and that they make it a criminal case in stead of just a civil one.
Suppose you're making a sports bet on an American Football game. You bet $10 that the Griffons will beat the Hydras by 3 points or more. It doesn't really matter to you if George or Bob are the ones to take your action, since they're both trustworthy friends of yours and they can't affect the outcome.
But if you're betting against Hank, who manages the Griffons, that's something you want to be made aware of. Even if he can't directly influence the game, knowing that your opponent picked the players for the team he's betting against, he's got a lot of information that you can't easily come by, and it'd be a bad move to bet against him. It's a bit of a bait and switch to say that you're betting against another neutral party when you're in fact betting against someone involved in the game.
But if you're betting against Hank, who manages the Griffons, that's something you want to be made aware of. Even if he can't directly influence the game, knowing that your opponent picked the players for the team he's betting against, he's got a lot of information that you can't easily come by, and it'd be a bad move to bet against him. It's a bit of a bait and switch to say that you're betting against another neutral party when you're in fact betting against someone involved in the game.
The assumption with securitization is that the people securitizing the deal are attempting to aggregate risky assets then slice of tranches with different levels of risk/reward. When they are telling you that these slices are relatively safe, the presumption is that there isn't grounds for disbelief.
The fact that the people structuring the deal were short on the deal is evidence suggesting a far, far more involved analysis before getting involved. That's a red flag that should cause significantly more due diligence. The entire purpose of the SEC is to make sure that such material information is not lied about.
The fact that the people structuring the deal were short on the deal is evidence suggesting a far, far more involved analysis before getting involved. That's a red flag that should cause significantly more due diligence. The entire purpose of the SEC is to make sure that such material information is not lied about.
The key difference between the two is that the idea behind a put is extremely simple, while the ideas behind a mortgage-backed collateralized debt obligation are extremely complex. Hence, a counterparty to the put could be reasonably expected to know what they are getting into, while the same does not apply in the Goldman Sachs case.
If you buy something you don't understand (when all the info is clearly available to you) its your own damn fault. The organizations buying this stuff were required to have ISDA contracts (not easy to get). Their money is managed by professionals.
If you want a place to put blame the most apt place would be Fitch, Moody's and Standard and Poors. The ratings agencies were far more complicit in perpetuating false understanding than GS was.
If you want a place to put blame the most apt place would be Fitch, Moody's and Standard and Poors. The ratings agencies were far more complicit in perpetuating false understanding than GS was.
"If you buy something you don't understand (when all the info is clearly available to you) its your own damn fault."
Suppose I sell you a word processing program. Inside the program, I include a snippet of code that will cause the program to stop working in thirty days, without telling you anything about it. By your logic, you would not be within your rights to demand a refund, since it is "your own damn fault" that you didn't understand the ten megabytes of assembly code that I sold you.
Suppose I sell you a word processing program. Inside the program, I include a snippet of code that will cause the program to stop working in thirty days, without telling you anything about it. By your logic, you would not be within your rights to demand a refund, since it is "your own damn fault" that you didn't understand the ten megabytes of assembly code that I sold you.
That analogy doesn't work. They were selling bonds to financial professionals, who had to have complicated ISDA agreements to even enter into these purchases. Part of their job is to analyze the assets they are buying. Its reasonable to expect them to do so.
Read the complaint again. Goldman Sachs failed to disclose Paulson & Co's role, and then actively lied to investors about Paulson & Co's net position in the deal.
This is material information that was not available to investors in the CDO. Hence the complaint.
Edit Got the players wrong. Fixed.
This is material information that was not available to investors in the CDO. Hence the complaint.
Edit Got the players wrong. Fixed.
@btilly (won't let me reply directly to your comment) I realize what you're saying is true, but most of the arguments being made are about being made about whether the trade itself (under normal circumstances) were unethical, I'm trying to counter those.
You keep doing that @ thing, there is a reason why you can't respond directly to the comments that you want to reply to, HN is set up to discourage flame wars by only showing the reply link when a comment is a little older.
So be patient and then when the thread has cooled down a bit you can reply directly.
If you really must reply there is always the 'link' link to the comment, the page that leads to does have the reply box. But beware of fanning the flames.
So be patient and then when the thread has cooled down a bit you can reply directly.
If you really must reply there is always the 'link' link to the comment, the page that leads to does have the reply box. But beware of fanning the flames.
I don't need you to teach me about HN man, I've been here for over 3 years. Your suggestion that I stop replying though is well taken, the misinformation/misinterpretation in this thread is rampant and off-putting.
As we all know, hedge funds, pension funds and investment banks are completely unable to evaluate complex investments.
Note: CDO's are not sold to retail investors.
Note: CDO's are not sold to retail investors.
So? When buyers push a deal, they design it so it's underpriced. When sellers push a deal, they want it overpriced. In other words, everyone is in this market to profit.
You're acting like the motives are criminal, here. But if two people take opposite sides of the same trade, they will both have the sinister motive of picking the other side's pocket. That's why there's a big, detailed disclosure agreement. You can read it right here: http://tinyurl.com/y7rnyh3 .
The lock/burglar analogy is flawed, because stealing destroys wealth. Inefficient asset allocations destroy wealth, and asset allocations can only be efficient when people with the same data and different interpretations are able to trade.
You're acting like the motives are criminal, here. But if two people take opposite sides of the same trade, they will both have the sinister motive of picking the other side's pocket. That's why there's a big, detailed disclosure agreement. You can read it right here: http://tinyurl.com/y7rnyh3 .
The lock/burglar analogy is flawed, because stealing destroys wealth. Inefficient asset allocations destroy wealth, and asset allocations can only be efficient when people with the same data and different interpretations are able to trade.
According to the SEC's complaint, filed in U.S. District Court for the Southern District of New York, the marketing materials for the CDO known as ABACUS 2007-AC1 (ABACUS) all represented that the RMBS portfolio underlying the CDO was selected by ACA Management LLC (ACA), a third party with expertise in analyzing credit risk in RMBS. The SEC alleges that undisclosed in the marketing materials and unbeknownst to investors, the Paulson & Co. hedge fund, which was poised to benefit if the RMBS defaulted, played a significant role in selecting which RMBS should make up the portfolio.
The SEC's complaint alleges that after participating in the portfolio selection, Paulson & Co. effectively shorted the RMBS portfolio it helped select by entering into credit default swaps (CDS) with Goldman Sachs to buy protection on specific layers of the ABACUS capital structure. Given that financial short interest, Paulson & Co. had an economic incentive to select RMBS that it expected to experience credit events in the near future. Goldman Sachs did not disclose Paulson & Co.'s short position or its role in the collateral selection process in the term sheet, flip book, offering memorandum, or other marketing materials provided to investors.