Last spring: U.S. and European officials are looking into how U.S. investment bank Goldman Sachs Group Inc. may have helped Greece disguise the size of its budget deficit through the use of cross-currency derivatives in 2001.
Showing posts with label goldman sachs.. Show all posts
Showing posts with label goldman sachs.. Show all posts
Monday, December 5, 2011
Wednesday, July 14, 2010
David Brooks: Op-Ed Columnist - An Economy of Grinds - NYTimes.com
(c) 2010 F. Bruce Abel
David Brooks writes pieces that are often hard to categorize, but I read everything he writes. This one deserves note and reading over and over again. It covers an interesting class view that fits with my own.
Knowing Brooks's Republican political-history, this piece is not of small import. David Brooks is slowly feeling his way into a world-view that is anti-establishment, anti-corporate. Far from where he was during the Bush years. Click on and start at the beginning.
Op-Ed Columnist - An Economy of Grinds - NYTimes.com: "Since the princes are nicer and more impressive, it is easy to be seduced into the belief that they also are more trustworthy. This is false. During the last few years, for example, the princes at Citigroup, Bear Stearns, Goldman Sachs and Lehman Brothers behaved with incredible stupidity while the hedge fund loners often behaved with impressive restraint."
David Brooks writes pieces that are often hard to categorize, but I read everything he writes. This one deserves note and reading over and over again. It covers an interesting class view that fits with my own.
Knowing Brooks's Republican political-history, this piece is not of small import. David Brooks is slowly feeling his way into a world-view that is anti-establishment, anti-corporate. Far from where he was during the Bush years. Click on and start at the beginning.
Op-Ed Columnist - An Economy of Grinds - NYTimes.com: "Since the princes are nicer and more impressive, it is easy to be seduced into the belief that they also are more trustworthy. This is false. During the last few years, for example, the princes at Citigroup, Bear Stearns, Goldman Sachs and Lehman Brothers behaved with incredible stupidity while the hedge fund loners often behaved with impressive restraint."
Sunday, July 4, 2010
What Is Goldman Sachs Thinking? « The Baseline Scenario
(c) 2010 F. Bruce Abel
This is a simple piece but very profound. Please click on and read on. This type of piece by Simon Johnson nips dangerous thinking in the bud. But to what avail? The smart guys start something and then the dumb guys plow in and overdo it just as the smart guys are doing a 180. It's the nature of capitalism. Do it until Goldman Sachs calls you up and says "you owe us 3 gazillion; pay up," and then does (already did) a giant squid-sucking vehicle that drives the previous-good-thing down and the taxpayers have to pay. But the taxpayers can't pay. Thus chaos.
What Is Goldman Sachs Thinking? « The Baseline Scenario: "Financial Times (p.13, front of the Companies and Markets section):
“Debt-to-GDP ratios in the developed world are about double those in emerging markets and they’re growing. This makes emerging markets interesting because you’re pick up incremental spread [higher interest rates compared with developed world rates], and in return you’re actually taking less macroeconomic risk.”This is a dangerous view for three reasons."
This is a simple piece but very profound. Please click on and read on. This type of piece by Simon Johnson nips dangerous thinking in the bud. But to what avail? The smart guys start something and then the dumb guys plow in and overdo it just as the smart guys are doing a 180. It's the nature of capitalism. Do it until Goldman Sachs calls you up and says "you owe us 3 gazillion; pay up," and then does (already did) a giant squid-sucking vehicle that drives the previous-good-thing down and the taxpayers have to pay. But the taxpayers can't pay. Thus chaos.
What Is Goldman Sachs Thinking? « The Baseline Scenario: "Financial Times (p.13, front of the Companies and Markets section):
“Debt-to-GDP ratios in the developed world are about double those in emerging markets and they’re growing. This makes emerging markets interesting because you’re pick up incremental spread [higher interest rates compared with developed world rates], and in return you’re actually taking less macroeconomic risk.”This is a dangerous view for three reasons."
Saturday, July 3, 2010
Talking Business - On Financial Crisis, Hearings That Aren’t Just Theater - NYTimes.com
(c) 2010 F. Bruce Abel
Joe Nocera, whom I am sometimes critical of, does a good job here, waiting a couple of days to get it right, reporting regarding the Financial Crisis Inquiry Commission hearings of this week.
Talking Business - On Financial Crisis, Hearings That Aren’t Just Theater - NYTimes.com: "He added: “I have been taken aback at the extent to which our financial markets, in addition to their traditional role, became betting parlors. I have also been struck by the way we built up a shadow banking system that was subject to enormous runs. And by the absolute failure of the regulatory mechanism. And how, with so many of our witnesses, when it comes to assessing responsibility, all fingers point away from themselves. And the way we forgot some fundamental lessons about balance between private enterprise and public good.”"
Joe Nocera, whom I am sometimes critical of, does a good job here, waiting a couple of days to get it right, reporting regarding the Financial Crisis Inquiry Commission hearings of this week.
Talking Business - On Financial Crisis, Hearings That Aren’t Just Theater - NYTimes.com: "He added: “I have been taken aback at the extent to which our financial markets, in addition to their traditional role, became betting parlors. I have also been struck by the way we built up a shadow banking system that was subject to enormous runs. And by the absolute failure of the regulatory mechanism. And how, with so many of our witnesses, when it comes to assessing responsibility, all fingers point away from themselves. And the way we forgot some fundamental lessons about balance between private enterprise and public good.”"
Thursday, July 1, 2010
Cassano Switches Topics and Committee Goes Along
(c) 2010 F. Bruce Abel
What kid gloves. Disgusting.
Cassano defends actions at AIG: "Joseph Cassano, who oversaw the American International Group unit that doomed the company and prompted a $182 billion federal bailout, defended his investment decisions Wednesday, adding that he could have saved taxpayers money if he had stayed with the firm."
What kid gloves. Disgusting.
Cassano defends actions at AIG: "Joseph Cassano, who oversaw the American International Group unit that doomed the company and prompted a $182 billion federal bailout, defended his investment decisions Wednesday, adding that he could have saved taxpayers money if he had stayed with the firm."
Friday, May 7, 2010
Santelli -- Best Line of the Day
(c) 2010 F. Bruce Abel
I usually don't understand a word of what Santelli says, but he just gave the line of the century, discussing high frequence traders who say they provide liquidity.
"If volume provides liquidity, where were you (Goldman, etc.) yesterday?"
I usually don't understand a word of what Santelli says, but he just gave the line of the century, discussing high frequence traders who say they provide liquidity.
"If volume provides liquidity, where were you (Goldman, etc.) yesterday?"
Monday, May 3, 2010
Buffett -- The Ultimate Sociopath?
(c) 2010 F. Bruce Abel
Has Buffett "explained" and put the cap on this spewing vomit called Abacus? And by implication its ilk? By saying the main loser was ABN Amro? Does that mean only some rich hedge fund, or country-fund, lost out? Ultimately there are mom and pops who put their money into whatever hedge fund or country-fund, aren't there? Pensions and insurance companies.
So how does the AIG bailout compare in structure with Abacus? I think somewhat identical. And there we have hundreds of billions of taxpayer money used directly.
Click on title above for the source of the following.
Buffett said the main "loser" in the Goldman situation, which includes civil fraud charges alleging the investment bank misled investors, and a criminal investigation, was European bank ABN Amro, which guaranteed the credit of another bank in the deal, to the tune of about $900 million.
"In the end, they made a dumb insurance decision," Buffett said. "It's a little hard for me to get sympathetic that a bank made a dumb deal."
By contrast, Buffett said his company has remained conservative and stuck with deals "we understand." He gave as an example a deal brought to Berkshire two years ago by Lehman Brothers, in which Berkshire guaranteed the bonds of about a dozen states for 10 years. Included was $700million worth of bonds issued by Ohio.
"If we lose a lot of money on these bonds, I'm not going to go to the person on the other side of the deal and say, 'Gee, you took advantage of me,'" he said.
Buffett and Munger both stressed that the government's charges against Goldman remain allegations, with no wrongdoing proved at this point.
Has Buffett "explained" and put the cap on this spewing vomit called Abacus? And by implication its ilk? By saying the main loser was ABN Amro? Does that mean only some rich hedge fund, or country-fund, lost out? Ultimately there are mom and pops who put their money into whatever hedge fund or country-fund, aren't there? Pensions and insurance companies.
So how does the AIG bailout compare in structure with Abacus? I think somewhat identical. And there we have hundreds of billions of taxpayer money used directly.
Click on title above for the source of the following.
Buffett said the main "loser" in the Goldman situation, which includes civil fraud charges alleging the investment bank misled investors, and a criminal investigation, was European bank ABN Amro, which guaranteed the credit of another bank in the deal, to the tune of about $900 million.
"In the end, they made a dumb insurance decision," Buffett said. "It's a little hard for me to get sympathetic that a bank made a dumb deal."
By contrast, Buffett said his company has remained conservative and stuck with deals "we understand." He gave as an example a deal brought to Berkshire two years ago by Lehman Brothers, in which Berkshire guaranteed the bonds of about a dozen states for 10 years. Included was $700million worth of bonds issued by Ohio.
"If we lose a lot of money on these bonds, I'm not going to go to the person on the other side of the deal and say, 'Gee, you took advantage of me,'" he said.
Buffett and Munger both stressed that the government's charges against Goldman remain allegations, with no wrongdoing proved at this point.
Sunday, May 2, 2010
Notes From the (Berkshire Hathaway) Front
(c) 2010 F. Bruce Abel
The following is a nice theoretical explanation. What is ignored is that it took people's money to bail out the insurers of these types of transactions. So the effects are far from theoretical. (I think.)
So...Warren talks tough on derivatives and "explains" the Abacus deal, defending Goldman Sachs. Click on enclosure link and enjoy. Does he explain who ultimately was caught holding the bag? I don't think so.
Buffett gave a detailed explanation of the nature of the much discussed ABACUS transaction, for which Goldman has been sued by the SEC.
An excerpt on the Abacus deal, which I will now consider.
The customer was a large bank, ABN Amro, now part of RBS. They guaranteed the credit of ACA, which insured the bonds covered by said instrument, and consequently suffered a large loss. Berkshire itself often engages in similar transactions, and collects a fee for guaranteeing similar credit. Berkshire evaluates bonds and prices them, exactly as ACA did.
In this case, ABN Amro was paid $1.6 million to bear the risk on $900 million worth of bonds, which turned out to be worthless.
Buffett believes many municipal bonds insurers expanded into new business such as structured credits when the margins on their traditional muni bonds business narrowed. But they were much less familiar with the new complicated securities, with unsurprising dreadful results.
Buffett has little sympathy for the bank making dumb credit decisions. ACA has
And then this video of Blankfein explaining that Goldman was just a market maker in the deal -- like the NY Stock Exchange.
http://www.huffingtonpost.com/2010/05/01/goldman-sachs-lloyd-blank_n_559606.html
Wednesday, April 28, 2010
Goldman Sachs -- "Sociopaths"
(c) 2010 F. Bruce Abel
The best comment yet on the Goldman hearings earlier this week, from "KT NY":
(Who else ever started a piece with the word "telling?" Very effective.)
April 28th, 2010 10:51 am
Telling to me was the fact that, although they most certainly had been warned by their attorneys to treat the hearing seriously and the Senators respectfully, the Goldman Sachs crew exuded contempt and smugness from every pore. "Our net worth is higher than yours," they seemed to be saying, "So you're stupid and we win."
What to do about these lunkheads? Clearly, it will not help to explain to them that not all smart people choose to devote their lives to making money: some design the Hadron Collider, identify the gene that causes breast cancer, write symphonies, and even become U.S. Senators. It will not help to explain, because to these guys, competition and its rewards -- status and cash -- are all that matter in life. Period. They're built that way, psychologically, and we're not going to change their minds.
What we can do, however, is recognize that while Wall Street culture -- the Goldman Sachs syndrome -- does in fact add value to our society, by allowing money to move through the system to those who need money to run businesses, that culture must be contained. That's because, as we saw in the Senate hearings yesterday, those who excel at the art of the deal are basically sociopaths, with few moral values and no ethical brakes. Their contributions to society might be analogized to nuclear energy: we build reactors, and the reactors make electricity. Yet those reactors have to be carefully monitored and controlled. If we let them blow up, we all die.
Because of its erroneous, free market ideology -- not to mention the money that it collects from Wall Street -- the Republican Party is incapable of recognizing that letting Wall Street operate without restraints is like building a nuclear reactor in Times Square and yelling "Let 'er rip!" In its own way, the GOP is as blind, and clueless, as the Goldman Sachs traders. That is why regulation is not merely needed, but will occur only if the public starts calling Senators -- like tomorrow -- to make its will known.
There is an election coming up. It's time to let your Senators know that the Era of the Poopy Deal must come to an end.
Globular and Mailer
(first the link to the New York Times article and comments above; too lazy to reformat above the title):
http://community.nytimes.com/comments/www.nytimes.com/2010/04/28/opinion/28dowd.html?scp=3&sq=sociopaths&st=cse
And some good from the Globe & Mail, especially the comments after the article, in today's Business section:
http://www.theglobeandmail.com/globe-investor/markets/markets-blog/the-casino-analogy/article1549918/?cid=art-rail-marketsblog
The best comment yet on the Goldman hearings earlier this week, from "KT NY":
(Who else ever started a piece with the word "telling?" Very effective.)
April 28th, 2010 10:51 am
Telling to me was the fact that, although they most certainly had been warned by their attorneys to treat the hearing seriously and the Senators respectfully, the Goldman Sachs crew exuded contempt and smugness from every pore. "Our net worth is higher than yours," they seemed to be saying, "So you're stupid and we win."
What to do about these lunkheads? Clearly, it will not help to explain to them that not all smart people choose to devote their lives to making money: some design the Hadron Collider, identify the gene that causes breast cancer, write symphonies, and even become U.S. Senators. It will not help to explain, because to these guys, competition and its rewards -- status and cash -- are all that matter in life. Period. They're built that way, psychologically, and we're not going to change their minds.
What we can do, however, is recognize that while Wall Street culture -- the Goldman Sachs syndrome -- does in fact add value to our society, by allowing money to move through the system to those who need money to run businesses, that culture must be contained. That's because, as we saw in the Senate hearings yesterday, those who excel at the art of the deal are basically sociopaths, with few moral values and no ethical brakes. Their contributions to society might be analogized to nuclear energy: we build reactors, and the reactors make electricity. Yet those reactors have to be carefully monitored and controlled. If we let them blow up, we all die.
Because of its erroneous, free market ideology -- not to mention the money that it collects from Wall Street -- the Republican Party is incapable of recognizing that letting Wall Street operate without restraints is like building a nuclear reactor in Times Square and yelling "Let 'er rip!" In its own way, the GOP is as blind, and clueless, as the Goldman Sachs traders. That is why regulation is not merely needed, but will occur only if the public starts calling Senators -- like tomorrow -- to make its will known.
There is an election coming up. It's time to let your Senators know that the Era of the Poopy Deal must come to an end.
Globular and Mailer
(first the link to the New York Times article and comments above; too lazy to reformat above the title):
http://community.nytimes.com/comments/www.nytimes.com/2010/04/28/opinion/28dowd.html?scp=3&sq=sociopaths&st=cse
And some good from the Globe & Mail, especially the comments after the article, in today's Business section:
http://www.theglobeandmail.com/globe-investor/markets/markets-blog/the-casino-analogy/article1549918/?cid=art-rail-marketsblog
Tuesday, April 27, 2010
My Picture, Goldman Sachs and Miscellany
(c) 2010 F. Bruce Abel
The banality of the system was on show yesterday. Ordinary looking monsters. Billions of other people's money. It seemed to me that focusing on the ACA company was a red herring that nobody exposed. They were not the party being deceived. Deutsches Bank was. And that entity was managing money for pension funds and little guys, albeit mainly Europeans.
The banality of the system was on show yesterday. Ordinary looking monsters. Billions of other people's money. It seemed to me that focusing on the ACA company was a red herring that nobody exposed. They were not the party being deceived. Deutsches Bank was. And that entity was managing money for pension funds and little guys, albeit mainly Europeans.
We all have to give our money to others to manage. So there's the "Friday afternoon problem." That is, What if my money manager gets caught up and flummoxed just like every other individual who is not the Goldman Sachs?
I call things "The Friday afternoon problem." Where your advisor just gives up because he wants to play golf. Stops thinking. Who's going to second-guess him? Certainly not the ultimate client.
At the hearings yesterday, it is said, everyone had been "lawyered up." The questions I saw were ridiculous. But still the NYT didn't ridicule the senators.
Oh, and Cramer? His stocks cratered yesterday along with everything else. Of course one of his books says "don't buy right away what I recommend." Wait a few days. So I blew it. Down $2000 in the blink of an eye.
Qty Change Open $ High Change Close $ Current Price Symbol Name Market Value Low Cost Basis Cost per Share P/L $ P/L $ per Share Bracket Sec Type Exp Strike Under
-10 $0.25 SUN 05/22/2010 34.00 C CALL SUNOCO INC $34.00 EXP MAY 22 '10 (24 DAYS) ($250.00) ($262.49) $26.25 $12.49 ($0.01) none Opt May 22 '10 (24 days) $34.00 SUN
300 $0.00 $18.38 $0.38 $18.35 WFT WEATHERFORD INTL LTD F $5,505.00 $18.00 $5,594.52 $18.65 ($89.52) ($0.30) none Eqty
245 $0.00 $0.00 $0.00 $28.89 CINF CINCINNATI FINANCIAL CP $7,078.05 $0.00 $7,358.95 $30.04 ($280.90) ($1.15) none Eqty
200 $0.00 $74.13 $1.40 $73.80 CMI CUMMINS INC $14,760.00 $72.45 $15,020.95 $75.10 ($260.95) ($1.30) none Eqty
500 $0.00 $30.45 ($0.01) $30.23 SUN SUNOCO INC $15,115.00 $30.23 $15,228.95 $30.46 ($113.95) ($0.23) none Eqty
Sub-Total $42,208.05 $42,940.88* -$732.83*
Cash $23,595.98
Total $65,804.03
That's what I was down on my existing positions as of the close of yesterday. In addition I closed out a trade of 200 SPY for a loss for $251. Glad I did that. And closed out a buy/write on 1000 Hershey for a $106.71 loss which had been a good-size ($850) unrealized gain Friday afternoon.
4/27/2010 Sell 200 SPY S P D R S&P 500 ETF TR EXPIRING 01/22/2118 $120.77 $24,144.64 $8.95 4/30/2010
Oh, and Cramer? His stocks cratered yesterday along with everything else. Of course one of his books says "don't buy right away what I recommend." Wait a few days. So I blew it. Down $2000 in the blink of an eye.
Qty Change Open $ High Change Close $ Current Price Symbol Name Market Value Low Cost Basis Cost per Share P/L $ P/L $ per Share Bracket Sec Type Exp Strike Under
-10 $0.25 SUN 05/22/2010 34.00 C CALL SUNOCO INC $34.00 EXP MAY 22 '10 (24 DAYS) ($250.00) ($262.49) $26.25 $12.49 ($0.01) none Opt May 22 '10 (24 days) $34.00 SUN
300 $0.00 $18.38 $0.38 $18.35 WFT WEATHERFORD INTL LTD F $5,505.00 $18.00 $5,594.52 $18.65 ($89.52) ($0.30) none Eqty
245 $0.00 $0.00 $0.00 $28.89 CINF CINCINNATI FINANCIAL CP $7,078.05 $0.00 $7,358.95 $30.04 ($280.90) ($1.15) none Eqty
200 $0.00 $74.13 $1.40 $73.80 CMI CUMMINS INC $14,760.00 $72.45 $15,020.95 $75.10 ($260.95) ($1.30) none Eqty
500 $0.00 $30.45 ($0.01) $30.23 SUN SUNOCO INC $15,115.00 $30.23 $15,228.95 $30.46 ($113.95) ($0.23) none Eqty
Sub-Total $42,208.05 $42,940.88* -$732.83*
Cash $23,595.98
Total $65,804.03
That's what I was down on my existing positions as of the close of yesterday. In addition I closed out a trade of 200 SPY for a loss for $251. Glad I did that. And closed out a buy/write on 1000 Hershey for a $106.71 loss which had been a good-size ($850) unrealized gain Friday afternoon.
4/27/2010 Sell 200 SPY S P D R S&P 500 ETF TR EXPIRING 01/22/2118 $120.77 $24,144.64 $8.95 4/30/2010
4/27/2010 Sell 1,000 HSY HERSHEY COMPANY $47.37 $47,360.24 $8.95 4/30/2010
4/27/2010 Buy to Close 10 HSY 06/19/2010 50.00 C CALL THE HERSHEY COMPAN$50 EXP 06/19/10 $0.66 ($667.50) $7.50 4/28/2010
4/27/2010 Buy 200 WFT WEATHERFORD INTL LTD F $18.62 ($3,729.77) $5.97 4/30/2010
4/27/2010 Buy 100 WFT WEATHERFORD INTL LTD F $18.62 ($1,864.75) $2.98 4/30/2010
4/27/2010 Buy 200 CMI CUMMINS INC $75.06 ($15,020.95) $8.95 4/30/2010
4/26/2010 Buy 245 CINF CINCINNATI FINANCIAL CP $30.00 ($7,358.95) $8.95 4/29/2010
4/26/2010 Buy 200 SPY S P D R S&P 500 ETF TR EXPIRING 01/22/2118 $121.94 ($24,396.95) $8.95 4/29/2010
4/26/2010 Sell 500 CAT CATERPILLAR INC $72.43 $36,205.93 $8.95 4/29/2010
4/26/2010 Buy 500 CAT CATERPILLAR INC $72.45 ($36,233.95) $8.95 4/29/2010
These are not official records and will not be reported to the IRS. Please use this information only as a tool to assist your financial management. Always refer to your Schwab statements, trade confirmations and/or IRS Form 1099 for a complete and accurate record of your transactions and holdings.
Exported from StreetSmart.com™ for account XXXX-xxxx on 4/28/2010 at 9:42 EDT
SPY 200 $24,396.95 $24,145.05 ($251.90) 04-26-10 - N/A 04-27-10 - 09:52:15 ET
HSY 06/19/2010 50.00 C 10 $667.50 $402.49 ($265.01) 04-22-10 - N/A 04-27-10 - 09:55:23 ET
HSY 1000 $47,418.95 $47,360.24 ($58.71) 04-22-10 - N/A 04-27-10 - 09:55:24 ET
Total $72,483.40 $71,907.78 ($575.62)
on 4/27/2010 at 9:56 EDT
Monday, April 26, 2010
Rich -- Goldman Sachs
(c) 2010 F. Bruce Abel
Best of the weekend:
http://dealbook.blogs.nytimes.com/2010/04/26/rich-fight-on-goldman-sachs/?scp=1&sq=rich%20goldman&st=cse
Best of the weekend:
http://dealbook.blogs.nytimes.com/2010/04/26/rich-fight-on-goldman-sachs/?scp=1&sq=rich%20goldman&st=cse
Tuesday, April 20, 2010
Send Up a Front
(c) 2010 F. Bruce Abel
As daughter Genny picked up the phone and said so confidently when we were settling into our room at the Rupp Arena Weston (?), "send up a front."
Now AIG is thinking of suing Goldman on the same theory as the SEC in the Abacus case:
http://www.cnbc.com/id/36656434
Read the comments as they seem knowledgeable.
As daughter Genny picked up the phone and said so confidently when we were settling into our room at the Rupp Arena Weston (?), "send up a front."
Now AIG is thinking of suing Goldman on the same theory as the SEC in the Abacus case:
http://www.cnbc.com/id/36656434
Read the comments as they seem knowledgeable.
Monday, April 19, 2010
The Institutional Investor -- Part 2
(c) 2010 F. Bruce Abel
This article and the comments are essential reading.
http://dealbook.blogs.nytimes.com/2010/04/19/the-goldman-defense-caveat-emptor/?hp
It contains Goldman Sachs's defense, given months ago.
This article and the comments are essential reading.
http://dealbook.blogs.nytimes.com/2010/04/19/the-goldman-defense-caveat-emptor/?hp
It contains Goldman Sachs's defense, given months ago.
Somehow This Reminds Me of Grisham's The Associate
(c) 2010 F. Bruce Abel
OK, go back to my earlier blogs whereby Grisham describes what the new associates at the biggest New York law firm, do in the "Document Review." Type on the label "Grisham," or "The Associate."
All the due-dilligence that was not done by the clients is now being done by the $800/hr boys. And their life is, essentially, over.
Somehow, somehow, this relates to the Goldman Sachs situation.
"Bespoke" deal just mentioned on CNBC. Paulson "only" did one. So?????
OK, go back to my earlier blogs whereby Grisham describes what the new associates at the biggest New York law firm, do in the "Document Review." Type on the label "Grisham," or "The Associate."
All the due-dilligence that was not done by the clients is now being done by the $800/hr boys. And their life is, essentially, over.
Somehow, somehow, this relates to the Goldman Sachs situation.
"Bespoke" deal just mentioned on CNBC. Paulson "only" did one. So?????
Sunday, April 18, 2010
Where Was Lynn A. Stout When Her Information Was Needed?
(c) 2010 F. Bruce Abel
Where was Lynn A. Stout when her information was needed?
http://roomfordebate.blogs.nytimes.com/2010/04/16/what-goldmans-conduct-reveals/#lynn
Over and over again there is nobody to present the other side of legislation that enabled the system to be destroyed. That's because there is nobody funding that side. Nobody called an expert to research the issue and report to Congress.
So as clear as Lynn A. Stout's piece is to us, where was she in 2000 when this information would have been relevant?
The information:
Sunday, April 18, 2010
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April 16, 2010, 3:31 pm What Goldman’s Conduct Reveals
By THE EDITORS
The Securities and Exchange Commission filed a civil lawsuit against Goldman Sachs for securities fraud on Friday, charging the bank with creating and selling mortgage-backed securities that were intended to fail.
According to the complaint, Goldman let John Paulson, a prominent hedge fund manager, select mortgage bonds that he wanted to bet against because they were most likely to lose value and packaged those bonds into the “Abacus” investments, which were sold to investors like foreign banks and pension funds. As those securities plunged in value, the Paulson hedge fund made money on the negative bets, while the Goldman clients who bought the investments lost billions of dollars.
Is this chain of events surprising? The S.E.C. is suing Goldman Sachs, but could regulation or monitoring of these financial instruments have prevented such losses? What kind of regulatory structure would need to be put in place?
Lynn A. Stout, professor of corporate and securities law, U.C.L.A.
Michael Greenberger, former commodities regulator
Nicole Gelinas, Manhattan Institute
Yves Smith, financial analyst
Nomi Prins, senior fellow, Demos
Edward Harrison, banking and finance specialist
Douglas Elliott, Brookings Institution
Megan McArdle, Asymmetrical Information
William K. Black, former banking regulator
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The Natural Result of Deregulation
Lynn A. Stout is the Paul Hastings professor of corporate and securities law at U.C.L.A. and an expert on corporate governance.
If the allegations against Goldman Sachs are true, then much of the blame for investors’ losses in the Abacus deal can be laid at the feet of an obscure statute passed by Congress in 2000, the “Commodities Futures Modernization Act.”
If we allow the unscrupulous to buy fire insurance on other people’s houses, the incidence of arson would rise sharply. In one dramatic move, that act eliminated a longstanding legal rule that deemed derivatives bets made outside regulated exchanges to be legally enforceable only if one of the parties to the bet was hedging against a pre-existing risk.
This traditional derivatives rule against purely speculative derivatives trading has a parallel in insurance law, because insurance, like derivatives trading, is really just a form of betting. A homeowner’s fire insurance policy, for example, is a bet with an insurance company that your house will burn down.
Under the rules of insurance law, you can only buy fire insurance on a house if you actually own the house in question. Similarly, under the traditional legal rules regulating derivatives trading, the only parties who could use off-exchange derivatives to bet against the Abacus deal would be parties who actually held investments in Abacus.
By eliminating this centuries-old rule in the name of “modernization,” Congress created enormous problems of moral hazard in the off-exchange derivatives market. Imagine, for example, if we allow the unscrupulous to buy fire insurance on other people’s houses; the incidence of arson would rise dramatically.
Similarly, by allowing an unscrupulous hedge fund to use derivatives to bet against an Abacus investment vehicle it didn’t own, the Commodities Futures Modernization Act invited that hedge fund to work with Goldman Sachs to make sure that Abacus would indeed fail — as it did.
Sadly, greed is a constant in human nature. We’re not likely to eliminate it soon. But we can at least keep it in check. It’s time for Congress to address the problem of moral hazard in derivatives betting by repealing the Commodities Futures Modernization Act.
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Accountability, at Long Last
Michael Greenberger is a professor at the University of Maryland School of Law and a former director of trading and markets at the Commodity Futures Trading Commission.
If Sept. 15, 2008, the day Lehman Brothers was allowed to fail, marks the Pearl Harbor or widely acknowledged onset of the present Great Recession (in Franklin Roosevelt’s words “a date which shall live in infamy”), April 16, 2010 may be deemed the equivalent of the U.S. victory in the crucial Battle of Midway in 1942 or the day the U.S. neutralized the Japanese fleet.
If the fall of Lehman was Pearl Harbor, the S.E.C.’s case against Goldman may be the Battle of Midway — a crucial victory.
.On April 16, 2010, the S.E.C. announced its enforcement action against Goldman Sachs alleging the improper marketing of what the S.E.C. alleges was the sale of two evenly matched, but highly conflicting, investments: essentially bets for and against the proposition that subprime (non-creditworthy) mortgage borrowers would pay back their loans. Goldman is alleged to have profited substantially from those who bet against subprime repayment while aggressively marketing to its other customers bets in favor of repayment.
Let’s be clear. Goldman Sachs vigorously denies the S.E.C.’s allegations, and doubtless it will fight the action with the utmost vigor. It is certainly entitled to do so.
Read more…
However, what makes the S.E.C. enforcement action a landmark is that it responds to a widely held desire on the part of the American taxpayer: accountability.
The underpinnings of that desire is that the present crisis, including high unemployment and devastating economic insecurity accompanied by skyrocketing deficits, was not caused by the average American. But, it is the average American who has had to foot the bill for restoring the economy.
What is especially aggravating is that those who unmistakably did cause the crisis, i.e., the “pillars of Wall Street,” are now stronger and more profitable than ever before. And the impression is that Wall Street has returned to “business as usual,” once again using the same investment strategies that brought on the fall 2008 deluge.
The case against Goldman shows that savvy insiders knew the financial crisis was coming, and profited from it.
.So the key question from Main Street is: where is the accountability? If the average American fails miserably in a business or professional enterprise, there are consequences, e.g., firing or bankruptcy. Up to today, it appeared that those traditional hallmarks of failure did not apply to Wall Street or those who were responsible for regulating Wall Street.
Just last week, Alan Greenspan, the former Fed chairman, and Robert Rubin, the former Treasury Secretary and Citigroup officer, said they were not to blame for the meltdown even though both prevented regulation of the kind of bets Goldman Sachs is now accused of misusing.
More galling is the constant refrain from both Wall Street C.E.O.s and former regulators that no one could have predicted the crisis. However, the S.E.C. allegations are premised on the fact that hedge funds and Goldman Sachs itself were so convinced of cataclysmic failure that they were looking for investment vehicles that would profit each time a homeowner defaulted on his or her mortgage.
In other words, there were competent and smart people making billions because they could foresee the obvious: people with poor credit would not be able to repay their home loans.
In short, it was not that no one knew. Savvy insiders knew.
We do not know the success of the S.E.C.s actions today. But, if successful, you can be sure that this will be the beginning of what those average Americans suffering during this Great Recession are desperately seeking: accountability.
As Winston Churchill said after early Allied victories in World War II: “This is not the end or even the beginning of the end; but it is the end of the beginning.” We may now be at the beginning of rewarding competence and sanctioning ineptness or worse.
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A Third Party Problem
Nicole Gelinas, a contributing editor to the Manhattan Institute’s City Journal, is the author of “After the Fall: Saving Capitalism from Wall Street — and Washington.”
The government’s charges against Goldman and its employees — if true — are not shocking. People lie. The Securities and Exchange Commission can do better at enforcing the laws that make liars think twice. But policing fraud cannot be our first line of defense against financial excess.
It’s simple: the German bank that bought the mortgage securities shouldn’t have relied on a consultant.
.The S.E.C. says that Goldman, in early 2007, told mortgage-bond buyers that the consultant who helped create their securities had their best interests at heart. The consultant was taking advice, at Goldman’s behest, from another investor who would profit when the securities went bust.
Synthetic collateralized debt obligations are hard, but dishonesty with clients is easy. Raking through the details of the case uproots far deeper problems, though.
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First, the obscure third parties that helped Goldman and other big banks sell complex deals encouraged investors to suspend necessary skepticism.
The German bank that bought the mortgage securities, IKB Deutsche Industriebank, fancied itself a sophisticated firm. So why did it rely on a Goldman consultant, ACA Management, as a “portfolio selection agent?” And why did sophisticated investors need third parties to “insure” the securities?
Just as Bernie Madoff’s investors would have done better not to rely on advisers to tell them that Bernie was O.K., IKB would have been better off performing its own analysis of American mortgage markets.
But obscure third parties were the spawn of Washington’s bank bailouts starting in the 1980s. The expectation of government support artificially fed Wall Street growth — so there was plenty of cheap money to trickle down from the too-big-to-fail banks to the ever-more-creative little guys.
Second, applying old trading and capital rules to new financial markets would have reduced hanky-panky.
Goldman was able to “customize” securities, allegedly committing fraud under cover of the opacity that customization provided, because the securities did not trade on a public marketplace. Such a marketplace would have demanded simplicity from Goldman in creating the securities. Thousands of investors, rather than a few hand-picked third parties, could have analyzed and priced them.
The same is true in credit-derivatives markets. Opacity serves only the banks, which reap higher fees from customers who remain in the dark.
Enforcing justice is vital to markets. But Washington should help investors, too, by reducing opportunities to thwart justice. We need a return to simplicity. Congress should direct regulators to impose trading, disclosure and capital rules consistently across financial firms and instruments — so that markets can smash the repositories for secrets that imperil the economy.
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Immoral, Destructive Behavior
Yves Smith writes the blog Naked Capitalism. She is the head of Aurora Advisors, a management consulting firm, and the author of “Econned: How Unenlightened Self Interest Undermined Democracy and Corrupted Capitalism.”
Strange as it may seem, the Securities and Exchange Commission’s lawsuit against Goldman Sachs for selling collateralized debt obligations (C.D.O.) designed to fail illustrates what a long and difficult haul it will be to reform the financial services sector.
This case should be a slam-dunk, but years of deregulation have narrowed the ground for lawsuits.
.Goldman allowed hedge fund manager John Paulson to sponsor a C.D.O. The sponsor can influence how the C.D.O. is constructed, the notion being that the sponsor will act in ways that help all the other investors. But this C.D.O. was allegedly a Trojan horse for Mr. Paulson to take a large short position, betting against the very same C.D.O. he was creating.
But his intent was not disclosed. And, not surprisingly, the deal was a complete wipeout, with Mr. Paulson collecting a billion dollars of winnings at the expense of investors who had been kept in the dark and would almost certainly have turned down the deal if they had had the full picture.
By any common sense standard, this case should be a slam-dunk. However, despite tough talk by the Obama administration on financial reform, it is not mounting a criminal case against Goldman.
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Moreover, the S.E.C. has long had a difficult time winning complex financial fraud cases. While critics like to argue that the S.E.C. is not up to the task, the situation is more complex. Years of deregulation have narrowed the ground for lawsuits considerably. What’s more, structured credit is a new area of litigation. Thus the S.E.C. is also mounting its case in an arena where there are few precedents to rely upon.
If the S.E.C. loses its case against Goldman, it will be too easy to draw the wrong conclusion: not that the S.E.C. failed, but that the financial services industry succeeds all too well in its campaign to tear down the rules needed to make markets safe for investors.
No matter what happens to this particular lawsuit, it’s critical not to lose sight of the fact that immoral, destructive behavior has become deeply entrenched on Wall Street, and it will take concerted action to root it out.
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Smelling the Deception
Nomi Prins is a senior fellow at Demos. She is the author of “It Takes a Pillage: Behind the Bailouts, Bonuses and Backroom Deals from Washington to Wall Street” and “Other People’s Money: The Corporate Mugging of America.” She was a managing director at Goldman Sachs.
It’s probably no coincidence that Goldman Sachs took such great pains to deliver a decisive “we don’t bet against our clients” statement right before the S.E.C. levied its charge that the firm “defrauded” its clients through “misstating and omitting key facts.”
The entire nature of the C.D.O. business invites firms to act for certain clients and against others.
.Indeed, under the particulars of this complaint, Goldman didn’t bet against its clients directly, it merely acted on all possible angles of a deal that facilitated one huge client betting against other clients, while obfuscating the specifics of its enabling and fee-taking role in the triangle.
That’s why it is dangerous to single out one member of Goldman (where the title of vice president is low on the totem pole) as the culprit. Collateralized debt obligations were very lucrative for everyone involved. The bad apple approach enforces an inaccurate representation of two main problems.
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First, it took the S.E.C. nearly three years to wake up and smell the deception. This was a large deal involving a major investment house and major hedge fund. Having some sort of priority examination of such deals would have been prudent.
Second and more important, is the lax regulatory structure itself. In our current regulatory framework, any issuing bank can act on all sides of a C.D.O. (or other complex security) — as creator, trader, hedger and seller. This inevitably means there will be conflicts of interest because the bank in the middle gets paid (handsomely) for all its services, no matter what the outcome of the deal’s performance. Plus, it has the benefit of insider knowledge.
Even without putting together a C.D.O. portfolio on behalf of the same client whose interest is served by shorting it as is the case here, the entire nature of the C.D.O. business invites firms to act for certain clients and against others. There is always the possibility of stuffing the worst assets into a C.D.O. and marketing them as the best.
Risk is shuffled around the market from those in the know (like Goldman or Paulson) to those who have far less access to information or fancy analytics (like pension fund buyers.)
That’s how spread, or profit, is created. And, as we’ll see if more such deals get investigated for their unique conflicts, that’s how loss is deferred to others, too. The best protection is to isolate securities creation from distribution.
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Is This Political?
Edward Harrison is a banking and finance specialist at the economic consultancy Global Macro Advisors. He is also the principal contributor to the financial Web site Credit Writedowns.
When Lehman Brothers collapsed in a heap in 2008, the financial world was thrown into turmoil. The financial calamity was entirely foreseeable for those who chose to look. Reckless borrowing, lending and speculation were an integral part of the breakdown in our financial system. But so too was fraud.
It seems unlikely that the Goldman legal case is better than a potential legal challenge to Lehman’s use of ‘Repo 105.’
.Since at least 2004, when the FBI warned of a mortgage fraud “epidemic,” it has been clear that deception, predatory lending and outright fraud have been rampant in the financial services industry. Yet regulators did nothing. Therefore, my initial reaction to the fraud charges against Goldman Sachs for misleading clients is largely positive. I have long felt that the government was treading lightly against large U.S. banks, perhaps for fear of our economy’s fragile state.
But, Goldman Sachs has often been accused of looking after its own interests rather than that of its clients. Allegations that Goldman bet against its own clients in derivatives deals involving American municipalities and European countries are examples of the purported double dealing. It is no wonder that former Washington Mutual Kerry Killinger recently testified before Congress that he was wary of engaging Goldman Sachs as an adviser for just this reason. To date, most of this behavior could have been construed as legal but unethical.
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Goldman Sachs may be the first major Wall Street firm to face criminal charges because it has been a lightning rod of populist discontent. Moreover, they do not fulfill a significant deposit-taking function. But, it strikes me as odd that Goldman has been charged when Lehman Brothers had a $150 billion hole in its balance sheet that, at a minimum, represented a potential Sarbanes-Oxley violation. To this non-lawyer, it seems unlikely that the Goldman legal case is better than a potential legal challenge to Lehman’s use of an accounting device, known as “Repo 105,” to temporarily move assets.
Much of this is likely political. I see the timing of the Goldman announcement as an attempt by President Obama to at once tell Americans that he is serious about financial reform and banks that he will resist their efforts to deter reform by any means necessary.
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The Current Regulatory Battle
Douglas Elliott, a former investment banker, is a fellow in the Initiative on Business and Public Policy at the Brookings Institution.
We will not know for some time how important this is, because it depends on the strength of the government’s case and the extent to which this is a forerunner of lawsuits against other firms.
This case will raise the level of public anger and help move the financial reform proposals through the Senate.
.It is important to remember that complicated securities fraud cases can be difficult to prove. But this could be a watershed event if the S.E.C. has a strong case and follows this suit with broadly similar lawsuits against other banks.
In the short run, the suit is likely to strengthen the hand of the Democrats who are pushing financial reform legislation. This case will raise the level of public anger still further, providing fuel to move the proposals through the Senate.
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I already thought the odds of passage were high; this increases the odds further. However, politics is always difficult to forecast. For example, the Democrats could overplay their hand and succeed in completely uniting the Republicans, leading to a successful filibuster that kills the bill, at least for now.
If Democrats play their hand right, though, the suit will make it harder for Republicans to hold all 41 members in a Senate filibuster vote or to break away one or more Democrats. This is not a good time for a politician to be seen as defending Wall Street.
It is not clear that a different regulatory structure would have made a difference in this case. If the S.E.C.’s allegations are correct, the actions were illegal under current law. The S.E.C. could, perhaps, have done a better job of catching such actions earlier, but that is a matter of execution not broad structure.
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Undermining Trust in Markets
Megan McArdle is the business and economics editor for The Atlantic.
In one respect, this is not shocking at all. Goldman Sachs is publicly perceived to have not merely weathered this crisis well, but to have actually profited by it. Public anger is high. It was only to be expected that prosecutors and regulators would go head-hunting. But the details of these particular charges are rather surprising.
Minimize insider dealing by pushing more transactions onto central clearinghouses and exchanges.
.If the allegations are true, Goldman Sachs allowed a third party with a material economic interest to determine the structure of securities it sold. By itself, this is not worrisome — but according to the S.E.C., Goldman did not disclose this relationship, instead allowing investors to think that it had been structured by a disinterested analyst.
One side of the transaction had dramatically more information than the other — a situation which most market regulation is supposed to prevent. If the S.E.C. is correct, this isn’t merely evidence of a crime, but of a distressingly cavalier attitude toward basic rules of market conduct.
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Critics have long accused the bulge-bracket banks of using their market position to self-deal at the expense of ordinary investors. But these charges suggest that heavy-handed use of market muscle may have slipped over the line into outright fraud.
It’s clear that the sort of thing described in the complaint shouldn’t happen. It’s less clear how we can prevent them. This sort of insider dealing is extremely difficult to police. We will never get to a market so well-regulated that bankers can’t cut deals for favored clients with a nudge and a wink.
What we can do is minimize the opportunities for such activity by pushing as many transactions as possible onto central clearinghouses and exchanges. These are no panacea — just witness the deals that equity desks were able to cut for special clients in the late 1990s. But the less transparency there is, the easier it is to cut special deals for favored clients at the expense of other investors.
This isn’t just bad for the investors; it’s corrosive to the trust that markets need to function well. It also erodes the public trust in the major investment banks. Those banks have fought fiercely against regulation designed to lessen their market power. As Congress moves towards passage of comprehensive financial reform, they, and the bankers, would do well to remember that without strong trust in markets, we’d all be a lot worse off.
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So Much We Don’t Know
William K. Black, an associate professor of economics and law at the University of Missouri–Kansas City, is a former top federal financial regulator. He is the author of “The Best Way to Rob a Bank is to Own One.”
It’s been a bad two weeks for our most elite financial leaders. Citicorp’s top mortgage credit officer, Richard Bowen, testified before Financial Crisis Inquiry Commission on April 7 that while Citi represented to Fannie and Freddie that the toxic mortgages it was selling them were “conforming” — 60 percent were not.
Why have there been no criminal charges?
.He warned Citi’s top managers, including Robert Rubin. They jumped right on the problem (which will cost the taxpayers hundreds of billions of dollars) — by allowing things to get worse.
The Senate Banking Committee released the findings from its investigation of Washington Mutual — the largest savings and loan and largest bank failure. My research specialty is “control fraud,” which involves fraudulent accounting. Lenders optimize accounting fraud through extreme growth; making bad loans at high interest rates; extreme leverage and trivial loss reserves. The Senate Banking Committee’s findings show that WaMu’s business operations followed this recipe.
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Lehman led the parade with the recent release of the bankruptcy examiner’s report. The report shows that Lehman had billions of dollars of losses on bad assets. But Lehman’s financial statements did not recognize the losses. In addition to this first-stage cover up of its losses, Lehman entered into huge quarter-end repurchase agreement transactions to further cover up its crippling losses. Both cover-ups could lead to criminal liability.
Now, we learn that the S.E.C. charges that Goldman Sachs should be added to the list of elite financial frauds.
It is a tale of two (unrelated) Paulsons. Hank Paulson, while Goldman’s chief executive, had Goldman buy large amounts of collateralized debt obligations backed by “liar’s loans” (low-grade mortgages). He then became U.S. Treasury Secretary and launched a successful war against securities and banking regulation. His successors at Goldman realized the disaster and began to “short” C.D.O.s.
It designed a rigged trifecta: (1) it turned a massive loss into a material profit by selling toxic C.D.O.s it owned, (2) helped make John Paulson, head of a huge hedge fund, a massive profit and (3) blew up its customers that purchased the C.D.O.s.
The S.E.C. complaint says that Goldman defrauded its own customers by representing to them that the C.D.O. was “selected by ACA Management.” ACA was supposed to be an independent group of experts that would “select” nonprime loans “most likely to succeed” rather than “most likely to fail.” The SEC complaint alleges that the representations about ACA were false.
The question is: did John Paulson and ACA know that Goldman was making these false disclosures to the C.D.O. purchasers? Did they aid in what the S.E.C. alleges was Goldman’s fraud? Why have there been no criminal charges? Why did the S.E.C. only name a relatively low-level Goldman officer in its complaint?
Goldman used American International Group to provide the insurance on the synthetic C.D.O. deals, and Hank Paulson used our money to bail out Goldman when A.I.G.’s scams drove it to failure. As we — Eliot Spitzer, Frank Partnoy and I — asked in our Op-Ed in the Times on Dec. 19, 2009 — why haven’t the A.I.G. e-mails and key deal documents been made public?
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.151 Readers' CommentsPost a Comment ».All CommentsHighlightsReaders' RecommendationsReplies..OldestNewest of 7Next ..1.R. Law
Texas
April 16th, 2010
4:32 pmIntegrity of the markets is sacrosanct to capitalism, on a pedestal equal to fiduciary responsibilities.
Firrms in charge of making markets and spreading the gospel of capitalism are doubly-charged with protecting both tenets.
Recommend Recommended by 53 Readers .2.Tom
Midwest
April 16th, 2010
4:33 pmConsidering the Republicans, maintaining their status quo, today unanimously vowed to oppose financial reform while at the same time President Obama vowed to veto any legislation that did not include regulation of derivatives which I believe are at the core of the financial collapse and problems. The Democrats, rightly or wrongly are proposing specific legislation while the Republicans propose nothing. That explains everything to me in a nutshell. Now tell me again which party is more beholden to the big financial companies and banks? The Republicans keep driving me farther and farther from the party I used to support. They used to have ideas, now they have only no.
Recommend Recommended by 303 Readers .3.greenmountain boy
burlington, vt
April 16th, 2010
4:33 pmLynn Stout has it exactly right. Bankers and investors will always be greedy. Trying to police a market of synthetic cdos is a waste of time. The traditional rule that you should only be hedging against your own actual risks needs to be reinstated.
Recommend Recommended by 151 Readers .4.Arin
Buffalo, NY
April 16th, 2010
4:37 pmThe politics of this plays very well. This lawsuit comes on the very day that the Republicans have unified to prevent debate of the financial reform bill in the Senate. It will hopefully shape the message of the Democrat party, that the Democrats stand for Main Street, and the Republicans stand for Wall Street. Whatever the outcome of this lawsuit, its intent has already paid dividends (no pun intended)
Recommend Recommended by 92 Readers .5.Mark O
Boston
April 16th, 2010
4:38 pmI was under the impression that the Federal government was in thrall to Goldman Sachs because the firm has until now been allowed to seek bilk the financial system with impunity. This lawsuit is both shocking and refreshing evidence of the government's independence.
Recommend Recommended by 65 Readers .6.jimmy
san francisco
April 16th, 2010
4:38 pmI think Professor Stout cleared it up for those on Wall Street. They burned the house down insured at 100 cents on the dollar with our bail out tax money in the hundreds of billions of dollars to AIG and they'll do it again. How can this not make anyone just completely sick. How many lives and careers have they ruined? And Obama says he's not out to get the bankers? I hope he was lying.
Recommend Recommended by 129 Readers .7.Atlanta Guy Making serious dough
Atlanta, GA
April 16th, 2010
4:46 pmWhy is Goldman Sachs only facing a civil suit? The allegation against them is criminal fraud and they should face criminal prosecution. This feeds the long standing view (held by many) that the rich get away with murder while the average joe is held to a higher standard. Though a civil case will indeed be very damaging to GS, it is NOT enough. You deceived investors and nearly destroyed the entire financial system and you're sitting there looking pretty (with billions in profit)
Recommend Recommended by 199 Readers .8.timfenton1
laura
April 16th, 2010
4:47 pmWhy didn't you request comment from Sen. Mitch McConnell who seems determined to sink financial markets reform?
Recommend Recommended by 83 Readers .9.GrammyofWandA
Maine
April 16th, 2010
4:47 pmThe teabaggers will surely point out that the Goldman Sachs employees who allegedly committed the fraud are extremely dedicated workers who should not be subjected to an income tax increase.
Recommend Recommended by 110 Readers .10.mark
Honolulu, Hawaii
April 16th, 2010
4:47 pmThe insurance analogy is spot on! We don't let people bet on whether other people's buildings will burn down for reasons that are so obvious they have been a part of insurance law forever. It's called the necessity of having an insurable interest. What do you think would happen if we allowed the mob to buy insurance on people's lives? When we allowed people to take out insurance without an insurable interest we converted a financial instrument predicated on personal risk avoidance into one predicated on profiting on other people's losses. The results are here in front of us for all to see. We need to reverse the mistake we made and reverse it quickly.
Recommend Recommended by 178 Readers .11.sara
oakland, ca
April 16th, 2010
4:47 pmi am waiting for the apologists for Market Innovation to begin the talking points that will crush litigation and effective reform.
Beneath the Goldman/Magnator shorting of these faulty CDOs with wildly high credit default swap pay-offs lies the RATIONALIZATION. Risk is diluted buy these derivatives, shorting keeps the market honest, capitalizing our realestate market bring poor folk into home ownership....ALL these arguments are either gross distortions of reality or cynical ways to preserve the looting of our economy by shallow wise guys. These short-term profiteers (thru millions in commissions from creating CDOs to the billions collected in crooked swaps as they failed) are now safely stashing away their fortunes; NO LESSON has been learned. And the law blocks retroactive taxation of windfall profits....or does it ?
Recommend Recommended by 37 Readers .12.jjcrocket
New Britain, Conn.
April 16th, 2010
4:48 pmDianna Farrell:
Obama Administration: Deputy Director, National Economic Council
Former Goldman Sachs Title: Financial Analyst
Stephen Friedman:
Obama Administration: Chairman, President’s Foreign Intelligence Advisory Board
Former Goldman Sachs Title: Board Member (Chairman, 1990-94; Director, 2005-)
Gary Gensler:
Obama Administration: Commissioner, Commodity Futures Trading Commission
Former Goldman Sachs Title: Partner and Co-head of Finance
Robert Hormats:
Obama Administration: Undersecretary for Economic, Energy and Agricultural Affairs, State Department
Former Goldman Sachs Title: Vice Chairman, Goldman Sachs Group
Philip Murphy:
Obama Administration: Ambassador to Germany
Former Goldman Sachs Title: Head of Goldman Sachs, Frankfurt
Mark Patterson:
Obama Administration: Chief of Staff to Treasury Secretary, Timothy Geitner
Former Goldman Sachs Title: Lobbyist 2005-2008; Vice President for Government Relations
John Thain:
Obama Administration: Advisor to Treasury Secretary, Timothy Geithner
Former Goldman Sachs Title: President and Chief Operating Officer (1999-2003)
http://the-classic-liberal.com...
Recommend Recommended by 129 Readers .13.Older but Wiser
Dallas
April 16th, 2010
4:48 pmIn a criminal trial most people withhold judgement until the verdict is reached. As civil cases turn far more on interpretations of rules it would be more seemly if the New York Times and its panelists waited until there is a conviction before crowing and trying to tell us what all this means.
Recommend Recommended by 5 Readers .14.smiths
ar
April 16th, 2010
4:48 pmI'm more concerned about Goldmans Sach's ownership of the Obama administration
Recommend Recommended by 95 Readers .15.RS Love
Palo Alto, CA
April 16th, 2010
4:48 pmJust a reminder that Frank Partnoy testified back in 2002 before a Senate committee that Enron was enabled to game and defraud investors using derivatives and that unless the law was corrected, more of the same was coming down the road. No one listened.
The culprit in the Enron crime wave was a recipe of CFMA 2000 mandated deregulation of trading exotics/synthetics, the corporate accountants serving no one, credit agencies for hire and our own lax Federal regulators too.
Roll tape forward to 2010. We are about to ignore the lessons of the past once again. Hard to admit that post-Depression banking legislation actually worked then and it worked up until the recent1990s while both parties dismantled it. There can be no real reform without separating the main street banking businesses from the casino bankers.
The mighty legends are headed to disgrace including Greenspan, Rubin, Summers, our Presidents (from Reagan to Obama), Paulson, Geithner, Gramm and the Senate Republicans who blindly took Wall Street's money; now it's the Democrats turn to pave the next road to financial ruin. They're right on schedule.
Recommend Recommended by 83 Readers .16.BTT
Wilkes-Barre, Pa.
April 16th, 2010
4:49 pmOne other point to Lynn Stout: you can't buy Home Insurance while the house is on fire! America at its worst! How immoral! BTT
Recommend Recommended by 32 Readers .17.Marcel Duchamp
Maine
April 16th, 2010
4:49 pmNext up: criminal prosecutions.
Let's go!
Recommend Recommended by 100 Readers .18.T.L.Moran
Idaho
April 16th, 2010
4:49 pmForget the SEC and its hunt through the dense weeds of microscopic regulatory law.
The attorneys general of many states facing bankruptcy, the many pension funds, university systems, and other public institutions, need only find one instance -- I'm sure there are many -- of death from heart attack or crisis-driven suicide and they have a perfect case against these corporations for depraved-heart murder.
The Wall St. thugs, driven by their addiction to complex scams and outsize profits, have demonstrated 'callous disregard' and 'extreme indifference' to the value of American lives with every million dollar profit they've made, every lavish bonus they've awarded themselves.
Never mind what slimy combination of congressional dopes and financial addicts undermined the laws protecting the country from this kind of daylight robbery. The intentions and the results speak clear: the executives of firms like this set aside all consideration for the continued life, health and happiness of everyday Americans in their adolescent race to see who could be the fastest, biggest looter of our national economy.
If corporations are people (thank you activist neo-con SCOTUS), then they are all guilty of depraved indifference. Prosecute, punish, and GET THIS COUNTRY'S MONEY BACK!
Recommend Recommended by 69 Readers .19.JVM Fan
Hollywood
April 16th, 2010
4:49 pmI just saw a movie on Sunset Blvd. called "Stock Shock" about all this Wall Street corruption and the audience was pretty shocked. It was the same story told through the eyes of Sirus XM investors that nearly went broke because of market manipulation. The movie is now sold on DVD just about everywhere, but cheaper at www.stockshockmovie.com
Recommend Recommended by 7 Readers .20.frank
providence, ri
April 16th, 2010
4:49 pmNone of this is news. Zuckerman in The Greatest Trade Ever (p.179) names Goldman, Bear Sterns, and Deutsche Bank (and others) as working with Paulson to create "controversial" CDO's (meaning this is not news) tailor made to fail. What can also be said it that mostly the banks were betting the other way, which is why they had so much losses, and the argument they were hedging really seems correct. But the fraud is ultimately about charges against an outside rating agencies, that maybe one didn't exist in this trade despite what was said. But all the rating agencies were also pushed and threatened no doubt NOT to rate the CDOs accurately. There is fraud everywhere, of course. The whole system was a fraud.
Recommend Recommended by 46 Readers .21.Docb
denver
April 16th, 2010
4:50 pmCome on folks --there has to be a market for these products...another IB or two or perhaps the street! They all did this created a market-- bought and sold against a fail...Go to the SEC site and pull up the Complaint--there is a firm mentioned , Paulson &Co---Hmmm could it be true? But this is just the tip...the SEC needs to be contacted and reminded that this is not isolated and not a case for fines and wrist slaps...1.888.732.6585 or the Sec of the SEC 1.202.551.5400
Recommend Recommended by 8 Readers .22.Dan
NYC
April 16th, 2010
4:50 pmI disagree with these rosy optimistic analysis of these so-called "experts."
This is the start of new chapter of regulations? Thats BS - These are civil charges, NOT criminal. Sure, Goldman will get hit with a settlement (probably around a million), which might sound big to the "main street average person" but in reality its not big at all to them. They will continue to do what they do and generate much much more money than that. Then, of course, Goldman Sachs will deny any wrongdoing, and Obama will praise the Justice System that we have. Every one wins! Except, of course, the people on main street and the people who GS fleeced.
Do you HONESTLY expect any better when the insane run the asylum?
Recommend Recommended by 55 Readers .23.pstgradny
New York
April 16th, 2010
4:52 pmWhat a shocker...dishonest and greedy investment bankers and traders. Sounds like fodder for a movie that might be entitled, Wall Street. I think Michael Douglas would be perfect for the lead role, and Charlie Sheen would be great as a conflicted young broker/trader. In the aftermath of the recent financial meltdown, this movie could be a huge hit, especially if done in 3D. Cameo performances might include Bernie Madoff, Jeffrey Skilling, Andy Fastow, Bernie Ebbers, Edward S. Digges Jr., etc.
Recommend Recommended by 16 Readers .24.Zenster
Manhattan
April 16th, 2010
5:13 pmIt seems every single person in the country knows for a fact that Goldman Sachs is a criminal organization, a white collar mafia - and still it took this long for the SEC to prosecute - and only this one charge, so amazingly egregious. What about the thousands and thousands of other crimes this giant vampire squid committed?
Recommend Recommended by 60 Readers .25.ron
new orleans
April 16th, 2010
5:14 pmI believe that the current banking crisis started out many years ago in Denver when the Silverado Bank and Neil Bush were bailed out by his father(Bush I) and his friends(Cheney,et al). Instead of starting a new wave of bank regulation at the time, Congress with the support of Bush, et al opened the flood gates to SEC deregulation. Being an optimist, I believe that everything that goes around, comes around. The American public will not be satisfied until the current group of creative criminals are exposed. Once they are indicted, historians should then revisit the first banking crisis.
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Where was Lynn A. Stout when her information was needed?
http://roomfordebate.blogs.nytimes.com/2010/04/16/what-goldmans-conduct-reveals/#lynn
Over and over again there is nobody to present the other side of legislation that enabled the system to be destroyed. That's because there is nobody funding that side. Nobody called an expert to research the issue and report to Congress.
So as clear as Lynn A. Stout's piece is to us, where was she in 2000 when this information would have been relevant?
The information:
Sunday, April 18, 2010
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April 16, 2010, 3:31 pm What Goldman’s Conduct Reveals
By THE EDITORS
The Securities and Exchange Commission filed a civil lawsuit against Goldman Sachs for securities fraud on Friday, charging the bank with creating and selling mortgage-backed securities that were intended to fail.
According to the complaint, Goldman let John Paulson, a prominent hedge fund manager, select mortgage bonds that he wanted to bet against because they were most likely to lose value and packaged those bonds into the “Abacus” investments, which were sold to investors like foreign banks and pension funds. As those securities plunged in value, the Paulson hedge fund made money on the negative bets, while the Goldman clients who bought the investments lost billions of dollars.
Is this chain of events surprising? The S.E.C. is suing Goldman Sachs, but could regulation or monitoring of these financial instruments have prevented such losses? What kind of regulatory structure would need to be put in place?
Lynn A. Stout, professor of corporate and securities law, U.C.L.A.
Michael Greenberger, former commodities regulator
Nicole Gelinas, Manhattan Institute
Yves Smith, financial analyst
Nomi Prins, senior fellow, Demos
Edward Harrison, banking and finance specialist
Douglas Elliott, Brookings Institution
Megan McArdle, Asymmetrical Information
William K. Black, former banking regulator
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The Natural Result of Deregulation
Lynn A. Stout is the Paul Hastings professor of corporate and securities law at U.C.L.A. and an expert on corporate governance.
If the allegations against Goldman Sachs are true, then much of the blame for investors’ losses in the Abacus deal can be laid at the feet of an obscure statute passed by Congress in 2000, the “Commodities Futures Modernization Act.”
If we allow the unscrupulous to buy fire insurance on other people’s houses, the incidence of arson would rise sharply. In one dramatic move, that act eliminated a longstanding legal rule that deemed derivatives bets made outside regulated exchanges to be legally enforceable only if one of the parties to the bet was hedging against a pre-existing risk.
This traditional derivatives rule against purely speculative derivatives trading has a parallel in insurance law, because insurance, like derivatives trading, is really just a form of betting. A homeowner’s fire insurance policy, for example, is a bet with an insurance company that your house will burn down.
Under the rules of insurance law, you can only buy fire insurance on a house if you actually own the house in question. Similarly, under the traditional legal rules regulating derivatives trading, the only parties who could use off-exchange derivatives to bet against the Abacus deal would be parties who actually held investments in Abacus.
By eliminating this centuries-old rule in the name of “modernization,” Congress created enormous problems of moral hazard in the off-exchange derivatives market. Imagine, for example, if we allow the unscrupulous to buy fire insurance on other people’s houses; the incidence of arson would rise dramatically.
Similarly, by allowing an unscrupulous hedge fund to use derivatives to bet against an Abacus investment vehicle it didn’t own, the Commodities Futures Modernization Act invited that hedge fund to work with Goldman Sachs to make sure that Abacus would indeed fail — as it did.
Sadly, greed is a constant in human nature. We’re not likely to eliminate it soon. But we can at least keep it in check. It’s time for Congress to address the problem of moral hazard in derivatives betting by repealing the Commodities Futures Modernization Act.
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Accountability, at Long Last
Michael Greenberger is a professor at the University of Maryland School of Law and a former director of trading and markets at the Commodity Futures Trading Commission.
If Sept. 15, 2008, the day Lehman Brothers was allowed to fail, marks the Pearl Harbor or widely acknowledged onset of the present Great Recession (in Franklin Roosevelt’s words “a date which shall live in infamy”), April 16, 2010 may be deemed the equivalent of the U.S. victory in the crucial Battle of Midway in 1942 or the day the U.S. neutralized the Japanese fleet.
If the fall of Lehman was Pearl Harbor, the S.E.C.’s case against Goldman may be the Battle of Midway — a crucial victory.
.On April 16, 2010, the S.E.C. announced its enforcement action against Goldman Sachs alleging the improper marketing of what the S.E.C. alleges was the sale of two evenly matched, but highly conflicting, investments: essentially bets for and against the proposition that subprime (non-creditworthy) mortgage borrowers would pay back their loans. Goldman is alleged to have profited substantially from those who bet against subprime repayment while aggressively marketing to its other customers bets in favor of repayment.
Let’s be clear. Goldman Sachs vigorously denies the S.E.C.’s allegations, and doubtless it will fight the action with the utmost vigor. It is certainly entitled to do so.
Read more…
However, what makes the S.E.C. enforcement action a landmark is that it responds to a widely held desire on the part of the American taxpayer: accountability.
The underpinnings of that desire is that the present crisis, including high unemployment and devastating economic insecurity accompanied by skyrocketing deficits, was not caused by the average American. But, it is the average American who has had to foot the bill for restoring the economy.
What is especially aggravating is that those who unmistakably did cause the crisis, i.e., the “pillars of Wall Street,” are now stronger and more profitable than ever before. And the impression is that Wall Street has returned to “business as usual,” once again using the same investment strategies that brought on the fall 2008 deluge.
The case against Goldman shows that savvy insiders knew the financial crisis was coming, and profited from it.
.So the key question from Main Street is: where is the accountability? If the average American fails miserably in a business or professional enterprise, there are consequences, e.g., firing or bankruptcy. Up to today, it appeared that those traditional hallmarks of failure did not apply to Wall Street or those who were responsible for regulating Wall Street.
Just last week, Alan Greenspan, the former Fed chairman, and Robert Rubin, the former Treasury Secretary and Citigroup officer, said they were not to blame for the meltdown even though both prevented regulation of the kind of bets Goldman Sachs is now accused of misusing.
More galling is the constant refrain from both Wall Street C.E.O.s and former regulators that no one could have predicted the crisis. However, the S.E.C. allegations are premised on the fact that hedge funds and Goldman Sachs itself were so convinced of cataclysmic failure that they were looking for investment vehicles that would profit each time a homeowner defaulted on his or her mortgage.
In other words, there were competent and smart people making billions because they could foresee the obvious: people with poor credit would not be able to repay their home loans.
In short, it was not that no one knew. Savvy insiders knew.
We do not know the success of the S.E.C.s actions today. But, if successful, you can be sure that this will be the beginning of what those average Americans suffering during this Great Recession are desperately seeking: accountability.
As Winston Churchill said after early Allied victories in World War II: “This is not the end or even the beginning of the end; but it is the end of the beginning.” We may now be at the beginning of rewarding competence and sanctioning ineptness or worse.
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A Third Party Problem
Nicole Gelinas, a contributing editor to the Manhattan Institute’s City Journal, is the author of “After the Fall: Saving Capitalism from Wall Street — and Washington.”
The government’s charges against Goldman and its employees — if true — are not shocking. People lie. The Securities and Exchange Commission can do better at enforcing the laws that make liars think twice. But policing fraud cannot be our first line of defense against financial excess.
It’s simple: the German bank that bought the mortgage securities shouldn’t have relied on a consultant.
.The S.E.C. says that Goldman, in early 2007, told mortgage-bond buyers that the consultant who helped create their securities had their best interests at heart. The consultant was taking advice, at Goldman’s behest, from another investor who would profit when the securities went bust.
Synthetic collateralized debt obligations are hard, but dishonesty with clients is easy. Raking through the details of the case uproots far deeper problems, though.
Read more…
First, the obscure third parties that helped Goldman and other big banks sell complex deals encouraged investors to suspend necessary skepticism.
The German bank that bought the mortgage securities, IKB Deutsche Industriebank, fancied itself a sophisticated firm. So why did it rely on a Goldman consultant, ACA Management, as a “portfolio selection agent?” And why did sophisticated investors need third parties to “insure” the securities?
Just as Bernie Madoff’s investors would have done better not to rely on advisers to tell them that Bernie was O.K., IKB would have been better off performing its own analysis of American mortgage markets.
But obscure third parties were the spawn of Washington’s bank bailouts starting in the 1980s. The expectation of government support artificially fed Wall Street growth — so there was plenty of cheap money to trickle down from the too-big-to-fail banks to the ever-more-creative little guys.
Second, applying old trading and capital rules to new financial markets would have reduced hanky-panky.
Goldman was able to “customize” securities, allegedly committing fraud under cover of the opacity that customization provided, because the securities did not trade on a public marketplace. Such a marketplace would have demanded simplicity from Goldman in creating the securities. Thousands of investors, rather than a few hand-picked third parties, could have analyzed and priced them.
The same is true in credit-derivatives markets. Opacity serves only the banks, which reap higher fees from customers who remain in the dark.
Enforcing justice is vital to markets. But Washington should help investors, too, by reducing opportunities to thwart justice. We need a return to simplicity. Congress should direct regulators to impose trading, disclosure and capital rules consistently across financial firms and instruments — so that markets can smash the repositories for secrets that imperil the economy.
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Immoral, Destructive Behavior
Yves Smith writes the blog Naked Capitalism. She is the head of Aurora Advisors, a management consulting firm, and the author of “Econned: How Unenlightened Self Interest Undermined Democracy and Corrupted Capitalism.”
Strange as it may seem, the Securities and Exchange Commission’s lawsuit against Goldman Sachs for selling collateralized debt obligations (C.D.O.) designed to fail illustrates what a long and difficult haul it will be to reform the financial services sector.
This case should be a slam-dunk, but years of deregulation have narrowed the ground for lawsuits.
.Goldman allowed hedge fund manager John Paulson to sponsor a C.D.O. The sponsor can influence how the C.D.O. is constructed, the notion being that the sponsor will act in ways that help all the other investors. But this C.D.O. was allegedly a Trojan horse for Mr. Paulson to take a large short position, betting against the very same C.D.O. he was creating.
But his intent was not disclosed. And, not surprisingly, the deal was a complete wipeout, with Mr. Paulson collecting a billion dollars of winnings at the expense of investors who had been kept in the dark and would almost certainly have turned down the deal if they had had the full picture.
By any common sense standard, this case should be a slam-dunk. However, despite tough talk by the Obama administration on financial reform, it is not mounting a criminal case against Goldman.
Read more…
Moreover, the S.E.C. has long had a difficult time winning complex financial fraud cases. While critics like to argue that the S.E.C. is not up to the task, the situation is more complex. Years of deregulation have narrowed the ground for lawsuits considerably. What’s more, structured credit is a new area of litigation. Thus the S.E.C. is also mounting its case in an arena where there are few precedents to rely upon.
If the S.E.C. loses its case against Goldman, it will be too easy to draw the wrong conclusion: not that the S.E.C. failed, but that the financial services industry succeeds all too well in its campaign to tear down the rules needed to make markets safe for investors.
No matter what happens to this particular lawsuit, it’s critical not to lose sight of the fact that immoral, destructive behavior has become deeply entrenched on Wall Street, and it will take concerted action to root it out.
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Smelling the Deception
Nomi Prins is a senior fellow at Demos. She is the author of “It Takes a Pillage: Behind the Bailouts, Bonuses and Backroom Deals from Washington to Wall Street” and “Other People’s Money: The Corporate Mugging of America.” She was a managing director at Goldman Sachs.
It’s probably no coincidence that Goldman Sachs took such great pains to deliver a decisive “we don’t bet against our clients” statement right before the S.E.C. levied its charge that the firm “defrauded” its clients through “misstating and omitting key facts.”
The entire nature of the C.D.O. business invites firms to act for certain clients and against others.
.Indeed, under the particulars of this complaint, Goldman didn’t bet against its clients directly, it merely acted on all possible angles of a deal that facilitated one huge client betting against other clients, while obfuscating the specifics of its enabling and fee-taking role in the triangle.
That’s why it is dangerous to single out one member of Goldman (where the title of vice president is low on the totem pole) as the culprit. Collateralized debt obligations were very lucrative for everyone involved. The bad apple approach enforces an inaccurate representation of two main problems.
Read more…
First, it took the S.E.C. nearly three years to wake up and smell the deception. This was a large deal involving a major investment house and major hedge fund. Having some sort of priority examination of such deals would have been prudent.
Second and more important, is the lax regulatory structure itself. In our current regulatory framework, any issuing bank can act on all sides of a C.D.O. (or other complex security) — as creator, trader, hedger and seller. This inevitably means there will be conflicts of interest because the bank in the middle gets paid (handsomely) for all its services, no matter what the outcome of the deal’s performance. Plus, it has the benefit of insider knowledge.
Even without putting together a C.D.O. portfolio on behalf of the same client whose interest is served by shorting it as is the case here, the entire nature of the C.D.O. business invites firms to act for certain clients and against others. There is always the possibility of stuffing the worst assets into a C.D.O. and marketing them as the best.
Risk is shuffled around the market from those in the know (like Goldman or Paulson) to those who have far less access to information or fancy analytics (like pension fund buyers.)
That’s how spread, or profit, is created. And, as we’ll see if more such deals get investigated for their unique conflicts, that’s how loss is deferred to others, too. The best protection is to isolate securities creation from distribution.
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Is This Political?
Edward Harrison is a banking and finance specialist at the economic consultancy Global Macro Advisors. He is also the principal contributor to the financial Web site Credit Writedowns.
When Lehman Brothers collapsed in a heap in 2008, the financial world was thrown into turmoil. The financial calamity was entirely foreseeable for those who chose to look. Reckless borrowing, lending and speculation were an integral part of the breakdown in our financial system. But so too was fraud.
It seems unlikely that the Goldman legal case is better than a potential legal challenge to Lehman’s use of ‘Repo 105.’
.Since at least 2004, when the FBI warned of a mortgage fraud “epidemic,” it has been clear that deception, predatory lending and outright fraud have been rampant in the financial services industry. Yet regulators did nothing. Therefore, my initial reaction to the fraud charges against Goldman Sachs for misleading clients is largely positive. I have long felt that the government was treading lightly against large U.S. banks, perhaps for fear of our economy’s fragile state.
But, Goldman Sachs has often been accused of looking after its own interests rather than that of its clients. Allegations that Goldman bet against its own clients in derivatives deals involving American municipalities and European countries are examples of the purported double dealing. It is no wonder that former Washington Mutual Kerry Killinger recently testified before Congress that he was wary of engaging Goldman Sachs as an adviser for just this reason. To date, most of this behavior could have been construed as legal but unethical.
Read more…
Goldman Sachs may be the first major Wall Street firm to face criminal charges because it has been a lightning rod of populist discontent. Moreover, they do not fulfill a significant deposit-taking function. But, it strikes me as odd that Goldman has been charged when Lehman Brothers had a $150 billion hole in its balance sheet that, at a minimum, represented a potential Sarbanes-Oxley violation. To this non-lawyer, it seems unlikely that the Goldman legal case is better than a potential legal challenge to Lehman’s use of an accounting device, known as “Repo 105,” to temporarily move assets.
Much of this is likely political. I see the timing of the Goldman announcement as an attempt by President Obama to at once tell Americans that he is serious about financial reform and banks that he will resist their efforts to deter reform by any means necessary.
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The Current Regulatory Battle
Douglas Elliott, a former investment banker, is a fellow in the Initiative on Business and Public Policy at the Brookings Institution.
We will not know for some time how important this is, because it depends on the strength of the government’s case and the extent to which this is a forerunner of lawsuits against other firms.
This case will raise the level of public anger and help move the financial reform proposals through the Senate.
.It is important to remember that complicated securities fraud cases can be difficult to prove. But this could be a watershed event if the S.E.C. has a strong case and follows this suit with broadly similar lawsuits against other banks.
In the short run, the suit is likely to strengthen the hand of the Democrats who are pushing financial reform legislation. This case will raise the level of public anger still further, providing fuel to move the proposals through the Senate.
Read more…
I already thought the odds of passage were high; this increases the odds further. However, politics is always difficult to forecast. For example, the Democrats could overplay their hand and succeed in completely uniting the Republicans, leading to a successful filibuster that kills the bill, at least for now.
If Democrats play their hand right, though, the suit will make it harder for Republicans to hold all 41 members in a Senate filibuster vote or to break away one or more Democrats. This is not a good time for a politician to be seen as defending Wall Street.
It is not clear that a different regulatory structure would have made a difference in this case. If the S.E.C.’s allegations are correct, the actions were illegal under current law. The S.E.C. could, perhaps, have done a better job of catching such actions earlier, but that is a matter of execution not broad structure.
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Undermining Trust in Markets
Megan McArdle is the business and economics editor for The Atlantic.
In one respect, this is not shocking at all. Goldman Sachs is publicly perceived to have not merely weathered this crisis well, but to have actually profited by it. Public anger is high. It was only to be expected that prosecutors and regulators would go head-hunting. But the details of these particular charges are rather surprising.
Minimize insider dealing by pushing more transactions onto central clearinghouses and exchanges.
.If the allegations are true, Goldman Sachs allowed a third party with a material economic interest to determine the structure of securities it sold. By itself, this is not worrisome — but according to the S.E.C., Goldman did not disclose this relationship, instead allowing investors to think that it had been structured by a disinterested analyst.
One side of the transaction had dramatically more information than the other — a situation which most market regulation is supposed to prevent. If the S.E.C. is correct, this isn’t merely evidence of a crime, but of a distressingly cavalier attitude toward basic rules of market conduct.
Read more…
Critics have long accused the bulge-bracket banks of using their market position to self-deal at the expense of ordinary investors. But these charges suggest that heavy-handed use of market muscle may have slipped over the line into outright fraud.
It’s clear that the sort of thing described in the complaint shouldn’t happen. It’s less clear how we can prevent them. This sort of insider dealing is extremely difficult to police. We will never get to a market so well-regulated that bankers can’t cut deals for favored clients with a nudge and a wink.
What we can do is minimize the opportunities for such activity by pushing as many transactions as possible onto central clearinghouses and exchanges. These are no panacea — just witness the deals that equity desks were able to cut for special clients in the late 1990s. But the less transparency there is, the easier it is to cut special deals for favored clients at the expense of other investors.
This isn’t just bad for the investors; it’s corrosive to the trust that markets need to function well. It also erodes the public trust in the major investment banks. Those banks have fought fiercely against regulation designed to lessen their market power. As Congress moves towards passage of comprehensive financial reform, they, and the bankers, would do well to remember that without strong trust in markets, we’d all be a lot worse off.
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So Much We Don’t Know
William K. Black, an associate professor of economics and law at the University of Missouri–Kansas City, is a former top federal financial regulator. He is the author of “The Best Way to Rob a Bank is to Own One.”
It’s been a bad two weeks for our most elite financial leaders. Citicorp’s top mortgage credit officer, Richard Bowen, testified before Financial Crisis Inquiry Commission on April 7 that while Citi represented to Fannie and Freddie that the toxic mortgages it was selling them were “conforming” — 60 percent were not.
Why have there been no criminal charges?
.He warned Citi’s top managers, including Robert Rubin. They jumped right on the problem (which will cost the taxpayers hundreds of billions of dollars) — by allowing things to get worse.
The Senate Banking Committee released the findings from its investigation of Washington Mutual — the largest savings and loan and largest bank failure. My research specialty is “control fraud,” which involves fraudulent accounting. Lenders optimize accounting fraud through extreme growth; making bad loans at high interest rates; extreme leverage and trivial loss reserves. The Senate Banking Committee’s findings show that WaMu’s business operations followed this recipe.
Read more…
Lehman led the parade with the recent release of the bankruptcy examiner’s report. The report shows that Lehman had billions of dollars of losses on bad assets. But Lehman’s financial statements did not recognize the losses. In addition to this first-stage cover up of its losses, Lehman entered into huge quarter-end repurchase agreement transactions to further cover up its crippling losses. Both cover-ups could lead to criminal liability.
Now, we learn that the S.E.C. charges that Goldman Sachs should be added to the list of elite financial frauds.
It is a tale of two (unrelated) Paulsons. Hank Paulson, while Goldman’s chief executive, had Goldman buy large amounts of collateralized debt obligations backed by “liar’s loans” (low-grade mortgages). He then became U.S. Treasury Secretary and launched a successful war against securities and banking regulation. His successors at Goldman realized the disaster and began to “short” C.D.O.s.
It designed a rigged trifecta: (1) it turned a massive loss into a material profit by selling toxic C.D.O.s it owned, (2) helped make John Paulson, head of a huge hedge fund, a massive profit and (3) blew up its customers that purchased the C.D.O.s.
The S.E.C. complaint says that Goldman defrauded its own customers by representing to them that the C.D.O. was “selected by ACA Management.” ACA was supposed to be an independent group of experts that would “select” nonprime loans “most likely to succeed” rather than “most likely to fail.” The SEC complaint alleges that the representations about ACA were false.
The question is: did John Paulson and ACA know that Goldman was making these false disclosures to the C.D.O. purchasers? Did they aid in what the S.E.C. alleges was Goldman’s fraud? Why have there been no criminal charges? Why did the S.E.C. only name a relatively low-level Goldman officer in its complaint?
Goldman used American International Group to provide the insurance on the synthetic C.D.O. deals, and Hank Paulson used our money to bail out Goldman when A.I.G.’s scams drove it to failure. As we — Eliot Spitzer, Frank Partnoy and I — asked in our Op-Ed in the Times on Dec. 19, 2009 — why haven’t the A.I.G. e-mails and key deal documents been made public?
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.151 Readers' CommentsPost a Comment ».All CommentsHighlightsReaders' RecommendationsReplies..OldestNewest of 7Next ..1.R. Law
Texas
April 16th, 2010
4:32 pmIntegrity of the markets is sacrosanct to capitalism, on a pedestal equal to fiduciary responsibilities.
Firrms in charge of making markets and spreading the gospel of capitalism are doubly-charged with protecting both tenets.
Recommend Recommended by 53 Readers .2.Tom
Midwest
April 16th, 2010
4:33 pmConsidering the Republicans, maintaining their status quo, today unanimously vowed to oppose financial reform while at the same time President Obama vowed to veto any legislation that did not include regulation of derivatives which I believe are at the core of the financial collapse and problems. The Democrats, rightly or wrongly are proposing specific legislation while the Republicans propose nothing. That explains everything to me in a nutshell. Now tell me again which party is more beholden to the big financial companies and banks? The Republicans keep driving me farther and farther from the party I used to support. They used to have ideas, now they have only no.
Recommend Recommended by 303 Readers .3.greenmountain boy
burlington, vt
April 16th, 2010
4:33 pmLynn Stout has it exactly right. Bankers and investors will always be greedy. Trying to police a market of synthetic cdos is a waste of time. The traditional rule that you should only be hedging against your own actual risks needs to be reinstated.
Recommend Recommended by 151 Readers .4.Arin
Buffalo, NY
April 16th, 2010
4:37 pmThe politics of this plays very well. This lawsuit comes on the very day that the Republicans have unified to prevent debate of the financial reform bill in the Senate. It will hopefully shape the message of the Democrat party, that the Democrats stand for Main Street, and the Republicans stand for Wall Street. Whatever the outcome of this lawsuit, its intent has already paid dividends (no pun intended)
Recommend Recommended by 92 Readers .5.Mark O
Boston
April 16th, 2010
4:38 pmI was under the impression that the Federal government was in thrall to Goldman Sachs because the firm has until now been allowed to seek bilk the financial system with impunity. This lawsuit is both shocking and refreshing evidence of the government's independence.
Recommend Recommended by 65 Readers .6.jimmy
san francisco
April 16th, 2010
4:38 pmI think Professor Stout cleared it up for those on Wall Street. They burned the house down insured at 100 cents on the dollar with our bail out tax money in the hundreds of billions of dollars to AIG and they'll do it again. How can this not make anyone just completely sick. How many lives and careers have they ruined? And Obama says he's not out to get the bankers? I hope he was lying.
Recommend Recommended by 129 Readers .7.Atlanta Guy Making serious dough
Atlanta, GA
April 16th, 2010
4:46 pmWhy is Goldman Sachs only facing a civil suit? The allegation against them is criminal fraud and they should face criminal prosecution. This feeds the long standing view (held by many) that the rich get away with murder while the average joe is held to a higher standard. Though a civil case will indeed be very damaging to GS, it is NOT enough. You deceived investors and nearly destroyed the entire financial system and you're sitting there looking pretty (with billions in profit)
Recommend Recommended by 199 Readers .8.timfenton1
laura
April 16th, 2010
4:47 pmWhy didn't you request comment from Sen. Mitch McConnell who seems determined to sink financial markets reform?
Recommend Recommended by 83 Readers .9.GrammyofWandA
Maine
April 16th, 2010
4:47 pmThe teabaggers will surely point out that the Goldman Sachs employees who allegedly committed the fraud are extremely dedicated workers who should not be subjected to an income tax increase.
Recommend Recommended by 110 Readers .10.mark
Honolulu, Hawaii
April 16th, 2010
4:47 pmThe insurance analogy is spot on! We don't let people bet on whether other people's buildings will burn down for reasons that are so obvious they have been a part of insurance law forever. It's called the necessity of having an insurable interest. What do you think would happen if we allowed the mob to buy insurance on people's lives? When we allowed people to take out insurance without an insurable interest we converted a financial instrument predicated on personal risk avoidance into one predicated on profiting on other people's losses. The results are here in front of us for all to see. We need to reverse the mistake we made and reverse it quickly.
Recommend Recommended by 178 Readers .11.sara
oakland, ca
April 16th, 2010
4:47 pmi am waiting for the apologists for Market Innovation to begin the talking points that will crush litigation and effective reform.
Beneath the Goldman/Magnator shorting of these faulty CDOs with wildly high credit default swap pay-offs lies the RATIONALIZATION. Risk is diluted buy these derivatives, shorting keeps the market honest, capitalizing our realestate market bring poor folk into home ownership....ALL these arguments are either gross distortions of reality or cynical ways to preserve the looting of our economy by shallow wise guys. These short-term profiteers (thru millions in commissions from creating CDOs to the billions collected in crooked swaps as they failed) are now safely stashing away their fortunes; NO LESSON has been learned. And the law blocks retroactive taxation of windfall profits....or does it ?
Recommend Recommended by 37 Readers .12.jjcrocket
New Britain, Conn.
April 16th, 2010
4:48 pmDianna Farrell:
Obama Administration: Deputy Director, National Economic Council
Former Goldman Sachs Title: Financial Analyst
Stephen Friedman:
Obama Administration: Chairman, President’s Foreign Intelligence Advisory Board
Former Goldman Sachs Title: Board Member (Chairman, 1990-94; Director, 2005-)
Gary Gensler:
Obama Administration: Commissioner, Commodity Futures Trading Commission
Former Goldman Sachs Title: Partner and Co-head of Finance
Robert Hormats:
Obama Administration: Undersecretary for Economic, Energy and Agricultural Affairs, State Department
Former Goldman Sachs Title: Vice Chairman, Goldman Sachs Group
Philip Murphy:
Obama Administration: Ambassador to Germany
Former Goldman Sachs Title: Head of Goldman Sachs, Frankfurt
Mark Patterson:
Obama Administration: Chief of Staff to Treasury Secretary, Timothy Geitner
Former Goldman Sachs Title: Lobbyist 2005-2008; Vice President for Government Relations
John Thain:
Obama Administration: Advisor to Treasury Secretary, Timothy Geithner
Former Goldman Sachs Title: President and Chief Operating Officer (1999-2003)
http://the-classic-liberal.com...
Recommend Recommended by 129 Readers .13.Older but Wiser
Dallas
April 16th, 2010
4:48 pmIn a criminal trial most people withhold judgement until the verdict is reached. As civil cases turn far more on interpretations of rules it would be more seemly if the New York Times and its panelists waited until there is a conviction before crowing and trying to tell us what all this means.
Recommend Recommended by 5 Readers .14.smiths
ar
April 16th, 2010
4:48 pmI'm more concerned about Goldmans Sach's ownership of the Obama administration
Recommend Recommended by 95 Readers .15.RS Love
Palo Alto, CA
April 16th, 2010
4:48 pmJust a reminder that Frank Partnoy testified back in 2002 before a Senate committee that Enron was enabled to game and defraud investors using derivatives and that unless the law was corrected, more of the same was coming down the road. No one listened.
The culprit in the Enron crime wave was a recipe of CFMA 2000 mandated deregulation of trading exotics/synthetics, the corporate accountants serving no one, credit agencies for hire and our own lax Federal regulators too.
Roll tape forward to 2010. We are about to ignore the lessons of the past once again. Hard to admit that post-Depression banking legislation actually worked then and it worked up until the recent1990s while both parties dismantled it. There can be no real reform without separating the main street banking businesses from the casino bankers.
The mighty legends are headed to disgrace including Greenspan, Rubin, Summers, our Presidents (from Reagan to Obama), Paulson, Geithner, Gramm and the Senate Republicans who blindly took Wall Street's money; now it's the Democrats turn to pave the next road to financial ruin. They're right on schedule.
Recommend Recommended by 83 Readers .16.BTT
Wilkes-Barre, Pa.
April 16th, 2010
4:49 pmOne other point to Lynn Stout: you can't buy Home Insurance while the house is on fire! America at its worst! How immoral! BTT
Recommend Recommended by 32 Readers .17.Marcel Duchamp
Maine
April 16th, 2010
4:49 pmNext up: criminal prosecutions.
Let's go!
Recommend Recommended by 100 Readers .18.T.L.Moran
Idaho
April 16th, 2010
4:49 pmForget the SEC and its hunt through the dense weeds of microscopic regulatory law.
The attorneys general of many states facing bankruptcy, the many pension funds, university systems, and other public institutions, need only find one instance -- I'm sure there are many -- of death from heart attack or crisis-driven suicide and they have a perfect case against these corporations for depraved-heart murder.
The Wall St. thugs, driven by their addiction to complex scams and outsize profits, have demonstrated 'callous disregard' and 'extreme indifference' to the value of American lives with every million dollar profit they've made, every lavish bonus they've awarded themselves.
Never mind what slimy combination of congressional dopes and financial addicts undermined the laws protecting the country from this kind of daylight robbery. The intentions and the results speak clear: the executives of firms like this set aside all consideration for the continued life, health and happiness of everyday Americans in their adolescent race to see who could be the fastest, biggest looter of our national economy.
If corporations are people (thank you activist neo-con SCOTUS), then they are all guilty of depraved indifference. Prosecute, punish, and GET THIS COUNTRY'S MONEY BACK!
Recommend Recommended by 69 Readers .19.JVM Fan
Hollywood
April 16th, 2010
4:49 pmI just saw a movie on Sunset Blvd. called "Stock Shock" about all this Wall Street corruption and the audience was pretty shocked. It was the same story told through the eyes of Sirus XM investors that nearly went broke because of market manipulation. The movie is now sold on DVD just about everywhere, but cheaper at www.stockshockmovie.com
Recommend Recommended by 7 Readers .20.frank
providence, ri
April 16th, 2010
4:49 pmNone of this is news. Zuckerman in The Greatest Trade Ever (p.179) names Goldman, Bear Sterns, and Deutsche Bank (and others) as working with Paulson to create "controversial" CDO's (meaning this is not news) tailor made to fail. What can also be said it that mostly the banks were betting the other way, which is why they had so much losses, and the argument they were hedging really seems correct. But the fraud is ultimately about charges against an outside rating agencies, that maybe one didn't exist in this trade despite what was said. But all the rating agencies were also pushed and threatened no doubt NOT to rate the CDOs accurately. There is fraud everywhere, of course. The whole system was a fraud.
Recommend Recommended by 46 Readers .21.Docb
denver
April 16th, 2010
4:50 pmCome on folks --there has to be a market for these products...another IB or two or perhaps the street! They all did this created a market-- bought and sold against a fail...Go to the SEC site and pull up the Complaint--there is a firm mentioned , Paulson &Co---Hmmm could it be true? But this is just the tip...the SEC needs to be contacted and reminded that this is not isolated and not a case for fines and wrist slaps...1.888.732.6585 or the Sec of the SEC 1.202.551.5400
Recommend Recommended by 8 Readers .22.Dan
NYC
April 16th, 2010
4:50 pmI disagree with these rosy optimistic analysis of these so-called "experts."
This is the start of new chapter of regulations? Thats BS - These are civil charges, NOT criminal. Sure, Goldman will get hit with a settlement (probably around a million), which might sound big to the "main street average person" but in reality its not big at all to them. They will continue to do what they do and generate much much more money than that. Then, of course, Goldman Sachs will deny any wrongdoing, and Obama will praise the Justice System that we have. Every one wins! Except, of course, the people on main street and the people who GS fleeced.
Do you HONESTLY expect any better when the insane run the asylum?
Recommend Recommended by 55 Readers .23.pstgradny
New York
April 16th, 2010
4:52 pmWhat a shocker...dishonest and greedy investment bankers and traders. Sounds like fodder for a movie that might be entitled, Wall Street. I think Michael Douglas would be perfect for the lead role, and Charlie Sheen would be great as a conflicted young broker/trader. In the aftermath of the recent financial meltdown, this movie could be a huge hit, especially if done in 3D. Cameo performances might include Bernie Madoff, Jeffrey Skilling, Andy Fastow, Bernie Ebbers, Edward S. Digges Jr., etc.
Recommend Recommended by 16 Readers .24.Zenster
Manhattan
April 16th, 2010
5:13 pmIt seems every single person in the country knows for a fact that Goldman Sachs is a criminal organization, a white collar mafia - and still it took this long for the SEC to prosecute - and only this one charge, so amazingly egregious. What about the thousands and thousands of other crimes this giant vampire squid committed?
Recommend Recommended by 60 Readers .25.ron
new orleans
April 16th, 2010
5:14 pmI believe that the current banking crisis started out many years ago in Denver when the Silverado Bank and Neil Bush were bailed out by his father(Bush I) and his friends(Cheney,et al). Instead of starting a new wave of bank regulation at the time, Congress with the support of Bush, et al opened the flood gates to SEC deregulation. Being an optimist, I believe that everything that goes around, comes around. The American public will not be satisfied until the current group of creative criminals are exposed. Once they are indicted, historians should then revisit the first banking crisis.
Recommend Recommended by 63 Readers . of 7 Next ..Post a Comment
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Wednesday, April 14, 2010
Morgenson -- One I Missed
(c) 2010 F. Bruce Abel
Looking for something else I read yesterday I came across this excellent piece. I was fascinated (although I knew the story line) and then was surprised to realize that this piece came out in December. Maybe when we were in Italy.
http://www.nytimes.com/2009/12/24/business/24trading.html?_r=1
Looking for something else I read yesterday I came across this excellent piece. I was fascinated (although I knew the story line) and then was surprised to realize that this piece came out in December. Maybe when we were in Italy.
http://www.nytimes.com/2009/12/24/business/24trading.html?_r=1
Friday, April 9, 2010
Rubin -- How to Read My Blog on Him
I will continue to build on my first recent blog, "Rubin -- Are You Nothing But a Sandwich?" So when you enter my blog today and the following week or so go back to that blog item.
Sunday, February 28, 2010
Comment 312
One of the commenters said there was no difference between the head of Goldman Sachs and Madoff. There is a big difference. Madoff was an unsophisticated lifeguard and Hofstra graduate. Goldman is lawyered up with the best of Harvard and Yale law schools. Madoff just took the money as his own. He was unsophisticated. What the big banks are doing is figuring out the law and figuring out how to steal and cheat right up to the line that would put them in jail. If that means changing the law in their favor they do it by paying off the congress. We often see people say tax avoidance is fine but tax evasion is illegal. The difference is arbitrary. The concept is to pay money to support government and societal functions. Tax avoidance is avoiding those obligations using every legal trick possible. Evasion is to cross that line. Both are morally indefensible. Kind of like saying oral sex is not cheating on ones wife.Had Madoff lawyered up with the best of Harvard Law School five years before his scheme blew up...they would have restructured the whole thing and he would have been fine....He would be honored as one of the great men of Wall Street. He was always an outsider, though, and he did not walk among the Harvard anointed. Another example is provided by another Harvard attorney who defended OJ so that he was "legally innocent" of a crime although morally and from a common sense standpoint we know he committed it.The real criminals here are the legal minds who think that just because something is "legal" it is morally supportable. It may be legal to set up these swaps etc. It may be legal to know how bad the situation is before the general public does. It may be legal to sell the bonds short in another division of the bank based on this inside knowledge. All of this may be legal but is it moral? Betting in poker after looking at the other players cards is perhaps legal but is it moral. In the Wild West folks who did that were shot. I often wonder why the jobless and suffering don't mob the headquarters of Goldman Sachs....perhaps they will....and Goldman is just the symbol....the leader of this legal/financial monstrosity and far from the only culprit. Of course with 400 lawyers advised by 4000 lawyer/lobbyists running this country it is hard to imagine that this will ever get better.
Thursday, February 25, 2010
Front Page -- II
(c) 2010 F. Bruce Abel
And read the comments to this article as well. As long as this derivative exists all government attempts to bail out the world will fail.
Banks Bet Greece Defaults on Debt They Helped Hide
By NELSON D. SCHWARTZ and ERIC DASH
Published: February 24, 2010
Bets by some of the same banks that helped Greece shroud its mounting debts may actually now be pushing the nation closer to the brink of financial ruin.
Post a Comment »
Read All Comments (167) »
Echoing the kind of trades that nearly toppled the American International Group, the increasingly popular insurance against the risk of a Greek default is making it harder for Athens to raise the money it needs to pay its bills, according to traders and money managers.
These contracts, known as credit-default swaps, effectively let banks and hedge funds wager on the financial equivalent of a four-alarm fire: a default by a company or, in the case of Greece, an entire country. If Greece reneges on its debts, traders who own these swaps stand to profit.
“It’s like buying fire insurance on your neighbor’s house — you create an incentive to burn down the house,” said Philip Gisdakis, head of credit strategy at UniCredit in Munich.
As Greece’s financial condition has worsened, undermining the euro, the role of Goldman Sachs and other major banks in masking the true extent of the country’s problems has drawn criticism from European leaders. But even before that issue became apparent, a little-known company backed by Goldman, JP Morgan Chase and about a dozen other banks had created an index that enabled market players to bet on whether Greece and other European nations would go bust.
Last September, the company, the Markit Group of London, introduced the iTraxx SovX Western Europe index, which is based on such swaps and let traders gamble on Greece shortly before the crisis. Such derivatives have assumed an outsize role in Europe’s debt crisis, as traders focus on their daily gyrations.
A result, some traders say, is a vicious circle. As banks and others rush into these swaps, the cost of insuring Greece’s debt rises. Alarmed by that bearish signal, bond investors then shun Greek bonds, making it harder for the country to borrow. That, in turn, adds to the anxiety — and the whole thing starts over again.
On trading desks, there is fierce debate over what exactly is behind Greece’s recent troubles. Some traders say swaps have made the problem worse, while others say Greece’s deteriorating finances are to blame.
“This is a country that is issuing paper into a weakening market,” said Ashish Shah, co-head of credit strategy at Barclays Capital, referring to Greece’s need for continual borrowing.
But while some European leaders have blamed financial speculators in general for worsening the crisis, the French finance minister, Christine Lagarde, last week singled out credit-default swaps. Ms. Lagarde said a few players dominated this arena, which she said needed tighter regulation.
Trading in Markit’s sovereign credit derivative index soared this year, helping to drive up the cost of insuring Greek debt, and, in turn, what Athens must pay to borrow money. The cost of insuring $10 million of Greek bonds, for instance, rose to more than $400,000 in February, up from $282,000 in early January.
On several days in late January and early February, as demand for swaps protection soared, investors in Greek bonds fled the market, raising doubts about whether Greece could find buyers for coming bond offerings.
“It’s the blind leading the blind,” said Sylvain R. Raynes, an expert in structured finance at R&R Consulting in New York. “The iTraxx SovX did not create the situation, but it has exacerbated it.”
The Markit index is made up of the 15 most heavily traded credit-default swaps in Europe and covers other troubled economies like Portugal and Spain. And as worries about those countries’ debts moved markets around the world in February, trading in the index exploded.
In February, demand for such index contracts hit $109.3 billion, up from $52.9 billion in January. Markit collects a flat fee by licensing brokers to trade the index.
European banks including the Swiss giants Credit Suisse and UBS, France’s Société Générale and BNP Paribas and Deutsche Bank of Germany have been among the heaviest buyers of swaps insurance, according to traders and bankers who asked for anonymity because they were not authorized to comment publicly.
That is because those countries are the most exposed. French banks hold $75.4 billion worth of Greek debt, followed by Swiss institutions, at $64 billion, according to the Bank for International Settlements. German banks’ exposure stands at $43.2 billion.
Trading in credit-default swaps linked only to Greek debt has also surged, but is still smaller than the country’s actual debt load of $300 billion. The overall amount of insurance on Greek debt hit $85 billion in February, up from $38 billion a year ago, according to the Depository Trust and Clearing Corporation, which tracks swaps trading.
Markit says its index is a tool for traders, rather than a market driver.
In a statement, Markit said its index was started to satisfy market demand, and had improved the ability of traders to hedge their risks. The index and similar products, it added, actually make it easier for buyers and sellers to gauge prices for instruments that are traded among players over the counter, rather than on exchanges.
“These indices have helped bring transparency to the sovereign C.D.S. market,” Markit said. “Prior to their creation, there was no established benchmark index enabling investors to track the performance of segments of the sovereign C.D.S. market.”
Some money managers say trading in Greek swaps alone, not the broader index, is the problem.
“It’s like the tail wagging the dog,” said Markus Krygier, senior portfolio manager at Amundi Asset Management in London, which has $40 billion in global fixed-income assets. “There is a knock-on effect, as underlying positions begin to seem riskier, triggering risk models and forcing portfolio managers to sell Greek bonds.”
If that sounds familiar, it should. Critics of these instruments contend swaps contributed to the fall of Lehman Brothers. But until recently, there was little demand for insurance on government debt. The possibility that a developed country could default on its obligations seemed remote.
As a result, many foreign banks that held Greek bonds or entered into other financial transactions with the government did not hedge against the risk of a default. Now, they are scrambling for insurance.
“Greece is not a small country,” said Mr. Raynes, at R&R in New York. “Credit-default swaps give the illusion of safety but actually increase systemic risk.”
And read the comments to this article as well. As long as this derivative exists all government attempts to bail out the world will fail.
Banks Bet Greece Defaults on Debt They Helped Hide
By NELSON D. SCHWARTZ and ERIC DASH
Published: February 24, 2010
Bets by some of the same banks that helped Greece shroud its mounting debts may actually now be pushing the nation closer to the brink of financial ruin.
Post a Comment »
Read All Comments (167) »
Echoing the kind of trades that nearly toppled the American International Group, the increasingly popular insurance against the risk of a Greek default is making it harder for Athens to raise the money it needs to pay its bills, according to traders and money managers.
These contracts, known as credit-default swaps, effectively let banks and hedge funds wager on the financial equivalent of a four-alarm fire: a default by a company or, in the case of Greece, an entire country. If Greece reneges on its debts, traders who own these swaps stand to profit.
“It’s like buying fire insurance on your neighbor’s house — you create an incentive to burn down the house,” said Philip Gisdakis, head of credit strategy at UniCredit in Munich.
As Greece’s financial condition has worsened, undermining the euro, the role of Goldman Sachs and other major banks in masking the true extent of the country’s problems has drawn criticism from European leaders. But even before that issue became apparent, a little-known company backed by Goldman, JP Morgan Chase and about a dozen other banks had created an index that enabled market players to bet on whether Greece and other European nations would go bust.
Last September, the company, the Markit Group of London, introduced the iTraxx SovX Western Europe index, which is based on such swaps and let traders gamble on Greece shortly before the crisis. Such derivatives have assumed an outsize role in Europe’s debt crisis, as traders focus on their daily gyrations.
A result, some traders say, is a vicious circle. As banks and others rush into these swaps, the cost of insuring Greece’s debt rises. Alarmed by that bearish signal, bond investors then shun Greek bonds, making it harder for the country to borrow. That, in turn, adds to the anxiety — and the whole thing starts over again.
On trading desks, there is fierce debate over what exactly is behind Greece’s recent troubles. Some traders say swaps have made the problem worse, while others say Greece’s deteriorating finances are to blame.
“This is a country that is issuing paper into a weakening market,” said Ashish Shah, co-head of credit strategy at Barclays Capital, referring to Greece’s need for continual borrowing.
But while some European leaders have blamed financial speculators in general for worsening the crisis, the French finance minister, Christine Lagarde, last week singled out credit-default swaps. Ms. Lagarde said a few players dominated this arena, which she said needed tighter regulation.
Trading in Markit’s sovereign credit derivative index soared this year, helping to drive up the cost of insuring Greek debt, and, in turn, what Athens must pay to borrow money. The cost of insuring $10 million of Greek bonds, for instance, rose to more than $400,000 in February, up from $282,000 in early January.
On several days in late January and early February, as demand for swaps protection soared, investors in Greek bonds fled the market, raising doubts about whether Greece could find buyers for coming bond offerings.
“It’s the blind leading the blind,” said Sylvain R. Raynes, an expert in structured finance at R&R Consulting in New York. “The iTraxx SovX did not create the situation, but it has exacerbated it.”
The Markit index is made up of the 15 most heavily traded credit-default swaps in Europe and covers other troubled economies like Portugal and Spain. And as worries about those countries’ debts moved markets around the world in February, trading in the index exploded.
In February, demand for such index contracts hit $109.3 billion, up from $52.9 billion in January. Markit collects a flat fee by licensing brokers to trade the index.
European banks including the Swiss giants Credit Suisse and UBS, France’s Société Générale and BNP Paribas and Deutsche Bank of Germany have been among the heaviest buyers of swaps insurance, according to traders and bankers who asked for anonymity because they were not authorized to comment publicly.
That is because those countries are the most exposed. French banks hold $75.4 billion worth of Greek debt, followed by Swiss institutions, at $64 billion, according to the Bank for International Settlements. German banks’ exposure stands at $43.2 billion.
Trading in credit-default swaps linked only to Greek debt has also surged, but is still smaller than the country’s actual debt load of $300 billion. The overall amount of insurance on Greek debt hit $85 billion in February, up from $38 billion a year ago, according to the Depository Trust and Clearing Corporation, which tracks swaps trading.
Markit says its index is a tool for traders, rather than a market driver.
In a statement, Markit said its index was started to satisfy market demand, and had improved the ability of traders to hedge their risks. The index and similar products, it added, actually make it easier for buyers and sellers to gauge prices for instruments that are traded among players over the counter, rather than on exchanges.
“These indices have helped bring transparency to the sovereign C.D.S. market,” Markit said. “Prior to their creation, there was no established benchmark index enabling investors to track the performance of segments of the sovereign C.D.S. market.”
Some money managers say trading in Greek swaps alone, not the broader index, is the problem.
“It’s like the tail wagging the dog,” said Markus Krygier, senior portfolio manager at Amundi Asset Management in London, which has $40 billion in global fixed-income assets. “There is a knock-on effect, as underlying positions begin to seem riskier, triggering risk models and forcing portfolio managers to sell Greek bonds.”
If that sounds familiar, it should. Critics of these instruments contend swaps contributed to the fall of Lehman Brothers. But until recently, there was little demand for insurance on government debt. The possibility that a developed country could default on its obligations seemed remote.
As a result, many foreign banks that held Greek bonds or entered into other financial transactions with the government did not hedge against the risk of a default. Now, they are scrambling for insurance.
“Greece is not a small country,” said Mr. Raynes, at R&R in New York. “Credit-default swaps give the illusion of safety but actually increase systemic risk.”
Front Page New York Times -- The Attention This Deserves
(c) 2010 F. Bruce Abel
Ok, so why does CNBC quote credit default swaps as though they are legitimate instruments? Why are they permitted...anywhere? How can any bailout work when they exist?
http://www.nytimes.com/2010/02/25/business/global/25swaps.html?ref=business
There are some topics so toxic that any writing about them pales.
Ok, so why does CNBC quote credit default swaps as though they are legitimate instruments? Why are they permitted...anywhere? How can any bailout work when they exist?
http://www.nytimes.com/2010/02/25/business/global/25swaps.html?ref=business
There are some topics so toxic that any writing about them pales.
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