In Goldman Sachs we trust: classic example of regulatory capture

Blurtman:

Any idea if Goldman bought CDS on AIG, and then destroyed the company?

mike:

Finally, attention is being paid to the topic of who benefits from collateral valuation markdowns

There’s a bigger story to mine there. William Cohan discussed it too briefly in his book on Bear Stearns’ collapse, which you can read here:

http://money.cnn.com/2009/03/02/magazines/fortune/cohan_houseofcards5.fortune/index.htm

Adrian Burridge

Great questions.

From a foreigners point of view, one can only hope that America’s leaders provide answers.

Yours Sincerely,

Adrian Burridge
CanadianInvestors.com

Independent Accountant:

The trio writes, “So far, prosecutors have been unable to build such evidence into anything resembling a persuasive case against any financial institution”. This is an indictment of the SDNY US attorney’s office. Preet Bharara (PB), are you listening? I can write the indictments for you. I accuse PB of “wilful blindness” in not handing out indictments like haloween candy in the AIG-Goldman scam. Yes, you PB. If you can’t find the “ostrich instruction” West’s Key, here it is: criminal law 772(5). Now read it and pull half of Vampire Squid’s (VS) officers out of 85 Broad Street. In handcuffs. See how easy this is? I’ve even given you VS’s address! Show us peasants that VS doesn’t own the SDNY US attorney’s office. No more crap from you and Benton Campbell like the Bear Stearns Two case. PB, we’re watching you.

Michel Delving :

Monolines did not just hit the wall. They were smashed into it. Proprietary traders rigged their bets using a steady stream of servicing data from subsidiary servicers engaged in fabricating bogus mortgage defaults. MBIA is fighting back, citing inappropriate mortgage servicing by Credit Suisse subsidiary Select Portfolio Servicing
in this recent suit: http://www.mbia.com/investor/publications/603751-09-complaint.pdf

And yet, mortgage servicing fraud continues to feed CDS casinos and no doubt servicers are already ramping up for Markit’s launch of ABX.PRIME which is certain to be another stacked deck. Just like ABX.HE, market makers will select reference entities, paint targets on them and servicers will go to work making those credit events happen.

Goldman Fueled AIG Gambles: Wall Street Titan's Role Shown in Journal Analysis; Firm Says Problems Hidden

By SERENA NG and CARRICK MOLLENKAMP

Goldman Sachs Group Inc. played a bigger role than has been publicly disclosed in fueling the mortgage bets that nearly felled American Insurance Group Inc.

Goldman was one of 16 banks paid off when the U.S. government last year spent billions closing out soured trades that AIG made with the financial firms.

A Wall Street Journal analysis of AIG's trades, which were on pools of mortgage debt, shows that Goldman was a key player in many of them, even the ones involving other banks.

Goldman as Middleman

Goldman originated or bought protection from AIG on about $33 billion of the $80 billion of U.S. mortgage assets that AIG insured during the housing boom. That is roughly twice as much as Société Générale and Merrill Lynch, the banks with the biggest exposure to AIG after Goldman, according an analysis of ratings-firm reports and an internal AIG document that details several financial firms' roles in the transactions.

In Goldman's biggest deal, it acted as a middleman between AIG and banks, taking on the risk of as much as $14 billion of mortgage-related investments. Then Goldman insured that risk with one trading partner—AIG, according to the Journal's analysis and people familiar with the trades.

The trades yielded Goldman less than $50 million in profits, which were mostly booked from 2004 to 2006, according to a person familiar with the matter. But they piled risks onto AIG's books, which later came to haunt the insurer and Goldman. The trades also gave Goldman a unique window into AIG's exposure to losses on securities linked to mortgages.

When the federal government bailed out the insurer, Goldman avoided losses on its trades with AIG covering a total of $22 billion in assets.

A Goldman spokesman says that up until AIG was rescued by the government, the insurer "was viewed as one of the most sophisticated financial counterparties in the world. It wasn't until the government intervened in September 2008 that the full extent of AIG's problems became apparent."

"What is lost in the discussion is that AIG assumed billions of dollars in risk it was unable to manage," the Goldman spokesman added.

An AIG spokesman declined to comment on the firm's trades with Goldman.

More clarity has emerged recently over the roles that firms such as Goldman played, as complex deals carried out by banks are now being untangled in legal and regulatory inquiries. Last month a government audit of part of the AIG bailout described Goldman's middleman role.

One of Goldman's trades with AIG involved a financial vehicle called South Coast Funding VIII. South Coast was one of many pools of bonds backed by individual homeowners' mortgage payments that Wall Street turned into collateralized debt obligations or CDOs.

Merrill Lynch, now part of Bank of America Corp., underwrote the South Coast CDO in January 2006 by stuffing it with packages of home loans originated by firms such as Countrywide Financial Corp., the big California lender.

Once a CDO debt pool is assembled, it is sliced into layers based on risk and return. Merrill sold the safest, or top layer, of deals like South Coast to large banks, including in Europe and Canada.

The banks wanted protection in case the housing market tanked. Many turned to Goldman, which effectively insured the securities against losses. Then, to cover its own potential losses, Goldman bought protection from AIG, in the form of credit-default swaps.

Goldman charged more than AIG for the protection, so it was able to pocket the difference, making millions while moving the default risks to AIG, according to people familiar with the trades.

The banks eventually realized they didn't need to use Goldman as a middleman.

The trades seemed prudent at the time given AIG's strong credit rating and the fact that AIG agreed to make payments to Goldman, known as collateral, if the value of the CDOs declined. The trades were also low risk for Goldman as long as AIG stayed afloat.

Other banks also acted as middlemen, including Merrill Lynch, which did roughly $6 billion of these deals compared to $14 billion for Goldman, according to people familiar with the trades and the analysis of banks' exposures to AIG.

"It seems shocking to me that Goldman would become so exposed to AIG and kept doing deals with them and laying on the risk," says Tom Savage, a former chief executive of AIG's financial products unit who left in 2001 before the explosive growth of insuring mortgage-debt pools.

The middleman trades began to unravel in mid 2007 when the U.S. mortgage market started slumping. Goldman was the first of AIG's trading partners to notify AIG that the CDOs were losing value and demand collateral. Other banks including Société Générale and a unit of Credit Agricole that had bought insurance from AIG eventually did the same.

A Goldman spokesman said that between mid-2007 and early 2008, Goldman showed AIG "market price levels" at which trades could be undone, allowing AIG to decrease its risk, but "AIG refused to accept that the market was deteriorating."

When Goldman didn't get as much collateral as it wanted from AIG, in 2007 and 2008 it bought protection against a default of AIG itself from other banks.

AIG officials were skeptical of the prices Goldman presented, according to the minutes of a February 2008 AIG audit committee meeting, which noted that Goldman was "unwilling or unable to provide any sources for their determination of market prices."

Additional calls for collateral from Goldman and other banks eventually led to AIG's September 2008 bailout and led the New York Federal Reserve two months later to fully cover $62 billion of insurance contracts Goldman and 15 other banks had with the financial products unit of AIG.

Goldman's other big role in the CDO business that few of its competitors appreciated at the time was as an originator of CDOs that other banks invested in and that ended up being insured by AIG, a role recently highlighted by Chicago credit consultant Janet Tavakoli. Ms. Tavakoli reviewed an internal AIG document written in late 2007 listing the CDOs that AIG had insured, a document obtained earlier this year by CBS News.

The Journal analysis of that document in conjunction with ratings-firm reports shows that Goldman underwrote roughly $23 billion of the $80 billion in mortgage-linked CDOs that AIG agreed to insure.

One such deal was called Davis Square Funding VI. That CDO, assembled by Goldman in March 2006, contained mortgage securities underpinned by subprime home loans originated by firms such as Countrywide and New Century Mortgage Corp., one of the first subprime lenders to fail in 2007.

A big investor in Davis Square's top layer was Société Générale, which bought protection on it from AIG, according to the internal memo. The French bank was the largest beneficiary of the New York Fed's Nov. 2008 move to pay off banks in full on their AIG insurance contracts.

A company financed largely by the New York Fed ended up owning both the Davis Square and South Coast CDOs. Société Générale received payments from AIG and the New York Fed totaling $16.5 billion.

Goldman received $14 billion for its trades that were torn up, including $8.4 billion in collateral from AIG.

A representative of Société Générale declined to comment.

The special inspector general for the Troubled Asset Relief Program, which recently reviewed the New York Fed's effort to stanch collateral calls last year, said Goldman officials said the company believed it would have been fully protected had AIG been allowed to fail because of collateral it had amassed and the additional insurance it had bought against an AIG default.

The auditor, however, questioned that conclusion. The report said Goldman would have had a difficult time selling the collateral and that the firm might have been unable to actually collect on the additional insurance.

—Amir Efrati
contributed to this article.

Elliott Widaski

When the federal government bailed out the insurer, Goldman avoided losses on its trades with AIG covering a total of $22 billion in assets."

Isn't that an interesting coincidence. I wonder what Hank Paulson knew and when he knew it. GS has certainly done well, after all they are one of the most "financially sophisticated" companies on Wall Street.

Sudhir V

You mean the $17 Billion Bonus pool set by Goldman was funded by US Treasury? You mean US borrowed from China to pay GS wiseguys big fat bonuses? Surprised?

Cate Long

Excellent reporting on a complex topic.

Treasury Secretary Geithner testified about the role of the NY Fed in the AIG bailout at the Congressional Oversight Panel yesterday.

See here starting about 100 minutes: http://cop.senate.gov/hearings/library/hearing-121009-geithner.cfm

Franklin Brock

Let's also not forget that Hank Paulson allowed Lehman to fail, and pretty much pushed Merrill Lynch into the arms of B of A.

So, Paulson bailed out Goldman Sachs, and destroyed their largest competitors.

Will the readers of the WSJ finally wake up to the fact that we have Crony Capitalism / Socialism for the Rich in these United States?!?!?!

DAVID LAWRENCE:

Blaming Goldman is a bit like blaming a gas station attendant for Molotov cocktails. "Would you like matches with that sir?" The line can become blurry depending on what was known and when.

Franklin Brock:

In this case, Goldman ran the gas station, pumped the gas into the bottle, inserted the fuse, lit the match, and used flame retardant (Paulson and US taxpayer funds) to avoid the heat while the rest of us got burned alive.

Allen Chambers

What is perhaps even more interesting is that Goldman KNEW AIG wouldn't have the cash and couldn't encumber regulated, insurance assets in the event of default. It seems reasonable to conclude that Goldman developed a game plan in advance. More than bit curious why the other insurers were not bailed out and settled contracts for less than par.

If we can investigate Clinton's sex life, we can certainly investigate this. The problem is that both parties are in on this one.

Wayne Baimbridge

Good point Allen, it speaks volumes about how politics run on the hill. It doesn't matter what party you gravitate toward anymore. Politicians are virtually owned by special interests and the special interests have nothing to do with the U.S. Constitution's definition of public funds and how they are suppose to be used.

Special interests are about profits supported by government policy toward large corporations. While OB trashed the pharmaceutical companies they contributed 3 times more money into his campaign than they did John McCain. Why? Because, they knew that national health care was No.1 on his agenda. They had to calculate which of the two would wind up improving their bottom line. It wasn't McCain.

What does that make O.B.? He's a politicians. And, ideology is not part of his agenda, it's how to best achieve his agenda and if sleeping with the devil is part of that, then so be it.

OK, OK, I'll stop before this turns into a rant... actually it came pretty close to that....

My two cents....

SANORAN TRIAMESH

We will never know the truth about GoldmanSach and AIG, since King Bernanke is being protected by Obama.

But we can derive some conclusions. These guys were playing for Billions. They (GoldmanSachs) did make lots of money already. Some of that money must have ended up as kickbacks to Obama/Federal Reserve staff (speaking fees, professorships like Henry Paulson is enjoying at Johns Hopkins?).

Maybe King Bernanke did not get any Kickback directly, but on the other hand he wrote a term paper on the Great Depression and look where he is now! So just to preserve his job he will do anything. GoldmanSachs can guarantee the King Bernanke gets reappointed. So in the end, its a very high stakes game. And it is kept secret with the blessing of congress with the excuse that the Fed must be independent!

If only the American people where not all obsessed with their own house prices and stock investments, they would probably complain enough to break up these 'clubs'. Sadly no one cares, Everyone just hopes that his house will appreciate, his stocks will go up, ... and King Bernanke is trying hard to do that, -by printing money. Subprimes loans have now been replaced by US Government Tax Payer funded Fannie/Freddie/FHA or whatever loans.

There is a reason why civilizations rise and fall.

Peter Von Nessi

"If only the American people where not all obsessed with their own house prices and stock investments, they would probably complain enough to break up these 'clubs'. Sadly no one cares, Everyone just hopes that his house will appreciate, his stocks will go up, ... and King Bernanke is trying hard to do that, -by printing money. Subprimes loans have now been replaced by US Government Tax Payer funded Fannie/Freddie/FHA or whatever loans."

You're right to a degree. It is not so much that people are obsessed with their own house prices and stock investments, as it is that these are the only things in which they have some measure of control (less in house prices). When it comes to the ruling oligarchy on Wall St, the banking fraternity and insulated politicos in DC, the average person feels futility in being able to make a difference. I believe that sense of futility gives rise to resignation and apathy and directs one's attention myopically to one's own immediate interests - at least to provide for the needs of themselves and their families.

Tyranny relishes and feeds on apathy and lack of resolve and public inertia. It takes a great force to move public inertia, but once it starts to move, it also takes a great force to stop it. Maybe if we keep exhorting the American people and informing them of how we are all being taken advantage of by a relative few, some good and positive change will come of it.

Benjamin Zapp

Forbes magazine had an article about the trading arm of GS bankrupting a major US pipeline company. GS is an amoral if not evil company. It should be broken up and their ill-gotten bonuses be taxed to the max.

Charles Ostrum

So how much money did Goldman make betting against AIG using their intimate knowledge of the potential size of the AIG mortgage insurance book? Don't forget that Goldman had started betting heavily against the mortgages and made Billions from that trading prior to the AIG blow-up. Since they also knew the real quality of the 13B in rotten CDO they assembled it was a rather obvious trade for them. Produce a lot of garbage and then bet against it and those who insure it. This is not top talent genius trading but the work of fraudsters preying on their customers and counterparties. Time for a special proscutor with plenty of FBI and forensic accounting support.

Peter Von Nessi

"So how much money did Goldman make betting against AIG using their intimate knowledge of the potential size of the AIG mortgage insurance book? Don't forget that Goldman had started betting heavily against the mortgages and made Billions from that trading prior to the AIG blow-up. Since they also knew the real quality of the 13B in rotten CDO they assembled it was a rather obvious trade for them. Produce a lot of garbage and then bet against it and those who insure it. This is not top talent genius trading but the work of fraudsters preying on their customers and counterparties. Time for a special proscutor with plenty of FBI and forensic accounting support."

Their "genius" was in getting away with it. What better situation than to profit enormously by ethically challenged activity that should be deemed criminal, but is not! GS refined and elevated common fraud to an art form that instead of being abhorred is lauded by many.

You are absolutely right about a special prosecutor. Unfortunately, I fear that those who could call for such action have been bought and paid for by the foxes guarding the hen house!

John S

Personally, I hope it is the US Attorney that brings criminal actions against them. If prosecuted they would go the way of Arthur Andersen.

TOM OKEEFE

To John S. and Douglas below. How about suggesting your ideas to the newly formed Financial Crisis Inquiry Commission? The lead attorney of this Commission is Tom Greene who handled the anti-trust suit against Microsoft for the State of California. He doesn't know Wall Street as well as he should for someone in that position but I think his anti-trust experience will come in handy for breaking these banks up. I also like Douglas' RiCO idea.

The Pecora Hearings of the 1930's revealed a lot of what the crooks on Wall Street were doing at that time. Those revelations were the bases of the tough securities laws that were passed in that period. The problem we have now is Congress is first passing the legislation (to CTA) . This Commission isn't issuing their report until December of 2010 - a month after the election. I guess they knew people of BOTH parties are to blame for this mess.

David Heitel

The fact that Goldman Sachs was securitizing selling CDOs while buying unhedeged CDSs betting on their failure strikes me as something out of the Sopranos. That has to be a breach of fiduciary responsibility. I would like to see Attorney General Eric Holder pursue a RICO investigation of Goldman. Their conduct seems no less egregious than that of the mob

Douglas Kurz

Goldman should be formally investigated and perhaps prosecuted under RICO. When will someone have the courage and competency to take on this aggressive, overly powerful, greed-driven empire and subject it properly to the just constraints of law and equity? The only thing that drives the culture at a place like Goldman is the bonus pool. Short of federal investigations, criminal prosecutions, and civil actions, the only thing that would constrain them would be to TAX THE BONUS POOL. Those are obviously ill-gotten gains to which the firm is NOT entitled, as it would NEVER have survived the AIG debacle without massive government support (orchestrated by its own former co-Chairman, Mr. Paulson). It is time to break Goldman up, force them to disgorge their wrongly obtained gains, and investigate the hell out of them.

Igor Des

I got news for you: if AIG hadn't been bailed out and the whole financial system didn't survive - our economy would have collapsed.. Which means that if not for government's support - none of us would have a paycheck to rely on.. Does this mean that we are not entitled to our paychecks?

John S

You can't prove that Igor. It is the same blanket statement of fear that was used by the criminals who perpetrated this in the first place. Hank Paulson being the most wanted financial gangster in history. Tyrants always take advantage of a crisis. There were other ways that the government could have stepped in and supported the financial system without picking favorites. For one, they could have held insolvent institutions in receivership, fired the management and gave a haircut to the bondholders. Depositors would have been saved and paychecks would still be flowing through the bank system. This was a criminal act which, if prosecuted may well bring GS down ... just like Enron and Arthur Andersen. I hope it does.

TOM OKEEFE:

Igor, do you know this for certain? The Banksters are masters of the Big Lie and Fear. They did the same thing in the 30's when they cried that the 33 and '34 Securities Acts would kill their industry. Now they are crying ( and this may be you) that they will move out of the country if tough legislation is passed.

Real tough legislation like a Windfall Profits Tax or increasing Section 31 fees to .80 of one percent instead of .25 would be a start.

If they threaten to move - let them . There are plenty of good banks in this country that could take their business and I mean TAKE their business because they shouldn't be allowed to operate in this country at all if that happens.

 

[Nov 19, 2009] Goldman Sachs Betting on Derivatives Collapse Sparked Financial Crash-

The Automatic Earth

Goldman Sachs recently published its 13F, a quarterly filing in which all asset managers reveal their largest holdings. In it, Goldman’s asset management group reveals their largest long positions and their largest short positions. Now, Goldie is widely held to be the “smartest” guys on Wall Street (not my opinion) so their net shorts (the stocks or companies they’re betting AGAINST) were particularly interesting to me:



The above positions combine Goldman’s long and shorts (stock and option based positions) for the NET short positions. In simple terms, Goldman MAY be long these companies, but because the bank is ALSO shorting them (and shorting more shares than it is going long) it has NET short positions. Put another way, these are the companies or positions that Goldman is betting the most money on falling in the future.
For starters, FOUR of the top 10 are financial companies. The largest financial short is Wells Fargo, which Goldman has committed $289 million to betting against. After that it’s Mastercard ($266 million), then PNC ($202 million), and finally AIG ($152 million). Looking at Goldman’s positions, it’s plain as day that Wall Street’s “finest” do NOT believe the financial crisis is over (why are they betting against the banks if they do?). It’s also clear that Goldman’s analysts have noted as I have that both Wells Fargo and PNC both have massive exposure to the derivatives market (the fact that Goldman ALSO has massive derivative exposure is beyond ironic).

However, where things get absolutely absurd is Goldman’s short position of AIG. Goldman, as has been widely documented, was one of the largest benefactors of AIG’s bailout (the then investment bank had MASSIVE counter party exposure to AIG’s toxic balance sheet). To see Goldman now betting AGAINST AIG after receiving $13 billion in tax payer money to insure the former didn’t go under along with the latter is outrageous (if not infuriating) to say the least.

On a final note, I wanted to point out Goldman is also shorting a Euro index (betting against that currency) as well as two gold mining companies (Barrick and Agnico Eagle Mines). This indicates that Goldie is bearish on both the euro and gold which hints that Wall Street’s finest are likely betting on a US Dollar rally (that would, after all, be the most obvious catalyst for a correction in gold and the euro). To be blunt, it’s clear that Goldman (like me) believes the financial crisis is nowhere near over: four of its top ten largest shorts are financial companies. It’s also worth noting that Goldman is betting against gold and the euro. Given Goldman’s incredible access to and close relationship with the regulators and federal government, I see this as further proof that we may be seeing another stock crisis triggered by a Dollar rally in the near future.

[Nov 19, 2009] Goldman: Flu Fear Spurs Donation! By Rick Ambrose

November 18th, 2009

(Reuters) New York: Having inoculated its employees with H1N1 vaccine dosages usurped from pregnant women and children, Goldman Sachs has increased its vigilance against the contagious virus by banning employee contact with spare change.

An internal memo outlines steps staff should take to avoid becoming ill, starting with the eradication of the potentially infected currency that may have lodged itself under the seats of their automobiles. The hazardous materials are being collected and sent to Small Business for disposal.

The memo also advised employees to “resist the urge to open your own car door ; let your driver do it.”

-Richard Ambrose

Space_Cowboy_NW:

Somehow, the poingant tone of ‘F#ck The Masses’ seems to resonate instep with “Doing God’s Work”.

As always, your mileage may vary……

“Action speaks louder than words but not nearly as often. ” -Mark Twain

bsneath:

While the risk of such an occurence is considered remote, Goldman employees were advised not to perform holiday volunteer work at soup kitchens or other locations frequented by poor people. “We are taking this action to avoid any potential contamination of employees in key profit centers.” Said Lucas Von Pragg, spokesperson for Goldman Sachs. He went on to say, “We feel we can better help these people by continuing our good work at making the markets more efficient for all.”

Goldman Sachs Nearly Bankrupted AIG by Janet Tavakoli

"Goldman's public disclosures in September 2008 obscured its contribution to AIG's near bankruptcy and the need to bailout Goldman's trading partners in AIG related transactions. Goldman's trading activities played a starring role in the near collapse of the global markets."

November 17, 2009

“Goldman’s trading activities played a starring role in the near collapse of the global markets.”

Goldman wasn't the only contributor to the systemic risk that nearly toppled the global financial markets, but it was the key contributor to the systemic risk posed by American International Group, Inc.'s (AIG) near bankruptcy in September 2008.

When it came to the credit derivatives AIG was required to mark-to-market, Goldman was the 800-pound gorilla. Calls for billions of dollars in collateral pushed AIG to the edge of disaster. The entire financial system was imperiled, and Goldman Sachs would have been exposed to billions in devastating losses.

A Goldman spokesman told me its involvement in AIG's trades was only as an "intermediary," but Goldman underwrote some of the collateralized debt obligations (CDOs) comprising the underlying risk of the protection Goldman bought from AIG. Goldman also underwrote many of the (tranches of) CDOs owned by some of AIG's other trading counterparties.

Goldman was AIG's largest counterparty, and its trades made up one-third of AIG's approximately $62.1 billion in transactions requiring market prices. Societe Generale (SocGen) was AIG's next largest counterparty with $18.7 billion. SocGen, Calyon, Bank of Montreal, and Wachovia bought several (tranches) of Goldman's CDOs and hedged them with AIG.

[Nov 3, 2009] Just Desserts and Markets Being Silly Again  by Jeremy Grantham

The Big Picture

Just look at Goldman's recent huge "profits," two-thirds of which went for bonuses. It is now estimated that this year's bonus pool will be plus or minus $23 billion, the largest ever. Less than a year ago, these same guys were on the edge of a run on the bank. They were saved only by "government" - the taxpayers' supposed agents - who decided to interfere with the formerly infallible workings of capitalism. Just as remarkably, it is now reported that remuneration for the entire banking industry may be approaching a new peak. "Well, we got rid of some of those pesky competitors, so now we can really make hay," you can almost hear Goldman and the others say. And as for the industry's concern about the widespread public dismay, even disgust, about excessive remuneration (and, I would add, plundering of the shareholders' rightful profits)? Fuhgeddaboudit! In the thin book of "lessons learned," this one, like most of our other examples, will not appear.

Mystery Why did Goldman stop scrutinizing loans it bought McClatchy

BANNING, Calif. — Goldman Sachs Group got into the residential mortgage business in 1984, and for 17 years, it ran a staid operation that simply bought and sold loans.

All that changed in 2001, when the elite investment bank leaped aggressively into the burgeoning subprime securities market that was becoming a fountain of money for its Wall Street rivals. The Goldman Sachs Mortgage Co. sold $8.7 billion in subprime bonds that year, amounting to a third of its business.

Soon, the Goldman subsidiary was in the jet stream, dealing with some of the most aggressive and controversial subprime lenders — including Ameriquest (through a subsidiary), New Century, Fremont General, National City and First Franklin.

A spokesman for Goldman, Michael DuVally, declined to explain how a firm of its stature was drawn into a business dogged by questions about the integrity of its lending practices.

Before they bought pools of thousands of mortgages, Goldman and other Wall Street firms hired contractors to comb through sample batches of the loans to weed out unsound or fraudulent applications.

Not much weeding occurred, however, several of the contractors said, because the Wall Street firms had agreed to accept mortgage lenders' relaxed credit guidelines.

Melissa Toy and Irma Aninger, among scores of contract risk analysts who thumbed through mortgage files for the San Francisco-based Bohan Group from 2004 to 2006, said that supervisors overrode the bulk of their challenges to shaky loans on behalf of Goldman and other firms.

They couldn't recall specific examples involving loans bought by Goldman, but they said their supervisors cleared half-million-dollar loans to a gardener, a housekeeper and a hairdresser.

Aninger, whose job was to review the work of other contract analysts, said that she objected to numerous applications for loans that required no income verification, her supervisor would typically tell her, "You can't call him a liar ... You have to take (his) word for it."

"I don't even know why I was there," she said, "because the stuff was gonna get pushed through anyway."

Toy said she concluded that the reviews were mostly "for appearances," because the Wall Street firms planned to repackage "bogus" loans swiftly and sell them as bonds, passing any future liabilities to the buyers. The investment banks and mortgage lenders each seemed to be playing "hot potato," trying to pass the risks "before they got burned," she said.

"There was nobody involved in this who didn't know what was going on, no matter what they say," she said. "We all knew."

Goldman spokesman DuVally said that the firm's standards for reviewing the loans were "at least as high, if not higher, in 2006 than they were in 2002."

But he didn't elaborate on what scrutiny was demanded.

In 2007, attorneys general in New York, Connecticut and Massachusetts subpoenaed reports that now-defunct Bohan and another due diligence contractor, Clayton Holdings Inc., provided to their Wall Street clients about the loan reviews.

Clayton revealed last year that it was cooperating with New York's inquiry in return for immunity from prosecution. A spokesman for New York Attorney General Andrew Cuomo declined to comment on the status of the inquiry.

Aninger and Toy, however, said that Bohan's and Clayton's reports to clients would be of limited value to investigators because they wouldn't mention verbal exchanges in which loan challenges were snubbed.

John Talbott, a former Goldman investment banker and the author of a new book, "The 88 Biggest Lies on Wall Street," said "it wasn't a mistake" when illegal immigrants got home mortgages.

The lenders, he said, "just wanted somebody, anybody to sign a note" so they could sell it to Wall Street, where ratings agencies that were paid hefty fees by the investment banks bestowed triple-A grades or their equivalent on most subprime bonds.

"It's not just unethical," Talbott said of the chain of profiting subprime players extending from real estate appraisers to Wall Street. "It's totally criminal."

[Nov 1, 2009] Why haven't any Wall Street tycoons been sent to the slammer McClatchy

WASHINGTON — More than a year into the gravest financial crisis since the Great Depression, millions of Americans have seen their home values and retirement savings plunge and their jobs evaporate.

What they haven't seen are any Wall Street tycoons forced to swap their multi-million dollar jobs and custom-made suits for dishwashing and prison stripes.

There are plenty of civil and class-action lawsuits from aggrieved investors angered by the losses in their mortgage bonds, hedge funds or pensions. Regulators have stepped up their vigilance after the fact. But to date, no captain of finance tied to the crisis has walked the plank.

There have been some high-profile arrests and federal convictions of financial giants — such as Ponzi scheme king Bernard Madoff and Stanford Financial Group chairman Robert Allen Stanford. They weren't among the causes of the financial meltdown, however, just poster boys for an era of lax enforcement, weak regulation and devout faith in free markets.

[Nov 1, 2009] How Goldman secretly bet on the U.S. housing crash McClatchy

November 1, 2009

WASHINGTON — In 2006 and 2007, Goldman Sachs Group peddled more than $40 billion in securities backed by at least 200,000 risky home mortgages, but never told the buyers it was secretly betting that a sharp drop in U.S. housing prices would send the value of those securities plummeting.

Goldman's sales and its clandestine wagers, completed at the brink of the housing market meltdown, enabled the nation's premier investment bank to pass most of its potential losses to others before a flood of mortgage defaults staggered the U.S. and global economies.

Only later did investors discover that what Goldman had promoted as triple-A rated investments were closer to junk.

Now, pension funds, insurance companies, labor unions and foreign financial institutions that bought those dicey mortgage securities are facing large losses, and a five-month McClatchy investigation has found that Goldman's failure to disclose that it made secret, exotic bets on an imminent housing crash may have violated securities laws.

"The Securities and Exchange Commission should be very interested in any financial company that secretly decides a financial product is a loser and then goes out and actively markets that product or very similar products to unsuspecting customers without disclosing its true opinion," said Laurence Kotlikoff, a Boston University economics professor who's proposed a massive overhaul of the nation's banks. "This is fraud and should be prosecuted."

John Coffee, a Columbia University law professor who served on an advisory committee to the New York Stock Exchange, said that investment banks have wide latitude to manage their assets, and so the legality of Goldman's maneuvers depends on what its executives knew at the time.

"It would look much more damaging," Coffee said, "if it appeared that the firm was dumping these investments because it saw them as toxic waste and virtually worthless."

Lloyd Blankfein, Goldman's chairman and chief executive, declined to be interviewed for this article.

A Goldman spokesman, Michael DuVally, said that the firm decided in December 2006 to reduce its mortgage risks and did so by selling off subprime-related securities and making myriad insurance-like bets, called credit-default swaps, to "hedge" against a housing downturn.

DuVally told McClatchy that Goldman "had no obligation to disclose how it was managing its risk, nor would investors have expected us to do so ... other market participants had access to the same information we did."

For the past year, Goldman has been on the defensive over its Washington connections and the billions in federal bailout funds it received. Scant attention has been paid, however, to how it became the only major Wall Street player to extricate itself from the subprime securities market before the housing bubble burst.

Goldman remains, along with Morgan Stanley, one of two venerable Wall Street investment banks still standing. Their grievously wounded peers Bear Stearns and Merrill Lynch fell into the arms of retail banks, while another, Lehman Brothers, folded.

To piece together Goldman's role in the subprime meltdown, McClatchy reviewed hundreds of documents, SEC filings, copies of secret investment circulars, lawsuits and interviewed numerous people familiar with the firm's activities.

McClatchy's inquiry found that Goldman Sachs:

 

 

 

• Bought and converted into high-yield bonds tens of thousands of mortgages from subprime lenders that became the subjects of FBI investigations into whether they'd misled borrowers or exaggerated applicants' incomes to justify making hefty loans.

   

   

• Used offshore tax havens to shuffle its mortgage-backed securities to institutions worldwide, including European and Asian banks, often in secret deals run through the Cayman Islands, a British territory in the Caribbean that companies use to bypass U.S. disclosure requirements.

   

   

• Has dispatched lawyers across the country to repossess homes from bankrupt or financially struggling individuals, many of whom lacked sufficient credit or income but got subprime mortgages anyway because Wall Street made it easy for them to qualify.

   

   

• Was buoyed last fall by key federal bailout decisions, at least two of which involved then-Treasury Secretary Henry Paulson, a former Goldman chief executive whose staff at Treasury included several other Goldman alumni.

   

   

 

The firm benefited when Paulson elected not to save rival Lehman Brothers from collapse, and when he organized a massive rescue of tottering global insurer American International Group while in constant telephone contact with Goldman chief Blankfein. With the Federal Reserve Board's blessing, AIG later used $12.9 billion in taxpayers' dollars to pay off every penny it owed Goldman.

These decisions preserved billions of dollars in value for Goldman's executives and shareholders. For example, Blankfein held 1.6 million shares in the company in September 2008, and he could have lost more than $150 million if his firm had gone bankrupt.

With the help of more than $23 billion in direct and indirect federal aid, Goldman appears to have emerged intact from the economic implosion, limiting its subprime losses to $1.5 billion. By repaying $10 billion in direct federal bailout money — a 23 percent taxpayer return that exceeded federal officials' demand — the firm has escaped tough federal limits on 2009 bonuses to executives of firms that received bailout money.

Goldman announced record earnings in July, and the firm is on course to surpass $50 billion in revenue in 2009 and to pay its employees more than $20 billion in year-end bonuses.

THE BLUEST OF THE BLUE CHIPS

For decades, Goldman, a bastion of Ivy League graduates that was founded in 1869, has cultivated an elite reputation as home to the best and brightest and a tradition of urging its executives to take turns at public service.

As a result, Goldman has operated a virtual jobs conveyor belt to and from Washington: Paulson, as Treasury secretary, sent tens of billions of taxpayers' dollars to rescue Wall Street in 2008, and former Goldman employees populate some of the most demanding and powerful posts in Washington. Savvy federal regulators have migrated from their Washington jobs to Goldman.

On Oct. 16, a Goldman vice president, Adam Storch, was named managing executive of the SEC's enforcement division.

Goldman's financial panache made its sales pitches irresistible to policymakers and investors alike, and may help explain why so few of them questioned the risky securities that Goldman sold off in a 14-month period that ended in February 2007.

Since the collapse of the economy, however, some of those investors have changed their opinions of Goldman.

Several pension funds, including Mississippi's Public Employees' Retirement System, have filed suits, seeking class-action status, alleging that Goldman and other Wall Street firms negligently made "false and misleading" representations of the bonds' true risks.

Mississippi Attorney General Jim Hood, whose state has lost $5 million of the $6 million it invested in Goldman's subprime mortgage-backed bonds in 2006, said the state's funds are likely to lose "hundreds of millions of dollars" on those and similar bonds.

Hood assailed the investment banks "who packaged this junk and sold it to unwary investors."

California's huge public employees' retirement system, known as CALPERS, purchased $64.4 million in subprime mortgage-backed bonds from Goldman on March 1, 2007. While that represented a tiny percentage of the fund's holdings, in July CALPERS listed the bonds' value at $16.6 million, a drop of nearly 75 percent, according to documents obtained through a state public records request.

In May, without admitting wrongdoing, Goldman became the first firm to settle with the Massachusetts attorney general's office as it investigated Wall Street's subprime dealings. The firm agreed to pay $60 million to the state, most of it to reduce mortgage balances for 714 aggrieved homeowners.

Attorney General Martha Coakley, now a candidate to succeed Edward Kennedy in the U.S. Senate, cited the blight from foreclosed homes in Boston and other Massachusetts cities. She said her office focused on investment banks because they provided a market for loans that mortgage lenders "knew or should have known were destined for failure."

New Orleans' public employees' retirement system, an electrical workers union and the New Jersey carpenters union also are suing Goldman and other Wall Street firms over their losses.

The full extent of the losses from Goldman's mortgage securities isn't known, but data obtained by McClatchy show that insurance companies, whose annuities provide income for many retirees, collectively paid $2 billion for Goldman's risky high-yield bonds.

Among the bigger buyers: Ambac Assurance purchased $923 million of Goldman's bonds; the Teachers Insurance and Annuities Association, $141.5 million; New York Life, $96 million; Prudential, $70 million; and Allstate, $40.5 million, according to the data from the National Association of Insurance Commissioners.

In 2007, as early signs of trouble rippled through the housing market, Goldman paid a discounted price of $8.8 million to repurchase subprime mortgage bonds that Prudential had bought for $12 million.

Nearly all the insurers' purchases were made in 2006 and 2007, after mortgage lenders had lifted most traditional lending criteria in favor of loans that required little or no documentation of borrowers' incomes or assets.

While Goldman was far from the biggest player in the risky mortgage securitization business, neither was it small.

From 2001 to 2007, Goldman hawked at least $135 billion in bonds keyed to risky home loans, according to analyses by McClatchy and the industry newsletter Inside Mortgage Finance.

In addition to selling about $39 billion of its own risky mortgage securities in 2006 and 2007, Goldman marketed at least $17 billion more for others.

It also was the lead firm in marketing about $83 billion in complex securities, many of them backed by subprime mortgages, via the Caymans and other offshore sites, according to an analysis of unpublished industry data by Gary Kopff, a securitization expert.

In at least one of these offshore deals, Goldman exaggerated the quality of more than $75 million of risky securities, describing the underlying mortgages as "prime" or "midprime," although in the U.S. they were marketed with lower grades.

Goldman spokesman DuVally said that Moody's, the bond rating firm, gave them higher grades because the borrowers had high credit scores.

Goldman's securities came in two varieties: those tied to subprime mortgages and those backed by a slightly higher grade of loans known as Alt-A's.

Over time, both types of mortgages required homeowners to pay rapidly rising interest rates. Defaults on subprime loans were responsible for last year's housing meltdown. Interest rates on Alt-A loans, which began to rocket upward this year, are causing a new round of defaults.

Goldman has taken multiple steps to put its subprime dealings behind it, including publicly saying that Wall Street firms regret their mistakes. Last winter, the company cancelled a Las Vegas conference, avoiding any images of employees flashing wads of bonus cash at casinos.

More recently, the firm has launched a public relations campaign to answer the criticism of its huge bonuses, Washington connections and federal bailout. In late October, Blankfein argued that Goldman's activities serve "an important social purpose" by channeling pools of money held by pension funds and others to companies and governments around the world.

KNOWING WHEN TO FOLD THEM

For investment banks such as Goldman, the trick was knowing when to exit the high-stakes subprime game before getting burned.

New York hedge fund manager John Paulson was one of the first to anticipate disaster. He told Congress that his researchers discovered by early 2006 that many subprime loans covered the homes' entire value, with no down payments, and so he figured that the bonds "would become worthless."

He soon began placing exotic bets — credit-default swaps — against the housing market. His firm, Paulson & Co., booked a $3.7 billion profit when home prices tanked and subprime defaults soared in 2007 and 2008. (He isn't related to Henry Paulson.)

At least as early as 2005, Goldman similarly began using swaps to limit its exposure to risky mortgages, the first of multiple strategies it would employ to reduce its subprime risk.

The company has closely guarded the details of most of its swaps trades, except for $20 billion in widely publicized contracts it purchased from AIG in 2005 and 2006 to cover mortgage defaults or ratings downgrades on subprime-related securities it offered offshore.

In December 2006, after "10 straight days of losses" in Goldman's mortgage business, Chief Financial Officer David Viniar called a meeting of mortgage traders and other key personnel, Goldman spokesman DuVally said.

Shortly after the meeting, he said, it was decided to reduce the firm's mortgage risk by selling off its inventory of bonds and betting against those classes of securities in secretive swaps markets.

DuVally said that at the time, Goldman executives "had no way of knowing how difficult housing or financial market conditions would become."

In early 2007, the firm's mortgage traders also bet heavily against the housing market on a year-old subprime index on a private London swap exchange, said several Wall Street figures familiar with those dealings, who declined to be identified because the transactions were confidential.

The swaps contracts would pay off big, especially those with AIG. When Goldman's securities lost value in 2007 and early 2008, the firm demanded $10 billion, of which AIG reluctantly posted $7.5 billion, Viniar disclosed last spring.

As Goldman's and others' collateral demands grew, AIG suffered an enormous cash squeeze in September 2008, leading to the taxpayer bailout to prevent worldwide losses. Goldman's payout from AIG included more than $8 billion to settle swaps contracts.

DuVally said Goldman has made other bets with hundreds of unidentified counterparties to insure its own subprime risks and to take positions against the housing market for its clients. Until the end of 2006, he said, Goldman was still betting on a strong housing market.

However, Goldman sold off nearly $28 billion of risky mortgage securities it had issued in the U.S. in 2006, including $10 billion on Oct. 6, 2006. The firm unloaded another $11 billion in February 2007, after it had intensified its contrary bets. Goldman also stopped buying risky home mortgages after the December meeting, though DuVally declined to say when.

I'VE GOT A SECRET

Despite updating its numerous disclosures to investors in 2007, Goldman never revealed its secret wagers.

Asked whether Goldman's bond sellers knew about the contrary bets, spokesman DuVally said the company's mortgage business "has extensive barriers designed to keep information within its proper confines."

However, Viniar, the Goldman finance chief, approved the securities sales and the simultaneous bets on a housing downturn. Dan Sparks, a Texan who oversaw the firm's mortgage-related swaps trading, also served as the head of Goldman Sachs Mortgage from late 2006 to April 2008, when he abruptly resigned for personal reasons.

The Securities Act of 1933 imposes a special disclosure burden on principal underwriters of securities, which was Goldman's role when it sold about $39 billion of its own risky mortgage-backed securities from March 2006 to February 2007.

The firm maintains that the requirement doesn't apply in this case.

DuVally said the firm sold virtually all its subprime-related securities to Qualified Institutional Buyers, a class of sophisticated investors that are afforded fewer protections than small investors are under federal securities laws. He said Goldman made all the required disclosures about risks.

Whether companies are obliged to inform investors about such contrary trades, or "hedges," is "a very hot issue" in cases winding through the courts, said Frank Partnoy, a University of San Diego law professor who specializes in securities. One issue is how specific companies must be in disclosing potential risks to investors, he said.

Coffee, the Columbia University law professor, said that any potential violations of securities laws would depend on what Goldman executives knew about the risks ahead.

"The critical moment when Goldman would have the highest liability and disclosure obligations is when they are serving as an underwriter on a registered public offering," he said. "If they are at the same time desperately seeking to get out of the field, that kind of bailout does look far more dubious than just trading activities."

Another question is whether, by keeping the trades secret, the company withheld material information that would enable investors to assess Goldman's motives for selling the bonds, said James Cox, a Duke University law professor who also has served on the NYSE advisory panel.

If Goldman had disclosed the contrary bets, he said, "One would have to believe that a rational investor would not only consider Goldman's conduct material, but likely compelling a decision to take a pass on the recommendation to purchase."

Cox said that existing laws, however, don't require sufficient disclosures about trading, and that the government would do well to plug that hole.

In marketing disclosures filed with the SEC regarding each pool of subprime bonds from 2001 to 2007, Goldman listed an array of risk factors that grew over time. Among them was the possibility of a pullback in overheated real estate markets, especially in California and Florida, where the most subprime loans had been made.

Suits filed by the pension funds, however, allege that Goldman made materially false or misleading statements in its public offerings, failing to disclose that many loans were based on inflated appraisals and were bought from firms with poor lending practices.

DuVally said that investors were fully informed of all known risks.

"What's going to happen in the next few years," said San Diego's Partnoy, "is there's going to be a lot of lawsuits and judges will have to decide, should Goldman have disclosed more or not?"

(Tish Wells contributed to this article.)

(This article is part of an occasional series on the problems in mortgage finance.)

COMING TOMORROW

Since the economic collapse that swept millions of Americans out of their jobs and homes, Goldman Sachs has moved aggressively to recover its losses. The firm is pursuing marginally qualified borrowers into state courts federal and bankruptcy across the country and seeking to seize their homes. McClatchy examines one couple's multi-year attempt to get Goldman to admit that it had purchased their mortgage.

MORE FROM MCCLATCHY

How Moody's sold its ratings — and sold out investors

Firms are getting billions, but homeowners still in trouble

Watchdog: Obama's mortgage relief efforts aren't good enough

Where did that bank bailout go? Watchdogs aren't sure

Worse than subprime? Other mortgages imploding slowly

Banks fight to kill proposed consumer protection agency

Why haven't any Wall Street tycoons been sent to the slammer?

Check out McClatchy's politics blog: Planet Washington

 

Don't Reinflate the Old Bubbles By Steven Pearlstein

October 14, 2009 | washingtonpost.com

Analysts at Goldman Sachs suggested Tuesday that, despite a 50 percent run-up in stock prices that has left the Dow Jones industrial average just shy of 10,000 and the S&P 500 selling at 20 times earnings, stocks are still cheap. In fact, according to Goldman, stocks are so cheap that corporations are going to start using all that cash on their balance sheets not for product development or marketing or some other productivity-enhancing investment, but for acquiring other companies.

In case you just fell off a turnip truck, you might think "Monetizing the M&A Revival" is serious research aimed at helping Goldman clients figure out how to profit from these uncertain times. The helpful analysts from Goldman even provided the names of companies they think are so underpriced that they are ripe for a takeover -- companies like Devon Energy, AK Steel and Red Hat.

But those with any memory at all will probably recognize this report for what it really is: a marketing brochure for Goldman's investment bankers, who are just itching to begin cranking up the old M&A machine and generating those big fees again. With deal flow, of course, comes an equally lucrative flow of new stock and bond issues to pay for all those ill-advised and overpriced acquisitions, along with increased volume on Goldman's trading desk from speculators hoping to cash in on the latest takeover rumors.

Just because Goldman is recommending this to its clients, however, doesn't mean Goldman is putting its own money behind the new bull market in mergers and acquisitions. Indeed, it is just as likely that Goldman is preparing to short the very takeover stocks it is touting to the public, just as it did in the late stages of the real estate and mortgage bubble. It's all perfectly legal. And it is perfectly in keeping with what we know about Wall Street's most successful firms, which is that if they stumble on a profitable trading strategy, the last person they are likely to share it with is you.

What we're witnessing here is pretty simple: another bubble in financial assets. All that "liquidity" created by the Federal Reserve and other central banks has accomplished its task and prevented a global financial meltdown. But unless they move now to begin sopping up that liquidity, the central bankers run a serious risk of reinflating many of the same bubbles that got us into this mess in the first place.

Many analysts now look at the economy and conclude that unemployment is still way too high and the threat of inflation still way too low for the Fed to even think about beginning to raise interest rates again. By one calculation, the appropriate federal funds rate today would be something like negative 5 percent. Since that's impossible, the Fed has signaled that it would not only stick by its zero-interest-rate policy for the indefinite future, but also will continue to inject additional money into the financial system by using freshly printed dollars to buy up the debt issued by government-owned Fannie Mae and Freddie Mac.

The problem is that because we didn't get into this recession in the normal way, the normal analysis and remedies are not appropriate. Slow growth and high unemployment are indeed going to be a big problem over the next several years, but they aren't going to be solved by pumping out lots of cheap money that is used to speculate in stocks, bonds and commodities rather than be invested in the real economy. And if all this speculation has the effect of driving up the price of commodities and driving down the value of the dollars we use for imports, then it is perfectly possible to wind up with high inflation and high unemployment at the same time -- as happened in the late 1970s.

The right policy response is for the Fed to begin withdrawing some of this extraordinary monetary stimulus even as the rest of the government steps up its effort to stimulate the real economy. That means more money for extended unemployment benefits; more aid to the states so that they can maintain the most vital public services; and more money to expand mass transit, state college and university systems, efficient energy production and basic scientific research. The economist Paul Krugman estimates that for every dollar in extra debt that will be required to finance this fiscal stimulus, about 40 cents will be repaid almost immediately in the form of tax revenues from higher short-term economic growth. And if the money is invested wisely in quality projects with high returns, the other 60 cents could wind up being a boon to future generations, rather than a burden.

What would surely not be good policy, by the way, is to extend and expand the current tax break for first-time home buyers that is set to expire at the end of the year, as many in Congress are now advocating. Home buyers are already getting a huge benefit from the dramatic drop in house prices, along with the lowest mortgage rates in a generation, thanks to massive government infusions into Fannie and Freddie. For the government to go beyond those efforts and try to induce home sales that otherwise wouldn't have happened -- at an estimated $75,000 a pop -- would surely be cheered by home builders, real estate agents and the analysts at Goldman Sachs. But in truth it would be nothing more than a misguided attempt to reinflate another bubble.

"Something is Wrong with Wall Street"

Lloyd C. Blankfein proved to be a very interesting guy: gambler remains the gambler no matter what.  He has been preaching the value of transparency... well... let their be light!

Economist's View

One element in the creation of  bubble is people's willingness to believe that this time is different. In the present case, this time was different because of financial innovation, better monetary policy, better technology to manage shocks (e.g. digital technology reducing supply bottlenecks), and so on leading to a (supposed) reduction in overall financial risk without a corresponding reduction in returns.

But this time wasn't different, it was in many ways a rerun of the dot.com bubble, and Shane Greenstein says people are finally starting to notice. In fact, according to the argument below, the effort to address problems on Wall Street has passed the "Russ Roberts test":

This just in, something is wrong with Wall Street, by Shane Greenstein [Note: original post replaced with an updated version at the author's request]:

Please forgive the irony in the title. But I just felt like expressing sarcasm because – Ha! — many professional economists have begun to notice something is wrong with Wall Street.

Better late than never, I guess.

This recent essay/podcast from Russell Roberts is a good indication that just about everyone has noticed that Wall Street has a tin ear for its public standing, which has sunk quite low due to self-serving behavior.

In case you have not noticed what Roberts has noticed, then let me remind you. Just recently the management at Goldman Sachs announced that the firm had a very profitable quarter, which, of course, resulted in very high pay for their executives.

That is where it gets interesting. Roberts points out (correctly, IMHO) that had the government not stepped in at AIG, etc., Goldman would have gone down with everyone else. Ergo, their executives should recognize that they have a connection to taxpayer money as much as any other firm, and they should, therefore, eschew blatantly selfish and observable behavior, such as paying themselves high salaries.

Russ Roberts is normally a free market economist, but in his essay he sounds like an old fashioned populist. When a firm does something to turn Russell Roberts into a populist then — perhaps — something is actually amiss with attitudes on Wall Street.

Alright, then, so what? Well, take this observation another step or two…

What Roberts did not say

Here is what Roberts did not say, so I will. Goldman displayed a tin ear by not making any gesture at the same time they announced their profitable earnings.

What do I mean by tin ear? Here is an example. They did not announce the hiring of many (otherwise) laid off workers — as sort of a political gesture to address the need to do something about the high unemployment rate around the country.

Here is another idea. Why stop with hiring a few more employees? How about making an unusually big (I mean VERY BIG) donation to a soup kitchen — once again, as a gesture to suffering of others in these hard time.

Hmmm, here is another idea. How about doing anything mildly publicly-spirited, like buying a new fire truck for the New York city Fire Department, because the whole city is having a bad budget year? Why the New York city Fire Department? Because nobody ever has anything bad to say about firefighters in most cities, and certainly not in New York City after their sacrifice during 9/11.

Heck, once you start thinking this way, it is quite easy to find a way to spend a half billion dollars in unexpectedly large profits. But if you have a tin ear for this sort of non-selfish gesture, then the thought might never have surfaced.

And now to the point of this rant…

For those of us who live in the land of high tech, these type of observations are nothing new. The self-serving and otherwise destructive behavior of some Wall Street managers is well known…

Look, I have been around the block enough to understand that sometimes financial managers have something useful to say to high tech firms. But there is also something wrong. For example, the short-termism of Wall Street managers is legendary among high tech managers who have a long term vision for their firm but are asked to deliver revenue tomorrow. The self-serving decision making of managers who give IPOs to friends is another well known behavior (and most young firms and VCs would love to eliminate it). Another common complaint concerns the unwillingness of IPO managers to change the system if it meant a loss of control. For example, remember this? Wall Street was unwilling to conduct any IPO as an auction until Google insisted — insisted! — that the old system would not apply to them.

Enough is enough. Even guys like Roberts can see that something is amiss.

Remember the dot com madness?

It is really nothing new. Really.

Back in the late 1990s — more than a decade ago — Wall Street cheered on one of the goofiest investment bubbles I have ever seen in my lifetime (and hopefully I ever will see). It was called the dot-com boom, and, frankly, it was nuts from any rational perspective.

Yes, there are lots of explanations for the boom. There was a social dimension: Plenty of observers tried to say it was nuts. They were drowned out by crazy evangelists who ignored basic finance and who argued that price earnings ratios could be way out of whack. And it sold copy: the business media loves of a sensational story, and that did not help.

But that is why adult supervision is required in high tech. The financial professionals and auditors of this country had a professional obligation to say sober things, to ask — perhaps, insist! — that revenues align with expenses, and advise investors when such alignment has little chance of appearing. And in the late 1990s, what did the professionals do? Well, it is complicated, but, suffice to say, few of them said no to the nuttiness.

Why not? Here is a good clue in an essay by Henry Blodget.

You may recall that Blodget was a wunderkindt cheer leader for dot coms. How did he get there? Basically, he made a bold call, got himself some attention, and kept making more bold calls. His bosses saw an opportunity and replaced someone else who had the good sense to point out that the promises had considerably risk. Blodgett instead went full steam ahead because — he fully admits it — he was hired to do just that.

I do not know this fellow, nor have we ever met. I have read some of his writing. As best I can tell, Blodgett actually has a pretty smart head on his shoulders. He writes well and has the capacity to make some intelligent and deep observations.

Anyway, Blodgett eventually got himself into trouble. While I understand how someone with those sort of smarts can delude themselves enough to tempt fate for a short while — he is human, after all — nonetheless, it is beyond my capacity as a psychologist to explain how someone can do it for a long time.  And he did. For several years. Until the dot com crashed, and a scandal broke, and he got banned.

There is a deeper question behind that run of several years. How did his bosses allow Blodgett to ply this trade for so long even though the wiser adults among them surely must have suspected/concluded/known that much of it was a financial charade?

The answer, of course is quite simple: they made so much money during that time. Blodgett’s bosses had no reason to change anything.

Many years later Blodgett wrote about his time in this essay. He finds many reasons for explaining his own behavior. Blodget says he did it because if he did not others would.  He did it because his bosses wanted him to do it. He did because everyone was making huge amounts of money from focusing on the short term benefits to their firm. All in all, he did it because it seemed like a good idea at the time.

In economics-speak, all those explanations add up to the following. Henry and his bosses simply ignored the consequences for the prudent investor or for the country as a whole — even though it had occurred to them that there was a chance that something might have gone wrong.

Let’s say this in general terms. Wall Street firms had no reason to internalize the issues with systemic risk — that is, they each ignored the downside to the entire system from all of them taking on too much risk, because each of them only contributed a small amount to it. Instead, each of them pursued their own selfish interests, and made out well in the short run, sacrificing system-wide long run stability.

Summing up

Those of us who live in high tech land noticed the odd behavior of Wall Street a while ago. Finally, it seems, the macroeconomics policy crowd has started to notice the same issues, and has started to argue that — perhaps — it is time to reign this in a bit. When a free market guy like Roberts notices, you know that the sensible people are finally thinking this one through.

Like I said, better late than never.

Now, on to the serious conversation: what to do about it….I am not sure what the right answers are, but limits on executive bonuses seems like a band-aid for a systemic issue. It is too much to ask a manager who makes several million dollars a year to stop gaming the system, but it might be reasonable to ask for better auditing, more transparency for investors, tighter capital requirements for firms taking risky actions, and a few others unpleasant measures that might help us all avoid these system-wide problems.

Oh yes… until then, the executives at Goldman might consider a public spirited gesture or two, such as — I dunno’ — donating a fraction of their recent profits to the New York Fire Department.

"Even guys like Roberts can see that something is amiss." So this time is different?

I want to believe that, I really do.

Selected comments

Bruce Wilder said...

Atrios had the best comment.

After quoting the Larry Summers' speech
["Roughly every three years for the last generation a financial system that was intended to manage, distribute, and control risk has, in fact, been a source of risk – with devastating consequences for workers, consumers, and taxpayers."

"Think about it. The last generation has seen:

1. The Latin American debt crisis
2. The 1987 stock market crash
3. The savings and loan debacle
4. The Mexican financial crisis
5. The Asian financial crisis
6. The collapse of LTCM
7. The bursting of the dot-com bubble
8. And now the financial crisis that began in 2007."

"One crisis every three years."

"Surely a system that produces this many accidents and accidents this severe is a system that is in very much need of reform."]

Atrios quipped, "All those crises that no one could have predicted. Makes one wonder if it's a feature, not a bug..."

Indeed.

 

Op-Ed Columnist - Goldman Can Spare You a Dime - NYTimes.com

By FRANK RICH

Published: October 17, 2009

AT the dawn of the progressive era early in the last century, muckrakers attacked the first billionaire, John D. Rockefeller, for creating capitalism’s most ruthless monster. “The Octopus” was their nickname for Standard Oil, the trust that controlled nearly 90 percent of American oil. But even in that primordial phase of the industrial era, Rockefeller was mindful of his public image and eager to counter it. “His great brainstorm,” writes his biographer, Ron Chernow, “was undoubtedly his decision to dispense shiny souvenir dimes to adults and nickels to children as he moved about.” Who could hate an octopus tossing glittering coins?

It was hard not to think of Rockefeller’s old P.R. playbook while watching Goldman Sachs’s behavior when the Dow hit 10,000 last week. As leader of the Wall Street pack, Goldman declared surging profits, keeping it on track to dispense a record $23 billion in bonuses for 2009. But most Americans know all too well that only the intervention of billions of dollars in taxpayer bailout money saved Goldman from the dire fate of its less well-connected competitors. The growing ranks of under-and-unemployed Americans, meanwhile, are waiting with increasing desperation for a recovery of their own.

Goldman is this century’s octopus — almost literally so. The most-quoted sentence in financial journalism this year, by Matt Taibbi of Rolling Stone, describes the company as a “great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money.” That’s why Goldman’s chief executive, Lloyd Blankfein, recycled Rockefeller’s stunt last week: The announcement of Goldman’s spectacular third-quarter earnings ($3.19 billion) was paired with the news that the company was donating $200 million to its own foundation, which promotes education. In Goldman dollars, that largess is roughly comparable to the nickels John D. handed out to children a century ago. At least those kids could spend the spare change on candy.

Teddy Roosevelt’s trust-busting crusade ultimately broke up Standard Oil. Though Goldman did outlast three of its four major rival firms during last fall’s meltdown, it is not a monopoly. And there is one other significant way that our 21st-century vampire squid differs from Rockefeller’s 20th-century octopus. Americans knew what oil was, and they understood how Standard Oil’s manipulations directly affected their pocketbooks. Even now many Americans don’t know what Goldman’s products are or how it makes its money. The less we know, the easier it is for reckless gambling to return to capitalism’s casino, and for Washington to look the other way as a new financial bubble inflates.

As Wall Street was celebrating last week, Congress was having a big week of its own, arousing itself to belatedly battle some of the corporate suspects that have helped drive America into its fiscal ditch. The big action was at the Senate Finance Committee, which finally produced a health care bill that, however gingerly, bids to reform industries that have feasted on the nation’s Rube Goldberg medical system. At least health care, like oil, is palpable, so we will be able to keep score of how reform fares — win, lose or draw. But the business of Wall Street, while also at center stage in a Congressional committee last week, is so esoteric that the public is understandably clueless as to what, if anything, the lawmakers were up to, if anyone even noticed at all.

The first stab at corrective legislation emerging from Barney Frank’s Financial Services Committee in the House is porous. While unregulated derivatives remain the biggest potential systemic threat to the world’s economy, Frank said that “the great majority” of businesses that use derivatives would not be covered under his committee’s much-amended bill. It’s also an open question whether the administration’s proposed consumer agency to protect Americans from mortgage and credit-card outrages will survive the banking lobby’s attempts to eviscerate it. As that bill stands now, more than 98 percent of America’s banks — mainly community banks, representing 20 percent of deposits — would be shielded from the new agency’s supervision.

If it’s too early to pronounce these embryonic efforts at financial reform a failure, it’s hard to muster great hope. As the economics commentator Jeff Madrick points out in The New York Review of Books, the American public is still owed “a clear account of the financial events of the last two years and of who, if anyone, is seriously to blame.” Without that, there will be neither the comprehensive policy framework nor the political will to change anything.

The only investigation in town is a bipartisan Financial Crisis Inquiry Commission created by Congress in May. It is still hiring staff. Its 10 members are dispersed throughout the country, and, according to a spokeswoman, have contemplated only a half-dozen public sessions over the next year. Such a panel, led by the former California state treasurer Phil Angelides, seems highly unlikely to match Congress’s Depression-era Pecora commission. That investigation was driven by a prosecutor whose relentless fact-finding riveted the country and gave birth to the Securities and Exchange Commission, among other New Deal reforms. Last week, we learned that the current S.E.C. has hired a former Goldman hand as the chief operating officer of its enforcement unit.

Even as we wait for Congress and its inquiry to produce results, the cultural toxins revealed by our economic crisis remain unaddressed by the leaders in the private and public sectors who might make a difference now. Blankfein may be giving $200 million to “education,” but Goldman is back to business as usual: making money by high-risk gambling, with all the advantages that the best connections, cheap loans from the Fed and high-speed trading algorithms can bring. As the Reuters columnist Rolfe Winkler wrote last week, “Main Street still owns much of the risk while Wall Street gets all of the profit.”

The idea of investing in the real economy — the one that might create jobs for Americans — remains outré in this culture. Credit to small businesses remains tight. The holy capitalist grail is still the speculative buying and selling of companies and the concoction of ever more esoteric financial “instruments.” The tragic tale of Simmons Bedding recently told in The Times is a role model. This successful 133-year-old manufacturing enterprise was flipped seven times in two decades by private equity firms. Investors made more than $750 million in profits even as the pile-up of debt pushed Simmons into bankruptcy, costing a quarter of its loyal workers their jobs so far.

Most leaders in America are against this kind of ethos in principle. Last month the president of Harvard, Drew Gilpin Faust, contributed a stirring essay to The Times regretting that educational institutions did not make stronger efforts to assert the fundamental values of pure intellectual inquiry while “the world indulged in a bubble of false prosperity and excessive materialism.” She rued the rise of business as the most popular undergraduate major, an implicit reference to the go-go atmosphere during the reign of her predecessor, Lawrence Summers, now President Obama’s chief economic adviser.

What went unsaid, of course, is that some of Harvard’s most prominent alumni of the pre-Faust era — Summers, Blankfein, Robert Rubin et al. — were major players during the last two bubbles. As coincidence would have it, the same edition of The Times that published Faust’s essay also included an article about how Harvard was scrounging for bucks by licensing a line of overpriced preppy clothing under the brand Harvard Yard. This sop to excessive materialism will be a scant recompense for the $11 billion Harvard’s endowment managers lost in their own bad gamble on interest-rate swaps.

Obama has also passed through Harvard. (Disclosure: so did I.) He too has consistently said all the right things about the “money culture” of “quick kills and bloated bonuses,” of “reckless behavior and unchecked excess.” But the air of entitlement that continues to waft from his administration sends another message.

In particular, the tone-deaf Treasury secretary, Timothy Geithner, never ceases to amaze. His daily calendars reveal that most of his contacts with the financial sector in the first seven months of 2009 were limited to the trinity of Goldman Sachs, Citigroup and JPMorgan. And last week Bloomberg News reported that his inner circle of “counselors” — key advisers who, conveniently enough, do not require Senate confirmation — are largely drawn from the same club. It’s hard to see how any public official can challenge a culture that he is marinating in, night and day.

Those Obama fans who are disappointed keep looking for explanations. Is he too impressed by the elite he met in Cambridge, too eager to split the difference between left and right, too willing to compromise? As he pursues legislation, why does he keep deferring to others — whether to his party’s Congressional leaders or the Congressional Budget Office or to this month’s acting president, Olympia Snowe? Why doesn’t he ever draw a line in the sand? “We know Obama has good values,” Jeff Madrick said to me last week, “but we don’t know if he has convictions.”

What we also know is that if Teddy Roosevelt palled around with John D. Rockefeller as today’s political class does with Wall Street’s titans and lobbyists, the tentacles of the original octopus would still be coiled tightly around America’s neck.

 

What is a Bank, then?

I was trying to avoid mentioning this, partially because I half-suspected it was deliberately over the top, and I'm not reading tone well these days. After all:
 

Virtually every BHC has elected to become an FHC. Under 12 U.S.C. § 1843(k)(4)(H), FHCs are allowed to make "merchant banking investments" in nonfinancial companies, on a principal or agency basis, through affiliated private equity funds or other invesment funds. (Private equity affiliates are dealt with at length in 12 C.F.R. § 225.173.) Goldman carried out the investment in Greely Automotive Holdings through one of its private equity funds, GS Capital Partners VI Fund LP.

I find it very difficult to believe that any serious bankers, no matter how "annoyed," wouldn't have known this. [links in original]

is difficult to treat seriously, given the infodump being followed by the snideness. But so it goes.

Until today, when Brad DeLong made it ones of his links of the day. Because now we have to go into context and depth, and remember a year ago.

Bear was sold to JPMChase in March. Six months later, IBs still had not lowered their leverage ratios, and credit was more difficult to find. So the IB that had six months to return to some semblance of sanity—Lehmann Brothers—dangled on the edge for a while and finally fell off, "murdered" we're now told. (Whether it was murdered by its own CEO is left as an exercise.) But the best was yet to come.

So the weekend was going to be a rocky one. And various plans in various stages were executed:

1. Endangered IB #3, the successor firm to Merrill Lynch Pierce Fenner & Smith, looked around for a sucker, saw Ken Lewis, and locked in their bonuses.
    
2. Endangered IB #4, the successor firm to Dean Witter Sears, teetered on the edge, hoping for a life preserver. And, apparently, it was more like Leo-in-Titanic than anyone wanted to admit.
    
3. Endangered IB #5, The Vampire Squid, called its buddies at Treasury.

Maybe it didn't go exactly like that, but by the end of the weekend, there was the declaration that, so long as they re-incorporated as a Bank Holding Company (BHC), IB#4 and IB#5 would have full access to lootsupport from the U.S. Treasury.

And now we are told—in answer to the question Simon Johnson initially raised:
 

If this is temporary, is it envisaged that Goldman will cease being a bank holding company, or that it will divest itself shortly of activities not usually allowed (and with good reason) by banks? Or will all bank holding companies be allowed to expand on the same basis. (The relevant rules appear to be here in general and here specifically; do tell me what I am missing.)

Increasingly, the issue of “too big to regulate” in the public interest is being brought up – an issue that has historically attracted the interest of the Department of Justice’s Antitrust Division in sectors other than finance. Should Goldman Sachs now be placed in this category? [italics mine; links, again, from the original]

The response appears to be that those regulations can be circumvented with impunity. Or, as Simon unbelievingly snarked initially, Goldman is doing nothing any other bank cannot do.

But all that does is beg the question: if a BHC can do everything that GS used to be able to do, what was the actual cost to Goldman and Morgan Stanley of converting their business. Or was it just a way for the Fed to save face while letting the taps flow wide?

The not-so-subtle management of markets

FT Alphaville

All things considered, Wall Street was taking the latest payroll figures in its stride on Friday. For both the Dow and the S&P 500 at the opening, cash markets were showing roughly half the losses predicted earlier by their respective futures.

There was a good reason for that: the payroll figures actually came out on Thursday.

Do remember that, 24 hours before the formal release from the Labor Department, the consensus forecast on job cuts in September stood at around 160,000.  Then Jan Hatzius at Goldman Sachs suddenly raised his own forecast for the month from 200,000 to 250,000 - dragging the consensus up to 180,000.

The upshot is that Friday’s formal figure of 263,000 failed to shock.  Evidence that the recovery is perhaps more faltering than many had previously thought has spread smoothly into the equity market; any likelihood of the payroll numbers triggering panic selling was averted.

It makes sense for the authorities to work at managing tricky news flow in this way, as long as they don’t start to think they can do it regularly or with any real precision.

And they’d better be subtle about it.

Of course, to suggest that someone from up-on-high tipped off Goldman Sachs would be absurd - and an insult to Mr Hatzius directly.

But, my word, you can see why  the conspiracy theories fly…

praxis22

I don't think you need conspiracy theory:

http://www.bloomberg.com/apps/news?pid=20601087&sid=aEzui88kh1iM

"Sept. 30 (Bloomberg) -- Companies in the U.S. cut 254,000 jobs this month, more than forecast, a private report based on payroll data showed today.

The estimated drop, which was the smallest since July 2008, compares with a revised 277,000 decline the prior month, figures from ADP Employer Services showed. The ADP report was forecast to show a decline of 200,000 jobs, according to the median estimate of 33 economists in a Bloomberg survey. Projections ranged from decreases of 300,000 to 133,000."

I not trying to protect the pond life, but it seems to me that if you want to keep your credibility, and you're looking at being 60K wide of the mark when ADP comes in hot, then it makes sense to bump your figures up.

But what do I know :)

[Sep 30, 2009] "An Inside Look at How Goldman Sachs Lobbies the Senate"

I am not as negative toward naked short-selling as Matt Taibbi (feel free to convince me I'm wrong), but his insights into the lobbying effort against financial reform are useful, and I share his concerns about the distortions (e.g. regulatory capture) this brings to the reform process:

An Inside Look at How Goldman Sachs Lobbies the Senate, by Matt Taibbi: ...Later on this week I have a story coming out in Rolling Stone that looks at the history of the Bear Stearns and Lehman Brothers collapses. The story ends up being more about naked short-selling and the role it played in those incidents than I had originally planned..., but it turns out that there’s no way to talk about Bear and Lehman without going into the weeds of naked short-selling...

It’s the conspicuousness ... that is the issue here, and the degree to which the SEC and the other financial regulators have proven themselves completely incapable of addressing the issue seriously, constantly giving in to the demands of the major banks to pare back (or shelf altogether) planned regulatory actions. There probably isn’t a better example of “regulatory capture” ... than this issue.

In that vein, starting tomorrow, the SEC is holding a public “round table” on the naked short-selling issue. What’s interesting about this round table is that virtually none of the invited speakers represent shareholders or companies that might be targets of naked short-selling, or indeed any activists of any kind in favor of tougher rules against the practice. Instead, all of the invitees are either banks, financial firms, or companies that sell stuff to the first two groups.

In particular, there are very few panelists — in fact only one, from what I understand — who are in favor of a simple reform called “pre-borrowing.” Pre-borrowing is what it sounds like; it forces short-sellers to actually possess shares before they sell them.

It’s been proven to work, as last summer the SEC, concerned about predatory naked short-selling of big companies in the wake of the Bear Stearns wipeout, instituted a temporary pre-borrow requirement...

The lack of pre-borrow voices invited to this panel is analogous to the Max Baucus health care round table last spring, when no single-payer advocates were invited. So who will get to speak? Two guys from Goldman Sachs, plus reps from Citigroup, Citadel (a hedge fund that has done the occasional short sale, to put it gently), Credit Suisse, NYSE Euronext, and so on.

In advance of this panel and in advance of proposed changes to the financial regulatory system, these players have been stepping up their lobbying efforts... Goldman Sachs in particular has been making its presence felt.

Last Friday I got a call from a Senate staffer who said that Goldman had just been in his boss’s office, lobbying against restrictions on naked short-selling. The aide said Goldman had passed out a fact sheet about the issue that was so ridiculous that one of the other staffers immediately thought to send it to me. When I went to actually get the document, though, the aide had had a change of heart.

Which was weird, and I thought the matter had ended there. But the exact same situation then repeated itself with another congressional staffer, who then actually passed me Goldman’s fact sheet.

Now, the mere fact that two different congressional aides were so disgusted by Goldman’s performance that they both called me on the same day — and I don’t have a relationship with either of these people — tells you how nauseated they were.

I would later hear that Senate aides between themselves had discussed Goldman’s lobbying efforts and concluded that it was one of the most shameless performances they’d ever seen from any group of lobbyists, and that the “fact sheet” ... was, to quote one person familiar with the situation, “disgraceful” and “hilarious.” ...

Posted by Mark Thoma on Tuesday, September 29, 2009 at 12:28 PM in Economics, Financial System, Politics, Regulation  Permalink  Comments (19)

 

 

The Secret to Goldman’s Success? By Barry Ritholtz

September 30th, 2009

The NY Post’s John Crudele looks at a simple question:

So, is this how Goldman Sachs does it?

“It,” of course, is making gobs of money even when nobody else on Wall Street can.

And those profits then go into outrageous bonuses to employees, which cause rancor on Capitol Hill and on Main Street.

You’ve heard the old saying, “it’s not what you know, but who you know.”

Goldman Sachs knows lots of important people. That fact is indisputable, mainly because former Goldman employees are scattered around the country, and the globe, in important, decision-making financial positions.

But I’d like to make an addendum to that old saying, which I’ll explore for you today: Who you know is only important if you can get them on the phone anytime you want. It’s also about the unparalleled access that Goldman Sachs had to Treasury Secretary Hank Paulson.”

I am not sure I buy into the full conspiracy theory, but it sure as hell seems like the CEO of Goldman Sach’s had pretty much unfettered acces to the Treasury Secretary — a former CEO of Goldman Sach . . .

See also:
An Inside Look at How Goldman Sachs Lobbies the Senate
Matt Taibbi
True Slant, Sep. 29 2009 – 9:50 am
http://trueslant.com/matttaibbi/2009/09/29/sec-weighs-new-rules-for-lending-of-securities-wsj-com/

Source:
The secret to Goldman Sachs’ good fortune
John Crudele
NY Post, September 29, 2009
http://www.nypost.com/p/news/business/the_secret_to_goldman_sachs_good_WBlKYEyLfH7GP4zT0vNrEP

8 Responses to “The Secret to Goldman’s Success?”

1. Moss Says:
September 30th, 2009 at 7:00 am

I don’t think it was a secret plot, it was fully planned and coordinated.
That it can be done with impunity; that is the conspiracy.
2. flipspiceland Says:
September 30th, 2009 at 7:12 am

Nobody else can?

Then what’s Jamie Dimon doing on the cover of Newsweek, and has his own book out?

JPMorgan is twice the size of Goldman Sucks, Jamie is the “Last Man Standing”, and he sleeps with The Bamster

Someone overlooked the $1.3 Trillion under management at JPM.
3. VennData Says:
September 30th, 2009 at 7:31 am

… and the $3T at Blackrock.
4. Mark E Hoffer Says:
September 30th, 2009 at 8:05 am

con·spir·a·cy (kn-spîr-s)
n. pl. con·spir·a·cies
1. An agreement to perform together an illegal, wrongful, or subversive act.
2. A group of conspirators.
3. Law An agreement between two or more persons to commit a crime or accomplish a legal purpose through illegal action.
4. A joining or acting together, as if by sinister design: a conspiracy of wind and tide that devastated coastal areas.

——————————————————————————–

[Middle English conspiracie, from Anglo-Norman, probably alteration of Old French conspiration, from Latin cnsprti, cnsprtin-, from cnsprtus, past participle of cnsprre, to conspire; see conspire.]

http://www.thefreedictionary.com/conspiracy

the word has been with us a long time, for a reason..

We should remember what We learned as children: “Stick and Stones may break our Bones, but…”
5. HEHEHE Says:
September 30th, 2009 at 8:05 am

Barry how can you be so naive? Look at the phone calls. Blankfein was at the AIG bailout meetings for crying out loud. I’ll go a step further and ask was there a quid pro quo between Paulson and Warren Buffet as Buffet gave his “endorsement” preferred stock deal with Goldman for American Express’ access to TARP funds by having them switched to a Bank Holding Company with no questions asked; Buffet was American Express’ largest shareholder.
6. jc Says:
September 30th, 2009 at 8:41 am

Chuzpah cubed. They ran a conspiracy right in front of us and Paulson got carte blanche for his illegal actions – on a never before imagined scale.
7. jc Says:
September 30th, 2009 at 8:47 am

There is a Sept 30 deadline on the Fed/Bloomberg appeal right? Talk about kicking the can down the road…
8. mknowles Says:
September 30th, 2009 at 9:26 am

GOLDMAN SACKED-USA 2007

 

[Sep 16, 2009] Goldman's big rebound raises some eyebrows -  by Pallavi Gogoi

USATODAY.com

NEW YORK — On a clear day, Lloyd Blankfein can look through the windows of his office on the 30th floor at the tip of Manhattan and see the Linden housing project in the East New York section of Brooklyn. That's the rough neighborhood where he grew up, the son of a mail sorter at the local post office.

As head of Goldman Sachs (GS) today, Blankfein has come a long way from the projects to becoming one of the highest-paid CEOs on Wall Street. Perhaps he's come too far, because it's a place that many people who live in his old neighborhood might find hard to comprehend. After all, Blankfein and his fellow executives make eight-figure salaries running a company that devised and dabbled in the complex financial products that many believe caused the near-collapse of the global economy last year.

No wonder Goldman's recent feats, which in any other environment would have drawn applause, this year are attracting derision and suspicion. As the economy struggled to shake off the recession and unemployment approached 10%, Goldman did some of the best investment banking of its 140-year history, posting record quarterly revenue of $13.8 billion and 65% growth in profits.

Just months after many on Wall Street debated whether the investment banking industry it dominated was dead, Goldman has proved the naysayers wrong. Shareholders have chalked up big gains from the bank's banner performance in the first half of the year. Goldman's stock has doubled since January.

"Goldman's success lies in the culture of the firm — of stability, strength and focus. It's a culture that you cannot build overnight," says Thomas Marsico, founder and CEO of Marsico Capital Management, which manages $51 billion in assets and owns 13 million Goldman shares. "At a time when Lehman and Bear (Stearns) were gone, Citi was dealing with its financial issues and Merrill (Lynch) its new leadership, Goldman executed for its customers."

However, Goldman's profits stand in sharp contrast to what the rest of the country is facing, hobbled with hundreds of thousands of job losses each month and hundreds of businesses shuttering on Main Street. Goldman also set aside $11.4 billion in the first half of this year for compensation and benefits for its employees, a 33% increase from last year. At a time when there has been intense focus on bankers' compensation, including congressional hearings, Goldman's decision has been hard to swallow on Main Street.

After all, the belief is that Goldman and some of the other Wall Street banks might not still be around if they hadn't gotten government help. And the plight of taxpayers who are funding the bailout of financial institutions stands in stark relief to bankers' stratospheric pay. CEO Blankfein, for instance, earned in excess of $100 million in the past three years, even though he didn't take a bonus last year.

Last fall, Goldman, along with eight large banks, was given billions in taxpayer dollars to boost confidence in the financial system. This June, Goldman was one of the first firms to reimburse the government in full, paying back its $10 billion plus interest.

But critics accuse the investment bank of greed and profiting from others' weak spots, and they haven't been kind in characterizing Goldman. Nobel laureate economist Joseph Stiglitz at Columbia University likens Goldman's business to gambling, because in the last two quarters the largest growth came from its trading desks. In the second quarter, its revenue from trading and investing in stocks, bonds and currencies nearly doubled to $10.8 billion.

"Goldman's activity is of negative social value. Its recent profits came from trading, which basically amounts to profiting from insider information at the expense of others," says Stiglitz.

Blankfein bristles at such characterization of the firm where he has worked for 27 years and emphasizes his firm's vital role in the economy. "I believe in the high public purpose of what we do," he says of the firm's role as a facilitator and funder of businesses. "Our activities are, if anything, more important today than they were before." Other Goldman executives — managing directors James Esposito of bonds and Paul Russo from equities among others — say Stiglitz's charges are false because 90% of its trades are done for clients.

Vampire squid, KGB culture?

Goldman may be misunderstood on Main Street, and people have called the company different names. A recent Rolling Stone article called the firm a "great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money." And a 2007 New York Times column likened its culture to the KGB, the former Soviet Union's secret police.

But in the capital markets, Goldman's prestige has rebounded quickly in recent months. Like all financial institutions, Goldman profited from the housing bubble, but it pulled back before many of its competitors did and started selling its riskiest mortgage securities as early as late 2007. Despite a loss in the fourth quarter of 2008, Goldman was profitable for the year. Rivals Merrill Lynch and Citigroup had annual losses of $27 billion each.

Emerging stronger from the crisis, without the distractions at many of its competitors, Goldman was able to seize the opportunities that arose. For instance, President Obama's economic stimulus package provides subsidies to states and local governments that want to raise money via what's called Build America bonds to help promote jobs and revive local economies. Goldman was among the first to move, helping California raise $5.2 billion in April, one of the largest of these kind of bond issues.

Bill Lockyear, California's treasurer, says the state's well-known budget imbalances had shut down several thousand public works projects, including construction of mass transit, public parks and affordable housing. "This bond program allowed us to restart those projects," says Lockyear, putting more than 90,000 people to work.

However, stimulus measures will not last forever, and some question how sustainable Goldman's gains are, especially if the economy fails to rebound, which would dry up companies' need to raise funds.

Buffett to the rescue

It's not as if Goldman escaped the financial crisis unscathed. There was a period of chaos last year when Blankfein admits he was willing to consider any option to survive, including merging with Citigroup, which by contrast is today considered one of the weakest financial institutions, 34%-owned by the government.

However, eight days after Lehman failed and Blankfein was still figuring out a survival strategy, billionaire investor Warren Buffett called saying he would invest $5 billion in Goldman's preferred shares for a 10% annual dividend. That same night, Goldman raised another $5 billion from the global markets by selling shares.

Though that helped Goldman's capital position considerably, the market turmoil continued. A few weeks later, Treasury Secretary Henry Paulson called Blankfein along with eight other CEOs of the largest U.S. financial institutions and asked them to take government money to shore up the system. Goldman was given $10 billion. "At that point the country was facing a pretty chaotic situation," says Blankfein. "The message from Paulson and (Federal Reserve Chairman Ben) Bernanke was clear. … Everyone was expected to participate in the program, because what was at risk potentially threatened the system itself."

Focus on big pay

Along with taxpayer money came increased scrutiny, especially on Goldman's big pay packages. Blankfein, along with its top six executives, decided to forgo any bonuses last year.

However, even today, though Goldman has returned the government money, there is no letup of pressure on the firm. In the latest quarter, Goldman says in a public filing that regulators have raised questions about its compensation policies. Goldman wouldn't elaborate.

Part of Goldman's big pay comes from its history of being created as a partnership and sharing its profits with its employees. The company became a public company in 1999 and has continued its partnership structure. Goldman points out that its compensation structure, which is close to 50% of revenue, is not very different from its peers.

Still, Blankfein says, his firm is working harder to tie compensation to long-term performance. In a speech at this year's annual shareholder meeting, Blankfein said rather than just individual performance, compensation "should reflect the performance of the firm as a whole." He indicated that compensation will be more closely linked to profits in the future by being tied to longer-term stock incentives.

Despite his deep pockets and the fact that he leads one of New York's most prestigious firms, Blankfein says he has not forgotten where he comes from and is keenly aware of his company's role in the economy.

"I went to a fancy school. … But I grew up in a position to understand the stresses and strains of the real economy," says Blankfein, who won a scholarship to Harvard University after graduating from public high school at 16. His first job at 13 was selling peanuts and popcorn at Yankee Stadium. Looking out of his windows in the direction of the playgrounds of his childhood, he remembers just how far he has come, and how his family suffered, too.

Before Blankfein's father got his post office job, he drove a truck for a company that went out of business. "He was unemployed for a while," he says.

In Goldman Sachs We Trust The Story of a $222 Stock going to $1 During the Great Depression.

John Kenneth Galbraith in his popular The Great Crash 1929 has a chapter dedicated to Goldman Sachs.  There is a pattern emerging dating back nearly a century:

“Goldman, Sachs and Company, an investment banking and brokerage partnership, came rather late to the investment trust business.  Not until December 4, 1928, less than a year before the stock market crash, did it sponsor the Goldman Sachs Trading Corporation, its initial venture in the field.”

Now you must remember the theories going around during the late 1920s about the roaring stock market.  One theory went that stocks held a “scarcity value” and the reason their prices were going high was because of a lack of common stock.  Therefore it was a fertile breeding ground for the investment trust or company.  The investment trust really didn’t promote new enterprise.  What it essentially did was allow people to own stock in old companies through a new form.  Goldman Sachs needed to join the boom:

“The initial issue of stock in the Trading Corporation was a million shares, all of which was bought by Goldman, Sachs and Company at $100 a share for a total of $100,000,000.  Ninety per cent was then sold to the public at $104.  There were no bonds and no preferred stocks; leverage had not yet been discovered by Goldman, Sachs, and Company.  Control of the Goldman Sachs Trading Company by virtue of a management contract and the presence of the partners of the company on the board of the Trading Corporation.”

Not a bad profit.  A quick 4 percent bang on the initial offering.  But this was only the beginning of the game for Goldman Sachs.  The argument being leveled on the organization today boils down to this.  Goldman Sachs made large profits on the mortgage backed securities market.  When the party started overheating, they had the vision to back out and time the market and hence use strategies such as shorting to make a profit on the downside.  Yet they couldn’t get out of the way quickly enough.  When things really imploded, they called in their chips with the government (many former Goldman Sachs employees like Henry Paulson were at the head of the Treasury) offered generous assistance to the firm.  The generosity was well timed for Q1 and Q2 of 2009 were the firm is making gigantic profits once again.  People forget how tenuous things got for the firm in 2008 culminating with the March low:

While the overall stock market is enjoying a record breaking 50 percent rally in 5 months Goldman Sachs has seen a 350% increase in value in this same time period.  Now many are asking how is this firm profiting multiple times over the entire stock market?  They are still using massive leverage to garner outsized profits with implied insurance from the U.S. Government.  I don’t think Americans are averse to profit.  In fact, they aren’t pulled away by gigantic profit.  Why don’t you see massive outrage for Google, Oracle, or Dell for example?  What is at the core here is the corporate welfare that appears to be occurring.  That is, the recession with the epic housing bubble, was aided by firms like Goldman Sachs and here they are taking taxpayer money and gambling once again.  Unlike a company like say Mervyns or Circuit City that failed because they had bad management, here we have a company being rewarded.

But let us go back to what occurred during the Great Depression since the current behavior seems to be something very familiar with the firm:

“In the two months after its formation, the new company sold some more stock to the public, and on February 21 it merged with another investment trust, the Financial and Industrial Securities Corporation.  The assets of the resulting company were valued at $235 million, reflecting a gain of well over 100 per cent in under three months.  By February 2, roughly three weeks before the merger, the stock for which the original investors had paid $104 was selling for $136.50.  Five days later, on February 7, it reached $222.50.  At this latter figure it had a value approximately twice that of the current total worth of the securities, cash, and other assets owned by the Trading Corporation.”

Massive value increase even though tangible real value was much less.  Incredible spikes seem to follow the firm.  Maybe they have the Midas touch?

“This remarkable premium was not the undiluted result of public enthusiasm for the financial genius of Goldman, Sachs.  Goldman, Sachs had considerable enthusiasm for itself, and the Trading Corporation was buying heavily of its own securities.  By March 14 it had bought 560,724 shares of its own stock for a total outlay of $57,021,936. This, in turn, had boomed their value.  However, perhaps foreseeing the exiguous character of an investment company which had it investments all in its own common stock, the Trading Corporation stopped buying itself in March.  Then it resold part of the stock to William Crapo Durant, who re-resold it to the public as opportunity allowed.”

Goldman Sachs seems to have a pattern of passing the proverbial buck after they have rinsed all profits from their venture and move out of the way before the train derails.  In this case, the stock was hyper-inflated because the firm was buying itself.  The L.A. Times in November of 2008 talks about this double sided betting:

“(L.A. Times) Goldman, Sachs & Co. urged some of its big clients to place investment bets against California bonds this year despite having collected millions of dollars in fees to help the state sell some of those same bonds.”

That is really looking out for the country especially with a state in major distress.  I’m sure the 38,000,000 residents of California appreciate this hedging on the state.

But in a time with no SEC, virtually anything went on Wall Street during the Great Depression.  Of course, we all know how the story ended with the epic 1929 crash.  Years later in Washington Mr. Sachs had this to say to Senator Couzens:

“Senator Couzens:  Did Goldman, Sachs and Company organize the Goldman Sachs Trading Corporation?

Mr. Sachs:  Yes, sir.

Senator Couzens:  And it sold its stock to the public?

Mr. Sachs:  A portion of it.  The firm invested originally in 10 per cent of the entire issue for the sum of $10,000,000.

Senator Couzens:  And the other 90 per cent was sold to the public?

Mr. Sachs:  Yes, sir.

Senator Couzens:  At what prices?

Mr.  Sachs:  At 104.  That is the old stock…the stock was split two for one.

Senator Couzens:  And what is the price of the stock now?

Mr. Sachs:  Approximately 1 ¾”

Some things just never change.

 

Jr Deputy Accountant

Developer sues Goldman Sachs for back rent (Crain's NY):
 

On Wednesday, Mr. Monian sued Goldman—which had backed some of his deals in the past—for at least $75 million, alleging that the investment bank broke the terms of its lease of his building at 180 Maiden Lane. Mr. Moinian’s action followed a lawsuit that Goldman Sachs filed against him last month alleging that he owed it at least $3.1 million.

Goldman leased the building from Mr. Moinian in 1998 for 15 years. The bank alleges Mr. Moinain owes it $3 million because it didn’t exercise a termination option in the lease last year. Sources said the bank sought to use the building as a sort of safety valve so it can stagger its move into the new headquarters it is constructing downtown, which is slated to begin in the fourth quarter.

Instead, Goldman subleased the building to insurer AIG but retained the right to keep employees in the building. According to Mr. Moinian’s lawsuit, AIG is paying the rent for Goldman on the space the investment bank has already left at 180 Maiden Lane. The suit claims the arrangement means that Goldman is profiting from the sublease and that the lease terms require it to share 50% of any profit with Mr. Moinian. He alleges that Goldman has spared itself $150 million in rents because of the arrangement with AIG.

“Goldman pushed Moinian too far—thinking he would not push back,” said Stephen Meister, who is representing Mr. Moinian. “Goldman’s cozy deal with AIG will not withstand judicial scrutiny.”

AIG declined to comment. Mr. Meister speculated that the troubled insurer would only agree to pay Goldman’s rent because the lease carries two five-year renewal options at below market rates. AIG agreed to sell its headquarters and another building downtown earlier this year.

A Goldman spokeswoman said Mr. Moinian’s suit had no merit.

Well, sure, Goldman spokeswoman, you may be right but to be entirely honest, Goldman itself has no merit so I'm not sure you are entirely qualified to discuss things of which you are not familiar.

Now I haven't been able to determine this yet but I'm wondering if perhaps there is some hilarious irony to be found in Goldman Sachs subletting AIG a property at Maiden Lane that I'm missing because I'm too outraged by the audacity of our friends from GS?

[Aug 26, 2009] Arrest Over Trading Software Illuminates a Wall St. Secret by ALEX BERENSON

August 24, 2009 | NYTimes.com

Flying home to New Jersey from Chicago after the first two days at his new job, Sergey Aleynikov was prepared for the usual inconveniences: a bumpy ride, a late arrival.

He was not expecting Special Agent Michael G. McSwain of the F.B.I.

At 9:20 p.m. on July 3, Mr. McSwain arrested Mr. Aleynikov, 39, at Newark Liberty Airport, accusing him of stealing software code from Goldman Sachs, his old employer. At a bail hearing three days later, a federal prosecutor asked that Mr. Aleynikov be held without bond because the code could be used to “unfairly manipulate” stock prices.

This case is still in its earliest stages, and some lawyers question whether Mr. Aleynikov should be prosecuted criminally, or whether a civil suit may be more appropriate. But the charges, along with civil cases in Chicago and New York involving other Wall Street firms, offer a glimpse into the turbulent world of ultrafast computerized stock trading.

Little understood outside the securities industry, the business has suddenly become one of the most competitive and controversial on Wall Street. At its heart are computer programs that take years to develop and are treated as closely guarded secrets.

Mr. Aleynikov, who is free on $750,000 bond, is suspected of having taken pieces of Goldman software that enables the buying and selling of shares in milliseconds. Banks and hedge funds use such programs to profit from tiny price discrepancies among markets and in some instances leap in front of bigger orders.

Defenders of the programs say they make trading more efficient. Critics say they are little more than a tax on long-term investors and can even worsen market swings.

But no one disputes that high-frequency trading is highly profitable. The Tabb Group, a financial markets research firm, estimates that the programs will make $8 billion this year for Wall Street firms. Bernard S. Donefer, a distinguished lecturer at Baruch College and the former head of markets systems at Fidelity Investments, says profits are even higher.

“It is certainly growing,” said Larry Tabb, founder of the Tabb Group. “There’s more talent around, and the technology is getting cheaper.”

The profits have led to a gold rush, with hedge funds and investment banks dangling million-dollar salaries at software engineers. In one lawsuit, the Citadel Investment Group, a $12 billion hedge fund, revealed that it had paid tens of millions to two top programmers in the last seven years.

“A geek who writes code — those guys are now the valuable guys,” Mr. Donefer said.

The spate of lawsuits reflects the highly competitive nature of ultrafast trading, which is evolving quickly, largely because of broader changes in stock trading, securities industry experts say.

Until the late 1990s, big investors bought and sold large blocks of shares through securities firms like Morgan Stanley. But in the last decade, the profits from making big trades have vanished, so investment banks have become reluctant to take such risks.

Today, big investors divide large orders into smaller trades and parcel them to many exchanges, where traders compete to make a penny or two a share on each order. Ultrafast trading is an outgrowth of that strategy.

As Mr. Aleynikov and other programmers have discovered, investment banks do not take kindly to their leaving, especially if the banks believe that the programmers are taking code — the engine that drives trading — on their way out.

Mr. Aleynikov immigrated to the United States from Russia in 1991. In 1998, he joined IDT, a telecommunications company, where he wrote software to route calls and data more efficiently. In 2007, Goldman hired him as a vice president, paying him $400,000 a year, according to the federal complaint against him.

He lived in the central New Jersey suburbs with his wife and three young daughters. This year, the family moved to a $1.14 million mansion in North Caldwell, best known as Tony Soprano’s hometown.

A video on YouTube portrays Mr. Aleynikov as a disheveled workaholic who suffers through romantic misadventures before finding love when he rubs a lamp and a genie fulfills his wish by granting him a wife. A friend, Vladimir Itkin, says the Aleynikovs are devoted to their children and seem very close.

This spring, Mr. Aleynikov quit Goldman to join Teza Technologies, a new trading firm, tripling his salary to about $1.2 million, according to the complaint. He left Goldman on June 5. In the days before he left, he transferred code to a server in Germany that offers free data hosting.

At Mr. Aleynikov’s bail hearing, Joseph Facciponti, the assistant United States attorney prosecuting the case, said that Goldman discovered the transfer in late June. On July 1, the company told the government about the suspected theft. Two days later, agents arrested Mr. Aleynikov at Newark.

After his arrest, Mr. Aleynikov was taken for interrogation to F.B.I. offices in Manhattan. Mr. Aleynikov waived his rights against self-incrimination, and agreed to allow agents to search his house.

He said that he had inadvertently downloaded a portion of Goldman’s proprietary code while trying to take files of open source software — programs that are not proprietary and can be used freely by anyone. He said he had not used the Goldman code at his new job or distributed it to anyone else, and the criminal complaint offers no evidence that he has.

Why he downloaded the open source software from Goldman, rather than getting it elsewhere, and how he could at the same time have inadvertently downloaded some of the firm’s most confidential software, is not yet clear.

At Mr. Aleynikov’s bail hearing, Mr. Facciponti said that simply by sending the code to the German server, he had badly damaged Goldman.

“The bank itself stands to lose its entire investment in creating this software to begin with, which is millions upon millions of dollars,” Mr. Facciponti said.

Sabrina Shroff, a public defender who represents Mr. Aleynikov, responded that he had transferred less than 32 megabytes of Goldman proprietary code, a small fraction of the overall program, which is at least 1,224 megabytes. Kevin N. Fox, the magistrate judge, ordered Mr. Aleynikov released on bond.

The United States attorney’s office declined to comment and the F.B.I. did not return calls for comment.

Harvey A. Silverglate, a criminal defense lawyer in Boston not involved in the case, said he was troubled that the F.B.I. had arrested Mr. Aleynikov so quickly, without evidence that he had made any effort to use or sell the code. Such disputes are generally resolved civilly rather than criminally, Mr. Silverglate said.

“It is astonishing that the F.B.I. arrested this defendant at all,” he said. Other firms have also sued former employees recently over concern about high-frequency trading software, though two similar cases are the subject of civil suits rather than criminal prosecution.

Six days after Mr. Aleynikov’s arrest, Citadel, the hedge fund, sued Mr. Aleynikov’s new employer, Teza Technologies, which was founded in March by three former Citadel employees. While Teza is not yet conducting any trading, Citadel claimed the former employees had violated a noncompete agreement with Citadel and might even be trying to steal Citadel’s code, causing “irreparable harm.”

As part of the suit, Citadel detailed the extraordinary steps it takes to protect its software. Besides encrypting its programs, the firm discourages employees from writing down details about them. Its offices have cameras and guards, and there are secure rooms that require special codes to enter. The precautions are necessary because Citadel has spent hundreds of millions of dollars developing its software, the firm said.

In its response, Teza said that it had never stolen or tried to steal Citadel’s software, did not ask Mr. Aleynikov to take code from Goldman, and had never seen the code he took. A lawyer for Teza did not return calls for comment.

Meanwhile, in March, the giant Swiss bank UBS sued three former members of its high-speed trading group in New York state court. UBS contended that the defendants had lied to the bank about their plans to work for Jefferies, another firm. Also, one defendant sent some UBS code to a personal e-mail account.

Lance Gotko, a lawyer for the men, said that they had not used the code they took and that it might not be valuable to Jefferies in any case. A lawyer for UBS referred calls to a bank spokeswoman, who declined to comment. A spokesman for Jefferies declined to comment.

Government Taken in Dealings with Wall Street- Accident or Design-

naked capitalism

A separate but related sighting from Roger Ehrenberg, who makes a point that few commentators have stressed: the "paying the TARP back" meme, which is somehow treated as a sign of government success, is in fact an abject failure. The TARP support was badly underpriced. And he doesn't mean the dickering over the warrants, either.

From Ehrenberg:

What we have is a return to business-as-usual. Except it's worse than that. The US taxpayer has been systematically looted out of hundreds of billions of dollars, yet the press is focused on Andy Hall and his $100 million payday. Whether this is too much pay for Mr. Hall misses the big picture. Yes, the Wall Street pay model is messed up, and I recently provided an alternative approach. But how about the fact that Goldman Sachs is posting record earnings and will invariably be preparing to pay record bonuses, not nine months after the firm was in mortal danger? Whether anyone will admit it or not, without the AIG (read: Wall Street and European bank) bail-out and the FDIC issuance guarantees, neither Goldman nor any other bulge bracket firm lacking stable base of core deposits would be alive and breathing today.

Goldman is a great firm with a stellar culture, and in most circumstances it's risk management and funding practices have been second to none. Except when the crisis hit. It stood with the rest of Wall Street as a firm with longer-dated, less liquid assets funded with extremely short-dated liabilities....In exchange for giving the firm life (TARP, FDIC guarantees, synthetic bail-out via AIG, etc.), the US Treasury (and the US taxpayer by extension) got some warrants on $10 billion of TARP capital injected into the firm. While JP Morgan Chase CEO Jamie Dimon prefers to poke a stick in the eye of the Treasury, seeking to negotiate down the payment to buy back the TARP warrants, Lloyd Blankfein smartly paid the full $1.1 billion requested. He looked like a hero for doing so, a true US patriot repaying the US Government in full for its lifeline, thanking the US taxpayer in the process. $1.1 billion... $1.1 billion...Hmm...something doesn't seem right. You know why it doesn't seem right? BECAUSE THE US TREASURY MIS-PRICED THE FREAKING OPTION.

There is not a Wall Street derivatives trader on the planet that would have done the US Government deal on an arms-length basis. Nothing remotely close. Goldman's equity could have done a digital, dis-continuous move towards zero if it couldn't finance its balance sheet overnight. Remember Bear Stearns? Lehman Brothers? These things happened. Goldman, though clearly a stronger institution, was facing a crisis of confidence that pervaded the market. Lenders weren't discriminating back in November 2008. If you didn't have term credit, you certainly weren't getting any new lines or getting any rolls, either. So what is the cost of an option to insure a $1 trillion balance sheet and hundreds of billions in off-balance sheet liabilities teetering on the brink? Let's just say that it is a tad north of $1.1 billion in premium. And the $10 billion TARP figure? It's a joke. Take into account the AIG payments, the FDIC guarantees and the value of the markets knowing that the US Government won't let you go down under any circumstances. $1.1 billion in option premium? How about 20x that, perhaps more. But no, this is not the way it went down....

Where we are left today, dear taxpayer, is a lot poorer. Unless you are a major shareholder and/or bonusable employee of Goldman Sachs. Brains, ingenuity and value creation should be rewarded in all fields, Wall Street included. But when value created is the direct result of the risks borne by others for your benefit, the sharing of benefits needs to be re-allocated. This has not and apparently will not be done, and we, dear taxpayer, are the worse for it. Further, such a crisis could have provided the opportunity and the impetus for a re-look at capital markets risks, getting CDS users to support a central credit derivatives exchange and revised capital rules to incentivize better gap management. The banks lobby like hell against these changes, because it cuts into their fees, notwithstanding the systemic benefits such changes could have on the global financial markets. Banks now lobbying with US taxpayer dollars against changes that could protect the US taxpayer from more harm in the future. Something is terribly wrong with this picture, yet all anyone wants to talk about are executives getting paid too much. It's called missing the forest for the trees, and it is a fixture of both those trying to sell newspapers (get clicks) and run our Government, and it pisses me off.

Goldman Code Theft Bombshell -- Seeking Alpha

Something really ugly popped up on Daily Kos Tuesday late in the afternoon.....

...GS, through access to the system as a result of their special gov't perks, was/is able to read the data on trades before it's committed, and place their own buys or sells accordingly in that brief moment, thus allowing them to essentially steal buttloads of money every day from the rest of the punters world.

Two things come out of this:

1. If true, this should be highly illegal, and would, in any sane country result in something like what happened to Arthur Andersen...

(2. ... is way off point....)

God help Goldman (GS) if this is true and the government goes after them. This would constitute massive unlawful activity. Indeed, the allegation is that Goldman alone was given this access!

God help our capital markets if this is true and is ignored by our government and regulatory agencies, or generates nothing more than a "handslap." Nobody in their right mind would ever trade on our markets again if this occurred and does not result in severe criminal and civil penalties.

There apparently is reason to believe that Sergey might have been involved in exactly this sort of coding implementation. Specifically, look at the patent claims cited on DailyKos; his expertise was in fact in this general area of knowledge in the telecommunications world......

This is precisely the sort of thing that a Unix machine, sitting on a network cable where it can "see" traffic potentially not intended for it, could have an interface put into what is called "promiscuous mode" and SILENTLY sniff that traffic!

ASSUMING THE TRAFFIC IS PASSING BY THE MACHINE ON THE WIRE THIS IS TRIVIALLY EASY FOR ANY NETWORK PROGRAMMER OF REASONABLE SKILL TO DO. IF THAT TRAFFIC IS EITHER UNENCRYPTED OR IT IS EASY TO BREAK THE ENCRYPTION.....

Folks, I have no way to know what the code in question does, but if there's anything to this - anything at all - there is a major, as in biggest scam of the century - scandal here - something much, much bigger than Madoff or Stanford.

What would this mean, if it was all to prove up?

It would mean that Goldman was able to "see" transaction order flow - bid, offer, and execute messages - before they were committed in the transaction stream. Such a "SNIFF" would be COMPLETELY UNDETECTABLE by the sender or recipient of the message.

The implication of this would be that they would be able to front-run any transaction where the data was visible to them, thereby effectively "stealing pennies" from each transaction they were able to front-run.

Again: I have absolutely nothing on the content of the allegedly-stolen code nor can I validate the claim made that Goldman had "special network access." Nothing. All I have to go on with regards to "market manipulation" (which such a program would be, writ large!) is the statement of the US Attorney that I cited in my earlier Ticker.

This may be nothing more than a crazy conspiracy theory put out by someone at Daily Kos. But consider the following:

The last few days the the market has traded "organically." I and many other market participants have noted that prior to the week before July 4th the market had been acting "very odd" - normal correlations between interest rate, foreign exchange the the stock markets had been on "tilt" for the previous couple of months, with the amount of "tiltage" increasing dramatically in the last three or four weeks. In fact, many of my usual indicators that I use for daytrading had become completely useless. Suddenly, just before the July 4the weekend, everything started correlating normally again. I have no explanation for this "light-switch" change but it aligned almost exactly with the day the NYSE had "computer problems" and extended trading by 15 minutes. Was there a configuration change made to their networking infrastructure, one asks?

Zerohedge's information, if you believe it, seems to point toward some sort of distortion. The cite above claims statistically "as likely as an asteroid hitting earth it is not true" proof of distortion in the market. I have not analyzed the data to independently validate that conclusion, but even if the odds of these "effects" in the market being random chance are only as good as getting hit by a tornado this afternoon......

Every market participant deserves answers on this point. Specifically to the NYSE and all other markets where collocation connections are made and allowed:

• Was it possible for message traffic to be "seen" by computers on your network and collocated into your infrastructure by other than the originator and recipient? That is, was it physically possible for anyone to "sniff" messages to and from other market participants.
• If it was possible, is it no longer possible, and if so, when was that change made?

I believe the SEC and FBI must direct a subpoena at all market exchanges for an under-oath answer to question #1. If the answer to that question is "yes" then every market participant who had or has equipment collocated on the NYSE infrastructure must be immediately served with a subpoena for a true and complete copy of all software operating on every machine connected to said infrastructure for immediate forensic investigation to ascertain if any participants were indeed "sniffing" traffic and front-running orders.

The charge made on the pages of Daily Kos is incredibly serious. If this happened it is a case of literal robbery of every market participant for the entire duration of the time that the code in question was executing on the network, with losses to market participants potentially running into the hundreds of billions of dollars.

Market participants deserve an answer to these questions.

The Joy of Sachs Paul Krugman

 July 16, 2009  | NYT

The American economy remains in dire straits, with one worker in six unemployed or underemployed. Yet Goldman Sachs just reported record quarterly profits — and it’s preparing to hand out huge bonuses, comparable to what it was paying before the crisis. What does this contrast tell us?

First, it tells us that Goldman is very good at what it does. Unfortunately, what it does is bad for America.

Second, it shows that Wall Street’s bad habits — above all, the system of compensation that helped cause the financial crisis — have not gone away.

Third, it shows that by rescuing the financial system without reforming it, Washington has done nothing to protect us from a new crisis, and, in fact, has made another crisis more likely.

Let’s start by talking about how Goldman makes money.

Over the past generation — ever since the banking deregulation of the Reagan years — the U.S. economy has been “financialized.” The business of moving money around, of slicing, dicing and repackaging financial claims, has soared in importance compared with the actual production of useful stuff. The sector officially labeled “securities, commodity contracts and investments” has grown especially fast, from only 0.3 percent of G.D.P. in the late 1970s to 1.7 percent of G.D.P. in 2007.

Such growth would be fine if financialization really delivered on its promises — if financial firms made money by directing capital to its most productive uses, by developing innovative ways to spread and reduce risk. But can anyone, at this point, make those claims with a straight face? Financial firms, we now know, directed vast quantities of capital into the construction of unsellable houses and empty shopping malls. They increased risk rather than reducing it, and concentrated risk rather than spreading it. In effect, the industry was selling dangerous patent medicine to gullible consumers.

Goldman’s role in the financialization of America was similar to that of other players, except for one thing: Goldman didn’t believe its own hype. Other banks invested heavily in the same toxic waste they were selling to the public at large. Goldman, famously, made a lot of money selling securities backed by subprime mortgages — then made a lot more money by selling mortgage-backed securities short, just before their value crashed. All of this was perfectly legal, but the net effect was that Goldman made profits by playing the rest of us for suckers.

And Wall Streeters have every incentive to keep playing that kind of game.

The huge bonuses Goldman will soon hand out show that financial-industry highfliers are still operating under a system of heads they win, tails other people lose. If you’re a banker, and you generate big short-term profits, you get lavishly rewarded — and you don’t have to give the money back if and when those profits turn out to have been a mirage. You have every reason, then, to steer investors into taking risks they don’t understand.

And the events of the past year have skewed those incentives even more, by putting taxpayers as well as investors on the hook if things go wrong.

I won’t try to parse the competing claims about how much direct benefit Goldman received from recent financial bailouts, especially the government’s assumption of A.I.G.’s liabilities. What’s clear is that Wall Street in general, Goldman very much included, benefited hugely from the government’s provision of a financial backstop — an assurance that it will rescue major financial players whenever things go wrong.

You can argue that such rescues are necessary if we’re to avoid a replay of the Great Depression. In fact, I agree. But the result is that the financial system’s liabilities are now backed by an implicit government guarantee.

Now the last time there was a comparable expansion of the financial safety net, the creation of federal deposit insurance in the 1930s, it was accompanied by much tighter regulation, to ensure that banks didn’t abuse their privileges. This time, new regulations are still in the drawing-board stage — and the finance lobby is already fighting against even the most basic protections for consumers.

If these lobbying efforts succeed, we’ll have set the stage for an even bigger financial disaster a few years down the road. The next crisis could look something like the savings-and-loan mess of the 1980s, in which deregulated banks gambled with, or in some cases stole, taxpayers’ money — except that it would involve the financial industry as a whole.

The bottom line is that Goldman’s blowout quarter is good news for Goldman and the people who work there. It’s good news for financial superstars in general, whose paychecks are rapidly climbing back to precrisis levels. But it’s bad news for almost everyone else.

Zero Hedge Why Does Goldman Need A Fed Exemption For VaR Calculations by Tyler Durden

2009-07-15 | zerohedge.blogspot.com

Lately the topic of Goldman's VaR has taken on significant prominence, not least because as Zero Hedge disclosed yesterday, it hit a record high. The implications for this were large enough that even Bloomberg picked up on this story. Many readers raised questions of how is it even remotely possible for the company to have a VaR in the low-mid $200 MM ballpark, yet to post a record number of $100MM+ trading days in Q1; Zero Hedge is willing to wager that the upcoming 10-Q release will demonstrate another record number of $100MM+ days in the just closed quarter as well.How is that possible?

The clue may come from a February 5 letter by the Federal Reserve to Goldman CAO Sarah Smith. The letter had come in response to GS requests for "temporary exemptions from the application of certain aspects of the Board's Market Risk Rules for state member banks and bank holding companies and the Board's general risk-based capital rules for bank holding companies." Basically through the end of 2009 Goldman is basically using non-traditional. SEC approved VaR models as can be seen here:
 

GSGI has requested that (1) through December 31, 2009, GSGI and Bank be permitted to use certain Value-at-Risk ("VaR") models approved by the SEC... to determine their capital requirements for specific risk under the Market Risk Rules; (2) through December 31, 2009, GSGI and Bank be permitted to use methods approved by the SEC to determine their capital requirements under the Market Risk Rules for those trading assets, including distressed debt and restricted stock investments that the SEC did not require to be included in the VaR-based models of GSGI and Bank; and (3) GSGI be allowed to use methods approved by the SEC to calculate risk-based capital requirements for its nonfinancial equity investments that are subject to the Board's Credit Risk Capital Rules.

The letter goes into detail explaining why a bank needs to follow a MRR VaR methodology. Yet what is not made clear is i) why does Goldman need almost a full year of alternative VaR calculation and MRR exemption and ii) what is the protocol for the SEC to enforce VaR compliance when Goldman's ultimate regulator is the Federal Reserve. The exemption raises critical questions not only with regard to the validity of the company's indicate VaR, but also downstreaming capital requirement reports. Zero Hedge would be remiss to point out that a very close relationship between the most critical financial company in the world and the most discredited regulator (SEC) does not bode well for confidence in this critical risk indicator, which as many have pointed out, is clearly the main metric by which to measure not only the performance, but the risk capacity of the world's largest government-backstopped hedge fund. Mr. Canaday, Mr. Van Praag - the floor is, again, yours. In your absence, Zero Hedge will, and encourages it readers to, contact Mr. Homer Hill at the Federal Reserve Bank Of New York at (212) 720-2164 to provide additional clarity on the matter

• Morpheus 11 hours ago

  " . . . a very close relationship between the most critical financial company in the world and the most discredited regulator (SEC) does not bode well for confidence . . . "
  
  How can the pretense that the SEC is rigorously evaluating GS requests be anything but a joke. I laughed when I read it. They're just going through the motions, doing the paperwork for the SEC to rubber stamp. God, that "request" for FED exemption is almost as pathetic as Goldman's lament yesterday that completely infiltrating and controlling pretty much every institution, public and private, that is related to their industry is more of a liability than an advantage.

• bruiserND 8 hours ago

  What Wall Street Owes You (Commentary)
  
  CNN – July 15, 2009
  
  By Janet Tavakoli
  
  Goldman Sachs Group Inc. announced record earnings Tuesday of $3.44 billion for the second quarter of 2009.
  
  Goldman's stock price leapt 77 percent for the first half of 2009, and closed Tuesday at $149.66 a share.
  
  Without an ongoing series of front- and backdoor bailouts financed by U.S. taxpayers, most of Goldman's record profits would not have been possible.
  
  In April 2009, Goldman Sachs' CEO, Lloyd Blankfein, who received record salary and bonus compensation of $68.5 million in 2007, said that bonus decisions made before the credit crisis looked "self-serving and greedy in hindsight." Now, they look self-serving and greedy with foresight.
  
  Goldman set aside $11.4 billion for employee compensation and benefits, up 33 percent from last year. That's enough to pay each employee more than $390,000, just for the first six months of this year.
  
  In June, Goldman bought back its preferred shares, repaying $10 billion it received from the government's Troubled Asset Relief Program, or TARP, and setting it free of limits on executive compensation and dividends.
  
  But pay is not the key issue. U.S. taxpayers deserve a large cut of the profits, not the chump change -- less than a half-billion dollars -- they got from preferred shares in the company and the relatively small amount they could get from warrants in its stock.
  
  U.S. taxpayers should insist that a large part of Goldman's revenues and profits belong to the American public. TARP money was just part of a series of bailouts and concessions that allowed Goldman to prosper at the expense of a flawed regulatory system.
  
  In March 2008, Goldman, a primary dealer in Treasury securities, was among the beneficiaries of a massive backdoor bailout by the Federal Reserve Bank. At the time, Henry Paulson, former CEO of Goldman Sachs, was treasury secretary.
  
  In an unprecedented move, the Fed created a Term Securities Lending Facility, or TSLF, that allowed primary dealers like Goldman to give non-government-guaranteed "triple-A" rated assets to the Fed in exchange for loans. The trouble was that everyone knew the triple-A assets were not the safe securities they were advertised to be. Many were backed by mortgage loans that were failing at super speed.
  
  The bailout of American International Group, or AIG, ballooned from $85 billion in September 2008 to $182.5 billion. Of that money, $90 billion was funneled as collateral payments to banks that traded with AIG. American taxpayers may never see a dime of their bailout money again, but Goldman saw plenty.
  
  Goldman may be the largest indirect beneficiary of AIG's bailout, receiving $12.9 billion in collateral, including securities lending transactions, from AIG after the government bailed out the insurance company.
  
  The key question is whether Goldman asked AIG to insure products that were as dodgy as the doomed deal from Goldman Sachs Alternative Mortgage Products exposed by Fortune's Allan Sloan in his October 16, 2007, Loeb Award-winning article: "Junk Mortgages Under the Microscope."
  
  If the federal government had not intervened and if AIG had gone into bankruptcy, Goldman probably would not have received its $12.9 billion from AIG. U.S. taxpayers and the American economy are owed some of the bailout money passed directly through AIG to Goldman.
  
  Wall Street firms also reaped trading windfalls when AIG needed to close out its derivative transactions. This was the most lucrative windfall business in the history of the derivatives markets. When AIG left money on the table, it was U.S. taxpayer money.
  
  Goldman Sachs was granted bank holding company status in the fall of 2008. It already had the temporary ability to borrow from the Fed through the TSLF, which would have expired in January 2009. Now it has permanent access to lending from the Fed.
  
  Goldman can now compete with the largest U.S. banks and borrow money at interest rates pushed as close to zero as possible by the Fed. Goldman gets a further benefit: favorable accounting rule changes. In addition, Goldman issued $30 billion of debt with a valuable government guarantee that remains outstanding.
  
  Meanwhile, the American public faces a rising unemployment rate, falling housing prices, rising unemployment, higher local taxes and a dismal economic outlook.
  
  Interested men with reputations and fortunes at stake rode roughshod over public interest. The American public is owed part of the profits Goldman was able to make because of the largesse of our Congress.
  
  Wall Street's "financial meth labs," including Goldman's, massively pumped out bad bonds and credit derivatives that have melted down savings accounts, pension funds, the municipal bond market and the American economy. Risky assets, leverage and fraud led to acute distress in the global financial markets.
  
  The biggest crime on the American economy may go unpunished with no consequences to the perpetrators. The biggest crime was not predatory lending, but predatory securitizations, packages of loans that did not deserve the ratings or prices at the time they were sold. They ballooned what should have been a relatively small problem into a global crisis.
  
  Wall Street owes the American public for its key role in bringing the global economy -- and in particular, the U.S. economy -- to its knees. Goldman is not alone in owing the American public. It is not the worst of all of the Wall Street firms. But among all of Wall Street's offenders, it is the most well-connected, and Goldman was the firm that cleaned up the most as the result of government bailouts.
  
  The opinions expressed in this commentary are solely those of Janet Tavakoli.
  
  Janet Tavakoli is the president of Tavakoli Structured Finance, a Chicago-based firm that provides consulting to financial institutions and institutional investors. Ms. Tavakoli has more than 20 years of experience in senior investment banking positions, trading, structuring and marketing structured financial products. She is a former adjunct associate professor of derivatives at the University of Chicago's Graduate School of Business. Author of: Credit Derivatives & Synthetic Structures (1998, 2001), Collateralized Debt Obligations & Structured Finance (2003), Structured Finance & Collateralized Debt Obligations (John Wiley & Sons, September 2008), and
  
  Dear Mr. Buffett: What An Investor Learns 1,269 Miles From Wall Street (Wiley, 2009).
  
   

Behind Goldman Sachs’ second quarter profit By Lucas Puente

07-15-09

This week, Wall Street superpower Goldman Sachs announced second quarter net profits of $3.44 billion, far exceeding expectations. Earnings per share also rose, to $4.93 from $4.58 a year ago. This is a promising sign that the battered financial industry is on the mend, but it should be noted that Goldman didn’t do it alone. In fact, at least some of these profits were made possible by guarantees, low-cost loans and other assistance from the federal government.

Goldman did pay off its $10 billion in TARP loans last month, along with a one-time preferred dividend of about $426 million. The firm was able to do this by raising $8.9 billion in equity, debt and asset sales.

But the financial giant continues to benefit from several government programs aimed at loosening up credit markets.

First, $13 billion of the government’s bailout of AIG went straight to Goldman, a 100% payoff of bets the firm had placed with the insurer. While industry insiders say that this was done to ensure that legally-binding contracts were upheld, others, including former New York AG Eliot Spitzer, argue that this was simply “a way to hide an enormous second round of cash to the same group that had received TARP money already.” This $13 billion was delivered despite Goldman’s continued insistence that it did not need government funding.

Goldman also benefited from artificially inexpensive debt thanks to the FDIC’s Temporary Liquidity Guarantee Program (TLGP). This program put a federal guarantee behind bonds issued by Goldman and other banks, including Bank of America and JP Morgan Chase, making them far more attractive to investors. For example, when Goldman sold $5 billion of 3.5 year bonds in November, it was able to attract buyers while offering a yield only 200 basis points higher than ultra-safe Treasuries with similar maturities. Altogether, Goldman issued $28 billion in debt using this program between November and April.

Mark Zandi, chief economist at Moody’s Economy.com, called this bond-guarantee program an infinite subsidy whose value could not be calculated.

Finally, it should be noted that Goldman Sachs and other major financial players are benefiting from a Federal Reserve program that allows them to borrow funds overnight for close to zero percent. Designed to catalyze economic activity and keep interest rates low for businesses and consumers, the program has also boosted bank profits by widening the spread between the cost of their incoming and outgoing capital.

Altogether, this government support essentially enabled Goldman to return to its traditional model of business: accepting risk in order to magnify profits. Specifically, Goldman boosted its “value-at-risk”—the estimated value of its trading activities on a given day under a worst-case scenario—to $245 million this past quarter from $182 million in the same quarter last year.

Shrewd business decisions by Goldman traders (along with a reduced field of competitors) were undoubtedly responsible for a good share of the profits being crowed about by the firm this week. Notably, the firm cashed in on profit margins for commodity and foreign exchange trading that, according to the Financial Times, now stand ”between two and eight times higher than before the height of the financial crisis.”

Indeed, the profits announced this week by Goldman Sachs are an encouraging sign that the financial markets are starting to return to normal. But they are by no means evidence of a full-fledged economic recovery. In fact, without the support of the aforementioned government programs, Goldman’s profits would have been incalculably lower.

[Jul 15, 2009] What Is Goldman Sachs The Big Picture

1. contraguy Says:
   July 14th, 2009 at 5:41 pm

   Buffett should ask for a refund??? What an incredibly dumb thing to say. For starters, Berkshire’s holding in Goldman common shares is zero. The entire $5 billion holding is in 43.4 million preferred shares with a 5 year term, paying 10% interest. Each preferred share carries a warrant, to buy a Goldman common share at $115. With Goldman common at $149.66, these warrants currently show a paper profit of over $1.5 billion. Of course, if these warrants were on the market they would be worth much more than that, with 4+ years of time premium remaining. Also importantly, the agreement with Goldman restricts how many new common shares they can sell, so Berkshire is protected from potential dilution. As for the 10% yield, aren’t we supposed to be in a low interest rate environment?

   The bottom line is that Buffett and Munger have more business savvy in one of their grey hairs, than in all of Jimbo’s big brain. To hear him questioning their investment prowess is laughable.
    

2. Pat G. Says:
   July 14th, 2009 at 7:08 pm

   GS is a bank whose profits were greatly enhanced by the USG’s TARP program, the taxpayers’ subsequent bailout of AIG (CDS) and who currently benefits nicely by being able to borrow from the FED at 0% while making loans at 3.5%.

3. Says:
   July 14th, 2009 at 10:00 pm

   The correct answer is BO’s master.

   Collateral Use Increases By 86% to $4 Trillion

   http://www.rgemonitor.com/financemarkets-monitor/256551/collateral_use_increases_by_86_to_4_trillion

   http://www.reuters.com/article/fundsFundsNews/idUSN0939714920090609

   Financial Chaos: The Invisible One Quadrillion Dollar Equation

   http://www.intent.com/blog/2008/09/29/stop-a-financial-bomb

   https://www.kbcmerchantbanking.com/WPP/D9e01

   A failure at CIT could result in losses for Goldman Sachs and Wells Fargo. Goldman last year agreed to a $3bn secured financing facility for CIT and Wells Fargo provided $500m in secured financing.

   http://www.ft.com/cms/s/0/980ffa7a-6fe3-11de-b835-00144feabdc0.html?nclick_check=1

   So what is tax cheat timmy government sachs doing?

   Despite the tough talk about CIT Group not being systemically important enough to be bailed out by the government, it looks like the bailout is coming.

   http://www.businessinsider.com/the-cit-bailout-looms-ever-closer-2009-7

   Who is really picking up the tab?

   The panel, charged with determining whether taxpayers are receiving maximum benefit from the TARP, conducted its own valuation of the warrants the Treasury holds. It found that the 11 banks that have repurchased their warrants from the Treasury for a total amount that the panel estimates to be only 66 percent of current market value, shortchanging taxpayers by $10 million.

   http://washington.bizjournals.com/washington/stories/2009/07/06/daily90.html

   Goldman Sachs Group Inc executives sold almost $700 million worth of stock since the collapse of rival Lehman Brothers last year, the Financial Times said on Monday.

   The newspaper said that most of the stock sales took place while the biggest U.S. investment bank was bailed out by the government with $10 billion of taxpayer money, according to filings with the Securities and Exchange Commission.

   http://www.reuters.com/article/ousivMolt/idUSTRE56D03R20090714

   http://greenhellblog.com/2009/07/08/goldman-sachs-to-be-carbon-regulator/

   http://greeninc.blogs.nytimes.com/2008/11/12/goldman-sachs-buys-into-carbon-offsets/

 

[Jul 14, 2009] The events preceding Goldman Sachs' new blowout profits - Glenn Greenwald - Salon.com by Glenn Greenwald

July 13, 2009 | Salon

The events preceding Goldman Sachs' new "blowout profits"

Remember all of this -- the $700 billion bank bailout, the AIG scandal, dark and scary threats of imminent global meltdown if there wasn't full-scale capitulation by the citizenry to the immense transfer of public wealth to the private investment banking sector?  Such distant, hazy memories:  so many exciting celebrity deaths and riveting celebrity resignations ago.  If sequences of events like these don't cause mass citizen outrage, then it's hard to imagine what will:

The New York Times, September 19, 2008:

WASHINGTON — It was a room full of people who rarely hold their tongues. But as the Fed chairman, Ben S. Bernanke, laid out the potentially devastating ramifications of the financial crisis before congressional leaders on Thursday night, there was a stunned silence at first.

Mr. Bernanke and Treasury Secretary Henry M. Paulson Jr. had made an urgent and unusual evening visit to Capitol Hill, and they were gathered around a conference table in the offices of House Speaker Nancy Pelosi.

“When you listened to him describe it you gulped," said Senator Charles E. Schumer, Democrat of New York.

As Senator Christopher J. Dodd, Democrat of Connecticut and chairman of the Banking, Housing and Urban Affairs Committee, put it Friday morning on the ABC program “Good Morning America,” the congressional leaders were told “that we’re literally maybe days away from a complete meltdown of our financial system, with all the implications here at home and globally.”

Mr. Schumer added, “History was sort of hanging over it, like this was a moment.”

When Mr. Schumer described the meeting as “somber,” Mr. Dodd cut in. “Somber doesn’t begin to justify the words,” he said. “We have never heard language like this.”

“What you heard last evening,” he added, “is one of those rare moments, certainly rare in my experience here, is Democrats and Republicans deciding we need to work together quickly.”

ABC News, September 26, 2008:

The embattled Goldman Sachs investment banking firm and its employees have spent more than $43 million dollars on lobbying and campaign contributions to cultivate friends and buy influence in Washington, D.C. since 1989, according to an ABC News analysis of campaign finance records compiled by the Center for Responsive Politics.

As a group, Goldman Sachs bankers have been the country's top political campaign contributors this year and have given $29.5 million in contributions since 1989, according to the Center.

"They are almost in a class by themselves," said Sheila Krumholz, the executive director for the Center for Responsive Politics.

"Their top executives are in a class that is way above the clout and name-dropping that most other American businesses can achieve," says Krumholz.

The New York Times, September 27, 2008:

Two weeks ago, the nation’s most powerful regulators and bankers huddled in the Lower Manhattan fortress that is the Federal Reserve Bank of New York, desperately trying to stave off disaster.

As the group, led by Treasury Secretary Henry M. Paulson Jr., pondered the collapse of one of America’s oldest investment banks, Lehman Brothers, a more dangerous threat emerged: American International Group, the world’s largest insurer, was teetering. A.I.G. needed billions of dollars to right itself and had suddenly begged for help.

One of the Wall Street chief executives participating in the meeting was Lloyd C. Blankfein of Goldman Sachs, Mr. Paulson’s former firm. Mr. Blankfein had particular reason for concern.

Although it was not widely known, Goldman, a Wall Street stalwart that had seemed immune to its rivals’ woes, was A.I.G.’s largest trading partner, according to six people close to the insurer who requested anonymity because of confidentiality agreements. A collapse of the insurer threatened to leave a hole of as much as $20 billion in Goldman’s side, several of these people said.

Days later, federal officials, who had let Lehman die and initially balked at tossing a lifeline to A.I.G., ended up bailing out the insurer for $85 billion.

MSNBC, October 3, 2008:

President Bush signed into law Friday a historic $700 billion bailout of the financial services industry, promising to move swiftly to use his sweeping new authority to unlock frozen credit markets to get the economy moving again. . . .

But Majority Leader Steny Hoyer, D-Md., said compromise was needed. He said that while he strongly opposed the Senate’s decision to pay for many of the tax breaks with debt, he could not forget everyday Americans at home who were struggling. “For their sake, we must act,” Hoyer said in a floor speech.

Wall St. Journal, October 6, 2008:

Treasury Secretary Henry Paulson is expected to tap Neel Kashkari, a key adviser on whom he has come to rely heavily during the financial crisis, to oversee Treasury's $700 billion program to buy distressed assets from financial institutions, according to people familiar with the matter.

Mr. Kashkari, 35 years old, a Treasury assistant secretary for international affairs and a former Goldman Sachs Group Inc. banker, is expected to be named interim head of Treasury's new Office of Financial Stability as early as Monday. The position confers substantial power on Mr. Kashkari. . . .

New York Times, December 13, 2008 -- "A Champion of Wall Street Reaps Benefits":

Senator Schumer plays an unrivaled role in Washington as beneficiary, advocate and overseer of an industry that is his hometown’s most important business.

An exceptional fund raiser — a "jackhammer," someone who knows him says, for whom "'no' is the first step to 'yes,'" -- Mr. Schumer led the Democratic Senatorial Campaign Committee for the last four years, raising a record $240 million while increasing donations from Wall Street by 50 percent.  That money helped the Democrats gain power in Congress, elevated Mr. Schumer’s standing in his party and increased the industry’s clout in the capital.

But in building support, he has embraced the industry’s free-market, deregulatory agenda more than almost any other Democrat in Congress, even backing some measures now blamed for contributing to the financial crisis. . . . But Mr. Schumer, a member of the Banking and Finance Committees, repeatedly took other steps to protect industry players from government oversight and tougher rules, a review of his record shows. Over the years, he has also helped save financial institutions billions of dollars in higher taxes or fees.

He succeeded in limiting efforts to regulate credit-rating agencies, for example, sponsored legislation that cut fees paid by Wall Street firms to finance government oversight, pushed to allow banks to have lower capital reserves and called for the revision of regulations to make corporations’ balance sheets more transparent.

USA Today, January 27, 2009:

WASHINGTON — Treasury Secretary Timothy Geithner picked a former Goldman Sachs lobbyist as a top aide Tuesday, the same day he announced rules aimed at reducing the role of lobbyists in agency decisions.

Mark Patterson will serve as Geithner's chief of staff at Treasury, which oversees the government's $700 billion financial bailout program.

Reuters, March 16, 2009:

President Barack Obama's nominee to oversee U.S. futures markets, who has confessed he should have done more to rein in exotic financial instruments that have battered global markets, was approved by the Senate Agriculture Committee on Monday.

The approval of Gary Gensler, a former Goldman Sachs executive, clears the way for a Senate vote putting him in charge of the Commodity Futures Trading Commission.

He was approved by a roll-call vote.

Robert Reich, March 18, 2009:

We've also learned that much of the 170 billion has been used by AIG to pay off AIG's putative obligations to other Wall Street banks such as Goldman Sachs. Goldman has maintained that it got no bailout money from the Treasury. But in fact it received some $13 billion through AIG. More troubling is that the original plan to bail out AIG was concocted at a meeting held last fall, run by then Treasury Secretary Hank Paulson who, before becoming Teasury Secretary, had been CEO of Goldman Sachs. Also attending the meeting was Lloyd Blankenfein, the current CEO of Goldman Sachs. Also at the meeting: Tim Geithner, then head of the New York Fed.

Tom Edsall, The Huffington Post, April 2, 2009:

Decisions made during the final months of the Bush administration created an environment in which the most politically connected investment banks, Goldman Sachs and Morgan Stanley, not only flourished, but saw their competitors laid waste, with firms like Lehman in bankruptcy, and others, like Merrill Lynch and Bank of America, forced to merge in desperate hope of surviving.

Former federal bank regulator Bill Black, The Bill Moyers Show, April 3, 2009:

BLACK: The Bush administration and now the Obama administration kept secret from us what was being done with AIG. AIG was being used secretly to bail out favored banks like UBS and like Goldman Sachs. Secretary Paulson's firm, that he had come from being CEO. It got the largest amount of money. $12.9 billion. And they didn't want us to know that. And it was only Congressional pressure, and not Congressional pressure, by the way, on Geithner, but Congressional pressure on AIG.

Where Congress said, "We will not give you a single penny more unless we know who received the money." And, you know, when he was Treasury Secretary, Paulson created a recommendation group to tell Treasury what they ought to do with AIG. And he put Goldman Sachs on it.

MOYERS: Even though Goldman Sachs had a big vested stake.

BLACK: Massive stake. And even though he had just been CEO of Goldman Sachs before becoming Treasury Secretary. Now, in most stages in American history, that would be a scandal of such proportions that he wouldn't be allowed in civilized society.

MOYERS: Yeah, like a conflict of interest, it seems.

BLACK: Massive conflict of interests.

MOYERS: So, how did he get away with it?

BLACK: I don't know whether we've lost our capability of outrage. Or whether the cover up has been so successful that people just don't have the facts to react to it.

The Washington Post, April 4, 2009:

Lawrence H. Summers, one of President Obama's top economic advisers, collected roughly $5.2 million in compensation from hedge fund D.E. Shaw over the past year and was paid more than $2.7 million in speaking fees by several troubled Wall Street firms and other organizations. . . . Fees ranged from $45,000 for a Nov. 12 Merrill Lynch appearance to $135,000 for an April 16 visit to Goldman Sachs, according to his disclosure form.

New York Times, April 27, 2009:

An examination of Mr. Geithner’s five years as president of the New York Fed, an era of unbridled and ultimately disastrous risk-taking by the financial industry, shows that he forged unusually close relationships with executives of Wall Street’s giant financial institutions.

His actions, as a regulator and later a bailout king, often aligned with the industry’s interests and desires, according to interviews with financiers, regulators and analysts and a review of Federal Reserve records.

Former IMF Chief Economist and current MIT Professor Simon Johnson, The Atlantic, May 2009:

THE ATLANTIC:  The crash has laid bare many unpleasant truths about the United States. One of the most alarming, says a former chief economist of the International Monetary Fund, is that the finance industry has effectively captured our government -- a state of affairs that more typically describes emerging markets, and is at the center of many emerging-market crises. . . . .

JOHNSON:  Squeezing the oligarchs, though, is seldom the strategy of choice among emerging-market governments. Quite the contrary: at the outset of the crisis, the oligarchs are usually among the first to get extra help from the government, such as preferential access to foreign currency, or maybe a nice tax break, or—here’s a classic Kremlin bailout technique -- the assumption of private debt obligations by the government. Under duress, generosity toward old friends takes many innovative forms. Meanwhile, needing to squeeze someone, most emerging-market governments look first to ordinary working folk -- at least until the riots grow too large. . . .

Matt Taibbi, Rolling Stone, this month:

Any attempt to construct a narrative around all the former Goldmanites in influential positions quickly becomes an absurd and pointless exercise, like trying to make a list of everything. What you need to know is the big picture: If America is circling the drain, Goldman Sachs has found a way to be that drain -- an extremely unfortunate loophole in the system of Western democratic capitalism, which never foresaw that in a society governed passively by free markets and free elections, organized greed always defeats disorganized democracy.

Paul Krugman, The New York Times, today:

At this point, however, the acute crisis has given way to a much more insidious threat. Most economic forecasters now expect gross domestic product to start growing soon, if it hasn’t already. But all the signs point to a "jobless recovery": on average, forecasters surveyed by The Wall Street Journal believe that the unemployment rate will keep rising into next year, and that it will be as high at the end of 2010 as it is now.

Now, it’s bad enough to be jobless for a few weeks; it’s much worse being unemployed for months or years. Yet that’s exactly what will happen to millions of Americans if the average forecast is right -- which means that many of the unemployed will lose their savings, their homes and more.

The New York Times, today:

Most of Wall Street, and America, is still waiting for an economic recovery. Then there is Goldman Sachs.

Up and down Wall Street, analysts and traders are buzzing that Goldman, which only recently paid back its government bailout money, will report blowout profits from trading on Tuesday.

Analysts predict the bank earned a profit of more than $2 billion in the March-June period, because of its trading prowess across world markets. If they are right, the bank’s rivals will once again be left to wonder exactly how Goldman, long the envy of Wall Street, could have rebounded so drastically only months after the nation’s financial industry was shaken to its foundations. . . .

Startling, too, is how much of its revenue Goldman is expected to share with its employees. Analysts estimate that the bank will set aside enough money to pay a total of $18 billion in compensation and benefits this year to its 28,000 employees, or more than $600,000 an employee. Top producers stand to earn millions.

Other than those individuals whose life purpose is to serve as reverent apologists and servile defenders for the most powerful financial elites, is there anyone who would be willing to claim with a straight face that the last event is unrelated to all the ones that preceded it?  Add to that all the Serious consensus-talk about how the country can't afford health care reform and how Social Security, Medicare and Medicaid must be cut because they're too expensive, and the picture couldn't be clearer.

Read the above-excerpted paragraph from Simon Johnson describing how, in his experience, fundamentally corrupt emerging-market nations respond to financial crises ("at the outset of the crisis, the oligarchs are usually among the first to get extra help from the government. . . . Under duress, generosity toward old friends takes many innovative forms.  Meanwhile, needing to squeeze someone, most emerging-market governments look first to ordinary working folk -- at least until the riots grow too large"). That "until" provision never seems to be triggered, which is why, as Johnson points out, the behavior continues unabated.

 

UPDATE: Several commenters add a crucial point:  back in September, the Federal Reserve allowed Goldman (and a few other surviving institutions) to convert from an investment bank into a bank holding company.  The Wall St. Journal claimed at the time that the move meant the firm would "come under the close supervision of national bank regulators, subjecting them to new capital requirements, additional oversight, and far less profitability than they have historically enjoyed."  A mere nine months later, Goldman boasts of "blowout profits."  So much for "less profitability."  As for allegedly greater regulations and capital restrictions, they freely admitted from the start:  "'We don't believe we'll have to get out of any businesses,' says Lucas van Praag, a Goldman spokesman. Adds Morgan Stanley's Mark Lake, 'There will not be much in terms of divestitures'."

But what the conversion did allow was access to lending from the Federal Reserve.  Since then, the Fed has increased its balance sheet by $2 trillion while steadfastly refusing to disclose the beneficiaries of that credit.  Thus, even aside from the bailout money it directly received and the billions in bailout money which it indirectly received (through AIG), Goldman has had access to massive amounts of Fed lending in order to fuel its bulging profits.  That unimaginably enormous (though entirely secret) lending is, in part, what is behind the Ron Paul-sponsored bill to audit the Fed -- a bill that is now co-sponsored by a majority of House members from across the political spectrum (progressive, conservative and everything in between), yet which continues to be blocked by Congressional leaders from receiving a floor vote.

UPDATE II: I've been commenting on the Sotomayor hearing on Twitter -- only because my sanity precludes my remaining silent as I watch this ludicrous spectacle.  Those interested can follow the feed, and read the commentaries from today, here.

FBI Arrest Opens Goldman-Sachs' Pandora's Box

by bobswern

Jul 06, 2009 at 02:51:26 AM PDT
 

Up until about two weeks ago, Matt Taibbi's favorite Goldman Sachs' market observers, the folks over at the Zero Hedge blog, had been continually commenting over the past six-plus months about how Goldman had all but cornered the market on program trading within the NY Stock Exchange. (Program trading is the automated stock trading via computers by firms specially authorized by the NYSE to facilitate same.) Clearly, according to Zero Hedge publisher Tyler Durden, something was up.

A couple of months ago, we also learned through Zero Hedge that Goldman had profited greatly from a sweetheart deal with the federal government concerning a new program instituted by the Feds known as "The Supplemental Liquidity Provider" Program ("SLP"), launched this past  Thanksgiving, which was supposed to provide "market liquidity" (i.e.: an ongoing, active market) for selected groups of 500 different NYSE stocks per SLP participant.  As Durden pointed out to all who were interested, it certainly appeared to him that Goldman was the only active participant in the program.

In April, we also learned that Goldman-Sachs had reaped the benefits of more  $100 million-plus days of trading revenue than it had in the history of its business! (Yes, you read that correctly, $100 million dollars per day in gross income from its trading business.)

This past week, according to Durden tonight, things starting going downright stranger than strange when Goldman's name went completely missing from the NYSE's Weekly Program Trading report. The firm that, by far and away (jn most instances accounting for anywhere from third to more than one-half of all program trades throughout Wall Street), had maintained the top position in program trading on Wall Street for practically every week for the past six-plus months, all of the sudden was nowhere in sight.

...This week's NYSE Program Trading report was very odd: not only because program trading hit 48.6% of all NYSE trading, a record high at least since the NYSE keep tabs of this data, and a data point which in itself was startling enough to cause some serious red flags as I jaunt from village to village in what little is left of Europe's bison country, but what was shocking was the disappearance of the #1 mainstay of complete trading domination (i.e., Goldman Sachs) from not just the aforementioned #1 spot, but the entire complete list. In other words: Goldman went from 1st to N/A in one week.

Tonight, thanks to Matthew Goldstein over at Reuters, we now know this: "COLUMN A: A Goldman Trading Scandal?"

COLUMN A: A Goldman Trading Scandal?
By Matthew Goldstein

NEW YORK, July 5 (Reuters) - Did someone try to steal Goldman Sachs' secret sauce?

While most in the United States were celebrating the Fourth of July holiday, a Russian immigrant living in New Jersey was being held on federal charges of stealing secret computer trading codes from a major New York-based financial institution. Authorities did not identify the firm, but sources say that institution is none other than Goldman Sachs.

The charges, if proven, are significant because the codes that the accused, Sergey Aleynikov, tried to steal are the secret sauce to Goldman's automated stock and commodities trading business. Federal authorities contend the computer codes and related-trading files that Aleynikov uploaded to a German-based website help this major financial institution generate millions of dollars in profits each year.

The platform is one of the things that gives Goldman an advantage over the competition when it comes to the rapid-fire trading of stocks and commodities. Federal authorities say the platform quickly processes rapid developments in the markets and using secret mathematical formulas, allows the firm to make highly-profitable automated trades.

As we also learned from the article, the criminal case "...has the potential to shed a light on the inner workings of an important profit center for Goldman..."

The case against Aleynikov may explain why the New York Stock Exchange moved quickly last week to stop reporting program stock trading for its most active firms. Goldman was often at the top of the chart -- far ahead of its competitors. It's possible Goldman had asked the NYSE to stop reporting the number after it discovered that someone may have infiltrated the proprietary computer codes it uses.

Here's a comment from the criminal complaint against Aleynikov:

"The Financial Institution has devoted substantial resources to developing and maintaining a computer platform that allows the Financial Institution to engage in sophisticated high-speed, and high-volume trades on various stock and commodities markets. Among other things, the platform is capable of quickly obtaining and processing information regarding rapid developments in these markets."

As Zero Hedge and Reuters are quick to point out, the case has the potential to actually pull the curtain aside for the public to take a look at the inner workings of Goldman's trading activities.

Speculation is running rampant throughout the blogosphere tonight regarding matters as diverse as the fairly well-known fact that Goldman is at the heart of the government's Plunge Protection Team, a/k/a the "President's Working Group On Financial Markets," (thus making this a matter of so-called national security, since the "PPT" group, created during the Reagan administration, is supposed to step in and prevent our markets from crashing), to the possibility that Goldman could have easily been "frontrunning" the rest of the market due to the implementation of their exceptionally fast proprietary code, identifying others' market-making trades and strategies, then acting upon them for Goldman's own benefit,  executing in-house trades before the third-parties' trades were even concluded.

Whatever happens as a byproduct of these latest, breaking events, as Robert Scheer told us awhile back over at HuffPo, it's to the point where we've become either numb, or resigned, or both, to the extent of corruption that occurs there. Then again, Matt Taibbi just informed us last week that the folks over at Goldman are no less than responsible for every market bubble that's occurred on Wall Street since the 1920's. (See: "The Great American Bubble Machine.")

Get your tinfoil hats on and go checkout ZeroHedge's reader comments on this story, tonight. They're fascinating, running the gamut from one conspiratorial option ('...Aleynikov is a patsy...') to another ('...the proprietary source code for the government's Plunge Protection Team will be available for the public to view at any moment...').

They don't even make movies with scripts that are this good.

Selected comments

CMYK

say a transaction must be no shorter in duration than 24 hours or the transaction is not legitimate.

You will hear screams but if that's the rule, and you know before you buy that you must hold the share for a minimum of 24 hours before you sell - that's just part of the risk.

The GS model trades million of shares at a time - buy's and sells at a fraction of an increase or decrease - that's not helping markerts or building tangible assets - that's simply skimming.  They skim because the law allows for it.  Don't blame GS; blame our Government - they allow it.

The care of human life and happiness, and not their destruction, is the first and only legitimate object of good government. - Thomas Jefferson

by ctexrep on Mon Jul 06, 2009 at 08:54:13 AM PDT

[ Parent ]

•  This whole thing. . . (36+ / 0-)

   

  . . . sounds like online poker, and Goldman Sachs just happens to be the player with the best "bots" running.

  We need to find good ways to curtail the pure gambling aspects of the stock market. Having minimum hold-times as you suggest might be a good start.

  The idea behind financial markets was to allow investors liquidity - the ability to cash out of what would otherwise be illiquid investments (shares in companies) by passing them along to another investor. But the important thing was supposed to be the facilitation of investment in going concerns that had real economic value, and the rewards to the investors were supposed to be in the form of dividends - purchasing a stock bought you a (hopefully predictable) income stream. The price of a stock was (supposed to be) predicated upon the future value of the income stream - not on how much the next guy might be willing to pay for it 10 seconds from now.

  Since the future cannot be known, investment is always something of a gamble, but the skimming and churning of instant trading is only of value to the financial houses, not to the greater economy.

  "Have nothing in your houses that you do not know to be useful or believe to be beautiful." -William Morris

  by Robespierrette on Mon Jul 06, 2009 at 09:13:44 AM PDT

  [ Parent ]