Goldman controversy deserves right questions

April 26, 2010

Goldman Sachs will be in the dock on Tuesday. Not in court, but in front of a U.S. Senate committee, where seven current and former employees, including boss Lloyd Blankfein and the self-styled Fabulous Fabrice Tourre, will appear. The danger is that the hearing becomes consumed with grandstanding and headline-grabbing hectoring. For past missteps to be avoided, more thoughtful probing is called for. Here are three possible icebreakers.

1. Would you do the Abacus deal again? The Securities and Exchange Commission has sued Goldman and Tourre for securities fraud, a charge the firm vigorously disputes. The deal in question is a synthetic collateralized debt obligation sold in early 2007, one of a series called Abacus. This complex beast was created primarily to allow Paulson & Co, a now-famous hedge fund, to bet against U.S. subprime mortgages. In hindsight the whole structure looks sketchy. Even Blankfein, in written testimony prepared for Tuesday’s hearing, concedes that Goldman needs to strike a better balance between clients’ trading desires and “what the public believes is overly complex and risky.”

2. Would you have sold Abacus securities to your best clients? Investment banking skeptics maintain that players in the industry, perhaps especially Goldman, treat their top customers better than others — and may sometimes short-change all of them in favor of self-interest. Blankfein says Goldman “cannot survive” if clients don’t trust the firm. In the aftermath of Abacus, investors like Calpers have expressed concern about how the firm treats its customers. As it happens, Goldman did get stuck with an Abacus holding and lost money. But would the firm have been comfortable selling the paper to its best clients?

3. If so, would you have told them more? The SEC’s legal case centers on whether Goldman should have told a buyer of the Abacus securities, German bank IKB  about the involvement of Paulson. IKB may not have been a very discriminating buyer of risky mortgage-related securities. Even so, the SEC reckons Paulson’s involvement — which may have included proposing bonds to be included in the package it was betting against — was material information that should have been disclosed.

These questions don’t offer obvious sound-bites but instead aim at the mindset and ethics of investment banking near the climax of a long-running boom. What seemed OK then might not be any longer. But that’s exactly the kind of thing a crisis autopsy should uncover — so that lapses and excesses can be avoided the next time.

Comments

Since they seem to be able to put their own money in stock options, obligations and such – a good question in my view would be why did they not invest into the Abacus themselves?

Interesting 10 min overview video of Goldman Sachs:
http://www.youtube.com/watch?v=4rI9JA1d6 4w

Posted by VeritasVincit | Report as abusive
 

The clients/investors were NOT a ‘sweet old grandmother & her life savings’ – the investors must take personal responsibility. In business, all clients ALWAYS check their purchased goods against cash delivery very thoroughly.
You cannot blame Goldman, however much we all envy them & wish we were them, for making money.

Posted by Risk_Manager | Report as abusive
 

The questions you propose Goldman has already answered in fact if not in word: 1, Yes they structured multiple Abacus deals and would continue to do so until the wheels fell off. 2, Goldman could and did sell these CDO’s to anyone they could peddle them off on. 3, No one but Goldman and Paulson knew the how about their “little arrangement” until after the conned parties had been thoroughly screwed so obviously Goldman wasn’t going to tell anyone anything more or less. Goldman knew what they were doing going into the deals, they knew the fallout they were going to have to eventually endure when light was eventually shined on the deals and they made the conscious decision to go ahead with the deals because the returns outweighed the costs. The question that needs to be asked of Blankfein is what he plans on doing NOW about all the damage he’s done to the US economy. If he has no answer to that, then he needs to be told Goldman will need to post a $1T corruption bond with the US Treasury until Goldman’s complicity in this financial crisis is sorted out. Fabulous Fab can wash dishes in the local homeless shelter while his part in this is determined. To hell with Goldman Sachs.

Posted by Woltmann | Report as abusive
 

Amen!

Posted by Bert2 | Report as abusive
 

To appreciate the depths of Goldman’s duplicity, just take a look at its 2009 annual report. In the opening salvo of the report, Goldman is downright indignant and asserts that its only role in the financial markets has been positive.

To deflect attention away from Wall Street matters, Goldman went to great lengths to say that it spent the year acting in the interests of its clients and that these actions were the driving force behind its business.

That fails to address the huge sums of money that Goldman made in proprietary trading that did nothing to benefit clients, but enriched Goldman’s shareholders and employees. The investment bank pressed the case that it paid workers only for their performances and nothing more.

On page 39 of the 2009 report, you find Goldman’s broad-brush disclosure in all its vague and generalized glory. Specific references to the Wells Notice, open investigations, lawsuits, administrative actions? Move along. Nothing to see here.

This was also the subject of an article “Goldman Sachs’ Annual Report: It’s All Smoke and Mirrors” on the International Business Law Advisor Blog http://www.IntlBusinessLaw.com on April 20, 2010.
http://bit.ly/cML7Po

Posted by Scueto | Report as abusive
 

Grandstanding and headline-grabbing hectoring. Spot on. Politicians at their very worst. It seems that UKIP’s slogan “Sod the Lot” is not so offensive after all. Quite mild in fact, and I’m not even a banker and never have been.

Posted by CO2-Exhaler | Report as abusive
 

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