How Goldman offloaded its toxic assets

By Felix Salmon
April 28, 2010
Chris Nicholson finds a particularly damning email in the mountains of evidence released by the Senate investigations committee. It's written by someone on Goldman Sachs's European sales desk:

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Chris Nicholson finds a particularly damning email in the mountains of evidence released by the Senate investigations committee. It’s written by someone on Goldman Sachs’ European sales desk:

Real bad feeling across European sales about some of the trades we did with clients. The damage this has done to our franchise is very significant. Aggregate loss of our clients on just these 5 trades along is 1bln+. In addition team feels that recognition (sales credits and otherwise) they received for getting this business done was not consistent at all with money it ended making/saving the firm.

Clearly Goldman’s clients aren’t buying what Lloyd Blankfein is selling: the idea that they’re just arm’s length counterparties who know what they want to buy and are just looking for the best price. Illiquid things like CDOs are sold as much as they’re bought, and Goldman’s highly-paid sales team was aggressively going out and selling instruments which were at one point on Goldman’s balance sheet and which wound up cratering in value.

The effects were twofold: firstly, the Goldman clients who got stuck with this nuclear waste when the music stopped were understandably none too impressed with Goldman. And secondly, Goldman managed to stick the losses on those instruments to its clients, rather than taking those losses itself, and as a result its profits were billions of dollars higher than they would otherwise have been.

Was the hit to Goldman’s franchise value a hit worth taking, given the billions of dollars it saved? Probably yes, until the SEC and Carl Levin came along. But clearly the European sales team which was responsible for successfully offloading this nuclear waste wanted to see some part of those billions of dollars in savings for itself. Because, like all Wall Streeters, they care more about their annual bonus than they do about their employer’s franchise value.

Here’s a question, though. Let’s say you work at an investment bank and you’re in charge of a book which includes a $1 billion barrel of toxic nuclear waste. You know that barrel is going to zero sooner or later, and you manage to sell it to some European dupes just in time, for full face value, saving your bank from $1 billion in losses. How much of a bonus, if any, should you get on that deal, and where should the money come from? And should you feel bad about avoiding the losses and sticking them to your clients instead?


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With any luck we will get another Michael Lewis out of all of this. He seemed to leave due to his abhorance of conflicts of interest, or that is what I gathered from Liar’s Poker.

Posted by david3 | Report as abusive

Michael Lewis believes one consequence of the Goldman Sachs – Abacus debacle is that bond salesmen are going to have to learn how to distinguish between right and wrong. In a recent Bloomberg column he wrote:-

“Just as there was a time when people could smoke on airplanes, or drive drunk without guilt, there was a time when a Wall Street bond trader could work with a short seller to create a bond to fail, trick and bribe the ratings companies into blessing the bond, then sell the bond to a slow-witted German without having to worry if anyone would ever know, or care, what he’d just done. That just changed.”

I sincerely hope he’s right! 0601039&sid=aWUolZvh4qmE

Posted by IanFraser | Report as abusive

The answer depends. If you are a proprietary trading shop your job is to make money (and avoid losses) at all costs. In fact, you have a fiduciary duty to somebody (eg, limited partners or shareholders) to do so. You sell the crap and never look back. Caveat emptor rules.

If you are a traditional investment bank, you find out which morons allowed $1 billion of concentrated toxic risk to accumulate on your balance sheet and you fire their incompetent asses for cause (ie, no bonuses, no golden parachutes). Then you convene the Executive Committee to decide whether it is worth permanently damaging your franchise as a supposedly neutral market maker by offloading the waste before it blows up onto your clients, or whether you should eat the loss as punishment for failure. (If you can sell it to your competitors, instead, that’s fair game.)

This is why trying to run a large proprietary trading operation inside a traditional market-making investment bank introduces a fundamental, highly dangerous conflict of interest. At a small scale, this kind of stuff happens all the time, and should, in a traditional investment bank. However, it should never reach the scale that threatens the short- or long-term future of the bank.

Then again, if you are Goldman Sachs I guess you just don’t give a damn.

Posted by EpicureanDeal | Report as abusive

Goldman is like any other agent or broker – they work to maximize their own income. This bit about how they care about their client is BS, as they only care about their individual income. Does your real estate broker truly want you to buy the house of your dreams, at the lowest possible price? No, they want you to pay as much as you can afford, so their commission is maximized, and they want you to upgrade in a few years, if not sooner. They work for themselves, just like the employees of Goldman. The employees of Goldman don’t even truly care about their shareholders, they just want them to be satisfied enough to continue to receive their undeserved bonuses.

I don’t understand why everybody is so shocked at Goldman’s behavior. They exist only to make money for themselves – it’s not like they are passionate about making some cool product that benefits society, their goal is to make as much money as possible while not going to prison. They say they care about their clients, but they only care about the client’s perception, and even then they care only if the client is able to get a better deal somewhere else, for if they leave Goldman, Goldman will lose a source of income.

This is how parasites behave. They extract as much from their host as possible without giving anything in return. Really, in exchange for the billions of dollars in bonuses that Goldman employees have sucked out of the economy, what value have they provided in return?

Posted by OnTheTimes | Report as abusive

Yo Felix,

I got a better question. If you know you have a billion dollars in toxic waste (aka investment) that you know is going to zero and you sell it to someone else, isn’t that fraud?!?! Especially if you don’t disclose details about the investment prior to the sell.


Posted by boogienights | Report as abusive

@OnTheTimes: Unfortunately this breaks down in the Squid’s case. Remember – they do God’s work.

If he hasn’t already, Blankfein will live to regret that one.

Posted by Curmudgeon | Report as abusive

it just goes to show the inherent conflict of interest in the otc market making business. the salesforce has no fiduciary responsibility to its “clients”, and in fact, in a zero sum game, stands to benefit when the client loses.

in my brief and unsucessful foray into debt sales , sales credits were based on the risk of the trade, but you very rarely never when you won your client a good price and your trader lost p&l!

intermediation should be just that, conducted by IDB’s. anything that is too illiquid and requires a market maker to take the other side shouldn’t be traded on a secondary market. Goldman should stick to prop trading and not even try to pretend that isn’t what it does!

Posted by MFM | Report as abusive

You have to love the idea that Goldman’s victims were “sophisticated investors”, so they deserved the shellacking they got.

It’s no more legit than saying a woman who wears a revealing dress and sexy lingerie deserves to get screwed.

Posted by thorsteinveblen | Report as abusive

thorsteinveblen, it is almost as funny as the idea that all these highly paid fund managers are now ignorant dupes, widows and orphans that merely were doing exactly this job for 20 years….

Your analogy is slightly off. It is more like a girl who goes to a singles bar gets on a desk and says who will service me, goes home with someone, takes her clothes off, lies on the bed and says take me whilst documenting it each stage of the way. Of course it would be the man’s responsibility to refuse to sleep with her right?

Posted by Danny_Black | Report as abusive

boogienights, again **what** exactly has GS not revealed to the investors? That Paulson was pushing certain items to be included in the investment? Pretty hard to say they were not aware given the fact they rejected around half of what he pushed. That he was bearish on the market? I assume in addition to having only 20 years of experience in the industry, they also were illiterate and didn’t read newspapers. Also given that Paulson testified to the SEC that the fund TOLD ACA that it was taking a short position it seems they had difficulty understanding english.

I assume the only thing GS could have done to satisfy you is break ACA and IKB arms so they could physically not buy this stuff.

Posted by Danny_Black | Report as abusive

Since this has temporarily turned into a website about prostitution, maybe Goldman is like the hooker who gives a client an STD, and then says somehow the client should have been aware that she might have an STD. Ok, that might work in court to get her off, but only a fool uses her services after that gets around.

Goldman’s legal defense team is building their case around the idea that people should know if they deal with Goldman, they have a reasonable chance of getting screwed, and suffering the STD afterword.

OK, market makers, can I buy a synthetic CDO where I am betting that Goldman is being less than truthful?

Amarillo Slim made a bet one time that he could hit a golf ball a mile, or some long distance like that. He found a counterparty to take the other side, because nobody could hit a golf ball that far. So Slim took the the other guys out on a big frozen lake, hit the ball, and watched it roll, and roll, and roll. Of course he won the bet. Another time he challenged a very good ping pong player to a game, and when the other guy showed up, Slim told him the game would be played with Coke bottles as paddles. Of course, Slim had been practicing with the Coke bottles, and won.

The point is, if you are betting against Slim, or making a deal with Goldman, you can think you have accounted for every little twist they might have put on the deal, but there will still be some little trick they take advantage of.

“Let the buyer beware?” Nope. Better off to not be a buyer when it comes to Goldman.

Posted by randymiller | Report as abusive


Did they tell them that they thought the investments were “shitty” and going to zero? Did they tell them that they thought the investments were mislabeled because people were paying ratings agencies for ratings? I don’t feel sorry for ACA or IKB and could give a damn if they lose all there money. Goldman needs to deal with their own counterparty risk and not rely on taxpayer help. Sorry if I don’t believe Fabulous Fab or Paulson. Show me an email, memo, letter, etc. that states that Paulson was taking a short position. Surely they did this to cover their ass, right? Investment banking, commercial banking, and market making need to be completely separate. Sell stupid someplace else.

Posted by boogienights | Report as abusive

It’s not as though Goldman was looking over its standing inventory and just happened to come across a cool billion bucks’ not-worth of suspiciously toxic assets it really ought to unload. Not least because if it were, the guy who hypothetically bought them with Goldman’s money wouldn’t have been paid in dollars but in bullets. That’s not what happened.

No, the process of actively searching for precarious assets, optioning them with a view to blending, repackaging and 18kt gilding them like so many Damien Hirst turds which they then gaily hawked to public pension funds… that wasn’t a one-time thing and it wasn’t a mistake. It’s doing Karl Rove, Tom Delay and satan’s work, destroying public infrastructure everywhere – Because They Can.

And it’s been Goldman’s business model since they became a so-called investment bank.

Posted by HBC | Report as abusive

boogienights, if they thought it was so “shitty” – which is another deal not the Abacus one – then how come then ended up owning part of it? Surely if they “knew” it was going to zero they would have got short on that deal not long.

Weird these emails never got released by the government or the SEC: Could-Undercut-SEC-cnbc-3160283437.html? x=0&sec=topStories&pos=main&asset=69e8ac 8d9997b758b24e337dd5d56fbd&ccode=1

Posted by Danny_Black | Report as abusive

Randy, you are completely missing the point. The point is that NOW we know those deals went to zero. Just like NOW we know that Netscape isn’t going to take over the world. At the time different people had different views. ACA and IKB had one view. Paulson had another. Paulson turned out to be right, having been wrong for a couple of years. ACA and IKB turned out to be wrong having been right for more than a couple of years.

There are very few things in the market you KNOW are going to go to zero and I guess I am not as bright as you are to know BEFOREHAND that they are going to zero. I can only assume that all of you how KNEW these products would go to zero are currently multi-billionaires slagging off Goldmans as a retirement hobby.

Posted by Danny_Black | Report as abusive


Alas, few of us were able to structure CDOs and pay the ratings agencies to obtain a AAA ratings on said structures to short the housing market (like Paulson, Goldman, et al).

Few of us also didn’t have a former partner sitting in Washington ready and willing to do whatever it took to protect the interests of his former colleagues — allowing two competitors to fail (BS and LEH) while making sure the wealth of taxpayers was there to save his beloved GS.

For example, I believe it took two days for GS to become a national bank when the application process for us mere mortals is 18 months.

Other than that, we all had the same opportunity as Paulson and Goldman.

Posted by longandshort | Report as abusive

Avoiding losses does not earn a fat bonus. Here is how to make the bonus check really fat:

Knowing that the half-life of the toxic junk is measured in months if not weeks, I buy “meltdown insurance”, essentially a put warrant, or credit default swap, from some deep-pocket issuer like AIG for something like $100K against the $1 bn notional. Then sell the tranches to “investors”. Once the thing implodes, I collect the face value of $1 bn for a tidy $999m+ profit. If my bonus is just a mere 10%, I have done well!

Posted by Ungaro | Report as abusive

longandshort, yeap same chances as them and the other people who made money shorting subprime like the one eyed aspergers ex-MD sitting in his room.

All I want for Xmas is your time-machine were I can go forward in time and predict when a bubble is going to finally burst and exactly which products will go to zero. Apparently you believe GS and Paulson had one of these.

Posted by Danny_Black | Report as abusive


No need for a time machine or a camera that shows you what is going to happen (a la Twilight Zone) if the Sec Tsy is going to save your butt if you get in trouble.

Pray tell, how many institutions get an national banking charter in 48 hours? I know, I know, it is because they have really good lawyers.

GS could take enormous risk in 2007/2008 with the knowledge that Hank Paulson/George Bush/Chris Cox were there to cover their losses with taxpayer funds.

How much risk do you think GS would take back then if a an ex LEH MD was at the Treausary and someone with an IQ above the freeezing point of water was at the SEC?

Where do you think GS stock would be if the bald Christian Scientist from Barrington let AIG fail?

Who needs a time machine when you have Hank and Chris to carry your water?

Posted by longandshort | Report as abusive

Danny Black,

You are evading the central question. Do you trust Goldman when it comes to investing in a product they are selling? Would you tell some 50 year old relative who is planning retirement that Goldman is trustworthy?

The issue is not how did the investments turn out. The issue is trust.

Posted by randymiller | Report as abusive