Felix Salmon

Goldman’s scandal-prone board

Felix Salmon
Apr 15, 2010 13:44 UTC

It’s pretty clear now why Rajat Gupta stepped down from Goldman’s board of directors last month — the only question is why it took him so long. Galleon’s Raj Rajaratnam was charged back in October, along with McKinsey director Anil Kumar; Gupta was not only the former head of McKinsey but was and is a close friend and business associate of Rajaratnam:

Messrs. Rajaratnam and Gupta spoke frequently, and Mr. Gupta was invited to attend parties hosted by Galleon, an individual close to the situation says.

In 2006, Mr. Rajaratnam, Mr. Gupta and Mark Schwartz, a former Goldman executive, formed Taj Capital, a hedge-fund and private-equity firm focused on South Asia. The firm, since renamed New Silk Route, manages $1.4 billion in private-equity investments.

All of that alone places Gupta far too close to Rajaratnam for Goldman to be happy with Gupta on its board. But today it gets much worse: the WSJ’s Susan Pulliam reports that Gupta is being investigated for examined with respect to insider trading in Goldman shares, via his friend Raj.

What is it with Goldman and these unfortunate events surrounding its board? First there was the scandalous secret meeting with Hank Paulson in Moscow. Then there were the dubious stock transactions by Stephen Friedman. Then there was the embarrassing interview with Ruth Simmons, which was swiftly followed by her departure from the board. And now this. What can it all mean?

Update: souhaite, in the comments, reminds me of the Meg Whitman affair in 2002. And a friendly PR person emails to tell me that there’s “an important distinction” between being investigated and being examined. Gupta’s being examined, according to the WSJ, he’s not being investigated.


Whenever I read comments such as above and stronger versions of the same, I have only one serious observation to note :- Where are all the “sharp” AG’s and serious investigative reporters to stop the arrogance of dead beat CEO’s and director’s that cannot think of wise honest policy’s to beat the opposition?
Are their actions “Reckless disregard and purposed intent to mislead” the trust investor’s place with them?
Then of course is the Greed of the Investing Public. They do not know of to play the game. Tobytwo

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Felix Salmon
Apr 15, 2010 05:10 UTC

John Gapper on the Magnetar Trade — FT

A purse that you can fill with wine — Damselesque

Cat learns how to use an iPad — YouTube

BofA now supports modifying mortgages in bankruptcy — HuffPo

Minimum bid for breakfast with Nouriel Roubini: $7,000 — CharityBuzz


18 in SF Bay Area indicted for mortgage fraud. Two worked for WaMu. Uh, is it fraud of the defrauded party knew the mortgages were fraudulent?

More here: http://www.contrarianpundit.com/?p=1029

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The scandalous Lehman CME auction

Felix Salmon
Apr 14, 2010 20:40 UTC

It was one of the least transparent and most underpriced asset sales since the days of Russian privatizations. In the chaos of the immediate aftermath of the collapse of Lehman Brothers, the CME Group auctioned off Lehman’s derivatives assets for less than half their value — handing a $1.2 billion windfall to Barclays, DRW Trading, and — you knew this was coming — Goldman Sachs.

The details are in pages 319-328 of the newly-unredacted Valukas report, and Andrew Clavell has a good summary: essentially Barclays walked away with $335 million, DRW made $303 million, and Goldman, coming out on top as always, managed to profit to the tune of $450 million.

Valukas concludes:

The bulk sale process resulted in a substantial loss to LBI exceeding $1.2 billion over the close‐of‐business liabilities associated with the positions… This process represented the first and only time the CME had conducted a forced transfer/liquidation of a clearing memberʹs positions…

Thus, LBI may have a colorable claim against CME, or any of the firms that bought LBI’s positions at a steep discount during the liquidation ordered by the CME, for the losses that LBI sustained as a result of the forced sale of house positions held for the benefit of LBI and its affiliates.

The smelly thing here is the way the auction was conducted. Not only was the whole thing utterly unprecedented, it was also far from transparent: only six firms were invited to bid. If the CME was actively trying to get the lowest possible bids it’s hard to think how they could have done better than this, holding a hurried auction in the midst of utter market chaos, with no minimum bids and seemingly not a care in the world about whether Lehman was getting a fair price for its assets. It looks very much as though the CME wanted to hand Lehman spoils to its largest clients, since Lehman itself was clearly not going to be a client going forwards and was in no position to object.

The craziest deal is the Goldman one:

Goldman Sachs assumed the equity positions cleared through the CME, as of close of business on Wednesday, in consideration for the transfer to Goldman Sachs of $445,132,487 from LBI’s margin and collateral deposits at the CME. The equity positions included options with a net option value of $4,867,513 so the amount transferred to Goldman Sachs exceeded the Wednesday close of business position liabilities associated with the positions by $450 million.

In other words, Lehman’s equity-derivatives positions were worth $4.9 million. And Goldman, in bidding for those positions, didn’t bid a single penny — instead, it demanded a whopping $445 million from Lehman’s margin accounts in order to take them over. So it got the positions for free, and another $445 million as gravy, on top. You can almost see the money being sucked up the Goldman blood funnel, no?


Of course he understands Aggregate Span Risk. He has a PhD in Derivatives from the University of Wikipedia.

So obviously he reran the scanning risks to verify his above conclusion. Probably used Adesi-Whaley valuation and I’m guessing Newton’s method to iterate convergence. Quite a sophisticated model if you ask me.

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The Greek debt spreadsheet

Felix Salmon
Apr 14, 2010 19:20 UTC

How fabulous is this spreadsheet? It allows you to take the official Greek assumptions of what’s going to happen with respect to its fiscal situation over the next few years, and replace them with anything you like.

Play around with anything in the orange cells, except for the ones saying “Nominal GDP growth”: that’s just the sum of the two rows above. It’s pretty easy to come up with some assumptions which show Greece’s debt-to-GDP ratio flattening out at somewhere north of 127%, instead of peaking at 120.6% and then falling to 113%:


Do let me know what kind of results you get. Reuters’s own Brian Love has run a bunch of numbers, including seeing real GDP fall by 3% in 2010, 7% in 2011, and 1% in 2012, before seeing a 3% rebound in 2013. (Those are numbers he got from Simon Johnson.) In that case Greece’s debt-to-GDP ratio rapidly gets higher than 135%, even before you take into account the fact that its borrowing costs would surely be rising sharply at the same time. Put in a steady 8% interest rate for its debt service, and the debt-to-GDP ratio can reach 150% quite easily:


Note that the chart above even assumes that Greece manages to run a primary surplus in 2012 and 2013 — that, before interest payments, it will be spending less than its tax revenues. Even at the end of an incredibly brutal recession. Realistically, the higher the negative numbers on the second line, the higher the negative numbers on the first line as well. That’s all you really need for a debt spiral: you don’t even need the interest rate on your debt to get crazily out of hand.

The stakes, then, could barely be higher. Either Greece manages to implement its current plan, or it comes very close to spiraling out of control into devaluation and/or default. Maybe that’s why the EU isn’t insisting on high levels of conditionality in its rescue package: it knows that the Greeks themselves have every incentive to get this right. Which doesn’t, of course, mean that they’ll succeed.


Good little spreadsheet, love the projecting capability

I have had a stab myself at constructing a spreadsheet about the crisis.

http://data.inflexionary.com/inflexionar y/greek-debt

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How loan servicers milk the foreclosure-prevention program

Felix Salmon
Apr 14, 2010 15:36 UTC

If there’s one consistent villain in the tale of attempts to minimize home foreclosures, it’s the loan servicers. They lose paperwork, they foreclose on homes they have no right to foreclose on, they accept borrowers into modification programs while trying to foreclose on them at the same time, they deny borrowers a modification even when they shouldn’t, they’re impossible to get ahold of, their communication with borrowers is atrocious, they claim to be owed vastly more money than they actually are owed, and so on and so forth.

Which is why it’s so depressing that servicers are actually the biggest winners of the way that the government is doing mortgage modifications — at the expense of homeowners, no less. Shahien Nasiripour, who is not giving up in his attempt to push principal reduction as a solution to the mortgage-modification problem, finds this in the latest COP report:

“HAMP’s original emphasis on interest rate reduction, rather than principal reduction, benefits lenders and servicers at the expense of homeowners,” the report reads. “Lenders benefit from avoiding having to write down assets on their balance sheets and from special regulatory capital adequacy treatment for HAMP modifications. Mortgage servicers benefit because a reduction in monthly payments due to an interest rate reduction reduces the servicers’ income far less than an equivalent reduction in monthly payment due to a principal reduction.

“Servicers are thus far keener to reduce interest rates than principal. The structure of HAMP modifications favors lenders and servicers, but it comes at the expense of a higher redefault risk for the modifications, a risk that is borne first and foremost by the homeowner but is also felt by taxpayers funding HAMP.”

The report explains:

Servicers’ primary compensation is a percentage of the outstanding principal balance on a mortgage. Thus, principal reductions reduce servicers’ income, whereas interest reductions do not, and forbearance and term extensions actually increase servicers’ income because there is greater principal balance outstanding for a longer period of time.

It’s worth noting here that another set of losers in this set-up is the people who bought mortgage-backed securities. Banks benefit from this system because they don’t need to write down their mortgages, and because they often own servicers. But investors in mortgages mark to market: they have no choice when it comes to taking losses. And when a servicer keeps the principal amount high and the interest amount low, that just means that the owner of the mortgage pays unnecessary extra money to the loan servicer.

That’s true of private mortgage investors at mutual funds and hedge funds — but it’s also true of the biggest mortgage investors of them all, Fannie Mae and Freddie Mac. Is it too much to hope that they might start pressuring the government to force more principal reductions?


BCS Free Loans & the Foreclosure Industry

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Blanche Lincoln’s excellent and doomed derivatives proposals

Felix Salmon
Apr 14, 2010 13:41 UTC

There’s a fair amount of confusion over the new derivatives legislation that Blanche Lincoln is planning to introduce tomorrow, and partly that’s because a lot of DC journalists don’t really grok the distinction between exchange clearing and exchange trading. (It’s a pretty recondite distinction, I hardly blame them.)

The easy way to think about this is that if an instrument is exchange-traded, then it will always be cleared by the exchange as well. It’s possible to have central clearing of derivatives transactions without having them exchange-traded, but you can’t have exchange trading without central clearing.

Lincoln wants to mandate exchange trading for most derivatives, although it looks as though she might give the CFTC final say on that front. If a company gets an exemption from having to clear its trades centrally, then, it will also have to get an exemption from the exchange-trading rules. And so Lincoln wants to make those exemptions very rare indeed.

Lincoln also wants to regulate foreign currency swaps, in a move which goes further than even Treasury wants to go. And more generally, in a Volcker-like move, she wants the big investment banks’ swap desks to be spun out of their bank parents, to prevent contagion and to help make them small enough to fail.

I think that’s a great idea, since at a stroke it would solve a lot of the interconnectedness problems which worried Treasury and the Fed so much during the financial crisis. And it’s a robust, Roman solution.

But it’s also pretty clear that none of this is going to happen. Never mind Republican support: this is going to have a hard time even getting Democratic support. It’s all a good idea, but it’s far too radical: while it might have had more of a chance if it had been introduced during the height of the crisis, at this point the banks have got their mojo working again and will quite easily be able to ensure that the beating heart of Lincoln’s proposals is surgically excised before it even gets anywhere near a vote.

And when even the exchanges themselves no longer want exchange trading of derivatives, it’s going to be hard to find any constituency at all in favor of these proposals.

Which is a shame, because I’d love to see something along these lines happen. I suppose there’s some hope that if Lincoln starts off very aggressive in her proposals, that will help them retain some teeth by the time they get incorporated into the final bill. But I’m not holding my breath.


Felix Salmon
Apr 14, 2010 04:25 UTC

Sting like a bunny — Glendale News

Sorkin’s careless sloppiness suddenly becomes willful disingenuousness” — Salon

Judd Gregg seems to think the Dodd bill mandates exchange trading of derivatives. It doesn’t — FT

I’m trying to work out whether this was deliberate or not. Can’t decide — TBI

Lydon on McLaren: “we fought the same battle against boredom, apathy, laziness and cowardice” — Reuters

Military vehicles do not belong on city streets — Manifest Destiny

“The guy’s a billionaire. The kind that doesn’t come from just selling carrots.” — NYP

The chairman of the Pulitzer drama jury lashes out at the Pulitzer board — LAT

New bill: CEOs will be required to personally appear in any political ad funded by their company — Atlantic Wire

Tough love: Gawker finds making it harder for comments to be seen leads to more (and better) comments — Nieman Lab

On closed vs open — Salon

You wanna be a Vogue intern for a week? Right now $13,000 can buy you that — CharityBuzz

Kwak: “Although I probably wouldn’t have behaved the same way under the circumstances, I have no problem with Magnetar” — Baseline Scenario

Looking for the oldest “Basel faulty” headline; the Economist had it in 2003. Expect a resurgence in a few days — Economist

Why Isn’t The iPad Shipping With A Calculator App? Steve Jobs Didn’t Like The Way It Looked — TBI


I had the sense that Apple lost the PC wars primarily because the PC was so much more open, while Apple was very closed. It’s strange to me to read that “Apple [may be] the new Microsoft”, when it was the old Microsoft, too.

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Questions answered on business blogging

Felix Salmon
Apr 13, 2010 20:30 UTC

I got an email this morning from a journalism student with a few questions; I thought if I was answering them I might as well do so on the blog, for anybody else interested.

1) How and why were business bloggers able to gain so much respect in the business world that companies are now inviting some bloggers to press conferences?

This one, I have to admit, made me laugh. Companies will invite pretty much anyone to press conferences: you don’t need to be respected. One difference between bloggers and journalists is that bloggers actually want to go to press conferences, and are flattered to be noticed and invited. As a result, they’re much more likely to write about them than journalists are. So inviting bloggers to press conferences is a good idea for all concerned. Remember that press conferences aren’t meant to be private, exclusive affairs: they’re designed to get information out to as many people as possible.

2) In your opinion, why do you believe that some bloggers are able to gain a big following despite the fact the blogger may have no formal training in journalism?

As someone with no formal training in journalism myself, I don’t know whether j-school trains people to develop a big following. I suspect, though, that it doesn’t. In my experience, j-school graduates tend to be quite earnest people who care a lot about the important role that journalism plays in a democracy while being less good at throwing caution to the wind and making mistakes. But as I like to say, if you’re never wrong, you’re never interesting. One of the best posts on this subject came from Gawker’s Gabriel Snyder, after Ian Shapira of WaPo accused Gawker’s Hamilton Nolan of stealing his story:

Hamilton succinctly digested Shapira’s piece and gave his post a headline (“‘Generational Consultant’ Holds America’s Fakest Job”) and lede (“The fakest job corporate America ever created was ‘Branding Consultant’ — until now”) that probably resembled what Shapira wanted to write but couldn’t.

All too often, I fear, a “formal training in journalism” just means that journalists self-censor the good and funny bits of stories that bloggers naturally latch on to. What’s more, bloggers have a much more natural voice and personality than journalists do. So it’s only natural that bloggers will get more of a “following” than some guy who writes straight-down-the-line stories for the local newspaper.

Then, of course, there’s the very germane fact that many highly successful bloggers didn’t get a formal training in journalism because they were too busy getting a formal training in the thing they’re writing about — business, finance, economics. The likes of Yves Smith or Brad DeLong or Simon Johnson or John Hempton are popular partly because these people know what they’re talking about and actually do it; it’s surely an advantage to be able to use first-hand rather than second-hand knowledge when you’re writing about something.

3) What does business blogging do to the future of mainstream business journalism outlets?

Well, in the best-case scenario, it makes them much better. Mainstream business journalists, if they’re smart, will read a lot of blogs and get a lot of insight from doing so; that’s going to make their journalism better. What’s more, blogs will drive lots of extra traffic to the best business journalists. Today, WaMu is all over the news; the best reporting on that story to date has come from the Puget Sound Business Journal. A few years ago, their story would barely have been noticed outside Washington State; now, anybody can read it, and people all over the country and the world do just that. (When it isn’t behind a firewall, of course.)

Journalists are often very competitive and feel that if anybody else is writing about what they’re writing about, that’s probably bad for them — especially if the rival outlet is very popular. But blogging doesn’t work like that: most of the time, when it’s done well, it’s full of external links, often to original journalism. Blogs are a great way for good journalism to get noticed, instead of being buried and ignored on page B7.

4) What does a business blog offer that is not offered by other media?

Attitude, links, wit, expertise, voice… all of these things exist in other media, but they come together in the blogosphere and are often absent elsewhere.

5) In your opinion, why did the U.S. Treasury in 2009 reach out and invite well-known economics bloggers to meet with Tim Geithner, the secretary of treasury?

Treasury spends a lot of time talking to reporters. Most of the discussions take place between hacks and flacks, but a lot take place between hacks and those famous Senior Treasury Officials, including Geithner. All of those officials are political appointees, so it should hardly come as a surprise that they cultivate relationships in the media. But of course the media is bigger now than it used to be, and even after the two blogger meetings at Treasury, I’m sure that the ratio of time-spent-on-bloggers to time-spent-on-journalists is much lower than the equivalent time-spent-reading ratio among media consumers. What’s more, bloggers tend to ask deeper questions, and spend less time on insidery political horse-race issues; officials who want to grapple with substantive issues often prefer talking to smart and sophisticated bloggers.

Overall, my feeling is that if mainstream business outlets embrace the blogosphere, they’ll do well. If they shun it, however — and paywalls are one good way to do that — then they’ll have a much harder time of things.


If the student was doing a survey, why wouldn’t he/she divulge that when sending the questions?

Even if your hypothetical scenario is true, it’s highly unlikely that a studenthas the same audience and exposure as this blog, so the final result is not impacted.

Lastly, to even do away with my final assumption, what kind of crazy person does an Internet search to see what other people have said before answering a survey?

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Goldman reputation datapoint of the day

Felix Salmon
Apr 13, 2010 18:29 UTC

Roben Farzad, in his BusinessWeek cover story on Goldman Sachs, had to mention the reputation issue:

Goldman’s reputation with its clients—who must have at least $10 million to open an account—has never been better. Among the general public, however, the perception is that Goldman is the toxic epicenter of everything wrong with Wall Street.

Viniar says Goldman’s decision to explain its motives and actions during the crisis isn’t fleeting, that it is committed to changing its popular image. “We believe our franchise is as strong as it has ever been and that our clients, our people, and our shareholders are happy with our performance,” he says. “But we’re also very aware of public opinion and the backlash against Wall Street, and we’re doing our best to address it.”

But I’m not at all sure that Farzad is right when he says that Goldman’s reputation with its clients has never been better. In fact, I think that reputation took a hit when the bank went public, and has never really recovered.

Today we learn from Aaron Elstein about an interesting pair of emails from within Washington Mutual in October 2007, long before Matt Taibbi and others turned Goldman into Public Enemy Number One.

WaMu’s Todd Baker, executive vice president for corporate strategy, had been receiving pitches for a deal which would get some toxic assets off its books. He told CEO Kerry Killinger that Goldman was his first choice, with the smartest banker. Still, he added, there was a downside:

However, Goldman “is very expensive and we may have trouble getting John’s full attention…We always need to worry a little about Goldman because we need them more than they need us and the firm is run by traders.”

Killinger lost little time in vetoing the Goldman idea:

“I don’t trust Goldy on this. They are smart, but this is swimming with the sharks.”

If plugged-in bankers like Killinger were thinking that way in 2007, at this point I think most of corporate America must be wondering what the downside is of hiring Goldman’s investment bankers when the firm will always be run by traders. It’s true that a lot of Goldman’s competition has merged or disappeared. But old firms will start fighting back, and new ones will emerge. And Goldman might well learn that what it considers popularity among its clients is really just a function of their not having a lot of choice right now.


if Killinger is your definition of a “plugged in banker” I am too frightened to ask you for an example of a banker who was “out of touch.” If GS was “swimming with the sharks,” I’m afraid WaMu shareholders were bloody meat thrown off the back of the boat.

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