Goldman enters rehab

By Felix Salmon
May 3, 2010
Mihaela Lica was writing about Goldman Sachs hiring “Master of Disaster” Mark Fabiani last Tuesday, with the news that he had helped prep Lloyd Blankfein and Fabrice Tourre for their Congressional grillings. Maybe that's why those two came out of the hearings better than most of the other Goldman executives who testified.

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Mihaela Lica was writing about Goldman Sachs hiring “Master of Disaster” Mark Fabiani last Tuesday, with the news that he had helped prep Lloyd Blankfein and Fabrice Tourre for their Congressional grillings. Maybe that’s why those two came out of the hearings better than most of the other Goldman executives who testified.

But it wasn’t until this weekend, when Blankfein sat down for in-depth interviews with Fareed Zakaria and Charlie Rose, that the media in general, and the FT in particular, woke up to the new strategy and the man behind it — especially since Blankfein himself admitted that his strategy had failed:

“We’re very important but the public doesn’t see that,” said Mr. Blankfein, who said the firm has always dealt with institutional clients and so it’s remained a little aloof from the American public. Now that the S.E.C. is accusing it of fraud, that’s going to change.

“It’s a huge challenge. I have to say, it’s my deficiency. But how often have you seen me on television–on general interest news shows?” he asked.

“Never,” said Mr. Rose.

“You know something, that was a probably a mistake. But now you see that we have a lot of work to do explaining to people what it is that we do. And we’re starting from a hole,” he said.

Blankfein probably needs to work on his own presentation, but in principle this is surely a good idea: the days when Goldman’s PR could be left to the famously-supercilious Lucas van Praag are over. Blankfein is the chief communicator at Goldman, for good or ill: that’s simply not something which can be outsourced.

Goldman’s PR operation has been on the back foot ever since Matt Taibbi’s “vampire squid” article came out in June. It’s tried a couple of hires: Samuel Robinson, chief of staff to president Gary Cohn, joined the PR team last fall, and now Fabiani’s taking the Goldman shilling as well. Maybe Goldman’s most expensive spokesman (at $500 million a year in prefered-stock coupon payments) will prove to have been a little bit more effective.

But the fact is that arrogance and secrecy are in Goldman’s institutional bloodstream, and that this particular crisis can’t easily be managed away. Blankfein’s going to have to get used to bad press — and to that bad press applying serious downward pressure to his share price. It will be years, if ever, before Goldman is rehabilitated.

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This is from Yves Smith:

http://www.nakedcapitalism.com/2010/05/i ncentives-complexity-and-the-blame-game. html

• Trading and sales personnel have an obligation to “know their customers” before recommending or entering into any securities transaction

– Learn the essential facts about the customer and the customer’s orders and accounts

• All recommendations to a customer must be suitable and appropriate for the customer

• The salesperson should know as much as possible about the customer’s objectives, strategies, tolerance for risk, and the type of information the customer is relying on

• Even when a customer is making its own investment decisions, special care and judgment need to be exercised in situations such as the following:

– The customer has trouble explaining in plain language its investment strategy, objectives, or risk tolerance, or how a transaction or product fits those criteria
– The customer wants to recoup, roll, hide, or avoid losses, or evade taxes, and proposes a transaction or structure clearly intended to do so
– A customer proposes a completely atypical transaction
– The customer has a history of litigation or a record of being a “sore loser”

In criticizing GS, I have been taking their own PR about their firm seriously. I don’t think their behavior measures up in its own terms. That’s why they’re in a bind. It looks like they either avoided full disclosure, or structured a deal to avoid it. Neither of these alternatives is their proffered self-image.

Although not dealing with legality, this is similar to my criticism of Bernanke. I think he did a good job, but believe he would have done a better job just following his own earlier views. I understand the necessity for pragmatism, but criticizing people by pointing out their own views still seems fair to me.

Posted by DonthelibertDem | Report as abusive

Would be more impressive if Lloyd were willing to face tough questions from Susan Webber, Simon Johnson or Steve Randy Waldman rather than softballs from Fareed or Charlie Rose, guys who don’t have a clue what Lloyd does for a living.

Posted by xyz70 | Report as abusive

As I was listening to Lloyd Blackfein’s seemingly sincere apologia during the Charlie Rose interview, it dawned on me that there were some interesting signposts of smarmy, spurious misdirection.

For example: Asked by Charlie Rose if Goldman Sachs should be a partnership (Rose pursuing one argument in M.Lewis’ The Big Short), Blankfein answered that Goldman Sachs already behaved as a partnership: the firm had 400 named “partners.” Moreover, it made decisions as a team. Obfuscation aside, this is not even close to the definition of a partnership. Goldman does not require its 400 “partners” to pitch in from their wallets in order to cover losses. And none of these “partners” personally guarantee any of the firm’s lease contracts, derivative contracts, contingent commitments or any other such liabilities.

Then, at the end of the Rose interview, Blankfein was asked what Goldman needed to do to restore Goldman’s reputation. Blankfein’s answer was instructive. With a “whatever” swift wave of the hand, he agreed that the firm need to review “internal controls.” Then he spent the rest of the interview complaining that the U.S. public did not understand the important function that Goldman Sachs served in the greater economy.

Blankfein repeatedly asserted that the most important task confronting Goldman was to inform the American public on how important the work that Goldman Sachs does.

So Blankfein, the J. Aron trader, is telling us that he now needs Madison Avenue to make his sale.

Internally, if you give employees the title of partner, you transform Goldman Sachs into a partnership.

Externally, if you spend enough advertising dollars to convince the American public you are doing “god’s work,” then they (and your customers and the government) will believe that you are doing god’s work. Classic Pull Demand Marketing Strategy.

Good luck, Fabiani.

I assume that with the coming media warm and fuzzy Goldman Sachs media blitz, we will see some Goldman bankers with their rolled-up white french cuffs holding Bernese mountain dog puppies, and then see others standing besides happy farmers on Iowa tractors, and then still others holding up soup ladles at homeless kitchens.

Hold your nose, but watch. The production values are sure to be brilliant.

Posted by AABender1 | Report as abusive

I fully understand Buffett’s position in re Abacus and I find it to be a load of hockum. (See the words I employ to keep it clean on this blog?)

Buffett looks at Goldman exactly the same way that Blankfein looks at Goldman, through a trading lens. From a trading lens, they did nothing wrong. You can take whatever position you want and everybody is an adult who must know what they are buying. Fine. This logic is rock-solid if you are just trading in the market.

The problem is that Goldman was not and is not simply a trading house. They are an underwriter and agent. They wore their underwriter hat when they created these securities and when they sold these securities. There absolutely are responsibilities when you do that.

Heavens, why would there be salesmen marching around with pitchbooks if all they are doing is trading on the open market? Baloney, this was a Goldman Sachs branded product.

By this analogy, it must be okay for an IPO underwriter to short the newly issued stock while they take a company public. After all, buyers can study the underlying company if they want.

This is a remarkably low ethical bar Buffett is trying to establish.

Posted by DanHess | Report as abusive

For those with less than 60 minutes or a kidney for PBS to waste here’s every Charlie Rose Show that ever was, in one 10-second nutshell:

Charlie: I’m gonna fix you with a cockeyed reptilian stare that’s supposed to indicate that I know what I’m talking about. You’re supposed to act like you haven’t noticed I’m three sheets to the wind.

Guest: Anything you say, Charlie!

Charlie: Likewise!

Posted by HBC | Report as abusive

I watched Fareed’s interview for awhile on Sunday, and he was asking the same standard questions Blankfein and his PR people could anticipate. Fareed is an extremely good writer on foreign policy, really illuminates the subject. It appears Fabiani is doing a very good job of getting Blankfein in front of interviewers who do not know the subject in any depth, and are therefore unable to throw Blankfein off his talking points.

Somebody needs to do a bait and switch, invite Blankfein to an interview with somebody like Wolf Blitzer, then bring in an expert questioner to do most of the questioning.

The really good interviewers know how to throw somebody off their talking points, and get something new. Russert could do that when it came to politics, as can Bob Schieffer. But Russert and his staff had really done their homework, and really knew their topic.

It would be interesting to get Blankfein in a room with Faber for about an hour. The quick interview Faber had with him after the Senate hearings scored some points.

For instance, talking point #1 is that synthetic CDO’s are the same as a farmer forward contracting his corn crop, locking in a price on both his crop and his inputs, buying crop insurance, giving himself the best chance at profitability, while avoiding a crippling financial disaster. The overwhelming majority of synthetic CDO’s are pure gambling, pure casino. There is a huge difference there. Faber understands that, and has questioned openly the utility of syn’s in the marketplace.

I just use Faber as an example, there are quite a few other potential interviewers out there who could do the same.

Posted by randymiller | Report as abusive

Dan Hess, there’s a reason why the flipbooks for structured derivatives have WE ARE NOT FIDUCIARIES in 1000 pt type everywhere. It’s because the “vendor” of the “security” in question is in ALL cases a counterparty from the outset (whether or not they choose to back the risk off with other “customers”) Salesmen of all types of derivative products march around with flip books just like the one for ABACUS — how else are they supposed to summarize what is obviously a very complicated structure? A flip book (not a pitch by any means) doesn’t make them fiduciaries, or 100% of all structured derivatives salesmen would be equally guilty of fraud for selling a zero-sum bet as if it were a security (it isn’t). A zero-sum swap of risk simply has nothing in common with an IPO of equity except the most superficial property of “price risk.”. Even if the general public never understands this, it is certain that ACA and IKB did.

Posted by AEinCH | Report as abusive

What is so difficult to understand about the different roles and responsibilities GS has as an adviser (e.g. in an IPO), a market maker (pure counterparty with no fiduciary responsibility), an asset manager (full fiduciary responsibility) and a proprietary trader? These functions are separate, with separate staff not knowing at any given time what the others’ position is (in theory even separated by Chinese Walls – but even if the latter are not enforced, these guys do not normally talk to each other before entering into transactions)?

Posted by Abulili | Report as abusive

Goldman is not a market maker but merely a money transfer machine. Not only is there no social value in weakening or destroying take over targets, but wealth “creation” in the form of merely transferring money away from others is not creating anything, but instead is destroying the underlying economy.

Posted by Anonmucker | Report as abusive

@AEinCH –

If Goldman merely was bringing a buyer and seller together, there would be no problem.

Goldman did not merely act as a market maker. These financial instruments were designed by Paulson to fail and Goldman peddled these instruments while failing to disclose the very central role of Paulson in designing the CDO to fail. That is failure to disclose a very material fact and therefore it is fraud. A jury is likely to agree.

Posted by DanHess | Report as abusive

Design was in this case shared between Paulson and ACA, the latter retaining final word on all components. But design had nothing to do with it. Any similar portfolio would have failed. “Designed to fail” is completely irrelevant to the outcome. Moreover, no one could have ‘designed’ a zero sum bet without consulting opposing bidders. How would any such thing even be priced? I can’t very well bet on the superbowl without consulting a bookie willing to bet against me. One of GS’ clients was going to lose the bet, regardless of who designed it. By your logic GS is guilty for facilitating any such zero-sum transaction.
re: jury trial — I’m sure a jury will have a hard time distinguishing one shark from another, especially if they review internal ACA correspondence on the structure and taped lines. But it’s telling the Feds asked for a civil suit in order to dodge a better informed arbiter. A criminal defendant could choose a securities judge versed in trading norms.

Anonmucker, you’re right about no wealth being created by this thing. It was a straight transfer of money from one bettor to another. That doesn’t mean it was without social benefit. Had ACA not invested in the phantom mortgages pitched by GS, they might instead have underwritten NEW mortgages, on houses that would now likely be in default. Critics of synthetics seem to think that promoting bad bond issues is somehow more moral than betting against them. You have it backwards.

Posted by AEinCH | Report as abusive

@AEinCH —

Do you work for Goldman Sachs? It is unfortunate that you apparently don’t have the courage to identify yourself because it seems you have a horse in this race.

“a securities judge versed in trading norms” — wouldn’t that be terrific. Is “trading norms” our standard now? These “trading norms” nclude all manner of foul behavior. Just because it is a “norm” doesn’t make it either legal or right.

The legality has nothing to with whether there was a zero sum game. The legality has to do with whether Goldman disclosed properly and they did not. They represented that the CDO was assembled by an independent third party, ACA. They did not disclose Paulson’s major role in the selection even when IKB asked for independent selection. That was a material misrepresentation. It is illegal to make a material misrepresentation in the sale of a security. Simple. Would IKB and ABN Amro have done the deal if Goldman had been truthful about the assemblage of the CDO? Probably not.

This is different from a typical arms length transaction because in the typical blind deal you aren’t disclosing. If you do disclose, you have to do so truthfully and not make misrepresentations.

Posted by DanHess | Report as abusive

DanHess, the behavior isn’t foul just because you say so. It is indeed normal for two sophisticated speculators to try to make money off one another, and for one of them to lose. A synthetic CDO is not a security in the same sense as a bond, precisely because it requires a short seller to even exist. Personally I think the nomenclature of “conventional” securities mkts has muddied the debate greatly.
I do have a stake in the govt not pursuing harassing lawsuits against trading shops and exploiting the public’s ignorance of professional trading norms. What are your interests here? How could you possibly have been hurt by this trade? What is the public interest in upholding some bogus disclosure standard in a pros-only venue like hi-stakes MBS derivs mkts, getting inbetween hedgies A and B? It’s not my fight, nor is it yours.

Posted by AEinCH | Report as abusive

@AEinCH

The public doesn’t stop caring just because YOU say so.

Make money ‘off’ one another? What is the public interest? The public took the risk. That is what is the crime is here and why there needs to be reform. Sadly, regulation isn’t in place to protect the little guys, so the big guys are actually making money off the public! The big guys get huge loans of taxpayer money at virtually no interest to give loans to the public for huge interest. Hell yes the public should care.

If it truly had been a few people playing high risk stakes WITH THEIR OWN private funds, then yes, who the hell are we to care. But that was not the case. There are depressed people, people who lost their homes, people who lost their future retirement funds, marriages shattered, etc. while the fat cats on wall street get richer. So yes the public should care.

Had the speculation of this type not falsely driven housing start ups to create the market bubble, had brokers not deliberatly pushed high risk loans and banks not be complicit, then yes I guess the public shouldn’t care.

Being there was no proper regulation of the crap with fancy names that are high risk trades, such as ‘synthetic’ CDO’s, then let the SEC look further to see how a Company can be giving huge bonuses and commissions for having lost money in the deals, as GS states they did. let the public see just how high a risk their investors were willing to allow. Let their shareholders hear them roar GS has no fiduciary duties. The shareholders and the public should care.

But as for fraud, withholding material information and misleading is not allowed per Rule 10b-5 … having omitted facts and misleading of Paulson’s role seems obvious. I just hope they delve further and deeper and into more companies and rating agencies to find out who was complcit in duping other investor, and the public, in these ridiculous trades.

Some want a pound of flesh, some want an ounce of blood, but everyone should care enough to ensure this doesn’t keep happening and that the world’s economy isn’t totally crushed by the so-called ‘market makers’ and their folly.

Posted by hsvkitty | Report as abusive

@AEinCH –

Personally as an investor I would like to swim in clean markets and not have everyone relieving themselves in the pool.

On behalf of the world, this type of transaction was at the core of the damage to the financial system, and a substantial piece of the global downturn.

Senate’s Goldman Probe Shows Toxic Magnification
http://online.wsj.com/article/SB10001424 052748703969204575220300651236446.html

If this doesn’t upset you, we have nothing to say to each other.

Posted by DanHess | Report as abusive

DanHess, unless you’re at a hedge fund or trading a structured credit book somewhere, you arent in these waters at all. This and all other zero-sum transaction destroyed no value because they were ZERO SUM.

It does bother me that idiots chose to take stupid bets on US housing (including those most responsible, home buyers in over their heads and the governments that encouraged it). What bothers me the most is the inversion of cause and effect here: GS simply didn’t cause the housing bubble. If anything, it was a class of investors who loaned money too cheaply that did cause the bubble, and who are responsible for its collapse. All derivative problems are by definition peripheral to this simple fact.

Posted by AEinCH | Report as abusive

“The big guys get huge loans of taxpayer money at virtually no interest to give loans to the public for huge interest. Hell yes the public should care.”

The public should be outraged at government handouts, not randomly outraged at pre-handout business practices that hurt no one but yield hogging morons. The arms-length nature of the deals were well advertised in all deal circulars. The people at ACA and IKB are also Wall Street fat cats — IKB’s US traders were in fact based on Wall Street, and their investment vehicle in some Caribbean tax haven.

Posted by AEinCH | Report as abusive

AEinCH,

Since you have apparently been living under a rock these past several years lets go over things real slow…

* Wall Street securitizations were at the center of the flow of funds into housing
* Zero sum derivatives stuck a number of firms with gargantuan losses leaving them in need of massive taxpayer bailouts.
* Cheap money? Wall Street borrows massively from the Fed at charity interest rates and floods the market with liquidity
* Many Wall Street firms including Goldman were stuck with garbage on their balance sheets — yes mortgage garbage, which they did deal in, in massive amounts. The Fed lovingly used Q.E. to pay far above market rates for this detritus to bail them out

As an American, I and at probably 100 million others who are paying attention are quite unhappy that uncle Sam’s balance sheet has been trashed. Zero sum? Only under your rock.

Posted by DanHess | Report as abusive

For what it’s worth, I think DanHess is much closer to being right here than AEinCH is, and that making assumptions about which of Felix’s readers swims in what kind of waters is not a wise move at all.

Thanks for the link AE, which was helpful, although I don’t agree that it bolsters your argument that the SEC case smacks of baloney. The issue isn’t that any widows or orphans were directly hurt, or involved somehow in the trade, or how sophisticated anyone was. It’s a disclosure issue at the core. The law forbids rich and poor alike to sleep under bridges, and it forbids the fancypants and the scrappy alike from taking certain kinds of actions without making their role clear to all involved.

And ultimately down the line THAT is what best protects the widows, orphans, small fish and swimmers in kiddie pools.

Posted by SelenesMom | Report as abusive

Uhhh.. as a matter of fact, we don’t know if widows and orphans got hurt in the Abacus deal for sure. WE do know, according to the Propublica article on Magnetar, that Magnetar burned Thrivent financial for Lutherans to the tune of 10 million dollars. Thrivent, as a matter of fact, does help widows, orphans, and other people who are down on their luck, and Thrivent getting burned means there is less money for those people.

IKB and RBS getting burned on this Abacus deal, and subsequent taxpayer bailouts of those firms, means the British and German governments will have less money to spend on widows and orphans because John Paulson got richer.

Many of the players on the losing side of syn bets were pension funds.

One could certainly argue that pension funds and banks and Thrivent should not have been betting in those bucket shops such as Abacus. Remember that in 2007, a lot of fund managers were under a lot of pressure to maximize their earnings anyway they could. Everybody down to the smallest 401K holder was moving some of their money to funds that were getting 20 percent returns, and that meant they were moving that money AWAY from somebody who was more conservative. Some of those guys making 20 percent or more were betting in bucket shops, but that small 401K holder had no idea that was happening. And some pensioner in Minneapolis had no idea his future was being bet on Abacus.

Zero sum game? Technically you could say that, but the reality is that some relatively innocent people had their money bet for them, and had no idea that was happening. And a lot of them lost big time.

Should syn’s be illegal? Yes, except in Vegas, where people have to bet with their own money.

Posted by randymiller | Report as abusive

Beyond the dull specter of Charlie Rose infotainment, there’s Bill Moyers:

http://www.pbs.org/moyers/journal/042320 10/transcript4.html

One of the reasons the UK, Germany, RBS & IKB are still likely to sue is that widows, pensioners, orphans and incorporated public communities were hit indeed by Abacus and the dozens of similar scams pulled by Goldman et al.

So AE can stuff that in his pipe and smoke it along with ye olde red herring that a subprime mortgage crisis was impelled by overoptimistic homebuyers or the Federal Government.

This would be suitable to AE’s reading level:
http://money.howstuffworks.com/mortgage- backed-security.htm/printable

Right until they no longer could, Wall Street kept clamoring for more and more subprime mortgages, more of them than there were actual homes for sale in the United States. Such unstable paper was the only remotely tangible element lending a veneer of credence to all the Trillions “worth” of toxic fluff they repackaged and re-rated as bona fide MBS/CDO investment material over the past several years.

Screwing everybody else blind, rules be damned, isn’t a gentleman’s game but it’s Goldman’s business model. The fact that they’re not alone in daily commission of fraud makes them no less culpable.

It is a bare-faced lie that homebuyers swarmed the banks and arm-twisted them into lending money they shouldn’t have. It’s a terribly primitive lie, but Goldman and the other culprits are betting it’s the sort of lie only Americans can love, and will chauvinistically love to death. Then they’d only have all the rest of the world to fend off.

Goldman is wrong on so many counts, how adeptly this wrong is righted will have significant bearing on how much more bleeding they can reasonably be expected to undergo. A slap on the wrist simply isn’t going to do the trick.

For all the damage they’ve wrought upon humanity over the last 90 years, GS and every similar predator corporation deserve to be not simply dismantled, but summarily laid to waste. Spin control may delay this event, but won’t put it off forever. And they know it.

Posted by HBC | Report as abusive

Selenesmom, the reason I’m comfortable assuming that DanHess doesn’t trade synthetic CDOsis because he persists in the fiction that they are securities at the core of the housing bubble. If anything they helped pop the bubble but in general they are a sideshow. He (and you) keep alluding to some law on US securities books requiring arms length counterparties to disclose all kinds of irrelevant information to each other as if it were relevant. If you ever traded derivatives (as I have for north of 15 years) you would understand why who designed the product is fundamentally irrelevant. You also seem to think that widows and orphans buy CDOs. They don’t. They’re no more exposed to this deal than GS investors (which needless to say counts many pensions among its late suffering shareholders.)
In case I wasn’t clear: Im against all bailouts; the decision by German (and US) authorities to pay taxpayer money to banks was a real mistake. That mistake does not entitle us to hunt for scapegoats among the very few winners in tangent markets. I don’t blame GS for the US government giving them your money.
GS detractors have yet to explain how Goldman’s shorting housing securities helped cause the bubble to inflate. Common sense tells us it should have had the opposite effect. And of course all synthetic deals are zero sum, whereas trillions in capital losses from real estate are not. If you think GS caused a significant portion of those capital losses (in fact phantom losses of ephemeral RE value) you are kidding yourself.

Posted by AEinCH | Report as abusive

“The issue isn’t that any widows or orphans were directly hurt, or involved somehow in the trade, or how sophisticated anyone was. It’s a disclosure issue at the core.”
“What is relevant disclosure” is the legal issue at stake, and in this context the sophistication of ACA/IKB and market norms are surely material. The US Supreme Ct. defined ‘material’ in other 10-b cases as follows:
“an omitted fact is material if there is a substantial likelihood that its disclosure would have been considered significant by a reasonable investor”
No one has shown that Paulson’s role in proposing trade elements would have thus been considered significant to a reasonable synthetic CDO investor. That the SEC is requesting a jury trial speaks to their aim to dilute this stringent test of materiality well established in case law. Laypersons are simply less qualified to determine materiality, and the SEC knows it.
What is uncontested are the many disclaimers littering the trade documentation, explicitly stating that GS and its customers might be betting against the structure. Whose magic wand has caused these straightforward disclosures -which embrace all apparent misgivings over Paulson’s role and GS’ positioning – to disappear from the record?
DanHess, I agree that WS securitizations are at the heart of flow into housing. But agencies were the ones doing most of the securitizing, and have also absorbed the lions share of federal largesse. Shouldn’t your ire be directed there? . Real value was also destroyed only to the extent that real bonds were issued on real home mortgages, and synthetics are a sideshow to this practice. Zero-sum transactions did not cause the bulk of Wall Street failures, but capital losses following decline in real estate value, impacting many trillions of agency securitizations. It is wrong to punish those who chose to bet against the folly of US government-sponsored massively leveraged real estate speculation. And as insurance sellers, ACA et al are more obviously to blame for irresponsible loan issues than *any party* on the short side of those loans. It also appears that much of what fuels this anti-GS crusade is a broad resentment about government intervention and a hostility to banking that has little to do with the facts of this specific case.

Posted by AEinCH | Report as abusive

HBC, as usual you make such a good point here:

“It is a bare-faced lie that homebuyers swarmed the banks and arm-twisted them into lending money they shouldn’t have. It’s a terribly primitive lie, but Goldman and the other culprits are betting it’s the sort of lie only Americans can love, and will chauvinistically love to death. Then they’d only have all the rest of the world to fend off.”

GS and others have tried to deflect the damage by blaming others, but this one one is such a red herring, it’s laughable.

Posted by hsvkitty | Report as abusive

@AEinCH hmmm you are opinionated but simply trying to deflect from the issues doesn’t make the case, although it can confuse and distract. Something GS is trying desperately to do as well.

The deal was not arms length, unless you mean as they had one hand pinched over their nose, whilst the other was outstretched to hand out the garbage. (Charlie Rose has nothing on me…)

‘The highly complex product’ that none of us are allowed to understand or our heads will blow up, was in fact crap which was made to be highly complex and had to be shoveled out quickly because it was crap. The more the crap the more the risk, the higher the yield. See even us dummies get it.

The ‘independent trader’ who was supposed to be independent in making the list of crap (oops I mean synthetic CDOs) to choose from was … Paulson? 10-b, omitted fact, Material .

Paulson was referenced as the transaction sponsor, independent third party but not as the party going short. 10-b, misleading, Material .

Being GS did not have a third party pick the bonds to choose from, allowed the person who was paying them to take on the middleman “market maker “position to stuff the prospectus with the most volatile junk, persuaded (somehow) a rating agent to dub said junky sub-sub-prime mortage bonds AAA, knew Paulson was short, Paulson initiated the transaction with Goldman’s and rejected ACA’s additions the profile. So to that end, ACA seems to NOT have final say in the cherry picked package. This all sounds very relevant for a client to know, even if they are ‘sophisticated’.

10-b, omitting facts, misleading, Material

Posted by hsvkitty | Report as abusive

HBC, thanks for that Moyers link – really good for a laugh, esp. when Moyers admits to knowing nothing about the issue, that it “makes him dizzy”. Good thing he’s asking all the questions, eh? So let’s look at what William K. Black -expert regulator- has to say.
“the complaint actually focuses on lying to investors. So it’s a very traditional securities fraud complaint”
Wrong on both counts! The complaint doesn’t say Goldman lied to investors. It accuses them of material omissions and failure to disclose key facts. And there is nothing traditional about synthetic CDOs, thus nothing traditional about the standards of disclosure being invoked by the SEC. Since these are at the heart of the case, Black’s statement is wrong. Like so many here, he doesn’t seem to understand the difference between a bilateral derivative and a bond, the fiduciary duties of GS (none), nor what “select” means (final approval of product structure and terms, including those negotiated with an adverse interest.)
“[Paulson] was betting against something that he knew was going to blow up. ”
This is fascinating and describes the mindset of many GS/Paulson critics. Because Paulson was right, he is alleged by this prominent regulator to be endowed with psychic powers. Black’s theory of complicity hinges too on GS *knowing* that Paulson would be correct, ie Fabulous Fab also being psychic. Without which we would have no element of wrongdoing, since **opinions of fair value however adverse do not affect asset quality**, the sole determinant here of materiality to investors. Scienter in this case hinges on GS knowing things it simply could not have known.

In sum, lawyer Black is ignoring the many overt disclaimers within the offering, the precedents in case law concerning materiality, fiduciary responsibility of swap participants, scienter etc in his mad dash to convict based on the theory that paulson was psychic and GS knew he was psychic. Brilliant.

hsvkitty, ACA collected a huge sum of money for picking the portfolio. Why are they not being sued for fraud?

Posted by AEinCH | Report as abusive

hsvkitty 3 questions for you:

Does shorting baskets of CDOs promote bad lending or do the opposite?

Does shorting baskets of CDOs inflate real estate assets or do the opposite?

We probably agree that a lot of people lent money they shouldn’t have lent. In this case, is this role most approximated by a.)Goldman, B.) Paulson or C.) ACA/IKB?

Posted by AEinCH | Report as abusive

AE, if you are really “in CH” then you might not have a good window into the housing bubble, or, if you prefer, “bubble.”

I can look out my window and wave at it. While I’m doing that, I will remind you that many of your interlocutors are at least close to playing in your ballpark. Who cares if DanHess doesn’t actually trade CDO’s? Let’s agree that if whatever your argument is, it doesn’t make sense to a first-year MBA student at, oh, NYU — then it needs some wordsmithing at the very least.

The reason all these terrible loans got offered to people in my neighborhood, who may or may not have been “predatory” for accepting them, is that the lenders weren’t stuck with the results of the bad lending and there were ultimately IKB’s and the like thirsting to suck the bad loans off.

The best way to figure out where is the problem, how to fix it, and whose fault, is to shine the sunlight on it.

Posted by SelenesMom | Report as abusive

SelenesMom, I like to think I have an ok window on the bubble to the extent it pertains to GS’ involvement in it. Goldman didn’t issue mortgage debt or conduct predatory lending, so i don’t see the relevance here. You’ve hit the nail on the head by noting that IKB (indirectly) did through a long chain of intermediaries. No one here has explained how GS’ receipt of taxpayer money is relevant to the facts of this case. It’s pretty obvious they have a huge axe to grind because GS benefitted in some minor way from their misery. But this doesnt mean that GS caused much less is criminally culpable for any of their problems, which can be traced much more to the IKBs of the world (and banks/funds just like it, some of which I can see very well from my window, or from under my rock as Dan so charmingly put it.)

Posted by AEinCH | Report as abusive

AEinCH Although the SEC is going for a civil suit, perhaps there will be criminal charges. That is under investigation.

There is criminal culpability among these firms, not just Goldman, and for some reason the regulators are hesitating. Probably because the firms are wiser now and hide everything and then claim when something is found… “…the issue was the result of an inadvertent, manual processing error.”

How does a highly sophisticated Company not catch that huge error even after the fact? This one firm and a few other deals are being scrutinized, and hopefully will be successful and lead to more investigation of all the firms. Why do you think they were begging for Goldman to settle?

These huge firms can do bait and switch and hand over gazillions of documents and while the regulators are looking at the truck loads of paper handed over, the good stuff is shredded, emails and data erased and ‘lost’. Does that sound familiar?

You are defending Goldman using their logic, that everyone was doing it, so why pick on one. Well there will be more and hopefully soon.

NB: As a Canadian I have no axe to grind about bailouts… so there goes some your obvious evidence. Speaking of evidence, yours has nothing to do with the case or 10b. You forget the court of public opinion is now world wide, as are some interests in this case.

Posted by hsvkitty | Report as abusive

And about Paulson’s psychic powers… if Paulson picks the bonds, is well aware some of the institutions are selling subprimes by shadey brokers (which may well be, being he picked them for a reason) or perhaps even ‘commissioned’ them through some affiliation (which is speculative but for the sake of argument let’s just say that is entirely possible) is well aware that some others have been sold off as junk hot potato 38 times and is already volatile, then also cherry pick until rating agencies give a higher ‘standard’ then it should have.

Paulson gets to ‘help’ GS make that meet standards by placing enough higher rated bonds in to cram through an AAA rating (paid for by GS, who was pressuring them) and also vetoes those that are high rated and chosen by ACA even though he is not only the one who picked them but also shorting, then Paulson doesn’t need psychic powers. He owns the game while GS holds the bet (and seems to have been in on the game, not just a middleman)

Although Paulson wrote a 6 page letter to it’s investors that it was ‘clean’ because it didn’t receive a wells notice, he doesn’t sound clean and regulations should ensure his ilk bilk no more. Nothing short of criminal charges will stop game makers from continuing their need for greed.

Fannie Mae and Freddie Mac are more culpable then most for their part in the bubble. I agree they should be scrutinized and take their huge hunk of the blame.

Posted by hsvkitty | Report as abusive

hsvkitty, I’m not defending Goldman by saying “everyone was doing it.’ I’m saying there is no ‘it.’ The fraud of which Goldman is accused had no influence on the creation or destruction of wealth, the real estate bubble or anything of consequence. It’s “victims” were the most well informed players in the market, who were far more responsible for inflating the real estate bubble by dumping cheap insurance onto the market like so much gasoline. ACA should be in the dock, not Goldman. If you believe Paulson selected the portfolio, you should agree with this at least.

I am well aware of the case, having read the complaint, the Wells responses by Goldman, and much of the case law they reference. i recommend you do the same.

Posted by AEinCH | Report as abusive

AEinCH

I could care less about rich people betting their own money. I do care about investors being duped and the law. I agree that greed fuels Wallstreet and those associated with it.

However, you defend GS as being innocent because they didn’t create or prick the bubble. No one has said they did in this conversation. (although the bubble and collapse culminated from just such transactions)

They aren’t being charged with that, however they were hauled into the senate to discuss it and did rather poorly convincing us they were anything but unethical and may well have been more responsible then we know, being there were many more transactions like it.

The ‘sophisticated’ buyer beware defense is nonsense, when it pertains to being fed false information. If the mafia dupes sophisticated rubes, they can still be charged.

I think you should read my comments on 10b rule above. I am not defending ACA and so far, you haven’t made a case for defending Goldman.

Posted by hsvkitty | Report as abusive

Come on people, of course there is an “it,” or else why would we be bothering with this conversation at all. I doubt that most posters here are laboring under the illusion that whatever “it” may be, only Goldman did “it,” either.

Speaking only for myself, I have the grandiose aim of understanding what has gone wrong (I’m starting from the premise that something has, so if you don’t agree, we won’t get very far) and what should be done about it, by whom.

Back in the day, I graduated from business school and it looked like with a few blips ironed out (a few Drexel-sized blips) we’d all be rolling in the clover while also conveniently promoting free markets, democracy and meritocracy. This has not happened. Ultimately, I’d like to better understand why. Of course it’s unlikely that Goldman all by its lonesome is the sole culprit, but the more I understand Abacus, the better I can get to the bottom of why we are not, in fact, visibly any closer to the promised land.

AE, you’re free to tell me that I am a goofball for having ever believed in it, but there was a time and place not so long ago when the sentiments I have expressed were well within the mainstream.

Posted by SelenesMom | Report as abusive

Aside from the back-and-forth between Government Sachs apologist AE, and the many GS detractors, the article itself simply said the Goldman needed some better PR…. WELL, soon they’ll have the entire GOP establishment on their side as the election season heats up. So help is on the way.
I would like to construct a synthetic CDO. Inside I place my bet that nothing is going to change, and in a years time, it’ll all blow over. IF (and that’s a BIG if) anyone goes to jail it’ll only be some small fry, and then everything will be back to normal. Government Sachs will escape unscathed, and those widows and orphans (who didn’t directly invest in this wager) will still be widows and orphans – albeit much worse off…. Any takers?

Posted by edgyinchina | Report as abusive

edgyinchina

Heck no, and if you live in China your money might be more valuable by then.

One thing about debt is it seems to always come back and bite you in the rear and these guys bet on it…

Want to take bets on some CDS on Canada? NO? That’s ok, you can’t anyway! (yet, knock on wood we stay sane)

Posted by hsvkitty | Report as abusive

“I could care less about rich people betting their own money.”

Then you don’t care about this case. Yet here we are chatting about it.

“However, you defend GS as being innocent because they didn’t create or prick the bubble”

No I specifically said that their broader role in the crisis is irrelevant to the merits of this case. This broader role has been alluded to with ref to this case on this blog more times than I can count, including many times by you.

“The ’sophisticated’ buyer beware defense is nonsense, when it pertains to being fed false information”

And if you read the complaint carefully, nothing the investor (ACA) was fed was false. I keep asking you whether you thought ACA was guilty of fraud for receiving money to design a portfolio you say they didnt design. Tellingly you have dodged me on this. If ACA was fed false information (they didnt design the CDO) then they shouldn’t have branded the CDO as if they had and received a fee for doing so.

I have read your comments on 10b, they are addressed in the Wells replies. Your quoting the law over and over doesn’t inform us how this broad statute has been interpreted by the courts. 10b demands a very high standard of materiality, established by a stack of case law incl. the US Supreme Court case I quoted, that you haven’t bothered to show. Read the GS Wells reply and its references.

SelenesMom, the “it” in this case, and this case alone, is a big nothing. Neither of us is contesting the fact of widespread incompetence, fraud, and irresponsibility permeating the mortgage market for years. We may not agree on how much Wall Street (incl. Euro fund managers) is to blame versus average in-over-their head speculators encouraged by federal tax policy. We might even disagree as to the social utlility of synthetic CDOs. Luckily, none of this is on trial here. The matter at law is a very specific deal where the materiality of undisclosed information is sufficient to support a charge of ‘fraud’. I believe that this view is inconsistent with market practices, the concept of a mortgage derivative, the professional status of the ‘defrauded’ party, and quite a bit of case law.

Posted by AEinCH | Report as abusive

OMG… you are deflecting… obviously a lawyer… I am not on a jury to be duped. I hope they unearth and FURTHER CHARGE criminally those who were criminally responsible, from WHATEVER firm that may be.

Social utility? of synthetic CDOs??? Dare you even say such a thing about such a mindless piece of garbage as synthetic CDOs AKA crack to greedy hedge fund investors is all it is… fluff. A non entity that people bet on with no regard for any social consequence. You truly sound like you are one of them

Dear lord if there is not financial reform to curb such misguided thinking, then the cycle will continue and you can be the lawyer at the end of the street who is the cartoon figure pulling money out of his pocket and burning it to keep warm. See you in the funny papers .. if the presses still run.

I don’t want to chat with you. I feel a little dirty for having been sucked into the ‘conversation’ with you.
I reiterate, If the mafia dupes ‘sophisticated’ rubes, (or professionals) they can still be charged.

Posted by hsvkitty | Report as abusive

“I don’t want to chat with you”

And yet here you are chatting away! Not caring, yet caring. Not chatting and chatting at the same time.

I’m truly sorry for my “lawyer’s” take on “securities law” – I don’t blame you for feeling dirty afterwards. It’s a dirty business. So rather than non-chatting so non-passionately on the topic, why not ignore it, as I recommended to Dan above? The suckiness of CDOs has nothing to do with GS defrauding ACA; why then are you harping on it? You told us you didn’t care.

It sounds like you don’t like funds or banks speculating in fluff, yet you’re using this intramural squabble as an excuse to indemnify one crackhead/speculator at the direct expense of another.

I don’t think we really disagree here, miss kitty. I am like you, *solidly against* buyers of fluff, most especially fluffy MBSes. Funds like ACA deserve their fate. The “sellers” of the fluff components, let’s not forget, were not originally hedgies like Paulson… but millions of high-risk leveraged homeowners – slot jockeys in the nation’s real estate casino, the mountain of fluff from which all other fluff flowed (or “derived” in sleazy lawyer jargon).

Gambling is bad, especially gambling your net worth that your new florida condo is a good investment.

Posted by AEinCH | Report as abusive

I believe that Goldman strategy was for a long time a Pump and Dump scheme for everything they sold using fraud and connections in D.C. to allow them to continue .
We have no chance , it is clear to me that clients are not equal and the small guy is nothing to them but a WIDOW OR AN ORPHAN so much for DOING GOD’S WORK . What a joke and they can keep an innocent face in Washington.
WE ARE THE PROBLEM FOR ALLOWING OUR “REPRESENTATIVES” ,
PARTICIPATE IN A GAME ON FOOLING ” WIDOWS AND ORPHANS”

Posted by fno | Report as abusive