Opinion

Felix Salmon

Goldman agrees to carry on as usual

By Felix Salmon
July 15, 2010

My favorite part of the SEC settlement with Goldman Sachs is the bit where Goldman agrees to “a permanent injunction from violations of Section 17(a) of the Securities Act of 1933″. Well, that’s reassuring, knowing that from now on Goldman has promised not to break the law. Goldman has also consented to an agreement that when it puts together new mortgage securities, it’ll run any prospectuses or term sheets by its legal or compliance departments. As if it wasn’t doing that already. And there’s lots more like that: people on the mortgage desk have to attend training seminars on disclosure! Goldman “shall provide for appropriate record keeping”! And so on and so forth.

Meanwhile, the closest thing to an admission of wrongdoing coming from Goldman is this:

It was a mistake for the Goldman marketing materials to state that the reference portfolio was “selected by” ACA Management LLC without disclosing the role of Paulson & Co. Inc in the portfolio selection process and that Paulson’s economic interests were adverse to CDO investors. Goldman regrets that the marketing materials did not contain that disclosure.

This doesn’t even rise to the level of an apology: it’s just a “regret”. Meanwhile, Goldman will be more than happy to wire $150 million to IKB and $100 million to RBS, as detailed in the proposed judgment. (Technically the judgment is contingent on being approved by the New York judge, but that’s just a formality.) As a way of getting out from under this suit, it would be cheap at twice the price.

The only bit of possible embarrassment still left for Goldman is the litigation against Fabrice Tourre, which is ongoing. I find that peculiar, since Tourre was pretty junior, and the people responsible for him behaving correctly all seem to be home safe. I’m not sure what the SEC thinks it might achieve with continued litigation against Tourre, or whether Goldman now feels that it can safely hang the poor chap out to dry. But this story has always been about Goldman’s actions, not Tourre’s. And it would be unfair, to say the least, if Tourre bore the brunt of the punishment, while Goldman gets away with little more than writing a check which barely makes a dent in its vast cash pile.

Comments
30 comments so far | RSS Comments RSS

Perhaps this was all Chicago politics. Grip Goldman firmly in the family jewels until FinReg gets through and then release, smile broadly and go about your business.

Posted by DanHess | Report as abusive
 

Goldman can’t very well agree that they were breaking the law when they weren’t. Their admissions seem thin because the case was always thin. “record settlement” or not, this is a great day to be a Goldman shareholder.

Posted by AEinCH | Report as abusive
 

I would hope that things would change, and people could trust these companies, but I doubt that we will see much change, as the same people are still running the company, and still putting all the politicians in their pocket. Oh well, more money for the coffers.

Posted by fred5407 | Report as abusive
 

Well, I just found out what happened to my IndyMac Conventional Loan from 2006. It was unilaterally turned into a sub prime loan and sent into the Goldman Sachs pool. They may jumping for joy… But it is at my expense. And, I’m mad as heck and I’m not going to take it any more.

So, I filed a federal suit in LA in pro se.
Where is Tony Robbins… when I need him?

You would think there would be ONE law firm capable of defending an innocent third party. Oh… and that wouldn’t be Goldman Sachs.

Thanks for the info.

Weston

Posted by weston | Report as abusive
 

Poor reporting.

You missed the clause where Goldman agrees that God will chair the risk committee as well continuing in his previous role of Chief Investment Officer.

Posted by ErnieD | Report as abusive
 

Another blatant case of U.S. government in bed with big business. Yeah, $550 million is a lot of money. But it pales in comparison to the obscene FREE profits guaranteed by funds at close-to-zero cost. The Fed is basically giving money to Wall Street and just paying this relatively puny fine is cheaper than paying Goldman’s lawyers.

The other outrage is nobody’s going to jail. Martha must be fuming since she went to jail for buying a few stocks.

God bless the American people.

Posted by doctorjay317 | Report as abusive
 

goldman sachs did any of us really think the ending would be different from how it’s turned out to be.
i can’t afford thier stock so they don’t have to worry about me selling off the shares. and i do not have enough money to invest with them so they have no fears of me pulling my account. but i am a free american and as such i will not capialize thier name and if i someday walk by the building in which they’re headquartered i will offer the polish salute thanks jerry d

Posted by imsosorryforyou | Report as abusive
 

This ENTIRE thing was a witch-hunt from the beginning. The central issue was activities between professional investors. The Senate hearings showed just how DUMB our Senators are and how SMART GS’s people are. GS shouldn’t have been blackmailed by NObama’s ilk to pay a dime, but to have this over was good and it only cost a buck a share from earnings well above that amount. Good riddance to the idiots in the Senate and the SEC. Better they should concentrate on figuring out how to get the USA out of debt than chasing producers into the ground, but that’s what Socialists do, isn’t it?

Posted by kapechi | Report as abusive
 

Command performance farce, wonderful production by the SEC, masterfully delivered by the GS thespian ensemble cast, thunderous Wall Street ovations but appreciated by almost no one else ..PHOOEY!

Posted by Woltmann | Report as abusive
 

@kapechi –

I hate socialism as much as the next guy and that is a big part of the problem I have with Goldman Sachs.

Borrowing at nothing from the Fed and lending out at an enormous markup? Government intervention to fill in losses when deals go south (AIG)? Private profits and public risk? Fed purchases of garbage ‘assets’ from bank balance sheets?

When will Goldman stop living off of the above handouts, especially the first one? As welfare-supported wards of the state, Goldman doesn’t fit my definition of ‘producer.’

Posted by DanHess | Report as abusive
 

Government hacks did their masters at Goldman Sachs bidding.

Posted by thecanimal | Report as abusive
 

Yes indeed, the SEC stuff is a lulu. My favourite was ‘incomplete marketing information’. Our UK bank RBS got $100M in compensation – but lost $840M thanks to the gaps in Goldman’s brochures. 10 cents on the buck, right – that’s the going rate is it?
Some of the thread above confirms my growing view that politics on both sides of the Pond need to be reconfigured away from Left and Right. Big and Small, Fair and Unfair, Daylight Robbery and Straight Dealing – maybe they’d be better dimensions.
For example, within three hours of the decision, Goldman’s share price rise had paid off the fines.
We must be consoled that both the EU/Greece suits and the Aussie fund-scam dwarf even these charges.
http://nbyslog.blogspot.com/2010/07/brea kinggoldman-sachs-fined-360m-pays.html

Posted by nbywardslog | Report as abusive
 

Ah, more boilerplate that no one reads. I recommend:

“Goldman Sachs disclaims any responsibilty for the fact that you the investor are utterly incompetent morons incapable of doing any actual due diligence and in fact are just lucky to be buying in the middle of a bubble that hasn’t burst. We say this knowing that when inevitably you do go bankrupt that you’ll find some trivial clause and use idiot churnalists and politicians to pump it up into a major case so we have to pay blood money to get you to leave us alone”. I think that sounds about right and they can get the investor to specifically initial that clause in blood.

DanHess, that is exactly what it is. Just like most people in the business said it was at the time when all the hysteria was reaching its peak about how evil GS was. As for AIG, dude read the actual facts. GS didn’t “lose” money and it’s direct exposure to AIG was insignificant so that wasn’t the bailout and the Fed is swapping the “rubbish” for treasuries at a significant haircut – which is not the same as “buying” it.

weston, did those nasty people lend you money to party for two years then demand you pay it back? What scumbags, don’t they know it is your god-given right to live it large at their expense?

nbywardslog, RBS shouldn’t even have got 100m. The information was not material and ABN had all the information it needed to make a proper trading decision. The fact they made bad one isn’t a reason for them to be compensated.

Posted by Danny_Black | Report as abusive
 

agree.

Posted by cz123 | Report as abusive
 

agree again.

Posted by cz123 | Report as abusive
 

“The real truth of the matter is, as you and I know, that a financial element in the large banking centers has owned the government of the U.S. since the days of Andrew Jackson.”
- U.S. President Franklin D. Roosevelt in a letter written Nov. 21, 1933 to Colonel E. Mandell House

Posted by GRJensen | Report as abusive
 

Roosevelt was right.

Posted by Sinbad1 | Report as abusive
 

The fine will probably have as much impact on GS as a traffic ticket.In relation to its earnings and cash flow, this is clear.
Furthermore GS didn’t admit guilt.
To bring about change, key people should be fired for cause and/or jail time.
New compulsory training and merit based assessment prerequisits should include morality and truthfulness while replacing greed and cunning where many have seemed to graduate with honors in the past.
Given the responsibility associated with this profession, they have to recognise that fast and loose can no longer be the benchmark. The consequences of the “old way” cost the Nation several trillion $ and we aren’t out of the hole yet.

Posted by lecourt | Report as abusive
 

GS did not admit guilt, yet at the same time this settlement does not exclude any third parties suing GS as well. I think they should set up a $20bn fund to compensate investors and homeowners… Oh wait, only a non-US company could be forced to do that

Posted by GA_Chris | Report as abusive
 

GA_Chris, why would they compensate people who of their own free will went out and borrowed money? Or people who made stupid bets? What happened to personal responsibility?

Posted by Danny_Black | Report as abusive
 

lecourt, sounds like a great idea…. all you need to do now is show they did something wrong.

Or you could go after the people who lied on their mortgage applications. Or who were told to lie on them. Or the incompetent, overpaid fund managers who were not keeping their fiduciary duty to their investors – this is the real duty not the made up one market makers are meant to have. Wouldn’t it be a crazy idea if people were held responsible for their decisions?

Posted by Danny_Black | Report as abusive
 

I like unicorns, leprechauns and rainbows. If we extend personal responsibility, properly, to buy-side investment managers and fund owners, should that extend to the lacking due diligence on the WL trading desks across Wall Street ? How about the lack of any adherence to practical business sense, notably from Merrill Lynch or Citigroup as they continued issuing CDO product for example.

Those overpaid fund managers are as much in the wrong as the absolute lacking of due diligence, of any kind, performed on these non-bank finance mortgage lenders who promptly failed (New Century, Ameriquest). And the lousy crap loans those very companies were issuing.

Posted by McGriffen | Report as abusive
 

McGriffin, what lack of due diligence was done on trading desks and do you see ML trading desk suing MS trading desk because ML didn’t mention that MS was selling something they thought would go down in price?

New Century and other mortgage financers went bankrupt and from the best of my recollection no one is suing on their behalf the liars and idiots who overextended themselves on loans from New Century and others.

Posted by Danny_Black | Report as abusive
 

So, there was never an enabling of this activity via Wall St-based financing / purchasing/packing activities ? My point is not about this vs. that trading desk. It is the ‘sausage reviewing’ that, for my two cents, went lacking.

I’ll do my best to connect the dots. A non-bank lender, such as New Century, would have access to warehouse lines via WallSt based financing. most likely these warehouse lines would support 60-90 days of approved / closed mortgage loan activity.

A. Mortgage loan approved, and funded, by warehouse line. Without warehouse lines in place, non-bank finance lending would struggle. Can’t be funded with deposits, or in the CP/Repo market (perhaps so, i’ll guess).
B. Mortgage loans aggregated, until sufficient volume accumulates to sell onward to a trading desk (most likely by the firm / warehouse line financing) these consummated package of residential whole loans
C. EPD should be getting kicked out. EPD were routinely not, late ’06/early ’07, and early delinquency status could prove it.
D. These WL packages were sold onward to an SPE/Conduit, in order to issue private-label MBS or a form of structured product
F. By this point, surely the rating wizardry via moodys or S&P or Fitch has been applied to the underlying collateral. Maybe, just maybe, a team of analysts have looked closely into the 105 LTV lending or the no-doc 660 FICO loans.

Once complete, the structured MBS or CDO product is available for public consumption (or 144A consumption, as the case may be). Every single cog in this wheel gets blame. Wall st firms, while not in the direct business of residential lending, were surely not of a collective mind to stand in the way of progress.

Posted by McGriffen | Report as abusive
 

My greatest contempt is for the NRSRO cabal, and how poor their performance has been and may well continue to be. Goldman was never a featured issuer of sub-prime or non-prime MBS, not nearly the extent as any currently existing or former counterparts.

Posted by McGriffen | Report as abusive
 

Goldman wins…they always win. Goldman shareholders win. All is as it should be.

Posted by eversfreedom | Report as abusive
 

McGriffin, the key point here though is that there was a wave of demand from the buyside. There was so much demand that there were not enough dodgy loans that could be given to enough dodgy people which is why synthetics were created. Nobody here is dealing with demand.

Posted by Danny_Black | Report as abusive
 

Once again into the breach. The demand side experienced much tighter spread activity. Yield spreads tightened to historical levels, across MBS and non-MBS sectors during this period, that pinning onto “demand” is too simplistic. The demand side could have experienced sector rotation, into competing relative value product. High-grade corporate bonds, for example.

Oh, let’s just market those new-issue CDO to municipalities in coastal Australia. Hey, it’s AAA since moodys said so (oh, by the way you actually hold BBB/BBB- subordinate RMBS). Without that blessed rating, much less of this market existed and therefore demand would have chosen an alternate investment product.

Let’s discuss those wondrous off-balance sheet SIV entities. $100-200 billion in CP-funded SIV conduits (largely run via Citigroup and the like). That is false demand for product, and created a false signal for spreads and structured products.

Plenty of “demand” buy-side investors chose not to participate. We agree to disagree, perhaps.

Posted by McGriffen | Report as abusive
 

Maybe plenty of buysides sat it out but more than enough were there to participate and speads tightened BECAUSE of demand. If you are a high-grade bond fund then a few bips levered up makes you a genius. Between regulation making these bonds on par with other investment grade bonds and competition for funds in an extended bubble, there was extensive pressure to move into these sort of products just like in the dot.com boom people like Perpetual lost their independence because they didn’t believe lastminute.com was worth 100 gazillion.

The CP-funded SIVs existed solely as a result of regulation. As I am sure you know, as long as the debt was less than 365 days you got preferential treatment in accounting and regulatory capital terms. Upshot people used ultra-short term financing which meant when the liquidity dryed up they were screwed. Not sure that is “false demand” since investors bought into these CDOs.

By the way, for Felix… This is a question that I have no idea about the answer to – how many of these bonds actually defaulted, ie what is the actual credit loss people have taken on these bonds. I am not talking about the changes in prices, I mean what value of bonds defaulted and what was the recovery on those defaults in either absolute terms or relative to the size of the market.

Posted by Danny_Black | Report as abusive
 

Don’t know the answer to that one, Danny_Black, but we’re running something like 1 million foreclosures per year. At last check, 10% of prime loans were delinquent and 3% were in foreclosure. I imagine the situation would be much worse if you looked at loans written between 2004-2007, since mature loans are less likely to default.

Recovery has been poor, partly because so many of the loans are heavily underwater, partly because they are dragging out the process in the hope things will improve.

Posted by TFF | Report as abusive
 

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