Dealbook’s Goldman debate

By Felix Salmon
June 15, 2011

It’s the big Dealbook debate! In the red corner, there’s Andrew Ross Sorkin, defending Goldman Sachs from Senator Carl Levin’s accusations of egregious behavior during the financial crisis. Sorkin’s main point: that depending on how you measure it, Goldman might not have been quite as short mortgages as Levin suggests. And now, in the blue corner, we have Jesse Eisinger, saying that it really doesn’t matter how big or small Goldman’s short was: the real problem, as has been clear from the day the SEC filed charges against Goldman over a year ago, is that it lied to its clients.

There was the lie that Goldman peddled to potential buyers of Hudson Mezzanine, that “Goldman Sachs has aligned incentives with the Hudson program”. In fact, Goldman had a huge net short against Hudson. There was the lie that the Hudson assets had been “sourced from the Street,” when in fact they were sourced from the festering pile of nuclear waste that was stinking up Goldman’s own balance sheet. There was Lloyd Blankfein’s lie that Goldman was simply acting as a market-maker in these securities, when in fact it was aggressively trying to sell them and had no interest at all in buying them at any point. There was the lie seen by the Israeli bank which bought Timberwolf assets at 78.25 cents on the dollar, presumably on the understanding that Goldman was making markets in such assets and that their value was in that ballpark. (In fact, Goldman had marked those assets at just 55 cents.)

And then there was the way in which Goldman gratuitously maximized the total mortgage losses in the global financial system by creating new mortgage-backed assets out of thin air:

Goldman’s techniques harmed the capital markets. Goldman brought something into the world that didn’t exist before. Instead of selling something — thereby decreasing the price or supply of it — and giving the market a signal that it was less desirable, Goldman did the opposite. The firm created more mortgage investments and gave the world the signal that there was more demand, for C.D.O.’s and for the mortgages that backed them.

By shorting C.D.O.’s, Goldman also distorted the pricing of the underlying assets. The bank could have taken the securities it owned and sold them en masse in a fairly negotiated sale, though it likely would have gotten less for them than it was able to make by shorting the C.D.O.’s it created.

Because of Goldman’s actions, the financial system took greater losses than there otherwise would have been. Goldman’s form of shorting prolonged the boom and made the crisis that followed much worse.

Jesse concludes:

Goldman executives surely hope to change the subject from the firm’s specific actions to a more general discussion of how much and when it shorted. We shouldn’t let them.

One of the problems here is that it’s easy to get caught up in endless discussions about whether Goldman’s actions were illegal or not. Best to leave that to the prosecutors, I think. But Goldman’s actions were undoubtedly harmful: to its clients, to the financial markets generally, and to its reputation as an honest broker. Goldman’s trying to revisit those days and persuade us that it wasn’t that bad after all. Jesse’s right: if they’re raising the subject like this, it’s incumbent upon us all to remember exactly what they did, rather than letting them snow us with revisionism.

Comments
17 comments so far

Too bad Dealbook (or Sorkin) still doesn’t properly disclose the fact that it is part subsidized by Goldman Sachs.

Posted by Foppe | Report as abusive

Trying to “snow us with revisionism.” Isn’t that just the truth in a nutshell?

Posted by hsvkitty | Report as abusive

Matt Taibbi was all over this several days ago.

Posted by tolstoy | Report as abusive

Why didn’t you ask first ? Sorkin licks to “Jamie and Lloyds”, to save them from jail and keep on robbing the markets with HFT.

In return they’ll help “2 Big 2 Smell 2″, T.V. serie, and thy’ll live happy, famous and rich ever after.

This time he’s gonna be an actor. That’s not N.Y.T. That’s Pravda.

Posted by squidcutter | Report as abusive

Imho the “crime” revealed by the Levin report revolves around the way-too-chummy relationship between collateral managers & underwriters. By choosing pliant, doltish or “stupid” collateral managers, Goldman was able to effectively increase the odds of their bet becoming a winner.

There’s an inadvertently funny scene in the Levin Report describing how Goldman assigned collateral managers to their Abacus CDOs. When Paulson’s sales rep suggested one collateral manager with a reputation for being pliant, his boss refused the suggestion by arguing, essentially, that the pliant or “dumb” collateral managers would be reserved for Goldman’s own CDOs, not for customers like Paulson, who would get comparitively “smart” collateral managers assigned to their deals.

The irony in all this is that Goldman’s unethical behavior turned out to be unnecessary because in the end it didn’t matter if the collateral manager was “smart” or “dumb” because all subprime collateral eventually cratered.

True enough, wherever possible Goldman & Magnetar tilted the playing field in their own favor. But in the end, my guess is that their winnings would have been just as big even if they hadn’t cheated, hadn’t broken the rules of fair play.

Posted by dedalus | Report as abusive

I think a big problem is that people believe that Goldman’s “clients” are on the same side of the table as Goldman. They’re not. There’s Goldman on one side of the table, and everybody they deal with on the other side. People need to adjust their expectations.

Oh, and Goldman shareholders? They’re like the dog, under the table, getting scraps.

Posted by KenG_CA | Report as abusive

As I have told many people looking for prosecutions, the scandal isn’t about who committed crimes without being prosecuted — the scandal is that so much harmful and conflicted conduct was in fact perfectly legal.

Every time a banker or credit rating agency defends itself by saying that its clients were knowledgeable and sophisticated, I wonder what the clients must be thinking about the sales and marketing pitches they received exhorting them to hire a knowledgeable partner to help them navigate the complexities of the financial world. Large investors — like CalPers, for instance — need to not just adjust their expectations but use only advisers who agree not to play all sides of the field at the same time. Yes, GS may be smarter than everyone else but how do their smarts help you if they are just as likely to use them (armed with your own information) in a way that is inimical to your interests?

Posted by rb6 | Report as abusive

Tosltoy: Yes, Taibbi shellacked Sorkin for his bit, and my guess was that they ran this piece as a defensive move, so they can say, hey look, we’re not _totally_ owned by GS.

Posted by Moopheus | Report as abusive

I NEED TO VOMIT. SORKIN AND HIS “PSALMS BOOK” WORK FOR THE HUNS – EVEN PRAVDA WAS MORE JOURNALISM.

HE IS OBSSESED ON “2 BIG 2 SMELL 2″, WHERE HE IS GONNA BE AN ACTOR, THEN A T.V.SERIE AND A TALK SHOW.SO HE LICKS UP “JAMIE AND LLOYDS” AND BECAME THEIR P.R.

HE’LL SIT WITH COHAN AND BE RICH AND FAMOUS, AND NEXT CRISIS IS HERE. N.Y.A.G., DEL.A.G AND N.Y.D.A. SHOULD ARREST THESE WORST MANIPULATORS EVER.

I’LL KEEP ON WRITING – SEE ON THAT “SEEKING ALPHA” BLOG. KEEP IN TOUCH. I ATTACH SOME INVESTORS LIKE FROM TODAY, LIGHT AND SOFT FOR THESE AMERICAN STUPID TWITTERS ETC.

Posted by squidcutter | Report as abusive

THAT’S MORE REAL – “A VERY SICK S.E.C. NEEDS E.R. – MARKETS’ SQUID POISONING”

אורי פרייס, משרד עורכי דין
Uri Praiss, Law Offices
רחוב אחוזה 17, רעננה 43208 טל’ 050-5573697, 054-7569760 פקס למייל
17 AHUZA ST. RA’ANANA43208 TEL (972)-54-7569760, 50-5573697 FAX-MAIL
praiss.uri@gmail.coml; praisuri@netvision.net.i E- mail:

June 9, 2011

Re: A very Sick S.E.C. needs E.R. – Markets’ Poisoning by an HFT Squid

Author: Uri Praiss, Attorney at law (Israel, since 1990)
law & Economics lecturer

On 4th June morning I’ve started feeling sick myself already in the morning, when I saw on T.V. former S.E.C. Chairman, Arthur Levitt, now “Policy adviser for Goldman” (and, I guess, Hill’s traveler like their new “International Advisor”, Ex-Sen. JSD Att. Judd Gregg. Fly together? Private?)

Levitt discussed the reports Goldman has been subpoenaed by Manhattan District Attorney’s office , 2nd last American White Knight, Cyrus Vance Jr., opening a fresh legal front, after GS subpoenaed recently by N.Y. A.G., Eric Schneiderman, as well. Levitt Said “These Subpoenas Mean Nothing for Goldman.”
Is that legal? He should be indicted too, for allowing this crisis, these bombs’ “securities” trade, that cost $ Trillions, including millions of families losing homes, jobs and hope. I guess if Mary Schapiro or N.Y.A.G asked Levitt, just theoretically, how much Goldman pays for his services, he shall be permitted by Goldman to answer.
S.E.C. was founded as one of the most important lessons of The Great Depression .We forgot the other most important lesson – Total Separation between Banks, Trade so called “Investment”, Consultancy, IPOs, etc. Even basic New York Martin Act, 1921 was almost forgotten.
The S.E.C. was created, as a rearmed special force, to defend us against the Robber Barons, or Huns, after they caused, stretched for 6 years and used that horrible national disaster, caused by financial crisis (and Manipulative panic / pessimist Short Selling, but not advanced like nowadays’ Algorithmic “Nuclear” HFTs)
But sooner than later they found out the handsome Huns’ generous attitude (like the wolf after swallowing Red Riding Hood’s Granny) as Mr. Levitt, not to mention the Exchanges, orthodox and modern biased scholars, “experts”, bankers, conservative politicians and officials, research budgets, presentations, conservative parties and rich contributors.
So the Exchanges and S.E.C. went to sleep many years before 2007, allowing the Huns to create and traffic those bombs or drugs “securities”, “Big Short”, “Regular daily shorts”, you name it. Look the other way. Tell the S.E.C. and Exchanges “Liquidity, bigger trade volume, market diversification”, count the fees, etc.

So the S.E.C.’s Investigations focus mostly on “Fishing under the Lamppost”, that gossipy piping Insider Trade Offences, by big billionare Rajaratnam or even this miserable Nelson Obus, hunted for 10 years (and 2 obsessive appeals) because of that “Investi-Mad-Dog”.
Then they can harass him with all kinda tickets, to avoid fair expenses and punitive damages’ compensation. Remind me Kafka’s “Trial” of poor Joseph K.
By the way, did you know that “Insider Trading” offences were pushed and demonized by Wall Street’s Traders and Analysts’ Lobbyist Cartels? That is not even theft. Just populist over -reacting. There is no victim except some righteous vague envy.
In most civilized Securities (Non U.S.) Laws, Manipulations, Fraud, Attempt of Affecting Rates by Short and /or concerted / HFT “Selling Efforts” are much “heavier” offences than famous and juicy “Insider Trade”. The Anti – social and economic damages as well as risks (!!) are much heavier. So is the “Mens Rea” and the punishment is more severe.

Meanwhile, S.E.C. and Exchanges try, maybe they can’t refuse, to rescue Goldman Trading “Bank”, by $ 550 Million’s S.E.C. selective “plea – bargain” fine. That appears Ex – Post as a gift – their “Gold Mine Windfall” – approximately 1 day’s total income, and let’s pretend It’s over. Nothing happened (!!) GS report $100 Million daily net trade profits easily (how exactly?!) They were just tickled to laugh by those twisted secret highly – organized, 15 or so, $1 Million State – fines. “Partial-but-final rehabilitation-immunity-bargains’” ridiculous fines (as lately urged in New Jersey and Massachusetts) which N.Y.A.G. Schneiderman refused to accept, as was reported here.
S.E.C. and GS would help also Moody’s and S&P. Remember classic “Prisoners’ Dilemma”, maybe most popular Economics’ Game Theory? Let’s invent 500 pages of new Rating Rules’ wasteful cover up, so maybe they won’t face Criminal and Civil Fraud and Conspiracy charges plus (Gross) Negligence huge law suits.
.”One for all and all for one” Musketeers meet at “Robin Hood”‘s Lady Gaga’s Charity Tax Deductable evening. Till N.Y.A.G. and N.Y.D.A. shall come between you.
Pardon April 13th Senators’ Carl Levin – Tom Coburn Committee 635 pages comprehensive final report and thousands of attached documents, Testimonies etc., of 2007 Financial disaster, where GS and Mr. B. are leading actors. The respectable Committee recommends many examinations (and investigations) of events and conclusions, as follows:

“The Report concludes that the most immediate cause of the financial crisis was the July 2007 mass ratings downgrades by Moody’s and Standard & Poor’s that exposed the risky nature of mortgage-related investments that, just months before, the same firms had deemed to be as safe as Treasury bills. The result was a collapse in the value of mortgage related securities that devastated investors. Internal emails show that credit rating agency personnel knew their ratings would not “hold” and delayed imposing tougher ratings criteria to “massage the … numbers to preserve market share.” Even after they finally adjusted their risk models to reflect the higher risk mortgages being issued, the firms often failed to apply the revised models to existing securities, and helped investment banks rush risky investments to market before tougher rating criteria took effect. They also continued to pull in lucrative fees of up to $135,000 to rate a mortgage backed security and up to $750,000 to rate a collateralized debt obligation (CDO) – fees that might have been lost if they angered issuers by providing lower ratings. The mass rating downgrades they finally initiated were not an effort to come clean, but were necessitated by skyrocketing mortgage delinquencies and securities plummeting in value. In the end, over 90% of the AAA ratings given to mortgage-backed securities in 2006 and 2007 were downgraded to junk status, including 75 out of 75 AAA-rated Long Beach securities issued in 2006. When sound credit ratings conflicted with collecting profitable fees, credit rating agencies chose the fees.”

Sorry, but the very bad news and the unhappy end (for now) is that neither S.E.C. nor Robber Barons haven’t learned anything yet. Vice Versa, the Huns have already found, use (on a daily basis) and develop their new “nuclear” arms, at least a year. Almost all financial and real markets, firms and households suffer daily doldrums, stagnation, waste and loss of potential growth and employment.

These are caused mainly by manipulative advanced Hi-Tech and Algorithmic HFT daily trade (by whatever “machines”?!), including Short selling, combined with endless fearful, false and as if professional daily negative economic excuses (Greece’s Debts? Portugal?) Not to mention serial scary “Flash Crashes” S.E.C. and Exchanges don’t want to see.

How they do it? As any illegal anti-trust cartel, the leaders are the most technologically advanced and biggest HFT’s Algorithmic traders (guess who). They are followed by many smaller traders, as Hedge Funds and other big brokers (remember “Huddles”?) that try their best to follow the leaders as fast as they can on real time trade.

Of course the leaders sell highest, and buy later at the lowest rates. That is trivial, because they have a constant “First mover Advantage” and they are much faster technologically. That is why GS, JPM, and sometime others, can make easily $ 100 Million net trade daily profit each. It is reported by financial media. The followers can have some nice profit too. Paulson, for example, as much smaller traders. Just follow and be alert.

The leaders hit down, to the closest 50 or 100 points line of Dow Jones, as 11,950 and so on and Nasdaq as well – 2,650, etc.
They try to cause fastest down drop, adapting to real time volume. It is almost like driving or skiing. The computer calculates easily which are the stocks, on real time, depend by their specific volume and $ price, that manipulate the whole Dow Jones or Nasdaq (sometimes S&P, to drop or maintain the drop to 1,300, 1,250 etc.)

The regular technical (“natural”) rules of resistance and support do not work anymore. Only the Huns’ HFT Manipulation counts.
So check which stocks can be used most effectively for this daily Dow and Nasdaq Manipulation: GOOG, AAPL, INTC, CSCO, BIDU, etc. Even the trading banks’ shares themselves might be manipulated, depends on volumes and rates. Baidu is preferred – a “Market Mover” – influence all Chinese Internet giants – SOHU, SINA, DANG, YOKU, RENN, etc.

Europe has already decided to start limiting Short trade and other advanced manipulations. Goldman’s and others’ “agents” try to stop these important suggestions there. But here, S.E.C. and Exchanges, as before, left the doors open, let the Robbers in and went to sleep on the beach. Send Mary to be some Judge, fast as you can. Good night.

Sincerely yours,

Uri Praiss, Attorney at law
Law & Economics Lecturer

Posted by squidcutter | Report as abusive

Hurry to sell and short GS, JPM and 4 other
Dinosaurs before the Ice Age (Part 1)

Author: Uri Praiss, Attorney at Law (since 1990, Israel)

Law and Economics Lecturer

Both our Quarterly financial reports and market analysis show clearly that the quarterly and annual income and profits of Goldman Sachs Group Inc. (NYSE: GS) are soaring. But there is a famous slogan saying “The xxxx changed the rules”, and I do not mean Frank – Dodd legislation. To make a long research short, our bottom line is “Sell, Sell, Sell” and even short/put options for Goldman Sachs Group (NYSE: GS).

GS and its whole industry’s other leaders, might drop 30% or more within 6 months, although GS’ real trade profits fly to the sky. The financial reports just cover up these facts – “not to lead with the chin”, facing public, legal, structural and financial enormous risks

The same recommendation is highly reasonable for GS’ escort and followers JP Morgan Chase & Co. (NYSE: JPM), BOFA Bank of America (NYSE: BAC), Morgan Stanley (NYSE: MS), Citigroup Inc. (NYSE: C), still recovering from its reverse split, and Wells Fargo & Co. (NYSE: WFC). That is enough for now.
Never the less, we do not believe that the “Robbed Cossack” concerted media’s P.R. that GS pushed on Friday, June 17th is reliable. Too coordinated plan for a sensitive eye. N.Y.T.’s Susanne Craig got a detailed anonymous (why?) $1 billion and 10% cuts plus lay-offs-plan that was too polished to be true.
W.S.J. (Shira Ovide) and Christine Harper of Bloomberg “won”, for a balance I suppose, some very suspicious “Atlantic Equities” brutal estimate cut of Goldman Sachs Group’s second quarter earnings by 40%, to $2.17 a share. (The average of analyst estimates, according to Thomson Reuters, is $3.56 a share)
“The European debt crisis, worries about the economy, the housing market, the US debt ceiling and regulations and have all conspired to leave investors sitting on the sidelines with little conviction. Overall market trading volumes appear weak across both debt and equity markets….Given the weak environment we expect jobs to be cut across the industry.”
“One bright spot Atlantic Equities highlights is merger advising. The analyst expects M&A advisory fees and debt underwriting to be relatively strong.”
After last week’s embarrassment of Dickey Dove (Rochdale Research) analysis (whom I agree with only at his bottom line – “SELL”) and Mr. (“Hot air”) Cohan, I’ve decided not to argue with these false Atlantic Equities report and Susanne’s Anonymous GS executive, but set the financial public facts.

The financial reports show they (GS – U.P.) hide huge unbelievable trade profits – “not to lead with the chin.” Just spin and move on. Throw carefully these Rajaratnam and Tourre to the sea, play the victim, cry and complain. So We shall see an outstanding “Profits’ Laundering” of very suspicious HFT algorithmic daily trade. This is the new financial crisis moving forward.

AS I wrote before (Seeking Alpha Blog, “A very sick S.E.C. needs E.R. – Market poisoning by a squid”) “On Tuesday, April 19th, Mr. B.’s filed GS Quarterly Reports. They are smart: “Don’t lead with the Chin”. Just spin and move.

1) So exactly the day before, they had rushed secretly and unexpectedly to early repayment (!!) returns of 5.5 Billions’ Loan to good old Warren Buffett, who rescued them at the crisis, when they couldn’t breathe, like the late Lehman Bros., Bear, Merrill, etc. They didn’t miss an opportunity to “Crowd Out”, at the midst of hell.
That is why G.S.’s revenues and profit dropped half in their updated quarterly reports but still are much higher than the Annalists’ expectations.”

2) $8 Billion “Receivables” – That is the explanation why Goldman Sach’s latest quarterly report reveals that the firm has over $8 billion assets it lists as “receivables from customers and counterparties.” A year ago, it reported it had just $1.8 billion of these kinds of assets. What’s going on here? When you “postpone” or cover cash income of $6 billion as if “receivables” – that’s what happen.

3) $100 Billion US Treasuries – The same explanation relates to another question, big time, why “Goldman Sachs dramatically increased by $15 billion – to $100 billion. Even Pimco’s Bill Gross sold them and shorts them heavily, cutting its exposure to debt issued by the US government and government-sponsored agencies like Fannie Mae and Freddie Mac in the first quarter of this year, apparently bucking the trend of some of the biggest bond traders to short US Treasuries”

4) … Those Trading “Banks”, each reporting $100 Million daily net trade profits easily (how exactly?!) were just tickled to laugh by those $1 Million State – fines.” “M & A , advisory fees and debt underwriting” are negligible. The big big money is this HFT aggressive daily trade. That is why they chose Lloyds – read Cohan’s – Lloyds is “The Trader” of the family.

Check also those Private Equity secret (non public) funds, and those hundreds of Parasite Partners (‘Goldman’s Diaspora”) updated wage, fees, payments and bonuses, whatever. Lloyd’s income as CEO grew 15 times (yes, 1500%) last 2 years. To be continued….

Posted by squidcutter | Report as abusive

Foppe, by part subsidised you mean it advertised exactly once over a year ago? Why doesn’t Reuters tell people it is part subsidised by Goldmans – via purchases of terminals? For that matter why doesn’t every single newspaper and every single bank in the world mention it either? Massive conspiracy!!!

Posted by Danny_Black | Report as abusive

KenG_CA, why would a market maker be on the same side as the investor? And which investor? The one he is buying from or the one he is selling to? Do you expect the NYSE to stop you from piling into something that a year or so latter will tank?

What you would expect is that the buysides that failed to do any decent due diligence and who drove this demand would be on the same side as you given they have a legal requirement to do so – called fiduciary responsibility.

Posted by Danny_Black | Report as abusive

squidcutter, did that attorney take his meds?

Posted by Danny_Black | Report as abusive

By the way Mr Salmon why do you insist on quoting this idiot? To date not a single one of his articles has ever been anything except pure unadulterated BS?

Guess it is because you seem to have driven off most of the informed commentators and have to please the those left.

Posted by Danny_Black | Report as abusive

DannyB, Goldman has clients they are supposed to advise. Not all of their “clients” are just investors looking for a broker. They have a big business telling people how they should invest their money. My point is they treat everyone as a source of capital, or worse, a mark, and should never be trusted. They don’t care about you.

Posted by KenG_CA | Report as abusive

If their clients are going to the market making desk looking for investment advice then they need to go back to the switch board. Market makers have counterparties not “clients”. Again those clients of the market makers include high paid buyside professionals who do have a legal responsibility to their clients to check what they are buying and selling and clearly didn’t bother. Given those professionals – a not insignificant portion of whom would have been far far better renumerated than their counterparty at GS – failed in that responsibility surely rather than calling them “victims”, they should be the ones in court.

Posted by Danny_Black | Report as abusive
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