The latest Rolling Stone article from ‘Vampire Squid‘ author Matt Taibbi:
They weren’t murderers or anything; they had merely stolen more money than most people can rationally conceive of, from their own customers, in a few blinks of an eye. But then they went one step further. They came to Washington, took an oath before Congress, and lied about it.
Thanks to an extraordinary investigative effort by a Senate subcommittee that unilaterally decided to take up the burden the criminal justice system has repeatedly refused to shoulder, we now know exactly what Goldman Sachs executives like Lloyd Blankfein and Daniel Sparks lied about. We know exactly how they and other top Goldman executives, including David Viniar and Thomas Montag, defrauded their clients. America has been waiting for a case to bring against Wall Street. Here it is, and the evidence has been gift-wrapped and left at the doorstep of federal prosecutors, evidence that doesn’t leave much doubt: Goldman Sachs should stand trial.
The great and powerful Oz of Wall Street was not the only target of Wall Street and the Financial Crisis: Anatomy of a Financial Collapse, the 650-page report just released by the Senate Subcommittee on Investigations, chaired by Democrat Carl Levin of Michigan, alongside Republican Tom Coburn of Oklahoma. Their unusually scathing bipartisan report also includes case studies of Washington Mutual and Deutsche Bank, providing a panoramic portrait of a bubble era that produced the most destructive crime spree in our history — “a million fraud cases a year” is how one former regulator puts it. But the mountain of evidence collected against Goldman by Levin’s small, 15-desk office of investigators — details of gross, baldfaced fraud delivered up in such quantities as to almost serve as a kind of sarcastic challenge to the curiously impassive Justice Department — stands as the most important symbol of Wall Street’s aristocratic impunity and prosecutorial immunity produced since the crash of 2008.
Toby-
Despite my ardent dislike of the “crony capitalism” that has gone on, I have to say that in this particular instance Goldman did not do anything wrong. Taibbi doesn’t even bother with detailing the abuses or explaining how they show that Goldman Sachs committed fraud. My guess is that is because there is no evidence of any criminal misdeeds. In the case regarding the synthetic mortgage-backed securities Goldman worked as a broker. In these cases (as with any exchange transaction) disclosure of the counterparty is forbidden. To charge Goldman Sachs in this instance would be like charging a casino for lost money because they set up a scenario where 4 gamblers could take a bet being offered by someone else and it turned out in that unknown party’s favor.
What should be invested regarding Goldman Sachs is what Warren Buffet might have known before investing $5 thousand million given his financial and other support of Obama and position as an insider with regard to the Obama administration. From there they could launch a probe of the financial bailouts etc. However, my guess is that Rolling Stone is not interested in being on the cutting edge of investigating corruption when it comes to Democrats.
Last but not least: Fabrice Toure should have been indicted and forced to share a cell with DSK for his cellphone texts alone. But I am sure the fact that he is a Frenchman and, as such, cannot conform to more rigid Anglo-saxon morality standards would have made him a potential presidential candidate. Fortunately, his ignominious demotion to whatever corporate hell he has been shackled to in the bowels of Goldman will ensure that we will never hear from him again.
Chris, please see my comments to Current 2011/05/19 at 09:47
Chris, in dealings between professionals I also incline towards caveat emptor. When the fracas about Abacus first blew up, for example, on balance I thought Goldman had a defensible case, not only in legal terms but also in terms of accepted market practice.
I started reading Taibbi’s article with this same attitude. No longer. Having finished it and read a bit of background elsewhere, I think they probably have a case to answer, and potentially a rather serious one. Aggressively marketing structured products when you’ve supplied (often apparently at premium prices) a good deal of the raw material and then taking a decent chunk (in the case of Hudson, apparently 100%) of the other side, all without disclosing any of this to your customers seems to me well beyond the pale.
Ingolf-
The question at hand is not one of business ethics. Rather it is one of criminality. My belief is that Goldman Sachs is in serious need of some change in order to save its business reputation, but the “casino” analogy still holds. Whether the counterparty was Paulsen or Goldman Sachs is irrelevant as the investors that were on the other side were just as savvy, if not necessarily correct.
That said, I think that Lloyd Blankfein will be lucky to finish this year as CEO. The board does not care about their reputation in the financial industry, but when a bad reputation threatens their issues of government debt or getting favorable treatment by the government then a sacrifice must be made.
It is also of note that Taibbi totally mischaracterises Hudson and Timberwolf as being investments when they were, essentially, bets on the performance of the underlying securities. There is also the characterisation of Goldman “dragging its feet” to release Merril from a bad bet when they had no obligation to do so and would have harmed the other side of the bet. Granted, Goldman was on the other side of that bet. However, it would have been more egregious if things were going Merril’s way and Goldman decided to liquidate prematurely to avoid losses.
The other issue is that Taibbi implies that Goldman’s actions a) somehow created the financial crisis and b)were the product of deregulation, both of which are not only untrue but have nothing whatsoever to do with the synthetic securities being sold. Why doesn’t he do an expose of how Fannie and Freddie were able to commit real frauds while they were regulated, and the regulators testified before Congress to this fact, yet no prison time was served by any of the C-suite people at these institutions.
Who knows whether any eventual criminal charges would stick, Chris. I certainly don’t. However, it seems a stretch to me to suggest that there’s no possible case to answer.
Take Hudson for example. According to the Senate report, the decision to create this CDO was only taken because despite several weeks of trying to offload risk, they were having real trouble finding buyers for house positions that eventually effectively comprised 60% of Hudson. So, presuming that’s correct, the whole exercise was conceived as a means of achieving what they couldn’t achieve through the wholesale markets. To my mind, that pretty clearly establishes mens rea right from the start.
That view is backed up, I think, by the way they presented the deal to potential buyers. Again per the Senate report, they stated that “Goldman Sachs had aligned incentives with the Hudson programme by investing in a portion of the equity”. They did, but this $6 million purchase of equity is rather overwhelmed by the fact that they took 100% of the short side. All undisclosed. And so on.
Is this merely a matter of shoddy business ethics? Maybe. Then again, maybe not.
As for Taibbi, sure, he’s hyperbolic. He probably has only a limited understanding of economics and markets (and it sometimes shows) and certainly as strong biases about who he wants to take down. For all that, I think he’s doing useful work.
Something that everyone should realise here is that we are talking about capital markets.
In capital markets the only aim is to make profit. The speculation is about what investments will do so. That means that any buyer and seller are inevitably in conflict. The seller believes they can find another investment that will make greater profit and the buyer believes they can’t find another investment that will make greater profit. So, in any capital market transaction those who disagree about the prospects for a particular investment are generally the ones who trade with each other.
Of course, that doesn’t mean that lying is acceptable, or that not disclosing information that should be legally disclosed is acceptable. But, it does mean that it shouldn’t be a surprise when one party in a transaction takes the short side and the other party the long side, that’s the normal case.
Current, for those confused people (the majority) who actually thought their deposits were theirs and assumed that their finnacial advisor was not “betting” but undertaking his enduring fiduciary duty (he tells you he is investing safely , prudently etc) to handle with care and invest wisely the irreplacable funds intrusted to him, did not know that any of this was going to happen, do you not think that these bandits, oh sorry, respected and esteemed Great Bankers, have some responsibility for their actions here?
This is not a parternalistic cry, but a contract law point. When told by the likes of Goldman that investing in X , Y, X, mortgage backed security that is “safer than safe,” (believe you me, I have had countless numpty wealth managers from these places, replete with their MBA’s and MPT spout rubbish to me) and in the knowledge that other parts of the Bank are shorting these “safer than safe” products, that at least they are in a contract law breach and and worst party to both criminal and civil fraud?
I should also add, I have never invested with these types of people, I hold them all, bar a very tiny minority of good people, to be bandits.
I would rather meet Dick Turpin in the streets who gives me a simple choice “your money or your life,” at least he his telling the truth with regards to his intentions, bad though they may be. Being charged 2% of my assets and 20% for performance in a profitable year and no claw back in an unprofitable year, telling me they are going to be investing my assets safely and wisely , then casino betting, not investing, is not what the finacial system should be about.
To hell with them all.
Toby-
I don’t share Current’s zero sum view of the capital markets, and you are correct that the financial system should be above this type of unnecessary speculation. I would also say that if GS were acting as investment advisors then this would be a massive fraud. Nevertheless, it is important to understand that that was not what they were doing. In essence, GS asked Merrill et al. whether or not they wanted “some of this action” (I am paraphrasing) and Merrill said “Yes.” Then Merrill lost the bet big time. Due to the fact that they were losing money Merrill couldn’t find a greater fool to take their place and GS was not about to let them out of the contract, so Merrill was stuck. Who knows where this money was coming from on Merrill’s side but I doubt that these particular abstruse synthetic derivative investments were part of anyone’s wealth protection portfolio. Nor was this a case of asynchronous information as these were people who either knew or should have known what they doing. Rather, this was a case of GS seeing that the market was going to continue to decline while other people were of the mind that it would rebound. The only reasons that this case is even being publicised and prosecuted is to make GS a scapegoat for the housing crisis, to make the case for unnecessary regulations and increased government control of the economy and as propaganda for the point that capitalism (and not the government) is to blame for the current malaise.
In short, we may not like what Goldman Sachs does but we should defend their right to do it.
As I said if Goldman Sachs did misrepresent the products that they were selling then they have done something that’s both morally wrong and against the law.
However, holding a different opinion about an asset to those who you are offering it for sale to isn’t the same thing. In asset markets this is the norm, the case where one party sells an asset to another and both largely agree on the future prospects for that asset is the exception.
Take the stock market for example…. Let’s suppose that stock market participants only want shares to earn capital gain or dividends, and that participants aren’t friends who may not be driven purely by self-interest. Also, let’s suppose that the majority of participants are all earning similar rates of return on their holdings. I don’t think either of these assumptions are unreasonable.
In this case suppose I sell some shares. What does that mean? Well, if I’m earning a rate of return close to the average that means that I think that these shares aren’t as valuable as others believe. It means I think other investments are likely to give a higher return. Similarly the person who buys the shares from me believes the opposite, he thinks I’m wrong and that the shares will be a better investment than alternatives. So, our interests are opposed.
There are only a few case where the interests of the two sides aren’t opposed… Firstly, if the selling side has an unrelated reason to sell, an emergency need for money for example. Secondly, if the two investors have radically different alternatives. For example, one investor could be selecting between three investments that he is confident will return 15%, 25% and 40% per year. He already has an investment in company X which yielded 15% last year and which he predicts will yield 15% the next (it is the first opportunity I list). As a result he puts all his funds into the one he believes will make 40% and sells the investments in company X. The other investor may not be so knowledgable about the financial markets or may not be so confident. In his opinion he has four opportunities yielding 3%, 6%, 8% and 15%. The 15% opportunity is the same one as for the first investor, company X, they both agree on the prospects for company X. In this case it will be in the interest of both parties if the first investor sells his 15% investment to the second. This is the case where the difference in expectation of returns on alternative investments makes the difference.
In all other cases apart from those I mentioned one party sells to the other because they disagree about prospects for the asset. This is why when people sell assets they often try to tell stories to put themselves into one of the categories I mention. A homeowner wouldn’t say to a prospective buyer that he is selling a house because it’s in a bad neighbourhood. He would either say nothing or (if he’s a chancer) perhaps say that though it’s a great house he must move to another city for work, or move to a smaller house because he’s had a wage cut or a large expense.
sorry: I meant “asymmetric information” not “asynchronous information”.