Wednesday, April 28, 2010
I thought the senior executives of Goldman Sachs, particular CEO Lloyd Blankfein and CFO David Viniar testified very effectively and responded admirably and patiently to what in general was shabby, ill informed and generally ignorant questioning. And I would observe that the ignorance was generally bipartisan.
The one thing I thought the Goldman executives should have remarked, when questioned about their tactical short overlay to reduce their long exposure to the mortgage morket, would have been to add that, had they not gone net short, they very likely would have been in line testifying with Dick Fuld from Lehman Brothers. And I know which questioning, however ignorant, I would prefer to face.
Today, I am a proud Goldman alum.
Then maybe you can answer my question: Why did Goldman Sachs employees give Barack Obama's campaign almost one million dollars?
The same reason most people give money to political campaigns -- their friends or business associates ask them to do. I've given money to lots of Democrats (although not the really detestable ones) for no other reason than a good friend asked me to. That's how money gets raised, and it is why so many affluent people give to both parties.
Let me get this straight TH, you donate money to to candidates you are philosophically opposed to and that govern contrary to your interests because a friend/business associate asked you to?
It has nothing to do with buying influence or access?
I am enlightened.
My pride relative to Goldman has nothing to do with their political contributions, either as a firm or as individuals. They have had brilliant leaders serve this country well, from John Whitehead to Bob Rubin to Hank Paulson in a bipartisan fashion.
And though I am conservative and a Republican, I am perfectly happy to give money to a competent intelligent Democrat with whom I may have significant disagreement and I am completely opposed to giving money to an incompetent Republican.
The pride I expressed had nothing to do with politics (except insofar as I expressed dismay at our incompetent Congresspeople of both parties).
Here Goldman stands a firm with nearly $70 billion of capital, 35,000 prosperous employees, millions of transactions and emails per day. And this is the best the government could do? This is it? A 28 year old bragging to his girlfriend and making jokes (some might call it gallows humor) about the market?
That's it? When they investigated Allen Stanford and Bernie Madoff mid criminal fraud and ponzi scheme and missed it totally?
Can we let the Goldman leadership interrogate Barney Frank and Chris Dodd about Fannie and Freddie? Who's gonna do that? Hmm?
Goldman has acquitted itself exceptionally. We would have been better served as a country if Citi and WAMU and Lehman and Bear had been so well managed.
This is one instance where the witch got the best of the hunters.
Goldman's reputation took a hit yesterday. e.g., Lloyd was on the cover of The New York Post: "Sachs of Sh#t!" was the headline. By itself, I don't think yesterday will have that much affect on their business. But it is part of a bigger picture.
Barney Frank goes Greek! Tomorrow he's having the House Finance Committee look into the effects of credit default swaps on the Greek debt crisis. So we'll hear more about Goldman. Long-term, Greek CDSs may be a bigger issue for Goldman than John Paulson and Fabrice Tourre.
Yesterday's questioning was mostly poor. McCain was especially bad.
These hearings are mostly political theater over Financial Services Reform, granted. It's unclear to me how this legislation plays out. Some Republicans want a seat at the table -- I don't know that the Democrats want them to. More on this below.
All the big banks still have a lot of litigation exposure. Yesterday didn't help.
SEC v Goldman won't go away lightly, but it's now largely a side show. Goldman will file for early dismissal -- and lose. The Fab's e-mails alone ensure this. The SEC has little reason to settle early. One of the big confusions yesterday was Senators not understanding that traders are 100% conflicted and don't have fiduciary duties. But the root of the problem with ABACUS is that Goldman let traders create "product" -- there's a lot of legal responsibilities that go along with that. Buyers of Goldman manufactured "AAA" got screwed on this deal -- there's something wrong with that, isn't there? If you say "No" -- think through the consequences of that.
Despite my prior comments, I actually really have a soft spot for Lloyd. BBQ - Bridge and Tunnel. He did a lot better than at prior hearings. To me, there was one telling moment near the end when he got verklempt when pressed on knowing that "AAA" was a required investment criterion for many institutions, widows and orphans, etc. Lloyd and Goldman weren't the worst offenders -- but to me this goes to a root issue. Lots of rules favor "AAA", so Wall Street collectively found ways to turn "BBB" and "CCC" into "AAA."
It's here: http://www.senate.gov/fplayers/I2009/urlPlayer.cfm?fn=govtaff042710&st=945&dur=39420 skip to around 648:00
So we still have this question: at what point does a "trader" take on bigger responsibilities? Lloyd grew up as a "trader" -- but now he's CEO of a major "bank holding company" that's too big to fail. Goldman never used to finance Main Street, but it's current business does relatively little to finance industry. Do they deserve to be part of "plugged-in" establishment?
I'd welcome criticism and comment on the following: There's a place for hedging and some exotic financials, but it's gotten way out of control. It's added a lot more risk to the system, and just created all sorts of arbitrage plays. Goldman has no place being a bank holding company. You can either fly a pirate flag, or be a very boring part of the plugged-in system. There's political sentiment out there to force this, but we may not see it reflected in Financial Services Reform. Financial Services Reform needs to address this, or we'll only have another crisis within a decade.
PS, the single biggest mistake we made was to enable people without a real down-payment (at least 10%) to get mortgages.
Well - to Truth is out there.
On the one hand, I am grateful for and appreciate your emotionally balanced perspective. However, I disagree with certain parts of it.
Number 1), it is not clear to me that Goldman is Too Big to Fail. Let us recall that Lehman was allowed to go bankrupt. Today, I would reckon Goldman's balance sheet is no bigger than Lehman's was at its bankruptcy filing.
Number 2) goldman is not, at least not yet, a deposit taking institution if significance. It does not bank Main Street. Therefore, like Lehman and Bear, it could be allowed to go without necessarily triggering a bank run -- in the end, the notion of bank bailouts - so polically unpopular, has nothing to do with baiing out shareholders, wholesale lenders or management.
The point is to give depositors comfort that their money is safe, thus they don't pull their deposits out, bury them in cans, and freeze your economy. I always chuckle when people whine about the bailouts. They were bailing US out.
A trader's job is simple. Buy and sell. If you consistently do that badly, you will be out of business. Doing it well means you give your counterparty what they expect. Blankfein said it right - if you transact with me, you are entitled to precisely the risk exposure you were represented. The price mechanism mediates the trade. That's it. I don't owe a fiducoary obligation to my counterparty, I owe it to my shareholders. Not hard to see that.
Last point, Vegas, Lotto and horseracing - all gambling that the government endorses and from whic it profits, are unfair bets. They are regressive and they prey on the little people. Go to Atlantic City. Or a tribal casino.
Wall Street, because you can short, allows for risk management and "fair bets". That's a statistical concept by the way, not a gambling comment. By creating a market for shorts, we enhance liquidity, and expand access to capital and credit. Had the market had more efficient mechanisms for shorting the mortgage market earlier, the bubble likely wouldn't have grown so much.
However, the goverment, thru Fannie and Freddie, tried to massively stack the deck against shorts. Subsidized mortgage finance, no doc loans, and low rates from the Fed fueled a market so enormous and so rigged, it was really perilous to short it. Those who did got abused for years.
Only with the development of sythetics actually, could you finally take an economically defensible position (without crazy negative carry). That is not inherently a bad thing.
And the rating agencies, and the CDS writers missed it, and mispriced protection. So we had a cat 5 hurricane wipe out massive amounts of capital and not enough insurance written or properly priced.
We need a clearing house for the derivatives (a la CFTC). The agencies need to properly understand the risks and rate accordingly.
And yes, Virginia, we will always have financial crises, and no amount of legislation will make it go away. Economies boom and bust, and always have.
Sorry about that.
I've got two or three questions/retorts: Here's the first re Too Big to Fail: This is a thesis -- rip it up if you think it wrong.
Bear Stearns had a liquidity run. Because of leveraged balance sheets, all financials are prone to this. Before the run, Bear had built up its liquidity and entered its last week with a lot of excess liquidity but it wasn't enough. Had it been a bank holding company, it could have met its liquidity needs directly from the Fed. Bear had plenty of collateral-eligible assets -- but no one would deal with them in the middle of a run. That's why they call it a run. Instead, the Fed needed JPMorgan to step in to source the liquidity that was largely provided by the Fed. There's still questions-- at least to me -- about what drove the run on Bear. The failures of the two Bear subprime funds were not direct obligations of Bear -- I heard these funds were really in the business of channelling poor mortgage product originated through Merrill. Bear was making money right up until the end.
Lehman followed a similar pattern, but there were questions beforehand about undisclosed problems at Lehman that have since been proven out. Hank Paulson and others let Lehman fail because they thought at the time that the market needed some discipline. [Insert alternative conspiracy theory here.]
In the end, Goldman and Morgan Stanley were at risk of the same -- the short sellers were working up the food chain. But they got to convert to bank holding companies in rapid order. Normally this takes months. I expect that lots of non-conforming activities had to be over-looked, and are still being over-looked. Kudos, Rodgin.
From what we learned from Lehman, Goldman is too big to fail. If you got an honest answer from Hank Paulson he'd say that letting Lehman fail was a mistake. It seized up credit markets for a critical few weeks. It almost took down the system. We almost had a run on money market funds -- don't forget that.
Goldman isn't a retail bank, granted. But why should Goldman -- a trading shop hedge fund -- get an implicit government guarantee? So long as it's a bank holding company with a trillion dollar balance sheet --- and even much larger counter-party exposure -- the markets will expect the US to cover any lenders to it -- 100 cents on the dollar. Can you say AIG?
ps. given that Goldman is a trading shop hedge fund quasi pirate ship -- no ex-Goldman senior official should ever again get a senior position in government. It's a conflict with a capital "C."
Further re: Too Big To Fail
Goldman is the 200 pound chimpanzee you think is housebroken -- it's acting nice right now but there's always a chance it'll rip your face off one day.
Fannie and Freddie are 1,000 pound gorillas and need to be included in Financial Services Reform.
Bear simply had a mismatched book. It borrowed short, and invested the proceeds in long term non-liquid securities that then tanked in value. It was a classic squeeze, and very much the same problem that killed First Pennsylvania Bank back in the early eighties. Ironically, it was the Fannie and Freddie plus Fed driven bubble in the mortgage business that made Bear so successful over the last fifteen years, and also the same business that killed them.
Lehman and National City Corp had many more similar (and multiple) problems than Lehman and Bear, in my opinion, not the least of which was that shorts seemed to know more about the value of their commercial real estate portfolios than regulators knew, or for that matter more than the respective executives and boards knew, and clearly more than the shareholders generally. Their entire balance sheet valuations were called into question, across many asset classes.
All three institutions were closed and sold. It was only then that the question of too-big-to-fail arose, and in my opinion the concept came about as a result of the rapid deterioration of the system generally (domestic and international). Not any one company was particularly at fault at that point, in other words.
If any one deal was the trigger for the concept I'd nominate the Fed forcing BofA to complete their acquisition of ML when that acquisition was clearly not in BofA's best interest. Suddenly, BofA needed to be protected at all costs. I even think the Fed was prepared to let Citi go (a company whose revenue is, after all, majority generated overseas and a bank with relatively low retail market share in the US could easily not be supported), despite the impact that failure might have had on counterparties around the world. But the Fed couldn't figure out how to distinguish between Citi and BofA, or how to plausibly say one should be supported but the other could die.
The support granted AIG is the intriguing case, and the one I think the Congress should most closely focus on in their investigation, once they fully and completely investigate the unprincipled muscling of BofA.
Goldman is a total sideshow, a political circus designed to rouse some enthusiasm among the Democrat base while hopefully appealing to the independent voters so disgusted with Obamacare.
The second mention of Lehman in the first sentence of the second paragraph was inadvertant. The sentence should have started,
"Lehman and National City Corp had many more similar (and multiple) problems than Bear"...
I have family that are on the board of GS and also who are very successful principals...and they make their money because they are a HELL of a lot smarter about this world than your average fool in Congress.
Having said that, I am disgusted, but unortunately not surprised at the performance of the august Senators in this Dog and Pony show.
They RELY on the fact that the average person will gloss over the details and engage in raw rage at "Wall Street".
Such details are clear. The investment was put together by a group of very savvy financial gurus who knew EXACTLY what they were betting for and against. The "e-mails" displayed no intent to defraud. Regardless who selected them, the specific hypothetical securities in the fund were all extensively described, in detail, in the “Flip Book” and the other offering documents for the new fund. They were all rated “BBB,” the very lowest investment grade. They were the junk (or, if you will, "shit") of this particular investment area, and if markets declined, they could be expected to decline even more, and more quickly. Everyone, the investors in particular, knew that. Paulson won when he sold short. The other investors lost.
Nobody sued. GS lost millions. Everybody went home and came back the next day to move on.
How the Government seeks to portray this as come kind of conspracy reminds me of Yosef Stalin.
>> A trader's job is simple. Buy and sell. If you consistently do that badly, you will be out of business. Doing it well means you give your counterparty what they expect. Blankfein said it right - if you transact with me, you are entitled to precisely the risk exposure you were represented. The price mechanism mediates the trade. That's it. I don't owe a fiducoary obligation to my counterparty, I owe it to my shareholders. Not hard to see that.
This is perfectly correct when applied to a trader. This is not correct when applied to an entity which issues securities under the '33 or the '34 act, pursuant to which issuers have a duty to disclose all material information relating to said securities.
In the big picture, Goldman is in hot water precisely because they have substituted the ethics of trading for the ethics of issuing. In the Tourre scandal you have consistently taken the position that Goldman did nothing more than intermediate a trade. That simply is not correct.
I didn't get to see much of the testimony so I can't comment on its substance. I will say that with all the press this has received I think it will be difficult for the SEC to settle the case on terms that would be acceptable to Goldman. I see this case going to trial and I see Goldman losing.
"All three institutions were closed and sold."
But they weren't. Lehman went into bankruptcy. In all cases but Lehman -- and that includes Fannie and Freddie and AIG -- creditors came out 100 cents on the dollar. The debt side is a big aspect to "too big to fail." Actually, it may be more important than the equity aspect. Investors in Citi debt and preferred know this. Over the years, buying Fannie and Freddie debt proved a good way to get 50 bps over Treasuries.
Bear got an odd-ball M&A shotgun marriage, with the Fed providing the dowry.
Merrill eloped, but Dad showed up with the shotgun when the groom got cold feet. Given that BAC paid stock in a fixed exchange, this deal will likeley turn out a winner for BAC.
Fannie and Freddie got a "conservatorship." I still don't understand the legal status of waht happened at AIG.
Lehman' was the only one left to fend for itself.
Once again, rip me when I'm wrong.
I agree with Anon 7:31
Goldman has had a blind spot by thinking a trader's mentality always applies. When you're only a trader, that's fine. But Goldman hasn't always acted as a trader.
With ABACUS, they were manufacturing product.
With Greek CDSs, they were enabling a client to fudge rules. You can make an analogy to buying a barge from Enron at year-end with a handshake that you'll sell it back a week later.
Sadly, Financial Services Reform may try to introduce new fiduciary concepts to trading which would be really stupid and dumb.
@cardinalpark: I'm not sure why you are proud of Goldman. 1. They continue to dispute the materiality of Paulson's involvement in the CDS selection. If ACA wasn't necessary in the first place, than mere disclosure of the reference securities should/would have been enough. NO. In fact, parties, as the SEC complaint alleges, wanted a third party selecting the reference securities. Are you suggesting they will win in the Courts their materiality claim (their only defense)??? I don't know anyone who thinks so (including every senior member of the securities defense bar that I respect.
Proud #2: Marlin Fitzwater used to have a saying at the WH. Cave early; cave often. They were the beneficiaries of the bailout to boot (though Blankfein claimed it was irrelevant b/c they were insured against AIG losses). They were the benefiiciaries in another way -- all but two of the top 5 investment houses collapsed, expanding their market share. There are fortuities.
What I did not pick up on; because I found them fairly typical of corporate executives I deal with; is that they came across as quite arrogant.
They are not going to fight the SEC complaint - and we all know it's because they can't get it dismissed pre-trial - which means there is something there.... and of this you are proud? Releasing the emails of Tourre that were private?? Of this you were proud? Claim that their net short position was small without explaining that their long was in the more credit-worthy sectors and their short was in the subprime sector big-time - more disingenuous than Levin was clueless. I could see how to pick them apart, and just because Levin couldn't doesn't mean they acquitted themselves well.
If the security had to be registered, the omission would give rise to strict liability under section 11 of the '33 Act because Goldman was the underwriter.
NO, SORRY, but Goldman has nothing to be proud of; and even less when they continue to defend that which is hard to defend.
Read George Akerloff's famous article on Lemon Laws if you wonder why disclosure of the referenced securities is not enough in a well-functioning market. Again, were it, ACA would not have been there.
You will note an odd wrinkle in Goldman's defense. It wants to both defend itself by relying on ACA, but then claim that there was no materiality to Paulson's role with ACA - which begs the question - if Paulson's role was irrelevant to Paulson, why did he want to participate???
Side point: Bernanke has testified that he would have liked to have saved Lehmann but couldn't arrange it.
Finally, I do not think we know enough about the use of synthetic derivatives to draw conclusions about whether they are healthy or inject too much rsik into markets. Prior to the 1929 crash, purchase on margin played a similar role, and now that is closely regulated by the Fed, because of the clear untoward consequences. I don't think anyone has a big enough picture of all that happened to know whether and to what extent the derivative market did, or did not, get out of hand.
I tend to think that most investment banks had next to no clue on how to value the derivatives. It is hard enough to value a put or call in a highlyl liquid security whose duration is more than several months (because B-S's assumptions start to fall apart). If the SEC were equipped (it's not) we'd see a study of this phenomenon.
Personally, I think Goldman bought itself trouble by trying to look innocent and emphasizing that they were not short the market. Who cares??? They were the spinmeisters....
And on ABACUS, all they have to do (as they will, mark my words) is acknowledge the failure to disclose was an error; that it was unintentional; and settle.
Unlike JPMCT, I view the opposite as a sign that they aren't as smart as they are stuck on believing about themselves. A clear sign.
I don't agree that Goldman acquitted itself well. They failed to explain the difference between acting as a fiduciary and acting as a market-maker. They failed to explain that their role is limited and that the gov't created trillions of bad mortgages with AAA ratings that had to find a home in the market. They failed to explain that if more people had shorted the mortgage market earlier, the bubble would have been smaller and less damaging when it collapsed. They failed to appear any more intelligent or honest than the grandstanding ignoramuses questioning them.
@CP Goldman deals with sophisticated market players.
YES. You however misunderstand what this means in a market. A sophisiticated player is not all-knowing - omniscient; well-versed in evaluation of every product. Rather, a sophisticated players knows that htey don't know everything.
A sophisticated used car buyer is not an auto mechanic, but someone who knows to take a car to an expert auto mechanic.
Markets don't work with omniscient players. Blankfein is sophisiticated; but he readily said he knows little about the market makers in that part of their busienss.
The problem is ACA's involvement with Paulson wasn't disclosed. If Paulson was irrelevant, why did Paulson want to be involved? Why was Paulson allowed to be involved? And given all that, why wasn't Paulson's involvement disclosed?
That's the issue. And defending that is, as far as I can tell, the real shame.
Here's another question / retort. Rip it up if you think it's wrong.
Risk can be created, but once created it can't be destroyed. Risk can be transferred ... or shared -- but any method to manage risk will itself add additional risks like counter-party default risk and moral hazard.
Managing risk can still be worth doing. We're better off in an economy where being good at a specific task -- or prudent -- is more relevant than just being lucky.
Thus, I understand why a cotton farmer sells futures.
But I don't get the ABACUS deal. It had no effect on the real US mortgage market. Paulson didn't really short mortgages. The European banks put no money into US mortgages. It was meant to be a private undisclosed deal. It was just a bet.
A few Europeans I suspect were enticed by Basel Accord arbitrage. US-rated paper got favorable capital treatment, thus higher ROE. They stretched for yield that looked even better on a risk-adjusted ROE basis. They told their ultimate risk manager don't worry -- it's a Goldman deal and it's rated. Goldman's name was on all the sales materials.
ABACUS only added to global financial risk, with no benefit to the real economy. More broadly, you can say the same thing about Goldman's Structured Products Group. Investment banking without issuers -- no pitch books, no bake-offs .... great work if you can get it -- but it ain't banking. Call me old-fashioned.
Once upon a time, Greenspan was enamored by securitization -- he made comments about why it was a great vehicle for achieving diversification. Recently he's saying it was the root of all evil. I'm agnostic: securitization used to work well when it was based on plain vanilla 20% down mortgages.
I fear we're just going to add higher capital rules, fiduciary rules, etc without dealing with the real issues. Among these are Fannie and Freddie being looked at as vehicles for effecting desired societal change.
Saints preserve us!
At this point, Im on the record and I can't respond to everybody's perspective.
FWIW, Goldman's stock has rallied from about $150 at the time of the hearings to $160 at moment.
I'll just reiterate a couple of bullets:
1) I have no problem with sythetic CDOS and shorting. They need to be cleared a la the CFTC.
2) I will bet Goldman's 33 and 34 Act disclosure was pristine.
3) I will bet that ACA knew, as Paulson reps have already stated, that Paulson was shorting. At worst, you will have competing recollections
4) Paulson and ACA negotiated the reference securities, and since ACA was the long, they were the selection agent of record. there will be an underlying agreement and contract that provides evidence of that posture.
If this is the best the SEC can do when it's trying to show how good a regulator it is, it's pathetic.
5) No major corporation will be deterred from hiriing Goldman for significant advice. Government related entities may be. Politics again over intelligence.
6) For those who care but didn't see it, go watch David Viniar's testimony again.
The GC at the SEC is a former SCt clerk who has spent all of his career in the securities bar. He knows it backwards and forwards. I am highly skeptical of the notion that if it were "pristine," he would let the action go forward.
I'll put the SEC GC up against any securities lawyer in the country - bar none. I think it's fairly well accepted in the bar. I've talked to other senior members of the securities defense bar who read (as a matter of professional education - to keep up with the chitchat) and they each said that if the facts are as alleged there is a violation.
Pristine? I have not heard one member of the bar, in my private conversations, all with heavy hitters, suggest the case has problems. They, I, and the SEC GC could be wrong: I doubt it. Moreover, I am quite sure we all know quite a bit more about disclosure law than you....
Which is why you are betting ... not asserting; and why Goldman has fallen back on the idea that was enough to describe the referenced securities.
They know they have a problem. I predict a settlement under 17(a)(2) or (3) of the '33 Act. The question is how big a penalty at this point.
Re: ABACUS and the obvious non-disclosed conflicts: CardinalPark -- and some others here -- doth protest too much ... and have done so here for too long, So they've asked for what follows: They could have just conceded the narrow legal case over ABACUS as just a one-off fuck-up. But no. Goldman never has client conflicts ... and Goldman never fucks up.
Is this a trained reflex with Goldman alums? Or has Goldman actually been sending you guys talking point memos? "Once in, never out."
At this point, ABACUS is just a sideshow ... with only a sideshow legal endgame left. Looking ahead the Greek CDSs are a bigger exposure for Goldman than ABACUS. I expect more shoes to drop.
But the larger point is that Goldman has put itself in a corner. It's not your Daddy's Goldman Sachs anymore, and hasn't been for some time. It hardly even banks industrial companies anymore. It has no constituency left, but itself. It serves no purpose, but itself, If Goldman were wound down and liquidated, would anyone but Goldman and its alums care? Goldman is just another hedge fund ... with some I-bank window dressing ... and many quite capable club-able people. That's it.
So why shouldn't Goldman be legislated out of the banking system to be left as just another pirate hedge fund?
This outcome may actually play out with Financial Services Reform. Even many Republicans in Congress want to see this happen. Don't you see this possibility in the cards? Or do I have to write you a derivative contract to that effect? I'm open for business. Call me.
Criminal probe initiated. Read 'em and weep, CP. 'Nuff said.
I have to agree with most of what The Truth is Out There wrote, although he/she is more vitriolic and entertaining than I am. This ain't your father's Goldman. Today Goldman is essentially a hedge fund that incidentally has access to the Fed's discount window. Nice gig.