The Fourteenth Banker Blog

April 17, 2010

Goldman and Bank Reform

Filed under: Running Commentary — thefourteenthbanker @ 2:14 AM

By now you have heard that the SEC charged Goldman with defrauding investors in its conflict of interest and lack of disclosure regarding the sale of complex CDOs.        This could be a strengthen the hand of reformers on Capitol Hill and in the White House. Perhaps the days of open cheating and self dealing are drawing to a close.

Why is Goldman still a bank anyway?      Clearly they can make enormous sums and the market believes they are well capitalized. Why continue to have access to the Fed Discount Window?    Answer:   because they are Too Big to Fail.



  1. Look, first thing, I’m not a huge GS fan. Biggest problem I’ve always had with GS is not knowing exactly where their interests lie. All that said, I am very familiar with this whole trade, and really do not think there is much to the SEC’s charge in this. In my prior job at a hedge fund in the structured products group, I remember when we were approached with a very similar trade. Third party equity, they wanted to bring most of the portfolio, and we would put our name on the transaction as the selection agent. We looked at the assets and passed. Why? Because, we didn’t want our name associated with what we thought was a bad transaction. Simple. But, that is why there are horse races. If you would like to outlaw casinos ok. But don’t get mad at the house for winning. Am I wrong?

    Comment by ACE — April 17, 2010 @ 2:49 AM | Reply

    • Thank you for this comment. I think your expertise could be helpful. Can you explain the transaction and how it differs from what is reported in mainstream media? Your firm decided to pass in similar circumstances. Why do you think Goldman would do otherwise? Are the controls different, the culture, the individual incentives?

      Comment by thefourteenthbanker — April 17, 2010 @ 3:58 AM | Reply

      • Well first, here is a link to the pitchbook (via the NYTimes)
        I took time to read through the entire SEC legal filing (not too long, about 20 pages). There was nothing in that filing which really stood out to me, but I’m not a lawyer. I’ll try to explain how I think this worked and how I think it went down, here goes.
        –once more, these are just my thoughts based on my own experience and not from any direct knowledge of this specific transaction. (And I’ll apologize for typos in advance, too).
        So, Paulson comes to GS and says they want to take a short position on the sub-prime RMBS market. They decide to utilize the ABACUS platform (which had already been created to allow GS to short the mortgage market). In the spirit of keeping things kosher (ok, maybe more in the spirit of protecting themselves from being sued in the future), they decide to get an “asset selection agent” (in this case ACA) to act as an impartial 3rd party and select the portfolio. Paulson & co, as the equity sponsor of the entire transaction sends ACA a proposed portfolio. ACA kicks some stuff out, and adds some selections of their own, and this process goes back and forth until there’s a mutually agreeable portfolio. Keep in mind, ACA doesn’t have $$ in the game here (they’re getting paid for their service) but they do have and are concerned about reputational/platform risk. At any rate, once the portfolio is set, it’s put into the pitch book and marketed. Paulson, for it’s part, now decides to take short positions (presumably in a net larger amount than the equity size of the transaction). Exactly how they did this and what they shorted I’m not sure, since it doesn’t say in the brief. I’m very curious about that.
        But here’s the thing. Does it really matter that the same company is creating the deal and then is also shorting portions? They’ve got a view, to be sure. But ACA decided that they were ok with the portfolio. Everyone who invested in the deal, looked at that same portfolio and said ok. From where I was sitting at the time (at a hedge fund with a lot of ex-GS guys), it was pretty common knowledge that various folks were out shorting the mortgage market big time. But some folks had been doing that already for a few years and been losing money on those same shorts.
        So, here are some questions not yet answered by the media (or SEC as far as I know). What exactly did Paulson & co short in the ABACUS 07 deal? Was it RMBS collateral going into the transaction? Was it slices of the ABACUS bonds? What were the notionals? What was the structuring agreement with GS? Let’s see the sources and uses of cash. Now, if Paulson had been the selection agent, and had not disclosed that they were net short, that would sound potentially fraudulent. But that wasn’t the case. So, was GS telling everyone everything about the transaction? Certainly not. But did they have to? I don’t think so either. This is why we have “Big Boy” letters.
        would love to hear other thoughts

        Comment by ACE — April 17, 2010 @ 10:05 AM

    • Yes you are wrong. The casino was rigged. Heads they win. Tails you lose. It is called the Casino Gulag Economy.

      If wrapping up garbage financial instruments and peddling it as AAA and then selling the garbage to your customers and then betting that the garbage is worthless and will collapse is not cause for criminal charges, then please explain to me what is.

      Mad indeed! That is why I was born!

      Don’t even get me started on high-frequency trading.

      Goldman Sachs are scum!


      Comment by The Mad Ape — April 17, 2010 @ 4:07 AM | Reply

  2. yet more from Max Keiser who knew about this months ago:

    Goldman Sachs Are Scum Part 1:

    Goldman Sachs Are Scum Part 2:

    Anyone denying that Financial Terrorists control the entire financial industry and the White House are plumb simple!


    Comment by The Mad Ape — April 17, 2010 @ 2:51 AM | Reply

  3. Do you know to whom we might write to encourage criminal charges be filed?

    Comment by Jan McLaughlin / The Faux Press — April 17, 2010 @ 3:00 AM | Reply

  4. Casinos are highly regulated and get in big time trouble when they rig the game.

    Comment by oldgal — April 17, 2010 @ 6:19 AM | Reply

    • Yes, and if there’s something rigged, that would be criminal. However, casinos don’t get in trouble just because the odds are in their favor (which the casinos insure that they are). GS didn’t “rig” anything (as far as I can tell). They didn’t have control. Also, remember that these kind of securities are only available to “sophisticated” investors. You or I probably wouldn’t be able to qualify to be able to purchase them in the first place. Presumably, the folks doing the investing know what they are getting into.

      Comment by ACE — April 19, 2010 @ 6:36 AM | Reply

      • GS didn’t rig anything? Surely you jest. Sophisticated investors? You are one sandwich short of a picnic.

        The reason the fraud charges have been laid is because GS did rig the casino and package garbage financial instruments and sold them to their clients saying that they were a pot of of gold. Then they hedged that these instruments would crash because they knew that they would.

        It amazes how people who are supposed experts in this field are not sophisticated enough to see fraud when it slaps them in the face.

        Not only did Goldman Sachs rig the casino, they used it to destroy the world economy. Criminal charges should be filed.

        Max Keiser was 100% correct when he labeled Goldman Sachs as scum. God’s work indeed!


        Comment by The Mad Ape — April 19, 2010 @ 7:28 AM

  5. Do you think that Glass-Steagall Act of 1933 will be put back on the books in whole or in part? The dissolving of this Act has greatly accelerated the problems we are facing. Do you see any honest consensus amongst those whom you have worked with as this legislation being a component in getting back to a healthy system wide center?

    Comment by Sarah Renee — April 17, 2010 @ 7:47 AM | Reply

    • The Glass-Steagall Act of 1933 was put there by our grandfathers to keep the Great Depression from happening all over again.

      Obviously it’s repeal has led to our down fall. But you can not truely fault the banks as they were losing money left and right and had to invent ways to make money so the act had to go. The real problem is wages in the U.S. right now.

      Without the means to produce wealth (read manufacture things of value) in the United States of America we are on a collision course with financial ruin. Of course the bankers had to cheat and steal to turn a profit and keep things going.

      In 1932 a man spent all day in line waiting for a bowl of soup.

      In 1942 a man spent all day in an assembly line producing war machines to defeat Hitler.

      In 1952 a man spent all day in an assembly line producing goods for the USA to sell to the whole world and for us to get wealth.

      In 1992 a man spent all day moving manufacturing plants to China.

      In 2012 a man will have spent all day waiting for a bowl of soup again.

      It is clear that taking an apartment in New York City that was built in 1920’s for $2,000 and selling it today for $2,000,000 is not the way to really make money.

      We need to go back to making things or we are going to be dirt poor again.

      Comment by karen smith — April 23, 2010 @ 12:57 AM | Reply

  6. Nice to see that big brother is present on this blog. Deleting some of my comments and editing others, changing the context of what I am saying.


    Comment by The Mad Ape — April 17, 2010 @ 8:10 PM | Reply

  7. And now my comments appear in their original form. WTF?

    Comment by The Mad Ape — April 17, 2010 @ 8:31 PM | Reply

  8. Dear Fourteenthbanker,

    Thanks for your blog and your courage. On this issue I am too hopeful that the tide is turning and we will start persecuting. Hopefully this is just a beginning of real regulation reform.

    Comment by Allen Vaysberg — April 17, 2010 @ 9:00 PM | Reply

  9. Just thought I’d post again, having been looking at this issue a lot over the last few days. This whole SEC vs GS thing is complete horse-shite. ACA came out yesterday saying they were fully in the know (unlikely, but doesn’t matter). Word on the street is folks over at GS are pissed! They feel impunged They’re gonna fight.
    To me this is important. Do we need some reform (or at least effective oversight) yes. But going into hystrionics is not going to help anybody.

    Comment by ACE — April 23, 2010 @ 12:02 AM | Reply

    • You are right on that. There are many real issues that may not have anything to do with “crimes” in a legal sense. This one will have to play out. SEC may have shot its toe off.

      Comment by thefourteenthbanker — April 23, 2010 @ 12:40 AM | Reply

  10. Let’s see Goldman Sachs needs the discount window of the Federal Reserve to borrow money at zero percent interest. They then go to the Treasury and buy US government bonds that pay 3 to 4 percent interest.

    This should worry people on two levels. First that the US is broke and no one is buying our T-bills. That forces the Federal Reserve to have Bernanke print money at the Federal Reserve in order to have buyers of T-bills that have the trillions of dollars needed to buy them.

    Second Goldman Sachs is able to make 3 percent to 4 percent money off the Taxpayers when everybody is hurting so bad and the real economy has not turned the corner yet. We are back in the age of Robber Barons.

    This is not going to end well folks.

    Comment by karen smith — April 23, 2010 @ 12:47 AM | Reply

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