Monday, April 19th, 2010

The Goldman Sachs SEC Investigation Is A Joke

A SHORT COMPLAINTOn Friday, when the Goldman Sachs SEC investigation press release went out, I was working in a Starbucks in a small town. There was a rather normal-looking man, and he was whisper-screaming on his cellphone about Goldman Sachs. I could hear phrases popping out, like "finally going to get them" and "those bastards" and the like. He had lost his mind, and the New York Times quickly followed. The Goldman Sachs SEC investigation-which is the sadsack SEC's unconvincing look at a minor bit of potential malfeasance in a single unit of the company in its transactions with other banks, with a potential fine equal to an extremely small percentage of Goldman's daily income-has been forcibly evolved by the media into a bizarre and misunderstood scandal. The SEC investigation made the front page, above the fold, of the New York Times both Sunday and today; Sunday's story was the most ludicrous.

Line by line, the Sunday Times story is composed of hot air and baloney. (Today's is more informative, at least, if largely speculative.)

The lawsuit "seemed to confirm many Americans' worst suspicions about Wall Street," they wrote, which is true, if you consider that the sentence hinged on "seemed," as no American understands the complaint. (It is only fair to note that I have read it several times now, and spent a lot of the weekend discussing it with people smarter than myself and still I probably do not understand all of it either.) Much of what follows in the Times piece is speculation on the idea of there being possible future lawsuits by other bank-customers of Goldman, and on the growing political machinations for regulation in a completely unregulated market. (Which, great! Looking forward to that.) The SEC lawsuit "raises new questions"! (Questions not really new or raised.) The stakes "couldn't be higher"! (Oh but they could.) Goldman's success is "controversial"!

The success is not, particularly, controversial. It is if you are playing perception politics.

And this piece of financial analysis is entirely coverage of perception. It is similar to the current role of the Times in covering actual politics; the paper reports on policies and initiatives by political leaders but renders their decisions in terms of quests for "political capital," that terrible meaningless and misused phrase so beloved of the Bushes, or in terms of the reaction of the "political audience." This is a very mistaken position regarding the importance of the public-and a cynical one, too, as it chalks up all actions by politicians or bankers to a wish to court the public, instead of, you know, a wish to actually do something.

The perception is stuck now; and in the intersection of politics and finance, it can safely be described as "a toxic political cloud"-even if nothing ever comes of it, which it most likely will not.

It does not in fact matter too much what the public thinks of Goldman Sachs! If they had a public opinion poll on how the average uninformed American "feels" about the bank, people would report that they feel quite bad about the bank, and that is not liable to change at any time. There are many reasons to dislike Goldman Sachs, of course. Few of them are as elaborate, specific and confusing as this case.

What's even worse about these stories is the confusion about who is an "investor." That word gets bandied about quite a bit, and never, in this case, does it mean "people who buy stocks" or "people who are not members of billion-dollar commercial entities." The game? It "is rigged, the odds stacked in the banks' favor." But, but… the game is entirely composed of banks. The game is always in "the banks' favor." There are no non-banks involved!

"Any investor who bought these C.D.O.'s and lost a significant amount of money is probably looking at their investment and wanting to know: what were the details behind the sale?" said William Tanona, an analyst at Collins Stewart. "Will they contact the S.E.C. and say, ‘Here's the transaction we participated in, and we'd love to know who is on the other side of it?'"

The poor uninformed investor! Main Street! Who was the investor so taken advantage of in the SEC charge? IKB Deutsche Industriebank AG-an immense bank, with nearly 2000 employees, that so wholeheartedly bought in to the subprime fad that it had to be bailed out twice.

A look back at Louise Story's largely excellent work at the Times on the Merrill Lynch-Bank of America craziness showed that that major financial story-which provided real insight into the relationship of the government and the banking system-rarely, if ever, broke out in the paper beyond the front page of the business section (except at least, once-when bonuses were involved). And also "S.E.C. CONCEDES OVERSIGHT FLAWS FUELED COLLAPSE" made it to the front page back in September 27, 2008, which is slightly another kettle of fish but not at all unrelated to the SEC's rather dismal little investigation into Goldman Sachs now.

The actual complaint is unshocking. Our German friends told Goldman Sachs that they weren't interested in purchasing CDOs that didn't have a trusted collateral manager; GS hired and negotiated with a trusted collateral manager to create the CDO packages that they then sold to the bank. That there was another party involved helping pick the package that was chosen by the Germans doesn't seem all that shocking-even while that other party "bet against" the package. (A legal act, mind you.)

The Merrill-B of A story was a real story about how the financial crisis went down. This story, on the other hand, may be the beginning of a long series of confusing, irritating lawsuits-although we'll see how many there are, in light of the fact that Goldman is likely to win this one without even really trying too hard.

44 Comments / Post A Comment

KarenUhOh (#19)

Lawsuits are mainly about perception, as well–and getting outsiders to "invest" in a perception based upon how they "feel" about "facts" that are, in fact, merely positions.

It is a "bet" that nine times in ten ends up being "resolved" by selling short and cutting losses. The "perception," at days end: everybody died, just a little, but everyone won back a bit of pride, for having the mettle to show up. And what you learned is, it was a game, and you have to determine whether it was worth your time, effort and money to play.

dado (#102)

Never have truer words been printed. This is clearly an example of a little knowledge being a dangerous thing…anyone who is trying to wrap themselves up in the arcane world of credit default swaps has fallen victim to the misdirection clearly being sent your way. This is singularly an attempt to get bank reform passed, any Republican against bank reform can now be painted as pro "fraud". Whether there was actual fraud or not matters not in the court of public opinion, and that's where the political power lies.

Are you arguing that we shouldn't "get bank reform passed"? And, as a related question, are you a banker, per chance?

dado (#102)

I have no problem with reform, it's the can't see the forest for the trees thing that irks me. The fraud charge, in my opinion, is bunk. You cannot make a synthetic CDO without having someone on both sides of the trade, the fact that it was Paulson is meaningless. But if you point out how he made 1bn on the trade, populism is now part of the equation.

Well, if you can't create one of these new-fangled derivatives without having the people shorting them involved in creating them, that's just fucked up. I ain't no financial expert, but I can smell a conflict of interest like that a mile off. The profit motive is guaranteed to screw over buyers in a situation like that.

Also, I think it's interesting that you never answered my question about whether you were a banker. I assume that means the answer is "yes." So, happy profits on your CDOs, as long as those profits last (I can't think why investors would want to keep buying them much longer).

According to reports, GS identified a third-party who didn't have an interest as the party who was choosing the contents of the product. But that wasn't true.

Ronit (#1,557)

Yup. I laughed out loud at the NPR reporter who was talking about how other CDO investors were "sitting at their kitchen table" worrying about whether they had been defrauded as well.

BardCollege (#2,307)

I'm sure all the banks have wonderful kitchens, not so sure that the bankers frequent the wonderful tables.

Ronit (#1,557)

Giant German banks don't need food! They sustain themselves entirely on the crushed dreams of widows and children.

Joe Schoech (#4,464)

point is goldman misrepresented paulson as the equity investor when really he was betting against the cdo, its a v bad thing and certainly not common or legal – had the other parites involved been aware of it they wouldve never invested 'oh the guy who picked these securities has an interest in seeing them fail, that sounds delightful, i will now wager that they will succeed, here is my wallet!'

just cause the times reporting misses the point doesnt mean its not a big deal – it is – and just because it starts out as a small civil case doesnt mean itll end that way- facts are uncovered creating new charges etc

salmon deconstructing blodget has some good details

btw yr comment box is comically small

petejayhawk (#1,249)

Joe Schoech LAUGHS DERISIVELY at the puny size of your weak-ass comment box.

Joe Schoech (#4,464)


roboloki (#1,724)

is your comment in yet?

People, it's not the size of the comment box that matters; it's the "motion of the the notion."

OuackMallard (#774)

I sort of got the feeling that Choire was basing his opinion on the Blodget piece? Maybe that's not fair.

It is a big deal, though, as you can see looking at GS share prices since Friday. GS doesn't deal with Main St., so their stock price seems to be responding to a predicted damaged reputation in the institutional investor space.

In this case, it's not about the charges per se. It's about what else shows up during the process of discovery.

Honest Engine (#1,661)

The SEC has the documents and has opened an investigation by they can get all the documents they want. They're in the complaint. What they probably don't have is Tourre throwing his bosses under the bus. They are probably trying to leverage the complaint against Tourre for this kind of testimony.

kneetoe (#1,881)

I don't think you can draw such a clear line between political calculation and actually doing something–they are complexly interconnected. That said, it seems to me that the relationship between the two is frequently mis-understood, even (or especially) by practioners such as politicians and pundits. But even when they get the "politics" wrong, their perception still impacts their actions.

OuackMallard (#774)

It seems pretty clear to me from the complaint that there was clearly an attempt to defraud investors; why does it matter that the investors were banks? This reminds me of Goldman's feeble excuse that "we lost money on the deal" as if that clears them from wrongdoing. The Merrill-BofA story is certainly may be the real story about how the financial crisis went down, but stories like this demonstrate that fraud was a part of the story in how the crisis got so large. If this is the case, then doesn't more regulation make sense to prevent it again?

deepomega (#1,720)

Yeah I mean it seems like a) The public doesn't understand whether/why they should be mad at GS and b) the government is riding that populist anger all the way to November. Probably a good political strategy, but maybe not actually going to affect anything in real life.

Limaceous (#2,392)

Well, yes, that is a ridiculous image. For the most part, CDO investors were banks and institutions. But many of those institutions were pension funds investing on behalf of people with kitchen tables (union pensions, state employee pensions, teachers pensions), it's just that the people sitting around kitchen tables had NO IDEA that those with a fiduciary responsibility were investing their retirements in these fraudulent, toxic investments.

"GS hired and negotiated with a trusted collateral manager to create the CDO packages that they then sold to the bank. That there was another party involved helping pick the package that was chosen by the Germans doesn't seem all that shocking-even while that other party "bet against" the package. (A legal act, mind you.)"

I'm sorry, Choire, but you totally lost me at that sentence. The fact that that "other party involved" in helping pick the package was a short-seller who bet on that same package to fail is a VERY VERY big deal, in my book. He's obviously going to pick the mortgages most likely to fail, because that will enrich him. The buyer is being defrauded, because he (or the bank or whatever) thinks the people who assembled the CDO designed it to succeed, not to fail. I'm no expert in whether that's legal but if it is, it shouldn't be. But legal or know, it's sleazy and dishonest and fraudulent and WRONG.

Joe Schoech (#4,464)

oh its illegal, you are required by law to disclose this sort of thing, and are certainly not allowed to willfully mislead investors

spanish bombs (#562)

you guys got trolled. obvious joke post!

Ya think? If so I'm embarrassed. I didn't pick up on any irony in the post, but maybe my brain's irony sensors are on the fritz today …?

gregorg (#30)

On the bright side, this post make an unassailable argument that news coverage of the Goldman Sachs SEC investigation is a joke.

Rod T (#33)

Choire Sicha, small-town barista.

That's how I read it, too, and it distracted me no end.

the Loud Coast (#1,362)

I hate writing this, but I think that this lawsuit may be beneficial in airing some facts about Goldman's actions right around the time that public opinion will be shaping up around financial reform legislation. As I said, I hate writing this, Im really clueless in this area, I don't like reducing these things to political equations. I dont want to be any kind of wonk or analyst, but that is one of the main things I've been thinking about it.

Couldn't disagree more.

This lawsuit is a case study of how our economy got fucked. It explains why Wall Street — long after being aware of the housing bubble — was so willing to purchase complete shit "no money down, liars" mortgages from shady mortgage brokers, package the mortgages and then sell the security.

This is why the bubble got much larger than it ever should had. Wall St. knew the housing market was way over-valued, yet they continued with these deals because of the fees involved and the shorting opportunities.

Also, "trusted collateral manager"? Interesting that at the meeting between GS, ACA and Paulson, Fab from GS (a co-defendant) emailed a co-worker at GS and described the meeting as "surreal." I imagine it is surreal when ACA inquired if Paulson would be purchasing the security that Paulson had such a material hand in creating and Paulson's guys answered in a non-comittal way.

The ML-BoA debacle was after the pop and while, very disconcerting, it does not explain how we got here as much as the GS case.

BardCollege (#2,307)

Lehman clearly fucked up the whole "knowing the housing market was over valued" thing.

Good point, I should have said "smart money on Wall St."

But a lot of the guys at Lehman and Bear probably knew the housing market was overvalued, however, because they were receiving significant — cash — compensation connected with pushing these deals through, they did not care so much about the long term effects on Lehman.

Yes, the people making the decisions were compensated in upfront fees and bonuses and so didn't care about the future. The same with the mortgage brokers, etc. Closing fees are now a lot larger than they used to be and it creates the wrong incentives. Maybe all the actors – brokers, lawyers, banks, syndicators – should be have their fees at risk for some period, say, at least 5 years?

Joe Schoech (#4,464)

riding the bubble, bailed etc

raf_oh (#1,296)

"The Merrill-B of A story was a real story about how the financial crisis went down."

The Merrill/BofA story only came about after everything was set up to collapse. I'd say the bricks were laid, deal by shady deal, and if GS knew the portfolio selection was done by a fund with an adverse interest, not disclosing that is an omission of material information.

Also: you're right, what the public thinks re: GS is meaningless, but what their clients think is a big deal, and this may really hurt GS in the eyes of their counterparties. Who wants to be on the other side of deal with them now?

Though I'm hoping Choire is just making fun of the WSJ editorial?

dado (#102)

Every single synthethic CDO, we're talking billions and billions, had a counterparty with adverse interests. The disclosure was not ommitted, it is the basis for the entire transaction.

Joe Schoech (#4,464)

the fact that 'every cdo has a counterparty' isnt relevant here – at issue is who the counterparty was and if their interests were accurately disclosed to investors – paulson was represented as the equity investor in the deal when in fact he was the counterparty, this is not common or legal – do you really think anyone would knowingly buy securities hand picked by someone who was betting on them to fail

raf_oh (#1,296)

Yes, like in every transaction, the buyer/seller have opposite interests.

The case here though isn't that Goldman was on the other side (they say they weren't, but it's not illegal if they were), it's that they should have disclosed if they knew the security was structured to detonate.

dado (#102)

Not every CDO…every "synthetic" CDO. And yes they did purchase securities hand picked by someone how was betting on them to fail. Every day. By the billions. Just because in hindsight one guy was right doesn't make it wrong. If you are looking for a culprit, blame the rating agencies.

It amazes me how some people will come up with some kind of logic to rationalize any behavior that makes somebody money – no matter how obviously immoral, deceptive and just plain sleazy that behavior is.

raf_oh (#1,296)

The fact that this CDO was synthetic (funded by selling CDSs) is irrelevant. You can't have an offering memorandum/term sheet/etc for any security (synthetic CDO or otherwise) that excludes pertinent information about the security.

Though IKB would likely not have purchased the security if they received a hindsight-correct rating from the agencies, on that we agree. Though it's hard to name anyone a culprit when so many people had a hand in the entire process.

dado (#102)

This is precisely the sentiment this is supposed to invoke…the investigation will only result in the passage of financial reform by getting it's opponents in line, other then perhaps the sacrifice of a 31yr old VP. Reform, that I may point out, that I am not necessarily against. Public sentiment is measured in votes, the only currency needed by any administration to enact their agenda. Getting wrapped around the axle regarding the intricacies of a specific deal obfuscates the ultimate motivation.

barnhouse (#1,326)

Paulson getting fingered here is not inconsequential. The fact of that happening at all is pretty weird.

missdelite (#625)

"I'm not a crook."

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