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Goldman Implicated In CDS Price Manipulation Scandal

Tyler Durden's picture




 

One of the recurring topics on Zero Hedge since inception has been that Goldman's flow/prop operations, simply by dint of their massive, monopolistic size, allow the firm to manipulate various securities, among which equities, structured products, and especially CDS. And while the firm has migrated to a more wholesale market manipulation paradigm when it comes to equities due to the far smaller bid/ask spreads, requiring the need for Goldman to become either an SLP on the NYSE, or to create market manipulating algorithms, such as that it is currently accusing Sergey Aleynikov of stealing, where the firm has always excelled has been in the far thinner, and far more profitable, courtesy of wide bid/ask margins, CDS market. Today, we get confirmation from Senator Carl Levin, to whom it appears Goldman has the same trophy value as SAC to the New York District Attorney and Federal Task Force, that Goldman was engaged in precisely the kind of CDS manipulation we have previously alleged the company was involved with.

From the FT:

Goldman Sachs ’ trading activities in the credit insurance market in 2007 have come under attack from a US senator after e-mails revealed a senior trader urged colleagues to “kill” some investors’ positions.

Carl Levin, chairman of the Senate permanent subcommittee on investigations, told a hearing on Wednesday that the alleged activity “looks like a trading abuse to me”, although he added that at the time in question the credit insurance market was unregulated.

While lacking the nuances of the firm's Abacus insider trading scandal, in which the firm bet openly against clients, here the wager was even more sinister: in essence while making markets in names in which Goldman was often the only axe, it would subsequently, knowing full well which clients has how much protection on, take advantage of this information and create artificial squeezes in any direction it desired. Furthermore, by controlling the variation margin on any position, Goldman could force its own clients to collapse on their positions, at massive losses, just so Goldman would make a profit, and Goldman's own traders could make another record bonus.

Mr Levin said that in May 2007, Goldman adopted a “short squeeze strategy” to drive down the price of credit default swaps on troubled mortgage-backed securities. Mr Levin alleged the move, which Goldman denies, would have enabled the bank “to purchase the CDSs for itself at artificially low prices”.

The subcommittee’s probe uncovered a document revealing a second trader stating that Goldman “began encouraging a squeeze” – a strategy that never materialised due to market conditions.

Ostensibly, the level of wrongdoing here could be said to be far greater than in the Abacus fiasco, as while Goldman was obviously making a market in CDOs, with or without one party knowing who or what the other party in the synthetic transaction was, in this case Goldman was the only beneficiary, and it can no longer use the "we are making markets defense" - in fact, there is no defense, as this is precisely a demonstration of just the monopolistic flow-control behavior we have been arguing for years, to which the only remedy is a true dismantling of Goldman's prop trading operation, and not its mere rebranding into a client-facing trader with billions in inventory. This is not insider trading: this is the worst form of abdication of client responsibilities imaginable.

Mr Levin’s attack opens a potential new front in the controversy over Goldman’s trading practices. In July, the bank paid $550m (€416m) to settle fraud charges from the Securities and Exchange Commission over an MBS sold during the financial crisis.

Mr Levin produced e-mails in which Michael Swenson, an executive in Goldman’s fixed-income trading division, told colleagues to offer cut-price credit default swaps on MBSs. As the housing market collapsed in 2007, investors, including Goldman, were rushing to buy default swaps to short MBSs that were losing value.

In another e-mail, he said Goldman should reduce prices on CDSs to “cause maximum pain” for existing holders of credit insurance.

Furthermore, it appears this has been a pervasive practice at Goldman, and surely not only in its CDS trading vertical:

In his end-of-year evaluation, uncovered by the subcommittee, Mr Salem called the squeeze a “doable and brilliant” strategy but said it ultimately never happened.

When cornered with this revelation, Goldman squirted some ink, and proceeded with the usual defense: you are all a bunch of idiots, who don't get the deeply humanistic and totally non-ulterior motive at play here.

Goldman said on Thursday: “This type of language sounds awful and is very disappointing, but it does not reflect the reality of what happened. There was no short squeeze.”

Of course, these identical kinds of allegations a year ago merely got us branded as the "conspiracy" blog. While we know too well, that before anything is fixed within Goldman's (allegedly) criminal and all-encompassing monopolistic enterprise, none other than its supreme defender, the Federal Reserve will have to be taken down, meaning the status quo will not change until after the revolution, we are at least once again, gratified to know our crackpotness was, as happens all too often, based on real facts which in any other banana republic would lead to at least one conviction.

 

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Thu, 12/09/2010 - 20:49 | 794446 plocequ1
plocequ1's picture

Very simple..Ctrl+Alt+GSCDS+Del= Problem solved. Erased from the memory of man. Rally on.

Thu, 12/09/2010 - 21:00 | 794461 gwar5
gwar5's picture

Cool.

Fri, 12/10/2010 - 00:54 | 794877 flacon
flacon's picture

LOL!

Fri, 12/10/2010 - 11:43 | 795499 indiansummer
indiansummer's picture

no surprise with the GS tools... this article got surprisingly little coverage, but shows the Squidz total lack of remorse. in the matter

http://www.propublica.org/thetrade/item/trading-for-the-client-or-winning-on-its-own/

Thu, 12/09/2010 - 20:59 | 794460 gwar5
gwar5's picture

Thanks.

My gut just tells me GS is the Wall Street mothership of all FU shit.

They cooked the books that got Ireland and Greece into the EU.

I don't know how that converts to hard assets, but it wasn't free.

Fri, 12/10/2010 - 00:58 | 794885 flacon
flacon's picture

Goldman is the mother maggot which spawns governators/politicians/elitists. JP Morgan is the semen which impregnates the Goldman's ovaries with demon seed. The White House is the maggot flesh which controls the IRS - the sticky saliva of external digestion. 

Fri, 12/10/2010 - 01:02 | 794887 Bastiat
Bastiat's picture

I'm not gonna sleep right after reading that.

Thu, 12/09/2010 - 21:05 | 794473 Arius
Arius's picture

i am shocked! i suppose while doing God's work

Thu, 12/09/2010 - 21:08 | 794481 RoRoTrader
RoRoTrader's picture

No fucking way!!!  Not the GoldSac???  Cannot be! Please, someone, wake me up, I must be trapped in a nightmare.

Thu, 12/09/2010 - 21:11 | 794491 Bearster
Bearster's picture

It seems to me that politicians scaring us that we need to bust up a company / regulate the market for our own good, or the good of the market, or some sort of good to their campaign coffers ... is how we got into our current "crony" fascist mess.

Let's not add to it.  Carl Levin is not exactly one of the good guys.  The end result of whatever comes of this will be:

1) more money for Carl Levin

2) more opaque regulations written by experts...

3) ...benefitting Goldman Sachs

Let's get rid of the Fed, get rid of fiat paper currency, legal tender laws forcing people to accept paper instead of gold, subsidies, bailouts, and regulations.  In a free market, those who add value make money, and the rest are history.

Thu, 12/09/2010 - 21:26 | 794524 Fearless Rick
Fearless Rick's picture

Hang in there, Bearster. There are more believers every day. Soon, our sentiments will turn to action. The righteous will become the law and the lawbreakers eliminated. We all must spread the word far and wide, with passion and commitment.

Thu, 12/09/2010 - 21:14 | 794498 theprofromdover
theprofromdover's picture

There is no God??????

Lloyd, surely not?

Thu, 12/09/2010 - 21:21 | 794520 buzzsaw99
buzzsaw99's picture

Anyone who does business with the squid deserves what they get.

Fri, 12/10/2010 - 08:25 | 795151 bonddude
bonddude's picture

Uhhh, the squid was operating under the protection of the SEC SLUT !

Don't forget that. Kinda like Whitey Bulger.

Fri, 12/10/2010 - 10:22 | 795153 bonddude
bonddude's picture

uhhhh

Fri, 12/10/2010 - 10:20 | 795155 bonddude
bonddude's picture

sorry for the dupes

Thu, 12/09/2010 - 21:31 | 794531 Cdad
Cdad's picture

No?  Creating short squeezes you say............CRM, CMG, NFLX, FFIV, LULU copper, to name a few.

The criminal syndicate known as Wall Street doing its good works.  I'm not worried.  I know E. Holder is on it.    And I hear that Goldman is almost done briefing Mary Shapiro on all the SEC laws she should not enforce so that the whole CDS thing can simply go away and money can more freely flow into Goldman's bonus pool.  It's all good.

Capital will not form in such corrupt entities as these which is why The Bernank is printing money to fill the void of 31 one consecutive weeks of Average Joe selling equities.

Thu, 12/09/2010 - 22:17 | 794608 Cursive
Cursive's picture

Capital will not form in such corrupt entities as these which is why The Bernank is printing money to fill the void of 31 one consecutive weeks of Average Joe selling equities.

This is why the whole power structure will need to be reset before we move forward.  Central bankers must go before Western Civ can advance.

Thu, 12/09/2010 - 22:32 | 794636 Cdad
Cdad's picture

You are correct, and we will know when we are moving forward in healing from this mess when, first, the central bankers turn on the syndicate bankers in an attempt to save themselves.  And when we have gone ahead and prosecuted the syndicate bankers, we can then address the issue of the central banks.

This is going to take many years, which is why we best get moving forward on it.  This means, of course, that we first need an effective SEC and an effective Justice Department, of which we currently have neither. 

100 years of neglect...arriving like a lead doorstop on my sons' future.  It is time for us to do something unequivocal.

Thu, 12/09/2010 - 21:30 | 794537 Cistercian
Cistercian's picture

 Odd, ZH out in front of this yet again....

  Great work Tyler!!!

Thu, 12/09/2010 - 21:50 | 794571 Bob
Bob's picture

Tyler . . . are you sayin' these mother fuckers ain't gonna do time?

Thu, 12/09/2010 - 21:52 | 794574 JohnKing
JohnKing's picture

hey Tyler, you might want to check in with Sergey..

 

 In the government's summation, prosecutor Rebecca Rohr said that, under pressure from his new boss, Aleynikov "chose to become a thief, a high-tech thief" and downloaded Goldman Sachs' proprietary software the next day.
     Defense attorney Kevin Marino countered that "Let's move fast" better describes the speed at which the government prosecuted his client at the behest of Goldman Sachs.

http://www.courthousenews.com/2010/12/09/32471.htm

 

Thu, 12/09/2010 - 21:56 | 794580 chindit13
chindit13's picture

This was all covered in Michael Lewis' book, which was quick and easy reading, even for Congresspeople.  The book has been out a while.  Nothing has been done.

(Incidentally, anyone who hasn't read the book will find it entertaining/infuriating.)

One of the real beauties of OTC markets is that the price is what you say it is.  This is particular important when marking to market, and allowed the Lake Wobegon Effect (everybody is above average) both within Wall Street investment banks (for bonuses) and in the hedge fund community (for the 20 part of 2 and 20).  BOTH sides to a trade could book a profit, and compensate themselves accordingly.  Everybody's a winner!  Well, everybody except shareholders, investors and taxpayers.

Thu, 12/09/2010 - 22:15 | 794604 ToNYC
ToNYC's picture

 

Goldman plays the Joel Cairo role (Peter Lorre) in The Maltese Falcon of Wall Street. The truth is not on the map in the 3-D card monte they play. They have no reason to not play both ends of the deal and become a derivative of the buyer or seller depending on how they color the deal to the parties they pretend to advise.

Fri, 12/10/2010 - 04:46 | 795051 ZeroPower
ZeroPower's picture

Not familiar with Lake Wobegon Effect but that sounds about right.

For OTC products, sometimes it doesn't matter what youre hoping for as a price in the long run, you book your 'profit' based on what you THINK you could sell back the security to someone else at a future time. Hell, even make a profit simply on the spread as it widens further (or tightens depending on where you stand)

Fri, 12/10/2010 - 01:11 | 794591 blindman
blindman's picture

http://www.minisikerdoskopon.gr/en/

CRIMINAL FRAUD CHARGE REPORT
AGAINST SPECULATORS AND THEIR
GREEK ACCOMPLICES & PARTNERS . http://maxkeiser.com/2010/12/09/must-read/ keiser report no 102.  !!!!!!! . it's all just fraud !!  ongoing  ..... " cds is is a financial bliiifff".  dr. kiriakos tobras . http://www.youtube.com/watch?v=7zXxwYt737o&feature=player_embedded#!
Thu, 12/09/2010 - 22:27 | 794624 Careless Whisper
Careless Whisper's picture

Goldman intentionally short squeezed their own clients. LMAO They got what they deserved if you ask me. Anyone stupid enough to maintain an account with a bunch of criminals should be shown no mercy. The only thing that surprised me is how sloppy Goldman was with the emails.

 

Thu, 12/09/2010 - 22:54 | 794682 dark pools of soros
dark pools of soros's picture

ZH frontrunnin Goldman's perp walk!!

Thu, 12/09/2010 - 22:57 | 794687 treemagnet
treemagnet's picture

Tyler - how would you chart or graphically represent GS size, power, and might.  I mean, its like they're an octopus with a tentacle here there, and everywhere?  I keep hearing the name whenever something crooked is mentioned but its starting to sound like "Fed" or "D.C." or whatever.  Just curious. 

Thu, 12/09/2010 - 22:58 | 794691 anolmec
anolmec's picture

Lets me get this straight. Carl Levin was on the "Investigating Committee" for Oklahoma City, Waco, Ruby Ridge, 9-11, and recomended invading Iraq due to WMD.. I dont think Goldman is to worried about this "investigation". If you ever need a pivot man for a circle jerk, Carl Levin would be your man.

Thu, 12/09/2010 - 23:16 | 794726 moneymutt
moneymutt's picture

dang, I was excited there for a moment. Interesting niche 'expertise" this guy has

Thu, 12/09/2010 - 23:33 | 794762 Alienated Serf
Alienated Serf's picture

carl levin is scum like all senators, but i'll take what we can get.

just to toot my own horn, i did my HS "senior thesis" on Ruby Ridge back in '94.

Thu, 12/09/2010 - 23:15 | 794725 moneymutt
moneymutt's picture

I'm shocked. Shocked.

Americans number one export: FRAUD

Fri, 12/10/2010 - 00:53 | 794873 Vendetta
Vendetta's picture

don't forget the death and destruction

Thu, 12/09/2010 - 23:29 | 794753 Alienated Serf
Alienated Serf's picture

this cds bit may result in another abacus like debacle for GS, but the real fun will be when things get ugly in europe.  after greece defaults and the current regime is deposed, the new guys in charge will be more then happy to expose gs criminality in hiding greek debt. collusion in criminal sovereign fraud is going interesting.  brussels will be very upset at mr. squid. 

Thu, 12/09/2010 - 23:33 | 794759 Cdad
Cdad's picture

Pet peeve...I admit.  But...if you are too lazy to hit the shift key, then you are too lazy to post.  Literally, I did not read you, so I do not know if you are brilliant or not.

Hitting the shift key is NOT hard.

Just sayin'

Thu, 12/09/2010 - 23:36 | 794766 Alienated Serf
Alienated Serf's picture

when i posted there was an error msg that said "your email was not sent, please contact the administrator if this problem continues."

perhaps that is why the post was out of alignment.  

regardless, your pet peeve is insane.

 

Thu, 12/09/2010 - 23:53 | 794794 Cdad
Cdad's picture

Ummmmm...really....you are blaming this problem on some sort of error message?  Please confirm.

As for whether or not I am insane, I expect that is up for debate.  However, that issue is separate from the obvious issue I just put to you.

And so how I know this is near the witching hour, and Hong Kong is coming online with the whole MB thing...please confirm. 

Are you:

1.lazy     2. stupid and obstinant    3.  In Hong Kong

Let me know...seriously....

Fri, 12/10/2010 - 00:04 | 794810 StychoKiller
StychoKiller's picture

I keep seeing some sort of error msg as well, but it does not interfere with MY shift keys! :>D

Fri, 12/10/2010 - 03:11 | 795008 Jasper M
Jasper M's picture

I encourage tolerance on the issue. Until recently, I had a busted shift key, and learning to use the other one in a hurry was not giving good results. So I know how easy it is to trigger your particular pet peeve. 

And, seriously, if having to see non-capped text (so very often the other way around!) is the worst thing to happen to you this week . . . it's a pretty good week. 

Fri, 12/10/2010 - 00:05 | 794809 moofph
moofph's picture

...it's not a pet peeve of mine...don't have any. but, i do notice you have a period missing there...unless you plan to finish your comment sometime in the future...but, i won't be waiting comment police person...geeesh...the irony and hypocrisy is priceless...lol.

...just sayin'.

 

Fri, 12/10/2010 - 01:12 | 794906 Cdad
Cdad's picture

Spalding....shhhhhhhhhh.......

Fri, 12/10/2010 - 01:35 | 794929 blindman
blindman's picture

i had a pet peeve so my wife bought some carpet cleaner

and now it's all good.  we survived.

Fri, 12/10/2010 - 00:14 | 794824 williambanzai7
williambanzai7's picture

REPOST

Fri, 12/10/2010 - 00:38 | 794857 moofph
moofph's picture

...lol!

Fri, 12/10/2010 - 00:57 | 794876 palmereldritch
palmereldritch's picture

Is it squid ink or just GS's secret sauce now out in the wild in multiple high frequency flavours?

A sugary high followed by a flashy crash when taken as simultaneous doses.

If it's anything, it's inky black.

Fri, 12/10/2010 - 00:55 | 794880 Vendetta
Vendetta's picture

the justice system will dutifully slap their wrists, scratch their balls for em and call it a day of administering justice well done ... no doubt.

Fri, 12/10/2010 - 01:22 | 794920 SheHunter
SheHunter's picture

ZH you have it all covered this eve....the 9/11 Conspiracy....God's Right Hand GS and WBanzai7 with an impeccible illustration.  Here's to you.

~V~

Fri, 12/10/2010 - 01:39 | 794934 moofph
moofph's picture

...i concur...and it seems like such a quiet evening...toooo quiet...eeeeerily quiet.

 

 

Fri, 12/10/2010 - 01:46 | 794944 Instant Karma
Instant Karma's picture

I was wondering about Goldman's trading in Mortgage CDS's before the crash. A while back I was reading "The Big Short" and one of the counter party's to the CDS was Goldman. Even as the mortgage market was collapsing in late 2006 and 2007 Goldman was demanding more collateral/margin and marking the CDS's as losing value, instead of gaining value. Seemed to me they were trying to force the positions to be closed at precisely the time the trade was really starting to work. You'll have to forgive me I don't remember the names of the parties involved, but I do remember how Goldman tried to pry those swaps out of the hands of the holders with margin calls.

Fri, 12/10/2010 - 06:15 | 795093 reload
reload's picture

As you say Micheal Lewis did cover this in `The big short` and it is clearly unethical to try to pry a good trade from a customer to your own advantage. However, I do not see Goldman facing charges on this, they would tie any prosecution in knots by claiming that the CDS was behaving like a synthetic option on a security that was increasing in volotility, therefore they had no choice but to ratchet up the margin. In any event there is no prosecutor with the balls to go for them on this, the `facts` would be overun by arcane and esoteric banker speak until everybody was thoroughly confused. When you deal in OTC products (especialy the thinly traded/ wide spread variety) you are the hostage of your clearer or prime broker. Only the inner circle are allowed to win, why Goldman have any clients left at all is the real mystery. At least their name is picking up a bit more tarnish.

Fri, 12/10/2010 - 02:23 | 794972 Threeggg
Threeggg's picture

 "based on real facts which in any other banana republic would lead to at least one conviction"

TD, kind of the same thing with the whole wikilicks thing. All the corruption, murder and theft but the only people in jail are a 16 year old geek and a journalist.

See a trend ??

Fri, 12/10/2010 - 06:05 | 795085 MrTrader
MrTrader's picture

GOLDMAN SACHS = BANKSTERS. AND A PERSONAL MESSAGE TO MICHAEL SWENSON : "YOU ARE A PRICK, SIR." NEXT TIME WHEN I SEE YOU, I WILL PERSONALLY DEMORALISE YOU !!!!!!!"

Fri, 12/10/2010 - 07:21 | 795117 Greater Fool
Greater Fool's picture

The CDS market is full of conflicts of interest, dealers in possession of material nonpublic information, and a whole range of practices that would not be tolerated in exchange-traded securities. This is not just GS--it's basically everywhere.

Yet another reason to find a way to trade these things out in the open rather than OTC, with collateral rules subject to the whims of your counterparty.

Fri, 12/10/2010 - 07:57 | 795133 Widowmaker
Widowmaker's picture

Fraud, cheating, and stealing are all perfectly acceptable as long as it's marked to market daily by an eagle scout -- at least thats what history reflects.

 

 

Fri, 12/10/2010 - 08:35 | 795157 YHC-FTSE
YHC-FTSE's picture

Shouldn't really surprise anyone here - this is par for the course. Okay, so it's good to air out the stinking mess of duplicitous bastards residing in the vagina that is GS. But isn't it more important and urgent that we know what they are doing TODAY? Right now?

Surely the biggest fraud of all is the cartel of 18 institutions in hand with the Fed manipulating the hell out the world's reserve currency, insider dealing the equities markets to death, propping up the Dow, and stealing from American tax payers? Everyone seem to know this - some of us even profit by it, but nobody does anything about it. Weird. I guess prison is only for those who reveal crimes, not for those who commit them.

Fri, 12/10/2010 - 11:25 | 795431 Bartanist
Bartanist's picture

I wonder if the $147/barrel oil squeeze on SemGroup that forced its bankruptcy will ever come to light?

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