Goldman Sachs exotic housing bet; was it illegal ?

Much speculation was done over the past year about the nature of the hedges Goldman Sachs has done in the housing securities. While there was no certain proof of Goldman Sachs misleading its investors many believed, among them ZeroHedge, that the nature of Goldman Sachs hedges was basically illegal and fraudulent, given the two tier treatment of the housing securities by Goldman Sachs.

In the recent report published by McClatchy some new and interesting details concerning those hedges are being brought into the spotlight. We hope that the regulatory bodies will perform their task and launch an investigation about the nature of those hedges.

Also, if Goldman Sachs was hedged via the CDS contracts underwritten by AIGFP, the possible default of the insurance giant would, almost certainly, issue a lethal blow to Goldman Sachs itself. While those hedges are in no way illegal by itself, the way and the time when Goldman was hedging his housing exposure is, to say the least, suspicious.

A detailed view is presented in McClatchy article published today, and we hope that the article will bring the much needed attention and finally result in an investigation into those hedging practices done by Goldman Sachs.

You can read the whole article here:

WASHINGTON — In 2006 and 2007, Goldman Sachs Group peddled more than $40 billion in securities backed by at least 200,000 risky home mortgages, but never told the buyers it was secretly betting that a sharp drop in U.S. housing prices would send the value of those securities plummeting.

Goldman's sales and its clandestine wagers, completed at the brink of the housing market meltdown, enabled the nation's premier investment bank to pass most of its potential losses to others before a flood of mortgage defaults staggered the U.S. and global economies.

Only later did investors discover that what Goldman had promoted as triple-A rated investments were closer to junk.

Now, pension funds, insurance companies, labor unions and foreign financial institutions that bought those dicey mortgage securities are facing large losses, and a five-month McClatchy investigation has found that Goldman's failure to disclose that it made secret, exotic bets on an imminent housing crash may have violated securities laws.

"The Securities and Exchange Commission should be very interested in any financial company that secretly decides a financial product is a loser and then goes out and actively markets that product or very similar products to unsuspecting customers without disclosing its true opinion," said Laurence Kotlikoff, a Boston University economics professor who's proposed a massive overhaul of the nation's banks. "This is fraud and should be prosecuted."

John Coffee, a Columbia University law professor who served on an advisory committee to the New York Stock Exchange, said that investment banks have wide latitude to manage their assets, and so the legality of Goldman's maneuvers depends on what its executives knew at the time.

"It would look much more damaging," Coffee said, "if it appeared that the firm was dumping these investments because it saw them as toxic waste and virtually worthless."

Lloyd Blankfein, Goldman's chairman and chief executive, declined to be interviewed for this article.

A Goldman spokesman, Michael DuVally, said that the firm decided in December 2006 to reduce its mortgage risks and did so by selling off subprime-related securities and making myriad insurance-like bets, called credit-default swaps, to "hedge" against a housing downturn.

DuVally told McClatchy that Goldman "had no obligation to disclose how it was managing its risk, nor would investors have expected us to do so ... other market participants had access to the same information we did."

For the past year, Goldman has been on the defensive over its Washington connections and the billions in federal bailout funds it received. Scant attention has been paid, however, to how it became the only major Wall Street player to extricate itself from the subprime securities market before the housing bubble burst.

Goldman remains, along with Morgan Stanley, one of two venerable Wall Street investment banks still standing. Their grievously wounded peers Bear Stearns and Merrill Lynch fell into the arms of retail banks, while another, Lehman Brothers, folded.

To piece together Goldman's role in the subprime meltdown, McClatchy reviewed hundreds of documents, SEC filings, copies of secret investment circulars, lawsuits and interviewed numerous people familiar with the firm's activities.

McClatchy's inquiry found that Goldman Sachs:

• Bought and converted into high-yield bonds tens of thousands of mortgages from subprime lenders that became the subjects of FBI investigations into whether they'd misled borrowers or exaggerated applicants' incomes to justify making hefty loans.
• Used offshore tax havens to shuffle its mortgage-backed securities to institutions worldwide, including European and Asian banks, often in secret deals run through the Cayman Islands, a British territory in the Caribbean that companies use to bypass U.S. disclosure requirements.
• Has dispatched lawyers across the country to repossess homes from bankrupt or financially struggling individuals, many of whom lacked sufficient credit or income but got subprime mortgages anyway because Wall Street made it easy for them to qualify.
• Was buoyed last fall by key federal bailout decisions, at least two of which involved then-Treasury Secretary Henry Paulson, a former Goldman chief executive whose staff at Treasury included several other Goldman alumni.

The firm benefited when Paulson elected not to save rival Lehman Brothers from collapse, and when he organized a massive rescue of tottering global insurer American International Group while in constant telephone contact with Goldman chief Blankfein. With the Federal Reserve Board's blessing, AIG later used $12.9 billion in taxpayers' dollars to pay off every penny it owed Goldman.

These decisions preserved billions of dollars in value for Goldman's executives and shareholders. For example, Blankfein held 1.6 million shares in the company in September 2008, and he could have lost more than $150 million if his firm had gone bankrupt.

With the help of more than $23 billion in direct and indirect federal aid, Goldman appears to have emerged intact from the economic implosion, limiting its subprime losses to $1.5 billion. By repaying $10 billion in direct federal bailout money — a 23 percent taxpayer return that exceeded federal officials' demand — the firm has escaped tough federal limits on 2009 bonuses to executives of firms that received bailout money.

Goldman announced record earnings in July, and the firm is on course to surpass $50 billion in revenue in 2009 and to pay its employees more than $20 billion in year-end bonuses.

THE BLUEST OF THE BLUE CHIPS

For decades, Goldman, a bastion of Ivy League graduates that was founded in 1869, has cultivated an elite reputation as home to the best and brightest and a tradition of urging its executives to take turns at public service.

As a result, Goldman has operated a virtual jobs conveyor belt to and from Washington: Paulson, as Treasury secretary, sent tens of billions of taxpayers' dollars to rescue Wall Street in 2008, and former Goldman employees populate some of the most demanding and powerful posts in Washington. Savvy federal regulators have migrated from their Washington jobs to Goldman.

On Oct. 16, a Goldman vice president, Adam Storch, was named managing executive of the SEC's enforcement division.

Goldman's financial panache made its sales pitches irresistible to policymakers and investors alike, and may help explain why so few of them questioned the risky securities that Goldman sold off in a 14-month period that ended in February 2007.

Since the collapse of the economy, however, some of those investors have changed their opinions of Goldman.

Several pension funds, including Mississippi's Public Employees' Retirement System, have filed suits, seeking class-action status, alleging that Goldman and other Wall Street firms negligently made "false and misleading" representations of the bonds' true risks.

Mississippi Attorney General Jim Hood, whose state has lost $5 million of the $6 million it invested in Goldman's subprime mortgage-backed bonds in 2006, said the state's funds are likely to lose "hundreds of millions of dollars" on those and similar bonds.

Hood assailed the investment banks "who packaged this junk and sold it to unwary investors."

California's huge public employees' retirement system, known as CALPERS, purchased $64.4 million in subprime mortgage-backed bonds from Goldman on March 1, 2007. While that represented a tiny percentage of the fund's holdings, in July CALPERS listed the bonds' value at $16.6 million, a drop of nearly 75 percent, according to documents obtained through a state public records request.

In May, without admitting wrongdoing, Goldman became the first firm to settle with the Massachusetts attorney general's office as it investigated Wall Street's subprime dealings. The firm agreed to pay $60 million to the state, most of it to reduce mortgage balances for 714 aggrieved homeowners.

Attorney General Martha Coakley, now a candidate to succeed Edward Kennedy in the U.S. Senate, cited the blight from foreclosed homes in Boston and other Massachusetts cities. She said her office focused on investment banks because they provided a market for loans that mortgage lenders "knew or should have known were destined for failure."

New Orleans' public employees' retirement system, an electrical workers union and the New Jersey carpenters union also are suing Goldman and other Wall Street firms over their losses.

The full extent of the losses from Goldman's mortgage securities isn't known, but data obtained by McClatchy show that insurance companies, whose annuities provide income for many retirees, collectively paid $2 billion for Goldman's risky high-yield bonds.

Among the bigger buyers: Ambac Assurance purchased $923 million of Goldman's bonds; the Teachers Insurance and Annuities Association, $141.5 million; New York Life, $96 million; Prudential, $70 million; and Allstate, $40.5 million, according to the data from the National Association of Insurance Commissioners.

In 2007, as early signs of trouble rippled through the housing market, Goldman paid a discounted price of $8.8 million to repurchase subprime mortgage bonds that Prudential had bought for $12 million.

Nearly all the insurers' purchases were made in 2006 and 2007, after mortgage lenders had lifted most traditional lending criteria in favor of loans that required little or no documentation of borrowers' incomes or assets.

While Goldman was far from the biggest player in the risky mortgage securitization business, neither was it small.

From 2001 to 2007, Goldman hawked at least $135 billion in bonds keyed to risky home loans, according to analyses by McClatchy and the industry newsletter Inside Mortgage Finance.

In addition to selling about $39 billion of its own risky mortgage securities in 2006 and 2007, Goldman marketed at least $17 billion more for others.

It also was the lead firm in marketing about $83 billion in complex securities, many of them backed by subprime mortgages, via the Caymans and other offshore sites, according to an analysis of unpublished industry data by Gary Kopff, a securitization expert.

In at least one of these offshore deals, Goldman exaggerated the quality of more than $75 million of risky securities, describing the underlying mortgages as "prime" or "midprime," although in the U.S. they were marketed with lower grades.

Goldman spokesman DuVally said that Moody's, the bond rating firm, gave them higher grades because the borrowers had high credit scores.

Goldman's securities came in two varieties: those tied to subprime mortgages and those backed by a slightly higher grade of loans known as Alt-A's.

Over time, both types of mortgages required homeowners to pay rapidly rising interest rates. Defaults on subprime loans were responsible for last year's housing meltdown. Interest rates on Alt-A loans, which began to rocket upward this year, are causing a new round of defaults.

Goldman has taken multiple steps to put its subprime dealings behind it, including publicly saying that Wall Street firms regret their mistakes. Last winter, the company cancelled a Las Vegas conference, avoiding any images of employees flashing wads of bonus cash at casinos.

More recently, the firm has launched a public relations campaign to answer the criticism of its huge bonuses, Washington connections and federal bailout. In late October, Blankfein argued that Goldman's activities serve "an important social purpose" by channeling pools of money held by pension funds and others to companies and governments around the world.

KNOWING WHEN TO FOLD THEM

For investment banks such as Goldman, the trick was knowing when to exit the high-stakes subprime game before getting burned.

New York hedge fund manager John Paulson was one of the first to anticipate disaster. He told Congress that his researchers discovered by early 2006 that many subprime loans covered the homes' entire value, with no down payments, and so he figured that the bonds "would become worthless."

He soon began placing exotic bets — credit-default swaps — against the housing market. His firm, Paulson & Co., booked a $3.7 billion profit when home prices tanked and subprime defaults soared in 2007 and 2008. (He isn't related to Henry Paulson.)

At least as early as 2005, Goldman similarly began using swaps to limit its exposure to risky mortgages, the first of multiple strategies it would employ to reduce its subprime risk.

The company has closely guarded the details of most of its swaps trades, except for $20 billion in widely publicized contracts it purchased from AIG in 2005 and 2006 to cover mortgage defaults or ratings downgrades on subprime-related securities it offered offshore.

In December 2006, after "10 straight days of losses" in Goldman's mortgage business, Chief Financial Officer David Viniar called a meeting of mortgage traders and other key personnel, Goldman spokesman DuVally said.

Shortly after the meeting, he said, it was decided to reduce the firm's mortgage risk by selling off its inventory of bonds and betting against those classes of securities in secretive swaps markets.

DuVally said that at the time, Goldman executives "had no way of knowing how difficult housing or financial market conditions would become."

In early 2007, the firm's mortgage traders also bet heavily against the housing market on a year-old subprime index on a private London swap exchange, said several Wall Street figures familiar with those dealings, who declined to be identified because the transactions were confidential.

The swaps contracts would pay off big, especially those with AIG. When Goldman's securities lost value in 2007 and early 2008, the firm demanded $10 billion, of which AIG reluctantly posted $7.5 billion, Viniar disclosed last spring.

As Goldman's and others' collateral demands grew, AIG suffered an enormous cash squeeze in September 2008, leading to the taxpayer bailout to prevent worldwide losses. Goldman's payout from AIG included more than $8 billion to settle swaps contracts.

DuVally said Goldman has made other bets with hundreds of unidentified counterparties to insure its own subprime risks and to take positions against the housing market for its clients. Until the end of 2006, he said, Goldman was still betting on a strong housing market.

However, Goldman sold off nearly $28 billion of risky mortgage securities it had issued in the U.S. in 2006, including $10 billion on Oct. 6, 2006. The firm unloaded another $11 billion in February 2007, after it had intensified its contrary bets. Goldman also stopped buying risky home mortgages after the December meeting, though DuVally declined to say when.

I'VE GOT A SECRET

Despite updating its numerous disclosures to investors in 2007, Goldman never revealed its secret wagers.

Asked whether Goldman's bond sellers knew about the contrary bets, spokesman DuVally said the company's mortgage business "has extensive barriers designed to keep information within its proper confines."

However, Viniar, the Goldman finance chief, approved the securities sales and the simultaneous bets on a housing downturn. Dan Sparks, a Texan who oversaw the firm's mortgage-related swaps trading, also served as the head of Goldman Sachs Mortgage from late 2006 to April 2008, when he abruptly resigned for personal reasons.

The Securities Act of 1933 imposes a special disclosure burden on principal underwriters of securities, which was Goldman's role when it sold about $39 billion of its own risky mortgage-backed securities from March 2006 to February 2007.

The firm maintains that the requirement doesn't apply in this case.

DuVally said the firm sold virtually all its subprime-related securities to Qualified Institutional Buyers, a class of sophisticated investors that are afforded fewer protections than small investors are under federal securities laws. He said Goldman made all the required disclosures about risks.

Whether companies are obliged to inform investors about such contrary trades, or "hedges," is "a very hot issue" in cases winding through the courts, said Frank Partnoy, a University of San Diego law professor who specializes in securities. One issue is how specific companies must be in disclosing potential risks to investors, he said.

Coffee, the Columbia University law professor, said that any potential violations of securities laws would depend on what Goldman executives knew about the risks ahead.

"The critical moment when Goldman would have the highest liability and disclosure obligations is when they are serving as an underwriter on a registered public offering," he said. "If they are at the same time desperately seeking to get out of the field, that kind of bailout does look far more dubious than just trading activities."

Another question is whether, by keeping the trades secret, the company withheld material information that would enable investors to assess Goldman's motives for selling the bonds, said James Cox, a Duke University law professor who also has served on the NYSE advisory panel.

If Goldman had disclosed the contrary bets, he said, "One would have to believe that a rational investor would not only consider Goldman's conduct material, but likely compelling a decision to take a pass on the recommendation to purchase."

Cox said that existing laws, however, don't require sufficient disclosures about trading, and that the government would do well to plug that hole.

In marketing disclosures filed with the SEC regarding each pool of subprime bonds from 2001 to 2007, Goldman listed an array of risk factors that grew over time. Among them was the possibility of a pullback in overheated real estate markets, especially in California and Florida, where the most subprime loans had been made.

Suits filed by the pension funds, however, allege that Goldman made materially false or misleading statements in its public offerings, failing to disclose that many loans were based on inflated appraisals and were bought from firms with poor lending practices.

DuVally said that investors were fully informed of all known risks.

"What's going to happen in the next few years," said San Diego's Partnoy, "is there's going to be a lot of lawsuits and judges will have to decide, should Goldman have disclosed more or not?"

(Tish Wells contributed to this article.)

The article states some serious allegations, and reveals a colossal failure in investigating Goldman Sachs. We hope, yet again, that an investigation, into this, is being prepared by the SEC and other regulators. But that is a long shot, and it would bring some necessary crackdown and some light on the black box which is Goldman Sachs.

Also, I would like to thank the people over at McClatchy for providing us with this overview of the GS hedges concerning the housing market. Thank you.

source: http://www.mcclatchydc.com/227/story/77791.html

hat/tip TitanTrad

Comments

[Unscarred]

Bump for prior post:

http://www.zerohedge.com/article/goldman-sachs-exotic-housing-bet-was-it...

GS took out counterpart risk insurance against AIG.

Goldman treated AIG like other counterparties, where it bought "insurance" through special contracts called credit-default swaps that would pay Goldman money if AIG went bankrupt. These CDS contracts are a common feature of trading relationships in the markets.

http://blogs.wsj.com/deals/2009/03/20/live-blogging-the-goldman-sachs-ai...

That's not poor risk management.  That's what makes them the best merchant bankers in the world.

(Looking for Bubby and/or Cheeky to continue the conversation)

[Anonymous]

GS is just symptomatic of much broader issues (crazy notions like trust or fiduciary duty) that have gone sorely lacking. To label any of them best is highly subjective. Always, always GS was better than Jimmy Cayne or Richard Fuld would ever be. That in mind, (institutional) customers of any bank beware: you have reserved the right to be fucked no matter what questions you ask or any semblance of due diligence that is done.

Personally I carry a much greater disdain for Moody's or S&P. Those assholes deserve to burn. Today as in prior times of crisis, there is a commonality to the NRSRO complete lack of competence & no discernible leadership.

McGriffen

[Unscarred]

That in mind, (institutional) customers of any bank beware: you have reserved the right to be fucked no matter what questions you ask or any semblance of due diligence that is done.

McGiffen, you hit the nail on the head with that one!  Don't think for two seconds that GS (or any other i-bank, for that matter) is ever going to enter into an agreement with a client/peer/politician/fallen angel that isn't 100% in their OWN best interests, first and foremost.

+100

[McGriffen]

Considering these entities as a whole, that's quite accurate.  That being said, there is the occasional working stiff who is capable & willing to help their customer(s) and won't blindly screw you on purpose.  Those folks were few and far-between, in my experiences.

Knowing that, always odd bond desks get shocked by a back-bid to the offer on a MBS or ABS.  Seriously, just who is shitting who...

[theadr]

Let's start naming names.  CH, Look into what Dan Sparks did for GS in Dallas (Not Equities in Dallas):  Oversaw mortgage swaps AND Head of GS Mortgage -- no Honky Wall there.  Dan Sparks retired at 41 after 19 years with GS.  Full time too tall legs, halibut, Dom and blowzine now, no doubt.  Where's he holing up, jack?

[Anonymous]

"Goldman remains, along with Morgan Stanley, one of two venerable Wall Street investment banks still standing."

Venerable? This really is debasing the language.

Guasilas

[Anonymous]

http://online.wsj.com/article/SB125712159288021753.html
Goldman wants Fannie's credits.

http://www.mcclatchydc.com/227/story/77841.html?storylink=omni_popular
Goldman takes on new role: taking away people's homes

http://www.mcclatchydc.com/goldman/ web video

http://www.mcclatchydc.com/227/story/77791.html
How Goldman secretly bet on the U.S. housing crash

[goldfreak]

isn't the new watchdog at the SEC a former Goldman man? HA ha ha am sure the SEC will be very interested

[Anonymous]

Isn't the new watchdog at the SEC a former Goldmanite? Sure the SEC is really going to be interested

[Anonymous]

It is vital that the two functions are kept as separate as possible, so in my mind it is symbolic of a strong risk management culture that two similar parts of the firm can take such opposing views. ---Ok..this does not happen..the Chinese Wall is a sieve...ask anyone who's worked on the street; it's a comforting bon mot for "investors".

Here's an example...you put an fx order in with your guy at an i-bank -- he IM's the trading desk and say bubkis wants to sell 1/2 a yard of $/JPY...trader sell $25mln..then your 1/2 yard...buys his $25mln back and he books the difference..or he puts you in on a wide quote. It's not a game for anyone but institutions and it is a game.

No one could top quarter after quarter after quarter of earnings if Chinese Walls worked. Ask a block trader sometime how well they work.

[AR]

Cheeky / Here is my favorite personal saying, which I repeat daily:

"Wall Street... the most highly regulated, legally CORRUPT. industry in the World."

I remember a Christmas party 20+ years ago, standing there, while someone ask me to tell them all about Wall Street? I muttered out the above definition. And, still to this day, it's profound, and holds more meaning today than at any other time in our history.

[AR]

Follow up:  You know, we teach our children, and some of us, our grand children, morals, ethics, principals of hard work and honesty.  Frankly, today, it's very easy to become greedy, lazy, dishonest, and the like. It's hard (because of society) to stand tall, be honest, and work hard.  Just remember something (no matter what) -- just because the rest of the world is jumping like lemmings off the cliff, it doesn't mean you have to join them. In the end, everyone reaps what they sow.  There are no shortcuts.  Only people (like the Goldman's) who in the short term, think there is.  Funny...ever been around someone dying of cancer?  When no amount of money can save their life? They discover very, very quickly -- that TIME is the most precious commodity in life, not money.  Which is Zero Hedge's basic tagline if no one has noticed.  Stay true to yourself and family.  Life is SHORT. Good luck everyone.

[20yearRevolution]

To the earlier posts that claim that one side of the bank did not know what the other was doing, I'll play poker with you any day. Somehow you think the upper management didn't take note of the counter strategies or direct it? And yes gullible IS in the dictionary.

[Anonymous]

Cheeky looks particularly dapper today.

[laughing_swordfish]

Squiddery, Squiddery, all is squiddery.

It seems that no matter where you look at the highest levels of eeither the Street or DC, all you see are squids....

But, swordfish and killer whales are the natural enemies of squids.

[waterdog]

Screw'em Cheeky, I liked it. By the way, are you the same Cheeky that was around in March?

[Cheeky Bastard]

yes, but i didnt post that much .....

[McGriffen]

Thanks for posting.  It was as it will ever be, caveat emptor and institutional buyers should know better.  However, the class of investors who purposefully stayed at the very top of the capital structure were getting fucked (by not just Goldman, it's widely prevalent).

However, when a seller of new-issue / non-agency MBS is purposefully short the ABX for reasons that firm knowingly later admits was an outright short that is a serious problem for any buyer (stupid or informed, don't matter).  I care not  if the MBS basis is hedged, as is quite prudent to do so (excepting cases of blatant idiocy by Goldman competitors).

The institutional buyers, again, must know better.  But if the prospectus / new-issue documents are read, and studied, by multiple & otherwise qualified persons how on earth could Goldman or any other bank defend these practices?  they can't.  Knowingly fucking your customers over, I thought those tasks resided with the US govt or the mob (or professional sport team owners).

And the mass media heap praise upon them.

[Anonymous]

?!?!?!?!? another conspiracy ?!?!?!?

wow . . . . those Goldman guys sure are smart . . . . and we are too stupid to figure it out until after the fact

We need to tighten our Tin Foil Hats

[AN0NYM0US]

a rebuttal to CB's article from ClusterStock (well sort of)

http://www.businessinsider.com/sorry-folks-goldman-sachs-was-not-secretl...

[Anonymous]

ormer Wall Street Player Reveals the Inside World Behind Shady Bailouts to Bankers

The top guy on Geithner's speed dial today is Goldman Sachs CEO Lloyd Blankfein. There's no scenario under which Geithner would ever say that what he did during the bailout and crisis period was wrong. Bill Clinton still doesn't see how repealing Glass-Steagall was at all involved in this crisis. Summers of course, was treasury secretary that day, a decade ago, when the Glass-Steagall Act was repealed, in fact, he introduced the ceremony.

JH: Now, we hear a lot about the little people's irresponsibility in all this -- in the collapse. They took on more debt than they could sustain, they thought the good times would roll forever. You argue this was never about the little guy, right?

NP: Neither the crisis, nor the bailout was about the little guy. Former Treasury Secretary Henry Paulson was explicit in stating several times, and in several ways, that the government should not be bailing out homeowners who got in over their heads. And true to those sentiments, it didn't. Instead, amidst trillions of dollars of subsidies to the industry were made available in the most original and creative of ways, and no heed was paid the jointly humane and economical solution which would have been to find ways to restructure personal mortgages and loans, as opposed to dumping buckets of money over the top layers of the financial community and promising it would somehow trickle down and loosen credit for the "little guy."

For the money spent on subsidizing the industry, the government could have bought out every single outstanding mortgage in the country. Plus, every student loan and everyone's health insurance. And on top of that, still have trillions of dollars left over.

http://tinyurl.com/yf5zc6b

[Anonymous]

Why beat yourselves up about it? We all know that nothings going to happen so long as the campaign funds keep flowing.

[tom a taxpayer]

"This is fraud and should be prosecuted." Thank you, Laurence Kotlikoff, Boston University economics professor, for speaking truth to power.

The Achilles heel of Goldman Sachs is their despicable treatment of pension funds: widows, widowers, children, the aged, the life savings of hard-working people. 

Enough is enough. It's time for criminal charges, not just civil settlements or fines. Fines are just a cost of doing business, and now, GS could be using taxpayer money to pay their fines. Only criminal charges on the top echelons of Goldman Sachs, the masterminds, the ringleaders, the Wall Street Teflon Dons flipping the bird to law enforcement, have any hope of arresting the rape and pillage of pension funds, investors and taxpayers.

[DaddyWarbucks]

I'm thinking RICO where you just round up the whole group and don't worry about individual details. I hear GITMO is available.

[tom a taxpayer]

"You said the secret word, "RICO", and you win $100", as Groucho Marx might have announced on "You Bet Your Life".

Perhaps this latest expose of GS will be the tipping point for a fast-track Racketeer Influenced and Corrupt Organizations Act (RICO) investigation of Goldman Sachs and the rest of the gang that raped and pillaged the mortgage industry, ruined the housing market, destroyed the credit system, endangered municipal financing, pension funds, and the banking system, sent the economy into a downward spiral, and continues to endanger the world financial system, and continues to hold the world in ranson to pay them billions$ or face the destruction of the world financial system and economy.

[Careless Whisper]

Is GoldmanSachs an investment bank holding company?

or a hedge fund?

or a criminal enterprise run by well educated people who control strategically placed operatives in responsible government positions?

http://www.youtube.com/watch?v=zvICN8DNMpY

[snorkeler]

All of the above

[DaddyWarbucks]

Yes.

[tom a taxpayer]

Goldman Sachs is whatever it wants to be. Secretary of Treasury Hank "the mole" Paulson, Ben "the bag man" Bernanke, Tim "the go for" Geither, and all the Goldman Sachs alumni, lackeys, wannabes, campaign $ recipients, etc. insure that the government allows Goldman Sachs to be whatever it wants to be to accomplish whatever bailout Goldman Sachs needs. 

Goldman Sachs survives ultimately not by its business and financial acumen, but by its friends in high places. Like Lehman employees, Goldman Sachs employees would have been dumped onto the street with their cardboard boxes if it had not been for multiple rescues by Goldman Sachs friends in high places.

[Careless Whisper]

Yes indeed, and the list of operatives all over the place goes on and on. Let's not forget Robert Rubin who engineered the end to glass-steagel, Neel Kashkari who is supervising TARP, Edward Liddy who worked as CEO of AIG just long enought to help insure that Goldman got $13 billion of bailout loot. Then there's Gary Gensler, former Goldman partner who is now head of Commodity Futures Trading Commission (just in case they ever regulate CDS). Robert Steele at Wachovia, who was there just long enough to convince Wells Fargo to buy that toxic dump. Robert Zoellick, now president of the World Bank. I haven't even mentioned Europe...

Here is Spitzer with Dylan Ratigan, 3 days ago.

Spitzer: I would NOT let Tim Geithner negotiate a house purchase for me.

Spitzer: Stop (Goldman) proprietary trading with Federally guaranteed money.

http://www.youtube.com/watch?v=1maBM5hOV3Y

[tom a taxpayer]

One of Goldman Sachs greatest penetrations into the federal government is Stephen "no conflict of interest" Friedman.  While on the Goldman Sachs Board of Directors, and while Chairman of the Board of the NY Federal Reserve, Stephen Friedman was also Chairman of the President’s Foreign Intelligence Advisory Board and Intelligence Oversight Board.

"In 1999, Bill Clinton appointed Friedman to the President’s Foreign Intelligence Advisory Board.  In 2005, Bush named Friedman chairman of that board, a surprise second-term replacement for Brent Scowcroft.  He has been chairman of the Intelligence Oversight Board, an independent body that assesses the state of national intelligence, since January 2006." 

http://www.whorunsgov.com/Profiles/Stephen_Friedman

Goldman Sachs Stephen "no conflict of interest" Friedman was Chairman of the President’s Foreign Intelligence Advisory Board and Chairman of the Intelligence Oversight Board from January 2006 to January 2009.

http://www2.goldmansachs.com/our-firm/about-us/leadership/board-of-direc...

[bonddude]

Thank you for this Cheeky.

I guess that anonymous G old man guy doesn't like people gettin' in his kitchen.

Yes, of course they were all doing this shit. But G S went the opposite route from Merrill who just stupidly decided to keep going push the accelerator to the floor hence their demise.

It's beautiful, just write insurance against the shit that's gonna bust.

The bullet point claim that they went to the end borrower is, well if true, it's so stupid it's scary.

I won't hold my breath for Government Sux to pay except for individual chump deals like the Massachusetts AG deal.

Cheers

[Anonymous]

I...just..want..to be...on...the...grand...jury.

This is such an obvious example of corporate swindle. The GS defense is simply that the folks swindled should have known that the ratings agencies were crooked, and that, because they were so sophisticated, they needn't have been told that these AAA bonds were worthless.

I can see all these lawsuits against GS prevailing. Too big to fail, watch when all the pension funds get to take all the GS money and GS goes out of business.

I can't wait.

[DaddyWarbucks]

I agree. The seller offered the goods as AAA and knew otherwise, that's fraud. Claiming that the buyer should have known it was a lie is no defense. Whenever the lawyers start doing verbal and conceptual gymnastics you know that, as Marla would say, "Here comes an avalanche of bullsh!t".

[AN0NYM0US]

more from the archives (and I thought Jamie was the Wunderkid) but then maybe he too was playing both sides of the trade

Mortgage-backed issuance is forecast to achieve record volumes this year
23 Oct 2006

Steven Schwartz, co-head of the real estate finance group at JP Morgan, said: “The commercial mortgage-backed securities market remains active and I would not be surprised if this year was another record with volumes up 30% from last year.”

This view is shared by Schwartz’s boss, Jamie Dimon, chief executive of JP Morgan, who said last week he expected the investment bank to sell up to $20bn (€16bn) of mortgage-backed securities in the final months of the year.
Steve Cummings, head of corporate and investment banking at Wachovia, said: “A significant dip in the real estate business would affect investment banking activities but we have not seen that and market conditions remain strong.”
Wachovia and Merrill Lynch last week advised Tishman Speyer, the owner of New York’s Rockefeller Center, and BlackRock Realty on the purchase of Stuyvesant Town-Peter Cooper Village, Manhattan’s largest apartment complex, for $5.4bn. The deal will be financed in the CMBS market. The sector’s boom has meant investment banks are taking the opportunity to boost their presence. Bear Stearns became the fifth bank this year to expand its mortgage business through acquisition when it bought Encore Credit, a subprime mortgage origination platform, this month. Merrill Lynch agreed to buy Californian mortgage origination and servicing business First Franklin Financial. Other banks that have bought US mortgage platforms include Morgan Stanley, Deutsche Bank and Barclays Capital.

http://www.efinancialnews.com/assetmanagement/pensionfunds/content/10456...

[Unscarred]

Thanks, Cheeky.  Nice article (both of them).

My thoughts:

1) Anyone is going to have a hard time proving that GS was betting against the housing market, so much as acquiring downside protection in the event that the MBS market turned against them.

2) This breakdown shows first hand how GS continues to breed it's successful culture - through air-tight risk management.  Notice that no other investment bank hedged their downside exposure, and the one's who imploded (Merrill, Bear, Lehman) acquired as much risk exposure as they could afford.

3) Most comments coming from the media seem to be slanted to state that "GS was secretly betting against the securities they were holding," not "GS was hedging the positions they were holding."

4) Because of Goldman's due diligence (read- buying CDS insurance from AIG), they somehow come out as the bad guy?!  Would GS still look as bad if other firms followed their lead, and AIG had to pay out $60B to a total of 5 firms?

I understand the perspective, I just don't agree with it.  I know that others do, and that I'll hear from them shortly.  Thanks again, Cheeky.

[defender]

Unscarred, I agree with you that hedging your exposure is not a immoral action (point #4).  The problem that I have is that once they knew things were going to collapse, GS:

1. Kept the CDS.  This is a personal opinion, I see no reason why someone should be able to hold hedges for something that they do not have exposure for, and still call it an investment.  It should be labled as gambling, and regulated as such.

2.  Sold them as fast as they could.  This is also not immoral by itself, but couple it with 3. and get a picture that involves a pitchfork and a barbed tail.

3.  Didn't include in the marketing that the performance of the loans was down, and the market was deteriorating rapidly.  This is the equivilent of a car salesman selling a car that he knows the transmision is about to go out in, and saying that it is "in tip top shape, with no mechanical problems".  I am sure that Travis can tell you exactly what happens to car dealers that do this sort of thing.  If no store in the country can get away with this sort of behavior, why should GS?

I think that our difference in opinnion basically boils down to you seeing the move as CYA, and me seeing the move as screw the little guy.  Anyway, I hope that wasn't to preachy.

Off topic, your avatar is completely spot on.  The end of starbucks would be a very good thing for this country.

[Anonymous]

You miss the point, it was different parts of the firm betting that the housing market would drop (internal prop desks/ABS trading desks) as opposed to the syndicate and market making desks which still sold products to investors.

It is vital that the two functions are kept as separate as possible, so in my mind it is symbolic of a strong risk management culture that two similar parts of the firm can take such opposing views.

In any case caveat emptor and all that on whoever bought the crap....

[defender]

That is actually my entire point.  These actions were taken with full knowledge of what was done in the other departments.  Just as there were emails floating around BoA about how bad these products were, I am quite certain that at least the same number were floating around GS.  I have worked in several large corporations, with two that were geographically isolated from the rest of the company, without exception you could find out everything that was happening in the rest of the branches all the way down to "private" business negotiations with other corporations.  All of this information was garnered from the people that worked on the floor, so you can only imagine what the managers knew. 

The other angle from this is that GS had internally published research which stated that these products weren't worth the paper they were printed on.  How is it not fraud that this information was excluded from the marketing for these products.  Isn't this the same as shorting a product that you have on a conviction buy list?

Basically my sense of morality is sorely chafed on this issue.  "The American way" has degenerated to nothing more than making a quick buck in any manner possible, because it is your right as an American.  We have long since lost the restraining hand of justice, and now all that we have is grift.  I think what pains me the most is that I see no peaceful way to change this.

[Bubby BankenStein]

Buying CDS from an undercapitalized counter party (AIG) Seems like very poor risk management unless there is Hank with his helpful services in play.  Nothing cheesy about this game.

[Unscarred]

GS took out counterpart risk insurance against AIG.

Goldman treated AIG like other counterparties, where it bought "insurance" through special contracts called credit-default swaps that would pay Goldman money if AIG went bankrupt. These CDS contracts are a common feature of trading relationships in the markets.

http://blogs.wsj.com/deals/2009/03/20/live-blogging-the-goldman-sachs-ai...

That's not poor risk management.  That's what makes them the best merchant bankers in the world.

[Cheeky Bastard]

yes move along, move along, nothing to see here ....

hence the now infamous bailout of GS via AIG bailout .... hate the game and the players ...

[Bubby BankenStein]

T Cube, Plumber Extraordinaire, will be keepin the faith.

[Anonymous]

Cheeky bastard, you are an utter clown, and as has been oft-repeated by others, amongst the very worst posters on the site.

With regards to this article in particular, so what if goldman's prop desks were doing something different from their market-making divisions? That just shows the effectiveness of their internal compliance and chinese walls.

[Bubby BankenStein]

Sarcasm is a fine compliment.

[Cheeky Bastard]

hello iheartgoldies ... nice to hear from you again .... so, what you been up to man ...

[Anonymous]

You are bullshit. Truly bullshit.

Why don't you just post the link and fucking forget about it? Because you love to hear yourself talk.

Honestly.

I feel sorry for ZeroHedge. We're all thinking what they are thinking is which is "What were they thinking" when they endorsed you.

You're bullshit.

[Cheeky Bastard]

Easy man .... I'm not the one you should send your complains to ... you have both Tyler's and Marla's e-mail address available in the sidebar; and you should address all your complains about their contributor choices to them, not me. If you want of them to take away the contrib status away from me send them your reasons why and im sure they will take a look into the whole matter, but im really not the one you should be complaining to.

Nevertheless, thank you for reading.

[Anonymous]

Cheeky bastard, you are an utter clown, and as has been oft-repeated by others, amongst the very worst posters on the site.

With regards to this article in particular, so what if goldman's prop desks were doing something different from their market-making divisions? That just shows the effectiveness of their internal compliance and chinese walls.

[AN0NYM0US]

Goldman's CEO sees no big write-down
Nov. 13, 2007

Blankfein says investment firm remains short on mortgages

Blankfein also said Goldman is comfortable standing behind its valuations for some $50 billion of risky and illiquid assets that it holds. They include private-equity, real-estate and leveraged-buyout loans.

"We are confident that we know how to evaluate these assets," Blankfein told his audience at the conference, which was sponsored by Merrill Lynch.

Goldman shares closed up 8.5% at $233.04.

In September, Goldman said its third-quarter profit rose 79%, driven by higher mortgage trading revenue from short positions, among other things.

http://www.marketwatch.com/story/goldman-ceo-sees-no-big-write-down-as-f...