On Goldman's CDS Market Manipulation

Tyler Durden's picture

Exactly a year ago, Zero Hedge penned "The Client Always Comes First At Goldman... Except When He Doesn't, Which Is Also Always" which was a review of Goldman's mark manipulation practices particularly as pertains to the OTC domain (read CDS) by going through self-evaluation reviews of the 4 key Goldman trades involved in the Abacus scandal (we would call it crime, but remember: Goldman neither admitted nor denied guilt). As a reminder, in April 2010 we said: "The line penned by Michael, who incidentally was the least like of the
three Goldman SPG MDs testifying on Tuesday based on peer feedback, that
broke our collective heart is the following: "Once the stress in the
mortgage market started filtering into the cash market, I spent numerous
hours on conference calls with clients discussing valuation
methodologies for GS issued transactions in the subprime and second lien
space [redacted] is prime example). I said "no" to clients who demanded that GS should "support the GSAMP" program as clients tried to gain leverage over us. Those were unpopular decisions but they saved the firm hundreds of millions of dollars." Alas, we find that all of Goldman's sincere hypocritical lies before the Senate committee were... precisely just that." This post was followed up by "Goldman Implicated In CDS Price Manipulation Scandal" which essentially recapitulated all the salient points from the first time. Today, with about a full year delay, Bloomberg's Christine Harper and Joshua Gallu realize that there was more than meets the eye to these very disingenuous revalations of impropriety by the very traders who were conducting them, and finally bring much needed broader attention to the matter in "Goldman Traders Attempted to Manipulate Market in 2007, Senate Report Says." Frankly, it's about time.

From Bloomberg:

Company documents show traders led by Michael J. Swenson sought to encourage a “short squeeze” by putting artificially low prices on derivatives that would gain in value as mortgage securities fell, according to the report yesterday by the Permanent Subcommittee on Investigations. The idea, abandoned after market conditions worsened, was to drive holders of such credit-default swaps to sell and help Goldman Sachs traders buy at reduced prices, according to the report.

“We began to encourage this squeeze, with plans of getting very short again,” Deeb Salem, a trader in the structured product group, said in a 2007 self-evaluation excerpted in the report. Swenson, Salem’s supervisor, sent e-mails in May 2007 urging traders to offer prices that will “cause maximum pain” and “have people totally demoralized.” In interviews with the committee, Salem and Swenson denied attempting a short squeeze, the report said.

Salem “claimed that he had wrongly worded his self- evaluation,” the report said. “He said that reading his self- evaluation as a description of an intended short squeeze put too much emphasis on ‘words.’”

Goldman Sachs traders abandoned the short-squeeze attempt after discovering on June 7, 2007, that two Bear Stearns Cos. hedge funds that specialized in subprime-mortgage investments were collapsing. Salem e-mailed Swenson and another colleague to suggest trying to buy short positions, known as “protection,” on collateralized debt obligations, or CDOs, from hedge fund Magnetar Capital LLC, according to the subcommittee’s report.

“We need to go to magnetar and see if we can buy a bunch of cdo protection… Can tell them we have a protection buyer, who is looking to get into this trade now that spreads have tightened back in.”

Swenson expressed “no concerns about the proposed deception” and responded to Salem that it was a “great idea,” according to the report.

And so forth... and so forth... And the thing is as long as Goldman has the ability to trade in a prop capacity, which it always will as it is nothing but a hedge fund, we will constantly see the firm, which also happens to be the world's biggest OTC product (CDS) broker, it will continue to be able to manipulate flow trading to its advantage.

We don't need self-evaluation to confirm just how corrupt to the core the firm and its trading practice are. But for those who do, here is a repost of the same self-evaluations we posted way back in April of last year.


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Cdad's picture

Nope...no need here to review the corrupt nature of Goldman, Tyler.  It has been clear for a long time now.  Of course, most of those idiots in DC know it, as well.  They just never found their stones and held them in there long enough to do anything about it...you know, prior to the bribery cash showing up.

What is really cool though...is just how Goldman has been bested in the category of corruption by JP Morgan.  I actually think old J. Dimon is worse...considering how he went directly for the throat of mortgage applicants...and is now chucking them out onto the streets.

War on the bankers, my brothers.  That is the task at hand.  Nothing less than the entire Republic hangs in that balance.  Oh...and I know there will now come the comments about guns and bayonets...ummm...not necessary. Getting rid of bankers is easier than that.  Just quit spending money on useless shit and houses you cannot afford, or houses that are overpriced by 200%.  Just quit patronizing the Ponzi economy.  Done.


Vergeltung's picture

I think I prefer the AK47 method.

In Fed We Trust's picture

Oh NO not a another $500 million dollar fine!  


Infinite QE's picture

No problem. They'll go to the Fed window, drop off $500 million face value of worthless rubbish, get $500 million then park it back at the Fed and gain 3%. Problemo fixo

flattrader's picture

>>>Getting rid of bankers is easier than that.  Just quit spending money on useless shit and houses you cannot afford, or houses that are overpriced by 200%.  Just quit patronizing the Ponzi economy.  Done.<<<

That's a pipedream.

Not enough impact.  No real destruction.

You might put some small to medium sized discount stores, retailers, restaurants etc...out of business.  They are going out of business anyway (and did) as POG rises.

You need confrontation to get the ball rolling.

Go to Amped Status.  Click on Empire State Rebellion.

ak_khanna's picture

The way Banksters are currently minting money.

They are driving the USD index down and pumping up everything else. This process will continue till there are no long positions left in the USD index and no short positions in any of the commoditie­­s, stock or currencies other than the USD.

The operators are then likely to take the long position on the dollar and short position on everything else. They would then use their money power to move the markets in the direction which would get them the maximum profit while screwing all other traders / hedge funds / investors.

The stock, commodity and currency exchanges have been reduced to gambling dens whereby the more powerful traders with deep pockets move the markets to maximize their own profits at the expense of the remaining not so powerful players. The big boys have enormous money power to move the markets in the direction which results in maximum profits for themselves­­. They effectivel­­y use the media to lure the other players in the market to a position where they would incur maximum loss.

The markets will turn downwards only when the banksters have eliminated all the short positions and only they themselves have positioned themselves to profit when the market falls


When an unexpected world event catches the banksters with their pants down and the softwares they use to rig the markets go berserk beyond their control.


bigdumbnugly's picture

and in the end nothing will be done about it

i think i've seen this movie before


HamyWanger's picture

These sort of news would matter if the world was not ruled by the infinite fiat/media machine. 

The average American does not care. 

LawsofPhysics's picture

Well fucking DUH! 

monopoly's picture

But no executive ever gets indicted, not even charged. The slime Mozillo in Florida with his tan and pink tie. Should be incarcerated for the rest of his pitiful life.


Tyler 2 good articles in the NYTimes you may want to post about. Just tells the sheeples what we all already know.

Ruffcut's picture

Banksters without steroids can't make the easy money. CDS bullshit market, only a squid could love

fbrothers's picture

And they have the balls to put it in writing. Evidently they know, with their donations to the various political entities, they are untouchable.

NumberNone's picture

Unlike China, rape has actually been up at Goldman Sachs. 

Mercury's picture

At some level I think it's wise to keep in mind the difference between "client" and "customer" here.  I know every business likes to refer to their customers as "clients" but that doesn't actually make them clients.

A client is someone  whom the firm (Goldman here) is acting on behalf of in the capacity of agent and under an arrangement where incentives are usually pretty well aligned.

A customer is someone who buys stuff from a business which is not acting in an agency capacity and does not have much legitimate expectation that the business will act in their best interest.  Buying an Ipad from Apple does not make you a "client" of Apple and it would be silly to presume that Apple has an obligation to disclose to you their business practices, profit margins on various components that go into the Ipad, what their larger strategy is or anything of the sort.

If you hire Goldman to advise you on M&A that's one thing but if you allow yourself to be sold one of their shiny new structured products...buyer beware.

AccreditedEYE's picture

The old Broker-Advisor relationship at the top end of the food chain. While I understand the logic of your argument Merc, retail brokers who deal with the public still get fucked when they aren't operating in the client's best interests or sell them something unsuitable. How is it that the bankers and "product creators" get away with it over and over and over again?

Mercury's picture

Brokers have specific fiduciary duties (which also serves as the mechanism that aligns incentives) when transacting at the retail level that don't exist when hustling product to institutional and qualified investors.

AccreditedEYE's picture

As I said, I understand the logic of your argument Merc. My point was that we might want to think about imposing fiduciary duties onto the I-Bank/product side of the business. Is it right to create a product you know will blow up just because the department that creates it is one of the last fat margin profit centers of the company? In most cases, these products are being sold to ERISA-regulated buyers. ERISA rules require the handling of all qualified plans to go beyond standard fiduciary duty. Is it a stretch to try and snag the bankers with ERISA laws?

We can argue that the dopes running these plans should have sense enough to know what it is they are buying and selling. The problem is they don't. Having an I-Bank look to profit off of known stupidity is a bit... wrong. JMHO

Mercury's picture

No, at some point adults should be left to walk on their own two feet all by themselves and if anything there's already too much "protective" regulation in force just now.  Hell, that's all we need is to grant protected minority status to stupid people with money.

If the management firm you hired to run your pension fund invested in a bunch of crap that lost a lot of money, it's time to hire a new manager. 

Besides, it's hard to believe that the same government that was pushing housing stock and cheap debt on anyone with a pulse and indirectly blessed structured products based on that debt (via Moodys/S&P - gov't protected monopolies) would at the same time stand athwart the trading desk yelling "No!" just before the ticket was written.

AccreditedEYE's picture

Hell, that's all we need is to grant protected minority status to stupid people with money.

I would agree with this statement if we were discussing accredited investors investing on their own or hedge fund / sophisticated trading operations. But when we are dealing with Pension money, that's retirement capital for average Joes. Shouldn't there be a higher standard for that capital? Who knows, maybe that means imposing more stringent legal restrictions on how they are allowed to structure their investment policies. All I'm saying is for the game to be played while it's The People's money isn't right. Remember this:   http://www.zerohedge.com/article/61-underfunded-illinois-teachers-pension-fund-goes-broke-becomes-next-aig-waiting-selling-bi 

If the management firm you hired to run your pension fund invested in a bunch of crap that lost a lot of money, it's time to hire a new manager.

Agree 100%, problem is, if said manager has blown through billions before he's fired how has the plan (aka the public employee who has no control over how this money is invested) been protected?

I understand the points you make... they are good and I used to adamantly take the side you are defending.. I'm just not sure it's so black and white anymore. I'm not trying to make a pro-union or anti-union argument... just discussing fiduciary duty to Public Pension $.

Mercury's picture

When times are good the pension funds want to be able to invest alongside the hot/smart money because that's where the big returns are and it's politically difficult to prevent that kind of behavior.  And right now it's the government that is trying to push capital (including pension funds I suppose) into riskier assets with both hands.

But the real problem is that, thanks to the Department of Central Planning, we live in a ZIRP world and there are no longer any (or damn few) honest-to-god, investment grade securities that yield above low-mid single digits (which is well below the long term return assumptions of most pension funds).  So, everyone is forced out farther on the risk curve and inevitably there are more blow-ups.

Even if the government guarantees minimum returns that just means taxing away the difference in returns shortfalls from other people.

Miss Expectations's picture

"I gave too much risk rope to people..."

But, thank goodness he gave enough rope to himself.

Eireann go Brach's picture

Who will pay for Obummers 2012 Campaign? Goldman to get slap on the wrist. Also we should have a drop down box when Hamy Wanger posts something, that lets you choose what you would like to do to him if you could meet him on the street, my choise would be to beat him good looking with a bat

Seasmoke's picture

i would consider it even if Paulson, Corzine and Blankfein were executed for treason

Careless Whisper's picture

It seems like everyday there's another lawsuit or investigation of some sort. I think it would be a service to GS stockholders if someone could list everything in a timeline spreadsheet so the potential exposure is listed in one spot. Something like this but with different criteria. I would do it myself but I don't have the software.



dexter_morgan's picture

Better get Dickhead Durbin on this.......oh wait, he's probably off grandtanding on some other good sounding issue that won't impact his his portfolio......or effect any real change......

oogs66's picture

I would bet a lot of money that if you go back through their research, one area came out with a report that helped the trading desk accumulate their position at attractive prices, and then once position was put on, another area of research came out with a contradictory report.  They usually like the product/sector specific research to do the initial lifting, then have their macro teams come out and support the back end.

fallst's picture

Slowly but Shirley they will put themselves in a box that even our corrupt piggy representatives can't fellate.

newworldorder's picture

This is the ultimate protection for the Banksters.

Domestically the US population does not give a shit at what has been going on.

Internationally other countries need to FED gravy train to survive. And if that does not buy them off, there is always the US military to protect the banksters.

Enjoy the bullshit everybody. It just got started and has a long way to go before it stops.

narnia's picture

Most Americans with any kind of resources know the concept of fiduciary duty is out the window with anyone who holds a Greenspan put.  

The problem is not a lack of prosecution (the immunity from which is already bought & paid for), it's a lack of activism by the average American on the retirement funds front.

TexDenim's picture

Every Goldman employee has only one duty: to make money for GS top echelon, and for themselves.

Dr. Impossible's picture

I call for a Constitutional convention!

Further i nominate myself as sole representative to/of/for the people of the U.S.