In case you’re wondering, that whistling sound you hear is the sky falling. When Erin Burnett stays late to host a special report on something, you know it’s a “game-metamorphosizer”. Why else would all bank stocks tank because a firm they’re not affiliated with was charged with non-criminal fraud in one transaction after months of SEC digging? Why else, at this very moment, are traders in Tokyo and Hong Kong counting down the minutes to when they can sell every last security on the planet ahead of the rest of the world this weekend? Why else would the price of gold – the ultimate refuge in times of uncertainty – be falling?
The simple fact that the market knows is that there is no uncertainty: Armageddon is upon us, and thus all the gold in the world has no value.
In its infinite wisdom, the always-rational, level-headed market knows that Goldman is finished once and for all. In fact, it’s already just a memory. A civil case whose maximum damages, including treble damages for fraud, are $3B could easily bankrupt a firm that had only $45B in revenue last year. Especially since there’s no chance this case will be settled without a trial for a small fraction of that amount. Why else would the only Google search term related to GS that’s more popular than “Goldman Sachs fraud” be “Goldman Sachs careers”? Everyone knows that the imminent liquidation will require lots of manpower and overtime. And even if, by some miracle, GS emerges from the SEC and inevitable investor litigation without resorting to Chapter 7, no one will ever do business with them again, which will cut their revenue to $0.00, which will require them to resort to Chapter 7.
And GS deserves to be destroyed for this particular transaction. To put their egregious behavior in the complicated CDO market in perspective, let’s break it down in terms of equities:
Let’s say a sophisticated investor – call him “Johnny the Jackal” -- tells an investment bank – call it “Dewey Goldmanthem & Howe” -- that he thinks a select group of stocks in the Russell 2000 index is a real dog. He asks the investment bank to create a new ETF that tracks the performance of the stocks he selected so that he can short it. The investment bank agrees, takes a fee, and unveils the newest ETF, the “Bow Wow 30” (ticker symbol: WOOF). Now let’s say a second sophisticated investor comes along – call it “Head-Up-Our-Ass European Bank” -- and says they believe the Bow Wow 30 represents the best companies on earth, and they want to go Hail Mary long. Even if DG&H doesn’t have a crystal ball, and even if it’s not sure which way the Bow Wow 30 is heading, it has a make-believe fiduciary duty under the pretend law to tell Head-Up-Our-Ass European Bank that there’s another investor who thinks the Bow Wow 25 is flea-ridden. Sure, Head-Up-Our Ass has analysts, lawyers, consultants and accountants who could do their homework on the companies in the Bow Wow 30, but it’s up to DG&H to tell them Johnny the Jackal knows better than them. That’s why every time you want to buy a security your broker sends you a list of all the people who've shorted it. GS broke the law because it didn’t provide the short list.
In addition to being the polite thing to do, this rule serves the important public policy of dissuading potential investors from investing whenever another investor disagrees with their judgment. The efficient functioning of the capital markets is all about no one buying when someone else wants to sell and no one selling when someone else wants to buy.
Not that politeness, public policy or capital markets matter now that the end of days is apparently Monday. (Unless you live in Asia, in which case it’s Sunday). Time for everyone to get their affairs and souls in order.