peterbirks (
peterbirks) wrote2010-04-16 07:53 pm
![[personal profile]](https://www.dreamwidth.org/img/silk/identity/user.png)
Gold, man? Sacks
And so, the investment bank big swinging dicks don't look so cocksure now, do they? Goldman Sachs charged with fraud by the SEC, which, presumably, feels that it should at least ought to do something.
This is all very strange. From my cyncical eyes, Goldman Sachs has done nothing that I wouldn't expect it to do. In Cliff Notes form, a hedge fund wanted to go short on the US CDO market (it was Paulson, which correctly identified that the whole thing was going to go tits up). It got Goldman to put together a product. Goldman then sold this product to a collection of children in a candy store. As Paulson guessed, the product went tits up within a year, and Paulson made a fortune (a billion bucks).
Interestingly, it appears that IKB, the German bank that was the first signal for the whole affair and the bank which I mentioned back in July 2007 as being curiously deep in debt for a relatively small operation, was the main buyer of this portfolio.
So, how is Goldman (which made a paltry $20m or so on the deal) being accused of fraud? Well, says the SEC, apparently it didn't tell IKB that the counterparty wanted to go short and that the counterparty had approached Goldman to build the product.
Well, correct me if I'm being naive here, but finance is a tough world. Suppose the market hadn't collapsed? Would Goldman have gone to IKB and said "oh, sorry, we thought the property market in the US was going to go tits up. It didn't, so the whole deal is void". No, of cvourse it wouldn't have. That kind of "well, we didn't think such a thing would happen, therefore we won't pay out on our guarantees that we offered if it did happen" are reserved for companies such as Equitable Life.
Indeed, in this business, I would have thought the whole point would be to not tell the potential buyer what line the potential seller wanted to take. To do otherwise would make it impossible to make a market.
I mean, if I'm a market maker, and I have a big overhang of stock at 4pm on a Friday, I'm not going to tell traders out there "hey, I've got a big overhang of stock, guys". Fuck me, no. I'm going to pretend that I'm short and that I need to pick up something. Pretending that you are the opposite way from your real position is just standard.
Well, it was. Now, according to the SEC, it's fraud. I eagerly await poker players being sued because they put in a big bet when they had complete shit, on the grounds that this was a blatant misrepresentation of the strength of their hand.
Jeez, misrepresenting your hand is what top level finance is about. That's why some clever people (Paulson) make money and some stupid people (ABN Amro, IKB, and a stream of dead companies in the past) lose it. The problem is, the SEC is full of klutzes who just don't understand this simple point. They think it's more like selling a car that's faulty. But that's a completely wrong comparison. What it is, is, I show you the car, and say "you can either sell it to me for one and a half grand or buy it from me for two grand." If you take the sell option then you lose if the counterparty sells it on for more than 1.5 and win if he has to sell it for less than 1.5. If you take the buy option then, well you lose if you can't sell it on for more than two. Sure, there's a spread, but if the car is a complete klunk, you take the sell option, and the counterparty loses.
++++++++
This is all very strange. From my cyncical eyes, Goldman Sachs has done nothing that I wouldn't expect it to do. In Cliff Notes form, a hedge fund wanted to go short on the US CDO market (it was Paulson, which correctly identified that the whole thing was going to go tits up). It got Goldman to put together a product. Goldman then sold this product to a collection of children in a candy store. As Paulson guessed, the product went tits up within a year, and Paulson made a fortune (a billion bucks).
Interestingly, it appears that IKB, the German bank that was the first signal for the whole affair and the bank which I mentioned back in July 2007 as being curiously deep in debt for a relatively small operation, was the main buyer of this portfolio.
So, how is Goldman (which made a paltry $20m or so on the deal) being accused of fraud? Well, says the SEC, apparently it didn't tell IKB that the counterparty wanted to go short and that the counterparty had approached Goldman to build the product.
Well, correct me if I'm being naive here, but finance is a tough world. Suppose the market hadn't collapsed? Would Goldman have gone to IKB and said "oh, sorry, we thought the property market in the US was going to go tits up. It didn't, so the whole deal is void". No, of cvourse it wouldn't have. That kind of "well, we didn't think such a thing would happen, therefore we won't pay out on our guarantees that we offered if it did happen" are reserved for companies such as Equitable Life.
Indeed, in this business, I would have thought the whole point would be to not tell the potential buyer what line the potential seller wanted to take. To do otherwise would make it impossible to make a market.
I mean, if I'm a market maker, and I have a big overhang of stock at 4pm on a Friday, I'm not going to tell traders out there "hey, I've got a big overhang of stock, guys". Fuck me, no. I'm going to pretend that I'm short and that I need to pick up something. Pretending that you are the opposite way from your real position is just standard.
Well, it was. Now, according to the SEC, it's fraud. I eagerly await poker players being sued because they put in a big bet when they had complete shit, on the grounds that this was a blatant misrepresentation of the strength of their hand.
Jeez, misrepresenting your hand is what top level finance is about. That's why some clever people (Paulson) make money and some stupid people (ABN Amro, IKB, and a stream of dead companies in the past) lose it. The problem is, the SEC is full of klutzes who just don't understand this simple point. They think it's more like selling a car that's faulty. But that's a completely wrong comparison. What it is, is, I show you the car, and say "you can either sell it to me for one and a half grand or buy it from me for two grand." If you take the sell option then you lose if the counterparty sells it on for more than 1.5 and win if he has to sell it for less than 1.5. If you take the buy option then, well you lose if you can't sell it on for more than two. Sure, there's a spread, but if the car is a complete klunk, you take the sell option, and the counterparty loses.
++++++++
no subject
(Anonymous) 2010-04-17 12:07 am (UTC)(link)This ain't a poker hand, nor even a standard trade between two sophisticated counterparties. It's a sale of a security subject to the heightened standards of 10b-5, which were the rules of the game each side were playing in. These guys have a real problem if the facts in the complaint are not completely out of context (I would wait until the answer at least before really guessing how deep in the doo-doo the squids are). If you haven't read it, the complaint itself is pretty damning at least as this lawyer reads it.
http://www.sec.gov/litigation/complaints/2010/comp21489.pdf
-SXLVR
no subject
I expected that the suit would hinge to some extent on Goldmans having made an accurate assessment of the competency of the counterparty - it's not legal in the UK (and I assume something similar applies in the US) to sell a complex derivative to an unqualified counterparty without taking all necessary steps to be certain that they understand the commitment into which they are entering and the risks involved in so doing. Something like that - it's one of the areas about which everyone at our place has had compliance training.
From skimming the filing, I guess the problem is that Paulson cherry-picked the constituents to create the risk profile they wanted, which is fine, but then GS failed to disclose that aspect of the security and went looking for a suitably naive patsy onto whom they could offload it. That's not allowed any more and further it looks like a serious breach of business ethics, something borne out to an extent by the (possibly out of context) quote from the trader's email.
I was at a "New Director" event on Wednesday where the UK CEO and Global Compliance head were both empahsising the need to operate at an ethical level beyond regulation in order, amongst other things, to manage reputational risk (we're paranoid about that) for the long-term benefit. Well, they would say that, wouldn't they, but the message seemed clear - screw up and they'll help with the hanging out to dry. Not something I expect to have to worry about overmuch personally, I hope.
no subject
In answer to our esteemed lawyer. Yes, you are right. It isn't a poker hand. Indeed, I remember playing an Avalon Hill game called Stockmarket about 20 years ago, and being amazed at the restrictions one had to obey. "How the fuck does anyone make any money?" I wondered to myself. So, yes, I was perhaps moaning about the rules and the way in which they are applied.
The thing about the CDS deals, of course, is that they were remarkably opaque and it's quite likely that fast bucks were being made because the rules were seen as unclear. Legally, I suspect Goldman Sachs will take this line, along with the line that it thought the counterparties would have been sophisticated enough to realize what they were stepping into.
In answer to Mike. I think we are roughly in the same ballpark. Let's split the legal side from the reputational side for the moment.
On the legal side, I guess my view would be that, if the counterparty is a first-world bank, then it would be reasonable to pretend to assume that it is competent to understand a synthetic CDS. Of course, we know that first-world banks are uploaded with incompetent fools. And, if they weren't, players like Paulson would not become billionaires.
Let's not misread this. IKB wrote those CDSs offered to it by Goldman because they offered a higher rate of interest. If Paulson had turned out to be wrong, it would have had no comeback and would not have requested it. IKB could have asked Goldman why the interest offered was the rate it was. It could have asked Goldman any number of questions. If it did ask those questions, and Goldman lied, then, bang, fraud. I would agree that it's fraud. But I really think that in dealings between banks it should be caveat emptor. Clearly, as lawyer states, under current securities sales rule, it isn't, which could make it sticky for Goldman.
I also wasn't denying that Goldman have been underhand here. All I was saying was, hell, what did you expect?
Now, as Mike says, it's the Paulson cherry-picking that looks the dodgiest part of the deal and it is this that will probably damage Goldman Sachs most. Goldman was really pushing the envelope here. I think this might do it a lot of harm, not least in the area of people being less keen to use Goldman if they can find someone else who will offer a similar service
Finally, it's probably reputational risk rather than actual risk that is really at stake, hence the fall in Goldman's share price being larger than the maximum penalty it could face!
This "operate at an ethical level beyond the regulations in order" is in tune with the old FSA "principles-based regulation". It translates as "we won't tell you where the line is, but if something goes wrong, we will say that you crossed it. If nothing goes wrong, we won't say a word".
I am deeply uncomfortable with this kind of regulatory system. I would far prefer, "Tell me how far I can go, and I will go no further. Don't tell me 'you must act more morally than the rules require', because, if I don't do that, and nothing goes wrong, I will be rewarded. Only if something goes wrong will I be penalized.".
PJ
no subject
There are first-world banks and there are small/medium business lending banks in Dusseldorf. IKB knew they lacked expertise in credit portfolio selection and required that a reputable third-party selection agent be involved. They weren't informed (because GS lied by omission) that the selection had been influenced by a party seeking to short the portfolio.
Unless we start operating within an environment where nothing is permitted unless the regulator specifically says it is, then there will be grey areas where there is now a clear requirement that the bank operate with a clear sense of ethics. (They actually talk about the "highest standards of business ethics" but it's probably a bit more pragmatic in reality). If you're hiding/masking/misrepresenting something because it's a bit smelly, you're probably doing wrong.
I don't see how regulators can make sensible rules about situations that haven't occurred yet, not beyond the general anyway. Sometimes the seeing is in the sucking, but in this specific case, GS look to have been aware that they were at best playing fast and loose. It's possible that the bank can push all the direct culpability on the employee, but I'd guess the best they can hope for in the event of losing the case is a hefty slap for failing on compliance grounds and another reputational hit.
My goodness, all that mandatory compliance training must have had more effect than I thought...
no subject
Near the end of the filing, I notice that ABN appear to have lost more dosh - about $840m, which loss was incurred post-takeover. So that's us shelling out there. One hopes HMG will be seeking to have the taxpayers' losses in this matter made good...
The portfolio was represented as being "in alignment with the interests of investors", which was true, but only from a point-of-view that required knowledge of the whole transaction. The robber barons may have got away with that kind of thing, but you're not supposed to do it now. It's the kind of angle-shooting rules-lawyer stuff that Johnny tries, but he's 9 and he'll have to grow out of it if he wants to be an investment banker when he grows up.
Oh dear. The "bang to rights, guv" side of the street is getting crowded.
Of course, any trouble for GS tends to result in a warm sense of Schadenfreude...
no subject
I was aware of the ACA matter (and that it was bust), and this certainly muddies the water.
I don't think that we disagree on much here, except perhaps the "bang to rights" part. I suspect that
(a) this will end up with GS paying a large amount of cas, but "without accepting guilt" and
(b) that the reputational damage will be greater than the financial damage.
Yes, the UK taxpayer could be looking for $841m here.
I still think that there's a big difference between lying by omission and out-and-out false statements of facts. If GS defends with "if they had asked, we would have told them", it might not play according to US securities issuance rules, but I think it will be a factor in the company's favour.
If IKB relied on ACA, I really feel that ACA should have pushed GS a bit harder on what the real situation was. The technical details of what GS said to ACA might turn out to be very important.
Oh, and, yes, definite schadenfreude, I wouldn't deny that. I will enjoy my next encounter with a GS employee.
PJ
no subject
(Anonymous) 2010-04-17 12:58 pm (UTC)(link)Keep in mind that the rules of the game are designed to allow the purchasers not to be paranoid about everything and in theory encourage more trust and therefore liquidity in the securities markets. If the legal framework were different (say poker rules on bluffing), than the purchasers would have more blame in what happened to them. Caveat emptor simply did not apply, which the calamari should have known. I would be pretty surprised if the squid lawyers were fully in the loop for this one.
-SXLVR
no subject
I'd also suggest that caveat emptor did apply; very much so. In fact, I can't think of a single transaction (real or theoretical) where caveat emptor does not apply.
That said, there is a very large number of very stupid people around with a very large amount of disposable cash/assets looking for a very large ROI. Things like this are going to happen. Much though I hate the idea of a billion or so being finagled by people who are either outright lying or concealing the truth, I think it's impossible to legislate against, ex ante. In fact, I don't think it should be.
Birks is right. It's small change. It doesn't matter. (Although I'm still looking for Merkel uzw to admit that IKB really fucked up.)
But I'm not so sure that paranoia is necessarily the inverse of liquidity.
no subject
The more moral question is, should they be? It's a bit like saying "look, we know that you (Goldman) are much cleverer than them (IKB), so we'll change the rules so that you have to explain the difficult things to them and don't do anything that might still be too complicated. 'Cos, if we don;t do that, IKB won't play the game at all.". This increases liquidity, but at what cost? Presumably, if Goldman is still willing to play, it accepts the handicap to create a more level playing field. But, on the other hand, it also increases moral hazard. Why should IKB care whether the deal is a pup or not, if it is sure of compensation if the deal goes wrong.
Securities law, as such, has to tread the fine line between the two. However, one could also question to what extent it's the job of the US legal system to "promote liquidity". The world would, after all, have been a far healthier place in this instance if the liquidity had not been there during the 2000s.
PJ
no subject
I suspect you've been entirely correct about IKB (and by extension, other Landesbanken) for the last two or three years. I believe that it's partly how they're set up, and partly where their aims (and we've all played Die Macher) coincide with politics, and what is now a century-old collective fear of hyper-inflation. Get over it! We'll even give you the shopping trolleys to carry cash around for free!
I don't even care about the Greenspan deviancy (infinite liquidity? Who cares!) any more -- it's too late for that. I'd like to hear a reasonable argument for what to do next.
You can punish a boastful idiot for cross-punting (and I agree: nothing wrong with this. At base, it's just insurance) $1 billion. But so what? It's small change. It's not relevant.
Actually, I'd just like to get back to decent government. Fat chance.
no subject
(Anonymous) 2010-04-17 01:24 pm (UTC)(link)http://www.interfluidity.com/v2/784.html
-SXLVR
no subject
(Anonymous) 2010-04-18 05:47 am (UTC)(link)DY
no subject
Election run-ups have traditionally benefited the LibDems/Liberals because it gives them a higher profile. This time round the benefit could be even greater because Clegg had a zero public profile beforehand, and because the live TV debates seem to have generated a surprising level of interest in the "ordinary voting public".
As polls in recent elections observed, the "stability" of voting intentions is misleading. A significant minority of people change their mind during the election campaign, but this seems to balance out.
So, is it a flash in the pan? I don't think so. But is it a "spike"? Yes. There will be a permanent benefit to the LibDems over the next three weeks, but that benefit will not be as great as the immediate boost in the polls.
_________
no subject
Really I want there to be some way to try to arrange a house deal between two parties who wish to swap houses (*), know their houses are of approximately equal value but want to get an unbiased estimator of what the difference in value between the two houses is. The extension would be to find a company who is not only prepared to provide a spread on the value of your house, but prepared to provide a spread on the difference in value of two houses; should several such companies exist, I think it would be reasonable to try to take the mid-point of the spreads' mid-points as a fair sort of estimator of what the difference ought to be, on the understanding that either party might choose to take one leg or the other of one of the spreads in preference to accepting this mid-point.
(*) which, I know, almost never happens in practice.
no subject