peterbirks (![[personal profile]](https://www.dreamwidth.org/img/silk/identity/user.png)
peterbirks) wrote2010-04-16 07:53 pm
peterbirks) wrote2010-04-16 07:53 pm
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.
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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.