Goldman v Geithner
Apr. 19th, 2010 01:23 pm![[personal profile]](https://www.dreamwidth.org/img/silk/identity/user.png){kind=small}
peterbirksOK, some second thoughts on the Goldman Sachs case, with an attempt to be "objective".
The major charges from the SEC over Abacus 2007-AC1, and Goldman's rebuttals, appear to be as follows:
Charge 1) Goldman and Paulson deliberately brought in ACA as an "independent third-party collateral manager" because it knew that, if Paulson was identified as a party constructing the portfolio with a view to shorting it, Abacus would be impossible to sell.
Rebuttal 1) Goldman said that "in trades of this kind, there is always an investor going short" and that it was normal practice for market makers not to disclose the identities of buyer to seller and vice versa.
Birks view 1) If Goldman can show that it did not disclose the identity of buyer IKB to seller Paulson, just as it did not disclose the identity of seller Paulson to buyer IKB, it has a case. But I suspect that it won't be able to show that, because Paulson was kept far more in the loop than was ACA and IKB. That said, I think it would be an odd (financial) world indeed if a middleman was forced to disclose the identities of counterparties before a deal was signed. Then again, US securities law never ceases to find ways to surprise me.
Charge 2) That Goldman made investors think that Paulson was long on the portfolio.
Rebuttal 2) "Total bollocks" said Goldman. Because, well, it has to. "Goldman Sachs never represented to ACA that Paulson was going to be a long investor", GS said on Friday.
Birks view 2) As I wrote before, I think this is the key point, and that there is a big difference between failing to say something (=, as far as the SEC is concerned, "lying by omission") and actually saying something which is not true. We could encounter interesting uses of the words "implied" and "inferred". The SEC might claim that, by remaining silent, Goldman "implied" something, whereas Goldman would reply that you can't imply anything by remaining silent -- the listener can only infer it.
Goldman has one strong defence -- that it lost $75m on the deal, even after the $15m fee from Paulson. And the SEC seems unwilling to address this point. Meanwhile, Tim Geithner, US Treasury Secretary, actually declined to comment on the matter when on a TV show on Sunday morning, which seems to me to indicate that he is not confident enough to nail his colours to the mast.
GS remains convinced that this is a political stunt rather than a proper investigation. It claims that the SEC made no contact with it between a Wells notice last July and the announcement last Friday. The SEC said that such lack of contact was normal. GS would point out, I assume, that, even though it might be normal, a nine-month gap between the notice and the charge, with no contact, most definitely isn't. Goldman's defence, it now seems to me, will be on two main planks:
1) That any accusation that it told ACA or IKB that Paulson was long on the portfolio is untrue.
2) That it provided ACA and IKB with quite enough information to see how risky the investment was, but ACA still backed it and IKB still invested in it. (Clearly, if Goldman is found guilty on the first plank, the second plank falls apart).
My money is still on a "settlement without admitting liability". But for how much? Probably a lot, maybe just shy of the amount GS would have been fined anyway if it had been found guilty. Because this is all about reputational risk and GS remaining "the company you have to go to". Its major strength here, perhaps, is that there isn't really another company around that is ready to step into GS's shoes.
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The major charges from the SEC over Abacus 2007-AC1, and Goldman's rebuttals, appear to be as follows:
Charge 1) Goldman and Paulson deliberately brought in ACA as an "independent third-party collateral manager" because it knew that, if Paulson was identified as a party constructing the portfolio with a view to shorting it, Abacus would be impossible to sell.
Rebuttal 1) Goldman said that "in trades of this kind, there is always an investor going short" and that it was normal practice for market makers not to disclose the identities of buyer to seller and vice versa.
Birks view 1) If Goldman can show that it did not disclose the identity of buyer IKB to seller Paulson, just as it did not disclose the identity of seller Paulson to buyer IKB, it has a case. But I suspect that it won't be able to show that, because Paulson was kept far more in the loop than was ACA and IKB. That said, I think it would be an odd (financial) world indeed if a middleman was forced to disclose the identities of counterparties before a deal was signed. Then again, US securities law never ceases to find ways to surprise me.
Charge 2) That Goldman made investors think that Paulson was long on the portfolio.
Rebuttal 2) "Total bollocks" said Goldman. Because, well, it has to. "Goldman Sachs never represented to ACA that Paulson was going to be a long investor", GS said on Friday.
Birks view 2) As I wrote before, I think this is the key point, and that there is a big difference between failing to say something (=, as far as the SEC is concerned, "lying by omission") and actually saying something which is not true. We could encounter interesting uses of the words "implied" and "inferred". The SEC might claim that, by remaining silent, Goldman "implied" something, whereas Goldman would reply that you can't imply anything by remaining silent -- the listener can only infer it.
Goldman has one strong defence -- that it lost $75m on the deal, even after the $15m fee from Paulson. And the SEC seems unwilling to address this point. Meanwhile, Tim Geithner, US Treasury Secretary, actually declined to comment on the matter when on a TV show on Sunday morning, which seems to me to indicate that he is not confident enough to nail his colours to the mast.
GS remains convinced that this is a political stunt rather than a proper investigation. It claims that the SEC made no contact with it between a Wells notice last July and the announcement last Friday. The SEC said that such lack of contact was normal. GS would point out, I assume, that, even though it might be normal, a nine-month gap between the notice and the charge, with no contact, most definitely isn't. Goldman's defence, it now seems to me, will be on two main planks:
1) That any accusation that it told ACA or IKB that Paulson was long on the portfolio is untrue.
2) That it provided ACA and IKB with quite enough information to see how risky the investment was, but ACA still backed it and IKB still invested in it. (Clearly, if Goldman is found guilty on the first plank, the second plank falls apart).
My money is still on a "settlement without admitting liability". But for how much? Probably a lot, maybe just shy of the amount GS would have been fined anyway if it had been found guilty. Because this is all about reputational risk and GS remaining "the company you have to go to". Its major strength here, perhaps, is that there isn't really another company around that is ready to step into GS's shoes.
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no subject
Date: 2010-04-19 02:37 pm (UTC)There are several* who would dispute that, irrespective of whether they could do so with any justification...
* Five or six that I'd suggest, two of which are probably only credible in their own minds.
no subject
Date: 2010-04-19 04:12 pm (UTC)On the other hand, these out-of-court settlements seem to be pushing the boundaries of credibility. I'm an old fashioned sort of guy. Either you did wrong, or you didn't. (There's also the possibility that you honestly fucked up.) If you did wrong, you go to court. The court may punish you too severely, or not severely enough, or (in the case of most FSA cases) it may be so incompetent that you get off scott-free.
I'll accept the (dubious) merits of plea-bargaining, but I still think that some level of court proceedings would be in order -- if you've done wrong.
Look at it from Goldman Sachs' angle (and assume they are as pure as the driven snow). You pay the Feds off to protect your reputation. This is perilously close to extortion (because it doesn't really address the matter at hand; more some sort of nebulous "brand" thing). Down the road, you're just encouraging a Spitzer or whoever to try it on again, on an annual basis.
It's equally bad for everybody else in the same community or market. If a self-proclaimed #1 won't stand up for itself in court, what chance does a mere hedge fund with less than a billion in assets have?
no subject
Date: 2010-04-20 10:20 pm (UTC)Mike is more cognizant with the current investment banking situation than I am, so I'll take his word for it. But my point was that GS is not the equivalent of Arthur Andersen. It's closer to PwC or McKinsey or (in the insurance broking world) Aon. If GS "died" (i.e., if its reputation were totally wrecked) the world would go on, but it would be a far greater inconvenience than it would to let it continue as the "people you go to because it's the people other people go to". The "critical mass" point that would kill GS is very high. But, once it was reached, everyone would happily jump ship, I guess.
I'm not justifying the OOC settlements -- just predicting that it's the most likely outcome. GS knows it's been dodgy, SEC knows it's going to struggle to get a conviction if GS really fights hard. Much easier to reach a "no liability accepted" deal.
As for the moral hazard (that it will encourage a Spitzer-type to do it again, year after year), well, possibly. But I think that you will get Spitzer types anyway (particularly when they are aiming for high office), and I don't think any company does the "we'll pay, but without accepting guilt" line unless they know, in their heart of hearts, that they have done some wrong. What's more interesting is whether the prosecutors should accept it. In practice, they do.
PJ
no subject
Date: 2010-04-21 05:07 pm (UTC)"In practice, they do." And although I am a total ignoramus in the field (I can't even read a balance sheet, and my knowledge of English law is essentially limited to the thirteenth century, plus a few accretions), I think I can say with some certainty that most "settlements" are in fact "admissions of guilt" without "admitting responsibility."
Which is all well and good, and is clearly related to the plea-bargaining nonsense.
However. And I wish to stress however. This is a static view of what we have now (whether good or bad, or even workable).
My, extremely vague, point, is that this is a dynamic process. Stiff a large firm for the (apparently quite common) fault -- if that is what it is -- of a VP (aka tea boy with gold braid); get them to pony up $10 million for "reputation" (which they can obviously afford); and what happens next?
If none of this stuff goes to court, then clearly the guilty get away with it. If some of this stuff goes to court, then clearly the FSA will nail the little guys, because they're easy meat.
But in any case, if this becomes an entrenched attitude (and it nearly did, under Spitzer), then I seriously believe that it leads towards a mafia-like system of payoffs for protection.
I don't see that as a very good thing.
no subject
Date: 2010-04-20 01:34 pm (UTC)http://www.propublica.org/feature/the-magnetar-trade-how-one-hedge-fund-helped-keep-the-housing-bubble-going
going from this article (which has also been published in a podcast version at ThisAmericanLife.org), the SEC should also sue other banks that did similar things, no?
no subject
Date: 2010-04-20 02:01 pm (UTC)This line is that Paulson had taken similar bets previously, which had indeed gone wrong. In other words, there was previous, but the market hadn't collapsed, so the buying counterparties won.
Goldman is therefore claiming that revealing that Paulson was the counterparty would not have made any difference, because Paulson's previous "short" bets had lost.
As for sueing other banks, hell, yes. GS was picked because it was the highest profile and it was American. As I wrote originally, I doubt that GS was acting like a lone gunman here in the way it went about things. If GS is guilty, then a lot of other banks are probably guilty too.
PJ
no subject
Date: 2010-04-23 09:47 pm (UTC)Picked this up today, Kuzami sounds like a potential Spitzer in the making.
"When you prosecute mass murderers who use guns and bombs and threaten your life, and you kick their asses anyway, you ain’t afraid of a group of billionaire bankers and their spreadsheets. He is the shit. My advice to anyone on Wall Street in his crosshairs: If you are indicted in a case by Khuzami, do yourself a big favor: Settle."
Hal