Goldman conflict of interest on housing, mortgages and CDS

http://www.youtube.com/watch?v=WWaRz_JBrMU

http://www.nakedcapitalism.com/
So here we have the pattern:

1. Goldman creates or sells $23 billion (or more) of CDOs and stuffs them into AIG.

2. Goldman proclaims to the world they have no exposure to CDOs and warns that banks and insurers with CDO exposure will get downgraded.

3. Goldman initiates the mark downs of CDOs with AIG and others, acelerating the market’s downward spiral.

4. Huge mark to market losses lead insurer and bank credit to freeze, short term markets to lock up, ABCP to collapse.

5. AIG posts as much collateral as it has to Goldman, who has more aggressively marked down the exposure.

6. Bond insurers are downgraded, banks begin commutations with them.

7. AIG fails, Fed steps in, Goldman gets bailed out at par.

http://www.youtube.com/watch?v=wByBzXzGf9s

GS didnt stuff anything..AIG was eating the stuff up left and right because they thot it was free money

AIG was a control fraud situation. Have to agree with you Marco on that.

The key guys at AIG had to know they weren't doing proper due diligence.

Riversider, a few weeks ago you posted a link to an eye opening story about how Goldman Sachs may have participated in the demise of Bear Sterns and Lehman Brothers by shorting their stocks following a secret meeting they had with fellow banks prior to the economic meltdown. If you recall this story, could you please re-post the link for me. I have been searching for it. Thanks!

Don't think I recall that link NYRENewbie

everything was finw while the game still worked. but when it stopped working it was too late and no where to go

Does anyone remember that story and can provide me with the link? I know I read it on Streeteasy. Thanks.

I think the Goldman Subprime story still has to be flushed out.
Two points.
1)Goldman owned Litton Servicing and had special knowledge of subprime loan performance and knew of problems before others. Question is did they properly disclose this to counter-parties.
2) Dealers in C.D.S. (Goldman)(know more about net positions) which translates to an advantage with regards to pricing of these instruments over their customers(counter-parties).

Nyrenewbie,
Google news search that bad boy.

No luck positivecarry. I know I couldn't have made this story up. It was stranger than fiction, more disturbing, and I'm just not that good.

I agree with Marco, it's was 2004-2007, we had a different mindset. Even I, the uber bear did not understand the magnitude of this crap.... Just could not understand 0% down io mortgages and bubble re prices. I had no reason to believe our financial system was about to melt.

The ONE critical flaw in this entire debacle is AIG. If we would have had a regulation requiring a waterfall mechanism in doling out cash calls from aig(like getting the state insurance regulators to bless any cash outs), the would have let the dominos fall. It was only when geitner realized that ppl would not be covered on any insurance policies that was the see god moment.

As an insurance company, it's first obligation is to have sufficient capital to pay out claims. Gs, boa, ml, etc should have all taken their lumps. It was a system these financial companies created, regulated and funded. The key link was aig, and hence the state/fed regulators.

http://www.roubini.com/financemarkets-monitor/258173/should_investment_firms_bet_against_their_clients_

“The simultaneous selling of securities to customers and shorting them because they believed they were going to default is the most cynical use of credit information that I have ever seen. When you buy protection against an event that you have a hand in causing, you are buying fire insurance on someone else’s house and then committing arson.”

-Sylvain R. Raynes, structured finance expert at R & R Consulting

its a big boys game

Riversider, interesting post, especially the point about producing and selling something where you are net short, as opposed to producing and selling something where you are net long or flat. I'm sure the GS logic of it is the following. "We have one business that produces and sells a product there is demand for. We have another business that make proprietary trades. There is a Chinese wall between the two businesses, and the proprietary trades to short the product used the same information and tools that were available to all our customers and investors, who by the way were sophisticated and made money for some time while we lost money because of their positions." Moral of the story: never trust your analysis to someone selling you the thing you're analyzing.

Three rules of Wall Street. 1) Whatever Wall Street's selling, I'm not buying. 2) Unless you're smarter than GS, don't buy what GS is selling unless you're sure GS is long; better yet, don't buy what GS is selling. 3) If you're going to panic, panic early. 4) Buy low, sell high. OK, that was 4, but it's friggin' Xmas & I'm feeling generous.

"Gs, boa, ml, etc should have all taken their lumps."

Except there was no way of doing that without launching financial armageddon. Any of those kids don't get paid in full, a default is triggered on all AIG CDS's (both the ones AIG holds as well as the ones written on AIG). All of a sudden BofA doesn't have the cash to pay GS on the AIG CDS, so they haircut or delay payment or whatever, then you got BofA CDS's triggering. All fun-and-games sitting back here until you start realizing about your deposits at the bank. Sure, it's FDIC-insured for a certain amount, but what if you got more? Whatever, no harm in pulling your money. See rule #3.

NYREnewbie,

Do you remember the publication?

No, I read it on Streeteasy. Someone posted the link. The gist of the story was that a meeting was held of all the big wall street players prior to the financial meltdown that Bear Sterns was not invited to. Shortly thereafter, Goldman started naked shorting Bear Sterns stock, and profited from their demise by wiping out a competitor as well as shorting the stock, not to mention their earlier e-mail to clients trashing Bear derivatives. It sounded like collusion. I'd love to re-read that article again if anyone could find it. It could be your Christmas present to me. Thanks and happy holidays!

Sounds like Rolling Stone Taibi, but I don't recall an allegation that Goldman directly shorted Bear stock(which would be way over the top). They did send a memo that they were no longer accepting Bear "risk". though.

http://money.cnn.com/2008/03/28/magazines/fortune/boyd_bear.fortune/index.htm

TUESDAY, MARCH 11: IF I KNEW WHY, I WOULD DO SOMETHING

Confidence continued to ebb, and Bear again tried to reassure investors. "Why is this happening?" CFO Molinaro asked rhetorically on CNBC. "If I knew why it was happening, I would do something to address it." The rumors were "false," he said. "There is no liquidity crisis. No margin calls. It's nonsense."

Still, momentum was turning against the firm. That morning Goldman Sachs's credit derivatives group sent its hedge fund clients an e-mail announcing another blow. In previous weeks, banks such as Goldman had done a brisk business (for a handsome fee, of course) agreeing to stand in for institutions nervous, say, that Bear wouldn't be able to cough up its obligations on an interest rate swap. But on March 11, Goldman told clients it would no longer step in for them on Bear derivatives deals. (A Goldman spokesman asserts that the e-mail was not a categorical refusal.)

"I was astounded when I got the [Goldman] e-mail," says Kyle Bass of Hayman Capital. He had a colleague call Goldman to see if it was a mistake. "It wasn't," says Bass, who is a former Bear salesman. "Goldman told Wall Street that they were done with Bear, that there was [effectively] too much risk. That was the end for them."

It was ominous, but it wasn't yet the end. Bear continued absorbing blows. The cost of insuring $10 million in Bear debt via credit default swaps, which had hovered near $350,000 in the month before, shot past $1 million. By the end of March 11, the rate was irrelevant: Banks refused to issue any further credit protection on Bear's debt.

I used to think Elliot Spitzer as AG was really excessive with his investigations of the banks and wall street but he was so right on. We need him back.

I sure hope GS doesn't get away with this! Thanks Riverside for the summary and the post.

What do you think, cats? Will justice ever be done with this mess?

"Any of those kids don't get paid in full, a default is triggered on all AIG CDS's (both the ones AIG holds as well as the ones written on AIG). All of a sudden BofA doesn't have the cash to pay GS on the AIG CDS, so they haircut or delay payment or whatever, then you got BofA CDS's triggering."

why would a default in AIG cause a trigger in all of the CDS which AIG owned? whether long or short..just so you know..institutions arent allowed to buy or sell protection on thier own debt.

Thanks Riversider. That was it. http://www.rollingstone.com/politics/story/30481512/wall_streets_naked_swindle/print

Then, on March 11th — around the same time that mystery Nostradamus was betting $1.7 million that Bear was about to collapse — a curious thing happened that attracted virtually no notice on Wall Street. On that day, a meeting was held at the Federal Reserve Bank of New York that was brokered by Fed chief Ben Bernanke and then-New York Fed president Timothy Geithner. The luncheon included virtually everyone who was anyone on Wall Street — except for Bear Stearns.

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Bear, in fact, was the only major investment bank not represented at the meeting, whose list of participants reads like a Barzini-Tattaglia meeting of the Five Families. In attendance were Jamie Dimon from JPMorgan Chase, Lloyd Blankfein from Goldman Sachs, James Gorman from Morgan Stanley, Richard Fuld from Lehman Brothers and John Thain, the big-spending office redecorator still heading the not-yet-fully-destroyed Merrill Lynch. Also present were old Clinton hand Robert Rubin, who represented Citigroup; Stephen Schwarzman of the Blackstone Group; and several hedge-fund chiefs, including Kenneth Griffin of Citadel Investment Group.

The meeting was never announced publicly. In fact, it was discovered only by accident, when a reporter from Bloomberg filed a request under the Freedom of Information Act and came across a mention of it in Bernanke's schedule. Rolling Stone has since contacted every major attendee, and all declined to comment on what was discussed at the meeting. "The ground rules of the lunch were of confidentiality," says a spokesman for Morgan Stanley. "Blackstone has no comment," says a spokesman for Schwarzman. Rubin declined a request for an interview, Fuld's people didn't return calls, and Goldman refused to talk about the closed-door session. The New York Fed said the meeting, which had been scheduled weeks earlier, was simply business as usual: "Such informal, small group sessions can provide a valuable means to learn about market functioning from people with firsthand knowledge."

So what did happen at that meeting? There's no evidence that Bernanke and Geithner called the confidential session to discuss Bear's troubles, let alone how to carve up the bank's spoils. It's possible that one of them made an impolitic comment about Bear during a meeting held for other reasons, inadvertently fueling a run on the bank. What's impossible to believe is the bullshit version that Geithner and Bernanke later told Congress. The month after Bear's collapse, both men testified before the Senate that they only learned how dire the firm's liquidity problems were on Thursday, March 13th — despite the fact that rumors of Bear's troubles had begun as early as that Monday and both men had met in person with every key player on Wall Street that Tuesday. This is a little like saying you spent the afternoon of September 12th, 2001, in the Oval Office, but didn't hear about the Twin Towers falling until September 14th.

Given the Fed's cloak of confidentiality, we simply don't know what happened at the meeting. But what we do know is that from the moment it ended, the run on Bear was on, and every major player on Wall Street with ties to Bear started pulling IV tubes out of the patient's arm. Banks, brokers and hedge funds that held cash in Bear's accounts yanked it out in mass quantities (making it harder for the firm to meet its credit payments) and took out credit- default swaps against Bear (making public bets that the firm was going to tank). At the same time, Bear was blindsided by an avalanche of "novation requests" — efforts by worried creditors to sell off the debts that Bear owed them to other Wall Street firms, who would then be responsible for collecting the money. By the afternoon of March 11th, two rival investment firms — Credit Suisse and Goldman Sachs — were so swamped by novation requests for Bear's debt that they temporarily stopped accepting them, signaling the market that they had grave doubts about Bear.

All of these tactics were elements that had often been seen in a kind of scam known as a "bear raid" that small-scale stock manipulators had been using against smaller companies for years. But the most damning thing the attack on Bear had in common with these earlier manipulations was the employment of a type of counterfeiting scheme called naked short-selling. From the moment the confidential meeting at the Fed ended on March 11th, Bear became the target of this ostensibly illegal practice — and the companies widely rumored to be behind the assault were in that room. Given that the SEC has failed to identify who was behind the raid, Wall Street insiders were left with nothing to trade but gossip. According to the former head of Bear's mortgage business, Tom Marano, the rumors within Bear itself that week centered around Citadel and Goldman. Both firms were later subpoenaed by the SEC as part of its investigation into market manipulation — and the CEOs of both Bear and Lehman were so suspicious that they reportedly contacted Blankfein to ask whether his firm was involved in the scam. (A Goldman spokesman denied any wrongdoing, telling reporters it was "rigorous about conducting business as usual.")

Add to that this excerpt about who profited from AIG's downfall. http://futurenewstoday.blogspot.com/2009/05/how-goldman-sachs-whacked-bear-stearns.html

Q: Who was one of the biggest beneficiaries when the Fed bought up AIG's bad assets?
A: Goldman Sachs.
Q: So when the Fed buys up Bear's bad assets, who do you think is the chief beneficiary?
A: Goldman Sachs.
Q: And who was the Chairman of the New York Fed at the time?
A: Gold Sachman's director Stephen Friedman, who was forced to resign due to "conflicts of interest".
Q: And who was the President of the New York Fed at the time?
A: Tim Geithner, who is now the Treasury Secretary.
Q: And who was Treasury Secretary at the time?
A: "Hank" Paulson, who was the former CEO of Goldman Sachs.

The problem seems to be that any serious investigation would lead back to Paulson and Geithner, or did I miss something?

I don't know much about economics, but it seems like a trail of who profited most from all of all this is Goldman Sachs. And aren't these the same guys who are running the Fed now? Could it be that Obama put the guys who may have spearheaded this country's economic meltdown in charge of solving it?

an interesting conspiracy theory about this would be...back when long term capital went belly up and the fed forced the street to come in and bail them out...the only bank which refused was bear..

Yea the Q.A. is a little over the top.
For me the issue is that the investment banks have for some time moved away from the agency model and now treat their clients as counter-parties. As I said earlier, I think this is fine for a Hedge Fund, but as semi-regulated institutions with a life-line to the Fed, I think this is problematic.
After the demise of Lehman & Bear I heard William Donaldson opine that the wall street model of acting as principal was over and the future would be a return to an agency relationship. This doesn't seem to be the case. Acting as principal, with the leverage and risk that entails is a systemic concern and I think it undermines the greater economy. It's like walking into a Casino and thinking it's a place to raise capital.

'"Any of those kids don't get paid in full, a default is triggered on all AIG CDS's (both the ones AIG holds as well as the ones written on AIG). All of a sudden BofA doesn't have the cash to pay GS on the AIG CDS, so they haircut or delay payment or whatever, then you got BofA CDS's triggering."
why would a default in AIG cause a trigger in all of the CDS which AIG owned? whether long or short..just so you know..institutions arent allowed to buy or sell protection on thier own debt.'

I'm no CDS expert, but I'll tell you what I think happens anyways. Say you've bought a CDS on subprime trash from AIG. The CDS has some margin requirement and some mark-to-market policy. I.e., of you bought the CDS at $100K for protection on $10M, and the next day the market price of the CDS goes to $110K, they transfer $10K to you the next day. In some cases, you might waive mark-to-market requirements: for example, AIG was often exempt from paying mark-to-market so long as it maintained it's AAA rating (the loss of which really started the collapse because they all of a sudden didn't have the liquidity required to meet this obligation).

In any case, when AIG defaults on any of its obligations, you've got two concerns. First, they might owe you some mark-to-maker money, possibly as little as one day's worth. If AIG defaults on anything by not paying, they're probably going to not pay you and default on you as well. You don't want to wait until non-payment, however, and want to be at the front of the bankruptcy line with everyone else. So what do you do? You say that if AIG is in material default on anything whatsoever, then they are in default on your CDS as well even if they have so far met their obligations.

Second, when AIG defaults on other contracts, you don't want to have a CDS with them because any margin you pay them goes into a black hole, and any margin they owe you they cannot pay because it is all frozen in bankruptcy. So what do you? You declare that when they are in material default of any contract, they are in material default on the CDS, and the CDS is terminated: i.e., the current non-marked-to-market amount of the protection is to be paid (in bankruptcy), and the contract disappears. You don't want to be in a CDS with a bankrupt entity.

"mark-to-maker" => "mark-to-market". But perhaps the iPhone got it right in this context.

It's widely agreed that AIG failed as a result of a massive margin call.

http://www.nytimes.com/2012/03/14/opinion/why-i-am-leaving-goldman-sachs.html?pagewanted=2&_r=2

TODAY is my last day at Goldman Sachs. After almost 12 years at the firm — first as a summer intern while at Stanford, then in New York for 10 years, and now in London — I believe I have worked here long enough to understand the trajectory of its culture, its people and its identity. And I can honestly say that the environment now is as toxic and destructive as I have ever seen it.

For more than a decade I recruited and mentored candidates through our grueling interview process. I was selected as one of 10 people (out of a firm of more than 30,000) to appear on our recruiting video, which is played on every college campus we visit around the world. In 2006 I managed the summer intern program in sales and trading in New York for the 80 college students who made the cut, out of the thousands who applied.

I knew it was time to leave when I realized I could no longer look students in the eye and tell them what a great place this was to work.

When the history books are written about Goldman Sachs, they may reflect that the current chief executive officer, Lloyd C. Blankfein, and the president, Gary D. Cohn, lost hold of the firm’s culture on their watch. I truly believe that this decline in the firm’s moral fiber represents the single most serious threat to its long-run survival.

ow did we get here? The firm changed the way it thought about leadership. Leadership used to be about ideas, setting an example and doing the right thing. Today, if you make enough money for the firm (and are not currently an ax murderer) you will be promoted into a position of influence.

What are three quick ways to become a leader? a) Execute on the firm’s “axes,” which is Goldman-speak for persuading your clients to invest in the stocks or other products that we are trying to get rid of because they are not seen as having a lot of potential profit. b) “Hunt Elephants.” In English: get your clients — some of whom are sophisticated, and some of whom aren’t — to trade whatever will bring the biggest profit to Goldman. Call me old-fashioned, but I don’t like selling my clients a product that is wrong for them. c) Find yourself sitting in a seat where your job is to trade any illiquid, opaque product with a three-letter acronym.

It makes me ill how callously people talk about ripping their clients off. Over the last 12 months I have seen five different managing directors refer to their own clients as “muppets,” sometimes over internal e-mail. Even after the S.E.C., Fabulous Fab, Abacus, God’s work, Carl Levin, Vampire Squids? No humility? I mean, come on. Integrity? It is eroding. I don’t know of any illegal behavior, but will people push the envelope and pitch lucrative and complicated products to clients even if they are not the simplest investments or the ones most directly aligned with the client’s goals? Absolutely. Every day, in fact.

That last post deserves its own thread.

And now another p.r. disaster for Goldman..

http://mobile.nytimes.com/2012/04/01/opinion/sunday/kristof-financers-and-sex-trafficking.xml

THE biggest forum for sex trafficking of under-age girls in the United States appears to be a Web site called Backpage.com.

This emporium for girls and women - some under age or forced into prostitution - is in turn owned by an opaque private company called Village Voice Media. Until now it has been unclear who the ultimate owners are.

That mystery is solved. The owners turn out to include private equity financiers, including Goldman Sachs with a 16 percent stake.

http://www.washingtonpost.com/business/economy/goldman-fined-22m-for-willfully-violating-the-law-on-information-sharing-sec-says/2012/04/12/gIQAEhJ1CT_story.html

The SEC action focused in part on what Goldman called its “Asymmetric Service Initiative,” in which analysts shared information and trading ideas with select clients, the SEC said.

inonada
about 3 years ago
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>Three rules of Wall Street. 1) Whatever Wall Street's selling, I'm not buying. 2) Unless you're smarter than GS, don't buy what GS is selling unless you're sure GS is long; better yet, don't buy what GS is selling. 3) If you're going to panic, panic early. 4) Buy low, sell high. OK, that was 4, but it's friggin' Xmas & I'm feeling generous.

Now what: http://www.businessinsider.com/walll-street-strategists-2013-sp-500-target-2013-5