More News Than You Can Shake a Keyboard At

Mon, 04/26/2010 - 23:42

It's hard to blog when there's so much to read that your eyes are glazing over. Where to start... with Blankfein's prepared remarks? Financial services reform legislation? Fears over Greece solvency? 

Tomorrow I'll be glued to the Goldman testimony and what it says about the sorry state of our financial services industry (and political system). More information keeps rolling out about more deals. In the thicket of details what is most important to remember is the essential truth that Wall Street is not a level playing field. The object of the game is to get an edge, to get paid for giving someone else an edge, or both. The asymmetric information that creates the edge means that problematic situations occur throughout the market all the time. The question is how clearly Goldman crossed the line:

> First, by giving a client an edge illegally when it sold the Paulson CDO. This security could not have been marketed without deceiving the counterparties. No one in their right mind would have bought it.

> Second, by collecting information from all of its counterparties, and using it on Goldman's prop trading desk. It appears that the firm reduced its overexposure to mortgages by selling its own positions to clients. Although not illegal this highlights the inherent conflict between running a prop business and running an agency business. This is like competing in a marathon and placing bets on yourself while cheering on your Facebook page for some other guy to win.

Lastly, in the avalanche of news about Goldman, we should not lose sight of one small detail of news, which is that that Nebraska Senator Ben Nelson owns a very large amount of Berkshire Hathaway stock.

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Tue, 04/27/2010 - 07:11 — Anonymous

The comment above has great validity

Alice,
I think the comment this guy "Steve" makes trumps your first comment. He put the assemblage of that Paulson CDO in its proper context and in the milieu that prevailed at the time. In my humble opinion, he is right and you are wrong. The rest of what you say is excellent.

Blankfein should do the right thing and go away, resign, take full "status responsibility" as CEO. And he should do so with the following display of good faith: no massive golden parachute. I am not saying there should be clawbacks. I am simply saying that he should apologize, let the board appoint his successor (who should probably be a banker and not a trader), and go away with a zero golden parachute. He has already made far, far too much money.

Meredith Whitney hit the nail on the head regarding Goldman when she was interviewed by Maria Bartaroma yesterday on CNBC. Blankfein should hold a seance with John Whitehead, John Weisberger, and Gus Levy. Blankfein should fall on the sword and disappear. There are many of us who were bright shining stars once in the investment business. Some few of us have had the good taste to stay away. Others have fought for their reputations and have a chance at restoring it (thinking of John Thain here) or coming off as strange dudes (George Ball of the former E.F. Hutton).

There is and was criminal activity going on at Goldman. It was protected by the Goldman alum who were in so many government positions. The biggest single problem is the prop desk trading against its own customers. It is preposterous on the face of it to advise your banking client to sell X or buy Y, when the party on the other side of the trade is the Goldman prop desk.

And another question I have is, why IS Goldman a commercial bank or bank holding company? Exactly what protections and benefits did they get from that?

I think Meredith really told it like it was. I also wonder this: could two people, say you and I or you and Meredith or some modern day equivalent of Mr. Goldman and Mr. Sachs start from scratch and build up, in today's environment, anything even approaching the powerhouse that is Goldman? That to me is an interesting question.

Meanwhile, I say: yield to the gentleman's main point above, or give us some brilliant rebuttal as to why he is not correct. His assessment is contextual. Yours is with the benefit of 20/20 hindsight.

I mean this respectfully. I think your comments are brilliant.

P.S. Please do not go to the Berkshire annual meeting this year. You are way way beyond that.

Wed, 04/28/2010 - 23:19 — aliceschroeder

great comments

so there is no way to know what is in the buyer's mind. all i know is the literal facts. i am calling this contract the "trojan horse." its true nature was not disclosed. the people on the other side of the trade probably knew that cdos contained extra risk for the extra yield they were getting -- but did they know the deck had been so stacked, handpicked actually, that it would become one of the, what was it, five worst performing of all the thousands of cdos issued? that i doubt. even if they thought they were trading yield for crap they didn't know the nature of the crap.

put it another way. if what they were doing was ok why didn't they just disclose it. anytime somebody goes to an effort to hide something, you have to presume they knew they were doing something wrong. paulson's involvement was obviously material. i know people may argue that it wasn't but i'm just saying this as a former auditor. he did not work for goldman or aca and was not a "related party" as defined yet he made the initial selection. it's deceptive not to say that even if you are deceiving sophisticated people.

ok onward to meredith. i like meredith a lot and think she is incredibly bright. i appreciated her candor yesterday and willingness to speak out. the clowns on cnbc (kudlow, kramer etc) were yukking it up as though the whole thing was a joke and there is not even an issue here. in that context i think what meredith did was noble and right. sidney weinberg would be rolling in his grave. there were a lot of comments today about how shifty blankfein looked. bloomberg radio had on a body language expert who said that blankfein's expressions, the squinting and so forth, showed contempt for the senators who were questioning him. his demeanor did not help goldman's case.

i am not sure that meredith's suggestion that goldman stock might go to book value will be born out unless there is a market correction or the whole group of financial stocks trades down 25- 30%. she is bearish by nature but this seems to be discounting in the worst of all worlds. one thing i learned as an analyst, the most obvious changes in the world take ten times longer than they should and the so-called victims of change make a lot of money in the meantime.

Tue, 04/27/2010 - 00:37 — Steve

First Point

Hi Alice, I enjoy your blog and loved your book Snowball. I am going to take issue with your first point above and I realize that this exercise is most probably going to be educational for me (if you respond) but at the moment I feel like I might have some insight for you.

Have you read Zuckerman's "The greatest trade ever?" Fabulous book about John Paulson and his shorting of sub-prime mortgages and is really timely with all the news today. If you haven't, I highly recommend it.

I'm sure you're aware but I will summarize the point of the book, I would say John Paulson was one of a handful of people on the other side of one of the greatest bubbles in modern history. His hedge fund made more money in about three years than the entire market cap of a fairly well known aerospace company here in the Pacific Northwest that has been making aircraft for about a century.

My point being that you don't make this kind of money when it is common knowledge that these CDO's were garbage. Everybody thought he was crazy and they couldn't get enough of these instruments, Goldman included initially (they reverse course in the nick of time). I will argue/speculate right here and now that the people on the other side of this trade knew exactly what they were getting, were in their right mind, wanted the higher yield and were probably laughing when they signed the contract.

Hindsight is always twenty/twenty and nobody will readily admit it now, but the thinking at the time was that it was almost as certain as death and taxes. Housing prices will always go up!

On this issue (and this one only) I think GS is being scapegoated. I agree with your other points and don't think too highly of the company.

I'd love to hear your take. Thanks, and keep up the great work!

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