A short Analysis of the Goldman Situation

Individuals and Business across the world have a variety of expectations from the Goldman Sachs investigations. Investment bankers like Stephen Wood, chief market strategist and Russell Investments Ltd hope that the SEC’s complaint remains just in regard to one specific instant and a particular trade, the Abacus. This is true, for now…

Economics is the study of dynamic behaviors. Investment banking and market creation is as dynamic as it gets. Meaning we build things as we go.

The whole Derivatives market was created only recently as products for investment and trade. So now that we know the result of unethically trading such products we are able to decide that it’s probably bad for the market to only internally trade these securities without regulation.

As investigators learn more about this case, they begin to realize what exactly to look for. The Civil suit is only for the Abacus deal but it has brought other deals into investigation. Goldman sold the Timber wolf structured product again as a AAA rated high-yield investment. Bayer Sterns bought 300 million into it while Goldman bought ‘puts’ against it, i.e. they were betting on Timber wolf failing (they were the sole buyer for protection on this security). What happens – 3/16/2008 Bayer Sterns nearly collapses and is bought by JP Morgan under a Fed brokered deal. Remember; JP Morgan and Chase profited from the meltdown via the hedge fund Magnetar. Thus the bank had investment capabilities and was also the first to re-privatize in 2009. The Hudson Mezzanine is another Goldman deal under investigation. So I feel that as the SEC and the investigations evolve there could be more banks that the SEC brings to question. Oh yeah and Goldman made a few Billion cashing out their insurance.

The Charges filed are Civil and not Criminal – I am sure the Civil and Criminal investigative bodies communicate with each other, leaving me to conclude that there wasn’t enough evidence to satisfy the demands of a criminal charge. However, we can conclude that this is not a one off thing and it will not go away.

What we have is a Globally Coordinated Regulatory Overhaul. Germany and Netherlands are involved with the SEC investigations, and one can speculate that there could be Civil charges against Goldman in Germany, the U.K. and even the Netherlands. Anyway IKB and ABN Amro have filed a claim to get their money back and if the charges stick, Goldman is liable to pay.

Hopefully this overhaul results in all big markets around the world having a similar set of regulations closely monitored by their respective governments. See if regulatory changes are not globally coordinated this will happen again. This is simply because investors and products seek the least regulated market conditions. There has been a significant shift in investment to the lesser regulated London and Hong Kong markets in the past 3 years.

Another good thing is that the Stock market was long overdue for a major correction. Prices have been riding too high in my opinion; stuff like this brings prices down to a level we can afford.

Political Implications – It would be naïve to assume that the left is not going to use this for political leverage. Even in the congressional election this autumn. “Look what happens when we leave the traders in charge? We are victims of big investors? Corporations caused the financial meltdown.” The public loves this stuff.

I can’t say if there truly is a legal issue here but there is an ethical problem. The finance industry needs to do some soul searching.

In an interview with Bloomberg Goldman’s CEO Blankfein said’ “There is a lot of distrust and doubt in the market and this hearing is a manifestation of it. I can’t say it’s a wakeup call because we have been living like this for a while.”

Another point I’d like to raise is the fact that these guys are really smart. I mean truly intelligent beyond you and me. They probably received a phenomenal education from our top institutions.
WHAT THE FUCK HAPPENED? Do our schools fail at building a moral base for the individual? Why do I feel like these people have completely lost their ethics? – just a thought...

Referring to Kavita's Comments on Goldman

Good Question's Kavita...

1 - We are not assuming that Goldman knew the CDO would Fail. It is a FACT that Goldman was selling a Shit Investment (in the words of Investigative committee Chairman, Senator Carl Levin). He used the word Shit Investment/product 11 times yesterday when the investigative committee first sat down to question Goldman Sachs.

2 - Everybody knew the housing bubble was going to burst. A half decent student of economics could have told you that.

3 - Goldman Lied - they selected 2 billion dollars worth of product from their inventory. Investments that were on the verge of collapsing and stuck em in the Abacus deal.

4 - Yes ABN Amro and IKB bank are idiots in regards to this deal. They were stupid enough to buy into the deal. Whereas ACA and a few other investment firms rejected it, the product was too risky and they could identify junk. These banks (IKB and ABN)got desperate and greedy bought into a risky portfolio. See there is no room for being a fool in investment banking. You will get taken advantage of. Goldman did exactly that., and not just to these banks but other institutions like Bayer Sterns...

5 - Even Goldman Sachs Sales people were well aware that the Abacus deal, Timber wolf deal and the Hudson Mezzanine to name a few were essentially going to fail. Goldman made Billions on each of these deals and their clients lost money.

6 - Isn't there a moral problem / conflict of interest when you sell a product to your client assuring them its a high yield security i.e. manipulate them into a long term investment and then you buy insurance against the success of the same security. Aka your company take the short run side of the investment.
So because they own the CDS's wont it be in the best interest of Goldman that the security fail?

7 - No individual can partake in the derivatives market. It is an internal market for banks only. Mr. Gary Gensler is pushing for Banks to trade derivatives on the open market so there there is more transparency. Good idea, lets hope it happens.

8 - Fact being that Civil Charges are filed and Not Criminal so we can't say that Goldman was scamming clients, its more politically correct to say that they withheld information. Big difference ya. haha...

Actions Implications and Beavig Get's It !

So Beavis Get's it... Every now and then, in an Intellectual Impulse even Beavis makes sense...

People are Bastards - Not one person will go just slightly out of their way to help someone else. Does it really Inconvenience us to save a human life?

Watch...

Visit msnbc.com for breaking news, world news, and news about the economy

It sucks that he died trying to help someone else.

You know what?
As long as none of this affects anybody directly, there will be no social change. You watch it, feel bad and that's that.

Why doesn't anybody decide to take social responsibility towards those in need?
Not charity, I believe that every human being comes across enough opportunity to help another in need!

Just the same way in which we seem to be alright with slave labor as long as it's geographically far away in a sweat shop in China or Bangladesh.
FYI - If you shop at Wal-Mart......

Its 2010, take charge of the world you live in. Build it the way you want it to be. and YES just ONE Person can make a difference !

Sense and Nonsense about the Case against Goldman Sachs and the SEC

Congratulations America! The SEC has grown a nice set of hangers under the enforcer; SEC boss Mary Schapiro. She cast the deciding vote in a split decision to charge Goldman with fraud. Finally we seem to have a good head on the Nations Financial Watch Dog.

Remember; under her three Bush-appointed predecessors, Harvey Pitt, William Donaldson, and Christopher Cox, Wall Street was basically self-regulating and the SEC was hands-off. This helped enable some of the biggest conmen and cases of fraud in American history: Bernie Madoff, Enron and Worldcom. The lack of regulation over the last decade sowed the seeds of the financial crisis we face today.

So the Securities Exchange Commission has filed a case of fraud on the world’s biggest Investment Bank. The case against Goldman is based on a single deal; the Abacus 2007-aci. It basically enabled hedge fund guru John Paulson to make Millions as the value of American homes crashed.

The Abacus 2007-aci was encapsulated in what is known as a synthetic Collateralized Debt Obligation or CDOs. Now CDOs are derived from mortgage bonds, thus they are derivatives designed to be mathematically complex and beyond the grasp of the average person. However, they don’t hold any actual assets but you can invest in them as you would in the real thing, and you can also short them as you would a stock, using insurance contracts called credit default swaps or CDSs.

The investment banks and hedge funds that made the CDOs are accused of loading them with the equivalent of toxic bonds and buying CDSs for themselves knowing that the CDOs would lose value. Goldman informed investors that they were buying a AAA-rated high-yield investment put together by an independent firm called ACA management. Goldman did a great job of selling a worthless well packaged fake investment. Netherlands’ ABN Amro agreed to issue more than $900 million Abacus bonds and Germany’s IKB bank invests $150 million into the deal. These sophisticated banks stand as fools/losers in a game of deception designed and enabled by Paulson and Goldman Sachs.

What Goldman failed to mention was that ACA picked most bonds for the portfolio from a list Paulson had pre-approved. So basically Paulson handpicked the losers he wanted to bet against. Now I’d like to add to our story a character who deserves equal credit for this mess; Goldman’s Fabrice Tourre. He played a key role as he misled ACA into believing that Paulson was going to invest in the deal. Whereas Paulson was buying Credit Default Swaps that would pay off if the portfolio drops. We all know what happened, as the housing bubble burst and prices took a dive, mortgage bonds began to default and investors in the Abacus lost over $1billion. Most of this went to Paulson as he had issued CDSs and bet against the Abacus investment.

Paulson is not the subject of the SEC’s complaint and is not facing any charges. Goldman says it didn’t set up investments to fail and didn’t mislead clients. They call the charges completely unfounded and vow to fight the allegations aggressively. It will be interesting to see how the SEC fights a full-on defense from Goldman on this.

Wall Street’s CDOs engaged the finance sector of the economy in producing nothing but pure economic waste. They didn’t help anyone afford a new house, no new cars were purchases, nobody got an educational loan and there was no actual productivity via such investments. They simply assisted in the transfer of wealth from the American working man in the service industry (i.e. the backbone of the economy) to a smaller group of already richly rich traders who profited as CDOs failed.

Goldman is the first in line to get a beating from the SEC, and this is a great thing as it shows that the SEC is serious about handling its responsibility as a regulator. The SEC has other banks under investigation for similar synthetic CDO financing deals.

Morgan Stanley had the dead president’s deals called Buchanan and Jackson. JP Morgan and Chase profited from the meltdown via their hedge fund Magnetar and even Merrill Lynch a subsidiary of the Bank of America Corporation is under investigation.

This makes me wonder… What Happened? How did we reach here? How did we end up letting a bunch of self-interested greedy investors run our financial markets? Why are we mesmerized by a purely capitalistic ideology? Why are we here in a world of artificial investments? Why are the traders in charge, those who will make a profit even at the cost of running the economy into the ground?

Investments in markets are essentially supposed to boost actual productivity by maintaining long term relationships and nurturing the economy and the companies and people in it. Whereas for the past two decades the dark world of unregulated high frequency trading generated millions of dollars of cheap money and left the traders in charge. A trader’s only goal is to maximize profits at whatever cost, they only have short term goals. So as a trader if you need to bet against the economy to make a profit, you will do it… everyday… knowingly… drive the economy to the ground and hurt your own fellow citizens in the wake of it.

Is it really worth it?

I have lots more to say which I will continue over the week… your thoughts and criticisms are greatly appreciated.