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...