SEC charges Goldman with Fraud

[jackson33]

D H; I've been waiting for a little more to work with on the issue and my point, that what GS has been and being charged with (civil action) was not only in their right, but part of any and all 'at risk' transactions. However to answer your complaint;

 

I've been needing to get that off my chest for a while.[/Quote]

 

In short, I use 'Jarte Word Processing' software in composing my post, nearly 100% of the time, while not even connected to SFN. If something interest me, I'll copy/paste the theme of one or more post and over time, doing other things especially during weekdays, will write the post. I've found it's much better than 'Word Pad' having it's own Spell Check, word definition and if needed encyclopedia look up, which with my grammar expertise is required. I'll apologize, if my participation and method for composing, do not meet your approval, however with all the complaints I recorded in my style, you have made a first.

 

D H from post 15

The existing laws that are already on hand would be a very good place to start. [/Quote]

 

Yes, but what current restrictions/regulation can prevent taking/assuming a loss, or new restriction/regulation. If nothing else 99% of most losses can be averted simply by holding the equity. Most all those 'derivatives' or any real estate note or holding, will in time be back to their original value, more than likely including inflation. It may be years, but real estate, unlike a Company Stocks, will always have a certain value and demand in this case will certainly come back. Factually IMO, today it would be a good play on inflation, probably better than gold, or silver which is how I play it...

 

The e-mails suggest Goldman benefited from its bets that securities backed by subprime mortgages would lose value. The messages seem to contradict previous statements by the investment bank that it lost money on the securities.

 

"Of course we didn't dodge the mortgage mess," CEO Lloyd Blankfein wrote in an e-mail dated Nov. 18, 2007, according to e-mails released by the Senate's Permanent Subcommittee on Investigations. "We lost money, then made more than we lost because of shorts."

 

Short positions are bets that the market will go down. As the housing bubble burst, Goldman and a few powerful hedge funds took short positions on the market. Many of those bets required other investors to bet the market would rise.

 

When the market went bust, people with short positions cleaned up. [/Quote]

 

http://my.att.net/s/editorial.dll?fromspage=all/home.htm&categoryid=&bfromind=2670&eeid=7258747&_sitecat=1462&dcatid=0&eetype=article&render=y&ac=1&ck=&ch=mo

 

bascule; This article hit my AT&T front page, this morning (4/24) and tells the story much better than I can. GS, no less than most every Hedge Fund and many investors can be involved in 'Long and Shorts' holding or selling whichever they feel are best, at a particular time. I trade with Scottrade, who maintain many Stocks in their Company Portfolio and I wouldn't doubt longs and shorts as well, which they do trade either way for their investors (I don't play shorts, even with their leverages). I see nothing illegal and more importantly nothing that regulation could control with out destroying the principle of risk taking (to finance anything new or old and growing or for a share of the profits) to begin with.

 

Obama quote in NYC "you can't just take what you can get" referring to investments and has it exactly backwards. When I as a tiny player in 'Day Trading' or the biggest players in anything that fluctuates (commodity/money markets) would never make the investment, without the total knowledge we can get out, whether the item is losing or showing a profit and at near the time we desire.

 

Critics say their bets added fuel to the financial crisis.[/Quote] Same link...

 

How could this be, the bubble had burst, people including myself, didn't realize how far down the Housing Market could retreat and many felt all through various points the bottom had been reached. As conservative as I am, selling everything when a DOW bubble was in my mind obvious (hit 14k with talk of 15k or 20k in a short period), did buy back in on several stocks, which continued to drop, GE and Lowe's to be exact and a few high dividend stocks. If you see the connection, GS did the same thing selling to any buyer, feeling themselves more was to follow, to anyone that disagreed.

 

Jackson - Caveat emptor doesn't quite apply when the only information made available to prospective buyers is fraudulent.[/Quote]

 

iNow; If the buyer and selling have access to the same information, whatever the dialog might be, then CE, most certainly does apply. If it can be proved any negative information was PROVIDED, especially with in the saleable contract itself, then you would have a case. It's my opinion, any person or entity dealing in Real Estate, their Notes, singularly or combined into those derivatives should have known the risk. Tens of thousand of Homes were being bought and sold all through the continuing slide (some locations) and I'll bet not one person had legal recourse to claim their losses on the seller, even to the contrary, where their liability in all States remains on the buyer, after walking away from their investment.

 

Another good example; Of the thousands of Homes sold, with a specific Chinese Wallboard, both the buying and seller worked with the same information, or lack of and recourse, would have to go back to the material producers, where intent would need to be proved and not possible, IMO. I thought about trying a thread on this issue.

[bascule]

I see nothing illegal and more importantly nothing that regulation could control with out destroying the principle of risk taking (to finance anything new or old and growing or for a share of the profits) to begin with.

 

The illegal bit of it is Goldmann misrepresented their product. They created derivatives which were designed to fail, had full knowledge that the embedded time bomb within these derivatives was undetectable by the purchaser, and still passed it off as if it were a totally legitimate product.

 

As far as regulation goes, just making derivatives trading between public corporations transparent to the public would go a long way to helping assess systemic risks. This is exactly what Brooksley Born wanted to do in the late '90s. It's still needed. If the financial crisis demonstrated anything, it's that assessing the risk of large financial corporations is incredibly complex and they do a lousy job of assessing their own risk, much less risk to the overall system

 

If the financials can't self-regulate, the government really needs to step in.

[Pangloss]

I see nothing illegal and more importantly nothing that regulation could control with out destroying the principle of risk taking (to finance anything new or old and growing or for a share of the profits) to begin with.

 

It is wrong if they told their clients they were committed to building up that investment while at the same time secretly knew that it was not a sound investment, and then leveraged their clients resources to make money for themselves by betting against the very same investment they were selling.

[bob000555]

I say all the following with the caveat that I am a Goldman Sachs shareholder.

 

Goldman was not charged with designing derivatives to fail nor with failing to disclose that they designed them to fail.( In fact there is evidence that firm money was riding on the deal, that is to say Goldman Sachs invested some of its own money in the instrument. It is unlikely that they would have done this if they suspected that the instrument would fail.) Rather Goldman has been charged with failing to disclose that John Paulson of Paulson and Company was involved in designing the derivative. Paulson and Company later made bets that the instrument would deprecate in value or fail. There is, as far as I am aware, no evidence that Goldman knew Paulson would later short the security and there is even disagreement in the legal community as to whether Goldman would have a duty to disclose even if they did know this.

 

The fact that the commission’s vote to charge the firm was 3 to 2 is rather telling. Usually when the SEC has a slam dunk case the vote is unanimous.

 

Goldman is perhaps the most hated firm on the face of the Earth and there are people trying to make a career of slaying Goliath. People hate Goldman because they are good at what they do; they made money when others were losing money.

 

Making derivatives trades public could have disastrous consequences. One of the responsible uses of derivatives is to hedge risk. This is illustrated by credit default swaps. The purpose of a credit default swap is for a party to protect itself against the default of people and corporations who owe money. During the late 2000’s we saw firms like AIG failing because they were the counterparty in such derivatives but if these derivatives had not existed in the first place then community banks could have failed because they would not have the protection they purchased from AIG. If it became public knowledge when a company purchased protective derivatives there would be a significant incentive not to purchase protection even when it would be the responsible thing to do because it would be viewed as acknowledging that their portfolios consist of bad loans. Expecting firms to purchase protection on their portfolios in public would be akin to asking patients to accept treatments for STDs in front of all the eligible people of opposite sex.

 

As for the dichotomy of Wall Street and Main Street that is fast becoming a cliché: if we learn one thing from the mortgagee debacle it should be that when bad things happen on Wall Street they quickly make it to Main Street. Recent proposals that are along the line of “let’s go burn Wall Street at the stake” seem to forget this premise.

Edited April 25, 2010 by bob000555

[bascule]

Making derivatives trades public could have disastrous consequences.

 

Really? Like a $700,000,000,000 bailout?

 

If we learned something from the financial crisis, it's that financials are too complex to effectively manage their own risk. Given that, what choice do we have but to put mechanisms in place so third parties (e.g. the federal government) can attempt to assess that risk, and systemic risks?

 

Personally I hope to see the federal government put a ban in place on large financials trading in CDOs, forcing them to spin off these divisions into separate companies.

[iNow]

In fact there is evidence that firm money was riding on the deal, that is to say Goldman Sachs invested some of its own money in the instrument. It is unlikely that they would have done this if they suspected that the instrument would fail.

 

Except, as recent emails from their chief executives demonstrate, they lost some money knowing they'd make back much much more. Your presentation unfortunately oversimplifies matters.

Yes, there were losses, but those losses came amidst a net gain.

 

 

http://online.wsj.com/article/SB10001424052748704627704575203882067718088.htm

In one of the email exchanges, Mr. Blankfein appears to bluntly acknowledge the firm's strategy in broad terms. "Of course we didn't dodge the mortgage mess," Mr. Blankfein said in an email on Nov. 18, 2007. "We lost money, then made more than we lost because of shorts.

 

 

http://articles.latimes.com/2010/apr/24/business/la-fi-goldman-sachs-emails-20100425

The e-mails released contradict previous statements by Goldman officials that the investment bank did not aggressively bet against the housing market and that it, too, lost money on mortgage-related investments along with many of its clients.

 

<...>

 

The e-mails go to the heart of civil fraud allegations brought this month by the Securities and Exchange Commission against the investment bank. The agency alleges that Goldman sold mortgage-backed securities to investors that the company knew would fail. Goldman has denied the allegations and reiterated Saturday that that it did not make money by betting that the mortgage market would collapse.

 

<...>

 

One of the e-mail exchanges featured Michael Swenson, managing director of Goldman's structured products trading group, commenting on news that a credit rating agency downgrade of $32 billion in mortgage-related securities would cause losses for many investors. But Goldman had bet against those securities, the subcommittee said.

 

"Sounds like we will make some serious money," Swenson wrote on Oct. 11, 2007, to a colleague, Donald Mullen, who e-mailed back, "Yes we are well positioned."

 

<...>

 

Under "bad news," one employee noted Goldman lost $2.5 million from the soured investments. But under "good news," the employee said Goldman had bet against the securities, which the Senate panel said the firm had assembled and sold to investors, and would make $5 million.

 

 

http://www.ft.com/cms/s/0/5defa420-4fa9-11df-a1ab-00144feab49a.html

Lloyd Blankfein, chairman and chief executive of Goldman, told other top executives in a November 2007 email exchange: “Of course we didn’t dodge the mortgage mess. We lost money, then made more than we lost because of shorts.”

 

<...>

 

Mr Blankfein and other top Goldman executives will appear before the Senate subcommittee on Tuesday. The SEC complaint has alleged that the bank committed fraud when it failed to tell investors that a hedge fund manager, John Paulson, was betting against a security that he had helped to create and was designed to fail.

 

<...>

 

Revelations that Goldman shorted the mortgage market are not new. In a letter to investors early this month, the Wall Street bank acknowledged it “went short” even as it was trading its clients’ mortgage-backed securities, the financial instruments that lie at the heart of the financial crisis.

 

 

 

 

 

Goldman is perhaps the most hated firm on the face of the Earth and there are people trying to make a career of slaying Goliath. People hate Goldman because they are good at what they do; they made money when others were losing money.

I'm not sure your representation accurately describes the reasons why so many people are livid with them. I am rather confident there are many other details which better describe the motivations for peoples disgust and anger.

 

 

if we learn one thing from the mortgagee debacle it should be that when bad things happen on Wall Street they quickly make it to Main Street. Recent proposals that are along the line of “let’s go burn Wall Street at the stake” seem to forget this premise.

Which proposals are doing that, exactly? I've not personally read any which suggest any such thing, and I'm looking to fill that gap in my awareness. Could you cite something or share a link or two?

[Pangloss]

Anybody know what the exact vote was in that 3-2 SEC decision? That might be interesting to look at in terms of the politics. The timing just prior to the Senate's debate on the financial reform bill is highly suggestive of political gaming.

[bob000555]

Really? Like a $700,000,000,000 bailout?

 

It is quite apparent that you either did not read the rest of the paragraph you quoted, completely ignored it or failed to understand it entirely. People on SFN have tendency to pick a few sentences out of a half page long post and to criticize and completely ignore the rest. Please read and try to understand this entire response before you reply.

 

As I said before one of the uses of derivatives is hedging. Hedging is the process whereby firms offset exposure to risk by taking some opposite position, usually a derivative. A common example amongst private investors is longing a stock and buying a put to limit downside exposure. Institutional investors like Goldman Sachs do the same thing except on a far more complex and far more extensive scale, this is one of the reasons Goldman made a profit in the down market.

 

Had companies had to disclose when they where buying protection it would be paramount to admitting that they held dangerous securities. If a firm admits this other firms would be far less likely to do business with them or give them loans. That last bit is the kiss of death on an industry that requires “over night loans” in order to cover fluctuations in capital. Wall Street firms are far more likely to simply not purchase the protection then to not purchase the risky securities that also involve huge upside potentials. Had firms not purchased at least the levels protection that they did before the mortgage crisis, the collapse would have been much worse and more tax payer money would have been necessary to prevent the total collapse of the financial market.

 

If we learned something from the financial crisis, it's that financials are too complex to effectively manage their own risk. Given that, what choice do we have but to put mechanisms in place so third parties (e.g. the federal government) can attempt to assess that risk, and systemic risks?

 

You make the mistake of assuming that third parties would do any better in assessing and managing risk. Third parties are humans too and are just as likely to get caught up in the psychology of a bubble as investment bankers. We saw this in the previous bubble, for example I personally knew senior people at the Federal Housing Administration(which has the responsibility of regulating and stabilizing the mortgage market) who where convinced that the price of housing could never go down, and therefore the price of large mortgage backed securities could never go down. We also saw this in the form of Fanne and Freddie buying up mortgagees with government money. We also saw credit ratings agencies giving irrationally high ratings to derivatives and securities.

 

I can absolutely assure you that in the next bubble, as in all bubbles, virtually everyone will be sucked into the irrational exuberance and this will include your trusted third party regulators.

 

As for the government being better able to handle complex markets let me simply ask you this: who do you think is better suited to handle complexity, people with PhD’s from places like Harvard, Princeton and MIT or people with BA’s from state universities? Now consider that a firm like Goldman Sachs is able to offer compensation that makes a government salary look like a pittance. It becomes no surprise that Goldman’s strategy division is brimming over with brilliant mathematicians, economists and engineers while the government has to few spread to thinly to be able to regulate the market.

 

Which proposals are doing that, exactly? I've not personally read any which suggest any such thing, and I'm looking to fill that gap in my awareness. Could you cite something or share a link or two?

 

Well, this one for example:

 

Personally I hope to see the federal government put a ban in place on large financials trading in CDOs, forcing them to spin off these divisions into separate companies.

 

This would entirely foreclose the possibility of hedging. Had this proposal been enacted before the mortgage crisis I can say, with out feeling at all as though I am engaging in hyperbole, that we would have seen the complete collapse of the global financial system when the crisis came.

 

 

Anybody know what the exact vote was in that 3-2 SEC decision? That might be interesting to look at in terms of the politics. The timing just prior to the Senate's debate on the financial reform bill is highly suggestive of political gaming.

 

I believe it was a party line vote. I know that the chairwoman cast the tie breaking vote.

Edited April 25, 2010 by bob000555
formating

[Cap'n Refsmmat]

Had companies had to disclose when they where buying protection it would be paramount to admitting that they held dangerous securities. If a firm admits this other firms would be far less likely to do business with them or give them loans. That last bit is the kiss of death on an industry that requires “over night loans” in order to cover fluctuations in capital. Wall Street firms are far more likely to simply not purchase the protection then to not purchase the risky securities that also involve huge upside potentials. Had firms not purchased at least the levels protection that they did before the mortgage crisis, the collapse would have been much worse and more tax payer money would have been necessary to prevent the total collapse of the financial market.

 

So disclosure is bad because it lets other people know the risks involved in making investments, and if they knew how risky it was, they wouldn't do it.

 

I thought the point here was that derivatives let people take huge fiscal risks, which then blew up in their face.

[bob000555]

So disclosure is bad because it lets other people know the risks involved in making investments, and if they knew how risky it was, they wouldn't do it.

 

I thought the point here was that derivatives let people take huge fiscal risks, which then blew up in their face.

 

No disclosure is bad because if buying protection requires people to disclose that they hold dangerous securities they will simply never buy protection.

 

As I said one of the purposes of derivatives is hedging, this use simply doesn’t receive attention because it is a much more interesting story to claim that Wall Street was wildly risking everything and putting the tax payers on the hook.

 

Did you read and consider the entire post or did you pick out one part you thought you could criticize easily and ignore the rest?

[Cap'n Refsmmat]

No disclosure is bad because if buying protection requires people to disclose that they hold dangerous securities they will simply never buy protection.

Alternately, they will take less risks.

 

Did you read and consider the entire post or did you pick out one part you thought you could criticize easily and ignore the rest?

 

Yes.

[bob000555]

Alternately, they will take less risks.

 

The problem is that risk is inherent in the banking system. The marginal cost of accepting additional risk is low enough that if hedging become more difficult companies would be more likely to simply not hedge then to give up the massive upside potential that is involved in risky securities.

 

Yes.

 

Am I to take this to mean that you read the entire post and then were intentionally intellectually dishonest? You responded to parts of my post by not taking into account other parts of the post that qualified them? Is this not just a clever form of a straw man?

[Mr Skeptic]

No disclosure is bad because if buying protection requires people to disclose that they hold dangerous securities they will simply never buy protection.

 

Unless they are really really clever people, like you, who understand that they are simply hedging their bets and so are actually less risky.

[jackson33]

Until recently, most people had never even heard of derivatives; but in terms of money traded, these investments represent the biggest financial market in the world. Derivatives are financial instruments that have no intrinsic value but derive their value from something else. Basically, they are just bets. You can "hedge your bet" that something you own will go up by placing a side bet that it will go down. "Hedge funds" hedge bets in the derivatives market. Bets can be placed on anything, from the price of tea in China to the movements of specific markets.

 

"The point everyone misses," wrote economist Robert Chapman a decade ago, "is that buying derivatives is not investing. It is gambling, insurance and high stakes bookmaking. Derivatives create nothing."1 They not only create nothing, but they serve to enrich non-producers at the expense of the people who do create real goods and services. In congressional hearings in the early 1990s, derivatives trading was challenged as being an illegal form of gambling. But the practice was legitimized by Fed Chairman Alan Greenspan, who not only lent legal and regulatory support to the trade but actively promoted derivatives as a way to improve "risk management." Partly, this was to boost the flagging profits of the banks; and at the larger banks and dealers, it worked. But the cost was an increase in risk to the financial system as a whole.2 [/Quote]

 

http://www.countercurrents.org/brown200908.htm

 

Derivatives, CFDs and spread betting;

 

Derivatives, such as gold forwards, futures and options, currently trade on various exchanges around the world and over-the-counter (OTC) directly in the private market. In the U.S., gold futures are primarily traded on the New York Commodities Exchange (COMEX), a division of the New York Mercantile Exchange (NYMEX), and NYSE Liffe US. In India, gold futures are traded on the National Commodity and Derivatives Exchange (NCDEX) and Multi Commodity Exchange (MCX).[26]

 

Firms such as Cantor Index, CMC Markets, IG Index and City Index, all from the UK, provide contract for difference (CFD) or spread bets on the price of gold.[/Quote]

 

http://en.wikipedia.org/wiki/Gold_as_an_investment

 

 

What are Contracts for Difference CFDs

 

A CFD is an agreement between two parties to settle, at the close of the contract, the difference between the opening and closing prices of the contract, multiplied by the number of underlying shares specified in the contract.

 

CFDs are traded in a similar way to ordinary shares. The prices quoted by many CFD providers is the same as the underlying market price and the you can trade in any quantity just as you would with an ordinary share, you will usually be charge a commission on the trade and the total value of the transaction is simply the number of CFDs bought or sold multiplied by the market price. However, there are some distinct differences from trading ordinary shares that have made them increasingly popular as an alternative instrument to speculate on the movements of shares or indices.[/Quote]

 

http://www.bullbearings.co.uk/cfd.trading.guide.php

 

 

 

The illegal bit of it is Goldmann misrepresented their product. They created derivatives which were designed to fail, had full knowledge that the embedded time bomb within these derivatives was undetectable by the purchaser, and still passed it off as if it were a totally legitimate product. [/Quote]

 

bascule; In all honesty, I'm getting involved on a subject/issue, well over my head, IMO on the substance, not so much the law. Note the first link, was written at the appropriate time for this discussion.

 

You no doubt understand CDF's, QQQQ, SLV, GLD and so on, which are similar to that of Derivatives, which are based on Real Estate Values, opposed to Nasdaq Stocks, Silver or Gold. With out giving my own definitions, I've offered those of others, which I couldn't further explain.

 

On the legal side; I don't understand HOW GS could have misrepresented their product, since RE values had been in decline from mid 2007, shortly after a peak, which was all to obviously past a peak, then sub-prime and Federal Regulations had been known and argued back into the late 1990's, I'd suggest long** before going back the Fannie being privatized and origin of Freddy Mac. Any entity that bought sold or made any transaction, whether GS or some other entity, had full access to anything that could be offered. Even if GS representative over stated the future values of RE in general, their were half the people involved, that would have agreed.

 

I'm not going to argue with bob's points, I understand his thought, but if I were concerned with GS or any stock, the always tell tailing 'insider trading' IMO, trumps hedged shorts and both usually known. If Company supervision or Institutional Ownerships, especially the CFO or CEO are selling Company Stock or if average daily exchanges are abnormally high, there is most always a reason/cause.

 

I also feel, this entire subject, is politically motivated, added to by a portion of Congress Members, fearing their involvement will become known. The simple facts, that GS is well represented in Government today and under Bush and has been in CLOSE talks (at the White House) while this entire affair has been known, tells me no less (Not to mention the Federal Reserve). As said before, I feel there will be an effort in Congress to use the issue, in promoting a 'Finance REFORM Bill, which is really not needed (IMO) and the CIVIL Action (you are suggesting is a criminal matter) will be settled out of Court, without GS admitting to 'wrong doing', with a reasonably minor fine to satisfy the general public (political base), they have been punished. The only thing that I question my own scenario on, is why or on earth these charges were ever made in the first place, there could be something, I'm missing.

 

**

The subprime mortgage crisis is an ongoing real estate crisis and financial crisis triggered by a dramatic rise in mortgage delinquencies and foreclosures in the United States, with major adverse consequences for banks and financial markets around the globe. The crisis, which has its roots in the closing years of the 20th century, became apparent in 2007 and has exposed pervasive weaknesses in financial industry regulation and the global financial system.[1]

 

Approximately 80% of U.S. mortgages issued in recent years to subprime borrowers were adjustable-rate mortgages.[2] After U.S. house prices peaked in mid-2006 and began their steep decline thereafter, refinancing became more difficult. As adjustable-rate mortgages began to reset at higher rates, mortgage delinquencies soared. Securities backed with subprime mortgages, widely held by financial firms, lost most of their value. The result has been a large decline in the capital of many banks and U.S. government sponsored enterprises, tightening credit around the world.[/Quote]

http://en.wikipedia.org/wiki/Subprime_mortgage_crisis

 

 

The problem is that risk is inherent in the banking system. The marginal cost of accepting additional risk is low enough that if hedging become more difficult companies would be more likely to simply not hedge then to give up the massive upside potential that is involved in risky securities. [/Quote]

 

bob000555; Agree and keep in mind further regulation, where any risk is involved would be to the detriment of any party, group or business wanting start a business, improve or grow a business, make acquisitions or merge a business almost impossible, more often than not failures to the initial cost.

[bob000555]

Unless they are really really clever people, like you, who understand that they are simply hedging their bets and so are actually less risky.

 

The problem with disclosing the purchase of a protective derivative is not so much the signaling of the risk inherent in the underlying security. The problem is more that it signals to potential lenders and counter parties that the firm habitually engages in dangerous trades. This may or may not be true but economic signaling theory tells us that agents will attempt to infer information from imperfect signals.

 

That is to say that if it was disclosed that a firm had purchased protection on a security it would be acknowledged that some of the risk in that security had been offset but it would through the stability of the rest of the portfolio into question. This would make it almost imposable for the firm to get the overnight loans that are the lifeblood of a bank.

 

To prevent this from happening firms would just stop hedging leading to disastrous consequences.

[padren]

The problem with disclosing the purchase of a protective derivative is not so much the signaling of the risk inherent in the underlying security. The problem is more that it signals to potential lenders and counter parties that the firm habitually engages in dangerous trades. This may or may not be true but economic signaling theory tells us that agents will attempt to infer information from imperfect signals.

 

That is to say that if it was disclosed that a firm had purchased protection on a security it would be acknowledged that some of the risk in that security had been offset but it would through the stability of the rest of the portfolio into question. This would make it almost imposable for the firm to get the overnight loans that are the lifeblood of a bank.

 

To prevent this from happening firms would just stop hedging leading to disastrous consequences.

 

Wouldn't the market naturally work this out? Firms that are overly cautious would loose out on what are actually good investments and the firms that read the signals correctly would profit from it. Overnight loans aren't common because they altruistically help banks, but because they are profitable. Firms would learn to read the signs accordingly to exploit that profit.

 

All the concern over the consequences of disclosure (which we are debating here) doesn't change the underlying problem: people are not willing to tolerate a system where they invest in a top rated company that sells them what they are told is a very good quality package, when it is in fact specifically designed to tank and screw them out of their money so said top rated company can make even more money.

It is a situation that is not tolerable. If the system requires a level of deception and the hiding of relevant information that allows these frauds to occur on this insane scale, then something has to be changed about the system, period. Wouldn't you agree the current state of affairs is untenable?

[iNow]

All the concern over the consequences of disclosure (which we are debating here) doesn't change the underlying problem: people are not willing to tolerate a system where they invest in a top rated company that sells them what they are told is a very good quality package, when it is in fact specifically designed to tank and screw them out of their money so said top rated company can make even more money.

It is a situation that is not tolerable. If the system requires a level of deception and the hiding of relevant information that allows these frauds to occur on this insane scale, then something has to be changed about the system, period.

Krugman just put forth an interesting article along these lines, basically suggesting that people stop focusing on Goldman and instead focus on the rating agencies who twisted the truth so as not to lose market share, and how it's the system itself which needs fixing.

 

 

http://www.nytimes.com/2010/04/26/opinion/26krugman.html

The bad news is that most of the headlines were about the wrong e-mails. When Goldman Sachs employees bragged about the money they had made by shorting the housing market, it was ugly, but that didn’t amount to wrongdoing.

 

No, the e-mail messages you should be focusing on are the ones from employees at the credit rating agencies, which bestowed AAA ratings on hundreds of billions of dollars’ worth of dubious assets, nearly all of which have since turned out to be toxic waste. And no, that’s not hyperbole: of AAA-rated subprime-mortgage-backed securities issued in 2006, 93 percent — 93 percent! — have now been downgraded to junk status.

 

What those e-mails reveal is a deeply corrupt system.

 

<...>

 

The Senate subcommittee has focused its investigations on the two biggest credit rating agencies, Moody’s and Standard & Poor’s; what it has found confirms our worst suspicions. In one e-mail message, an S.& P. employee explains that a meeting is necessary to “discuss adjusting criteria” for assessing housing-backed securities “because of the ongoing threat of losing deals.” Another message complains of having to use resources “to massage the sub-prime and alt-A numbers to preserve market share.” Clearly, the rating agencies skewed their assessments to please their clients.

 

These skewed assessments, in turn, helped the financial system take on far more risk than it could safely handle. Paul McCulley of Pimco, the bond investor (who coined the term “shadow banks” for the unregulated institutions at the heart of the crisis), recently described it this way: “explosive growth of shadow banking was about the invisible hand having a party, a non-regulated drinking party, with rating agencies handing out fake IDs.” <

more at the link

>

[bascule]

On the legal side; I don't understand HOW GS could have misrepresented their product

 

It's a very tricky issue that uses theoretical computer science I don't fully understand.

 

The best metaphor is encryption. They "encrypted" the toxic assets into CDOs using a previously unknown method which renders them undetectable to the purchaser.

 

To my knowledge Goldman was the only one to figure out this method and certainly the only one who knew about it prior to the financial crisis.

 

The method renders it computationally infeasible to detect toxic assets embedded in a CDO. The thing Goldman knew that the purchasers of its derivatives didn't was that Goldman had come upon such a method for disguising toxic assets and didn't tell anyone.

[jackson33]

bascule; Well if they are found guilty of encrypting to defraud (not yet charged), that would be pretty serious and one point I've tried to make, the charge is Civil, not criminal. Since I can barely keep my little computer from getting infected, it's hard for me to argue what could be done with an entire system, designed to inform. I understand, google accepts a fee from advertisers, to place some clients first on certain 'searches', which is deceptive, but not illegal.

 

 

Anyway, Beck is advertising his show today has something to do with GS, which might be interesting. 5PM ET on your favorite Cable News channel...

[ParanoiA]

The thing that disturbs me most about this is this weirdo emotional appeal to betting against the american people, betting against the housing market. I'm not talking about the fraud, that's way out of bounds and people should go to jail for it. Money should be reimbursed, however feasible such a thing could be.

 

No, I'm talking about that single emotional appeal. Only half of this is about fraud. The moral of this event, and what I believe Obama and company is going to run with, is that it should be illegal to make money off of the population losing value in their capital. And that's crybaby, hypocrisy stuff.

 

I think people are so turned off by the idea of people making a killing off of the collapse of a market, effecting millions of people, that they think it should be illegal. They would never dream of coming to the defense of Joe Blow corporation when their stock plummets and investors get rich off of it.

 

No, we only hear complaining when it's a market the masses are participating in - oh, suddenly it's just "intolerable" to a civilized society, blah blah blah. Making exceptions for ourselves, yet again.

 

I look for legislation that supports that emotional offense, beyond the fraud prevention.

[ecoli]

I understand penalizing Goldman based on current rules, but creating more/new regulations seems like an exercise in futility. More regulations simply means more loopholes. Reacting to previous disasters does not prepare you for future ones.

 

I wish more people would read the Black Swan.

[ParanoiA]

I wish more people would read the Black Swan.

 

Interesting. Thanks for sharing. I'd add this book to my list of books I need to read...but that list is already unrealistically long.

[jackson33]

The thing that disturbs me most about this is this weirdo emotional appeal to betting against the American people, betting against the housing market. I'm not talking about the fraud, that's way out of bounds and people should go to jail for it. Money should be reimbursed, however feasible such a thing could be.[/Quote]

 

P; Basically, this is where the misunderstanding comes from. In fact those that are buying the shorts, saying any market has reached bottom, then going back up, would be patriots under your philoshophy, it's simply a business transaction. As previously mentioned, I had no idea how serious the Housing Bubble in fact was in 2007-8, really still don't understand it. People were retiring in all time high numbers, wanting to retire in warm climate areas, like Florida, Las Vegas, Arizona and Southern California all the hardest hit. It really wasn't until late 2008 and 2009, that unemployment and new policy gave any possible explanation.

 

I look for legislation that supports that emotional offense, beyond the fraud prevention. [/Quote]

 

I haven't gone over the 1300 pages of 'Finance Reform' or do I intend to, but it's my understanding it's more a revamping of how general business is conducted than how 'Wall Street' operates. This administration is trying to convince you, they can prevent downturns in the US and World economies, prevent anyone from taking losses and everything will from now on only be worth more as time goes on. IT'S A FANASY, and recessions are going to happen, some market sectors will become less important or not relevant at all, while others will assume that importance and relevance and a good many investor will always resist or join in, in advance of what actually happens. We use to say the markets were predictors of the economy (including the internal changes in importance) a year in advance.

 

NO law or regulation can prevent intentional fraud, any more than they can prevent robbery or murder and emotional buying selling of at risk items is drastically needed. No one would buy anything, knowing there would be no one else that might buy that item if it started retreating in value, with no possible means to unload, until it reached a factual bottom, which is just not predictable.

 

Think about it, your major Financial Institutions, which own a VERY LARGE, percentage of every Corporation (guessing over 100,000), would and could not invest in them, if assuming a loss were to become indirectly or directly illegal. They take chances everyday (well had been), on people buying homes, starting a business, knowing the statistical probability, half or more business will fail and 2% of home loans default every year.

 

I understand penalizing Goldman based on current rules, but creating more/new regulations seems like an exercise in futility. More regulations simply means more loopholes. Reacting to previous disasters does not prepare you for future ones.[/Quote]

 

ecoli; Remember GS, did not want to accept 'bail out funds', Paulson not giving them a choice. With out that action, I don't think anybody would be concerned with GS, their pay scale or anything else would never had been know, including the built up animosity toward one of the oldest financial institution on this plant.

 

If GS or any Bank, Financial or in fact any business, gets into financial trouble, the world will not come to an end, the overall economy will not be effected (including GM) if they are self forced into Bankruptcy. Assets will be sold or assumed by others and the general public protected. The best bet in my opinion, is for Government to get out of their way entirely, which was the case until the Savings and Loan fiascle and all these regulations started up in the first place. Nothing was solved, could be or will ever be, yet still be a Free Market Capitalist economy. Banks/Financial that buy into FDIC insurance, should be the limit...

 

 

bascule; Update on the Beck show... it was primarily what we had been discussing for a week, relating to the closeness of Obama's administration (he left out Paulson in Bushes) and how little sense this whole thing was making.

[ecoli]

Interesting. Thanks for sharing. I'd add this book to my list of books I need to read...but that list is already unrealistically long.

 

He's writing an updated version that will come out in may. The original book was written before the economic crisis. I'm sure Nassim Taleb will have some interesting things to say about it.

 

Here's an econtalk interview with him: http://www.econtalk.org/archives/2009/03/taleb_on_the_fi.html

[bascule]

I understand penalizing Goldman based on current rules, but creating more/new regulations seems like an exercise in futility. More regulations simply means more loopholes. Reacting to previous disasters does not prepare you for future ones.

 

How would banning financial institutions like GS from trading in CDOs be a "loophole" in any way, shape, or form?