How Much More Shit do We Have to Take From Goldman Sachs?

While Goldman Sachs raked in profits, clients squirmed

By GREG GORDON

McClatchy Newspapers

Traders for Morgan Stanley gnashed their teeth for weeks in early 2008, watching helplessly as their $1.2 billion investment in an exotic offshore deal, which was marketed by Wall Street rival Goldman Sachs, began to shrivel.

With the housing market deteriorating rapidly, Morgan Stanley traders wanted to sell off hundreds of millions of dollars in securities positions that had been downgraded by credit ratings agencies and recover what money they could. But as the deal's liquidation manager, Goldman Sachs held sole control over the disposal of any of the securities contracts, and Goldman Sachs was resisting.

On Feb. 6, 2008, Morgan Stanley trader John Pearce wrote a colleague that he got so exasperated with a Goldman representative that "I broke my phone." A day later, he wrote to a Goldman Sachs counterpart: "One day I hope I get the real reason why you are doing this to me."

It turns out, Senate investigators revealed this week, that Goldman Sachs had plenty of reasons to delay a selloff. The investment banking giant had secretly wagered on the default of the securities around which the $2 billion deal was structured. The farther their value dropped, the bigger Goldman Sachs' profits.

Ultimately, a Morgan Stanley lawyer lodged a formal protest, charging that Goldman Sachs had breached its contractual duty to sell off downgraded securities, and that the delays had already cost Morgan Stanley $150 million.

Known as Hudson-Mezzanine-2006-1, the deal totally collapsed in November 2008, barely more than two years after its creation. Goldman Sachs reaped $1.35 billion. Morgan Stanley lost $930 million.

The story of the deal, which drew outrage from Democratic Sen. Carl Levin of Michigan at a news conference Wednesday, is unveiled among hundreds of newly disclosed documents released by his Senate Permanent Investigations Committee, culminating a two-year inquiry into the financial crisis.

It provides another close-up glimpse of how Goldman Sachs deftly scaled back its risks as the housing market crested in late 2006 and then, at the expense of its investor clients, earned billions of dollars from a full-scale blitz of secret bets that the value of home mortgage securities would crash. Goldman Sachs was the only major Wall Street firm to escape relatively unscathed from the nation's economic meltdown.

The subcommittee reported that Goldman Sachs packaged at least four offshore deals with total value of $4.5 billion that were rife with conflicts of interest, including one for which the firm paid $550 million in fines to Securities and Exchange Commission last summer to settle a civil fraud suit.

Levin charged that Goldman Sachs deceived investors on the Hudson deal by failing to disclose that it was betting the other way. And, he alleged, the company misled the subcommittee during a marathon hearing last year in which he repeatedly pressed Chief Executive Lloyd Blankfein and a half-dozen other current and former Goldman Sachs execs to acknowledge the firm bet massively on a housing downturn in 2006 and 2007.

A spokesman for Goldman Sachs, which says its executives testified truthfully, declined to comment on the Hudson deal.

Internal Goldman Sachs documents show that the firm's mortgage department came up with the idea for the Hudson deal to offset $1.2 billion in positive bets on dicey mortgage securities on a London-based exchange, known as the ABX Index. By late 2006, it grew hard to find buyers willing to pay good prices to bet that baskets of subprime loans to marginal homebuyers would perform well.

To "transfer the risks" of its ABX holdings to investors, Goldman Sachs traders and structured products specialists came up with the idea on Sept. 19, 2006, of creating a series of new bets, known as credit-default swaps, on 80 of the mortgage securities listed on the ABX, most barely investment grade or below. They even offered investors a discount to cover the $1.2 billion in risks. The firm also added $800 million in bets on other subprime securities.

Top-level executives, including Blankfein and Chief Operating Officer Gary Cohn, were apprised on Oct. 26, 2006, that the deal would reduce the mortgage department's housing risks, an internal document said.

The pressure was intense enough that marketing of another deal was bumped in favor of Hudson, and Goldman Sachs traders sent congratulatory messages when they'd peddled most of the deal to investors over the next month.

In their marketing booklet, the Goldman Sachs traders stated that the securities selected for the deal were "sourced from the street" and that Hudson "is not a balance sheet" deal. In Wall Street parlance, that meant that the securities were purchased from Wall Street dealers and that Goldman Sachs wasn't taking the "short" position, or wagering that the securities would default.

Neither was true, the investigators said, and Goldman Sachs was making "a proprietary investment ... in a direct, adverse position to the investors" - a position it declined to divulge even when a representative of another investor, National Australia Bank, directly asked.

Goldman Sachs also stressed to investors that it was investing in an equity piece, or one of the riskiest slices of the deal.

The committee found that Goldman Sachs invested $6 million in the equity slice. Meanwhile, Levin said, it bet "more than 300 times more" - $2 billion - against the deal.

Sylvain Raynes, an expert in structured products, said the Hudson deal was "full of conflicts of interest," including Goldman's dual role as liquidation agent.

"This deal should never have gone to market, due to the lack of transparency and the fact that Goldman was holding both ends of the deal," he said.

However, Goldman Sachs could mitigate liability due to standard language in the contract documents informing investors that it may initially take the short position and that it may have conflicts of interest.

For its role as liquidation agent, the subcommittee said, Goldman Sachs collected an additional $3.1 million in fees.

Read more: http://www.kansascity.com/2011/04/14/2800987/while-goldman-sachs-raked-in-profits.html#ixzz1JYucvU4F

Did Obama and the Democrats Use the SEC Case Against Goldman for Politics?

Goldman Sachs SEC case: Is it all about politics?

The Goldman Sachs SEC case, filed Friday, comes as President Obama makes a push for Wall Street reform in Congress.

SEC Chair Mary Schapiro, Fed Chairman Ben Bernanke, and Treasury Secretary Timothy Geithner testify before the House Financial Services Committee Tuesday in Washington. The Goldman Sachs SEC case comes just as Obama seeks Wall Street reform in Congress.

By Mark Trumbull, Staff writer Christian Science Monitor/ April 20, 2010

Republican lawmakers on Tuesday raised concerns that the lawsuit in the Goldman Sachs SEC case, filed on Friday, may be more about politics than securities law.

Whether or not that assertion is true, what's undeniable is that regulators have alleged fraud at Goldman just as President Obama is making what he hopes will be a final push to win passage of Wall Street reforms by Congress.

What's more, the Securities and Exchange Commission (SEC) filed the case only after a 3-to-2 partisan vote, with Republican commission members opposing the action.

“The events of the past five days have fueled legitimate suspicion on the part of the American people that the Commission has attempted to assist the White House, the Democratic Party, and Congressional Democrats by timing the suit to coincide with the Senate’s consideration of financial regulatory legislation,” Rep. Darrell Issa of California wrote in a letter Tuesday to SEC chairman Mary Schapiro.

Even as Republicans sought to raise doubts about the SEC, however, Goldman itself faced new pressure Tuesday. Britain's Financial Services Authority (FSA) said it has launched its own investigation into Goldman Sachs International, after Prime Minister Gordon Brown lamented Goldman's "moral bankruptcy" in a weekend interview.

Mr. Issa, writing for himself and other Republicans on the House Oversight and Government Reform Committee, said Americans “have a right to know whether the Commission ... may have violated federal law by using the resources of an independent regulatory agency to promote a partisan political agenda.” He called for the SEC to release various records related to the case within a week.

Whatever the SEC's motivation, the sparring on Capitol Hill is a reminder that the stakes in the lawsuit are in many ways political. The impact on the debate over financial reform is the most obvious example.

The SEC faces its own political pressure – to prove it is on the case of protecting investor interests. The agency is under scrutiny not only because of its role as a Wall Street cop as the financial crisis emerged, but also for failure to catch Ponzi schemes such as those of Bernie Madoff and R. Allen Stanford.

SEC Chairman Schapiro said Tuesday the agency was "absolutely not" basing its decision on politics, the Associated Press said. In filing the case Friday, the commission said it was also pursuing other possible lawsuits related to the role of complex investment products in the financial crisis.

Goldman Sachs, too, has more at play than just whether the civil lawsuit results in fines or other penalties. Its reputation as the largest and most successful Wall Street investment bank could be at risk. In a business where client relationships and trust mean everything, the SEC is alleging that Goldman failed to disclose material information in one investment deal it set up for clients.

The firm reported strong earnings Tuesday morning, but chief financial officer David Viniar emphasized something much more basic than a $3.46 billion quarterly profit. "Our clients will continue to support us as long as we provide very good service to our clients," he said on a conference call with investors and stock analysts. "We're still doing that."

Goldman's ability to make profits – and to distribute large bonuses to its partners – is also heavily dependent on the regulatory climate in Washington. No Wall Street firm has stronger ties to US politics (two of its recent CEOs have served as Treasury Secretary, while another has been New Jersey governor). Now the political currents seem to be running against firm and Wall Street in general due to the financial crisis and unpopular bailouts.

The lawsuit comes as Wall Street banks including Goldman have been seeking to influence the shape of financial reforms, which Mr. Obama says are needed to prevent future financial crises.

To some financial professionals, the timing of the lawsuit appears to be no coincidence.

"The administration is trying to pass financial regulation reform before the election, and it can’t hurt to let Wall Street know that lobbying against it can be hazardous to your corporate health," Joseph Calhoun of Alhambra Investment Research wrote in a commentary over the weekend.

Goldman's stock value fell 3 percent Tuesday, following double-digit losses in the immediate wake of the SEC suit.

The Euro, Past, Present and Future

Bernanke wants answers on Goldman role in Greece
Thu Feb 25, 2010 12:09pm EST
Related News
Greece not alone in exploiting EU accounting flaws
Mon, Feb 22 2010
Reuters

* Bernanke says SEC also 'interested' in Goldman role

* Shouldn't use derivatives to destabilize countries

* Bernanke says US economy weak, job losses a worry

* Congress needs to agree to get deficits down, now

By Glenn Somerville and Pedro da Costa

WASHINGTON, Feb 25 (Reuters) - U.S. regulators are looking into how Wall Street firms like Goldman Sachs (GS.N) helped debt-stricken Greece arrange derivatives deals that critics say were used to disguise the size of its budget deficits.

Federal Reserve Chairman Ben Bernanke made the disclosure on Thursday and suggested securities regulators also wanted the information.

"We are looking into a number of questions related to Goldman Sachs and other companies in their derivatives arrangements with Greece," Bernanke said in response to a question from U.S. Senate banking Committee Chairman Sen. Christopher Dodd before testifying to the group for a second day on the state of the U.S. economy.

Bernanke said the Securities and Exchange Commission similarly was "interested" in Wall Street's activities in helping Greece do derivatives deals.

He stopped short of saying an official inquiry of Goldman Sachs' activities was under way by either the Fed or SEC. The SEC had no immediate comment when contacted.

"Obviously, using these instruments in a way that potentially destabilizes a company or a country is counterproductive," Bernanke said. "We'll certainly be evaluating what we learn from the activities of the holding companies that we supervise here in the U.S."

Goldman Sachs spokesman Michael DuVally said, "As a matter of policy, we don't comment on legal or regulatory matters."

FED HAS STRONGER HAND NOW

In the midst of the severe financial crisis that swept the U.S. economy from 2007 to 2009, Goldman and other Wall Street firms converted to bank holding companies, putting supervision of them more firmly in the Fed's hands.

Goldman Sachs has come under scrutiny for deals it did with Greece before it staggered into a debt crisis that has raised fears of a sovereign debt default and forced the European Union to say it will help if necessary to avert one.

The Greek crisis has pressured the euro and EU partners fear it may spread to weaker euro zone economies like Portugal and Spain.

Goldman Sachs entered into currency swaps with Greece, which critics say helped it disguise its debt, and has defended them as neither uncommon at the time nor inappropriate.

Cross-currency derivatives that Goldman Sachs conducted for Greece in 2001 helped reduce the size of its debt at a time when the country was keen to meet criteria for entering the EU and adopting the euro.

Goldman Sachs has a particularly high profile in Washington, having produced numerous alumni including former Treasury Secretary Henry Paulson, many of whom still play active roles in key agencies like Treasury.

It also has attracted a heavy share of public anger over gold-plated banker pay packages, not helped by comments such as chief executive Lloyd Blankfein's assertion last November that the bank was doing "God's work."

The bulk of Bernanke's testimony was a repeat of remarks he made on Wednesday when he told the U.S. House of Representatives that a weak U.S. job market means interest rates must stay low for a long time to try to spur activity.

A key uncertainty is whether the economy can grow fast enough in future to bring unemployment down at an acceptable rate, Bernanke said, a particularly poignant remark in view of a Labor Department report on Thursday that showed unemployment insurance benefit claims rising for a second straight week.

FINANCIAL SERVICES TOO BIG

With the Senate working toward a bill on financial regulatory reform, expected to be unveiled by Dodd early next week, Bernanke said in response to questions that he hoped it would lead to a downsizing in the importance of the financial services sector, which he said has become too big.

He appeared to pour cold water on the idea of a "Volcker rule" that would ban banks from engaging in so-called proprietary trading -- using government-guaranteed capital to make bets for their own account -- as the Obama administration had advocated but Congress seemed to be moving away from.

"We all agree that we don't want excessive risk-taking, particularly not on a 'tails I win, heads you lose basis,' certainly, "Bernanke said, but added there could be "unintended consequences" from such a rule.

He has said that banking regulators should get more powers to monitor and stop some bank trading activities if they deem it necessary to protect financial stability.

One key theme that Bernanke turned to repeatedly during a question-and-answer session was the need for lawmakers to come to agreement on measures for shrinking soaring U.S. budget deficits.

Republicans are reluctant to raise taxes and Democrats have measures before Congress, including healthcare reform, that would at least initially raise deficits, leaving the two sides stalemated on a wide range of fiscal issues and making progress on deficit reduction next to impossible.

"It could become a problem tomorrow if bond markets are not persuaded that Congress is serious about bringing down the deficit over time," Bernanke warned. Big deficits can erode confidence in a country's ability to repay debt, in turn driving the value of currency down and push inflation up.

(Editing by Andrew Hay)