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Posts Tagged ‘economics’

  • Watch the Goldman case – “It accuses Goldman of intentionally designing a financial product that would have a high chance of falling in value, at the request of a client, and lying about it to the customers who bought it. It says that Goldman allowed that client — John Paulson, a hedge fund manager — to pick bonds he wanted to bet against, and then packaged those bonds into a new investment. Goldman then sold this investment to its clients, telling them the bonds were chosen by an independent manager, and omitted that Mr. Paulson was on the other side of the trade, shorting it, in the industry vernacular.”
  • Goldman’s stacked bet – “Portions of an email in French and English sent by Tourre to a friend on January 23, 2007 stated, in English translation where applicable: “More and more leverage in the system, The whole building is about to collapse anytime now…Only potential survivor, the fabulous Fab[rice Tourre]…standing in the middle of all these complex, highly leveraged, exotic trades he created without necessarily understanding all of the implications of those monstruosities!!!””
  • What Goldman’s conduct reveals – “If the allegations against Goldman Sachs are true, then much of the blame for investors’ losses in the Abacus deal can be laid at the feet of an obscure statute passed by Congress in 2000, the “Commodities Futures Modernization Act.” In one dramatic move, that act eliminated a longstanding legal rule that deemed derivatives bets made outside regulated exchanges to be legally enforceable only if one of the parties to the bet was hedging against a pre-existing risk.”
  • The SEC’s lawsuit shows how Goldman Sachs put its own interests ahead of its customers’ – “Paulson wanted Goldman to create the CDO just so it could bet against it—Paulson thought the mortgages in the CDO would default at a high rate, thus rendering big chunks of it worthless. It’s kind of like a developer (Paulson) commissioning a construction firm (Goldman) to build a condominium tower while purchasing insurance that would pay off in case it fell down. But the SEC complaint alleges the scheme went a step further. The SEC says that Goldman worked with Paulson and ACA, a “portfolio selection agent,” to ensure that the edifice was composed of defective and subpar materials. The SEC presents evidence that ACA, as Goldman watched, included in the CDO specific assets that Paulson had chosen. Goldman then proceeded to sell condos (slices of CDOs) to other Goldman clients without telling them of the hazardous design.”
  • Looters in loafers – Krugman – “We’ve known for some time that Goldman Sachs and other firms marketed mortgage-backed securities even as they sought to make profits by betting that such securities would plunge in value. This practice, however, while arguably reprehensible, wasn’t illegal. But now the S.E.C. is charging that Goldman created and marketed securities that were deliberately designed to fail, so that an important client could make money off that failure. That’s what I would call looting.”
  • Don’t cry for Wall Street – Krugman – “These profits were justified, we were told, because the industry was doing great things for the economy. It was channeling capital to productive uses; it was spreading risk; it was enhancing financial stability. None of those were true. Capital was channeled not to job-creating innovators, but into an unsustainable housing bubble; risk was concentrated, not spread; and when the housing bubble burst, the supposedly stable financial system imploded, with the worst global slump since the Great Depression as collateral damage.”
  • How Wall Street became a giant casino – “Wall Street’s purpose, you will recall, is to raise money for industry: to finance steel mills and technology companies and, yes, even mortgages. But the collateralized debt obligations involved in the Goldman trades, like billions of dollars of similar trades sponsored by most every Wall Street firm, raised nothing for nobody. In essence, they were simply a side bet — like those in a casino — that allowed speculators to increase society’s mortgage wager without financing a single house. The mortgage investment that is the focus of the S.E.C.’s civil lawsuit against Goldman, Abacus 2007-AC1, didn’t contain any actual mortgage bonds. Rather, it was made up of credit default swaps that “referenced” such bonds. Thus the investors weren’t truly “investing” — they were gambling on the success or failure of the bonds that actually did own mortgages. Some parties bet that the mortgage bonds would pay off; others (notably the hedge fund manager John Paulson) bet that they would fail. But no actual bonds — and no actual mortgages — were created or owned by the parties involved.”
  • A difficult path in Goldman case – “But Donald C. Langevoort, a law professor at Georgetown University, said the case was consistent with other government efforts in past years to broaden the definition of material information. “The S.E.C. has long insisted that context is important,” Professor Langevoort said. “If you think of it more broadly in that way, this isn’t an unprecedented case.” Professor Langevoort cited as an example the commission’s 2003 settlement with 10 investment banks over accusations that their research departments were providing recommendations to investors without disclosing that favorable reviews were used to attract underwriting business from the companies issuing the stock.”
  • Innovation and ethics – “Guys like John Paulson didn’t have enough real mortgage pools to short, so the geniuses on Wall Street had to invent synthetic mortgage pools to increase the amount of “product”. There is an inverse connection between innovation and ethics. I’ve been reading No One Would Listen, Harry Markopolos’ tale of exposing the Bernie Madoff fraud. What is so astonishing is that the investigators at the SEC were mostly lawyers and they were completely conned by the math whizzes like Madoff. They had no idea what they were looking at and Madoff convinced them that his innovation (the supposed “split strike conversion”) was really taking all of the volatility out of the market.”
  • Top Goldman leaders said to have overseen mortgage unit – “Mr. Tourre was the only person named in the S.E.C. suit. But according to interviews with eight former Goldman employees, senior bank executives played a pivotal role in overseeing the mortgage unit just as the housing market began to go south. These people spoke on the condition that they not be named so as not to jeopardize business relationships or to anger executives at Goldman, viewed as the most powerful bank on Wall Street. According to these people, executives up to and including Lloyd C. Blankfein, the chairman and chief executive, took an active role in overseeing the mortgage unit as the tremors in the housing market began to reverberate through the nation’s economy. It was Goldman’s top leadership, these people say, that finally ended the dispute on the mortgage desk by siding with those who, like Mr. Tourre and Mr. Egol, believed home prices would decline.”
  • What are banks for? – “Goldman Sachs, in an epic effort to spin the SEC indictment, say they lost money on the Abacus deal at the center of the suit. This is such nonsense. The whole point of an investment bank is to guarantee that an individual security will be sold. If the investment bank can’t find takers for every tranche of the deal, they hold it in their “book” while they try to unload it. What Goldman will not say is how much they collected from insurance claims (probably placed at AIG) on the Abacus deal.”

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