“The simultaneous selling of securities to customers and shorting them because they believed they were going to default is the most cynical use of credit information that I have ever seen. When you buy protection against an event that you have a hand in causing, you are buying fire insurance on someone else’s house and then committing arson.”

-Sylvain R. Raynes, structured finance expert at R & R Consulting

>

Should investment banks make bets against their own clients? How about when they create new synthetic products, sell that to their clients, and then make bets that their own products will collapse?

Those questions get a once over from Gretchen Morgenson and Louise Story in a long, front page piece in the NYT.

Of course, front and center in this mess is Goldman Sachs. Their PR people must be putting in big overtime hours these days.

Goldman points out that the C.D.O.’s were made to satisfy client demand for such products (at least for those folks who had an optimistic view of the housing market). Further, Goldman says their clients knew they might be taking the other side of bets against the mortgages that underlay the securities. GS’ last defense: Buyers of synthetic mortgage C.D.O.’s were well financed, sophisticated investors .

Here’s an excerpt:

“Mr. Egol, a Princeton graduate, had risen to prominence inside the bank by creating mortgage-related securities, named Abacus, that were at first intended to protect Goldman from investment losses if the housing market collapsed. As the market soured, Goldman created even more of these securities, enabling it to pocket huge profits.

Goldman’s own clients who bought them, however, were less fortunate.

Pension funds and insurance companies lost billions of dollars on securities that they believed were solid investments, according to former Goldman employees with direct knowledge of the deals who asked not to be identified because they have confidentiality agreements with the firm.

Note that other firms, such as Deutsche Bank and Morgan Stanley, also sold synthetic collateralized debt obligations and then bet against them. But no one else bet as much againstt heir own clients, and profited fromt hose bets, as Goldman Sachs did.

Congressional investigators, the Securities and Exchange Commission, and FINRA are all making inquiries into whether these “disastrously performing securities” violated any securities laws for “fair dealing.”

>

click for larger graphic

Courtesy of NYT

>
Source:
Banks Bundled Bad Debt, Bet Against It and Won
GRETCHEN MORGENSON and LOUISE STORY
NYT, December 23, 2009

http://www.nytimes.com/2009/12/24/business/24trading.html

Category: Bailouts, Derivatives, Legal

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

70 Responses to “Should Investment Firms Bet Against Their Clients?”

  1. Moss says:

    There can be NO honest rational for such behavior. Free market capitalism has been severely compromised by these products and the underhanded behavior of firms like Goldman. Anyone who even suggests, or attempts to defend these practices as normal can’t be taken seriously. The fact that it is legal on paper is even more troubling and demonstrates how perverted the culture of Wall Street really is.

  2. flipspiceland says:

    Should? No, from an ethical standpoint. But what’s “should” got to do with it, though.

    What goes on between counterparties to a trade is between them.

    It’s when the bets go bad that the Treasury and the Federal Reserve use printing presses, Q.E., and defrauding the taxpayer, penalizing hundreds of millions of people by sinking the dollar and increasing taxes, arranging for the government to give them bailouts arranged thru bribery of politicians , and using their place in the hierarchy to rip us off that needs to be addressed

    The real question is Should you and I be unwilling 3rd parties to their trade? And that is an emphatic,

    Get the fuck outa here!

  3. snapshot says:

    http://www.bloomberg.com/apps/news?pid=20601109&sid=aR02WG2lDCLc&pos=13

    I hope the commission looks into this…Shouldn’t there be a fiduciary duty…

  4. Transor Z says:

    This fundamental question was raised/outed by Michael Lewis in Portfolio a year ago:
    http://www.portfolio.com/news-markets/national-news/portfolio/2008/11/11/The-End-of-Wall-Streets-Boom/?page=0

    Here’s an excerpt characterizing Steve Eisman’s strange partnership with Goldman et al:
    In retrospect, pretty much all of the riskiest subprime-backed bonds were worth betting against; they would all one day be worth zero. But at the time Eisman began to do it, in the fall of 2006, that wasn’t clear. He and his team set out to find the smelliest pile of loans they could so that they could make side bets against them with Goldman Sachs or Deutsche Bank. What they were doing, oddly enough, was the analysis of subprime lending that should have been done before the loans were made: Which poor Americans were likely to jump which way with their finances? How much did home prices need to fall for these loans to blow up? (It turned out they didn’t have to fall; they merely needed to stay flat.)

    . . .

    But [Eisman] couldn’t figure out exactly how the rating agencies justified turning BBB loans into AAA-rated bonds. “I didn’t understand how they were turning all this garbage into gold,” he says. He brought some of the bond people from Goldman Sachs, Lehman Brothers, and UBS over for a visit. “We always asked the same question,” says Eisman. “Where are the rating agencies in all of this? And I’d always get the same reaction. It was a smirk.” He called Standard & Poor’s and asked what would happen to default rates if real estate prices fell. The man at S&P couldn’t say; its model for home prices had no ability to accept a negative number.

  5. Transor Z says:

    Rule of Professional Conduct 1.8(b):
    A lawyer shall not use confidential information relating to representation of a client to the disadvantage of the client or for the lawyer’s advantage or the advantage of a third person, unless the client consents after consultation. . . .

    So, if Goldman were held to the standard I’m held to, client knowledge isn’t enough; the client has to be consulted and must consent.

    The legal profession certainly has its share of “issues,” but one thing you can say about legal ethics is god help you if you’re revealed to be conflicted in a matter.

  6. Mike in Nola says:

    We need to remember that these guys are businessmen, and we know that the business of America is business. It’s not like they are those despised plaintiff lawyers who sue businessmen for lying to, cheating and killing members of the public and who have an ironclad fiduciary duty to clients and would be disbarred if they did these things.

    Of course they will continue the practice, as long as it’s not prohibited, and not just by an empty rule, but with a ban from the security industry as a penalty. For those who don’t like regulations, just ban the mandatory arbitration/kangaroo court clauses that are forced on all investors. Nothing like fear of a lawsuit to make people behave.

    Wikipedia has a nice discussion of fiduciary duties. http://en.wikipedia.org/wiki/Fiduciary

    It’s interesting thet fiduciary duty is widely imposed as shown in the article, but that financial middlemen have managed to get themselves exempted.

  7. KidDynamite says:

    wait a second – if i’m a GS client, and I want to buy a CDO through GS, they can either short it to me (which actually enables me to buy it at a lower price) or they can go out and act as agent on my behalf and buy it from someone else, in which case i’ll likely have to pay a little more… GS acting as principal here benefits its clients.

    the PROBLEM comes with the use of the term “sell.” Did GS call it’s clients saying “you guys have got to get your hands on these beauties – this is some top quality paper here,” while they were shorting that same paper to the clients? THAT seems clearly wrong/unethical/immoral. OR, did clients call GS and say “i need to get my hands on some of those hot XYZ CDO’s,” to which GS replied “no problem, i’ll sell them to you” ???

  8. wally says:

    This is a wonderful argument for breaking up large investment firms… not just banks and investment banks.

  9. Mike in Nola says:

    Kid: You can bet that the most investors don’t know the diff between someone who acts and an agent buying on behalf of the customer and the bucket shop operations of GS, which is really all that was going on, if you think about it. GS was acting as a bookie and laying off bets it took. Just another illustration of the Wall Street Casino.

  10. holulu says:

    This report by Sprott Asset Management suggests that there are PHANTOM buyers of US Treasury that can not really be identified. Something very sinister is going on in this country.

    http://www.zerohedge.com/article/sprott-calls-fed-ponzi-scheme-half-trillion-treasury-purchasers-are-unaccounted

  11. jhellman says:

    Whether by design or default isnt that what happened in the equity markets (the prohibition of firms essentially betting against clients by acting as a principal) ? All these firms used to have equity market-making desks where the traders took the other side of the trade – “making a market”. While I have long since left that side of the business, from what I know firms arent allowed to take the other side anymore. They all act as “agent” only. If I am correct in this, why are these other markets not policed like the equity markets then ?

  12. KidDynamite says:

    @Jhellman – no, firms have certainly not been banned from acting as market makers and forced to act as agent only in equity markets.

  13. rw08tu says:

    Just to put the question into better perspective…

    Should restaurants serve food they know is tainted?
    Should farmers sell meat they know is diseased?
    Should doctors offer cures they know will kill?
    Should journalists offer stories they know are fake?
    Should airlines sell seats on a plane they know will crash?
    Should teachers teach lessons they know are lies?
    Should police arrest citizens they know are innocent?
    Should firemen start fires in order to put them out?

  14. Moss says:

    Re: why are these other markets not policed like the equity markets then ?

    That is by design, on purpose, by decree or whatever verb you wish to use. Derivatives have no ‘police’ except that of the almighty, omnipresent, self regulatory aspects of the market. You know, the rational expectation that a potential failure will act as a moderator for all those rational individuals acting in their own self interests. That whole premise could only work (we now know it did not) if the market is ‘honest’ in that all the available information is known by the rational participants.

  15. jc says:

    OT,Unemployment numbers nothing to write home about.Unemployment and housing are showing very marginal gains (still) in spite of gov programs
    In the week ending Dec. 19, the advance figure for seasonally adjusted initial claims was 452,000, a decrease of 28,000 from the previous week’s unrevised figure of 480,000. The 4-week moving average was 465,250, a decrease of 2,750 from the previous week’s revised average of 468,000.

    The advance seasonally adjusted insured unemployment rate was 3.9 percent for the week ending Dec. 12, unchanged from the prior week’s unrevised rate of 3.9 percent.

    The advance number for seasonally adjusted insured unemployment during the week ending Dec. 12 was 5,076,000, a decrease of 127,000 from the preceding week’s revised level of 5,203,000. The 4-week moving average was 5,233,000, a decrease of 90,000 from the preceding week’s revised average of 5,323,000.

    The fiscal year-to-date average for seasonally adjusted insured unemployment for all programs is 5.673 million.

    UNADJUSTED DATA

    The advance number of actual initial claims under state programs, unadjusted, totaled 561,902 in the week ending Dec. 19, an increase of 6,492 from the previous week.

  16. KidDynamite says:

    @MikeinNola:

    that’s exactly my point – if the client doesn’t know the difference between GS acting as agent or principal, the client doesn’t care!!! the client just wants to buy the CDO! It doesn’t matter if GS shorts it to them or buys it for them elsewhere.

    alas, i won’t be able to debate this all day, i have to hit the road to my in-law’s house.

    but i’ll leave you with this thought: again, it seems we’re putting the burden back on the Big Bad Banks and absolving the clients as innocent victims. It was the CLIENTS – the pension fund managers who bought this crap – the municipalities – who failed miserably in their fiduciary duties, and we need to stop holding them up as victims.

  17. ella says:

    Another fine example of predatory capitalism. Fiduciary duty anyone?

  18. “Pension funds and insurance companies lost billions of dollars on securities that they believed were solid investments, according to former Goldman employees with direct knowledge of the deals who asked not to be identified because they have confidentiality agreements with the firm.”–from, above

    Who were these ‘Pension Fund’ “Managers” ?

    I think it’s EZ to keep pointing at GS, but Who are their Counterparties – the “Buyer” of these, “they believed were solid investments” ? and, how, exactly, were they “sold” ?

    There’s a Reason that these “Managers” are being kept out of the story..

    I think if JohnQ had the first inkling of how his ‘Fiduciary interests’ were, absolutely, s***-canned, there’d be an, unprecedented, ‘rush to the Exits’..

    and be a major plank of a ‘tax revolt’ when the “lost billions of dollars” come home to roost in the form of requests for higher taxes to make those “Pensions” whole..

  19. “It was the CLIENTS – the pension fund managers who bought this crap – the municipalities – who failed miserably in their fiduciary duties, and we need to stop holding them up as victims.”–KD, above

    x2

  20. [...] How Goldman and the other bulge brackets created CDOs, sold them to clients… and then sold them short for themselves.  (TBP) [...]

  21. bsneath says:

    Would you want to do business with someone who has the reputation for knifing their customers in the back?

    Goldman has strayed from their values and they are not going to gain customers back until management changes and the company demonstrate to the business community that they are no longer simply high stakes gamblers, using a fixed deck of cards, whose modus operandi is to throw their clients under the bus.

    There was a good article in the New York Times:

    As Goldman Thrives, Some Say an Ethos Has Fade

    “Mr. Blankfein has accelerated a decade-long decline of Goldman’s old partnership ethos, which was built around the principle that its bankers and traders can do well — indeed, very well — while putting their customers first, former partners said.”

    http://www.nytimes.com/2009/12/16/business/16goldman.html

  22. Transor Z says:

    @KD:

    But Barry framed the question thusly:
    How about when they create new synthetic products, sell that to their clients, and then make bets that their own products will collapse?

    So this pops into my head:

    Fundie:
    Tranchemaker, Tranchemaker,
    Make me a tranche,
    AAA bond,
    Carve it up fine
    Tranchemaker, Tranchemaker
    Look through your book,
    And make me a perfect tranche

    Goldie:
    Fundie, oh Fundie
    Have I made a tranche for you!
    It’s solvent, it’s rated!
    Alright, it’s made of poo.
    But it’s some nice loans, a good tranche, true?
    True.

    I promise there’ll be money,
    And even if there’s not,
    There’s more to life than that—
    Don’t ask me what.

  23. Bokolis says:

    It really comes down to how “solicited” these bets were. Let’s say a bookmaker has a mush for a client. Is it unethical (given, of course, that sports betting is legal) if the bookie turns around and bets the other side?

    No. Not to stick up for Goldman but, hey, it’s not like they were backdoor-ing mom and pop. A professional has no excuse for getting hoodwinked.

    To make it more comparable, let’s say the bookie knows that the key players on the football team on which mush has bet have had all-night drinking sessions every night of the week…and the bookie was serving. Is it the bookie’s obligation to tell mush?

    No. We can get into ethics, but those went out the door a LONG time ago. We can get into the concept of Goldman’s return business, but every other house was doing the same.

    The retail customer (mark) has been railing for years about conflict of interest. That these “professionals” couldn’t see the conflict of interest on a much grander scale, even after they had been notified of its possibility, borders on criminal negligence…especially when they had a fiduciary duty to the captive shlubs contributing to their plans.

  24. LeeX says:

    It may not be fair, but it’s God’s work!

  25. ashpelham2 says:

    Mike In Nola: We have a winner here. As much as I usually side with investors getting jipped, this is a case of buyer beware. After all, aren’t we all just talking about sophisticated forms of gambling anyway? Isn’t it always you versus the house when you visit the MGM Grand? I do see the conflict of interest, and that is what I guess is at the heart of the issue, so rules for “fair-dealing” came into being. But from my perspective, when you buy a security, regardless of what it is, if it’s of legal issue, then you are taking the bet against the house, the originator, the underwriter, the seller, and even the underlying assets/liabilities.

  26. MayorQuimby says:

    rw08 nailed it.

  27. Marcus Aurelius says:

    The idea that the purchaser of these falsely rated “securities” are responsible for their own fleecing is absurd and intellectually dishonest. If I leave my bicycle in a public place, but not chained and locked to a light pole, I have committed neither a crime nor an unethical act. If someone then steals my unsecured bike, it is that person who has committed the crime of theft. While I might or might not get my bike back in the same condition in which I left it, the person who stole it should pay for the crime they, not I, committed.

  28. Transor Z says:

    @Bokolis:

    To make it more comparable, let’s say the bookie knows that the key players on the football team on which mush has bet have had all-night drinking sessions every night of the week…and the bookie was serving. Is it the bookie’s obligation to tell mush?

    The analogy misses the mark (no pun intended). It’s more like Goldman knows that the football team is comprised of people who are not who they say they are.

    For example, it turns out that Latrell Caldwell: USC 2006, whose roster notes indicate that he was an All-American LB who led the conference in sacks and whose stats include, 6′ 2″ 275#, 4.3 40 is actually Manuel Diaz, a 5’9″ 175# 7.2 40 (on account of his one bum leg) migrant strawberry picker from Encino. (Manuel didn’t actually play any downs in the NCAA and in fact greatly prefers soccer.)

    So the whole roster is billed as being on par with my New England Patriots when, in fact, at least a few roster slots are held by deceased persons.

  29. theorajones says:

    McClatchy is sending around emails pointing out they had this story 2 months ago: http://www.mcclatchydc.com/goldman/

    I love how everyone pays attention to the atrocity of the week, and debates whether or not this is a violation of the laws of the guild. Reminds me of how the corrupt Catholic church of the middle ages would debate the finer points of issuing indulgences, and under which circumstances an inquisitor could walk into a torture chamber and accept a recantation of heresy as freely given. Of course, the problem was more fundamental: they were authoritarian control freaks bent on stopping any kind of social change–including progress.

    Likewise, the real problem here is that we’ve spent decades shoveling too much money into Wall Street and you guys have run out of decent investments to peddle. So, rather than turn away enormous sums of money and lose the fortune you would make on the transaction–now you’re peddling junk. And peddling bets on the junk. And peddling insurance on the bets. And bets on the insurance on the bets on junk. As long as we keep supporting policies that send Wall Street an ever-increasing share of GDP, someone will find a new way to monetize junk, and a rationale for why it’s OK to be selling people junk–and people will make enormous sums of money for awhile, and then the music will stop and we’ll need to save the system from utter collapse. And if we keep sending more money to Wall Street, the cycle will begin anew.

  30. Rikky says:

    Kid_Dynamite @8:53am, blaming the client who wants something as being uninformed or uneducated about their investments is not looking at the whole picture. the very act of a client wanting something regardless of advice could influence the seller to position themselves in a way to impact the profitability/loss of such a position. its a simple conflict of interest.

  31. torrie-amos says:

    with theora

    integrity is the high regard for the truth and the upholding of standards, it’s starts at the top and goes downhill, imho, when they let nixon go, they shouted out to the world, come on we all know it’s true, we are all not equal, thus, let the games begin

  32. MA,

    you must do a lot of walking..

    get real, these “Managers” were Paid, as Professionals, to exercise Fiduciary Responsibility for/toward the Beneficiaries of the Funds they were ‘Managing’.

    I’m sorry, the level of care required, often, goes beyond ‘reading the label’..

    The Gross Incompetence these people displayed doesn’t catch a pass with the utterance of “But, they were Rated”-magic words..

    They F*****-Up, (and, were, most likely, taking ‘gratuities’ to do so) if they have a beef with the NRSROs, they should sue them..

    There are all kinds of smart boys & girls ‘on the Street/in the Market’ that are buying/selling all kinds of Securities that are trading anomalously v. their ‘Rating’, and doing so on the basis of ‘their own Homework’..

    But, as I mentioned, don’t shine the light, on those Incompetents, it would, truly, endanger a Key Source of “the Font of the Eternal Bid”..

    http://www.thefreedictionary.com/Anomalously

  33. [...] Sachs (GS) bet against its clients in the housing crisis, and won.  (NYTimes also Big Picture, naked capitalism, [...]

  34. Bokolis says:

    @ Transor Z:

    If Manny can run a 7.2 on a bum leg- at 16 and 155 lbs., Bokolis ran a (combine) 4.5…but, at 3x, 205 and still with two good wheels, I’m probably getting odds to break 6-flat these days- chances are he can at least kick field goals.

    To be a little more serious, I was trying to hold a few things constant and didn’t want to make it so involved, but I can’t agrue against your analogy. But, I’ll add that the fund managers had a press pass and (grainy?) film of spring practice and declined to watch.

  35. wally says:

    As noted over at CR and in the Times:
    “One focus of the inquiry is whether the firms creating the securities purposely helped to select especially risky mortgage-linked assets that would be most likely to crater, setting their clients up to lose billions of dollars if the housing market imploded.”

    If you read that, you’ll realize that what they are looking for is far worse than a bookie steering a customer to a fixed race… it is whether they actually fixed the race. I don’t know if they can find proof of that, but if they do it could be the end of some big trading houses.

  36. MayorQuimby says:

    “Fraud is generally defined in the law as an intentional misrepresentation of material existing fact made by one person to another with knowledge of its falsity and for the purpose of inducing the other person to act, and upon which the other person relies with resulting injury or damage. Fraud may also be made by an omission or purposeful failure to state material facts, which nondisclosure makes other statements misleading…

    …To constitute fraud the misrepresentation or omission must be made knowingly and intentionally, not as a result of mistake or accident, or in negligent disregard of its truth or falsity. Also, the plaintiff must prove that the defendant intended for the plaintiff to rely upon the misrepresentation and/or omission; that the plaintiff did in fact rely upon the misrepresentation and/or omission; and that the plaintiff suffered injury or damage as a result of the fraud. Damages may include punitive damages as a punishment or public example due to the malicious nature of the fraud.”

  37. Marcus Aurelius says:

    Mark E Hoffer:

    I lock my bike, but my point stands.

    Your comment seems uber-libertarian — if I swindle you, it’s okay, because you were stupid enough to be swindled. No foul, no crime. Fortunately, we do not live in a libertarian system, and under this system there was a foul (conspiratorial collusion between the banks/ratings agencies/mortgage originators to create and trade in fraudulent securities), and a crime (securities fraud).

    Bottom line: stupidity is not a crime, fraud is.

    The more important question — the one we should be asking — is why do these people still walk freely among us? Why do they continue to have assets? Why are we stuck with the bill for this crime when the perpetrators still have their ill-gotten gains?

  38. maynardGkeynes says:

    What makes me think that the mid-tier state and municipal employees who run or are supposedly supervising the people who run public pension plans, and their similarly mid-grade counterparts at private companies, are not a bunch of financial geniuses? My guess is that they are hardworking, trusting, and probably naive investors like 99% of Americans. For this horrible sin, they got fleeced by GS, among others. And unless something is done, they will always get fleeced.

  39. bsneath says:

    “It was the CLIENTS – the pension fund managers who bought this crap – the municipalities – who failed miserably in their fiduciary duties, and we need to stop holding them up as victims.”

    That statement is absolute bullshit. The CLIENTS operated under good faith that their financial advisors were being honest. That is why they pay for financial advisory services. It is not to get fucked over by unscrupulous Wall Street pigs.

    I am sorry, but if you are going to blame the client, then you are full of shit.

  40. bsneath says:

    “Now, pension funds, insurance companies, labor unions and foreign financial institutions that bought those dicey mortgage securities are facing large losses, and a five-month McClatchy investigation has found that Goldman’s failure to disclose that it made secret, exotic bets on an imminent housing crash may have violated securities laws.”

    I see a nice big lawsuit in the works. Where can I go to volunteer for Jury Duty????

  41. bsneath says:

    Lloyd Blankfein is really not that bright. Don’t you think his apology for past deeds might be brought up in a court of law?

    ““We participated in things that were clearly wrong and have reason to regret,” “We apologize.” – NYTimes

    “We’re a leader in our industry and we participated in things that were clearly wrong and we have reasons to regret and apologize for.” – PBS Nightly Business Report

  42. Mannwich says:

    Bingo, TZ. You hit it square.

  43. Mannwich says:

    Let’s not get into the “blame the victim” meme. If that’s the way we want to go, then beware of even more cultural decline on the horizon.

  44. bsneath says:

    Madoff treated for facial fractures, broken ribs

    http://abclocal.go.com/wtvd/story?section=news/local&id=7187293

    It might be Lloyd Blankfein’s turn next in the pokey.

  45. red_pill says:

    Goldman can’t predict the future and neither can their clients. Some of their clients took the wrong side of trades, but some also made money. Why is the focus only on the ones that lost money? GS is being used as a symbol at the moment by everyone b/c it’s easy. They were forced to take gov’t money by Paulson to protect the image of the really unhealthy banks. Why aren’t we angry at the banks that failed but rather at a bank that has survived? Why aren’t people demanding gov’t accountability? If a government regulator doesn’t monitor systemic risk, set proper capital requirements and regulate new financial instruments (3 factors which could have prevented the sharp downturn we had in the financial markets) why is that GS fault?

    re ratings agencies: no serious investor ever buys anything because a rating agency (just another private research company as far as I’m concerned) says they should. you must always do your own thinking. always. the rating agency argument is a false one and should be dropped. yes they were paid by the firms they were rating, but that was public information…so you should have known that risk existed.

  46. Mannwich says:

    @wally: I think they did “fix the race”. That’s why we’re not seeing any real perp walks here. They don’t want to peel away the rotten onion, because if they do, they’ll find that most of the system is an utter sham, and rotten to the core.

  47. mknowles says:

    http://www2.goldmansachs.com/our-firm/about-us/business-principles.html

    1. Our clients’ interests always come first. Our experience shows that if we serve our clients well, our own success will follow.

    what a crock.

    GOLDMAN continues-to-SACK-USA

  48. DL says:

    Investment firms should be obligated to provide as much disclosure as possible about the products they’re selling. But I don’t think they should be obligated to disclose the fact that they’re taking a position in opposition to one of those products.

  49. willid3 says:

    some how i am not surprised that we are surprised that business ethics is an oxymoron. after all, if you told a business they could get money from customers for doing nothing, they would happily do just that. and history shows they have done just that over and over again. I think we keep hoping that business has changed. maybe it like Lucy and Charlie Brown and that football. the one she always pulls away when Charlie tries to kick it. even though she always says she won’t

  50. bsneath says:

    red_pill Says: “no serious investor ever buys anything because a rating agency (just another private research company as far as I’m concerned) says they should. you must always do your own thinking. always.”

    I disagree. Of course sophisticated investors conduct extensive due diligence, but a large number of municipalities, small pension funds, state governments, etc. will rely of the advise of financial advisors and rating agencies. The big banks understand this which is why they target these entities when they need to unload toxic crap.

    With respect to Goldman Sachs getting all the blame. Yes, they are because they are representative of the entire fraudulent ridden industry. Go ahead and substitute Merrill Lynch, Morgan Stanley, JP Morgan, CitiBank, if you like.

  51. Transor Z says:

    Fund managers had a press pass and (grainy?) film of spring practice and declined to watch.

    Nice. True enough. And that was one of the points raised by the Michael Lewis article last year. Anybody could have paid a due diligence team to travel to spot-check the underlying mortgages. Manuel’s gimp would have been visible even in grainy film. :-)

    BTW, I still got my wheels, too. It’s the axles and shocks I’m not so sure about.

  52. Mannwich says:

    @TZ: Sounds eerily familiar to the sports media’s collectively looking away from the PED story over the past couple of decades. They had a front row seat to it all and acted SHOCKED, SHOCKED this kind of thing was going on. Pathetic. For this reason, most mainstream media outlets should die a quick (not slow) death, but they won’t.

  53. red_pill says:

    bsneath Says:

    “I disagree. Of course sophisticated investors conduct extensive due diligence, but a large number of municipalities, small pension funds, state governments, etc. will rely of the advise of financial advisors and rating agencies. The big banks understand this which is why they target these entities when they need to unload toxic crap.”

    yes they do, but you assume the entities you list are not sophisticated. if that is true, that they are not sophisticated, and they know that fact, they must realize that by moving away from cash (although arguably even cash is risky these days) they are taking on additional risk. if they are not prepared to take those losses at times, they shouldn’t take excess risk. ratings agencies sell research, you can choose to buy it or not. the fiduciary duty is between the entities you name and their stakeholders but not between the ratings agencies and their clients (as their disclaimers will tell you ad nauseum). do your own analysis.

  54. Blissex says:

    GS seems to be a bunch of shysters, I mean WINNERS :-), but they were *selling* securities to their “victims” — in an asset sale obviously the seller thinks that they’d rather have cash than the asset, or else they’d be holding on to it.

    Suppose that you own lots of Lehman shares in 2007, you figure out they are going to go down the drain and you sell them to someone who thinks the opposite, and then you short the buyer’s shares too — that seems perfectly fine to me, you either win a lot of lose a lot, you don’t have any duty to tell the buyer that you think they are suckers and you are shorting them too.

    Of course GS may have done much worse than that, but if they acted purely as sellers they have no fiduciary duty to the buyers, quite the opposite — they have a fiduciary duty to their shareholders to screw the buyers as hard as they can.

    Anyhow, investment bankers have a well deserved reputation, and anybody with a minimal exposure to finance knows that reputation very well, and the proverb says that to soup with the devil it is best to use a long spoon.

    As to GS’s customers, yes they had a fiduciary duty to their dumb money customers, but frankly fiduciary duty is in practice a joke and anybody who relies on it is an idiot (outside limited domains like some parts of medicine and the law), and as someone wrote a large explanation for the recent insane bubbles and AAA ratings was that with very low interest rates large funds managers had difficulty making their bonus targets and were desperate to buy yield at any (delayed) price, and when there is desperate demand for high yield paper at any (delayed) price, a supply come into being.

    I have been reading Galbraith’s very reasonable and informative “The great crash 1929″ and GS features prominently in it too, as 80 years ago they were already in the business of creating high yield paper at any (delayed) price to satisfy demand (at that time by creating investment trust shares).

  55. Blissex says:

    «large funds managers had difficulty making their bonus targets»

    Which are usually delirious, as they are expected to return 8% per year every year, because unless pension funds have that kind of return they are not going to meet their pension obligations because of colossal underfunding of pension promises by employers (for defined benefit pensions) and my employees (for defined contribution ones).

  56. bsneath says:

    red_pill, Many an investor made, with the knowledge that was available to them, reasonable and prudent decisions based on their own analysis or on the advise of hired experts, such as Goldman Sachs, only to have their assets blow up.

    Those who created the mess, knew what they had created and were in the position to profit when it blew. On the other hand, those who expected markets to function in a rational manner got screwed by an economic collapse, black swan event that was created by the investment banking industry.

    Brag about your personal due diligence efforts if it makes you feel good. Rationalize that all of the cities, counties, states, transportation agencies, pension funds, were simply fools because they didn’t do their homework.

    Sorry. It does not cut it. The bankers created this crap, they were the ones who were in the know and they knew how to trade this baby both up and down. They did not give one fuck what happened to the various “clients” who got screwed over because, like you, they rationalized some “buyer be aware” bullshit to justify their actions.

  57. bsneath says:

    Seriously, the parties who were harmed by Goldman Sachs need to file a class action law suit. If they attempt to go one at a time, Goldman will raise the “red pill” defense and stop them. Collectively however it will be more difficult to argue the “they should have known that risk existed” line of reasoning.

  58. Thomas Adams says:

    “Body Count From Goldman Actions Crosses Into Criminal Territory”

    So here we have the pattern:

    1. Goldman creates or sells $23 billion (or more) of CDOs and stuffs them into AIG.

    2. Goldman proclaims to the world they have no exposure to CDOs and warns that banks and insurers with CDO exposure will get downgraded.

    3. Goldman initiates the mark downs of CDOs with AIG and others, acelerating the market’s downward spiral.

    4. Huge mark to market losses lead insurer and bank credit to freeze, short term markets to lock up, ABCP to collapse.

    5. AIG posts as much collateral as it has to Goldman, who has more aggressively marked down the exposure.

    6. Bond insurers are downgraded, banks begin commutations with them.

    7. AIG fails, Fed steps in, Goldman gets bailed out at par.

  59. torrie-amos says:

    fwiw, Liars Poker is a good book, basically day by day book about same stuff as today, i’ve read 20 or so books on investors/investments going back too railroad times thru great depression, it’s always exactly the same game

    IMHO, lot’s of people got screwed by GS, no doubt in the world, and world wide, yet, these are big huge funds who are diversivied, if you have one of you’re ten stocks go bankrupt, too zero, you still are in the game, and wether one wants to admit it, you knew the bk company had issues

    GS, probably called all the ones they screwed and said, shit man, sorry, yeah I sold you this stuff, I didn’t know the guys ten floors up had that trade on, hey, let’s make it up, here’s the stock we like, these can go up 10-20 times, let’s spread out are bets and hold on, we’re buying, chemicals, copper, and energy companies………………..let’s all be honest, if I worked at GS that’s what I’d do, it’s what I did in my own business when my guys screwed up, i’d give away some freebies, or cut my price on the next job with the implicit intent, hey, i could charge you 100k for this, yet, i’m doing it for 95k cause i made you look bad on that last job, or my guys did………….that’s real business, lol

    for 2009 and this decade, i’m shutting her down, it’s been a winner and a loser, a tale of two cities, two countires, two worlds

    people at the top are in fact no different than the ones at the bottom, i always use too think never underestimate the folks at the top, well, lesson learned, is whereas we think the ones at the top are supposed to be better, and should be better, in fact they are not, they simply have much better PR, and access to power and money to ask jackson browne sings, get up again and do it again

    in summary, being a happy idiot aint’ bad

    merry xmas and good tidings to all posters

    new years resolution, negativiy BE GONE

    anticipate a V shaped recovery, we are all in it together worldwide, all countries have stimulated and will stimulate, stimulus will be available until we get good employment, fact of the matter is, if you bought the lows, no reason on gods green earth too sell early

    out of the whole mess Mr. Rhithotz has proved correct in his analysis, early in his execution, cautious in his approach, yet always on the correct side of the trend until it is very obvious

    Barry’s wavy recovery pattern is probably the Best Estimate of future reality for equities, buy low, sell high use a stop loss

  60. torrie-amos says:

    Goldman borrows 10B from buffet, who owns that huge put, Goldman buys hand over fist at the lows cause it see’s the flow and has money and connections.

    Lloyd comes from commodities bankground, and that is there big play focus.

    And the beat goes on, in 1905 it was morgan, in the 1870′s it was others, today it’s goldman, one could say more folks are educated on this stuff and can see how the game is played

    history does not repeat it rhymes

  61. What Is The Significance Of Being A Fiduciary?

    Fiduciaries have important responsibilities and are subject to standards of conduct because they act on behalf of participants in a retirement plan and their beneficiaries. These responsibilities include:

    Acting solely in the interest of plan participants and their beneficiaries and with the exclusive purpose of providing benefits to them;

    Carrying out their duties prudently;

    Following the plan documents (unless inconsistent with ERISA);

    Diversifying plan investments; and

    Paying only reasonable plan expenses.

    The duty to act prudently is one of a fiduciary’s central responsibilities under ERISA. It requires expertise in a variety of areas, such as investments. Lacking that expertise, a fiduciary will want to hire someone with that professional knowledge to carry out the investment and other functions. Prudence focuses on the process for making fiduciary decisions. Therefore, it is wise to document decisions and the basis for those decisions. For instance, in hiring any plan service provider, a fiduciary may want to survey a number of potential providers, asking for the same information and providing the same requirements. By doing so, a fiduciary can document the process and make a meaningful comparison and selection.
    http://www.dol.gov/ebsa/publications/fiduciaryresponsibility.html

    ..The courts stringently examine transactions between people involved in fiduciary relationships toward one another. Particular scrutiny is placed upon any transaction by which a dominant individual obtains any advantage or profit at the expense of the party under his or her influence. Such transaction, in which Undue Influence of the fiduciary can be established, is void.

    West’s Encyclopedia of American Law, edition 2. Copyright 2008 The Gale Group, Inc. All rights reserved.
    http://legal-dictionary.thefreedictionary.com/fiduciary

    ..reasonable care n. the degree of caution and concern for the safety of himself/herself and others an ordinarily prudent and rational person would use in the circumstances. This is a subjective test of determining if a person is negligent, meaning he/she did not exercise reasonable care. (See: negligence, duty of care)
    http://legal-dictionary.thefreedictionary.com/reasonable+care

    MA,

    your ‘locking of your bike’ demonstrates ‘reasonable care’..

    but, you jeremiad on ‘libertarianism’ is non-responsive.

    I wasn’t saying that there was ‘no crime committed’. I was saying that, in this instance, the # of criminals, being counted, is too few..

    and, with that, these Pension Fund ‘Managers’ are culpable, as well..

    or, if they are not, they should be lining up to press their Case, in Courts (are they?, in any large #?)

    they, the PFMs, were part, and parcel, of the syndicate that led to these ‘losses’ being stuffed into JohnQ’s PF..

    this – this system there was a foul (conspiratorial collusion between the banks/ratings agencies/mortgage originators to create and trade in fraudulent securities), and a crime (securities fraud).

    leaves out those playing the Role of ‘Safeguard’–Paid ‘Professionals’ engaged under the guise of Fiduciary Responsibility.

    A different, higher, standard applies to them, they Failed, they’re part of the Problem, no a ‘victim’ of it..

    As I was saying, those Incompetents are going to be the last ones, if at all, to see the Light shine on them.

    again, ..if JohnQ had the first inkling of how his ‘Fiduciary interests’ were, absolutely, s***-canned, there’d be an, unprecedented, ‘rush to the Exits’..

    and be a major plank of a ‘tax revolt’ when the “lost billions of dollars” come home to roost in the form of requests for higher taxes to make those “Pensions” whole..

  62. Transor Z says:

    @Manny:
    It’s depressing to think that PEDs are a symptom of deeper cultural corruption.

    At the jam-packed mall doing the last-minute thing.

    Merry Christmas to everyone. (Except GS)

  63. Mannwich says:

    @TZ: Agreed. Culture trumps (and pervades) all. Very difficult, if not impossible, to change overnight. Ditto on the Merry Christmas wishes to all here at TBP! Signing off for now from the Winter Wonderland that is Minneapolis.

  64. call me ahab says:

    “But I don’t think they should be obligated to disclose the fact that they’re taking a position in opposition to one of those products.”

    Well- its one thing to hedge- another thing entirely for GS to bet against a product they were instrumental in creating- and so therefore- have substantially more information and knowledge than the poor fools who relied on bogus ratings from the rating agencies-

    not cool-

    a simple note such as the following- “Disclaimer: GS is positioned so that it benefits when this product decreases in value.”

  65. jonpublic says:

    How is this different than gambling? It seems that it’s the same. The house always wins in both.

  66. engineerd1 says:

    I think if Goldman is my financial advisor and they advise products that they are shorting then they should go to jail. If Goldman is selling long positions that their investment side is shorting, this is business, strictly business, and the lamentation of the women (of both sexes) moves me not. The only types that could object to such a thing are people that hate business, or are empowered by those that do……so stay tuned for the obama/pelosi/reid version of the stalin show trial.

  67. xboerse says:

    The investment companys always want your best thing – your money ;-) Merry x-Mas 2009….

  68. red_pill says:

    bsneath Says:

    “Sorry. It does not cut it. The bankers created this crap, they were the ones who were in the know and they knew how to trade this baby both up and down. They did not give one fuck what happened to the various “clients” who got screwed over because, like you, they rationalized some “buyer be aware” bullshit to justify their actions.”

    Just debating the argument brother, nothing personal. Merry X-Mas to you and yours. You may be right from an ethical standpoint but from a strictly legal point of view I may be too. Have a good one.

  69. Marc P says:

    I’m surprised. All these comments and not one mention of the legal rule.

    Securities Exchange Act of 1934
    Rule 10b-5 — Employment of Manipulative and Deceptive Devices

    It shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce, or of the mails or of any facility of any national securities exchange,

    a. To employ any device, scheme, or artifice to defraud,

    b. To make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading, or

    c. To engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person,

    in connection with the purchase or sale of any security.

    The key to this rule has always been “omit to state a material fact.” Such as the fact that these firms were paying off the ratings agencies to give the appearance of less risk. One can argue that the big pension funds are big boys who can take care of themselves. However, that is not the law and hasn’t been for 75 years. Also, many purchasers are not in the business of doing full due diligence on these securities. That is the role of the ratings agencies. Last, GS and DB had actual knowledge of the falsity of the statements made and the omissions made. This is an easy case.

    That doesn’t mean that anyone will suffer legal consequences. Wall Street will get a slap on the wrist just like it did after all the fraud in 1997-2000.

  70. [...] Big Picture blog quotes one insider summing up the practice: When you buy protection against an event that you have a hand [...]