I keep finding these gems I missed while out for the holiday week. Here’s another fascinating reads — its a nice takedown of Goldman Sachs via McClatchy.

The article implies that GS and others knew they were selling paper that was going to create a giant loss to the buyer.


“When financial titan Goldman Sachs joined some of its Wall Street rivals in late 2005 in secretly packaging a new breed of offshore securities, it gave prospective investors little hint that many of the deals were so risky that they could end up losing hundreds of millions of dollars on them.

McClatchy has obtained previously undisclosed documents that provide a closer look at the shadowy $1.3 trillion market since 2002 for complex offshore deals, which Chicago financial consultant and frequent Goldman critic Janet Tavakoli said at times met “every definition of a Ponzi scheme.”

The documents include the offering circulars for 40 of Goldman’s estimated 148 deals in the Cayman Islands over a seven-year period, including a dozen of its more exotic transactions tied to mortgages and consumer loans that it marketed in 2006 and 2007, at the crest of the booming market for subprime mortgages to marginally qualified borrowers.

In some of these transactions, investors not only bought shaky securities backed by residential mortgages, but also took on the role of insurers by agreeing to pay Goldman and others massive sums if risky home loans nose-dived in value — as Goldman was effectively betting they would.”

Note that the implication in the full piece is not that these were possible losses, but rather, based upon what GS understood about the ways these papers were structured and then hedged (insured with the client), it was a sure loss. So rather than hold on to the money losing mortgage based securities, GS devised a way to sell it to clients!

The entire piece and accompanying video are worth spending time with on a Sunday afternoon…


Goldman’s offshore deals deepened global financial crisis
Greg Gordon
McClatchy Newspapers, December 30, 2009

Category: Bailouts, Derivatives

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.

31 Responses to “How Goldman Sachs Bagged Clients (via McClatchy)”

  1. Mannwich says:

    Is this really anything new? Of course they knew. Their rationale is “caveat emptor” ad infinitum.

  2. Mannwich says:

    Any other industry or company knowingly sells defective products and they get slapped around. Goldman and Wall Street do it and they get rewarded. What a country.

  3. budhak0n says:

    “Securitization” . Sure everybody knows it was done. From JPM with car loans to Goldman with Home Loans.

    It’s still not illegal and it can’t be proven that they “knew” that the backing asset would decline. It can only be proven that they did not wish to back the asset backed borrowing.

    Not much different from the way FHA or SBA loans work.

  4. budhak0n says:

    Blankfein is 100% correct in his assertion that these were professional investors willing to buy the product.

    It’s like if you trade options. If you go and do it, and it winds up you have no idea what you’re doing, once you sign the papers , the broker who let you in isn’t responsible for your losses.

    Sorry but that’s just the way it works. GS as boogey man will pass into the night just like they all do.

  5. budhak0n says:

    The correct recourse is for these clients to during the next round choose not to do business with Goldman.

    Other than that, they can lawyer up all they want, it’s a loser in the end.

  6. troubled times says:

    Your grandkids will love it when you telling them about the good old days when the press actual did thier job.

  7. Mannwich says:

    So does this credo now apply to other industries/products/companies? As long as “informed” customers are “willing to buy the product”, then those companies can just knowingly sell defective products and it’s deemed to be just fine? Sounds like a great sound way to run an economy and enduring society.

  8. Darmah says:

    God works in mysterious ways.

  9. cognos says:

    Budhakon — Lucid comments. Thanks.

    Mannwich — What you miss… is that Goldman facilitates both “long” and “short” trades in the same product. So which product is “defective”?

    The quote from Janet Tavakoli about “ponzi scheme” is so SAD and STUPID. Nothing in these securities paid “early investors” from the payments of “late investors”. IF housing and mortgage repayment were good (or even bad) these securities made money. It was only the 1/100 year housing downturn that caused losses across the AAA. (Actually the realized “losses” are looking lower and lower as most AAAs are back from 50 to 70. It was the “fear”, the “m-t-m” and the failure of Lehman and AIG that caused the crisis losses. Fundamental value seems likely to be 80-90 or greater. It may even end up being 100. Ha!)

  10. cognos says:

    Here are the prices:

    ABX AAA HE series:
    2006-1 Now 82, bottomed at 60
    2006-2 Now 47, bottomed at 30
    2007s Now 35, bottomed at 23

    My friends who follow this stuff closely (many who were happily short) will say… “this stuff recovers way better than this… but its pretty fair to price it to a 15% YTM. So if the remaining avg life is 5-yrs… and coupon is basically zero because this was done in bubble at 6 bps spread… then “fair” price if recovery is 100 pts… is still 50 pts (~15% ytm).

    So recovery price looks like 80-100… its just that it was done to a zero spread and now one can earn 10% on plenty of high quality risks. So most of the “price losses” do not look like likely defaults.

  11. torrie-amos says:

    i’m sure the bagholders made tons of money on commodities with goldman in the past, thus, when they ended up the bagholder on this trade since it was probably small % of there folio’s they sold, took the lose, and manned up, moved on, would be my guess

    has too much downside for someone too sue, you paint a scarlet A on your company, plus, the probabiliies of winning are pretty slim, cause as they say, ur sophisticated, and you shoulda known better

  12. Darmah says:

    “It’s still not illegal….” Ah, yes, the great, amoral, efficient, free market.

    “Nuttin’ personal. It’s just bidness.”

  13. wunsacon says:

    Aren’t sellers required to disclose risk in prospectuses? You have to wonder whether the risk was adequately disclosed. Does anyone know?

    Why aren’t there lawsuits? Didn’t the Greek government lie to the EU? Didn’t GS help them lie? That’s what it looks like to me. Can’t some zealous prosecutor press some racketeering charges? Aren’t some unemployed lawyers or overstaffed firms interested in suing GS and collecting a bigger payday than the ones earned a decade ago from Big Tobacco?

    How is it legal to fleece governments like this?

    I’m not a lawyer and am just speculating. But, I’m sure of this: GS deserves to be bankrupted by trial attorneys.

  14. Robespierre says:

    cognos Says:
    March 1st, 2010 at 2:18 pm

    Here are the prices:…

    To address your morally deficient comments lets not forget that if they are recovering value is due to the trillions of taxpayers dollar our corrupted officials decided to give awy to put a floor under them…

  15. Why spend time and get aggravated.
    Why not do something.
    Ask your attorney general to sue
    Get a list og business so defrauded and call their lawyers
    Do something

  16. MRegan says:

    Responding to cognos and budhak0n is unnecessary. They have been tasked with revisionism. Assertions designed to obfuscate. What is curious is BR’s reticence.

    Here budhak0n engages in a deft bit of misdirection with his “it’s not illegal”.

    “It’s still not illegal and it can’t be proven that they “knew” that the backing asset would decline.”

    My recommendation is to avoid responding to these two with any ‘moral outrage’. Use their comments as an opportunity to observe interesting rhetorical and discursive strategies.

    Dialogue with committed ‘sophists’ is pointless. These guys would defend a roufie dropper by saying that their client asked, no reponse and that ‘silence is consent’.

  17. Mannwich says:

    Bingo, MRegan. The Wall Street apologists are out in full force now that the “recovery” is in full effect. Nothing to worry about. Just get in on the next bubble, get rich quickly, no matter the greater consequences to everyone and everything else. What a great way to run an economy and country.

  18. Mike in Nola says:

    Manny and MRegan – haven’t been around much lately because of a number of things. Checked in over the weekend and it seems a new crowd had taken over. I see they are back today, although the names look different; not a surprise. Agree that not feeding the trolls is the best tactic.

    Wonder how much Lloyd pays them?

  19. Mannwich says:

    @Mike: Unfortunately I think that it’s partially the new crowd that has greatly diminished the comments from the prior crew, which now mostly hangs out at other blogs these days. Too bad. The comments section used to be one of the best features of this blog. All good things must come to an end, I guess.

  20. cognos says:

    MReagan says:
    “Responding to cognos and budhak0n is unnecessary. They have been tasked with revisionism.”

    We actually look at MARKETs which seem to simply and dramatically support our view of the data.

  21. Mike in Nola says:

    Manny: what other blogs? Tried going to AndyT’s, but it’s now invite only and I see no way to ask for an invite.

  22. Mannwich says:

    @Mike: Email me at mannwich08@gmail.com and I’ll send you the links.

  23. GrafSchweik says:

    Cognos wrote:
    “We actually look at MARKETs which seem to simply and dramatically support our view of the data.”

    Yo, Cog!

    I know you’re not as completely bereft as a Govt-Sachser—e.g. you actually recognize income & FICA taxation policies are skewed in favor of Our Plutocratic Overlords & hey, you even agreed with me “100%” on the Volcker thread last week (although I did detect some cognos-tive dissonance in your explanation why)—but to be blunt, a high percentage of the time you’re mistaking the map for the territory.

    Admittedly that map works pretty well most of the time…except when it doesn’t. I apologize for repeating myself: the portion of the American culture/psyche/economy covered by your map is shrinking and has been doing so for thirty years. Hence the semantic gulf separating you from most of the posters here…

    Living, eating, drinking and breathing only numbers is great for mathematicians and people doing quantum mechanics. Their work is not very likely to contribute to the wholesale destruction of domestic industries or a complete stagnation of wage growth (adjusted for inflation) for 70% of the citizenry over a span of three decades.

    We no longer have a well integrated economy; an absurd percentage of it depends on consumer spending.
    I am no longer current on what percentage of corporate profit is currently accruing to the Bankster fraternity–I’m too busy with a book project to go hunting for it now–but before the Neoliberal-merde hit the fan it was about 38%.

    The knock-on effects are all around us in decaying infrastructure, the consolidation of whole sectors into relatively few corporate and private equity hands and the wholesale substitution of productive jobs with low paid, poorly trained, no future service sector ones.

    Too high a percentage of America’s intellectual capital has spent the last quarter century flipping businesses and gaming the system. Walk into any decent science or engineering graduate school in the country and in most of them you will find foreign students in the majority. As I last heard, the situation in PhD programs is particularly dire.

    This is a recipe for disaster and to mix in another metaphor, by its failure to push through the necessary reforms and to begin breaking up the corporate oligarchies, the Obama administration is adding even more fuel to what was already enough for a firestorm. Now we’re in danger of a social conflagration.

    Believe or not, sometimes the Black Swan carries a pitchfork or a rifle.

    We’re just trying to save you a highly unpleasant WTF moment down the road. :-)


  24. vasco7777 says:

    Cognos wrote : “It was only the 1/100 year housing downturn that caused losses across the AAA”

    Yes and it was only a 1/100 housing bubble that provided liftoff to foist this crap on the market disguised as AAA paper.

    The problem with your premise is that the time of issuance, tangible evidence of the bubble was already comprehended widely amongst people paying attention, presumably to include your pals who “follow this stuff closely” and without question, God’s servants at 80 Broad.

    Steve Miller comes to mind “Go On, Take The Money And Run”

  25. David Merkel says:

    I always advise retail investors not to buy structured notes — Wall Street offers an above-average yield, and has the buyer sell short some expensive option. You lose more in capital losses than you gain in interest on average.

    This isn’t any different. It just that bigger players that should have known better are getting hosed.

    There is no better defense than “buyer beware,” and “Don’t buy what someone else wants to sell you. Buy what you want to buy.”

    Unless we want radical revisions to contract law, you are your own best defender.

  26. [...] How Goldman bagged [...]

  27. “…Wall Street offers an above-average yield, and has the buyer sell short some expensive option. You lose more in capital losses than you gain in interest on average.

    This isn’t any different. It just that bigger players that should have known better are getting hosed…”
    – David Merkel, above

    yes, of course, though, interesting, is it?, that so few of ‘counter-parties’ are made known..

    who, really, was it that was ‘exercising their Fiduciary Responsibilities–on behalf of untold legions of *Pension Fund beneficiaries ??

    how, seriously, where those ‘Managers’ renumerated for doing so ??

    how many, for instance, ‘family Vacations’/’exp-acct Dinners’ did they *earn for steering those Funds ??

    I’ll submit that there are very distinct Reasons for the lack of coverage of those, and related, aspects of this Heist..

  28. renumerated .. mistake

    remunerated .. corrected

    re·mu·ner·ate (r-myn-rt)
    tr.v. re·mu·ner·at·ed, re·mu·ner·at·ing, re·mu·ner·ates
    1. To pay (a person) a suitable equivalent in return for goods provided, services rendered, or losses incurred; recompense.
    2. To compensate for; make payment for: remunerated his efforts.


    [Latin remnerr, remnert- : re-, re- + mnerr, to give (from mnus, mner-, gift; see mei-1 in Indo-European roots).]


    re·muner·a·bili·ty (-nr–bl-t) n.
    re·muner·a·ble adj.
    re·muner·ator n.

    The American Heritage® Dictionary of the English Language, Fourth Edition copyright ©2000 by Houghton Mifflin Company. Updated in 2009. Published by Houghton Mifflin Company. All rights reserved.

    full disclosure: that seems to be a persistant programming bug..

  29. budhak0n says:

    Your bigger problem is not in what GS or anyone did on Individual Trades.

    Your problem exists as Volcker correctly notes in how the “Finance” industry as a whole has taken a stance in opposition to the people they service.

    This isn’t surprising in a society where how well you hit a ball or catch a pass is valued exponentially more than how well you score on tests of reading comprehension and logical analysis.

    You can not remove the psychology from the law.

    Your basic problem with Goldman is that they did something to benefit themselves. This is no different than any of the people in this room.

    When you get up in the morning , do you immediately go outside to make sure that your neighbor’s car is swept off of snow so that they will have a nice ride to work in the morning?

    No. Of course not.

    Trying to find societal benefit to the actions of investment bankers is a very VERY slippery slope but I do agree with the basic premise that the “finance” industry is a bit out of control.

    The bigger problem before us is not that GS acted in a particularly selfish fashion involving a series of trades.
    It’s how to actually redirect the system ( as if we actually have the drive necessary to do such a thing) that the Individual efforts of the participants, pursuing their own self interest , somehow benefits the community at large.

    At any time, it is not the individual participants responsibility that what they do actually benefit their compadres.

    But it is their job to make sure that in so doing they don’t place a ticking time bomb underneath a central pillar of the system as a whole.

    One of my main concerns with any of this would concern the offshore nature of it. Why is it necessary for this business to be conducted away from the prying eyes of the players in New York.

    Capitalism has it’s limits. Oh and I stick by my “legal” analysis of this particular incident 100%.

    The way to fix the problem is not with individual litigation because the general public in the end cares just as less about the “client in the unknown mask with a paper bag on his or her head” as they do Lloyd Blankfein’s personal grooming habits.

    They care that this stuff “may” or may not have affected their ability to get a car loan or retire or buy a coke.

    And so long as enough distance can be laid between the two actions. nobody really cares.

  30. budhak0n says:

    This will sound as crazy as anything you’ve maybe ever read.

    But your central problem all originates out of the FICO system. When you allowed repository’s to be open which allowed protected corporate to probe through the financial behavior of the many millions of U.S. citizens, it was just a matter of time before this proprietary information was used to somehow absurdly benefit one of the players.

    Now it’s another game altogether of ” It’s got nothing to do with me” . Or “what the heck does my credit score” have to do with my trading strategies?

    Companies don’t care about your individual payments. They care how overall transactions affect their status in the system.

    Scary yes. A fix? None I can think of.

  31. [...] a stark counterpoint to How Goldman Sachs Bagged Clients, I recall ever so fondly how Merrill Lynch bagged itself:  With a Sept. 2006, top-of-the-market, [...]