Did Goldman mislead Congress about its ‘Big Short?’ The answer, according to PPWIJ* Jesse Eisinger, is an emphatic yes.

Eisinger cuts right to the heart of the matter regarding Goldman Sachs possible perjury regarding their “big short.” It was not the actual size of the short, but it was a) How GS got short; and 2) Whether Goldman was saying one thing in disclosures to clients and doing another.

Here’s Jesse:

“To establish many of its short positions, the Senate report says, Goldman created new securities, backed them with its good name, and then strung together misleading statements to its customers about what it was actually doing. By shorting the way it did, the bank perverted the market instead of correcting it.

Take Hudson Mezzanine, a $2 billion collateralized debt obligation created by Goldman in 2006. In marketing material, the firm wrote that “Goldman Sachs has aligned incentives with the Hudson program.”

I suppose that was technically true: Goldman had made a small investment in the C.D.O. and therefore had an aligned incentive with the other investors. But the material failed to mention the firm’s much larger bet against the C.D.O. — a huge adverse incentive to its customers’ interests.”

That appears bad enough; but Goldman seems to have misled its clients as to how these CDO’s were constructed. In a classic case Goldman Sachs alchemy, they scraped the shit off their own boots, i.e., junk assets on their own books they could not otherwise find a buyers for. That is not what they had told buyers, however:

“Goldman told investors that the Hudson assets had been “sourced from the Street,” which most investors would understand to mean that Goldman had purchased the assets from other broker-dealers. In fact, all the assets had come from Goldman’s own balance sheet, the Senate report found.”

If you are going to screw your clients, well, thats bad enough. It may not be illegal, its merely sleazy, Vampire Squid-like behavior. But to get this bad behavior to rise to a crime, you need to do a little more. You need to lie to Congress about it:

“In his April 2010 testimony to the Senate, Goldman’s chief executive, Lloyd C. Blankfein, argued that Goldman was merely making a market in these securities and derivatives, matching willing and sophisticated buyers and sellers. But Goldman was acting like an underwriter, not a market maker.

As the underwriter, Goldman threw its marketing muscle behind Hudson Mezzanine and other C.D.O.’s. When the bank’s salespeople ran into trouble selling the securities, they begged for help from the executives who created them. One requested material to give to clients about “how great” the sector was. One needed the aid to get a client to invest, to be “THERE AND IN SIZE,” according to e-mails cited in the report.”

Goldie can dispute the Permanent Subcommittee on Investigations report on the financial crisis all it wants; The report is compelling and the data shows Goldman Sachs had a huge hedge against the housing market versus their own underwriting.

Whether this amounts to a Big Short or not is almost beside the point: You cannot say one thing to clients and then do the exact opposite in your own book.

I previously suggested this may not be an ideal case to settle. In light of the most recent revelations, and the ongoing overhang that is starting to impact recruiting, retention, and other factors. The stock has been one of the worst performing issues int he financial sector.

Maybe its time for GS to face this head on. Thus, I will give advice to Goldman Sachs that 1) might save them $100s of millions of dollars; b) be completely ignored.

That advice? Sit down with Senate and DoJ leaders, put together new procedures, write another big fat check, and make this go away . . .

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Previously:
10 Things You Don’t Know (or were misinformed) About the GS Case (April 23rd, 2010)

Its the Law, Bitches! (July 19th, 2010)

Contest: Ideas for Goldman Sachs Ad Campaign (September 29th, 2010) 

Source:
Misdirection in Goldman Sachs’s Housing Short
JESSE EISINGER
New York Times DealBook, June 15, 2011, 3:01 pm
http://dealbook.nytimes.com/2011/06/15/misdirection-in-goldman-sachss-housing-short/

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* Pulitzer Prize Winning Investigative Journalist

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.

20 Responses to “Classic Goldman Sachs Alchemy”

  1. HEHEHE says:

    Does Sorkin know about this article?

  2. Jim Greeen says:

    First, make GS pay all the money back they made from the deception, then fine them and thirdly, offer no immunity to anyone and prosecute where applicable.

  3. [...] Yes, the Squid did perjure itself.  Release the hounds.  (TBP) [...]

  4. b_thunder says:

    “That advice? Sit down with Senate and DoJ leaders, put together new procedures, write another big fat check, and make this go away . . .”

    Yes, I’m sure they will write a big fat check…. except this time it won’t be to the SEC, but directly to the Presidential and the Senate banking committee members’ reelection campaigns!

    BTW, what’s the USA’s latest ranking on the list of corrupt nations?

  5. Lyle says:

    After reading the book F.I.A.S.C.O. Goldman is just following the script of that book, rip your counter parties face off given half a chance. The whole financial industry has decided that win-win is old fashioned and win is the only way to go. What I fail to understand is how “sophisticated” counter parties did not understand this. (The book was about Morgan Stanley but if they do it you can be sure Goldman does it also). Sophisticated investment professionals should know and follow trust but verify and to add to that if you don’t understand it just say no. If police are allowed to decieve folks why should one expect anything different from the used care (oops I meant financial) salesmen. Perhaps I am insulting the used car salesmen as they may have more ethics than the financial types, plus they do sell something that has a real existance, all be it the wheels may fall off once you drive it off the lot.

  6. FS says:

    “You cannot say one thing to clients and then do the exact opposite in your own book.”

    Exactly.

    This country top to bottom, left and right, has become to accustomed to spin, lying, deception and allowing the
    standards to become consistently lower and lower. We are becoming broken.

  7. This, too, is, ultimately, another Distraction..

    really, like “wither GS?” is The pressing Question of the Daze..
    ~~

    maybe, it’d be useful to hear the POV of one not enthralled by “The Grift” (?)

    Source – WSJ

    By James Grant

    Ben S. Bernanke doesn’t know how lucky he is. Tongue-lashings from Bernie Sanders, the populist senator from Vermont, are one thing. The hangman’s noose is another. Section 19 of this country’s founding monetary legislation, the Coinage Act of 1792, prescribed the death penalty for any official who fraudulently debased the people’s money. Was the massive printing of dollar bills to lift Wall Street (and the rest of us, too) off the rocks last year a kind of fraud? If the U.S. Senate so determines, it may send Mr. Bernanke back home to Princeton. But not even Ron Paul, the Texas Republican sponsor of a bill to subject the Fed to periodic congressional audits, is calling for the Federal Reserve chairman’s head.

    I wonder, though, just how far we have really come in the past 200-odd years. To give modernity its due, the dollar has cut a swath in the world. There’s no greater success story in the long history of money than the common greenback. Of no intrinsic value, collateralized by nothing, it passes from hand to trusting hand the world over. More than half of the $923 billion’s worth of currency in circulation is in the possession of foreigners.

    In ancient times, the solidus circulated far and wide. But it was a tangible thing, a gold coin struck by the Byzantine Empire. Between Waterloo and the Great Depression, the pound sterling ruled the roost. But it was convertible into gold—slip your bank notes through a teller’s window and the Bank of England would return the appropriate number of gold sovereigns. The dollar is faith-based. There’s nothing behind it but Congress.

    But now the world is losing faith, as well it might. It’s not that the dollar is overvalued—economists at Deutsche Bank estimate it’s 20% too cheap against the euro. The problem lies with its management. The greenback is a glorious old brand that’s looking more and more like General Motors.

    You get the strong impression that Mr. Bernanke fails to appreciate the tenuousness of the situation—fails to understand that the pure paper dollar is a contrivance only 38 years old, brand new, really, and that the experiment may yet come to naught. Indeed, history and mathematics agree that it will certainly come to naught. Paper currencies are wasting assets. In time, they lose all their value. Persistent inflation at even seemingly trifling amounts adds up over the course of half a century. Before you know it, that bill in your wallet won’t buy a pack of gum.

    For most of this country’s history, the dollar was exchangeable into gold or silver. “Sound” money was the kind that rang when you dropped it on a counter. For a long time, the rate of exchange was an ounce of gold for $20.67. Following the Roosevelt devaluation of 1933, the rate of exchange became an ounce of gold for $35. After 1933, only foreign governments and central banks were privileged to swap unwanted paper for gold,….”
    http://dailybail.com/home/james-grant-life-behind-bars-for-bernanke.html
    ~~~
    “I know that most men, including those at ease with problems of the greatest complexity, can seldom accept even the simplest and most obvious truth if it be such as would oblige them to admit the falsity of conclusions which they have delighted in explaining to colleagues, which they have proudly taught to others, and which they have woven, thread by thread, into the fabric of their lives.” – Tolstoy

    or more simply put. . .

    “It is difficult to get a man to understand something when his salary depends upon his not understanding it.” – Upton Sinclair

  8. foosion says:

    My favorite GS defense: GS is so big and important that a major prosecution of GS would destabilize the economy.

  9. Sechel says:

    This will never end until firms such as Goldman are required to ensure the security is suitable , and further restrict the definition of “sophisticated investor”. It’s no accident that all the securites mentioned occured in the private placement market. Banks need to their customers as “customers” and not counter-parties. Make more of these securities SEC registered and unleash the lawyers. The banks won’t engage in these deceptive trades if they come to know that duped investors have legal tools to seek remedy.

  10. Moss says:

    I have a better idea.. make them go away. They are at the center of the most corrupt, self serving industry the World has ever known. What is most ironic is that they would have failed, regardless of the Big Short, if the so called ‘market’, that they pretend to embrace, would have been allowed to ‘correct’ organically in an ‘efficient’ way.’ The fact is the market is not efficient and they don’t embrace competition and natural market forces. There mission is to petition for preferential treatment to ensure their compensation system remains intact. The DNA of the industry needs to be altered before it is to late.

  11. A-Hugh says:

    The biggest issue here is the inherent conflicts of interest. When you are a making markets, prop trading and underwriting, there will always be conflicts of interest. When all the functions are under one roof they can always claim plausible deniability.

  12. inessence says:

    Was goldie acting as a broker? No fiduciary role, sutiability standards de minimis, disclosure and conflicts of interest standards nebulous.
    Was goldie acting as a fiduciary? Legally compelled to disclose conflicts as well as put client’s interest before its own.

  13. wunsacon says:

    inessence,

    Even brokers can be held liable if they present misleading information (mentioning some facts while excluding others) in order to effectuate a sale.

    With that in mind, re-consider these two blurbs:

    >> In marketing material, the firm wrote that “Goldman Sachs has aligned incentives with the Hudson program.”

    >> “Goldman told investors that the Hudson assets had been “sourced from the Street,” which most investors would understand to mean that Goldman had purchased the assets from other broker-dealers. In fact, all the assets had come from Goldman’s own balance sheet, the Senate report found.”

    If Goldman hadn’t presented this misleading information, then fine. But, they did.

  14. socaljoe says:

    The consequences for the crime have to be greater than the reward.

    That means restitution to the victims, penalties for the company, and jail time for the perps.

    Anything less will encourage more of the same.

  15. DeDude says:

    Lyle; I find it amazing that sophisticated counterparties do not demand a buy-back clause in every deal they make with these swindling organizations. If the deal is as wonderful an investment as the seller claims it to be, then a buy-back guarantee would not be a problem, would it?

  16. river says:

    Interesting that this article comes out of the same place as that Sorkin article a couple weeks ago did. Does this mean that Sorkin is conceding the arguement to Taibbi?

  17. Lyle says:

    I think the crisis may have demonstrated that sophisticated investor is a misnomer. Clearly there a a number of dumb sophisticated investors, who chase yield because its how they are evaluated. Perhaps a sign that to many money managers are in the business. One change I would make to the definition right now is to define all US state and local government bodies as unsophisticated investors after the Orange CO Ca and Jefferson County Al debacles. Perhaps also a requirement that one must declare to ones investors that one has filed as a sophisticated investor and so waived a lot of the protections of the law in search of a better yield.

  18. ToNYC says:

    The old school way was to make every regular recipient of the Goldman checks wear a Golden letter “G” prominently on their clothing.

  19. Danny Black says:

    Lyle, I would go further. Anyone who claims to be “duped” by these “schemes” should be forced to have moron tatooed on their foreheads and banned for holding any asset other than cash under a bed as they are clearly too stupid to do anything else.

    Weird when the investors in these products were claiming their 2 and 20 that they neglected to mention that they don’t bother doing any due diligence and are actually a bunch of shaved monkeys.

    PS this reporter won his Pulitzer for cutting and pasting a story from Yves Smith and each and every single article I have ever read by this reporter just showed how clueless he was – just like 99% of all financial journos. I would not trust him to accurately represent anything, not because he is a liar but because he is a moron. For instance, how long were these assets on GS balance sheet? Two years or just before GS bundled them into the CDO because ALL of the assets in ANY non-managed CDO have to be warehoused before the CDO is launched because you have to detail them in the prospectus. But don’t expect Jesse to having clue about that because he knows that as long as he is slapping down GS no one is going to bother actually fact checking his BS.

  20. Danny Black says:

    Lyle, the “sophisticated investors” already have to declare this to their investors which is what they are getting highly paid for. Wierd with all this screaming about GS that no one is investigating the funds – who DO have a fiduciary responsibilty to their clients – for failing to due more than cursory due diligence, something that they were very very very highly paid to do.

    A-Hugh, when you are prop trading there is no conflict of interest. Your sole interest is to make money for your employer. When you are market making, you are there to provide liquidity and a bid and offer. If they don’t like your price then no one is forcing them to buy or sell, it is not your job to assess the long term value of the product because you are not investing. You might be confusing them with the “victims” who actually do have a legal responsibility to manage their clients money properly but given attacking buysides – of which Mr Ritholz is a member – doesn’t sell advertising don’t expect to read that here. I am sure when his “portfolio advice” that he is selling turns out to be closet index tracking or worse I am pretty sure he will be the first screaming about how the sellside mislead him and how it wasn’t his fault at all. What I can guarantee he won’t do is return the fees he earnt when he pretended he was adding some actual value.