[Winstonm]

mike777, on Apr 21 2010, 11:26 AM, said:

thank god we have found our whipping boy......GS........the country needed one to kick around.

Look how happy it made our posters and the tv commentators.


So what if it looks like ACA, the company that put this thing together, bet a billion bucks on the upside and lost....and they knew it was a bet and it is accussed that ACA is the company Paulson talked to.....

Let's make it clear what happened here.

The bet for Paulson was on a synthetic CDO, a derivative contract of which its only value was determined by what occurred in a seperate CDO, i.e., real mortgages bundled together as a security.

The SEC is saying that when GS sold the CDO (to a third party) it did not disclose that Paulson - who had a seperate side bet that the loans would fail - had helped pick the loans that became part of the CDO security.

It's like saying GS sold a guy a poker hand, but he failed to tell him that another guy had a side bet that the hand would be a loser, and, oh, by the way, this guy helped shuffle and deal the cards.

Some might consider that withholding material information.

Gambler Mike seems to think it is A-OK.

[kenberg]

So Wnston, you are prepared to place a large bet that the SEC suit will stand up in court?

Me, I wouldn't bet either way.

But maybe I could learn from these guys how to make money no matter how it goes. Oh, that's right, that only works if I am too big to fail.

[mike777]

Winstonm, on Apr 21 2010, 07:17 PM, said:

mike777, on Apr 21 2010, 11:26 AM, said:

thank god we have found our whipping boy......GS........the country needed one to kick around.

Look how happy it made our posters and the tv commentators.


So what if it looks like ACA, the company that put this thing together, bet a billion bucks on the upside and lost....and they knew it was a bet and it is accussed that ACA is the company Paulson talked to.....

Let's make it clear what happened here.

The bet for Paulson was on a synthetic CDO, a derivative contract of which its only value was determined by what occurred in a seperate CDO, i.e., real mortgages bundled together as a security.

The SEC is saying that when GS sold the CDO (to a third party) it did not disclose that Paulson - who had a seperate side bet that the loans would fail - had helped pick the loans that became part of the CDO security.

It's like saying GS sold a guy a poker hand, but he failed to tell him that another guy had a side bet that the hand would be a loser, and, oh, by the way, this guy helped shuffle and deal the cards.

Some might consider that withholding material information.

Gambler Mike seems to think it is A-OK.

lets back up and make clear the facts are in dispute






What the SEC says may or may not be true and may or may not be illegal


Of course if FRAUD.......get them.


again my best guess is GS will yell uncle and settle out of court

fine =1billion...loss compared to market cap loss =14 billion you pick



at the very least take a look at ACA
some reports say
1) they had final say on what went into "death" cdo
2) many(Paulson) called tACA and told them what they want in "death" cdo
3) ACA created "death" cdo and then went 1 billion on long side........then other european banks backed them.....
4) one side of story.....

[mgoetze]

Winstonm, on Mar 25 2010, 02:23 AM, said:

Over-reliance on mathematics seems to be a recurring theme in Wall Street disasters.

The problem is not overreliance on mathematics, per se. The problem is overreliance on mathematics that are absolutely not applicable to the situation at hand, by people who don't understand mathematics at all.

Here's how it works: someone with a degree in mathematics creates a model. This model is based on certain assumptions and they are stated clearly. They hand this model to someone with a degree in business or economics. They skip the assumptions and see a formula where they can stick their numbers in. They give the formula to someone with a degree in computer science and say they want this used for real-time pricing of securities X, Y, and Z.

The model requires that two variables be statistically independent. The numbers being plugged in are obviously not. The model assumes that prices change in a normally distributed fashion, when it's historically obvious that they don't. None of the underlying math has been proven for these conditions. But who cares, there's a formula, we can plug numbers into it, and the results are close to what we expect under normal conditions, so it must be correct!

And you can't excuse these business/economics types by saying, well, they might not understand mathematics very well, but at least they understand financial products. Because I'm sure they don't. One of the more interesting parts of the interview that started this thread:

Quote

Nobody but someone with Asperger’s would read a subprime mortgage bond prospectus. And he had a feeling that he was the only one who read the things, except for the lawyers who drafted them. So I think his intense focus on data really helped.

I don't think I have Asperger's, but I have skimmed some 300+ page (non-subprime) bond prospectuses. They sometimes contain conditions where I think, who in their right mind would buy this? But the "market price" for these things is entirely in line with more sensible bonds of the same category. That's because people buying and selling these things in units of millions of dollars don't have time to read the prospectus. On a good day they might have a glance at the Bloomberg summary...

Of course, this all shouldn't matter, because in theory, the market will sort everything out. It will do so by punishing those who make foolish decisions and rewarding those who are prudent. Oh wait, that's another false assumption in a fundamental economic theory...

[Al_U_Card]

mgoetze, on Apr 22 2010, 12:28 PM, said:

in theory, the market will sort everything out. It will do so by punishing those who make foolish decisions and rewarding those who are prudent. Oh wait, that's another false assumption in a fundamental economic theory...

Or rather, reward those that are involved in menu preparation and punish those that come late to the table...

[pdmunro]

I am aware that both Town and City Councils in Australia invested their funds in "toxic assts" in the US on the advice of investment advisors. According to press reports, court cases have commenced. If they go after the investment advisors, will the investment advisors then go after the investment banks who packaged and sold the "toxic products"? How will the SEC's prosecution of Goldman Sachs for fraud impact other court cases?

We had a major insurance company (HIH) fail here in Australia about 10 years ago. Court cases alleging fraud and mismanagement by senior executives from this failure still appear at intervals in the press. It seems that major financial fraud can take many years to untangle.

Obviously, GS with its unlimited source of funds can drag the case on for years. (Till the protagonists are dead and buried?) But the fact that the one of the parties who lost money is the Royal Bank of Scotland, now majority-owned by the British Government, suggests that a few home truths are being expressed in the corridors of power.

**********************
Article from MSNBC:
Goldman case is likely tip of the legal iceberg

Among the legal action expected in the coming months:

• Class-action suits by Goldman shareholders who believe Goldman alleged misconduct made their stakes less valuable ...
  
• Suits by investors who believe Goldman sold them on deals that were doomed to fail ...
  
• Possible criminal charges ...
  
• Charges by regulators about other mortgage investments at Goldman and elsewhere ...

Several legal experts suggested Goldman and the SEC had reached an impasse over a settlement before the charges were announced. They speculated that Goldman was unwilling to admit that it allowed the hedge fund to create a portfolio of securities that was designed to fail because that admission could do irreparable harm to Goldman's reputation.

"Goldman could've easily paid a fine already," said John Coffee, a securities law professor at Columbia University. "So I don't think it's money they're fighting over."

The case has been assigned to U.S. District Judge Barbara Jones of New York. Jones is the federal judge who five years ago presided over the $11 billion criminal fraud case that toppled WorldCom Corp. and sent its former CEO Bernard Ebbers to prison for 25 years.

http://www.msnbc.msn.com/id/36628044/ns/bu...s-us_business//

[Winstonm]

Quote

So Wnston, you are prepared to place a large bet that the SEC suit will stand up in court?

No. But I am at least willing to have a trial. I am not inclined as some seem to be to declare GS not guilty because this time they may have cheated other cheaters and the other cheaters should have seen it coming.

It's unclear to me what that argument has to do with statutory law. I've never seen it written in statutes that it's O.K. to defraud one group but not this other group based on the financial sophistication of the ones being defrauded.

[y66]

From Krugman's column today:

Quote

In his Thursday speech, by the way, Mr. Obama insisted — twice — that financial reform won’t stifle innovation. Too bad.

And here’s the thing: after taking a big hit in the immediate aftermath of the crisis, financial-industry profits are soaring again. It seems all too likely that the industry will soon go back to playing the same games that got us into this mess in the first place.

So what should be done? As I said, I support the reform proposals of the Obama administration and its Congressional allies. Among other things, it would be a shame to see the antireform campaign by Republican leaders — a campaign marked by breathtaking dishonesty and hypocrisy — succeed.

But these reforms should be only the first step. We also need to cut finance down to size.

And it’s not just critical outsiders saying this (not that there’s anything wrong with critical outsiders, who have been much more right than supposedly knowledgeable insiders; see Greenspan, Alan). An intriguing proposal is about to be unveiled from, of all places, the International Monetary Fund. In a leaked paper prepared for a meeting this weekend, the fund calls for a Financial Activity Tax — yes, FAT — levied on financial-industry profits and remuneration.

Such a tax, the fund argues, could “mitigate excessive risk-taking.” It could also “tend to reduce the size of the financial sector,” which the fund presents as a good thing.

Now, the I.M.F. proposal is actually quite mild. Nonetheless, if it moves toward reality, Wall Street will howl.

But the fact is that we’ve been devoting far too large a share of our wealth, far too much of the nation’s talent, to the business of devising and peddling complex financial schemes — schemes that have a tendency to blow up the economy. Ending this state of affairs will hurt the financial industry. So?

FAT tax? Wall Street will howl? Gordon Gekko was a piker? I love this guy.

[PassedOut]

I liked this clear paragraph by Krugman from the same piece:

Quote

So why were bankers raking it in? My take, reflecting the efforts of financial economists to make sense of the catastrophe, is that it was mainly about gambling with other people’s money. The financial industry took big, risky bets with borrowed funds — bets that paid high returns until they went bad — but was able to borrow cheaply because investors didn’t understand how fragile the industry was.

It was "heads I win, tails you lose."

A stable financial system is important to businesses, ours included, and to consumers. But I have to agree that the financial "industry's" profits -- one third of all domestic profits -- is way out of line with the actual value of its services.

[y66]

Yep, that part hits home. Michael Lewis says something along the same lines in this memorable excerpt from his November 11, 2008 account of lunch with former Salomon Brothers CEO John Gutfreund:

Quote

We spent 20 minutes or so determining that our presence at the same lunch table was not going to cause the earth to explode. We discovered we had a mutual acquaintance in New Orleans. We agreed that the Wall Street C.E.O. had no real ability to keep track of the frantic innovation occurring inside his firm. (“I didn’t understand all the product lines, and they don’t either,” he said.) We agreed, further, that the chief of the Wall Street investment bank had little control over his subordinates. (“They’re buttering you up and then doing whatever the ***** they want to do.”) He thought the cause of the financial crisis was “simple. Greed on both sides—greed of investors and the greed of the bankers.” I thought it was more complicated. Greed on Wall Street was a given—almost an obligation. The problem was the system of incentives that channeled the greed.

But I didn’t argue with him. For just as you revert to being about nine years old when you visit your parents, you revert to total subordination when you are in the presence of your former C.E.O. John Gutfreund was still the King of Wall Street, and I was still a geek. He spoke in declarative statements; I spoke in questions.

But as he spoke, my eyes kept drifting to his hands. His alarmingly thick and meaty hands. They weren’t the hands of a soft Wall Street banker but of a boxer. I looked up. The boxer was smiling—though it was less a smile than a placeholder expression. And he was saying, very deliberately, “Your…fucking…book.”

I smiled back, though it wasn’t quite a smile.

“Your fucking book destroyed my career, and it made yours,” he said.

I didn’t think of it that way and said so, sort of.

“Why did you ask me to lunch?” he asked, though pleasantly. He was genuinely curious.

You can’t really tell someone that you asked him to lunch to let him know that you don’t think of him as evil. Nor can you tell him that you asked him to lunch because you thought that you could trace the biggest financial crisis in the history of the world back to a decision he had made. John Gutfreund did violence to the Wall Street social order—and got himself dubbed the King of Wall Street—when he turned Salomon Brothers from a private partnership into Wall Street’s first public corporation. He ignored the outrage of Salomon’s retired partners. (“I was disgusted by his materialism,” William Salomon, the son of the firm’s founder, who had made Gutfreund C.E.O. only after he’d promised never to sell the firm, had told me.) He lifted a giant middle finger at the moral disapproval of his fellow Wall Street C.E.O.’s. And he seized the day. He and the other partners not only made a quick killing; they transferred the ultimate financial risk from themselves to their shareholders. It didn’t, in the end, make a great deal of sense for the shareholders. (A share of Salomon Brothers purchased when I arrived on the trading floor, in 1986, at a then market price of $42, would be worth 2.26 shares of Citigroup today—market value: $27.) But it made fantastic sense for the investment bankers.

From that moment, though, the Wall Street firm became a black box. The shareholders who financed the risks had no real understanding of what the risk takers were doing, and as the risk-taking grew ever more complex, their understanding diminished. The moment Salomon Brothers demonstrated the potential gains to be had by the investment bank as public corporation, the psychological foundations of Wall Street shifted from trust to blind faith.

No investment bank owned by its employees would have levered itself 35 to 1 or bought and held $50 billion in mezzanine C.D.O.’s. I doubt any partnership would have sought to game the rating agencies or leap into bed with loan sharks or even allow mezzanine C.D.O.’s to be sold to its customers. The hoped-for short-term gain would not have justified the long-term hit.

No partnership, for that matter, would have hired me or anyone remotely like me. Was there ever any correlation between the ability to get in and out of Princeton and a talent for taking financial risk?

Now I asked Gutfreund about his biggest decision. “Yes,” he said. “They—the heads of the other Wall Street firms—all said what an awful thing it was to go public and how could you do such a thing. But when the temptation arose, they all gave in to it.” He agreed that the main effect of turning a partnership into a corporation was to transfer the financial risk to the shareholders. “When things go wrong, it’s their problem,” he said—and obviously not theirs alone. When a Wall Street investment bank screwed up badly enough, its risks became the problem of the U.S. government. “It’s laissez-faire until you get in deep *****,” he said, with a half chuckle. He was out of the game.

It was now all someone else’s fault.

He watched me curiously as I scribbled down his words. “What’s this for?” he asked.

I told him I thought it might be worth revisiting the world I’d described in Liar’s Poker, now that it was finally dying. Maybe bring out a 20th-anniversary edition.

“That’s nauseating,” he said.

Hard as it was for him to enjoy my company, it was harder for me not to enjoy his. He was still tough, as straight and blunt as a butcher. He’d helped create a monster, but he still had in him a lot of the old Wall Street, where people said things like “A man’s word is his bond.” On that Wall Street, people didn’t walk out of their firms and cause trouble for their former bosses by writing books about them. “No,” he said, “I think we can agree about this: Your fucking book destroyed my career, and it made yours.” With that, the former king of a former Wall Street lifted the plate that held his appetizer and asked sweetly, “Would you like a deviled egg?"

[mike777]

BTW 75% of these huge profits by Morgan and BA are from Investment Banking, not old fashion "banking".

So take away the ability to do "investment banking" and watch these banks shrink fast.

[Winstonm]

mike777, on Apr 23 2010, 12:56 PM, said:

BTW 75% of these huge profits by Morgan and BA are from Investment Banking, not old fashion "banking".

So take away the ability to do "investment banking" and watch these banks shrink fast.

And round and round we go. Seems we have been here before, back in 1936 or so?

barren rhyme
repetition sows
history as weeds

[mike777]

Winstonm, on Apr 23 2010, 07:52 PM, said:

mike777, on Apr 23 2010, 12:56 PM, said:

BTW 75% of these huge profits by Morgan and BA are from Investment Banking, not old fashion "banking".

So take away the ability to do "investment banking" and watch these banks shrink fast.

And round and round we go. Seems we have been here before, back in 1936 or so?

barren rhyme
repetition sows
history as weeds

Maybe so

Keep in mind today the only thing banks offer that others dont is checking accounts. FDIC banks do get to borrow at a lower cost.

All my mortgages in my life are from non banks despite having worked for them.



Even if we just ignore the issue of what is investment banking and what is not, I dont see anyone advocating for forcing banks to get out off Investment banking.

Perhaps a better start would be enforcing leverage req on FDIC banks.

In any event who would be shocked to see another "financial" crises in 2020?

[Gerben42]

Quote

In any event who would be shocked to see another "financial" crises in 2020?

I wouldn't be surprised at all. I just hope they wait until I bought myself a house, then inflation can come and eat my mortgage.

[hrothgar]

Gerben42, on Apr 24 2010, 12:16 PM, said:

Quote

In any event who would be shocked to see another "financial" crises in 2020?

I wouldn't be surprised at all. I just hope they wait until I bought myself a house, then inflation can come and eat my mortgage.

I bought my new place as an inflation hedge....

[y66]

Gerben42, on Apr 24 2010, 04:16 AM, said:

... inflation can come and eat my mortgage.

I am thinking this way too. Would like to hear dissenting voices if there are any.

[PassedOut]

y66, on Apr 24 2010, 09:17 AM, said:

Gerben42, on Apr 24 2010, 04:16 AM, said:

... inflation can come and eat my mortgage.

I am thinking this way too. Would like to hear dissenting voices if there are any.

Very wise decision, in my opinion. Thinking along the same lines my eldest son, 27 years old, just bought his first home.

[Winstonm]

y66, on Apr 24 2010, 09:17 AM, said:

Gerben42, on Apr 24 2010, 04:16 AM, said:

... inflation can come and eat my mortgage.

I am thinking this way too. Would like to hear dissenting voices if there are any.

Housing is still high-priced compared to historical norms.

The reason to buy and own a home is to have a roof over your head - when the mortgage is finally retired it is like getting a raise.

[kenberg]

I bought a house because I wanted to live in a house. I have rejected suggestions that I buy a vacation home as an investment because I don't want a second house. I was pleased when my wife sold her rental property because I find messing with such things to be a pain in the ass. So, as with so many things, "know yourself" is good advice. But still, all in all, for anyone but the most wandering of souls, I recommend buying a house rather than renting. But for me, at its root, I like owning a home because I like owning a home. Some things in life do not require deep analysis.

[Winstonm]

mike777, on Apr 21 2010, 11:26 AM, said:

thank god we have found our whipping boy......GS........the country needed one to kick around.

Look how happy it made our posters and the tv commentators.


So what if it looks like ACA, the company that put this thing together, bet a billion bucks on the upside and lost....and they knew it was a bet and it is accussed that ACA is the company Paulson talked to.....

From the actual SEC complaint: (enphasis added)

Quote

3.In sum, GS&Co arranged a transaction at Paulson’s request in which Paulson heavily influenced the selection of the portfolio to suit its economic interests, but failed to disclose to investors, as part of the description of the portfolio selection process contained in the marketing materials used to promote the transaction, Paulson’s role in the portfolio selection process or its adverse economic interests.

4.Tourre was principally responsible for ABACUS 2007-AC1. Tourre devised the transaction, prepared the marketing materials and communicated directly with investors. Tourre knew of Paulson’s undisclosed short interest and its role in the collateral selection process. Tourre also misled ACA into believing that Paulson invested approximately $200 million in the equity of ABACUS 2007-AC1 (a long position) and, accordingly, that Paulson’s interests in the collateral section process were aligned with ACA’s when in reality Paulson’s interests were sharply conflicting.

I would be shocked to find that the SEC does not have ironclad proof of the above statement placed in bold type. If so, this may well rise to the nature of a criminal complaint for fraud.

And as Barry Ritholtz has pointed out (quoted in Barron's), the prosecutor only has to provide the barest of essentials at this time - the proof in form of e-mails, wiretaps, etc. does not have to be provided in the complaint.

I cannot for a minute believe that a 27-year-old junior GS employee was the sole party to designing and directing this entire multi-billion-dollar transaction (the complaint concerns only a small part of a bigger package). Upper management had to be aware.

Like Al Jolson use to say: you ain't see nothin' yet.