Goldman Sachs and the Art of Ripping Your Clients' Faces Off

"Traders and salesmen would boast about 'ripping the face off' their clients -- structuring and selling complicated deals that clients did not understand but that generated huge profits for the bank that was brokering the trade."
-- From the book 13 Bankers

That quote actually refers to how banks operated in the 1990s. But some things never change on Wall Street.

Goldman Sachs (NYSE: GS  ) was charged with fraud on Friday, but you probably already know that. The story has been reported relentlessly. Just to cover the bases, here's the deal:

  • Collateralized debt obligations (CDO) are packages of mortgage-backed securities (MBS). The CDO are diced up into different risk slices and sold to investors.
  • In a specific deal put together by Goldman, hedge fund manager John Paulson was allowed to help pick the MBS that were included in the CDO. Paulson ostensibly picked the most wretched MBS he could find because his hedge fund was short (betting against) these same securities through credit default swaps (CDS). Paulson paid Goldman $15 million to throw the deal together.
  • All of this was unbeknownst to the clients purchasing the CDO. In fact, they were told otherwise: That the MBS were independently selected by a company called ACA Management, LLC. (You can download the dealbook investors were given here.)
  • According to the SEC's fraud charge: "The deal closed on April 26, 2007 ... By January 29, 2008, 99% of the portfolio had been downgraded. As a result, investors ... lost over $1 billion. Paulson's opposite CDS positions yielded a profit of approximately $1 billion."

"God's work," baby!
To be blunt, Goldman fibbed, rigged the game, and "ripped the faces off" its clients. Or at least that's what it's being accused of.

What's curious is that, despite the media frenzy, most of this story has been known for some time. Wall Street Journal reporter Greg Zuckerman explained the bulk of it in his 2009 book The Greatest Trade Ever, which details Paulson's bet:

Paulson didn't think there was anything wrong with working with various bankers to create more toxic investments ... After all, those who would buy the pieces of any CDO likely would be hedge funds, banks, pension plans, or other sophisticated investors ...

However, at least one banker smelled trouble and rejected the idea. Paulson didn't come out and say it, but the banker suspected that Paulson would push for combustible mortgages and debt to go into any CDO, making it more likely that it would go up in flames ... other bankers, including those at Deutsche Bank and Goldman Sachs, didn't see anything wrong with Paulson's request and agreed to work with his team.

So to be clear here, that Paulson had a hand in helping Goldman create CDO isn't news, nor was it a crime. The only charge (and it's a big one) is that Goldman didn't disclose this fact to the CDO buyers. What's it all mean for the bank?

What this means for Goldman
In the late 1970s, John Whitehead, a former Goldman senior partner and co-chairman, wrote down a list of 14 "business principles" the bank should strive to follow. To this day, the list is paraded on Goldman's website and in its annual reports as a practical bible.

Nos. 1 and 2 on the list are:

  1. Our clients' interests always come first. Our experience shows that if we serve our clients well, our own success will follow.
  2. Our assets are people, capital, and reputation. If any of these are ever lost, the last is the most difficult to regain.

Assuming the charges against Goldman are legit, rule No. 1 has been thoroughly spat on, and the latter part of rule No. 2 is about to become the bank's worst nightmare.

The biggest threat Goldman faces are not fines. It's that clients will come to terms with what's long been suspected: That a good number of Goldman bankers are well-dressed Ivy League carnies. Not wanting its face ripped off again, business could turn elsewhere.

Think that's being dramatic? In the mid-1990s, a tape recording caught employees from Bankers Trust bragging that the goal was "to lure people into the calm and then just totally [$%@#] 'em." The bank never fully recovered from its reputational blow and was eventually taken over by Deutsche Bank. If you were a pension manager, or the head of finance for a municipality, and a Goldman salesman came to your door tomorrow offering to sell something fancy and lucrative, would you take him seriously after learning of these fraud charges? Think about it.

And although Goldman is the only bank implicated, suspicion of investment bankers is pretty universal these days. After learning of Goldman's mischief, client protest may very well wander over to the other big shops -- Citigroup (NYSE: C  ) , Bank of America (NYSE: BAC  ) , JPMorgan Chase (NYSE: JPM  ) , and Morgan Stanley (NYSE: MS  ) .

Maybe ... maybe not
There are a few counterarguments here. One is that only one Goldman banker was named in the fraud charges, and the entire franchise shouldn't be lumped in with his misbehavior. This sounds fair, but I don't think this holds much water. When business is based solely on character, you're only as strong as your most morally bankrupt idiot.

Enron's auditor, Arthur Anderson, wasn't engaged in companywide fraud, but its reputation was pretty well wrecked after Enron collapsed. That's why when Warren Buffett stepped in as Salomon Brothers CEO in the early 1990s amid a scandal, he told Congress his attitude was, "Lose money for the firm, and I will be understanding. Lose a shred of reputation for the firm, and I will be ruthless."  

Another why-worry argument is that this has all happened before. After the dot-com bust, a mess of Wall Street banks were accused of hyping Internet stocks to clients while privately acknowledging otherwise. Some thought Wall Street was ruined. Yet just a year or two later, it was successfully peddling mortgages that could make Pets.com look conservative. Investors have short memories, especially when they get a new bubble to play with.

I certainly don't think this will be fatal for Goldman. But I'm hoping -- really, truly hoping -- this wake-up call will defang some of the power and influence banks wield. Maybe that's being naive. Fingers crossed.

Fool contributor Morgan Housel doesn't own shares in any of the companies mentioned in this article, and realizes his chances of ever getting a job with Goldman Sachs have pretty much been shattered after writing this article. A member of The Motley Fool's board of directors is the chief operating officer of Paulson & Co. The Fool has a disclosure policy.


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  • Report this Comment On April 19, 2010, at 1:03 PM, MrCainThaler wrote:

    Yes, Goldman got paid $15 million to allow Paulson to choose the exposure. However, as a friend of mine said earlier, no one seems to be pointing out that Goldman lost something like $60 mm on bad CDO bets, which seems to infer that Goldman Sachs itself was betting that Paulson would ultimately lose.

    The Goldman conspiracies are getting out of hand. People need to get back to center and stop beserking against this entity.

  • Report this Comment On April 19, 2010, at 1:33 PM, XMFRael wrote:

    I don't doubt for a moment that Goldman was up to some bad stuff, but I'm not sure this is a face-ripping moment. If I understand correctly, Goldman was caught on the other side of some CDS trades -- which implies that either 1) these guys are dumber than even I think or 2) they didn't believe the subprime market would collpase and the "insurance" come do.

    After all, who the heck was John Pauson at the time? Who was to say that he was right when everybody else was wrong? Of course, if -- or when -- it comes out that Goldman suspected suprime would collapse, this argument goes right out the window. But even then i say Goldman ripped its own face off.

  • Report this Comment On April 19, 2010, at 2:07 PM, TMFHousel wrote:

    MrCainThaler/TMFRael,

    GS made $4 billion betting the housing market could collapse. From a Dec. 2007 WSJ article:

    "The group's big bet that securities backed by risky home loans would fall in value generated nearly $4 billion of profits during the year ended Nov. 30, according to people familiar with the firm's finances. Those gains erased $1.5 billion to $2 billion of mortgage-related losses elsewhere in the firm."

    http://online.wsj.com/article/SB119759714037228585.html

    When GS talks about losing a few million bucks on individual long-housing trades, it's leaving out the gigantic windfall it made on CDS bets.

    As far as GS knowing subprime would collapse, the fraud charge quotes the banker putting these products together saying in an email, "More and more leverage in the system. The whole building is about to collapse anytime now."

  • Report this Comment On April 19, 2010, at 2:56 PM, bigcat1969 wrote:

    Good end to the piece. This is all sound and fury. In a few years none of this will matter and it will be business as usual. GS is too big to be allowed to fail and all that can be done is a grandstanding slap on the wrist. We all know that GS made a huge contribution to the mortgage collapse and we love cheering against them, which is what the President was banking on.

    Make no mistake, this is Obama's slap back after GS (and others) ignored his threats about getting in the way of his new banking rules and timed to create a rebound of belief in his party as the midterm elections edge closer. None of the other cards worked so he pulled this one. It was timed perfectly to come on a Friday early in the earnings season, so the impact on the markets would be low. Even now they are rebounding and will continue to do so on good tech and banking news. A big market correction was the only downside possibility to this power play and a media frenzy was the upside. Well played Mr. President, you got the frenzy and the positive jolt for your rep without the market slam.

    Think for a second, the US government bailed out 100 cents on the dollar, the very company they are now "going after" and a much smaller company failing led the the market crash. Do you think for a moment that they have any interest in seeing any longer term harm come to one of the few money making US businesses? What do we export except US culture and banking? We can't afford to lose one of the few enterprises that isn't just one American selling something to another American. That is why GS, Morgan, Citi, BoA, GM, Walmart and a few others are de facto untouchable even if they take a few de jure hits.

  • Report this Comment On April 19, 2010, at 3:07 PM, jaketen2001 wrote:

    All of the pseudo GS publicity phantoms out there in the blogosohere cant make this sound good. Sorry poster #1, GS was net short on the Abacus deal in question. The 90 mil they lost is just a beard.

  • Report this Comment On April 19, 2010, at 3:11 PM, stan8331 wrote:

    Politics aside, this seems like a simple case to me. Either Goldman truthfully disclosed who was involved with the selection of the securities, or they didn't. If they didn't, they should bear some sever consequences.

  • Report this Comment On April 19, 2010, at 4:49 PM, Natador54 wrote:

    Hang 'em.

  • Report this Comment On April 19, 2010, at 4:52 PM, TMFJoeInvestor wrote:

    In any case, this is an epic headline.

  • Report this Comment On April 19, 2010, at 5:04 PM, WyattJunker wrote:

    Meanwhile Frank and Dodd in the Senate get a free hypocrisy pass card.

    If Goldman is gonna get douched, then Fannie, Freddie and Ginnie along with the 537 people who "run" this country should all be in jail yesterday. But you won't see that will you?

    No.

    Which is why I can dogpile onto Goldman. This is thespian vaudeville at its worst, and now Chi-Town politics baby.

    The conmen in congress are putting on a 3 ring circus at the same time they walk their elephant(bank bill) into center stage. Its called triangulation and its brilliant. It will work on stupid voters and stupid media parrots. Triangulation, from Rommie Boy, goes like this. Get free media publicity for your bank takeover bill by using GS as the whipping boy and now if a Repub opposes your bill, you can cry GOLDMAN SACHS!!!

    Get it?

    Anyway, they timed it last quarter too on bank's earnings season. Volcker and his ban on prop desk trading(which btw had nothing to do with the melt up or melt down). So we'll get Dodd/Frank get out of jail cards in exchange for putting Blankenfein and Cohen inside Supermax. Isn't that how politics is supposed to work?

  • Report this Comment On April 19, 2010, at 5:12 PM, RLAprof wrote:

    Protected by corporate law, the individuals are immune. Goldman makes a billion, is found guilty, pays a $10 million fine. The fine is paid by the stockholders, the thugs lose their jobs and they immediately get jobs with the Fed. Maybe a few have to retire, but what the hell? They just paid themselves another round of bonuses to cushion the fall.

    What a country.

  • Report this Comment On April 19, 2010, at 5:17 PM, Gonzhouse wrote:

    HavIng worked on Wall Street for 5 years early in my career, the most vivid explanation for what goes on can be summarized by an old Wall Street expression: "Today, the broker made money, the firm made money, and 2 out of 3 ain't bad".

  • Report this Comment On April 19, 2010, at 5:19 PM, chukarlady wrote:

    Lots of people will not forget. I have gotten quite tired of the crap that investment banks have pulled. I'm still young and I've got decades left to try to stick it to these people particularly the director types that drag home hundreds of millions and then want to turn around and claim that they have no supervisory responsibilities. I don't see how the US or the world can survive if we base our economies on defrauding people and charging them fees to do so. Go SEC, get some more of these a-holes!

  • Report this Comment On April 19, 2010, at 5:24 PM, maccdw wrote:

    Fellow posters, did my reading glasses deceive me? GS lied to clients, telling them that ACA packaged the CDOs, instead of telling them that Paulosn not only packaged the CDOs, bit shorted them.

    If we are going to condone corporate bald-faced lying, then we deserve what we get, which will probably be anothe chance to rescue GS from itself.

    What about the novel approach of not tolerating corporate lying (spelled FRAUD in BA 101)?

  • Report this Comment On April 19, 2010, at 5:31 PM, Tobiqueboy wrote:

    What responsibility to rating agencies who gave a good rating to this junk have?

  • Report this Comment On April 19, 2010, at 5:44 PM, dbman5 wrote:

    I think bigcat1969 was wrong in saying, "In a few years none of this will matter and it will be business as usual." He should have said, "In a few years nobody will care about this anymore..."

    These types of actions will still matter but nobody will care. That's why some rules need to be changed now - while people do care.

  • Report this Comment On April 19, 2010, at 5:46 PM, mtracy9 wrote:

    This all traces back to the Ronnie RayGun

    era of deregulation, continued under

    Libertarian (and former media darling) Alan Greenspan

    to the point that a cabal of schemers in the financial

    industry gamed the system, ultimately collapsing the

    economy.

  • Report this Comment On April 19, 2010, at 5:57 PM, plange01 wrote:

    goldmans head rat blankfein looking at 20 years minimium...

  • Report this Comment On April 19, 2010, at 6:02 PM, TMFBent wrote:

    Strange, but a lot of the reaction I hear to this (from some surprising places) is along the lines of "Who cares if they lied? The counter-parties should have known better."

    Keep an attitude like that, and you deserve the "markets" you get.

    Sj

  • Report this Comment On April 19, 2010, at 6:08 PM, Gerlitz wrote:

    Three cheers for Warren Buffett, worlds greatest investor. Fannie Mae, Moody's and Goldman. What's that famous quote," find great thieves and invest in them"?

  • Report this Comment On April 19, 2010, at 6:17 PM, driller101 wrote:

    I think it was clever of Paulson and the others mentioned in Lewis's The Big Short to have made this bet. I just wish the govt hadn't bailed out the AIG's and others so they could pay them off at 100 cents on the dollar with OUR money.

    Surely Pauson would have been satisfied with 50 cents.

  • Report this Comment On April 19, 2010, at 6:24 PM, jonpete69 wrote:

    Strange that these allegations come out at the time that the administration is pushing for additional regulation of the financial sector. A bit of "Wag the Dog"?

    Did I note that these are still allegations.

  • Report this Comment On April 19, 2010, at 6:29 PM, zaph wrote:

    Anyone know what Warren Buffet's response to this has been. He is now a huge GS owner.

  • Report this Comment On April 19, 2010, at 7:17 PM, Tinka82 wrote:

    Wyatt Junker and RLAProf are correct. Unfortunately, I must share in the cynicism. Obama has surrounded himself with Fed Reserve and GS people. They are basically his family/cabinet. This is a show, and that's all it is. Paulson, Soros, and a few other cronies also got a sweet deal bilking the FDIC on the old Indy Mac Bank deal, now known as OneWest. I think they 'helped' them down, and then pulled a loss agreement deal that results in an obscene profit and quite possibly a direct line into the Treasury due to the underfunded status of the FDIC. Worse yet, the way I've read this, it also gives them impetus to deny workouts with borrowers. Giving them more reason to foreclose.

    Sweet, eh?

  • Report this Comment On April 19, 2010, at 7:24 PM, DBrown7 wrote:

    It seems like this will be a difficult case to win. On the other hand, the SEC can drag this out and make this a PR nightmare for Goldman, even if they can't win the case. The media will be only too happy to lay it on GS.

    So it seems the SEC holds some cards even if they don't have enough evidence to win the case. I'm pretty sure Goldman wants this to go away as soon as possible. Maybe a deal can be struck here. The SEC will settle without any admission of guilt by Goldman, if Goldman returns the $13 billion they took from the taxpayers in the AIG payoff. The taxpayers haven't seen that $13 billion, have they?

  • Report this Comment On April 19, 2010, at 7:43 PM, mtracy9 wrote:

    This all traces back to the Ronnie RayGun

    era of deregulation, continued under Libertarian

    (and former media darling) Alan Greenspan.

    We had our first taste of it in the 1980's after Ronnie

    deregulated the savings and loan industry, leading to

    a crisis in which Silverado scammer Neil Bush

    (brother to our former President) cost taxpayers 1.3

    billion.

    President) walked away with

  • Report this Comment On April 19, 2010, at 7:52 PM, dgmennie wrote:

    "Collateralized debt obligations (CDOs) are packages of mortgage-backed securities (MBS). The CDOs are diced up into different risk slices and sold to investors."

    Yes, so how is this any different from three-card monte as played in the street every day?

    "John Paulson was allowed to help pick the MBS that were included in the CDO. Paulson ostensibly picked the most wretched MBS he could find because his hedge fund was short (betting against) these same securities through credit default swaps. All of this was unbeknownst to the clients purchasing the CDO. In fact, they were told otherwise."

    OK, who really wants to place bets and pick cards under these conditions? Wall Street sharks (and street hustlers) survive by staying a few paces ahead of the regulators (police/SEC) and the angry crowd carrying torches and pitchforks.

    While CDOs may now be unmasked, the math geniuses behind these deals are already working on a new batch of "products" for you sophisticated investors to load up on.

    Everything old is new again. Step right up!

  • Report this Comment On April 19, 2010, at 8:14 PM, CentexDem wrote:

    CNN reported today that the "bailout" the GOP says is in the Wall Street reform bill is not a taxpayer bailout as the GOP would like voters to believe but a fund funded by banks to pay for reorganization of a bank when it fails to avoid a taxpayer bailout.

  • Report this Comment On April 19, 2010, at 8:15 PM, goalie37 wrote:

    Every day for the last several months, my father has said to me, "We should sell everything and put it all into Goldman." The last two days he hasn't said it.

  • Report this Comment On April 19, 2010, at 8:38 PM, arttwodee2 wrote:

    while not condoning GS or any of the other major players, I say there is plenty of blame to go around.

    Let's start off with some of the real estate agents who knew that the people that they were selling real estate to couldn't afford the properties they were buying. Then let's go to the local motgage broker who, if he had any ethics or scruples at all, would have told the buyers that they couldn't afford the houses that they were buying. Instead he would put them into a morgage with a teaser rate which might have been initially affordable, but would jump dramaticly in approx. two years. And, of course, he would make sure that the application would be filled out correctly, even if there was not one piece of documentation to back up the assertations.(btw, WAMU made the process even simpler; the just cut and pasted the name onto the financials that they knew would be approved. I mean, what the hey?)

    Now let's move to the property appraisers who would appraise a property not by the "comps", but would hand in an appraisal sometimes 15-50% higher than the last comparable piece of property. They certainly didn't want to squelch the deal or they would be out of business.

    Of course wqe now move to the mortgage lenders whose practices I won't bother to repeat. Suffice to say they were much more interested in getting the deal done(profits) because unlike the old days, they wouldn't keep the paper themselves. They could just sell it to the big banks who NOW would securitize these securities.(btw, how is it that thse companies were allowed to leverage themselves35x?)

    Lastly, where were the New York State Insurance regulators, and why did they allow AIG to coduct this type of business?

    I would suggest several remedies. First, all mortgage brokers should be federally licensed and supervised by some federal agency ie like FINRA supervises financial advisors. While this won't stop all fraud, it's certainly better than the state regulators who are overmatched in manpower as well as knowledge.

    Secondly, every mortgage lender must retain a certain percentage of mortgages for a certain period of time, say three years. I bet that the underwritting process would mean a whole lot more meaningful for them then.

    Lastly, I think the real estate agents should be subject to criminal penalties if out and out fraud is committed. Certainly not every mortgage won't fail, but there is a difference between a failure because circumstances change and out and out lying.

    The whole system needs to be fixed, not just the headline makers.

  • Report this Comment On April 19, 2010, at 8:44 PM, joewatts wrote:

    It's all Obama's fault!

    For the past nine months I've heard nothing on Motley Fool but blame on Obama for all of Wall Street's woes.

    "Obama is destroying the country!" That's the cry of the Wall Street gangsters. Repeat, Repeat, Repeat.

    Tell a lie, repeat, repeat, repeat. The Fools will believe.

    Capitalism is sick, mighty sick, and it needs a doctor fast.

  • Report this Comment On April 19, 2010, at 9:20 PM, MrArbitrage wrote:

    This is a very delicate situation.

    2 things stand out:

    1. This mortgage aspect is -nothing- because they did the same damned thing with -OIL- the only difference being that the oil pump & dump affected EVERYONE, not just greeedy people speculating on mortgages securities. It caused global rioting, starvation and death - to enrich Goldman Sachs.

    2. This is delicate because so many of our elected scoundrels were complicit in all of this Goldman treachery, investigating too deeply should incriminate many of them. Therefore: I expect -just enough- jawboning and enough demonizing from The False Prophet to sucker us into believeing that MORE government collusion and control over the free market will "cure" the problem. If they don't have the SEC under tight reins, there may be some nervous traitors right now on Capital Hill (unlikely).

    As I wrote at www.TableOfWisdom.com

    "July 28, 2009

    The intellectual indolence of those who attack speculators

    by MrArbitrage

    table of wisdom com

    The big story this week: regulators considering setting limits on Wall Street speculators

    Forget additional position limits. Ceding that kind of authority to elected imbeciles is probably just as bad if not worse than the actual disease. It is a slippery slope, like allowing these buffoons to determine salaries. I think I would prefer to see the leverage abated. I have heard compelling arguments on the “pro” side of changing margin requirements but not too many “cons”. I don’t think that controlling copious quantities of commodities which are essential to human sustenance -with 10 cents on the dollar- is some kind of inherent right derived from natural law.

    As I wrote back on June 20th 2008 in my piece called “Speculation: Good for America but Manipulative Analysis = Crime against Humanity”(at Table of wisdom com) – the problem is fallaciously being attributed to “speculators” by intellectually lazy people like Bill O’Reilly. The demonization of “speculators” in the generic sense is quite dangerous to our free markets. If the mere presence of speculators CAUSED the vexing bubble in oil that we recently experienced, how do you explain the MAJORITY of time throughout the 20th century when there was relative equilibrium in prices? We had speculators THEN. This begs the question -WHY- was there stability during most of those years despite the presence of speculators?

    The key to this imbalance (according to me) is the presence of two extreme variables that were NOT the norm for most of the past century and a quarter:

    1. It is not normal to have a powerful company like Goldman Sachs permeating every level of state and federal government. Historically we have seen powerful industries with deep pocketed lobbyists (which I’m personally ok with). However, this parasitic company not only has access to legislators and presidential appointees – they have actually BECOME the most powerful people in our government. One might say that we the people are the “host”. The Goldman conspiracy is an interesting topic but what does that have to do with anything? In my aforementioned piece from June 2008, I elucidated on how I believe that Goldman may bear a substantial amount of responsibility for the pain the world suffered last year and which may have been the proverbial straw that broke the camel's back.

    What the simple minded media overlooks in their critique is that WHILE Goldman was apparently making a fortune trading oil last year, their ANALYSTS were ubiquitous throughout every form of media talking up the price of oil while their trading division reaped a fortune at the expense of their fellow countrymen. As people in some parts of the world suffered starvation and Americans went broke from gas prices and a bursting real estate bubble – Goldman analysts threw gasoline on the fire as they daily inveighed on the direction of oil. These “analysts” never proffered any due diligence with quantifiable numbers to support their suspiciously timed and arbitrary price targets for “$200 per barrel within a year”. The sophistication of their due diligence, at least that which proliferated the media was as prosaic as “China is growing rapidly”; therefore we were to believe that there could be no ceiling to oil prices. No price was too high! If they were able to drive oil to $200 per barrel, I have little doubt these cheerleaders would have called for $300 and so on.

    When the fundamentals clearly contradicted their propaganda, they began to advance the most absurd “catalysts” to keep it going. I had envisioned them unwinding their positions while publicly trying to convince us that stories like the Somali Pirates would keep oil prices going ever higher. I cynically imagined them praying for a hurricane to hammer the gulf of Mexico because once the public built an immunity to the China story, that’s all we heard about were Pirates and their hurricane fear mongering about what COULD happen IF…

    How that ties in with the “Goldman conspiracy” is simple. I believe that Goldman is so firmly entrenched within our governments, federal and state, that arguable crimes against humanity have been tolerated in a way that never would have been if it were not for their control and influence within the most powerful governmental circles. That is not to say that they could have convinced their colleagues in government to act in collusion. It could all transpire without impunity by simply having the power to manipulate the markets with “analysis” that was a direct- conflict of interest – while having their colleagues in government turn a blind eye. I fully expect nothing to happen to Goldman aside from a possible tongue lashing as certain gutless politicians posture before the cameras in hope of a nice sound bite making its way to their constituents while knowing they will not do anything of substance in the end.

    2. The other extreme variable that has played a part in fomenting the oil bubble is the Federal Reserve keeping interest rates at unnatural lows. Every time they have done it, they have created new bubbles. That combined with manipulative analysis created a perfect storm. As we ran through bubbles in the other major asset classes, this potential energy created by the Fed was easily converted to kinetic energy with the guiding hands of the unscrupulous. As an aside, the bubble they are about to create next will be in junk bonds.

    Again, there is nothing wrong with speculation – absent manipulation. I feel embarrassed for people like O'Reilly and Obama when I hear them ignorantly (or deviously in Obama's case) blaming this on speculators. Yes, speculators carried it out but they would not have been induced into it if it were not for Goldman, J.P. Morgan and the Federal Reserve who essentially spiked their drink with an overdose of ecstasy. Absent those two variables, speculation would never have gotten out of control the way it did. The hearings held by the Commodity Futures Trading Commission this week need to stop attacking capitalism and focus on the conflict of interest and manipulation by these firms. It was no different than the way the wire houses like Merril had their analysts knowingly pumping garbage stocks while raking in investment banking fees. Henry Blodgett went to jail for that and the only people hurt were those who chose to speculate on their bad information. In the case of the commodities, the people who were hurt, even killed in riots globally were NOT those who chose to dabble in script. These victims were just trying to eat or fill their gas tanks. THAT is what makes THIS a “crime against humanity. It is nothing short of treachery and people need to be investigated at these firms to see what kind of communication may have gone on between analysts, traders and fund managers at these firms.

    There is nothing wrong with self-interest when the people have the morality essential to self government, liberty and capitalism, without which we can have none (according to our founders). The golden rule is the only rule that will preserve our nation and our economy."

    http://boards.fool.com/Message.asp?mid=27845160

  • Report this Comment On April 19, 2010, at 9:22 PM, wjcoffman wrote:

    Investors have short memories, especially when they get a new bubble to play with.

    Perfect!

  • Report this Comment On April 19, 2010, at 10:03 PM, CarrieMike wrote:

    You don't think this administration will let them get to Paulson, do you?!

  • Report this Comment On April 20, 2010, at 6:11 AM, robcerra wrote:

    Please excuse me if I don't get excited about the federal charges. Goldman Sach is going to get a slap on the wrist.

    Let them get punished in the market place. For an industry that seems to only understand the bottom line the punishment would fit the crime.

  • Report this Comment On April 20, 2010, at 6:39 AM, RLAprof wrote:

    CarrieMike said, "You don't think this administration will let them get to Paulson, do you?!"

    I honestly don't think this administration is any different from any administration we have had since Carter was ousted from the White House. Since that time we have been ruled and controlled more and more openly by big money and corporations.

    Our time and effort would be much better spent fixing our form of government than pointing fingers at one party or another. Another looming danger is to tip in the direction of a facist third party intent upon finding and exploiting a scapegoat group on which we can blame our woes.

  • Report this Comment On April 20, 2010, at 6:59 AM, Sleddawg63 wrote:

    Looks like I picked a good week to read LIAR'S POKER.

  • Report this Comment On April 20, 2010, at 7:37 AM, SPARTANBURG wrote:

    Oh please! Goldman Sach's has been "ripping face", and a whole bunch of other stuff in the U.S. and beyond. This system where a bank gets to make its own pie and eat it too is obviously against all common sense.

    Greece is a part of Goldman Sach's symphony of disaster albeit not with CDOs but with other instruments of mass destruction. Get a lid on these immoral people through some sort of legislation.

    Obviously G.S. isn't the only bank but it is definitely the bank that paid the least from this disaster that is in all likelyhood in the beginning for Main street. And Main street is not only in the U.S. but in Europe, Asia and the whole wide world.

  • Report this Comment On April 20, 2010, at 9:21 AM, ewent0 wrote:

    It was always suspected that GS was at the core of the financial meltdown. It was divide and conquer for GS from the get go.

    Absolute power absolutely corrupts. GS thought it was above human accountability.

    The stupidity began when government allowed banking institutions to police themselves.

    Prediction: Next to fall? Wells Fargo. Their skanko tactics have been flying under the radar for 2 decades.

    The landfill is piling high enough to be easily visible. No sympathy for these gambling fools. It's what happens whenever there is no penalty and the reward of bailouts.

  • Report this Comment On April 20, 2010, at 9:54 AM, kayakmastr wrote:

    The WSJ seems to disagree! See the April 19 editorial!

  • Report this Comment On April 20, 2010, at 12:19 PM, iverbro wrote:

    There is an book written about Wall Street around 1940 by a partner in a now defunct firm , when a million share day was a good day. Its title; Where are the Custtomer's Yachts? This question came from a tourist who had just been shown the broker's yachts moored at the foot of Wall Street. It is a tongue in cheek look at the pretentions of the brokerage business.

    That said, one of the absolute basics of the business is the separation of the buyer and the seller. Whether dealing as a broker or a dealer, introduction of the two parties was never part of the transaction. The whole idea of clearing is part of maintaining the separation of the parties and the integrity on the trade.

    The transaction in question was not between two innocents, both were sophisticated traders with opposing views of the market. It is easy to remark with perfect hindsight that one of the parties was a pigeon, but I am sure when the transaction was made that both parties expected to make money.

    I would like to see some clearing mechanism evolve from this mess, but the Agency's get tough attitude afteer the Madoff situation looks like a face saver to me and worse strikes at the heart of a system, even with excesses has worked very efficiently for a very long time. Kbrevi

  • Report this Comment On April 20, 2010, at 2:59 PM, hudsondusters wrote:

    ACA had final say on what went into the pool of reference securities. They know someone had to be short. If it wasn't Paulson it would have been someone else, since if no one is short thed deal can't get done.

    ACA wanted exposure to the incremental yield. Paulson wanted to be short. ACA knew and approved every security.

    I don't think it is good for GS's reputation if paulson knew ACA was long and ACA didn't know he was short, but ACA should have figured out what Paulson was up to. He wasn't well-known but he had been looking for ways to short sub-prime. And he was taking a risk his analysis was wrong or that the system could be kited a little longer.

    In any event, even if there was an absence of disclosure, it is hard to see what actual damages there are. What would ACA have done, said, gee, his analysis must be stronger than ours? But the should have been thinking "why are these folks short?" with respect to anyone on the other side, and the fact is they know SOMEONE is on the other side betting a lot of money against them. They assumed the shorts were patsies, but they were the patsies.

    A broker is always in the business of matching the desires of someone who wants to buy something with someone who wants to short the exact same thing. The long chooses what he wants to go long, the seller picks what he wants to sell, and the broker tries to find folks to facilitate those opposing desires.

    If we all took caveat emptor seriously, due diligence seriously, money seriously (what did the german bank care, it is other people's money), and realize that 6% yield in a 4% environment carries risk, things would be better off than just sitting around blaming GS, which is far less responsible for the meltdown than BSC, LEH, C, ML, BAC etc., as well as home buyers, mortgage brokers, GSEs, politicians, lazy and stupid money managers, boards, etc.

    If I make a stupid bet on a stock, I blame no one but myself. If there is active fraud is one thing. I don't see how this is fraud. Slimey maybe. But when I buya stock, I know damn well someone has their own reason for selling, I don't know who they are, and they may be right and I may be wrong. And current reports may even say so and so is long,a nd I may think great, but the holdings update may be a couple of weeks or so old and they are the ones selling to me. Too damn bad.

    Truste me, there was plenty of demand for this crap, some "smart" folks in GS thought it was crap, and some thought it was good, even inside GS. There was so much demand for a couple of extra points that there weren't enough poor credit risk buyers to fulfill the demand and they had to create synthetic crap.

    GS didn't cover themselves in glory. No one did. Look in the mirror. Even if you played by the rules, why did you think your credit was so cheap and your house went up in value? No man is an island.

    This isn't to say just leave it alone. But the grandstanding is sickening. And if the case gets shot to pieces, like the Cioffi case, well, how good is that for "reform" efforts, such as they are?

  • Report this Comment On April 20, 2010, at 3:01 PM, hudsondusters wrote:

    Oh, and ratings agencies. Forgot them in my list of blameworthy characters.

  • Report this Comment On April 20, 2010, at 3:02 PM, hudsondusters wrote:

    Iverbro, you make the point better than I do.

  • Report this Comment On April 20, 2010, at 5:36 PM, sapereaude1 wrote:

    Still think that flogging a few hundred of these vermin stark naked on their hands and knees up and down the main street of every county seat in the country would have a miraculous effect on the probity of the survivors. I'll bet they'd get religion in a hurry.

  • Report this Comment On April 21, 2010, at 10:13 AM, jfenlon wrote:

    I retired from the Army as a Lt. Col. in 1981 after 21 years service. We moved 13 times in those 21 years. I had practically no money saved. For the reason, research the pay tables for military personnel that year. We had enlisted men with families who would have been eligible for food stamps. The need to buy a house, our first, led me to work with a female real estate agent to whom I provided my financial data. After musch searching we found a modest place that we could afford. To get the house I had to assume a V.A. mortgage at 8 1/4 %. Fortunately I was able to get a personal loan from a bank to make the down payment, which was substantial. Near the day we were to make the final decision we passed a house on the same street which was slightly larger, looked better, and had a better yard. I asked about that one and the agent said plainly "not possible". She knew we couldn't afford it and told me so. Of course, there was a time in this country, so I'm told, that the only thing needed to seal a business deal was a handshake.

  • Report this Comment On April 21, 2010, at 4:17 PM, mikecart1 wrote:

    i hope GS goes bankrupt; they are a cancer to the economy, a fraud among investors, a lie among the US, an embarrassment to the world;

    the day GS gets eliminated is the day the world will be one again!

  • Report this Comment On April 23, 2010, at 12:45 PM, mcrose wrote:

    These back trades could mean a lot of things about Goldman Sachs - and many point to the fact that Goldman lost on a bunch of the CDO's.

    But I don't think we should be looking at the results for Goldman to devine intent. Look at the results for the indiviual traders and managers - If you are John Paulson and you can make $30 million, while Goldman loses $60 million, or you can make $10,000 while Goldman breaks even - what do you do?

  • Report this Comment On April 23, 2010, at 1:03 PM, mombazo wrote:

    Speaking of reputation...

    "A member of The Motley Fool's board of directors is the chief operating officer of Paulson & Co."

    Yikes!

  • Report this Comment On April 23, 2010, at 1:19 PM, fool425 wrote:

    Let's face it, Wall Street has ALWAYS been a good old boys club. There was insider trading before the Great Depression and ponzi schemes as well. Many clients choose GS today because they believe the company benefits from all of its corporate and political relationships and they wish to be part of the insiders. Is that surprising? Being the-smartest-guys-in-the-room will be a self fulfilling prophecy until it isn't, like it was for LTCM. That's why regulation and oversight is necessary to keep the animal spirits in their proper cage. The most important issue to come out of the recent credit crisis is that the preponderance of what Wall Street does to generate profits has little to do with being an arbiter for corporate finance which was their original charter. That is truly a shame.

  • Report this Comment On April 23, 2010, at 2:01 PM, STORMSTOCKER wrote:

    So, didn't we "dummys" call the connection between our Government TARP bailouts, and "Gold Man Slacks"???. No one has to be a rocket scientist to know that these LDO's were "corrupted" by "sticks of dynamite" inside their packaging....How does a Goldman salesman" guy "Short" what he is selling? without the knowlege of the home office?? This all stiinks of corruption, "fishy" and inserted LDO "gun powder"- bad, bad, bad, bad, loans, mixed in "with the good stuff" !

    Yes, there are "disclaimers" in the "sales brochure", but "buyer beware", was Rated "AAA"ahhh yaaright!!

  • Report this Comment On April 23, 2010, at 2:04 PM, STORMSTOCKER wrote:

    Has anyone read the childrens book,"The Emperors New Clothes"??......great litature!- in these "naked-bare all", economic times !!

  • Report this Comment On April 23, 2010, at 2:10 PM, STORMSTOCKER wrote:

    Soooooooo, now ALL these "blown up LDO's" will be repaid, to the banks "losses", by the good and gracious, will of our president, congress, and us, the US TAXPAYERS !!

    VOTE THE BUMS OUT !!

  • Report this Comment On April 23, 2010, at 4:57 PM, harrison5046 wrote:

    If there was a huge fraud against ACA, why didn't ACA's bankruptcy trustee file a civil suit against Goldman?

  • Report this Comment On April 23, 2010, at 9:56 PM, mpersico wrote:

    arttwodee2 asksa:

    Lastly, where were the New York State Insurance regulators, and why did they allow AIG to coduct this type of business?

    Answer: http://en.wikipedia.org/wiki/Commodity_Futures_Modernization...

    In particular: "The CFMA continued an existing 1992 preemption of state laws that prevented any such law from treating eligible OTC derivatives transactions as gambling or otherwise illegal. It also extended that preemption to security-based derivatives that had previously been excluded from the CEA and its preemption of state law."

    Congrefs strikes again.

  • Report this Comment On April 24, 2010, at 1:40 AM, steadygrowth76 wrote:

    Wow, people are spending a lot of ink on this. I've worked in the swaps and derivatives markets for many years. I would say this:

    1. Investors (especially public pension funds and municipalities) look to rating agencies as independent and unbiased. In the last ten years, as they have pushed for profits, they simply haven't been. I've been on plenty of conference calls when the sponsor investment banks pushed the rating agencies on certain aspects of the CLO or CDO to get a better rating. I'm not saying this is good or bad, but something needs to change. Either people need to understand who is paying for the ratings (the sponsor investment banks) and NOT rely on those ratings, or the ratings process needs to be insulated from the pressure that the bankers put on the ratings agencies (i.e., their compensation needs to be guaranteed or needs to come from another source or otherwise isolated from the economics of the deals that they rate, or somehow the bankers need to not be able threaten to move to a more "friendly" rating agency, which they threaten on virtually every deal I have ever worked on; you basically have alpha males beating up on beta males, frankly).

    2. I have been opposite virtually every U.S. and European bank over the last fifteen years, and I would say to you, if Goldman is selling, selling anything, then you really need to be confident in your investment thesis, because if you are not supremely confident in your investment thesis, and Goldman is selling, then you should not be buying.

  • Report this Comment On April 24, 2010, at 9:07 AM, Airdriver100 wrote:

    As to GS losing $60 million on Paulson CDO's, I have read that the ONLY reason GS was long was that they could not sell the whole offering and had to buy what was left over.

    Thus, losing $ on the deal is no defense!

  • Report this Comment On April 24, 2010, at 10:57 AM, MORK000 wrote:

    Well GS does it again! And our government does it again! Why.How could this happen.Simple us people in the UNITED STATES ARE VERY VERY STUPID..

    Remember to vote your Congress man back in so this can continue.

  • Report this Comment On April 24, 2010, at 12:26 PM, Startrekkee wrote:

    Goldman's behavior in the Paulson-influenced selection of bonds for Abacus was wrong, and their failure to acknowledge the error demonstrates how ethically challenged the entire investment banking world has become. I don't expect that to change, nor can regulation really stay on top of it. Would someone please remind me of the societal benefits that arise from the creation, sale and trading of these CDO "avatars?" It appears that they are created solely to allow "investors" to make highly leveraged bets on certain individual securities and markets. What dragged the financial system to the brink was the excessive amount of leverage that these instruments introduced into the financial system. Our best defense against future Abacus investment scams is to legislate leverage to reasonable levels.

  • Report this Comment On April 26, 2010, at 9:12 AM, jvbueno wrote:

    People like to blame others and in this case Who are blaming Who?

    All these mammoth institutions are crap, and they did pretty badly, but what about the “people”, “individuals” that knowingly sign mortgages with wrong balloon information to get “easy” mortgages. All now fired back but ,

    You all know what are I am talking about

    When the state will go against these insincere individuals?

  • Report this Comment On April 26, 2010, at 12:14 PM, ducky106 wrote:

    Matt Taibbi wrote an interesting article in Rolling Stone calling Goldman Sachs a "giant vampire squid attached to the face of humanity."

    The Great American Bubble Machine

    www.rollingstone.com/politics/story/.../the_great_american_b...

  • Report this Comment On April 26, 2010, at 4:15 PM, Buckoux wrote:

    By what criteria did Paulson & Co. use to select the MBS' to be included into the shorted CDO's? More to the point, did Paulson and GS, "Redline"? That is, did they have access to and use data that indicated any specific discriminatory bias in separating the included losers from the excluded winners? If so, this begs the question that if Paulson could do it, why couldn't mortgage brokers do it? Or was it against the law at the mortgage broker level?

  • Report this Comment On April 27, 2010, at 9:33 AM, cecurtis wrote:

    Here's an article in VF on GS: http://www.vanityfair.com/business/features/2010/01/goldman-...

    I'm not against people making money but these guys seem like they have no morals. But that's not illegal.

    If we are worried about companies too big to fail (or can cause others to fail), what about BlackRock?

  • Report this Comment On May 02, 2010, at 9:20 AM, rflow wrote:

    two questions/observations: in the goldman ceo's testimony, he indicated (i think) that the biggest buyer of securities in abacus was, in fact, aca management. as i recall, he also indicated that there were only 3 buyers of the securities. i may be wrong on both counts, but that is what i think i heard. i have heard nothing from aca. if someone knows more specifics on the above, please comment. if the position of aca is correct, why would they not be upset - if fact, why would they not be saying something about goldman. also, who were the 3 buyers of the securities, and what did they do with them? candidly, i have disliked goldman for a very long time, and ex-treas secretary paulson's position on bailing goldman and letting lehman sink has not been explained to my satisfaction.

  • Report this Comment On June 02, 2010, at 9:54 PM, Polybio wrote:

    IMHO, it was bad enough putting a a package like this for Paulson or any client, but to try and cover it up and also the fact they did not disclose that SEC was going to charge them and they refused to negtiate and now they are willing to pay " hundreds of Millions" to plea a lesser charge than Fraud is to say the least passing the limits of audacity and arrogance, if they succedd in negotiating a lesser charge IT WILL PROVE THAT WITH ENOUGH MONEY YOU ARE ALLOWED TO CHEAT YOUR CLIENTS IN USA.

    Ir will hurt this great country more,better to better to close down Goldman Sachs they are not doing God's work and certainly defame " God's chosen people".

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