Posted on 08/24/2008 6:42:34 AM PDT by dennisw
Goldman Sachs was one of the top 10 sellers of C.M.O.’s for the last two and a half years. From the evidence I see, Goldman was doing this for years. It might have sold very roughly $100 billion of the stuff in that period, according to ABAlert. Goldman was doing it on a scale of billions even when Henry M. Paulson Jr., the current Treasury secretary, led the firm.
The point to bear in mind, as Mr. Sloan brilliantly makes clear, is that as Goldman was peddling C.M.O.’s, it was also shorting the junk on a titanic scale through index sales — showing, at least to me, how horrible a product it believed it was selling.
The Goldman Sachs spokesman said the company routinely shorts the securities it underwrites and said this is disclosed. He noted candidly that Goldman is much more short in this sector than usual.
From what I have observed over years, Goldman has a fascinating culture. It is sort of like what I imagine the culture of the K.G.B. to be. You always put the firm first. Now, obviously, Goldman Sachs does many fine deals and has many smart, capable people working for it. But it’s not the Vatican. It exists to make money for the partners and (much farther down the line) the stockholders. The people there are not statesmen. They are salesmen.
HERE is a query, as we used to say in law school: Should Henry M. Paulson Jr., who formerly ran a firm that engaged in this kind of conduct, be serving as Treasury secretary? Should there not be some inquiry into what the invisible government of Goldman (and the rest of Wall Street) did to create this disaster, which has caught up with some Wall Street firms but not the nimble Goldman?
(Excerpt) Read more at nytimes.com ...
I trade futures and I've never heard of this one. Shorting something that has a limited availability is stupid.
I once had a client who owned the whole tranch of a CMO and there was an article on the front page of the WSJ about that particular tranch as an example. My client went ballistic as if he were protecting his turf. He didn't like all the attention to that tranch.
You or I couldn’t go buy a CMO in the retail market either.
I do it every day. Yes, for Mom and Pop.
I can't believe it is because insitutional buyers will take down an entire tranch. If you control the entire issue of something and there is a short in it, in the street, you've got yourself an opportunity to squeeze somebody's b2lls off.
So Ben is mad that Goldman sold a derivative to another investment bank?
You or I couldn’t go buy a CMO in the retail market either.
Is that your final answer?
I didn't even think of that.
If you control the entire issue of something and there is a short in it, in the street, you've got yourself an opportunity to squeeze somebody's b2lls off.
I don't think that would be an issue in a case like this. Especially if Goldman created the security. They have all the details, they're collecting all the checks. All they have to do is pay the same interest and principal on their short as on the rest of the issue. They never have to cover. It's not like the price will double, it's not like they're short a stock that could be bought out much higher.
He who sells what isn't hisn' buys it back or goes to prison.
If Goldman is a market maker, not sure if that's the case for CDOs, yes. As long as they pay the coupons in full and on time.
There are no voting issues. No takeover risk.
Make that CMOs...
No, I don’t think Ben is mad that Goldman (specifically) sold an instrument, just that these instruments (in aggregate) have served to thwart the Fed’s power to set target interest rates.
Greenspan started the “conundrum” talk back in 2004 or so as to how they weren’t seeing the expected interest rate changes in response to Fed policy. The Fed continued to see disparity in interest rate behavior clear into this credit melt-down, where as the Fed would be taking down target rates, the market was not reflecting the target, indicating that the Fed was no longer the 800lb gorilla in the bond market.
Every one of these new products in the debt market, especially derivatives, further thwarts the will and policy of the Fed. After all these decades of being the guys who call the tune, it is only natural that the Fed governors and chairs start getting a little PO’ed that they not only can no longer jawbone the market as they once did, they can’t really make the market do what they want through official policy, either.
The Fed, and the US taxpayer, has to get used to the idea that the Fed has essentially lost control of the US banking system. Only the most draconian regulatory framework being imposed could re-establish control, and indeed, the Fed and the SecTreas have now been talking up the plan whereby the Fed becomes the uber-regulator of the markets and banking system, perhaps having powers far in excess of the SEC.
I would prefer that the Fed quit socializing the losses of stupid actions in the financial markets and allow the invisible hand(s) of Adam Smith to deliver the requisite smack-downs, but in this current environment, it appears that Adam Smith is now dead and buried, and we’re going to have regulation - lots of it.
Should there not be some inquiry into what the invisible government of Goldman (and the rest of Wall Street) did to create this disaster, which has caught up with some Wall Street firms but not the nimble Goldman?
Huh? Invisible government?
Sorry, didn’t answer your second question:
Yes, a retail investor can buy CMO’s. Sorry, had CDO’s on the brain. CMO’s are available in the retail market.
CDO’s are (in the vast majority) an institutional product.
Ben is mad that the market outsmarted government? I didn't get that from this article.
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