U.S. (SEC) Accuses Goldman Sachs of Fraud

The New York Times ^

[quesney]

Goldman Sachs, which emerged relatively unscathed from the financial crisis, was accused of securities fraud in a civil suit filed Friday by the Securities and Exchange Commission, which claims the bank created and sold a mortgage investment that was secretly devised to fail.

[Hoosier-Daddy]

Would a class-action lawsuit by Homeowners against the Congress be at all possible?

[TopQuark]

"There is the difference between the pin that popped it and the air that blew it up in the first place."

I agree. And this does not seem to contradict anything I said.

"And the housing bubble caused the financial crisis."

Not at all. The financial crisis was caused by the government letting Lehman fail. It was not the act itself but a complete reversal of the decades-old policy of "too-big-to-fail." As you probably know, lenders don't shy away from risk: when they face a greater risk, they increase interest and/or collateral. When they cannot estimate risk, however, they freeze. And that is what happened after the Lehman failure: the government signaled that new rules are in place, but nobody knew yet what those rules were. That freezing took the form of a crises. Subsequent ripples had their own causes, of course.

[Thane_Banquo]

To an extent I agree with your points. However, the CRA issue cannot alone explain the fact that the largest houses had made way more investment in dodgy mortgages than even the law would have requried. I mean, it doesn’t explain Fuld going limit long on Subprime over the summer of 2008.

But where I do fault the largest investment houses is that they claim to be these great, bold capitalists, and then they go crying to Congress in 2008 for taxpayer money when their bets went bad. They only want to be capitalists when it suits them.

They claim, of course, that they were forced to take TARP money, but that is not how I remember it: My counterparties at the large houses were all sending out messages on Bloomberg and email about how we have to support TARP and get it passed through Congress. How it will save the entire economy and instantly solve all our problems. One of them told me “This is about survival.” So I offered to buy a yard of 6 mo. EUR/USD ATM calls for 25 bps. For some reason he wasn’t desperate enough to take me up on my offer. ;-)

As for Goldman, I am quite suspicious of the fact that they were the only large house not forced to merge with another failing bank, and that for some reason Paulson bailed out Bear but didn’t bail out Goldman’s biggest competitor Lehman. That the Treasury structured a hybrid deal with them about a week or two after Buffet struck the same deal with them, but for some reason the Treasury charged half the interest rate that Buffet did. And that, at the same time, they also were giving hundreds of millions to Obama’s campaign.

If it walks like a duck...

[farlander]

Actually the complaint is for a cool $1B. If true (and it seems very plausible), that’s going to leave a mark.

[ding_dong_daddy_from_dumas]

But your calling the market manipulation GS and a handful of financial cartel players perform, "capitalism", is equally entertaining.

The good news: SEC accuses Goldman of fraud.

The bad news: Obama will use this to push his agenda (so that he can take control at will of honest businesses).

[fightinbluhen51]

And it will be settled for 10 to 20 percent. Book it.

[stephenjohnbanker]

Correct.

[penelopesire]

Very interesting stuff.

“While these transactions may sound similar to the widely decried Goldman synthetic CDO program, Abacus, by which the firm went short various real estate exposures, effectively dumping the risk on customers, the Magnetar program was not only much larger, but also produced far more devastating systemic consequences, thanks to the distinctive structure of its CDOs.”

[farlander]

Dunno about that... even that is 100-200M, still not pocket change. We shall see.

[sickoflibs]

I was warning you about this late last year, this banking regulation stuff is populist(even if it looks bad) given hatred of bailouts and banks that some republicans will join democrats on. Even now with democrats even more unpopular they see this as an easy win.

If dems get enough R defectors, republicans will lose the issue completely. Republicans could still turn this around politically , but it will take determination and skill that I dont see just yet.

[TopQuark]

" the CRA issue cannot alone explain the fact that the largest houses had made way more investment in dodgy mortgages than even the law would have requried. I mean, it doesn’t explain Fuld going limit long on Subprime over the summer of 2008."

Since you inserted "alone," you are technically correct. But it is like saying: the engine is by itself responsible for pulling the last car. That is true: a connection between the two via intermediate cars of the train is also required. But it is always there.

Similarly in this case. The CRA created steadily increasing prices. New expectations about the future --- the only ones that matter in investments --- were subsequently formed. Until these evermore optimistic expectations become new "common sense," appreciation of assets does not become a bubble. The expectations of economic agents are the connecting cars between the engine (CRA) and the last car (burst). Based on those expectations, banks took actions that seem foolish in retrospect. But so is Hitler, whose rise to power ended with 10% of Germans dead. So is Russian Communism, which left tens of millions dead and the rest impoverished. Those too were bubbles.

One has to be careful when applying retrospection when dealing with bubbles. You and I may question or outright despise some specific banks' actions. One has to refrain from overreaching, however: none of the banks has sufficient power to create or deflate bubbles. It took coercive power of the U.S. government to create the bubble. And took the power of U.S. government to bail out all big players ever since S&L crises and then abruptly to change course. Similarly, it took new demand from China and India to push up oil prices in this decade --- remember how those prices were blamed on "banks' speculations" just a year or two ago?

Yet another reason to be on guard from overreaching is the very nature of innovation. True innovation, by definition, operates in uncharted territory. When it comes to financial innovation, practically all of it in the last 40 years came from Wall Street. Not London, not Frankfurt, but Wall Street. The point is that even honest people may be found _in_restrospect_ to have overstepped the boundaries when those boundaries were unclear at the time. Society imposes restrictions only after an innovation has been found undesirable.

When applying the foregoing to the issue at hand, how come nobody mentions that securitization has been with us since late 1980s? Not only it did not cause problems but has been credited with contributing to our boom in the 1990s. It well may be that some specific deals were shady and less than honest, but to blame the entire phenomenon on the bankers is not only factually incorrect but intellectually dishonest: blame them for our immense prosperity as well.

[The same goes for pharma, another "evil" sector: I read a paper a few years ago documenting that over 90% of all new drugs in the last 30 years have been developed in the U.S. This is not surprising: we spend three time more on R&D and also times more on defense. Those who want us to be like Europe conveniently forget that Europe free-rides on us. In sum, when arriving at conclusions, please count not only costs but benefits as well.]

"They claim, of course, that they were forced to take TARP money, but that is not how I remember it: My counterparties at the large houses were all sending out messages"

That is indeed a fact: unlike Detroit, Wall Street was forced to take the money (Paulson scared Bush sh--s, excuse my language, and elicited thus his endorsement). This need not contradict what you saw subsequently: it well may be that, AFTER taking the money, banks may found it useful to put the PR spin you describe. I cannot attest to that (I simply don't know) and take your word for it. But the two effects are not in contradiction.

"As for Goldman, I am quite suspicious of the fact that they were the only large house not forced to merge with another failing bank,"

That is easily explained by the fact that GS was the healthiest of them all. They started to bet on the decline in May, and the crisis hit in October.

"and that for some reason Paulson bailed out Bear but didn’t bail out Goldman’s biggest competitor Lehman."

That single fact bothers me most of all. I can find no excuses for it. And not only for the act itself, but the recklessness with which it was undertaken. It is that recklessness that froze the credit markets. I am looking forward to reading more details some day, as more information is revealed in "memoirs" and collected.

Thank you for this discussion.

[moehoward]

"I don't really care where Taibbi's articles appear: the man does not even understand the words he is using, and that becomes annoyingly clear in a few minutes."

Translating the jargon to what the publications target audience could comprehend necessitates the "articles" "words". I notice you don't indicate what he's saying is untrue. Probably because the same stories are covered by many other reporters using words that perhaps are less offensive to those more knowledgeable.

[fightinbluhen51]

Err, you’re right, my at lunch math was WAY off. Say 1 to 2 percent is what my original prediction was, that’s what I’m sticking to.

Come on, this is all just a ruse to push through the bank regs. Anyone with half a brain can see it.

[Thane_Banquo]

That is indeed a fact: unlike Detroit, Wall Street was forced to take the money (Paulson scared Bush sh--s, excuse my language, and elicited thus his endorsement). This need not contradict what you saw subsequently: it well may be that, AFTER taking the money, banks may found it useful to put the PR spin you describe. I cannot attest to that (I simply don't know) and take your word for it. But the two effects are not in contradiction.

The messages in question came before TARP was passed, discussing what a great idea it would be. When it failed in the House vote the first time, I got messages about what a travesty it was and how stupid Congress was for voting against this brilliant idea. In fact, I remember hearing about a TARP idea from counterparties before it was even mentioned in the press. My conclusion is that TARP was invented by the banks as a way to get access to cheap capital and cushion their stupid investments. I don't believe any of them were truly forced to take TARP money, except maybe Dimon at JPM. At this point all we have is their word, and my experience in trading with Manhattan banks is that their word is about as valuable as the gifts a dog leaves on your lawn. The claim that they were forced was, I suspect, their ex post facto spin to defend themselves to an angry American public.

That is easily explained by the fact that GS was the healthiest of them all.

If GS was "the healthiest of them all," then they should have been the first to be forced to buy up failing enterprises like Wachovia, MS, Merrill, etc. They were not forced to buy anyone, leaving them in a much better position vis-a-vis their competitors, who would have to go through the 6 mo - 1 yr administrative hassle of integrating firms, and would also be strapped by the poor asset portfolios of their acquisitions.

[stephenjohnbanker]

We need to replace at least 1/3 of the House & Senate Republicans, or we are finished as a nation.

[TopQuark]

"Translating the jargon to what the publications target audience"

This is not about translating: he simply repeats the words of two bankers whose drinks he bought a day earlier without understanding what those words mean. He has zero knowledge of finance and simply speaks nonsense when he does not quote. [That is unsurprising, given that the man has not done anything in his life for more than a couple of years; an epitaxy of a charlatan.]

[Rockitz]

What a coincidence! Just when Zero needs public support for his Wall Street reforms, this suit against GS comes along. As soon as it's signed into law, the suit will evaporate on a technicality and GS will skate.

[JerseyHighlander]

The article in my post you originally replied to:
http://www.nakedcapitalism.com/2010/04/rahm-emanuel-and-magnetar-capital-the-definition-of-compromised.html

further:
HEARD ON THE STREETJANUARY 14, 2008
A Fund Behind Astronomical Losses
http://online.wsj.com/article/SB120027155742887331.html?mod%3Dhpp_us_whats_news

Magnetar CEO Alec Litowitz: Proud Democrat
Sun, 04/11/2010 - 1:05pm — lambert
http://www.correntewire.com/magnetar_ceo_alec_litowitz_proud_democrat

http://www.philstockworld.com/2010/04/11/dont-want-to-read-that-gigantic-report-about-the-hedge-fund-magnetar/

Macroeconomic Resilience
towards a more resilient macroeconomy
The Magnetar Trade
http://www.macroresilience.com/2010/04/11/the-magnetar-trade/

The connection to Milken’s original co-conspirators crooks and Magnetar Capital:
http://www.deepcapture.com/tag/bam-capital/

Also ProPublica.com is running agitation and propaganda puff pieces to obscure the connection between the Magnetar CApital, the Milken crooks, Rahm Emanuel, Blago, and Barack Obama.

[farlander]

Oh I certainly won’t dismiss the timing of the anouncement as a ‘coincidence’. Yea they’re using this to push the bill. All I’m arguing is whether or not GS actually comes out of this without a large black eye.

[PMAS]

I’m sure Soros didn’t know anything...

Soros Warns of Market Crash Thursday, 15 Apr 2010 10:58 AM
http://moneynews.com/StreetTalk/george-soros-market-crash/2010/04/15/id/355816?s=al&promo_code=9C29-1