The Long Crisis

Posts Tagged ‘Goldman Sachs’

Goldman Sachs CEO Lloyd Blankfein is experiencing a rough week. Goldman Sachs and Blankfien have over the years enjoyed significant political cover due in large part to the significant contributions made to both Democrat and Republican politicians and to the numerous Goldman Sachs alumni that served, and still serve, at the highest levels of government. However, in a midterm election year, and with a majority of voters yelling “off with his head”, his sunny day friends in government are joining in the populist sentiment of “off with all the Wall Street big shot’s heads”.

Public sentiment is now so strong over the reckless, greedy, immoral, behavior of the big swinging dicks Masters of the Universe at a time when Main Sreet America was and still is severely hurting that surely it will be a temptation for vote seeking politicians to let a few heads roll. Who can forget that almost immediately after the government bailed Wall Street out, including Goldman Sachs, with billions of dollars of taxpayers funds that the Wall Street unrepentant tone deaf executives paid themselves multimillions of dollars in bonuses, even after running their firms into near bankruptcy?

Lloyd Blankfein, as the head of the most powerful investment bank in the world, Goldman Sachs, is a prime head to go after. This Tuesday he faced a blistering cross-examination from U.S. lawmakers about the company’s ethics and behavior toward its clients.

In Tuesday’s interrogation by Senator Carl Levin, Blankfein was constantly interrupted, told to answer the question and stick to the point. He often looked extremely disoriented and uncomfortable. He often squinted as if puzzled by the questions. No doubt, a man who makes multimillions of dollars per year, whether his firm or economy is doing well or not, is not used to being interrogated and treated with disrespect.

“You’re going short against the very security (you’re selling) … many of which are described as crap by your own sales force internally.” said Levin, chairman of the Senate Permanent Subcommittee on Investigations.

“How do you expect to deserve the trust of your clients, and is there not an inherent conflict here?”

The SEC has brought fraud charges against Goldman Sachs for the way in which it conducted its business in structuring and marketing of CDO’s during the run-up to and during the housing mortgage crises of 2007 and 2008. The initial charges by the SEC were filed as civil charges only and charged Goldman Sachs and only one employee with fraudulent misrepresentation of the quality and nature of the CDO securities marketed by the firm.

Goldman has also been charged with basically favoring a large hedge fund, Paulson and company, by allowing Paulson to select poor quality mortgages to be included in a CDO offering and then marketing the junk CDO portfolio to less sophisticated Goldman clients. The SEC has charged that the transaction was fraudulent, that basically the CDO was designed to fail, and that Goldman Sachs knew full well that money in effect would be transferred from the “chump” clients to Paulson & Co.

The SEC has now given a clear indication that additional charges will be filed, probably against a number of high-ranking Goldman Sachs executives, including CEO Lloyd Blankfein, by referring its investigation of Goldman to The Justice Department for possible criminal prosecution, according to several media reports, including one by the Wall Street Journal, Thursday night.

In this case, the standard top level executive defense of “a few bad apples” and “gee, we didn’t know” are unlikely to stand up as from the recent Senate hearings it is apparent that the SEC and congressional staffers have quickly assembled volumes of Goldman’s internal e-mails and documents that indicate immoral and possibly illegal behavior on the part of top level Goldman executives.

It appears that Goldman Sachs and its top executives, especially CEO Lloyd Blankfein, are about to find out just how fickle their politician former friends can be when the voting crowd starts shouting “off with his head”.

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As early as 2007 homeowners were falling behind on their subprime mortgages, causing huge losses for investors that owned slices of their mortgages in collateralized securities peddled by Wall Street. According to internal company emails by top Goldman executives Goldman Sachs was “well positioned” to profit from a decline in the value of these offerings and as the economy tanked expected to make a financial killing.

What well-positioned meant is that the the firm had “the big short,” on as was declared by chief financial officer David Viniar — Goldman Sachs was making money off the souring of the very securities they had peddled to the market. Goldman Sachs in effect became the most profitable Wall Street investment banking firm in history by selling toxic assets in the form of CDO securities to their worldwide client base and then placing big bets against those securities which they were convinced were garbage and would fail.

Thus far, the SEC has only brought fraud charges against Goldman Sachs for one of the many CDO’s that they brought to the market during 2007 and 2008. The SEC charges allege that Goldman failed to properly disclose pertinent information about the quality of the securities that they were selling to their clients and about how those securities were selected.

Apparently, Goldman allowed a large hedge fund client to handpick the mortgages that were placed in the offering. The client, Paulson & Co., structured the CDO in a manner that guaranteed failure by selecting sub-prime mortgages that had been entered into by weak credit mortgagees. Goldman Sachs and Paulson & Co. both took short positions against the CDO and profited handsomely as the value of the mortgages collapsed. The SEC charges that fraud occurred in that one large client was favored with information that was not disclosed to other Goldman clients that purchased securities in the offering and that the quality of the securities was misrepresented.

Up to now, only civil charges have been filed against Goldman Sachs by the SEC. Probably, only a small amount of the evidence against Goldman Sachs has been publicly released by the SEC. As the case proceeds the SEC prosecutor will likely slowly release additional evidence of fraudulent behavior on the part of Goldman Sachs. I have little doubt that additional charges will be filed by the SEC as the case proceeds. Very likely, Goldman’s fraudulent behavior was not limited to only one of the CDO offerings that it marketed but extended to a number of them.

Let’s think for a moment about what type of behavior Goldman Sachs was involved in. In order to market securities Goldman must have told its clients that the securities were good investments. That’s the job of securities salesman and Goldman high powered salesman are some of the most aggressive and best in the business. Wth the collusion of the credit rating agencies, such as Moodys and Standard and Poors, securities that Goldman Sachs allegedly knew were pure garbage were marketed as AAA securities. Goldman then in effect took short positions against the securities, fully expecting them to drop in value, by purchasing credit default swap insurance from big insurance companies such as AIG.

As has been stated by Senators who are now investigating the actions of Goldman Sachs, and how their actions contributed to the financial meltdown, this is much like selling to one of your clients a house that you know has dangerous defective electrical wiring, then taking out an insurance policy that would pay you handsomely after the house burned to the ground.

As additional e-mails, internal documents, and perhaps even telephone conversations between Goldman Sachs executives, are presented by the prosecutor as evidence of Goldman’s fraudulent activities, it is highly likely that Goldman’s attorneys will strongly suggest that they settle the case with the SEC before going to trial. I expect that as Goldman has become the very symbol of Wall Street greed and excessive compensation to executives, even though those executives were apparently engaged in fraudulent activity, Goldman’s attorneys would realize that selecting a jury that didn’t hate Goldman Sachs would be a challenge.

Therefore, Goldman will probably escape from the fraud charges by not admitting to any wrongdoing on their part and by the payment of some fairly substantial monetary fine. Thanks in large part to the generosity of the federal government towards providing Goldman Sachs with emergency money when they needed it Goldman has once again returned to being an extremely profitable company and could pay a large fine without any difficulty. In light of the companies present strong cash position if I were a top level Goldman executives my real worry would not be about the payment of a fine. No, my concern would be that at some point criminal charges are added to the civil charges which have to date been filed.

It seems to me, that Goldman Sachs, and undoubtably other Wall Street firms, have become little more than criminal organizations when as a normal course of business they package and market securities to clients, thereby collecting substantial fees and commissions, when they know full well that the securities that they are marketing will more than likely lose substantial value. The criminal nature of the transaction becomes evident when the Wall Street firms take short positions against the very securities that they are representing to their client’s as being sound moneymaking investments. Certainly, this type of behavior is immoral and just plain wrong.

Hopefully, Goldman Sachs and other Wall Street firms will learn that placing “the big short” against security products of your own structuring and against your own clients in a deliberate effort to profit as your clients lose money is not only immoral but is in fact criminal behavior. If the top executives of Enron and WorldCom went to prison for defrauding investors and clients why should top executives of Goldman Sachs be spared the same punishment? However, I do not think that no matter how damaging the evidence may be against Goldman Sachs executives that criminal cases will ever be filed.

I expect that if Goldman Sachs executives are spared from criminal prosecution it will be because of the close ties that Goldman Sachs enjoys with the federal government and the need for the services that the firm provides to the government. No doubt, Goldman is THE major player in not only the stock market, but in the bond market and commodities markets. Bringing real heat against Goldman Sachs may place all of these markets as well as the economy in some jeopardy. In the present financial environment, our government may have a desperate need for Goldman Sachs services, especially in the bond market, and limit any prosecution to a civil suit or two that after some protest on the part of Goldman as to their innocence would be settled by merely a slap on the wrist and the payment of a fine.

Even with financial reform legislation being championed by the Obama administration Goldman Sachs will probably be deemed too important to the operation of the government’s fund raising efforts in the bond market and to the economy to punish in any meaningful way. Once again, we are likely to see just how relevant the Golden Rule is in a society that has misplaced its moral compass.

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With recent fraud charges being brought by the SEC against Goldman Sachs as to its structuring and marketing of collateralized debt obligations (CDOs) the exotic and toxic investment instruments that were financially engineered by Goldman Sachs and other Wall Street firms are back in the news. Yet few investors outside of financial market specialists fully understand just what a collateralized debt obligation financial instrument is and how the collapse of the real estate housing market could bring such financial grief to the world investment community.

Finally, a video has been created that explains in simple terms how a CEO is structured and managed and why they were and are still financial instruments of mass destruction.

The insanity of the Wall Street financial engineers is clearly shown as so-called synthetic CDOs were created by assembling portions of previously created CDOs into new CDOs which contained the most risky segments of the existing financial instruments. These highly risky investments, which apparently in some cases were actually structured to fail, were then sold to unsuspecting investors in every corner of the globe by an army of Wall Street salesman. The Wall Street investment banks and brokerage firms, such as Goldman Sachs and Merrill Lynch, generated hundreds of millions of dollars in commissions from marketing these toxic financial instruments.

However, some of the clever Wall Street favored hedge funds, such as Paulson and Co., that were at least partially responsible for the structuring of the CDO’s, made billions of dollars as the housing market collapsed in 2007 and 2008 and the mortgages providing interest payments to the CDOs went into default. As the video clearly shows once the stream of income from the underlying mortgages was reduced, or in extreme cases stopped altogether, the value of the CDOs plummeted, even reaching zero.

How could this be? How could a hedge fund that owned part of a CDO that lost most if not all of its value stand to make massive profits as the CDO collapsed? The answer lies in the hedge funds ability to purchase credit default swaps from poorly managed firms such as AIG, that depended upon CDO ratings of risk issued by rating firms like Standard & Poors rather than completing its own due diligence. The credit default swaps work much like an insurance policy. The hedge fund use the credit default swaps to insure against losses that might occur from a loss of value by the CDO.

As an example, let’s say that the hedge fund took an equity position of $50 million in a $1 billion CDO. Should the value plunge to zero the hedge fund would lose the $50 million. However, depending upon the amount of the credit default swap purchased and upon how quickly the CDO lost value the hedge fund might make hundreds of millions of dollars from the transaction as it could purchase protection on the entire CDO, not just the $50 million portion that it had purchased. Therefore, it was highly profitable to participating hedge funds and Wall Street investment banks, which also purchased credit default swaps, when the highly risky structured to fail CDO’s completely blew up.

The current SEC charges against Goldman Sachs barely expose the tip of the CDO iceberg. Trillions of dollars of collateralized debt obligations and credit default swaps were engineered by Wall Street. The practice of marketing CDO financial instruments to investors who, even though they may be sophisticated, didn’t understand the investments, perhaps because they relied far too much upon the reputation of Goldman Sachs and other Wall Street firms to protect their investors against abuse, was wide spread and earned billions of dollars in commissions for the Wall Street firms.

The CDO cancer quickly spread throughout the Wall Street community. The probability of making out sized profits was just too great for top Wall Street executives to resist. Wall Street has always engaged in corrupt, immoral, and completely selfish behavior. Greed is a powerful emotion and has not been washed away by the financial meltdown of 2007 and 2008. With housing foreclosures expected to reach record rates in 2010 we will more than likely hear far more about collateralized debt obligations and credit default swaps during 2010. It is highly unlikely that any of the news will be pleasant.

It will be interesting to see just how serious the SEC is in its fraud charges against Goldman Sachs. No doubt Goldman Sachs top executives will engage in a “we didn’t know” and “a few bad apples” defense. Certainly, they will push back with all of the firepower that politically well connected wealthy executives who are also major political campaign contributors can muster. There is a real possibility that at the end of what is likely to be a drawn out investigation Goldman Sachs will receive little more than a slap on the wrist.

In my opinion, in recent years Goldman Sachs and other Wall Street firms have degraded to being little more than criminal organizations. They seem to think that it is quite okay to plunder and pillage the very investors they are supposed to serve. Unfortunately, at times it appears that the cooperation between the United States government and the Wall Street firms is so close and orchestrated that the entire relationship is designed to fleece investors wherever they may reside as well as the American taxpayer.

So how do collateralized debt obligations work? Technicalities aside they have worked to transfer trillions of dollars from investors around the world, including huge amounts of funds from pension funds and retirement accounts, to Wall Street bankers and to hedge funds that bet that the investments would fail. The SEC fraud charges against Goldman Sachs will be a test as to just how cozy the relationship is between the Wall Street fraudsters and the United States government.

In the much smaller in scale Enron and WorldCom scandals of a few years ago the top executives were given prison terms. If the SEC and government are really serious about curbing fraud and financial abuse the top executives at Goldman Sachs and other Wall Street firms will eventually be given free room and board at a federal prison. Not that that will recover funds lost by investors but it might make them feel a tad better about their losses.

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