Goldman Sachs: Don't Blame Us

http://www.businessweek.com/print/magazine/content/10_15/b4173030234603.htm

by known • 16 years ago

46 66 16 years ago

What bullshit.

1. Goldman blew up AIG by making AIG post collateral based on market prices (for bond insurance AIG had written). Because this is only fair.

2. Goldman got the feds to pay off the insurance at 100% value, not market value. Without an insurable event happening, and without executing the insurance by delivering the bonds.

3. Goldman used the pay off to buy the bonds. At unspecified prices, presumably market prices if we read between the lines.

4. "Qualified investors" knew what they were getting into massive risks buying certain instruments. They were well informed and knew how to investigate and rate risk properly. But when Goldman bought bond insurance from AIG, they were shocked, shocked to find AIG could not pay.

AmericanOP3• 16 years ago

2. If I recall, GS expected and was prepared to take the hit right before bailout bonanza.

afterburner• 16 years ago

I'll bet they knew they'd be among the first to benefit from bailouts if there were any at all though, given the Treasury Secretary Henry Paulson was an ex-CEO of GS.

Estragon• 16 years ago

You can't blame them for bullshitting. They've been dodging responsibility for this kind of thing for at least the better part of a century, and it seems to work for them.

http://books.google.com/books?id=YoXZWqBIIE8C&pg=PA64

idm• 16 years ago

It's still okay to blame them for bullshitting. I assume your point is that they've never experienced negative outcomes for their previous bullshitting, so there's no reason for them to do anything different, and I'd have to agree...

yummyfajitas5• 16 years ago

1. Two multinational corporations staffed by highly sophisticated investors came up with a contract. One corporation then enforced the terms of the contract.

How evil.

4. The "qualified investors" knew that the contract might obligate them to pay out large sums of money. If you bet money on a horse race, you better plan for losing.

On the other hand, Goldman (and everyone else) did not expect gigantic AAA counterparties to go bankrupt. If you bet money on a horse race, you might not plan for winning but then having the track going bankrupt.

jbooth• 16 years ago

I'm sure that Goldman was capable of whipping out a pocket calculator, figuring out how much money was going to pay out and figuring out that that's more than the GDP of some european countries.

"Nobody could have predicted" is the worst kind of excuse.

Also, when entities go bankrupt, usually all of their debtors get a % of the money they're owed, because if they could get paid everything, then there wouldn't be a bankruptcy. The feds should have told Goldman and everyone else "Here you go, 50 cents on the dollar, take it or leave it". They would have taken it and everything would have been fine.

codexon10• 16 years ago

1. When anyone loans money or buys an insurance policy, they are subject to counterparty risk: http://www.investopedia.com/terms/c/counterpartyrisk.asp

What is evil is that if it was you instead of Goldman Sachs, AIG would have paid you pennies on the dollar instead of the full value on paper.

4. See #1. Counterparty risk is part of every deal.

Example:

If you took a bet from Joe Sixpack that would probably pay $1000, but possibly $10 million (more than his life time earnings), the US government would not, and should not, be using taxpayer money to pay you $10 million in the worst case scenario. Unless you happen to be Goldman Sachs.

jimbokun3• 16 years ago

My understanding was that the money paid to Goldman came out of the pockets of the American taxpayer, through AIG and into Goldman's pockets.

Sure, AIG owed Goldman money. But when AIG went belly up, why did the U.S. taxpayer step in to pay Goldman in AIG's place?

anamax• 16 years ago

> On the other hand, Goldman (and everyone else) did not expect gigantic AAA counterparties to go bankrupt.

Greenspan says that evaluating counter-party risk was SOP at the private institutions where he worked before joining the fed. He claims that he knew more about the state of his competitors when he was in private biz than he did about the state of the same institutions when he was in the fed.

> If you bet money on a horse race, you might not plan for winning but then having the track going bankrupt.

You may not plan for it, but it happens.

More to the point, it doesn't matter whether Goldman planned for it - they were willing to take the profit, so they should take the loss as well.

Daniel_Newby4• 16 years ago

"1. Two multinational corporations staffed by highly sophisticated investors came up with a contract. One corporation then enforced the terms of the contract.

How evil."

Yes. Goldman knew the contract was fraudulent. They signed it to create a bogus asset that they could list on their balance sheet, allowing them to speculate using what should have been reserves. If AIG could not pay, they would simply write it off and lose a pittance (the few percent they paid AIG), small compared to the returns they could get on the speculations. If by some miracle AIG did pay, Goldman would throw a party where it rained money and cocaine.

"On the other hand, Goldman (and everyone else) did not expect gigantic AAA counterparties to go bankrupt."

First, a proper financial investigation ("due diligence") looks into the risk that the counterparty will spend all the money on fast cars and hookers. Second, if Goldman did not expect bankruptcies, then why did they buy insurance for bonds they did not own? Buying a derivative by itself is not a hedge, it is speculation.

steveplace• 16 years ago

AIG FP made AIG blow up. GS maybe threw some firecrackers in.

stretchwithme6• 16 years ago

The real problem is not that Goldman Sachs knows how to exploit bubbles or that they sell bad products or turn to the government when their gambles don't pay off.

The real problem is that our government seems to be at the beck and call of Goldman Sachs and entities like it.

Congress has even surrendered its responsibility for our money to the Federal Reserve, a scheme hatched by bankers that created the bubble leading up to first great depression.

borism• 16 years ago

tin foil hat alert!

cynicalkane• 16 years ago

"First great depression"?

The "first" great depression had the Dust Bowl, mass migration, people starving to death right in public, shantytowns popping up everywhere, and 25% unemployment. The "first" great depression had a 30% decline in GDP.

When was the second great depression?

pw0ncakes3• 16 years ago

I call this the Petty Depression. It's not nearly as bad as the depression of the 1930s, but it's worse than a recession. Recession is the predictable, brief, and necessary period of creative destruction and contraction in a functioning economy. It causes some people to get laid off, but they usually get better jobs within 1-3 years, and the economy as a whole improves. This is something else, and will have a long-term scarring effect on the nation.

The fact that "petty" means both small (which this one is, as far as depressions go) and mean-spirited (price-gouging on housing with young families at the barrel-end) means it fits surprisingly well.

patrickgzill• 16 years ago

To add to this: the Fed was created in response to the usual ups and downs of the marketplace - there would be financial crises about every 20-30 years, and they could be quite crushing.

The claim was that if the Fed was created, we would never have such bubbles/panics again.

Since the Fed was created in 1913, and we have had the Great Depression and lots of other monetary issues, including the current one, it is safe to say that the original argument in favor of the Fed is proven false.

jimbokun3• 16 years ago

Outside of the great depression, have the crises been as bad as they were before the institution of the Fed? It's possible that the Fed has moderated the severity of monetary crises.

hackermom• 16 years ago

It's so hilarious seeing bankers and investers pointing finger elsewhere - especially Goldman Sachs, of all the greedy, evil people...

AmericanOP3• 16 years ago

de facto monopoly, at minimum.

lrm242• 16 years ago

Greedy, sure ok. But 'evil'... seriously?

pw0ncakes3• 16 years ago

Goldman Sachs is pretty fucking scummy, but not substantially worse than the rest of Wall Street; anyway, the pace-setting for scumbaggery was set in the past by many firms that don't even exist anymore. The only thing I would call evil about GS is the way it is managed to convert its economic power into political power, thus preventing proper regulation of the banking industry, and that's the government's fault (and ours) as much as it is theirs.

AmericanOP3• 16 years ago

Finally some macro on HN :)

I can buy the argument that Goldman didn't see the subprime coming since they were initially exposed (or so the story goes http://www.vanityfair.com/business/features/2010/04/wall-str...) Because of this, they were the first big bank to see the coming pop, and acted.

However, while their CFO may be the most "frustrated" he's ever been during his 30 years as a Goldmanite, I'm the most frustrated I've ever been in my 23 years as an American. To see this bank make millions every day because a luiqidity-at-all-costs monetary policy issues taxpayer debt to TBTFs as near-zero % interest loans which they use to jack the DOW to all time highs is ridiculous. Yes, the US government is totally unable to tackle the country's financial problems which creates opportunities for I-banks like GS, but I can hardly believe the right path requires a bonanza for these guys. Non-CNBC headlines consistently point to a blatant conflict of interest between fiscal policy and wall street profits (today: http://www.zerohedge.com/article/guest-post-tim-geithner-sni...) They want to play the dangerous game of squeezing the heart of our nation during a time of impending crisis.. look to Blackwater for PR advice.

Obligatory: http://creattica.com/photoshop/ut104/18473

pasbesoin• 16 years ago

Your second link needs to drop the trailing period:

http://www.zerohedge.com/article/guest-post-tim-geithner-sni...

rrhyne• 16 years ago

They saw it coming. They shorted the same subprime products they were selling. GS bankers are on tape saying they will murder the client on a specific deal related to these shorts.

DuncanIdaho• 16 years ago

Jury, you've heard every word, But before you decide. Would you look into those mother me eyes, I love you, for you my love, For you my love.

Don't blame, The sweet and tender hooligan, hooligan, 'Cause he said that he'd never, never, never, never do it again.

He was a sweet and tender hooligan, hooligan, Because he'd never, never, never, never do it again.

-The Smiths, Sweet and Tender Hooligan

julio_the_squid• 16 years ago

I approve, Duncan Idaho.

johnohara• 16 years ago

I don't know whether the actions of GS, AIG, Citi, BoA, Lehman, Merrill, Countrywide, New Century, the Fed or anybody else involved in the slicing and dicing of mortgages constitutes treason but they sure betrayed my trust and confidence in financial institutions, breached my faith in financial markets, and made me realize that investing with these organizations is treacherous.

I'm sure the good people of Iceland would agree.

vlod14• 16 years ago

Huh? you lost me. Care to explain how you got from mortgage slicing to treason?

stretchwithme6• 16 years ago

he said he DIDN'T know if it constitutes treason.

sever• 16 years ago

This situation makes me so mad my teeth hurt, but I don't think Goldman is at fault. They were no better or worse than other i-banks, interspersing themselves into the money flow, probably sucking out more value than they were creating -- I think so. The fault is with the government for bailing them out. They should be bankrupt, shareholders wiped out, company carved up and sold off, making room for better companies. Instead the government decided to give them billions (which they paid out as bonuses to themselves). It was ludicrous, the government gave them 100 cents on the dollar for AIG. Why 100, why not 120, why not 200, it would have made just as much sense.

vlod14• 16 years ago

"Goldman vigorously disputes that it could not have survived if the government hadn't paid it in full"

Maybe you missed the part in the article where they said they could have survived without the money.

Also the TARP money was pretty much forced on them http://goo.gl/N7SP (businessinsider.com)

stretchwithme6• 16 years ago

they would have survived, but they certainly would have had a big loss without that 12 or 14 billion payoff from AIG.

clammer• 16 years ago

Weird, no one seems to blame our own government.

stretchwithme6• 16 years ago

I did if you check my first comment.

Goldman Sachs: Don't Blame Us

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