How Much Did Goldman Know? 10 comments
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According to an on-going investigation by McClatchy newspapers, in 2006 and 2007, the Goldman Sachs Group (GS) peddled more than $40 billion in securities backed by at least 200,000 risky home mortgages – much if not most of its subprime portfolio -- but never told the buyers it was secretly betting on a sharp drop in U.S. housing prices at the same time, that would send the value of those securities plummeting. In this manner Goldman was able to pass on most of its would-be losses and bet hard on the eventually of collapsing housing prices and make yet more money there. It sold its putative losses and won on its wagers.
Investors who bought from Goldman thought they were buying triple A rated investments, but in fact they were buying junk, at best. Only later have the investors discovered what Goldman did. They are not too happy about it, either. Most of the buyers were pension funds, insurance companies, labor unions, and other financial institutions.
Now, they face big losses and are considering what recourses they might have against Goldman Sachs. The failure to disclose might violate the securities laws, depending on what who knew when. The hedges against a collapse in housing prices, suggests Goldman understood what was coming, but the issue becomes one of timing as much as anything and who was talking to whom within the company. More narrowly, the question is what did Goldman know or believe and when. Too, Goldman’s motivations for dumping its subprime portfolio have a heavy bearing. Not surprisingly, Goldman is not saying much about this matter just now, probably following its legal counsel’s advice.
The core legal issue is whether there was a duty to disclose and disclose what, in the circumstances, and to whom and when. Lawsuits are gearing up as plaintiffs’ investigators do their job. Some suits are already filed.
What Goldman is saying is that other market participants, including their buyers, had the same access to the same information Goldman did. What they did with it was their business. Goldman claims it had no duty to say anything about what else it was doing in the circumstances. It seems that Goldman also has some internal Chinese walls, designed to keep bond and investment sellers in the dark. Why, we might ask?
Goldman and Morgan Stanley are the two venerable Wall Street investment banks still left standing. Bear Stearns, Merrill Lynch and Lehman Brothers were either acquired or folded.
More specifically, McClatchy's investigation has found that Goldman Sachs:
- “Bought and converted into high-yield bonds tens of thousands of mortgages from subprime lenders that became the subjects of FBI investigations into whether they'd misled borrowers or exaggerated applicants' incomes to justify making hefty loans.
- “Used offshore tax havens to shuffle its mortgage-backed securities to institutions worldwide, including European and Asian banks, often in secret deals run through the Cayman Islands, a British territory in the Caribbean that companies use to bypass U.S. disclosure requirements.
- “Has dispatched lawyers across the country to repossess homes from bankrupt or financially struggling individuals, many of whom lacked sufficient credit or income but got subprime mortgages anyway because Wall Street made it easy for them to qualify.
- “Was buoyed last fall by key federal bailout decisions, at least two of which involved then-Treasury Secretary Henry Paulson, a former Goldman chief executive whose staff at Treasury included several other Goldman alumni.”
Goldman benefited immensely and financially, the investigation discloses, “when Paulson elected not to save rival Lehman Brothers from collapse, and when he organized a massive rescue of tottering global insurer American International Group.” These actions pulled much of Goldman’s fat out of the fire. With Paulson’s approval, “AIG later used $12.9 billion in taxpayers' dollars to pay off every penny AIG owed Goldman” mostly in regard to credit default swaps Goldman had acquired to hedge or protect its positions. We should not be surprised to learn that during this interval “Goldman chief Blankfein was in constant telephone contact with Paulson" and successfully got the Federal Reserve Board's blessing to be compensated. Goldman came out smelling like a rose. It timely dumped what would have been its larger losses and made money on its judgment housing prices would collapse.
It is not exactly heartwarming to realize how much taxpayers gave to not so needy companies like Goldman, without anyone yet to serve any jail time. Amazing! The Wall Street crowd takes care of its own, whether on the Street or in Washington, working for the government. The top end is a small club, with immense money, power and influence.
Disclosures: no relevant positions
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This article has 10 comments:
It depends what you venerate. If you venerate political and economic power, influence and contacts then: yes. If you respect ethics and contributing to the success of the nation then: no.
How do you go about changing the existing situation when companies like Goldman blatantly rip the govt off yet do it inside the law?
If it's legal, there's not a damn thing you can do about it. Goldman knows that and THAT'S why it's blatant.
Now GS friends in Washington will create law if need be, that can be exploited.
The masses can act with their money - spend your money on main street, not wall street.
I hope this story develops to the point where Buffett is forced to say something. I don't think that "Mr Ethics" has the right to remain silent on this. He should be pushed. What he had to say about Salomon carried great weight. Let's see what he has to say about Goldman.
On Nov 02 07:55 AM Kimball Corson wrote:
> Wall Street clearly venerates political and economic power. GS and
> MS are venerable there. That you and I have different views from
> elsewhere bothers them not one wit. As the story makes clear, GS
> cares only about money and how to get it.
too pig to fail & too big to be touched = untouchable in today's political situation. how many books will be written in the next 50 yrs on the subject of this caper?
> jack
I think India used to keep most of its reserves in sterling for many years, now it is buying the worlds gold. Hmm.. don't those "bloody naked fakir buggers trust barclay's or the british pound" anymore?