Shaggieman

Wall Street Breakfast: Must-Know News

Goldman betting on crash, review shows
Investment bank's strategy should be investigated as securities fraud, critics say

By Greg Gordon
McClatchy Newspapers

Published on Sunday, Nov 01, 2009

WASHINGTON: In 2006 and 2007, Goldman Sachs Group peddled more than $40 billion in securities backed by at least 200,000 risky home mortgages, but never told the buyers it was secretly betting that a sharp drop in U.S. housing prices would send the value of those securities plummeting.

Goldman's sales and its clandestine wagers on falling home prices, completed at the brink of the housing market meltdown, enabled one of the nation's premier investment banks to pass most of its potential losses to others before a flood of mortgage loan defaults staggered the U.S. and global economies.

Only later did investors discover that what Goldman promoted as triple-A investments were closer to junk.

Now, pension funds, insurance companies, labor unions and foreign financial institutions that bought those dicey mortgage securities are facing large losses, and a five-month McClatchy Newspapers investigation has found that Goldman's failure to disclose that it made secret, exotic bets on an imminent housing crash may have violated securities laws.

''The Securities and Exchange Commission should be very interested in any financial company that secretly decides a financial
product is a loser and then goes out and actively markets that product or very similar products to unsuspecting customers without disclosing its true opinion,'' said Laurence Kotlikoff, a Boston University economics professor who has proposed a massive overhaul of the nation's big banks. ''This is fraud and should be prosecuted.''

John Coffee, a Columbia University law professor who served on an advisory committee to the New York Stock Exchange, said that investment banks have wide latitude to manage their assets, and so the legality of Goldman's maneuvers hinges on what its executives knew at the time.

''It would look much more damaging,'' Coffee said, ''if it appeared that the firm was dumping these investments because it saw them as toxic waste and virtually worthless.''

Lloyd Blankfein, Goldman's chairman and chief executive, declined to be interviewed for this article.

A Goldman spokesman, Michael DuVally, said that the firm decided in December 2006 to reduce its mortgage risks and did so by selling off subprime-related securities and making myriad insurancelike bets, called credit-default swaps, to ''hedge'' against a housing downturn.

Although the company had secretly bet on a downturn, DuVally told McClatchy that Goldman ''had no obligation to disclose how it was managing its risk, nor would investors have expected us to do so. . . . Other market participants had access to the same information we did.''

FBI investigations

In piecing together Goldman's role in the subprime meltdown, McClatchy reviewed hundreds of documents, SEC filings, copies of secret investment circulars and lawsuits and interviewed numerous people familiar with the firm's activities.

McClatchy's inquiry 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 used by companies 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.

Record earnings

With the help of more than $23 billion in direct and indirect federal aid, Goldman appears to have emerged intact from the economic implosion, and by repaying $10 billion in direct federal bailout money — a 23 percent taxpayer return that exceeded federal officials' demand — the firm has escaped tough federal limits on 2009 executive bonuses that accompanied bailout money.

It announced record earnings in July, and is on course to surpass $50 billion in revenue in 2009 and pay its employees more than $20 billion in year-end bonuses.

From 2001 to 2007, Goldman hawked at least $135 billion in bonds keyed to risky home loans, according to analyses by McClatchy and the industry newsletter Inside Mortgage Finance.

Its financial panache made its sales pitches irresistible topolicymakers and investors alike, and helps explain why so few of them questioned the risky securities that Goldman sold off in a 14-month period that ended in February 2007.

Since the collapse of the economy, however, some investors have changed their views of Goldman.

Adding up losses

Several pension funds, including Mississippi's Public Employees' Retirement System, have sued, seeking class-action status, alleging that Goldman and other Wall Street firms negligently made ''false and misleading'' representations of the bonds' true risks.

Mississippi Attorney General Jim Hood, whose state lost $5 million of the $6 million it invested in Goldman's subprime mortgage-backed bonds in 2006, said the state's funds are likely to lose ''hundreds of millions of dollars'' on those and similar bonds.

California's huge public employees' retirement system, known as CALPERS, purchased $64.4 million in subprimemortgage-backed bonds from Goldman on March 1, 2007. In July, CALPERS listed the bonds' value at $16.6 million, a drop of nearly 75 percent, according to documents obtained through a state public records request.

In May, without admitting wrongdoing, Goldman became the first firm to settle with the Massachusetts attorney general's office as it investigated Wall Street's subprime dealings. The firm agreed to pay $60 million to the state, most of it to reduce mortgage balances for 714 aggrieved homeowners.

Wall Street Breakfast: Must-Know News

Ending too big to fail vs. continued TARP for GMAC an other failed companies. Reminds me of the Alien vs. Predators movies. Who'll win? I know it won't be the tax payers.

Wall Street Breakfast: Must-Know News

<<which bank executives fear will hamper its abilities to recruit talent>>

They keep talking about a mysterious talent only a few folks possess. Do they mean the babes or are they talking about hiring the best scammers that truly can game the system to perfection?

Equities Get a Kick in the Pants

Hey Larry,

Did you see the below article. The Fed may not have a choice here.
If they stop buying treasuries and want the rest of the world to the rates have to raise. I don't think 2% say would be a big market killer personally.

October 1, 2009, 11:33 am

Alan Greenspan, Welcome to Club Wagner
By David Leonhardt
Andrew Harrer/Bloomberg Alan Greenspan, former chairman of the Federal Reserve.
From Bloomberg:

Former Federal Reserve Chairman Alan Greenspan said the U.S. will have to both tighten credit and raise taxes as the economy pulls out of the worst recession since the 1930s.

“The presumption that we’re going to be able to resolve this without significant increases in taxes is unrealistic,” Greenspan, 83, said in an interview with Bloomberg Television yesterday.

We founded Club Wagner earlier this year here at Economix. It’s a club for anyone who acknowledges that taxes must rise in coming years, to repay our current debt and to cover the cost of the kind of government voters have made clear they want — a government that includes Medicare, Social Security, the military and more.

The club is named after Adolf Wagner, a 19th-century German economist who predicted that taxes would rise as societies became wealthier. “As people grew more affluent,” the writer Matt Miller has explained, “they’d want more of what only government could provide — a strong military, public order, good schools and assorted welfare benefits, services that private citizens would have trouble arranging for on their own.”

We welcome you, Mr. Greenspan.

Wall Street Breakfast: Must-Know News

<<<Creditors are outraged that the Fed, which lent Lehman $46B last September just before it went under, were paid back promptly and in full, while they've languished in bankruptcy courts hoping to recoup at least some of their losses.>>>

When going to learn, ya have to be in the club, GovSacs and the Fed never lose.

Wall Street Breakfast: Must-Know News

China's rushing to unload dollars for oil while they still have a little value left. Perhaps there's a message here for all of US.

E*Trade: Expect a Takeover Any Day Now

Usually, they say one thing and do another; so no telling? I think a Wells Fargo could really benefit from an ETFC take over. They could combine ETFC with there current brokerage and become a much more relivent financial institution.

Wall Street Breakfast: Must-Know News

Now with CD's paying next to nothing POOR retires trying to make it on a fixed income might as well just die. I say the rates need to raise now to defend what few dollars long term savers have left. Disgusted retiree!

Wall Street Breakfast: Must-Know News

Yes, now owned by the Japanese as a result of the Firestone 500 tires and accompanying litigations. The main plant was, just off the 5 freeway, turned into a flea market. Ha! Ha! Ha!


On Sep 14 10:23 AM Buckoux wrote:

> Firestone tires is owned by the Japanese tire company, Bridgestone.
>
> Ha! Ha! Ha! (*****)

Wall Street Breakfast: Must-Know News

Poor China put up with our Firestone 500 tires exploding all over there then limited roads so now it's payback time. Tire go boom! Ha! Ha! Ha!

Petrobras Can Go Down Even if Oil Goes Up

Makes no sense to me to be short this volatile a stock and long other oil issues. Either your in or out of oil and natural gas issues. You say PBR might issue more shares but I say they might also find a new large field. Too risky shorting PBR IMHO.

17 Reasons for Crude to Fall Near Term

When do the capital gains taxes revert back? I thought it was the end of next year 2010. If that's the case it might inspire folks to sell issues in the 2009 year at the lower cap rate. Do know but that's my understanding.

Wall Street Breakfast: Must-Know News

I hope they're on the banks books but from what I am hearing the banks have started a 3 card monte for counting newly foreclosured properties. Banks thinking it helps to hide the problems and if the commerical real estate starts defaulting watchout below.

On Jul 30 08:59 AM robert.b.ferguson wrote:

> Keep in mind that these "Distressed loans" are on someones books some where as "Toxic assets.".

Bleak Outlook for Independent U.S. Oil Refiners

Ferd... Better to refine it locally since the blends are so different depending on where your at. That's besides the dangers of transporting gasoline. Caboom!

Wall Street Breakfast: Must-Know News

Not before taking out a $245M loan from you guessed it, Citi.

Tuesday, June 23, 2009
More Bad News For Boeing: Sea Launch Files For Bankruptcy

Posted by Tyler Durden at 11:20 AM
Commercial satellite-launch services provider Sea Launch, which is 40% owned by 787 on time manufacturer extraordinaire, Boeing, filed for bankruptcy last night in Delaware (09-12513). The Long Beach company which has used the Kazakhstan Baikonur Space Center for rocket launches in the past, has listed liabilities of over $1 billion.

What is hilarious is that just last week, the Company launched a $245 million one-year Term Loan underwritten by Citigroup. Is Citi doomed to have the worst luck of any investment bank for ever and ever? For what it's worth, Goldman only provides loans to soon to be bankrupt companies (ahem, Movie Gallery) if they file for chapter with at least a one month lag post refi (and long after the bank has syndicated the loan to unwitting, dimwitted credit PMs who have to generate 15% returns in 3 months or the Exit sign it is).

At least gullible investors in the recent TL issue (yielding between L+200-350) be happy that it is guaranteed by Boeing, which after its 5th 787 launch delay may be better off changing its business model to focus on making space ship launch pads.