Bing Blog

How The Lizard Sheds Its Tail

Goldman Sachs

It's amazing what expensive messaging can buy. The first wave of publicity surrounding the SEC case against Goldman was fierce and damning. Now what we're seeing is their Public Relations dollars at work. The conversation has shifted, have you noticed? What was huge, solid outrage against Goldman has moderated, and thoughtful (if bald) heads are prevailing.

Of course Goldman took short positions against its long bets on the real estate market. Wasn't that what it was supposed to do? The real problem isn't shorting your own investment vehicles, the ones you sell to unwitting idiots who believe your upside drivel. It's really just a matter of disclosure. You should disclose more. People who are uncomfortable with the whole process of free, unadulterated hedging are bad for America.  America is about Freedom. God bless America.

You can feel the debate turning.  Narrowing. The animal is adjusting itself. Protecting all the tender, essential body parts that it wants to retain going forward. Preparing to shed its tail as a necessary sacrifice in the overall effort to save the actual lizard. Bah. What Goldman Sachs -- and others, I am sure -- did that got it in trouble with the SEC seems pretty simple to me. Correct me if I'm wrong. They invented an investment vehicle that was designed to fail spectacularly if the real estate market showed the slightest signs of weakness, signs that were already evident to those in touch with the early warning signals. It then sold that fund to people who believed in the gung-ho, positive view its sales people were still adopting. At the same time, it worked with the guys who designed the offending instrument to fail to bet against the very thing they were selling.

They designed it to fail. It failed. They made a lot of money. They took about half of that revenue for their own compensation.  They bragged about it, too. Know why they bragged about it? Because there's nothing wrong, in the prevailing mind, with betting both for and against investments. In a horse race, insiders who bet against their own entrants are viewed with tremendous suspicion. Also boxing, that sweetest of corrupt sports. Well, perhaps not the sweetest. Maybe Wall Street is the sweetest.

The PR effort is paying off, though. We've already got people seeing any attempt to control double-dealing as politically motivated. Why should it be looked at that way? Because casting issues in that fashion guarantees many long months of fruitless, pointless, aggravating, shallow, partisan debate. There's an enormous, well-financed team executing that strategy right now. Ultimately, though, there will be some regulatory adjustments. Lizard Freres will shed its tail. It will agree to disclose a bit more carefully what it intends to do profit from your credulity. I have one modest proposal, therefore. I suggest that every firm that promotes investments while hedging against them be required to post a large, boxed message on the front page of every offering:

This firm is attempting to sell investors an instrument that has such dramatic associated risks attached to it that we are, at the same time, hedging our bets in a significant fashion. In fact, we stand to make more money, both as a firm and personally, if this investment fails. We thought you should know.

I wonder if that would do a lot more to influence sales than 8-point type on page 87.  It would certainly crimp one side of the conversation or the other, I'm pretty sure. On the other hand, we could make it illegal to play both sides of a transaction, both selling and hedging against the same vehicle in a manner than would be outlawed at any racetrack or arena in the world. But we won't. That would be un-American.

 

24 Comments Add Comment

At the end of the day nothing is going to happen to no one because Wall Street is really a big casino operation. What this crises has revealed is that you do not have to be a Harvard or Yale graduate to work at any Wall Street casino operation: what you really need is big cojones, steel nerves, high tolerance to alcohol (and to other funny stuff) and, first and foremost, have a total disregard of humanity in general. How sad that Wall Street is nothing but a big Las Vegas.

Lies,deception, misrepresentation and the like, are all part of business and love.
The problem is when they are on a scale that effects the country they become noticeable.
Engineering something to fail is easy, just ask the auto industry.

Playing both sides of the fence is known as a win, win, situation.

Banks do it, finance companies do it, they all hope you will miss the last payment so they can repo the valuables.

Should we be surprised that Goldman and co. planned well in their business dealings,,,,no we should not be...

When it comes to money, every transaction should be looked upon as a hot romance,,,,the big question you have to ask is...who is doing what to who...

You know something is amiss when your banker/broker leans back, lights up a smoke and has an ear to ear grin after you sign the papers commiting your money.

I don't believe you should ban hedging or short selling. To do so condemns us to living in a world that believes prices can only increase which is how we got into the mortgage mess in the first place. It is an individual's right to question the valuation assumptions of others.

However I think your idea of forcing Golden Sacks and others of their ilk to post the disclaimer in bold face on the cover. Would be investors should also have to sign that they have read it and understand the significance to re-enforce the old axiom ( if you don't know who the fool is in the card game,it's probably you)

It looks like they are preparing to try to throw the Fab overboard and try to paint him as the rogue
trader,as if someone as junior as him could authorize such a transaction. The failure of duty to supervise should extend right to the top of the food chain.
This may yet become the most expensive piece of tail ever.

A few things I wish the whole world would learn:

- Self-policing is an oxymoron

- Governments are the only organizations powerful enough to keep multinationals nominally honest.

- Democratic government is sluggish and inefficient because it attempts to be fair.

- Private enterprise is quick and efficient because it doesn't give a damn about being fair.

- You are never safe. Never. Get over it.

- Life is unfair. Sometimes it is unfair against you. Sometimes it is unfair in your favor. As long as you played fair, don't be embarrassed about a win you didn't deserve. You've lost when you shouldn't have too. That makes it even.

I guess that's enough profound stuff for one post...

Bing:
While I won't vouch for boxing, I think you go to far in comparing horse racing to wall street. While the owners may bet against themselves, at least the horses can't get to the betting window!

There's nothing at all dishonest with coming up with an investment vehicle that will profit if the housing market (or any other market) fails. That vehicle will turn a loss if the housing market doesn't fail within some specified time period.

All of these derivitives are zero-sum; for every winner, there's a loser. If you can't follow that, you shouldn't be near them.

Anyone who was not a fool knew that the housing market was a bubble economy and was going to crash. One could have been completely right about this, been wrong about *when*, and still lost one's shirt.

What was wrong was how one side of this "bet" was portrayed. There was a conflict of interest, there was no disclosure, the risk level was mis-represented, and the entity supposedly selecting the investments was not the one actually making the selection; this was intentionally disguised. Everything that's come out regarding this situation makes it look highly unethical, yet much of the media coverage makes it look like the issue was taking a short positon against the housing market, which appears to be the only thing that was legit in this whole affair.

Personally, Leeroy, I think it's wrong to sell a product to one group of people as a good thing and the same product to another group of people as a bad thing. But then, I'm not in Finance.

Conflicts of interest and kickbacks are everywhere. The only surprising thing is just how less widespread they are in the US than most other countries.

Doctors, politicians, former government employees. Everyone sells access and relationships. Everyone who has access and relationships, that is.

Legislators should just pass an act that disallows all conflicts of interest. But that would probably look too much like an earlier act that came down on stone tablets. And that would get into separation of church and state issues.

Caveat emptor.

I think people are being unfair to Las Vegas and casinos. I've lost money there, but at least I've been confident that the place was run fairly. Don't confuse bad odds with unfairness. Casinos are very tightly regulated. They have to report their win/loss record. This data is publicly available, which is more than you can say about Wall Street. This is the whole point about this mandatory disclosure.

At least I had more fun losing money in Las Vegas than I had watching my portfolio tank because of what the overpaid liars on Wall Street did.

Why did the buyers BUY it? Nobody has to buy anything. Alternatively, before buying one can do their own due diligence. When you buy a car, you check yourself whether it cimes with the spare tire, you do not simply believe the saleman.

All you have to do is ASK for the actual mortgage origination document underlying the mortgages... ooops, those are not available? Then you do not have to buy structures built on sand...

Show me the SAND.

Yes, Drey, you can check for a spare tire. But you can't check if the guy who's selling it to you has taken out an insurance policy in your name right before cutting your fuel line.

With a nod to Leeroy.

Americans love zero sum games.

Saints 31
Colts 17

Oh, the beauty of the apparent finality, but finality is only till next time.

So Goldman gamed the system better than the next firm. Isn't that, at least in part, what they're paying those guys to do?

To quote the immortal Snagglepuss,
"Choirboys, exit stage left."

It's impossible NOT to sell a synthetic CDO to one party without another party shorting the underlying assets. It comes back to what Leeroy and Drey said: if there was misrepresentation of the terms or inaccurate disclosure, then prosecute that, but don't blame the product itself for the buyer's poor investment decision.

This whole discussion depends upon whether one subscribes to the rotten and despicable philosophy of 'never give a sucker an even break'. Such a belief is fed by the arrogance of its proponents, who believe they are above such personal foolishness.

Everyone of us is dependent upon honest and fair treatment by people who have specific knowledge and training that we do not possess. I could instantly name a dozen disciplines where such self-serving abusive, and fraudulent behavior would, unlike the business world, land one in immediate hot water with professional and legal authorities. Of course, on Wall Street, such behavior is celebrated as the essence of market freedom.

GS made a market of misrepresented financial instruments, then deliberately set itself up to benefit from the inevitable failure of those instruments. If the result of this situation is aggressive and over-reaching financial regulation, don't comdemn the public or its elected representatives....thank the likes of Goldman Sachs.

In fact, the more the financial types that visit this blog bemoan such regulation the more apparent some serious regulatory remedies are needed. There's no downside to strangling such 'free market' activities.

Hey! Welcome back ChicagoSail, you old freemarketer! ;)

Commission sales, piece work, incentives, bonuses, and ambition, among many other motivators, acts to ignite and fuel the fire of greed; we all possess it.

Piece work factory workers with their blood sweat and tears can be driven into a frenzy to kill a standards rate simply for the high that earning the extra bucks can produce.

Wall Street banks and investment firms motivators are no less different than any factory and sports incentives; except, for the cologne, wardrobe, cosmetics, illusions, and delusions that help fuel the drive to recreate that first orgasmic sales victory!

What seems to lead to addiction in greed is the drive to recapture the illusive first orgasmic sales victory, achievable only the first time. Damn it!

Disclosure was all that Brooksley Born was advocating.

Why is Goldman or any bank to blame for
this? They weren't the mortgage company who
issued these loans...why hasn't anyone blamed citi for anything? I wrote my senior thesis on the demise of the housing market in college 4 years ago. Is Obama going to come after me too? This will just end up giving other countries a competitive edge over us and then Obama will have his sorry ass back begging the Chinese for help.

what are you smoking Bing? oh that's right, there is a warning label on that product?

Bing,talk about confusion. one expose you consider farce and the next social commentary. please give me a warning. i am not as 'sharp' as you or many of your readers.

Spot on Bing! Put "Caveat Emptor" on every financial transaction document and the problem will be solved! Even Bernie has pointed this out in multiple postings on his blog! See it for yourself! http://bernard-madoff-scam.blogspot.com/search?q=caveat+emptor

Bing:

There are perfectly acceptable and valid business reasons for options contracts and derivatives. They're often complicated, however, and therefore easily abused.

Let's say you run an airline, and your costs are severely impacted by fuel price fluctuations. It might make good sense for you to contract for fuel at a set price, or better yet, have the option to purchase at a set price if prices rise.

The only way you'll get that deal is if someone else is willing to take some cash in exchange for accepting your risk. They're taking the other side of your deal. If prices remain low, they profit. If prices rise, they lose and your airline is protected. You're essentially buying fuel price insurance.

One might be involved in building real estate, and want to offset the financial risk of a market collapse by investing in a short position that will profit in a downturn to offset the risk of building.

Or, one could just be fairly certain that the market is due for a correction and be gambling on being right, of course.

Nonetheless, there are plenty of valid and certainly ethical reasons for short positions, but every time anyone makes money on the short side, it gets portrayed as thievery.

The American people need to wake up and realize that they have been the victim of a great and terrible black lie. A lie promoted by the very corporations that drug us to the brink of a second great depression. This lie is that Capitalism = Democracy. This is the greatest fraud ever perpetrated against the american people. China and Nazi Germany both had rampant Capitalism without the slightest shred of democracy. We are in dire danger of losing democracy and becoming a "Corpocracy" ruled by the Corporate Elite.

One delicate moment. I heard of this talk about "market making." Here is the delicate part. This was not the usual market making. In the usual market making, a market maker has an inventory of CASH and of stock, say CITIGROUP stock. The market make stays ready to use his cash to BUY the stock and uses his inventory of stock to SELL it. Thus, he stays ready to BUY and SELL, therefore he MAKES MARKETS.

Please notice that the market maker dod not create (did not design) the instrument in which he makes markets. Disclosure regarding cash flows of the asset, Citigroup, is up to City.

This is very different from making markets in an asset that one actually built/designed and has premier information about.

I wonder why nobody picked up on this when all the talk of market making was happening...

Which Economist advises law makers?

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