The "Fabulous Fab" Goes To Washington

Goldman Sachs is a corporation with over 25,000 employees. If you go through 25,000 people's emails you will find some people who believed housing was a bubble and you will find people who believed housing prices would continue higher. You will also find some narcissists, like the "Fabulous Fab", who refer to themselves in the third person.

There is very little evidence in this case but that does not matter in the court of public opinion. This was a very shrewd move by Obama to win over the masses and increase the pressure to get financial reform passed. Wall Street plays hardball with their armies of lobbyists and Obama is hitting back. While Goldman probably acted within the letter of the law, its hard to say they don't deserve this. The pursuit of short term  profits is all that matters on Wall Street, no matter what the long term damage is. The bonus comes first is the real Wall Street motto.

Financial reform will hit all the Wall Street banks but the market is acting as if Goldman will be the only one effected. It is very possible that we will see a bottom today in Goldman as the bad  news is bought. Toyota Motors bottomed the day of their Senate hearing and we might see the same for Goldman today.

12 comments:

IC said...

I don't agree. Goldman created a product (CDO) at the behest of a sophisticated short seller and then sold it as "AAA" after bullying the ratings companies. No one buying this crap (mostly pension funds) was told why these vehicles existed in the first place and that is certainly material information. By definition withholding material information is fraud and all these banking behomth managers should spend some time behind bars.

Tsachy Mishal said...

While that is morally reprehensible. As long as the proper disclosures are made its not illegal.

Anonymous said...

In hindsight it's easy for us to say they' were terrible investments and thus a fraud (after the meltdown) but at the time people didn't see it that way even though some people might have. And this was before Paulson made his money.

IC said...

That is the point, the proper disclosure had to include the reason for the creation of these vehicles. Normally no one creates things for the sole purpose of loosing money, so that is a very unusual investment vehicle and that part should have been disclosed to any investor.

Tsachy Mishal said...

To add to anons post: at the time it was easier to find sellers of CDS than buyers. That is why the buyers got to choose.

IC said...

GS created these CDO for Paulson, his group picked the worst possible trenches so he could short them. Again there is nothing illegal about it as long as the buyers were aware of this and consciously took the risk of betting against Paulson, but this information was not disclosed and is thus fraud.

PJ said...

I'm not sure I follow the first half of your reasoning.

GS and MS are the only "clean" investment bank plays, and both are down about 20% from their October highs. Though the other banks are less exposed to investment banking, they have underperformed recently too. So, the argument that GS has taken a disproportionate price hit from the news is not an open-and-shut case.

Moreover this is not just a legal issue but a PR issue. The fact that the government is using MS and not GS to sell its C shares illustrates the significance of perception. GS gets much of its income from government activities, and if it's becoming politically anathema then its franchise is in real trouble. Private i-banking is being undermined by the Internet, that's why Lehman/Bear/Merrill failed and MS and GS came close. If GS loses its political business, there may be nothing left.

Also remember GS is a global business and it is getting hammered in Europe now for PR reasons.

Finally, as IC says, the case against GS is reasonable. Just because for decades the SEC has been overlooking failures to disclose material facts, doesn't mean they can't win a prosecution, especially since they are only bringing a civil case (reduced burden of proof - preponderance of evidence).

Senate hearing as a potential buying opportunity, that makes sense. But I would make it a very short-term trade.

Anonymous said...

Also Tsachy, GS's interaction with the rating agencies may constitute fraud. Seems like they knowingly coerced the rating agencies to prop up the ratings on a lot of the debt they were selling.

Anonymous said...

goldman made a market. everyone knew that there was a sophisticated investor on the other side. moreover, everyone knew what they were buying. it's goldman's job to manage risk and make markets, and managing risk means SHORTING... regardless of what they think of the direction. every hedge fund is managed this way...

Tsachy Mishal said...

There is no evidence of that even though it likely happened. The only evidence is some embarrassing but circumstantial e-mails.

What the banks did to this country makes me sick but these are the facts and this is still a democracy. The best we could do is pass financial reform that will make sure this doesnt happen again.

IC said...

We had financial reform it was called the Glass-Steagal act, passed after the Great Depression to prevent this and it worked; guess who lobbied hardest to get rid of it? Yep, GS. We need to reinstate it. However fraud has always been against the law and it simply needs to be prosecuted appropriately.

PJ said...

Well, GS Senate panel rally lasted one hour. Hope you were nimble.