Goldman Case Not Open and Shut

The case against Goldman Sachs is not an open and shut case. Paolo Pelligrini, of Paulson & Co. at the time of the transaction, gave testimony to the SEC that he told ACA he intended to short the CDS in question. The $13 billion hit that Goldman's stock took when this case was announced seems to price in a worst case scenario.

It is undeniable that these bankers have prospered while bringing the country to its knees. Financial reform is needed and this will effect profits in the entire financial sector. However, the way the market trades it seems that Goldman is the only one that will suffer.


PJ said...

I agree that the market is not trading rationally ... C is up at $5 for no reason other than that the government needs it there to find $30 bn of buyers ... whatever the government wants, it is getting ... it wants Goldman to be a political show animal defusing criticisms that it is in bed with the banks ... In the end it may amount to nothing, and they can say they tried.

But I don't see why you think financial reform is necessarily bad for the banks. They get one of their main lobbying goals, a permanent Treasury slush fund for bailouts and permanent Treasury authority to do bailouts without congressional approval. Other provisions will be full of loopholes. This bill will give the government great power over the banks, but it's not clear that's bad for politically well-connected banks. It will likely reward big banks and further concentrate the banking industry.

Tsachy Mishal said...

An exchange and clearing house for opaque derivatives is the last thing investment banks want. They want to control the market so they could earn larger spreads.

Reform will include stricter leverage rules and more oversight which will also hurt profitability.

PJ said...

Yes, I agree with that ... but will that be in the final bill? The sense I get from people in the industry is that it's completely impractical to move most contracts to exchanges, and so such a provision would bring about a dramatic fall in systemic leverage. But the economic policy of Summers/Geithner/Bernanke is to increase systemic leverage as much as possible ... they have enough influence, along with the banks via Dodd/Schumer, to make sure nothing like that is in the final bill, or that it has loopholes they can drive a truck through.

More oversight will add costs but it will reduce competition. It will drive the small banks out and leave a few titans with a near-monopoly on most trading. Just the information value of that is huge.

I do think it's probably negative in the long run. A firm like Goldman will become a ward of the state; able to make huge profits as long as they are in the good graces of the authorities. Over time the politicians will extract more and more of the profits, and there will be less for shareholders.

But as this market shows, the long run can take a long time to reflect itself in market prices. In the short term they'll have a cozy relationship with regulators and growth in market share.

PJ said...

The big problem for Goldman is that they could become a global scapegoat. They're now being investigated by Europeans, by American states, by the US Senate, and private litigators who are not under the control of the Obama administration. This could metastasize.