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A Wall Street Insider’s Views on Goldman Sachs

Posted by Larry Doyle on April 16, 2010 1:45 PM |

Given the extraordinary interest in the SEC charging Goldman Sachs with fraud, I am compelled to provide a compilation of my writing on Goldman going back over the last year. Although many may view Goldman as one massive conspiracy, I have never been one to paint an entire organization (or industry) with a broad brush. That said, I have been aggressive in questioning Goldman’s comfort level in jeopardizing its reputation in pursuit of profit. I said as much in a public interview on CNBC last month.

Goldman’s close, if not incestuous, relationships with Washington, many hedge funds, and major clients has positioned the firm as the centerpiece of America’s outrage toward Wall Street. To that end, for those interested in my views of Goldman Sachs, I am happy to provide the following links from the Sense on Cents archives:

Doing Biz with Goldman Sachs = ‘Swimming with the Sharks’ (April 14, 2010)
This piece highlights that WaMu’s CEO Kerry Killinger writes in an email that he does not trust Goldman Sachs.

Goldman’s Prop Trading and Reputational Risk (March 12, 2010)
This piece addresses how Goldman seated a prop trading desk right next to its customer desk. A highly irregular and questionable decision.

Goldman Sachs: The Reputation You Deserve (March 2, 2010)
This commentary addresses the fact that Goldman realizes it has an image problem. Why? Goldman does not fully appreciate the result of compromising its reputation in pursuit of profit. Or, perhaps they do but do not truly care.

Media Appearance on CNBC’s Street Signs (March 2, 2010)
After writing the piece mentioned above, I was contacted by CNBC to appear on Street Signs to address issues surrounding Goldman Sachs. At the 3-minute mark of the video clip, I warn that Goldman’s greatest risk involves questionable business practices resulting in a jeopardized reputation.

Goldman Sachs: ‘The Great Enabler’ (February 17, 2010)
Did Goldman facilitate the meltdwon in Greece by disguising its overall fiscal position? Read this.

Is Lloyd Blankfein a Liar? (November 18, 2009)
This probing article addresses Goldman’s involvement with the bailout of AIG.

Just How Sorry is Goldman Sachs? (November 17, 2009)
Lloyd Blankfein issues an unspecified mea culpa. Why? I cover the possibilities.

Goldman Sachs Doing God’s Work? (November 10, 2009)
Blankfein displays the ultimate chutzpah in invoking the Lord’s name. What balls and what ego.

Goldman Sachs ‘Shooting Fish in a Barrel’ (November 5, 2009)
How could Goldman’s trading operation only lose money one day in the entire 3rd quarter of 2009?

Goldman Calls ‘Huddle Up’ (August 25, 2009)
Goldman picks and chooses selected clients who receive color and proprietary information prior to it being broadly disseminated.

How Does Goldman Sachs Operate? (July 6, 2009)
My initial review of the firm. I likely stand corrected on my commentary on Goldman’s shorting the sub-prime market in light of news breaking today.

LD

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  • Fred

    Larry,

    I have also been very critical of GS in the past. I do however, find myself siding with GS in these matters. Less than full disclosure to “sophisticated” investors hardly seems earth shattering.

    • LD

      Fred,

      In speaking with an insider on Wall Street, he shared that the dealer community likely did widely conspire with selected hedge funds to structure these deals. Selected law firms also facilitated the lack of disclosure.

      If the SEC chooses to follow all the paths, a significant part of the structured finance business on Wall Street may be exposed as being a fraud.

      The hedge funds were making a fortune. Investors lost a fortune. The Wall Street banks were taking out their fees.

      Will be very interesting.

      • Fred

        Larry,

        I just don’t see the fraud; unless these securities were misrepresented as being something they were not (ie. rated BBB and sold as AAA) or sold to “unsophisticated investors” and the risk not adequately disclosed.

        According to the allegations, GS defense is that they only acted as a market maker. I’m sure Paulson demanded “cherry picking” as a condition of the deal getting done.

        Granted, it doesn’t look good for one side of a trade to influence the makeup of the security, but they were rated by a credit agency and purchased by “sophisticated” investors.

        You may have to go back to Mike Milken and junk bonds for any precedence.

        • LD

          Fred,

          I understand the case as follows:

          1. Paulson was involved in selecting the collateral for the deal. That was not disclosed but legally it should have been. The law firm used on the deal may have liability here.

          2. Paulson was presented as an investor in the deal but he actually shorted the deal. That misrepresentation would seem to rise to the level of fraud as well.

          I believe the Chicago-based hedge fund Magnetar was heavily involved in these types of transactions as well, as our friend Bill points out.

          The disclosure requirement is critically important so that investors are aware of potential conflicts of interest.

          Additionally it is interesting that the VP was singled out at Goldman. How about his managers under a failure to supervise? How about the salespeople who were involved in negotiating terms? How about trading management?

          If the SEC follows this path, it may lead them to a wide array of deals at a number of shops.

          You can’t just tell investors, Caveat Emptor. There need to be some rules of the road followed in regard to disclosure and representations of interests.

          Will be very interesting. I have to believe there are some guys at different hedge funds and Wall Street shops who are going home tonight more than a little bit nervous.

          • Fred

            Larry,

            I do agree with your second point and disclosure rules exist and therefore should be complied with and enforced.

    • JPC

      Perhaps it’s not “earth shattering,” but even if GS dodges legal responsibility here, it’s unlikely that GS’ clients will listen to its sales pitches with the same confidence and trust. Unless you never want to deal with a client again, you never “bag” them. Your reputation in this business is crucial, and GS has hurt itself severely in its short term focus on profit. The old partnership would not have sacrificed the decades of good will for a fast buck.

      • Fred

        I don’t disagree. GS will loose in the court of “public opinion”. In my opinion, “sophisticated” investors that are “sold” aren’t very sophisticated. Maybe they should have to defend their qualification and answer to their constituents without passing “the buck”.

  • Matt

    Larry –

    On another note briefly, 5 bank failures today, including a big bank with $3.5 billion of assets (Riverside National Bank of Flordia). Today is a big hit to the FDIC’s ever-dwindling Deposit Insurance Fund.

    Matt

  • Aaron Kramer

    The damage to GS is done regardless of the outcome. Get ready for the state and municipal laws and regulations banning GS from underwriting bond offerings in the future. Think about advocate investors like CALPERS and other pensions funds, will they continue to do business with GS or Paulson? This could really do major damage to GS and the market as a whole.

  • Stu

    This is PR..nothing more. How many billions or trillions of dollars are US taxpayers on hook for? This crisis was not a mere miscalculation on the part of investment banks but an orchestrated effort by the globalists to further consolidate the control of capital.

    The media will try to play the rule of law applies to everyone canard. The US public will buy it. $20 Million dollar fine which Goldman can write off. The financial “reforms” will be pushed harder and will likely pass…resulting in the fourth uberbranch of “government”: the Federal Reserve and a nascent global regulatory regime.

  • john w

    Why is the media, politicians, and so-called toothless Regulators afraid to breathe the words “Auction Rate Securities”. This is still the largest fraud of all of Wall Street’s crimes, and gets scant attention. Why ?
    This should have been part of the SEC’s charges, as Goldman Sachs invented the Auction Rate Security fraud scam in the 1st place!

  • lizzy

    LD,
    Isn’t the timing of this suit a little suspisious? BO just forced through his historical health care deformity. Then we had the nuclear summit dog and pony show. Now after only two plus years we are going after Goldman. Got to whip up public opinion to pass yet another worthless bill purporting to reform and regulate the financial sector. Smells like last week’s dead fish.

    • LD

      Lizzy,

      Things that make you go hmmmmm??!! Why didn’t the GS fraud suit go after trading and sales management instead of just the VP who structured the deal? Why was the charge released the same day that the SEC OIG released a very incriminating report of the SEC’s bungling of their Stanford investigation?

      Hmmmmm….

      Administration needs a little mojo in an attempt to push through the financial regulatory reform. Orchestrated or not (the timing of both SEC stories on the same day speaks volumes), the fact that Americans believe it is orchestrated is all we really need to know. Americans do not trust our government. It’s that simple.

      Good point….thanks for raising it!!

  • coe

    I don’t think anyone should take much delight in these developments. I certainly don’t. Clearly, as you and your readers have pointed out, it is curiously timed and will absolutely lend weight to the well-intentioned but seriously flawed regulatory reform bill. How ironic is it that this bill bears the imprint of Chris Dodd, a Senator who was personally and politically buoyed for years by the RBS/UBS/Hedge Fund titans setting up shop in CT? It can’t be good for the market, for the economy, for the mortgage sector, for the recovery of the much needed securitization market, for all credit markets…And though Wall St has always found and rewarded their very own wunderkinds, the fact that this structure went to some form of screening/management committee at GS cuts to the heart of the matter – i.e. where is the ethical leadership on Wall St? Maybe I am a bit rusty in my folk lore, but didn’t John Guttfreund and Tom Strauss take the fall when a young-ish Salomon Brothers’ government trader was found to be improperly manipulating the auction activities?
    And how is it possible that the hedge fund that helped concoct this scheme has done nothing wrong? Yet another black eye for our big institutions, for Wall St, and for capital markets in general – not good!

    If there is any honor at all at GS, Blankfein would be ousted for lack of supervision as would those in the supervisory chain who tacitly approved the deal. Do we think that will happen? One can hope. Yet another example of playing with fire when there is excess leverage and structured credit mischief – now that’s a product that needs some boundaries, don’t you think!

    • LD

      Coe,

      You nailed it. Gutfreund and Strauss did pay. I am sure you recall that none other than Warren Buffett took over the management of Salomon and appointed …..drum roll, please….Deryck Maughan.

      Whatever happened to the failure to supervise rule? Is that just for the small shops or those not well connected?






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