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Wall Street Should NOT Have to Defend Itself Against Washington’s and Media’s Ignorance

Posted by Larry Doyle on April 29, 2010 10:27 AM |

I am not bashful in calling out Wall Street for its shortcomings and transgressions throughout our economic crisis. Similarly, I am happy to take Washington or any other party to task for shoddy performance. I welcome the same treatment if and when readers view Sense on Cents as being off base or out of line. Spirited engagement between and among interested and informed parties is the foundation for real progress.

So while I am willing to call out Wall Street when necessary, I strongly believe that the industry should not need to defend itself from the ignorance, and often abrasive ignorance, heaped upon it by those in Washington or the media.

In that vein, I am all too happy to blast members of the Senate subcommittee for real ignorance on a number of fronts during their questioning of Goldman execs this past Tuesday. I am also happy to blast The Wall Street Journal this morning for a ton of drivel put forth in writing, Clients First at Goldman?:

Who wants to entrust their money to a Goldman Sachs fund after this?

Ordinary investors around America have more than $50 billion invested in Goldman Sachs mutual funds, says industry specialist Financial Research Corp. That makes the beleaguered Wall Street bank one of the top 25 managers in the country.

And Tuesday many of those investors will have watched, with disgust, the Mark McGwire moment during the Senate hearings at which four Goldman executives, former and current, testified about the firm’s role in the collapse of the mortgage market.

(The former major league baseball player famously refused to answer congressional questions about alleged steroid use, instead insisting “I’m not here to talk about the past.”)

Why doesn’t The Wall Street Journal use the same approach in going after Mary Schapiro and her tenure at FINRA? You want gutless? I am happy to call the editors of The WSJ totally gutless for allowing Ms. Schapiro to continually play the Mark McGwire card on that front. I have had no problem in calling out our current SEC chair. (In fact, I used the McGwire baseball reference in a commentary I wrote this past January entitled, “Mary Schapiro and Mark McGwire.”) Back to The WSJ piece:

Just before lunch Maine’s Susan Collins (R.) asked the Goldman honchos an equally straightforward question, which should be a slam dunk for any self-respecting professional–namely, whether the firm puts its clients’ interests first. And several pointedly refused to give a direct answer.

Dan Sparks, former head of the mortgages department at Goldman paused briefly, then said: “I believe we have a duty to do well for our clients.”

Fabrice “Fab” Tourre, the Goldman executive director who is named in the SEC’s suit against the firm, said Goldman has a duty to serve clients in its role as a market maker by providing liquidity. “I do not believe we act as an investment adviser to our clients,” Mr. Tourre said.

Sounds like rhetoric from the public relations firm of Waffle, Weasel and Spin.

Neither Senator Collins nor The WSJ’s reporter Brett Arends understand the frame of reference for this question. The Goldman execs answered the question based upon their roles and responsibilities within the firm. These individuals are traders. Their role is to make markets and provide liquidity to clients. The Goldman salespeople covering customers have the responsibility to represent and protect client interests.

The reporter Brett Arends references Goldman Sachs funds as if they were managed by these individuals. Perhaps he may want to do a little homework before spewing off. The funds referenced are marketed and managed by a totally separate division of Goldman Sachs, that is Goldman Sachs Asset Management. In point of fact, GSAM is most likely largely if not totally precluded from doing business with the broker-dealer division within Goldman.

I am all for calling Goldman Sachs and these individuals on the carpet, but they should not have to defend themselves against the ignorance displayed by Senator Collins and the WSJ’s reporter.

America’s interests will never be served if those charged with questioning and reporting have little to NO understanding of the industry.

LD

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  • LRogers

    Larry,

    Here’s a few names who should be sitting where those GS guys were:

    – Chris Cox (ran the SEC during this mess and allowed banks to over leverage themselves, not to mention he struck out on Madoff)
    – Whatever senators approved the mark-to-market rules that were in place
    – Greenspan, Rubin
    – Daniel Mudd and the guys who pushed Fannie and Freddie into the sub-prime business
    – The rating agencies

    On a separate note: Its unfortunate how people in the media like Olbermann can edit the scenes from the hearing to make it seem like the senators Levin and McCaskill stuck it to the GS guys. (I’m surprised he didn’t show footage of Collins embarrassing herself, he doesn’t usually pass up on exposing a stupid republican) The whole time I felt like I was watching a high school mock trial team during a cross-examination.

  • phil trupp

    While I agree we could use a lot more sophistication among financial writers and legislators, the GS witnesses didn’t do themselves any favors, either. They were often evasive, occasionally confused, and unprepared to make statements in PUBLIC–a different exercise than discourse in the realm of trader talk. When you come to Washington to make your pitch, especially when you are here to defend your position, you had best be prepared to speak in simple declarative sentences. Financial-speak is viewed by the public as “obfuscation.” Wall Street has never been known for making good cases in public; and the public, in turn, responds in the most negative ways, as if being spoken down to. Wall Streeters are not the smartest guys in the room when it comes to political savvy or gaining public trust. If the legislators and the press are often short on financial wisdom, Wall Street is in the dark when it comes to PR. The result is confusion and a sense that the Street has separated itself from the rest of us. In this last point–the appearance of separation– are the devilish details over which all parties stumble.

  • beth

    Hi Larry,
    I have a few questions re GS/Abacus;
    First: Did Paulson choose those securities? If so, did he then ask GS to market them: as reported GS then found the investors for the deal.
    My questions:
    1. Why would an investor buy (according to what I’m reading) toxic inventory such a Abacus?
    2. Why would that investor want this investment vehicle to tank in 7 or whatever months?
    3. Wouldn’t that investor want this investment to succeed/ pay off unless the investor himself shorted the deal as well.
    4. Wouldn’t GS as an investment bank want the ‘client’ investor to succeed and make money.
    5. How sophisticated were these investors? I believe they were entities such as Pension funds and according the reports Germany’s IKB Deutsche Industriebank did as well as other investor entities.
    6. Aren’t these knowledgable investors? why would they buy toxic sub prime???

    Can you explain this?
    What am I missing. I am so confused w/ this?
    Also, Do you know of any websites or info that I can read to help me understand this transaction.

    Thanks so much for your input,
    Beth

    • LD

      Beth,

      All great questions.

      First: Did Paulson choose those securities? If so, did he then ask GS to market them: as reported GS then found the investors for the deal.

      Based on my knowledge, Paulson and team heavily influenced the assets selected so they reflected loans that would most likely decline in value.

      My questions:
      1. Why would an investor buy (according to what I’m reading) toxic inventory such a Abacus?

      A lot of investors, believe it or not, were lazy and would not perform serious due diligence on a deal. If the security received a AAA rating within the deal structure, the investor was more focused on the price of the bond rather than the true quality of the underlying pool of collateral. They screwed up in not fully appreciating the likelihood that a lot of the underlying loans were poised to decline in value — if not outright default based on a variety of reasons.

      Would they have performed greater due diligence if they knew the counterparty who heavily influenced the selection of collateral was short that collateral into the deal? Well, if they would not do the due diligence then they deserve to lose their money and their jobs.

      2. Why would that investor want this investment vehicle to tank in 7 or whatever months?

      What investor? The entity buying the deal would certainly not want it to tank. The entity (Paulson) which shorted the collateral would want it to tank.

      3. Wouldn’t that investor want this investment to succeed/ pay off unless the investor himself shorted the deal as well.

      Yes. Any investor purchasing this deal would want the deal to perform.

      4. Wouldn’t GS as an investment bank want the ‘client’ investor to succeed and make money.

      Typically, an underwriter would very much want deals to perform so the investors are happy and buy more of your deals in the future. A question that should be pursued is what sort of underwriting fee Goldman was paid to get this deal done for Paulson. Was the fee outsized which would have skewed GS motivations? The Senate subcommittee should have required this info to be presented and verified.

      5. How sophisticated were these investors? I believe they were entities such as Pension funds and according the reports Germany’s IKB Deutsche Industriebank did as well as other investor entities.

      Sophisticated is all relative. They are more sophisticated than Mom and Pop, but less sophisticated than what you may believe. Especially investors who purchased what they thought were the top slice of the deal (AAA), they often would not perform real due diligence.

      6. Aren’t these knowledgable investors? why would they buy toxic sub prime???

      The way that the deals were structured (either through excess collateral or overcollateralization, that is $110 worth of sub-prime collateral used to create $100 of bonds), investors thought the deals had enough support to perform. How wrong they were. They also did not appreciate that there were a LOT of very poorly — if not fraudulently — underwritten mortgages used in these deals. The mortgage originators, the underwriters, the rating agencies, the regulators, and investors all deserve blame for not addressing that reality.

      Can you explain this?What am I missing. I am so confused w/ this?

      I hope this helps.

      Also, Do you know of any websites or info that I can read to help me understand this transaction.

      I do not. These are great questions. Hope this helps you and others who read my answers.

  • beth

    Thanks Larry, I’m understanding this a whole lot more!

    Just one more question:
    you said… A question that should be pursued is what sort of underwriting fee Goldman was paid… Was the fee outsized which would have skewed GS motivations?

    What exactly does ‘outsized’ mean?

    Thanks again for all your input.

    Beth

    • LD

      Beth,

      The underwriting fee is the money earned by Goldman or any other bank in bringing a deal to market. On a deal of this sort, a typical underwriting fee would probably be in the realm of 1 to 3 points. What does that mean? I believe the deal was a $1.1 billion transaction, so a 1 point fee would equate to $11 million.

      I would define outsized as 5 points meaning Goldman would have earned $55 million.

      If America knew that info then it would more fully understand how and why Goldman acted in the manner that it did.

  • beth

    I don’t want to take up all your time, just another thought…
    it makes me question, why have rating agencies if you can’t believe their ratings? what use are they? esp if investment firms like GS etc pay for the agencies to rate them… isn’t this a conflict of interest?
    why not do your own research on these investments… but that makes me question if you do your own research how reliable is that data that’s coming out… how reliable is that prospectus? look at Enron?…

  • Larry Doyle

    Beth,

    Your points are well taken. The fact is the entire Rating Agencies business model (banks pay the fees earned by the Ratings Agencies) is nothing short of an enormous conflict of interest.

    People do need to do their own research. In that process people can utilize the ratings agencies views but should not take them as a blanket endorsement.

    Add it all up and Caveat Emptor, “Buyer Beware” remains the order of the day….along with reading Sense on Cents. (LOL)






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