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Quelle Surprise! Goldman Knowingly Sold Garbage Barges

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As Goldman and the Senate Committee on Investigations are duking out The Battle of the E-Mails, with each side claiming the other has painted a misleading picture, it is becoming pretty clear that Goldman, contrary to its sanctimonious twattle about putting clients first, actually puts its fees first.

This should come as no surprise to anyone who had dealt with the industry; indeed, any other behavior would be surprising. Transaction-based revenues, not surprisingly, induce participants to complete more trades, the bigger and higher margin, the better. The old-school style of cultivating relationships and taking a protective posture towards clients went out of fashion in the age of the dinosaurs, meaning roughly the 1980s.

While the securities industry had always focused on getting deals done, deregulation has led to changes in industry structure and conduct which in turn unleashed much more aggressive behavior (we discuss this issue long form in ECONNED).

So it is predictable that an e-mail dump would unearth some less than savory conduct. For instance, the Wall Street Journal highlights that Goldman worked with some crappy lenders:

Washington Mutual Inc. and its Long Beach Mortgage Co. subprime-lending unit rang up one of the worst failures in U.S. history. Left in the wake were billions of dollars of soured loans and questionable lending practices…

Recently released emails and other documents, including securities filings, show how Goldman, considered one of Wall Street’s most elite banks, built its mortgage business by closely working with lenders such as Washington Mutual and Long Beach, two firms that “polluted the financial system” with souring loans, according to a Senate review of Washington Mutual on April 13.

Yves here. There is a little problem with this account. Anyone who was in the subprime business would have dealt with some crappy lenders. So while Goldman is fair game for criticism here, why aren’t the other major firms also being raked over the coals?

More revealing is Goldman’s role in a particularly bad deal, Timberwolf. a $1 billion CDO. From the Financial Times:

Goldman Sachs officials privately disparaged a complex $1bn mortgage security that the Wall Street bank sold to investors, according to e-mails released by Senate investigators on the eve of hearings on Tuesday on the bank’s role in the financial crisis….

The Goldman communications released on Monday involve Timberwolf, another so-called “collateralised debt obligation”, or CDO, which was structured by the bank to give investors a chance to bet on subprime mortgages.

Tom Montag, then a senior Goldman executive and now head of corporate and investment banking at Bank of America, was quoted as describing the deal in an e-mail as follows: “Boy that timeberwof (sic) was one shi**y (sic) deal,” according to the Senate subcommittee.

The subcommittee said that Matthew Bieber, the Goldman trader responsible for managing the deal, later described the day that the Timberwolf security was issued as “a day that will live in infamy”, recalling the language President Franklin Roosevelt used for the Japanese attack against Pearl Harbour.

Bloomberg provides additional detail:

[Daniel] Sparks, who left the bank in 2008, in one e-mail urged “personnel working on a potential Korean sale to ‘[g]et ‘er done,’ and sent a mass e-mail to the sales force promising ’ginormous credits’ for selling” the debt, according to Levin’s statement. “A congratulatory e-mail was sent to an employee who sold a number of the securities: ‘Great job … trading us out of our entire Timberwolf Single-A position,’ ” the panel said, potentially referring to $36 million of A-rated notes.

Yves here. Securities salesmen are often offered extra “credit” meaning sales credits, to encourage them to work on difficult or time-sensitive trades. An article by Louise Story at the New York Times discusses five Goldman transactions that show, in the eyes of the Senate subcommittee, that Goldman that Goldman put its profits ahead of its clients’ interests.

Note that these exchanges don’t simply suggest that Timberwolf was a bad transaction; they depict it as a singularly wretched monstrosity. And that in turn implies that there were less ostentatiously awful deals that Goldman also trafficked in. A “routine” bad deal might not merit comment (I’ve seen enough of these back as far as the more prim and proper 1980s as to be highly confident that that pattern is even more deeply entrenched now), which might make it harder for investigators to ferret out, since it would be unlikely to provoke the sort of comments that are persuasive to a jury or judge.

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18 comments

  1. RPB

    I will not cry tears for Goldman and if they did anything wrong I hope they get nailed to the wall.

    But if we are going to indict Goldman, should we not investigate the managers who bought this sh*t? They too are at least partially responsible because it is their job to investigate the quality of their investments. Goldman may have done something wrong, but this was not Ma & Pa Kettle putting their mattress savings into some fancy wall street da-rav-a-tav. These investors are ***supposed*** to be sophisticated, experienced managers capable of discerning quality investments.

    Look through their emails, how much due diligence did those jokers do? I bet they even thought they were getting a sweet deal!

  2. attempter

    So while Goldman is fair game for criticism here, why aren’t the other major firms also being raked over the coals?

    Because Goldman’s the one who’s supposedly now finally on the ropes. (Though I’ll believe this isn’t political theater when I see real results.)

    From these e-mails it sure sounds like these thugs were enjoying themselves. And they all still get to keep laughing at the same or better jobs.

    Yes, keep laughing. We appreciate that. It helps clarify things for more and more people. We’ll see how funny they are when we take back the country and finally pay them as they really merit. I imagine justice, even and especially if delayed, can in the end serve up quite a “bonus” of its own.

  3. a

    “So while Goldman is fair game for criticism here, why aren’t the other major firms also being raked over the coals?”

    Because they haven’t been accused by the SEC of anything, and so only Goldman has suffered having to reveal its eMails. The eMail dump is one of the most important elements in the SEC’s strategy. It will hit Goldman’s reputation – hard. I don’t think there are many firms, even the saintliest, which could endure an exposure of their emails to the general public.

    1. krf

      totally agree that the SEC’s real “case” is the PR campaign using GS own emails. GS has done themselves no favors in this regard. I think GS will find they should have just paid the $2-3B fine to the SEC and gotten it over with. The PR debacle that is unfolding is far more damaging in terms of reputation and investor confidence – “and its not over yet”(to borrow Lloyd’s phrase). They have already lost several european institutional investors. They need these players as suckers, so there goes that business model.

      1. aet

        IIRC e-mails did not help Enron either.

        I would have thought that that episode would have taught people something. But no.

        1. Anonymous Jones

          Wow, let me tell you, the number of incriminating emails sent does not seem to have diminished at all. I have had some of my own employees send me emails basically asking me if it’s ok if they commit fraud with a lender or a customer. First of all, I say no on substantive grounds, then I mercilessly ridicule them for writing it down in an email. People just don’t get it, and on top of that, they never entertain the possibility they will get caught.

  4. M.InTheCity

    Yves – your point about “routine” bad deals is very important. The normalisation of crap deals and screwing over clients certainly will make it harder to find “smoking guns”.

    1. DownSouth

      Andrew Bacevich asserts that the finance industry complex is not alone, that a similar phenomenon has occurred in the military industry complex as well:

      No matter how great the disaster—-in relation to Iraq alone, consider the flawed intelligence used to justify the invasion, the bungled occupation, and the billions of “reconstruction” dollars squandered or stolen as a result of incompetence or blatant corruption—-senior officials operate on the implicit assumption that they are immunized from accountability. In May 2007, in a stinging critique of post-9/11 military leadership, Army Lieutenant Colonel Paul Yingling wrote in “Armed Forces Journal” that “a private who loses a rifle suffers far greater consequences than a general who loses a war.” Yingling is correct—-and one could easily broaden his indictment to include high-ranking civilians. A Pentagon file clerk who misplaces a classified document faces stiffer penalties than a defense secretary whose arrogant recklessness consumes thousands of lives.

      Failure does not yield apology or contrition or even acknowledgment of responsibility. Instead, it creates opportunities for yet more obfuscating explanations; in short, the chance to write a self-explanatory memoir. “Look, not everything went right,” Secretary of State Condolezza Rice explained in shrugging off Iraq. “This is a very difficult circumstance. There were some things that went right and some things that went wrong. And you know what? We will have a chance to look at that in history. And I will have a chance to reflect on that when I have a chance to write my book.”

      Faced with a choice of acknowledging an uncomfortable truth or finding some way to conceal, spin, or deny that truth, those who preside over the institutions of the national security state invariably choose the latter.
      –Andrew Bacevich, The Limits of Power

      1. Cynthia

        Yes, DownSouth, our banking system has patterned itself after our fat and bloated military system to the point where the two are like two peas in a pod. So we must put a lid on the both of them before they drive our country into third world status.

        1. aet

          I could easily be wrong, but I have always thought that too-low interest rates during the build-up to the current wars was one of the bigger reasons for the economic debacle we’ve been seeing.

      2. aet

        “Easily be broadened…”?
        More like “necessarily implies”.

        In the US, the Armed Forces are entirely under civilian control.
        Again, I may be wrong, but could not the C-in-C dismiss the entire Officer Corps if she saw fit?

        By C-in-C, I mean the President of the United States.

        1. Anonymous Jones

          Alas, having the right to do something is different from having the realistic ability to exercise that right. This has been especially true throughout history regarding government’s right to control the military.

      3. Doug Terpstra

        DS, great observations. Many believe the two are inseparably co-dependent and have coined the label Military-Financial-Industrial-Complex (MFIC) to describe the “wretched monstrosity” (to borrow Yves’ vivid term).

        The subtitle to Bacevich’s book is “The End of American Exceptionalism”, which the synergy of military and credit debacles are certain to accelerate. Of Candidate Obama, Bacevich writes:

        ‘Victorious in snowy Iowa, the candidate proclaimed—to wild applause—that “our time for change has come.” If elected president, he vowed to break the power of the lobbyists, provide affordable health care for all, cut middle-class taxes, end both the war in Iraq and the nation’s dependence on foreign oil, and “unite America and the world against the common threats of the twenty-first century.”…’

        ‘…to imagine that installing a particular individual in the Oval Office will produce decisive action on any of these fronts is to succumb to the grandest delusion of all. The quadrennial ritual of electing…a president is not an exercise in promoting change, regardless of what candidates may claim and oridnary voters believe. The real aim is to ensure continuity, to keep intact the insitutions and arrangements that define present-day Washington… The candidates who decry the influence of money in national politics are among those most skilled at courting the well-heeled to amass millions in campaign contributions.’

  5. NS

    Thank you Yves for all your hard work. I wish you continued success. I’m sincerely happy you finally made it back after an extended stay in the UK.

    The routine bad deals aren’t surprising and hardly limited to GS. JPM just as, if not more so, in its double dirty dealings. Citi, Wells, BoA/countrywide/Merrill…none can be excluded..and it extends overseas too.

    What is sincerely frightening to this nobody reader is what constitutes the majority of the SIV market, which are not CDOs but currency and interest rate swaps accounting for hundreds of trillions involving the IBs in the US and abroad.

    If this little trickle results in a tsunami of realizations that unveils this opaque market, it will reveal the entire world as rubes of ‘sophisticated investors’ just like those of Birmingham Alabama and IDK.

    If there are no consequences, then we can expect new markets will be developed to squeeze everyone’s quality of life by the intellectually and ethically corrupt further. I’m dubious if there will be any consequences other than offering up a few underlings without meaningful changes otherwise. It is clear the political will is absent as its been paid for. No one appears to have the SPINE to stop it.

    Repeal the CFMA, restore Glass-Steagall in its full form and put the bullies back in the own sandboxes to play with each other rather than extracting my decades of wealth earned from work without my choice. Oh and the federal reserve can close that 0% loan window now since these wonderful banks are reporting record profits and bonuses again, right?

  6. eurostoxx

    Yves. I am curious to know if you have heard much about CIBC’s (the canadian bank) involvement with all of this. From my understanding, CIBC had big Goldman envy (and probably still do)and were very happy in 2007 when some GS salesman called an offered to allow CIBC in the game with some deal flow. The catch?? Buy some crappy Mezz CDO’s, from ACA (probably the abacus deals). But to allow CBIC to book instant profits on the deal, ACA would also sell CIBC a CDS on the CDO, so credit risk would be minimal on the trade. Then to make some extra money, as the accounting rules encouraged this, CIBC would sell a CDS on the original mezz CDO. The CDO’s that CIBC sold would of course be backed up by a very sturdy bank, CIBC, and not ACA, which was the only monoline insurer to have a single A rating, which S&P somehow worked out. I wonder how many other banks GS did this to, as I’m sure they knew that the CDS’ ACA wrote wouldnt be worth a damn thing when the sh&t hit the fan. So sucker in some Canadian (and probably german banks) into the loop and then use their balance sheet to ensure that whoever bought the CDS (GS, paulson, my guess) would actually get paid. CIBC got taken for a big ride (I think they lost like 10billion) on a trade that was maybe due to pick up a few bps.

  7. Cynthia

    As I’m thinking about how our giant parasitic rent-collecting rathole of a banking system is eating our country out of house and home, I’m reminded of this quote by Thomas Jefferson:

    “I believe that banking institutions are more dangerous to our liberties than standing armies. If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks and corporations that will grow up around [the banks] will deprive the people of all property until their children wake-up homeless on the continent their fathers conquered. The issuing power should be taken from the banks and restored to the people, to whom it properly belongs.”

    1. alex

      Sorry to be pedantic, but except for the first sentence that quote is probably apocryphal.:

      http://www.snopes.com/quotes/jefferson/banks.asp

      Nevertheless Jefferson was generally “anti-bank” (and anti-Hamilton), leery of paper money, believed in precious metals, etc.

      Looking at it from a couple of centuries later, I can’t agree with most of Jefferson’s economics or his general pro-agrarian, anti-industry bias, but he was absolutely right to warn about what teddy Roosevelt called “malefactors of great wealth”.

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