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.