Frank Partnoy Has Bad Day, Attacks Goldman Persecution in Financial Times

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Frank Partnoy, derivatives salesman turned law professor, took an ill fated star turn in the Financial Times today. In a comment titled, “Goldman is wrong target for official censure,” he writes (among other things): “Goldman is not to blame for the financial crisis,” a straw man if I ever saw one.

I hate to say it, because I like and admire Partnoy, but this piece is the writing equivalent of a bad hair day. It’s hard to understand how this article came about, since Partnoy has been a long-standing critic of both the dubious products and sales techniques that have become widespread in the financial services industry. He is also normally a scrupulous, diligent researcher; his book Infectious Greed, for instance, provides a detailed, compelling account, not only of numerous financial services industry scandals in the 1990s, but also the successful efforts to stymie reforms.

But Partnoy, despite his keen insights, has some peculiar blind spots. He has argued that even though Enron engaged in transactions to flatter their financial statements, Enron nevertheless was a highly profitable derivatives bank. He contends it collapsed not because it was a house of cards, but its creditors did not understand how much risk it was taking, and went into run on the bank mode when they realized how levered it really was. Pretty much everyone I know who knows Enron reasonably well disagrees vehemently with Partnoy’s thesis.

Let’s turn to Partnoy’s current piece. Strip it to its core, it comes dangerously close to the sort of argument you’d reject if it came from your six year old: “It isn’t fair that the teacher punished me. Johnny was doing even worse stuff.”

If Goldman engaged in criminal conduct, or violated securities laws, it should be punished. And other securities firms should be investigated and if the facts warrant, punished as well. But Partnoy goes off on the rather odd assumption that Goldman is somehow being unfairly picked on by the government. He forgets that the SEC took action because it got a referral from a private party, which we had reason to believe was IKB. Unless Partnoy can tell us that there are other referrals for complaints that the SEC or the Justice Department is not taking as seriously as the Abacus case, it’s hard to see how this “Goldman as victim” argument stands.

Now it is fair to say that the MEDIA focus on Goldman has been consistent and pointed, with the Matt Taibbi famous “vampire squid” article as centerpiece. But that stems from several causes. First, when former high fliers suffer a decline in fortune, be they ones on an eventual terminal downslide like Enron, or ones who are merely not longer darlings, like Cisco in the dot bomb era, the press can overshoot on the downside much as it did on the upside. Second, Goldman’s seemingly untouchable standing as “Government Sachs”, in combination with some events that did not pass the smell test (Hank Paulson’s discussions with Blankfein over AIG when Goldman was the investment bank with the most extensive involvement in AIG’s toxic CDOs), resentment within the industry for suspected front-running, and arrogance that was an outlier even by securities industry standards made it a very juicy target for journalistic salvos. Its ham-handed responses (will Lloyd Blankfein ever live down his “doing Gods’ work” remark?) keeping the outrage going.

Goldman had come to epitomize what was wrong with Wall Street – arrogance, lack of remorse, phony capitalist posturing, and presumed predatory conduct – yet its cultivation of friends in powerful places seemed to assure that they would be never called to account. So it isn’t surprising that the media and the public would respond so strongly to the news of the SEC’s lawsuit. And it therefore isn’t unreasonable for the Permanent Subcommittee on Investigations to focus on Goldman in light of the SEC case, as in this gave them a concrete example they could probe deeply..

Partnoy did have the bad luck to have the government disprove his contention that Goldman was being “singled out” by a leak of an investigation of Morgan Stanley hitting the wires within hours of his article going live. But it illustrates what I would have argued regardless: that his “Goldman is being singled out” argument is sheer conjecture. The fact that action against Goldman is now visible does NOT mean that other investigations are not proceeding apace.

Many of his arguments are bizarre:

Of the banks that dominated the market a few years ago, why would the government target the only one to survive the crisis financially intact?

Yves here. Huh? First, “financially intact” is inaccurate. All major capital markets firms around the world needed government assistance to make it through 2009. Per former derivatives traderRoger Ehrenberg:

Goldman is a great firm with a stellar culture, and in most circumstances it’s risk management and funding practices have been second to none. Except when the crisis hit. It stood with the rest of Wall Street as a firm with longer-dated, less liquid assets funded with extremely short-dated liabilities…..

There is not a Wall Street derivatives trader on the planet that would have done the US Government deal on an arms-length basis. Nothing remotely close. Goldman’s equity could have done a digital, dis-continuous move towards zero if it couldn’t finance its balance sheet overnight. Remember Bear Stearns? Lehman Brothers? These things happened. Goldman, though clearly a stronger institution, was facing a crisis of confidence that pervaded the market. Lenders weren’t discriminating back in November 2008. If you didn’t have term credit, you certainly weren’t getting any new lines or getting any rolls, either. So what is the cost of an option to insure a $1 trillion balance sheet and hundreds of billions in off-balance sheet liabilities teetering on the brink? Let’s just say that it is a tad north of $1.1 billion in premium. And the $10 billion TARP figure? It’s a joke. Take into account the AIG payments, the FDIC guarantees and the value of the markets knowing that the US Government won’t let you go down under any circumstances. $1.1 billion in option premium? How about 20x that, perhaps more. But no, this is not the way it went down….

Yves here. Remarkably, Partnoy uses the bogus argument that Goldman did not need a bailout to contend that the firm was being prudent in going net short and that “it was not a scheme to bet against a client”.

There are so many things wrong with that construction that it takes some unpacking.

First, the question of the ethics or legality of Goldman’s conduct is separate from the results. The “it was good for Goldman to go net short, therefore this Abacus trade was OK” is tantamount to saying ends justify the means. Moreover, not just this section, but the ENTIRE PIECE ignores the central charge in the SEC’s complaint: that Goldman made a material misrepresentation in not letting investors in the deal know that the CDO had been significantly influenced by someone who wanted to create a short position, John Paulson.

Note also that the common defense, “there had to be someone on the short side in a synthetic CDO” is also bogus. First, synthetics were sold to investors as being economically equivalent to cash CDOs, so dealers played down the role of the buyers of CDS protection that went into the CDO. Second, there was no reason for an investor to assume that the CDS buyers were putting on a short position; they could be hedgers (a lot of players in the mortgage industry would partially or fully hedge exposures of various sorts). Third and most important, it would NOT occur to investors that the equity investor (who was in theory taking the most risk and hence was given some say over the deal) was a Trojan horse for a bigger short position. Even if it is found to be legal, that was deception.

His argument about Magnetar v. Goldman is similarly questionable:

According to a recent report from ProPublica, there were 26 deals in which Magnetar, a hedge fund, both sponsored CDOs and bet against them. (Magnetar says these deals were perfectly legal.) They were arranged by Citigroup, Credit Agricole, Deutsche Bank, JPMorgan Chase, Lehman Brothers, Merrill Lynch, UBS and others (not Goldman). There are hundreds of non-Goldman CDOs that no one has yet investigated.

Yves here. Goldman got its Wells notice in September 2009. The SEC must have received its referral prior to that; it take some time to investigate a complaint. By contrast, ECONNED broke the Magnetar story in March 2010, and it did not get considerable attention until ProPublica released its own report six weeks later. Magnetar went to some length to stay under the radar; there were two books published on subprime short and neither mentioned Magnetar. Moreover, even the full extent of Magnetar’s deals is not yet known; our deal list has two more transactions than ProPublica’s and we are told there may be as many as 20 more. So it is far too early to criticize the officialdom for inaction on Magnetar.

Similarly, the issue is not “other CDOs” at this juncture (although we have raised issues about other types of market manipulation that we feel merit attention” but the role of synthetic or heavily synthetic CDOs. The Magnetar program and its imitators were the biggest of the bunch. There were not as many pure synthetic programs: Goldman’s Abacus program was one; DeutscheBank had a program, START, which we have noised about here and wish someone would probe (we have not been able to find their transactions) plus the smaller Morgan Stanley program now under investigation, one by Citi called Franklin, and seven pure synthetic CDOs launched by the hedge fund Tricadia.

The final point is that, as we have discussed before in this blog, is that there has been almost no litigation of structured finance deals, which are underwritten under rule 144a. The SEC may want to proceed cautiously and file suits where it thinks it has a particularly strong case to see what grounds will be well received in court before widening its frame of action. Admittedly, the Administration is now pressuring Goldman and the SEC to settle the case, but the SEC had to assume it might wind up in court.

The piece goes on to offer more dubious arguments:

The Securities and Exchange Commission advertises itself as the “investor’s advocate”. Yet the investors in Goldman’s Abacus 2007-AC1 deal were two large European banks, one of which, it is alleged in a separate private lawsuit, defrauded US pension funds by selling them similar subprime mortgage-backed investments. Why would the SEC advocate on behalf of a European bank against Goldman Sachs instead of on behalf of American investors against a European bank?

Yves here. Read that argument a second time. This is stunning. Because one bank foreign and is ALLEGED (meaning the case has not been tried yet) to have defrauded US investors by a PRIVATE party, the SEC should not take action. So if you get sued, the SEC should forget about you. In other words, the US should not offer equal protection under the law, anyone who is stupid enough to be sued, no matter how frivolous, must be assumed to be unworthy of protection. And the US capital markets should be made safe only for US players, if you are foreign, you are fair game for fraudsters and crooks.

And then we get this:

Another explanation is that Goldman is the healthiest, most profitable remaining target. Some banks are dead; others might not survive government attack. Politicians who need to throw a bank under the bus might pick the one most likely to live through the rumble. The easiest and safest scapegoat is the one with the highest salaries and profits.

Yves here. Huh? What firms were big in the CDO game? Merrill (now BofA), Deutsche, Calyon, SocGen. Bear (now JPMorgan), Citi, UBS, Morgan Stanley and others were also significant. Think any of them can’t handle a major private suit? No, in fact Fannie and Freddie are demanding that Citi, BofA, Wells, JPMorgan buy back mortgage securities that these banks misrepresented, with 2009 losses among the four totaling $5 billion and 2010 losses expected to reach $7 billion. But Partnoy would have us believe that the “government” is socking it to Goldman only because it is particularly profitable. And as Eliot Spitzer showed, criminal charges against a corporation, particularly a financial firm, are a sword of Damocles, they are assumed not to be able to survive a successful prosecution. So any of the big firms would survive a private suit by the SEC (they can afford to grovel, settle, and pay a big fine) and any firm, wealthy or not, would have trouble surviving a successful criminal prosecution.

I sincerely hope Partnoy returns to his usual impressive form. This piece verges on intellectual dishonesty. I can’t fathom what about the spectacle of Goldman in the stocks in the town square elicited such an off-kilter reaction from a normally sound commentator.

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  1. attempter

    I guess if you put this together with the Enron whitewashing it sounds like Partnoy’s at best a would-be “reformer within the system” who still believes ideologically in the morality of the system.

    So although on a mechanistic level he can do a good job chugging along decrying various “abuses”, as he probably calls them, at some point it’s occuring to him that the critique of Wall Street may be showing signs of going beyond the “reform” of technical “abuses”. If he’s alarmed at how the “vampire squid” has become the incarnate symbol and therefore most prominent target of a real political counteroffensive, it may be because his alram is really over the concept of a political counterattack on Wall Street as such, and the proposition that the technical “abuses” aren’t abuses at all but the correct uses within a system that is in toto an abuse of democracy and humanity itself; that the measure isn’t one of legalistic “crimes” but of a hijacked system of anti-law which legalizes organized crime itself. It would seem this is far further than he’s willing to go, and he’d rather side with Goldman on principle.

    So perhaps he’s protesting the attempt to turn politics and law right side up again after they’ve been turned completely upside down, because in the cracked perception of system cadres including “reformers within the system”, the topsy-turvy world looks to be the correct one.

  2. Skippy

    Frank Partnoy said…”The Securities and Exchange Commission advertises itself as the “investor’s advocate”.”

    For the last 20 years (if ever), agencies federal or other wise proclaiming advocacy for consumers, has been nothing more than industry factories for ‘smoke and mirrors’. Deflecting all examination of standard legal or ethical behavior in the name of *the consumer knows what they want and the consumer is always right*.

    I believe that until pressure is applied from all corners, strata of American society, foot dragging, apologetic or deflective arguments will be the main stay of those with the most to lose, with in, mainstream understanding this epic fail to enforce law, regulate in the name of the citizens and not for the largess of enterprise ( I like to work and profit from it but, not at the destitute of others).

    At some point the actors in this play will have to decide their fates, the American psyche can only handle so much. If the plans in motion, don’t play out the way its author’s intended, it could snap, lots of anger out there, which way will it point when the trigger is pulled.

    These guys sould know their history.

    Skippy…will the lifeboat just land in a lake of fire, imagine the relief, momentary negative Gs as the raft is released, only to see and feel the heat upon landing.

  3. Toby

    This is an excellent article, though I feel it plays the game within rules which are somehow grossly offensive, or don’t pass the smell test. ‘Legal’ and ‘illegal’ are becoming arbitrary labels that swing this way and that, now favouring this part of society, now that (though those that can afford good lawyers seem to do best overall).

    I’m talking from intuition here, not from any depth of legal knowledge, but that caveat is also a pointer at a deeper problem, namely that finance, politics and law (among other things) have become so complex they are no longer healthily functioning components of society — they serve only their masters. The general complexity levels are such that only a reaction of rage makes sense in the face of all that obfuscation and explaining; only rage is possible. The language one must deploy to take on these monsters of success; the resources one must command, both financial and in terms of acumen; are far beyond most people’s reach. Whether the GS affair is legal or not, whether there are acts of rhetoric and casuistry that seem to defend the general status quo or a particular act within it, I believe very strongly that the entire system is sick to its core, and breaking down in front of our eyes.

    So I’m with Skippy. These guys should know their history. Nothing lasts forever, and this ship is sinking fast.

    1. Siggy

      Your perception of complexity is the perception of the facade that masks the straight forward fraud that is being executed.

      Once laid bare, the transactions are simple and in their simplicity absolutely fraudulent. For example, a repo is a loan not a sale. A CDO is not a vehicle that inherently mitigates risk, it is a vehicle comprised of the first loss tranches of other questionable vehicles. In that, a CDO has an expected terminal value of zero on its face. The only rational reason to own a CDO is to have standing for the purchase of insurance; i.e., a CDS. The mark in the room is the fool who offers CDS on any CDO. Things get complicated because people get lazy and eschew full description of the transactions at hand. Labeling a vehicle toxic avoids the length of description necessary. As is the case with all contracts, you have read all the words. Siggy’s Dictum is a good guide here, ‘if there are too many words the deal is suspect’.

      As to our sinking ship, it is not seaworthy and has not been so for a very long time. The real problem is that like the Titanic, there are too few lifeboats. In these waters a kapok vest is of little use as after fifteen minutes or so you will succumb to hypothermia.

      1. tegnost

        Sadly, it seems that the only way into the lifeboat is a diploma from Harvard or Yale, with a bit of time at Oxford (for cultural assimilation,don’cha know) Like, we all want justice, but not so much that we are no longer invited to the dinner parties. To use Enron as an example is sickening to me,and reveals Mr. Partnoy (I don’t know his alma mater,but I’m suspicious) the perps felt they were unjustly targeted for doing what everyone else does, robbing grandma..this is capitalism, after all, and price is not about value, it’s about what you can get. There are no other rules (efficient markets, anyone). “So”, they say, “you socialists can just go and eat a pile of jealous”. In my imagination there’s a room in D.C. with a sign on the door that says “3 trillion dollar social security trust fund”. Behind that door is an empty room. That’s right, the geniuses from Harvard and Yale spent it all. They’re the smartest guys n gals in the room,remember and they can recognize an unguarded pile of cash and they know what to do with it when they see it, we should thank them for revealing to us our folly (you left your bike outside and unlocked, I stole it from you to teach you a lesson about trust,i.e. don’t do a trust unless you have an Eli draw up the contract…)Yes, I am bitter, I just digested the fact that our “Democrat” president nominated another regular american to the SCOTUS, you know, , just your average, run of the mill Harvard Yale Oxford who will instinctively know who to coddle and who to crush. Full disclosure: Lifetime democrat who has just “had it” with these “experts”… So how’s that oil gusher working out, you geniuses? I’m not worried, though I’m sure you’ll find an Eli to keep you out of trouble, and a Harvard to help you capitalize on the crisis…

  4. kevin de bruxelles

    We must be reaching the endgame since now instead of just letting interested parties make the case for the banksters, they are reverting to a formula that worked well in the Surge stage of the Iraq War; namely the “converted critic” technique.

    During the propaganda kick-off for the Surge, the NYT published an article by two supposed Iraq War critics Ken Pollack and Mike O’Hanlon. As Glenn Greenwald put it:

    The Op-Ed is an exercise in rank deceit from the start. To lavish themselves with credibility — as though they are war skeptics whom you can trust — they identify themselves at the beginning “as two analysts who have harshly criticized the Bush administration’s miserable handling of Iraq.” In reality, they were not only among the biggest cheerleaders for the war, but repeatedly praised the Pentagon’s strategy in Iraq and continuously assured Americans things were going well. They are among the primary authors and principal deceivers responsible for this disaster.

    While Mr. Partnoy seems to have built up his critic credentials a little more convincingly than Pollack and O’Hanlon, perhaps this just shows TPTB’s respect for the critical thinking abilities of the business community. None the less, the “converted critic” technique is a nice way to take the well deserved authority of the Wall Street critics and to transfer it towards actually protecting Wall Street itself. It will be interesting to see if Mr. Partnoy starts making the rounds by giving interviews on the cable business shows.

  5. Jim in SC

    I agree with Toby. The law has become too complicated. It needs simplifying, but that’s not what we’ll be getting.

    As for whether you think Goldman Sachs is guilty, I think it boils down to whether one believes that the meaning of ‘material’ should be expanded. The SEC will find difficulty convicting Goldman under the standard that has hitherto existed. I am a non-attorney. However, life has taught me to distrust the opinions of experts.

    1. aet

      Amongst the focus on the legal, people forget that Courts can enforce equites: they have an Equitavble juridiction, wherein one finds their jurisdiction over Trusts and Fiduciaries – which relations are NOT a matter of self-definition: the Courts may impose duties based upon the actual forms taken by the relationship: not based upon what the contracting parties themselves declare it to be.

      The Courts have more power than people know- and congress spends most of its time LIMITING such powers, it seems to me.

  6. Don in GA

    I’m also a little bit puzzled at Partnoy’s conversion. I read a piece from him in FT a few weeks ago that was equally baffling.

    Charlie Munger praised Partnoy’s book Fiasco several years ago and it probably sold a lot of books because of the huge following Munger and Buffett have. Now that Munger and Buffett have damaged their reputations via their ownership stake in Moody’s and by becoming apologists for and investors in Goldman after decades of Wall Street bashing, perhaps Partnoy is returning the favor to Munger by backing Goldman and the financial establishment.

    I think the bigger picture regarding Goldman and the other large financials is that they’ve become parasites on the U.S. and global economies. Look at the huge escalation in the percentage of overall corporate profits by financials over the last 30 years. We need to somehow get back to the idea of finance as a support function that allocates capital in the real economy, not as an economic engine in itself. Step one would be a reinstatement of Glass Steagall, step two is to break up the TBTF institutions. Not that either will happen. As Simon Johnson noted more than a year ago in his piece “The Quiet Coup”, government and the large financial institutions are joined at the hip.

  7. jm

    Several decades ago I read a letter-to-the-editor in Barron’s that told me all I needed to know about Wall St. ethics; basically what it said was, “God wouldn’t have made suckers if he didn’t want them to be taken.”

    And who is a sucker from a Wall St. viewpoint?

    Anyone who believes anything anyone else says.

    If you don’t perform “due diligence” by investigating the nature of what they’re selling in sufficient detail to make sure you’re not being cheated, well, then you deserve to be cheated.

    Alas, this raises the annoying little issue of what good it does to do “due diligence” if you can’t believe anything anyone tells you — if you can’t believe the rating agencies, or the accountants — what good does it do to study a deal’s accounting reports when the accountants’ and law firms’ most profitable business is advising their clients on how to commit fraud without being detected, or be convicted of a crime if it is detected? (Remembering Enron again.) And in such an environment, how can one do “due diligence” at a low enough cost to make any investment worth doing?

    I long ago concluded that if a Wall St. firm is trying to sell me something, it’s certain that it’s a scam, and that if I buy it, they’ll be doing God’s work by taking a sucker who deserves to be taken.

    Just how can a modern economy — indeed, any economy — continue to function when dominated by such people?

    I think one of the reasons the American and Northern European economies outperformed those of the rest of the world for so long was that they had a relatively lower level of fraud, such that people could trade with each other without having to expend large amounts of time and energy on making sure they weren’t being cheated. (A Chinese friend of mine not long ago remarked to me that you can make more money in China, but it’s not worth it because you have to bribe everyone all the time to do anything in business, and you can’t trust that your food’s not poisoned.)

    1. renato

      You can perform all the “due diligence” in the world. You’ll still be taken for a ride.

  8. GS shareholder

    Yves – thank you for the post. I read Partnoy’s column before heading here and I thought I was going crazy – or at the least I needed another “black eye” before re-reading. Is someone working on a SEC investigation scorecard for CDOs?
    I hope so…………

  9. steelhead23

    Yves, You said you “like and admire Partnoy” and then you very logically and systematically go about flaying the poor man’s arguments with an X-acto knife. I would hate to see how you would eviscerate someone you don’t like and admire. I have two thoughts on this for you. First, there is a tendency for those within an industry, say off-shore oil exploration, to take it personally when their industry or a major player is being dismembered in the press. Thus, as a player, Mr. Portnoy isn’t so much defending GS as the industry, and not so much defending the industry as himself. Second, have you ever provided professional advice to Obama or anyone else in the admin? You see, not only are you bright and articulate, you have achieved a distance from your background, a very professional detatchment that makes you an astounding critic. I cannot think of another individual I believe Obama would gain more from than yourself. He needs to read Econned. If he replaced Larry Summers with Yves Smith, I would sure sleep better.

    1. Yves Smith Post author

      He has written three excellent books, which trust me, take vastly more work than a piece in the FT. Plus he has written for an open source investigation of AIG.

      He has a LONG track record, which is not in keeping with this article.

      1. steelhead23

        Thanks for the reply. On my second point, please comp a copy of Econned to the White House – hopefully someone would read it. I wasn’t trying to flatter you I’m just saying that you truly have something to offer. I read recently that Obama invited Paul Krugman to dinner, presumably not to talk about Princeton basketball. I like Dr. Krugman and he is very sharp with economic models, but he never structured an SIV and he doesn’t very well comprehend the red-meat attitude of the players on the street. In short, in shark-infested waters, he’s bait. Short of storming the palace, I simply cannot imagine a sharper wedge to drive between the administration and Wall Street than one Yves Smith. Also, short of being awarded a Nobel, the best way for you to be heard outside of NC is to get more face time on TV and more air time on radio. Too many people believe this financial crisis simply happened, that it was accidental or the result of stupidity. You know better and spell it out chapter and verse for the laity. Please do more.

        1. Glen

          Perhaps Frank Partnoy is part of the new PR effort by GS to redeem their image. If so, he would seem to implementing point one (Implicate the rest of Wall Street, as quickly as possible) of Michael Lewis’s suggestions:

          I thought I had read that GS had hired quite a few PR firms (27?) to get going on a “Wall St makeover”, but I cannot find the link.

          I view this article as expressing the Washington and Wall St attitude that any SEC action or Senate hearing is nothing more than diversion for the masses and that the fraud, looting, and corruption will continue at the same time, same place sometime next month with the opening bell.

  10. Yearning to Learn

    If he replaced Larry Summers with Yves Smith, I would sure sleep better.

    But he won’t. That’s just it. In order to get Yves in a position of power we’d have to change the person at the top.

    Summers is where he is because Obama wants him there. We are bailing out the banks because that’s what our leaders want to do.

    unfortunately, it’s not just the financial system that is broken.

  11. b

    Well, I did find this on his website:

    “Recent News: The Match King Shortlisted for Financial Times and Goldman Sachs Business Book of the Year”

    Obviously this news is no longer “recent” and The Match King did not win the Financial Times and Goldman Sachs Business book of the year award. But, I’m sure this article won’t hurt his chances with the next book that he publishes.

  12. PJM

    Is Portugal a victim of racism? Yes, it is, in my humble opinion.

    One opinion maker that seems racist is mr. Ambrose Evans-Pritchard, who wrote a lot about Portugal and the portugueses. He failed in his analiys. Today, Eurostat reported that portuguese economy had the highest growth in Europe, even better that UK economy. This portuguese results are good to shut up these kind of opinion makers, that are ignorante and racists.

    Lets check the numbers here .

    Maybe a lot of people is surprised about the economic perfomance of Portugal. But they shouldnt. In stead beeing racisst, these “analists” should do their homework. The portuguese figures are good because the portuguese people works a lot and are trying to do the best to sell goods and services abroad.

    The portuguese exports are growing very well, something like 15% y/y. Isnt enouph and we should work better to improve these figures. However this high perfomance is a stimulus to our people work more and better. In stead blaming others, like chinese, germans or japanese, portuguese people should focus cuting errors and working more to be better than before.

    Portugal and portuguese are victims of racism. Standard & Poors downgraded our rating, not because our figures are so bad but becuase they think Portugals grwth will be low. However, when they did their analisys they should read the figures available. And portuguese figures were so good, that isnt fair downgrade our rating because their bad economic analisys. S6P is racist and isnt reliable. I must stress that before their downgrades, some hegdefuds shorted portuguese shares. In my humble opinion, that is enouph to put the finger in that agency. In my humble opinion, theyre corrupts. Or even racists.

    A lot of opinion makers dont do their homework about Portugal. They only use words pretending to do economic analisys. They dont. They do ideological propaganda against the famous PIGS. These opinion makers only see Portugal as a member of the club PIG and are racists enouph to talk about one cowntry, one economy and one people without studying serious the facts and figures.

    I have proud of my people. He is the best. He knows that were in war. An economic war against some obscure interests. However, portuguese people dont stop fighting to show, how unfair is treated by some interests. And with my people effort and luck, Portugal is wining the war. We are growing very fast (about 4%) and were figthing our fiscal deficit too. We will win this war. We wil not be defeated.

    I hope Naked Capitalism give some attention to the real picture about Portugal and portuguese. Not faked or flawed pictures, but the real picture. We portuguese need good criticism, not racism or others bad interests.

    Portugal will win this economic war. Its hard and very dificult. But with a lot of work, work and more work, we will win our future and defeat our hide and stealth enemies.

    Again. Im proud of my people. He is the best. Im proud to be portuguese.

    1. PJM

      Some weeks ago, Portugal made his first austerity plan and was aproved in Brussels by EC. However some opinion makers like mr. Simon Johnson worte that portuguese didnt had plans to cut his fiscal deficit and cut spending. That wasnt true and even figures published by this “expert” and “ex-chief economist of MFI never was explained how he got. We cant forget the damage by this “expert” and analist to put fire against portuguese debt and the euro. In the future we will remember him his doom propfecies.

      But today, the portuguese government and the main oposition party reached an agreement to cut more the portuguese fiscal deficit. This new austerity plan will increase some taxes and cut some public spending. Just not to calm our investors, the real concern in our minds, but as our european partners that are spending money to help us and others european countries.

      We respect our investors and our european partners who are helping our cowntry to fight our problems. So, today, we have another austerity plan. The second. But if that isnt enouph to calm our investors, we will have more plans until everybody believes more in our wish to do the best, to cut our fiscal deficit and lack of productivity.

      However we dont want to do the same mistakes as others. I dont want to notice who are they. I think our readers can find quicly if they wnat it. We want to cut our fiscal deficit and our lack of exports and productivity but step by step, as the economy improves and needs more policies. We dont want to kill the economy just to cut our fiscal deficit. We are trying to cut our fiscal deficit with less pain for all. We want to have a strong economic growth and at same time, cuting our fiscal deficit trade imblalances. We want to do in a way to asure that portuguese growth will be strong and the internal imbalances are cuted as the results and markets demand our effort.

      Some opinion makers, like mr. Simon Johnson, should study better our way. We dont want to do the same errors as others. We dont want to cut fiscal our deficit with violence and with a lot of social pain. We want to do the things step by step, with a honest evaluation of our results, the market mood and do not damage our people. We can do the things in a way thatinvestors and the people can be protected. And without the social pain as is very often associated with these kind of policies.

      Maybe its time to be more lowli and talk about others with more respect and more real concern with others efforts. Mr. Simon Johnson is a symbol of arrogant american who dont do his homework and thinks he is the best analist. But perhaps he should read more others opinions an look what is the real situation in Portugal.

      Today the new austerity plan was achieved. Its hard and will be some painful for our people. But I think portuguese people will understand that is needed to calm our investors and the markets. I believe they will acept well because they know that were in an economic war.

      1. craazyman

        It may be just a broader form of insanity than racism. You worry me PJM, you and all the social thought police, you’re energy is starting to frazzle around the edges like sparklers, which is always a bad sign for those of us who watch the skies. Pretty soon all of you types will be insane and there’ll be no body left for me to sell my Gold to at a profit. I want to go to an absinthe bar in Lisbon and then hit the beach with a Margarita. I don’t like applied mathematics. If Portugal is so great, what’s your best 5-bagger? A 10-bagger would be even better but I don’t want to be greedy. And It needs to go straight up, no bouncing around to blow out the stop loss.

    2. kevin de bruxelles


      I enjoy reading your comments but I think you are going overboard by calling the attacks on the Eurozone in general and Portugal in particular as “racist”. Portugal is not a race, it is a Nation. There has been some serious “racism” hyper-inflation recently (in many European languages, not just English), my 10 year old son recently accused me a being “racist” against children because I wouldn’t buy him something in a store. And if you scroll a little further down this thread you will see a jihadi-Jew of intolerance is already spraying and praying his rhetorical AK-47 loaded with charges of “anti-Semitism” in order to protect Wall Street criminals of which Jews unfortunately are highly over-represented. Please don’t make the same mistake he is making in trying to shame people away from critiquing your favoured groups .

      There are very good reasons that the Euro zone is being attacked; and most of them have to do with global power politics. But first of all it is important to recognize that there are obviously glaring structural deficiencies in the financial and political architecture of Europe’s institutions. The recent crisis has been quite helpful in reinvigorating the process of European integration.

      One reason for the attacks is that the US rightly sees the Euro as a long-term threat to global dollar hegemony. The danger is that Euro will eventually morph into a “EurAsio” which Europe, Russia, India, China, and the Gulf States would use for trade between themselves. At the same time that the Eurasian landmass integrates into one huge economic block, the US will continue its decent into Latin American status which will leave the eventual US Peso as a second tier currency. This process would take at least twenty to thirty years so US policy makers are indeed wise to try to snuff out the Euro while it is still young and vulnerable.

      As far as A E-P and other British nationalist critics of the Euro, they rightly see European integration as an existential threat to the United Kingdom, which is one of the last remnants of that crumbing Hegelian construct, the British Empire. What is striking is that their emphasis on the economic over the political. After recently defeating a separatist insurgency within its borders, the UK is now only being desperately held together by fiscal transfers from an ever increasingly broke England to Wales, Scotland, and Northern Ireland. But the economic can only trump the political in the short term. As the Tories are forced to cut their welfare bribes to the periphery, look for Scotland first to make a bid for independence and for within ten years the UK to totally disintegrate.

      In Europe the case is the opposite, there is a will for political integration but the economic institutions and mechanisms are still lacking. The recent Anglo-Saxon attacks on the Eurozone have only helped it. If they really wanted to destroy the Euro they should try to strengthen it to $2 per Euro instead of pushing it towards parity.

      So don’t take the attacks on your nation personally. If Portugal were still within the British sphere of influence then the A E-P’s of the world would be singing your praises. You have to remember that he was one of Bill Clinton’s most voracious critics back in the ‘90’s. There may be many reasons for this but about the last one I would consider is that A E-P was being racist against Clinton!

      1. PJM

        Dear Kevin, I agree with you a lot. My word racist should be readed as xenophobic. This was my mistake.

        And I agree with you in general but I feel this atack to the euro is concerted by anglo-saxon world. A lot of atacks are pure market mood mechanisms, but others are deliberated to stop the euro currency.

        But I hope to be wrong and to say: look, I was wrong and that crisis in Europe was the normal behaviour of the markets.

        Thanks for your comment.

      2. PJM

        My dear Kevin, I agree with you a lot. My word racist should be readed as xenophobic. This was my mistake.

        And I agree with you in general but I feel this atack to the euro is concerted by anglo-saxon world. A lot of atacks are pure market mood mechanisms, but others are deliberated to stop the euro currency.

        But I hope to be wrong and to say: look, I was wrong and that crisis in Europe was the normal behaviour of the markets.

        Thanks for your comment.

  13. VenusVictrix

    Partnoy’s defense of Goldman is oddly incongruent with his very public stance about disclosure of the AIG documents. How can he argue on the one hand that the secretive AIG negotiations were inappropriate – but on the other hand that Goldman should be unassailable?

    The argument makes no sense. Clearly if the AIG bailout was tainted – as almost everyone believes to be the case – then Goldman is by association tainted also.

    I am disappointed. I actually believed he was fighting for the truth to come out. It seems he’s switched sides.

  14. Steve Diamond

    Professor Partnoy only states the view that I think is widespread among those of us with some expertise in securities law. And in light of the borderline anti-semitic character of some of the attacks on Goldman (i.e., Taibbi’s “vampire squid” crack) it is high time that some balance is restored to the discussion.

    (For the record, I was on both sides of the table on deals with Goldman while in private practice and have been in an adversarial position to them on several transactions as a consultant.)

    Goldman behaved during the housing bubble as everyone knew and expected them to behave – bringing buyers and sellers of positions together in the derivatives market. To survive as a market maker in that environment meant managing their financial position carefully. Equating them to Paulson – shorting while others went long – which is the position Sen. Levin took in the hearings is just plain dumb. Otherwise they would indeed not have needed any help at all from the Feds.

    And let’s stop shedding tears for IKB. Not only were they big and sophisticated, they came into the Abacus deal looking to make a killing off of the sale of commercial paper to the small and genuinely unsophisticated entities on the other end!

    From the LA Times:

    “[O]ne of the main buyers of the complex toxic securities issued by the Goldman vehicle, a German bank known as IKB, paid for its share of the deal with money it collected from a number of relatively unsophisticated investors including King County in Washington state….In 2007, the county bought $100 million of commercial paper, a type of short-term debt, from Rhineland, a special fund created by IKB that in turn snapped up nearly $150 million of the securities created by the Goldman vehicle known as Abacus 2007-AC1.

    “When the huge financial apparatus devised by Goldman went down in flames, taking Rhineland with it, King County was saved from a loss only because IKB had agreed to insure Rhineland’s debt.

    “But the local government wasn’t so lucky with a similar, $50-million purchase it also made in 2007 from another IKB fund, dubbed Rhinebridge.

    “The county lost $19 million when Rhinebridge collapsed — and an additional $54 million when other similar funds defaulted. About 100 county agencies in the Seattle area, including some that deal with libraries and schools, saw their budgets cut as a result. The county has sued IKB and the rating firms that put their stamps of approval on Rhinebridge.

    “‘They invested in commercial paper that they thought was as safe as Treasury bonds,’ said James Cox, a professor of securities law at Duke University. ‘They undoubtedly thought they were investing in something much more secure.’

    “‘We got caught up in the … disruptions caused by this sort of slick, extremely high-level shenanigans that were going on,’ said Larry Gossett, a member of the King County council.”

    So, IKB sold genuinely naive local municipalities commercial paper to gobble up the Abacus deal. If IKB did not look under the hood of the car they intended to cut up in their own chop shop and sell off to unsophisticated investors, that is their problem.

    Why haven’t you made this point, Yves?

    There is no evidence I have seen that convinces me IKB were misled in a material way. The risk factors in the offering circular said specifically that the mortgage market was deteriorating, fast. The disclosure said Goldman would be short on the deal and could and might lay off that position to someone else.

    Can anyone explain to me why knowing – if indeed they did not know – about Paulson’s role would have made any difference to them? Yves has certainly not offered such an explanation.

    Btw, the Abacus deal was done through Rule 144A not Rule 144a – the latter is a resale exemption for all holders of restricted securities, the former a safe harbor for resales to and by institutional buyers.

    1. steelhead23

      Steve, As regards your question of whether GS’s failure to disclose Paulson’s role in picking assets to put into the Abacus synthetic CDO would have made any difference to IKB, I find this to be not germane to the question at hand. The issue at hand is NOT IKB’s motivations in consumating the deal, the question as regards SEC’s allegations is was it Goldman’s intent to defraud. As far as I know, IKB’s motives are not a cause of action here. I thought lawyers were taught to focus on the question at hand, not to create strawmen to bludgeon. Now, if IKB were to sue GS for misrepresenting facts, well then your question would be on point. My guess is that IKB got SEC to go after GS rather than suing them directly precisely for this reason – discovery would be a bitch.

    2. Yves Smith Post author


      I find your argument peculiar, particularly from someone who makes a point of bringing up his legal expertise.

      Who IKB’s customers were and Goldman’s activities as a market maker are completely irrelevant to the charges made by the SEC. The role at issue is underwriting, not market making. The SEC has made a specific, narrow charge against Goldman, that it made a material misrepresentation in the offering memorandum. The issue is not Goldman’s short position; the dealer is often the initial short counterparty. The issue is that the intended taker of the short position influenced the structure of the deal to make it more like to fail, period.

      The parties’ motivation is a fundamental factor in the analysis of any credit transaction. Qualitative considerations in a deal are often as important as quantitative ones.

      And your assertion re IKB making a “killing” in the commercial paper market is patently ridiculous. IKB bought an AAA instrument for a commercial paper program because it was supposedly super safe. The biggest buyers of CP are mutual funds, so there is nothing perverse or unusual about retail buyers ending up with CP that came out of SIVs. Where exactly were you in August 2007? Rhineland’s woes were replicated all over the SIV market; this is in turn the reason the ABCP market imploded. CP profits are in basis points, not hundreds of millions. You profess to have expertise in securities matters, yet appear ignorant of, or worse are consciously misrepresenting, product economics.

      And keep your inaccurate charge of bias out of here. It reads like exactly what it is: a cheap shot to silence legitimate criticism. My maternal grandmother’s name is Stenberg, and I worked for Salomon and Goldman when they were Jewish firms. Goldman ceased being in the 1990s (you seem to forget that it was headed by a trio of goyim: Paulson, Thain, and Thonton, not long ago). Taibbi’s “vampire squid” is similarly not an ethnic slur; it’s a real creature:

      1. Steve Diamond

        I suggested that Taibbi was bordering on anti-semitism not you, and I find it odd you would take my comment so personally. The idea that the insulting reference at stake is based on a real creature is irrelevant – many racial and ethnic slurs are based on actual animals or other living creatures. In light of your background (and something we share in a general way) I would assume you have spent some time considering the problem. If not, then perhaps an article by Michael Kinsley located here: would be worth perusing, particularly in light of your notion that the presence of a few goyim at the top of GS in the last decade would be enough to satisfy the anti-semites out there.

        As for expertise, someone who does not know the difference between 144a and 144A is hardly in a position to take on someone of Partnoy’s training and background. But let’s leave that aside. Re-read the SEC Complaint – it is clear that the idea that you can separate the market making role played here by Goldman and what you continue to insist is an “underwriting” role (which it was not as they were not an underwriter in this transaction but a placement agent) is wrong.

        IKB had as big a role in shaping the portfolio selection process as Paulson – well in advance of the circulation of the offering memorandum. They were the ones who wanted ACA involved in the first place. They KNEW a short would be on the other side of the trade. That is the nature of the structured product world about which you claim such expertise. Heck, forget about Paulson who was not well known or particularly successful at the time. Goldman was on the other side, as the initial protection buyer. So IKB wanted ACA in there fighting for their interests in selecting the reference portfolio.

        IKB is now being sued and there is evidence – as the LAT reported – that IKB is a bad actor and there is indeed a justification in asking whether the SEC should be riding to the rescue of bad actors with limited public resources.

        And that will be the reason the SEC will lose if this case ever sees the inside of a courtroom. IKB knew the material facts about the transaction and did not care that there was a short in the room. Well, they did care because they NEEDED a short on the other side of the deal. Paulson, Goldman, what’s the difference? It would not have “altered the total mix” (the relevant legal standard) and thus fails to meet the materiality standard needed by the SEC here.

        1. Yves Smith Post author

          You certainly enjoy dishing it out, don’t you? And you clearly can’t take it.

          You accuse various writers, Taibbi by name and others by implication, of anti-Semitism, then you further accuse me of being insensitive to alleged slurs against Jews but making none of your own. Sorry, I ran the post by several others, and all saw your remarks as a thinly veiled charge that I was anti-Semitic.

          I am also aware of the 1990 private placement safe harbor rules. The fact that you choose to make a case out of a typo (particularly since I am notoriously typo prone) when there is no substantive error in what I wrote means you are invoking rank to cover up your failure to address the rebuttal of your argument. By contrast, your rant about IKB contains several SUBSTANTIVE errors about the commercial paper market. But you keep maintaining, in the face of your own errors, that you are the expert.

          IKB’s collapse is an indictment of GOLDMAN, and all purveyors of AAA ABS CDOs to SIVs, which funded with commercial paper which was in turn purchased heavily by money market funds and others seeking safe investments like King County. If Rhineland is a “bad actor”, the biggest bad actor is Citigroup, which was far and away the biggest player in the SIV market. (And do you even know how commercial paper is placed? Clearly not….if you had the foggiest understanding of that market, you would know your argument is laughable).

          You also make simply false assertions on the relationship between IKB and ACA. The collateral manager was presented to investors as independent and qualified, yet Goldman’s OWN e-mails suggest ACA was selected for its LACK of independence, and its behavior with respect to Paulson would support this argument. There is no evidence I have seen in the public domain that IKB influenced collateral selection, while Paulson clearly did (I’ve read most of the 900 pages of Senate material from the Goldman hearing, plus the famous flip book and the germane section of the prospectus).

          Have you MET any of the people from IKB? They were more clueless and less well paid than US commercial bankers. You choose with NO factual basis to ascribe malicious intent when incompetence is the real explanation. Goldman and its ilk went on a global search for stuffees; IKB happened to be a particularly good target.

          As I have said repeatedly on this blog, structured credit cases have very few precedents, this is an untested area. I am in contact with firms that are involved in this litigation, and also have the product expertise, which your foot in mouth in IKB makes abundantly clear that you lack. They think the SEC’s case has decent odds of success. They read the misrepresentation as a slam dunk; the question that would be the battleground is materiality.

          1. Steve Diamond

            There are only three types of lawyers involved in this litigation: government lawyers going after Goldman who of course are not talking to you; Goldman’s lawyers who of course disagree with you; and, finally, the only group that might be willing to talk to you – class action lawyers looking to free ride off of the federal government’s politically motivated and specious claims.

            So I think it is reasonable to conclude you are being fed the class action litigators’ line in this situation and you are falling for it hook, line and sinker. Or perhaps they are willing to engage with you to help promote their views in order to increase the chances of a settlement out of which actual shareholders will see next to nothing but they walk away with a huge fee.

          2. Yves Smith Post author

            Let us look at what has happened in this thread.

            You challenge my views on Goldman asserting superior knowledge of the legal issues, which in theory should consist of an understanding of both the law and the presumed facts at hand. You assert that other securities lawyers would agree with your reading of the law. You also attack one of the parties that suffered losses by taking the long side of the Goldman deal, and assail their character, while demonstrating that you fail to understand the relationship between the parties, the SIV and the CP markets, all of which are relevant to an interpretation of the motivations and actions of the parties. You further assert that IKB influenced the deal via ACA, which is simply counterfactual.

            Reader bystander then informs us that you have reversed your position. You claim it to be on the facts having changed, when no facts have changed. Nor have you ever deigned to defend or even explain your legal theory. I tell you I know lawyers who know the industry practices better than you do (you having demonstrated you are way over your head here) and you then proceed to assert, with NO foundation for your charge, that I am a shill for them.

            And you can’t even be bothered to get simple facts right, like tracking down the source of famous quotations.

            So we have learned:

            1. You are lacking in scruples.

            – You have engaged repeatedly in character assassination in an effort to an argument That is both deemed to be an invalid form of argument (“ad hominem attack”) and is typically the recourse of someone who cannot win an argument on its merits.

            – You have not interest in the truth of the matter and simply make things up out of whole cloth (that IKB influenced the deal, that IKB made millions).

            2. You do not understand the products or tradecraft in the arena, which is essential in making a determination as to the merits of a claim.

            You have now twice slurred me in this thread, first with implying my attacks on Goldman were racist.

            You now are trying a second line of personal attack, that I am merely a shill for class action lawyers. If you had bothered to read ECONNED or the blog on CDOs, it has been well ahead of where lawyers, regulators, and the press are on this issue. And contrary to your unfounded assertions, my sources on the bad industry practices are industry participants themselves (both former and current) who have a sense of morals, as unfathomable as that notion clearly is to you.

            I have had several neutral parties, including Jews, read the thread and all view your “borderline racist” remark as an attack on me. All save one advocated banning you based on that cheap shot alone. The lone holdout change his view based on your most recent remarks.

            You are a repeated and persistent violator of the Ritholtz rules for comments, which I have adopted as my standard. You are not longer permitted to comment here. Take your character assassination and industry-serving PR elsewhere.

    3. bystander

      “Professor Partnoy only states the view that I think is widespread among those of us with some expertise in securities law…Can anyone explain to me why knowing – if indeed they did not know – about Paulson’s role would have made any difference to them?.”

      Well Steve, your expertise in securities law is evidently rather recently acquired; at some time since 17th April 2010, in fact. Here you are, on that date, holding forth on the strength of the SEC case at your own blog:

      “In any case, ask any rational investor if they would have wanted Paulson’s role (in numerous meetings during the preparation and selection process) revealed prior to their investment decision. I cannot imagine anyone saying they would not care.”

      (more at

      Now, this backflip about the relevance of Paulson’s position does hint that you may be some kind of legal professional, so you have established your credentials, kinda.

      But unfortunately there is a visible problem with your integrity now, is there not? One or both of your statements above is BS. So, in general, how do we tell when you are expressing the well-founded opinion one expects from authority?

      Or do we just assume you are full of it all the time? That might be the most economical step, given that your sole substantive contribution to the debate seems to have been to point to the difference between Rule 144a and Rule 144A.

      Thanks for that, at any rate.

      I admit I did briefly admire the combination of humbug and pomposity in your statement “And in light of the borderline anti-semitic character of some of the attacks on Goldman (i.e., Taibbi’s “vampire squid” crack) it is high time that some balance is restored to the discussion.”

      So, boiling it right down, Taibbi’s smeared GS and you want to smear back, is that it? That is how it reads, once one’s got the measure of this “borderline anti-semitic” construct, which enables you to stick some mud to Taibbi, without actually having to provide any evidence that he deserves it. Whatever its rhetorical attractions, it’s a false friend, this “borderline” gambit, because it makes you look dishonest.

      Just as your volte-face on Paulson does. Most unfortunate.

      1. Steve Diamond

        My initial reaction was indeed that GS may have misled investors but like Churchill when the facts change I consider alternative theories, what do you do?

        1. bystander

          No new facts relevant to the point on which you flip-flopped have emerged. That’s why I selected it.

          That’s J.M. Keynes you are mangling, not Churchill.

  15. Marshall Auerback

    Unfortunately, I suspect that we’ll see more of the types of defences mounted by the likes of Frank Partnoy. As Yves suggests, Frank Partnoy is a good man, an excellent scholar and a very good analyst with an exceptional understanding of these toxic derivatives. He is usually on the right side of these issues, but seems to have a blind spot here. No mention of AIG? Most extraordinarily, he seems to feel it’s OK to swindle wholesale, but not retail.
    It’s also worth noting that Goldman just hired a phalanx of PR firms to “change the narrative.” I think this is not the last attempted defence of GS, although it’s certainly correct to suggest that their behaviour was not unique and that further probes at other Wall Street banks are certainly justified as well. So if Frank Partnoy’s misconceived defence has one potential benefit, it might shift attention to the behaviour of the other banks which were doing the same thing.

    1. kevin de bruxelles

      It looks like GS will use the “if everyone is guilty, then no one is guilty” defense which is a pretty brilliant move systemically. It allows the SEC to get aggressive with every big Wall Street bank so as to undercut the growing criticism that it is a do-nothing regulator. But paradoxically, the more cases the SEC brings on, the more they will be protecting Wall Street. The critics will have to veer from complaining about no SEC action to screaming about too much SEC action. In the end a “grown up” (read: Obama) will have to step in and slap a small fine on all the players before the whole process threatens to spin out of control and end up “hurting Main Street” or some other BS.

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