The Obama Adminstration's Handling of Wall Street.

I don't think I've ever seen a thread that is both informed and also with this much poo being flung.

 

I must be watching something different. Regardless, who knew popcorn would be warranted in a thread like this?

 

Once again, immaterial. As I already told you, it took me 20 - 25 minutes, without any kind of analytical software, to determine that security wasn't worth buying. Any kind of analytical software would have told you in minutes if not seconds.

Essentially what you have here is a bunch of idiots with no business trading those bonds, who either didn't bother or didn't know how to perform due diligence, got burnt on a deal by a bunch of pros and now are whining over it.

No they were not. There's a HUGE difference between prop trading and clients advisory. Everything you tried to show me (which isn't much, btw), including that graph, shows prop trading positions. None of them show that they were selling and then betting against their clients.

Perhaps they were, but you, much like Carl Levin, haven't shown evidence of such. And let's be honest, compared to Merrill and Morgan, Goldman's client advisory services is small fry compared to its prop trading and underwriting businesses.

It told you everything you need to know. It told you in that very document that Goldman was a market maker, clearly spelled out. It told you that it may bet against your position, being a market maker and not an adviser.

As for Goldman's profit from betting against the sub-prime market, yes we actually DO KNOW how much they made. If you take Carl Levin's fuzzy math in the Senate report, Goldman made $1.2 billion. If you take Goldman's own disclosure, it made $500 million. In either case it wouldn't be tough to argue it wasn't a "massive short position." Surely you knew that.

And your VaR point is irrelevant. Firms exceed their own VaR limit all the time. See Kerviel, Jerome.

LOL, so we're back at ethics. So after months of investigation we are, once again, back to something subjective and interpreted not based on its legality but a subjective moving definition of ethical. So fine, please define to me what is ethical? And how exactly would we proceed converting an ethical definition into a perjury charge?

Once again, irrelevant. As I've mentioned, taking a directional bet, even a short one, isn't illegal.

 

Btw, you'll excuse me if I have a laugh over Josh Birnbaum's claim that Goldman was "hedged." As far as I'm concerned there are only two ways you could hedge against the downside risk of those sub-primes, CDS and credit insurance, neither of which would have done (and in fact didn't do much) during the financial crisis.

I certainly hope, chuckles, he wasn't hedged at Ambac.

 

Perhaps but I am enjoying MFW's posts. Definitely find this thread quite entertaining. Also I think its safe to say lil sammy is guily of being a royal jerk quite a lot more than all the numbers being thrown around in this thread added up.

 

Not defending GS, but if Bove is right, then this complicates things further. This also demonstrates why perjury is such a complicated charge.

http://www.cnbc.com/id/43353537


"It is becoming increasingly apparent that a terrible wrong may have been done to Goldman Sachs," Dick Bove writes in his latest note on the investment bank.

Goldman [GS 132.95 -0.58 (-0.43%) ] stands accused of possibly misleading a Senate panel that looked into the financial crisis. Executives at Goldman testified that their short positions on the U.S. housing market were hedges against long positions. The company was not "net short" the housing market, the executives said. Other evidence indicated that Goldman was net short. The chairman of the Senate investigations panel referred the case to the Justice Department for possible perjury charges against the Goldman executives.

"Evidence is now mounting that the company did not have a net short position at a crucial time under study, and that the Senate Committee may have misread the numbers,” Bove writes in his note.

He predicts that investigators will not charge Goldman with any wrong doing.

"This may sway investor sentiment toward the firm," Bove writes.

The real challenges for Goldman in the future will not come from legal risk, Bove argues. They will come from economic risk. Trading volumes in almost everything have declined: stocks, commodities, currencies, bonds. This could hurt Goldman's performance.

The earnings projections for Goldman are "much too high," Bove writes.

Bove is keeping his "sell" rating on Goldman’s stock, at least until "other analysts adjust their estimates on the company and the political entities begin withdrawing their attacks."

 

Agreed - no one is defending GS's ethics or their desire to make money at anyone's expense. But as noted earlier, ethics and perjury are different things.

 

LMAO. Well let's see, HSBC said in 2006 they see no profit in the U.S. housing market (this of course, after they dumped billions into it as supposed to their traditional profit centres in Asia) and shut their mortgage/underwriting business. Goldman of course. Morgan Stanley started de-leveraging in 2006. Ambac stopped insuing credit insurance in 2005. Merrill Lynch in late 2006 early 2007. Bear Stearns (the smart part of it) in late 2006 early 2007. Citigroup did more than a bit of earnings management, realizing they probably won't be earning money for a very very long time and had a "record profit" in Q3 2007, proceeded of course, by years of record losses. Interesting that no one seem to investigate this as supposed to Goldman no?

And of course, years before the public media masturbation of of Nouriel Roubini, Meredith Whitney and Dick Bove, there was Mike Mayo, an analyst that hit Citigroup and Ambac so hard that Citigroup decided to deny him access to information. And of course, a bunch of others.

Better check your facts, the U.S. housing market, from a securitiztion perspective peaked in 2003, probably when they ran out of prime borrowers and sub-primes as a fraction of total origination hit 8.4%. Sub-prime underwriting peaked in 2005, fell off in 2006 and fell off a cliff in 2007. Going from 21.3% of all origination in 2005 to 20.1% to 7.9%. Hell, the whole originations market fell of a cliff, going fom $3 trillion to $2.5 trillion in 2007.

The banks couldn't get those things off their balance sheets fast enough. Why did you think they were issuing CDO's? And of course, those that were ahead of the curve (like Goldman, shocked) got out relatively unscathed. The rest got burnt.

It seemed the only ones content on going off the cliff was Lehman and Countrywide.

Your e-mail did show me anything that doesn't line up wth what Goldman said. Goldman said they lost money on their long positions but made money on their short positions, that they had no "MASSIVE NET SHORT" against the housing market, your e-mail show exactly that. It showed that it lost money on the long, made money on the short and overall made, but did not make much money.

It is perfectly consistent with their Senate statement.

The Jerome Kerviel who was fined $6.7 billion and now faces about five years in prison for COMMITTING FRAUD AND COVERING UP THAT HE EXCEEDED THE VaR. Whereas in Goldman's case it was a delibrate calculation to exceed the VaR. French authorities were head hunting and SocGen had to shift the blame on somebody because that very SocGen told regulators that it had very tight internal controls. Oops.

Except they DIDN'T claim otherwise to congress. If they did it would have been another story. They did say they didn't have a short. They didn't even say they didn't have a huge short. They said they didn't have a huge net short. Sounds about right.

Using your own figures, they had 54% short position. Well, was is trading flat? What is no net short position? 50%. It's where your longs perfectly balances your shhorts. So you're gonna tell me a 4% positionn over flat and 8% of longs, absent of a legal definition, is "massive" or illegal? Who are we kidding.

Chuckles. Fine let's talk ethics. Did you read the dissenting opinions to the government report to the causes of the financial crisis? I'm of course, giving you the benefit of the doubt and assuming you read the original findings. One of the very important points in the dissenting opinion is that it is a LIE that banks lead the country into the sub-prime crisis, originally at least.

The opinion gave the example of Agencies (Fannie, Freddie, Ginnie). In theory the Agencies were supposed to create "conforming" loans. Yet by 2007, (forget non-conforming loans) sub-prime loans were 32% of total loans on its balance sheet. By 2001/2002 it had hit 56% of all mortgages on their balance sheets. I already gave you the figure for total sub-prime originations in those years as a percentage of total mortgage originations. Here they are again. 7.8% in 2001, 7.4% in 2002, 8.4% in 2003, 18.2% in 2004, 21.3% in 2005, 20.1% in 2006, 7.9% 2007 and 0.9% in 2008.

And of course, when the first Bush signed the Housing and Community Development Act of 1992, Agencies accounted for 30% of all U.S. mortgages. It reached 55% in 2007. So I'd say that a 24% of sub-primes has a percentage of the balance sheet for organizations that are 55% of the housing market is fairly significant.

When you are pushing for, AS A NATIONAL POLICY, home ownership to people who have no way of affording them, in an easy money environment, are we really surprised it popped? LOL. And the other interesting thing to note too, is that, you can't blame this all on Dubya either (like you did in another thread).

Onto another point then. You said that you were familiar with both SFAS and IFRS. Let's go there next. Let's start with stock options expensing, SFAS 123, if I remember correctly. I'm starting with this one because it's engrained in my memory. I distinctly remember the inside jacket of my intermediate accounting text book, where Gray Davis, in the aftermath of the dot.com bubble, stated that FASB should not force companies to recognize as an expense, stock options; because obviously, recognizing such "bullsh1t" would hurt nascent economic recovery of the country.

And I'm sitting there scratching my head. So it is an expense. But if we don't recognize it, it won't hurt the economic recovery? Or maybe he's arguing that it's not an expense? Nevertheless, he got more than enough traction in Congress, that despite Arthur Levitt's (Chair of the SEC) warning to butt out, Congress threatened revoking the regulatory authorities of the FASB (and by extention, its very existance) if it didn't revoke SFAS 123 and back down. It backed down. Shocking huh.

Then of course, there is MTM accounting, which I don't agree with, but not for the reasons/bullsh1ts stated by Congress.

Of course, a year later, and not in an election year mind you, in the wake of WorldCom and Enron, the American public realized holy ****, maybe we should have recognized stock options and MTM at least had merit in certain cases. Congress, the very same one, is once again outraged at FASB, for not forcing the recognition of stock options. Isn't it funny that Congress is outraged on both side of the argument?

Now, like I said, I disagree with some of the regulations set forth by FASB, but make no mistakes about it, so long as they are the accounting rule-making authority in the country (the PCAOB is a joke), they should be entitled to independence without interference by Congress.

And of course, there is Merrill Lynch. The idiot Ken Lewis recognized at the 11th hour that he got a rotten deal and tried to pull out. Yet authorities no less than the Fed and Hank Paulson threatened him if he pulled out of the deal. Then of course, they issued a gag order on the extent of losses at ML. So Ken Lewis didn't tell the shareholders and the rest is history.

Why did you think the SEC only slapped a peanuts $33 million on BoA? Was it because going to trial would more than have aired some government laundry?

Now, I was actually glad that Jed Rakoff rejected that argument. Would have made for very good political theatre, but even that seemed to have been swept under the rugs. Interestingly the media never reported the subsequent settlement.

Those are of course, along with the housing market, another few of a long list of examples for real-politik in Washington. As I've mentioned in an earlier post, there is NOBODY IN THE BANKING INDUSTRY who doesn't think he/she is at fault to an extent, but let's be honest, Congress is head hunting. It needed a scapegoat to cover its own tracks. Who are we kidding.

 

first of all, i appreciate all the info your posts. that being said, this can't all be blamed on dubya, but your info on the percentage of mortgages in the subprime category during his reign er term is striking.

 

Except I didn't turn it into a defense of Goldman. A defense of Goldman stands on its own merit and like I said and still maintain, you have no case. The whole reason it was even brought up is your insistence on "morals" and "ethics" as supposed to legalities. Well, since we went down that rabbit hole, it was perfectly reasonable to bring up the fact that Goldman was far from the sole culprit and essentially what you are doing, and what the government is doing, is nothing short of what I call scapegoating.

Except you didn't allege Goldman committed fraud now did you? You alleged they committed perjury. And I've no idea why you even brought up Goldman's campaign contribution, as if it is the only party guilty of the attempt to influence politics.

That phrase is actually telling. So you admit that there is at best, a lack of information, yet you seemed to have convicted Goldman already.

The IFRS argument was a tangent, yes, except that it clearly demonstrates a point. It was that the very same governing authorities which weakened the regulations is now involved in a witch-hunt. What do we call that, extra-judicial "justice" or political agenda?

There was nothing Goldman did that any other participants in the market haven't. To dogmatically pursue Goldman (as you have) simply gives the appearance of justice to the fools who are too stupid to know better; unless of course, you were to bring lawsuits against the other guilty parties, and it doesn't stop at banks.

The same regulators are still largely in place.

As I've said before (and I'll say it again), Dubya was an idiot who significantly worsened a very lousy situation. But make no mistakes about it, it was all candies and roses when he took over.

Rather, as I've said before, I hate both sides almost equally.

 

I probably also should note that I've made a typo in one of my previous posts. The total sub-prime on Agency balance sheets were 32% in 1997 (not 2007), reaching 56% in 2001/2002. That should clear things up a bit.

Of course the more telling part was that it was as high as 32% in 1997.

 

So that's it then? Your retort was Wachovia's money laundering, which incidentally has ABSOLUTELY NOTHING to do with the subject in hand? I don't know where your happy place is but you seem completely ignorant of how the real world works. And btw, it goes far beyond the "cozy relationship" between government and big banks, a relationship that wasn't too cozy to begin with, considering how frequent government seems to throw banks under the bus. Self-interest reins supreme. This isn't the first time it's happened nor will it be the last.

Let me tell you what ACTUALLY happened. For a structured product, sub-prime CMO's are amazingly simple in structure compared to the others, especially the prime-backed CMO's out there. For an average American with his 5 second attention span, nothing may stick, but I'm hoping that you at least retain something.

Here's how it works. Goldman acquires from a originator $1 billion in sub-prime mortgages. As high as that sounds, it's actually shockingly typical for such deals. It goes to S&P and says, "we want to securitize this deal." S&P says, "these are crap," we'll only give you AAA's if your senior enhancement percentage is 50% with 5% overcollateralization.

Goldman says fine, its structure creates $500 million worth of senior tranches, let's assume a vanilla one group deal, A1 through A6, which get rated AAA for the first 3 and maybe AA for the 4 through 6. It creates a 5% OC. That leaves $450 million spread between the "mezzanines," M1 through M3, and subordinates B1 through B6. Of course, Goldman doesn't want to call the B's subs, so it calls them M4 through M9 instead.

The Net Weighted Average Coupon on the mortgages are for example, 7.5%. Goldman gets 3% underwriting fee. Goldman hires Wells Fargo (the largest servicer) to service the mortgages, which for its trouble, gets typically 0.5%. It hires LaSalle as the trustee, which gets typically 0.1 to 0.3%. It hires Ambac as the mortgage insurance agent for the senior tranches, which gets between 1 to 3% and of course, hires let's say Lehman as the swap/cap counterparty because many of those sub-prime CMO tranches have coupons floating off LIB1. But for simplicity's sake, let's just say that fees only total 0.5%. So it's Net WAC 7.5% mortgages that are 7.0% after servicing fees and pays LIB1 + spread on the bonds, which let's say totals 6.8%. The other 0.2% is excess interest, used to pay losses, basis risk and interest shortfalls, etc.

Here's how it pays. May of those sub-prime mortgages have 2/3 year teaser rates. So before period 37, the step-down date (right after 3 years, shocking huh), it pays everything sequentially. It first pays A1, A2, A3, so on and so forth. So let's say $100 million in principal came in, your seniors paid down from $500 million to $400 million.

After step-down date, everything pays to a target. You needed 50% senior enhancement percentage to maintain AAA rating on the A1 through A3, but now your senior percentage (assuming no loss) is 55.56% because you still have $500 million (subs + OC) backing now only $400 million in senior bonds. So for a couple of periods, the seniors get actually nothing and the subs get paid until you have $400 million in subs + OC. Then it pays everything to target to maintain the AAA rating, 50% to seniors, 45% to subs and 5% to OC.

Except there is one problem. Losses. The deals are structured to protect the seniors such that if cumulative losses or delinquencies hit a certain percentage of the cut-off day balance ($1 billion), everything pays sequentially again. Furthermore, the subs get first loss. It hits OC first, then M9, M8, M7, so on and so forth. So it is obvious the seniors actually get quite a bit of protection while the most subordinate subs are ****.

As mentioned, the seniors get AAA and AA's, the mezzanines (M1 through M3) get maybe BBB and BB. The subs, B1 through B6 (or M4 through M9) are so sh1tty that Goldman doesn't even ask S&P to rate them, because they'll be junk bonds.

Why is Goldman doing this? Underwriting fees of course. Those companies (think unions, retirement funds, health insurances, apparently also RBS and Deutsche Landesbank) who doesn't know **** about these deals and their risks said "holy crap, there's a AAA rated mortgage banked bond yielding (assuming priced at par) 6.8%. The 30 year treasury only yields 4.5%. And of course the housing market can't colllapse." They couldn't get enough of that ****.

So the banks (the biggest in this was actually Lehman, Countrywide was bigger but wasn't an investment bank) keep creating those deals because there is a huge demand for them. They keep earning 3% fees had something else not happened.

Remember those M4 through M9? Those subs? Those junk bonds? So bad that they don't even rate them? They never get sold. Nobody buys them. Even those idiots who had no business buying those deals don't buy them. Because they buy based on rating (instead of analysis) and those aren't rated. They stay on the banks' balance sheets.

Eventually the banks realized, holy crap, we have this huge ticking time bomb on our balance sheets. That's why you had Cioffi saying "IF the report is correct, we should close the funds now." We need to get rid of them. So they create, guess what, CDO's. Go to S&P again, we got those (not mortgages any more) CMO's, we want to securitize them. S&P, which is at least a decade behind the curve, gives AAA to tranche A, tranche B gets AA, tranche C gets BBB, tranche D gets BB, First Loss tranche doesn't get rated.

Goldman now sells tranches A and B, C, D and First Loss never gets sold. Then it does it again and creates CDO Squared. Doing the same thing in another CDO backed by C, D and First Loss. It wasn't long before some smart guys figured they could go beyond going flat. They could create a synthetic CDO to actually short the market.

Through it all though, structured products did precisely what it was supposed to do. It mitigated risk. Instead of having $300 to $450 million debilitating losses concentrated at the major banks, it spread them out. But it mitigates, as supposed to completely eliminate the risks on the underlying assets, those mortgages.

What went in Abacus? Check them out. They're all M7, M8, M9, etc etc etc. As a matter of fact, as I said, it was already blatantly obvious by the time that deal came out they were going to fail. It wasn't just based on historical data, there's a probability they were going to fail. Cumulative losses and deliquencies already hit such a high proportion but it was virtually certain it was gonna fail. The only difference between that and any other CDO based on the subordinate tranches was that it was already certain. All the others were also crap.

And furthermore, given that data I gave you, which showed the sub-prime frenzy kicked in in 2005, are we really surprised that the whole thing came tumbling down in late 2007 early 2008, when the teasers expired?

So is what the banks did unethical? Absolutely. But you know what, the government's role is already widely established, what about the others?

Why did Goldman create those deals? Because some idiotic investor wants them so bad without EVER understanding the risks and had no business trading them. Those very idiotic investors are now trying to blaming Goldman for things they asked Goldman to create so they could buy. The only investors that have a right to sue are the investors to the likes of RBS and Landesbank, who should very well ask why their banks (so called highly sophisticated investors) lost them so much money by missing something so blatantly obvious.

The very same people who were suing banks under the Fair Housing Act for not giving them mortgages they shouldn't ever receive are now suing the very same banks for giving them mortgages they shouldn't ever receive. And on top of that, Obama is giving them loan mods, which opens another can of worms (and I don't even mean the "moral hazard" bullsh1t, but effects on the housing/securitization market). But that's story for another day.

I don't think I'll even respond to this drivel.