Talk:Goldman Sachs

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Alleged fraud

The SEC case against Goldman Sachs

In July 2009, the SEC served Goldman Sachs with notice that it intended to file fraud charges against it. On April 15, 2010, the SEC followed through and charged Goldman Sachs and Fabrice Tourre, an employee of the bank, with defrauding investors. In addition to the SEC’s civil case, Rep. Marcy Kaptur, D-Ohio has asked the Attorney General for criminal charges as well, arguing "On the face of the SEC filing, criminal fraud on a historic scale seems to have occurred in this instance.” Shareholders are also suing the bank because of its failure to disclose the SEC investigation against it.

The SEC’s case focuses on a particular Goldman Sachs’ product named “Abacus 2007-AC1”. This product enabled Paulson & Co. Inc., a hedge fund headed by John Paulson, to make $1 billion betting against the US mortgage market. Paulson paid Goldman Sachs $15 million to create and market Abacus. The specific rules Goldman Sachs is accused of violating are: 17(a) of the Securities Act 1933, section 10(b) of the Securities Act 1934 and Exchange Act Rule 10b-5.

The SEC is claiming Goldman Sachs made “materially misleading statements and omissions” in its marketing of Abacus to investors, failing to inform them that Paulson’s hedge fund had “played a significant role” in choosing the subprime mortgage-backed securities underlying this CDO and that Paulson had an incentive to pick securities that would probably decline in value. Nine months after Abacus 2007-AC1 was sold to investors, 99 percent of the underlying mortgage securities had been downgraded. Abacus investors lost over $1 billion and Paulson made $1 billion from derivative side bets that Abacus would decline .

Commenting on the charges, former SEC lawyer Steven Thel says that given their serious nature the SEC would not have launched the case unless it thought it was going to win. Thel stated in an interview with the International Financial Law Review: “This is an example of a bank saying it was client led, but in fact was favoring hedge funds over institutional investors in the most grotesque way. I am sure the Goldman Sachs line will be that they gave all sorts of disclosure. But that boilerplate provision may not be enough.”

The potential for conflicts of interest is illustrated by the Abacus deal, since it involved Goldman Sachs structuring a collateralized debt obligation for a hedge fund that wanted to bet against it at the same the bank was responsible for convincing investors to buy this product. In its pitch book to market Abacus to investors, Goldman Sachs touted the reliability of ACA, a firm hired to manage this CDO. Goldman Sachs described ACA as having a “commitment to longterm bondholder and counterparty security - Durability and stability emphasized”. The bank assured investors that, “No rated notes in any of ACA’s CDO’s have ever been downgraded.”

This marketing of Abacus on the basis of its safety contrasts with the comments in Goldman Sachs employee emails about the dire state of the housing market. In addition, Tourre wrote in an internal March 2007 email that the Abacus portfolio was “selected by ACA/Paulson” which seems to confirm the role Paulson had in selecting the securities making up the deal.

The SEC case against Goldman Sachs employee Fabrice Tourre

The SEC case against Fabrice Tourre describes him as the Goldman Sachs executive “principally responsible” for the Abacus deal. The SEC alleges that Tourre knew of Paulson’s interest in having Abacus decline in value, did not disclose this, and instead gave the misleading impression that Paulson had invested $200 million in the equity of the CDO with the expectation that it would do well. At a Senate subcommittee hearing, Tourre categorically denied that he had failed to disclose material information to investors.

Tourre’s emails suggest the trader knew at the time he was selling his CDO deals that they were bad for investors. Tourre advised his colleagues not to try to sell these types of deals to hedge fund managers because they were too “sophisticated” and would not let Goldman charge large fees, but instead that they should target "buy-and-hold ratings-based buyers". A particularly revealing email stated: “More and more leverage in the system, The whole building about to collapse anytime now…Only potential survivor, the fabulous Fab[rice Tourre]…standing in the middle of all these complex, highly leveraged, exotic trades he created without necessarily understanding all of the implications of those monstruosities!!!” Another Tourre email, passing on information from a Goldman’s Sachs mortgage trader, said that the mortgage business “is totally dead and the poor little subprime borrowers will not last so long!!!”

In a disparaging comment about the investors he was selling CDOs to, Tourre said in an email “I’ve managed to sell a few Abacus bonds to widows and orphans that I ran into at the airport…” An email from a Goldman Sachs executive to Tourre suggests Tourre was under pressure to execute these deals quickly, because “the cdo biz is dead we don’t have a lot of time left.”

Goldman Sachs’ defense against fraud charges

Goldman Sachs CEO Lloyd Blankfein has denied there is a conflict when his employees package securities they know are bad and sell them to investors. At the April 26, 2010 Senate subcommittee hearings on Goldman Sachs’ role in the financial crisis, Blankfein stated: "In the context of market making, that is not a conflict. What clients are buying... is they are buying an exposure. The thing that we are selling to them is supposed to give them the risk they want. They are not coming to us to represent what our views are. They probably, the institutional clients we have, wouldn't care what our views are, they shouldn't care.” Blankfein did not address the role the bank plays in actively promoting deals, as its pitch book for Abacus demonstrates.

Not all financial institutions felt the kind of deals Goldman Sachs made to bet against the housing market were ethical. In his book on John Paulson, Gregory Zuckerman reports how Paulson also approached the now-defunct firm Bear Stearns to create a CDO his hedge fund could bet against. Paulson believed “the debt backing the CDOs would blow up.” According to Zuckerman, Paulson “didn’t think there was anything wrong with working with various bankers to create more toxic investments”. Paulson was open about what he was doing. However Scott Eichel, a senior Bear Stearns trader, was “worried that Paulson would want especially ugly mortgages for the CDOs, like a bettor asking a football owner to bench a star quarterback to improve the odds of his wager against the team.” Eichel turned Paulson down, in his words, because “it didn’t pass the ethics standards; it was a reputation issue, and it didn’t pass our moral compass. We didn’t think we should sell deals that someone was shorting on the other side.”

Goldman Sachs has said the SEC’s charges were “completely unfounded.” It released a report presenting the firm as a small player in the subprime business overall and with insignificant investments that could profit from a housing downturn. The bank is also claiming it lost money on the Abacus deal. However, a story in Businessweek points out “Goldman won't reveal the positions in its mortgage trading book, so there's no way to tell what's real.”

The bank has its defenders in the media. The CEO of Thomson Reuters, Tom Glocer, published an extraordinary blog, saying, “Enough already” about the criticism of Goldman Sachs. In what may be taken as direction from management by Reuters reporters, Glocer said that the “[SEC]proceedings are best left to the securities and regulatory lawyers.” Glocer argued that while there may be a few “bad apples” among Goldman Sachs’ 35,000 employees, many were “upstanding, ethically decent mothers and fathers” and he knew a number of them personally. Sebastian Mallaby, writing in the Washington Post, said by charging Goldman Sachs the SEC had become “a poster child for government power run amok.”

As well, Republicans are questioning whether the SEC timing of it fraud charges was politically motivated to help the Democrats pass financial reform legislation. In this regard, Republican Congressman Darrell Issa gave the SEC a May 2010 deadline to provide records of communication between Democrats and the SEC.

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Greek Financial Crisis

In April 2010, Greece was at risk of defaulting on its national debt. Greece’s financial crisis threatens French, German and other European banks, which hold $193 billion in Greek government bonds. One financial analyst observed that, “This crisis is beginning to look much like the sub-prime mortgage meltdown, when the falling value of real estate loans created a vicious circle in credit markets.”

Greece has been able to disguise the true nature of its fiscal problems due to a deal Goldman Sachs structured for it in 2002. The European Union has strict rules about how much debt a member government can carry and how large of a deficit they can run. But through a Goldman Sachs designed currency swap that involved what has been called “fictional exchange rates”, Greece was able to hide the size of its debt. Goldman Sachs went on to arrange $15 billion in government bond sales for Greece but did not disclose the swap deal, possibly leading investors to be fooled about the real value of the bonds.

Minimal Tax Payments

Goldman Sachs paid $14 million in taxes in 2008, a drop from $6 billion in 2007, and an effective tax rate of 1%. The bank made $2.3 billion in profits and paid out $10.9 billion in employee benefits and compensation. Goldman Sachs attributed its lower taxes to “changes in geographic earnings mix”. A tax expert commented that, “Clearly they have taken steps to ensure that a lot of their income is earned in lower-tax jurisdictions.”

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Goldman Sachs’ Post-crisis Profits

In 2009, Goldman Sachs had the most profitable year in its history. It earned $13.4 billion which was almost as much as the top five US banks combined, with “aggressive trading” being a major source of its revenue.

Robert Scheer has said that, “The story of the financial debacle will end the way it began, with the super-hustlers from Goldman Sachs at the center of the action and profiting wildly.” Scheer points out that, “It was Goldman-Chairman-turned-Treasury-Secretary Henry Paulson who engineered the Bush-era bailout that left Goldman holding the high cards. The corporation was allowed to suddenly become a bank holding company, a privilege denied Lehman Brothers, and hence eligible for TARP funding and a sharp discount in the cost of borrowing money. Treasury Secretary Timothy Geithner, then head of the New York Fed, worked with Paulson to give Goldman the federally protected status of a commercial bank and also worked on the deal that passed taxpayer money through AIG to Goldman.”

In February 2010, PBS Newshour aired a program entitled “Is Taxpayer Money Behind Profits at Goldman Sachs?” The program linked Goldman Sachs record profits to the backing it received from government during the financial crisis. One of the experts interviewed, former IMF chief economist Simon Johnson, explained that in 2008 Goldman Sachs was facing bankruptcy, but because of their status as an investment bank they could not borrow from the Federal Reserve. Johnson said that the authorities came up with the solution of transforming both Goldman Sachs and Morgan Stanley into bank holding companies so that they could get access to cheap money from the Fed. This transformation solved Goldman Sachs’ liquidity problems and reestablished investor confidence, because the bank would now have the backing of the US government. Gaining status as a bank holding company also made Goldman Sachs eligible for TARP funds.

Former Goldman trader Nomi Prins was also interviewed for the PBS program, and she pointed out that another advantage of becoming a bank holding company was that Goldman Sachs would be covered by FDIC protection, which is ultimately guaranteed by the US taxpayer. Government backing means the bank is considered a very low risk and is able to borrow at extremely low rates to fund its deals.

L. Randall Wray, Professor of Economics at the University of Missouri-Kansas City, has estimated how much Goldman Sachs’ conversion to a bank holding company has been worth. Wray wrote in his blog: “hile many think of Goldman as a bank, it is really just a huge hedge fund, albeit a very special one that happens to hold a Timmy Geithner-granted bank charter, giving it access to the Fed’s discount window and to FDIC insurance. That, in turn, lets it borrow at near-zero interest rates. Indeed, in 2009 it spent only a little over $5 billion to borrow, versus $26 billion in interest expenses in 2008—a $21 billion subsidy thanks to Goldman’s understudy, Treasury Secretary Geithner.”

Another explanation for Goldman Sachs’ extreme post-crisis profitability is the elimination of much of its competition during the financial crisis. William Cohan, in his 2010 book on the crisis, has observed “some Wall Street firms, particularly Goldman Sachs and JPMorgan Chase, have figured out ways to make historic amounts of money in the wake of the global demand for their services and an equally historic lack of suppliers to meet that demand. After all by taking out the third-, fourth- and fifth-largest securities firms as competitors in the market, it stands to reason the remaining firms will benefit.”

Bad bonus publicity

Goldman Sachs is considering its options dealing with the issue of bad bonus publicity. The company is reportedly planning to hire a brand manager to combat its negative public image. Three options have been suggested to soften the negative public reaction to the bonuses: 1) Pay the vast majority of the bonus in stock. On Wall Street, executives receive a combination of stock and cash, with the cash portion comprising 65% of the total bonus. 2) Goldman Sachs could pay much smaller bonuses and hand out larger salaries. 3) Goldman Sachs could forgo bonuses for the most part and just buy its stock in the open market. Because most of its executives have large pieces of their net worth tied up in shares of Goldman, the wealth effect would be bigger and less sensational than paying all those huge bonus packages at the end of the year.

Code Pink demonstrating at Goldman Sachs, October, 2009:

Coal energy assets

Goldman Sachs' subsidiary, Goldman Sachs Power Holdings, owns Cogentrix, a North Carolina-based company which owns four coal-fired power plants, with a total capacity of 574 MW.

Goldman Sachs has a 49% share in SSA Marine, which applied for a permit to export coal from the Gateway Pacific Terminal in Washington to Asia.

Coal investment pricing

In June 2011, Goldman Sachs announced coal stocks look poised to rise 35% over the next six months, as U.S. bituminous thermal-coal producers increased exports to Asia and Europe, leading the firm to raise investment-recommendation rating for coal-sector stocks to "attractive." In conjunction with the sector upgrade, Goldman Sachs raised its ratings on Patriot Coal, Peabody Energy, and Consol Energy.