Goldman Sachs Is Robbing Us Blind
businessinsider.com
businessinsider.com
I really hate articles like this. There is nothing specifically stated to back up the conclusion. Give specific actions taken by Goldman and show why that exploted people.
Secondly, even if some groups within Goldman did do this, its a vast oversimplification to say "Godlman Sachs Is Robbing Us Blind." I know, its hard to get very nuanced in an article like this, but at least state which divisions of Goldman did this. A lot of groups in Goldman are not structuring products. Some of them are facilitating trade of other companies, some are just buying and selling stock, some of them are doing economic research, etc...
An article like this is meant to provoke anger, and thats fine. Without getting people really mad, nothing will ever change (I mean this in a broader context as well, not just with respect to Goldman). If a large power financial institution is truly using dishonest methods to rob us, we should figure out what to do. I just wish there was some reference to a cold hard fact, a link to further reading which wasn't just the article itself on the huffington post or something to allow people to make an informed decision.
Ah well.
Edit: Spelling, a few additions.
We tend to think of Obama as the anti-thesis of the Bush years and policies, but he is in lock step with the Bush and Clinton administrations in his deferral of all financial decisions to Goldman Sachs and their alums.
Of all the "Goldman is Evil" talk that I've heard, this is without a doubt, the most damning.
I don't really know what can be done, like the article said, Goldman ends up looking like a hero each time. On top of that, whenever stuff like this happens, articles come out about how great they are at making profits and how it comes from their brilliance in investing.
With respect to the "next bubble," I have to admit, I didn't realize that the carbon credits could really be traded by entities that don't product carbon (at least not to the degree that manufacturing does). Talk about a horrible idea. I still have some faith in markets to properly price things like stocks, etc... (though its dwindling) but having the markets trade carbon credits goes completely against their purpose. I don't necessarily even want carbon credits to be prices "properly", I may want them to be (eventually) unrealistically expensive. Maybe not, but market pries don't really correlate with what we want.
Anyway, thanks for posting this. I'm going to look for some articles which disagree, just for a balanced view, but this is great stuff.
http://www.salon.com/opinion/greenwald/2009/10/16/goldman/in...
The lack of transparency in the case of an obvious and massive conflict of interest is just as frightening as any specific cases of wrongdoing - which, anyway, would probably result only in the show trials of some low-level traders or officials.
A) "Heads I win, tails you lose" or
B) "Socialism for the rich" (privatize profits and socialize losses).
"Ten Principles for a Black Swan-proof World": http://chrisco.wordpress.com/2009/06/10/ten-principles-for-a... -- Nassim Nicholas Taleb's ideas ("Fooled by Randomness"). See also the Nouriel Roubini links there.
NYT: "Wall Street Smarts": http://www.nytimes.com/2009/10/14/opinion/14trillin.html?_r=... -- Interesting op-ed.
This is what I don't understand. Why is the government responsible? Shouldn't the buyer of an insurance make sure that they are getting their money's worth? If the insurance is not transparent enough, it is just another reason not to buy.
Insurance is really the wrong word, even though the article uses it.
I'm not sure how nobody is going after the credit rating agencies. They're the ones that rate how stable a bank is.
In this case, I have my doubts as to how significant the role CDS's played in the crisis in the first place given that after they were all netted out, the actual size of the market was nowhere near the initial scare numbers put out in the press. Here's a decent overview of how the market works: http://www.wilmott.com/blogs/satyajitdas/index.cfm/2009/4/12...
More here: http://seekingalpha.com/article/138047-how-cds-spreads-affec...
In the aftermath I figure we'll probably find that the much larger issue was in the debt markets and fears of the underlying asset values related to subprime cascaded down to other loans.
Heres a link: http://blogs.reuters.com/felix-salmon/2009/07/04/why-insuran...
From the link you provided: "Many swaps can be thought of as being like an insurance contract, should one be so inclined." Just because you call it insurance, doesn't mean that insurance commissioners should regulate it as such. Just as insurance commissioners shouldn't regulate financial options even though they can also be used conservatively as insurance against given financial risk as much as wild financial bets.
Maybe CDS 'should' be regulated as insurance but thats for another day. :)
Anyway.. for those that are interested..
From: http://en.wikipedia.org/wiki/Credit_default_swap
CDS contracts have been compared with insurance, because the buyer pays a premium and, in return, receives a sum of money if one of the events specified in the contract occurs.
However, there are a number of differences between CDS and insurance, for example:
- The buyer of a CDS does not need to own the underlying security or other form of credit exposure; in fact the buyer does not even have to suffer a loss from the default event.[1][2][3][4] In contrast, to purchase insurance, the insured is generally expected to have an insurable interest such as owning a debt obligation;
-the seller need not be a regulated entity;
-the seller is not required to maintain any reserves to pay off buyers, although major CDS dealers are subject to bank capital requirements;
-insurers manage risk primarily by setting loss reserves based on the Law of large numbers, while dealers in CDS manage risk primarily by means of offsetting CDS (hedging) with other dealers and transactions in underlying bond markets;
-in the United States CDS contracts are generally subject to mark to market accounting, introducing income statement and balance sheet volatility that would not be present in an insurance contract; Hedge Accounting may not be available under US Generally Accepted Accounting Principles (GAAP) unless the requirements of FAS 133 are met. In practice this rarely happens.
Look up viaticals for instance. However, whether or not you call it insurance, is irrelevant given the underlying components still exist - the risk and the financial instrument that can either be used to offset that risk or essentially gamble. This applies as much to regulated insurance markets as it does to derivatives.
That's similar to placing the responsibility on the buyer of a gallon of milk to make sure it has not been poisoned.
This applies very well to the insurance business. If you are promising to pay a certain amount if a certain event happens, then it turns out you did not actually put away any money to pay out, that's a pretty straightforward case of fraud.
With milk, the government has decided to put processes in place to keep milk that could sicken or kill people off the shelf, instead of just letting the survivors of people killed by poisoned milk sue after the fact. Regulating the financial industry is the same idea, make sure companies have enough assets to pay off their obligations, for example.
2) Federal Startup's job is to ensure we have a stable, vibrant startup culture
3) Federal Startup loans money to startups using money it prints
4) Goldman Cloud company, a successful startup, places key people in high levels of government, including Federal Startup
5) Goldman Cloud company takes many risks with the knowledge that Federal Startup will help them if things get very bad
6) Things get bad, loans dry up. Goldman Cloud has a former CEO which now runs Federal Startup. They work together to 'fix' the system.
7) At the end of the day, after the turmoil is over, Goldman Cloud is one of the last startups standing
Personally, I don't blame Goldman Sachs, but I do blame the Federal Reserve and US Treasury. End the Fed.
Clever people looked into those CDS and decided to bet against them. They became extremely rich during the crisis.
There is nothing wrong with CDS, it's just that it was based on crap and people didn't do their homework. "It earns money, must be cool".
Want to prevent this? Well have American banks join Basel II. Stop allowing them loaning money to people who will never be able to reimburse. Make sure insurance companies like AIG can't enter the derivative products market so easily.
And please stop reading articles from people who learnt about derivative products yesterday.
However, we should consider not helping them, if it fails.
Since you cannot allow it to fail, you must set in place some rules to limit the risks they take.
(Yes I know about the typo CDS=>CDO, I can't edit myself).
Frankly I think you are the one being glib. A huge problem with CDOs was that many carried AAA ratings. In this past, buying a security with this rating was doing your homework. Unfortunately, Moody's and S&P were not purveyors of accurate information on these securities. This became a huge problem since AAA ratings allowed banks to hold these securities and call them capital.
And your argument doesn't make sense in light of how much money the Euro-banks lost. If lack of regulation was the problem, why did the most regulated entities, buying the most regulated securities, according to the strictest rules -- lose the most money?
Why did regulated hedge funds beat the S&P by about 20% in 2008? If regulation keeps us safe, why is it always so dangerous?
Even banks who did stay out of the "contaminated" credit business had business with banks who didn't.
Suppose your liquid net worth is $2mm. It would be a very bad idea for you to enter into a legally binding wager with a penniless person on a fair coin where "heads you win $1M; tails you lose $250K"
They let a few banks die and look at the global effect. Imagine if they let everything tumble down.
The banks are very-very tightly coupled together, such that the whole system nearly collapsed.
Thats not just the finance industry, thats the whole economy.
The question isn't so much allowing everything tumble down but provide a structure where banks can quickly deal with the losses/asset revaluations and be reborn so that depositors don't fear for the safety of their deposits. To suggest that the choice was binary and that we could have either saved them or let the world descend into chaos as silly as it is untrue.
Instead we've created a system where bankers have gotten rewarded for taking outsized risks without fear of the downside and the supposed "systemic" risk has gotten even larger as those massive banks have become even larger.
You don't think there would have been a run on the banks if more had failed and gone Chapter-11?
As noted, if there were more of a rapid bankruptcy structure where the government could have taken over a bank on a Friday to allow it to emerge Monday and restructure its assets, this could have provided greater confidence to the markets. The major issue of these institutions was that they weren't able to continue funding ongoing cash requirements.
Lehman went into bankruptcy because of liquidity - ie that their short term assets weren't able to cover their short term obligations. Much of this reason was because people didn't trust the valuations of their assets (e.g. subprime mortgages) and fears that proved to be overblown as to outstanding unstated liabilities - because it wasn't a transparent market. Barings, if you recall was brought down by a rogue trader so it wasn't beyond the realm of possibility and at that point the numbers being quoted as to the risk exposure of CDS's was in the tens if not hundreds of trillions of dollars (which again if netted out was only a couple trillion - and for that exposure to be realized would basically require every major company in the Fortune 1000 to go bankrupt at once).
Even if a bank wanted to lend another bank money, it takes time to do a reevaluation (more than a weekend) of another banks assets and they would be more concerned of trying to calculate their own exposure.
The idea is that there wouldn't be a liquidity problem as the debt excluding individual depositors would be restructured as equity or some type of quasi equity/debt with assets aggressively written down.
The problem with what has currently been done with the bailouts is that the underlying problem hasn't be dealt with and only deferred meaning that at some point it's still going to have to be dealt with - and by taxpayers instead of investors who should bear responsibility for the risks that they have taken and the trust they placed in the executives of these institutions.
It was Goldman alum deciding that Lehman should fail and Goldman should get bailed out.