Goldman Sachs: Always on the Fence

When I first read William D. Cohan's article in the Opinionator (The New York Times), I thought, finally, we will have something to grasp onto to explain why Goldman Sachs should be prosecuted. But the next day I read the rebuttal by Barry Ritholz (The Big Picture), and I'm left with the image of Goldman Sachs sitting pretty on the fence, neither guilty nor innocent but sophisticated as hell! With such fiercesome competition amongst banks and a literal fight to the death, I guess Goldman Sachs inspires admiration for its tenacity rather than loathing for what it does wrong.

How Goldman Killed A.I.G.
by William D. Cohan - The Opinionator, The New York Times

The conventional wisdom has it that the final report of the Financial Crisis Inquiry Commission was a low-budget flop, hopelessly riven by internal political disputes and dissension among the commission’s 10 members. As usual, the conventional wisdom is completely wrong. Actually, the report — and the online archive of testimony, interviews and documents that are now available — is a treasure trove of invaluable information about the causes and consequences of the Great Recession.

For instance, on the exceptionally important but little understood role played by the increasingly lower prices Goldman Sachs placed on the complex mortgage securities on its balance sheet — which helped determine the fate of many of its shakier Wall Street brethren — the commission report, on page 237, is crystalline:

As the crisis unfolded Goldman marked mortgage-related securities at prices that were significantly lower than those of other companies. Goldman knew that those lower marks might hurt those other companies — including some clients — because they could require marking down those assets and similar assets. In addition, Goldman’s marks would get picked up by competitors in dealer surveys. As a result, Goldman’s marks could contribute to other companies recording “mark-to-market” losses: that is, the reported value of their assets could fall and their earnings would decline.

The first victims of Goldman’s decision in May 2007 to begin communicating its lower marks to the rest of the marketplace were the two Bear Stearns hedge funds that were heavily invested in complex and squirrelly mortgage securities. Although Goldman disputes the charge, the lower marks caused the two hedge funds to recalculate the funds’ net asset value, known in the business as N.A.V., and to re-issue to investors in June 2007 a far lower N.A.V. — down 19 percent, rather than down 6 percent. All hell broke loose. Soon enough, the funds’ investors were blocked from withdrawing their money, and by July the funds filed for bankruptcy and were soon liquidated. Investors lost much of the $1.5 billion they had invested. The liquidation of the two hedge funds led to the collapse of Bear Stearns nine months later.

Read the rest of the article here

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Did Goldman Sachs Kill AIG?
by Barry Ritholz, The Big Picture

I have to take issue with William Cohan’s Op-Ed, How Goldman Killed A.I.G.

First off, let me start out by saying that these are two bad actors; there are no “good guys” here. Second, let me remind the reader that AIG under-wrote $3 trillion worth of derivatives, a massive high-risk exposure — and collected $3 billion (10 bps) in fees on their exposure.

Tom Savage, President, the head of AIG’s Financial Products, it free money: “The models suggested that the risk was so remote that the fees were almost free money. Just put it on your books and enjoy the money.”

Gee, how could that go bad?

Thus, looking at what was done, I think its more accurate to say that AIG committed suicide. Goldman was merely one of the many Brute(s) that thrust their daggers into Caesar.

Goldman became a counter-party of AIG by paying them $100 million to insure $23 billion of mortgage securities. The contract included several triggering events that required AIG to post more reserves. These included AIG’s loss of their Triple AAA ratings, as well as a drop in the value of the underlying securities. Both events occurred, forcing AIG to pony up billions.

The “dispute” between GS and AIG was over the timing and amount of the collateral call. I must emphasize that this was part of the contract between two very sophisticated financial firms — AIG was the world’s biggest insurer, and GS was one of the world’s biggest bankers.

Read the rest of the article here