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According to the Collins English Dictionary 10th Edition fraud can be defined as: "deceit, trickery, sharp practice, or breach of confidence, perpetrated for profit or to gain some unfair or dishonest advantage".[1] In the broadest sense, a fraud is an intentional deception made for personal gain or to damage another individual; the related adjective is fraudulent. The specific legal definition varies by legal jurisdiction. Fraud is a crime, and also a civil law violation. Defrauding people or entities of money or valuables is a common purpose of fraud, but there have also been fraudulent "discoveries", e.g. in science, to gain prestige rather than immediate monetary gain
*As defined in Wikipedia

Wednesday, March 30, 2011

The Charmed Life of Goldman Sachs

It doesn't seem to matter where Goldman Sachs goes, it always comes out the other end with a firm grasp on the money. Take, for instance, what Buffett says about getting better returns on his $5 billion investment in Goldman Sachs than did the taxpayers' on their TARP "investment" of $10 billion with Goldman Sachs. Buffet earned twice as much interest on his loan!

Or take the case of Goldman Sachs (and other Wall Street banks) who continue to make money by underwriting other firms TARP loans being paid back. In a convoluted (and unfair) manner, Goldman Sachs takes TARP money, pays it back at a lower premium, then underwrites others' paybacks and earns hefty fees for so doing!

Then because there seems to be no distinct definition of proprietary trading, Goldman Sachs can test or extend the limits of that definition to pursue further profit which it has become used to enjoying. If market making and proprietary trading are on the same continuum, then Goldman Sachs has a lot of leeway with which to work as shown by the following article by Christine Harper in Bloomberg:

Goldman Special Situation Profit Seen at Risk With Volcker
by Christine Harper - Bloomberg

March 28 (Bloomberg) -- For Goldman Sachs Group Inc.’s Special Situations Group, disasters can be a source of some of the biggest profits. Now the secretive investing operation faces its own potential calamity.

Goldman Sachs already has shut two units that made bets with the company’s money because such proprietary trading by banks will be prohibited under the Volcker rule approved by Congress last year. Still, the Special Situations Group, known as SSG, continues to make investments and named a new global head last month. Executives have argued that SSG shouldn’t be affected because it’s more of a lending than a trading business.

Created during the late 1990s, SSG invests the bank’s money in the debt and equity of troubled companies and makes loans to high-risk borrowers. The effort to defend it illustrates how important the business is to Goldman Sachs and may be a test of how flexible regulators will be in defining proprietary trading.

“It is proprietary trading, but the business can also be modified if you had to,” said Brad Hintz, an analyst at Sanford C. Bernstein & Co. in New York. The question, he said, is “Where will the regulators draw the line?”

While SSG’s financial results aren’t published, the unit has been a major profit contributor at New York-based Goldman Sachs -- the biggest in some periods -- according to former SSG executives who asked not to be identified because they don’t want to speak publicly about their former employer.

Twice the Profit

Investing and lending, the newly created Goldman Sachs division that includes SSG, proprietary-trading businesses and investments in hedge funds and private equity, generated 32 percent of the firm’s 2010 pretax profit, almost twice the profit from investment banking and money management combined. Only sales and trading contributed more. Until last quarter, SSG’s results were included in Goldman Sachs’s largest segment by revenue: fixed income, currencies and commodities, or FICC.

Richard M. Ruzika, 51, a former Goldman Sachs commodities- trading chief and one-time New York Jets recruit, is retiring from the firm at the end of April after running SSG since 2007, said a Feb. 17 memo obtained by Bloomberg News. He will be replaced by Jason M. Brown, a Briton who has led SSG in Asia since 2007, according to a separate memo. Brown, who joined Goldman Sachs from Bear Stearns Cos. in 1999 and became a partner in 2006, will remain in Hong Kong.

Japanese Golf Courses

The unit bought distressed assets in the aftermath of Asia’s financial crisis and profited in the Enron Corp. bankruptcy, one former employee said. A gain on an investment in Accordia Golf Co., Japan’s largest golf-course operator, contributed about $500 million to fixed-income’s $3.1 billion of revenue in the fourth quarter of 2006. The gain wasn’t disclosed by Goldman Sachs until a year later.

Without those profits, it would be difficult to generate returns previously achieved, analysts said. Goldman Sachs’s annualized return on average common shareholders’ equity was 13.1 percent in the fourth quarter of 2010, down from 41.5 percent in the same period in 2006, company reports show.

Goldman Sachs has dropped 6.1 percent this year to $157.97 on the New York Stock Exchange, compared with a 2.5 percent gain for the 81-member Standard & Poor’s 500 Financials Index.

When Chairman and Chief Executive Officer Lloyd C. Blankfein addressed investors at a conference on Nov. 11, 2008, less than two months after rival Lehman Brothers Holdings Inc.’s bankruptcy, he tried to reassure them about Goldman Sachs’s ability to make money.

Volcker Restrictions

“We believe we have as strong a track record as anyone at being a nimble investor in special or distressed situations,” Blankfein, 56, said. “We can decide the extent to which the firm itself will invest.”

The Volcker rule, championed by former Federal Reserve Chairman Paul Volcker, 83, and included in the Dodd-Frank Act, could change that. The provision aims to constrain banks that receive government backing, such as deposit insurance and access to Fed funds, from betting on investments that could produce significant losses. It would also limit the amount of money firms can invest in private equity and hedge funds.

The Financial Stability Oversight Council, made up of U.S. regulators, released a study and recommendations Jan. 18 on how to implement the Volcker rule. The Fed and other banking regulators must put it into effect by October.

Unanswered Questions

There are unanswered questions that could leave an opening for SSG, said analysts and legal experts, including Roberta Karmel, a former member of the Securities and Exchange Commission who now teaches at Brooklyn Law School in New York. Can Goldman Sachs claim that purchasing debt makes the division a lender rather than a trader? If the unit holds its investments for months or years, do they cease to qualify as proprietary trading because the firm isn’t seeking to “profit from near- term price movements,” as the FSOC guidelines say?

“These laws are too complicated, and they can find loopholes,” said Karmel. “I don’t know how strictly the regulators will be able to define proprietary trading.”

David A. Viniar, Goldman Sachs’s chief financial officer, said on an Oct. 19 call with analysts that the Volcker rule might not affect SSG because “the predominant part of that business is actually a lending business, which we think is not only OK under the rules but is actually something that’s encouraged because it obviously helps the economy grow.”

Goldman Sachs executives don’t believe the company will be barred from using its money for so-called principal investments as long as they aren’t made through hedge funds or private- equity funds, Guy Moszkowski, an analyst at Bank of America Corp. in New York, wrote in a March 21 note to investors.

‘Key Drivers’

“One of the key drivers of Asia earning has historically been the ability to deploy the firm’s own capital in principal investments,” Moszkowski wrote after meeting in Hong Kong with four Goldman Sachs executives, including Yusuf Alireza, head of securities for Asia. “GS continues to believe, based on its interpretation of Volcker, that non-fund-related direct investing will not be precluded.”

Many of those investments are likely to be made through SSG or another unit called PIA, for Principal Investment Area, Moszkowski said in a phone interview after the report.

“They have been in the past, and they will be in the future,” said Moszkowski, who rates Goldman Sachs stock “neutral.” “Historically these types of balance-sheet investments have cropped up in many places around the firm, and it’s never entirely obvious that that’s a PIA investment or that’s an SSG investment.”

Troubled Companies

In his note, Moszkowski said it isn’t clear how Goldman Sachs will defend SSG’s practice of making loans to troubled companies and then receiving equity when the debt is converted to stock in a bankruptcy.

“To maximize many of these positions, SSG has followed a ‘loan-to-control’ strategy, whereby distressed-debt positions wind up as a controlling equity stake,” the analyst wrote. “Our interpretation of this has been that flat-out equity investments, or holding periods after a conversion to equity, will be very limited.”

If Goldman Sachs succeeds in convincing U.S. regulators that SSG doesn’t run afoul of the Volcker rule, new regulations from the Basel Committee on Banking Supervision could increase the amount of capital the firm has to set aside against principal investments, Moszkowski and other analysts said.

Read the full article here


Anonymous said...

Bank regulation

The regulation of banks simply does not work and has led to a serious loss of public credibility in them and of confidence in their true motives. Almost all of the problems arise from their activities in securities markets, rather than traditional banking. The conflicts of interest and profitability of these fee-earning and trading activities have been growing, dwarfing the importance of normal banking income. These factors are irreconcilable, and a sensible unregulated business would have decided long ago where its true priorities lie, so that they may focus on them by ceasing any conflicting activities.

Government-sponsored regulation therefore fundamentally alters the competitive picture by legitimising the natural desire of banks to maximise their financial power, rather than compete in a free market for customer business. In this sense, the regulator has become the tool of the monopolistic banks, because the regulator is the path to that power.

The US Commodity Futures and Trading Commission was established to regulate futures and options markets. But the same rules apply: the CTFC’s primary responsibility is to the political elite that created it and its own organisation rather than to the market itself, which is a secondary consideration in common with all government-sponsored regulators.

The result is the CTFC does not have a free hand in policing the market and controlling systemic risks, which, if the role of the CTFC could be valued, is what the users of the market would probably require. Even though the CTFC has just closed a public consultation period where it has sought the views of all market participants, it will only enact those changes that do not conflict with the interests of the powerful vested interests that govern it. So the wider users of the market who expect unbiased results will again be most probably disappointed.

The relationship between regulators and the powerful monopolist banks has become one of servants and masters respectively.

...btw...your site takes forever to download.

Anonymous said...

A charmed life indeed...when...


The storyline that has been sold to the public by the Federal government, Wall Street, and the corporate mainstream media over the last two years is the economy is recovering and the banking system has recovered from its near death experience in 2008. Wall Street profits in 2009 & 2010 totaled approximately $80 billion. The stock market has risen almost 100% since the March 2009 lows. Wall Street CEOs were so impressed by this fantastic performance they dished out $43 billion in bonuses over the two year period to their thousands of Harvard MBA paper pushers. It is amazing that an industry that was effectively insolvent in October 2008 has made such a spectacular miraculous recovery. The truth is recovery is simple when you control the politicians and regulators, and own the organization that prints the money.

A systematic plan to create the illusion of stability and provide no-risk profits to the mega-Wall Street banks was implemented in early 2009 and continues today. The plan was developed by Ben Bernanke, Hank Paulson, Tim Geithner and the CEOs of the criminal Wall Street banking syndicate. The plan has been enabled by the FASB, SEC, IRS, FDIC and corrupt politicians in Washington D.C.

Joyce said...

The above two links are very good reading with, however, a terrible message. The "Extend and Pretend" article vividly explains how corruption from the top down (Fed Res, Treasury, President [by not investigating properly]) and from the bottom up (Goldman Sachs, JPM, Citigroup, etc.) has preserved the TBTF banks.

The cost, I fear, is too great.

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