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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

Saturday, September 10, 2011

Front Running and Goldman Sachs

Below we have an excerpt from an interesting article about Goldman Sachs's so-called confidential report to its institutional clients. The article from EconMatters discusses possible conflicts of interest and GS's ability to front-run its own clients. Other GS lawsuits and potential lawsuits are enumerated also, including the one brought by the FHFA regulator.

It mentions the revolving door with government that gives GS the edge in any suit brought against its practices. But don't get too excited that big things are going to take place because the piece concludes with the following:
"And judging from the civil actions brought by the government agencies so far, it would seem that either the U.S. financial regulation system could use a fast and furious overhaul to have some real legal power to hold these big banks accountable for any subprime-like mess, or the U.S. banking structure and the sector's political clout has morphed it into one that's too big to regulate or reform."
Wall Street Banks: Too Big To Blame For Subprime?
By EconMatters

Goldman Sachs has historically been one of the more bullish investment houses on Wall Street, but the firm has recently taken a dark macro view. The Wall Street Journal reported on Sept. 1 that Goldman issued a 54-page report sent to their institutional clients on August 16th arguing that as much as $1 trillion in capital may be needed to shore up European banks; that small businesses in the U.S., a past driver of job production, are still languishing; and that China’s growth may not be sustainable.

The trading ideas suggested by Goldman,
"....a fancy option play that offers a way to take a bearish position on the euro, and a bearish bet through an index of insurance contracts on the credit of European financial stocks."
But Goldman is also facilitating sales of Spanish sovereign bonds. From WSJ:
".....On Wednesday [Aug. 31], Goldman and two other major banks hosted a presentation in London in which the Spanish economics secretary, Jose Manuel Campa, planned to outline Spain’s fiscal austerity measures and pitch Spain’s case to investors, according to an invitation seen by The Wall Street Journal. Goldman has a leading position among banks in facilitating sales of Spanish sovereign debt."
"Goldman's own trading positions potentially could benefit if hedge funds and other clients make trades based on the report. Goldman says in bold letters at the top of the report that other Goldman traders, or "Goldman Sachs personnel," may already have acted on the material in the report."
So what that means is that Goldman is already in positions and is front-running their clients. Now that's really delivering the promise of putting the interests of clients first. Moreover, there could be some potential conflict of interest.

That is, on one hand, Goldman is getting compensated to market the sovereign bond of Spain, but on the other hand, Goldman has put in positions and advised its big clients to bet against the Euro and European banks, which is, in essence, betting against the Spanish bond the firm is supposed to facilitate sales, albeit indirectly.

So, it'd be very interesting (and entertaining), to say the least, to be a fly on the wall to listen to what Goldman's response would be when challenged by the potential investors of the Spanish bond with questions such as "Are you sure we should buy these bonds? You guys are pretty bearish on the Euro and European banks and are supposedly betting against them?"

An even better question is when Goldman would reverse its recommendation whenever the situation suits (and release it to the media and general public) as it did within a-month time on commodities and crude oil in April and May this year leaving the majority of regular investors holding the bag, while the firm would be most likely already positioned to benefit from the resulted market reaction...."Chinese Wall" notwithstanding.

This came just two months after Goldman has reportedly received a subpoena in June 2011 from the office of the Manhattan district attorney "stemming from a 650-page Senate report from the Permanent Subcommittee on Investigations that indicated Goldman had misled clients and Congress about its practices related to mortgage-linked securities."

You might recall prior to the 2008 financial crisis, Goldman Sachs, along with some other big Wall Street banks were peddling complex synthetic collateralized debt obligations, or CDO’s (the more infamous one is Goldman's Abacus 2007-AC1). These big banks then not only made short bets, but also pitched their hedge fund and institution clients to bet against the housing market, and pocketed huge fees and profits.

In April 2010, the U.S. SEC (Securities and Exchange Commission) did file a civil fraud law suit against Goldman for creating a mortgage product that was intended to fail. But Goldman settled with the SEC in June 2010 for mere $550 million (Goldman's gross profit is $39.16 Billion for the past 12 months)...... without admitting or denying guilt.

Not to worry, along came the latest party pooper of Wall Street banks--the FHFA (Federal Housing Finance Agency)--the federal regulator that placed Fannie and Freddie into conservatorship about three years ago. In a bit to recoup billions of dollars in losses from failed subprime mortgage bond investments, after filing in July against UBS AG, seeking $900 million in damages, the FHFA went on and sued some of the biggest banks on Wall Street on Sept. 2 (See the list below from WSJ):
  • Ally Financial (ex-GMAC), $6 billion
  • Bank of America Corp., $6 billion
  • Barclays Bank, $4.9 billion
  • Citigroup, $3.5 billion
  • Countrywide, $26.6 billion
  • Credit Suisse Holdings USA, $14.1 billion
  • Deutsche Bank, $14.2 billion
  • First Horizon National, $883 million
  • General Electric, $549 million
  • Goldman Sachs, $11.1 billion
  • HSBC North America, $6.2 billion
  • J.P. Morgan Chase, $33 billion
  • Merrill Lynch/First Franklin Financial, $24.853 billion
  • Morgan Stanley, $10.58 billion
  • Nomura Holding America Inc., $2 billion
  • Royal Bank of Scotland Group, $30.4 billion
  • Societe Generale, $1.3 billion
Read the whole article here


Guest said...

Fighting against the big banks

In this day and age, it is courageous for any elected official to go
against the large Wall Street banks that have been victimizing Americans
for years. The Justice Department, along with other federal agencies,
must continue to question and investigate the banks’ unreliable and
sleazy modes of operation.

By pressuring the attorneys general’s executive committee to pass
this fruitless proposal, President Obama and his administration are
allowing the big banks, generous campaign contributors, to once again
get away unscathed for their chancy and untrustworthy practices. In
times like these, we need leaders like Schneiderman to challenge the big
banks, making sure that victims receive justice and restitution and
that overall reform changes the mortgage industry.

To allow a settlement to be reached that hinders future
investigations into large banks’ foreclosure and mortgage practices is
criminal. Fight on, Mr. Attorney General.,35457?page=3&content_source=

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