Occupy Wall Street Gets an Album and Everyone Is On It

Music to Occupy with.  From Time.com 
"Occupy This"

Enjoy

'Occupy This Album' features 99 tracks of class-conscious message music. But which are hits and which should go back to the drum circle?

Read more: http://newsfeed.time.com/2012/05/14/listen-occupy-wall-street-gets-an-album-and-everyone-is-on-it/#ixzz1utQH2T00

Goldman Sachs and Insider Trading

Rajat Gupta once sat on Goldman's board and was also a director at Proctor & Gamble.  He has been indicted for insider trading; specifically, he is accused of giving tips to Raj Rajaratnam, the manager of Galleon Group hedge fund who is serving 11 years for insider trading.

Gupta seeks calls thrown out of U.S. Insider Trial
By Grant McCool - Reuters

Gupta's trial starts on May 21 in U.S. District Court in Manhattan. A onetime head of McKinsey & Co, he is accused of giving Rajaratnam secrets of Goldman and Procter & Gamble board meetings in 2007 and 2008. In addition to sitting on the Goldman board, Gupta also was a director at P&G.

Gupta, 63, has denied the charges, which include five counts of securities fraud and one count of conspiracy. He says he lost money investing with Rajaratnam and that as many as four other Goldman personnel could have tipped off Galleon. Gupta could face up to 25 years in prison if convicted of securities fraud.

Rajaratnam is serving an 11-year prison term, the longest sentence handed down for insider trading in the United States, after being convicted in the same court a year ago. Much of the evidence against him was gathered in FBI wiretaps, revealing a network of contacts providing inside information.

Read the full story here

Goldman Sachs: Equity Versus Leverage

Researchers are looking into ways that banks can be regulated in a more positive and socially beneficial manner.  The article below states that equity requirements can keep the financial system healthy.  If equity is used with flexibility it can become a tool to avoid financial crises.  Regulators can ban dividends for equity holders during a crisis;  when banks are able to pay dividends then they should be able to lend.

Control of payouts and equity issued mandates can maintain stability and health in the financial system.  The more leverage in a bank the worse the risk.  Leverage should not be subsidized but equity should be encouraged.  The topic discussed below is equity versus debt in regulating the financial system.

Why Bank Equity Is Not Expensive
By Bill Snyder - Stanford

(This paper has sparked discussion. View other material related to this topic)

Since the 2008 market crash, banking interests and economists have clashed over how much of their operations banks should fund with equity as opposed to debt. Bankers and others often say that, "equity is expensive." By contrast, a recent paper, coauthored by three faculty of the Stanford Graduate School of Business, argues that this conventional wisdom is incorrect, and that, "Quite simply, bank equity is not expensive from a social perspective, and high leverage is not required in order for banks to perform all their socially valuable functions." 

STANFORD GRADUATE SCHOOL OF BUSINESS—When the financial markets crashed two years ago, Americans discovered that all too many banks and financial institutions became distressed because of their high degree of leverage. Since then, regulators, economists, and the banking industry have jousted over the question of how much equity capital banks should hold.

The prevailing argument by the industry and its allies is that raising equity requirements will weaken banks and raise the cost of borrowing for everyone because "equity is expensive." But is that really the case?

In a new, and likely to be controversial, research paper, Anat Admati, of the Stanford Graduate School of Business, and her colleagues argue that this is not the case. "Quite simply, bank equity is not expensive from a social perspective, and high leverage is not required in order for banks to perform all their socially valuable functions, including lending, taking deposits, and issuing money-like securities," they wrote.

What's more, the researchers argue, raising capital requirements would produce widespread social benefits as well: "Our analysis leads us to conclude that, starting from current capital requirements, the social benefits associated with significantly increased equity requirements are large, while the social costs, if any, are small."

Read the entire piece here 
See the videos with Anat Admati here 

Goldman Sachs: Nonpareil Lobbyist

Matt Taibbi of RollingStone has looked at the process of creating the rules and regulations that will accomplish the reform of the financial system, reform made necessary by the financial meltdown of 2008.  He describes the attempts to defeat meaningful reform under five steps.

The steps that Matt described are listed below and followed with one observation by us:

"Step 1:  Strangle It in the Womb"
Obama never intended to pursue prosecutions of those who the committed fraud and helped bring down the  financial system.

"Step 2:  Sue, Sue, Sue"
When regulators seemed poised to pursue and prosecute the fraudulent activities of the banks, they were sometimes sued for such things as "cost-benefit analysis" before implementing the new rules.

"Step 3:  If You Can't Win, Stall"
The rules for regulating the financial system are often delayed; for example, the CFTC was supposed to implement rules on position limits by January17, 2011.  A new date was set for September 2011, but in 2012, the CFTC was in court facing a lawsuit designed to kill the bill.  (Gary Gensler is a former Goldman Sachs guy.)

"Step 4:  Bully the Regulators"
Through control of funding from Congress, the regulators have to work with threats to their budget where cuts would make their work more difficult to carry out. 

"Step 5:  Pass a Gazillion Loopholes"
Republicans have passed numerous individual laws that are designed to undercut the regulations of the CFTC and the SEC.  It is as though the lobbyists are making the new rules to suit their own specifications.

The pursuit of a completely unregulated market system continues to evolve with the complicity of the White House and the Congress to the detriment of the community of citizens. 

How Wall Street Killed Financial Reform
It's bad enough that the banks strangled the Dodd-Frank law.  Even worse is the way they did it--with a big assist from Congress and the White House
By Matt Taibbi - RollingStone
. . . .

STEP 3: IF YOU CAN'T WIN, STALL

You might think otherwise, but it doesn't naturally follow that because a law has been passed by Congress and signed by the president, said law actually has to be implemented. With Dodd-Frank, the SEC took a brilliant approach to submarining one of its own regulations. The agency was supposed to begin enforcing the new proxy access rule by late 2010. Instead, in October 2010, it granted speculators a last-minute stay – essentially giving the Chamber of Commerce time to prepare its lawsuit to permanently kill the rule.

Position limits are another example. Dodd-Frank ordered the CFTC to begin enforcing the new rule no later than January 17th, 2011. But January 17th came and went, and – no position limits! Gary Gensler, the head of the CFTC and a former executive of Goldman Sachs, then announced that he hoped to implement the rule by September 2011. But September came and went, and soon it was 2012, and before you knew it, the CFTC, like the SEC, was in court, facing a lawsuit that would permanently kill the rule.

Even the president got into the stalling game. . . .

Read the whole article here

Goldman Sachs as the Object of Veneration on Wall Street

It is always instructive to read about Goldman Sachs's regulatory filings.  In spite of Goldman's constant lobbying against new rules and regulations, it always seems to be "complying:"  It sells its investments in hedge funds; it claims to be reining in risk under the Volcker Rule; it sets aside money for lawsuits ("the cost of doing business" rather than doing business ethically); it discloses arbitration claims from its underwriting (which is not always topnotch); and it even predicts what will happen if its credit rating fell. 

Yet, Goldman is what other banks aspire to as their ultimate object of veneration.  What a bank!

Goldman Moves to Comply With Volcker Rule
By Susanne Craig - DealBook

Goldman Sachs, moving to comply with a new rule aimed at reducing the riskiness of the country’s big banks, recently sold some of its investments in hedge funds.

The Wall Street firm disclosed in a regulatory filing on Thursday that it had sold $250 million worth of investments it had in hedge funds. Typically, Goldman will invest in hedge funds alongside its clients, but new regulations require the bank to reduce those holdings.

Banks have roughly two years to bring their businesses into line with the so-called Volcker Rule, which aims to rein in risk-taking on Wall Street by barring banks from placing bets with their own money. It will also will reduce the amount of capital they can investment in sometimes risky vehicles like hedge funds. Going forward, banks will be able to invest only about 3 percent of their capital in hedge funds.

“The firm currently plans to comply with the Volcker Rule by redeeming certain of its interests in hedge funds,” Goldman Sachs wrote in filing, which outlines its business activities for the three months that ended March 31.

The disclosure was part of a grab bag of information about the firm that included new disclosures about some of its legal battles as well as the number of trading days Goldman lost money on in the first quarter.

The bank said its “reasonably possible” losses from lawsuits in the quarter rose to $2.7 billion, up from $2.4 billion at the end of 2011. There was at least one new item of note in the disclosure.

Goldman disclosed that in February it was named as a respondent in three separate arbitration claims filed by the cities of Houston and Reno, Nev., and a California school district. Goldman said the claims were based on its role as underwriter and broker-dealer of the claimants’ issuances of roughly $1.7 billion of auction rate securities from 2004 to 2007.

The three entities say Goldman failed to disclose crucial information about their investments. The auction rate security market ran into trouble during the financial crisis, causing some investors to lose money. A number of people and institutions have filed claims against Wall Street firms over this issue. The cities and the California school district are seeking to recover damages.

Read the whole piece here 

Oh, Goldman Sachs, How Totally Disengaged You Are!

Two articles show how disengaged from reality the bank of Goldman Sachs has become.  First, there is the information on James A Johnson who serves as director and compensation chairman for Goldman. 

Mr. Johnson is accused of obtaining preferential rates for three home mortgages.  He is a man who believes that executives should have very good compensation packages and serves on several boards (besides Goldman's) that grant lavish pay packages to its executives.

Even when Goldman's profit dropped 47%, the compensation for Blankfein went up.  Blankfein will get $12.4 million for 2011, thanks to Johnson.

On the other hand, the city of Oakland which has already paid off a bond of $187 million has been trying to reach a negotiated deal with Goldman to achieve some relief from paying $4 million annually because of the persistent low interest rates.

Goldman does not seem to be interested in alleviating some one else's pain even though Goldman managed to get a government bailout when it was in trouble after helping to bring down the whole financial system.

You can see how unyielding and unfair Goldman is:

Councilmembers discuss ways to get out of bond debt deal with Goldman Sachs 
By Ryan Phillips - Oakland North

The City of Oakland should find a way to get out of its interest rate swap agreement with Goldman Sachs, a deal that costs the city $4 million annually, according to a city staff report. The problem before the city council now is figuring out the best way to do that without costing the city more money.

The Oakland City Council’s Finance and Management Committee received a report from the city administrator’s office on Tuesday afternoon detailing options for the city’s bond debt deal with the investment bank, and recommending that the city enter into negotiations to terminate the deal “at a below market cost” by the end of the next fiscal year. Under the current terms, ending the deal would cost the city about $15.5 million, the current negative market value of the swap.

The city and Goldman Sachs agreed to a rate-swap deal in 1997 relating to $187 million in city debt. The deal allowed the city to convert floating interest rates on municipal bonds into a fixed rate of 5.6 percent. But when the financial markets crashed in 2008, the city was left on the short end of the deal. The city has already paid out $26 million more than it owed; the underlying bond was paid off by the city in 2008.

The deal, which runs until 2021, has angered community members and city officials because big banks like Goldman Sachs were bailed out with billions in taxpayer money in 2008, yet even with Oakland struggling financially, the bank had been unwilling to renegotiate the deal to give the city some relief.

Last June, Oakland city councilmember Rebecca Kaplan (At-large) wrote a letter to Goldman Sachs CEO Lloyd Blankfein asking to renegotiate the deal because companies like Goldman Sachs have a responsibility to “operate in a manner that would be beneficial to the public” after using “taxpayer dollars in order to salvage private, for-profit corporations.” The union that represents city workers, SEIU 1021, began researching the deal around the same time, and by October a coalition of community groups, now called the “Oakland Coalition to Stop Goldman Sachs” had formed to discuss how the city may get out of the deal.

The discussion finally made it to City Hall on Tuesday, and the Sgt. Mark Dunakin Room on the first floor of the building was packed with members of the Coalition to Stop Goldman Sachs. During the meeting, many in the crowd held up bright signs that read, “Stop the swap, invest in the poor not the rich.” A long line of speakers approached the podium to reject the staff recommendation if it meant paying Goldman more money, and urged that the deal be ended immediately, at no further cost to the city. Many asked councilmembers to examine what other cities with similar agreements have done; for example, in Los Angeles the city government refused to negotiate any new deals with Goldman Sachs if the investment bank didn’t waive a cancellation fee.

Read the whole article here 

Bribery, Lobbying, Fraud and Goldman Sachs

Fraud comes in many guises, such as bribery and lobbying.  In a Washington Post article by Tom Hamburger and Brady Dennis, we read the following:

The list of those facing federal bribery inquiries stretches well beyond 100 and includes prominent names such as Pfizer, 3M, Goldman Sachs and Alcoa. Even icons of corporate responsibility such as General Electric and IBM have paid hefty sums to settle allegations, part of a broader effort that has netted the government billions in fines in recent years and landed some executives in prison.  (Tom Hamburger and  Brady Dennis - Washington Post)

Lobbying is a Goldman Sachs forté. Three letters in USA Today mull over the differences between bribery and lobbying here.

Goldman Sachs Has No Clothes

David Stockman, former Republican US Congressman, is interviewed by The Gold Report and examines the role of the Federal Reserve in promoting the stock market.  Markets are not working and savers are being penalized.  Stockman traces the various scenarios that may result from the actions of the Federal Reserve's pumping money into the markets.

Goldman Sachs is one of the cronies in the crony capitalism that runs the financial system.  Here is how it works:

The Emperor is Naked:  David Stockman
By David Stockman - FedUpUSA
. . . .

DS: There are two kinds of front-running. First is market-based front-running. You try to figure out what the Fed is doing by reading its smoke signals and looking at how it slices and dices its meeting statements. People invest or speculate against the Fed’s next incremental move.

Second, there is illicit front-running, where you have a friend who works for the Federal Reserve Board who tells you what happened in its meetings. This is obviously illegal.

But frankly, there is also just plain crony capitalism that is not that different in character and it’s what Wall Street does every day. Bill Dudley, who runs the New York Fed, was formerly chief economist for Goldman Sachs and he pretends to solicit an opinion about financial conditions from the current Goldman economist, who then pretends to opine as to what the economy and Fed might do next for the benefit of Goldman’s traders, and possibly its clients. So then it links in the ECB, Bank of Canada, etc. Is there any monetary post in the world not run by Goldman Sachs?

The point is, this is not the free market at work. This is central bank money printers and their Wall Street cronies perverting what used to be a capitalist market.

TGR: Does this unwinding of the Fed and the bond markets put the banking system back in peril, like in 2008?

DS: Not necessarily. That is one of the great myths that I address in my book. The banking system, especially the mainstream banking system, was not in peril at all. The toxic securitized mortgage assets were not in the Main Street banks and savings and loans; these institutions owned mostly prime quality whole loans and could have bled down the modest bad debt they did have over time from enhanced loan loss reserves. So the run on money was not at the retail teller window; it was in the canyons of Wall Street. The run was on wholesale money—that is, on repo and on unsecured commercial paper that had been issued in the hundreds of billions by financial institutions loaded down with securitized toxic garbage, including a lot of in-process inventory, on the asset side of their balance sheets.

The run was on investment banks that were really hedge funds in financial drag. The Goldmans and Morgan Stanleys did not really need trillion-dollar balance sheets to do mergers and acquisitions. Mergers and acquisitions do not require capital; they require a good Rolodex. They also did not need all that capital for the other part of investment banking—the underwriting business. Regulated stocks and bonds get underwritten through rigged cartels—they almost never under-price and really don’t need much capital. Their trillion dollar balance sheets, therefore, were just massive trading operations—whether they called it customer accommodation or proprietary is a distinction without a difference—which were funded on 30 to 1 leverage. Much of the debt was unstable hot money from the wholesale and repo market and that was the rub—the source of the panic.

Read the whole article here 

Goldman Sachs and Trust

The actions of Goldman Sachs have left people trusting less in the ethical and moral standards of banks.  The alumni of Goldman Sachs have filled many government positions and have looked after the interests of banks rather than the needs of the community.  Hank Paulson and Robert Rubin come to mind.

The individual actions of members of institutions have led to much distrust and a battered economy. 

One subheading from washingtonsblog in an article entitled Lack of Trust--Caused by Institutional Corruption--Is Killing the Economy expresses an idea that makes sense; that is, Prosecuting the Criminals Is Necessary to Restore Trust.  An excerpt follows:

Lack of Trust--Caused by Institutional Corruption--Is Killing the Economy
By washingtonsblog
. . . .

Prosecuting the Criminals Is Necessary to Restore Trust

Nobel prize winning economist Joseph Stiglitz says that we have to prosecute fraud or else the economy won’t recover:

The legal system is supposed to be the codification of our norms and beliefs, things that we need to make our system work. If the legal system is seen as exploitative, then confidence in our whole system starts eroding. And that’s really the problem that’s going on.
***

I think we ought to go do what we did in the S&L [crisis] and actually put many of these guys in prison. Absolutely. These are not just white-collar crimes or little accidents. There were victims. That’s the point. There were victims all over the world.
***
Economists focus on the whole notion of incentives. People have an incentive sometimes to behave badly, because they can make more money if they can cheat. If our economic system is going to work then we have to make sure that what they gain when they cheat is offset by a system of penalties.

Robert Shiller said recently that failing to address the legal issues will cause Americans to lose faith in business and the government:

Shiller said the danger of foreclosuregate — the scandal in which it has come to light that the biggest banks have routinely mishandled homeownership documents, putting the legality of foreclosures and related sales in doubt — is a replay of the 1930s, when Americans lost faith that institutions such as business and government were dealing fairly.

Economists such as William Black and James Galbraith agree. Galbraith says:

There will have to be full-scale investigation and cleaning up of the residue of that, before you can have, I think, a return of confidence in the financial sector. And that’s a process which needs to get underway.

Galbraith also says that economists should move into the background, and “criminologists to the forefront”.

Government regulators know this – or at least pay lip service to it – as well. For example, as the Director of the Securities and Exchange Commission’s enforcement division told Congress:

Recovery from the fallout of the financial crisis requires important efforts on various fronts, and vigorous enforcement is an essential component, as aggressive and even-handed enforcement will meet the public’s fair expectation that those whose violations of the law caused severe loss and hardship will be held accountable. And vigorous law enforcement efforts will help vindicate the principles that are fundamental to the fair and proper functioning of our markets: that no one should have an unjust advantage in our markets; that investors have a right to disclosure that complies with the federal securities laws; and that there is a level playing field for all investors.

Read the whole article here

Goldman Sachs Successfully Eludes "Fraud" Label

It is interesting to see how the government and the judicial system manage to keep from using the word "fraud" in relationship to the causes of the financial crisis.  While it is certain that fraud was at the heart of the reasons for The Great Recession, no one can seems able to pin it on a person who should pay the consequences.  There have been, and will be in the future, many more instances of avoiding the words that need to be said:  the banks committed fraud at the expense of the people.

Goldman Sachs Wins Dismissal of Some Claims in CIFG Suit
By Chris Dolmetsch - Bloomberg Businessweek

Goldman Sachs asked the court in October to dismiss six of the eight claims in the suit, arguing that CIFG was informed of the risks associated with the investments, failed to conduct due diligence on its own, and hasn’t sought contractual remedies that would allow it to seek the repurchase of certain loans.
New York State Supreme Justice O. Peter Sherwood, in an order filed today, granted Goldman Sachs’s motion to dismiss three counts, including one for fraudulent inducement, while denying the New York-based investment bank’s motion to dismiss three other claims for breach of contract. 
. . . .
  
“Obviously, we’re disappointed that the court dismissed the fraud charge, but we’ll consider our options going forward,” David Berger, a lawyer for CIFG, said in a phone interview. The insurer’s lawyers were still reviewing the ruling and hadn’t decided whether to appeal, he said.

Michael DuVally, a spokesman for Goldman Sachs, declined to comment on the ruling in an e-mail. 

Read the whole piece here 

Comments that Apply to Goldman Sachs

Barry Ritholtz has definite views about what caused The Great Recession and about the players that indulged themselves in order to bring it to the rest of us.

The excerpts below are pertinent to bankers like Goldman Sachs in regard to HFT, Rogue Bankers, Robert Rubin, Financialization of the US Economy, Lobbying and Bankers and Risks:

Ritholtz Interviews With Jonathan Miller:  An Uncompromised View of Contemporary American Politics and Economics
From Capitalism Without Failure

On High-Frequency trading: It's a zero sum game. They are skimming. Mom and pop's pension fund is being ripped off a little bit on every trade. Only shameless whores, that are the publicly traded exchanges, would steal from the public. If the exchanges were not-for-profits no one would ever think of doing this. It is this kind of behavior that makes the public wary of investing in stock markets.

On Rogue Bankers: There is no such thing as rogue traders. There are only rogue banks. If you are that grossly negligent that you have to be rescued by the government, then I guarantee you they are doing lots of other things wrong. If you have an entity that messed up so badly that it can't survive... how are you going to go out and run a marathon? Jamie Dimon is the next CEO who needs a humbling.

 On Robert Rubin: Another giant asshole - he gave us Geithner and Summers. You don't send the same surgeon in after a botched surgery because the first surgeon is more interested in covering up his work.

On the Financialization of the US Economy: From a macro perspective, the US economy has been financialized. Wall Street is supposed to bring capital to companies working on new products. And, in theory, they also manage retirement accounts and assets - but they don't do a good job of that. Everything else - moving paper around, structuring finance, all that other bullshit - is just a waste of energy. It doesn't do anything for society. And, even worse, it pulls people - mathematicians, engineers, etc. - into the industry who would otherwise have gone into the Googles, the Apples, etc.

 On Lobbying: I have libertarian friends who are always bitching about government. I always say to them, when a dog bites you in the ass... that's what dogs do - don't blame the dog. Look up the leash and see who is holding the handle. When you look at Congress - Congress is the snapping dog. But they are somebody's bitch. You have to see who is holding the leash. Very often it is banks and Wall Street and the financial sector having Congress do its bidding. Most of the things that got us into trouble have been done at the bequest of the banks. For example, the 2004 change in leverage ratios... ironically known as the Bear Stearns Act - as in banks larger than Bear Stearns had lower ratio requirements. First of all, why do you change a law for just 5 banks and not for all of them? That shows you how corrupt the system is.

On Bankers and Risk: I look at bankers like 5 year olds - if you give a 5 year old a bowl of chocolate bars and say they can have one... As soon as you leave the room they will eat until they are sick. Bankers are no different. As soon as you say, "You're a big boy... we trust you not to blow up the economy and send the world to the precipice..." They are so short-term focused, they will do whatever is necessary to get that bonus, and then will let the world go to hell and let it be someone else's problem. The whole run-up from 2003-2007 was make-believe, based on risk not mattering. If risk doesn't matter, you mash your foot to the carpet and let the speedometer go up to 250. When the driver hits the wall he kills himself. The difference is the driver kills himself, but the bankers take everyone with them.

Read the article and listen to the podcast here

Goldman Sachs and Oil Speculation

Here is another article about how Goldman Sachs and other speculators make gas prices higher:

Les Leopold:  How Wall Street Drives Up Gas Prices
By Les Leopold - Naked Capitalism

The oil markets have become just another profitable Wall Street casino. Why? Because, as the infamous outlaw Willie Sutton said, “That’s where the money is.” Oil markets as well as other commodity markets require a certain number of speculators. Oil producers and end users go to these markets in order to lock in prices for the products they use or sell. From refiners to shippers to airlines, oil markets provide a way to obtain price certainty for a specified period of time. To make these markets function, speculators are needed to take the other side of those trades. For more than a century about 30 percent of these commodity markets involved speculators and 70 percent of the participants in terms of volume were real producers, distributors and users. That’s what a healthy commodities market looks like.

But once financialization metastasized, the proportions flipped. Now 70 percent of the action comes from speculators, while only 30 percent comes from those who really produce, distribute and use the actual commodities. The casino has taken over.

This speculative invasion is why gasoline prices are climbing rapidly. The only question remaining is how much of the price rise is due to excess speculation. Here’s what the experts say:

• The St. Louis Federal Reserve (not exactly a Marxist institution) claims that 15 percent of the rise in gasoline prices is due to Wall Street speculation (PDF).
  
• A report from the House Committee on Government Oversight claims that up to 30 percent of the rise may be due to speculators.
  
• Even experts at Goldman Sachs, of all places, say that “excessive speculation is causing oil prices to spike by up to 40%.”
  
• And Saudi Arabia, ”the largest exporter of oil in the world, told the Bush administration back in 2008, during the last major spike in oil prices, that speculation was responsible for about $40 of a barrel of oil.”
  

This flip in the balance of real economic activity and speculation is precisely what John Maynard Keynes warned us about more than 75 years ago:

"Speculators may do no harm as bubbles on a steady stream of enterprise. But the position is serious when enterprise becomes the bubble on a whirlpool of speculation. When the capital development of a country becomes a by-product of the activities of a casino, the job is likely to be ill-done. The measure of success attained by Wall Street, regarded as an institution of which the proper social purpose is to direct new investment into the most profitable channels in terms of future yield, cannot be claimed as one of the outstanding triumphs of laissez-faire capitalism…."

Who are the speculators?
Senator Bernie Sanders released classified documents revealing the names of the largest speculators in the oil markets as of 2008.

A look at the top 20 speculators reveals that only five are actually involved in producing, shipping, refining and consuming oil (Vitol, CMA, ENA, Semgroup and Emirates Oil). The other 15 are banks and investment houses – a virtual who’s who of Wall Street firms that puffed up the housing bubble and took down the economy. Goldman Sachs, Morgan Stanley, JP Morgan Chase, Merrill Lynch, Citigroup — they all make the list.

Read the entire piece here 

Goldman Sachs Does Not Like Some Rules

In an effort to prevent another financial crisis, the Federal Reserve would like to implement a rule seeking to limit links between banks. See the article here.  Goldman Sachs does not like the rule and is predicting all kinds of drastic scenarios about lost economic growth and increased unemployment.  Banks like to think they are indispensable but in their present TBTF form they are more a danger than a benefit to the economy.

It is the vast linkages between banks that help define the financialization of the GDP.  At present, the big banks are not interested in promoting industry and agriculture where products and services to the public reside.  Generating interest and fees and making capital gains are where their actions reside. Loans are diverted from goods and services to generating wealth for the banks themselves.  The result is the transfer of wealth upwards to the very rich.  Profit-making through financialization does not provide capital formation or raise living standards of workers.

Banks like Goldman Sachs have managed to take control of the economic, cultural and political processes of the national economy.  As financialization proceeds, banks become arbiters of policies of government, decision-makers in government departments including the Treasury and deregulators of laws that interfere with making huge profits.

Whenever Goldman Sachs gets incensed about certain rules or regulations, you can be sure they have very good reasons for doing so.  They want no limits put on their present activities which are so profitable for them and so disastrous for the rest of the population.

If one could make a law which stated that all banks must make loans available for commerce only (i.e., goods and services) and no loans for further financialization (including OTC derivatives), the world would be a better place. 

Goldman Sachs is only interested in itself:  its profits and its welfare.  Below is a reminder of how Goldman Sachs contributed to The Great Recession of 2008.  That report shows why the loopholes that Goldman Sachs suggests should never be considered and why some bank executives should have been indicted (under Sarbanes-Oxley) for contributing to the financial crisis.

Wall Street and The Financial Crisis  
Anatomy of a Financial Collapse
By Carl Levin and Tom Coburn - US Senate Permanent Subcommittee on Investigations

Two case studies, involving Goldman Sachs and Deutsche Bank, illustrate a variety of troubling practices that raise conflicts of interest and other concerns involving RMBS, CDO, CDS, and ABX related financial instruments that contributed to the financial crisis.

The Goldman Sachs case study focuses on how it used net short positions to benefit from the downturn in the mortgage market, and designed, marketed, and sold CDOs in ways that created conflicts of interest with the firm’s clients and at times led to the bank=s profiting from the same products that caused substantial losses for its clients.

From 2004 to 2008, Goldman was a major player in the U.S. mortgage market. In 2006 and 2007 alone, it designed and underwrote 93 RMBS and 27 mortgage related CDO securitizations totaling about $100 billion, bought and sold RMBS and CDO securities on behalf of its clients, and amassed its own multi-billion-dollar proprietary mortgage related holdings. In December 2006, however, when it saw evidence that the high risk mortgages underlying many RMBS and CDO securities were incurring accelerated rates of delinquency and default, Goldman quietly and abruptly reversed course.

Over the next two months, it rapidly sold off or wrote down the bulk of its existing subprime RMBS and CDO inventory, and began building a short position that would allow it to profit from the decline of the mortgage market. Throughout 2007, Goldman twice built up and cashed in sizeable mortgage related short positions. At its peak, Goldman’s net short position totaled $13.9 billion. Overall in 2007, its net short position produced record profits totaling $3.7 billion for Goldman’s Structured Products Group, which when combined with other mortgage losses, produced record net revenues of $1.2 billion for the Mortgage Department as a whole.

Throughout 2007, Goldman sold RMBS and CDO securities to its clients without disclosing its own net short position against the subprime market or its purchase of CDS contracts to gain from the loss in value of some of the very securities it was selling to its clients. The case study examines in detail four CDOs that Goldman constructed and sold called Hudson 1, Anderson, Timberwolf, and Abacus 2007-AC1. In some cases, Goldman transferred risky assets from its own inventory into these CDOs; in others, it included poor quality assets that were likely to lose value or not perform. In three of the CDOs, Hudson, Anderson and Timberwolf, Goldman took a substantial portion of the short side of the CDO, essentially betting that the assets within the CDO would fall in value or not perform. Goldman’s short position was in direct opposition to the clients to whom it was selling the CDO securities, yet it failed to disclose the size and nature of its short position while marketing the securities. While Goldman sometimes included obscure language in its marketing materials about the possibility of its taking a short position on the CDO securities it was selling, Goldman did not disclose to potential investors when it had already determined to take or had already taken short investments that would pay off if the particular security it was selling, or RMBS and CDO securities in general, performed poorly. In the case of Hudson 1, for example, Goldman took 100% of the short side of the $2 billion CDO, betting against the assets referenced in the CDO, and sold the Hudson securities to investors without disclosing its short position. When the securities lost value, Goldman made a $1.7 billion gain at the direct expense of the clients to whom it had sold the securities.

In the case of Anderson, Goldman selected a large number of poorly performing assets for the CDO, took 40% of the short position, and then marketed Anderson securities to its clients. When a client asked how Goldman “got comfortable” with the New Century loans in the CDO, Goldman personnel tried to dispel concerns about the loans, and did not disclose the firm’s own negative view of them or its short position in the CDO.

In the case of Timberwolf, Goldman sold the securities to its clients even as it knew the securities were falling in value. In some cases, Goldman knowingly sold Timberwolf securities to clients at prices above its own book values and, within days or weeks of the sale, marked down the value of the sold securities, causing its clients to incur quick losses and requiring some to post higher margin or cash collateral. Timberwolf securities lost 80% of their value within five months of being issued and today are worthless. Goldman took 36% of the short position in the CDO and made money from that  investment, but ultimately lost money when it could not sell all of the Timberwolf securities.

In the case of Abacus, Goldman did not take the short position, but allowed a hedge fund, Paulson & Co. Inc., that planned on shorting the CDO to play a major but hidden role in selecting its assets. Goldman marketed Abacus securities to its clients, knowing the CDO was designed to lose value and without disclosing the hedge fund’s asset selection role or investment objective to potential investors. Three long investors together lost about $1 billion from their Abacus investments, while the Paulson hedge fund profited by about the same amount. Today, the Abacus securities are worthless.

In the Hudson and Timberwolf CDOs, Goldman also used its role as the collateral put provider or liquidation agent to advance its financial interest to the detriment of the clients to whom it sold the CDO securities.

You can find the report here 

Why Goldman Sachs Will Never Face Criminal Charges

For awhile many people thought that Eric Schneiderman, NY Attorney General, was going to aggressively pursue serious investigations of mortgage-backed securities.  Instead, he caved in to the government's wishes and became part of the foreclosure settlement with the banks in which banks will only pay a small sum and all the fraud will be overlooked.

None of the investigations or task forces is serious about prosecuting financial fraud for any bank or organization.

No wonder Goldman need never fear it will be criminally prosecuted for its mortgage-backed securities.

Rest easy, there will be no Pecora Commission for the 2008 Great Recession.

Memo to Schneiderman Mortgage Task Force:  When You are in a Hole, Quit Digging
By Yves Smith - Naked Capitalism

. . . .
But an even worse sign, the task force appears to be shunning assistance from that very sort of expert. One colleague reported that he has spoken to attorneys who said they were involved with the Schneiderman task force. He has argued that many of the SEC cases filed as civil suits, such as the Goldman and Citigroup CDO cases, could have been brought as criminal cases. Two months ago, they were very eager to speak with him. They’ve since gone radio silent.

Why? The excuse through the grapevine is that the failed Bear Stearns prosecutions show it’s just too hard to prevail on criminal charges. Bollocks. Those suits were badly conceived. The SEC relied on what it thought was decisive evidence in various e-mails. It failed to do enough discovery (critically, enough in the way of depositions of the targets) to find out that the e-mails didn’t necessarily tell the whole story. Those suits failed due to lazy, hasty preparation, and probably also to poor choice of target (the Bear Stearns funds were investors, and thus in many ways victims more than perps).

The real reason is that the Administration has absolutely no interest in pulling hard on the fraud thread and seeing what it unravels. This is an election year and the banks are one of the very biggest donor groups, second only to health care. Obama’s policy is not to look back, and Geithner last week repeated the official mantra that the banks were just hoist on their own petard. How convenient. From The Hill (hat tip Amanda):

Geithner took things a step further, suggesting that it was primarily human nature, not criminal actions, that caused the crisis.
“Rarely is an actual crime a material source of the damage. This is a tragic thing. I wish it were different,” he said. “You cannot legislate away stupidity and risk-taking and greed and recklessness.”

Funny how we don’t accept “human nature” as an excuse for wife-beating, illegal drug use, statutory rape, or embezzlement. But if you are powerful enough to have a Treasury secretary doing your PR, presumably any conduct goes. 

Read the whole article here 

Goldman Sachs: You Can't Make Silk Out of a Sow's Ear

Goldman Sachs, you do not need a media manager.  Instead of trying to control others, control yourself.  You need more than a "positive online presence;"  you need an overhaul.

Here are some suggestions for changing your habits:

1.  Have a high ethical standard; i.e., forgo CDOs that bring havoc to investors; endeavour not to commit fraud;
2.  Be morally, rather than monetarily, persuasive; i.e., reduce salaries and give up bonuses especially when the bank does not make a profit;
3.  Be honest; admit your wrongdoing that led to the Great Recession; i.e., say you were wrong to vote against the mortgage market that you helped to bring down;
4.  Be empathetic; i.e., understand and sympathize with your fellow human beings, especially those on whom you foreclosed and used robo-signing forgery;
5.  Go back to your partnership roots; i.e., give up your access to Fed money and bailouts and stop being a bank holding company.

Those suggestions to becoming part of the conversation are just for starters. Other people may have ideas to add.

Goldman Looks to Hire Social Media Strategist
By William Alden - DealBook

Goldman Sachs may dominate financial markets, but there is one frontier it has not yet conquered: social media.

So the Wall Street firm that many on the Internet love to hate plans to hire a “social media community manager,” according to a posting on its Web site. The position involves overseeing the firm’s online communities and developing a “positive online presence.”

It is a presence that could use some rehabilitation. The firm’s Facebook page is littered with negative comments. A Twitter account under the Goldman Sachs name has yet to post a message.

Perhaps the most prominent online voice emanating from the Wall Street firm is a parody Twitter account, @GSElevator, that claims to post snippets of dialogue overheard at work, tending toward the profane.

Like its rivals on Wall Street, Goldman Sachs has kept social media at arm’s length. The firm bars staff members from accessing major social media sites at work, and it has been known to crack down on employees who share too much online. Although Goldman is one of the investment banks leading the giant Facebook I.P.O., technically its workers are not allowed to browse the social networking site.

Even firms that have given employees partial access to social media, like Morgan Stanley Smith Barney, tightly control postings. This is partially because of regulations governing communication, which require firms to archive and monitor messages.

But now, Goldman wants to be part of the online conversation.

Read the whole article here 

Eventually, Goldman Sachs Ruling the World Will No Longer Be a Metaphor

We find out from a CCPA report that Canadian Banks were bailed out during the Great Recession but the Harper government has denied any such bailout.  What are we to make of this?  Now, you don't suppose that because our Governor of the Bank of Canada is from Goldman Sachs that that fact could give us a hint?  The Bank of Canada did for Canadian banks what the Federal Reserve did for US banks except that the Canadian Parliament did not have a say in whether a bailout should be given.

We should always be suspicious when Goldman is mentioned in any context.

Now we see that another Goldmanite is being touted for the Governor of the Bank of England.  When all the central banks in the West are run by Goldmanites, then we will surely know that we are royally screwed!  We only suspect it now.

Goldman's O'Neill tipped to join Bank governor race

            By Simon English - The Independent

From the comments page by 12758

Goldman Sachs takeover of Europe: All these people are Goldman Sachs employees or former Goldman Sachs employees (with the exception of Papademos).

Karel Van Miert:  Former EU competition commissioner.
Otmar Issing:  Former board member of Bundesbank and the ECB helped create the Euro
Mario Draghi: Head of the European Central Bank
Petros Christodoulou: Head of Greece's debt management agency
Lucas Papademos: Prime minister of Greece, Ran the Central Bank of Greece at the time of the controversial derivative deal with Goldman that enabled Greece to hide the size of its debts.
Mario Monti: Prime minister of Italy
Antonio Borges: until recently  head of the IMFs European department.
Peter Sutherland: Attorney General Ireland

Outside Europe:

Mark Carney: Governor, Bank of Canada
Henry Paulson: United States Secretary of the Treasury
Robert Zoellick: President of the World Bank

Virtually everyone connected with finance and financial regulation in the US.
It looks like someone has been paid off or threatened to ensure that this appointment goes through. It hasn't even been advertised yet and already the GS spin machine is working. If GS get this appointment take all your money out the bank, it'll be safer. Everything in the country will end up privatised.

Read the article here

Goldman Sachs Closes "Dark Pools" in Canada

It would be interesting to know exactly why Goldman Sachs closed its "dark pool" trades on the TMX in Canada.  They had planned on "beating Canada's biggest banks to the punch."

Canadian can only be most happy with the turn of events described below:

Goldman Sachs Closes Canadian Dark Pool Seven Months After Open
By Nina Mehta - Bloomberg Businessweek

Goldman Sachs Group Inc. (GS) (GS) closed Sigma X Canada today, shutting down the dark pool for equities seven months after starting it. 

The stock trading venue stopped taking orders, according to a statement from the Investment Industry Regulatory Organization of Canada. Since all orders expire daily on Sigma X Canada, none will be open after it closes, the agency said.

Virtually no trading occurred on the platform, which finished last on a list of 12 Canadian venues ranked by market share compiled by IIROC. Dark pools are private stock trading systems that don’t display offers to buy and sell shares to the public. 

Read the entire article here 

Goldman Sachs and "Money, Power, and Wall Street"

Often we don't get enough in-depth coverage of the financial crisis on the mainstream media.  The program Frontline sometimes analyzes topics in depth; however, it seems to have missed the boat as far as its latest series called "Money, Power, and Wall Street."

Yves Smith of Naked Capitalism discusses what Frontline got wrong:

Frontline's Astonishing Whitewash of the Crisis
By Yves Smith - Naked Capitalism

Several of my savviest readers wrote expressing disappointment and consternation with the Frontline series on the crisis, “Money, Power, and Wall Street.” The first two parts of the four part series have been released, and it’s probably safe to say that this program is far enough along to be beyond redemption.

It’s a recitation of conventional wisdom, with just enough focus on some of the numerous things the banks and the authorities did wrong so as to make it seem daring for mainstream TV. But anyone who has been on this beat will find the first two segments cringe-making (one advantage I had was that of reading the transcripts, which makes it much easier to parse the construction). Despite the obligatory shots of Occupy Wall Street protestors, displaced homeowners, and stymied officials, much of the story line is remarkably bank-friendly.

The first segment is particularly troubling. It heavily cribs from the Gillian Tett book Fool’s Gold, which to be blunt was not very well received by reviewers. Fool’s Gold discussed the development of the credit default swaps market from the perspective of JP Morgan executives and staffers, with the result that it verged on hagiography. Oh, those great, intrepid, innovative bankers who just wanted to make the world better, and maybe make a buck or two in the process.

The book at least explained that the reason for the creation of the CDS was to solve a rather big problem for JP Morgan, that it was carrying a ton of loan risk and could use a way to lay it off (the broadcast, by contrast, made it sound like this was a market just waiting to happen, as opposed to one JP Morgan, and later its competitors, cultivated).

And no one clearly explains that CDS, as currently used, are certain to produce periodic blowups of undercapitalized guarantors (the monolines and AIG are prototypical). Tett and pretty much everyone in the segment perpetuates the industry PR that CDS are derivatives. A derivative is an instrument whose price “derives” from an actively traded underlying instrument. CDS, by contrast, are the economic equivalent of unregulated insurance contracts. The pernicious feature of CDS is that the CDS protection writers (the guarantors) aren’t regulated for capital adequacy, the way other insurers are. They instead are required to post collateral to reflect the current value of the contract. But that is no guarantee that the CDS protection writer will be able to pay out. When a default or other credit event occurs, the price of the CDS spikes up, and the guarantor may not be able to make good on the new, higher collateral posting. And requiring CDS protection writers to put up enough margin to allow for “jump to default” risk would make the product uneconomical.

Read the whole piece here 

How Goldman Sachs Delays Tax Payment

Wherever there is a loophole, you will find Goldman Sachs.  This time it is a "timing difference" which, by the way, allows Goldman to keep its money and make more money from it before using it to pay taxes.  Apparently, Goldman is capable of paying the tax in full with cash on hand.

 Maybe Goldman should set aside a yearly sum for tax money just as it sets aside large sums for "legal" payments; that is, to pay fines for malfeasance.

Goldman Sachs pays £4.1m tax on £1.9bn profit
Wall Street giant attacked for deferring 99 percent of its tax bill
By Gideon Spanier - The Independent


The London arm of Goldman Sachs paid only £4.1m in corporation tax to the Treasury last year despite making pre-tax profits of £1.92bn, annual accounts have revealed.

Goldman Sachs International (GSI) had a corporation tax bill of £422.3m but it deferred £418.2m – or more than 99 per cent of the amount – that it had to pay immediately in "current tax". The Wall Street giant, presided over by Lloyd Blankfein, was able to postpone payment because of "timing differences", according to the accounts.

Goldman's decision will be a blow to the Treasury's coffers as the Chancellor George Osborne battles to reduce the Government's deficit. There is no suggestion that GSI is seeking to avoid corporation tax by deferring payment. However GSI's tax activities have come under scrutiny after it emerged last year that the Inland Revenue boss Dave Hartnett had "let off" the bank to the tune of £10m.

Mr Hartnett insisted to MPs that "a mistake had been made" and he is retiring early this summer.
The bank's UK corporation tax bill fluctuates yearly as it can be skewed by the value of its bankers' share options, which oscillate in tandem with the stock market.

The £4.1 m GSI has paid in "current" corporation tax in 2011 is in stark contrast to the £336m it paid in the previous financial year.

The accounts showed revenues slumped 31 per cent to £3.19 bn last year because of eurzone jitters and "lower global equity prices". But profits jumped, partly because the "paper" value of share options paid to staff fell by more than £1.1 bn, thus cutting the bank's wage bill.

Labour MP John Mann, a member of the Commons Treasury select committee, said Goldman Sachs should not defer tax payments when it could hand over the cash now.

"It's morally and ethically wrong. These are people who are at the heart of the problem in the financial world who've paid extraordinary bonuses to their partners and aren't prepared to pay a fair amount of tax. It's pure unadulterated greed."

Read the whole article here 

The Chief Scoundrel at Goldman Sachs

When Blankfein talks about risk management what he really means is that his bank's risk is spread worldwide so that Goldman makes money and the citizens get austerity.  The risk ultimately lies with the taxpayers who pay for Goldman's bad bets.  He talks about wealth creation and that too is unequally spread about in the same areas as the risk is--more wealth for Goldman, less wealth for the rest of the world.  Conflicts of interest would be a manageable thing if it were always made clear where and when these conflicts occur.  Betting against the mortgage market for which Goldman created bad securities is certainly an example of spreading the risk elsewhere and bringing the wealth home to Goldman!

Yves Smith says it best below:

Mirabile Dictu!  Goldman CEO Lloyd Blankfein Makes Case for Breaking Up Big Banks
By Yves Smith - Naked Capitalism

. . . .

The Goldman CEO, Lloyd Blankfein, had an interview today with a very friendly outlet, Bloomberg News. The chat served to remind viewers of how inward looking and self referential the financial services industry has become.
We need to deal with the obvious misrepresentations before getting to the unintended revelations:

…..we’ll have to do a better job, getting out there and telling people how important this industry is, what it does when we advise companies on their growth plans and finance their growth plans and manage their assets for them and how important this is for the economy, the markets and obviously society at large.

Yves here. First, since your industry succeeded in holding up governments around the world and continues to do so (witness the backdoor bailout of German and French banks at the expense of ordinary citizens in the rolling Eurocrisis), you can spare us the false modesty. Second, you don’t advise companies on “growth plans”, you advise them on transactions. Third, you and your cohorts have done a crappy job at anything other than looting. Andrew Haldane of the Bank of England did a quick and dirty estimate of the cost of the last crisis, and his low figure was one times global GDP. If you try to make the big banks like Goldman repay the costs of the damage they didn’t, they can’t even begin to. If you try amortizing that low estimate of the losses over 20 years, the big banks can’t even afford the first year levy. It exceeds their market capitalization. So firms like Goldman don’t create value, they destroy it in a massive, profligate manner.
But Blankfein tries to pass off the idea that Goldman is misunderstood, as opposed to all together too well understood:

I think the average American probably had no contact and had never heard of Goldman Sachs before three years ago. Shame on us in a way for not anticipating how important that would be. We’re an institutional business with no consumers. It turns out, another name for consumers are citizens and taxpayers. They became important for reasons that are obvious. They always should have been important, but it wasn’t part of our audience as we thought about it. Now we will have to develop those muscles a little better than we have. Shame on us.

Translation: We should have been buying more retail advertising, like JP Morgan does, so all those financial section editors would have to think twice before dumping on us.
Later in the interview. in response to whether Goldman would have survived if it didn’t have access to the Fed’s discount window:

We did not have access to the Fed window as the bank leading up to the crisis because frankly we run ourselves very conservatively. One of the reasons why we came out of that crisis, that moment so well is because we went into so strong. Today, we carry over $170 billion of liquidity. We are very highly capitalized among the highest tier in our industry. We don’t borrow from the discount window.

This is such tripe. Goldman became a bank holding company in the crisis, remember? That was so the Fed could intervene if needed. Having access to the discount window plus all sorts of backdoor and direct bailouts, like the TARP, the Primary Dealer Credit Facility, guaranteeing money market funds, rescuing AIG, kept Goldman afloat. As derivatives trader and now venture capitalist Roger Ehrenberg wrote in 2009:

Goldman is a great firm with a stellar culture, and in most circumstances it’s risk management and funding practices have been second to none. Except when the crisis hit. It stood with the rest of Wall Street as a firm with longer-dated, less liquid assets funded with extremely short-dated liabilities….In exchange for giving the firm life (TARP, FDIC guarantees, synthetic bail-out via AIG, etc.), the US Treasury (and the US taxpayer by extension) got some warrants on $10 billion of TARP capital injected into the firm…

There is not a Wall Street derivatives trader on the planet that would have done the US Government deal on an arms-length basis. Nothing remotely close. Goldman’s equity could have done a digital, dis-continuous move towards zero if it couldn’t finance its balance sheet overnight. Remember Bear Stearns? Lehman Brothers? These things happened. Goldman, though clearly a stronger institution, was facing a crisis of confidence that pervaded the market. Lenders weren’t discriminating back in November 2008. If you didn’t have term credit, you certainly weren’t getting any new lines or getting any rolls, either. So what is the cost of an option to insure a $1 trillion balance sheet and hundreds of billions in off-balance sheet liabilities teetering on the brink? Let’s just say that it is a tad north of $1.1 billion in [option] premium. And the $10 billion TARP figure? It’s a joke. Take into account the AIG payments, the FDIC guarantees and the value of the markets knowing that the US Government won’t let you go down under any circumstances. $1.1 billion in option premium? How about 20x that, perhaps more. But no, this is not the way it went down….

Where we are left today, dear taxpayer, is a lot poorer. Unless you are a major shareholder and/or bonusable employee of Goldman Sachs. Brains, ingenuity and value creation should be rewarded in all fields, Wall Street included. But when value created is the direct result of the risks borne by others for your benefit, the sharing of benefits needs to be re-allocated. This has not and apparently will not be done, and we, dear taxpayer, are the worse for it.

Now let’s get to the juicy bit. While Blankfein tries to maintain that Goldman can manage its conflicts of interests, he paints the firm as so inherent conflict-ridden as to make the case that clients can’t be well served dealing with a firm that can’t have an undivided loyalty to you. That is tantamount to an admission that big corporate and institutional clients would be better served if there were more players, better yet, firms that were more specialized.

Let’s start with his basic premise:

I think no one who is going to be effective in this business can avoid conflicts of interest coming up. You can do that if you only represent one client in every industry, in which case you won’t really be able to be that effective, knowledgeable, or influential. You won’t be able to get anything done.

Ahem, that’s an investment banking side argument, and it isn’t remotely true. As debunked above, investment banks are not strategic advisors. And even then, he’s also wrong on his premise that “you wouldn’t be effective or knowledgeable” if you represent only one client in an industry. That has long been Bain’s business model, and Bain has long been one of the top three consulting firms.

The reason that banks have industry specialization on the banking side is a bad reason: CEO and CFOs feel more comfortable with a banker who knows the gossip and the deals in their industry. But guess what? That patter is irrelevant to getting deals done. A generalist banker (say at a boutique like Rothschild) can work up the industry comparisons in very short order. And the knowledge of how to price securities offering is held on the sales and trading side of the firm, not among the glad-handed investment bankers.

We have this bit:

If you advise a client today, you have to lend to that client. If you lend to that client, they have to pay back. Now you have a stake in the outcome of their business decisions. You give them advice, but since you are a lender to them, like every bank has to be today, you have conflicts of interest. They always have to be managed.

Again, for a Goldman, that takes place in the context of M&A, and the lending role is exaggerated. Takeover loans are put into collateralized loan obligations and are sold to investors. The lead banks retain a small slice (for credibility reasons, unlike mortgage backed securities, investors like to see the lead banks have some skin in the game) but most is sold off. And a bank like Goldman would likely hedge at least some of the credit risk with credit default swaps.

With prime brokerage clients, the conflicts are even more rife. Goldman lends to many of its hedge fund clients (that’s where the real juice is), yet hedgies are acutely aware that their broker can and will trade against them, and so go to great lengths to disguise their positions and intentions by trading through multiple firms. Consider how this conflict worked against dealers in the case of Long Term Capital Management: the firm was massively leveraged, and when traders realized it was hugely on the wrong side of certain trades, they began exploiting its distress, which only made matters worse for the firm and ultimately for the dealers, who had to bail out LTCM so it could be wound down in an orderly manner. But preying on smaller hedge funds that got it wrong has never bothered the big banks, and many feel they were treated badly in the crisis when their prime brokers squeezed them by raising haircuts far beyond what seemed to be warranted even given the terrible market conditions.

The problem, of course, is that clients see the roles differently that Goldman does. This is Blankfein’s account:

For example, in the market making business, we give prices to our client and a client decides whether to trade or not. We hope as a result of that exchange, we will make money and not lose money. If over time we lose money, we will be out of business. We have other businesses or we are an adviser and other businesses where we are a pure fiduciary. One of the things we set up to do when we wrote our business standards report is go out and carefully delineate for our audience what our roles and responsibilities are in each segment of our business. As an adviser, we work for the best interests of our clients. As a fiduciary, our clients to come first. As a market maker, we have to protect Goldman Sachs.

But remember the Greg Smith letter. As a salesman, he saw his role as advisory (and there is a tension in being a salesman of any sort for a bigger firm: the salesman is often more protective of his clients than the house is, since loyal clients might very well follow him if he leaves the firm). Yet it was very clear from Blankfein’s testimony before Congress in 2010 that he saw Goldman’s role in CDOs like Timberwolf as that of a market-maker (caveat emptor!) when some clients thought Goldman was acting in at least an advisory capacity. To pretend that firms like Goldman don’t prey on that gullability is naive.

So the newer, friendlier Lloyd Blankfein isn’t that much more persuasive than the old version, save maybe to those who hold similar views. But until Blankfein and his ilk are subject to meaningful pressure, all he need to do is make occasional contrite gestures, like this Bloomberg chat, as he carries on as before.

 Read the whole article here