Monday, April 19, 2010

Goldman and the SEC Case....

This from a friend of mine about the Goldman case....

"I have been studying this area for months now. The SEC case against Goldman is a very technical one on the issue of fair disclosure. The Wall Street Journal says the allegations were that Paulson initiated the idea of that deal and had been in discussions with respect to bond selection with the credit manager for the deal ACA. And the SEC feels that that fact should have been disclosed to investors. As stated, that is really a stretch.

The newspapers are putting on a different spin. That these deals were sucker plays in which investors were sold securities with the knowledge that another party was short the securities. What the papers fail to understand is that unlike with other securities, a credit default swap always has mirroring long and short positions from the get go. So for every synthetic CDO deal done, the investment bank knew (and investors should have known) there was someone buying protection out of the insurance created in the deal, hence short.

The much more troubling aspect of all this comes out of a much earlier NY Times article on December 24, 2009 by Gretchen Morgenson

That article says that Goldman created synthetic CDOs for the purpose of creating capacity in credit default swaps to cover its own long positions in real estate. And that it is the reason Goldman kept the policies on their books rather than sellling them off to likes of Paulson.

If that is the case, then Goldman could be criticized on its ethics and perhaps sued.

As an addendum, I used to wonder why insitutions were willing to invest in synthetic CDOs and thereby become the issuer of a credit default swap giving protection on pools of subprime mortgages. The answer is that writing a credit default swap and receving the quarterly "insurance premiums" plus owning a Treasury is equivalent to owning a high-yield bond, and a bond having a credit rating. "

This OPED in the Wall Street Journal today is certainly worth a read. They come to the defense of Goldman with respect to this case which has knocked off some $1o billion in market value, to be felt not just by Goldman people, but everyone who owns a share of stock. They say the "real impact of this case is political. The SEC charges conveniently arrive on the brink of the Senate debate over financial reform, and its supporters are already using the case to grease the bill's passage." The WSJ has critisized the firm in the past over many issues, but this is not one of them.

Here is the challenge - To bring appropriate reform to the financial system while maintaing sufficient confidence and trust in those implementing the reform, and those on the receiving end. They have to work together. I do not see this as a war where one side wins and the other loses, but rather working in partnership for a better long term outcome for all. I know... dream on.


Jacki Zehner said...

A friend passed on this site as a good source of information

Mike said...

I believe you are smart and cruel.

...a friend of mine about the Goldman case...."The SEC case against Goldman is a very technical one"...

Tiny, little people, like me, were crushed when our highly regulated banks very technically called our loans because of a very technical financial crisis caused by your unregulated banks.

I profoundly hope the WSJ is correct.."real impact of this case is political"...because voters deserve to learn why the world's richest bankers ruined the lives of home-owners and small investors.

Your suggestion, to, "dream on", is wonderful advice for people who pay you to preserve their wealth.

Your fight against reform is too well-documented to ignore.

If you want to get beyond hopes and dreams, email Mike Micallef

Jacki Zehner said...

From another friend....Hi there! Interesting reading. But I think there's a problem with your friend's analysis. (Please argue!) Goldman has two cases to fight, one in the court of law, and one in the court of public opinion. From what little I know, the legal one is quite winnable. The public opinion one? Not a prayer unless GS backtracks from its holier than thou stance (which I'm not sure it can at this point) and starts apologizing. The problem with your friend's analysis is that this isn't a case of sophisticated insiders vs the great unwashed media and public, as GS and your friend would have it. I first heard about these deals from a CDO manager who understands precisely how this stuff works and was appalled by it. The only people who defended this sort of transaction were former GS people. I guess the biggest question for GS is whether the court of public opinion matters. Maybe not!

Jacki Zehner said...

Mike. I am not paid to manage other people's money. Also for clarification, I have never fought against reform, in fact, I am in favor of it.

Mike said...

I apologise for the technical error you noted in my previous post.

As a founding partner of Circle Financial Group, you provide, "access to efficient practices in tax as well as trust and estate planning."

Please tell me if my substantive point about your work at CFG is correct.

Do you help people preserve their wealth with, "access to efficient practices in tax?"

When you apply CFG, "trust and estate planning" is your objective to preserve their wealth?

I don't believe you are willing to support reform, but I'm willing to be convinced by your new plan.

Mike Micallef

Chris Gray said...


I thought Mike might resurface when this news broke. Let me give you my opinion. I believe your role in this matter is to shine a certain light on this situation. I do not think it is to define political angles or legal/technical positions. Leave that to others.

You mention the court of law and the court of public opinion. There is a third case in this matter. It is our Creator.

How do you think the United States of America was conceived? Read Part the First, Article III., first paragraph of the CONSTITUTION OF THE COMMONWEALTH OF MASSACHUSETTS. To my amazement, in today's world this language has not been amended, which indicates either a lack of understanding or a willingness to live without something. That something is the truth.

This third case is most important for you to give consideration. The truth. In the end, if you live the truth and without fear, the courts and public opinion are irrelevant. As irrelevant as Mike's attacks on you.

Romans 3 is a good guide to this matter.

Let's leave theology and philosophy behind, we live in a time that needs action.

A history of American consumer finance in my lifetime.

1) When I was a child I had a savings account. When I put money in the bank, black numbers appeared and the amount went up. When I wanted to spend money, a red number appeared and the amount went down.

2) When I was a freshman in college credit card companies began marketing cards to students. I explained to my Dad as I brought my dirty clothes home one weekend that I could get a card. He laughed and told me I didn't have a job.

3) Credit card companies figured out how to get an entire nation hooked on consumer debt with 0% interest introductory rates until the amount of revenue was limited only by the birthrate in the US.

4) Having hit this wall of generating revenue, financiers scratch there collective heads until a light bulb goes off somewhere with the question "where is there more money?". Houses!

5) The US financial system grabs the people of this country by the ankles and shakes money out of their homes until they have to stop.

6) Unemployment soars. Forget U-3, we are at 20% unemployment, with a massive amount of people in and enslaved by a colossal, corrupt, no exit strategy public sector.

What about free markets and individual responsibility? It is voided by taking bailout federal dollars in order to survive. Evil. Moral bankruptcy. Inflicted pain on a people and a nation.

More than 3 million U.S. households are likely to get a foreclosure notice this year, topping last year's record 2.8 million. Include short sales minus speculators, let's say 5.5 million new homeless financially damaged or destroyed households.

The government last month dedicated $14 billion to its efforts to tackle "under water" mortgages and high unemployment that propel more borrowers to default on their largest asset. No avail.

Principal reduction is one element of the enhanced program, which many housing experts contend needs to go even further to really make a dent in the foreclosure crisis. Hopeless

Re-default is the bane of the Obama administration's $75 billion Home Affordable Modification Program, with billions of dollars spent to delay rather than prevent foreclosures. Live with a gun to your head every day.

I agree with Simon Johnson's post this morning. Lawsuits, politics, class action lawsuits, civil penalties turning criminal are all logical conclusions, especially with the economic landscape of our country. The people want blood, whether it is justified or not case by case and I believe Obama will have to hand it up because of his political position.

The minutiae of GS problems is not important. Knowledgeable, clear voices of good versus evil is needed.

Chris Gray said...


I believe in personal responsibility and free markets. More importantly I believe in free will.

Consider this:

A test for a 1st grader.

Question 1) You are offered drugs and a free car ride. You

a) say no and find the nearest parent, friend or teacher

b) take the ride and drugs and do not tell anyone

What do you think the result would be on such a test? Why?

It is rhetorical. The result would be overwhelming that the answer is (a), understood by an immature mind because the person or people in charge of these children understand the responsibility and moral obligation to provide the children with truth, motivated by love.

Now let me quote my March 2005 Delta Sky Miles Insider magazine. "Earn up to 25,000 miles on home equity loans and lines of credit." So, if you leverage your house $71,428.57 you can get enough miles to get a free plane ticket (subject to black out dates).

But now let me add this:


a) what is a mortgaged back security

b) what is a synthetic CDO

c) who is AIG and describe how a credit default swap works

d) what is a sovereign fund and why should you care

Seem like a ridiculous comparison? Only if you ignore the position of authority over a financial system and society and discount love of your fellow man.

This is not theory. This is reality.

I live in Florida. Most people do not understand that if a hurricane makes landfall this season, Florida will be bankrupt because the private sector has been temporarily destroyed. Most people do not understand that the state budget gap cannot be met next fiscal year without federal assistance or steep property tax increases. I believe municipalities and cities in the state will ultimately default.

I have watched an old lady plead to county commissioners to help her keep her house. (a loan she cannot pay back on her fixed income)

A man in our town killed his wife and five children by slitting their throats.(economic stress)

A woman bounced a $100 check for her son's participation on our high school lacrosse team and tearfully asked if she could pay $10 dollars a week because the sport was the best thing that has happened for him since his father left (economic stress). We gave him a scholarship for the year.

I have a friend, I will call him J. He moved here in 2005 and bought a house at the going rate (massively inflated by Wall Street). He has three children. The second has Turner syndrome. He is in construction. Construction unemployment in Florida is about 27%. He still has his job at a 25% pay cut and extra medical costs. What he does not have is a penny of his life savings or a home. He lives paycheck to paycheck. He rents. He is 35, a good man. His wife quietly carries her burdens. She is a sweet girl.

Do you understand the responsibility and moral obligation to provide people with truth, motivated by love.

I have thought long and hard about personal responsibility on the part of those who have been harmed. I can only come to one conclusion, and the blame mostly belongs to Wall Street and large financial institutions.

Do not get caught up in the merits of derivatives, political reform, Glass -Stengal re-instituted, mark to market, break up the banks, blah, blah, blah....

There are more than enough people to provide these views (and they will).

Think about the bigger picture, beyond Manhattan. Beyond this world.

You have the potential to have a powerful voice in this matter. It might cost you some of your comfortableness and standing.

You can make a difference.

Jacki Zehner said...

I am sorry I do not have time this morning to write you the thoughtful reply you deserve. I am travelling to Denver today for 5 days for the Women's Funding Network Conference.

"Do you understand the responsibility and moral obligation to provide people with truth, motivated by love." Honestly... I am not sure I fully understand it, but I am trying to and take this responsibility seriously. I agree, it is not my 'purpose' to write about wall street, but i do a little of it, and you may have noticed much less then I used to. My purpose, and most of my blogs are around the empowerment of women, which is what I spend 90% of my working time doing. We are soon to move our family far away from New York City, in part for the reasons you mentioned. I do hold Wall Street accountable for the real pain suffered, but also the regulators that were suppose to have the public's interest in mind. You are right in saying my perspective is warped, and I humbly apologize for that.
Bottom line if everyone acted in a way that had a mindfullness for the greater good and not just themselves and the bottom line, the world would be a very different place. This is especially true for those with incredible influence and resources..

Thank you for your incredibly thoughtful comments and all the best to your daughter...

My husband has been a pastor for years but became ordained yesterday. I am so grateful for him and his influence on my life. I am trying to do the best I can, every day, and I always fall short.

Chris Gray said...


I did not say your perspective is warped, and you owe me no apology.

I simply found your blog. You are a female who worked for Goldman Sachs that expresses a concern over today's matters. What a unique position.

Congratulations to your husband on his ordination. Perhaps he has wisdom that can help you in this matter. ECC 4:9



Jacki Zehner said...

Chris.. I am Canadian.. we apologize to the table when we bump in to it.

blessings from Denver...