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Was Obama Wall Street’s BIGGEST Short?

Blankfein (left) and Jamie Dimon (center) at the White House, March 2009

You gotta love Lloyd Blankfein for finally telling it like it is.  Wall Street thinks we’re all suckers.  If you don’t specifically ask whether a security or CDO is crap, shitty or junk, they have no obligation to tell you.  That’s not their job.  They just sell the stuff.  It’s the 2010 version of “I just take orders”.  There’s got to be another Milgram experiment just waiting for a post doc in yesterday’s hearings.

Here are some gems from Lloyd:

Levin asked Blankfein if Goldman has to disclose to investors in securities it sells that the firm plans to take and keep the short side of the transaction.

“I don’t think we have to tell them,” the chief executive replied. In addition, he said that when underwriting a securities offering, Goldman has an obligation to conduct thorough due diligence and provide full disclosure of the assets and risks involved in the deal.

Mortgage-related securities that Goldman underwrote and sold delivered the specific exposure that clients wanted, Blankfein explained. “There are a lot of opinions about how a security will perform against the market it’s in.

“Investors we’re dealing with on the long or the short side know what they want,” he continued. “If they ask the salesperson their opinion, they have a duty of honesty. But we’re selling securities all the time that are weak. The same securities that were the subject of those comments can probably be bought today for pennies on the dollar.”

and this from the NY Times:

Mr. Blankfein was asked repeatedly whether Goldman sold securities that it also bet against, and whether Goldman treated those clients properly.

“You say betting against,” Mr. Blankfein said in a lengthy exchange. But he said the people who were coming to Goldman for risk in the housing market got just that: exposure to the housing market. “The unfortunate thing,” he said, “is that the housing market went south very quickly.”

Senator Levin pressed Mr. Blankfein again on whether the his customers should know what Goldman workers think of deals they are selling, and Mr. Blankfein reiterated his position that sophisticated investors should be allowed to buy what they want.

Mr. Blankfein was also pressed on the deal at the center of the S.E.C. case. He said the investment was not meant to fail, as the S.E.C. claims, and in fact, that the deal was a success, in that it conveyed “risk that people wanted to have, and in a market that’s not a failure.”

Risk.  That’s what Goldman Sachs was selling.  It was all wrapped up in a pretty fiction of established Wall Street investment houses, where bankers arrive at their offices in chauffered limos and eat in luxurious dining facilities and work out in gold plated gyms.  It all looks very clubby.  But the reality was that these people were running a giant Monte Carlo casino using the hard earned retirement funds of carpenters and other working class people.

Behind the plush digs and $600 suits and cottages on The Pond are a bunch of guys with serious gambling addictions.

Sometime back in 2006 as housing prices peaked and started to decline some of them must have started to get a little concerned.  In fact, Michael Lewis, who wrote The Big Short, says that outsiders looking in had the bankers’ number in 2003-2004.  It was March 2007 when the money started to drain away in earnest.

So, when did Wall Street decide to short the presidential election?

Think about it:  Many of the people on Wall Street should be at Gambler’s Anonymous.  in 2007, they were about to lose everything if they couldn’t find suckers to play their games and cover their bets.  Politics could have had a big influence on how much of a hit they actually had to take.  Charlie Ledley, the garage-band head fund guy with a conscience who actually tried to explain the bets to the SEC, was concerned with his own short positions.  He naively thought that if the federal government came to the rescue of homeowners, his CDS’s would be worthless.  As it turned out, the government bailed out the banks instead so Charlie made out big.  The CDO’s are still crap.

But if you are a Wall Street banker, you have to account for all kinds of possibilities.  Picture the following three scenarios:

1.) A Republican wins.  His party saw what happened during the last financial meltdown 80 years ago.  That New Deal thing was a disaster for his party.  He’s not going to make that mistake.  Screw Keynes, enter The Great Depression 2.0.  Oddly, Wall Street is probably not too keen on this idea.  You can’t play the game if you don’t have easy marks on the other side of the bet.  Depressions severely depress the number of easy marks.

2.) Democrat #1 wins.  But she’s too much of a New Dealer type.  She’s got mortgage bailout written all over her.  That would mean regulation and mortgages will be adjusted and bankers will have to take a loss.  That’s too much reality.  She’s like frickin’ rehab.  And besides, there’s always that remote possibility that the people who took out “liar’s loans” will suddenly have stupendous wage increases just in the nick of time when their 2 year teaser rate is up.  It could happen.  So, no, Democrat #1 is out.

3.) Democrat #2 is narcissistic one-trick pony with a pregnant mistress.  Nominating him means the Republican wins.  Moving on.

4.) Democrat #3.  Ooooo, this one is intriguing.  Did Wall Street court him or did he court Wall Street?  Recklessly ambitious type.  Muy simpatico.  He certainly looks like he could fit into Wall Street.  He wants to “form multi-disciplinary task forces to re-engineer our core processes so that we’re a world class organization”.  He speaks their language.  It’s meaningless, of course, and they all know that way down deep inside.  It’s code.  He’ll scratch their backs if they scratch his, to the tune of $900K in campaign contributions from Goldman Sachs employees alone.  With Dem #3, it will be an exciting spin of the wheel.  They’ll get close to the edge, probably a little too close for comfort, but in the end, they’ll be able to walk away with big profits, big bonuses and they can keep on playing.  This guy is an enabler.  Double down.

Obama sure made a lot of campaign money from Wall Street.  His small donors accounted for something like 30% of his campaign stash.  You don’t get a cool billion to run for president without making a lot of banker friends.  It was their biggest short.

In light of that very real possibility, can we on the left finally dispense with the idea that Obama was the Change! agent?  Lots of money will get you a very good PR firm with all of the marketing, astroturfing and social engineering you can eat.  Maybe he’s not the civil rights hero, politically brilliant, 11 dimensional chess playing, post partisan Messiah everyone thought he was.  Maybe he was just the best hedge Wall Street ever made and nothing more than that.  You can stop pinning your hopes and dreams on him.

As Lloyd would say, “the investment was not meant to fail, as the S.E.C. claims, and in fact, that the deal was a success, in that it conveyed “risk that people wanted to have, and in a market that’s not a failure.””

The Obots bought it and made suckers of us all.

Extra: Michael Lewis has a lengthy piece in Slate where he plays his tiny violin for the bond market traders who are suddenly getting blamed for everything they do.

Simon Johnson at BaselineScenario.com has a piece about how some parts of Europe have slipped into “emerging market” status overnight and how the rest of the world is turning their eyes to Obama for comfort and guidance to stem the ensuing panic.  Good luck with that.

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96 Responses

  1. Brilliant question! A resounding YESSSS! from me.
    And here’s how today’s tabloids put it today

    http://edgeoforever.wordpress.com/2010/04/28/tabloids-goldman-sachs-in-deep-s/

  2. Goldman, Obama, Hedges, Pound of flesh
    So let’s see what is salient about Mr. Blankfein’s testimony yesterday. First, I point to his fulsome adulation of Obama and his brand of financial “reform.” Maybe this explains why Obama was so heavily favored by Goldman’s political contributions. Of course, they were his top donor. (Even beating out George Soros.)But then Goldman always hedges their political bets in a thoroughly agile and timely manner, as the latest Wall Street psychobabble would put it. After all wasn’t it Hank Paulson, he of Goldman stack who went on bended knee, hat in hand, crocodile tears and all to Pelosi and begged for a bailout. And Goldman got it too, didn’t they. Straight from the Treasury to AIG to Golman. Thanks Uncle Sam, you sucker. Of course Blankfein says he would have got his pound of flesh anyway. Yes that’s right. 200,000 teachers are being laid off now and Goldman, and the buggers on Wall St wallow in it. This simply is a noisome and odious disgrace and cancer upon the body politic which must be amended if we hope to ever truly prosper again.

    • I really feel for the teachers. Well, not all of them but most of the 80 teachers we are about to lose in my district don’t deserve it. (the 7th grade REACH teacher is a fucking sadist whose main mission in life appears to be cutting down as many tall poppies as she can find and destroying their self esteem) And the kids are really going to get the shaft. Especially G&T kids who are always the first ones to suffer anyway.

    • Wasn’t there a report about the number of visits Blankfein had directly with Obama? Quite the mutually beneficial man crush.

  3. This is totally OT, but it might amuse some people here. In Bobotland, Bobots debate the usefulness of the Orange Cheeto. The headline:
    Is Dailykos in suicide mode?

    • I thought DKos died in 2008. Now, it’s just a stinking, rotting corpse. I hope Markos got what he wanted from it.

      • They are irrelevant at this point. Even the other Koolaid blogs see the Cheeto as ridiculous.

        Thanks for this great post, RD. I was in suicide mode last night, but after reading your take and the piece by Michael Lewis, I’m back to hoping America will finally wake up.

    • here is a brilliant comment by one of the DUers.

      The site became unreadable and too fast moving. It was impossible to follow favorite threads.

      DKos still will be remembered as a beacon of progressivism during the dark days of 2000.

      But I mostly ignore them now.

      dkos didn’t exist until 2004 or late 2003.

      I find it very ironic that DUers are accusing dkos of being irrelevant.

  4. They do not get it do they? We are not amused to learn that they are not investing in our economy and the future but playing craps with our pension funds. Of course, it is not illegal to run global scams of endless reach and damage but it is not exactly what we thought they were up to, even though we had our suspicions.

    • I’m more concerned with Obot nation. It is time to stop defending, excusing and wishing for the best. Do you hear me Joan Walsh? You can’t make this problem go away. You can’t give your support to Obama because you think he means well and you have to try to love him more.
      Obama is a creation of the money class. They made him, packaged him and got him elected. He is their man. Things will not get better on the left side of the political divide until people like Joan and Chris Bowers and even BTD to some extent accept that.
      He is not a political genius. He is not a postpartisan savior. I’m not even sure he’s committed to doing any kind of good at all. He is a product of a political mindset that favors free market, laissez faire capitalism with minimal regulation. He will never be a new dealer. That’s not in his political DNA.
      Just because he happened to win doesn’t make him worthy.

      • Some people are never going to be able to admit they were wrong.

      • They will however. Because the red meat feeding time is here – and they can’t possibly resist it

        http://edgeoforever.wordpress.com/2010/04/28/obama-back-to-personal-attacks/

        • Exactly. Sharks must feed. They don’t stop themselves. Expecting them too is folly. If they could check themselves, they would have allowed Hillary to realize her victory and fix things so the system could function …but they and the system were way past that . Since we can’t have colonies externally ( well besides Iraq ) they aim to create them internally. An Empire must have something to steal. That’s what it does. So in a pinch, the wealth of the American people, gatherd from last 100 years of their labor, will do .

      • This is absolutely correct, I’m afraid. But maybe the Blogojevitch trial will ease Obama into a timely retirement in Hawaii with his ill gotten fortune.

      • Lordy, you never could count on Obama to even hold your coat in a fight! …much less fight! LOL! Expecting him to do anything he hasn’t done in his whole life is plum crazy . He’s THERE because he won’t do anything, but sharpen his golf game… He’s ” watch this drive ” , part 2 !

      • Just clap harder, RD, and Obama will turn into FDR.

    • Do high risk gamblers give a damn about long term investment or prosperity for a nation? It’s so easy to tip the balance and grease the wheels with a cool billion and paid for propaganda. Roll the dice.

      With no meaningful regulation and oversight in place, where is the next bail out money going to come from when the treasury is empty and the American Working/ Middle Class is decimated, many of which are going to (try to) retire within the next 10 years.

      Who cares that’s later. How the hell did they sell Obama as a new dealer. If the lie is outrageous enough………….

  5. Great post RD

    It’s the 2010 version of “I just take orders”.

    lol!

    What also gets me is the endless TV ads were they tell you they know what they are doing , they have huge research departments at work and have your back…in fact they are your only hope(” theses days” … that they created these days says goes unsaid).The only good part of the melt down was that these scolding and finger waging ads disappeared from the tube. Now they are creeping back. They are doing Al Capone one better. They run a protection racket without providing any protection. Sweet.

  6. No doubt Wall Street wanted BO. Media chose BO in the primaries. Wall Street chose BO in the general. Repubs would have been more reluctant about bailouts. Hill would have helped homeowners. Obama would bailout bankers and multinationals and follow their advice on econ policy.

    The hearings yesterday were disappointing. GS played dumb to the public who are not their customers. The financial institutions who are their customers knew what they saw, GS stock was up yesterday even as the market was down 2%. The subcommittee never seemed to nail the differences between lines of business in client advisory, client trading, proprietary trading. Maybe the SEC can do better, though it should really be the Fed that cracks down. GS demise would send a strong message to the financial industry, and that would ultimately eventually be healthy for the general economy imo.

    • Good point. The NBC network (Chris Mattews, for example) is one of Obama’s biggest mealy mouthed supporters. It should not be a shock that CNBC is staffed with former Goldman employees, like Cramer, who are currently defending them to the hilt.

    • I really doesn’t matter. The IMF will be cracking down on the Fed soon, and the US will lose any pretense of national soveignty. What used to be called “conpiracy theory” is going to be reality.

      • I started asking my students if any of them knew about Blankfein or GS or the hearings. None of them so far have. But they could all tell me what happened over the three days of the NFL draft and who went in what rounds. I don’t think that many folks watched anything yesterday at all.

        • Sounds like those students are all hoping for cushy GS jobs rather than actually having to think about something.

      • IMF total capitalization is about same size as original Tarp. Our public debt is around 20x that, private debt multiples more. IMF presses developing nations on fiscal austerity, the same thing the WH fiscal responsibility commission is up to. Good for capital preservation and the investor class. IMF should push China to release the yuan to full float at the Toronto G20 in June. Would do more to create jobs here than anything BO is doing.

    • I disagree. Wall Street was the first to pick Obama, back in 2007 way before the primaries, when Soros introduced him to some friends and his first billion was raised – for an unknown. The media eventually followed the money and joined in during the primaries (or just about before).

      • First million. Could be. Some on wall street for sure. Most were hedging across the major candidates. Not sure everyone was convinced they would need bailouts back in 2007.

    • I keep telling you but you don’t get it.

      Wall Street OWNS the media.

      • I stand corrected.

        • I wasn’t replying to you but what I said applies to your comment too.

          The media is not some independent entity, they are servants of their corporate masters.

      • Indeed. The media is their plaything/cabana boy .
        They do as they are told. They don’t come along when convinced…ha! Like they have a say in anything but how their steak is cooked at their favorite restaurant ….which is fine with them. Their job is to come up with justifications for decisions they know nothing about, nor want to know. imo

        • Did you hear about Jon Stewart’s reply to the Comedy Central threat from the Muslim organization? He shrugged and said, “it’s their right, they sign the checks.” Very brave stand for the First Amendment Jon.

      • Connect the dots for me myiq. Broad strokes. Am asking very sincerely.

      • Yes. I just made a post on this — went into moderation because has links showing how media is being bought out here, MIQ.

        Whitman and Obama share some Goldman stuff. Her target-marketing trumps what he did. Believe it or not.

        hugs Conf & Co.

  7. Gawd. You candidates description from their perspective just makes me shiver. You are so right and we are so screwed.

  8. It’s also no accident that Obama’s pal Soros is the biggest money behind dope legalization (see the Open Society) and that CNBC is running continuous propaganda for dope too. Like the blurb below from them:
    “Jackpot
    If America’s marijuana market is worth $40 billion a year, why don’t they tax it?”

  9. Another side effect: my boss is a single mom with her own business, raising 4 teens on her own. Two in college, one graduating. The third is a high school senior and just received notices from colleges. All her top choices wait-listed her, and she is an A student with lots of extra-curricular activities, AP classes, high SAT’s etc. Of course, she needs financial aid. Yesterday, NPR did a piece about the unusual number of wait-list students this year. Schools that have never had wait lists are using them more than ever, because they are all struggling with their own budget problems and do not know how many accepted students will enroll etc. so they, too, are “hedging” their bets. It’s systemic.

    • Lot of schools and other large non profits took a bath with their endowments at the hedge funds.

  10. But the reality was that these people were running a giant Monte Carlo casino using the hard earned retirement funds of carpenters and other working class people.

    Not to be a GS apologist or anything, but that’s not really true. They don’t manage pension funds. The provide investments to pension fund managers who request certain types of investments. This particular problem was created by a bunch of pension fund managers who went for higher return investments without really looking into what they were… sort’ve like they way they all flocked to junk bonds in the 80s. It’s the Larry Summers types who thought they knew what they were doing and went all out for exotic investments. GS just offers them in a buyer beware environment when asked to provide them. They’re sort’ve willing enablers to the stupid. (Like drug dealers that hang around celebs)

    • oh, and the Lewis article is really nice and juicy! it really hits the nail on the head

    • Two things pop out.

      Didn’t these fund managers learn anything from the junk bond fiasco?

      Did GS properly rate the risk on these investments?

      • Answer to question 1: Fabrice etc wasn’t alive during the junk bond thing. Us old folks remember it and we didn’t fall for it. Depends on trader. Talked to my ex about Mutual of Omaha (a mutual company, btw, not public so policy owners own the company, not investors) about their approach to these things. They hired a quant who looked at them for them and passed. But again, it was a bunch of old guys who remember the junk bond things. Mutual/United of Omaha didn’t get burned on them.

        2. GS didn’t rate the investments. The raters did. That’s a whole ‘nother enchilada.

        • Maybe people like Fabrice need to spend more time reading history books then and less time sending e-mails.

    • But Laissez Faire mercantilism is what the peddlers of such crap always fall back on. Bucket shops, please feel free to Google it) It’s like the case of the guy who murdered his parents who asks the judge for leniency because he’s now an orphan.

      • Goldman Sachs doesn’t peddle their wares to everyman. They only deal with the big guys. It would be one thing if you were talking about your neighborhood financial planner but you’re not. These guys arrange products for institutional investors who should know better and pay tons to staff who are educated on this stuff and should know better. Are you saying you feel sorry because a German Bank didn’t do its due diligence? Not exactly the same as taking candy from a baby. GS is not Scott Trade or Merrill Lynch. It doesn’t deal with any little guys who are lambs led to slaughter at all. What’s bank doing looking at a CDO anyway?

        • When GS was buying up all that paper to bundle into investment products did they even bother to look at any of it.

          • depends on the bundle…some of them no, that’s what Paulson did which is where the SEC problem comes in … he sliced and diced the tranches then took a short position on the most junior tranche from what I understand.

            I think one of the big disconnects here was that Goldman assumed the loan documentation in the loans was correct and that the mortgage brokers had done due diligence which was absolutely not the case with WAMU, Countrywide, etc. They had farmed origination out to marketing types and weren’t really checking the actually documents. Some of those mortgage brokers basically defrauded the banks. Also, they relied on the raters to properly assess the tranches which is what they pay for and that of course, turned out to be a bogus set up too. They were terribly mispriced.

            The entire process from start to finish was basically riddled with issues. It’s because there was so much market demand for these silly things they were packaged quickly and sloppily and they were totally overdone.

            It’s the same deal with the dot com stocks that blew up the market in 99 and same with the junk bond thing that blew up the market in the 80s. These assets are very specialized and niche-oriented but some how, investment managers decide they have to have them and the market gets overheated. Gold markets did that in when then Spanish sailed the seven seas too. There are suckers born every minute and there are dealers more than willing to oblige their stupidity. I never invested in any of the crap. Old rules apply. If it looks to good to be true, it is too good to be true. Only the very first into these things make money. Every one else loses but these cycles never stop. If you make one thing illegal another one will crop up some place else.

        • So why do we bail them out when AIG,THE big guy who got stuck in their web? Because we suckers let these brilliant quants evolve their slimy crap, that used to be illegal before Nixon pulled the plug on gold leading to derivatives arbitrage. Did you Google bucket shops?

          • We didn’t bail GS out. We made them take government money instead of insurance funds because they wanted to settle AIG without a big market explosion. GS didn’t need tarp funds. The government asked them to take them in lieu of collecting their private insurance.

    • Oh, did I say they were managing the funds? No, I did not. Nevertheless, they did package the CDOs for the funds and then were placing bets on their failure on the side.
      You can stop rolling your eyes now. I’m no finance genius but I did stay at a Holiday Inn Express.

    • Then the markets need to be regulated There is no excuse for what happened, IMHO.

      • they do need to be regulated, but GS is not in that TBTF category actually

        • Whatever. Why are you defending them?

          • Well, they’re definitely bad guys. No doubt about it. And they made the problem significantly worse than it otherwise was. But I thought that the TBTF banks were JPMorgan-Chase, Citibank, Bank of America, and one other. Wells-Fargo? WaMu? Can’t recall.
            Nevertheless, GS was heavily into gambling on the bond market that was deliberately opaque. Not the only ones. There were others. I don’t really know what the purpose of these hearings are. Call me cynical but for all I know, GS is brought out to be a symbol of the industry ad a whole. Fab-fab has some tittilating emails. Blankfein says, “so, we bite. You knew that when you picked me up”. The senators get some nice sound bites for the folks at home and then they sit back and let ideological inertia do the rest.
            A pox on everyone’s house. You know what would get their attentions? If voters just switched parties this year and voted everyone out. Seniority isn’t a good argument for retention anymore.

          • I’m not defending them. Citigroup is too big to fail. JP morgan is too big too fail. GS is’nt in the same class. Go look at the financials.

          • Actually, I look at them more as enablers of gamblers. It’s sort’ve like the family of those terrifically obese people who keep going to McDonalds to buy things for them after they can’t get out of their chairs. If that makes any sense.

          • I think that GS is a clear example of
            1) we can’t expect Wall Street to regulate itself
            2) what is good for Wall Street is not necessarily good for the USA

        • Kat,

          you say GS is not too big to fail? Of course they are.

          You’ve been talking the whole time about their advisory side, but that’s the tiniest part of GS as far a money making is concerned.

          Goldman Sachs is probably the largest hedge fund there is, only that it’s a public company. They make by far their largest profits on trading.

          Within GS there are tons of institution such as GSAM, GS Global Alpha Fund, GSGEO, and so on.

          Thisa is a company with nearly $900B assets and you say they’re not TBTF?

          Btw, what if GSAM advised a Mutual Fund to some CDOs their traders have betted against? (Are we even sure this did not happen)?

          I know you’re defending them but you don’t seem to know GS very well.

        • MABlue

          I was happy to see Lehman allowed to fail. I think the same for Goldman would be an earthquake for the system and the economy but healthy in the long run and would be happy to see it happen.

          That said, Goldman is a pure investment bank that takes no consumer deposits, even with their current holding company status. They didn’t want TBTF status in the past nor do they expect one in the future. They took the initial 10b Tarp like everyone else because Paulson didn’t want the weaker banks looking even weaker relative to their peers during the panic. Goldman and Morgan Stanley are the only two remaining investment banks without a commercial banking unit. I think the resolution authority bailout fund (beyond the current FDIC) is a bad idea. It will serve to preserve the TBTF status of TBTF institutions, when they should be cut down in size or at least Glass Steagalled. But even if the bailout fund stands, GS and MS should certainly not be a part of that mix, nor are they asking to be. Would also be good if their access to the Fed’s discount window and emergency reserves were closed down.

          As to asset management being firewalled from trading, that exists and is also an issue in every institutional banking house. The bigger issue is client trading being firewalled from proprietary trading, and that debate may redefine the role of the modern investment bank. Could be all hedge funds and private equity firms in the future.

          • thank you for that …. couldn’t have said it better.

            You know I’ve written things against GS before and I undoubtedly will again. They were a part of a huge process that failed miserably. I’m not going to ignore some of the facts on the ground to demonize them. I’ll call them out when I see that the situation calls for it …

            GS has no fiduciary responsibility. It has no ‘little guy’ customers. It’s not like countrywide or wamu or citigroup. In it’s role as a market maker it frequently takes multiple offsetting positions. You have to figure out where there were games and where it was just setting up offsets as a market maker. I have no doubt the SEC is knee deep in their accounts now looking for just that thing.

          • oh, and yes, the issue is the proprietary trading thing … it looks like it should be firewalled.

          • DK,

            you seem to be bogged down on the fact that GS has no “little guy” customer. In a strict sense it’s true but that doesn’t mean whatever they’re doing has no bearing on the “little guy”.

            Here is a good example:

            Goldman takes on new role: taking away people’s homes

            Btw I’m not among those who think you’re some sort of GS defender. I actually like the fact that you try to set a couple of things straight but in doing so, you seem to miss a couple of things. Many of these large (cough cough) “Investment” banks have very opaque structures including entire operation know to only a tight circle within the organization.

          • TW & DK,

            you should read this article from Reuters (ht BB). It illustrates my point much better than I could.

            Goldman’s more than a Wall Street toll collector

            Here is the money quote:

            There is truth to Goldman’s defense that much of what it does in markets for bonds, stocks, commodities, currencies and other asset classes is to act as a middleman in transactions between sophisticated buyers and sellers.

            But fees associated with making a market tell only a part of the story when it comes to how big investment companies like Goldman make money — especially on esoteric products like collateralized debt obligations.

            MISSED OPPORTUNITY?

            After all, Goldman is not paying its 31,000 employees $500,000 a year, on average, simply to serve as Wall Street’s version of a glorified toll collector.

            Far more of Goldman’s annual income comes from the trades or hedges it does every day to offset the risk it takes on as a market maker. And those hedges aren’t simply designed to take a neutral position on a stock or bond. Sometimes they are intended to place a directional bet as well.
            (…)
            [T]he distinction between trades that are done to hedge an exposure and trades that end-up generating a profit can and do get blurry. It’s one reason investment firms do not break out specific revenue figures for proprietary trading — trades done with a firm’s own capital.

            Go read the whole thing.

          • yes, that’s a good article and it talks about the two sides to that coin… every derivatives transaction is not a bet but it could be and not all derivatives are bad and not all transactions using them are inherently bad and some are placed and you’re better of if you ‘lose’. You don’t have to exercise a lot of them if you placed them to hedge, but the original transaction came in way better than expected. That’s actually the other side of the coin. Some of these deals stink. Some of them are valid. It doesn’t make GS all demon nor are they all angel. The CDO market should’ve been a small niche market and should’ve never reached the numbers it attracted. We’re still shaking out exactly why that happened. I think there’s plenty of blame to go around a lot of places–from the originators of the mortgages forward to AIG that sold insurance on the deals. No one who played in this market is pristine but no one is the devil alone either.

  11. Brilliant analysis of the candidates, RD. Right down to that corporatese BS meaningless language that BO talks (which was a dead giveaway for some of us).

  12. Bucket shop is a brokerage firm that “books” (i.e., takes the opposite side of) retail customer orders without actually having them executed on an exchange.[1] These brokerages are also often called boiler rooms. The term is a defined term under the criminal law of many states in the United States which make it a crime to operate a bucket shop. [2] Typically the criminal law definition refers to an operation in which the customer is sold what is supposed to be a derivative interest in a security or commodity future, but there is no transaction made on any exchange. The transaction goes ‘in the bucket’ and is never executed. Without an actual underlying transaction, the customer is betting against the bucket shop operator, not participating in the market. Alternatively, the bucket shop operator “literally ‘plays the bank,’ as in a gambling house, against the customer.” [3] Operating a bucket shop in the United States would also likely involve violations of several provisions of federal securities or commodity futures laws[4].
    A person who engages in the practice is referred to as a bucketeer and the practice is sometimes referred to as bucketeering.

    • Goldman didn’t take the offsetting position, Paulson did.

      • I am assuming that Paulsen and Co is a hedge fund with a similar arrangement to Goldman Sachs that Steve Eisman’s Frontpoint has to JP Morgan. It looks independent but it’s really not. If JP Morgan wanted to yank Eisman’s chain, it could do it. I’m guessing that the biggies don’t take too kindly on their own hedge funds shorting them. Eisman *was* shorting some Wall Street firms. He probably stopped short (no pun intended) of shorting his own.
        So, Abacus was an instrument and many parties played with it. Goldman got what it wanted out of it.

        • Of course, Goldman gets fees from arranging these things. They hardly care about what’s in them as long as they meet the criteria the client gives them. The banks that bought these things were insane. I can’t even believe a pension fund looked twice at these things. There’s plenty of blame to go around. But, pension plan and fund managers get paid for high ROA, so they’re going to try to get the deal that fits that need. It’s like stupid Larry Summers blowing up the Harvard Legacy funds. The hedge funds came out on the right side of the deal this time. The things need to be exchange traded with the rest of the derivatives, they get priced better that way. Hedging is a perfectly good risk management strategy and some folks (the hedge funds) speculate and the investment bankers underwrite the deals. The big question to me is why on earth were pension funds allowed to get into the stuff to begin with? Like they didn’t figure this out during the junk bond binge? Why were banks allowed to invest in these things? They serve no useful purpose in situations like that.

          • Bad managers, bad rating agencies.

          • The big question to me is why on earth were pension funds allowed to get into the stuff to begin with? Like they didn’t figure this out during the junk bond binge?

            Why not? AAA-rating? ABS? Of course you would invest in. Nothing looks more secure than that.

            Only some hedge funds came out on the right side. Many many of them and some of them got hammered out of existence.

            Even the best among them got hammered (Citadel, AQR, Sowood, and on and on). The problem is that many of them ended up believing in that bullshit, so you can blame some “lowly” fund manager when he got sold these instruments by some wall street “genius”.

          • ma: I asked my ex about the portfolio managers at Mutual of Omaha/United just to get an idea of what practitioners were doing because I am so sheltered in quant land that I knew these were going to tank in early in 2006. He said they brought in a quant and figured there was no difference between them and junk bonds in the 1980s and they passed. Now, this is a mutually owned company so it’s not beholden to giving investors profits; just covering the pensions and the insurance holders who own the company, but the deal is they passed. They knew they couldn’t price them and they didn’t trust S&P or Moody’s, etc. AAA for US treasuries is not equal to AAA for junk bonds or derivatives, you should know that! Any investment manager worth his/her salt knows that. Especially those of us that lived through junk bonds, dot com stocks, and the rest of the designer crap du jour.

          • Kat,

            normally junk bond don’t get AAA rating. That’s why they are “high yield”.
            Before Milken, people used to run away from them.

          • No, they don’t but you get my drift. You can’t compare AAA rating across asset classes or triple BBB. Plus, what investment officer worth his salt actually depends on Moody’s or S&P? They’re wrong all the time. I teach folks to ignore them.

    • and if the SEC thought they were doing this, there would be a charge against them. Not the charge they currently face.

  13. Why are synthetic CDO’s any different than the definition of Bucket shops? Oh brave defender of Goldman Sucks?

    • you obviously haven’t read my pieces on GS because I hardly defend them, but in this situation, there’s a lot of misunderstanding. CDOs are specially arranged between given buyers and sellers. They were put together because parties wanted to take certain exposures to the mortgage market which was the hot market in the 2000s. They set the one side up for a client and then arrange for a buyer for the offset. Any party to a CDO should know what they’re getting into. If they don’t, they shouldn’t be a party to one. It’s an arranged investment.

  14. Great one, RD. When I read you I always hear the true voice of what I believed the Democratic Party to be made of. You are always incensed about how the little guy gets screwed — I think that is one of the things that made us Upton Sinclair Dems?

    Grapes of Wrath Dems, so to speak.

    You are so right on those choices — reform “corporate-style” — well?
    In our lifetimes we have never seen this much toxic corruption and greed. Who knew what was going on behind the scenes, and what else is going to surface.

    I’m over both political parties circa 2010. Equally corrupt in my eyes.
    I believed in the Dems. That’s the letdown. The biggest letdown.

    http://www.bloomberg.com/apps/news?sid=aONrb3LGeEr4&pid=20601087

    We watched as Palin surfaced, thinking gee… could this be a feminist? But no. Now we watch as the two sides snarl at each other while the country is falling apart. I look at this through the lens of a psychotherapist, though. The broader lens. This whole Arizona deal? This is only the beginning of something far more damaging to the collective psyche of all Americans.

    If you could hear the ads that are running out here by the candidate trying to buy our state? Well, you would hear AZ redux and that will come out of the non-coastal arena. That gigantic red area that encompasses the interior.

    Nightmare.

    We grew up choosing and believing in whichever political party we chose in college, or high school. I want to show you guys something — it’s this video.

    Then watch this one:

    Watch this, because now you can buy ads in the middle of TV programs in strategic markets? Unreal.
    Watch for this in your own states in the future.

    big hugs.

  15. Yes, a hot air speculative market that had no business ever being created in the first place. Just like the tulip, John Law, Mississippi, Internet bubbles, etc, etc. If we were sane we would outlaw these derivative securities outright and soon. Their notional value is in the hundreds of trillions and contrary to Blankfein et al. they serve no useful purpose except unbridled greed and destruction.

    • Agree in general terms. Are there any okay derivatives.

      • There is nothing inherently wrong with using derivatives. They have a purpose. One side uses them for hedging and risk management, the other wants a speculative investment. The deal with the CDO market is that the contracts aren’t standard, they aren’t traded on an exchange where a market could price them, they don’t have standard delivery processes, and they are frequently so individual and so complex that it takes an army of lawyers to figure them out. This is quite different from a vanilla derivative like a futures contract on number five red wheat. I used to use GNMA futures to hedge interest rate risk in the 80s for a savings and loan originating and packaging mortgages for Fannie and Freddie. That’s a perfectly legitimate use. So are FOREX futures or commodities futures. But, they are exchange traded and because of that they are better priced and easier to monitor and assess.

        Which derivatives do you want to eliminate?

        • Agree. I’d say going too far would be derivatives of underlying securities or assets that have no connection to any social or economic value. Like say, a put option on a CDS of a synthetic CDO made up of some bad mortgages mixed in with some interest rate swaps and currency futures. Purely profiting from complexity.

  16. Even the schizophrenic statement from Warren Buffet admits this, while he continues to use them. Do you disagree with him then, also?

  17. “Behind the plush digs and $600 suits and cottages on The Pond are a bunch of guys with serious gambling addictions.”

    Plush digs and cottages on The Pond, surely, but I don’t think any of those guys would be caught dead in a suit that only cost $600.

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