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Goldman Sachs operates a corrupt casino?

I had just finished reading this fascinating article on Goldman Sachs in Business Week “Don’t Blame Us” when news arrived that GS is, in fact, being prosecuted for securities fraud by the S.E.C.  In 2009 GS made a profit of $13.9 billion. It amazed me that 78% of this came from trading – currencies, stocks, bonds, commodities and derivatives.   The S.E.C. claim is that GS put together a set of mortgage-backed securities to mainly foreign clients at the behest of another client who went short on these securities.  The client (John Paulson) made $3.7 billion in 2007 by correctly betting that the housing bubble would burst – he made about $1 billion from the suspect GS deal.   Paulson himself is not being prosecuted by the S.E.C. though he was involved in the design of the suspect financial instrument. The nagging implication of the GS prosecution is that the global financial crisis was not only caused by mismanagement but also straight dishonesty and fraud.

I am still trying to work out exactly how the deal was formulated – I’ll update this post as the news comes in.  The big issue is whether GS did this once only (if at all) or whether this sort of behavior is a norm. GS itself faces the prospect of losing the trust of its customers – a far more crushing punishment than any fine that might eventually be handed out.

10 comments to Goldman Sachs operates a corrupt casino?

  • derrida derider

    The last line’s right of course – who would ever buy a bunch of packaged securities from these jokers again?

    Since at least the South Seas bubble “outright dishonesty and fraud” has been the norm in a bubble. Indeed arguably that is what defeats market rationality in the first place and sets the bubble off.

    Note that while this last implies that wholly honest markets are rational, this does not mean I think actually existing markets are generally rational; smart crooks are common enough that any big market is never wholly honest. Put another way, asymmetric information problems are pervasive.

  • hc

    You are right DD a feature of booms is that the crooks slither out from under their rocks – people are off their guard and excessively optimistic. But Goldman Sachs is a highly respected firm. These are astounding allegations.

    The best discussion of the role of crooks in a boom that I have come across are the books by Trevor Sykes – The Money Miners and The Bold Riders. Every student of finance and accounting – and every wouldbe stock market investor – should read the chapters in BR on Laurie Connell and Allen Bond. In TMM Sykes refers to one investor who ran his broker screaming “buy anything”.

    The GS saga reminds me of the Woodie Guthrie line about the pervasiveness of people who rob others with “six gun” and those who do so with a “fountain pen”.

  • But everyone one loves a Ponzi scheme until they are the last in line then they scream for protection.

  • observa

    “who would ever buy a bunch of packaged securities from these jokers again?” The same people flush with funny money that bought them before DD. After all if there’s massive supply of paper and little productive investment to spend it on where else will it go? The art is to get out just before the inevitable bust which they’re all just waiting for any hint of. That’s why the SEC move has sent shivers through the mob. It opens up a Pandoras Box of liability by the banks and financial institutions all over again and that threatens to turn off the tap rather suddenly. Keynesian central bankers have reinflated the bubble economy again but the underlying problem of real savings and investment has not been addressed and the crash is inevitable as these phoney investments must be liquidated to achieve that. There’s a wry irony for Austrians now in watching these Keynesians wanting to punish their innovative financial intermediaries for finding new ways of accomodating all their funny money creation. Like filling lots of holes and then digging them up again?

  • observa

    Presumably filling lots of holes and digging them up again is what Keynesians call GDP and then it logically follows that’s more GDP per capita and presto, leftist nirvana for all. Austrian trogs are by nature deeply skeptical, believing that if that were so, Mugabe would have the Nobel for Economics and the Weimar Republic would be going strong in a 1000 years. Nevertheless if the O was put in charge of the printing press he would no doubt come to recognize the warm fuzzy nature of Keynesian nirvana and that printing a bit extra (say 2-3% per annum eh Glenn and Ben?) and distributing it himself was all for the common good. He might also invent an Hedonic Index for those nasty skeptics that decried this was somewhat inflationary and really robbing Peter to pay O. Then you think about lots of Os in those Central Banks and Morgan Sachs and Cos and you might be starting down the slippery slope of thinking like an Austrian, which is of course why some Keynesians are beginning to transgress and have these impure thoughts. Clearly their high priests and defenders of the faith need to watch that before it all gets out of control. God forbid that should happen.

  • observa

    Meanwhile some Austrians are apparently in a bit of a Keynesian dilemma according to the Business Spectator-

    “In an interview with German magazine, Der Spiegel, Schäuble[German Finance Minister] said the Greek financial rescue was crucial because “we cannot allow the bankruptcy of a euro member state like Greece to turn into a second Lehman Brothers.”

    The Lehman’s collapse in September 2008 plunged global financial markets into turmoil, and ushered in a dangerous new phase of the global financial crisis.

    In the interview, Schäuble said that although Greece’s debts were all denominated in euros, “it isn’t clear who holds how much of those debts”. As a result, he said, “the consequences of a national bankruptcy would be incalculable. Greece is just as systemically important as a major bank”.

    Meanwhile, the Wall Street Journal reports that Bundesbank President, Axel Weber, told a small group of German lawmakers that Greece could require as much as $US108 billion of financial assistance in order to avoid default.

    According to the WSJ report, Weber told the German lawmakers that Greece’s financial situation was worsening, and “the numbers are changing all the time”.

    Earlier this month, eurozone members agreed to provide Greece with $40 billion of emergency loans this year. In addition, the IMF was expected to provide up to an additional $20 billion.

    The situation has become even more urgent, with Greek interest rates hitting new record highs overnight. Yields on 10-year Greek bonds hit 7.7 per cent, a staggering 4.62 percentage points higher than German bunds, which are the benchmark in Europe. This is the widest gap since 1998. With Greece facing a steep rise in its interest costs, many see the joint $US60 billion European Union-IMF bailout package as Greece’s only chance of avoiding bankruptcy.”

    But can’t they just print more money so nobody is a loser?

  • The last line’s right of course – who would ever buy a bunch of packaged securities from these jokers again?

    Since at least the South Seas bubble “outright dishonesty and fraud” has been the norm in a bubble. Indeed arguably that is what defeats market rationality in the first place and sets the bubble off.

    Note that while this last implies that wholly honest markets are rational, this does not mean I think actually existing markets are generally rational; smart crooks are common enough that any big market is never wholly honest. Put another way, asymmetric information problems are pervasive.

  • Presumably filling lots of holes and digging them up again is what Keynesians call GDP and then it logically follows that’s more GDP per capita and presto, leftist nirvana for all. Austrian trogs are by nature deeply skeptical, believing that if that were so, Mugabe would have the Nobel for Economics and the Weimar Republic would be going strong in a 1000 years. Nevertheless if the O was put in charge of the printing press he would no doubt come to recognize the warm fuzzy nature of Keynesian nirvana and that printing a bit extra (say 2-3% per annum eh Glenn and Ben?) and distributing it himself was all for the common good. He might also invent an Hedonic Index for those nasty skeptics that decried this was somewhat inflationary and really robbing Peter to pay O. Then you think about lots of Os in those Central Banks and Morgan Sachs and Cos and you might be starting down the slippery slope of thinking like an Austrian, which is of course why some Keynesians are beginning to transgress and have these impure thoughts. Clearly their high priests and defenders of the faith need to watch that before it all gets out of control. God forbid that should happen.

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