Editorializing From The Financial Capital Of The World

Although headquartered in the financial capital of the world, the NY Times editors apparently do not believe they need to understand the first thing about finance.  Here they go again, bleating about the civil suit against Goldman Sachs and comparing derivatives to casino gambling:

What all those proposals don’t address is whether the type of derivative Goldman was selling should even be allowed to exist. The Goldman deal was nothing more than a bet on the mortgage market, in which one side was destined to win and the other to lose, without “investing” anything in the real economy. The C.D.O. did not hold actual mortgage-related bonds, but rather allowed the participants to stake a position on whether bonds owned by others would perform well, or tank. And that helped to further inflate the housing bubble.

That is not investing. It is gambling, and it is abusive. It has no place in banks that can bring down the system if they fail.

Hmm - empowering sellers by creating synthetic mortgages that let sellers absorb the demand created by buyers inflated the housing market?  Would it really be a better world if the German money manager on the losing side of the controversial Goldman deal had used his money to fund more construction of new homes?

I will say this - it appears, after the fact, that the overall effect of making housing-related financing more liquid was not helpful.  Had it been harder for people to finance and re-finance their homes the housing bubble would surely have been smaller.  There are lots of ways the government could intervene to make the mortgage market grind more slowly.  They could start with reining in Fannie Mae and Freddie Mac, move on the imposing more stringent mortgage origination criteria (that would have a disparate impact on minorities, women, and immigrants), limit mortgage securitization by requiring originators to retain a portion of their product, and eventually work up the food chain to derivatives.

But even though derivatives are so unfashionable that a NY Times columnist can boast about her ignorance, the Times really needs to crack open a basic economic textbook to help them distinguish between gambling and speculation.

Gambling can be thought of as the creation and transfer of risk for entertainment's sake; the resulting prices and risk transfers don't guide any useful economic activity.  A bet on whether my next toss of the dice will result in a seven does not guide any real economic activity, other than baby getting a new pair of shoes.  Or not.

Speculation, by way of contrast, can provide socially useful prices and the opportunity for risk transfers.  For example, speculators routinely buy and sell futures contracts on corn, even though they have no interest whatsoever in growing, storing, milling, or selling corn.  Why is that not just gambling?  Because the speculators, through their participation in the market, help guide the behavior of people who do have to make a living growing and handling corn.

Kelloggs will be making a lot of corn flakes next December - should they fill their corn silos now to assure their supply of corn, or wait until the next harvest?  A "bet" with a speculator may simplify their planning.

A farmer has to decide whether to plant more corn, leave a field fallow, or plant something else.  What will corn be worth come harvest time?  The existence of speculative derivative contracts on corn helps provide an answer to that question and an opportunity for a farmer to assure his price today.

The Goldman deal looks like socially useful speculation.  Should mortgage originators push even more money out the door to create more supply for the securitization chain?  There were a lot of buyers lined up saying "Yes!"  However, the use of synthetic CDOs allowed sellers to show up shouting "No."  That price discovery can be socially useful, as the Times editors ought to understand.

I QUIBBLE WITH MYSELF:  What about betting on which teams will go the the World Series next fall - is that socially useful?  I would not dismiss the question out of hand - the mayors and police chiefs of Atlanta, Philadelphia, and St Louis (not to mention New York and Boston) might like to know what October will bring; event planners and convention organizers might like to know whether there will be plenty of hotel rooms, or whether their event will be over-run by a baseball crowd.  That is a thin thread, but it takes us to the gray line between gambling and prediction markets.

Comments

[Clarice]

Humph! A person like you probably would even defend charging interest on loans. And look where that notion put the Protestant countries compared to places where such things are considered not only not socially useful but morally wrong.

Next you'll be yammering about the time value of money and other such "cosmopolitan" notions.

[nathan hale]

Gail Collins, who Dowd wants to be, when she grows up.

[Ignatz]

--I will say this - it appears, after the fact, that the overall effect of making housing-related financing more liquid was not helpful......There are lots of ways the government could intervene to make the mortgage market grind more slowly.--

Yes, and the government also had lots of ways to make it grind into overdrive, all of which it availed itself of.
The main reason exotic derivatives weren't helpful in providing extra liquidity was because the government had already intervened to flood the market with its own liquidity.
Here's an idea. Since they almost never know what they're doing, how about the government not intervene at all; either to make it grind slow or fast?

[Old Lurker]

"What all those proposals don’t address is whether the type of derivative Goldman was selling should even be allowed to exist."

They're joking, right?

Without naming any names, I attended a board meeting last week where the top execs of one of these very banks gave a presentation (they being our lead bank for decades, but now they needed to be comforted by seeing us as much as we needed to remain comfortable with them...unusual dynamic, BTW).

Anyway, during the discussion they were asked their opinion of the new regs presented by Dodd. Having already shown us the role of these fancy vehicles on their profitability, and we use some of them ourselves, they opined that they and their peers could relocate those businesses offshore very quickly if need be, and they already have the corporate shells in place and offices established in banking centers from London to Singapore so no time would be lost. If necessary.

Statists just cannot ever grasp how hard it is to control the flow of capital in a global economy.

[Jeff]

Bad loans were the root cause of the crisis ...
What was the root cause of those bad loans ?
Government intervention, red lining civil suits and the no risk loan environment fostered by Fannie and Freddie appetites for any and all loans all contributed to banks making "bad" loans.
Remember a loan is not bad for the bank if they sell it off immediately to Fannie and Freddie. They become servicing agents and have little or no "risk" in the loan itself.

If you were required and encouraged to make loans that you would then have no real financial interest in then why would a bank stop lending to questionable borrowers ?

The government facilitated the tools to allow any number of bad loans to be made. A truly free market would have stopped packaging these bad loans and banks would have stopped making them long ago.

[Patrick R. Sullivan]

This is not Felix Salmon's luck day

Both the WSJ and the FT have got their hands on a letter from John Paulson to his investors, but infuriatingly neither of them have seen fit to share it with their readers. So we’re left with a few snippets of direct quotes, and we have to simply guess at the overall tone of the note. ....

Without seeing the actual letter, I’m going to have to conclude that it reads largely as a set of Goldman Sachs talking points, which is interesting....

In fact the letter
can be read here, and it a sober, logical, factual defense of Paulson's role.

[Patrick R. Sullivan]

Here's another super lawyer for DoT's file on experts who disagree with him.

Also interesting for Michael Lewis's continued descent into Ballardism.

[matt]

clarice, I needed a good laugh...thanks.

Paulson is now under heat from his investors as well, so he's in defensive mode. Basically, the SEC is extorting GS and Paulson.

[bgates]

Although headquartered in the financial capital of the world, the NY Times editors apparently do not believe they need to understand the first thing about finance.

or,

"Not understanding the first thing about finance, the NY Times editors apparently don't want to be headquartered in the financial capital of the world."

[matt]

"I lose money, therefore I am"

Pinch "metroboy" Sulzburger

[Dave (in MA)]

Jughead and Plughead Earth Day update from Drudge:

Obama and Biden to Celebrate Earth Day by Tying Up New York Air Traffic...

Obama and Biden will board separate jets in Washington on Earth Day morning to fly 250 miles up to New York, where they will land at separate airports to attend separate events within a few miles of each other... Jets will be forced to circle and burn more fuel as they wait for the VIPs to come and go...

Nice.

[anduril]

On the most recent Goldman thread Ignatz linked to a very worthwhile blog by Steve Waldman which suggests that people claiming that these types of transactions are necessarily zero-sum pure bets do not understand the reality of the situation. Here, for ease of reference, is the blog: Goldman-plated excuses. Here's a key passage:

Goldman’s claim that “market makers do not disclose the identities of a buyer to a seller” is laughable and disingenuous. A CDO, synthetic or otherwise, is a newly formed investment company. Typically there is no identifiable “seller”. The investment company takes positions with an intermediary, which then hedges its exposure in transactions with a variety of counterparties. The fact that there was a “seller” in this case [Paulson], and his role in “sponsoring” the deal, are precisely what ought to have been disclosed. Investors would have been surprised by the information, and shocked to learn that this speculative short had helped determine the composition of the structure’s assets. That information would not only have been material, it would have been fatal to the deal, because the CDO’s investors did not view themselves as speculators.

The first comment to the blog entry is by Nemo (Latin for "nobody"), who happens to have his own blog, at which his co-blogger "Bond Girl" offers More on Goldman Sachs. Bond Girl focuses on the central issue of the role of the selection agent (Paulson). Here's a sample, but I recommend it all:

I think any person who is being intellectually honest here will regard Paulson as a de facto portfolio selection agent in this transaction, and if investors care about the economic interests of the portfolio selection agent, they would care about Paulson’s economic interests. If you read Goldman’s response, you will discover that this entire arrangement was initiated by Paulson. Paulson approached Goldman with a strategy he wanted to implement, and Goldman went looking for investors to take the other side of that transaction. There is nothing wrong with that, in my opinion. The problem has always been his involvement in the process of selecting the securities, and the fact that this was not disclosed.

Goldman’s argument in response to this is that the firm has an obligation of confidentiality to Paulson. Goldman never needed to disclose Paulson’s identity. Goldman could have just told investors, “hey, by the way, these securities were selected by a party with a net short position.” That would have sufficed, but it probably would not have been conducive to locating a bagholder, which internal emails indicate is what Goldman wanted. (And it probably found a good one in IKB.) Goldman did not disclose Paulson’s role in this transaction for a fairly obvious reason.

That pretty much covers my take on Goldman’s “there will be a short in this transaction, by definition” argument, which is basically that the firm does not need to disclose to investors how the firm manages its own risk. Again, Goldman is confusing the idea that there would be a natural interest in the other side of the transaction, which is all good and fine, and letting investors know who influences the structuring of the deal.

As with sophisticated investors, I am all for sociopaths sleeping in the beds they make. It would be nice if Goldman got positively nailed to the wall in court over this. But let’s all face it, that probably won’t happen in this country. What I do hope is that Goldman’s clients internalize Goldman’s logic and reconsider their financial allegiances. Regardless of the legal merits of the case, it is clear that Goldman has little regard for its clients or ethical behavior in general. The prevailing view of analysts seems to be that Goldman, on account of its size and interconnectedness, will be a difficult relationship for institutional clients to replace, so the firm will probably get away with screwing its clients without consequences. You could not ask for a better illustration of what is wrong with the financial sector these days.

Re TM's unsubstantiated claim that the "Goldman deal" "looked like" socially useful speculation, Waldman has two things to say:

Goldman could have tailored a security or derivative contract to Paulson’s specifications and found a counterparty willing to take the other side of the bet in full knowledge of the disagreement. Goldman needn’t (and shouldn’t) proffer an opinion on the substantive economic issue (was the subprime RMBS market going to implode or not?). Investors get to disagree. But it did need to ensure that all parties to an arrangement that it midwifed understood the nature of the disagreement, the substance of the bet each side was taking. And it did need to ensure that the parties knew there was a disagreement.

IOW, Waldman disputes the common assertion that all players in this market actually are aware that there is another side. Please read Waldman's blog, as he explains it far better (and with more authority) than I can. He also gets into the psychology of the investors (the "dupes"), for whom he has no sympathy.

And

I have little sympathy for CDO investors. Wait, scratch that. I have a great deal of sympathy for the beneficial investors in CDOs, for the workers whose pensions won’t be there or the students at colleges strapped for resources after their endowments were hit. But I have no sympathy for their agents and delegates, the well-paid “professionals” who placed funds entrusted them in a foolish, overhyped fad. But what investment managers believed about their hula-hoop is not what Goldman now hints that they believed. Investors in synthetic CDOs did not view themselves as taking one side of a speculative gamble against a “short” holding opposite views. They had a theory about their investments that involved no disagreement whatsoever, no conflict between longs and shorts.

Perhaps TM will next offer a detailed explanation of why it is, in his opinion, socially useful for workers to lose their pensions due to this nonsense, and how it's really all their fault.

[matt]

couldn't Marine One be used to fly to New York? It would seem the distance is well within range. AF One seems like overkill.

[nathan hale]

The definition of chutzpah, really has to be stretched extra tight, with this notice, in the LUN

[Patrick R. Sullivan]

Here's Goldman's disclaimer from the actual 'Flip Book' for this deal:

Goldman Sachs may, by virtue of its status as an underwriter, advisor or otherwise, possess or have access to non-publicly available information relating to the Reference Obligations, the Reference Entities and/or other obligations of the Reference Entities and has not undertaken, and does not intend, to disclose, such status or non-public information in connection with the Transaction. Accordingly, this presentation may not contain all information that would be material to the evaluation of the merits and risks of purchasing the Notes.

Goldman Sachs does not make any representation, recommendation or warranty, express or implied, regarding the accuracy, adequacy, reasonableness or completeness of the information contained herein or in any further information, notice or other document which may at any time be supplied in connection
with the Transaction and accepts no responsibility or liability therefore.

Goldman Sachs is currently and may be from time to time in the future an active participant on both sides of the market and have long or short positions in, or buy and sell, securities, commodities, futures, options or other derivatives identical or related to those mentioned herein. Goldman Sachs may have potential conflicts of interest due to present or future relationships between
Goldman Sachs and any Collateral, the issuer thereof, any Reference Entity or any obligation of any Reference Entity.

That pretty much refutes the SEC's claim.

[anduril]

So, Patrick, your position is that this paragraph is legally binding and absolves Goldman or any other party who inserts that sort of boilerplate in their literature of all liability?

Goldman Sachs does not make any representation, recommendation or warranty, express or implied, regarding the accuracy, adequacy, reasonableness or completeness of the information contained herein or in any further information, notice or other document which may at any time be supplied in connection with the Transaction and accepts no responsibility or liability therefore.

I'm guessing that would be a tough sell in court. Without researching further, there is this from Wikipedia:

United States

In the United States, a disclaimer must be conspicuous in the contract, e.g., in a different kind of print or font that makes it stand out. On the other hand, express warranty, that is, any affirmation of fact or promise to the buyer, or description of the good, oral or written, can be negated or limited only if such disclaimers are not unreasonable. (Uniform Commercial Code, Section 2-316 (1)).

Some jurisdictions, however, limit the ability of sellers or manufacturers to disclaim the implied warranty of merchantability or fitness, such as Massachusetts. (Massachusetts General Laws, Chapter 106: Section 2-316A).

Contractual language can also limit the remedies available for breach of an implied warranty - for example, capping recoverable damages or limiting the remedy to a replacement of a defective item. However, such a term can be found to be unconscionable. For example, if a defective product causes a personal injury, a contractual provision limiting recovery in such a case will be deemed prima facie unconscionable. (Uniform Commercial Code, §2-719(3).)

That may not be the end of the story, but it's an indication that there's more to the story than Goldman's boilerplate statements.

[Ignatz]

--That pretty much refutes the SEC's claim.--

While I'm generally sympathetic to your position on this transaction, PRS, it is not too likely that GS, or anyone else, can absolve itself of responsibility for revealing certain material facts by disclaiming the responsibility to do so.

[NK]

Tom, Tom, Tom--

You treat Barry O and the NY Times as if they know -- or care-- anything about anything-- especially fiancial instruments. Like the Bourbon Kings, "they have learnt nothing and forgotten nothing". What's this all about then? maybe Barry O telling Lloyd "hey guy, move all that GS derivative trading stuff to the Chi Town MERC and this SEC stuff goes away. You'll love living in the northern Lake Front suburbs" you know, what's shakin' on shake down street. Pinch? he's just an 'effin moron. Cheers

[NK]

Hey Ignatz--

It may not be too likely, but it sure makes for interesting motions to dismiss and SJ. Remember who the consumers of these CDO instruments were; other banks, hedge funds and private equity funds. They AND the SEC KNEW GS trades both sides -- wouldn't everybody-- in that case boilerplate may be more powerful as a matter of law, because the consumers of the boilerplate were financial "experts". What if the SEC loses on a motion to dismiss? ai yai yai, yai yai.

[Patrick R. Sullivan]

Goldman Sachs may, by virtue of its status as an underwriter, advisor or otherwise, possess or have access to non-publicly available information relating to the Reference Obligations...

That's not boilerplate, that's specific. Where's the statutory obligation that specifies what an underwriter must disclose.

[Clarice]

Big Government's Andrew Mellon has uncovered a true tale of political plunder, involving Paulson, Schumer, ACORN, Sandler, Soros and Indymac:

http://biggovernment.com/amellon/2010/04/22/indymac-attack-did-schumer-paulson-soros-and-the-crl-kill-the-bank-and-profit-from-its-collapse> Political Plunder

[Clarice]

Mellon's article is the biggest blockbuster in ages IMO.

[anduril]

Patrick, last I checked the US is a Common Law country, and that really does mean something. In addition, if you READ the material that I pasted in above, you'll see that each of the three paragraphs cites a specific statute. And those are just relatively random examples of statutory codifications of Common Law principles, provided to illustrate the point. I'm sure there are others.

Could one of the usual RINOs here please explain why I should feel sorry for a bunch of fat cat, unethical leftists, who couldn't give a shit about the social consequences of their actions and who buy off Congress, regulators and even Presidents to tilt the playing surface to suit them? Do any of you really think it's coincidence that GS stock is going up even now?

[Bill in AZ]

OT - but we're celebrating Earth Day here in Central AZ with an absolute whiteout snowstorm at 5000 ft elevation. It's adding to the Al Gore Glacier that was starting to recede finally.

[Rob Crawford]

And there goes Mr. Delusional-Thinks-He's-A-Sword, again. Pounding the table and attacking the character of the accused isn't convincing. I don't care if the accused is the Baby-Raping Bishop of Bath and Wells, if the government can't a) cite the laws that were broken, and b) provide evidence that the laws were actually broken, then the accused is innocent.

"Fat cat" is class warfare -- leave it to the Marxists. "Unethical" is an opinion, and rarely subject to prosecution, and the "social consequences" of a business deal are none of the government's business.

[anduril]

Heh. Who was it that first said: Ignorance of the law isn't a defense?

[F P]

Looks like this finance bill will become law...along with cap and trade, immigration and who knows what else: Senate Dems to eliminate the filibuster. Get ready for the worse 9 months of your life.

LUN

[F P]

worst not worse. well it will be worse than the last 9 months.

[anduril]

On a more serious note we have this: Obama, the Best President Goldman Sachs’ Bundled Contributions can Buy. This answers a lot of the questions I was raising:

Obama to Keep Goldman Funds reports,

President Barack Obama won’t return about $1 million that employees of Goldman Sachs Group Inc. donated to his 2008 presidential campaign, according to a spokesman for the Democratic National Committee.

“We make these decisions on a case-by-case basis, and in this case we have not accepted contributions from specific individuals accused of wrongdoing, nor have we advocated for positions that big Wall Street banks generally favor,” said DNC spokesman Hari Sevugan, speaking on behalf of Mr. Obama.

The latter statement from Mr. Sevugan is an outright lie because Barack Obama is pushing for cap and trade legislation whose express purpose (per fellow Democrat Kirsten Gillibrand of New York as opposed to conservative talk radio) is to line the pockets of Goldman Sachs, J.P. Morgan Chase, and other Wall Street firms at the expense of the American people. The bottom line is that Barack Obama is squarely in the pockets of Goldman Sachs executives who can peel off twenty-three hundred dollar bills to support his campaign and then use another C-note to light their $20 cigars and then Barry’s cigarette.

As stated by Kirsten Gillibrand, who received $30K or so from her sugar daddies at Goldman Sachs,

An infrastructure is already beginning to form, as entities like the New York Stock Exchange, J.P. Morgan Chase, Goldman Sachs, and the new Green Exchange are developing carbon trading platforms or expanding their environmental trading desks. There are nearly 100 funds already focused on green investments.

Has anyone else been noticing the stories saying that Cap 'n' Trade isn't dead--as I noted yesterday? As Time Carney wrote, Goldman loves regulation.

[Jim Rhoads a/k/a vjnjagvet]

Anduril:

I don't have the knowledge that PRS and DOT have in this area, but have litigated enough cases involving non-disclosure under the Securities and Exchange Acts to know that common law fraud concepts (pretty much creatures of the laws of the various states) have little effect on issues involving Federal statutory law like the SCAs.

Generally, SEC offerings made to "Qualified" purchasers -- i.e. those who affirmatively represent, among other things, that they can afford to lose their entire investment in the offering -- are governed by the technical representations of the offeror and broker (like GS) contained in the offering memorandum or the prospectus.

If such representations are in whole or in part false, misleading or incomplete, the Acts generally make them unlawful and subject the representers and those in active concert with them to liability. On the other hand if such representations taken as a whole are not false or misleading, there is no liability. The issues of whether such representations are false, misleading or incomplete under the Acts is determined by federal law and not state law.

[ignoranceofthelaws]

Kerry stopped all those o crashes, so after the coups are straight it's okay. So, it fell out of the sky.

[anduril]

Thanks for the clarification, Jim. My overall point was:

That may not be the end of the story, but it's an indication that there's more to the story than Goldman's boilerplate statements.

I assumed that there would be statutory law covering virtually everything that was going on, but common law fraud concepts would be incorporated in one form or another. And I presume that interpretation of the statutes owes something to common law concepts, as well.

[Clarice]

Jim, I think you're right. General precepts fall in the face of a detailed and specific statutory framework dealing with the specialized transactions over which the SEC has jurisdiction.

[hrtshpdbox]

Way off-topic, but how does a highly paid legal team manage to publish docs where the redactions are "easily viewable if the text is copied and pasted to another document."? Curious, no? LUN

[Clarice]

It's harder to do than you think. In the Libby case it was obvious that the redacted name on the public documents was Armitage..Nothing else fit.

[nathan hale]

It's dubious that any one at the Times really knows anything, and it seems to transfer to
any publication they work for, in the LUN

[Jim Rhoads a/k/a vjnjagvet]

Anduril:

An SEC offering memorandum and prospectus are filled with "boilerplate" as required by the Acts fully to describe the nature of the investment offering and the fees earned by and relationship among the selling parties and their representatives.

That "boilerplate" like the rest of the offering document is generally taken quite literally, and, unless materially false, misleading or incomplete may give the offeror a complete defense to any subsequent claims, even those which seem otherwise valid with 20/20 hindsight.

[Cecil Turner]

Goldman’s argument in response to this is that the firm has an obligation of confidentiality to Paulson. Goldman never needed to disclose Paulson’s identity. Goldman could have just told investors, “hey, by the way, these securities were selected by a party with a net short position.” That would have sufficed, but it probably would not have been conducive to locating a bagholder, which internal emails indicate is what Goldman wanted.

Are we to believe either party to a synthetic derivative deal is under the impression all parties selecting the securities have a similar (e.g., net long) position? Why, then, the back-and-forth on the selection process? Sorry, this simply makes no sense. ACA had to know their counterparties were short, and represented in the selection process (as GS noted they had been in similar deals in the past).

The only significant piece of information held back was Paulson's identity and position (him being such a future superstar and all), and that is similarly implausible as evidence of fraudulent behavior, even if they didn't know he was a net short invester (which is also disputable). And frankly, like much of your cited-at-length opinion pieces, the quality of the excerpts posted here do not induce an immediate "I gotta read the whole thing" response.

[Clarice]

HEH!

Or should I say HEH ?

[Patrick R. Sullivan]

Thanks, Jim, you've now made it unnecessary to point out that Goldman's disclaimer wasn't found in a mutual fund prospectus, but was there for the, literal, handful of qualified investors who might read the 'flip book'.

[Jim Rhoads a/k/a vjnjagvet]

...otherwise "invalid" not otherwise "valid".

I hope my analysis is better than my proofreading. And I even used preview.

[hrtshpdbox]

"Are we to believe either party to a synthetic derivative deal is under the impression all parties selecting the securities have a similar (e.g., net long) position?"

I've been under a rock, I've purposely avoided this story as I would reports of gory car crashes. Worse, I'm just dropping into the thread without having read all the sites and posts. I think I tuned out when I heard a financial reporter talking about a derivative that "was designed to fail", which is nonsense. It would be a derivative designed to succeed when mortgages when bust, simply a derivative that's short mortgage values. There's nothing wrong with such a derivative, of course; those who needed to protect their already-devalued mortgage holdings from falling further would find a legitimate need for such a product (they sure wouldn't want to bail on the actual assets at fire-sale prices). So I don't know what it's all about - maybe it was presented so poorly that investors didn't know what they had, maybe there's some form of culpability. But there's no question that Washington was never going to be able to get their little heads around all the things that would happen when they repealed the guts of Glass-Steagall.

[ignows]

Thanks Os,

Why won't Obama change/reform?

[Ranger]

Totally off topic, but fun anyways...

Blago has requested a Subpoena for Obama as a defense witness. He also knifed Obama and Fitz by somehow "messing up" the redaction, so that all the redacted portions for the request are now in the public domain.

http://www.nbcchicago.com/blogs/ward-room/The-Six-Secrets-You-Need-to-Know-From-the-Blagojevich-Filing-91848634.html>Redactions Revealed: The Six Secrets You Need to Know From the Obama Subpoena Request

I think this one is particularly interesting:

Rezko has also stated in interviews with the government that he believed he transmitted a quid pro quo offer from a lobbyist to the public official, whereby the lobbyist would hold a fundraiser for the official in exchange for favorable official action, but that the public official rejected the offer. The public official denies any such conversation. In addition, Rezko has stated to the government that he and the public official had certain conversations about gaming legislation and administration, which the public official denies having had.

Redacted footnote: The defense has a good faith belief that this public official is Barack Obama.

To me the issue is not if Obama refused the "quid pro quo offer", but that Obama claims the conversation never took place.

Libby was convicted of lying to the FBI on less evidence than they seem to have against Obama right now.

[Ignatz]

--That "boilerplate" like the rest of the offering document is generally taken quite literally, and, unless materially false, misleading or incomplete may give the offeror a complete defense to any subsequent claims, even those which seem otherwise valid with 20/20 hindsight.--

Jim,
Isn't that the whole point of the SEC charge; that GS did materially mislead investors and/or not disclose info they should have?
If they did, the disclaimer is of no use. If they didn't, the disclaimer is of no consequence.
What all the evidence shows, I have no idea. What I've seen so far is weak tea indeed.

[hrtshpdbox]

"Libby was convicted of lying to the FBI on less evidence than they seem to have against Obama right now."

But Fitz would never go there.

[centralcal]

Ranger: The last redacted piece is where Blago claims to have talked to Obama - mano y mano - over the telephone. Any clue if that phone call was part of any wiretapping?

I kinda felt like Blago was sending a message (albeit via his attorneys) with that.

[Rick Ballard]

"required by the Acts fully to describe the nature of the investment offering and the fees earned by and relationship among the selling parties and their representatives."

Jim Rhoads,

Where would the $15 million paid by Paulson to GS for structuring and marketing the CDO fit into that description? I'm sure there must be a Grand Canyon of a loophole due to the probity and immaculate reputation of the participants but is it a "unless Participant A calls Kings X" type that is specific to the boilerplate or is it black letter?

[anduril]

That "boilerplate" like the rest of the offering document is generally taken quite literally, and, unless materially false, misleading or incomplete may give the offeror a complete defense to any subsequent claims...

That's precisely my point: the "boilerplate" language does NOT offer a complete defense. The "boilerplate" language doesn't "refute" the SEC's case--not if the SEC is able to convince a court that Goldman made statements that were "materially false, misleading or incomplete." We've all known that's what this case is about from the beginning.

[matt]

well, Obama is probably the greatest liar to have ever held the office, so why should we be surprised? Wouldn't it be lovely to get him on the stand?Take the 5th? Tell the truth? hmmmm...it all sounds good.

Speaking of which,where's Patrick Fitzgerald on the Rezko case. Rezko's sentencing has been pending for over 18 months now.

[Ranger]

Actually, I think that conversation in question was a face to face.

So, it will be a he said, he said in the trial.

I think Blago is trying to angle for Obama to be forced to essentially testify as a character witness. "yes we talked about the Senate seat and we agreed that Blago should pick the most qualified candidate." It puts Obama in a no win situation.

Blago seems to think his best tac is to go on offense against Fitz, and Blago has nothing to lose at this point. It should be fun.

[Clarice]

Yes, indeed, Ranger. Yes, indeed. And I expect that the telephone conversation was somehow recorded..he gives the exact number of the call in any event so it shouldn't be hard for the WH record keepers to track whether there was one at that time and date from O to B.

[Ranger]

Basicly, it looks like Blago's defense is that this was just 'the way things get done in Illinois.' Obama can either get on the stand and deny it all (lists of perfered candidates, floating Jarret's name to the local SEIU thug), thus blowing the evidence Fitz has gathered. Or, Obama can say, yes, all this is true, and there was nothing wrong it it. That's the no win for Obama.

[hrtshpdbox]

".. it shouldn't be hard for the WH record keepers to track whether there was one at that time and date from O to B."

Obama wasn't President yet, though; couldn't the "record keepers" just shrug their shoulders?

[nathan hale]

So what is the standard of proof in such a suit, (preponderance of the evidence) and who
are they ostensibly conducting this lawsuit
on behalf of, the shareholders of ACA

[Ranger]

Well, its one of those situations where, if it was a phone conversation, then it should have been recorded, because they were recording everything at that point. So if that tape is mising, it is like the Eckenrode's notes of the first Russert interview.

If it was a face to face, then Obama is really hosed (IMHO). Blago can put Obama in the worst of all possible situations. I don't think people will think Obama is that honest by the time this is over.

[Ranger]

BTW, the phone call referenced in #6 is between Harris and Blago's legal counsel. They are using it as evidence that Blao and Obama had a conversation, because that conversation is reference in the phone call that was recorded. Fitz can say, yes they talked about a conversation between Blago and Obama, but they were lying (in which case what else might they have lied about on the phone calls), or he can admit that the conversation between Blago and Obama took place and that Obama lied when he denied any conversations with Blago about the Senate seat.

[Rick Ballard]

Narciso,

Merkel and Brown are the two parties most interested in hanging something on GS. The German and British taxpayers had to foot the bill when the bookie "front" (ACA) fainted into ABN AMRO's arms. It's fortunate that GS is such an honorable firm because otherwise Merkel and Brown might try and hang a piece of the Greek fiasco on them as well. Some silliness to due with other structured finance operations that might, to the truly unsophisticated, appear to have been somewhat fraudulent.

[Jane says obamasucks]

hrtshpdbox,

Nice to see you - you haven't been around in a while, have you?

I think those redactions are damning and Fitz will completely ignore Obama's culpability like he ignored Armitage's. But it will be more fodder for the up coming impeachment.

[anduril]

Are we to believe either party to a synthetic derivative deal is under the impression all parties selecting the securities have a similar (e.g., net long) position?

Here's what Steve Waldman says:

So why did Goldman put that line in their deeply misguided press release? One word: derivatives. The financially interested community, like any other group of humans, has its unexamined clichés. One of those is that derivatives are zero sum contests between ‘long’ investors and ’short’ investors whose interests are diametrically opposed and who transact only because they disagree. By making CDOs, synthetic CDOs sound like derivatives, Goldman is trying to imply that investors must have known they were playing against an opponent, taking one side of a zero-sum gamble that they happened to lose.

Of course that’s bullshit. Synthetic CDOs are constructed, in part, from derivatives. (They are built by mixing ultrasafe “collateral securities” like Treasury bonds with credit default swap positions, and credit default swaps are derivatives.) But investments in synthetic CDOs are not derivatives, they are securities. While the constituent credit default swaps “necessarily” include both a long and a short position, the synthetic CDOs include both a long and a short position only in the same way that IBM shares include both a long and a short position. Speculative short interest in whole CDOs was rare, much less common than for shares of IBM. Investors might have understood, in theory, that a short-seller could buy protection on a diversified portfolio of credit default swaps that mimicked the CDO “reference portfolio”, or could even buy protection on tranches of the CDO itself to express a bearish view on the structure. But CDO investors would not expect that anyone was actually doing this. It would seem like a dumb idea, since CDO portfolios were supposed to be chosen and diversified to reduce the risk of loss relative to holding any particular one of its constituents, and senior tranches were protected by overcollateralization and priority. Most of a CDO’s structure was AAA debt, generally viewed as a means of earning low-risk yield, not as a vehicle for speculation. Synthetic CDOs were composed of CDS positions backed by many unrelated counterparties, not one speculative seller. Goldman’s claim that “market makers do not disclose the identities of a buyer to a seller” is laughable and disingenuous. A CDO, synthetic or otherwise, is a newly formed investment company. Typically there is no identifiable “seller”. The investment company takes positions with an intermediary, which then hedges its exposure in transactions with a variety of counterparties. The fact that there was a “seller” in this case, and his role in “sponsoring” the deal, are precisely what ought to have been disclosed. Investors would have been surprised by the information, and shocked to learn that this speculative short had helped determine the composition of the structure’s assets. That information would not only have been material, it would have been fatal to the deal, because the CDO’s investors did not view themselves as speculators.

[Jim Rhoads a/k/a vjnjagvet]

My only point is that the language/information in the Offering Memorandum is the only language and federal law is the only law to be considered in determining whether Goldman made material false, misleading or incomplete representations regarding the transactions in question.

IMO, the case is more likely than not to be initially decided on a motion for summary judgment.

[Clarice]

Ranger, there's a third way--the president can refuse to be questioned under oath in the courtroom,,I don't think any president has been compelled to testify. In that case, Blago will put forth his defense and whatever he can get from the prosecution's notes of the discussion with Obama which support his claims.

[Clarice]

How hard will it be to convince a Chicago jury that Obama and his posse never got involved in the pay to play scheme? Heh

[anduril]

Jim, I don't disagree in any way with what you've said, and I do appreciate your input. I lack the experience to make any sort of educated guess as to the outcome of the suit, however I'm open to the conspiratorial notion that it could possibly involve, in effect, a certain amount of collusion--the Gov bashes GS for the time being in order to get the bill through quickly, then lets the suit fold. The hope/design would be that the bill gets through before any motion for summary judgment comes up. GS gets benefits through provisions of the bill, etc.

[Ranger]

I thought the whole point of the Clinton-Jones ruling is that even the president has to be treated like a private citizen in the eyes of the court. Denying Blago the right to call Obama as a defense witness denies him his constitutional right to a fair trial (at least I am sure that is what Blago will claim, and I bet he would win that). It was Obama's Senate seat after all, and if Rahm has already basically admitted there was a "prefered list" in Obama's desk, then Blago's 'thats the way we do things here' defense seems much more plausable.

[hrtshpdbox]

Jane, Thanks, nice to see you as well, it has been awhile; viewing the political scene, I've been alternately despondent and appalled for 15 months. An "upcoming impeachment" would be nice, but a resounding neutralization of Obamageist come November won't be too bad for starters - I read one pollster who said that an 80-seat House gain is not of the question. Woohoo!

[Jim Rhoads a/k/a vjnjagvet]

Anduril I agree that the suit was a cynical political decision. The SEC has typically been used that way since FDR, Joe Kennedy and William O. Douglas (later Justice Douglas) were running the commission.

Traditionally, the enforcement division of the SEC has been a very professional and apolitical organization. This suit certainly sullies their generally good reputation.

GS is likely to be in the front row in formulating the regulations to favor big institutions like they have become.

[Clarice]

Yes, Ranger, but that was a civil case and this a criminal case.
I don't know that a president has ever been forced to testify in such a case esp when as here (see link) he's being charged with lying (twice)to the prosecutor.

http://www.sfexaminer.com/opinion/blogs/beltway-confidential/blagos-lawyers-obama-lied-twice-91850149.html> Liar, liar

[anduril]

Obviously, from your remarks re summary judgment and the sullying of reputations, you don't think much of the merits of the case. Could you expand a bit? What do you think of the opinions I've been citing, above? I have an open mind on the legal issues, but the business model I find rather disturbing. I understand, I think, that GS and others are taking advantage of what the Government has enabled (and of course advocated what the Government enabled), but that doesn't in my mind justify what Wall St. has become. Full disclosure: two of my nieces are married to guys who have been up to their ears in precisely this field.

[Jane says obamasucks]

All he has to do is pardon Blago - for the good of the country - of course.

[Jim Rhoads a/k/a vjnjagvet]

I'm afraid I'm in the "they're all big boys" school of thought, Anduril.

The "victims", if any, were sophisticated investors on all sides of highly complicated, technical, sophisticated deal. All parties had the best securities counsel money could buy, with the brightest of the bright securities lawyers fly-specking the deal before it closed.

I have to think that if any one of these super-bright lawyers thought there was a SEC violation lurking in the transaction a very public civil action would have been filed with heavy hitter securities litigators prominently in the forefront of the case. Such a case could involve billions in damages, and a victory would be a home run for any law firm.

[Patrick R. Sullivan]

anduril, ask your expert, Waldman, if he also thinks you can have a coin flip without there being a head and a tail.

[Janet]

The whole "liar" tenor sorta permeates Obama. Blago and the discussion on the Covering Up the Cover-up thread.
America elected a real jewel...

[Cecil Turner]

Investors might have understood, in theory, that a short-seller could buy protection on a diversified portfolio of credit default swaps that mimicked the CDO “reference portfolio”, or could even buy protection on tranches of the CDO itself to express a bearish view on the structure. But CDO investors would not expect that anyone was actually doing this.

Yeah. Who'd a thunk it? And especially not Paulson. Unless they actually read Business Week a month before closing the deal:

One of the hedge funds said to be cleaning up on the ABX short trade is Paulson & Co., a $7 billion fund led by former Bear Stearns BSC investment banker John Paulson. Traders familiar with Paulson say the hedge fund made a massive, leveraged short bet on the ABX index dropping.

This "Inconceivable" claim is just as plausible the second time 'round as it was the first: not very.

[Extraneus]

Great link, Clarice. That IndyMac deal smelled from day one.

I know some people here disagree, but if the Republicans regain power and don't unleash the hounds -- citing some sense of decorum and putting the past behind us -- they will have done a historic disservice to this country.

I'll donate money to any candidate who vows to chase these scumbags to the Gates of Hell.

[PaulL]

A coin flip needn't result in heads or tails. It can land on its edge.

[Clarice]

Sandler, Soros, ACORN, Obama, Stein, Schumer--an all star cast.
What a production, Ext.

[anduril]

It's an attractive argument. It seems to boil down to: GS would have been too smart to think it could get away with this, and the others would have been too smart to fall for it if GS tried it. My reservations, for what they're worth, are:

1. I've seen very smart people, including lawyers, do very dumb things. More to the point, that's pretty much what our current mess is about--smart people assuming the R/E bubble would go on forever. That's the psychology behind all bubble, and nobody seems to learn from experience.

2. The tone of the GS emails certainly makes it sound like GS was looking for suckers--or, if you prefer, was scrambling to reposition itself.

3. A lot will depend on the quality of the evidence and the witnesses (duh).

We shall see.

[anduril]

Oh, I guess it's hard for me to understand why the Dems would seriously try to take down such a big supporter. That's on the it's-a-bad-case side of the ledger.

[Rick Ballard]

I think we have the "probable cause" for Stern's resignation now. I wonder if there was a target letter involved?

[Jim Rhoads a/k/a vjnjagvet]

And the discernment of the Judge, A. Many of the SDNY judges have a lot of experience with complicated securities cases.

[Clarice]

Yes, I have no question who the union official was, Rick.

[Jane says obamasucks]

What's the probable cause Rick?

[Clarice]

He's the union official involved in pay for play, Jane. I forget which graph of the Blago motion but it's all there in the inadequately redacted stuff. I'll go look for it.

[Clarice]

Here:

2. Obama may have overtly recommended Valerie Jarret for his Senate seat
Blagojevich's defense team basically alleges that Obama told a certain labor union official that he (Obama) would support Valerie Jarrett's candidacy for the Senate seat. Jarrett, referred to as "Senate Candidate B", is now a senior advisor to the president.
Redacted portion: Yet, despite President Obama stating that no representatives of his had any part of any deals, labor union president told the FBI and the United States Attorneys that he spoke to labor union official on November 3, 2008 who received a phone message from Obama that evening. After labor union official listened to the message labor union official told labor union president “I’m the one”. Labor union president took that to mean that labor union official was to be the one to deliver the message on behalf of Obama that Senate Candidate B was his pick. (Labor union president 302, February 2, 2009, p. 7).
Labor union official told the FBI and the United States Attorneys “Obama expressed his belief that [Senate Candidate B] would be a good Senator for the people of Illinois and would be a candidate who could win re-election. [Labor union official] advised Obama that [labor union official] would reach out to Governor Blagojevich and advocate for [Senate Candidate B] ... [Labor union official] called [labor union president] and told [labor union president] that Obama was aware that [labor union official] would be reaching out to Blagojevich.” (Labor union official 302, February 3, 2009 p. 3).

http://www.nbcchicago.com/blogs/ward-room/The-Six-Secrets-You-Need-to-Know-From-the-Blagojevich-Filing-91848634.html#ixzz0lsxGpIL4>Andy Stern

[Rick Ballard]

Jane,

I wasn't using probable cause in the legal sense - Andy Stern resigned as head of SEIU last week. The dirtbag knows what's on the tapes (just as Emanuel does) and may have been informed that Fitzpatrick wouldn't try and block admission.

I hope Blago does go for 'it's just the Chicago Way' as a defense. If enough of the adviser clique are forced to resign perhaps the puppet will collapse.

[Clarice]

Not in this filing, but I recall that when the case first was brought, there was evidence that Blagojeich was seeking a position on a Board of an outfit to which the SEIU (Stern's outfit) was a major player.

[Ranger]

I think Stern just saw the train coming down the tracks and decided to get out of the way. I think the Union Official is the Illinois SEIU president, who was already reportedly lobby hard for Jarret to get the seat.

If Blago can tie that lobbying to an Obama list of prefered candidates, then Fitz has to either say Obama was doing something wrong, or Blago was just responding to various parties, including Obama, who wanted their prefered candidate to get the seat.

[Ranger]

Maybe there was contact between the Illinois SEIU and Sterns office that got caught in the net?

[centralcal]

Ah, jeez, Clarice! How did you and Anduril end up with the same avatar?

[Clarice]

I find it unlikely that O had no great interest in who filled his seat and preposterous that this wheeling and dealing is considered criminal.

[Clarice]

Changed it just for you,cc

[Rick Ballard]

Ranger,

The Feds may have had a wiretap warrant on Tom Balinoff (President of the SEIU Chicago local) as well as on Blago. That would still be good cause for Stern to spend more time teaching advanced thuggery rather than practicing it.

[Melinda Romanoff]

Just tapping in.

Isn't Chicago entertaining?

More tomorrow.

And anduril, define "unregistered security".

[anduril]

Really good article in tomorrow's WSJ: Back to Basics on Financial Reform.

Covers lots of ground.

[Army of Davids]

With the new regulations in the Dodd Bill that the media pushed SEC attack on Goldman is encouraging......it's a good time to focus on the failure of regulators past.

SEC....was virtually handed Stanford and Madoff....did diddly.
OCC and OTS...had regulatory authority to reign in the 3 biggest lenders of bad mortgages. Coutrywide, WAMU and (Countrywide spinoff) IndyMac....did diddly.
OFHEO...finally brought Fannie and Freddie in front of congressional oversight. Congress.....did diddly.

Will the Dodd Bill / Barney Frank House Bill outcome solve problems or create more?

[bunkberbuster]

``There were a lot of buyers lined up saying "Yes!" However, the use of synthetic CDOs allowed sellers to show up shouting "No."

No. The creation of synthetic CDOs actually obscured the price of mortgage risk. That is WHY they were created. The whole point of securitization is to reallocate risk in a way that destroys the original market signal, because that original signal is a big flashing "It's illegal to buy me'' for institutional investors. So what CDOs allow is for investors to show up and shout YES to assets that would have formerly been "NO WAY." CDOs redirect the cash flows from risky debt to ISOLATE it from the risk so that it becomes, in theory, risk free or AAA, while a portion of it remains junk (the equity tranche.)
Investors could shout no all day long without CDOs, they can just be on the "long" side of a credit default swap for the debt in question...

[anduril]

Off the top of my head I'd say that an unregistered security is a financial instrument that is not filed with either the Attorney General's Office or the Securities and Exchanged Commission.

[Pofarmer]

I haven't read the whole thread, but, FWIW, excessive speculation in a market is conducive to excessive volatility. There are now limits on speculative positions in the Ag markets. While some speculation is healthy, too much speculation actually makes the marketing job harder. Don't ask me how I know, or do, whatever, but, I've got the scars to show for it.

[anduril]

Sorry, Freudian slip, I guess.