Goldman Sachs And Casinos

Andrew Ross Sorkin of the Times surely knows the textbook answer to this:

When Wall Street Deals Resemble Casino Wagers

...But if there is a larger question, it is this: Why was Goldman, or any regulated bank, allowed to create and sell a product like the synthetic collateralized debt obligation at the center of this case? What purpose does a synthetic C.D.O., which contains no actual mortgage bonds, serve for the capital markets, and for society?

That may be a larger question, but Mr. Sorkin never answers it.  Instead, we get this explanation of derivatives:

One side bets the value will rise, and the other side bets it will fall. It is no different than betting on the New York Yankees vs. the Oakland Athletics, except that if a sports bet goes bad, American taxpayers don’t pay the bookie.

“With a synthetic C.D.O., it’s a pure bet,” said Erik F. Gerding, a former securities lawyer at Cleary Gottlieb Steen & Hamilton who is now a law professor at the University of New Mexico. “It is hard to see what the social value is — it’s hard to see why you’d want to encourage these bets.”

Hard to see the social value?  Let me help - speculators and short sellers aid in the process of price discovery, so that market participants can use "real" prices (and I emphasize the airquotes here for reasons explained below) to make decisions.  [What, was 'Casino Royale' on television recently?  Here is a NY Times op-ed that also leans on the flawed casino analogy.]

So for example - imagine it is 2007, there is something Alan Greenspan is calling a global savings glut, and all around the world investors have become persuaded that they must own US residential mortgage-backed securities ('RMBS').

In a world with no synthetic CDOs, would-be investors would have to bid for the existing supply of mortgages, driving up prices and encouraging every builder in America to build more houses and every mortgage originator in America to make new loans.  If and when that bubble pops, the result will be huge over-building in the housing market and a serious unemployment problem as people who thought they could make a career in construction or mortgage origination migrate to new professions.

But suppose we allow the creation of synthetic CDO's.  By itself, that does nothing.  But suppose there also exists a large group of well-financed investors who are prepared to put big money behind the notion that US residential mortgage-backed securities are over-priced and bound to fall in value.

Ah hah!  Now the RMBS bulls and bears can slug it out in a virtual world.  Investors who feel they must own these bonds can buy synthetic versions from bears who are happy to sell to them.  Actual prices may not change and neither real-world builders nor mortgage originators will get a price signal exhorting them to expand the nation's housing stock. 

Then, when the bubble bursts, all that happens is that large sums are transferred from the bulls to the bears (had the bubble not burst, the opposite would have occurred).  The wholesale layoffs in construction and the massive overbuilding of the housing stock don't occur.  And if no bank bet too much (If!), there would be no bailouts.

I exaggerate for effect, of course - in reality, the huge demand for RMBS would fuel both the creation of a synthetic market and expanded real-world construction.  However, to the extent that the bears were able to put their money to work to hold down prices, the magnitude of the overbuilding should have been mitigated.  Put another way, prices are more likely to float above their "correct" value when bears have no mechanism that lets them express their opinion with cash.

So, is the use of synthetic CDO's different from betting on the Yankees or the A's?  Well, the value of the price signal that the Yankees have a more powerful team than the A's is far from clear to me.  I'd hate to say it is useless, but I can't think of a use. 

But here is gambling question I am sure I can answer.  Consider a casino (as alluded to in the headline) where bettors are putting their money or the red or black of the roulette wheel.  I am confident that (assuming it is a fair, properly balanced wheel) the price signal conveys no socially useful information. 

(That said, I will indulge my inner pedant and add that if there is a flaw in the roulette wheel that prompts it to favor a particular color, there is an excellent chance that the price action will deliver that signal to the casino operator, as sharp bettors discover the flaw and put their money down on the winning side.)

So - housing market side-bets can provide a useful guide to real world behavior in a way that does not translate to baseball betting or casino wheel.

Mr. Sorkin presses on with two more dubious but related points.

The Securities and Exchange Commission, in its suit, says that Mr. Paulson asked Goldman to help create a synthetic C.D.O. of lousy mortgage loans that he selected so he could bet that they would go down and then profit on their fall.

That's what they say.  But part of Goldman's response is that hindsight is 20/20.  In 2007 Paulson was a guy with an opinion about housing bonds, just as Nouriel Roubini was a guy with an opinion about the financial system.  So what?  With the passage of time, their opinions were vindicated and others were not.  But who knew events would play that way in 2007?  Sophisticated investors who believed that RMBS represented good value also understood that other market participants disagreed and that the nature of a synthetic CDO required both bears and bulls in the deal. 

Paulson might look at a particular bond with a bearish slant and persuade himself that since it hadn't fallen much yet, it had a lot longer to drop.  A bullish investor might look at the same bond and convince himself that since it hadn't fallen much yet, it would lead the way in the next rally.  After the fact, they won't both be vindicated, but that doesn't mean that the bull should credit Paulson with prescience from the outset.

Put another way, after tonight's game between the Yankees and the Athletics, it will be perfectly obvious that one side bet correctly and the other side did not.  But if the A's go on to win (heaven forbid!), that will hardly prove that everyone who bet on the Yankees was an idiot.

One last gasp from Mr. Sorkin:

Try this mental exercise: Imagine if, a few years ago, an influential investor like Warren Buffett, bullish on real estate, had asked Goldman to develop a synthetic C.D.O. made up of undervalued mortgages.

Now, imagine if Goldman had found John Paulson to take the opposite side of the trade and, lo and behold, a year later Mr. Buffett turned out to be right and Mr. Paulson lost his shirt. Would you call that fraud? Would you be very upset?

Maybe not, but Mr. Paulson sure would be. And he might be inclined to sue over it, especially if he found out that his bet had been rigged against him from the start. Which brings us back to the financial legislation being debated in Washington.

First of all, Warren Buffet has been a legendary investor for decades, so his involvement in the deal would clearly be material.  Paulson was a legend in the making who is now famous for having called the housing turn; back in 2007, he was one more housing bear no one had heard of.

As to the notion that the bet "was rigged from the start", well, that is tricky.  Mr. Paulson (or Mr. Buffet in the hypothetical above) is not, for example, a Cisco insider structuring a short sale of Cisco to dupe some outsiders.  The bears have an opinion, but they have no material inside information unavailable to the bulls.

A synthetic CDO must, by its nature, have bulls and bears.  Saying to one of the bulls, "by the way, do you fully understand that someone is selling what you are buying?" would not have added to their understanding of the deal.  Telling them that the buyer was someone they had never heard of would not have expanded their useful data set either.  On the third hand, telling them that the other side was being taken by the legendary Warren Buffet would have given many people pause (at a minimum, an investor would pause long enough to figure out how to explain to his boss that he is smarter than Buffet.)

Well, that is the Goldman side.  I should add this - if the SEC can establish that Goldman made a deliberate effort to mislead the investors about Paulson's role, it would certainly suggest that Goldman thought there was something worth hiding.  But that evidence is a bit thin.

"REAL" AND "CORRECT" PRICES:  I used the quotes up above because of a common mis-apprehension of the nature of market prices.  The notion of efficient markets is not that prices are always right - it is that prices are wrong in ways that cannot reliably be predicted in advance.

Just for example, tonight, some people will study the rosters and starting pitchers and bet on the Yankees; others will do the same thing and bet on the A's.  Just now, the "right" price might show the Yankees with a 60% chance of winning; by about 4AM ET tomorrow, that price will be absurdly wrong, since the Yankees will have either won or lost.  But at this moment in time, it is a perfectly reasonable price and tomorrow morning it would be unfair to say the losing bettors were buffoons who were duped by the winners (We save "buffoons" for Red Sox fans).

Similarly, back in 2007 different people had theories about the likely developments in the US housing market.  Obviously, some were right and others wrong.  Paulson was right, and good for him.

Comments

[Army of Davids]

Why is the AFL-CIO rallying in support of the Dodd bill?

[nathan hale]

yep, just the folks, how many of the top players dealt subprime dreck around the world. I wonder what has been the value of Time WArner's in kind contribution. So hwo fervent a defense will Skaddens push Craig
to make of Goldman

[Charlie (Colorado)]

It's a point of view kinda thing. You might say that the opinions of GS are exactly that--opinions that are worth no more than anduril's opinions. Someone else might say: the FACT that an outfit like GS is scrambling to reposition itself in the mortgage market, the FACT that GS thinks the CDO market is about to go off a cliff, is information--grist for the mill. My opinion on that would have been information, too, but nobody would have paid for it, least of all myself. But I'm betting that people would have paid for the opinions that were being expressed internally at GS-- the FACT that such opinions were being expressed is definitely information.

Anduril, if those are "FACTS", then explain how it was that Goldman ended up long on these thing, and lost 6 times its fee.

[Charlie (Colorado)]

Sports analogy don't work for CDO(s). These are people who are betting on mortgages they don't have any money in.

Oh, don't be an ass. Do you think the only people betting on a sports line are part owners of the teams?

[matt]

daddy, those cheerleaders are from Northern India, that's all....

[Frau Dankbar]

Thanks ever so much, nathan, for clearing the site of the Daddy Obama=CIA agent foolishness. Yes, the connection was very much to the Red Bear via East Germany. Next up is the tale of Stanley Ann=CIA.

daddy, my sister-in-law in Germany reported that the news informed them about the racial taunts and hooliganism of the D.C. Tax Party. Their news comes directly from the NYT and BBC. She also reported that they had had absolutely no ashes from Iceland. She lives between Cologne and D'dorf.

[PaulV]

Refusal to answer Issa's questions will make it easy to keep 41 R Senators from giving in to media pressure. Will Dodd and Obama return the blood money from GS?

[peter]

Daddy __ might you be a Northwest guy?

[nathan hale]

I don't know how this meme could have
surfaced, Frau.actually I do misdirection,
she certainly had a beat sensibility that she
transmitted to her son, and was focused more directly by his experience in what could be
considered an American ally of sorts in Indonesia, and later sojourns to Pakistan

[Ignatz]

--Thanks ever so much, nathan, for clearing the site of the Daddy Obama=CIA agent foolishness.--

As far as I could tell Frau that was a luciferian idea; probably didn't have much in the way of legs.

One question. Why does this Goldman stuff seem to make so many people, whatever their viewpoint, so darn cranky?

[Ice Land]

O's dad was an informant like that guy he met at college who was a terrorist. Both misunderstood, truly serving America. O's got too much stuff like money, Harvard, Presidents and stuff. All that has to be arranged. Maybe Plame would check on that type of thing. Someone had to be there.

So, his mom, if it is, was really a Plame?

[Ignatz]

I rest my case.

[Ie Land]

So, Nathan, since your one of those misdirectors your not misdirecting people in the Stans about how Russians and foreigners are bad, especially right after a coup.

Luciferian?

[nathan hale]

Well you have one powerfully connected institution, with ties to officials mostly in one party, which seems to have been spared competition by having their rivals eliminated
Bear Stearns and Lehman, also under unusual circumstances, it seems to have been involved
in every borderline if not outright illegal
scheme of the decade, from subprime to oil speculation, and it not only survives but flourishes, rewarding it's protectors, FWIW

[Rick Ballard]

Goldman heads for the "Rogue Employee Exit"

I'm betting on the contemporaneous memoranda from ACA on their meeting with Fabulous Fab being the SEC trump card. The memoranda will probably be backed up by additional email and conversations with ABN Amro re reinsurance of the Fantasy Mortgage League CDS.

[Max Regor]

Here is a summary of the SEC case. It may be incorrect as to the interpretation of the SEC case. It may be wrong on the facts as alleged by the SEC. Let me try to paint this as clearly as I can. Goldman was the trying to be the honest broker between buyer and seller, though paid by the seller! I have not figured out how Goldman paid a 2 million dollar bonus to Mr. Fab on a transaction that lost Goldman 90 million less a 15 million dollar fee.

[Charlie (Colorado)]

I have not figured out how Goldman paid a 2 million dollar bonus to Mr. Fab on a transaction that lost Goldman 90 million less a 15 million dollar fee.

Wire transfer, probably.

[daddy]

No peter.

I'm too dangerous to carry passengers unless its Tom Hanks.

[peter]

I was a freighter Dad.

[Jerome J]

Only if the Dems can apply this to all businesses everything would be ok:

"Senate Bill Sets a Plan to Regulate Premiums
By ROBERT PEAR
Published: April 20, 2010

WASHINGTON — Fearing that health insurance premiums may shoot up in the next few years, Senate Democrats laid a foundation on Tuesday for federal regulation of rates, four weeks after President Obama signed a law intended to rein in soaring health costs."

NYT LUN

[Danube of Thought]

Off to Virginia for three days. Will be checking in with you people through the miracle of I-phone. Cheers.

[nathan hale]

What was it Reagan said, 'facts are stubborn things" in the LUN

[Jane]

Geez DoT - I wish you had made that trip last week! Have fun.

[glasater]

Markets Rebounding On Potentially Fatal Blow To The SEC's Case

If CNBC's report is true, that Goldman Sachs (GS) counterparty ACA was in fact informed of Paulson's intentions to go short, it could deal a potentially fatal blow to the entire case.

[anduril]

Obama contributors:

Look who's number two.

University of California $1,591,395
Goldman Sachs $994,795
Harvard University $854,747
Microsoft Corp $833,617

And look who's number 4!

Q. Where does Microsoft get all that money to throw at Obama?

A. Not from me!

[Captain Hate]

Fearing that health insurance premiums may shoot up in the next few years, Senate Democrats laid a foundation on Tuesday for federal regulation of rates, four weeks after President Obama signed a law intended to rein in soaring health costs

How is this any different from wage and price controls; at least half of it? That worked out well....

Also do the activities of European airlines re: flying with volcanic ash present in violation of existing rules, peg everybody's cynisism meter?

[Captain Hate]

Wow, Dana Milbank skewering Straight Outta Scranton:

It was a faith-based initiative for the American economy. But the vice president seemed weary as he recited this economic version of the Nicene Creed. He spoke for just 23 minutes, a mere clearing of the throat by Biden standards, and took no questions. He hewed closely to his teleprompter, sometimes reading the words without evident comprehension.

After listing various ingredients that a financial regulatory reform must include, Biden said: "The president and I will not support any reform that fails to address these fundamental problems." He then moved on to the next line in the speech, but he mistakenly read it as though he were listing the "fundamental problems" he had just mentioned: "Powerful. Political. Lobby. With cynical tactics and opponents." At this point, Biden must have realized he wasn't making sense, for he stopped and tried again: "Opponents of reform are not going to stop us from getting this right."

Yet Biden's leap of faith transcended his lackadaisical delivery as he enumerated his beliefs about the economy. "If the next expansion fails to lift the middle class," he said, "it will not be the expansion that the president and I believe this nation so badly needs."

[anduril]

Anduril, if those are "FACTS", then explain how it was that Goldman ended up long on these thing, and lost 6 times its fee.

Charlie, it's touching that you seem to think that I have all the answers to this case. Let me break it to you: I don't. I'm just trying to understand it. However...

Here's an article from yesterday that may be linked elsewhere. I'll link it here, since it goes into The Importance of Fabrice Tourre.

There's lots to interest the reader in this article, so let's start with the basics:

The reasons are two-fold why only Mr. Tourre has been accused of securities fraud at this point. First, he is yet another person haunted by his e-mail. The S.E.C. alleges that Mr. Tourre now famously wrote on Jan. 23, 2007:

“More and more leverage in the system, The whole building is about to collapse anytime now … Only potential survivor, the fabulous Fab[rice Tourre] … standing in the middle of all these complex, highly leveraged, exotic trades he created without necessarily understanding all of the implications of those monstruosities!!!”

These words, if true, are gold in the hands of a lawyer before a jury. Moreover, they establish an important element necessary to establish a securities fraud claim: intent. No doubt many people were working on this transaction, but intent to deceive must be proven by the government. Mr. Tourre is the easy fish to fry.

Under the doctrine of respondeat superior, Goldman is responsible for Mr. Tourre’s actions — a finding of fraud by Mr. Tourre establishes Goldman’s liability as well. It is clear that he was working to benefit Goldman, so the firm cannot distance itself from him by labeling him a rogue in the hope of avoiding responsibility for his actions.

So despite the involvement of others more senior in the Goldman hierarchy, Mr. Tourre is named in the S.E.C. suit because he provides the basis to establish the necessary intent and evidence to support it. The fact that no other person was included shows that this case will be a battle in part over of what Mr. Tourre knew and when did he know it. It also highlights the uphill battle that the S.E.C. will have in making its case by using a salesman as the linchpin of its case.

Now, re your specific question:

So, why award a bonus to Mr. Tourre and promote him to London where he is now? Even Wall Street is not so blind to results that it would base a bonus on a loss of this magnitude.

This is where Mr. Tourre may prove to have his most damaging effect on Goldman.

...

In other words, Mr. Tourre’s compensation may have been on a countervailing trade on Abacus or the mortgage market itself that ultimately profited Goldman. Given Goldman’s penchant for hedging, it is doubtful that the firm would have kept a naked $90 million bet that the mortgage market would go up at the same time they were marking down their mortgage-backed securities portfolio.

This is obviously speculation, but Mr. Tourre is a link here who may provide the S.E.C. with a compelling narrative of Goldman’s actions during the time the mortgage market was collapsing. The narrative is that Goldman knew about, and was even betting on, a decline in the mortgage market while simultaneously selling securities to its clients going the other way using information gathered by Mr. Tourre and others.

The ellipsis represents FIVE paragraphs of details.

And here's the authors' summing up:

This may not constitute fraud under the federal securities laws; in fact, this is part of what investment banks do — mediate information and trading and profit on it. But it may damage Goldman’s reputation and may play out badly for the firm in other litigation. No jury is likely to take a kindly view on this action. Although few, if any, of these cases are likely to see a jury, even the threat of this can be quite compelling to Goldman.

The fabulous Mr. Tourre is likely to play an important role not just in this case but in the increasingly important court of opinion about Goldman and any other investigations. Watch him.

[anduril]

Milbank has been writing some pretty acerbic stuff re this Admin lately. Obviously he's pissed at his lack of access. Still, he's got some great lines in there.

[Dave (in MA)]

(We save "buffoons" for Red Sox fans).

Now that was uncalled for.

[anduril]

Steven Malanga gives a succinct presentation of the Goldman defense: The Goldman Deal: Adults Living Dangerously. However, he also explains how this will play into demands for reform, simply because this adult play didn't just harm consenting adults:

In the end, one of the real lessons of investments like Abacus which we're in danger of missing is not that big players lacked important information, but rather that they could get into these deals without adequate capital backing their bets. As a result, when the market tanked some of these contracts not only exploded, but they brought the financial system down with it. That's one reason why financial reform in Washington needs to emphasize that even private contracts among big players, especially those which magnify the risk to the system, need to be backed by sufficient capital in the same way that less sophisticated transactions, like buying stocks with borrowed money, have capital requirements.

There is also a question about whether less sophisticated investors should be banned from buying into these volatile deals. Although there is a real problem with identifying who is "sophisticated" enough in such instances, there is one class of investor I know should be protected from themselves: states and municipalities who bet big-time with taxpayer money on complex investments like swaps.

In the last decade politicians eager to insulate their variable-rate municipal bonds from interest-rate swings entered into swaps contracts with Wall Street firms that have exploded since the economy soured. In Pennsylvania alone more than 100 school districts cut swaps deals in which school boards bet that rates would rise. One school district alone, in Bethlehem, has lost at least $10 million, and the state legislature is currently considering legislation that would ban municipalities from entering into such contracts.

As the auditor general of Pennsylvania found out when investigating his state's swap mess, politicians and school board members who authorized these deals couldn't adequately describe them to him and clearly didn't understand them. That's a case of children being allowed to play in an adult investment sandbox. It's not surprising that trouble ensued. But that's also not what happened with Goldman and the Abacus investors.

Malanga covers a lot of ground. The whole article is well worth a read.

[Rick Ballard]

I've read this post a couple of times but I'm missing the link to the repository of trading information regarding CDOs and CDS that was supposed to "aid in the process of price discovery". If I could find that repository I might be able to stop thinking about the bubble as a fee driven circle jerk that shoveled cash to unqualified buyers in order to generate MBS "deals" that flat contravened basic underwriting standards regarding credit worthiness due to the purchase of spurious AAA ratings bought from three monkey CRA outfits.

Surely the sole repository couldn't have been the six major investment banks which constituted the theoretical circle jerk and the insurance companies gulled by the CRAs rented reputations. I just can't seem to find it.

[Captain Hate]

Milbank has been writing some pretty acerbic stuff re this Admin lately. Obviously he's pissed at his lack of access. Still, he's got some great lines in there.

The question should be why is he the only one pissed at his lack of access and reporting accordingly? My answer to that is that journalists are the largest collection of lazy a-holes in any profession. Their complete lack of self-awareness was revealed last year when Odummy pointed out at the dinner where Wanda Sykes made a fool of herself that all of them had voted for him and there wasn't the slightest evidence of any discomfort at him pointing that out to a purportedly objective source of information.

So yes, Milbank gets some well-placed zingers in on the lowest hanging target in a field of stunted fruit trees. Where's the next crack in the ediface?

[anduril]

Breaking fatal flaw in SEC's case? ACA WAS Informed Of Paulson's Intentions According To Pellegrini, And The SEC Knows This. That blog contains an important link to another item about what IKB was up to. Obviously this still leaves questions about social utility wide open, as in balancing potential costs against supposed benefits.

[Extraneus]

Where can I buy a CDS on the federal government?

[anduril]

Perhaps someone can correct me if I've got this wrong, or confirm that I've got it right.

My impression is that the people who bought Abacus did so in the full knowledge that the underlying mortgages may not have been the greatest, but in the assumption that a rising tide (the housing market, so they thought) lifts all boats and that it would lift Abacus, too. Paulson's bet was that the tide wasn't rising--it was actually ebbing. Goldman's defense is that this transaction was structured basically to be a pure bet on the housing market and Paulson won (Goldman may have won, too).

[Old Lurker]

Army of Davids: "Why is the AFL-CIO rallying in support of the Dodd bill?"

Because the damn thing grants the President (via a committee) the right to take over any financial or nonfinancial company deemed important enough to the economy, to erase the creditor and shareholder rights (giving them to unions, no doubt), bypass bankruptcy courts and other safeguards, install new boards and management and all those other things desired by statists. I suppose Exxon is vital, GM & Chrysler (sorry already got them), Boeing, Lockheed, General Dynamics, US Steel, Alcoa, maybe a bunch of banks, certainly some airlines, maybe FedEx & UPS, would be nice to have some big construction firms. Oh and some drug companies and while we're at it, farms are real important. Hell if they owned McDonalds, they could manage that pesky salt and transfat stuff better. If they owned those darn coal companies...

Where is the outrage?

[jimmyk]

Ex, you may have been joking, but they exist, as in the LUNed article.

The problem is that "default" does not encompass inflation, which is the more likely way the government will eventually reduce the value of the debt. There's no need to default when you can just reduce the value of the debt by printing money.

[Old Lurker]

LUN is the Lindsey memo to Boehner posted by Ignatz last night.

[Clarice]

Have a great time DoT.

[Ignatz]

I'm not a huge Jonah Goldberg fan but I struggled unsuccessfully to find anything I disagreed with in this column about Bush and Tea Parties.

[Rick Ballard]

Geez, I could have just linked the NYT. The article totally neglects the impact of the investment banker's suicide vest security offered by being able to purchase CDS from a top rated and extraordinarily qualified firm such as AIG or ABN AMBRO but appears reasonably accurate in what it does describe.

NOTE: The article makes it clear that Citi/JPM each did four times as much business in the Fantasy Mortgage League as GS.

[Steve Carr]

Tom: Regarding your baseball analogy, would you let the Yankees select the A's lineup then bet money on the outcome? If i recall correctly, this is part of the reason Pete Rose got into trouble betting on baseball.

Second, as for "price signals" in the casinos, well, what do you think parimutuel betting is? Go look at "price signal" on Intrade, etc.

The real issue isn't that Goldman operated as the house in putting two gamblers together. The issue is whether Goldman let one of the gamblers (Paulson) stack the deck without telling the other gambler.

[Extraneus]

Wait'l the long investors find out that I'm considering those, jimmyk.

[anduril]

The more we learn the harder it is to see any social utility in all this--which means it's harder than ever to justify taxpayer bailouts. That this is what America has become--after all, the financial sector is a huge slice of our GDP--appalls me. And of course GS and other big players give money to both parties.

Steve Carr, it seems to me that gambling in a casino has more transparency than what was going on on Wall St.

[Ranger]

Because the damn thing grants the President (via a committee) the right to take over any financial or nonfinancial company deemed important enough to the economy, to erase the creditor and shareholder rights (giving them to unions, no doubt), bypass bankruptcy courts and other safeguards, install new boards and management and all those other things desired by statists.

Hmmmm... You would think that, considering what bad financial situations currently exist for the NYT and the WaPo, they might be a little concerned about what a future president might do.

[rse]

OL-

Plus Big Gov is saying that the identity of firms being bailed out can now be kept secret.

Chrysler was outrageous but at least motivated people could determine the terms and who was being bailed out.

No more.

[anduril]

Because the damn thing grants the President (via a committee) the right to take over any financial or nonfinancial company deemed important enough to the economy, to erase the creditor and shareholder rights (giving them to unions, no doubt), bypass bankruptcy courts and other safeguards, install new boards and management and all those other things desired by statists.

That appalls me, too.

[Clarice]

Ranger, the last guy who pulled off a stunt like this ended up near Lake Como hanging upside down from a lamp post alongside his girlfriend.

[jimmyk]

would you let the Yankees select the A's lineup then bet money on the outcome?

Poor analogy. Paulson didn't have any power to affect the outcome of the underlying mortgages. Or, to put it another way, if I know who is in the lineup, does it matter who selected it? Only if I think the selector had inside information, which is not alleged here.

[Jane]

Shameless plug (with apologies to Patrick Sullivan) check out the latest at You too - "The President Courts Scott Brown" and don't forget to post a message so I can approve you for all times.

[Old Lurker]

RSE, I will go to my grave believing the plain fact that the global bond market did not "rebel and go on strike" when the GM & Chrysler stunts were pulled invites all of the above and more. Having gotten away with those, the bond vigilantes were found to be toothless so the statists can now do what statists do.

Bill Clinton, who marveled at how he found "he was working for the bond market", must be wondering how this guy gets all the luck.

[Charlie (Colorado)]

The more we learn the harder it is to see any social utility in all this

Anduril, I think this whole "social utility" issue is a red herring: the "social utility" is that it's their goddamn money.

The issue is that we discovered having that big a bet without having it covered was a bad thing, a lesson bookies normally handle by welshing and leaving town.

[Old Lurker]

Ranger "NYT and the WaPo, they might be a little concerned".

A dirty joke comes to mind regarding some things that are just too distasteful to contemplate.

Seriously, Rush's tag of Government Run Media does now bear watching, doesn't it.

[Rob Crawford]

Plus Big Gov is saying that the identity of firms being bailed out can now be kept secret.

?!

The wannabe tyrants don't aim low, do they?

[Ranger]

Yes, I am sure the NYT, CNN, and the WaPo all think this is great. Obama could bail them out and keep that fact secret from the public. Crony capitalism indeed.

[Rob Crawford]

LUN for the Big Gov story about keeping the bailed-out firms secret:

According to the Dodd bill, the eligibility for this program will be subject to approval from a “Financial Stability Oversight Council.” Once the Fed grants a loan to a private company, they may make this loan secret from the public if, the “Board determines that such disclosure likely would reduce the effectiveness of the program.” They still would have to provide justification to the committees of jurisdiction in the House and Senate, yet they would never have to disclose the name of the company receiving the loan.

That's right, folks, an unelected Star Chamber capable of using your money to secretly seize private assets!

[Ignatz]

--would you let the Yankees select the A's lineup then bet money on the outcome?--

It is not even disputed that ACA, the primary long investor in Abacus, in fact approved all of the securities in the deal, correct?
This timeline is from the complaint itself via Kudlow:

ACA/PAULSON PORTFOLIO

January 9, 2007
Goldman sends email to ACA, titled “Paulson Portfolio,” containing list of 123 RMBS selected by Paulson for the Abacus 2007-AC1 reference portfolio

January 22, 2007
ACA sends email to Fabrice Tourre & others at Goldman containing list of 86 RMBS, including 55 of the 123 selected by Paulson; 68 were rejected. This is very important. Goldman maintains that ACA was in fact the portfolio selector. ACA rejected 68 of Paulson’s recommendations. They accepted 55.

February 2, 2007
After meetings with Paulson & Tourre, ACA emails Paulson, Tourre & others at Goldman a list of 82 RMBS on which Paulson & ACA concurred, plus 21 others. So at this point, they are in agreement on 82, but they insert 21 others.

February 5, 2007
Paulson sends email to ACA & Tourre deleting 8 of the RMBS recommended by ACA and leaves the rest alone.

February 26, 2007
After further discussion, Paulson & ACA agree on a reference portfolio of 90 RMBS for Abacus 2007-AC1

In this case the Yankees suggested the A's lineup. The A's reordered it to their liking, they both and agreed and the ump said "play ball".
And if ">http://www.cnbc.com/id/36685026"> Pellegrini is telling the truth then the case against GS, at least as it applies to ACA, would appear hard to discern.

[Ignatz]

Pellegrini

[anduril]

The issue is that we discovered having that big a bet without having it covered was a bad thing, a lesson bookies normally handle by welshing and leaving town.

That's Malanga's point. My problem is that if this stuff is going on abuses are (humanly speaking) inevitable, and we've seen what the ramifications for the rest of us can be--disastrous. Them leaving Dodge just isn't good enough. We need to try to prevent the abuses and the attendant disasters--without enabling new and creative abuses. That's the tricky part.

That said, I hasten to add that I don't see financial reform alone as some sort of economic panacea.

[anduril]

SEC's position re Schwartz at ACA could be that she was just stupid. Nor will the SEC argue that the selection process was simple--rather, they will suggest to the jury that non-simple means clever and devious. GS does not want to be in front of a jury.

[hit and run]

I've been out of pocket lately,and while dutifully acknowledging the objection to the overly social nature of JOM,I simply cannot pass on my responsibility to apologize for missing this on Saturday...

¡¡¡FELIZ CUMPLEAÑOS A MAMÁ DE NARCISO!!!

[anduril]

Anduril, I think this whole "social utility" issue is a red herring: the "social utility" is that it's their goddamn money.

Here's the reason "social utility" isn't a red herring: the banks, and pension funds and municipalities, etc. who got involved in these things were not playing with "their goddamn money." It was other people's money. Cf. Malanga as well as Roger Martin, the dean of the U. Toronto Business School whom I cited on this thread yesterday. Malanga is all for covering bets, IF it's your own money you're betting. If it's not your own money then he thinks you shouldn't be betting it--at all. Martin explains the mentality of the dupes who got involved in this, and why GS and other outfits were looking for exactly those kinds of people.

[jimmyk]

Are you suggesting these "dupes" didn't know what the banks were going to do with their money, they thought it would get put in the vault and left there? Or get invested in T-bills? No, these so-called dupes wanted the banks to do their gambling for them.

The main objection I have to the whole thing is that these same people acted shocked asked to get bailed out with the taxpayers' money when their gambles didn't pay off.

[Patrick R. Sullivan]

Am I too big to say, 'I told you so'?

The government has testimony from a Paulson & Co. official that could contradict its own claims against Goldman Sachs, CNBC has learned.

Paolo Pellegrini told the government that he informed ACA Managementthat Paulson intended to bet against, or short, a portfolio of mortgages ACA was assembling.

Don't short your Big Bippy's, folks.

[Patrick R. Sullivan]

I just can't seem to find it.

What, your way home at night without a guide, Rick?

[jimmyk]

I told you so.

I don't recall you saying that ACA was told about Paulson's short interest. Your argument, which I largely agreed with, was that not telling ACA didn't amount to fraud. If this story is true, a perhaps unfortunate side effect is that this issue won't get settled.

The scandal will be if the SEC knew this and went ahead anyway.

[glasater]

Plus, the "trash talk" is out there with no coherent refutation by the MSM.

[Patrick R. Sullivan]

Your memory isn't good, jimmyk. Here I am responding to our host back on April 19th:

But Goldman managed to keep some relevant information from some buyers

Almost certainly untrue. Did they buy up all the copies of the March 7, 2007 Business Week identifying Paulsen as bearish on MBS? That article appeared before the ABACUS deal closed in late April.

My position all along has been that the SEC claim is unbelievable on its face. Paulson was a know bear on MBS, and all ACA would have had to was ask him what his interest was if they were in any doubt--somebody had to be the bear and it wasn't ACA themselves nor their longtime client IKB.

[Old Lurker]

Jimmy: "The scandal will be if the SEC knew this and went ahead anyway."

That's perfectly OK. The agenda was always to get Dodd's Bill approved. Never did have anything to do with a crime.

[Steve Carr]

Thanks, Ignatz. It doesn't look like there's much to the SEC suit does it?

It's starting to look more like a stalking horse for the Dodd plan doesn't it?

[Melissa T]

Oh, Goldman cheerleader, Patrick Sullivan, is back with his ramblings. That ACA/Paulson email is only a snippet. Wait until you see the whole picture (as it comes out over the next couple of years). Goldman is going down, Patty.

[Ignatz]

--Oh, Goldman cheerleader, Patrick Sullivan, is back with his ramblings.--

Well, his ramblings, while frequently intemperate, have been pretty accurate so far regarding this Paulson/GS/ACA deal.

As a free marketeer who never liked TARP, I believe GS should probably be pushing up daisies at this point, but because of market discipline over bad decisions, not over what looks more and more like a dog and pony show.

[jimmyk]

Your memory isn't good, jimmyk.

Sure it is. You never claimed that Goldman or Paulson informed ACA, you simply said that ACA should have known anyway from reading Business Week (or whatever). The news here is that Pellegrini actually told ACA.

[Greg Q]

Charlie (Colorado):

Greg O, in every stock transaction, the buyer is betting they're smarter than the seller, or alternatively that the person on the other side is the doofus.

Wrong. I may be selling stock because I want / need the money. I may have bought a stock with a specific price increase goal, and then sell it when I've met that goal, so that now I can go after different stocks. etc.

Steve Sturm:
No, people thought Paulson was wrong, that doesn't mean they thought he was a complete idiot incapable of making good decisions.

Assume you think the stock market is going to go up. Would you buy Long into a stock fund being put together by someone who was going to Short the fund? Conversly, if you thought the market was going to go down, would you Short a fund put together by a competent manager who had invested in the fund?

Of course not. In either case, it's a much better bet for you to invest in a neutrally managed fund.

Well, I would bet you that a randomly selected pile of mortgage securities would do better than the pile that Paulson specifically picked as ones he thought would go down. I would also bet you that GS would have had a fairly hard time getting people to invest in the fund if they'd mentioned in the Pitch Book that all the bonds being bought by the fund were from a selection offered by the guy taking the Short position on the fund.

Which is why GS didn't mention that.

Which is why they should get nailed for leaving that material information out.