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GS criminal probe

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geojanes
Dignitary

Fri Apr 30, 2010 8:57 am

http://finance.yahoo.com/news/.....0&.v=1

In 1999 the idea that Arthur Andersen could go bust was so remote that it would have been considered crazy talk. They were the top player in their business, the best of the best. A criminal probe started its downfall into nothingness. This probe of GS could possibly have very serious consequences. (Not to mention long-term upside potential for their competitors). It's unlikely, but if they were forced out of existence because of criminal activity, this is how it would start.

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Ozymandias
Emissary

Fri Apr 30, 2010 7:31 pm

I'm not precisely sure they did anything illegal, though. Now, I haven't followed it that closely, I'm not up to date on all the SEC regulations, and I don't know the specifics of what GS did, but from what I see it is just an unethical business ploy, rather than an illegal one.

Goldman, as well as any other investment bank, has a fiduciary duty to make sure that the people who buy their securities are qualified to understand what it is their buying. These categories are pretty broad, and mean that mom-and-pop investors really aren't allowed to buy them. So its not like they took advantage of naive investors; financial experts and people with wide experience in securities trading bought these goods.

To my mind the question is, is Goldman, and by extension any bank, required to only sell products they think are good? If there is a market for a poor product, why should they be barred from creating that product? Its a bet, like any investment, and I don't see why Goldman shouldn't be allowed to bet against their own product. They don't have access to information their investors don't. If one chooses to sell short, and the others want to buy, whats the huge deal? I take umbrage with the notion that an investor should be shielded from all but the tiniest risks; financial investment isn't an everybody-wins game, and investors need to be cognizant of that. So much of the blame for the financial meltdown and all that comes along with it is placed on "greedy" banks; the truth is, investment banks are only creating products for which there is a market, and I despise the lack of accountability on the part of the investor class, and their readiness to point fingers to shield their own lack of responsibility, foresight, and fiduciary restraint.

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posts: 788 | joined: 07 Jan 2005 | medals: 1

geojanes
Dignitary

Sat May 01, 2010 9:46 am

Yeah, I think I agree with you. It's not at all clear they did anything criminal. But: 1) there is a criminal investigation that started this week, and 2) Arthur Andersen was convicted of obstruction of justice, nothing else. AA destroyed documents that were important to an investigation. So even if they did nothing wrong legally, if GS is worried by unethical or embarrassing emails or actions coming to light and they destroy anything, they're done. And they might want to because they're going to have to worry about their reputation. Regardless of legality, whatever this investigation uncovers will not be good for them.

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Ozymandias
Emissary

Sat May 01, 2010 8:56 pm

geojanes wrote:

Regardless of legality, whatever this investigation uncovers will not be good for them.

And thats just the problem. Now, on the whole I respect the SEC and the job they do, and am of the opinion they rarely bring frivolous lawsuits. However, I would not be surprised that the anger at investment banks over obvious recent failures of the system has pressured them into pursuing a case that probably isn't justified.

If that happens to be the case, then the whole thing is an outrage. An excellent financial institution will be mowed down because public anger at nothing in particular (read: their own gullibility and greed) forces and groundless investigation that results in serious, serious harm to the reputation and accountability of a leading bank.

I have no issue if one objects to what GS did. Thats a matter of opinion, not law. Pursuing a frivolous lawsuit (if it is indeed groundless, as I said, I'm not fully up to date on these things) is a completely different issue.

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rickyp
Statesman

Wed May 05, 2010 1:41 pm

Quote:

Its a bet, like any investment, and I don't see why Goldman shouldn't be allowed to bet against their own product. They don't have access to information their investors don't. If one chooses to sell short, and the others want to buy, whats the huge deal?

There's probably more been learnt in the investigation about whether or not this is a truly accurate description.... It may also be that when Goldman sold short, then that fact should have been part of the revelation regarding the investment.
Would you buy a product that was being advertised as worth a certain value, if you knew that the entity selling it to you was fairly certain it was in no way worth what they were claiming? Certain enough to "bet against it",
That this major piece of "product knowledge" wasn't revealed may constitute failure to disclose fully. Which I think is fraud.

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posts: 4768 | location: Oakville, Ontario, Canada | joined: 14 Aug 2000

Ozymandias
Emissary

Fri May 07, 2010 2:37 pm

rickyp - I personally wouldn't, but people do all the time. Goldman can do what they like with their money. What is buying a stock in a non-IPO situation but betting on something another investor is better against (by selling it)? Where Goldman chooses to invest its money is irrelevant to the quality of the product; as I said, only people with knowledge of how these securities work are even allowed to buy the damn things, and if they are not capable of intelligently assessing the quality of the product they want to purchase, they should be removed from their jobs.

Its the same way there can be two opinions about anything at all in life. Goldman looked at this product and saw A, others looked and saw B. Its the same set of facts, its just how you choose to interpret it. And Goldman shouldn't be forced into giving away the techniques it uses to analyze potential investments, which is likely a lucrative trade secret (I mean people get paid many millions to do it), just because a couple of idiots with access to cash and an easy scapegoat gets upset.

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rickyp
Statesman

Sat May 08, 2010 10:34 am

Quote:

Its the same set of facts,

Isn't this the essential dispute? That Goldman had a different "set of facts".

The very nature of the CSD's was opaque. Having constructed them GS had a far better idea of their fragile underpinnings then those who were offered the instruments....
I suppose time will tell...

posts: 4768 | location: Oakville, Ontario, Canada | joined: 14 Aug 2000

Ozymandias
Emissary

Sat May 08, 2010 2:20 pm

rickyp wrote:

Quote:

Its the same set of facts,

Yes but my point is that they aren't shoving anything down anyone's throats. The facts aside, Goldman exists to provide an international marketplace with products that said marketplace demands. Goldman can't force investors to buy, and their entire viability is dependent upon coming up with creative products to sell to the market. Nothing says they have to be good. Junk bonds are traded. And the whole "$@#!" part is built right in to the word! Same with "subprime mortgages." It is not the responsibility of the investment bank to shield its clients from all sorts of risks. Quite the opposite, their purpose is to provide clients with a spectrum of risk, and let the individual entity decide what to buy.

The point of all this being, Goldman should not be responsible for the choices its clients make or the products they demand. I'm not sure this is a case where the vendor should be liable for any mishaps of the customer. If they lie or misdirect about the facts surrounding the security, different story. But if the client hears whats up, wants the product anyways, why shouldn't Goldman or any other bank decide "well now, we don't think as highly of this product as Investor X did, lets bet against it."

Their specialized knowledge shouldn't automatically make them the bad guy.

posts: 788 | joined: 07 Jan 2005 | medals: 1

geojanes
Dignitary

Tue May 11, 2010 5:03 am

I had coffee this morning with someone who used to manage risk at one of the big banks and she had an interesting perspective on the transaction in question. The long side of this trade was ABN Amro, a bank that was in the process of being acquired. The traders at Amro got their bonus based upon the spread, the larger the spread, the larger their bonus. The traders knew that their bonus would vest immediately once they were acquired, and once they were acquired they would probably all lose their jobs. So they had absolutely zero interest in the long-term consequences of this trade. They were interested in getting the highest spread possible because it enriched them personally at the expense of the bank that acquired their bank. The trade blew up, of course, but it was after they were acquired and after the traders vested their bonus.

Goldman just found a buyer who actually wanted this piece of crap. They didn’t incent the buyer to make a stupid decision. The people who set up the compensation model at ABN Amro did that just fine.

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