Classic Goldman Sachs Alchemy

Did Goldman mislead Congress about its ‘Big Short?’ The answer, according to PPWIJ* Jesse Eisinger, is an emphatic yes.

Eisinger cuts right to the heart of the matter regarding Goldman Sachs possible perjury regarding their “big short.” It was not the actual size of the short, but it was a) How GS got short; and 2) Whether Goldman was saying one thing in disclosures to clients and doing another.

Here’s Jesse:

“To establish many of its short positions, the Senate report says, Goldman created new securities, backed them with its good name, and then strung together misleading statements to its customers about what it was actually doing. By shorting the way it did, the bank perverted the market instead of correcting it.

Take Hudson Mezzanine, a $2 billion collateralized debt obligation created by Goldman in 2006. In marketing material, the firm wrote that “Goldman Sachs has aligned incentives with the Hudson program.”

I suppose that was technically true: Goldman had made a small investment in the C.D.O. and therefore had an aligned incentive with the other investors. But the material failed to mention the firm’s much larger bet against the C.D.O. — a huge adverse incentive to its customers’ interests.”

That appears bad enough; but Goldman seems to have misled its clients as to how these CDO’s were constructed. In a classic case Goldman Sachs alchemy, they scraped the shit off their own boots, i.e., junk assets on their own books they could not otherwise find a buyers for. That is not what they had told buyers, however:

“Goldman told investors that the Hudson assets had been “sourced from the Street,” which most investors would understand to mean that Goldman had purchased the assets from other broker-dealers. In fact, all the assets had come from Goldman’s own balance sheet, the Senate report found.”

If you are going to screw your clients, well, thats bad enough. It may not be illegal, its merely sleazy, Vampire Squid-like behavior. But to get this bad behavior to rise to a crime, you need to do a little more. You need to lie to Congress about it:

“In his April 2010 testimony to the Senate, Goldman’s chief executive, Lloyd C. Blankfein, argued that Goldman was merely making a market in these securities and derivatives, matching willing and sophisticated buyers and sellers. But Goldman was acting like an underwriter, not a market maker.

As the underwriter, Goldman threw its marketing muscle behind Hudson Mezzanine and other C.D.O.’s. When the bank’s salespeople ran into trouble selling the securities, they begged for help from the executives who created them. One requested material to give to clients about “how great” the sector was. One needed the aid to get a client to invest, to be “THERE AND IN SIZE,” according to e-mails cited in the report.”

Goldie can dispute the Permanent Subcommittee on Investigations report on the financial crisis all it wants; The report is compelling and the data shows Goldman Sachs had a huge hedge against the housing market versus their own underwriting.

Whether this amounts to a Big Short or not is almost beside the point: You cannot say one thing to clients and then do the exact opposite in your own book.

I previously suggested this may not be an ideal case to settle. In light of the most recent revelations, and the ongoing overhang that is starting to impact recruiting, retention, and other factors. The stock has been one of the worst performing issues int he financial sector.

Maybe its time for GS to face this head on. Thus, I will give advice to Goldman Sachs that 1) might save them $100s of millions of dollars; b) be completely ignored.

That advice? Sit down with Senate and DoJ leaders, put together new procedures, write another big fat check, and make this go away . . .


10 Things You Don’t Know (or were misinformed) About the GS Case (April 23rd, 2010)

Its the Law, Bitches! (July 19th, 2010)

Contest: Ideas for Goldman Sachs Ad Campaign (September 29th, 2010) 

Misdirection in Goldman Sachs’s Housing Short
New York Times DealBook, June 15, 2011, 3:01 pm


* Pulitzer Prize Winning Investigative Journalist

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