Goldman Bundled Bad Debt, Bet Against It and Won

[the1]

<i>All that remains to be seen is whether the SEC and the FBI are “God’s workers”, or whether they see their job in simple “real life” terms as protecting ordinary Americans as well as foreigners who invest in America from those who claim to speak for God.</i>

The SEC will do nothing about this because GS has already infiltrated the SEC. The FED and SEC act to serve the banking system much the way the FDA acts to serve the pharmaceutical industry. These Government Regulatory bodies become occupied by executives from the firms they are in charge of policing. With that kind of conflict it is impossible for these agencies to serve in the way they were designed to serve.

 

[jem]

Quote from sprstpd:

I'm not disputing those facts. But the responsibility also falls on the shoulders of the people who bought these contracts from Goldman Sachs to do their own due diligence. And Goldman was not the only entity that struck deals with the ratings agencies. If anything, the ratings agencies are more harmful than good and should be terminated immediately.

Wall street bond salesman and investor buyers are not the typical relationship. If if you think these institutions are well represented in these transactions, then perhaps Congress is out there protecting their constituents interests.

How many rounds of golf and front row tickets to concerts does it take to compromise the honest people on the buy side for the larger institution.

How much more is involved for the corrupt.

The AAA rating gave them the cover they needed to screw their principle.

 

[Ghost of Cutten]

ALL debt issuers have to pay ratings agencies to get a rating. The issuer doesn't "buy" a rating of their choosing (bribery), they purchase a rating that S&P then assigns.

The proper analogy is this:

You own a car, you can't be 100% sure but you think it's a lemon. You want to get rid of it. You take it to a car inspector and find, to your surprise, that they are willing to rate it as a good car. Not believing your luck, you then go and advertise it for sale, pointing out that it got inspected and rated as a good car. Some idiot buys is without checking under the bonnet, you stay quiet and pocket the cash.

Did you commit fraud? No. Did you lie about anything? No. Were you entirely open and honest with the buyer about the suspect flaws? No. Is it illegal? No - caveat emptor. Is it ethically questionable? Yes - it's not how you would want to be treated if you were the buyer. Is it clearly wrong? IMO it's unclear, it depends on your personal opinion on transactions and morals of disclosure. I personally wouldn't do that. If I was the victim of that, I would be annoyed but would say caveat emptor and mostly blame myself for being careless. I don't think a seller has a moral obligation to tell me everything about an item for sale, *unless* they advertise it as without problems. I would always ask "do you know of any problems with the car?". If they say "no problems with it mate" and there are problems, they just committed fraud. But I don't think they have to pre-emptively warn me if I don't ask.

However, if the customer is *also your client* then I would say it's illegal and clearly unethical. If you have a client then you have a duty of care to them, to at least warn them of the risks. If Goldman has said "look, these are AAA but there are some risks with them if housing turns down in a big way" but the buyers were keen to buy them anyway, then that's fine. If Goldman knew those risks but kept them secret whilst persuading the customers to buy, IMO that is wrong and should be illegal if it isn't already.

 

[MarketMasher]

Quote from Ghost of Cutten:

ALL debt issuers have to pay ratings agencies to get a rating. The issuer doesn't "buy" a rating of their choosing (bribery), they purchase a rating that S&P then assigns.

The proper analogy is this:

You own a car, you can't be 100% sure but you think it's a lemon. You want to get rid of it. You take it to a car inspector and find, to your surprise, that they are willing to rate it as a good car. Not believing your luck, ...

Well, therein lies the tale I guess. But the analogy isn't quite right because you are not selling one car - you are selling boatloads of them.

Ratings-shopping was brought up before. Scratch my back with a good rating and I'll scratch yours with more business. CNBC took it's report title "House of Cards" from an internal ratings agency e-mail where someone said "Let's hope we're wealthy and retired by the time this house of cards falls."

Now, ratings agency employees have never been described as "the best and brightest" in the press as far as I've seen, and somehow they could smell something was wrong as the wording of that e-mail stated. What about the firms where the best and brightest were?

Lemonade?

 

[dtrader98]

No one seems to have been around long enough to know that they (GS and rating agencies) had a practically identical meltdown with currency derivatives before the Asian contagion hit in late 90s. Known as the thai baht fiasco, it is described in detail in Frank Partnoy's 'FIASCO'.

And although it was made crystal clear then, it has been repeated, and will continue to repeat, over and over and over. That's the way things work around wall street.

Until people wake up and demand that these ratings agencies be held to some standard (by legal means with repercussions), they will continue to peddle garbage at the request of the highest bidder. Regardless of the type of apologetic excuses posters make on behalf of GS, there is no excuse for the agencies not to look under the hood and properly assess risk; in theory, that is what they are paid for.

It's akin to a car inspector getting paid to give hundreds of thousands of salvaged vehicles a bill of health (think post Katrina), then passing each with flying colors and putting them on showroom floors as perfectly operating vehicles.

 

[trendlover]

Quote from dtrader98:


Until people wake up and demand that these ratings agencies be held to some standard (by legal means with repercussions), they will continue to peddle garbage at the request of the highest bidder. Regardless of the type of apologetic excuses posters make on behalf of GS, there is no excuse for the agencies not to look under the hood and properly assess risk; in theory, that is what they are paid for.
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Billions of dollars worth of mortgage-backed securities were sold to investors on the premise that the securities were safe under most market conditions. "It seems to me that we had blinders on and never questioned the information we were given," an unidentified Moody's employee wrote as part of a survey after a September 2007 town-hall meeting. "Combined, these errors make us look either incompetent at credit analysis, or like we sold our soul to the devil for revenue, or a little bit of both."

A separate email forwarded by Brian Clarkson, former president of Moody's Investors Service, showed that the firm competed fiercely to outdo its rivals. Mr. Clarkson's aggressive push to win business was the subject of a page-one article in The Wall Street Journal in April.


Frank Raiter, left, former executive at S&P, and Sean Egan, managing director at Egan-Jones Ratings, confer during a House hearing Wednesday. Former executives said conflicts led ratings agencies to take a rosy view of risky securities.
.At S&P, one employee wrote in an instant-message exchange: "btw-that deal is ridiculous." A colleague replied: "it could be structured by cows and we would rate it."
http://online.wsj.com/article/SB122471995644960797.html

 

[nutmeg]

Perhaps a Groucho marx analogy for ratings.

"Those are my models and if you don't like them... well, I have others"

 

[the1]

So it seems the rating agencies knew they were rating junk and GS new they were peddling junk. They went as far as going short that junk at the same time they were selling it.

So the real question becomes, "what will be done?" My guess is something to shut down those blasted day traders, like the Pattern Day Trader rule that came along following the last fiasco. Say, how about we tax every financial transactions to shut down those blasted day traders for good?

 

[traderum]

Quote from Ghost of Cutten:
ALL debt issuers have to pay ratings agencies to get a rating. The issuer doesn't "buy" a rating of their choosing (bribery), they purchase a rating that S&P then assigns.

The proper analogy is this:

You own a car, you can't be 100% sure but you think it's a lemon. You want to get rid of it. You take it to a car inspector and find, to your surprise, that they are willing to rate it as a good car. Not believing your luck, you then go and advertise it for sale, pointing out that it got inspected and rated as a good car. Some idiot buys is without checking under the bonnet, you stay quiet and pocket the cash.

Did you commit fraud? No. Did you lie about anything? No. Were you entirely open and honest with the buyer about the suspect flaws? No. Is it illegal? No - caveat emptor. Is it ethically questionable? Yes - it's not how you would want to be treated if you were the buyer. Is it clearly wrong? IMO it's unclear, it depends on your personal opinion on transactions and morals of disclosure. I personally wouldn't do that. If I was the victim of that, I would be annoyed but would say caveat emptor and mostly blame myself for being careless. I don't think a seller has a moral obligation to tell me everything about an item for sale, *unless* they advertise it as without problems. I would always ask "do you know of any problems with the car?". If they say "no problems with it mate" and there are problems, they just committed fraud. But I don't think they have to pre-emptively warn me if I don't ask.

However, if the customer is *also your client* then I would say it's illegal and clearly unethical. If you have a client then you have a duty of care to them, to at least warn them of the risks. If Goldman has said "look, these are AAA but there are some risks with them if housing turns down in a big way" but the buyers were keen to buy them anyway, then that's fine. If Goldman knew those risks but kept them secret whilst persuading the customers to buy, IMO that is wrong and should be illegal if it isn't already.

Don't forget this juristical key fact: Goldman at the same time had bet against it!...
So they committed fraud. I would even say it was organized crime.
And it's a crime according to this law:

Securities Exchange Act of 1934

Rule 10b-5 — Employment of Manipulative and Deceptive Devices

It shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce, or of the mails or of any facility of any national securities exchange,

a. To employ any device, scheme, or artifice to defraud,

b. To make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading, or

c. To engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person,
in connection with the purchase or sale of any security.

 

[jem]

Quote from the1:

So it seems the rating agencies knew they were rating junk and GS new they were peddling junk. They went as far as going short that junk at the same time they were selling it.

So the real question becomes, "what will be done?" My guess is something to shut down those blasted day traders, like the Pattern Day Trader rule that came along following the last fiasco. Say, how about we tax every financial transactions to shut down those blasted day traders for good?

exactly
and expand bank leverage