WHAT DOES THE GOLDMAN FALLOUT MEAN FOR STOCKS?
It’s looking like the banks perp walks couldn’t have started at a much worse time for Wall Street. In mid-January financial reform discussions sparked a swift 10% bank decline, but as reform looked increasingly less likely the banks rallied and they rallied big. Since the February bottom the banks surged 26%. It was the largest rally without a 10% decline since last Summer. How much of that rally was due to lax bank reform could play into the next move for bank stocks and with the way things are looking it wouldn’t be shocking if much of that rally was erased in the coming months. Banks and the general market have been strenuously overbought for several weeks now, sentiment is wildly bullish and many of the positive catalysts (primarily earnings, an improving economy and lax financial regulation) have been priced into shares.
It was little reported on Friday, but stocks had already turned negative before the Goldman news hit the tape. Google, Bank of America and GE all reported excellent quarters and all three sold-off on the news. We saw the same thing occur last quarter when investors were eager to front-run the earnings news, but were disappointed to find out that the news was already priced in by the time the reports were released. That resulted in the brief 9% decline that laid the foundation for the current move higher. At this point, a very good earnings season is more than common knowledge and the surge in equities is evidence of that. Investors are already selling the earnings news so any positive catalyst for equities will likely come from other sources.
Perhaps most alarming with regards to the Goldman news is the level of uncertainty it will create. At first glance the reaction to the Goldman news looks excessive, but this could have widespread ramifications. First, this lawsuit looks like a carefully crafted political move that will make financial reform far more stringent than bank investors had been expecting. President Obama was out Friday saying that he will veto any bill that does not contain derivatives reform. JP Morgan CEO Jamie Dimon has previously mentioned that this portion of the bill would cost the bank between $500MM – $700MM. The Goldman lawsuit appears to make derivatives reform a slam dunk. This would likely shave billions in easy profits from total S&P 500 earnings. The President has also expressed a willingness to drop the $50B bailout fund. Mr. Obama is flexing his muscles now and looking to slam thru his second big bill in a matter of months. That’s good news for Main Street. Harsh reform is necessary to protect us all from ever allowing these firms to put us in this position again. Unfortunately, what’s good for Main Street is not always good for Wall Street. I wouldn’t be surprised if bank stock puke all over themselves for several weeks until the dust settles.
In addition, there is severe risk of more perp walks. This is eerily reminiscent of the Wall Street research perp walks following the many business scandals of the dotcom bubble. In April of 2002 the market appeared to be stabilizing and had rallied 20%+ off its 2001 lows. But then came the Sheriff of Wall Street. Eliot Spitzer unleashed hell on the Wall Street banks when he sued several of the largest firms for conspiring to drive up prices. Over the ensuing 5 months equities lost 25%. The Goldman news is the first of what will likely be several perp walks.
Speaking of Eliot Spitzer, he has been very vocal in recent days about breaking up the big banks. The Republicans certainly hate the too big to fail rule so it wouldn’t be shocking to see a resurgence in the Volcker Rule. Goldman is so massively hated right now that any politician who stands in the way of strict bank regulation will likely face the consequences in November. There is an almost frightening public outcry for harsh regulatory reform. The Goldman news reverses what appeared like lax regulatory changes.
Making matters worse, this isn’t the last lawsuit. The private lawsuits are likely to begin pouring in as small investors sue over potential negligence. But it won’t stop there. Several leaders including Connecticut Attorney General Blumenthal have said they are looking into any malicious actions. The SEC also said that this is not the last of their investigations:
“We’re looking at a wide range of products. If we see securities with similar profiles, we’ll look at them closely.”
Lastly, is the potential impact of Paulson & Co. redemptions. The SEC was very clear that Paulson was not being charged, however, investors are fearful that Paulson’s $30B+ hedge funds could suffer redemptions that pressure markets. The Paulson news alone drove gold prices down by 2% in Friday trade as investors feared the ramifications of any redemptions.
The reaction at Goldman certainly appears as though it is an overreaction considering the low penalty Goldman is likely to face, however, the contagion is likely the more important uncertainty at this point. There is simply no telling how badly this could impact the banks and the broader market, but with stocks strenuously overbought and struggling to find a new bullish catalyst this couldn’t be happening at a worse time for the market. I would urge investors to remember that the recovery is very much alive for now and a brief downturn in the market might actually be a good thing. On the other hand, the urge to buy the dip in banks appears fraught with massive risks in my opinion and with this kind of uncertainty there is simply no reason to buy a sector that is just 3% off a new 52 week high and on the back of a smoking 26% rally….They say the trend is your friend until it bends. Well, this bend looks like it could be particularly unfriendly.
Excellent observations. The political regulation uncertainty will double the perceived risk to investors … if the gov is on a witch hunt, won’t they feel stupid by ramping up extend and pretend on the other side. Investors will feel that greater losses will start to come back on the books. Hell, the bank CEOs will say that we will have to decrease bank lending even further because of potential uncertainty and decline in trading profits.
you keep on saying perp walk. you are aware that this is a civil case, aren’t you? sometimes it is ok to be provocative, but i think this is a little silly.
your political commentary is right on, but you don’t mention one big downside to this sec case…the sec is supposed to be independent, not doing the bidding of the white house. the timing of this case, together with its overall weakness, leads me to believe that this was brought for political purposes, which is verboten in the sec. what goes around comes around…next time the sec wants to bring a case, the white house may say no. the sec shouldn’t be doing the white house’s bidding.
i agree that this will have an undue effect on the markets, it already has, and i think the market still has further to go down. but i see the market rebounding when this news receeds off the front page. i also think goldman wins this case, although we won’t know this until next year likely, and even later after exhaustion of appeals. in the meantime, financial reform will have passed requiring, among other things, disclosure in all derivative transactions of additional information, including identity of counterparties.
i don’t want to engage in a long discussion about the merits of the case here, but i think this is a weak case and may never get to the jury.
the disclosure document had extensive disclosures,
everyone long had extensive access to the underlying mortgage securities information,
everyone long signed off on the composition of the cdo after having done their own due diligence,
everyone long was a highly sophisticated institutional investor,
there is no custom in the industry and there is no legal precedent holding that a party to a market making transaction must be disclosed who is on the other side (although i expect this new rule to be passed as a part of financial reform),
i expect everyone who will be deposed to say that this was a normal structuring where everyone’s input was permitted and anyone could have pulled out any securities they wanted,
all of the embarrassing emails that everyone is frothing about will never be seen by a jury and will not be considered relevant by the judge in deciding a motion by goldman for summary judgment.
people have been talking about all of the beneficiaries of the institutional investors that have been harmed, as support for the sec’s militancy here; this is wrong; institutional investors are expected to be able to protect their beneficiaries by doing their due diligence and exercising their good judgment; aca had the opportunity to do all of that here.
you say there will be an onslaught on private actions to follow; you should know that private parties must prove reliance upon the f&m document. again, hard to see how aca would say that they wouldn’t have bought if they knew paulson was participating on the other side, after aca had full opportunity to sign off on all aspects of the deal, including selection of the mortgages in the cdo.
as for the financial trade, this certainly does complicate things. i was expecting to exit the sector when ben changed the fomc language; now i might have to do so earlier. just will have to observe and react.
just two more points:
re “malicious actions”
remember what everyone was trying to do then. take a bunch of mortgages, the riskier the better, put them in a cdo and tranche them, get the super senior to be rate AAA, and the devil will take the hindmost for the support tranches.
everyone made money as real estate asset values went up. the riskier the mortgages, the more money there was to be made.
paulson (and others) wanted to take the other side of the trade, and therefore wanted the riskiest mortgages they could find.
the long side knew this, and knew the risks involved…they were betting that the real estate gravy train would continue, so that as long as it did, increasing risk yielded increasing rewards
and the ratings agencies were there to provide an independent rating of this conversion of the pigs ears into silk purses
so there was nothing malicious here for christ sakes…goldman was putting together two sides who had two views of the mortgage market, and one side won
finally, some have pointed out how bad goldman will look in front of a jury..so let’s play this out
first off, most jurors have negative experiences with the government, so having the sec be the plaintiff is not a benefit right off the bat…nothing sympathetic about the government to a juror
second, if goldman was such a bad guy, why did they end up losing $90MM on the deal (not clear if that was real money or an assigned value). goldman defense counsel will say follow the money, who made out on this deal?
jurors will have a hard time punishing goldman (a net investment loser) when the guy who made billions off of deals like this is off scott free; this case will not ring true with a juror’s sense of fairness.
My responses to Henry Blodget regarding similar threads….
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@Henry Blodget: Let me make sure I understand your comment. You think there is a correlation between ‘stock market’ performance and public outrage/interest in financial reform? Calm the masses by bid rigging the market higher?
So that explains why former SEC Chairman Cox ‘forbid’ short selling at various times sporadically, changing the rules constantly in favor of a one sided trade (same goes for the behavior of FSA and other foreign counterparts). A lot good that did.
So that explains why at numerous points in time during this ridiculous rally that trying to short (from numerous examples per other blogs) as an example the S&P 500 ETF (SPY) becomes ‘hard to borrow’ … meaning, no shorting available of the S&P 500 cash market.
So that explains why a handful of the TBTF guys gun the market close and paint the tape to their advantage.
So that explains why the SEC’s COO (newly hired back last October) is a 29 year old FORMER GOLDMAN SACHS employee.
As I have been saying all along…. Rule of Law (or what little there seems to be left of it) is only as effective as those WILLING and ABLE to ENFORCE them with MEANINGFUL and TIMELY DETERRENCE.
Thanks for the explanation. I got it.
Read more: http://www.businessinsider.com/henry-blodget-goldman-has-three-things-going-for-it-in-the-sec-fraud-case-and-one-big-problem-2010-4#ixzz0lN71DG86
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Come on Henry. This was all rehearsed and pre-staged. Nothing but optics to try to quell the angry mob visible via the protests which seem to grow in numbers and frequency. Just a civil case? Please. Tourre was the sacrificial lamb who was thrown under the bus. You may get more ‘VPs’ thrown under, but who cares. Criminal suits need to be enforced against the entire entity … but that will never happen.
And penalties? See my previous post… The Dow30 will end down either -92 or -55 … just for optics. Govt motivations? Need to scare ‘the public’ into buying US Treasuries as a ‘safe haven’ trade, especially since auctions are showing lots of stress and heavy reliance to phantom ‘direct bids’. What rigged b.s.
“Penalties? More optics in that category What are the penalties for failure to comply with ‘rule of law’? A $10M fine? $50M fine? Chump change for these TBTF guys. TBTF will just have the shareholders pay for the fines by issuing more stock … and then give themselves a bonus. Risk to reward for these TBTF guys still tilts towards recklessness, coercion, and fraud. Oh yeah, and shareholder dilution will also need to factor in excessive attorney fees (to defend corrupt accounting practices) and political contributions. Did I miss anything?”
Read more: http://www.businessinsider.com/11-examples-of-recent-corruption-on-wall-street-2010-4#comment-4bc5c6eb7f8b9a3f2b110100#ixzz0lHfeMIDi
Read more: http://www.businessinsider.com/henry-blodget-hold-on-the-secs-first-major-fraud-allegation-against-goldman-seems-very-weak-2010-4#ixzz0lN7J5ecc
Unfortunately, though Goldman has committed a number of wrongs, this really isn’t the one I would’ve liked the SEC to pursue – because I very much doubt it will have any penalty, it distracts from the much bigger issues (ie. market manipulation and front running), and it is 100% politically motivated.
As chris stated, there is very little to argue against with full disclosure given, especially considering the level of knowledge one would expect fro counterparties of this size. Finally, even if someone “predict” a collapse, one could only argue that it only becomes apparent in hindsight. For sure, Goldman would have done more to protect themselves if they felt such a disaster was imminent. These emails will be thrown out.
However, this is the sort of thing that can really hurt the market. With the threat of looming legislation or even the possibility of such – banks will securing the hatches and building up reserves while dumping as much debt as possible. This means selling stock holdings, foreclosing and pulling credit lines. The result could be a catastrophic negative feedback loop that the market really isn’t prepared to handle. Credit and lending will freeze and we will have a replay of the events of last March – except with many more people and states in desperate situations. And this time around, the banks may be reclutant (or literally blocked) from investing in the market.
The notion of having every derivative exposure, its mark to market value adjusted daily, and the counterparties involved being disclosed is crazy. It would expose strategic moves by business and also make them ripe for market exploitation from traders and competitors. But more importantly, it wont prevent anything because there are enough well trained resources to even process all this inflormation. We’re talking trillions upon trillions in notional exchanged daily! The Bernie Madoff experience should send a clear message that even when fraud is committed openly and brazenly, with multiple people warning of such for decades – the Federal Government still screwed up and didnt know a thing until the gig was up and no money was left. That was basic arithmetic – how are they going to deal with first and second level calculus and statistics with multiple parties involved?….
Good thoughts everyone. The more I think about this case the more I think it’s 100% political. Obama and the Dems have been playing chess with their little brothers and sisters (Reps) and got angry when it looked like they couldn’t win so they knocked all the pieces off the board and restarted the game with two queens. In other words, it’s hard to imagine that this has no political motivation at all.
If that’s true it’s very bad, but this is one case where I am more Machiavellian than I might usually be. It really does look like the government is going to have a hard time winning this case, but does it matter at all? The SEC has served their purpose. The public is enraged and they should be. This was a terrible case to bring, but we all know Goldman played a huge role in the crisis. Harsh reform is coming now and Obama has the lobbyists over a barrel.
As for stocks, I am obviously biased, but I wrote this trying to be as balanced as possible. Looking back at the witch hunts in 2002 and the downturn in early January it’s hard to imagine that this isn’t the beginning of something bigger. The derivatives reform alone is going to hammer the banks. I just don’t see how any of this is good for stocks and I would never be able to hold any financial for fear of waking up in the morning to a -15% stock price on the back of an SEC filing. We all know there will be other rolling out over the next 6 months. These things are rarely one and done.
All in all, I think it’s important to remember that this correction (should it occur) would be quite healthy in my opinion. The economy is certainly stabilizing and it’s unlikely that firms outside of the financial sector will be hard hit by all of this. So, stay very cautious in the coming months until fin reg is clear and we know what’s coming down the pipe in terms of SEC actions. GS is a very tempting buy at the open on Monday (for a short trade), but I don’t see how this doesn’t have larger and longer impacts on them. The rest of the market is a buy after a correction.
And Chris, a perp walk is just a public display of a prisoner for the media to drool over. Is that not what’s happening? I am not be dramatic about any of this (though it is very dramatic and salacious). The only provocative part of any of this is the timing and that my friend, you need to take up with Mr. Obama.
Have a great weekend everyone.
TPC Author,
I do not share your ‘optimism’.
So many problems, where do I begin….
As long as FASB continues to be a pawn for TBTF and sound accounting principles are ‘delayed’, nothing will change … and the ‘stock market’ will continue to rise based purely on interest-rate arb … TBTF borrowing at Fed Funds (0% – .25%), borrowing Yen at 0.1%, borrowing Swiss Francs at 0.25%, …. and using those proceeds to daytrade S&P futures or whatever else.
And that’s how we got into this mess in the first place …. TOO MUCH BORROWING, TOO MUCH LEVERAGE. REMEMBER, EVERYTHING BORROWED MUST ULTIMATELY BE REPAID (ie. UNWIND). Remember the unwind of the leveraged Yen carry trade? Or have we become so complacent that we already forgot?
And how is ‘The System’ ‘dealing’ with the housing / mortgage mess? … Taxpayer funded bailouts of large banks while banking execs get fat bonuses and record salary compensation to compensate for ‘reduced’ bonuses … taxpayer funded bailouts of reckless, fraudulent, or uneducated / inept ‘homeowners’ / lenders through modifications which now include principal reduction … delinquent ‘homeowners’ now turned squatter, not making a mortgage payment for well over a year, just so the banks don’t have to ‘recognize’ the loss on their balance sheet … strategic defaults on commercial real estate (Morgan Stanley walking away from 5 large properties in the San Fran area) … ‘DO AS I SAY, NOT AS I DO’ ….
WHERE DOES IT END?!
Trust in the system has evaporated. Trust is THE KEY ingredient necessary for economies and societies to grow … let alone a fiat monetary system to function (which is now being revealed as a complete joke).
Let’s face it, RULE of LAW (or what little seems to be left of it) is only as EFFECTIVE as those WILLING AND ABLE TO ENFORCE THEM with MEANINGFUL and TIMELY DETERRENCE.
Penalties? More optics in that category What are the penalties for failure to comply with ‘rule of law’? A $10M fine? $50M fine? Chump change for these TBTF guys. TBTF will just have the shareholders pay for the fines by issuing more stock … and then give themselves a bonus. Risk to reward for these TBTF guys still tilts towards recklessness, coercion, and fraud. Oh yeah, and shareholder dilution will also need to factor in excessive attorney fees (to defend corrupt accounting practices) and political contributions. Did I miss anything?
Bottom line. The underlying disease is debt deflation. The usually prescribed ‘medicine’ of ultra-cheap monetary and liquidity inflation will NOT work this time. REMEMBER, it takes two parties to CREATE CREDIT in our system … someone willing/able to provide credit (The Fed … lender of last and only resort now), and someone willing/able to take/accept the credit/loan. Last I checked, credit continues to shrink across all segments except for government. Until this country addresses the massive underlying structural cancer (too much debt to GDP, crony capitalism, socializing losses while extracting profits for the oligarchy) in any meaningful manner, we will not have a meaningful recovery.
WE NEED A MEANINGFUL RETURN TO ‘RULE OF LAW’!
The capital markets have morphed into such an unrecognizable beast over the last several decades … what a sham … I mean shame.
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But don’t worry, the US taxpayer will bailout everyone …. UNLIMITED?!
http://www.huffingtonpost.com/2010/03/23/geithner-fannie-and-fredd_n_510438.html
As Shahien Nasiripour notes:
Taxpayers have pumped more than $125 billion into the failed firms — and on the hook for many more after the administration promised an unlimited source of funds just before Christmas to backstop their growing losses.
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I rest my case. More looting to come at the expense of US Taxpayers.
Corzine Plans to Make MF Global Into Treasuries Primary Dealer
http://www.bloomberg.com/apps/news?pid=20601087&sid=aX4AZ9u6_im8&pos=6
I don’t disagree, but you have to start somewhere. This looks like a good start. We can’t fix the system overnight. At least we’re moving forward….
Kabuki theater. Nothing but optics. Why wait till now? And remember, this is just a civil case … a criminal case would send a stronger more substantial message.
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Goldman Sachs Said to Have Been Warned of SEC Suit (9 months ago!)
http://www.bloomberg.com/apps/news?pid=20601087&sid=a52BBUru4.hM
Goldman $5B Bonus for 1Q.
http://business.timesonline.co.uk/tol/business/industry_sectors/banking_and_finance/article7100961.ece
Nothing to see here.
Do you think there was a message at this past Super Bowl’s halftime entertainment? The Who’s ending song for the show …. ‘Wont’ Get Fooled Again’.
We’ll be fighting in the streets
With our children at our feet
And the morals when they worship will be gone
And the men who spurred us on
Sit in judgement of all wrong
They decide and the shotgun sings the song
I’ll tip my hat to the new constitution
Take a bow for the new revolution
Smile and grin at the change all around
Pick up my guitar and play
Just like yesterday
Then I’ll get on my knees and pray
We don’t get fooled again
The change, it had to come
We knew it all along
We were liberated from the foe, that’s all
And the world looks just the same
And history ain’t changed
‘Cause the banners, they’d all flown in the last war
I’ll tip my hat to the new constitution
Take a bow for the new revolution
Smile and grin at the change all around
Pick up my guitar and play
Just like yesterday
Then I’ll get on my knees and pray
We don’t get fooled again
No, no!
I’ll move myself and my family aside
If we happen to be left half alive
I’ll get all my papers and smile at the sky
For I know that the hypnotized never lie
Do ya?
There’s nothing in the street
Looks any different to me
And the slogans are out-phased, by-the-bye
And the parting on the left
Is now parting on the right
And their beards have all grown longer overnight
I’ll tip my hat to the new constitution
Take a bow for the new revolution
Smile and grin at the change all around
Pick up my guitar and play
Just like yesterday
Then I’ll get on my knees and pray
We don’t get fooled again
Don’t get fooled again
No, no!
MEET THE NEW BOSS
SAME AS THE OLD BOSS
No worries … the Fed has your back covered. (eg. Repo 105)
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http://dealbook.blogs.nytimes.com/2010/03/16/at-lehman-watchdogs-saw-it-all/
At Lehman, Watchdogs Saw It All
March 16, 2010, 3:31 AM
Lehman Brothers executives weren’t the only ones in the building when they were moving billions of dollars in liabilities off their books at the end of each quarter with magic accounting. So were the Feds, The New York Times’s Andrew Ross Sorkin writes in his latest DealBook column.
Regulators like the Securities and Exchange Commission and the New York Fed sent emergency teams to monitor most of the big banks after the collapse of Bear Stearns. They had constant access to Lehman’s books, and not just the dolled up quarterly reporting. So where was the government while all this “materially misleading” accounting was going on?
It now appears that the federal government itself either didn’t appreciate the significance of what it saw (we’ve seen that movie before with regulators waving off tips about Bernard L. Madoff). Or perhaps they did appreciate the significance and blessed the now-suspect accounting anyway, Mr. Sorkin writes.
All is well … all is contained …
Bank Of America Says Its Lehman-Style Bogus Balance Sheet Manipulation Is A-Okay*
As John Hempton pointed out last week, Lehman wasn’t the only bank that engaged in bogus end-of-quarter balance sheet manipulation to trick investors into thinking it was less leveraged than it was.
Turns out, Bank of America (BAC) did it, too.
Hempton compared Bank of America’s “average quarterly assets” and “end of quarter assets” and found that, in each quarter, billions of dollars of assets conveniently disappeared briefly at the end of the quarter, only to return again at the start of the next one.
Read more: http://www.businessinsider.com/henry-blodget-bank-of-america-says-its-lehman-style-bogus-balance-sheet-manipulation-is-a-okay-2010-3#ixzz0lVAxRoTY
TPC Author:
Yup. Nothing but a dress rehearsal.
http://www.businessinsider.com/sec-has-documents-that-contradict-its-own-goldman-case-2010-4
the timing of this case, together with its overall weakness, leads me to believe that this was brought for political purposes
If the timing were strictly political, then this sort of thing would have happened a long time ago. Obama stands to gain little benefit from this move — the populists wanted heads to roll during the depths of the crisis, and nothing that he does now will make them believe that he isn’t a sellout.
The timing seems more economic in nature. The feds would have been reluctant to stir up doubts in the markets during the depths of the financial crisis, since their goal was to engineer a recovery. Now that things are more stable than they were before, the government can act without inducing another crash. It is far better for the markets to sell off now than it would have been 12 months ago; today, we can handle the hit, whereas before, we could not.
I think Obama was focused on getting the health care bill through – it’s probably one of those legacy things that means a lot to him. Now he had won that war, he could move on to other targets.
Angry that is laughable. This is totally politically motivated. The Democrats are doing this for show and for November and that is it. If Goldman Sachs was really not above the law, they should be prosecuted for front running and helping Greece to lie about its debt and the hundred of other things that they do. I wouldn’t be surprised if GS designed cocaine and heroin swaps for the Mexican drug cartels either. I know those don’t exist but they should lol.
I think GS news friday option was a no event
to stock market, banks before GS news were red.
These CDO news are old news, everybody know
exotics products…GS is just a detail.
What is more important now is how Bank Rules
will get more attetion.
Everybody know that the market is overbought
but the economy is in better shape.
China is still doing well…it is more important
that GS event.
I don’t see a big correction untill USA
drive the economy with low rates.
IMO GS lost all credibility by omitted and lie
now and from Greece balance.
It’s naive to say that this is a non-event. This could be the most important news of the entire year. Harsh financial reform is coming and as TPC said this will have a large negative impact on net earnings. In addition, the legal risk in owning the banks is enormous. Do you want to own Bank of America or JP Morgan just a few percentage points from their 52 week high in an overbought market when the risk of a law suit is right around the corner?
I agree, this is a buying opportunity at some point, but not until the market corrects substantially. Everyone knows the economy is better and that earnings are good and that’s all priced in. Everyone is bullish right now and this has potentially dramatic bearish implications for the market. I say wait and see what happens. There is no reason to buy the dip this early.
As I say it is a non event. Old news IMO
Ex-Paulson Manager assisted SEC in Goldman Case
By Reuters
Friday, April 16, 2010 3:29:51 PM ET
WASHINGTON (Reuters)—Paolo Pellegrini, who co-managed hedge fund firm Paulson & Co.’s credit opportunities funds, cooperated with the U.S. Securities and Exchange Commission in its case against Goldman Sachs, a source familiar with the matter said on Friday [April 16].
Earlier, the SEC charged Goldman with fraud in the structuring and marketing of a debt product tied to subprime mortgages Previous Reuters Story. The SEC alleged that Paulson & Co. worked with Goldman in creating a collateralized debt obligation and stood to benefit as its value fell.
New York-based Paulson & Co. correctly bet that housing prices would fall in 2007, which helped transform the firm into one of the industry’s most successful. Mr. Pellegrini had been instrumental in the bet, but split from Paulson in 2008, becoming the only person to leave the firm that year. He has now set up his own hedge fund. A spokesman for Mr. Pellegrini had no immediate comment.
Agree, I’m not buying here.
U.S. Stocks will see a 3% correction Monday!
The Democrats are doing this for show and for November and that is it.
And you base that belief on what exactly?
Obama won’t gain much, if any, traction from this, being that those who view him as being a sellout to the Street won’t care what he does going forward — they have already judged him and they will not be persuaded.
If the objective was to whip up sentiment for the Democrats, then this is too little, too late. The segment of the public that wants blood sees little distinction between the two parties with respect to “banksters”, etc., and the Main Street vs. Wall Street schism is alive and well among voters on both ends of the spectrum.
From a political standpoint, it would have been far, far better to have done this during the White House honeymoon period, before Obama owned the economy. At this juncture, these charges are just part of the mix, and they won’t help anyone in either party to win or lose an election.
You’re wrong. People’s memories are short. If he did this way back then and kept bringing it up people would begin to stop caring. If they do this NOW it will be fresh in their minds. Have you actually read any comments by people on news sites? This is very popular and people are very happy about this. The intention was to boost Democrats as anti-big business and corporate crime. Now they will spend the next few months attacking banks and pushing through legislation and demonizing Wall Street. Not that I think that is bad.
Personally, I’m all for a big hit to my portfolio if it’s in the name of cleaning up the scum on Wall Street. It’s the only way we’ll ever get back to a REAL bull market. Down with Goldman.
People’s memories are short. If he did this way back then and kept bringing it up people would begin to stop caring.
At this point, the Democrats have already established the appearance that they are complicit It will be difficult, if not impossible, to change this perception among those who hold those views strongly enough to vote with that in mind.
Have you actually read any comments by people on news sites? This is very popular and people are very happy about this.
I would not use that as a basis for gauging public sentiment. Most of the population will never post anything on an internet forum, and those who do tend to be more passionate than normal about their views.
The Obama presidency has been defined by his efforts to appear moderate. He didn’t attack Wall Street early on because he didn’t want to spook the markets or provoke even more accusations of being a “socialist”, etc. (although that hasn’t certainly stopped the Tea Party crowd from doing it, anyway). When Tim Geithner talked down the dollar and the markets, the administration response was to get him a speech coach and make his rhetoric more market-friendly.
The dominant goal of the tail end of the Bush Administration and of the current one to date has been asset inflation. With the Dow at 11,000 and financial stocks on the move, now was the time to attack on the reform side. Going after the industry when the Dow was under 7000 and GS stock was under $80 would have been conspicuously poor timing. They are making an effort to time their battles.
This article sounds like the rant of someone who is desperately talking their bearish book.
The market was almost guaranteed to decline a substantial amount on options expiration Friday, given how unbalanced the market had become over the prior several days, including on Wednesday, when the equity Put/Call ration literally fell off the ten year charts (punch it up on Bloomberg- pretty breathtaking to behold).
You may recall I tried to communicate this state of affairs in a response to your article on Thursday about the “unending slaughter of the bears.” I noted that the market would very likely decline ~1% on Friday, or if not, then on Monday, on a purely technical basis, just to rebalance the market. If not Goldman on Friday, it would have been something else, like for instance, Steve Jobs catching a cold.
So, we had our expected Friday sell off, and what kind of sell off was it? Extremely benign, from all indications. The speculative stocks, i.e., high beta momentum names, including all the small cap chip stocks, barely budged by the end of the day, and ended up giving back a fraction of their gains on the week. It was very apparent halfway throught the day that all these stocks had a firm underlying bid.
How ’bout the slaughter of the financials? They outperformed the market on the week, and were still one of the week’s better performing sectors
The financials have come belatedly back to life the last several weeks, after many months of pitiful underperfomance, putting them 3-4% above their October highs.
If you bought the financials during the initial roll out of ObamaCare for the banks in late January, you would have clocked in >25% easily, after Meredith Whitney came on CNBC to assure viewers that all banks would be dead money for the year- another die-hard bear despeately talking her book.
The markets are certainly more vulnerable to a correction than they have beenfor several months, but the tape action on Friday should have been disheartening to anyone one of an ursine dispostion.
Let’s see if the bears can put in a more impressive showing in the ensuing days- from the action on Friday, I would say odds appear low.
John,
First, you didn’t make any call on Friday. You came here Thursday AM and trashed me for being bearish. Then, after GOOG missed earnings and the futures fell 50 points you made some vague comment about the market being extended and vulnerable.
As for Friday’s action – it was the highest volume day since February. Explain to me how a high volume 1.5% sell-off is not bearish? The onus is not on the bears now. It is on you and the other bulls. You need more buyers. After all, markets don’t only fall when there are too many buyers. They fall when there are too few buyers. What is your next catalyst? Who hasn’t piled into stocks in recent weeks? We all know the economy is better. We all know earnings are good.
Better question – do you want to own banks now? Personally, I like that there are many people like you who are out there and still wildly bullish. You are on the same side of the boat as the majority of the other investors….
As for my supposedly biased article. Can you give me ONE fact that counters it? You gave me a bunch of opinions. I provided cold hard facts. Quotes, facts, history. What did you give? Opinions.
I really appreciate the comment section here, but it’s counterproductive when you call my post biased or misleading without providing even one single coherent counterargument….
Sounds like someone talking up their Bullish Book. Too bad! Too late! If you are all in and overexposed and have still not been able to recoup last year’s decline, you’re screwed!
Somebody voted for Obama – that is ever apparent whenever you post something re: bank reform.
I’m a little disappointed with the framework you use to analyze the financial crisis, both cause, effect and the steps we take moving forward to prevent something similar from happening in the future.
Transparently omitted from all of such posts is the role and responsibility of the individual consumer and borrower in the whole mess as well as ALREADY excessive government intervention.
Any logical analysis would ostensibly lead one to conclude that banks, operating within the framework of the rules of the game that the government set up for them (i.e., lend, lend, lend and make sure it is increasingly to lower income folks who don’t deserve or can’t afford a house to begin with), did what any profit driven entity would do, they sought to maximize profits. Why wouldn’t they?
It’s not about derivatives, or malfeasance within the banking system. Instead, it’s all about the liberal wing of government increasingly intervening in the economy and stripping human beings of their dignity by offering them something for nothing thereby implicitly making the statement that their are incapable of achieving on their own! And then, when there is a mess to clean up, let’s all blame it on big business!
But at the end of the day, the banks did in fact bring this on themselves, not through imprudent risk taking in 03-07, but by electing Obama in 08!! I find it satisfyingly ironic that a significant portion of the most senior ranking execs at major brokerage houses and banks are on the record having voted for Obama!! What a great corollary for corporate America’s inability to strategically think beyond the distance of the tip of their noses anymore! It’s hilarious that none of them saw Obama for the radical, highly partisan ideologue that he was destined to be!
Free housing anybody?
Amen B Ferro! One of the most insightful and intelligent posts I have seen on this blog or any other for some time now.
Indeed, let’s not forget to credit profligate house buyers and the ratings firms for their crucial roles in this mess, both heavily aided and abetted by the very liberal politicians now looking to scapegoat the banks with a trumped up show trial, ala Goldman.
I also find it disturbing that the author of this blog is screaming for harsh financial reform to “protect Main Street from Wall Street,” with nary a mention of the many other complicit parties, including most of all the Democrats (Cuomo, Frank, et.al) who motivated the whole sub-prime lending phenomenon.
Also, no mention of the profits made by Main Street on the bail out of Wall Street.
Invoking the views of dirtbag Spitzer also does nothing for the author’s credibility. As I recall, the 2002 meltdown had very little to nothing to do with his political shenanigans, and everything to do with the Worldcom blowup in June and the Enron blowup in October.
I think many people in this country are finally realizing that we somehow elected a jive-talking thug from the South Side of Chicago as President, with in retrospect not unsurprising consequences. After all, what did we really expect from an acolyte of the Reverend Wright?
More hogwash from a new reader. I have been VERY critical of Barney Frank here. Quote:
“Barney Frank (has no real financial background and arguably helped cause this mess by transferring FNM/FRE oversight in 2000)”
The 2002 downturn in fact started with Spitzer’s investigations. April. Fact. Your history is wrong. The sell-off started well before the summer of 2002. Fact.
Your arguments are almost entirely political and your derogatory and borderline racist comments don’t help your cause.
Again, you have yet to write a single comment that is fact based.
Ferro,
Very disappointed to see a regular reader try to imply that I don’t blame the consumer. Just a few weeks ago I wrote:
“This is not to imply that the U.S. consumer played no role in taking out more debt than they should have, but the lack of regulation in the banking industry substantially contributed to the gross amount of debt that consumers (and banks) have been allowed to take on (no doc, no down loans come to mind here).”
As for your political misrepresenations – I am a registered Republican who voted for Obama because he was the lesser of two economic evils. I have been very vocal and disappointed in all of his economic policies thus far. I was VERY vocally against his health care bill. Implying that I have some political bias is disappointing to see from a regular reader.
Your argument that this isn’t about derivatives is nothing short of absurd. Derivatives made the crisis far worse than it ever should have been.
I have never implied that the consumer wasn’t to blame, but the ability of the banks to leverage themselves up via various products is what made a small crisis a potentially devastating one.
This isn’t political at all. This is about protecting the economy from ever experiencing this sort of fiasco ever again. Economies and humans don’t regulate themselves. There will always be malfeasance. Some level of government intervention is necessary to keep the greedy from potentially destroying the whole system.
I still don’t see a single coherent argument from any Republican against more regulation. Thus far, it’s just a bunch of hogwash about Obama and nonsensical politics.
I will concede, as you have proven, that you’ve talked about consumer responsibility in this whole mess. However, I do believe that the latter is a backburner issue in your analytical framework, whereas I believe it to be front and center. As you are well aware, I largely agree with 99% what you write. Alas though, I think Obama and reg reform is one place we might differ.
As I stated, to me, the system worked as it should have up to and through the financial crisis. Profit seeking firms sought to maximize profits. Derivatives disclosure and reform isn’t going to change anything. As long as we continue to socialize risk (again, due to the liberal wing of gov’t) no amount of reform will prevent this from happening again. Maybe you can start eliminating some financial products that exacerbate any liquidity crisis, but quote un quote reform (i.e., more rules, etc.) just isn’t going to do it.
Spoken like a true-blue, gum-dipped Tea Partier. When confronted with irrefutable facts debunking their talking points, they reply in true Mensa style, “they’re lying.”
*************************************
(…….“Derivatives disclosure and reform isn’t going to change
anything.”)
Regulation worked pretty well for two thirds of the 20’th. Century, didn’t it? And when malfeasance was exposed, regulators were there to snuff out the problem before it became “systemic.”
(……..“again, due to the liberal wing of gov’t”)
Ole Georgie Bush and Hanky Paulson wouldn’t take kindly to your calling them a dirty name, “Librul.”
>>Google, Bank of America and GE all reported excellent quarters a
pal, excuse my French, but you chosen wrong profession… your analysis sucks
excellent… Google && bank of America don’t matter cause 1st is official market leader- monopoly… second is a bank.. you don’t have to be genius to borrow at 1% and invest in 4 %..
but GE matters.. its like US economy lots of fluff ++ some real stuff..
lets peek into report.. (http://www.ge.com/investors/events/event_id04162010.html)
1st forget the earnings.. when I read ‘ excluding impact of Olympics’ in official report game is up… i guess
lets talk about gross sales / cash flow
page 2
revenues down 5 % from 2009
sales in capital services down 9%
sales in industrial services down 2%
cash flow from industrial services down 17%
and last point.. in march/April 2009 stock was about 10-11 $,,, now its about 20.. 100% gains but sales/cash flow still less… so much for recovery…
excellent ????
alex west
Excellent is relative. Analysts rule Wall Street. That’s how the game works. Any regular reader knows I have maintained that the real economy is weaker than many think.
But the earnings were excellent compared to expectations….That’s a fact.
so it wasnt YOUR thought that earnings were better.. there were by some kind of analyst…
well you should have put it in disclosure.. also track record of that analyst would be interesting as well.
good luck
alex
ps
i dont know who rules what.. sorry
+/-10% over months is normal noise volatility. I don’t think we’ll have anything beyond that, the market reaction was simply the usual broad market risk off/on mania. (All those 25-year-old Nintendo PMs that say “oh, it’s clear with this news that I should be 59.9/40.1 vs. 60/40 today.”) The next 3-5 days will tell, but may be overshadowed by the continuing earnings season if any unusual news crops up. There doesn’t seem to be any unusual unwinds Fri. and low quality credit performed well.
the ability of the banks to leverage themselves up via various products is what made a small crisis a potentially devastating one.
This should be obvious. But it’s pretty clear that the political types and those in industry who invented the products that created the leverage that led to the crash are trying to dodge responsibility for their handiwork.
The hard right devotes a lot of effort to talking the talk about responsibility, but they refuse to walk the walk. “Responsibility” is really just a code word for blaming everyone, except for themselves, for their failures. They want to own the benefits of the upside, while avoiding all of the ugliness of the downside — privatized gains, socialized losses.
Reading latest news, IMO this GS event will finish in pizza, there is a political
theme behind it, also SEC trying to show service after Madoff fiasco.
Goldman Sachs Text: Further Comments on SEC Complaint
PrintEmail
NEW YORK (MNI) – The following is the text of a statement issued by Goldman Sachs late Friday:
Goldman Sachs Makes Further Comments on SEC Complaint
NEW YORK — April 16, 2010 – The Goldman Sachs Group, Inc. (NYSE: GS) said today:
We are disappointed that the SEC would bring this action related to a single transaction in the face of an extensive record which establishes that the accusations are unfounded in law and fact.
We want to emphasize the following four critical points which were missing from the SECs complaint.
* Goldman Sachs Lost Money On The Transaction. Goldman Sachs, itself, lost more than $90 million. Our fee was $15 million. We were subject to losses and we did not structure a portfolio that was designed to lose money.
* Extensive Disclosure Was Provided. IKB, a large German Bank and sophisticated CDO market participant and ACA Capital Management, the two investors, were provided extensive information about the underlying mortgage securities. The risk associated with the securities was known to these investors, who were among the most sophisticated mortgage investors in the world. These investors also understood that a synthetic CDO transaction necessarily included both a long and short side.
* ACA, the Largest Investor, Selected The Portfolio. The portfolio of mortgage backed securities in this investment was selected by an independent and experienced portfolio selection agent after a series of discussions, including with Paulson & Co., which were entirely typical of these types of transactions. ACA had the largest exposure to the transaction, investing $951 million. It had an obligation and every incentive to select appropriate securities.
* Goldman Sachs Never Represented to ACA That Paulson Was Going To Be A Long Investor. The SECs complaint accuses the firm of fraud because it didnt disclose to one party of the transaction who was on the other side of that transaction. As normal business practice, market makers do not disclose the identities of a buyer to a seller and vice versa. Goldman Sachs never represented to ACA that Paulson was going to be a long investor.
Background
In 2006, Paulson & Co. indicated its interest in positioning itself for a decline in housing prices. The firm structured a synthetic CDO through which Paulson benefitted from a decline in the value of the underlying securities. Those on the other side of the transaction, IKB and ACA Capital Management, the portfolio selection agent, would benefit from an increase in the value of the securities. ACA had a long established track record as a CDO manager, having 26 separate transactions before the transaction. Goldman Sachs retained a significant residual long risk position in the transaction
IKB, ACA and Paulson all provided their input regarding the composition of the underlying securities. ACA ultimately and independently approved the selection of 90 Residential Mortgage Backed Securities, which it stood behind as the portfolio selection agent and the largest investor in the transaction.
The offering documents for the transaction included every underlying mortgage security. The offering documents for each of these RMBS in turn disclosed the various categories of information required by the SEC, including detailed information concerning the mortgages held by the trust that issued the RMBS.
Any investor losses result from the overall negative performance of the entire sector, not because of which particular securities ended in the reference portfolio or how they were selected.
The transaction was not created as a way for Goldman Sachs to short the subprime market. To the contrary, Goldman Sachs’s substantial long position in the transaction lost money for the firm.
** Market News International New York Newsroom: 212-669-6430 **
This video is old news, but worth a watch if you have not seen it:
http://www.msnbc.msn.com/id/21134540/vp/36604057#36604057
Goldman is not the problem, the problem here is stocks become a risk free investment after 80% rally
. Tell me when and where stocks are risk free, even if US goes Weimar next year…
Why are the Repubs trying to block this bill? That’s unfathomable.
Who are we kidding? The Republicans want to block this bill because it’s a huge victory for Obama. He looks like the protector of Main Street as opposed to the big bad socialist that the R’s have been trying to paint him as. This is all political to them. They’re not interested in helping small investors. They’re solely interested in moving their anti-Obama campaign. Even if it means helping wall street and hurting main street.
It’s really a shame that this has devolved into a poltical debate. I entirely agree with you that the Republicans don’t want Obama’s name plastered to a bill that is very pro Main Street.
I think 95% of American’s want to see the banks burn and this bill does a great deal to satisfy the public’s desires. The Repubs understand that and it is one more victory they don’t want Obama to have.
This should not be a political debate. John Mauldin raised some excellent points in his most recent piece and he is a raging R. But he also recognized the need for Derivative reform and the end of TBTF. I think his piece was an excellent overview of what the Republican’s should all be arguing.
The bill is not perfect, but this unified stance against it by the R’s is absurd and destructive to the well-being of Main Street.
And please bear in mind that I am a registered R and a VERY vocal critic of any Obama tax hikes, most of his absurd spending policies, his homeowner bailouts, the bank bailouts and his healthcare bill. The arguments that this author is somehow democratically biased are beyond absurd….
Great job – one of the few blogs that I read everyday.
Unfortunately i believe that the government will buckle under the debt burden
which was caused by saving GOLDMAN AND FRIENDS THRU AIG . WHO THE HELL ASKED US IF WE WANTED TO SAVE THEM . I DONT REMEMBER VOTING FOR IT .
GOLDMAN HAS THE NERVE TO DEFRAUD PENSION FUNDS , think about that for a moment and what that practice can do to your future.