Wednesday, April 28, 2010

The Jaded Monkey Is In The Glove Box

Apparently, Goldman Sachs doesn't get it about both the financial crisis and the Senate hearings:
Goldman Sachs Chief Executive Lloyd Blankfein told legislators Tuesday that when clients approach the investment bank as a market maker to buy or sell securities, they don't care what the firm thinks of the securities or whether it's betting against them.
Now, for some investors, that might be true.  Jaded monkeys like me who have spent 30 years in the underbelly of the financial markets dealing with the cowboys have learned how to read between the lines and focus on specific words and phrases in offerings and private placement memoranda would have hedged the Goldman Sachs offering, asking to get in on the other side of the deal.
Similarly, if I was offering to bundle my holdings and have GS place them, I'd want them to minimize my risk and play down the potential for loss. It's just good business sense, if by "business sense" you mean leaving the suckers holding the bag while I sail to Bimini.
Which, unfortunately, is precisely what "good business sense has come to mean in America in the 21st century.
But, to borrow from another set of hucksters, wait! There's more!

Sen. Carl Levin, chairman of the Permanent Subcommittee on Investigations, lashed out at Blankfein, claiming that Goldman creates conflicts of interest when it underwrites securities while betting against them.

Levin cited examples where Goldman employees described collateralized debt obligations the firm was selling, or assets backing those deals, as "shitty (corrected for impact)," "crap," "junk" and "lemons."

You'd think these morons would have learned from the Enron debacle. Worse still, as an employee of a FINRA registered firm, my e-mails are subject to storage and archiving for possible use in any investigation of my firm's practices.

Let's tie these two together: It's one thing to sell a risky security to an investor and make the blanket disclaimer that it could conceivably go belly up faster than fish after dynamite. It's another thing to know an investment is shitty and still try to pump out a sale. Markets demand perfect information and if your brokers are proudly boasting of selling a pig in a poke, that same braggadocio ought to be shared with the investment community, and not covered up in order to maximize your profit on betting against the very instruments you've sold.

Derivatives serve some purpose, it's true. An airline that hedges its fuel costs by purchasing futures on its fuel is doing right by its shareholders. Further, if it goes out and places a bet that the price will go down below the future contract price, it is mitigating its loss on the contract.

And vice versa for the firm selling the fuel futures contract. It's an entire other thing, tho, for the broker selling the futures contract to place a side bet based on knowledge he or she has with respect to the price of crude, say, that either party or both is not savvy to.

And still, Goldman Sachs are not getting it! As a "market-maker," Goldman Sachs has an obligation to set the ground rules for the market it is creating. It has what's called a fiduciary responsibility (a responsibility not unlike the one a doctor has to a patient or a lawyer to a client) to perform up to certain standards that exceed the expectations of investors. And it has a well-earned reputation to protect.

In one fell swoop, in one release of e-mails about a series of "shitty deals," Goldman has destroyed its credibility, the markets' credibilities, and rejected its fiduciary responsibility. Rather than admit this, however, Goldman has basically gone on the record as saying they acted in accordance with what some fly-by-night shyster would have done: fleeced investors.

There was a time in this country when an investment bank-- Merrill Lynch, Smith Barney, Goldman Sachs-- would have competed for clients based on its reputation and the trust its investors and clients placed in them.

Now, I'll admit one thing: the Internet and the rise of discount brokerage houses has made that aspect of their business moot. After all, why pay 2% of your assets and 20% of any trades to Goldman or Bear Stearns when you can commit the same trade at TD Ameritrade for $9.99? You keep more of your money, and it's the same damned shares.

This forced Wall Street houses to find new and more innovative ways of fleecing people so they can afford to drive their Beamers and fly their Falcon 50s to their beach house on Bermuda. But that same technology that defeated one aspect of their business made this other aspect of their business wildly profitable.

Powerful computers, advanced mathematics, and the ability to sift through mounds of information well-ahead of investors has given the Wall Streeters a powerful leverage over not only investors, but the American marketplace. Wal-Mart no longer sets prices as much as Wall Street does, by forcing Main Street to dig deeper and deeper into its bottom lines and come up with more and more income and dividends.

And this, this is the great tragedy of Goldman's blind spot. They aren't just stiffing investors and clients, they're stiffing the poor shnooks who bought houses and now have lost value in them, and opened shops and had to close those, and tried to keep hold of a job that was terminated because the company lost money directly or indirectly to Goldman's coffers.