Skip to comments.The Long and Short of It at Goldman Sachs (they short what they sell)
Posted on 08/24/2008 6:42:34 AM PDT by dennisw
Goldman Sachs was one of the top 10 sellers of C.M.O.s for the last two and a half years. From the evidence I see, Goldman was doing this for years. It might have sold very roughly $100 billion of the stuff in that period, according to ABAlert. Goldman was doing it on a scale of billions even when Henry M. Paulson Jr., the current Treasury secretary, led the firm.
The point to bear in mind, as Mr. Sloan brilliantly makes clear, is that as Goldman was peddling C.M.O.s, it was also shorting the junk on a titanic scale through index sales showing, at least to me, how horrible a product it believed it was selling.
The Goldman Sachs spokesman said the company routinely shorts the securities it underwrites and said this is disclosed. He noted candidly that Goldman is much more short in this sector than usual.
From what I have observed over years, Goldman has a fascinating culture. It is sort of like what I imagine the culture of the K.G.B. to be. You always put the firm first. Now, obviously, Goldman Sachs does many fine deals and has many smart, capable people working for it. But its not the Vatican. It exists to make money for the partners and (much farther down the line) the stockholders. The people there are not statesmen. They are salesmen.
HERE is a query, as we used to say in law school: Should Henry M. Paulson Jr., who formerly ran a firm that engaged in this kind of conduct, be serving as Treasury secretary? Should there not be some inquiry into what the invisible government of Goldman (and the rest of Wall Street) did to create this disaster, which has caught up with some Wall Street firms but not the nimble Goldman?
(Excerpt) Read more at nytimes.com ...
Ben Stein proving once again, that he has trouble telling the difference between cause and effect.
“From what I have observed over years, Goldman has a fascinating culture. It is sort of like what I imagine the culture of the K.G.B. to be”
I suppose it is fitting that Goldman Sachs is Obama’s biggest campaign contributor. Marxists like to support other marxists.
Ben Stein has seen something that has caused him some serious trouble....any ideas what has happened to the ben stein we used to know. Og course all those years acting on TV might have just been his ‘role’ and we are seeing the ‘new & improved’ BS???
Reading between the lines, it sounds like what he's basing this part of the article on boils down to Goldman having shorted a ton of ABX (more than pure hedging would require - as if that's possible to know in such a market..) long before the rest of the market caught up to subprime realities. Well, perhaps so. If so, that's called foresight and the will be rewarded for it.
As for the conspiracy theory about the Kanzius paper, I do not even understand what Stein is trying to say exactly. Sometimes Stein's mind seems to lose its sharpness.
While these new securities are on the firm's own books, they represent a risk that is quite large compared to the firm's overall capital. They are an undiversified, concentrated risk in this or that sector or security type, arising merely because the firm got an underwriting deal in that sector or type, and not because its traders decided that was the greatest thing since sliced bread this month.
Traders adjust the position over the whole firm to the desired mix of holdings. The default is not "own whatever random stuff you are doing business in with third parties", it is "own the whole market, capitalization weighted, and risk carefully limited so your capital can withstand a 99% outlier move against the firm". That is standard risk control.
Banks hedge the options they write by dynamic trading in the underlying securities, they hedge their interest rate risk with swaps, they hedge their currency risk, they hedge everything. The better ones do it efficiently and accurately, and Goldman is the best in the world at it. This is a smear and it is silly. It is a lawyer blame game, not finance.
Goldman didn't put a gun to anybody's head forcing them to reach for another 1% in yield by driving credit risk to the moon. Goldman didn't rate the securities for Moody's and Standard and Poors. Goldman didn't write mortgages to deadbeats. Goldman didn't take out any loans it could never repay, and then welsh and cry for a bailout when the real estate market switched direction. Goldman is not a bad guy here.
They are just good, and a certain small minded sort of person looks around in hard times for anyone who is good at anything, and rips into them in envy and hatred. But that isn't conservatism.
Goldman Sachs has been untouched by the sub prime mess....Compare that to other Wall Street firms that weren’t so connected and with revolving door Treasury jobs
My take on Ben’s article, is that he is saying that Goldman, with help from the bond rating agency’s (moody’’s etc) inflated these CMO’s, and sold banks these “products” knowing more that the banks about them (as goldman had done due diligence and performed their own ratings on these CDO’s). Goldman essentially unloaded this junk on the banks, and knowing how bad these products were, began to actually short the banks that they were selling these products to.
I think it hilarious that most all financial firms have downgraded GS recently, while GS has done the same to them. A war brewing in the financial sector? If someone starts telling the truth, it will be interesting.
krogers, correct. not only does gs short the banks and institutions that they have sold these products too, but shorted the product indexs. in my world it’s called stealing.
Shorting a CMO (I don't know what he means by shorting "indexes") could be a dangerous game because you have to eventually make a delivery of that which you sold. Each and every tranch of each and every CMO is different. You don't short that because you can't go out and borrow it.
Can you toddster?
The primary lesson here is that if your broker is recommending it, stay away from it.
Learn to select your own stocks or buy Mutual Funds.
After I fired my broker I started making real money.
As far back as I can remember Ben Stein has been saying this sort of thing and I've been getting TAS for at least 15 years I'd say. He's always been skeptical about Wall Street...nothing wrong with that.
FWIW, GS has a history of sharing profits with all employees down to the clerks. Some other brokerage houses have kept the goodies for the big boys.
There’s all sorts of indexes in debt products that you won’t see in the retail market that are created and used by investment banks.
Here’s a CMO index created by Merrill:
It fits. And it's creepy.
Thanks...you linked to this Ben Stein piece today or yesterday
But you can’t just short an index. There has to be some sort of contract or security to short.
Can you toddster?
You might be able to borrow it, if it was an especially large issue, but I've never heard of that happening.
If they make a market in a security, they can short it, in fact they have to have the ability to go naked short to keep an orderly market. Not sure if that's what Ben is talking about.
I'm not aware of any CMO index, but so many new things have been created in the last 10 years, anything is possible. Most likely, Ben is making stuff up.
As soon as these guys create an index, they create some instrument or derivative to trade it. Again, we don’t see many of these instruments in the retail market.
You or I couldn’t go buy a CMO in the retail market either.
I trade futures and I've never heard of this one. Shorting something that has a limited availability is stupid.
I once had a client who owned the whole tranch of a CMO and there was an article on the front page of the WSJ about that particular tranch as an example. My client went ballistic as if he were protecting his turf. He didn't like all the attention to that tranch.
You or I couldnt go buy a CMO in the retail market either.
I do it every day. Yes, for Mom and Pop.
I can't believe it is because insitutional buyers will take down an entire tranch. If you control the entire issue of something and there is a short in it, in the street, you've got yourself an opportunity to squeeze somebody's b2lls off.
So Ben is mad that Goldman sold a derivative to another investment bank?
You or I couldnt go buy a CMO in the retail market either.
Is that your final answer?
I didn't even think of that.
If you control the entire issue of something and there is a short in it, in the street, you've got yourself an opportunity to squeeze somebody's b2lls off.
I don't think that would be an issue in a case like this. Especially if Goldman created the security. They have all the details, they're collecting all the checks. All they have to do is pay the same interest and principal on their short as on the rest of the issue. They never have to cover. It's not like the price will double, it's not like they're short a stock that could be bought out much higher.
He who sells what isn't hisn' buys it back or goes to prison.
If Goldman is a market maker, not sure if that's the case for CDOs, yes. As long as they pay the coupons in full and on time.
There are no voting issues. No takeover risk.
Make that CMOs...
No, I don’t think Ben is mad that Goldman (specifically) sold an instrument, just that these instruments (in aggregate) have served to thwart the Fed’s power to set target interest rates.
Greenspan started the “conundrum” talk back in 2004 or so as to how they weren’t seeing the expected interest rate changes in response to Fed policy. The Fed continued to see disparity in interest rate behavior clear into this credit melt-down, where as the Fed would be taking down target rates, the market was not reflecting the target, indicating that the Fed was no longer the 800lb gorilla in the bond market.
Every one of these new products in the debt market, especially derivatives, further thwarts the will and policy of the Fed. After all these decades of being the guys who call the tune, it is only natural that the Fed governors and chairs start getting a little PO’ed that they not only can no longer jawbone the market as they once did, they can’t really make the market do what they want through official policy, either.
The Fed, and the US taxpayer, has to get used to the idea that the Fed has essentially lost control of the US banking system. Only the most draconian regulatory framework being imposed could re-establish control, and indeed, the Fed and the SecTreas have now been talking up the plan whereby the Fed becomes the uber-regulator of the markets and banking system, perhaps having powers far in excess of the SEC.
I would prefer that the Fed quit socializing the losses of stupid actions in the financial markets and allow the invisible hand(s) of Adam Smith to deliver the requisite smack-downs, but in this current environment, it appears that Adam Smith is now dead and buried, and we’re going to have regulation - lots of it.
Should there not be some inquiry into what the invisible government of Goldman (and the rest of Wall Street) did to create this disaster, which has caught up with some Wall Street firms but not the nimble Goldman?
Huh? Invisible government?
Sorry, didn’t answer your second question:
Yes, a retail investor can buy CMO’s. Sorry, had CDO’s on the brain. CMO’s are available in the retail market.
CDO’s are (in the vast majority) an institutional product.
Ben is mad that the market outsmarted government? I didn't get that from this article.