We’re too cynical to believe that the mere unmasking of Goldman Sachs & Co. on Friday as a corporate swindler caused U.S. stocks to weaken. Iceland’s ash-spewing volcano is where the real economic threat lies, we’re convinced. Granted, Goldman is the Government’s poster boy for the global banking system’s supposed recovery, and it won’t help appearances that the firm stands accused by the SEC of being, to put it colloquially, a bunch of double-dealing scumbags who would cheat their own clients to make a buck. But who doubted that to begin with? It is only in the eyes of newspapers, network news anchors and CNBC interviewers that Goldman’s officers are corporate royalty. For the rest of us, meaning the newsletter world, the firm is about as trustworthy as someone who has done hard time for murder or buggery. Goldman has been getting away with the financial equivalent of both for years, although it has always been assumed the company was too well connected to be formally accused of wrongdoing. While we sincerely applaud the SEC for taking them on (perhaps bidding to make amends for dropping the ball on Bernie Madoff), we’re concerned that the regulators may not know just who they’re messing with.
Not that it took Deep Throat to tell them where to look. While the charges brought by the SEC concern Goldman’s sale of some esoteric financial instruments to investors, the crime itself is not difficult to understand. Here’s an account from the Associated Press that manages to divulge the juiciest part of the story in the opening sentence: “The government on Friday accused Wall Street’s most powerful firm of fraud, saying Goldman Sachs & Co. sold mortgage investments without telling the buyers that the securities were crafted with input from a client who was betting on them to fail.” A Goldman spokesman called the SEC’s charges “completely unfounded in law and fact,” but even Joe Sixpack can see that the bank has been caught with a holdout device and some aces up its sleeve. If Goldman is smart, they will not ask for their day in court. Regardless, it is inconceivable that any sanctions that may result will constrain Goldman and its ilk from conducting business as usual. Only a Second Great Depression can do that, although we can only pray that our children and grandchildren will have reason to believe someday that purging corruption from “the system” – from our way of life, to be blunt about it — was worth the pain.
Ashen Europe
Concerning Iceland’s catastrophically prolific volcano, it may be more obvious in a month that it, and not the dog-bites-man story concerning Goldman, caused stocks to fall (though not to plunge). It is already apparent that the problems of volcanic ash spewing over Europe are significant enough to bring airborne business nearly to a halt. The timing couldn’t be worse, coming as it did after Germany and the IMF had just finished lacquering the veneer of a Greek bailout that can only drag the rest of Europe — meaning Portugal, Italy, Ireland and Spain — down with it. For our part, we told subscribers to buy put options on the Diamonds on Friday after raising the possibility the night before that the stock market was in danger of collapse. Although shares have been defying gravity for more than a year, the mood change on Friday evinced the kind of queasiness that we have come to associate with important turning points.
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This is a pretty good video, since Paulson & Co. are now made guilty by association:
Yahoo Finance Tech Ticker
http://tinyurl.com/y7yvot2
Paulson wasn’t only betting on a decline in housing prices, but was also positioning for a decline of short term interest rates, at the time a very dubious bet.
“…we can only pray that our children and grandchildren will have reason to believe someday that purging corruption from “the system” – from our way of life, to be blunt about it — was worth the pain.”
In one sentence Rick, you may have summarized the quintessential issue of our age.
The day before my father passed at 88, we talked about the market, as we often did. His take was, we could not trust it any more. That was Thanksgiving 2008 when big government took over the free economy and markets by force majeure…
Chris T.
Per another source, the “client” appears to be the hedge fund Magnetar. Here is a link to a relatively long, but good article about the operation: http://www.propublica.org/feature/all-the-magnetar-trade-how-one-hedge-fund-helped-keep-the-housing-bubble
wyz
You may want to check out Janet Tavakoli on that Pro Publica story before you put too much stock in it.
http://www.huffingtonpost.com/janet-tavakoli/propublicas-and-ny-times_b_542441.html
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While we can all applaud Ms. Tavakoli’s efforts to keep Goldman sleaze from being covered up, she has used the term “synthetic CDOs” in the way less knowledgeable types (which she surely is not) — usually reporters and news readers — use the term “naked” options/shorts. These words are intended to stir up readers’ suspicions, but in fact, the synthetic creation of CDOs was done, presumably, because the supply of “real” CDOs meeting the criteria of Goldman, Magnetar et al. was too small to meet institutional demand. As much was true of equity put options before they became listed on every stock in the late 1970s. Before that time, each exchange had only five stocks on which puts could be bought. But that didn’t stop market-makers from creating and selling synthetic puts.
Concerning demand for CDOs outstripping the supply, a symptom much broader than the one Ms. Tavakoli has written about is the frenetic hustling of re-fi packages by mortgage brokers. Besieged with offers of cheap loans, homeowners must have wondered why the lenders were being so “nice.” But because the outcome appeared to be a win for all parties involved, and because the final product helped satisfy all-but-insatiable demand from institutional portfolio managers in need of triple-A yields to cover the entire curve, home-equity loans burgeoned far beyond the level of “organic” demand. Blame the feather merchants if you want, but there is no getting around the fact that we were all complicitous, since the operators downstream of Goldman never had to twist our arms to make us borrow. RA
And for the full picture, here’s a bit of research on Pro Publica itself:
http://maxkeiser.com/2010/04/19/tavakoli-propublicas-untold-magnetar-story-creates-excuses-for-wall-st-and-washington/
Here’s an added angle to ponder from Thomas J. Bowley at Invested Central;
“Adding to the bears’ fuel on Friday was the announcement that the SEC is alleging that Goldman Sachs (GS) defrauded investors out of $1 billion relating to mortgage investments. I’m not going into the details of the allegations, but help me with the math here. GS lost $23 per share on Friday, or $12 billion in market cap, because of $1 billion defrauding allegation? Is there more to it than what was provided in the initial news release or was this a complete overreaction on options expiration day? I guess we’ll find out soon enough.
But here’s the really ironic part of the GS story. GS has market making operations. Does anyone else see the irony in this being announced on options expiration Friday? Let me tell you that prior to Wednesday, the largest daily spread of equity calls traded vs. equity puts traded was 1.5 million contracts. After Intel (INTC) reported better-than-expected earnings on Tuesday, the spread of equity calls vs. equity puts skyrocketed to 2.0 million contracts on Wednesday. On Thursday, that spread was 1.8 million contracts. In other words, options traders have NEVER been so optimistic about the short-term market prospects and when everyone is buying up those calls, who is on the other side of the trade? Well, it’s one of the responsibilities of the market maker – to provide liquidity in the marketplace. My proprietary relative complacency ratio hit 29% by Thursday’s close. This is a useful sentiment indicator based on equity options trading and it marked the second consecutive day over 25%, which are the only two days it’s ever been that high. Relative complacency generally marks tops. I’ve never seen the market print extreme readings like the ones on Wednesday and Thursday. So now let’s discuss the timing of the SEC’s Friday announcement. While GS likely stands to be slapped on the wrist at some point in the future for these alleged violations, I can only imagine how much the timing of the SEC’s announcement cost all those call buyers on Wednesday and Thursday and helped turn profits at market making units like Goldman Sachs’. Let me just guess that it’s more than $1 billion and leave it at that. I’m calling it the 2010 financial bailout, as if they needed another.”
The Icelandic volcano? Simply a metaphor of the absolute overtaking of clarity. An endless spew of choking ash cynically propelled from a searing, sulphurous rift obscuring light of day. An ice age commeth from the burning bowels of bailout blowout, …in other words.
If we lose Goldman does it mean there is no God? Kidding, of course. It is hard to believe that Blankfein could be so blind to have not known the danger in that flammable statement. “God’s work?” Even arrogance is more intelligent. prediction: “public” GS gets vaporized. Nobody goes to prison. Current management takes the whole thing private. They are so short that they make 10 times the cost of the ultimate buyout (why do you think they were so confidently defensive last Friday? “sell more Mortimer!!”. Obama forever waves his “I took down God-man Sachs” flag and struts around the political ring like a WWF champ. Ultimately, as the light of truth is shown on all of the posers, industrial and political, the public cynicism will grow until we have the “End of Equities” cover story several years from now.
Also, everyone knows GS are scumbags, but that’s different from a host of lawsuits: Sec, Britain, Germany, class action, and God knows what others that are sure to follow against Goldman and Other Banks to be named soon. The door has been opened. This market may recover temporarily. But it’s cooked.
The second the goldman announcement came out stocks dropped 50 points. That second. They never recovered. Tough to see how the volcano figured in.
“The timing couldn’t be worse, coming as it did after Germany and the IMF had just finished lacquering the veneer of a Greek bailout that can only drag the rest of Europe — meaning Portugal, Italy, Ireland and Spain — down with it.”
I would say that that is precisely the point of trumping up this volcano. There was a physicist on one of the MSM stations when this first happened. For the record, he was that asian scientist who I would recognize anywhere but whose name I don’t recall at the moment.
Studies dark matter, iirc. Anyway, he explained volcanic winters and said we might have one, because of all the ash and smoke and other particles in the mix. He then talked about the year without summer, back in 1816. That was also the reason behind the flight ban, all that ash and other junk. However…
http://wattsupwiththat.com/2010/04/18/volcanoes-and-water/#more-18678
What ash is there to worry about? Can water vapor really rob us of summer? Does that mean planes shouldn’t fly? Somehow I don’t think so, on all counts. But if a popular physicist can get up on TV and say we need to worry about volcanic winter and keep air traffic down for x number of months, even though there’s little grounds for thinking or doing so, then you can bet that something is shaping up because of this.
I, for one, smell a rat here. Greece never was going to float. But now that there’s been a volcano that they can blame things on, well… There ya go! You’ve gotta go broke. There was a volcano. You must endure higher food prices. There’s a volcanic winter (that is covering up the global warming we haven’t been seeing, of course, so you still gotta spend billions on wind farms). You can’t leave and go somewhere else. There’s an ongoing flight ban because of the volcano…
It’ll be the same old, same old from Officialdom.
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Take another look at the satellite photos, Ben. It is only the white part of the billowing clouds that is steam. The rest is obsidian and other volcanic dust , and the microparticles can probably grind a jet’s fans down to mere nubbins in the blink of an eye. RA
Hi Rick,
I figured someone would pick up on my error. I really should proofread a bit more before hitting that submit button! But no, I didn’t mean to say that there was _no_ ash. There certainly is, but the question is if it justifies the wide-spread, extended, and multi-million dollar flight ban.
From what I’ve been seeing on google earth, as well as the pictures found all over the net (the BBC site in particular has many pictures of the various airports), it’s not looking like it is. It’s been looking quite clear at most airports across Europe affected by this ban. I can understand Iceland and parts of northern and northwestern Europe being shut down, but when Brits in Chicago can’t get back to London (clear) and Obama must cancel his appearance in Poland (clear), it makes one wonder. Surely the airlines and airforce one especially could fly over or around the trouble spots?
Rick,
“with input from a client who was betting on them to fail”
While that specific piece of information may not have been known up to now, it has been no secret that GS was itself shorting this market while still selling these instruments long to clients. Where is the accusation for the general fraud therein?
As to the SEC, and occdude’s point also, this is a civil suit, not a crimimal one. So not really punishment for fraud in the usual sense. Why should the government get this money if they win, they were not the one’s hurt. You just know, that none of the injured third parties will get any of the money awarded. As to SEC complicity, who knows, look at their input into Enron, and the CFTC’s complicity (at the very least by inaction) in the manipulations in the commodities…
I have not followed this story very closely, but it would not be a surprise to find out that this “client” was Jon Paulson. That would make his vaunted foresight and skills just another typical bankster rip-off.
And beyond showing that the seller had no real belief in the value of the instruments being sold to clients for fat fees, how come there is no mention (in the msm) that the very act of shorting actively depresses the value of them?
Finally, to the airtraffic impact, I recommend reading about the “City of Edinburgh” flight to NZ in 1982. This was the first plane to pass through volcanic ash. It is a miracle that the pilot was able to save the plane, after all four engines caught fire and stopped. There is a passenger account at spiegel online…
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The civil charges brought against Goldman will lower the burden of proof for the prosecution, but the net result will be the same as if they’d been charged criminally: Goldman’s reputation will be destroyed. When you see what Goldman’s line of defense is — the Wall Street Journal laid out the firm’s case, such as it is, over the weekend — the nature of the fraud will become even clearer to the lay reader. The firm will be claiming, for one, that many of the investments they offer are two-sided bets. However, just let them try to produce even one investor who thought that the particular bundle of mortgage securities selected by Paulson was a bullish bet on the mortgage market. Concerning Paulson, there is no doubting his foresight. There was never going to be an easy way to make a bundle on a collapsing housing market, but he figured out how, and with a lot of work and hustle made it happen. RA
At least one source has GS making money covering their naked shorts…
http://reddragonleo.com/
In a banking collapse nearly a century ago, bankers were hauled from their offices and hung from lamp posts in the street. It is a crying shame that Wall St. no longer has lamp posts. I think the bankers had them removed. ;(
Dusty
PS. Not to foster a conspiracy, but are there derivatives on volcanic eruptions?
I hate GS. I hope the government sticks a regulatory stake in their black hearts and ends their evil reign, so light can again return to this fair land. Although you raise a good point and that is the government doesn’t know exactly who its foolin with. GS is connected and not just domestically but internationally. GS also does a lot of financial dirty work for our government something that the treasury and Fed knows, but the SEC doesn’t. I wonder how Geithner and Bernanke feel about this virtuistic pursuit of justice?
I have a hard time believing that they are really trying to put Goldmans head on a stick and wonder if this isn’t some ruse to get a mea culpa and some type of absolution for GS who continue to take body blow after body blow (for good reason mind you).
As an aside, I haven’t been following your “hula countdown” but you may have just gotten a stay of execution not from the market, but from the US gubermint.
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The hula is to be danced in the dead of winter as promised, but since there was no time limit on Goldman going to $29, I’ll push for one more February. Mind you, I still think it is Goldman’s karmic destiny to end in smoldering ruin, since it is the company most closely identified with the lies, corruption, cronyism and epic self-deception that were necessary to take the global economic system down. We’re probably no more than a third of the way there, if that much, so Goldman obviously has a long, long way to fall. RA
GS/PB already below 29…
http://stockcharts.com/charts/gallery.html?gs/pb