
Goldman Sachs Is Robbing Us Blind - vorador
http://www.businessinsider.com/dylan-ratigan-goldman-sachs-is-robbing-us-blind-2009-10
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roundsquare
Not getting into what I think of the conclusions of this article...

I really hate articles like this. There is _nothing_ specifically stated to
back up the conclusion. Give specific actions taken by Goldman and show why
that exploted people.

Secondly, even if some groups within Goldman did do this, its a vast
oversimplification to say "Godlman Sachs Is Robbing Us Blind." I know, its
hard to get very nuanced in an article like this, but at least state which
divisions of Goldman did this. A lot of groups in Goldman are not structuring
products. Some of them are facilitating trade of other companies, some are
just buying and selling stock, some of them are doing economic research,
etc...

An article like this is meant to provoke anger, and thats fine. Without
getting people really mad, nothing will ever change (I mean this in a broader
context as well, not just with respect to Goldman). If a large power financial
institution is truly using dishonest methods to rob us, we should figure out
what to do. I just wish there was some reference to a cold hard fact, a link
to further reading which wasn't just the article itself on the huffington post
or _something_ to allow people to make an informed decision.

Ah well.

Edit: Spelling, a few additions.

~~~
chaostheory
I'm not a finance guy, but I think this is a better article on the subject:
[http://www.rollingstone.com/politics/story/29127316/the_grea...](http://www.rollingstone.com/politics/story/29127316/the_great_american_bubble_machine)

~~~
jimbokun
Wow, there sure were plenty of facts in that one. If even a substantial
fraction of what's in that article is true, Goldman Sachs is purely,
objectively evil. And there's probably nothing we can do about it.

We tend to think of Obama as the anti-thesis of the Bush years and policies,
but he is in lock step with the Bush and Clinton administrations in his
deferral of all financial decisions to Goldman Sachs and their alums.

~~~
wmeredith
Yes, that article is mind blowing. Unfortunately it was published in Rolling
Stone, meaning that there's a large portion of the country that would refuse
to read if given the chance as well as some who wouldn't believe it if they
did. As far as the Obama comment is concerned, he is lockstep with the Bush
admin on more than just financial policy, he's also followed their lead on
torture, search and seizure etc. The emperor truly has no clothes. (I feel
that I should actually be posting this on Reddit...)

~~~
slpsys
Not so sure about that, Matt Taibbi is pretty well known for being up on his
shit, regardless of the fact that it's published in Rolling Stone. I think the
actual distribution of the publication is more of a limiting factor than any
potential stigma attached to it.

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chris123
Pick your slogan for Wall Street in general, but especially the insiders club
of Goldman:

A) "Heads I win, tails you lose" or

B) "Socialism for the rich" (privatize profits and socialize losses).

"Ten Principles for a Black Swan-proof World":
[http://chrisco.wordpress.com/2009/06/10/ten-principles-
for-a...](http://chrisco.wordpress.com/2009/06/10/ten-principles-for-a-black-
swan-proof-world/) \-- Nassim Nicholas Taleb's ideas ("Fooled by Randomness").
See also the Nouriel Roubini links there.

NYT: "Wall Street Smarts":
[http://www.nytimes.com/2009/10/14/opinion/14trillin.html?_r=...](http://www.nytimes.com/2009/10/14/opinion/14trillin.html?_r=1&em)
\-- Interesting op-ed.

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Tichy
"Now this method of "business" is only possible if the government continues to
allow these crooked insurance contracts to be written in secret, allows them
to hold little or no money in reserve for payment "

This is what I don't understand. Why is the government responsible? Shouldn't
the buyer of an insurance make sure that they are getting their money's worth?
If the insurance is not transparent enough, it is just another reason not to
buy.

~~~
vlod
It's not insurance. It's a credit default swap which is a financial instrument
and AFAIK not regulated as much as insurance.

Insurance is really the wrong word, even though the article uses it.

I'm not sure how nobody is going after the credit rating agencies. They're the
ones that rate how stable a bank is.

~~~
cwan
All forms of insurance are financial instruments. Not all forms of insurance
are as regulated. Premiums are another word for savings/downpayments for some
potential future payout. Insurance is an appropriate word for credit default
swaps - as it is insuring against the default on a given loan.

In this case, I have my doubts as to how significant the role CDS's played in
the crisis in the first place given that after they were all netted out, the
actual size of the market was nowhere near the initial scare numbers put out
in the press. Here's a decent overview of how the market works:
[http://www.wilmott.com/blogs/satyajitdas/index.cfm/2009/4/12...](http://www.wilmott.com/blogs/satyajitdas/index.cfm/2009/4/12/Credit-
Default-Swaps--Through-The-Looking-Glass)

More here: [http://seekingalpha.com/article/138047-how-cds-spreads-
affec...](http://seekingalpha.com/article/138047-how-cds-spreads-affect-
equity?source=yahoo)

In the aftermath I figure we'll probably find that the much larger issue was
in the debt markets and fears of the underlying asset values related to
subprime cascaded down to other loans.

~~~
vlod
No credit defaults swaps are NOT insurance they are a swap. They _can_ be used
to hedge 'bets' as options can be used to hedge positions.

Heres a link: [http://blogs.reuters.com/felix-salmon/2009/07/04/why-
insuran...](http://blogs.reuters.com/felix-salmon/2009/07/04/why-insurance-
commissioners-should-not-regulate-cds/)

~~~
cwan
You're arguing over semantics. Insurance is about making bets. Life insurance?
You bet you're going to die, your insurer bets you won't die that soon.

From the link you provided: "Many swaps can be thought of as being like an
insurance contract, should one be so inclined." Just because you call it
insurance, doesn't mean that insurance commissioners should regulate it as
such. Just as insurance commissioners shouldn't regulate financial options
even though they can also be used conservatively as insurance against given
financial risk as much as wild financial bets.

~~~
vlod
As wikipedia says, with insurance there has to be a debt obligation. With CDS
there is none. i.e I can't buy life insurance on you, but I could
(potentially) buy a CDS that covers me if you declare bankruptcy.

Maybe CDS 'should' be regulated as insurance but thats for another day. :)

Anyway.. for those that are interested..

From: <http://en.wikipedia.org/wiki/Credit_default_swap>

CDS contracts have been compared with insurance, because the buyer pays a
premium and, in return, receives a sum of money if one of the events specified
in the contract occurs.

However, there are a number of differences between CDS and insurance, for
example:

\- The buyer of a CDS does not need to own the underlying security or other
form of credit exposure; in fact the buyer does not even have to suffer a loss
from the default event.[1][2][3][4] In contrast, to purchase insurance, the
insured is generally expected to have an insurable interest such as owning a
debt obligation;

-the seller need not be a regulated entity;

-the seller is not required to maintain any reserves to pay off buyers, although major CDS dealers are subject to bank capital requirements;

-insurers manage risk primarily by setting loss reserves based on the Law of large numbers, while dealers in CDS manage risk primarily by means of offsetting CDS (hedging) with other dealers and transactions in underlying bond markets;

-in the United States CDS contracts are generally subject to mark to market accounting, introducing income statement and balance sheet volatility that would not be present in an insurance contract; Hedge Accounting may not be available under US Generally Accepted Accounting Principles (GAAP) unless the requirements of FAS 133 are met. In practice this rarely happens.

~~~
cwan
Definitions in a regulatory context and simple definitions can be different as
this shows. Look up insurance in any dictionary and you'll get some variation
of this definition: "A promise of compensation for specific potential future
losses in exchange for a periodic payment."

Look up viaticals for instance. However, whether or not you call it insurance,
is irrelevant given the underlying components still exist - the risk and the
financial instrument that can either be used to offset that risk or
essentially gamble. This applies as much to regulated insurance markets as it
does to derivatives.

------
va_coder
Here's the startup equivalent: 1) The creation of Federal Startup

2) Federal Startup's job is to ensure we have a stable, vibrant startup
culture

3) Federal Startup loans money to startups using money it prints

4) Goldman Cloud company, a successful startup, places key people in high
levels of government, including Federal Startup

5) Goldman Cloud company takes many risks with the knowledge that Federal
Startup will help them if things get very bad

6) Things get bad, loans dry up. Goldman Cloud has a former CEO which now runs
Federal Startup. They work together to 'fix' the system.

7) At the end of the day, after the turmoil is over, Goldman Cloud is one of
the last startups standing

Personally, I don't blame Goldman Sachs, but I do blame the Federal Reserve
and US Treasury. End the Fed.

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shin_lao
The problem with CDS is when they are based on crap, ie the ability of people
without money to buy houses.

Clever people looked into those CDS and decided to bet against them. They
became extremely rich during the crisis.

There is nothing wrong with CDS, it's just that it was based on crap and
people didn't do their homework. "It earns money, must be cool".

Want to prevent this? Well have American banks join Basel II. Stop allowing
them loaning money to people who will never be able to reimburse. Make sure
insurance companies like AIG can't enter the derivative products market so
easily.

And please stop reading articles from people who learnt about derivative
products yesterday.

~~~
byrneseyeview
A derivatives contract has two sides. You have to pick which side you're
talking about when you say it's dumb -- if one side of the trade was
exceedingly stupid, the other side must be extremely smart.

And your argument doesn't make sense in light of how much money the Euro-banks
lost. If lack of regulation was the problem, why did the most regulated
entities, buying the most regulated securities, according to the strictest
rules -- lose the most money?

Why did regulated hedge funds beat the S&P by about 20% in 2008? If regulation
keeps us safe, why is it always so dangerous?

~~~
shin_lao
Because European banks do a lot of business with American banks.

Even banks who did stay out of the "contaminated" credit business had business
with banks who didn't.

------
Timothee
Unfortunately, I'm afraid this is nothing new…

~~~
cwan
Who are the ones robbing us blind here? The problem wasn't so much the
underwritten credit derivatives - for which there's an actual genuine business
need, but rather governments who have enabled companies like Goldman Sachs
(AIG, and Lehman - which the government of course let go under), instead of
letting these guys get reborn through some type of accelerated bankruptcy
structure or better yet, collapse to be replaced by nimbler, smaller
competitors.

~~~
vlod
I think the general thought is that a few banks would fail, nobody would
really care (because they are sleaze anyway) and everything would continue as
normal. errh.. no.

They let a few banks die and look at the global effect. Imagine if they let
everything tumble down.

The banks are _very_ - _very_ tightly coupled together, such that the whole
system nearly collapsed.

Thats not just the finance industry, thats the whole economy.

~~~
cwan
It's not an easy choice - but the anger is a bit misplaced insofar as Goldman
Sachs goes given that the "us" here was complicit.

The question isn't so much allowing everything tumble down but provide a
structure where banks can quickly deal with the losses/asset revaluations and
be reborn so that depositors don't fear for the safety of their deposits. To
suggest that the choice was binary and that we could have either saved them or
let the world descend into chaos as silly as it is untrue.

Instead we've created a system where bankers have gotten rewarded for taking
outsized risks without fear of the downside and the supposed "systemic" risk
has gotten even larger as those massive banks have become even larger.

~~~
vlod
What structure existed at the end of last year that allowed banks to be reborn
with the depositors not being scared?

You don't think there would have been a run on the banks if more had failed
and gone Chapter-11?

~~~
cwan
When the government started making it clear that they would provide liquidity
to large banks, they effectively extended their own credit rating to these
institutions - for the same reason that Fannie Mae and Freddie Mac didn't fail
because they were taken over by the government.

As noted, if there were more of a rapid bankruptcy structure where the
government could have taken over a bank on a Friday to allow it to emerge
Monday and restructure its assets, this could have provided greater confidence
to the markets. The major issue of these institutions was that they weren't
able to continue funding ongoing cash requirements.

Lehman went into bankruptcy because of liquidity - ie that their short term
assets weren't able to cover their short term obligations. Much of this reason
was because people didn't trust the valuations of their assets (e.g. subprime
mortgages) and fears that proved to be overblown as to outstanding unstated
liabilities - because it wasn't a transparent market. Barings, if you recall
was brought down by a rogue trader so it wasn't beyond the realm of
possibility and at that point the numbers being quoted as to the risk exposure
of CDS's was in the tens if not hundreds of trillions of dollars (which again
if netted out was only a couple trillion - and for that exposure to be
realized would basically require every major company in the Fortune 1000 to go
bankrupt at once).

~~~
vlod
How would they restructure their assets so quickly (over the weekend) and
solve their liquidity problem without the Fed? (with the banks not lending to
each other)

Even if a bank wanted to lend another bank money, it takes time to do a
reevaluation (more than a weekend) of another banks assets and they would be
more concerned of trying to calculate their own exposure.

~~~
cwan
It's called a cramdown: <http://www.forbes.com/forbes/2008/1027/030.html>

The idea is that there wouldn't be a liquidity problem as the debt excluding
individual depositors would be restructured as equity or some type of quasi
equity/debt with assets aggressively written down.

The problem with what has currently been done with the bailouts is that the
underlying problem hasn't be dealt with and only deferred meaning that at some
point it's still going to have to be dealt with - and by taxpayers instead of
investors who should bear responsibility for the risks that they have taken
and the trust they placed in the executives of these institutions.

