

Goldman Sachs and the Apple structured bond deal - Libertatea
http://tech.fortune.cnn.com/2013/01/29/apple-structured-note-goldman-sachs/?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+fortuneapple20+%28FORTUNE%3A+Apple+2.0%29

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will_brown
This article aside, I find it crazy how many HN posters immediately supported
GS as if at their beck and call.

As a lawyer, we have detailed guidelines about who we can and cannot take on
as a client because of conflict of interest. On rare occasions lawyers can
represent a client where there is a conflict of interest provided it is
spelled out in writing and signed by both the lawyer and client. On the other
hand GS lives off of conflicts of interest and exploiting them.

For example, just before the real estate bubble, GS owned a bunch of "toxic"
real estate backed assets. GS sent internal emails throughout the firm to sell
these assets to clients before they became worthless, and even offered
additional incentive compensation for dumping these toxic assets off on their
own clients. When certain GS clients lost everything and these emails were
leaked a congressional hearing was held, see here:
www.c-spanvideo.org/program/293196-3

When asked about the GS conflict of interest and dumping self-owned toxic
assets on their clients that GS acknowledged would become worthless, the CEO
responded by saying just because those assets were no longer in GS's best
interest, does not mean they were not great deals for their clients, nor did
GS have any duty to disclose that GS itself was dumping the same asset it was
trying to sell to its own client.

Be warned: This can and will happen again, despite the passing of The Wall
Street and Financial Reform Act to make sure the 2008 financial crisis will
not repeat itself, GS and other special interest groups made sure that
prohibitions/disclosures of this type of conflict of interest were not
included in the reform.

~~~
rjtavares
HN posters supported GS because the article is ridiculous, not because GS is a
well beloved institution. It showed no evidence of a scam, in fact no evidence
of wrong-doing by GS, and the correction posted to the article make it sound
like the journalist had no idea what was done and just declared a scam because
the public loves shady banking stories.

~~~
bitcartel
GS set a price target on Apple of $760 within 12 months, indicating to clients
that Apple's share price will rise. Yet at the same time GS themselves dispose
of convertible bonds which are about to convert into Apple shares. Does it
sound like GS really believes in its own advice to clients?

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cs702
Not necessarily a scam.

In the prospectus filed with the SEC[1], Goldman disclosed that _"...with
regard to your notes, from time to time, we and/or our affiliates: (1) expect
to acquire, or dispose of positions in listed or over-the-counter options,
futures or other instruments linked to the index stock, (2) may take or
dispose of positions in the securities of the index stock issuer itself, (3)
may take or dispose of positions in listed or over-the-counter options or
other instruments based on indices designed to track the performance of the
New York Stock Exchange or other components of the U.S. equity market, and/or
(4) may take short positions in the index stock or other securities of the
kind described above — i.e., we and/or our affiliates may sell securities of
the kind that we do not own or that we borrow for delivery to purchaser."_

Let me paraphrase Warren Buffett: if you're playing poker with the big boys
and you don't know who the patsy is, you're the patsy.[2]

\--

[1]
[http://www.sec.gov/Archives/edgar/data/886982/00011046591300...](http://www.sec.gov/Archives/edgar/data/886982/000110465913003878/a13-1071_17424b2.htm)

[2] Buffett's original quote: [http://www.goodreads.com/quotes/29147-if-you-
ve-been-playing...](http://www.goodreads.com/quotes/29147-if-you-ve-been-
playing-poker-for-half-an-hour-and)

~~~
camus
as outragious as it sounds , banks can bet against their own clients , in fact
, that's how they make most of their money, they have the duty to protect
shareholders interests , and respect a few laws but that's it.

If they do not guarantee any return on whatever investment they sell then they
are under no obligation to look for their clients best interests.

It happened during the subprime mortgage crisis where banks would sell
derivatives to their clients and short the same clients because they knew the
products were bad. And it is totally legal.

So who is to blame ? the banks ? or the elected representatives that made
these things legal ? in the end the people is , for electing people that
serves bank interests.

~~~
chollida1
> banks can bet against their own clients

This is indeed true.

>in fact , that's how they make most of their money

This however requires some proof. They do make money this way but to say that
this is how banks make "most" of their money is way off by my understanding
and I work in the industry.

~~~
elemeno
Likewise, I'd not say that it's 'most' of their money, but pretty much every
bank I know of will happily take the opposing position to their clients. In
many cases though, this is just the bank providing the market to their
clients, especially in the cases of less liquid products.

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fmstephe
I don't understand some crucial details of these deals. If anyone can fill in
the gaps I would really appreciate it.

From my understanding Goldman Sachs typically makes money selling these kinds
of derivatives through sellers fees. i.e. They are not actually backing the
debt behind the derivative, they are just selling it and collecting a fee
(typically, around 0.3%).

If this is true then the deal simply looks like a bad one for the buyers, but
not in any unusual way. They purchased derivatives linked to Apple's stock
price the day before the earnings were made public. They bet of good news and
they lost.

The Goldman deals that were fraudulent were around Goldman recommending their
customers buy derivatives they themselves owned and were furiously offloading.
Or they were selling derivatives and then betting against those derivatives
through AIG.

This article would make sense if we could demonstrate that Goldman actually
stood to gain from Apple's precipitous stock price fall. But that connection
isn't obvious to me.

I would love to hear from someone with real knowledge about these things. Also
if anyone can pick holes in what I wrote about I would appreciate that too.

~~~
niggler
The way these deals work is simple:

1) For some reason, they have an outsized position that they want to reduce.
Circumstances include:

\- Proprietary trading group wants to liquidate a position without having to
go to the open market

\- Firm obtains a large position as part of a block deal.

In this case, I suspect they engaged in a deal with a hedge fund that had a
large exposure to AAPL and wanted to get out. GS would have acquired the
position at a significant discount (say, 5% below market price).

2) They need to find clients to soak up the exposure.

To do this, they construct investment products that allow them to offset the
exposure without having to directly move the inventory. Offering shares
directly would have to be essentially free, but products can be sold with some
extra fees.

To summarize, they have a long position in AAPL and taking the opposite side
of a derivatives trade helps balance the net position.

Note that if the clients _made_ money then you wouldn't hear about the deals.
It's only because clients lost that we are hearing about this.

~~~
thingylab
No. If you have a block of shares, there are much better ways to get rid of
them. These deals typically take a long time to structure, market and
initiate.

Besides, you really don't need a lot of shares to hedge this type of product.
You need options that are typically (at least initially) deep-ish out of the
money and so have little delta.

~~~
niggler
We are talking about positions on the scale of the Knight Capital Group or
Rochdale Securities error (both concerning positions much larger than 1B USD),
for which purchasing options could not solve the problem (the required options
would be far more than options market makers would buy at a reasonable price).

Remember, just because the MM would buy or write one contract doesnt mean
they'll buy or write tens or hundreds of thousands of contracts at the price.

~~~
thingylab
Please re-read my comment. I'm not saying you need options to get rid of a
large block of shares.

What I'm saying is that trying to get rid of a lot of shares through $30MM
worth of a reconv is very ineficient, if not downright stupid.

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Pezmc
I'm starting to get slightly concerned with how many reporters will happily
label something as a scam with little or no evidence to suggest it was.

If you read through this you see: Goldman published that they thought Apple
would do well; Goldman sells a derivative linked to Apples stock price and
collects a sales fee; people bought into that derivative; Apple released their
earnings; the value of the derivative went down; Goldman published a revised
estimate on Apple.

Where's the scam? It looks to me like people bought something that went down
in value, and suddenly it's the sellers fault!

Is this just the good old put Goldman in the title and people will read it?

~~~
omonra
More to the point - someone actually _called_ GS and asked to do this deal
(reverse inquiry). So to label this as "scam" borders between disingenuous and
libelous.

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thingylab
How exactly is this a scam ?

These are very generic products, and many investment banks issued dollops of
them (especially tied to Apple) in the past few years.

Basically, they look like bonds that pay a higher-than-average coupon, the
catch being that if the equity the note is tied to declines in value, you lose
part of your capital. Company treasurers tend to like those because of the
high headline return rate (i.e. assuming the underlying equity doesn't tank).

Now, the banks do not take the reverse position. They hedge it (probably not
perfectly, but very closely) using a combination of cash deposits and equity
options (which is really what these products are about). There is little to no
trading PnL on these things. They make money by selling the note $10 when its
intrinsic value is $9.50.

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monochromatic
Goldman may or may not have done something shady, but this post is absolutely
devoid of evidence that they did.

~~~
xradionut
Regardless of how many "good" or "legal" deals they do, they have a long
history of moral and ethical bankruptcy, so people tend to think the "worst"
of them.

~~~
monochromatic
That's fine, I guess. But what's the point of this post?

~~~
xradionut
What's the point of your post then? :)

~~~
monochromatic
Sorry, I meant what was the point of the original post.

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cmdkeen
The article is off on the magnitude of the fine - $550 million not billion.
Still very large but not quite GDP of a nation size.

It's a bit much to label it a scam based on the evidence in the article
itself. The target price of an exchange traded share is far more public and
published compared to a complex financial instrument. If people bought
millions of dollars of bonds based on nothing more than Goldman's analyst's
stock target price then they are a fool.

~~~
kenkam
Agreed, I fail to glean from the article how people "got scammed". Were they
told Apple stocks would continue to rise?

what I would like to find out is whether they were market making and hedging
what they were selling to their clients or rather taking short positions and
selling clients long positions. They stand to gain little if they were just
market making -- I suspect they must have taken some middle ground to make a
profit.

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omonra
CORRECTION: An earlier version of this story described the bond deal as a sale
to retail clients. According to a Goldman Sachs spokesperson, it was a
"reverse inquiry" for a single institutional client. The company denies that
it "made money" betting against this client. The company also points out that
Bill Shope is an equities analyst in the research department, which it
describes as independent and "totally walled off" from the securities division
where the notes were issued.

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DoubleMalt
The bank always wins. True in Las Vegas, true in New York.

[edit=elaboration] I really wonder who buys bonds from a bank when all of this
is true:

a) I can only make profit when the bank loses

b) The bank's analyst predicts that I willmake profit

There are only two possibilities:

1) The bank does not know how to earn money

2) The bank tries to screw you over

As Goldman Sachs has a pretty good track record at making money, 1) is bloody
unlikely.

~~~
adaml_623
If you do your research then you will find that medium to large public bodies
are especially good at getting ripped off buying these bonds.

Usually your local education board or city council (A) has some money to
invest or some income to smooth out. 1\. They talk to financial advisors (B)
who give advice. 2\. The advisors get commissions if they sell certain types
of products. 3\. The inexperienced financial staff in A believe the advice
given by B. 4\. The taxpayer shoulders the risk.

~~~
DoubleMalt
One more reason not to put money in the hands of politicians.

People that lose their own money on these scams can't expect sympathy for
being greedy from me.

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driverdan
The title should be changed. Calling this a scam is libelous.

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digitalengineer
I don't get it. Why in Gods name would _anyone with money_ freely be their
client? Who wants to be handled like a puppet? (Their words, not mine).

~~~
jwhite
I think they described their clients as muppets, not puppets:
[http://www.nytimes.com/2012/03/14/opinion/why-i-am-
leaving-g...](http://www.nytimes.com/2012/03/14/opinion/why-i-am-leaving-
goldman-sachs.html?pagewanted=all&_r=0)

~~~
digitalengineer
Actually, I thinks that's even worse.

------
antr
Scam?

Can a HN mod please change the title/link bait?

------
lifeisstillgood
I have not seen any stats behind this, but I have noticed an increase in the
number of suits against Goldman in the past year - either its a fallout of the
recession, or a meme now popular in the media, or frankly GS are very bad
boys.

Is the apparent increase in lawsuits real ?

~~~
Pezmc
I think the media attention to these has increased, rather than the actual
volume. It's easier to try and pin blame on the biggest bank that everyone
else is targeting. Plus, media outlets know if you throw Goldman Sachs in the
headline, more people will read the article.

It's mostly scapegoating as far as I am aware, the banking sector collapsed,
and people want to blame someone!

~~~
lifeisstillgood
Yeah - I was struck by an interesting thought - don't blame the banks

Well actually you can, but we are in a massive period of transition, where
technologically based unemployment is chucking middle income earners onto the
fire.

The sensible response to temporary unemployment is to borrow to cover the down
period and pick up with a new job - but for millions there is no job

So debt was take. On massively across the board - and debt is what was
revealed in the 2008 bust up - there was no where else to hide the debts and
bang

Not sure if its coherent analysis but interesting (read race against the
machine)

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snake_plissken
chinese firewall!

