I've been informed that BNP Paribas has blocked access to blogspot URLs from their servers. That means that employees of the French bank can no longer enjoy my blog nor many others. EFF YOU BNP!
some things to read (some are old):
Cliff Asness: Keep the casino open
Roger Lowenstein's NY Times Op-ed: "How Wall Street Became a Giant Casino"
Alea: Abacus for dummies
Bethany McLean's NY Times Op-ed: "Meet the Real Villain of the Financial Crisis"
"Probably where many of the differences of opinion form is whether or not we think of offerings as market making activities or as some kind of “sale/promotional.” I think the diffculty in this discussion is that for most people when they see a pitchbook or a sale of offerings, they think of it coming from an advisory standpoint. People find the behavior appalling because the assumption is that the sales function of goldman and other banks is to present you with things that will be “good” for you and make you risk adjusted money. That is a perfectly reasonable view to have and I would be appalled too if I had that view.
From my perspective and the perspective of GS, their function is not to make you money. At least not in respect to trading, market making and even offerings. The presentations, pitchbooks etc simply exist to tell you “this is what you will be buying, and this is a price at which you can buy it for.” In theory the IPO prices in an offering are supposed to be values that reflect a neutral point between the sellers and buyers. Even here there is an adversarial relationship. Sellers want more, and buyers want less.
As much as GOLDMAN doesn’t want to admit it, most of their operations are as bookies not as advisors. And being a bookie isnt a bad thing. Lots of professions do basically the same thing. A real estate broker is no different. They’re just guys that know the process , collect a fee and and set some lines.
It’s why you heard GS execs saying they sold exposure, not returns..."
and related to that comment, from the NY Times' live blog of the hearings, this explanation of why Senator Levin and Lloyd Blankfein seemed to be speaking different languages:
"What you’re witnessing here is an essential debate over the components of Goldman’s business. As Dan Sparks explained earlier, Goldman both creates new investments (like C.D.O.’s and mortgage bonds) and it provides so-called market making, which is like the air-traffic control room of assets. As a market-maker, Goldman trades assets that were already created. And so Mr. Blankfein’s remarks on market-making and the senator’s remarks on investments created by Goldman are floating past each other like cars headed in opposite directions."
I don't really want to debate the GS hearings, but I do think that Senator John McCain's questioning was an embarrassment to himself and his role. McCain showed up late in the day, asked ignorant questions that were a complete waste of time (like asking for an explanation of what a CDO was), demonstrated a complete lack of understanding of what the SEC suit vs GS is about, and, of course, threw in some populist references to the ails of community banks. Hey Senator McCain - do you know why community banks are going out of business? It's because they made bad loans! I know! Hard to believe that, right?
-KD
17 comments:
Was it just me, or did the lack of understanding and line of questioning by the Senators actually make the GS gang look good? The senators came off like a bunch of ignorant stubborn geriatrics. McCain looked like someone from the retirement home woke him up, took him out of hospital gown, threw a suit on him, and wheeled him into the hearings. He seemed more prepared for the post debate ice cream. Levin's line of questioning was like watching an argument with an old codger, where he just goes on beating the same point to death, without acknowledging that the point of contention was a simple interpretation of meanings between the debating parties. Rather than bring clarity to the discussion, Levin went on to repeat his same points over and over and over, without adding anything!!! "And then you shorted!!!" Christ sakes Carl, just shut up and play your cards for already!!
The whole experience was quite bed pan-ish, or in other words "shitty".
The Chicago Mercantile Exchange used to allow dual trading - whereby a broker, with a fiduciary responsibility to his client, is allowed to participate and trade his own money acting as a proprietary entity and a broker to the client.
Sometimes his opinions will align with the customer, and sometimes against. Overall the practice was outlawed by the CME because of obvious conflict of interests between brokers and clients - as well as nonpublic information in the brokers pocket quickly lead to rampant trading abuses.
Its how many of the bond locals in the 80's and 90's made their living - as broker/locals with big clients they could skim/front run.
The Goldman case kind of speaks to Goldman allowing themselves the role of both market maker and broker. It is wrought with conflict.
The SRW post touches on whether or not IKB/ACA viewed Goldman as an entity acting with any fiduciary responsibility to them. Goldman seems to think only in the absolute strictest legal sense.
Overall i think this hurts Goldman's ability to push the more frothy structured products (the one's with all the edge) and overseas products should suffer as well.
In closing,whatever your take on this, I hope we agree that Goldman should under no circumstances have access to taxpayer subsidies via their bank holding status.
Period. A Government subsidized hedge fund? That's crazy. (and Citi/JPM et al)
Further, their GOV'T connections got them paid out in full on AIG counter-party risk to the tune of 13 billion plus.
That being said, WTF is a German Pension fund doing hunting in American Subprime in March 2007? Why was it still rated AAA? That train had already left the port. Talk about leading with your chin.
And yes to Anon above, the Senators seemed like uniformed clowns.
scharfy - 1) i absolutely agree that GS should not be able to use the bank holding company loophole. 2) i don't think SRW's point was that ACA/IKB viewed GS as having fiduciary duty to them - it's widely agreed upon that there is no fiduciary duty there.
i was going to write a post about how generally, the idea of principal traders having fiduciary duty is mutually exclusive - it's impossible for them to act in the best interests of their firm and of their clients at the same time. the GS guys on the panel didn't want to come out and say that - which is why Senator Collins was so frustrated with the general non-answer to her question.
of course, it's already being discussed as to whether fiduciary responsibility for brokers should be added into the financial reform bill. I say, strongly, NO, as it would logically lead to the law of unintended consequences: preventing market makers from doing their job of committing capital (Again, how can you consistently act as principal if you have fiduciary duty to your client, and job responsibility to your firm?!?!)
McCain's special guest appearance was so mailed-in as to strike me as completely bizarre. I actually thought the senators put on a good show and didn't embarrass themselves as much as I thought they would. I think they know exactly what happened and have Goldman's number. (Unfortunately, that number is on speed dial on their cell phones.) Whoever Goldman may be on Wall Street, they are zeroes and outclassed by the pols when it comes to performing in front of the general public.
Goldman came across as having something big to hide, which they do. As we all "know" but probably will never be proven, that something big is the real dimensions of the Big Short, which included puts in equities of Bear Stearns, Lehman, ACA and probably every clown organization that was dumb enough to buy the toxic exposures Goldman was offloading and/or packaging with the dual purpose of shorting and taking out the competition. I'm convinced they gave Bear and Lehman et al discreet little shoves down the stairs. Unethical? Absolutely. Illegal? Maybe not. Something about GS might leave a bad taste in my mouth, but it's clear they are an organization of excellence. But we all know that organizational excellence means efficient vertical and horizontal communication, and the ability to identify and implement good ideas from whatever source within the organization.
That's a nice way of saying those smug bastards knew exactly what other departments were doing, what the macro position was, and served the organization in lockstep.
People are making a mistake in understanding fiduciary duty. No trade with goldman, even in offerings is ever anything but a simple buy and sell. It's why the whole idea of "do you what's best best your customers" is a completely nonsensical question.
You wouldn't ask this question of coke or any other business. Because what's best for your customer is necessarily worst for you. If fiduciary duty were a requirement it would be impossible to make markets at all.
Even if you were just someone matching and executing trades. As a pure execution broker you could in a day get a buy order from one client, and a sell order from another. If one of the orders is very large, how could you ever put the trades in. If you tried to parse out a large sell order, anyone who bought securities from the beginning of the sell, would find that the price was much lower later in the day as large blocks pushed prices down. But if you held off from entering the buy trade, the sell could argue that you didn't get him the maximum value for his sells, since you held a buy out of the market.
It's an insane, ridiculous and impossible standard by which to trade. Mind you this is a broker/dealer that is not principal trading but merely clicking buttons and entering trades for their clients to let others fill.
yes Jon - i very much agree. that's what I was alluding to in my recent comment. good point about even agency traders though - I hadn't though about that issue.
OK, so I'll ask the question--if GS sold stuff they knew was bad just to sell it, how are they different from the guys from Glengarry Glen Ross? Is it all just "buyer beware" and steak knives for second place?
How is it different? I'd really like to know. . .
As for the Senators--this is what comes of letting everyone of them have time to talk. There are some good people there but the fools and rabid partisans drown them out.
BWDIK - rather than get into this again, i'd refer you to the Jon W comment in the body of this post. I think it explains it well.
GS's has clients. some of them want exposure on the long side of an asset class. GS sells them this exposure. Some of them want exposure on the other side of an asset class - GS sells these other clients this other exposure. nowhere, at any point, is there any advisory role, or implication of performance in there: other than that the product will perform as advertised: if the asset class goes up, and you're long the product, you should make money.
as for GlenGary GlenRoss: i'm not sure that's the best analogy, but if the buyers that Shelly The Machine Levine was selling properties to wanted exposure to the housing market, they certainly got it, right? The difference was that Shelly suggested that the houses would appreciate - Goldman Sachs never made any such suggestion.
oh - by the way, BWDIK - right now, I think the stock market is overvalued. Clearly, some of the big brokerage houses THINK that the market is either overvalued or undervalued.. Let's pretend that brokerage XYZ thinks the market is going lower. That does not mean that if their clients come in to buy stocks that they have any obligation to talk them out of the trade! Who knows where the market is going?
this is kinda a catch-22: if it was so obvious that the products (in this case, synthetic CDOs) GS sold were total crap guaranteed to fail, then why didn't the buyers realize it? And this gets back to the key point: the KEY piece of information had absolutely NOTHING to do with who had input in constructing the portfolio, or who was on which side of it. what REALLY MATTERS is WHAT IS IN THE PORTFOLIO. Had ACA merely done good analysis on the portfolio (WHICH THEY SELECTED!), they should have seen that it was crap, right? if it was so obvious?
I hear what you and Jon are saying, KD, but I think the distinction lies in whether you think that these CDO's were bought or sold--in Jon's example, Coke (I assume we're talking about the legal stuff) is "bought"--it's sitting on the shelf and someone comes along and picks it up. If something is "sold" like life insurance or annuities, then it seems to me that the seller bears some responsibility to exercise restraint and not stuff the buyer with something that will not work.
I realize this "buy/sell" distinction is fuzzy and legally unenforceable, but if someone calls me up and misleads me into buying something, I'm calling foul. That's unethical behavior.
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It was only obvious to GS--not to the buyers. Sheldon "the Machine" Levine and Ricky Roma know that their product is a fraud but the buyers do not.
Actually, the bigger fault here is any institutional player that has been burned by GS and then buys something else from them. Fool me once. . .
BWDIK:
The problem here and the problem every discussion we've been having is this: People assume that the purpose of a security is to make money. That is not what it's purpose is. It's function is to represent the underlying assets. It is profit and motivationally neutral.
It works if it represents these assets properly. This means an ownership of x% of a company, or the risk exposure to some assets. The security, the price and it's function have nothing to do with making money. It is profit neutral. It's function is agnostic to who is buying / selling it.
A better example is a car. What defines a car. You hit the gas pedal, it moves, you can turn etc. This is what they car does. There are many reasons why you might buy a car. Someone may want it to get to work on time, others get a ferrari because they think it will attract girls and get them laid. These are obviously material to why you buy a car, but in no way is it how a car "works"
Somehow, somewhere people came to assume that the function of a security is to make you money. It's not. A security works as long as it represents the ownership of an asset and what that asset is, is understood.
bwdik - correct: there is a huge difference between GS calling clients and saying "hey, i've got a great thing for you to make money on," and "hey - i've got a great thing to give you exposure to upside in the housing market if that's what you're looking for"
of course, there are many variations on that theme.
I don't want to beat a dead horse here, but Jon put his finger on the disconnect between Wall Street and Main Street.
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Let me just say that 99% of the people out there would take as a given that you buy a bond, stock, MLP, or whatever for one purpose--to make money, be it through interest, dividends, or price appreciation. That may not be the "right" reason for buying, but that's why they're doing it--and its an unspoken assumption that everyone else is trying to do the same thing. Main Street can't understand why you would want "exposure" to something unless you thought it was going to go up.
It may be an assumption, as you say, but take it away and no one will play.
BWDIK -
I don't think Jon said that you don't buy a stock to make money. that is why you buy it - because you think that the company's business prospects are good, and, here's the key - that the stock will reflect these business prospects! THAT is what the stock is supposed to do: reflect the economics. NOT "go up". the CDOs in question with GS are not supposed to "make money" they are supposed to "make money if the underlying assets perform well." there is a HUGE difference, which was Jon's point. Take it back to MSFT. MSFT stock isn't supposed to make money. MSFT stock is supposed to reflect the value of MSFT's business and prospects. it goes up when those are good, it goes down when those are bad.
you want exposure because you think the asset will move in your direction. Every time you buy a stock because you think it's going up, there HAS to be someone selling it to you, because either they think it's going down, they think that something else will go up more, or they no longer want the risk associated with the possibility that the stock might NOT go up.
There are no guarantees! And even though Broker XYZ may have a "sell" rating on a stock, you can bet your ass that they'll still sell it to any customer who comes in to buy it!
The assets we're talking about don't even have that "sell" or "Strong buy" rating on them. that's what main street doesn't understand. and that's why our senators do such a dis-service to the people by DISeducating them or MISeducating them via grandstanding and populism, instead of trying to actually address the issue, which, if anything, has more to do with suitability.
I actually think Jon's explanations have been exceedingly eloquent - i will probably use them if i write another post on the subject. Hey Jon - are you the same JonW I quoted in the body of the post from Steve Waldman's comment thread?
I think we're saying similar things here--maybe just with a different focus. As a wise man said to me at the beginning of my career--the guy on the other side of your trade thinks he's doing the right thing too. But whatever you and Jon think about what buying a security ought to represent, you won't have much of a business if the person you're selling it to doesn't think he's supposed to make money on it--after all, if he wasn't, why the hell would he do it?
As an aside, it has finally (I think) gotten through my thick skull the crux of question you had awhile back about how the process of a bank making a loan actually works. Did you ever get a satisfactory answer?
bwdik -
yeah - i think we covered the mechanics of banking pretty well in those previous comment threads.
i wrote a post about an interview I had with Susquehanna many years ago, where there point was exactly: "why is the guy on the OTHER side of your trade willing to trade with you? ALWAYS think about that."
again - just to clarify - buyers of securities certainly DO expect them to make money. that's a separate issue from what Jon was trying to say. buyers expect to make money from rising prices, sellers expect to make money from falling prices. Securities just "are."... they just reflect the underlying asset that they are supposed to...
KD:
Yup same person. Funny, I clerked for SIG a long time back for a few months. hated it. My poker playing got me past the interview process.
I've pretty much given up on the idea that I'll even get people to understand the point I'm getting across in that thread.
The gap between the two sides in this discussion lies in a very nuanced difference on what securities are.
For BWDIK here though:
I'll try one last way. A much more philosophical construction. Function versus purpose.
Function is the properties of an item as it relates to what it does and is.
What are the functions of a ferrari?
If you press down on a gas pedal the wheels spin. It is constructed from metal. Turn the steering wheel left and the tires turn left. It is red. It can go from 0-60 in 3 seconds...
Each property above is quantifiable/verifiable by any party. These functions are the same and as true for you, for me, or even a cow you might run into on the road. Function is absolute and the same in all frames of reference. It describes who, what, where, when and how.
The purpose of something on the other hand is the narrative applied to items in the world.
What is the purpose of a shoe?
For most people a shoe protects your feet while you walk. For others a shoe is a fashion accessory or a collectors item. For a dog it's a chew toy. For the bacteria living in the sole, the shoe is home.
Purpose is relative. It is frame of reference dependent. It is different for everyone. The purpose of an object describes Why it is. That we're having this discussion illustrates that why as it applies to the object is impossible to define. Statements of purpose dont describe the item, they describe the person using the item.
Look at the difference in sentence construction between the ones under function vs the ones under purpose. In "function" the subject in the sentences is the item. The sentences tell the story of the car. In "purpose" the subject in the sentence is not the item. The item is the object here. As statements of fact these sentences describe you, me, the dog, and the bacteria.
The argument that KD, I and others are making is that since function is absolute, it can and must be the only way we evaluate materiality. The subject of disclosure is the item.
Setting the standards of disclosure as an objects purpose is to make it relative, making the subject all the people using it and therefore impossible to accomplish. Even if the great majority of the population shares the same why. Purpose is never a shared statement of fact.
The functions of a security, what a security is, is a representation of assets. So long as the disclosures are a truthful representation of the assets, then materiality and the responsibility of an underwriter is fulfilled. While Paulson thinks the assets will go down is a fact, it is a fact about paulson and not the assets.
I understand why this discussion is so difficult. Humans have a propensity for applying narratives and purpose to everything. We then believe that these purposes are elements of the world, rather than elements of us.
Thousands of years ago, humans built a large ring of giant stones was built in Northern Ireland. This is stonehenge. In the absense of its builders everyone can still understand what was built. To this day no one really understands why it was built. Knowing why stonehenge was built doesnt tell us about stonehenge, it tells us something about the people who built it.
This is probably worth at least some decent grade in a Ivy league philsophy course.
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