Thursday, April 29, 2010

Defending Goldman

Tuesday's spectacle in Congress with Senator Carl Levin's (D-Mi) committee grilling executives of Goldman, Sachs over their and the firm's activities in the mortgage markets was a perfect reminder of Churchill's view that "Democracy is the worst form of government, except for every other."

Some observations:

1. The senior executives defended themselves valiantly, the junior ones which were the four that appeared first, did less well, appearing more often than not, evasive. Now Monk should opine on this as this is his practice but certainly the entire group seemed a bit over overbriefed and instructed to be too careful by their attorneys. This was rather obvious when CFO David Viniar refused to opine on matters on which he was clearly an expert. I suppose the Goldman counsel have instructed that a battle with Congress cannot be won and therefore should not be fought and they'll try to win the case in court or settle without guilt. And I suppose a modest victory was that none of the Goldman employees or ex-employees gave the committee or Carl Levin the damning soundbite they so desperately wanted.

2. Without intimate familiarity with the details this case seems flimsy as you have sophisticated investors, an independent agency, ACA and there was give and take as to what securities should be included or excluded in the package. In any case the 3-2 decision by the commissioners suggest heavily that this charge was strongly politically motivated and came at a most fortuitous time coinciding with the financial regulation bill.

3. As having been involved intimately in the markets, barring the occurrence of actual fraud, the allegations and insinuations of Levin's committee is pure political pandering - and that goes for both sides of the aisle.

- "Betting against your clients": As Blankfein argued but to little avail since most senators and Americans have little idea what a market-maker is, if the client buys from Goldman, Goldman is necessarily short or less long in the case that they actually have the inventory. He's also absolutely right that the clients have no right to know what Goldman's overall position is or that it is relevant at all. Now Goldman employs some of the smartest folks in the room but who aren't always right. They famously called a super-spike in crude oil to $200 a barrel. It got to $147 before crashing to $32.

- "Goldman knew the market was going down and still continued to sell this crap." This is just arrant stupidity- with the benefit of hindsight Goldman was right. I am not sure why no one thought to use the following example: In 1999 and early 2000 a lot of real smart folks thought the NASDAQ was stupidly overvalued at 4,000 and that it was ready for a fall. They were entirely right. Many of them also bet that way and were carried out feet first as the NASDAQ hit 5,000 before crumbling below 2000. For those of us in the money business, you must not only have the direction right BUT YOUR TIMING HAS TO BE CORRECT. Do we propose then that everyone who sold NASDAQ stocks (check a favorite of the time called CMGI) or led an IPO when they were uncertain of the future of the market was guilty?

- What makes a market, any market, is a difference of opinion and/or the market position of the participants. Why would a seller sell any product at a given price?
a. he thinks it will go lower before it goes higher
b. he can replace the item he sold more cheaply
c. he is naturally long inventory which decays (someone who sells eggs, or options)
The buyer has the converse view. So with sophisticated investors who invest in these products not only can the view be different on direction but it can often be in timing.

Anyone who is the business of selling any financial product needs to be rooting hard for Goldman to prevail- otherwise anything that you sell that drops in value will open you to charges of fraud. And if the SEC prevails one shudders to think how many other lawsuits will hit the docket (or are already on the way).

4. Many of those emails cited were unfortunate in their use of language. But if you are a Goldman or any bank employee and you think a market is going down and there are willing buyers your fiduciary duty to the firm and your shareholders is to sell. In this regard they are not investment advisers and have no duty to the other side of the transaction.

No comments: