6 ms·
Goldman executives cheered housing market's decline, newly released e-mails show
- grandalf 17y agoWhy is this bad? Are investors supposed to be cheer leaders? Any time a stock transaction takes place, one party believed it was a good idea to sell and the other party believed it was a good idee to buy. How is the housing market any different? Should we all be made to believe it's always a strong buy?
- jhancock 17y agoIts my understanding that GS is being accused of playing both sides: telling clients to continue to invest while GS was internally hedging for a fall. This article possibly points out some evidence of this.
- philk 17y agoUnless it's the same employee at Goldman doing both within a short timeframe, I'm not sure what the problem is. Goldman is a big place; of course they'd have divisions dedicated to shilling instruments and divisions dedicated to exploiting market opportunities. A lot of the blame should be laid at the investors feet; why did they buy something they so manifestly failed to understand?
- olefoo 17y agoIt is of course always the marks fault. If they line up to be fleeced, they should not be surprised when they are sheared.
- philk 17y agoIf you invest in something you don't understand I'm not sure you're entitled to complain when it doesn't do what you wanted. (If you don't want to have to spend all your time managing your investments then you're best off sticking to simple things like index funds or cash. That's not a bad choice at all)
- wtn 17y agoIn my grandparent's youth, you could invest in "simple things" but nowadays, with the 12mo T-bill yielding 0.42% and an inflation rate of 2.3%, your cash strategy won't get you very far.
- wisty 17y agoI'm confounded. How can interest be below inflation? Don't people want money now? I though there was a premium on saving money, because people were short-sighted and greedy. I though that saving your money let it get put to work, creating productive stuff, and you would get rewarded for your short-term austerity. Funny old world.
- hga 17y agoIt can happen when it's the least worst place to park your money. E.g. what's your interest rate when you put it under your mattress? In a deflation, which we still seem to be in (or so many think), the trick is to find safe places, because the big way to lose is to have the entity you're investing in go under. This is why blue chip bonds were so popular during and for a long time after the Great Depression. AT&T with its government monopoly wasn't going to go under.... One should also note that a T-bill is funding the Federal government's deficit (hardly putting your money in a place where it will "get put to work, creating productive stuff"); you do that for safety and short term liquidity. You can get higher yield instruments ... with a higher risk (almost by definition). Obviously there's a lot of risk aversion nowadays. (In fact, in general but in particular right now the Federal government has a perverse incentive to make their instruments look like the safest in the world....)
- wisty 17y agoIf we have deflation, that makes sense. Banks could even charge you to hang onto your money. But if you have any inflation above interest rates, surely you could just take out a loan, buy durable goods (houses, tinned fish, iron ore), hide them under your mattress, and make a killing.
- _delirium 17y agoYou do have to be pretty careful if you're selling some instruments and exploiting market opportunities in the same instruments, though. In particular, you have to be really certain that those two sides are walled off from each other, and not sharing information.
- grandalf 17y agoYours is a common argument, but isn't it functionally equivalent to, say, breaking up GS into two firms, each of which would be able to do one of the roles? If so, isn't this primarily about economies of scale? Since the only reason both roles take place within one firm today are because there are efficiencies associated with the ancillary services (and perhaps capital requirements) that give a conglomerate iBank an advantage over two smaller firms. ??
- endtime 17y ago> telling clients to continue to invest while GS was internally hedging for a fall. I think it's slightly more subtle than that. They didn't actively tell clients to invest - rather, they had clients who wanted to go long housing, and facilitated the trade without telling the buyers that GS thought it was a bad idea. At least, that's my understanding, based on talking to some people who spent decades at GS and left between six months and three years ago.
- shrikant 17y agoAh the age-old corporate cop-out: commission vs omission.
- hga 17y agoBingo. As this article http://www.theatlantic.com/business/archive/2010/04/goldmans-victim-in-sec-case-was-a-yield-chaser/39464/ http://www.theatlantic.com/business/archive/2010/04/goldmans... details, "Goldman’s ‘Victim’ in SEC Case Was a Yield Chaser": "The German bank on the losing end of the Goldman Sachs derivatives deals that have attracted the ire of the Securities and Exchange Commission was so absorbed in the pursuit of high-yield returns from financial instruments linked to the U.S. housing market that it preferred to lose one of its top executives rather than change course." Sounds a bit like what happened at Harvard; in that case, envy forced out the team that was earning them their high rate off return, leaving B Ark types who mindlessly continued the same strategy (it was so bad they neglected to unwind one position until they'd needlessly lost 1 billion dollars on it). In this case, their portfolio manager of the German bank in question predicted what would happen, was ignored by upper management, and then left. The bank was getting squeezed by the spread between their short term commercial paper and their long term investments like this one, e.g. others were noticing their reckless real estate bets as things in general in this market were starting to get bad. But they needed high yields to keep the game going (they got bailed out/bought out by another German bank in the end), so in this case (not the only one, I gather) they went to Goldman to get that. Others with a clue like Paulson (who was at the other end of the transaction) and certainly many at Goldman thought they were wrong ... but at what point do you get so sure someone is wrong that you refuse to do business with them? They were hardly the only ones betting this way! Note also that things get really ugly when everyone stops doing transactions in a market, which is exactly what eventually happened, resulting in unmarketable "toxic" financial instruments. We need liquidity in markets and I don't think it's the job of entities like Goldman to "pull away the punchbowl". That's supposed to be the job of e.g. the Fed, especially the NY Fed (headed at the time by our current Treasury Secretary).
- noilly 17y agoThis only looks bad in hindsight... I cannot speak for GS et al., but it seems like most of the commentary attributes the banks with prescience (and therefore malice).
- rwmj 17y agoHow's this bad? It was blindingly obvious to anyone in 2005-2007 that the UK housing market was crazy and overheated (and it still is). The fact that people still invested is their own stupidity, and if GS made money off that fact, good for them.
- grandalf 17y agoThis isn't stupidity, it's greed. People bought houses because they thought houses were a sure way to double one's money in a few years.
- sz 17y ago> Are investors supposed to be cheer leaders? No, and neither are they supposed to not be assholes. But imagine a situation in which someone elects to profit from a crowd of people getting run over by a freight train. Why is this bad?
- bd_at_rivenhill 17y agoAny time a stock transaction takes place, one party believed it was a good idea to sell and the other party believed it was a good idee to buy. This is not entirely true, and I can think of two counterexamples immediately: 1. A long-term stock investor who is at or near retirement will tend to want to convert stock holdings to bond holdings in order to reduce the volatility of the portfolio and start to receive cash income to meet daily needs regardless of his/her opinion of the quality of the stocks. 2. An index mutual fund will sell/buy stock shares in response to investor redemptions/purchases of fund shares without regard to the quality of the shares or the state of the market because the fund is in the business of matching its benchmark and not trying to pick the best stocks. The market is not always a zero-sum game because participants have different goals and time horizons. There are even more examples than this in the derivatives markets.
- grandalf 17y agoYou're right but it doesn't mean that it's not a zero sum game. When you buy a stock you do not assume it has perfect liquidity (if you wanted that you'd invest in a more liquid investment). So you trade liquidity for growth. Liquidity correlates strongly with volatility. If (as you approach retirement) you decide to trade growth for liquidity and convert to cash, you may end up penalized if the volatility of the stock reduces your return (if you have to sell in a dip). This is part of the trade off that you entered into and you are not penalized as long as you can afford to wait out whatever volatile price movements make the conversion temporarily disadvantageous. As for your point 2, while this is true for an individual trade it's the sort of thing that averages out over time...
- lsternlicht 17y agoThese articles have sensational headlines that don't point to the real issue. The possible fraud committed relates to GS recommending securities that they were betting against.
- philk 17y agoPersonally I cheered the housing market's decline as well. It's interesting how we're always told it's a disaster when there's a market correction but never when an asset class is getting overvalued.
- arch_hunter 17y agoYes, and then the government 'has' to do something to 'correct' the market's own correction.
- davidw 17y agoI'm cheering for its decline too: I don't own a house, so lower prices are good for me.
- bushido 17y agoFacts: 1) The stock-market itself is theoretically a zero sum game. So regardless of the instrument being trade someone is always betting against a trade. ex. over and above a long/short combo, even if person X is going long and person Y is booking profits. Person Y is theoretically betting against X. 2) GS is a clearing house among other things. Hence there is a high probability that on any given day they have hundreds of transactions that are long/short withing the same client pool. 3) Most transactions take place on a level 2 platform, i.e. the maximum someone can see if which company cleared the transaction, not which client etc. 4) Even if it is the same advisor, it would be illegal to disclose the transaction details of a client to another client. 5) I have never come across a retail investor that invests in CDOs and other exotic instruments. 6) There is a difference between hedging and naked/un-hedged trade. If someone is smart enough to be willing to trade an exotic instrument in the later category they better have the ball s to take ownership of the losses. 7) I wonder if people would have whined at all if GS did not make money on the hedge, since that happens in the majority of cases. Even in the case of GS. Like a number of other activities/sports a 30% win rate can be awesome. 8) This article is baseless is theory and practicality... Because(Opinions): a) Either they are trying to say, hedging should not be allowed. If it should be allowed the ones hedging should not make a profit(??). If they do make a profit they should feel sad about it. b) If making a profit is a bad thing then, I guess they are trying to promote a way to eliminate losses. If thats the case I wonder what they would like to do. More bailouts or close the stock markets completely.. what would be the use if no one should make a profit?? c) I guess to make the article/issue clearer the next thing they could say is underwriting of any kind is also an illegal practice, since the institution assuming the risk is only entitled to risk and losses, go forbid if they make a profit, well we can see GS getting bashed for now :) d) Anyone who lost money, even if they were GS's clients ought to have done their own due diligence too, if the people investing do not understand the inherent risks involved with doing business they are better of staying away from the markets as much as possible. e) lastly, IMO the intent of this article is not to do anything but upset people who lost money or know someone close to them who lost money (includes all most everyone)to help gracefully without opposition let others implement speculative unhedged measures to curb speculation, hedging, profit making, angel funding etc.. Cheers!!
- wrinklz 17y ago
- wrinklz 17y agoI liked Bill Black's comments on the Bill Moyer's Journal last week. He said (my paraphrase) that if corporations are to have the privileges of personhood, most notably free speech and rights to political contributions, then they also should have the same consequences: As in losing civil rights for felony convictions, and the "three strike" rule, meaning I guess they should be permanently dissolved upon the third felony conviction.
- hga 17y agoCorporations of this type are "executed" by starting the first criminal prosecution. E.g. Arthur Anderson, the shell of which was ultimately vindicated. WRT to Goldman, a pointless discussion since they are primary dealer of Federal government treasury bills and bonds. As long as the government is depending on borrowing 1.5 trillion a year at low interest rates, they can't afford to trash primary dealers.
- gruseom 17y agoSomehow it's controversial to argue that corporations should have responsibilities other than to their shareholders. You don't have to take many steps back from our present-day paradigm to see that as awfully weird. Personally, I'd have thought the controversial view would be that corporations shouldn't need to balance shareholders' interests against, say, employees' and public's. That seems like the ideological dogma to me: this idea that if you place one set of interests above all others, magic will happen.
- hga 17y agoLogical error: "place one set of interests above all others" is not the same as does not have "responsibilities other than to their shareholders".
- motters 17y agoTo me this seems like unethical behavior of a very profound nature when you consider the human consequences.
- toddh 17y agoWould you like your surgeon who is charging you money to save your life to also take out a life insurance policy on each operation?