5 ms·

Goldman Sachs Is Robbing Us Blind

36 points by vorador 17y ago

Timothee 17y ago
Unfortunately, I'm afraid this is nothing new…
- krav 17y ago
  Agreed.
- cwan 17y ago
  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.
  - riffraff 17y ago
    hear hear
  - vlod 17y ago
    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 17y ago
      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 17y ago
        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 17y ago
        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 17y ago
        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.
        17y ago
Tichy 17y ago
"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 17y ago
  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 17y ago
    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/Credit-Default-Swaps--Through-The-Looking-Glass http://www.wilmott.com/blogs/satyajitdas/index.cfm/2009/4/12... More here: http://seekingalpha.com/article/138047-how-cds-spreads-affect-equity?source=yahoo http://seekingalpha.com/article/138047-how-cds-spreads-affec... 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 17y ago
      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-insurance-commissioners-should-not-regulate-cds/ http://blogs.reuters.com/felix-salmon/2009/07/04/why-insuran...
chris123 17y ago
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-black-swan-proof-world/ http://chrisco.wordpress.com/2009/06/10/ten-principles-for-a... -- 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=1&em http://www.nytimes.com/2009/10/14/opinion/14trillin.html?_r=... -- Interesting op-ed.
roundsquare 17y ago
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 17y ago
  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_great_american_bubble_machine http://www.rollingstone.com/politics/story/29127316/the_grea...
  - jimbokun 17y ago
    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 17y ago
      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...)
va_coder 17y ago
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.
shin_lao 17y ago
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.
- eru 17y ago
  If banks want to lend their capital to people who can't repay, who am I to judge? However, we should consider not helping them, if it fails.
  - shin_lao 17y ago
    The problem is that you can't let a bank fail, especially a big bank, it would bring the whole system with it. Since you cannot allow it to fail, you must set in place some rules to limit the risks they take. (Yes I know about the typo CDS=>CDO, I can't edit myself).
    - eru 17y ago
      Or require them to split themself up? Or better --- withdraw state guarantees for all deposits. The customers will flee to higher quality.
      - shin_lao 17y ago
        Provided they have enough information to make the right choice.
- rortian 17y ago
  Umm, I think you mean CDOs. CDS are credit default swaps. These are what brought AIG down. Frankly I think you are the one being glib. A huge problem with CDOs was that many carried AAA ratings. In this past, buying a security with this rating was doing your homework. Unfortunately, Moody's and S&P were not purveyors of accurate information on these securities. This became a huge problem since AAA ratings allowed banks to hold these securities and call them capital.

36 points by vorador 17y ago

Timothee 17y ago

Unfortunately, I'm afraid this is nothing new…

krav 17y ago
Agreed.
cwan 17y ago
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.
- riffraff 17y ago
  hear hear
- vlod 17y ago
  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 17y ago
    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 17y ago
      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 17y ago
        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 17y ago
        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.
        17y ago

Tichy 17y ago

"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 17y ago
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 17y ago
  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/Credit-Default-Swaps--Through-The-Looking-Glass http://www.wilmott.com/blogs/satyajitdas/index.cfm/2009/4/12... More here: http://seekingalpha.com/article/138047-how-cds-spreads-affect-equity?source=yahoo http://seekingalpha.com/article/138047-how-cds-spreads-affec... 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 17y ago
    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-insurance-commissioners-should-not-regulate-cds/ http://blogs.reuters.com/felix-salmon/2009/07/04/why-insuran...

chris123 17y ago

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-black-swan-proof-world/ http://chrisco.wordpress.com/2009/06/10/ten-principles-for-a... -- 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=1&em http://www.nytimes.com/2009/10/14/opinion/14trillin.html?_r=... -- Interesting op-ed.

roundsquare 17y ago

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 17y ago
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_great_american_bubble_machine http://www.rollingstone.com/politics/story/29127316/the_grea...
- jimbokun 17y ago
  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 17y ago
    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...)

va_coder 17y ago

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.

shin_lao 17y ago

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.

eru 17y ago
If banks want to lend their capital to people who can't repay, who am I to judge? However, we should consider not helping them, if it fails.
- shin_lao 17y ago
  The problem is that you can't let a bank fail, especially a big bank, it would bring the whole system with it. Since you cannot allow it to fail, you must set in place some rules to limit the risks they take. (Yes I know about the typo CDS=>CDO, I can't edit myself).
  - eru 17y ago
    Or require them to split themself up? Or better --- withdraw state guarantees for all deposits. The customers will flee to higher quality.
    - shin_lao 17y ago
      Provided they have enough information to make the right choice.
rortian 17y ago
Umm, I think you mean CDOs. CDS are credit default swaps. These are what brought AIG down. Frankly I think you are the one being glib. A huge problem with CDOs was that many carried AAA ratings. In this past, buying a security with this rating was doing your homework. Unfortunately, Moody's and S&P were not purveyors of accurate information on these securities. This became a huge problem since AAA ratings allowed banks to hold these securities and call them capital.