patrick.net

I think GS already shorted the market and gave a go-ahead to SEC. Now, they will be fined with 10M or so, but GS already made the money..Its as simple as that.

I want Lloyd Blankfein & his cabal caught on tape colluding to defraud and front-run. I want to see some orange overalls. This "we'll settle out of court on a small fine" is a very small bone and entirely unsatisfying.

It sucks that they won't feel the pain they inflicted upon so many others.

Vicente says

I want Lloyd Blankfein & his cabal caught on tape colluding to defraud and front-run. I want to see some orange overalls. This “we’ll settle out of court on a small fine” is a very small bone and entirely unsatisfying.

Its not going to happen. They didnt even charge Paulson who originated the whole thing. They just found a fall guy and will do a wrist in the slap, everything will be over by Monday.

I agree that GS isn't going to get touched in the long run. Paulson's going to go through the meat grinder. There's a lot more coming. I think this was just to get the hit to GS out of the way early so they could clean up on the scraps coming. Or maybe payback for Greece? Obama's a lot closer to Europe than England.

Fed usually does not show teeth unless there's a chunk to bite. Fed is tougher SOB than you guys think it is. SEC openly sues GS means they got a solid evidence or two that even GS can not easily manipulate.

As of now, it still is bunch of allegations. No criminal charges or DOJ involvement so far, thus the most likely scenario is settlement b/w Fed and GS. It is whole different ball game if it become criminal case or GS's direct involvement with the fraud.

I think it's little too early to say anything rather than that. The bald guy at the top of GS building need to learn when to shut up, because things can get ugly for GS if he refuse to learn it. :)

Seriously, what planet are some of you from? The hedgies figured out the fatal flaw in the system and exploited it -- the fact that the banksters would sell their grandmother down the river if it meant a couple of of bucks in commission for them. They made material misrepresentations (or is that omissions!) to their clients. Hang 'em high. The hedgies... well, damn they were good; can't blame them for trying to destroy civilization as we know it. The Magnetar trade was evil, but, as far as I can tell, it wasn't illegal. Someone prove me wrong... please.

This Goldman Sachs fraud case is a sacrificial goat. No criminal charges ever result from SEC actions these days. The company will pay some token fine. The SEC gets to look tough, and Goldman gets to look like it didn't get a "get out of jail free" card. If I were GS damage control I'd be CHEERING something like this as it makes them appear subject to government controls in some superficial but meaningless LONG-after-the-crime&profits way. This is a big ole Nothingburger.

MarkInSF, Many thanks for this thread. I'm bumping it up as it is superior to the other GS thread started on Saturday. Like many long time Patrick.netters, I first came to this site over 4 years ago wondering how housing prices could continue to defy gravity. Finally, the curtain has been pulled away and we get a hint of what happened behind the scenes. As the This American Life piece (see link above) makes clear, natural market dynamics (a large number of short positions) should have put a brake on market excesses. Instead, hedge funds figured out how to the keep machine going for a couple more years (which relied, in no small part, on the greed and questionable ethics of individuals and organizations within the investment banking community). This is why, as DinOR used to say, we "hit the wall at 100mph". The hedgies (see Paulson & Co. and Magnetar) funded the creation of more CDOs by taking a first loss equity position. This point is lost on a lot of folks; that's right, the hedge fund sponsors bought the lowest tranche and got creamed. They did this for the privilege of being able to short (by buying CDSes) all the higher tranches, some of which were rated AAA. The investment bankers got paid, and the hedge funds (without whom the subprime party would have stopped) got to influence what got put into the CDOs. The investment banks then sold off the higher tranches to their customers, with more than a hint of material misrepresentation. The TAL piece makes an interesting case, though, that individuals in search of well funded bonus pools did most of the damage. In fact, the TAL piece claims that the higher tranches of one CDO were retained by JPM, and they took a huge loss. The rouge banker got his bonus, and he continues to ply his trade (perhaps elsewhere). All this to say, finally, we know how the punch bowl was spiked. I, for one, could log off patrick.net somewhat content as we have fit together this piece of the puzzle. Of course, now I want to know the rest of the story...

I will continue to feed this thread daily. Another summary from the source. Again, the bubble was not just about people making ill informed decisions; it was about allowing people to continue making these decisions long after a reasonable market would have shut off the spigot. Hedge funds found a highly leveraged way to stuff money into the securitization chain by taking advantage of flaws in the CDO sausage making machine.
According to bankers and others involved, the Magnetar Trade worked this way: The hedge fund bought the riskiest portion of a kind of securities known as collateralized debt obligations -- CDOs. If housing prices kept rising, this would provide a solid return for many years. But that's not what hedge funds are after. They want outsized gains, the sooner the better, and Magnetar set itself up for a huge win: It placed bets that portions of its own deals would fail.
Along the way, it did something to enhance the chances of that happening, according to several people with direct knowledge of the deals. They say Magnetar pressed to include riskier assets in their CDOs that would make the investments more vulnerable to failure. The hedge fund acknowledges it bet against its own deals but says the majority of its short positions, as they are known on Wall Street, involved similar CDOs that it did not own. Magnetar says it never selected the assets that went into its CDOs.

EBGuy says

The Magnetar trade was evil, but, as far as I can tell, it wasn’t illegal. Someone prove me wrong… please.

Indeed, it was clearly not illegal. The question in my mind is why should the government be involved in enforcing these contracts?

I actually think this is the proper way to frame the "reform" debate. Contracts always have as an implicit third party - the State. It's not about "regulation" or making things "illegal", it's just recognizing that a limited government should not be obliged to be the enforcer of every convoluted contract Wall Street comes up with. Declare a class of contract unenforceable, and they will go away.

The only reason the state in the business of enforcing contracts at all is that it serves a greater social good. Mortgages, business loans, commodities futures have all demonstrable positive-sum benefits. If their are classes of contracts that do not serve a greater social good (like taking our fire insurance on your neighbors house, or naked CDS contracts), then the state should not be a party to those agreements.

There are probably more industry insiders than can be counted who committed fraud, and they all deserve to go to jail. If we need to start w/Goldman Sachs then so be it. Angelo Mozillo too. No one's "too big to go to jail." (Though ususally the big ones pay fines and do NOT go to jail!)

I hear a lot about how the bank CEO's are guilty of fraud but there's still far too little mention of the number of other housing/finance industry insiders who were committing fraud. Unless a person reads mortgage fraud cases, etc, they aren't necessarily aware, and it's negligent of the media not to be covering it much. E.g. real estate agents, appraisers, brokers, builders, lenders...so many have been caught up in fraud and only a few are being prosecuted. But the percentage of the fraud done by these people is amazing. The FBI found 80% of mortgage fraud was done by these industries. http://www.fbi.gov/publications.htm This was announced years ago and recently had a little flurry of interest again during congressional hearings grilling (?) Greenspan, etc. But why wasn't something that significant on every TV news station when it happened, instead of, oh, Barbara Corchoran telling everyone to buy a house now? (NBC's real estate shill who gets a regular spot)

For that matter, why did bloggers know about GOldman years ago but the media's acting like it just happened? Corporations have way too much control of both govt and media. The American people are mostly in the dark, and corporate powers are at work to make the internet as dumbed down as TV as we speak. I hope this pattern can be broken before the last bastion of free flowing information is also destroyed.

In defense of Magnetar, they claim (PDF alert) their CDO portfolio was market neutral. In fact, if you look at (and believe) Graph 1 in the WSJ link I provided, they would have lost money if their CDO portfolio declined by ~4% to 12%. The reason they needed "more crap" in the CDOs was to get the returns they needed on their long positions. And then, I think, if push came to shove, they would finger point at the ratings agencies. As it is, they never do this, but instead talk about the systematic relative value mispricing which drove their positions. Unfortunately, this also drove more mortgages to subprime buyers...

Omitting the systemic importance of Magnetar risks turning the Magnetar story into a scandal about an individual firm, rather than what it truly is: an indictment of the financial system as a whole.

http://www.nakedcapitalism.com/2010/04/magnetar-goldman-press-flurry-still-misses-the-biggest-point-of-all.html

CSC says

I hear a lot about how the bank CEO’s are guilty of fraud but there’s still far too little mention of the number of other housing/finance industry insiders who were committing fraud. Unless a person reads mortgage fraud cases, etc, they aren’t necessarily aware, and it’s negligent of the media not to be covering it much. E.g. real estate agents, appraisers, brokers, builders, lenders…so many have been caught up in fraud and only a few are being prosecuted. But the percentage of the fraud done by these people is amazing. The FBI found 80% of mortgage fraud was done by these industries. http://www.fbi.gov/publications.htm This was announced years ago and recently had a little flurry of interest again during congressional hearings grilling (?) Greenspan, etc. But why wasn’t something that significant on every TV news station when it happened, instead of, oh, Barbara Corchoran telling everyone to buy a house now? (NBC’s real estate shill who gets a regular spot)

Exactly! count the number of times you saw during the boom years realtors in the news making comments and telling the public buy now or be priced our forever and all the other nonsense. Add to that the newspapers and internet. The curious note that some on Wall Street like Stephen Roach from Morgan Stanley and other investment bankers were making comments that housing prices were going to crash because prices were disconnected from incomes and inflation.

Frankly we are making the bankers scapegoats. Congress's own political and social agenda over the past 10 years regarding housing policies failed as such they are now blaming Wall Street.

E-man says

I watched the hearing today. Our Senators are so stupid that they make Goldman Executives look good. I couldn’t believe we voted for these clowns to run our country, or maybe, just maybe, Goldman is running our country behind the scene :o)

The hearing was an example once again, that Congress, over populated with lawyers, is clueless regarding how finance and US business work. Goldman with their short showed they were not going to be teamplayers with governments failing housing policy any longer. That is what the hearing was about.

You might as well have Maxine Waters threating corporate CEOs with nationalization if they dont follow governments left wing social agenda.

CSC says

For that matter, why did bloggers know about GOldman years ago but the media’s acting like it just happened? Corporations have way too much control of both govt and media. The American people are mostly in the dark, and corporate powers are at work to make the internet as dumbed down as TV as we speak. I hope this pattern can be broken before the last bastion of free flowing information is also destroyed.

The media is full of anti-corporate types anyway. Did it ever occur to you that it wasnt corporations controlling media but many in the media itself and government with a social political agenda pushing on banks to make risky loans. If they didnt follow the government agenda on housing policies they get hit with boycotts and government anti-disrimination lawsuits. Isnt that what we been seeing since the mid 90s?

thomas.wong1986 says

The media is full of anti-corporate types anyway. Did it ever occur to you that it wasnt corporations controlling media but many in the media itself and government with a social political agenda pushing on banks to make risky loans. If they didnt follow the government agenda on housing policies they get hit with boycotts and government anti-disrimination lawsuits. Isnt that what we been seeing since the mid 90s?

Actually, no it's not. This theory has been completely debunked here on several other threads.

I watched the Senate hearings on C-SPAN3 last night. At first I was against GS, but after listening to our Senators doing their on-the-air politics, I supported GS. I think the government should be more worried about Fannie and Freddie.

thomas.wong1986 says

CSC says

For that matter, why did bloggers know about GOldman years ago but the media’s acting like it just happened? Corporations have way too much control of both govt and media. The American people are mostly in the dark, and corporate powers are at work to make the internet as dumbed down as TV as we speak. I hope this pattern can be broken before the last bastion of free flowing information is also destroyed.

The media is full of anti-corporate types anyway. Did it ever occur to you that it wasnt corporations controlling media but many in the media itself and government with a social political agenda pushing on banks to make risky loans. If they didnt follow the government agenda on housing policies they get hit with boycotts and government anti-disrimination lawsuits. Isnt that what we been seeing since the mid 90s?

How many anti-discrimination have there been? I've only seen a couple, which were wisely (the banks were clearly redlining) settled. Was this really a pervasive problem? Why were the biggest RE booms in the upscale area's least affected by the community reinvestment act if this were true?

I seem to remember the media playing up the financial industry when the party was in full swing. King's of finance, the new economy, and all that stuff. I think the media is full of story of the day people who just jump on the current trend, whatever it is.

tatupu70 says

Actually, no it’s not. This theory has been completely debunked here on several other threads.

Oh really! Does very little in the real world buddy! The media is run by idiots chasing stupid stories only soccer moms are interested in.

jvolstad says

I watched the Senate hearings on C-SPAN3 last night. At first I was against GS, but after listening to our Senators doing their on-the-air politics, I supported GS. I think the government should be more worried about Fannie and Freddie.

The government largely ignored any and all problems at the GSEs back some years ago.
But see for yourself.... http://www.youtube.com/watch?v=_MGT_cSi7Rs

bob2356 says

Why were the biggest RE booms in the upscale area’s least affected by the community reinvestment act if this were true?

Define upscale and regions ?

thomas.wong1986 says

Oh really! Does very little in the real world buddy! The media is run by idiots chasing stupid stories only soccer moms are interested in.

huh? I'm not sure what you are trying to say there Thomas. The media caters to the general public. In a free market, they provide what people will buy.

But what does that have to do with your inaccurate post about the government pressuring lending institutions to make risky loans?

tatupu70 says

But what does that have to do with your inaccurate post about the government pressuring lending institutions to make risky loans?

http://www.youtube.com/watch?v=iW5qKYfqALE&feature=related.

Fannie Mae Eases Credit To Aid Mortgage Lending
By STEVEN A. HOLMES New York Times
Published: September 30, 1999

In a move that could help increase home ownership rates among minorities and low-income consumers, the Fannie Mae Corporation is easing the credit requirements on loans that it will purchase from banks and other lenders.

The action, which will begin as a pilot program involving 24 banks in 15 markets — including the New York metropolitan region — will encourage those banks to extend home mortgages to individuals whose credit is generally not good enough to qualify for conventional loans. Fannie Mae officials say they hope to make it a nationwide program by next spring.

Fannie Mae, the nation’s biggest underwriter of home mortgages, has been under increasing pressure from the Clinton Administration to expand mortgage loans among low and moderate income people and felt pressure from stock holders to maintain its phenomenal growth in profits.

In addition, banks, thrift institutions and mortgage companies have been pressing Fannie Mae to help them make more loans to so-called subprime borrowers. These borrowers whose incomes, credit ratings and savings are not good enough to qualify for conventional loans, can only get loans from finance companies that charge much higher interest rates — anywhere from three to four percentage points higher than conventional loans.

”Fannie Mae has expanded home ownership for millions of families in the 1990’s by reducing down payment requirements,” said Franklin D. Raines, Fannie Mae’s chairman and chief executive officer. ”Yet there remain too many borrowers whose credit is just a notch below what our underwriting has required who have been relegated to paying significantly higher mortgage rates in the so-called subprime market.”

Demographic information on these borrowers is sketchy. But at least one study indicates that 18 percent of the loans in the subprime market went to black borrowers, compared to 5 per cent of loans in the conventional loan market.

In moving, even tentatively, into this new area of lending, Fannie Mae is taking on significantly more risk, which may not pose any difficulties during flush economic times. But the government-subsidized corporation may run into trouble in an economic downturn, prompting a government rescue similar to that of the savings and loan industry in the 1980’s.

”From the perspective of many people, including me, this is another thrift industry growing up around us,” said Peter Wallison a resident fellow at the American Enterprise Institute. ”If they fail, the government will have to step up and bail them out the way it stepped up and bailed out the thrift industry.”

Under Fannie Mae’s pilot program, consumers who qualify can secure a mortgage with an interest rate one percentage point above that of a conventional, 30-year fixed rate mortgage of less than $240,000 — a rate that currently averages about 7.76 per cent. If the borrower makes his or her monthly payments on time for two years, the one percentage point premium is dropped.

Fannie Mae, the nation’s biggest underwriter of home mortgages, does not lend money directly to consumers. Instead, it purchases loans that banks make on what is called the secondary market. By expanding the type of loans that it will buy, Fannie Mae is hoping to spur banks to make more loans to people with less-than-stellar credit ratings.

Fannie Mae officials stress that the new mortgages will be extended to all potential borrowers who can qualify for a mortgage. But they add that the move is intended in part to increase the number of minority and low income home owners who tend to have worse credit ratings than non-Hispanic whites.

Home ownership has, in fact, exploded among minorities during the economic boom of the 1990’s. The number of mortgages extended to Hispanic applicants jumped by 87.2 per cent from 1993 to 1998, according to Harvard University’s Joint Center for Housing Studies. During that same period the number of African Americans who got mortgages to buy a home increased by 71.9 per cent and the number of Asian Americans by 46.3 per cent.

In contrast, the number of non-Hispanic whites who received loans for homes increased by 31.2 per cent.

Despite these gains, home ownership rates for minorities continue to lag behind non-Hispanic whites, in part because blacks and Hispanics in particular tend to have on average worse credit ratings.

@thomas

Have you followed any of the previous threads on this issue? I don't want to delve into the details again, but it has been shown pretty conclusively that this theory is wrong. And what does a link to Barney Frank have to do with your contention at all?