From the Wall Street Journal
NEW YORK (Dow Jones)--Credit markets became jittery again Friday as a U.S. regulator filed civil fraud charges against storied Wall Street firm Goldman Sachs (GS).
The Securities and Exchange Commission said Goldman had failed to disclose to investors vital information about a synthetic collateralized debt obligation, or CDO, based on subprime mortgage-backed securities. In particular, the agency was interested in the role a major hedge played in selecting the assets included in the CDO, which the hedge fund then bet against.
"Credit markets are seeing a sizeable impact from the Goldman news," said Bill Larkin, a portfolio manager at Cabot Money Management, in Salem, Mass. "The question is, has the SEC discovered what may have been a common practice across the industry? Is this the tip of the iceberg?"
Investors will rush to "safety," Larkin added, noting that "this is impacting all markets across the globe."
The cost of protecting Goldman's debt rose sharply before backtracking a little by late afternoon. The bank's credit default swaps or CDS were quoted at 124 basis points after Thursday's close of 90 basis points, according to administrator Markit. The level had widened to 136 basis points earlier in the day.
Investors tried to figure out whether other firms or other structured finance products will be affected. They are concerned that the SEC's action may create a domino effect affecting other firms and other structured finance products. There's also the worry that this regulatory move may rattle the recovery and bring uncertainty back to the market.
This is major news, and will be even bigger if the SEC gets a judgment against Goldman Sachs (This is a civil, not criminal case). Goldman Sachs was one of the big winners in the bailout mess of 2008, with a lot of help from their buddies like Hank Paulson and Chris Dodd. To give an idea of the kind of power Goldman Sachs has:
Clinton's treasurer Bob Rubin - Goldman Sachs
Bush's treasurer Hank Paulson - Goldman Sachs
Disgraced former New Jersey Governor Jon Corzine - Goldman Sachs
Chief of Staff to Obama's treasurer Tim Geihtner, Mark Patterson - Goldman Sachs
Goldman Sachs is also overwhelmingly (although not exclusively - Paulson) democrat, unless your the auto industry hating Richard Shelby.
Lloyd Blankfein - CEO and Chairman - Donated to Richard Shelby (one of my least favorite Republicans), ACTBLUE, Mike McMahon, Chris Dodd, Hillary Clinton, Jon Corzine, John Kerry, Tom Daschle, Tom Carper, Dick Gephardt, Chuck Schumer, and Arlen Specter.
David Viniar - Chief Financial Officer - Donated to Chris Dodd, who along with Barney Frank, is one of the two most responsible for the financial mess. He also supported Tom Daschle, Chris Van Hollen, Erskine Bowles, Bob Menendez, and Barack Obama.
Gary Cohn - Chief Operating Officer - Donated to Richard Shelby, Lee Fisher (D-running for Voinovich's seat), Kirsten Gillibrand, ActBlue, Scott Murphy, Mike McMahon, Steny Hoyer, Hillary Clinton, Barack Obama, Chris Dodd, Max Baucus, Jack Reed, John Edwards, DNC, Ben Cardin, Sheldon Whitehouse, Max Baucus, Bill Nelson, Bob Menendez, Harold Ford, Jon Corzine, and Tom Daschle. In short, the biggest bunch of F'ups on the face of the earth - the US Senate.
In 2009, Forbes magazine gave Lloyd Blankfein a fitting award. The number one position in CEO Hall of Shame.
And last but not least: the divine Lloyd Blankfein (No. 1), chairman and chief executive officer of Goldman Sachs ( GS - news - people ). Despite bearing scant resemblance to, say, Mother Theresa, the Pope or the Dalai Lama, Blankfein told the Sunday Times of London in November that he was just a banker doing "God's work." He later said he meant it as a joke, but he certainly pays himself as if he were accomplishing something greater than human: In 2007 he made $73 million, according to Forbes, and only $25 million in 2008, as the economy tanked, but look for a recovery in his compensation this year as Goldman Sachs has recovered far ahead of the economy as a whole. In honor of the modesty of his pronouncement, we lift him to the celestial height of No. 1 on our list of CEO outrages of 2009.
Goldman Sachs has a long history of controversies.
Goldman Sachs helped the Greek government to mask the true extent of its deficit with the help of a derivatives deal that legally circumvented the EU Maastricht deficit rules. At some point the so-called cross currency swaps will mature, and swell the country's already bloated deficit.
Greece's debt managers agreed a huge deal with the savvy bankers of US investment bank Goldman Sachs at the start of 2002. The deal involved so-called cross-currency swaps in which government debt issued in dollars and yen was swapped for euro debt for a certain period -- to be exchanged back into the original currencies at a later date.
Fictional Exchange Rates
Such transactions are part of normal government refinancing. Europe's governments obtain funds from investors around the world by issuing bonds in yen, dollar or Swiss francs. But they need euros to pay their daily bills. Years later the bonds are repaid in the original foreign denominations.
But in the Greek case the US bankers devised a special kind of swap with fictional exchange rates. That enabled Greece to receive a far higher sum than the actual euro market value of 10 billion dollars or yen. In that way Goldman Sachs secretly arranged additional credit of up to $1 billion for the Greeks.
This credit disguised as a swap didn't show up in the Greek debt statistics. Eurostat's reporting rules don't comprehensively record transactions involving financial derivatives. "The Maastricht rules can be circumvented quite legally through swaps," says a German derivatives dealer.
When the subprime market gave banks a beating, Goldman Sachs on the other hand. The Guardian
Goldman's annual profits, announced on Tuesday, were up 22% to $11.6bn.
The bank's 30,000 staff will share a compensation pool of $20.1bn - amounting to $600,000 each if it was divided up equally (which, obviously, it won't be). Even certain Goldman secretaries, according to one pay expert, can expect to scoop $200,000 apiece - more than the salary of New York state's governor, Eliot Spitzer.
That's against a backdrop in which other firms are slashing jobs. Bear Stearns has crashed to the first quarterly loss in its 84-year history and has cut 9% of its workforce. Citigroup, having lost between $8bn and $11bn, is shopping for investors to boost its flagging capital adequacy ratio.
Gee, it helps to have friends in high places, like Paulson, Rubin, and Patterson. In fact, since AIG was "too big to fail" thanks to bipartisan screwups, Goldman Sachs was the winner. From Politico
the documents AIG released account for some of the more than $180 billion in aid that AIG has received, and they detailed for the first time which financial firms are benefitting from the federal handout.
In all, AIG disclosed payments of $105.3 billion between September and December 2008. And some of the biggest recipients were European banks. Societe Generale, based in France, was the top foreign recipient at $11.9 billion, Deutsche Bank of Germany got $11.8 billion and Barclays, based in England, was paid $8.5 billion.
Here in the U.S., Goldman Sachs received $12.9 billion. Edward Liddy, the government-installed CEO of AIG, sat on the board of directors of Goldman Sachs until he joined AIG.
He took the position while President George W. Bush's Treasury Secretary, Henry Paulson — who until joining the administration had served as Goldman's chairman and CEO — arranged the insurance company's initial government bailout.
Paulson again. Thanks a lot Dubya for that appointment.
This will be an interesting trial or settlement. If it goes to trial, the discovery process may be more interesting than the trial itself. One thing is for certain, regardless of the outcome, Goldman Sachs needs to be kept far from the government.