Tuesday, May 11, 2010

Being Goldman Sachs

In her article "Why a Criminal Case Against Goldman Sachs Matters and Why Charges Could Stick" Pam Martens makes her case clearly. Here is a large portion of the article:
The first Goldman Sachs panel to line up before Senator Carl Levin’s subcommittee on April 27 consisted of Daniel Sparks, Joshua Birnbaum, Michael Swenson and Fabrice Tourre. Mr. Sparks headed the Mortgage Department and supervised the other three who worked in the Structured Product Group at the time the SEC has alleged the securities fraud occurred.

To hear these four tell it, their jobs included trading for Goldman’s benefit (proprietary trading), originating investment products, selling the products to customers once they were created (distribution), and, in Mr. Tourre’s case, even speaking with the rating agency that would transform these subprime bets into AAA derivatives. And how did they sum up all of this as a job description? They testified, under oath I might add, that they were “market-makers.” In a sane world, a market maker is an entity that matches buyers with sellers and profits from capturing a portion of the spread (bid and ask) on the buy and sell price of securities.

To a lay jury, this might fly as legitimate conduct; something akin to a short order cook who shops for the groceries, whips up the omelets, throws a little parsley garnish on the plates, serves the diners, and tallies up his P&L at the end of the day. If he overbought on ground beef, he might have to have three days of specials like Shepherd’s Pie, Hungarian Goulash, and Spaghetti with Meat Sauce to “flatten” his position and “get closer to home.” Nothing criminal going on here; just good ole American know-how and innovative workouts.

The major problem with this analogy, and most others in defense of Goldman, is that the short order cook wasn’t trying to pass off E. coli beef for prime rib. Another problem for Goldman is that embedded in the heart of every securities law is the principle that the customer must be treated honestly and fairly and any mechanism or device to deceive, manipulate or defraud is patently illegal. Remember, securities laws grew out of the ingrained Wall Street corruption exposed in two years of Senate hearings in 1932 and 1933.

It is difficult to see how one can be engaging in proprietary trading for the benefit of the firm at one moment, acting in an agent capacity for the benefit of the customer the next moment, and creating investment products designed to fail on a latte break. Sparks, Birnbaum and Swenson all had principal licenses to engage in investment banking activities like underwriting as well as the Series 7 license to trade securities. Mr. Tourre had only the Series 7 and Series 63 licenses to trade securities. He had no principal license according to his regulatory file available online. That could be a big legal issue for Goldman as a firm, for Mr. Sparks who supervised him, and for the controlled-demolition investment product he assisted in creating without a principal license. Failure to supervise is one of the first areas security lawyers review in assessing a firm’s liability.
Please find the entire article here. Ms. Martens worked on Wall Street for 21 years.


Anonymous said...

I'm as "lay person" as one can get. No finance guru, I struggle to keep my checkbook balanced (God bless the inventor of the calculator).
The more I read with my beginner's mind about the financial meltdown and the quasi-related tentacles (Goldman, Madoff, etc.), the more I shake my head and feel sad for humanity. The greed and imbalance is just awesome.

I wonder if there is any way to go back to simpler times. I suspect not.

Judith Ellis said...

MWG - This is the reason there are committees in Washington. Those who are not as financially literate should have an advocate in our congresspersons and senators. This is the disgrace in what we are witnessing. It is their lack of integrity and leadership. But we have to press for change. Those of us who are more financially literate should lead the charge right to state capitals and Washington. Regarding going back to a "simpler times," deregulation and globalization laws largely created this mess and they can be corrected. I am all for reverting back to policies that enabled a healthier fairer society, here and abroad. Certainly, Greece was not helped by Goldman Sachs.

septembermom said...

Here's another non financially savvy voice thanking you for this information Judith :)

Judith Ellis said...

Kelly - I am happy to post such important information. Now, as citizens, we have to really insist on financial reform that matters.

JOHN O'LEARY said...

Judith, I've read two articles (one in BusinessWeek I think) incriminating Goldman — or Wall Street in general - in Greece's debt crisis. But I haven't seen a lot of coverage of that. Have you come across that?

Judith Ellis said...

You're right, John. It's like a massive cover up by the media. I'm assuming Warren Buffett's deified status has something to do with this. He invested some $5 billion in Goldman during the height of the crisis. Goldman Sach's behavior seems not just unethical but criminal. I am hoping that the SEC will actually do its job and properly investigate. The people have to press this issue as the media does not seem as if it will. I saw a repeat of the hearings on C-Span.

Anonymous said...

Aren't the Washington folks just as bad as the Wall Street folks?

It's pure illusion to think that our elected officials actually run things. More like the Forbes 500 run the world.

Nobody is looking out for the little folks, or the planet we live on.

Judith Ellis said...

It sure does seem that way, MWG. The question is what are we going to collectively do about it?