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Goldman and Frankenstein's monster

Robert Peston | 10:25 UK time, Monday, 26 April 2010

The gulf of mistrust and misunderstanding between the US legislature and Goldman Sachs is something to behold.

Goldman Sachs signThe events of the past few days have been a propaganda battle between two enemies that would not have looked anomalous during the Cold War.

The Senate's permanent sub-committee on investigations has released Goldman e-mails that support its conviction that the world's leading investment bank made big profits from betting against the housing market and put the bank's profits before the interests of clients or the wider economy.

Goldman's response has been to release a barrage of other internal e-mails and management reports, which back up its contention that it did not generate enormous profits in this way.

Who is right?

Well, a bit like the Cold War, perception of the truth is conditioned by ideology.

Goldman would not disagree that it bet on the fall of residential mortgage-backed securities (RMBS) and collateralised debts obligations (CDOs) manufactured out of subprime housing loans in 2007 - that it went short of them.

But it would see the adjustment of its own trading and investment positions as a defensive measure, a sensible precaution to avoid lethal losses, rather than an aggressive punt to make enormous profits.

And what it regards as conclusive proof of its innocent intent is that in the circumstances of a collapsing market for RMBS and CDOs, it didn't actually generate colossal winnings: its net revenues from residential mortgage-related products business in 2007 was $500m, not trivial but only 1% or so of its total net revenues that year; and in 2008 Goldman says it made a loss of $1.7bn from these activities.

To be clear, these net revenue figures probably understate the scale of its bet against subprime: what caught Goldman out in 2008 was the weakening in the better-quality home-loans market.

That said, Goldman's speculative position against subprime wasn't remotely as substantial as its big hedge-fund client, Paulson, or as the few other hedge funds that made a killing (many billions of dollars) out of shorting subprime.

The picture that emerges from Goldman's internal e-mails and management documents is certainly of its partners seeking to protect the firm's financial interests; but their first priority appears to be to limit the risk of a lethal loss rather than to maximise the potential for an enormous profit.

Now, most dispassionate observers would probably say it's a shame that more banks weren't a bit more like Goldman in respect of their risk controls: the banks that really let down taxpayers and citizens were those like Merrill Lynch, Lehman, Citigroup, UBS and Royal Bank of Scotland that made stupendous and insane bets that the bull market in debt would go on forever.

So it should not be dismissed as trivial that taxpayers' financial help for Goldman was considerably less than for most of its domestic and international competitors - which is not to ignore that when markets melted down in the autumn of 2008, Goldman too had to be bailed out.

But the big and important point is not about the quantum of Goldman's subprime bet or the quality of its risk management. It is about the essence of Goldman's business model, whether it remains appropriate for Goldman to have the twin priorities of maximising trading and investment profit for its own account, albeit subject to strict limits on the risks it runs, while also seeking to maximising returns for clients.

Those Goldman e-mails written in 2007, when the RMBS and CDO markets were entering the final gasping phase of their bubbled life before collapsing in August 2007, show that Goldman's partners were agonising about how far the price of housing-related investments would fall, whether - for example - prices were overshooting and would bounce.

It's an intelligent and fascinating debate between colleagues with palpable respect for each other. But did they show the same respect for their clients? Did they expose their concerns about the potential for a subprime debacle with those to whom they were selling RMBS and CDOs?

What's so potentially damaging for Goldman about Securities and Exchange Commission's recent fraud charges against it (see my posts on its role in creating and selling the Abacus 2007-ACI CDO) is the allegation that it didn't share relevant information about the risks of investing in a CDO with one important group of clients.

Goldman denies the charges and the broader critique.

But it is surely aware that the SEC case is simply an extreme version of a criticism routinely made by its investment and corporate clients: I have lost count of the number of times chief executives of big companies have said to me that they hire Goldman because the bank is so powerful and talented that they don't want it working for a rival, but they're not confident that every bit of Goldman is promoting their respective interests, rather than those of other clients or the bank's book.

Again, I should say, that at every instance of conflict of interest, Goldman is brilliant at showing that it plays by the rules.

And whatever the reservations of clients, those qualms haven't prevented Goldman becoming - arguably - the most influential and important investment bank since the heyday of the Rothschilds some 200 years ago.

Perhaps therefore the best way of seeing the assault on Goldman by Senate and SEC is as part of the wider debate about how to sanitize the banking system - about whether the risks of boom and bust in banking would be reduced if there were a clearer demarcation between banks that advise clients and institutions that deploy their own capital to generate trading and investment returns.

A couple of e-mails released by Goldman may come to characterise this debate.

They were written towards the end of January 2007, a good six months before Armageddon for the asset-backed securities market, by Fabrice "Fab" Tourre, the middle-ranking Goldman executive charged by the SEC.

Here are the resonant quotes, from flirtatious notes to Tourre's female pals:

"More and more leverage in the system. There is a risk that the entire edifice will collapse at any moment...Sole potential survivor, the fabulous Fab...,standing in the middle of all these complex, highly leveraged, exotic trades he created without necessarily understanding all the implications of those monstruosities (sic)!!! Anyway, not feeling too guilty about this, the real purpose of my job is to make capital markets more efficient and ultimately provide the US consumer with more efficient ways to leverage and finance himself, so there is a humble, noble and ethical reason for my job; amazing how good I am in convincing myself!!!"
"When I think that it is to an extent myself who has participated in the creation of this product (which, I should say in passing, is a pure product of intellectual masturbation, the kind of thing one invents while saying: 'well what if one invents something that has absolutely no purpose, is utterly conceptual, totally theoretical and no one knows how to price'), that makes me sick to see it implode in flight...It's like Frankenstein turning against its inventor".

It turns out that Tourre was a prophet; he saw the tsunami building on the horizon.

Many may well think it's a shame that Tourre's searing insights seem to have been reserved for his women chums.

But the big questions for his bosses - which will doubtless be put tomorrow by US Senators when they grill Lloyd Blankfein, Goldman's chairman - is whether they agreed that CDOs are a "pure product of intellectual masturbation" and whether the way they switched to shorting subprime showed that they too feared the collapse of "the entire edifice".


  • Comment number 1.

    > Sole potential survivor, the fabulous Fab...,standing in the middle of
    > all these complex, highly leveraged,

    Standing in the middle of a jail cell, more like!

  • Comment number 2.

    Rather than quibbling over the fine details, the real road forwards is to abolish these things that, in Fab's words, 'have absolutely no purpose' from the catalogue of possible investments and go back to the idea of investing as putting your money into a business or behind a product which you believe will give you a good return.

  • Comment number 3.

    In my simple view, they help to set up sub prime, they saw it coming that it would fall and then advised on how to make cash out of both sides.. And then at the end asked for cash to stay in business.
    Would any one of the staff or managers get a slap or a jail term?
    No just a cash bonus

    And now they want the public to trust banks? In any form? Even politicians now seem to be trustworthy..... well just a bit

  • Comment number 4.

    The two parties to a transaction must necessarily have a different view of the value of the asset being traded, or else the trade would never happen. The buyer believes the asset is worth more than the transaction price, the seller believes it is worth less, hence the willingness to swap.

    The fact that Poulson believed the credits in the CDO were overpriced/overrated is neither here nor there. The only thing that matters is whether Goldman deliberately marked up their own valuation in order to convince someone to buy the CDO and protection.

    Given that the illiquid world of CDOs relies heavily on model based pricing, and these models necessarily had to rely on a subjective view of the future, it is very hard to prove that Goldman deliberately misrepresented anything without a smoking gun email. Buyer beware.

  • Comment number 5.

    I am sure the apologists for the banks will continue to view this behaviour as legitimate.
    When will the politicians get the courage to act?

  • Comment number 6.

    I have worked in risk for 12 years, Goldmans have the best risk management processes in the city. When HSBC was telling the world that they were having problems with MBS in the US, Goldman were quietly hedging their positions. That's how Banks work.

    Obama, like Labour did in the late 90s is developing a high populist big Government agenda irrespective of the long term damage to it's Financial Services. Instead of dealing with the complex world of Risk Management it was much more politically convenient to blame their best Banks for the failure to control the entire countries Property Boom during the 90s. My doing so they are merely politicise the Risk Management issue, which given the impact of Sovereign debt at the minute is highly risky.

    The Banks were where the symptoms were felt most but the source was the US debt culture that was allowed to develop without control over the last two administrations. Obama is now the biggest Risk Factor in the world economy.

  • Comment number 7.

    “have lost count of the number of times chief executives of big companies have said to me that they hire Goldman because the bank is so powerful and talented that they don't want it working for a rival, but they're not confident that every bit of Goldman is promoting their respective interests, rather than those of other clients or the bank's book.”
    In other words they don’t trust Goldman, but chose to try and be on the inside with the fantasy of making something from nothing.
    I’m actually starting to feel a bit sorry for Goldman here, honestly, an awful lot of the world (lawyers, accountants, marketing, IT etc) , not only banks, want to make a killing on selling to executives and management “pure products of intellectual masturbation”. There all just a load of executives anyway.
    Surely this would be fairly simple to regulate, either bar short selling or make trades open knowledge.

  • Comment number 8.

    Crikey, lots of big words getting used here. Indeed one word with 12 letters beginning with 'M' and ending 'N' indeed had I ever used it in any of my bloggs Mr Moderators axe would surely have fallen. Quite simply the current US administration have a quandry on their hands, if they act then perhaps the American dream will never be the same! under capitalisim read exploitation, some clever money seen the opportunity to exploit! Was it lawful? depends on who's rules were or still are being applied. Personally anyone who substantially gained before, during or after should be sitting in some form of correctional institution with all their assets sequestrated. Heck I've got a word that decribes them and its only 7 letters beginning 'W' and ending 'S', but it's a UK term, so not sure our US cousins would understand.

  • Comment number 9.

    # 2. At 11:16am on 26 Apr 2010, Megan wrote:

    > the real road forwards is to abolish these things that, in Fab's words,
    > 'have absolutely no purpose' from the catalogue of possible investments

    Agree. Let's have a white-list if items that are useful to society. If it's
    not on the list, the perps go to jail. If we can ban drugs, we can ban
    dangerous toxic items.

  • Comment number 10.

    I suspect that GS may escape the clutches of the SEC. You can argue about the morailty of structuring such a CDO and then betting against it but disclosure or a lack of disclosure is what will really decide this. Remember the old adage 'caveat emptor'. As for Tourre, he'll be demonised as just another arrogant banker whatever the outcome. How little do the newspapers know or care to find out? Some described him as a 'Goldman's boss'. A senior vice president at a major investment bank? Small fry.

  • Comment number 11.

    There are two courts that matter here.

    1) the law courts where my gut feel is that GS will win and SEC get trounced

    2) the court of public opinion where no matter what GS does it will lose, but it knows that and will concentrate on reminding various senators how much GS staff contributed to campaigns to head the seeingly inevitable off at the pass. Again gut feel is that US legislation will start out with big intentions from Obama and then get watered down into insignificance by congress/senate

  • Comment number 12.

    "It's like Frankenstein turning against its inventor".

    Is it just me who gets annoyed when he reads things like this? Stop making the economy collapse more efficiently and read a book, for heaven's sake.

  • Comment number 13.

    Robert, when are you going to write a blog about the recent alternative proposals to the monetary system? I find it unacceptable that the BBC will only reflect the system imposed by the establishment.

    I URGE OTHER BLOGGERS to support this plea for a blog where we can discuss alternatives as they DO exist. Please write the phrase "Life beyond money" in the beginning of your entries! THANK YOU!

  • Comment number 14.

    The more i read and hear from these people the more i am convinced of their own importance, and at every turn prove themselves unworthy of any support from tax payers.

    If we do not curb there practices once and for all and split up retail and investment banking we will go through all this again at a later date....

    These people are only wealth creators because we allow them to create money out of thin air, its alice in wonderland accounting and has to stop.

  • Comment number 15.

    The big issue with CDOs is that they were more correlation products than pure credit products. If the correlation between the underlying credit products rose the value of the CDO fell, if the correlation fell then the value of the CDO rose.

    The problem with correlation between credit products is that it is virtually impossible to calculate accurately, even where only a small number of credits are concerned. It is clear to see that, for example, Ford and General Motors are very similar companies operating in the same marketplace. But even then, should correlation be regarded as highly positive (e.g. if US consumers stop buying cars then both companies suffer), negative (e.g. if Ford goes under then US consumers wanting to buy American will opt for GM instead), or somewhere in the middle (i.e. a mixture of both scenarios).

    When such a simple correlation is so difficult to accurately measure how can anyone expect to sensibly calculate the correlation between, for example, Ford, Gilette, Coca Cola, Matshushita, BP, British Airways, Deutsche Telekom, and another 93 companies in varying countries and industries?

    And if the correlation can only be estimated (as pricing models require, to avoid having vast numbers of correlation lookups), the price of the CDO is itself subject to the vagaries of estimation.

  • Comment number 16.

    Another thought, if we are going to label CDOs as the products of "intellectual masturbation" and ban them as a consequence, should we also ban monstrous reports written by management consultants at vast expense that do little more than aggregate the viewpoints of everybody in the workforce and shroud them in layer upon layer of obfuscation?

    Or, to adapt the phrase, avoiding using one word when 18 will do the same job?

  • Comment number 17.

    So now we have a derivation for the rhyming slang for 'banker'.

  • Comment number 18.

    16. At 11:57am on 26 Apr 2010, ThoughtCrime wrote:
    ...avoiding using one word when 18 will do the same job?
    How would we be able to tell who had been to business school if it wasn't for the verbose language they are indoctrinated with and copy? Certainly we cannot tell by their performance.

  • Comment number 19.

    I'm totally puzzled by the SECs actions on this. It seems all parties were making guesses on which way the market would go and placing their bets accordingly. None of the parties were little old ladies or vulnerable individuals, so where is the crime?

  • Comment number 20.

    # 11. At 11:34am on 26 Apr 2010, Justin150 wrote:

    > There are two courts that matter here.
    > the law courts where my gut feel is that GS will win and SEC get trounced

    Thanks for that opinion. I'm not sure the judge is listening, though.

    > the court of public opinion where no matter what GS does it will lose

    You can't maximize investment profit for your own account, at the same
    time that you maximise returns for clients. They conflict. That's why
    they will will loose in both courts (but let's wait for the outcome, eh?)
    and that's why Americans are right to break them up.

  • Comment number 21.

    The rules they are observing, to the letter, are exactly the same as the rules of Mornington Crescent. Exactly.

  • Comment number 22.

    No13 plamsci.
    A good starting point would be to have published a list of creditors re-the national debt.
    Are you aware of where that information can be found?
    Could the list contain banks?

  • Comment number 23.

    # 17. At 12:21pm on 26 Apr 2010, S Thomas wrote:

    > So now we have a derivation for the rhyming slang for 'banker'.

    That would be a gross insult to those who use self-induced
    sexual gratification.

  • Comment number 24.

    Tourre wrote "Anyway, not feeling too guilty about this, the real purpose of my job is to make capital markets more efficient and ultimately provide the US consumer with more efficient ways to leverage and finance himself, so there is a humble, noble and ethical reason for my job; amazing how good I am in convincing myself!!!"

    We're all guilty of convincing ourselves how important we are. However in his case efficiency has nothing to do with it, his job was to generate trades and take a little of the cream each time. If banks had lent on the basis of real assets we would not be in this mess and they might have contributed to efficiency. GS were acting as brokers, not banks; unfortunately they had no idea of the value of what they were dealing in.
    GS thought they were so powerful they didn't have to worry about telling the buyers the risks or that they were betting on their own account against their customers interest.

    But it doesn't matter, it's not real money.

  • Comment number 25.

    Very, very interesting article Robert.
    What an insight into the way that "big finance" thinks.
    It shows that some US bankers may have been aware of the "monster".....the house of cards that had been created and was probably going to collapse.
    Were UK bankers and government also aware of the situation at this time?....probably not. We may still have been trolling along in "boomland".
    Houses... turned into "financial instruments" and traded like coffee beans (by many banks, internationally).
    When the coffee market collapses, the damage is limited and recovers swiftly....but when "sub prime" collapsed, it caused havoc worldwide and will affect us all for decades.
    Hopefully all governments now realise that "wheeler-dealing" in mortgages needs to be heavily regulated.

  • Comment number 26.

    Excellent insight.

    If it proves that Goldman failed to disclose to one set of clients, then the failure in the duty of care is clear and the potential for a charge of fraud to stick is difficult to dismiss.

    The principles of selling on risk and spreading the risk are so well established in order to reduce a hit on any one institution by any one product or insured. Bring in a competitive market and the riskier options become more attractive again.

  • Comment number 27.

    There seems to be quite a bit of misunderstanding about the SEC case against Goldman.

    My understanding is that it is not that Goldman needs to disclose that somebody is on the other side of the trade.

    What they legally must disclose, (and allegedly didn't), is that the person on the other side of the trade, (Paulson), actually designed and originated the product being traded.

    I think I would want to know if I was buying a financial producted that was being trashed by the very person who designed it.

  • Comment number 28.

    'Life beyond money'


    Would this still include 'intellectual masturbation'?

    Have some of Mr Peston's posh friends challenged him in a bet do you think about words to try and get in his articles on the BBC?

    He can probably pronounce it better than other alternatives!

  • Comment number 29.

    22. At 12:58pm on 26 Apr 2010, IPGABP1 wrote:
    No13 plamsci.
    A good starting point would be to have published a list of creditors re-the national debt.
    Are you aware of where that information can be found?
    Could the list contain banks?


    It is plamski

    Who and how much do we owe is irrelevant. The system loves debt as it is a tool that replaced religion in control of the masses.

    But this is not the debate I'd like to raise. The question is: why and why do we support a self-perpetuating system of debt. This system will collapse rather soon when the consumption slows down below the minimum threshold and the consumption is supported by debt, which on the other hand raises this minimum threshold.

    We will never be able to reduce the gap between rich and poor based on the monetary system. The time has come for this civilisation to upgrade itself to a system NOT based on monetary profit.

    I hope that any of the official economic editors are reading this and will be brave enough to start a discussion about alternatives in the mainstream media.


  • Comment number 30.

    "pure product of intellectual masturbation"

    Finally we are getting to the truth about what banks are really about.

  • Comment number 31.

    CDOs (and CDSs wtc.) have more in common with insurance products rather than financial products. Insurance products require that participants disclose everything in the 'utmost good faith'.

    It would appear that the CDO 'market' was not one of 'good faith' disclosure at all, but the product was in essence (particularly in its option from) an insurance product where the buyer had to take on faith that the product was indeed properly valued.

    They were not properly valued or properly rated as investments so someone somewhere appears to be 'guilty' of possibly deliberately misrepresenting the value of these products and in consequence it would appear, that if this is proven, then various remedies can be applied, including the complete unwinding of such misrepresented products ab initio. That is the company that constructed and/or consolidated the product should be required to repay all purchasers of the misrepresented product(s) at the price paid for the product as it the sale had not taken place thus putting the parties into the same position as if the transaction had not taken place.

    (Downside of this will be to exchange duff products between duff banks/institutions and in the end who knows who will be in pocket and out of pocket.)

  • Comment number 32.

    The fascinating aspect of this entire crisis is how fundamental the issue is, as the entire Frankensteinian monster is nothing but the very fundamentals of banking enlarged to massive proportions, while as soon as it became apparent what results the collapse of the house of cards would have, it also became apparent that taking overt actions against it happening would initiate the collapse.

    The entire system is based on risk, and growth, so inescapably when there has been enough growth there will be a risk taken and lost. But at the same time, while we condemn growth in this aspect, we also are inmeasurably proud of the results that very same growth brought us in terms of prosperity.

    Either we forgo a sizeable chunk of the benefits modern society and banking brought us, or we effectively accept and condone that this kind of crisis was inevitable, and will happen again.

    Will we as society blame the individuals who happened to be in the wrong place at the wrong time when the system crashed, and then essentially continue down the same road? So far it seems like it, as most regulations that are being drawn up are meant to be nothing but suspenders, to soften a future crash.

    To a cynical mind this rather closely resemble theatre, with every news report being a microscopic portion of the grand stage called "world politics".

  • Comment number 33.

    Goldman Inc created a product, or series of, that they knew from the outset could and would fail. They then profited from that act.

    That is not so much Fraud - but Gross Criminal Negligence.

    The chickens as the saying goes - will now come home to roost.

    Bye Bye Goldman.

  • Comment number 34.

    #20 it is not just my opinion I see a number of other legal comments moving the same way. The problem is that it has nothing to do with conflicts and everything to do with what was (or was not) disclosed by GS. The point that GS are making is that there was full disclosure of all material facts relating to the underlying assets sufficient to allow the buyers to decide whether or not the assets would go up in value or down GS go further and say they are not required to disclose that someone else on the same facts has reached the conclusion that the assets will go down in value.

    Now I have to say the position is not entirely clear because a major player in the market could have an effect on the price of the assets (in which case that might need a disclosure) but I am sure GS will point out that Paulson is not a big enough player to move the market by itself - Paulson was a major player but the markets were massive and Paulson even if it bet all its assets on a fall would not have moved the market if everyone else bet the other way

  • Comment number 35.

    Dear Robert,

    Ignoring for the moment the legal position, how could the Abacus CDO securities be given a credit rating? These synthetic CDO transactions were essentially a bet between two punters on what would happen to the US sub-prime market - if thats the case how could the securities have sensibly been given a credit rating by Goldman (supported by a credit rating agency)? This is brought into even sharper relief by Goldman themselves shorting similar CDO securities, as they've admitted in various emails. Did they believe in the ratings given to these types of securities or didn't they?

  • Comment number 36.


    GRIMUPNORTH77, I am afraid any debate over the current monetary system is an intellectual masturbation. I'm not so sure how intellectual it is, but sheer masturbation it is.

    If your teeth are so rotten that any repair will only be a temporary fix, you would question the treatment, wouldn't you? Especially, if the dentist tells you that losing a tooth or two is a necessarily crisis and more if you become aware that there is a new treatment, which could give you a brand new set of teeth.

    I am afraid this system is rotten beyond repair and it is not the fault of Goldman Sachs or anybody else. It is simply out of date.

  • Comment number 37.

    What a tangled web we weave when we plan to deceive!
    Another one caught by the electronic age , first Tiger Woods and his wrong doings now Tourres been caught boasting in e mails and text messages.
    What a set of low lifes they really are, no morals just set everybody up for the fall and then take the money. He will be sacrificed on the altar and the others will carry on as normal.
    If you want to read the full blown US new article the link is detailed below :

    All I can say is thank god for e mails and smartphones recording every sordid detail of this scam.Caught hook line and sinker thats for sure.

  • Comment number 38.

    Arbitrage products with as small percentage in the buying/selling are not new. What's slightly baffling and concerning is that employees like ''Fab'' know they don't understand their products yet think they will be the ''sole survivor''. He sees his purpose as increasing efficiency of such banking/financial products but doesn't seem to reliase that

    a) Others may do something more efficient
    b) People realise his product is useless and dangerous.
    c) His employer reads/receives his e-mails and finds out they have a chancer and ignoramus in the business.

  • Comment number 39.

    Nothing more than 2nd hand car dealers yes guv its genuine mileage and it was owned by one lady owner! Its a great buy worth every penny and you will not find a better product any where.
    2 months later buyer comes back, that car you sold me was a high mileage fleet car and was owned by a leasing company! Buyer beware but how can you beware if you are not told ALL the facts & details?
    Whats the difference they sold a product to the unsuspecting, they hide behind confidentily as a means of escaping detection and commit the ultimate sting on an unsuspecting buyer.

  • Comment number 40.

    Does anyone know if it is possible to obtain a list of UK creditors and the amount owed to each?

  • Comment number 41.

    "13. At 11:38am on 26 Apr 2010, plamski wrote:
    Robert, when are you going to write a blog about the recent alternative proposals to the monetary system? I find it unacceptable that the BBC will only reflect the system imposed by the establishment."

    This is so true. They talk about the current fiat money system likes its always been there and always will be. Its been in place less than 40 years and has nearly run its course already.

    Its all a giant Ponzi scheme, the basis of our Ponzi economies and Ponzi welfare/warfare states.

  • Comment number 42.

    The Senate is a cesspool of corrupt rich who look out for themselves and their friends. Goldman is now the girl they don't want to be seen with in public, but still visit a lot. They were all warned and did nothing. The SEC was working for the banks, the government is full of bankers and they all let it happen for greed. Everyone now wants to pretend they didn't know.....this is bad theater, but Americans like bad theater. They can't even pass legisltation that will prevent the bankers from stealing again....congress is a commodity that has been bought. Slapping the hand of a major criminal....what a punishment....all thieves preying on the public....socialism is bailing out the they say they want to prevent that, after they have already done it, what a bunch of hypocrits.

  • Comment number 43.

    No36 plamski,
    Apologies for not spelling your name correctly.
    I am interested in your 'new' system.
    Could you explain what you have in mind?

  • Comment number 44.

    Getting tired of all the banker-bashing. Its obvious everyone just wants to point fingers at the rich just because their jobs are hard to understand (and therefore considered worthless).

    The real reason for this mess is that so many people in this country (and the US of course) was happily loading up on credit card debt, 100% mortgages etc. Yes tax-payer money ended up bailing out the banks but we wouldn't have had to if people lived within their means.

    Everyone wants to bash derivatives and other complex instruments but none of us were complaining when they allowed us to get cheap loans or better savings rates.

  • Comment number 45.

    Remember this. Sub-prime was not the fault of the banks. It was forced on them by government - specifically Clinton and Bush. Clinton and Bush both pushed the likes of Fannie Mae to significantly increase lending to sub-prime. There were even laws brought in to help this, like the Single-Family Affordable Housing Tax Credit Act, and the American Dream Downpayment Act. Unfortunately, Fannie Mae couldn't shift the vast quantities of sub-prime mortgages on to other investors and was starting to become a systemic risk of its own. Banks stepped in and came up with a product which they "thought" would enable them to safely repackage this debt and make it acceptable to other investors. Unfortunately, the products were not as safe as everyone thought. I'm sure there has been some fraud in all this, but I'm also sure that it isn't that widespread. CDOs were created to meet a market need that was created by political pressure on Freddie and Fannie to lend to people who couldn't afford the loans. Don't forget, the money lost in sub-prime hasn't vanished. It has actually gone into the coffers of the companies that build housing for the poor, and has been swallowed up by the collapse in price of much of that property.

  • Comment number 46.

    'life beyond money'


    Life before money involved bartering and trading what you had for what you wanted - difficult to do now with internet etc.

    Also transition from one state to another would seem to be very problematic - what happens to everyone's debts and assets - do they become null and void.

    I'm on the hook enough to ask the questions - are you going to give me the answers or are you going to leave me to intellectually masturbate on my own?

  • Comment number 47.

    Tempting to ask just how many times a week bankers decide to have a go at being intellectual.

    That aside Tourre's assertion that he was doing his bit to "provide the US consumer with more efficient ways to finance and leverage himself.." is worrying. He believes he was only being efficient, at worst? That's what he seems to think, whilst at the same time failing "to understand the implications of all the monstruosities..."

    If the creator of these things has no idea how badly they could go wrong, (like kids playing with matches, having no idea of the wider implications,) or, like he says "Frankenstein turning against his inventor," then they should be BANNED and I think ultimately this is what Obama is trying to achieve? The world is not ready for these exotic instruments - I don't think we need to keep having periodic financial market meltdowns to see if they have become more manageable, certainly not if the taxpayer is clearing up the mess!

    Like Tourre says, he had no idea about the implications.....So was it really even sensible that the markets Goldman's were Gambling in were the humble Residential Mortgage markets?

    Although Tourre says he didn't understand the implications. I'm very tempted to suggest that he could see the implications - namely the personal security that homeowners thought they had was much less secure than was the case - but chose not to say anything to his bosses out of fear. Because that would have been much less impressive to his female audience?

    Wherever the regulation goes in future maximum protection must be given to the taxpayer. If that means bank nationalisation, Glass-Steagall or the like then so be it!

  • Comment number 48.

    I'm a firm believer that people shouldn't invest in products they don't understand.

    If people buy something with no understanding of what it is they have, no understanding of what it might be worth and no understanding of how to figure its value at any given point in time, it's a bit rich to them complain that the person who sold it didn't do them any favours.

    Here it seems some greedy sellers sold to greedy buyers who couldn't grasp the basic concept that nothing is free, and everybody got their fingers burned. Why is it such a surprise?

  • Comment number 49.

    44. At 4:12pm on 26 Apr 2010, Al wrote: many people in this country (and the US of course) was happily loading up on credit card debt, 100% mortgages etc. Yes tax-payer money ended up bailing out the banks but we wouldn't have had to if people lived within their means.
    In the "old days" banks did not have a sales force to get ordinary people to borrow. Now most of the staff are trying to get customers to take out this insurance or have you thought about that loan.
    Selling dangerous debt to people who do not understand the long term implications is as wrong as selling contaminated food or faulty cars to them. There is an obligation to your customer.

  • Comment number 50.

    #31 I assume GS will be arguing that the underlying assets in their CDO were correctly valued by someone with experience and skills in valuing. Its just that Paulson reckoned the valuer was completely wrong and the market was about to tank. There is nothing unusual in economics with two experts taking the same set of facts and coming to different conclusions (actually I think all economics is like that)

  • Comment number 51.

    "CDOs (and CDSs wtc.) have more in common with insurance products rather than financial products. Insurance products require that participants disclose everything in the 'utmost good faith'."

    A CDO is not an insurance product, it is an entity owning credits, and issuing paper of differing seniority, not unlike any issuer of bonds and equity. Apart from listing the assets of the entity (the credits), and setting out the makeup of the different levels of seniority, there isn't much to disclose.

    The rest is assumptions about what the real quality of the assets will turn out to be (in terms of default rates) *given* assumptions about what you believe the economy will do. But they are only assumptions and yours should be as good as mine. The fact that someone else had a different opinion of the quality of the underlying assets and the future property market is not a disclosable fact - even if they chose the credits.

    It's like saying that an estate agent can be held responsible for not disclosing that the property seller believes house prices will fall.

  • Comment number 52.

    Did Goldman-Sachs advise their clients who were investing in sub-prime mortgages that Goldman-Sachs itself was betting against them? That would seem to the important ethical question here. If they did not then they concealed information that might have influenced their client's investment decisions and clearly did not act in their client's best interests.

    I don't pretend to understand the legal questions of the finance laws and regulations in this case but since the lawyers make more money the longer they can extend the legal battle I have to wonder if we'll ever learn the truth in this case.

  • Comment number 53.

    On a purely literary point:

    Fabrice Tourre obviously has never read Mary Shelley's book, as Frankenstein CREATED the monster, so when he e-mails 'It's like Frankenstein turning against its inventor' he shows his ignorance of great literature.

  • Comment number 54.

    'life beyond money'

    Plamski - just to show that I have been wondering along these lines for a while here is a post I wrote at end of November at time of Dubai problems.

    'Is it possible that the system used around the world for exchange known as 'money' is unsustainable? far fetched I know but it seems like the 'value' of money has been put into question and if money has no value then pension funds are truly worthless - perhaps I've just been reading this blog too much lately!!'

    Now you seem to have the answer and I'd like to know what it is!

  • Comment number 55.


    41. At 4:06pm on 26 Apr 2010, Wardy29 wrote:
    They talk about the current fiat money system likes its always been there and always will be. Its been in place less than 40 years and has nearly run its course already.

    Wardy29, what I have in mind is not only replacement of the current fiat money system but a gradual transformation towards money-free, resource based economy. It is a system that Jacque Fresco (Venus Movement) and recently Peter Joseph (Zeitgeist) have been talking about.

    43. At 4:10pm on 26 Apr 2010, IPGABP1 wrote:
    Could you explain what you have in mind?

    46. At 4:26pm on 26 Apr 2010, GRIMUPNORTH77 wrote:
    Also transition from one state to another would seem to be very problematic - what happens to everyone's debts and assets - do they become null and void.

    The best thing is to watch Part I of the presentation -
    This Part 2 is an exploration of what life might be without money - Project Earth

    In a summary, Part 1 explains why corruption is embedded into the current monetary based system and why it cannot be repaired.

    Part 2 is the more interesting one as it presents a vision of a future technocratic society with an economic system based resources and technologies available on this planet at the moment. It proposes a different approach to the decision process whereas we do NOT make a decision but rather arrive at a decision based on data stored in computer databases. That is fundamental difference as with the current representative democracy we rely on the politics to make the best decision for us, which are very often flawed and biased.

    They talk about a future city, so please do not get too hung up about that, it is only to visualise what MIGHT be possible.

    In a nutshell, it's system based on effeciency/sustainability rather than ever growing consumption, based contribution rather than competition and based on resource/work sharing rather than monetary profit (self-interest).

    It can only work on a global scale and it rejects the idea that there might be too many people on this planet born from the fact that so far we have not been using the resource effeciently.

    I know, many will jump up and say it's an utopia or communism but as a matter of fact it has nothing to do with the Marxist's concepts as communism still uses money and debt/interest.

    The whole idea takes time to comprehend as we've been conditioned to ONLY think of life within the money system. Just imagine how many people are involved in useless occupations, as for example if all army men and women were to change their occupation so much wealth could be created instead of destroying it.

    You don't have to agree with everything in these presentation but just try to imagine life beyond money and what people's motivation to create, share and develop might be. Money is an artificial and imposed motivation.

  • Comment number 56.

    i agree very much with Megan (#2). and for plamski and GRIMUPNORTH77, the war on money must begin!

  • Comment number 57.

    Dear Mr Somali Pirate

    If you are still tacking around, according to the Borowitz report

    'Somali Pirates Say They Are Subsidiary of Goldman Sachs'

    Can this be true?


    Mrs Bloggs

  • Comment number 58.

    This comment was removed because the moderators found it broke the house rules. Explain.

  • Comment number 59.

    This comment was removed because the moderators found it broke the house rules. Explain.

  • Comment number 60.


    If it can be shown that there was the 'intent' by GS and Paulson to create a CDO that was bound to fail and they kept this information from the ratings agencies and indeed misrepresented the quality of the underlying securities to the ratings agencies (and to purchasers) then it may be that it is reasonable that they are prosecuted.

    The point about likening the contact that creates a CDO to an insurance contract is that the misrepresenting of the underlying risk in insurance (that is above that of random chance) is generally a cause that renders the contract at least voidable and in most cases will render the insurance contract null and void. For example insuring a ship that you know is sinking and is unseaworthy, claiming that it is seaworthy renders the insurance null and void. Did GS/Paulson do this? The courts will have to decide, but for all our sakes, and the public good, they must be prosecuted and the outcome will depend on the facts.

    (Why haven't any of the ratings agencies been prosecuted yet?)

  • Comment number 61.

    We will wait to see how this develops. But it is much more likely that, faced with temptation of big profits, Goldmand and its staff will put their own self-interests and interests of Goldman, above that of their clients, the country and the world.

  • Comment number 62.


    I agree that if GS managed to create a CDO that was bound to fail and did not disclose this, they should be prosecuted. However, this is pretty hard to do, unless you already know that the defaults have happened (in which case the CDO has already failed at some level).

    Usually the ratings agencies have full view of the underlying securities, and these are often themselves rated, and this is used as input to the model that rates the different tranches of the CDO. Hence it is more likely that they simply picked securities where they did not agree with the rating given, and it simply comes down to being better at valuing securities and predicting economic conditions than someone else.

    The shipping scenario is not a good analogy, but if you wanted to use it, it would be equivalent to building a new type of ship, getting it certified and sold, and then betting that the weather would get so bad that this type of ship wouldn't be able to leave the harbour.

  • Comment number 63.

    Goldman in their position as market makers will always tread a fine line in mis selling as inevitably one party's gain will be another party's loss in their business. But what is startling about this case is the blatant intent shown by Mr Fab and other Goldman execs to seemingly target certain players to enhance their marketing and placing of deliberate and hand picked toxic assets which were always going to have losers. This raises two major questions, does such abuse amount to fraud and does the inevitable market maker defence provide any excuses for this and the big question really is has this been wide spread in that the market makers got out of control and inflated the conceptual market to the point where it threatened everything and then shorted its inevitable collapse with the losers being targeted in this type of way. The new Fraud Act in the UK requires a basic Act of Dishonesty resulting in a loss somewhere else, in New York Fraud basically requires intent, what was the market makers intent in this instance, these are the questions for the SEC and the FSA.

  • Comment number 64.

    #27 thank you for summing up the case so clearly - if a poker player won with a pack he manufactured I reckon his fellow gamblers would administer some rough justice - the term 'honour among thieves' comes to mind. I hope the SEC is up to the task.

  • Comment number 65.

    I think that will be the most interesting issue, how will the SEC perform here, they need to be strong and principled especially after they seemingly wimped out on a similar case involving Barclays and Bear Stearns. I'm looking forward to Goldman's answer to the complaint.

  • Comment number 66.

    Let’s talk about the "P" boys.
    As a big-wig at Goldman, H.P. oversaw the buying of CDOs.
    When H.P. became a big-wig at the US Treasury, he went on to fight against securities and banking regulation.
    H.P.’s successors at Goldman began to “short” CDOs.
    They knew that they had a “short” window of opportunity to unload the losses onto their customers.
    J.P. (no relation to H.P.) controlled a large hedge fund. He also wanted to jump into shorts on CDOs. He too recognized the “short” window. The reason the market was “short” was that the “market” for toxic mortgages only appeared to be functioning. It was, in fact: a massive bubble, so inflated that it was just about to burst.
    According to the SEC complaint: In January 2007, a "P" employee explained that “rating agencies, CDO managers and underwriters all had incentives to keep the bubble expanding, while ‘real money’ investors (people like you and me) – well, we were like shooting ducks in a barrell – just look at our life savings explode!!!
    We know from Bankruptcy Examiner Valukas’ report on Lehman that the Federal Reserve KNEW that the “market” prices were UNREAL and yet REFUSED to demand that entities like Lehman recognize their losses on these so-called toxic debts.
    Goldman and J.P. worked together. One of the key things to know about shorting is that the best way to get the job done is complicity – get a bunch of crooks to play at the same time. By helping J.P. take advantage of Goldman’s customers, Goldman not only earned a substantial fee, but also aided its overall plan of shorting the toxic waste.
    Goldman, ACA, and "P" all failed to disclose to purchasers that the synthetic CDOs were designed to fail. The presentation was the opposite: that the assets had been picked by an independent third party with the interest pf the investor at heart. Goldman tried to poison its valued customers to the tune of over $1B, but was unable to sell he last $90M.
    (Goldman used AIG to provide the CDS on most of these synthetic CDOs, and H.P. used tax payer money to secretly bail out Goldman when AIG’s deceptive practices drove it to failure.)
    The SEC’s Goldman fraud complaint points to fundamental problem in the financial sector: The market is so rotten, transparency isn't possible. Investors lack clear information to make investment decisions. There is a continuing absence of real consumer protection.

  • Comment number 67.

    The things coming out of Goldman are truly stunning. At least they are to me. And the funny thing is no one seems to have noticed – at least it’s not on the front page yet. These people clearly were nothing but conmen, cheats, swindlers, liars and thieves – all at the same time. I find the fact that it was legal to behave as they did quite astounding. Clearly they knew that they were selling rubbish – like buying a job lot of broken window glass, putting it in pretty boxes and selling it as diamonds. In any other walk of life they’d be seen for what they are – organised criminals - and locked up! And the point is they didn’t just steal from fellow professionals as they claim. Ultimately behind their investors are the hundreds of millions of ordinary working people who tried to find a safe place for their savings, local council investors, charities and so on – and lost it. And the thing is they (Goldman and the hedge funds and their lot) haven’t just stolen from the past. They’ve stolen from the future too – the millions of people around the World who have lost their jobs and the massive pain in taxes that we’re all going to have to foot the bill for over the coming years. If the penny ever drops on the man in the street, then these people are going to want some pretty good places to hide!


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