The Shitty Deal - Goldman Senate Hearing April 27th, 2010

If ya all are wanting some blood on the floor, the Goldman Sachs hearing may give it to you. Below is Senator Levin questioning a Goldman Sachs internal email labeling a toxic asset, a CDO called Timberwolf, as caca:

 

 

Ok, what is Timberwolf? It is a synthetic CDO that was issued in 2007, within 5 months lost 80% of it's value. Given that context, one can infer what shitty means and it ain't someone's job performance.

It's been a long time since a financial scandal looks like the paparazzi over Paris Hilton.

 

 

Here's Senator McCaskill on the overall mentality:

 

 

This one's great. Goldman Sachs claims it doesn't have to disclose to investors it's positions, uh like shorting the crap out of a structured financial product they are peddling to investors to purchase.

 

 

Now that we have the public roasting out of the way, check out this post, Ex-Goldman Sachs Trader Bought Major Stake in ACA, Shorted Subprime CDOs.

ACA is the firm supposedly in charge of managing the Abacus synthetic CDO that the SEC is charging Goldman Sachs with Fraud. For details on the SEC case, see here and here.

Richard Perry. Perry, a former Goldman Sachs trader, became known as one of the subprime winners in 2007 — one of the hedge fund managers who saw the crisis coming, and placed profitable bets that the housing market would collapse. Perry reportedly shorted $3 billion in subprime-related securities, netting a $1 billion profit on the trade.

Around the same time, in late 2006 and 2007, Perry’s hedge fund, Perry Corp, began buying up shares in a certain financial management company that had a close business relationship with Goldman Sachs. His stake grew from 5% to 8% (around $30 million in early 2007), to the point where Perry Corp was disclosed as a major shareholder in the company in the prospectus for one CDO put together by Goldman in August 2007.

That company: ACA Capital, the same firm wrapped up in the Goldman Sachs-John Paulson CDO deal that the SEC has deemed fraudulent.

Hmmm, another hedge fund manager, who wins big by betting on a meltdown, not only has ties to the very same firm as John Paulson, the hedge fund winner in the SEC Fraud case, but also has strong ties to Goldman Sachs.

Yves Smith has more comments on today's proceedings where Ted Kaufman asks about another CDO based on all WaMu subprime loans, peddled by Goldman Sachs.

Maybe we should classify Goldman Sachs Financial Products as shit sundaes.

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Comments

$110 Billion Synthetic CDOs in 2006/2007

I don't know how many are bust but now that we're hammering for media headlines on Goldman Sachs, the good news is this fictional timebombs, there is a growing movement to plain ban them, along with CDSes.

Hey, when things do not add up from the mathematics, the models and create such a contagion web as these things do, that's my druthers. Ban them. Supposedly (cough, cough, we know this isn't true), the FDA has to approve drugs before they can enter the market to make sure new drugs don't kill people and/or actually work.

We need some sort of product regulator here so these financial companies cannot just create structured financial products and then sell them for billions, which in turn put the global economy at risk, when they do not even make sense from the math!

Notice how that is ignored. The mathematics are fiction on these things. Why is that ignored? Because to understand the models are based on faulty assumptions which are not mathematically valid in this context, one needs advanced probability theory and statistics to see that.

This is where the structured finance, the quantitative analysis community should be shot. I'm sorry, they did not flag this stuff enough to point out the models were mathematically invalid. The computation of a CDO is impossible to verify it's distribution is actually random, there are a host of problems on this front!

Folks, they need some engineers, some mathematics people, some computer engineers and some structured financial people as regulators.

Of course the geeks are always ignored by D.C.

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What was most surprising to

What was most surprising to me watching the hearing was the ineptitude of Senator Levin. He tried to demonstrate that GS had benefited by the government bailout of AIG. Blankfein answered his question well, explaining how that was not the case and Levin just kept repeating the same claim as if he had not heard the answer. It seemed as if he had run out of questions or something. I shudder to think our senators are that dumb. No wonder we are in such a mess.

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Goldman did benefit from the AIG bail out

in a huge way. They received 100% payout on a host of CDSes they bought against CDOs, all paid by AIG. Maybe Levin can't explain it to the American people or in the hearing, but this is real. See the real screw job blog post for the details. The amounts are there as an attachment.

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Case Referred to DOJ

Lets see how this plays out.

SEC Refers Goldman case to the Justice Department

The Securities and Exchange Commission has referred its investigation of Goldman Sachs to the Justice Department for possible criminal prosecution, less than two weeks after filing a civil securities fraud case against the firm, according to a source familiar with the matter

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I was just about to put this up as an Instapopulist

But you can do that as well, if you wish. All of this focus on just Goldman Sachs has me a little disturbed because it was not "just" Goldman Sachs who set this up. But this is good press at least to have a prayer's chance at getting any real financial reform through.

Last read is they are trying to "exempt" (similar to the House bill) pretty much all derivatives trading.

Some of the proposals, I'm not so sure of, such as breaking up a corporation due to it's total percentage of GDP. I think it would be better to do break ups based on contagion. To firewall out these risks which were like dominoes. i.e. commercial and investment banking, separate, then some derivatives should be banned. I have a real problem with those completely ignoring many of these things are mathematical nonsense as well as have computational complexity which makes them impossible to verify. That should be out, period.

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Waiting For RICO

RICO, even if used only to go after Goldman, would quickly
cause the rest of Wall Street to fall in line.

This would be a Wall Street meeting after Goldman got hammered by RICO:

Listen, I aint gonna get f****d like Gribbs, understand. Gribbs is 70 years old and the f****n guy's gonna die in prison, I don't need that. So I'm warning everybody, EVERYBODY. It could be my son, it could be anybody. Gribbs got 20 years just for saying hello to some f**k who was sneaking behind his back selling junk, I don't need that, ain't gonna happen to me, you understand.

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