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SockMarket (34.23)

RE: The Common Goldman Defense

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May 04, 2010 – Comments (5)

The common defense:

"Apparently the SEC has become more liberal and believes that everyone should deal with investing the way children are dealt with in the public school system. The lowest intelligence in the class is the one that is taught to."

"So Goldman has to disclose all information on the securities to the investors whether it is relevant to the decision to invest or not, because investors aren't smart enough to make a rational decision on a security if they don't know who is potentially taking a position opposite of them or with them."

and of course the (not so) good, old:

"But Goldman lost money too!"

(top 2 quotes are from USNHR's "Buffett defends Goldman" blog)

 

The Rebuttal:

Wait a sec, Goldman lost money? Really? For the past 2 years they have been telling all their shareholders that they navigated the mortgage crash successfully. Well, they are in a darned if you did darned if you didn’t situation because they have been caught talking out of both sides of their collective mouth. So, that aside which statement is correct?

According to spokesmen for the company they lost $1.2B. According to an email from the man who “does God’s work”, Lloyd Blankfein: “Of course we didn't dodge the mortgage mess. We lost money, then made more than we lost because of shorts.” Congratulations Mr. Blankfein, you just incriminated yourself!

Next let us look at the issue of fraud. Whether their actions found by a court to match the technical definition of fraud is yet to be seen. That their practices were misleading, grossly dishonest, and disgusting is certain. In an honest deal the seller of a product provides, or can be assured that the purchaser has reasonable access to, all pertinent information to the deal. When the information that Goldman was betting against the deal was limited to one sentence (you can see it here on page 8) that says, more or less “We make a bunch of bets both ways on many markets- -just like this one. As a result, at some point in time we may, or may not have a conflict of interest with this deal.”

If the investor had known to ask the question, then maybe, just maybe they would have found out that there is a serious conflict of interest here. And chances are, if they called they were given a false or misleading answer (hence the lawsuit, based on a blog by TMFBane yesterday I am tempted to think this is the case). If they didn’t call, the information was hidden from view and the investor had little opportunity to know. Whether they would have been told upon a call or not does little to change the fact that, the way this deal was constructed it was crooked from the beginning.

Most investors can reasonably expect that an investment bank, who relies on suckers like them to buy their products, will want to provide all the information necessary to making the deal and that they will not actively bet against the deal. The investor would think that no company would do this because no one would buy from them in the future if they were known to do this.

To go back to the kids in school reference (from the blog quoted above), here is a comparable scenario:

One day a fourth grade geography class was given a pop quiz which amounted to 75% of their grade. The subject was geographical changes in Central and Southern Africa between 1960 and 1980, with an emphasis on changes it navigable waterway paths during that period.

There was probably a sentence in the syllabus that said “we cover many focus areas in this course and from time to time we may or may not have a pop quiz.” However, unless the fourth graders knew what to look for in the syllabus, when to ask the question, and how to phrase it so that no answer but a straight one would be given it would be impossible for them to know when the quiz was or when to study.

Additionally most of the students probably assumed, reasonably, that the teacher would not be enough of a jerk to upset his clientele (aka students) by making one pop quiz worth 75% of their grade.


So regardless of the finding of the court I find it hard to believe that GoldmanSachs is not a sleazy, rapacious firm, with whom few will do business and with whom no one should.
 

5 Comments – Post Your Own

#1) On May 04, 2010 at 11:27 PM, DarkToast (32.12) wrote:

You have been writing great stuff lately Daniel. +1

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#2) On May 05, 2010 at 12:00 AM, goalie37 (86.62) wrote:

Very good.  I may be in the minority, but Goldman's hubris is just too big for the financial world to ignore.  A bank has little more than their reputation.  This could be their undoing.

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#3) On May 05, 2010 at 4:49 PM, lemoneater (58.23) wrote:

Nice analogy.

My husband wouldn't get away with offering a pop quiz worth 75% of the grade to his students. However, according to my brother who graduated from law school some of his finals were worth the entire grade. Needless to say those who attended the lectures regularly were much more likely to pass the class than those who just opted to attend the final. Talk about stress! 

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#4) On May 05, 2010 at 7:10 PM, SockMarket (34.23) wrote:

DarkToast,

Thanks! I'll try to keep it coming

 

goaile,

I hope you are right but since everyone in that realm is so corrupt I am not sure you could get away with it.

 

lemon,

thanks

from someone who is a bit of a slacker in school if I got a pop quiz that size I think I, and most of the other kids would flunk the course. I have heard about that in Psycology grad programs as well (and to compound the stress the prof. can flunk you if they choose to, even if you have a perfect exam!). This isn't just a bad rumor--it happened to a family friend when he was in the Wash. U program some years back.

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#5) On May 06, 2010 at 12:01 PM, lemoneater (58.23) wrote:

There is a reason why I didn't go to law school--I'm not my best under pressure. Perhaps the law professors want to imitate the real life experience one has in presenting a case in court? But to flunk even when one does well on an exam sounds too arbitrary for words! I guess it's a good thing I didn't go after a psych grad degree.

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