Here is Facebook founder Mark Zuckerberg saying he doesn’t believe in privacy. Here is Facebook tapping Goldman Sachs to work some financial magic so that it can raise a bunch of capital without disclosing anything to the public. Forbes’ Jeff Bercovici notes the irony:
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The Goldman-Paulson fraud suit threatens to throw a spotlight on a realm of Wall Street that has escaped most scrutiny throughout the financial crisis: the hedge fund industry. Top hedge fund managers profit from Wall Street’s business model of fraud and collusion more than any CEO at the big banks, but tend to evade accountability because of the opacity of their industry and their extraordinary power.
One such hedge fund manager is 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.
The Goldman fraud suit continues to dominate the media cycle. After the initial shock of the US government actually doing something to hold Wall Street accountable, the business press — led by Goldman Sachs and their lawyers at Sullivan and Cromwell — has turned to questions about the merits of the suit. Today, the New York Times gave A1 real estate to a piece headlined “A Difficult Path In Goldman Case.”
The article opens by saying that the SEC is “pursuing an unusual claim that could be difficult to prove in court” according to legal experts. But the article only quotes one legal expert clearly criticizing the substance of the case: Allen Ferrell, a professor at Harvard Law School. According to his CV, Ferrell has been engaged as an “expert for large financial institution involving subprime-related litigation (details confidential).”
This is clearly a potential conflict, but the entire article appears to be based around Ferrell’s lone, critical quote. This is irresponsible journalism, especially considering the landmark significance of the Goldman suit. So I wrote the following letter to the Times ombudsman to alert him to the conflict and request a proper correction/disclosure:
Goldman Sachs appears to be testing the limits of its special talent for avoiding all accountability following revelations of its role in exacerbating the Greek debt crisis.
The bank has come under heavy criticism from European political officials over its role in helping Greece hide its debts, and on Wednesday, Greek labor unions staged a historic strike that shut down the country’s national infrastructure in response to economic policies urged by bankster elites. The European turmoil has forced US officials to take notice, and scrutiny of the bank is now coming from the unlikeliest of quarters, with Ben Bernanke telling Congress on Thursday that the Federal Reserve is looking into Goldman and questions surrounding the bank’s swap transactions with Greece.
Bernanke was vague about what, exactly, the Fed is investigating, and it is possible that the inquiry will go nowhere. But the fact that the Fed chair would make remarks that amplify concerns about Goldman’s role in Europe is a sign that the political winds have shifted significantly since Matt Taibbi’s “vampire squid” metaphor first captured the public imagination last summer. The populist outcry against bankster fraud and collusion finally shows signs of steering the authorities towards a more oppositional, watchdog role.
The rumors of a possible partnership by John Paulson and Goldman Sachs in the speculative attacks on Greece, which I first reported on last week, are now heating up in Europe to the point where one French journalist has multiple sources corroborating them. No one can point to hard evidence, just yet, because these are opaque, unregulated markets. But the news is quickly rising above the status of rumor.
The French financial newspaper Les Echos picked up on my post on John Paulson and Greece yesterday. Here is my (rough) translation:
Goldman Sachs’s Greek adventure got an in-depth look from the New York Times yesterday. The article extends on last week’s Spiegel piece, which reported that the bank helped Greece hide the true extent of its debt through the use of specialized derivative products. We first reported on the parallels between AIG and Greece in a post last week, following the lead of Zero Hedge. Entry into the paper of record means the story now has legs this side of the pond, and MIT economist Simon Johnson is arguing that Goldman Sachs is set to be blacklisted in Europe.
One question looming over this story: did Goldman position itself to profit from the Greek fiasco? Did it use its special knowledge of Greek’s hidden debt to build profitable bets on its future downfall and rescue? If the bank’s past behavior is any guide, the answer is yes. Ignoring the impending catastrophe (obvious from their vantage point), and failing to properly “hedge” (extract massive profits), would have been “irresponsible” (insufficiently greedy/corrupt) on the part of senior management.
Considering this, hedge fund king John Paulson’s role in Greece deserves far more scrutiny. I wrote about this last week, pointing out that they shared the same vulture flight pattern in Greece, but at the time did not realize that Paulson and Goldman actually partnered in executing massive and profitable bets against the subprime market. Are they doing the same with Greece?
With the mounting crisis in Greece, another massive stash of toxic debt has revealed itself in a way that can’t be ignored. Fears of a “contagious default” in the Eurozone hammered markets yesterday, with one Greek banker calling it a “wholesale selling off of the country.” Today, markets are rebounding on hopes for an EU bailout, and around we go again.
Though parallels to Dubai are obvious, Zero Hedge has noted the similarities between Greece and AIG due to the intimate involvement of Goldman Sachs in both crises. Rumor has it that Goldman was a “bulk buyer” of Greek protection, ZH writes, and that thus “it is precisely Goldman, just like in the AIG case, that can now dictate what the collateral margin that Greek counterparties, and by extension the very nation of Greece, have to post on billions of dollars of Greek insurance.” This is the kind of enormous leverage that helped Goldman take AIG to the cleaners at taxpayers’ expense.
Zero Hedge’s allegations are backed up by rumors, for the most part. But there is no denying that Goldman is mixed up in Greece, between this piece from Spiegel and this recent Financial Times article on Goldman’s prominent role in the Greece “rescue.”
If the allegations are true, Goldman is once again negotiating for a giant pass-through of taxpayer money from a world superpower. There are also signs that the bank is (once again) joined by a network of hedge fund colluders in its efforts.
Louise Story and Gretchen Morgenson had a lengthy new story up at the Times yesterday on how Goldman bled AIG to death. The piece details negotiations over payouts on swaps that Goldman had purchased from AIG. Details of the negotiations are interesting, but this paragraph jumped out at me:
In addition, according to two people with knowledge of the positions, a portion of the $11 billion in taxpayer money that went to Société Générale, a French bank that traded with A.I.G., was subsequently transferred to Goldman under a deal the two banks had struck.
It seems that Goldman was even more of a beneficiary of the AIG bailout than we previously thought. Officially, it received more than any other counterparty, but add in the Société payments and headlines that referred to “AIG Trading Partners…” or “AIG Counterparties” would have to be revised to read “Goldman Sachs.”
This is outrageous. When was this arrangement made, and why? Did Goldman use SocGen to hide the extent to which it caused (and benefitted from) the AIG catastrophe? Would the size of its taxpayer-funded bonus pools be threatened by full disclosure of the payments? Like so many other aspects of Goldman’s business, this deserves an investigation.
Bloomberg reported yesterday that the New York Fed pushed AIG to withhold key information about bonuses and swap counterparties in late 2008. Today, the story is blowing up, with the New York Times, Wall Street Journal, and a range of other outlets picking up on the story.
There is an incredible conflict of interest at the heart of the AIG-New York Fed dealings: the very same New York Fed lawyers who pushed AIG to withhold the names of counterparties also advised Goldman Sachs on large deals in 2008.
Goldman Sachs was one of AIG’s largest counterparties, and received a controversial 100% payout on its swap contracts with the firm.
In an editorial today, the New York Times calls for an investigation of Goldman Sachs and other financial firms for placing large bets against securities that they bundled and sold to clients. Titled “Betting against all of us,” the editorial was prompted by an article by Gretchen Morgenson and Louise Story that appeared in the Times on Christmas eve. That article is well worth a read (and deserved a bigger news day).
A key excerpt:
But Goldman and other firms eventually used the C.D.O.’s to place unusually large negative bets that were not mainly for hedging purposes, and investors and industry experts say that put the firms at odds with their own clients’ interests.
“The simultaneous selling of securities to customers and shorting them because they believed they were going to default is the most cynical use of credit information that I have ever seen,” said Sylvain R. Raynes, an expert in structured finance at R & R Consulting in New York. “When you buy protection against an event that you have a hand in causing, you are buying fire insurance on someone else’s house and then committing arson.”
The article also highlights the role of Treasury official Lee Sachs in this market. His firm prior to joining the Obama administration, Tricadia Investments, packaged many of these types of CDOs and won big on bets against them. The Times editorial notes that an investigation “would have to reach into the Obama Treasury Department.”
