If the goal of the marathon Senate grilling of Goldman Sachs was for Sen. Carl Levin (D-Mich.), to prove that Goldman was net short the housing market in 2007, then yes, despite Lloyd Blankfein’s futile attempts to downplay the big short, split hairs, net things out, or plainly obfuscate, at the end of the hearing, the very end, the bitter end, papers shuffling, lawyers whispering, hearts pounding, a biblical tediousness raining down on the Dirksen Senate building, it was clear: Goldman was short, in 2007, at the peak of the housing bubble, and profited, substantially.
Instead of trying to posture Goldman as neutral market maker (and not market mucker upper, as Sen. Claire McCaskill, a Democrat from Missouri said) or arguing that the longs and shorts were always to be considered alongside each other over rolling periods, Blankfein might have been better off saying “you’re damn right I ordered the code red!”
Or at least smiled and said, Senator, all due respect, we’re a for-profit business, but yeah, we pushed some bad deals out the door and injected some high stakes craziness into the financial system. We are Long-Term Capital Management, and they are us, and this time we have learned our lesson. Goldman has delevered. There are no more synthetic CDO-squared products sold by Goldman or anyone else, and that has nothing to do with Levin’s line of questioning. What’s the next scheme? One man’s scheme is another’s dream, and for millions of people it’s the same thing, to make money. Goldman need not be embarrassed by that.
Halfway through the Goldman Sachs grilling Tuesday, Sen. Carl Levin (D-Mich.), scowled at former trader Dan Sparks and unleashed a barrage of questions centered around an infamous CDO called Timberwolf.
That’s the one that had been described in an email sent by another former Goldman staffer as “shitty.”
“You sold hundreds of millions of that deal after your people knew it was a shitty deal,” Levin said. “Does that bother you at all?”
Sparks, seemingly miffed, hemmed, hawed and then murmured, then evaded the question before shuffling some papers, and finally avoiding the question altogether.
“Your top priority is to sell that shitty deal!” Levin emphasized, holding up a phone book sized dossier of exhumed emails.
“Come on, Mr. Sparks! Would Goldman Sachs be trying to sellâ€”and by the way, it sold it, a lot of it, after that dateâ€”should Goldman Sachs be trying to sell the shitty deal? Well, can you answer that one yes or no?”
The room was silent, save for a faint chorus of Meatloaf’s “Paradise by the Dashboard Light” running collectively through the audience’s subconscious. Let me sleep on it, baby, baby, let me sleep on it …
“There are prices in the market [at which] people want to invest in things,” Sparks answered. “I didn’t use that term with respect to that deal.”
That deal: Timberwolf Ltd., a $1 billion collateralized debt obligation holding pieces of other CDOs. A CDO squared, the financial engineering equivalent of a KFC doubledown sandwich. Timberwolf’s manager was Greywolf. Greywolf was co-founded by a former staffer at Goldman.
In an email in June 2007 to Sparks, Tom Montag, Goldman’s former head of sales and trading, wrote:
“Boy that Timberwolf was one shitty deal.”
Montag, who would go on to join Merrill Lynch, would prove prescient.
Within five months, Timberwolf lost 80 percent of its value.
One firm that bought pieces of Timberwolf from Goldman was Bear Stearns Asset Management, specifically two of BSAM’s credit hedge funds.
Those funds eventually went belly up, as did Bear, sparking the wider credit crisis resulting in a near systemic failure of the financial system and the worst recession in a generation.
Levin, later, to Sparks: “You’ve got no regrets? You ought to have plenty of regrets. I don’t think you’re willing to acknowledge them, but you ought to have them.”
During the first half of Tuesday’s Senate grilling of current and former Goldman Sachs employees, much of the heat was on Dan Sparks, the former mortgage desk chief 2006-2008, as well as Fabrice Tourre, the young trader charged in the SEC’s fraud case against the besieged Wall Street powerhouse. Early on the hearing got testy, even scatological, with Sen. Carl Levin (D-Mich.) pressing Sparks on an email he got in 2007 from a former executive at Goldman who called one particular deal “shitty.” Sen. Ted Kaufman (D-Del.) was aggressive in challenging the firm on why they sucked up so many loans for securitization that were mostly based on borrower’s stated income, a risk factor in the conveyor belt that, Kaufman stressed, the venerated investment bank must have seen as troubling if not possibly rife for fraud.
All of the members of the Goldman contingent, which also included Josh Birnbuam, former head of structured product trading and Michael Swenson, the current head of that group, were asked whether they felt they had a role in the financial crisis of 2008. Not surprisingly, there was some hedging.
Sparks: “Regret means there was something you feel like you did wrong. I don’t have that. We made mistakes, though, and we made poor business decisions in hindsight.”
Sparks: “Wrong to me means a qualitative judgment on something inappropriate. I think we made mistakes but we I do not think we did anything inappropriate.”
Tourre: “I am sad and humbled by what happened in the market in 2007 and 2008 and the whole financial crisisâ€¦. I firmly believe that my conduct was correct.”
Birnbaum: “We’re all sympathetic to the negative impact of that bubble. There’s a lot of pain and human suffering that came from the bursting of the bubble and to the extent that investment banks may have extended too much credit at a certain time, then it’s possible.”
Swenson: “I do not think that we did anything wrong. There’s things we wish we could have done better in hindsight, but at the times we made the decisions I don’t think we did anything wrong.”
Watching Goldman Sachs executives testify on Capitol Hill before the Senate Permanent Subcommittee on Investigations, I can’t help but think that the people at the tables are a lot less worried about keeping their jobs in the long term than some of the people up on the dais. Although interestingly, of the nine members on the subcommittee only two are up for re-election this year, and both are Republicans: John McCain of Arizona and Tom Coburn of Oklahoma. Only McCain seems to be facing a tough re-election bid.
So maybe nobody is concerned about his or her job. Maybe It’s All Good up on the Hill today, and the parties are playing their roles secure in the knowledge that at the end of the day everyone will go home and nothing will change. Because there is one thing that the Goldman executives and the politicians have in common: the status quo benefits them all.
UPDATE, 2:55 p.m. ET - I’m listening to the hearing. Words I’m thinking of to describe the two sides of this verbal transaction today … for the questioners: “ignorant,” “combative,” “condescending,” “posturing,” “preachy,” “hypocritical,” “grandstanding”. For the respondents: “obfuscating,” “delaying,” “denial,” “insincere,” “annoyed,” “defiant,” “unconcerned.”
UPDATE, 3:15 p.m ET - I neglected to note that Ted Kaufman, Joe Biden’s replacement in the senate, is subject to a special election on Nov. 2.
UPDATE, 4:45 p.m. ET - The subcommittee just took a break so the senators could attend a test vote on financial regulation. But not before Goldman Sachs’ David Viniar got off the line of the day in response to a persistent, if poorly-worded, question from Carl Levin. Levin was trying to get Viniar to speak to whether Goldman customers had a “right” to expect securities sold by Goldman to “succeed.” What he was getting at was should Goldman customers believe that, because Goldman was marketing a deal, that there was an implicit expectation that Goldman wanted the deal to make the customer money. Viniar was having trouble getting his mind around the question, and so Levin read back a comment from an email written by a Goldman salesperson that referred to one of the subprime deals in question as “a shitty deal.”
How did Viniar feel, hearing that a Goldman salesperson wrote that, Levin asked.
Viniar replied that he felt it was regrettable such a sentiment was expressed in an email.
George Soros is famous, generally, for breaking the bank of England and also for underwriting the left wing. And of course every year he seems to pop up on a list of the highest earners in the universe. But just because a top earning portfolio manager has plenty of money in his checking account, it doesn’t make donating $30,400 to a senatorial campaign committee a mere throwaway gesture. Nor does it necessarily mean anyone is ending up in that manager’s pocket. Still, it’s interesting to see which hedge fund industry members are actually doling money out to campaigns, how much, and to which parties.
Adding in gifts given in the name of spouses and children, a politically minded individual can legally hand out is $115,000 in any one election cycle. No hedge fund manager has hit that limit yet in the current cycle (roughly the past 12 months), though the largest donations among hedge fund managers, according to the Center for Responsive Politics, went to Democrats. Jim Simons, the recently retired founder of Renaissance Technologies, was the single largest hedge fund industry donor with total contributions of $94,100 so far, all but a few hundred dollars going to Democratic senators, including Chuck Schumer (D-N.Y.) and Harry Reid (D-Nev.), or to PACs. The second highest hedge fund political donor was ex Goldman Sachs star trader Eric Mindich who gave $89,600 to a variety of Democrats, including Chris Dodd of Connecticut and Kirsten Gillibrand of New York.
In all, hedge fund managers have donated $3.16 million to politicians; $1.93 million to Democrats and $1.22 million, according to CRP data.
The CRP also recently ran some numbers on newsmaker John Paulson. They found he gave $213,000 in political contributions over the past decade, and that he was fittingly, somewhat hedged, giving 60 percent to the GOP and 40 percent to the Democrats.
Harbinger’s Phil Falcone has also demonstrated bipartisan support; he gave $30,400 to the Democratic Senatorial Campaign Committee and $10,000 to the Republican Party of Minnesota.
Obviously not an Al Franken fan.
Quant figure Cliff Asness leans mostly to the right but is apparently not averse to taking a flyer now again. Of the $72,090 he gave out, 99 percent went to Republican causes. He did however give $490 to Dodd.
The most famous hedge fund manager of them all, Stevie Cohen, is among the top ten donors among hedge fund donors, but he barely made the cut, donating $68,400. All but $4,800 went to Republicans, including embattled Nevada Senator John Ensign.
With so much political controversy swirling around the New York Mercantile Exchange in recent days, it is somewhat surprising that no politician has yet made an issue out of the continuing consolidation in the market for commodities exchanges: in particular, about the impending acquisition of NYMEX by the CME Group.
After all, the charge that energy speculators are to blame for much of the recent price run-up in gasoline and/or crude oil has become part of the common coin of political debate in the U.S., sometimes indeed promoted under such monikers as, â€śtrader realism.â€ť
NYMEX is necessarily at the center of that controversy, and CME will find itself in the same position when, as is now expected, the two complete their nuptials.
So: why hasnâ€™t anyone on the national scene made an issue out of the merger?
In part, it may just be the the issue has too many moving parts. When the CME and CBOT merged last year, some discussion of the general trend of consolidation of derivatives exchanges did take place. That discussion involved the vertical integration of exchanges and clearinghouses, the “barriers to entry” this may create, the fungibility of products, the relationship between equity exchanges and their derivatives counterparts, and much else.
Even when a matter is of great public interest, once discussion passes a certain threshold of complexity it gets re-allocated in the public mind to a small circle of deskbound wonks.
Or it might be a general recognition that globalization has come to the point where everything has to happen on a very large scale, and that the consolidation of exchanges is an inevitability.
“Consolidation among exchange operators continues to be a viable growth strategy. The transaction will result in a more competitive exchange, offers NYMEX Holdings shareholders a financially fair consideration and is expected to be accretive to earnings for the surviving shareholders of CME Group,” is how Glass Lewis put the key point, in recommending that both sets of shareholders vote in favor of the deal at their upcoming meetings.
Still, I have the uneasy feeling that exchange consolidation could easily be portrayed, by a politician looking for a point to make, as a way of easing the least productive or rational or consumer-friendly forms of speculation out there. [I'm not making such a point, mind you, only commenting on what some hypothetical demagogue might be able to put together in this line].
My unsolicited (but inexpensive) counsel to any deal makers out there is, then, as follows: make these deals while the makin’ is good. The climate could change.
Ok. We read it 100 times in the past week. The message is clear on the part of U.S. Secretary Treasury Henry Paulson: Fannie Mae and Freddie Mac are too big to fail. As a result, the U.S. taxpayer will be required to lend them money. Watch out. Itâ€™s a round number: $25 billion for the taxpayers due in fiscal 2009-2010 according to Congress. Thatâ€™s how the â€śimplicit guaranteeâ€ť of the government becomes honestly very explicit. I just wrote a series of three articles on our site, summarizing the Fannie and Freddie mess that has unfolded over the past 10 days or so.
Clearly, the story of Fannie and Freddie is simple to summarize: an implicit government guarantee and an explicit double standard. For years, those two monsters made money for their shareholders because the government gave them a series of privileges no other financial company could ever dream of. I donâ€™t have a problem with making money, for instance, the way a hedge fund guy makes money. But with Fannie and Freddie, the art of making money is a bit more esoteric. It’s more like the art of having-your-cake-and-eating-it-too, so to speak. Let’s look at what Paulson himself nicely calls â€śthe dual mandateâ€ť of the two government sponsored entities. Here’s a summary: They donâ€™t pay state and local taxes. Instead, the taxpayer pays their bill when times are tough, like today. Their minimum capital requirement is ridiculously low, in fact, three times lower than what banks are subject to. The result: Those companies are almost insolvent. They just don’t have enough capital. They run their portfolio like there is no tomorrow, leveraging thirty to one times. You want to blame hedge funds. Look no further. Here is a pair of wild hedge fund cowboys. And the beauty of this is that they can buy assets very cheaply because it is assumedâ€”for good reasonâ€”that theyâ€™re too big to fail and that the government will bail them out.
Of course it will. We will. We, the taxpayers, are the last line of defense for a type of dizzy capitalism on the ropes, knocked out by the financial crisis. Itâ€™s a very creative form of capitalism, one that can easily flirt with socialism because if one follows Mr. Paulson logic, there will always be something too big for the government not to be the boss.
The string of recent bailouts proposed by the government suggests that free markets and wild capitalism are no longer fashionable words: mortgage bailout, student loan bailout, bank bailout/merger, Fannie and Freddie bailout.
This credit crisis in my view is a crisis of capitalism. The U.S. will either return to a free market–and that would imply, getting rid of anomalies such as Fannie and Freddie that date back from the New Deal. Or as many of us expect and fear, American financial institutions will face a much tougher regulatory oversight.
I am not so sure that the pendulum will swing toward regulation overkill. Rather, we may just cure our sick capitalism and hope for the end of those forced and dysfunctional unions between private enterprises and public interest. Translate: Kill Fannie and Freddie. They’re from another age.
But it does not look like anything very new is going to happen soon. We have too many monsters “too big to fail.” And right now, the regulators are focused on limiting freedom, such as the freedom to sell certain stocks in bad times. The idea is not really to empower the markets.
To be fair, the government has a tough job to do. They want to stop a potential disaster. We know and we understand the risk of not doing anything.
Fan and Fred have issued and guaranteed $5 trillion in debt and mortgage backed securities guarantees, out of which $3 trillion is held by U.S. banks and over $1.5 trillion by central banks all over the world. â€śBecause of their size and scope, Fannie and Freddie’s stability is critical to financial market stability,” said Mr. Paulson. You bet.
This government has been very good at explaining and addressing systemic risk. It came to the rescue of Bear Stearns & Co, Inc in March. As a result, the Federal Reserve Bank lent $29 billion to JP Morgan, Bearâ€™s acquirer. Now the Treasury wants to give unlimited credit to its darlings Fannie and Freddie. We understand the stakes. No one wants a Great Depression-like meltdown. But soon, we’ll understand the cost of those bailouts very well too.
How did we get there? How did the U.S., the heartland of capitalism, get to be such a financial mess, with the government feeding the growth of semi-public semi-private ogres? My question is: Why donâ€™t we have a competitive environment in place, one that would just as well fuel our mortgage market? It’s not forbidden to imagine a mortgage financing system made of several smaller institutions competing with one another, with no one too big to fail, in fact with the bad ones more likely to fail than the good ones. Anything wrong with that?
Of course itâ€™s time for a reform of Fannie and Freddie. If a system relies on private profits-slash-public liabilities, it screams for reform. Either privatize it altogetherâ€”why not? Or nationalize it. But itâ€™s unlikely that things will change in a deeper way anytime soon, so long as Fannie and Freddie remain what they are: lobbying bullies with a big heart when it comes to financing political campaign contributions in a positive, bipartisan spirit.
Whoever is willing in Washington to take on this challenge will have to bite the hand that feeds Capitol Hill. It’s hard to imagine it will ever happen. And yet, just like Wall Street engineered a toxic form of debt it now has to rid itself of, Washington at some point may be well-advised to do without its toxic politicized mortgage machine.Â
Farmers, CTAs and other affected parties can probably be forgiven for thinking that Mother Nature has declared war on them over the past couple of months–after cool and damp weather delayed planting of many crops this spring, heavy rains over the past couple weeks have left many growing areas in the Midwest waterlogged or submerged altogether, with the upshot that corn prices won’t be coming down for a long, long time, and things aren’t looking too good for soybean yields, either.
In today’s edition of The Gartman Letter, North Dakotan farmer and ag stock commentator Roger Neshem weighed in on the situation with some astute points about fertilizer leaching, yield expectations and whether or not farmers might cut their losses for the remainder of the year rather than spend more money on a risky crop. But after noting that the current conditions bode well for wheat yields, Mr. Neshem closes with a comment that possibly reveals a little bitterness toward that most fickle of mistresses, Mother Nature:
I often find it funny that idiots like Al Gore yell mad in the streets about warm temps as being bad and never stop to think that the real enemy to the farmer and mankind alike is the cold. Our biggest crop failure in the last 20 years here was 2004 when a frost on august 20th decimated much of the states corn, soybean and sunflower crops. The great extinctions in history have occurred when the earth is cooling and the great population explosions occur when the temps are warming. I pray for global warming so as our species can survive!!!
So bear this in mind, carbon-neutral advocates. As a matter of fact, Mr. Neshem’s screed brings to mind a similar view expressed by famed industrialist and nuclear power magnate Mongomery Burns, on the topic of recycling:
“Oh, so Mother Nature needs a favor? Well, maybe she should have thought of that when she was besetting us with droughts and floods and poison monkeys. Nature started the fight for survival and now she wants to quit because she’s losing? Well, I say hard cheese!”
A snafu in Congress? Difficult as it may be to give credence to such a notion, here we are.
President Bush vetoed the farm bill yesterday. Given the wide margins by which the bill had passed both the House (318 to 106) and the Senate (81-15), an override of that veto seemed assured.
What’s more, the denizens of Capitol Hill have some time off coming up — they had hoped to get out of town for a week. Those in rural districts especially had probably relished the idea of bringing the farm bill home with them as one brings home a bass after a day of fishing. (more…)
Last week, Sen. Maria Cantwell became the latest in a long line of politicians (a line that probably dates back to Pericles and the marble-futures market) who blame price increases on speculators and market manipulation.
In a speech on the floor of the Senate, she made reference to the Amaranth matter — which involved natural gas, notÂ crude oil or petroleum –Â and then demanded that the powers of federal regulators be expanded to crack down on the (hypothetical) Amaranths lurking there. (more…)
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