Shitty DealsPosted: April 27, 2010
I just spent the morning watching Goldman Sachs executives dance around both good and bad questions from senators sitting on Karl Levin’s Subcommittee on Investigations. I’ve learned several things. First, many senators sitting on that committee seem to misunderstand the role of firms like Goldman Sachs as market makers. Senators Coburn and Ensign should be required to spend some time in an investments class or seminar until they figure out why strategies for buying and selling and for risk management can be different at various levels of a firm. Some folks manage the entire position of the firm of Goldman Sachs and then some have to manage the position of individual products that will be originated and sold to many parties; including competitors. They also seemed to confuse why Goldman could sell a product and then create a synthetic hedge to minimize the risk or basically insure a price. That being said, I completely enjoyed watching Senator Levin make them squirm in their seats with words from their own emails.
On the Goldman side, I was really impressed with Dan Sparks who seemed to try to answer questions and at times, even tried to explain the complex derivatives world to the very thickheaded Senator Jon Tester who was clearly asking questions that showed he should be limited to serving on agriculture and land use committees. Joshua Birnbaum seemed to suffer from a lot of forgetfulness for such a young man and Fabrice Tourre seemed to parse words with the ease of a champion linguist. (Aside: I’ve been wondering all day what the deal is with the woman behind Fabrice over his right shoulder. Is she dying from boredom or is it just me?)
As Senator Susan Collins remarked, they sure spent a lot of time not answering questions in very complex ways. Collins spent a great deal of time trying to ask about how much loyalty an investment banker should have to a client compared to loyalty to their firm and potential bonus checks. (BTW, GS stock is up at the moment, that should say something.)
Sen. Susan Collins asked the question to Dan Sparks, former head of the mortgages department at Goldman He paused briefly, then said: “I believe we have a duty to do well for our clients.”
Collins asked the same question to Joshua Birnbaum, a former managing director in structured products group trading at Goldman. Birnbaum said Goldman has such a duty and has fulfilled that duty.
Collins asked the question to Fabrice Tourre, executive director in structured products group trading at Goldman. He said the firm has a duty to serve clients in its role as a market maker by providing liquidity. “I do not believe we act as an investment adviser to our clients,” Tourre added.
“There seems to be confusion here,” Collins concluded. She also proposed legislation that would impose a clear fiduciary duty on investment banks to work in the best interests of their clients.
“Conceptually that doesn’t seem like an issue,” Birnbaum said. “It seems like an interest idea.”
Even though this was set up to be a public circus, there were some very revealing moments. Senator Karl Levin just connected the dots between emails (the ones leaked recently) within Goldman Sachs and products foisted on the public. It was clearly buyer beware atmosphere as far as GS was concerned. If they could off load it, they would and they did.
Here’s the best exchange I saw this morning highlighted at Politico. It’s an excerpt from the YouTube video above with some political analysis added.
“Boy, that Timberwolf was one shitty deal,” Levin said, quoting the email from a Goldman Sachs executive.
It is extremely unusual for senators to use obscenities from the dais, let alone during remarks carried live on cable television networks. Levin used it again and again.
“How much of that shitty deal did you sell to your clients?” Levin asked a witness, Daniel Sparks, former head of the Mortgage Department at Goldman Sachs.
“Mr. Chairman, I don’t know the answer to that,” Sparks replied.
Levin pressed Sparks on the question of whether he had an obligation to disclose to his clients that he was selling assets that Goldman itself was betting against.
“You didn’t tell them you thought it was a shitty deal? Levin asked.
Sparks said that the context of the email was that his own performance on the deal was not good.
“Should Goldman Sachs be trying to sell a shitty deal?” Levin pressed.
“Well, there are prices in the market that people want to invest in things,” Sparks responded.
The best way to eliminate these problems is to trade these things on markets and make them as standardized as possible (like some of the other derivatives) so that the pricing mechanism works better and it’s out in the open. So, even if there isintent to defraud or there is an intent to withhold some pertinent information, it’s less likely to matter when the pricing is SO far off. It contains the damage to the participants only and not to society.
I think every one would be much better off if these things were exchange traded, standardized and monitored by an independent regulator for certain standards. That way, it’s absolutely clear what’s involved to most the of the participants. It’s a risky asset. If you want to call speculation betting, then fine, but the deal is the longs create an asset of value and without the speculators it would’nt work. When you bet on a horse race, there’s no social or business benefit to either the long or the short position in terms of risk or portfolio management. Both are purely speculative. And that’s the difference.