Part I of II in a series. Part II here.
“It takes 20 years to build a reputation and five minutes to ruin it. If you think about that, you’ll do things differently.”
Arguably the greatest living investor, Warren Buffet, clearly valued a person’s or an organization’s reputation. In 2008 Buffet was the “white knight” investor for a struggling Goldman Sachs, investing $5b in the firm. A mentor of mine had wise complementary counsel to Buffet’s: when providing legal advice, be sure that you would be comfortable if that advice were to appear in a New York Times, Washington Post or Wall Street Journal front page article.
We live in an age of greed, and indeed supreme irony. Perhaps Mr. Buffet never shared his wise advice with the senior management of Goldman Sachs. Worse, maybe he did and they ignored him. In any event, how has Goldman’s reputation fared? Let’s examine three separate front page New York Times articles.
Banks Bundled Bad Debt, Bet Against It And Won (NY Times, December 24, 2009)
Goldman Sachs sold mortgage-backed debt securities to pension funds and insurance companies. To hedge their position and to profit from a decline in the housing market, Goldman created a synthetic derivative security called Abacus. This second security was a direct bet against the position of their institutional clients. The mortgage-backed debt securities sold to the institutional clients performed poorly, with losses in the billions. Some of the original securities were of such poor quality that losses occurred within months of issue. Goldman created these synthetic securities well in excess of any hedging needs, permitting it to profit handsomely at the expense of its institutional clients. The obvious ethical problem was succinctly stated:
“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 SEC and other governmental agencies are investigating Goldman and other firms to determine whether or not they violated “fair dealing” rules.
Testy Conflict with Goldman Helped Push A.I.G. to Edge (NY Times, February 7, 2010)
AIG insured some of Goldman’s complex mortgage securities. When the housing crisis deepened, AIG paid Goldman $2b to cover potential losses. AIG later asserted that Goldman had inflated the potential losses and sought monies back. Goldman countered that it was due even more money. The SEC is now looking into whether or not Goldman’s demands for loss coverage depressed the mortgage market and hastened AIG’s demise.
In another supreme irony, after the government took over AIG, Goldman received an additional $12.9b from taxpayers, one hundred percent of expected losses.
Wall St. Helped to Mask Debt Fueling Europe’s Crisis (NY Times, February 14, 2010)
Goldman’s questionable financial maneuvers were not confined to the United States.
As worries over Greece rattle world markets, records and interviews show that with Wall Street’s help, the nation engaged in a decade-long effort to skirt European debt limits. One deal created by Goldman Sachs helped obscure billions in debt from the budget overseers in Brussels.
Even as the crisis was nearing the flashpoint, banks were searching for ways to help Greece forestall the day of reckoning. In early November — three months before Athens became the epicenter of global financial anxiety — a team from Goldman Sachs arrived in the ancient city with a very modern proposition for a government struggling to pay its bills, according to two people who were briefed on the meeting.
The bankers, led by Goldman’s president, Gary D. Cohn, held out a financing instrument that would have pushed debt from Greece’s health care system far into the future, much as when strapped homeowners take out second mortgages to pay off their credit cards.
European authorities are looking into the role of Goldman and others in skirting EU rules.
Is There Another Way?
Has the American public been lulled into believing that this is an acceptable way of doing business, or do we require the people involved to be publicly excoriated, tried, convicted and jailed before we acknowledge their tactics were shabby? Is Goldman Sachs an institution now synonymous with crafty machinations and greedy outcomes? Are its tactics symptomatic of a Wall Street “disease?” Is there an alternative way of doing things? Does reputation matter? Part II will examine these issues and possibilities.
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Related posts:
- A Reputation as Good as Goldman Part II
- Goldman and the Winner Take All Society
- Some Random Thoughts on Goldman
- Watershed Event in the Financial Crisis – SEC v. Goldman
- Trust Once Lost
Tags: AIG, Goldman Sachs, Greece, mortgage-backed securities, Wall Street, Warren Buffet
