Goldman Sachs Expose - Privatized profits, socialized losses...

[WhiskeyGirl]

So many deals...so little time...

I keep reading about a Goldman Sachs expose.  Is this another Washington gift to the American people?

Maybe some new blood in the job rotation between Goldman, Treasury, Federal Reserve, Congress?

“Janet Tavakoli Comments on Goldman Sachs Fueled AIG Gambles”

JT Note: Goldman’s “middleman” trades were probably done from its proprietary trading desk, but had A.I.G. failed, Goldman would have had to make good on these trades. Whether it acted as a “middleman” on all of these trades or just some of them, Goldman had assumed the risk (and A.I.G. provided a hedge).

According to the WSJ article, Goldman spokesman said that “What is lost in the discussion is that AIG assumed billions of dollars in risk it was unable to manage.” Yes, and what Goldman’s spokesman lost in the spin was that Goldman Sachs also could not manage that risk. Instead, Goldman “hedged” with A.I.G., and Goldman overexposed itself to A.I.G. If A.I.G. had failed, a liquidator might have asked Goldman to return a large portion of the collateral it collected. When one examines the collateral of the deals underwritten by Goldman, it includes some collateral from Goldman Sachs Alternative Mortgage Products and other collateral that did not perform well. Goldman’s way to “manage” that risk was to stuff it into value destroying CDOs, portions of which were then sold to customers and/or hedged with A.I.G.

It sounds like taxpayers got the shaft.  Privatized profits, socialized losses.

JT After Note: The last part of the WSJ article suggests that the SIGTARP report stated Goldman would have a difficult time “selling the collateral.” I am not sure what is meant here, but I believe it refers to the reports’ stating Goldman might have a difficult time collecting on the hedges Goldman bought to protect itself against an A.I.G. bankruptcy. I would also point out that if A.I.G. had gone bankrupt, a sensible liquidator would have clawed back collateral that A.I.G. had already given to Goldman due to the extraordinary circumstances. After it saved the day by extending the credit line, the FRBNY should never have settled for 100 cents on the dollar. In August 2008, one month prior to the FRBNY providing A.I.G. with an $85 billion credit line to pay collateral to its counterparties, Calyon, a French bank that bought protection from A.I.G. (including on some Goldman originated CDOs) settled a similar $1.875 billion financial guarantee with FGIC UK for only ten cents on the dollar.
By Janet Tavakoli

It sounds like taxpayers got the shaft.  Privatized profits, socialized losses.

More here – http://www.marketoracle.co.uk/Article15750.html

Janet Tavakoli writes financial books.  Amazon list here http://www.amazon.com/s/ref=nb_ss?url=search-alias%3Dstripbooks&field-keywords=Janet+Tavakoli&x=11&y=16

Dear Mr. Buffett: What An Investor Learns 1,269 Miles From Wall Street

Structured Finance and Collateralized Debt Obligations: New Developments in Cash and Synthetic Securitization (Wiley Finance)

Credit Derivatives & Synthetic Structures: A Guide to Instruments and Applications, 2nd Edition

Collateralized Debt Obligations and Structured Finance : New Developments in Cash and Synthetic Securitization

Seems like this EXPOSE is lost with all the Healthcare Debate.

[WhiskeyGirl]

“Response to Goldman Sachs Expose”

Goldman responded to the New York Times saying many of these deals were the result of demand from investing clients seeking long exposure. In an earlier Huffington Post article about Goldman’s key role in the AIG crisis; it traded or originated $33 billion of AIG’s $80 billion CDOs. AIG was long the majority of six of Goldman’s Abacus deals. These value-destroying CDOs were stuffed with BBB-rated (the lowest “investment grade” rating) portions of other deals. These BBB-rated portions were overrated from the start. Many of them eventually exploded like firecrackers.

Goldman said it suffered losses due to the deterioration of the housing market and disclosed $1.7 billion in residential mortgage exposure write-downs in 2008. These losses would have been substantially higher had it not hedged. Goldman describes its activities as prudent risk management. Many Wall Street firms wound up taking losses. The question is, however, how did they manage to get through a couple of bonus cycles without taking accounting losses while showing “profits?”

The answer is that they sold a lot of “hot air” disguised as valuable securities. Goldman claims this was prudent risk management. In reality, Goldman created products that it knew or should have known were overrated and overpriced.

If Wall Street had not manufactured value-destroying securities and related credit derivatives, the money supply for bad loans would have been chocked off years earlier. Instead, Wall Street was chiefly responsible for the “financial innovation” that did massive damage to the U.S. economy.

More good reading here - http://www.marketoracle.co.uk/Article16064.html

Privatized profits, socialized losses…

No jobs or prosperity for Main Street.

The TARP slush fund continues under Obama.

jmho