Goldman Sachs: the Big Short

I’ve been studying this Goldman Sachs thing all weekend, and wow: it looks like the Dreaded Shit Hammer of Accountability might finally be falling on the herd of venal Wall Street swine that engineered and profited from the catastrophic economic collapse of 2008:

Goldman Sachs Group Inc. was sued by U.S. regulators for fraud tied to collateralized debt obligations that contributed to the worst financial crisis since the Great Depression. The firm’s shares tumbled 13 percent and financial stocks slumped.

Goldman Sachs created and sold CDOs linked to subprime mortgages in early 2007, as the U.S. housing market faltered, without disclosing that hedge fund Paulson & Co. helped pick the underlying securities and bet against the vehicles, the Securities and Exchange Commission said today. Billionaire John Paulson’s firm earned $1 billion on the trade and wasn’t accused of wrongdoing. The SEC also sued Fabrice Tourre, a Goldman Sachs vice president who helped create the CDOs, known as Abacus.

Without delving into the mechanics of CDOs, credit default swaps and other investment scams that make my eyes glaze over with incomprehension, my understanding of what these greed-crazed douchebags were up to can be analogized as follows:

Imagine a building contractor who builds a beautiful new home in which he’s purposely installed faulty wiring, and for insulation he’s used some explosively flammable substance like shredded cedar.  He then takes out fire insurance on it — facilitated by the insurance company’s home inspector, who knows the house doesn’t make the cut but gets a few bucks from the contractor to give it a passing grade anyway.  Then the house is sold to some unsuspecting home buyer. After the inevitable fire, the insurance company pays out the contractor’s claim — so he’s been paid twice, once when he sold the house and once from the insurance. The poor suckers who bought the house?  They die in the blaze.

Goldman Sachs is the building contractor, AIG is the insurance company, and the pension funds of millions of ordinary people are the home buyers who perished in the inferno.  Goldman Sachs was betting on the collapse of properties it sold as good investments — “shorting”, which is a perfectly legitimate trading practice, unless you’re the one who’s engineered the collapse.  In that case I’m pretty sure it’s a crime.

It’s worth remembering that Goldman Sachs isn’t some scammy little fly-by-night online trading company — they were supposedly the “gold standard” for investment banks.  So imagine what the SEC is finding under all the other rocks it’s presumably turning over.  If a gang of greedhead pigs is finally held accountable for their contribution to an economic cataclysm, that’s great, but I wonder what the uncertainty might do to a fragile market that’s been crippling its way towards recovery since the crash.  I have the queasy feeling that the other shoe is about to drop, and it could be heavy.

13 Responses to “Goldman Sachs: the Big Short”


  1. 1 brebis noire Sunday, April 18, 2010 at 1:28 pm

    I started to deeply mistrust banking/insurance systems ever since the mid-1990s when I was talked into buying some mutual funds. The money I turned over of course became unavailable for my actual needs, and all I did was lose money, even in “good” times. Luckily, I only had a little bit to lose at the time (still don’t have much more…) The way I was talked into it and how they recommended the Wealthy Barber was a real turnoff. What a racket. My excuse was that I was young and I trusted my elders (and my eyes glazed over whenever they trundled out the technical terms). I became deeply allergic to RRSPs thanks to that experience. I’ll have to learn to distill vodka to support my old age. ;-)

    The only thing that surprises me is how it took so long to collapse.

  2. 2 Bleatmop Sunday, April 18, 2010 at 2:23 pm

    ut I wonder what the uncertainty might do to a fragile market that’s been crippling its way towards recovery since the crash.

    It’s my opinion that we will be in the same mess again real quick unless some accountability happens. No law changes and until now no criminal charges laid would seem to indicate that we’re heading down the exact same path as we did before.

    1 charge laid, only about 50,000 left to go.

  3. 3 hemmingforddogblog Sunday, April 18, 2010 at 2:34 pm

    Best explanation from The Big Picture:
    “I’ve been racking my brain for the easiest way to get people to understand what GS did.

    The best I could come up with was Mel Brook’s “The Producers.” They purposefully tried to create the worst play ever, lose their investors money and pocket the proceeds.

    Its not much of a stretch to suggest that Abacus 2007 was Goldman Sachs’ “Springtime for Hitler.””

    I’ve just finish reading “The Big Short” by Michael Lewis; “The Best Trade Ever” by Gregory Zuckerman and “No one would listen”, by Harry Markopolous. The first two were about the mortgage debacle and the last one about a group who kept trying to tell the SEC (to no avail) that Bernie Madoff was a crook. Ten years ago!!!

    It’s not an understatement to say that the SEC doesn’t know much about the derivatives market.

  4. 4 squirrelist Sunday, April 18, 2010 at 7:08 pm

    A few years ago I happened upon a Goldman Sachs training manual someone carelessly left where they shouldn’t in London and spent an interesting couple of hours looking through it.

    I didn’t get a lot of the maths, or follow all the equations that were designed to ensure that G-S always made a profit on any deal it did, but some sections could hardly have been plainer or more egregious. They were, purely and simply, instructions on how to sail as close as possible to the wind without getting caught.

  5. 5 Cornelius T.Zen Monday, April 19, 2010 at 6:59 am

    Good morrow, all!
    To Goldman Sachs, “accountability” beomes “accounting ability”, as in, “make sure the books make it look legal.”
    Fable time!
    One day, a young man bought a donkey. Only, the donkey was dead when he went to pick it up. He demanded his money back. The farmer who sold the donkey said, “Try this.”
    So the young man hosted a lottery. Two dollars, and the winner gets a donkey. Many tickets were sold, and the winner came by to get the donkey.
    “Hey! This donkey is dead!”
    “Okay, here’s your two dollars.”
    When he grew up, the young man became CEO of Enron, WorldCom, and finally, Goldman Sachs.
    I’m open to a better explanation – CTZen

  6. 6 RossK Monday, April 19, 2010 at 9:38 am

    Helluva lede there JJ.

    Epic.

    .

  7. 7 JJ Monday, April 19, 2010 at 10:08 am

    brebis

    I started to deeply mistrust banking/insurance systems ever since the mid-1990s when I was talked into buying some mutual funds.

    Mutual funds blow!!! :evil: I lost almost 30K in mutual funds when the market crashed :( in spite of warning my broker that I would strangle him with his own intestines if he lost any of my money.

    Even without the crash, mutual funds suck pretty badly. There are just too many different “wealth advisors” :roll: handling your money and charging a fee every time they do. I wouldn’t touch them again… better to open a commodities account and do my own trading ;)

  8. 8 JJ Monday, April 19, 2010 at 10:09 am

    Hey — what happened to my avatar?

  9. 9 JJ Monday, April 19, 2010 at 10:22 am

    Bleatmop

    No law changes and until now no criminal charges laid would seem to indicate that we’re heading down the exact same path as we did before.

    Right… in fact, they are still doing things exactly the way they were doing them before the crash. Nothing’s stopping them — yet. But there are fairly stiff regs coming down soon, and unless Geithner adds some douchebaggery loopholes, there should be a lot more transparency to what these scumbags do. No more packaging dogshit with roses.

    In the short term it will probably cause a lot of rock and rolling, but in the long term the economy will be better off for it.

  10. 10 JJ Monday, April 19, 2010 at 10:35 am

    SQ – Yeah, Bill Maher said something like that on Friday night, that it was like the Producers, which is a very apt analogy. The most incredible thing about it is the utter arrogance of these guys — knowing full well what they were doing, but doing it anyway for the short term gain. Indescribably morally bankrupt.

    I’ve got the Big Short on order from Amazon, but the Pony Express hasn’t made it over the mountains yet. I’ll also check out those other two books you mention. As repulsive as it is, I’m fascinated by this stuff.

  11. 11 JJ Monday, April 19, 2010 at 10:44 am

    squirrelist

    They were, purely and simply, instructions on how to sail as close as possible to the wind without getting caught.

    “Scumbag 101″, eh?

  12. 12 JJ Monday, April 19, 2010 at 10:46 am

    CTZen

    When he grew up, the young man became CEO of Enron, WorldCom, and finally, Goldman Sachs.
    I’m open to a better explanation

    I think that’s a pretty good one :lol:

  13. 13 JJ Monday, April 19, 2010 at 10:48 am

    RossK – Why thank you! :)


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