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The shocking news that Goldman Sachs is greedy
February 5, 2013 11:09 AM   Subscribe

"Twenty five years ago I quit a job on Wall Street to write a book about Wall Street. Since then, every year or so, UPS has delivered to me a book more or less like my own, written by some Wall Street insider and promising to blow the lid off the place, and reveal its inner workings, and so on. By now, you might think, this game should be over. The reading public would know all it needed to know about Wall Street, and the publishing industry would be forced to look to some other industry for shocking confessions from insiders. Somehow this isn't the case."
posted by vidur (47 comments total) 14 users marked this as a favorite

 
I have a theory about why so many of these shocking exposes about Wall Street aren't sinking in - they involve really, really technical financial jargon that the average person couldn't even begin to comprehend. (I've worked in various financial firms for 10 years now and could not for the life of me tell you what anyone around me has ever been talking about in all that time.)

People get hooked by the "the shocking truth about Wall Street" come-on, but they expect to read something like "Sid Stockbroker faked some papers and embezzled a whole pile of money and flew off to Jamaica with it". The actual misdeeds, which go something like "Sid Stockbroker hadn't made a full disclosure of the IBDO compliant with Glass-Stegal and thus liquidated the assets before full maturity" or whatever, just leave people thinking, "uh....wait, where's the bad bit?"

TL/DR - before you can expose the reading public to "all it needs to know about Wall Street," you need to be sure the reading public knows way, way more about economics in general.
posted by EmpressCallipygos at 11:21 AM on February 5, 2013 [13 favorites]


I found this quote succinctly lays out how bad things are:
Stop and think once more about what has just happened on Wall Street: its most admired firm conspired to flood the financial system with worthless securities, then set itself up to profit from betting against those very same securities, and in the bargain helped to precipitate a world historic financial crisis that cost millions of people their jobs and convulsed our political system. In other places, or at other times, the firm would be put out of business, and its leaders shamed and jailed and strung from lampposts. (I am not advocating the latter.) Instead Goldman Sachs, like the other too-big-to-fail firms, has been handed tens of billions in government subsidies, on the theory that we cannot live without them. They were then permitted to pay politicians to prevent laws being passed to change their business, and bribe public officials (with the implicit promise of future employment) to neuter the laws that were passed—so that they might continue to behave in more or less the same way that brought ruin on us all.
posted by nowhere man at 11:29 AM on February 5, 2013 [31 favorites]


I have a theory about why so many of these shocking exposes about Wall Street aren't sinking in - they involve really, really technical financial jargon that the average person couldn't even begin to comprehend.

But the bottom line is always easy to comprehend. You don't have to know how someone is scamming you to know that someone is scamming you -- the question becomes do you want to do something about it or pretend nothing is wrong so that you don't have to acknowledge there are serious flaws in a system/industry/government/country?

It's like people who know their spouses are cheating on them, robbing them blind, sucking the life out of them and destroying the best years of their lives -- but the actions needed to right that wrong seem like serious work that require admitting they were wrong from the get-go; so they settle for the status quo, endure, and pretend everything is wonderful.

The assumption that people will automatically want to see the truth and take the necessary action to fix things isn't always right. Ignorance can be a handy excuse, but it's still just an excuse.
posted by Alexandra Kitty at 11:34 AM on February 5, 2013 [4 favorites]


The reason the exposes aren't sinking in is that the same people that are doing the scamming are also running the communication networks (books, TV, radio, news, talk shows, the government) etc. One book a year is nothing compared to the trillions of messages a day each of us gets to SPEND SPEND SPEND INVEST INVEST INVEST RICH PEOPLE WILL SAVE YOU.
posted by DU at 11:38 AM on February 5, 2013 [3 favorites]


Also EC, shaded a different way, much Wall Street malfeasance just looks like Greed + Cleverness. Legally fleecing suckers out of their money? Many people don't see the big deal as far as outrage goes (sort of like steroid doping. It keeps happening because fundamentally we understand the motivation is winning, which we find it hard to take a 0 tolerance stand on because hey we like to win too.). We're all greedy, so while giving into it seems uncool, it doesn't raise the same moral hackles that murder or stealing a car does. "Hey that's my car! Hands off my stuff poor people. Anyway, as soon as I find a clever way to get suckers to pay me to do something easy I'll be rich."

This is why we have a representative government--to enforce fair laws that we can prove will help our society benefit, even if it's not something we despise. If only we could elect more folks on the basis of reasoned arguments rather than the aforementioned visceral outrage or that weren't in the pockets of those doing the clever greedy bullshit in the first place.
posted by Potomac Avenue at 11:39 AM on February 5, 2013 [1 favorite]


You don't have to know how someone is scamming you to know that someone is scamming you -- the question becomes do you want to do something about it or pretend nothing is wrong so that you don't have to acknowledge there are serious flaws in a system/industry/government/country?

I'm not entirely sure I agree. We know someone is scamming us, but the impenetrability of how we are being scammed may be what is leading a lot of people to be unsure of what to do about it. After all, if we don't know the exact means of how we're being scammed, how do we figure out how to stop it and what exactly needs to be stopped?

It's like people who know their spouses are cheating on them, robbing them blind, sucking the life out of them and destroying the best years of their lives -- but the actions needed to right that wrong seem like serious work that require admitting they were wrong from the get-go; so they settle for the status quo, endure, and pretend everything is wonderful.

Not true - in this instance, we can point to exact things that these dishonest spouses did ("he's a loser!" "Why, what did he do?" "he slept with the neighbor/he withdrew all the money in our bank account and bought a boat/he tells me I'm fat!"), whereas in the case of finance we aren't completely sure ("they're cheats!" "Why, what did they do?" "They...did something that made me not have money!" "But what did they do?" "....I'm not really sure, something about a glass act, I think?" "What's a glass act?" "Shit, I don't know, actually....")
posted by EmpressCallipygos at 11:42 AM on February 5, 2013 [2 favorites]


If, say, back in 2004, someone such as Greg Smith had stepped forward and explained to the world what was going on inside Goldman, he might have spared us all a lot of pain and trouble.

What? No of course it wouldn't have. The specific details were subtle and hard to dig out but the basic fact - that the housing market was totally out of whack - was pretty obvious to anyone capable of doing basic arithmetic (or watching a youtube video). Nothing in the world would could have convinced the average Joe that this was headed to disaster, there were too many people making stupid money by flipping condos for any sensible opinion to be effective.

Hoocoodanode isn't the question; anyone could have known but nobody could have cared.
posted by Skorgu at 11:42 AM on February 5, 2013 [3 favorites]


Oh, my turn, my turn.

The reason the exposés aren't sinking in is that people read all these reports of sociopathic assholes living fast lives of unimaginable luxury while they fuck everyone possible from their cubemates to their grandparents retirement funds is because they are reading about the gods. They're gods, doing godly things, that normal humans would never do, and mortals do not meddle in the affairs of gods.

C'mon, it's all laid out right there for you in Homer. The gods squabble, disasters befall the earth, and humanity scrambles to pick up the pieces. Over and over and over.
posted by seanmpuckett at 11:46 AM on February 5, 2013 [53 favorites]


Also, this is a systemic problem, and systemic problems are hard to explain and hard to solve.

Specifically:
1) No one person was responsible, many people were partially responsible. There was no set of clearly defined generals who could be prosecuted, or those few that did exist were very clever.

2) Most of the bad stuff came from a lot of people trying to fleece each other. Everyone was acting badly, and everyone was winking at the bad behavior, until it was too late. This makes it hard to find clear bad guys.

3) Much of what was being done wasn't technically illegal. The actual illegal stuff was, as a number of commentators pointed out, extremely boring and difficult to understand.

4) Many of the institutions at the center of the game were actually critical to the US economy. That made it hard to let them fail, and hard to investigate quickly, and hard to get political coverage to investigate.

5) Many of the people involved, and I know a lot of bankers, didn't think they were doing anything wrong. Many of them weren't doing anything clearly wrong individually, but were doing things with bad implications for the system. Or, even if they were nervous about what they were doing, they didn't understand the systemic implications of their actions.

You can make rules to lower systemic risk going forward (though these also lower profit, and thus are lobbied against) - but it is hard to unravel retrospectively in a way that makes blame clear...
posted by blahblahblah at 11:49 AM on February 5, 2013 [6 favorites]


Remember when all those guys on Wall Street were hiring armed guards and wearing bulletproof vests? They learned something. The American people are suckers and sheeps.

Here's how it works.

1) Fuck shit up.

2) Declare that we are totally fucked if we don't do something NOW! (but of course "something" means "stabilize the system" which means "making sure the guys running the joint keep getting their fair cut so they can piss it down to the rest of us)

3) Once things are stabilized enough act like it wasn't really that bad; depend on the public's short memory; if necessary, co-opt their rage into an electoral scheme to blame the little folks.

4) Stay alive as a corporation, stay outta jail as a CEO, keep makin' that mad cash.

5) See #1
posted by symbioid at 11:50 AM on February 5, 2013


Actually, I think the reason these supposed exposés don't sink in is the same reason that memoirs of redeemed drug addicts don't prevent anyone else from becoming addicted, we want what we want and we don't see the consequences happening to us.

Also, someone should ask Michael Lewis the same questions he is posing towards Greg Smith, namely, why did you leave when you did and not earlier? He was in the center of the go-go greed 80's and yet didn't leave until the end of the decade. Gordon Gekko had already declared that "Greed is good", the Bonfire of the Vanities was serialized in 1984...why does he place himself as at the turning point of good bankers going bad when the evidence was that it happened so much earlier? Even in Liar's Poker he had made it seem like he lucked into Princeton, got lost and ended up at the London School of Economics and was somehow swept into the bond trading; all of which occurred against his will. But, of course, once he made his $$$, that's when the honor was lost in the profession. Sure.
posted by roquetuen at 12:00 PM on February 5, 2013 [2 favorites]


Many of them weren't doing anything clearly wrong individually, but were doing things with bad implications for the system...

And of course in a culture where:

1) thinking is frowned on and
2) making money is virtue unto itself

we never see anything punitive for these guys because the anger is directed elsewhere.
posted by DU at 12:04 PM on February 5, 2013 [1 favorite]


But somewhere a poor person has scammed a social service program for dozens, maybe even HUNDREDS of taxpayer dollars! And I can punch down with one hand while tugging a forelock with the other!
posted by BitterOldPunk at 12:08 PM on February 5, 2013 [16 favorites]


Could someone answer me a stupid question? Why would anyone in their right mind invest with Goldman Sachs now?

How can anyone, when they consider putting their money with them, not have that lingering question in the back of their mind how are they planning to screw me over? Is this financial product designed to fail? What do they know that I don't? How on earth could I think they have my best interests at heart?
posted by JHarris at 12:08 PM on February 5, 2013 [2 favorites]


>> INVEST INVEST INVEST RICH PEOPLE WILL SAVE YOU

I would sincerely like to learn of a viable retirement plan that avoids this.
posted by JohnFredra at 12:10 PM on February 5, 2013


ah, but despite knowing they will screw you over, you'll still get a better return on your investment than with any other firm...
posted by larthegreat at 12:11 PM on February 5, 2013 [1 favorite]


Also: "hoocoodanode"? As a term? Really?
posted by JHarris at 12:12 PM on February 5, 2013 [1 favorite]


Real Estate?
posted by Potomac Avenue at 12:12 PM on February 5, 2013


JK I meant bitcoin.
posted by Potomac Avenue at 12:12 PM on February 5, 2013


How on earth could I think they have my best interests at heart?

Again, 99% of the messages out there say they do. In fact, watch the backlash when I ask the same thing about, say, Apple:

Why are you handing your data and computing to Apple? How on earth could you think they have your best interests at heart?

You are going to see a lot of rationalization, but none of it is going to explain why I trust a for-profit corporation to do what's best for ME rather than THEM. (The main one will be something like "because if they don't, I'll vote with my wallet" but doesn't that argument apply to the banks too? Doesn't seem to be working.)
posted by DU at 12:13 PM on February 5, 2013


The point being nothing particular about Apple, obvs. The point is that everyone is telling you something is true when it plainly could not possibly be. THAT'S why Goldman Sachs, and Apple, stay in business.
posted by DU at 12:15 PM on February 5, 2013


The best, most concise explanation of the malfeasance will not change the fact that the scale of it was huge, epically huge, and there's no one person we can point to. The evil dictator that leads his troops to commit genocide? Easy to hate, easy to fight. The evil corporation that uses POWs as slaves until their deaths? It feels abstract and distant, with a distinct flavor of "well that was a long time ago and those people aren't there any more." To arouse emotional responses that can be focused and useful, we need a person to focus on. "Goldman Sacks" isn't going to work, until that's the name of a specific person that is still walking around a free man after committing these crimes, you know?
posted by davejay at 12:20 PM on February 5, 2013


this is one of the reasons why Warren Anderson, then CEO of UUC, became a wanted man in India: holding a person responsible rather than a company gives the fire sufficient fuel to burn.
posted by davejay at 12:23 PM on February 5, 2013


How can anyone, when they consider putting their money with them, not have that lingering question in the back of their mind how are they planning to screw me over?

I think it's the same reason why 90% of people feel that they're better than average drivers. It's because they're confident that they can extract an investment and profit well before the whole thing comes down.

Or in other words. I'm going to screw them over first, before they screw me over.
posted by FJT at 12:23 PM on February 5, 2013


ah, but despite knowing they will screw you over, you'll still get a better return on your investment than with any other firm...

Then don't invest with a firm. If the choices are between going broke and going broke-and-a-half, one would be sorely tempted to just put one's money in a bank, or even a mattress if it comes to that.

Again, 99% of the messages out there say they do.

Bu there is a VERY LOUD MESSAGE still looming in everyone's memory, from a few isolated but clear voices like Taibbi, persistently reminding us about the things they did, and how their corporate culture hasn't changed at all. And indeed, the opacity of the company works against them in this -- because no one really understands how Goldman Sachs works, that poisons people's willingness to deal with the company in anything. And the same goes for these huge investment banks as a whole; to us, it starts to look like a sucker's game.

Why are you handing your data and computing to Apple? How on earth could you think they have your best interests at heart?

What does Apple have anything to do with this? For their faults they're still a company that makes products that people want, that don't break down at the drop of a hat, that don't crash and lose all your work. The whole reason you'd want to invest with a firm like Goldman Sachs is money, holding it reliably and profiting from it generally. But they aren't reliable; hordes of seniors lost their shirts. I don't know if they're generally profitable now, but there is a hell of a big black swan in everyone's memory, and I haven't heard anything reassuring that another crisis won't happen.

I think it's the same reason why 90% of people feel that they're better than average drivers. It's because they're confident that they can extract an investment and profit well before the whole thing comes down.

For casual investors maybe, but people who really are good with money, I'd have to think, have to know the limits of their knowledge. It is a mistake to think everyone's a fool, especially people who have built their careers off of investing.
posted by JHarris at 12:32 PM on February 5, 2013 [1 favorite]


I have a theory about why so many of these shocking exposes about Wall Street aren't sinking in - they involve really, really technical financial jargon that the average person couldn't even begin to comprehend.

This is very true, I think. I mean, even the description of the Abacus deal that we get in this article and the way it has been mythologized in the popular imagination is wildly simplified (Goldman deliberately sells crap bonds to unsuspecting rubes and bets against them, twirling their mustaches all the way). In fact the short wasn't Goldman's--it was John Paulson's; he simply asked Goldman to put together the deal for him. The complaint against Goldman is that they didn't properly disclose that they were making these sales in order to enable Paulson to establish his short position. The problem with that claim is that it's actually A) at best partially true (this piece is worth reading--it shows just how much disclosure there actually was--and how sophisticated many of the purchases were who nonetheless seemed to ignore what was being disclosed) and B) doesn't really put Goldman in the cartoon-villain position people want them to be in. Every time you put any financial instrument up for sale you're in a situation where one side is betting it's a good time to sell that instrument and the other is betting it's a good time to buy it. The fact that Paulson made a good call about shorting these things doesn't in itself mean that Goldman was committing fraud when it found other investors who wanted to go long on them.

That's not to say that the Abacus deal is clearly fine and above board, by any means. Goldman were certainly soliciting buyers who would have been very interested to know that Paulson was betting against these bonds and had they been specifically told this they might well have chosen not to buy. But this is getting into a much less clear-cut kind of "villainy" than the general public (or Metafilter commentators) want to have taken place. They want outright, deliberate "I think you overestimate their chances!," "I want you to DIE, Mr Bond!" villainy. And that's simply not what happened here--which is why people who do actually understand these things are willing to keep on doing business with Goldman.
posted by yoink at 12:38 PM on February 5, 2013 [4 favorites]


I think some people are divided between a secret admiration for the supposed smarts of the financial con artists and pure, but indiscriminated loathe against "the system" that brings them down...but were to direct the rage? Would the real villains please stand up, so that we may torch em? Unsuprisingly they don't stand up.

I also guess the closes approximation of the kind of villany many people could relate to isn't, as some would think, Mr. Ponzi ...but rather, the true-old-time-tested "seduced and abandoned" plot of many a novel.

It goes more or less like this:

1. charming seducer charms with promises of happy future and delectable present (3% return right now, more later! for a reasonable fee!);
2. blind trust is at some point offered by the enamoured person (I suppose I understood your contract entirely, mr financeer);
3. after a while, charming seducer castle of lies and deceptions starts to crumble (where's my money? just wait a week and I'll get it to you);
4. seducer flees, while maintaining he/she is a victim of a.circumstances b.bad luck c.evil (*gubmint did it* he did it* I didn't know shit, but I am an expert in finance as I stated when I met you, you are my bestest clientest everest);
5. seducer maintains he/she is blameless and the the love he/she feels is true (it's just the market, we'll recover!);
6. seducer is gone in the wind (Cayman, Vatican, you name it).

Emotionally, these people have ruined so much trusts they are more toxic that any CDOs will or has ever been.

Note: many financial "experts" can't tie their own laces or cook an egg - doesn't mean they don't know about their business, but still no rocket scientist.
posted by elpapacito at 1:00 PM on February 5, 2013 [1 favorite]


I remember back when I worked in the big city bank's capital risk assessment group on a project where we built a formula and protocols by which every vehicle, foreign or domestic, down to the tiniest student loan or mortgage, could be assessed for risk on the same scale so that they could then be clustered together in whatever scheme maximized the total capital we submitted for review by our internal and external regulators. This way the bank could maximally leverage itself without running afoul of international accords.

It seemed pretty shady to me at the time. It's bad math: averaging averages gives different results than does averaging each number in a range. Everybody I worked with was either smarter or more educated than me, though. I felt I had to catch up on my education, so I was always reading some financial book or other while I ate lunch at my desk. None of them were too complex, but I may have been primed to understand, since general banking concepts were floating around the workplace every day.

One lunchtime a couple of my coworkers stopped by to ask what I was reading.

"It's called When Genius Failed. It's about the Long Term Capital Management disaster, remember that?"

"Not really."

"How about Enron, have you read much about that? I just finished a book called The Smartest Guys in the Room, it's pretty damning."

"Yeah, I mean, we all have MBA's, so we already did all the reading about this shit that we'll ever have time for."

"Not even Liar's Poker? It's pretty short."

"You sure know a lot about this stuff, but it's all about how things go wrong. That won't happen to us. You know our formula. That's math, that's logic, it's right there. We're making things transparent, we don't have to worry."

Later one of the rocket scientists came to my desk and in a conspiratorial tone asked me to write down a reading list for him, because he too felt a little cynical about the decisions being made around our office. So I suggested the above, plus Po Bronson's novel, Bombardiers.

I got my pink slip a couple months later, at the leading edge of the great slough-off of late 2008. After about a year I got a call from my rocket scientist friend, who thanked me for the book list and said he found them all very interesting. The big city bank kept him on through the layoffs, and wanted to keep him longer, but he said after reading the writing on the wall, and knowing from these books I gave him what kinds of minds were making the big decisions, he decided to retire from banking and open a bed and breakfast on Lake Placid.

I guess it doesn't amount to much, and it certainly didn't help me beyond a feeling of pride for helping a friend, but hey, at least someone has read these tell-alls and made the right choice.
posted by Ice Cream Socialist at 1:37 PM on February 5, 2013 [18 favorites]


SEC Enforcement Actions, Revised Stats (as of February 1, 2013)

Number of Entities and Individuals Charged 154

Number of CEOs, CFOs, and Other Senior Corporate Officers Charged 65

Number of Individuals Who Have Received Officer and Director Bars, Industry Bars, or Commission Suspensions 36

Penalties Ordered or Agreed To > $1.53 billion

Disgorgement and Prejudgment Interest Ordered or Agreed To > $756 million

Additional Monetary Relief Obtained for Harmed Investors $400 million*

Total Penalties, Disgorgement, and Other Monetary Relief $2.68 billion

* In settlements with Evergreen, J.P. Morgan, State Street, TD Ameritrade, and Claymore Advisors
posted by RoseyD at 1:49 PM on February 5, 2013


I did not notice any prison terms, just fines less than a single quarter's profit. Single digit billions could probably be drawn out of petty cash for most of those companies.
posted by absalom at 1:55 PM on February 5, 2013


Also of note here is the fact that 4 years is the maximum Statute of Limitations for charging anyone with a crime.

The dust is settling on last decades' debacles . . .
posted by RoseyD at 2:01 PM on February 5, 2013


And, meanwhile, back at the ranch . . .
posted by RoseyD at 2:38 PM on February 5, 2013


-Friends of Fraud
-Volcker with voltage
-The Case For and Against Too-Big-to-Fail Banks
-Too Big to Fail Too Hard to Fix Amid Calls to Curb Banks
-The Horrific Accident That Created the Regulatory State
-Global Financial Crisis Explained: The Theory of Social Costs: "markets have not and cannot discipline financial institutions. Rather, we reduced regulation and supervision by government that was supposed to direct finance to serve the public interest."

also btw...
-Magic, markets and models of science
-Science, politics, mathematics and finance
posted by kliuless at 3:45 PM on February 5, 2013 [2 favorites]


I kind of think that it doesn't sink in because that shit was goooood. We want it to happen again. Only, this time, I'll be on top for sure!
posted by amanda at 3:47 PM on February 5, 2013


I can't read stories like this any more. They make me feel like an ant on a greasy plate, being blasted with a fire hose.
posted by turgid dahlia 2 at 3:48 PM on February 5, 2013 [4 favorites]


It's just that I got my fortnightly salary yesterday and after the bare minimum of rent and bills I am already wondering how we are going to eat anything other than beans next week. I mean I like beans and all but, jesus.
posted by turgid dahlia 2 at 3:54 PM on February 5, 2013 [3 favorites]


How can anyone, when they consider putting their money with them, not have that lingering question in the back of their mind "how are they planning to screw me over?"

Look around the poker table closely at each party involved in the deal;
if you can't see the sucker, you're it.
posted by ceribus peribus at 4:56 PM on February 5, 2013 [1 favorite]


Maybe people have become desensitized by this point, or start to think these sorts of things don't really affect them. Nonetheless, they still get drawn in by these sorts of books, so perhaps there is a natural interest in the sort of scandals they may hear about vaguely in the news.

The scary thing is that the actual effect of these crooked people ends up being so large it's like the curvature of the Earth - dramatic and inescapable, but also so large we can't see it from our own personal perspective.
posted by jyc at 5:03 PM on February 5, 2013 [1 favorite]


There's a rhetorical issue here. Yes, people want to prevent abuses. At the same time, there is some awareness now that these are systemic issues, that there are few cartoon villains (though there is plenty of greed and negative externalities), and also that Wall Street is still a huge American industry, one of the few in which the US still has a big global advantage, and which, like it or not, has played a core role in the extraordinary growth of the world economy over the last several decades.

So rhetorically, the old-school left-wing burn-the-rich kill-the-banker rhetoric simply doesn't have the traction its backers would like it to have. Because people ask: what's the alternative? Just a "more boring capitalism"? Maybe, but going back to the 1950s state of affairs somehow does not seem like a step forward. And people are rightly skeptical of anything that smacks of the straightforward capitalism-is-the-bogeyman thinking put forward by pro-Soviet academics 50 years ago... and is put forward by their successors today.

So a new set of ideas that actually taps the zeitgeist properly, in a more nuanced yet emotionally effective way, is still lacking. The punchy yet thoughtful rhetoric that addresses the new post-Communist-yet-post-laissez-faire-capitalism reality hasn't quite been invented. And that's why people aren't as unified in their ideas about these issues, or about other economic issues on the progressive agenda generally (e.g. income/wealth inequality) as one would hope.
posted by shivohum at 8:43 PM on February 5, 2013


Because people ask: what's the alternative? Just a "more boring capitalism"? Maybe, but going back to the 1950s state of affairs somehow does not seem like a step forward.

That's an interesting thought. I wonder why we so implicitly assume that we must "move forward" at all times. This infatuation with so-called "growth" is something I am starting to have difficulty with. Surely, there are some things that have gotten as good as they are going to get and its okay to not have exponential "improvement" or "growth" or "forward movement" in those things? Now, I am not sure if that's actually true for "banking regulation" or "capitalism", but if it is true for things like toothbrushes and razors (leaving side the ever-increasing number of blades), then may be we should consider if 1950s (or whatever other time is consideration-worthy, I am no economist/regulator) were a pretty good model for financial regulation and going "back" to them is actually a step forward?

/end random thought
posted by vidur at 9:20 PM on February 5, 2013 [3 favorites]


These examinations of "The problem set" seem to always exclude any insight into how/why/when Insurance Industry decisions break the bank. (Remember that AIG was the biggest of the whirligigs that went spinning out of control.)

Mabe it's not an engine design flaw so much as it is a fuel injection issue?
posted by RoseyD at 11:55 PM on February 5, 2013



"Still, there have been no calls for breaking up large nonbank firms. The reason for this is difficult to discern. It’s not a function of size; the largest banks tend to be somewhat larger than the largest insurance companies, but again, no one has any idea what size would make a financial institution not TBTF, and the Dodd-Frank Act designates $50 billion as the size at which a bank may be TBTF."

"It is noteworthy in this connection that Senator David Vitter (R-LA) and Representative Scott Garrett (R-NJ) recently introduced legislation in the Senate and House that would eliminate the authority of the FSOC to designate nonbank financial institutions as systemically significant. The bill applies only to nonbank financial firms and does not attempt to modify the Dodd-Frank Act’s determination that all banking organizations with more than $50 billion in assets are systemically important. If proponents of Dodd-Frank oppose this legislation because they believe that nonbank financial firms should continue to be designated as systemically important firms regulated “stringently” by the Fed, they should be prepared to explain why those institutions should not also be broken up into smaller units. Thus far, no one has attempted to explain either why large nonbank financial institutions that have been labeled as systemically important should not be broken up or why they are different from banks in this respect."
posted by RoseyD at 12:09 AM on February 6, 2013


"Standard & Poor's Ratings Services' ratings on U.S. life and property/casualty (PC) insurers have stabilized. However, the combination of limited growth, weak market conditions, and sovereign debt concerns are causing companies to rethink strategic priorities. Whereas some of the strongest insurers continue to focus on international strategies--particularly in emerging markets--many others are retrenching to the core business lines that they know best. Many companies seem to be questioning whether diversification has become a benefit or a burden, which leads to the core question: Is the insurance industry globalizing or de-globalizing?"
posted by RoseyD at 12:31 AM on February 6, 2013


Interesting articles, kliuless, thanks!
posted by jeffburdges at 4:10 AM on February 6, 2013


yoink: " Every time you put any financial instrument up for sale you're in a situation where one side is betting it's a good time to sell that instrument and the other is betting it's a good time to buy it. The fact that Paulson made a good call about shorting these things doesn't in itself mean that Goldman was committing fraud when it found other investors who wanted to go long on them."

This is mindless parroting of a "it's just Econ 101, man" excuse. Reality is a lot more complicated. The Abacus deal wasn't just a stock trade where one side sells a stock for $25 because they think its going down and the other side buys for $25 because they think it going up.

The Abacus synthetic CDO is really an insurance contract. There is a very unsymmetrical risk in the deal because Paulson puts up just $10 million in insurance premiums on the short side and the investors risk billions on the long side. It's the same deal where you pay a few hundred dollars for fire insurance on your house and the insurance company is on the hook for hundreds of thousands if it burns down. The way insurance companies work is that they distribute the risk. They insure thousands of houses, any one of which is very unlikely to burn down in a one year. Insurance doesn't work if the insurance agents actively scheme to insure only firetrap shacks with bad wiring that are likely to burn down. Moreover, the agents selecting those house to burn down, buy insurance on those house they don't even own. Insurers will never work with an insurance agent who they believe is selecting and betting on houses burning down.

The fraud comes about because Goldman misrepresented what they were offering to the investors. The investors are expecting the typical insurance contract in which individual bonds are selected to spread out the risk of any one bond failing. One third of the Goldman prospectus was hyping up the reputation of the third party underwriter they chose to make the bond selections. They did not disclose that they had a counterparty, Paulson, who they allowed to actively bias the selection in order to concentrate risk in the CDO. Further, when the underwriters questioned Paulson's participation, Goldman told them that Paulson was going long, not short, which was a lie intended to deceive the underwriters as to his motives in selecting bonds.

So Abacus wasn't just a simple "one side is long, the other side is short" deal. It was an insurance contract. When you buy fire insurance you aren't betting that your house will burn down. When you buy health insurance you aren't betting that you will get cancer. In an insurance contract you are spreading your small risk across thousands of others. If someone is gaming the system by buying insurance on firetraps and then scheming to combine all those into one insurance contract, that is fraud if it isn't disclosed. And no insurance company would allow an agent to do that if it was disclosed, which was why Goldman had to lie about it. This type of arrangement was so unusual that Paulson had to look high and low and finally pay Goldman $5 million to arrange the deal.
posted by JackFlash at 8:52 AM on February 6, 2013 [1 favorite]


JackFlash, you clearly didn't read my entire comment. You might be interested to read the link I included with shows just how much Goldman did, in fact, disclose about the risks of what they were offering. You might also reach the point where I point out exactly what you're saying about what Goldman did wrong in the deal (see e.g.: "That's not to say that the Abacus deal is clearly fine and above board, by any means. Goldman were certainly soliciting buyers who would have been very interested to know that Paulson was betting against these bonds and had they been specifically told this they might well have chosen not to buy.").

I wasn't saying "it's just Econ 101, man." I agree that Goldman played an ethically dubious role. But it is also true that most people's understanding of what took place is completely wrong (i.e., that Goldman were themselves shorting these CDOs and selling people instruments which they, themselves, had determined were a bad bet). The real story is a much murkier and much less satisfyingly clear-cut one.
posted by yoink at 10:12 AM on February 6, 2013


Sorry if there was a misunderstanding. I'm mainly reacting to the assertion that this is a typical transaction in which for every long there exists a short and no one should be surprised. That is pure propaganda right out of the PR department at Goldman Sachs. This is an insurance instrument and insurers don't expect the insurance pool to be gamed to cause failure of the pool.

And I don't buy Goldman's disclosure of risks. All of those clauses cited are standard boilerplate which basically says, you're a big boy so screw you if you lose money. What they don't include is the fact that Goldman was lying to the investors. Goldman omitted material facts from their disclosures, the ones that really mattered in this deal. It is clear cut and in fact Goldman paid more than a half billion fine for their deception, the largest fine ever paid by an investment bank. That's about as clear as you can get and not murky at all.
posted by JackFlash at 6:59 PM on February 6, 2013


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