Goldman Sachs Finally Admits It Defrauded Investors During the Financial Crisis
fortune.com
fortune.com
Its stock hasn't nose dived. Nobody is going to jail. Investors think they are ok. This is just business as usual.
They have 0 incentives not to do it again. In fact they'd be stupid not to do it again. Given they know better how fines are calculated and can just fold that into the total equation.
That said, I'm really surprised the stock hasn't taken more of a hit from this case.
Already priced in long ago. Agreement in principle was made in January.
http://www.goldmansachs.com/media-relations/press-releases/c...
Reserves for these penalties were allocated last year.
http://www.nytimes.com/2016/01/15/business/dealbook/goldman-...
TLDR: Other wall street bank settlements were much greater.
So yeah, they might have not taken down the economy, but fuck me they got a sweet deal for being criminally irresponsible.
First off, it was trillions AFAIK.
Secondly, the impact of the bailout on the global economy is still playing out:
http://www.tradingeconomics.com/united-states/money-supply-m...
While I'm agreeing with you, I'd go further to say that the impact of socializing the fraudulent losses of these firms simply has yet to be felt.
You'd think at least that these folks would be barred from any further involvement with the financial industry.
http://www.nytimes.com/2016/04/12/business/dealbook/goldman-...
The rewards are just too good and the downsides too easy to live with.
It's less analogous to accidental customer data leaks and more analogous to running a phishing operation.
When their user data eventually leaked, it resulted in countless lives and relationships ruined and at least a handful of suicides. While civil lawsuits have been filed, I haven't seen any talk of criminal charges.
Jail is a bit much for a negligence-caused data leak, but I certainly would welcome large fines against companies with shoddy systems. It might incentivize c-level execs to invest in properly securing their systems and the rest of the organization to take security seriously.
These financial crimes weren't the result of negligence. They were committed by people who knew what they were doing and profited handsomely from it.
obama should have listed this as his top failure. they have actually proven that they are smarter than each and everyone of us - in acquiring money by any means and getting away with it. very impressive in a twisted way.
It's also worth noting the procedural posture of the government's case against Goldman. It's under FIRREA, which allows the government to bring a civil action for violation of 14 specific criminal laws. The burden of proof in the civil action is the lower civil standard of proof, instead of the high "beyond a reasonable doubt" standard.
"While the exact wording of fraud charges varies among state and federal laws, the essential elements needed to prove a fraud claim in general include: (1) a misrepresentation of a material fact; (2) by a person or entity who knows or believes it to be false; (3) to a person or entity who justifiably relies on the misrepresentation; and (4) actual injury or loss resulting from his or her reliance."
http://criminal.findlaw.com/criminal-charges/fraud.html
The statement below appears to cover 1 and 2 and we already know 3 and 4 to be true.
"Goldman received information indicating that, for certain loan pools, significant percentages of the loans reviewed did not conform to the representations made to investors about the pools of loans to be securitized, and Goldman also received certain negative information regarding the originators’ business practices."
https://www.justice.gov/opa/file/839901/download
rayiner, given your legal background, do you consider this type of misrepresentation to be criminal fraud irrespective of what regulators have achieved to date?
Goldman Sachs, as part of a certain class of institutions, plays a systemic role in the economy and as such, Goldman Sachs, its affiliates and the activities under discussion are subject to innumerable pages of regulations enforced by several different regulators. There is no equivalent regulation for Microsoft's firmware update announcements.
> I think criminal prosecution should be reserved for the most outrageous and clear-cut misrepresentations.
Is this the same standard you apply to any type of criminal prosecution?
And, one of the very first things the founders said when they booted up this country was "no ex post facto laws".
False.
http://www.ag.ny.gov/sites/default/files/pdfs/bureaus/invest...
http://www.bloomberg.com/news/articles/2011-06-03/goldman-sa...
The link below is a general discussion of securities fraud and related legal theory. Goldman is used as an example while discussing the case settled with the SEC in 2010.
"The law allows a case like the one against Goldman to be alleged and argued as securities fraud even if the seller merely failed to exercise due care as to whether the buyer was misled about the nature of the securities being sold or how those securities were selected. The law further permits a claim of fraud—even when brought by a private litigant—to be founded on an allegation of recklessness and allows the litigant to assert, in essence, gross negligence as to whether the buyer was misled. If one takes the federal appellate decisions on the issue at face value, the law would appear to support a criminal conviction in a case like Goldman’s even if the seller were merely reckless."
http://scholarship.law.duke.edu/cgi/viewcontent.cgi?article=...
Right next to "no bills of attainder", which is pretty much exactly what people want to pass.
That's an argument that we penetration testers would say "has a lot of attack surface".
Imagine if wherever you work had to settle with the SEC / FTC / ABCXYZ for fraud. Wouldn't this devastate your customer base?
Yet when a bank gets fined, it seems simply like business-as-usual. Even when a government agency levies a fine for fraud, or emails are released in which employees actively mock their customers for being suckers, investment banks' abilities to find customers seems unhindered.
1) Are my perceptions wrong? Do these events damage reputation more than it seems?
2) If banks acting in this manner is the standard... why? Why isn't a firm carving out the "niche" of not being assholes?
1. investors were fighting to get their hands on subprime assets. There was so much liquidity around that it was the only way to make a little bit of money, very much like today. Investors have been piling cash into tech companies and EM markets where they probably shouldn't have. Is it financial intermediaries' role to bar them from doing so? Is it the supermarket's role to bar you from buying snacks and sodas because it's bad for your health?
2. what annoys me is that these "unsuspecting investors" were professional buyers. It is people who's job it is to do their homework and understand these products. We are not talking about selling complex products to grannies. These are highly educated, highly paid finance professional who simply did not do their job of vetting what they were buying.
Now if Goldman made misrepresentations (i.e. lied) on the nature of the assets, then there is clearly fraud, and by reading quickly the DoJ announcement it seems to be what Goldman is accused of. But in my opinion investors bear a very large part of the blame for this credit bubble. It's not a case of nasty Goldman vs nice unsuspecting investors.
Well, it's a combination. Goldman packages up crappy mortgages as bonds, then has the rating agencies rate them and magically transform them into Triple AAA instead of junk.
The due diligence required of the investor, even a profession investor, is rather extreme - and having the rating agencies in your pocket only makes that worse.
Sure, but how many of professional money managers had their clients entire portfolios in subprime mortgages?
My guess is that it was mainly allocated to the portions of portfolio deemed "high risk", and if they're not buying subprime mortgages, they're buying high-yield bonds, Puerto Rico munis, assets of bankrupt North Dakota frackers, and high-risk high-yield real estate projects like casinos and theme parks.
There's daily trading activity on JNK and MORL and similar other instruments. I don't think there's any pretending going on that those are high-quality assets, and I also doubt anyone (in a clear state of mind with no gambling addiction) is going 100% into those ETFs.
The credit agencies are to blame, but they were an enabler. AIG FP was the main cause of the AAA rating by simply lending its name to the whole deal and promising to make the pension funds whole in case of any defaults.
Fighting regulators is a very dangerous game for any company, as the government will usually settle for much less than the potential fine (, usually less than the cost of fighting the fine), and the looming threat of an ongoing prosecution adds costly uncertainty to the business. In addition, the executives have a large incentive to settle because this is just the shareholders' money, and a failure to comply could be met with a criminal prosecution.
https://www.justice.gov/sites/default/files/criminal-fraud/l...
Section IX B. seems to be the relevant one there, suggesting that regulators and prosecutors attempt to weigh the fallout that such a charge might have on innocent 3rd parties.
[1] http://www.bloombergview.com/articles/2015-05-11/nobody-s-wo...
Well here in the UK one was claiming to be - the Co Op Bank. Ethical investing policy, mutual rather than floated on the stockmarket, and so forth. Not even based in London so hopefully free of any city groupthink. Also behind smile, one of the first online banks.
£1.5bn bailout, forced into flotation with no benefit for mutual members, and turns out their ethics policies didn't stop them playing the same games as all the rest. (Bailout stemmed from them trying to takeover another failing bank, but they didn't realise they didn't have the money. Um, OK, a bank that can't add up). That's as well as being left holding tons of bad investments and loans.
http://www.theguardian.com/business/2015/aug/11/co-op-bank-s...
Other mutuals here were just as keen to play the big boy games. Same for share dealing and investment funds.
So where can a customer that gives a damn put his money?
How can that customer have any confidence at all that they'll be honest, ethical, solvent and numerate?
I see no choice at all on any of those measures.
1) Act as advisors in financial transactions. You expect them to have your best interest in mind here. That's the core reason you are paying them -- to give you good advice and look out for you.
2) Act as brokers when you want to buy or sell something. Sometimes it's hard to find buyers or sellers for your particular transaction. Imagine trying to sell a hotel... or a 10% stake in Tesla... or a few million barrels of oil. You might not know anyone who has interest in that, but you still want to buy or sell. An investment bank can help broker a transaction. In this case, you're (implicitly or expicitly) paying for liquidity, i.e. access to their relationships with buyers and sellers around the world. The service being provided is arranging a buyer(seller) for your transaction. (The service is not about providing advice in your best interest).
There are certainly examples of shady dealings in role #1 above.
But in role #2, a customer of an investment bank generally understands that the service is matching buyers/sellers, and you don't rely on the investment bank to do your diligence. You're not paying for advice in this case.
It's like if your real estate agent was representing both the buyer and the seller, and you know they get compensated only if a transaction occurs. of course you expect that they are doing everything in their power to get everyone to transact.
In other roles, they are directly advising the client. In those cases they have fiduciary duties to the client. They can't just sell you crap. They have to do their best.
The real problem is there is a whole lot of inbetween roles. Where they are quasi salesmen and quasi advisors. Like in this case, Goldman is acting like a salesmen but is making some quality claims about how much diligence they did.
Also, I think in the abstract that knowingly selling toxic assets would destroy a banks reputation, but the fact that everyone got caught in the sub-prime mess lessened the impact.
That said, for the largest transactions there is a tiny pool of qualified companies out there. And if you’re doing a 50 billion dollar merger a multi-million dollar premium can seem completely reasonable.
Much like how search is a sideline for Google, their primary mission is to sell adds everything else is simply how they accomplish that.
The sad dirty secret is that the other major players are usually pension funds, which are always under enormous pressure to make more money out of their investments. At the end of the day they don't care where the money comes from because turning a blind eye to evil is usually better for a fund manager's job security than asking for more contributions.
How much are you, personally, willing to pay this year for the services of a "not assholes" bank? I'm not sure I'd be willing to pay very much, myself. I'm not in a position to be putting a large number of digits of funds under management. I wonder if those who are may be more interested in returns than in the non-financial value of not being an asshole.
That being said reputation is important in banking and I like to think that investors are a bit more skeptical than before the crisis. Not that it is very difficult.
There are many people like me who have shifted all their banking to credit unions, including home loans.
When the time comes for me to inherit financial products, the first thing I will do is shift investments away from sketchy companies like Gold Man Sacks.
If the only acceptable goal is short-term profit, actions and belief systems which maximise short-term profit are rewarded, and actions and beliefs which have a negative influence on short-term profit have negative incentives.
This is often called "markets" being "efficient."
In reality it's just an unstable self-destructive system with an inherently broken fitness function.
Banks make profit from the interest they make on their loans, minus the interest they pay to their depositors and minus other expenses. Other expenses include loan defaults.
So as a bank you can be more profitable by 1) making more loans than your competitors (and inevitably that implies more risk), 2) paying less interest to your depositors - but that would lose you deposits, which would curtail your ability to lend, 3) be generally more efficient - but they all have computers now, and regulatory compliance is both a major, and commonly shared cost or 4) make safer loans, and suffer less loan defaults.
The problem with 4) though is deposit insurance, means your customers don't care, but more critically that loan defaults aren't a nicely compartmentalised property of each individual bank's activities, since a big enough series of defaults from one of your more risk taking competitors is likely to trigger a default cascade that impacts your debtors as well. (Companies fail, their employees are fired, and can't pay their debts, their suppliers are similarly impacted, etc.)
As you say, it's a very fragile system - and easy for excitable chimpanzees to break.
That being said, I can't think of a company outside of the world of finance that can repeatedly screw over their "clients" and still exist.
http://www.wired.com/2009/02/wp-quant/?currentPage=all
It does a good job of explaining the intuition, behind the Gaussian Copula, and of course where it fell apart.
I submitted the below article a few days ago and I think at this point this topic can be considered a very dead horse.
That article was submitted yesterday, when the US DOJ released a statement.
One day of light beating (didnt even see a link to GS' statement of facts) and this horse is 'very dead'?
I know no one has been imprisoned over the financial crisis mess, but settlements like these truly show that the justice department and the SEC are doing a pretty good job at penalising the banks. Combined, the fines probably add up to hundreds of billions, my personal opinion is that this is way more than the banks did from selling these securities.
You think that the SEC and DOJ are doing a good job? You are in an extremely small minority then. Not only is this settlement a slap on the wrist its also "engineered" courtesy of the warm and friendly relationship Washington and Wall Street have. Please read this:
http://www.nytimes.com/2016/04/12/business/dealbook/goldman-...
You claimed Goldman made "hundreds of billions of dollar[sic]". Their entire profit for a year is around 10 billion. Are you claiming their entire profit for multiple decades came solely from MBS?
It did not.
The question is if you want to take a $5B sure thing for some shady behavior or spin the roulette wheel of justice and hope it was actually illegal.
Remember different parts of the firm were on both sides of those securities.
Would you feel better about a 5 billion dollar fine (in addition to the previous multi billion dollar fines) if they made 2 billion on mortgage backed securities?
But, punishing GS for an act we don't like that another actor did (the government underwriting a private insurance company) is not how the law is supposed to work.
I for one, am very uncomfortable with punishing an entity for not understanding the technical aspects of their business nor for using made up numbers to justify why a punishment is just.
I'm saying that, in light of the totality of events, this $5 billion fine is not meaningful.
Statement of Facts: https://www.justice.gov/opa/file/839901/download
Them (example Hillary Clinton):
FBI will invite Ms. Clinton for an interview sometime next month.
You:
FBI raided Mr. Johns house and will jail him without bail until next week's scheduled interrogation begins.
Them (Goldman Sachs):
They agreed to pay a fee.
You:
Mr. Johns was sentenced to pay a penalty for his crime.
Is this really happening in the United States of America??
http://www.nytimes.com/2016/04/12/business/dealbook/goldman-...
This part is especially infuriating:
> On the broadest level, any money that Goldman spends on consumer relief will be deductible from its corporate tax bill.
So Goldman Sachs will get a government subsidy for defrauding the American public. The government is literally subsidizing their fraud with taxpayer money.
That's not a fair shake at how deductions work. They aren't getting paid a subsidy, they are paying less tax because of higher expenses. No money is going from "the taxpayer" to Goldman.
The government wanted it this way because they can point to a bigger number and get money to where they want it without having to get Congress to do anything (which they won't).
This logic essentially categorizes government fines as a cost of business, rather than a punishment; as an input to the sausage, as it were, rather than a reduction in profits.
This is money that would have gone to the taxpayer in the form of benefits like security, education, infrastructure.
Contrast the corporation with the individual: any fines you may get from convictions don't reduce your own income tax liability…
They broke the law, but get to claim it on their taxes as an expense.
That's like deducting my speeding ticket payments as an expense on my tax return.
Payments of fines to governments are not deductible, neither for you or Goldman. Payments of compensation and restitution are.
For what it's worth there is some vague consistency on this issue.
Where did the legal precedent or IRS rule be set that restitution should be a deductible business expense? If you need to pay compensation or restitution, it means you did something you should not have done as decided by a judge/jury, so having it be treated more like a "penalty" seems prudent to me.
Who do I talk to about getting that angle on this story out there? :)
The difference of course is that you would get audited and maybe go to jail. Goldman Sachs's friends in government have written the law such that it's not even illegal for them.
Both sides win in this arrangement, even though I'd argue most Americans do not want Goldman Sachs to do any kind of winning as a result of this very necessary legal action against them.
>...gets to write off the community service portion of their punishment.
If it is a punishment (a bank handing out money counts as community service in these courts?) it is a penalty.
[1] https://projects.propublica.org/bailout/entities/237-goldman...
Then realize solution to financial crimes is to put people in jail for 1 year for every multiple of the median yearly household income.
Steal $1M when the median income is $50K? 20 years. Steal $1B? Enjoy dying in prison.
"The settlement expressly preserves the government’s ability to bring criminal charges against Goldman, and does not release any individuals from potential criminal or civil liability."
https://www.justice.gov/opa/pr/goldman-sachs-agrees-pay-more...
Who may or may not do something about it?
http://www.opensecrets.org/industries/recips.php?cycle=2016&...
"Too Big To Fail" should mean "Too Big To Be Allowed To Exist" but apparently it still means "Open Checkbook to Taxpayer-Funded All-You-Can-Eat Buffet"
That was the moment that I realized that some of these people live in a reality distortion zone where it really wasn't their fault.
The only thing weird about credit agencies is that they're sometimes written into state and local laws as being the sole judge of whether some money can be invested in a certain way. The law shouldn't depend on private companies.
The other thing is that because pensions are managed in aggregate, the individuals investing in them don't have much choice in what to invest in. It's the same problem with Social Security. It's a weaker but still valid concern with 401(k) retirement accounts, since your employer determines what you can invest in. It's just a bad idea to let other people manage your money for you, especially at scale.
Nothing about the credit rating agencies needs to change(by force), but I'd say it's important that people not be forced into trusting them. Once that's in place, it's on you if you blindly trust a credit rating agency. They're just a private company, so it (should be) legally the same as paying my bartender for stock tips.
I don't know - do credit agencies ever issue contracts guaranteeing their ratings? If you get one of those, the bartender analogy doesn't hold.
Here's another one: You're a software developer. Software developers caused Heartbleed. Why do most software developers "live in a reality distortion field where it wasn't their fault"? Probably because they don't work on SSL libraries. Should I blame you for not taking responsibility next time Cloudflare goes down, even though you might have an outside opinion on what caused it?
The user in question works at an online advertising company, not at a credit rating agency. Why do they think it 'was not their fault'? Probably because it wasn't his fault.
> Nobody adjusted the models when they produced incorrect answers because the answers weren't incorrect. They weren't the answers you like in hindsight, but they were correct insofar as the model was vetted & the input was correct.
This is 100% absolving the agencies of any responsibility for the brokenness of their models. According to this person, it's the public's fault for behaving in ways that led to unrealistic ratings, and not at all the agencies' fault for having models that didn't reflect reality.
[1] https://news.ycombinator.com/user?id=rayiner
[2] https://en.wikipedia.org/wiki/Alayne_Fleischmann
[3] https://en.wikipedia.org/wiki/Richard_M._Bowen_III
[4] https://www.nolo.com/legal-encyclopedia/false-affidavits-for...
The idea that there was any single factor that caused the financial crisis is equally delusional.
Rewind back a decade and observe the flurry of "Flip this house!" shows in mainstream pop-culture. There were tons of "the public" who were in on the game, or who indirectly benefited from it.
We, the public, respond to the signals provided by the monetary system. When that system malfunctions - and it is just as capable of being exploited as any other distributed system - the public behaviour is really the effect rather than the cause.
Similar for lending to all students for degrees. You know you don't need a degree to do a regular office job but because everyone else has one you know the recruiter will immediately bin your CV.
Control is counter-intuitive. Most people would restrict credit. The establishment understand you hand it out like confetti. After all it's free.
Like many things, most people would love to restrict it...for others. Of course, they alone would love to have the ability to borrow and lend as they see fit. Being able to extend or accept credit is a freedom, and it's misuse is part of that package.
What's with the down-voting brigade?
Most of the subprime sector evolved from trying to game the 20% requirement, either legislatively (through HUD and other "assistance" programs), financially (interest-only loans) or just plain old dishonesty (no-doc loans) originated by companies like Countrywide.
Remember: if a person's model of the world favors authority over realism, authority is perpetually blameless in their eyes.
Well, they clearly did do something wrong. Unfortunately, no one pays with jail time for defrauding their way into the financial crisis, and when they do get punished it's usually for a small fraction of the sums they gained, much less than the public is let to believe they are paying thanks to various loopholes. All of this also after being saved by taxpayer money (they only paid some of it back, but there were other programs, some secret, in which they got even more money).
To be fair, the public isn't 100% blameless as a large number of people made poor choices to create the situation. Supply without demand is largely useless, after all. Similarly, the public hasn't shutdown the routes after the fact but rather accepted a smokescreen of a solution.
The blame primarily rests on the shoulders of the banks and credit rating agencies because they provided the supply. They also were the best informed side of the transaction and engaged in a certain degree of deception that they should be punished severely for.
The best lies, or distortions of reality, do have a kernel or two of truth.
Banks, credit agencies, and the whole sell side, selling bad debt in bad faith to organizations like pension funds, carry the brunt of the responsibility.
At the same time, the millions of poor and lower middle class people who took out loans way beyond their means -- and then defaulted on them -- aren't blameless victims, either.
Say I'm a shift manager at a grocery story, but I want to buy an $700,000 McMansion. So the bank offers me a Negative Amortization Loan. (Those were fairly common in the few years before 2008.)
The page clearly says that the loan will never be repayed if I make the minimum payment--the principal will grow every month. It clearly states the minimum monthly payment, a bit over half my paycheck.
It's amoral and greedy for the bank to make that offer. At the same time, it's irresponsible and greedy for me to take it.
If you default on your mortgage you will lose the house and suffer long term harm to your credit and your ability to get future loans.
What is evil about the bankers' gamble is that when things go bad, they get bailed out and get to keep everything. They have nothing on the line.
If I default on my mortgage and commit fraud, I don't have the luxury of saying "the fraud sentence is enough, can't I at least keep my house?"
I disagree. Whether following the buy-vs-rent calculator (and opting for a purchase vs renting) or buying in hopes of selling at a higher price later on, everyone made a perfectly rational decision - people still buy real estate today when it makes sense to them, and every day investors buy growth stocks which produce no dividends, so the only plan is to sell them at a higher price later on.
Normally though a risky speculative behavior is constrained by market's readiness to finance it. Most mortgage originators will loan very quickly at 60% LTV, will due their due diligence at 80% LTV, and do a whole lot more for lending at more than 80% LTV, and would want to be compensated by higher interest rate. Same for investment properties - most likely I will have to accept higher interest rate, higher down payment, as lenders are trying to control their own risk.
The only time when lenders' guard is down is when a reputable third party tells them they will underwrite the risk in the event of a default. This reputable third party was known as AIG Financial Products, and if AIG tells the lender they will make them whole in an event of a default, then there's little reason to be diligent.
If AIG FP did not exist, a lot of loans would receive a higher risk rating, which would increase the diligence onus on the lenders and financial burden on the borrowers, thereby removing a lot of those questionable transactions off the market.
So yeah, when the entire industry comes to the government and says "unless you bail us out right now our entire industry will collapse, but you're definitely going to save us because we're too big to fail," then yes, it means it's their fault. The public may have been complicit, but it's not the public's job to keep the financial industry healthy when the profits from that industry are kept privately.
That's an interesting interpretation of the events. In fact, there were institutions that were coerced by the government to participate in the bailout. Much of the derivatives betting was zero-sum, and done amongst the banks. The winners of those bets would have been more than happy to watch their competitors fail (fire sale!).
http://www.economist.com/node/13832261
> April 16, 2009 | THE WORST nightmare of many bankers, natural capitalists, is being under the direct control of the government. So it's no surprise that American banks want to throw off the yoke of government meddling and pay back any accepted TARP money as soon as possible. Predictably, Goldman Sachs is leading the charge.
http://www.economist.com/blogs/freeexchange/2009/04/i_dont_w...
The point is that complicity provides the avenue to allow people to tell themselves a story of how the banks weren't the largest part of the problem.
Is it really a poor choice to buy a house? Should people have known that banks were intentionally misleading them? The banks are the ones that should have been telling potential homebuyers that they weren't qualified, but they weren't doing that. Yes, the banks were also incentivized to make that kind of loan, but creating the derivative products that intentionally obscured the high risk of those loans and reselling those products as "low risk" derivatives is definitely on the banks and ratings agencies.
But what did banks do once they hit the limit? Invent CDO and then synthetic CDO to create "artificial" supply for the bad loans. These derivatives are what really made the crisis very bad.
I'm sorry that wasn't clearer. I was just discussing the art of self deception depends heavily on a kernel or two of truth to hang itself.
No jail? You fail.
I no more know what the author's intent was than you do, but I'm going to go with a more charitable interpretation: it's meant to clarify the means by which the robbery took place. In other words, the exact opposite of "obscure". But if you have a narrative, by all means stick to it.
Politically well connected Corporations "defraud."
The comment you replied to, however, was made in jest in an attempt to call out how regular everyday people are treated more harshly than corporations.
Similar to how if you default on your mortgage, you're an untrustworthy person. But if your business defaults on a business loan, that's "just business."