Goldman Serves One Master Better Than the Others

As Wall Street bombshells go, the lawsuit that the Securities and Exchange Commission filed against Goldman Sachs Group Inc. is about as big as it gets.

Who knew the folks at the SEC still had it in them to accuse a major Wall Street bank of fraud? And who could have guessed that Goldman’s canned explanation for its behavior during the subprime mortgage bubble -- that it simply was serving clients’ needs -- could come so unglued so quickly?

To recap, the SEC’s complaint accuses Goldman and one of its vice presidents of selling subprime mortgage-backed securities to institutional investors, without disclosing that one of its clients, the giant hedge fund Paulson & Co., had paid Goldman to structure these securities so that they would be the world’s perfect short -- at least from Paulson’s point of view.

The securities, called Abacus 2007-AC1, became worthless within months, showing that Paulson had done its homework. The SEC said Paulson paid Goldman a $15 million fee.

The SEC said Goldman’s main infraction was telling investors who bought the securities that an independent company called ACA Management had chosen the assets that were backing them, when it was Paulson that played a major role in the process. The SEC said Goldman duped ACA into believing that Paulson was looking to take a bullish position, though the SEC’s complaint doesn’t try to explain why this somehow would excuse ACA’s decision to bow to Paulson’s influence.

Neither the fund, founded by John Paulson, nor its employees were named as defendants, because the SEC said it was Goldman that made the misstatements to investors.

Goldman Denial

 

The assets backing these securities, known as synthetic collateralized debt obligations, were themselves securities backed by subprime mortgages. Goldman issued a one-sentence statement denying the SEC’s allegations as “completely unfounded in law and fact.” Among the investors that the SEC says got suckered was a hapless Goldman client in Dusseldorf, Germany, called IKB Deutsche Industriebank AG.

It’s hard to imagine an allegation by the government that could be more damaging to Goldman’s reputation. This wasn’t the American public at large that Goldman supposedly ripped off, which might be forgivable or even praiseworthy from the view of Goldman’s shareholders. These were Goldman clients that Goldman allegedly ripped off, in an effort to please another Goldman client.

Throughout the aftermath of the financial crisis, Goldman and its chief executive officer, Lloyd Blankfein, have consistently stuck to the same story when asked why the bank had created and sold to its clients subprime mortgage-backed securities that quickly became worthless: The firm was merely giving those clients what they wanted.

What They Do

That’s what market makers do, Blankfein told the Financial Crisis Inquiry Commission last January. “What we did in that business was underwrite to, again, the most sophisticated investors who sought that exposure,” he testified.

That may have been true when it came to the Goldman client Paulson & Co., which made $1 billion shorting these allegedly custom-made CDOs by buying credit-default swaps on them. If we are to believe the SEC’s claims, though, it wasn’t true for the Goldman clients that lost $1 billion on the CDOs, including the chumps at IKB, which lost $150 million.

While those clients may have been seeking exposure to subprime mortgages, and may even have been unconscionably stupid for doing so, they surely weren’t seeking exposure to the other side of a cherry-picked trade created for the exclusive benefit of one of the world’s largest hedge funds. They probably aren’t happy, either, with Moody’s or Standard & Poor’s, which, you guessed it, slapped AAA ratings on the CDOs’ highest rungs.

Clear in Translation

Their eyes must have been burning, too, when they saw some of the e-mails that the SEC quoted in its suit, portions of which the SEC translated from French. (The spellings and punctuation are as they appear in the SEC’s complaint.)

“More and more leverage in the system. The whole building is about to collapse anytime now,” Fabrice Tourre, the Goldman Sachs vice president who was sued for his role in putting together the deal, wrote on Jan. 23, 2007.

“Only potential survivor, the fabulous Fab … standing in the middle of all these complex, highly leveraged, exotic trades he created without necessarily understanding all of the implications of those monstruosities!!!”

A few weeks later, Tourre, now 31, e-mailed a top Goldman trader: “the cdo biz is dead we don’t have a lot of time left.” Goldman closed the Abacus offering in April 2007.

Those statements bring to mind a well-known quote from Warren Buffett, who invested $5 billion in Goldman back in September 2008 near the peak of the financial crisis: “It takes 20 years to build a reputation and five minutes to ruin it.”

Can’t wait to see how Goldman tries to talk its way out of this one.

Commentary by Jonathan Weil, a Bloombery News columnist.

A ‘black eye’ for Goldman

It may have to pay as much as US$2bil; CEO and CFO could face the axe

BANGALORE: Goldman Sachs Inc may have to cough up a big fine to settle the civil lawsuit brought by US regulators but the biggest damage would be to the reputation of the influential bank, analysts said.

Rochdale Research’s Richard Bove said Goldman may have to pay as much as US$2bil, including fees earned and penalties, and chief executive officer Lloyd Blankfein and chief financial officer David Viniar could face the axe for the “devastating decline” in the firm’s persona.

Since it is a civil complaint, it may not be “life threatening” for the company and the worst could be a large monetary fine, Citigroup analyst Keith Horowitz said. “Based on our understanding, this implies the government did not find sufficient evidence to justify a criminal action, although that cannot be ruled out in the future.”

Bernstein Research estimated a worst-case liability of US$706.5mil for the company, or US$1.20 per share, based on a 2010 average diluted share count.

Oppenheimer Equity Research said the shares were likely to suffer in the near term although Goldman will continue to post strong earnings.

“At the moment, it looks as if the SEC is pursuing an agenda aimed specifically at Goldman. That likely will keep a cloud over the stock for now,” Oppenheimer analyst Chris Kotowski said.

People walk past revolving doors of the new Goldman Sachs Group Inc global HQ, also known by its address as 200 West Street, in New York’s lower Manhattan. — Reuters

 

The lawsuit and other potential litigation may create an overhang on the shares, while upcoming regulations would cloud the earnings outlook, S&P Equity analyst Matthew Albrecht said.

The lawsuit may help the administration in swaying some on-the-fence Republicans to support a tougher financials bill that the White House had been lobbying for, Barclays said.

“These charges, and the timing of them, increase the likelihood of passage of a more onerous derivatives bill for dealers, and that could ultimately be far more costly to Goldman and its competitors,” Barclays analyst Roger Freeman said.

Goldman is seen reporting another quarter of out-sized profits, when it posts financial results tomorrow, after an unusually strong year from its fixed-income trading operation in 2009.

“While tough to quantify the impact from this complaint, we don’t see massive changes to the business model or earnings power over the long term,” UBS analyst Glenn Schorr said. — Reuters

Oppenheimer’s Kotowski said the stock would not perform well until the SEC charges were closer to resolution, but said he believed that the bank would remain highly profitable.
Goldman shares closed down about 13% at US$160.70 on Friday on the New York Stock Exchange. — Reuters

Latest business news from AP-Wire

Google: botnet takedowns fail to stem spam tide

'If one goes offline, spammers buy, rent, or deploy another' 

Spam levels have remained resolutely stable despite recent botnet takedowns, according to a survey from Google's email filtering business.
Google Postini reports no lasting effect from the recent takedown of spam-spewing botnet, such as Mariposa and Mega-D. The command-and-control servers associated with the Mega-D botnet were isolated towards the end of 2009, effectively decapitating one of the top-10 junk mail sources.

Early this year, government agencies and security firms teamed up to take-down several other botnet targets - including Waledac, Mariposa, and Zeus - using similar tactics. The operations are these botnets were either curtailed (Mariposa) or severely hampered in the process (Zeus).

These combined efforts have failed to make much difference in the volumes of spam circulating online. Spam and virus levels did dip down 12 per cent from a Q409 high but held "relatively steady" throughout the first quarter of 2010, Google Postini reports.

"This suggests that there’s no shortage of botnets out there for spammers to use," a blog post by Postini researchers notes. "If one botnet goes offline, spammers simply buy, rent, or deploy another, making it difficult for the anti-spam community to make significant inroads in the fight against spam with individual botnet takedowns."

The Google spam filtering division concludes that going after botnets is no more effective than the previous tactic of targeting rogue ISPs. The takedown of rogue ISP 3FN bought a temporary respite from the spam deluge for about a month. However, after Real Host, another ISP, was taken out months later spam volumes recovered after only two days. The marked difference was due to use of improved disaster recovery approaches by cybercriminals.

Google's conclusions are based on an analysis of spam volumes flowing into the email in-boxes of 18 million business users working for of 50,000 organisation protected by Postini's technology. Analysis of the junk mail traffic blocked by Google's technology also shows a 30 per cent increase in the size of individual spam messages toward the end of March - signs of a possible resurgence in the use of image spam - and the use of natural disasters (such as the Haiti earthquake) and celebrity gossip in a bid to persuade recipients to waste time on junk mail messages, some of which form the kick-off point of financial fraud.

The prevalence of malware within spam, which rose from 0.3 per cent at the start of 2009 to 3.7 per cent in the second half of last year, fell back to 1.1 per cent in the first quarter of 2010. ®

By John Leyden • Get more from this author

Source: http://newscri.be/link/1075392

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The Dogs of War: Apple vs. Google vs. Microsoft

It’s hard to grasp the breathtaking scale of the epic war between Microsoft, Google and Apple. Billions upon billions of dollars. Entire industries at stake. This is the board. These are the pieces.

If you think about it, what’s shocking isn’t the size of Microsoft or Apple, companies that are decades old, established titans of industry (even if they have stumbled in the past) — it’s Google. In just over 10 years, Google’s become arguably the most important company on the web, spreading to anything the internet touches with astonishing speed, almost like a virus: From the web and search to books, video, mobile phones, operating systems, and soon, your TV.


Friends have become enemies, enemies more paranoid. And you know, it’s only a matter of time before Google’s remaining gaps on this map are filled out. (BTW, you can click on the picture to make it bigger.)

Back in the 1990s, “hegemony” was another way to spell “Microsoft.” It was Microsoft that looked to invade everything. It was Microsoft in the Department of Justice’s sights for antitrust issues. Anywhere there was computing, there was Microsoft. But today, it’s Apple that conquered music. Apple that revolutionized mobile phones. Apple that might make tablet computing mainstream. Not Microsoft. As the incumbent, Microsoft’s not going anywhere. But it plays catch up more often than it leads, at least when it comes to the things people care about now, like the web and mobile.

What’s at stake? Nothing less than the future. Microsoft wants computing to continue to be tied to the desktop — three screens and a cloud, as Ballmer is fond of saying. For Apple, it’s all about closed information appliances with lots of third-party apps, computers anybody can use. And for Google, all roads lead to the internet, and the internet is synonymous with Google.

This isn’t a road map. It’s a study guide.

By Gizmodo

If things don’t change, they stay the same

SHUT UP ABOUT ADVERTISING BY PAUL LOOSLEY

 NOW I’ve been rereading a book. (You know, that a small papery thing with words printed on it). It’s one of the very few books about advertising worth reading. It’s called “From those Wonderful Folks who gave you Pearl Harbour”.

The author is one of the legends of American advertising, Jerry Della Femina. The story goes that, in the middle of a brainstorming session to find a new theme line for Panasonic, Jerry, then a copywriter, leapt up and proudly suggested the words that became the slightly, un-politically correct title of the book. It seems only his art-director saw the funny side! Whether there were any Japanese in the room he doesn’t say. The book was written in 1971 and it may be that long ago since I first read it. It was written during the heydays of BBDO, DDB, Ted Bates and early Ogilvy (also legendary people you may be less familiar with like Mary Wells, Carl Ally and George Lois). So, for a change, this month I’d like to share a couple of hopefully interesting observations drawn from this belated reread.

First is that the TV show, Mad Men, is total bollocks. Anyone who has watched those rather effete, supposedly suave actors wandering across your TV screens with their shiny grey suits, clouds of cigarette smoke and dry martinis are viewing, at best a caricature, at worst a total fabrication.

Reading Della Femina’s book you would see that ad people in the 60s were quite tawdry. They didn’t hang around with models, they didn’t eat at the swankiest restaurants and they certainly didn’t regularly schtup the clients’ wives. For instance, Jerry talks about creative teams moving desks into the office stairwells because it gave them the best view of the partially dressed girls in the apartment block opposite. Day and night they perched there until the cops came and arrested them as peeping toms. And the art director who, sick of his constantly ringing telephone stabs it with a pair of scissors. These were (and probably still are) the real creative people.

Della Femina also makes the classic observation that creative people fully realise that no-one is watching the TV or buying a magazine to look at their ads. Most normal people say, on meeting a creative person, “Oh, you put the captions under the pictures”. This means there was, and remains, so much BS that creative people had no way of measuring their self worth. (Today we have, of course, entirely trustworthy creative rankings and creative award shows to help us!)

And this brings me to my second point. Much of what Jerry recounts in the book – the turns of phrase and the incidents, the anecdotes are exactly the same things that still happen in advertising today. It’s an industry that seems never to move on. Over 40 years later the industry is still saying the same dopey things and making the same dopey mistakes. (I intend to talk more about this next month).

But most of all, the thing that remains so completely the same today as then, is the fear. Jerry spends many pages discussing it. He recounts an agency president telling him: “I start worrying about losing an account the minute I get it.”

The fear of losing a piece of business has most account executives perpetually standing in a puddle of pee. And it filters down to the work. He tells a tale of a new piece of business that came in asking for “new, exciting” work. But no-one could bring themselves to show “new, exciting” work to the client; it was just too dangerous, so they showed extremely “safe and comfortable” work. And they lost the business! Naturally “new and exciting” and “safe and comfortable” go together like oil and water. Did then, does now.

My particular favourite Della Femina fear story is of the time he brought a tape recorder into a creative review board. It filled the board with terror. None of them wanted their comments to be on record, it seems they talked about anything except the creative work. As Jerry says, “it represented truth”. Last thing anyone wants or wanted.

Altogether there are so many things Jerry talks about in the book that apply now.

The people who always agree with the boss or the client – constantly on the lookout for the signals – a twitch, a certain tone of voice, a small gesture – so they can neatly preempt the boss/client before he says “It stinks.”
Ad people who could smell a recession coming as the clients stop spending.

And how keen agencies were to fire expensive older people and hire relatively inexperienced people for salaries up to 75% less. He goes on to speculate that creative people over 40 are all on an island somewhere full of burnt-out writers and art directors.

He supposes that guys who are wigged-out write wigged-out stuff.

He posits that censorship, any kind of censorship, is pure whim and fancy.

And even back in 1971 he said “boutique advertising is the new advertising” because it means you’re going to be dealing with the man who owns the store.

And he ends the book with the greatest (and most debatable) ad quote; possibly of all time. “Advertising is the most fun you can have with your clothes on.”

If you can get a copy take a look. Keep it for another 40 years and see if things have changed in 2050. Even money – nothing will change.

PS: Jerry still has an agency named after him in New York, he runs restaurants, sits on boards and writes for magazines and papers. Clearly no longer wigged-out.

> Paul Loosley is an English person who has been in Asia 30 years, 12 as a creative director, 18 making TV commercials. And, as he still can’t shut up about advertising, he tends to write every month. Any feedback; mail
p.loosley@gmail.com (but only if fully dressed)