Is it just me, or are the defenders of Goldman Sachs becoming more vocal and more numerous these days? Andrew Ross Sorkin today seems to come down squarely on the side of Warren Buffett and Bill Ackman, defending Buffett from accusations that his stance on Goldman is self-serving (”his stake in Goldman is more a loan than an investment, so he'll no doubt be paid no matter what happens with the Abacus suit”) and agreeing with Buffett that there seems to be something of a witch-hunt going on:
With so many easy targets of the financial crisis "” Fannie Mae, Freddie Mac, A.I.G., Bear Stearns, Lehman Brothers "” it does seem odd that the government, and the public, has chosen to vilify one of only a couple of firms that made fewer mistakes than the rest.
The problem is that this makes no sense. Does Sorkin really believe for one moment that the other firms on his list haven’t been vilified? After all, he himself wrote a column last year explaining that that the vilification at AIG was so bad that you wouldn’t want to work there for less than $3 million a year.
More invidiously, Sorkin twice plays the cunning game of stating the SEC case against Goldman in ways that makes it easy to criticize. “The S.E.C. has accused Goldman of not disclosing that the Abacus instrument was devised in part by a short-seller, John Paulson, who stood to gain by betting against it,” he writes, accurately enough, and then lays out the opposite case:
"For the life of me, I don't see whether it makes any difference whether it was John Paulson on the other side of the deal, or whether it was Goldman Sachs on the other side of the deal, or whether it was Berkshire Hathaway on the other side of the deal," Mr. Buffett said…
One Berkshire shareholder who has been a regular in Omaha is Bill Ackman…
In recent days, he has gone even further than Mr. Buffett in his defense of Goldman, suggesting it would have been unethical for the firm to disclose Mr. Paulson's position in the Abacus deal. He says that Goldman, as the market maker, had a duty to protect the identity of both sides of the transaction.
He agrees with Mr. Buffett that as an investor, he would not have considered it necessary to know that Mr. Paulson had helped select the securities.
But this is a bit of a straw man, as Sorkin well knows. The heart of the SEC case is not that Goldman failed to disclose Paulson’s name. It’s that Goldman failed to disclose the fact that the sponsor of the deal, the fund which was paying Goldman $15 million to put it together, was going short the entire thing. The Magnetar disclosure, for instance, which the SEC presented to Goldman as an example of what the bank should have done, never actually reveals Magnetar’s name or identity. But it does make it clear that the Initial Preferred Securityholder might be shorting the deal and that its interests are not necessarily aligned with those of the investors.
What’s more, Buffett and Ackman have made their careers, and become extremely wealthy, by analyzing and picking individual securities. That’s what they’re especially good at. Neither of them in a million years would invest in a CDO managed by someone else, like ACA: they compete with the likes of ACA. IKB, by contrast, specifically asked for an independent CDO manager, and said that it would not be happy with Goldman itself selecting the contents of the CDO. That’s not the kind of action that you’d expect from someone who thinks that a simple list of reference securities comprises “all the relevant facts that any investor would need”, in Sorkin’s words.
ACA, here, is a bit like a mutual fund manager, and IKB was an investor in that fund. The argument from Buffett and Ackman is essentially that so long as fund investors know what their fund manager is investing in, they shouldn’t really care who that manager is. It’s silly, especially coming as it does from two men who have made a fortune by setting themselves up as great stewards of other people’s money.
John Gapper is much more sensible on the whole affair, throwing prior Buffett statements back at him, especially the one from 2002 where he complains that derivatives are nearly always mispriced until it’s far too late. He says that “the shareholders of Berkshire Hathaway were disappointed by Warren Buffett's defence of Goldman Sachs”, while Sorkin prefers to say that “by the end of Berkshire's annual meeting, at least some of the 40,000 shareholders in attendance who had been skeptical of Goldman” had come around to Buffett’s way of thinking. I suspect that Gapper’s characterization is the more accurate.
But it seems that Goldman is drumming up a certain amount of what it likes to think of as “third-party validators” these days, including this astonishing statement from law professor Richard Epstein:
At the time of the ill-fated Goldman transaction, no one in the CDO market thought they were governed by any full disclosure regime. It was everyone for himself, and for good reason.
Hm. I wonder, in that case, why there was a 196-page prospectus for the deal, full of dense, disclosure-filled legalese.
Let me get this straight:
1. BRK buys from GS preferred shares with a 10% annual dividend – I assume that, if GS loses money, this dividend is not paid on time
2. BRK gets from GS options to buy stock at $115 until 2013, so the higher the actual price the better the return BRK gets
And Ross Sorkin wants me to believe that Buffett is not invested in GS’s financial performance going forward?
I can agree that the SEC case is far from bulletproof. But the key issue is that GS failed to provide useful (vital?) info from the Abacus deal to the long side, and that is, to say the least morally reprehensible. I don’t know how Buffett can defend that, unless you understand that, by siding with GS, Buffett is just fueling the return on his GS investment (not a loan, btw).
Felix,
Don’t ignore one of the more obvious items: It’s very sad to say it, but one of the reasons people hate this firm is the ethnic background of the ‘partners.’ As Jews, I think we are well aware that anti-antisemitism is alive and well in today’s USA.
Getting through Sorkin columns of this type (such as a “Blackstone are really terrific guys” example I recall from a while back) is sort of the price you pay for finding out who swore at whom in the most colorful fashion during Great Moments In Financial History.
All enforcement is selective. In this case, the government lawyers likely felt that:
a. It’s important to affirm the standard that a blunt disclosure law can’t be avoided for profit and that claims of “sophisticated investor” don’t vitiate disclosure obligations under law. b. Since the end clients are public, meaning pension fund investors and the like, there is a public interest in encouraging companies to adhere to the law.
My guess is that if the end client was really just another financial company that the government would have little to no interest in this matter.
@MarkWolfinger,
I hate GS with the utmost vitriol but until you brought ethnicity into the conversation, I wouldn’t have been able to tell you the ethnicity of anybody involved with the company (because I don’t care). Jew, Swede, Italian, Asian, African, or Canadian, GS presents itself as a beacon of condescension and self importance that personifies the class war in the United States.
Middle America is squeezed from all sides while institutions like GS, AIG, et al. are bailed out with our tax money that is then used to pay out massive bonuses. And then on top of it all, these corporations turn around and tell us that it’s for our own good (as if we had a choice anyway) with not a hint of humility. I mean really, you don’t think that there is enough there to hate without bringing race into the picture??
Felix, If your view is the right one, why isn’t IKB suing ACA and/or Goldman? Why isn’t ACA suing Goldman? The SEC’s case doesn’t make sense to me until I see the private suits filed, where those entities specifically lay out how they were misled. It makes no sense to me that the SEC is doing this on their behalf.
there is no doubt Buffet is talking his own book – he’s a pro at that. remember, it was his op-ed about being long America that sparked the equity rally in the first place!
however, i do believe that HE believes what he’s saying about GS’s role in all of this..
Most of the “dense legalese” in this document pertained to elements of the deal, not disclosure. Only some five pages or so are given to some boilerplate disclaimers about agency that GS detractors still pretend isnt there.
“It's important to affirm the standard that a blunt disclosure law can't be avoided for profit ”
I’d be interested to see the specific parts of derivatives law that require market makers to disclose their clients’ positions to one another, especially among those with directly adverse interests in a zero sum structure.
“Since the end clients are public, meaning pension fund investors and the like”
Do you mean the pensions invested with Paulson? Or those with Goldmans? Who is the “end client” in your conception of this trade?
@Beer_numbers –
IKB probably isn’t suing for the same reason that many others aren’t suing. They didn’t exactly cover themselves in glory on these deals. If you managed to lose hundreds of millions being the patsy in a scam it looks much worse than if you lost it in a ‘general market crash.’ For all we know, the managers of IKB may even have exceeded their mandate in chasing yield.
Lots of banks and funds are quietly nursing their wounds and would rather it not be known to their investors and clients how their lost so much money. Buffett is engaged in bullying tactics to label these counterparties as incompetent fools in advance to scare them away from suing. He sure is loyal!
I thought the “end clients” here were whoever IKB was going to (or did) sell on to, whether that’s German pension funds, or directly to individual German dentists/engineers/widows/orphans and the like.
Felix is right that in the narrow legal sense, GS should have disclosed Paulson’s role in the transaction, or at least put a disclaimer in like Magnetar. Still, IKB knew full well it was a zero-sum bet, and at least in the legal sense, a sophisticated investor. And wouldn’t GS have hedged the entire transaction beforehand had they believed the price would collapse (given Paulson’s role, and their knowledge thereof)?
Selenesmom, IKB didn’t sell the “securities” on, one of many reasons why this case smacks of baloney. IKB was buying them on behalf of its own offshore regulatory avoidance vehicle called ‘rhineland conduit.’ see here eg for more: http://www.nickdunbar.net/?page_id=146
DanHess, IKB would rather look good than recover money? That seems to be a pretty direct fiduciary failing. I’m with Buffett on this one.
Folks are with Buffett because IKB is skuzzy and unsympathetic?
That doesn’t change the fact that the law, at least in a narrow sense, seems to have been broken.
“ACA, here, is a bit like a mutual fund manager, and IKB was an investor in that fund. The argument from Buffett and Ackman is essentially that so long as fund investors know what their fund manager is investing in, they shouldn't really care who that manager is. It's silly, especially coming as it does from two men who have made a fortune by setting themselves up as great stewards of other people's money.”
Do you mean Paulson was the fund manager?
And what do you really mean, “like a fund manager”? ACA was exactly like a fund manager, except they couldn’t buy or sell (manage) for the fund. If I bought a mutual fund whose portfolio was set in stone before I bought, then I personally would care about the portfolio, but not the “manager”. Would you approach it differently.
Read Full Article »
