The Goldman Sachs 'Scandal' Is Much Ado About Nothing
Back in 1929, prominent American economist Irving Fisher famously observed that "Stocks have reached what looks like a permanently high plateau." Not long after Fisher uttered those fateful words, the Dow Jones Industrial Average collapsed 12.5% on "Black Tuesday" on the way to a pretty bleak decade for equities.
In March of 2000, when the Nasdaq moved above 5,000, a Warburg Dillon Read analyst told the New York Times "I don't see the end in sight." Around the same time, a BofA analyst told the Los Angeles Times that before "too long", the Nasdaq index would double in value.
In 2002, while at Credit Suisse, this writer e-mailed a gold trader at the firm to inquire about the yellow metal's future prospects with it trading at $300/ounce. The response was "It's going to plummet, man!" Soon enough gold began its decade long spike upward.
Wildly incorrect statements and e-mails like the ones referenced above must be kept in mind in light of the response of the incompetents within the SEC and their reliably hysterical media enablers about the alleged "smoking gun" missive that has emerged from Goldman Sachs (full disclosure: I worked for Goldman Sachs from 1997-2001) mortgage trader Fabrice Tourre. Tourre is the Goldman employee who, according to the SEC, was "principally responsible" for gathering together and marketing the mortgage securities that comprised ABACUS 2007-AC1, an investment vehicle sold to Goldman clients in 2007 who felt that mortgage markets would continue upward. Incomplete evidence at present suggests Tourre wasn't terribly optimistic about the securities compiled.
Tourre's e-mail reads like this: "The whole building is about to collapse anytime now...Only potential survivor , the fabulous Fab...standing in the middle of all these complex, highly leveraged, exotic trades he created..." Tourre, like most people in the investment world, had a strong opinion about the future direction of the mortgage markets he was principally involved in. To the SEC that so impressively whiffed on Bernie Madoff and Allen Stanford, along with a media nakedly out for Goldman blood, Tourre's opinions signify guilt for him marketing a fund comprised of subprime mortgages that in the words of the Washington Post, "would probably go bad."
But back in the land of the rational, the only thing remarkable about Tourre's e-mail and the subsequent direction of the mortgage securities is that he actually got their direction right. If it's true what political commentator Charles Krauthammer has suggested, that every Senator looks in the mirror and sees a future President, then it's also true that the reflection which beams back to most successful Wall Street traders is that of a future hedge fund billionaire.
Grandiose statements the likes of the one uttered by Tourre are commonplace in a business with a highly grandiose sense of self. Sadly, for an SEC so desperate to finally get something right, Tourre's correct market call is no more damning than the incorrect ones referenced above. Opinions about the markets are ubiquitous on Wall Street, and as evidenced by how wrongheaded some of them have been throughout history, aren't generally taken seriously by sophisticated investors.
This is important to remember given the SEC's charges against Goldman Sachs. The SEC is essentially charging Goldman with a deception, whereby it tricked its clients into a fund certain to decline in value. Unfortunately, that's not the way it works.
Investment products at any Wall Street firm frequently materialize due to demand from its sophisticated client base looking for ways to play a variety of markets. Goldman's clients are nothing if not sophisticated, and while the full details of the buyers of ABACUS haven't yet emerged, it's fair to say these weren't buyers of the retail variety.
As for the Post's clear-eyed suggestion in hindsight that the securities "would probably go bad", this wouldn't have been relevant to the investors who piled into the fund, particularly in 2007. Indeed, as author Michael Lewis has made plain in his new book, The Big Short, by the end of 2006 there were 13,675 hedge funds reporting results, and the bearish view of mortgage securities had "in one form or another, reached many of them."
Lewis's point was that while well known and analyzed, the bearish mortgage vision in ‘07 was the minority one. Back then, the broad market consensus was that mortgage securities were set to rise as evidenced by how easy it was for what Lewis termed the "more than ten, fewer than twenty" investors and funds that made "straightforward" bets against the subprime mortgage market to do so very inexpensively. In Tourre's case, no matter his bearish views, investors didn't agree, and Goldman was simply responding to client demand for exposure to the securities that Tourre was allegedly skeptical about.
Deutsche Bank's Greg Lippmann plays a prominent role in Lewis's book, and while he developed a bearish view himself, this didn't keep him from servicing clients on both sides of the mortgage trade. This is important too, because numerous commentators are presently trying to suggest Goldman ignored its internal code of serving clients first on the way to marketing ABACUS. The mere suggestion is yet another example of how foolish the commentary surrounding this non-scandal is.
Implicit in the anti-client argument is that the customers served by Goldman back in 2007 were monolithic in their views about the future direction of mortgages. It doesn't take a genius to realize that the very presumption is and was absurd, and so from an outsider's point of view, it's very apparent that when it came to the fund in question, Goldman served the needs of a variety clients with a variety of views. To put it very simply, there are two sides to every trade, so for Goldman Sachs or any Wall Street firm to properly serve its bullish clients, it must find bearish clients eager and willing to take the other side of the trade.
In this case, it's apparent from all media accounts that the "other", more bearish Goldman client was John Paulson. While Paulson is not charged with any wrongdoing, the media are in a panic over his alleged role in helping compile the mortgages that comprised ABACUS.
Once again, the unreason surrounding Paulson's is purely a function of hindsight, as opposed to reasoned thought. Indeed, as Lewis so interestingly recounted in his book, back in 2006 when a rich Goldman client contacted the firm to ask about a largely unknown hedge fund manager who'd solicited him for funds, the response about Paulson was that "he was a third-rate hedge fund guy who didn't know what he was talking about."
Present knowledge of course tells us that Paulson was quite the visionary, a first-rate hedge fund guy, but as evidenced by the billions he made shorting the very mortgage market that mesmerized so many sophisticated investors, the exalted, otherworldly view of him held by many now is very much a modern one.
That being the case, if it's true that Goldman wasn't up front with clients about the individuals picking the mortgages that would make up ABACUS, and specifically if it wasn't up front about Paulson's role, it's only mistake was a marketing one whereby it failed to highlight Paulson as the man who would arrange the fund's holdings. Back then Paulson was not taken seriously, and if his role had been known, it's a fair bet that client demand for ABACUS would have been even greater.
So while it's certainly possible that more distasteful information is yet to be revealed, at this point the story is that there's no story. What we think we know now is that Goldman's Fabrice Tourre arranged a fund a with the alleged help of mortgage bear John Paulson, a fund that they may have been bearish about, but that other Goldman clients thought had good prospects. Goldman clients of varying views were served well here, and that the fund didn't perform well is merely a reminder that not all investments go up.
This is perhaps why Goldman Sachs itself has made it very apparent that it will fight the SEC's charges with great gusto. Let's hope it does, because in doing so, it will further expose the true scandal here; one about a Washington bureaucracy that continues to be funded despite ably serving as the picture definition of the term "governmental incompetence."