Impressions From The Flogging!

Not sure what this means but at 3:00PM the only major financial stock that was up on the day was……..Goldman Sacks!  The market is down 145.  

Consistent questions for the first panel revolve around four particular deals.  We don’t know how many other deals were done in the same timeframe.  Were these unusual, or a small percentage of what the firm was doing, large percentage?  It is hard to judge the overall context of activity.  

The technically orientated risk management for these deals is complex and changes with market conditions or a projection of market conditions.

Is Goldman engaged in some questionable stuff, yea probably, they do what they do and odds are they’re smarter than me, or you.  They play with numbers generally incomprehensible to the common man; small changes can mean big money, one way or the other.  They are involved in a lot of big dollar markets and handle massive amounts of capital.  They vary positions based on their internal analysis, long and short both played based on changing market analysis over time.  

Goldman owns what they trade and market.  They have every expectation of making money on those positions.  They are also selling to both sides of a deal, long and short.  As they participate in analyzing the deal you would expect them to play their own bias, without telling the other components of the deal where they were going with their hedge.  Apparently, under the law, the rules of fiduciary responsibility don’t necessarily apply if you’re the market maker as opposed to a financial advisor.

The question Senators shared was, it that Kosher, can you, should you be able to play both sides against the middle?  But the reality is lots of big guys with big money played this game.  I think many of us know in our gut: big players can and do dominate and sometimes manipulate markets!  Goldman is a big player.  Goldman is probably an essential player as well and that will be where the rubber meets the road.  How badly do you want them damaged?   

The Goldman guys are pretty smart.  Senator/Dr. Coburn is too.  The best of the floggings came courtesy of Dr. Coburn as he talks the lingo and may have identified the path forward for, at least a portion of the investigations.  Did Goldman, go short on collections of deal components that were kicked out of other deals?  That may bear the smell of a smoking gun.   

Senators were often frustrated with the refusal to answer general questions and the frustration took about five minutes to establish itself.  The G men kept insisting on a narrowing of the question and running out the clock.  The Chairman made it clear the clock would run as long as necessary.  The attempt at a tearful catharsis from the G men ended in disappointment, but they did seem to get a little more nervous. 

Some of the deals in question were current G-men working with former G-men.  You would assume that all the G-men knew what was going on and how to evaluate the investments. 

Senator McCaskill provided a reasonably accurate and generally colorful analogy to the G-men as being nothing more than bookies.  She even asked the G-men what their “vig” was for playing both sides of the deal; my nomination for best sound bite. 

But, it sounds like playing both sides of the deal is common practice to get the deal sold.  Protections are purchased related to investor positions and the market maker takes enough of an initial risk position to make it saleable and at what price. 

Ratings agencies will / should be the next in the flogging queue.