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iRock
Joined: 08 Nov 2010
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 Posted: Fri Mar 16, 2012 5:42 am Post subject: |
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aw but hersheys bars are tasty.
now i'm sad |
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Kuros
Joined: 27 Apr 2004
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| Posted: Fri Mar 16, 2012 8:41 am Post subject: |
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Pkang, your arguments about corporations are a distraction. This thread is about Wall Street's terrible culture. Wall Street bets against its own clients for profit everyday. And its activities are backed by the US government.
Why Greg Smith Is 'Dead Right' About Goldman Sachs
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"Greg Smith is dead right," Ahamed wrote me in an email today. "Goldman and all the other investment banks are plagued by conflicts of interest. The problem is that over time all of them, but especially Goldman, have shifted from the business of advising clients or raising capital for clients to trading on their own account. I have the impression (from books about the Pecora hearings) that in the 1930s Glass Steagall was motivated as much by outrage at conflicts of interest (e.g. Citibank famously stuffing the accounts of its deposit holders with foreign bonds that then went bankrupt) as the desire to make the banking system more stable."
But we didn't get a new Glass-Steagall. Instead, courtesy of Tim Geithner and Co., we got the milquetoasty Volcker Rule (which the Treasury only backed, after a year of ignoring Paul Volcker, when Barack Obama insisted on it, as I have previously written), dubious rules about unwinding Wall Street's still-giant firms in a crisis, and a Consumer Financial Protection Bureau that is under constant assault on Capitol Hill. So it beggars common sense to think that we're really getting a new Wall Street.
And none other than Goldman CEO Lloyd Blankfein--whom Smith attacked yesterday for losing "hold on the firm's culture"--has already conceded this point. As I wrote in my 2010 book "Capital Offense," Goldman Sachs became the biggest earner and most prestigious firm on Wall Street in part because it had no scruples about simultaneously betting against products it was selling. Goldman justified this by saying that it had more sophisticated customers, like big institutional and professional investors, who didn't mind if Goldman placed hedges against the very investments it was touting to other clients. |
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| Dodd-Frank "really just focuses on paperwork without any changes in practices . . ." |
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nate1983
Joined: 30 Mar 2008
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| Posted: Fri Mar 16, 2012 9:05 pm Post subject: |
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| Kuros wrote: |
| Pkang, your arguments about corporations are a distraction. This thread is about Wall Street's terrible culture. Wall Street bets against its own clients for profit everyday. And its activities are backed by the US government. |
Okay, I don't think you're 100% clear on what Wall Street firms do. The original focus of Investment Banks was raising capital (debt and equity origination) and providing advisory services (like M&A). In order to support those operations, they developed trading desks where banks now act as a market maker to sell clients products such as foreign exchange, equities, fixed income products, and derivative instruments across various asset classes.
It's this last function, the trading desk, that's been the source of a lot of the negative publicity. Now, a bank's trading activities can be thought of as split into pure market making/flow trading, which is where it quotes prices from the market and sells the client what they want without holding it long on the bank's books; and proprietary, or "prop" trading, which is when the bank takes positions (or "bets") by holding (or shorting) a financial product in the hopes that its position becomes more profitable. In reality, most banks are doing some of both - they hold an inventory of products, which they hope become more valuable, and when the customer asks for something they will sell out of their inventory based on the appropriate market price.
Now, if a customer asks for something, say a contract to buy 10 million euros against US dollars 6 months from now, the bank will have to quote a price, for example 1.3060. That means the bank will have to deliver the client 10 million euros in 6 months and in exchange receive 13.06 million USD. In this case, it's easy to see that the bank and the client have diverging interests: if the euro gets stronger, the client is happy, and if the dollar gets stronger, the bank is happy. In reality, the bank would generally go to the "market" (interbank broker) if they didn't want to keep that exposure on their books, which is what typically happens. Since customers calling up these banks are generally large corporations or financial institutions, the bank's basically have to quote the "real" market price for liquid products like foreign exchange, or else the client will takes its business elsewhere.
Where things get dicey though, is in more non-liquid products, such as Credit Default Swaps. A CDS is essentially a contract where the "writer" promises to pay the holder of the CDS a certain amount should a "credit event" (i.e. default) happen on the underlying reference entity (think Lehman Brothers, Johnson & Johnson, Greece). Mortgage Backed Securities were also sold through Special Purpose Vehicles (a way of getting assets off the balance sheet). What banks like Goldman did was sell some of these highly rated yet toxic (in the sense that the value could go way down) products to its customers. As in the case of foreign exchange, it is natural for the bank to be opposite the customer in these situations. However, Goldman didn't disclose it was taking the short side (building up a negative inventory) of products like MBS, and allegedly tried to "advise" customers to buy them, all the while placing its bets the other way. For transparent products like foreign exchange, where the client is clearly sophisticated enough to understand the dangers, this wouldn't be as big of a deal. However, the toxic assets in question were being portrayed as very low risk, and the clients didn't really have a thorough understanding of the way they were structured.
I'm sure there's similar stuff that happens in other areas of investment banks, but I don't have as much personal experience there so can't really comment. In general, clients are very clear on the products they're getting (most of it is very vanilla FX or fixed income) and the pricing is very fair. The MBS/secret options that Goldman/Citi did with Greece/Italy, and all that is what's been blowing this whole thing open. I've got a couple friends at Goldman, and while they're not at all representative of the culture Mr. Smith bemoans, I'm sure a fair number of people (especially senior management, and in particular in certain areas of the bank) are. But there are corporate cultures (including among financial institutions, though I can't say about all the bulge brackets) that are totally different, so let's not lump everyone into the same basket. |
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Kuros
Joined: 27 Apr 2004
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| Posted: Fri Mar 16, 2012 9:18 pm Post subject: |
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Okay, nate, let's cut through all the condescension and get to the meat in your post:
| nate1983 wrote: |
| As in the case of foreign exchange, it is natural for the bank to be opposite the customer in these situations. However, Goldman didn't disclose it was taking the short side (building up a negative inventory) of products like MBS, and allegedly tried to "advise" customers to buy them, all the while placing its bets the other way.. |
Right. In my profession, if there's a conflict of interest, we must disclose and get a waiver from the client. But Goldman makes it their business to bet against their client and not disclose.
| nate1983 wrote: |
| I've got a couple friends at Goldman, and while they're not at all representative of the culture Mr. Smith bemoans, I'm sure a fair number of people (especially senior management, and in particular in certain areas of the bank) are. But there are corporate cultures (including among financial institutions, though I can't say about all the bulge brackets) that are totally different, so let's not lump everyone into the same basket. |
Oh, boohoo. These guys constructed contrary positions from their clients on complicated financial instruments and failed to disclose, made a lot of money, and damaged the financial system. Then they hijacked Washington, funded both parties, and coopted Geithner and thus Obama. They then corrupted Dodd-Frank (both were in their pocket) and engineered their own legislation. And now we get, "hey, let's not lump my buddies in with the senior management of the banks." Well, obviously I care more about the senior management because they shape the culture. And the investment banks have run our country into the ground. Anybody can see that. |
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NohopeSeriously
Joined: 17 Jan 2011
Location: The Christian Right-Wing Educational Republic of Korea
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| Posted: Sat Mar 17, 2012 6:48 am Post subject: |
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Wait until we see more and more kinds of criticisms against Goldman Sachs.
Goodbye capitalism. Hello Socialism-based economy. |
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nate1983
Joined: 30 Mar 2008
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| Posted: Sat Mar 17, 2012 6:12 pm Post subject: |
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| Kuros wrote: |
But Goldman makes it their business to bet against their client and not disclose.
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It's not the "betting against" per se - I've booked dozens of derivatives trades with Goldman as the "counterparty" and it is well understood by all involved that if rates move one way they make money, and if they move the other way we make money. No harm, no foul, as that's the nature of the game. The issue was that clients were calling the sales or structuring desk and Goldman had developed a product that it (and at least one major client, upon whose recommendation the product had been created) had a short position in, and at the same time it was recommending the product to others (the key issue here is that it was going beyond the role of intermediary). Goldman execs were also pushing the rating agencies for higher ratings of its CDOs.
You can extrapolate the "betting against" to any transaction, so that itself isn't the issue. It's the fact that they knowingly misled counterparties as to the nature of the products they were selling and the risks involed. |
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