Goldman Sachs urged bets against California bonds it helped sell

[sabra]

Source: LATimes

The Wall Street titan's activities could have harmed taxpayers, officials say.

Goldman, Sachs & Co. urged some of its big clients to place investment bets against California bonds this year despite having collected millions of dollars in fees to help the state sell some of those same bonds.

The giant investment firm did not inform the office of California Treasurer Bill Lockyer that it was proposing a way for investment clients to profit from California's deepening financial misery. In Sacramento, officials said they were concerned that Goldman's strategy could raise the interest rate the state would have to pay to borrow money, thus harming taxpayers.

"It could exaggerate people's worries about our credit," said Paul Rosenstiel, head of the public finance division of the treasurer's office.

Such worries would tend to drive down the price of California bonds. That, in turn, would drive up the interest rate the state and its municipalities pay to borrow money. An increase of a single percentage point on a $1-billion bond issue would cost taxpayers an additional $10 million a year in interest.

That's especially troublesome at a time of severe budget turmoil and tight credit. Gov. Arnold Schwarzenegger has warned that the state could run out of cash as early as February.

Read more: http://www.latimes.com/business/la-fi-goldman11-2008nov11,0,1943014.story

[JDPriestly]

1. We taxpayers should not be entrusting our government's tax revenues

with the MBAs and accountants that run these firms, banks and other companies.

They cannot be trusted. They are traitors. We pay taxes to provide for the security and well-being of the citizens of our country and to promote the common good, but they are not investing the money to those ends. Rather, they are using the money to promote their own wealth and well-being at the expense of the country's as a whole.

[WriteDown]

4. ?

I guess we shouldn't trust those medical school grads w/our health either. They're just a bunch of money grubbers!

Don't think that having an MBA is a bad thing.

[brentspeak]

21. Comparing MD's with MBA's...LOL

Ethical and competent MBA's do exist -- but they are a small minority among their peers. The problem stems from the so-called "elite" business schools:

http://www.huffingtonpost.com/charles-warner/blame-the-business-school_b_138015.html

[WriteDown]

22. I've met far more MD's

that are in it for the trophy wife and fast car than I have MBA's who are generally just looking for something in middle management.

[brentspeak]

23. On that, we can agree

There are too many physicians who care more about their social status and lifestyle than they do their patients or the field of medicine. However, your earlier post suggested that you didn't think MD's were "money grubbers".

[truedelphi]

24. The poster is saying that we cannot trust the people

who have proven to be lying scum bag pieces of effluvia.

Just as you and I would avoid a medical doctor who has killed people on the operating table because he or she was drunk, so too should we avoid the crooks who have made THEIR FAME AND FORTUNE on Wall Street, while destroying the wealth of the citizens (and local and national governments) of this country.

[Occulus]

27. It is not good form to compare science to chicanery. n/t

[WriteDown]

29. I could also say the same about....

quackery and business principles. We can always look up the # of malpractice cases in the US if you need examples. Wrong foots being amputated, medication being wrongly prescribed.

[Hugin]

28. Since when is there a Hippocratic Oath for MBAs?

http://en.wikipedia.org/wiki/Hippocratic_Oath

[WriteDown]

30. Because that has stopped all doctors from wrong actions...

HAHAHAHA.

[Hugin]

31. At least it's something... Whereas, the MBAs celebrate unethical behavior.

Greed is an established part of their corporate culture.

[WriteDown]

32. Yeah.....sure....

I take it that you have never been to business school. Business ethics is actually a required course study.

[Hugin]

33. You seem to know everything about everything.

So, there's no need to continue.

[WriteDown]

34. Just general knowledge about business school....

I do not know if there are course requirements for medical ethics in medical school.

[wolfgangmo]

36. The problem is that MD's haven't taken the Hippocratic oath in decades.

Sorry, but MD's haven't taken the hippocratic oath in decades. So yes, I know some MD's who are only in it for the money. But there are some good ones out there. For my GP I see an ND. They still take the oath and seem to mean it.

I have never met any MBA who wasn't in it for the money. Not one.

Besides, if a doctor is a butcher, then there is a licensing authority and state offices that can help. MBA's are completely unregulated and many of them seem to act like they are in the lawless wild west.

I think it is crazy to trust anyone who has proven by their actions that they cannot be trusted. This includes MBA's GOP's and corporations. These funds used to be managed by state employees who were fully qualified and did a good job. These days if you have a state retirement fund, it is usually outsourced, much to our chagrin.

[Hugin]

39. For the life of me I can't think of any Medical Journals or Magazines dedicated to Money.

But, there are stacks of Business Rags littering newsstands and yes a few in my own home which are dedicated
to posting lists of the wealth acquired by people like it's some kind of sports score. But, what have they
done with that money? Typically, not very much to benefit others.

When I listen to business radio subsequent to every name is how many fascatillions of other people's money
are 'under management' by the next chatterer in line.

The TeeVee is constantly pumping out one get-rich-scheme after another in ad after ad.

Greed is an epidemic...

I only used the Hippocratic Oath because it was some evidence that perhaps there is another way of living
where one individual cares what the outcome is for others.

[WriteDown]

40. Ever see Dr. 90210? nt.

[JDPriestly]

35. The American economy went into decline when our companies

started hiring and being managed by MBAs and accountants rather than liberal arts grads and entrepreneurs who had far less if any education. MBAs and accountants don't learn anything useful in their business courses -- nothing they couldn't learn on the job. And they lack the broad view that they could gain if they obtained a broader education about the world, history, language and culture.

When I went to college back in the 1960s, business majors were considered to be just one step above majors in basketweaving. Frankly, I think history has shown that view was correct.

[WriteDown]

41. You're kidding right?

3 years of intense academics can be replaced with on the job training? Spoken like someone with absolutely no knowledge of what business school is like.

[JDPriestly]

42. I'm judging based on the results, on what has happened to American

businesses over the past 30-40 years. The MBAs and business majors have outsourced everything. They just shipped everybody else's jobs overseas so that they could crawl over each other to get to the top of their companies and take bigger salaries. There is no pride in running a company, doing a job in a business anymore. That is what business education has done to our country, to our economy. They've ruined it all.

[WriteDown]

44. You sure about that?

Or are you just assuming that they are MBA's? You know sometimes companies are led by people with masters degrees and *gasp* even doctorates. Your analysis is also flawed. No one ever looks at outsourcing as a way to pad their own salary. It is done in a desire to compete foreign companies. You really can't ascribe any malice to it. GM is a prime example. Toyota and Honda are not burdened by union labor and legacy costs so their cars naturally sell cheaper than GM vehicles. What is the solution?

[ronnie624]

45. Toyota and Honda are not cheaper than GM vehicles.

Japanese vehicles are often considerably more expensive than their similarly equipped U.S. counterparts. For price comparisons, go here:

<http://www.nadaguides.com/default.aspx?l=1&w=20&p=2&f=5020&any=0&nozip=1&jkId=8a8ae4cc1acb2a4f011adb3ed6732fa8&jt=1&jadid=2711773664&js=1&jsid=9286&jk=car%20price%20comparison&jmt=1&>

According to J.D. Power & Associates and Consumer Reports, Japanese vehicles consistently rank higher in quality and customer satisfaction than U.S. autos. Perhaps that plays a role in their popularity.

Being virtually assured of a "bailout" when times are tough, perhaps the executives at GM have no real incentive to be competitive. Isn't competition the foundation of the "free market" alter for those who worship capital and profit?

[WriteDown]

46. The point is...

That the cars cost less to make. If they made the same exact car, their car would be less.

[JDPriestly]

47. "union labor" and "legacy costs"

What do you know about Japan, or Germany, or France, or any other country? Have you ever lived in any of those countries? Have you ever studied their employment law?

Let's forget about China and India. China is to this day a Communist regime in which workers are slaves to the government master and its favorites. They are not a democracy. No one has any rights. The Chinese government is happy to allow Chinese "businessmen" to do the low level exploiting of its slaves for it.

India, similarly, has been governed by a series of Socialist and other governments that would horrify the MBAs and company managers in the U.S. American managers are happy to take advantage of poverty, wherever it provides cheap labor, including India.

It is almost comical to watch how horrified the American MBAs and company managers are suddenly to discover that the market for their goods and services -- the American union laborers whom they so despise -- are no longer buying. I guess Harvard Business School forgot to tell its students that you can only sell products to people who can afford to buy them. Paying good wages to your employees creates the consumers and hence, the markets that you need in order to sell your goods. Management can't make money exchanging products with other overpaid members of the management class, especially when those numbers are dwindling as jobs are outsourced.

As for Japan, Japanese workers traditionally join a company or firm while young and stay in that same firm or even job for virtually the rest of their working lives. They enjoy generous health insurance and other benefits. They may not have what we call unions, but have positive working conditions. In exchange, they work long hours and are very loyal to their employers. Japan has a lot of economic problems, but they are not due to unions.

Then there is Germany. Did you know that, in Germany, employees in large companies not only belong to unions, but also are represented in many aspects of the management of the companies. Further, the employees have the right to far more knowledge about the finances of the companies that they work for than do their American counterparts. Oh, almost forgot, German employees have the right to free speech in the workplace. Some years ago, for example, the German equivalent of the Supreme Court ruled that an apprentice who had spoken out against nuclear energy could not be fired for that speech even though it displeased the management of his company. German unions had a reputation for not going on strike. I think that is changing a bit.

In virtually all western European countries, employees also enjoy universal healthcare, 5 weeks of paid vacation a year and, when I lived over there (lived in four European countries in addition to the U.S.), got an extra month's salary per year -- all mandated by law. Oh, and most important, European employees enjoy job protection and generous unemployment benefits as a rule.

Back in the 70s and 80s, Europeans saw the handwriting on the wall and decided to focus on small is better and on developing special green technologies among other market niches and high-tech businesses. Japan (I know, not European, but still quite progressive in some ways) as we know, developed hybrid cars. Germany leads in the area of solar energy. Europeans decided to accept the changing reality and deal with it. As you may know, western European governments often own an interest in their banks and therefore play a much more direct and influential role in the economies of their nations.

Meanwhile, the good old USA with its millions of mediocre MBAs churned out in diploma mills heading its business sector has lost its leadership role in the world economy. Unless you consider leading in the area of producing the biggest gas guzzlers and the most sleazy, dishonest bankers in the world to be leadership.

I grew up in the 1940s and 1950s. The WWII vets were coming home, going to school on GI loans and beginning to enter the workforce. Prior to that time, most of the leaders of our businesses and industries were either hardworking guys who started at a low level and learned management on the job, entrepreneurs who started very small businesses that grew in the booming economy or liberal arts majors who studied philosophy or language and entered the business world with well developed intellectual tools that permitted them to learn just about anything including how to run a business.

Ever since the rise of the MBA, ever since business majors began to make the decisions and fill the top positions in American companies, especially since the Nixon era, America has become less and less competitive. We have a better educated, more willing workforce than ever before in the history of the U.S. maybe even the world. No longer do we have guys on the shop floors with 5th grade educations.

It's not the quality of workers that has declined, it is the quality of management. What kind of manager insists on continuing to make and sell huge gas guzzlers when he can see at a glance that a large portion of his market is switching to buying fuel efficient Toyotas and Hondas? An intelligent manager would continue to produce the gas guzzlers in smaller numbers but quickly develop cars that could compete with the Toyotas and Hondas. That's just one example of American MBA managers totally missing the bus with regard to innovation and responding to changes in the markets.

MBAs are the scourge of our economy. Since they have been managing our businesses, we have become less and less competitive. I stand by my analysis.

[Turbineguy]

2. And tax payers are different from others?

GS made tons of money off those who lost their homes and they'll make tons going back up too.

It's a good thing the Russians didn't have Goldman Sachs. They would have easily buried the U.S. back in those nasty Cold War years.

[unblock]

3. there's just no pleasing some people.

if they give advise to BUY the bonds they're hawking, they're accused of conflict of interest, rightfully so.

so they set up a chinese wall to keep advice separate from issuance. then they're accused of not coordinating.

sheesh.

[Lucky Luciano]

25. DING DING DING!!

We have a winner.

Would we prefer that analysts say to buy everything (like they did during the dot com bubble) just because they do not want to lose investment banking clients with sell recommendations?

In this case, what GS did was correct as stated in the post above.

[Roland99]

5. First it was Enron and electricity. Then it was Goldman Sachs and bonds/credit ratings.

How are they going to try and screw California the next time?

[YvonneCa]

10. Exactly. California finances were de-stabilized...

...by Enron. They blamed it on Gray Davis, got rid of him and gave us Arnold. Now this. Somebody needs to go to jail for this.

[asjr]

12. Sadly no one will go to jail. No one

has been minding the store.

[benld74]

6. Thse dirty rotten no good sumbitches, Id like to get them in a room for

5 minutes with a ball bat. hucksters! greedy bastards! A MAJOR CRACKDOWN by GOVT IS NEEDED ON ALL BUSINESSES! ENOUGH OF THIS EFFIN NONSENSE! While WE struggle with our day to day living, these greedy bastards never stop screwing the american people!

[kirby]

7. I'm going to slightly defend Goldman Sachs...

During Enron a major complaint about accounting firms providing 'auditing' services to their customers was that there was a conflict of interest. Same with 'ratings' agencies. The concern was that these companies were paid by the companies they were supposed to audit / rate. So the audits were sugarcoated or the ratings were always 'buy or hold', never sell.

In this case Goldman was accurate that California is in financial straights and they said it.

This is a damned if you do, damned if you don't type of story.

[pattmarty]

9. If these "business" had even minimal regulation (spelled laws for....

.....those not too bright) this type of shit would not happen. Regulation is to business as laws are to humans. I won't steal from you if per chance I get caught and may go to jail and/or pay a substantial fine. You can "defend" all you want, but in the end you are STILL FUCKING WRONG.

[kirby]

13. How am I 'STILL FUCKING WRONG'?

Goldman issued a report to it's clients that said:

Several large states, including California, faced "worsening fiscal outlooks," the report said. It cited the recent bankruptcy of the Bay Area city of Vallejo as evidence of the "worsening fundamentals of municipal finances."

Goldmans 'solution' was to buy credit default swaps as a hedge. While I agree that the credit default swap business is largely unregulated and needs to be regulated strictly, the advice Goldman gave was just stating the economic conditions which are obvious to everyone. They fact that they would benefit on 'both sides' of the transaction is the current nature of those who handle all these market transactions for a 'fee'.

[benld74]

14. So Sorry Kirby, you are still on the wrong side because,,,

Sachs set up this mess to make money on both ends of the deal. Ethical? HArdly. Legal? Yes, BECAUSE Sachs ALSO successfully lobbied for years to have the laws changed in their favor, which was done by the Repubs, and favored by our soon to be late ungreat administration. Ethical? If you still say yes then you are on the wrong side. Legal? Yes NOW it is!
The ONLY time REPUBS WANT govt to step in is when BUSINESSES are hurting. NOTHIG is said when the PEOPLE are hurting and it is BECAUSE of BUSINESSES!

[kirby]

19. I agree that the system is broken...

It is legal what they did, but wrong. However, my only point was they gave advice to their clients on how to operate within the current system based on deteriorating market conditions. If they had not done that, it would have been unethical also. That is why i said this is a damned if you do, damned if you don't kind of story.

I hope we see real regulation (and even outlawing) some of these CDS crap that JP Morgan Chase pioneered in 1997.

[pattmarty]

17. REGULATE, REGULATE, REGULATE!!!!!!!!!!!!!

[kirby]

20. I AGREE, I AGREE, I AGREE!!!!!!!!!

[YvonneCa]

11. California was in this mess because...

...of Enron. The CDS game is an Enron shell-game at the federal level. I have ZERO sympathy when the outcome risks the lives of people, their famiies, their small businesses, their homes, their jobs, and their pensions. ZERO.

[Jacobin]

16. The difference here is that Goldman Sachs is not a ratings agency

It represents clients in securities offerings and makes gigantic fees in doing so. When it represents one client to do an offering and then a short time later counsels other clients to bet against the offering that it promoted it is wearing too many hats.

Ratings agencies at one time had some credibility when they didn't shake down the people they were rating. Now, they have become part of the criminal scheme and no one except a fool would believe a rating agency's score on a company's health

[pattmarty]

8. REGULATE, REGULATE, REGULATE....................

[Auggie]

15. Don't screw with California

We get mad. Real mad.

[xiamiam]

18. i think this is what happened to mortgage packages as well..60 minutes

did a special a few weeks back about those who were betting that the mortgage packages would fail...something that had been regulated until 2006...the report said that people who bet made billions..yep..billions..i dont understand the concept..but i know that millions are losing their homes..we are in deep trouble..the housing market will not recover quickly..and individuals made billions..correct me if i've got this confused..but i think its the same culprits..different money source..

[lelgt60]

26. So, should Goldman not have sold the bonds? Or not have told later investors there was a problem?

If no one sells the bonds, California can't get the money it needs.

If no one tells later investors about problems with the bonds sold previously, they are screwing those later investors.

I don't think that's what the complaint is.

There's a big difference between advising investors on what to buy and what not to buy and, essentially advising investors to short the bonds. As we have seen, gangs of short sellers can drive prices down way below fair value. They can, in effect, generate a false bankruptcy. Isn't this the problem? Isn't this what Goldman was doing?

I know of no God given right to short. Imagine you and a couple of friends start a company. We get a loan from a couple of other friends, giving them our company as collateral. As we expand, our new company, now worth something, goes back to the bank for additional financing. Unbeknown to us those original "friends" go to the bank and tell them we're a bad loan risk. The bank does not loan us the money. We go bankrupt. Our "friends" now own our company.

[Waiting For Everyman]

43. Exactly. They're doing "bust outs" of localities, and companies, and people.

It's OVERCHARGING on the way to BANKRUPTING... on purpose. Then taking the assets. And of course making profits on the "bets", on the way there.

It's the same with mortgages - using "ratings" to charge a higher rate or blackball people out of refinancing at a lower rate, then adding un-checked fees to it, then foreclosing. It's the same with suddenly skyrocketing credit card rates. Same with student loans, cars, any kind. The credit default swaps on it are one level of bets, and then they trade and short those. The rings of ripples are endless, and all fictions.

This is a massive syphon, sucking up all the income from everywhere, taking it straight to the top.

Almost every business and every person is sending all of their income to banks in interest and charges. And the states and localities too. That's "cost of doing business", it doesn't result in anything we have from it, except the ability to keep on doing it. Oh and if we do build up some equity - in a house or a pension fund or some kind of capital expeditures, guess what happens to that lately? Gone too.

What I'm wondering is, when are we going to stop this?

[acmavm]

37. Goldman Sachs. Now why does that sound familiar? OH YEAH!

The the crooks who paid Henry Paulson 18.5 million dollars for six months work on their board. That's right. And now that son of a bitch is robbing us blind.

[puerco-bellies]

38. Ethics would be a problem here if GS

Was pushing one tranche of clients to buy while simultaneously telling another tranche of investors to sell. If this was the case GS was lying to one or both classes of clients. I often had the same and different clients on opposite sides of a trade as a hedge against a move in an unexpected direction. How I avoided a conflict of interest was to tell the client why I was suggesting the positions.

We need to separate investment banking functions, brokerages, and rating services, with ownership firewalls. This will minimize conflicts of interest.