The squeezed big boys
Goldman Sachs was charged with fraud, or as former Under Secretary of the US Treasury Peter Fisher put it, the bank showed the kind of behaviour Fisher has called ‘naughtiness.’ Now, it can pay its way out of court with a $500m fine to the SEC. The story is that a hedge fund, Paulson, was certain that the mortgage market had peeked and wanted a mortgage product it could bet against. It chose products to put in a bundle, called Abacus – Goldman’s staff chose about half of it. Then it was sold to customers who weren’t told that this product was made for someone to bet against, thus defining customers’ relations the Goldman way. As envisaged, the customers who bought the product lost and Goldman and Paulson won (though Goldman’s CEO Leo Blankfein tried to pretend during hearing at US Congress that Goldman had also lost until he was reminded of the fact that Goldman only lost because it couldn’t sell all these product, not because it believed in the product).
Plenty of people will not have too great a sympathy for the customers who lost. Aren’t they institutions who should know better, who have the means to know what they are buying? In short, aren’t they big boys who should be big enough to know what they were being sold?
In an ideal market they are big enough to know. But the market was far from ideal in 2007 leading up to autumn 2008. Recently, I talked to an analyst who worked for Kaupthing, the failed Icelandic banks. He mentioned the Goldman Sachs case, adding ‘we were the suckers back then,’ meaning that also Kaupthing bought similar products (not the Goldman products at the heart of the fraud case though) that later turned out to generate losses (although none of the Icelandic banks bought much of the subprime toxic products – their largest clients turned out to be much more toxic though but that’s another story).
Kaupthing, like any other bank, had of course analysts who in principle should analyse what the bank was being offered. But these weren’t normal times. In 2007, the analysts got ever shorter time to analyse. Towards the end of the year they weren’t given any time at all to do their work. The bigger boys, the big banks and the market makers shoved a product under their nose with the offer ‘buy it now or leave it,’ giving no time to scrutinise or analyse.
Those who didn’t say ‘yes’ fast enough just lost the opportunity to buy this product and then eventually would lose out on everything. Or that at least was what they feared. The refrain was ‘if you don’t buy it we will sell it to someone else.’ End of story – and banks like Kaupthing feared they would simply be left out of the loop completely. No deals, nothing would be coming their way. And that would of course have been end of story. End of their story.
I have no pity for any of these banks and certainly no sympathy for a bank like Goldman. But behind this story is the story of big boys being squeezed, threatened and bullied by yet bigger boys. Like Goldman Sachs.
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