Saturday, February 21, 2009

Goldman Sachs, Fools or Knaves?

"Many Americans believe that any bonuses for top executives paid by rescued banks would constitute 'excess compensation,' a phrase used by Barack Obama. ... But the Wall Street bonus system has some serious flaws. The most important is the amount of moral hazard that the system creates. Great rewards to executives are paid for successful risk-taking, but the penalties for unsucessful risk-taking end up being borne by taxpayers. One remedy for this is to charge traders a cost for the capital they use based on the risk that they intend to put it into. Many firms just charge the firm's own cost of the capital, and therefore overstate the profits they record on the riskiest trades. This also ovestates the bonuses that should be paid on them. ... Public anger is hard to deny, but we shouldn't let it weaken an important industry', Roy Smith (RS) at the WSJ, 7 February 2009.

"Why did the union [Ken] Lewis lauded as the 'deal of a lifetime' spin so quickly into disaster? ... A 24-year veteran of Goldman Sachs, [John] Thain was viewed as a Wall Street wizard. ... Peter Kraus, whom Thain lured from Goldman to head strategic planning, got a guarantee of around $25 million, which he received even though he left the company after three months. ... But despite his earlier words, he did little to rein in Merrill's proprietary trading operation, which took supposedly low-risk positions in currencies, commodities, and especially bonds, and had been a reliable profit center for years. That decision would come back to haunt him. ... Merrill also bought protection from the so-called monoline insurers, such as MBIA and Ambac. But when those insurers were downgraded by the rating agencies, the protection Merrill had paid for was less valuable, and Merrill had to add to its reserves to make up the difference", my emphasis, Shawn Tully at Fortune, 16 February 2009.

RS, MBA Harvard, 1966, "former" Goldman Sachs (GSG) partner, now a finance professor at New York's Stern School. Is RS an idiot or a criminal? RS admits what I've said for decades: major commerical and investment bank cost accounting stinks, causing excessive trader compensation. Imagine, firms hire GSG and its competitors for "financial advice". Why? What do these guys know? Alternatively, RS and his fellow partners knew all along what they were doing and should be indicted for fraud, i.e., defrauding their outside shareholders. This is a disgace. Further, a "former" GSG partner was a our last TreasSec. Treasury is infested with these parasites, on 14 October 2007 I called for a 25-year moratorium on GSG personnel working for Uncle Sam, That may not be long enough to purge our system of these parasites. What risk-taking is RS talking about? GSG executives are not capitalists, they are grossly overpaid hired help. Did RS scream about this at GSG? Did he tell GSG's shareholders? Why listen to RS now? Who is he protecting? Where were the compensation consultants like say Hewitt Associates and Pearl/Meyer while this went on? Who needs those guys either? See my 23 and 30 November 2008 posts: and

Get this, it's "public anger" that weakened Wall Street. This clown's arrogance is amazing.

Another Wall Street idiot. A GSG "wizard" would be a fool in any other industry. Thain thought monoline insurance had value, fool. He thought Merrill's trading business was "a reliable profit center". Under what kind of accounting regime? Wall Street must be the most poorly managed business on earth, except for its senior employees.


Anonymous said...

The reason why Goldman Sachs executives are not charged with fraud is because their company is so tied to a lot of other companies which did the same thing. They all have these leveraged deals with each other and if you pop one company then the others pop as well. They will go after the lone wolfs like Madoff since they can pretend he is not tied into the rest of the Wall Street banks. But go after Goldman or one of the other big banks and that will call into question the whole system. The partial bailout of Bear Stern and Lehman Brothers hit the big banks hard already, any more hits and the big banks crash.

Now the question is are the big banks worth saving, my answer is no, they are nothing but black holes of debt and filled with people who are either incompetent or frauds and we certainly don’t need any more incompetent or fraudulent banks, we have plenty already.

Put any bailout money into the better banks and into FDIC so that people won’t lose their life savings and put the banks which have no real assets into bankruptcy court.

A warning, the crash of the big international banks will accelerate the collapse of the international trade bubble which was built on the same reliance on too much debt like the housing and consumer bubble. But the international trade bubble is doomed anyway so lets just pop it and get it over with.


Anonymous said...

Ditto for General Electric and AIG and Bear and Lehman and Citi and BofA and .... (it's wearing me out to list all these hooligans...)

I think a big issue is that these "geniuses" are just running in a herd... one firm figures out a new "trick" making money and the others just copy the method... derivatives... structured finance... tech underwriting (last bubble) MBS packaging...

Well... the herd charged over the cliff... couldn't have happened to a nicer herd...