Goldman Sachs & God

In financial markets, Goldman Sachs is like a god. Goldman Sachs was about the only big investment bank that did well during the subprime financial crisis, JP Morgan did OK as well. But both went about doing alright in very different ways. Now people are complaining that Goldman Sachs cooperated (conspired?) with a hedge fund hustler in John Paulson (maverick or genius depending on whom you are talking to) to assemble and sell "synthetic collateralized debt obligations" that everyone involved, except maybe the purchasers knew would probably fail. The hedge fund hotshot made $1 billion.



I think Goldman Sachs did what a great investment bank should have done anyway. If you are smarter than the rest, you do the smart thing. Its a for profit entity, Goldman Sachs made most of its money by trading anyway, not by marrying trades.

Goldman Sachs is a convenient pinyata for those wanting to point out and punish those who behaved unethically and profited from the crisis. What GS did was not illegal but probably unethical. The basis for saying that is that most of the buyers of synthetic CDOs did not know the full extent of what they were buying - or did they? You don't go around buying billions of that stuff and then claim that you don't know what you were buying!!?? So what if GS knew that it was probably a bad trade for those who bought the CDOs. If you bought IOI Corp via GS, and then 6 months later IOI fell by 50%, is GS culpable?

GS, John Paulson, Steve Eisman, Mike Burry and the others in the brilliant new Michael Lewis book, The Big Short, basically got the right read on the subprime markets. Its never ethical to make money when you are short the markets, you can try to justify it but its not ethical. Its a profitable bet, its a calculated bet, its a knowledge bet, you are betting that the majority of the markets are wrong. In any crisis, its the majority who will suffer.

If you read The Big Short, you will fully understand how little GS and John Paulson knew of what they were doing. Those who were really the geniuses were people like Mike Burry and Steve Eisman, who were vilified and laughed at for a couple of years when they tried to short the subprime markets.

Dimon steered JP Morgan away from the subprime market early enough with an edict to his employees not to touch the stuff, but JP Morgan did not make bets against the subprime market. But then again, JP Morgan is not a big player in proprietary trading.

What was stupid was the GS CEO Blankfein saying that they are doing God's work. Just run GS as what we all know it is, a devil's playground where money is God. You do not need to make excuses on how you made money as no one expects you to be saintly or even ethical (really). Those who now trumps the word "ethical" as an absolute requirement for the character of the firm are deluding themselves. Ethics are just classes you take for GS to appease the lawmakers. It will never be allowed to conflict with money making motives. In fact, if you read The Big Short, you will know that GS was just like Bears Stearns, Citigroup and Merrill Lynch, holding the stuff on their books. It wasn't till late into 2006 that someone wised up at GS and said this was pretty stupid stuff if more than 7% of the loans defaulted - they actually went to 30% default rate in the end. Thats a risk they measured and a risk they acknowledged, the rest of the investment banks and AIG never put into their model that property prices could stop rising or that defaults could ever be higher than 3%.

If fact, if the subprime crisis imploded 6 months earlier, GS would have lost billions just like the rest. I guess, that is what people want, to have GS suffer alongside with all of them. Do any of those who shorted subprime (John Paulson, Mike Burry, Steve Eisman, GS, etc.) really have an edge - no, they just figured it was a better bet to go the other way. No one will know for sure that their bets will turn out exactly the way they wanted. We all buy and sell stocks with the information we have and the big picture beliefs that we hold. Some will be better at it but it does not mean they will be right. Just because they better correctly in a big way, is that a crime? Just be better consumers, be better investors - the only thing was that were some people DUPED, like in a Ponzi scheme? GS is not big enough to do that, and if you read the still excellent book The Big Short, you will know that GS was probably a bit lucky.

Can you really put in ethics into the mantra of an investment bank? Seriously folks, ... its a nice to have, but its never going to happen in reality. Should it be something we should work towards to, yes, by all means ... are we going to get there, I seriously doubt it, not when the people are paid by how much they bring into the bank and not by whether they had been ethical. Can we penalise them, probably, but will it be big and hurting enough to bring about a change in behaviour? I doubt that, not when people are making hundreds of thousands a year in bonuses or more.



Sydney Morning Herald, April 26, 2010

AS THE mortgage crisis in the United States gained momentum and many banks were suffering losses, Goldman Sachs executives traded email messages saying they would make ''some serious money'' betting against the housing markets.

The messages, released on Saturday by the US Senate Permanent Subcommittee on Investigations, appear to contradict statements by Goldman that left the impression the firm lost money on mortgage-related investments.

In the messages, Lloyd Blankfein, the bank's chief executive, acknowledged in November 2007 that it had lost money initially. But it later recovered by making negative bets, known as short positions, to profit as housing prices plummeted. ''Of course we didn't dodge the mortgage mess,'' he wrote. ''We lost money, then made more than we lost because of shorts.''

In another message, dated July 25, 2007, David Viniar, Goldman's chief financial officer, reacted to figures that said the company had made a $US51 million profit from bets that housing securities would drop in value. ''Tells you what might be happening to people who don't have the big short,'' he wrote to Gary Cohn, now Goldman's president.

On Saturday Goldman denied it had made a significant profit on mortgage-related products in 2007 and 2008. It said the committee had ''cherry-picked'' email messages from the nearly 20 million pages of documents it provided.

This sets up a showdown between the committee and Goldman, which has aggressively defended itself since the Securities and Exchange Commission filed a security fraud complaint against it nine days ago. Tomorrow seven current and former Goldman employees, including Mr Blankfein, are expected to testify at a congressional hearing.

Carl Levin, head of the committee, said the email messages contrasted with Goldman's public statements about its trading results.

''The 2009 Goldman Sachs annual report stated that the firm 'did not generate enormous net revenues by betting against residential related products','' Senator Levin said. ''These emails show that, in fact, Goldman made a lot of money by betting against the mortgage market.''

On October 11, 2007, a Goldman executive, Donald Mullen, predicted a windfall because credit-rating companies had downgraded mortgage-related investments, which caused losses for investors.

''Sounds like we will make some serious money,'' Mr Mullen wrote, and received the response, ''Yes we are well positioned.''

Documents released by the committee appear to indicate that in July 2007 Goldman's accounting showed losses of $US322 million on positive mortgage positions, but its negative bet - what Mr Viniar called ''the big short'' - brought in $US373 million.

Messages from as early as 2006 show Goldman executives discussing ways to get rid of the firm's positive mortgage positions by selling them to clients. In one, Mr Viniar wrote: ''Let's be aggressive distributing things.''

On December 14, 2006, he called Goldman's mortgage traders and risk managers to a meeting and concluded they would reduce overall exposure to the subprime mortgage market. This was largely done by making bets against the market to cancel out bets it had placed that the market would rebound. A day after the meeting Mr Viniar wrote to Tom Montan, co-head of the securities division, saying, ''There will be very good opportunities as the market goes into what is likely to be even greater distress and we want to be in position to take advantage of them.''

This typified exchanges on whether to continue to neutralise Goldman's exposure to subprime mortgages or expand investment in them well into 2007. By November 30, 2007, Goldman had largely cancelled out its exposure to subprime mortgages by increasing its bets that the market would continue to slide, according to the document.

Goldman also released statements for its mortgage trading unit which showed traders in what was known as the structured products group made a profit of $US3.69 billion as of October 26, 2007, more than covering losses in other parts of its mortgage unit.

Several traders from that group will testify tomorrow and their profitable short positions are likely to be of interest to the committee.

Malaysian Stocks & Ringgit

In 2010, the KLCI gained 5.42% YTD as of early-April 2010, registering as the second best performer in Southeast Asia. As fiscal risks in the EU affected capital inflows, the KLCI decreased by 5.6% until early-February 2010. However, with positive domestic investments, better GDP data, the central bank’s interest rate hike and expectations of a domestic currency appreciation, stock market surged by 7.6% until early-March 2010 from February. After experiencing some correction in mid-March, the KLCI rallied again with the expectation of the government’s sustained market liberalization scheme, enhancing foreign investor sentiment. The KLCI reached 1341.8 on April 5, 2010.

The P/E ratio of the KLCI increased to 19.17 in early-April 2010 from 18.19 in late-February 2010 as the stock market rallied. The P/E ratio of the KLCI is still relatively low compared to stock markets in India and Malaysia. However, compared to South Korea and Singapore, the KLCI’s P/E ratio is high. The estimated P/E ratio for 2010 was 15.95 as of April, still attractive relative to other equity markets.

Foreign investment turned to net inflows in March 2010. According to a statement from Bursa Malaysia in April 2010, foreign institutional investments bought MYR8.9 billion (February: MYR5.0 billion) and sold MYR7.8 billion (February: MYR5.7 billion). The positive economic outlook and the recovery of exports and industrial production helped improve foreign investor sentiment. However, foreign retail investment in the stock market was unchanged in March 2010.



Local institutional and retail investment registered slight net outflows in March 2010 after posting net inflows in February. Bursa Malaysia said that local institutional investors invested MYR12.6 billion (February: MYR7.7 billion) while they sold MYR13.1 billion (February: MYR7.1 billion) in March. Meanwhile, local retail investors bought MYR6.9 billion (February: MYR3.8 billion) and sold MYR7.2 billion (February: MYR3.7 billion).

After falling to a decade low of 14 in 2009, initial public offerings (IPOs) will pick up in 2010 due to government efforts to relax investment rules in the stock market. According to Bursa Malaysia, the securities commission as of early February 2010 had already approved almost 20 IPO applications. Malaysia’s government also plans to list 10-15 government-related companies in the stock market in 2010.

After sharp depreciation in late 2008, Malaysia’s currency, the ringgit (MYR), gained 1.2% in 2009 due to an increase in the current account surplus, capital inflows and U.S. dollar (USD) weakness. However, because of the sluggish domestic economy, slow export recoveries, smaller foreign portfolio investment and FX intervention by the central bank, MYR appreciation was relatively limited compared to other Asian currencies. In 2010, while capital inflows into the equity and debt markets might continue to support the MYR, movements in the currency will be determined by the central bank’s FX intervention and the current account balance.

Higher commodity prices and exports will support the MYR in 2010. Policy rate hikes and the interest rate differential with the U.S. and Japan will boost carry trade. However, MYR appreciation will be limited as the central bank is expected to continue to intervene in the FX market to maintain export competitiveness vis-à-vis China. Moreover, any weakening of risk appetite and capital inflows, increasing imports and any political instability will constrain the ringgit appreciation.

The MYR had appreciated 6.65% YTD against the USD as of early-February 2010, becoming one of the best performers among Asian currencies. After strengthening by 2.9% until mid-January, the MYR depreciated by 3.9% until early February 2010 due to the correction in the domestic stock market and capital outflows amid the global uncertainty. However, the MYR began to appreciate again from early-February led by the stock market recovery and positive GDP data, improving investor sentiment. The central bank’s interest rate hike in early-March 2010 provided extra momentum for the MYR appreciation. Between early February and early April 2010, the MYR appreciated 6.1%. On April 5, 2010, the MYR marked 3.23 per USD.



External Balances: Exports picked up in September 2009 and has continued to improve led by higher export commodity prices, global inventory restocking and strong exports to China and India. As these effects are expected to sustain in H1 2010, exports will continue to show the recovery. The rise in exports will likely to increase intermediate goods imports in the coming months, which may somewhat narrow trade and current account surpluses in 2010. Nevertheless, surpluses will be sustained in 2010 due to Malaysia’s much larger exports than imports.

Capital Flows: After massive capital outflows in late 2008 and early 2009, capital flows somewhat returned in 2009 with the revival of the global risk appetite and somewhat improved political stability. However, compared to its peer countries, capital inflows in domestic market were relatively weak in 2009 due to the concerns about rising the government’s debt and sluggish economic recovery. In 2010, analysts forecast that coupled with the central bank’s interest rate hike in March, further monetary tightening will support capital inflows as interest rate gap against the U.S. widens. However, for further improvement of capital inflows, the government needs to show the significant progress in its economic reforms including larger domestic consumption, financial market liberalization, fiscal consolidation and political stabilization.

Central Bank Policy: The upward trend in the ringgit against the U.S. dollar and the revival of capital inflows into the equity market have increased central bank intervention in the FX market to support exports. Central bank intervention in the FX market will remain dominant until exports and global commodity prices recover, and China allows the renmimbi to appreciate. Large FX reserves and external surpluses are a plus to deal with export contraction and weak capital flows. Trends in the USD and Singapore dollar will also be important determinants of the MYR's movement. In 2008, the central bank intervened in the FX market to protect the ringgit from sharp depreciation amid capital outflows.

Under the government’s exchange rate regime, the exchange rate of the MYR is controlled against “a trade-weighted basket of currencies.” The central bank has prohibited offshore MYR trade since 1998. The fixed exchange regime was removed in 2005.