Goldman Sachs claims the Senate subcommittee's characterization of its subprime business was “sloppy and incomplete.” (Photo Credit: CC BY/Ludovic Bertron/Flickr)

Goldman Sachs Group Inc., the securities firm Sen. Carl Levin, D-Mich., once described as a “financial snake pit, rife with greed, conflicts of interest and wrongdoing,” is preparing to strike back. The Wall Street Journal reports that the firm plans to counter the Senate’s financial crisis subcommittee’s 639-page report, which alleges that Goldman Sachs sought to profit by betting against the housing market and betraying its clients. Reports indicate that Goldman’s defense will focus on what the company believes to be “sloppy math” on the part of federal regulators.

‘Sloppy math and incomplete analysis’

The Senate Permanent Subcommittee on Investigations went through tens of millions of documents disclosed by Goldman Sachs, yet the securities firm says in its defense that the Senate’s analysis was incomplete. Goldman Sachs has not denied that the firm profited from the subprime mortgage crisis as prices fell and borrowers defaulted, creating the big short. However, the firm believes data suggest the Senate’s numbers are inaccurate.

One document the Senate found particularly damning for Goldman Sachs was a chart that characterized the company’s net short positions against the housing market being as high as $13.9 billion on June 25, 2007. Goldman says that number appears artificially large when juxtaposed against the 2007 net revenue of $11.6 billion the Senate reported. Goldman claims its actual net revenue was $46 billion.

Insider trading, truthful and accurate

The WSJ reports that Goldman Sachs will use data on bullish mortgage trades to temper the opportunistic venom behind such numbers, data to which the Senate already had access but chose not to highlight in its report. Goldman argues that billions of dollars in bullish trades – as well as more than $5 billion invested in prime mortgage bonds – more than offset the subprime short bets.

Despite the fact that former Goldman Sachs corporate board member Rajat Gupta backed away from his position following allegations of insider trading, the firm maintains that its dealings with the U.S. government have been “truthful and accurate,” according to a company representative for CEO Lloyd Blankfein.

Goldman Sachs gambled more than $1 billion of Gaddafi’s money

Sources

The Atlantic Wire

Goldman Sachs

Wall Street Journal

A Senate report investigating the cause of the financial crisis accuses Goldman Sachs of misleading both its clients and Congress. Image: Flickr/greyloch CC-BY-SA

Goldman Sachs emerged as the villain in a senate investigation report on the financial crisis released Wednesday. Other Wall Street banks, financial regulators and Congress also shared the blame, but Goldman Sachs was singled out for fleecing its clients on mortgage-backed securities and collateralized debt obligations. Details of the report also suggest that Goldman executives committed perjury during Senate hearings on the financial crisis a year ago.

Goldman described as greedy snake pit

Goldman Sachs was described as a “financial snake pit rife with greed, conflicts of interest, and wrongdoing,” by Sen Carl Levin, D-Mich., chairman of the Senate subcommittee investigating the causes of the financial crisis. The 63-page report, presented by Levin and Sen. Tom Coburn, R-Okla., contains documents discovered during the two-year investigation that they say prove Goldman misled both its clients and Congress. In particular, Goldman allegedly sold risky securities and then bought insurance against their failure, knowing that when the loans went bad their clients would suffer significant losses and the firm would make a profit. The report detailed several incidents where Goldman said its interests were aligned with investors who bought collateralized debt obligations, when in fact the firm held a 100 percent short position against those same CDOs.

Goldman execs may face perjury charges

The Senate report also questioned the truthfulness of testimony given by Goldman Sachs’ executives, including CEO Lloyd Blankfein, at a Senate hearing on the financial crisis last April. Documents submitted to the Senate investigation by Goldman appear to conflict with statements Blankfein made under oath to the subcommittee. In the hearing, Blankfein denied that Goldman held a huge short position against the housing market and bet against its clients. He described what appeared to be conflicts of interest as “managing risk.” A Goldman spokesman said the Senate report confirms that the testimony given by Blankfein and others was “truthful and accurate,” but it has changed business practices to “strengthen relationships with clients.” Levin said he will refer the case to the Justice Department, an implication that Blankfein and other executives could be charged with perjury.

Business as usual on Wall Street

Goldman stock fell as much as 3 percent after the report was released. But analysts figure that Blankfein and Goldman will somehow wiggle off the hook. Analysts at S&P Equity Research expect Goldman stock to rise and view the Senate financial crisis investigation as only a “potential negative.” The fact that Goldman has simply denied wrongdoing seems to be enough for the firm to expect that nothing will come of Levin’s wrath. According to S&P Equity Research, “we expect GS to report robust global banking fees and strong trading revenues.” Goldman may ultimately be successful in arguing that what they did wasn’t illegal, just business as usual on Wall Street. Caveat emptor.

Sources

ABC News

Reuters

Fortune

Former Goldman board member Rajat Gupta faces insider trading charges for profiting from confidential information during the financial crisis. Image: CC World Economic Forum/Flickr

The level of notoriety that Goldman Sachs either enjoys or endures increased Tuesday. The Securities and Exchange Commission filed insider trading charges against Rajat K. Gupta, one of its former board members. Goldman Sachs was also forced to admit that it could lose billions from lawsuits by investors who were bilked by the bank during the financial crisis.

Gupta busted for Buffett tip

The SEC  is suing former Goldman Sachs board member Rajat K. Gupta for insider trading on suspicions that he passed confidential information to Raj Rajaratnam of the Galleon Group, a financier scheduled to go on trial for securities fraud and conspiracy charges. The SEC said that while Gupta served on Goldman Sachs and Procter & Gamble boards, he tipped off Rajaratnam that Warren Buffett was going to invest $5 billion in Goldman Sachs. Buffett bet on Goldman in September, 2008, during the worst of the financial crisis, a move that helped prevent the bank from collapsing and provided assurance to the markets that all was not lost. Rajaratnam allegedly used the insider trading information from Gupta to generate “illicit profits and loss avoidance of more than $17 million,” according to the SEC.

Why was Gupta lining Galleon’s pockets?

The SEC also charged Gupta for passing Rajaratnam information about Goldman Sachs financials for the second and fourth quarters of 2008 before the reports were made public. Additional insider trading charges against Gupta include giving Rajaratnam information about Procter & Gamble’s 2008 fourth-quarter financials the day before they were released. Rajaratnam allegedly used the Procter & Gamble data to generate $570,000 in ill-gotten gains for his Galleon Group. While a board member at Goldman Sachs and Procter & Gamble, Gupta directed investing for several Galleon hedge funds that the SEC has tied to the insider trading scheme. Gupta also had numerous other business deals brewing with Rajaratnam, who is scheduled to go on trial in federal district court in Manhattan on March 8.

Goldman overwhelms penalties with profits

After the SEC insider trading charges against Gupta made the news, Goldman Sachs shares dropped 1.2 percent. Goldman also reported that it could stand to lose $3.4 billion in damages over lawsuits involving mortgage backed securities it sold that became worthless during the financial crisis. Goldman released the information to comply with new SEC transparency rules regarding financial liabilities. In 2010 Goldman paid a $550 million SEC fine, the largest ever assessed to a Wall Street bank, for deceiving investors with collateral debt obligations. Yet 2010 was the fourth best year for profits in Goldman’s history. The firm’s trading revenue dropped 33 percent from the previous year in 2010, but revenue from investing and lending more than doubled.

Sources

New York Times

Forbes

Wall Street Journal

Business Week

Groupon may achieve the highest IPO valuation of a company to date. (Photo Credit: CC BY-ND/Justin/Single Dad Surviving)

Local business marketing and consumer coupon company Groupon is a rising star in the online retail community. The company has done so well that in November Google offered to buy Groupon for nearly $6 billion. But as the New York Times reports, Google doesn’t always get what it wants. Groupon will soon move forward with an initial public offering that could value the company at more than $15 billion.

Groupon raised $950 million from investors

Groupon’s funding push, which brought in $950 million from investors, included money from large investors such as Fidelity Investments, T. Rowe Price and Morgan Stanley. In anticipation of going public, Groupon met with banking representatives this week, anonymous sources close to the potential $15 billion-plus deal told Read Write Web. Over the past year, Groupon has expanded to 35 countries, gotten into 500 new markets (up from 30 in 2009), expanded its subscriber base by 2,500 percent. In 2010, approximately 60,000 businesses marketed their products and services to the public via Groupon’s coupon system.

Annual revenue at Groupon reportedly exceeds $1 billion. The company has more than 50 million users worldwide and a staff of 3,100.

Groupon CEO Andrew Mason has seen company’s value skyrocket

While nothing is official until Groupon’s IPO, company CEO Andrew Mason sees a Groupon stock value that’s out of sight. If Groupon does manage a $15 billion-plus IPO, it would be the highest initial valuation of a company to date, exceeding even Google’s 2004 IPO. With new Chief Financial Officer Jason Child (a 12-year veteran of Amazon’s international business arm) in place at Groupon, the ship appears to be in good hands.

Morgan Stanley and the IPO inside track

Financial experts believe that Morgan Stanley’s involvement in a potential Groupon IPO would give the company the inside track it needs to go public. Greg Sterling, analyst and founder of Sterling Market Intelligence, told the Times that Morgan Stanley’s sizable reputation on Wall Street should play a huge role in Groupon’s future.

Web startups raising major cash

Groupon’s $950 million from investors headlines what the Times calls a “particularly frenzied” time for Web startups. Twitter raised $200 million recently, and the company is valued at $3.7 billion. Career networking platform LinkedIn appears to be headed for its own IPO this year, according to insiders. Even Facebook appears to be on its way to an IPO in 2012 – reluctantly, claim reports – after a $450 million investment from Goldman Sachs.

Sources

New York Times

Read Write Web

Groupon mobile app review

MoneyBlogNewz/Flickr.com/CC-BY

A Goldman Sachs Facebook investment of $450 million was the biggest news on Wall Street Monday. The Goldman Sachs Facebook deal, plus an additional $50 million investment from a Russian firm, has given Facebook an implied market value of $50 billion. Goldman’s investment makes it a front runner to manage a Facebook IPO that most analysts consider imminent.

The Goldman Sachs Facebook deal

The Goldman Sachs investment gives the social networking phenom more implied market value than eBay, Yahoo and Time Warner. Digital Sky Technologies, a Russian investment firm, added $50 million to its stake in Facebook. In 2009 DST paid $200 million for a 2 percent stake in Facebook, and by buying shares from Facebook employees is reported to have increased its stake to about 10 percent. Facebook, still a private company, doesn’t disclose finances, but it’s apparent the company has no need to borrow money.  Facebook’s 2010 revenues were reported to be approaching $2 billion. The social networking site overtook Google as the most visited website in the U.S. last year.

Goldman hustles to outrun Volker rule

The Facebook investment has provided analysts with clues about Goldman Sachs’ private equity strategy in the wake of the Dodd-Frank financial reform bill. The “Volker rule” is part of the financial reform that bill limits the investments Wall Street banks can make with their own money. Financial reform legislation gives the banks several years to comply with the new regulations. The Goldman Sachs Facebook deal indicates that the firm is taking advantage of that grace period to make lucrative private equity deals with its $900 billion balance sheet. Goldman is also recruiting wealthy clients to pour up to $1.5 billion into Facebook.

Goldman eyes coveted Facebook IPO

Facebook is currently being investigated by the Securities and Exchange Commission for private trading of the company’s shares on the secondary market. Last year Facebook cracked down on employees who were selling their shares as the company’s implied value skyrocketed. SEC rules limit private companies to 499 shareholders. When Facebook hits 500 shareholders it must register its shares and make its finances public. The Goldman Sachs Facebook deal could force Facebook into an IPO. As a shareholder in Facebook, Goldman is now positioned to underwrite a Facebook IPO, which would generate huge fees for the bank and a financial windfall for its clients.

Sources

New York Times

Financial Times

PC World

Goldman Sachs said goodbye to a few bucks this fiscal quarter. Image from Flickr.

Goldman Sachs profits fell 86 percent in the second quarter compared to the first — the richest securities firm on Wall Street took a beating. The biggest reasons for the precipitous drop in revenue, most analysts say, are a big fat SEC fine and an even fatter British bonus tax. However, historically volatile markets also hurt the bank’s earnings.

Goldman Sachs profits withstand SEC fines and British bonus taxes

Tuesday Goldman Sachs announced that the bank’s profits were $613 million in the second quarter. Those numbers are down 86 percent from the first quarter and 84 percent from the second quarter of 2009. The Los Angeles Times reports the Goldman Sachs profits announcement came just a few days after it settled a lawsuit with the Securities and Exchange Commission. In a deal during the financial crisis, the SEC accused Goldman Sachs of fraud as it made money at its clients’ expense. In the Goldman Sachs fraud case, the bank escaped having to admit to a crime, but it coughed up a $550 million fine to sweep the case under the rug. The total amount was subtracted from the bank’s earnings for the second quarter. A $600 million British bonus tax levied on Goldman Sachs for its executives working in Britain also hit the bottom line.

Goldman Sachs went wrong direction in volatile market

Bloomberg reports that Goldman Sachs lost money because it bet on stock market volatility to ease just as it was surging. To illustrate, Bloomberg used the Chicago Board Choices Exchange Volatility Index, known as the VIX. The VIX is probably the most widely used measure of stock market volatility. The VIX, which started the second quarter at 17.47, rose as high as 45.79 on May 20 before ending the quarter at 34.54. The index, which methods the cost of using opportunities as insurance against declines within the Standard and Poor’s 500 Index, has averaged 20.38 over 20 years.

Goldman Sachs nevertheless pays out billions in bonuses

Even though Goldman Sachs profits fell in the second quarter, the bank nevertheless made tons of money. The Los Angeles times article said that though Goldman Sachs has come under fire before because of its massive employee bonuses, it didn’t let up in that department. In the second quarter, the bank dedicated $ 3.8 billion, or 43 percent of total revenues, to Goldman Sachs bonuses — the exact same percentage of revenue used for bonuses during the first quarter. And even as second quarter profits plunged, the bank hired 1,000 new employees.

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It may be the richest few who get the most handouts. Image from Wikimedia Commons.

The financial reform bill that is heading for Obama’s desk is designed with Wall Street in mind.  The idea is to keep the recession of the last few years from happening again, and to not have to bail out any more banks.  However, that brings up the issue of which institutions actually were bailed out, or benefited the most.   The public is the one funding it, so we should know who it was receiving our dollars.

Wall street got the bulk of the bailout

According to CNN Money, there were 707 banks that participated in the Troubled Asset Relief Program, or TARP.   From those 707 banking institutions, 690 of them had to split $40 billion between them.  The average for those 690 banks is $57,971, 014.49 apiece.  That means that the bulk of bailout funds went to 17 of the largest financial institutions, 13 of which have already repaid the Treasury.  They are also starting to return to profitability, as it was announced today in the Market Watch that JP Morgan Chase had just posted $4.8 billion in second quarter income.

Main street left struggling

The same CNN article also highlighted that only $15 billion of the $40 billion lent to small and medium banks participating in the Capital Purchase Program, or CPP.  Main street banks weren’t definitively left in the lurch, but the banks that were too big to fail certainly weren’t allowed to.  Only 10 percent of the smaller banks that received CPP loans have been able to repay their debts already.  Out of the small banks that still owe money from CPP loans, 15 percent have missed at least one payment.

Feed the wolves to save the sheep

Wall Street is still at the heart of the fallout from the financial crash in 2008.  The financial reform bill that just passed is testament to the call for them to run things more responsibly, and with the $550 million fine just slapped on Goldman Sachs from the SEC, it seems that more stringent standards may become the norm.  However, what happens if Main street banks go under?  Will we have to choose from a small list of institutions that just cost us $700 billion or more to watch over our money?

Further Reading:

CNN Money on TARP: http://money.cnn.com/2010/07/14/news/economy/Main_Street_banks_TARP/index.htm

CNN on Goldman: http://money.cnn.com/2010/07/15/news/companies/SEC_goldman/index.htm

Market Watch: http://www.marketwatch.com/story/jpmorgan-chase-reports-second-quarter-2010-net-income-of-48-billion-or-109-per-share-on-revenue1-of-256-billion-2010-07-15?reflink=MW_news_stmp

(Photo: ThinkStock)

Don’t be taken for a ride! We are living through a recession that was built by people who make a practice of using deception for personal gain. What happened at Goldman Sachs is a classic example. Convincing investors, under false pretenses, that a portfolio of mortgage investments would be profitable made the company a lot of money, at least until the SEC caught on. The housing collapse left too many people in a position of borrowing money to avoid financial ruin.  In the aftermath of so much waste, it is apparent that developing strategies for being able to spot the lying cheats of Wall Street is crucial. Perhaps if investors kept in mind the top 10 secrets of effective liars, they’d be able to spot them more readily.

Top 10 secrets liars don’t want you to know

You don’t want to be taken for a ride; that much is clear. Thanks to Psychology Today, you can spot the top 10 secrets of effective liars and make your own determination as to whether to trust that investment adviser or get-rich-quick schemer knocking at your door.

1. Good liars aren’t pathological. They wait until the key moment to insert falsehood. Thus, much of the information in an investment spiel could be factual, but perhaps a key element or the ultimate promise in the pitch skews the truth. Find the key points that would impact you financially and question the presenter thoroughly on those points in an attempt to expose cracks in the façade.
2. Good liars practice the lie often before delivery. This is why asking observant questions and phrasing your questions in non-standard ways could be more effective at breaking cheats from their rehearsed presentations.
3. Good liars use half-truths. Trickery once more, as a statement that is backed up even to a small degree by fact is much more palatable than an overzealous or outlandish claim. Again, you should question everything, or at least the parts where sky-high rates of return are promised to you. The more questions the liar is made to answer, the less likely he is to be successful.
4. Good liars know their targets. According to Carolyn Saarni, co-editor of the book “Lying and Deception in Everyday Life,” the best liars will attempt to empathize with the mark in order to put them at ease. The mark’s guard subsequently drops. Thus, when it comes to dealing with financial advisers who may be less than reputable, get right down to business rather than giving the potential con the time to size you up first. If it means rushing him through his presentation, all the better, because you’ll be disrupting his polished, pre-rehearsed game. If the potential con can’t get a clear picture of your thought process, they’re much less likely to hit upon your sympathies.

CLICK HERE to see numbers 5-10 of the top 10 secrets of liars who may be trying to steal your investment dollars during this recession!

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Warren Buffett vigorously defends Goldman Sachs. Image from Wikimedia Commons.

Over the weekend, investor extraordinaire Warren Buffett came to the defense of embattled investment house Goldman Sachs.  Goldman has been under fire for some time, for the role it played in the Wall Street meltdown and the recession.  Buffet asserted that the fraud allegations and investigations are unwarranted.  He also came to the defense of Ben Bernanke, and that the Fed Chairman was right in the course the Federal Reserve took in its actions in making out short term loans to ailing Wall Street firms and banks.

Warren Buffett offers support of Goldman Sachs

Warren Buffett defended Goldman Sachs against the charges of fraud leveled in a Securities and Exchange Commission lawsuit.  The purchases in question were a bundle of mortgages in collateralized debt obligations (CDOs) packages, sold as the product Abacus. Hedge fund Paulson and Co. bet on the securities losing money. The charge is that Goldman Sachs purchased the securities without notifying stockholders of the bet against Abacus. Warren Buffett said in Reuters: “I don’t have a problem with the Abacus transaction at all,” and that “I think I understand it better than most.”

Buffett Defends Bernanke

Warren Buffett also leaped to the defense of Ben Bernanke.  Bernanke, the Chairman of the Federal Reserve, has taken a bit of a beating in the press for seeming to be too willing to pump cash into Wall Street. Buffett said that “there’s no one in the United States  that I know of whom I would rather have running the Fed than Ben Bernanke.”  Bernanke, sometimes called “Helicopter Ben” orchestrated the emergency infusion of cash into troubled Wall Street firms.

Berkshire-Hathaway owns a hefty stake in Goldman

Warren Buffett, through his company Berkshire-Hathaway, has a wide variety of concerns and investments, and a hefty one is a stake in Goldman Sachs. Buffett owns more than $5 billion in Goldman shares.  He would be in a unique position to see whether a transaction could be fraudulent or imprudent.  He seems to be satisfied with the actions of Goldman Sachs and executive Lloyd Blankfein.  Buffett, after all, is an Investment Wizard, and wouldn’t back a company if he didn’t have a legitimate reason to do so.

The SEC today announced that Goldman Sachs would be prosecuted for their part in the mortgage crisis. Image from Flickr.

This morning, the Securities and Exchange Commission brought charges up against Goldman Sachs for fraud. The SEC alleges that Goldman Sachs defrauded investors by “misstating and omitting key facts.” The SEC suit against Goldman Sachs is an outgrowth of the investigation into the collapse of the U.S. housing market, urged on by unsecured loans at all levels of the financial system.

The SEC suit against Goldman Sachs

The downfall of the housing market and much of the associated U.S. economy is the “fault” of many different entities such as Goldman Sachs. Specifically, the SEC is alleging that Goldman Sachs had a cut-and-dry conflict of interest that they lied about. Specifically, Goldman Sachs allowed a hedge fund that was making bets on mortgages to have a say in the “quality” of those mortgages. Goldman Sachs then told investors that an independent third party had verified the quality of these investments.

Goldman Sachs responds to the SEC filing

At the same time that the Securities and Exchange Commission filed its  suit against Goldman Sachs, Goldman Sachs released a response. The response was all of one sentence:

The SEC’s charges are completely unfounded in law and fact, and we will vigorously contest them and defend the firm and its reputation.

The products Goldman Sachs was selling

The basis of the SEC filing against Goldman Sachs is a product called Collatoralized Debt Obligations, or CDO. A Collateralized Debt Obligation is simply a group of mortgages. Once a homeowner gets a mortgage, the bank bundled it up with lots of other mortgages, and sold that bundle. Because the homes acted as collateral, many banks and investment firms saw these CDO products as safe investments. The idea is that payments on the mortgages would continue to come in, and the investment firm would make money. What many banks – like Goldman Sachs – did not tell investors is that these mortgages were not all good. In fact, many of these home loans were practically payday loans – given with no credit check and no certainty that the mortgage would actually be paid.

The specifics of the Goldman Sachs CDO

The debt obligation that the SEC filing against Goldman Sachs is based on is the ABACUS CDO. Goldman Sachs bundled up all these bad mortgages, known as Residential Mortgage Backed Securities, or RMBS. Goldman Sachs then asked ACA Management LLC to analyze how risky the investment might be. What Goldman Sachs did not tell ACA Management or investors was that these mortgages had been selected by a group of people who had taken out a bet that the mortgages would fail. In other words, investors bet that the mortgages would fail, then selected mortgages they knew would fail. When Goldman Sachs sold these mortgages in groups, the company didn’t tell investors that huge bets had been taken out against the mortgages. To put it simply, Goldman Sachs knew that this was a bad investment and didn’t say a thing about it.

Find out more about the Goldman Sachs inside job

A great resource to find out more about how these financial products work and how some companies made billions of dollars off the housing collapse is the This American Life episode Inside Job

Sources

Securities and Exchange Commission
MarketWatch