Tuesday May 4 2010

In class I roughly summarized what has happened with Goldman. Three days ago we pointed out that Buffet had come to the defense of Goldman. We pointed out that GS stocks was dropping uncomfortably towards Buffet's strike price for the GS options. Now a Rolling Stone write sums is all up. This is from Jesse's Cafe this morning.  AS Jesse observes, now we know that Warren is no different than anyone else, he has a price for which he too will join the thieves. 

One of the best summaries of what the deal actually encompassed is excerpted below by Rolling Stone journalist Matt Taibbi.

"Here's the Cliffs Notes version of the scandal: Back in 2007, Harvard-educated hedge-fund whiz John Paulson (no relation to then-Treasury secretary and former Goldman chief Hank Paulson) smartly decided the housing boom was a mirage. So he asked Goldman to put together a multibillion-dollar basket of crappy subprime investments that he could bet against. The bank gladly complied, taking a $15 million fee to do the deal and letting Paulson choose some of the toxic mortgages in the portfolio, which would come to be called Abacus.

What Paulson jammed into Abacus was mortgages lent to borrowers with low credit ratings, and mortgages from states like Florida, Arizona, Nevada and California that had recently seen wild home-price spikes. In metaphorical terms, Paulson was choosing, as sexual partners for future visitors to the Goldman bordello, a gang of IV drug users, Haitians and hemophiliacs, then buying life-insurance policies on the whole orgy. Goldman then turned around and sold this poisonous stuff to its customers as good, healthy investments.

Where Goldman broke the rules, according to the SEC, was in failing to disclose to its customers – in particular a German bank called IKB and a Dutch bank called ABN-AMRO – the full nature of Paulson's involvement with the deal. Neither investor knew that the portfolio they were buying into had essentially been put together by a financial arsonist who was rooting for it all to blow up.

Goldman even kept its own collateral manager – a well-known and respectable company called ACA – in the dark. The bank hired the firm to approve the bad mortgages being selected by Paulson, but never bothered to tell ACA that Paulson was actually betting against the deal. ACA thought Paulson was long, when actually he was short. That led to the awful comedy of ACA staffers holding meeting after meeting with Goldman and Paulson, and continually coming away confused as to why their supposedly canny financial partners kept kicking any decent mortgage out of the deal. In one ACA internal e-mail, the company wonders aloud why Paulson excluded mortgages issued by Wells Fargo – a bank that traditionally created high-quality mortgages. "Did [they] give a reason why they kicked out all the Wells deals?" the quizzical e-mail reads."

Matt Taibbi, The Feds Vs. Goldman

Tuesday May 4, 2010

The WSJ now reveals that various Congressman in their own accounts bet on the falling markets in 2008. This occurred at the same time many were calling to reign in firms that were doing the same thing. 

Year ago a cartoon character named Pogo made the famous observation

We have met the enemy and he is us!

Monday May 3 2010

This is a good background article on British Petroleum. The CEO has been trying to turn things around but seems to keep facing problems, safety and otherwise. 

Transocean RIG had suspended bonuses this past year over safety violations.

Yesterday on one of the news shows, Bill Kristol made the point that politicians had forced offshore drilling into deeper waters.  The deeper the water, the greater the risk of not being able to control an accident.  We are not drilling on land in ANWAR, and other states do not want close in drilling in safer shallow waters. So the risk has been increased by the very people who claim to be adverse to risky drilling. I found the comments from most of the talking heads to be worthless. No one took Kristol's observation seriously. Rather when Chris Wallace asked Janet N. what she would have BP do, she has said they are not doing enough, of course she had no answer. Others suggested that we do not proceed with any more drilling until something vague like 'all safety precautions are in place.'  This is malarky, drilling in a mile of salt water will never be a safe proposition. As this disaster shows, there is no such thing as fail safe equipment in such a dangerous environment. 

My Father was a drilling supervisor for Gulf Oil I visited my first operating oil rig when I was about thirteen years old. My point being that unless you have physically stood there and seen and listened to the noise, and weight of the sheer amount of machinery necessary to do all this, you are not grasping the enormity of the task of make this 'safe.' The vast majority of land based wells in the US do not flow naturally, there is not enough pressure, all those wells were drilled years ago. The search for new oil has taken us to new, and literally untested waters. 

Even the Interior Secretary noted that 30,000 wells have been safely drilled in the Gulf. Statistically this is an outlier, the results of course are not. The shoreline in Alaska is mostly rock which at least is subject to scrubbing and washing. That is not the case for thousands of miles of low lying marsh land along the Gulf Coast. 

For whatever reason, we are now in a period of significant upheaval. Hurricane Katrina, a volcano in Iceland, a mine disaster in Eastern US, a rig explosion in the Gulf, two financial collapses since year 2000, and now a Euro meltdown. Interesting times.