$5B - not pocket change, but operating on $40B revenue not exactly too damaging either.
Its stock hasn't nose dived. Nobody is going to jail. Investors think they are ok. This is just business as usual.
They have 0 incentives not to do it again. In fact they'd be stupid not to do it again. Given they know better how fines are calculated and can just fold that into the total equation.
The prize for the DOJ in this settlement was an admission of wrongdoing. Theoretically this opens Goldman Sachs up to a lot more lawsuits and damages from private investors that were screwed when Goldman Sachs knowingly sold them mortgage bundles that were doomed to fail.
That said, I'm really surprised the stock hasn't taken more of a hit from this case.
Actually, it looks like they'll be able to discharge about $2.7B as "expenses". So effectively they'll only be paying around ~$2.3B for completely destroying the American economy. I call that a bargain.
Let me rephrase it: "Goldman Sacks took a central role in creating a crisis that, hadn't it been resolved by investing hundreds of billions of taxpayer dollars, would've tanked the global economy; it also made sure to be on the negotiating table from day 1, so that its interests took precedence over those of other companies (Bearn Sterns, Lehman Brothers) and the American public."
So yeah, they might have not taken down the economy, but fuck me they got a sweet deal for being criminally irresponsible.
Speculating on how a stranger's emotional state influenced their stated opinion, based only on their internet posts, is impossible to judge and that isn't terribly productive in conversation.
What is the gain from the fraud? Note that in the comments section of HN, it's acceptable to compare the settlement to the entirety of a company's revenue. In court, the fine would be compared to actual damages, which requires a causal connection between misrepresentations and losses. You might be able to establish damages in a statistical fashion, but that will still come down to computing some specific fraction of the sales that were fraudulent and the fraction of the value of those sales that were losses.
Very difficult to establish the gain, because some of that gain requires estimating the counter-factual profits they would have made in various circumstances.
That would be just part of the upside. It's like a gambler betting $10 on 1:8 odds if the real odds are 1:7. It's hard to measure the profits of being a good gambler.
Until people actually go to jail for like 30 years and until fines far exceed any profits, companies will continue to indulge in this type of behaviour.
The rewards are just too good and the downsides too easy to live with.
Or even having their massive bonuses clawed back. Ignoring the motivations of the company for a second, employees at places like GS are clearly incentivized to push the limits. Personally collect big bonuses now, let the company as a whole pay fines in several years. Not a good dynamic
If you steal a slice of pizza 3 times you can go to prison for a very long time. If you steal billions over years and years and wreck the economy while doing so, you won't face any personal consequences.
This is not true in the majority of the United States unless you already had felony convictions unrelated to your pizza caper. The misdemeanor petty theft only gets upgraded to a felony if you have a pattern of behavior, and that upgraded felony would only be your first strike.
I wonder what people here would say if non-tech folks started talking like this about the tech industry. For example, how many stories have we heard about data leaks involving complete incompetence or negligence by the company involved? How many of them have ended up in jail or even with a fine?
We do occasionally talk like that. Various security failures like credit card dumps are often attributed to the absolute lack of consequences for not giving a shit about security.
Similar things happen in the tech world. Ashley Madison had a feature that you could pay to have your data deleted from their database. Except they never deleted the data for those that paid. That is outright fraud as well.
When their user data eventually leaked, it resulted in countless lives and relationships ruined and at least a handful of suicides. While civil lawsuits have been filed, I haven't seen any talk of criminal charges.
People need their totems and need for them to be simplistic and singular to classify them as black or white. No thought given to things like government MANDATING increased numbers of subprime loans to facilitate a populist agenda, nor the guilt of the vast majority choosing to live beyond their means knowingly. Instead, they want a boogey man everyone can point their blame towards. The degree of that folly will be apparent over the years to come
Dude, you aren't actually comparing the two are you. Do you actually believe that tanking the global economy comes anywhere close to what you described? May I ask where you work? No one not working on/with ties to Wall Street would have this opinion.
I don't work anywhere close or on anything similar to Wall Street. But I do have a degree in econ and know that what "tanked the global economy" is a lot more complicated than Goldman Sachs lying to investors. But whatever, let's just lynch the bankers and their big bonuses and pretend that our industry is without flaws.
In every other industry that gives out the title of "engineer", you're taking on a weighty burden to be the guy that signs off and assumes the liability. Software engineers have taken the role, but eschewed the responsibility that traditionally comes with it.
> For example, how many stories have we heard about data leaks involving complete incompetence or negligence by the company involved? How many of them have ended up in jail or even with a fine?
Jail is a bit much for a negligence-caused data leak, but I certainly would welcome large fines against companies with shoddy systems. It might incentivize c-level execs to invest in properly securing their systems and the rest of the organization to take security seriously.
These financial crimes weren't the result of negligence. They were committed by people who knew what they were doing and profited handsomely from it.
That would be good too actually, although I can't recall any IT failure causing 100 000 of people to consider their life has been ruined by it. But still, we are responsible.
You are intentionally misrepresenting things to further your own point. There are countless leaks worse than "dog pictures or email addresses" and you can't blame "crashing the global economy for personal gain" on any single person, company, or action.
wow, pretty amazing - i wish i could get away with stuff like this!
obama should have listed this as his top failure. they have actually proven that they are smarter than each and everyone of us - in acquiring money by any means and getting away with it. very impressive in a twisted way.
Fraud has a very specific meaning, and what Goldman admitted to wasn't fraud (especially not criminal fraud). Here is the actual statement of facts: https://www.justice.gov/opa/file/839901/download. They admitted to doing what companies do every day: overselling a product they knew was crappy while having shoddy Q&A.
It's also worth noting the procedural posture of the government's case against Goldman. It's under FIRREA, which allows the government to bring a civil action for violation of 14 specific criminal laws. The burden of proof in the civil action is the lower civil standard of proof, instead of the high "beyond a reasonable doubt" standard.
"While the exact wording of fraud charges varies among state and federal laws, the essential elements needed to prove a fraud claim in general include: (1) a misrepresentation of a material fact; (2) by a person or entity who knows or believes it to be false; (3) to a person or entity who justifiably relies on the misrepresentation; and (4) actual injury or loss resulting from his or her reliance."
The statement below appears to cover 1 and 2 and we already know 3 and 4 to be true.
"Goldman received information indicating that, for certain loan pools, significant percentages of the loans reviewed did not conform to the representations made to investors about the pools of loans to be securitized, and Goldman also received certain negative information regarding the originators’ business practices."
rayiner, given your legal background, do you consider this type of misrepresentation to be criminal fraud irrespective of what regulators have achieved to date?
I think criminal prosecution should be reserved for the most outrageous and clear-cut misrepresentations. Look at the examples on pages 6-9 of the government's statement of facts. If any of those folks should go to prison? Should the folks at Microsoft who keep stating that the latest firmware update fixes Surface Book/Pro 4 sleep issues, even though people keep having troubles getting their laptop to sleep properly, also go to prison?
Goldman Sachs, as part of a certain class of institutions, plays a systemic role in the economy and as such, Goldman Sachs, its affiliates and the activities under discussion are subject to innumerable pages of regulations enforced by several different regulators. There is no equivalent regulation for Microsoft's firmware update announcements.
> I think criminal prosecution should be reserved for the most outrageous and clear-cut misrepresentations.
Is this the same standard you apply to any type of criminal prosecution?
I agree with you about Goldman, but we don't yet have the law that makes materially harmful commercial misrepresentations made by systemically important financial institutions a felony. We should, but we don't.
And, one of the very first things the founders said when they booted up this country was "no ex post facto laws".
The link below is a general discussion of securities fraud and related legal theory. Goldman is used as an example while discussing the case settled with the SEC in 2010.
"The law allows a case like the one against Goldman to be alleged and argued as securities fraud even if the seller merely failed to
exercise due care as to whether the buyer was misled about the nature of the securities being sold or how those securities were selected. The
law further permits a claim of fraud—even when brought by a private litigant—to be founded on an allegation of recklessness and allows
the litigant to assert, in essence, gross negligence as to whether the buyer was misled. If one takes the federal appellate decisions on the issue at face value, the law would appear to support a criminal conviction in a case like Goldman’s even if the seller were merely reckless."
The products were designed to be safe even if a large percentage of the underlying assets went into default. They did not represent the pools as free from assets that would default. They represented the pools as diverse.
It is! But to bring a felony case that would survive the standard of proof in criminal court, prosecutors would have to convince a jury that the people at Goldman who decided to or actually made some flawed statements knew that those statements were categorically false --- could not under any circumstances have been true --- and that the specific things about which they were knowingly and categorically wrong were material: that reliance on those statements benefited Goldman and harmed the people who relied on them.
That's an argument that we penetration testers would say "has a lot of attack surface".
This. There's a big difference between what you think is probably true and what you can prove, particularly when the law stipulates a state of mind. Prosecutors don't usually pursue these kinds of cases unless the defendant was dumb enough to brag to his friends or leave an email trail.
The one thing I can never wrap my head around in the banking industry is why this kind of behavior is tolerated by _customers_.
Imagine if wherever you work had to settle with the SEC / FTC / ABCXYZ for fraud. Wouldn't this devastate your customer base?
Yet when a bank gets fined, it seems simply like business-as-usual. Even when a government agency levies a fine for fraud, or emails are released in which employees actively mock their customers for being suckers, investment banks' abilities to find customers seems unhindered.
1) Are my perceptions wrong? Do these events damage reputation more than it seems?
2) If banks acting in this manner is the standard... why? Why isn't a firm carving out the "niche" of not being assholes?
1. investors were fighting to get their hands on subprime assets. There was so much liquidity around that it was the only way to make a little bit of money, very much like today. Investors have been piling cash into tech companies and EM markets where they probably shouldn't have. Is it financial intermediaries' role to bar them from doing so? Is it the supermarket's role to bar you from buying snacks and sodas because it's bad for your health?
2. what annoys me is that these "unsuspecting investors" were professional buyers. It is people who's job it is to do their homework and understand these products. We are not talking about selling complex products to grannies. These are highly educated, highly paid finance professional who simply did not do their job of vetting what they were buying.
Now if Goldman made misrepresentations (i.e. lied) on the nature of the assets, then there is clearly fraud, and by reading quickly the DoJ announcement it seems to be what Goldman is accused of. But in my opinion investors bear a very large part of the blame for this credit bubble. It's not a case of nasty Goldman vs nice unsuspecting investors.
"2. what annoys me is that these "unsuspecting investors" were professional buyers. It is people who's job it is to do their homework and understand these products. We are not talking about selling complex products to grannies. These are highly educated, highly paid finance professional who simply did not do their job of vetting what they were buying.
Now if Goldman made misrepresentations (i.e. lied) on the nature of the assets, then there is clearly fraud, and by reading quickly the DoJ announcement it seems to be what Goldman is accused of. But in my opinion investors bear a very large part of the blame for this credit bubble. It's not a case of nasty Goldman vs nice unsuspecting investors."
Well, it's a combination. Goldman packages up crappy mortgages as bonds, then has the rating agencies rate them and magically transform them into Triple AAA instead of junk.
The due diligence required of the investor, even a profession investor, is rather extreme - and having the rating agencies in your pocket only makes that worse.
> It is people who's job it is to do their homework and understand these products. We are not talking about selling complex products to grannies. These are highly educated, highly paid finance professional who simply did not do their job of vetting what they were buying.
Sure, but how many of professional money managers had their clients entire portfolios in subprime mortgages?
My guess is that it was mainly allocated to the portions of portfolio deemed "high risk", and if they're not buying subprime mortgages, they're buying high-yield bonds, Puerto Rico munis, assets of bankrupt North Dakota frackers, and high-risk high-yield real estate projects like casinos and theme parks.
There's daily trading activity on JNK and MORL and similar other instruments. I don't think there's any pretending going on that those are high-quality assets, and I also doubt anyone (in a clear state of mind with no gambling addiction) is going 100% into those ETFs.
I am not sure of that. The financial system is built to absorb expected losses. Where things go really wrong is when a big loss occurs where it was not expected. A lot of senior tranches in subprime RMBS had AAA ratings, which made then eligible for safe, low yielding portfolios. Banks could also pile them up on the balance sheet because the RWA footprint was really small given the rating. And that's why when it went "bang" it really hurt.
Right, the AAA rating is the cornerstone of the entire thing. On one hand you have originators eager to offload risk, on the other pension fund managers are under the pressure to boost their yields, but are limited into what they can invest.
The credit agencies are to blame, but they were an enabler. AIG FP was the main cause of the AAA rating by simply lending its name to the whole deal and promising to make the pension funds whole in case of any defaults.
This is another reason why defined benefit pension plans are a bad idea and ought to be discouraged as a matter of public policy. Pension fund managers tend to take excessive risks in order to meet unrealistic return targets. They have little personal stake in the outcome and if they fail then employers and taxpayers are forced to cover the gap.
As a thought experiment, consider what would have happened if that money had instead been in defined contribution retirement plans utilizing low-cost index funds. I think that would have reduced the severity of the financial crisis.
Some time ago (>>10 years) SEC fines were rare and they did carry the stigma you speak of, but the SEC's enforcement actions have now increased to a point where all the banks regularly pay out fines whether or not they did anything wrong; the stigma is now gone, and the fines are just a cost of doing business.
Fighting regulators is a very dangerous game for any company, as the government will usually settle for much less than the potential fine (, usually less than the cost of fighting the fine), and the looming threat of an ongoing prosecution adds costly uncertainty to the business. In addition, the executives have a large incentive to settle because this is just the shareholders' money, and a failure to comply could be met with a criminal prosecution.
IIRC and IANAL, there is also a strange problem that if criminal charges are brought against companies, there is a lot of fallout, and potential for the company to barred from operation.
Section IX B. seems to be the relevant one there, suggesting that regulators and prosecutors attempt to weigh the fallout that such a charge might have on innocent 3rd parties.
> Why isn't a firm carving out the "niche" of not being assholes
Well here in the UK one was claiming to be - the Co Op Bank. Ethical investing policy, mutual rather than floated on the stockmarket, and so forth. Not even based in London so hopefully free of any city groupthink. Also behind smile, one of the first online banks.
£1.5bn bailout, forced into flotation with no benefit for mutual members, and turns out their ethics policies didn't stop them playing the same games as all the rest. (Bailout stemmed from them trying to takeover another failing bank, but they didn't realise they didn't have the money. Um, OK, a bank that can't add up). That's as well as being left holding tons of bad investments and loans.
Broadly speaking, investment banks perform two roles:
1) Act as advisors in financial transactions. You expect them to have your best interest in mind here. That's the core reason you are paying them -- to give you good advice and look out for you.
2) Act as brokers when you want to buy or sell something. Sometimes it's hard to find buyers or sellers for your particular transaction. Imagine trying to sell a hotel... or a 10% stake in Tesla... or a few million barrels of oil. You might not know anyone who has interest in that, but you still want to buy or sell. An investment bank can help broker a transaction. In this case, you're (implicitly or expicitly) paying for liquidity, i.e. access to their relationships with buyers and sellers around the world. The service being provided is arranging a buyer(seller) for your transaction. (The service is not about providing advice in your best interest).
There are certainly examples of shady dealings in role #1 above.
But in role #2, a customer of an investment bank generally understands that the service is matching buyers/sellers, and you don't rely on the investment bank to do your diligence. You're not paying for advice in this case.
It's like if your real estate agent was representing both the buyer and the seller, and you know they get compensated only if a transaction occurs. of course you expect that they are doing everything in their power to get everyone to transact.
The issue is that banks play various roles depending on the type of banking. In some roles they are basically salesmen and you aren't supposed to put much trust in them. In those roles, they are just supposed to not defraud the customers. Like you can get Goldman to create a product that hedges against oil prices going up. Goldman isn't fucking you over just because they think oil isn't going up. They are almost adverse to their customers.
In other roles, they are directly advising the client. In those cases they have fiduciary duties to the client. They can't just sell you crap. They have to do their best.
The real problem is there is a whole lot of inbetween roles. Where they are quasi salesmen and quasi advisors. Like in this case, Goldman is acting like a salesmen but is making some quality claims about how much diligence they did.
Also, I think in the abstract that knowingly selling toxic assets would destroy a banks reputation, but the fact that everyone got caught in the sub-prime mess lessened the impact.
Because the customers are, for the most part, sophisticated investors who know what they are getting into and these fines are more politically motivated theater than actual punishment for inflicted harm.
Major investment banks primary mission is best thought of as advertising not investment. They make money based on the size of transactions not how good they are at their jobs. The completion is brutal and they are really good at convincing people of things that are not true. We use artisanal ingredients ~= we employ people from the top programs.
That said, for the largest transactions there is a tiny pool of qualified companies out there. And if you’re doing a 50 billion dollar merger a multi-million dollar premium can seem completely reasonable.
Much like how search is a sideline for Google, their primary mission is to sell adds everything else is simply how they accomplish that.
People who benefit most from these financial institutions are either financial managers or wealthy people themselves. The former has the same mindset and the latter doesn't care as long as their wealth continues to grow without having to be too involved in the process.
The sad dirty secret is that the other major players are usually pension funds, which are always under enormous pressure to make more money out of their investments. At the end of the day they don't care where the money comes from because turning a blind eye to evil is usually better for a fund manager's job security than asking for more contributions.
> 2) If banks acting in this manner is the standard... why? Why isn't a firm carving out the "niche" of not being assholes?
How much are you, personally, willing to pay this year for the services of a "not assholes" bank? I'm not sure I'd be willing to pay very much, myself. I'm not in a position to be putting a large number of digits of funds under management. I wonder if those who are may be more interested in returns than in the non-financial value of not being an asshole.
In fact if you shop at Walmart, you specifically go for the "asshole" supermarket who will squeeze every penny from their employees and their supplier, and will sell you the cheapest knock off that still passes FCC/FDA regulations. Doesn't seem to turn off that many people.
That being said reputation is important in banking and I like to think that investors are a bit more skeptical than before the crisis. Not that it is very difficult.
There are many people like me who have shifted all their banking to credit unions, including home loans.
When the time comes for me to inherit financial products, the first thing I will do is shift investments away from sketchy companies like Gold Man Sacks.
>2) If banks acting in this manner is the standard... why? Why isn't a firm carving out the "niche" of not being assholes?
If the only acceptable goal is short-term profit, actions and belief systems which maximise short-term profit are rewarded, and actions and beliefs which have a negative influence on short-term profit have negative incentives.
This is often called "markets" being "efficient."
In reality it's just an unstable self-destructive system with an inherently broken fitness function.
Yes, that is the issue. Economics makes the mistake of assuming Banks can be modelled like other companies - it's not really the markets directly though.
Banks make profit from the interest they make on their loans, minus the interest they pay to their depositors and minus other expenses. Other expenses include loan defaults.
So as a bank you can be more profitable by 1) making more loans than your competitors (and inevitably that implies more risk), 2) paying less interest to your depositors - but that would lose you deposits, which would curtail your ability to lend, 3) be generally more efficient - but they all have computers now, and regulatory compliance is both a major, and commonly shared cost or 4) make safer loans, and suffer less loan defaults.
The problem with 4) though is deposit insurance, means your customers don't care, but more critically that loan defaults aren't a nicely compartmentalised property of each individual bank's activities, since a big enough series of defaults from one of your more risk taking competitors is likely to trigger a default cascade that impacts your debtors as well. (Companies fail, their employees are fired, and can't pay their debts, their suppliers are similarly impacted, etc.)
As you say, it's a very fragile system - and easy for excitable chimpanzees to break.
This. If I was in a transaction and Goldman was on the other side I would assume they were trying to screw me. But the reality is that for many large bank transactions there are very few players to go to - and that actually only got worse post-financial crisis with the consolidation of the banking industry.
That being said, I can't think of a company outside of the world of finance that can repeatedly screw over their "clients" and still exist.
My guess is that the barrier to entry is too high and all of the players in the industry are already assholes. It could also be that investment banking attracts assholes so even if you did start a non asshole IB, you would soon be overrun with assholes because that is the available workforce. What a dilemma.
They will pay a 5 billion dollar fine out of the hundreds of billions of dollar they made. That's just the cost of doing business then isn't it. If a regular person is found guilty of fraud they generally wind up inside a jail cell. If a wall street bank does the same, its settled by writing a check behind closed doors and then everyone goes to lunch.
GS makes around $10 billion a year, are you saying that the profits for the last 10 years or more came purely from sales of MBS?
I know no one has been imprisoned over the financial crisis mess, but settlements like these truly show that the justice department and the SEC are doing a pretty good job at penalising the banks. Combined, the fines probably add up to hundreds of billions, my personal opinion is that this is way more than the banks did from selling these securities.
I'm not following you. I don't understand your point. This fraudulent practice went on for the better part of a decade.
You think that the SEC and DOJ are doing a good job? You are in an extremely small minority then. Not only is this settlement a slap on the wrist its also "engineered" courtesy of the warm and friendly relationship Washington and Wall Street have. Please read this:
>I'm not following you. I don't understand your point.
You claimed Goldman made "hundreds of billions of dollar[sic]". Their entire profit for a year is around 10 billion. Are you claiming their entire profit for multiple decades came solely from MBS?
For the last 5000 years there has been a different legal system for the peasants and the nobility. This is just ongoing proof that that hasn't changed.
But they haven't actually been found guilty of fraud. They agreed to a settlement. To send them to jail, the SEC would have to prove they're guilty in a court of law. Maybe the SEC could do that, maybe it couldn't.
The question is if you want to take a $5B sure thing for some shady behavior or spin the roulette wheel of justice and hope it was actually illegal.
The issue is and always has been that company have limited responsibility to allow them more flexibility as opposed to physical persons. This isn't working when the persons making the actual decision is offloading their share of responsibility onto the company. There is a strong dichotomy with the bearing of the responsibility when it comes to economy. I am not sure we can break this habit as long as we consider that the "freedom" of having jobs is one of the most important thing in this world. Or maybe the definition of job needs to change radically. Hopefully, we will see how things pans out with the more menial jobs automation there is.
Except they won't even pay the $5 billion. After "qualifying" for various deductions listed in the fine print and taking advantage of the tax benefits (no, I'm not kidding), the final payment will be closer to $2-3 billion.
Can you give a citation on why you think Goldman made 100s of billions of dollars on mortgage backed securities?
Remember different parts of the firm were on both sides of those securities.
Would you feel better about a 5 billion dollar fine (in addition to the previous multi billion dollar fines) if they made 2 billion on mortgage backed securities?
Not hundreds of billions, but GS received $12.9 billion as part of the AIG bailout. AIG had basically written insurance policies it couldn't pay, so the government stepped in.
I don't doubt that GS is worth our scorn, nor that they peddle in influence (I'd go so far as to say that we should in act laws to limit that influence peddling).
But, punishing GS for an act we don't like that another actor did (the government underwriting a private insurance company) is not how the law is supposed to work.
I for one, am very uncomfortable with punishing an entity for not understanding the technical aspects of their business nor for using made up numbers to justify why a punishment is just.
> On the broadest level, any money that Goldman spends on consumer relief will be deductible from its corporate tax bill.
So Goldman Sachs will get a government subsidy for defrauding the American public. The government is literally subsidizing their fraud with taxpayer money.
> So Goldman Sachs will get a government subsidy for defrauding the American public. The government is literally subsidizing their fraud with taxpayer money.
That's not a fair shake at how deductions work. They aren't getting paid a subsidy, they are paying less tax because of higher expenses. No money is going from "the taxpayer" to Goldman.
The government wanted it this way because they can point to a bigger number and get money to where they want it without having to get Congress to do anything (which they won't).
It would be nice to pay parking tickets etc. out of pre-tax income rather than post-tax, wouldn't it?
This logic essentially categorizes government fines as a cost of business, rather than a punishment; as an input to the sausage, as it were, rather than a reduction in profits.
Sure, but they agreed to pay a bigger fine because portions of the relief was deductible. The government wanted as big of a number as possible for their press release. The general public will go "wow that's a lot" while the investors will do the math and move on with their day.
They don't deduct the fine from their tax liability, they deduct the restitution payments from their tax liability. They are essentially being forced to "donate" $1.8B to those they wronged by their actions. Imagine if an individual were forced to make a charitable donation (in addition to being fined a certain amount) as a part of the the ruling. Despite being forced, it's still a tax deductable donation.
This was a negotiated settlement and apparently the government preferred getting a higher total and more money for relief than a lower total that was not tax deductible. It's not hard to see why.
Interesting - I didn't know that, and I think the penalty levied here should have been levied as a fine, rather than compensations or restitution.
Where did the legal precedent or IRS rule be set that restitution should be a deductible business expense? If you need to pay compensation or restitution, it means you did something you should not have done as decided by a judge/jury, so having it be treated more like a "penalty" seems prudent to me.
It would be more similar to having the option of paying a higher total fine, but with a portion of it in the form of a charitable donation (which is deductible). Higher total dollar amount, but the same as an overall lower fine that wasn't deductible. The government gets a big juicy number which is apparently what they wanted (in addition to being able to control where the money goes without having Congress involved).
I - and I think many others - feel that these companies should get negative consequences from their behavior. If the government is just inflating the number artificially, and actually resulting in something that benefits the group that did bad things... seems like most people would be pretty unhappy knowing that.
Who do I talk to about getting that angle on this story out there? :)
I'm sure you wouldn't be the first person to try that, especially if he tries to justify the speeding as a business need.
The difference of course is that you would get audited and maybe go to jail. Goldman Sachs's friends in government have written the law such that it's not even illegal for them.
As the other replies indicate, it's less about them writing the law in this instance, but rather having the government prosecution be complicit in boosting the dollar number they can publicize in exchange for a lower overall cost to the company.
Both sides win in this arrangement, even though I'd argue most Americans do not want Goldman Sachs to do any kind of winning as a result of this very necessary legal action against them.
The actual penalty portion isn't an expense, but the full number includes billions of other stuff that is ($2.4b in "consumer relief"). Goldman essentially gets to write off the community service portion of their punishment. On the flip side, the government gets to brag about such a large settlement. It's not a sketchy deal or actually even unusual.
There's also the benefit of not having to do any appropriation of funds in congress for the consumer relief portion to actually be paid to the consumers that it is relieving. No possibility of that money not going directly to what it is being extracted from Goldman Sachs to do.
"The settlement expressly preserves the government’s ability to bring criminal charges against Goldman, and does not release any individuals from potential criminal or civil liability."
No silver lining there. This is just pro for a bullshit to keep the pitchforks at bay. To see just how seriously these "deferred judgements" are taken by parties on either side of the table, see HSBC (found guilty of massive and very deliberate money laundering for Mexican drug cartels), which has continued to rack up offences with impunity while operating under one of these agreements.
As long as a politician can say the words "Too Big To Fail" with a straight face this will continue.
"Too Big To Fail" should mean "Too Big To Be Allowed To Exist" but apparently it still means "Open Checkbook to Taxpayer-Funded All-You-Can-Eat Buffet"
Wat. That $12.9 billion wasn't a loan. Maybe AIG paid some back but Goldman Sachs definitely did not. It was an insurance policy, except they (AIG) didn't call it "insurance" because that would have made it subject to regulation.
So many people should be in jail for what happened here. I'm not sure how we got here, but capitalism some how turned into socialism. Only it was not the people that the government redistributed the wealth to, it was the failing businesses. I know the reasoning was to prevent a bad recession, but I don't know how capitalism is going to work with that sort of interference from the governments.
It seems like a reasonable comment. I don't work in finance, but he seems to describe a feedback loop that's at least plausible. He links to a paper with a lot of numbers and charts in them, written by some Economics professors. It seems like a positive comment to have around.
The only thing weird about credit agencies is that they're sometimes written into state and local laws as being the sole judge of whether some money can be invested in a certain way. The law shouldn't depend on private companies.
The other thing is that because pensions are managed in aggregate, the individuals investing in them don't have much choice in what to invest in. It's the same problem with Social Security. It's a weaker but still valid concern with 401(k) retirement accounts, since your employer determines what you can invest in. It's just a bad idea to let other people manage your money for you, especially at scale.
Nothing about the credit rating agencies needs to change(by force), but I'd say it's important that people not be forced into trusting them. Once that's in place, it's on you if you blindly trust a credit rating agency. They're just a private company, so it (should be) legally the same as paying my bartender for stock tips.
I don't know - do credit agencies ever issue contracts guaranteeing their ratings? If you get one of those, the bartender analogy doesn't hold.
As a Scala quant, it sounded like the guy was thinking about the problem analytically rather than emotionally. Then, the phrase "the public caused X" would be more like how a software developer would interpret "this buffer overflow caused the attacker to gain a foothold in this 10-stage attack on some server". The determination of an appropriate scapegoat is more of a politician or PR guys' job, not a quant.
Here's another one: You're a software developer. Software developers caused Heartbleed. Why do most software developers "live in a reality distortion field where it wasn't their fault"? Probably because they don't work on SSL libraries. Should I blame you for not taking responsibility next time Cloudflare goes down, even though you might have an outside opinion on what caused it?
The user in question works at an online advertising company, not at a credit rating agency. Why do they think it 'was not their fault'? Probably because it wasn't his fault.
> Nobody adjusted the models when they produced incorrect answers because the answers weren't incorrect. They weren't the answers you like in hindsight, but they were correct insofar as the model was vetted & the input was correct.
This is 100% absolving the agencies of any responsibility for the brokenness of their models. According to this person, it's the public's fault for behaving in ways that led to unrealistic ratings, and not at all the agencies' fault for having models that didn't reflect reality.
I mean, just yesterday some of the top-rated comments on the settlement story were claiming that in-house counsel and firewalls meant that nothing actually illegal happened [1]. This despite multiple whistleblowers [2,3] and billion-dollar settlements from JP Morgan, Citigroup, Bank of America, Goldman Sachs, and Morgan Stanley. The robo-signing scandal that occurred in the aftermath was by itself industrialized fraud on an epic scale [4].
>That was the moment that I realized that some of these people live in a reality distortion zone where it really wasn't their fault.
The idea that there was any single factor that caused the financial crisis is equally delusional.
Rewind back a decade and observe the flurry of "Flip this house!" shows in mainstream pop-culture. There were tons of "the public" who were in on the game, or who indirectly benefited from it.
Go deep enough into Banking mechanisms and regulation, you will find that loan securitization was/and is (nothing has really changed) a huge exploit on the regulatory controls that had been developed around banking up to that point.
We, the public, respond to the signals provided by the monetary system. When that system malfunctions - and it is just as capable of being exploited as any other distributed system - the public behaviour is really the effect rather than the cause.
I disagree. If you make credit loose some idiot will borrow and then everyone else is forced to bid against them.
Similar for lending to all students for degrees. You know you don't need a degree to do a regular office job but because everyone else has one you know the recruiter will immediately bin your CV.
Control is counter-intuitive. Most people would restrict credit. The establishment understand you hand it out like confetti. After all it's free.
Like many things, most people would love to restrict it...for others. Of course, they alone would love to have the ability to borrow and lend as they see fit. Being able to extend or accept credit is a freedom, and it's misuse is part of that package.
The derivatives bomb was vastly larger and more destructive than bad house loans. The banks had made insane bets on all kinds of propositions that all went down the toilet when it turned out that black swans show up rather more frequently than expected. Blaming retail mortgage customers is ridiculous.
I still remember that one CNBC reporter who said that the housing crisis was the fault of "loser homeowners", rather than banks issuing loans en masse to people they knew had no means to pay the money back.
That was Rick Santelli and the 'rant of the year'. He is credited as one of the instigators of the Tea Party movement. Incidentally, Jon Stewart of the Daily Show had some choice words for Mr. Santelli.
Most of the banks' underwriting policies involve loans at 80% maximum LTV (hence 20% down payment expected from the buyer).
Most of the subprime sector evolved from trying to game the 20% requirement, either legislatively (through HUD and other "assistance" programs), financially (interest-only loans) or just plain old dishonesty (no-doc loans) originated by companies like Countrywide.
It also wasn't that long ago when many people were still saying "the banks did nothing wrong, so why would they be punished?"
Well, they clearly did do something wrong. Unfortunately, no one pays with jail time for defrauding their way into the financial crisis, and when they do get punished it's usually for a small fraction of the sums they gained, much less than the public is let to believe they are paying thanks to various loopholes. All of this also after being saved by taxpayer money (they only paid some of it back, but there were other programs, some secret, in which they got even more money).
> That was the moment that I realized that some of these people live in a reality distortion zone where it really wasn't their fault.
To be fair, the public isn't 100% blameless as a large number of people made poor choices to create the situation. Supply without demand is largely useless, after all. Similarly, the public hasn't shutdown the routes after the fact but rather accepted a smokescreen of a solution.
The blame primarily rests on the shoulders of the banks and credit rating agencies because they provided the supply. They also were the best informed side of the transaction and engaged in a certain degree of deception that they should be punished severely for.
The best lies, or distortions of reality, do have a kernel or two of truth.
Banks, credit agencies, and the whole sell side, selling bad debt in bad faith to organizations like pension funds, carry the brunt of the responsibility.
At the same time, the millions of poor and lower middle class people who took out loans way beyond their means -- and then defaulted on them -- aren't blameless victims, either.
Say I'm a shift manager at a grocery story, but I want to buy an $700,000 McMansion. So the bank offers me a Negative Amortization Loan. (Those were fairly common in the few years before 2008.)
The page clearly says that the loan will never be repayed if I make the minimum payment--the principal will grow every month. It clearly states the minimum monthly payment, a bit over half my paycheck.
It's amoral and greedy for the bank to make that offer. At the same time, it's irresponsible and greedy for me to take it.
The claim was for fraud. The fact that GS defrauded investors is its own independent transgression, separate from the risky bets that the government de facto insured them from.
If I default on my mortgage and commit fraud, I don't have the luxury of saying "the fraud sentence is enough, can't I at least keep my house?"
Those billions are relative to the amount of money they made though. A crappy analogy is a bank robber who steals a million dollars from 10 banks, gets caught at the last, and has to pay back 2 million dollars.
It's almost a year's worth of profit. Do you have reason to believe that their income obtained by fraud is significantly more than the fines they paid? Goldman has plenty of other businesses.
> To be fair, the public isn't 100% blameless as a large number of people made poor choices to create the situation.
I disagree. Whether following the buy-vs-rent calculator (and opting for a purchase vs renting) or buying in hopes of selling at a higher price later on, everyone made a perfectly rational decision - people still buy real estate today when it makes sense to them, and every day investors buy growth stocks which produce no dividends, so the only plan is to sell them at a higher price later on.
Normally though a risky speculative behavior is constrained by market's readiness to finance it. Most mortgage originators will loan very quickly at 60% LTV, will due their due diligence at 80% LTV, and do a whole lot more for lending at more than 80% LTV, and would want to be compensated by higher interest rate. Same for investment properties - most likely I will have to accept higher interest rate, higher down payment, as lenders are trying to control their own risk.
The only time when lenders' guard is down is when a reputable third party tells them they will underwrite the risk in the event of a default. This reputable third party was known as AIG Financial Products, and if AIG tells the lender they will make them whole in an event of a default, then there's little reason to be diligent.
If AIG FP did not exist, a lot of loans would receive a higher risk rating, which would increase the diligence onus on the lenders and financial burden on the borrowers, thereby removing a lot of those questionable transactions off the market.
Mortgages (or any loan really) implies risk. This is part of why the loan is profitable: repayment isn't guaranteed. It is the bank's job to protect itself from risk. That is why it takes collateral and assesses that collateral. It's why the bank requires a down payment, especially if the borrower is on the edge of what they can afford. If the buyer defaults, the bank takes the collateral back and it's their job to make sure they are in an ok place afterwards.
So yeah, when the entire industry comes to the government and says "unless you bail us out right now our entire industry will collapse, but you're definitely going to save us because we're too big to fail," then yes, it means it's their fault. The public may have been complicit, but it's not the public's job to keep the financial industry healthy when the profits from that industry are kept privately.
>when the entire industry comes to the government and says "unless you bail us out right now our entire industry will collapse
That's an interesting interpretation of the events. In fact, there were institutions that were coerced by the government to participate in the bailout. Much of the derivatives betting was zero-sum, and done amongst the banks. The winners of those bets would have been more than happy to watch their competitors fail (fire sale!).
So that speaks very highly of JPMorgan, and none of my criticism then applies to them. It's all the banks that were going to fail without TARP that I am criticizing.
> June 11, 2009 | SINCE the economy hit an iceberg in October, America's biggest banks have felt a bit like shipwreck survivors: required to wear lifebelts provided by the government, despite complaints from some that they could have kept afloat on their own.
> April 16, 2009 | THE WORST nightmare of many bankers, natural capitalists, is being under the direct control of the government. So it's no surprise that American banks want to throw off the yoke of government meddling and pay back any accepted TARP money as soon as possible. Predictably, Goldman Sachs is leading the charge.
> So yeah, when the entire industry comes to the government and says "unless you bail us out right now our entire industry will collapse, but you're definitely going to save us because we're too big to fail," then yes, it means it's their fault. The public may have been complicit, but it's not the public's job to keep the financial industry healthy when the profits from that industry are kept privately.
The point is that complicity provides the avenue to allow people to tell themselves a story of how the banks weren't the largest part of the problem.
Is it really a poor choice to buy a house? Should people have known that banks were intentionally misleading them? The banks are the ones that should have been telling potential homebuyers that they weren't qualified, but they weren't doing that. Yes, the banks were also incentivized to make that kind of loan, but creating the derivative products that intentionally obscured the high risk of those loans and reselling those products as "low risk" derivatives is definitely on the banks and ratings agencies.
99% of the blame should go to the banks and credit agency. The book The Big Short explains this well. Yes, the public participated in bad loans. But there was a natural limit to this, there's only so many people and homes. If it stopped there, the crisis would have been much more limited.
But what did banks do once they hit the limit? Invent CDO and then synthetic CDO to create "artificial" supply for the bad loans. These derivatives are what really made the crisis very bad.
It's meant to obscure the crimes that were happening.
I no more know what the author's intent was than you do, but I'm going to go with a more charitable interpretation: it's meant to clarify the means by which the robbery took place. In other words, the exact opposite of "obscure". But if you have a narrative, by all means stick to it.
Let me reverse what you said: "Rob" sounds more threatening. And, in fact, it is more threatening - I lose my money either way, but "rob" means I'm more likely to also be injured or killed.
The comment you replied to, however, was made in jest in an attempt to call out how regular everyday people are treated more harshly than corporations.
Similar to how if you default on your mortgage, you're an untrustworthy person. But if your business defaults on a business loan, that's "just business."
Its stock hasn't nose dived. Nobody is going to jail. Investors think they are ok. This is just business as usual.
They have 0 incentives not to do it again. In fact they'd be stupid not to do it again. Given they know better how fines are calculated and can just fold that into the total equation.