Trade With Dave

Regardless of the outcome of the S.E.C.’S civil case against Goldman Sachs and one of its key managers, the real question is not the cost to settle the case, but rather the reputational cost if they did indeed double-deal a client.  A few years ago, following their public offering, I started noticing that due to their structure it would be difficult not to bet against their clients, or inadvertently “front-run” their clients due to the breadth and depth of the enterprise.  When you’re really big, like Goldman, it can be easy to say something like; “We’re in a lot of businesses and it’s our nature to take a lot of different positions in the market. It would be impossible for us not to have bets that were opposed to those of our clients.”  That’s certainly understandable.

It would be the equivalent of comparing the tragedy of manslaughter in a car accident to a premeditated murder. Although in both instances, there is a fatality, there is no comparison in the circumstances.  Regardless of the potential for a huge financial settlement (or worse), proportionately that’s nothing compared to the cost to Goldman Sach’s reputation for failing to protect a client’s interest.  Sure there are plenty of smart and skilled people at Goldman, but the main thing you are buying when you hire an advisor is the promise of loyalty.  In the case of conflicting interests, you should be able to rely on a full disclosure of those conflicts.  Mostly what you are paying for is trust.  Not trust in some junior executive who may send an inappropriate email, but trust in the fundamental structure of the business models and the integrity of the management of the firm.

The White House is surely motivated in search of their “pound of flesh” and whether Goldman is able to settle quickly will have a big impact on the loss of blood.  From what I understand the case is going to court.  No matter how you slice it, the S.E.C.’s decision to take on Goldman based on a three year old case was bold and is a big gamble for an agency with almost no credibility due to the mis-handling of Bernie Madoff.  It feels like an all or nothing gamble for the S.E.C. in the great plan to “spread the wealth around” as President Obama clearly said to “Joe the Plumber” on the campaign trail.

If customers of Goldman Sachs begin to question whether or not the company can be trusted to protect their interests, the damage would be fantastic in financial terms.  Would the S.E.C. bring such a case if they didn’t believe they could prove it?  It’s hard to say.  Other cases were brought by Justice against Bear Stearns and by the S.E.C. against Bank of America.  The Bear Stearns case was an embarassment for the government while the Bank of America $150 millinon settlement was described by the judge as ”half-baked justice.”

If I was a betting person, last week I would have bet on Goldman, but this week I would bet on the government’s case. Why did I change my position? Two reasons: A) Lloyd Blankfein sent a voice mail to the staff of Goldman attempting to encourage them over the weekend. B). Goldman said in their official press release that they didn’t profit from the Abacus trades in question.

Why on earth would any company, much less one like Goldman Sachs, do these two things?  What does not making money on the trade have to do with anything.  This isn’t a criminal trial where motive is in question.  It’s the equivalent of saying “I didn’t have my hand in the cookie jar because I didn’t like the way the cookies tasted so I didn’t swallow the cookie.”  How is that relevant? It makes them look so guilty that it convinced me that they were guilty and I don’t even know the details of Abacus and Paulson.  If I came home and one of my kids said “I didn’t swallow any cookies,” you would hardly need to investigate the cookie jar inventory.  It’s as good as a confession.  

After reading that all I could think was; are these folks in the Goldman public relations department working for the White House, because why else would they say something so self-incriminating?  It’s the original “Spread the Wealth” p/r strategy; we didn’t make money so how is it possible that we had a conflict of interest?  I was stunned.

Do you really think when you’ve got a Harvard MBA and you trade synthetics, currencies or metals and make $20 million per year that a voice mail from Lloyd Blankfein is going to make you feel better about the future of your company.  It’s emails that caused all the problems and here’s your C.E.O. sending yet another electronic message.  This isn’t a high school pep rally.  This IS a big chunk of the global economy all wrapped up inside a single company.  What do encouraging words from the same CEO who said “We didn’t make money on this” do but scare the staff when they know the content of the message will be circulated in the media on Monday.

How ’bout this for a strategy? Have your lawyer say the charges are a lie and you plan to defend the company’s reputation with all vigor and leave it at that.  Instead you have people like Jim Rickards on CNBC (April 19) saying Goldman may go the way of Drexel.  I’m stunned again.  Rickards learned a thing or two about massive global collapses and government bailouts as counsel for Long Term Capital Management.

I can barely bring myself to believe that this is all real.  Then again, there is something called the economic cycle and maybe this is how the “Too Big To Fail” drama comes to an end.  Between this and the allegations last month by veteran trader Andrew Maguire presented to the CFTC of massive manipulation of the precious metals market by J.P. Morgan, it all seems like a dream.  Add in that Maguire and his wife were injured in a hit and run accident the next day and now you have a Hollywood opportunity in the making.  Hopefully they will/are fully recovered.   

The economy may be tough and discretionary spending may be down, but I saw a line at the movie theater and they’re getting $10.50 per ticket.  Maybe they can move up the release of the sequel to Michael Douglas’ Wall Street.  Below is a link to a very interesting audio interview by King World Media of Jim Rickards. He’s proposing a legitimate solution to both the devaluation of the U.S. Dollar and the Chinese carrying of U.S. debt through treasuries.  In regard to the timing of these Goldman allegations, all I can think is did this happen as soon as Treasury Secretary Geithner had structured a new deal with the Chinese.  What would such a new deal possibly look like?  Maybe we should ask Rickards.

Here’s a link to the audio interview.  Don’t let the homegrown feel of the website fool you.  It’s a first class interview: http://kingworldnews.com/kingworldnews/Broadcast/Entries/2010/4/14_Jim_Rickards.html

Here’s the video where the SEC’s Robert Khuzami describes the Goldman/Abacus/Paulson scenario as one of ”opposite economic interests.”  By the way, that’s the # 1 rule in business.  Whether it’s the law or not, a company needs to have similar interests to those of its customers, if it intends to keep its customers.  http://www.cnbc.com/id/36598517

Here’s a link to DGC Magazine’s special edition on the Andrew Maguire whistleblower story and CFTC testimony by GATA (Gold Anti-Trust Action Committee).  I can’t vouch for the accuracy of the story and would expect it to be bias towards gold investors, but it makes for interesting reading nonetheless. http://www.dgcmagazine.com/dp/y

Here’s a link to the CBS Marketwatch article by Constance Gutske on the gold reserves at Fort Knox, Kentucky. http://moneywatch.bnet.com/economic-news/article/is-there-gold-in-fort-knox/385523/

Lest we forget that today’s Goldman is not yesterday’s Goldman.  Here’s an excerpt from the company’s November 28 10-K.  It should serve as a reminder to all of us of who is in charge now.  I wonder if the culture has caught up with the reality of being a regulated bank holding company.  The SEC’s lawsuit focuses on Abacus products (Abacus 2007-AC1) created in February 2007.

 

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This entry was posted on Tuesday, April 20th, 2010 at 9:16 pm and is filed under Uncategorized. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.