By on April 27, 2010

I’m a crook, and I’m glad to admit it. Back when GM was trading in the 20’s I decided to sell the company short. Way short. In fact I didn’t cover my short until GM’s price reached a bankruptcy teetering $3 a share. The reasons were endless… of course. But the crux of my decision was based on the very same observation Goldman Sachs had with American’s sub-prime mortgages… the books were essentially cooked.

I saw how crappy Aveo’s, Cobalt’s and Ion’s were once they came to the auctions and how little they sold for. I ran my fingers through the misaligned panels of $40,000 Corvettes and Cadillacs. I even studied GM’s future pension obligations and could only conclude that a low margin company with millions of sub-standard vehicles and hundreds of billions in obligations would go right down the Chapter 11 tubes. Did I warn anyone? Yes, my wife’s Grandma who eventually took a six figure bath with her ‘safe’ GM Bonds.

Well let’s face it. Am I a villain for simply betting the right away? For betting ‘against America’ even though my upbringing left me little in the ways of GM’s country club cronyism? How about Goldman Sachs? Should the folks there be allowed to profit and congratulate each other for the collective stupidity of their competitors AND some holier than thou Americans? I think so.

I think we both just happened to have done our due diligence and bet right.To be frank, if the politicians du jour think that they are entitled to ‘reform’ our way of thinking they better think twice. Why? Because you can’t reform any company or industry (or country) by eliminating the opportunity to criticize their decisions by selling it short. If there are systemic risks out there, a short gives opportunity to give those things the notice and attention they deserve. Whether the powers that be listen in the end is not up to any of us. But as in investor, you have the right to put your money in whatever you wish. General Motors? Hey. I know what I know. As for Collateralized Debt Obligations and Derviatives… it’s all Greek to me!

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42 Comments on “Hammer Time: Responsibility...”


  • avatar
    educatordan

    Didn’t I read on this website that the Feds looked at GMs books just before or during the bankruptcy and after much, much study they shook their heads, said “Whiskey, Tango, Foxtrot.” and walked away muttering under their collective breaths?

  • avatar
    motron

    Steve,

    This analogy only holds if you were also designing and producing GM cars that you knew to be junk, while simultaneously suggesting that people buy them.

    • 0 avatar
      Sinistermisterman

      Exactly. Shorting stocks because you know they’re going to fail is one thing, lying about the risk of a particular CDO in order to sell it and then insuring yourself for more than the bond is worth, knowing it will eventually fail because your company has included the riskiest junk mortgage bonds into it is something completely different.

    • 0 avatar
      bunkie

      “Shorting stocks because you know they’re going to fail is one thing”

      And that thing is actually illegal (insider trading). Shorting stocks because you believe they will fail is probably what you really meant.

    • 0 avatar
      Sinistermisterman

      … believe… yes.

    • 0 avatar
      lawstud

      Bunkie, what you said is not true in all cases. It matters how you got the information. If you didn’t break the law or breach a duty you and someone who told you the information didn’t, then you can trade with non-public material information without violating the law (10b-5 of the 1934 Securities Act).

  • avatar
    porschespeed

    Steven,

    I applaud your due diligence when analyzing GM.

    Applying the same due diligence (ok, much less, it’s easy) to Goldman-Sachs you will find that the situation was not a straightforward short. At least in the under $50MM club sense.

    GS knew as well as anyone that the RE market was about to crash. They created multiple instruments that organized that ‘short’.

    Who did they sell the counter-positions to? Their own clients. Tons of internal docs show that GS knew they were selling positions that would enrich only GS.

    GS is also the king of High Frequency Trading (HFT). Look it up, it’s a way of using millions of dollars of computing power and proximity to the market to make money on others’ trades.

    Wall Street has become Vegas. GS is the biggest casino, and makes up new games every day to fleece the players and beat the regulators.

    • 0 avatar
      jmo

      GS knew as well as anyone that the RE market was about to crash.

      They certainly didn’t know that back in 2006/2007. 20/20 hindsight makes it seem obvious but it certainly wasn’t obvious back then.

    • 0 avatar
      philipwitak

      re: jmo’s response: “They certainly didn’t know that [that the real estate market was about to crash] back in 2006/2007. 20/20 hindsight makes it seem obvious but it certainly wasn’t obvious back then.”

      your statement above could not be more incorrect – as the senate hearings this morning have clearly confirmed.

    • 0 avatar
      jmo

      your statement above could not be more incorrect

      Do tell? They knew for a fact we were about to enter into a housing crash the likes of which this country hasn’t seen since the depression? They knew that for a fact? Like the speed of light in a vacume and the charge of an electron, fact? Wow, I had no idea.

      The bubble could easily have inflated for years before the crash came. If it had Paulson would have been bankrupt and AIG and Lehman would still be reporting record earnings. As the old saying goes “The market can remain irrational far longer than you can remain solvent.”

    • 0 avatar
      porschespeed

      jmo,

      Of course they knew for a fact. They were doing the deals. They knew the paper was junk. They have massive computing power to run the numbers out. If you are the one running the game, you have a damn good idea of when the house of cards will collapse.

      The insurance man doesn’t know exactly when you are going to die. But he has a darn good handle on when the average American will keel over.

      So did all the ratings agencies. Moody’s, S&P, you name it the insiders doing the ratings knew what they wee rating AAA was not even ratable paper – but since the got paid massive sums, guess what? AAA it is…

      Tons of emails to support all of these allegations. Beyond that, it’s the way Wall Street has worked since just post-Reagan.

    • 0 avatar
      jmo

      They knew the paper was junk.

      It was only junk if home prices stopped rising. It was entirely possible that home prices could have continued to reach new irrational heights for years after this deal was done. It was entirely possible that Paulson could have lost his shirt and the boys in Dusseldorf could have made out like bandits.

      Only with 20/20 hindsight can we say that Goldman “knew” the bubble was about to pop. Bubbles can continue to inflate for years, and often do…

    • 0 avatar
      MattPete

      jmo: Anyone who was paying modest attention (and many weren’t) knew it was going to fail. I sold my house, banked my profits (into treasuries), made sure none of my investments were in MBS or related to realestate or finance, and sold most of my equities.

      I knew for a fact that we were going to “enter into a housing crash the likes of which this country hasn’t seen since the depression”. To me, it was as plain as day. Places such as TheHousingBubbleBlog and CalculatedRisk (heck, even MYM like The Economist) had been studying this for a while.

    • 0 avatar
      porschespeed

      It was only junk if home prices stopped rising. It was entirely possible that home prices could have continued to reach new irrational heights for years after this deal was done. It was entirely possible that Paulson could have lost his shirt and the boys in Dusseldorf could have made out like bandits.

      jmo,

      Housing prices had already reached new irrational heights. Once again, I think you are overlooking the fact that GS was inside the game. Pulling the strings. Writing the rules. Regardless, you can only blow a balloon so big. With the right datastreams, you know just where that is.

      Beyond that, the inevitability of the collapse was everywhere more than a year prior. It was in the MSM, you just had to get past the noise generated by the people who have a vested interest in cleaning you out.

      I’m sure MattPete is also fully aware of the coming crash in commercial RE. I know I am, and the writing has been on the wall since the crash.

      And, yes, the next dip in the economy is coming.

    • 0 avatar
      MattPete

      Yep, I told my parents to get out of commercial last year. And for once, they actually listened to me!

  • avatar
    roadracer

    If anyone is a crook it’s the SEC for allowing GM stock to continue to trade when it was clear to all the world they were going Chapter 11. You’re not a crook for selling short.

    • 0 avatar
      ivyinvestor

      Roadracer,

      It’s not within the SEC’s purview to delist a company’s stock “when it was clear to all the world” they were headed for C11. That responsibility falls to the exchange where GM common was traded – in this case, NYSE Euronext, and is subject to a suite of requirements to even begin the process.

      And don’t think people weren’t making money when it was essentially “worthless”: they were. Would you deny them their trading risks since that’s what they were – theirs?

  • avatar
    Detroit-Iron

    If the bean counters, engineers, and managers responsible for making such sh1t products were doing so on purpose so that they could short their own stock, that would be unethical if not illegal. As someone who is not a fiduciary of GM you have every right to not wear the rose colored glasses/drink the kool aid etc. As far as GS, it really depends on how they represented the product to the customers. As I understand it, they were all pretty big entities too, so maybe they should have known that if something sounds too good to be true, it probably is.

  • avatar
    ivyinvestor

    In all truth, Revver, I don’t think Mr. Lang is familiar enough with what’s been brought to the table vis a vis GS. Many folks aren’t, as evidenced by the continuous incorrect explanations of synthetic CDS and CDOs in the media and at the watercooler.

  • avatar
    Aeroelastic

    ivyinvestor, I think you have it right. This is a really complex issue, and I don’t even know if all the details are out yet.

    As far as I can tell, GS was doing the equivalent of selling poisoned food at a restaurant, and then taking out life insurance policies on their customers. Is that a somewhat correct analogy?

    • 0 avatar
      porschespeed

      Aerolastic,

      Your restaurant analogy is pretty close.

      The best part is GS employees cycle in and out of top jobs at the Health Department. And the life insurance company.

    • 0 avatar
      ClutchCarGo

      Your restaurant analogy is pretty good, but just to tune it up a bit: it’s as if GS opened a sushi restaurant offering fugu (the blowfish that is deadly poisonous if not prepared correctly) and hired a novice sushi chef to prepare it, and then secretly took out life insurance policies on those who ordered fugu. Not all dishes offered are deadly, and the chef could possibly prepare it correctly, but the odds are pretty good that diners will die.

  • avatar
    texlovera

    You are neither crook nor villain. Neither are you a rube. You are simply acting out of enlightened self-interest (with emphasis on the “enlightened”).

    A lot of people, however, are now finding out just who the rubes are…

  • avatar
    porschespeed

    “It’s complicated”.

    This is the way that The Street blows smoke up the unwitting ass.

    Complicated CDO and CDS instruments were created to allow continuing over-leveraging by investment banks. They avoided (and still do) any regulation, and are currently setting up the next crash of the market.

    It’ll be even worse this time. But don’t worry. Investment bankers won’t lose their bonuses, let alone go to jail.

    Warren Buffet and many others will tell you that if it’s complicated – it is for a reason. The reason is to confuse the buyer and take advantage of them.

    Money and markets are straightforward. Risky at times, but straightforward. Any time it starts looking like an Enron statement, you know it is fraud.

  • avatar
    don1967

    Short selling is only evil when it beats the crap out of a perfectly stock for the sake of quick trading profits. In the case of GM, however, short-selling helped bring the stock closer towards its actual intrinsic value – zero – which is healthy.

    The only “crooks” were the Wall Street cheerleaders who kept talking up the stock just to pawn it off on less sophisticated investors. May they spend eternity in the fires of hell, washing and waxing Lucifer’s 2001 Pontiac Aztek.

  • avatar
    xyzzy

    I agree with the other posters that Steven is taking an oversimplified view of what Goldman is in the dock for. They aren’t in the dock simply for shorting deals. They are in the dock for helping a hedge fund create intentionally bad deals that were designed to fail so the hedge fund could short them — and then selling the long positions (i.e., sucker) to their clients.

    Several good explanations have been proffered, but if you really want to know the details and mechanics around what Goldman did, read this,which while long is written very well and accessibly, and thoroughly researched:

    http://www.propublica.org/feature/all-the-magnetar-trade-how-one-hedge-fund-helped-keep-the-housing-bubble

    It’s worth noting that this article speculates on what might be illegal in this deal, leaving aside the ethical factors. The thing that they said would be illegal is the exact role that Goldman played. It’s also worth noting this article came out BEFORE Goldman was indicted.

  • avatar
    Maxb49

    Not to hijack this thread, but what do you guys think is going to happen with Ford? I was in a Ford dealership last week looking at the new F-350 and I had a chance to look at their cars – er car, as Ford is only making the Taurus in multiple iterations. I didn’t find these Taurus cars and wagons very appealing, particularly for the high prices the dealer was charging. I’m not saying that I am a representative sample of the average auto buyer, but do you folks think that Ford’s profits could start to tank if people don’t like this platform? They seem to be making the 1980s GM mistake of making the same care over and over again. That, and the cost of tooling for these new cars makes me wonder if this is a high risk strategy.

  • avatar
    Werther

    Selling short is “evil” only when it is a naked short, i.e., the short seller has no skin in the game. Actually, legitimate short sellers who risk their own equity perform a valuable market-signalling function: they have to do their homework in terms of looking past the stock issuer’s quarterly report BS and really understanding the company’s true market value.

    Comparing that to Goldman is apples-to-oranges. GS was making unsecured bets on derivatives, i.e., they had no equity in the underlying instrument. That is the equivalent of naked short selling. Plus, they willfully mislead clients by selling products they knew were junk (and were in fact designed to fail) and misrepresenting them. In plain English that is fraud, despite what GS’s high-priced lawyers say.

  • avatar
    50merc

    “Caveat Emptor” has always been the cardinal rule for investors. It’s tough to swim against the current, but contrarians can get rich if they can hang in there until the boom goes bust. Congrats, MattPete.

    I’m not well versed in Goldman Sachs alleged hanky panky, but “gnomes of Zurich” conspiracy theories leave me cold. Lehman Brothers was as well-connected, insider-smart and market-wise as anyone on Wall Street, and they didn’t see the crash coming.

    • 0 avatar
      porschespeed

      50Merc,

      If you are interested, if you do a bit of digging you’ll find there were plenty of voices inside Lehman that knew this was coming, but the corporate direction was to ride the train into the wall.

      They didn’t want to be the first to blink.

  • avatar
    wsn

    I don’t see anything wrong with GS betting on this or on that. The bailout is wrong. If it weren’t for the bailout, AIG would go C7, resulting in GS going C7.

    Then we don’t need to waste time talking about curbing irresponsible betting, because the market force would have weeded that out of existence.

    And no, the sky won’t fall. There are plenty of more responsible firms waiting to buy AIG’s assets on the cheap. All GS employees losing their jobs won’t trouble much of America either.

    Giving president Bush/Obama so much power to hand out bailouts and hope for the financial reform, is like giving senator Palpatine more power in hope of peace. A small inconvenience is blown into a big mess due the fear of the uneducated.

  • avatar
    Steven Lang

    With all due respect, I have a very different opinion on Goldman Sachs.

    The collateralized debt obligations we are talking about here are not bought by your Mom and Pop. They are purchased by bankers and investment managers who are supposed to be well versed in what they’re buying.

    In my world of ‘dealer’ auctions, I would consider Goldman’s clients to be the very same type of ‘experts’ as car dealers. They are supposed to have a solid foundation of knowledge for the product that they are buying. Goldman is pretty much the same thing as an auction house. They need to package and market an asset to make it look as attractive as possible… and their ‘clients’ are on both sides of the fence.

    At auto auctions the very same thing is done to an ‘investment vehicle’. Vehicles are detailed, repaired, marketed and sold in the auction’s pursuit to have as many sales as possible. When the auctioneer says something in the lines of, “That thing will scrub up!” or, “Look at the wheeells on that one!” they are using their powers of persuasion to create the urgency to buy. Goldman did the same thing with the CDO’s by creating instruments that had the levels of perceived risk and return that these institutional investors sought.

    When the auction is over the auctioneer may have ended up selling a lot of junk. In many cases he will even have some of the defects listed on the run list. Does that mean that he should share in those losses? I really don’t think so. I think it’s the job of the buyer to do his homework.

    If that expert can’t understand what they’re buying then they shouldn’t be there. Period. But if a fellow chooses to be there then it’s strictly up to them to do their due diligence. That’s how any free market works.

    Experts who purchase shitty assets are responsible for the inevitable outcome of their decisions. Whether it’s a CDO or an Olds, the ultimate reward and fault are with that buyer.

    • 0 avatar
      porschespeed

      Steven,

      While I like the auto auction analogy, I think there were a few differences.

      GS may have been the auctioneer, but they were also the builder of replica Ferraris. Which they knowingly purported to be the genuine article.

      While the replicas were know to be bad to the ‘outside expert evaluators’ (the ratings agencies) the fakes were given a clean bill of health because the auctioneer paid them a huge fee to do so.

      The auctioneer also then created an insurance product to ‘protect’ the buyers. Which was backed with no assets. At all.

      So the buyers, who should have known better, pony up. Hey, everybody ‘respectable’ says they’re real. And in the end, the taxpayer will bail me out if I get it wrong.

      Then the auctioneer goes to Vegas and bets that all those Fezzas are damn near worthless. Which it already knew.

  • avatar

    Honestly Steven, I’m just sad that you didn’t do the aforementioned trade using Options or Leaps instead of shorts.

    If only you could’ve worked some leverage in there, you could now easily buy every member of the B&B a V8 Vantage, build the world’s largest trebuchet, and lob fiery Cavaliers into the empty lots of Detroit on the 4th of July. Wheeeeeee!

    Next time you have a trade idea, Let Us Know!!!

    (+Also, 1) Weren’t the Ratings-agencies also committing fraud by going along with this? and 2) If my distant-relative mortgage banker had a huge WTF in 2007, I’m sure more than 1 person saw this CDO/CDS thing coming. 3) Buffett just seems to be echoing Benjamin Graham’s advice against speculation whenever he talks to the public.)

    • 0 avatar
      Steven Lang

      Trade ideas? Heck I’ll give you my entire trading portfolio if it will yield me a free ride form the airport.

      Risk tolerance is a huge impediment towards obtaining such depreciable drek as Vantages and Cavaliers. Only a masochist would own the former and only a frugalist would own the later.

      A few folks saw it coming. I wasn’t one of them and I doubt GS was able to time the market as well as the politicians and conspiracy theorists would lead us to believe.

      Even the best investors in the world have a problem with timing. Just ask Warren Buffett. He’s had a few dozen.

    • 0 avatar

      Steven,

      What’s masochistic about an Aston Martin? If someone accepts depreciation as the cost of ownership and they think it’s worth it, how is that different than my aunt and uncle going to Vegas regularly?

      I know a guy who has a DB7 that’s been used as a daily driver long enough that depreciation isn’t a factor any more than it is with a Toyota or Chevy you keep for 10 years. Probably the only Aston with worn carpet and pedals. His backup car is a Jaguar XJ. His backup’s backup is a ’95 Impala SS that’s been professionally retrofitted with a 6 speed manual.

      A neighbor of mine happens to own a Vantage. He’s a successful oral surgeon whose father was a wealthy builder. His father in law sold their family business for $48 million. He can afford the depreciation and as long as he “puts the pedal down and it goes fast” he’s happy. The guy doesn’t even know if it’s got an eight or a twelve.

      Also, considering what the interiors of Aston Martins are like, it’s hard to call anything involving the marque as masochistic.

      There are lots of cars, new and vintage, that are on my lottery list, but if I ever hit the jackpot, the first car I’d buy would be an Aston Martin.

  • avatar
    undrgnd40

    Caveat Emptor. there must be some metaphor here about buying a Cayenne Turbo and realizing it’s just a hyped up VW “Too-rag.” By the way, Warren Buffet who warned us all about the financial armageddon to come from CDOs and derivatives is now the biggest mouthpiece against financial instrument reform.

    • 0 avatar
      porschespeed

      Buffet continually warns about the failings of the market and the excesses of Wall Street.

      That does not mean that he will not take advantage of them when they become evident.

    • 0 avatar
      windswords

      Warren Buffet just wants and exemption for himself in the ongoing financial reform. That’s why his lap dog, Senator Bob Nelson, voted to filibuster the reform process. He’s working for another cornhusker kickback. The sooner he’s removed from office the better.

  • avatar
    Steven Lang

    Porschespeed, now I believe you are putting ideology ahead of common sense.

    Warren Buffett has been an outspoken critic of the flat tax, deficit spending, free trade, and the current real estate laws in the state of California.

    All of these issues would hurt him considerably if the current governments (California and Federal) followed his advice.

    The issue isn’t Warren Buffett. It’s Goldman Sachs. I can see an argument against what Goldman Sachs did if the purchasers in question were not supposed to be well versed in CDO’s. That would be a breach in fiduciary duty. But that’s simply not the case at all here. The buyers, due to their role themselves as financial advisors were fully responsible for their actions.

    Now if Goldman had sold something that physically wasn’t what it is they were buying… that would be a different story. But that’s not the case.

    • 0 avatar
      porschespeed

      @Steven Lang,

      Please explain how GS told the truth about the packages they were selling.

      Just because you bribed KBB to say that the Chevy Cavalier was worth 50% of sticker 4 years out, does not make it so. Sure, I know better, but when the ‘objective rating agency’ is saying different, how is it my fault for selling it to my clients?

      This was nothing more than a scam, perpetrated by the top 1% – spare me the BS, I’m not an idiot.


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