$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.
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.
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?
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?
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.
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.
> 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.
>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.
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.
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.
> 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.
"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."
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"
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.
[+] [-] rdtsc|10 years ago|reply
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.
[+] [-] jobu|10 years ago|reply
That said, I'm really surprised the stock hasn't taken more of a hit from this case.
[+] [-] dguaraglia|10 years ago|reply
[+] [-] roderickm|10 years ago|reply
[+] [-] bogomipz|10 years ago|reply
http://www.nytimes.com/2016/04/12/business/dealbook/goldman-...
[+] [-] talmand|10 years ago|reply
[+] [-] SeanDav|10 years ago|reply
The rewards are just too good and the downsides too easy to live with.
[+] [-] jbattle|10 years ago|reply
[+] [-] InclinedPlane|10 years ago|reply
[+] [-] talmand|10 years ago|reply
[+] [-] slg|10 years ago|reply
[+] [-] kartman|10 years ago|reply
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.
[+] [-] rayiner|10 years ago|reply
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.
[+] [-] chishaku|10 years ago|reply
"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."
http://criminal.findlaw.com/criminal-charges/fraud.html
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."
https://www.justice.gov/opa/file/839901/download
rayiner, given your legal background, do you consider this type of misrepresentation to be criminal fraud irrespective of what regulators have achieved to date?
[+] [-] cm2187|10 years ago|reply
[+] [-] kauffj|10 years ago|reply
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?
[+] [-] cm2187|10 years ago|reply
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.
[+] [-] nickff|10 years ago|reply
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.
[+] [-] anexprogrammer|10 years ago|reply
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.
http://www.theguardian.com/business/2015/aug/11/co-op-bank-s...
Other mutuals here were just as keen to play the big boy games. Same for share dealing and investment funds.
So where can a customer that gives a damn put his money?
How can that customer have any confidence at all that they'll be honest, ethical, solvent and numerate?
I see no choice at all on any of those measures.
[+] [-] philrapo|10 years ago|reply
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.
[+] [-] rhino369|10 years ago|reply
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.
[+] [-] harryh|10 years ago|reply
[+] [-] Retric|10 years ago|reply
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.
[+] [-] rm_-rf_slash|10 years ago|reply
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.
[+] [-] Kalium|10 years ago|reply
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.
[+] [-] TheOtherHobbes|10 years ago|reply
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.
[+] [-] inthewoods|10 years ago|reply
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.
[+] [-] TheSockStealer|10 years ago|reply
[+] [-] keketi|10 years ago|reply
[+] [-] chollida1|10 years ago|reply
http://www.wired.com/2009/02/wp-quant/?currentPage=all
It does a good job of explaining the intuition, behind the Gaussian Copula, and of course where it fell apart.
I submitted the below article a few days ago and I think at this point this topic can be considered a very dead horse.
https://news.ycombinator.com/item?id=11472094
[+] [-] jsprogrammer|10 years ago|reply
That article was submitted yesterday, when the US DOJ released a statement.
One day of light beating (didnt even see a link to GS' statement of facts) and this horse is 'very dead'?
[+] [-] bogomipz|10 years ago|reply
[+] [-] tma-1|10 years ago|reply
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.
[+] [-] epicureanideal|10 years ago|reply
[+] [-] nxzero|10 years ago|reply
Statement of Facts: https://www.justice.gov/opa/file/839901/download
[+] [-] joering2|10 years ago|reply
Them (example Hillary Clinton):
FBI will invite Ms. Clinton for an interview sometime next month.
You:
FBI raided Mr. Johns house and will jail him without bail until next week's scheduled interrogation begins.
Them (Goldman Sachs):
They agreed to pay a fee.
You:
Mr. Johns was sentenced to pay a penalty for his crime.
Is this really happening in the United States of America??
[+] [-] beloch|10 years ago|reply
[+] [-] harryh|10 years ago|reply
[+] [-] mtgx|10 years ago|reply
http://www.nytimes.com/2016/04/12/business/dealbook/goldman-...
This part is especially infuriating:
> 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.
[+] [-] malloreon|10 years ago|reply
Then realize solution to financial crimes is to put people in jail for 1 year for every multiple of the median yearly household income.
Steal $1M when the median income is $50K? 20 years. Steal $1B? Enjoy dying in prison.
[+] [-] chishaku|10 years ago|reply
"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."
https://www.justice.gov/opa/pr/goldman-sachs-agrees-pay-more...
Who may or may not do something about it?
http://www.opensecrets.org/industries/recips.php?cycle=2016&...
[+] [-] riprowan|10 years ago|reply
"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"
[+] [-] Osiris|10 years ago|reply
[+] [-] __abc|10 years ago|reply
[+] [-] xupybd|10 years ago|reply
[+] [-] known|10 years ago|reply
[+] [-] haberman|10 years ago|reply
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.
[+] [-] pasbesoin|10 years ago|reply
No jail? You fail.
[+] [-] tomp|10 years ago|reply
[+] [-] X86BSD|10 years ago|reply