Vault's Careers Blog

Career advice and job search strategies for the modern careerist

Why the Goldman Sachs case is a Witch Hunt

with 5 comments


When I was an officer at NYMEX I had to get a Series 7 & here’s the problem that those of us who know the rules have with what has happened at Goldman… But first, allow me to give you a little background:

1. Goldman Sachs bundled sub-prime mortgages into mortgage backed securities and marketed them

2. The securities were sold to individuals, pension funds, other trading firms and Goldman’s own in-house traders

3. Two of Goldman’s in-house traders started to believe the housing market was going to drop and they made such a vociferous argument that they convinced their managers to allow them to start SHORTING mortgage backed securities, INCLUDING THEIR OWN.

4. When the bubble burst, the house accounts managed by those two traders made over a billion dollars

So the SEC is suing Goldman because the company made money by selling the securities to the public, then made money in their own account when the bubble burst. In the complaint, the SEC contends that even though Goldman knew there was going to be trouble, they kept selling these toxic bonds to the public. Yes, it looks bad but here’s the problem.

The SEC has VERY STRICT RULES that prohibit the sharing of information between a financial firm’s analysts and the traders. Why? Well think about this. Let’s say the analyst have put a deal together that is going to cause Microsoft stock to go up. If they told the in-house traders, they would all buy Microsoft stock before the deal happened and they would benefit from inside information. So they have what they call a “Chinese Wall” between the analysis side and the trading side of the business. It’s so rigorous that Analysts and Traders aren’t allowed to ride in the same elevators or eat in the same cafeteria for fear that a trader may overhear the conversations between two analysts.

Anyway, if Traders and Analysts ARE NOT ALLOWED TO SPEAK, how the heck is that Goldman Trader supposed to persuade a Goldman Analyst that his mortgage backed securities are about to go sideways & he should stop recommending them to the public? His job was to make as much money as possible by trading his house account. That’s it. He had a hunch, he bet his hunch & it paid off. And now the SEC is going after the poor guy as if he did something wrong.

It’s a public hanging in the interests of “headline justice”.

–Posted by Sean Carrington, Director of Technology, Vault.com

Sean Carrington was Chief Information Officer of the New York Mercantile Exchange (NYMEX) from 1999-2001.

**Update: Sean Carrington and Vault Finance Editor Derek Loosvelt had a substantive email debate over the merits of the Goldman case. Click here to read their discussion, which breaks down some of the key issues at stake in the case.

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Written by Linda Petock

April 19, 2010 at 8:25 am

5 Responses

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  1. Your are confusing some associated news with the SEC complaint. Suggest you read the complaint: it makes no mention of traders who may have been short. The legal issues concerns the directly involved parties.

    David Harper

    April 19, 2010 at 12:33 pm

  2. Did you defend the actions of Enron’s management too?

    To say G-S management cannot be held accountable for what has transpired is completely ignorant. While it may not have been illegal – thanks entirely to banking deregulation – it was definitely immoral. And one would have to be completely naive to believe in the “Chinese Wall”; it’s merely an ethnic slur.

    They are crying all the way to the bank. Wait – they are the bank.

    Elliot

    April 26, 2010 at 6:04 am

    • How is “Chinese Wall” in any way an ethnic slur? It’s a common term in banking and legal industries to refer to separation between between departments handling conflicting matters. It’s obviously a reference to the Great Wall of China and not even the most determinedly sensitive has made any credible claim to the contrary. Is “Herculean Effort” a slur against Greeks? Is “Dry as the Sahara” a slur against Egyptians?

      Though I do agree that anyone who thinks the fix wasn’t in at Goldman is an utter and complete tool.

      Rose

      April 28, 2010 at 9:52 pm

      • I did not mean “ethnic slur” to be a derogatory one. Phrases like this are throughout our culture – and some are derogatory. I meant it as an ethnic phrase, but got caught up in the hatred for what has happened to society over the past three decades.

        And I wholeheartedly agree about the fix and believe both parties need a major overhaul with independent infusion and no lobbying ties.

        Elliot

        April 29, 2010 at 5:56 am

      • Hi all,

        Thanks for your comments thus far on the issue. For those who are interested, Sean has added a link on the comment thread on the follow-up to this piece that he feels strengthens his case. Check it out here: https://vaultcareers.wordpress.com/2010/04/19/trading-opinionsin-the-news-understanding-the-goldman-case/

        Phil Stott

        April 29, 2010 at 7:02 am


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