Sunday, November 1, 2009

Goldman Sachs may not limbo under FINRA's Suitability rules nor Fiduciary duty owed Pension plans

Update 1 - Dec 24, 2009.
See end of article.

November 1, 2009.
Today McClatchy News reported "How Goldman secretly bet on US housing crash"

However, ALL securities firms owe most customers a fiduciary duty as well as the protections afforded by the "Suitability" and "Know your customer" rules.

When it comes to recommendations to institutional customers the link below may provide plaintiffs' (see list at end) counsel with more footing to show that investments appear:

1) solicited by Goldman, compared to the likelihood that a customer banged on Goldman's door and demand a certain, specific derivative RMBS or CDO security? Not likely.

2) such solicitation requires a Suitability determination at the time of sale with additional duties required for institutional accounts - not with standing liability-shifting claims of "sophistication."

3) disclose information from Goldman in toto - whether from Goldman's sales team OR Goldman's proprietary trading. At some point as was reported in today's McClatchy news Goldman's CFO Mr Viniar approved both the hedging /shorting of derivatives of RMBS including the sub prime Alt-A species AND the contemporaneous solicitation, recommendation and placing of orders for sale to public customers.

Would Goldman's public customers have been informed of triple AAA ratings assigned to these securities - very likely. But would Goldman's public or proprietary sales desks have been as willing to AND inform AND provide the link to such caveats as the S&P Ratings Direct alert "Who will be left holding the bag" in when?
September 2005, yes 2005.

Who Will Be Left Holding The Bag?
Beth Ann Bovino, New York (1) 212-438-1652;
Table Of Contents
More Creative Lending
Who Holds The Mortgages?
September 12, 2005

Excerpt - the first paragraph:
It's a question that comes to mind whenever one price increase after another—say, for ridiculously expensive homes—leaves each succeeding buyer out on the end of a longer and longer limb: When the limb finally breaks, who's going to get hurt?

In the red-hot U.S. housing market, that's no longer a theoretical riddle. Investors are starting to ask which real estate vehicles carry the most risk—and if mortgage defaults surge, who will end up suffering the most. To one degree or another, it's everyone associated with those people on the end of the limb. In real estate, that means investors in the riskiest private-label pools, along with banks, insurers, and other holders of "creatively" financed loans, such as interest-only mortgages that are nearly as big as the purchase price of a property.

Said orders require a supervisors' blessing, then subsequent internal compliance and audit departments review and blessing again...really?

4) How, why, who and which derivatives were held by Goldman for its own proprietary trading accounts compared to those they decided to actively market and sell (perhaps from the same inventory) to customers would be useful; as well as the hedging for or against same. Compared also to those Goldman held for itself but sold and distributed similar securities around the globe.

5) Whether GS informed, suggested or as equally strongly recommended its customers hedge investments; compared to equally available derivative and securities risk mitigation strategies it might suggest to these and other customers as in paired trading or market neutral strategies.

6) In the absence of 6 - was it because GS could or would know that additional buyers of CDS insurance would cause the cost of same to increase...

7) so how was GS able to, much earlier than virtually the entire market and field of competition, divine and effectively trade and hedge for its proprietary accounts that the housing market would tank? It clearly points to the value of darkness and this. Like the Rothschild's couriers of over a hundred years ago - ADVANCE INFORMATION is best.

So was it the vaunted Goldman network effect of Goldman alums who serve/d in the US Treasury, or for another alum who during the relevant period served as a director on the board of Countrywide? Muckety maps (accuracy not verified) reflects the connections here (note BELOW THE MAP - the current senior adviser post where?) Goldman.

8) What is or was or should be the fiduciary duty Goldman owes/d to public customers and the investing public? See FIDUCIARY DUTY OWED TO ERISA PLANS BELOW.

What is or was or should be the priority of interests - was it first and only Goldman's traders and executives, then shareholders, partners, non-partner employees, counterparties as in LLCs or LLPs off shore and domestic and bringing up the rear AND last - public customers?

It's often useful to see if the salespeople were themselves in the moving or storage business when it comes to eating a little home cooking - did they or their families own the same types of derivatives they were actively unloading, recommending, soliciting to reasonably reliant public customers? Or were they assiduously avoiding or effectively hedged against or short same? Or was it just plain old coincidental 85 Broad luck?

9) What compensation and bonus arrangements and promotions - in effect ALL hard and soft emoluments, oft legal levers of behavior were dangled over the heads and wallets of certain GS employees?

10) Would we like to know the securities lending activities (at the security level detail) of Goldman related to certain counterparties including others in the TBTBATF (Too big to be allowed to fail club) formerly known as only the Too Big to Fail club as well as AIG and Lehman.

The securities lending market like peanut butter goes with chocolate contains VERY valuable market color on the short side. The NYSE and other open markets, are fully disclosed sources of color primarily on the long side; with the distinction that they only provide same on registered securities. In the darkness - private contracts, private placement and listed, and OTC securities; registered and unregistered can be pledged, negotiated, loaned and borrowed under the legal cover of darkness in securities lending activities; all risk capital to be sure BUT for the sole purpose of profit for the house; rarely does a public customer know enough to demand a piece of the fruit.

11) Last, despite the hard questions, intrigue and allegations - perhaps Goldman is, was and will be THAT good - showing that when you have real skin in the game - you will act as an owner to PRESERVE CAPITAL as opposed to a renter or manager of OPM (other peoples' money). After all the math of recovery to break even is made exceedingly more difficult when a 100% gain is required to offset a 50% loss.

Last two points
The following suggests the Goldman spokesman believes there was an "equivalent" understanding, access, awareness and competent independent analysis of RELEVANT information:

A Goldman spokesman, Michael DuVally, said that the firm decided in December 2006 to reduce its mortgage risks and did so by selling off subprime-related securities and making myriad insurance-like bets, called credit-default swaps, to "hedge" against a housing downturn.
DuVally told McClatchy that Goldman "had no obligation to disclose how it was managing its risk, nor would investors have expected us to do so ... other market participants had access to the same information we did."

(So were the questioned trades placed on an agency or principal basis?)

When it comes to the fiduciary duty owed to certain ERISA plans, or similar plan's assets - GOLDMAN - LIKE ALL OTHER SECURITIES FIRMS - OWES THAT DUTY TO ITS CUSTOMERS FIRST. It would appear to apply to: as reported by McClatchy:
Several pension funds, including Mississippi's Public Employees' Retirement System

California's huge public employees' retirement system, known as CALPERS

New Orleans' public employees' retirement system, an electrical workers union and the New Jersey carpenters union

Ambac Assurance purchased $923 million of Goldman's bonds; the Teachers Insurance and Annuities Association, $141.5 million; New York Life, $96 million; Prudential, $70 million; and Allstate.

Of course, all these and other parties' matters resolution depend on the facts and circumstances on the ground at the time.

The NY Times ran this article Dec. 24, 2009 - just in time for a little something under the tree - Merry Christmas right?

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