Friday, May 21, 2010

More Trouble for Goldman – The Wolf at the Door

On Wednesday, The New York Times ran a long, devastating article about Goldman Sachs – “Clients Worried About Goldman’s Dueling Goals.”  The article states that “ a former Goldman partner, who spoke on condition of anonymity, said that the company’s view of customers had changed in recent years.  Under Lloyd C. Blankfein, Goldman’s chief executive, and a cadre of top lieutenants who have ramped up the firm’s trading operation, conflict avoidance had shifted to conflict management, this person said.  Along the way, he said, the firms’s executives have come to see customers more as competitors they trade against than as clients.”

One of the episodes the article cites as an example of Goldman treating its customers badly involves a CDO called Timberwolf.  Goldman underwrote this $1 billion CDO in March 2007, and “within months” the security had lost 80% of its value.  Bear Stearns had bought $300 million for some funds it was managing, and this loss generated a lot of attention.  Goldman, though, had taken a bet that Bear’s share price would fall (the article does not specify whether Goldman sold shares short or used derivatives).  Bear ,of course, ended up failing and swallowed up by J.P. Morgan Chase with Federal Reserve assistance a year later.

This caught my attention since Timberwolf sounded like it might be related to the Greywolf CLO that Goldman put into the Abacus deal.  In fact, they are related.

Matthew Goldstein of Reuters has been writing about this.  As he writes in an April 24 article –  “Abacus might have had other benefits for Goldman” – Greywolf Capital Management of Purchase, New York, is an “ management firm founded by a group of former Goldman distressed bond traders.”  Goldman underwrote the Greywolf CLO for the firm in January 2007.  The article explains that this security “was a $502 million collateralized loan obligation, a complex bond backed by debts often used to finance corporate buyouts. The deal was one of the first complex securities put together and managed by Greywolf, which later went on to do a $1 billion CDO backed by mostly subprime assets called Timberwolf 1.”

The SEC has not charged Goldman with doing anything wrong by putting Greywolf CLO into Abacus.  But whatever the legalities, it is another part of the emerging evidence against Goldman in the court of public opinion.  It is not clear whether Goldman did anything that violated securities laws, but it is losing its reputation.  It can always pay a fine, but, if it wants to continue to have customers and not just be a hedge fund, it may find the reputational hit very costly.

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