From The Business Insider, Dec. 24, 2009:

The New York Times delivers a front-page expose on the original Goldman Sachs scandal: How the firm created derivatives (synthetic CDOs) to allow investors to bet on the housing market, sold the CDOs to clients who wanted to bet on additional housing market gains, and then went short the same CDOs because Goldman believed the housing market would crash.

The outcome, of course, was the same as it usually is: Goldman made a killing, on both the product origination fees and the proprietary bets.  Goldman's clients, meanwhile, got crushed.

One observer likens this to buying insurance on a house and then burning the house down:

“The simultaneous selling of securities to customers and shorting them because they believed they were going to default is the most cynical use of credit information that I have ever seen,” said Sylvain R. Raynes, an expert in structured finance at R & R Consulting in New York. “When you buy protection against an event that you have a hand in causing, you are buying fire insurance on someone else’s house and then committing arson.”

But is it really a scandal?

If you view Wall Street the old-fashioned way, yes: The firm sold its clients a product and then bet against it.  This allowed Goldman to make money two ways instead of just one: Product origination fees and trading profits, all at its clients' expense.

If you take a more realistic view of Wall Street, however, this is just an everyday reality.  Wall Street firms like Goldman sit between buyers and sellers, and they also buy and sell on their own behalf.  Every single transaction these firms conduct entails a conflict of interest: Everyone is always making bets, and someone is always winning and losing them.  It's just not obvious until later which party that is.

The way we suspect Goldman viewed its behavior in the housing scenario above is as follows:

• Clients are desperate for products with which to bet on the housing market

• We can help our clients by creating those products and get paid handsomely for doing so. 

• We're negative on the housing market, so we can use the products bet against the housing market.  If we're right, we'll make some money there, too.

Don't forget that the buyers of Goldman's CDOs were among the most sophisticated investors in the world.  These investors were paid to analyze the housing market and make smart investment decisions based on that analysis.  The investors did their analysis and concluded that the housing market was going to go up.  Goldman did its own analysis and came to the opposite conclusion.  But it was at least relatively a fair fight. ...

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More coverage from The Business Insider:

• Goldman blasts the NYTimes hit-job
• How Goldman screwed its clients in the housing collapse

President Obama will be meeting with some community bankers at the White House today.  As he did last week in his meeting with Wall Street's kingpins, the President will undoubtedly encourage the community bankers to lend more.

But first, he has some explaining to do: Specifically, why the government is doing everything it can to save Wall Street but is allowing smaller banks to fail--a double-standard that is presumably forefront in the mind of most community bankers.

Beyond that elephant in the room, the meeting will be a brainstorming session designed to figure out how to persuade the banks to start lending to small businesses again.

Part of the problem is that loan demand is down.  Part of the problem is that the banks are still preserving capital to protect against losses from old loans.  And part of it is that banks can currently make enormous profits from lending risk-free to the government, so there's little incentive to take on additional risk.

The real answer of what to do about it is likely "be patient."  Our debt problem took two decades to build.  We can't "deleverage" back to normal overnight.

See Also: Consumer Debt Burden Less Crushing Than It Was A Year Ago

Google and Apple are locked in a battle to become the "platform" upon which most future mobile applications are built.

So far, Apple has a big lead in this market--the integrated software and hardware iPhone dominates third-party mobile apps--but Google's strategy of giving software away for free to handset makers could allow the company to provide some serious competition.  The latter strategy, after all, is the one Microsoft used in the late 80s and early 90s to take share away from Apple, which then, as ever, was building integrated hardware and software devices.

But now Google appears to have changed its strategy, trying to have it both ways.

Over the weekend, Google confirmed that it is producing integrated hardware and software phones.  Specifically, it confirmed that it has distributed an Android-based phone to employees for them to provide feedback, presumably before selling the phone to actual consumers.

Plenty of questions remain...

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From The Business Insider, Dec. 10, 2009:

A few media outlets cheered the announcement that Bank of America was repaying its $45 billion of bailout money ahead of time.  Bank of America is now obviously healthy again, so it's time to celebrate, right?

Well, no.

The main reason Bank of America paid back the money was to get out from under the onerous pay caps that makes it harder to keep its people and attract a new CEO.  To make the payment, Bank of America had to take huge dilution at what a year ago would have been considered an appalling price.  Bank of America may be healthier than it was 9 months ago (maybe), but shareholders certainly didn't consider selling $19 billion of equity at $15 a share cause for celebration.

But aren't taxpayers better off now that Bank of America has paid us back? 

Not if you thought the control and pay restrictions TARP provided were a good thing.

What Bank of America has done is simply replace one form of taxpayer sponsored capital (TARP) with equity and another form of taxpayer sponsored capital--loans from the Fed.  Those loans carry super-low interest rates, so they'll help Bank of America make more money at taxpayer expense.  Those loans also, importantly, come with NONE of the restrictions that TARP does.

And taxpayers are on the hook...

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• These TARP paybacks are all about pay, pay pay
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From The Business Insider, Dec. 8, 2009:

Perception is reality.

So it doesn't matter what really happened when pay czar Kenneth Feinberg agreed to exempt a bunch of AIG executives from pay caps because they whined and threatened to quit over them. 

This decision just looks like yet another wimpy, lame move from a government whose policies with respect to Wall Street have defined wimpy and lame.

Ever since the waning years of the Bush administration, when Washington "service" became just another rung on the Wall Street career ladder, our government has gone out of its way to protect the interests of its once and future employer.

• Idiot bondholders--the folks who provided the money necessary to fund our debt binge--have been rescued to the tune of 100 cents on the dollar

• Massive, incompetent financial firms have been bailed out and nursed along

• Counterparties ready to take a major haircut on CDS contracts have been made completely whole

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• Meredith Whitney is still bearish, says the govt. has run out of bullets
• Ken Feinberg caves on pay caps for AIG

The DOW hit a new 2009 high yesterday, continuing to defy those who have been predicting collapse since the lows in March.

The market's charge has brought the asset management business back to life--many hedge funds and mutual funds will make a killing again this year--but it has also created a major headache for fund managers.

Why?

Because in the fund management business, you get fired for missing rallies just as fast as you get fired for losing clients' money.

This "career risk" is causing fund managers to pile into the market even as valuations and history suggest a major correction may be looming.

Earlier this week, John Hussman of the Hussman Funds said he sees an 80% chance of a major market crash over the next year--a startling prediction for a fund manager who normally goes to great lengths to hedge his bets.

Morgan Stanley is arguing that the fun is over and that the next few years will see the market move sideways at best. SocGen, meanwhile, continues to predict global economic collapse.

In other words, the market is still climbing the "wall of worry." For the sake of investors who are just beginning to get their confidence back after getting clobbered for two years, let's hope it continues to do so.

See SocGen's logic about the global economic collapse.

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From The Business Insider, Dec. 1, 2009:

When Dubai wobbled last week, everyone rushed to the Internet to await confirmation of the imminent bailout. 

And they saw what they wanted to see!

The airwaves (and pipes) were clogged by a steady stream of pundits declaring that there was no way Abu Dhabi would let Dubai go bust.

Why not?

Because if Dubai went bust, then...   well... then the stock market might go down for a while!  Then the idiots who loaned Dubai World money to build huge islands and buildings in the desert would have to pay for their stupidity!  Then the buildings' ownership would change in a debt restructuring--the kind that happens every day in a normally functioning capitalist economy! 

INCONCEIVABLE!!!

Remarkably, against this tidal wave of panic and entitlement, Abu Dhabi stood its ground, refusing to reward idiocy by throwing more good money after bad.

And lo and behold... the world's stock markets have stabilized and Dubai is having civilized conversations with its lenders, the same way folks who have had to restructure their debts have had since the dawn of time.

In the United States, meanwhile, Messrs. Bernanke and Geithner no longer have to assure us that they will never let a big bank fail--because we understand that this guarantee has basically been written into the United States constitution.  The LESSON OF LEHMAN BROTHERS has been learned, and the lesson is this:

We have become a nation of mamma's boys.

Specifically, after 25 years of debt-fueled consumerism, we have become accustomed to instant gratification and instant fixes, led by politicians and regulators terrified of having to tell us the harsh truth:

We lost our discipline. Getting it back will make life tougher for a while.  But it will make us stronger in the end.

It wasn't always this way.  In fact, the era of prosperity that we've just enjoyed was made possible by a leader with a huge spine--one who, unlike our current financial and economic leaders, wasn't afraid to risk his job (and enormous public pressure and disapproval) to do the right thing.

Who was that leader?...

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After two days of silence and refusals to talk to the police, Tiger Woods finally published a statement yesterday.

In it, he took responsibility for ramming his car into a tree, but he didn't address several key questions about what happened.

Specifically, he did not put to rest speculation that his wife Elin may have contributed to the crash by smashing the car with a golf club while he was driving away--a story that would appear to contradict some of what Elin told the police.

For understandable reasons, Tiger wants to keep the details of what happened a "private matter."

But this is no longer a private matter. Now that the police are involved, it's a public matter. And charges are reportedly pending.

Until the questions about the crash are answered, Tiger will remain in the headlines. This will continue to hurt his reputation and make his sponsors more nervous than they already are.

No matter how embarrassing the details are, Tiger and his wife would be better off revealing them themselves--now, once and for all.

Suddenly, it's the least attractive job in the country.

Bank of America has been searching for a new CEO for months, ever since battered Ken Lewis announced that he was stepping down.  But no one wants the job. 

Why not?

Because they'll have to listen to annoying government bureaucrats vilify them all day, says analyst Dick Bove of Rochdale Securities.  Because they'll be unable to hire top people because of pay constraints.  Because they'll be forced to chop up the company instead of reaping the rewards of scale.  Because they'll be limited to a pay package that would make the average dime-a-dozen Wall Street managing director go bitching to his boss about how he was being underpaid.

All of which means, Bove says, that Bank of America's board once again looks incompetent. ...

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From The Business Insider, Nov. 19, 2009:

The White House finds itself in a pickle: How to extend the TARP bank bailout without so enraging voters that incumbent Dems get the heave-ho next year.

And here's one creative solution on the table: Use the rest of the TARP to reduce the national debt!

Doesn't that sound good?

Well, of course it does.  Except that it's ridiculous spin.  The government borrowed money for the TARP.  Using what remains to "reduce the national debt" would simply mean giving our lenders (some of) their money back.

Meanwhile, however, other legislators are desperate NOT to return the TARP money to lenders but to use it for additional stimulus--this time of the allegedly job-creating variety.

David Cho, Michael D. Shear and Lori Montgomery, WaPo: The Obama administration is poised to extend the life of the highly unpopular $700 billion financial bailout and, to display a commitment to fiscal responsibility, is planning to use much of the leftover funds to reduce the national debt, government sources said.

Administration officials are grappling with how best to announce the extension of the Troubled Assets Relief Program at a time when the economy is struggling and the unemployment rate is at its highest point in 26 years. The officials are hoping that by putting roughly $200 billion toward paying down the $12 trillion national debt, they could mitigate the political fallout, the sources said.

No final decision about the fate of the bailout has been made, and officials are keenly aware that their preferred course contains risks.

Keep reading >

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