How Goldman Double Dealt California Bonds
Goldman Sachs had earned about $25 million in underwriting fees from California issues in 2008. That was till it switched roles from a investment banker to a hedge operator, under its new CEO, Lloyd Blankfein.
Today investment banking brings in only around 11% of Goldman earnings, while trading , namely hedging, betting, swapping and shorting, accounts for 75% of the banks bumper profits of $13.4 billion.
During the summer of 2008, Goldman advised and helped in first promoting and then shorting California, New Jersey and Wisconsin municipal bonds. As per ProPublica a NY based non-profit, Goldman in a 58 -page confidential report to select institutional clients, advised the shorting of California’s municipal bonds that it had promoted and had underwritten at the time of issue. Citing the bankruptcy of Bay Area city of Vallejo as evidence of “worsening fundamentals of municipal finances” it advised hedging and buying of CDS against municipal bonds issued by California.
The issue here is not an analyst evaluation of a "'munibond" or a country debt, which anyway could be shaky in the world’s best run democracies, as elected politicians cannot take the best business decisions, like selected corporate leaders.
In question is the ethics and principles of an underwriter and promoter of a bond, to short it a few months after issue. The right of independent hedge fund managers like Paulson to pass a decree, with no statutory approvals, on any public issue, and then slaughter it at the future markets. The ability of a few hundred odd brokers and dealers at the ICE or NYMEX commodity exchange to drive down prices of any public issue or commodity, by issuing a CDS and profit from the unusual volatility.
The ICE cartel, of big banks and big oil, where Goldman is a lead member has been driving a mindboggling $7 trillion in CDS contracts per quarter, as per their website.
What chance does a corporate, a municipality, or a nation have against the punters who have been driving once stable commodities like oil up and down the charts since the last decade.
Surely the regulators at the CFTC, FSA, SEC, Fed and the Treasuries have themselves to blame, for the way they have allowed hedge funds to move into the driving seat of the world’s economy.