Like you, I am shocked and appalled by what I've read about Goldman Sachs. To think that some punk is running around calling himself Fab Fabrice when everyone knows that's my nickname.
His real name is Fabrice Tourre and he's playing the stock role of rogue trader in this latest instalment of Bankers Gone Wild. So far, investors are spooked and Goldman shares have been pummelled. I think it's overdone. Not to underestimate the power of politicians or to defend well-fed bankers, but I just doubt that this brouhaha will do a lot of long-term damage.
What do we know about this supposed rogue? He writes a lot of e-mails to his girlfriend(s), saying that he doesn't really understand the investment products he invented and sold but he does know that they're "absolutely conceptual" - the product, in his words, of "intellectual masturbation."
As the poster child for the political campaign against Goldman, Mr. Tourre must be a disappointment to the antagonists. And the broader case against Goldman is about as flimsy.
You can rest assured that the U.S. Securities and Exchange Commission scoured the Earth for signs of wrongdoing at Goldman. The best they can come up with is the Abacus 2007-AC1 collateralized debt obligation.
The bank supposedly didn't tell the buyers of the CDO - Holland's ABN AMRO and Germany's IKB - that hedge fund Paulson & Co. allegedly stuffed it with garbage and shorted it. Paulson, of course, denies that it picked the mortgages that went into the CDO, although it doesn't mind allowing that it made $1-billion (U.S.) betting on its demise.
Goldman earned $15-million on the trade, a lot of bread for a couple of phone calls, but nothing compared with what Paulson made or the Europeans lost.
Even if it's true, where's the offence? Is it unethical? Maybe. Is it legally wrong? Doubtful. How can you allege a civil transgression when the victims are so quiet, despite supposedly having been taken for 10 figures. (ABN was bought by Royal Bank of Scotland, which had to be bailed out. IKB's fate was similar.)
Why are they quiet? Because they're big boys and they know they should have done more homework. Who invests a billion dollars without adequate due diligence?
What did Paulson know that ABN didn't or couldn't? Nothing. Would ABN have changed its mind if it learned that Paulson was betting on the CDO to fail? Of course not.
So why are ABN's well-paid bankers not hauled before a committee to answer hard questions about their failures?
Because this case isn't about standing up for the aggrieved investor; Main Street USA wants bankers to pay for their unbridled bonuses. The politicians have to heed that call but they don't really want to bite the hands that feed them tens of millions of dollars in campaign contributions every election. U.S. President Barack Obama alone got $1-million from Goldman employees.
If Goldman has damaged its reputation with clients, it will pay for it in the marketplace. Given the tear the stock was on - tripling from its October, 2008, low - it doesn't look as if the bank was losing clients or market share. Clients seem quite happy to do business with the bank.
The company's first quarter bears testament: net revenue up by about a third year over year; profit per share up 40 per cent; book value of $122 a share; return on equity of 20 per cent; Tier 1 capital of 15 per cent.
Goldman was also the top investment bank in the world in completed and announced mergers and acquisitions and, by and large, looks like a bank plenty of people want to deal with.
My guess, for what it's worth, is that Goldman officials will get spanked in public, the CEO might lose his job and the firm might pay some fines that look big on paper but are a trifle compared to the bank's earning power. Then the voters will move on to some other grievance and the politicians will follow them there.
The stock, closing at $153.04, a mere seven times earnings, picks up where it left off. It's impossible to predict where it'll be in five weeks or months but I'm willing to bet it's a lot higher in five years.