Goldman Sachs earned 600 million Euro to help Greece fudge the numbers

Stunning revelations in an article on Bloombergs website.

Basically Goldman Sachs received 600 million Euro (= RM 2.4 Billion, RM 2,400,000,000.00!) to structure a deal enabling Greece to fudge the numbers to meet the European Union requirements.

Greece’s secret loan from Goldman Sachs Group Inc. (GS) was a costly mistake from the start.

On the day the 2001 deal was struck, the government owed the bank about 600 million euros ($793 million) more than the 2.8 billion euros it borrowed, said Spyros Papanicolaou, who took over the country’s debt-management agency in 2005. By then, the price of the transaction, a derivative that disguised the loan and that Goldman Sachs persuaded Greece not to test with competitors, had almost doubled to 5.1 billion euros, he said.

Papanicolaou and his predecessor, Christoforos Sardelis, revealing details for the first time of a contract that helped Greece mask its growing sovereign debt to meet European Union requirements, said the country didn’t understand what it was buying and was ill-equipped to judge the risks or costs.

“The Goldman Sachs deal is a very sexy story between two sinners,” Sardelis, who oversaw the swap as head of Greece’s Public Debt Management Agency from 1999 through 2004, said in an interview.

Goldman Sachs’s instant gain on the transaction illustrates the dangers to clients who engage in complex, tailored trades that lack comparable market prices and whose fees aren’t disclosed.

Goldman Sachs DNA

“Like the municipalities, Greece is just another example of a poorly governed client that got taken apart,” Satyajit Das, a risk consultant and author of “Extreme Money: Masters of the Universe and the Cult of Risk,” said in a phone interview. “These trades are structured not to be unwound, and Goldman is ruthless about ensuring that its interests aren’t compromised -- it’s part of the DNA of that organization.”


Barry Ritholtz writes about this case, and another on in the US, and warns about these very difficult to understand financial structures, and comes up with “The Inviolable Rules for Dealing with Wall Street”:

1. Reward is always relative to risk: If any product or investment sounds as if it has lots of upside, it also has lots of risk. If you can disprove this, there is a Nobel Prize waiting for you.

2. Asymmetrical information: In all negotiated sales, one party has far more information, knowledge and experience about the product being bought and sold. One party knows its undisclosed warts and risks better than the other. Which party are you?

3.Good advice is priceless: I know, easier said than done. The Street buys the best legal talent, mathematicians and strategists that money can buy. Make sure you have expert advisers and lawyers working for you as well.

4. Motivation: Always ask, what is the motivation of the outfit selling me this product? Is it the long-term stability and financial health of my organization — or their own fees and commissions?

5. Legal documents are created to protect the preparer (and its firm), not you or yours: In the history of modern finance, no large legal document has worked against its drafters. Private placement memorandums, sales agreement, arbitration clauses — firms use these to protect themselves, not you.

6. Performance: How significantly do the fees, interest rates commissions, etc., have an impact on the performance of this investment vehicle over time? Determining for yourself what the actual cost of money is will avoid more heartache in the future.

7. Shareholder obligation: All publicly traded firms (including investment banks and bond underwriters) have a fiduciary obligation to their shareholders to maximize profits. This is far greater than any duty owed of care to you, the client. Always ask yourself whether this new product benefits the shareholders or your organization. (This is acutely important for untested products.)

8. Reputational risk: Who suffers if this investment goes down the drain? Who gets fired or voted out of office if this blows up? Who suffers reputational risk?

9. Keep it simple, stupid (KISS): It’s easy to make things complicated, but it’s very challenging to make them simple. The more complexity brought to a problem, the greater the potential for things to go awry — not just astray, but very, very wrong.

10. There is no free lunch: Repeat after me: There is no free money, no riskless trade, no way to turn lead into gold. If you remember no other rule, this is the one that will save your hide time and again.

 The only positive thing in this whole case (and many others as well) is that there are organisations that are actively trying to uncover what exactly happened:

"Bloomberg News filed a lawsuit at the EU’s General Court seeking disclosure of European Central Bank documents on Greece’s use of derivatives to hide loans."

Where has the US retail investor gone?

Excellent article from Barry Ritholtz in The Washington Post and highly relevant for the Malaysian situation. The message is clear, don't follow the US example, all the new inventions in financial engineering (derivatives, high frequency trading, etc) have not done anything good. In the contrary, confidence of retail investors is at a low, and they have gone home. Many people in the US believe the game is rigged against them, surely this also holds in Malaysia.

Lots of folks are wondering what happened to the Main Street-mom-and-pop retail investors. They seem to have taken their ball and gone home. I don’t blame them for feeling put upon, but it might be instructive to figure out why. Perhaps it could even help us determine what this means for risk capital.

We see evidence of this all over the place: The incredibly light volume of stock trading; the abysmal television ratings of CNBC; the closing of investing magazines such as Smart Money, whose final print issue is on newsstands as it transitions to a digital format; the dearth of stock chatter at cocktail parties. Why, it is almost as if America has fallen out of love with equities.

Given the events of the past decade and a half, this should come as no surprise. Average investors have seen not one but two equity collapses (2000 and 2008). They got caught in the real estate boom and bust. Accredited investors (i.e., the wealthier ones) also discovered that venture capital and private equity were no sure thing either. The Facebook IPO may have been the last straw.

What has driven the typical investor away from equities?

The short answer is that there is no single answer. It is complex, not reducible to single variable analysis. This annoys pundits who thrive on dumbing down complex and nuanced issues to easily digestible sound bites. Television is not particularly good at subtlety, hence the overwhelming tendency for shout-fests and silly bull/bear debates.

The factors that have been weighing on people-formerly-known-as-stock-investors are many. Consider the top 10 reasons investors are unenthused about the stock market:

1 Secular cycle: As we have discussed before, there are long-term cycles of alternating bull and bear markets. The current bear market that began in March 2000 has provided lots of ups and downs — but no lasting gains. Markets are effectively unchanged since 1999 (the Nasdaq is off only 40 percent from its 2000 peak).

The way secular bear markets end is with investors ignoring stocks, enormous P/E multiple compression and bargains galore. Bond king Bill Gross and his Death of the Cult of Equities is a good sign we are getting closer to the final denouement.

2 Psychology: Investors are scarred and scared. They have been scarred by the 57 percent crash in the major indexes from the 2007 peak to the 2009 bottom. They are scared to get back into equities because that is their most recent experience, and it has affected them deeply. While this psychological shift from love to hate to indifference is a necessary part of working toward the end of a secular bear, it is no fun for them — or anyone who trades or invests for a living.

3 Risk on/risk off: Let’s be brutally honest — the fundamentals have been utterly trumped by unprecedented central bank intervention. While this may be helping the wounded bank sector, it is not doing much for long-term investors in fixed income or equities. The Fed’s dual mandate of maximum employment and stable prices seems to have a newer unspoken goal: Driving risk asset prices higher.

When investors can no longer fashion a thesis other than “Buy when the Fed rolls out the latest bailout,” it takes a toll on psychology, and scares them away.

4 Poor returns across all asset classes: Investors have been burned by a series of booms and busts: dot-com stocks (2000); real estate (2006-?); equities (2008-09); even gold (2011-12) is significantly off its 2011 highs. Perhaps after these experiences, too many investors have decided that investing isn’t such a great deal after all.

5 De-leveraging: The marginal buyers are out of the market as they de-leverage excess credit consumption. There is an entire cohort of investors who are no longer playing with equities. Indeed, they have been priced out of all investment options as they rebuild their personal balance sheets.

6 Wall Street scandals (Part I): First the market gets blown up by bankers, and then Wall Street is rescued. Meantime, Main Street mostly got nothing but the invoice for the bailouts. If you don’t think the credit crisis and Great Recession have moved people to stay away from the casino, you are kidding yourself.

Many people believe the game is rigged against them. They aren’t conspiracy nuts, they are merely observing what has been going on since 2007. At the very least, it appears that bankers have corrupted the political process for their own gains. Investors are wondering why they should participate in such an absurd environment.

7 Trendless economy and markets: The economy has been operating just above stall speed. Manufacturing has been strong, employment has not, wages are flat and retail spending unremarkable. This soft economy does not get investors fired up about putting risk capital to work. And a range-bound market simply makes trading too challenging for most participants. Paying fees for zero returns, as we saw in 2011, isn’t very encouraging, either.

8 Bank scandals (Part II): Think about the recent scandals at various banks and investment firms. MF Global, Peregrine Financial, Knight Trading, Standard Charter and JPMorgan Chase — yet another set of factors that are persuading investors to stay away. Theft and incompetency appear rampant, and ethical transgressions seem to be part of ordinary business. Why on Earth should anyone entrust hard-earned money to those guys?

9 High frequency trading: Investing is a zero-sum game. The gains that the high-frequency traders have taken come right off the bottom line for anyone with a pension or retirement account. The complexity may be beyond the average investor’s comprehension, but the impact is not. People can smell when they are being ripped off, and you can blame the exchanges and high-frequency trades for that.

10 ETFs: Some people seem to have wised up to the stock-picking game. It was certainly fun while it was working during the rampaging bull market, but that has been over for years. When correlations go to 1, stock picking no longer matters. Add to that the advantages of lower costs, fees, taxes and turnovers, and the traditional stock-picking approach looks like a fool’s errand.

Does the average Main Street mom-and-pop investor think these things matter? I believe they do, and that is why so many investors have voted with their feet.

4 Major Secular Bear Markets, Warren Buffett is buying

http://www.ritholtz.com/blog/2011/11/4-major-secular-bear-markets-1900-2011/

"There are three issues worth noting here plus one important caveat:

1. The long 10-20 year secular bear moves seem to have lots of major rallies and sell offs; the ups and downs are intense, but make little in the way of net progress. After 15 years, the average secular bear is essentially unchanged.

2. The roller coaster ride leaves investors psychologically exhausted. They come to forget the good times of so long ago, and believe there is no way out of the morass. Naturally, they are reluctant to believe in the new bull market once it begins.

3. The major bottom seems to occur about halfway through; this implies that the March 2009 lows will not be revisited (note I only wrote IMPLY and not guarantee or forecast!)  If we look at the current Bear versus the ’66-’82 (with lows like ’73-’74), it suggest that 8500-9000 on the Dow is possible, but barring another crisis 6500 is much less likely. And it also suggests that the next secular bull might begin around 2016-18.

Now for the caveat: We have but one century of data, and within that 100 year span, only four examples of long term secular bear markets. We really need 500-1000 years of data, 20-40 secular bears during the era of modern capital markets. That would allow us greater confidence that these four patterns aren’t merely coincidences.

See you around 2900 to validate the data . . ."

The good news is that if the above graph is an indication, the secular bear market might soon be over in the US, which has implications for the Global share market as well. But the end of the bear market also might still be a few years away. 

Warren Buffett has started to buy in a pretty big way. Getting the timing right is simply impossible, but in general when he buys there is profit to be made, although it might be on the horizon, and there might be moments in the future where shares are cheaper.

Buffett Broadens Portfolio by Spending $23.9 Billion

http://www.bloomberg.com/news/2011-11-07/buffett-broadens-portfolio-by-spending-23-9-billion-in-quarter.html

"Warren Buffett’s Berkshire Hathaway Inc. (BRK/A) invested $23.9 billion in the third quarter, the most in at least 15 years, as he accelerated stock purchases and broadened the portfolio beyond consumer and financial-company holdings."