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Anger at Goldman Still Simmers

By GRETCHEN MORGENSON, The New York Times

Published: March 25, 2012

Copper River relied on Goldman to handle its negative bets, known as short sales, in compliance with securities laws. These regulations require that before a short sale can be made, the shares must be borrowed; Mr. Cohodes said his fund had paid Goldman approximately $100 million to borrow shares over many years.

In his testimony, Mr. Cohodes said he and his partners at Copper River had even come to wonder if Goldman had in fact borrowed the shares for the firm. Without the shares, Copper River faced losses, while Goldman could have come under regulatory scrutiny.



Along with a handful of traders at smallish firms, Goldman’s securities lending unit has been cited by regulators for lapses. In 2010, the S.E.C. sued Goldman on accusations that it “willfully” had failed to preborrow shares as required for its short-selling clients in January 2009, shortly after Copper River went out of business. The improprieties involved 385 short sales in which the firm had not located shares for its brokerage clients to borrow.

Goldman paid $450,000 to settle the case without admitting or denying the accusations.

Failing to borrow shares on behalf of customers is illegal because of concerns about market manipulation. But it can also leave a brokerage firm’s client who is short a stock dangerously exposed to an escalating price in the shares. If a stock shorted by an investor began to trade higher and the shares were not borrowed, closing out the transaction would require the fund to buy them in the open market. That could propel the already rising price of the shares even higher, adding to the costs of the trade.

On the Meaningless of Contracts and the New Optionality

Yves Smith, Naked Capitalism

Monday, March 26, 2012

With a rise in an options-based view of business, it isn’t hard to see how a pernicious dynamic sets in. It used to be that only occasional scumbags would behave this way, and you’d write it off as bad luck and a reminder to do a decent amount of due diligence on new customers. But when this sort of behavior becomes common, the cost of doing business escalates since no one can trust anyone’s commitments. You can see this now in the way many types of contracts have changed. It used to be possible to do business with a short agreement. In many fields, they’ve now become excruciatingly long, since the odds of them being litigated is correctly seen as higher, so nailing down all sorts of possible outcomes is more important. And longer agreements means more protracted negotiations. It amounts to a tax on commerce.

And this pattern is particularly devastating to small businesses. It’s comical to see the Administration talk up the need to help entrepreneurs yet gut the rule of law to help banks.



We can see the damage of the breakdown of the norms of commerce. The private label securitization market, which functioned fairly well when originators and servicers acted in accordance with their agreements with investors, is now dead. The securitization market, which was 60% private label prior to the crisis, is now effectively 100% government guaranteed (there was all of one private label deal last year). Various reform proposals have been suggested; some have been well thought out enough that past investors reacted positively. But of course, the sell side nixed anything far-reaching enough to make a real difference. The investors I know say there won’t be a private label securitization market ex root and branch changes for at least ten years.

So it looks like Marx is being proven correct, that capitalism sows the seeds of its own destruction, although not by the route he envisaged, that of a worker revolt. Instead, it comes about via the capitalists turning on each other to try to secure an even better deal.

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