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.

Well, that kind of sucked the fun right out of it.  At least I got to sing Bill Orange.

Last Night’s Results-

Tonight’s Action-

UConn should have no trouble with Penn State, nor Notre Dame the Bonnies.  We root for the ‘Zags because TheMomCat likes their name.

Hey, could be uniform color.

Are the wheels coming off Formula One?

It would be irresponsible not to speculate.  All is not well in Ecclestone land.  His agreement with the Formula One Teams Association expires next season and despite sweetheart deals to keep Red Bull (easily the most financially committed Team sponsor) and Ferrari (some would argue the most historic marque) in line and claims to have a majority of teams in favor of a new arrangement, dissatisfaction is rampant among those getting the shaft and his attempts to raise $10 Billion in new capital through an IPO are stalling in a bad economy with even his pets refusing to invest and tracks looking for ways out of their unprofitable contracts.

Ferrari faces it’s third or fourth uncompetitive season in a row, Mercedes is about ready to bolt, and the field fillers are finding the Washington Generals too expensive losers.  Renault has never been happy and is distancing itself as fast as its contracts allow even though they produce what is probably the best and most reliable power plant.

And the cars are U-G-L-Y ugly.

Lotus Renault had an overnight fire that destroyed its hospitality suite and damaged its garage.  Raikkonen (whom I think is not having a bad return from retirement compared to Schumacher) and Kovalainen have 5 grid penalties for various violations.  It is cloudy and hot at Sepang.

• Formula One 2012: Sepang Qualifying
• Formula One Official Site
• Speed Racecast

Repeats @ 3 pm today and Noon Tuesday.

Pretty tables below.

Women’s College Hoopies is one area where I am intensely partisan- Lady Huskies all the way.  Therefore I’ll be rooting against Stanford in the nightcap simply because they’re a threat (also they don’t post their overall record which is a pain in the ass).

Likewise I’m a Big Easter and the latest defections, despite being teams I would ordinarily favor, have only hardened my antipathy toward the ACC and it would be a pleasure to see St. John’s, which has little enough to brag about since the Carnesecca Sweater hey days kick some Duke.

Last Night’s Results

Tonight’s Action-

Today’s early games are on ESPN.  Due to far eastern Formula One blogging I think I’ll mostly nap.  Make your own fun.

I hope I’ll be a little more coherent tomorrow but these far east starts on top of March Madness Hoops and the time change thing leave me a little wonky and disoriented.

The major competition story is that Scuderia Marlboro UPC has a slow car, severely lacking in downforce.  Maranello is distinctly disappointed and while Alonso is making the usual nothing to see here noises; Massa, who’s career at Big Red hangs by a thread, has asked for and gotten an entirely new chassis, tuned just for him, which is no better.

Mercedes seems poised to take over the third team spot and has some kind of fiddly aero bit reminiscent of the F-Duct that doubly reduces drag when activated in conjunction with the Drag Reduction System everyone uses and it has been ruled legal.  So far.

Red Bull really is handicapped by the changes to the blown diffuser rules and are not nearly as dominant though they are easily the second best team and are much better at race management than McLaren who still suck.

Sepang is hot and wet.  Even odds that they have to break out the Inters or Wets at some point, though with track temperatures in excess of 91 Farenheit the prescribed Pirellis are the Hards and Mediums with about 1.7 seconds a lap between them.  The Mediums have shown a tendency to lock up under heavy fuel in race start trim.  Sepang is rated a Medium to High speed track, flat with 15 turns, as opposed to Albert Park which is a bumpy road course rated Medium to Slow.

Bernie Ecclestone (aka CVC) is looking to cash out of Formula One via IPO, orchestrated by none other than those paragons of Wall Street virtue, Goldman Sachs.  The Formula One Team Association (everyone except Red Bull and Ferrari) is not altogether happy about this concept.

• Formula One Official Site
• Speed Racecast

Tomorrow’s race starts at 2 am for GP2, 3:30 am for the start.

It’s hard to get enthused about tonight’s games.  Richard has no interest in the tournament now that MSU is out and made a point of telling me it was the worst game they played all season (I wouldn’t know).

This is the Cinderella side of the bracket and any real upsets will come tonight, but I don’t expect any.

Oh, and Sepang Qualifying at 4 am on Speed.

Last Night’s Results-

Tonight’s Action-

If you’ve never been to Syracuse you may not know it’s built over a great salt dome.  This song from 1912-13 is kind of midway between Bill Orange from 1899 and Down the Field from 1914 and was originally part of a musical, not a fight song.  Oddly enough there are no YouTubes I could find.

It’s distinctly possible that the Orange could go down tonight because they’re not that good a team and their 7 foot center, Fab Melo, is still under suspension.  Plus they’ve never, ever been able to shoot fouls in the Boeheim era.

Altogether it’s been a tough year, they’ve had a Paterno-esque molestation scandal with the assistant head coach, Boeheim has always hated his job, and they’re pulling out of the Big East because the Administration would rather have a Throwball program that sucks than a Basketball team.

They are my sentimental favorites, but you don’t bet money on sentiment.  Armando, who has been consistently wrong this season, gets to see his beloved ‘Gators go down in flames tonight so don’t expect any charity from him tomorrow.  His predictions are here.

Michigan State should advance with ease (No Troll Izzo), I’m rooting for Cincinnati over the evil Ohio State (I’m only half troll and no part Buckeye).