Friday, April 23, 2010

Michael Lewis: Bond Market Will Never Be the Same After Goldman

Financial writer (and former bond salesman) Michael Lewis has an excellent commentary on Bloomberg entitled "Bond Market Will Never Be the Same After Goldman" which is written as if it were a letter to bond traders, telling them what questions Main Street should be asking them, the bond traders, on Wall Street. It starts out:

If you happen to be sitting on the Goldman Sachs bond-trading floor life must feel horribly unfair.

You did nothing worse than live by the ethical assumptions of your market -- any money-making event short of obviously illegal is admirable -- and now your own grandfather thinks you're some kind of monster. Your world feels upside down: What was right is now wrong; what was good is now bad; what once felt like winning now feels like losing.

You are probably wondering: What next? What will the angry rabble -- all those ordinary people who can never really understand your business -- now demand that you explain to them, so they can disapprove of you all over again?

He actually gives us some solid insight gleaned from his own experiences dealing with bond traders.

I think the reference to grandfather and monster is actually a speech by former Federal Reserve Chairman Paul Volcker in which he chastises his very smart grandson, who apparently worked on Wall Street, for using "the Nuremburg excuse" for absolving himself of blame for his role in the financial crisis.

Mr. Lewis also writes:

Your bosses claim to have lost almost $100 million on the Abacus trade for which your firm is being sued. This seems, to put it mildly, disingenuous. In March 2007, the time of this particular Abacus trade, your prop traders were already short the subprime market. Would they really have taken a naked long position in a deal you helped to construct precisely so that it would fail without offsetting in some other way on their books?

That is exactly what I was wondering when I read about Goldman's mysterious $100 million "long" investment. It seemly oddly out of place, given everything else they were doing. Was that simply one position among many, or was it really a net position? I doubt the latter. My own hunch is that it was part of some larger trade and not a true, "naked long" position or net position.

Mr. Lewis reminds us that it seemed odd that the SEC is going after only one lower-tier individual:

His name isn't even on the top of the list of Goldman traders listed on the $2 billion Abacus deal for which you are being sued. The name on top of that document is Jonathan Egol. Egol appears to have been the bond trader at the center of your Abacus program. The same Jonathan Egol who told fellow traders in 2006 -- a year before this transaction -- that the subprime market was doomed.

The public eventually will ask: Who is Jonathan Egol and what exactly was his game?

Exactly.

And then on the curious matter of the "independent" manager of the CDO deal:

But what's interesting here is what you appear to take for granted: that ACA has no talent for evaluating the bonds picked by Paulson. After all, if ACA was doing its job it wouldn't have cared one way or the other what Paulson (then a little-known hedge fund manager) was up to. ACA would have known which bonds were good and which were bad, and picked the good ones.

In their anxiety about Paulson's motives we can all glimpse their incompetence. They want to know that Paulson has an interest in picking the good ones because they themselves have no clue which ones they are.

But if a CDO manager had no independent ability to select the bonds inside a CDO what, please explain to us, was his financial function? Why did you select ACA to manage your deal?

And finally, on the matter of moral values on Wall Street:

The masses will be curious to know, for instance, how you became blinded to the very simple difference between right and wrong. The more moralistic among them will ask the question mainly to fuel their own outrage; the more tactical will ask the question because they sense that the financial system doesn't function unless you have the incentive to think in these terms - - and you clearly do not.

Definitely read Lewis' piece. It is shorter tan the general media coverage, but offers much greater insight. And it is actually easy to read and understand. No wonder he was unable to hold a position on Wall Street for any significant length of time. All the better for him, and us.

-- Jack Krupansky

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