Tag Archives: Billion

Greece *sigh* again

Not that I don’t love Greece.  Or even Greeks for that matter.

Greece is a beautiful country populated by wonderful people, with a rich history and a storied past.

The Greek bailout package is a big one.  It represents the first bailout since the forming of the European Union and it highlights the risks of socialized retirement in my opinion.  The package totals 120 BILLION euros.  Yes, I capitalized billion.  We don’t think of that as a lot in our country, where we are looking at trillions of dollars at use in our budget.  But for the small country of Greece, it’s quite a bit.

The country is required to reduce it’s deficit by 30 billion euros a year.  In order to do this, they are going to have to institute an “austerity” plan.  And what is wrong with that?  From a country where the word “spartan” was a badge of honor, and it’s warriors were forced to endure great hardships.  However, protests are erupting all over the country, highlighting a sense of entitlement that the Greek people and indeed, the entirety of Western Europe has.

Civil servants are allowed to receive their pensions in their 40′s.  Pensions can be passed to their daughters, resulting in a whole generation that has never needed to work to pay their bills.  The retirement age has been raised, but likely needs to be raised further.  With the mortality tables getting longer and longer, it is no wonder that countries around the world are feeling the pinch.

I hope that this is a wake-up call to Europe and the rest of the world.  We can no longer operate like this is the 1950′s.  Even the United States, with it’s social security age comfortably at 66, will be experiencing a crisis in coming years.  And who has the cash to bailout the United States?  Will it be China?

As we move more and more to dependence on the state, who will the state depend on?

Goldman Sachs… Crooked or Not?

Breaking News!  Goldman Sachs is being sued by the SEC!  They made money off of a trade that bet against the housing market!  They bet against YOU the people!  String ‘em up.  Take their money and spread it around!

Seriously though, Goldman Sachs is being sued because they played broker to two opposite sides of a trade.  It’s interesting that the reason that they are being demonized is because they failed to disclose and they must have made a bunch of money.  Not to mention they received TARP funds.  Is this really a big deal, or is the media (gasp!) sensationalizing it?

Let’s look at the case and see if we can determine if Goldman played fair:

Henry Paulson of Paulson and Co Hedge Fund wanted to bet against the housing market.  Specifically, he expected that CDOs (basically bonds with smaller debts imbedded) carrying garbage mortgages would collapse.  So what did he do?  He went to Goldman Sachs and asked them to take the other side of that bet.  Goldman found a group of accredited investors (defined as having extensive investment knowledge and expertise as well as a lot of capital) who would bet that the housing market would continue to go up.
There were perhaps a handful of people in 2006 (when this trade occurred) who thought that the real estate market would never stop going up.  Paulson was one of them.  The allegations are specifically that Goldman failed to disclose that there were in fact garbage mortgages in the CDOs.  This may be true, and if it is, Goldman has some explaining to do.  However, I have looked at their presentation on synthetic CDOs and read the disclosures, which like most financial services company’s disclosures basically say you can lose all of your money and there are no guarantees.
As for the opposing parties not knowing what were in the CDO’s, they have armies of securities attorneys and analysts look over those things before they would make such a huge trade.

Turns out Paulson was right, his fund made over a $1 billion on the trade.  The other people lost money.  Goldman included.  What the news won’t tell you is that they lost $90 million on that trade and only made $1.7 million on the commission.  It makes little sense that they were purposefully hiding information from anybody.

Subsequently, Goldman began making money off of betting against the housing market (I wonder why?).  It makes sense that after their experience losing money on this trade that they would bet in the way the wind was blowing and in fact did.  There is no fraud or crime in that.  Most corporations try to make money.  And many, when they do, give gobs of it away.  Does this excuse bad behavior?  Of course not.  There may, and I stress MAY have been some ethics violations, for which anybody should be held accountable.  But to sue a company for failure to disclose, when it is obvious both parties knew what they were getting into is preposterous.

As for TARP funds.  I know people are up in arms about the TARP money, but Goldman was the first to pay it back and may not have even needed the money to begin with.

Media sensationalism though, it may not be.  Many take this case as the reason we need financial reform.  I’m all for financial reform to protect investors.  However, I’ve found that the simplest option is the best.  The more we try to complicate regulation, the more likely ordinary investors are likely to get screwed.  In this case, it was sophisticated investors who apparently didn’t read correctly.