By: Scott Redler
From what I watched yesterday of the Goldman Sachs-Senate hearing, the leaders at the big bank have done everything in their power to avoid the truth. Their fluff was not taken lightly. I think Senators did a good job of taking a hard line approach and they forced Blankfein & Co. to answer the tough questions. Goldman has a lot of skeletons in its closet besides what was covered in the hearings.
Don’t forget that Goldman has plenty of friends in Washington. Among other things, cronies gave them direct access to Henry Paulson and Ben Bernanke right before surprise rate changes. In many situations, Goldman was privy to more information than anyone else, and used that knowledge to profit at the expense of others.
In 2007, I warned the world about a possible decline on CNBC. I made money short, but told everyone in my community my honest thoughts based on my reading of the charts. Contrary to popular belief among Goldman traders, you can make money short but still be transparent.
Here is a metaphor to put what Goldman did in simple terms:
Goldman told clients to build a community of wooden and very flammable houses. Meanwhile, their biggest and brightest minds anticipated that a huge heat wave was coming that would burn down all the houses. Then, they took insurance out on the houses they had their clients build. Common sense tells you this is not right. Maybe they could have built houses that could have withstood the heat wave, but why would they want to do that when they would make more money when they burned down?
At the very least, the Goldman cronies should have gotten up in front of Congress and the American people and admitted that ALL of their business dealings are unethical, driven by unbridled greed. When derivatives become involved,the “Average Joe” American is told they are too stupid to understand the reality of the situation. Now that the extent of Goldman’s indiscretions has been exposed, hopefully the American taxpayers can feel some sense of accountability from our government.
We sold Goldman Sachs on the Friday when the allegations hit, when the stock was still around 178. I also sold my macro longs that same day, and advised our community to do the same thing. Although the market held up reasonably well given the magnitude of the news, the foundation was cracking, and under the surface weakness was bubbling. Prudent active trading is an exercise in risk management, and there was certainly a lot of risk on the table at that point if you were holding longs.
Although I never trade based on predictions, my gut told me the news would sooner or later lead to a break of the trend and a correction of some degree. You always need to take off risk when you have a potentially huge, spiraling problem like the GS fraud situation. Add in the fact that we have had eight straight positive weeks, and we were due for a correction. Most of my targets were met before the news anyway.
Going forward, GS will probably be seen like big tobacco. They may continue to be profitable, but will be seen as bad for the public health. No matter what results from these fraud allegations, the firms reputation is irreparably damaged. One thing is for sure: the American people are finally starting to understand the extent to which they were cheated out of their hard earned money.
