On Goldman’s CDS Market Manipulation

by Tyler Durden

Exactly a year ago, Zero Hedge penned “The Client Always Comes First At Goldman… Except When He Doesn’t, Which Is Also Always” which was a review of Goldman’s mark manipulation practices particularly as pertains to the OTC domain (read CDS) by going through self-evaluation reviews of the 4 key Goldman trades involved in the Abacus scandal (we would call it crime, but remember: Goldman neither admitted nor denied guilt). As a reminder, in April 2010 we said: “The line penned by Michael, who incidentally was the least like of the three Goldman SPG MDs testifying on Tuesday based on peer feedback, that broke our collective heart is the following: “Once the stress in the mortgage market started filtering into the cash market, I spent numerous hours on conference calls with clients discussing valuation methodologies for GS issued transactions in the subprime and second lien space [redacted] is prime example). I said “no” to clients who demanded that GS should “support the GSAMP” program as clients tried to gain leverage over us. Those were unpopular decisions but they saved the firm hundreds of millions of dollars.” Alas, we find that all of Goldman’s sincere hypocritical lies before the Senate committee were… precisely just that.” This post was followed up by “Goldman Implicated In CDS Price Manipulation Scandal” which essentially recapitulated all the salient points from the first time. Today, with about a full year delay, Bloomberg’s Christine Harper and Joshua Gallu realize that there was more than meets the eye to these very disingenuous revalations of impropriety by the very traders who were conducting them, and finally bring much needed broader attention to the matter in “Goldman Traders Attempted to Manipulate Market in 2007, Senate Report Says.” Frankly, it’s about time.

From Bloomberg:

Company documents show traders led by Michael J. Swenson sought to encourage a “short squeeze” by putting artificially low prices on derivatives that would gain in value as mortgage securities fell, according to the report yesterday by the Permanent Subcommittee on Investigations. The idea, abandoned after market conditions worsened, was to drive holders of such credit-default swaps to sell and help Goldman Sachs traders buy at reduced prices, according to the report.

“We began to encourage this squeeze, with plans of getting very short again,” Deeb Salem, a trader in the structured product group, said in a 2007 self-evaluation excerpted in the report. Swenson, Salem’s supervisor, sent e-mails in May 2007 urging traders to offer prices that will “cause maximum pain” and “have people totally demoralized.” In interviews with the committee, Salem and Swenson denied attempting a short squeeze, the report said.

Salem “claimed that he had wrongly worded his self- evaluation,” the report said. “He said that reading his self- evaluation as a description of an intended short squeeze put too much emphasis on ‘words.’”

Goldman Sachs traders abandoned the short-squeeze attempt after discovering on June 7, 2007, that two Bear Stearns Cos. hedge funds that specialized in subprime-mortgage investments were collapsing. Salem e-mailed Swenson and another colleague to suggest trying to buy short positions, known as “protection,” on collateralized debt obligations, or CDOs, from hedge fund Magnetar Capital LLC, according to the subcommittee’s report.

“We need to go to magnetar and see if we can buy a bunch of cdo protection… Can tell them we have a protection buyer, who is looking to get into this trade now that spreads have tightened back in.”

Swenson expressed “no concerns about the proposed deception” and responded to Salem that it was a “great idea,” according to the report.

And so forth… and so forth… And the thing is as long as Goldman has the ability to trade in a prop capacity, which it always will as it is nothing but a hedge fund, we will constantly see the firm, which also happens to be the world’s biggest OTC product (CDS) broker, it will continue to be able to manipulate flow trading to its advantage.

We don’t need self-evaluation to confirm just how corrupt to the core the firm and its trading practice are. But for those who do, here is a repost of the same self-evaluations we posted way back in April of last year.

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Peer Reviews

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