Giving Head, Chasing Tail

| 23/04/2010

The SEC’s civil suit brought against the good (and God-fearing) folk over at Goldman Sachs is a hugely entertaining story of intrigue, greed and good old-fashioned cockiness. The Fabulous Fab Tourre, Master of his Universe at Goldman Sachs and self-confessed naïvette as to the consequence of his esoteric trades, has brought his bosses to sharp attention.

The very ethos of this venerable firm of bankers and market-makers (we do God’s Work) is under close scrutiny. Not that allowing experienced investors to gamble on the outcome of certain trades is in itself a moral problem — both Paulson and IKB knew the rules of the game, and were purported to be experienced players — but that there were certain disclosures not made, and information not disseminated. IKB was led to believe that John Paulson was net long in the investment and had serious skin in. Fab, along with several others (notably Alec Litowitz of the infamous but wildly successful short-specialist fund Magnetar) had realised that the steam in the residential prime and sub-prime mortgage business was rapidly losing its head and were using the synthetic CDO markets offered by Goldman Sachs to bet his hunch accordingly against the long positions held by the mainstream mortgage bulls. No problem here, either — in each trade, there is a winner and a loser, it being a zero sum game. Score? Paulson 1 ($bn), IKB -1($bn). Tough.

Both Iton and Travers miscall this situation. The Cayman Islands’ significance in all of this is slight, that a lot of hot air and wasted energy is being generated over this spat. Both talk up the importance of ‘complicated’ financial engineering carried out in the Cayman Islands — Iton calling it a cheap misuse of the good reputation of the Cayman Islands for a pittance in direct fees earned, and Travers maintaining the erroneous position that the Cayman Islands is a vital cog in the process of complicated financial engineering processes. Both have little to worry about — after all, Fabulous Fab spent less that 0.5 seconds thinking about where the SPV would be domiciled and how it would be structured. This was after all, the second last concern on his mind. Far more important was locking his sales teams into constructing the trades, buying ACB into the deal as portfolio advisors, getting Goldman Sachs’ counterparty structure bedded down for the trade and naturally, throwing those wild parties in his Manhattan apartment. Important stuff, all of it. Whether Cayman was the domicile of choice for the SPV ABACUS 2007-AC1 or not, was of no concern whatsoever. Neither ACB, Paulson, IKB nor Goldman Sachs for that matter, gave a rat’s ass about where or how the SPV was constructed. Who cares?

The Cayman Islands provides the room, the bed, the sheets, the laundry and the janitorial service, that’s all. The room is convenient, there are no cameras and the staff are discreet. What those four consenting adults got up to in that room, in that bed and between those sheets, is entirely their own concern, not ours. Next consenting group, please…

Category: Viewpoint

Comments (9)

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  1. Kent says:

    Wow,

    I simply can’t be serious about discussing this with such little thought being given to something as important as the title.

     

    that is FUNNY!

  2. Richard N. Parson says:

    Even though the "offshore industry" as a whole is highly questionable, and in the eyes of many, unethical, it is nevertheless, legal.  Bottom line: don’t blame Cayman for the dirt you do.  Nobody in Cayman forced anyone to do anything they didn’t want to do.

  3. Anonymous says:

    Thank you for the clearly informed summary of the substance of Cayman’s marginal involvement in the current dispute in which Goldman’s is embroiled. The perspective you attribute to those who purchase what are in essence financial services commodities rings true, even if the analogy is a bit harsh. I would however suggest that we in Cayman might wish to note your equation relating to the rat’s backside, while not basing any decisions exclusively on that criterion. I would also suggest that recent US insolvency decisions suggest that not all of the janitorial work related to these types of transactions will necessarily be supplied by Cayman. However, I digress from the main point that I would like to make..

    The singular common point which Mr. Iton and Mr. Travers appear to make in their recent contributions is that Cayman ought to change the nature of the financial services which it sells to the world. The subtext of their divergence of opinion is of course the meta-debate regarding what ought to be the role, composition and extent of influence of specific elements within Cayman’s financial services sector going forward. 
      
    The critical policy point which neither Mr. Iton nor Mr. Travers explicitly articulate in their most recent contributions has little to do with Abacus per se, but has everything to do with what they are debating. That point is that assumptions made by successive governments to the effect that self-interested private sector decision makers would necessarily ensure Cayman public’s interest over the long term if simply left to their own devices, was horribly flawed. The best that can be said in relation to our politicians is that they behaved as if there was an alignment of long term public sector interests and short term profit taking by service providers when there clearly was no such alignment.
     
    Historically, private sector playersin Cayman argued against or ignored any effort to add economic substance to Cayman’s financial services offering, after all they there making huge amounts of money and had full “in trays”. The more or less exclusive pursuit of short term profits through sales of financial services products which inherently lend themselves to commoditization, has left Cayman with its dominant foreign exchange producing economic sector weak in terms of substance and durability.
     
    So how should Cayman take into account the fact that the self-interests of our financial services sector, which typically focus on the very short term, are not necessarily aligned with the long term interests of the community?  A large part of the answer, as at least some in the private sector including Mr. Travers apparently now realize, is diversification both within and outside of the financial services sector, specifically diversification aimed at adding substance.
     
    Entangling Cayman in the current Goldman affair is not part of the answer. Over-reaction is dangerous in the current context. No sensible person should adopt a tangentially Barrow-esque perspective which sees, and rails against, the shadow of colonial and post-colonial exploitation in anything and everything which passes through New York or London. Similarly no sensible person should assume that a Thatcherite free-for-all will serve our community’s interests. We are no longer living in the 70’s or 80’s, and we do not live in a Utopian enclave of Cave Hill or Cambridge design. If we have any sense we will avoid adding any kind of Cayman-based political fray to that in which Goldman’s is entangled in the US and possible the UK, at least until the dust has settled. If we are going to have a debate, let us shape that debate to suit the long term interests of Cayman in this century. 
  4. Raffaele says:

    Yes Knal N domp you also are deliberately marginalizing the role of Abacus 2007 AC1 and pretending that its not important unfortunately FSA and SEC don’t share yours and Mr Travers and the rest of the financial messiah’s posting on here’s scoured view. The mere fact it is being investigated should be of concern to all Caymanians because it our name not your expat financial wizards playing this game of chance as you put it. They are not going to be held accountable, they can pack their overnight bag and get out of town if it gets too warm here for them. Abacus’s connection to Greywolf and Timberwolf and Goldman Sachs present and past employees is rather troubling and where did the192 million tranche come from Yes Mr Wizards you all do not have the monopoly on financial information and knowledge on this little Island. God Bless you Mr Iton for merely pointing out this financial lobby and charlatans who are using trickery to prostitute or name yet we get little or nothing from it. This same little lobby who controls immigration policy inthese islands is another outrageous situation that needs to be addressed. Whether our role is highlighted in this matter or not its a matter now of perception and Cayman’s reputation is severely damaged and this is yet another damaging blow to it. What if our leadership had a little integrity???? Look around Cayman see who’s benefiting from the financial industry and ask why is the government in such a serious financial position with all these Financial deals in the Billions happening or structured right here yet our economic position and reputation is faltering. Thank you Mr Andre Iton for a reality check. To the rest of you dig a deeper hole or pour more sand on your heads.

  5. Anonymous says:

    Glad to see someone gets it. 

  6. isandman says:

    Rubbish!…Change is happening and Cayman would do well to embrace the future and it’s changes, than continuing with the same old same, old further ruining the image of cayman as a place for reputable business.

  7. Anonymous says:

    So, Tony thinks the room rent is too high and they need more house cleaners and Andre thinks the rent is too low and the house cleaners should get higher tips! LOL 

  8. slowpoke says:

     Dear Knal,

    Oh noes, we agree on something.  Am I losing my grip on reality?

  9. Roadblogger says:

    Perfect!!  I was going to attempt to respond to Traver’s "We’re smarter than you are nyah nyah"  viewpoint but I’m sure he would have rolled out something like "it was simply a synthetic subprime mezzanine collateralized debt obligation which went haywire" just to confuse us.  Or put us in our places.  And you’re right in making the assessment no one cares what motel the participants used.  They all look the same.  Aside from that I simply don’t care if Goldman Sachs and other arrogant types of their irk call it civil fraud as opposed to criminal fraud, it was still fraud, and not just "sophisticated investors" were out a bundle, many good people lost their savings in pension plans. 

    Most of us may not know all the intricacies behind CDO’s and SPV’s, etc. but it makes you wonder that if the guys who used and sold these items are so smart why couldn’t they bail themselves out?