Goldman, Naked

Goldman Sachs Group Inc's GS.N market-making unit has been censured and fined $450,000 after U.S. regulators found hundreds of violations over how it processed customer trades involving short sales of stocks.

via UPDATE 2-US fines Goldman unit over short-sale violations | Reuters.

Apologize for being absent from the blog of late, have been in transit and much consumed with this ballooning Goldman business.

In an interesting side note to the much more publicized businesses involving John Paulson, Greece, and whatever else Goldman is currently getting tarred and feathered for, the bank was quietly slapped on the wrist by the SEC for violations related to naked short-selling.

I wrote about this last year. The story was that Goldman (and others) had extremely lax standards for locating the securities it lent out to short-sellers. When you lend securities to someone without locating the stock first, that makes it possible for that person to sell the stock without actually possessing it or intending to possess it. That's called naked short-selling and it's a kind of counterfeiting that pretty much everyone admits is fairly common on Wall Street, although there is wide disagreement over how harmful it is to the market.

The current story reports that the SEC fined Goldman for failing to prevent crappy locates in late 2008. They're describing the violations as a "bookkeeping error," probably because a systematic effort at profiteering via the enabling of naked short-sellers is not a simple thing to prove. To quote Reuters:

Regulators said that because of a bookkeeping error, the Goldman unit between Dec. 9, 2008, and Jan. 22, 2009, accepted about 385 orders to short stocks where it had not first borrowed or arranged to borrow the securities as collateral.

They also said the Goldman unit failed about 68 times over that period to timely close out market-making positions in stocks or notify customers about such lapses.

In a piece I wrote about naked short-selling last year I published transcripts of Goldman officials discussing their shoddy locate systems at a conference of SIFMA, the Securities Industry and Financial Markets Association:

In a conference held at the JW Marriott Desert Ridge Resort in Phoenix in May 2008… a compliance officer for Goldman Sachs named Jonathan Breckenridge talks with his colleagues about how the firm's customers use an automated program to report where they borrowed their stock from. The problem, he says, is the system allows short-sellers to enter anything they want in the text field, no matter how nonsensical – or even leave the field blank. "You can enter ABC, you can enter Go, you can enter Locate Goldman, you can enter whatever you want," he says. " Three dots – I've actually seen that."

On the list of crimes perpetrated by the big banks during the crisis period, naked short-selling probably isn't near the top. But it definitely exists and it was almost certainly a tool that contributed to the mammoth-killing of firms like Bear and Lehman Brothers. The big banks like Goldman enabled this game by closing their eyes to shoddy locates in order to make sure they kept their prime brokerage clients. They've been caught at it before and now they're being caught at it again. But you can add this to the list of offenses that the banks will get off for with a mild fine ($450,000? Are you joking) and the usual facsimile of legal consequence. From Reuters again:

Half the penalty will go to NYSE Regulation, a unit of NYSE Euronext… and the rest to the federal government. Goldman agreed to settle without admitting wrongdoing.

When was the last time there was a settlement with one of the big banks without that phrase attached? Just once I'd like to see an SEC settlement that included a transcript (plus a photo) of a bank official on his hands and knees, weeping into his tie, shouting, "I did it! You got me! I did it!" I suppose that's a little too much to ask, however…

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