The race is not to the swift, nor the battle
to the strong.
-- Ecclesiastes 9:11
But that’s the way to bet it.
--Damon Runyon
A reader has just
asked how, under a cascade of falling knives, Goldman Sachs might shelter
itself?
Media coverage of
last Thursday’s Senate hearings tip-toed around the use by Subcommittee on
Investigations Chairman Carl Levin (D.-Mich.) of the internal nomenclature of
the “sh*tty deals,” like pedestrians in sandals on my dog-infested Paris
street.
The odor of the
entire sordid proceedings was unrelieved by the insistence of more punctilious
editors on asterisks and euphemisms, nor was the dignity of America’s upper
legislative chamber improved.
Goldman confronts a
quartet of threats, of which only the latter two will be serious:
- The Senate’s orgy
of finger-pointing is now old news, supplanted by the BP oil spill, the Times
Square car bomb and the British elections.
- The eventual financial
services legislation to emerge from the Congress will be pernicious and
misguided, but no less survivable by Goldman than by any other banks.
- The SEC’s suit over
the subprime-mortgage-backed product designed and sold at the behest of hedge
fund manager John Paulson, and the potentially broader and more crippling
criminal investigation by Justice, will resolve in due course.
- And, ultimately,
there will be a franchise value effect of the verdict to be rendered by the
court of public opinion.
In reaction to the
reader’s query, Goldman might well re-deploy the energy and creativity of its
SEC co-defendant, the young hot-shot Fabrice Tourre. The self-styled “fabulous
Fab” is now evidently side-lined in its London office – under the classically
sound tactical decision to keep him on board rather than throw him overboard
into the waiting jaws of the sharks of law enforcement.
That is, Tourre as
a pitchfork veteran around the Goldman sh*t-pile should see the threats to
Goldman’s franchise value as both a challenge to new product development and an
opportunity to generate both revenue and rehabilitation.
Namely:
The street already
sponsors talk of a settlement between Goldman and the SEC, which will affect
the company’s now-depressed stock price. But why would a simple office pool on
the outcome be the only bet? Rather than pursue the mundane approach of
speculation in either GS itself or its vanilla options, a creative derivatives
engineer would build a whole suite of investment products tied to the timing
and cost of the resolution.
The simplest
tradable derivative would be on the straight-dollar over/under of the SEC
settlement – the likelihood of a litigated defense victory being as much an
unimaginable outlier as, say, the industry’s prior assessment of the collapse
of LTCM, Bear Stearns or Lehman Brothers.
Those interested in
handicapping the competing litigation capabilities of the SEC and Goldman’s
counsel could test their assessments in the marketplace. Also, Goldman is said
to be facing potential legal expenses of up to $100 million – certainly enough
to set up a special fund whose performance would be tied to the cubic volume of
the court filings.
Those believing
that Goldman is Satan reincarnate rather than the Lord’s messenger could take
faith-based bear positions on the outcome, while those cynics who profess
skepticism that politics underlie the SEC’s case would do the opposite.
As for the more
threatening criminal proceedings, opportunities arise to speculate on the
stability of Goldman’s reputational capital. With the Fab’s proven ability to
spin gold out of subprime sh*t, it would be child’s play to devise a
“reputational index” that could be traded long or short – perhaps tied to the
firm’s movement in league tables or deal flow.
Subsidiary products
could handicap the odds on the most likely individual candidates to be thrown
under the litigation bus -- including (probably in inverse order) CEO Lloyd
Blankfein, COO Gary Cohn, CFO David Viniar, and the soon-to-be dispensable Mr.
Tourre himself.
What is critical
for Goldman, of course, is to capture for itself not only the hedging
opportunities but also the vigorish on all this activity, rather than leave
anything at the table for the competition.
Having the inside
track on the timing of litigation developments, costs and strategies would seem
to require scrupulous care not to be seen as arbitraging its privileged
position or trading under conflicting interests. But if its claim to sponsor’s
neutrality in the original CDO deal is given credence, Goldman should have
nothing to worry about.
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