A Goldman Sachs mistake?

the Goldman press release

In a press release dated April 16 2010, Goldman made “further comments” on the SEC fraud complaint arising from an Abacus derivative transaction.  The first of four “critical points” made in the release is:

“• Goldman Sachs Lost Money On The Transaction. Goldman Sachs, itself, lost more than $90 million.  Our fee was $15 million.  We were subject to losses and we did not structure a portfolio that was designed to lose money.”

What are we supposed to make out of this statement?  At first blush, the meaning appears very straightforward.  Goldman thought this was a good deal, invested its own money in it expecting a profit and lost a large amount instead.

The New York Times commentary

New York Times ran a subsequent story about the transaction in question, in which it asserts that:

1.  Goldman never intended to participate in the transaction and did so only when the buyer of a portion of the deal backed out at the last minute;

2.  Goldman tried to sell this piece of the deal but was unsuccessful;

3.  The Times implies, but doesn’t state outright, that Goldman then neutralized its Abacus position by establishing an opposite position as a hedge, with the result that the money Goldman lost on Abacus was offset by gains on hedging.

Assuming the Times story is true–and doesn’t seem to have been retracted–the real state of affairs appears somewhat different from what the press release contends.

conversational context counts

Consider the following situation:

A man who’s an inveterate, and always losing, gambler takes part in a card game in which he loses $5,000.  He goes home and his spouse, seeing his downcast face, asks him how much he lost this time.  His reply:  “$10.”

What should we make out of that statement?

The short answer is, “It depends.”

The statement itself is factually correct.  The man did lose $10.  In one way of looking at it, the statement is just incomplete.

Lots of factors can make a difference in what’s being communicated, like body language, tone of voice, prior conversations of the same type.  But the one I want to focus on is the relationship between the two speakers.

In this case, the speaker is talking with his spouse, with whom he presumably has a relationship of open communication and trust.  Does he have an implied obligation to give a full and complete account, or is it ok to give the partial and potentially misleading one he renders?

I think that if the questioner were a friend at work or a nosy neighbor, the “$10.” answer would be ok.  But I think the spouse is entitled to the full story.  In this case, the “$10.” answer is inappropriate.

back to Goldman

Among the rituals in the give and take between publicly traded companies and professional securities analysts, one is that a company can’t answer a question with a factually incorrect statement.  But if it doesn’t really want to give out the information, it can give an incomplete response.  The unwritten “rules” of the game say it’s the questioner’s job to realize this possibility and ask a follow-up question.  If the questioner doesn’t and ends up forming the wrong conclusions, it’s the questioner’s fault for not being skillful enough to pin the company down, not the company’s.

In dealing with securities analysts (and, I suspect, with lawyers) , a Goldman answer of “$10.” would be perfectly fine.  I think that’s what he company has done in its press release.

I think the general public, on the other hand, regards itself as more like the loving spouse who is in a relationship of trust and expects a full and complete account.  Rather than looking at the Goldman press release and the subsequent NYT article and admiring Goldman for having made an elegant and artful statement about its Abacus situation, it’s easily possible the public won’t approve.  If so, and if this indictment is mostly about politics, Goldman itself may be helping to make the SEC’s case.

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