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#Madoff Crisis Manager Explains The Markets to Congress

To: L.Blankfein
From: George Sard

As you are aware, our firm has done a superb job of representing the Madoff boys, and for making sure that their story is told properly, and for addressing the many misconceptions of their role at Bernie's firm.

That said, after watching more than six hours of your traders and risk managers being grilled on Capitol Hill today, however great a job they did in trying to explain their roles at GS, its patently obvious that the only person missing from the Senate panel today was Joe McCarthy.

You know and I know that there was not one single Senator in that room that understands (among other things) what GS's role in the market is, what the job of 'market-maker' is, nor do any of them understand, [despite the many campaign contributions that your firm has made to members of both parties],  the meaning of "net short" . 

If one didn't know better, Senator Levin was given a course in net in/net out by Irv Picard's people; you know-- the definition that makes sense for people that don't have any sense.

You've got 10 firms doing PR work for you, and you've just added a dozen more people to your lobbying office in DC; but I respectfully suggest that you need us. We know how to communicate with mental retards. Yes, that phrase is not politically correct, but if Ram can use, then we can use it. And when it comes to politicians that are incorrect, you're facing a boat load of them.

1. As much as each of your people tried to explain that GS was only "short" subprimes (via synthetics)  because you were compelled to buy ("go long") underlying mortgage bonds from customers that relied on you to provide liquidity for them, the only Senator that seemed to understand that notion was Ensign. Levin, on the other hand, spent the entire day counting the money that you made on your shorts (as if it were a crime of some kind), and refused to understand that you had offsetting long positions that you were losing money on.

2. You need to explain that as a market-maker, Goldman Sachs provides the invaluable service of buying when customers want to sell, and by supplying (selling) product when customers want to buy. That's called "providing liquidity". Many times this requires putting your shareholder's capital at risk in order to accommodate your customers, and as a result, this role requires hedging; in much the same way that Bernie's failed "split strike strategy" proposed to offset the risk of markets moving one way or another.

If you explain that had you not hedged your bets, and otherwise simply accumulated securities in a sinking market, while your customers, including government pension funds, forced you buy them ad infinitim as the price kept dropping, that type of activity would have bankrupted your company, and in turn, would have cause a tsunami throughout the financial world.

2a. Yes, above implies that you're too big to fail. The implication is not your doing. But, the fact is you didn't fail when many of your competitors did, because you were smart enough not to opine on which way the markets would trade. That's your brand's value proposition!

OK, so it didn't hurt that your former partner and former Treasury Secretary (appointed by a Republican administration) made sure that AIG would, on a 100% basis, honor its insurance contracts to you on all of those sub prime puts they wrote..

Here's the PR point: Senator Levin and every single one of the grill meisters on that panel repeatedly voted in favor of government legislation that effectively made it public policy for anyone and everyone in this country to be able to buy a home. That's what created the sub prime mortgage debacle.

3. Conflict of Interest. Its almost unbelievable that these politicians believe that you have a moral or ethical obligation to divulge what your proprietary trading position is at the single point when a customer calls to buy a product from you. Or, the other preposterous notion that you have an obligation to disclose who your counterparty is, or what their motivation is for selling the product to you, so that you can sell it to your customer.

Just because the Govt announced they would be selling their Citibank shares, doesn't mean that George Soros, Warren Buffet, Bill Gates, or any other of the world's leading investors necessarily want it known when they are buying or selling their investments. If Senator Levin is proposing to draft that type of legislation, and otherwise require brokers or traders to disclose to sophisticated investors--the ones that get paid millions by their investors what their motivation is, that's when the Tea Party will become the party of choice.

Its obvious that Mr. Levin and his associates have no idea that Goldman maintains dozens of trading desks, incorporating dozens of products, yet many of which are interconnected to each other. No different than the concept of a Global Economy. Let's call it the Goldman Economy so that those idiots can understand.  So, if a customer buys ten bags of oranges from one desk-who might not have any physical oranges to sell and deliver, your job is to buy orange juice futures to protect the firm in the event the price of oranges goes up.

Make it that simple..or use apples as the analogy, but my point is that these politicians just don't understand.

4. Before America wakes up and votes out every single one of these morons, you have an obligation to your franchise, if not Warren Buffet, to explain the simple facts of what Goldman's role as a trader is (not to be confused with investment banker) and to explain that your traders didn't underwrite and package toxic debt and market it as something that it wasn't, or something that the sophisticated buyers didn't understand.

That said, make sure there are no records of calls or copies of easy-to-misinterpret emails with the rating agencies.

Unless you (i) really do have a crystal ball that tells you beyond a doubt that the markets will go up (or down), and until that kind of device is outlawed by Congress, the notion that it was (in hindsight or foresight) unethical or immoral, or even a "conflict of interest"t that you managed to make more than you lost throughout the 2007-2008 mortgage meltdown is one that you need to counter.

Here's the inflection point. The interrogators, when not getting the answers they wanted to hear, repeatedly made reference to expletive phrases extracted from your emails--as if using the phrase "piece of crap", "shitty" or "crappy" were somehow the Devil's words, and using them make you criminals.

In the words of Joe Biden, "Fuck that bullshit!"

Every time the word "shitty" came out of Levin's mouth, trust me when I tell you that he was looking for a way to deflect his naivete.  Jump on this.


George

Full post as published by Bernard Madoff on April 28, 2010 (boomark / email).