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"Throughout the 2000s, Wall Street structured complex derivatives to help European governments such as Greece and Italy mask their debt and make their budgets look healthier than they actually were. These deals generated hundreds of millions of dollars in fees for the banks, but ultimately helped these countries kick the can, and their problems, down the road. Failing to address these problems culminated in the European sovereign debt crisis that the world is trying to deal with today.
But it doesn’t end with state governments. Municipalities and cities also get pulled in. Goldman sold a derivative called a swap to the City of Oakland to help it protect itself against rising interest rates. The product ultimately backfired, and is now costing the city millions of dollars a year. In 2009, JPMorgan Chase was forced to pay the SEC $700 million to settle a probe into the sale of structured derivatives that pushed Jefferson County, the most populous in Alabama, to the brink of bankruptcy.
There was tremendous potential for short-term profit in structured derivative products—also tremendous potential for short-term loss. But when clients are scared, you’re not telling them about possible downsides. Those are buried in the fine print of the ten-page disclaimer at the end of the contract. Most clients pay as close attention to that as you do when you hit the Accept button before downloading music from iTunes.
Buying one of these structured derivative products is a bit like going into a store and buying a can of tuna. The can clearly says, “Bumble Bee Tuna,” and features a cute little logo. You go home, and most of the time you enjoy some delicious tuna. But let’s say you get home one day and find dog food inside the can. How can this be? you wonder. They told me it was tuna. But then you look at the back of the can. There, in print so tiny as to be almost unreadable, is printed something like “Contents may not be tuna. May contain dog food.”
The governments of Greece and Italy, the Libyan Investment Authority, the City of Oakland, the State of Alabama, and countless other endowments and foundations have all opened their cans and found dog food.
And somewhere along the way, Goldman Sachs stopped being the market maker it used to be, a firm that stood up and took risk in order to help clients, no matter how tumultuous the environment. The firm became pickier about what business it did, and did not, want to facilitate. It was willing to take reputational hits, as long as it kept its profit and loss intact. This was a long way from the days, weeks, and months post-9/11, when the firm’s main priority had been to facilitate client positions and get the markets up and running again. Back then, it was not the time to exploit our clients’ and competitors’ weaknesses—as now should not have been."
But it doesn’t end with state governments. Municipalities and cities also get pulled in. Goldman sold a derivative called a swap to the City of Oakland to help it protect itself against rising interest rates. The product ultimately backfired, and is now costing the city millions of dollars a year. In 2009, JPMorgan Chase was forced to pay the SEC $700 million to settle a probe into the sale of structured derivatives that pushed Jefferson County, the most populous in Alabama, to the brink of bankruptcy.
There was tremendous potential for short-term profit in structured derivative products—also tremendous potential for short-term loss. But when clients are scared, you’re not telling them about possible downsides. Those are buried in the fine print of the ten-page disclaimer at the end of the contract. Most clients pay as close attention to that as you do when you hit the Accept button before downloading music from iTunes.
Buying one of these structured derivative products is a bit like going into a store and buying a can of tuna. The can clearly says, “Bumble Bee Tuna,” and features a cute little logo. You go home, and most of the time you enjoy some delicious tuna. But let’s say you get home one day and find dog food inside the can. How can this be? you wonder. They told me it was tuna. But then you look at the back of the can. There, in print so tiny as to be almost unreadable, is printed something like “Contents may not be tuna. May contain dog food.”
The governments of Greece and Italy, the Libyan Investment Authority, the City of Oakland, the State of Alabama, and countless other endowments and foundations have all opened their cans and found dog food.
And somewhere along the way, Goldman Sachs stopped being the market maker it used to be, a firm that stood up and took risk in order to help clients, no matter how tumultuous the environment. The firm became pickier about what business it did, and did not, want to facilitate. It was willing to take reputational hits, as long as it kept its profit and loss intact. This was a long way from the days, weeks, and months post-9/11, when the firm’s main priority had been to facilitate client positions and get the markets up and running again. Back then, it was not the time to exploit our clients’ and competitors’ weaknesses—as now should not have been."
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