Excerpt from a post on Naked Capitalism, by Yves Smith citing a Wall Street Journal article called "Goldman Is Queried About Bear’s Fall."
Did Goldman Traders Manipulate Bear, Lehman Stock?
"Has Goldman gone over the line of permitted behavior, particularly now that the SEC has decided to go after firms who may have contributed a bit too actively to share price declines of troubled brokerage firms and banks? The Wall Street Journal, in "Goldman Is Queried About Bear’s Fall," says that the CEOs of Bear and Lehman thought so.
From the Wall Street Journal:
Alan Schwartz, who headed Bear Stearns Cos. when it collapsed in March, has pointedly asked Goldman Chief Executive Officer Lloyd Blankfein whether there was any truth to talk that in the days preceding Bear Stearns’s fall, traders in Goldman’s London office manipulated the struggling firm’s stock, according to a person with knowledge of the conversation.
Lehman Brothers Holdings Inc. CEO Richard Fuld Jr., whose firm’s shares also have been battered, also has contacted Mr. Blankfein. "You’re not going to like this conversation," Mr. Fuld told Mr. Blankfein, according to people familiar with their talk, but he was hearing "a lot of noise" about Goldman traders who allegedly spread negative rumors about Lehman. In recent months, Mr. Fuld has contacted traders he felt may have been bad-mouthing his stock, according to someone familiar with the matter. Spreading rumors one knows to be false with the intention of manipulating a public company’s price is illegal.
Mr. Blankfein was taken aback by the inquiry from Mr. Schwartz, according to a person with knowledge of the discussion, even though the former Bear Stearns CEO was quick to add that he didn’t believe Mr. Blankfein would ever knowingly tolerate misconduct. Mr. Blankfein responded that he had no knowledge of any alleged manipulation, this person said, adding that he told Mr. Schwartz he would respond severely if he ever discovered such behavior by Goldman traders. Through a spokesman, the Goldman CEO says he doesn’t recall the conversation with Mr. Schwartz.
Yves here. Ooh, this already smells bad. Blanfein saying that "he had no knowledge" is as weak a statement as you can make, and not the right one either. A responsible CEO would say, "No, I’m not aware of that, and I certainly hope what you are hearing isn’t true. I’ll get on top of it and get back to you." You don’t get told the truth in that scenario. No one is going to incur that sort of liability. But the objective of the CEO-to-CEO call is to get the traders, if they are playing games, stopped.
And it is a bald-faced lie that Blankfein doesn’t remember that conversation. If it were accurate, Blankfein would need to be removed his post immediately and treated for early onset Alzheimers.
Back to the Journal:
Goldman strongly denies wrongdoing. "We went out of our way to be supportive of Bear and were rigorous about conducting business as usual," spokesman Lucas van Praag said. He said Goldman never altered its terms for doing business with Bear, even as lenders pulled their financing and some trading partners retreated during the troubled securities firm’s struggles in early March.
Van Praag presumably said more, but his protestation as reported isn’t fully responsive to the issue. Remember, Goldman was trading and selling subprime dreck when the house was net short. It’s possible one hand didn’t know what the other was doing, or playing out the scenario above, some aggressive traders were reined in when the higher-ups realized what they were up to.
Or this could be flat out misrepresentation, which Goldman has been prone to do in the past. Institutional Risk Analytics reported earlier this year that Goldman CFO David Viniar maintained "we have 100 percent confidence in Lehman Brothers," when the firm was refusing to trade with Lehman and take clients out of Lehman exposures."
Full article here.
