Goldman Sachs Dictionary Reveals Hidden Truth: Jonathan Weil

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Goldman Sachs Dictionary Reveals Hidden Truth: Jonathan Weil

Commentary by Jonathan Weil

April 27 (Bloomberg) -- The key to understanding Goldman Sachs resides not in its opaque balance sheet, or the trove of internal e-mails that the Senate Permanent Subcommittee on Investigations will release at its hearing on the bank’s role in the financial crisis. What you must realize, foremost, is that Goldman’s employees speak their own distinct language.

The only thing certain about today’s hearing is that, in between the sounds of burbling lawmakers reading staff-written questions off index cards, there will be replies from Goldman executives that seem unresponsive, when in fact they are not. All the senators need to follow the testimony is a handy-dandy Goldmanese-to-English dictionary, excerpts from which will be provided shortly.

First, a quick recap of why Goldman Sachs is in trouble. The Securities and Exchange Commission filed a lawsuit April 16 accusing Goldman and a vice president, Fabrice Tourre, of making false and misleading statements to investors about a synthetic collateralized debt obligation that was designed to fail. The SEC said the firm’s main offense was telling the German bank IKB that a company called ACA Management had selected the portfolio of investments underlying the deal, when actually the selection process was heavily influenced by Paulson & Co., a hedge fund that later made $1 billion shorting the CDO.

Goldman has called the SEC’s allegations “completely unfounded in law and fact.” Yet to truly grasp the breadth of the bank’s defense, you must understand what the following 10 Goldmanese terms of art mean in ordinary English:

1. Sophisticated: Susceptible to predators, blindly trusting of Moody’s and Standard & Poor’s credit ratings, all in all an easy mark.

How to use in a sentence: The companies that lost $1.1 billion on Abacus 2007-AC1 “were among the most sophisticated mortgage investors in the world,” Goldman said in an April 16 press release.

2. Transaction: An investment position whose scope can be defined rigidly or elastically, as a single business deal or a group of many, resulting in either a loss or a profit, depending on the desired outcome. Such flexibility can be useful for tax purposes, or for confusing an angry yet gullible public.

Example: “Goldman Sachs lost money on the transaction,” the bank said. (Notice how the word, when used by Goldman, conveniently excludes the seriously large offsetting profits Goldman made by shorting subprime-mortgage bonds in 2007.)

3. Hedged: A public-relations term that refers to the act of pairing a free-standing loss with a separate profitable transaction, thus creating the outward impression that a Wall Street bank never bore any risk. Effective only when the actual facts are unverifiable. Not effective where showing a profit would cause further harm to the bank’s reputation.

Usage: Goldman said it wouldn’t have lost money if AIG had filed for bankruptcy in 2008, because the bank was hedged. Goldman said it was not hedged on Abacus.

4. Select: To agree to be called a “portfolio selection agent,” at a Wall Street bank’s request, even though one of the bank’s bearish clients is doing much of the picking. See statement from Goldman’s April 16 press release: “ACA, the largest investor, selected the portfolio.”

Related word: Independent. As in, ACA was “an independent and experienced portfolio selection agent,” Goldman said.

5. Investor: A company that promises to pay an outlandish sum of money upon the occurrence of some future event, in exchange for a small amount of cash upfront. For instance, if you pay $1,000 to buy a $1 million life-insurance policy, the insurance company has made a $1 million investment in you. Bet you didn’t know that, huh?

Likewise, according to Goldman, ACA made a $909 million investment when it sold $909 million of credit protection on Abacus, in exchange for yearly premiums of 50 basis points, or half a percentage point of the amount insured. (That’s about $4.5 million, by my calculation.)

6. Market maker: An intermediary that matches sophisticated investors with clients that actually know what they’re doing. Usually employs at least one French-speaking broker who takes orgasmic pleasure in persuading widows and orphans to buy CDOs that he thinks were designed to fail.

7. Relatively unknown: Less famous than the Paris Hilton sex tape.

Usage: “A disclosure that the relatively unknown Paulson was the entity” that planned to short Abacus “would have been immaterial to investors in April 2007,” Goldman told the SEC in a letter last year.

8. Hindsight: The ability to recognize the consequences of a decision contemporaneously, as it’s being made. Example: With hindsight, anyone at Goldman Sachs with a pulse could have seen that the CDO it structured was designed to fail.

9. Blindside: To catch a Wall Street bank off guard about a material event, such as an SEC fraud lawsuit, thus depriving its board members of any potential opportunity to tip off their friends with market-moving inside information.

10. Synthetic collateralized debt obligation: Don’t ask.

Just remember this. Goldman Sachs lost more than $100 million as a market maker in a transaction involving sophisticated investors. It wasn’t hedged. The identity of the relatively unknown Paulson wasn’t a material fact, and neither was Paulson’s role in the selection process.

Only with the benefit of hindsight could a reasonable person see anything wrong with Goldman’s actions. Moreover, Goldman was unfairly blindsided by the SEC’s lawsuit.

Good luck, senators. You’re on your own now.