Prof. Jayanth R. Varma's Financial Markets Blog

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Prof. Jayanth R. Varma's Financial Markets Blog, A Blog on Financial Markets and Their Regulation

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Mon, 13 Jun 2011

Levin-Coburn Report and Goldman Risk Management

The Levin-Coburn report (prepared by the staff of the US Senate Permanent Subcommittee on Investigations) came out while I was on vacation and I finished reading it (nearly 650 pages) only now. In the meantime, the findings of the report have been discussed and analyzed extensively in the press and in the blogs. I will therefore focus on what the report tells us about risk management in a large well run investment bank.

Even as the crisis unfolded, we knew that Goldman was among the few firms that sold and hedged their mortgage portfolio and limited their losses. The Levin-Coburn report gives us a ringside view of how this process actually works. Of course, it is ugly, but it is also fascinating. Three examples stand out:

In short, implementing a risk mitigation strategy was extremely hard even though (a) Goldman had the right view on the market, and (b) it was willing to place its self interest far above that of its “customers” in executing its desired trades.

Finally, anybody who thinks that investment banks like Goldman would give them a fair deal should read the gory details of how Goldman dumped toxic securities (Hudson, Anderson and Timberwolf) on investors around the world to protect/further its own interests. There have been many press reports about these shady deals, but the wealth of detail in the report (page 517-560) is much more than what I have seen elsewhere. The Abacus deal which led to the record $550 million settlement with the SEC appears much less sinister in comparison.

Posted at 17:40 on Mon, 13 Jun 2011     View/Post Comments (1)     permanent link