Bizarre story of the day: The state of California is angry at Goldman Sachs (GS) for urging clients to bet against California state bonds that it was involved in selling.
Goldman, Sachs & Co. urged some of its big clients to place investment bets against California bonds this year despite having collected millions of dollars in fees to help the state sell some of those same bonds.
The giant investment firm did not inform the office of California Treasurer Bill Lockyer that it was proposing a way for investment clients to profit from California’s deepening financial misery. In Sacramento, officials said they were concerned that Goldman’s strategy could raise the interest rate the state would have to pay to borrow money, thus harming taxpayers.
Um, so? The state and then some random expert that the author cited, suggested that there could be some kind of conflict of interest here, but really it’s just the opposite. A conflict might have arisen if Goldman didn’t give its trading clients honest advice, but instead tried to boost the fortunes of its bank banking clients. It’s kind of shocking, actually, that the state would raise this issue, saying in effect, that they expected favoritism in exchange for hiring Goldman to handle the bond placement.
There’s also an allegation that Goldman inappropriately pushed credit default swaps on the same munis, despite the fact that the risk of default was low, in order to juice activity and tradin. However, even Lockyer admits there’s not much evidence for this.
Here’s what’s going on. If you read the article, there’s an attempt to somehow tie Goldman to the state’s budgetary woes, by claiming Goldman helped push interest rates too high. Sound familiar? It should. The last time California faced a financial crisis, they set Enron up to be the scapegoat, claiming budget-crippling energy market manipulation. That was a lie: the state was hurt by the collapse of the .com bust and the attendent tax evaporation. At the time, it was Bill Lockyer leading the charge, though he was the state’s AG then. Now he’s Treasurer and raring to do the same thing.
We wonder, does Lloyd Blankfein remember what Lockyer said at the time about Kenneth Lay: “I would love to personally escort Lay to an 8-by-10 cell that he could share with a tattooed dude who says, ‘Hi, my name is Spike, honey.”
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