It seems everyone has an opinion on the Goldman case, as though there’s some really big principle here. Lawsuits have very little to do with principle, as these are merely pretexts to get lucre. Think of ambulance chasing attorneys jumping on Toyota based on dubious claims that accelerators were ‘stuck’: supposedly they just want a safe public. Yeah sure.
In my lawsuit with Telluride Asset Management, they asserted I violated a confidentiality agreement. They claimed that any usage by me of certain base ingredients for portfolio selection was a violation, because it was necassarily informed by their sage stewardship at Telluride. Yet, I had used these criteria before Telluride as a portfolio manager, and they weren’t exactly secret ingredients: profits, momentum, volatility, mean-variance optimization. After the judge noted I did not invent these while at Telluride, she then asked the simple question: “what’s your end game? What do you want?” I would have loved an end game. Telluride’s lawyers merely said ‘to protect our property!’ Later, a new judge came in, and asked the same question, and again an unassailable answer: ‘to enforce a confidentiality agreement!’ Well, the judge couldn’t say he was against that, these are bedrock principles!
The key key issue was ‘what is your property?’ or ‘what is your view of the scope of the confidentiality agreement?’ It’s hard to clear yourself when you’ve been accused of something to be defined later. Principles are great things in courts, or rhetoric in general, because its so easy to find one that supports whatever you want to do, and so impossible to argue against.
Anyway, if the principle here is that a large complex financial institution should not service issuers that seem certain to default, California should just declare bankruptcy today. Currently, one-third of their revenue is in deficit, an unsustainable cash-burn rate. Legislators are puppets of basically three unions, that make money based on laws passed by those same legislators: the SEIU (janitors, hospital workers), the Teacher’s union, and the public safety workers (cops, firemen). California already has high taxes and people are out-migrating for the first time in a century, so they face the downward portion of the Laffer Curve (ie, higher tax rates → lower revenue). It seems pretty clear they need to cut costs, but why wouldn’t the unions push for bankruptcy as opposed to benefit cuts? The city of Vallejo recently went bankrupt, and it’s still to be determined whether the pensions and union contract have priority in their bankruptcy the way they did for General Motors and Chrysler. Bondholders should not anticipate priority.
I bet all of the major investment banks are facilitating debt issuance by the State of California and its various agencies, counties, and municipalities. I bet also there is a small but spirited set of shorts, trying to make money off of the inevitable bankruptcy. With hindsight, it will be obvious, and everyone currently buying California-related debt will develop amnesia and claim they never liked California debt.
At that point, should all the investment banks be liable? If so, is every bank facilitating California debt issuance committing fraud right now?