David Viniar, Goldman's CFO, testified under oath to the Federal Crisis Inquiry Commission and claimed that Goldman didn't track its derivatives deals separately from its other transactions. FCIC panel chair Angelides pressed him: "Are you telling me you have no system at your company that tracks revenues or assets of contracts, and liabilities and payments under contracts? You have no management reports, no financial reports that track these contracts?"
"I've never seen one," Viniar answered. The Commissioners seemed to verge on accusing him of lying. "Nobody here really believes (that)," said one. Flash back to February of this year, when David Viniar said this in a presentation to investors: "Technology is fundamental to everything we do, from revenue-producing activities to enabling much of the control infrastructure of the firm." And here's another quote, from Goldman's Business Principles: "We take great pride in the professional quality of our work."
As the Wall Street Journal reported, Goldman has said that "credit trading desks ... are separated by industry group ... (and) traders are indifferent to whether they are selling clients a bond or a credit derivative." The Journal added: "The firm also said its technology systems firm-wide don't single out derivatives transactions."
Now comes the part of the movie where we place our sentence, that jigsaw puzzle piece, into context so that we get its full meaning:
" The Goldman Sachs risk system is called SecDB (securities database), and everything at Goldman that matters is run out of it. ... Database replication was near-instant, and pushing to production was two keystrokes. You pushed, and London and Tokyo saw the change as fast as your neighbor on the desk did (and yes, if you fucked things up, you got 4AM phone calls from some British dude telling you to fix it). Regtests ran nightly, and no one could trade a model without thorough testing ... Unbeknownst to most of the non-strategists, you could see basically every position and holding across the company, whether you were supposed to or not. The whole thing was so good ..."
He's saying that Goldman Sachs has a first-rate, centralized data system that captures each deal in detail, and that everyone can see it as soon as it's posted. What's more, if I understand him correctly, he's saying that employees are required to run a detailed model of their deals before they can post them on the system. And all this information is stored on a database. How can a system can do all this and yet be unable to distinguish between a bond and a derivative?
Nevertheless, David Viniar testified under oath that Goldman's systems were so unsophisticated that he couldn't even tell the FCIC how much profit the company made from derivatives. Eventually, under continued pressure, Goldman provided the FCIC with an estimate which amounted to 25%-35% of its 2009 revenue. Yet Goldman is telling investors it won't lose any revenue as a result of the financial reform bill, and analysts believe them. "They've clearly seen the writing on the wall and are planning their moves ahead of time," said one.
That brings us to Goldman's plans to shut down its proprietary trading unit and spin it off into an independent hedge fund -- or move it into Goldman's asset management arm. Here's a question that probably hasn't been asked yet: Do they plan to use Goldman's SecDB, or any other Goldman systems, in that asset management firm? If this trading unit is moved into a hedge fund, will that fund 'rent' its computer systems from Goldman? Will all the traders and 'quants' at these various organizations be able to 'see' deals happening in real time? That could trigger calls for an SEC investigation or other actions to prevent Goldman from improperly using computer data. And it could raise questions about the other big banks' systems, too.
It's understandable why, given the implications of this nerdy sentence, Goldman would dispatch its publicists to tell Clusterstock it isn't true. As for Garcia-Martinez, he was asked why he deleted the sentence. "Prudence is the better part of valor," he answered --- followed, no doubt, by a click as a gloved hand placed the telephone back in its cradle.