Who is the inside trader – Rajat Gupta, Rajaratnam, Goldman Sachs or Warren Buffett?

Who is the inside trader – Rajat Gupta, Rajaratnam, Goldman Sachs or Warren Buffett?

1. Good intentions

Growing inequality in the U.S. is not only killing the economy, but it threatens to undermine the nation’s values and identity. America today can no longer regard itself as the land of opportunity that it once was, with equality of opportunity less evident than in Europe. – Joseph Stiglitz

The occupy Wall Street movement to me is a great example. In this case unfortunately is not the solution but people say ‘enough is enough’. I want solutions and it should send a strong message. – Paul Polson, Chairman Unilever

Preet Bharara, who has been leading the Obama administration’s ongoing crackdown on insider trading, said in a statement released after the conviction that Gupta “once stood at the apex of the international business community. Today, he stands convicted of securities fraud. He achieved remarkable success and stature, but he threw it all away. Having fallen from respected insider to convicted inside trader, Mr. Gupta has now exchanged the lofty board room for the prospect of a lowly jail cell.” – TIME

We can’t solve problems by using the same kind of thinking we used when we created them. ~ Albert Einstein

If Joseph Stiglitz feels for the growing inequality and is worried about the nation’s values and identity, Paul Polson brings out the mood of the people from the Occupy Wall Street movement that started off with the agitation against the US government in 2008 demonstrating. What Preet Bharara has brought into focus is the recycling of same kind of thinking we used reacting to if bread is not there why not take apple syndrome, playing to the gallery.

2. Goldman Sachs desperate search for funds

Insider trading in principle covers anyone remotely connected to the purported deal an insider said to have executed not excluding Directors. Goldman Sachs is indeed a major player in the world economy. On the fateful day of 23rd September 2008 Rajat Gupta was caught conveying some tips to Raj Rajaratnam within 60 secs of receiving an information of a deal concluded by Goldman Sachs that would entail the company an investment of $5 billion from Warren Buffett.

Directors of a company such as Goldman Sachs, for that matter many such companies, do not walk into their HQ and start discussing matters concerning operations or correspond with emails or by phone. A member of the Board of Directors strictly is not an insider, unless they are executives of the company sitting in the board. They do not ask for the information but they are given the information. In case of Rajat Gupta he was given an information on the just concluded deal of Warren Buffett investing $5 billion in Goldman Sachs.

$5 billion by itself is a small change for Goldman Sachs a company that spends $16 billion on payroll alone where Lloyd Blankfein took a bonus of $67.9 million in his first year as CEO. 23rd September 2008 was a special date however for Goldman Sachs. On September 16, 2008 Lehman Brothers London office was closed and all transactions came to a halt. After the Bear Stearns fiasco in the month of March 2008 it lead to its merger with JP Morgan Chase, Goldman Sachs was truly afraid of a similar situation affecting its very foundation. The melt down had begun and the world capitals were looking at Goldman Sachs with trepidation. Christine Lagarde the then Finance Minister of France was shocked seeing Lehman Brothers closing unexpectedly. Hedge funds who had assets with Lehman in London could not get their assets back. AIG owed $13 billion to holders of credit default swaps and it didn’t have money. On 17th September 2008 AIG was taken over by the Government. On 18th September 2008 Henry Paulson Secretary of Treasury and Barnake asked congress $700 billion to bail out the banks.ⁱ

Flashback: On May 23, 2012ⁱⁱ Byron Trott,

who was vice chairman of investment banking at Goldman Sachs and the architect of the $5 billion investment by Buffett’s Berkshire Hathaway Inc. (BRK/B), testified at Gupta’s insider-trading trial. Testifying about a “time of turmoil” and “fear” in the markets, Trott told jurors that he twice reached out to Buffett to see whether he’d be willing to invest in Goldman Sachs. Buffett, with whom Trott had a “special relationship,” rejected a first overture but was receptive to a renewed request on Sept. 22 of that year, he said. On 23rd September 2012 “Warren had alerted him that I’d be calling him about a deal he’d agreed to,” Trott said, laughing and turning to explain to the jury. “Mark Hamburg didn’t know the details until well after the close of the market.”

On 23rd September the same date when Goldman Sachs signs an agreement hurriedly with Warren Buffett without the knowledge of Mark Hamburg, Paulson and Barnake presented to the Senate Banking Committee, $700 billion bail-out plan.

Warren Buffett earlier had rejected Trott’s first overture.

Bear Stearns

• ⁱⁱⁱOn March 14, 2008, the Federal Reserve Bank of New York agreed to provide a $25 billion loan to Bear Stearns but later withdrew the offer. Then NY FED decided to make a $30 billion loan to J.P. Morgan (collaterallised not by any J.P. Morgan assets but collaterallised by Bear Stearns Assets), who would buy Bear Stearns for 2 dollars per share. Two days later, on March 16, 2008, Bear Stearns signed a merger agreement with JP Morgan Chase in a stock swap worth $2 a share or less than 7 percent of Bear Stearns’ market value just two days before.

• On March 24, 2008 a new agreement was reached that raised JPMorgan Chase’s offer to $10 a share, up from the initial $2 offer, which meant an offer of $1.2 billion.

Warren Buffett did not choose to invest in Bear Stearns. At the same time Bear Stearns went through methodically knocking at the doors of several rescuers.

AIG^iv

• AIG suffered from a liquidity crisis when its credit ratings were downgraded below “AA” levels in September 2008. The United States Federal Reserve Bank on September 16, 2008 created an $85 billion credit facility to enable the company to meet increased collateral obligations consequent to the credit rating downgrade, in exchange for the issuance of a stock warrant to the Federal Reserve Bank for 79.9% of the equity of AIG. 

Warren Buffett did not choose to invest in AIG. Possibly he didn’t have enough inside information of what would happen to AIG without the positive support from the then Secretary of Treasury Henry Paulson, ex-CEO of Goldman Sachs. However, AIG had to go through the process of rescue packages that were transparent to all.

Goldman Sachs – Warren Buffett biggest INSIDER TRADING

• The second overture from Bryan Trott was fully acceptable to Warren Buffett. On 22nd September 2008, Henry Paulson Secretary of Treasury was ready with the rescue package of $700 billion. Goldman Sachs executives including Chief Executive Officer Lloyd Blankfein, Chief Financial Officer David Viniar and Bryan Trott vice chairman of investment banking at Goldman Sachs formed a close team. Warren Buffett demands were met by these three gentlemen from Goldman Sachs.
• A 10% guaranteed annual dividend of $500 million for an investment of $5 billion AND a bonus of right to buy at $115 /share at anytime during the next five years. No special meeting for approval, no discussion, no EGM. Warren Buffett was fully appraised of the insider information, company’s scenario, support from the $700 billion package. Warren Buffett is a clever investor that he asked about the impact of Goldman Sachs purchasing at least $22 billion credit default swaps from AIG, that Goldman could bet against CDOs it didn’t own, and get paid when the CDOs failed. What if AIG goes under, the St. of Helena queried? The three wise men assured Warren Buffett of how Goldman spent $150 million insuring themselves against AIG’s potential collapse. The three wise men informed Buffett that Henry Paulson has assured them of 100% cents to the dollar from AIG and that furthermore would ensure AIG to surrender its right to sue Goldman Sachs for fraud.
• Buffett was satisfied with the terms and there were only four men who were privy to the biggest INSIDER TRADING in the history of Corporate World. Berkshire’s CFO, Mark Hamburg was busy scheduling Buffett’s grandkids trip to Dairy Queen.
• At the dot of 3:50 when the three wise men signed the surrender document of concession to Warren Buffett, a spokesman of Goldman Sachs could have called the media to announce the impending cash in-flow of $5 billion but the men boasting of ‘special relationship’ with Buffett chose to remain silent.

Insider Trading is the prerequisite for a successful hedge funds management. Insider Trading exists on account of unavailability of granular data of companies they trade in. Hedge Funds manage over trillion dollar trading. Highly-paid managers achieve remarkable results that investors are confident of high returns. Key to the success of hedge funds is an uncanny intuitive knowledge of the market whether it goes up or down or pops out. Intuitive knowledge is the art of connecting dots of information to relevant market making capability. Warren Buffett finds it safe to obtain a solid 10% assured return, the person who terms derivatives as “weapons of economic mass destruction”. Warren Buffett didn’t have to go through the complicated derivatives speculation and why should he when he has all the dopes of Goldman Sachs straight from its CEO?

Intuitive minds such as Raj Rajaratnam or Warren Buffett do interact with many from corporate and do obtain ideas that are translated to tangible end product of decision making.

Role of a director in Goldman Sachs – Rajat Gupta

Rajat Gupta apparently submitted his resignation from the Board on September 9, 2008^v but was persuaded by Lloyd Blankfein to stay on board. Goldman Sachs is a multi-billion dollar MNC having tentacles spread to several countries. The Directors are chosen carefully to advance the company’s interests and influence the governments as Goldman Sachs would wish them to do. Rajat Gupta comes from McKinsey & co. with a clean record having joined them straight from Harvard to become its CEO.

Who is Rajat Gupta?

In an open letter dignitaries headed by Mukesh Ambani published the following information:

Rajat has built several world-class humanitarian and educational institutions, a legacy that will outlive all of us and greatly benefit future generations.

The REAL Rajat known to us over several decades is completely at odds with the public narrative. To our collective knowledge which spans a lifetime and covers hundreds of friends Rajat has:

• always upheld the highest of ethical standards;
• been judged, without a chance to tell his side of the story; and
• been mischaracterized by people who have little or no knowledge of him.
• Rajat has maintained his innocence with total conviction. We fully stand by him:
• in his rights to presumption of innocence
• in his efforts to clear his name and in his cause to win back his well-deserved reputation for integrity in all aspects of his life and his dedication to humanitarian causes.

Rajat Gupta set standards at McKinsey and did leave them after 3 terms of office at the head, a standard set by himself. He is said to have contributed 80% of his earnings to charity.

Raj Rajaratnam looks at David Loeb and Rajat Gupta as a tool to further his ambition. Bryan Trott looks at Warren Buffett with special relationship. Lloyd Blankfein looks at all of them to further the interests of Goldman Sachs. For Raj Rajaratnam and Warren Buffett insider trading is paramount which is the least consideration Lloyd Blankfein looks towards Rajat Gupta. Rajat Gupta is a valuable ally to have a foothold into India an economy Goldman Sachs can hardly ignore. Rajat Gupta has direct entry into Prime Minister’s office in New Delhi. A man of reputation, having created a formidable base at McKinsey which in turn has connection to several Indian corporate and government offices, is a thing of value for Goldman Sachs beyond a few tuppence of an insider trading could fetch him.

Events leading to 23 September 2008

^vi Before midnight of September 14, 2008 bankruptcy case of Lehman had commenced. Neither Lehman nor the federal government had done any planning for bankruptcy. Paulson and Bernanke had not consulted with other governments, and didn’t understand the consequences of foreign bankruptcy laws. Under British law, Lehman’s London office had to be closed immediately on September 16, 2008. All transactions came to a halt. And [there are] thousands and thousands and thousands of transactions. The hedge funds who had had assets with Lehman in London discovered overnight, to their complete horror, that they couldn’t get those assets back.

^vii On September 23, same day as of Goldman Sachs – Warren Buffett $5 billion package deal, a bail-out plan for $700 billion was presented by Paulson and Bernanke to the Senate Banking Committee, who rejected it as unacceptable. On September 24, President Bush addressed the nation on prime time television, describing how serious the financial crisis could become if action was not taken promptly by Congress.

23rd September 2008, a few minutes after the Senate Banking Committee rejecting the bail-out plan of $700 billion, that Goldman Sachs mostly to gain from, ‘special relationship’ manager Bryan Trott was asked to approach Warren Buffett for a $5 billion facility, a second overture from Trott. At 3:50 after hard negotiations Goldman Sachs signs the surrender treaty with the wizard of Omaha. Before the digital signatures get corrupted Lloyd Blankfein rushes to the conference telephonic call to all the directors.

Scenario 1: Lloyd Blankfein informs the details of how Goldman Sachs had been ripped by the Sage of Omaha and that they had no other choice left. So this surrender document details please take it to your home and keep inside your safe-deposit vault and see not a soul on this earth comes to know of it, as it is very very secret.

Scenario 2: Or could it be like this: “We have just signed an agreement with Warren Buffett wherein he would …$5 billion.. under these terms and conditions. We were hoping eagerly this morning of the proposal from Henry accepted by Senate Banking Committee but it is indeed a great set-back. What is important at the moment is to bring an assurance to the world money market that Goldman Sachs is here to stay, come what may. Please do not hesitate to contact all known governments and central banks that you are on familiar terms, informing them of the stability this arrangement with Warren Buffett brings in. Last week Lehman Bros downfall has created literally an Armageddon among Hedge Funds market. Hedge Funds are a trillion dollar business and truly leaders for revival of world market. Irrespective of their association with Goldman Sachs Hedge Funds shall also be informed of the development. Our primary focus is to restore confidence and revival of market. Warren Buffett is God send and I wish you God speed.”

Scenario 3: Every director places a call around the globe including Rajat Gupta, informing of the development to all their associates, be in government or corporate.

None of the calls put through are recorded excepting Rajat Gupta’s call to Raj Rajaratnam who was under the radar of FBI already.

Raj Rajaratnam was under the radar of FBI,  NOT Rajat Gupta. If Rajat Gupta was under the radar of FBI beginning 23 September 2008 then establishing inside trading by Rajat Gupta ought to have been recorded. The two recordings of 23 Sep and 23 Oct. 2008 ought to be backed up by other supportive evidences such as e-mails. Coming to e-mails David Loeb an insider at Goldman Sachs as Managing Director had profusely interacted with Raj Rajaratnam through e-mails but his evidences were disallowed in the court. There is no such e-mails or wiretapping on Rajat Gupta. As much as David Loeb’s e-mails were disallowed by the court the wiretapping of Raj Rajartnam cannot be brought against Rajat Gupta.

Raj Rajaratnam thinks before leaping into purchase of Goldman Sachs stock. He is aware of the the rejection of $700 billion proposal and the market would surely go down the next day. Prices of Goldman Sachs stock will most likely raise but it would be very thin if not down. Even then it is likely there could be a connection established between his purchases to his telephonic conversation with Rajat Gupta. Therefore he directs two separate traders to purchase $43 million of Goldman Sachs stock but not from his own Galleon trading floor. Truly the market was down the next day on account of Senate Banking Committee’s rejection of the bail-out plan and his investment of $43 million fetched him a mere $1.2 million. A risky decision for a Hedge Funds operator to invest in Goldman Sachs, given the melt-down he was sitting on. Raj Rajaratnam was very lucky that he was not ripped off. He could have as well off-loaded his entire stock in Goldman Sachs looking at the desperate situation the company was in. Where does an understanding between him and Rajat Gupta arise to share profits at this juncture? It is one of those market tips Raj Rajaratnam or Warren Buffett comes across every day but the decision is theirs. Non-public tips can bring in profits as well as losses for a hedge funds operator. It does not become an insider trading unless the tipper is given a share of profits.

Events leading to 23 October 2008

Rajat Gupta does not have a clue of what has happened between Raj Rajaratnam and his Goldman Sachs purchases. A month later on 23 October 2008 Raj Rajaratnam receives another call from Rajat Gupta informing of Goldman Sachs losing money in the previous quarter. It is said during the trial of Rajat Gupta that Raj Rajaratnam used this information to avoid losses of several million dollars and at the available opportunity after the stock market reopened, Rajaratnam started to sell his entire holdings in Goldman Sachs^viii.

• On 14 October 2008 US Government was expected to buy stakes in big banks amounting to $250 billion and the share of Goldman Sachs was to be $10 billion. They will carry a 5% annual dividend that rises to 9% after five years^ix. This step from the government was public knowledge a few days before the announcement of likely losses in Goldman Sachs in the previous quarter. With the additional burden of $1 billion cash outflow for dividend [Berkeshire (10% of $5billion) and US Govt. (5% of $10billion)], the liquidity position of Goldman Sachs and the likely legal suits against the company from many quarters and in particular AIG, the expectation of Wall Street analysts for Goldman Sachs to make money was indeed unfounded and illogical. This expectation of profits after the surrender treaty with Warren Buffett with the proviso of restricting the sale of shares by Lloyd Blankfein & co. became public knowledge, was indeed foolhardy. On 23 September 2008 when Warren Buffett applied the restrictive clauses for sale of shares by Lloyd Blankfein & co. it was an open declaration of Goldman Sachs losing money as imminent. With what gumption an inside trader can screw such a big company!

• Secondly Rajaratnam started off-loading the stock of Goldman Sachs in the next available opportunity of market reopening means the decision to sell is not the special privilege of Rajaratnam alone as others too should have received the same information before the market opened. It is crystal clear at the dot of selling his stock of Goldman Sachs Rajaratnam ceased to hold any non-public information. The only market manipulator who did not have to deal with Goldman Sachs stock on 23 October 2008, for another five years, was Warren Buffett, having the privilege of buying at $115 as per the surrender treaty signed by the company.

Rajat Gupta – an inside trader or a man of virtue with an identity?

One of the jurors after convicting Rajat Gupta says^x “He’s a man who came to this country and became a wonderful example of the American dream, a story-book life, with a family whose support looked to be based on respect, love and honour,” said one. His colleague added, “We wanted him to walk.”

Gupta joined McKinsey & Company in 1973^xi as one of the earliest Indian-Americans at the consultancy. He was initially rejected because of inadequate work experience, a decision that was overturned after his Harvard Business School professor Walter J. Salmon called Ron Daniel, then head of the New York office and later also the managing director of McKinsey, on Gupta’s behalf.

Rajat Gupta worked for only one company in his entire life, a company he cherished and valued, a company that he built in his own image – not out of an American Dream but his Indian dream of establishing business values and virtues in America. And he did succeed.

Rajat has built several world-class humanitarian and educational institutions, a legacy that will outlive all of us and greatly benefit future generations, shows the greatness of a great man.

“We wanted him to walk.” Indeed he does with pride, for Not many who ever walked on this planet are ten feet as tall as Rajat Gupta.

3. Conclusion:

1. The 3 Ps of Corporate Critical Density for Goldman Sachs

1.1 On June 22, 2012 under the banner Goldman Sachs Fails to Get Investors’ CDO Suit Dismissed^xii, U.S. District Judge Paul A. Crotty says: “Goldman’s allegedly manipulative, deceitful, and fraudulent conduct in hiding Paulson’s role and investment position in Abacus transaction, and in hiding its own investment position in Hudson, Anderson, and Timberwolf I transactions takes plaintiffs’ claim beyond that of mere mismanagement,” Crotty said in his ruling. (Paulson no relation to Henry Paulson but fit for an insider trading probe.)

1.2 Kristin Davis ran an elite prostitution ring from her high-rise apartment. It was located a few blocks from the NYSE^xiii. The conversation with Charles Ferguson:

Charles Ferguson: And were all the major Wall Street firms represented? Goldman Sachs.

Kristin Davis: Lehman Brothers; yeah, they’re all in there.

Jonathan Alpert: Morgan Stanley was a little less of that. Uh, I think Goldman was, was pretty, pretty big with that... These people are risk-takers; they’re impulsive.

{Jonathan Alpert is a therapist whose clients include many high-level wall street executives.}

It’s part of their behavior, it’s part of their personality. And that manifests outside of work as well. It’s quite typical for the guys to go out, to go to strip bars, to use drugs. I see a lot of cocaine use, a lot of use of prostitution.

1.3 On Amadeo Peter Giannini, the man who turned Bank of Italy to Bank of America: from Consumer banking owes a big debt to a produce seller who refused to say no: “When Giannini died at age 79, his estate was worth less than $500,000. It was purely by choice. He could have been a billionaire but disdained great wealth, believing it would make him lose touch with the people he wanted to serve. For years he accepted virtually no pay, and upon being granted a surprise $1.5 million bonus one year, he promptly gave it all to the University of California. “Money itch is a bad thing,” he once said. “I never had that trouble.”^xiv

The first one represents the insatiable risk appetite of Goldman Sachs whereas the second the non-existent risk culture. Goldman Sachs had not set a boundary to its risk appetite. Setting a boundary is a policy statement. Then only risk culture can follow suit within the organisation i.e., statement of practices. Giannini is spot-on when he says he would otherwise lose touch with the people, the very foundation for nation’s values and identity. Goldman Sachs draws a blank in each of them – 3 Ps – Policies, Practices and People.

2. ‘enough is enough‘ is a tricky situation requiring a matured approach lest it turns volatile. It is a tough job of careful handling for Preet Bharara but he must realise criminal sweep of Board of Directors is not the same as criminal sweep of gangs. Wiretapping is a must for one and opposite is true for the other. What corporates warrant now is mandatory implementation of preventive measures < Chapter II UNCAC>.

3. We can’t solve problems by using the same kind of thinking we used when we created them.- Albert Einstein

(E = mc²): E in the equation stands for Energy, m for mass and c² for the speed of light squared. In simplest term, what the equation says is that mass and energy have an equivalence. They are two forms of the same thing: energy is liberated matter: matter is energy waiting to happen. Since c² (speed of light by itself) is a truly enormous number, what the equation is saying is that there is a huge amount – a really huge amount – of energy bound up in every material thing^xv.

The 3 Ps – Policies, Practices and People together make up m the mass. When m is zero E the energy is zero, which is what the status of Goldman Sachs today. But each unit of m added brings in a huge amount – a really huge amount – of energy bound up in every material thing. Goldman Sachs has got a great future to work for.

4. Way forward

Central to the world economy is the value system acceptable by the People. For which You can’t expect to meet the challenges of today with yesterday’s tools and expect to be in business tomorrow and therefore Measure what is measurable, and make measurable what is not so. What is crucial is to bring the abstractions into reality, acknowledge value where value is due, and deconstruct what is valueless.

Tailpiece: Where did Rajat Gupta go wrong? The legal aid he took from Goldman Sachs.

Jayaraman Rajah Iyer

Kodaikanal

30th June 2012