Burning questions about the SEC fraud charge against Goldman Sachs
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You don't need to know what a "synthetic collateralized debt obligation" is (an exotic financial instrument) to understand what this charge is about: The SEC says that Goldman created an investment vehicle full of securitized sub-prime mortgages that included some really terrible ones selected by a big hedge fund manager who wanted to make money when they failed. In order for him to do that, he needed people to take the bet that they wouldn't fail. The SEC charges that Goldman did not tell the investors it sold this vehicle to that (a) it included crap mortgages that were (b) picked by the guy who wanted them to crash. The things failed, the hedge fund manager made money, the other investors lost money. Oh, and Goldman scored a $15 million management fee.
You can see the problem, if true. Goldman says the SEC charge is false in "law and fact" and will fight it.
My colleague Ezra Klein has asked three questions about about the case.
I have several more:
1. Timing. Why did the SEC take the highly unusual step of announcing a major action at the height of midmorning trading instead of before or after the markets closed? The SEC didn't know anything more at 11 a.m., when it released the news, than it did at 9:30 a.m., when the markets opened. As a result, the markets tanked and a major sell-off ensued, nearly wiping out the week's gains. Why did this happen? The markets react this way every time you toss a grenade into the middle of them and run. If bad news is announced before the markets open, traders price the bad news into stocks and, though they may go down, it will be a slower decline and a softer landing.
2. The second timing question is this: Traders are wondering about the politics of the SEC charge. Consider: Goldman Sachs is the lion of Wall Street, the gold standard of investment banks. It has weathered the financial crisis largely unscathed. There is massive financial regulatory reform on the Hill right now designed to clip the wings of big banks like Goldman. Traders wonder: Is there a better way to give tough regulatory reform the final push over the finish line than to level a fraud charge against the biggest, best-regarded bank on Wall Street?
3. WWCD? Or, "What Will Cuomo Do?" As New York attorney general, and as a man who's made a reputation of going after Wall Street, will Andrew Cuomo file criminal charges against Goldman and Tourre? The SEC can file only a civil complaint; Cuomo can put guys in jail. Cuomo has thus far remained silent on this case, but that can hardly be the case for long.
4) Does this charge represent a war on Wall Street? Many traders and bankers already have felt the chill from the Obama administration and lawmakers, who they believe want to take this opportunity -- the aftermath of a financial crisis -- to fundamentally change the way Wall Street does business. Obama used confrontational language in addressing the issue Friday, warning GOP lawmakers not to side with the embattled financial industry.
"Every member of Congress is going to have make a decision," Obama said. "Are they going to side with the special interests and the status quo, or are they going to side with the American people?"
This is going to be a long and fascinating case -- assuming the SEC does not settle -- with plenty of discovery. We may learn a lot.
Follow me on Twitter at @theticker
April 16, 2010; 5:06 PM ET
| Tags: Andrew Cuomo, Business, Financial instrument, Goldman Sachs, Hedge fund, SEC, Subprime lending, Wall Street
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