Goldman responds point-by-point to SEC charges
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Now that we're past the shock-and-awe phase of the SEC's bombshell fraud charge against Wall Street megabank Goldman Sachs that landed in the middle of Friday's trading, we can bring some more analysis to situation and take a look at what Goldman is saying today about its actions.
In a somewhat overheated moment, British Prime Minister Gordon Brown (Labor, or liberal, Party) accused Goldman of "moral bankruptcy." So that's the sort of outrage this charge is bringing in some quarters.
First, a quick recap: At the urging of hedge fund manager Paulson & Co., Goldman designed an investment vehicle called a synthetic collateralized debt obligation, or CDO. Paulson believed the housing boom was about to go bust and wanted to bet against bundles of bad subprime mortgages he believed were going into default. Goldman allowed Paulson to pick the bad mortgage packages that went into the CDO. Then, Goldman got more investors, including European insurance companies.
The SEC charges that Goldman committed fraud by not telling the other investors that the guy who wanted to bet against the crap mortgages picked the crap mortgages to go into the CDO.
No one disputes that this CDO was designed to fail. Paulson believed subprime mortgages were going to crash and he, being a good capitalist, wanted to make money on that fact. Goldman wanted to satisfy a big client and make a big management fee -- in this case, $15 million.
Whether this thing was meant to fail or not is not the point.
The point is: How much was Goldman obligated to tell other investors in the CDO and did it fulfill that requirement?
Goldman is defending itself by essentially saying everyone involved in this case was a big boy and knew how to play by big-boy rules. No naifs were fleeced in this transaction, Goldman is saying. Both sides bet; Paulson won, the other side lost.
However, others say that the European investors believed in good faith that they were insuring a financial instrument, rather than allowing themselves to get sucked into a high-stakes poker game. And ProPublica reports that several other banks created the same kind of investment vehicles that Goldman did. The Wall Street Journal is reporting that the SEC is looking at similar deals structured by other big banks.
Goldman responded today with a lengthy defense of its actions, which I have bulleted below, quoting from the release:
Here is a good Q&A on the whole magilla from the Wall Street Journal.
Even if all the parties involved in this high-stakes, highly sophisticated deal were big boys, that's only part of the story and that part -- in and of itself -- means little to average Americans. A bigger question to ask is: How much did these big Wall Street deals extend the housing bubble longer than it should have lasted and made it more painful when it eventually popped? In other words, did they know there would be average American victims because of their actions and did their deals make the situation worse than it would have been?
Those, by the way, are not necessarily questions that could lead to a legal charge, but they are worth asking. It may very well end up that Goldman did nothing wrong -- legally -- and the firm ends up paying some sort of settlement in which it neither affirms nor denies wrongdoing. If history is any guide, Fabrice Tourre, the 31-year-old Goldman exec who set up this CDO transaction, is probably toast. Goldman may characterize him as a rogue operative and offer him up as the sacrifice the SEC demands.
The job of Wall Street is to create capital and make our capitalist system run at its highest rate of efficiency and return for as many parties as possible. There will be winners and losers and that's the price we accept for having this system.
At the same time, however, not every American knows or understands or is able to play by big-boy rules. And they often get caught in the backwash of the schemes run by the Wall Street elite.
Follow me on Twitter at @theticker.
April 19, 2010; 12:22 PM ET
Categories: The Ticker , Wall Street | Tags: Business, Collateralized debt obligation, Goldman Sachs, Hedge fund, Mortgage-backed security, SEC, Subprime lending, Wall Street
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