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Three questions about the Goldman fraud filing

api.asp.gifConfused about the SEC's fraud filing against Goldman Sachs? You're probably not alone. Let's try this two ways.

First, let's play it straight: Goldman Sachs let hedge-fund manager John Paulson select the subprime-mortgage bonds that he thought likeliest to explode and put them into a package called Abacus 2007-AC1. Paulson, who guessed early that the market was heading for a crash, wanted to bet against these bonds. But he needed someone on the other side of the bet. So Goldman went out and found him some suckers, or, as Goldman called them, "counterparties." Many of them were Europeans.

But here's the rub: Goldman didn't tell the counterparties that Paulson had picked the bonds. “Goldman wrongly permitted a client that was betting against the mortgage market to heavily influence which mortgage securities to include in an investment portfolio, while telling other investors that the securities were selected by an independent, objective third party,” said Robert Khuzami, the director of the SEC’s division of enforcement.

Another way of think about it comes from the Washington Independent's Annie Lowrey, who analogizes it to a housing sale. Imagine a broker shows you a home. It looks good to you. Looks like the other homes, in fact. But when you buy it, it turns out that the foundation is cracked and the roof leaks and the neighborhood is full of crackhouses.

How can this be? You got the home appraised! And your broker knows all about homes!

Well, it turns out that your broker was working for the seller, who did the appraisal himself. And the seller had bet a bookie that whoever he sold the home to would move out within a year, which and your broker knew that but never told you. In this analogy, as you've already guessed, the broker is Goldman, the seller is Paulson, and the buyer is the counterparties.

Now that we've gone through the deal, here are three questions about it:

(1) The stock market has taken a dive on news that the SEC is going after Goldman. Is the market upset that major investment banks swindled investors? Or is it upset that the government is holding one of them to account?

(2) How much likelier did passage of financial regulation just become? Is Goldman going to be the Anthem Blue Cross of this particular battle?

(3) How much long-term damage did the SEC just do to Goldman? It's one thing for Goldman Sachs to get made fun of in Rolling Stone articles. It's a whole other for investors to have to worry about whether they can trust Goldman to protect their interests.

Photo credit: New York Times.

By Ezra Klein  |  April 16, 2010; 2:48 PM ET
Categories:  Financial Regulation  
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Next: Is now a good time to get rid of the mortgage interest tax deduction?

Comments

SEC should be embarrassed by this case....they are going to lose badly in court.

Posted by: kovachs | April 16, 2010 2:58 PM | Report abuse

If the market dives because of this indictment, then it is more proof that it is rigged by elitist wall streeters and needs substantial reform.

Posted by: Lomillialor | April 16, 2010 2:59 PM | Report abuse

Ezra, here is the answer to your questions:

1) The "market" is most affected by large institutional investors. Hedge funds, retirement funds, etc. I'd guesse these large institutional investors are mostly freaked out by the idea that their investments in companies like Goldman Sachs might be at risk. But that is guess work on my behalf.

2) I don't doubt some kind of FinReg will pass regardless of this. The real question should be, "Will this make FinReg stronger."

3) I doubt Goldman will feel much long term impact from this. Goldman's former employees are littered throughout the US Government. Indeed, I'm surprised the SEC managed this at all.

Posted by: nisleib | April 16, 2010 3:05 PM | Report abuse

It will be interesting to see if the SEC goes after this with full force or if it will be one of those cases that drags on for years and years and then is quietly dropped when some other big news story is dominating the cycle.

Posted by: AuthorEditor | April 16, 2010 3:08 PM | Report abuse

First, an SEC investigation of GS, and now unanimous Republican opposition to any and all financial industry reform. It's really hard to believe that the GOP will unanimously oppose Final Reform. I think it's a suicide pact. The perception of the GOP still in the grip of Wall Street (and K Street) campaign contributions, and perhaps some kind of misguided Ayn Randian ideology, is an ugly one. Where are the Tea Party protests over this? I guess the Republicans (and particularly their base) have a nasty case of Obama Derangement Syndrome which forces them to do things so obviously contrary to their own political interests. This looks like a "win-win" situation for President Obama, but for the sake of the nation I hope something is done about financial industry corruption. We can't risk another September 2008.

Posted by: osullivanc1 | April 16, 2010 3:12 PM | Report abuse

You're engaging in a fair amount of speculation for the day the suit was filed. For example, this might just be the first of many such filings by the SEC, or this might be the only one and the SEC will get its clock cleaned, or somewhere in between. I'll go out on a limb and say only time will tell.

Posted by: ostap666 | April 16, 2010 3:12 PM | Report abuse

How convenient that these revelations occur just before financial regulatory reform: is it just a coincidence or is the administration quite savvy in timing this to ensure passage of the bill?

Posted by: ns3k | April 16, 2010 3:14 PM | Report abuse

Ezra, Nothing substantial is going to happen to GS. Someone in another post has it correct - too many colleagues scattered throughout the government to let this happen. And I would add because of the following - a. too many buddies from the same elite northeast schools, b. too much nepotism and c. too many high paying jobs at stake. This will be dragged on and on for years until it dies a silent death. No wonder there are Tea Parties.

Posted by: shangps | April 16, 2010 3:23 PM | Report abuse

Does this fall into an existing line of SEC fraud actions, or is this a practice that has been around but never addressed as fraud?

Posted by: jduptonma | April 16, 2010 3:23 PM | Report abuse

Didn't Sachs make off with a lot of AIG's bailout money (perhaps more accurately, the money the bailout later replaced)?

AIG was insuring Sachs investments. How many times over did Sachs recover their losses?

Posted by: mexaly | April 16, 2010 3:28 PM | Report abuse

Tip of the proverbial iceberg. Suggest Ezra fans start with Yves Smith (?) from HuffPost & keep going with ProPublica series on the Magneta hedge fund. And Gillian Tett's "Fool's Gold", etc.
Lots of commentary on who 'stiffed/rigged' the system, the ordinary investor, etc. Pitiful little intelligent commentary on how to level the playing field going forward. Oh, and don't bet on either party to do it even half 'right'.

Posted by: TXMary | April 16, 2010 3:32 PM | Report abuse

first off it needs to be clarified if this individual is related to that OTHER Paulson.


Next its amazing to me how people that are honestly not educated on the subject can speculate that the market does this because of that. To say that "it dives" because of this is proof it needs whatever is ludicrous when out of the same mouth we'd hear that health insurers stocks went up because no public option was included or it went up because its seen as a bailout of the industry. There are so many factors weighing positively and negatively on each company on the exchange that its idiotic to pick a single thing and say it'll be "X".

To that end has Goldman Sachs never been fined by the SEC?

How is Merck doing since it was fined? Or any other company that gets fined by the Federal government.

ALso you don't think that people that "get into bed" with GS know who and what they're dealing with?

These are the same people that are driving up the debt costs in Greece speculating that the country could fail. These are NOT the boy scouts.

Posted by: visionbrkr | April 16, 2010 3:33 PM | Report abuse

I wonder if John Paulson recently went short on GS stock?....

Posted by: notsoswift | April 16, 2010 3:34 PM | Report abuse

Presumably much of the outcome will hinge on the degree of intentionality and the pervasiveness. If it is an isolated case where there was just inadequate sensitivity to conflicts of interest, it will be like health care. There will be some fines and probably some departures of the involved staff. But otherwise it likely will be a large amount of posturing and blowing political smoke. In any case, it is probably more of a problem for Republicans to defend Wall Street practices than it has been for them to support an health care insurance system that was badly broken regardless of any particular insuance company's sins. On the other hand, if Goldman was on a large scale intentionally promoting the sale of assets that it expected to fail and conniving to profit the failure of those assets, there well may be some major consequences.

Posted by: dnjake | April 16, 2010 3:48 PM | Report abuse

I wonder if the word "scienter" will enter the national vocabulary.

Posted by: jduptonma | April 16, 2010 3:56 PM | Report abuse

Ezra, maybe you want to qualify your statements or restate them as "allegations" by the SEC and include a response from Goldman denying your interpretation of what happened? Otherwise one wonders if you are engaged in responsible journalism or have some other motives? For example, in your example of a real estate transaction, there could be fraud on either side, it depends on an obligation (legal or ethical) to reveal certain facts but obscure others, we will see in the trial. Very often con games work only because the "victim" has intent to defraud the other himself and willfully ignores relevant facts. In this case, the counterparties were sophisticated investors, pension funds and insurance companies, who themselves had an obligation to hedge risky investments (as Goldman and Paulson did) by hedging (short selling the bull market). If house prices continued to rise today and the shorts had to pay up, would you say that they contributed to a market for affordable housing, a bedrock of a middle-class lifestyle that continues to be puffed up by Fannie Mae? Or would you ever point out that housing was a bubble and Goldman and the hedge funds correctly saw this and successfully bet against it and so revealed problems in the system that need to be corrected in ways other than prosecutions for fraud?

Posted by: joeshuren1 | April 16, 2010 4:02 PM | Report abuse

1. "The Market" is still at risk of some volatility due to generally low volume with more an emphasis on trading and less on buy-and-hold investment. Traders will look for any excuse to unload after a nice run-up. At this level 500 points would be "taking a dive" so medium term I am not so worried.

2. I would say likelier.

3. I think a lot. It will cost them a lot more to do business if their marks...er, sorry, counterparites demand a risk premium.

Posted by: luko | April 16, 2010 4:14 PM | Report abuse

I'm having trouble seeing how Goldman did anything wrong here. Based on my reading, its role was to create a vehicle for gambling--and found two sophisticated gamblers who wanted opposite sides of the bet (more accurately, they found one and one found them). The house analogy seems way off-base. My analogy would be this:

You (Paulson & Co) are a sports bettor who thinks Floyd Maywether is a better boxer than Manny Pacquaio. So you go to a boxing promoter (Goldman) and say "We want to set up this fight and bet $1 billion on Floyd. If you arrange the bout and find someone to take the bet, we'll pay you a big fee." Goldman arranges the fight and finds the counterparty (Deutsche Bank). Where's the crime?

Posted by: mkindc | April 16, 2010 4:38 PM | Report abuse

The housing analogy is little rough in this case.

It would be illegal for a seller to fail to disclose structural defects that he or she knew about (e.g. foundational cracks definitely, leaky roof perhaps). This assumes that you didn't buy the house in "as is" condition.

Crackhouses in the neighborhood aren't a structural defect -- in fact, if your OWN agent said "this isn't a great neighborhood -- too much crime, too many drugs" she could fall afoul of fair housing laws and lose her real estate license.

A closer analogy for housing would involve an agent who has represented him or herself as YOUR buyer's agent; who then turns around and fails to disclose to you a relationship involving the party on the other side of the deal. That's on the first level -- the failure to disclose material and structural defects is the other. Both levels appear to be at work with Goldman. Undoubtedly they will try to argue that they didn't fully understand what both hands were doing and plead ignorance (e.g. in the case of a home inspection if an owner does not disclose a structural or material defect because the owner is genuinely unaware of the problem, they might skate by; one the other hand, on the fidiciaury responsibility question the agent probably would get nailed for failing to disclose a relationship -- of course, there may be loopholes for financial firms).

Posted by: JPRS | April 16, 2010 4:42 PM | Report abuse

Goldman isn't Anthem in this situation, they are Osama Bin Laden.
The reason why the market has fallen is that this could cause the banking sector to approach failure again and there are no more bailouts to be had. The hubris of the banking sector is about to exact a toll.

Posted by: ThomasFiore | April 16, 2010 4:49 PM | Report abuse

mkindc,

Sports betting analogy would be -- you are the betting agency, and one of the fighter's managers -- you all work for the same firm. Your guy is heavily favored (AAA rated in fact, a safe bet).

You fail to disclose any of this to the people on the other side of the transaction.

Your fighter loses and your firms ALSO wins a lot of money.

In that case you weren't merely a conduit for two unrelated parties, you were a conduit AND you were a party to the trade.

Yeah, there's definitely a problem with that.

Posted by: JPRS | April 16, 2010 4:52 PM | Report abuse

GS and the rest of Wall St. will go kicking and screaming all the way to the Courthouse, just like the Catholic Church Bishops, Cardinals and Popes.

Then when the "smoking gun" memos are disclosed, they will argue it was "the way business was done back then," and can we all just "move on" after a "simple apology?"

This is the inherent problem with power elites, who make their "business' to complicated for the "common man" to understand.

Good luck SEC!

Posted by: Robe2 | April 16, 2010 4:55 PM | Report abuse

It's like a car manufacturer selling a car knowing that it is unsafe to drive, and then taking out an insurance policy in case the car gets in an accident. Also knowing that the driver will probably die in the accident, the dealer also takes out a life insurance policy on the driver.

It's too bad we're regulating our car safety standards so heavily. There is simply not enough room for innovation of the car manufacturer's revenue model!

Plus, since consumers aren't stupid, the free market will sort it out since consumers definitely won't buy cars that aren't in their best interest to drive.

Sigh, if only we had a more free society...

Posted by: will12 | April 16, 2010 5:08 PM | Report abuse

JPRS (and others),

Here's the thing I honestly don't get: Goldman packages the deal and looks for a counterparty, at Paulson's Behest. Counterparty may not know Paulson, but they know someone is taking the other end of the deal. So why is goldman culpable?

As I best as I can tell (which I willingly admit is an incomplete understand), the Goldman-bashers have two arguments:

1) Goldman is obligated to tell counterparty that gambling vehicle not only HAS short bettor but was actually BUILT by short bettor. Why does does this matter? It's a bet--take it if you think it's a good bet! Reject it if you don't.

2) Goldman is culpable because they didn't believe in the bet. Again, who cares? If a bookie offers you a bet that the Thunder will beat the Lakers, does it matter if the bookie actually believes the Lakers are the better team?

Posted by: mkindc | April 16, 2010 5:18 PM | Report abuse

1) Let's not anthropomorphize the stock market. The last published, agreed-upon price of Goldman Sachs (GS) common stock is waaay lower than the previous day's close, but that's a product of dealers of GS stock finding little demand to buy (sell in dealer's parlance) at the old price and plenty of supply to sell (buy) at any price. The market price is the last quoted sale of GS common stock, which was the result of a person making a decision to buy or sell (or, for many, do nothing!). Multiply by thousands of people and you have our stock market. That the last sale price is boiled down into one particular rationale and given a human emotion attaches misleading importance and wisdom to the stock market.

2) Doesn't this stink of overly-fortuitous timing for BO administration? Passage is almost a certainty after this. How does it look for the GOP leaders to speak to Wall Street exec's about killing the Financial Reg. reform bill? It looked bad before, but way worse now.

3) It's a whole other thing for Clients, as opposed to investors, to distrust Goldman. Investors should distrust anyone they buy from; alternately, while lots of GS's revenues comes from proprietary activities, the bulk of their business depends on relationships. This is bad. If they can pin it on the French guy, they'll regain their stature sooner, but the so-called "revolving-door" between GS and the Fed Gov't has been shut. This is also bad timing for this Berkshire Hathaway Director's comment:

http://www.businessweek.com/news/2010-04-13/buffett-bet-on-goldman-sachs-integrity-olson-says-update1-.html

Posted by: rglvr | April 16, 2010 5:23 PM | Report abuse

add: 2) Fortuitous timing for the BO Administration in that it comes two days after the bipartisan meeting over the financial regulation reform bill that showcased the GOP's "principled" stance on the bill. The lawsuit would come anyway, but mayhaps there was a delay (or push).

Posted by: rglvr | April 16, 2010 5:27 PM | Report abuse

Answers:

1. Are you kidding?

2. Don't know, but I hope McConnell filibusters by reading aloud selections from the WSJ editorial page.

3. Investors seem to have forgotten who screwed them over the last 3 times..you think this time is different?

Posted by: stevie314 | April 16, 2010 5:28 PM | Report abuse

1. To "shangps": "Nothing is going to happen..." There used to be an accounting firm called Arthur Anderson. You might want to check the internet to see what happened to them.

2. To "kovachs": Sounds like you know something about securities law. Could you explain WHY the SEC is going to lose the case?

Posted by: marty1314 | April 16, 2010 5:58 PM | Report abuse

The question is: "how much damage did Goldman do to itself and the market by engaging in fraudulent activities?" Don't blame cop for the victim's poverty after being robbed.

Posted by: dolph924 | April 16, 2010 6:18 PM | Report abuse

Sometimes it can be helpful to provide positive feedback.

During the healthcare reform bill debate, the one that consumed most of our adult lives (or seemed to), Ezra Klein was a beacon of clarity, a consistent voice informed by in-depth knowledge of a truly complicated issue. For me as a reader, he was the go-to source whenever something odd or tiresome happened -- meaning, very often.

While I liked his work, though, I was sad to think that the passage of the bill into law would mean he would no longer have much to say on other issues of the day and would fade from relevance, a one-trick pony who had earned our gratitude but no longer had a job to do.

Wow, was I wrong about that. Thank you Ezra for apparently knowing quite a lot about just about everything to do with economics and politics in the US, and expressing it in such a clear and interesting way that I can follow along, and want to. Please keep on keeping on.

And happy Emancipation Day to all DC residents.

Posted by: fairfaxvoter | April 16, 2010 6:20 PM | Report abuse

To those commenting on the fortuitous timing of the indictment, if Goldman Sachs can be indicted under present law, how does that support the need for additional regulation? Isn't a big part of the problem the SEC's failure to enforce regulations that already exist?

Don't get me wrong, I support additional regulation, but I don't see how this indictment evidences a need for additional regulation.

Posted by: tim37 | April 16, 2010 6:49 PM | Report abuse

All this is fine and well but can you please fix the links on the page?

1. The first link "How financial innovation leads to financial crises" is broken.

2. This link is also broken "Jon Gruber makes the case for the individual mandate" is also broken. It is better than (1) above as the break results from a typo which can be fixed.

3. The link "Raghuram Rajan's prescient 2006 argument that finance makes the world riskier." does not link to what it says but to Raj Date presentation on Freddie & Fannie - topical but not expected.

Hope these will be fixed soon - or perhaps the sub title changed to "Economic and Domestic Policy, and Lots of broken links".

Posted by: rgChapelHill | April 16, 2010 7:10 PM | Report abuse

Apparently, withholding vital information about an investment from people with investment money is normal operating procedure. You cannot fault Goldman Sachs for doing what is customary on Wall Street. But I can. Suppose GM manufactures a Buick whose brakes are designed to fail when you drive above a certain highway speed. Your dealer sells you the car. Without telling you, GM buys an insurance policy that pays off should your Buick crash. The insurance company doesn't know it is sure thing that a crash will happen. You don't know your Buick was manufactured to crash. The crash and the insurance payoff look normal to the casual observer. Yet, the deal was cooked up. It was a sure thing. Talk about risk mitigation. Can you prove GM put your life on the line so GM could rake in some insurance money? Doubtful.

Posted by: BlueTwo1 | April 16, 2010 7:48 PM | Report abuse

Q1: The market is nervous because one of them is being held to account.

Q2: Alot, as much as they hate the Romans.

Q3: Likely less than alot, unless there is more to come. In that case see Toyota.

Posted by: jmdziuban1 | April 16, 2010 8:06 PM | Report abuse

This is from the SEC's Litigation Release No. 21489 / April 16, 2010 (http://www.sec.gov/litigation/litreleases/2010/lr21489.htm):

"According to the Commission's complaint, the marketing materials for ABACUS 2007-AC1 — including the term sheet, flip book and offering memorandum for the CDO — all represented that the reference portfolio of RMBS underlying the CDO was selected by ACA Management LLC ("ACA"), a third party with expertise in analyzing credit risk in RMBS. Undisclosed in the marketing materials and unbeknownst to investors, a large hedge fund, Paulson & Co. Inc. ("Paulson"), with economic interests directly adverse to investors in the ABACUS 2007-AC1 CDO played a significant role in the portfolio selection process. After participating in the selection of the reference portfolio, Paulson effectively shorted the RMBS portfolio it helped select by entering into credit default swaps ("CDS") with GS&Co to buy protection on specific layers of the ABACUS 2007-AC1 capital structure. Given its financial short interest, Paulson had an economic incentive to choose RMBS that it expected to experience credit events in the near future. GS&Co did not disclose Paulson's adverse economic interest or its role in the portfolio selection process in the term sheet, flip book, offering memorandum or other marketing materials."

This seems like simple, blatant, outright fraud. Goldman made a representation of material fact that it knew to be untrue and on which it hoped and expected investors would rely.

As for timing, I doubt the Obama Administration was able to have the SEC complete its investigation to match the push for meaningful regulation. But if they did, more power to them. If something like this is what it takes to show the public that "trusting the markets" is BS, then by all means go for it. There is no evidence for the Administration manipulating the timing of the charges, but the right has never needed evidence or facts.

Goldman delanda est.

Posted by: Garak | April 16, 2010 8:08 PM | Report abuse

mkindc,

Here's a good quick run-down of the issues at stake.

http://blogs.reuters.com/felix-salmon/2010/04/16/the-abacus-pitchbook/

Basically, Goldman is alleged to have made misrepresentations about a product that they sold. That's what at issue here as I understand it.

With respecting to the gambling analogy, think of it more in terms of the House is not just a middle man trying to attract money from different parties, but the House knows in advance how the bet will play out (because it has helped to fix the outcome).

If the House is just handling money and balancing the odds based on the way the money goes, OK. The House doesn't care if the Lakers or the Thunder win -- it's just a clearing house. It gets a cut regardless of the outcome. It's just providing a service.

If the House knows in advance that an event is cooked, and it entices people into a wager with the intent of playing the other side of the wager -- that's fraud (e.g. the bookie has bribed the water-boy to put a laxative in the opponents drinking water; and it's hired Tonya Harding to take a swipe at a star players knees at half. It knows all this in advance, because the bookie has helped to pre-determine the outcome).

This is different from where two people have access to the same information, but one just gets very lucky, or has the ability to calculate risk.

In the case of the typical sports wager, one side doesn't really know in advance what the outcome is -- it hasn't fixed the game.

The issue is that Goldman failed to disclose the origin of the product that they were selling, because they probably knew doing so would trigger greater due diligence from the other side -- their deception would have been exposed. It wasn't an honest wager.

Posted by: JPRS | April 16, 2010 8:41 PM | Report abuse

Goldman Sachs is not the only investment bank guilty of this type of behavior. Our financial markets are corrupt and all of the major players are guilty. In this case, the accusation of fraud is more important that a conviction. Any fines imposed will be tiny compared to the damage done to the integrity of our “trusted” markets.

The recent proposal by Sen. Lincoln (D- Ark) has it about right, demanding, 100% open transactions, separation between trading and banking activities, and prohibition of fed window access to any company engaging in trading activities. Rather than punishing them; the time has come to rewrite the rules.

Posted by: NewThoughts | April 16, 2010 8:53 PM | Report abuse

This topic was covered by last week's "This American Life" on NPR. The program set forth the story of Magnetar, a hedge fund whose manager sponsored mortgage-backed CDOs, misled investors into buying the upper tranches, loaded the CDOs with the worst possible mortgages, and made a killing off of short positions against the tranches of his sponsored CDOs through credit default swaps.

With regard to this SEC complaint, I don't understand the obtuse observations about how Goldman did nothing wrong. I've read the SEC complaint, and it lays out a strong basis for plain vanilla criminal fraud against Goldman Sachs employees and even John Paulsen. [BTW, the SEC does not prosecute crimes, DOJ does]. Paulsen and Goldman planned the credit default swaps before they even formed the synthetic CDO; as Barry Ritholtz observed, the CDO was akin to "Springtime for Hitler," the play that the con-men in "The Producers" deliberately created to fail. It's all in the emails.

Posted by: terminator_x | April 16, 2010 9:14 PM | Report abuse

"3) How much long-term damage did the SEC just do to Goldman?" Isn't the real question: How much long-term damage did the Goldman just do to itself? They're not exactly the victim here. Will we at least see full restitution to those defrauded by Goldman and Paulson? The final result should be a good measure of how strongly this prostitution ring has burrowed itself into the Government.

Posted by: kenj2 | April 16, 2010 9:37 PM | Report abuse

"3) How much long-term damage did the SEC just do to Goldman?"

If Goldman beats the wrap the answer is zero. Even if Goldman cops a plea, or if the fine ends up being hit with a nominal penalty in the low tens of millions, the answer is probably zero.

If Goldman gets nailed though, I agree that it's not a question of the damage that the SEC's done to Goldman.

This is a little like blaming law enforcement for the damage that's done to an alleged murderer for bringing charges against a suspect. There is some potential harm to the accused's reputation if the charges are proven to be baseless; on the other hand, if the person did commit the crime, you can't exactly blame law enforcement for trying to seek justice.

Goldman will probably suffer a lot more if there's an effort to simply create more transparency in the derivatives market, create a more competitive financial sector (e.g. by breaking up the big banks), or if we eliminate socially useless activities like high frequency trading.

Posted by: JPRS | April 16, 2010 10:11 PM | Report abuse

Get Medical Insurance for your entire family at the lowest price from http://bit.ly/dqJw9Z

Posted by: MaryJames1 | April 17, 2010 3:52 AM | Report abuse

How much damage did the SEC do to GS? WTF? there is one way,in three steps,to fix this. Prosecution,confiscation and executions of the miscreants both in and out of 'bidness & gubmint'.

Posted by: par4 | April 17, 2010 7:58 AM | Report abuse

If GS did not lie to these huge institutional investors who lost money, then I don't see that that there is a case. The investors have an obligation to do due diligence. GS should win this hands down.

Posted by: Nemo24601 | April 17, 2010 8:12 AM | Report abuse

4. How much money did Goldman execs make by shorting their own stock hours before the lawsuit hit? *

Bonuses all around!

* I have no evidence that this actually happened. I also have no evidence that Goldman execs personally kick down doors of foreclosed homes with their puppy-skin boots. Baby seal skin is an equally plausible possibiity.

Posted by: dpurp | April 17, 2010 9:48 AM | Report abuse

It seems to me that Goldman and Paulson conspired to create a CDO that was designed to go bust. With this insider information, they then bet that this would happen by buying credit default swaps. Paulson makes $1 billion on this almost sure bet based on insider information. The holders of the bonds lose $1 billion due to Goldman not acting responsibly to their customers by selling CDOs that they designed to go bust. How much did Goldman bet on this CDO going bust?

It will be interesting to learn who were the counterparties on the CDS bets… probably AIG whom the government is bailing out. Now we know why Treasury Secretary Paulson, formerly CEO of Goldman, insisted that AIG be bailed out. Don’t expect much to happen from this since Goldman VIPs gave were bipartisan in the $6 million in donations to Democrats and Republicans (FEC data).

We should bring back the Glass Steagel Act that banned investment Banks like Goldman from being involved in mortgages. This act was created during the Great Depression due to similar types of crookery in the 1920s by Wall St banks. In a fit of deregulation this act was repealed in 1998. Bring it back I say to protect us from the crooks.

Posted by: fedupindc | April 17, 2010 12:53 PM | Report abuse

JBRSS,

But Goldman didn't "know" the investment would go bad. All they knew was that one of the shrewest investors in the world thought it would. And, they failed to disclose to the counterparty that Paulson was taking the other side of the bet.

I've read a bit more about this since my original post, and that fact appears to be the crux of the SEC's case--that Goldman's failure to disclose Paulson's interest on the other side of the bet, and his role in creating the instrument, was itself unlawful.

I can't speak to the legal issues here, I'm just asking myself "is it wrong" on an ethical level. And I keep coming back to the key fact that these are sharks (Paulson vs. DeutscheBank) playing a sharks game. They know the risks and they're supposed to be smart enough to do their own work. If Goldman had been peddling this to little old ladies or doing anything that suggested Goldman thought it was good buy, I'd be with you. But given what I think the facts are, I'm just having trouble feeling sympathy for the counterparties.

(And, as a personal aside, I can't believe I'm defending Goldman $^@^@ Sachs!)

Posted by: mkindc | April 18, 2010 12:14 AM | Report abuse

To appreciate the depths of Goldman’s duplicity, just take a look at its 2009 annual report.

In the opening salvo of the report, Goldman is downright indignant and asserts that its only role in the financial markets has been positive.

To deflect attention away from Wall Street matters, Goldman went to great lengths to say that it spent the year acting in the interests of its clients and that these actions were the driving force behind its business.

That fails to address the huge sums of money that Goldman made in proprietary trading that did nothing to benefit clients, but enriched Goldman's shareholders and employees. The investment bank pressed the case that it paid workers only for their performances and nothing more.

On page 39 of the 2009 report, you find Goldman’s broad-brush disclosure in all its vague and generalized glory. Specific references to open investigations, lawsuits, administrative actions? Move along. Nothing to see here.

This was also the subject of an article “Goldman Sachs' Annual Report: It's All Smoke and Mirrors” on the International Business Law Advisor www.IntlBusinessLaw.com

Posted by: Scueto | April 21, 2010 12:05 AM | Report abuse

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