The Reaction: Even the S.E.C thinks Goldman Sucks!

By J. Thomas Duffy

Oh boy, the old saying of "If you want to dance, you gotta pay the band", is playing a medley of waltzes (we'll have to wait, to see, if they are death marches) for the banking/investment firm/giant vampire squid company Goldman Sachs.

It's not a good thing, when your company is in a headline like this - "U.S. Accuses Goldman Sachs of Fraud in Mortgage Deal".

Here's the press release from the U.S. Security and Exchange Commission;

SEC Charges Goldman Sachs With Fraud in Structuring and Marketing of CDO Tied to Subprime Mortgages

Washington, D.C., April 16, 2010 — The Securities and Exchange Commission today charged Goldman, Sachs & Co. and one of its vice presidents for defrauding investors by misstating and omitting key facts about a financial product tied to subprime mortgages as the U.S. housing market was beginning to falter.

The SEC alleges that Goldman Sachs structured and marketed a synthetic collateralized debt obligation (CDO) that hinged on the performance of subprime residential mortgage-backed securities (RMBS). Goldman Sachs failed to disclose to investors vital information about the CDO, in particular the role that a major hedge fund played in the portfolio selection process and the fact that the hedge fund had taken a short position against the CDO.

We like the way Stephen Gandel, at the Curious Capitalist blog, put it;

So there you have it. Finally, the financial crisis gets its first major fraud case. Investment banks created complex securities that increased the risks of in the financial system. Most then held on to the securities because they didn't know what they had. Goldman instead came up with an elaborate scheme to lay off the risk on unsuspecting investors. Either way, Uncle Sam had to come in a clean up the mess. As the SEC says, in selling something they knew was worthless, Goldman was no different from the medicine man of old. It's a fraud as old as time.

[snip]

Last: So are hedge funds more to blame in the financial crisis than we thought? It certainly looks that way. When the hedge funds went before Congress a year or so ago, they were praised--Paulson included. Now it looks like Paulson masterminded a trade that cost the government tens of billions of dollars. I would hope his next Congressional meeting will be less pleasant.

Now, if you remember, back last October, we added Goldman Sach Advisor Brian Griffiths to our Ignorant Dolt roster, for a taste of playing us for suckers, defending paying fat cats like really really big fat cats, or, as John over on Gawker described;

Lord Griffiths of Fforestfach is quite the Christian apologist for wealthy people; he wrote a book called Morality and the Marketplace and has thought long and hard about how to reconcile the teachings of Jesus Christ with the relentless drive to acquire money. He's done pretty well with it. But wasn't there something about camels, and heaven, and rich men? And if Jesus wants Goldman Sachs employees to get multi-million-dollar taxpayer-financed bonuses, why are the Benedictine Sisters of Mt. Angel launching a shareholder movement to get Goldman to reign in its compensation packages? We guess that, for the fabulously wealthy who go for the whole heaven/hell thing, it makes sense to enjoy as many Amber Lounge after-parties as you can squeeze in while you're in this world, because the one that awaits doesn't really have much to offer.

The McClatchy Newspapers, who, if you recall, were on-the-money, from the get-go, about the Bush Grindhouse lying us into war, has also been the dog-on-bone with Goldman Sachs;

“It appears that the financial ‘protection’ provided by Goldman and described in the SEC complaint may have been more akin to the kind of protection provided by organized crime,” Hurley said.

McClatchy Newspapers, in a series published in November about Goldman’s role in the subprime lending disaster, found that Goldman sold more than $40 billion in mortgages in 2006 and 2007 while secretly betting on a housing downturn that would sink their value. It’s unclear whether any of those transactions have drawn SEC or Justice Department scrutiny, but a Senate investigations panel has been examining them.

Here's two of those articles referenced;

Goldman takes on new role: taking away people's homes

Investors could only lose in Goldman's Caymans deals

Goldman's response to the SEC charges is a yawner - "The SEC’s charges are completely unfounded in law and fact and we will vigorously contest them and defend the firm and its reputation."

Ah, Felix Salmon, you want to step up here and talk a little about that "Goldman reputation";

Goldman’s reputation in tatters

Goldman talks ad nauseam about how everything it does it does for its clients, and how any profits it ultimately ends up making are just a result of being “long-term greedy”. But if it attempts legalistic hair-splitting about how its behavior in the Abacus case was technically not illegal, it’s just going to end up looking even more culpable in the eyes of its clients. Goldman, if it was behaving honorably here, would have been open about the whole truth of what was going on. It would have revealed Paulson’s role in structuring the deal to IKB and other investors, and it would have revealed Paulson’s short position to ACA. Instead, it played IKB and ACA for suckers. And that’s just not the kind of behavior that Goldman likes to think that it engages in.

Goldman, as you might extrapolate out their resounding statement, is going to set up a fall guy for this, however, when you read Annie Lowrey's, from the Washington Independent, analogy, you see she goes all Denzel Washington on Goldman, explaining like we're all four-year-olds.

Yves Smith, over on Naked Capitalism, helps her out;

Oooh, things are starting to get interesting.

A number of journalists and commentators (yours truly included) have taken issue with the fact that some dealers (most notably Goldman and DeutscheBank) had programs of heavily subprime synthetic collateralized debt obligations which they used to take short positions. Needless to say, the firms have been presumed to have designed these CDOs so that their short would pay off, meaning that they designed the CDOs to fail. The reason this is problematic is that most investors would assume that a dealer selling a product it had underwritte was acting as a middleman, intermediating between the views of short and long investors. Having the firm act to design the deal to serve its own interests doesn’t pass the smell test (one benchmark: Bear Stearns refused to sell synthetic CDOs on behalf of John Paulson, who similarly wanted to use them to establish a short position. How often does trading oriented firm turn down a potentially profitable trade because they don’t like the ethics?)

Back, last August, we pointed out how being noted for your greediness, wasn't, necessarily a good thing in "Survey Shows Name Should Be "Goldman Sucks", and then, December, added some more reasons.

They looted Main Street (and, possibly, Greece), so, it's nice to see, even belatedly, the S.E.C., finally, getting a glove, and getting into the game.

Bonus Links

Ezra Klein: Three questions about the Goldman fraud filing

Choire, at The Awl - Goldman Sachs SEC Lawsuit: "The CDO Biz is Dead We Don’t Have a Lot of Time Left"

Gregory White: Here Are The Financial Companies That Got Screwed By Goldman's Alleged Fraud

Steve M: BOEHNER'S SELF-CANCELING GOLDMAN TALKING POINTS

Scarecrow: SEC Sues Goldman Sachs; US “Shocked, Shocked,” to Find Wall Street Fraud

Dealbook: S.E.C. Inquiry May Widen, Khuzami Hints

John Nichols: Will SEC Crackdown on Goldman Spur Senate Action?