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SEC Charges Goldman Sachs With Fraud

270 points by ra88it 17y ago

rjett 17y ago
Goldman's activity sounds a lot like the trade that UBS, Merrill, Citi, and 6 other IBs helped Magnetar perform. http://www.propublica.org/feature/all-the-magnetar-trade-how-one-hedge-fund-helped-keep-the-housing-bubble http://www.propublica.org/feature/all-the-magnetar-trade-how...
- jamiequint 17y ago
  The difference is that these were synthetic CDOs so they didn't generate more demand for residential mortgage backed securities, rather they piggybacked off pre-existing ones. This likely did nothing to expand the bubble.
  - btilly 17y ago
    They didn't directly generate more demand, but the existence of deals like this generated a market for the low quality bonds in deals, which made the hardest part of structuring those deals much easier. So no, it didn't directly expand the bubble. But this kind of activity indirectly did so. (Though this particular deal came late enough that the bubble was about to collapse anyways.)
    - jamiequint 17y ago
      I'm not sure this is true. If the packagers of the non-synthetic CDOs realized no benefit from Synthetic CDOs being made off of theirs why would they have incentive to cater to the Synthetic CDO creators.
      - btilly 17y ago
        The market for synthetic CDOs like this only arose because the demand for low quality debt exceeded the available supply. Evidence that demand exceeds supply is encouragement to create more low quality debt. So no, it is not a direct connection. But it is indirect encouragement.
  - jfager 17y ago
    I don't think that makes much sense. Consider a music analogy: samplers and sequencers didn't kill demand for new music. If anything, they spawned a whole new sub-industry dedicated to simply finding and selling new interesting snippets of sound.
- jashkenas 17y ago
  Thanks for linking to a great story. The documents that they reference are part of a project I'm working on (DocumentCloud). Here's a direct link to Magnetar's response to the investigation: http://www.propublica.org/documents/item/magnetars-responses-to-our-questions http://www.propublica.org/documents/item/magnetars-responses...
- jfager 17y ago
  Goldman was in a similar role to UBS, Merrill, Citi, etc., and Magnetar was in a similar role to Paulson & Co. I think that's probably what you meant, but just wanted to clarify.
- minouye 17y ago
  FYI this was featured on This American Life last week: http://www.thisamericanlife.org/radio-archives/episode/405/inside-job http://www.thisamericanlife.org/radio-archives/episode/405/i...
robdimarco 17y ago
These are the civil charges, it will be interesting to see if there are criminal charges. A civil verdict against GS just costs money. A felony conviction would destroy the bank, like it did to Arthur Andersen.
- deleted 17y ago
  [deleted]
  - jbarham 17y ago
    It's a different Paulson: "John Paulson [founder and president of Paulson & Co. referenced in the SEC link] is not related to former Goldman Sachs CEO and U.S. Treasury Secretary Hank Paulson." (from http://en.wikipedia.org/wiki/John_Paulson http://en.wikipedia.org/wiki/John_Paulson)
  - apsec112 17y ago
    Paulson was Secretary of the Treasury, not Federal Reserve Chairman. There's a big difference; a Secretary of the Treasury is a normal Cabinet post subject to Congressional oversight, while the Federal Reserve basically isn't subject to oversight by anyone.
    - digitallogic 17y ago
      That's patently false: "The chairman is subject to Senate confirmation to a four-year term. In practice the chairman is often re-appointed, but cannot serve longer than one 14-year term as governor" http://en.wikipedia.org/wiki/Chairman_of_the_Federal_Reserve http://en.wikipedia.org/wiki/Chairman_of_the_Federal_Reserve
      - roboneal 17y ago
        The chairman may be subject to Senate confirmation and dragged in front of a committee now and then. However, the larger practices of the Federal Reserve, especially dealings internationally, are not regulated and essentially secret.
dmillar 17y ago
GS is a good buy today.
- dwwoelfel 16y ago
  I disagree. If you want to invest, you have to look at your investments in the context of your entire portfolio. Money invested in GS is money that can't be invested elsewhere. There's a good chance that GS will trade down or sideways over the next month. During that time, you could have invested in something with better short term prospects. The following blog post goes in to more depth on this idea, with Massey Energy's recent mine explosion as an example. http://www.fundmymutualfund.com/2010/04/massey-energy-mee-still-struggling.html http://www.fundmymutualfund.com/2010/04/massey-energy-mee-st...
byrneseyeview 17y ago
This is a novel legal theory. Goldman is being sued because they did not disclose that people on the opposite side of a trade had opposing opinions. Basically, they facilitated a transfer of wealth from the stupid to the smart, and now they're getting punished. If Goldman made some kind of material misstatement about the quality of the products, that's a different matter. But so far, there's no indication of that. They helped execute a deal between two consenting, informed parties; suing them is like suing a condom manufacturer because they facilitated the one-night stand that turned into an unpleasant relationship.
- apsec112 17y ago
  No, that's not the problem. The problem is that the mortgage securities were, in large part, designed by people who would benefit if they failed. It's like selling someone a lock that was designed by burglars.
  - jamiequint 17y ago
    Thats the definition of any zero sum bet though. Puts are also designed by people who will benefit if stocks drop in price, that doesn't necessarily make it wrong or bad. The counterparties had access to all the same info Paulson & Co. did, they just didn't analyze it correctly or in as much detail.
    - apsec112 17y ago
      The key difference between the two is that the idea behind a put is extremely simple, while the ideas behind a mortgage-backed collateralized debt obligation are extremely complex. Hence, a counterparty to the put could be reasonably expected to know what they are getting into, while the same does not apply in the Goldman Sachs case.
      - yummyfajitas 17y ago
        As we all know, hedge funds, pension funds and investment banks are completely unable to evaluate complex investments. Note: CDO's are not sold to retail investors.
AmericanOP 17y ago
To discourage misinformation, here's a copied and pasted summary for those who aren't going to read the whole thing: According to the SEC's complaint, filed in U.S. District Court for the Southern District of New York, the marketing materials for the CDO known as ABACUS 2007-AC1 (ABACUS) all represented that the RMBS portfolio underlying the CDO was selected by ACA Management LLC (ACA), a third party with expertise in analyzing credit risk in RMBS. The SEC alleges that undisclosed in the marketing materials and unbeknownst to investors, the Paulson & Co. hedge fund, which was poised to benefit if the RMBS defaulted, played a significant role in selecting which RMBS should make up the portfolio. The SEC's complaint alleges that after participating in the portfolio selection, Paulson & Co. effectively shorted the RMBS portfolio it helped select by entering into credit default swaps (CDS) with Goldman Sachs to buy protection on specific layers of the ABACUS capital structure. Given that financial short interest, Paulson & Co. had an economic incentive to select RMBS that it expected to experience credit events in the near future. Goldman Sachs did not disclose Paulson & Co.'s short position or its role in the collateral selection process in the term sheet, flip book, offering memorandum, or other marketing materials provided to investors.
- flipbrad 16y ago
  It's not clear to me what this is - Paulson facing corruption charges, Goldman facing breach of fiduciary duty/conflict of interest, or Goldman and Paulson facing conspiracy to defraud?
  - MaysonL 16y ago
    Eventually all of the above, if we're lucky. Right now, just GS lying to investors.
known 17y ago
Too little. Too late.
- anigbrowl 17y ago
  Disagree. I would rather the delay than the SEC going on a fishing expedition and being unable to make the charges stick and undermining its own credibility in the process.This is a very high-profile target and my [i]hope[/i] is that SEC investigators are taking a 'measure twice, cut once' approach.
- julio_the_squid 16y ago
  Agreed, I think anybody that has watched the history of major banks and their political chums for the past oh, 200 years or so, knows that this will amount to a slap on the hand, much less than they gained through their various activities of the sort, and will prove to be little deterrence or punishment.
startuprules 17y ago
1. Sell doomed products to stupid clients 2. Short those products 3. Profit X 2 ! 3a. If fail, have taxpayer pay for it
- deleted 17y ago
  [deleted]
- warfangle 17y ago
  If I read it correctly, it's not that they sold doomed products to stupid clients. It's that they represented the products as awesome, when they knew they were structured specifically to be doomed.
  - drunkpotato 17y ago
    Correct.
  - jamiequint 17y ago
    Its the job of Goldman's investment bank to broker product not take one side or the other. It didn't matter to Goldman if they were "doomed" or not (in fact when Goldman structured them Goldman may have even thought Paulson & Co were the fools) they were trying to find pairs of parties willing to take bets against each other and make a commission.
    - dsplittgerber 17y ago
      In the process of structuring and pairing willing parties they just forgot to mention one party had privileged information about what the product actually was. That is not what a supposedly neutral broker does.
      - jamiequint 17y ago
        Sorry, you're wrong. Both parties had access to the mortgages in the pool. Paulson & Co. just had a more accurate analysis of what they were actually worth because they had done in depth macroeconomic research on the residential mortgage market.
csomar 17y ago
Dow, Nasdaq and SP50 are sliding down. I wonder how much this will affect the economy.
dsplittgerber 17y ago
Doesn't anyone else think this is a just a short-term measure to appease public opinion? It was obvious something like this had to happen, there is still a lot of blame to be attributed. Alas, it's the easy way out. Of course, some of the things that happened have to be brought to court, as there definitely was at least misrepresentation, if not fraud, involved. That doesn't change the fact that there are much larger things amiss. 1. Regulators who are ill-suited and ill-willing to enforce existing standards, not to mention any kind of additional authority that gets bestowed on them soon. There are numerous cases of whistles rightly being blown where regulators didn't do anything. Selective enforcement is worse than no enforcement at all. 2. Too much governmental interference in markets and backstopping of market actors to let markets function properly - but blame it all on the markets afterwards and cover up all kinds of fraud at Fannie/Freddie. This encourages fraud in markets which the government kindly looks down upon (it's housing, after all) 3. No consistent policy regarding bail-outs. If you bail-out market actors, you have to split up 'too big to fail'-institutions; otherwise it's just a game of waiting for the next tax-payer-sponsored bail-out.
- cwp 17y ago
  No, it doesn't solve all the deep-seated problems in our financial/political system. But it's still good news, because: - Court cases tend to make public previously secret information. Witness the recent publicity of banks under-reporting their debt levels. That pretty much came out of the Lehman bankruptcy proceedings. Lehman's accounting tricks came out in court, and people started wondering if other banks were still doing it. - It keeps the issue in the spotlight so that politicians feel pressure to do something about it. Perhaps this will help strengthen the Senate's reform bill. - The SEC is finally doing its job again! It's a small step, yes, but it's a start. Go Schapiro!
- barmstrong 17y ago
  Totally agree - this feel like "security theatre" at the airport - except it's SEC theatre. The SEC has largely failed in it's mission to prevent things like this happening in the first place - going back and arguing over whether it was technically fraud or not with the benefit of 20/20 hindsight isn't going to prevent stuff like this from happening again. People get sold bad investments all the time - the onus is on you as the buyer to make good decisions and do your research. If you feel it's fraud, the courts are available to you as a private party. The SEC doesn't add any benefit to this equation that I can see. It does perhaps add one negative to the equation by encouraging people to take these investments "on faith" because they believe (incorrectly) that the SEC is effective at watching out for them.
signa11 17y ago
this is pretty instructive: CARY LEAHEY, SENIOR MANAGING DIRECTOR, DECISION ECONOMICS, NEW YORK: "The SEC has come out swinging, going after the biggest, most recognized name on Wall Street with regard to alleged abuses in the credit derivatives market. This will be a difficult case to prove, particularly to the laymen on the jury, as even supposed experts on Wall Street with years of experience in this area are still scratching their heads trying to figure out who did what to whom and when."
- ajg1977 17y ago
  1) Create hand-picked collections of assets a favored investor wants to bet large sums against. 2) Sell those packages as investments to other clients, with clear statements that they were chosen by independent parties. Doesn't sound too difficult to prove to me.
  - iron_ball 17y ago
    It's easy to phrase it that way, hard to prove (to a legally sufficient degree) that that phrasing is correct.
    - MaysonL 16y ago
      Hard to prove beyond a reasonable doubt, maybe. But this is a civil case, and I believe the standard is merely by a preponderance of the evidence.
justlearning 17y ago
would anyone know what would be the fall out from these charges?
- anigbrowl 17y ago
  I'll hazard a guess (and it is no more than that - IANAL), based on the complaint and the cited statute: - about $2 million in direct fines - return of the $15-20 million GS made in brokerage fees - return of any bonuses made by 'Fab' Tourre - 'equitable relief...appropriate or necessary for the benefit of investors' This last is extremely open-ended and the nature of such relief is up to the court. It can take many possible forms and I have no idea what the norm is in such cases, only that it is technically complex. It does strike me, however, that the complaint specifically mentions two investors; IKB, a german bank, lost $150m; and ACA (who may or may not be considered 'investors' in this context) fell into the arms of Royal Bank of Scotland, who ended up paying ~$860 million to GS, most of which went to Paulson & co. This figure is mentioned explicitly in the complaint. Now, RBS got into trouble themselves (partly as a result of this), and at this point are ~80% owned by the British government. Fabrice Tourre, the Goldman VP at the center of the complaint, currently an executive director of Goldman Sachs International, based in London. This coincidence might or might not have a bearing on the outcome. Knowing the British tabloid press, I'm willing to bet that at least one of tomorrow's front pages will feature a picture of Mr Tourre with a caption along the lines of 'have you seen this man?'
claymmm 17y ago
This is exactly like an arsonist burning down a building to collect insurance. It's plain old fraud.
- billybob 17y ago
  Upvoted. But there's a difference - the arsonist is only allowed to get an insurance policy on buildings he owns. It's more like an arsonist taking out insurance policies on other people's buildings, THEN burning them down. Except we don't allow crazy antics like that with insurance. And the insurance companies have to keep money reserved to pay out claims. And it has to go on their balance books. So what we have here is "a building just burned! Oh crap, who has insurance on that? Who sold it? Who's going to go broke? Who shouldn't we lend money to? Nobody knows!"
  - lkijuhyghjm 17y ago
    It's more like a doctor being able to take out a $M life insurance policy on a patient before he operates!
    - warfangle 17y ago
      Or, while we're on the analogy train, a doctor taking out a $MM life insurance policy on a terminal patient before he performs an operation (which will in no way help the patient live longer), collecting the patient's health insurance dollars along the way.
prosa 17y ago
I particularly enjoyed this quote from Tourre (the named VP defendant), talking about how they have to move fast: More and more leverage in the system, The whole building is about to collapse anytime now…Only potential survivor, the fabulous Fab[rice Tourre]…standing in the middle of all these complex, highly leveraged, exotic trades he created without necessarily understanding all of the implications of those monstruosities!!! Fabulous Fab indeed!
johnohara 17y ago
I've always viewed CDO's as being similar to "pointer-based" securities. GS sold the value of the pointer rather than the value of the data at the location. Like any memory crash, when the value at the location is wiped out, any pointer to it is useless. Shorting the value of the pointer makes sense when you know ahead of time that the value at the location will soon be clobbered.
va_coder 17y ago
Goldman is so powerful. I'm shocked the SEC is brave enough to do this.
- siavosh 17y ago
  Let's not count the chickens before they hatch. The SEC is known for filing highly public cases just to get pressure off their a. This case might very well be discarded 6mo down the line and be reported in a footnote in the last page of the WSJ business section.
  - va_coder 17y ago
    Yea..the unfortunate and unjust reality sets in
va_coder 17y ago
Perfect example of the deck being stacked against the little guy
va_coder 17y ago
It'll be interesting to see which political campaigns Goldman contributes to in this year's election.
rrhyne 17y ago
I doubt this is going anywhere. The suit is civil, not criminal which likely means no one is going to jail. They'll get find 1% of what they made on the deal and call it the cost of doing business.
- MaysonL 16y ago
  No one is going to jail. Yet.
otakucode 17y ago
Will they have the guts to fine Goldman even one millionth of the amount they earned through the fraud? I seriously doubt it. For all intents and purposes, Goldman Sachs IS the United States economy.
cryptnoob 17y ago
What everybody here is forgetting, is that this is a civil suit. Why not charge them criminally? Bottom line, this has been staged to defang them in front of next weeks house hearings on banking reform. It's theater. That's not to say it might not be true, but if you really think the administration wants to clean things up, ask why this is a civil action.
- anigbrowl 17y ago
  The SEC lacks authority to bring criminal prosecutions. The DoJ has to do that, although the SEC may assist them. Not sure what role they can or do play in criminal proceedings brought by the State of New York.
manderson2080 17y ago
This whole problem had two starting points. 1. The repeal of the Glass-Steagal act. This allowed banks to undertake the business of commercial banks, investment banks, and insurance agencies. That means that, banks were able to build these complex derivatives, use money from people's savings accounts to partake in risky investments, and then insure them with high standards. All from under one roof. 2. The investment firms went public. This was a fundamental change in the 80's where Goldman, Morgan Stanley, and many others where they became officially owned by the public. That ment that the risk of all their losses was owned by the shareholders as well as profits. Risky investing became the norm, because if you lost a ton of money for Goldman, you may have gotten chewed out or lost your job. But if you made a ton of money for Goldman, you had a very large bonus waiting for you. Now this mindset has just grown out of hand. It's greed that is driving our financial center, Wall Street.
- aaronbrethorst 17y ago
  Also known as the Gramm-Leach-Bliley Act. http://en.wikipedia.org/wiki/Gramm–Leach–Bliley_Act http://en.wikipedia.org/wiki/Gramm–Leach–Bliley_Act That Gramm guy is Phil Gramm, who later went on to say that the recession was all in our head's and that we're a nation of whiners. http://www.huffingtonpost.com/2008/07/10/mccain-adviser-americans_n_111857.html http://www.huffingtonpost.com/2008/07/10/mccain-adviser-amer... He also happened to be McCain's chief economic advisor and a co-chair of McCain's national campaign during the 2008 Presidential campaign. http://money.cnn.com/2008/02/18/news/newsmakers/tully_gramm.fortune/index.htm?postversion=2008021917 http://money.cnn.com/2008/02/18/news/newsmakers/tully_gramm.... Too bad we elected a socialist to the White House. Think how much better we'd be off with McCain and Palin right now! Goldman Sachs would be just fine! The economy would be great! Phil Gramm would be vindicated! Or we'd be living in the economic equivalent of the Weimar Republic right now. Yeah, that's probably more likely.
Tawheed 17y ago
Too bad VCs haven't figured out a way to short startups yet.
ashbrahma 17y ago
The great american bubble machine. Excellent article about GS by Matt Taibbi on the Rolling Stones magazine: http://www.rollingstone.com/politics/story/29127316/the_great_american_bubble_machine http://www.rollingstone.com/politics/story/29127316/the_grea...
anigbrowl 17y ago
Rabobank (NL) has an active civil suit against Merill Lynch (now owned by Bank of America). According to their attorney, ML employed the same mechanism as GS on behalf of Magnetar (discussed below). http://www.businessweek.com/news/2010-04-16/merrill-lynch-used-same-alleged-fraud-as-goldman-bank-claims.html http://www.businessweek.com/news/2010-04-16/merrill-lynch-us...
sabat 17y ago
Seven words: Federal Pound-Me-in-the-Ass Prison. OK, yeah, I know, they're only civil charges. But a boy can dream.
dpatru 17y ago
This American Life had a program on this last weekend: http://www.thisamericanlife.org/radio-archives/episode/405/inside-job http://www.thisamericanlife.org/radio-archives/episode/405/i...
known 17y ago
I think breach in http://en.wikipedia.org/wiki/Chinese_wall http://en.wikipedia.org/wiki/Chinese_wall in GS is responsible for the subprime crisis

270 points by ra88it 17y ago

rjett 17y ago

Goldman's activity sounds a lot like the trade that UBS, Merrill, Citi, and 6 other IBs helped Magnetar perform. http://www.propublica.org/feature/all-the-magnetar-trade-how-one-hedge-fund-helped-keep-the-housing-bubble http://www.propublica.org/feature/all-the-magnetar-trade-how...

jamiequint 17y ago
The difference is that these were synthetic CDOs so they didn't generate more demand for residential mortgage backed securities, rather they piggybacked off pre-existing ones. This likely did nothing to expand the bubble.
- btilly 17y ago
  They didn't directly generate more demand, but the existence of deals like this generated a market for the low quality bonds in deals, which made the hardest part of structuring those deals much easier. So no, it didn't directly expand the bubble. But this kind of activity indirectly did so. (Though this particular deal came late enough that the bubble was about to collapse anyways.)
  - jamiequint 17y ago
    I'm not sure this is true. If the packagers of the non-synthetic CDOs realized no benefit from Synthetic CDOs being made off of theirs why would they have incentive to cater to the Synthetic CDO creators.
    - btilly 17y ago
      The market for synthetic CDOs like this only arose because the demand for low quality debt exceeded the available supply. Evidence that demand exceeds supply is encouragement to create more low quality debt. So no, it is not a direct connection. But it is indirect encouragement.
- jfager 17y ago
  I don't think that makes much sense. Consider a music analogy: samplers and sequencers didn't kill demand for new music. If anything, they spawned a whole new sub-industry dedicated to simply finding and selling new interesting snippets of sound.
jashkenas 17y ago
Thanks for linking to a great story. The documents that they reference are part of a project I'm working on (DocumentCloud). Here's a direct link to Magnetar's response to the investigation: http://www.propublica.org/documents/item/magnetars-responses-to-our-questions http://www.propublica.org/documents/item/magnetars-responses...
jfager 17y ago
Goldman was in a similar role to UBS, Merrill, Citi, etc., and Magnetar was in a similar role to Paulson & Co. I think that's probably what you meant, but just wanted to clarify.
minouye 17y ago
FYI this was featured on This American Life last week: http://www.thisamericanlife.org/radio-archives/episode/405/inside-job http://www.thisamericanlife.org/radio-archives/episode/405/i...

robdimarco 17y ago

These are the civil charges, it will be interesting to see if there are criminal charges. A civil verdict against GS just costs money. A felony conviction would destroy the bank, like it did to Arthur Andersen.

deleted 17y ago
[deleted]
- jbarham 17y ago
  It's a different Paulson: "John Paulson [founder and president of Paulson & Co. referenced in the SEC link] is not related to former Goldman Sachs CEO and U.S. Treasury Secretary Hank Paulson." (from http://en.wikipedia.org/wiki/John_Paulson http://en.wikipedia.org/wiki/John_Paulson)
- apsec112 17y ago
  Paulson was Secretary of the Treasury, not Federal Reserve Chairman. There's a big difference; a Secretary of the Treasury is a normal Cabinet post subject to Congressional oversight, while the Federal Reserve basically isn't subject to oversight by anyone.
  - digitallogic 17y ago
    That's patently false: "The chairman is subject to Senate confirmation to a four-year term. In practice the chairman is often re-appointed, but cannot serve longer than one 14-year term as governor" http://en.wikipedia.org/wiki/Chairman_of_the_Federal_Reserve http://en.wikipedia.org/wiki/Chairman_of_the_Federal_Reserve
    - roboneal 17y ago
      The chairman may be subject to Senate confirmation and dragged in front of a committee now and then. However, the larger practices of the Federal Reserve, especially dealings internationally, are not regulated and essentially secret.

dmillar 17y ago

GS is a good buy today.

dwwoelfel 16y ago
I disagree. If you want to invest, you have to look at your investments in the context of your entire portfolio. Money invested in GS is money that can't be invested elsewhere. There's a good chance that GS will trade down or sideways over the next month. During that time, you could have invested in something with better short term prospects. The following blog post goes in to more depth on this idea, with Massey Energy's recent mine explosion as an example. http://www.fundmymutualfund.com/2010/04/massey-energy-mee-still-struggling.html http://www.fundmymutualfund.com/2010/04/massey-energy-mee-st...

byrneseyeview 17y ago

This is a novel legal theory. Goldman is being sued because they did not disclose that people on the opposite side of a trade had opposing opinions. Basically, they facilitated a transfer of wealth from the stupid to the smart, and now they're getting punished. If Goldman made some kind of material misstatement about the quality of the products, that's a different matter. But so far, there's no indication of that. They helped execute a deal between two consenting, informed parties; suing them is like suing a condom manufacturer because they facilitated the one-night stand that turned into an unpleasant relationship.

apsec112 17y ago
No, that's not the problem. The problem is that the mortgage securities were, in large part, designed by people who would benefit if they failed. It's like selling someone a lock that was designed by burglars.
- jamiequint 17y ago
  Thats the definition of any zero sum bet though. Puts are also designed by people who will benefit if stocks drop in price, that doesn't necessarily make it wrong or bad. The counterparties had access to all the same info Paulson & Co. did, they just didn't analyze it correctly or in as much detail.
  - apsec112 17y ago
    The key difference between the two is that the idea behind a put is extremely simple, while the ideas behind a mortgage-backed collateralized debt obligation are extremely complex. Hence, a counterparty to the put could be reasonably expected to know what they are getting into, while the same does not apply in the Goldman Sachs case.
    - yummyfajitas 17y ago
      As we all know, hedge funds, pension funds and investment banks are completely unable to evaluate complex investments. Note: CDO's are not sold to retail investors.

AmericanOP 17y ago

To discourage misinformation, here's a copied and pasted summary for those who aren't going to read the whole thing: According to the SEC's complaint, filed in U.S. District Court for the Southern District of New York, the marketing materials for the CDO known as ABACUS 2007-AC1 (ABACUS) all represented that the RMBS portfolio underlying the CDO was selected by ACA Management LLC (ACA), a third party with expertise in analyzing credit risk in RMBS. The SEC alleges that undisclosed in the marketing materials and unbeknownst to investors, the Paulson & Co. hedge fund, which was poised to benefit if the RMBS defaulted, played a significant role in selecting which RMBS should make up the portfolio. The SEC's complaint alleges that after participating in the portfolio selection, Paulson & Co. effectively shorted the RMBS portfolio it helped select by entering into credit default swaps (CDS) with Goldman Sachs to buy protection on specific layers of the ABACUS capital structure. Given that financial short interest, Paulson & Co. had an economic incentive to select RMBS that it expected to experience credit events in the near future. Goldman Sachs did not disclose Paulson & Co.'s short position or its role in the collateral selection process in the term sheet, flip book, offering memorandum, or other marketing materials provided to investors.

flipbrad 16y ago
It's not clear to me what this is - Paulson facing corruption charges, Goldman facing breach of fiduciary duty/conflict of interest, or Goldman and Paulson facing conspiracy to defraud?
- MaysonL 16y ago
  Eventually all of the above, if we're lucky. Right now, just GS lying to investors.

known 17y ago

Too little. Too late.

anigbrowl 17y ago
Disagree. I would rather the delay than the SEC going on a fishing expedition and being unable to make the charges stick and undermining its own credibility in the process.This is a very high-profile target and my [i]hope[/i] is that SEC investigators are taking a 'measure twice, cut once' approach.
julio_the_squid 16y ago
Agreed, I think anybody that has watched the history of major banks and their political chums for the past oh, 200 years or so, knows that this will amount to a slap on the hand, much less than they gained through their various activities of the sort, and will prove to be little deterrence or punishment.

startuprules 17y ago

1. Sell doomed products to stupid clients 2. Short those products 3. Profit X 2 ! 3a. If fail, have taxpayer pay for it

deleted 17y ago
[deleted]
warfangle 17y ago
If I read it correctly, it's not that they sold doomed products to stupid clients. It's that they represented the products as awesome, when they knew they were structured specifically to be doomed.
- drunkpotato 17y ago
  Correct.
- jamiequint 17y ago
  Its the job of Goldman's investment bank to broker product not take one side or the other. It didn't matter to Goldman if they were "doomed" or not (in fact when Goldman structured them Goldman may have even thought Paulson & Co were the fools) they were trying to find pairs of parties willing to take bets against each other and make a commission.
  - dsplittgerber 17y ago
    In the process of structuring and pairing willing parties they just forgot to mention one party had privileged information about what the product actually was. That is not what a supposedly neutral broker does.
    - jamiequint 17y ago
      Sorry, you're wrong. Both parties had access to the mortgages in the pool. Paulson & Co. just had a more accurate analysis of what they were actually worth because they had done in depth macroeconomic research on the residential mortgage market.

csomar 17y ago

Dow, Nasdaq and SP50 are sliding down. I wonder how much this will affect the economy.

dsplittgerber 17y ago

Doesn't anyone else think this is a just a short-term measure to appease public opinion? It was obvious something like this had to happen, there is still a lot of blame to be attributed. Alas, it's the easy way out. Of course, some of the things that happened have to be brought to court, as there definitely was at least misrepresentation, if not fraud, involved. That doesn't change the fact that there are much larger things amiss. 1. Regulators who are ill-suited and ill-willing to enforce existing standards, not to mention any kind of additional authority that gets bestowed on them soon. There are numerous cases of whistles rightly being blown where regulators didn't do anything. Selective enforcement is worse than no enforcement at all. 2. Too much governmental interference in markets and backstopping of market actors to let markets function properly - but blame it all on the markets afterwards and cover up all kinds of fraud at Fannie/Freddie. This encourages fraud in markets which the government kindly looks down upon (it's housing, after all) 3. No consistent policy regarding bail-outs. If you bail-out market actors, you have to split up 'too big to fail'-institutions; otherwise it's just a game of waiting for the next tax-payer-sponsored bail-out.

cwp 17y ago
No, it doesn't solve all the deep-seated problems in our financial/political system. But it's still good news, because: - Court cases tend to make public previously secret information. Witness the recent publicity of banks under-reporting their debt levels. That pretty much came out of the Lehman bankruptcy proceedings. Lehman's accounting tricks came out in court, and people started wondering if other banks were still doing it. - It keeps the issue in the spotlight so that politicians feel pressure to do something about it. Perhaps this will help strengthen the Senate's reform bill. - The SEC is finally doing its job again! It's a small step, yes, but it's a start. Go Schapiro!
barmstrong 17y ago
Totally agree - this feel like "security theatre" at the airport - except it's SEC theatre. The SEC has largely failed in it's mission to prevent things like this happening in the first place - going back and arguing over whether it was technically fraud or not with the benefit of 20/20 hindsight isn't going to prevent stuff like this from happening again. People get sold bad investments all the time - the onus is on you as the buyer to make good decisions and do your research. If you feel it's fraud, the courts are available to you as a private party. The SEC doesn't add any benefit to this equation that I can see. It does perhaps add one negative to the equation by encouraging people to take these investments "on faith" because they believe (incorrectly) that the SEC is effective at watching out for them.

signa11 17y ago

this is pretty instructive: CARY LEAHEY, SENIOR MANAGING DIRECTOR, DECISION ECONOMICS, NEW YORK: "The SEC has come out swinging, going after the biggest, most recognized name on Wall Street with regard to alleged abuses in the credit derivatives market. This will be a difficult case to prove, particularly to the laymen on the jury, as even supposed experts on Wall Street with years of experience in this area are still scratching their heads trying to figure out who did what to whom and when."

ajg1977 17y ago
1) Create hand-picked collections of assets a favored investor wants to bet large sums against. 2) Sell those packages as investments to other clients, with clear statements that they were chosen by independent parties. Doesn't sound too difficult to prove to me.
- iron_ball 17y ago
  It's easy to phrase it that way, hard to prove (to a legally sufficient degree) that that phrasing is correct.
  - MaysonL 16y ago
    Hard to prove beyond a reasonable doubt, maybe. But this is a civil case, and I believe the standard is merely by a preponderance of the evidence.

justlearning 17y ago

would anyone know what would be the fall out from these charges?

anigbrowl 17y ago
I'll hazard a guess (and it is no more than that - IANAL), based on the complaint and the cited statute: - about $2 million in direct fines - return of the $15-20 million GS made in brokerage fees - return of any bonuses made by 'Fab' Tourre - 'equitable relief...appropriate or necessary for the benefit of investors' This last is extremely open-ended and the nature of such relief is up to the court. It can take many possible forms and I have no idea what the norm is in such cases, only that it is technically complex. It does strike me, however, that the complaint specifically mentions two investors; IKB, a german bank, lost $150m; and ACA (who may or may not be considered 'investors' in this context) fell into the arms of Royal Bank of Scotland, who ended up paying ~$860 million to GS, most of which went to Paulson & co. This figure is mentioned explicitly in the complaint. Now, RBS got into trouble themselves (partly as a result of this), and at this point are ~80% owned by the British government. Fabrice Tourre, the Goldman VP at the center of the complaint, currently an executive director of Goldman Sachs International, based in London. This coincidence might or might not have a bearing on the outcome. Knowing the British tabloid press, I'm willing to bet that at least one of tomorrow's front pages will feature a picture of Mr Tourre with a caption along the lines of 'have you seen this man?'

claymmm 17y ago

This is exactly like an arsonist burning down a building to collect insurance. It's plain old fraud.

billybob 17y ago
Upvoted. But there's a difference - the arsonist is only allowed to get an insurance policy on buildings he owns. It's more like an arsonist taking out insurance policies on other people's buildings, THEN burning them down. Except we don't allow crazy antics like that with insurance. And the insurance companies have to keep money reserved to pay out claims. And it has to go on their balance books. So what we have here is "a building just burned! Oh crap, who has insurance on that? Who sold it? Who's going to go broke? Who shouldn't we lend money to? Nobody knows!"
- lkijuhyghjm 17y ago
  It's more like a doctor being able to take out a $M life insurance policy on a patient before he operates!
  - warfangle 17y ago
    Or, while we're on the analogy train, a doctor taking out a $MM life insurance policy on a terminal patient before he performs an operation (which will in no way help the patient live longer), collecting the patient's health insurance dollars along the way.

prosa 17y ago

I particularly enjoyed this quote from Tourre (the named VP defendant), talking about how they have to move fast: More and more leverage in the system, The whole building is about to collapse anytime now…Only potential survivor, the fabulous Fab[rice Tourre]…standing in the middle of all these complex, highly leveraged, exotic trades he created without necessarily understanding all of the implications of those monstruosities!!! Fabulous Fab indeed!

johnohara 17y ago

I've always viewed CDO's as being similar to "pointer-based" securities. GS sold the value of the pointer rather than the value of the data at the location. Like any memory crash, when the value at the location is wiped out, any pointer to it is useless. Shorting the value of the pointer makes sense when you know ahead of time that the value at the location will soon be clobbered.

va_coder 17y ago

Goldman is so powerful. I'm shocked the SEC is brave enough to do this.

siavosh 17y ago
Let's not count the chickens before they hatch. The SEC is known for filing highly public cases just to get pressure off their a. This case might very well be discarded 6mo down the line and be reported in a footnote in the last page of the WSJ business section.
- va_coder 17y ago
  Yea..the unfortunate and unjust reality sets in

va_coder 17y ago

Perfect example of the deck being stacked against the little guy

va_coder 17y ago

It'll be interesting to see which political campaigns Goldman contributes to in this year's election.

rrhyne 17y ago

I doubt this is going anywhere. The suit is civil, not criminal which likely means no one is going to jail. They'll get find 1% of what they made on the deal and call it the cost of doing business.

MaysonL 16y ago
No one is going to jail. Yet.

otakucode 17y ago

Will they have the guts to fine Goldman even one millionth of the amount they earned through the fraud? I seriously doubt it. For all intents and purposes, Goldman Sachs IS the United States economy.

cryptnoob 17y ago

What everybody here is forgetting, is that this is a civil suit. Why not charge them criminally? Bottom line, this has been staged to defang them in front of next weeks house hearings on banking reform. It's theater. That's not to say it might not be true, but if you really think the administration wants to clean things up, ask why this is a civil action.

anigbrowl 17y ago
The SEC lacks authority to bring criminal prosecutions. The DoJ has to do that, although the SEC may assist them. Not sure what role they can or do play in criminal proceedings brought by the State of New York.

manderson2080 17y ago

This whole problem had two starting points. 1. The repeal of the Glass-Steagal act. This allowed banks to undertake the business of commercial banks, investment banks, and insurance agencies. That means that, banks were able to build these complex derivatives, use money from people's savings accounts to partake in risky investments, and then insure them with high standards. All from under one roof. 2. The investment firms went public. This was a fundamental change in the 80's where Goldman, Morgan Stanley, and many others where they became officially owned by the public. That ment that the risk of all their losses was owned by the shareholders as well as profits. Risky investing became the norm, because if you lost a ton of money for Goldman, you may have gotten chewed out or lost your job. But if you made a ton of money for Goldman, you had a very large bonus waiting for you. Now this mindset has just grown out of hand. It's greed that is driving our financial center, Wall Street.

aaronbrethorst 17y ago
Also known as the Gramm-Leach-Bliley Act. http://en.wikipedia.org/wiki/Gramm–Leach–Bliley_Act http://en.wikipedia.org/wiki/Gramm–Leach–Bliley_Act That Gramm guy is Phil Gramm, who later went on to say that the recession was all in our head's and that we're a nation of whiners. http://www.huffingtonpost.com/2008/07/10/mccain-adviser-americans_n_111857.html http://www.huffingtonpost.com/2008/07/10/mccain-adviser-amer... He also happened to be McCain's chief economic advisor and a co-chair of McCain's national campaign during the 2008 Presidential campaign. http://money.cnn.com/2008/02/18/news/newsmakers/tully_gramm.fortune/index.htm?postversion=2008021917 http://money.cnn.com/2008/02/18/news/newsmakers/tully_gramm.... Too bad we elected a socialist to the White House. Think how much better we'd be off with McCain and Palin right now! Goldman Sachs would be just fine! The economy would be great! Phil Gramm would be vindicated! Or we'd be living in the economic equivalent of the Weimar Republic right now. Yeah, that's probably more likely.

Tawheed 17y ago

Too bad VCs haven't figured out a way to short startups yet.

ashbrahma 17y ago

The great american bubble machine. Excellent article about GS by Matt Taibbi on the Rolling Stones magazine: http://www.rollingstone.com/politics/story/29127316/the_great_american_bubble_machine http://www.rollingstone.com/politics/story/29127316/the_grea...

anigbrowl 17y ago

Rabobank (NL) has an active civil suit against Merill Lynch (now owned by Bank of America). According to their attorney, ML employed the same mechanism as GS on behalf of Magnetar (discussed below). http://www.businessweek.com/news/2010-04-16/merrill-lynch-used-same-alleged-fraud-as-goldman-bank-claims.html http://www.businessweek.com/news/2010-04-16/merrill-lynch-us...

sabat 17y ago

Seven words: Federal Pound-Me-in-the-Ass Prison. OK, yeah, I know, they're only civil charges. But a boy can dream.

dpatru 17y ago

This American Life had a program on this last weekend: http://www.thisamericanlife.org/radio-archives/episode/405/inside-job http://www.thisamericanlife.org/radio-archives/episode/405/i...

known 17y ago

I think breach in http://en.wikipedia.org/wiki/Chinese_wall http://en.wikipedia.org/wiki/Chinese_wall in GS is responsible for the subprime crisis