Friday, April 16, 2010

Goldman Sachs Charged With Subprime Fraud

The Securities and Exchange Commission (who should be charged with gross negligence) announced today that THEY are charging the brokerage giant with "defrauding investors by misstating and omitting key facts about a financial product tied to subprime mortgages".

According to the Wall Street Journal:

"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," Mr. Khuzami said.

The guilty pursuing the guilty through the cesspool of Wall Street corruption. I'm unimpressed.

This should be a job for the Justice Department, but I'm afraid that even they are wrapped up in the web. I wonder if there is a way for the attorneys general of all fifty states to come together and prosecute these crooks? Does anyone know?


  1. That sounds a bit like the Magnetar trade - except the Goldman punk in this case apparently made representations which were false.

  2. OK, here's an interesting piece: Henry Blodget (dot com analyst who found himself on the wrong end of an SEC investigation himself) writes that the SEC case is pretty weak.

    The horror is not that he's wrong, of course, but that he may be right. (In other words, possibly the scandal isn't what's illegal, but what's legal).

    Any set of regulations can be gamed. It wouldn't surprise me if what GS and its trader did was completely "legit". (Wouldn't surprise me if they stepped over the line, either.)

    What would surprise me is if this is the very worst the SEC found.

    Here's what I think happened (this is rank and irresponsible speculation, but tough noogies):

    - SEC is under pressure from the White House to make itself look useful.

    - SEC goes trolling through Goldman Sachs' traders' email (GS has the most headline value).

    - SEC makes a list of traders who are without question sociopathic douchebags - those who are emailing within the firm that the deals they are putting together are total crap, while heartily marketing same deals to their clients. Likely that list has a length greater than one.

    - SEC wraps charges around that trader's actions (nice if they are real violations, but not necessary - GS will settle).

    - SEC cold cocks Goldman with the charges. The "tell" here is that they did not respond immediately; usually the SEC gives firms a "heads up" that they are under investigation. Max publicity effect; SEC narrative floods the zone.

    - main value is headline: SEC is seen as "doing something", public has 2 minute hate against GS (well deserved, too; still, it _is_ (IMHO) orchestrated).

    - and any opposition to "banking reform" bill will melt; in the Sentate, but also in the more influential power center: Wall St... which will be eager to avoid pushing the issue, since...

    ...they know full well the list of sociopath traders with explosively embarrassing (if not outright illegal) conduct documented in email trails is much, much longer than one person, and the SEC is prepared to go down that list... or not.

    Not that I expect the "reform" will do much: the object is not actual reform, but the appearance of reform, and most importantly, a "another victory for the White House in the face of Republican intransigence", a "repudiation of Republican led deregulation (ROFLMAO), etc.

    My model of Wall St and Washington as "frienemies" is, I feel, still intact here.

  3. A note about the "headline value" I mentioned above: the particular incident, and the way the SEC chose to expose it, were calculated to inflict max damage to Goldman: not to poison its relationship with the public (they're hated, they know it, they're over it) or Washington (where they can - quite literally - afford to be hated).

    The charges are maximally damaging to Goldman because they poison its relationship with its clients. Bond girl lays this all out.

    Consider: charges which were prima facie evidence of criminality, but which served the interests of its clients, wouldn't be viewed with contempt by those clients. Not a bug, a feature.

    Dealing against your clients and treating them like chumps - that's a bug. (Even if it turns out to be "legal").

    Goldman will want to put a lid on the garbage pile that this gem was fished out of.

  4. Lewy, it's all bad theater. A joke. Nothing will happen to Goldman Sachs. Sachs is, arguably, the most powerful entity on earth.

    There will be high drama in the news, and some schmuck broker will get thrown under the sacrificial bus. The systematic looting of American investors will continue even during the mock investigation, and will continue unabated after the so-called "reform" measures are signed into law.

    GS owns Washington. The only way to effectively clean up our financial system is for the states to band together, investigate, prosecute, and legislate at the state level, IMO.