April 16, 2010
GOLDMAN TAKES A HIT...
Wall Street is a shadow of its former self, and not just because of the financial trauma in late-2008. Technology has long been reducing the relevance of big-city financial centers. Much of what passed as standard operating behavior among previous generations of bankers and money managers working in the financial canyons of New York, London and other cities can now be accomplished in the hinterlands, and probably at a lower cost. But if the writing has been on the wall for some time, it may be accelerating with today’s news that the SEC has charged Goldman Sachs with a rather large fraud in regards to its dealings with the subprime mortgage market. (Goldman denies the charges and claims the government's case is unfounded.)
Here's how Bloomberg News explains the charges:
Goldman Sachs created and sold CDOs tied to subprime mortgages in early 2007, as the U.S. housing market faltered, without disclosing that hedge fund Paulson & Co. helped pick the underlying securities and bet against the vehicles, the Securities and Exchange Commission said today. Billionaire John Paulson’s firm earned $1 billion on the trade and wasn’t accused of wrongdoing. The SEC also sued Fabrice Tourre, a Goldman Sachs vice president who helped create the CDOs, known as Abacus.
“The product was new and complex but the deception and conflicts are old and simple,” SEC Enforcement Director Robert Khuzami said. “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.”
And the core of the SEC's charge, in the agency's own words via its complaint:
In sum, GS&Co arranged a transaction at Paulson’s request in which Paulson heavily influenced the selection of the portfolio to suit its economic interests, but failed to disclose to investors, as part of the description of the portfolio selection process contained in the marketing materials used to promote the transaction, Paulson’s role in the portfolio selection process or its adverse economic interests.
Lisa Endlich told us a decade ago that the Goldman partnership that has for so long endured and triumphed had a “culture of success” via her 2000 book Goldman Sachs . A decade hence, Michael Lewis, among others, paints a less-flattering profile of Goldman Sachs and its Wall Street counterparts in The Big Short: Inside the Doomsday Machine on the subject of subprime mortgages. As for a more general cultural indictment, and one of the more memorable phrases to come out of the financial crisis, Matt Taibbi's in last year's Rolling Stone piece calls Goldman the "great vampire squid wrapped around the face of humanity."
One pundit wonders if we've gone too far. "Are we really to believe that Goldman is the worst offender?" asks Dennis O'Brien at the Huffington Post. "Or are they a convenient scapegoat? Politically, nothing could be a safer bet than attacking Goldman."
In any case, this is now officially the golden age for attacking the world's leading investment bank. Rightly or wrongly, Goldman is on the ropes like never before. One might wonder if the firm will survive after reading today’s news. Given the sharp drop in the price of Goldman shares, as we write, the thought has crossed the minds of a few traders.
Meantime, if any one was wondering if the SEC was willing to bare its teeth in the wake of Harry Markopolos’ indictment of the government’s financial industry watchdog, today’s revelation seems to suggest an answer. If the SEC is in fact a new and more aggressive agency, that represents no less than a complete transformation from the institution that Markopolos encountered when he tried for a decade to warn the government that Bernie Madoff was running history’s biggest Ponzi scheme. To no avail. The old SEC, he writes in No One Would Listen, was unable or willing to do much of anything to act on behalf of investors’ best interest—even when the evidence of an ongoing fraud was handed to the institution on a silver platter…several times.
Today’s SEC looks different, or so the latest news suggests. What are the ramifications of the government’s case? Here’s a sampling of the first round of reactions from the punditocracy this afternoon…
"The news about Goldman Sachs is still very fresh and we do not know all the details but from 30,000 feet the notion that the worst financial crisis in 80 years could tidily wrap up in a year or two is ludicrous."
--Roger Nusbaum, Random Roger
"Finally the chickens are coming home to roost on the greatest short scam of the last decade."
--Jon Taplin, TPM Café
"Three cheers for the SEC!"
--Paul R. La Monica, CNNMoney.com
"Certainly under the leadership of a new chairman and enforcement director, the SEC’s Obama years have marked a hard switch from the posture of the Bush SEC. In 2009, the regulator opened twice as many investigations as in 2008, with fines up 35 percent. The new assertiveness helped cool talk on the Hill that the SEC should be merged with the CFTC and pushed into a giant super-regulator."
--James Pethokoukis, Reuters
"Road blocks for financial regulation have taken a hit today."
--Thomas Villalta, co-portfolio manager of the Jones Villalta Opportunity Fund, via AP
"This is just one SEC filing [i.e., the charges against Goldman]. My guess is that more will be forthcoming."
--Annie Lowrey, Washington Independent
"Finally. Finally. There may be some accountability on Wall Street. This is only a civil suit. Many of these big bankers should probably be in jail, so I'm holding out for criminal charges. But, the SEC showed it has some teeth. This is a good start."
--Joe Sudbay, America Blog
"I’m no lawyer, but here’s my guess as to what is likely to occur: Goldman will deny any wrongdoing, claiming that everything was disclosed to the accredited investors (pension funds, foreign banks and other institutional investors) who purchased Abacus. And even if the SEC’s claim is sort of correct–that it wasn’t disclosed that Paulson was cherry-picking the bad stuff–Goldman will settle for some seemingly large, but ultimately not earth-shattering amount and go on its way. Remember that only Moby Dick and Ishmael survived…"
--Jill Schlesinger, MoneyWatch.com
"Going back to the transaction that instigated this suit, Goldman created and marketed the CDO for $15 million. A substantial sum of money to be sure, but something that could have easily been foregone by the banking titan. In the halcyon days of the housing bubble, Goldman’s bonuses to top producers were factors of that sum.
"It’s unlikely that Goldman Sachs would have walked into litigation where the SEC seeks disgorgement of profits, fines and an injunction over a relatively measly $15 million. The sale of shares in the CDO could have resulted in greater upside for Goldman, but this is just one of dozens, if not hundreds, of similar deals being made on Wall Street at the time.
"A number of reasons for this action come to mind. First, collateral estoppel. If the SEC can get favorable rulings or a fat settlement out of Goldman, it can use them as leverage in future suits against the bank and other financial entities. The specter of a potential lawsuit will chasten other banks and potentially even bring them to the table to avoid future litigation, especially as this mornings news has already sunk Goldman’s stock price (ticker symbol GS) 10%. For executives and employees with much of their compensation tied up in stock options, as was the case at Bear Stearns, the fallout from this event poses a significant risk. There is the rage of populism, which spilled over at yesterday’s nationwide Tea Parties. Though these people cannot quite articulate what Wall Street and, specifically, Goldman Sachs do, they’re mad as hell to see the financial sector enriched as the traditional economy crumbles. Though the SEC has more independence than other agencies, the Commission’s actions are ultimately imputed back to the President, and it’s good press to go after The Great Satan of high finance."
--J. DeVoy, The Legal Satyricon
Posted by jp at April 16, 2010 3:34 PM
Until the criminal indictments begin- and against senior officers- this is all "contained".
Posted by: MarkM at April 17, 2010 7:10 AM