Saturday, April 17, 2010
A short note on the Goldman Sachs enforcement action
By now, everybody knows that the Securities and Exchange Commission is bringing an enforcement action against the world's most consistently profitable investment bank, Goldman Sachs, for allegedly structuring a complex mortgage securities transaction for the benefit of John Paulson, a hedge fund operator. The New York Times has a fairly comprehensive write-up in today's paper edition. Outside the Beltway covers the waterfront. Interestingly, the SEC is not bringing an action against the supposed beneficiary, billionaire Paulson. By way of explanation, the SEC says that Paulson did not actually make any "misrepresentations" in the deal.
Well, no, but is it really the case that the SEC could not find a conspiracy or aiding and abetting claim to file?
More likely, the SEC did not go after Paulson, the dude who actually seems to have profited from this alleged fraud, because they want him to be a friendly witness against big, bad, Goldman Sachs.
So why go after Goldman Sachs? Setting aside the chance that the SEC might just be doing its job -- it is certainly possible that Goldman actually committed fraud here, although that firm has famously rigorous compliance and risk management programs, so I doubt there is anything endemic -- there are at least two other reasons.
First, Goldman is so unfashionably profitable that there are obvious political points to be scored among jealous people and redistributionists. Fair enough, such actions are the stock and trade of prosecutors everywhere, in all governments.
Second, and perhaps most significantly, an attack on Goldman softens up the political defenses of the financial services industry for the massive regulatory reform that Barack Obama wants to pass this year. Ezra Klein notices the connection without drawing the conclusion:
Blanche Lincoln's derivatives bill is up. It's called "The Wall Street Transparency & Accountability Act of 2010," and you can get the text, the summary, and the section-by-section here. And it's good timing for Lincoln: The Goldman Sachs fraud filing that's in the news has to do with their treatment of -- yes, you guessed it -- derivatives, which is going to make this issue seem a lot more concrete for people.
Dollars for donuts that "good timing for Lincoln" is no coincidence.
Of course, your results may vary.
48 Comments:
By 
, at
Sat Apr 17, 12:05:00 PM:
You read way too much into things you know almost nothing about.
For example, I've never seen an aiding and abetting claim regarding a filing with the Commission. To make out such a claim, one would have to show that the aider and abettor knew of the disclosure obligation and assisted in not making the disclosure. (Knowledge after the fact would only be enough for accessory after-the-fact, but because of the odd ways the securities laws DO NOT work, there is not accessory after the fact liability -- and even that would be dubious.)
On the contrary, if what is reported in the New York Times is true - that Paulson picked, in some way, the securities, or he was even allowed to make a bet on a tranche knowing to be poorly collateralized -- and that wasn't disclosed - I can't see much more of a serious violation of the security laws. I don't know the facts, but if what is true in the Times (as reported) is true, it's a ludicrously offensive practice.
I also have no idea why you think you have thought this through when you are blathering on about the legal requirements of aiding and abetting when you know almost nothing, and probably nothing, about those requriements. (For example, of all the securities acts - the '33 Act, the '34 Act, and the two '40 Acts - only the '34 Act even has a aiding and abetting statute. There isn't even a conspiracy statute, unlike the criminal code. Which in one recent major case, led - as the former GC of Schwab pointed out to me - to the bizarre result that folks who pled guilty to criminal charges in the SDNY got the SEC charges related to the same conduct dismissed. The securities laws are full of more holes than you could shake a stick at ... when it comes to many types of fact patterns.)
No, this has the air of serious conduct, reported by the NY Times in December, that the agency didn't want to appear to be sitting on forever.
And regarding "anything endemic." LOL. You again have no idea what these firms try to get away with. Simply no frigging idea.
Didn't you read the story in the NYTimes from a week ago Friday, about the balance sheets of major banks, and quarter end, as reported by the Fed....???
Youre living in a corporate apologist world. As though the crash happened through a series of innocent mis-steps. But then you don't see what those inside the agency see. It's a testament to SEC incompetence, not lack of factual bases, that there aren't many more such actions.
By , at
Sat Apr 17, 12:09:00 PM:
Btw, you have no idea what firms try to get away with because you don't see the facts, up close and personal, so to speak. You see headlines of settlements reached to avoid expenditure of resources, when individuals behind the entities are involved in some truly objectionable sh*t.
Again, you got no idea. Stop writing commentary not based on carefully researched facts. It's beneath you. Heading off into Fox/MSNBC land.....
By 
Bomber Girl, at
Sat Apr 17, 01:04:00 PM:
I'm just wondering what GS' new scenario analysis regarding reputational risks is coming up with on this one. The deal looks slimy - even if it turns out to be legally intact, and they lost money on it. Not to mention the fodder it provides for reform legislation.
By Escort81, at
Sat Apr 17, 01:56:00 PM:
I can't believe I am saying this, but I actually agree with Henry Blodget that the case against Goldman is rather weak. As far as I know, Blodget has not been an apologist for Goldman, and he does know something about deliberately misinforming clients in his past life.
I have no particular interest in defending anyone on Wall St., especially since, well, that's what lawyers are for; furthermore, I would like to see specific acts prosecuted (hopefully criminal and not just civil), to the extent such acts contributed to the evaporation of trillions of dollars of capital in 2007-9. Is the "Fabulous Fab" Fabrice Tourre and Goldman Sachs the best place to start?
Under the theory that the SEC is leading with its strongest case, though there may be other shoes to drop, I have to wonder, in the immortal words of Peggy Lee, "Is that all there is?" Or, in the equally immmortal words of Col. Jessep (Jack Nicholson in A Few Good Men), "Please tell me that you have something more, Lieutenant."
The market thinks that there are other signficant shoes to drop, since it dinged the market value of Goldman by about $10 billion yesterday, a figure that is an order of magnitude greater than the losses due to the alleged fraud in this case.
What is most remarkable to me is the extent and depth of the outright hatred many blog commenters are expressing toward Goldman as a firm -- it is as if everyone has become Matt Taibbi, the Rolling Stone reporter who coined the term "vampire squid" to describe Goldman. The hatred comes from people with no Wall Street experience and also from those who work on (or recently worked on) the Street.
I hav few illusions regarding Goldman and the manner in which it uses its size and strength to transact business and generate very significant profits. Since about 1992, the firm has been essentially a little M&A and corporate finance advisory firm attached to a big hedge fund. Where the haters lose me, in terms of a logical thread, is the belief that Goldman is at the center of some criminal conspiracy to control the world. The handful of people I know who work there can't even control their kids.
By , at
Sat Apr 17, 03:17:00 PM:
I'll leave the legal details to those who know something about it. What I find interesting is the timing. When the pros are in charge, in Washington, no newsworthy government announcement is happenstance. Here the levers of government are being used to further the policy agenda. Contrast that with all the dumb pronouncements we've heard in the last year from say, AG Holder. The Obama team is learning how to play the game and becoming more formidable. Wouldn't be good to underestimate them. Defeating them is too important.
M.E.
By , at
Sat Apr 17, 03:46:00 PM:
By , at
Sat Apr 17, 04:36:00 PM:
Can you say conflicts?
There's a reason GS fell 13% in an hour. They have a big exposure, especially over reputation.
You can try to say that GS was only a bookie ... that some clients wanted "long", another wanted "short" ... but it doesn't fly.
Instead, it sure looks like GS fucked over their dumb money clients. You can find the pitchbook for the ABACUS deal on line. There's no mention that Paulson was involved in it, let alone that he instigated it, that he did negative cherry picking to structure it so it would suck ... nor that he was shorting it. Instead, the SEC complaint says that GS misrepresented to key participants that Paulson was long in ABACUS, not short. If this is true, GS loses. Foreign bank investors lost $1 billion on this one deal, it's not a small thing.
GS got Wells notices on this months ago. Some companies disclose Wells notices, many don't. Thus, it looks like the SEC could have brought theses charges months ago. Thus, the timing certainly seems tied to the big push on Financial Services Reform. But that doesn't mean GS is innocent.
Carl Levin's committee will be all over this later in April. McCain is the ranking Republican --- expect him to go medieval on GS's ass. McCain thinks Hank Paulson cost him the election. What will come out is that GS -- and other banks -- were shorting the mortgage deals they were doing. We could also learn how involved GS was in creating a run on Lehman, etc. One banker -- who took to wearing a "I shorted your home" T-shirt will become infamous.
Frequent readers here may recall my mentioning this stuff months ago. Obama held this back, but that doesn't mean he's not playing a good card.
Other banks have exposure, but GS will be painted Public Enemy #1 by the end of April. They have a lot of blood on their hands, and a lot of enemies. ABACUS is just the start. As the old Wall Street saying goes, "pigs get slaughtered." They should have eased Blankfein out months ago. Instead, this now won't end until the little porker finds his piggy little face on a spike ... figuratively of course. Blankfein is out of central casting -- if this were a movie, I'd cast Peter Lorre.
I hope those NYC gun permits came through for applicant Goldman partners. They may need them.
The political splits on this will get interesting. TH and some of the posters here won't have much company defending Goldman. Even Blankfein would call it a losing bet.
I fear that the good side of Wall Street -- capital raising for business -- is going to get hurt here. But GS over the last few years has been at the forefront of promoting crony capitalism to their own benefit. They deserve to be blown up and the ground at their new building salted over. But ironically it's not clear that the Obama version of Financial Services Reform will do this.
By , at
Sat Apr 17, 04:51:00 PM:
Too much speculation based upon too little fact.
It's easy to say things that sound good....but understanding the ins and outs of these cases, and the processes involved, is not something one can comment on from a fact or two (the filing of a complaint is all that is generating all this speculative commentary).
it reminds me of headlines where the news reports that: "the supreme court once again today said that abortion is constitutional". The Court says no such thing. They say laws limiting are unconstitutional. Etc. etc.
By , at
Sat Apr 17, 05:13:00 PM:
@Been there, Done that: I'm fairly sure that as a former public company GC and current public company CFO, TH has a passing familiarity with the '33 Act and the '34 Act. I think we can be equally certain that he is familiar with the antics of investment banks. I appreciate your knowledge and your opinion, but not your tone. Try not to sound like such a dick.
By , at
Sat Apr 17, 05:28:00 PM:
"Too much speculation based upon too little fact."
How can you say that. You can read the complaint and related stuff here I have, because it's related to my day job. There's a reason the stock fell 13% quickly.
GS exposure is really over undisclosed conflicts. The SEC charges spells this out. ABACUS was a $2 billion deal -- GS can't just blame it on the VP. ABACUS isn't the only exposure. GS fucks their clients, when they can. "If you shake hands with someone from Goldman, count your fingers." That's the take-away. They'll have a hard time living that down, especially in Europe.
By , at
Sat Apr 17, 05:58:00 PM:
"... but not your tone. Try not to sound like such a dick."
You weren't addressing me directly, but you might have been. I'm being a dick on this thread to be provocative, and to show where this may be going. If you think I sound like a dick now, just wait a month for the broader public reaction I expect.
Levin's Senate committee subpoenaed GS and other banks months ago to seek evidence that bankers questioned 2006 -2007 mortgage deals but still did them anyway. That won't be hard to find. But if it's also revealed that banks profited from shorting these deals -- while joking about it in "Big Swinging Dick" e-mails -- there'll be hell to pay. Levin's committee may pursue other angles as well. Some Republicans -- including McCain -- will be bringing pitchforks and firebrands.
We'll know by the end of the month.
By , at
Sat Apr 17, 06:24:00 PM:
@FormerGC
I think the speculation is dick-ish in the way that Fox News and MSNBC report news in a half-fact checked way.
{TH} will tell you, if he's honest and he knew who I was, that one of us knows a lot more about the '33 Act, the '34 Act, the '40 Act, and the SEC, than he does.
If [TH}'s comments had had a semblance of information behind them (that is a factual basis for some of his wild assertions about the case, for which he has absolutely no basis, and is purely just ranting...not a bit more) then your comment would be justified. I know [TH] well; and I'm quite confident he hasn't a clue about the basis for any of his comments.
So since you are "fairly sure" about [TH]'s level of knowledge, you too have engaged in the fallacy of assuming who knows more and understands it better. I'm sure {TH} knows more about filing 10-Ks; he knows a lot less about enforcement actions and should not be randomly impugning motives without a factual basis, in my view.
In my view, that's what set off the "dickishness" if that's what you want to call it.
You don't think there was a tone to "the SEC couldn't even bring an aiding and abetting charge against Paulson"....without [TH] knowing one iota about the evidence or record of the investigative proceeding.
Come on.... if TH wants to call a spade a spade, he better have the goods, or someone is going to point out his own pontification, to which he is prone (and he will admit as much in personal conversations - he knows it's a weakness of his).
By , at
Sat Apr 17, 07:17:00 PM:
Response to Anon @ 6:24 pm
Jeez, Louise. Chill. Why the personal animosity? We're all just ranting here -- but I think more informatively than what you get from normal media outlets. TH is just teeing it up.
Collective ranting here often gets to something closer to Truth than you get from other media, even if we individually aren't all experts and don't have all the facts.
In that vein ...
If "SEC v Goldman" were a one-off over ABACUS, it would likely have gone the typical route of no public announcement by the SEC until an announced C&D order / settlement. Wouldn't it? But GS didn't even get a courtesy call on Friday before charges were filed. So something else is going on -- wouldn't you agree?
Paulson's not being charged does raise an eyebrow, as he was the instigator. It doesn't matter that the securities laws are still unclear over aiding and abetting liability. Recall that Merrill bankers got jail time over the Enron barge trade -- the SEC/DOJ could find a way to charge Paulson if they wanted to on the facts alleged in the Goldman complaint. Couldn't they?
The timing of these charges is curious, isn't it.
You say you're an expert. Please enlighthen us.
By , at
Sat Apr 17, 08:36:00 PM:
Response to Anon @ 6:24 pm
I know enough about TH, though admittedly more through reputation from others who know him better, to know that he likely is a good CFO and was a good GC. If so, he knows a hell of a lot more about the securities laws than simply how to draft and file a 10-K. He might not be expert in enforcement actions, but I continue to believe that a more respectful tone is warranted. Those of us who have been public company GCs know plenty of people who have been screwed by the SEC and the Justice Dept. and know of at least an equal number of instances in which those who deserved it failed to get nailed. It's one of the primary reasons I chose to be "Former"GC. A skeptical perspective on anything they choose to do is merely being realistic.
By Kinuachdrach, at
Sat Apr 17, 10:57:00 PM:
The Obaminoids may indeed be learning to play the game -- but it is probably too late. This Goldman Sachs case is clearly going to be very important for the financial industry, but it will probably not have much resonance (or impact) in the broader world.
First, the public has no time to keep up with the details. The Cliff Notes version is that nasty rich US bankers screwed some dumb rich European bankers. Is there a problem there? GS will go up in the estimation of most Americans!
Second, Obama has lost control of the agenda, and his LameStream Media buddies can't help him get it back. Worsening employment at home and events in Iran, North Korea, & elsewhere will make the Administration's efforts on bank regulation seem ever further from the real concerns of the US population.
Third, Congress has bigger fish to fry -- such as self-preservation. When Congresscritters get out of the Washington Bubble, they will find out that they are if anything less popular than bankers. And as the gap between the Adminstration/Congress's rhetoric and their abysmal performance becomes ever more undeniable, there will be little public encouragement for show trials.
The GS case will probably work out quite differently from what many people expect.
By , at
Sun Apr 18, 12:39:00 AM:
@FormerGC
There are so many things wrong with what TH said that it would take me an hour to pick it apart.
Regarding his knowledge of securities law, it's obviously not broad enough to know that there isn't even a conspiracy statute. Moreover, his career before his current job was not in litigation. His experience and expertise is not in proof of facts.
You will note this paragraph in the December NYTimes article: "How these disastrously performing securities were devised is now the subject of scrutiny by investigators in Congress, at the Securities and Exchange Commission and at the Financial Industry Regulatory Authority, Wall Street’s self-regulatory organization, according to people briefed on the investigations. Those involved with the inquiries declined to comment."
That is a clear sign that this case was well along the way at that point and that someone from either the Congress or SEC "briefed" reporters on background. That may not have been the case, but it usually takes a fair amount of time for an SEC case, once an investigation is complete, to reach the Commission, be reviewed by all interested Divisions, and then additional time is required for drafting of a Complaint.
The comment that GS did not receive a call Friday is surely fatuous. There were extensive discussions, it is almost assured, trying to settle the matter. Very few SEC matters are brought in court, particularly against companies as large as Goldman.
I am not aware of a case in which the SEC has "screwed" someone. I know people who claim they were screwed. I know plenty of cases in which individuals were let go so that the companies could settle.
I hope Goldman didn't do what is alleged. What is interesting is that DOJ indicts thousands of people every day, and TH makes not a comment - because they are drug criminals and other petty criminals. But God forbid - God forbid - a large investment bank should be charged. All sorts of apologies start getting made.
I think the bottom line is that, were the SEC better staffed, you all would discover that there is a lot more corporate corruption that you are implying. That's another story.
TH can defend himself; just as he has a propensity to make outlandish claims to start an argument. As a friend of his put it, "often wrong, never in doubt."
I'd like a little more factual back-up, myself, when the motives of a law enforcement agency are being so directly impugned, and questions about charging decisions are being raised. Facts matter.
By , at
Sun Apr 18, 01:00:00 AM:
Here are the central allegations of the Complaint, quoted directly and worth reading. There are many parts that merit comment, but it will be interesting to see what the defense is:
"GS&Co marketing materials for ABACUS 2007-ACI-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 experience 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-ACI 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 ofthe ABACUS 2007-ACI
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 interests or its role in the portfolio selection process in the term
sheet, flip book, offering memorandum or other marketing materials provided to investors.
3. 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 ofthe description ofthe 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.
4. Tourre was principally responsible for ABACUS 2007-ACI. Tourre devised the
transaction, prepared the marketing materials and communicated directly with investors. Tourre
knew ofPaulson's undisclosed short interest and its role in the collateral selection process.
Tourre also misled ACA into believing that Paulson invested approximately $200 million in the
equity of ABACUS 2007-ACI (a long position) and, accordingly, that Paulson's interests in the
collateral section process were aligned with ACA's when in reality Paulson's interests were
.sharply conflicting. "
By , at
Sun Apr 18, 01:00:00 AM:
GS&Co marketing materials for ABACUS 2007-ACI-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 experience 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-ACI 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 ofthe ABACUS 2007-ACI
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 interests or its role in the portfolio selection process in the term
sheet, flip book, offering memorandum or other marketing materials provided to investors.
3. 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 ofthe description ofthe 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.
4. Tourre was principally responsible for ABACUS 2007-ACI. Tourre devised the
transaction, prepared the marketing materials and communicated directly with investors. Tourre
knew ofPaulson's undisclosed short interest and its role in the collateral selection process.
Tourre also misled ACA into believing that Paulson invested approximately $200 million in the
equity of ABACUS 2007-ACI (a long position) and, accordingly, that Paulson's interests in the
collateral section process were aligned with ACA's when in reality Paulson's interests were
.sharply conflicting.
By , at
Sun Apr 18, 01:16:00 AM:
Reading the Complaint, obviously IKB was upset about what unfolded.... This Complaint was not, it appears, manufactured by the SEC but the underlying facts were pointed out by some of the institutional investors who, when they discovered what had happened, were quite upset about their losses:
"GS&Co and Tourre knew that it would be difficult, ifnot impossible, to place
the liabilities of a synthetic COO if they disclosed to investors that a short investor, such as Paulson, .played a sigtiificantrole in the collateral selection process. By contrast, they knew that the identification of an experienced and independent third-party collateral manager as having selected the portfolio would facilitate the placement of the COO liabilities in a market that was beginning to show signs of distress.
20. GS&Co also knew that at least one significant potential investor, IKE Deutsche Industriebank AG ("IKE"), was unlikely to invest in the liabilities of a COO that did not utilize a collateral manager to analyze and select the reference portfolio.
21. GS&Co therefore sought a collateral manager to play a role in the transaction proposed by Paulson."
By Gary Rosen, at
Sun Apr 18, 03:19:00 AM:
I'm supposed to be a smart guy, I've got advanced degrees and I'm holding down a fancy high-tech job but man I get confused by all this financial wheeling and dealing. In the end it always makes me think of that WC Fields movie:
"You Can't Cheat an Honest Man"
By Neil Sinhababu, at
Sun Apr 18, 05:58:00 AM:
Probably the best summary I've seen of what Goldman is accused of comes from Steve Randy Waldman at interfluidity. Here's the 3-sentence microsummary:
John Paulson wanted to bet that the housing market was going down, but he couldn't find a sufficiently craptacular bunch of bad housing stuff to bet against. So he had Goldman design a crap-basket for him to bet against. The potential crime is that instead of telling buyers that the unifying principle of the basket was "crap-basket for John Paulson to bet against", Goldman passed it off to them as "well-designed long-term investment for you."
By TigerHawk, at
Sun Apr 18, 07:12:00 AM:
A few observations. Yes, it is true that I am far from expert in the details of SEC enforcement. I know enough about the securities laws and take a conservative enough approach that I have never been the target of either an enforcement action or a private securities law suit in 15 years of being in charge of compliance at one public company or another. So I'm better at staying out of trouble than knowing what one does when one gets in trouble.
Regardless of my ignorance, though, a couple of observations are worth making.
The SEC prosecuted Michael Milken for "aiding and abetting violations of the net capital rule." It was the first time that the SEC had used that cause of action, and for all I know it was the last. The point being, the SEC can be very creative in developing a cause of action when it chooses to be. Perhaps again revealing my ignorance, I find it hard to believe that the SEC could not find a cause of action against Paulson in all of this if it were interested in doing so. I continue to suspect that it decided against such a claim in part because it wanted him as a helpful witness against Goldman, which is the better-publicity target even if it might also be the more culpable on some legal or moral scale. If our Anonymous commenter, who I suspect (on some private evidence) has worked at the SEC, denies that the desire for Paulson's cooperation played any role in the decision not to sue him, I'll believe him, but it would surprise me.
As for the point on the Lincoln bill, it certainly looks as though the timing, targeting, and publicity of the enforcement action against Goldman will turn out, perhaps serendipitously, to be enormously useful to the people who are pushing new regulation of the financial services industry. My own guess is that at a minimum the political value of the case made it much more difficult for Goldman to settle it because the SEC recognized the value in the publicity of it. But again, I defer to our learned Anonymous commenter.
The last observation I would make is that the grumpy commenter does not seem to get the point of the post, or even of blogging. My post was blatant speculation and labeled as such. It was a transparent attempt to drive a discussion. The speculations were not grounded in expertise more than experience in the way of Washington and particularly the Obama administration, which has begun *every* regulatory assault on an industry with adverse publicity and legal attacks designed to shape public opinion against that industry. The point of the post was not (and is never) to do journalism. We make no such pretensions here. It is to drive a discussion in, I might add, as non-dickish a way as possible (to use an excellent term from earlier in this thread). So the post did its job, and apart from the technical of my legal knowledge -- who really *cares* if there is no conspiracy law, the Milken history suggests that the SEC could come up with *some* collateral cause of action in a case like this -- no commenter has yet persuaded me that the filing of the case, the introduction of Lincoln's bill, and Obama's speech the other day all randomly intersected at the same point in the space-time continuum with no thought for the political consequences.
By Bomber Girl, at
Sun Apr 18, 08:36:00 AM:
By , at
Sun Apr 18, 08:53:00 AM:
I have a confession to make. I went to law school .... practiced for awhile ... and even know a little about the '33 and '34 Acts (who knows anything about the '40 Acts), and then went into banking. Along the way I met a lot of lawyers.
Not all lawyers -- but far too many -- are idiot savants: They can master a narrow, self-referential body of knowledge -- the narrower the better ... but they drown when they try to swim in the deep end of the pool. Witness "Anon - Been there, Done that" ... who obviously has a personal ax to grind, purports to know a lot about SEC enforcement but can't see the forest for the trees: BtDt should stick to proofreading indentures.
*****
Further to TH's last point, the WSJ now says that GS got its Wells Notices nine months ago. Wells Notices are draft charges shown to targets to give them a chance to defend themselves before public announcement of charges. Even the SEC can go from a Wells Notice to formal charges inside of nine months. Thus, we can infer that the delay in bringing charges is tied to the timing of the Financial Services Reform bill. Is it so hard to believe that SEC Commissioner Schapiro takes calls from the White House?
"but it will probably not have much resonance (or impact) in the broader world."
I disagree. I'd expect more "announcements" in coming weeks. Much of this is tied to ramming Financial Services Reform through. The Republicans will be split over this. The bill will now get passed, on the terms Obama wants.
Bigger picture, Obama wants to channel all the anger that's out there onto someone else. Wall Street is a perfect target. Just wait for the upcoming Levin hearings. There's also the Financial Crisis Inquiry Commission.
Lloyd Blanfein may be great guy -- I don't know from him. But he's right out of central casting for a villain ... think Peter Lorre. GS should have eased him out months ago. Instead, I'd bet that Lloyd will end up as public enemy #1. My over/under is that Lloyd will get at least ten covers on the New York Post over two months, none flattering. The gang at MSNBC needs something new to rant about. Even O'Reilly and the Fox crowd will jump on this ... they always want to boost their populist street cred. I wouldn't be surprised to see Madoff-like coverage of Lloyd -- ambush camera crews camped out, etc. before this is over.
By , at
Sun Apr 18, 09:26:00 AM:
"Goldman plated excuses" is a good piece, but it doesn't put ABACUS in any broader context. I suspect there is a broader context -- a $13 billion market cap drop backs me up.
Much of this broader context involves credit default swaps and the like. Years ago, Warren Buffet called them "weapons of financial mass destruction." They should have been regulated as insurance products -- with capital requirements -- years ago. I'd love to run an insurance business without any capital regulation. It's a license to print money, until the hurricane hits. It's insane that the likes of Goldman are still doing what they do now that they're a bank holding company. I may actually side with Obama on this.
By Bomber Girl, at
Sun Apr 18, 09:49:00 AM:
If I was still a stock market analyst (which I'm not) and covering the financial sector (which I didn't), I would venture to say that the massive drop in GS stock (and significant declines in the rest of the sector) is due to market supposition that the profit party is over. More regulations, more capital requirements, more transparency. More lawsuits. Less profit.
By , at
Sun Apr 18, 10:04:00 AM:
As I write, the following are current headlines at Bloomberg, FT, WSJ and Reuters. If you put enough dots on the page, even "BtDt Anon" can draw the cat.
Goldman CDO case could be tip of iceberg
Clients-Come-First Mantra at Goldman Is Undermined by SEC's Fraud Lawsuit
Blankfein faces grilling on Capitol Hill
Britain, Germany Weigh Action Against Goldman
Democrats Seize on Goldman Sachs Suit to Bolster Case for Financial Rules
Geithner Says Financial Overhaul Likely to Pass With Republican Support
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I agree that the market drop has more to do with discounting the effects of more regulation than the one SEC case. Other banks had losses too, the amount probably correlates well to how much they depend on derivatives.
Maybe they'll just go back to capital raising for companies ... the horror!
By Bomber Girl, at
Sun Apr 18, 10:22:00 AM:
I would also add that this particular case is a potent one for a simple reason - it is really not so complicated to understand, so it's political impact is large. You don't have to know anything about derivatives, CDOs or financial markets to get the sense from the SEC action that GS (rogue or endemic, I don't know) favored one investor over another (sucker punch?) by not disclosing some key investment considerations. The emails are pretty blatant. Even if they "win" the case based on legal requirements as written, the push for reform will be helped by the knowledge that this is "OK" under current market practice. Not exactly uplifting. And they are vigorously defending it.
By , at
Sun Apr 18, 10:33:00 AM:
If I'm ranting too much here, forgive me. This is in my sweet spot of quasi-expertise, righteous indignation and Obama paranoia.
Try this: If you type "Goldman SEC" into google you get a "sponsored link" -- which means "paid ad" from www.BarackObama.com that says: Help Change Wall Street It's Time for Financial Reform that Protects Main Street. Act Now! It doesn't work for "Morgan Stanley SEC" nor for "Citigroup/Citibank SEC". www.BarackObama.com is now run by the DNC.
Meanwhile, Geithner and others are doing the rounds of the Sunday talk shows to talk about Financial Services Reform. Coincidence?
The real thing going on isn't about Goldman, nor about derivatives. It's to jam through the creation of a federal bank consumer protection agency as part of Financial Reform. The Republicans are now powerless to resist this. The federal bank agencies already cover consumer issues, but are thought to be too bank-friendly. Can you say "mandated subprime"
By , at
Sun Apr 18, 12:38:00 PM:
I'm certainly no SEC enforcement expert, but the news reports seem to suggest that Goldman gathered investors together to buy some assets and failed to tell them another investor was taking the sell side of the deal. Isn't that obvious?
By JPMcT, at
Sun Apr 18, 04:59:00 PM:
In simple terms..Paulson is the "perp". GS just supplied the getaway car.
Yet Paulson walks.
If Obama is sitting in the front row knitting on this one...he should think how this will play in Peoria.
By , at
Sun Apr 18, 07:13:00 PM:
Paulson wanted to short the subprime market ... God love him ... but that wasn't a crime by itself. Paulson wasn't making the disclosures, and he didn't have a direct fiduciary relationship to the buyers. That's on GS.
Paulson was only an "instigator." I first learned of this term -- and related moral culpability -- when applied to me by nuns while in grammar school. "Who ... me? ... He did it!" To the nuns, "instigation" could be an even worse offense ... but not to the SEC.
Blankfein is scheduled to be in front of Levin's Senate Investigations Committee on April 27. A lot of Senators who are on this panel -- including at least one well-known Republican -- will want to shove a broken bottle up his ass.
Given the detail in the SEC charges and other facts in the public domain ... I could beat Lloyd like a pinata. Imagine what you could do if you had access to GS's internal e-mails.
So here's the opening betting line:
Odds that Lloyd is forced to plead the Fifth on 4/27 ... 50%/50%
Odds that the cover of the NY Post the next day is Lloyd as "Dr Evil" .... 50%/50%
In a fair world, several other CEOs should be in the dock before Lloyd, but so it goes.
By , at
Sun Apr 18, 07:19:00 PM:
OK: a few responses to @TH, @Former GC, and @The Truth is Out There:
1. @TH, speculation. The clarification is much appreciated. I respect that.
2. @TH, aiding and abetting. There is one aiding and abetting statute in the securities law, found in the '34 Act. I do not know the Milken charges but if I am reading correctly, it was pre-Central Bank of Denver. Prior to about 1994, there was no aiding and abetting statute. In Central Bank of Denver, the SCt held that there was no aiding and abetting liability under the securities laws. (For real. Contrast the statutes at 18 USC 2, 18 USC 3, and 18 USC 4, and I think it's 18 USC 355 (conspiracy).) When the SEC returned to Congress to "fix" Central Bank of Denver, they made the decision, I am told, because of hostility to securities enforcement, not to seek a full range of changes covering conspiracy, aiding and abetting, accessory after the fact, etc. As a result, there are fact patterns where one thinks, as a well-educated lawyer, that the law should permit something - it must, so to speak - and in fact the securities laws don't permit it. I should find the name of the recent case where the defendants pled guilty to criminal charges but had the SEC's civil charges dismissed (because the SEC's statutes weren't broad enough). This is an unfortunate problem. I do agree that, on a visceral reading, it SEEMS like Paulson ought to be in there; I disagree that under the securities laws it must needs be the case that he COULD BE if this weren't somehow a thin case against Goldman. That's just not the way how the securities laws work, or the SEC has used aiding and abetting since getting the Congressional fix; and one would have to know the nuance of the record. NOTE: the charge against GS is a disclosure charge, not a market manipulation charge. It's a much tougher argument to say B aided and abetted A in not saying enough....unless there's a good case that B knew what A was disclosing and tried to get A to say less..... I have seen cases like this in analogous settings where A and B are, in some sense acting in concert, but the primary violator A illlegal conduct under the securities laws does not imply B was engaged in illlegal conduct. True. More common than you'd think.
@The Truth is Out There: Timing of Wells Notices. My guess here is that this case went through a lengthy period of vetting internally, and negotiation with GS externally. It is routinely the case that a substantial period passes between a Wells charge and filing of charges. For one, a Wells Notice then typically gives the other side 40 days to write the submission. BUT they often get an extension. And it takes about 2 months to go before the Commission for authority. There likely was additional fact-finding after GS submitted its Wells submission in response to the Wells notice, to make sure a mistake wasn't being made. NOTE: This extremely cumbersome, lengthy process is one of the main complaints against the SEC's enforcement division, in many respects. I have a friend who worked out a plea in a criminal case [DOJ] in 3 weeks, and had to wait 6 months for the SEC to finish its approval of its (civil, and less serious) settlement. THAT is a joke. THAT is reason to be concerned about the SEC. However, in a case like this, there would be a lot of jockeying all along the way by both sides, no matter who had it.
By , at
Sun Apr 18, 07:20:00 PM:
@TH. Timing. I seriously doubt any timing, other than trying to get it done as soon as they could. No Hill timing. The SEC can barely coordinate the activities of its Divisions on a good day, let alone work a timing feat like you suppose.
@The Truth is Out There. Public Announcement. All cases (ALL) get a litigation release if a complaint is filed. All big cases ($1 billion is big) get a press release once a complaint is filed. It never happens that the SEC says nothing when a complaint is filed. It does not always involve a press release, but this kind of case, involving a large financial institution, is almost always going to get one. I can't imagine the opposite.
@The Truth is Out There. "find a way to charge Paulson" See disclosure comment v. market manipulation comment. Not knowing the record, I don't know the answer. I'd have to know the record. I hesitate to say anything at all without knowing the record.
@The Truth is Out There. "BtDt should stick to reading indentures." BtDt = this Anon. BtDt has never read an indenture, much as TH has never litigated an enforcement case with the SEC. BtDt hopes to never read an indenture. BtDt would poke his eyes out with a stick if forced to read an indenture, and picks up a #2 lead pencil and eyes it with malice aforethought every time he/she is forced to wade through a 10-K or 10-Q in detail.
Hope that all helped. I doubt much is going on other than SEC possibly having a very interesting case. I wish I knew the facts (beyond the complaint, the nuance of proof, etc.) I'd like to know if this is as bad as it really appears to be. I'd also like to know if there is a technical defense for GS, even if they did what is alleged. I could explain, but it would go on for quite a long while, and I think the conduct, if alleged is true, is pretty slimey, so I'm not looking to give GS any ideas on how to avoid liability.
By , at
Sun Apr 18, 08:38:00 PM:
To BtDt Anon at 7:19
Re: aiding and abetting
"Central Bank (1994)" only limited "aiding and abetting" in the context of private actions for market losses. Instead it re-affirmed -- and endorsed -- the SEC's authority to bring enforcement charges for "aiding and abetting." In this regard, the PSLRA amendments (1995) only confirmed existing law. The SEC brings "aiding and abetting" cases all the time -- both before and after Central Bank. This stuff is not in my sweet spot of quasi-expertise, but I now think I know more about it than you do.
Re: timing
Everyone and his mother suspects the timing is tied to Financial Services Reform, and not a coincidence. Even www.BarackObama.com was in on it. So are you a fool or disingenuous?
Re: SEC announcement
The SEC filed its complaint and press release without giving GS any immediate warning. Of course GS knew this shoe might drop at some time. But the lack of warning is why GS could only first respond with a one line press release while its stock was in free fall. This isn't quite Eliot Spitzer scumbag tactics, but GS should have gotten some warning. It's the professional, correct thing to give a call first, even if you're putting a broken bottle up their ass.
Re: Paulson
See my comment above.
Re: Indentures / 10-Ks
I often read Ks and Qs with interest. Primary sources like this are the best. Financial footnotes can be a mother load. You show your ignorance.
***
"I doubt much is going on other than SEC possibly having a very interesting case. I wish I knew the facts ..."
No further comment. Over and out ....
By , at
Sun Apr 18, 09:02:00 PM:
@THIOT
I demur. More words is a waste, except to say this much.
Be careful. I think you have no idea who I am. And I'm quite confident I can run circles around you on these issues. For days.... for days.... and even longer. If you knew who I was, or what I know, I think you'd agree.
Ignorance? LMAO. LMAO.
:)
By , at
Sun Apr 18, 09:09:00 PM:
Btw, read pages 182 to 183 of Central Bank, as reported in the US Reports. You will realize that there was no general aiding and abetting liability, and the Court did not say that the SEC had such general authority. Its opinion makes clear that the SEC did not have that authority under section 10(b).
Among other things, the Court says "More to the point, Congress has not enacted a general civil aiding and abetting statute - either for suits by the Government (when the Goverment sue for civil penalties or injunctive relief) ...."
It then lists a few sections in the '34 Act that allow the SEC to sue aiders and abettors. That was the reason for the amendments that led to section 20(e), if I have the cite right.
I could go on.
So much for my ignorance. I let you, and others, draw your own conclusions about your own scope of knowledge.
By , at
Sun Apr 18, 09:23:00 PM:
My own conclusion, reading all the various comments, is that if BtDt worked for the SEC that explains a lot. Just sayin'.
By JPMcT, at
Sun Apr 18, 09:35:00 PM:
What's up with this Anon 09:02 dude carrying on like he is the second coming of Christ!!!
If you are so impressive...shed your anonymity and allow us all the privilege of kissing the hem of your garment!
Until then, as far as I am concerned, you are a 12 year old geek sitting in your underwear in your parents rec room typing with one hand!
By , at
Sun Apr 18, 10:13:00 PM:
It's a blog....that's the fun of it. As TH points out. You can only take it so seriously. If you were talking serious journalism, as TH says, then you'd have to be a lot more accurate, careful.
It ain't work. Everyone is BSing a bit. As TH points out. Which is a fair point.
By , at
Sun Apr 18, 10:24:00 PM:
I'm glad the SEC finally grew a pair, whatever the spin.
Long overdue.
By Bomber Girl, at
Mon Apr 19, 08:23:00 AM:
Today's press (WSJ): "Goldman Sachs Group Inc. officials said they knew as far back as August 2008 that regulators were examining controversial mortgage securities created by the firm but were stunned by the bombshell civil fraud suit lodged against it Friday, with most having learned about it from news reports.
Firms typically get a chance to settle such suits, but not in this case, Goldman said."
Anon/BtDT: "The comment that GS did not receive a call Friday is surely fatuous. There were extensive discussions, it is almost assured, trying to settle the matter. Very few SEC matters are brought in court, particularly against companies as large as Goldman.
I am not aware of a case in which the SEC has "screwed" someone."
Anon/BtDt: "Come on.... if TH wants to call a spade a spade, he better have the goods, or someone is going to point out his own pontification, to which he is prone.
"I let you, and others, draw your own conclusions about your own scope of knowledge."
Works both ways. Just sayin'.
By MTF, at
Mon Apr 19, 01:21:00 PM:
My prediction is that the SEC suffers mightily from this case, and that before it's all over this will look even to the Obamanation like a political persecution. That is, unless Goldman decides to rescue the government from their own stupidity and settle.
The investors who bought the product in question were obviously sophisticated investors and knew that an equally sophisticated investor was on the other side of the trade. GS claims there is no crime here, unless the name "John Paulson" can itself be made to be a material ommission. This looks like a bizarre case.
By MTF, at
Mon Apr 19, 05:19:00 PM:
In their initial defense to last year's Wells notice, Goldman makes the same point I made, only better:
"The bottom line is that no amount of disclosure would change that the very sophisticated investors already knew that some entity or entities by necessity had to take a short position, and that any and all participants – including themselves – might express their views as to the reference portfolio. None of these descriptions contains any concrete, analyzable information that might educate the sophisticated institutional investors that typically purchase synthetic CDOs. Regardless of who selected them, the offering documents for each of the reference securities disclosed detailed information on their underlying assets, as required by Regulation AB. It is this concrete information on the assets – not the economic interest of the entity that selected them – that investors could analyze and use to inform their decisions."
By , at
Mon Apr 19, 06:05:00 PM:
"Regardless of who selected them, the offering documents for each of the reference securities disclosed detailed information on their underlying assets, as required by Regulation AB."
Bullshit.
SEC Regulation AB was a contributing factor to the mortgage meltdown as it obscured detail on the actual underlying mortgages. Adopted in 2005, it assumed investors need only rely on the MBS ratings. They didn't get the detail to assess what went into the pools.
Thus, folks like GS and Paulson could put themselves in an advantaged position.
On April 7, 2010 the SEC proposed a total rewrite of Regulation AB to require " ... specified asset-level information about each of the assets in the pool. The asset-level information would be provided according to proposed standards and in a tagged data format using eXtensible Markup Language (XML). In addition, we are proposing to require, ... the filing of a computer program of the contractual cash flow provisions expressed as downloadable source code ..."
Some would call this closing the barn door ...
This is but one of several examples of where the SEC served us poorly over the last decade. It's more subtle than missing the Madoff ponzi scheme, but caused far more damage.
"My prediction is that the SEC suffers mightily from this case ..."
... and I predict Lloyd will be one of the most hated people in America within a month. Not saying he deserves to be, just that that's how it'll play.
By MTF, at
Mon Apr 19, 06:27:00 PM:
No question the Democrats want to make Lloyd hated, and bankers more generally as a class too. As a result of this ill-advised show trial, the SEC may end up looking like (and probably actually are) buffoons and hacks but the administration will ensure that Goldman and the banking industry is demagogued from start to finish.
If the Tea Party groups are populist, and composed of a representative slice of America, this is a nasty perversion of populism designed to make the leading party look like they give a shit about “Main Street”. So what if banks and bankers have to be made to suffer, goes the thinking, because they make a lot of money and the voters can easily be focused on and hate that central fact.
This is really ugly politics.
By , at
Mon Apr 19, 07:01:00 PM:
DC deserves most of the blame, but Wall Street is culpable too. Goldman appears especially egregious -- I half believe that they've been a vampire squid. They've certainly promoted crony capitalism. Tell me how I'm wrong -- God's work indeed.
Obama has a winning hand here. He should be able to split the Republicans on this, and get Financial Services Reform approved. The tragedy is that it won't solve the real problem: that we can (1) allow casino banking or (2) enable "too big to fail", but having both just invites another crisis, probably within the next decade.
Obama will also slip in what he really wants -- a powerful federal Consumer Finance Protection Agency ... think ACORN redux, with enforcement powers!
By , at
Sat Apr 24, 09:27:00 AM:
