CNBC On The Goldman Complaint - This Is Surreal

CNBC reports that, contra the SEC complaint, ACA was aware of the role being played by Paulson in the controversial Goldman "ABACUS" deal:

The government has testimony from a Paulson & Co. official that could contradict its own claims against Goldman Sachs, CNBC has learned.

Paolo Pellegrini told the government that he informed ACA Management that Paulson intended to bet against, or short, a portfolio of mortgages ACA was assembling.

...CNBC has examined documents in which a government official asked Pellegrini whether he informed ACA CDO manager Laura Schwartz about Paulson's position in the portfolio, named Abacus 2007-AC1.

"Did you tell her that you were interested in taking a short position in Abacus?" a government official asked Pellegrini, referring to the name of the CDO portfolio.

"Yes, that was the purpose of the meeting," Pellegrini responded.

...CNBC further learned that Pellegrini and Schwartz met at least three times to discuss the CDO and Paulson's short position on Abacus.

Because of the deal's structuring, Paulson stood to gain $900 million from the deal but lose only $20 million.

How did that work?  Just roughly, Paulson held $20 million of equity, intended to absorb the first losses on the underlying index bonds.  However, Paulson also bet that remaining $1 billion in bonds would fall by a lot more than 420 million, as they eventually did.

The SEC bobbed and weaved around that in its complaint.  For example, this is from p. 15:

50. Based upon the January 10, 2007, “Transaction Summary” sent by Tourre, the January 12, 2007 telephone call with Tourre and continuing communications with Tourre and others at GS&Co, ACA continued to believe through the course of the transaction that Paulson would be an equity investor in ABACUS 2007-AC1.

Well, ACA may have believed it because it was true; that does not mean that Paulson was exclusively long the bond portfolio.

This is from p. 2 of the complaint:

Tourre knew of Paulson’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-AC1 (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.

Was it $200 million or $20 million?  Just how long and how badly ACA was misled is more of a mystery; the CNBC report does not provide dates, but per the complaint, ACA was talking with and about Paulson in January and February of 2007.

I had noted earlier that the SEC inclusion of this email snippet may be out of context and misleading:

32.  On February 2, 2007, Paulson, Tourre and ACA met at ACA’s offices in New York City to discuss the reference portfolio. Unbeknownst to ACA at the time, Paulson intended to effectively short the RMBS portfolio it helped select by entering into CDS with GS&Co to buy protection on specific layers of the synthetic CDO’s capital structure. Tourre and GS&Co, of course, were fully aware that Paulson’s economic interests with respect to the quality of the reference portfolio were directly adverse to CDO investors. During the meeting, Tourre sent an email to another GS&Co employee stating, “I am at this aca paulson meeting, this is surreal.”

Surreal why?  Because ACA was learning for the first time what Paulson was up to?  Because the Paulson people were pretending to be bullish on the bonds, and only later outed themselves?  Because it was surreal watching bullish and bearish investors agree on a bond pool that would lead to the ultimate demise of one side?

I don't know.  And I am beginning to suspect that reading this SEC complaint won't tell me.

Comments

[Clarice]

Maybe when the govt reassigned he lawyers who prosecuted Ted Stevens they sent them over to the SEC to work on GS.

[Clarice]

**The lawyers *

[Charlie (Colorado)]

So then, Goldman is being accused of not disclosing something to someone that it had disclosed?

I don't normally buy into theories of covert coordination between government agencies, because I have seen so few examples of government agencies being able to coordinate openly and overtly ... but between the timing, and this apparently concealed exculpatory information, it's getting harder to disbelieve.

[anduril]

Charlie, in this Admin I think I can buy into those theories.

Still, this is why I was talking about "social utility," rather than fraud. The FACT that GS may not have broken any law doesn't mean this activity was good for the country. Government can't and shouldn't attempt to prevent ALL activity that isn't good, but activity that leads to economic and social disruption on the scale that we've been experiencing--and has no apparent benefit--does need to be checked.

[anduril]

Any football fans here? This should be good for some controversy: Race factors into evaluation of Gerhart.

[steve sturm]

did Paulson have $20 million of equity in the CDO or was $20 million the costs of the 'insurance' he bought on the CDO that he would lose if the CDO didn't drop in value?

[Gabriel Sutherland]

The FACT that GS may not have broken any law doesn't mean this activity was good for the country.

As much as I enjoy kicking sand into the teeth of Government Sachs, what if there position was to bet against the RMBS market in order to tame it before it turned the entire economy into a Frankenstein monster?

I still think GS needs the US Dollar, so riding that bull wave on US housing forever would have been a poor choice.

[Gabriel Sutherland]

I'm still curious how Hank Greenberg thought he could save AIG from this mess.

[Captain Hate]

anduril, I already responded to that on the last thread.

[Rick Ballard]

Janet Tavakoli.

Again, but swinging harder and with crystal clarity.

OL,

Re "Where's the outrage?" wrt the Socialist Takeover Bill, there may only be a finite amount available and pols and Wall Street have a corner on the market for the moment.

I believe that it's rather difficult for the average person to distinguish between the "connected" boards of "free market" capitalists, such as GE, GM and GS and a "socialist" system run by cronys of a truly worthless political class. DNA testing might be able to distinguish between the two but 20/20 vision won't do the trick.

[PaulV]

Should a GS stockholder sue SEC for intentional infliction of damage to GS stock price?

[matt]

The SEC's case seems to be unraveling like a cheap suit.....

[anduril]

anduril, I already responded to that on the last thread.

sorry:

1. which of my two posts (above) did you respond to?

2. did you respond on the most recent Goldman thread or the penultimate thread overall?

please link me to your post and i'll gladly read it.

[fdcol63]

I'm inclined to believe 3 things:

1) There are those on Wall Street and in the Fed gov't who didn't know what was really going on or how much damage their actions would cause.

2) There are those on Wall Street and in the Fed gov't who DID know ... full well ... what they were doimg would cause serious damage and that they'd profit from it personally.

3) Either way, we're screwed ..... and the Gramscian "long march through the culture" strategy to undermine major Western institutions, systems, values and ideals is winning ...... because NO ONE trusts these bastards anymore.

[Old Lurker]

Rick, I am afraid that system overload is part of the plan.

[anduril]

Goldman Sachs wants regulation, not laissez-faire:

Goldman Sachs, accused of civil fraud by the Securities and Exchange Commission, may be Washington's favorite whipping boy right now as both Democrats and Republicans try to run against Wall Street in the 2010 elections. But Goldman stockholders can take heart: As indicated by their embrace of some key proposed regulations and their hiring of key Obama administration personnel, the firm is poised to come out ahead in this regulatory fight.

...

Politico quoted a Goldman lobbyist Monday saying, "We're not against regulation. We're for regulation. We partner with regulators." At least three times in Goldman's conference call Tuesday, spokesmen trumpeted the firm's support for more federal control.

Vague public calls for "reasonable regulation," of course, are often little more than smoke. But Goldman's annual report explicitly endorsed stricter federal capital and liquidity requirements. Goldman reported on the conference call that it holds 15 percent "Tier 1 capital," meaning it is very liquid and not very risky. Goldman can play it safe, you see, without needing a regulation. But regulations prevent smaller competitors from taking the risks needed to compete with Goldman (and every competitor is smaller).

It's a game that nobody plays as well as Goldman, but all the big banks will have a hand in crafting this "reform." Consider the recent flap over the $50 billion resolution fund in the Senate bill. Banks didn't like the resolution fund, because it would be capitalized by a bank tax. Republicans rightly attacked the bill for institutionalizing bailouts, but focusing on the $50 billion was a bit of a distraction. Some leading Democrats are now ready to back away from the $50 billion and the bank tax, which just means that we now have unfunded implicit bailouts. The banks win.

So, just as drug companies and insurers used Republicans to kill the public option before using Democrats to mandate insurance and subsidize drugs, big banks are using Republicans to kill a bank tax while using Democrats to erect barriers to entry, to institutionalize bailouts, and to restore confidence in Wall Street.

...

...But regulatory agencies aren't kidnapped -- they are born in the custody of the businesses they regulate. This is the nature of the game. And it's a game rigged in Goldman's favor, regardless of Obama's trash talk.

So who's the loser?

[Ignatz]

--Should a GS stockholder sue SEC for intentional infliction of damage to GS stock price?--

How about "intentional infliction of emotional distress because my Goldman stock went down"?
It is essentially impossible to sue the SEC or other government enforcement arms, except in the case of malicious prosecution, which has a very high bar to cross and would only give GS and the fabulous Mr. Tourre standing to sue in this case. And neither of them could come close to meeting the test here.

[Clarice]

instapundit links to a timeline which if read carefully makes the notion of DNC/press/SEC and WH coordination inescapable.

[Cecil Turner]

So who's the loser?

Hopefully the DNC and Obama's fundraising site. But it ain't over til it's over, and this was never about securing a judgment against GS.

[Patrick R. Sullivan]

I don't know. And I am beginning to suspect that reading this SEC complaint won't tell me.

It won't...exactly, but there are some clues. I earlier noted that ACA had owned 62 of the bonds in Paulson's original 123. That's right there in the complaint.

I suspected the talk of Paulson investing in an 'equity tranche' could only refer to ACA's 'equity'--as no one actually has to own the underlying securities that were 'referenced' in the CDO--and that was part of the attraction for ACA to be long.

ACA was hedging their bet by laying off an 'equity tranche' in the underlying securities, and Paulson was hedging his short bet by buying same. It just makes the math more complicated, which wouldn't matter to players this sophisticated.

Anyway, it doesn't make the SEC look any less politicized (and wrong).

[anduril]

Cecil, perhaps I should have included a multiple choice listing. The correct answer was supposed to be: all of us, or something to that effect.

I agree, however. The best case scenario is: GS gets off the hook, discrediting the Dems while GOPers get kudos for sniffing out the WH conspiracy, the GOPers then pass a really smart financial reform law.

[Ignatz]

--Anyway, it doesn't make the SEC look any less politicized (and wrong).--

Here is the indispensable Alan Reynold's take on that.

[anduril]

This is what Reynolds gets very right:

Losses sustained by a few financial speculators on one exotic derivative had nothing to do with the start of a global recession in December 2007 or the related financial crisis of September 2008. The core of the latter crisis was mortgage-backed securities per se, yet Goldman was only the twelfth-largest private MBS issuer in 2007. Fannie Mae and Freddie Mac were and are the biggest risk, so any reform that excludes them is a fraud.

Reynolds is talking about social utility. Perhaps not the best term, but we get the idea.

[theQuestion]

If this isn't some kind of smoke screen for something to make more money for "Goldman Sachs" and they feel what is going on is some kind of "witch hunt". Than what they need to do is to come out with a television commercial requesting the return of 996 thousand dollars and what promises the Obama people promised them for that campaign money.

[Extraneus]

And that Insty link didn't even mention the 3-2 party-line vote in the SEC. That's the smoking gun as far as I'm concerned.

[matt]

I agree, anduril.

I also just saw a headline in the military news that the U.S. has formally ruled out military action against Iran in the near future.

With the introduction of SCUDs, which can reach Tel Aviv in minutes with dirty bombs, I think we are seeing the Israeli version of the Cuban Missile Crisis. With the Gates memo being released yesterday, this is getting scary. LUN.

[anduril]

Neanderthals may have interbred with humans: Genetic data points to ancient liaisons between species.

Am I too proud to say, I told you so? Not at all. I've suspected this ever since I started posting at JOM. :-)

[anduril]

i agree, too.

[Extraneus]

That $996K "Goldman money" is a little misleading. This includes money donated by employees, who are required to enter their employer in a box on the donation form. If I work for GE or GM and I donate money to Sarah Palin or Micky Kaus, that's what goes on that form and comes up in the OpenSecrets query. It's not really all "Goldman" donations, or at least the way it's being portrayed as coming from the top.

[Captain Hate]

anduril, here's what I posted re: racial considerations in NFL drafting

The idiocy that goes into the NFL draft is a hodge-podge of spurious correlations that lead to hilariously wrong decisions like Ryan Leaf drafted highly and Tom Brady languishing until the 6th round; not to mention the league whiffing completely on Kurt Warner. The only "racism" claims that goofs like Roger Goodell care about are completely erroneously reported ones regarding Rush Limbaugh, whose foolishness in wanting to be part of such a group of "elite" idiots I've previously disparaged.

[Ignatz]

Let's try it again (frickin typepad)

And here is the indispensable Nicole Gelinas on just how bad Dodd's sham of a bill is.

[Cecil Turner]

The correct answer was supposed to be: all of us, or something to that effect.

Except tubing the crappy Dodd bill is surely a win for everyone but Democrats. The case for reform is not so strong we need do something stupid just to be doing something.

. . . the GOPers then pass a really smart financial reform law.

The proposals to rein in FM/FM have been out there since at least 2003. The Democrats, having successfully foisted blame for this fiasco off on the GOP, refuse to acknowledge FM/FM as the problem (because then they'd own it).

Glenn is not only right that any bill that excludes FM/FM is a fraud, but that FM/FM must be the focus of any meaningful reform. Dem efforts to create more of the same whilst perpetuating the underlying problem is worse than useless. Public rejection of their cynical effort is key to progress. (And the same goes for their counterproductive tinkering with bankruptcies.)

[anduril]

Cap'n: I agree all over that. Including--what was Rush thinking?

Cecil: Alan.

[anduril]

"orderly liquidation fund"

LOL

[Extraneus]

The Democrats, having successfully foisted blame for this fiasco off on the GOP, refuse to acknowledge FM/FM as the problem (because then they'd own it).

It bears re-recalling that this is John McCain's fault, btw. He had golden opportunities to explain this during the debates, but stupidly whiffed.

[xhasnobabyshowerfromotherplanet]

Humans? See what we were back then:

http://www.dailymail.co.uk/sciencetech/article-1260294/X-Woman-Species-ancient-human-Siberia.html

the old guy at the bottom looks like a guy I know.

[Neo]

If there is any hint of cooperation between the DNC, the SEC, Organizing for America, the White House and the New York Times on this, I want a Special Prosecutor.

Turn about is fair play.

[Neo]

The Democrats, having successfully foisted blame for this fiasco off on the GOP, refuse to acknowledge FM/FM as the problem (because then they'd own it).

That's not what Bill Clinton said the other night. He said they made mistakes .. they should have regulated derivatives (next they will go hyperbolic and claim that we need to regulate integrals as well).

[DrJ]

next they will go hyperbolic and claim that we need to regulate integrals as well

*snort*

I'd say that one is an economy killer.

[RJ]

With the Gates memo being released yesterday, this is getting scary.

I may still yet get my tank ride through Tehran and my early-twenties Persian war bride.

I'm all about the silver linings.

The case for reform is not so strong we need do something stupid just to be doing something.

While I don't pretend to fully understand all of the ins and outs of the technical aspects, I can spot one major problem from the knothole seats. That's this...

In our current state of social consciousness, rather than the directly aggrieved banding together and going after GS themselves, the People expect the gubmint to do something.

What that something is - they do not know. Whether certain suggested somethings will fix the problem - they cannot say. And so we will all be treated to a parade of theatrical outrage from our fine public servants, until one of those crooks catches the public imagination and crafts the bill that will be the first part of the next problem. And all the people will say "Amen!"

And then we will start the cycle all over.

[Captain Hate]

what was Rush thinking?

I think he was overcome by the idea of being able to chew the fat with jocks. It's a malady of people that have lots more money than sense, which means I'll probably always be immune to it. His BS meter should've been pegged by the prospect of being included in a group assembled by pinworm Dave Checketts; honestly I could've steered him clear of that. Plus Roger Goodell reminds me of what I scrape from the bottom of my shoes if I'm careless when I walk Maggie the Airedale.

[nathan hale]

Speaking of surreal, what color is the sky on
this fellow's planet, in the LUN

[Old Lurker]

"next they will go hyperbolic and claim that we need to regulate integrals as well"

Didn't the Civil Rights Law deal with that?

Sorry

[anduril]

So Obama is pushing a VAT now, and Cap 'n' Trade is still lurking out there. Socialism in one term, fully funded--as much as it ever is.

[DrJ]

Didn't the Civil Rights Law deal with that?

Only for indigenous or oppressed integrals, OL.

[Ignatz]

--So Obama is pushing a VAT now, and Cap 'n' Trade is still lurking out there.--

Two terms of this clown and we'll be PIIGS on ice also.
A sharp Republican party would introduce legislation proposing the United States of America be renamed the American Union.

[Old Lurker]

You've been hiding, DrJ. Busy?

[Pofarmer]

Let me make sure I've got this right.

In the good ole days, you went to the bank and got a home loan.

In the 90's, into the early 2000 Oughts, you went to a lending agency, or, a large bank with a lending arm. That lending agency filled out the loan forms. That loan was then sold, most likely to fannie mae or freddie mac. Fannie mae and Freddie mac then packaged these loans into "investment vehicles" called MBS. Mortgage Bached Securities, and peddled these BACK to the investment banks. The investment banks then repackaged these into CDO's, and resold them yet again. The Investment banks, along with other third parties, then bought and sold CDS, Credit Default Swaps, completely unregulated, on these "tranches" of mortgages, betting, basically, for or against their ultimate performance. I mean, it's all so clear and transparent, it's hard to imagine that anything could have gone awry.

[Old Lurker]

Two terms, Iggy, and there will be no Other Peoples Money remaining to take.

[DrJ]

You've been hiding, DrJ. Busy?

Swamped. I'm just back from two days of proposal reviews (again!) but this time they were held in Palo Alto. Two modest contracts are coming in, and the details on those are being finalized. There's a proposal due in a month that I'm starting to write.

I bet you thought I did research, didn't you?

[Extraneus]

If everyone was required to put 10% down and prove they could make the payments via their verified income, credit rating and debt ratio -- like I and probably all of you did -- none of that would have mattered, Po. The rest is all misdirection to hide the success of the Cloward-Piven mortgage strategy.

[Old Lurker]

I did. But busy is good.

[Rick Ballard]

Pofarmer,

You forgot 2nds and HELOCS. Those were batched separately. I'd also toss in the "new" 80/20 blend AKA "100% mortgages" (80% 1st 20% 2nd, sold to separate lending entities and a primary reason why the risible HAMP fiasco is failing so badly).

Did I mention "stated income", AKA "liars loans"?

That appellation really summed up the totality of the Wall Street involvement.

[nathan hale]

It does beg the question, why would you do this, disguise 'substandard' loans wrapped
in the tortilla of a legitimate loan

[Clarice]

msnbc
EW YORK - Goldman Sachs is taking its fight against a government civil fraud case to Capitol Hill. Goldman CEO Lloyd Blankfein will testify before a Senate panel Tuesday in what are expected to be his first public comments on the Securities and Exchange Commission's lawsuit charging that the bank defrauded two investors, according to a person familiar with the plans. He spoke on condition of anonymity because the appearance hasn't been publicly announced. A 31-year-old Goldman employee at the center of the lawsuit, Fabrice Tourre, is also expected to be questioned at the hearing, according to media reports.

[fdcol63]

Extraneous, I think you've got it.

[fdcol63]

Whoops ... sorry about the "o". LOL

[Old Lurker]

Man, everywhere you turn.

Just saw a slick commercial from GM bragging about "repaying the US loan, with interest, five years early..." Pat, pat, pat.

The news reported it the same way.

Are our memories so short to recall, and are our reporters so biased they won't tell, that the loan was but a small fraction of the US investment.

This is getting tiring.

[Clarice]

OL. the repayment was not out of earnings. It was the proceeds from yet another TARP loan.

[Jane says obamasucks]

it also was paid back with another line of credit OL.

[fdcol63]

Kinda like making a mortgage payment with a credit card.

[JM Hanes]

Clarice:

"Goldman CEO Lloyd Blankfein will testify before a Senate panel Tuesday...."

Do you suppose that was set up fast enough to deserve its own spot on the timeline you mentioned above?

[Pagar]

More reasons the Democrats may want to keep you focused on the Goldman Fiasco.

My guess is that Ohio Democrats would do almost anything to keep you from looking at their state Homeland Security Dept problems.

"Insider: Top Ohio homeland security officials falsify credentials, obtained fake diploma mill degrees***Updated***Updated 2x"

Over at American Thinker Rick Moran (also) has the story.

[matt]

Rick;

Throw in all the mortgage resets that will occur this year and next into the brew as well. Some of this is a part of the short sale boom, but there are plenty of foreclosures in there as well. They're inventing new accounting practices at the big banks as we speak, I'm sure.

[Clarice]

Yes, I do , jmh.

[Old Lurker]

Well, I find the GM thing just brazen.

And the muddle will be so impressed with Obama's acumen. Maybe he can run the banks...

[PaulV]

By chance was the CDO composed of poor quality Fannie and Freddie loans fraudulently sold by those GSEs?

[Clarice]

Some good legal news..AP reports that Judge Gershon's preposterous ruling that Congress lacked power under the Bill of Attainder prohibition to cut off funds to ACORN was stayed pending the resolution of the appeal to the 2d Circuit.

[Rick Ballard]

"They're inventing new accounting practices at the big banks as we speak, I'm sure."

I think the current focus is on abandoning old accounting standards. Richard Koo works for Nomura in Tokyo. His latest piece explains the situation rather succinctly

"If US authorities were to require banks to mark their commercial real estate loans to market today, lending to this sector would be extinguished, triggering a chain of bankruptcies as borrowers became unable to roll over their debt."

The piece is well worth reading - especially the part about the Fed retraining bank examiners on how to manage distressed commercial real estate loans. I had no idea that the Fed charter included property management.

The ZombieBanks are twice dead - once on the balance sheet and the second time via Dodd's Socialism Now reform knocking out the prop desks. That's really OK though - Dodd thoughtfully provided the mechanism by which the Democrat Party can safely rob the bloating corpses.

[Pofarmer]

Can I get off this ride?

from www.barnhardt.biz

Red Alert
Posted by Ann Barnhardt - April 21, AD 2010 1:19 PM MST
Here they come. The Marxist-Obamaists introduced legislation today that would seek to put EVERY BODY OF WATER in the United States under Federal jurisdiction. This would include ponds, draws and puddles. I'm not kidding. It is HR5088, the "America’s Commitment to Clean Water Act".

The Clean Water Act of 1972 was specifically limited to NAVIGABLE waters. This bill would remove every instance of the word "navigable" from the Clean Water Act. Therefore your ponds, lagoons, draws and puddles would become Federal jurisdiction.

Quoting Sen. Mike Crapo of Idaho now:

"Farmers in my state are particularly concerned that this legislation would allow the federal government to aggressively regulate farming practices under the Clean Water Act because their land is located near “any waters of the U.S.” I agree with their concerns. This legislation represents a drastic expansion of the ability of the federal government to regulate water sources, from intermittent streams to prairie potholes. State and local governments and private property owners are concerned, as am I."

[Ignatz]

PO,
IIRC, the SCOTUS already ruled such a reg unconstitutional. The feds claimed the right to regulate any old pond or puddle on the idiotic premise that migratory wildfowl might at some point look at or use such a wetland, thereby triggering the commerce clause as migratory birds are subject to federal regs, and were laughed out of court;
the feds not the ducks.

[Bill in AZ]

water? in the west?? f*ckers really want a war don't they? Zero has been provoking for one since day one. He and Rahn have been scratching whatever it is that they scratch when they try to think through their cocaine addled synapses, trying to figure out what will provoke us. Getting close. No balls to go after the one that starts with G and rhymes with nuns

[Cecil Turner]

I see Mary Schapiro responded to the Darrell Issa letter:

"The SEC is an independent law enforcement agency. We do not coordinate our enforcement actions with the White House, Congress or political committees. We do not time our cases around political events or the legislative calendar.

"The fact is that regulatory reform has been pending for over a year. We have brought many cases related to the financial crisis over that period.

"On a personal level, I am disappointed by the rhetoric . . .

Or sorta responded. It can't be only me who noticed she didn't answer the questions about whether the staff coordinated on this filing.

[Clarice]

How can she know what the other commissioners did or did not do?
How does she explain the decision to file with less than a unanimous Commission vote as--we are told--was past practice?

Does she deny that there was a leak of the fact of the filing to come? If not, how to explain the incredible timeline in which the Hill, the Obambis and the press all reacted with supersonic speed?

[anduril]

Bob Samuelson has a good article today on what I've been calling "social utility" and Wall St., but what he terms "productive uses." The title is deceptive, since Samuelson is obviously not attacking the profit motive: Goldman Sachs's Questionable Profit Motive. Here's how he starts out:

It's unclear whether the Securities and Exchange Commission can prevail over Goldman Sachs in court. Goldman's legal obligations in this complex and contested transaction are murky. But whatever happens in court, the complaint against Goldman represents a watershed. It challenges a moral transformation on Wall Street that has justified behavior that most people would regard as deceptive or dishonest.

Once upon a time, Wall Street's leaders saw themselves as arbiters of capital, helping allocate society's savings to productive uses. By contrast, Wall Street's major firms now see themselves as captains of "the market," navigating it -- for themselves and sometimes their clients -- for maximum gain. This is a distinction with a difference.

As arbiters of capital, Wall Street was paid to make judgments. It tutored investors on which stocks to buy. It advised companies on which mergers and acquisitions to pursue. It decided which companies deserved capital through the sale ("underwriting") of new stocks and bonds to investors. Wall Street made money through fees and commissions. Now the prevailing model is very different. Wall Street firms still give advice -- and earn fees. But their main business is trading for their own accounts and creating trading opportunities for clients.

Just coincidentally, Goldman Sachs' recent profit report underlined the extent of the shift. In the first quarter of 2010, about 80 percent of Goldman's $12.8 billion in revenues came from its trading and proprietary investment accounts. The remainder represented underwriting, financial advice and management.

Samuelson isn't blind to the problems in the SEC case, nor does he think a return to the "good old days" is possible, but he concludes:

A court will presumably decide the legal issues. But the moral question is more insistent. Goldman abdicates some of Wall Street's role as arbiter of capital, deciding what should be financed and traded. It adopts a strict market standard: If buyers and sellers can be found, we'll create and trade almost anything, no matter how dubious. Precisely this mindset justified the packaging of reckless and fraudulent "subprime" mortgages into securities. Hardly anyone examined the worth of the underlying loans.

Judgment was missing. Many factors moved Wall Street from the old model to the new: the end of fixed commissions on trades in 1975, which squeezed revenues; computer technology, which made rapid trading and exotic financial instruments possible; and the replacement of partnerships with publicly held corporations. When partners were individually responsible for a firm's losses and mistakes, they restrained excessive risk-taking. These changes won't be reversed. But if Wall Street can't control itself, someone else will.

GOPers must navigate carefully between the Scylla of opposing a "reform" bill that doesn't reform and the Charybdis of supporting the status quo. IOW, while opposing false reform they can't lose sight of the fact that reform is nevertheless called for.

[nathan hale]

I'm still trying to figure out how this bill prevents any off these catastrophes in the future, if you have to bail out the firm, the patient is already on the operating table

[Rob Crawford]

The FACT that GS may not have broken any law doesn't mean this activity was good for the country.

The FACT that no laws were broken means the government should not persecute people for their lawful activities.

The argument that a legal act that doesn't appear to be "good for the country" should be punished is an argument for tyranny.

[Ignatz]

--Many factors moved Wall Street from the old model to the new:--

He fails to specify the main one, which is the buckets of money and consequent bonuses available with the new model as opposed to the old.
And it's human nature that the bigger the bucket of money the more reckless and risky the venture.

[anduril]

Nothing like a bit of context:

Still, this is why I was talking about "social utility," rather than fraud. The FACT that GS may not have broken any law doesn't mean this activity was good for the country. Government can't and shouldn't attempt to prevent ALL activity that isn't good, but activity that leads to economic and social disruption on the scale that we've been experiencing--and has no apparent benefit--does need to be checked.

Elsewhere I also argued that government action encouraged this type of activity and is part of the problem.

[Rob Crawford]

That $996K "Goldman money" is a little misleading. This includes money donated by employees, who are required to enter their employer in a box on the donation form.

I've always held the idea that employees always donate to their employers' interests suspect. If this were true, why would we need unions?

[Rob Crawford]

The extra context doesn't change your argument. You're still arguing from "social utility" (barf) and "good for the country". That's clear from the "and has no apparent benefit" line -- if both sides of a transaction don't see a benefit, the transaction won't happen.

Hows about arguing from the law? Or aren't we a nation of laws anymore?

[anduril]

I'm still trying to figure out how this bill prevents any off these catastrophes in the future...

don't waste your time.

[MarkO]

I have had the misfortune to have to write rules and regulations. There are none that cannot be skirted. If you write them; people will most definitely break them.

The question really is the enforcement mechanism. The SEC has the rules, it just can't enforce them. What will be different with a new alphabet crew?

[anduril]

The extra context doesn't change your argument.

...

Hows about arguing from the law? Or aren't we a nation of laws anymore?

Your initial post accused me of advocating the punishment of legal acts:

The argument that a legal act that doesn't appear to be "good for the country" should be punished is an argument for tyranny.

No one else read that into my posts. In fact, just above, where I pasted in Bob Samuelson's views--and he is a free market advocate for the most part--I commented:

GOPers must navigate carefully between the Scylla of opposing a "reform" bill that doesn't reform and the Charybdis of supporting the status quo. IOW, while opposing false reform they can't lose sight of the fact that reform is nevertheless called for.

That means I'm advocating reform of the law --not extra-legal persecution--including the possible banning of activities that can be tied to our current economic debacle. And as I repeated above, I previously argued that government action (regulation) was a clear causal factor in the debacle and needs to be scrutinized along with Wall St. practices.

[anduril]

MarkO, I'm not convinced that the SEC has all the laws and regulations it needs--or, rather, that the laws and regulations it has are the right ones. As I argued yesterday, by posting Tim Carney's article, the problem is that government agencies are often captives or creatures of the industries they purport to regulate. Just because enforcement is a never ending task doesn't mean we can or should simply throw up our hands.

On another day I would also argue that political reform is needed as well. That would take us rather far afield. As Ignatz suggests, where money becomes a predominant influence there will be corruption. We need to do something about money in the politics or our country will come crashing down. I don't claim to have all the answers to that. The income tax is a huge part of the problem.

[anduril]

OK, The Complete Story Of What Really Happened Between Goldman, Paulson, ACA, IKB, And ABN. This sure beats reading the SEC complaint. This is identified as a "key part" of the SEC's case:

This is a key part of the SEC's case. They say because Tourre received this email --

“I certainly hope I didn’t come across too antagonistic on the call with Fabrice [Tourre] last week but the structure looks difficult from a debt investor perspective. I can understand Paulson’s equity perspective but for us to put our name on something, we have to be sure it enhances our reputation.”

-- he knew or was reckless in not knowing that ACA had been misled into believing that Paulson intended to invest in the equity portion of ABACUS.

and again:

In their press release explaining their charges against Goldman, the SEC says, "he misled ACA into believing that Paulson & Co. invested approximately $200 million in the equity of ABACUS."

We don't find evidence of Tourre's telling the SEC Paulson was $200 million invested in ABACUS.

Check it out and see what you think.

[Rick Ballard]

How droll 73% support the lynching of Goldman while only 20% disagree that "most Wall Street firms commit fraud".

It appears as though the public would be satisfied with the lynching of any of the big sporting house/casinos and wouldn't mind much if they were all hanged. Perhaps that's the answer to the "social utility" question? It appears that the public may have learned something by watching the "sophisticates" lose their asses with map, compass and GPS in hand (and still be clueless as to where they might be found).

True value was discovered!

[anduril]

A Modest Proposal: Work release for Bernie Madoff so he can serve as arbiter re: who is a sophisticated investor.

[Cecil Turner]

The "reform" proposals so far just happen to give political branches incredible power over the financial industry (including the power to bail out or shut down individual companies essentially at a whim). Coincidentally, we have a glaring example of how lawsuits can ruin a company even without any compelling case of wrongdoing. (Though it may backfire in the long run, GS stock took a drastic short-term hit).

As Michael Barone notes, that power enables government to shake down individual financial companies for cash and political concessions. Compared to the "gansta government" corruption that enables extra-legal persecution, the status quo doesn't look too bad. And while we're at it, let's start any reform at Fannie Mae and Freddie Mac . . . perhaps if we fix the underlying government interference that started all the mortgage paper going bad in the first place, there will be less need to tinker with the financial markets. In any event we can stop using Wall Street as a whipping boy for the housing downturn, and pretending Congress (esp. Frank and Dodd) is the solution rather than the problem.

[nathan hale]

So why is Toure on the charge sheet if Paulson, or someone even higher up authorized
this

[Ignatz]

I've made known my skepticism of these particular charges re GS but am still waiting for some actual facts to emerge.
However here is one link and here is another, that argue GS is pretty dirty in this particular case. They're not dispositive and contain errors but they're well written and contain no purple prose or over the top allegations and do raise some good questions.
Both links have excellent discussions, pro and con, in the comments section.
Well worth a read if you have the time.

[Old Lurker]

Cecil...the tidbit you missed is that the power covers all firms important to the economy...NOT limited to finacial firms.

[anduril]

Headlines at Drudge

[anduril]

Yeah, there's no doubt that with this Admin they're going for the whole ball of wax--control of the whole economy, not just this or that industry.

[Ignatz]

More grist for the mill.
This story contends ACA picked worse MBSs for the CDO than Paulson did and contributed to their own losses.

[anduril]

Ignatz, I'll read those in detail (oh, the suspense!) when I get back from the liquor store.

At a first glance, Waldman's point about "reasonable expectations" is well founded as well as grounded in law (Rob?). I've seen that point elsewhere and I think it makes sense.

Re the other article, this excerpt gets to social utility:

I have little sympathy for CDO investors. Wait, scratch that. I have a great deal of sympathy for the beneficial investors in CDOs, for the workers whose pensions won’t be there or the students at colleges strapped for resources after their endowments were hit. But I have no sympathy for their agents and delegates, the well-paid “professionals” who placed funds entrusted them in a foolish, overhyped fad.

What we need is Bernie Madoff's input on sophistication in investing.

[Rick Ballard]

Ignatz,

Thanks for the links. There is a missing bit about the potential for a null outcome in what I've read about this to date as well. The use of "zero sum" is being interpreted as "all or nothing" when it really shouldn't be. IOW - losses and gains on the various pieces of the transaction could have balanced to zero with both sides winding up with the same amount of cash in their pockets at the end of the wager as they had when they anted up (less the house/bookie cut, of course). The comparison to parimutuel pool is more accurate than a comparison to a Pass/Don't Pass wager.

This time all the horse died before they hit the finish line. Who (aside from Janet) woulda thunk?

[Jane]

The "reform" proposals so far just happen to give political branches incredible power over the financial industry

Isn't it just executive power? The Congress doesn't even have authority over the money. It's simply a re-elect Obama arm.

[nathan hale]

There was a certain expectation that there wouldn't be a fraud, how could it be legitimate to them to do what they did.
But we do have to focus on the bigger picture,
this bill will not prevent this sort of situation

[Old Lurker]

It is far worse than just re-elect Zero, Jane. It is to cement socialism here, and the only question is whether it will be of the Franco-European variety, or the Hugo Chavez version. I actually see more of the latter in the patchwork quilt of all the balls in play.

And if so, that takes care of the re-election problem.