Goldman's Defense - Hindsight is 20/20

Two documents in which Goldman responded to the SEC are now available at Alphaville.  They make some interesting points about the importance of hindsight that I suspect will be unpersuasive.

Just to recap - Paulson, now a fearsome hedge fund made famous by third successful call of the hosing meltdown, was just another player back in 2007 when they approached Goldman and sought their help in creating a vehicle that would let them go short some residential mortgage backed securities.

Goldman enlisted ACA as the investment portfolio manager; per the SEC complaint, Goldman then duped them into believing that Paulson was a long investor.  ACA then accepted a lot of input from Paulson in putting together a bond portfolio which ultimately swooned, to Paulson's profit and ACA's surprise.

But Goldman makes some valid points.  Among them:

Who The Heck is Paulson?

...while Paulson‟s investment strategy and success are well known today, nothing in the record establishes that Paulson‟s involvement would have been significant in early 2007 to anyone involved in the 2007-AC1 transaction. All participants in the transaction understood that someone had to take the other side of the portfolio risk, and the offering documents clearly stated that Goldman Sachs might lay off some or all of the short exposure to the portfolio that it had taken on. A disclosure that the relatively unknown Paulson was the entity to which Goldman Sachs transferred that risk would have been immaterial to investors in April 2007.

A Receding Tide Strands All Boats

...there is no basis to suggest that the portfolio would have performed any differently or that the economic outcome for the participants would have changed in the least had Paulson‟s role and interest been more transparent. The portfolio that ACA originally selected had the same characteristics as the Reference Portfolio, and both experienced virtually the same poor performance in the face of the subprime meltdown.

In early 2007 market participants were surely aware that opinions were divided on the outlook for the housing market; per today's Times, opinions were divided inside Goldman Sachs.  Paulson was what - a firm that would be famous in two years for calling the market turn?  What would that mean in 2007?

And the notion that Paulson had an uncanny knack for picking bonds about to collapse may simply be hype - plenty of other bonds bought in utter good faith also collapsed, and it may be that, as Goldman says, any portfolio ACA put together would have fared poorly over the next few years.

Good points but... if that is all true, then why not tell investors and/or ACA about Paluson's role?

Their response also circles back to a point I had mentioned in passing earlier - is this really all the SEC has?

...there is no basis for a finding that Goldman Sachs made any alleged misrepresentations about Paulson‟s role with the negligence required under Section 17(a), much less with the scienter mandated by Section 10(b). The Staff has pointed to two ambiguous statements contained in an e-mail from Goldman Sachs that it contends caused ACA to infer that Paulson would be an equity investor.  As an initial matter, it is difficult to reconcile such an inference with the Staff‟s theory that Paulson tried to influence ACA to select dozens of riskier Baa2-rated securities, which would have raised questions about Paulson‟s true economic interests for any sophisticated market participant. The record, in all events, contains no evidence that Goldman Sachs caused ACA to infer that Paulson had an equity position. Nor does the record support the conclusion that any confusion by ACA as to the nature of Paulson‟s involvement in 2007-AC1 changed how ACA selected the Reference Portfolio.

It may come out at trial that ACA had formed a pretty accurate sense of Paulson's intentions but was unfazed.  The SEC complaint includes a no-context email in which Tourre, the Goldman deal manager, described a meeting between ACA, Paulson and himself as "surreal".  How conclusive is that?  The meeting could have been surreal because Paulson played along as a bullish investor and ACA was duped; it could have been surreal because Paulson pretended to be bullish and ACA pretended to believe him; it could have been surreal because, rather than lions and lambs lying down together, Tourre was watching bulls and bears sit together and negotiate a mutually agreeable portfolio, knowing one side or the other was likely to be crushed.  Who can tell, from the SEC snippet?

And despite the ghastly ex post outcome it is not as if ACA lacked expertise or confidence in selecting bonds.

Goldman includes these bold words:

If this matter is litigated, Goldman Sachs is confident that a fuller record – including its own discovery of all transaction participants – will underscore that no one in fact considered Paulson‟s role important and that no one was misled.

Good point - what were the ACA people saying to each other and what will they say on the stand?

Eventually, Goldman argues that there is no crime without intent:

[t]o prove scienter with respect to a non-disclosure, it is not enough to simply show that the defendant was aware of an undisclosed fact that a court later determines is material. Rather, a plaintiff must show that the defendant must have been aware of both the materiality of the undisclosed fact and that its nondisclosure
would likely mislead investors.

I think this is where they have a problem.  Goldman can rationalize Paulson's involvement in the portfolio selection process as immaterial, but if the SEC can make a case that Goldman took steps to misdirect ACA about that role, the actions will refute the rationalizations.

HOW DUMB ARE THESE GUYS?  Goldman notes that the ACA people were active in evaluating the proposed portfolios:

Finally, ACA‟s purported belief that Paulson was an equity investor would have been neither reasonable nor credible if one accepts the major premise of the Staff‟s theory that Paulson proposed literally dozens of weaker securities that were systematically rejected by ACA.  If this premise were true, then a market participant as sophisticated as ACA would have quickly recognized this trend, and questioned at least in its own mind what Paulson‟s economic interest was. Certainly, the credibility of ACA‟s purported interpretation will be subject to vigorous attack in a contested proceeding.

I have no idea what ACA people will say on the stand.  However, the SEC brought the suit, so they must have a bit of confidence.  Well, I say that - the final vote was 3-2 in favor of proceeding.  Yike - what we don't need right now is a weak, politically motivated case.  C'mon, bring on a slam-dunk!  That said, Obama gets the headlines he wants now and this case won't go to trial for months or years.

ANOTHER HINT OF TROUBLE IN PARADISE:

From p. 32 of the first Goldman response is this footnote:

The Staff has also asserted that certain internal ACA documents state that Paulson intended to invest in the equity tranche of the 2007-AC1 transaction. Copies of those documents have not been provided to Goldman Sachs.

I don't recall seeing those in the complaint.  Was the SEC bluffing?

Comments

[anduril]

Absolutely freakin' brilliant:

Scientists successfully teach gorilla it will someday die

[1couldo]

Cool how O made those Chinese pay for the hosing with guarantees. Real smart except for the foreign aid deals. Maybe the coup will be next year, guess he didn't want one so it was the others. Not that O's that smart.

[Sue]

I'll be honest. I do not understand any of this.

[anduril]

Tell me something I didn't know already.

[Rick Ballard]

That's why you should only deal with reputable and honest investment banks, Sue. They're very easy to find - there's always one next door to the unicorn stable.

[Sue]

Hey, I like unicorns. I collect them.

[lilath]

Eve, believing she was Adam's equal, was cast out of heaven, earth.

Then she came back.

[nathan hale]

An obvious question, so of course it hasn't come up yet, in the LUN

[Q]

It's not killing, it's sending them to heaven where everyone's happy.

So, what is responsible for ethnic violence when it is promoted and attacked at the economic level transforming national resources?

[Patrick R. Sullivan]

At the risk of offending the unicorns here, I'll actually comment on something relevant:

...regular CDO investors were fully aware that a synthetic CDO transaction can occur only if there are market participants taking long and short exposure to the reference portfolio. They also understood that synthetic CDOs routinely arose as a result of reverse inquiries; indeed, they had themselves made such inquiries from time to time.

For example, IKB‟s own inquiry led to the initial ABACUS transaction. Finally, they were also fully
aware that in synthetic CDO transactions, participants often express their views as to the
composition of the portfolio; they had all expressed their views in such circumstances in the past.

Accordingly, they had every reason to assume that these same dynamics – participants shorting- 11 -
the portfolio, reverse inquiries and interactions as to the portfolio composition – would exist in the case of 2007-AC1.8

IOW, the SEC is making up stuff that can't be found in any other ACA portfolios.

[Pasadena Phil]

I am currently reading Michael Lewis' latest book: "The Big Short" and the gist of the book tells the story of a certain Steve Eisman and later Greg Lippman who first noticed that the rating agencies made no distinction in rating securities with 20% versus 80% subprime. They all got stamped AAA thus making buying insurance (credit default swaps) against them very cheap. The key was to target the toxic-rich securities. Eisman and Lippmann "shorted" these mortgages by buying the insurance. Paulson shopped around for dupes like ACA (or so it seems for now).

It is still not clear to me what happened here between ACA and Goldman but I doubt ACA would have allowed Paulson to pick the securities had they not been misled into believing that he was on their side.

Whether or not this was illegal doesn't remove the abominable ethics and moral depravity displayed here.

[Patrick R. Sullivan]

More from Goldman that seem to me unarguable:

Regardless of how the Reference Portfolio was selected, the offering documents comprehensively described each individual asset backing the securities. Nothing about the selection process affected the inherent value or risks of the resulting Reference Portfolio. And nothing stopped any investor from adjusting its risk tolerance to the extent that its economic outlook and view of the housing market changed.

Later:

We respectfully believe that the Staff has at most shown that ACA may have been confused about the role of Paulson. But nothing in the record establishes that anyone at Goldman Sachs intended to mislead ACA, and the drafts of the offering materials Goldman Sachs provided to ACA expressly indicated that the first loss tranche was “N/A,” rather than identifying Paulson as the investor. The notion that ACA was misled into believing that Paulson was an equity investor is in all events difficult to reconcile with the Staff‟s theory that Paulson proposed weaker securities to ACA, a trend that would have caused a market participant with ACA‟s deep knowledge to question Paulson‟s true interest.

[Charlie (Colorado)]

And the notion that Paulson had an uncanny knack for picking bonds about to collapse may simply be hype - plenty of other bonds bought in utter good faith also collapsed, and it may be that, as Goldman says, any portfolio ACA put together would have fared poorly over the next few years.

What's more, there's the after-the-fact evaluation issue that Taleb talks about in The Black Swan: they're not comparing this to a representative population, they're looking at the one guy who made a big score on the deal.

Now, consider this experiment: I take a large population, say all the left-handed redheads in the US. That's something like 0.1 x 0.02 x 300 million, or about 600,000 people.

I have them all start flipping coins. As soon as one flips tails, we eliminate them. At the end of some finite time, we'll be down to one left-handed redhead who has flipped nothing but heads.

We then conclude that this one person has a special skill among all lefthanded gingers for flipping heads.

We, at this point, don't really know anything about John Paulson's talents as a picker of portfolios except that he happened to have a long run of heads.

[Carol Herman]

It was a manipulated market! Michael Lewis' excellent: THE BIG SHORT discusses how the 2005 to 2007n 'tranches,' of broken up mortgage CDO's, weren't going to survive, once borrowers couldn't pay their monthly mortgage payment, after the teaser rates were all used up.

Yes, Lewis follows the story! Yes, the market should have dropped BUT IT DIDN'T, because all those who were allowed to buy "shorts," and it was NOT generally available; kept having to put up interest payments to cover their shorts ... to the tune of $150-million.

It was a manipulated market! Goldman, here. But where's AIG? Where's Moody's? Did you know how inexperienced the raters were?

You can only be fooled if the paperwork was so obfuscated you couldn't figure it out. It was all done on purpose. And, Lewis said "unfortunately" the greedy wall street types began buying into their own hype.

Manipulated market kept it all going. Even Bernie Madoff didn't steal as much.

[OfficeGI]

SEC comes from where? They don't all hate short selling.

[Rick Ballard]

"I don't recall seeing those in the complaint."

It may be referring to:

51.
On February 12, 2007, ACA’s Commitments Committee approved the firm’s participation in ABACUS as portfolio selection agent. The written approval memorandum described Paulson’s role as follows: “the hedge fund equity investor wanted to invest in the 09% tranche of a static mezzanine ABS CDO backed 100% by subprime residential mortgage securities.” Handwritten notes from the meeting reflect discussion of “portfolio selection work with the equity investor.”

[Pasadena Phil]

Sue said: "I'll be honest. I do not understand any of this."

It is a very difficult case. If you can at least grasp how corrupt these deals are, would it be difficult for you to swallow the Goldman is innocent just because it is legal? The legal discussions might be tedious but the immorality of it is glaringly obvious.

I have no problem with guys like John Paulson finding other sophisticated individual investors to make private bets with their own money. But they are doing it with money once kept out of their grasp by the Glass-Steagall Act.

Capital markets exist because we have bought into the notion that free markets are better at allocating capital to where it will be most efficiently used. That is how capitalism creates jobs through innovation. What is the benefit of transforming capital markets into a big casino that structures deals designed to dupe the unwary?

Having done away with what, in my opinion, is possibly the wisest and most efficient regulation ever invented, the gamblers are now managing ALL of the capital in the world.

[matt]

It was a carnival of whores. Everyone involved knew the game was rigged, and that as soon as the music stopped, some of them were going to get burned. The joker was the ratings on so much of the debt and fractionation of that debt.

Eventually, many instruments were completely disassociated from the underlying debt.Try figuring that out in the middle of a meltdown.

Dressing up a gardener as a landscape architect on a Riverside residential mortgage multiplied by 100,000 or 1,000,000 should have triggered a good faith investigation but never did.

These people were so involved in setting up and profiting from these instruments that messes like this were bound to occur. The SEC had no clue what was going on and only let loose the poodles long after the fox left the henhouse.

Chris Cox has a do nothing position with a local law firm, and deservedly so. At least Schapiro has some experience, but when considering how long Madoff was allowed to elude justice, the staff clearly bears the blame.

[Rick Ballard]

PP,

It won't be a particularly difficult case if contemporaneous memoranda establish that 27 year old Fabrizio misrepresented Paulson's participation in order to gain ACA's commitment.

[Danube of Thought]

I note with delight that former WH counsel Greg Craig--forced out by Rahm--is now on the Goldman defense team.

The NY Times ponders the merits of the case.

Get out your scorecards--here is how things will proceed:

Goldman will file a motion to dismiss the complaint on the grounds that no real wrongdoing is alleged. The court will decide that motion based on the allegations of the complaint (which it must assume are true), and on any facts disclosed in any documents attached to the complaint. Goldman can't bring forward any evidence of its own at that point, other than stuff that is common knowledge ("judicial notice").

If the motion fails, they'll begin discovery, and at any time Goldman can move for a summary judgment, and the court will consider any evidence that has been obtained and which is submitted to it for consideration. Goldman has to show that there are no material facts any longer in dispute, and that on the undisputed facts it is entitled to a judgment in its favor as a matter of law.

Don't know how the investment bankers in NY are doing these days, but the folks at Skadden, Arps will do rather well in the near future.

[Captain Hate]

I note with delight that former WH counsel Greg Craig--forced out by Rahm

He was counsel in the Clinton administration, no? Why would Rahm want him gone?

[nathan hale]

Didn't she fail when she was at FINRA, the track record is not encouraging, It seems
the whole purpose of these transactions was
to hide the underlying facts, Everyone dumped
on Milken and Boesky's junk bonds, but no one
pretended they were AAA hence the name

[Rick Ballard]

"Why would Rahm want him gone?"

Insufficiently unethical would be my guess.

[fdcol63]

If these people (the Wall Street execs AND our politicians) are the best that this nation can produce, we're screwed.

[fdcol63]

Which I think is a major component of the Left's Gramscian strategy.

[Melinda Romanoff]

DoT-

The fact that Skadden and others will have a field day brought me to the realization, this morning, that this was the plan all along and explains the civil suit being brought by the SEC.

No offense, but the bar is finally going to get its vote on who's to blame for the credit contraction and will extract it's thirty percent pound of flesh.

Just curious if Craig will be enough to fend it off.

I doubt it.

[Danube of Thought]

Craig was in the Obama WH also, but took the fall for the failure to get Gitmo shut down.

Mel, I'm sure Craig by himself can't get it done. But Skadden is a mighty litigation machine, and they get recruits out of law school who wouldn't even consider working at the SEC. They get paid by the hour; the gov't lawyers don't.

Meantime, way OT, but Cowabunga, dude! We just got called by Raz! Señora Danube took the call, and was waving me away while feverishly pushing the buttons to signify "Strongly Disapprove." God I love her!

[MarkO]

Craig was dismissed because he had two first names. There's a rule against that. He is sufficiently corrupt to have stayed on.

To me, the question is whether a first tier firm will take a plaintiff's position on this matter. Say, for example, Boies or Latham or another large player. That would tell us a great deal about the underlying merit.

If it is simply someone in the SEC failing to understand the transaction and hoping to impress Obama, it will go badly, but not until generous sums have been paid to defense counsel.

Damn.

[Melinda Romanoff]

DoT-

Jones, Day is cranking up the mimeo machine as well. This is the new asbestos, as somebody already mentioned on another site, tonight.

G'night all.

[Rick Ballard]

It would be a decent political move by Angela Merkel to toss the Republic of Germany's hat in the ring as a plaintiff.

[Steve Diamond]

In my other life I am a securities lawyer, having practiced in NYC and Silicon Valley for several years before becoming a law professor and teaching securities law for the last decade.

For the record, Goldman was a client or on deals I worked on while in private practice.

While I always had the highest respect for GS - they were almost always a cut above other banks - my first inclination, like all lefty law professors, was to think, aha, Gotcha Goldman, but then my brain started working and I have started to re-think this.

This is a disclosure case - which means the SEC is claiming that Goldman had an obligation to disclose material facts to potential investors. The SEC then claims it was material to investors that Paulson had a role in building the CDO reference portfolio.

Let's assume that it is in fact true that Paulson did have a major role. Heck, let's assume that in fact Paulson picked all the securities in the reference portfolio and then ACA - the portfolio manager - blessed the package he selected.

So what?

The performance of the mortgages that underlay the reference portfolio was independent of Paulson's role. If they were dogs nothing he did made them dogs. And IKB was perfectly free to analyze those mortgages themselves independently of ACA's blessing of them.

At the time, as has been pointed out, Paulson was not the billionaire genius bear he is today. It is entirely plausible that even if GS had told IKB and other investors in ABACUS about Paulson's role they would have said exactly what I am saying:

"So what? We know there is a short on the other end of a synthetic CDO. We want a (stupid) short to be on the other side of this trade so we can go long against him!"

By definition a synthetic CDO links the fates of a long and a short, since someone is buying CDS protection and someone else is selling it!

And the job of market makers like Goldman is to put those longs and shorts together, to connect supply and demand for these kinds of investments. Is it really any different if a customer of GS wants to buy 100,000 shares of IBM? That customer is "long" IBM and anyone who sells for reasons other than an immediate liquidity need is "short" IBM.

Long story short (I couldn't resist) it seems a tough road to argue that telling IKB about Paulson's role was a material fact. Arguably the price of the deal already incorporated the information that a short was involved in light of the inherent nature of synthetic CDOs.

I can recall when I was in private practice at the height of the dot com bubble in Silicon Valley how impossible it was to suggest in polite society that the bubble might burst. People looked at me cross eyed when I left practice in the fall of 99 to teach. I kept telling them the old saw about Joe Kennedy: when asked the secret of his success he said, "I always sold too early."

And it may be hard today to recall just how crazy many people thought the Paulsons of the world were at the time to be short housing in a big way.

So there would appear to be more than a bit of hindsight bias at work here, not to mention political pressure on the SEC to take on a big fish. Only in hindsight does it seem significant to anyone that Goldman should have wasted their time telling IKB about Paulson.

[Danube of Thought]

...it seems a tough road to argue that telling IKB about Paulson's role was a material fact.

I think that is the issue of fact that is raised by this case. The question I have is whether a judge will rule, on either a motion to dismiss the complaint, or a subsequent motion for summary judgment, whether that question is one of law for the court to decide, or one of fact for the jury to decide.

Over the years as a litigator (including securities and antitrust litigation) I developed a quite healthy respect for the notion that judges would come out right without regard to their personal biases, although everyone who has done this stuff knows of the exceptions. At the same time, I discovered early on that the submission of complex factual cases to a jury is a borderline-obscene crapshoot. That is not in any way an indictment of the jurors, who after all have actual lives to lead, but of the system that allows lawyers to manipulate them so brazenely.

[Patrick R. Sullivan]

my first inclination, like all lefty law professors, was to think, aha, Gotcha Goldman, but then my brain started working and I have started to re-think this.

Not a lot of that going around here.

[Pasadena Phil]

Steve,

Do you think that there is a problem with Goldman investing its own money to bet against Abacus?

When Blankfein testified before Congress, he denied betting against Goldman clients arguing that they were just hedging risk off of their own balance sheet. In this case, they were making an explicit bet.

I would think Blankfein would be worrying about being charged with perjuring himself before Congress.

[Max Regor]

Steve, if I may be familiar, I do not think the Paulson role is the sole issue. ACC was long, they lost a lot of money. ACC knew Paulson was involved. ACC negotiated with Paulson about the securities to be included. The allegation is that ACC thought there were negotiating with a long side investor, an investor in the equity tranche. I would suggest this article as a statement of allegations, if not facts.
http://www.forexyard.com/en/news/How-Goldmans-ABACdeal-worked-2010-04-16T203025Z-FACTBOX-US

[Jim Rhoads a/k/a vjnjagvet]

Ol' Joe was one smart dude.

I litigated a number of deals that went south in the condo and raw land REIT boom of the 70's, the tax shelter LP boom of the early 80's, the S&L boom of the early 90's and the dot com boom of the late 90's. Usually the parties that took a bath were those who thought the boom would never stop. Of course, no one ever read the prospectuses that were churned out in the big securities shops about those deals. The message in all of the million pages of prospectuses (boiled down to a few words) was uniformly "don't buy this crap".

[jimmyk]

[posted in the other, now dead, thread]

IIRC, one of the allegations (which may or may not be supported by the evidence) is that GS misled investors that Paulson was going to be long this particular portfolio.

I fail to see whether some guy named Paulson (remember, he wasn't particularly famous at the time) is long or short represents "material" information. If he was long then someone else was short. Sure, he made the initial selection of the securities, but then ACA got to make its own choices.

As for Ignatz's question, "In what way did this tranasaction accomplish that in any way that was helpful to the economy?": It's not specific transactions that help the economy, it's the sum of actions by market participants that result in prices, and those prices convey information. Make it more risky for people to participate in markets (for fear of getting sued) and that information will be lost.

[Max Regor]

I have to correct my post. It is ACA, not ACC. The point still stands. When ACA negotiated with Paulson, were they negotiating with someone on the long side or the short side of the transaction? Is that a material difference?

[MarkO]

Patrick, to be fair, I read you as being unrelenting in your opinion, irrespective of the minute possibility that you could be wrong. That give me, and perhaps others, the sense that you are emotionally or financially involved in the matter.

I have no idea what the outcome will be. I have litigated securities issues for far to long to make some prediction about that. But, in the context of no context perhaps we can all learn something.

I just don't want to have to write off your contribution because you are so certain of all of it. Moreover, I'm not really interested in hearing that you find the remainder of us to be as inflexible as you clearly seem.

[Danube of Thought]

Whether the info that wasn't disclosed was material or not is the ultimate question that will dcide the outcome. We've already seen arguments yea and nay here.

Be patient.

[Max Regor]

Here is what puzzles me most about this. Goldman's fee for the transaction was 15 million. Goldman claims a loss of 90 million. This is the only article I have found so far that considers the question. Here is a radical thought. The SEC names Goldman and one specific employee. There is a lot more going on here than meets the eye.

[Jim Ryan]

Interesting post by Dennis.

[Patrick R. Sullivan]

Do you think that there is a problem with Goldman investing its own money to bet against Abacus?

Does the self-described licensed professional also not know the meaning of being 'long'?

Patrick, to be fair, I read you as being unrelenting in your opinion...

I tend to be that way about the rules of logic, yes.

Moreover, I'm not really interested in hearing that you find the remainder of us to be as inflexible as you clearly seem.

Mostly it's the stupidity that bothers me. Perhaps, as one who is an JOM originalist I'm a little more miffed than most that this site has degenerated from a place where intelligent and informed people would exchange information, to a social networking place where establishing relationships is the soup of the day.

[bgates]

This is the new asbestos

I certainly hope so, given Obama's somewhat infamous failure to achieve his desired result in dealing with the old asbestos.

[Charlie (Colorado)]

Watch tomorrow's PJM, I just bought an interesting piece by Ira Stoll.

[helpusordie\Alliance for a Healthier Generation]

Roger Buck,

O was really lobbying for a friend, not like she forced us all to clone and get fat. See, it was just help for the poor, the disastered, the people who can't help themselves. That's what was supposed to stop all the evil that happened not cause; they were trying to help us like they know we should.

That or die.

[Steve Diamond]

Max,

Arguably there may be something to the Paulson role if there is some way to justify IKB not asking any questions about the deal because ACA was the selection agent. But I don't see any indication yet that can be justified.

The SEC's claim is that GS left out material facts about the security they sold to IKB. The material facts related to Paulson's role. But would a reasonable investor at the time of the transaction have thought learning about Paulson's intention to short the deal was material? My sense is no, because they already knew someone was going to short the deal. They didn't care. They had their theory that housing was a safe bet and they were so intent on getting in on the action they were willing to invest in synthetic CDOs to do it.

I can see ways to chip away at this theory but right now my sense is the SEC has an uphill battle.

Steve Diamond

[Extraneus]

I'm surprised that nobody has yet commented on the 3-2 vote that TM linked. Three Democrats voted against two Republicans to approve the suit, coincidentally on the week before Obama makes a big push for Dodd's financial regulation bill.

Come on. Have Democrats done anything in the past several years to merit the benefit of the doubt on something like this?

And, secondarily, what do transactions like this Paulson play have to do with the mortgage meltdown? Did they cause it, accelerate it, worsen it, or did they just bet on something that was either going to happen or not happen anyway?

[Melinda Romanoff]

Ex-

It's part of my being convinced it's a sham suit.

[Good, that one.]

pp was on message.
========

[Old Lurker]

Hey Kim...did you see the link on Drudge to Hilary Clinton's State Dept conclusion that mankind is causing all the global warming, and that their written opinion on that is about to be sent up to the various UN type bodies?

[Extraneus]

I was in a bar the other night, and a conversation ensued between a few drinkers and the bartender regarding the GS suit. None of them were well-versed as to the specifics, but "something's gotta be done about these Wall Street scumbags" was nonetheless agreed upon by all involved.

Good thing Obama's standing between them and the pitch forks, I guess.

[Melinda Romanoff]

kim-

In the larger concept, yes, he is. I have some minor points that have been glossed over in the larger framework, but aren't worth getting bogged down at this time. If it looms larger, I'll digress at that time, but I'll bore people out of their minds with the details.

[Old Lurker]

Here is the LUN to State's "GW is unequivocal and largely human induced..."

[nathan hale]

I was watching Colbert, which is something I never do, and he was interviewing Sorkin, about the matter, and he was a little incredulous about the loss that Goldman had suffered, akin to that episode, where the mob had been defrauded by Wall Street, what a 'revolting development this is' Then again after Libby, Black, Stevens, instead of Armitage, Radler, Allen, I guess I'm not terribly surprised

[Old Lurker]

Sorry "primrily" not "largely" human induced.

[RichatUF]

Rick-

I need to talk. Can you call me. Thanks.

[Melinda Romanoff]

You OK, Rich?

Anything I can help with?

[Captain Hate]

It's part of my being convinced it's a sham suit.

The WSJ weighs in on what's driving it @ LUN

[See Bishop Hill and Keith Kloor.]

Judith Curry, the Ramblin' Wreck: 'I am no longer substituting the IPCC's judgment for my judgment in this matter'. The world in a tiny little sentence.
=============

[Singlehandedly restoring credibility to climate science.]

Dang, it's 'for my own judgement in this matter'. And wow, is her judgment formidable.
===================

[Sue]

to a social networking place where establishing relationships is the soup of the day.

Well thank goodness no one will ever accuse of that. You dodged a bullet, getting out while you still could.

[Here Come Da Judge.]

I nearly always have to correct my 'judgments'.
=========

[FD]

It really is national security. School lunches are important overseas. O is saving us we got fat.

[Here Comes La Nina.]

We are cooling, folks; for how long even kim doesn't know.
==================

[Melinda Romanoff]

Cap'n-

Chaco's right hand/left hand is precisely what's going on in that bit. The Stanford case is just brutal on the SEC.

[Serve it with gusto.]

Ketchup is tomato sauce. Catsup is thick tomato soup. It is not cat soup. It is neither animal nor mineral in origin.
=========================

[nathan hale]

So they buried the IG Report on Stanford, with this claim. Some days I'm not cynical
enough, I think.

[Captain Hate]

Thanks Melinda.

AllahPuke is a complete douche and eeyore but ignore his comments and enjoy the video @ LUN of Toonces dealing with a literal tea-bagger.

[Cecil Turner]

I'm surprised that nobody has yet commented on the 3-2 vote that TM linked.

Hadn't gotten around to reading it, and didn't realize it was a party-line vote. Which rather seals the deal for me.

I admit being vastly confused over most of the technical issues, but the politics is very clear. Goldman Sachs is being pilloried over something it had very little to do with (the meltdown, not this case), and the people actually responsible (esp. Democrats in Congress) are using the case as propaganda to support a bill that essentially turns every large bank into a Fannie Mae/Freddie Mac clone. Yeah, that'll fix the problem.

Un-frickin-believable.

[rse]

Legal Insurrection makes the excellent point that no matter how much one dislikes GS, taking them down will represent yet another private commerce power center no longer in the way of the federal government.

LUN

[Captain Hate]

nh, you can't be too cynical with this bunch. Unpossible.

[Melinda Romanoff]

narciso-

This is real deal on Stanford. Worse than can be imagined.

[Sue]

I don't understand the politics of this one. Goldman Sachs contributed almost a million dollars to Obama's campaign. And contributed 75% to 25% to democrats in 08. Yet republicans are being tagged with this?

http://www.opensecrets.org/orgs/summary.php?id=D000000085>Source

[nathan hale]

1997?, it's a wonder they don't 'take a flame
thrower to the place' It took almost as long
to catch Madoff, even with everything Markopoulos served up to them

[sbw]

I'm a little more miffed than most that this site has degenerated from a place where intelligent and informed people would exchange information, to a social networking place where establishing relationships is the soup of the day.

Yeah. Some of us got miffed. Losing PUK and Bad helped others of us appreciate what a fine, intelligent, caring community had blossomed here.

In my opinion, your soup is a little thin.

[Sue]

Ex,

I'm surprised that nobody has yet commented on the 3-2 vote that TM linked. Three Democrats voted against two Republicans to approve the suit, coincidentally on the week before Obama makes a big push for Dodd's financial regulation bill.

I think you worded that wrong. 3 democrats voted for the suit and 2 republicans voted against the suit.

Which is why I don't understand the politics of this case. GS contributed heavily to democrats, yet they are pushing the suit.

[rse]

Andy McCarthy, as usual, nails it (from NRO):

The statists who gave us the financial meltdown are making a wager more insidious than anything Paulson or Goldman ever came up with. They are betting that Americans will be duped into believing that something other than pandering — something other than the government’s scheme to use taxpayers’ dollars to purchase the loyalty of low-income and minority voters — is responsible for our current straits. Obama & Co. are constructing a narrative that says a near-depression was triggered by greedy Wall Street predators who dragged investors under water. If you buy that, they get a double boon: They escape blame, and they bolster their campaign to grab more control of the private sector under the guise of “regulation.”

[Sue]

I may have worded my post wrong too. I understand the politics of why they brought the suit at this time. Obama wants the headlines it will generate. Easy target. Fat-cat Wall Street bankers are always easy targets. What I don't understand is how republicans are getting tagged with being in the pocket of Wall Street when Wall Street contributed heavily to democrats in the last 2 election cycles.

[Jane]

"something's gotta be done about these Wall Street scumbags"

I am convinced that we will lose this battle unless we can come up with on line phrases that explain our position - on everything.

If the explanation is complicated, no one listens - and the left is very good at doing this.

[Clarice]

Listen, GS officers and employees kicked in about a $million for Obama's campaign--the other big firms kicked in big, too. As did the largest lawfirms. They figured it'd be the same old Dem party, attacking them verbally when necessary but always playing ball when it counted.

Now they know.
Lesson learned.
I don't honestly care what happens in this case, but I think GS has already set forth a reasonable defense.

But even if they win, it will cost them in huge legal fees and lost business.
And I don't think they'll be alone.

[nathan hale]

It's all too reminiscent of the S&L situation,
in the 80s, then again, real estate speculation was the collateral that supported
the portfolios, specially in Texas, California
Florida, Many of the players who had backed
these moves, were Democrats, Wright, St. Germain, at least four of the Keating 5. In one case, Centrust, one was a front for BCCI, which in turn was controlled by a Arabian financier Ghaith Pharaon, the figurehead, David Paul was the treasurer of the Campaign that put the Democrats back in the majority in '86, run by John Kerry, while his committee, headed by former Church
committee staffers like Blum, slandered
American intelligence operations by legitimizing the Christic nuts, the predecessors of Moveon. Back at head quarters, Amiable dunce Clark Clifford
was a front man for another clique of con men from the Peninsula, Kamal Adham. former Saudi Intelligence chief, sacked in part
for facilitating the Sadat reproachment
with Begin, a clique of princes from the emirates, Dubai pops up like a bad penny
and a confidence man from Pakistan.

What popped the S&L bubble, besides their
own malfeasance, the collapse of oil prices
for the pan handle, but more importantly in light of what I described earlier, a reduction in the deductability of real estate as part of the '86 tax reform act. Considering what S&L were floating on, that's like pulling that last piece in Jenga,

[Danube of Thought]

I'm a little more miffed than most that this site has degenerated from a place where intelligent and informed people would exchange information, to a social networking place where establishing relationships is the soup of the day.

Don't let the doorknob hit you in the ass.

[Danube of Thought]

Minus 10 at Raz. GOP by 10 on generic congressional ballot.

[jimmyk]

I'm a little more miffed than most that this site has degenerated from a place where intelligent and informed people would exchange information, to a social networking place where establishing relationships is the soup of the day.

PRS, as someone who has largely agreed with you on this issue, I would say that there's been plenty of information exchange by intelligent and informed people, and very little stupidity. A few mistakes, yes, but that will happen. Any social networking is just a byproduct, as is almost inevitable.

I think that some of the anti-GS sentiment here stems from the fact that they appear to have benefited from the bailouts (AIG, in particular), and from their strong political connections to the Democratic party. The sense is that they are not shy about using the political system to their advantage, and now they are getting hoist on their own petard. That doesn't justify the suit, but it explains why not too many are crying for them. I think the suit should get thrown out, but, as they say, "What goes around comes around."

[Old Lurker]

Somehow I just cannot shake the feeling that we are all being played. Obama, GS, the lawyers...all of them are up to something.

Remember the old line about poker: if you can't tell in five minutes who the mark is...you are it.

[Extraneus]

If this is a political setup, there's no reason for the SEC to actually win the case, and the players could very well be winking at each other over it. (I mean, Greg Craig? Doesn't that seem like a wink right there?) All that has to happen is that the financial regulation bill pass. The SEC could lose, settle, drop the suit, etc., after that, and it's still mission accomplished. Even if GS pays a fine, they'd probably have that more than covered in provisions of the bill.

Yes, I admit to having lost some faith in the Federal government.

[anduril]

this site has degenerated from a place where intelligent and informed people would exchange information, to a social networking place

Yeah, it's really bothersome to have to scroll through all the drivel and mindless chatter.

[Cecil Turner]

Don't let the doorknob hit you in the ass.

I'm with Patrick on this one. The camaraderie is all good, but I come here for the information and mental stimulation, not the social stuff. Having both is great, but if one pushes out the other . . . One reason I absolutely detest the Mobys and related (resultant?) group mentality is that it drives out intelligent opposition. My favorite memories involve debates with folks like Jeff (Lomonaco) in which I generally learned a lot more than I will ever admit (and he was still wrong, of course).

[nathan hale]

Greg Craig, the attorney for the Haitian Mev
oligarchs, the go between with the Cuban government, the co counsel for John Hinckley, surely he's on the up and up. And don't call
me shirley

[Janet]

OT -
LUN is an "America is crap" editorial from today's WaPo. Written by Henry Allen who was a Post editor and reporter for 39 years.
Anywhooo...he says -
"There were no weapons, but we kept fighting to make Iraq safe for democracy and ended up holding mass torture sessions at Abu Ghraib that produced colorful souvenir snapshots by our GI Joes and Janes. Are Iraqi kids playing baseball yet?"

I get sickened by the meme of Abu Ghraib summing up our entire efforts in Iraq. A crime occurred...it was being prosecuted...THEN the pictures were released for propaganda purposes.
Does Waco sum up Clinton's entire term as President?
Which event killed more people?
Did newspapers print pictures of the dead children endlessly...souvenir snapshots by our Journalist Joes and Janes?

[Clarice]

You know, Janet, the Post has a place for online comments and your post is so good it should be re-posted there.

[Melinda Romanoff]

Ex-

Try it from this perspective:

GS settles, pays the fine, or wins. The follow-on suits are the real problem, and every single securities firm across the country will be hit in some form, clearing, execution, trusteeship, what have you. These suits will pay for years and the scrupulous attorneys that will flood the courts for the next ten years will continue to flood the contribution pipe.

Which is the point of this particular exercise, in my eyes. Continued funding sources for the good of the party, hence the permanent bailout provision.

Or, I might be too jaded in my thoughts.

[anduril]

Tunku Varadarajan has a very worthwhile article: The Irrefutable Moral Case Against Goldman. Here's his main point:

It has been argued—and argued, sometimes, too glibly—that the purchasers of the CDOs were sophisticated investors; in other words, that they were big players, not widows and orphans, and so deserve neither our sympathy nor our protection. But a sophisticated investor is not an omniscient one, and an investor’s sophistication is, inevitably, determined by the information he has—or should have—after suitably diligent research. But what if information, material information, is occluded, or obscured in such a manner as to lie beyond the reach of an investor’s research? The key question, then, is: Would the investors have bought the product if they’d known that Paulson had put it together, and that he was betting, as was his custom, that the mortgage market would go up in smoke? For only with that knowledge would they have had enough information to make an informed—and, no doubt, sophisticated—decision.

At the heart of Goldman's defense is their contention that the only information that was material was the quality of the underlying assets in the CDO. I find that problematic--even sophisticated people need wake up calls, warning flags. Why would Goldman not have erred on the side of fullest disclosure?

This whole episode raises a basic issue, that is being addressed at numerous sites: if the purpose of more or less free markets is the efficient allocation of credit, then exactly how do these transactions contribute to that end? Would not fuller disclosure have been more efficient, as tending to prevent what turned out (for all but Paulson) to be a major misallocation? As Tunku V. says:

It would be hard to find a decent human being who would disagree with the view that Goldman’s methods were morally questionable. And it is here, in the interstices between the law and morality, that the pressure for reform starts to build up irresistibly.

[Cecil Turner]

Which is why I don't understand the politics of this case. GS contributed heavily to democrats, yet they are pushing the suit.

GS represents Wall Street in the middle of a class war. They need some case to epitomize the uncaring fatcats profiteering from the meltdown, and this one works. It's also a very effective threat for future shakedowns (i.e., "if we're willing to do this to our friends . . .") But mostly it serves to disadvantage Republican opposition at a critical period. The politics works on every level.

The fact that GS is made up almost exclusively of Democrats, contributes vastly more to Democrats, lost money on this particular deal instead of profiteering, and is largely blameless for the bigger picture of the market meltdown is mere detail. (And you can rely on Dem friends in the media to ensure those pesky facts don't get a lot of play.)

[Extraneus]

So either way, the Dems win. Sweet!

[anduril]

I come here for the information and mental stimulation...

Sadly, many here are seriously offended by that and seek only the comfort of Groupthink.

[hit and run]

FWIW, throw http://www.foxbusiness.com/story/markets/industries/finance/wall-street-obama-parting-ways/>this into the mix,from March:

Wall Street’s love affair with President Obama is officially over — at least for now — with the CEOs of the biggest Wall Street firms, big banks and large financial institutions expressing their dismay over everything from the president’s anti-Wall Street rhetoric, his calls for new regulations on the financial industry and his initiatives that will lead to a takeover of the health-care system, people at the big firms tell FBN.

To be sure, after jumping on the Obama bandwagon during the 2008 presidential campaign in a major way, the relationship between Wall Street and Obama has been strained in recent months, particularly after the president referred to bankers as “fat cats” in a television interview in December and after Republican Scott Brown’s surprise victory to take over the Senate seat held by Democratic Party stalwart Teddy Kennedy in January, where the president immediately endorsed a plan to restrict certain types of lucrative trades.

...

But senior officials at the big firms say their relationships with the White House are now at a critical stage, with top executives openly saying that they doubt they will support the president as they did in 2008. During the presidential campaign Wall Street firms such as Goldman overwhelmingly supported the president despite his liberal voting record as a U.S. Senator over his Republican challenger John McCain. Goldman, for instance, gave four times more money to Obama than it did for McCain, according to campaign contribution filings.

“If the election was held today, Obama would lose the senior Wall Street executives who had considered themselves Liberal Democrats,” said one senior Wall Street executive who frequently meets with the CEOs of the top firms. “They thought they were voting for a moderate and now they think they’ve gotten something else."

...

According to one Wall Street CEO who spoke on the condition of anonymity, the Obama as president is much different than Obama the candidate who wooed top executives in 2007 and 2008. “He came across as nothing short of a moderate,” said this CEO, who supported the president during the campaign. “On health care he always talked about the need to lower costs, never about a massive new entitlement. Federal spending, he always spoke about the need to level the playing field between the super rich and the poor, not massive income redistribution.”

Question is,are these "rubes self-identifying",as Glenn might say?

Or potential political targets painting the concentric circles on their own backs?

[nathan hale]

Others have touched on the real issue, here, which is granting authority to intervene in any company for any reason, without review, this is something Putin would give up a limb for.

We've learned that the TARP was despite it's purported aim, not about solving the subprime crisis, the stimulus was not about restoring the economy, cap n trade, is not about saving the planet, Obamacare is not about reforming health care, so this is not about cleaning the Augean stables, and Campaign Finance is not about getting money
out of politics, just making it more unaccountable. So when you have a stampede
led by Schumer and Dodd, you know it's like
an Oceans series film, it's a con

[Melinda Romanoff]

Cecil-

a la "useful idiots".