SEC Sues Goldman

The SEC is filing a civil suit against Goldman, Sachs [here is the complaint]:

The instrument in the S.E.C. case, called Abacus 2007-AC1, was one of 25 deals that Goldman created so the bank and select clients could bet against the housing market. Those deals, which were the subject of an article in The New York Times in December, initially protected Goldman from losses when the mortgage market disintegrated and later yielded profits for the bank.

As the Abacus deals plunged in value, Goldman and certain hedge funds made money on their negative bets, while the Goldman clients who bought the $10.9 billion in investments lost billions of dollars.

According to the complaint, Goldman created Abacus 2007-AC1 in February 2007, at the request of John A. Paulson, a prominent hedge fund manager who earned an estimated $3.7 billion in 2007 by correctly wagering that the housing bubble would burst.

Goldman let Mr. Paulson select mortgage bonds that he wanted to bet against — the ones he believed were most likely to lose value — and packaged those bonds into Abacus 2007-AC1, according to the S.E.C. complaint. Goldman then sold the Abacus deal to investors like foreign banks, pension funds, insurance companies and other hedge funds.

But the deck was stacked against the Abacus investors, the complaint contends, because the investment was filled with bonds chosen by Mr. Paulson as likely to default. Goldman told investors in Abacus marketing materials reviewed by The Times that the bonds would be chosen by an independent manager.

“The product was new and complex, but the deception and conflicts are old and simple,” Robert Khuzami, the director of the S.E.C.’s division of enforcement, said in a statement. “Goldman wrongly permitted a client that was betting against the mortgage market to heavily influence which mortgage securities to include in an investment portfolio, while telling other investors that the securities were selected by an independent, objective third party.”

Knowing nothing other than what I am reading here, that sounds like a winnable suit for the SEC.  So why hasn't Goldman settled?  My current wild guess - a spate of private lawsuits will come in the wake of this action if it succeeds.

FROM THE COMPLAINT:

Tourre was principally responsible for ABACUS 2007-AC1. Tourre devised the transaction, prepared the marketing materials and communicated directly with investors. 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.

More details follow.  Seems pretty damning.

Comments

[Mixed messages, mixed agendas, hence mixed metaphors.]

So Goldman thought this was OK? I think there'll be a flood of lawsuits even if the SEC doesn't prevail. There are at least 3.7 billion dollars of low hanging deep pockets in view.
========================

[Black Hat]

For example, take a look at the Magnetar deals that were written about last week. LUN

[rse]

I suspect GS figured that in our new corporatist economic system, they, like GE, were among the favored and not bound by the rules ordinarily in play.

You can almost hear the execs looking at the complaint and being confused given all those campaign donations they made.

"This isn't what we paid for!"

[Clarice]

some wild guess, TM.

Rick'll cut the cards the next game, if you don't mind.

[Rick Ballard]

Kim,

It's much more than $3.7 billion and GS ain't exactly all alone.

[Old Lurker]

Even Rick will be impressed with how blatant this seems to have been. He's had their number from the get-go, but he thought they were smarter than leaving fingerprints and powder burns behind.

[Old Lurker]

Hey Rick, I was just talking about you...

:-)

[Melinda Romanoff]

now you know how you push a reform agenda in Chicago.

[Danube of Thought]

Given the facts as described, the private actions will begin immediately, if they haven't already done so. (If he weren't a disbarred felon, Bill Lerach would already be on file.) The outcome of the SEC action won't affect the plaintiffs' bar.

[MarkO]

Goldman had an insider at all the meetings and knew days before about every action the Bush and Obama administrations were going to take. Any seasoned observer knows that Goldman will game any system better than any regulator will ever realize.

The real catch would be the insiders, but they will skate away, protected and rich.

Even I was aware of the suspension of short trading the day before it was announced and I'm hardly an insider except in my own barn.

[Patrick R. Sullivan]

Talk about hindsight bias! Some of Goldman's clients bet one way and some bet the other way. Big deal.

This is the kind of stupidity Michael Lewis has gotten rich peddling. Here's Lewis being undressed by Brian Lamb (watch the program, don't read the transcript) about halfway through, asking a simple question about where all the subprime mortgages came from. It goes down hill for Lewis from there.

[PD]

We need to hear from Jim Cramer on this.

[Captain Hate]

If he weren't a disbarred felon, Bill Lerach would already be on file

Yes, but future California law school professor in the LUN. Gee, I don't have the first clue about why lawyers get such a bum rap.....

[matt]

Why is it that so many leading Democratic fundraisers are

a - Wall Street crooks

and

b - under indictment

and nary a word from the press about "close ties to the Administration"? Just wondering.

[Patrick R. Sullivan]

Goldman had an insider at all the meetings and knew days before about every action the Bush and Obama administrations were going to take.

I think you're confusing your Paulsons.

[Danube of Thought]

Patrick S, I think the problem is that Goldman's clients were betting one way while Goldman was betting the other way.

[Melinda Romanoff]

DoT-

Goldman seems to have screwed over their smaller customers in favor of their big ones.

[Patrick R. Sullivan]

No, DoT, some of Goldman's clients were betting one way, some the other way. That's the brokerage biz. They're happy to take the money of both.

[Danube of Thought]

It's reminiscent of the way that commodities trader passed out losses on cattle futures to a bunch of clients so he could pass out gains to Hillary.

[Patrick R. Sullivan]

What's your evidence for your claim, Melinda?

[Melinda Romanoff]

I disagree, PRS, this is way worse.

[Chris]

How is this different from GS underwriting state muni's, collecting huge fees and then shorting those same bonds on their proprietary trading desks?

[Melinda Romanoff]

From the article:

"Goldman let Mr. Paulson select mortgage bonds that he wanted to bet against — the ones he believed were most likely to lose value — and packaged those bonds into Abacus 2007-AC1, according to the S.E.C. complaint. Goldman then sold the Abacus deal to investors like foreign banks, pension funds, insurance companies and other hedge funds."

The volume of transactions from Paulson's firm dwarfed the other customers, whom this carp was marketed to by GS. This security was designed by and for Paulson, and GS, marketed inapropriately (see "prudent man" rule) to other customers while with holding material fact.

Do you want the filing? GS may skate on this, expensively, but Fabrice is going back to the continent, if not jail first.

[Melinda Romanoff]

chris-

you can't short a bond, and definitely not a muni bond.

You need a CDS.

[Patrick R. Sullivan]

Melinda, the analytical content to emotion ratio is low to non-existent in your argument. A client got to select the securities he wanted to invest in? Heaven forfend!

Everybody involved was a deep pocketed, sophisticated investor. Who do you think bought the CDO, retirees with their SS checks.

[Danube of Thought]

It appears to me that a client got to select securities that he expected to default, which Goldman sold not to that client but to other clients without disclosing the basis for their selection.

This strikes me as a garden-variety material non-disclosure under Rule 10b5.

[Patrick R. Sullivan]

It's reminiscent of the way that commodities trader passed out losses on cattle futures to a bunch of clients so he could pass out gains to Hillary.

Definitely not (why do you think I called it hindsight bias?). In the cattle futures scam, the losses and gain were realized BEFORE they were assigned on a basis of favoritism.

In this, the positions were taken prior to realized gains and losses. John Paulson had money at risk. He could have been wrong.

[Danube of Thought]

From the complaint:

"Undisclosed in the marketing materials and unbeknownst to investors, a large hedge fund, Paulson & Co. Inc. (“Paulson”), with economic interests directly adverse to investors in the ABACUS 2007-AC1 CDO, played a significant role in the portfolio selection process. After participating in the selection of the reference portfolio, Paulson effectively shorted the RMBS portfolio it helped select by entering into credit default swaps (“CDS”) with GS&Co to buy protection on specific layers of the ABACUS 2007-AC1 capital structure. Given its financial short interest, Paulson had an economic incentive to choose RMBS that it expected to experience credit events in the near future. GS&Co did not disclose Paulson’s adverse economic interests or its role in the portfolio selection process in the term sheet, flip book, offering memorandum or other marketing materials provided to investors."

Paulson could indeed have been wrong. But the Abacus investors were entitled to know that a short-seller had participated in the selection of the securities in which they were investing.

[Patrick R. Sullivan]

DoT, you only disclose facts, not opinions--which are wrong as often as they are right. I hope you don't advise your clients to offer opinions when they're deposed in a lawsuit.

[Danube of Thought]

More from the complaint:

"Tourre was principally responsible for ABACUS 2007-AC1. Tourre devised the transaction, prepared the marketing materials and communicated directly with investors. 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."

Paulson's adverse position, and his participation in the selection of the securities, were facts, not opinions, and they were definitely material facts.

Were it otherwise, the SEC's complaint would be susceptible to a dismissal for failure to state a claim upon which relief can be granted. I'm betting that doesn't happen.

You needn't worry about how I advise my clients, but suffice it to say that sometimes opinions are required in testimony.

[Melinda Romanoff]

A security marketed for this purpose, while obfuscating Paulson's interest in the security as a shortable vehicle, by regulation, is a fraudulent sale no matter how sophisticated the client. The twist is the use of civil fraud as an enforcement tool, and not regulatory violations.

If even one slice of the CDO went to a pension, the Prudent Man Rule is enforceable against the agent at GS, supervisors, and a whole host of people.

I can't follow up further until later tonight, when I will with vigor. I have more knowledge of this type of trade than you might know.

[glasater]

This whole thing is going to give Zero a big club to beat the R's over the head on Financial Reform

He's already done so with the cutesy web cam comments from a meeting with Volker nodding in agreement at his side.

Don't have a link to that video but it will show up soon--somewhere on the web.

[Joe Investor]

Goldman is going down. The pitchforks are out. And how long has Patrick Sullivan had ties to Goldman. And what's his address? I want to add him to the complaint.

[Patrick R. Sullivan]

...the Abacus investors were entitled to know that a short-seller had participated in the selection of the securities in which they were investing.

Well, he wasnt' a short seller at the time. Note, from the complaint; 'After participating in the selection of the reference portfolio, Paulson effectively shorted the RMBS portfolio it helped select by entering into credit default swaps (“CDS”) with GS&Co to buy protection on specific layers of the ABACUS 2007-AC1 capital structure.'

AFTER. But, any sophisticated investor knows there are people taking a contrary position. The buyers have their own due diligence departments, their own analysts.

[Danube of Thought]

Are you saying the complaint does not allege facts that constitute a violation the anti-fraud provisions of the Act?

[Danube of Thought]

Well, he wasnt' a short seller at the time

Not at the time of the selection of the securities. I infer (but can't determine) that he was a short seller at the time of the sales to the Abacus investors.

[glasater]

Why isn't DOJ jumping in on this with both left feet?

[Danube of Thought]

This whole thing is going to give Zero a big club to beat the R's over the head on Financial Reform

I don't see how. The acts alleged in the complaint violate long-standing law.

[glasater]

"If Goldman loses on this--than all CDO's from 2007 will have to be looked at."

[Tom Maguire]

Talk about hindsight bias! Some of Goldman's clients bet one way and some bet the other way. Big deal.

I think this will be a big deal. Paulson met with Goldman and said he wanted to short a fairly specific list of real estate bonds.

Goldman then hired ACA, an advisory firm, and told them Paulson would be net *long* the bonds portfolio deal, so work with him in putting a pool together. Paulson suggested some bonds and vetoed others.

Goldman then told other investors that ACA, a perfectly credible firm, had put together a portfolio.

The SEC position is that Paulson's role was material and that Goldman deceptively concealed it. IMHO both are true.

From the complaint:

C. GS&CO AND PAULSON DISCUSS A PROPOSED TRANSACTION 15. Paulson performed an analysis of recent-vintage Triple B-rated RMBS and identified various bonds it expected to experience credit events. Paulson then asked GS&Co to help it buy protection, through the use of CDS, on the RMBS it had adversely selected, meaning chosen in the belief that the bonds would experience credit events.

16. Paulson discussed with GS&Co possible transactions in which counterparties to its short positions might be found. Among the transactions considered were synthetic CDOs whose performance was tied to Triple B-rated RMBS. Paulson discussed with GS&Co the creation of a CDO that would allow Paulson to participate in selecting a portfolio of reference obligations and then 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.

[Is the climate changing?]

That sounds like ACA has a case against GS, too.
====================

[glasater]

It does Kim.

And somewhat comforting is this headline:

Boehner Statement on SEC Charges Against Goldman Sachs, President Obama’s Top Wall Street Ally

[rse]

Question-

If a big part of the stock market's lofty values were being manipulated by big players like GS to make this Admin's policies look better, will this filing likely impact the stock market's values going forward?

or Are we currently a port in the storm given what's going on in Greece and elsewhere in Europe and that will drive the market forward temporarily?

[matt]

You have the Goldman, Citi, B of A/Merrill, Lehman, etc rigged casino on the one hand; Fannie/Freddy on the other; derivitives that no one understood, and grifters like Wa Mu and Mozillo.

All the while the same offenders are the ones with their hands around the levers of power both in DC and New York. They are lawyered up and lobbied up to the gunnels to boot.

Goldman own the Treasury regardless of party.

These are separate issues requiring specific solutions. Now Obumble is trying to ram through a one size fits all solution. Where are the frickin grown ups?

What could possibly go wrong, as TM might say?

[Patrick R. Sullivan]

Gee, I've only been sued once, but I know that lawyers overstate their positions in legal documents all the time. Everyone is being naive if they believe what the SEC is alleging. Consider:

...a large hedge fund, Paulson & Co. Inc. (“Paulson”), with economic interests directly adverse to investors in the ABACUS 2007-AC1 CDO, played a significant role...

The author of that line is a politician in the making. But, it'll be fun to see how international financial institutions who bought the CDO are transformed into widows and orphans.

[Extraneus]

This whole thing is going to give Zero a big club to beat the R's over the head on Financial Reform

I don't see how. The acts alleged in the complaint violate long-standing law.

I don't think many people will know or care about that; they'll just know that another fat cat Wall Street insider scammed honest Americans, who were just innocently speculating in sub-prime mortgages.

Implicit in this is the convenient argument that it's not the sub-prime mortgages, but the unregulated fat cats, who took the real estate market down.

I'm with glasater. Either that or it's just an amazing coincidence. Kind of like that Anthem 39% rate increase just in the nick of time for the health care vote.

[Chris]

chris-

you can't short a bond, and definitely not a muni bond.

You need a CDS.

Melinda

As an underwriter/market maker in muni's, how can they not have a trading bias? And what of collecting fees for underwriting bonds and advising clients not to buy the same bonds?

Is this a minor issue? I'm not being snarky. Been out of the business for several years now but I believe Goldman could devise a short-sale on the Pacific Ocean if they chose to.

[Pasadena Phil]

Despite the investment instruments in question being opaque and complicated, the case itself is relatively simple. Here is the short version.

A "client" hired Goldman to structure a deal where they would bet on subprime mortgages appreciating. Other Goldman clients, Paulson & Co in particular, were hot for shorting subprime mortgages and were already pushing Goldman to find counter parties to the trade. The two were matched up. The problem is two-fold.

One, Goldman failed to disclose to the long buyers that other Goldman clients were the counter parties AND THAT PAULSON WOULD BE THE "INDEPENDENT" THIRD PARTY SELECTING THE MORTGAGES FOR THE PORTFOLIO.

Two, Goldman failed to disclose that they themselves were betting against them.

Goldman is going to claim that they were just providing a service to two clients by bringing them together and that as an investment bank, they needed to hedge their positions. Sounds right doesn't it?

Why that doesn't pass the smell test is that Goldman made a billion dollars on the trade. If they were hedging to be neutral and just providing a service to two clients, they shouldn't have made or lost money. If you had just lost a billion dollars on this shell game, how would you feel?

Political or not, it is long past time for Republicans and Democrats alike to accept that "regulation" is not a dirty word. To Republicans in particular, capitalism seems to be the only game best played without rules. There is a distinction to be made between fair and efficient regulation versus ponderous bureaucracy. Glass Steagall was a perfect example of a fair and efficient regulation. Having revoked it, we are now seeing the possibility of a ponderous new bureaucracy.

Good job GOP!

No incumbents after this November! This corrupt one-party system just isn't working.

[Patrick R. Sullivan]

The twist is the use of civil fraud as an enforcement tool...

No kidding, that's because the burden of proof would be on the SEC in a criminal charge.

...another fat cat Wall Street insider scammed honest Americans, who were just innocently speculating in sub-prime mortgages.

Quit your day job, there's a career in stand-up begging for you.

[Pasadena Phil]

If some of you are so hell-bent on making this a cynical ploy by the Obama administration, explain away that Goldman Sachs was Obama's biggest political contributor. And the charges were filed by the SEC which has been shuffled to the back of the room by Congress, lobbyists, the Treasury and the Fed. This is a regulator doing its job.

That they filed a civil fraud case is just a start. It gets the investigators foot in the door and I predict that it will lead to criminal charges. What the politicians are afraid of is how the path will eventually lead to particular politicians and regulators.

Get ready, this is only the beginning and we are in for a ride. It's about time.

[Pasadena Phil]

By the way, it looks like Republicans are about to shoot themselves in the foot by defending Goldman Sachs. That's one of the thousands of reasons I'm not a Republican anymore.

[Chris]

What the politicians are afraid of is how the path will eventually lead to particular politicians and regulators.

Get ready, this is only the beginning and we are in for a ride. It's about time.

Posted by: Pasadena Phil | April 16, 2010 at 03:37 PM

You are kidding right, Phil? We have Barney Frank on tape saying he wants to "roll the dice" a while longer on Freddie and Fannie. Does he appear afraid of anything?

What Dem pol would worry about appearances at this point?

[steve sturm]

I'm unenthusiastic about this.

The losers in these trades weren't mom and pop investors, they were experienced players for whom Rule #1 is 'assume the guy on the other side is trying to screw me'. Goldman didn't disclose information? They didn't ask... and now the feds come riding to the rescue of people who were too stupid to do the most basic of due diligence? No! It's one thing (not right, but it's at least different) to have the feds rescue idiot consumers who don't bother to read their credit applications, it's another thing to come to the rescue of pension funds who have millions of dollars of talent on the payroll for the purpose of checking out their investments. (Note: one of the more interesting points of Lewis' new book is how utterly uninterested the buyers of these CDOs were in the contents; in fact, they thought the guys like Paulson were the idiots, betting on a structural and unprecedented collapse of the mortgage debt market).

As for Goldman making money, some of this was on the spread, some was in betting their own money on the collapse... but even here, everybody who deals with Goldman knows that Goldman makes bets with house money and uses information garnered from clients to do so.

Additionally, nothing like having the SEC come in after the cows have left the barn and bring an action in order to justify their own existence and to justify even more power. The fact is the SEC was clueless and probably still is as to what happened.

[Old Lurker]

P.Phil, per Bloomberg, the SEC is also sniffing at GE for telling the investing public one thing while tell Paulson at Treasury (he of GS) the opposite. Now that one could get juicy too.

[Captain Hate]

That's one of the thousands of reasons I'm not a Republican anymore.

Why don't you list all thousand and see if you can waste more TypePad space than you already have?

[Pasadena Phil]

"They didn't ask... and now the feds come riding to the rescue of people who were too stupid to do the most basic of due diligence? "

That is wrong on so many levels. First, Goldman Sachs is supposed to be an impartial middleman. Turns out they conspired with some clients to defraud other clients.

That the regulators only stepped AFTER the crime is revealing ulterior motives to you? Were they supposed to file charges "just in case" to prevent a crime?

This is a perfect example to make the argument that unfettered capitalism is NOT efficient. Capital markets and economies are NOT inherently stable. If there was one point that Karl Marx was right about, it is that unfettered capitalism would experience wilder and wilder oscillations until it self-destructed. Isn't that what we are seeing?

Nothing will get solved if any "solution" must first meet the political needs of one party or the other. I don't care whether the Dems or the Reps get the credit. Let's fix the problem! This is a great first step.

[Pasadena Phil]

I highly recommend Michael Lewis' latest book "The Big Short". It will greatly improve everyone's understanding of what is happening.

[Melinda Romanoff]

Patrick-

Upon further review,and time to think, move over, I'm coming to sit next to you, this is a sham suit, and probably will be dropped before court time.

But not before the Dodd bill is passed.

[Pasadena Phil]

Old Lurker, in "Too Big to Fail", Andrew Ross Sorkin describes another example of Paulson lying. In fact, even as he was telling Congress that the bailout money was going to be used to shore up the banks by buying up their toxic debt, he was revealing to others that the money would be re-directed elsewhere. It's quite a crooked club we have running things.

[steve sturm]

Pasadena Phil: did you read the book? If so, how do you square your claim that GS is supposed to be an impartial middleman with the view of people who dealt with Greg Lippman (not at GS, but in the same role) who knew he was trying to screw them? Who deals with Wall Street and is naive enough to think that they are dealing with an impartial middleman?

And what is the problem that is going to get solved with whatever 'solution' you have in mind? Is there a mechanism for keeping people from making bets that they think are sure things but turn out to be wildly wrong? Is there a pill that will bless regulators to suddenly become smart and be able to detect problems before they arise? (again, a disconnect between your argument and the book: Lewis makes it very clear that the 'regulators', in this case, the rating agencies, were at the bottom of the intellectual food chain). You think the people who work at the SEC are smarter than the market as a whole? Hint: they're not, and for the simple reason that if they were, they wouldn't be at the SEC.

[Patrick R. Sullivan]

Henry Blodgett has some detail undercutting the SEC argument:

The SEC alleges that Goldman failed to disclose to investors that Paulson & Co. played a role in selecting the securities that were included in the CDO in question.

Instead, the SEC says, Goldman merely told investors that a third-party firm, ACA, was the "Portfolio Selection Agent."

Based on a close reading of the SEC's evidence, however, Goldman likely has a strong argument that it was not required to disclose that Paulson & Co. had been involved in the selection process.

Why?

Because it is clear from the email snippets the SEC cites that ACA had full control over which securities were selected for the final portfolio.

For example, Paulson picked 123 securities it wanted in the CDO. ACA reviewed Paulson's picks and then sent an email to Goldman saying it was comfortable using only 55 of them. Later, ACA submitted its draft portfolio to Paulson, and Paulson requested that ACA eliminate 8 securities. ACA agreed to do this--but it clearly still had the authority to approve--or not--the final portfolio.

So the SEC's evidence does show that Paulson was involved in the security selection. It also suggests, however, that ACA was the final arbiter of what would be included and what wouldn't. It seems appropriate, therefore, for Goldman to describe ACA as the "Portfolio Selection Agent." It does NOT seem obviously necessary for Goldman to have mentioned that Paulson was involved in the selection.

Why not?

Because dozens of things were presumably involved in the security selection. ACA had constructed more than 20 of these products. It had its own analysts and models. It clearly did not just simply rubber-stamp Paulson's suggestions (on the contrary--it dinged more than half of them).

[Danube of Thought]

To Republicans in particular, capitalism seems to be the only game best played without rules. There is a distinction to be made between fair and efficient regulation versus ponderous bureaucracy. Glass Steagall was a perfect example of a fair and efficient regulation. Having revoked it, we are now seeing the possibility of a ponderous new bureaucracy.

I don't think you get it: The acts alleged here were, indeed, regulated, and have been prohibited by such regulation since 1934. I know of no Republican who has ever advocated or defended securities fraud. And Glass-Stegall was repealed by Bill Clinton (with the support of Phil Gramm).

[nathan hale]

Add to the fact, thar Goldman, spawn of the Old Ones, is actually in favor of thiscursed
'carte blanche' bill. Did Goldman do anything productive in this last era, don't forget I believe it was Rubin, that merged Houston Natural Gas and another company to
form Enron, and selected Ken Lay to head it

THe CRA revisions and other regulations permitted this three card monte to continue. Geithner certainly had power at the NY Fed, but chose to do nothing, and he selected a Goldman minion Patterson as one
of his flunkies

[Danube of Thought]

The evidence described by Blodgett might, indeed, support a summary judgment motion by Goldman. It is not disclosed on the face of the complaint.

No kidding, that's because the burden of proof would be on the SEC in a criminal charge.

The burden of proof, although lower, is on the SEC in a civil case as well. Criminal actions by the SEC have been very rare since its establishment.

[Danube of Thought]

This is a perfect example to make the argument that unfettered capitalism is NOT efficient.

If by "unfettered capitalism" you mean a capitalism where fraudulent transactions go unpunished, then it certainly is not efficient. But I know of not a single individual who has ever advocated such a system.

[glasater]

That's one of the thousands of reasons I'm not a Republican anymore.

P Phil--tell someone who cares.

If you're in the mood for one more insult check out Brian Lamb's takedown of Michael Lewis--watch the video.

Michael Lewis

[Patrick R. Sullivan]

Blodgett also doesn't think much of the charge against Goldman VP Fabrice Tourre:

...it becomes clear that ACA believed that Paulson was planning to buy the equity of the CDO (there's plenty of evidence of this). The SEC then alleges that Tourre knew this and had a duty to disabuse ACA of this notion: Tourre knew, or was reckless in not knowing, that ACA had been misled into believing Paulson intended to invest in the equity of ABACUS 2007-AC1.

So... there does not appear to be any incontrovertible evidence that Tourre lied to ACA. There is evidence that ACA believed Paulson was going to buy the equity of the CDO and that Tourre knew this. The question, therefore, will be whether he had a duty to disabuse ACA of this.

One important factor here. Presumably, like all investors who have made mistakes, ACA would prefer to believe that it was misled than to accept that its analysts blew it. ACA, therefore, has a motive to blame Tourre for misleading it.

In reality, however, to make this case, ACA is going to have to make the embarrassing admission that knowing what Paulson & Co was going to do affected its judgment with respect to the transaction. This information should NOT have affected ACA's security selection process. It should also not have affected ACA's decision to go forward with the deal. ACA is an independent firm staffed with experienced professionals paid millions of dollars to evaluate securities by themselves. What Paulson was or wasn't planning to do, therefore, should have been irrelevant.

[Patrick R. Sullivan]

BTW, anyone else notice someone missing--other than the widows and orphans, I mean--from the SEC's charge?

Don't John Paulson's actions have any relevance to charges of fraud here? Where's he?

[Patrick R. Sullivan]

And Glass-Stegall was repealed by Bill Clinton (with the support of Phil Gramm).

Glass-Steagall hasn't been repealed. Only a provision of it that prohibited any 'affiliation' between commercial banks and investment banks was repealed.

The FDIC insured deposits of commercial banks are still very much prohibited from being mixed with securities underwriting and dealing.

[Rick Ballard]

"Where is he?"

Probably feeling pretty secure in the knowledge that he had no duty to disclose the actions taken by a lightly regulated hedge fund.

Somewhat unlike the thieves at GS.

[Jeff]

buying credit protection IS NOT the same as short selling ...

[Patrick R. Sullivan]

Well, Rick, then why would GS have any duty to disclose their opinion as to what a lightly regulated hedge fund might do?

[Chris]

PRS,
Why is Blodgett a reliable source pertaining to security selection and the rationale behind buy/sell decisions? I realize he is a pretty smart guy and has to make a living like everyone else, but we don't have to give a damn what his opinion is. His wares were found wanting, quite dramatically, not so long ago.

[Clarice]

SCAM, Ltd. approves the entire thing. I can't understand why our friends at the SEC balked. We threw them a great Christmas party.

[glasater]

"Where is he?"

Watching gold go down twentythree dollars.

[Extraneus]

Goldman Silent Partner Was a Schumer Fundraiser

[Old Lurker]

Mel, when you get home and pour a drink, please expand.

[Rick Ballard]

"why would GS have any duty to disclose their opinion as to what a lightly regulated hedge fund might do?"

Perhaps they didn't. I'm quite willing to await a court decision in this matter - or a decision from the EU to bar them from continuing to perform unnatural acts wrt security issuance on behalf of anyone willing to meet their price.

I'm bit surprised that GS CDS didn't jump by even more than 50%. A well deserved guilty verdict would open the flood gates for recovery at a level that would put them under.

What a shame that would be.

[Pasadena Phil]

The Glass-Steagall Act WAS repealed. It was repealed when it was superseded by the Financial Services Modernization Act of 1999. The Glass-Steagall act was not important for the trifling frills concerning the FDIC insurance but by the very sensible provisions that prohibited the inherently conflicting interests represented by commercial banks, investment banks and insurance companies from owning each other or partnering up on deals.

The reason for this was that each involves a different set of risks. Commercial banks (depositors) should not be exposed to investment banking risks. Insurance companies set aside deposits tied to the actuarial risks they assume. Both of these types of risk are conservative-oriented.

Investment banking is defined by the major risks it assumes that create industries and the jobs that come with them. By pooling these together, the investment bankers, in search of their ginormous bunuses, take risks on a scale that dwarfs any potential economic benefit to society. Their bigger bonuses are due to the bigger scale, not greater benefit. They are taking far too much risk with money that should not be used for that purpose.

As we have seen over the past twenty years of jobless recoveries, banks continue to create capital but instead of that new capital being re-directed into job creation, it is being skimmed off by greedy management.

I am a devoted capitalist. In fact, I am an investment manager. Investment bankers are essential to a thriving capital market. But they should only be working with risk money that is made available by parties who are explicitly exposing their wealth to risk in pursuit of big gains. That is the "hidden hand" of capitalism. But since repealing Glass-Steagall, these guys have accessed ALL capital reserves in the new banking system to take unsuitable risks. It's more about scale than function.

We need to pry the hands of the investment bankers off of the commercial banking depositors money and of the insurance companies' reserves so the science of it all works again and that we can isolate specific risks so as to act when problems develop.

We need to restore Glass-Steagall so that the majority of the capital, commercial bank deposits and insurance reserves, are once again managed by less greedy risk-averse managers while allowing the investment bankers manage the rest.

[Patrick R. Sullivan]

...unnatural acts wrt security issuance on behalf of anyone willing to meet their price.

Otherwise known as voluntary capitalistic acts between consenting adults. Why the hostility to the human inclination to truck and barter?

[Patrick R. Sullivan]

The Glass-Steagall Act WAS repealed.

No, it WAS NOT. As I've already explained, only a provision of it dealing with 'affiliation' between banks and investment houses was repealed. And, that had no effect on banks inability to underwrite and deal in securities.

Virtually everything in your rant is factually wrong.

[Melinda Romanoff]

PP-

Are you implying that Sandy Weill didn't pay for the repeal "for the good of the country"?

I bet Chuck Prince and Bob Rubin might have strong words for you, or they might not know anything.

But I suspect the latter.

And you left out the federal regulation of insurance, should still be run by the states, but then that removes the opportunity for graft on the federal level, rather than just the state level.

We are just seeing local political tactics moved up to the federal level. Somebody was bound to try, know we know who.

Sorry to be snarky, but try taking it down from 11, only "hit and run" has group permission to use 11 around here.

And there is little or no party affiliation, for the most part, around here. Tea Party, maybe, but little else other than a decidedly conservative bent.

Which is different than being Republican.

Being called Republican, using the big brush like you did, raises hackles and sets teeth on edge.

[Rick Ballard]

"Why the hostility to the human inclination to truck and barter?"

I retain a bit of hostility to con artists and cheap hustlers running three card monte games when they aren't working on improving their shell and pea skills. I'll admit that GS ranks right up at the top among the con men and I'm pretty sure there is absolutely nothing they wouldn't do to turn a buck.

I'm just a little puzzled as to what makes the run of the mill GS client feel that they won't be the next to be conned or hustled. To me, GS looks a lot like the housing market in '06. Quite a bit more shoddy material and corners cut in construction, perhaps, but the same type of "value".

[Ignatz]

--As we have seen over the past twenty years of jobless recoveries--

?

[Pasadena Phil]

Patrick Sullivan: on every blog site, there is a pedant who presents himself to be all-knowing and specializes in debunking conventionally accepted wisdoms by introducing tricky arguments proving that angels can dance on a pin. I get the impression that you are that pedant here.

The Glass-Steagall Act IS DEAD. If you don't think so, try filing a claim or lawsuit specifically citing the Glass-Steagall Act. You can't. It was superseded by the Financial Services Modernation Act of 1999.

Just because many of lesser features of the bill are still in force does not mean that Glass-Steagall is still the law of the land. The US Constitution superseded the Articles of Confederation which superseded British law but there are still to this day many, many laws from the British regime embedded in American law. So what law prevails in American court? The Magna Carta? Do you follow that logic?

I am professionally licensed to know these things. The points that I made in presenting my arguments are factual. You can argue against my logic but the facts are correct.

[Ignatz]

--Watching gold go down twentythree dollars.--

Yes, but I was watching lumber up lock limit again. 120% higher than the low of March 2009.

[hit and run]

Melinda:
only "hit and run" has group permission to use 11 around here.

Truth be told,I prefer to use XI.

On Fridays.

[Melinda Romanoff]

prs-

The Travelers/Citi mash up was the grounds for the teeth pulling of Glass/Steagall. Rode that gem for twelve years. The whole rewrite was dedicated to the premise that by creating "financial superstores" for clients would save everyone money, especially clients. The SEC, I feel, was left woefully underarmed for the occaision.

I'm foggy on remembering the actual legislation, but that was the gist of it and Sandy didn't get sued for the merger.

And he sold out near the top right after creating the mess, handing it over to Prince and Rubin, which, of course, ended well.

More later.

[Melinda Romanoff]

(jotting of notes)

Got it hit.

[Pasadena Phil]

Melinda, I get it. You are a Republican. I am not. I am a non-affiliated conservative. If you don't like the status quo, don't defend it. Republican crooks are just as bad as Democratic crooks. We need real world solutions because there is no such thing as a political solution.

[Rick Ballard]

OT,

Patrick Frey offers a very sincere Thank You, Mr. President. I must say that I concur wholeheartedly. I still won't forget the "good man" post though.

[Patrick R. Sullivan]

Normally, with a fish on the line like you, Phil, I'd play it out a little longer, but since there are some kitty cats whose tails I want to set on fire, I'll let Peter Wallison explain Glass-Steagall to you:

The law known popularly as the Glass-Steagall Act initially consisted of only four short statutory provisions. Section 16 generally prohibits banks from underwriting or dealing in securities...and Section 21 prohibits securities firms from taking deposits.... The remaining two sections, Section 20...and Section 32,...prohibit banks from being affiliated with firms that are principally or primarily engaged in underwriting or dealing in securities. In 1999, the Gramm-Leach-Bliley Act (GLBA)...repealed Sections 20 and 32, so banks could thereafter be affiliated with securities firms, but Sections 16 and 21 were left intact, so that whatever banks were forbidden or permitted to do by Glass-Steagall--before the enactment of GLBA--remains in effect. In other words, after GLBA, banks were still prohibited from underwriting and dealing in securities, although they were now permitted, under very restrictive rules ..., to be affiliated with investment banks.

[glasater]

Year Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Annual
2000 4.0 4.1 4.0 3.8 4.0 4.0 4.0 4.1 3.9 3.9 3.9 3.9
2001 4.2 4.2 4.3 4.4 4.3 4.5 4.6 4.9 5.0 5.3 5.5 5.7
2002 5.7 5.7 5.7 5.9 5.8 5.8 5.8 5.7 5.7 5.7 5.9 6.0
2003 5.8 5.9 5.9 6.0 6.1 6.3 6.2 6.1 6.1 6.0 5.8 5.7
2004 5.7 5.6 5.8 5.6 5.6 5.6 5.5 5.4 5.4 5.5 5.4 5.4
2005 5.3 5.4 5.2 5.2 5.1 5.0 5.0 4.9 5.0 5.0 5.0 4.9
2006 4.7 4.8 4.7 4.7 4.6 4.6 4.7 4.7 4.5 4.4 4.5 4.4
2007 4.6 4.5 4.4 4.5 4.4 4.6 4.6 4.6 4.7 4.7 4.7 5.0
2008 5.0 4.8 5.1 5.0 5.4 5.5 5.8 6.1 6.2 6.6 6.9 7.4
2009 7.7 8.2 8.6 8.9 9.4 9.5 9.4 9.7 9.8 10.1 10.0 10.0
2010 9.7 9.7 9.7

Jobless recoveries?

Ignatz-
Lumber up?

Maybe my logging helicopter pilot will get his 'bird' out of hock.

[glasater]

Think you're having a bad day? Check this out:

Buffet">http://www.businessinsider.com/buffet-goldman-sachs-2010-4#ixzz0lIvqwHCl">Buffet Loses $950 Million In One Day On Goldman SEC Charges

[nathan hale]

I object, on having a fraudster from the previous tech bust, really counseling us on the propriety of this latest action

[Danube of Thought]

I'll let PP and PRS fight it out over Glass-Steagall; it's pretty much like watching the Iran-Iraq war.

I'll also pass, for the time being, on philosophical arguments about unfettered capitalism and Republicans vs. Democrats, as neither seems particularly pertinent here.

The complaint alleges old-fashioned, common-law fraud, codified in (among other places) SEC Rule 10b-5. If they prove it by a preponderance of the evidence, the SEC wins. If they can't, they lose. I expect Goldman Sachs to be exquisitely well represented.

Let the games begin.

[Extraneus]

glasater's link

[Rick Ballard]

I suppose that the argument in opposition to additional regulation might involve looking at the effectiveness of Sarbox in revealing the Lehman Repo 105 shenanigans or Citi's burying of liability in offshore SIVs.

Is further regulation sufficient to ward off investment banksters wearing CDS explosive vests with dead man switches? Would regulation have prevented the government from raping GM bondholders in order to reward unions? Would regulation have put the Govmo zombies and Citi in an unmarked grave at a crossroads?

It's almost as if our bankrupt Gargantuas' size and accretion of power might have something to do with the depth of corruption involved. I'll have to ask Leviathan.

[Danube of Thought]

Actual ABC News headline (not a parody):

Consumer Mood Unexpectedly Worse in Early April

[Pagar]

"Suspicious Options Activity in SKF" might add some fuel to the fire.