Goldman Sachs

Plenty of press stories are circulating about joint SDNY/SEC investigations of Wall Street Investment Banks over their marketing of mortgage-backed securities and synthetic CDOs. The primary question being asked is apparently whether all material facts were revealed to potential investors. I don’t expect much in the way of ultimately successful major prosecutions. When the alleged fraud in question is endemic to an entire industry, it starts getting difficult to make a case. Besides, from what I can gather, Goldman Sachs and the others were pretty careful about making the required disclosures. Ditto for New York A.G. Cuomo’s inquiry into whether credit rating agencies were deceived. You were deceived? Why did you post your rating methods online? As usual in these post-fiasco financial investigations, prosecutors should focus their vision on the most egregious examples of lying, cheating, and stealing. There will be enough of those, but if some AUSA thinks DOJ is going to let him/her indict a major investment bank–get real. This doesn’t mean that the criminal investigations should not go forward. Not to inquire would constitute a dereliction of duty on the part of DOJ.

I was disappointed in the general lack of press commentary on the utter stupidity of letting Fabrice Tourre testify. I say that without having read his testimony. Anyone in his position, a defendant in an SEC civil fraud suit who is also the subject/target of a criminal investigation, has no business talking about the facts of the case to anyone other than his attorney. He certainly has no business testifying under oath to U.S. Senators and their staffers. A person in Tourre’s position will inevitably be accused of perjuring himself, making false exculpatory statements, admitting key facts, or all of the above. He should have taken five. Of course, Goldman needed him in its publicity war. Maybe Goldman would have fired him if he invoked the privilege. So what. Better to be fired than in FCI Butner.

Here is a thoughtful analysis on the SEC case against Goldman Sachs by Taesik Yoon of Forbes.com.

Here is Zachary Goldfarb’s Washington Post story detailing the SEC complaint, Goldman Sachs’ reaction, Paulson & Co. Inc.’s statement, and SEC Enforcement Chief Robert Khuzami’s remarks. Here is Paulson & Co. Inc.’s complete statement via PRNewswire.com. According to Paulson & Co.: 

“As the SEC said at its press conference, Paulson is not the subject of this complaint, made no misrepresentations and is not the subject of any charges.”

“While Paulson purchased credit protection from Goldman Sachs on securities issued under the ABACUS ABS CDO program, we were not involved in the marketing of any ABACUS products to any third parties.”

Jolly good, old chap! But didn’t Paulson know the securities were going to be marketed to investors? Wasn’t that the whole point of asking Goldman Sachs to created a CDO in the first place? And did Paulson really think that Goldman Sachs would reveal Paulson’s role in selecting the 123 mortgage-backed securities that went into the Abacus 2007-ACI CDO to potential investors? Anybody ever hear of willful blindness?

The Paulson statement continues:

“ACA as collateral manager had sole authority over the selection of all collateral in the CDO, securities of which were subsequently rated AAA by both S&P and Moody’s.”

But, according to the WSJ and the Washington Post, Paulson & Co. had a major hand in selecting the risk, and ACA was not told that Paulson would be betting against it. Also, investors were not informed of Paulson’s role in selecting the risk. This question of who had a role and who had ”sole authority” over selecting the risk is likely to be at the heart of Goldman Sachs’ defense.

Reading between the lines of the various stories, it would appear that Paulson & Co. Inc. cooperated with the SEC probe and that the SEC needed that cooperation in order to fill in various conversational blanks. You can’t make an entire case from a paper trail alone, although sometimes you can come pretty close.

According to Khuzami: “The product was new and complex, but the deception and conflicts are old and simple.”