Goldman’s Fall From Grace

by Publius

Big Government Contributor, Charlie Gasparino gives his take on the SEC charges against Goldman Sachs at the Daily Beast:

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John Paulson is an interesting guy: He was one of a handful of hedge-fund managers who bet the mortgage-bond market would decline beginning in late 2006, and made billions from that bet. Here is where the SEC charges get interesting: Goldman allowed Paulson to help create the bond and to put some of the most risky mortgages in the portfolio, or mortgages that were most likely to default and tank the investment.

The SEC’s problem with all of this is not that Paulson went to Goldman to create the bond (Paulson wasn’t charged) or even that Goldman even sold the same instruments to investors, but that Goldman didn’t tell investors of Paulson’s involvement. Remember, because of his short position he had every incentive to pack the bonds with the crummiest mortgages that would later default, which they did.

Goldman’s excuse for all this is that it somehow lost money on the whole sordid affair (not sure how that happened) and that the SEC’s case is completely unfounded in law and fact. It left out, of course, that in 2007 Goldman also shorted the housing market like Paulson, and that contributed to its massive earnings that year, not to mention Blankfein’s paycheck which nearly reached $70 million.

Let’s just say there is no securities law violation here. That a judge that gets this case (presuming Goldman won’t settle, which if it hasn’t probably means the SEC wanted a lot by possibly making investors whole or something along those lines, which means Goldman could end up paying $1 billion) and throws it all out because Goldman deals with sophisticated investors who should know better.

After all, these big pension funds and hedge funds all have the means to have done their due diligence on the mortgages imbedded in the bonds, and they could have seen the risk they presented.

That all may be true, but what this case represents (and it’s a pretty good read for an SEC legal document) is a clear and compelling road map into how a firm that was once considered the gold standard of Wall Street behaves like a two-bit thug when money is on the line.

And if that notion holds with its clients, Goldman Sachs has got bigger problems than a bunch of name-calling journalists.

Read the whole thing here. John Paulson hasn’t been charged in this affair, but it is interesting that he has such a significant supporting role. As Big Government readers know, Paulson is the largest single donor to the Center for Responsible Lending, a leftist advocacy group that is part of a complicated web of non-profits and private investment funds. A leading executive of CRL is now at the Treasury Department, overseeing the proposed “Consumer Financial Protection Agency.” Paulson is becoming Wall Street’s Zelig, who keeps showing up in very interesting places.


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Posted Apr 17th 2010 at 1:43 pm in Financial Services, News | 103 Comments