SEC Charges Goldman with Fraud

By James Kwak

Press release here. Complaint here. The allegation is that Goldman failed to disclose the role that John Paulson’s hedge fund played in selecting residential mortgage-backed securities that went into a CDO created by Goldman. Here’s paragraph 3 of the complaint:

“In sum, GS&Co arranged a transaction at Paulson’s request in which Paulson heavily influenced the selection of the portfolio to suit its economic interests, but failed to disclose to investors, as part of the description of the portfolio selection process contained in the marketing materials used to promote the transaction, Paulson’s role in the portfolio selection process or its adverse economic interests.”

The problem is that the marketing documents claimed that the securities were selected by ACA Management, a third-party CDO manager, when in fact the selection decisions were influenced by Paulson’s fund. Goldman had a duty to disclose that influence, especially since Paulson was simultaneously shorting the CDO. (According to paragraph 2 of the complain, he bought the credit default swaps from Goldman itself. I used to wonder about this; if he bought the CDS from another bank, then Goldman could claim it didn’t know he was shorting the CDO, implausible as that claim might be. But in this case Goldman must have known.)

It seems like the key will be proving that Paulson influenced the selection of securities enough that it should have been in the marketing documents. Paragraphs 25-35 include quotations from emails showing that Paulson was effectively negotiating with ACA over the composition of the CDO, so it’s pretty clear he had influence. The defense will presumably be that ACA had final signoff on the securities, and Paulson was just providing advice, so Paulson’s role did not need to be disclosed. (I don’t know what kind of standard will be applied here.)

The complaint also alleges that Goldman misled ACA into thinking that Paulson had a long position in the CDO via the equity tranche, while in fact Goldman knew all along that he would short the debt tranches. It seems pretty clear that that’s what ACA believed. The implication is that had ACA realized that Paulson was shorting the CDO, they would not have gone along with the deal.

One of the things I say now and then that most annoys people is that the financial crisis was not caused by criminal behavior. (Note: The “Prayer for the Relief” at the end of the complaint only asks for civil penalties, but I suppose this does not preclude a criminal action — someone who’s a real lawyer could answer that.) My general line is that I’m sure there was some bad behavior that rose to the level of criminal liability — like lying in disclosure documents — but that it wasn’t necessary for the crisis, and we could have had the crisis without any criminal activity at all. (For example, since most investors weren’t even reading the disclosure documents, Goldman could have said that Paulson was involved in the security selection, and then everything would have been hunky-dory.) For the most part, the ideological takeover and the resulting non-regulatory environment that we discuss in 13 Bankers were enough to do the job.

And I don’t think this action contradicts my general point. I would love it if the SEC could nail banks for some of the CDOs they created, but I’m still betting that the vast majority will not create legal liability for them.

The type of transaction involved — in which a hedge fund makes a CDO as toxic as possible in order to then short it — is similar to the Magnetar trade, which I discussed earlier. One thing we learn from paragraph 5 is that Paulson sure knew how to pick ’em:

“The deal closed on April 26, 2007. Paulson paid GS&Co approximately $15 million for structuring and marketing ABACUS 2007-AC1. By October 24, 2007, 83% of the RMBS in the ABACUS 2007-AC1 portfolio had been downgraded and 17% were on negative watch. By January 29, 2008, 99% of the portfolio had been downgraded. As a result, investors in the ABACUS 2007-AC1 CDO lost over $1 billion. Paulson’s opposite CDS positions yielded a profit of approximately $1 billion for Paulson.”

And once again, no doubt to the annoyance of many, I don’t blame Paulson. It’s Goldman that had the duty to its investors, not Paulson.

Fabrice Tourre of Goldman, however, who is named as a defendant? Well, he will forever be identified by the email quoted in paragraph 18, whatever it means:

“At the same time, GS&Co recognized that market conditions were presenting challenges to the successful marketing of CDO transactions backed by mortgage-related securities. For example, portions of an email in French and English sent by Tourre to a friend on January 23, 2007 stated, in English translation where applicable: ‘More and more leverage in the system, The whole building is about to collapse anytime now…Only potential survivor, the fabulous Fab[rice Tourre]…standing in the middle of all these complex, highly leveraged, exotic trades he created without necessarily understanding all of the implications of those monstruosities!!!’ Similarly, an email on February 11, 2007 to Tourre from the head of the GS&Co structured product correlation trading desk stated in part, ‘the cdo biz is dead we don’t have a lot of time left.'”

According to the SEC’s complaint, the deal closed on April 26, 2007, and Paulson & Co. paid Goldman Sachs approximately $15 million for structuring and marketing ABACUS. By Oct. 24, 2007, 83 percent of the RMBS in the ABACUS portfolio had been downgraded and 17 percent were on negative watch. By Jan. 29, 2008, 99 percent of the portfolio had been downgraded.

132 thoughts on “SEC Charges Goldman with Fraud

  1. Fabulous Fab also appears not to have understood the very, very low probability of his survivability potential.

  2. Oh!!
    I was sooo excited for a moment that I even ran to my mom and told her about this :(

  3. I would like to know if I understand Kwak correctly. Is he saying it is OK to screw everyone else via deception? That seems to be what he is saying with the “don’t blame Paulson” remark. Is the system to blame for not having a strong enough box around such dangerous critters? Is Goldman solely to blame by letting the critter loose? Isn’t the case similar to Simon’s argument that you have to put down the TBTFs because the cage around them will one day fail? If so, and if Paulson did as alleged, shouldn’t Paulson be put down (removed from the opportunity of ever damaging society again)? It isn’t necessary to blame him. Just recognize that the financial world would be better off without him, and act upon that recognition.

  4. I will remain excited about this act if for no other reason than that it has the potential to begin other suits against other players, and also may invite examination of criminal conduct (if it existed, as Mr. Kwak points out).

    Moreover, the political symbolism is also important in and of itself, although much more is required.

  5. I’m sure at least some of those involved on all sides read this blog, and I’m sure they’ll soon be receiving useful thoughts from Simon. Got get ’em.

  6. Sweet. Why do I get the feeling that Goldman will come out of this with nothing more than a little slap on the wrist….

  7. Paraphrasing one of Captain Renault’s more memorable quips: “I’m shocked, shocked to find that fraud is going on in here!”

  8. I also would encourage James to be a bit more aggressive in formulating his legal theories, especially since at the 2L stage it doesn’t hurt to be imaginative. If GS has committed fraud, a case can be made that it conspired with Paulson to do so. His intent to defraud can be inferred from the fact that he picked the worst of the worst for the security that GS sold. I don’t think it matters that his intent was to profit indirectly from the fraud. I’d like to see him charged. Raj-Raj and insider trading is peanuts compared to this.

  9. Sadly, “deception” doesn’t always rise to something that is illegal. A-moral perhaps, but not illegal.

  10. CDO managers have duty to represent all investors fairly. This is clear violation of fiduciary duty. Was CDO manager not used? Why is SEC going after Goldman and not just those involved? Does this imply that there were systematic problem at goldman and not just ABACUS 2007-AC1? Let’s say a stockbroker churns client’s account. SEC goes after the stockbroker and company fires the broker. In this case, SEC is going after goldman and no one was fired.

  11. Was this connected with the Société Générale Fraud of Jan. 2008? Did they know each other?

  12. John Paulson should be investigated for attempting to manipulate the CDO market. If anyone was found to have violated his/her fiduciary duty, they should be indicted. If Goldman as a company was complicit in violating fiduciary duty, they should be sued.

    I won’t be surprised if Goldman gets away with this and just blame third party CDO manager who made final saying in what goes in the CDO.

  13. The contrast between Lloyd Blankfein’s and Jamie Dimon’s skills at PR couldn’t be more striking.

    Some time before the start of the GFC, I read and considered significant that Blankfein was the first Goldman CEO to come from the trading side of the business – as opposed to the investment banking side. And it shows. Esp compare with Dimon, Blankfein seems an all brass knuckles kind of guy.

    This was testimony to just how powerful proprietary trading desks have become for the large banks.

  14. Uh, let’s read again from one of the experts

    WILLIAM K. BLACK: “Fraud is deceit. And the essence of fraud is, “I create trust in you, and then I betray that trust, and get you to give me something of value.” And as a result, there’s no more effective acid against trust than fraud, especially fraud by top elites, and that’s what we have.”

  15. Its nearing the end of the 4th quarter of the who to blame Superbowl. Mitch McConnell is counting on the usual threats of a filibuster to keep the financial regulation bill from coming to the floor. Each Republican is weighing the effectiveness of the campaign theme “the government did it, let the free market be free”. Now they have explain away the GS charge as election politics. Who knows, maybe some of it is. The financial lobby now has to figure out its betting strategy, can the Republicans take back one chamber and kill off the drive or will they still have to deal with a Democratic Congress in Jan, 2011. Once again a few “moderate” Senators will be assigned the task of “negotiating’ with the majority to delay action and then at the last moment renege on their compromise.

  16. True. But for a moral person not to call for removing the dangerous critter from the ability to foment further damage? It makes me wonder about their morality.

  17. James,

    Not sure I entirely understand the SEC’s complaint here–maybe you’d be able to shed some light?

    As I understand it, the SEC is claiming:

    (1) Paulson was a client of Goldman.
    (2) Goldman let Paulson put junk mortgages into synthetic CDOs that Goldman was selling, without disclosing.
    (3) And then Goldman sold Paulson a bunch of swaps on the synthetic CDO (???).

    But why on earth would Goldman sell swaps on the junk CDO? Isn’t that just giving away free money?

    Unless I’m misreading the complaint, there’s something missing here… how did Goldman make money by selling swaps to Paulson? Did Goldman then cover that position by buying swaps from someone else? (AIG?)

  18. I was wondering when the Obama Justice Department would open it’s offensive. Very well timed. A great aid to incumbent Democratic congresspersons.They should be appreciative. It certainly puts pressure on Republican opposition to law restructuring. FDR went after Samuel Insull. GS would be about in the same notorious position today that Boobus Americanus held Insull in back in 1934. They tried Insull criminally several times and he was acquitted in a few minutes the last time. Each time the jurors were certified Booba Americana. But, Insull served FDR’s political purpose. Same here for GS.

    Along with James, I doubt there was any criminal activity of a heinous nature on the part of GS. Certainly, John Paulson was free to ask for anything not of a criminal nature under the statutes and GS was possibly required to say no.

    E Mails certainly do get these people in trouble. I wonder if Arnold Rothstein or Meyer Lansky would be stupid enough to use E Mails if they were alive today and on Wall Street.

    The offensive though has opened.Exciting day.

  19. Patience. This is the first shoe to drop. Obviously Paulson instigated, and was complicit in this deal.

    Could it be that Paulson WASN’T sued or charged because Paulson is acting as state’s evidence and cooperating with the SEC against Goldman……?

    Goldman is the big fish here.

    The Goldman onion is the onion that needs to be peeled. Discovery in this case is already very far advanced, but will result in more revelations as it progresses. Ultimnately leading to potentially many more SEC investigations and charges, private civil litigation matters, and potentially criminal investigations and charges.

    I for one am fine if the SEC put the screws to Paulson and had him flip against Goldman. Goldman is the cancer here.

  20. An interesting coincidence, GS is charged with fraud and announces support for derivatives clearinghouses.

    I assume the past few years taught them that their biggest risk lies, not in the market, but in their counterparties. Their book might be well hedged, but if their counterparties default, they are doomed.

    Thus, it seems to me, the request for clearinghouses. GS will force other dealers to use their models and risk mitigating tactics.

    Let’s assume they get their way. Other dealers, like JP Morgan (JPM), Bank of America (BAC) and Citibank (C), will likely find they haven’t properly valued and hedged their books. The government, in its zeal to enact reform will likely be forced to pick up the cost of reducing these other banks’ risk, and the banks themselves will likely find that GS is the last player standing.

    Let’s be cynical and assume that GS will be the spring from which derivatives’ regulators will be drawn. That would be one way to avoid embarrassing fraud charges from the SEC, and a way to watch what other dealers are doing, in the bargain.

    Death by regulation.

    If I were sitting at the negotiation table I’d be willing to give GS what it wants, with one proviso, the government will pick up the tab of reducing sector wide risks in derivatives if and only if size limits on banks, and separation of commercial banking from proprietary trading activities (i.e. the Volcker rules) are part of the bargain.

    It might not hurt to later impose some strict limits on the revolving door between GS and the public sector.

    Without such a bargain, the creation of clearinghouses will only further concentrate pricing control of these instruments, in the hands of GS. However skilled the GS boys currently are, monopoly control of derivatives will beg abuse down the road.

    One coup de grace deserves another.

  21. But where is the credit rating officer in this whole affair? He is the first one who should be indicted; and he could thereafter use the argument “I was lied to” and, if that’s proven beyond any reasonable doubt, then I guess there is a case of fraud and that could lead to a criminal conviction… unless of course the judge accepts at that moment the plea of “insanity” and which he should probably accept.

    But having some declared insane, hopefully some regulators among them, that would be the first step towards re-establishing that market disorder that serves us so much better than any Basel inspired order.

  22. This is THE penultimate battle for Goldman. Right here, right now is the beginning of Goldman’s Alamo. The SEC did NOT bring a knife to this gunfight. They took their time, did their research, and most assuredly have much, much more evidence not disclosed, and almost assuredly can bring additional civil and criminal charges on this, as well as other deals. Not to mention the thousands of unemployed or underemployed civil trial attorneys that will almost assuredly immediately initiate a multiitude of class actions and other civil litigation.

    But, alas, what Goldman loses in civil fines and penalties from this or any other actions is meaningless relative to the impact the full disclosure of Goldman’s duplicity and fraud will have on its reputation. Would YOU ever buy anything Goldman packaged or sold? Again?

    Goldman could very well be a dead man walking right now a la Arthur Anderson which died in large part due to its inability to ever restore its previously good reputation….

  23. All these guys are Class A scumbags. I’ll be stopping by Tractor Supply on my way home to buy a pitchfork. I’ve had it.

  24. Read the Complaint. Goldman sold CDSs to Paulson on the Abacus deal which Goldman purchased from ABN. ABN had to pay Goldman almost $900 Million, which Goldman in turn paid to Paulson. Thus, Goldman:
    1) Sold the Abacus deal to IKN and others and made $15-20 Million
    2) Sold Paulson the ABN CDSs and made ????
    3) Couldn’t have done either if it hadn’t succeeded in hiding the Paulson involvement, and had ACA endorse it.
    4) Thus, Goldman got paid coming and going…..and held no risk……

  25. I imagine that the intent is window dressing, but don’t discount the chances that 1) it isn’t, as SEC worker bees have professional pride too, or 2) populist outrage offers the pols this opportunity to keep their power and throw the bankers under the bus.

  26. Don’t forget conspiracy or RICO theories….

    This could simply be the FIRST….

    There might be a PATTERN here….

    Probably to involve Magnetar, Paulson, et al….

  27. Off the top of my head, I don’t think the SEC can file criminal charges. They have to bring in the DOJ or appropriate State AG to do so.

    Am I correct?

  28. Yes, you are correct. THE SEC can not initiate crimninal charges. My post was not clear. But, the DISCOVERY obtained in this and other civil SEC investigations, and even other civil litigation matters may ultimately lead to criminal charges being initiated by competent authorities like the NY AG, and US DOJ.

    My apologies for confusion.

  29. No, what I perceive James is saying is that an institutional investor walked up to an investment bank and asked for a certain financial product. His intentions shouldn’t be an issue with that. Funds go long and short all the time, arbing inefficiencies in the market. They also often work with banks to get products that give them the exact exposure they want. The real issue here is Goldman’s alleged failure to disclose the conflicts in the creation of the securities, and probably also the ratings granted to the securities by the ratings agencies.

  30. As I see it, the only wrongdoing at issue here is that GS knowingly mis-represented who was picking the bonds in the documentation.

    So, the worst case, they will owe the $1B back to the originally defrauded purchasers. More likely they’ll get a fine (I think I recall $133M is the going rate) and the White House will get to claim they were “tough” on Wall Street in November even after they inevitably cave on the fin reg bill.

    Move on people, nothing to see here.

  31. I should think conspiracies and Rico , both civil and criminal, would be next to impossible to make stick. GS and others have possibly more money to throw at the litigation than the even the government can allocate to the battle. Every defendant would have a lot of insurance coverages and many times that of their own money. This is civil to start with. Under the circumstances, might Wall Street itself establish a common defense organization? Pool their money?
    If GS is TBTF and the government understands the fact of life that GS is TBTF, the aces are in the hands of GS.

    It would be a contest of the most ruthless side winning.

    What would be the facts needed to prevail by the government that the defendants could not obscure or ruin for legal purposes?

  32. Just finished reading your book: 13 Bankers: OUTSTANDING!!

    I couldn’t believe the news. There is a God up there for sure.

    Thanks again!

  33. It’s the SEC. They’ve almost certainly already gotten all of the discovery using their own subpoena power. And the DOJ was almost certain involved all along. Which means they probably already decided against seeking criminal charges.

  34. And Goldman’s reply to the action? That they will “defend their good reputation”. Is that the reputation they have among the other hungry sharks cruising the reef, or the fish that live there? And who wrote that intergalactic press release, and what galaxy are they from?

  35. i there really anyone at all who doesn’t believe this is the way the firm does business. not my article, but clearly on can see how easily this can apply agin and again.

    how about how this firm did all those dot com ipo’s.

    you see the clear pattern. package crap, use the prop desk to ramp it up, make bets on derivative exchanges or somewhere behid closed doors, then do again.

    this was the story with the greece debt, and is what tabbi accused them of. how about oil?

  36. A blast from the past.

    A few months ago, on a flight to Chicago I The Partnership: The Making of Goldman Sachs, which I highly recommend, if you can manage to stomach the all too frequent claims of absolute integrity wrapped around some very dodgy activities (like getting caught forcing Penn Central to buy back its commercial paper while it was selling same to the public right before the railroad went bankrupt in June, 1970).

    From the Court Record of the Case of Welch’s et. al (who got stuck with the bankrupt paper) vs. GS:

    Question: Were you aware that on Feb. 5, 1970, Wilson [a GS partner in the CP division] asked Penn Central to buy back $10M of its commercial paper from the inventory position of Goldman Sachs?

    Gus Levy [GS Managing Partner]: It was in the memorandum, so I knew about it.

    Question: Was that nonpublic information?

    Levy: That was definitely nonpublic information.

    Question: Did you instruct disclosure of that fact?

    Levy: I did not.

    Quelle surprise!

  37. Just thinking about the number of people who had their hands in this deal, who had to have known or suspected what was going on… This is one of the most disturbing things I’ve read in a long time.

    I doubt the penalties they receive will suit what they’ve done, but I hope people far and wide stop to think about the details and question why the hell they are still doing business with Goldman Sachs, a firm that proves over and over again that it will stab you in the back for a fee.

  38. Rockfish you are probably right, but “with a little bit of luck, with a little bit of luck”… a few of the GS&Co executives will get the Martha Stewart treatment…I will settle for 5 months in federal prison for “LYING TO FEDERAL INVESTIGATORS.” And let them spend their flaunted bonuses on attorneys’ fees, and get perspiration stains on their Turnbull and Asser shirts giving depositions, trying to walk the razor’s edge between truth and lie.

  39. ‘Fabulous Fab’, huh? Jerk. Whole thing reminds me of 12 years ago. Height of the mania and I sold my company and came into a chunk of cash. Goldman wants to manage it. That’s the Goldman of Abby Joseph Cohen breathlessly whipping the froth on their IPO’s built on nothing but harebrained business plans, Kool Aid-drinking Goldman analysts, and bankers like Cohen selling their combined dreck right back to their valued clients. “Yeah, let me think about it. Call you back.” Their phone # right out of my memory. Good choice. The jerks who run our money! And after 15 years of mostly getting things wrong, Abby’s still a valued contributor to Barron’s annual roundtable of investing honchos! I wonder who she has pictures of?

  40. That’s their reputation as “a great vampire squid wrapped around the face of humanity”?

    The vampire squid meme will reverberate more effectively through history than anything a public relations firm could invent for GS. Besides, I thought GS considered themselves immune to public relations. Or at least they’ve acted that way.

  41. Also, don’t forget that Paulson picked up the tab for origination and marketing fees — $15M worth.

  42. There has been much said about investment banks and bank holding companies. It is important to note that their influence on society extends beyond the area of finance but to its health, eg., W.H.O. (World Health Organization), or allocation of limited pandemic vaccines.

    NYC Commissioner Defends Giving H1N1 Shots to Goldman

    Nov. 6 2009 (Bloomberg) — “New York City Health Commissioner Thomas Farley said his department sent 6 percent of the city’s limited doses of swine flu vaccine to Citigroup Inc., Goldman Sachs Group Inc. and other large employers because they traditionally distribute shots in flu seasons.”

    An Investor’s Guide To Avian Flu

    BMO Nesbitt Burns Research – 2005 (Canada)

    Dr. Sherri Cooper
    Donald Cox

    Click to access Avian%20Flu.pdf

  43. ““We have no evidence that providers were giving the vaccine outside the priority populations,” said Schuchat, head of the Atlanta-based CDC’s Center for Immunization and Respiratory Diseases.

    The CDC designates pregnant women, caretakers of infants less than 6 months of age, health-care workers, children and adults with health conditions such as asthma or diabetes, and people under the age of 25 to be in high-priority groups for the vaccine.”

  44. And, lest we forget, it is worth remembering that this loathsome company is still getting unlimited 0%-interest, taxpayer-backed loans, compliments of the pornographers at the Fed and Treasury, to do with as they please…heads they win, tails we lose.

  45. “Doctors for large companies can ask for the vaccine along with other doctors but must agree to vaccinate only high-risk employees like pregnant women and those with chronic illnesses, said Jessica Scaperotti, a spokeswoman for New York City’s Department of Health and Mental Hygiene.”

  46. I seem to recall the Juliani hit Drexel with the threat of RICO prosecution and they said that no firm could withstand a RICO investigation and pleaded nolo contendere to a bunch of felony counts.

    Keep our fingers crossed. Drexel did not have anywhere near as many friends in the the executive branch as Goldman.

  47. This really is a well run program. Simply split up the responsibility for the fraud between too many organizations and people to sue….except GS was caught. The fraud is simply watered down by the puppetmasters pulling the strings from the top. Set up the bonus programs to promote fraud, water down the risk managers so no one asks questions or halts the fraud, lobby congress so that they deregulate your business, inellectually / financially capture regulators so they remain silent about risks, etc. And the cherry on top – consolidate your businesses so there are only a few very large players so that anyone that speaks out against any of the questionable business practices is committing career ending or business relationship hari-kari. Now that’s an area of TBTF that I haven’t seen Simon cover – Too Big To Fail creates an environment of intimidation which inhibits anyone from acting or speaking up to protect the public interest which is part of the doom loop. No one questions TBTF business practices because they are too intimidated, leaving the cards heavily stacked against repeating another public bailout.

    The CEO’s and other executives don’t have to know about the fraud, they simply have to create the environment where that is the outcome that will logically occur.

  48. “Paulson paid GS&Co approximately $15 million for structuring and marketing ABACUS 2007-AC1.”
    In the great olden days before deregulation mania, Paulson & Co. would be the issuer. Paulson paid for the deal, structured the deal, and received investor funds from the terms of the deal (via GS as intermediary). It is Paulson that proposes to issue the security and contacts GS for that very purpose. Paulson is the issuer in fact no matter how many nominal structures are interposed (a limited liability Cayman LLC issuing notes via a trust) or ridiculous nomenclature employed (“Transaction Sponsor”) to avoid disclosures required by the issuer.
    Enter deregulation and it’s now accepted that form overrides substance and that the ultimate recipient of a billion dollars in investor funds that initiated, proposed, and paid for security issuance has no duty to disclose.

  49. Johnson and Kwak: Ezra Klein (IMHO) misrepresenting your position over here.
    (I think your main point is that “banks” need to be shrunk to reduce their political power.)

  50. The Fire Next Time

    April 15, 2010 – NY Times – PAUL KRUGMAN – excerpts

    “On Tuesday, Mitch McConnell, the Senate minority leader, called for the abolition of municipal fire departments.

    Firefighters, he declared, “won’t solve the problems that led to recent fires. They will make them worse.” The existence of fire departments, he went on, “not only allows for taxpayer-funded bailouts of burning buildings; it institutionalizes them.” He concluded, “The way to solve this problem is to let the people who make the mistakes that lead to fires pay for them. We won’t solve this problem until the biggest buildings are allowed to burn.”

    O.K., I fibbed a bit. Mr. McConnell said almost everything I attributed to him, but he was talking about financial reform, not fire reform. In particular, he was objecting not to the existence of fire departments, but to legislation that would give the government the power to seize and restructure failing financial institutions.

    But it amounts to the same thing.”

  51. Unified GOP To Block Senate From Debating Wall Street Reform

    04-16-10 02:21 PM – excerpt

    “Mitch McConnell has rounded up the necessary votes to block Democrats from bringing Wall Street reform to the Senate floor, a spokesman for the Senate Minority Leader said on Friday afternoon.

    Senate Majority Leader Harry (D-Nev.) said on Thursday he planned to bring the bill to the floor next week where it would be debated and amendments added. McConnell has now persuaded 41 Republicans to vote against debating reform.

    ‘We simply cannot ask the American taxpayer to continue to subsidize this ‘too big to fail’ policy. We must ensure that Wall Street no longer believes or relies on Main Street to bail them out. Inaction is not an option,” McConnell writes in a letter to Reid that was provided to HuffPost.”

    “Cold hearted orb that rules the night,
    Removes the colours from our sight,
    Red is gray and yellow white,
    But we decide which is right.
    And which is an illusion?”

    Days Of Future Passed – Moody Blues – 1967

  52. Boy this sure is an education though a little late.

    Today’s lesson learned: Never again have anything to do with a Goldman Sachs or Paulson business deal. Not only do they profit by concealing knowledge deliberately but they even construct the fraud instrument! Then we hear ‘I have done no wrong’.
    GS management said they are doing god’s work! Which god? Somewhere in the Bible a harlot wipes her mouth and says ‘I have done no wrong’ Read Proverbs 29:3 and be warned? How widespread is this ethical position and behavior? Today’s good advice may well be ‘No cop, don’t stop’. Any other advice how to avoid traps?

  53. This is not the SEC getting serious. The SEC does not get serious with the likes of Goldman. This is the SEC pretending to be serious about the likes of Goldman. It is now preparing for a chest thumping news conference to announce Goldman’s agreement to some cosmetic change in some irrelevant procedure and payment of a fine that would bankrupt any normal defendant but will be a rounding error on Goldman’s quarterly report.

    I will believe this government is serious about banker fraud when it initiates a RICO proceeding naming any investment bank a criminal enterprise. That is what every one of them is.

  54. Hillbilly Darrell, is that really you? Normally, you are right on the money. You ought to know the SEC better than this.

    We’ll see.

  55. Two things:

    1) Goldman’s public response to the charges is self-destructive. The wording is incredibly defensive and disparaging of the SEC. Instead of using the response as an opportunity to reinforce the company’s business principles, it makes no mention of them, leaving a moral vacuum. This puts employees in an awkward position, effectively encouraging them to take sides against the SEC, whose mission is to maintain fairness in the marketplace.

    2) In these transactions, Goldman supposedly defrauded its clients, of which ACA was the largest. Do we know what ACA’s position is on the matter? Do they even care? Are they bringing a civil suit of their own?

  56. So, an instititutional investor walks up to a bank and says give me a CDO wrapped around these 619 mortgages I have picked from this list I found lying in a bar. I will take the equity piece. You run over to Moodswings and get an AA rating on the senior tranche. Feel free to sell it to that school district in Minneapolis or keep it yourself. All I want a CDS on my CDO. You can reinsure with AIG.

    Regarding what the institutional investor did: WAS THAT WRONG?

  57. With regard to your claim that criminal activity was not necessary for the financial crisis, I believe you are omitting financial arson and insurance fraud. Any bookie knows that when big money is placed on a long-shot, such as the collapse of Bear Stearns, there is something funny going on. Many big players who bought insurance on Bear (and others) also conducted bear raids on its stock. This included naked shorting, where stocks are electronically counterfeited and dumped on the market, and spreading of false rumors. These acts of arson spread into a conflagration that led to the panic run on money markets and “broke the buck”. I doubt the crisis would have been as severe as it was without the run on the money markets. Is this really not criminal? It certainly is sociopathic…

  58. On the other hand, suppose our institutional investor says: make a CDO out of these 617 mortgages and give me CDS protection on it. I don’t care what you do with the actual product, just keep it as far away from me as possible.

    If the investment bank peddled this thing to ANYBODY without bold faced disclosure stating THIS PRODUCT IS GUARANTEED TO BLOW UP IF ANYTHING GOES WRONG IN THE MORTGAGE MARKET, AND THE REASON WE KNOW IS THAT IT WAS CREATED BY OUR CLIENT A FAMOUS SHORT SELLER, SO THAT HE COULD BUY CDS PROTECTION ON IT, then, that investment banker is guilty of securities fraud if anybody ever has been.

  59. Actually casting Goldman Sachs as a harlot does the harlot a disservice. Proverbs 30:20 better states:

    This is the way of an adulteress
    She eats and wipes her mouth and says, ‘I’ve done nothing wrong.’

    Yep, sounds more like Goldman Sachs doing their god’s work? Their god the Devil?

  60. wontpaythem​an wrote:

    4/16/2010 – Globe & Mail

    “In any decent society, the discovery of a thief ( “alleged”, of course) produces approval and joy. On Wall Street, unsurprisingly, it produces fear and trembling.

    Too big to fail ???? Why not, too evil to be permitted to survive?”

  61. And where are the investigations of the ‘arsonists’?
    A year and half later and….not one…

  62. Report: SEC knew of Stanford scheme since 1997

    Updated 12m ago – excerpt

    WASHINGTON (AP) — “The Securities and Exchange Commission knew since 1997 that R. Allen Stanford likely was operating a Ponzi scheme and an agency enforcement official who helped quash investigations of his business later represented the billionaire, according to the SEC inspector general.

    The SEC didn’t bring charges against Stanford, alleging a $7 billion fraud, until February 2009. The SEC inspector general also said in a report released Friday that “institutional influence” in the enforcement division was a factor in the agency’s repeated decisions not to conduct a full investigation.

    Complex cases like Stanford’s that couldn’t be quickly resolved were discouraged by enforcement higher-ups, the IG’s report says.”

  63. You’re assuming that Paulson was aware that Goldman was (allegedly) deceiving people.

    There’s nothing wrong with Paulson going to Goldman with a list of CDOs he thinks will fail and asking them to design a way for him to short them. The problem was when Goldman (allegedly) lied to investors and ACA.

    This is why I disagree with Art’s theory for intent to defraud – you can’t infer intent to defraud from doing exactly what a completely honest person would do. Anyone who asks GS to design a way for them to short something will give them the product they think will fail hardest.

    If Paulson told Goldman to lie, or hired them knowing they would lie, then yes, there’s a case for fraud. But we don’t have those facts from the SEC complaint.

  64. Obama: I’ll Veto Financial Reform Without Derivatives Regulation

    04/16/10 05:02 PM – Huff Post – excerpt

    “President Barack Obama declared Friday that he would veto the bill if it doesn’t regulate the freewheeling derivatives market. “We can’t afford another AIG,” the president said, referring to the giant insurance conglomerate that relied heavily on the complex, sometimes exotic investment instruments.

    Separately on Friday, the government accused Goldman Sachs & Co., Wall Street’s most powerful firm, of defrauding investors by failing to disclose conflicts of interest in mortgage investments it sold as the housing market was collapsing two years ago.”

  65. I think we’re being overly cynical here people. THEY ARE DOING SOMETHING FOR CRYING OUT LOUD. I applaud the SEC and I think it’s a good sign. I also don’t think Rick Bookstaber would have joined the SEC if he didn’t see some glimmers of hope there.

  66. I get it. Even if Paulson and GS knew that the synthetic CDO they created was junk and did not tell the credit rating officer, it would still be the fault of the credit rating officer first, and the regulators second. Paulson and GS cannot possibly have done anything wrong.

  67. But but but all 41 Senators have signed on to McConnell’s letter:

    We are united in our opposition reported by the Senate Banking Committee. As currently constructed, the bill allows for endless taxpayer bailouts of Wall Street and establishes new and endless regulatory power that will stiffle small businesses and community banks.

    (My bold.)

  68. For this type of tool, it would be so much better if you shopped at a local mom-and-pop owned hardware store, if there are any left where you live.

  69. My bet is that a lot of the people out there are just like James: they assume there was no criminal wrongdoing, so they don’t look for it. Well, if you don’t look for something, you won’t find it, will you?

    The problem with James’ thesis is that it seems to propose that the crises was brought about EITHER by “ideological takeover” OR by criminal behavior, and could not have been brought about by both. His defense of this false dichotomy is that criminal behavior wasn’t necessary to create the crisis, to which I respond “so what?” The fact that something wasn’t required in theory to bring about the crisis doesn’t mean that it was not, in fact, a proximate cause of the crisis.

  70. CNBC’s Cramer, a lawyer, needs to study up. He said this afternoon that the SEC suit is meritless because GS could not disclose a client confidence–i.e, that Paulson was shorting the fund GS was selling. This episode indicates how greedy GS was. They had three options: (1)Tell Paulson to take his trades in a fund GS was selling elsewhere, or (2) keep Paulson as a client and decline to sell the fund, or (3) make full disclosure to the buyer(s) of the fund that Paulson, who put it together, was shorting it. They chose none of these options and that appears to be securities fraud based on the information currently available.

  71. “The law doth punish man or woman
    Who steals the goose from off the common
    But lets the greater felon loose
    Who steals the common from off the goose.”


  72. $1 billion paid to Paulson to for his short positions on the deal.

    Can any of the $1 billion be directly linked to payouts from the TARP fund?

  73. The details are still rather sparse. First, Paulson did not have legal shorts. He owned credit default swap contracts. From what I can piece together, Paulson sold these contracts for around $1 billion. He sold property. These CDS contracts had increased in value. He was not paid off for the conditions precedent to settling the contract. The contracts were bought to realize gains on a condition precedent having occurred. It just so happens that the contract maker was buying back his own contract. If the makers of the contract to pay on conditions precedent occurring bought back their contract do they not validate that they made a legitimate deal? Otherwise, why not wait for the conditions precedent to occur and refuse to pay asserting fraud?
    Am I greatly wrong here?

  74. Firstly Goldman Sachs is a Fall Guy For The Banking Elite of Basel Switzerland.
    and in turn, The Federal Reserve Bank of America. Politically Obama will also have a hand, and benefit from goldmans Demise.
    SMOKE and MIRRORS for The true Rulers of the World in Basel …………..

  75. So you are saying Goldman Sachs sold the CDS contracts sold to Paulson, and then GS purchased the same contracts from Paulson. So this proves the CDS contracts did not involve fraud?

  76. I just watched Mr. Johnson and Mr. Kwak on Bill Moyer’s Journal, and I thank them for explaining how we got in this crisis state, in a way that I hadn’t heard before. But now how do we get them in front of people that can actually do something about this. Get them onto CNBC and Bloomberg etc. Our future is doomed in this country if we don’t do something to correct our financial system as they have laid it out.

  77. “This would be equivalent to selling swampland advertised as a buildable lot.”

    More Than Goldman Sachs In SEC Gun Sight

    04.16.10, 06:49 PM EDT – – excerpt

    “Truthfully, any indictment is unlikely as it would threaten Goldman’s charter as a dealer of Treasury securities and throw the financial community back into panic.”

  78. Why is Paulson not implicated? Did it not know that GS was going to say nice things about the accumulated junk that it was advising GS to put together? Maybe there’s no culpability in the civil context. but it seems that Paulson could be charged with conspiracy criminally. There are a lot of minor level druggies who get swept in on conspiracy charges even though they are not the ones masterminding the criminal actibity.

  79. Eli, I could not agree more. Both gentlemen rocked. I have friends who would not be able to follow the detail and insight which these two brought to the table, but at the end of the program, it should be apparent to all with some semblance of gray matter that bigger is not always better, that political shenanigans have been occurring for decades, and that both sides of the political aisle may seem to say one thing in front of the camera while their hand is out behind their backs.

    The game has been tilted in favor of those who have the biggest checkbooks. Oligarchy indeed.

  80. Exactly – the process itself would be damaging if the political will was there to go through with it.

  81. Paulson using GS as a broker purchased credit default swaps from say RB Scotland. RB Scotland was paid an up front and annual fee by Paulson to reimburse Paulson or whomever owned the contract for losses as defined in the contract. RB Scotland took Paulson or others money had Paulson sold the contract. Based on an article in the Telegraph today, RB Scotland bought back their contract incurring a loss of well over $800 million. RB Scotland bought back it’s own deal. Now thet scream fowl. They just want a bailout via the legal system for their own folly. At the least , RB Scotland and others are running the idea up a flag pole to see if the legal system salutes.

    The subject of the CDS contract was a CDO created by GS via ACA. This CDO type was created by GS and ACA with some non binding input by Paulson. Apparently, GS was not able to sell all the tranches and took a bath on the loss of the CDO to the extent GS itself did not cover itself by buying CDS contracts itself.

    Did RBS own the same CDO it was insuring against loss? They thought the CDO was excellent and thus likely both owned the CDO and contracted to make good any loss of value as a side venture. Paulson was not obligated to own a nickel’s worth of the specific CDO he paid RBS and others to cover against loss of value. In the meantime, the value of the CDS contract Paulson held appreciated in value as owners of the same CDO tried to buy a stop loss.

    Shades of the Maverick Brothers in the 1950’s TV show. Wall Street is grifter’s paradise.

  82. I agree with everything James said, although I have a stronger feeling regarding criminality as it applies to trades made without disclosure. Relating to many of the CDO’s, Goldman and many others who were heavily involved in this market had to be either completely retarded, or completely ignorant of the underlying security, to portray any of these “investments” as winners, ever. The very fact that Paulson was able to go to Goldman (and by the way, you could substitute losts of names into the same scenario) and work with them to find the weakest tranches indicates that they had full knowledge of the constitution of each and every CDO and tranche applying to each, which also means that they knew exactly which would likely be failing and in what order. Is it legal to sell any security of any kind in which there is virtual certainty of its eventual failure? Obviously, if it is legal, then the law must be changed.

    Further, the real significance of this is that the SEC has obviously decided to work on its image, and many participants in the Goldman game on trial should be shaking a bit. Or maybe more than a bit.

  83. Thanks JerryJ,

    It looks like ABN and RBS were involved in the CDS contracts. I’ll have to read the SEC complaint closely.

    A possible defence could be: Yes I brokered the CDO and the CDS contracts taking short positions against that same CDO. But I was acting in good faith. The CDO was AAA-rated so the seller of the CDS had the advantage (not the buyer). But given Tourre’s emails this argument might not hold water for Goldman.

    As for Grifters Paradise … perhaps a paradise of billions and trillions entrusted to the grifters by the innocent, gullible and greater fools.

  84. As I understand the process, a DOJ attorney is already assigned to the case. AJ, it isn’t that the DOJ hasn’t decided not to seek a criminal complaint rather; the DOJ is allowing the SEC to do it’s discovery.

    Secondly, obviously somebody at ACA flipped.

    Third, the moral of this story is that there is no honor among thieves. Who’d a thunk that.

  85. I don’t think Paulson needed to tell Goldman to lie or deceive. I think they knew exactly what was happening.

    I don’t think they have to tell their business partners what they should do or need to do. They know what the goals and intentions are and they tend to it in such a way as to enable and protect everyone involved. And that’s why the facts won’t come out.


  87. These charges are a sham cooked up with the approval of GS. The purpose is to make it look like the government is “getting tough.” The fine will be so small that it won’t impact the bonuses at GS, which is all those guys care about. And the taxpayers will ultimately pay the fine, because we’re supplying GS with interest-free funding. Yippee for us!

    If the government was serious, they’d bring fraud charges against all the top executives at GS. GS bribed people at Moodys and S&P to rate mortgage-backed-junk-bonds as AAA. That was the key to this entire con job and the largest fraud in American financial history.

  88. Correction:

    The CDO was tranched so only part of it was AAA-rated.

    But still the CDO was a good investment. I mean … when deal with a high-end brand like Goldman Sachs you know they are not going to sell you junk right?

  89. Goldman knew for months charges were possible

    Fri Apr 16, 2010 – excerpt

    NEW YORK April 16 (Reuters) – “Goldman Sachs Group Inc (GS.N) learned it was facing potential civil liability in the Abacus CDO case sometime in the past six months when it received a “Wells Notice” from the U.S. Securities and Exchange Commission, sources said on Friday.

    Regulators send Wells Notices to firms or people to alert them of the likelihood that the government will file an enforcement action against them. Companies or people being investigated have the right to argue why they should not be charged by filing a “Wells submission.”

  90. Show time. Obama confronts the notorious squid. Today a top government legal team broke out their Super Soaker 500’s for what should be an aquatic ballet for the ages. Come on James, if we can’t put them in prison, how about in an aquarium under glass. Psychologists could study sociopathic behavior at least. These guys would sell the mothers out for a dime. They don’t produce anything but schemes and victims.

  91. One wonders about the politics, heh, heh. GS is the ogre. A bigger player though appears to be Deutsche Bank through one player Greg Lippman. Lippman was thought near certifiable by other traders at DB that shunned him for most of the time he was dealing with Paulson and for the DB trading account. Lippmann was betting against the other DB traders and they did not like it one bit. Lippmann cleared doing deals at DB with Paulson. Eventually, the other DB traders started covering their positions by buying CDS protection too. Lippmann made a ton of money for DB offsetting the CDO losses created by other DB traders.

    Now , might DB just have some international relations protection in the US that that GS does not as the American Insull?

    Henry Blodget, who ought to know about securities prosecutions, on Business Insider yesterday concluded the SEC had a weak case. At the end of the day , when this action was filed, the need is political at the moment. A repeat of FDR and Insull? Insull was found not guilty in three different actions.

    Very well timed politically. Obama needs to apply heat to the Republicans in Congress. Put them in a political corner. The Congress incumbents themselves must understand that to some important degree their own retention as a candidate in the coming primaries requires settlement of the financial regulation bills in Congress.

    The SEC charge against GS is politically very Goldilock’s in the selection and timing for political purposes. The laws need passing. After that the SEC case can win or lose but will have served it’s purpose.

    FDR spit nails over the Insull and Mellon case acquittals but I doubt Obama really cares about GS losing this case all that much.

    Very exciting times politically are coming in May and June.

  92. Oops, I meant Obama not caring much if the SEC loses it’s case against GS down the road a bit.

  93. Heads must really be rolling right now… at the SEC!! “You sued WHO!?!? Pack your belongings and get out…*dialing*… Lloyd.. Chris here…hey sorry about this misunderstanding, it’s been taken care of.. we’re still on for golf Sunday, right? Ok, bring your A-game Blankey!!”

  94. Eric wrote:

    “Heads must really be rolling right now… at the SEC!! ”

    Dan Stewart wrote (excerpt) :

    “This case will wind up in a couple of years with GS entering into a no admissions (without admitting or denying the charges) settlement with fines and restitution of less than $500 million (a pittance for GS). GS employee Tourre, the sacrificial lamb, will also settle with no admissions and several million in fines and restitution, and a lifetime bar from the securities business.

    Meanwhile, the real perpetrators go unscathed free to continue business as usual.

    Apparently, not only is GS too big to fail, they’re too big to indict.”

  95. In the end, the SEC matter will be just a minor traffic offense for Goldman. When the Republicans win back the House in 2010, they’ll probably defund the SEC in the 2012 budget. “We must get the jackboot of SEC fascists off the throat of free enterprise,” Rep. Eric Cantor said on February 4, 2011 on the House floor during the budget debate on the proposed 2012 budget bill.

  96. And to think that the TEA Party folks don’t want a government that is powerful enough to recall bad hamburger – which is what we have got.

  97. I don’t see why John Paulson isn’t charged too. I am very right wing but Wall Street needs to disciplined. George Bush let them run wild while amusingly enough they are all liberals over there and mega-donors to 0bama. GS was the second largest 0bama donor. Check it out if you don’t believe me.

  98. It makes me sick that these people got away with scaming so many people. I hope they get convictions, and those convictions lead to changes that make sure this type of thing never happens again.

  99. To prosecute criminally, the SEC would have to refer the case to the NY Attorney General’s office, the NY or CT DA’s office, or other prosecutorial office with jurisdiction.

  100. I’m not so sure about that based on the pass. The rich, powerful and well connected usually can get away with ‘murder’. Pass cases such as Black Water, KBR and Halliburton to name a few. Although the goverment is trying to investigate and take actions, but it will be difficult when you have Republican senators label finance reform as ‘bailout’ in their talking points to get opposition from the general public.
    This can only happen in America when the people took the opportunity to create/froster/enable and therefore responsible for the whole finacial mess can not only go free, but retain all of their gains.
    Not fair in my book as we compare this situtation with what Martha Stewart did and received.

  101. Goldman vs. the Mafia:

    Early 21st century investment banks are essentially criminal enterprises. I prefer old school mafia types to bankers. They are more interesting people, have a code, have loyalty to their family and community, have some aversion/hesitation to harming their community/society–some restraint from harming innocent bystanders, and are normally punished for bad behavior–held accountable.

  102. Typically in this type of investigation, the SEC coordinates throughout its investigation with DOJ (and typically FBI). That means prosecutors – either from the relevant US Attorney’s office or from main Justice – were likely in the room or any interviews and likely got copies of all document productions. That is almost certainly what happened here. I say “almost certainly” only because I not involved in this case.

    The implication is therefore that the criminal prosecutors have decided not to bring a criminal case here. We can conclude that because the SEC would not have compromised a possible criminal prosecution (against GS and Tourre) by starting a civil case. For those who think the civil case is just a means to get discorvery, that is wrong. The SEC’s subpoena power is sufficient to get whatever discovery it needs.

    Finally, as someone said above, it’s clear from the complaint that ACA, IKB and the other buyer (can’t remember who it was) are cooperating/complaining to the SEC.

  103. Wow – judging by the number of comments, something is really happening here.

    “My general line is that I’m sure there was some bad behavior that rose to the level of criminal liability — like lying in disclosure documents — but that it wasn’t necessary for the crisis, and we could have had the crisis without any criminal activity at all.”

    I tend to agree. I don’t mind if GS is prosecuted and convicted. What I really hope happens is that people finally realize these people are not your friends, and anybody you do business with should not be doing business with Goldman – what does it take for people to realize that these companies work against their customers financial interests??? Hopefully that will be more devastating to GS than any prosecution.

  104. I personally know of 1 – one – SEC litigator who specifically joined the SEC to go after the bezzle. So while capture may be generally true, there is at least ONE person there who will gleefully pursue fraud charges against TBTF and other well-connected insiders. If this person gets fired, then I’ll be proof that the legal system is too far gone to be saved.

  105. Oh if only they WERE sending their resumes to GS & Co…..instead we find out they were j*rking off to porn sites all day every day at work!

  106. Does anyone know if the taxpayer bailout of AIG resulted in the making GS and John Paulson whole on the CDS protection of Abacus? In other words, was John Paulson’s billion dollar payday courtesy of the U.S. taxpayer?

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