Well, we finally have ourselves a high profile case filed by the SEC against Goldman Sachs. Lord knows it couldn’t have happened to a more deserving company! As those of you who follow my column know, I have said many times that we won’t get a real recovery going until we clean house and put the crooks who are responsible for all of this in jail. So I should be happy, right? Well … yes and no.
I am, in fact, happy and encouraged that the SEC finally got around to bringing any kind of charges against one of the worst apples in this whole debacle. If you didn’t catch the financial news recently, the charges stem from an approximately $1 billion dollar CDO (collateralized debt obligation or bond offering) full of sub-prime loans that Goldman helped put together. The individual loans for this pool were handpicked by (John) Paulson and Company—a large U.S. hedge fund company. So Paulson and Company wanted to get rid of a huge chuck of sub-prime loans, AND then turn around and “short” the offering. This is a fancy way of saying Paulson wanted to bet against the pool of loans performing as agreed. So you can guess the quality of loans selected, given this stated intention. And if you want to pull off something this slimy, who better to call than Goldman Sachs, right? So Goldman Sachs liked the idea and brought in another company named ACA Capital Management. ACA was retained to resell the bond offering to other institutional investors. In reality, this is akin to selling a bomb disguised as an “asset” to investors. You make money on the sale of the bomb, then you light the fuse and run out and get insurance on the fire it will create. You with me so far?
I say that this CDO was a bomb because the collapse of the sub-prime market started in 2006, and this offering was pushed out in 2007. So anyone in the mortgage business knew sub-prime was in a complete freefall at that time. But more importantly, it is likewise apparent that Goldman’s then 29-year-old bond salesman, Fabrice Tourre, knew that this CDO was full of the worst hand-picked batch of sub-prime loans Paulson and Company could find. He is the lone Goldman employee named in the suit, likely because of e-mails he sent internally which stated among other things, “More and more leverage in the system … The whole building is about to collapse anytime now … Only potential survivor, the fabulous Fab (what he called himself) … standing in the middle of all these complex, highly leveraged, exotic trades he created without necessarily understanding all of the implications of those monstrosities!”1
So let’s review. Goldman earned the fees for putting this CDO together, but didn’t want to get its hands too dirty. They bring in ACA to do the re-sale to investors, but ACA is somehow led to believe that Paulson will be a “buyer” of the CDO offering once the packaging is done. Goldman, of course, now claims it has no idea where ACA could have gotten that idea. ACA is likewise never told that Paulson handpicked the sub-prime loans going into this CDO in the first place. The CDO offering is completed and resold by ACA. Paulson and Company then buys hordes of credit default swaps (insurance against the fire it specifically designed to happen) and subsequently makes over a $1 billion dollars.
“OK, but you aren’t happy. Then why?” you ask. Well, for one thing, this is a civil suit, not a criminal one. And we all know how this will end up, right? Goldman will eventually settle for a $50 to $100 million fine without ever having to admit guilt. That sounds like a lot of money, but it pales in comparison to the money they likely made on their own credit default positions, taken out against this same CDO. So no one will go to jail and they will all get to keep the bulk of their ill gotten gains. No one will lose their securities license, except maybe the fabulous Fab. And all the really big questions will go unanswered … questions like, why would Moody’s and Standard & Poors rate this pile of dung AAA? There is no doubt this con game couldn’t have been pulled off without a bond rating shill to stamp it AAA. And since they aided and abetted this financial fraud, why aren’t they named? Why isn’t Paulson and Company named in the suit? They came up with the idea for this flim flam after all, and made $1 billion helping to pull it off. How many CDOs like this did Goldman put together? Did they use a strategy like this with AIG that we, as tax payers, picked up the tab for? How much did Lloyd Blankfein know about these kinds of practices? He was the CEO of Goldman at the time, and you can’t imagine he’d let a 29-year-old who calls himself “the fabulous Fab” loose with a $1 billion deal all on his own. For that matter what did Hank Paulson know? He only left Goldman the year before to become Treasury Secretary. And so on and so on …
Then, of course, there is the timing of the charges, coincidentally announced the same day President Obama announced his tour to promote financial reform. Plus, it sure didn’t hurt to shift everyone’s attention to Goldman, and away from the Lehman Repo 105 scandal involving our friend Timmy Geithner either. Maybe I’m just cynical, but I don’t believe anything in politics is coincidental anymore. How about you? Hopefully the “too big to fail” banks will be done drafting the financial reform legislation for Senator Dodd in time for next month’s column. I can’t wait to see what regulations they come up with to prevent themselves from doing this to us again!
1 http://dealbook.blogs.nytimes.com/2010/04/20/the-importance-of-fabrice-tourre/?src=busln
