Explanation of the SEC Charges against Goldman Sachs

Email  Print Print  

I’m sure you’ve heard the recent news that the SEC has charged Goldman Sachs with fraud for misleading some of its investors. At the core of the complaint is that Goldman structured and marketed a synthetic CDO but failed to disclose key aspects of the product. The key aspect in question here is that the architect of the CDO hand picked the pieces of the CDO and then bet against it.

If you read the complaint and are still unsure what happened, this video explanation by Patty Hirsch on Marketplace will explain it with an easily understood analogy and the absence of much editorial (which is hard to find these days):

I, and many many others, suspect this case was conveniently timed with the announcement of financial reform. I think financial reform is very much needed but this particular charge isn’t related to the core of what we need to reform. All the major players are enormous financial entities who should have known what they were doing and asked the right questions. If the investors didn’t ask how the products were being created and didn’t conduct their due diligence, the fault lies with them. If they asked and Goldman lied, then Goldman is at fault.

It remains to be seen how this all shakes out but unless we get specifics of how people were deceived, it looks to me like someone is just being set up for other motives. As an investor, you should know that there’s someone on the other side of the deal. Goldman is like a bookie, they profit off the action, not off the end result. You bet on the New York Jets and they find someone to bet against it, taking a piece of the action along the way. They don’t care if the Jets win or lose, only that the game happens. I think it doesn’t matter that investors didn’t know that Paulson shorted it, because someone is on the other side of that CDO and it doesn’t matter who it is, but if there was clear deception then it should be dealt with.

What are your thoughts on all this?

{ 26 comments, please add your thoughts now! }

Related Posts

RSS Subscribe Like this article? Get all the latest articles sent to your email for free every day. Enter your email address and click "Subscribe." Your email will only be used for this daily subscription and you can unsubscribe anytime.

26 Responses to “Explanation of the SEC Charges against Goldman Sachs”

  1. Prasath says:

    makes me to understand about this whole process, kind of messed up.

  2. zapeta says:

    It will be interesting to see if Goldman truly lied about the CDO or if the investors in the CDO were at fault for not having due diligence. My guess is that the blame is probably on both. I do think it was a brilliantly timed Friday morning news dump so people were talking about financial reform all weekend.

  3. tbork84 says:

    It looks like they are elevating the issue to make Goldman look bad as they press with new regulations. Which I feel is perfectly fine, since the real drive in public opinion to reform banking has died down with the economy no longer in a free fall.

    I agree with Zapeta, it seems to be an example where both parties were at fault. But back in 2007, pretty much anyone would have bought the long end of the short that Paulson was proposing in this deal.

  4. tom says:

    I agree with zapeta. All parties are to blame.

    I place more blame on the investors themselves. Goldman is pushing this CDO hard to investors, shouldn’t they do a little research? It sounds as though the investors got greedy.

    I’m not saying Goldman didn’t do anything wrong, but no one is forcing the investors to invest in this package. I don’t care who you are or what you do, if you are going to put your hard earned money (whether it’s your money or your company’s) in an investment, at least do as much research as possible to understand what this investment is comprised of.

    Now, if the research they did was manipulated by Goldman and Paulson, and there was no way to find out otherwise, then this is flat out fraud. Looking at the Goldman presentation on the ABACUS CDO to investors, I’m lead to believe that a simple phone call to ACA asking what is in this CDO would have been enough to drive most investors away.

    • otipoby says:

      What I have read is that the funds that were in the CDO were accurately disclosed, with relavent information (spread, historical default rates, etc). The marketing material was higher-level and less specific. The marketing material still needs to be truthful (or at least not untruthful). From what I have read, the marketing material was subjective, such as statements like the following:

      “Asset selection…premised on credit fundamentals.” “Alignment of Economic Interest” with investors. None of “ACA’s CDOs have ever been downgraded.”

      I believe these statements will be difficult to prove to be lies.

  5. billsnider says:

    Thanks. This is easy to understand.

    Given Wall Streets track record, I think they should be nailed. They have all the facts and did not disclose this to invetsors.

    Does anybody here believe that an investor would have bet on Abacus if they knew it was being fed dog food?

    How can anyone defend Goldman Sachs unless you work there?

    bill Snider

    • Jim says:

      There are two things missing from the explanation that I believe make a big difference:
      1. I believe that the “investors” are large institutions, not individuals like you and me. They have a cadre of analysts paid to perform due diligence on this.
      2. He calls them punters, which is British slang for gamblers.

      If the horse was being fed dog food, the investors should learn it in researching the investment. If they were told it’s fantastic food by Goldman when Goldman knew it was subpar, then I believe something wrong happened. I’m not defending Goldman as much as I’m not defending large institutional investors as if they fell victim to some nasty plot.

      • billsnider says:

        If I accept yopur analysis, then I have to accept the government position that they have to review and APPROVE every decision made by banks and wall street.

        I don’t accept that!

        Bill Snider

  6. Fred says:

    It makes no difference whether the “investors” were large institutions or not.

    The fact that the funds’ advisors were betting against the fund and Goldman knew it is the key piece of data.

    Everyone on Wall Street knew there were people betting against risky mortgages. However, there is a difference between another “independent” investor making that bet and the funds’ advisors themselves making it.

    It’s obvious:

    (1) the funds advisors are financially incentivized to ensure the fund fails.

    (2) they are further incentivized to hide the risks of what they are doing to encourage maximum investment by investors.

    (3) Goldman knew this, and had a responsibility to disclose it to investors.

    Case closed. If all this is really true, Goldman’s going to eat it big time.

  7. otipoby says:

    I do not think I could agree with you more.

    Just because Paulson thought (correctly) that the securities would go default is not a “truth” that would need to be disclosed. That is one man’s opinion – even if it is the opinion of somebody who influenced the fund creation.

    If all parties had the same information about what assets were in the fund and people came to different conclusions about the value, then this is not fraud in my opinion. Markets only work when two parties come to different conclusions about the value of an asset.

  8. Andrew says:

    Screw financial reform. the government needs to get their hands out of everything in my life. Free enterprise has its ups and downs but always corrects itself.

  9. Jessica says:

    Jim, I agree with you. The timing of this is very suspicious and we are not talking about main street investors, but institutions who deal with sophisticated investments.

  10. Kate says:

    While I think that the investor does hold some blame, don’t you normally decide to use the help of a broker because you don’t have the financial backgroud to make sound decisions? By choosing an investment bank, investment fund or any other financial investment expertise, aren’t you putting money in their hands because you have faith in them? I think it will be interesting to see what happens.

  11. eric says:

    Clearly messy. I think I generally agree with your view but if Goldman Sachs was really sleazy, they should definitely be punished.

  12. Wilma says:

    When you put money into invest ALL facts should be on the table for ALL parties involved. This video explanation is a key to why so many people are afraid to invest their money. You just don’t know all the facts and who’s on what side of the fence and or if they’re straddling the fence. The UTM (under the mattress) strategy looks better and better all the time. Investing is always a gamble but it shouldn’t be that treacherous.

  13. Ron says:

    “In every bet there is a fool and a thief.” ~~Anonymous

    “I’m more interested in the return OF my money than the return ON my money.” ~~Will Rogers

  14. Sebastian says:

    This American Life did recently ran a stroy which also explains this.

  15. I’m not much of a fan of investment banks, but the government has a weak case against Goldman. They will probably lose the court case if it gets that far. But that doesn’t really matter. They want to try Goldman in the court of public opinion. The timing of these charges are no coincidence. They are designed to help force a flawed financial reform bill through the Senate without proper vetting and debate.

    Who in their right mind would buy a BBB rated CDO no matter who selected the securities? European banks and ACA, the selector of the securities. Hindsight is 20/20. Few people thought housing was headed for a crash in 2007.

    Expect more politicized complaints to be filed by the SEC against other investment banks in the next couple of weeks. And just wait until that blowhard Cuomo jumps into the fray.

  16. One other point…synthetic CDOs by definition are designed to have a long and a short. Every institution who buys a synthetic CDO knows this. Who took the largest long position in this security? ACA, the company who along with Paulson selected the securities and rated them. If the failure of this CDO was such a sure thing, wouldn’t they have known it?

  17. ebekele says:

    Thanks for the break down Jim!

    they were all practicing the samething, not only goldman. and the analysts didn’t care, they got their fat bonuses either way – fail or no fail. there needs to be some type of light regulation/reform. it was out of hand. people lost their life savings. who woke up SEC??? lol they’ve been warned since 2001…

  18. I’m a huge fan of Paddy Hirsch but I think he missed here. We have to be careful about whether bets were made or lies were told. The government bought a lot of “toxic debt” and guess what? They made a lot of money off of it. The stuff they bought went up in price against what the “experts” expected. Paulson shorted the CDOs. Ok…if he had been wrong then what. Would a case be brought against Deutsche Bank?
    Here’s the deal: if the foreclosure rate was 20% and they told investors it was 15% they should go to jail. Not just some 3rd level trader but the higher ups at Goldman. If one side of the trade thought it was going higher and other side not…well that’s what makes markets.
    This isn’t about feeding horses dogfood.

  19. Anonymous says:

    this whole thing stinks, the internet scams that read everyday are the same things theses bankers are doing. so it means that our whole economy is based on gambling why then do we criticize the communist economy. the gamblers have actually used government and the people to overthrow communism by labellings as a crime main while the real criminals are free to colonize us and make us pay for gambling. economic recession , bailouts all of this who suffers? it is still the ordinary worker. wall street reforms are will soon be labeled socialism just as the health care reforms was labeled socialism. my conclusion is that anything to benefit the worker is labeled socialism. but if a government cannot protect it citizens from excesses of these gamblers then there is no use for government.

    whenever crime such as gambling becomes leglal in any civilization then i know the end of that civilization has come.

    the stage is right now being prepared for the prophesied one world government by the Antichrist.

    think of it one of the worlds biggest financial institution is just an ordinary gambler. yet it is claimed to have groomed the best minds in the world. so we can conclude that our whole economy is based on gambling. Oh!!! how we must be trying the patience of the creator of the world as well as insulting him. with all the intelligence he endowed humans with, gambling is the only way we know to operate our economy? shame on us all.

  20. “If they asked and Goldman lied, then Goldman is at fault.” I completely agree with this statement. Too many people try to blame others, when they could have done more research and made sure they are getting the product they think. If the company lied, then of course they should be held liable.

  21. I believe Politicians know they don’t have a strong case but will still look heroic for battling the great Goldman Sachs.

    This is an oversimplification, but the Government does not have a strong case against Goldman for lack of disclosure because Goldman does not control markets and it does not control greed.

    For the simple fact that market participants (individuals and institutions alike) can act irrationally, there is no possibly way to prove that Goldman “knew” Abacus would lose miserably, much less the timing of such a result.

    When markets are irrational, they can get even more irrational. All Goldman was doing was creating a market for the buying and selling of greed. If greed swells, Goldman wins. If greed fails, Goldman wins. This was just an extreme case that was unethical but not likely provable to be illegal. Easy to see, hard to foresee…

    “The markets can remain irrational longer than you can remain solvent.” ~ John Maynard Keynes

    “There is no calamity greater than lavish desires. There is no greater guilt than discontent. And there is no greater disaster than greed.” Lau-tzu

  22. jsbrendog says:

    they will probably get away with it due to some loop hole or lack of evidence or blatant bribery


  23. Associated Press says:

    Is it any wonder why the SEC took so long to tackle Goldman Sachs? Guess they couldn’t keep their hands off their privates long enough to pay attention to the screwing Goldman was delivering to the taxpayers. Wonder if theres a website for that!

    SEC workers accused of surfing porn sites
    Associated Press
    April 23, 2010

    Washington-An agency watchdog says senior employees of the Securities and Exchange Commission spent hours surging pornographic websites on government-issued computers while they were being paid to police the financial system.

    SEC Inspector General David Kotz says in a memo obtained by the Associated Press that the behavior violates agency and governmentwide ethics rules.

    The memo reports 33 violations in the past five years– 31of which took place in the 2.5 years since the financial system teetered and nearly crashed.

    It says one supervisory accountant looked at pornographic websites about twice a day and saved images on his SEC computer to view during work hours. The memo is a response to an earlier request by Republican Sen. Charles Grassley of Iowa.

    The memo said that one senior attorney at the SEC’s Washington headquarters spent up to eight hours a day looking at and dowloading pornography. When he ran out of hard drive space, he burned the files to CDs or DVDs, which he kept in boxes around his office. He agreed to resign, and earlier watchdog report said.

Please Leave a Reply
Bargaineering Comment Policy

Previous Article: «
Next Article: »
Advertising Disclosure: Bargaineering may be compensated in exchange for featured placement of certain sponsored products and services, or your clicking on links posted on this website.
About | Contact Me | Privacy Policy/Your California Privacy Rights | Terms of Use | Press
Copyright © 2016 by All rights reserved.