By Pete the Banker As the Wall Street Journal so eloquently described the Securities and Exchange Commission’s inquiry of Goldman Sachs, “Start with a villain. Find a crime.” But is it the Government’s pursuit of Goldman that is the real crime, conspiracy and fraud? The SEC has charged Goldman with Fraud and Conspiracy to defraud sophisticated investors through an investment transaction by the name of Abacus (here).
Goldman is an Investment Banker, a financial intermediary that markets investments, finding a willing seller and to a willing buyer. As is customary in financial trades, the buyer and seller may or may not know the others identity, nor necessarily the other’s motivation for the trade. The investment in question consisted of a Collateralized Debt Obligation (CDO) containing a pool of Credit Default Swaps (CDS) basically insuring Subprime Mortgages. This investment pool of these CDS was created through the negotiation of a then little known hedge fund trader, John Paulson and ACA Management, the primary agent in selecting the securities to be included in the package. Paulson was taking the “short” or sell side of the transaction speculating that home prices would fall, mortgage delinquencies and defaults would rise, while investors ACA management (the lead investor) and IKB Bank were speculating that home sales would improve, housing prices would rise, and mortgages would not display abnormal levels of delinquency. In hindsight, Paulson was on the right side of the transaction, while ACA and IKB were on the wrong side. With the subsequent massive decline in housing, the value of the CDS “insurance” contracts paid off handsomely making Paulson literally a Billionaire over night. ACA went bankrupt perhaps a fitting outcome for its incompetence in underwriting suitable investments.
The SEC now charges fraud by Goldman alleging that they did not fully disclose that Paulson “hand picked” the securities for the pool and his intent to short or sell the CDO pool. This is despite the fact that over half of the initial mortgage backed securities to be “insured” were rejected outright by ACA Management, ACA being both the selecting agent and the lead investor in the deal, and a sophisticated investor who negotiated with directly with Paulson. (http://www.housingwire.com/2010/04/21/measuring-the-hysteria-surrounding-sec-and-goldman-sachs/)
The timing of the SEC civil suit is curious, being released immediately preceding the Administration’s final push for its Financial Reform Package. And just curiously, its timing also immediately preceded the release of a rather uncomplimentary Inspector General’s report about the incompetence of the SEC, a report which had been held by SEC Chief Mary Shapiro for several weeks. That report indicated that the SEC had known about the Stanford Ponzi scheme since 1997 and only acted upon it in 2005.
However in reading between Obama’s lines, the Administration and SEC may never have discussed the “details of the charges” to be brought, but the real question is whether the Administration discussed and pressured an independent Federal Agency, the SEC, to take action, any action to promote the pending financial reform package and cover the SEC’s reputation given the pending release of the IG’s report.
So where is the real crime? Is acting as a financial intermediary for a transaction that is structured by others, without possessing the absolute ability to forecast an uncertain economic future and financial market environment, really a crime? Or is the true fraud and conspiracy, an Administration that uses dishonesty deception and complicity for calculated advantage? Isn’t it the Administration’s/SEC’s conduct, deception, and faulty allegations that are the true fraud and conspiracy?
Tell ’em where you saw it. Http://www.victoriataft.com
