Guest Post: Goldman Cracks

Washington’s Blog

Given the tremendous water pressure involved, even a small crack in a huge dam can lead to catastrophic failure.

Similarly, even a small breach in a seemingly invincible army’s defenses can lead to defeat.

The SEC’s fraud action against Goldman Sachs is really small potatoes. It alleges only civil – not criminal – fraud.

And it is against only one small player, not against his bosses or top management.

(And Goldman has done a lot worse.)

But Goldman has suffered a crack in its veneer of respectability.

More importantly, the SEC action may represent a crack in the company’s armor.

Before the SEC announced the charges, Goldman seemed unstoppable. It seemed like even countless tons of water pressure or scores of invading armies could not touch Goldman.

Now, there is a crack …

Even if the timing of the SEC’s announcement was wholly political (some commentators have called it bread and circuses or kabuki theater), and even if (as some writers have alleged) Goldman CEO Lloyd Blankfein himself approved the action as a way to diffuse pressure for bigger, criminal prosecutions against bigger players, tons of public pressure and hordes of lawyers are probably on their way.

Or perhaps Goldman is like the warlord hated – but feared – by all.  If there is ever a crack in the warlord’s veneer of invincibility, the locals might realize that he is only human after all … and decide they can – together as a group – take him on.

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About George Washington

George Washington is the head writer at Washington’s Blog. A busy professional and former adjunct professor, George’s insatiable curiousity causes him to write on a wide variety of topics, including economics, finance, the environment and politics. For further details, ask Keith Alexander… http://www.washingtonsblog.com

25 comments

  1. wunsacon

    I’m really amazed at the lack of class action civil suits. Do those high-priced plaintiff lawyers do nothing without waiting for SEC action to start or prove a case for them?

    So much for them functioning as “private attorney generals”.

  2. VenusVictrix

    It’s truly an insult to the enormity of this fraud that the SEC only named one small, insignificant player. Surely they would have waited to include the entire cast – if they had any intent to do so. It looks like they are planning to execute the “rogue trader” defense for the company – much like the AIG/Joe Cassano/CDS story.

    With this strategy, the company and regulators all dodge responsibility by placing blame on a single individual who is purported to be the lone perpetrated of the identified offense.

    Yet it’s a long stretch to accept that no one amongst Goldman’s Sr. Management had any vague idea where the firm was reaping such astronomical gains while they were executing their “Bet Against America’s Homeowners” strategy with AIG (supposedly).

    It’s also a stretch of the imagination to accept that John Paulson would be shuffled off to some mid-level VP at Goldman for his dealings with the firm – rather than being given kid-glove treatment by Sr. Management as a major hedge fund player.

    Let’s hope that this crack in the facade of institutional integrity will be fully exploited by investors and their legal representatives, since our own regulators seem impotent to protect us from this entity.

  3. Jojo

    I wonder what Goldman did to piss off someone very high in USA government who could order the SEC to do something? Maybe this is Obama’s way of showing that he is displeased with the $20 billion in bonuses that Goldman disbursed last year?

    But it does seem a bit too early for the Dems to be worrying about making a show for November just yet. Were that the driving force, I don’t think we would have seen anything until after Labor day.

    And some of the European countries seem to have glommed onto this also.

    Curiouser and curiouser….

    1. wunsacon

      >> But it does seem a bit too early for the Dems to be worrying about making a show for November just yet.

      No, I think it’s very, very late. 80% of Americans distrust government. I’m sure many are angry with the Dems doing nothing to “change” the corrupt practices on Wall Street.

      One or two $1b law suits will not suffice either. Firms must be banned from the business (a la Andersen from Enron debacle) and scumbags must be put in jail.

      1. Jojo

        The American public memory is VERY short. This is why I say that if you want to influence the November elections, then you need to act right after Labor Day when people are returning from summer vacation.

        1. LosingGround

          In this case, the memory will *not* be short, any more than people’s memories about their dislike for former ex’s are short. This is no longer seen in the public mind as some tabloid dirt–it’s more firmly embedded and considered much more personal than that.

          After a couple of years of BS posturing (see current reform bill, for example), the democrats seen to have finally realized this (curiously, the repubs haven’t yet, although I’m sure they’ll figure it out by the summer). Go anywhere public and count how often you hear somthing derogatory being said by WS, or investment banks in particular (a year ago, most people had no idea what an investment bank even was).

          This is not going to blow over, and the SEC is not going to be able to settle this one. And even if they lose this case, they’re going to feel compelled to bring on another case just to justify their existence..And then another…ad nauseum.

          After all, if you are an enforcer who can’t be bothered to go after two major and blatant ponzi schemes–after being tipped off, no less!!!–and you can’t do anything after the banks have looted to the tunes of trillonis of dollars over a decade, what the hell are you going to justify your budget on?

          If Goldman had any F!cking common sense, they’d roll over and beg for forgiveness now. Relying on some technical and obtuse comments or some stupid charitable donation or a PR firm to change their image at this point is just going to rile the public up further at this point, and before long, no politician is going to be dumb enough to even try to help them.

  4. UnnaturalIntelligence

    Machiavelli was very specific about this: it is better to be feared than loved, but above all, the prince must avoid being hated by the people.

    GS could not control its vanity and has crossed that threshold. It is only a matter of time.

    1. Cynthia

      Despite your unnaturalness, you are naturally right about this. GS could not control its vanity and has crossed the Machiavellian threshold between fear and hate, so it’s only a matter of time before GS faces the proverbial guillotine. And even though I’m not into blood and gore, by any stretch, watching the beheading of GS will be a glorious sight for me.

      1. UnnaturalIntelligence

        What’s great is that there are numerous, recent examples of companies that believed they were above this most fundamental law.

        From tech, we had the Evil Empires of IBM and Microsoft, both which eventually withered. I never thought it would happen, but here we are, 2010, and Microsoft is the dinosaur that IBM once was.

        Scott McNealy, former Sun CEO, speaking about Microsoft during the heights of its monopolistic abuses: “If it’s mankind versus X, I’ll bet on mankind every time.”

        1. enoriverbend

          Scott uttered that classic phrase (““If it’s mankind versus X, I’ll bet on mankind every time.””) on December 6, 2005.

          Since that time, Sun lost almost half its value per share before selling out to Oracle. Microsoft gained more than 10% over the same time.

          Which one was the dinosaur again? Which “eventually withered”?

          1. UnnaturalIntelligence

            This was not about Sun vs. Microsoft, this was about _everyone_ vs. Microsoft. And everyone is winning, slowly.

            Microsoft was an untouchable monopoly — now they are woefully behind Google and Apple is completing the pincer. They will not file for Chapter 11 any time soon, but they are not what they used to be.

  5. Kevin de Bruxelles

    The only conclusion that makes sense given the corruption of both political parties is that Goldman were invited in to help design the public “sanctions” they would have to take in order to help quell the rising anger. The Scooter Libby model and with lots of loony liberals dreaming of a white Fitzmas would seem to be the precedent here. The troubles were concentrated as much as possible into one “lone nut” (and better yet a French one at that) who was located in GS’ London office.

    There is no reason for anyone to publicly start hailing this as some sort of victory. While no one knows how this will turn out it, it will surely not hurt to keep rattling the banksta cage and demand more and more heads to roll. In other words, until proven otherwise, Bread and Circuses or Kabuki should be the operating assumptions.

  6. LeeAnne

    I agree with you -being hated could lead to disqualifying you from public office among other things if you’ve been employed by Goldman Sachs for instance…

    It was only recently that Goldman Sachs threatened to take their business and move out of the UK. Gordon Brown couldn’t have liked that kind of bullying very much. In this morning’s WSJ

    Brown, Merkel call on watchdogs to probe alleged fraud by Goldman Sachs
    Marcus Walker, David Enrich April 19, 2010 10:47AM here

    “There is a moral bankruptcy reflected in what I am reading about and hearing about,” Mr Brown told the BBC’s Andrew Marr show.”

    “Mr Brown’s statement came after a spokesman for German Chancellor Angela Merkel said Germany’s financial regulator, Bafin, would ask the SEC for information as a possible prelude to legal action in Germany.”

    Its the racket in counterfeit money created by issuing stock and stock options that’s the elephant in the room. That whole system steals from the public. Corporate executives take excessive profits while shareholders gamble on future returns.

    Look at what happened to the long term shareholders of GE staying put for their advisors and investment managers while GE executives went into the super leveraged investment banking business and took their money out on the way down. The US research and manufacturing giant turned into a bank that fleeced widows and orphans along with everyone else who had reason to expect they were in a conservation AAA stock. Lots of propaganda in all of this against the public. There never was a ‘blue chip’ stock. All stocks have always been a gamble.

  7. Sid Finster

    I see it as throwing the commie peasants a crumb, a fall guy to placate their anger and then back to business as usual.

  8. NYShooter

    Hasn’t anyone here read the SEC’s statement that this is “only the beginning.”

    My Lord, even the U.S. Government has to walk slowly & cautiously when taking on a grotesquely rich, morbidly powerful, and vengefully connected behemoth like Goldman Sachs.

    We’re a little quick with the dismissive comments here, doncha think?; I’m old enough to recall, quite vividly, that little “third rate burglary” 40 years ago.

  9. Toby

    Typically I’m not a fan of cynicism, but see it as justified here. These are indeed early days as NYShooter rightly points out, and yet the depth of regulatory capture, the bought-and-paid for nature of policy making from the republocrat party, the MSM Shill-machine in full spin- and propaganda-mode, strongly suggest a perennial reluctance to believe what TPTB say they are doing is in fact what they are doing, is the correct stance. Non-stop cage-rattling is required. The corruption goes all the way to the top and is systemic. Until that is addressed we have to remain cynical.

    1. NYShooter

      Certainly, one would agree with each of your points. but none are new. Regulatory capture, and more broadly, intellectual capture, are well known entities.

      What “may” be new is the S.E.C’s possibly mutating into some sort of actual enforcement body, albeit limited, and yet, rather exciting, in this case.

      Let’s cut’em some slack and say “skeptical” rather than cynical. (on a short leash, of course)

  10. FSB #1

    What I find to be amazing is that after all these institutions found out about the sordid nature of the trades, not one of them stepped forward to take on GS. Despite GS’s protestations to the contrary, it’s pretty well known that they crap on their institutional clients for their own proprietary book. Why people still use them as a broker/dealer is beyond me.

  11. aet

    The wheels of justice grind finely, and they grind slow.

    But grind they do.

    IMHO one ought to take great care not to get some stray piece of apparel caught up in them.

    From what I’ve seen, it can be very difficult – and expensive – to extract oneself therefrom, therefafter.

  12. Bruer

    The SEC indicted a younger person, he was approximately 26 at the time, is now approximately 31.

    This can be good or bad. First the good:

    If the SEC was independent and have a heart to go after executives in large banks, to serve as a deterrent (big if), this indictment of a young person would be a good thing, as they could leverage this suit against a young guy to get him to provide testimony and evidence that higher ups gave him the mentoring example and told him what to do, and he being a younger person, would have some defense in being the new guy, somewhat eager to please and possibly a slight bit gullible; the naive person in the deal room, with about 15 to 40 other execs setting him up and a few key ones guiding him regularly off record, and they (being mid-level execs), reporting and answering to others involved (upper level oversight).

    A 26 year old does not act independently in high financial markets. They all have mentors and people they have to run every important decision by, and they are constantly talking upward when they have a new idea and when they are involved in promoting/brokering/selling the things higher ups want them to sell.

    In this situation, you have what are “third-party actors” (executives performing behind the office of a younger member of the firm). Acting behind or through another’s actions, does NOT provide a defense for fraud. It can help in defense of the new guy, for the younger member is involved in a mentor-type relationship. And mentoring was big and growing in 2003-2007.

    Sometimes what happens in a large brokerage house* the higher ups may meet with hedge fund managers or keep the lines of communication open, and sometimes, recommend a younger or new guy, to use. This is often discussed as way to get the new guy some experience, while also providing a perk for graft and questionable work product, which mid and upper level execs might “dream up” in order to make their quota and then some. In these situations, the new guy is just doing what he is told and he is given encouragement with no written promises that he will be taken care of. The higher ups speak in general terms and create an environment of introducing the new guy to wealthy people that they would want to serve. This is a prestige-con, involving the peddling of influence off record, where upper management create an environment of pressure, to get the new guy to do things he would NOT normally do on their own, and only do, because they are trying to please their bosses and also, the wealthy client in a side-market or business like a hedge fund. When ethics are raise, the higher ups pad the troubled new guy, by saying something like, “would not want you to disappoint one our firms best clients. …That wealthy client has been doing business with us for 22 years and his father was doing business with us 57 years ago and his father… The relationship goes back 85 years since the founding of this firm…” bla, bla, bla .. In other words, if this client is asking you to take the good quality Wells Fargo loans out of this bundle, and lie to your buyers, or break any rules of law along the way, then you better do it, because we are hear to make money and not pamper your ethically troubled mind … If you don’t want to work with this client (and sell your soul to the devil) there are several other new hires who will.

    Sometimes it is this “introduction” to a wealthy client, mixed with a prestige/influence con-game, that higher ups use to turn tadpoles into poisonous toads. [The kind that spew poison. Spit in other people’s eye, or otherwise cause warts. See Long-fingered Stream Toad and Pigmy False Toad, (genus) Ansonia longidigita and Ansonia malayana. http://en.wikipedia.org/wiki/Ansonia ]

    There are two ways for the a good prosecutor to deal with toads and poisonous broker-dealers. One way (as with Fabrice Tourre) is get him to explain how he was misguided by higher ups and that they told him or pressured him, to do fraud (to deceive buyers). If a younger person was coerced or guided unethically (having less experience as their mentors), to do things they would not do on their own, it adds an element of substantialness to the fraud imposed on buyers, and opens the door for criminal indictments.

    This is one instance where bad ethical behavior can be morally wrong (corrupting younger members of a firm), such that it lends to the substantial criminal indictment. There are many levels of nuance in such a legal strategy, but there is this need to observe some hierarchy. Young members of a firm do not always act on their own to do evil. The name itself, “Fabrice Tourre,” with Paulson, could be a tip of the iceberg type of showing. The “first crack” in the armor as the author of this thread provides. What the public sees is small fry, but what the corporations in the fraud see, are key lynch pins, leading to their broader (and more significant, immoral) fraud.

    If two or three more small fry are indicted with other CDO or derivatives fraud, this could signal the nets are in place. By this I mean to note the strategy of a good prosecutor. A good prosecutor would not name a small fry in a suit, without first securing warrants to surveillance of the upper executives over the small fry.

    It is a flushing strategy, but this again, is if the SEC is doing a good work as a prosecutor. It still stands to reason, we must wait to see what the SEC is going to do.

    As for indicting Tourre, they need to apply pressure to get him to plea bargain. Tourre was principally responsible for ABACUS 2007-AC1. Tourre devised the transaction, prepared the marketing materials and communicated directly with investors. Tourre knew of Paulson’s undisclosed short interest and its role in the collateral selection process. Tourre also misled ACA into believing that Paulson invested approximately $200 million in the equity of ABACUS 2007-AC1 (a long position) and, accordingly, that Paulson’s interests in the collateral section process were aligned with ACA’s when in reality Paulson’s interests were sharply conflicting. ACA is “ACA Management LLC” a third-party with experience analyzing credit risk in subprime residential mortgage-backed securities (“RMBS”).

    If they can pressure Tourre, they can possibly get more information about “The Goldman Sachs MCC,” which included senior-level management of GS&Co, who (page 12, paragraph 40) approved ABACUS 2007-AC1 near March 12, 2007. GS&Co expected to earn between $15-and-$20 million for structuring and marketing ABACUS 2007-AC1. Senior level management take their bonus off such “structuring and marketing” approved by the firm. They are suppose to be at the helm of oversight, asking questions about the origin of the product, to assure quality in the tradition of a prestigious firm (there is also high standard of conduct that commensurate with high fee structure and rate of pay), and asking about the marketing materials, the prospective buyers, and sometimes will also recommend some other buyers. It is all part of the upper level management executives role with the firm. Upper management cannot say, “I was dumb” to what this young (26-28 year old) member of the firm was doing, because it is upper management who is tasked with oversight of younger members, and VP’s in just such circumstances as ABACUS 2007-AC1. Upper management can’t say as their defense, that he had the keys to the liquor cabinet, and was not given any oversight. If was just liquor, yes they could, but it was not liquor, it was actually mortgaged backed security instruments. As a parent may be a hawk to a teenager who is starting to learn about alcohol, so is the senior executive suppose to watch the younger members of the firm. They not only task middle management to look over them, but they often check in on and review that person’s work (because their bonus pay is tied to providing oversight of middle-management and new VPs of the firm.

    The reason to get more information about Goldman Sachs MCC, is to also get more information about the deals ACA did in their association with GS.

    ABACUS 2007-AC1 is one of many, many CDOs. From my perspective, this case shows how subprime was sold with A and AA and AAA ratings (How it was done: How clients were duped. How it was approved by senior level managers, how similar instruments were brokered by others in the firm). If managed correctly, this will become the blueprint signature case, showing how younger members at prestigious firms like Goldman Sachs, JPMorgan and Morgan Stanley, went wrong and where they became corrupted in relationships with wealthy hedge-fund managers or senior executives providing a direct or indirect mentoring relationship.

    How younger members were used by large firms, often gives testimony and evidence of how the senior management team acts and thinks about its clients or about the communities and nation in which they are acting, and operating. A model of dereliction at senior executive levels, will not look good for a firm like Goldman Sachs.

    How are the younger associates and VPs mentored? Is it a good relationship or is it a damning one? Are they really given independence and no oversight with all that money? No. They are sometimes harnessed like donkeys having a mind, but not really using to be stubborn in the right places.

    This case if managed correctly is about the corruption of youth/the corruption of talented and bright young minds. How they were given both guidance and incentives, before and during the time, they were eventually guided and handled and shepharded by they tender touch of Goldman’s senior tier – into doing evil deeds and bad faith work product.

    Now for the bad news:)

    1. Bruer

      Admin: there is no edit feature, can you please delete this post and the post above, I have cleaned up my post and edit for third post to follow.

      thank you.

  13. Bradford Tomkus

    I always enjoy reading intelligent articles by an individual who is definately knowledgeable on their chosen subject. I’ll be following this thread with much interest. Keep up the good work, I will be back

  14. windcatcher

    An “octopus wrapped around the face of humanity” as one journalist put it; the New World Banking Order has arrived. In 2009 speculative, uncontrolled derivatives were the Worlds largest market at an estimated 600 Trillion. The Worlds total economic output was an estimated 58.07 Trillion and the total World bond market was an estimated 82.2 Trillion. Yet, there is no “crime” that the bankers can be charged with as they bankrupt citizens and Nations into the New World Order?
    The appropriate criminal charge should be Treason to the American People and our Democratic Republic and Constitution. The members of the Trilateral Commission and the Bilderberg Group in government and banking who conspired to overthrow our soverenity as an independent nation, who conspired to bankrupt our Treasury with three unjust Wars and multinational corporate “rolling” bailouts, conspired to control mass media “free Press” propaganda, conspired and manipulated “financial crisis” for their own gain, conspired to “relocate” American manufacturing/industry and technology, conspired to offshore “American Income Tax”, and who have conspired to enslave American citizens with National debt (about $64,000 per citizen) and personal debt. Deserve the death sentence by firing squad for Treason.
    Obama, your New World Order is Totalitarian and we Patriots, American free citizens, will fight for our Democracy, Independence and Freedom.

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