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Guest Post: Goldman Sacked?

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Washington’s Blog

The Goldman fraud charge is obviously huge news.

The Connecticut Attorney general wants to file criminal charges. And New York might not be far behind.

Germany and other European nations and companies might also sue.

ProPublica points out that other major banks did the same thing as Goldman. Yves Smith points to one example:

The Wall Street Journal reports that Dutch bank Rabobank has filed a suit alleging that Merrill Lynch engaged in the same type of behavior as Goldman did with John Paulson, namely, devising a CDO on behalf of a hedge fund who was using it to take a short position, and not disclosing that fact to investors in the deal.

Shahien Nasiripour writes:

Securities fraud charges against Goldman Sachs are just the beginning as federal regulators and investigators comb through the wreckage of a fraud-induced recession, caused by a pervasive and systemic culture of deceit at Wall Street’s biggest firms, say Wall Street analysts.

Simon Johnson thinks “our Pecora moment” – where the powers-that-be are finally confronted, and the tide starts to turn – has arrived.

Are the prosecutions finally starting? Is the dam finally breaking? Has Goldman really been sacked?

Maybe.

But Tyler Durden thinks it’s all bread and circuses.

And as Mish points out (edited slightly for readability):

Here is a list of some of the things the SEC has ignored.

Geithner’s Illegal Money-Laundering Scheme Exposed; Harry Markopolos Says “Don’t Trust Your Government”

77 Fraud, Money Laundering, Insider Trading, and Tax Evasion Investigations Underway Regarding TARP

Secret Deals Involving No One; AIG Coverup Conspiracy Unravels

Questions Geithner Cannot Escape

Time To Indict Geithner For Securities Fraud

Bernanke Guilty of Coercion and Market Manipulation

Paulson Admits Coercion; Where are the Indictments?

Bernanke Suffers From Selective Memory Loss; Paulson Calls Bank of America “Turd in the Punchbowl”

Let the Criminal Indictments Begin: Paulson, Bernanke, Lewis***

We need a complete ethics overhaul but we will not see it until people are thrown into prison and corporations have to choose which business they want to be in as opposed to the current state of affairs where anything for a profit is acceptable.

  • Firms give advice based on how much profit the firms will make on it
  • Firms trade their own books to the detriment of clients
  • Firms make upgrades and downgrades after they take positions themselves
  • Firms front-run trades
  • Firms engage in dark pools
  • Firms deemed too big to fail take advantage by upping leverage
  • Firms like Goldman Sachs (which is nothing more than a giant hedge fund with no ethics) have access to Fed funds at low interest rates to do whatever the hell they please

Is someone finally standing up to the vampire squids of the world?

Or is this yet another p.r. stunt, where deals will be cut, some tens or hundreds of millions of dollars worth of fines imposed (a slap on the wrist for a behemoth like Goldman), a few low-level patsies will be convicted, and business as usual will continue?

Only time will tell …

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47 comments

  1. VenusVictrix

    It’s a pageant –

    Consider that for months we’ve had to listen to Goldman crow about how brilliant they were to foresee the housing crash, and thus negotiate all those CDSs with AIG-FP back in 2005 (before AIG supposedly quit writing CDSs on subprime collateral).

    Yet somehow the SEC managed to find the ONE (?) deal that AIG wasn’t involved in?

    Goldman made billions on their strategy betting against the housing market, but the SEC found the ONE deal that they say they lost money on?

    This is a stunt. They need to go after the deals that the public funded via AIG.

    1. rootless_e

      Goldman is now in a world of hurt – especially after the revelation that they forgot to disclose the SEC notice in their annual report.

      Blankfein will be gone in 2weeks outside.

      High probability that Cuomo will move against them – I am confident that GS never bothered to understand the implications of becoming a bank.

  2. Doc Holiday

    This is all about politics and healthcare strategy; see my post in previous GE story.

    Thinking squid will be hunted down and killed off, is a cute concept, but this is not going beyond a firm scolding by SEC. If anything, this will be a buying opportunity by teacher pension fund managers that are golfing this weekend with Goldman staff….

  3. rootless_e

    “∙ Geithner’s Illegal Money-Laundering Scheme Exposed; Harry Markopolos Says “Don’t Trust Your Government””

    The “illegal scheme” described in that story is Geithner’s inventive method of keeping the government from being totally screwed on the AIG bailout.

    The problem with your whole analytical effort here is that you are so desperate to blame everything on Geithner that you sink into Bircher conspiracy theory and basically unhinged stuff like Markopolos’s paranoid fantasies.

  4. ab initio

    I think many including me are rather cynical and believe this just kabuki. The Wall Street oligarchy owns both parties and consequently Congress and the Presidency. I heard an interview where it was noted that Wall Street spends $1 million each day lobbying Congress. The revolving door means all the regulatory agencies are actually run by Wall Street. No meaningful reform will be passed but we will get a lot of theater and the so called reform bill will be toothless.

    When Bob Rubin, Hank Paulson, Summers, Geithner and Bernanke are indicted for racketeering by the Attorney General then we know we actually have returned to a country with rule of law. Until then more circuses for the sheeple getting shorn every day.

      1. Claire

        “except that they OWN Obama”

        I disagree–they RENTED Obama, and the agreement was only good so long as both sides felt they had no choice but to honor the agreement. Obama likely looked at his poll numbers, looked at the poll numbers for that sham of a health insurance bill, and then looked at the “I hate banks and especially Goldman” numbers, and decided to backtrack (at least a little bit). Whatever his faults, Obama isn’t a complete idiot–I’m sure he could figure out that no amount of bank lobbyist money was going to help him in November (2010 or 2012) if he continued on his current path.

  5. Doc Holiday

    The fact is, derivatives need to be regulated like narcotics and Goldman, et al need to be dealt with like drug-dealers or financial terrorist organizations that are a threat to “our” society — the derivatives and deals they involve themselves in are forms of corruption and as a society, “we’ should not tolerate behavior that is destructive! Obama needs to fight them, like they are nazis!

    Amen and out….

  6. Doc Holiday Rampages

    And another OT rant..

    Goldman thugs would like to pontificate that there are two sides to deal and what they do is not illegal — that same argument can be made in countries where dictators rule, where communism dwells, where nazis were in control, where drug overlords run governments — where corruption is the rule and where chaos reigns. If Goldman wants to play drug-dealer mafia and suggest that they have the right to sell derivatives like heroin, coke or meth, or a synthetic derivative cocktail that results in destructive consequences — then let them stand up as the pigs they are and let Obama choose a side!

    1. esb

      Obama chose his side in February 2009, some say earlier.

      He stands with the oligarchs, because the tax-evading SoT convinced him that if they go down we all go with them.

      They will go down in the next bust iteration of this boom bust con game (probably in 2013) and though things will be rough as hell for the rest of us for a few years after that we will be far better off for it.

  7. Vinny

    But wait, wait… weren’t they doing God’s work?…lol

    You know, the Good Book says, “Pride goeth before destruction, and a haughty spirit before a fall”.

    Vinny (getting comfortable in my easy chair in front of my plasma screen, so I can watch every gory detail of GS’ fall…lol)

  8. BDBlue

    I thought GS was named in a civil suit by the SEC and not indicted (which is a criminal charge), did I miss something?

  9. ronald

    innovative financial products have always been a proxy for back door taxpayer bailouts and looting by the financial elites. With the destruction of RE collateral value little of value remains to be looted and as the door closes on make believe financial products the titans of Wall Street can only hope that their gated communities are really safe from main street anger.

  10. craazyman

    yes children, only weeks ago I was meditating in the garden and saw in visions that the V. Squid would be puked up like bad milk, and there are now such signs in the heavens, as was foretold. A great disturbance, like the rushing of wings of a thousand birds, a thousand crows with black wings, the great spirit of the divine dragon waketh as if from a slumber. The upper reaches of the nouousphere are in motion, the superego cracks like thunder and fizzures into two halves, there is surprise, a sudden gust of wind takes the thought seed from its bud and throws it into the sky of the universal mind.

    -Lakesh V. Supraanatan, Palm Reader
    Disciple of the Transcendent Buddah and Gold Day Trader
    Holy Temple of the Chakras
    Pranduhapabad, South Dakota

    1. pearlw

      These were synthetic CDOs…the “stuff” in the CDOs were the credit default swaps. So essentially investors buy interest in the trusts…the trusts write protection on the mortgage pools…and then someone on the other side buys protection.

      Since these were synthetic CDOs, ALL INVESTORS WOULD KNOW WITHOUT A DOUBT that there was someone on the other side betting against these pools. The issue in the Goldman case is whether they should have disclosed that Paulson had a hand in selecting which mortgage pools. THE FACT THAT SOMEONE WAS BETTING AGAINST THE POOLS WAS NEVER AN ISSUE…IT WAS REQUIRED TO EVEN CREATE A SYNTHETIC CDO.

        1. rootless_e

          This is in the sales deck for the Paulson deal – this is part of what was disclosed to the customer (mark)
          ——————————————————

          Goldman Sachs will enter into a CDS with the Issuer to buy protection on Reference Portfolio losses
          related to the Class A through Class D Notes.

          The Collateral Securities and/or Eligible Investments will be available to make payments to
          Goldman Sachs in the case of writedowns or other Credit Events occurring on the Reference
          Portfolio, which in each case incur writedowns on the Class A through Class D Notes

          1. Blurtman

            Thanks rootless_e,

            Who was the counterparty(s) to GS in their CDS position(s)? Sorry if this is obvious.

          2. rootless_e

            The counter-party was the issuer- ACA andthen the hapless IKB.
            That’s what “enter into a CDS with the issuer” means. The investors got paid by the GS side of the CDS – that’s where the money came from for the higher returns. In exchange GS (and Paulson who they apparently fronted for) got to keep the deposits if the reference securities tanked – which they did. As much as GS treated their customer like a chump, the customer was a chump and their managers should have been indicted for breach of fiduciary duty – in fact the head of the bank is on trial for exactly that.

        2. jake chase

          There is so much confusion about this deal. A CDO is a credit default swap. Essentially, it is an insurance policy on a bundle of debt, in this case mortgage debt. The protection buyer (Paulson) pays a premium. The protection seller (IKA) may simply take on a contingent off balance sheet liability, or it may put up cash in an SIV (which sits there until a ‘triggering event’). The protection buyer becomes entitled to withdraw cash from the SIV (or to collateral if there is no SIV) when specified adverse events happen to mortgages included in the bundle. Notice that nobody involved owns any of the mortgages which are being insured. They are simply out there in the ether, owned by unrelated third parties utterly unaware of the existence of this deal. That is what makes the deal synthetic. The protection buyer isn’t insuring anything he owns, he is gambling on the future of the mortgage pool. Of course, he expects the pool to deteriorate, since he would have no other reason for buying the protection.

          What motivates the protection seller (IKA)? The size of the premium. Typically, this so called investor looks at the rating on the ‘security’ (actually an insurance policy) and tells himself ‘this thing is mispriced and I will make money on it.’ What basis does the investor have for thinking this? NONE. It is impossible for anybody to know what is going to happen to this bundle of mortgages, and all attempts to make money this way are no more sensible than bets on sporting events. Of course, the difference is that the gamblers in the CDS market are using other people’s money. If they win they get bonuses; if they lose the bank goes balls up.

          That this market even exists is an absurdity and a crime against the real economy, which is now saddled with several hundred trillion of these proposition bets. Nobody knows what other exposure his counterparty may have to this game, which makes every published financial statement utterly unreliable. They are the reason that a relatively small increase in mortgage foreclosures brought the entire credit market to the brink of collapse, and nothing whatsoever has been done to prevent this happening again as a result (for example) of a default by Greece or Portugal or some industrial or commercial behemoth, since there is monumental CDS gambling on all of these credits and God only knows what else.

          Is the protection buyer’s active participation in creating the mortgage pool a material fact the non-disclosure of which amounts to ‘securities fraud’? After 35 years experience in securities law I would say ‘perhaps’, but what this case looks like to me is political grandstanding leading up to a wrist slap and a whitewash of a ten or fifteen year organized crime spree.

        3. pearlw

          Essentially this is the chain

          IKB buys interest in the trust (CDO).

          The trust gets it income by writing protection on the mortgage pools. Goldman Sachs is the buyer of the protection (this is not hidden and is the same as any synthetic CDO.

          Goldman hedges its position by selling protection to Paulson or whoever wishes to take other side.

          GS makes its money through differences in what it pays and sell the protection for.

          Nothing above is fraudulent or anything different than what the buyers of the CDO expect. Someone had to have paid for porotection in order for the trust to generate income to pay the interest on the CDO. The issue here is whether GS had to disclose that the Paulson had helped select which mortgage pools were references in the CDO and whether they misrepresented it.

  11. Washington Carrasco

    The international aspect of this case is proving helpful. One wonders how many other bundled asset schemes may now be reviewed and end up in court.

    And pearlyw, cool it with the all caps. We can hear you.

  12. Curmudgeon

    Expect the SEC’s case to go like the antitrust case against Microsoft: evaporated in a puff of well-placed campaign cash. GS is too big to fail and too big to regulate.

  13. Tim

    You can not discount Iceland.

    1. Banks blew up Iceland.
    2. Iceland’s Volcano is now shitting on Europe and the world.
    3. Next, passing the Icelandic Modern Media Initiative to give all whistle blowers a place to work from.

    Finally…. where is the campaign for real financial reform similar to http://www.FixCongressFirst.org ?

  14. MichaelC

    Re Wells notices:

    Does anyone know if a listing of Wells notices issued is published by the SEC?

    If firms receiving the notices are supposed to disclose receipt and don’t (GS apparently), what is the penalty?

  15. Fair Economist

    This is probably a political move on the part of the SEC, based on how this is going after a very particular deal and focusing on a particular VP (like he was making the real decision to push 10′s of billions in garbage). I’d speculate the goal is to force GS to submit to the financial reform packer. But, there are many other players involved. The state AGs and the foreign countries, and even many junior prosecutors in the Administration, are not party to that political stratagem. This could easily get far out of hand.

  16. Doc Holiday

    Look yonder at this derivative framework for goldman* and the nazi gang on wall street. This is exactly how goldman/wall street and the derivative mess needs to be dealt with starting Monday morning ….. after yah shitcan FASB and SEC …. well, then we have congress, fbi, doj, ftc, and it’s just plain stupid to list all the agencies that are involved in this … I guess it is easier to start doing homework to see if there are any agencies that are not corrupt or involved in this … maybe start with something obvious like Elizabeth Warren and the Consumer Financial Protection Agency, but beyond that all we seem to have is bullshit — like the newest farce called fcic….

    > Just substitute derivative/casino chips for narcotics (below):

    Single Convention on Narcotic Drugs
    http://en.wikipedia.org/wiki/Single_Convention_on_Narcotic_Drugs

    The Single Convention on Narcotic Drugs is an international treaty to prohibit production and supply of specific (nominally narcotic) drugs and of drugs with similar effects except under licence for specific purposes, such as medical treatment and research. As noted below, its major effects included updating the Paris Convention of 13 July 1931 to include the vast number of synthetic opioids invented in the intervening 30 years and a mechanism for more easily including new one.

    Since the Single Convention is not self-executing, Parties must pass laws to carry out its provisions. The United Nations Office on Drugs and Crime works with countries’ legislatures to ensure compliance. As a result, most of the national drug statutes in the UNODC’s legal library share a high degree of conformity with the Single Convention and its supplementary treaties, the 1971 Convention on Psychotropic Substances and the 1988 United Nations Convention Against Illicit Traffic in Narcotic Drugs and Psychotropic Substances.

    The Article also provides for extradition of drug offenders, although a Party has a right to refuse to extradite a suspect if “competent authorities consider that the offense is not sufficiently serious.”

    * The author has decided to stop capitalizing names of terrorist related organizations like goldman and wall street and a very long list of co-conspirators like moody’s, fitch, sandp and so on and so on ….

  17. lessismore

    I speculate that we see progress because Wall Street, Goldman especially, has pissed off the Eurocrats, big time.

  18. sam hamster

    One will be made the fall guy. Promotions will be given to everyone else.

    Does anyone really believe that accountability has suddenly appeared in America?

    The last exciting story concerned confronting China on its currency peg. Where did that go?

    Things peter out. Stories amount to nothing. Only natural disasters can be trusted to be genuine.

  19. Thomasina Jefferson

    Not sure that GS being sued by the SEC – remember its a civil suit – bears much significance. It could be significant depending on how the case is handeled.
    The worst thing that could happen is if they were cleared. I remain skeptical, but am happy to be surprised.

    However, even if GS is sacked, nothing really changes. Much more is needed to fix this mess.

  20. Hugh

    This case by itself is nothing. But its consequences could be far reaching, even shattering. It is a civil suit launched by a largely toothless regulator. Even so it startled a Wall Street culture used to acting with complete impunity. Will there be a federal criminal indictment? Would the Obama DOJ risk one? It would have a real potential for bursting the the very bubbles in stocks and commodities that the Administration has been so carefully nurturing. Without the massive figleaves of those bubbles, the nasty state of the underlying fundamentals would have nothing to hide them. Not exactly what Obama wants in an election year. But once begun can the process be stopped or diverted? We are already hearing about possible indictments in state courts and private suits from companies who suffered losses because of these kinds of activities. If the aura is not gone, it may be dissipating. I have no idea why the clients of the banksters would think for a minute that the banks would not and haven’t already screwed them over. Goldman and the other banks’ big bonuses showed that they never hesitated to stick it to their investors by siphoning a huge percentage of profits to reward themselves. But the fiction that GS and the other wheeler dealers of Wall Street didn’t do this to their clients is now impossible to maintain. This is where the real impact will likely be. Believe me I think a lot of these clients, big funds and their managers, would just as soon continue in this con game. Afterall fraud has been everywhere and in so very, very many deals, yet they stayed in and worked with the banksters anyhow. But how can they now? Their own positions have become problematic. The fraud is no longer a hypothetical discussed by bloggers and other malcontents. It is official and on the table. This means their necks are now on the line. Blowing off their fiduciary trust just became a lot harder. In fact, they may pile on simply to redirect attention away from their own action, i.e. their losses weren’t their fault but the fault of those nefarious and fraudulent banksters. This is another way the current bubbles could burst. And that is a point I have been making for probably 6 months. The stock bubble and the related one in commodities are mature. The initial upside spurt has been over for months. The cracks have been forming for some time. They are ready to go. It shows how shakey the markets are that we look at each of these exogenous events and ask ourselves, “Will this be the one?” In a fundamentally sound economy, the question would not even arise.

  21. kensey

    Ok then what of all the posts here and on other blogs about how the administration was “captive” to the financial industry?? Is that no longer true now that “our Pecora moment” has arrived?

    I mean come on.

  22. kssong

    a short prayer.

    lord,
    you are my shepherd.
    you lead us to your holy house
    they pretend to be our shepherd.
    and lead us to the slaughterhouse.
    …still with our bended knees they came to your house and said with forked tongue,they are doing your work.
    lord,don’t be conned by them like us.
    amen

  23. Jefferson

    What we are witnessing with the SEC suit against Goldman is the beginning of a long and vicious campaign by the globalists against Wall Street management. The knives are coming out. The corrupt and greedy bank executives at the money center banks will be taken to the woodshed in order to justify instituting a slew of regulatory reforms eventually resulting in an international monetary order based on a single global currency run by technocrats in Basel under the auspices of the G20. Said good night to national sovereignty.

    1. David

      I wouldn’t describe those banks as guardians of national sovereignty. I used to work in one, and it explicitly considered itself an international institution. Explicitly not a US institution, even though it was incorporated here.

      1. Jefferson

        I never asserted the money center banks were guardians of national sovereignty. I argue simply that the misdeeds of the executive management of these banks will justify the globalists instituting an international regulatory regime utilizing SDRs as a single global currency.

      2. Jefferson

        “…[T]he powers of financial capitalism had another far-reaching aim, nothing less than to create a world system of financial control in private hands able to dominate the political system of each country and the economy of the world as a whole. This system was to be controlled in a feudalist fashion by the central banks of the world acting in concert by secret agreements arrived at in frequent private meetings and conferences. The
        apex of the system was to be the Bank for International Settlements in Basle, Switzerland, a private bank owned and controlled by the world’s central banks which were themselves private corporations….

        Carroll Quigley, Tragedy of Hope pub. 1966
        Professor, Georgetown’s School of Foreign
        Service

  24. Jefferson

    I guess it depends on how you define Capitalism. I’m not particularly optimistic about potential alternatives.

    1. David

      There’s got to be some sort of capitalism that does not include totally unbounded risktaking, with the taxpayer on the hook for the worst of the losses.

      Like the way it used to be until 10 or 15 years ago, perhaps.

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