Rabobank: Merrill Committed Similar Fraud to Goldman With a Magnetar-Sponsored CDO « naked capitalism

Saturday, April 17, 2010

Rabobank: Merrill Committed Similar Fraud to Goldman With a Magnetar-Sponsored CDO

The Wall Street Journal reports that Dutch bank Rabobank has filed a suit alleging that Merrill Lynch engaged in teh 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 teh deal.

Oddly, the story does not mention that Magnetar was the hedge fund in question, (nor did the Journal report on its involvement in its earlier report on the CDO in question, Norma, back in 2007).

From the Wall Street Journal (hat tip Richard Smith):

Merrill Lynch & Co. engaged in the “same type of fraudulent conduct” that Goldman Sachs Group Inc. was accused of committing by the U.S. Securities & Exchange Commission in a lawsuit on Friday…..lawyers for Cooperatieve Centrale Raiffeisen-Boerenleenbank BA, or Rabobank, said Merrill Lynch committed a similar fraud in the structuring of a $1.5 billion collateralized debt obligation, known as Norma CDO Ltd…

Rabobank sued Merrill Lynch in New York state court last year, alleging it was owed about $45 million in a senior secured loan when the CDO defaulted and was liquidated in 2008.

The Dutch bank claimed Merrill Lynch misrepresented that the CDO was carefully structured investment vehicle when Rabobank made a $57.7 million upfront loan in March 2007.

Rabobank claims the Norma CDO was a “dumping ground” impaired subprime assets and was structured with the help of a prized Merrill Lynch hedge fund client as a bet against the mortgage-backed securities market.

48 Comments:

RueTheDay says:

April 17, 2010 at 7:31 am

Will Tea Party rage now start to target the private companies that caused the financial crisis or will they continue to just mindlessly repeat the Republican talking points they’ve been fed about the free market and continue to erroneously blame the government?

DownSouth says:

April 17, 2010 at 9:29 am

RueTheDay,

The neoliberal package includes both laissez faire and bailouts, laissez faire being the policy which facilitates the accumulation of unmanageable private-sector debt, and bailouts being the means by which this unmanageable private-sector debt becomes public-sector debt.

Another key element of the neoliberal paradigm is the capture of government by the finance industry. Neither laissez faire nor bailouts would be possible, after all, if the populous retained sovereignty.

Now granted, the Tea Baggers (and by the way, polls show a full 1/3 of them claim to be Democrats) get only two-thirds of this equation right. They accurately see the government to be captured by the finance industry, and they accurately see bailouts to be part of the problem. However, they are foolishly and naively blinded to the deleterious consequences of laissez faire. This opens the door to their anti-government absolutism.

But to claim that the government is not captured by the finance industry, or that it did not play a key role in both laissez faire and bailouts, is simply not true.

The question is what to do about it. The Tea Baggers believe the solution is the elimination of government—-nihilism. I, on the other hand, believe the solution is the reform of government, the return of sovereignty to the people.
- RueTheDay says:
  
  April 17, 2010 at 10:02 am
  
  I agree that regulators are in large part captured by the financial industry.
  
  However, let’s not give the Tea Partiers too much credit here. Most are not even smart enough to define “regulatory capture”. Their argument is nowhere near that sophisticated, it’s just the typical libertarian blather about how the government is the root of all problems and letting the free market be free is the universal solution.
  - DownSouth says:
    
    April 17, 2010 at 11:49 am
    
    RueTheDay,
    
    Not just regulators were captured, but lawmakers as well.
    
    The NY Times had a piece yesterday (which featured Yves) and I found Lynn A. Stout’s comment most germane. As she points out:
    
    Under the rules of insurance law, you can only buy fire insurance on a house if you actually own the house in question. Similarly, under the traditional legal rules regulating derivatives trading, the only parties who could use off-exchange derivatives to bet against the Abacus deal would be parties who actually held investments in Abacus.
    
    By eliminating this centuries-old rule in the name of “modernization,” Congress created enormous problems of moral hazard in the off-exchange derivatives market. Imagine, for example, if we allow the unscrupulous to buy fire insurance on other people’s houses; the incidence of arson would rise dramatically.
    http://roomfordebate.blogs.nytimes.com/2010/04/16/what-goldmans-conduct-reveals/?hp
    
    All this makes Kevin Phillips’ comments from a few years ago appear most clairvoyant, when in 2002 he wrote:
    
    The result by 2000 was a Washington in which liberals found themselves muttering about “corruption” that was largely legal behavior—-decision-making lubricated by so-called “soft money” political contributions and resulting in flagrant tax favoritisms, bank bailouts, gutted regulations, and see-no-evil administration of the federal election laws.
    –Kevin Phillips, Wealth and Democracy
    
    It also rings of something Martin Luther King wrote of in his “Letter from Birmingham City Jail”:
    
    We can never forget that everything Hitler did in Germany was “legal” and everything the Hungarian freedom fighters did in Hungary was “illegal.”
    - Jasonbaz says:
      
      April 17, 2010 at 1:03 pm
      
      haha…you are quoting from the New York Times in defense of your arguments related to Finance??? Keep drinking the Kool Aid…and don’t forget to watch The Daily Show on Monday to get your opinions for Tuesday. Sorry…maybe you didn’t understand what I said little sheep…baaaaah, baaaah bahhh, baaaaaaah.
    - attempter says:
      
      April 17, 2010 at 1:59 pm
      
      We can never forget that everything Hitler did in Germany was “legal” and everything the Hungarian freedom fighters did in Hungary was “illegal.”
      
      DownSouth, did you ever read Richard Rubinstein’s The Cunning of History? In it he demonstrates how the Nazis set it up so that technically, legalistically, no crimes were committed in the death camps.
      
      I think about that book often these days.
    - Tim says:
      
      April 17, 2010 at 8:10 pm
      
      @Jason
      
      The Daily Show’s fake news is far more accurate than Faux News.
      
      Just an observation.
- colinc says:
  
  April 17, 2010 at 11:19 am
  
  While your comment, DownSouth, is not overtly incorrect, I’m sure that it is equally applicable to the neocons, the GOP (in general) and the so-called “libertarians.” It should be apparent to anyone possessing even a modicum of neural and synaptic function that Congress no longer represents “we the people” but their own irrational self-interest and is reverential to “we the filthy rich.” Note, I have no objection to anyone acquiring large amounts of money but I absolutely do not abide that acquisition by fraud, deceit, or outright theft… which is now pretty much “the American way.” It is a truly sad state of affairs when our alleged representatives enact “laws” making criminal activities “legal” exclusively for the moneyed interests.
  - DownSouth says:
    
    April 17, 2010 at 12:10 pm
    
    Yep. But for those incapable of independent thought, for those terrified by uncertainty and doubt, or for those wishing to defend the status quo, “the law” always offers a refuge of certitude and faith.
    
    “It’s the law” or “it’s not illegal” are arguments always trotted out to justify immoral or unethical behavior.
    - colinc says:
      
      April 17, 2010 at 5:01 pm
      
      I concur completely. Personally I have long contended that change _is_ the only constant in the universe. Every moment of every life is nearly overwhelmed by “uncertainties” but most prefer to remain blissfully unaware of them. In fact, I doubt there are more than few, but at least one, “certainties” in any given life. Actions, reactions and consequences are merely a matter of pseudo-random, coincidental probabilities, their desirability relegated to perception and perspective.
  - kievite says:
    
    April 17, 2010 at 12:28 pm
    
    While your comment, DownSouth, is not overtly incorrect, I’m sure that it is equally applicable to the neocons, the GOP (in general) and the so-called “libertarians.”
    
    DownSouth comment is not only “overly incorrect”, it’s anti-historic. Government capture by financial oligarchy is the fact that is difficult to disprove. But, at the same time, to lament about government capture in general is naive as from historical point of view governments are always “captured” (capture of the government is the part of the definition of the ruling elite). It’s just dominant faction of ruling elite changes with time.
    
    I would encourage DownSouth to list “non-captured” governments to disprove my critique.
    - DownSouth says:
      
      April 17, 2010 at 1:36 pm
      
      If you’re in search of utopias, I agree you’re certainly not going to find one in this world. But to argue that FDR was equally as captured by the elite as was Coolidge or Hoover, or that Nerva, Trajan, Antoninus Pius or Marcus Aurelius were equally as captured as Caligula, Nero and Domitian, is a distortion of the historical record.
      
      Your comment has the tone of religious conviction or fervor, discussed here by the theologian Reinhold Niebuhr:
      
      Nevertheless the tendency of religion to obscure the shades and shadows of moral life, by painting only the contrast between the white radiance of divine holiness and the darkness of the world, remains a permanent characteristic of the religious life.
      
      This tendency has more than one dubious effect. It certainly tends very readily to a moral, social and political indifferentism. The individual, and more particularly society, are regarded as too involved in the sins of the earth to be capable of salvation in any moral sense. Usually the individual is saved by the grace of God, while society is consigned to the devil; that is, the social problem is declared to be insoluble on any ethical basis. Thus Augustine concludes that the city of this world is “compact of injustice,” that its ruler is the devil, that it was built by Cain and that its peace is secured by strife. That is a very realistic interpretation of the realities of social life. It would stand in wholesome contrast to the sentimentalities and superficial analyses, current in modern religion, were it not marred by a note of defeatism. That note creeps easily into all rigorous religion, with its drift toward dualism. The injustices of society are placed into such sharp contrast with the absolute moral ideal, conceived by the individual conscience, that the religiously sensitized soul is tempted to despair of society. Religion thus degenerates into an asocial quest for the absolute. The soul seeks the perfection of God in either quietistic absorption or ascetic withdrawal from the world; and in each case perfection is defined and experienced in purely individualistic terms.
      –Reinhold Niebuhr, Moral Man & Immoral Society
    - JTFaraday says:
      
      April 17, 2010 at 5:22 pm
      
      “Religion thus degenerates into an asocial quest for the absolute. The soul seeks the perfection of God in either quietistic absorption or ascetic withdrawal from the world; and in each case perfection is defined and experienced in purely individualistic terms.”
      
      Sounds more like liberalism to me, frankly. The invention of personal life.
cas127 says:

April 18, 2010 at 5:32 am

Have any links supporting you allegations that Tea Party supporters support Goldman, et al?

My sense is that most Tea Party supporters are pissed off at Wall Street for causing a disaster and DC for socializing it into a catastrophe.

attempter says:

April 17, 2010 at 7:37 am

Aw, and on the same day as the NYT’s love letter to BofA and how the Merrill deal’s looking good after all. Those meanies.

Just like how the killjoys ruined the stock market’s good time yesterday.

scott says:

April 17, 2010 at 9:10 am

There seem to have been precious few who figured out how to do this CDO on MBS via CDS alphabet soup trade. Magnetar, Paulson, a Texas hedge fund plus the New York one Gretchen Morgensen mentioned in her NYT’s article as well as one individual who appears to have learned the technique from the NY hedgie plus those investment banks that created, sold
and hedged against their own CDO.

Unless there were others, this seems a rather puny cohort in a rather large universe of hedge funds and other large investors who might be expected to figure this trade out. It was no secret that many of the mortgage loans being originated in 2006 and 7 had little chance of ever being repaid. Most any loan officer at Wamu, Countrywide or a dozen other mortgage originators could have told you that.

How come so few figured this trade out or was it that the trade was only offered by a few to a select handful?

RueTheDay says:

April 17, 2010 at 9:23 am

“How come so few figured this trade out or was it that the trade was only offered by a few to a select handful?”

How many other hedge funds got to pick which underlying mortgages to package
- MichaelC says:
  
  April 17, 2010 at 10:29 am
  
  A good place to start if you want to answer that question is the list of Collateral managers in the Pro Publica Magnetar piece.
  
  For example, do a few google searches on the Strategos deals and you’ll see a similar pattern involving Cohen &Co and its captive entities playing roles as equity investor and collateral managers. You’ll also find the head of the programs at Cohen &Co was the former head of CDOs at Merrill. And you’ll find that this programs deals were loaded with Merrill drek. This program looks even seedier than Paulson’s winning trade.
  
  Goldman and Paulson are going to look like choirboys compared to the copycats when we get through with this. Each of the collateral managers listed in the Magnetar deals were doing similar work with other ‘equity’ investors in Magnetar-like programs, and all the major banks were partners.
- Jasonbaz says:
  
  April 17, 2010 at 1:05 pm
  
  Hey Rue—- if you knew what you were talking about you would have known that nobody wanted to make that trade. At the time it would have been considered moronic and a waste of money. Keep parroting your sources though.
barry says:

April 17, 2010 at 9:51 am

Hindsight is wonderful. Any salaried + bonus investment manager payihng a premium to buy CDS on securities rated AAA+ by S&P would most likely have been suspected of being on the take.

Dan Duncan says:

April 17, 2010 at 9:30 am

I am looking for Sarah Conner.

And you should be too…because I guarantee you, THEY sure as hell are looking for her.

The fate of all humanity hangs in the balance.

Think about what’s happening here:

1. Gov’t levies civil fraud charges against GS.

2. The civil fraud charges escalate to criminal fraud.

3. The market remembers Arthur Anderson…and the fact that there mere charge of criminality is a death-blow to a financial entity.

4. There’s a run on GS. Morgan Stanley’s next. C and BofA begin to swirl down the toilet bowl.

Welcome to TBTF 2.0.

Geithner, Bernanke and Summers have emergency meetings to save the financial system from collapse. Timmy sleeps on a cot in his office, while Vanity Fair correspondents chronicle his every bowel movement….

It’s apparent to all involved that Investment Bank as bank holding company doesn’t go far enough. They need something more….

So GS is secretly accorded special Fannie/Freddie GSE status. It is given the mandate to GROW, BABY GROW.

And in 20 years all of them…C, BofA, Fannie, Freddie, MS, The Treasury and the IRS will be folded into the entity known as Robo Sachs.

In the meantime, however, a tiny seed is embedded deep within the 4 to the 10th power of pages of healcare legislation whereby GS and Genentech merge and are funneled billions of R&D money for the creation of a secret NJ lab whereby pods of semi-frozen petri-dishes incubate thousands of future Robo-Sachs analysts….

Half-Man, half-machine. Half-gov’t, half-private. The ultimate profit-seeking, revenue-collecting quasi-government super-human cyborg.

And he will…be back.

Jojo says:

April 17, 2010 at 1:32 pm

Ha! Excellent prognosis doctor.
Sid Finster says:

April 19, 2010 at 5:16 am

A much less dramatic and more likely outcome:

1. SEC files relatively narrow civil fraud charges against Goldman.

2. State Attorneys General jump in with some criminal charges against Goldman and/or some Goldmanites.

3. Goldman settles civil fraud charges; receives slap on wrist in exchange for promise not to get caught in future. Judge approves settlement.

4. PRESS CONFERENCE! SEC issues press release mouthing something akin to “bold statement!” and “strong action!” Goldman exec seen at Midtown watering hole with appropriately trite facial expression.

5. Goldman exec pleads guilty to minor criminal charge. Fine paid.

6. PRESS CONFERENCE! State AGs take chance to grandstand.

7. By now the masses have moved on to some other shiny object. Life goes on.

Paul Tioxon says:

April 17, 2010 at 10:12 am

I take it Dan Duncan is the American Scholar who leaves simple minded Hegelian thesis/ anti-thesis / synthesis in a perpetual cycle of struggling conflict and resolution behind for a more Hollywood metaphor on the never ending battle in life as we know it. I guess deterministic models of history are a real pain to deal with, but they do have a certain explanatory power not seen in British equilibrium models.

Jim says:

April 17, 2010 at 10:24 am

Down South–What type of reform of government would return sovereignty to the people?

Please explain in more detail your linkage between nihilism and the absence of government.

Allan says:

April 17, 2010 at 10:24 am

I’m sorry, did I miss something? Who is Sarah Conner?

Robin says:

April 17, 2010 at 10:39 am

The heroine in “The Terminator” movies.

Allan says:

April 17, 2010 at 11:05 am

My bad!

velobabe says:

April 17, 2010 at 12:22 pm

yeah RABOBANK, go after merrill.

rabobank pro cycling team
has strong team hopes for a
win on home soil in the
Amstel Gold Race on Sunday

Doc Holiday says:

April 17, 2010 at 1:05 pm

Wake up out there; are people really this complacent, dull and naive and lacking in wisdom? This here dog and pony show with Goldman is really about global corporate tax evasion and then using derivatives to leverage ponzi schemes that were totally acceptable during the Bush Coup.

Every agency that had a fiduciary obligation to protect citizens from financial terrorism looked away as they were either bribed, part of collusion, part of conspiracy or the long-shot possibility, that many of these people involved in this fraud, were part of a chain of nepotism, which linked a large group of retarded people that were given jobs as part of Bush’s Ownership Society Ponzi Scheme ….

It doesn’t take the half cousin of a brain surgeon to take 5 seconds to ponder that Goldman is NOT an isolated case and although Goldman was inside the White House calling many of the shots, they were part of a large organized crime network, which continues to be under the radar of Homeland Security and every single person called a Congressman. The corruption did go to the top, just like during Watergate, just like Enron, just like this — and thus, the people in charge that are still involved in criminal activity need to be held accountable — and that includes Bush and Paulson and Cheney and the long string of CEO’s that were involved in these crimes.

Furthermore, Goldman’s fraud with 1 CDO is a pathetic starting point and shows beyond a doubt that the SEC, DOJ, FBI and every agency out there is still as corrupt as they were 10 years ago — there are probably 80,000 of these fraud-filled CDOs that link every bank on wall street to fraud — but Goldman will get a $5000 fine and this bullshit dog and pony show will be over, the day after elections in November

From Wiki see: As of July 2008, Standard & Poor’s (S&P) had downgraded 902 tranches of U.S. residential mortgage backed securities (RMBS) and CDOs of asset-backed securities (ABS) that had been originally rated “triple-A” out of a total of 4,083 tranches originally rated “triple-A;” 466 of those downgrades of “triple-A” securities were to speculative grade ratings. S&P had downgraded a total of 16,381 tranches of U.S. RMBS and CDOs of ABS from all ratings categories out of 31,935 tranches originally rated, over half of all RMBS and CDOs of ABS originally rated by S&P.

Also see: The 2010 midterm election will be held on Tuesday, November 2 with at least 36 of the 100 seats in the Senate being contested and all House seats coming up for election.

Claire says:

April 17, 2010 at 1:17 pm

“Goldman will get a $5000 fine and this bullshit dog and pony show will be over, the day after elections in November”

This is the prevailing view in the blogosphere, but I think it may be incorrect. A quick look at the comments sections of the NC, NYT, Zerohedge, etc suggest that this is really hitting a nerve among the public. The SEC would have a *very* difficult time backing down right now (or even later) without risking enormous backlash.

The BAC issue made them look stupid, but only to people who at least read the blogs (or FT) on a semi-regular basis. This GS issue may have originally been intended to be a bluff, but I don’t think it’s so easy to bottle up the issue with the standard fine/neither admission nor denial of guilt anymore.

This story is quickly swelling well outside of Washington’s (and New York’s) control.

Just an uninformed opinion…
- Tao Jonesing says:
  
  April 17, 2010 at 2:09 pm
  
  As I say below, the maximum penalties that can be imposed on GS are a drop in the bucket for GS. In a single day, GS makes on average 5x the maximum penalty. Thus, assuming that the SEC does not back down and secures the maximum penalty, so what?
  
  If this is the only lawsuit we ever see against GS, then the cynics will have made the right call.
- Doc Holiday says:
  
  April 17, 2010 at 2:58 pm
  
  ” SEC would have a *very* difficult time backing down right now (or even later) without risking enormous backlash.
  
  > Don’t make me laugh so F’ing hard ….. the SEC would be in the limelight and put on the spot …. by who? The SEC would have to face Congress, or the press, wow, what a threat to their credibility, or maybe a blow to their reputation, or maybe this would be yet another example of a non-functioning government agency … oh my God, this could really change the course of how the mafia operates, and oh,oh … what about people that actually call their local congressional hot-number — maybe you can speak to someone and lodge a complaint about how the SEC isn’t doing its job, or that TARP was a joke, or that rewarding the crooks with bigger bonuses is not “ethical” — gimmie a F’ing break … you may be able to use your vote in November to put one mafia bastard in office, versus taking out the old mobster, but to suggest that this Goldman charade is going to amount to anything, is like thinking your home value is going to skyrocket like the Dow and double in a year or less ……. wake up!
Claire says:

April 17, 2010 at 1:19 pm

“Every agency that had a fiduciary obligation to protect citizens from financial terrorism looked away as they were either bribed, part of collusion, part of conspiracy or the long-shot possibility, that many of these people involved in this fraud, were part of a chain of nepotism, which linked a large group of retarded people that were given jobs as part of Bush’s Ownership Society Ponzi Scheme ….”

Another dumb question–could the SEC or any of the other enforcement agencies actually get sued by the public or investors or whoever for negligence? (ie, is it legally possible for this to occur)? I’d assume no, otherwise it would have happened in the madoff scandal, but just checking.
- Tao Jonesing says:
  
  April 17, 2010 at 2:13 pm
  
  No, the SEC and other regulatory agencies cannot be sued for this kind of stuff. There are very few areas in which the federal government has waived its sovereign immunity from lawsuits, and I don’t think what happened here fits within any of them.

Claire says:

April 17, 2010 at 1:11 pm

I’m sorry, but could somebody with a legal or financial background please explain why this fraud allegation against GS is such big news? Given all the shenanigans, this particular allegation seems to be one of the weakest charges (is it?) Also, the SEC is singling out someone who seems to be a very, very small minnow in the entire ecosystem (is he?). Why are they not going after anybody else? Given the charge, what’s the maximum that GS would have to pay back? Are bonuses (for example) also clawed back on anybody involved, or just on the trader charged? Given that every IB was involved in this kind of stuff, why is only Goldman being singled out right now?

Also, is it legal for GS to have just sat on this news for nine months without informing the public? If legal, is it common?

And–just because this keeps surprising me–why would anybody want to actually do business with Goldman? Having decided to do business with *any* IB, why would they agree to opaque transactions, where they know that they always have less information than the counterparty? I really don’t get this.

Finally, even if this suit succeeds, would it actually change business practices in the IBs for practical purposes?

Sorry for all the questions–I’m still a little lost in this forest of mirrors.

Tao Jonesing says:

April 17, 2010 at 2:05 pm

@Claire,

If the SEC’s civil fraud suit against the SEC and the one small fish is all there is, then it shouldn’t be “such big news.” The last page of the SEC’s complaint, which Yves linked to yesterday, specifies that the SEC is seeking (1) that GS and Tourre disgorge all profits they made and (2) that GS and Tourre pay penalties under Section 20(d) of the Securities Act. For GS, the maximum payout looks to be $15-$20 million in disgorged profits plus $500 thousand in penalties. Whoopee. Tourre faces a maximum payout looks to be $100 thousand in penalties, unless he profited somehow from the transaction. Success in this lawsuit cannot force anyone to cover GS’s customers’ $1 billion in losses, nor can it force John Paulson to disgorge the $1 billion he got for shorting the CDO.

I think the reason that the suit is “such big news” is because, politically, it may be the start of a larger set of actions by the government against Wall Street. We’ll see. While I share the hope of Simon Johnson, I also share the cynicism of Doc Holiday.

As to GS sitting on news of the fact that it was being investigated by the SEC (I’m assuming that is what you mean about the nine month lag), if GS had the right risk factors in its 10Q and 10K, it would have been justified in waiting until an actual complaint was filed. Yes, it’s legal. Yes, it’s common. The fact is that the SEC disclosure rules are designed to protect management, not to provide transparency to shareholders.
- Claire says:
  
  April 17, 2010 at 5:08 pm
  
  “Success in this lawsuit cannot force anyone to cover GS’s customers’ $1 billion in losses, nor can it force John Paulson to disgorge the $1 billion he got for shorting the CDO. ”
  
  1. Thanks for the reply.
  2. If the SEC wins and investors lost, say, $5bn total, what is the maximum they could theoretically recover?
  
  Doc–I’m pretty cynical, but what I was trying to get across is that whatever the intentions of politicians and enforcement, there’s enough rage out there that this may become too difficult to ignore or paper over. Though legalisms may satisfy a judge, they will not placate a mob.
  - Tao Jonesing says:
    
    April 17, 2010 at 8:32 pm
    
    I believe that the only thing that can be recovered by investors in the SEC lawsuit is the $15M in fees they paid Goldman Sachs (most likely less the costs of providing the “services”) because that was Goldman’s profit. The investors’ losses are an entirely different thing and not at issue in the lawsuit except in helping select which tier of penalties is available.
Jojo says:

April 17, 2010 at 2:34 pm

This NYT stroy discusses the possible strategy of going after the “little fish” first.
===========
For Goldman Sachs, a Winning Bet Carries a Price
By LOUISE STORY and GRETCHEN MORGENSON
Published: April 17, 2010
http://www.nytimes.com/2010/04/18/business/18goldman.html
- Tao Jonesing says:
  
  April 17, 2010 at 4:42 pm
  
  Based on the behavior of the Obama administration to date, it would be overly optimistic to assume that this penny ante SEC lawsuit against GS is going to expand into a much more comprehensive and criminal investigation of Wall Street. Rolling up the small fish to get the big fish is a time-honored strategy, but doing that with Wall Street would require resolve and follow-through, two things that the Obama administration has yet to show.
  
  By all means, let’s hope that this grows into something meaningful, but until then we should be highly skeptical.
Doc Holiday says:

April 17, 2010 at 3:13 pm

Why would anybody want to actually do business with Goldman?

1. For the same reason people play bingo at retirement homes?

2. They are well connected in the White House and can literally get away with any crime.

3. They have the smartest crooks in the world pretending to be a investment banking and securities firm, while cloaking the reality they they are an organized crime syndicate that launders money and runs drugs, prostitution, porno and crap like that…. while evading taxes and consulting with treasury (See Hank Bazooka Paulson).

4. The only people that lose money at the Goldman Casino are the little people that freak out when the Dow plunges to 6600 and then bounces back to 14K a year later. Don’t be stupid when you go to Vegas, bet on red and stick with it your whole vacation, and if you lose in 2010, try the same strategy next year, or the year after — you can’t lose all the time, just hang in there and enjoy the ride!
- Claire says:
  
  April 17, 2010 at 5:11 pm
  
  “They have the smartest crooks in the world pretending to be a investment banking and securities firm,”
  
  If I were in this racket, I’d probably want to do business with the dumbest and least well-connected crooks.
  
  Like Merrill Lynch :)

Jojo says:

April 17, 2010 at 1:38 pm

theAtlantic
4 Defenses Goldman May Use To Fight the SEC Lawsuit
By Daniel Indiviglio

http://www.theatlantic.com/business/print/2010/04/4-defenses-goldman-may-use-to-fight-the-sec-lawsuit/39107/

Glen says:

April 17, 2010 at 2:19 pm

Go Rabobank!

Maybe we can get some institutional investors with wiped out pensions to start working with the SEC, FBI to pull more of these Wall St a$$holes apart?

Sam says:

April 17, 2010 at 2:40 pm

The WSJ article does mention Magnetar back in 2007. I think they were the first ones to do it.

Here is an archived version:
http://www.realestatejournal.com/buysell/mortgages/20071228-ng.html

emca says:

April 17, 2010 at 4:10 pm

Sounds as though in late 2007, early 2008 Mr. Obama’s “savvy investors” saw the writing on the wall, in sum: that many mortgage loans weren’t going to be honored, rendering them worthless (or worthless as investment instruments), that the collateral backing such loans was also heading in similar directions, that investment pools composed of such ingenuous indiscretions were decomposing rapidly from the bottom up.

So how to avoid the consequences of reckless behavior in the pursuit of wealth, to not be as those hapless seafaring mortgage owners ensnared upon shoals of financial Nirvana? Find investors, or investment managers to offload your bundle of woes; the Cayman Island, land of transparent regulation (transparent because its not there), beckoned (you could also through such channels stipple the flow of blood by betting on failure, not necessarily hoping for profit but staying Agamemnon by amelioration of loss).

Unfortunately this appears to have not been enough to remedy the situation, so a third-party counter party, the mother of all counter parties, the federal government and its agents in the FED, (or is it visa versa?), proceed to make amends to such reckless behavior so no bad will come to the chosen, who moreover can do no wrong and by the nature of their serene, impenetrable righteous and their massive immunizations of campaign cash, cannot fail.

But many of those aforementioned mortgage takers stranded on the rocks are crying “foul”. Since certain political notables (of numerous persuasions) seek solace as defenders of the mass (democracy), so we are seeing the actions we see today.

One hope might be some go-getter from the SEC or regulatory elsewhere will see this as the ticket to fame and fortune. There certainly is no lack of material to ponder.

Even my humble self, who could or would advise no one on the merits of financial scheme ‘A’ as oppose to financial scheme ‘B’, could, if force, devise a page of questions pertaining to recent financial innovations (double space, 10 pt type, standard indentations) that should keep retainers busy for weeks. Someone with expertise could de-train the whole Wall Street Express powered on rails of human frailty…if given the wherewithal to act.

Whatever course the proceedings flounder, I suspect this isn’t the only pea in the shell, only the most currently flagrant.

Robert Shattuck says:

April 27, 2010 at 10:25 am

Will the Plaintiffs’ Lawyers Make Goldman More Ethical?

Part of the plaintiffs’ lawyers’ propaganda is that they make corporations more ethical.

This contention is deserving of critical evaluation in the context of a national controversy about the social utility of the litigation that the plaintiffs’ lawyers purvey.

If the contention is true, and plaintiffs’ lawyers do contribute to making corporations more ethical, it is appropriate for lawmakers and judges to take that into account in their legislative and judicial actions concerning those lawyers’ litigations.

If, on the other hand, the proposition is false, lawmakers and judges most definitely need to contemplate that the lawsuits in question do not make corporations more ethical. Further, if the proposition is worse than false, and if plaintiffs’ lawyers actually undermine business ethics, that is even more important for lawmakers and judges to take cognizance of.

At first blush, one would think that class action lawsuits against corporations surely cannot undermine business ethics and surely must have a positive effect for improving corporate behavior.

How in the world could that not be so? How could class action lawsuits against corporations possibly undermine business ethics?

Deeper consideration reveals that there are reasons why plaintiffs’ lawyers might not improve corporate behavior.

These reasons start with human nature; and that, in human nature, it is a fact of life that self-seeking motivations are powerful and predominant, and altruism is weak. Also, there is a predicate that, in order to deter corporate wrongdoing, it is necessary to deter officers and employees from doing the activities that constitute the wrongdoing.

Given human nature, if punishment and other sanctions, including civil liability, are to have a deterrent effect against corporate wrongdoing, the effect will be much stronger to the extent they are imposed personally on culpable officers and other employees who conceive, design, and implement the actions and activities that constitute the corporate wrongdoing. Merely to punish or impose liability on the corporation may not be sufficient to deter the employees.

It is true that employees who participate in a corporate wrongdoing do not want their corporation to experience a punishment or liability from the wrongdoing, but this incentive to avoid a corporate wrongdoing can be ineffective for various reasons.

First, wrongdoing is not always clearly black and white. If individual officers and other employees are not exposed to possible punishment and sanctions against them personally, they can be more inclined to rationalize going ahead with the design and implementation of a questionable corporate activity where only the corporation is subject to possible adverse consequences.

Further, the object of corporate wrongdoing is to gain a financial benefit for the corporation by increasing revenues or lessening costs and expenses. The corporate time frame for doing this is short term, when compared to an uncertain, longer term time frame in which corporate wrongdoing may or may not come to light and the corporation as a result may or may not suffer adverse consequences from litigation about the wrongdoing. Employee compensation is determined in the shorter time frame in which the employee’s contribution to helping the corporation’s bottom line currently is very relevant. In these circumstances, an officer or other employee not at risk for punishment and sanctions against him or herself personally can have increased willingness to participate in wrongful corporate activities that enhance the corporate bottom line currently, thereby get recognized compensation wise currently, and as a result disregard the longer term risk for the corporation only.

If human nature makes for a greater deterrent effect if punishment and sanctions are imposed on culpable officers and other employees personally, the plaintiffs’ lawyers have a problem with that. Their financial objectives cannot be achieved by going after the wrongdoing employees, because there are too few of them and their pockets are not deep enough. The plaintiffs lawyers financial objectives can only be achieved by going after the corporation, and indirectly its many innocent shareholders and others, such as the employees who are innocent of the corporate wrongdoing and also the corporation’s customers, all of which shareholders, employees and customers are the real parties in interest and who ultimately pay the price when a corporation has to pay a judgment or settle a contested legal liability.

This focus of attention of the plaintiffs’ lawyers to extract moneys from the many who are innocent parties (because the culpable employees are too few to generate a big pot for the lawyers) plays out in various ways to undermine the business ethics of the corporation.

It gives the culpable officers and employees cover and protection and diverts resources away from punishing and holding those culpable persons accountable.

The cover and the protection derive from the propensity of society to fool itself into thinking that, since a big bad corporation has been made to pay a lot of money for alleged corporate wrongdoing, proper deterrence is being achieved. So fooling itself, society fails to give adequate attention to the harder work of holding culpable employees personally liable.

This gets helped by a large diversion in fact of economic resources to paying the plaintiffs’ lawyers for going after the corporation and innocent parties, whereas those resources would be better deployed for spending on criminal and regulatory investigations and prosecutions that hold accountable culpable employees personally.

Further, while the plaintiffs’ lawyers want to obscure their modus operandi of going for the big pot of money that can be gotten in small amounts from many innocent parties, the public has at least a vague sense that something is amiss in what the plaintiffs’ lawyers are doing, and the public vaguely senses that the law, and the deployed financial resources are, not being properly utilized to hold the culpable employees accountable in order to better achieve deterrence.

The public further senses that something is amiss when so much of the class action litigation alleging corporate wrongdoing is settled without any meaningful determination of what the wrongdoing in fact was, and the law thereby fails to give guidance to other persons about what is and is not wrongdoing.

These and other distortions in the civil liability system that are wrought by the plaintiffs’ lawyers in order for them to achieve their financial objectives breed much disrespect, if not contempt, for the law. They foster a belief that the law is not about what is right or wrong, ethical or unethical, and just or unjust; rather, it is about manipulation by lawyers to line their pockets to the detriment of society’s interest in a properly functioning civil liability system.

Cynical corporate officers and other employees who are prepared to engage in possible corporate wrongdoing can well gain justification in their minds connected to disrespect for the law. Their thoughts can be along the lines of, if society makes the law a game for lawyers to play to line their pockets, why should they as employees be deterred from a possible corporate wrongdoing if the corporation will get a financial benefit in the short term, the employees will get increased current compensation for that, the corporation may get away scot-free in the end, and, if something untoward ultimately happens for the corporation, that is no skin off the backs of the culpable employees. After all they are only doing what the plaintiffs’ lawyers do, which is profit at the expense of innocent parties.

Yes, there are good reasons for thinking that plaintiffs’ lawyers do not contribute to making corporations more ethical, and, in fact, they undermine business ethics. Yes, there are good reasons for thinking the plaintiffs’ lawyers will not make Goldman more ethical and may make Goldman less ethical.

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