Goldman Subpoenaed Over Levin Committee Hearing Findings

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On the one hand, this is just a subpoena of Goldman from the Manhattan DA’s office, but on the other, after all the crisis investigations, we finally have a prosecutor somewhere deciding to take some abuses during the crisis seriously enough to see if they add up to a legal case. (Yes, the SEC did file a suit against Goldman on one synthetic CDO, one transaction out of 25 in its Abacus program, which Goldman settled for $550 million, but this was litigation on one deal, not on broader patterns of misconduct).

And it came not out of the splashy but designed not to accomplish much FCIC, but the quieter and more tenacious Senate’s Permanent Subcommittee on Investigations. I hardly ever do media briefings, but I was on the blogger call for both reports, and the contrast was night and day. The FCIC briefing was softball PR, with Phil Angelides and Brooksley Born (who by definition had not done the work and therefore were not big on detail) leading the call. The Senate call was led by staffers who demonstrated impressive command of the products and industry economics and transmitted information at a very high bit rate.

Not surprisingly, the information request comes from a local prosecutor. The DoJ continues to be missing in action.

In one sense, these suits are about whether the officials believe markets should be kept safe for investors. That was the premise of the securities legislation of 1933 and 1934; CDOs technically are not securities (mortgage bonds, by contrast, are) and are thus are subject to a lower level of investor protection. Goldman and its ilk effectively rely on the “consenting adults” idea: per them, no one can claim any harm or foul; everyone should know investment banks are on every side of a trade and will probably screw you.

But the process of issuing CDOs was almost guaranteed to prevent adequate due diligence. The deals would be marketed based on general parameters about 60 days before the targeted closing. Some deals were “managed” meaning they were “trust me” paper where investors relied on the independence and experience of the firms hired to be CDO managers. We’ve since learned that in many cases these firms were NOT independent; indeed, the material presented in the first round of the Levin hearings showed that Goldman was looking for compliant managers, meaning ones that would not ask too many questions about the dreck Goldman wanted to put in these CDOs. For the “static” deals, the list of what was in the CDO would typically be presented the day before closing, which was not enough in advance to allow for a serious evaluation.

Put it another way, if you had consensual sex with someone who had HIV and didn’t tell you about it, how would you react? It may not be illegal under the law but it sure ought to be criminal. And some jurisdictions have found it to be criminal even with no specific laws against it on the books.

Bloomberg broke the story and the New York Times provided a summary:

Goldman Sachs has received a subpoena from the office of the Manhattan district attorney, which is investigating the investment bank’s role in the financial crisis, according to people with knowledge of the matter.

The inquiry stems from a 650-page Senate report from the Permanent Subcommittee on Investigations that indicated Goldman had misled clients and Congress about its practices related to mortgage-linked securities.

This Bloomberg video provides additional detail as to the issues highlighted in the report that look to be relevant to prosecutors:

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  1. David

    I really don’t trust the New York D.A. to do what needs to be done. The people doing the ripping off were those living in the million dollar condos in New York City. The people getting ripped off live all over the world. Does the Manhattan D.A. cared that the local thieves stole from investors all over the world? I doubt it.

    I really think the Manhattan D.A. is looking to get Goldman to hire a few of his friends and political allies and pay those monster bonuses.

    1. rafael bolero

      David, thanks for reconfirming my Midwestern stereotype of all NYC people being corrupt and greedy. Oh, and cynical.

  2. Philip Pilkington

    Half naked dude with the Lady Justice apparel in the HIV link? Eh, preeeety damn hilarious, no?

  3. sgt_doom

    Please, Madam Smith, don’t be harsh with AG Eric “Chiquita” Holder and the feebs of the F.B.I.

    They are busy carrying on the Bush administration policy of preemptively arresting all those political activists so they can’t protest. Carlos Montes was another target a several weeks back in LA, where SWAT and FBI teams attacked his home and arrested him because he had been protesting their previous preemptive arrests.

    That AG and FBI is far too busy to be bothering with the likes of the real crooks and super-criminals at Goldman Sachs, JPMorgan Chase, Morgan Stanley, Citigroup and Bank of America.

    Besides, as we all realize, every management type at Treasury is former Goldman Sachs, and Geithner’s BFF, Daniel Zelikow, is at Goldman now, while many of the top guys at State are also former Goldman.

    Nope, GS is in like flint!

  4. steve silverman

    i may not understand the situation in its entirety but in my dealings with the sell side (i have been on the buy side making investment decisions for between 25 and 30 years)i have found goldman to be above average in honesty, friendliness, likelihood of trying to do what i have asked of them- and in most relevant attributes. in terms of competence they seemed much better than average-maybe the best. i knew, and i believe all institutional investors knew, that if one were entering into a principal transaction with them this implies that someone at goldman might (and probably does) think the opposite of what i do. so one of us will be wrong and one right or there is some exogenous reason for us to enter into the transaction (one of us needs to hedge something and are willing to pay up for it). if i was asking them for advice it would be a very different story. certainly institutional investors are aware that investment banks have principal investment postions and when you enter into a transaction with them sometimes your interests and theirs are opposed.
    because i know they are smart, shrewd and probably better informed about most things, i would only enter into principal transactions with them with extreme caution.
    my observation is that merrill, lehman, bear stearns, deutsche, morgan stanley and even jp morgan did essentially everything ‘bad’ that goldman did and i am not sure why you seem to be so down on goldman. certainly magnetar seemed to be in the business of ‘setting traps’. but that is another story and even though this seems a lot more nefarious it still seems legal to me.
    i write this as someone who; 1- thinks it is weird (unfair?)that the financial sector which ’caused’ the 2008 collapse seems to have suffered almost not at all while many working stiff have continued to suffer and 2- enjoys and learns a lot from your blog.
    why is goldman the one you single out for such disapprobation?

    1. Allen C

      Thanks for your observations.

      I have yet to hear/read of any significant civil action against Goldman or any other TBTF institution. Perhaps they want to avoid looking incompetent.

      What irritates me is that Goldman benefits from government support (bank status, zero interest rate loans, discount window access, etc.) and is at best an expensive financial intermediary skimming money off people that actually produce products and services of value.

    2. Betty Sue

      Steve Silverstein: “why is goldman the one you single out for such disapprobation? ”

      Me and the gals here over at Norma-Jean’s Nail and Beauty Salon were just discussing this, and we’re not sure what the answer is, but we think it might have something to do with the sheer brazenness of that $13 billion “swoop and squat con” more commonly known as the AIG rescue.

      Or, for instance, that Ed Liddy, the former Goldman director, was put in charge of AIG (by Paulson) and after Liddy came on board, $13 billion was forked over to Goldman, and so forth….

      Then that Goldman denied they were bailed out, or that they ever needed any taxpayer help.

      I’m not sure if this is it, but to us gals working here at Norma-Jean’s for $8 an hour, a $13 billion taxpayer bailout seems like an awful lot of money, especially considering that instead of thanking all of us suckers out here in taxpayer land, Goldman pretended like they never even got the money.

      Like you said, all of them were doing it, but to some of us rednecks out here in the heartland, it looks like the Vampire Squid was the worst of the bunch.

      I hope this helps.

      1. readerOfTeaLeaves

        Damn – where IS your salon? If the topic of ‘banks’ comes up (and it does), there’s a kind of smoldering stench that starts to fill the place and Amy races to open up a window…

        Then we change the subject before we all get hopping mad.

      2. anon

        Usually my award for internet comment of the day goes to someone on dealbreaker. Congrats, you’ve earned it today.

  5. Pat

    This investigation will probably go nowhere, as usual. Read this:

    “The news of a Goldman Sachs subpoena is after a report from an analyst that said that Goldman Sachs would not be prosecuted or charged with any crime because it would threaten the entire financial system.

    “According to a note analyst Brad Hintz sent investors, he believes that Goldman won’t face criminal prosecution related to sales of mortgage-linked securities because such a move could threaten the U.S. financial system.
    “If an alleged violation is identified during a Goldman investigation, we expect a reasoned response from the Justice Department,” Hintz, an analyst for Sanford C. Bernstein & Co, wrote. “In a worst case environment, we would expect a ‘too big to fail’ bank such as Goldman to be offered a deferred-prosecution agreement, pay a significant fine and submit to a federal monitor in lieu of a criminal charge.”

    1. Jason Rines

      But of course Pat! All America’s failure to investigate and prosecute come down to national security of course. Those that own this country mean THEIR national security, not the 300 M corporate citizens.

    2. Francois T

      “According to a note analyst Brad Hintz sent investors, he believes that Goldman won’t face criminal prosecution related to sales of mortgage-linked securities because such a move could threaten the U.S. financial system.

      Let me see if I get this stuff: One criminal prosecution of one major financial company would threaten the entire U.S. financial system?

      Translated in trade-speak: Short the hell out of the entire sucker, it is way too fragile to be trusted.

    3. Yves Smith Post author

      Brad Hintz is a hopeless shill and not qualified to opine on litigation. There’s stuff happening in courtrooms all over America that contradicts Hintz’s view of the world, like a New York judge saying he really didn’t care if MERS had 62 million mortgages registered, if they sidestepped legal procedures, they’d have to face the music just like everyone else.

    4. Valissa

      Hmmm, let’s see… Power & Money vs. Law & Order, who will win?

      Hintz strongly telegraphing that he sees this as a Money & Power game, and that Law & Order will make concessions. Commenters here (and the little people everywhere) preferring Law & Order to restrain Money & Power.

      Perhaps we should start a betting pool on who will win this round? Odds anyone?

      1. ambrit

        Mz Valissa;
        Considering all the ‘stuff’ I read here and elsewhere, plus my hegemonic cyniciam, I’d like to short the Law and Order position please.
        Reminds me of a Mack Reynolds book based on the Supreme Courts ruling restoring “Trial By Combat” as a legitimate legal gambit. Seeing all the ‘Private Armies’ popping up here in the West, Reynolds’ sarcastic tome from the ‘Golden Age’ of SF is looking downright prophetic.

      2. psychohistorian

        Come on, where is the conflict?

        Money and Power will have legislation passed “real soon now” that will moot any Law & Order initiatives.

        I used to think good thoughts about Law & Order but they are certainly not showing the better side of humanity’s attempt to implement that equal justice under the law concept. If Law & Order do not stand up for the masses then they are propaganda shills like economists for the inherited rich that has brought our world to this condition.

  6. anon48

    From the initial pages of the Senate report:

    “…Internal reviews of two high volume WaMu loan centers, for example, described “extensive fraud” by employees who “willfully” circumvented bank policies. A WaMu review of internal controls to stop fraudulent loans from being sold to investors described them as“ineffective.” On at least one occasion, senior managers knowingly sold delinquency-prone loans to investors. Aside from Long Beach, WaMu’s President described WaMu’s prime home loan business as the “worst managed business” he had seen in his career…”

    For once, I hope the DA starts at the bottom. If GS underwrote securities created with some of these loans, would that create nexus(or whatever the appropriate legal term would be) for the Manhattan DA to pursue these former WAMU employees(seems obvious DOJ has no interest in doing this)? If so, the DA should do exactly that. Nail them as hard as he can-then turn them. (Since WAMU is extinct there may be no readily available deep pocket legal defense funds.) Seems to me this would provide the leverage to move the investigation upstream against higher level WAMU ,managers and /or laterally against people in other entities including the, wholesalers, underwriters(e.g. GS), ratings agencies, audit firms, etc.

    For the life of me, I can’t understand why this is not already being done. But then again what do I know?

  7. Francois T

    Hope the Manhattan DA has good personal protection and is absolutely squeaky clean, no skeletons.

    This guy has no friends, only hostiles and enemies. You can bet your last n’gwee the DOJ will be among the hostiles.

  8. Shankara

    Steve Silverman wrote:

    “i have found goldman to be above average in honesty, friendliness, likelihood of trying to do what i have asked of them….”

    That’s nice and downright heartwarming. Kinda’ marshmellows around the Kumbaya fire nice. They always remember to put the seat down do they? How thoughtfull!

    However, if my plumber is soldering a pipe and catches the joists on fire, he/she has to rebuild my house to the exact specs as before the spark. Damn those pesky laws!

    If my F-100 pickup becomes toast due to a faulty cigarette lighter, they’ll be forced to do a recall at their expense and replace same. Read the fine print.

    If these totally honest folks you describe at GS create products that light the fuse of a global neutron bomb that destroys tens of millions of jobs just within the U.S. borders, not to mention the rest of the world, causing many millions of foreclosures, creating destitution the likes of which have never been witnessed in all of mankind’s travels….wouldn’t you begin the think just a wee bit that whatever it is they’re up to is not in fact God’s work, but merely another branch of Satan’s grand hierarchy in action?

    Sorry about coming across as a Southern Baptist here. My bad.

    1. psychohistorian

      This Northwest Cosmologist Hippie agrees.

      But then again Rule of Law is whatever our bought government says it is next week to cover this weeks rape and pillage by the minions of the inherited rick like the banksters and heads of multi-national corps that do not work in the best interest of most Americans.

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