Simon Johnson On 'Real Time' (VIDEO): Broken System If Goldman Conspirator John Paulson Is Not Charged

Economist Simon Johnson appeared on Bill Maher's "Real Time" panel Friday alongside GRITtv host Laura Flanders and New Yorker editor David Remnick.

The panel covered the tea party movement and the Securities and Exchange Commission's decision to charge Goldman Sachs with fraud.

While explaining how Goldman made billions by selling bad securities, Johnson mentioned investor John Paulson.

Johnson: "They designed something intentionally complex that's basically a mechanism of transferring money from you to John Paulson. John Paulson, it is true, has not been charged with anything. But he was involved in designing the security."

Paulson, who was named in the SEC's civil fraud lawsuit against Goldman Sachs, conspired with Goldman and Deutsche bank to sell investments made up of bad loans. The New York Times reports that Paulson personally made $1 billion off of the deals.

Johnson told Maher that if Paulson avoids charges similar to Goldman, it will show how broken our system is.

"For all we know right now, it was probably [Paulson's] idea," Johnson said. "If he walks away without being charged, that just tells you there's something even more profoundly broken..."

Johnson said that Goldman would fight the lawsuit "tooth and nail" because it could open the doors for customers to file a class-action lawsuit against the firm.

WATCH:

Comments

[wethepeople3884]

12:19 AM on 05/02/2010

That great law firm quote was awesome!

[inthelandoftheblind]

01:30 PM on 05/22/2010

x2!

[lvdragonlady]

06:37 PM on 04/19/2010

All of this started because of the deregulation that was done BY the GOP in the 80's.
When are we going to learn?

[chordchaser]

07:35 PM on 04/19/2010

You've conveniently overlooked the Clinton years, without whose banking and finance policies the current crisis could never have occurred. The first step towards learning anything from this is finally recognizing that these problems are the result of policies developed and implemented by both Republican and Democratic administrations. I'm not hopeful.

[inthelandoftheblind]

03:14 PM on 05/22/2010

Clinton dereg'd after visiting with Thatcher.I recall the news clips, seeing them walking together, as Thatcher was talking.Later, I was wondering why he was deregulating the markets, as the Brits were, then.

As you may recall - lots of the AIG bailout went to European banks - much in the way of bonuses, to the Brit AIG branch office, which I'd heard had designed much of the AIG fiasco! In this Maher clip, Paulson is credited with the larger heist.

This might as well be called class warfare.

Fanned for keeping the balance.

[outnow]

12:21 PM on 04/19/2010

The thing about capitalism that people don't want to accept is its dark side. Investment banking is predatory lending against private and public alike.

Anyone read of the loans made down in Jefferson County In Alabama to finance the programs mandated by the EPA to eliminate pollution in the state's largest river? The deal was financed by JPMorgan Chase. GS was involved.

Local politicians were influenced by campaign funding apparently. Jefferson County where Birmingham is located is bankrupt, just like Greece is. The terms of the loans are a total joke but it is the taxpayers who suffer. Schools and courts are closed until the bankers are paid off. Government cannot provide services.

As the banks are bailed out, the debt goes to the taxpayers. More borrowing follows to pay public debt and credit is more difficult and expensive for the private sector

"Arrangers" help bury governments with debt. This goes on with the IMF, too. A big project means a big loan and a bond issue. The loans are re-financed and rolled over - "churning" as they call it. Lot's of commissions and bank charges and fees. The arrangers get their multi-million dollar cut for doing nothing except to grease the wheels inside the government. It is so easy to do that the model has been accepted by investment bankers worldwide. Iceland and Latvia come to mind.

[chordchaser]

07:48 PM on 04/19/2010

South America and Africa come to mind as well. The only difference is we've not used assasination as a tool for making sure governments step into line.

[seawolf77]

07:30 AM on 04/19/2010

What they did was securitize mortgages which made them open to writing derivatives on as you would any stock, commodity, currency, bond or just about anything else it seems nowadays. This was a new "product" created by the IV bank houses that they put into clients with money and not much brains. As such you would have puts and calls and longs and short written in the options market and futures market by people that have money and brains and are assesing whether they think that any particular product is over or under priced at every moment of the day realtivve to history. This market is huge and essentially parasitic. It is alas also necessary for capitalism to function otherwise entrepeneurs would go broke without it. The average investor does not know how to go short since by defintion the purchase of an investment indicates by default you think the price is going to rise. Unless you like losing money. You made the decision to go long. What if you had told your broker "No I prefer to buy put options on those securities at the strike price you are trying to sell me the product at." Bet that would have raised his eyebrows.

[chillwind]

01:06 AM on 04/19/2010

Paulson was clearly a conspirator, but will likely skate, thanks to the Robert's Supreme Court decision in 2008 in Stoneridge v. Scientific Atlanta. Section 10(b) of the Securities Exchange act is not worded in a specific enough manner (for a strict constructionist reading) to include third parties in liability for securities fraud as aiders and abettors. The SEC believed at the time that third parties should indeed bear scheme-liability for such fraud, and wanted to make a statement in the case to that effect, but the Bush administration prevented them. Certainly Paulson, and his attorneys, are aware of this decision.
He had no direct contact with the defrauded investors. Here's a taste:

http://www.scotusblog.com/2008/01/court-limits-securities-fraud-law/

This also underscores the need for extemely specific language and intent when Congress writes legislation

[inthelandoftheblind]

03:43 PM on 05/22/2010

Sunshine IS the best disinfectant, so maybe politicians will grasp that, due to accessibility to the internet, etc, more of the public are becoming aware of their collusion in all this.

Fanned for this post, & thanks for the link!

[funkalicious]

09:10 PM on 04/18/2010

I cannot understand Simon Johnson's remarks blaming Paulson for the misdeeds at Goldman Sachs.

Paulson was prescient in his ability to bet against the housing market. It really didn't take a genius to understand what was happening, no money no income loans, 120% no money down loans 100% interest only loans. America was awash in free money for housing, Paulson understood when the music stopped there wouldn't be enough chairs at the table.

Paulson did not write the derivative rules, he didn't sell crappy mortgages he didn't bundle a bunch of crappy loans and repackage them . what he did do was through a third party make a request that certain types of crappy loans be bundled so he could sell them short, by buying insurance that those securities would fail.

What GoldMan Sachs did was honor the request they bundeld the crap mortgages created a security and sold that not as an asset to short like Paulson but they sold the other side of that trade to pension funds and individuals as a good solid bet. The wrong doing is Goldmans alone they didn't sell the Abacus asset as a crap sandwich they sold it as fillet Mignon.

[Carolab]

12:43 AM on 04/19/2010

PAULSON IS AN INSIDE TRADER.

HE IS NOT PRESCIENT.

[funkalicious]

07:24 PM on 04/20/2010

Carolab,
Paulson was not the inside job you claim him to be. Paulson is a speculator he did his homework. Paulson read the market , he did not issue one subprime mortgage he never ran a boiler room operation in Las Vegas selling Ninja loans he did not manufacture the no money down interest only loans.
What Paulson did do was read the writing on the wall. He requested that certain mortgage products be bundled so he could make bets against them. That is not illegal or inside information he was a market maker. all legal in our economic system. You may not like that he profited from the trail of tears.
Goldman Sachs accommodated Paulson stuffing Abacus with rotten paper, then they had a rating agency rate the crap as AAA and sold junk as AAA rated. That is the crime not asking to short garbage that is a function of the market that purges fraud and ill conceived loans. You should blame the likes of Barney Frank and Maxine Waters that were encouraging 100% no money down loans. They encouraged fraud.

Paulson could have lost all of his money waiting for the bubble to burst. he was prescient and he schooled the market. I would rather Soros who also bet against housing and Paulson be in possession of Capital instead of the frauds who holed America.

[inthelandoftheblind]

03:53 PM on 05/22/2010

...and what of the ratings agencies?It was common knowledge among those in the know,they were offering AAA ratings to make the crap sandwich smell so good to investors.

GS was not naive, but among those who colluded to cause all this, weren't they?

[chordchaser]

08:58 PM on 04/18/2010

Rubin, Summers and Geithner on a path to reform policies developed and implemented by... Rubin, Summers and Geithner. The irony here is that Democrats will likely gain political points for this so-called reform. Laughable.

Re: the Tea Party; whatever legitimacy that self-parody of a movement might have had at its inception has been successfully undermined by neocons (the Republican "base"), Faux News, and of course the typical right-wing ignorance that presents such large, slow-moving and often hilarious fodder for Bill Maher, et al.

By the way, did I just hear the economics professor at MIT, the former chief economist at the IMF, say the income tax was antiquated? Isn't that among those topics from which we are to refrain from speaking or debating lest we be called unpatriotic?

[Carolab]

12:44 AM on 04/19/2010

Simon Johnson must have learned some valuable lessons while at the IMF just as Joe Stiglitz did at the World Bank. Sometimes when you are inside a place and find out how rot-ten it really is, you speak out. That is, if you have scruples.

[PhilipTaylor]

12:53 AM on 04/19/2010

WILLIAM K. BLACK: Because it is a fundamental lack of integrity. But also because, if you look back at crises, an economist who is also a presidential appointee, as a regulator in the Savings and Loan industry, right here in New York, Larry White, wrote a book about the Savings and Loan crisis. And he said, you know, one of the most interesting questions is why so few people engaged in fraud? Because objectively, you could have gotten away with it. But only about ten percent of the CEOs, engaged in fraud. So, 90 percent of them were restrained by ethics and integrity. So, far more than law or by F.B.I. agents, it's our integrity that often prevents the greatest abuses. And what we had in this crisis, instead of the Savings and Loan, is the most elite institutions in America engaging or facilitating fraud.

http://www.pbs.org/moyers/journal/04032009/watch.html

[Fishboy43]

03:56 PM on 04/18/2010

Share a cell with Bernie Madoff?

[Roy Piper]

02:37 PM on 04/18/2010

John Paulson did NOTHING wrong. What law does this economic quack think he broke? All he did was ask Goldman to create a pool of securitites he could bet against, or, short. There is nothing wrong with that...from Paulson's side. From Goldman, that is another matter because they sold this to their own clients without telling them it's purpose. But Paulson does NOT owe Goldman clients anything, he owes HIS clients. And he delivered for them to the tune of billions. There is nothing wrong with betting against America, especially when he was proven correct for doing so.

[taxpayertoo]

04:14 PM on 04/18/2010

Did NOTHING wrong eh? Creating a pool of "toxic" securities he could bet against. And betting AGAINST America? Doesn't that sound a teeny bit UnAmerican............with ethics like those no wonder our financial house is in the toilet.

[digiboxer]

04:56 PM on 04/18/2010

By that logic anyone who sold a security of a US business would be "betting against America".

Get serious

[funkalicious]

08:41 PM on 04/18/2010

Exactly, Money has always been made on the short side of a bad trade. Paulson did not create any of the mortgages and underlying junk that he asked to bet against. Goldman Sachs is the culprit in this mess. When Kennedy did it in the depression he was a hero and he actually called folks to tell them to buy stocks in a a telephone scam then shorted the shares cascading the markets lower.
Paulson realized that the charlatans at Wa Mu Countrywide Citi Northstar, etcc etc wwere selling 120% no money down loans.

What Goldman di was tell clients that these CDO's bundled withthe crap was worth something then they sold the same securities short and slammed the market knowing what Paulson knew. Paulson is not at fault. with out people like Paulson to say the emperor has no clothes markets end up at the extremes.

[spinns17]

02:10 PM on 04/18/2010

there are many more crooks in this mess.and the government better round them all up and put them in jail

[hjalmar]

09:59 PM on 04/18/2010

The crooks ARE the government ... at least they own and control it. The jails are built to enrich the builders and managers of same, and filled with VERY small time "crooks."

[digiboxer]

01:44 PM on 04/18/2010

I'm no expert, but I see major problems with Goldman case.

In 2007 99.9% of the players in residential mortgage securities we punch-drunk to own more. Paulson is only remarkable because he was in the fraction of 1% that was actually bearish.

What difference does it make if he selected the stuff in the package? Just because he turned out to be right in hindsight does mean it was pre-ordained at the time. He could well have lost everything, and the huge preponderance of market sentiment thought he was wrong.

The buyers of the Goldman product were highly sophisticated financial institutions, able to analyze the portfolio just like Paulson.... undoubtedly they did. And smart enough to know that by definition SOMEONE was going to be on the short side of the transaction.

Yet, we're supposed to believe that if they had only know it was PAULSON on the other side, they would't have done the deal? That fact would have caused them to change their opinion of the mortgage investments in general and the Goldman package in particular?

Implausible; but take it further: if the identity of the counter-party was important to them, did they ask who it was? Require identification as condition of their investment?

The securities markets would cease to function if buyers and sellers had to disclose their identities and motives for buying and selling.... yet in the Goldman deal, it looks like the buyers could have asked and didn't.

Fraud?

[hellboundtrain]

02:16 PM on 04/18/2010

AAA ratings for trash.

[Doug Compagner]

11:35 AM on 04/18/2010

Fannie, Freddie, and Barney should be given no special treatment either...they should be investigated just like all the rest!

[MadeandBakedintheUSA]

11:54 AM on 04/18/2010

KNOW your facts-

FAnnie Freddie Reform came to floor in 2003 --- DROPPED

2005- PASSED HOUSE dropped in SENATE with Frist and SHELBY

Please- fo to SPAN VIDEO for your FACTS

CUT THE MURDOCH DUMB DOWN

[mnkors]

11:59 AM on 04/18/2010

Should not we start with Gramm-Leach-Bliley boys who had worked hard to repeal the important safeguards? They are the founding fathers of today's financial crisis.
Where are the conservative republicans when we need them?

[bola47]

10:39 AM on 04/18/2010

the indictment of goldman is another "show" for the public. charges will eventually be dropped by some judge saying there is not enough evidence of wrongdoing or the sec worded their complaint incorrectly. wall st. will go on as usual and the next time some institution that is too big to fail goes bust, the treasury dept. will be opening their coffers to help out their buddies. remember the fact that wall st. money controls our govt. and the greedy congress (dems & repubs) who live on piles of cash donated by the pigs at the trough.

[hjalmar]

10:02 PM on 04/18/2010

Correct.

[Kevin Atlanta]

10:09 AM on 04/18/2010

Well let's get Bill to pay attention to the Bush / Cheney / Rove administration charged with Treason for 2 illegal wars, Torture, Fiscal Malfeasance, Abrogation of Oath of office like the 404 Congressmen and Senators who voted for the Patriot Act which is neither Patriotic nor required. Do you like being wiretapped?

[sammyscout]

02:09 AM on 04/19/2010

Fanned

[jcranman]

08:01 AM on 04/18/2010

Even Dodd use the terms corrupt and broken to describe the system on Matthews.

Finally, we are facing the truth, step 1.