THE BLOG

Did Goldman Sachs Breach Their Fiduciary Duty to CDO Investors?

04/26/2010 05:12 am ET | Updated May 25, 2011

This morning, Bloomberg released more excellent journalism on the Goldman-AIG-Fed scandal. A secret document shows "Goldman Sachs underwrote $17.2 billion of the $62.1 billion in CDOs that AIG insured." Thus, without a doubt, this is like Toyota knowingly manufacturing cars with faulty breaks, then buying insurance for protection in the event of a mass recall.

For those unfamiliar with some basic legal principles, a fiduciary duty is "an obligation to act in the best interest of another party ... whenever the relationship with the client involves a special trust, confidence, and reliance on the fiduciary to exercise discretion or expertise in acting for the client." In this case, Goldman (and the other underwriters including Merrill Lynch, Deutsche Bank AG, and others) owed a fiduciary duty to the investors who bought the CDOs these underwriters distributed. And we all know these CDOs ended up in portfolios across the globe.

If Goldman et al created these instruments with their "expertise", then their bets against the CDOs is direct evidence the iBanks betrayed their fiduciary relationship with anyone who bought their CDOs. If every CDO is tracked back to the original underwriter, investors should bring forth a class action. In the meantime, the Toyota hearings in Capital Hill should be followed by the more entertaining hearings during which Congress actually gets to the bottom of the greatest heist in history.

What do you think about the role of investment banks in both creating and betting against toxic CDOs? Share your comments below.