Did Goldman Sachs Breach Their Fiduciary Duty to CDO Investors?

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.

 

 

 

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Comments

[Rule Of Law]

07:55 PM on 02/24/2010

Someone will post and call it risk management. Like managing a boxer you know is injured and betting against him in the championship fight.

[venusvictrix]

07:51 PM on 02/24/2010

There was no "bet" involved here: this was a no-risk scheme concocted by Goldman et al. that was guaranteed to payoff big time.

Making loans to unqualified borrowers with built-in interest and payment hikes making the loan even less affordable was a strategy guaranteed to put loans into default . . . especially when housing affordability dropped off a cliff after years of unsustainable appreciation due to the same easy money policies.

Therefore the CDSs against these toxic “securities” involved no risk whatsoever. Goldman’s CDO strategy was not a “bet” – it was fraud.

[sonofsamphm1c]

02:40 PM on 02/24/2010

I think it's called risk management, and every client knows the investment bank is going to manage its risks.

This was not a heist, so there is no way to get to the bottom of it.

[GlenParked]

02:17 PM on 02/24/2010

I know that if I, or any of us in middle America, had tried the tiniest fraction of their schemes, we'd be imprisoned for fraud. But when you've bought and paid for the legislative and judicial systems, you get the keys to the Fed's vault as your sentence and restitution. Where do I sign up to be a "savvy business man"?

[sborsher]

12:27 PM on 02/24/2010

"hearings during which Congress actually gets to the bottom of the greatest heist in history"? That would be unique and refreshing. Typically, they just ask a lot of questions to look like they are doing something useful, then adjourn. They never follow a line of questioning to get to its ultimate conclusion; they merely give each committee member their allocated time and track time that zealously. It's just more Congressional waste of time and money.