Remarkably, Goldman Sachs, one of the richest, most powerful, politically connected (aka Government Sachs) too-big-to-fail Wall Street banks, has demonstrated a Teflon-like ability to bounce back from egregious misdeeds, if not outright illegal conduct, and horrible publicity. From Matt Taibbi's Rolling Stone classic "great vampire squid wrapped around the face of humanity" to Sen. Carl Levin's expose of Goldman's infamous Abacus derivatives rip off, for which Goldman paid the SEC a record $550 million to settle (without, of course, admitting any wrongdoing), not to mention the massive government bailouts that kept it from collapsing (oh, and the billions of dollars in AIG's bailout funneled through the backdoor to Goldman as well), Goldman has appeared to be on the ropes, only to end up back on top again, seemingly unscathed, welcomed again with open arms in all the rich, powerful, connected industry, media, political, charitable and social circles.
But, a pending lawsuit in London against Goldman might just change that. In it, Goldman is alleged to have ripped off the Libyan sovereign investment fund, losing 98 percent of the $1.3 billion invested and pocketing $350 million in fees, as detailed in a recent Financial Times article.
Like most lawsuits, this one is full of conflicting accounts, but it reveals a few themes related to Goldman's business practices, almost regardless of where they occur. (Hint: see Sen. Levin's hearings in/report by the Senate Permanent Subcommittee on Investigations of the Abacus CDO deal and the testimony related to Goldman's selling its clients what was referred to as a "sh**ty deal.")
One theme is that, whenever a client of Goldman's loses money, it's apparently never Goldman's fault, never a bad investment, never bad advice and never due to Goldman's own conflicts of interest.
Another theme is that Goldman's clients are apparently very sophisticated and, if they lose money, it's their own fault, they should have known better, they were sooooooooooooo smart. In fact, Goldman seems to want the world to believe that their clients are just as smart and sophisticated as they are, at least when they lose money and especially when they sue Goldman. (Remember also that some/many/most of Goldman's "clients" are not, as CEO Lloyd Blankein's testimony before Sen. Levin's committee made clear, actually "clients," but "counterparties" who Goldman was entitled to sell virtually anything to and make as much money as possible.)
In the lawsuit, the "clients" Goldman claims were sophisticated were described as "'a team of clearly naïve and unqualified individuals...doing their best in the face of extremely intelligent, ambitious and experienced individuals.'" Goldman's position that its clients (or counterparties or, for that matter, muppets) are sophisticated appears particularly questionable given that Goldman appears always to make money, but its really, really sophisticated clients, er, counterparties, er, muppets often don't appear to. (Frankly, the massive losses inflicted on the buy side - including some of the supposedly most sophisticated investors -- during the financial crash should have killed the myth of the sophisticated investor a long time ago, but it remains a potent legal defense and Goldman is pushing it hard.)
How could they be that naïve and unsophisticated? Because the fund was brand new: "Western financial institutions [like Goldman] flocked to the beleaguered nation [of Libya] after the raising of sanctions, intensely courting the officials of the nascent sovereign wealth fund." As a result, as the Wall Street Journal has reported, "In early 2008, [Libya] gave $1.3 billion to Goldman to sink into a currency bet and other complicated trades. The investments lost 98 percent of their value, internal Goldman documents show."
In addition to the issues raised directly in the lawsuit and in reporting about possible bribery, prostitution and other corruption, a couple of other interesting issues are suggested by the allegations. First, outside the lawsuit, Goldman has publicly claimed (at Levin's hearing for example) that it began to protect itself and its balance sheet in 2007 and early 2008 as it saw a high risk of extreme volatility and a possible crash of the subprime mortgage bubble. Yet, it is alleged in the lawsuit that, "[b]etween January and June 2008, Goldman execs set up a $1.3 billion investment [for its client LIA] in option contracts on Citigroup, Italy's UniCredit, Spain's Banco Santander, German insurer Allianz.... The investment ... worked on the thesis that the stocks would rise in value."
Thus, it appears that Goldman was defensively protecting itself due to a concern about a possible crash from the subprime bubble at about the same time it was putting its client Libya into firms like Citigroup with huge exposure to that bubble. Was Goldman trading/positioning itself opposite the way it was advising its clients like the Libya at the same time? How many other clients did it position like Libya? How many clients did it position opposite Libya during this time?
Second, while Libya is alleged to have lost about $1.3 billion on the investments, who made the $1.3 billion? Put another way, who was on the other side of the trades? Was Goldman, directly or indirectly, on the other side? If Goldman "earned $350 million in profit" from placing $1.3 billion in trades, as alleged, that's a pretty nice profit. Was any of that from principal positions?
Curiously, this lawsuit and these issues are getting very little U.S. media coverage. For example, Politico's Morning Money wouldn't even mention the half page Financial Times article on the lawsuit. But, the outcome of the lawsuit for Goldman's and Wall Street's clients and counterparties "sophisticated" or not, is potentially far-reaching. Will this case finally end the "myth of the sophisticated investor," opening the door to a mountain of other lawsuits against Goldman and the other too-big-to-fail sell side megabanks on Wall Street? Will this case finally reveal who was on the winning side of all those losing bets, er, positions that Goldman and others put their clients into? And, will we learn how Goldman and others traded for their own accounts at the same time they were selling various positions to clients?