THE BLOG
07/17/2010 05:46 pm ET | Updated May 25, 2011

Goldman Sachs Settlement: A Reader's Outrage

Seems almost everyone I talk to these days is very outraged over the corruption in the financial system.

Here are some comments from one of my readers in response to my blog article
Goldman Sachs to Pay $550 Million to Settle Civil Fraud Charges:

I'm very disappointed with the SEC-GS settlement. The dollar amount doesn't seem sufficient to discourage a continuation of unethical/ illegal activity by the brokers / investment banks. Plus, they always get away without admitting "guilt". Maybe this particular settlement will, somehow, leave them open to gigantic, future, private lawsuits (I hope).

I've seen a lot of commentary that the charges were weak and that a diligent investor could have figured out the weaknesses of the ABACUS offering, and that John Paulson wasn't well known so disclosing his involvement wouldn't make a difference. Although I have no legal training, I can't see how any of those arguments are the issue. It seems to me that the laws regarding marketing of investment securities are strict, and strong, and that GS would have a hard time convincing a jury or impartial judge that it, by "mistake" omitted information about ABACUS that would have been "material" to investors. To me it seems they deliberately omitted disclosing material information. Maybe this subject could be a post for you to expand on, or refute, in your blog.

For example, maybe I am wrong but, I think the securities disclosure/ marketing laws would require GS to disclose something along the lines of:

ABACUS has been created at the request of, and with the significant involvement of, a hedge fund investor (henceforth called HF) who wishes to profit from a future collapse in housing prices and failure of the underlying home mortgages and mortgage securities. Unlike all other synthetic CDOs GS has previously offered to the marketplace, ABACUS has been constructed so that HF believes that the funds it receives from ABACUS investors will exceed the periodic payments that HF makes to investors over the life of ABACUS. In other words, ABACUS is designed to provide insurance against mortgage defaults. By investing in ABACUS you are betting that its designers cannot create an instrument that will fail.

If I have interpreted ABACUS and previous CDOs correctly, I don't see how this information could be immaterial. GS should be shut down. At a minimum it should immediately lose its status as a Bank Holding Company.