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.

 

 

 

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Comments

[ChHill]

09:36 AM on 07/19/2010

There are rules and if the US government cannot even enforce its own rules or that of its agencies, then why create them? Banks do as they wish, negotiate to pay a fine and then move on, like locusts. Clear message that you can always buy your way out if you are a large financial institution. Banks whose lawyers see the details when it comes to defending a case against the bank, amaze me when they say there was an omission. Omission is equivalent to neglect. A tort based on neglect is a case that can be argued?

[William McKibbin]

03:19 PM on 07/18/2010

Let's face it, Dr Bernanke and Sec Geithner are counting on Wall Street to invest in the "clean energy" of the future. I suspect we will soon hear about government investment guarantees that will encourage Wall Street to invest in electric jets, spontaneous combustion engines, and weather oscillating machines. Of course, with double-your money back loan guarantees from Uncle Sam, Wall Street will gladly thow money into these "deals" Then, millions of people will be recruited to create marketing materials, give speeches, lobby, and to sell these fantastic technologies to unsuspecting consumers. Who knows, maybe the money will actually lead to an invention or two, we'll just have to wait and see. But here's the thing, if companies like Goldman Sachs are going to invest in these government guaranteed "deals," then they can't be under indictment by the SEC. Moreover, the Federal Reserve will need enhanced authorities to rifle these dollars into these government-sponsored research and development programs. Finally, our most important industries and manufacturers (such as GM) must be free and clear of bankruptcy distractions if they are to manufacture the electric jets of the future. In conclusion, first we must fix Wall Street, then we fix the manufacturing companies, and then we hope for the best on Main Street. Look for trillions to be spent on "invention" reserarch in electric jets, spontaneous combustion, weather control systems, and massive campaign contributions in the next few years...