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Goldman Sachs and the Luxury of No Risk

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Written by Ronald Ricker, M.D and Dr. Venus Nicolino

The 'truths' are falling like raindrops in a thunderstorm -- 'Truths' about the financial disaster that is consuming our society. Our economy supposedly collapsed because our financial system froze, stopping lending, largely because of the sub-prime mortgage fiasco. It was this problem that lead to TARP, our government's $750 Billion attempt to loosen our financial system, without which our economy would collapse. Or so the story went.

Wrong.

In October of 2008, Goldman Sachs, the "gold standard" in our investment banking industry, took $12 billion of our money, otherwise known as TARP, because they 'desperately' needed that money to become liquid again. This money was returned within one year. The following year, Goldman gave out $19 Billion in bonuses to their employees. Guess they didn't really need the money.

The populist anger over much of what has happened with Wall Street in the last 2-3 years stems from situations like that of Goldman Sachs. The general population is fine with the idea of making profits from genuine hard work and ingenuity. But when the populous feels like the system is gamed and somehow one group profits not necessarily from intelligence and hard work but malice and greed -- and connections (see the Fed and other Paulson) -- we start to lose the whole spirit of free enterprise. Today, Goldman Sachs was charged with defrauding investors by the Securities and Exchange Commission -- $1 billion worth of fraud discovered so far. The fraud itself is not the major issue at hand, it is the issue of equity. How can an institution with the power of a Goldman Sachs commit such an obvious breach of fiduciary duty and have no sense of humility. The reason is that there are no repercussions, perhaps until now.

The fraud goes as follows: In 2007, Paulson & Co., a billion dollar hedge fund, wished to take a bearish position in mortgage backed securities. In short, they wanted to make money with the decline in values of mortgage backed securities. To do so purely on intellect would be one thing, but to purposely structure a product with substandard collateral (i.e. mortgage collateral that was, in layman's terms, toxic) insured that this fund would make money as the pool of mortgage securities was guaranteed to decline in value. Goldman was happy to partner up with these principles and created a new Fund to accomplish these goals, the Abbacus Fund.

It's an all too familiar arrangement, Goldman-Sachs and Paulson and Co. made an unholy alliance of simple economics. Paulson & Co. would choose the toxic mortgage backed securities to put into the Abbacus Fund and Goldman would sell it to their clients. Per the Abbacus Prospectus, an independent company was to select the mortgage backed securities to be included in the pool of assets that made up Abbacus. "Independent" here means anyone but Goldman-Sachs or Paulson & Co. In direct contradiction to the promise of the Abbacus Prospectus, Paulson & Co. selected the assets for the pool and Goldman, with little contrition, sold this crap to their clients. With any good con you need two parties. Goldman lied to prospective buyers, saying that only high quality mortgages were purchased. Those who bought Abbacus fund expected their shares to go up. Goldman-Sachs and Paulson & Co. knew the fund would go down. Paulson shorted the fund out of the gate (i.e. he bet on the fact that the fund would lose value - not hard to do when you know better than anyone the underlying value of the assets that were contributed to Abbacus). It did go down, as expected, and Paulson & Co. made lots of money. $1 billion to be exact, so far. And Abbacus lost $1 Billion. And counting.

Goldman-Sachs was paid $15 million to set up this fraud and claims they lost money. The reality is that they also have proprietary capital that allows the firm to take positions in trades where they know they can make money - and without a doubt they bet alongside Paulson & Co. and made billions as Abbacus got smoked. A fact Goldman can conveniently deny as their proprietary trading desk effectively has nothing to do with their mortgage backed securities desk (a convenient fact that most of Wall Street doesn't want Main Street to know). By the way, this fraud was set up in 2007, approximately 6 months before the government gave Goldman-Sachs $12 Billion to 'unfreeze' them.

Although the actual dollars involved in this Goldman Sachs fiasco, as counted so far, by comparison to the US economy, is small, the horrendous implication is that this fraud by Goldman is not a one time occurrence. Goldman Sachs has undoubtedly done this more than once. However, what is far worse than the accused fraud or the history of fraud is the simple fact that crime does in fact pay - and very well. Goldman is by no means alone in this drive to make money at the expense of ethics and morality. But at what point do we start destroying the fabric of what has made this country great. When we have so little to show the rest of the world in terms of industries that make products in the USA - we are still supposedly the financial superpower of the world, or so we thought. How sad to think that the emperor has no clothes. And, what little clothes we have are made in China.