I’m trying to get a feel for the Goldman investigation. Felix Salmon takes a detailed look at the charges here and sums up:
The scandal here is not that Goldman was short the subprime market at the same time as marketing the Abacus deal. The scandal is that Goldman sold the contents of Abacus as being handpicked by managers at ACA when in fact it was handpicked by Paulson; and that it told ACA that Paulson had a long position in the deal when in fact he was entirely short.
(note: the Paulson here is not Hank, it is the hedge fund Paulson and Co.)
Essentially, Goldman was selling investors CDOs that Goldman thought were worthless and was lying about who assembled the CDOs along with what the actual assembler really thought of the CDOs’ contents. The former is legal, the latter may or may not be.
(Note: I’ve edited this post a lot for clarity, so I hope it makes sense now.)
Edward G. Talbot
Yes, it is garden-variety fraud if they actually did what they are accused of. I have no doubt that they did of course, but whether a case can be made by the SEC I’m not sure.
KG
It may not be illegal (could be under securities laws, not my area of expertise), but it’s definitely unlawful, it screams of fraud.
r€nato
If it’s not illegal, then there’s something wrong with the law and it should be made illegal.
And the Republicans will, of course, obstruct that reform and the scumbags at GS will, of course, work harder at plausible deniability to get around such a reform.
…I’m trying real hard to make sense of that alphabet soup at the link, but it’s intimidating. I feel like I just grasp about half of it and I’m making educated guesses about all but 10% of the rest.
pixelpusher
Hello??? It was the poor people who did it! Stop trying to cover for them! The bankers were just innocent bystanders!
burnspbesq
Well, there certainly seem to be misstatements and omissions. The issue will be materiality.
I am not a securities lawyer, but I know as much securities law as I need to know to practice tax law. My understanding is that the test for materialty is pretty simple, i.e., “if a reasonable investor knew the real story would they still have done what these investors did?”
I leave it to others to jump to conclusions before seeing any of the evidence.
Keith
This would be one of the “market innovations” that we hear so much about.
r€nato
@pixelpusher: Indeed, all you need to know is:
Democrats
Barney Fag
Chris Dodd
Clinton
Carter
The darkies and illegals
Steve
Goldman didn’t necessarily think they were worthless, although it believed the whole subprime market was going to blow up in the near future.
What Goldman knew is that they had an investor (Paulson) who wanted to create an investment and take the short side of it, but that no one would want to buy it if they knew the component parts had been self-selected by the person on the other side of the bet. So they used ACA as a sham intermediary, and told investors that the component parts had been selected by this objective third party.
Here’s an analogy. You’re going to play poker, and you’re told the cards are going to be dealt by some fair and independent third party. Only, wait, it turns out the cards in your hand were actually picked out of the deck by the guy you’re playing against. Did I forget to mention that?
Culture of Truth
Capitalism, baby!
jncc
Michael Lewis’ “The Big Short” is a useful summary about what Goldman, and others, were doing during this time.
I just happened to start reading it 3 days ago and even to my jaded eyes, it was shocking stuff.
Cat Lady
The GS VP Tourre isn’t going to go down quietly or alone. He’s a young guy without any apparent scruples. This is not going to end well for some GS execs. No honor among thieves.
pixelpusher
@r€nato:
What about Acorn? And the Nazis and the Commies? Don’t hold back!
Steve
I could spend hours trying to figure out why my comment is awaiting moderation.
rootless-e
@r€nato:
As i understand it it’s pretty simple
Goldman got another company (ACS) to put together a package of mortgage loan bundles. They then sold shares of the package to their clients. What they didn’t tell their clients is that another Goldman client, Paulson, had selected these mortgage loan bundles because he believed they would fail and he was betting they would fail.
This is like: I sell you a car, without telling you that my friend picked this car and managed to buy insurance on it that paid him if it caught fire.
licensed to kill time
@Steve: I would guess games of chance for $200, Alex.
Midnight Marauder
I thought this article originally published at The Big Money had some pretty good insights on the entire ordeal. Especially this angle, which I haven’t really seen discussed that much elsewhere:
Bob L
Please people; Jimmy Carter was president from 1976 – 1980. The bankers had no choice, they were forced to do it!
tworivers
I think it would be very healing for all involved if John Paulson, Fabrice Tourre and Lloyd Blankfein were placed in stockades on a public square. Ideally there would be an ample supply of tomatoes for people to hurl at them.
El Cid
@r€nato: You forgot FANNIE FREDDIE and ACORN!
Roger Moore
@tworivers:
Fixt. Sorry, but public shaming just ain’t enough. We need to see some blood.
Omnes Omnibus
@Bob L:
Well done, sir. Absolutely none of that is true. I applaud your dedication.
anonymous
Be the Jedi, Obama, be the Jedi.
Anton Sirius
@Roger Moore:
I know it might be cold comfort, but metaphorically speaking that’s exactly what happened on the market today: Goldman’s stock price has dropped almost 13% since the news of the suit broke.
That’s the Wall Street equivalent of the boozers scattering for the exits when the police raid the speakeasy.
tworivers
@Roger Moore:
An old-fashioned stoning, you say? That’s pretty hardcore, man – but I reckon I can get behind the idea if they’re not stoned to death.
Tsulagi
@burnspbesq:
I’m guessing Goldman’s errors and omissions coverage is likely provided by AIG. It would just fit. Goldman settles (it’ll never see a courtroom), AIG pays the settlement, and then is back looking for more taxpayer money to bleed out.
Legalize
I saw we just nuke Goldman from orbit. It’s the only way to be sure.
That Homo-Erotic Burger King Clown
With politicians in general, and this Administration in particular, you need to consider with several levels of thought, their actions.
These lawsuits, in normal civil circumstances, would be filed by those who were wronged to the tune of trillions of dollars. These lawsuits would have involved discovery periods, uncontrollable by the Goldman Sachs machine. This would have ruined Goldman.
There were none of these lawsuits (zero) 0. There should have been thousands.
Instead Goldman (Hank at the time), installed themselves at the Treasury, and made their CDO buyers whole with taxpayer money.
Now Goldman is in charge of the entire government (birth certificate), and is staging a public show trial which they themselves control. They will clear themselves with a bandaid. This is their get out of jail free card as they can only be tried once under our current form of government.
Teabaggers continue to observe with our eyes.
A really good place to learn the details of this, admittedly sharp move, is Plato’s The Cave.
Napoleon
@Tsulagi:
Fraud is not insurable (at least your own fraud). That is why it is E & O and not E,O & F.
J. Michael Neal
@burnspbesq:
I don’t think materiality can be questioned at all. If the facts are as alleged, the misstatements were clearly material to ACA, since they provided the wrap, and probably material to other investors.
I think the only question of law here is whether or not the misstatements qualify as an “omission to state a material fact necessary in order to make the statements made” in the sense of whether or not this was something that Goldman was required to disclose.
I’m somewhat surprised that the SEC didn’t reference Reg AB (on asset backed securities; it’s a part of Reg S-K on the issuance of new securities, which is authorized by the Securities Act of 1933) in the complaint. The instructions to Item 1119(b) state:
If you follow the trail of indicated sections from Item 1119(b) to Item 1119(a) to Item 1100(d)(1), you get that the list of related parties whose interest is required to be disclosed includes:
It seems to me that Reg S-K requires that Paulson’s interest needed to be disclosed.
Or, maybe not. My guess is that the defense is going to hinge not on materiality, but on the fact that at the time of registration, Paulson was not short. They didn’t actually enter into the short positions until after the security was created. I guess I’ll be interested to see whether or not the firm intention to enter into a position is an interest that requires disclosure. I’m not a lawyer, merely a poor accountant, so I don’t know if this is actually a settled issue or not.
The Dangerman
@tworivers:
Without death or having any permanent damage to any organs, I say you are good to go.
/John Yoo
J. Michael Neal
@That Homo-Erotic Burger King Clown: Wrong. Enforcement of much of the Securities Act and the Securities Exchange Acts (the 1933 Act and the 1934 Act respectively, for which the specific rules are Reg S-K and Reg S-X) is specifically given to the SEC, and private lawsuits aren’t possible. That’s done precisely to prevent companies from being wrecked by nuisance lawsuits. Securities law is a major pain, and can be so nitpicky that frivolous suits could be a real problem.
So, the order of things does not support your conspiracy theory. The sorts of investor lawsuits you are thinking of originate from a different set of rules that don’t apply here.
Elisabeth
@That Homo-Erotic Burger King Clown:
Correct me if I’m wrong but this is a civil complaint. They can still face criminal charges; DOJ and US Attorney personnel have refused comment on the matter.
I also heard that this opens up the possibility for dozens (hundreds?) of civil lawsuits that probably won’t wait for the SEC action to finish. At the very least it would seem to me that GS is going to be very busy defending itself in multiple setting.
Elisabeth
@J. Michael Neal:
So what I heard this morning about the possibility of lawsuits is wrong?
Tsulagi
@Napoleon:
You may call it fraud, Goldman would say at worst they may have made honest mistakes and unintentional nondisclosures. The suit will be settled.
Bob K
Fellow Balloon-Juice Readers:
Do not google “Circle Jerk” – If for some reason you do google circle jerk DO NOT click on the first web site you find there. SERIOUSLY – the nuns would beat us within an inch of our life if they knew we saw that. That being said I just want to mention that Washington pundits are rather like the people they most like to make fun of.
You’ve got to remember that these are just simple farmers. These are people of the land. The common clay of the new West. You know… morons.
Of course it’s a circle jerk. They have been interbreeding since before they came over on the Mayflower.
Of course in their own lives they more resemble Jeff Foxworthy: You might be a republican if you go to family reunions to meet women.
Okay – other than that I got nothing – crawl back into my refrigerator box under the overpass now.
J. Michael Neal
@Elisabeth:
I won’t correct you, because you’re right. The SEC does not have the authority to bring a criminal complaint. If they believe that one is warranted, they must pass the case to the DOJ. However, they are not precluded from both filing a civil complaint and referring the case to Justice.
No, it was right. I truncated my post so that I was referring to Mr. King Clown’s charge very specifically. Once the SEC has filed a complaint, then all of the investors can line up at the courthouse, papers in hand. Though, they often wait until after the SEC complaint is resolved, because they can size a lot of money on discovery if they file, or avoid the costs of litigation if the complaint is rejected.
J. Michael Neal
@Tsulagi:
I wouldn’t be too sure about this. Recently, some federal judges have been beating up the SEC and rejecting settlements due to too much leniency. The SEC was really embarrassed when that happened, and is probably looking to avoid a repeat. The SEC worded its allegations pretty strongly here, which leads me to believe that they both have the case nailed down (ACA’s e-mails are probably pretty useful here) and are looking for some serious sanctions.
Also, the specific indictment of Fabrice Tourre as an individual defendant is interesting. It means that the commission is leaning on him pretty heavily.
Brick Oven Bill
SEC Website:
Regulation S-K.
Regulation S-X.
Where in this mess is a buyer of a financial product that was falsely represented prevented from seeking redress?
Who would protect the individual who bought a CDO from Goldman in the case that the government did not step in?
Thank you in advance for your time. I need to stop giving up the good aliases.
Elisabeth
@J. Michael Neal:
Thank you so much for the clarification. I barely understand any of this and I was relying on what I heard from CNBC this morning.
kay
@J. Michael Neal:
I don’t know how they can characterize assertions they made in their own marketing materials as “omissions” or misstatement, and those marketing materials are not a big secret, and only available through discovery. They NYTimes have the marketing materials.
They made a positive statement that there would be an “independent manager” in information they provided to prospective investors and on which investors (presumably) relied. There wasn’t an independent manager, and they knew it.
Bob L
@That Homo-Erotic Burger King Clown:
If you theory is true dude then your whole Tea Party is utterly useless. No, your bankers-control-the-universe is just a smoke screen for community activists, who passed a law FORCING honest real Americans (bankers) to give loans to brown people over thirty years ago.
The banks had no choice but to commit fraud on a massive scale. Don’t you see BROWN people had bank loans! They were up against Jimmy Carter. What else were they going to do but lie to their customers? Tell the truth. What is this, Communist Russia now?
J. Michael Neal
@kay: As I said, a lot of it depends upon whether Paulson is determined to have had an interest in the security based upon its *intention* to go short. It was not short at the time of the deal. It was represented that they were going to invest $200 million in the equity tranche (the position of first loss), and that’s exactly what they did. They also bought enough protection on the higher tranches to more than cover themselves, but that was a future action. I could see how it would be ruled that, AT THE TIME PAULSON WAS INVOLVED IN THE SELECTION PROCESS, they were, indeed, independent. Ethically they sure as hell weren’t, but I don’t know that it rises to the level of meeting the legal definition.
Suicidal Zebra
I don’t know about anyone else, but I’m going to start buying shares in shredder machine manufacturers.
Tsulagi
@J. Michael Neal:
I’d put money on it. In addition to political clout, Goldman has the resources to bring a legal expense world of hurt to the SEC if they try to go the distance with this. SEC’s entire budget for this year is around $1B. About 1/16 the amount Goldman paid out in bonus money for last year.
And while not passed yet, a provision championed by Schumer in the Senate banking reform legislation calls for the SEC to be self funded. A nice settlement would help fill the tip jar. And if Goldman could make that settlement without admitting guilt, a settlement they may even get their insurers to pay, it’s all win.
Ash Can
@J. Michael Neal:
@kay:
Exactly. Anyone pulling crap like this at my old firm would have been fired on the spot. Intentionally misleading clients and acting on non-public information were strictly forbidden, for the self-evident reasons that it would shoot hell out of our reputation and cost the firm a fortune in fines. It boggles my mind that any firm, let alone big ones on Wall Street, would take risks like this. I’m coming around to the realization that these guys didn’t just think they were too big to fail, they thought they were too big to be subject to the law. I hope the SEC throws the damn book at them.
J. Michael Neal
@Tsulagi: I’m not saying a settlement won’t happen, but I’m not convinced it will. I also suspect that any settlement will be significantly more stringent than it would have been in the past. Mary Schapiro needs some good PR right now.
I’d also love to see the SEC go to Congress, and ask for a special appropriation specifically to fund a prosecution. They might get it, and it would give the GOP another chance to get run over by the train they’ve created.
J. Michael Neal
@Ash Can: Actually, you touch on what might be the biggest cost of this whole thing: Goldman’s reputation. An actual SEC allegation that you like to rip off your customers is a big deal. Even if the action fails on some technicalities, or is even settled for a large amount, that could hurt a lot. The world has changed, and people might be a lot less interested in doing business with someone with that sort of trail behind them.
kay
@J. Michael Neal:
I can’t tell the timeline from the complaint. They use “had” adverse economic interests but the same paragraph uses “after choosing the portfolio..”
J. Michael Neal
@kay: Keep in mind that they went short by buying protection on the security that was created. Pretty much by definition, you can’t do that until after it exists.
In fact, that was the entire purpose of the scheme. Paulson wanted to short a particular bunch of assets, but didn’t have a vehicle through which they could do it. They needed to create the security. If they had been able to go short without it, they never would have had to get involved in this mess in the first place.
Linda Featheringill
An explanation from Ezra Klein:
WereBear (itouch)
It has occurred to me that when you rig the game, there no longer has to be any expertise and skill.
Just what kind of talent is required? More like a lack of things like ethics.
Steve
@J. Michael Neal: JMN, this is not really a “failure to disclose” case. They made an affirmative misrepresentation when they said the component parts of the CDO would be selected by ACA, an independent third party. Instead, the parts were selected by Paulson, whom they knew intended to take the other side of the bet once the security was created.
So technical questions about whether they were affirmatively required to disclose aren’t really important. The question is whether what they said was false and whether it was material. Similarly, since the case involves a false representation of material fact in connection with the sale of a security, I see no reason why the purchaser couldn’t bring an ordinary 10(b) claim under the securities laws.
burnspbesq
@kay:
Felix Salmon has a link to a pdf copy of the offering materials on his blog at Reuters. Should make for interesting reading.
burnspbesq
@Suicidal Zebra:
Actually you might want to think about shorting those stocks. Buried way in the back of the Sarbanes-Oxley Act was a provision that made the criminal penalty for destroying evidence the same as for attempted murder of a witness (i.e., 20 years).
kay
@burnspbesq:
I have been meaning to ask you.
Who do you read on terrorist prosecution issues? Is there a lawyer-blogger who focuses on that? You listed certain lawyers you were reading once once, and I saw it but didn’t pursue it. I’m looking for analysis of the state side, so a former prosecutor would be great. I’m familiar with the defense argument. I can read the Obama DOJ filings and such, but I need explanation/analysis.
Of course, no wingnuts. I’m just looking for an individual to read who has a pro state-side bent, but is not a right wing lunatic.
I was actually hoping there was a former Clinton-era prosecutor who was weighing in somewhere on Obama DOJ approach. I’ve been reading a little on the Clinton/terrorism era, and I want to compare Obama DOJ to Clinton DOJ, re: terrorism prosecutions. Is anyone doing that?
Sibelius
And the great thing about the SEC litigation process is they get YOUR lawyers and staff (former staff here, been there a few times) doing most of the dirty discovery. The key for defendants in litigating with the SEC, is whether the staff attorneys know, or rather don’t know, what they’re doing. Wells notices get very specific with tailored doc. requests and the negotiations get pretty intense, but in the end you give them the documents they want, all of them. There is no “document dump” of millions of pages of junk for them to sift through, they get the good stuff before they file the complaint.
And then, the plaintiffs securities lawyers get the package as well, maybe a little later, but in a nice neat package, buried somewhere.
And let’s not forget the 12% stock drop today, if they haven’t already been filed they will be on Monday. I know Lerach is out of the game, but his proteges are working hard as we speak. Once the SEC complaint is filed it’s going to be really hard for a judge to dismiss a securities class action without allowing discovery.
I don’t miss the fun. The overtime pay, yes, the rest of it, not so much.
snarkout
@steve:
Discussion I saw elsewhere on the interwebs (including from a former Goldman Sachs bond trader) centered around whether providing a pre-screened list to ACA that ACA was free to reject (indeed, they rejected about 20% of the MBSes) or extend meant that Goldman could legally claim that ACA was, in the end, doing the picking. Goldman stacked the deck, but ACA still drew the cards. (The consensus was that Goldman’s claim is not going to hold up but that a bunch of lawyers are going to send their kids to Princeton on the proceeds of arguing about it.) And yeah, it sounds like the reputational hit from the SEC officially putting Goldman’s clients on notice that GS will rip them off is more dangerous to them than a paltry billion dollars in fines and legal fees.
burnspbesq
@kay:
As luck would have it, there is a fascinating post on this very subject at Balkinization today. I might also browse the archives at Volokh Conspiracy and Prawfsblawg. There used to be a blog called Sentencing Law and Policy, which might provide some useful links, if not some content. I’ve never spent any time with the Military Law Review, but it’s out there and seems like it would be worth checking out.
Finally, run some keyword searches in SSRN – a lot of legal academics post papers there that later become law review articles.
HTH.
burnspbesq
@burnspbesq:
Duh! Jack Goldsmith!
kay
@burnspbesq:
Thanks so much. I was reading how Janet Reno and Patrick Fitzgerald wrangled on the whole “attorney-client confidentiality versus national security” question and I realized that there was a whole approach prior to Bush: that they were dealing with this intensely during the Clinton years, and I don’t know anything about that, because it wasn’t national news.
I feel as if the Clinton approach was rejected whole post-9/11, in that insanity and hyper-political climate, and maybe that wasn’t wise: to start from scratch. It’s so Bush-era: to judge the work that was done as a “failure” due to the attack, and throw it out.