SEC hits Goldman Sachs with fraud

I blogged on this very topic back in late December, and now the SEC is cracking down hard. As one  financial industry insider quoted in the second link says, “This is big.”

From the second link:

Goldman Sachs Group Inc was charged with fraud on Friday by U.S. securities regulators in the structuring and marketing of a debt product tied to subprime mortgages.

The Securities and Exchange Commission lawsuit alleges that Paulson & Co, a major hedge fund run by the billionaire John Paulson, worked with Goldman in creating the collateralized debt obligation, and stood to benefit as its value fell, costing investors more than $1 billion.

Fabrice Tourre, a Goldman vice president who the SEC said was principally responsible for creating the product, was also charged with fraud.

Paulson has not been charged. “Goldman made the representations here to the investors, Paulson did not,” SEC enforcement chief Robert Khuzami said on a conference call.

Goldman said in a press release that the SEC’s charges are completely unfounded in law and fact and it will vigorously contest them.

The lawsuit, filed in Manhattan federal court, marks a dramatic expansion of regulatory efforts to hold people and companies responsible for activity that contributed to the nation’s financial crises. It also comes as lawmakers in Washington debate sweeping reform of financial industry regulation.

Wall Street rigged the CDO market

Man, it’s easy to make money when you can create a bad investment out of whole cloth then bet against its success while selling it hand-over-fist to your unsuspecting clients. There ought to be some legal action in the form of civil suits from defrauded investors if nothing else.

Wall Street wonders why Main Street holds it in such contempt. Stories like this should make that dynamic easy to see.

From the link (bolded text my emphasis):

Mr. Egol, a Princeton graduate, had risen to prominence inside the bank by creating mortgage-related securities, named Abacus, that were at first intended to protect Goldman from investment losses if the housing market collapsed. As the market soured, Goldman created even more of these securities, enabling it to pocket huge profits.

Goldman’s own clients who bought them, however, were less fortunate.

Pension funds and insurance companies lost billions of dollars on securities that they believed were solid investments, according to former Goldman employees with direct knowledge of the deals who asked not to be identified because they have confidentiality agreements with the firm.

Goldman was not the only firm that peddled these complex securities — known as synthetic collateralized debt obligations, or C.D.O.’s — and then made financial bets against them, called selling short in Wall Street parlance. Others that created similar securities and then bet they would fail, according to Wall Street traders, include Deutsche Bank and Morgan Stanley, as well as smaller firms like Tricadia Inc., an investment company whose parent firm was overseen by Lewis A. Sachs, who this year became a special counselor to Treasury Secretary Timothy F. Geithner.

Also from the link:

“The simultaneous selling of securities to customers and shorting them because they believed they were going to default is the most cynical use of credit information that I have ever seen,” said Sylvain R. Raynes, an expert in structured finance at R & R Consulting in New York. “When you buy protection against an event that you have a hand in causing, you are buying fire insurance on someone else’s house and then committing arson.”

About those Goldman Sachs bonuses

Here’s an interesting bit of number crunching:

Strangely we haven’t heard much recently about impending gigantic Goldman bonuses. Once the issue hits the news radar again, I hope to see some detailed analyses of how, exactly, Goldman made its recent record profits.

At the link below you will find an analysis of Goldman’s prop trading numbers for 2008 (not a good year), using the public records of its charitable Goldman Sachs Foundation. Thanks to a reader for sending this. I don’t know how reliable this method is — it all depends on whether GSF’s records reflect the firm’s overall trading pattern.

And now the nut from the above-mentioned analysis:

… Yet what is obvious no matter how the data set is sliced and diced, is that the firm was bleeding money across virtually all prop-traded groups in 2008. Is it any wonder that the firm’s only source of revenue is courtesy of i) the near-vertical treasury curve (thank you taxpayers) and ii) the ability to demand usurious margins on Fixed Income and other products from clients trading in bulk who have no other middleman choices.

Too big to fail …

… and too much arrogance not to use our tax dollars to run up huge year-end bonuses. I know that’s an overstatement and Wall Street compensation is pretty arcane, but the message Main Street is going to get when the final numbers come out is one big middle finger from Wall Street.

If I were Goldman Sachs I’d ramp down a whole lot lest the heavy hand of a Democratic Congress and White House take unwanted action interfering with business as usual on the Street.

Call it what you want — balls, chutzpah, hubris, whatever — it’s very, very bad pubic relations, very questionable internal policy to continue the old ways when the entire game was changed by last year’s bailout, and frankly I think the best description for Goldman’s feeble justification is blind stupidity.

From the link:

As Wall Street firms typically do, Goldman set almost half that sum aside to compensate its workers. Through the first nine months of 2009, the firm socked away $16.7 billion, enough to pay the average Goldmanite $526,814.

The bonus pool is on pace to hit $21 billion for 2009, which would match the record bonus payout of 2007.

Goldman said it won’t decide the size of the bonus pool till year-end. In any case, the payments will be substantial — and will come just one year after huge sums of taxpayer dollars were funneled to financial institutions.

Critics charge that the lion’s share of Goldman’s profits comes from making big bets using cheap dollars printed by the Federal Reserve. Plus, given the crisis that followed the failure of Lehman Brothers, there’s a sense that government officials won’t let big firms go bust. That in effect gives too-big-to-fail firms a license to bet the house.

“This is almost an ‘in your face’ kind of setup here,” said Michael Panzner, a Wall Street veteran who blogs at financialarmageddon.com and who wrote a 2007 book predicting economic disaster. “They’re rolling the dice, and so far they’re winning,” said Panzner.

Banks want backsies

Oh, now they see the light since Bush’s blindly giving team is gone and Obama’s group demanding oversight with teeth is in place.

I hope these banks are able to repay the taxpayer’s money very quickly. I predicted some of the oversight rules put into place by the new economic team might cause some executives to see the capitalist light and decide the public dole of corporate socialism wasn’t so great after all.

Heh.

From the link:

Even before the government announced its latest efforts to fix the troubled banking industry on Tuesday, executives at Goldman Sachs and Morgan Stanley said they wanted to repay the money quickly. Both banks received $10 billion under the first rescue plan last fall.

Paying back all those funds would be difficult in this tough economic environment. But banking executives worry that the government may intrude further into their businesses as long as they are beholden to Washington.

Retail is down …

… maybe for months? This bodes poorly for the holiday shopping season.

From the link:

The sharp slide in economic activity that began in October looks to have deepened in November,” wrote Seamus Smyth, an economist for Goldman Sachs.

Economists have been lowering their forecasts for growth in light of the sharp drop off in November. The median forecast for fourth-quarter growth is now negative 4.1%, with negative 2.9% expected for the first quarter. Most economists don’t see a rebound in growth until next summer.

Power shift — Wall Street to Washington

Irwin Stelzer sees a radical shift in power from Wall Street to DC and puts the blame squarely on Hank Paulson’s shoulders.

And the corporate socialism goes on …

From the link:

The continuing series of bailouts, and potential bailouts, has Irwin M. Stelzer of The Weekly Standard bemoaning “a profound change in the nature of our government.” The check on government power imposed by the Constitution’s separation of powers will be weakened by full Democratic control of both branches, he notes. But the bigger change is the end of markets as a constraint on government. And for this, Stelzer pins much blame on Treasury Secretary Hank Paulson. “Paulson, of course, continues to preside over the billions-going-on-trillions that will be made available to whatever industries make the best case for a hand-out. You might recall that the Treasury secretary came to Washington after heading up Goldman Sachs, a firm now reporting billions in losses after abandoning its business model in favor of status as a government-sheltered commercial bank. Nothing more clearly demonstrates the shift of power from Wall Street to Washington than the Paulson saga. Once the man who raised private-sector funds for private-sector businesses from his perch at Goldman, he is now the man who distributes taxpayer funds to private-sector businesses from his perch at the Treasury.”