Goldman charged with defrauding clients...anybody surprised?

[Narmer]

Honestly, I'm surprised this doesn't happen more often. Investments banks usually go into partnerships or compete with their clients. I'm not sure how strong that chinese wall holds up.

http://money.cnn.com/2010/04/16/news/companies/sec.goldman.fortune/index.htm?hpt=T2

SEC charges Goldman Sachs with fraud
By Colin Barr, senior writerApril 16, 2010: 10:57 AM ET


(Fortune) -- The Securities and Exchange Commission on Friday charged Wall Street's most gilded firm, Goldman Sachs, with defrauding investors in a sale of securities tied to subprime mortgages.

The SEC said it charged New York-based Goldman (GS, Fortune 500) and a vice president, Fabrice Tourre, for their failure to disclose conflicts in a 2007 sale of a so-called collateralized debt obligation. Investors in the CDO ultimately lost $1 billion, the SEC said.

The SEC's civil fraud complaint alleges that Goldman allowed hedge fund Paulson & Co. -- run by John Paulson, one of the biggest winners in the subprime collapse -- to help select securities in the CDO and didn't tell investors that Paulson was shorting the CDO, or betting its value would fall.

"The product was new and complex but the deception and conflicts are old and simple," said Robert Khuzami, director of the Division of Enforcement for the SEC.

"Goldman wrongly permitted a client that was betting against the mortgage market to heavily influence which mortgage securities to include in an investment portfolio, while telling other investors that the securities were selected by an independent, objective third party," he said.

Goldman shares tumbled 10% in midmorning trading on the SEC announcement. A Goldman spokesperson didn't immediately return a call seeking comment.

 

[Special K]

This isn't directly related to Goldman Sachs, but the most recent episode of This American Life tells a similar story about how a hedge fund was able to select which bonds went into CDOs created by the investment banks. The hedge fund bought a small piece of the CDO and took out CDS on the rest of it. They knew the securities were likely worthless, and the money they made from the CDS was much greater than the money they lost on the small piece of the CDO they purchased. Unfortunately the investors who bought the rest of the CDO had no idea.

http://www.thisamericanlife.org/radio-archives/episode/405/inside-job

 

[Pneumothorax]

Too bad this is a toothless civil lawsuit. If it were a criminal one, I'd one of the first in line with pitchforks.

 

[nageov3t]

is this like the government suing itself?

 

[Balt]

Seems like Goldman was pulling some pretty shady stuff here. They knew the fund was intentionally created to be full of what someone suspected to be bad assets, but sold it to customers claiming it was created by an independent manager. Dirty pool.

 

[her209]

Just in time for the financial reform bill...

 

[lothar]

is this like the government suing itself?

Government no longer owns any stake in Goldman.
They already repaid TARP.

 

[Balt]

I wonder how many Goldman Sachs employees shorted their own stock today.

 

[Slew Foot]

Im sure theyll get off with barely a slap on the wrist

 

[nageov3t]

Government no longer owns any stake in Goldman.
They already repaid TARP.

I was more thinking about how many ex-GS'ers are running things in the west wing.

not that I can say anything, Goldman Sachs is a major investor in the company that I work for too

 

[exar333]

This isn't directly related to Goldman Sachs, but the most recent episode of This American Life tells a similar story about how a hedge fund was able to select which bonds went into CDOs created by the investment banks. The hedge fund bought a small piece of the CDO and took out CDS on the rest of it. They knew the securities were likely worthless, and the money they made from the CDS was much greater than the money they lost on the small piece of the CDO they purchased. Unfortunately the investors who bought the rest of the CDO had no idea.
http://www.thisamericanlife.org/radio-archives/episode/405/inside-job

Doesn't anyone see that as a major issue? "We just bought $500 million in these junk bonds, but it's not our fault, we didn't research them at all!"

If I want to sell you something for 10$, and I am also betting against the future value of that item, unless you are consuming that material you would not pay 10$ for it. If you did, you are a fool.

 

[nonlnear]

This is simply laying the groundwork for a toothless financial reform bill. By portraying the losses that resulted from the CDO/CDS mess to the public as a problem of isolated frauds, they are legitimizing the rating agencies and other institutions that systemically failed to do due diligence. You can see it coming a mile away.

edit: Spot on, ExarKun333. The blind faith in "third party managers" is the problem. There are no third parties in the financial system. Everybody is paying everybody else off, which is what makes it such a hilarious joke.

 

[Patranus]

If the Democrats could have gotten their reform packages passed I don't think that these charges would have been filed.

 

[halik]

I wonder how many Goldman Sachs employees shorted their own stock today.

Can't take any positions for less than 30 days, so I would bet none. Although there was an exception if you're down more than 25%, but at that point the losses are sunk.

 

[Narmer]

Can't take any positions for less than 30 days, so I would bet none. Although there was an exception if you're down more than 25%, but at that point the losses are sunk.

I wonder how many did in the fall of 2008. Probably everyone.

 

[heyheybooboo]

If the Democrats could have gotten their reform packages passed I don't think that these charges would have been filed.

How can any single person hate America as much as you? Please leave and take your Con henchmen with you.

The future of America rests with obliterating scum like you and your butthole buddies. Take your 'politics before people' and choke on it.

The Kings of Leverage at GS are criminal. If they wish to continue their investment activities the Fed window should immediately close on their greedy, grubby little manicured fingers.

"Banks benefiting from public support by means of access to the Federal Reserve and FDIC insurance should not engage in essentially speculative activity unrelated to essential bank services."

--

 

[halik]

I wonder how many did in the fall of 2008. Probably everyone.

I don't think the company allows any short transaction from the insiders (nearly positive that's perma blacklisted) and you're inherently long by working there anyway. Part of my comp were annual stock grants.

If anything people would buy puts to protect themselves from the downside if they have a heavy exposure to 1 name.

 

[nobodyknows]

Was I surprised they were defrauding clients? Absolutely not!!

 

[Genx87]

Is this reform bill going to finally force these bank to pick deposit or investment again? Or are we just going to get some watered down piece of shit the banks and big govt will trample over until it implodes and come running to the taxpayer again?

 

[OBLAMA2009]

the sad thing is that for every one time theyre charged with something minor like this there are 10000 times that they get away with it and walk away with millions, largely because the they are smarter than regulators and prosecutors, who have no idea what all that stuff is even about

 

[heyheybooboo]

Is this reform bill going to finally force these bank to pick deposit or investment again? Or are we just going to get some watered down piece of shit the banks and big govt will trample over until it implodes and come running to the taxpayer again?

The cynic in me thinks all of the recent 'noise' about banking reform between the Cons and the Dims is a duhversion to focus attention away from moving bank holding companies out of 'speculation' and derivatives.


edit: I had to go snag my China Catfish out of the toaster oven

Government no longer owns any stake in Goldman.
They already repaid TARP.

GS has not repaid the $13+ billion passed through from AIG, nor do we know how much capital the Fed pumped into their 'operation' as a result of their conversion to a bank holding company.


--

 

[Special K]

Doesn't anyone see that as a major issue? "We just bought $500 million in these junk bonds, but it's not our fault, we didn't research them at all!"

If I want to sell you something for 10$, and I am also betting against the future value of that item, unless you are consuming that material you would not pay 10$ for it. If you did, you are a fool.

Yeah, it seems no one did their due diligence and instead took the rating agencies' AAA ratings as gospel. What's even more interesting is that many of these banks purchased stakes in the very same CDOs they helped create. I'm not sure if their own risk management departments didn't know about the risk or just didn't care. Maybe they thought the fees they were generating from selling the CDOs would more than offset any losses they would be forced to take.

The main point of the radio episode was that this hedge fund was generating a huge amount of business for the investment banks by requesting and buying more CDOs, even though they knew the securities would likely decline in value. In a sense, they were making the crisis worse by causing more bad mortgages to be originated, while at the same time profiting from it.

 

[halik]

The cynic in me thinks all of the recent 'noise' about banking reform between the Cons and the Dims is a duhversion to focus attention away from moving bank holding companies out of 'speculation' and derivatives.


edit: I had to go snag my China Catfish out of the toaster oven



GS has not repaid the $13+ billion passed through from AIG, nor do we know how much capital the Fed pumped into their 'operation' as a result of their conversion to a bank holding company.


--

What 13B you're talking about?

If you're referring to the AIG derivatives positions, you're way off mark. Those things are settled daily (including collateral calls) and IIRC goldman had some $8B in collateral from AIG and another ~2B of other CDSs to cover the gap exposure.

Most people know jack shit about derivatives, so it's easy to make stupid arguments.

 

[Narmer]

Yeah, it seems no one did their due diligence and instead took the rating agencies' AAA ratings as gospel. What's even more interesting is that many of these banks purchased stakes in the very same CDOs they helped create. I'm not sure if their own risk management departments didn't know about the risk or just didn't care. Maybe they thought the fees they were generating from selling the CDOs would more than offset any losses they would be forced to take.

The main point of the radio episode was that this hedge fund was generating a huge amount of business for the investment banks by requesting and buying more CDOs, even though they knew the securities would likely decline in value. In a sense, they were making the crisis worse by causing more bad mortgages to be originated, while at the same time profiting from it.

Risk management is subservient to trading. They are easily pressured into saying yes.

 

[Kadarin]

Was I surprised they were defrauding clients? Absolutely not!!

I am somewhat surprised that the SEC is actually filing charges. I had thought our government was more corrupt than that.