Goldman Under Scrutiny For Fraud
As you no doubt now know Goldman Sachs is being accused of trickery in its marketing of a certain securitized deal. The SEC is attacking an aspect of the Goldman business model that many of us find repugnant. Whether Goldman broke the law will be difficult to prove. That it was reckless and unethical is beyond any reasonable doubt.
The deal, boiled down to its basics went this way:
Goldman packaged a set of mortgages into a bundle, a mortgage backed security filled with residential mortgages – an ‘RMBS’. It hired an advisor to help identify the mortgages and assist in the packaging. It then turned around and sold off pieces of the RMBS to third party investors. Very soon after the sale was completed some of the mortgages turned to losses. Eventually 99% of the underlying mortgages were losses, and the RMBS had turned out to be worthless. The investors all lost a pot load of money.
This was typical of swathes of the lunacy of the last decade. History books will tell the story well: incompetent investment bankers churning stupid assets to gullible investors who all lost their shirts. All in all an ugly and depressing era for Wall Street.
Or was it? Were the bankers incompetent or, worse, were they gangsters?
Here’s the trickery.
Goldman came out golden. And so did that advisor.
In fact the advisor made a fortune. Its name is Paulson & Co. one of the largest finance companies that lurk in the shadows of our non-regulated banking world. it is to companies like Paulson that we refer when we throw around the phrase ‘shadow banking’.
How did they make a mint on what appeared to be a total dud of a deal?
The advisor constructed a series of credit default swaps, which it bought from Goldman amongst others, which effectively shorted its position in the RMBS. In other words if the RMBS lost value, which it did in spades, the advisor made out like a bandit.
It gets more interesting:
Remember: the advisor, who stood to make a fortune if the asset was a total loser, picked the mortgages that made up the package within the RMBS. In other words the game was rigged from the get go. Goldman allowed the advisor to stuff the RMBS full of toxic waste. Then Goldman turned around and sold it as if it were pristine. The game was stacked against the investors from the start.
Goldman and Paulson were playing with house money. They knew full well what that RMBS was worth: nothing.
Nowhere in any of the marketing materials, and there were a ton of different pieces as there always are, was the advisor’s role disclosed. And nowhere was there a mention of the short position being built by that advisor with Goldman’s active support. To an innocent investor Paulson was not involved in the deal in any way. This lack of disclosure was central to the trickery. Goldman’s entire ability to scam its customers hinged on hiding the fact that the RMBS had been deliberately stacked to fail.
Caveat emptor!
It was a classic case of Wall Street rape and pillage. The folks at Goldman claim it was all legal. It may well have been. But that seems to me to be a tad technical. The law may be nuanced. The lawyers may have winked at the goings on. So Goldman may in fact be correct.
What Goldman is not, is ethical. It very deliberately ripped off customers. This was no accident. And it was not an isolated event. This was a piece of business carefully constructed and crafted to hoodwink customers in order to channel profit to the advisor and to Goldman.
It was fraud.
Goldman may successfully fend off the SEC in court. That is yet to be decided.
My point is somewhat different.
As a former customer of Goldman. Someone who had an enormous respect for the talents of the people there. I am stunned by the complete betrayal this deal represents. No one can possibly look at Goldman the same way again. Their ethical capacity is evidently so fractured and suspect that the very concept of customer has become a quaint anachronism. I think the word ‘victim’ is more appropriate.
The truly sad part of this story is that people looking for assets are inevitably going to have to deal with one of the big Wall Street banks. All of whom have fallen into the gutter like ethical world that this deal demonstrates is where Goldman now lurks. So there is no choice. The entire non-Wall Street world is now seen as a gullible target filled with victims to be pillage at will by the traders and executives who run the big Wall Street banks. The economy – the world in which jobs are created for regular folks – is now a carcass to be picked over for the private gain of a few bankers sitting at trading desks. The notion of a bank playing a role as risk taker and underwriter, as a profitable conservative facilitator of capital allocation for the greater good, is a long distant memory.
It is sad to see a great company such as Goldman fall to such a low and venal ebb. Clearly it is infested with a rapacious and anti-social culture in great and urgent need of cleansing.
Every moment that it wastes defending itself against the SEC charges will stand as testimony to its abandonment of respectability, and its willfulness in the face of the obvious.
There is a stench over Wall Street in sore need of disinfectant.
Which is why banking reform is so vital to our economic health.
We need healthy, ethical, and conservative banks. We need them run by people who respect the fiduciary duty they hold. We should not tolerate the abusive and extraordinarily brazen behavior that deals such as the one the SEC is attacking represent. Even if it was legal.
It was a monumental breach of trust.
And trust used to be a bankers most treasured possession.
Shame on Goldman. Shame on Wall Street.
