That Merrill Lynch now stands accused should not
surprise anyone. Nor will it be any surprise if Morgan Stanley and
Citigroup are accused of similar dealings. Indeed, it may be interesting
to see who is not accused.
Goldman's statement The SEC
allegations are “unfounded in law and fact, and we will vigorously
contest them” is an interesting theoretical debate.
Accusations
that Goldman front runs trades, bets against clients, is unethical to
the nth degree, and has no sense of fiduciary responsibility to its
clients is quite easy to believe. Whether Goldman Sachs violated the law
is another question.
Even if the Goldman settles with the SEC
for peanuts, numerous cases will likely make it to court. This may drag
out for years.
Obama Says
Reform Must Move Forward
Clearly the SEC charges were
timed to meet Obama's agenda.
Treasury
Secretary Timothy F. Geithner said he thinks the U.S. will adopt
financial-industry reforms that will take derivatives “out of the dark”
and eliminate the need to “clean up the mess later.”
Reforms are
needed so that regulators can “act ahead of the storm,” Geithner said.
“Ahead of the abuse. Ahead of the crisis.”
The Obama
administration has been seeking Republican support for legislation
introduced by Senate Banking Committee Chairman Christopher Dodd, a
Connecticut Democrat. Dodd’s bill sets up a mechanism for unwinding
systemically important financial firms when they fail, creates a
consumer protection bureau at the Federal Reserve and bolsters oversight
of derivatives and hedge funds.
It is already way to late
to prevent a massive derivatives blowup of some sort. The only question
is when that blowup happens. It could be next month or years from now.
Now that the SEC has dropped a bomb on Goldman
Sachs, the list of who wants an investigation and is about to file civil
charges mounts by the hour. Prime Minister Brown is the latest in on
the act. ....
Lawsuits Rest On
Single Point
Every one of these lawsuits rests on a single
point regarding improper disclosure. The Wall Street Journal discuses
the situation in SEC
Faces Challenges With Goldman Case
"Hedge Funds are Extensions of the Dealers
with which they Interact"
Institutional Risk Analysis has
some interesting commentary about the SEC
Litigation
In the case of Paulson, the information
provided by the SEC makes it seem as though Paulson was the party which
initiated these transactions and, according to the SEC, paid GS $15
million to arrange and market these CDOs to investors. Paulson was also
apparently working as an advisor to GS and collaborating with GS
regarding investment strategy. A spokesman for Paulson told The New York Times that all of their
dealings with GS and other parties were on "an arm's length basis." We
believe that reasonable people can differ on this issue. We also suspect
that the nature and the extent of the relationship between GS and
Paulson will be the subject of extensive legal and political inquiry in
the weeks and months ahead.
But for us, the bottom line is that
hedge funds often times are merely extensions of the dealers with which
they interact. It is often difficult if not impossible to tell where the
dealer's interests end and those of the hedge fund begin, especially
when the dealer and the fund seem to be working in concert to create
securities that are being sold to third parties.
... "To be fair,
Goldman is not alone—all of this appears to be normal business
procedure. In early spring 2010 a court-appointed investigator issued
his report on the failure of Lehman. Lehman engaged in a variety of
"actionable" practices (potentially prosecutable as crimes).
Interestingly, it hid debt using practices similar to those employed by
Goldman to hide Greek debt. The investigator also showed how the prices
by Lehman on its assets were set—and subject to rather arbitrary
procedures that could result in widely varying values. But most
importantly, the top management as well as Lehman's accounting firm
(Ernst&Young) signed off on what the investigator said was
"materially misleading" accounting. That is a go-to-jail crime if
proven.
The question is why would a top accounting firm as well
as Lehman's CEO, Richard Fuld, risk prison in the post-Enron era? There
are two answers. First, it is possible that fraud is so wide-spread that
no accounting firm could retain top clients without agreeing to
overlook it. Second, fraud may be so pervasive and enforcement and
prosecution thought to be so lax that CEOs and accounting firms have no
fear. I think that both answers are correct." ...
"Meanwhile, the
Obama administration should immediately revoke Goldman's bank charter.
Even if the firm is completely cleared of illegal activities, it is not a
bank. There is no justification for provision of deposit insurance for a
firm that specializes in betting against its clients. Its business
model is at best based on deception, if not outright fraud. It serves no
useful purpose; it does not do God's work. .... Actually, anyone who
ever worked for a financial institution must be banned from Washington
until we can reform and downsize and drive a stake through the heart of
Wall Street's vampires."
I think Goldman Sachs is guilty of
fraud. Others may disagree. Ultimately a court of law will decide.
Regardless, Goldman Sachs does not do "God's work", it is not a bank but
rather a hedge fund with no ethics, with business a model based on
greed and deception (at best) just as the Wall Street Pit claims.
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