Reading the SEC allegations against Goldman Sachs and Co., you get the impression the agency would prefer a simple world where you could charge a company with lying and be done with it. Lying to one’s clients is at the core of the suit against Goldman Sachs. Unfortunately there is apparently no law against lying in phone conversations and meetings, but there are laws against fraudulent written representations, and this is the legal foundation on which the SEC is basing its suit.
The meaty stuff in the SEC complaint is to be found in the behavior of Goldman Sachs and its employee who structured the transaction known as ABACUS 2007-AC1. Fabrice Tourre, now age 31, was a vice president on the structured product correlation trading desk. He put together the ABACUS deals and is said in the complaint to have left out pertinent information, or lied altogether, to the firm that helped set up the ABACUS deal and make it sellable to investors. No other Goldman Sachs employee is identified in the suit, and the management on the trading desk or in his department are described only in shadowy terms.
Goldman’s response this week to the suit says that they will defend themselves vigorously (and no doubt with many millions of dollars of legal expense), so they are not throwing Mr. Tourre to the wolves as some rogue trader. This would have been the logical thing to do since the allegations against Mr. Tourre are especially damaging. By embracing and defending him so readily, we therefore have to assume Mr. Tourre’s behavior is emblematic of the Goldman Sachs culture, and how he comported himself is how many others behaved at the firm. This in itself is very revealing about Goldman Sachs and its management.
The Transaction
The creation of the ABACUS-2007 transaction is certainly interesting and not too difficult to understand. We can follow the SEC complaint step by step.
Ӣ By early 2007, fissures were developing in the residential mortgage market in the US. A few months earlier, in the autumn of 2006, prices of homes had stopped climbing and in many markets had begun to fall. Defaults on home mortgages were beginning to rise sharply.
”¢ Because of this, it was getting harder to sell collateralized debt obligations (CDOs) based on residential mortgages. This business was a specialty of Goldman Sachs, which set up the structured product correlation trading desk in 2005 to create and sell these CDOs. The CDOS were composed of one hundred or more Residential Mortgage Backed Securities (RMBS’s), which were themselves composed of over a thousand individual home mortgages. The RMBS market often structured their securities so that all the mortgages would be from California, for example, or all would be subprime or share some other commonality. This was convenient for creators of CDOs; they could devise sections, or tranches, with different risks, ranging from Aaa rated down to near-default risk, which was referred to as equity because it was tantamount to having no protection other than that of a shareholder.
Ӣ Investors who bought CDOs could choose which level of risk they would undertake; the higher the risk the greater the yield they could achieve. Because of this flexibility and the attractive yields, banks, mutual funds, pension plans, and endowments formed the customer base for these CDOs. These investors were getting a bit choosy, however, given the rising defaults in the mortgage market, and CDOs based on residential mortgage backed securities were getting harder to sell. Goldman had done several ABACUS deals in recent years, and this one under consideration by Fabrice Tourre was expected to generate up to $15 million in fees for the firm.
”¢ What investors wanted to know was who selected the RMBS’s to include in the CDO? They were no longer willing to buy CDOs of this nature if Goldman Sachs selected the RMBS’s; they wanted the assurance that an independent third party had selected only the best securities for inclusion into the CDO. Despite the weakening residential mortgage market and rise in defaults, investors were not especially worried that the CDO tranche they were buying was going to deteriorate. Most everyone agreed housing prices in the US never declined on a national scale, and the CDO yields were still very attractive compared to US Treasuries.
”¢ Not everyone agreed that the housing market was stable. In fact, John Paulson, owner of the Paulson & Co. hedge fund, believed the housing market was about to collapse. He wanted a way to bet against the housing market, and did a study of hundreds of RMBS’s that he thought were ultimately going to be downgraded and lose substantial value. He was particularly interested in those securities that featured mortgages from California, Nevada and Florida (where housing price appreciation had been the greatest), and subprime securities of the NINJA variety (no income, no job, and no assets verified for the home owner).
”¢ Paulson approached Goldman Sachs in early 2007 with an idea for shorting the housing market. He would buy from Goldman Sachs an insurance policy, called a Credit Default Swap (CDS), based on the very RMBS’s he thought would likely lose value. He would pay a one-time fee for this CDS, and if he was right, Goldman Sachs would pay him as much as a billion dollars. Normally CDS’s are sold to clients who are using them to hedge the credit risk in assets they already own, but in the discussions with Goldman Sachs, Paulson made it clear he owned no residential mortgage securities, and was interested in the CDS as a pure speculative play against the housing market.
”¢ The first question that came to Goldman Sachs’s mind was: how do we hedge this transaction? They needed cash flow equal to a billion dollars to pay to Paulson if the housing market did indeed collapse. It was Paulson who suggested Goldman Sachs create a CDO that would bring in a billion dollars; under the right terms a CDO could still be made attractive to investors who believed the opposite of Paulson, in other words that the housing market would not deteriorate. This is where the services of Fabrice Tourre came in to the picture, as he was assigned the task of creating another in the ABACUS series of CDOs.
”¢ To solve the problem of the independent third party, Goldman Sachs approached the collateral management firm ACA Capital, which specialized in selecting and managing the securities in CDOs and had done 22 previous transactions. Tourre told ACA that Goldman was acting on behalf of a sponsor ”“ Paulson & Co. ”“ and that Paulson wanted to contribute to the initial selection of the RMBS’s to be included in the CDO. Paulson sent a list of 123 securities he wanted in the CDO, all of them from his own list of the weakest securities in the market according to his research. ACA accepted only 55 of them for inclusion.
”¢ Several meetings were then set up among Paulson, Tourre and ACA to refine the group of RMBS’s that would ultimately be selected for the CDO. At no time in any of these meetings did Tourre mention that Paulson was going to enter into a side contract with Goldman Sachs to short these securities by purchasing a CDS from Goldman. In other words, it was never revealed to ACA that Paulson had a serious conflict of interest; in fact he had a reverse interest: he wanted the CDO to fail and to do so as quickly as possible. His real interest was getting the worst possible securities included in the CDO package.
”¢ ACA was concerned about Paulson’s desire to include the weakest securities in the CDO. For example, he refused to allow any mortgages from Wells Fargo to be included, because Wells Fargo was known to have a more careful credit review process for mortgages than other lenders. Privately, Tourre assured ACA that Paulson’s financial and economic interest was entirely aligned with theirs, because Paulson and Co. was going to invest $200 million in the equity portion of the CDO. This was demonstrably a lie; Paulson never invested in any portion of the CDO.
”¢ ACA has told the SEC that they would never have put their firm’s reputation at stake and acted as collateral agent for the ABACUS-2007 CDO had they known that Paulson was not going to invest in the CDO, or had they known that he was going to short portions of the CDO by buying a credit default swap from Goldman.
Ӣ When it came time to approach investors, Tourre put together a term sheet, prospectus, and other documents describing the ABACUS-2007 CDO. Great prominence was given to the fact that ACA was the collateral agent and had chosen the securities included in the CDO. There was never any mention that Paulson & Co. had participated in selection of these securities or was a sponsor of the CDO. Several investors have told the SEC they would never had bought the CDO had they known that the selection process was compromised and not entirely independent.
Ӣ The CDO closed on April 26, 2007. By late October, 2007, 83% of the securities in the portfolio had been downgraded, and by late January, 2008, 99% of the securities had been downgraded and lost substantial value. Investors lost hundreds of millions of dollars, and several bank investors had to be rescued by their governments because of these and similar losses.
”¢ Meanwhile, Paulson’s credit default swap soared in value, and he eventually earned $1 billion in profit on his short of the mortgage securities market. This money came directly from the investors who lost at least at much on the CDO. For example, one investor, the Dutch bank ABN, negotiated with Goldman Sachs in late 2007 to get out of their tranche of the CDO, and paid Goldman $841 million to unwind their deal. This money ultimately went to Paulson.
Some Observations
Goldman Sachs has issued a brief statement in defense of their conduct, saying that their job has always been to match the interest of parties with different views about the market. In this case, Paulson & Co. thought the mortgage securities market was going to collapse, while investors in the CDO did not. Goldman gives you the impression they are a disinterested middleman matching buyers and sellers. This is exactly how a trader thinks, and it is traders like Lloyd Blankfein who run Goldman Sachs and have done so ever since the firm went public in the 1990s. This is not what Goldman Sachs used to be like when it was a private firm. Then, it operated only in the interest of one client at a time, and if there was any potential conflict of interest with another client, it would decline the transaction. This culture has died out on Wall Street, and this deal, created as it was on a trading desk, displays the consequences of the new culture where the most important thing is getting the deal done at the maximum amount of profit to the firm.
The behavior of Fabrice Tourre, if proven in court, is indefensible. Goldman Sachs will have to throw him over at some point and claim he did not act within the standards of the firm. They will probably do so in a negotiated settlement with the SEC, after stalling the settlement with legal tactics for a few years so everyone can forget about it. The SEC is demanding a jury trial and disgorgement of all profits, plus an assessment of penalties, so this is going to cost Goldman Sachs a hundred million dollars or more, but in this environment Goldman would rather pay this privately than risk a jury trial.
Notwithstanding whatever Goldman ultimately will say about Fabrice Tourre, he is being defended at the moment because the firm cannot afford to quickly jettison him without affecting morale at the company. He is also a typical Goldman employee ”“ full of himself (he egoistically refers to himself in emails as ”œfabulous Fab”), aggressive with the facts, and unconcerned about conflicts of interest. Perhaps he lied more overtly than most employees would, but stretching the truth a bit must be common when the firm has to spend nearly every transaction skirting over and hiding the conflicts of interest involved.
Very little is said in the lawsuit about Goldman Sachs management. There is a Mortgage Capital Committee that approved the deal. They were made aware of the fees earned and the involvement of Paulson & Co. and the CDS he would undertake with Goldman. Apparently none of these senior executives were the slightest bit concerned about the conflict of interest or whether ACA needed to be misled about Paulson for them to enter into the deal. Management obviously did not insist that the written material be clear about Paulson’s role. These are obvious reasons to include Goldman Sachs & Co. as a defendant in the lawsuit.
John Paulson is given credit for being one of the few who saw disaster coming in the housing market. Readers here at The Agonist and at other blogs have long known about this potential, even as early as 2004. The difference between us and John Paulson is that we had no way to profit from this event, other than selling our house and renting. As a billionaire hedge fund manager, Paulson has access to the financial power structure and used it to his advantage. In fact, with this lawsuit we see his behavior is not entirely commendable. He certainly kept his mouth shut about his desire to short the mortgage securities market when he was meeting with ACA, and it is hard not to believe that he had an understanding in advance with Fabrice Tourre that his true role would never be revealed.
Paulson is not the only hedge fund manager who shorted the housing market. A Chicago firm called Magnetar has recently been revealed to have engaged in very similar transactions with other big Wall Street banks. Their true position was never revealed in these deals as well, so theoretically the SEC has lawsuits it can file against JP Morgan Chase, Bank of America and others.
It should also be remembered that a few weeks ago the chairman of JP Morgan Chase testified to Congress that not once in any of the executive meetings at the bank did someone postulate that the housing market might collapse. Yet this bank was at the time doing huge transactions with hedge fund managers who certainly did believe this to be case and were actively betting against the housing market. It is simply preposterous to believe that bank managements ”œdidn’t see it coming.”
The SEC suit exposes Goldman Sachs to more civil lawsuits from the investors who can now claim they were defrauded into buying the ABACUS CDO. This would include the German bank IKB, which collapsed because of such investments, ABN of The Netherlands, and AIG, now owned by the US government. Goldman is facing serious problems with these tangential lawsuits.
Finally, when all is said and done, we are just getting a tiny peek at the culture of corruption that is Wall Street. Will there be more such revelations, or is this all we are going to be allowed to see?
Numerian, maybe you know
It is my impression that bond underwriting is not subject to the same SEC regs as stocks. Am I wrong? Could be.
The second thing I wonder about is how many of these transactions are “private placements” to “exempt entities”
The conceit was that some players are so big and sophisticated that they can take care of themselves and do not need the securities laws, just extra paperwork and expense, and so if you meet a certain size threshold, then you can opt out of the securities laws. Is that what was going on in the bond markets?
I am not sure.
I am sure that this “big = sophisticated” is a bunch of bullshit, and that those exemptions should be eliminated.
Krugman: The Fire Next Time http://www.nytimes.com/2010/04/16/opinion/16krugman.html?src=me&ref=general
Even more important, however, the financial industry wants to avoid serious regulation; it wants to be left free to engage in the same behavior that created this crisis. It’s worth remembering that between the 1930s and the 1980s, there weren’t any really big financial bailouts, because strong regulation kept most banks out of trouble.
and
To understand what’s really at stake right now, watch the looming fight over derivatives, the complex financial instruments Warren Buffett famously described as “financial weapons of mass destruction.†The Obama administration wants tighter regulation of derivatives, while Republicans are opposed. And that tells you everything you need to know.
Touche.
The lawsuit is very focused, narrow and quite simple. Excessive delay on Goldman’s part is not going to be easy. Failure to disclose is Constructive Fraud, which is the underlying legal theory, but I didn’t see that phrase in the SEC’s complaint.
The SEC has put a huge burden on Fab Tourre. It appears to me they are going to use all their pressure on this one person to bust Goldman open. Discovery is going to be very interesting. The jury trail demand is a club with which the SEC will beat Goldman. In today’s environment I find it hard to believe Goldman could win in front of a Jury. (I’m from Goldamn S…”Guilty” shouts the jury immediatly in unison).
If I were Mr Tourre I’d offer to cooperate in every way with the SEC, name names, roll over, play fetch, and sing like a canary, for as you say it’s only a matter of time before Goldman throws him to the wolves. Tourre needs to throw Goldman to the wolves, so when Goldman make an offer to settle, the SEC can say “We have all the cooperation we need,” and extract a high price from Goldman the Goldammed.
Goldman’s management had a duty to supervize, and is vacariously liable for Tourre’s behaviour. By not firing him immediatly, Goldman are confirming that they believe he acted properly, which does not reduce his liability, but hugely increases Goldmans’.
One further point, is the use of Goldman’s money to defend this lawsuit and pay damages. If I were a large Goldmans shareholder I’d have my lawyers wrting a brief demanding the Goldman managers pay their own legal fees, and then the penalties, as I as a shareholder was also deceived by the management and should not be punished becuase it’s my money Goldman put at risk through this fraud, which they have now sanctioned by not firing Tourre immediatly.
A logic similar to the BofA & SEC case when the judge threw out the SEC/BofA settlement, sastating the sharholders had already lost money becuase of managements’ actions, and the settlement had the sharholders penalized a second time for the misdeeds of the management.
this is snippet, but it was speech to bond organization by an SEC commissioner
the most obvious aspect of the speech is how oblivious the guy was to the real threats. not mentioned. all distracted by arcane trivial stuff
but he touched upon basic underwriting liability and implied that it is in effect. I wonder. How many are exempt? If not exempt, why not more SH suits against the underwriters of the CDOs and the MBS?
the snippet of speech:
Due-diligence standards
I mentioned a few minutes ago the natural expectation of investors that sellers will stand behind the product they sell. In the new issue market, the lawyers have a special term for it: underwriter liability. There is nothing new about this – since 1933 investors have had a federal right to sue underwriters for material misstatements and omissions in offering documents, and since that time an underwriter’s best protection against this major source of liability has been the due diligence defense.
I applaud the recent efforts by the Bond Market Association to bring industry members together to discuss how to improve the due-diligence process. I do, however, think that there are a few points you ought to keep in mind.
The underwriters have largely relied on due diligence for two important reasons – first, to ensure that their understanding of a deal, and the disclosures, are in fact correct. And second, to provide a legal defense if the disclosure is materially defective.
I well understand the competitive pressures you are under to get deals done quickly, and I know that often “quickly” means “now.” But you may also recall the wise old saying, “marry in haste, repent at leisure.”
http://www.sec.gov/news/speech/spch042005whd.htm
Let’s hope the SEC is successful in breaking the web of questionable financial inducements spun by master spider GS. This financial bully needs to be reigned in before it can inflict more financial pain on unsuspecting investors, be they individuals, or banks, or institutions.
Tolerating prostitution is tolerating abuse and torture of women and children.
It’s a given that Goldman and Paulson will be wallpapered with lawsuits on this.
The lasting damage to Goldman is that existing and potential clients now clearly see what backstabbing sociopatghs they are.
But we need criminal prosecutions, not just civil.
In the 1930”s, the ex-head of NYSE Richard Whitney was frog-marched to Sing Sing from Grand Central Station after his felony conviction for embezzlement. Thousands came to watch.
That’s what we need now. Banksters going to prison.
Criminal prosecution referrals spring.
civil is more effective, if aggressively used
TAKE THEIR MONEY
it is more sure than criminal prosecutions (lower standard of proof), and so more likely to effectively punish more people
there is also a hidden downside to criminal prosecutions. First, a lot of evidence gets shown to grand juries. And the grand jury rules are a real mess. Need to be revised. But for now, they are what they are. Bottom line: big evidentiary hurdles to effective civil enforcement if evidence is run through a grand jury first. Tremendous opportunities for defense lawyers to obfuscate and delay.
criminal prosecutions slow things down in other ways too. while the criminal prosecution is on-going (often for years) the civil prosecutions are often put on hold
a few obvious players should go to jail
but the big emphasis should be a civil fraud task force at the Dept of Justice
They did one for medical fraud, and got some results
They need to staff up and target bankers
I have heard no rumor that this is happening, sadly
… Ken Silverstein of Harper’s Magazine, dropped this bomblet last night:(with a deserved hat tip to Demcracy Now(!)Co-Host Juan Gonzalez):
“A former banker who blew the whistle on thousands of secret bank accounts rich Americans held at Swiss giant UBS, claimed Thursday some U.S. Politicians also kept off-shore accounts with the bank. “We had an office in Washington that we all referred to as the
“PEP” office – for “Politically Exposed People” Bradley Birkenfeld said… “Only top managers from the bank knew the names of the political clients”.
Bejezus Numerian, there are myriad financial scandals out there. But, Goldman/financial instruments and UBS/Off-Shore are at the top of my Stink-O-Meter! Numi, I get the sinking feeling that the Obama/Holder Justice Department is trying to perform a desperate “Balancing Act” here. In both cases, Obama has gone after the miscreants “civilly” – and it almost seems as a “Sop” to mollify the well-placed anger of informed Progressives (that’s Agonistas, especially you!).
A Couple of Questions (Please) Numerian:
1) Do you see the “Affair Goldman” (or the UBS Swiss Bank and their Secret Account Scandals) taking on unstoppable dynamics all their own, which must end in criminal prosecutions and great scandal; this, despite Obama’s apparent efforts to at least defuse if not derail? And, 2) was this entire “Great Recession” the result of massive & pervasive fraud, or, an unforeseen “Black Swan”?
Thanks Again Numerian! JB
going forward, the trick is not to unmask the unknown conspiracy of the past
the trick is to figure out what dry “rules of the road” for the financial markets are needed, and try to get them passed
frankly, Congress has no clue what is needed
I an not sure either
and I do not see a whole lot of piercing analysis on the topic, though there may be some somewhere
we need to make the system work
But are not some of the most important rules pretty obvious:
1. Too big to fail is too big.
2. Limit the leverage. Not sure what number, 15:1 I think is the House proposal. Still sounds too high to me but it sure is better than 30:1.
3. No more creating long term debt and then selling all the liability, this is simply a recipe for certain fraud. Those who create the debt must hold skin in the game. Again, I cannot say what number is right but I heard the House again says 5% which is nowhere near enough. I would say at least 25%, maybe 50%.
4. Restore most if not all of Glass-Steagal.
Keep it simple stupid.
That is Matt Taibbi’s now famous term for GS. I hear their PR dept is working OT to counter the image. Don’t let them get away with it.
Goldman-Sachs = Giant blood-sucking vampire squid
Keep the meme alive!
Counterpunch
Fuck me to tears.
I did inhale.
Wall Street has convinced the SEC that hedge funds should be exempt from the usual standards of care that apply to retail investors when it comes to derivatives, because hedge funds have much more sophistication and research available. This argument worked for awhile but in recent years hedge funds have opened up their portfolios to individual investors with as little as $25,000 to invest. The argument has shifted from “hedge funds are big and therefore need no regulator,” to “hedge funds are now dealing with the little guy and do need a regulator”.
The SEC has provisions in law that let them regulate and sue offenders in equity and bond markets, and presumably in derivatives. What is most important to the history here is that in 2000 the SEC was put under new management that did not believe in regulation, at a time when Greenspan at the Fed was espousing the same Republican philosophy. Bush and Cheney were eager to free up business to be creative and unhindered by meddling bureaucrats, and this extended to the financial sector, mining, coal pollution, wildlife management, national parks management, nuclear power generation, urban housing standards – everything Cheney could get his hands on was denuded of authority to regulate. Long time staffers, considered to be Democratic liberal plants, were eased out of their jobs and vacancies never filled. Some of this philosophy was already underway with Clinton but Bush/Cheney delivered the coup de grace to government regulation everywhere. The results have been devastating for the economy and the safety of the American people.
The Democrats are timid about putting regulation back in place, except when it comes to keeping the expanded powers Bush took to spy on Americans and torture and imprison them for terrorism. The SEC could easily go back to enforcing the laws on the books and jettison the regulations Bush/Cheney put in that weakened these laws, but they’ve gone slowly. Some say they have to build up staff and this takes time, and others say they’ll investigate just as much to accommodate popular anger, but otherwise business will still have a free rein. This is therefore a first or last step; no one knows outside of the SEC and the White House.
Wall Street lawyers have perfected the art of crafting boilerplate in prospectuses that states that the firm did proper and thorough due diligence, but the investor is sort of on their own if something was somehow missed. Then blame can be shifted away from the underwriter to the client who is assumed to have misled the underwriter during the research period. Courts get very bollixed up over who to blame when these matters reach them.
That said, I think most Wall Street firms take due diligence seriously. The issue with the ABACUS dealers is actually a bit stranger. Matters of importance were deliberately left out of the prospectus, and the third party collateral manager was lied to. Goldman Sachs did its due diligence properly, it just failed to reveal critical facts in an effort to deceive investors and the collateral manager so as to induce their participation. This seems to fall directly into fraud rather than the less serious charge of following proper standards of care.
Public anger is apparent but not very focused. There have been no hearings with shocking revelations as occurred with the Pecora Commission. No high profile arrests have been made other than Bernie Madoff, who turned himself in to an SEC that was nearly clueless about what he had been doing. The Obama administration has issued a criminal indictment against the whistleblower who blabbed to the press about NSA spying transgressions, so Obama is no friend of the common man here or of sunshine laws.
There are two developments that could help snowball criminal prosecutions. One is diligent exposes from the press. The NYT article in December on ABACUS provided so much appalling detail of self-serving double dealing on Wall Street, that the SEC may have been forced to act on this one instance. This ties in to Obama’s effort to get any sort of financial reform through Congress, and he is now publicly said he is sick of Wall Street lobbying and obstruction of reform. This lawsuit may be a warning to Lloyd Blankfein and Jamie Dimon that Obama may love them personally but major reform is still coming so don’t fight us or we will fight back.
The second impetus is the economy, which despite all the happy numbers coming out on growth and housing starts and low inflation, is still very vulnerable to a setback. If we do go into a second dip in this recession, as I suspect, the situation with the banks changes dramatically. Not only would there be no public support for any more bailouts (not that the Fed couldn’t keep bailing them out behind the scenes), the Obama administration could let some of the big guys fail which would allow the administration to craft a reformed financial landscape any way they want.
We need to see everyone who gamed the system illegally exposed and prosecuted. The wealth transfer is the worst theft ever. People won’t tolerate it and it represents the end of civil comity to allow just a few people to behave this way and steal a major portion of the nation’s wealth. Why should anyone follow the rules, other than basic inclination, if these folks get away with this?
What allowed this? Repeal of the Glass-Steagall (allowing banks to engage in huge risks.Act and enactment of the Commodity Futures Modernization Act (allowing unregulated CDS, etc.), to begin with. Those events took place in 1999 and 2000 through a bipartisan effort. The fact that no one in Congress has moved seriously to rectify the situation is proof ipso facto that they’re either stupid, bought by Wall Street, or both. Congress needs to be cleaned out too.
Then it’s time to create a transparent market that people can trust. But a big part of that is locking up the crooks and reversing the changes that allowed all of this.
I’ve been following their quarterly statements since they’ve become a bank and detect no “trading” in their trading results. Their earnings are way too consistent, and enormous, to be the work of a true trading operation. Real traders don’t take losses on three days out of the quarter and make money on every other day, like Goldman. Real traders are happy to make gains around 55% of the time. Goldman’s lack of losses suggest they are rent-seeking, not trading. They have found a way to extract rent from the trading markets, and voila! – along came the high speed trading exposes to prove the point.
How the NYSE would allow any private firm to place a computer on their own premises to extract information on trades, whether or not it is proprietary information, is beyond me. The SEC had to be willfully negligent to let this happen.
I must say this story has resonated with my trader friends, all of whom are retail investors. There is a feeling afoot, very strong now, that the financial markets are rigged against the small guy, and this high speed trading scam is the absolute proof. This story has done some serious damage to Wall Street’s reputation in ways they are only now beginning to see. We are in month 13 of a major market rally and still the private retail investor is largely sitting it out, preferring to keep money in bonds. Another thing that is stirring up conspiracies about market manipulation has been the unusual pattern this year of morning rallies and afternoon rallies at the close, all based on computer orders. It looks like the big guys are gunning this rally for their own benefit, trying to sucker in everyone else. Minor corrections aren’t even allowed. Consequently volume keeps dropping because the small investors don’t trust what is going on.
Five years ago retail investors were willing to trust that the market was fair, even though that may have been naive. Today, distrust is high and growing, and we are slowly creating the conditions of the 1930s when retail investors left the market and did not return to the 1950s.
There were secret players in these deals that few knew about, certainly not the buyers. That’s the nature of an unregulated derivatives market. That’s what Congress created when they put in place the Commodity Futures Modernization Act (Sponsors:
The nature of any derivatives market involves betting on market numbers or corporate/government debt in which the buyer has no interest. It was illegal since the early 20th century until the “bipartisan” coalition decided that they knew better.
Tourre is the key, and surprise, surprise, he now works out of London and is no doubt being handsomely paid and supported to keep him on the team. First the SEC has to get him back in the States on trial, facing the testimony from ACA Capital and IKB about his deceptions to them, plus the trail of emails and public documents. If he doesn’t cooperate, they will go for a long conviction and let him stew in jail for a few years to see if he will turn state’s evidence. Goldman may want to negotiate a settlement well before that, to keep him from talking.
The SEC was humiliated by Judge Rakoff in the Bank of America case. He quintupled their fine, jacking it up to $150 million. At the same time, NY Attorney General Andrew Cuomo was charging BofA with serious infractions under the Martin Act (yet to go to trial). Then we saw the Connecticut AG go after Moody’s and S&P for fraud in state court there. The difference is the responsiveness of the prosecutor to the people. Cuomo and CT’s Richard Blumenthal have to get reelected and pass muster with their citizens. The SEC can sally forth, wave their foil, and return to the ivory tower. Then there’s Obama who, by his own description, stands between the people with pitchforks and the bankers. We’ll see what the SEC makes out of this.
Thanks for the very quick turnaround on the suit. I printed out the brief about 4 and saw then just as I was sitting down to read it. I was able to enjoy our company and chat with apparent authority on the latest scandal.
At first I thought you meant Russ Tice, but that can’t be right because as far as I know he’s not been jailed.
“The best-informed man is not necessarily the wisest. Indeed there is a danger that precisely in the multiplicity of his knowledge he will lose sight of what is essential.”
- Dietrich Bonhoeffer
http://www.nytimes.com/2010/04/16/us/16indict.html.
I had read he had done some jail time on being arrested but I can’t find the citation, so I’m editing the comment. This is however a criminal indictment so a jail term is clearly being sought. Drake has no money apparently so is using a public defender; I don’t know how that is going to work out for him.
More on this from Glenn Greenwald:
http://www.salon.com/news/opinion/glenn_greenwald/2010/04/16/prosecutions/index.html
The indictment doesn’t specify which paper or reporter Drake talked to. While the NY Times carried the story and is reporting on the indictment, even they say the description in the indictment matches best with articles written in the Baltimore Sun.
well, looks like I am mostly wrong on this point. But I am wondering why obvious crap would not attract a flood of Rule 10b5 suits
Anyway, I understand what you are saying about recent politics, and agree. Moreover, there are serious problems with the SEC bureaucracy and staff.
The key is probably to invigorate private suits. These are often very effective because the plaintiffs have a personal motive: $$.
Of course, the rightwing propaganda (swallowed whole by many Dem pols) is that these are “frivolous lawsuits” that should be prohibited by “tort reform.”
The only hope are the campaign contributions by the plaintiff’s bar.
In the Big Short, Lewis describes an eccentric doctor turned hedge fund operator who identified the flaws in various MBS instruments by reading through prospectus
That would suggest that you are correct. Technically, in the fine print, the risk was disclosed. No fraud.
Maybe a few “bright line” disclosures, yes or no on important criteria, are needed. What would they be?
Pro Publica Is doing some fine reporting on this deadly subject. Magnetar, a synthetic gambling casino help start the trend, Goldman mearly copied and opended up a new Casino.
Paulson, is the person at the center of this crime. This was his baby. Be interesting to see the e-mails and phone records between Goldman and Paulson.
“There are two types of folk music:
quiet folk music and loud folk music.
I play both.”
Dave Alvin
Raises questions of interferance and conspiracy.
I’d not be surprised if Tourre was found dead in some english wood with his wrists cut and a suspicious lack of blood on the ground.
here from Sam Antar, a former white collar criminal who has experience with the situation and the SEC lawyer involved.
Btw – I just finished reading the complaint. The SEC was obviously in a big, big hurry to get this out. There are at least two typos. Considering the number of eyes that would have to have reviewed this before it was issued, that’s remarkable.
Also, it turns out that Richard H. Klapper at Sullivan & Cromwell is representing Goldman in the suit.
“I despise ideologues masquerading as objective journalists.†– Bill O’Reilly, March 30, 2007
“There may well be a factual and legal basis to consider state investigation of allegations related to the SEC’s civil action against Goldman Sachs, and my office has begun a preliminary review.
“The SEC’s allegations read like a Sopranos episode. The SEC is accusing Goldman Sachs of constructing — at hedge fund manager John Paulson’s request — securities designed to fail so that Paulson’s hedge fund could make billions betting against them. It would be like Goldman selling consumers houses deliberately designed to collapse just so Paulson could collect the insurance.
“If true, these allegations constitute outright fraud. Goldman Sachs is accused of fleecing its own clients — selling them securities it knew would implode — to enrich itself and Paulson.
“A key question is whether this case was an isolated incident or part of a pattern of investment banks colluding with hedge funds to purposely tank securities they created and sold to unwitting investors. The Wall Street bankers and anyone who knowingly and purposely profited from this alleged scheme should be held accountable.
“These allegations provide further powerful proof of the urgent need for financial reform — including regulation of opaque derivatives markets that helped this alleged scheme succeed. Congress must pass legislation to stop such abuses before they wreck our economy. Wall Street must enable the American Dream, not undermine it.”
Link: http://www.ct.gov/ag/cwp/view.asp?Q=458954&A=3869