Has Goldman Sachs No Shame?

An article in Bloomberg gives us some hope that criminal prosecution of Goldman Sachs may yet be possible because of New York's Martin Act as explained here.

Still there is no end to the apologists coming forward and making excuses for the bad behavior of Goldman Sachs. See Hintz and Frenkel . Hintz thinks Goldman Sachs is "too big" or "too important" to be prosecuted. You could say the same thing about Madoff's Ponzi scheme and it would not excuse Madoff from criminal responsibility for his actions. One apologist talks about Goldman Sachs being able to rehabilitate itself like a "juvenile delinquent" would.

Meanwhile, Goldman Sachs reports on how pessimistic Americans are about their wage and economic growth. Americans will have to tighten their belts because of the financial crisis which Goldman Sachs itself contributed to. Irony of ironies: They help create a crisis which takes away the wealth of the middle and lower classes and then explain back to them how pessimistic they are! Goldman Sachs takes the money with which taxpayers bailed them out and spends billions on huge bonuses for their executives while the ordinary homeowner watches his wealth crumble. Of course, households are worried about the future especially since the banks engaged in activities that defrauded them of their pensions, saving and homes.

And not only that, Goldman Sachs has reduced its potential liabilities from lawsuits to $2.7 billion from $3.4 billion. Many of these lawsuits have to do with their participation in creating the economic climate which brought about unemployment and wealth inequality. They have such confidence!

Daniel Indiviglio writes a balanced argument that asks "How Serious Would a Criminal Indictment Against Goldman Be?" An excerpt of his article follows:

How Serious Would a Criminal Indictment Against Goldman Be?
By Daniel Indiviglio - The Atlantic

On Thursday, we learned that the Manhattan district attorney and New York state had subpoenaed Goldman Sachs. Some commentators have suggested that the action may be part an attempt to set up a criminal investigation based on a recent Senate report that accuses the banking behemoth of having acted improperly in its efforts to short the mortgage market as the bubble began to burst. Will the bank be able to wiggle out of these allegations if a criminal case is brought?

For a fairly detailed explanation of the law likely to be involved in a case against Goldman, check out the post I wrote on Thursday. It boils down to this: if a court deems its mortgage market shorting strategy as "material information" that investors should have been provided when Goldman sold them mortgage exposure, then Goldman might be in trouble. There are a few ways to look at this question.

Will the SEC Settlement Come Back to Haunt Goldman?

First, a similar issue was actually at the heart of last year's Securities and Exchange Commission lawsuit against Goldman. In that case, the SEC said that Goldman should have notified an investor (ACA Management) that it sold mortgage exposure to through a complex security that a prominent hedge fund manager (Paulson & Co.) helped to select the assets that the security referenced. The SEC asserted that this information was material. As a part of the settlement, Goldman didn't exactly concede wrongdoing, but said:

The firm entered into the settlement without admitting or denying the SEC's allegations. As part of the settlement, however, we acknowledged "that the marketing materials for the ABACUS 2007-ACI transaction contained incomplete information. In particular, it was a mistake for the Goldman marketing materials to state that the reference portfolio was 'selected by' ACA Management LLC without disclosing the role of Paulson & Co. Inc. in the portfolio selection process and that Paulson's economic interests were adverse to CDO investors. Goldman regrets that the marketing materials did not contain that disclosure."

Now think about the mortgage securities that Goldman sold to investors on which it took the other side of the bet. If it didn't disclose that Goldman's "economic interests were adverse" to those investments, isn't that a similar problem?

This gets a little bit sticky. In the SEC case, the specific sort of security sold was created in part based on the recommendation of an investor who was betting that it would fail. This might not be the case with the short positions from which Goldman profited. But if they underwrote some securities as a part of their shorting strategy, and didn't notify the investors that they sold those securities to of that strategy, isn't that the same wrongdoing that they conceded in the SEC case?

If so, the Goldman might have set itself up for a very tough road if it created securities that it kept the short interest on as part of its investment strategy and not its usual market making activities, but failed to disclose that to investors to whom it sold those securities. It may have been better off fighting the SEC lawsuit, rather than settling it. That settlement essentially concedes that an investor buying a security has a right to know if anyone having an interest in seeing the security decline in value had a role in its creation.

Read the full article here