Criminal Probe Into Goldman Starting? US Prosecutors Subpoena Vampire Squid

Tyler Durden's picture

In yet another confirmation that Goldman's multi-million dollar push to advertise its humanitarian image on various websites has been a colossal failure, the WSJ has just broken news that the firm will shortly be the proud recipient of yet another barrage of legal inquiry in the form of subpoenas relating to its mortgage-related business, only this time not from the SEC but from criminal prosecutors. This stems from Carl Levin's massive 639 page report which referred the firm to the justice department  (and whose findings were summarized best by Matt Taibbi), an escalation which could rekindle not only a civil case against the squid, but also potentially force the new District Attorney to finally lob a couple of criminal indictments here and there, thus guaranteeing that GS stock is about to be pulverized (and cementing those plans to finally MBO the company, as the Fed's balance sheet has largely served its purpose). The WSJ clarifies: "Subpoenas don't necessarily mean criminal charges against Goldman or individuals at the firm are inevitable or even likely. The company turned over hundreds of millions of pages of documents to the Federal Crisis Inquiry Commission, a 10-member panel that examined the causes of the financial crisis. Goldman also gave tens of millions of documents to the Senate Permanent Subcommittee on Investigations." Yeah, but... ""Any step in the direction of criminal charges would be bad news for Goldman's stock price," said Jeff Harte, an analyst at Sandler O'Neill + Partners LP." And now that Rolling Stone has peeled off the scab once more and made it all too clear that the villain is and has always been GS, Lloyd may find himself on the wrong side of the Q&A session all over again.

From the WSJ:

Goldman has said repeatedly that it simultaneously took "long" and "short" positions on mortgages as part of its normal business. While those bets sometimes resulted in a net short position, meaning Goldman would benefit from turmoil in the housing market, the company usually had a bullish overall bet during the crisis, according to the firm. As a result, Goldman suffered losses when the real-estate bubble burst.

Last month, Goldman said it disagreed with "many of the conclusions of the report," though the company added that it takes "seriously the issues explored by the subcommittee." As part of last year's settlement of civil-fraud charges with the Securities and Exchange Commission, Goldman admitted making mistakes but denied wrongdoing in its handling of a mortgage-bond deal called Abacus 2007-AC1.

As part of the SEC's probe, which led to a $550 million settlement by Goldman, the company provided the agency with a mountain of trading records, business documents and emails. Goldman didn't admit or deny wrongdoing.

Goldman's latest quarterly report filed with the SEC included a 7,852-word "legal proceedings" section. In 2007's first quarter, which came just before the crisis erupted, the same section was just 406 words long.

Then again, the theater factor in this latest development registers at least a solid 9.5 out of 10:

Mr. Harte speculated that U.S. prosecutors are unlikely to bring criminal charges against Goldman because they probably already have seen much of the information amassed by the SEC during its civil investigation. The SEC has an information-sharing agreement with the Justice Department.

Criminal fraud cases face a higher legal hurdle than civil charges because prosecutors must prove to a jury that the defendant intentionally committed fraud. "Ordinarily, a criminal securities-fraud case based on the same facts would be even more difficult to prove," said Russell Ryan, a partner at law firm King & Spalding who previously was an SEC enforcement lawyer.

Of course there is nothing intentional or deceptive in such statements as:

"The #1 missed opportunity for the mortgage department in 2007 was externalizing profitable shorts from the ABS desk to clients."

or this one:

We began to encourage this squeeze, with plans of getting very short again,”
Deeb Salem, a trader in the structured product group, said in a 2007
self-evaluation excerpted in the report. Swenson, Salem’s supervisor, sent
e-mails in May 2007 urging traders to offer prices that will “cause maximum
pain
” and “have people totally demoralized.” In interviews with the committee,
Salem and Swenson denied attempting a short squeeze, the report said.

or this one:

“We need to go to magnetar and see if we can buy a bunch of cdo protection… Can
tell them we have a protection buyer
, who is looking to get into this trade now
that spreads have tightened back in.”

or thousands more that are about to become part of the public record.