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A Look At The Goldman Case
From The Daily Capitalist
What did Goldman do wrong?
I've analyzed securities law based on the facts as they are being reported. We haven't yet seen Goldman's answer to the complaint.
This article is based on a review of the SEC complaint against Goldman Sachs, a review of Goldman's responses, and articles from The Wall Street Journal and Bloomberg.
Assume it is April, 2007.
Let's examine some hypotheticals before we launch in to the facts.
For each hypothetical, assume each issuance of a security is supported by a prospectus meeting the standards required by the SEC and NASD. Everything is disclosed among the 500 pages of the document and its exhibits, except for short sales, which by law do not have to be disclosed. Any claim as to the identity of the short seller could only be actionable if it was part of a misrepresentation of a material fact claim under section 17(a) of the 1933 Act or 10(b) and 10(b)-5 of the 1934 Act.
Bear with me. My securities law may be a bit rusty. I am sure someone will point out my errors.
Hypothetical No. 1.
Buyer goes to Broker and wants to buy stocks of home builders. Broker executes the trade. Broker knows that these stocks are being shorted and doesn't disclose it.
No liability.
Hypothetical No. 2.
Broker goes to Buyer and recommends the purchase of stocks of home builders. Buyer agrees to buy and Broker executes the trade. Broker knows that these securities are being shorted and doesn't disclose it.
No liability.
Hypothetical No. 3.
Buyer goes to Broker and wants to buy a BBB tranches in a classic mortgage trust structure consisting of 9 tranches rated AAA to B. Broker puts together the basket and sells it to Buyer. Broker doesn't know that these securities are being shorted by third parties.
No liability.
Hypothetical No.4.
Broker goes to Buyer and offers the same basket as in No. 3. Broker knows that someone is shorting the portfolio.
No liability.
Hypothetical No. 5.
Broker goes to Buyer and offers a synthetic CDO security consisting of BBB and below tranches from various mortgage trusts. Broker selects the tranches. In a synthetic CDO the security doesn't actually own the tranches, but the value of the actual tranches are represented as notational amounts in the security. It's a bet on the future value of the tranches. In order to complete the transaction, by definition, someone has to go long and someone has to go short. Broker arranges for a short buyer on the other side of the deal.
No liability.
Hypothetical No. 6. The Big Short
Players: Short seller (Paulson); Broker (Goldman); Hedge Fund long buyer and Selection Agent (ACA).
Here are the facts as pleaded in the complaint, plus some information from Goldman's response and news sources:
1. Paulson goes to Goldman and indicates it wishes to short BBB tranche MBSs in a synthetic CDO transaction.
2. Paulson gives Goldman a list of securities it wishes to short.
3. Paulson agrees to pay Goldman $15MM to put the deal together.
4.Goldman goes to ACA and asks if they would like to go long BBB tranche securities in a synthetic CDO transaction.
5. ACA is an experienced investor in these securities and manages 22 CDOs with underlying portfolios consisting of $15.7 B of assets.
6. Goldman insists that ACA select the assets for the transaction.
7. Goldman gives ACA a list of assets selected by Paulson. They contain very risky assets.
8. ACA knows Paulson is involved in selecting the assets.
9. ACA had already invested in 62 of the 132 securities on Paulson's list.
10. ACA selects the securities from the list that it wishes to buy long. It had the right and duty to select any securities it wanted in the deal.
11. ACA and another investor, a German bank, buy $1B of these securities.
12. Paulson shorts the same securities via credit default swaps.
13. Goldman buys some of the securities.
14. The security tanks because of the housing market collapse and ACA loses $1B and Paulson makes $1B.
15. ACA later says that it thought Paulson was actually going long in the deal.
16. Goldman denies that they represented that Paulson was taking a long position.
Is Goldman liable?
Did Goldman have a duty to inform ACA of the identity of the short seller. No. ACA knows there has to be a short side of this transaction.
Did Goldman, as a material inducement to do the deal, mislead ACA by saying Paulson was going long in the deal rather than shorting it?
This is a question of fact for a jury. In a civil case the burden of proof is a "preponderance of evidence," not the criminal "beyond a reasonable doubt" standard. It is an easier standard.
The only hard evidence in the complaint is from ACA's emails that they thought, or were confused as to whether, Paulson was an "equity" investor (i.e., long buyer). They assumed Paulson was an equity investor and I am sure they will so testify. Goldman will deny it. I haven't read Goldman's emails yet.
Then there is the materiality standard.
1. Was it material that Paulson was the short seller?
a. Someone had to be the short. Paulson is a major player in this world, but so is ACA. At one point ACA managed $17B of assets. ACA had to make the investment decision based on the investment value of the securities they were buying long. In these transactions, someone was going to lose, but that's the bet. They had the burden of doing their own investment analysis and due diligence.
b. What if instead of Paulson, they found that the short was: Warren Buffet, Bernie Madoff, Lehman, Blackstone, Dufus Capital Management, Merrill, Peloton Partners, Sh*tF*rBrains Capital Investors? (Pick one.) Would ACA have said, "Wow, they are so much smarter than we, we'd better not do this deal? Or "Wow, they are so fkcuing dumb, we'd better do this deal?" The fact they did the deal means they had confidence in the securities.
2. Did the fact that Paulson presented a list of securities to Goldman, who communicated this list to ACA, amount to a breach of securities law?
a. ACA as a sophisticated investor had a duty to perform its own due diligence on the securities in order to carry out its fiduciary duty as an advisor to its investors. The fact that someone else has a different opinion is irrelevant. The fact that Paulson chose the master list of securities from which ACA made its selection does not excuse ACA from its duty to its investors.
b. It is also apparent ACA as portfolio selection agent, a service that ACA had previously undertaken and understood the significance and legal duties of, had a legal duty to select securities that met the investment objectives set forth in the prospectus. In essence there was a legal hand-off from Goldman and Paulson to ACA acting as selection agent. I think this is the biggest flaw in the government's case. The other investor in the deal (IKB) may have a case against ACA acting as selection agent for selecting bad assets. But, we haven't seen the ABACUS prospectus yet so we don't know what the reps were.
This materiality issue is a question of fact for the jury.
I am fully aware that most people think Goldman is the worst thing that ever happened to the investment world. Vampire Squid and all that. Especially here at Zero Hedge. Whatever you think of Goldman you can forget it when it comes down to determining their liability in this case. Whatever they have done before and after this transaction has no relevance in a court of law. Unless it is material to the complaint, the SEC cannot bring up any facts extraneous to the case.
I personally don't know if they are liable or not in this transaction. But I think the timing of this case, with the financial reform bill being debated in the Senate, is not a coincidence. I also think the Goldman is being scapegoated for the crash. As I said before:
Since most of our legislators, bureaucrats, and White House residents have no idea what caused the Great Recession, they are itching to blame it on someone, and that “someone” is Goldman Sachs, the arch-capitalist of our time. As if fraud was the cause of all of our problems. It’s like blaming greed.
Let me first get it on the table: I am not defending Goldman Sachs. The point of this article is to defend free market capitalism which has been incorrectly branded as the villain in our economic crisis. If Goldman defrauded their clients, they should pay the price.
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Phew. Glad you got that out of your system. All I'm saying is that in this particular case, these are the facts and that the government's case isn't rock solid. If the government has information on all this other stuff you bring out, then they would have gone after them with criminal indictments, which they haven't ... yet.
wearing a bloody hand , standing over a dead body, feet covered with mud ,
prove that i was eating tacos . three months ago at two in the afternoon. while seated in macdonalds .
Bottom line, given what we know, who would actually bet that Goldman wins and doesn't pay a fine? Not me. It's not that difficult boys and girls. The difficult part for our overlord's is if this turns into many other cases (i.e., not controlled by the SEC, or the result of unintended consequences).
I don't care about he said/she said, and and the case is moot. McPhearson was head cheerleader for the FINRA Investor Deathsquad Arbitration System, where investors are denied due process in the US Judicial System. These guys are her long time buds and funded FINRA and her Chair at FINRA. Nothing with real teeth is going to come out of the SEC. This is a handpuppet show for us dirts fighting over the crumbs left on Main Street.
Given the facts as stated above, the narrative here is not GS, it's Paulson. Paulson as Hunter/Killer Mastermind.
First, let's agree there are no accidents in the Financial Aristocracy. Paulson didn't want to make hay on the MBS collapse, he wanted to maximize it.
He did one of two things...
= They worked up a list of the 300 worst dogshit BBB tranche MBS available, based on their analysis. Then they looked for the dipshits, whose analysis was legally blind and had positive interest in a good number of them. They found ACA with their fingers on 62 of them. From the remaining other 238, they chose 70 which had analytical attributes similar to the first 62 dogpile.
or
= They had ACA from the word go. The first 62 became the model for selection of the next 70 for the list.
Either way, ACA is the farkin' Golden Goose. Did they think it was statistically odd that somebody would come up with a list looking for the long side, on which ACA was already half?
No. (And that's where GS might have overplayed their hand, at the crucial moment.)
This "list" is both a validation and enticement for ACA. But they have to believe the deal was constructed with a long side intention. It's an entre for GS directly to ACA.
"Hey, I want to send over a list on a deal Paulson has us putting together. Looking at it, you guys already have a decent familiarity with it. We'd like you guys to go over all of it, and see if it's worth your Holy Water. If you think they are a "Go", you're welcome to get a front seat."
This is the crucial moment. The question is fundamental. After they get the list and see they already own half of it. It is huge for ACA.
"Does Paulson have any skin in this game?"
It can't be a white lie or misunderstanding. It is material to ACA vetting the product. It makes no sense for Paulson to pay the $15MM and be neutral. The deal is not a pick 'em, it's one sided. If ACA vets the product to others, and the originator was on the shortside the whole time, ACA wins Assholes of the Year.
But that's not all. If the answer is "He's on the short side". Alarms go off, and ACA is suddenly taking a serious look at the 62 they already have in the box.
Depending on the answer, those 62 are either the Trojan fucking Horse for the deal, or a burning cross warning.
With the list of 132, Paulson had the whole deal figured from Front to Bullseye. For what little GS had to do, it was found money.
The SEC has got 'em. They'll never admit Paulson spun them around like a top. They'll have to admit the company working for the baby Jesus gets bad apples working for them sometimes, too. Pay the fine, and turn up the volume on the HFT machines and algos, to pay for it.
They made out better than ACA, who ate their own dogshit cooking.
The screenplay will be ready before the trial starts.
A basic problem Goldman has is like the old Monty Python skit.
Waitress: We have egg and spam; egg bacon and spam; egg bacon sausage and spam; spam bacon sausage and spam; spam egg spam spam bacon and spam; spam sausage spam spam bacon spam tomato and spam...
According to the SEC allegations:
Goldman told people that ACA Management had made the portfolio selections, without revealing that Paulson had already made sure that all the menu selections, that ACA Mgt could choose from, included spam. So to speak.
It was misrepresentation by Goldman, a sin of omission. (Let us pray it was only a venial sin - or is the word "venal" in this case? - lest the soul of the squid be denied divine grace on judgment day.) To be truthful, Goldman ought to have revealed that ACA Mgt only made selections from the Paulson "spam menu," not from the entire market.
"Omission of material fact" is a violation. It doesn't matter what anybody "ought to have known." The rule is simple, that basically it's against the law to be misleading. Which Goldman was. Allegedly.
Also, ACA did not "go long" on the deal. An ACA Capital subsidiary, ACA Financial Guaranty Corp., provided insurance via CDS. The difference is about like buying a house versus insuring a house.
In the church of the vampire squid, judgement day is when the bonuses are handed out. No soul required.
My take from the GS-grilling, as I more-than-layman-less-than-ibanker, was that GS seems to think that nothing they do/did is ethically wrong. I may not work at GS, but I thought CFA-level ethics like "if you know it is at best inappropriate and at worst toxic waste, don't sell it to your customers" would carry over into the ibanking world. Guess not. My biggest hope is that, assuming GS is slapped with little more that a fine, institutional investors the world over wake up and realize GS screws over their customers without thinking twice. I know if I am ever in a position to voice my opinion, I will vote against dealing with GS in any capacity.
My first post. Please forgive
Jethro, was "Mr. Bill" already taken?
By putting all of these issues front and center at a moment in history when they will not be ignored the Commission has performed an invaluable public service.
We all know what Goldman does. The question is should they and their cohorts be allowed to continue behaving in this fashion? Fines and wrist slapping will not alter the nature of the beast.
It will take structural change.
It is my considered opinion as a lawyer that the system as it now stands makes a mockery of American capitalism. Disclosure has become a CYA operation, the idea of sophisticated investors is a farce, the notion of conflicts of interest is a cost benefit exercise.
Wall Street has demonstrated it's utility for all to see.
Time for change.
Let me add what You and I both know.
Why is it that asset managers get to talk to CEOs on road shows and the exchange is allowed to remain secret? Why can the big asset managers can visit the company or get the CFO on the phone any time, and there is no requirement to stream it live over the internet?
Securities regulation has become a cruel hoax. It's the private forward looking statements that matter, and those are never shared. Instead we get hundreds of pages of lawyerly gobbledy gook that is essentially meaningless, in filings that are outdated by the time they are made public.
And the financial statements in the filings are often very misleading unless you can get the CFO to take your call, or the analyst at a TBTF will take your call and tell you the accounting tricks that have been used.
Does anyone out there really believe that Warren Buffet has access only to the same information the we have?
"Regulation FD does not prohibit companies from engaging in private one-on-one meetings or nonpublic conferences with investors and analysts, and these remain common practices. However, SEC enforcement actions underscore the burden on the company representatives in those situations to limit the information discussed to only what is publicly available or not material."
What a farce!
We have the appearance of equality of information without any of the reality.
What you are saying underscores the flaw in SEC regulation. That is, that information is never equal and never will be. Someone will always have better information: better industry analysis, better analysis of financial statements, better market analysis, better business judgement, etc. On the other hand, it is rare that good investment decisions are made on inside information. Ask Martha as Erbitux tanked. On the other hand ask Harry Markopolos who did the basic grunt work to expose Bernie yet the SEC never listened. The point is that everyone on the Street knows that you've got to watch your own back. Most analysts are just lazy. Anyone really digging into Enron's financials would have seen the farce (some did) but most analysts just bought what they said, saw Arthur Anderson's signature, yawned and said "buy."
By the way I practiced law for many years and did probably 100 private placements. No client of mine was ever sued for violations of securities laws. Just sayin ...
I do not think you can do this:
"just forget everything you believe about Goldman and their ethics and role in the economy because those mean nothing in this case. There is one issue and that is, within the facts set forth in the SEC complaint: "
if their a hege fund, not a market maker or originator, or have a huge prop desk trading a large portion of the nyse every day, I have no probelm with them. same as I have no problem with ackman, or chanos. although those folks go public and disclose their positions. ackman on mbia. you just can't compare apples with oranges. their size, role in the pipleine, etc. makes them unique. you can't remove what happened form the situational context. It may not be illegal, but
part of my analysis can include the conflicted roles each portion of the firm has. for instance is the market maker cover for things that didn't sound kosher. That's what I heard. so take away their prop desk, market maker function, slp function origination functions and let them do what they want (take away access to discount window too).
let them only trade for themselves, not clients, and be the hedge fund they are. the problem is they can do what they want under the guise of filling some role the company has. not right, maybe not illegal, but it's the reason we need to break up these big structures.
Can we just broaden the net to include the rating agencies? I'm still confused on how a passel of 3B gets a 3A.
You can't go after the rating agencies. In retaliation, they would downgrade US debt to junk. Gotta be careful around the crystalline architecture.
I think this case is merely a prelude to more substantive and expensive cases (both domestic and international) regarding the sale (and shorting) of these instruments to institutions that could not reasonably be considered sophisticated investors. We're really not even in Act 1 of this yet. And keep in mind, state and local institutionals generally outsource to private firms for this (see also: tobacco settlements). Private firms with profit motive > underfunded/understaffed/undermotivated federal lawyers. Tobacco money ain't shit compared to what they could potentially to make with this stuff.
Really, just selling this garbage alone (without shorting it) probably exposed these firms to civil litigation because they were selling what essentially amounts to a defective product that they knew was defective (and I'm guessing the legal strategy is going to involve techniques similar to defective product cases, which good firms usually win). Add on that they were shorting the garbage = many multiples in punitive damages.
And this doesn't even get into the synthetic rate swap issue. Does anyone honestly think that shit's not going to come back to bite them in the ass?
Basic rule of thumb: if you engage in screwing with public money, regardless of the legality or lack thereof, you're going to get a public ass kicking, at the local, state, national, and international level.
There are less disclosure rules for selling toxic substances like those concocted by the likes of Paulson and Goldamn Sucks and other TBTFs, than there are for selling my house.
Whenever you hear claims of "complexity" you are hearing the Goldman argument.
In fact this case is incredibly simple. Goldman sold a security (the synthetic derivative) without disclosing material non-public information. That is all there is too it. You can give as many examples as you please of intermediaries selling securities without identifying the seller, but that is immaterial to this case.
It is hard to think of information more material than the fact that the reference securities behind this synthetic were hand picked by the short seller.
Goldman finds itself in the same exact position as the defendant in Texas Gulf Sulphur, a mining engineer who drilled a few promising samples and bought a few lots of his company's stock. The favorable drill tests had not yet been disclosed in a press release. His purchase was a "fraud on the market" because the sellers did not know about the drill tests - he bought without disclosing material information.
What Goldman's defenders, and the investment banking industry in general argue, sub-silentio, is that every otc derivative is structured in accordance with the preferences of the initiating party, and that it is the job of the investment banker to go find a patsy to take the other side of the deal. The standard industry deception is that the salesman (the surest route to managing director) will always tell the patsy that he is going to remain in the deal on the same side as the patsy, and as soon as the patsy bites, the prop desk at salesman's firm will take the opposite side of a similar otc derivative in quantity sufficient to bring the firm back to risk neutral, thus making the saleman's pitch a lie.
Of course these deals only work as long as there are no capital requirements behind derivative positions, which is why we see the intense opposition to regulatory reform.
I have always thought that the structuring and selling of OTC derivatives are fraught with legal risk. And that is why all the hand wringing. 10-b-5 can slow down the sales effort just as dramatically as capital requirements and posting margin.
I should note parenthetically that the real message of Texas Gulf Sulphur was that middlemen on Wall Street must always have "first call" on all information. Can't let the little mice in their treadmills escape! At least the defendant in that case actually produced the wealth he was attempting to share in. The vampire squid is a far less sympathetic defendant.
And how can a fellow lawyer make a lengthy post without suggesting that Goldman will almost certainly elect a judge trial, simply because a judge is unlikely to be as hostile as a jury, and more important, because it is far easier to overturn a judges conclusions of fact on appeal than it is to overturn a jury's finding. Goldman's prospects for delaying final resolution are far better with a judge trial than a jury trial.
Hey Palladium: Are you sure about overturning a Judge on findings of fact on appeal? I've been told its the opposite. That if you get unlucky and draw a judge who is slopping with the facts your legal arguments become problematic. Do you have much securities experience at the federal level?
Roughly less than 1% chance of anything like that happening. Fraud isn't that 'complex'. Did you or did you not deceive (in this case for material gain)? The larger question isn't whether Goldman Sachs will lose (i.e., settle or actually have a judgement against; I'd put the odds at 90%+ of that just from what we know), it's if this will turn into many other cases like it (i.e., if it goes from a timed show trial to a general problem for the vampires of the world).
Yes, I'm sure.
However there is a near universal bias against judge trials, especially in criminal cases. Also the quality of judge trials will vary a great deal from jursdiction to jurisdiction. The Federal Judge assigned to the Goldman case is as sharp as a tack!
The written opinions of Federal Courts all state as a rule that Judge findings of fact, particularly in cases where much of the evidence is in writing and in the appellate record, can be overturned more easily than jury findings of fact. This applies particularly to "mixed questions of law and fact."
However, I am equally sure that, as a practical matter, this will vary from Federal Judge to Federal Judge, as the smart and dilligent judges will make far fewer "clearly erroneous" fact findings than others. There is one exception to this general rule, and that is where passion or prejudice can be shown after the fact in one or more jurors. Appellate courts are not going to accept arguments that a federal trial court judge acted out of passion or prejudice.
At the state court level, appellate courts often overturn excessive jury awards of damages, but that is a special sort of fact finding. However, they very rarely overturn a jury finding of liability or "fault". State appellate courts are far less likely to overturn a judge's finding of damages, largely because a judge, unlike a jury, will articulate his reasons for the award and those reasons will convince the appeals judges, particularly in large awards of punitive damages.
If Goldman gets a "blue ribbon jury panel" it is pretty much guaranteed that Goldman is going to be stuck with the jury's findings on appeal. This is a novel case in which there are likely to be many "mixed issues of law and fact" so I suspect that Goldman would want a Judge trial, but then an active practitioner in the SDNY would have a much better feel for the attitudes of a likely jury pool. In Manhattan, a jury might have many employed in the financial industry.
You have lured me into a very complex subject. Hope this suffices.
They can argue all they want about what is material. What do you think
S&C are going to tell them from now on.
The dynamic of disclosure is clearly different when you are structuring a bet as opposed to a business financing.
A tilted playing field is clearly a material fact as well as the motivations of the structuring agent.
"A tilted playing field is clearly a material fact as well as the motivations of the structuring agent." I agree with you, and that is the only real issue in the case.
At a minimum, this will go to the 2nd Circuit Ct. of Appeals, and probably on to the Supremes. This is a hugely important case.
And Congress gets to duck the issue and rely on the courts to regulate derivatives with Rule 10-b-5.
Mr. P,
You may be right, but when ACA was appointed selection agent, I think GS has a pretty good argument that there was a legal hand-off of liability. ACA was the 90% investor!
As a seller of a security you cannot "hand off" liability. The only thing that ACA's presence allows you to do is to argue that Paulson's involvement was less material. But that argument is tangential to the materiality of the actual selection criteria, wherever they came from, and that is why the securities industry is so upset about this case.
The only way to really be safe is to disclose to the patsy everything about the selection criteria - the who, where, what, and why.
In other words, you can't rely upon the patsy's ability to reverse engineer the selection criteria and motive by observing the reference securities actually selected.
I don't think you are correct. ACA knew Paulson had selected the list. But does that let ACA off the hook for being the selection agent? After all, they had done 22 deals! If they were confused about Paulson's role, there is the issue of (1) why didn't they clarify that, or if they did, then (2) can the government prove Goldman lied about it? From the pleadings, it's not clear.
Not everyone who breaks the law is prosecuted, and not everyone who is legally vindicated is innocent.
And, what is just and what is legal are not necessarily the same thing.
In any case, what of it? In the end, v. squid will not see the inside of a jail, and won't suffer the humiliation of having to wear a government-issued tentacle bracelet and pink undies. Although... they may set up a clueless GS lamb as a sacrificial offering; but certainly none of the big kahunas who did the crime will do the time. Instead they will get their own HBO special.
Hey I'm no friend to the banksters and have about 1000 posts to support that... but
Heard about Ritholz's commentary through Honest Abe in Barron's...
He makes 1 point, 'The claim Paulson & Co. were long $200 million dollars when they were actually short is a material misrepresentation — that’s Rule 10b-5, and its a no brainer. The rest is gravy.'
The equity tranche was not part of the final deal, so not sure what the point is. The reference to Paulson being long was conditional, in some initial memo. Yes? Was it in the final structure? Don't think so. That's damn weak stuff. Folks didn't read the final deal? Seriously?
What other point does Ritholz make?
'What you don’t see are all the emails, depositions, interrogations, phone taps, etc. that the prosecutors know about and GS does not'. Uh.. well neither does Ritholz, so again, what is the point?
The rest of his commentary is blah blah blah...Now I wasn't privy to this deal getting circled but I'll hazard a guess as to what the equity tranche was all about...
Paulson was more than willing to put down a sliver of equity in order to secure the AAA, but once it was confirmed that the rating agencies would give the pixie dust lipstick without it, it went buh-bye...
Not unusual at all.
Waiting for every other bankster to be charged in the same fashion, most all of 'em culpable by this threshold.
Barry has this BS bet going. He'll bet $1,000 that GS loses the case or settles. Of course they'll settle. If he wants to make a real bet, it should be that if the case goes to trial, GS will lose.
Thank you. Finally.
An attempt to survey the facts as known and the law without hysterics.
Imagine that.
In this spirit I will refrain from discussing any related issues for another time.
The biggest weakness in your argument that I see is
Why was this "other investor" not invited to the security selection table? More importantly, was this investor notified that the entity shorting the synt CDO had a material hand in the underlying selection process? This is the snafu that gets Goldman from a layman's perspective.
As bearish as I am on the housing sector, I would go long on 5 LTV, Greenwhich, CT median size housing, co-signed with full documentation and 800 FICO scores. If I would go long, this is exactly how I would put the CDO together. Now, would you short it if know I put such a security together? I bet you would if you simply thought it was a run of the mill, Jumbo prime bundle.
Just as my hypoethical above was designed purposefully to burn short sellers, the Paulson deal was - by design - created to destroy those long the securities.
The way these deals work is that the broker hires a third party selection agent. This is so the broker can avoid liability related to conflict of interest. In this case ACA was the perfect selection agent because it was the biggest long investors in the deal (90%). As I mentioned, there is a legal hand-off to ACA. The German banks had a prospectus with all the details and they, like any investor, are invited to inquire further in the assets. This bank had the duty to its investors to do sufficient due diligence.
Denninger has a good discussion that basically agrees with you. He emphasizes that determining the purpose of the offering is material information, that it was created for a specific purpose.
Reggie,
That is great observation, but I wonder what case does a third party really have who did not perform due diligence? Why were they not invited to the asset picking party? Even if they outsourced the selection process are they still not obligated to know what is in the package?
Zactly - what was not disclosed was that the securities were hand picked, from a basket full of handpicked securities, each of which was selected for their likelihood to fail. All the investor saw was GS's brand, shiny AAA ratings and a bright future in investing. Never knew what hit them.
all right. first off Goldman's stock has "soared on the news" so clearly they've done nothing "wrong." Second the politicians only want to get re-elected so "they've done nothing wrong" save for not inserting the word "Jew" more often between sentences (whIich actually would have been pretty hard since Senator Levin is one of the only 10 Jews left in the state of Michigan.) Third the whole "argument" misses the point. In other words "does Goldman pay its taxes" and "isn't it good news if all they're doing is selling protection to paranoid and angry so called Europeans"? Yeah, yeah--i here ya', "they're greedy"--but more to the point THEY MAKE MONEY, TOO. Until you start with this "simpleton view" you're just a dog chasing your tail.
Econophile: First, in a civil trial firms go crazy because of two things: (1) As you point out, the burden of proof is low (i.e., a preponderance of evidence vs. beyond a reasonable doubt). (2) Even ignoring number 1, what really drives them crazy is that a judge and especially a jury will tend not to be sympathetic (i.e., the basic problem with juries is compounded when an artificial entity goes to trial). Essentially, firms in general are subject to silly judgements because nobody is going to feel sympathy for something that isn't flesh and bones (it's just basic human psychology), and especially when that something is called names like Giant Vampire Squid and its average personnel make many mulitiples of what the potential jurors make. In other words, it would be like a cat getting a fair trial at a dog pound. Anyways so there's that part o the puzzle.
In addition, there are the merits of the case. I like that you are methodical on that issue, but the major problem as I see it is that the idiot Blankfein already gave up the gost for the civil trial. Specifically, when he wrote the internal memo trying to push the notion that one bad apple caused the fraud, he screwed their chances. In short, he really effectively admitted fraud. It will be almost impossible to go to court and explain that he didn't really belive it was fraud when that memo is placed as an exhibit. Also, of course, it probably was fraud on some level.
Part of the problem with making your argument here is that there is a gross disagreement between both parties to this case surrounding various numbered "facts" within your Hypothetical #6.
If the "facts," as you list them, can be proven (or not disproven) to be accurate, then I think Goldman did nothing criminally wrong. (ethically, sure, they are lowly)
Whether or not they have residual liability, I am not qualified to say. I am not an attorney (capital markets professional, rather).
May very well be true Carl.
L
I'd rather bet that legislators, bureaucrats, white house residents have a full and complete idea on what caused the US recession (the loss of the possibility of injecting Indian land in the Ponzi scheme built at that time) but they are totally clueless on how to solve something that should not be considered a problem but an expected consequence.
Just like it was difficult to build a physical shortage of land to inject when reaching the western coast, it is very hard to speed the injection rate of matter needed to support the US.
What to do about that? They dont know and are not the only ones.