The S.E.C. claims that Goldman sold securities related to mortgages that were designed to make Goldman a profit and stick investors with a loss. The investment vehicle, which is apparently a Toyota with a stuck gas pedal, was called Abacus 2007-AC1. Apparently, this specific product was a derivative-like instrument based on betting for or against the housing market. Goldman started Abacus in 2007 at the behest of one John Paulson, a hedge fund manager, who went on to make one billion dollars in this scheme. According to the New York Times, Paulson made an additional $3.7 billion by betting against the housing market in 2007.
Here's the rub, while Paulson held a stake in this investment scheme, Goldman told clients that an independent manager would choose the bonds. Here's what the S.E.C. alleges, as I understand it: John Paulson chose all the bonds, selecting those he thought most likely to lose value, this is how he made his money, by betting against the market. Whereas, Goldman allegedly sold these securities to foreign banks, insurance companies, and pension funds, but these institutions would only make money if the bonds, selected based on Mr. Paulson's "bet" that they would lose value, gained value! Get it? I mean this is the kind of scheme the mafia would be proud to hatch. Of course, Goldman Sachs made a profit while their clients lost their shorts because this, according to the S.E.C., was the intent. A Goldman Sachs vice president, Fabrice Tourre, is also named in the suit as the mastermind behind this scheme.
Goldman Sachs issued not one but two statements yesterday denying they did anything illegal. Much like the big financial cheeses, who Peggy Noonan recently took to task, they don't know how it happened that they made money on an investment on which their clients lost money. As one of the first bits of wisdom my Dad imparted to me goes: Figures don't lie, but liars can figure and often do. At the end of the day, it may turn out be yet another case in which there was wrong doing, but it was not illegal. Even this possibility demonstrates the need for a serious and comprehensive overhaul of financial laws and regulations, as well as an increased focus on enforcement and compliance.
I am glad that this is a civil suit because maybe the victims can reclaim some of what they lost. I am still waiting for there to be criminal charges filed based on the many schemes that led to our current melt down. I am sure the case hinges on many intricacies of security law, but I am not interested in that because there are enough attorneys to take care of the legal matter. I care about the gross immorality of playing around with insurance companies, banks, and pension funds. These are businesses and institutions on which the rest of us rely. We pay insurance premiums, we pay into 401ks, and we have our money in the bank. I really find myself asking, where is the concern about all of this?
Perhaps this is the beginning of a determination that will result in the decision that Goldman Sachs is too big and too destructive to succeed. In the meantime, maybe Goldman Sachs can brush up on basics, like revisting the defintion of the word fiduciary, which, according to Dictionary.com, is "[a] person [inexplicably-corporations are persons under U.S. law] legally appointed and authorized to hold assets in trust for another person. The fiduciary manages the assets for the benefit of the other person rather than for his or her own profits" (underlining emphasis mine).
The Economist also has a concise piece the S.E.C. lawsuit.