SEC’S Case vs. GS&CO: Weak, Most Experts Agree

Goldman Sach’s Chairman and CEO Lloyd Blankfein had to dumb it down for his interrogators during a 3-hour question and answer session of an 11-hour marathon hearing last month on Capitol Hill.  The hearing was about the Securities and Exchange Commission’s (SEC) civil case against GS.  Several members of the Permanent Senate Committee on Investigations asked similar questions different ways that Blankfein had to find the proper words in the hope of making himself understood by an audience of what appears clearly as a group of “investment banking neophytes”.  At one point he caught himself almost about to use the word “fiduciary”, stopped in time and had to struggle to describe what he meant in much simpler terms.

Lloyd Blankfein who received his business and law degrees from Harvard University and who was named “2009 Person of the Year” by the Financial Times, was probably the smartest person in the room during that senate hearing.  Blankfein had skillfully steered GS&Co. through the financial meltdown.  The company earned an impressive $13.4 billion last year and has not recorded a losing day from the first business day of 2010 through the end of the first quarter.  To acquiesce to political correctness, he announced compensation caps for his company last year despite the company’s huge profit.  Some report that GS received $10 billion of TARP money.  If true, they clearly did not need it and it must have been paid back with interest.  The Treasury Department used most of the TARP money to increase the capital of “too big to fail” banks and other financial institutions, such as GS whose assets have fallen when “mark to market” accounting method is applied.

As to the SEC’s suit, I see it as nothing more than a political move by the SEC which is composed of a decision-making body of 5 commissioners headed by a Chairman.  The commissioners are appointed by the President and their terms are 5 years each but are staggered so that each commissioner’s term ends on June 5 of each year.  To make the SEC non-partisan, no more than 3 commissioners may belong to the same party.  So much for that non-partisanism.  The decision to sue GS was not a unanimous decision but a 3-2 split along party lines which leads me to believe that this is all a political ploy, possibly to call attention to some kind of Financial Reform Bill which Obama and the Democrats have been trying to push through.  If the SEC had a stronger case, I would argue that they would have gone directly to the Justice Department for a criminal prosecution rather than file, what in my opinion is a frivolous civil case.

GS&Co. has nothing to fear from the SEC.  Goldman’s lawyers issued an initial statement indicating the allegations of “securities fraud” are completely unfounded in law and in fact.  I agree.  Let us briefly examine the allegations:  SEC alleges,  1) “GS&Co …made misleading statements and omissions in connection with a collateralized debt obligation (CDO-ABACUS 2007-ACI)) it structured and marketed to clients…”  Paraphrasing Blankfein’s reply, “If no one is willing to buy them, we cannot sell them.”  In other words, the buyers of the CDO’s were well aware of the risks as well as the high returns.  Says Blankfein, “We do this thousands of times a day.  We buy and sell securities”.  2) GS&Co. failed to disclose in their prospectus that ABACUS 2007-ACI, which was backed by sub-prime residential mortgage securities (RMBS) was partially structured by hedge fund, Paulson & Co.  Paulson shorted the portfolio it helped create by buying CDS (Credit Default Swap) securities from GS&Co. Paulson’s interests were sharply conflicting.  Here is my spin on this:  My understanding is that there is nothing in the law that requires the marketer of the securities to disclose that a selector of the securities in the portfolio took an adverse position by hedging against the portfolio. If Congress wants to introduce a law for that specific disclosure, let them do it right after the resolution of this case.  Second, the SEC alleges that investors in ABACUS lost over $1 billion and Paulson’s opposite CDS yielded him approximately $1 billion.  John Paulson is not God.  The market could have gone against him.  If anyone knew what we know now, in 2007 no one including Warren Buffet would have bought ABACUS.  As it is, GS&Co. sold 10 billions of dollars in ABACUS stocks to mostly savvy investors.  Would it have made a difference if those savvy investors knew that the selector of the funds took an opposite position?  I don’t think so.  Not when Chris Dodd and Barney Frank kept assuring us as late as June 2008 that there was nothing wrong with the housing market and that Fannie Mae and Freddie Mac were still good investments.  Before the sky fell, ABACUS was highly rated and yielded an annualized double digit return.

This article is not intended to provide financial advice.  Please consult your financial advisor before acting on any advice provided herein.

Any opinions and views expressed herein are the sole responsibility of the writer.

Leave a Reply

Your email address will not be published. Required fields are marked *