The following post is by Dealbreaker reader and commenter Infinite Guest.
Whether they could have avoided it, I don’t know–today’s Securities and Exchange Commission acts like a wounded animal–the management of Goldman, Sachs & Co. made a strategic error by failing to cultivate a closer relationship with the new regime. That much is evident from the fact that the suit came as a surprise. Chairman Schapiro is quite capable of partnering with industry: Had Goldman done better, earlier, there might never have been a lawsuit. Popular wisdom says that Goldman should settle. I disagree. Although both parties understand that cooperation beats enmity, the SEC chose not to cooperate; and now, Goldman’s best strategy is to respond in kind.
A settlement would reward the SEC’s transparent attempt to obtain, through extortion, a victory it cannot hope to gain by enforcing the law. The burden is on the SEC to prove that Goldman’s failure to advertise Mr. Paulson’s interest in the Abacus deal was a material omission, or else to prove not only that Mr. Tourre lied to ACA about Paulson’s position, but also that it mattered, and that Goldman is liable. If the case goes to trial, Judge Barbara Jones will not allow theatrics and badgering to compensate for a weak case. She will insist on having the facts. The facts, as far as we have seen, show that Goldman did nothing illegal. For the edification of those who fret that they did something unethical, a full airing of the facts would suffice to demonstrate that Goldman behaved at all times according to the best ethics in the business of institutional derivatives sales.
Goldman is in a bad position. Settling the case does nothing to mitigate the flood of legal actions against them. If anything, a settlement encourages further action. Settling the case does nothing to clear the blot that the SEC has smeared on their name. Fighting carries the risk of losing the case, and supposedly carries additional headline risk with each passing day. While the risk of losing is real, especially before a jury, it is at this point remote, therefore inferior to the likely costs of settlement, in dollar terms and in terms of subsequent risks. The marginal headline risk, too, has been vastly overstated. Goldman is constantly in the news these days. The worst headlines to come will happen only periodically, at times that Goldman can anticipate: for instance, when they file a motion to dismiss; when that motion is denied; when a court date is set; whenever another firm files an amicus brief; and every day during the trial. Goldman can effectively get ahead of all of those headlines. In the meantime, they are well-advised to continue denying the allegations, delaying the prosecution, and defending the firm’s reputation.
Since the suit was filed, management has done an outstanding job presenting its side of the story internally, to clients, shareholders and the public. Goldman has secured multiple enviable endorsements from popular, credible public figures. They have wisely agreed to discuss a settlement with the SEC, in case they can somehow find any common ground: perhaps a $15 million disgorgement and a promise to make future CDOs more transparent, without the admission of any wrongdoing, would be reasonable in exchange for freedom from criminal prosecution. Some kind of settlement, even now, would be worthwhile, albeit distasteful, if it rewards Goldman for cooperating. Judge Jones, unlike some of her peers, has shown a conspicuous willingness to reward cooperation.
Mr. Tourre, who is in an even worse position than his employer, is the wildcard. Mr. Tourre’s e-mails to his girlfriends were clearly a frolic, wholly unrelated to Goldman’s business. His weakness for Belgian jokes, his graphic metaphors, his narcissism and the rest are no crime, and certainly nothing for which his employer can be held to account. Even if evidence suggests that Mr. Tourre may have told ACA Mr. Paulson wanted to buy some of Abacus, all is not lost. In order to implicate the firm, the SEC has to prove that Mr. Tourre was lying, they have to prove that his lie helped induce ACA to participate, and they have to prove that his managers knew, or should have known. Paolo Pelligrini, who told ACA that Paulson wanted to take a short position, is on record as having wanted buying the equity tranche–as a hedge. Mr. Pellegrini’s buying interest is not inconsistent with Mr. Tourre’s remarks, nor does it obviously indicate anything material in context. Nevertheless, Mr. Tourre’s strong motivation to settle is self-evident. The SEC named him, and only him, for a reason. They are counting on him to put his own self-interest above his employer’s. They’re using him as a lever. It is incumbent upon the Goldman to take good care of Mr. Tourre, to keep a close eye on him, to make a clear commitment to him contingent upon his continuing loyalty, and to ensure he understands that he has no better choice.
Bess’s posts have more references to nutsacks than this one.
I tire of this topic. Don’t any of you people ever shut up?
Thoughts, Anal_yst?
You assume Goldman isn’t sitting on a treasure trove of embarrassing emails about all manner of business, and that during the discovery phase the SEC will go on an all-out fishing expedition and drape these out over and over in the press.
$15 million to settle a fraud that net $1 Billion. Sorry, but this isn’t Chris Cox’s SEC any more. Goldman will pay the piper or suffer 2 years of devastation. BTW, Lloyd will need to fall on his sword as well….
Based on the style, I deduce that you have been reading the economist for many years. I also deduce that you probably have two hands.
Charlie is the wildcard, assbag.
@2 “Can’t anybody here play this game?”
It’s one thing to be conclusory, but to be contradictory? Should Goldman not settle, or should they settle? You are taking Gasparinoism – they may settle, they may not – to new heights.
Ok …GS is in a tough spot either way but settling via consent decree and fighting it out with the plaintiff’s bar (covered by insurance)is ALWAYS preferable to fighting the feds. If they settle with SEC, they end up being thought of as “reasonable” and if other isssues come up, then the SEC will give them a break.
If they fight, they are betting the franchise. The press will drag them through the mud; clients will vacate the place as will the real assets (employees)…..readers of this blog must be a)young, b) well educated and hence idealistic and 3) not very street smart….
@7 you are a tool…and I am none of those things, I am:
old
poorly educated (Harvard Law)
much smarter than anybody else on Wall Street
@6. There is nothing wrong with being contradictory. For example: tranny porn. Expand your mind, man.
@5, in green spandex
Prolix prose. Greg, yo’ mamma misses you.
Anal_yst, thoughts on you joining the Taliban?
I think 7′s crazy. Which clients will flee? Where will they go? Lehman’s dead. Bear’s dead. For all intents and purposes, MER’s dead. Fact is, GS is and has been consistently the best. You have to remember who the clients are. These are not fresh-faced Joe Schmoes. These are institutional investors who understand the game, understand the stakes, and know exactly what kind of environment they are getting themselves into upon first stepping onto WS.
As far as the employees, I don’t think they’re going anywhere. Unless, however, those police standing outside 200 West day in/day out actually have to serve their purpose, should anything awful happen.
As IG presents above, I think the charges are baseless, and GS would do more harm by settling.
-28Y/O & Rational
Infinite Guest – In whose wise legal opinion does the fact that the entity that picked the shitty bonds that went into the portfolio and then bet that the whole thing would go to zero not count as a material fact, and therefore a material omission, and therefore fraudulent? Have you taken your Series 7?
And how do you get off stating that the purchase of the equity tranche was simply (innocently) a “hedge”? And that purchase wasn’t actually the way Paulson bought the privelege to pick the bonds made up of mortgages taken by Orange County day laborers for multi-million dollar homes?
Good writing, though, your sophisticated style almost convinced me of what you were saying.
@3: new SEC tranny site firewall got you visiting DB now?
@9/EPD, “tranny porn”: contradictory or redundant?
LB
If you were to go in to SEC with hat in hand, begging for a fine, they will have fined you 10x what they would have in the 1990′s in 2004; now under this new regime and emboldened after their success in the mid 2000′s, fines could be 100x the level of 1990′s fines (plus restitution).
Larry Lasser, Ex Putnam CEO
There’s a hoary legal maxim been kicking about since Lord Coke first uttered it: swallow the toad.
GS reputedly is better than anyone at managing risk. I don’t see them betting the franchise on this.
@13 “The Assets” after they have trained at GS and earned street cred will flee to HF’s and or the HF arms of PE firms or get a Vik-guarantee or a JamieD-guarantee comp pkg. Goldman is good but not the only game in town.
Why do you think Josh Birnbaum worked at GS? Certainly not to line LB’s nutsack? he did it to start his own shop (making 20-50% of profits instead of 5% or less of profits)…Young person
Serious question because I’m too lazy to research it myself. How granular was the disclosure of the mortgages underlying the synthetic CDO? Did it list them individually with details of city, date, amount, quality, etc.? Or was it a more aggregate disclosure. Thanks.
$15 million is total bullshit. This is a shakedown by the SEC and a pathetic attempt by the BHO admin to put on a show for the masses and then to create policy that redistributes wealth.
Obama is taking on the big dog in the gang in a public forum while fanning the fire of anger at the WS to cover up his own incompetence and complacency.
If GS actually did something wrong as the SEC states then a 15 million dollar fine is a slap on the wrist. If the SEC knows it has no case then the proposed $15M is greenmail.
If GS pays, it shows they have something to hide. If they stand tough and get into a kung fu stance then we know they got nothing but John Lobbs in the closet.
So far all we have seen is GS hang French Fry out to dry and some shit grinning punks wise off to congress. it looks like GS may need to pay the greenmail but as I said, that will do nothing to remove the shit stain on the LB’s shirt. In fact I will look like they did some shady shit.
@20/AB As I understand it, there was CUSIP-level disclosure of the RMBS deals underlying the synthetic CDO; anyone with a Bloomberg and a Trepp or other such feed could presumably then pull up the granular details on the loans in the individual RMBS (geographic distribution, loan type, yadda yadda).
@14 – please learn something about your chosen topic before posting. HuffPo doesn’t always have, or understand, the most relevant facts.
I love how “Mr. Look at the facts” uses arguements like “management has done an outstanding job presenting its side of the story internally, to clients, shareholders and the public” to justify his position. Those aren’t the facts!
If Moody’s testifies, as it did on capital hill, that if they had known the shorts were involved in structuring they would have rated the securities differently, then GS is screwed.
@22 – Thanks.
ACA was supposedly a professional investor. Was their expertise limited to looking up a bond’s Moody’s or S&P ratings? Presumably, they got a wider spread if riskier mortgages were included in the deal. ACA was the selection agent and the investor and they met with Paulson’s people. Did they ask Paulson’s people what they were doing at the meetings? What did they say? Pelligreni says he told ACA that Paulson was buying protection. Even if ACA thought that Paulson was also an equity buyer, they must have known that an equity buyer wants high yield and maximum variance while a senior lender wants low yield and minimum variance. How about suing ACA for gross negligence and for misrepresenting its review process and expertise to its investors?
I agree, however, that this whole thing is getting boring.
@24 Are you a client of GS? I am, and I agree with IG’s statement.
By the way, there is only one “e” in argument.
@26 Not to mention that IKB and ABN AMRO presumably possessed Bloomberg terminals and someone capabale of typing in CUSIP DES and digging from there.
Agreed also that this is getting boring.
@24 –Moody’s stated position was that they based their CDO ratings on their own (moody’s) ratings of the underlying assets and the diversity of the pool. Especially on a static pool, they did not factor in who chooses the assets. They didn’t give credit for being able to pick better assets or penalize for possibly picking worse assets. In their mind, their rating contained all the relevant credit info. They were Moody’s after all. It wouldn’t do to admit that somebody knew more about credit than they did. The guy who testified was mistaken or lying.
@23 I don’t care or know what Huffpo says on the topic, the point is if you had the ability to consider the facts independent from your reflexive and defensive view of the world, as well as a basic understanding of securities law, you’d see that there is more to this case than your GS press release-infused opinion.
The author made a blanket statement on the merits of the case, and I think it warrants a more nuanced explanation.
@27 Obvious admitted bias – thus meaningless opinion. Additionally, this is the comments section of a blog, not a NYT editorial. Is your argu”e”ment that my argu”e”ment has no merit b/c I spelled a word wrong?
@1-@29,
You are all ignorant peasants. The first thing we learn in finance is to do an independent anal_ysis. If the SEC morons would have done this, we wouldn’t be discussing Abacus. It’s that simple people! Arrrghh! I hate the simplistic mind-set of the MSM and Internet commentators.
-Anal_yst
Anal_yst,
You are the ignoramus. They are lawyers; they dont analyze; they try and convict. They have GS dead to rights…..go back to your IT help desk….and clear up some tickets…
Can the Joke Briefer please step in?
If you all think for a second that GS is going to hand this to a jury of pissed off, screwed over Americans then you’re as crazy as your posts make you sound. They’ll hem-and-haw for a little while,but in the end they’ll pony up the cash to make this go away. Too many skeletons in that closet just dying to rip out. @3 is the only poster with a brain!!!
–3
@7 and @32 is also spot on…he is refreshing
-7
@35 True, but @3,@34 shows more intelligence.
@32,@35,
You just don’t get it. Away to yahoo finance with you. People that actually work in finance are talking.
-Anal_yst
Anal_yst
People aren’t “in finance.” They are traders, salesmen, portfolio managers, hf pm’s, prop traders, etc. People “in finance” work in windowless offices and used to work in Audit at PWC and went to St. John’s or SUNY Albany
@38 @32 @7 gets it.
Josh B
@38 really? the fact that his name links to shemales.com wasn’t a tip off that 38 isn’t THE anal_yst but merely doing an impression of the great one?
@40 Don’t know about that, but I do know that our back office gets really busy about this time of the day….or anal_yst has stepped out to lunch at Ray’s for a slice
I’m going to d in your b, and h all over your face while you k in your mother’s p. J o & c in the bat cave, suckers.
Leave Anal_yst alone.
Goldman’s ability to survive a loss in this case is probably better than the SEC’s.
@43 Really? There more accountability at the SEC than Goldman. You’re kidding, right? Shapiro might take a hit but that nebulous thing called the SEC will survive no matter what. Goldman gets its ass kicked in the press and court and clients, shareholders and the like start getting pretty pissed. Pressure’s on Goldman to settle, fast…..
@24/30 How is my opinion meaningless? You said GS hadn’t communicated well to clients. I said I was a client and disagreed– thought they had communicated well. Go blow a goat.
@34 Don’t think it’ll get to a jury myself but if it did I wouldn’t want to bet money on the outcome. Look at the Bear Stearns HF case– the evidence the press reported in that case looked way more damning than this.
@43 Agreed.
Pigfuckers!
I remember when the comments on here used to be witty and biting, and juvenile, and funny…when did YahooFinance dump out its turds onto DB? Actually arguing against someone on here is stupid…tell them you’d fuck their mother, and that they wish they’d gone to an Ivy League B-School, slap them in the face with your giant rainmaking dick and let that be done with it.
“I remember when the comments on here used to be witty and biting, and juvenile, and funny”
god you’re fucking moron. go to any other posts on DB this day/week/month year. they are all of those things. when the post is something a bit more serious, like the above, people with brains like to have a debate (something that does not happen on Yahoo! finance except to talk about who works at a bigger chop shop). In sum, fuck your mother, your community college attending cockgobbler.
“Actually arguing against someone is stupid”
not for people with more than half a brain cell and an opinion.
“Arguing over the internet is like the special olympics, no matter who wins you’re still retarded.” – The Interweb
@48 the commentariat is more than happy to tell you to fuck your mother, after she’s done take it up the ass for them.
@51 I’m a narcissistic prick so I’m going to assume you’re talking to me and mis-labeled that, and with that I say thank you.
@49 “Actually arguing against someone is stupid….ON HERE” I’m all for intelligent debate. The problem is that the internet takes any intelligent argument, throws it in the retard blender and out comes an idiot shake.
-@47
@52 the internet is obviously not the ideal place to have a debate but it’s amusing that you think a bunch of guys in finance who ALWAYS have an opinion are going to be restrained from having an argument when there’s something to debate. also, your comment got extra retard points for claiming that the ones on a post like this, which is not a standard DB post but an every now and then serious one, were indicative of the vast majority by saying “I remember when the comments on here were…” the comments on DB’s usual posts are nothing if not by and large “witty and biting, and juvenile, and funny.” and that’s why I say to you now- which community college did you drop out of and what’s it like going through life being a human cockbag? don’t bother responding, just slink back to your teller’s station.
@53 now that is an appropriate response. thank you.
@54 you’re welcome, cocksucker.
Unclefuckers!
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