You've heard that name a lot in the news lately, haven't you? Last week the Securities and Exchange Commission charged Goldman Sachs with fraud. Since then people Republicans and Democrats have been trying to use the case to promote their own causes. Democrats cite Goldman Sachs as support for more financial regulation; Republicans cast dark questions about the involvement of some of Obama's folks and are wondering if Obama will return nearly one million in Goldman Sachs campaign contributions. (Why should he?)
So .. what's the deal here? Well, you come to the right place for a simple explanation: A simple-minded person who can cut through the bullshit.
Goldman Sachs sells securities, investments. Some of these investments are for ordinary investors. It doesn't take a lot of investment knowledge to buy stock in Apple. Other investments are for very sophisticated investors only. If you're not in the market you probably don't know that some investments sold by brokerages and securities firms are so complicated, so iffy, so convoluted that the person selling those investments has a legal responsibility to determine that you are a "sophisticated invester" and that you actually have some clue as to what you're doing.
The investments that Goldman Sachs sold which are at issue here are called collateralized debt obligations. In this case these CDOs were investment instruments that were basically backed by mortgages. Starting to see the trouble brewing, aren't you? Mortgage-backed securities haven't exactly been sterling investments for the past few years.
So ... Goldman Sachs is creating some CDOs to sell to investors. To do this Goldman Sachs needs to figure out just which mortgage bonds and other investments will be included in the CDO. To do this Goldman Sachs needed some help. This is where Paulson & Co. comes into the picture.
Introducing John Paulson of Paulson & Company. Now before the real estate mortgage meltdown Paulson wasn't really that big a blotch on most folks radar screens. Paulson, however, did something that most of us did not. He saw the real estate meltdown coming .. and he saw it a long way off. Over the past couple of years, while Americans have been losing their butts in the market, Paulson has been making money hand over fist. Why? Because he went into the market and bet against real estate.
Back to Goldman Sachs. Here they are trying to select the contents of their investment fund, which they will call Abacus 2007-AC1. Goldman Sachs allowed Paulson to help, and here's where it gets interesting. This was a "Synthetic CDO" meaning that they buying party KNOWS there is a short on the other side of the trade. Paulson thinks that securities backed by mortgages are going to tank, and here he is helping Goldman Sachs select the mortgage bonds and instruments that are going to be included in Abacus. Now doesn't it stand to reason that since Paulson is betting against mortgage-backed securities he is going to try to design a CDO for Goldman Sachs that is going to tank in the marketplace? Apparently that's just what he did, and Abacus was a miserable failure. Not only was Paulson paid $15 million by Goldman Sachs to help select the contents of Abacus, but he made --- now get this --- about one billion (with a "B") in profits by selling that sucker short. Goldman Sachs, on the other hand, bet on Abacus to succeed .. and lost about $90 billion.
Here comes the SEC and a lawsuit is filed against Goldman Sachs. Essentially the lawsuit claims that before Goldman Sachs sold this instrument to investors it had the responsibility to tell the investor absolutely every detail as to how this CDO was created, including the involvement of John Paulson. Now keep two things in mind here. One, the CDO is a very sophisticated investment instrument and those to buy CDOs are often just as knowledgeable as the people at Goldman Sachs making the sale. Secondly, at the time Abacus was created Paulson had not achieved fame by betting against mortgage-based investments. Why, then, did Goldman Sachs have to disclose his involvement? It probably wouldn't have meant anything to the investors anyway. Remember - Goldman Sachs thought they had put together a CDO that was going to make some big bucks. That's why Goldman Sachs bet on Abacus, and ended up losing ninety billion. I mean---if you're going to commit fraud don't you think you ought to make ninety billion and not lose ninety billion?
One of the issues here is the odd way the SEC has been acting in this case. Usually when the SEC brings an action against a company there is plenty of warning and an opportunity to reach a settlement as to how to resolve the problem and any fines that might be played. Oddly - and nobody can remember where this has happened before --- the SEC wouldn't even return Goldman Sachs calls in the days leading up to the lawsuit. This is pretty much unprecedented, as is the nature of this particular SEC action. There really is no record of an action like this taken by the SEC before.
So ...what's going on here? Enter Barack Obama and the Democrats. Now that Obama has a vehicle to destroy private health care up and running, it's time to go after Wall Street. Obama's next big goal - one that he wants to accomplish before the November elections - is to place massive new regulations on America's financial institutions. Now I'm not saying that there doesn't need to be some changes made in the rules governing Wall Street, but I am saying that perhaps a man with a clear dislike of capitalism might not be the person to lead this effort.
Let's wrap this up with a simple and easy to understand question. Did the SEC pop this lawsuit on Goldman Sachs last week to bolster Obama's calls for new financial regulations? Was this lawsuit thrown out there to give Obama the talking point he needs to sell his new regulatory scheme? Usually actions like this are settled before a lawsuit is filed, but in this case the SEC wouldn't even return calls from Goldman Sachs. Maybe someone was telling them to get this thing done .. and get it done NOW ... so that Obama can have his talking point for regulatory reform.
And remember---the people who buy these kinds of derivatives have herds of lawyers and investment counselors who do due diligence on these kinds of investments. So---who's to blame and could there have been any fraud? Don't think so.
Dickson's prediction--it's all stage craft by the administration and nothing will come of it. It's the same as a fart in the swimming pool. there will be a big bubble, it will rise to the top, then there will be a foul odor and then ---Nothing.