After listening to the TV chatterheads talk about the SEC’s Complaint against Goldman Sachs the past few days, I decided to do something rather novel. I read the Complaint. And I must say, I’m not overly impressed. Lots of folks are asking: Is this the end of Goldman? Not based on these charges.
If you haven’t read the Complaint, it is basically as follows:
John Paulson runs a hedge fund. He’s the kingpin. And he thinks the housing market is getting ready to tank and that when it tanks it will make lots of institutional bond holders real sick. And he wants to make a big bet against these big institutional bond holders. He wants to spread this sickness. So he asks Goldman if they have any of that sweet drug (toxic mortgages) that others will buy and that will make them sick. Goldman says: “No but we think we know where we can get you some.” So they go find a dealer (ACA). Paulson wants Goldman to get the dealer to bundle up some of this bad stuff and sell it to these institutional bond holders. They have to be careful about the dealer they choose. They need a dealer who will put together bad stuff, but believe it is good stuff and represent to the junkies that it is good stuff.
So this dealer (ACA) is not really like other dealers.This dealer is a little sketchy. But this dealer is going to go out and pick and choose some stuff for the users. The dealer has been doing this for a long time and probably has a pretty good idea of what is good and what is bad. In fact, the dealer represents that it’s real good at picking out what is good and bad stuff. Goldman and Paulson help the dealer pick out the stuff but don’t tell the dealer that they’re actually not using the stuff themselves. In fact they are betting that this stuff will cause great sickness. And they will profit.
And these users (the institutional investors) are not your typical street junkies. These are sophisticated users. You might say they have a PhD in pharmacology and they know what this stuff can do to you. So even though a little research would indicate that this stuff is bad, these junkies want to buy it anyway. They’re addicted.
And that’s what happens. The stuff the dealer finds (and represents is good) is actually toxic and it makes the junkies (ie institutional investors/big banks) real sick (not to mention pissed). Paulson makes a cool billion. Goldman makes about $15 million. Chump change for Goldman.
But Goldman is not the dealer; it’s not the junkie; it’s not the kingpin; it’s not really even the pusher. It’s sort of the pusher’s helper.
If I were defending Goldman I’d offer the following advice: First everyone needs to take a powder. These are civil charges. Noone is going to jail. I am dumbfounded at the misconception held by so many people (even some of the “experts” on tv) that jail time may be involved. Sheesh.
This is just about the money. As an old guard Texas lawyer told me in my first mediation years ago when I got all bowed up: “Son I don’t want your wife or your life. I just want your money.” And noone does money better than Goldman. One of the remedies sought by the SEC is a disgorgement of profits. Blankfein could go to the SEC this week and negotiate a settlement. Get this off the front pages. Tell the press they didn’t do anything wrong but they just want to close this chapter in their history. Hell, they’ll spend $15 million in litigation fees in 2 months.
Then again, it’s tough to advise Goldman to cut a deal because these charges are so defensible (and it may open them up to some difficult “admissions” in other civil cases depending on the type of arrangement they make).
Here is my bullet point defense.
-Point to the empty chair. Curiously, the SEC did not name Paulson or ACA in the case. That is always problematic. Juries do not like empty chairs. Goldman will make ACA and Paulson look like Simon Lagree and Hitler before this is over. The SEC should have employed a different strategy- one that is akin to a lame sports analogy. Tackle everyone in the backfield and let the jury figure out which one has the football.
-This sh*# is complicated. Make it even more complicated. RMBS, CDO, CDS, XYZ-PDQ, TGIF, WTF. You get the picture. Only the most sophisticated dealers and users play in this playground. If you can’t run with the big dogs, stay on the porch.
-Everyone was doing it. Why are we the ones being singled out? This is monday morning quarterbacking in the worst way.
-It’s political. President Obama announced a crackdown on derivatives and other exotic financial arrangements around the same time this Complaint was filed. Coincidence?
-It’s a victimless “crime”. Who lost their shirt? Ralph and Shirley Mudge? Nope. Big banks. Juries don’t give a rat’s ass about a big bank losing money.
Or if that fails Goldman can use the same defense used in the clip below. It’s a classic.