Nice mention in todays Barrons . . .

Barry Ritholtz contends, contrary to the common view, that the case against Goldman is anything but weak. Like it or not, here comes financial reform.

Who ever dreamed the day would come when anyone aspiring to become another Lord Keynes or Milton Friedman would need to take a double major in economics and criminology to get his Ph.D.?

On Wall Street, not surprisingly, sentiment is strongly pro Goldman (at least when uttered publicly). Especially among folks who haven’t bothered to read the complaint, which, as we noted last week, was a model of clarity, the feeling is that the SEC has a weak case.

Not so, thunders Barry Ritholtz, who runs Fusion IQ and turns out a steady stream of spirited and highly informative pieces on the markets. On Friday, Barry chose to take on the notion the SEC’s case is feeble and show why it ain’t necessarily so. He seems ideally suited for the task because, as he confessed to us, he’s a recovering lawyer (an earlier professional incarnation) as well as a seasoned and savvy follower of markets.

Barry asserts the case against Goldman, far from weak, is very strong. “Based upon what is in the complaint, parts of the case are a slam dunk. The claim (by Fabrice Tourre, a former Goldman VP pushing the deal) that Paulson & Co. was long $200 million when it actually was short is a material misrepresentation — that’s Rule 10b-5, and it’s a no-brainer. The rest is gravy.”

He points out, too, that the complaint contains only the bare minimum the prosecutor, who he thinks is first-rate, has to reveal to file his complaint. “What you don’t see,” he explains, is all the e-mails, depositions, interrogations, phone taps and the like — “the arsenal of additional evidence” — that only the government knows about.

Nor does he buy the idea, commonly bruited about, that this is a complex case. Parts of it, he says, are a little more sophisticated than others, but what it boils down to in Barry’s view, is a simple case of fraudulent misrepresentation. The most difficult part of the case is likely to turn on just what is a “material omission.” Whether Paulson’s involvement in selecting mortgages was or not material is an issue of fact for a jury to determine. “But complex? Not even close.”

Barry is willing, moreover, to put his money where his mouth is, as evidenced by his offer at the bottom of his analysis: “I have $1,000 against any and all comers that Goldman Sachs does not win — they settle or lose in court. Any takers? My money is already in escrow — waiting for yours to join it. Winnings go to the charity of the winner’s choice.”

So far, as he tells it, the rush to take the other side of his bet has been underwhelming.

Abelson is way too kind, but I nonetheless am humbled by the sentiment.


Wanna Bet?
Barrons Up and Down Wall Street, APRIL 24, 2010

Category: Media

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

39 Responses to “Wanna Bet?”

  1. Mannwich says:

    Again, well done, BR! That’s why many of us keep coming back to this blog – for the hard-hitting pieces that pull no punches regardless of who is on the other end of it.

  2. DL says:

    The question, of course, is not merely whether GS failed to meet its obligations to disclose material facts, but what the damage award should be. If the ultimate financial penalty is small, this will lend credence to the argument that politics played a role in the decision to bring the lawsuit.

  3. E-mails show Goldman Sachs profited from mortgage crisis

    “Sounds like we will make some serious money,” Goldman Sachs executive Donald Mullen said in a separate series of e-mails from October, 2007, about the performance of deteriorating second-lien positions in a collateralized debt obligation, or CDO.

  4. …once the lapdogs in the media turn on you it really is all over. I don’t know if GS is there yet but they are getting pretty close. They have been getting nipped but the pack mentality hasn’t quite taken over yet

  5. franklin411 says:


  6. ab initio says:

    Settling these cases is the usual way out. Shareholders get screwed again since management is never held to account.

    Its like Pfizer who gets fined and shareholders pay for selling drugs for non-approved uses. They then as part of the settlement promise not to do that again. The general counsel who negotiates the settlement then becomes CEO. They once again get caught under his watch for selling drugs for non-approved uses. Shareholders once again pay over $2 billion dollars fine as part of a new settlement. No personal accountability for the CEO.

    Rinse and repeat!

    We need to go the Brazil route – where directors, officers and controlling shareholders of banks have their personal net worth at risk for any failure at the bank. Just like the good old days on Wall Street when firms like Goldman Sachs were partnerships with the partners net worth at risk.

    Now we have privatization of profits and socialization of losses and no accountability for those at the wheel either in private industry or government.

  7. cognos says:

    Hasnt AA been calling the “double dip” since 900 on SPX? Bad company…

    Why is “Tourre said Paulson was long” an undisputed fact? Tourre has denied this. Paulson himself said “ACA knew we were short, thats the whole point of a synthetic CDO”.

    Why does much of the speculation surround whether knowing Paulson was short was a “material” fact? If this case was about Tourre saying he was long? These two points dont connect. In fact, they just confuse the masses.

    1 – If Tourre said “Paulson was long”. This is a small, but significant, verbal misrepresentation by a low level employee on a single deal. 10-5b violation. Mistake made, small fine. Why is the SEC making such a big deal?

    2 – Is the case about the need to disclose that Paulson was short? (This is lunacy. Goldman does not need to NOR should they disclose the L/S positions or intentions of other clients. Client position information is not a “material” investment fact but a CONFIDENTAL detail known only to the broker).

    3 – What else? There is nothing else here. All the other points — “this thing was designed to fail”. Uh, thats the whole point of the SHORT. Many people have been shorting companies and credit products “designed to fail” for the last 12 months… these shorts have all lost enormous money. The “toxic assets” of 1-yr ago are up 100%, 300%, even 10x or more in some cases. Welcome to financial markets – risk and reward.

  8. super_trooper says:

    Oh boy, I have no hope for financial journalism left. This was just straight from your blog. He didn’t even interview you in person. You go to people’s blogs, read posts, copy and massage it into an article. Is this how it’s done nowadays by a “veteran financial journalist”? How lazy can you get. He’s misleading the reader in his “quotations” and he’s not mentioning that all the “quotes” came straight out of your blog post. This “journalist” is a JOKE.


    BR: We spoke for 30 minutes on Friday

  9. DL says:

    One can wonder…

    IF Bernie Madoff hadn’t committed fraud,
    IF Obama wasn’t trying to get a financial regulation package through Congress,
    IF SEC employees hadn’t been caught watching porn during business hours…

    would the suit have been brought?


    BR: Probably

  10. Tarkus says:

    If the SEC was watching porn during the height of the crises, wouldn’t that be during the Bush Administration (oh, the pun…)?
    If Goldman was short the CDO’s, I would wonder if they are short Greece (with a little insider knowledge from the deal they made for them).

  11. The “toxic assets” of 1-yr ago are up 100%, 300%, even 10x or more in some cases.

    It sure helps when Uncle Sam is backstopping everything.

  12. bsneath says:

    Barry, your personal values of honesty, integrity and the pursuit of the truth are what I respect about your blog. While one may have differing perspectives on particular issues, one cannot (or at least they should not) attack you on your character or your motives. These are above reproach.

  13. Mannwich says:

    @cognos: So does that mean you’ll be putting your $1K down in a bet against BR?

  14. bobabouey says:

    For anyone interested, links to the two derivative complaints are here:

    Mostly piggyback off the fed case. Less likely to lead to massive damages or settlement, just a bunch of attorneys fees and some remedial actions. Ironically, AIG / Chartis provides the D&O coverage, so they’ll get stuck with the bill.

    I speak from experience here, i was GC for a public company that defended an option pricing litigation case. No evidence of mis-pricing was found, but the best outcome was still to settle for remedial changes to various internal procedures that were not substantively different than existing policies, and for helping to bring about that change, the plaintiffs attorneys got their $1m of expenses covered… And then we had to sue AIG to collect on the D&O policy (largely successful).

    Still waiting for the counterparty claims, thats when things will get interesting for GS in my opinion, and when we’ll know if the Fabrice Tourre type misstatements were a common theme or a one-off issue.

  15. NormanB says:

    A rule of investment life: Goldman’s best client is Goldman, period. Those that don’t know it get what they deserve. Remember, Goldman makes their money by trading so by definition when they win someone else has to lose. There is no net economic benefit to the system in what they do. They are and always have been a pack of intelligent thieves.

    What I do wonder is that with all of this negative publicity even assuming that they don’t get proven guilty of anything if Goldman (and maybe the others) will get Anderson-ized. Remember when Arthur Anderson was caught playing both sides of the field penalties and legislation did not do them in. No, the clients left in droves and the business collapsed. In Goldman’s case maybe all of the sheep-like entities like municipalities and pension funds will have to go elsewhere to pretend they are able to game the system and get ‘extra’ returns. Any ideas?

  16. Mannwich says:

    Old Warren has to be wondering about that investment of his in GS.

  17. bsneath says:

    NormanB Says: “A rule of investment life: Goldman’s best client is Goldman, period. Those that don’t know it get what they deserve.”

    I suspect everyone knows it now.

  18. zell says:

    Cognos: why don’t you think your question number one through yourself?

  19. DL says:

    Norman B @ 2:45

    Yeah, a good thing that Goldman is the only investment bank that hires sleezebags.

  20. The Curmudgeon says:

    Manny: Consider the significance of what just happened–the government turned on one of its overseers, yet w/out any outwardly evident reason to do so. Perhaps this is all a canard–Goldman being shocked, the government “going after” them, etc. Maybe this is just political theater for the masses, and the government’s still got Goldman’s back (or rather, vice versa). And maybe shrewd Warren is happily playing pinochle knowing full well which side the government and Goldman are on–his.

    Goldman the fall guy? Anyone? It takes the heat off them as a general villain and quantifies the villainy (which isn’t so bad); it takes the heat off the SEC, and puts the heat on financial reform legislation–which Goldman wants and the government needs in order to show it is “doing something” about those evil investment bankers.

  21. Mannwich says:

    Great point, DL. The veil is being pulled back on Wall Street in general. GS is FAR from the only firm doing shady stuff like this, but all the Feds need is one scapegoat to make it’s point politically, however ineffective in reality that may be….

    @Curm: Good point. Could all just be political theater but I don’t know. They’re risking a lot for just pure theater. Assuming enough people on Main Street are paying attention (could be a false assumption on my part, I know), if enough shady details get out, it might tough to put the genie back in the bottle as the MSM actually starts to do its job.

  22. Stu707 says:

    Was Barry Ritholtz a Wall Street lawyer? His offer to wager that Goldman either loses the SEC suit or settles out of court is a sucker’s bet. Ninety-seven percent of civil suits settle out of court.

    “Political theater for the masses” is what this case is. After the election Goldman settles without admitting liability and pays a small (in Wall Street terms) fine.


    BR: Like I said, John Paulson isn’t the only guy on Wall Street who knows how to stack a deck !

  23. Mannwich says:

    Taibbi weighs in. Of course. He’s the one who got the ball rolling on GS with his infamous “squid” Rolling Stone article.

  24. mbelardes says:

    I swear, the more “bad emails” that come out from Goldman the better this firm is looking to the people that matter most to them: Clients, Shareholders and Employees.

    So all of the Goldman Execs in mid-to-late 2007 (timeline is key) are emailing each other about the subprime mortage situation and noting how everyone else is bullish on CDOs related to Subprime garbage and then these Officers of the firm collectively make a decision to reduce their exposure and bet against the irrational exuberance of their competitors?

    This is supposed to be bad? Isn’t this what the executives of every financial firm circa 2007 should have been doing? In the exact same time period as GS was getting out, Lehman was jumping in.

    The Abacrap transaction took place in early 2007 and, from what I can tell in the emails, was one of the last subprime CDO transactions GS did.

    Does anyone have any data on failed subprime CDOs created by Goldman and sold to their clients AFTER these execs agreed to decrease their own exposure? Because that would at least make them look bad in the eyes of their clients, and THAT is how you get at GS. Abacus was bank-to-bank. Show me a CDO sold to a teachers union pension in 2008…

    I’d bet Barry, but I think we are headed to a BofA/Merrill/SEC/Judge Rakoff styled settlement with no admission of guilt.

  25. polizeros says:

    Changing times indeed: In the CA governor’s race, the two major candidates are accusing each other of having ties to Goldman.

    Meg Whitman was on their board and forced to resign over an apparent ‘eBay steers Goldman business and eBay execs get preferential IPO shares’ ploy.

    Jerry Brown’s sister is Senior Advisor for Public Finance, Western Region, for Goldman.

    The squid has tentacles everywhere, but no one wants to know them anymore.

    The predator has become the prey. Good.

  26. Mannwich says:

    And on cue, the apologists come out in defense of the Squid. Stockholm Syndrome writ large.

  27. cognos says:

    Mannwich – The bet with BR loses if GS settles for a nominal fine without admission of wrong doing. As the commenter points out above more than 90% of SEC actions end in some kind of settlement. Why would anyone bet this? BR should put the bet out that GS will “admit guilt” or be convicted. Thats tougher on him.

    I am already betting much more on GS and will happily increase that bet as the price declines. Stock is worth $250, maybe more. Probably rolls over a bit more from here (hard for SEC to settle in short term, continued bad news flow) but then moves up strongly as we approach another good Q of earnings (month of June into July 20th earning rel). I would not be surprised to see them announce this as “settled” on the Q2 call. On that news, stock is above $200, right? GS did $22 eps last year, did $25 in 2007, $20 in 2006. Will do $25/shr this year. Thats worth over $300/shr in an upside recovery case. They have the best bull-market ibanking franchise. The competition is closed (BSC, LEH) or managed awfully (C, MS).

  28. Mannwich says:

    Ok cognos. Good luck to you.

  29. Mannwich says:

    Speaking of “pulling no punches”, this transcript is well worth a read. Wow.

  30. Thor says:

    mbelardes – Are you insane? They were betting against the very investments they were selling to their clients. Why on Earth would any present or future client trust a company like that? What’s to guarantee their clients that GS isn’t CURRENTLY betting against them?

    Come on, tell us the truth, you’re really John Carney aren’t you?

  31. Mannwich says:

    @mbelardes: It this one of the emails that “makes Goldman look even better?”

    Goldman Sachs Group Inc. executive Fabrice Tourre predicted in 2007 that subprime borrowers “will not last so long,” according to newly released emails from a Senate investigation.
    “According to Sparks, that business is totally dead, and the poor little subprime borrowers will not last so long!!!” Mr. Tourre wrote in a March 2007 email to his girlfriend, referring to a Goldman Sachs colleague.
    In a June 2007 email, Mr. Touree boasted to his girlfriend he had just landed in Belgium where he managed to “sell a few abacus bonds to widows and orphans that I ran into at the airport.”

  32. VennData says:

    Alan Ableson is a superb analyst and reader of the markets.

    His column is the first thing I do after morning tea on Sat. morning. He may be off on his recent call, time will tell, but his bearish opinion throughout the last decade was a spot on.

    What to do with the winnings? Fund a chair at the shedd aquarium studying the habits of Vampiroteuthis infernalis?

  33. stevesliva says:

    I get tired of hearing that Goldman’s excuse here is that those who went long were “sophisticated investors” and “should have known better.

    This reminds me of the sophisticated people at AIG who should have known better. And, clearly, GS should have known that AIG would become insolvent before being able to pay all the CDS it had issued.

    Simple solution. Since everyone should have known better, GS should return the $10B from AIG to the taxpayer.

  34. bsneath says:

    stevesliva Says: “Since everyone should have known better, GS should return the $10B from AIG to the taxpayer.”

    Your reasoning is very good. They can’t have it both ways. But then again, we are talking about Goldman Sachs, so apparently they can…

  35. Carse says:

    Finally, thanks for your insightful rendering through all of the noise. It appears GS is up the creek, but GS has plenty of paddlers, so no I’m not betting, the jury will have plenty of bias going in no matter where on Earth the case is tried.

    I’m a recovering lawyer too.

  36. TakBak04 says:

    Goldman Sachs: What Hath Fraud Wrought?
    by Michael Winship | April 24, 2010 – 12:16pm

    The GOP opposition to the SEC’s complaint came just days before federal campaign finance filings were released on Tuesday. In March alone, Goldman Sach’s political action committee donated $167,500 to Republican candidates and fundraising groups and $123,000 to the Democrats. As per the Web site, “That March total alone — coming ahead of a major Wall Street reform bill — is more than the firm donated to political campaigns in the previous year.”

    A pox on all their houses. So thinks Bill Black, the one time federal regulator who cracked down on banking during the savings and loan crisis of the 1980′s, pursuing the guilty with the tenacity of Inspector Javert in Les Miserables. He now teaches law and economics at the University of Missouri/Kansas City and wrote the book The Best Way to Rob a Bank Is to Own One.

    If Black had his way, he’d enforce a three-strike policy. “Three strike laws, you go to prison for life, if you have three felonies,” he said. “How many of these major corporations would still be allowed to exist, if we were to use the three strike laws, given what they’ve been convicted of in the past?”

    That will never happen until the corporate clout of cash is removed from the American way of governance. Bill Black recalled a slogan he and his colleagues invoked during the savings and loan crisis: “The highest return on assets is always a political contribution.”
    Maybe that new $100 bill should read, “In Fraud We Trust.”

  37. toddie.g says:

    @VennData….If you only started reading Alan Abelson’s column the past few years, I could see how you might perceive him to be a ”superb journalist.” You indicate that he’s been bearish the past decade. It’s more like the past two decades, making him essentially a permabear.

    I used to love reading Barron’s back in the 80′s and 90′s, back in the pre-internet days when I was starved for in depth coverage of financial markets. I used to think Abelson’s witty, edgy columns were worthwhile until I realized his views never changed in the face of a roaring bull market and a constructive backdrop (falling rates, the death of inflation, end of the cold war). It would always “end badly” I think was one of his oft quoted idioms so therefore you should never get in the market. Abelson’s skepticism I am certain clouded my views for far too long, and then I finally swore off reading his crap or buying Barron’s ever again.

    Now, since I haven’t read Abelson the past decade, I am operating under the assumption he didn’t remove his bearishness from 2003-2007, or from March 2009-present. If he was constructive on the markets during those periods, then I will retract my calling him a permabear, and I”ll have renewed respect for the man. If however, he stayed a permabear the entire decade, and especially the last 13 months then all I can say is that Abelson is the classic ”broken clock”. As we all know a broken clock is right twice a day. Very bearish economic fundamentals finally caught up to Abelson’s bleatings in 2007, and his bearishness was merely coincidental. It was his broken clock moment.

  38. howard0339 says:

    Q: isn’t the real question one of which bunch of scumbags gaming the system is most corrupt? People with net worth of hundreds of millions of dollars are going to hedge in equally suspicious CDOs and stuff so that they will make a killing with their (phony) hedges and it is the chains of these types of transactions that is the real problem here. Harvard and MIT MBAs are smarter than I am for sure.