“…it is impossible for us, with our limited means, to attempt to educate the body of the people. We must at present do our best to form a class who may be interpreters between us and the millions whom we govern.”

-Thomas Babington Macaulay, member of the Governor General`s Council, in Calcutta, in 1834. Quoted in The New Yorker, May 31, 2010.

>

FT’s Alphaville says I am cranky. Jeff Matthews says I am wrong. Michelle Leder points out the settlement is a pittance relative to GS’ cash.

Here’s a news flash: All of that is irrelevant. We are a nation of laws, and that is what guides SEC prosecutions, negotiations, and settlements. Sure, I may be cranky (only fellow curmudgeon Alan Abelson agrees with me), but what I truly am is astonished at some of the uninformed commentary pinging about inter-tubes about this subject.

Spin isn’t fact, opinions aren’t laws, and having an opinion is not the same as being informed.

One might hope that various folks discussing these issues have a passing familiarity with Securities law, but apparently not. Let’s see if we can edumacate some folks who are unfamiliar with the 1933 and 1934 Security acts.

1) Its the Law, Bitches!: First and foremost, this is a legal issue: It is not a philosophical debate, a political question, or a case of ethical transgressions; It is not even an investing question.

I am not going to get all Kartik Athreya on everyone, or claim that only lawyers should discuss this. But too many people seem to be forgetting that this is a legal case. It turns on what the law is, how regulatory agencies enforce that law. Discussing this out of that context is fun and intellectually stimulating, but it also provides zero insight into the legal case, or its prosecution, or its resolution.

Here is the classic legal syllogism: Understand the relevant law, apply the facts to that law, draw your conclusion. And the relevant law?

2) Securities Exchange Act of 1934:

Since this is a legal case, what say we actually look at the law?

“It shall be unlawful for any person, directly or indirectly to make any untrue statement of a material fact or to omit to state a material fact . . . [or to] engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person, in connection with the purchase or sale of any security.”

-Rule 10b-5, Securities Exchange Act of 1934 *

Based upon the evidentiary information the SEC had — emails, phone calls, sworn statements, etc. — the “Fabulous Fab” told Abacus buyers that John Paulson was long the Abacus CDO when he was in fact short it; Further, Fab omitted to mention that a short seller helped to construct the synthetic CDO that he was betting against.

That factual description is a clear violation of Rule 10b-5.

There are some folks who have argued that yes, Fab made untrue statements and omitted others — but they were not material. That is a very good, very lawyerly argument — but it is one that would be a stone cold loser in front of any jury.

Bottom line: IMO, this was a no brainer case based on these facts and the law. Unless you can show Fab never said those things, it is case closed.

THAT is why Goldman settled.

3)  Its a pittance! This is only a) 14 days of profits; b) 7X the CEOs salary c) 5% of Cash on hand:

Pay attention, this is important: I have been laboring under the impression that fines and penalties are relative to the legal transgression — you know, the law that was violated, and the damages that violation caused.

Fines are not based upon your bank account or annual income.

But that seems to be precisely what some people are arguing for. Does anyone here really want to see  the law structured so that fines and penalties are dependent upon your assets and income — and not based on the actual infraction?

Imagine getting pulled over for a speeding ticket, and in addition to license and insurance and registration, you give the cop (or the judge) your IRS 1040, bank account and IRA/401k statements. Fines are then assessed based on your income and wealth — rather than the actual seriousness of the infraction?

Pretty ugly and absurd thought! Yet that is exactly what I keep hearing people claim — that apparently, we should use a company’s finances and income to assess a far greater penalty.  Therefor, the fine should have been much greater — regardless of the transgression, because GS is so profitable and has so much cash.

Is that the road any of you seriously want to go down?

4) Penalties should be proportionate to infractions: Consider the transgression at hand: Fab lied in the sale of structured products, and his firm Goldman Sachs failed to adequately supervise him in these transactions. In the grand scheme of things, this was actually a minor transgression. Sure, it was sleazy, but it was not a billion dollar violation; It sure as hell was not an Arthur Anderson type massive firm-wide fraud deserving of the death penalty — as some of the angrier posts have demanded.

As much as many people want to blame the entire economic meltdown on the vampire squid, they deserve only a modest amount of blame. Worse still, this was not their most egregious offense.

In a nation of laws, we punish people for the crimes/transgressions they caught doing — not the ones we suspect they are guilty of (although OJ might beg to differ).

5) Securities Act of 1933: Civil Recovery by Defrauded Investors

As to the issue of Civil recovery by Goldman’s client’s, again, the 1933 Act is clear:

“In general,any person who offers or sells a security by means of a prospectus or oral communication, which includes an untrue statement of a material fact or omits to state a material fact, shall be liable to the person purchasing such security from him, who may sue either at law or in equity in any court of competent jurisdiction, to recover the consideration paid for such security with interest thereon . . . ”

–Section 12 — Civil Liabilities Arising in Connection with Prospectuses and Communications, Section 12 A

As noted Friday, this now opens Goldman to all manner of civil litigation by clients. I have no idea what the final cost of this will be; but a multiple of the $550 million in SEC settlements is likely, and a 10-20X final dollar amount is certainly in the range of possibilities.

6) Goldman’s Stock Rallied, therefore, its a victory:  I’ve always hated that analysis, but since you brought it up: Pre-indictment, GS was north of $180. It closed Friday at $146. Its still some 20% below where it was.

On a related noted, since the indictment, Goldman Sachs has lost about $15 Billion if market capitalization. Isn’t that part a consequence of the SEC indictment? Isn’t that, in effect, part of the penalty?

~~~

Life is not a black & white, bull/bear debate. There is nuance and subtlety to complex issues. But there are also law, facts, and actually a functioning legal system with specific rules and procedures.

Some people seem keen to ignore that . . .


>

* The full 10b-5 rule is

“Rule 10b-5: Employment of Manipulative and Deceptive Practices”:
It shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce, or of the mails or of any facility of any national securities exchange,
(a) To employ any device, scheme, or artifice to defraud,
(b) To make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading, or
(c) To engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person,
in connection with the purchase or sale of any security.”

Category: Legal, Really, really bad calls

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.

118 Responses to “Its the Law, Bitches!”

  1. Sircornflakes says:

    The outcome of this will indeed be very interesting in assessing the faith in this ongoing shell game.

  2. dead hobo says:

    BR quoted from a textbook

    Here’s a news flash: All of that is irrelevant. We are a nation of laws, and that is what guides SEC prosecutions, negotiations, and settlements.

    reply:
    ———–
    The part you forgot to add:

    … when they’re awake, interested in anything beyond internet porn, and not voting along party lines. If Martha Stewart cops a couple grand in pin money then they let the dogs loose. If Flash traders front run billions a few cents at a time, then they yawn as a sign of intense interest once you finally get their attention.

    If GS is pecked to death by ducks (civil investors filing suit to compensate for 1933 fraud violations to the point that it matters in any material respect) then there might be something about those law thingies. I think we all know it will really drag out for years and be settled for pennies before trial.

    Until the SEC does something useful when it comes to master criminals, I plan to remain highly doubtful that said criminals have met their match with the SEC. I do, however, admire your fine optimism and trusting nature in the system.

  3. Bomber Girl says:

    “It’s the law, BITCHES”?

    You are cranky, BR. Perhaps it is that time of the month for you. Take something for it.

  4. V says:

    It is quite popular to jump on the anti-GS bandwagon, perhaps it is just a way of explaining the fine to the public given that the scale of these numbers is difficult to interpret by the layperson.
    I think Chris Whalen made some similar comments on tech-ticker that the fine was equivalent to profit from x trading days.

    As an aside on point #3, Finland actually does fine people for traffic offences based on income, which results in some massive fines.
    http://online.wsj.com/article/SB978398058976592586.html
    Obviously there are implications for liberty/privacy here but the counterargument that sees the rich able to speed simply because they can afford the smallish fines (found in most countries) at least deserves a statistical analysis of the data to see if there is in fact any over-representation traffic offences, adjusted for incomes etc.

    You could argue that a law change in this area for TBTF investment banks, in terms of sliding scale fines could be a way of restoring behaviour in the financial industry, in place of the way partnerships used to restrain behaviour. Good luck lobbying for it however.

  5. dead hobo says:

    So if GS added one or two more sentences to the prospectus, they wouldn’t have gotten int trouble?

    While I’m not a lawyer, I think that would have been the case.

    The moral, “You can fuck over anyone you want in almost any way you like, just put it in the prospectus. Otherwise you’ll get into trouble”

    Given the vegetable level intelligence of the average money manager as seen on TV (excellent communications skills are not intelligence), you could confess to anything in the prospectus and not enough people would notice for it to matter.

  6. Tarkus says:

    Imagine getting pulled over for a speeding ticket,…
    Is that the road any of you seriously want to go down?

    How about going down the road of paying the speeding ticket, but telling the judge “I’m not admitting anything!”?

    @ dead hobo – “If Flash traders front run billions a few cents at a time…” (That’s sub-pennies at a time – an access level that the retail dupe doesn’t get).

    Not sure what the penalty should be for doing “God’s work”. Governments like China refused to pay on derivatives they believed where scams. Helping Greece hide its debt, selling and shorting toxic CDO’s – all have alerted the entire world to the practices that generated Wall St’s “success”. They are kind of like the Khmer Rouge killing civilians. But just because its legal where you are doesn’t mean you should do it…

  7. Mike in Nola says:

    Well done, BR. I have had many occasions where clients wouldn’t accept what the law was and I had to listen to them bitch about how unfair it was when they voted for the very people who restricted their rights.

    My main gripe with the law is that, in cases of intent, the fine should be proportional to the defendant’s worth. Otherwise there is little incentive to refrain from doing it again. There’s a good illustation in this weekend’s FT “Dear Economist” blog.

    http://blogs.ft.com/undercover/2010/07/dear-economist-should-i-risk-the-fine-and-travel-first-class/

    The answer requires free registration.

    A recent illustration is Toyota’s symbolic fine from NHTSA of something like $16M dollars for hiding the throttle problem on lines of cars where the make billions and billions. No incentive not to repeat it.

  8. franklin411 says:

    Re Point #4…I’m no lawyer, but it seems to me that basic common sense would at least spur the media types to look into the question of whether an admission of wrongdoing (whether that be by commission or omission) opens one up to civil liability. Even if there wasn’t a specific statutory remedy provided for cases such as these, the admission that GS was negligent is a welcome mat for investors to file suit.

    But then, I’m not a journalist. IE, I have a brain!

  9. Janet Tavakoli says:

    Barry,

    You bring up many good points. You keep bringing up Rule 10b-5. The SEC’s original allegation was that Goldman was in violation, and as you point out, the question comes back to materiality. Goldman did not settle under these antifraud provisions, instead this went by the boards. Moreover, my assertion is that the charges should also have addressed whether material information regarding the underlying collateral, ultimately the underlying loans.

    In fact, however, Goldman setteled charges related to Rule 17a, i.e, lesser charges. This seems weaker since it covers fraud, intentional or otherwise, and even the perceived lesser problem of negligence. The wording of Goldman’s press release reflects this and suggest Goldman is trying to imply simple negligence.

    I explain my position on these matters here:

    http://www.cbc.ca/video/#/News/Money/ID=1473248390

  10. Chief Tomahawk says:

    “Does anyone here really want to see the law structured so that fines and penalties are dependent upon your assets and income — and not based on the actual infraction?”

    I saw a program on History Channel’s “Modern Marvels” a few years ago about the German highway system. In an effort to improve safety and reduce speeding, they were going to a penalty/fine setup where the speeding violation was a percentage of one’s previous year’s salary so the wealthy don’t flaunt the law. Thereby some affleunt offender received a record-setting speeding ticket. My guess is such an idea over here would be widely derided by the wealthy (and a new reason for them to hate small towns!)

    A quick Google search:

    http://www.trafficticketsecrets.com/speeding-ticket-news-finnish.html
    “Finnish Man Gets Six-Figure Speeding Ticket”
    “HELSINKI, Finland (AP) — Looking at Anssi Vanjoki’s speeding ticket, many Finns are wondering whether their egalitarian spirit has taken them over the edge.
    True, Vanjoki was doing 46.5 mph in a 30-mph zone. But $103,000?”

    http://articles.sfgate.com/2010-01-11/news/17823924_1_mph-limit-speeding-swiss-justice-ministry
    “Speeding fines being linked to income in Europe”
    “Geneva – — European countries are increasingly pegging speeding fines to income as a way to punish wealthy scofflaws who would otherwise ignore tickets.
    Advocates say a $290,000 speeding ticket slapped on a millionaire Ferrari driver in Switzerland was a fair and well-deserved example of the trend.
    Germany, France, Austria and the Nordic countries also issue punishments based on a person’s wealth. In Germany the maximum fine can be as much as $16 million compared to only $1 million in Switzerland. Only Finland regularly hands out similarly hefty fines to speeding drivers, with the current record believed to be a $190,000 ticket in 2004.”

  11. DD123 says:

    1) Its the Law, Bitches!: First and foremost, this is a legal issue: It is not a philosophical debate, a political question, or a case of ethical transgressions;

    Kind of like your analysis on BP?

    “We are hypocrites. We brought this on ourselves!”

    So with GS, it’s all about the black letter of the law, but with BP it’s something we brought on ourselves.

    Because, it’s all about the law bitchez, let’s apply Barry’s BP reasoning to from BP to GS. Using “Oil Consumption Around the World” post http://www.ritholtz.com/blog/2010/06/oil-consumption-around-the-world/ as a template, we get:

    The Brits think we Yanks are being less than honest with ourselves regarding our anger at GS.

    The Brits have had a rather interesting response to the American Outrage over the GS fraud: With less than 5% of the world’s population, the US consumes 25% of the world’s CDOs.

    They believe we are being hypocritical in our outrage — if we were all that concerned, argues the Brits, we would not have been so profligate in our consumption, love affair with exotic financial instruments, and refusal to enact Pigou taxes on derivative speculation.

    They raise a valid point.”

    OK, then.

  12. Janet Tavakoli says:

    Barry,

    This is a repost, since I left out a phrase earlier, so the meaning wasn’t clear. You bring up many good points. You keep bringing up Rule 10b-5. The SEC’s original allegation was that Goldman was in violation, and as you point out, the question comes back to materiality. Goldman did not settle under these antifraud provisions, instead this went by the boards. Moreover, my assertion is that the charges should also have addressed whether material information regarding the underlying collateral was disclosed (or withheld).

    In fact, however, Goldman settled charges related to Rule 17a, i.e., lesser charges. This seems weaker since it covers fraud, intentional or otherwise, and even the perceived lesser problem of negligence. The wording of Goldman’s press release reflects this and suggests Goldman is trying to imply simple negligence.

    I explain my position on these matters (in simpler terms) here:
    http://www.cbc.ca/video/#/News/Money/ID=1473248390

    Best,

    Janet

  13. constantnormal says:

    @BR

    “Life is not a black & white, bull/bear debate. There is nuance and subtlety to complex issues. But there are also law, facts, and actually a functioning legal system with specific rules and procedures.”

    Barry, have you actually looked at the laws that the Congress has been creating for all of our lives?

    I mean, you make it seem like they are some high and noble piece of work, instead of what they really are, conduits to direct lobbyist money into Congress’ greedy hands …

  14. dead hobo says:

    Janet Tavakoli Says:
    July 18th, 2010 at 10:07 am

    In fact, however, Goldman settled charges related to Rule 17a, i.e., lesser charges. This seems weaker since it covers fraud, intentional or otherwise, and even the perceived lesser problem of negligence. The wording of Goldman’s press release reflects this and suggests Goldman is trying to imply simple negligence.

    reply:
    ————-
    As I wrote earlier, they bargained down a felony to a traffic ticket and negotiated 1/2 the fine away. They also have to go to traffic school and can’t deny they got a ticket. Had GS properly disclosed their offering, they probably wouldn’t be in this situation. A couple of sentences in the prospectus might have been enough to accomplish this. Artfully worded, it could have been made to look like uber capitalism at work to the sufficiently gullible. Lots of gray to work with.

    Sufficient stalling and proper spin could make the omission of a couple of sentences to look like simple negligence at worst. It doesn’t matter that the investment looked like crap to members of the company, except as a public relations problem. (ie Fab shocked us with those terrible emails. He’s obviously not a team player and should never have been in place. Nobody else here does anything like that.)

  15. Chief Tomahawk says:

    Wow! I’m flattered I got a post after Janet T., as she’s much smarter than the, um, “average chimp”!!!

    Now JT if you could just do me a favor and bring Eric Janszen back — right now he seems destined to become a deity to the Goth, as his recent tribute to the Polyphemus Moth has me disconcerted, to say the least… “I recommend that readers also find ways to stay in shape and get their minds off the unfortunate events that they see unfolding over the next several years, and the frustration of knowing that it was all preventable. Staying in good shape and good spirits up will be just as important as your financial preparations.”

  16. Equityval says:

    BR, I think your blogging fame is starting to run away with your ego. There are many great things about this blog, but I think the notoriety may be going to your head.

    It’s good to know there are so many stupid people out there who can only be enlightened by a special class of people, presumably you among them, who can interpret the world for us and tell us how to think about complex subjects. I thought that was the MSM model that blogs were supposed to help do away with.

    I’ve been in the securities business all my life. I’m not a lawyer, but have a graduate degree from a school everyone recognizes and enough IQ points to think through complex and nuanced legal issues with the help of attorneys. I’ve got a strong ethical foundation and seek to stay on the right side of the “bright lines” and not venture into the grey zones when it comes to the law. That said, having dealt operationally with securities laws and regulations for many years, there is no doubt in my mind that these laws and regulations involve a tremendous amount of ambiguity as to where the bright line is. The regs themselves are frequently ambiguous, and I suspect deliberately so – providing prosecutors with great leeway and keeping would-be line-skirters off balance.

    Materiality, which you mention, is only one such example, and often these topics come to be interpreted over a period of years through court cases and administrative rulings. Rarely do they provide bright line clarity in an operational context, usually only some general guidelines as interpreted by your attorney. In short, complying with these laws and regs is not easy and involves a considerable amount of judgment and, frankly, hope that a malicious intent is not read into a particular set of facts and circumstances if something goes badly months or years later.

    I think reasonable people can disagree about the materiality of the disclosure of Paulson’s role in this case. You see a lead pipe cinch of a case. That’s fine, but a little more humility about the infallibility of your judgment would be appropriate from the perspective of someone who has dealt with these laws and regs for years.

    One last thing, congrats on your quote in the NYT. You’ve clearly become a darling of the MSM. However, in prominent quotes like that one, you ought to get your facts straight. As the article later states, and I believe has been amply determined by the testimony and facts of the case that you are so eager to cite, Goldman did not, in fact, “get short” the CDO in question. Rather, they ended up with a long position.

    ~~~

    BR: 3 quick responses:

    1) I’ve been writing the same stuff for decades now. Go back and look at the posts from 2003 or ’04 or ’05. These current posts are the same contrarian/the masses are wrong/people are lazy eejits as 7 years ago. If you speak to my wife, she will tell you I am the same jackass I have always been — I just have a somewhat bigger platform now.

    2) If a claiming someone is long $100s of millions of dollars of when they were short as part of a sales pitch isn’t material, WTF is? Maybe someone who was betting against the instrument help to contruct it might be? Besides, “Materiality” is a question of fact for a jury.

    3) I was speaking generally about GS, and not about Abacus. When you discuss things with a reporter, its 40 minutes of back and forth. Some nuance context gets lost in a single sentence . . .

  17. Floyd Norris says:

    Those who sneer at the S.E.C. point to Goldman shares rising Friday as proof that this does not amount to much. I disagree, and so, it seems to me, does the market.

    Here are the changes in value from April 15 (the day before the S.E.C. suit was disclosed) through early afternoon today.

    S.&P. 500, down 12 percent.

    S.&P. financials, down 3 percent.

    Goldman Sachs, down 19 percent.

  18. jz says:

    I understand the crankiness, Barry. You put your ass on the line saying that Goldman would settle or be convicted, and they settled for a huge amount, and you deserve to be lauded for being right. Instead, people are pissing in your face. The worst of it was Jeff Matthews having the audacity to say you were wrong. He definitely made that one up.

    To the people who say, it was” only” $550 million, that is rolling on the floor laughing my ass off funny. Time Magazine just said all of corporate America paid out $3.5 billion to Congress last year. Yet Goldman with all its high priced lawyers and lobbyists couldn’t pay off enough people to get their case dismissed or the fine reduced substantially because their case was so bad.

    Besides, if their case was such a slam dunk and they didn’t do anything wrong, why not fight it? How much would it have cost to fight? 10 or $20 million?

    That is something people don’t get about settlements. When you settle a case for more than it costs to defend, you are practically admitting guilt.

    With government lawyers putting a huge chunk in the Goldman wall, other lawyers are going to follow this up with their own sledgehammers. This is just the beginning.

  19. jdmckay says:

    I like your post, and agree… mostly. Personally though, I don’t think the fine meets the crime: in concert w/the rest of mortgage bond vampire bankers, these guys brought down world finance and bankrupted many w/no voice who can’t afford legal representation. Further, the allocation of capital away from so much that remains desperately needed but undone on US shores…

    I mean, AIG is scott free (no prosecutions). Enron more or less remains an object lesson in successful malfeasance, much of what they did mimicked and copied by much of today’s street.

    Hank Paulsen had major correspondence w/GS through crafting of TARP. Perhaps I missed the “legal” community’s (SEC) clamor for access to those conversations?

    WSJ has been on one of their rolls lately, shouting at stuff like this settlement as “criminalizing business” and such. If you’ve been reading, clearly these guys not only are non-repentant, they’re twisting arms to keep the loopholes open and unobstructed.

    By contrast, China is executing public officials for corruption. In US conservative circles, advocacy of death penalty is more or less a necessary requirement for ” joining the party”. Just for discussion sake, I wonder what deterrent affect may result from dragging Ken Lay in from whatever private beech he’s been enjoying since his fake death, and hanging him from the neck in a public gallow on WS.

    Just wondering.

  20. Robespierre says:

    Barry,

    “it is the law bitches”

    “I’ll have more on the GS settlement tomorrow — but I keep getting emails from people insisting that since Goldman’s stock rallied, it is, therefore, a victory. I’ve always hated that analysis, but since so many of you keep bringing it up:”

    This was never an argument about the law and what the SEC could do within the confines of the law. As you can see from what you wrote (in a previous blog) this was an argument about who won and according to your own blog the definition of wining was an “economic” and not a “legal” one. And by those metrics the execs of GS won (IMHO).

  21. franklin411 says:

    @Robespierre
    Barry’s argument is that this is only the beginning. GS has admitted guilt, and now their investors need only que up for their massive settlement checks.

  22. constantnormal says:

    I must admit, a vacation does an enormous amount of good in letting BR’s innate boyish enthusiasm for the law and our system of “just, even, honest government” unfurl its flag …

    My bet would have to be on the trillion-dollar pirate bankster and its legions of soulless lawyers against a ragtag motley crew of mewling plaintiffs. The big dog (SEC) had its chance to fix the junkyard dog of the banksters, and they merely waggled their finger and said “bad dog!”.

    Just look at the Exxon Valdez verdict and penalties, and what was eventually actually paid, and tell me (with a straight face) that GS will be brought to heel by a bunch of civil suits …

  23. franklin411 says:

    @constant
    At what point did Exxon admit negligence, as GS has done?

  24. w says:

    You are fighting the Wall Street PR machine. All it will take is a bit of time for people to see through the fog of war. But they will.

  25. Bruman says:

    Barry, I like your analysis, but I would add that when it comes to fines and damages, the legal system does allow for “compensatory” damages, and “punitive” damages. “Compensatory damages” are basically to compensate hurt parties for the damage done by a person’s actions. But if the negligent party is so wealthy that compensatory damages are unlikely to change behavior, punitive damages can be assessed to make sure that the negligent party actually feels some painful consequence to their actions.

    Now, this is a settlement, so the legal distinctions between compensatory and punitive don’t really come into play: it’s more about bargaining and determining what is agreeable to both parties.

    I believe if a well-heeled hedge fund manager keeps getting speeding tickets because the infraction fine is a drop in the bucket (as are the insurance costs), there are places where a judge is allowed to take more serious actions (usually suspending the license, but potentially higher fines).

    Another interesting bit about the case (that you’ve mentioned in passing) is that although the settlement includes no admission of wrongdoing, it certainly *looks* like it opens GS to a ton of civil suits, which tend to be decided on “preponderance of evidence.” In this case, the “appearance” of wrongdoing carries some legal weight even if there is no admission of wrongdoing from GS.

    ~~~

    BR: Thanks for the analysis — the civil numbers may be surprisingly large.

  26. constantnormal says:

    When attempting to portray this as a “significant verdict”, consider the past discussions of whether GS coulda, shoulda been charged with and prosecuted for significant criminal actions (vs civil violations), with the treat of jail time hanging over Blankfein, et al.

    From the outset it was clear that the SEC was going to pull its punches. Wouldn’t do to have the bosses campaign contributors get concerned …

    This was mainly a reminder to Goldman that when presented with an opportunity to settle, they should do so. Nothing more, and certainly nothing of a significant penalizing nature.

    Consider the fine levied vs the amount of profit GS brings in on a monthly basis. Is this fine intended to force significant changes, or compensate the victims? I don’t think so. BP is being deal with in a much harsher manner, something that is closer to the tone of how GS should have been treated.

    What the SEC left on the table was the opportunity to make a statement to the industry at large, by forcibly busting up GS, separating their trading house activities from their investment banking activities. Just a little bit of “discovery ” (which doubtless took place) would certainly reveal sufficient evidence to go after GS, hammer+tongs.

    Instead the message that is being delivered is mainly to the rank-and-file, dweebs like “Fabulous Fabrice”, who is going to get keelhauled, and possibly banned from the industry for life.

    These would be messages like “don’t write emails or tweets about your work”, and “keep your mouth shut”.

  27. gmherger says:

    All you say is true.

    Victory and deterrence!!

    And, Thank God!

    This earth-shattering victory will save countless unsuspecting widows and orphans and billionaires, like investment banks and Deutsche Bank, from being snookered by thieves, like Fab and Paulson, into buying collateralized debt obligations or – please God!! – other even more exotic mortgage-backed debt securtities, collateralized by (and only payable from payments from) subprime, toxic loans in various states of delinquency, default, or foreclosure.

    Thank God!!!

    Paulson and Fab didn’t say the loans were prime, did they? They didn’t say they were current when they were delinquent, did they? They didn’t fabricate the loans, did they? Does the fact that Paulson was short affect a party’s decision to buy (now if he were Buffett . . . ) or, more importantly, the cash flows of under-lying subprime, toxic loans?

    This case is as old as the Roman Republic, at least. Caveat emptor. Do do due diligence.

  28. DonF says:

    One point I cannot agree more on is the level of uninformed commentary that is going on about this and for me that absolutely includes the mainstream media. Same goes for the Financial reform bill which is probably even worse. Simply astonishing indeed. Insightful financial journalism might be dead. If it weren’t for the Big Picture, I’d be in a strait jacket.

  29. constantnormal says:

    @franklin411 — Exxon’s admission or lack thereof have little to do with the matter — they were convicted. There was no settlement.

  30. And now to what is important:

    Curmudgeon? You called yourself a curmudgeon? Whoa! Hey, let’s not be giving ourselves accolades that we haven’t earned yet. You haven’t even formed a crust yet (except maybe a bit of an upper crust but don’t let that be confused with crusty as in crusty old codger).

    You better hope the board Curmudgeon is off berating kids for walking on his grass today

  31. wngoju says:

    @Equityval: You “have a graduate degree from a school everyone recognizes and enough IQ points to think through complex and nuanced legal issues”. Dudette! You are waaaay cool!

  32. gmherger says:

    Other criminal sentenced:

    “The Federal Election Commission has penalized Vice President Joe Biden’s 2008 presidential campaign $219,000 for accepting over-the-limit contributions and a discounted flight on a jet owned by a New York hedge fund. His campaign also was charged with sloppy record-keeping. ”

    Read more: http://www.politico.com/news/stories/0710/39875.html#ixzz0u3Cl9ms3

  33. davver says:

    1) Its the Law, Bitches!: First and foremost, this is a legal issue:
    ————————————————————————————–
    When the law is interpretive the philosophical framework the judge approaches it with matters. This is why judges so repeatedly disagree. That is why the supreme court has 5-4 decisions, why appeals courts have 2-1 decisions, and why verdicts constantly get overturned.
    _______________________________________________________
    Imagine getting pulled over for a speeding ticket, and in addition to license and insurance and registration, you give the cop (or the judge) your IRS 1040, bank account and IRA/401k statements. Fines are then assessed based on your income and wealth — rather than the actual seriousness of the infraction?
    ————————————————————————————–
    Actually in Germany they do change speeding ticket fine levels based on the driver (it could be another European country, I’m going on memory). They found that fine wasn’t enough to stop wealthy drivers from speeding so they started charging them extremely hefty fines. After all, the purpose of the fine is to be a deterrent to reckless behavior, and $100 doesn’t deter someone in a $100,000 car. Similarly, if the purpose of financial regulation is to deter fraud then the punishment should be big enough to actually do so, not simply be a cost of doing business as usual. Penalty levels of legal judgments are common in our legal framework, to go beyond the direct damages and make sure the accused, and those in their industry, stop acting in an irresponsible manner.

  34. The Curmudgeon says:

    @How the Common Man Sees It:

    I just got finished running the gdamn kids away. Thanks for the props. Barry may occasionally be a curmudgeon, but he’s not The Curmudgeon.

    And this BR said, regarding materiality:

    “That is a very good, very lawyerly argument — but it is one (I believe) would be a stone cold loser in front of any jury.”

    The “I believe” is the why this settlement is not about the law, bitches, but is all about the politics. What do you “believe” shapes the outcomes in a courtroom in front of a jury? Did OJ walk because of the law, or the politics? Do you really think a catchy rhyme made up by one of his defense attorneys set him free? If it did, it worked because the jury was already receptive to it.

    I think, in a rare instance of clarity, the Wall Street Journal’s Review and Outlook nailed this settlement on the head: The $550 million was simply a fee for the billions Goldie got in the bailout, directly and otherwise. It was nothing more than politicians playing to the zeitgeist, trying to make it appear to the unwashed masses that there was actually some governing going on at the SEC.

    And the fact that Goldie emphatically did not admit to a 10b violation gives this almost no procedural or precedential value for others that might be foaming at the mouth for a piece of them. It means that the behavior upon which the allegations in the complaint (which are roughly the industry standard) are based got a free pass so far as the much more serious 10b violation goes.

    I stand by what I said Friday. This settlement means nothing, if meaning something requires that it has some systemic impact. It doesn’t. Goldie got off the hook, but the government got to look as if it were doing something. And that’s the politics my friend, not the bitching law. The law is ever and always whatever the politics say it is.

    ~~~

    BR: heh heh OK, I will remove the “I believe”

  35. VennData says:

    If you don’t say the GS settlement is a trifle, than you give justification to Obama’s legislative victories and his low-level finger wagging at business.

    When the GOP media machine’s over-riding argument becomes nuanced (that GS actually broke the law, that BP actually messed up on safety, that health insurers actually drop people) you undermine their entire advertising pitch: “Obama is unjustifiably scaring business into not hiring.”

    That’s the line that must prevail in the hearts of GOP genuflecters everywhere, because it couldn’t be that the aftermath of the Bush recession is what’s causing the lack of employment growth, it has to be Obama. (it also means we’re safe for more tax cuts for the rich.)

    When non-partisans like you tell it like it is, it’s the most infuriating thing in the world to the GOP marketing people. Especially when it’s complex, and nuanced.

  36. MayorQuimby says:

    1. “Imagine getting pulled over for a speeding ticket, and in addition to license and insurance and registration, you give the cop (or the judge) your IRS 1040, bank account and IRA/401k statements. Fines are then assessed based on your income and wealth — rather than the actual seriousness of the infraction?”

    In Germany, that is precisely what they do actually. Here in America, rich individuals have NO SPEED LIMITS because financially speaking, there are no consequences for them breaking them.

    2. The REASON we actually HAVE LAWS, is to discourage individuals and entities from engagin in behavior that is harmful to society. In this instance, the penalty DOES PRECISELY THE OPPOSITE. Having STOLEN $13 BILLION from the taxpayer, they walk away with a net gain of $12.4 BILLION WITH THE LAW BEING ENFORCED. The PENALTY for raping a woman should NOT be ‘you need to do 50 push-ups’. If it were, men would be raping every woman they could get their hands on.

    3. Market cap is 100% IRRELEVANT. The entire market is down almost the same % since that date.

    ~~~

    BR: Actually, GS is down more than other financials oer that same period . . .

  37. b_thunder says:

    BR says: “We are a nation of laws, and that is what guides SEC prosecutions, negotiations, and settlements. ” – Sure, on paper! When it comes to the world of Wall Street, banking and “high finance” we’re The Animal Farm. Get it? A place where some are more equal than others.
    Where was the law to bail out AIG, and keep the entire affair secret? Where was a law about TARP? Oh, Paulson threatened that the world would end, here’s your law. Top 5 banks had about 5 losing trading days in Q1 – Securities act My A$$!

  38. Minderbender says:

    “FT’s Alphaville says I am cranky”

    Might be cranky, but I would submit that ‘prickly” better describes the mood.

    (Perhaps both in good sense and bad sense, depending on which side of the argument or wrath of Barry you are on.)

    But that’s Barry’s brand value, the edge that gives him his edge.

  39. b_thunder says:

    BR says:
    “Imagine getting pulled over for a speeding ticket, and in addition to license and insurance and registration, you give the cop (or the judge) your IRS 1040, bank account and IRA/401k statements. Fines are then assessed based on your income and wealth — rather than the actual seriousness of the infraction?”

    Well ,there is a precedent: a few years ago a CEO (or perhaps Chairman or President) of Nokia got pulled over for speeding and had to pay *drum roll…) over $200K fine! Because their fine is a percentage of income!

    You see, for certain individuals and corporations, monetary penalties are meaningless. Most of the time the penalty gets passed on to the shareholders and the perpetrators of the fraud do not suffer at all! The penalty must be a punishment and a deterrent to be effective.

    And for the fine to be effective, it has to be big enough to:
    I) Drive shareholders totally NUTS and force the shareholders to dump the board and the execs on whose watch the fraud took place.
    II) The fine needs to be sufficient to a ) deter the execs of other corporations to do the same and b) to make it financially painful for this company’s executives. Unless their personal losses exceed ALL THE GAINS they’ve reaped front he shady deals – it won’t deter anyone.

    What we have is a bump in the stock price, and if anything the shareholders are cheering the settlement, and will be happy to extend support to the existing board and management, and will be happy to front-run everyone en perpetuity.

    No, this is neither a punishment, not a deterrent.

  40. DL says:

    O.K., “it’s the law, bitches”, and we’ve got to follow “rule 10b-5”.

    Even if we assume that Fabrice Tourre is “guilty as sin”, there still remains the question of the liability of GS as a firm, and the liability of the top managers of GS.

    I’m not arguing that the top managers should necessarily get off “scott-free” if Fabrice Tourre is indeed guilty of fraud. I’m only suggesting that “the law” might not be so crystal clear with regard to the liability of the top managers of GS.

  41. peachin says:

    Who’ll Stop The Rain?

    “Long as I remember The rain been coming down.
    Clouds of myst’ry pouring Confusion on the ground.

    Good men through the ages, Trying to find the sun;
    And I wonder, Still I wonder, Who’ll stop the rain.

    I went down Virginia, Seeking shelter from the storm.
    Caught up in the fable, I watched the tower grow.
    Five year plans and new deals, Wrapped in golden chains.
    And I wonder, Still I wonder Who’ll stop the rain.

    Heard the singers playing, How we cheered for more.
    The crowd had rushed together, Trying to keep warm.
    Still the rain kept pouring, Falling on my ears.
    And I wonder, Still I wonder Who’ll stop the rain.”
    - John Fogerty (Credence)

  42. I can’t personally say that the people at GS are going to an eternal hell. It is not my place to judge based on such limited information. One thing I can be pretty sure on. If they do get there the one thing they’ll be thinking about this issue, if they have time. The one thing they’ll be thinking is that they will have wished they paid more.

    I can find comfort in that

  43. b_thunder says:

    Where are the “perp walks?” Where are convictions? I’ve heard that almost 1000 people were convicted after the S&L crisis/fraud. This was much bigger fraud with much larger consequences for the economy. And all they got was a lame-ass attempt to prosecute 2 Bear Sterns fund managers? This is F***ing disgrace!
    Unless you put people *in jail*, by the end of the next economic cycle (8 years tops) there will be exponentially MORE FRAUD.

    One more thought on the fines tied to the wealth of the guilty party: the punishment should a) fix the crime, b) rich should feel as much pain as a result of breaking the law than the rest of the people.
    Either pay a fine proportional to your income (i.e. feel the pain like all of us), or do a time in the slammer (and of course reimburse the State for the cost of keeping you in jail.) Otherwise the punishment is pointless.

  44. globaleyes says:

    Prior to events that culminated in Bailout Nation-type stuff, there were plenty of reasons to think short term and cut corners. But then things changed and now there is no longer any (worthwhile) alternative to taking the longterm view.

  45. lalaland says:

    Heh – I like it when you no longer gladly suffer fools…

  46. Petey Wheatstraw says:

    BR:

    Your cites of the applicable laws do nothing for your argument re: severity of punishment.

    The first describes an illegal act, and the second a civil remedy.

    The second citation distinguishes clearly between the two.

    Being that there has been no indictment or trial on the underlying, and I’m going to go out on a limb and assume felonious, crime of fraud by GS, it’s difficult to see how they were punished at all. As I commented earlier, criminal punishments often leave those adjudged guilty penniless or without income whatsoever, if for no other reason than the fact that those so judged are typically imprisoned.

    Goldman has paid its governmental partner in crime a minimal civil fine (a truly punitive civil fine would be treble actual damages, or more). In paying this fine, it appears that GS has bought-off the true threat to it’s ongoing enterprise — a criminal investigation into its general operations.

    Regardless of any niggling trouble this might cause GS, it does nothing to address the broader criminal aspects of the firm’s behavior.

    I think that’s why so many disagree with your take on this.

  47. wally says:

    “Fines are then assessed based on your income and wealth”

    … as opposed to the current system where money buys your way out?

  48. PeterR says:

    BR cranky?

    GOOD THING !!!

    And the world would benefit from BR cranking up to kick more ass.

    Western Capitalism is at the turning point of its own self-destruction.

    Thank goodness fine human beings such as BR are willing to stick their necks out to tell it like it is.

    Without the cranks, there would be no operating machinery!

    Crank On BR!

  49. alnval says:

    Thank you. Your statement, “Spin isn’t fact, opinions aren’t laws, and having an opinion is not the same as being informed.” should be writ large in samplers hung on the walls of civics classes (if we still had them) across the country. However, if we’re going to have a decent rebellion in this country we first need to kill all the lawyers. We can’t have people like you running around reminding us that we still can be rational if only we think about it. Therein lies the rub: remembering that the law is paramount and not the mob.

    I’m not surprised, however, that our upset and frustration at the continued thwarting of laws, regulations, and common sense in the interests of (fill in the blank) has brought us to a point where our outrage now destroys whatever remnants of proportionality we might have possessed whether about law-breaking or everyday discourse. Moreover, it has eroded our ability to trust in the government’s ability to treat sensibly and fairly issues related to the general welfare.

    I’m tired of having to quote Murphy’s Law as a way of rationalizing our pandemic stupidity. I want things to work again. I want my family to be safe and I want this country to grow and prosper. Most of all I want the idiots who are running things to step outside and look at how things really are. Where is Jonathan Swift when you need him?

  50. plantseeds says:

    “Goldman’s Stock Rallied, therefore, its a victory: I’ve always hated that analysis, but since you brought it up: Pre-indictment, GS was north of $180. It closed Friday at $146. Its still some 20% below where it was.
    On a related noted, since the indictment, Goldman Sachs has lost about $15 Billion if market capitalization. Isn’t that part a consequence of the SEC indictment? Isn’t that, in effect, part of the penalty?”

    JMP, MS, BAC, WFC…et al… are down 16% – 35% over that same time period…..are their declines consequences of the SEC indictment? … in effect, part of the penalty or just for GS?
    Or maybe you could argue GS would never have dropped in price had there been no SEC charges…right?

    Like the rest of the argument, its relevance is pure speculation and wishfull thinking at this point. The law? Who cares about the law!?
    Maybe the civil suits will matter if they materialize and impact earnings and thus stock price, div. payouts, etc.
    What would have happened..blah blah blah, and what will happen….. is unknowable but looking forward, which is what we do, things don’t look half as bad as they might have.

    ~~~

    BR: Agreed! Thats why I hate that argument!

  51. obsvr-1 says:

    @Equityval

    I’ve been in the securities business all my life. I’m not a lawyer, but have a graduate degree from a school everyone recognizes and enough IQ points to think through complex and nuanced legal issues with the help of attorneys. I’ve got a strong ethical foundation and seek to stay on the right side of the “bright lines” and not venture into the grey zones when it comes to the law.

    —-

    strong ethical foundation — if that was ingrained into the corporate DNA we wouldn’t be in this situation.

    The “bright line” between ethical and unethical behavior is in conflict with the ‘grey zones’ of legal ambiguity and loopholes. The law and the requisite enforcement thereof should push these closer together (tighten the spread), by punishing the bad actors when they get out of line.

    The argument about which laws GS broke and whether the punishment meet the “crime” can rage on, however I don’t think there can be much of an argument regarding the unethical behavior underpinning the CDO deals (with the ABACUS 2007-AC1 as being only one of the deals) and the unethical behavior that contributed to the amplification of the financial crisis.

    When the laws are circumvented through legal maneuvering by the best lawyers money can buy then the spread between ethical and unethical behavior widens – which is a sad state of affairs for everyone.

    The financial crisis has uncovered how the actions of bad actors within the financial industry has diverged from the ‘bright line” of ethical and legal business practices. It is too bad that the Moral Compass has been so compromised, certainly a black eye for capitalism.

  52. dsawy says:

    “Pretty ugly and absurd thought! Yet that is exactly what I keep hearing people claim — that apparently, we should use the company’s finances and income to assess a far greater penalty. Therefor, the fine should have been much greater — regardless of the transgression, because GS is so profitable and has so much cash.

    Is that the road any of you seriously want to go down?”

    Is this not, at least in part, what determines punitive damages when awarded by a jury? If so, are we not already living under such a system? Are the size of awards given by juries in cases brought against tobacco, oil and other companies not, in part, determined by the depth of their pockets?

    Obviously, this case was not in court. It was an enforcement action brought by the SEC. But I do think that in cases where malice, gross negligence, etc are proven, we already have a system where the depth of the pockets of the defendant are taken into consideration in the punitive award(s), so we’re down to distinguishing between fines determined by enforcement actions and fines/awards determined by trial.

  53. Ilya says:

    Br’er Bear caught Br’er Rabbit. Br’er Rabbit pleads ‘Puhleese don’t trow me in dat briar patch.’ Br’er Bear slings Br’er Rabbit into dat briar patch and standing smuggly with a tuft of fur twixt his paw he say ‘dat’ll teach em!’

  54. mbelardes says:

    Again, you are still wrong because you only look at the statute and ignore what actually encompasses the “law”.

    What is a “Material Fact”?

    Online Definition:
    “A material fact is a fact that would be to a reasonable person germane to the decision to be made as distinguished from an insignificant, trivial or unimportant detail. In other words, it is a fact which expression (concealment) would reasonably result in a different decision.”

    There are two issues here:

    1) The selection of the underlying securities in the CDO.

    2) The statement by Fab that Paulson was long.

    For #1, it is more than clear from the facts of the case that the counter party was more than aware that Paulson was helping select the securities underlying the CDO. You have Paulson’s right hand man visiting the counter party to discuss the CDO. You also have the basket of underlying going back and forth between ACA/GS/Paulson. So the other party was aware that Paulson was involved in selecting the securities but ACA ULTIMATELY chose the basket and thus it would be very difficult to argue the materiality of Paulson’s involvement in the selection process.

    For #2, this is wide open to interpretation as to what Fab actually said, how it was interpreted, and whether or not the statement could have influenced the decision of ACA. The Prospectus clearly discloses the CDS and Paulson’s people told ACA they were buying the CDS. This is where a good securities attorney goes to work with Wall Street terminology in complex transactions of synthetic CDOs with sophisticated investors. You could say Fab made a mistake in not clarifying Paulson was “long the CDS” and that was SIMILAR TO “shorting the CDO” (which is basically all that GS admitted to, a mistake in clarification of terminology during the transaction).

    If you watch the 6 hours of the GS testimony before the Senate, it is incredibly clear to me this is how they were planning to set it up. That’s why they spent the whole day using terms the Senators were mixing up. It’s the ol’ “You just don’t speak or language and that’s why it looks bad” defense. In a court, in front of a jury, Goldman would get to go over transactions like this in detail until the jury was so confused they wouldn’t know whether Fab really misstated a fact and whether that fact was material.

    And with the materiality, I am not sure that in 2007 the fact that an unknown hedge fund wanted to bet against what everyone thought was a booming market would have been material to the transaction. ESPECIALLY, because it was so common of these firms like ACA to buy the CDO and sell the CDS specifically because they wanted the extra return. It could be argued that they were happy there was an investor out there willing to buy the CDS and that’s why they use Goldman.

    NOW AS I KEEP SAYING, if you want some material misstatements that influence investment decisions look no further than Repo-105. 2008 has Lehman execs going on TV saying David Einhorn is wrong, they aren’t hiding things off their balance sheet, reporting huge earnings, while issuing secondary offerings to cover the losses from their off balance sheet transactions. THAT IS A 10b-5 SLAM DUNK! Where is that case?

    ~~~

    BR: Awaiting an indictment and Dick Fuld perp walk . . .

  55. jobardu says:

    Fines and penalties are supposed to deter future criminal behavior. The Goldman settlement is a wrist slap, so it has no deterrent value to the moral hazard of systemic looting. What it will do is cause them and others to balance the amount of the fine, the probability that the Government will have the stomach to go after them again, against the amount of profit they will make by using obscure mathematical flim flam to pump and dump imaginary investment instruments. That will hurt in the long run as people lose faith in the system and stop innovating because the system is perceived as being rigged against them. The settlement needed to include either a big enough fine or legal settlement, such as forbidding the senior partners from dealing in securities again, to be credible as a deterrent to intelligent observers. It isn’t. Hello Oceania.

  56. Patrick Neid says:

    Personally I give a shit whether GS is guilty or innocent. In fact I could care less how the SEC or any other body rules on this case or others past, present or future. If other institutions continue to deal with GS that is the only verdict that counts in the real world.

    Putting all of that aside however, what I do know, innocent parties settle all the time. Sometimes the truth just ain’t worth fighting for.

  57. lambert says:

    Barry writes “It[']s the Law, Bitches!”

    What makes anybody think this is a nation of laws? If it were, we’d have finance CEOs in orange jump suits doing the perp walk for accounting control fraud; see Bill Black here.

    Instead, we have elite impunity, just like the banana republic our financial overlords have turned us into.

  58. mbelardes says:

    Now to back up Barry on a point,

    Goldman Sachs has most definitely been punished in a way that they feel it. While I dispute the severity and the long term effects of this (this is like a DUI for an individual, costly and embarrassing but survivable) I completely agree they have been bitch slapped today (but have “won” the fight for the long term if they get this behind them).

    For Example:
    1) They lost face. That means EVERYTHING to GS whether you believe it or not. Their brand is important to them and this tarnishes them significantly.
    2) They lost money, $550 million plus all the other monetary costs we won’t hear about called opportunity costs of every second anyone at the firm spent working on or worrying about this case.
    3) They lost market cap through price decline. I commented on another post yesterday that Lloyd himself lost anywhere from $30 million to $200 million of personal wealth, on paper, due to the fall from $180 to $130 (the range just because I’m not spending all weekend comprehending the GS proxy statement exec comp stuff).
    4) They may lose corporate clients. Time will tell on this one.
    5) They have a whole new list of compliance and disclosure obligations to live up too and, if you work at a firm, everyone hates that crap.

    I could go on…

  59. td says:

    “Does anyone here really want to see the law structured so that fines and penalties are dependent upon your assets and income — and not based on the actual infraction?”

    Well…. does anyone really want to see the law structured so that fines and penalties are so easily borne by the offending party that they provide little to no value as a deterrent?

  60. mbelardes says:

    @Patrick Neid

    “innocent parties settle all the time. Sometimes the truth just ain’t worth fighting for.”

    $550 million probably IS worth fighting for but your point is valid.

    My opinion is that a government agency should never settle if they have a clear win. As with my points above, if Fab’s statements were material facts then the SEC has a duty to drive that home in a court case and establish it as clear law. That way, in the future, every I-Bank on The Street knows if you make a deal like this and don’t disclose it’s being designed because a Hedge Fund is betting on it to blow up, you better disclose that fact, otherwise, “The SEC will file a 10b-5 action under the Goldmans Sachs ruling from 2010!!!!”

    That’s why it’s a win for Wall Street. Have we even determined that a transaction like this requires the disclosure of the Hedge Fund’s position? Or just that Fab shouldn’t have stated anything? Or what? It’s a gray area still and an I-Bank and Corporate Attorney’s best friend. We don’t know if the statements of Fab are considered material for actions elsewhere.

  61. obsvr-1 says:

    mbelardes Says:

    And with the materiality, I am not sure that in 2007 the fact that an unknown hedge fund wanted to bet against what everyone thought was a booming market would have been material to the transaction. ESPECIALLY, because it was so common of these firms like ACA to buy the CDO and sell the CDS specifically because they wanted the extra return. It could be argued that they were happy there was an investor out there willing to buy the CDS and that’s why they use Goldman.

    —-
    Reply:

    GS, ACA and Paulson conspired to build CDOs with ‘junk’ components that were destined to fail (in 2007 they were aware of the turn in housing market – GS started to unwind their long position at the end of 2006 and needed a way to flush out their warehouse of long positions.

    The investors were presented with a prospectus that omitted and misrepresented information that would be material in making a decision to purchase. It is not just the fact that Paulson was shorting the position, but the fact that the underlying assets were selected by him to increase the probability of failure. GS knew this and built the structure (CDO with CDS coverage), Paulson obviously initiated the activity (“build me a bomb”) and ACA was complicit in the “selection process” to provide plausible deniability.

    The CDS contracts were being used to provide credit enhancement to the CDO structures to appease rating agencies to provide enhanced ratings to the CDOs.

    The fact that Paulson used naked CDS to obtain the windfall on instruments that he help select the underlying assets is just outright wrong. He participated in perpetrating fraud against the CDO investors and ultimately it cost the taxpayer for his paid out on the “Big Short”. Hopefully the SEC is investigating the other $14B in Paulson deals … Wall Street should be a target rich environment for the SEC and DOJ for months and years to come.

  62. beltane says:

    Pay attention, this is important: I have been laboring under the impression that fines and penalties are to relative to the legal transgression — you know, the law that was violated, and the damages that violation caused. The fines are not your bank account or income.

    In some places that how its done.

    Finland, Denmark (unlimited)
    Highest Fines: $200,000 (or more)
    Even if you’re one of the richest men in Europe, a nearly $200,000 speeding ticket is going to pang just a little (and that was in 2002, when $200,000 was a lot of money). The Trick here is that Finland, and nearby Denmark, both levy speeding fines depending on the annual income of the driver unfortunate enough to pick up a ticket. In this case, records showed that Jussi Salonoja, a 27-year-old heir to a northern European meatpacking empire, earned $11.5 million in 2002, which after a complex calculation by the courts resulted in the world-record fine of about $200,000. And all that for driving 50 mph in a 25 mph zone. A Finnish business executive also had a $165,000 fine reduced to a mere $9000 after he restated his earnings to the courts.

  63. Tao Jonesing says:

    I think Barry is missing the Big Picture here, which can be summed up by a question “what about all the other fraud and evil doin’ perpetrated by GS?”

    The answer is, most likely, nothing whatsoever. The Obama administration purposefully went for the capillaries with a civil suit, won big (I agree with Barry on this point as well as in his original assessment), and now it’s done. This was all for show, not for justice.

    So what’s the point of winning one battle when you surrender the war immediately after your victory?

    ~~~

    BR: That — “all the other fraud” — is a different post entirely.

  64. NoKidding says:

    “Imagine getting pulled over for a speeding ticket, and in addition to license and insurance and registration, you give the cop (or the judge) your IRS 1040, bank account and IRA/401k statements. Fines are then assessed based on your income and wealth — rather than the actual seriousness of the infraction?

    Pretty ugly and absurd thought!”

    I thought that was exactly how left of center people desired it to work. Otherwise, why a graduated income tax, busing kids around in school districts, extra taxes on cadilac health plans and normed civil service scores?

  65. lalaland says:

    this won’t bring ma and pa investor off the sidelines, that’s for shizzle…

  66. [...] Ritholtz of The Big Picture blog says “It’s the Law, Bitches”, claiming that the law clearly required disclosure.  Bunk.  The law requires disclosure of a [...]

  67. Equityval says:

    @obsvr-1

    Apparently your acquaintance with the facts of the case is fleeting (its not clear that you even read past the headlines).

    ACA, in the view of Barry and the prosecutors was one of the victims here. They went long the credit. Perhaps you can expand upon how they were complicit in the crime.

    This was a synthetic CDO, there were no actual bonds in the structure. So there was no opportunity for Goldman to “flush the warehouse.” CDS rather than bonds were used to create the yield and the credit exposure of this CDO. As Goldman ended up with a long position in the CDO, perhaps you can explain how that allowed them to “flush the warehouse”. The facts are that they had more exposure to housing post deal then they had going in to it.

    Moreover, since it was a synthetic CDO, the back and forth that occurred between ACA and Paulson over the reference securities was a normal part of the process by which synthetic CDOs are constructed. Both parties had an economic interest in the performance of the reference securities and they horsetraded to get a portfolio that both felt they could live with. Implicitly, they had very different views on the outlook for housing. That’s what makes markets.

    Apparently you don’t like the idea of synthetic CDOs given your rant about Paulson’s use of “naked CDS”. Well that’s fine, but no one has disputing the legality of that structure, certainly not the SEC.

    Finally, this deal didn’t cost the taxpayer a dime. The losses were born ultimately by banks in Europe. AIG was not involved. ACA was an independent financial guarantor that went down fairly early in the crisis and their liabilities were settled via commutation with their counterparties who took the hit – no bailout needed.

    One last thought, go back and read Barry’s preamble to the post, paying special attention to: “having an opinion is not the same as being informed”

  68. mbelardes says:

    @obsvr-1

    Have you looked at the actual prospectus? It’s on docstoc. http://www.docstoc.com/docs/35868496/Abacus-Doc

    Page 60 is the CDS provisions.

    I don’t really have a response other than what I have already written and to say that everything you said could be litigated as to whether or not it was material and subject to disclosure and that I think Goldman would win on many points.

    I actually do agree with you there there may be a case for conspiracy to commit securities fraud. I have a similar thought on a Civil Rico case on another TBP post here:
    http://www.ritholtz.com/blog/2010/07/we-did-nothing-wrong-and-we-promise-not-to-do-it-again/#comments

  69. Transor Z says:

    The law, bitches, is that executive management of a publicly traded company has a duty to operate in the grey areas to maximize profit for shareholders.

    This wasn’t Armegeddon, when the forces of the Lord fight the forces of Satan in a cosmic battle. It was a single legal matter. There should be more to keep WS somewhat on edge. Notice I don’t say “honest.” :)

    The existence of crystal clear business ethics is a fairy tale responsible people invent to say “It couldn’t happen to me.” I call bullshit on anyone that smug/confident in their moral compass. (Alluding to a couple of comments above)

    As an occasionally “soulless attorney” YOU WANT ME ON THAT WALL because some folks, obviously can’t handle the truth.

  70. Joe Friday says:

    BR:

    “what I truly am is astonished at some of the uninformed commentary pinging about inter-tubes about this subject.”

    Then you would have been truly shocked watching Friday night’s Charlie Rose. Andrew Ross Sorkin, William Cohan, and Roben Farzad ALL claimed there was NO CASE against GS.

    How do normally smart people fall gullible to this kind of spin and propaganda ?

  71. DL says:

    mbelardes @ 3:33

    “…look no further than Repo-105. 2008 has Lehman execs going on TV saying …they aren’t hiding things off their balance sheet …THAT IS A 10b-5 SLAM DUNK! Where is that case?”

    . . . . . . . . . . . . . . . . . . . .

    Yeah, I would much prefer to see the SEC expending their limited resources on cases like that.

  72. clinton says:

    BR has jumped the shark. Does he SERIOUSLY believe that GS $550 million love tap is anything but a dog and pony show? He’s sounding way too close to one of those bankster loving stooges on CNBC.

    lol.

    Call me when GS gets banned from ANY MORE GOVERNMENT HANDOUTS and is forced to pay a REAL TWELVE FIGURE FINE for its criminality. Same with the other TBTF pigs.

  73. Trevor says:

    I’m glad I’m not the only one who noticed this gem in Barry’s excellent post: “Spin isn’t fact, opinions aren’t laws, and having an opinion is not the same as being informed.”

    In the process of calling a spade a spade, Barry has achieved something unique: in a single sentence, he summed up all of the world’s religions AND almost all of the U.S. news(y)/political/finance shows/channels/websites. Quite a feat. Bravo! ;-)

  74. philipat says:

    I agree with BR that this is, first and foremost, a legal matter, which is why I took issue with the SEC taking decisions “Along party lines” when their remit as an Agency is simply to apply the law.

    However, there is a difference between what says the law and what is right and fair. The new FinReg demonstrates this well. Or in the words of Dickens “If that is what the law supposes, then the law is an a*s”.

    A functioning democtratic society is supposed to set standards and make the law according broad values established by society from time to time through the appointment of its elected representatives. However, therein lies the problem in the US.

    It also doesn’t seem reasonable and fair that it is the long-suffering common shareholder who will again pay the price (Reductions of profits via the payment of penalties from earnings and a drop in value of common). The bonus pool will not be reduced nor will any single figure on Wall St be held accountable in any way, with the possible exception of the “Fabulous Fab”. The inside negotiations on that aspect must be interesting and, again, I have confidence are being conducted to the letter of the law before common stockholders are asked to pick up legal costs and the costs of what will presumably be a very generous severance package.

  75. obsvr-1 says:

    OK – maybe complicit is too strong, however given the insider activities and stories like the following makes one wonder …

    http://www.businessinsider.com/henry-blodget-but-wait-theres-more-head-of-allegedly-swindled-goldman-cdo-buyer-aca-is-married-to-goldmans-deputy-general-counsel-2010-4

    As for Synthetic CDOs — they are still based on the underlying RBMS which are based on the underlying loans. Paulson was involved in the selection process of the RMBS bonds that the CDO referenced– the fact that they were synthetic only puts more indirection and complexity into investigating the transactions.

    Refer to the actual complaint from the SEC for the details and answers to some of the questions:

    http://www.sec.gov/litigation/complaints/2010/comp-pr2010-59.pdf

    I am not adverse to the structure of the CDO, it is just an instrument. What goes into the structure and how it is represented to investors is the important factor.

    My reference to the taxpayer as ultimately paying for these deals is the fact that if the Treasury and FDIC did not step in with the TAPR funds and $T’s in guarantees to stabilize the financial system then the interconnected counter parties across the spectrum would have collapsed. There are a lot of assets moved into the Maiden Lane portfolios that came from these type of deals linked to GS — not just GS but across the I-Bank environment.

  76. comet52 says:

    BR: the Smartest Guy in the Room. Seriously dude, you are the new anti-Enron–a one-man financial justice league who will not be defeated! I thank you for keeping us all on our toes and for the best take on Goldie I’ve seen so far. And I admire the fact you are putting this hit material up on a Sunday morn to boot. In the immortal words of Gomer Pyle, USMC… “Shazam!”

    Now don’t let all this go to your head.

  77. JohnathanStein says:

    Barry — Well spoken!

    BUT: Who gets to make up the losses? Isn’t there “unjust enrichment” here?

  78. obsvr-1 says:

    @Transor Z says:
    The law, bitches, is that executive management of a publicly traded company has a duty to operate in the grey areas to maximize profit for shareholders.

    * * *

    As an occasionally “soulless attorney” YOU WANT ME ON THAT WALL because some folks, obviously can’t handle the truth.

    Reply:

    Unfortunately the grey ares are created by the “soulless attorneys” and lobbyist that influence or even write the legislation to allow the executives to live in that zone. The BOD and executives have the duty to not cross the line putting the company at risk (e.g. a $15M transaction that results in a $550M judgment is a radical departure from maximizing profits).

    Is it asking too much for professionals to behave ethically — not crystal clear ethics, just a bit closer to the “bright line” would be a step in the right direction.

    Sounds like I struck a nerve — perhaps there is hope after all for the “soulless attorneys” ;-)

  79. RC says:

    Joe Friday said:
    “Andrew Ross Sorkin, William Cohan, and Roben Farzad ALL claimed there was NO CASE against GS”
    ———-

    They are not all lawyers. I know that Andrew Ross Sorkin is not. Others mentioned above are not as well. So how credible is their opinion about a LEGAL matter??
    Thats what BR is trying to point in these multiple postings but somehow it is just not getting thru’.

  80. Joe Friday says:

    RC,

    All three are journalists, and Cohan is also a former investment banker, with Wall Street as their beat.

    But that was my point, why would normally smart people regurgitate gibberish instead of checking with legal sources I’m sure they have available to them ?

  81. Transor Z says:

    The BOD and executives have the duty to not cross the line putting the company at risk (e.g. a $15M transaction that results in a $550M judgment is a radical departure from maximizing profits.

    What was Goldman’s profit on those types of transactions, net net? Worth the risk?

  82. obsvr-1 says:

    And the lawsuits continue to roll on …. GS lawyers are going to have a busy year …

    On April 16, the U.S. Securities and Exchange Commission filed a civil fraud lawsuit accusing Goldman of creating and marketing collateralized debt obligations linked to subprime mortgages in early 2007, without telling investors that hedge fund Paulson & Co helped choose and was betting against them.

    Goldman has denied wrongdoing. At least 18 shareholder lawsuits have been filed against Goldman and its officials arising out of that arrangement, known as Abacus.

    *****

    Goldman Sachs Group Inc (GS.N) was sued by Liberty Mutual Insurance Co, which accused the Wall Street bank of fraudulently misleading it into buying preferred stock of mortgage financier Fannie Mae (FNMA.OB) that would become “virtually worthless.”

    In a lawsuit filed Thursday in Boston federal court, Liberty Mutual said it deserves to be reimbursed for losses on the $62.5 million of Fannie Mae preferred stock it had bought in late 2007 through offerings underwritten by Goldman.

    ****

    Goldman Sachs Group Inc., Citigroup Inc., Morgan Stanley and dozens more bank and brokerages were sued by a Boston area-based fund seeking reimbursement for losses related to subprime loans.

    Cambridge Place Investment Management Inc., founded by ex- Goldman Sachs Group bankers Martin Finegold and Robert Kramer, lost more than $1.2 billion as a result of the banks’ untrue statements, according to a copy of the complaint filed July 9 in state court in Massachusetts.

  83. Marc P says:

    You’re right Barry, it’s about the law. What you are missing is that it appears that the settlement wasn’t just for this particular security offering. It was $550M for all possible transgressions. The press release stated that the SEC agreed not to bring any other cases against GS.

    $550M for just screwing the Abacus buyers would appear an appropriate fine under the law. $550M to settle all possible SEC cases is the deal of the decade.

    Caveat: my view is preliminary, as I haven’t seen the settlement agreement yet. I have only the SEC press release. Let’s read the full settlement agreement and then revisit this issue.

  84. beaufou says:

    The 550 may not be the end of it since others are considering suing GS.
    So I think you are right in thinking this is more important than the financial thingy they just voted, GS making it go away is a proof of guilt and opens the door for many other similar stories and will be an example in future dealings, for Goldman as well as other firms.

    I disagree with the man getting a ticket analogy though, GS is not an individual and should not have the honor of being depicted as such, the Supreme Court might disagree with me on this one.

    I was disappointed in the settlement, it should have included me meeting Blankfein in a dark alley and teach him how to squint like he never did anything wrong, but that’s just an opinion and I’m not even cranky tonight.

  85. obsvr-1 says:

    Transor Z Says:
    July 18th, 2010 at 11:33 pm

    What was Goldman’s profit on those types of transactions, net net? Worth the risk?

    –Reply

    I don’t know how many MBS CDO deals GS did and how much profit they made — would be an interesting data point

    — but that is not the point, what they did was illegal, notwithstanding GS position of not accepting or denying the allegations in the settlement.

    Now we are full circle to the root of the anger and frustration with the SEC not pushing for the 10b(5) Fraud action …

    Your saying it is OK to do what GS did in the ABACUS 2007-AC1 deal (and the high degree of probability of repeated transgressions in other CDO deals) as long as they make a net profit !?
    (who knows what GS was thinking, maybe “as long as we don’t get caught”).

    There was just too much unethical behavior, conflict of interest and fraud underlying this single transaction by multiple participants (some duped, some complicit), with GS at the center orchestrating the whole mess. Multiply that by the number of deals and number of I-Banks doing the same things and it gets really ugly.

    — Outrageous !

  86. obsvr-1 says:

    Marc P Says:

    What you are missing is that it appears that the settlement wasn’t just for this particular security offering. It was $550M for all possible transgressions. The press release stated that the SEC agreed not to bring any other cases against GS.

    —— Reply

    Section 14 leaves the door open for further actions .. see http://www.sec.gov/ for the proposed Judgment and Consent doc’s and http://www.sec.gov/litigation/complaints/2010/comp21489.pdf (original complaint)

    14. Consistent with 17 C.F.R. 202.5(f), this Consent resolves only the claims asserted against Defendant in this civil proceeding. Defendant acknowledges that no promise or representation has been made by the Commission or any member, officer, employee, agent, or representative of the Commission with regard to any criminal liability that may have arisen or may arise from the facts underlying this action or immunity from any such criminal liability.

    Defendant waives any claim of Double Jeopardy based upon the settlement of this proceeding, including the imposition of any remedy or civil penalty herein. Defendant further acknowledges that the Court’s entry of a permanent injunction may have collateral consequences under federal or state law and the rules and regulations of self-regulatory organizations, licensing boards, and other regulatory organizations. Such collateral consequences include, but are not limited to, a statutory disqualification with respect to membership or participation in, or association with a member of, a self-regulatory organization. This statutory disqualification has consequences that are separate from any sanction imposed in an administrative proceeding. In addition, in any disciplinary proceeding before the Commission based on the entry of the injunction in this action, Defendant understands that it shall not be permitted to contest the factual allegations of
    the complaint in this action.

  87. obsvr-1 says:

    The healthcare sector is about 15% of GDP approx $2T and is expected to grow to 20% of GDP by 2020 — we all fell this in our healthcare insurance premiums and out of pocket costs …

    Does anyone know the size of the legal sector — # of lawyers, size in $ for the amount of legal spend, any other stats ? It would be interesting to see what % of GDP and what the growth rate is.

  88. mbelardes says:

    @Marc P

    Here is the settlement agreement, though I believe they have one last court appearance for a judge to officially sign off on it. Not sure if the judge writes a ruling or anything. Last time I followed this sort of thing was the BofA/Merrill fiasco.

    http://www.sec.gov/litigation/litreleases/2010/consent-pr2010-123.pdf

  89. Guambat says:

    OK, so GS only got a spot of soup on its cravat. But Achilles only got a scratch on his heel. Barry will be right in the long run, should Guambat live so long.

  90. d4winds says:

    A jury trial in which the SEC lost would have been a much greater reputational and bottom line hit to GS, since the extended press coverage would have left them exonerated but irreparably besmirched.

  91. rktbrkr says:

    A trial would have exposed GS liars to perjury charges, oh wait, they purjured themselves in front of congress and nothing happened. Like greed perjury is GOOD!

  92. Mark Down says:

    14 days of Profit… 14 days of Profit… 14 days of Profit… What will we tell the children?

  93. Tarkus says:

    I’m curious of whether those in the SEC and government consider the resolution of charges as requiring some kind of future deterrent. Otherwise, why do we lock up drug dealers?

    It seems financial malfeasance is treated more like prostitution – fine the hooker and let her go out and turn more tricks so she can pay the fine.

  94. Transor Z says:

    obsvr-1 said:

    I don’t know how many MBS CDO deals GS did and how much profit they made — would be an interesting data point

    — but that is not the point, what they did was illegal, notwithstanding GS position of not accepting or denying the allegations in the settlement.
    ———————-

    Sorry, you’re wrong, the relative profitability of an illegal line of business vs. risk is precisely the point.

    You’re the CEO of a trucking company that operates routes along the I-95 corridor in the South. You find that it’s cheaper and faster to send your trucks along parallel county roads instead of I-95. The problem is that your trucks all exceed the tonnage limits for those county roads. Periodically your trucks get pulled over at police weigh stations resulting in $400 fines per instance. Even with the periodic fines (you get about 36 per year), the county road routes save about $1 million per year in tolls, gas, and labor.

    Q: If you and the Board decided to “do the right thing” and only send your trucks on I-95, would you be opening yourself and the Board to liability through a shareholder derivative suit or does choosing the “lawful” alternative provide a safe harbor for your decisions?

  95. number2son says:

    Smack!

  96. mbelardes says:

    No link to provide in an article by Yael Bizouati today entitled “Goldman Loses $700M in Bond Mandates” he reports:

    “A California pension plan fired Goldman Sachs Asset Management from two bond mandates worth nearly $700 million combined last week, citing client service dissatisfaction, underperformance and concerns about the organization. The pension also fired AXA Rosenberg from a sizable mandate, joining numerous other institutional investors that have terminated that firm in recent months.”

    The article goes on to say the decision was primarily based on dissatisfaction with performance but notes that the issues surrounding Goldman was a factor of the decision.

    I believe they also lost another significant pension deal in March.

    It will be interesting to see their quarterly figures and try to extrapolate how much business they will get from private institutions. I know a few public institutions have already been pulling business.

  97. Petey Wheatstraw says:

    Transor Z Says:

    “Even with the periodic fines (you get about 36 per year) . . .”
    _______________

    With 36 fines, you should have your permits to operate and your business license pulled. I’m sure the shareholders would insist on the company operating within the law, then.

  98. Transor Z says:

    @Petey:

    Certainly might have been a more desirable state regulatory scheme but that wasn’t the law in this case. And don’t forget: the state(s) got paid. :-)

  99. Patrick Neid says:

    ……..”It will be interesting to see their quarterly figures and try to extrapolate how much business they will get from private institutions. I know a few public institutions have already been pulling business.” mbelardes.

    This is the only verdict long term that matters. It can snowball.

    The fine is/was the cost of doing business.

  100. ZedLoch says:

    A+ material here, BR. You’ve been consistent, you called it, now everyone else has egg on their face as they scramble to change their stories to fit their slant.