I have a quote in Alan Abelson’s column in Barron’s on the Goldman Sachs case:

“WHILE IT MAY SEEM LIKE an octopus squid to lots of civilians, Goldman Sachs doesn’t lack for fans on Wall Street. Any number of investment pros and their followers staged a brief (very brief) celebration of the news that Goldman had settled the SEC’s civil-fraud complaint against it for $550 million. The celebrants couldn’t all have relatives who worked for the firm.

Even its most buoyant admirers oohed and aahed over what a coup it was for the firm to get away so cheaply, having only to say it didn’t do anything wrong and pledging never to do it again.

They kept repeating that $550 million might seem like a big wad of dough to the little people, but it’s only a couple of weeks’ worth of profit for Goldman.

As Barry Ritholtz, proprietor of Fusion IQ and stalwart market-watcher, points out, the very people who are congratulating Goldman on its “triumph” were blithely dismissing the charges when first made public with the claim “the SEC doesn’t have a case.” Well, Barry insisted it did, and we quoted him to that effect back in April.

And he now thinks Goldman suffered a “massive” defeat that is being spun as “some sort of victory.” He notes that Goldman paid the highest fine/settlement in the history of the SEC. It admitted material omissions and misstatements in its marketing materials, disgorged profits, made up investor losses and faces significant risk of future litigation.

Goldman is an incredible money machine but that, Barry insists, won’t fix the severe damage to its reputation, the “black eye” inflicted by the indictment and the settlement.”

I am sure there will be more commentary on this same subject soon . . .


An Outbreak of Investor Discontent
Barron’s, JULY 17, 2010

Category: Corporate Management, Legal, 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.

20 Responses to ““We Did Nothing Wrong . . . And We Promise Never to Do It Again””

  1. flipspiceland says:

    Guess Abelson didn’t read the overwhelmingly negative response by the chatters to BR’s take on the Goddamn take down.

    If he had he would have learned that Lord Blankfein’s domain paid petty cash for the trillions they managed to ripoff, along with the billion that made it into the lawsuit that they were charged with.

    That’s like penalizing Dillinger for failure to wipe his shoes on entering a bank, while he makes off with the entire contents of the vault, kills a guard, and takes a machine gun to windows in the escape.

    Khuzami may not be a shmendrick, but he is a pea shooter to Goddamns atomic power, a point which BR and Abelson both missed.

  2. The law doesn’t care about what your bank account size is — the penalty fits the crime, not your net wealth.

    Or would you prefer to show the officer your license and registration and 401k and 1040 when pulled over for speeding?

  3. Patrick Neid says:

    Goldman’s fate rests with other institutions and governments. Years ago(late 80′s) EFHutton was brought low when it got involved in check kiting for its clients vs banks. By today’s standards it was peanuts almost Robin Hoodish for its clients. But institutions and governments folded and EFHutton disappeared into Shearson a couple of years later. Myself, I was shown the door!

  4. Chief Tomahawk says:

    I sense a Goldman ad campaign ramping up soon. Something along the lines of “You, Me, and Goldman”, with a glossy overview of how Goldman makes a better life possible for the family of four.

  5. Chief Tomahawk:
    I don’t know. Have all the commercials BP has been running lately improved their image?

  6. krice2001 says:

    Well GS has many reasons to want to appear to be a winner and its cohorts and apologists have every reason to go along. I wouldn’t concern myself with the immediate chatter from the financial media or friends and associates of GS. Now, appearing to be too victorious or too unscathed may further piss off the general populace but GS has generally seemed unconcerned about that.

    On the other hand, before I doubt Barry’s take on any situation, I always reflect on my strategy since finding Barry’s site in late 2006. Unless proven otherwise, I trust his instincts and his models. JMHO.

  7. drey says:

    “The law doesn’t care about what your bank account size is — the penalty fits the crime, not your net wealth.”

    Not really true, Barry. There is always an element of ‘what will it take to get this defendant’s attention’ when it comes to sentencing or the equivalent.


    BR: I thought the indictment got their attention pretty well . . .

  8. DL says:

    I disagree with BR’s contention that the SEC had a strong legal case against GS. IKB knew, or should have known, that the guy on the other side was selecting securities, just as IKB was given the opportunity to do. I also disagree with BR’s (previous) contention that this case wasn’t politically motivated; i.e., to show how “tough” the SEC can be, and because Obama likes the convince the “little guy” that he is no friend of big, bad corporations. Note also the timing of this case versus the FinReg bill in Congress.

    I find it very interesting that, throughout this whole incident, the alleged victim, IKB, hasn’t said a word about it. If they had been willing to say publicly, exactly how it was that GS mislead them, then I would be willing to believe that GS had actually committed fraud. (Or alternatively, if the SEC itself would provide facts that would strongly indicate fraud, which they haven’t done).

    And if this case had gone to trial, it would have been a case of one “fat cat” institution against another. So even if the jurors all had a bias against banks, that bias probably wouldn’t have caused them to decide against GS.


    BR: 1) 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 SEC information (emails, phone calls, etc.) the Fabulous Fab obviously violated this law — he told Abacus buyers that Paulson was long (he was actually short) and he omitted that a Short Seller helped to construct the synthetic CDO.

    This was a no brainer case based on the facts and the law (Case closed)

    2) IKB has lawyers, and they likely told them to let the SEC fight their battle for them. Which is what happened.

  9. DL says:

    flipspiceland @ 11:51

    “…Blankfein’s domain paid petty cash for the trillions they managed to rip off…”

    I do have my own personal suspicions that GS frequently trades on inside information, and perhaps also, from time to time, bribes public officials. But if true, that doesn’t make them guilty of fraud in the IKB/Paulson case.

  10. DL says:

    BR @ 1:36

    Thank you for the response.

    If it is an uncontested fact that Fabrice Tourre told IKB that Paulson was long, when he was in fact short, I agree that that is pretty sleezy, if not criminal. And it is also true that the case against Fabrice Tourre is not settled.

    If it’s really true that the people who set up the CDO told IKB that only the “longs” were allowed to select securities, and that the “shorts” were prohibited from doing so, then that could very well constitute fraud, at least on the part of those specific individuals making the false statement. But it’s not clear whether that is what happened or not.

  11. drey says:

    “BR: I thought the indictment got their attention pretty well . . .”

    Not as well as a $550 million fine, I dare say.

  12. mbelardes says:

    I have a visiting professor that says the recent 5-4 ruling by the Supreme Court that the 2nd Amendment applies to states and local municipalities and that Americans have a constitutional protection from a handgun ban is actually a huge LOSS for the gun rights advocates.

    He went to Harvard, was a classmate of Kagan, and is now a dean of a law school.

    And he is totally wrong. He will not admit it because it challenges many of his fundamental beliefs about a great many things.

    I don’t know why the need to cling to this settlement as a huge loss for Goldman. That’s fine. They have a huge fine to deal with. Their reputation in the I-Bank is injured (but will recover). They will change policies (proudly if you talk to anyone working there). Blankfein will depart at some point and be replaced by someone with I-Bank experience as their I-Bank Division needs some serious rebuilding anyway (Blankfein is a from Trading, and not specifically Banking). Fab may still get smashed by the SEC but we always knew he was the fall guy anyway. The only way to truly claim a loss for Goldman is if this settlement gives way to a Criminal Prosecution (which is still very possible and why folks should not go “all in” on GS) though I’m not sure Mario Cuomo will go down that route and I’m positive Eric Holder doesn’t even know what Goldman Sachs is.

    I think it is just silly, FOR ALL OF US, to haggle over whether this is a win or a loss.

    At this point, it doesn’t matter. It’s like arguing if you should have bought or sold on the day of the Flash Crash. This is like me (Laker Fan) arguing with Celtic fans over how game 7 could have been different. Who cares? We are past it now.

    The question is, who should be next? Why is Repo-105 still floating adrift? Where are we on the AIG murder? How is the SEC being bolstered to do it’s job? Why aren’t we seeing a “perp walk” when you can safely assume there were more people than just Madoff and Stanford committing white collar crimes you can slam dunk? Where are the shareholder derivatives suits (Citi had one and lost) against all these firms?

    I just fear that the Goldman hate is getting everyone’s eye off the ball. It is a distraction. That is the danger. We are ignoring problems and repeating the steps that got us here (though making slight improvements). We are wasting a major opportunity for change. Do lobbyists and firms really have that much power?

    It’s going to be a real shame if the most we get it response to all that has happened in the last decade is a black eye for one firm (maybe a broken nose and tooth knocked out as well) and a Financial Regulation bill that lacks teeth and does not reach to the heart of the matter.

  13. mbelardes says:

    Does anyone have a credible list of firms/governments unwilling to do business with GS now? I would be interested to see what the rumor mill has on that.

  14. flipspiceland says:


    It won’t take long to find out. Just keep an eye on their year end bonuses.

  15. ACS says:

    The customers will utimately determine the fate of GS. It is upon their fees and against their orders that the big bucks are made for those big bonuses. Seems everybody was afraid to not do business with The Squid before. If that doesn’t change now, then it’s back to business as usual. Mbelardes makes a good point. I seem to recall another firm where the traders took over from the bankers. Now what was the name… oh yeah, Salomon Brothers.

  16. mbelardes says:

    My Civil RICO suit idea.

    I found this summary online: “Every RICO claim must be based on a criminal violation or, as the statute states, an “act of racketeering.” “Acts of racketeering” are all serious crimes and are listed in section 1961(1) of the RICO Act. A civil plaintiff must not only prove that the defendant engaged in acts if racketeering, but must also prove that these acts constituted a “pattern” and must prove all of the other elements of a civil RICO claim.”

    Securities fraud is a violation that meets criminal violation requirement. Let’s assume the “Magnetar Trades” are securities fraud that will satisfy the pattern of activity requirement.

    The Defendant has to be an “enterprise” which is not limited to “corporation” and can be as little as two individuals. All you really need is some sort of relationship with a common purpose.

    I have wondered why not draw the lines between Hedge Funds, I-Banks, Credit Rating Agencies, Attorneys, and Accountants (although attorneys and accountants have their own legal shields).

    If you really dig down deep and read over the Abacus transaction details, what do you have?

    Let’s just assume that the totality of the following circumstances are going to show that the Abacus CDO was built to fail in a complex scheme to commit securities fraud without looking like you are committing securities fraud (it’s just speculation and making a market, right!?!?!?)

    So Hedge fund has an investment idea where they can “stack the deck” on someone too stupid to figure out what is going on. They go to I-Bank and ask them to find some stupid and willing investors (Sophisticated in this case but I’ve met some sophisticated stupid people in my life). I-Bank then goes to stupid investors and gauges their interest. I-Bank goes back to Hedge fund and asks which cards should be in the deck. Hedge fund selects a bunch of cards for the I-Bank to submit to stupid investor. Stupid investor looks over cards, tosses out some and keeps others but needs a good rating before committing. I-Bank takes deck over to Credit Rating agency they have a relationship ship with and Credit Rating just rubber stamps AAA on it to keep the business coming. Lawyers and Accountants get together on prospectus and iron out the details, they sign off and collect their fee. Everyone is happy because they have successfully navigated the letter of the law and can dodge most legal claims unless some idiot at the I-Bank sends emails around blowing their cover.

    Transaction takes place. Stupid investor gets blown up.

    Now, do we not have a pattern of activity and a bizarre enterprise running here? But everyone is strangely shielded by navigating rules and laws and then being able to just say “well, it’s all market speculation and there is no way we could have known what would have happened to housing…”

    That’s the problem. I think if you just look at the actions of a couple institutions as opposed to The Big Picture (pun intended) then I think it’s difficult to nail these firms over these transactions.

    Now, I think this entire case (Civil Rico and not the GS/Fab case) rests on why a CDO in the first place? I think that is a key part of the whole thing.

    Why create a synthetic? Why one of garbage? Why would exposure by garbage be allowed to have a AAA? Why would nobody raise a hand and say “eh, not sure this should be highly rated”?

    I think it’s one thing to have purchases an actual MBS and it implodes because all the mortgages defaulted. It’s another thing to buy something that is synthetic and then it implodes because it was designed to do so and for the scam to work you have to find someone that willingly holds the bag.

    These are billion dollar transactions, millions of dollars of fees generated, and the CDS must have cost hundreds of thousands of dollars (correct me if I’m wrong) in a giant transfer based on designed speculation.

    Looking at it this way, can the case be made for a Civil Rico suit that swings the bat at the industry as a whole and specifically at these type of seemingly-gamed transactions (especially transactions that have almost no economic benefit)?

  17. So are you now being considered Goldman’s foil Barry? Are you the guy they will now quote as being the market’s anti-establishment guy? This could be good for you. You no longer need to watch your back because like the republicans and democrats the media needs a foil to use as a dig that will speak truth to power. They need a point and counterpoint. I’d say you are definitely establishing yourself as the credible counterpoint that is the go to sound bite.

    congrats ;)

  18. Bokolis says:

    With regard to the hit to its reputation, given that salesmen are the easiest people to sell, I’m eager to see what it’ll take (that is, I’m eager to see it play out…I know what it’ll take, and I ain’t sayin’) for institutional to shun Goldman.

  19. Jessiekay says:

    It is the story of the tree hiding the forest! Nothing else and it will last!!!

  20. obsvr-1 says:

    mbelardes Says:
    July 17th, 2010 at 3:56 pm

    My Civil RICO suit idea……


    Great narrative to hand over to the “Elliot Ness-ies’” (DOJ) to pursue :-)

    Unfortunately RICO requires a pattern of criminal activity, and we are in the world of Civil actions at this point, and the bad actors are shrouded by well paid lawyers and political cronyism.