Amongst the regular complaints I have about the financial media is the lack of accountability of alleged experts. The bad stock picks, the terrible market calls, the unsupported opinions, all blithely made and forgotten. Yet the same experts are trotted out week after week to give more money losing advice.

The silver lining to this institutionalized incompetence is that its good for business for those who are not incompetent. Nonetheless, it is horrifying to watch on a daily basis.

Nowhere has the lack of qualifications been more evident than in the coverage of the SEC indictments of Goldman Sachs. The parade of pundits who opined about things they knew nothing about was an impressive display of the blind leading the foolish. The silliness got so bad that it forced to stop doing more important things to post 10 Things You Don’t Know (or were misinformed) About the GS Case. I was surprised that this became the single most read post in the Big Picture’s history.

Now that Goldman Sachs has lost their will to fight and settled the case for a record breaking amount, the same media fools who told you a) this was a weak case and b) GS was going to win are now spinning this massive Goldman Sachs defeat as some sort of a Goldman victory.

Don’t believe them. This is a painful loss for Goldman Sachs, with expensive repercussions likely to last far into the future:

• Our “no-brainer” bullet point proved to be dead on: GS conceded misleading disclosures, and hence was forced to settle. This will be important in related actions (keep reading).

• As we noted yesterday, Goldman paid the highest fine/settlement in the history of the SEC. For an ego-driven corporate culture such as Goldie, that is a painful loss. Silver lining: Settlement was under a billion dollars. Regardless, expect some high profile resignations to follow.

• Goldman admitted material omissions/misstatements in their marketing materials; They disgorged profits and made up investor losses (Yves notes IKB and ACA were made whole). When you admit to misleading investors, you open the firm to future liability from all clients who bought money-losing synthetic derivative products. Hence, this is a significant litigation risk for GS — client civil suits to follow.

• The latest brain dead spin: “The settlement is only the price of a few days’ revenue.” See here and here. This is a classic example of conflating two unrelated issues: 1) The biggest SEC settlement ever; 2) GS is an incredible money machine.  But the latter says absolutely nothing about the former. The bottom line remains this is a black eye, and an early Christmas present for the litigators who represent Goldie’s clients who lost money on CDO deals.

Bloomberg reports that the settlement changes the vetting and approval process for the marketing of structured securities. “Those changes will probably lead to a new industry standard for disclosures in private sales of securities, even to the most sophisticated investors.”

In other words, the entire street, and not just Goldman Sachs, lost this case.

Here is a question for GS shareholders: Why didn’t Goldie write a $20 million check to settle this a year ago? What sort of bad legal advice did they get, and from whom? What executives allowed what should have been a simple action to turn into a record setting settlement?

• First Moody’s now Goldie: Warren Buffett is the other loser in the case. His claim that GS didn’t commit fraud was wrong. Now Buffett looks like just another shareholder defending an investment, right or wrong. There is mud on his formerly squeaky clean reputation.

~~~

Which leads me to our headline question: What media pundits, talking heads, and other fools completely blew this one?

I don’t mean honest analysis that turned out to be incorrect — that is part of engaging in informed debate, using imperfect information, about unknowable future outcomes. What I am referencing is — who really shat the bed on the Goldman Sachs case? Who got this totally wrong? Who continues to get this wrong?

Category: Analysts, Financial Press, Legal, Regulation

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.

60 Responses to “Who Steered You Wrong About the GS Case?”

  1. More Yves:

    Paulson, by implication, earned his money on the ACA trade thanks to Goldman’s misrepresentations, rather than his shrewdness. The settlement thus tarnishes the popular myth that the subprime shorts were insightful outsiders who executed “the greatest trade ever”. Paulson’s purported $1 billion in profits from this ACA deal depended, in part, upon inaccurate statements made by Goldman for his benefit. In effect, Paulson’s gain cost Goldman $550 million while the parties on the other side of Paulson’s trade (the ones that are still around, since ACA is defunct) got most of their money back. This implies that had Goldman not made the inaccurate disclosure about the deal, the investors might not have bought the bonds and Paulson would not have made such a killing. The settlement does nothing to discourage the notion that other CDO transactions had similar inaccuracies which resulted in ill-gotten gains for the shorts and unwarranted losses for the long investors.

    http://www.nakedcapitalism.com/2010/07/tom-adams-is-the-sec-settlement-really-a-win-for-goldman.html

  2. PDS says:

    BR….interesting that the SEC case was decided along party lines…dems for it…gop against…politics as usual…. NY pols short on campaign cash perhaps?

    BTW….ur overall assessment of the state of the dysfunctional MSBM is right on….zero accountability….following my own cnbc appearances i have attempted to get producers to focus on track record of recomendations, focusing on one of their media stars in particular, for that at attempt to point out lack of transparency and honesty, i have been sitting in penalty box ever since…i believe u have had similar experience….life’s too short

  3. More hollow GS victory:

    Robert Khuzami, the SEC’s director of enforcement, said at a news conference yesterday that his agency means to send a signal to the entire industry.

    “We would strongly encourage other institutions to adopt any kinds of best practices that they see across the street in order to prevent this kind of wrongdoing,” said Khuzami, 53. “The deterrence, and preventing a fraud before it occurs, is a much better outcome than picking up the pieces afterwards.”

    The SEC is still investigating other companies and a range of products that fueled losses during the financial crisis, Khuzami said. Last month, the agency sued New York-based ICP Asset Management LLC on claims that it improperly traded assets in CDOs it managed. ICP has denied wrongdoing.

  4. foosion says:

    For the securities lawyers among us, this was obvious – GS omitted to state (or misstated) a fact that was material (or at least arguably material). There was no way GS was going to trial, it’s just too large a risk.

    Most people I know that got it wrong were claiming that because the investors were very sophisticated and had the opportunity to ask questions, GS was not liable. While that argument is intuitively appealing, it is not the law.

    Also not many practicing securities lawyers would ever be quoted criticizing GS. It’s too big, well connected and a potential source of business.

    BTW, that it’s a few days revenue is irrelevant. It’s more than a few days earnings.

  5. lalaland says:

    Sanity! It’s what’s for breakfast…

  6. PDS says:

    BTW BR….any thoughts on the late day pop in GS just before close…i believe it ran up about 7% in last half hr of trading on “rumors” of settlement….wouldn’t it be ironic that on the day finreg was passed with regs to limit prop trading that GS’s prop trading desk front ran the news about their mother ship’s SEC settlement???….nah…that would never happen….they’re a bank….and banks don’t do that sort of thing!!

  7. HEHEHE says:

    Excellent synopsis, but you left out one thing, what is going to happen to Fabulous Fab?!?!?! Looks like he’s on his own.

  8. d4winds says:

    admitting to material omissions/misstatements in their marketing materials” is by no means equivalent to “admitting to misleading investors”; the first is an “oops, sorry about that” whereas the second is fraud. It is hard to see how civil lawyers seeking compensation for material misrepresentation were aided by this settlement.

  9. KidDynamite says:

    ACA can’t be made whole, they are out of business. i believe they were insured by ABN Amro, which was glommed into RBS, which according to Reuters lost $841MM on the deal, but was reimbursed $100mm.

    http://www.reuters.com/article/idCNLDE66F0TD20100716?rpc=44

  10. HEHEHE says:

    There’s a couple ways the plaitiffs bar is helped 1) GS can’t use any of this settlement money as an offset to any future litigation awards; 2) that leaves open the litigation casino; 3) the mere fact of the settlement implies GS may be in check cutting mode and may seek some sort of global settlement once all the class actions are consolidated.

  11. Marcus says:

    In addition to who really got it wrong, it’s worth noting who really got it right. Jim Crammer is at the top of the “got-it-right” list. Crammer is a former Goldie, often considered to be the top PR shill for Goldman. But he saw the Abacus deal led by Fabrice Tourre as the soft underbelly of GS and said so. Does that make Jim the fountain of knowledge to blindly follow for investment gold? I leave that question open.

    Here are my candidates.

    Jim Crammer, Slammed Goldman and Was Dead On.
    http://www.youtube.com/watch?v=uf42yWwDFRA

    Kevin M. LaCroix, Blogger Lawyer, Nailed It
    http://www.dandodiary.com/2010/04/articles/subprime-litigation/ok-so-the-sec-sued-goldman-sachs-now-what/

    Wall Street Journal, They Really Blew It
    http://online.wsj.com/article/SB10001424052748704508904575191882961621478.html

    What can we learn from the Goldman fine?

    Watch those loose-lipped emails, like the one the Fabulous Fab sent off. Bill Gates too hit send on a couple of missives he wishes he had not sent out.

    GS delayed nine months in responding to a Wells Notice on this case, and failed to notify stockholders. The point of law in all this is in the fine print. Goldman had bad fine print. If Goldman can edit it’s fine print, and get those disclaimers more pointed, it can go back to business as usual. It’s not a good idea to spit in the regulators eye. But it is a good idea to edit your own fine print from time to time.

    There are a lot of lessons from the GS fine!

  12. Deborah says:

    “Now that Goldman Sachs has lost their will to fight and settled the case for a record breaking amount, the same media fools who told you a) this was a weak case and b) GS was going to win are now spinning this massive Goldman Sachs defeat as some sort of a Goldman victory.”

    I have not followed the details, but a quick internet search I find:

    “The biggest loser in the alleged fraud was ABN Amro, a major Dutch bank, and the Royal Bank of Scotland, which acquired major portions of it in 2007. The SEC said the Royal Bank of Scotland paid Goldman $841 million to unwind ABN transactions.

    (http://finance.yahoo.com/news/SEC-accuses-Goldman-Sachs-of-apf-1523020722.html?x=0)

    It looks like they got off easy compared to RB of Scotland’s losses. Am I missing something?

  13. Kid D, I am trying to not confuse people, but since you brought it up:

    RBS is the successor in interest to ACA, the original party to the Abacus CDO. But the loss was ABA’s, and the buyer of their assets out of bankruptcy picks up that claim.

    I will clarify that above.

  14. Trevor says:

    Coïncidentally, today’s TBP quote of the day is from the oracle: “You try to be greedy when others are fearful, and fearful when others are greedy.” —Warren Buffett

    ~~~

    BR: That is the ” shantz-wordpress-qotd” plug in — and its totally random!

  15. Janet Tavakoli says:

    For years the SEC failed to do its job to protect investors, including retail investors. Likewise, it failed to deal with accounting fraud. The SEC is well behind private litigation (in scope and theory) in these matters.

    This is a great settlement for the SEC, but its focus on sophisticated investors that could have fought for themselves using their own resources for recovery should just be the beginning. There are much bigger issues here. Multi-year malfeasance was widespread. CEOs and CFOs in this post-Sarbanes Oxley world should be held accountable.

    This is a small victory, but one shouldn’t let it misdirect from the larger profound issues.

    I’ve stated this publicly on more than one occasion. With respect to this case, in these two venues:

    With Katie Couric on CBS: http://www.youtube.com/watch?v=WiwZ2LfOO-c&feature=player_embedded

    and on Canada’s CTV: http://www.cbc.ca/video/#/News/Money/ID=1473248390

  16. curbyourrisk says:

    Sorry but $550 million is not enough as far as I am concerned. Hell…Tiger Woods has to pay $750 million settle his problems and he only slept around, not brought an entire financial system to their knees (maybe a few ex-pornstars to their knees, but not the enire financial system). As far as I am concerned GS should have had done to them, what Arthur Anderson went through. Back in 2007 when we first predicted all this made mumbo-jumbo at my company, the director asked us how long we would be in the funk, I said probably until 2013, or Goldman Sachs was destoryed…..which ever comes first. I still root for the destruction of GS.

    ~~~

    BR: Tiger signed a very severe prenup (his attorney must be an idiot). I’m not sure its a good comparison

  17. Marcus says:

    The markets are stranger than fiction.

    Goldman dropped 50 points during this debacle, from a $185 per share high in Mid-April to a July 1 low of $130. But GS has gained 15 points from July 1 until now. In the premarket GS is up 4%, right after the bad news hit.

    The silent, unseeing hand of the economy (and markets) move all.

    If Goldman was humbled, I want to buy some stock when they are at their lowest point. You can’t make this stuff up.

  18. HEHEHE says:

    Cramer spent at least a comical few day to a week defending Goldie before he changed his mind. I still get a chuckle remembering him miss-prounouncing the word Abacus repeatedly, it seemed like the entire CNBC newsroom didn’t know how to pronounce the word, which figures considering probably nobody there would know how to use one.

    That D&O Diary blog is da bomb. That guy did an amazing job tracking all of the Madoff litigation. Put Lexis, Westlaw, Bloomberg etc to shame.

  19. Petey Wheatstraw says:

    “This is a painful loss for Goldman Sachs, with expensive repercussions likely to last far into the future . . .”
    ____________

    As can be seen from the reaction of their stock price.

  20. The pundits may have been off base, but in my opinion, the public perceives this as a huge win for a despicable company that should have been forced out of business.

  21. rktbrkr says:

    PDS, we’re in the phase where Rs are going to vote against everthing and most Ds are going to vote for everything regardless of merits. No excitement where simple majority rules but filibuster rules turns everything into a dogfight, not wholesome overall but less damaging than the banks lobby paying for laws to suit their needs.

    Maybe we need a revolution, another 5-6 years of slow recovery, high unemployment, evictions etc, maybe we’ll get there.

  22. philipat says:

    Agreed as on record. They should have settled at the outset. Less costly and less reputational damge AND Wall Street noise. Which Law Firm?

    Sadly, this is probably not Blanfein’s last erection?

  23. Taliesyn says:

    Considering the hatchet-job that lobbyists representing financial institutions have successfully achieved on the so-called *Financial Reform* bill on top of this plum settlement with the SEC where GS admits no *wrong doing* while shelling out $550 ( as a return refund? puh-lease! ) one can wonder out loud just how long before the next financial aftershock hits due to practices of *no wrong doing* because it ain’t illegal. Hell the 2008 debacle was only 7 years after the Tech Bubble Burst. Lessons learned legislation anyone?

  24. philipat says:

    @Barry
    Kid D, I am trying to not confuse people, but since you. Brought it up:

    Don’t spilt your infinitives!!

    ~~~

    BR: Fixed (Damn Blackberry)!

  25. philipat says:

    As is “Trying not TO confuse”. Damn, we purists of the English langauge. Where is Safire?

  26. inessence says:

    I was on the trading desk when watching the live coverage when senior officers from Kidder Peabody were led out of their Manhattan offices in handcuffs. Same with Drexel et.al. This was in addition to large financial penalties. From mine and our firms perspective it gave us pause to understand that breaking the securities laws had sever consequences. Comparing Goldies transgressions, the (lack of) impact on its management and its business going forward, I view this incident and the SEC as toothless aggression. Fraud was committed but who is responsible? Lets see some individual culpability!

  27. sumo says:

    Sigh.

    >>Now Buffett looks like just another shareholder defending an investment, right or wrong. There is mud on his formerly squeaky clean reputation.>>

    *NOW*?? Moodys delays disclosure of adverse material fact – a Wells notice from the SEC – until after kindly old Uncle Warren sells. And you’re starting to be skeptical *NOW*??? Jeez…

    >> Those changes will probably lead to a new industry standard for disclosures in private sales of securities, even to the most sophisticated investors.

    Dream on. You think the finance lobby – the largest best funded lobby group in existence – will sit idly by at the Hamptons and let this happen? Bloomberg speculates and you take it at face value?

    >> The bottom line remains this is a black eye

    Please. You think GS didn’t trade the non-brainer pop in its own stock? And just before OpEx?

    And you’re in this business as a professional? Wow, just … wow.

    ~~~

    BR: First, You don’t hire influencers to lobby the SEC. They are a prosecutorial, not a legislative or regulatory office.

    Second, I don’t know what you have been the past 5 years, but you seem to have missed this, this, this, this, this, this and this.

    Oh, and I wrote in Bailout Nation, “Warren Buffett is the biggest shareholder in Moody’s and should consider himself lucky the scandal hasn’t tarnished his reputation [yet].”

    You apparently missed this quote about Moody’s:

    “Since I cannot put this in the book, I might as well toss it out here: All of these motherfuckers need to be thrown in prison, where they will be sodomized on a daily basis for the rest of their lives.”

    Oh, and there was this:

    “We should not have been. Buffett has been the biggest shareholder in Moody’s — a collection of filthy whores and pederasts who were one of the main contributors to the economic collapse — should have raised serious questions as to his judgment in our minds. That he sat by silently as they did their worst, sodomizing the nations credit system for fun and profit was a powerful indictment of Buffett as someone far different than his public persona. In retrospect, as Moody’s was helping to destroy America’s financial system, his merely spouting off aphorisms about about Financial WMDs now looks too cute by half.”

    But please, don’t let your colossal ignorance prevent you from offering an opinion . . .

  28. b_thunder says:

    I do not understand why “Warren Buffett …. His claim that GS didn’t commit fraud was wrong. ”
    Goldman did not acknowledge any fraud. And the fraud cannot be determined in court of law, because now there won’t be a trial.
    I’m not a lawyer, so please correct me if i’m wrong, but in the eyes of the law there was no fraud. So “good ol’ uncle” Warren was grossly hypocritical, but he was right!

  29. The Window Washer says:

    @b_thunder

    fraud: 1. crime of cheating somebody: the crime of obtaining money or some other benefit by deliberate deception

    Buffet isn’t a lawyer, though he tries to play one on TV, so you can presume he was using this definition in his PR work. He needs to be taken to task for his GS statements he either lied or was thoughtlessly using his image to manipulate public perception of GS.

    I started getting uncomfortable with Buffet in late 06 and sold my BRK in mid 08. He has a cult of personality now so I stay far away.

  30. Dennis the menace says:

    Oh snap Sumo you have been served!

  31. The Window Washer says:

    BAMMM!!!

    Sumo is out of the ring.

    Looks like Barry is in bitch-slap mode today. Ahhhh a lovely thing to watch.

  32. Whew! Glad I was on Barry’s side during this one. And thank my lucky stars I interviewed him as my key source ;)

    Barry, you’re the man.

  33. Mannwich says:

    Thankfully I didn’t listen to cognos on this one.

  34. mbelardes says:

    What?!?!

    [First, I want to say this isn't over. The Civil Proceeding is done and if a Criminal Proceeding is going to take place it will come later and without warning as a Grand Jury cannot discuss investigations. I have always felt that this Abacus Case was weak and merely being used as a "fishing expedition" by the DOJ to get facts/leads for a criminal investigation.]

    This is a win for Goldman and a win for Wall Street. A settlement means there are no articulated legal rules on the financial transactions involved that would lead plaintiffs to start slam dunking firms for losses. BP’s hiring Goldman to protect them from a takeover tells me they still command respect from corporate clients and while this incident hurts their image I don’t believe it will really hurt their bottom line over the long term (it certainly didn’t hurt their ability to influence FinReg). They will survive and move on where other firms would have been finished over this.

    Your claim of loss for Wall Street is based on … changes in disclosure policy? That stuff was implemented months ago out of fear of lawsuits.

    Why not settle for $20 million? Where did you get that number? Justice Jed Rakoff would have thrown that out and this would have been forced to trial like with Merrill/BofA. They settled because their lawyers pointed out that the volume of transactions they did like this means they better iron out all the legal points on all of thee transactions and settle with the SEC in a manner that protects them from coming under the gun for every transaction they ever did (Remember “shitty deals” and Timberwolf?). So GS is likely shielded on all other similar past transactions and the Legal Team gets to go pitch their legal strategy to the rest of Wall Street.

    Yeah, EPIC victory for the SEC we have here. The seem just as incompetent as ever.

    On the coverage, gimme a break. You yourself never really discussed the actual merits of the SEC case, facts that supported Goldman, or any of the real “inside baseball” of how these transactions go down and when is really required within the letter of the law (and before someone says “this isn’t a legal blog” Barry dropped the “if you aren’t a lawyer STFU” mantra and this is a legal case). Instead you took the “guilty until proven innocent” perspective (as did most readers in the comments) and now you want to say the Pundits mislead everyone? Call everyone else out but TBP didn’t exactly present an objective discussion of the case or inform and educate its readers.

    I got called a “Goldman apologist” for repeatedly laying out what was important. That’s fine. I’m not on Goldman’s payroll and I believe in firmly prosecuting violations (I actually posted how to really swing a bat on this under Civil RICO but was dissed by an “attorney”). But the SEC case was always weak. I said this as early as April 17th~24th. I still ask WHY NOT GO AFTER LEHMAN FOR REPO-105? I never pulled anything out of thin air and I actually consulted a former-US Attorney/now-White Collar Defense attorney, my corporate law professor that worked in structured products for an investment bank, and even went to a conference at my school that had Bill Lerach weighing in where he agreed the SEC has no teeth and Goldman will settle for a big fee.

    Anybody that actually practices, studies, or understands both financial transactions and securities law called this exact outcome months ago. It’s the Pundits and Bloggers with their biases that just got everything wrong. Objective understanding and reasoning trumps all. (See my comments on the 10b-5 post in mid-April).

  35. carrottop says:

    kudos for this post and your GS thread,
    yes,
    tv/newspaper is garbage,
    but then,
    we all moved to the internets,
    and so,
    whereas cnbc’s announcers r now “real food for the real guys”, “buy gold coins”,”the computer guy who teaches u how to use ebay”,
    bigpicture’s announcers r ING, Verizon, HP.
    sodomy aside (a sometimes loving activity),
    we need a comedy central of finance.

  36. The Window Washer says:

    @mbelardes Says:

    They settled because their lawyers pointed out that the volume of transactions they did like this means they better iron out all the legal points on all of thee transactions and settle with the SEC in a manner that protects them from coming under the gun for every transaction they ever did (Remember “shitty deals” and Timberwolf?).

    Did they get covered on all of these “types” of transactions? Every one was custom so it seems lawsuits will be shooting in every hole in the place looking for another weak spot and triggering other settlements with the SEC.

  37. Steve Hamlin says:

    @BR: “BR: First, You don’t hire influencers to lobby the SEC. They are a prosecutorial, not a legislative or regulatory office. ”

    Not correct. The SEC is both regulatory AND prosecutorial. And there is absolutely influencing going on toward the SEC to shape the regulatory interpretation and enactment of legislation.

    “The SEC’s four main divisions are: Corporation Finance, Trading and Markets, Investment Management, and Enforcement.” (Wikipedia)

    The CorpFin group can and does make regulatory policy by questioning filed financial statements and requesting or demanding additional information and disclosure, which then is applied to other companies’ 10Ks. There is intense pushback (aka influencing) from industry and its hired vendors (lawyers, accountants) on those points.

    “The Trading and Markets division oversees self-regulatory organizations (SROs) such as FINRA and MSRB, and all broker-dealer firms and investment houses. This division also interprets proposed changes to regulations and monitors operations of the industry.” Wall Street operations don’t attempt to influence this?

    “The Investment Management Division oversees investment companies including mutual funds and investment advisors. This division administers federal securities laws…responsibilities include…assisting the Commission in interpreting laws and regulations for the public and SEC inspection and enforcement staff;…and advising the Commission on adapting SEC rules to new circumstances.” Wall Street operations don’t attempt to influence this?

    The Division of Enforcement is the prosecutorial arm, that works in compliment to the other 3 mostly-regulatory divisions. Enforcement might not be lobbied in the traditional sense, but the other 3 divisions certainly are.

    ~~~

    BR: You are correct, and I was imprecise.

    To refine my statement: This was an action out of the prosecution’s enforement division. You don’t lobby them. (A very good attorney can convince them thei case is weak, but that is not the same as lobbying)

  38. lalaland says:

    If only I could get John Boehner to comment on the site today…

  39. I am very comfortable being in the minority on this — the way I was back in April.

    These represent the consensus viewpoint, which I believe is misguided:

    Can You Hear Goldman Laughing?by Tunku Varadarajan
    http://www.thedailybeast.com/blogs-and-stories/2010-07-16/goldman-sachs-pays-small-sec-fine-and-nothing-else/full/

    Settlement Is Win for Goldman Despite Record Fine By: John Carney
    http://www.cnbc.com/id/38268903

    FinReg in the Bag, Goldman Goes Free By Dan Freed
    http://www.realclearmarkets.com/articles/2010/07/16/finreg_in_the_bag_goldman_goes_free_98578.html

    Goldman’s win Felix Salmon
    http://blogs.reuters.com/felix-salmon/2010/07/15/goldmans-win/

    Of the major media coverage, only Bloomberg seems to have gotten it right:

    Goldman Sachs ‘Victory’ Ushers Change for Wall Street
    http://noir.bloomberg.com/apps/news?pid=20601087&sid=aHa9PYGHfRFU&pos=1

  40. plantseeds says:

    • The latest brain dead spin: “The settlement is only the price of a few days’ revenue.” See here and here. This is a classic example of conflating two unrelated issues: 1) The biggest SEC settlement ever; 2) GS is an incredible money machine. But the latter says absolutely nothing about the former. The bottom line remains this is a black eye, and an early Christmas present for the litigators who represent Goldie’s clients who lost money on CDO deals.

    Don’t be ridiculous….your latter has nothing to do with the former either…who cares about litigators and what does that have to do with anything?
    “”A lawyer with his briefcase can steal more than a hundred men with guns.” – Mario Puzo

    Goldman is already the most hated on the street so if you’re going with GS or thinking of it you already know the reputation, it ain’t nothin’ new.

    The REAL bottom line is always…..(drum roll) ….Net income – who cares about black eyes and other speculation. People suddenly have morals now? Greed is passé? I’m not buying that for a second.

    Fact ….the settlement amount represents .3% of the current cash position which by the way, increased $17 billion from q4 ’09 to q1 ’10 to $236 billion.
    Time will tell how the brand was damaged but I think this just feeds the legend.
    For some reason everyone “loves” Vito Corleone.
    Media pundits, talking heads, and other fools are now scrambling to save face, it’s too soon to say at this point who’s who.
    “Mistakes fail in their mission of helping the person who blames them on the other fellow. “ -Henry S. Haskins

  41. curbyourrisk says:

    Without handcuffs and orange jumpsuits this is still not enough to prevent GS from acting this way again. It might stop some of the smaller guys, but not a behemouth like GS.

  42. [...] steered you wrong on Goldman?  (Big Picture also Jeff [...]

  43. mbelardes says:

    @The Window Washer

    “Did they get covered on all of these “types” of transactions? Every one was custom so it seems lawsuits will be shooting in every hole in the place looking for another weak spot and triggering other settlements with the SEC.”

    I do not have any direct experience with settlements with the SEC but my understanding from professionals I have spoken with is that in negotiating a settlement on a civil suit from a government agency the corporation will be sure to settle in a manner that deflects exposure to further suits on similar matters or encompasses all similar violations.

    My point was merely that GS likely had numerous instances of the “Magnetar Trade” where disclosure was blurry at best and this settlement is likely to cover all of them so that the SEC doesn’t just turn around and sue them again for Timberwolf or whatever else is out there.

    After posting I thought it would be misinterpreted when I state it’s a “win for Wall Street” that I mean no other firm will face a legal suit. That is definitely not what I meant. My point was just that now many firms will settle similar suits easily by hiring the same lawyer(s) and making the same points rather than have to go toe-to-toe with the plaintiffs bar using newly clarified legal rules had Goldman been forced into court.

    That said, I think we still might see a criminal fraud suit somewhere against somebody at some firm. I mean, it’s crazy if we don’t. But I really don’t have high expectation for Eric Holder’s DOJ at this point.

    And Civil RICO would be a very interesting case if they took Credit Rating Agencies, Investment Banks, Hedge Funds, Accountants, and Lawyers and lumped them all together as a racket. That would be an impossible case to push, it would have to come from the top from someone with guts, and I doubt it would ever happen. Hmm … it would make an awesome movie though…

  44. dsawy says:

    1. Paying the highest fine in the history of the SEC. This is meaningless if the prior fines were so small as to make a not-as-small fine look big.

    As you yourself have railed, the SEC has been asleep at the switch for years and years. In those years, they were handing down puny fines and settlements. Doubling something puny still gives you something small.

    If the took the fine up into an area where it is described as “X Billion” (with a B), then people would have really sat up and taken notice. This is a mental thing, especially when these big banksters are making earnings in the billions. Millions just doesn’t hit home when an outfit is making more than $10B per year.

    2. “It takes only a few days to make that back… conflating two issues.” No, I believe you’re overlooking the bottom-line (literally) issue. Money is fungible. OK, so this group inside Goldman just cost The Squid a nice bit of folding money, but on the whole, they can make that back.

    It won’t make a difference to outfits like the Squid until the numbers that rattle down to the bottom line leave a mark. And the reason why it won’t is this: Until the overall profits are decreased by one of these settlements, the rest of the company continues to get their fat-assed bonus at the end of the year. What will really bring this home to these clowns is a settlement or fine so large that, hey, guess what people? It doesn’t matter whether you were involved in the particular scam the SEC was investigating, all of you Squids, no matter what group or division, are going to suffer a decreased or non-existant bonus at the end of the year. ALL of you.

    That will change the culture on Wall Street. This has been true forever in large group dynamics. There’s a reason why drill instructors make the entire platoon bust a gut when one wise-ass screws up: it is because the DI knows that the next time Mr. Wise Ass thinks he’s going to pull a prank or shoot off his mouth, the DI won’t need to lift a finger, because everyone else in the platoon is going to beat Mr. Wise Ass down.

    It works this way in large industrial shops, too, but with the carrot instead of a stick. They use end-of-year safety bonuses. If your shop, mine site, refinery, etc can go an entire year and have no “lost time” accidents, there is often a tidy safety bonus handed out to all employees. Want to guess what happens to the one dipstick who thinks he’s going to take a safety shortcut? They don’t get beat up, but they get a real warning from their co-workers: “You cost me my safety bonus with your shortcuts, and we’re going to have words….”

    If the SEC wants real culture change, they’re going to have to find a way to invoke this peer pressure from the outside. The only way I see this happening is to make one of these scams cost everyone their year-end bonus.

    3. Buffett: On the strength of your analysys against The Squid, I rather thought this was coming. I’m now long clear of any shares in BRK. You’re the man, BR.

  45. wngoju says:

    BR – a great post, thanks.

  46. Danny Black says:

    Investors weren’t made whole. ABN lost around 800 million and got 100 million. IKB got 150million and ACA got zip and as was pointed out to you back when you made this “brave” annoucement that GS would settle, virtually all of these prosecutions settle. GS explicitly DOES NOT admit “misleading investors”, it merely notes – and “regrets” – that the documents were incomplete and contained a mistake.

    GS also agrees to add some more boilerplate and more committees to generate more documentation for the boilerplate.

    Hardly the slam-dunk you were predicting back in April but then I wondered why you weren’t willing to bet that the SEC would take this to court and win given how bullish you were……

    ~~~

    BR: The biggest settlement in SEC history? What would it take you to think ANYTHING was a slamdunk ?

  47. Ted Kavadas says:

    Interesting post.

    The main question IMHO is whether this is the “beginning of the end” for these types of investigations / prosecutions or the “end of the beginning.”

    In an era of immense profits for investment banks and steep losses for many investors, needless to say there can be different “interpretations” as to whether risks were properly disclosed, whether there were conflicts of interest, etc, etc.

  48. Danny Black says:

    Maybe a payout that wasn’t made back in market cap during the time it took to announce the deal? Maybe some sort admission of having done something wrong as opposed to being sorry about omitting some information?

    PS love the way that in order to spin this as the “biggest payout in SEC history” we have to ignore inflation… I mean Milken by himself paid 400million USD back in 1990.

  49. Transor Z says:

    I think $550 mil is a respectable fine. GS’s concern is its reputation, which has been trashed over the past year. Khuzami wouldn’t let them off with a general non-admission but required them to admit the truth of a core allegation: that the ABACUS marketing materials should have notified investors of John Paulson’s role. Remember that GS and its panel o’ punks before Congress denied that up and down: “Everybody knows there’s a counterparty in the background taking a short position on CDOs,” they kept saying, going so far as to suggest that it was normal for that short to be involved in the portfolio selection process and that the burden of due diligence is 100% on the portfolio manager and investors. And remember they also tried to play semantic games with “selected by.”

    This admission is inherently an admission that GS wasted everyone’s time with a bullshit dog-and-pony show performance before Congress. Yes, of course we all “knew” that was the case at the time, but Khuzami just made them write it on the chalkboard 550 million times. I don’t think this is a trivial settlement at all.

  50. Patrick Neid says:

    To boldly go where no one has gone before….

    Forget the Goldman b.s., no one will remember a thing about it except for a reference point for future fines but the “split infinitives” mentioned above led me down an interesting hole where everyone get’s to be right!

    …..”Some English teachers believe that thou shall not split infinitives was written on the stone tablets that Moses carried down from the mountain. Breaking the rule, in their eyes, is equivalent to killing, stealing, coveting another man’s wife, or dishonoring one’s parents. If you have this type of English teacher, then don’t split infinitives!

    Other folks, however, consider the split infinitive a construction, not an error. They believe that split infinitives are perfectly appropriate, especially in informal writing.

    In fact, an infinitive will occasionally require splitting, sometimes for meaning and sometimes for sentence cadence. One of the most celebrated split infinitives begins every episode of Star Trek: “To boldly go where no one has gone before ….” Boldly to go? To go boldly? Neither option is as effective as the original!

    When you are making the decision to split or not to split, consider your audience. If the piece of writing is very formal and you can maneuver the words to avoid splitting the infinitive, then do so. If you like the infinitive split and know that its presence will not hurt the effectiveness of your writing, leave it alone.”

    http://www.chompchomp.com/terms/infinitive.htm

  51. Here is what GS might be looking at in the future:

    A.I.G. to Pay $725 Million to Resolve Fraud Claims
    http://www.nytimes.com/2010/07/17/business/17aig.html

    American International Group, the troubled insurance giant, has agreed to pay $725 million to settle a long-running securities fraud lawsuit led by three Ohio public pension funds in one of the largest settlements of a class-action case ever in the United States.

  52. [...] settlement will be a net positive for Goldman.  Felix thinks it is definitely a win for Goldman.  Ritholtz disagrees.  Tom Adams (on Naked Capitalism) is somewhere in-between.  For what it is worth, I am inclined [...]

  53. The Window Washer says:

    Barry,
    It looks like you have something to sink you teeth into here. You’re working on the video idea somewhere, how about a series on legal issues like these and how enforcement can force changes (Now that we know finreg is a joke).
    This post pushed the limit of your blog, a wider format from someone like you would be great. Get together a legal team for a charlie rose type chat.

  54. The Window Washer says:

    @mbelardes

    “I do not have any direct experience with settlements with the SEC but my understanding from professionals I have spoken with is that in negotiating a settlement on a civil suit from a government agency the corporation will be sure to settle in a manner that deflects exposure to further suits on similar matters or encompasses all similar violations.”

    Thought you meant something like this.
    Considering the way these products were created and held, SIV’s and off book, I’m wondering if a “all similar violations” will have the legal cover it used to.

  55. Shah F says:

    “Paulson, by implication, earned his money on the ACA trade thanks to Goldman’s misrepresentations, rather than his shrewdness. The settlement thus tarnishes the popular myth that the subprime shorts were insightful outsiders who executed “the greatest trade ever”. Paulson’s purported $1 billion in profits from this ACA deal depended, in part, upon inaccurate statements made by Goldman for his benefit. In effect, Paulson’s gain cost Goldman $550 million while the parties on the other side of Paulson’s trade (the ones that are still around, since ACA is defunct) got most of their money back. This implies that had Goldman not made the inaccurate disclosure about the deal, the investors might not have bought the bonds and Paulson would not have made such a killing.”

    Completely wrong. ACA was a well known investor in subprime mortgages. Their business consisted of putting their money into these things. From the SEC complaint:

    “27. On January 9, 2007, GS&Co sent an email to ACA with the subject line, “Paulson Portfolio.” Attached to the email was a list of 123 2006 RMBS rated Baa2. On January 9, 2007, ACA performed an “overlap analysis” and determined that it previously had purchased 62 of the 123 RMBS on Paulson’s list at the same or lower ratings.”

    They knew what they were getting involved in. They had already invested in over half of the instruments in Paulson’s list. No deception was needed to get ACA (which took a 90% stake in the deal, practically all of it) to commit their money to this deal because they were avid purchasers of these types of mortgages. They were stupid and Paulson was smart. End of story.

  56. [...] article at The Big Picture has a different view than I have expressed in the above discussion. Ritholtz [...]

  57. [...] noted Friday, this now opens Goldman to all manner of civil litigation by clients. I have no idea what the final [...]

  58. FrancoisT says:

    “What sort of bad legal advice did they get, and from whom?”

    Here’s an amusing factoid: Blogger Economics of Contempt is a structured finance lawyer (who was on the “This is a weak case” camp BTW) and gaves this advice to Goldie (free of charge mind you!) text in [ ] is from your truly

    My sense is that they’re thinking, “You know what? The know-nothing talking heads can get all huffy if they want, but we’re right, and they’re wrong, and we’ve had just about enough of this shit. We’re taking it all the way!” [Cue the rah-rah blast emails.] While I kind of sympathize with that view (emphasis on “kind of“), I also think it’s incredibly short-sighted. Sure, having attention-hungry idiots constantly vilify you in the media eventually gets to you, but it’s still just words. This is the first time all that nonsense [not so much as Barry demonstrated, hmmm?] has turned concrete and hurt Goldman monetarily, not the culmination of some long series of events which has forced them to draw a line in the sand. So take a deep breath, and realize that this can either be a one-month story that you lose, or a two-year story that guarantees a steady stream of negative publicity and wears on morale, but that you win. Take the blue pill.

  59. [...] Goldman are more chastened than we realised. Maybe, even, Barry Ritholtz was right. Maybe we’ll all get more clarity on this during Tuesday’s Q2 conference call., due at [...]