In last year’s grand legal battle, Goldman Sachs allowed a minor case of misrepresentation in a sale of mortgage backed securities to a sophisticated investor to become a calamity. The end result of the Abacus case was a record setting $550 million dollar SEC fine.

Last week, Senator Carl Levin released a massive report on the credit crisis. He suggested that the committee might refer their report to the Justice Department for consideration of criminal charges of Perjury or Obstruction of Congress.

When the Abacus case was pending, I warned Goldie that it was a slam dunk case of violating black letter security law. Had they not listened to the crowd, they could have saved about a half a billion dollars in fines. This current issue is far more murky; I would suggest against settling it, and I would be much more willing to fight criminal charges.

This post marks the very first time I ever found myself advising Goldman Sachs not to settle.

The prosecution will turn on the language Goldman’s CEO and CFO used in describing the short bets GS made against the residential mortgage market while selling similar investments to clients. That turns out to be far more ambiguous than you might surmise. This is a much harder case to prove than the “material misrepresentation” of the Fabulous Fab case.

Consider the following:

• Goldman is a huge firm, with many different divisions, proprietary traders, and hedging strategies. Think of them as 100 hedge funds together under one roof. The firm does not have a single coordinated position.

• At various times, GS was simultaneous long and short positions in mortgage backed paper. But at various times, the firm was also simultaneously long and short in various stocks, bonds, etc.

• Different traders may have put on short trades against residential real estate, but that was their own trades. In a firm made up of traders, there is a difference between a firm position and an individual putting on a trade.

• Until the year 200X, GS the firm had no official position on the mortgage market. They will argue that once they decided, on a firm wide basis, to get out of the mortgage market, they began to wound down their sales to clients.  This was a process that took about 6 months, and there may have been some overlap.

Dealbook notes that the governing statute is 18 U.S.C. § 1515(b), and it states “acting with an improper purpose, personally or by influencing another, including making a false or misleading statement.”

Thus, the “improper purpose” turns on the intent of the witnesses in front of Congress. In order to succeed at proving this was criminal, the prosecutors would need to show a clear intent. The full testimony of Blankfein would need to be considered, and include the overall frankness of what was said. A jury watching the entire testimony is likely to find it challenging to reach that conclusion.

To the prosecutors, I would exhort that there is so much low hanging fruit in terms of bank fraud that you should focus your efforts there: There was “Origination Fraud” that took place; Nonfeasant Regulators who refused to do their legal duty because it disagreed with their personal philosophy. MERS engaged in dubious behavior that can best be described as “Extra-Legal;” Foreclosure Fraud remains rampant; All prosecutors need to do is follow the money to see how systemic bank fraud contributed to the financial crisis.

But Blankfein’s testimony? That is going to be a more challenging case to make . . .


See also:
Finding Goldman at Fault in the Crisis
NYT, APRIL 18, 2011, 12:59 PM

Category: Corporate Management, Legal

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.

27 Responses to “Goldman Sachs Criminal Case? Not Much There…”

  1. keithpiccirillo says:

    Squidward has inveterate flexibility to keep adverse legal decisions at bay.

  2. Moss says:

    Perhaps the internal communications and other records are more damaging. Why would this rumor about Blankfein on his way out surface? Most likely a trial balloon to determine if his hide would serve as collateral for their misdeeds.

    Not sure TBTB want to acknowledge and therefore prosecute the systemic bank fraud. This would be an indictment of the whole system. The squid is so high profile and everyone loves to hate them.

  3. dead hobo says:

    You appear to be suggesting a new standard in law enforcement and economics: To Big To Manage. Once a firm reaches this size threshold, cultivated ignorance and stupidity becomes a defense for bad acts.

    Did anyone testify falsely to Congress but later issue a correction after they realized they were ignorant of the facts, assuming ignorance was the true reason for the false statements? If not and if there is no prosecution, then will they invoke the “Pardon Me, I’m Just Clueless” defense and expect everyone to let them off the hook?

    Too Big To Manage looks like the new PR campaign to let GS get away with it. Maybe they should hire Ex-Gov Blago to champion their cause, as he appears shameless and tireless and that is exactly what GS needs here.

  4. Petey Wheatstraw says:

    Ambiguity in our laws makes plausible deniability possible.

  5. Transor Z says:

    The firm does not have a single coordinated position.
    Was the firm’s trading organized as a sophisticated hub-and-spoke operation? Clearly, firm-wide controls had to be in place re: such things as distribution of VAR and this had be centrally managed.

    Until the year 200X, GS the firm had no official position on the mortgage market.
    Key word here is “official.” There is a lot of anecdotal evidence of activity to the contrary. Will it add up to a de facto position when you put it all together? I dunno.

  6. Jim67545 says:

    BR you describe GS as 100 individual traders and the difficulty in proving that the individual actions of some traders represent a stated policy of the company. You suggest that they prosecute mortgage originators, among others.
    I believe prosecutors will have the same problem with originators. There were tens of thousands of originators, each acting individually. Second, there were possibly lying loan applicants, defrauding originators, influenced underwriters, “cooperative” appraisers, naive product underwriters and the overarching issue of change (deterioration) in the borrower’s circumstances over time. So, “blame” for default in each individual case might lie in any one or all of these areas and offers unlimited opportunity for obfuscating the situation.
    Is a rogue originator who submits inaccurate information symptomatic of the company? How about an underwriter that believes that lax underwriting is a condition of continued employment? Is that company policy? The connection needs to be made. Does a company that decides to originate NINA mortgages (often for competitive reasons) legally responsible when these have higher delinquency rates? Or, is it just a poor decision on their part as it relates to risk in an environment when home values seemingly had nowhere to go but up?
    If they couldn’t convict Mozillo they won’t be able to convict any originator.

  7. dead hobo says:

    Too Big To Manage could also be referred to as the Sgt Shultz Defense … “I Know Nothing.”

    I don’t plan to get worked up over this. Of course Uncle Stupid will let GS off the hook. Wall Street corruption is pervasive in Washington. I have no doubt that few substantive discussions are being held at DOJ. Minor functionaries are holding the few discussions that are occurring. They will be told to study the problem in full detail. The completed analysis will be sent back to said functionaries or new ones fur further study. It will end up as some old fart’s last project before retirement.

  8. Jim67545 says:

    Let me rephrase the last line:
    If they couldn’t convict Mozillo they won’t be able to convict any company which originated mortgages.

  9. dead hobo says:

    Transor Z,

    You are falling into the GS trap of letting the defense define the prosecution. That’s how OJ got off in the murder trial while making the prosecution look like public embarrassments. It’s really simple. Did GS make false statements? At what point did they realize they were false statements? Did they issue corrections when they made this realization? If no correction, then this is perjury. If intentional false statement, then this is perjury.

  10. Petey Wheatstraw says:

    As with corporate profits, actions by individuals should taint the entire organization. Should.

    It’s all academic anyway — the corporatists hold every office of power. They will neither police nor hold themselves accountable.

  11. curbyourrisk says:

    The reason that US courts have almost a 99% conviction rate is because everyone charged with a crime, is also charged with the conspiracy to commit that crime. This way, if they can;t get you on the actual charge….they nail you on the conspiracy to commit the crime.

    Screw Goldman and charge each of them on both the crime and the conspircay to commit that crime. Tehy all deserve to go to jail, and I can;t think of a better bunch to get what they deserve.

    Go ask Martin Armstrong how the .gov nailed him…. Goldman can be gotten…. And for that matter so can JPM, BAC, WFC, ……… adn the rest of the criminals.

  12. Irwin Fletcher says:

    Unless you have worked at GS you don’t really know how it works. There’s no criminal case.
    Levin is an idiot, by the way.

  13. Petey Wheatstraw says:

    That the right hand did not know, or can deny knowing, what the left hand is doing, should not excuse the body from responsibility or punishment. You are either a corpus (in the original sense), or you are not. Ignorance of criminality by one’s own body parts isn’t an affirmative defense.

    Irwin Fletcher:

    The same can be said of any scam enterprise: Until you are in on the scam, you don’t know how it works.

    So have you worked at GS? If so, please tell us how “it” works.

  14. wally says:

    “But at various times, the firm was also simultaneously long and short in various stocks, bonds, etc.”

    Internal inefficiency.. a net zero position. (Much like a State that elects one repub and one Dem Senator). Legal issues aside, a firm should have some sort of internal sweep that would recognize head-to-head positions within the firm… but maybe that is not possible in so large a firm with so many head-to-head egos. In that case, too-big-to-manage is the correct description.

  15. dead hobo says:

    Last post:

    So, the correct question for GS is …

    Are you too big to manage or are you lying?

  16. wally says:

    “Are you too big to manage or are you lying?”

    To simplify: Stupid or evil?

  17. I was under the impression that GS’ CFO is ‘on record’ speaking of “net Short” (RMBS, and the ilk)..

    this: “…Think of them as 100 hedge funds together under one roof. The firm does not have a single coordinated position…”

    may be some nice ‘Defense Attorney’-posturing, but it doesn’t square with, as Transor, above, points out, “…Clearly, firm-wide controls had to be in place re: such things as distribution of VAR and this had be centrally managed…”
    though, past that, as I. Fletcher, above, posits: “…Unless you have worked at GS you don’t really know how it works…” — GS is a huge Firm, to think it’s run according to any ‘Textbook Model’ (and, thereby, valid assumptions can be drawn) is not to be *Thinking..

  18. Equityval says:

    This seems to turn on semantics if you read the Dealbook piece.

    The facts seem to be that Goldman decided in late 2006 that there was a big problem in the housing market and they needed to hedge their exposure. They did that and, according to Dealbook, eventually established a $500MM short position. To most of us, that is a big position, but in a firm the size of Goldman, it is hardly “massive”. Consider the amount of mortgage debt they were long in 2005 or 2006 and it doesn’t really look extraordinary. Compare their short position with those that John Paulson or Michael Burry had relative to their capital bases – those were “massive”.

    Blankfein’s language in front of Congress may have been artful and appears to have spun the facts differently than he did with other audiences (shareholders and employees). From where I sit, Goldman should have been proud of the steps it took to hedge its mortgage exposure – it figured out the impending crisis (a little late, but in time to do something about it) and took appropriate action to protect their shareholders’ capital which is more than most of its peers on the Street could say. It is certainly understandable why he wouldn’t want to overstate those facts in front of a blowhard like Levin with his “shitty deal” show trial.

    BR is right, there are much better targets to go after than to worry about parsing the semantics of Blankfein’s testimony. Unfortunately, too many people in Congress are worried about the optics of issues rather than the substance. Is it any wonder we have so many problems as a country and so little respect for Congress?

  19. carleric says:

    I think most thinking people are aware of the incestous relationship between the federal government bureauracies, the Federal Reserve and Goldman Sachs….Paulson, Geithner, Greenspan, Bernanke, etc. However, the “investigation” is nothing more than a diversion….See, “we are after Goldman” which is throughly hated by Main Street. Its popular and pandering of the highest order. If anyone thinks anything will result from this they are incredibly naive.

  20. AHodge says:

    i m with you
    which is worse
    selling bad stuff to the low end of your customer food chain–goldman
    or selling magniturdes more toxic stuff, bankrupting your own company–most other TBTF

    which is worse
    making big bucks with sharp practices running a tight company
    or running a badly accounted out of control operation that goes bankrupt at taxpayer expense
    while taking down 8 figure bonuses

    goldman was easier for dumb prosecutors because the company made money doing this
    the defence now is
    take a bonus let your company blow up and say
    see we didnt know either
    the rest of wall st is jealous of GS
    and at some dim level knows their methods are the future of the business
    they were angry Goldman was trying to fix the bad accounting-which is the main way the dopes make money.
    they have won there
    goldman has backed off accounting reform

  21. AHodge says:

    excuse the magnitudes typo,
    but maybe i like magniTURDS better

  22. AHodge says:

    I not with GS having less trader oversight than others
    to the contrary they have far more top level oversight and management of risk than all others except perhaps JPM
    with a unique workable VAR system they have in near real time what the actual marked net company position on everything is, what 20 different traders are doing in, say, south african Rand.

    i will say they are probably lying about what was hedged and unhedged, claiming they lost money on the prosecuted Fabre trades. thats the defense “we lost money” forget the hedges (or for others the earlier bonuses). it is malfeasance for prosecutors to implicitly accept that defense

  23. Transor Z says:

    I disagree with Equityval’s comment at 10:01 am but, to be fair, it is a cogent and thoughtful comment.

    I agree in a sense with Dead Hobo’s response to my earlier comment when he cautions that the defense (i.e., GS) should not be allowed to define the parameters of any criminal investigation and whatever might follow from that.

    Remember that criminality, to the extent any may exist, is an injury to society. Lying is not always criminal. In law we use a cute word — “puffery” — for a particular species of lying, which is basically the inevitable exaggerations of salesmanship. Puffery lives in caveat emptor land, not fraud land.

    In my view, injury to society may have been done to the extent (if any) that GS (1) as peerless students of economic history and finance knowingly supported the inflation of the global credit/asset bubble; (2) identified an approaching “peak” with characteristically good precision (perhaps belying a characteristically good “exit strategy” from the Bubble) and took steps to unload its RMBS exposure at all costs, including, perhaps, going beyond “mere puffery” into a different level of misrepresentation.

    In the Wild West created in the wake of repealing Glass-Steagall, society at large clearly stands to benefit from spending resources to investigate and prosecute possible crimes at institutions whose actions can bring down entire governments and decimate entire industries and communities. In fact, it is the height of prosecutorial nonfeasance not to do so.

    I’m afraid our expectations are too influenced by the dramatic arc of one-hour crime dramas like Law & Order. Law enforcement needs to respond with resources and urgency proportionate to the seriousness of the possible crime. The collapse of bubbles of such huge scale, without exaggeration, can cause wars.

    I understand that some people are so cynical that they see every high-profile prosecution as purely politically or financially motivated, skins on the wall for ambitious people, whatever. But life isn’t quite that simple either.

  24. AHodge says:

    as for prosecuting dont forget your beautiful 10b-5
    and insider trading for anyone that cashed big stock or options early like Mozilo and Killinger.
    no precedent for this but no big mess like this before either?
    INAL but looks like it could work to me, esp for mozilo who was actually warning everyone by July 2007 while unloading his stock

  25. budhak0n says:

    Matt Taibibi’s a shmuck… I like Eliot but me thinks that perhaps somebody on the inside at GS had something to do with making his “thang” a bit bigger than it had been….

    They’ve got nothing on Goldman and just would be conducting a little bit of a scapegoat sideshow.

    Frankly it’s a waste of taxpayers resources. But if they want to waste everybody’s time and money, what else do they have to do? Go right ahead. It’ll be a complete sideshow with no convictions but my guess is people in these “government” positions don’t have anything better to do with their time.

  26. Jim67545 says:

    BR. Actually there WERE thousands of underwriters. You are thinking “underwriter” as in Lehman underwriting MBS. I am thinking “underwriter” as the individual at each of the investors (Countrywide, Wells, and on and on) who underwrote the individual loan as being suitable for sale into the secondary market. In many cases these were at least initially subject to an automated underwriting system such as Desktop Underwriter but then these were designed by a team of underwriters at Fannie or Freddie.

    Also, underwriter and originator are two different folks.

    I might also add that the practices permitted by the investors’ (Fannie, etc.) underwriting guidelines give further cover to anyone being accused of fraud. For example, it was perfectly permissible to submit a mortgage application for only one spouse and completely ignore the other. That struck me as suicidal since the spouse might have horrible credit (usually the case), be the owner of an unprofitable business, or perhaps be subject to litigation, etc. In any such cases to pretend that one spouse’s problems won’t affect the financial condition of the entire family is plainly stupid.