In a party line 3-2 vote SEC commissioners voted to sue Goldman Sachs. The SEC charges that Goldman fraudulently represented to investors that the mortgages underlying one of its residential mortgage-backed securities were being selected by an independent third-party. The mortgages, however, were selected by Paulson & Co., a hedge fund that also took a $15 million credit default swap position betting against the same residential mortgage-backed security.
The Epicurean Dealmaker puts the whole fuss wittily into perspective.
I have been reliably informed that something scandalous has recently been unearthed which involves a recurring target of Your Formerly Diligent Blogosopher’s ruminations. I even believe the word “fraud” has been bandied about liberally.
Given that a) I have been occupied elsewhere, and b) I really couldn’t give a flying fuck in a rolling donut whether the Great Vampire Squid of West Street (new digs, natch) vanishes into the singularity or not, I frankly have not paid much attention to the scandal beyond a cursory perusal of the headlines and a couple of blog posts. Honestly, life is just too short.
However, in the spirit of duty which compels Your Humble Servant to satisfy every bloggy whim my Peremptory Audience demands of me (and also because Natasha has temporarily left the hotel room to get more caviar and ice cubes), I will make the following brief observations:
The parties which Goldman supposedly defrauded were large and supposedly sophisticated financial institutions. The managers of these institutions were or should have been paid quite large sums of money to, among other things, protect their stakeholders from fraud, unethical sales practices, and general office supply stealing. I have no sympathy whatsoever for the knuckleheads at ACA or IKB. And, frankly, neither should you.
Whether the alleged fraud rises to the level of an actionable civil claim or simply represents unethical behavior is a question for a court of law. I am not qualified to judge, but the criteria which ultimately determine the nature of Goldman’s alleged offense will be legalistic ones, akin to judging exactly how many mortgage CDO investors’ brains can be fitted onto the head of a pin. While the answer may be definitive, it will not be particularly revealing to the vast majority of us who live outside the cloistered halls of Americus Litigalis.
I must agree with Felix Salmon and others, who claim that the real damage to Goldman Sachs has already been done, with its formerly venerated name being dragged publicly through the mud with an accusation of fraud. While this may have little effect on the majority of Goldman’s business on the sales and trading side of the houseâ€”where counterparties are generally too smart to raise a stink about the 800 pound gorilla of the global financial markets (and often too unprincipled themselves to care) â€” it should and will have an effect on Goldman’s extensive investment banking business with governments, corporations, and other entities.
The Squid has been living for years off the simple fact that, like the fabled IBM of yore, no-one ever got fired (or sued) for picking Goldman Sachs. That calculus has been changed, and I and every one of my red-blooded peers in the industry who is not currently drawing a paycheck signed by David Viniar are making damn sure that CEOs, CFOs, government officials, and Boards of Directors know it. For those of you who were wondering, this is the real reason why Goldman’s market capitalization has taken the vapors to the tune of more than ten billion dollars in response to an action likely to cost it no more than a tiny fraction of that amount: its reputation premium is quietly and rapidly evaporating. There is no shortage of competent investment banks and adequate investment bankers available to conduct the financing and M&A business of the global corporate and government economy. No longer can Goldman rest assured that it will win mandates simply because it is Goldman Sachs.
Hat tip to Walter Olson.