Now for a few words about Goldman Sachs Group Inc. and the Securities and Exchange Commission complaint that accuses the firm and one of its young guns of fraud for constructing a synthetic housing-market bond that was sure to fail, selling it to a valued customer who specifically didn’t want that type of bond, conspiring with a short seller of bonds to create a vehicle for his firm to make money from the security and tricking a rating firm into approving it.
If these allegations are true, and maybe they aren’t, this is simply the worst behavior in finance by a large firm I have ever seen. I taught securities law for six years. I wrote about financial fraud for Barron’s and the New York Times for many years.
I have never seen such a blatant disregard for ethics, and possibly the law, by a large Wall Street firm as is alleged in this case. I wrote about wrongdoing by Drexel Burnham Lambert Inc. in the 1980s and helped bring it to justice and then helped taxpayers recover money the firm had stolen. I never saw at Drexel the level of outright contempt for law that Goldman’s Fabrice Tourre and his colleagues showed in this case, if the facts are as alleged -- and again, they may not be: allegations aren’t proof.
That said, Goldman Sachs has many thousands of employees. I am sure most are fine people. I know some of them and they are, indeed, good people.
But the story of how this Abacus deal happened raises some desperately important questions:
1. Why didn’t the SEC accuse the short seller, John Paulson, of wrongdoing as well? Is he a government witness? Is a disgruntled former Paulson aide a government witness? How many other deals allowed Paulson to pick and manage the contents of the bonds he shorted? If there was one, it is a little hard to believe there was only one.
2. If there were other similar deals, how much did their flimsy construction and Paulson’s ability to short them with credit default swaps spook the market and create the panic that led to the Wall Street meltdown of 2007 and 2008. How much did Paulson’s and Goldman’s alleged mischief contribute to the current recession? How much did crafty Goldman behavior contribute to the demise of Lehman Brothers?
3. The complaint alleges that Goldman’s management was kept apprised of what Tourre was doing and approved of it. If this is so, why aren’t they named in the SEC’s complaint?
Rigging the Game
4. Many have expressed amazement about Goldman’s ability to post record profits during the current hard times. Is the price- fixing and game-rigging described in the SEC’s complaint a way that Goldman Sachs rings up its huge “trading” profits? Drexel made stupendous profits by controlling the buyers and sellers of its bonds. Was Goldman doing something similar? More mystifying, how did Goldman manage to lose money, as the firm claims, on this deal when it was running every aspect of it, as the SEC alleges?
5. Much is made in its annual reports of “the Goldman Sachs culture” of duty to the client. Now we have a good idea of what that culture may have been in some cases. What, if any, training in ethics is done at Goldman Sachs to ensure that following the law and serving clients come before the firm’s own profits?
6. If Goldman can make money by creating a scam synthetic security, as the SEC’s complaint alleges, and then make more money by co-operating with short sellers to demolish that security and consequently attack the industry around it -- in this case, housing -- is there anything Goldman can’t do? Is there no limit to how anti-social and unpatriotic traders and underwriters can be? Or is it all about making the quick and immense buck? That is, in a world in which young Americans are fighting terrorists in Iraq and Afghanistan, is there any limit to what financiers here at home can do? And if there aren’t adequate limits, why don’t we have them, and soon?
(Ben Stein is a lawyer, economist, writer and actor. The opinions expressed are his own.)
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