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The SEC dropped a bomb last week by leveling a complaint against Goldman, sending shivers to the financial services sector on the possibility of industry wide investigations. Essentially, the SEC argues that Goldman should have notified investors that the financial product they were buying was selected in part by a party (John Paulson) that was heavily betting against it .

Usually companies such as Goldman go two routes - a mea culpa followed by a fine or the naming and persecution of a 'rogue trader'. In this case, Goldman is doing neither and remarkably saying they did nothing wrong... And they have an incredibly strong case:

* Goldman themselves lost $90M in this transaction -- if they were going to defraud, would they defraud.. themselves?
* each one of these bets always has someone on the short and long side -- gamblers take either side, Goldman is just the 'house' arranging the transaction
* last and most logically, who is to say that these bets wouldn't have gone the other way? would anyone be complaining then?

The SEC is pointing to two things - an email by a young trader suggesting that these products were going to fail and another firm (Bear Stearns) refusal to take on the transaction due to 'moral conflicts'. But these are incredibly dicey waters that require 20/20 hindsight. To suggest that Goldman knew with certainty that these products were inferior defies logic in the most material of Wall Street ways - the $90M that Goldman lost.

This appears to me a prosecution on Goldman's morality (they should have done done more), but I don't really see what Goldman, with any amount of certainty, could have done differently.

As a Goldman Sachs alumnus, I can say with authority that Goldman and every other investment bank ALWAYS takes a position on the other side of the trade. That's how they hedge their risk--by writing derivatives. I am not saying they are not culpable in this case--I actually know nothing abou it. I am just saying it's not uncommon for banks to work both sides of the aisle. As the only real unstoppable force on Wall Street, Goldman experiences tremendous amounts of success and with it comes a tremendous bulls-eye on their back. My guess is that Goldman, like always, will somehow come out of this clean as a whistle.

The SEC case took a further hit yesterday when Paulson said that ACA was aware of his bearish position on the bonds. The non-disclosure position, which was tenous at best, seems very waterlogged now given this conversation.

Again, if Goldman had made money on this venture or the SEC had gone after Blankfein for advising the government on what to do with AIG given Goldman's own economic interests, that would have made for a much more interesting complaint w/ethical and possibly criminal implications. This by itself looks more and more like a complaint made for the sake of making a statement.


Aveek Guha
President, www.mbadaycamp.com

Goldman claims net $1.7B loss on residential mortgage - https://online.wsj.com/public/resources/ ... an0424.pdf

Doesn't sound like fraud to me -- they had some shorts, but nothing in the size to profit wildly during 2008/2009

Aveek Guha, President, www.mbadaycamp.com