Goldman Sachs gets away with it
August 10, 2012 9:30 AM   Subscribe

In April 2011, the Senate Permanent Subcommittee on Investigations (PDF) release a report that Goldman Sachs knowingly sold mortgage-backed securities that they believed would fall in value, and then shorted them for billions in profit. The Department of Justice and the U.S. Attorney for the Southern District of New York declined to press charges today.
posted by Hollywood Upstairs Medical College (94 comments total) 29 users marked this as a favorite

 
You a word. Maybe request an edit from the mods?
posted by jaduncan at 9:32 AM on August 10, 2012 [1 favorite]


Title-not-appearing-in-post claims another victim.
posted by Horace Rumpole at 9:34 AM on August 10, 2012 [1 favorite]


You know what will get you charged? Stealing from Goldman Sachs.
posted by "But who are the Chefs?" at 9:36 AM on August 10, 2012 [4 favorites]


Yes, uh, mods, please rewrite the first sentence so it makes sense without the title.

"...Investigations release a report that Goldman Sachs knowingly..."
posted by Hollywood Upstairs Medical College at 9:36 AM on August 10, 2012


[Replace a pronoun with a proper noun, carry on.]
posted by cortex at 9:36 AM on August 10, 2012


So, given that the US DoJ is run by crooks, what can people do about this level of corruption? Walking in marches gets you tear-gassed, ridiculed and marginalized. Other popular movements are owned by the same corporations that commit these crimes. You try to vote for someone new and get told your vote means nothing. It's corruption from all sides.
posted by Blazecock Pileon at 9:38 AM on August 10, 2012 [25 favorites]


How is this news? This is what happens in a financial oligarchy.

Goldman is TBTF, systemically important, whatever, take your pick of words that boil down to "prosecutorial immunity". There's 0% chance of real charges or real reforms because financial interests literally own every facet of any formal system which could hold them accountable.
posted by T.D. Strange at 9:42 AM on August 10, 2012 [9 favorites]


You try to vote for someone new and get told your vote means nothing.

Ah, but I suspect the people trying to tell you that are the people trying to preserve the corruption.
posted by EmpressCallipygos at 9:42 AM on August 10, 2012 [2 favorites]


Can someone explain to me what laws were broken? Not trying to stir the pot - I really don't know and hope someone can explain it to me.
posted by Kellster at 9:43 AM on August 10, 2012 [3 favorites]


This all happened because the SEC closed their investigation yesterday finding no violation. Without the SEC on board, a criminal case would have done nothing. Since the SEC is completely independent, DOJ was effectively hung out to dry.
posted by Ironmouth at 9:43 AM on August 10, 2012 [4 favorites]


I definitely feel cheated.

This post's headline promises an opportunity to be outraged at Goldman Sachs' despicable behavior and the government's complicity in same, but the second link fails to disclose the deficiencies in Federal law and evidence that prompted the DOJ to decline to pursue the case, eliciting confusion rather than outrage.
posted by notyou at 9:45 AM on August 10, 2012 [8 favorites]


Prosecutors “determined that, based on the law and evidence as they exist at this time, there is not a viable basis to bring a criminal prosecution with respect to Goldman Sachs or its employees in regard to the allegations set forth in the report,”

So is this actually illegal or just a super dick move we wish was illegal. Can somebody who understands this tell us who the counterparties in the sales were ? We here may think it unethical to dump assets we know to be worthless but many people would think it was shrewd business.
posted by Ad hominem at 9:47 AM on August 10, 2012


This demonstrates the difference between "law" and justice.
posted by incandissonance at 9:48 AM on August 10, 2012 [2 favorites]


A number of people are totally surprised by this. That number, of course, being zero.
posted by tommasz at 9:48 AM on August 10, 2012 [1 favorite]


phew - for a second there I thought you were saying Goldman is TBTF
posted by thetruthisjustalie at 9:51 AM on August 10, 2012


Breach of fiduciary duty. It would be like buying a house from a realtor who is handling both sides of the deal and they conceal from you that the house is built on top of a sink hole.
posted by papercrane at 9:52 AM on August 10, 2012 [7 favorites]


The issue is likely a violation of Rule 10b-5, which prohibits fraud in the sale of securities. The problem is likely based on the qualified investor rule. Certain persons can agree to have less coverage under the rules because they want to engage in riskier trading. It requires a pile of money to qualify, or to be an institutional investor.

Note my securities law days are far behind me. I'm also only vaguely familar with the case.
posted by Ironmouth at 9:52 AM on August 10, 2012 [5 favorites]


So is this actually illegal or just a super dick move we wish was illegal.

superdick move we wish were illegal. see what Ironmouth said. GS had no fiduciary responsibility. Where the SEC has attempted to charge people is for lying to the third parties they hired to manage the vehicles. But that didn't work. They lost in court. Also they just lost a jury trial against a Citigroup exec for basically the same issue.
posted by JPD at 9:59 AM on August 10, 2012 [7 favorites]


How can GS short their own securities? Who were the parties that bet AGAINST GS's bet that their own investments would decline in value, and why would anyone do that?
posted by clockzero at 10:00 AM on August 10, 2012


This all happened because the SEC closed their investigation yesterday finding no violation. Without the SEC on board, a criminal case would have done nothing. Since the SEC is completely independent, DOJ was effectively hung out to dry.

And the SEC has a sterling reputation as a tireless crusader against financial wrongdoings by the most powerful firms on Wall Street. If the SEC says there was nothing improper going on, you can be sure that no amount of alleged instuitutional capture would have altered thier opinon, every single letter and spirit of the law was followed perfectly.
posted by T.D. Strange at 10:01 AM on August 10, 2012


Thanks JPD. Are you in the securities industry or securities law?

The qualified investor is essentially treated as the bank's equal in the transaction, with the parties essentially both considered to be knowledgeable enough to make bets.

In the end, the real issue is too big to fail and Glass-Stegall. When this sort of activity isn't firewalled off, creditors can get to the larger banks' assets wiping them and Wall Street out.
posted by Ironmouth at 10:04 AM on August 10, 2012


How can GS short their own securities? Who were the parties that bet AGAINST GS's bet that their own investments would decline in value, and why would anyone do that?

People who think they are smart and voluntarily give up these protections in order to take the risk of betting against the house.

Part of the issue is that both parties are looking at the larger housing market and forclosure rates and one side reads the data one way, and the other reads it the other way. This is how the qualified investor rule works. Its for large players to make bets the banks won't.
posted by Ironmouth at 10:08 AM on August 10, 2012 [2 favorites]


So the charge is essentially this: I am selling pokemon cards. Everyone thinks Snorlax cards are cool and wants a Snorlax. I, through a complex mathematical equation taking into Account historical fluctuations in the value of Snorlax cards believe that Snorlax cards are going down in value. I think, let me sell my Snorlax cards while the selling is good. Soon I am running out of Snorlax cards but I know a guy up the street with 50 Snorlax cards and he's kinda dumb so I know I can just trade him a lunchable for all his Snorlax cards. I call all my friends and say, I got 50 more Snorlax cards here I will sell you 50 cards for 1 million a peice, and they buy them. I then go down the street with my lunchable and say "yo, I will trade you this lunchable for your 50 Snorlax cards, but I need you to drop them off at Phil's house"

Is that right?
posted by Ad hominem at 10:09 AM on August 10, 2012 [5 favorites]


How can GS short their own securities?

No - that's not really how it worked - they weren't shorting their own securities. They created securities they thought had a high probability of failure. Usually in cahoots with a third party investor (Magnetar, Paulson, et al) they would select the collateral (or derivatives + cash) to be put into the securitization. They would then hire a third party to manage the collateral in said securitization (although that third party wants to keep Goldman happy because they want a steady stream of business from them) and sell the security they've created to institutional clients (nearly always European entities looking for yield). They then turned around and made even more money by selling a pile of credit default swaps at nice chunky prices to the third party who helped you select the collateral.

So Goldman made money on buying the collateral and selling it to the CDO, they made money again when they sold the CDO to investors, and they made money by selling the CDS to the third party investors. In theory if they timed everything right there was almost no risk to them. If they wanted to retain some the CDS exposure for themselves to hedge other CDO positions in their book they might do that as well. But technically the security isn't issued by Goldman Sachs, but rather by some bankruptcy remote entity they've set up.
posted by JPD at 10:09 AM on August 10, 2012 [11 favorites]


And the SEC has a sterling reputation as a tireless crusader against financial wrongdoings by the most powerful firms on Wall Street. If the SEC says there was nothing improper going on, you can be sure that no amount of alleged instuitutional capture would have altered thier opinon, every single letter and spirit of the law was followed perfectly.

The "victims" are super smart investors who put themselves beyond protection. The SEC brought cases and lost.
posted by Ironmouth at 10:10 AM on August 10, 2012 [1 favorite]


Very interesting, thanks for that explanation JPD.
posted by clockzero at 10:12 AM on August 10, 2012


Ok, so it is more like I work with a collectables company to create Snorlax cups I know will never be collectable in order to take advantage of the Snorlax craze that I myself created and I also own the glass blowing company that makes Snorlax cups.

I can see how people stuck with worthless Snorlax cups would be pissed.
posted by Ad hominem at 10:18 AM on August 10, 2012


Is that right?

Not really. Its closer to selling people pokeman in packs of 20 for a dollar and telling them its a random assortment of cards, but your buddy came up to you and said "I've got way too many of these Snorlax- if you help me sell them I'll give .05 of the 1.00 per 20" so you opened up all of the packs you had for sale and took out a few cards you wanted and inserted a bunch more of the crappy cards your buddy didn't want. Then when you go to sell them the customer says "hey - why are these open" and you say, "well I just wanted to make sure they legit, and oh btw I hired that guy for a penny per pack (not your buddy) to take a look as well to assure you its on the up and up [rating agency I lied to about the whole thing] and I hired that guy to put them all into new packs [CDO manager who has a financial interest in keeping me happy]. But feel free to look at the cards yourself." and then this is why you get off. That guy never looked until after someone else told him "hey did you see all the shitty pokemon cards that guy gave us"
posted by JPD at 10:19 AM on August 10, 2012 [120 favorites]


Wall Street employees are largely switching to the red team anyway. I guess they not only want to get away with it, they want to make as much money as they did back when they were getting away with it.
posted by RobotVoodooPower at 10:22 AM on August 10, 2012 [1 favorite]


The other thing is that the Snorlax cards had been going up and up and up, so the counter-party was sure it was easy money.
posted by Ironmouth at 10:24 AM on August 10, 2012 [2 favorites]


You try to vote for someone new and get told your vote means nothing.

Ah, but I suspect the people trying to tell you that are the people trying to preserve the corruption.


Let me dispel your suspicion. I'm someone who advocates people not vote for third-party candidates unless they have a realistic chance of winning. I am not interested in preserving corruption. I'm sorry for the derail, so I'll try to be brief.

The first-past-the-post election system heavily in use in the U.S. makes third-party votes not contribute to the election outcome. Of course, you may derive some benefit from casting a vote for a third-party candidate other than influencing the actual outcome of the election (e.g. feeling good about voting honestly*).

You can double the amount of influence you have over the system if you vote in primaries, reducing the expected amount of corruption you will end up voting for.

If you were intending to vote for a third-party candidate, but have become discouraged by Duverger's Law, please try to figure out which of the two leading candidates is more palatable anyway rather than not voting. I ask this because the proportion of third-party voters that are low-information is likely smaller than the proportion of leading-candidate voters. It would be great if more informed voters had an effective say in who won.

*It is very commonly accepted that being completely honest sometimes has negative practical effects that aren't worth it. Consider that voting may be similar- it may be appropriate to vote for a candidate other than who you would really love, because voting for a different candidate may end up having a better practical effect. Where one draws the line between "worth it" and "not worth it" is fairly subjective in personal relationships, but with voting, there's actual math that says that some voting systems provide no benefit for third-party votes.
posted by Jpfed at 10:25 AM on August 10, 2012 [10 favorites]


"well I just wanted to make sure they legit, and oh btw I hired that guy for a penny per pack (not your buddy) to take a look as well to assure you its on the up and up [rating agency I lied to about the whole thing] and I hired that guy to put them all into new packs [CDO manager who has a financial interest in keeping me happy]. But feel free to look at the cards yourself."

So that is the crux, You knew the ratings agency and CDO manager thought you were the coolest guy at school and wanted to be your buddy and that everyone is too psyched to get super valuable Snorlax cards to stop and do an exhaustive audit of Snorlax to Squirtle ratio in the packs.
posted by Ad hominem at 10:30 AM on August 10, 2012


This does suck, but one positive thing is that the Dodd-Frank Act contained a provision specifically making this type of behavior illegal. So at least going forward designing an asset-backed security to fail and then taking the other side from your customers is illegal.
posted by zipadee at 10:33 AM on August 10, 2012


and they made money by selling the CDS to the third party investors

So how does this part work? Wouldn't they get hosed when they had to pay out the claims on the CDSs once the CDOs started to fail? What it that the price they charged for the CDSs was high enough to more than offset the payouts on the swaps?
posted by VTX at 10:35 AM on August 10, 2012


Sincere questions from a non-American: Why in God's name do you people put up with this shit? How did you let them clear out Zucotti Park?

Like T.D. Strange said, you don't live in a democracy, you live in a financial oligarchy.

Story after story like this comes along, but I don't see anger, I see apathy and resignation. The most animated I see people get is complaining that Obama is a sell-out (your wording may vary).

This won't change until you demand it be changed. I'm sad for you.
posted by dry white toast at 10:35 AM on August 10, 2012 [10 favorites]


Or -- to be more precise -- conflicts of interest in structuring ABS are now supposed to be illegal. SO not only can't the bank take the other side, they can't work with a manager who is designing it to fail. See Section 621 of the Dodd Frank Act / Section 27B of the 33 Act.
posted by zipadee at 10:36 AM on August 10, 2012


Like T.D. Strange said, you don't live in a democracy, you live in a financial oligarchy.

We live in a democracy. People pick things they think are good, they are often wrong.

And let's be clear--i don't give a rats ass if one rich party gets ripped off by another. Its when the larger economy is too linked to these activities that is the problem.
posted by Ironmouth at 10:40 AM on August 10, 2012 [6 favorites]


Let me dispel your suspicion. I'm someone who advocates people not vote for third-party candidates unless they have a realistic chance of winning. I am not interested in preserving corruption.

I actually wasn't even thinking about third-party options, I was thinking more about the apathetic "feh, I'm not even gonna bother voting, it doesn't ever do anything anyway" attitude. There is a culture of non-involvement in politics in this country that is counter to the way the government was supposed to work.

Shit, even the two-party system would work better if people used it to its full. And by that I mean actually voting, and contacting congressmen and holding them accountable, and paying attention to current events.

But there is a culture of "fuck it, what's the point" going on, and while some of it is no doubt coming from people who are genuinely cynical, I wouldn't be surprised at all to hear some of the people chiming in and saying "yeah!" are people who have ulterior motives.
posted by EmpressCallipygos at 10:40 AM on August 10, 2012 [1 favorite]


So how does this part work? Wouldn't they get hosed when they had to pay out the claims on the CDSs once the CDOs started to fail? What it that the price they charged for the CDSs was high enough to more than offset the payouts on the swaps?

The CDO itself in these cases was a pile of cash and a bunch of written CDS contracts rather than the underlying RMBS.

So that is the crux, You knew the ratings agency and CDO manager thought you were the coolest guy at school and wanted to be your buddy and that everyone is too psyched to get super valuable Snorlax cards to stop and do an exhaustive audit of Snorlax to Squirtle ratio in the packs.

Pretty much, although its also really really hard and expensive to audit the Snorlax to Squirtle ratio even if you wanted to.
posted by JPD at 10:41 AM on August 10, 2012 [3 favorites]


Thanks for your posts in this thread, JPD.
posted by spaltavian at 10:54 AM on August 10, 2012 [3 favorites]


Awesome, technical, super-informative discussion here.
posted by Ironmouth at 10:57 AM on August 10, 2012


The greatest threat to Capitalism is Capitalism.
posted by bardic at 10:57 AM on August 10, 2012 [1 favorite]


Pretty much, although its also really really hard and expensive to audit the Snorlax to Squirtle ratio even if you wanted to.

and I also made all my customers sign a piece of paper saying if they get ripped off it is their own damn fault because they are experts buyers.

Thanks.
posted by Ad hominem at 10:59 AM on August 10, 2012 [1 favorite]


and I also made all my customers sign a piece of paper saying if they get ripped off it is their own damn fault because they are experts buyers.

I legally can't even talk to them unless they prove to me I'm an expert buyer. (except that proof the SEC requires is really lame)
posted by JPD at 11:00 AM on August 10, 2012


they're an expert buyer
posted by JPD at 11:01 AM on August 10, 2012


So, in the final analysis, Martha Stewart got more prison time than these guys.
posted by Malor at 11:02 AM on August 10, 2012 [9 favorites]


JPD, explanations like that are why I put up the $5.
posted by Hollywood Upstairs Medical College at 11:06 AM on August 10, 2012


So, in the final analysis, Martha Stewart got more prison time than these guys.

Stewart's transactions were on the open market with people who had no information at all. Here, sophisticated investors made stupid bets.
posted by Ironmouth at 11:06 AM on August 10, 2012 [1 favorite]


Sincere questions from a non-American: Why in God's name do you people put up with this shit? How did you let them clear out Zucotti Park?

I'm roughly 700 miles away from Zucotti Park, so I don't know if let them is the most realistic turn of phrase here. We don't necessarily put up with it, either, but we change this kind of behavior primarily through slow-moving processes (legislatures, popular vote). And we don't always collectively make the best possible decisions, but I also think most Americans don't really think that reenacting the French revolution on Wall Street is a great approach to the problem either.

I think most Americans are angry about these kinds of stories, to the (perhaps limited) extent they understand them, but it's not like I can quit my job and start building guillotines. So I vote instead.
posted by axiom at 11:12 AM on August 10, 2012 [3 favorites]


Here, sophisticated investors made stupid bets.

Were any of these sophisticated investors banks or funds that many people would have exposure to (through pension plans, etc.)? Or is this really solely a case of "rich people" throwing away their own money chasing returns? (Not trying to snark, I've honestly got no idea.)
posted by junco at 11:17 AM on August 10, 2012


I disagree. I think Martha and these guys should go to jail. The only difference is that Martha committed a crime the legal system understood at the time she committed it.

There were plenty of legit CDOs "sophisticated investors" could lose money on. Its like saying a rigged casino shouldn't be illegal because everyone should know you can't make money over time in a casino.

Now since the law lags, what these guys did to the investors seems to me as a non-lawyer to be legal but wrong.
posted by JPD at 11:18 AM on August 10, 2012 [1 favorite]


Sincere questions from a non-American: Why in God's name do you people put up with this shit? How did you let them clear out Zucotti Park?

Something that may not be obvious is that there has been a relentless media blackout on Occupy topics, especially with respect to the organizational structure and actual goals. This, coupled with the extreme amount of force that's been used to literally drag Occupiers away from organized events of any sort results in the perception that the movement has simply died out from lack of interest.
posted by odinsdream at 11:20 AM on August 10, 2012 [2 favorites]


Were any of these sophisticated investors banks or funds that many people would have exposure to (through pension plans, etc.)?

Yes. But part of what you are paying the managers there to do for you is to be the expert. Those guys are schmucks and should be fired.

Although most of these particular end of the party deals seem to have European Banks as their victim.
posted by JPD at 11:21 AM on August 10, 2012


Goldman should not have gotten off the hook for lying about who built the CDO. The customer sold the CDO, ACA specifically stated to Goldman that they would only by the CDO if a disinterested third party picked the bonds so that they would have confidence that the bonds would perform well. Paulson paid Goldman $1 million in order to have the privilege of picking bonds that would fail. That Goldman did not disclose this fully to ACA is fraudulent misrepresentation.
posted by JackFlash at 11:22 AM on August 10, 2012


Stewart's transactions were on the open market with people who had no information at all.

I thought Martha Stewart ended up going to prison solely for obstructing the investigation and lying to investigators, not for any of her financial acts.
posted by benito.strauss at 11:22 AM on August 10, 2012


So, given that the US DoJ is run by crooks, what can people do about this level of corruption? Walking in marches gets you tear-gassed, ridiculed and marginalized.

Walk in the marches anyway. This is very important.

There are 311 million people in the United States. Unless you're rich or famous, your opinion is not going to matter enough to affect a substantial portion of that population beyond your personal share, which is 1. One in 311 million.

But when you express an unpopular opinion, state it and believe it and can back it up, your expression, by virtue of its differentness, matters for more than your share. It might, mathematically speaking, be worth two or three times that of an ordinary person who never think anything on their own a day in their life. And that, if you can combine it with the opinions of other people, can matter, with time and effort. And it can matter at the voting booth regardless of whether your guy wins or not, because if you can get up to a statistically significant portion of the population the candidates will have to consider courting your opinion to get elected, which matters especially in close races.

When people shrug or tell you there's no point, they are the people who are saying the ordinary thing, the tremendous weight of the status quo speaks through them and argues for inertia. Do not listen to them. Of course it's hard to change things -- if it was easy, it'd already be changed! And then we'd be in a different status quo, and we'd be wringing our hands about something other problem. Voting for Obama didn't change the world, because the world never changes instantly. It always changes slowly. Laws are the expression of that change, not the change itself.

If you vote once, figure then "well I voted him in" or "that didn't work" and give up, you're fooling yourself. If your convictions have no stamina then how do they count for anything?
posted by JHarris at 11:24 AM on August 10, 2012 [2 favorites]


ACA wasn't the buyer, they were the manager.
posted by JPD at 11:28 AM on August 10, 2012


Sorry, that was confusing. ACA was the third party hired by Goldman to pick the stocks in the CDO. Goldman represented to the investors that ACA was an independent consultant when actually they were just a cover for the fact that Paulson was really picking the bonds. This was a lie.
posted by JackFlash at 11:29 AM on August 10, 2012


Yes. But part of what you are paying the managers there to do for you is to be the expert. Those guys are schmucks and should be fired.

Well, yeah. But that's just what happens when the whole financial culture is based on the obscene compensation the "superstars" receive that leads to risky behavior looking for huge payoffs to justify their fees.

From my perspective of limited knowledge, anyway. But true or not, it's a perception that's led a lot of people I know in my cohort who've thought about it to the conclusion that securities are a rigged game right now, in no small part due to what our parents have seen happen to their portfolios at the hands of those clueless managers and the Masters of the Universe types exploiting their greed/stupidity.
posted by junco at 11:31 AM on August 10, 2012


Sorry, that was confusing. ACA was the third party hired by Goldman to pick the stocks in the CDO. Goldman represented to the investors that ACA was an independent consultant when actually they were just a cover for the fact that Paulson was really picking the bonds. This was a lie.

1) I agree with you, if there is fraud here it has to do with the relationship between GS-ACA-Paulson. For whatever reason the SEC decided not to pursue that route almost two years ago.

2) The way it really worked was Goldman submitted a list of suggested securities to ACA and ACA then chose the securities to put into the CDO partially from that list. About half of the securities in the CDO were from that list, the remainder were chosen by ACA. ACA could have chosen none of the securities from that list if they wanted to. Of course they wouldn't because that would piss Goldman off. But I would guess as a non-lawyer that the argument is that ACA could have chosen any security they wanted. Of course in the real world we know that had they done that they would have never gotten business from Goldman again.

3) From what I've seen the best fraud case surrounds the fact that ACA was told that Paulson would buy the most junior tranche of the securitization - which was true. ACA claimed that this led them to agree to sell super-senior protection of the structure, because "hey Paulsons a smart guy and if he's taking the junior risk, we should be happy to take the senior risk". The problem was that in addition to being long the junior tranche, he was very very short the senior tranche. In theory the way the trade would work is that if the losses triggered the senior CDS that would more than make up for the loss on the junior tranche, and if the economy picked up and the junior tranche was ok they would be OK as that gain would be a little bit bigger than the loss on the carrying cost of the CDS. The only way they would really lose is if the junior tranche was wiped out but the senior tranche was made whole. Hence their need to select securities that insured a high probability of triggering the senior.

So for whatever reason the SEC decided this latter case was where there was potentially fraud but decided to settle rather than go to court.
posted by JPD at 11:42 AM on August 10, 2012 [3 favorites]


JPD, explanations like that are why I put up the $5.

Indeed. I've already flagged several of them as "fantastic comment" both for content and accessibility.
posted by zombieflanders at 11:46 AM on August 10, 2012


Were any of these sophisticated investors banks or funds that many people would have exposure to (through pension plans, etc.)?

I think that's exactly right, actually.

So, given that the US DoJ is run by crooks, what can people do about this level of corruption? Walking in marches gets you tear-gassed, ridiculed and marginalized.

The DOJ is not run by crooks. They tried prosecutions and lost because the investors in question deliberately put themseves outside the protection of the laws.

As for marching, I'd give a million marchers for people calling up their congressmen and women when the congress passed the law taking the CFTC out of regulating derivatives like this. Its a lot less fun but gets a lot more done, as the fight over ACTA showed this year. Congress was willing to pass that shit until everyone spoke up.

That's why Occupy the SEC is my favorite. They comment on rules. They organize pressure on the regulating agencies during the rulemaking process rather than yelling when the barn door is already wide open.
posted by Ironmouth at 11:47 AM on August 10, 2012 [4 favorites]


Goldman's defense is that they were simply market makers facilitating a trade between Paulson and the investors. But you can't claim to be just a facilitator and at the same time make representations about the quality of the investment. Then you become a salesman and have a different level of judiciary responsibility.

For example a real estate agent can facilitate a sale between buyer and seller, but they can't vouch for the soundness of the house. And they especially can't vouch for its soundness when the seller has already disclosed that the wiring is faulty. What Goldman did is tell the buyers that they had a great house inspector who would make sure the house was sound. At the same time Goldman knew that Paulson was going into the house at night and rigging the wires to make sure that the house would burn down. Paulson then purchased fire insurance on the house and bought his fire insurance from the investors.

In this case, Paulson initiated the deal. Paulson believed the market was going to tank but found it difficult to short the market because no sane bank puts together a CDO that is designed to fail. Paulson paid Goldman to put together just such a CDO to fail. However, Goldman concealed this motivation from the investors. In fact, their presentation goes on and on for many pages about why this was a great investment because it was being handled by ACA. They did not disclose that Paulson, who was betting on failure, was instead making the picks. What Goldman did was help Paulson, who they knew was rigging the house for arson, find someone willing to sell fire insurance without disclosing this fact.
posted by JackFlash at 11:57 AM on August 10, 2012


"fiduciary responsibility" damn spellchecker
posted by JackFlash at 11:58 AM on August 10, 2012


They did not disclose that Paulson, who was betting on failure, was instead making the picks.

Legally Paulson was not selecting the Collateral, ACA was. The fact that ACA was by definition going to try to keep Goldman happy, and by extension Paulson doesn't actually matter legally.
posted by JPD at 12:01 PM on August 10, 2012


Something that may not be obvious is that there has been a relentless media blackout on Occupy topics, especially with respect to the organizational structure and actual goals. This, coupled with the extreme amount of force that's been used to literally drag Occupiers away from organized events of any sort results in the perception that the movement has simply died out from lack of interest.

***

So I vote instead.

This story from This American Life demonstrates pretty succinctly why, as things now stand, voting on its own, within the current system, really does nothing at all to change it.

Perhaps "let them clear out Zuccotti Park" isn't exactly the best choice of words, but the point still holds that Occupy is by no means the first movement to have its actors dragged away with extreme force. Of course its not getting coverage, its become invisible. What's there to cover? Change takes persistence, resistance, and probably getting arrested. No one said changing an entrenched system is easy.

I guess I'm dwelling on Zuccotti because it was the first time in I don't know how long that I've seen the broader American public discussing how messed up things really are, because the protest was forcing everyone, whether they supported Occupy or not, to take notice of it. But for that discussion to continue and turn into something fruitful, it needs to stay in people's face.
posted by dry white toast at 12:03 PM on August 10, 2012


But you can't claim to be just a facilitator and at the same time make representations about the quality of the investment. Then you become a salesman and have a different level of judiciary responsibility.

When you are selling securities like this you can, because the person on the other side of the table has already announced to you that he is as capable as you are of judging the quality of the investment and you've only entered into the conversation after stipulating to that.
posted by JPD at 12:08 PM on August 10, 2012


Legally Paulson was not selecting the Collateral, ACA was. The fact that ACA was by definition going to try to keep Goldman happy, and by extension Paulson doesn't actually matter legally.

Legally, Goldman was misrepresenting how the bonds were picked. It knowingly was using ACA as a cover because the investor had already stated that they would not make the investment without a disinterested third party picking the bonds.
posted by JackFlash at 12:11 PM on August 10, 2012


When you are selling securities like this you can, because the person on the other side of the table has already announced to you that he is as capable as you are of judging the quality of the investment and you've only entered into the conversation after stipulating to that.

The "qualified investor" rule was written by the banks and is basically a get-out-of-jail-free card that states that banks are freely permitted to lie to qualified investors because they should be smart enough to figure out that they are lying.
posted by JackFlash at 12:13 PM on August 10, 2012 [1 favorite]


No you are butchering the story. It was ACA who was told the original list of bonds was chosen by someone with a positive economic interest in the securitization, not the finally buyer of the CDO. The reason why this isn't fraud is that reasonably ACA as the manager of the CDO should had underwritten the characteristics of each of the underlying pieces of collateral before putting them into the structure. Since legally ACA was not bound to select any of the original "suggested" positions it isn't fraud. Its actually the same Qualified Investor Exemption.

The Qualified Investor Exemption is really really important and is way more than a get-out-of-jail-free card. I, as someone who invests in basically broken, scary, verge of bankruptcy businesses for a living do not want my brokers worrying about my grounds for suing them if something I buy turns out not to be what I thought it was. Yes, it can be distorted, and yes, certainly I think in this case it is being abused, but it actually has a real reason for existing.
posted by JPD at 12:19 PM on August 10, 2012 [4 favorites]


In other words, Goldman was playing poker with the investors, marked the deck and lied telling the investors the deck was fair. They then claimed that this is okay because the investors were experienced poker players and should have been able to figure out the deck was marked and that that Goldman was lying.
posted by JackFlash at 12:22 PM on August 10, 2012


Forget ACA. They were just a tool used by Goldman and Goldman is pretending that it was all ACA's responsibility. Goldman was the only one who knew exactly what Paulson was doing and they used ACA to conceal that from investors, misrepresenting the character of the investment.
posted by JackFlash at 12:27 PM on August 10, 2012


Pretend ACA is an equity manager, and instead of the list of securities being CDO related pretend its their Equity Research teams "Best Ideas List". Now, I as a cynic know that there can be all kinds of reasons why names get put on that list, but if I asked a junior GS equity sales guy who barely knew me "Are these really your guys best ideas" he'd say "of course." If I was a buffoon I might turnaround and just invest my portfolio in that list - which is basically what ACA did. (NOTE: Goldman Private Client would probably not let you do this with your portfolio, because they do have a fiduciary responsibility)

Two years later it turns out Goldman's Best Ideas weren't really so best. All my clients fire me because I suck at managing money. I can't say "Goldman told me these were good ideas" and I would be laughed out of court if I tried to sue Goldman.

In other words, Goldman was playing poker with the investors, marked the deck and lied telling the investors the deck was fair. They then claimed that this is okay because the investors were experienced poker players and should have been able to figure out the deck was marked and that that Goldman was lying.

No. Goldman actually told no lies to the end investors. The only lie they told was to ACA. They gave the dealer (ACA) a stack of decks of cards and said "Use this one if want, or any of these other ones that are unopened. Your job is to keep this fair (wink wink)." ACA then announced to the room I'm an expert at identifying marked cards, so don't worry about it you are safe with men, and then used the marked cards because Goldman told them they were fair.
posted by JPD at 12:29 PM on August 10, 2012


JPD: 1) I agree with you, if there is fraud here it has to do with the relationship between GS-ACA-Paulson. For whatever reason the SEC decided not to pursue that route almost two years ago.

...

So for whatever reason the SEC decided this latter case was where there was potentially fraud but decided to settle rather than go to court


Is this sort of settlement final or could it still be rejected by a court like happened with an earlier SEC settlement?
posted by Anything at 12:31 PM on August 10, 2012


'earlier' -> 'another' -- I don't know which one actually is earlier.
posted by Anything at 12:32 PM on August 10, 2012


Forget ACA. They were just a tool used by Goldman and Goldman is pretending that it was all ACA's responsibility. Goldman was the only one who knew exactly what Paulson was doing and they used ACA to conceal that from investors, misrepresenting the character of the investment.

Well that's the thing legally it was all ACA's responsibility.
posted by JPD at 12:33 PM on August 10, 2012


Y'know...It's almost as if the Bürgermeisters are flippantly daring the dirty commoners to do something to stop them from looting the world. Something...drastic.
posted by Thorzdad at 12:48 PM on August 10, 2012


The SEC and DOJ have had very little luck prosecuting the mortgage crisis for the simple reason that the mortgage crisis was not, to any significant extent, caused by illegal conduct. The losers in the trade were brought down by their greed and/or stupidity, and those things are not illegal. The winners in the trade won by savvy and luck; also not illegal.

Many people thought that housing could never go down: that was stupid. Many people knew housing could go down, but thought they could get out before the music stopped: that was greedy. The greedy and the stupid ran the gamut from the most sophisticated institutional investors in the world to people making $40k a year who bought $500k houses on credit.

A small number of people saw things spinning out of control and decide to sell what the greedy and stupid were so unwisely eager to buy -- they were the savvy, although the risks they were taking were huge. Some people just sold because they wanted to sell (that's the lucky).

(The market, by the way, was always telling people with eyes to see and ears to hear that there was something too good to be true. A Triple-A CDO always paid a lot more return than a Triple-A corporate bond. A subprime mortgage in Vegas always cost a lot more than a prime mortgage in Dallas.)

This is why Dodd-Frank won't prevent another financial crisis any more than Sarbanes-Oxley prevented the 2008-2009 crisis -- you can't outlaw greed or stupidity.
posted by MattD at 1:06 PM on August 10, 2012 [1 favorite]


but it's not like I can quit my job and start building guillotines.

Oh, if only.
posted by tyllwin at 1:07 PM on August 10, 2012


In theory the way the trade would work is that if the losses triggered the senior CDS that would more than make up for the loss on the junior tranche, and if the economy picked up and the junior tranche was ok they would be OK as that gain would be a little bit bigger than the loss on the carrying cost of the CDS. The only way they would really lose is if the junior tranche was wiped out but the senior tranche was made whole. Hence their need to select securities that insured a high probability of triggering the senior.

Magnetar and others who made out like bandits during the financial crisis put this kind of trade on as well. It was the great insider trade for those who realized what was happening. And it helped fuel the creation of all those toxic assets over 2005-2007.
posted by zipadee at 1:40 PM on August 10, 2012


The only problem I see with all this is that many of the 'qualified' investors were gambling with pensions and 401k's.

Thank God they didn't manage to privatize social security like they were trying earlier.
posted by psycho-alchemy at 1:58 PM on August 10, 2012 [1 favorite]


The problem there lies in who gets hired by the plan sponsors and put on the investment list by 401k plans.

(also in reality the Mortgage and Mortgage Related Securities had a much much much smaller impact than did the bank shares et al that were permanently impaired by the crisis)
posted by JPD at 2:13 PM on August 10, 2012


Obama’s Goldman-Sachs surrender
posted by homunculus at 3:29 PM on August 10, 2012


Obama Administration Needs to Tap, Not Stiff-Arm, Wall Street Whistleblowers
posted by homunculus at 3:30 PM on August 10, 2012 [2 favorites]


Goldman actually told no lies to the end investors.

Actually they did tell lies. Goldman wrote the prospectus and presentation, not ACA. Out of 66 pages in the presentation, a third were just about ACA, its reliability and integrity, etc. The hiring of ACA was key to selling the investment because they provided cover for Goldman's deception. The investors testified that they had told Goldman that they wanted an independent party to pick the bonds, yet Goldman knew that was not true. Paulson was not independent and he was influencing the picks, contrary to what Goldman told the investors.

Well that's the thing legally it was all ACA's responsibility.

Goldman is like the mob boss who claims plausible deniability. They never pulled the trigger. It's the hitman's responsibility.
posted by JackFlash at 6:00 PM on August 10, 2012


I guess I'm dwelling on Zuccotti because it was the first time in I don't know how long that I've seen the broader American public discussing how messed up things really are, because the protest was forcing everyone, whether they supported Occupy or not, to take notice of it. But for that discussion to continue and turn into something fruitful, it needs to stay in people's face.

From your comments I gather that you live somewhere else on the globe than the US, and I wonder have you ever been here? One of the things Americans commonly do (that is, I think, often taboo in many other countries/cultures) is to discuss politics with complete strangers. I'm not saying Occupy wasn't important, but don't think for a second that if not for Occupy nobody would've talked about the banking catastrophe. Everyone knew that they were getting screwed.

If anything, Occupy brought certain talking points to the fore that otherwise might not have been so championed. Even though I'd heard of the Glass-Steagall act before Zuccotti, and I would vote for anyone who supported a similar bill in a heartbeat (provided they didn't have some other execrable political platform planks, obviously), I think Occupy and its coverage brought a lot better understanding of just how we were getting screwed.
posted by axiom at 8:25 PM on August 10, 2012


Actually they did tell lies. Goldman wrote the prospectus and presentation, not ACA. Out of 66 pages in the presentation, a third were just about ACA, its reliability and integrity, etc. The hiring of ACA was key to selling the investment because they provided cover for Goldman's deception. The investors testified that they had told Goldman that they wanted an independent party to pick the bonds, yet Goldman knew that was not true.

you can keep saying this, but it just isn't legally correct. That's why the only thing the SEC decided to sue over was GS convincing ACA to sell the extra super senior protection - and that case was tenuous enough they settled very quickly. So far as the presentation and docs go - the SEC actually went to trial on that with a case from Citigroup and lost, and lost quickly. The jury actually said "its shocking that this was legal, but the state didn't come anywhere near proving its case in this instance" And a reasonable assumption is that the Citi docs were less carefully parsed than were the Goldman docs and the SEC thought they wanted to pursue their strongest case first. Goldman just is more careful and spends more on lawyers than does Citi.

If you wanted to prove ACA was not the manager, but rather serving as a direct proxy for GS and Paulson you would need to find some evidence that showed that - an email saying "We will pick the bonds you want us to" or even circumstantial evidence in the form of ACA just blindly choosing the securities on the list Goldman gave them. Even an internal email that said "goldman told us to play ball on this or they'll never hire us again." Do I think some guy from Goldman might have suggested that to someone from ACA over a lunch? sure. But you can't prove it.

Again - there were 130 names on the list Goldman gave them, there 90 securities in the CDO, 55 of them were from the list Goldman gave them and 35 were not. And this is what makes it really hard to prove - other CDO's with similar risk exposures and created during the same time period but no accusations of fraud performed very similarly to the Abacus securitizations. That actually makes it even harder to prove fraud, because you can't even prove there was harm.

Goldman is like the mob boss who claims plausible deniability. They never pulled the trigger. It's the hitman's responsibility.

Well no. That's not even logically consistent. In this case ACA would have been the hitman, and no one is accusing them of fraud.
posted by JPD at 7:04 AM on August 11, 2012 [2 favorites]


JPD: The only lie they told was to ACA.

Even if you insist on believing that Goldman did not lie directly to the investors, which I think is wrong, you freely admit they lied to ACA. The lie was passed by ACA to the investors, knowingly or not. Goldman should not get off just because they used an intermediary for their hit.

The fact remains that Goldman paid a half billion dollar fine for their behavior, the largest in history. They didn't do that because their hands were clean. In the settlement statement the SEC said that "Goldman misled investors, who were making a positive bet on housing, because Goldman did not disclose Mr. Paulson’s involvement in creating the deal." "Though Goldman did not formally admit to the S.E.C.’s allegations, it agreed to a judicial order barring it from committing intentional fraud in the future under federal securities laws." Note that the SEC said that Goldman misled investors, not that Goldman mislead the ACA or that ACA mislead the investors.

You keep qualifying the your position by the word "legally." It only means that the Feds think it would be a difficult case, partly because of get-out-of-jail-free rules like "qualified investor." Part of the problem with the whole financial crisis is what turns out to be legal but shouldn't be. This isn't surprising since the banks write the laws.
posted by JackFlash at 10:07 AM on August 11, 2012 [2 favorites]


So there you go, you don't believe in rule of law for people you don't like.

The SEC can say what ever it wants in a press release - its PR. If it could have proven the case in court it would have.

The question at hand is not "is this sleazy and wrong", it is "was this illegal".
posted by JPD at 10:32 AM on August 11, 2012 [4 favorites]


Alan Greenspan on his Fed Legacy:
one day before Lehman Brothers crashes, conventional wisdom was not even certain that we would fall into a recession. In fact, we learned many months later that the downward trend had actually started. How could we have possibly got it so wrong? I mean, I actually was saying, “Yes, recession is coming, Not that we’re here yet.” We didn’t know that it had already hit.
posted by the man of twists and turns at 2:42 AM on August 12, 2012


The SEC can say what ever it wants in a press release - its PR. If it could have proven the case in court it would have.

The appearence of collusion, conflict of interest, and ideological affinity at the SEC makes it impossible for me to believe it was people say this.

I think the Standard Charter case illustrates clearly the depth of collusion between the regulatory bodies and the institutions they are responsible for: fraud and illegal acts becomes costs of doing business. It may very well be that there was no case, but I have no faith that there was actual due dilligence done by the government lawyers... it's one of those situations where the *appearence* of impropriety is probably worse than the improriety in terms of the integrity of the system. But a regulator that took a "broken windows" approach to regulating Wall Street would immediately become a threat to the American way of life, see Elizabeth Warren.
posted by ennui.bz at 12:41 PM on August 12, 2012 [2 favorites]


It's getting to the point where I wouldn't be all that surprised to find Goldman Sachs partnering up with one of the multinational gangs like MS-13, although on reflection MS-13 probably wouldn't want to sully their image.
posted by Ritchie at 1:52 AM on August 13, 2012


Matt Taibbi: Goldman Non-Prosecution: AG Eric Holder Has No Balls
posted by homunculus at 12:09 PM on August 16, 2012


No Criminal Case Is Likely in Loss at MF Global

There Is No "Manslaughter" Charge in Financial Firm Incompetence
posted by homunculus at 2:35 PM on August 16, 2012


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