Goldman and the SEC Case….


This from a friend of mine about the Goldman case….”I have been studying this area for months now. The SEC case against Goldman is a very technical one on the issue of fair disclosure. The Wall Street Journal says the allegations were that Paulson initiated the idea of that deal and had been in discussions with respect to bond selection with the credit manager for the deal ACA. And the SEC feels that that fact should have been disclosed to investors. As stated, that is really a stretch.

The newspapers are putting on a different spin. That these deals were sucker plays in which investors were sold securities with the knowledge that another party was short the securities. What the papers fail to understand is that unlike with other securities, a credit default swap always has mirroring long and short positions from the get go. So for every synthetic CDO deal done, the investment bank knew (and investors should have known) there was someone buying protection out of the insurance created in the deal, hence short.

The much more troubling aspect of all this comes out of a much earlier NY Times article on December 24, 2009 by Gretchen Morgenson

That article says that Goldman created synthetic CDOs for the purpose of creating capacity in credit default swaps to cover its own long positions in real estate. And that it is the reason Goldman kept the policies on their books rather than sellling them off to likes of Paulson.

If that is the case, then Goldman could be criticized on its ethics and perhaps sued.

As an addendum, I used to wonder why insitutions were willing to invest in synthetic CDOs and thereby become the issuer of a credit default swap giving protection on pools of subprime mortgages. The answer is that writing a credit default swap and receving the quarterly “insurance premiums” plus owning a Treasury is equivalent to owning a high-yield bond, and a bond having a credit rating. ”

This OPED in the Wall Street Journal today is certainly worth a read. They come to the defense of Goldman with respect to this case which has knocked off some $1o billion in market value, to be felt not just by Goldman people, but everyone who owns a share of stock. They say the “real impact of this case is political. The SEC charges conveniently arrive on the brink of the Senate debate over financial reform, and its supporters are already using the case to grease the bill’s passage.” The WSJ has critisized the firm in the past over many issues, but this is not one of them.

Here is the challenge – To bring appropriate reform to the financial system while maintaing sufficient confidence and trust in those implementing the reform, and those on the receiving end. They have to work together. I do not see this as a war where one side wins and the other loses, but rather working in partnership for a better long term outcome for all. I know… dream on.

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