On Friday, the Securities and Exchange Commission (SEC) charged Goldman Sachs with fraud related to the structuring and marketing of a synthetic Collateralized Debt Obligation (CDO) deal. It was about time but now the question is what other financial conglomerates were doing similar things?
SEC has accused Goldman Sachs of defrauding investors by failing to disclose important information regarding the structuring and marketing of a synthetic CDO that depended on the performance of sub-prime residential mortgage backed securities (RMBS). The complexity of the transaction could have made the perpetration of the alleged fraud easier. However, the actions of Goldman’s and the other party who benefited from this transaction are what matters.
Goldman had a huge hedge fund client - Paulson & Co (the other party). Paulson & Co. is run by John Paulson. Paulson had made billions of dollars betting against the residential mortgage market (with help like it got from Goldman it’s no surprise). Paulson wanted to create a deal where it could short sell a security that involved subprime mortgages. Keep in mind this was happening as the mortgage market - subprime bubble was about to pop. It paid money to Goldman to structure such a deal. Goldman created the synthetic CDO but get this - Paulson chose the subprime mortgages that would be included in the pool backing RMBS and of course Paulson picked the worse performing mortgages.
Goldman needed someone/investors (suckers) to take the opposite position of Paulson to pull this transaction off for Paulson. Goldman was able to find some suckers for the transaction - over $1 billion. SEC alleges that Goldman failed to disclose to investors Paulson’s relationship in the deal and that Paulson was planning to short the synthetic CDO. End result - investors lost over $1 billion, Paulson made $1 billion and Goldman gets huge fee from Paulson.
Are you pissed yet? Goldman used its reputation and credibility in financial markets to sucker investors into investing in this garbage. This was not much different than a ponzi scheme. But how widespread was this lucrative practice?
Well, it appears that the SEC is investigating other toxic deals. It’s about time. Now, one of Goldman’s defenses or responses or public spin is that only big investors (big boys) lost money. Well, that explanation probably doesn’t satisfy UK and German officials who had to bail out the several of the investors in this scheme. But this response is bullshit for other reasons.
Financial transactions and markets rely on a certain level of trust and confidence between participants in markets. To the extent that one or several of the biggest players in the market are not trustworthy that can cause markets to freeze up as we saw in money market funds. Our economy depends on properly functioning financial markets and to the extent that financial conglomerates such as Goldman are endangering the functioning of them because of their behavior then they are a threat to our economy and to us.
economy financial+crisis budget+deficit obama unemployment jobs credit+cards debt social+security deficit personal+finance capitalism bailout mortgage mortgage+crisis economic+crisis wall+street+bailout new+economy job+guarantee retirement+savings credit+unions deficit+hawks economic+stimulus cooperatives health+care+reform financial+regulatory+reform income+inequality federal+debt financial+conglomerates tarp financial+oligarchy 401k worker+cooperatives gdp debt+management new+normal money scams fiat+currency china economic+growth federal+reserve wages globalization savings neoliberal consumer+protection stimulus unemployment+rate tax+cuts wall+street middle+class investing consumer+debt investments financial+planning credit+card+debt debt+settlement federal+deficit democrats republicans stocks government+spending negative+equity risk foreclosure budget u.s.+treasuries job+growth bonds economic+mobility bank+of+america foreclosure+fraud taxes consumer+spending cfpa ira class+war inflation jobs+report financial+bailout fiscal+policy evil pete+peterson health+care financial+literacy jobs+crisis foreclosures move+your+money full+employment modern+monetary+theory stock+market neo-liberal checking economic+policy banking identity+theft cash+flow compound+interest fraud too+big+to+fail fdic state+of+the+union predatory net+worth u.s.+treasury+securities class+warfare bankruptcy mortgages derivatives goldman+sachs great+recession debt+consolidation eu keynes gold fico+scores refinance credit+scores real+estate debt+crisis banking+system mortgage+foreclosure financial+regulation financial+crisis+inquiry+commission deficit+commission debt+servitude krugman federal+budget de-regulation solidarity free+trade wisconsin debt+collection income+tax refinancing loan+modifications trickle+down+economics financial+stability+plan poverty retirement working+class currency monthly+budget wills economics #finreg tbtf estate+planning consumer+credit gold+standard debt+ceiling auto+industry president+obama center+for+responsible+lending mutual+funds innocent+fraud aig life+insurance personal+income market+fundamentalism consumer+financial+protection+agency trade+deficit gas+prices obama+administration destruction citizens+united outlays wall+street+bailouts exports household+debt fallacy+of+composition securities+laws save public+option living+standard unions july+2011 unemployment+benefits imports card+act fallacies emergency+funds deductibles strategic+defaults keynesian wiped+out productivity+ralph+nader new+era+windows laid+off citigroup financial+sector foreclosure+gate auto+loans human+capitalism savings+tip financial+reform arra free+credit+report chicago money+market+accounts unemployment+insurance fox+news+channel credit+rating+agencies credit+reports fallacy money+market+mutual+funds afl-cio fox move+money predatory+lending refund+anticipation+loans jobs+data moody's revolution tax+reform uaw employment principal+reduction roger+ailes close+banking+accounts countervailing+powers tax+refund debt+forgiveness lehman+brothers cornel+west exuberance denmark propaganda banking+services john+k.+galbraith monetary+policy option+arm mortgage+loan+modifications subprime+mortgages corporate+profits disposable+income national+infrastructure+bank corporate+welfare u.s money+manager+capitalism birth+certificate fundamentals living+wage output+gap success consumption interest+rates greece quantitative+easing political+system john+mccain minimum+wage new+democrat+coalition two+americas ltcm universal+health+care income+distribution household american+recovery+and+reinvestment+act oligarchy two+economies frontline senate+democrats eurozone debt+commission haymarket existing+home+sales jobless+recovery carried+interest john+edwards income regulations ben+bernanke california+budget catfood employee+ownership paladino robert+reich mark+to+market budgets payroll+tax euro chicago+idea fannie+mae housing+market cowards slavery dollar sector+balances gmac life+settlements tax+holiday ireland mlk subprime bad+bank bullshit target+date+mutual+funds argentina fierce savings+plan alan+greenspan deficit+errorists payroll+tax+holiday phone+scams financial+regulations national+debt free+markets united+states now savings+bonds shadow+banking+system fica+tax madison time+value+of+money cost+of+unemployment ponzi+schemes swipe+fees credit+markets fair+debt+collection+practices+act tax+code #wallstreetscam great+divergence paulson future+value pensions fed+audit debit+cards cooperative+economy predatory+home+lenders cash cdo walker warren+buffett treasury+department present+value tax+deal 20-year+mortgage obama+tax+deal short+sales liquidity u.s.+debt poverty+rates conservatives ppip job+loss economic+purgatory long+term+unemployment vicious+cycle cash+management treasury+securities detroit+schools home+buying home+closing banks deficit+hawk american+capitalism bartering emergency+savings efca debt+hysteria online+scams income+taxes investment inequality community+gardens economic community+banks debt+to+gdp recession austerity email beige+book mortgage+modifications yuan risk-return investment+advice estate investment+yields happy+year finreg hyman+minsky american+dream malicious+software deflation corporate+bailouts federal business+roundtable cooperation dot+com+bubble leading+economic+indicators deferred+annuities bailouts economic+policies balancing+checkbook alternatives returns housing+bubble chris+dodd lei fixed+rate+annuity lobbyists debt+is+evil disability+income+insurance scam fiscal+sustainability home+mortgage insurance variable+rate+annuity corporate+tax+breaks credit+card+law deficit+spending tina balance+check+book credit+report teach-in currency+manipulation bill+gross foreclosure+rescue+services gross+domestic+product race+to+bottom big+banks marx june+jobs+report general+motors economic+indicators budgeting financialization warren+mosler washington+consensus emergency new+capitalist+manifesto bank+fees credit+card minsky tips open+auction lost+decade financial+genocide republican+budget human+capital direct+deposit reaganomics overdraft cfpb galbraith social+security+cards geithner commercial+real+estate direct+jobs+program civil+disobedience balance etf economic+justice barack+obama worker+ownership personal+consumption treasuries protests