It Was a Mistake
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What happened yesterday will (quietly) go down as one of the most ridiculous distortions of justice ever.
A distortion that I predict will prove to be a clarion call for Occupiers and their brethren Hactivists to accelerate their protests against banks and globalization.
Just minutes after the Department of Justice announced it would not prosecute Goldman Sachs (NYSE: GS), the Manhattan DA charged former Goldman programmer Sergey Aleynikov with two felonies that could lead to four years in state prison.
To understand the absurdity here, compare these two facts:
1. Less than six months ago, a federal appeals court overturned Aleynikov's conviction on federal criminal charges that he stole secret source code from Goldman’s computers.
2. On July 14, 2010, Goldman (shareholders!) paid $550 million to the SEC to settle a civil action related to Abacus and other transactions (those which it was relieved of criminal sanctions today).
Uh, what?
It's worth reviewing, now post mortem, what we learned about Goldman during Sen. Carl Levin's investigation Wall Street and the Financial Crisis: Anatomy of a Financial Collapse (646-page PDF).
From 2004 to 2008, Goldman was a major player in the U.S. mortgage market. In 2006 and 2007 alone, it designed and underwrote 93 Residential Mortgage-Backed Securities ("RMBS") and 27 mortgage related CDO securitizations totaling about $100 billion, bought and sold RMBS and CDO securities on behalf of its clients, and amassed its own multi-billion-dollar proprietary mortgage related holdings. In December 2006, however, when it saw evidence that the high risk mortgages underlying many RMBS and CDO securities were incurring accelerated rates of delinquency and default, Goldman quietly and abruptly reversed course.
Over the next two months, it rapidly sold off or wrote down the bulk of its existing subprime RMBS and CDO inventory, and began building a short position that would allow it to profit from the decline of the mortgage market. Throughout 2007, Goldman twice built up and cashed in sizable mortgage related short positions. At its peak, Goldman’s net short position totaled $13.9 billion. Overall in 2007, its net short position produced record profits totaling $3.7 billion for Goldman’s Structured Products Group, which when combined with other mortgage losses, produced record net revenues of $1.1 billion for the Mortgage Department as a whole.
Throughout 2007, Goldman sold RMBS and CDO securities to its clients without disclosing its own net short position against the subprime market or its purchase of CDS contracts to gain from the loss in value of some of the very securities it was selling to its clients.
In the case of Abacus, Goldman did not take the short position, but allowed a hedge fund, Paulson & Co. Inc., that planned on shorting the CDO to play a major but hidden role in selecting its assets. Goldman marketed Abacus securities to its clients, knowing the CDO was designed to lose value and without disclosing the hedge fund’s asset selection role or investment objective to potential investors. Three long investors together lost about $1 billion from their Abacus investments, while the Paulson hedge fund profited by about the same amount. Today, the Abacus securities are worthless.
On April 16, 2010, the SEC filed a civil complaint against Goldman Sachs, alleging their actions constituted securities fraud. The SEC specifically alleged violations of Section 17(a) of the Securities Act of 1933, as well as Section 10(b) and Rule 10b-5 of the Securities Exchange Act of 1934. The SEC contended that Goldman had failed to disclose to potential investors materially adverse information, that the party shorting the reference assets was the same party that had played a significant role in selecting those assets.
On July 14, 2010, Goldman reached a $550 million settlement with the SEC. In connection with the settlement, Goldman acknowledged:
“[T]he marketing materials for the ABACUS 2007-AC1 transaction contained incomplete information. In particular, it was a mistake for the Goldman marketing materials to state that the reference portfolio was ‘selected by’ ACA Management LLC without disclosing the role of Paulson & Co. Inc. in the portfolio selection process and that Paulson’s economic interests were adverse to CDO investors.”
"...it was a mistake..."
Wait, wait, wait -- "it was a mistake"??? Passive voice. "It?" Who's "it?"
This should be Sergey's main defense. "The highly confidential code known in the industry as Goldman's 'secret sauce' (which brings up a whole other question), was mistakenly on my computer. It was a mistake. Ha-ha. You guys understand better than anyone what a mistake is. Oops!"
Correlation does not causality make. Fine, but consider this:
President Barack Obama’s largest campaign donors this year have included employees of Wells Fargo & Co., (NYSE: WFC), JPMorgan Chase & Co. (NYSE: JPM) and Goldman Sachs, according to an analysis of Federal Election Commission records. Their support indicates that Wall Street, which gave Obama $16 million for his successful 2008 White House run, is opening its checkbook again for the president. The contributions helped Obama raise $21 million in February, including $6.5 million transferred from a joint fundraising committee with the Democratic National Committee.
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That is no mistake.
DaveHarvilicz has no positions in the stocks mentioned above. The Motley Fool owns shares of JPMorgan Chase & Co. and Wells Fargo & Company and has the following options: short OCT 2012 $33.00 puts on Wells Fargo & Company and short OCT 2012 $36.00 calls on Wells Fargo & Company. Motley Fool newsletter services recommend Goldman Sachs Group and Wells Fargo & Company. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. If you have questions about this post or the Fool’s blog network, click here for information.
