Goldman Sachs’ Bloody Nose

There’s something fishy about the SEC’s suit against Goldman Sachs. The timing seems particularly odd. Why did the SEC decide to drop this bombshell on a Friday, just when the market had reached a 12-month high and the economy was showing signs of improvement? Was it because they thought they might need the weekend to change course if the market suddenly plummeted 400 points? And why was Goldman picked over the other Wall Street banks? Was it because Obama knew that by targeting the most hated bank on Wall Street he could garner support for his reform agenda? The whole affair smacks of a political maneuver. Yes, the momentum IS building for regulatory reform, but the congress is still stuck in the mud, which makes the SEC suit look particularly suspicious, like a clever public relations ploy designed to push Obama’s toothless bill over the finish line.

There’s little doubt that Goldman is guilty of fraud. According to the SEC filing, they failed to make material disclosures about the synthetic collateralized debt obligations (CDO) they sold to their clients. These kamikaze CDOs were designed to blow up just months after they were constructed (which they did). According to former regulator William Black, “Goldman did not just withhold information, they told people, ‘Hey, the investment decisions are being made by experts who would only choose good quality stuff’, when in fact, the stuff that was put in was chosen because it was considered the most likely to suffer near-term downgrades.” So they deliberately misled investors. That’s fraud. They also never told investors that the securities were selected (in part) by a prominent hedge fund manager, John Paulson, who planned to bet against the same CDO. That’s another no-no. So the suit looks reasonably straightforward. As SEC Director Division of Enforcement Robert Khuzami said, “The product was new and complex, but the deception and conflicts are old and simple.” Indeed. What’s most shocking, is that Goldman was caught shafting its own clients to make a buck, which will no doubt haunt them for a very long time. Their reputation has suffered a major hit.

The New York Times Gretchen Morgenson and Louise Story co-authored a groundbreaking piece on CDO’s back in December 2009, which revealed the details of Goldmans activities. According to the Times:

“Goldman and other firms eventually used the C.D.O.’s to place unusually large negative bets that were not mainly for hedging purposes, and investors and industry experts say that put the firms at odds with their own clients’ interests.

“’The simultaneous selling of securities to customers and shorting them because they believed they were going to default is the most cynical use of credit information that I have ever seen,’ said Sylvain R. Raynes, an expert in structured finance at R & R Consulting in New York. ‘When you buy protection against an event that you have a hand in causing, you are buying fire insurance on someone else’s house and then committing arson’…..

“In early 2005, a group of prominent traders met at Deutsche Bank’s office in New York and drew up a new system, called Pay as You Go. This meant the insurance for those betting against mortgages would pay out more quickly….Other changes also increased the likelihood that investors would suffer losses if the mortgage market tanked.

“Banks also set up ever more complex deals that favored those betting against C.D.O.’s…..At Goldman, Mr. Egol structured some Abacus deals in a way that enabled those betting on a mortgage-market collapse to multiply the value of their bets, to as much as six or seven times the face value of those C.D.O.’s. When the mortgage market tumbled, this meant bigger profits for Goldman and other short sellers — and bigger losses for other investors.” (“Banks Bundled Bad Debt, Bet Against It and Won”, Gretchen Morgenson and Louise Story, New York Times.)

So, Goldman is a serial arsonist that has turned betting against its clients’ interests into a science. The Times article makes it clear that shorting subprime and luring gullible investors into the trap, was standard operating procedure. Goldman’s CEO Lloyd Blankfein dismisses the criticism with a wave of the hand saying, “They were sophisticated investors,” which is the same as saying “buyer beware”. It’s worth noting that shorting subprimes exacerbated the pain in housing by creating incentives for originators to issue more mortgages to people with poor credit. This prolonged the housing boom and deepened the recession when the bubble finally burst. The eventual downturn was largely engineered by Wall Street.

Still, this doesn’t explain why the SEC chose Goldman over the other investment banks that were engaged in the same type of activities. Keep in mind, the Abacus CDO deal only cost about $1 billion, small potatoes compared to the $100 billion hijinx at Lehman Bros. So, why isn’t Dick Fuld in leg-irons?

This is not a defense of Goldman. (They should throw the book at them) But Goldman is no guiltier than anyone else. So, what gives? The public is not ready to answer that question because they’re too swept up in schadenfreude; i.e., malicious pleasure in the misfortune of others. Everyone is savoring this intoxicating moment of payback where the deep-pocket bunko-artists finally get their comeuppance. But there may be more to this than meets the eye, part of a strategy to pass Obama’s reform bill or to give him a Teddy Roosevelt-makeover and to boost the Dems’ prospects for the upcoming midterms. After all, the Rubin-clones, Geithner and Summers, still haven’t gotten their pink slips. And Obama’s position on the main issues– “Too big to fail”, OTC derivatives, off-balance sheet operations, securitization, ratings agencies and CFPA–hasn’t changed at all. Wouldn’t that be the logical place to start if Obama was serious about cleaning up Wall Street and reforming the system? Instead, all of the attention is focused the headline-grabbing slapdown of Goldman? Sorry, it doesn’t pass the smell test.

Many of the other banks were engaged in the same shenanigans as Goldman. Yves Smith at Naked Capitaism cites one example:

“The Wall Street Journal reports that Dutch bank Rabobank has filed a suit alleging that Merrill Lynch engaged in the same type of behavior as Goldman did with John Paulson, namely, devising a CDO on behalf of a hedge fund who was using it to take a short position, and not disclosing that fact to investors in the deal.”

Of course, compared to Lehman Bros. $100 billion “Repo 105” off-balance sheet swindle, the Goldman scam looks trivial. So, where are the subpoenas, the indictments, the criminal prosecutions?

Last week, the Senate Subcommittee on Investigations exposed a veritable breeding-ground of larceny, malfeasance and fraud at Washington Mutual. Here’s a clip from Senator Carl Levin’s opening statement which sums up what was going on at WaMu:

“Tuesday’s hearing, shows how, over a 5-year period, from 2003 to 2008, Washington Mutual and its subprime lender, Long Beach, loaded up with risk. The bank dumped low-risk 30-year fixed loans in favor of high risk subprime, option ARM, and home equity loans. High risk loans grew from one-third to three-quarters of the bank’s home loan business.

“Those high risk loans were problem-plagued… In one instance, a year-long internal WaMu probe found that two of WaMu’s top loan producing offices were issuing loans with fraud rates of 58 per cent and 83 per cent…. At still another loan office, a sales associate admitted ‘manufacturing’ documents to support quick loan closings.

Washington Mutual’s shoddy lending practices affected more than its own operations. WaMu and Long Beach sold or securitized most of their loans. From 2000 to 2007, WaMu and Long Beach securitized at least $77 billion in subprime loans, stopping only when the subprime secondary market collapsed in September 2007. WaMu sold another $115 billion in Option ARM loans. Together, WaMu and Long Beach dumped hundreds of billions of dollars of toxic mortgages into the financial system like polluters dumping poison in a river.” (Opening Statement of Sen. Carl Levin, D-Mich.: U.S. Senate Permanent Subcommittee on Investigations Hearing on Wall Street and the Financial Crisis: The Role of Bank Regulators)

Fake documents, bogus loans, fraud rates of 83 per cent, and West Coast boiler rooms dumping toxic sludge into the secondary market where it was scooped up by credulous investors. This is industrial scale white collar crime, and yet it barely found a spot on the back-pages of the nations newspapers. Why? Goldman’s puny CDO doesn’t hold a candle to WaMu’s gigantic ripoff? Is this selective justice or just public relations?

And then there’s Citigroup, which appeared before the Financial Crisis Inquiry Commission in early April. Here’s how ex-regulator William Black summarized Citi’s testimony:

“Citicorp’s top mortgage credit officer, Richard Bowen, testified on April 7 that while Citi represented to Fannie and Freddie that the toxic mortgages it was selling them were ‘conforming’ — 60 percent were not.

“He warned Citi’s top managers, including Robert Rubin. They jumped right on the problem (which will cost the taxpayers hundreds of billions of dollars) — by allowing things to get worse.” (NY Times William Black, “So much we don’t know.”)

Bowen admits that Citi was deliberately defrauding Uncle Sam by using Fannie as a toxic landfill to unload non-performing garbage that it knew was only worth pennies on the dollar. And, after Bowden issued his warning, the dumping actually intensified. So, where are the handcuffs, the SWAT Teams, the orange jumpsuits?

Lehman, Citi and WaMu; three examples of corruption in a sector where corruption is the norm. Nothing about the Goldman case stands out, except for the fact that the Goldman logo fuels populist rage. Corruption on Wall Street is pervasive and deeply-rooted. It is not the purview of any one institution.

Obama has the wind at his back. Now that he’s bloodied Goldman’s nose and gotten the public riled up, his reform bill will probably pass. But Obama’s financial reforms are much like Obama’s health care; half-loaf remedies that translate into a few extra votes on election day, but merely transfer more middle class wealth to giant corporations. It’s pathetic. It looks like we’ve entered another era of “triangulation”.

MIKE WHITNEY lives in Washington state. He can be reached at




MIKE WHITNEY lives in Washington state. He is a contributor to Hopeless: Barack Obama and the Politics of Illusion (AK Press). Hopeless is also available in a Kindle edition. He can be reached at