SEC Investigating How Goldman Sachs & Friends Gamed the System
Image by AFP/Getty Images via Daylife
Heads I win, tails you lose.
That’s pretty much how it worked for Goldman Sachs and others who were trading in Collateralized Debt Obligations (CDOs), the credit default swaps that made Goldman, Morgan Stanley, Deutsche Bank and other smaller firms billions—much of it coming from the pockets of their own clients.
Immoral? Yes. Illegal? We may soon find out.
The New York Times reports this particular scam is now under investigation by the Securities Exchange Commission, which is questioning whether there was anything illegal in this version of how Goldman and others screwed over their clients. The scam is a bit complicated—the better to keep it under wraps—but here’s how it worked:
Goldman sets up a fund of collateralized mortgage debt, which it sells to clients with promises of a nice payout if the housing market continues to rise. It then takes out insurance to cover losses should the housing market tank. It then bets against the fund by shorting the bonds, a little maneuver that helped bring down the housing market.
When the housing market collapses, Goldman’s clients lose big. Goldman’s paper losses are covered by insurance, and it cleans up on the short sale. Talk about a fixed game. And what a game it was. Between 2005-2007, more than $100 billion of these securities were sold.
Goldman and others involved in this scheme insist—surprise!—they’ve done nothing wrong. The SEC is not so sure. One focus of its inquiry is whether the securities Goldman and others picked were particularly risky mortgage-linked assets. These were the investment that cost investors dearly and pushed the government to use billions of our tax dollars to stabilize the banking system. Several of the securities packaged by Goldman and another firm, Tricadia, were so bad they tanked just months after they were sold.
“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,” Sylvain R. Raynes, an expert in structured finance at R & R Consulting in New York, told the New York Times. “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.”
Others might call it stealing.
Post Your Comment
You must be logged in to post a comment
T/S Members
Log in with your True/Slant account.
Interesting. Can’t say I’m too confident that the SEC will really do anything.
Sad to say, I too am not too optimistic. Perhaps if enough of us yell loud enough, something will finally be done. Even if there is nothing technically illegal about what they did, the immorality of it all is staggering. These people hold the rest of us in contempt, then throw spare change into public relations campaigns to improve their image. Rather disgusting.
In response to another comment. See in context »Thank you from all the little fish’s. What is the second thing we should know? I think it should be the rules of the game have no rules! Goldman also has many friends, like Knight Capital… OTC’s most powerful Market Maker. President of Knight Capital is also the CEO of Scottrade…. is that legal? What about when Scottraid halts the buying of some stocks, then turns around and lends those same shares to NITE/ Knight Capital to Short Naked…..is that legal? Another market maker ABLE/ NATIXIS BLEICHROEDER LLC trades with Goldman Sachs Executions. So let me tell you about my favorite stock that all of themm are trying to get a piece of, in this new market of Medical Marijuana. The most undervalued and most shorted stock on the market -HESG, Health Sciences Group Inc. I’m an investors at .0001, Scottrade halted the buying of this stock, when the CEO Tom Gaffney retired 2 Billion shares of this stock. NITE has traded over 20 Billion shares of this stock in Nov. & Dec. …YTD combined total shares traded of HESG is 36 BIllion shares from a stock that has 2.2 Billion shares Outstanding and 3 Billion shares Authorized with a current price per share of .0006…Hmmmmm sounds fishy to me how about you? But back to my point…Is it legal for Scottrade to halt the buying of certain stocks, while lending those same shares to NITE. For shorting and diluting the share holders with phantom shares? In hopes of buying those shares back at a cheaper price before they Fail To Deliver. What Are The Rules To This Game?
Peace
[...] http://trueslant.com/jonpessah/2009/12/24/sec-investigating-how-goldman-sachs-friends-gamed-the-syst... [...]
[...] deal at the center of the SEC complaint—titled Abacus 2007-AC1—was one of 25 Goldman put together to bet against the overheated housing market. According to Elizabeth Warren, Goldman and others in the banking industry are giving McConnel and [...]