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Apr. 16 2010 - 11:27 am | 589 views | 2 recommendations | 18 comments

SEC’s Goldman Sachs fraud suit amounts to nibbling at the Great Vampire Squid’s tentacle

One of the series of images of a live giant sq...

It's getting away! (Image via Wikipedia)

It’s a very good day if you had a short position on Goldman Sachs stock. The company’s shares are tumbling as word emerged that the Securities and Exchange Commission was suing the investment bank effectively for setting up a collateralized debt obligation or CDO that it knew would fail, down about 15% around 11:15 am.

You can read the New York Times for a newsy analysis of what’s going on here, but I wanted to focus in on the SEC’s press release, which really raises the question to me of how much money Goldman Sachs, ‘the great vampire squid‘ as Matt Taibbi memorably named it, is set to lose should the feds have their way with the company in court:

The SEC alleges that Goldman Sachs Vice President Fabrice Tourre was principally responsible for ABACUS 2007-AC1. Tourre structured the transaction, prepared the marketing materials, and communicated directly with investors. Tourre allegedly knew of Paulson & Co.’s undisclosed short interest and role in the collateral selection process. In addition, he misled ACA into believing that Paulson & Co. invested approximately $200 million in the equity of ABACUS, indicating that Paulson & Co.’s interests in the collateral selection process were closely aligned with ACA’s interests. In reality, however, their interests were sharply conflicting.

According to the SEC’s complaint, the deal closed on April 26, 2007, and Paulson & Co. paid Goldman Sachs approximately $15 million for structuring and marketing ABACUS. By Oct. 24, 2007, 83 percent of the RMBS in the ABACUS portfolio had been downgraded and 17 percent were on negative watch. By Jan. 29, 2008, 99 percent of the portfolio had been downgraded.

Investors in the liabilities of ABACUS are alleged to have lost more than $1 billion.

The SEC’s complaint charges Goldman Sachs and Tourre with violations of Section 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934, and Exchange Act Rule 10b-5. The Commission seeks injunctive relief, disgorgement of profits, prejudgment interest, and financial penalties.

So let me see if I have this right: GS earned about $15 million from this ABACUS 2007-AC1 flop? Goldman Sachs calls that ‘walking around money.’ Meanwhile, the bets made by Paulson & co., who asked GS to put the CDO together, earned the hedge fund around $1 billion. And no one is suing them.

So how much is this lawsuit really going to cost GS should they be ruled against in court, or reach a settlement with the SEC? Anywhere close to the more than $1 billion that investors lost according to the SEC?

As This American Life/Pro Publica’s report on Magnetar Capital and their ‘bets against the American dream’ demonstrated, the market was redolent with deals like the ABACUS 2007-AC1 product before the Great Recession got underway in 2008. So if Goldman Sachs is only going to lose the $15 million it earned from Paulson & Co., along with the interest and penalties, this SEC action will amount to catching the edge of a single tentacle on a squid that swims away to safely feed in vast quantities again. If this isn’t the first in a lengthy string of prosecutions for defrauding investors in deals like the one described in the SEC complaint, that loss in the value of GS stock ought to be recovered nicely once the bank escapes the headlines again.


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  1. collapse expand

    I doubt if GS execs are shaking in their boots since they have GS alumni operatives in government from tax cheat Geithner on down….

    No doubt GS execs were give a heads up on the suit by the SEC, so they could lay their debts and make some walking around money off of falling stocks….

    No doubt the SEC, itself, placed side bets….

    • collapse expand

      Geithner- and I don’t like him anymore than you do- was not a “tax cheat”. He made a mistake, was fined, paid what was due, with penalties and interest. If you’re going to criticize somebody, criticize them for the right things. Hey, did you check that Factcheck.org link I left you? Paid for by Walter Annenberg, close friend of Ronald Reagan.

      In response to another comment. See in context »
  2. collapse expand

    If Giant Squid was only going to make pocket change from the deal, then why did they even bother? In other words, how many such deals like this were they actually pulling? Couch change adds up, if you have enough couches. If the SEC makes a case showing a pattern of misbehavior, surely Grandiose Suckfish could end up losing more than than a token fine- one would hope. Anyhow, this case can only help the mission of real financial reform. The timing is interesting.

    • collapse expand

      I’m certain they were doing a lot of these deals – that’s what the TAL/ProPublica report alleged. But I’d rather the SEC dropped a cluster of charges at once rather than doing it piecemeal.

      As for fin reform, I don’t know. Conservatives are already seizing on the relationships between Goldman execs and Obama officials as evidence that financial reform isn’t sincere. They may not be wrong, although of course they’d only make it worse by taking little to no action at all.

      In response to another comment. See in context »
      • collapse expand

        Sigh. Thanks for the dose of cold water- needed it I guess, and you’re clearly right on the Con’s attack points- even andy got that memo. (Stings a bit to admit that they have a point.) By the by, sorry about the troll-chasing on your blog, I was bored. Actually, I’m getting rather fond of andy.

        In response to another comment. See in context »
      • collapse expand

        Money is power. Power trumps charisma. GS owns Obama.
        Michael is absolutely right about financial reform. A cheap democrat handjob is far better than republican nothing. Great logic, albeit twinged with a slight hint of defeatism. Parsing the pluses and minuses of the two dominant political prostitution rings is urgent bidness. Maybe there is hope for your career in humor, Mike! You really are funny… kinda.

        In response to another comment. See in context »
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