I’ve been painfully busy this week so I was only able to get out my thoughts in a few tweets and comments on other blogs, forgive me. Felix Salmon, Kid Dynamite, Henry Blodget and others have all beat me to the punch, and largely, I share many of their thoughts, especially Dynamite’s most recent take (wherein he quotes Blodget).
I won’t rehash the charges as they’ve already been beaten to death by everyone else, however, I will say after reading the SEC’s complaint, the Abacus pitchbook, and Goldman’s defense, I’ve come to the following conclusions (I’m neither a lawyer or structured finance professional, so keep that in mind):
Not only do I not see how/why GS was under any obligation to disclose the party (parties) on the other side of the Abacus synthetic CDO transaction (see page 8 of the pitchbook), I can’t figure out how it’d matter if they had (more on this below). I also haven’t seen anything yet that explicitly says whether Paulson & Co. did or did not buy into the equity tranche of the deal. The SEC complaint seems to imply that they did not, however if that is, in fact, the case, I’m very curious why they danced around saying so clearly…
Also, as KD wrote (emphasis mine):
Note that no one is arguing the merits of GS’s disclosure (or lack thereof) here, but I am absolutely arguing that the disclosure shouldn’t have mattered IF ACA HAD DONE THEIR JOB. The underlying securities in the synthetic CDO are what they are, regardless of who put them on the list, or who takes the other side of the trade. They need to be evaluated based on risk metrics, cash flows, etc. The real issue is that ACA didn’t do this work to the level that they needed.
GS may be guilty of insufficient disclosure – let’s just pretend they are. My point is that even given this failure to disclose, the buyers of the securities in question were grossly negligent in failing to properly assess the values and prospects of the synthetic CDOs, and they are trying to remedy their bad trade by diverting blame.
Again, while I’m not a lawyer, from what we’ve seen so far, it looks like the investors’ shareholders may have merits to file suit against the firm’s management for breach of fiduciary duty, since its seems pretty clear that both ACA and IKB (and/or others) didn’t come anywhere close to conducting the kind of diligence required prior to undertaking such a transaction. They were given a list of all the underlying RMBS and could have easily done the same research Paulson & Co. apparently did, but it seems that either they did – and simply had a rosier outlook for MBS/over-reliance on Ratings – and/or didn’t, in which case they have no one else to blame but themselves.
At best, Goldman’s role(s) in this Abacus transaction teeter(s) on the edge of what most would call ethical business practices, however, I’m not sure the SEC – especially up against the all-star legal team GS is likely to bring – will be able to prove fraud on any meaningful scale. Given the emails involving “Fab” Tourre the SEC complaint cites, I wouldn’t be surprised if he gets thrown under the bus here by his squid overlords to save their butts. If that happens, I also wouldn’t be surprised if he tries to shift the blame onto one or two of his higher-ups, an action which GS senior management may deem necessary to protect the firm as a whole. Ultimately, my guess at this point is that Goldman ends up paying a $50-$100 million fine -tops – after a year or two of courtroom haggling, while “neither admitting or denying any wrongdoing.” My friend, The Reformed Broker explains what’ll likely come of this in it far better detail, here
As far as the bigger picture goes, I’m glad the SEC looks like they may finally be getting their shit together. Unfortunately, unless they have an ace up their sleeve, I doubt this case is the slam dunk they likely thought it was.