Will the SEC Be Able to Nail Goldman?
How strong is the case, really?
Yesterday, the SEC announced it was suing hated megabank Goldman Sachs--which up until now has managed to stay on the right side of the law--for fraud. To review, the basic charge is that Goldman sold securities "designed by an interested manager," in the words of The Atlantic's Dan Indiviglio, "to go bad, but didn't represent them that way to investors." More specifically, the security looked like it had been evaluated and put together by ACA--a third-party firm--when in fact it had been structured more by hedge funder John Paulson, who was himself betting (contrary to what Goldman suggested) against the ultimate success of the security.
So what do the experts think of the charge? Does the SEC have a good chance of finally nailing down Goldman, the ultimate trophy from the populists' perspective? Here, the opinions of top business bloggers, former Wall Streeters, and a lawyer:
- SEC Looking Good While admitting that "there is some chance that the SEC has a weak case, but looks to enjoy some public praise for finally appearing to crack down [on Goldman and their ilk]," The Atlantic's Dan Indiviglio says the bottom line is this:
The idea is that Goldman structured securities that were designed by an interested manager to go bad, but didn't represent them that way to investors. If the facts of the case are proven to be accurate as depicted above, then it should be very easy for the SEC to prove fraud. Cherry picking bad assets and selling them to investors who thought they were chosen by an "independent manager" is illegal.
- SEC Looking Selective Edward Harrison, economics consultant, finds it odd that the SEC is going after Goldman rather than John Paulson, and suspects that this may well be an SEC publicity stunt.
- True, and That's Not Good, points out Reuters's James Pethokoukis, who looks at the political incentives for the SEC case. "Its aggression can also lead to unforced errors. A judge threw out a $33 million SEC fine against BofA regarding bonuses paid to Merrill Lynch employees. The SEC also failed to execute in its case against Cohmad Securities and the firm’s involvement with Bernard Madoff. In February, a federal court dismissed the SEC’s “flimsy” charges that Cohmad helped enable the notorious Ponzi schemer."
- 'Should Be a Slam-Dunk,' But Might Not Be Former Goldman employee Yves Smith, who has long criticized her former company for this very deal, notes that the SEC's is a civil, not a criminal, case against Goldman. That indicates, as others, too, have pointed out, that the evidence wasn't strong enough for a criminal case. "Moreover, the S.E.C. has long had a difficult time winning complex financial fraud cases ... Years of deregulation have narrowed the ground for lawsuits considerably," and "structured credit is a new area of litigation. Thus the S.E.C. is also mounting its case in an arena where there are few precedents to rely upon."
- Case 'Very Weak,' declares a Henry Blodget, himself once a target of the SEC (he settled). He argues "Goldman likely has a strong argument that it was not required to disclose that Paulson & Co. had been involved in the selection process. Why? Because it is clear from the email snippets the SEC cites that ACA had full control over which securities were selected for the final portfolio." Elsewhere, Blodget also adds that, weakening the case, the victims here "were not sympathetic mom-and-pop investors--they were highly sophisticated German banks who knew (or should have known) exactly what they were doing." On the other hand, Goldman "will NEVER be a sympathetic defendant." The SEC has that going for it.
- Looks Stronger than Some The Atlantic's head business blogger, Megan McArdle, acknowledges that "financial crises produce immense political pressure for securities regulators and attorneys general to go head-hunting, and the cases often turn out to be weaker than they seem once the defense gets a chance to speak ... But it certainly sounds as if the SEC has the goods here."
- Much Ado About Nothing: Here's What's Going to Happen Wall Streeter Joshua Brown rejects all the hype. Goldman will hire great lawyers, he says, will settle, will "admit no wrongdoing" while "the White House will claim victory ... Not one of you will be safer, more employed or in better shape as a result of any of this," and "the lawyers and PR reps involved in the case will buy Maseratis and vacation homes. Lots of them."