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Will Heads Roll at Goldman Sachs Over S.E.C. Fraud Lawsuit?
By
John Del Signore
Published Apr 20, 2010
Modified Apr 20, 2010
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By
John Del Signore
Published Apr 20, 2010
Modified Apr 20, 2010
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Goldman Sachs is defiantly denying allegations that one of its Vice Presidents did anything improper by selling subprime mortgage "derivative products" that he believed would fail, thus enabling a hedge funder who chose the cruddy bonds to cash in when they went bust. In the wake of Friday's S.E.C. lawsuit against the bank, there's little consensus on how the allegations will affect Goldman (and the banking industry at large). One securities analyst tells the Times, "I’m skeptical you will see heads roll on this [at Goldman]. The partnership will link arms and hold strong." But another analyst predicts, "Someone must fall on their swords for the devastating decline in this company’s persona."
But Goldman's CEO Lloyd C. Blankfein's position remains strong, and the board is fully behind him. Still, some Goldman alumni "worry that Mr. Blankfein is jeopardizing Goldman’s culture of success," the Times reports. "Goldman no longer seeks to avoid conflicts, Mr. Blankfein has said. Instead, it seeks to 'manage' them." Indeed, Goldman has moved aggressively to manage these allegations of fraud.
Goldman lawyers have told the S.E.C. that the company hired to manage the deal, ACA Management, was "no mindless dupe that could be easily manipulated." Furthermore, participants knew "someone had to take the other side of the portfolio risk." That was billionaire hedge fund manager John Paulson, who helped pick the underlying securities and then bet against them by buying insurance on them. But according to Goldman's lawyers, they did not need to disclose that "the relatively unknown Paulson" was betting against the deal because "no one in fact considered Paulson's role important and that no one was misled."
The S.E.C. begs to differ, but their civil suit is based on an unusual claim that some legal experts suspect might not hold up in court. Instead of alleging that Goldman misrepresented a product it was selling, the S.E.C. argues that Goldman misled customers about how that product was created. As the Times puts it, "It is the rough equivalent of asserting that an antiques dealer lied about the provenance, but not the quality, of an old table." And as The New Yorker's Nick Paumgarten observes, "Anyone buying this stuff from Goldman had to know this—they knew that someone somewhere, and probably someone pretty smart, was betting against them."
Tagged
derivitives
goldman sachs
subrprime mortgage
John Del Signore
Originally from the Albany area, John Del Signore has called NYC home since 1995. In addition to his thousands of meticulously-crafted bespoke blog posts for Gothamist, his writing has also been published in The Awl, Deadspin, The Nervous Breakdown, and performed at The Brick Theater in Brooklyn.
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Gothamist is funded by sponsors and member donations
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