Saturday, April 17, 2010

A Buffoon on the Prowl

Long term EPJ readers know that I am no fan of the coziness between Goldman Sachs and the government, and that I consider the bailout of AIG simply the raping of America by Goldman. However, this new fraud charge coming out of the SEC against Goldman can only be viewed as the most absurd grandstanding by the SEC and one, SEC enforcement chief Robert Khuzami. I am tempted to throw Khuzami on my Evil Bastard list with just this one act, but it is so absurd a charge that I can't wait for the next circus act from him, so I am going to just sit back and enjoy the absurdity of it all.

Not only did Khuzami misrepresent the charges in his statement on the case, but it is one of the weakest cases that he could bring and suggests that while Khuzami may want to be the next Rudy Giuliani type, "fighting corruption on Wall Street," he really may not have enough wires in his attic, so to speak, to get  anywhere close.

Here is what Khuzami is quoted as saying in the press release announcing the civil fraud charges against Goldman Sachs:
"The product was new and complex but the deception and conflicts are old and simple," said Robert Khuzami, Director of the Division of Enforcement. "Goldman wrongly permitted a client that was betting against the mortgage market to heavily influence which mortgage securities to include in an investment portfolio, while telling other investors that the securities were selected by an independent, objective third party."
Well, just where does it say, anywhere, that  Goldman has to explain to anyone how they put their deals together, as long as an independent, objective third party puts a stamp of approval on this type deal? If I contact Goldman and ask them to construct some exotic gold call option for me and they do, why would they have to disclose to anyone on the other side of the trade  that they were selling the opposite side at  my request? Here's Goldman on what really went down:
The portfolio of mortgage backed securities in this investment was selected by an independent and experienced portfolio selection agent after a series of discussions, including with Paulson & Co., which were entirely typical of these types of transactions.
At another point Goldman correctly, and significantly, points out that the buyers of the CDO were hardly babes in the woods and should have known exactly what they were buying:
IKB, a large German Bank and sophisticated CDO market participant and ACA Capital Management, the two investors, were provided extensive information about the underlying mortgage securities. The risk associated with the securities was known to these investors, who were among the most sophisticated mortgage investors in the world. These investors also understood that a synthetic CDO transaction necessarily included both a long and short side.
Goldman, because of this absurd complaint, is even forced to state the obvious:
The SEC’s complaint accuses the firm of fraud because it didn’t disclose to one party of the transaction who was on the other side of that transaction. As normal business practice, market makers do not disclose the identities of a buyer to a seller and vice versa. Goldman Sachs never represented to ACA that Paulson was going to be a long investor.
Bottom line: Goldman's high-priced attorneys are going to make mince meat out of this case.

Which doesn't mean that Lloyd Blankfein escapes scot free. The negative publicity from this will have serious implications.

There is something wrong if Blankfein can't stop a clearly clueless SEC official from bringing such a weak case. It should have been made clear to Khuzami that when this is all over, he is going to look like a fool.  It will take a while for MSM to catch on to Khuzami's weak act, but they will. In the meantime, Goldman's rep takes another huge hit. The average guy on the street, and more important to Goldman, senior corporate execs will think the SEC has finally caught Goldman with their hands in the cookie jar. It is aa severe black mark that will be difficult to wash away.

With  this development, it becomes increasingly difficult to see how Blankfein survives the year.

As for Khuzami, who is relatively new as head of enforcemnet at the SEC, he has clearly established his buffoon status with me. This is just a dumb case to bring against Goldman. It's showboating to the masses, but he has no chance of winning the case. Meanwhile, Khuzami doesn't have the balls to go after real crime.


  1. Not one mention of the fact that it is alleged that Goldman allowed Paulson, the CDS buyer, to cherry pick the rotten contents of the Abacus portfolio?

  2. Janet Tavakoli obviously disagrees with you, RW.

  3. Hi Bob -

    You're wrong.
    It's a strong case of fraud.
    I read through the document and the emails and evidence.

    I think if they were smart they could come up with a legal theory to go after Paulson too