Let’s say the president used the charge against Goldman Sachs politically. Concede, too, that the Democrats took advantage of the situation to get a politically agreeable ad to show when searching Goldman online.
So what?
If the same had been done by a Republican-dominated Washington, Republicans would have responded with what the side being criticized always uses, the Casablanca defense: “I’m shocked, shocked to find politics being played in Washington!”
The essence of the charge is whether the government has a case. But I think beyond that is whether, based on what we know so far, the Goldman deal was ethical. This is important because, even though in the final analysis I believe in our legal system, in the elite world of high finance it would not be surprising if a legal rationale is found for exoneration.
But from a Main Street-level look, it looks lousy.
According to a WSJ report:
Regulators say Goldman allowed Mr. Paulson’s firm, Paulson & Co., to help design a financial investment known as a CDO, or collateralized debt obligation, built out of a specific set of risky mortgage assets—essentially setting up the CDO for failure. Paulson then bet against it, while investors in the CDO weren’t told of Paulson’s role or intentions.
The WSJ noted in another article reporting about the SEC charges that a Goldman employee,
In launching the Abacus product, … sought the imprimatur of ACA Management LLC, an independent firm that analyzed mortgage loans. But the SEC alleges that [he] instead relied heavily on input from his contacts at Paulson, according to the SEC. Paulson wanted to make a bearish, or short, bet on the market for risky home loans.
Reportedly, within months the CDO investors saw their money dwindle to nothing or thereabouts, while the hedger who picked the now-soured assets was sitting on a $1 billion gain.
This portion of a letter to the editor in the WSJ, from a former Goldman Sachs employee, seems to sum it up:
“In the Abacus 2007-AC1 transaction, Goldman knowingly sold a product that was designed to fail, favoring its own interests and the interests of one client—John Paulson—over the interests of other clients. Further, it failed to fully disclose how the Abacus portfolio was assembled.”
Goldman and Paulson said they have done nothing wrong. Indeed, using the Casablanca defense, Goldman was “shocked, shocked” to have been charged , even as it knew for months this was an issue with the SEC. Goldman was apparently shocked, too, that anyone would have a problem with this deal.
So, why doesn’t this deal sound right? Is it a lack of sophistication or insufficient knowledge of esoteric investment “vehicles?” (This wasn’t just a CDO, it was a synthetic CDO, don’t cha know.)
Maybe it doesn’t pass the smell test because it sounds a lot like this scene from the TV series Crime Story. In it, up-and-coming crime star Ray Luca is explaining to top mobster Manny Weisbord, major associate Phil Bartoli and Max Goldman his idea for a way to make big money in gambling, no matter what:
RAY
This is how it works. Our man in Manhattan wires to us in Nevada all the New York action he’s taken on the Clay fight. Let’s say, uh, $4.2 million on Clay at 5 to 3. Now, because we’re in touch with the rest of the country that quick (snaps fingers), we can lay off $4.2 million on Clay at 3 to 5. We don’t try to win and we don’t try to lose. We’re at no risk. All we do is take our cut, 2 percent off the top of all the money bet on illegal gambling nationwide, week in, week out.
MANNY
(Smiles, then laughs)
This might not even be illegal.
RAY
It almost isn’t. Ya see, all we are is a clearinghouse for people who bet illegally in a state where betting is legal.
MAX
What’s the hitch?
RAY
We need, uh, an existing operation, one the bookies, uh, already have faith in for an accurate line.
Yeah, like Manny said: It might not even be illegal.
