Goldman Sachs Settles With SEC Over Fraud Claims -- And Stock SOARS

(Yet again, the government (SEC) rolls over for the Wall Street devil banksters, letting Goldman Sachs get away with fraud hot on the tail of their record bonuses and TARP funds. Understand this: No matter which party is in charge of the country, the banks and corporations are the real rulers of this land. And they make or break laws at will with no real threat of legal action or punitive response from the government, their loyal employees. It's sickening, and enabled by the govt, the wealthy get everything they want while 'we the people' suffer seemingly endlessly.--jef)

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Goldman’s SEC Settlement by the Numbers: We Do the Math
by Marian Wang | ProPublica

Goldman Sachs has agreed to pay $550 million to settle the SEC's civil fraud lawsuit against it. The SEC is touting the sum as the “largest-ever penalty paid by a Wall Street firm,” but how much does the settlement actually hurt Goldman? We looked a up few numbers to put things into perspective:

• It’s about eight times what the head honcho has taken home in a year. In 2007, Goldman did the deal at the center of the SEC's suit, CEO Lloyd Blankfein took home $68 million in salary and bonus.
• It’s just a touch less than a Goldman charitable donation. In November 2009, after criticism of big bonuses at Goldman, the firm pledged $500 million to help small business owners.  
• It's less then a tenth of the gain Goldman's stock had today. Goldman’s stock took a hit when the SEC announced its lawsuit in April, but since word of the settlement first started circulating today, it’s added back $7.9 billion dollars to its market cap.
• It’s about two weeks’ worth of profit. Goldmanreported (PDF) earning $3.3 billion in the first quarter of 2010. That’s about $250 million in profit per week.
• It’s a sum that Goldman could pay immediately (and probably a hundreds of times over).The company’s average global core excess liquidity—the average worth of assets it could readily convert into cash—was $162 billion for the first quarter of 2010.
• It’s a fair amount more than what Goldman made on the deal the SEC sued over. Goldman reportedly made $15 million in fees from the CDO deal that landed Goldman in hot water. But keep in mind: Goldman did 25 of these so-called Abacus deals in all, and created many more CDOs without the Abacus label.
• Of the $550 million, the U.S. Treasury will get $300 million, and investors who lost out on this Abacus deal will get $250 million.

Meanwhile, Goldman has neither admitted nor denied the SEC’s fraud allegations, although Goldman did acknowledge that its marketing deals “contained incomplete information."

Harvey Pitt, former chairman of the Securities and Exchange Commission, told me the SEC’s extraction of this acknowledgement from Goldman was itself “highly unusual.” He called the settlement "a major victory for the SEC.”

Here’s the statement from Goldman:

In particular, it was a mistake for the Goldman marketing materials to state that the reference portfolio was ‘selected by’ ACA Management LLC without disclosing the role of Paulson & Co. Inc. in the portfolio selection process and that Paulson’s economic interests were adverse to CDO investors. Goldman regrets that the marketing materials did not contain that disclosure.

The terms of the settlement still need to be approved by a federal judge. The SEC's lawsuit against Goldman employee Fabrice Tourre will continue.

As we’ve pointed out, other major banks did deals similar to Goldman’s, and it remains to be seen whether the disclosures in their marketing documents will be sufficient. More on that, I’m sure, to come.

Goldman in the Dock

Making a Killing
By MIKE WHITNEY

Just two days after a marathon 10-hour hearing before the Senate Permanent Subcommittee on Investigations, Goldman Sachs learned that it is the target in a criminal investigation conducted by the U.S. attorney in Manhattan. Goldman has been accused of fraud by the SEC (in a civil suit) in connection to the sale of complex securities (CDOs) tied to subprime mortgages. Allegedly, the CDOs were designed to fail. The charges have raised Goldman's public profile and caused severe damage to its image as a company that serves the interests of its clients. The news of a federal probe could be a major hit to the bank's short-term prospects and profitability. According to Friday's Wall Street Journal:

"Federal prosecutors are conducting a criminal investigation into whether Goldman Sachs Group Inc. or its employees committed securities fraud in connection with its mortgage trading, people familiar with the probe say.

“The investigation from the Manhattan U.S. Attorney's Office, which is at a preliminary stage, stemmed from a referral from the Securities and Exchange Commission... The SEC recently filed civil securities-fraud charges against the big Wall Street firm and a trader in its mortgage group....The criminal probe raises the stakes for Goldman, Wall Street's most powerful firm." ("Criminal Probe Looks Into Goldman Trading" Wall Street Journal)

The public is paying close attention to developments in the case and video clips from the senate subcommittee hearings have been widely circulated on the Internet and used as fodder by late-night comedians. The depth and severity of the ongoing recession has created a need to find a scapegoat, one company who more than any other embodies the recklessness and voracity which led to the biggest financial crisis since the Great Depression. Goldman Sachs is that company.

News of the investigation has already roused Wall Street and put fear in the hearts of hedge fund managers and investment bankers who wonder if they'll be next in line. The public is likely to support aggressive action by the Department of Justice to hold the fraudsters accountable and to ensure that investors and homeowners are protected in the future. The question is whether the investigation is an honest attempt to reign in Wall Street or a political stunt to build support for President Obama's financial reforms that are stuck in the senate?

On Thursday, Reuters reported that Goldman planned to settle its fraud case with the SEC. Apparently, CEO Lloyd Blankfein decided that it would be wiser to pay a hefty fine and put the matter behind him than risk another drubbing like he suffered earlier in the week before the senate subcommittee. Now that option has been taken off the table. A full-blown criminal investigation means that Blankfein will be spending his days trying to explain why misleading his clients is a laudable business practice and not a felony. And, for Goldman shareholders, the news is even worse. With the country already in a lather over Wall Street's transgressions, the case could snowball into a reputation-busting main event. If the case goes to court, the networks will be stumbling over themselves to cover every lurid minute of the trial while deploying their footsoldiers to go through Blankfein's personal file with a fine-tooth comb.

Wall Street Journal:

"Over the years, the government has been reluctant to criminally charge financial firms with wrongdoing because the charge itself can cause a business to implode. Some investing clients can't or won't trade with a firm facing such a taint.

Indeed, in the more than two-century history of the U.S. financial markets, no major financial firm has survived criminal charges. Securities firms E.F. Hutton & Co. and Drexel Burnham Lambert Inc. crumbled after being indicted in the 1980s. In 2002 Arthur Andersen LLP went bankrupt after it was convicted of obstruction of justice for its role in covering up an investigation into Enron Corp. The conviction was later overturned by the Supreme Court."("Criminal Probe Looks Into Goldman Trading" Wall Street Journal)

As the WSJ points out, the stakes couldn't be higher. But is the SEC serious or is this just carefully choreographed political theater? No one knows for sure, but the markets aren't going to like it, especially if their Golden boys start blabbering about where all the bodies are buried. That's the nightmare scenario--"contagion"-- one criminal investigation after another spreading through Wall Street like a virus. But it could happen. The word is out that the SEC's new Director of Enforcement Robert Khuzami is eager to prove he's got the sinew to take down the biggest firm on the street. There's nothing that would make John Q. Public happier than seeing a phalanx of SEC regulators in full police regalia goosestepping through lower Manhattan. People are tired reading about bankers pulling in billions, and being fleeced by them.

The SEC wouldn't make a move like this unless they had a pretty solid case. That means that Khuzami may be getting information from a disgruntled former employee, someone who knows how Goldman works from the inside. A criminal case means documentation, hard evidence, and proof of intent. That's a tall order, and not one that the SEC would take lightly. After all, Khuzami vs. Goldman will be "winner take all" contest ; the 52 year old attorney will either be heaped with praise or face a career flame-out.

But Khuzami has his work cut out for him. Goldman will enlist every lawyer from Orlando to Portland to plead its case. And crossing swords with Blankfein will be the easy part. The hard part will be the rearguard action from the Geithner/Summers block within the administration. An attack on Goldman is an attack on Obama's financial braintrust, and it's bound to trigger a split within the White House. Remember how Geithner stuck his neck out to make sure that Goldman got 100 cents on the dollar for its credit default swaps (CDS) with AIG? Government officials don't do that unless they're working for the other side. Geithner is a Goldman loyalist, just like many other of Obama's lieutenants.

What people want is justice. And revenge.

The SEC Has Charged Goldman Sachs With... What?

The Breakdown
by CHRISTOPHER HAYES
April 23, 2010

For the last few weeks, the news cycle has been dominated by the financial industry, and the continued struggle to enact reforms on the giants that precipitated the global economic meltdown. In the wake of endless panels, congressional hearings and infuriating claims of total innocence (by everyone from Alan Greenspan to Lehman Brother's Richard Fuld), the US Securities and Exchange Commission took action. Last week, the SEC filed a civil suit against heavyweight Goldman Sachs for their role in exacerbating the sub-prime mortgage crisis by producing risky investment options. On this week's The Breakdown, DC Editor Christopher Hayes discusses the complexities of the case with the prolific blogger, author and economist Simon Johnson.

Wall Street's Bad Dream

If Only for a Moment ...
By ANDREW COCKBURN

If only for a moment, things look a little sour for Wall Street. Amid the SEC’s indictment of Goldman-Sachs and consequent reminder to the citizenry of the crookedness rampant in the financial “services” industry, a hitherto loyal ally, Senate Agriculture Committee chair Blanche Lincoln, has proposed legislation requiring major banks to divest themselves of their their vitally lucrative derivatives trading desks. Only at the very end of the senate Democrats’ enormous 1408 page financial reform is there a hefty chunk of solace for the bankers, in the form of Section 1155, a generally unnoticed provision clearly mandating another taxpayer-funded bailout all round the very next time disaster strikes.

Although there may be a lifeboat ready for future emergencies, bankers are currently feeling “quite undone,” one lobbyist with a fine eye for Wall Street’s Washington operations told me recently. “Lincoln’s proposal is their worst nightmare. Up until now ‘reform’ has been going fine for them. The administration and congress have largely been proposing what the banks wanted,” such as leaving them under the benign regulatory supervision of the Federal Reserve. Thanks to masterly work by the lobbyists, it seemed that the world would be kept safe for derivatives trading operations.

True, Senator Chris Dodd’s “Restoring America’s Financial Stability” bill makes popular noises about forcing derivatives trading into clearing houses and onto exchanges, but the big dealers were not unduly worried. After all, they already controlled major clearing houses, such as ICE, the Intercontinental Exchange, and anything too unwholesome in Dodd’s banking committee bill could be purged in a companion bill emanating from the Agriculture committee. CounterPunchers will recall that this was the tactic adopted in emasculating the derivatives-trading provisions of the house financial reform bill, which defined an exchange as two dealers talking on the phone. Ready and apparently willing to supervise the same operation in the senate was Arkansas’ Lincoln. “We always considered her reliable,” sighed my lobbyist friend.

But Lincoln’s re-election campaign is in serious trouble, not least because her primary opponent has been harping on Lincoln’s warm relations with Wall Street. Even so, she had shown every sign of hewing to the derivatives traders’ policy of highlighting the requirements of “end-users” in making the case for keeping things as they are (in the dark, with no public disclosure of market prices, thus preserving the opportunity for profitable gouging of customers.) “End users” in this context are businesses whichg in theory at least use the commodities they are betting on -- thus Coca Cola might buy derivatives on the price of sugar to hedge on future prices. Such corporations, wrangled into the Coalition for Derivatives End-Users by the bank lobbyists, dutifully broadcast the case that mandatory exchange trading would cramp their style and “hurt the consumer.” In reality, the end-user argument has always been an almost total sham, since derivatives trading has been overwhelmingly a matter of speculation, with little discernable effect on the consumer – apart of course from the derivatives-induced financial crash.

Unfortunately for the banks, Lincoln was so energetic in touting the end-user line that even Timothy Geithner grew a little uncomfortable. So, accompanied by Commodities Futures Trading Commission Gary Gensler, Geithner called on the senator and brusquely informed her she was being “too soft” on the issue. Her reaction was not at all what the treasury secretary expected, still less desired.

Piqued beyond measure by his graceless approach, Lincoln not only abandoned the cause of the end-users altogether, but inserted the requirement, thermonuclear in its implications for the profitability of JP Morgan and others, that banks dump their derivative trading operations. Adding insult to injury, the legislation clearly defines an exchange as a “trading facility,” another unpleasant surprise for the banks.

Separating banking from “prop trading” is essentially what Paul Volcker proposed some months ago. Although unveiled in one of those recurring moments when Obama wants to appear tough on Wall Street, the idea has barely been heard of since. Now Lincoln has offered a means of implementing the “Volcker Rule” and Geithner, the bankers’ friend, is reportedly not pleased. (Gensler is a different matter. Of all the senior administration financial officials, he is the least respectful of and subservient to Wall Street, doubtless thanks to insights gained during his erstwhile career at Goldman Sachs.)

Sad to say, the proposal is far too sensible and necessary for the health of the financial system to be allowed to stand, and will doubtless disappear in some administration-brokered compromise in pursuit of republican votes. The Dodd bill has already shorn the proposed Consumer Finance Protection Agency of any putative independence, consigning it to the black hole of the Federal Reserve.

More recently, there are reports that the bill will be stripped of a provision requiring a levy on the “too big to fail” banks as an insurance fund in the event of possible future defaults. However, anyone who believes official trumpetings about ending mega-bank bailouts should take a look at the paragraph on page 1379:

“During times of severe economic distress,” it reads, the Federal Deposit Insurance Corporation “shall create a widely available program to guarantee obligations of solvent insured depository institutions or solvent depository institution holding companies (including any affiliates thereof)...”

In plain English, this means that the next time they bring the system to ruin, the banks and bank holding companies will get bailed out by the taxpayers, just like this time. However disgruntled they may feel, the banks are not undone just yet.