Goldman Civil Suit: Expect a Slap on the Wrists

by Addison Wiggin.

What’s really interesting, as always, is the story that no one is telling. The SEC is either stupid or corrupt for announcing their suit on options expiration Friday, the most volatile day of the month.

April 170 Goldman Sachs puts, which would have expired worthless had the SEC waited until today, rose 140,000% on Friday.

Goldman April Puts

Anyone with an extra thousand bucks and some insider info on Friday morning could have made just shy of a million and a half by Friday afternoon.

There was surprisingly large volume in these “out of the money” puts the days before… who in their right mind would bet on such a large fall for such a typically stable company? Someone who knew what was coming. Maybe someone in the SEC should look into that, too.

Heh. Maybe someone already did.

In case you missed it, here’s the quick and dirty on the SEC’s suit against Goldman Sachs:

  • Über-billionaire hedge fund manager John Paulson – the guy that was oh-so “smart” to see the subprime fiasco coming – allegedly pays Goldman to assemble a CDO of destined-to-fail mortgages, which Paulson then bets against. No problem there, happens all the time. Paulson is not named in the suit
  • Goldman pockets Paulson’s fee (in some way or another) then turns around and sells these securities labeled triple AAA to investors in Europe. They end up spread across banks in Holland and Germany. The SEC claims no party was informed the CDO – called Abacus 2007-AC1 – was built to fail. Oops. Fraud by omission
  • Goldman, at some point, also bets against Abacus 2007-AC1. “Hedging” Goldman calls it. Following Paulson’s lead…meh, maybe not such a bad move, but not exactly on the up and up, either. Still not likely criminal.

Paulson banked a billion when Abacus 2007-AC1 blew up. Goldman got to keep Paulson’s fee, the profitable sales of Abacus and its own hedge profits…though it still claims the lost money in the long run.

The SEC lawsuit itself is, like the one they filed against Bank of America for lying to their shareholders, far from frightening.

It’s civil, not criminal – no one’s going to jail. The complaint cites about $1 billion in fraudulent transactions. Goldman’s market cap is $84 billion. And there’s already a no-name patsy lined up: Fabrice Tourre, the ONLY Goldman employee named in the SEC complaint. A French guy, to boot. How sweet.

The worst damage Goldman is going to see out of this may already be done. Goldman stock fell 13% Friday, wiping out $10 billion in shareholder value. If history is any guide, the media will do their best to make a real story out of this over the next week. Goldman will get a slap on the wrist later this year…and back to business as usual.

Are you shocked? C’mon. This kind of fraud happens all the time.

“Now that the SEC announced it is charging Goldman Sachs with securities fraud,” writes our Dan Amoss, “maybe we’ll see a long overdue shift to prosecuting the fraud that permeates the financial system.

“While more prosecution of fraudulent mortgage origination is nice, accounting is the bigger issue that regulators need to deal with. ‘Mark-to-myth’ accounting is taking the US banking system down the same path as post-bubble Japan.

“While we need to see the SEC push for a return to honest accounting in the banking and brokerage sector, I’m not holding my breath. The Treasury Department has trillions in new bills, notes and bonds to sell over the next few years, and it needs the primary dealers to assist in the greatest intergenerational theft in history.”

Addison Wiggin
for The Daily Reckoning

Addison Wiggin is the executive publisher of Agora Financial, LLC, a fiercely independent economic forecasting and financial research firm. He's the creator and editorial director of Agora Financial's daily 5 Min. Forecast and editorial director of The Daily Reckoning. Wiggin is the founder of Agora Entertainment, executive producer and co-writer of I.O.U.S.A., which was nominated for the Grand Jury Prize at the 2008 Sundance Film Festival, the 2009 Critics Choice Award for Best Documentary Feature, and was also shortlisted for a 2009 Academy Award. He is the author of the companion book of the film I.O.U.S.A.and his second edition of The Demise of the Dollar, and Why it's Even Better for Your Investments was just fully revised and updated. Wiggin is a three-time New York Times best-selling author whose work has been recognized by The New York Times Magazine, The Economist, Worth, The New York Times, The Washington Post as well as major network news programs. He also co-authored international bestsellers Financial Reckoning Day and Empire of Debt with Bill Bonner.

  • tony bonn

    what’s so amazing is that the europeans will bend over further with more lube and squeal like a pig….no action, no lawsuits, no nothing except squealing…

  • Harry

    I bought some this morning. Watch it fly tomorrow after earnings. This whole thing is over blown by a mile.

  • Tom

    It’s just another power grab by DC that won’t improve Wall Street one bit (and they probably knew about and benefitted from). A pointless SEC suit on Friday, talking heads babbling for a week and then, surprise! Dodd’s financial reform bill to be introduced this week consolidating economic and political power even further.

    What’s the definition of fascism again? Something about industry-government partnerships controlling the nation if I remember. Oh well….

  • Venky

    If this blows over and nothing happens of any substance, it will confirm that enough people are bought, on the dole or sufficiently entranced in societal diversions to keep them distracted.

    A job well done boyz.

  • Dean

    No Addison. The SEC is stupid AND corrupt. There is no “or” my friend.

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