Goldman Civil Suit: Expect a Slap on the Wrists

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