shenanigans

Listening to the Q&A session on the SEC call regarding the securities fraud charge at Goldman Sachs, it became obvious immediately that the press was going to screw this one up. Only NPR came up with an interesting question and one that may be the real story. The rest of the questions were idiotic. And now we have David Weidner reporting in the Wall Street Journal exactly in line with what I'd expect. This guy is utterly clueless.

Story is here.

... at the heart of the inferno is an ill-defined issue crucial to Wall Street: What does it mean to make a market?

Actually that has nothing to do with the inferno. What is he talking about exactly? This quote he uses from the chairman of the Financial Inquiry Commission is telling.

“It sounds to me a little bit like selling a car with faulty brakes, then buying an insurance policy on the buyer of those cars.”

In other words Goldman is up to shenanigans because they sold something that went bad. First, I have no problem with Goldman doing this. Someone has to perform this service if anyone is to buy any security. And presumably we are all big boys and if we want to buy a security we should do our homework. But more importantly that has nothing to do with SEC case against Goldman. I just knew the press would get the wrong story.

So what did Goldman actually do wrong? The SEC said that Goldman marketed the security in question with fraudulent materials. Every security offering has a prospectus that lays out the facts of the security in question. In this case what Goldman allegedly said in the prospectus (that the mortgage debt in the security offering was picked by an independent 3rd party) differed from how the debt was selected (namely that the hedge fund Paulson selected the debt and then promptly used derivatives to short the security suggesting it intentionally picked debt it expected to go bad). That's it. That's what they did. And to be honest its pretty nefarious.  Big boys can't do their own analysis if they don't have the correct information.  It'd be like putting fake financials into a company's IPO prospectus. Decidedly fraudulent if true.

So what did NPR ask?

"Why did Goldman Sachs do this?"

It's a good question. Why did they do this? Goldman was paid for underwriting the security issuance. Whether or not they helped Paulson pick the debt and whether or not they had non fraudulent marketing materials, they get paid THE SAME. In this case $15m. A pittance for Goldman.

So why did they do it? I think implicitly in this Paulson was somehow throwing something Goldman's way. Either implied business with Goldman or Paulson was investing some of Goldman's money or something. This could be the real story.