Published: Saturday, April 24, 2010 at 1:00 a.m.
The Securities and Exchange Commission is sending a welcome signal of enforcement with its lawsuit against Goldman Sachs: No firm is too big to nail.
In recent years, the SEC was content to shrug while Wall Street titans ran amok. Its laxity contributed to the financial meltdown. The agency failed to ask even the most basic questions about Lehman Brothers' indebtedness before the firm collapsed. SEC investigators also ignored repeated, specific complaints about fraudulent broker Bernard Madoff, who lost billions for investors in a Ponzi scheme.
But the SEC is now suing Goldman, one of Wall Street's elite firms, claiming it misled investors by selling them a mortgage-backed security without telling them that the instrument was designed to fail. The wizards at Goldman created an investment opportunity that was essentially a bet on which way the housing industry was going. The instrument was called the Abacus 2007-AC1. When the subprime mortgage market collapsed, so did this investment.
The SEC alleges that Goldman and one of its executives, Fabrice Tourre, failed to disclose to investors that a hedge fund manager who bet against Abacus played a key role in devising the instrument. That hedge fund manager, John Paulson, ended up making about $1 billion in the deal. Other investors lost about $1 billion. ...
Goldman argues that it isn't guilty of wrongdoing. The firm notes that it lost a total of $90 million from the investment.
But other investors should have had access to the same information that Goldman did, including Paulson's role in the deal. Investors in these intricate transactions typically understand that someone is betting against them. But in this case they didn't know that the other bettor was helping Goldman choose the outcome. It could have swayed decisions.
The SEC had been negotiating a possible settlement with Goldman before filing its lawsuit. Goldman officials are crying foul, saying the SEC blindsided them with the complaint. Goldman might well feel blindsided, considering that Wall Street firms previously could count on a docile SEC to nap while plundering abounded. What's different this time is that the SEC is finally baring its teeth.
This enforcement action by the SEC is a positive signal that the watchdog is no longer afraid to take on deep-pocketed giants on Wall Street. An aggressive SEC is one of the best ways to prevent further abuses in the financial industry.
-- The Philadelphia Inquirer
You can't run a fair market with a rigged abacus. The complaint filed by the Securities and Exchange Commission against Goldman Sachs and one of its vice presidents, Fabrice Tourre, alleges that the investment bank did exactly that in marketing a financial instrument called Abacus 2007-AC1 in early 2007, when the housing bubble was just starting to burst. ...
Goldman notes that those investing in Abacus were sophisticated investors in such obligations. They were not told of Paulson's involvement, but they knew that someone was gambling in the opposite direction. ... And, Goldman says, the investors were fully informed about what underlying bundles of mortgages were the basis for the deal. Indeed, Goldman notes, although it made $15 million for structuring the deal, it also invested in it -- and lost a net $90 million. ACA also invested and lost. That strikes us as relevant but not conclusive. Just because Goldman knew about Paulson's role and decided to invest anyway doesn't mean that other investors weren't entitled to -- and wouldn't have been interested in -- that information.
The SEC is under fire, rightly, for regulatory lassitude that enabled the financial meltdown and allowed other frauds to flourish. ... SEC Chairman Mary Schapiro says the agency's ethos has changed. The Goldman case could be a welcome sign of a new aggressiveness; Goldman says it is a sign of overreaching. The company is entitled to offer its justification of that charge before anyone renders a final judgment.
-- The Washington Post
One factor in the March 21 passage by the U.S. House of the health care reform bill took place far away from the halls of Congress: On Feb. 4, Anthem Blue Cross announced that it intended to raise rates as much as 39 percent for individual health insurance policyholders. Thirty-nine percent was a big number that suddenly put the whole debate into sharp focus.
Similarly, as the Senate was preparing to take up the broadest reforms to the financial industry since the New Deal, came the new face of financial reform: "the fabulous Fab." That would be Fabrice Tourre, 31, executive director of Goldman Sachs International in London, who, the Securities and Exchange Commission charged, was a principal in a billion-dollar Goldman scam.
Tourre, Goldman vice president at the time, boasted to a friend in an e-mail obtained by the SEC that he was "the fabulous Fab standing in the middle of all these complex, highly leveraged exotic schemes he created without necessarily understanding all the implications of these monstrosities!!!"
The SEC lawsuit, filed in U.S. District Court in Manhattan, charges that Tourre, with the help of other principals at Goldman, teamed up with John Paulson of Paulson & Co., one of the world's largest hedge funds, to assemble the riskiest possible collection of subprime mortgage securities they could find. Paulson's firm then bet against those securities by buying from Goldman credit default swaps, or insurance, against their collapse.
... The financial regulation bill passed by the House and the Senate version would impose restrictions on derivative trading. Both also would impose stricter capital requirements on banks and create an agency to regulate financial products from mortgages to credit cards and payday loans. The Senate bill would require banks to fund a $50 billion fund that would wind down any bank that gets into trouble. ...
The Senate bill should be passed quickly, and then thoroughly beefed up in conference with the House. America needs a strong and vital banking industry that will focus on creating wealth the old-fashioned way, rewarding prudent investors and clients, not rigging the game for its own benefit.
-- St. Louis Post-Dispatch
The $2 billion Abacus 2007- AC1 fund set up by Goldman Sachs epitomizes what Main Street hates about Wall Street: It's the financial industry's version of a high-stakes poker table, where supposed sharpies bet on the success or failure of other people's investments. And the lawsuit filed by the Securities and Exchange Commission last week only reinforced the suspicion that the tables are rigged. ...
If the SEC is correct -- Goldman and Paulson have denied any wrongdoing -- the Abacus debacle could cost Goldman in reputation far more than the company gained from its bets against the housing bubble. But the case also underlines the need for Congress to plug dangerous gaps in the regulatory system.
Derivatives trades and complex securities need to be more fully disclosed and transparent. The companies that rate securities should be given stronger incentives for independent and accurate analyses. The lenders that bundle loans for Wall Street to sell should have to keep a stake in the loans' performance, rather than allowing lenders to offload every penny of risk onto investors. And most important, banks shouldn't be allowed to originate loans that the borrower has no chance of repaying. Those reforms are included in the financial overhaul bills in Congress.
-- Los Angeles Times