Blogs > Your Money

Dave Patterson and Erin Preston, a father-daughter team of Certified Financial Planner® licensees, provide thoughts and suggestions on a broad collection of personal finance topics.  Information provided in this BLOG is intended to be of a general nature and may not be appropriate for all situations.  Readers should consult with their own financial advisors before relying on any information contained herein.

Monday, April 19, 2010

Don’t Rush to Judgment on Goldman Sachs

All may not be as it appeared in the news on the Goldman Sachs fraud charges by the SEC. An interesting editorial by the Wall Street Journal (“The SEC vs. Goldman”, Monday, April 19, 2010) points out that the investment in question did not hold any mortgages but was a “synthetic” collateralized debt obligation (CDO). The investment allowed investors to bet on the future value of certain mortgage backed securities without actually owning them. Major investors involved in the investment knew they were gambling on the mortgage market. The article stated “The existence of a short bet wasn’t Goldman’s dark secret. It was the very premise of the transaction.”

According to the article, the SEC claims Goldman let Paulson & Co. dictate which mortgage-backed securities would be involved in the speculation and then didn’t disclose he was involved. Yet, according to the Journal, “The SEC complaint itself states that ACA (ACA Management was the largest investor on the other side of the deal from Paulson) had the final word on which assets would be referenced in the CDO.” The article states that at the time Paulson was not well known. He only became famous after he profited from the investment. His involvement at the time the investment was formed, therefore, would have made little difference to other investors.

The article points out that Goldman was also a loser in the investment, to the tune of $90 million. If they thought Paulson’s involvement was such a risk, why would they bet against him?

The article also questions the timing of the suit. Could it in any way be related to the Senate debate over financial reform?

It was also interesting to see another separate article in the same Journal that discussed the fact that Goldman previously knew it was being investigated by the SEC (Silence Was Goldman; Will a Price Be Paid”) yet refrained from disclosing the fact to its investors. According to the article, Goldman was not legally required to notify its investors. Its stock took a hit, however, to the tune of a drop in market capitalization of $12.4 billion. Disclosure of the investigation could have mitigated such a decline. Perhaps Goldman thought the potential suit by the SEC had little merit and that’s why they didn’t disclose the investigation?

Obviously, there may be more evidence not disclosed by the SEC. Nevertheless, on the surface it seems that the suit may be questionable. Time will tell.


Post a Comment

Subscribe to Post Comments [Atom]

<< Home