If you’re not spending your Sunday afternoon reading about the SEC’s fraud charges against Goldman Sachs (GS), then you’re wasting your time.Here are three pieces from around the web that caught our attention.
First is from Eric Falkenstein who argues that, duh, of course Paulson’s intent matters!
In securities markets, people often buy from those who think the price will fall. Yet in this case the seller’s intention was material because when there is incomplete information, knowing the intentions of the parties involved makes a huge difference. I know from my litigation experience, that appropriate tactics are vastly different when dealing with parties who have good faith, versus parties with bad faith. Intentions, motivations, go a long way in explaining things, but the problem with blaming intentions is they are usually impossible to determine objectively, and so best ignored. In this case, the portfolio was constructed by a short seller so the intentions are pretty clear. Whether there’s a law against this, I’m not sure, but it’s pretty bad business.
A CDO, synthetic or otherwise, is a newly formed investment company. Typically there is no identifiable “seller”. The investment company takes positions with an intermediary, which then hedges its exposure in transactions with a variety of counterparties. The fact that there was a “seller” in this case, and his role in “sponsoring” the deal, are precisely what ought to have been disclosed. Investors would have been surprised by the information, and shocked to learn that this speculative short had helped determine the composition of the structure’s assets. That information would not only have been material, it would have been fatal to the deal, because the CDO’s investors did not view themselves as speculators.
And here’s professor Craig Pirrong, an expert on derivatives, who notes the double-edged sword that is Farbrice Tourre’s emails:
One curious thing in the complaint. Typically annoying investment banker jerk Fabrice Tourre (who seems to have stepped out of a Tom Wolfe novel) is the only named defendant. Didn’t oodles of people at Goldman have to sign off on this deal? Why aren’t they named? That seems to suggest a certain weakness in the case.
The self-styled “Fab” is a natural target primarily because of his big mouth–or more precisely, his lurid emails. Emails like this are catnip to reporters–and prosecutors. But any prosecutor who makes such correspondence the keystone of his case is taking a huge risk, as the recent Bear Stearns cases illustrate clearly. The emails should be used like the cherry on the sundae–not the entire dessert. To make the case, the SEC will need more substantive evidence about Goldman’s actions–including the actions of others beyond Tourre, including any putative adults in legal. Yes, it’s hard for juries to follow. Yes, it’s boring. But that’s the hard work that must be done to secure a conviction.
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