Just How Weak is the Case Against Goldman Sachs?

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Goldman Mouthpiece?

A growing number of people are chiming in to say that the SEC case against Goldman Sachs is not as strong as it seems. Not sure why they would say that. I have read the SEC complaint a few times and it seems like damaging stuff to me. Even if Goldman didn’t break the disclosure rules that are at the heart of the case against it, the whole thing just seems sleazy and morally wrong, and a great window into what went wrong on Wall Street in the past decade. If you are not Goldman or Paulson, I just don’t get why you would defend this behavior. Nonetheless, Newsweek’s foreign affairs expert Fareed Zakaria comes out swinging on the side of Goldman in a piece on CNN.com with some of the dumbest logic so far on why the SEC doesn’t really have a case. Zakaria is a pretty smart guy when it comes to the Middle East, but on business he seems way over his head. Here’s where Zakaria goes wrong:

Zakaria’s first point is one that my 3-year-old would make. It’s the “everyone else was doing it” excuse.

“I’m largely in favor of financial reform,” Zakaria told CNN. “But I also believe in the rule of law, and I believe people should be innocent until proven guilty. And the government should not use the police power of the state to retroactively criminalize things that were considered fine when the market was going up.”

Bubbles always hide behavior that seems right at the time, but only in retrospect is clear how wrong and destructive it is. That’s the nature of a good swindle. You only see it in hindsight. In the 1990s, it was investment banks using their supposedly independent research teams to flog Pets.com and all the other worthless IPOs. This time around it is investment banks like Goldman rigging tricky bond offerings to fail, so that hedge funds could benefit at the expense of pension funds, local governments, the average homeowner, and because of the bailout every US taxpayer. That’s not behavior that the government is retroactively criminalizing. That’s always been wrong.

Zakaria point #2

I think when you read the SEC’s case carefully, frankly the civil case against Goldman is very weak, because what Goldman Sachs did was act as a bookie between two people who wanted to make bets.

Well, yes, but not sure why comparing Goldman to a bookie helps your argument of innocence. But in this case Goldman was more like the bookies that fixed the White Sox World Series.

Zakaria point #3

What I’m not clear about is that even if Paulson did select the securities he wanted to bet against, why is that illegal? That happens in markets every day. Somebody comes to a bank like Goldman Sachs and says, “Hey, I want to bet against oil futures. I want to bet that oil is going to go down in value. Here’s the instrument I want to bet against. Find me someone who wants to take the other side of this bet” — and they go out and find that person.

Right here Zakaria is missing what is wrong at the very heart of the Goldman/Paulson transaction. Zakaria is right, that if what he saying happened then perhaps there is nothing wrong here. But what he misses, and this is precisely the SEC’s case, is that Goldman didn’t disclose to the investors that Paulson had picked the home loans that would be the basis of the investment. In fact, the SEC goes back and asks the one investor a German bank IKB in this deal whether they would have put their money in if they knew that Paulson was picking the investment and they effective said, “Heck No.”

But here’s the even bigger point that Zakaria doesn’t get. This wasn’t like two parties betting on the price of oil. This was like someone who secretly had bought up all of the barrels of oil in the world asking you to bet that the price of oil was going to go down. And then after you place the bet, that person dumps all of that oil in the ocean. The issue is not that Goldman got someone to place a bet with Paulson, but that that bet was rigged from the start.

UPDATE: Fareed landed an interview with Goldman CEO Blankfien. So it seems this piece of “journalism” was just a suck up to land an interview for his CNN show. Not sure why Newsweek, which ran a similar column to CNN.com, would stand for that, but just goes to show you how far they have fallen over at our competitor.

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