What happened to the global economy and what we can do about it
with 195 comments
By Simon Johnson, co-author of 13 Bankers: The Wall Street Takeover and The Next Financial Meltdown
Of all the reactions so far to various dimensions of Goldman fraudulent securities "Fab" scandal, one stands out. On Bill Maher's show, Friday night, I argued that John Paulson "“ the investor who helped design the CDO at the heart of the affair "“ should face serious legal consequences.
On the show, David Remnick of the New Yorker pointed out that Paulson has not been indicted. And since then numerous people have argued that Paulson did nothing wrong "“ rather that the fault purely lies with Goldman for not disclosing fully to investors who had designed the CDO.
But this is to mistake the nature of the crime here "“ and also to misread the legal strategy of the SEC.
The obvious targets are Goldman's top executives, whom we know were deeply engaged with the housing side of their business in early 2007 "“ because it was an important part of their book and they were well aware that the market was in general going bad.
Either Goldman's executives were well aware of the "Fab" and its implications "“ in which case they face serious potential criminal and civil penalties "“ or they did not have effective control over transactions that posed significant operational and financial risk to their organization.
They will undoubtedly pursue the "we did not know" defense "“ which of course debunks entirely the position taken by Gerry Corrigan (of Goldman and formerly head of the NY Fed) when I pressed him before the Senate Banking Committee in February. Corrigan claimed that Goldman's risk management system is the best in the business and simply superb; the former may be true, but the latter claim will be blown up by Lloyd Blankfein's own lawyers "“ they must, in order to keep him out of jail. (Aside to Mr. Blankfein's lawyers: the people you are up against have already read 13 Bankers and may put it to good use; you might want to get a copy.)
And don't be misled by the purely civil nature of the charges so far "“ and the fact that the announced target is only one transaction. This is a good strategy to uncover more information – for broader charges on related dimensions – and it allows congressional enquiries to pile on more freely.
As for John Paulson, the issue will of course be the “paper trail” "“ including emails and phone conversations. A great deal of pressure will be brought to bear on the people who have worked with him, many of whom now faced permanently broken careers in any case.
Here's the legal theory to keep in mind. Mr. Paulson only stood to gain on a massive scale (or at all) if the securities in question were mispriced, i.e., because their true nature (that they had been picked by Mr. Paulson) was not disclosed. In other words, the Paulson transactions at this stage of the game only made sense if they involved fraud. The principals involved (Paulson and top Goldman people) are all super smart, with unmatched practical experience in this area; they get this totally.
John Paulson was not the trigger man "“ it was Goldman and its executives who withheld adverse material information from their customers. But if the entire scheme was Mr. Paulson's idea "“ if he was in any legal sense the mastermind (obviously he was, but can you prove it beyond a reasonable doubt?) "“ then we are looking at potential conspiracy to commit fraud. And if he had conversations of any kind and at any time during this period with top Goldman executives, this will become even more interesting - so of course all relevant phone records will now be subpoenaed.
Mr. Paulson should be banned from securities markets for life. If that is not possible under current rules and regulations, those should be changed so they can apply. If that change requires an Act of Congress, so be it.
There is fraud at the heart of Wall Street. It is time to end that.
Written by Simon Johnson
April 18, 2010 at 9:00 am
Posted in Commentary
Tagged with John Paulson
“Mr. Paulson should be banned from securities markets for life. If that is not possible under current rules and regulations, those should be changed so they can apply. If that change requires an Act of Congress, so be it.”
“No Bill of Attainder or ex post facto Law shall be passed.”–US Constitution, Article I, Section 9.
The Raven
April 18, 2010 at 9:05 am
And furthermore, Congress has been passing “Acts” with reckless abandon and the result is???? Have you ever asked yourself why most of the “Acts” are preceded by the word ‘Reform’? Take a look at the neumber of Tax Reform Acts. It is because: 1. they never get anything right in the first place; 2. they rewrite the laws to suit contributors and croneys.
How anyone who has ever really watched Congressional hearings could look to support from such “Kabuki” (Jake Chase)is beyond my comprehension.
Jessica
April 18, 2010 at 9:48 am
Bills of attainder relate to criminal charges and threats of jail. Being banned from an industry doesn’t fall under the rhetoric of “bill of attainder”. Simple notion, clear cut distinctions. Eat some crow, Raven … sorry, couldn’t help that pun ;-)
Alan
April 18, 2010 at 10:24 am
Mr. Simon suggests that Paulson be banned under existing regulations. I presume that to include laws and ethical codes.
Prohibition of ex-post facto law intends that a law not be invented to prosecute a person or persons retroactively. It doesn’t mean that new laws not be promulgated to prosecute future crimes.
idiot
April 18, 2010 at 10:39 am
This notion that we must reinvent all the safeguards put in place after the Great Depression is getting old. I’m all for retro-active criminalization if that is possible. These guys knew right from wrong.
I’m no lawyer and it’s obvious I don’t know the law. But I sure know common sense. These people need consequences and serious/severe ones. We are not paying nearly as heavily for all this as the rest of the world who bought these securities, mortgages, whatever. And the rest of the world is trying to get tough with these guys. Take their money and put them in jail!
Joanie
April 18, 2010 at 1:53 pm
Joanne Good points. But we still need regs-rules to prevent abuse of power of last 29 years .These folks must go under oath so we see them for what they are – crooks in $ 3000 suits . There must be strong punishment / huge fines for these White collar criminals. Problem is Reagan 1981 Bush 2008 – toxic deregulation policy made fraud- dirty deals – predatory lending perfectly legal Right wing judges are doing best they can to undermine us even further.
diane ribben
April 18, 2010 at 2:08 pm
Agreed, but you unconsciously omitted the CLINTON part of that timeline…..under which Rubin and Summers successfully lobbied for Glass Steagall to be repealed (1996-arguably THE most important aspect of the period. AND, during this time period they also successfully argued AGAINST derivatives regulation and won against Brooksley Born. These two VERY key elements of the current debacle can be traced directly back to the Clinton (DEMOCRAT) administration. And, you have omitted the other DEMOCRAT (Barack Obama) whose administration has been monumentally important and significant in the response to the crisis, for better or worse, from your timeline.
Thus, it should run:
Ronald Reagan (1981-1989) George H.W. Bush (1989-1993) Bill Clinton (1994-2001) George W. Bush (2002-2009) Barack Obama (2009-?)
Hillbilly Darrell
April 18, 2010 at 3:44 pm
Your wrong about the one thing. The $3,000 suits. That may have covered a cuff link. But probably not. Just kidding, I think
Dburn
April 18, 2010 at 8:05 pm
One nagging question on my mind from the day that Greenspan got the job with Paulson—what role did he play in all these nasty shenanigans?
Read Full Article »