Why Goldman Sachs Will Beat the SEC

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David Weidner's Writing on the Wall

April 20, 2010, 12:01 a.m. EDT · Recommend (10) · Post:

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By David Weidner, MarketWatch

NEW YORK (MarketWatch) -- Let me begin by saying that in the way the Securities and Exchange Commission laid out the case, what Goldman Sachs Group Inc. did was troubling and not too far from morally reprehensible, unethical, slimy, devious and unjustifiable.

Goldman /quotes/comstock/13*!gs/quotes/nls/gs (GS 160.61, -2.71, -1.66%) , in packaging a collateralized debt obligation in which parts were hand-picked by the hedge fund Paulson & Co. and not disclosing that firm's role to long investors, apparently used the vagaries of derivative market rules to cater to a client who would bring in fees, not only on this deal, but on deals down the road.

Reuters Goldman Sachs Group Inc. global headquarters, also known by its address as 200 West Street, in New York.

Maybe this is what Lloyd Blankfein, Goldman's chief executive, meant by saying clients come first at Goldman: investors were first to lose money, and favored hedge funds were the first to make it.

But for all of the hand-wringing over the case, Goldman has a great shot at winning. Wall Street firms and brokers not as expert as walking legal lines as Goldman have won cases such as this before, or settled them with nary a blip to the bottom line.

That doesn't mean the case won't have a significant impact, but we'll get to that later.

Goldman has a portfolio of reasons it can win:

Since the suit was filed Friday, there's been a wave of reports showing that Goldman wasn't alone in structuring products for clients looking to short the mortgage market. UBS AG /quotes/comstock/13*!ubs/quotes/nls/ubs (UBS 16.59, -0.01, -0.06%) and Deutsche Bank AG /quotes/comstock/13*!db/quotes/nls/db (DB 74.81, +1.24, +1.68%) did it. J.P. Morgan Chase & Co. /quotes/comstock/13*!jpm/quotes/nls/jpm (JPM 45.74, +0.35, +0.77%) did it. There are almost certainly many more. See WSJ report on SEC's expanding probe.Read ProPublica report on Magnetar.

But what many interpret as a negative, is actually a positive for Goldman. If it can show this was a common industry practice, Goldman can knock down the intent argument. Claiming "everyone was doing it" isn't going to win the case, but it undermines the SEC's contention this was isolated and intentional.

And let's be blunt here. When an investment bank gets a security ready for sale, it markets it to both the long and short side. This has increasingly become the prevalent practice on Wall Street amid the boom in derivatives in hedge funds. While most of the public sees something nefarious about short sellers, Wall Street banks are equanimous in their view of the long and short sides.

That can mean structuring the product for either client. Given the skepticism of short sellers, would the SEC be pursuing the case if it was the buyer of the securities picking the mortgages for the security if that wasn't disclosed to the short side? Would there be the same outrage if John Paulson got the raw end of the deal?

Goldman Sachs says it lost $90 million on the soured trade. OK, that's not the $1 billion shared by IKB Deutsche Industriebank /quotes/comstock/11i!ikbdf (IKBDF 0.96, +0.03, +3.15%) and ABN Amro Holding NV , but it does seem to undermine the argument that Goldman sought to share in the profits on this deal. Goldman says it earned only $15 million in fees. So, what was the upside other than helping Paulson?

David Weidner is the Wall Street columnist for MarketWatch. He formerly covered M&A and financial services at The Daily Deal, American Banker and Dow Jones. He writes the Writing on the Wall column which appears Tuesday on MarketWatch and Thursdays on WSJ.com. He also is a regular contributor to the News Hub.

Here's when you know things aren't good: Based on an auction Tuesday, investors would rather hold German debt for ten years than hold Greek paper for 13 weeks, writes Steve Goldstein.

10:46 a.m. Today10:46 a.m. April 20, 2010 | Comments: 10

The true Judge of Goldman and other thieves like them are the People. Every one, force your money out of them. Even putting the money under the cushion is better than give it to them. Force your politicians to stop every form of public money relief to them, and to repay NOW all the money already given. Let them fall. The Systemic Risk Excuse is a fraud, they USE it to aggravate the problems and..."

- Phitio | 3:40 a.m. Today3:40 a.m. April 20, 2010

"David Weidner's Writing on the Wall: Why Goldman will beat the SEC: For all of the hand-wringing over the SEC char... http://bit.ly/bqoR0N" 11:57 p.m. EDT, April 19, 2010 from davidweidner

"Lewis Black on tea parties, the iPad, Wall Street bonuses, Sarah Palin and what makes him happy. http://bit.ly/c9QftL" 11:53 a.m. EDT, April 19, 2010 from davidweidner

"My interview with Lewis Black (edited for a family website) http://bit.ly/c9QftL" 11:51 a.m. EDT, April 19, 2010 from davidweidner

"David Weidner's Writing on the Wall: Goldman and the 'faulty brakes' argument: The smoke around Goldman Sachs Grou... http://bit.ly/bIIoeP" 12:15 p.m. EDT, April 16, 2010 from davidweidner

"RT @zerobeta: You know GS frontran that volcano. There is no better Geothermal Arb desk on the street." 3:35 p.m. EDT, April 15, 2010 from davidweidner

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