Can you stand reading one more thing about the Goldman Sachs (GS) scandal? Try to bear with me. I'll tell you something about it you haven't heard before.
As you know, as you've heard a million times over the last week, the Securities and Exchange Commission has sued Goldman Sachs for fraud, in connection with a complex subprime mortgage security with the decidedly unsexy name of Abacus 2007-AC1. If you want to read the SEC's formal complaint click here. It'll only take you 10 minutes to read, and you don't have to be a lawyer to understand it. I recommend taking a look, rather than letting the media tell you what to think.
That said, speaking as a card-carrying member of the media, let me proceed to tell you what to think. Or more specifically, what not to think.
Here's what to think. If the SEC is right, then Goldman failed to disclose all the relevant facts about Abacus 2007-AC1 to investors. Under the securities laws, if those facts are found to be material to making an informed decision about investing, then failing to disclose them is fraud.
Here's what not to think. A lot of commentators are saying that Goldman designed Abacus 2007-AC1 as an investment time-bomb, deliberately created to be as worthless as possible. Why would Goldman do that? Because there were not only people who wanted to buy subprime mortgages like Abacus 2007-AC1 -- thinking they'd be great performers -- there were also people who wanted to sell them short -- thinking they'd be dogs. Supposedly Goldman was catering to the shorts, not the buyers.
First, let's be clear on one critical reality. No matter what the media mouthpieces are saying about it, the fact is that the SEC is not accusing Goldman of this. It's a simple fraud case based on failure to disclose. No one is accusing Goldman of created financial weapons of mass destruction.
Second, let's be clear on what Abacus 2007-AC1 is, and what it isn't. It's a very unusual and complex investment instrument -- and if you just think about it like a plain vanilla stock or bond, you won't understand what Goldman did, or why.
When Goldman or any other investment bank underwrites a new issue of stock or a bond, it has a duty to offer its customers a sound investment. Sure, there are always risks. That's where disclosure comes in. But Goldman's customer is the buyer, so Goldman basically owes that customer something that's worth buying, at least given the risks.
But that's not Goldman's duty when it acts as a broker for trading in stocks and bonds that already exist -- rather than new issues that Goldman is underwriting. With existing securities, Goldman's duty might be to a buyer, or to a seller, or to both at the same time. The buyer might think the stock or the bond is wonderful, and the seller make think it's the worst -- Goldman just stands in between them and makes the trade happen, without passing judgment.
Goldman's role in Abacus 2007-AC1 is more like that, even though it was a new issue that Goldman was underwriting. The reason why is that Abacus 2007-AC1 wasn't a stock, and it wasn't a bond. It was what is called a synthetic collateralized debt obligation, or "synthetic CDO." It's a derivative security, simply a bet between its buyer and its seller. It wouldn't even exist if there were not someone who wanted to be long and another someone who wanted to be short. So Goldman owes a duty to both buyer and seller symmetrically.
Trackback URL for this story: http://www.smartmoney.com/tb/Jduv.2BNc.3D
What is a Trackback?It is a way to tell us that you have published something that references this story.
How do I send a Trackback? If you blog or mention this story on your website, you can use this Trackback URL to notify us about it. Some blogging software programs can help in sending a Trackback to us.
Click here to read more about Trackbacks.
The Goldman Case: What You Need to Know: So Goldman owes a duty to both buyer and seller symmetrically. Should .. http://bit.ly/cpa1gJ
[forexprime] [forexprime] The Goldman Case: What You Need to Know http://bit.ly/aB1uZl [19:58Â? http://goo.gl/fb/CNNRl
[forexprime] The Goldman Case: What You Need to Know http://bit.ly/aB1uZl [19:58:23] http://goo.gl/fb/Xdy6C
The Goldman Case: What You Need to Know: But that's not Goldman's duty when it acts as a broker for trading in sto... http://bit.ly/cENzgt
The Goldman Case: What You Need to Know http://bit.ly/9hmtgA
Read Full Article »