The Securities and Exchange Commission recently filed fraud charges against Goldman Sachs after months of speculation. The investment firm sold a sub-prime mortgage-backed security that was assembled by a hedge fund. The hedge fund, in turn, was betting on the mortgages to fail. The complaint is based on the allegation that Goldman misled its client, ACA Management, into thinking that the hedge fund, Paulson & Co., was betting for, not against, the security.
The security was a collateralized debt obligation, meaning that the value of the security depended on the value of the mortgages that constituted it (most of which ended up depreciating). Sebastian Mallaby, in an editorial published in The Washington Post, described the SEC’s case as “flimsy.” He insists that unless the SEC shows more evidence, the fraud charges will go nowhere.
The investors who bought the security did not know that Paulson & Co. helped Goldman construct the CDO. The SEC claims that the investors would not have purchased the security had they known that one of its architects was betting heavily against it. Goldman claims that the investors knew the kinds of mortgages that were included in the CDO, and that knowledge of Paulson’s involvement in constructing the investment would not have affected their decision.
Records show that ACA thought Paulson was going to buy the security, despite evidence to the contrary. The SEC claims it was Goldman who deceived ACA into thinking that Paulson was a buyer. CNBC reported on April 21 that the S.E.C. has testimony from a former Paulson & Co. executive that contradicts that claim. Paolo Pellegrini testified that he told ACA manager Laura Schwartz that Paulson was going to bet that the security would depreciate. John Nester, a spokesman for the SEC, told CNBC that the SEC’s case “is built on a thorough evidentiary record that includes testimony, documents, hand-written notes and emails and will be presented in court at the appropriate time.”
Politicians have heavily debated the timing of the civil suit. Rep. Darrell Issa, R-CA, the ranking Republican member on the House Oversight and Government Reform Committee, questions whether the complaint was politically timed. The suit was filed days before President Obama went in front of many Wall Street Bankers at Cooper Union in New York City to push financial regulatory reform.
The Chairwoman of the SEC, Mary Schapiro, denied any allegations of politically-motivated timing, stating that the SEC does not “coordinate our enforcement actions with the White House, Congress or political committees. We do not time our cases around political events or the legislative calendar.” Ms. Schapiro added that the SEC’s case against Goldman had developed for more than a year.
Goldman is sometimes called “Government Sachs” on account of its close connections with the government. Gregory Craig, a lawyer for Goldman, was President Obama’s chief legal counsel during the president’s first year in office.The President, however, stressed that the connection is no cause for alarm, telling CNBC that Craig “cannot lobby the White House” and “cannot in any way use his former position to have influence on us.”
Former Goldman employees currently working in the government include Mark Patterson, a former lobbyist who is now Treasury Secretary Timothy Geithner’s Chief of Staff, and Gary Gensler, a former executive who is Obama’s head of the Commodity Futures Trade Commission.The President himself is not untouched by Goldman, whose executives, partners, employees, and their relatives gave Mr. Obama $994,795 in campaign contributions. The White House has been quick to diffuse any indication of a conflict of interest and deny any responsibility for Goldman’s business practices.
The President told CNBC that the White House received no indication from the S.E.C. when or if any charges would be filed against Goldman. Press Secretary Robert Gibbs, at a press briefing, stated “anybody who contributed to the campaign at any point knew where the President stood on regulating Wall Street and regulating the financial industry. . .” Gibbs and the president cited speeches Mr. Obama made in 2007 and 2008 to Wall Street calling for financial regulatory reform to distance the President from the practices of Goldman Sachs and other financial institutions.
Mickey Gardella is a freshman political science major from New Jersey. He resides in Knott Hall and is hoping for the Yankees’ 28th World Championship this year. Contact him at mgardell@nd.edu.
