Wednesday, April 21, 2010 0 comments ++[ CLICK TO COMMENT ]++

SEC's Goldman Sachs case appears to unravel before it even gets going

I'm not too knowledgeable about legal matters and hence am not exactly clear on what the Goldman Sachs civil suit by the SEC entails. It looks like the SEC case is weakening by the day, at least in the public eye. Published reports, including one from Reuters (via the The Globe & Mail,) suggest that ACA was informed of the short sale by Paulson. One of the key portfolio managers at the Paulson fund, Paolo Pellegrini, apparently told ACA of their short-side bet.

It's not clear if Pellegrini's comments were informal and outside of the legal disclosures involved in selling the CDO. If ACA was told before the sale of the CDO by Goldman Sachs, the SEC case would be weak (note: I'm talking about the perception from the public and not about the legal case— I don't know anything about how this impacts the law.) The main criticism appeared to be the fact that Goldman Sachs didn't disclose to ACA, as well as the CDO buyers, that Paulson was not only betting against the CDO, but also played a key role in selecting the assets that constituted the CDO.

Unlike ACA, it's not clear if the CDO buyers were aware of the Paulson short-sale. So there is still some valid criticism that can be levelled at Goldman Sachs. I don't know if the CDO sale occurred in America but if it did not (the big losers were European institutions,) I wonder if the SEC has jurisdiction over the matter if ACA, who was the CDO manager, was actually informed of Paulson's intent.

Goldman Sachs has decided to unleash the firepower in its arsenal and is fighting this case vigorously (many cases appear to be settled out of court but not this one.) I think Goldman Sachs is doing the right thing (for its sake) by fighting the US government. On top of setting a precedent—who knows what other cases are lurking in the background—the bank needs to prevent damage to its reputation. Goldman Sachs can afford to lose some money (say up to $10 billion) but it cannot afford damaging it reputation. Customers pay a premium price to get Goldman Sachs as their banker/underwriter/etc. If customers start dumping Goldman Sachs, it's all over. Financial services are based on trust and it is critical that Goldman Sachs, for its own sake, retain its reputation. So far, as the linked story above mentions, one government-owned European bank, Landesbank Bayern, has decided to sever ties with Goldman Sachs.

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