The banner across the Wall Street Journal this weekend was “SEC SUES GOLDMAN SACHS FOR FRAUD.” It was everywhere this morning — across blogs and on twitter and on news sites. The gist is straight forward:
– A couple of guys in the mortgage packaging side of the business figured that this housing bubble nonsense could not go on forever.
– They worked with some hedge funds to package up the crappiest of the absolute crap in mortgages, stuff clearly going to fail, into securities.
– They got the ratings agencies to brand it all ‘AAA’ platinum safe and secure.
– They went and put insurance on all off these securities through AIG.
– They sold ’em to investors.
– They collected millions in fees for billions in business.
– They placed their own short sell bets on the securities.
– Bubble burst!
– They launder taxpayer money through AIG to cover the insurance bets AND they pay off handsomely in their short sells.
This whole little bit of shenanigans is covered awesomely in Episode #405 of This American Life, the Inside Job put together with our friends at Pro Publica, where covered Magnetar Capital, the King of Utterly Crappy CDOs. They even wrote a little song!. It’s catchy! It is show-tuney! Granted, the current SEC fraud case is not against Magnetar but against a division called ABACUS but as this investigation spreads out, it will certainly pull them in.
Part of me thinks this is a political maneuver from the White House to go after the Big Kahuna on what is essentially fraud and money laundering to sell their Banking Reform package and use political pressure to get that passed. The other part of me, the part of me that still has this sad little shred of Hope, thinks the SEC grew a pair and they wouldn’t issue a throw down if they didn’t have the evidence in hand.
My hope for someone growing a pair is slim.
Best Case Scenario: The executive suite of Goldman Sachs gets taken down on Fraud. Several C-levels perp-walk. Goldman Sachs is used as a big stick for pulling apart the investment banks from the depository banks and the derivative market gets regulated. I do not think this will happen, sadly.
Probable Scenario: Goldman Sachs settles with the SEC behind closed doors for a small slap on the wrist fee of a few hundred million — and considering they are handing out $3.5b in bonuses this week for 3 months worth of work, a few hundred million is change between the couch cushions for them, it goes back to fleecing us all in business as usual. No one goes to jail. Or if anyone goes to jail, it’s some low level flunky.
I do want the US Government to grow a pair. A President has gone after a big financial institution and won before. But it means a pair of cast iron steel and I’m not seeing it.
… but then again, the Germans are starting to look into this too, and they are merciless bastards. Hope springs eternal! In the form of the Germans getting vengeance for bringing down the Euro with their steely knives.