Tuesday, May 04, 2010

Why a Criminal Case Against Goldman Sachs Matters and Why Charges Could Stick

What Was Fab's Job Description


Goldman Sachs used to be the firm that pursued top government posts; now
government is in hot pursuit of it, and not in a good way. The SEC has
charged the firm and an employee, Fabrice Tourre, with securities fraud
and the Justice Department has commenced a criminal investigation,
according to news reports.

Change appears to be swallowing Goldman Sachs. It began quietly moving
out of its storied and staid headquarters at 85 Broad last Fall to flashy
new multi-billion dollar digs at 200 West Street, including a 54,000
square foot gym (roughly the size of 20 homes for average Americans; those
who can still afford one after the Wall Street pillage). And after the
release of internal emails by the SEC and Senate, Goldman looks more like
a sleazy boiler room pump and dump operation in drag than an investment
bank (in drag as a bank holding company). Comedy talk show hosts are
having a field day (Jon Stewart calls them "those f*!*!ing guys") and
Goldmanfreude (pleasure in watching Goldman shamed for the pain it
inflicted on others) is in full swing.

It all sounds eerily familiar to the wealth transfer maneuver by Goldman
Sachs Trading Company in the asset bubble of 1928. The Trading Company
was a closed end fund (called a trust in those days) that Goldman Sachs
created and offered to the public at $104 a share, stuffed with conflicted
investments while paying Goldman a hefty management fee, only to end up a
few years after the 1929 crash trading at a buck and change. On May 20,
1932, Walter Sachs, President of the Goldman Sachs Trading Company, was
grilled by the Senate Committee on Banking and Currency. The implication
was the same as the current round of Senate hearings: Goldman royally
fleeced its customers to line its own pockets.

Security lawyers who watched the Senate Permanent Subcommittee on
Investigations grill Goldman Sachs employees on April 27, 2010 hopefully
were more eagle-eyed than investment guru Warren Buffet, who is now
echoing the same refrain as Goldman CEO Lloyd Blankfein, that the firm has
done nothing wrong and is being unfairly pummeled. Never mind that Mr.
Buffet has $5 bilsky invested in Goldman on which he is earning 10
percent. (Goldman employees like to refer to $1 billion in their emails as
a bilsky when bored of characterizing what they're selling to clients as
crap or sh---y deals.)

The first Goldman Sachs panel to line up before Senator Carl Levin's
subcommittee on April 27 consisted of Daniel Sparks, Joshua Birnbaum,
Michael Swenson and Fabrice Tourre. Mr. Sparks headed the Mortgage
Department and supervised the other three who worked in the Structured
Product Group at the time the SEC has alleged the securities fraud

To hear these four tell it, their jobs included trading for Goldman's
benefit (proprietary trading), originating investment products, selling
the products to customers once they were created (distribution), and, in
Mr. Tourre's case, even speaking with the rating agency that would
transform these subprime bets into AAA derivatives. And how did they sum
up all of this as a job description? They testified, under oath I might
add, that they were "market-makers." In a sane world, a market maker is
an entity that matches buyers with sellers and profits from capturing a
portion of the spread (bid and ask) on the buy and sell price of

To a lay jury, this might fly as legitimate conduct; something akin to a
short order cook who shops for the groceries, whips up the omelets, throws
a little parsley garnish on the plates, serves the diners, and tallies up
his P&L at the end of the day. If he overbought on ground beef, he might
have to have three days of specials like Shepherd's Pie, Hungarian
Goulash, and Spaghetti with Meat Sauce to "flatten" his position and "get
closer to home." Nothing criminal going on here; just good ole American
know-how and innovative workouts.

The major problem with this analogy, and most others in defense of
Goldman, is that the short order cook wasn't trying to pass off E. coli
beef for prime rib. Another problem for Goldman is that embedded in the
heart of every securities law is the principle that the customer must be
treated honestly and fairly and any mechanism or device to deceive,
manipulate or defraud is patently illegal. Remember, securities laws grew
out of the ingrained Wall Street corruption exposed in two years of Senate
hearings in 1932 and 1933.

It is difficult to see how one can be engaging in proprietary trading for
the benefit of the firm at one moment, acting in an agent capacity for the
benefit of the customer the next moment, and creating investment products
designed to fail on a latte break. Sparks, Birnbaum and Swenson all had
principal licenses to engage in investment banking activities like
underwriting as well as the Series 7 license to trade securities. Mr.
Tourre had only the Series 7 and Series 63 licenses to trade securities.
He had no principal license according to his regulatory file available
online. That could be a big legal issue for Goldman as a firm, for Mr.
Sparks who supervised him, and for the controlled-demolition investment
product he assisted in creating without a principal license. Failure to
supervise is one of the first areas security lawyers review in assessing a
firm's liability.

According to the SEC complaint, Mr. Tourre knowingly assisted in creating
and then peddled an investment product designed to fail that had been
handpicked for that purpose by a hedge fund manager to facilitate his
profiting from a short position. (John Paulson, the hedge fund manager,
made approximately $1 billion while those on the other side of the trade
lost about $1 billion while never being advised of the hedge fund
manager's role.) According to the Senate, Goldman was itself shorting
(betting on subprime derivative products to fail) while actively promoting
these products to clients. The Senate hearings raised a practice and
pattern of deceit by Goldman against its own clients. And let's not
forget that the approximately $12.9 billion of taxpayer bailout funds that
went in the front door of AIG and came out the backdoor into Goldman's
coffers was a result of Goldman's well-placed subprime bets offloaded onto

Clearly, Goldman's defense is being structured around the idea that
anything goes if you call yourself a market maker. That seems like a
fairly lame defense when your shareholders have lost $20 billion in market
cap despite your top tier law firms playing hardball and the Oracle of
Omaha waving pompoms. (This Buffet gesture is reminiscent of Prince
Alwaleed bin Talal cheering on Citigroup as its share price plummeted to
earth along with tens of billions of off balance sheet debt derivatives.
He also owned a boatload of the stock.)

My advice to Goldman is to throw yourself on your sword. Come clean on
everything and clean house. Put a modest gym in the basement of your new
digs and donate the 54,000 square foot space to charities for the
struggling folks you ripped off in their pensions and 401(k)s. And maybe
it's time to apologize for what you did in 1928 and 1929 as well.

Then have a sit down with Warren Buffett and start co-authoring OpEds on
why the Glass-Steagall Act separating investment banks from insured mom
and pop funds at commercial banks must be restored. If you have any
trouble finding an argument for this, just lay all those recently
disclosed internal emails end to end and observe the narcissistic,
sociopathic culture you've created out of the uber-testosterone Wharton
School boys.

Pam Martens worked on Wall Street for 21 years; she has no security
position, long or short, in any company mentioned in this article. She
writes on public interest issues from New Hampshire. She can be reached
at pamk741@aol.com

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