Who's to Blame? Goldman Sachs or the Politicians Who Enabled Them

* Goldman Sachs - I do not believe that the SEC lawsuit against Goldman Sachs will amount to anything. The fact that the Sec committee only had a 3-2 majority to pursue the case indicates that some on the SEC had doubts about the success of the case. Goldman Sachs also knew this case was coming, and chose not to settle before hand with the SEC, ostensibly because they believe they will win. Just like the case against Matthew Tannin and Ralph Coffi, the BSAM MD’s who were found innocent of wrong doing, I would bet that Goldman prevails in their defense.


Despite the stupid things which Fabrice Tourre, which a Goldman employee was quoted as writing in an email, his stupidity is different than a guilty verdict against Goldman Sachs. Here is his quote from the SEC lawsuit:


“More and more leverage in the system, The whole building is about to collapse anytime now…Only potential survivor, the fabulous Fab[rice Tourre] … standing in the middle of all these complex, highly leveraged, exotic trades he created without necessarily understanding all of the implications of those monstrosities!!!” 


That was a totally stupid thing to write, but not something which will convict Goldman Sachs in the case seeking civil penalties. Here is what I see as the problem:


The government is under the gun to bring justice to the American people. The bottom line is that the people who should be brought to justice are the dopes who enabled the biggest of the bail outs. To that end, the list includes Hank Paulson, Tim Geithner, and Ben Bernanke. The government subsidized the weak and the failing, and now is going after the healthy, because everyone is angry about the success which these firms are achieving on the back-end of the government’s bail-outs. The capitalist system is designed to reward the successful and put poorly run companies out of business. The natural consequences of capitalism is to deliver economic justice where it is needed. The bail-outs have undermined this process. As a result, the American public is pissed off as they see the many of these financial firms making outsized profits as the current recovery is helping the profitability of a few firms, while many of them are unemployed, in trouble with their mortgage, or both. The trouble is that the public does not seem to differentiate between AIG, which should be out of business, and Goldman Sachs, who smartly was able to raise $10 billion from Warren Buffett in September of 2008, as the financial snowball was gaining downhill momentum. 


Nor does the SEC understand the difference. It is interesting to note that the two SEC commissioners who voted against pursuing Goldman were both Republicans. Is this a Democratic vendetta?


The remarkable sub-plot which comes out of this story was the fact that RBS, as the successor to ABN Amro, lost $841 million on the CDO transaction in question. ACA, the CDO manager, received $4.5mm in fees by selling protection on $841 million of subprime BBBs. In turn, ACA bought a backstop of protection, in case they failed, from ABN Amro, for only $2mm.  In exchange for their $2mm in fees, ABN Amro/RBS lost $841 million. Here is the interesting question: Why would anyone back-stop protection written by ACA to the tune of $841 million. As a Broadpoint colleague remarked yesterday, buying protection from ACA is like going to the dry cleaner for the same insurance policy. In fact, we should all be so lucky as to be able to sell so much insurance without having the financial backing to make good on these obligations. ACA was lucky enough to find ABN Amro, who back stopped their sale of insurance. However, ACA was not so smart in the aggregate, and did go out of business too.