SEC Files Charges Against Goldman Sachs — About Time!
The Securities and Exchange Commission filed civil charges against Goldman Sachs yesterday alleging that Goldman Sachs fraudulently promoted and sold a series of mortgage instruments without telling buyers it had been deliberately set up to fail. The details of the alleged scheme are well reported in this News & Observer article.
Here is the basics: Paulson & Co, a hedge fund, went to Goldman Sachs, for help in creating an investment vehicle based on mortgages Paulson owned. Paulson selected the mortgages used in the security by pulling together subprime mortgages it believed would fail. Goldman then sold the securities to others without telling the buyers that the securities were set up to fail.
Paulson then sold the securities short — it bet on them to fail. So when they failed Paulson made its money back on the shorts, and the buyers were left holding the bag.
To put it in layman’s terms, suppose you knew your spouse was sick, but no one else did. Then suppose you went out and purchased a large life insurance policy on your spouse. Shortly afterwards, your spouse dies. you collect on the policy, and the only person harmed is the insurance company, which would have never issued the policy if it knew your spouse was sick.
If that is the case, Goldman should be fined. And honestly, Paulson should come under some scrutiny, although I’m not sure for what. One of the problems with the economy in the last few years is that there has been no penalty for bad decisions and misbehavior — companies get bailed out, management gets it golden parachutes, and everything goes on pretty much like before. Without a penalty for failure, there is no reason not to take risks. That has to change.
