Posted in: Capitol Hill | Securities Law | FINRA | SEC | Greedy Brokers | Breach of Fiduciary Duty | Risky Investments |
There has been no shortage of investors, pundits, and observers who have directed their anger at Goldman, Sachs & Co. in recent years. In 2007 the firm would short-sell much of its assets in mortgage-related securities, which would contribute to the housing bubble bursting-in the recession that would soon follow, Goldman Sachs was one of the few firms to actually profit while investors nationwide were losing near-incalculable amounts of money.
On Friday the Securities and Exchange Commission formally charged Goldman Sachs, and one of its vice presidents, of fraudulently marketing and selling sub-prime mortgage securities to investors.
By now global citizens, not just Americans, should be fairly clear on what transpired before the 2007-2008 housing collapse: who the major players were, the contributing factors, and certainly how investors were affected. Though Goldman Sachs obviously contributed in some degree to the financial crisis, the firm received $10 billion as a result of TARP bailout money and then subsequently doled out triple that amount in executive bonuses in January 2009.
It was no major surprise when United Kingdom Prime Minister Gordon Brown, after learning of the SEC’s civil charge last week, aptly referred to Goldman Sachs’ business practices as “moral bankruptcy.”
The real question should be why it took the SEC nearly three years to conclude what had been staring us all straight in the face. A regulatory agency, lambasted over the past two years because of its bungling of the Bernie Madoff investigation, is yet again slow to react to a massive alleged fraud scheme, and we should all be wondering why.
The easiest explanation for all this would likely be because of Goldman Sach’s unprecedented governmental influence. It is no coincidence that Goldman Sachs, a firm many on Wall Street refer to as “Government Sachs,” had previously employed no fewer than seven members of the Obama administration. Henry Paulson and Robert Rubin, who presided as secretary of the Treasury Department under Presidents Clinton and George W. Bush, were ex-Goldman Sachs executives.
The SEC also has no shortage of ties with the firm, which holds $64 billion in assets worldwide. Adam Storch, a 29-year-old former Goldman Sachs employee, was named chief operating officer of the federal regulator’s enforcement division in October of last year. Ironically, the Los Angeles Times reported that his hire was intended to make SEC enforcement more efficient.
To put the SEC’s strange timing into perspective, the New York Times’ Gretchen Morgensen broke nearly every detail included in the latest complaint last December, and even at that point it was a re-hashing of what many Americans either knew or needed further clarifying.
In 2007 Goldman Sachs Vice President Fabrice Tourre, the 31-year-old who is included in last week’s SEC charge, was approached by star hedge fund manager John Paulson. Both Goldman Sachs and Paulson foresaw impending doom in the sub-prime housing markets, but deliberately sold customers what were called collateralized debt obligation, or CDOs, build around risky mortgage securities.
Soon after, both Goldman Sachs and Paulson short-sold their own CDOs - without alerting customers their own mortgage holdings were becoming toxic - and quickly made billions.
What is perhaps even more incredible than the SEC’s delayed response with regards to civil action against Tourre and Goldman Sachs is that it still leaves out many other players omitted.
What about Jonathan Egol, a managing director for Godman Sachs who Morgensen accused in her December article of also creating harmful mortgage-related securities. And what about Paulson, the architect behind CDOs?
Paulson and his firm have not been named as defendants in the SEC’s suit, the Wall Street Journal said, because they weren’t actually marketing the bonds to investors. Even though Paulson had actively pursued banks to sell his bonds shortly before the sub-prime market collapse, and would later net $4 billion in 2007 for correctly betting on the housing market to fail, the SEC concludes this was only because he was enabled by Tourre.
Since federal regulators and the Obama administration appear conflicted with Goldman Sachs, there must be a reason why the SEC would rather charge the firm embarrassingly late-rather than never.
According to the Los Angeles Times, this latest push might be intended to undo the PR mistakes incurred during the federal TARP bailout in 2008. Pointing the finger at a firm which episiotomies Wall Street greed, a broker-dealer which has been vilified by the public and media, may also swing support behind the financial regulation overhaul bill which has become a higher priority in the wake of “Obamacare” being signed into law.
So in other words, the SEC’s charges against Goldman Sachs and Tourre may be more about political posturing than helping investors.
The case of Goldman Sachs is yet further proof why investors must constantly be on the lookout for broker misconduct, and why victims of broker fraud should be skeptical of government intervention.
If an investor wants any chance of recovering damages on a fraudulent investment, they must enlist the help of attorneys who are well qualified in securities law. Waiting for the SEC, FINRA, and other regulators to take proper actions against bad brokers is the ultimate crapshoot.
