patrick.net

I think GS already shorted the market and gave a go-ahead to SEC. Now, they will be fined with 10M or so, but GS already made the money..Its as simple as that.

I want Lloyd Blankfein & his cabal caught on tape colluding to defraud and front-run. I want to see some orange overalls. This "we'll settle out of court on a small fine" is a very small bone and entirely unsatisfying.

It sucks that they won't feel the pain they inflicted upon so many others.

Vicente says

I want Lloyd Blankfein & his cabal caught on tape colluding to defraud and front-run. I want to see some orange overalls. This “we’ll settle out of court on a small fine” is a very small bone and entirely unsatisfying.

Its not going to happen. They didnt even charge Paulson who originated the whole thing. They just found a fall guy and will do a wrist in the slap, everything will be over by Monday.

I agree that GS isn't going to get touched in the long run. Paulson's going to go through the meat grinder. There's a lot more coming. I think this was just to get the hit to GS out of the way early so they could clean up on the scraps coming. Or maybe payback for Greece? Obama's a lot closer to Europe than England.

Fed usually does not show teeth unless there's a chunk to bite. Fed is tougher SOB than you guys think it is. SEC openly sues GS means they got a solid evidence or two that even GS can not easily manipulate.

As of now, it still is bunch of allegations. No criminal charges or DOJ involvement so far, thus the most likely scenario is settlement b/w Fed and GS. It is whole different ball game if it become criminal case or GS's direct involvement with the fraud.

I think it's little too early to say anything rather than that. The bald guy at the top of GS building need to learn when to shut up, because things can get ugly for GS if he refuse to learn it. :)

Seriously, what planet are some of you from? The hedgies figured out the fatal flaw in the system and exploited it -- the fact that the banksters would sell their grandmother down the river if it meant a couple of of bucks in commission for them. They made material misrepresentations (or is that omissions!) to their clients. Hang 'em high. The hedgies... well, damn they were good; can't blame them for trying to destroy civilization as we know it. The Magnetar trade was evil, but, as far as I can tell, it wasn't illegal. Someone prove me wrong... please.

This Goldman Sachs fraud case is a sacrificial goat. No criminal charges ever result from SEC actions these days. The company will pay some token fine. The SEC gets to look tough, and Goldman gets to look like it didn't get a "get out of jail free" card. If I were GS damage control I'd be CHEERING something like this as it makes them appear subject to government controls in some superficial but meaningless LONG-after-the-crime&profits way. This is a big ole Nothingburger.

MarkInSF, Many thanks for this thread. I'm bumping it up as it is superior to the other GS thread started on Saturday. Like many long time Patrick.netters, I first came to this site over 4 years ago wondering how housing prices could continue to defy gravity. Finally, the curtain has been pulled away and we get a hint of what happened behind the scenes. As the This American Life piece (see link above) makes clear, natural market dynamics (a large number of short positions) should have put a brake on market excesses. Instead, hedge funds figured out how to the keep machine going for a couple more years (which relied, in no small part, on the greed and questionable ethics of individuals and organizations within the investment banking community). This is why, as DinOR used to say, we "hit the wall at 100mph". The hedgies (see Paulson & Co. and Magnetar) funded the creation of more CDOs by taking a first loss equity position. This point is lost on a lot of folks; that's right, the hedge fund sponsors bought the lowest tranche and got creamed. They did this for the privilege of being able to short (by buying CDSes) all the higher tranches, some of which were rated AAA. The investment bankers got paid, and the hedge funds (without whom the subprime party would have stopped) got to influence what got put into the CDOs. The investment banks then sold off the higher tranches to their customers, with more than a hint of material misrepresentation. The TAL piece makes an interesting case, though, that individuals in search of well funded bonus pools did most of the damage. In fact, the TAL piece claims that the higher tranches of one CDO were retained by JPM, and they took a huge loss. The rouge banker got his bonus, and he continues to ply his trade (perhaps elsewhere). All this to say, finally, we know how the punch bowl was spiked. I, for one, could log off patrick.net somewhat content as we have fit together this piece of the puzzle. Of course, now I want to know the rest of the story...

I will continue to feed this thread daily. Another summary from the source. Again, the bubble was not just about people making ill informed decisions; it was about allowing people to continue making these decisions long after a reasonable market would have shut off the spigot. Hedge funds found a highly leveraged way to stuff money into the securitization chain by taking advantage of flaws in the CDO sausage making machine.
According to bankers and others involved, the Magnetar Trade worked this way: The hedge fund bought the riskiest portion of a kind of securities known as collateralized debt obligations -- CDOs. If housing prices kept rising, this would provide a solid return for many years. But that's not what hedge funds are after. They want outsized gains, the sooner the better, and Magnetar set itself up for a huge win: It placed bets that portions of its own deals would fail.
Along the way, it did something to enhance the chances of that happening, according to several people with direct knowledge of the deals. They say Magnetar pressed to include riskier assets in their CDOs that would make the investments more vulnerable to failure. The hedge fund acknowledges it bet against its own deals but says the majority of its short positions, as they are known on Wall Street, involved similar CDOs that it did not own. Magnetar says it never selected the assets that went into its CDOs.

EBGuy says

The Magnetar trade was evil, but, as far as I can tell, it wasn’t illegal. Someone prove me wrong… please.

Indeed, it was clearly not illegal. The question in my mind is why should the government be involved in enforcing these contracts?

I actually think this is the proper way to frame the "reform" debate. Contracts always have as an implicit third party - the State. It's not about "regulation" or making things "illegal", it's just recognizing that a limited government should not be obliged to be the enforcer of every convoluted contract Wall Street comes up with. Declare a class of contract unenforceable, and they will go away.

The only reason the state in the business of enforcing contracts at all is that it serves a greater social good. Mortgages, business loans, commodities futures have all demonstrable positive-sum benefits. If their are classes of contracts that do not serve a greater social good (like taking our fire insurance on your neighbors house, or naked CDS contracts), then the state should not be a party to those agreements.

There are probably more industry insiders than can be counted who committed fraud, and they all deserve to go to jail. If we need to start w/Goldman Sachs then so be it. Angelo Mozillo too. No one's "too big to go to jail." (Though ususally the big ones pay fines and do NOT go to jail!)

I hear a lot about how the bank CEO's are guilty of fraud but there's still far too little mention of the number of other housing/finance industry insiders who were committing fraud. Unless a person reads mortgage fraud cases, etc, they aren't necessarily aware, and it's negligent of the media not to be covering it much. E.g. real estate agents, appraisers, brokers, builders, lenders...so many have been caught up in fraud and only a few are being prosecuted. But the percentage of the fraud done by these people is amazing. The FBI found 80% of mortgage fraud was done by these industries. http://www.fbi.gov/publications.htm This was announced years ago and recently had a little flurry of interest again during congressional hearings grilling (?) Greenspan, etc. But why wasn't something that significant on every TV news station when it happened, instead of, oh, Barbara Corchoran telling everyone to buy a house now? (NBC's real estate shill who gets a regular spot)

For that matter, why did bloggers know about GOldman years ago but the media's acting like it just happened? Corporations have way too much control of both govt and media. The American people are mostly in the dark, and corporate powers are at work to make the internet as dumbed down as TV as we speak. I hope this pattern can be broken before the last bastion of free flowing information is also destroyed.

In defense of Magnetar, they claim (PDF alert) their CDO portfolio was market neutral. In fact, if you look at (and believe) Graph 1 in the WSJ link I provided, they would have lost money if their CDO portfolio declined by ~4% to 12%. The reason they needed "more crap" in the CDOs was to get the returns they needed on their long positions. And then, I think, if push came to shove, they would finger point at the ratings agencies. As it is, they never do this, but instead talk about the systematic relative value mispricing which drove their positions. Unfortunately, this also drove more mortgages to subprime buyers...