The SEC dropped a bomb last week by leveling a complaint against Goldman, sending shivers to the financial services sector on the possibility of industry wide investigations. Essentially, the SEC argues that Goldman should have notified investors that the financial product they were buying was selected in part by a party (John Paulson) that was heavily betting against it .
Usually companies such as Goldman go two routes - a mea culpa followed by a fine or the naming and persecution of a 'rogue trader'. In this case, Goldman is doing neither and remarkably saying they did nothing wrong... And they have an incredibly strong case:
* Goldman themselves lost $90M in this transaction -- if they were going to defraud, would they defraud.. themselves?
* each one of these bets always has someone on the short and long side -- gamblers take either side, Goldman is just the 'house' arranging the transaction
* last and most logically, who is to say that these bets wouldn't have gone the other way? would anyone be complaining then?
The SEC is pointing to two things - an email by a young trader suggesting that these products were going to fail and another firm (Bear Stearns) refusal to take on the transaction due to 'moral conflicts'. But these are incredibly dicey waters that require 20/20 hindsight. To suggest that Goldman knew with certainty that these products were inferior defies logic in the most material of Wall Street ways - the $90M that Goldman lost.
This appears to me a prosecution on Goldman's morality (they should have done done more), but I don't really see what Goldman, with any amount of certainty, could have done differently.
Aveek Guha, President, http://www.mbadaycamp.com