The Goldman Sachs Fraud Case Is About Disclosure, Plain and Simple


I'm devouring all news I can about the Goldman Sachs fraud case while on I've been the road. There's a lot to digest. The case involves the world's most powerful investment bank marketing and selling a security to investors that a prominent hedge fund helped it create in order to bet that the security would decline in value. I wanted to share some of my initial thoughts:

First of all, the issue is not that billionaire John Paulson's firm, Paulson & Co., helped structure these deals so they were favorable for him to short.

The basis of all securities law is in providing full disclosure. This fraud has two main issues. Did the Goldman Vice President Fabrice Tourre, who structured the collateralized debt obligation (CDO), lie by claiming the securities were structured by an independent third party? Did he also lie and say Paulson was going to buy $200 million worth of the security? If so, then fraud occurred.

I'd like to further point out that a vice president is a fairly low-level position. Above VP there might be other VPs, senior VPs vice-presidents, directors, managing directors and vice-chairmen. Did this VP act alone, or did others above him approve the language in the CDO documents? Who reviewed the documents at Goldman Sachs (GS) before the investor invested?

Everyone Is Responsible

A question was asked on CNBC: "Will people trust Goldman Sachs again?" And the answer is obviously "yes." Look, every bank out there was involved in structuring CDOs, and every bank out there allowed Paulson or others like Paulson to help structure them. Just like Paulson (and Goldman) was greedy, so were the alleged victims who bought the securities.

I think they must have known they were getting sold a bill of goods, but they were desperate for yield and probably paying attention to all the other statistics at that time that showed that defaults were historically very low. They conveniently forgot that this subprime class was relatively new.

This all took place in 2007 when everyone on Wall Street played this game (although not everyone probably had VPs -- rogue or not -- that lied in their disclosure statements). And the buyers of these CDOs knew that they were gunslinging in the Wild West. Everyone is responsible here, and I think we need to avoid a witch-hunting environment.

Disclosures Needed

Let's move forward from this by getting back to basics and require that the simple disclosures needed for equity offerings be required for structured finance as well. A regulatory commission needs to be developed that reviews CDO documents the same way the SEC reviews initial public offerings. Are the risks properly disclosed? Are all the counterparties named?

Here's a final thought: Over at BloggingStocks, my colleague Sheldon Liber thinks the Goldman Sachs fraud story is providing a buying opportunity for GS shares. As for me, I'm staying away from them. But my guess is by this afternoon or Monday morning shorts will begin to cover, Goldman Sachs will respond and a new chapter in the financial crisis media buzz will begin.