Goldman Sachs employees work in the investment firm's booth at the New York Stock Exchange Friday.
Updated: May 3, 2013 12:14PM
It is absolutely disgusting. If Goldman Sachs is guilty of the charges brought by the SEC, these greedy pigs deserve every fine and loss of stock value that the government and the markets mete out to them.
But America does not deserve this fate, nor do the innocent employees of the company who will be brought down as this once iconic and always egotistical firm is pilloried.
Although Goldman says it will vigorously defend the suit, the battle will bare publicly the ways in which Wall Street -- and Goldman, which has become a proxy for Wall Street -- helped destroy the American dream of home ownership.
Of course, that destruction started with greedy home buyers, and greedy mortgage brokers, and greedy ratings agencies. But now the laser of blame is focused directly on the process that ultimately financed that mortgaged house of cards -- and on the firm at the center of the circle of greed.
SEC: What Goldman did
First, here's a simple explanation of what Goldman is accused of doing:
They allegedly put together packages of subprime mortgages, to be sold to global investors. These packages were called Collateralized Debt Obligations (CDOs). Big international banks purchased pieces of these high-yielding fund shares, without looking into the risk of the underlying securities. Of course, American mortgages had always been viewed as secure debt obligations.
Who picked the mortgages that would go into this pool or fund? It was supposed to be Goldman. And Goldman was supposed to be acting in the interest of its clients -- the banks and institutions that would buy shares in the fund.
Instead it is alleged that one "star" Goldman trader, 31-year-old Fabrice Tourre, was working closely with a hedge fund called Paulson & Co. to pick the securities. And instead of picking the best mortgage securities to put into the fund, Paulson allegedly helped Goldman pick the worst, most risky mortgage securities to put into the fund.
Why would they do that? Well, Paulson & Co. had made a multibillion-dollar bet (using over-the-counter derivatives traded between banks) that the mortgages, and thus the fund, would fail. As the mortgages within the fund securities defaulted, the value of the shares would collapse. But those who bet on the "short side" like Paulson would make billions.
And that is exactly what happened. Within a year of the creation of this fund in 2007, 99 percent of the mortgage securities within it had failed, costing the institutional fund investors $1 billion. But the hedge fund made at least that much, or more, by betting against the fund investors.
It's as if the dealer in a card game had purposely handed all the players the low cards, while dealing himself all the aces and picture cards from the bottom of the deck. Those sitting at the table, betting on the game, were bound to get fleeced.
Laying the blame
Many have asked why only Goldman was charged, and not the Paulson hedge fund that helped stack the debt. (By the way, the fund founder is John Paulson, who is not related to former Treasury Secretary Hank Paulson.) Of course, morally the Paulson hedge fund is indicted, and it is likely they will face huge lawsuits from those who invested, and lost money.
But the SEC charges are made under securities laws -- the laws that require a broker to fully disclose all potential conflicts of interest.
Just a few weeks ago, I wrote a column about the effort in Washington to get stockbrokers to abide by the higher standards of investment advisers -- the "fiduciary rule" that requires registered advisers to put their clients' interest ahead of their own, and to fully disclose any conflicts of interest.
That proposal was sidetracked to a "study group" -- because everyone in Washington knows that you can't make money, or pass laws, if you have to fully disclose all conflicts of interest. But now you see why the big firms in the brokerage and insurance community opposed this legislation.
In Goldman's case, this blatant conflict of interest and the lack of disclosure that they were the cardsharks at the table, dealing from the bottom of the deck, will likely result in a win for the SEC when the case ultimately comes to court.
In the meantime, they have given fuel to the fire that demands increasing regulation over Wall Street activities. Never mind that government regulators had the laws, and the power, yet still completely failed to uncover scams ranging from Madoff to the current Goldman conflict of interest.
Scamsters will always attract more smart minds than regulatory agencies, simply because they can make more money on the dark side of the street.
But the real loss is to the future of America, which needs the free enterprise system to provide growth and opportunity, as well as pay down our existing debts. Every over-regulated economy in history has failed -- from the U.S.S.R. to Cuba -- to provide for its citizens, despite the good intentions of government planners.
The name Goldman will live on in infamy. Hubris -- the sin of pride -- has brought them down, and an important piece of America is now at risk.
There's an ultimate irony: Gold, the precious metal, cannot be tarnished. But Goldman has forever tarnished its name -- and the free enterprise system. And that's The Savage Truth.
Terry Savage is a registered investment adviser and a co-host of ''Monsters and Money in the Morning'' on WBBM-Channel 2 from 5 to 7 a.m. weekdays.