…It’s Goldman Sachs That’s To Blame.
Or so the Democrats and their asshat brigade would have you believe.
It was inevitable that the government would go after one of the big investment banks for their conduct during the run up to the credit crisis. Someone must be thrown to the lions so that the polis are distracted from the role their government played in the fiasco. So what are we to make of the SEC case against Goldman Sachs? Let's take a spin around the blogosphere:
At first blush, this case looks to take on a practice of Goldman and other banks that has been widely criticized in the media – selling asset-backed securities (ABSs) to investors then using credit default swaps to profit should those securities default. Which has been likened to a doctor taking out a life insurance policy on a patient.
A closer examination of the facts asserted in the press release suggests that the SEC carefully chose a test case. An underwriter that sells ABSs has a stronger argument that buying credit default swaps (which would pay out should the ABSs default) is legitimate when the underwriter is holding on to some of those ABSs. The credit default swap then looks like a legitimate hedging of risk (and some believe that we want to encourage underwriters to hold part of an offering to retain some “skin in the game.”) In other words, the doctor is taking her own medicine, and the life insurance policy covers her own life.
But, based solely on the SEC’s allegations, that is not what happened here. The allegations are that a large hedge fund, Paulson & Co., pushed Goldman to sell a CDO to investors. The hedge fund allegedly (a) played a large behind-the-scenes role in helping Goldman structure and select the assets (collateral) that backed the CDO, and then (b) bought a number of credit default swaps that “shorted” the CDO. The SEC alleges that Goldman told neither investors nor the CDO’s collateral manager (akin to the investment manager for the CDO) of Paulson’s role in selecting assets or its short position – which would suggest a conflict of interest. It is hardly shocking that a securities law case boils down to disclosure.
Note also that the head of the Hedge Fund at Goldman Sachs is question is a noteworthy contributor to the Democratic Party:
Hedge fund manager in Goldman Sachs case is major Democratic donor
By Alexander Bolton
The billionaire hedge fund manager at the center of an alleged fraud hatched at Goldman Sachs, a leading investment bank, has given tens of thousands of dollars to both parties.
Campaign fundraising records show that John A. Paulson, founder and chairman of the hedge fund Paulson & Co., gave $30,400 to the Democratic Senatorial Campaign Committee in June, qualifying him as a major Democratic donor.
He also gave $2,300 to Senate Majority Leader Harry Reid’s (D-Nev.) reelection campaign in February of last year and $4,800 to Senate Banking Committee Chairman Chris Dodd (D-Conn.) last April, according to records filed at the Federal Election Commission.
What would the Democrats do were it not for convenient scapegoats.