Goldman Sachs is a bunch of big fat liars.

Let’s make sure we understand why Goldman Sachs was willing to pay $550 million to settle the SEC’s lawsuit against it – “one of the largest penalties ever paid by a Wall Street Firm.” Goldman Sachs committed fraud to get investors to buy into a fund of securities. It isn’t even a difficult fraud to understand.

Goldman agreed with John A. Paulson, a prominent hedge fund manager who earned an estimated $3.7 billion in 2007, that Paulson could choose the particular mortgage-backed securities that Goldman would sell. Paulson chose securities he knew would default. At the same time he bought credit default swaps on those same securities — in essence, insurance policies that would pay him the value of those securities if they defaulted. In short, he chose the securities for the fund because he knew they would fail and their failure would profit him mightily.

Goldman’s problem, of course, is that no one would buy the securities if they knew Paulson had chosen them. As the complaint filed in the case by the SEC (embedded below) states: Goldman “knew that it would be difficult, if not impossible, to” sell the securities in the fund “if they disclosed to investors that” someone who had “shorted” the securities, “such as Paulson, played a significant role in selecting the securities.”

So Goldman went out and got ACA Management LLC, a company with experience in analyzing the credit risks associated with funds like that it was selling, to agree to be “Portfolio Selection Agent” — that is, to represent itself as the entity that had chosen the securities Goldman was selling. Of course, ACA was not the Portfolio Selection Agent, but Goldman knew what it needed. As Goldman’s Fabrice B. Tourre wrote in a memo:

“One thing that we need to make sure ACA understands is that we want their name on this transaction. This is a transaction for which they are acting as portfolio selection agent, this will be important that we can use ACA’s branding to help distribute the bonds.”

Tourre later wrote in another memo:

“We expect to leverage ACA’s credibility and franchise to help distribute this Transaction.”

I’m happy to learn that the settlement does not include any agreement with Tourre personally. One thing I wonder, though: wasn’t Paulson part of a conspiracy to defraud investors? Why has he gotten to go off with his billions untouched by the SEC?

S.E.C.’s Civil Lawsuit Against Goldman Over C.D.O

The Madoff Investigation Should Focus on the SEC.

Ever since the Bernie Madoff scandal broke, I’ve wondered: was the SEC paid off? It’s hard to believe the SEC could have investigated Madoff as it did, see what anyone who looked closely could see, and not dig sufficiently to uncover the fraud. And a story today from the Washington Post only adds gasoline to the fire of that suspicion. An SEC lawyer told her superiors in 2004 that “information provided by Madoff during her review didn’t add up and suggest[ed] a set of questions to ask his firm.” She was instructed in response to focus on other matters. And her immediate supervisor’s boss later married Madoff’s niece!

The suspicious SEC lawyer, Genevievette Walker-Lightfoot, “had previously worked at the American Stock Exchange, where she developed an expertise in specialized trading strategies.” After she was diverted to other matters, she never was asked about the Madoff investigation again, even during an agency investigation into Madoff in 2005 which only “found three violations of minor rules.” In 2006, Walker-Lightfoot left the SEC after filing a complaint with the agency alleging that she’d been subjected to a hostile workplace. A person familiar with the complaint said it was settled in Walker-Lightfoot’s favor.”

Madoff, incidentally, once “boasted at a business roundtable discussion about his close relationship with SEC regulators, saying “my niece just married one.”