NEW YORK (
)--There are two basic facts about the
fraud case that are getting lost as details emerge about the complex case.
First, Goldman Sachs, like the rest of Wall Street, rests firmly on a bedrock of weaseldom. In fact, I think it is fair to say that part of the reason Goldman is more successful than competitors like
Bank of America
is that Goldman has better lawyers, or, put differently, better weasels.
Second, the fraud charges brought by the SEC against Goldman are all about politics. Mike Mayo, a veteran securities industry analyst at CLSA, put this succinctly in a recent report, pointing out that President Obama appeared just three hours after the
Securities and Exchange Commission
announced its charges against Goldman to stress the importance of passing financial services reform legislation.
"The connection appears clear to us: pass a bill and the heat will subside," Mayo wrote.
But just because a case is political doesn't mean it isn't justified, to paraphrase former New York Governor Eliot Spitzer, who ought to know a thing or two about politics, Wall Street and the law.
I certainly hope he's right. I am rooting against Goldman, even though I sense the case against the bank is weak from a legal standpoint.
Goldman boosters Wednesday were seizing on a
that Paolo Pellegrini , a former executive at hedge fund
told government investigators he informed
ACA Capital Management
that Paulson planned to short Abacus 2007-AC1, the toxic financial creation at the heart of the Goldman case. The SEC has said Goldman failed to disclose to ACA Capital that
was in the laboratory with the mad scientists that helped build the "Frankenbond" that was Abacus 2007-AC1, helping them choose the shady mortgages he planned to bet against.
argued the testimony from Pelligrini
the SEC's case, though I'm not quite sure I agree. Goldman general counsel Greg Palm told reporters yesterday that Goldman was not privy to conversations between ACA Capital and Paulson & Co. executives. If that's true, I don't see how Goldman was relieved from its duty to disclose to ACA Capital that Paulson was on the short side, if it indeed had one.
Whether Goldman really had such a duty is a larger question, and I have to admit I don't understand why it did. ACA Capital is not somebody's grandmother, responding to a sinister direct mail ad. This is a giant institution that simply bet big and bet wrong. If they didn't know a short-seller helped create the deal, it seems to me they should have known, but here my limited knowledge of how such deals are put together puts me (and nearly everyone opining on the legality of this deal) at a disadvantage.
Goldman has argued it had no duty to tell ACA Capital that Abacus was put together by shorts, and has also argued (less persuasively) that ACA Capital and not Paulson put together the deal. I'd bet Goldman is right and the SEC is wrong. As the writer Bill Cohan told me last week,
are the last people you'd expect to screw up on something like this.
No, it's not hard to imagine the SEC's lawyers put together a crappy case. If they were any good, they'd be working for Goldman.
So is President Obama wearing brass knuckles in his fight with Goldman and the rest of Wall Street? I sure hope so. I'm not sure how he can win otherwise.
Written by Dan Freed in New York