It doesn't get any bigger — or dumber — than this.
Yes, we are talking about the Securities and Exchange Commission case against Goldman Sachs (Stock Quote: GS) (GS) - Get Report , and in honor of this momentous occasion, we here at The Five Dumbest Lab are devoting an entire column to the battle. That's right, it's all Goldman, all the time. Or at least for this week.
Before we get started, however, here is a quick recap over what the two parties are squabbling about — just in case you have been living under a rock or sleeping in a European airport due to volcano-related delays.
(GS) - Get Report Goldman Sachs "defrauded investors by misstating and omitting key facts" about subprime mortgage securities it sold to investors, according to a complaint filed by the SEC last Friday. Specifically, the SEC is alleging that Goldman "structured and marketed a synthetic collateralized debt obligation (CDO) that hinged on the performance of subprime residential mortgage-backed securities (RMBS)."
The charges involve a transaction that Goldman structured for hedge fund Paulson & Co. that allegedly allowed the fund to take short positions against mortgage securities. Goldman then allegedly marketed a CDO including the subprime securities to clients without telling them that Paulson & Co. had participated in selecting what subprime securities to include, and that it was taking a short position against the CDO.
(GS) - Get Report As for Goldman, the investment bank issued a terse response to the complaint, saying the charges are "completely unfounded in law and fact" and vowed to "vigorously defend the firm and its reputation."
As for us, we can't get enough of this stuff. Enjoy!
5. Goldman and the Governor's Race
(GS) - Get Report While California's $26 billion budget deficit threatens to sink the Golden State, the leading candidates in the governor's race are foolishly spending their time threatening each other over their respective ties to Goldman Sachs. Former eBay (EBAY) - Get Report CEO Meg Whitman, the front-running Republican, resigned from Goldman's board about seven years ago in the wake of charges that she received shares in attractive initial public offerings in a practice known as "spinning."
As for her chief Democratic rival, former Gov. Jerry Brown's sister, Kathleen Brown, is a former California state treasurer and head of public finance for the west region of Goldman Sachs.
(GS) - Get Report (EBAY) - Get Report "Over the course of this campaign, I think the voters are going to be fully aware of Meg Whitman's financial dealings at Goldman Sachs and they'll hold her accountable for them," said Brown campaign spokesman Sterling Clifford. State records also show Whitman has received more than $105,000 in political donations from Goldman executives.
Tucker Bounds, a spokesman for the Whitman campaign, refuted claims that his candidate has been bid up and paid for like a Beanie Baby on eBay.
(GS) - Get Report (EBAY) - Get Report "It's highly hypocritical and disingenuous for Team Brown to make these accusations considering Jerry Brown's sister is a current Goldman Sachs executive that has direct dealings with the State of California on these matters," said Mr. Bounds.
4. Goldman vs. Obama
Goldman Sachs, which is currently in the government's crosshairs over its alleged double dealing in mortgage-backed bonds, generously contributed to then-Senator Obama's presidential campaign, according to Federal Election Commission figures compiled by the Center for Responsive Politics. Goldman Sachs' political action committee and individual contributors who listed the company as their employer donated $994,795 during 2007 and 2008 to Obama's campaign, making it the second-highest contribution from a company PAC and company employees.
(GS) - Get Report (EBAY) - Get Report Goldman Sachs contributions to the Obama campaign were more than four times larger than the $230,095 in donations to Sen. John McCain's (R., Ariz.), presidential campaign. Federal law prohibits a company from directly giving money to an electoral campaign.
"I did not run for office to be helping out a bunch of fat cat bankers on Wall Street," said President Obama in a December interview on CBS' "60 Minutes."
(GS) - Get Report (EBAY) - Get Report Worst of all for Goldman, all that campaign cash did not even buy the firm any business. The U.S. Treasury said in March it plans to sell its major stake in Citigroup (C) - Get Report through Morgan Stanley (MS) - Get Report .
In case you were wondering — and we knew you were — only the PAC and employees of the University of California, which donated more than $1.5 million, topped Goldman Sachs generosity toward Obama.
(GS) - Get Report (EBAY) - Get Report (C) - Get Report (MS) - Get Report Unlike Goldman, however, the federal government has not bailed the state of California out of its multibillion dollar budget hole. Yet.
Dumb-o-meter score: 80 — Goldman employees would have been better off buying $1 million worth of cat food than contributing to Obama's campaign.
3. Goldman and the Fabulous Fab
We here at The Five Dumbest Lab have just one thing to say about the trader at the heart of this fraud case: Vive le Fabuleux Fab!
Central to the government's case against Goldman — and presumably the investment bank's defense — are the actions of Fabrice Tourre, the 31-year-old French trader who paired up hedge fund honcho John Paulson and two bullish institutional investors on the U.S. housing market. The SEC alleges that Tourre "misled ACA into believing that Paulson invested approximately $200 million in the equity of ABACUS 2007-AC1 (a long position)."
Since last Friday's announcement by the SEC, the London-based employee, who makes more than $2 million a year, has been placed on paid leave and deregistered with the British regulatory agency Financial Services Authority. Just because Tourre has been sidelined, however, does not mean he is out of the picture. In fact, his legend is growing.
London's Daily Mail calls Tourre a "high flier" who moved to London in 2008 after spending several years in Goldman's New York office, where "he rented a £3,000-a-month ($4,600) apartment and claimed to be from a prominent French family." The Daily Mail goes on to say that the hard-partying Tourre was unafraid to wake the neighbors, and not just on Bastille Day.
As for Tourre's fateful nickname, he hung the moniker on himself. In a 2007 email, Tourre ill-advisedly wrote that "the whole building is about to collapse anytime now" and that the "only potential survivor" was "the fabulous Fab rice Tourre ... standing in the middle of all these complex, highly leveraged, exotic trades he created."
(GS) - Get Report (EBAY) - Get Report (C) - Get Report (MS) - Get ReportAu contraire mon Fab frere. You may still be standing, but it's in the middle of a tempete de merde of your own creation. And if you aren't careful, your bosses at Goldman may throw you en dessous de l'autobus.
Dumb-o-meter score: 85 — If infamy loves company, then Jerome Kurviel, the French rogue trader who sank Société Général, must be happy right now.
2. Goldman vs. the SEC
Here's a head-scratcher: How on earth will the SEC persuade a jury to find Goldman guilty when it could barely convince itself to bring the suit?
The SEC split 3-2 along party lines to approve an enforcement case against Goldman Sachs, according to Bloomberg, which got its information from two unnamed sources close to the regulator. In the non-public vote, SEC Chairman Mary Schapiro sided with Democrats Luis Aguilar and Elisse Walter to approve the case, while Kathleen Casey and Troy Paredes voted against suing.
Don't you dare tell Mary Schapiro that the case is politically motivated though. Dem's fighting words to that Dem who released a statement on Wednesday saying she was "disappointed by the rhetoric" and could "not think of any instance where politics was a consideration in bringing an enforcement action."
Why the SEC commissioner felt the need to publicly display her indignation so soon after launching the case, we have no idea. If it was a play for public sympathy, it was a Hail Mary thrown way too early in the game.
Any show of SEC weakness, of course, only makes the "vampire squid" at Goldman more bloodthirsty, and as evidenced by their recent earnings results, they can certainly afford a killer legal team. Goldman reported Tuesday that its first-quarter net income nearly doubled to $3.29 billion with per share earnings of $5.59 easily beating analysts' average forecast of $4.01.
Goldman Sachs said in a statement last week that the SEC's allegations are "completely unfounded in law and fact" and said it will "vigorously defend the firm and its reputation."
If the SEC doesn't get its act together soon, Goldman won't need to do much — or spend much — to defend itself.
1. Goldman and the Dumbest Case Ever
Quite simply, everything.
Crooked mortgage brokers. Corrupt ratings agencies. Dishonest lenders. Dubious borrowers. Clueless regulators. Ponzi Schemers. Greedy CEOs. Dishonest politicians. Suspect short-sellers. Stock market manipulators. Spent up consumers. Unemployed workers. Bankrupt states. Foreclosed homes. Chinese ascendancy. European insolvency.
(GS) - Get Report (EBAY) - Get Report (C) - Get Report (MS) - Get Report And with all this going on, all these major systemic problems in desperate need of resolution, what topic is dominating political and financial discourse across America right now?
Whether Goldman Sachs was treating one customer better than another. When it all comes down to it, that's what this overhyped case is all about.
(GS) - Get Report (EBAY) - Get Report (C) - Get Report (MS) - Get Report
Goldman Sachs knowingly sold a bunch of toxic mortgage bonds to willing investors because they thought they could make more money making hedge fund manager John Paulson happy. The bonds were designed to fail because John Paulson wanted them to fail, and Goldman Sachs wanted to accommodate him.
(GS) - Get Report (EBAY) - Get Report (C) - Get Report (MS) - Get Report That's it in a nutshell. Goldman was double-dealing. It sacrificed one customer for the sake of another, and judging by Goldman's "big-boy defense," the investment bank is not showing much remorse. This will only hurt them in the future as potential clients avoid the investment bank for fear of being fleeced. Nobody wants to shop in a store whose motto is caveat emptor; the customer must come first.
That said, we won't lose much sleep over Goldman's future. Vampire squid have tremendous survival instincts.
(GS) - Get Report (EBAY) - Get Report (C) - Get Report (MS) - Get Report As for those who wish to dwell on the specifics of the case — like what ACA knew about Paulson's position or what Fab Tourre was telling the banks — please feel free to debate yourselves to death. Just do it elsewhere.
There are far dumber things out there that need our attention.