What an array of topics made news this past week. Headlines included another devastating earthquake in China, immigration reform legislation, a presidential move to grant same-sex partners hospital visitation rights, Tea Party protests on tax day, and unemployment hitting 12.6% in California. While all are important, none of them spoke to me the way the story about the SEC filing a fraud suit against Goldman Sachs did. Now, in fairness to those unlike me who have a strong background in either finances or economics, let me disclose that my last economics class was in high school and my own finances are run through Schools First Federal Credit Union and Union Bank, two institutions I hold in high regard. Although I knew of Goldman Sachs as a firm with an incredible history on Wall Street, their name was not one associated with an average citizen until their former head, Henry Paulson, was making bigger headlines than the two men facing off in the 2008 presidential election. In his role as Secretary of the Treasury he advised President Bush to bailout banks including Goldman Sachs, but not their rivals, Lehman Brothers. This is where we, average citizens, come in, because he used our hard earned dollars to help these poor bankers. Goldman Sachs paid back the billions they borrowed plus 23% interest in just a year. Sounds great, except if these allegations prove true, we start to get a picture of how this conservative institution was able to rebound from devastation to record setting profitability in such a short time. For the simplest explanation I turn to Michael Hiltzik, a business columnist in the Los Angeles Times. “But the ABACUS deal wasn’t a mortgage or a bucket of mortgages. It wasn’t a mortgage-backed security or a portfolio of mortgage-backed securities It wasn’t a collateralized debt obligation, which is a security backed by securities backed by mortgages. It was a ‘synthetic’ version of the latter, which is to say an investment that tracked the performance of certain collateralized debt obligations without actually requiring ownership of them.” In other words it’s a virtual world setup by Goldman Sachs with the help of a hedge fund operator named John Paulson, no relation to Henry, who had a reputation for predicting the collapse of the housing market. They failed to disclose his role in setting up this “synthetic” to the investors who purchased it and lost a billion dollars in a year while Paulson scooped up a billion dollars selling short. Goldman Sachs received 15 million in fees. Amazingly, it is Goldman Sachs and one of their vice presidents, Fabrice Tourre, who initiated ABACUS that are named in the suit, since they allegedly perpetrated the fraud on their investors. One might speculate there was some form of collusion and the suit should have named those who profited from this fraud, but it is important to recognize what a monumental step this was for the SEC, many of whom worked on Wall Street before becoming government agents. Prior to this action, the SEC was reluctant to point a finger let alone bring suit against their former cohorts. Again, I am not a financial wizard, but it doesn’t take a genius to recognize that a bunch of overzealous homebuyers did not cause all this economic turmoil by themselves. In the end I hope some kind of light can be shed on these deceptive practices and it won’t be necessary for me to wear 3-D glasses to figure out what I am seeing.
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