The Securities and Exchange Commission (SEC) on Friday, April 16th, hit Goldman Sachs with a civil fraud charge that alleges that Goldman duped clients by selling them a financial instrument designed by a hedge fund firm Paulson & Company. It is believed Paulson and Company made a $1 billion profit by betting on the deal’s downfall after creating the investments for Goldman Sachs.
Well, there is no doubt that Goldman Sachs has come a long way from its 1869 founding by Marcus Goldman who operated as a small commercial paper deal in a one room office. There is doubt that the SEC’s case can truly stick. Some believe it is political maneuvering as the Obama Administration and Congress seek financial regulation reform as well as an effort to appease the populist revolt and growing animosity towards banks, big Wall Street bonuses, and questionable activities in the markets.
There are others who worry that the civil fraud case could open the what-if negative worries that the overall stock market has peaked and is heading downward. After all, the 2008 year proved that investors will panic and sell when they lose confidence in the financial system. Others believe that Goldman’s case will have little effect on the market if the SEC doesn’t go after other firms or appears that it will go to any extreme to bring Goldman Sachs down.
Whether you believe Goldman Sachs is guilty or innocent, you need to understand what has happened in our economy and markets thanks to subprime mortgages. I recently had the opportunity to meet Michael Lewis, author of the book “The Big Short: Inside the Doomsday Machine.” Michael is one of my favorite authors and you may know him best by his previous book, “The Blind Side.” That said, as Michael spoke to our group initially, he shared with us that he had the opportunity to speak to Washington Congressional leaders who, following his presentation, said that it was the first time many of them understood what had happened in the subprime mortgage meltdown that nearly ruined our economy.
In this book, Michael Lewis asks the question “Who really understood the risk in the assumption of ever rising real estate and the risk that was exponentially created by artificial securities that were based on piles and piles of doubtful mortgages?” Goldman Sachs is mentioned many times throughout this book along with unique characters like Michael Burry, a shrewd investor with uncommon characteristics. Burry makes it clear that Goldman Sachs never appeared to care very much which bonds they were insuring. Burry figured out how to make money in that environment. So the questions become, “What if Goldman Sachs’ decisions are not illegal? Suppose what they did was not in the best interest of the client, but didn’t violate any rules?” It could be that this question will determine the outcome of Goldman Sachs and the future of Wall Street. Read Michael Lewis’s book and understand what has happened and find out what needs to be determined to prevent our country from meltdowns in the future.