Goldman Sachs Had "The Big Short" On Against Mortgage Packages It Sold

As early as 2007 homeowners were falling behind on their subprime mortgages, causing huge losses for investors that owned slices of their mortgages in collateralized securities peddled by Wall Street. According to internal company emails by top Goldman executives Goldman Sachs was “well positioned” to profit from a decline in the value of these offerings and as the economy tanked expected to make a financial killing.

What well-positioned meant is that the the firm had “the big short,” on as was declared by chief financial officer David Viniar — Goldman Sachs was making money off the souring of the very securities they had peddled to the market. Goldman Sachs in effect became the most profitable Wall Street investment banking firm in history by selling toxic assets in the form of CDO securities to their worldwide client base and then placing big bets against those securities which they were convinced were garbage and would fail.

Thus far, the SEC has only brought fraud charges against Goldman Sachs for one of the many CDO’s that they brought to the market during 2007 and 2008. The SEC charges allege that Goldman failed to properly disclose pertinent information about the quality of the securities that they were selling to their clients and about how those securities were selected.

Apparently, Goldman allowed a large hedge fund client to handpick the mortgages that were placed in the offering. The client, Paulson & Co., structured the CDO in a manner that guaranteed failure by selecting sub-prime mortgages that had been entered into by weak credit mortgagees. Goldman Sachs and Paulson & Co. both took short positions against the CDO and profited handsomely as the value of the mortgages collapsed. The SEC charges that fraud occurred in that one large client was favored with information that was not disclosed to other Goldman clients that purchased securities in the offering and that the quality of the securities was misrepresented.

Up to now, only civil charges have been filed against Goldman Sachs by the SEC. Probably, only a small amount of the evidence against Goldman Sachs has been publicly released by the SEC. As the case proceeds the SEC prosecutor will likely slowly release additional evidence of fraudulent behavior on the part of Goldman Sachs. I have little doubt that additional charges will be filed by the SEC as the case proceeds. Very likely, Goldman’s fraudulent behavior was not limited to only one of the CDO offerings that it marketed but extended to a number of them.

Let’s think for a moment about what type of behavior Goldman Sachs was involved in. In order to market securities Goldman must have told its clients that the securities were good investments. That’s the job of securities salesman and Goldman high powered salesman are some of the most aggressive and best in the business. Wth the collusion of the credit rating agencies, such as Moodys and Standard and Poors, securities that Goldman Sachs allegedly knew were pure garbage were marketed as AAA securities. Goldman then in effect took short positions against the securities, fully expecting them to drop in value, by purchasing credit default swap insurance from big insurance companies such as AIG.

As has been stated by Senators who are now investigating the actions of Goldman Sachs, and how their actions contributed to the financial meltdown, this is much like selling to one of your clients a house that you know has dangerous defective electrical wiring, then taking out an insurance policy that would pay you handsomely after the house burned to the ground.

As additional e-mails, internal documents, and perhaps even telephone conversations between Goldman Sachs executives, are presented by the prosecutor as evidence of Goldman’s fraudulent activities, it is highly likely that Goldman’s attorneys will strongly suggest that they settle the case with the SEC before going to trial. I expect that as Goldman has become the very symbol of Wall Street greed and excessive compensation to executives, even though those executives were apparently engaged in fraudulent activity, Goldman’s attorneys would realize that selecting a jury that didn’t hate Goldman Sachs would be a challenge.

Therefore, Goldman will probably escape from the fraud charges by not admitting to any wrongdoing on their part and by the payment of some fairly substantial monetary fine. Thanks in large part to the generosity of the federal government towards providing Goldman Sachs with emergency money when they needed it Goldman has once again returned to being an extremely profitable company and could pay a large fine without any difficulty. In light of the companies present strong cash position if I were a top level Goldman executives my real worry would not be about the payment of a fine. No, my concern would be that at some point criminal charges are added to the civil charges which have to date been filed.

It seems to me, that Goldman Sachs, and undoubtably other Wall Street firms, have become little more than criminal organizations when as a normal course of business they package and market securities to clients, thereby collecting substantial fees and commissions, when they know full well that the securities that they are marketing will more than likely lose substantial value. The criminal nature of the transaction becomes evident when the Wall Street firms take short positions against the very securities that they are representing to their client’s as being sound moneymaking investments. Certainly, this type of behavior is immoral and just plain wrong.

Hopefully, Goldman Sachs and other Wall Street firms will learn that placing “the big short” against security products of your own structuring and against your own clients in a deliberate effort to profit as your clients lose money is not only immoral but is in fact criminal behavior. If the top executives of Enron and WorldCom went to prison for defrauding investors and clients why should top executives of Goldman Sachs be spared the same punishment? However, I do not think that no matter how damaging the evidence may be against Goldman Sachs executives that criminal cases will ever be filed.

I expect that if Goldman Sachs executives are spared from criminal prosecution it will be because of the close ties that Goldman Sachs enjoys with the federal government and the need for the services that the firm provides to the government. No doubt, Goldman is THE major player in not only the stock market, but in the bond market and commodities markets. Bringing real heat against Goldman Sachs may place all of these markets as well as the economy in some jeopardy. In the present financial environment, our government may have a desperate need for Goldman Sachs services, especially in the bond market, and limit any prosecution to a civil suit or two that after some protest on the part of Goldman as to their innocence would be settled by merely a slap on the wrist and the payment of a fine.

Even with financial reform legislation being championed by the Obama administration Goldman Sachs will probably be deemed too important to the operation of the government’s fund raising efforts in the bond market and to the economy to punish in any meaningful way. Once again, we are likely to see just how relevant the Golden Rule is in a society that has misplaced its moral compass.