Did Goldman Sachs Get Off Easy?
In the wake of the
Still, other observers have been lining up to say that Goldman got off easy. "The
The stickier question involves what, if any, legal and regulatory ramifications the settlement, which is still tentative until a federal judge signs off on it, would have. One the one hand, Goldman has conceded that it made a "mistake" and provided investors with "incomplete information" in the course of packaging synthetic collateralized debt obligations. Namely, Goldman had represented to its clients that an independent third party had picked securities for the deal when in fact, according to the
But Goldman has stopped short of admitting to fraud. In other words, Goldman, which in all likelihood still faces a bevy of civil lawsuits even now that the
While this type of "guilt free" resolution is par for the course when the
In terms of regulation and deterrence, though, experts say there's a good chance that the precedent will be meaningful. "While Goldman, as is usual, didn't admit any wrongdoing except for having made a mistake, a civil penalty of this size is definitely a substantial marker and a warning as to how the
The settlement stems from the government's allegations that Goldman misled investors. The Goldman product that the
With the Goldman case, of course, the big difference was that investors were instead betting on mortgages. And since the investment products were synthetic, investors were able to place bets on the direction of the housing market without actually owning any physical mortgage bonds.
In arranging these deals, one of Goldman's roles was that of matchmaker. In other words, it was Goldman's job to find some investors who thought that the housing market would stay healthy and others who thought it would tank. Goldman would then pair the two sides up in a transaction.
"Acting as a swaps dealer, Goldman has a commodity. And in order for it to earn a fee for that commodity going out into the marketplace, it has to put together the short side and the long side. So it has to be simultaneously in possession of the names of bona fide longs and shorts," says Kopff. Using a gambling metaphor, he says, "In that sense, [Goldman] has a duel incentive. It wants some people to go short and some people to go long, because it's basically like the house. It's making money as long as it pairs up the longs and shorts."
The question then becomes: When should we blame the house? The most obvious answer is that the house could be at fault when the deck is stacked against some of the bettors.
In the Goldman case, this issue is particularly relevant. Notably, the
Paulson, of course, effectively shorted the housing market by betting against the bonds, but there were also investors on the long side of the deal in question. The
Goldman was hardly the only firm to package deals like this. As a result, Greenberger sees the
Still, Zamansky says the settlement sends the wrong message. "If you write a check to the
Also curious is the timing of the settlement. The
"The goal of the enforcement action was to create publicity that would give a push to financial reform," he continues. "It worked."
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Did Goldman Sachs Get Off Easy?
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