Friday, August 10, 2012

To the Surprise of No One, SEC Declines to Prosecute Goldman Sachs

You're steaming mad at those damned banks.  They caused this whole financial mess, and it seems like nobody's getting in trouble.  You'd have to be crazy to take their side of this argument.
Call me crazy.  I agree.  It's not the banks.
It's the ratings agencies and Congress.
Read on.
Back in April of 2010, I outlined the case against Goldman.  For those of you who may have missed it, here is the annotated version:
1.  Paulson & Co., Inc., a well known hedge fund, provided a list of residential mortgage securities to Goldman Sachs.  Paulson had a "short" position against these securities.  That means they thought the value would decrease.
2.  A Goldman employee asked ACA, Ltd. to rate the securities.
3.  That Goldman employee allegedly told ACA that he got the list of securities from Paulson. 
4.  ACA rated the investment as "investment grade."
5.  The derivative securities were sold to "sophisticated investors," like banks, pension funds and very wealthy people.
6.  The "sophisticated investors" (and Goldman, by the way) lost money.
Goldman was sued by the SEC.
Goldman lost that case.
I disagreed with the decision then, and continue to disagree with it now.
Here is a completely fictitious made-up story that may illustrate why.

Warren Buffett:  A well known investor who has a history of making a lot of money
Kitty O'Keefe & Co., Inc.:  An investment banker
Standard & Poor's:  A rater of securities
You:  A "sophisticated investor."   You are an nvestor who is deemed to have sufficient investing experience and knowledge to weigh the risks and merits of an investment opportunity.  You have either a net worth of $2.5 million or have earned more than $250,000 in the past two years.

Dingy little coffee shop in Omaha, NE
Buffett:  Here's a list of companies I think are ridiculously overpriced.  I want to make money when they go down.
O'Keefe:  Okay.  I'll see if I can get someone to buy them and you can borrow them at today's price and buy them back when they go down.
Fancy coffee shop in Beverly Hills, CA
O'Keefe:  I got this list of securities from Buffett.  Will you rate them for me?
Standard and Poor's guy:  Sure!
Conference room at Standard & Poor's
Standard and Poor's guy and his bosses:  We LOVE these securities.  These are fabulous!  We rated them A-OK!  What's Warren Buffett like?  Do you think we could meet him?
On the phone with you
O'Keefe:  We have a group of securities obtained from a well known investor from Omaha that are rated A-OK by Standard and Poor's.  Want to take a look?
You:  Sure!  Are you buying them?
O'Keefe:  Yes.
Dingy little coffee shop in Omaha, NE
Buffett:  Thanks!  I made a bundle.
O'Keefe:  sigh.  I lost a lot.

Standard & Poor's should not have paid a bit of attention to where the securities came from.  A ratings agency is a ratings agency.  Rating securities has nothing to do with "star power."  It has to do with analyzing balance sheets and cash flow statements, which were provided to them.
Kitty O'Keefe & Co., Inc. made $15 million in fees for putting the deal together, but lost $95 million in investing in it.  She should have known better.  She's an investment banker. 
You are a sophisticated investor.  You are eligible to buy into investments like pre-IPO securities, that are considered "non-disclosure" or "non-prospectus" issues because you know what you're doing and have a lot of money.  Shame on you.  Do your research.

The "bad guys" here are the ratings agencies that didn't do their homework and were paid by the companies whose securities they rated.  SHAME!
Also, blame the politicians who encouraged home ownership for people who had no business owning a home.  They did this by pressuring Government Sponsored Entities Fannie Mae and Freddie Mac to purchase mortgages with increasing lax review of income and property values.  The mortgages were badly underwritten and sure to collapse.  SHAME!

Now you know.
Please confine your responses to hateful words - and refrain from physical violence.

1 comment:

  1. No hateful words, but a great article that dissects the situation so a layman like me can understand. I am so fed up with what has gone on and now it seems like not much is happening because all the news agencies are focusing on the election and not on much else that is so important.