Monday, April 19, 2010

Goldman Sachs shares rise slightly today, as more details on the SEC fraud case emerge (GS)

A few updates on the SEC's sloppy attack on Goldman Sachs, which has now caused $11.5billion in trading losses for Goldman Sachs shareholders who sold on the news last Friday. Those investors should feel free to call up the Securities & Exchange Commission, and demand to know if the SEC's politically driven drive-by was worth the destruction of shareholder wealth that followed.

Information Line (General SEC Information): (888) SEC-6585

Public Affairs: (202) 551-4120 For press inquiries

Investor Assistance and Complaints: (202) 551-6551

The broad market jumped higher in the last hour and a half of trading, and some think it was because the "voting" breakdown of the SEC's decision was publicized:
April 19 (Bloomberg) -- The U.S. Securities and Exchange Commission split 3-2 along party lines to approve an enforcement case against Goldman Sachs Group Inc., according to two people with knowledge of the vote.
SEC Chairman Mary Schapiro sided with Democrats Luis Aguilar and Elisse Walter to approve the case, said the people, who declined to be identified because the vote wasn’t public. Republican commissioners Kathleen Casey and Troy Paredes voted against suing, the person said.

That split vote probably gave the market some confidence that the SEC's charges will prove baseless.

To that end, the Wall Street Journal pointed out some important facts regarding the case. The journal rightly points out that the SEC might not quite understand the very product at the heart of the case

"Yet much of the SEC complaint is written as if the offering included actual pools of mortgages, rather than a collection of bets against them. Why would the SEC not offer a clearer description? Perhaps the SEC's enforcement division doesn't understand the difference between a cash CDO—which contains slices of mortgage-backed securities—and a synthetic CDO containing bets against these securities.
More likely, the SEC knows the distinction but muddied up the complaint language to confuse journalists and the public about what investors clearly would have known: That by definition such a CDO transaction is a bet for and against securities backed by subprime mortgages. The existence of a short bet wasn't Goldman's dark secret. It was the very premise of the transaction.

A much simpler point is that these were - in their own words - VERY sophisticated investors involved in this deal.

Not that there are any innocent widows and orphans in this story. Goldman is being portrayed as Mr. Potter in "It's a Wonderful Life," exploiting the good people of Bedford Falls. But a more appropriate movie analogy is "Alien vs. Predator," with Goldman serving as the referee. Mr. Paulson bet against German bank IKB and America's ACA, neither of which fell off a turnip truck at the corner of Wall and Broad Streets.
IKB describes itself as "a leading investor in CDOs" and "a leading credit manager in the German market." ACA, for its part, participated in numerous similar transactions. The Journal reports that ACA was known for embracing more risk than its competitors, because, with a less-than-stellar credit rating, it had a higher cost of capital.

Legitimate, long-term investors lost billions over the last few days, over an SEC witch-hunt that might have been politically motivated and timed to help speed financial overhaul legislation. If anyone should be sued, it should be the hacks at the SEC, who somehow forgot that on Wall Street, there's a winner and a loser in every trade. I still own the the shares I bought Friday (@160.5), and I plan to sell them higher over the next few days if all goes well...

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