The gold standard is set for the elite, the top of the top, and Goldman Sachs was considered the golden standard of Wall street. The company employed only the brightest minds and it always paid-off: Goldman registered a $13.4 billion profit last year which set a record for a Wall Street securities firm.
So what happened on Friday? The U.S. Securities and Exchange Commission charged Goldman Sachs with FRAUD. Goldman’s name should never be on the same sentence with the word “fraud” and for that the stock got hammered down 13% and lost $14.2 billion in market capitalization. In fact, the whole market sold-off and the S&P 500 closed down 1.61%.
The fraud case is based on the accusation that Goldman Sachs allowed a client, Paulson & Co, to pick the assets that go into AAA synthetic collateralized debt obligations (CDOs). Further, Paulson choose the lowest quality AAA and packaged it together into toxic CDOs. Goldman went on to market the CDOs to its clients only for Paulson & Co to go and SHORT the hell out of it. It worked well for Paulson who made a name for himself during the financial crisis by shorting CDOs and financials, and later buying financials at their lows. He went on to expand his hedge-fund from a $2 billions under-management desk to a whopping $32 billion shop.
Goldman Sachs denied the allegations and called the SEC’s charges “completely unfounded in law and fact” and said it will contest them. Analysts agree that the risk to Goldman will be mostly reputational. According to an analyst, “People are going to be more inclined to look at Goldman Sachs and think, “Who’s on the other side of this trade?” The financial implications will be minuscule as Brad Hintz, an analyst at Sanford C. Bernstein & Co. said that the “worst-case liability” if the SEC case succeeds would be $706.5 million hit to net income, or $1.20 in earnings per share. There is also the expectation that CEO Blankfein will resign, but replacement is not a problem at Goldman.
A bigger question mark is what will happen to Paulson? Will he be charged too? Even if he isn’t charged, will his hedge fund clients start pulling their money out? Will the redemptions be as fast as his rise from $2 billion to $32 billion assets under management? Gold, traditionally considered a safe-haven, plummeted on Friday as fears surfaced of a liquidation by Paulson & Co, the biggest holder of the Gold ETF. The Friday sell-off also targeted Bank of America and Citi which are two of Paulson’s highest concentrated and most liquid positions.
What do you guys think?
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Loading ...Tags: Bank of America, CDO, Citi, Fraud, Gold, Goldman Sachs, SEC, Securities and Exchange Commission
One of the things you always here over and over again.. is that if results are too good to be true , then they probably are. Especially with hedge fund strategies, you can never really understand whats going on and one should always be skeptical..
The funny thing is, when they tried reaching (Tourre) the 31year old guy who is accused of misleading the investors
he refused to comment Source “bloomberg” and the only thing he said before hanging up was “I need to jump, thank you, goodbye” now what does that tell you..
As for Paulson, he denies initiating which collaterals to buy and “So Far” his firm hasnt been accused of any wrongdoings..
My personal view,, wait and see what will happen to GS in the next coming days, it might even be a good opportunity to buy the stock
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Keynesian Reply:
April 18th, 2010 at 9:49 pm
I’d be careful of buying now. Most banks did it, but the SEC went for the biggest fish: Goldman and they want to set an example. However, you may still be right.
I believe this all politics: Congress elections are coming up pretty soon and things are not looking good for them. Since Obama can’t decrease unemployment quickly, he will take the populist measure of attacking the biggest firm on Wall Street. There is also a Financial Reform bill that Democrats want to add more regulations to. Such a headline helps them plug-in whatever they want.
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finally….hopes for justice coming from america
golden sachs is mafia of the financial world
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