On the one hand, this is just a subpoena of Goldman from the Manhattan DA’s office, but on the other, after all the crisis investigations, we finally have a prosecutor somewhere deciding to take some abuses during the crisis seriously enough to see if they add up to a legal case. (Yes, the SEC did file a suit against Goldman on one synthetic CDO, one transaction out of 25 in its Abacus program, which Goldman settled for $550 million, but this was litigation on one deal, not on broader patterns of misconduct).
And it came not out of the splashy but designed not to accomplish much FCIC, but the quieter and more tenacious Senate’s Permanent Subcommittee on Investigations. I hardly ever do media briefings, but I was on the blogger call for both reports, and the contrast was night and day. The FCIC briefing was softball PR, with Phil Angelides and Brooksley Born (who by definition had not done the work and therefore were not big on detail) leading the call. The Senate call was led by staffers who demonstrated impressive command of the products and industry economics and transmitted information at a very high bit rate.
Not surprisingly, the information request comes from a local prosecutor. The DoJ continues to be missing in action.
In one sense, these suits are about whether the officials believe markets should be kept safe for investors. That was the premise of the securities legislation of 1933 and 1934; CDOs technically are not securities (mortgage bonds, by contrast, are) and are thus are subject to a lower level of investor protection. Goldman and its ilk effectively rely on the “consenting adults” idea: per them, no one can claim any harm or foul; everyone should know investment banks are on every side of a trade and will probably screw you.
But the process of issuing CDOs was almost guaranteed to prevent adequate due diligence. The deals would be marketed based on general parameters about 60 days before the targeted closing. Some deals were “managed” meaning they were “trust me” paper where investors relied on the independence and experience of the firms hired to be CDO managers. We’ve since learned that in many cases these firms were NOT independent; indeed, the material presented in the first round of the Levin hearings showed that Goldman was looking for compliant managers, meaning ones that would not ask too many questions about the dreck Goldman wanted to put in these CDOs. For the “static” deals, the list of what was in the CDO would typically be presented the day before closing, which was not enough in advance to allow for a serious evaluation.
Put it another way, if you had consensual sex with someone who had HIV and didn’t tell you about it, how would you react? It may not be illegal under the law but it sure ought to be criminal. And some jurisdictions have found it to be criminal even with no specific laws against it on the books.
Bloomberg broke the story and the New York Times provided a summary:
Goldman Sachs has received a subpoena from the office of the Manhattan district attorney, which is investigating the investment bank’s role in the financial crisis, according to people with knowledge of the matter.
The inquiry stems from a 650-page Senate report from the Permanent Subcommittee on Investigations that indicated Goldman had misled clients and Congress about its practices related to mortgage-linked securities.
This Bloomberg video provides additional detail as to the issues highlighted in the report that look to be relevant to prosecutors:
This post originally appeared at naked capitalism and is reproduced here with permission.
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