As volcanoes erupt and the skies darken, the fallout from the SEC lawsuit against Goldman Sachs continues to trickle down to the most unlikeliest of places.
Perhaps the most surprising fact that has come to light is that Goldman Sachs was not the first bank Paulson went to in order to create his CDOs. According to the Gregory Zuckerman’s investigative account of Paulson’s shorting of Wall Street – The Greatest Trade Ever – Paulson originally went to Bear Stearns to create the CDO.
Bear Stearns refused. Bear Stearns trader Scott Eichel told Zuckerman: “It didn’t pass our ethics standards; it was a reputation issue, and it didn’t pass our moral compass.” This, from a bank that collapsed due to massive over-leverage, rapacious profit-hunting and non-existant management controls, is a 25 standard deviation event, to coin a phrase from David A. Viniar, chief financial officer of Goldman Sachs.
n.b. – The real protagonist in the GS v SEC story is John Paulson. Untouchable in his ability to make money during the subprime crisis, he has remained out of reach (for now) from legal recriminations concerning the $1 billion pound profit he made at the expense of less sophisticated investors.
For many – Paulson is as culpable in the crime as Goldman Sachs. After all, he helped pick many of the securities that created the now infamous Abacus synthetic-CDO. Representatives from his hedge fund also sat at the same table as the investors Goldman supposedly duped, in full knowledge of the end result of the trade. In reality, it is difficult to pin anything on Paulson. Even if his hedge fund did pick the securities, the responsiblity was on the counterparty to do their research. They didn’t. Hindsight has cemented our perception of the housing market – we know what happened. Paulson knew what was going to happen. But in 2007, the majority of people had not an inkling of the difficulties ahead – and many investors continued to make bad bets even Paulson made his Abacus deal. Even teams in Goldman Sachs were arguing whether the housing market was going to crash. The worst you can accuse Paulson of is his silence. “All that is necessary for the triumph of evil is that good men do nothing.” But blowing a $1 billion payoff due to a nagging conscience does not keep investors happy. All these factors point to only one winner in the up-coming court case – the lawyers.