SEC has some crazy theory about Goldman Sachs

The SEC has released this crazy theory about a conspiracy at Goldman Sachs to defraud investors.

Although technically, if they have enough evidence to win at trial, it won’t really be a conspiracy theory any more.

Isolated or Systemic Fraud?

The big question here is whether we’re looking at a one time event or a pattern of behavior.  If the SEC only has this one complaint lined up, this might not end up as much of a story at all.  The total value of the Abacus transaction is only about $1 billion and Goldman’s stake is even smaller.  Bloomberg is saying they only made about $15 million in fees for this particular deal, so the charges here are really, really insignificant for a company that made a thousand times that much profit in just last year.

On the other hand, if this turns out to be the kind of deals that Goldman routinely uses to collect fees and bring profits to their favorite hedge funds and investment firms… Well, then we could be looking at a price fixing scheme big enough to make huge profits in the event of a crisis situation.  Hell – let’s just be honest and admit that it would be a big incentive to create a financial crisis.

On Timing the Announcement

A lot of the analysis surrounding the SEC’s complaint relates to the timing of its release. There are definitely a few interesting “coincidences” to be considered when trying to determine what we can really expect out of this:

• No one got “blindsided” – Goldman had knowledge of the charges months ago and they didn’t take the opportunity to come out and announce the pending suit on their own terms.  They kept quiet about the SEC accusations and got their PR machine working to promote a general brand image.
• The “other” SEC Report – Oh yeah, by the way, the SEC also published its explanation of why it took 12 years to actually bring any charges against a suspected ponzi scheme that is turning out to be one of the biggest direct investment scams of the bubble era.  Its probably a good thing for the SEC’s own public image that everyone is busy talking and thinking about how they’re “cracking down” on Goldman and not about how they’re mostly turning a blind eye to all of the other scams going on.  If you want to see the whole report and tell us what it says, its down at the bottom of the page.  Thanks!
• Options Friday – April options contracts expired Saturday, so anyone who was bearish on Goldman in the options market could have made some serious cash.  While most of these common derivatives generally expire without being exercised, a huge sudden price move triggered huge volume in the options market.  With 300,000 contracts leveraging up to 30 million shares at a $5 or $20 profit each, way more money was earned on the options market than the actual value of Goldman’s participation in the fraud they’re alleged to have committed.  Based the major sell off and next month’s options activity, traders are expecting Goldman to continue falling over the near future.

International Investigation(s)

And it might not be up to just the SEC to prove a case for systemic fraud.  In fact, they might already have help from German authorities who are in the process of bringing their own legal actions against the investment firm.  A German bank was among the buyers of the intentionally doomed mortgage securities, so one of the most influential governments in the European Union has a reason to take this scam personally.  If there is more dirt to be found on Goldman, I’m sure they’d like to help expose it.

Of course we also already knew that Goldman had a hand in the Greece’s deceptive debt accounting and the Federal Reserve claims to be taking care of that investigation, but how long will it be before Greece or France or the U.K. sets up their own investigations in the interest of keeping the EU financially stable? I can’t give you a date, but EU Monetary Affairs Commissioner Olli Rehn promises it will be “profound and thorough.” Of course, the United Kingdom is the home turf of big banking, so you know when London is talking about sanctions there must be something seriously rotten going on. Then again, maybe Gordon Brown is just trying to win some election points with tough talk.

The craziest theory

With May options investors seeming to expect declines that far exceed the value of the SEC’s entire case, it seems like the craziest conspiracy of all might now be coming to light.  Not only did Goldman Sachs intentionally misrepresent the securities they sold, but this is starting to be perceived as a standard course of action rather than any kind of isolated incident.  With prior executives and directors staffing some of the most influential political positions around the world, they were widely presumed to be immune from this kind of scrutiny and seen as safe a bet as any aggressive growth stock could be.

Instead, whether this was intended as a public relations move or a slap on the wrist, it could have serious implications for Goldman’s ability to acquire clients in the future – or even operate inside certain legal jurisdictions.

As promised, here is the SEC’s “other report” from Friday. No one’s really talking about it so I haven’t bothered to read it. I’m sure though, that its a great reminder of why the SEC can’t (or won’t) actually take on a powerful company on its own until they’re absolutely certain they can win a case.

Inspector General’s Report on S.E.C.’s Stanford Inquiry