By now you've heard that the SEC charged Goldman Sachs with fraud, specifically "defrauding investors by misstating and omitting key facts about a financial product tied to subprime mortgages as the U.S. housing market was beginning to falter."
In simple English: Goldman Sachs, working with John Paulson (a hedge fund manager), created collateralized debt obligations (CDO), which are bonds that are created by compiling different debts (mortgages -- but any kind of debt or credit risk) that have varying risks. The higher the risk, the more the CDO pays out. So, buying a CDO is essentially gambling, with the pay-off being higher the more risk the person takes.
Paulson bet against the CDOs he was creating, meaning that he specifically packaged the CDOs with high-risk investments likely to fail AND he bet they would fail (which means he purchased securities insurance on the CDOs). When they did fail, he made $1 billion as investors lost $1 billion after paying Goldman Sachs $15 million for the privilege of receiving this really crappy deal that was almost guaranteed to fail.
Goldman Sachs knew that investors would never buy the CDOs if they knew that a hedge fund were behind them, so they defrauded investors by holding back that information, allowing investors to believe that the CDOs were packaged by a third party -- one who didn't stand to gain anything by the deal -- and made the deals impossible to understand so investors took a leap of faith based on Goldman Sachs' reputation in buying them.
Which tells you once again (Bernie Madoff ring any bells?) that if something looks too good to be true, it probably is. And that greed will bite you in the ass regardless of where you fell in the Goldman Sachs deal.
And back to that idea of reputation? Goldman Sachs not only stands to lose a lot of money in fines (and they should), but they also have trashed their reputation and businesses would be foolish to trust them now.
But what is the online world saying?
- Motley Fool has a fantastic explanation of the situation, complete with their predictions of Goldman Sachs' future.
- NPR's Planet Money also gives a simple explanation and includes links to the SEC's charges and Goldman Sachs' statement.
- Huffington Post has numerous pieces of commentary including a main post from Arianna Huffington on how Wall Street has ravaged the middle class, Philip Neches discussed the idea of trust when it comes to investment banks, and actor Alan Cumming has a post from the layman's perspective on why he moved his money from Goldman Sachs.
- Laurie's Random Musings explains why you should be outraged.
- Megan McArdle at the Atlantic cautions about how we discuss this case and The Hunting of the Snark deconstructs Megan McArdle.
- Baseline Scenario talks about the size of mega banks and how they contribute to these situations.
- Professor Bainbridge presents his own take on the situation as well as including additional links to other thoughts from the blogosphere.
Of course, Jon Stewart and Steven Colbert had their say, too:
The Daily Show With Jon Stewart
Mon - Thurs 11p / 10c
These F@#king Guys - Goldman Sachs
Daily Show Full Episodes
The Colbert Report
Mon - Thurs 11:30pm / 10:30c
Goldman Sachs Fraud Case - Andrew Ross Sorkin
Colbert Report Full Episodes
What is your take on the SEC's charges?
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