As the Abacus civil suit
continues, the SEC is now investigating Goldman Sachs for another deal possibly marred by a conflict of interest. The
"collateralized debt obligation" in question, or CDO, was the $2
billion Hudson Mezzanine, which was full of subprime
mortages. Goldman sold the CDO while quietly betting it would
collapse--which it then did, netting the firm a tidy profit and leaving
the client somewhat dissatisfied.
So what's the deal with the investigation, and how likely is it to end in another lawsuit? The finance bloggers weigh in:
- 'Like Abacus ... Revolve[s] Around the Issue of Disclosure,' explains FT's Tracy Alloway. This is also where the Hudson deal begins to look "more sticky" than even the Abacus case: "the bank can’t fall back on the argument of client confidentiality. There was no Paulson (or equivalent) here." Paulson had been the third party that set up the subprime backage in the Abacus case. To clarify the point, Alloway quotes Senator Carl Levin on the matter:
In the documents Goldman used to sell Hudson Mezzanine to clients, the firm even suggested to investors that Goldman stood to benefit if the investment performed well, telling those customers: "Goldman Sachs has aligned incentives with the Hudson project by investing in a portion of the equity." In fact, that was not true. Goldman Sachs’ interests were not aligned with its customers. They were in conflict.
- 'The Potential to Be Particularly Damaging' Former Goldman employee Yves Smith,
now an indispensable blogger for those following the Goldman tales,
points out that "this CDO was created solely as a proprietary trading
position to help the firm get short subprime risk in late 2006, when
the market was clearly on its last legs." That's not going to play well
with the public, she says. She, too, examines Goldman's "statement in
its marketing documents," used to sell the Hudson CDO, that "Goldman
Sachs has aligned incentives with the Hudson program." Her take:
This is a flat out misrepresentation. The equity position is a Trojan horse for the much larger short position ... Goldman may argue that the disclaimer language in itty bitty print on the next page gets it off the hook, but I have my doubts that that will be viewed with much sympathy. There is a notion of good faith and fair dealing that underlies all contracts. It is such a bedrock concept that it is not clear that Goldman can try to disclaim its way out of it.
It Goes from Here "Details are scarce, the investigation is
preliminary, and there's no indication yet this will lead to any new
civil charges," Business Insider's Joe Weisenthal
reminds those eager to jump the gun. But he also has a larger
prediction, and one not particularly favorable to Goldman: "As more and
more of these emails and possible conflicts of interest come out and
various banks, we're thinking the odds of a .com-like global settlement
keep going up."