Posted on 05/05/2010 6:44:11 AM PDT by SeekAndFind
Warren Buffett may understand the complex derivative at the heart of the fraud suit against Goldman Sachs (GS: 149.11*, -0.42, -0.28%) “better than most,” as he put it this past weekend, but I’m not sure he understands the securities laws or the legal definition of fraud.
Buffett mounted a vigorous defense of Goldman, the embattled firm in which he is a major investor, arguing that the identity of the investor betting against the collateralized debt obligation — hedge fund manager John Paulson — would have been irrelevant to the investor betting on the underlying subprime mortgages. “For the life of me, I don’t see whether it makes any difference,” Buffett said at the Berkshire Hathaway (BRK.A: 114403.00*, -497.00, -0.43%) annual meeting. This point has been echoed by many of Goldman’s defenders, who note that the firm has no duty to disclose the identity of counterparties to trades in which the firm stands in the middle.
But that argument is a straw horse. The SEC didn’t file a fraud case because Goldman failed to disclose Paulson’s identity to potential counterparties. As the SEC itself said, “Goldman Sachs failed to disclose to investors vital information about the CDO, in particular the role that a major hedge fund played in the portfolio selection process and the fact that the hedge fund had taken a short position against the CDO.” The essence of the alleged fraud is that Goldman let the short seller choose some of the underlying subprime mortgages, failed to disclose that, and instead promoted the idea that an independent third party chose those securities. This is the material fact at the heart of the SEC’s case. (Berkshire Hathaway did not return calls seeking comment.)
With last weekend’s Kentucky Derby in mind, let’s consider a horse racing analogy. There are just two horses and two betters. The promoter offers you the opportunity to bet on one horse. Someone else is betting on the other. He doesn’t tell you that the other better chose the two horses in the race, and picked one horse with no chance of winning. Instead, he says the horses were picked by an independent racing federation. You bet and lose. Would you feel that was fair?
I doubt it. Perhaps this is why most people seem to intuitively understand the SEC’s case, unlike supposed experts like Buffett and others with a vested interest in seeing the SEC fail.
Goldman maintains the SEC’s allegations are wrong. The firm deserves and is entitled to a fair hearing, unlike the show trial it endured at the hands of Congress last week. Instead of brow beating Goldman executives for 11 hours, a spectacle worthy of Soviet Russia, the Senate subcommittee could have performed a genuine public service by illuminating the still murky aspects of the deal at the heart of the SEC’s case. Why didn’t the committee call representatives of ACA Capital Management and German bank IKB, the alleged victims on the other side of Paulson’s bet? As the purported victims in this fraud, how do they feel victimized? Or are they just sore losers?
Compounding the uncertainty is The Wall Street Journal’s revelation last week that Goldman is under criminal investigation. In a sense, this development shouldn’t be a surprise: All fraud charges in the SEC’s arsenal have criminal counterparts. Whether criminal charges ultimately emerge is usually a function of intent to defraud and whether the charges can be proven to the far higher criminal standard of beyond a reasonable doubt.
It seems unlikely that the allegations in the SEC’s civil case would be the focus of the Justice Department’s inquiry. Ordinarily, the SEC defers to the Justice Department and lets criminal matters be resolved first. That suggests that something else is under scrutiny.
So the Justice inquiry takes the affair to another level. Criminal charges would be life threatening, which is probably why Goldman shares dropped so sharply on the news last week. As the unfortunate example of accounting firm Arthur Andersen illustrates, even a highly respected institution cannot survive the filing of criminal charges by the U.S. government. Few seem to remember that Arthur Andersen’s conviction was ultimately overturned on appeal. By then the firm was defunct. This draconian outcome also serves as a reminder that the Justice Department needs to exercise restraint and sound judgment. I don’t think many people feel the world is a better place because we now have only four major accounting firms.
Arthur Andersen made the mistake of outright defiance, which is why I’ve counseled Goldman to cooperate fully and get all the facts out as soon as possible. As soon as Goldman learns what else is being investigated, it shouldn't wait for reporters to break the news. I assume shareholders would consider that to be material information. (I would, although I don’t own Goldman shares.)
Plenty of questions in this case remain unanswered, which is why I believe it’s risky for Buffett to get too far out on the Goldman limb before the facts are known. So far he hasn’t said he’s putting his money where his mouth is by increasing his stake in Goldman. Until more facts are known and some of the legal uncertainties are resolved, potential Goldman investors should recognize that buying Goldman shares is a lot like the derivative transaction at the heart of the SEC case: It’s a speculative bet.
Buffett’s hypocrisy has now exceeded his enormous wealth,and gutted his glowing reputation.
Buffet talks his book thats all
I do not like Goldman Sachs because of GS being involved with Al Gore and the “carbon credit” scam.
I do not like GS because they give so much money to Democrats, and so many Democrat office holders once worked there.
However?
Goldman did NOTHTING wrong, in the case in question.
The financial melt down happened because the government FORCED lenders to make bad loans!
PERIOD, end of story!!
I am not letting GS off the hook yet. I want to know what special deal they got from the US government ( and by proxy, tax payer money ) when they got bailed out in the AIG deal.
What was Lloyd Blankfein doing and talking abuot in the White House when he visited four times ?
totally concur!!!
Warren Buffett is a slime. The idiot shareholders show up at Omaha cause they love the money and Buffett can do no wrong in their eyes.
No not Period end of story. get a clue. Goldman also financed and cleared the trades of hedge funds manipulating the market.
The financial melt down happened because the government FORCED lenders to make bad loans!
Please buy a clue. The SEC case against GS has nothing to do with why "the financial melt down happened." It has to do with GS screwing their clients.
Goldman will win this case. Goldman did nothing wrong, in this case.
I still do not like Goldman Sachs, since Goldman bankrolls Democrats!
Blaming hedge funds for “manipulating the market” is like blaming your thermometer for the temperature outside.
You are an idiot, on financial matters!
You are an idiot have no clue at the manipulation hedge funds engage in. Not all of them but many. They are not the cause but they helped the financial run that elected Obama. The only ethical short hedge fund is probably Chanos fund.
You are a known idiot pal.
However, Hedge Funds deal with reality.
Hedge funds do not create reality.
Your logic, if it can be called that, is faulty to the extreme.
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