–Did Goldman Sachs really commit fraud?

An alternative to popular faith

The public feels Goldman Sachs committed fraud and should be punished. This time the innocent public may have it right. People who wouldn’t know the security in question, a synthetic collateralized debt obligation, from a nylon shirt, somehow understand what many of the experts don’t seem to get.

Goldman Sachs marketed synthetic CDOs, reportedly designed to fail. They were created by a man who stood to make a billion, and allegedly did make a billion, when the product in fact, failed. Goldman told no one about this. Their defenses so far are three: Legally they didn’t have to tell anyone; the buyers were sophisticated investors; and Goldman itself lost money – proof they wouldn’t invest in a product they thought would fail.

The law will be argued in court, but when a brokerage advises its clients to buy a security, and provides reasons why, do the clients have a reasonable expectation that the brokerage is telling the whole truth? If your broker says, “Buy this,” when in fact he knows it was designed specifically to go down, and in fact was designed by someone who is paid for it to go down, is that fraud? Or if your broker merely accepts your order, but says nothing about the information he possesses, is that fraud?

And if the buyer were a sophisticated clone of Warren Buffett and Bill Gates, would that make cheating less illegal? Many of Bernie Madoff’s customers were sophisticated investors. Does that absolve Bernie of liability for cheating them?

Finally, Goldman lost money, but not because it invested in the CDOs, hoping they would go up. Rather, it’s been reported they were unable to unload them to unsuspecting customers, and were stuck with a bunch. The Shakespearian expression for that is “hoist with one’s own petard,” which means to be hurt by your own attempt to hurt someone else. If a man attempts to bomb a building, and is injured by the blast, is he now innocent of a crime?

The lawyers will receive millions to argue the various arcane ipso factos, and the conservatives will claim the SEC is a tool of Democrats (and vice versa), but after all the shouting and fury and technicalities and excuses and public grandstanding and denials, the innocent public may have it figured out. If it looks like a fraud, smells like a fraud, walks like a fraud and quacks like a fraud, it probably is a fraud.

Rodger Malcolm Mitchell

2 thoughts on “–Did Goldman Sachs really commit fraud?

  1. I agree with your anaysis of the commission of fraud.

    On a side note, can we stop calling the ‘betting’ on CDOs and other like instruments as ‘investments’. The should be regulated like all gambling. I do not own a sports team nor have any vested interest in one, but because I put money down on who will win a championship, is that investing?


  2. Danile, while I agree with the sentiment, sometimes it’s a tough call. Is the stock market gambling? How about the commodity futures market? How about the purchase of real estate?

    In short, at what point does an “investment,” that could go up or down, become “gambling”?

    I suspect the real question is, what should be regulated and traded on an exchange?

    Rodger Malcolm Mitchell


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