Goldman Sachs case shakes investor trust

April 21, 2010


There seems to be no end to the revelations about Wall Street’s manipulation of the securities market and its role in exacerbating — if not causing — what has now come to be called the “Great Recession.” As I understand the allegations now being made by the SEC, and revealed by the media, it would appear that Goldman Sachs, the most powerful investment bank on Wall Street, if not in the world, not only negligently supported the creation and ultimate downfall of the subprime mortgage market, but may actually have deliberately manipulated that market so that certain hedge funds, particularly one managed by John Paulson, were able to make enormous profits by shorting mortgage-backed securities sold by Goldman.

According to the allegations, certain executives at Goldman Sachs (we do not yet know the full extent of the firm’s involvement nor how many executives may have been involved) cooperated with Mr. Paulson to create mortgage-backed securities that were virtually certain to fail and, by failing, to permit hedge funds to make enormous profits through shorting those securities, i.e. signing contracts to sell the securities at prices significantly below those paid by the investors who bought those securities from Goldman not knowing that they would soon drop in price because their true value was far below their offering price. If these allegations prove to be true and Goldman Sachs was, in fact, involved in this scheme, then this could very possibly go down in history as one of the worst stock manipulation schemes ever conceived and executed.

The ramifications of this case go far beyond any civil or criminal penalties to which executives at Goldman Sachs may eventually be liable. The vast majority of American and foreign investors who have suffered as a result of the various scandals that have rocked our financial markets and caused so much suffering, the revelation that one of the most powerful investment firms in the world, one whose former executives now occupy some of the most powerful positions in the U.S. government, was not only negligent but actually willfully dishonest, must come as a great shock. Indeed, not only must we all be shocked, we must be outraged.

Wall Street, hardly contrite, continues to give out multi-million dollar bonuses to its employees while much of the rest of the nation and the world continues to languish in the depths of the Great Recession.

Ultimately, our financial markets depend upon trust and the belief that they are not simply a fool’s game in which the insiders make billions and the rest of us are robbed blind. Trust in Wall Street and the American financial system is already quite low. Most Americans are becoming aware that the odds at the gaming tables in Las Vegas are a whole lot better than on the New York Stock Exchange. If it now turns out that the great financial losses so many Americans and others have suffered in the past few years weren’t simply the result of naivete and stupidity, but, instead, were caused by deliberate fraud and market manipulation, then one can only wonder who in their right mind will continue to feed the greed, rapacity, and dishonesty of Wall Street in the days to come. The very existence of our financial system may well be at stake.

Every American and every foreigner who has lost money in the financial markets over the past few years must pay close attention to the charges and eventual litigation involving Goldman Sachs. If it proves true that there was direct market manipulation and that this manipulation either caused or exacerbated the current recession, then it may well be time to question whether we need a thorough reform of the American financial system.

There has to come a point when ordinary people say “enough.” There has to be a point at which Americans refuse to be cheated by a small group of financiers blinded by their greed and rapacity. There has to come a point when the American people finally come to their senses and refuse to support a corrupt system which takes away their livelihood, their security, and their futures by fraud and dishonest manipulation. The current investigation of market manipulation by hedge funds and investment bankers is of the greatest importance to all of us and to the nation.

For those of you interested in reading more on this subject, please check out my new blog, “the Grumpy Professor” on the Journal-World multimedia Web site (http://www2.ljworld.com/weblogs/grumpy-professor/). I will be posting more of my thoughts there on the current fiscal crisis, as well as what’s going on at Kansas University and in the academic world.

— Mike Hoeflich, a distinguished professor in the Kansas University School of Law, writes a regular column for the Journal-World.


cato_the_elder 7 years, 11 months ago

Mike, if you're looking for "greed, rapacity, and dishonesty," you need look no further than Christopher Dodd, Barney Frank, and Barack Obama, the three leading recipients of pre-bailout money from Fannie Mae and Freddie Mac, whose grossly imprudent loan practices, strongly encouraged and supported by liberal Democrats, were the ultimate cause of the severe financial disaster that's still hanging around our necks. It's also notable that Barack Obama received close to a million dollars in campaign contributions from Goldman Sachs, proving once again that all of this goes full circle - and that major housecleaning is needed at all levels in Washington, D.C.

d_prowess 7 years, 11 months ago

Goldman Sachs did not donate close to a million dollars to Obama. Individuals that listed Goldman Sachs as their employer did. That is a big difference than insinuating that the company itself supported Obama.
And even if you say that those employees were acting together to protect their business, what did that million dollars get them? Just a potentially shattering fraud charge against them... so not necessarily a good investment!

rse1979 7 years, 11 months ago

XBRL won't do anything to improve the accuracy of the numbers reported / it's just a standard format that allows for more consistency.

Scott Drummond 7 years, 11 months ago

I disagree, Tom. right wingers and anti-Progressive Democrats also played a role in the ill-conceived loosening of regulation. It was not all george's fault. He was simply the Chief Executive who oversaw the misgovernment.

just_another_bozo_on_this_bus 7 years, 11 months ago


The (Senator) Sanders Standard for Financial Reform

  1. Break Up Huge Banks. The four biggest U.S. banks – Bank of America, Citigroup, JPMorgan Chase and Well-Fargo – issue two-thirds of all credit cards, write half the mortgages and control nearly 40 percent of bank deposits in the United Sates. "We must break up these behemoths because of the incredible economic power they exert through their concentration of ownership," Sanders said. "It is simply not acceptable that a small handful of giant financial entities can exert such enormous influence over the economic well being of hundreds of millions of Americans."
  2. Make Wall Street Part of the Real American Economy. "With rampant unemployment and when small- and medium-size businesses are unable to obtain affordable credit, it is insane that our largest financial institutions continue to trade trillions in esoteric financial instruments which makes Wall Street the largest gambling casino in the world," he said. Instead, Sanders said, we need to create millions of new jobs by rebuilding our manufacturing base, transforming our energy system and addressing our transportation and infrastructure crisis. We need to make sure that businesses get the credit they need to expand and create employment.
  3. Cap Credit Card Interest Rates. Millions of middle-class Americans who pay their bills on time are being charged interest rates of 30 percent or more. "That is not only obscene but, according to every major religion, immoral. Banks cannot be allowed to engage in usury and charge outrageous interest rates," Sanders said. He will offer an amendment that would cap interest rates for private banks at the same level federal law allows for credit unions; 15 percent except under exceptional circumstances.
  4. End Fed Secrecy. During the bailout, large financial institutions received trillions of dollars in near-zero interest loans. "Who received those loans and under what terms? The Fed won't say. Did some of them turn around and, in a mammoth welfare scam, invest that Fed money in government treasury bonds at 3 percent or 4 percent interest rates? The Fed isn't telling. It's time we had transparency at the Fed so that the American people know what our central bank is doing with taxpayer dollars," Sanders said.

Flap Doodle 7 years, 11 months ago

GS people pumped almost $1 million bucks into Dear Leader's campaign. Bet they're wanting their money back now.

just_another_bozo_on_this_bus 7 years, 11 months ago

You're the only one in either this column or in the subsequent comments to have mentioned Bush, Tom.

Is that a symptom of derangement?

just_another_bozo_on_this_bus 7 years, 11 months ago

My question was,

"Is that a symptom of derangement?"

The answer, apparently, is "yes."

Flap Doodle 7 years, 11 months ago

“…It's the health care fiasco all over again. A manufactured crisis with an identifiable demon…” http://legalinsurrection.blogspot.com/2010/04/now-they-are-coming-for-goldman-sachs.html

just_another_bozo_on_this_bus 7 years, 11 months ago

"Using force to dismantle a business simply because of its size is silly."

It isn't "simply" because of its size. It's because if they ever fail, as all of them nearly did, they can potentially take everybody else with them.

"In general, a business gets to be large because it is better at what it does than its competitors. "

Sure enough. But as you alluded to, what they were good at was essentially the defrauding of the entire world economy, and it's precisely their size and power that allowed them to do it.

"This is a bad argument."

It wasn't an argument. It's just a fact of the way any market-based economy must run. If businesses can't get sufficient credit to operate and expand their businesses, which is currently the case, then the economy tanks. And nowhere in Sanders's statement does he say that businesses unworthy of credit should be given loans they likely can't pay back.

"All that will do is cause banks to refuse to issue as many credit cards."

Yep, and given the millions of people stuck with credit card debt they may never pay back, that'd be a good thing.

"Even if that weren't the case, do we really want to encourage people to take on more debt?"

You're flip-flopping here. First you say limiting the interest rate will mean less credit card debt, and then immediately say it will increase credit card debt. Which is it?

"If anything, interest rates should be raised to encourage people to save more and spend less."

15% is a quite high rate as it is. Or are you suggesting that credit cards and consumer loans of any kind from banks be outlawed altogether and let the payday loan companies and loan sharks take over that market just to force people to save?

just_another_bozo_on_this_bus 7 years, 11 months ago

"No, notice I said "even if that weren't the case." I was talking about two different scenarios."

Whatever. Still looks like flip-flopping to me.

"There's no such thing as a free lunch."

Who said there is? Sanders wasn't talking about competition between Farmer A and Farmer B to see who gets a new tractor. He's talking about the Wall Street Casino sucking up all available capital so that neither Farmer A nor Farmer B gets a new tractor (and likely get their land confiscated as a result of some new financial "instrument.")

Flap Doodle 7 years, 11 months ago

Rahm was on GS's payroll not long ago......

cato_the_elder 7 years, 11 months ago

D_prowess, you've touted the Party Line quite faithfully. The million dollars that Obama received demonstrates once again that there are plenty of Democrats on Wall Street. The close ties between Obama and Goldman Sachs are well-documented. Moreover, the legislation that Obama and the Democrats are proposing constitutes what amounts to a permanent bailout of big banks, so those ties are so far paying off quite well. In addition, Goldman may well have viable defenses to the SEC case based in large part on the testimony of former Paulson & Co. employee Paolo Pellegrini, as the result of which Goldman may walk. In other words, we continue to see a lot of talk but even more two-faced hypocrisy spewing forth from the Obama regime.

JVMFan 7 years, 11 months ago

This comment was removed by the site staff for violation of the usage agreement.

Flap Doodle 7 years, 11 months ago

I loves me the smell of spam in the evening.

Paul R Getto 7 years, 11 months ago

This can easily be solved: Don't let financial institutions take excessive risk with other people's money. If the investment is worthy, let the big shots put their own money into it and don't use Wall Street for a personal casino. We are all, in part, guilty for these messes. Americans have become spoiled and greedy and don't want to pay the real cost for what we either expect (govt. benefits) or allow (bs wars on the credit card.) There is a way out of all of this, if we grow up as a culture, stop acting like teenagers and work together for the common good.

JVMFan 7 years, 11 months ago

I just saw a movie on Sunset Blvd. about naked short selling and all this Wall Street corruption and the audience was pretty shocked. It was the same story told through the eyes of Sirus XM investors that nearly went broke because of NSS. The movie was called "Stock Shock" and is now sold on DVD just about everywhere. PS-DVD is cheaper at www.stockshockmovie.com

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