American Proscenium

Failure on Many Levels

Goldman Sachs buys and sells securities for customers and also trades for its own book.  It’s the world’s biggest derivatives dealer.  CEO Lloyd Blankfein told a British magazine in late 2009 that they were “doing God’s work.”  Now we know what that entails.

At an April 27 Senate subcommittee hearing, Carl Levin (D-MI) quoted from Goldman e-mails that referred to securities they were selling to clients as “junk” or “crappy” or “sh-tty.”  Senator Levin added, “You are betting against the same security you’re out selling.”  On April 16, the SEC sued Goldman Sachs for civil fraud.  Could cheating be a major profit center for Goldman?  The SEC alleges that one client paid Goldman $15 million to be allowed to design a security to fail—which Goldman then sold to other Goldman clients without disclosing that the security had been designed to fail.  Within a year the security performed as it was designed: The first client made one billion dollars, and the others lost the same amount.  The major loser was Royal Bank of Scotland, which led British Prime Minister Gordon Brown to call Goldman “morally bankrupt.”

The SEC lawsuit also introduced the general public to something called a synthetic collateralized debt obligation (CDO).  The mechanical details were astonishing; the outline of the deal took 65 pages. ...

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