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Madoff on Goldman Sachs Suit: Pinstripes Are Fine

While I'm neither fan nor foe of Goldman Sachs, the SEC lawsuit lodged this past Friday is laughable. Its patently obvious to anyone with 1 oz of gray matter in between their ears that this is a politically-motivated undertaking (can you spell O-b-a-m-a?) that is intended to appease Main Street, which is still reeling in a steep recession, while Wall Street is back racking in the big bucks. And that?s no disrespect intended to the President. After all, Politics is a contact sport.

Goldman was asked to create a vehicle by an institutional investor (Paulson & Co.), in which said investor could bet against sub-prime mortgages, as that investor, presciently portended that the world had gone completely mad by inhaling inflating bubbles filled with noxious gas, and Paulson believed that reality would ultimately take hold, and the market for sub prime mortgages would sink faster than a Russian submarine once the economy lost its gas. [For you sycophants at the SEC, the Abacus vehicle is best known as a ?Put?. The buyer of the put bets that the underlying securities will go down in price before a pre-determined date, and the seller of the put is betting that the underlying securities will stay at the current price, or perhaps go up in price before the expiration date of the contract].

Let's assume for a second that Paulson and Co. actually did help devise the "basket" of mortgages that he wanted to bet against. So what?? Whether he did, or didn't (and a little birdie flapping around The Street says that a Paulson staffer ?absolutely provided cooperation to the SEC in exchange for Paulson being held harmless (sic immunity) for its role..?), the fact of the matter is that more than a few qualified institutional investors who are paid big bucks to analyze the risk of securities they invest in, were hungry to bet on this particular pool of toxic debt, because they thought the returns justified the risk. These glass-is-half-full managers always want a fuller glass, and in this case, they were happy to bet other people?s money that Chicken Little (dressed as John Paulson) was ?once again? chirping into the wind of an economy that had lots of wind in its sail.

The portfolio managers that bought the Abacus product weren't orphans, they weren't widows, and they weren't naive retail investors without the resources to do their own due diligence. Abacus was ?bought? by PM's that make six and seven figure salaries plus bonus, even if they have a fiduciary interest on behalf of those end investors to research and make investment decisions when buying (or selling) for the school teacher?s pension fund.

The blatant fact is--those that bought Abacus wanted to buy it; its not as if Goldman Sachs sales execs put a gun to their heads and forced them to. No more than anyone was forced to invest with your?s truly. The contents, if you will, of the Abacus pool, however toxic, was clearly detailed. Almost as detailed as our account statements. Nobody was led to believe Abacus contained were commercial paper quality notes, or bank CD?s. The underlying securities within the pool were existing ?low grade? instruments, traded in the OTC market by ?qualified investment managers?, and laughably, came with the impromptu of at least one rating agency.

That last observation i.e. rating agency involvement could/might be the trap door to the SEC's first salvo. After all, nobody gets hit with a 1-charge complaint by a federal agency unless there?s a bunch of other charges loaded, but not yet fired at the defendant. Even the incompetents at the SEC must have more than one card up their short sleeve, or so one would think.

Bottom line: With the Health Care issue ?resolved?, Obama's new battleground is Financial Market Reform. Its a worthy effort, as the financial industry could use some reforming. Trust me on this. While millions remain unemployed, and the real economy is stagnating (despite the proclamations that the Recession is Over), the current administration wants to demonstrate it can get its pound of flesh from those dozens of ?blood-sucking bankers that continue to exploit the free market financial system?.

Goldman is the perfect target; they represent the crowd that sings Greed is Good, and their billion-dollar profits, in good and bad times, is something that Joe the Plumber just doesn't think is fair. Joe?s the guy that thinks it is fair however, for Sarah Palin to incite civil riots while sipping tea.

I for one don?t believe that the financial meltdown was caused by Goldman, the ?evil banks?, or even the cadre of creative alchemists that design and sell exotic financial instruments. My problem is with the millions of people like my neighbor, the young fellow that made $65k a year as a mid-level manager for a company that makes widgets, and who signed a loan document for $575k so that he could buy a $650k home; the one that he obviously couldn?t afford. Nobody put a gun to his head to buy an overpriced home in a nicer neighborhood than the one he moved from, or the millions of others that decided to live way beyond their meager means.

This is the kid with a Beemer in his driveway and a ?just leased? sticker on the back window, and five flat panel TV screens bought with credit cards from three different lenders. Did somebody force him, or any of the millions of others, to tie the debt anchor around their necks?? I didn?t. But I know who fueled the fire that burned down, among others, the house that Bear Stearns built.

Its hysterical how for years, our ?elected leaders?, including Barney Frank, all voted to make sure that everyone could buy a home, and all of whom pushed federal agencies (backstopped by my tax payments and Social Security payments) to provide the loose lending. Barney wasn?t alone; for years, those bills were voted in on a bi-partisan basis with nearly nobody voting nay.

Greed is Good. Free Market is better. As long as everyone knows that nothing in life is free.

BUT..the SEC accusation against Goldman is absurd. So what if it wasn't disclosed that Paulson picked the items in the basket they wanted to short? Its not as if Paulson had a crystal ball in which he knew for certain which way the winds would blow up, and when. And, its not as if the PM's that took the other side of the trade would have said.."Oh Gee..if John Paulson thinks these are going to trade down, maybe I shouldn't buy them..."

Fraud is intent to deceive. In this case, Goldman?s lawyers might not say this, and their crisis managers had better not even elude to it if they know what?s good for them, but the purported deception as to who helped ?cherry pick? the contents of the pool that was being bet on by professional gamblers is inconsequential. Everyone knew Abacus was comprised of the pits of the cherries, not the cherries themselves.

The fraud might be whether the bonds were in fact independently rated, and whether Goldman had reason to believe the ratings were [fraudulently] inflated. The presumption we make is the ratings truly represented the objective opinion of a third party firm that had no connection with the promotion, sale or trading of the underlying instrument. But, we all know that rating firms are paid by the underwriters to provide the ratings. And of course, AIG, one of Goldman?s most significant relationships, insured the payments of claims that might arise when the pits turned sour. So who?s to blame?

According to my pal Junior, The Smart Money says that, despite the bluster, there isn?t likely to be any filibuster. Goldman is going to settle with the SEC before November (election time), pay perhaps $5 billion or maybe even $10 billion to the government (based on the $13 billion haircut given to the stock price this past Friday), and they?ll structure that payment so that its not considered a punitive punishment, and so that its tax-deductible.

Goldman is certainly not going to be forced to admit wrong-doing; that would make the Administration look silly when considering there are so many Goldman execs currently doing their sabbaticals in Washington DC. This will be a face-saving moment for all, and one that brings some cash back into the til so that Uncle Sam?s balance sheet can look a bit better for the upcoming government earnings statement in advance of the next elections. Its simply the cost of doing business in a free market society. The kind of society that we all want; this is America. Love it or Leave It!

I?ve said this before; the Financial Reform movement should press for one simple, no-cost strategy. Every investment document needs to be stamped Caveat Emptor. If Aunt Sadie isn?t smart enough to figure out what she?s investing in, she has no business investing. She could buy US Treasuries, and if those fail, so be it. The Doctrine of Sovereign Immunity?you know, the argument the SEC is using to defend itself against those claiming how they failed to protect my silly investors?protects the government from those they are supposed to be protecting.

For those institutional managers that cry foul and who are continuously afflicted with buyer?s remorse because they were buffoons for thinking the sun will always come out and shine tomorrow, they should be tar and feathered. Better yet, take out the water boards and find out exactly what (or who) really inspires them to make the type of investment decisions that they make.

Trust me when I say these things.

Bernard "Midas Touch" Madoff

P.S. For those investors that aren't sure if the sun will really come out tomorrow, this song is dedicated to you!

Full post as published by Bernard Madoff on April 19, 2010 (boomark / email).