An article in the Wall Street Journal has reported that Goldman Sachs Group and one of its vice presidents, Fabrice Tourre, have been charged with fraud in a civil complaint filed by the SEC. The complaint alleges that Goldman failed to disclose to purchasers of CDOs, collateralized-debt obligations, that the selection of the underlying mortgage backed securities had been influenced by Paulson & Company. With the bursting of the housing market bubble, the CDO investors lost $1 billion, Paulson raked in profits of $1 billion, and Goldman earned $15 million for handling the transactions.
And while the stock market and business writers are focused upon this story, an article in the Financial Times is, for me, far more interesting as it pertains to current issues in the housing market. It seems that a real estate fund managed by Goldman Sachs has lost 98% of its $1.8 billion in equity. Adding an interesting twist to the story is the fact that Goldman has chosen to return the keys to some of its investments back to the creditors, in effect choosing “Strategic Default,” an oft criticized option when chosen by defaulting homeowners.
To complicate matters for those who speak of the “morality” of not honoring one’s obligations, it was Lloyd Blandfein, CEO of Goldman Sachs, who recently described the efforts and actions of his company as “doing God’s work.” If Blankfein’s assessment is correct, then, it would seem that the question of the “morality” of strategic default may have been resolved for all of us.
Finally, while the SEC “appears” to be vigorously pursuing the case against Goldman Sachs, some might ask how the regulators were able to miss the offenses when they were committed. And what many would like to see is “perp walks” by the heads of companies who enriched themselves and their cronies at the expense of millions of homeowners and investors; but such action seems unlikely, with perhaps only a few “scapegoats” suffering for the misdeeds of their companies. It is good to see some action being taken, but it would be far better if our regulatory bureaucrats and politicians would do their jobs by providing the oversight and enforcement of the regulations already in place.
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