UK Prime Minister Cites "Moral Bankruptcy" Requests Special Investigation of Goldman; Germany Reviews Fraud Case; SEC's Case Hinges on Single Point

Now that the SEC has dropped a bomb on Goldman Sachs, the list of who wants an investigation and is about to file civil charges mounts by the hour. Prime Minister Brown is the latest in on the act.

UK Prime Minister Cites "Moral Bankruptcy" at Goldman Sachs

Please consider Brown Says He Wants Special Investigation of Goldman Sachs

Speaking on the BBC's Andrew Marr Show the Prime Minister described the situation as one of "moral bankruptcy".

Mr Brown said that the UK Financial Services Authority should launch an immediate inquiry in co-operation with the US regulator, the Securities and Exchange Commission (SEC).

"Hundreds of millions of pounds have been traded here and it looks as if people were misled about what happened. I want the Financial Services Authority to investigate it immediately."

The other two main parties have plans to reform the banking system. Among Conservatives plans is a strong push for an international agreement to stop banks engaging in large-scale trading using their own money

And the Liberal Democrats, which would have gone further than Labour's bail-out and nationalised banks, say they will separate banks' retail and investment arms.

Royal Bank of Scotland Lost $841 Million, UK Taxpayers Took The Hit

Goldman may owe British taxpayers $841m

British taxpayers have a direct material interest in the outcome of the fraud case brought against Goldman Sachs by the US financial watchdog, the Securities and Exchange Commission.

Because the bulk of the loss on the transaction at the heart of the charge against Goldman ended up with Royal Bank of Scotland, the bank where British taxpayers have an 84% stake.

The material fact to dwell on for now is that on 7 August 2008, just before Royal Bank was semi-nationalised, it paid out $841m to Goldman Sachs to settle a claim on credit insurance provided by ABN, the Dutch bank which Royal Bank had acquired (or to be more precise, it had bought a big bad chunk of ABN in the autumn of 2007).

Goldman then passed this $841m to the ultimate beneficiary of the insurance contract, the giant US hedge fund, Paulson & Co.

Now the SEC claims that the insurance contract would never have been written, and therefore the loss would never have fallen on RBS, if Goldman had told the truth about certain financially important elements of the investment product that was being insured.

Germany Reviews Legal Action Against Goldman Sachs

Inquiring minds are reading Germany Reviews Legal Action Against Goldman After Fraud Case

Germany may take legal action against Goldman Sachs Group Inc. after the U.S. Securities and Exchange Commission said it was suing the company on fraud charges, government spokesman Ulrich Wilhelm said. The German financial regulator, Bafin, “will ask the SEC for information,” Wilhelm, main spokesman for Chancellor Angela Merkel, said today by phone. “Then we will look at the records and consider possible legal steps.”

Lawsuits Rest On Single Point

Every one of these lawsuits rests on a single point regarding improper disclosure. The Wall Street Journal discuses the situation in SEC Faces Challenges With Goldman Case

The SEC's suit against Goldman is the agency's biggest assault on a Wall Street firm in a matter stemming from the credit crisis. A successful outcome for the SEC could go a long way in repairing its reputation, which was damaged by its failure to discover Bernard Madoff's Ponzi scheme and other shortcomings that emerged during the crisis.

The SEC's case against Goldman and a vice president at the firm, Fabrice Tourre, hangs on a single critical contention. The SEC says Goldman sold investors a product linked to the performance of certain mortgages without telling them that a hedge fund betting on the mortgages' demise helped design the product.

Several lawyers not involved in the case said the evidence, as laid out in the SEC's complaint, is deep enough to support the civil fraud charges. "From the complaint, it looks pretty strong," said Jill Fisch, a law professor at the University of Pennsylvania. "It's a test case in terms of the SEC going forward both for whether they're successful and, if they settle, will it be a meaningful penalty," she said.

One line of defense, hinted at in Goldman's initial statements, is that the sophisticated investors buying the products should have known these transactions inherently involve investors betting on the success and failure of the underlying mortgages. Lawyers who reviewed the SEC complaint agreed that the products themselves weren't illegal.

That puts the onus on the SEC to demonstrate that the hedge fund, Paulson & Co., played a key role in designing the product and that Goldman had an obligation to disclose this role. Paulson wasn't charged.

In a court of law one can never tell how a jury will vote. Certainly most taxpayers are mad as hell about jobs, housing, fraud, and salaries at banking institution that have been bailed out and that may not be so great for Goldman.

However, this case may never see a jury, as most civil trials in the US are bench trials with the judge ruling on a point of law. Furthermore, the case may be settled out of court.

Regardless, expect to see a long and messy process whether Goldman attempts to settle with the SEC or not. I doubt Goldman settles with the SEC because countless other lawsuits are sure to follow unless Goldman Sachs is totally and completely exonerated in a civil trial, whatever form it takes.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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