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Goldman Sachs Now Facing Criminal Investigation

Posted by Larry Doyle on April 30, 2010 10:47 AM |

Goldman Sachs stock is down approximately 8% this morning. What is going on?

The Department of Justice has announced it is launching a criminal investigation of Goldman Sachs. ABC reports, Justice Department Reviewing SEC Case Against Goldman Sachs:

Officials at the U.S. Department of Justice are reviewing whether the Securities and Exchange Commission’s recent fraud charges against Wall Street giant Goldman Sachs warrant a full-scale criminal investigation, two government sources told ABC News.

It’s unclear what specific deals or which Goldman Sachs employees are part of the Justice Department’s review and whether criminal charges will ever be filed. The Wall Street Journal reported today that the federal prosecutors were investigating whether Goldman employees committed securities fraud in connection to the firm’s mortgage trading.

A few comments:

1. Little doubt as to why the Goldman Sachs execs were reticent in answering questions this past Tuesday, knowing full well that a criminal investigation was potentially close to being launched.

2. Goldman Sachs stock has been downgraded by two analysts this morning. Price projections for Goldman’s stock by these analysts have been dramatically reduced.

3. If this criminal investigation actually leads to criminal charges and the charges lead to convictions, what does it mean? A l0t of things, but the biggest impact is that a number of customers, most importantly state pension funds, would not be allowed to deal with Goldman Sachs. The demise and ultimate death sentence meted out to Drexel Burnham Lambert was directly linked to this exact reality.

Add it all up and the risk surrounding Goldman Sachs has dramatically increased.  What is at the core of this risk? Goldman’s willingness to jeopardize its reputation in a number of deals for the benefit of short term profits. Do you think Goldman now wishes that it had not brought some of these deals to market?

Is there a hedge against reputational risk? Not really, other than to sell the stock. Do not expect the noise surrounding Goldman to abate anytime soon. I addressed the topic of reputational risk in regard to Goldman Sachs when I appeared on CNBC’s Street Signs on March 2nd.

For a treasure trove of material on Goldman and why the firm has the reputation that it deserves, go here.

LD

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  • divvytrader

    Larry : What happens when GS provides concrete evidence that BAC/C/JPM/MER/LEH/BSC all underwrote numerous synthetic CDO where a client had to be short and others had to be long to get deal placed ?

    Have ya noticed how quiet Jamie Dimon has been ? He knows they equally guilty of underwriting same stuff .

    Stunning that GS can be down $16 and US stock markets seem to be shrugging . The most profitable investment bank around , payer of hundreds of millions in taxes , getting pile driven into the ground for crimes all on Street involved in .

    Oh , Obama is having a liberal trifecta today . Coal sector is plunging as he uses MEE accident to put regulatory clamp on whole sector . Oil drillers getting crucified today as Obama unilaterally declares all new drilling in Gulf of Mexico until further notice , and GS going down like a subprime mortgage …….. meanwhile , he gives a speech from some govt subsidized ‘ green energy ‘ factory he no doubt will push as the solution as ‘ evil big energy ‘ gets crushed ……

    Frightening how it happens with almost cheerleading from America …….

    We are all John Galt now

    http://www.humanevents.com/article.php?id=36761

    • LD

      Divvy,

      There is NO doubt the GS transaction occurred all over the street. Some dealers may have been more aggressive than others but they knew what they were doing.

      Caveat Emptor.

      In regard to Obama, he clearly wants to position himself as a populist and fighting for everyman while he is not only killing business but driving taxes up in the process.
      Our country has real issues.

      Market overall is holding up surprisingly well but this will likely be one of the few down weeks in a LONG time.

      • Freedom

        Larry
        Please consider what is going on and the timing of it all. As much as I believe as you do that Goldman was selfish when they decided to make money by hedging against the mortgage paper they owned remember they also lost a lot of money during the same two years 2007 and 2008. Haven’t you ever thought how Merrill, Lehman, Wachovia, JPM, MS, on and on wished they had been smart enough to do the very same. You and I both know GS hires those minds that seem to be just a bit smarter than the other firms. You are correct when you talk about the influence GS has on policies. That is the problem. They must look bad at times while shaping policies and (and this is important) uncovering and partly funding ways for their political friends to make money the old fashion way. Illegally.Come on Larry. You have discussed your experience in the industry. Don’t you think both the way this so called hearing and especially the timing was handled is nothing more than another Obama rouse? Please consider what I am saying and do not feed the fire. Goldman and many others on wall street are guilty of taking advantage of a system that allowed them to leverage to the hilt. The key word is allowed. This is much bigger than this.

        By have you reported anything about how our lawmakers are voting on annexing (so to speak) Puerto Rico? How would that affect the US financially? Why are we doing this? Do you not find it disturbing that one can pick up a local newspaper or watch local news and hear all there is about GS and yet nothing about PR? How about the international gun legislation they are attempting to pass? Heard anything in the locals? I have no idea if you watch FOX or not. I do. They report what is not being reported. Two months ago I began watching Glen Beck and glad I began. If you do not then it will be hard for you to really know what is going on beyond all the crap. Watching his program last night was hard because of the content. Personally I do not want to believe what he and his team came up with because if true and accurate it portrays clearly that Obama is nothing more than a criminal. If you did not watch it but know a way to do so then do so. If you do not believe what is said it will at least entertain you.

        I guess you can tell I am one of those that believes we must take America back by voting out those that are doing harm to all of us. I hope you feel the same way because you influence many others and voices such as yours is needed now.

  • LD

    Freedom,

    You make a LOT of great points. I want to respond in appropriate fashion.

    Please consider what is going on and the timing of it all.

    LD: I do not discount for a second that there was a connection between the timing of the SEC’s suit against Goldman and the push for financial regulatory reform. Chicago style politics at its best.

    This fact does not preclude that there was a fraudulent transaction to pursue at Goldman. In fact, if the SEC loses this case, it may very well be relegated to the pile of most ridiculously ineffective government organizations in our nation’s history.

    As much as I believe as you do that Goldman was selfish when they decided to make money by hedging against the mortgage paper they owned remember they also lost a lot of money during the same two years 2007 and 2008. Haven’t you ever thought how Merrill, Lehman, Wachovia, JPM, MS, on and on wished they had been smart enough to do the very same. You and I both know GS hires those minds that seem to be just a bit smarter than the other firms.

    LD: On one hand, I do not begrudge the fact that Goldman got short this market via the utilization of the ABX (asset backed synthetic index). That short is certainly outstanding risk management technique, and their shareholders – to whom they are ultimately responsible – deserve that prudence. No doubt the shareholders of Citi and other shops wish their managers did the same.

    Goldman’s getting short is a separate question from its responsibility to properly disclose counterparty interests in the process of bringing a deal to market.

    You are correct when you talk about the influence GS has on policies. That is the problem. They must look bad at times while shaping policies and (and this is important) uncovering and partly funding ways for their political friends to make money the old fashion way. Illegally.Come on Larry. You have discussed your experience in the industry. Don’t you think both the way this so called hearing and especially the timing was handled is nothing more than another Obama rouse? Please consider what I am saying and do not feed the fire. Goldman and many others on wall street are guilty of taking advantage of a system that allowed them to leverage to the hilt. The key word is allowed. This is much bigger than this.

    LD: I think I have been very consistent in calling both parties involved in what I have always defined as ‘the Wall Street-Washington incestuous relationship.’ America needs this incest exposed. I do not now, nor will I ever, believe one party to the incest deserves a pass because the other party’s motives were equally to blame, if not worse. If we were to go that route, we’ll never expose the incest for what it truly is, a legal (and perhaps at times illegal) form of corruption which continues to cripple our country.

    By have you reported anything about how our lawmakers are voting on annexing (so to speak) Puerto Rico? How would that affect the US financially? Why are we doing this? Do you not find it disturbing that one can pick up a local newspaper or watch local news and hear all there is about GS and yet nothing about PR?

    LD: I have not, but please do not take my lack of writing as a lack of interest. I wish I could tell you that I will have my staff look into it, but you’re talking to the staff. To that end, I would ask you to enlighten our audience as to developments in Puerto Rico. I am aware that three banks were just shut down there yesterday at a cost to the FDIC of approximately $5 billion. (Thank you to our loyal supporter Matt for highlighting that point in a prior comment.)

    How about the international gun legislation they are attempting to pass? Heard anything in the locals? I have no idea if you watch FOX or not. I do. They report what is not being reported. Two months ago I began watching Glen Beck and glad I began. If you do not then it will be hard for you to really know what is going on beyond all the crap. Watching his program last night was hard because of the content. Personally I do not want to believe what he and his team came up with because if true and accurate it portrays clearly that Obama is nothing more than a criminal. If you did not watch it but know a way to do so then do so. If you do not believe what is said it will at least entertain you.

    LD: I try to process as much information as possible from a wide array of sources. I see Beck periodically. I find much of his info very interesting, but personally think his MO or shtick hurts his overall impact.

    I guess you can tell I am one of those that believes we must take America back by voting out those that are doing harm to all of us.

    LD: You have plenty of company, as evidenced by the popularity of many in middle America supporting the Tea Party movement. To that end, I had representatives of Freedom Works on my radio show a few weeks back to highlight a wealth of important issues. Did you catch that show? I received a LOT of fabulous feedback on it.

    I hope you feel the same way because you influence many others and voices such as yours is needed now.

    LD: You are very kind and I appreciate your support. I am trying my best to promote real truth, transparency, and integrity across our entire economic landscape. I am certainly not always correct. I do believe I am totally honest in calling it like I see it. I hope people feel that.

    Thanks again for your fabulous comment. Keep writing and spreading the word.






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