Sense on Cents

While some may view Friday’s charges by the SEC as a mere flesh wound against the all powerful Wall Street titan Goldman Sachs, I think this situation has the potential to mushroom far beyond that.

I am sure that Goldman Sachs is currently running full throttle in terms of damage control. In fact, given that Goldman was served with a Wells Notice many months ago, there is no doubt in my mind that Goldman has been ‘circling the wagons’ in regard to its legal exposures. That said, Goldman can not fully nor properly prepare for public backlash and investor outrage. As much as Goldman can do to disparage the SEC’s case, the fact is the much bigger case against Goldman will be held in the court of public opinion.

As with any legal entanglement, interested parties always look for precedent. I know of no other cases similar in nature to this one simply because the CDO-structured finance market has largely been operating only for the last decade or so. There is one case, however, that I think readers would be interested in reviewing. This case revolved around government bond trading at Salomon Brothers back in 1991. As The New York Times reported on August 10, 1991, Salomon Admits Traders Tried to Corner U.S. Bond Markets:

One of Wall Street’s biggest securities houses suspended two of its top players on Friday and admitted that they had repeatedly tried to corner the market for government bond issues in auctions during the last year.

Salomon Brothers Inc. did not name the pair, but it said they held the rank of managing director. In Wall Street argot, they were Masters of the Universe: swaggering traders who can make millions of dollars for their firm on the turn of a single issue.

A Salomon spokesman refused comment on a Reuters report identifying them as Thomas Murphy, head of the government securities trading desk, and Paul Mozer, who has responsibility for foreign exchange trading. Mr. Murphy is also chairman of the committee on government trading practices of the Public Securities Association, the trade group for government bond dealers.

Salomon acknowledged that the two suspended traders violated Treasury rules by bidding for more bonds than any one dealer is allowed to hold at an auction, and that they did it by bidding for the securities in the names of others who had not authorized the bids.

As a side point, Paul Mozer’s name has long been connected with the Salomon bid-rigging scandal. The passage of time has benefited Mr. Murphy to a much greater extent.

Certainly, the comparison between Goldman now and Salomon back in 1991 is anything but perfect. That said, the key point is damage control. Salomon then wanted to contain the fire. No doubt Goldman now would like to do the same.

Despite the fact that Salomon admitted the scandal, the fire was not able to be contained. Ultimately, the heat got so hot that it torched the heads of the firm, Tom Strauss and the legendary John Gutfreund.

These situations can potentially take on a life of their own. Despite initial shows of bravado on behalf of those who would defend Goldman, I do not expect this charge of fraud to die down anytime soon.

Will it cost Lloyd Blankfein his job much as the Salomon scandal burned John Gutfreund? I would not be surprised if it does just that. How might that happen? When investor sentiment turns on the firm and forces the Goldman board’s hand. Friday was the spark that started the fire.

Do you think Lloyd Blankfein has the legal team working round the clock? Perhaps he might want to call Mr. Gutfreund and get his take on how these situations play out.

LD

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This entry was posted on Monday, April 19th, 2010 at 1:29 PM and is filed under General, Goldman Sachs. You can follow any responses to this entry through the RSS 2.0 feed. You can skip to the end and leave a response. Pinging is currently not allowed.