Sunday, April 18, 2010

Economist and top federal prosecutor during the S&L crisis, William Black, declares Goldman Sachs "rotten to the core"



"Rotten to the Core": Bill Black and Barry Ritholtz React to Goldman Fraud Charges

Posted on Yahoo Finance Tech-Ticker April 16, 2010 by Aaron Task

The SEC's civil suit against Goldman Sachs rocked the market Friday and has potentially major ramifications for the firm as well as the debate in Washington D.C. regarding financial re-regulation.

In the accompanying video, I discuss the news with Barry Ritholtz, CEO of FusionIQ and author of Bailout Nation, and William Black, a top federal prosecutor during the S&L crisis and associate professor of economics and law at the University of Missouri-Kansas City.

Ritholtz and Black agree there is strong evidence of wrongdoing and that it's unlikely this was an isolated incident. Wall Street is "rotten to the core," Black says. "When [Goldman CEO Lloyd] Blankfein said ‘Goldman's doing God's work,' we didn't know that ‘doing God's work' involved blowing up your own customers."

The SEC charged Goldman with misleading its customers by withholding "vital information" about a synthetic collateralized debt obligation (CDO) named Abacus that was intentionally stuffed with the most toxic subprime mortgage-backed securities.

Wall Street is a "sharp-elbowed, bloodthirsty place to work" but "this makes the 'Vampire Squid' nomer look soft and cuddly," Ritholtz quips. "There's been rampant fraud on Wall Street -- all kinds of bad behavior that's gone unpunished."

Goldman vowed to fight the charges, which the firms says are "completely unfounded in law and fact," The New York Times reports.

The suit also names Goldman V.P. Fabrice Tourre who helped create and sell the investment vehicle. "This was deliberate, corporate policy," not the work of a rogue employee, Black says.

Famed hedge fund manager John Paulson, who helped structure the Abacus deal and then shorted it, was not cited in the SEC suit. But it's like "the guy who owns the hurricane insurance on house is helping use crappier lumber to build it. So he made it pretty wobbly and then he bet against it," Ritholtz says.

Adds Ritholtz on Paulson: "He did something that's kind of sleazy. But I don’t see it as technically illegal. He let Goldman do all the illegal stuff.”

That's probably true, Black says, but Paulson “should have seen the disclosures. So if he sees disclosure statements by Goldman Sachs that he knows to be false, and that he’s going to profit from, he has a serious danger of being viewed as a co-conspirator. Now the SEC hasn’t chosen to go that way. The only individual named is small fry. That’s the major question here. Why is the SEC aiming so low in terms of individuals?”

Stay tuned for continuing coverage of this scandal.

Full disclosure: I edited Ritholtz's book and was paid for my contributions.

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