Friday, July 29th 2016

Justification vs. Justice with Goldman Sachs

As an update to our January entry about Goldman Sachs,  Goldman Sachs is now in the middle of a ghastly legal battle. The Securities and Exchange Commission (SEC) has filed fraud charges against Goldman for structuring and marketing faulty investments tied to subprime mortgages. The allegations against Goldman Sachs paint the picture that they not only abused the trust of their shareholders, but also that of the entire national economy and ultimately the global market.

The banking industry has been the foundation of  capitalism and business for a very long time, and over time people have taken more control of the growth of their finances by investing their money and expecting positive returns on those investments. Investors put their full faith in experts who should diligently care for their money and thus, their livelihoods. However, as we’ve seen over the past few years (can anyone say Enron or Bernie Madoff?), we now know that no one is safe from getting taken to the laundry.

Here’s a brief breakdown of how Goldman Sachs has been charged with fraudulent activity:

  • In 2007, Goldman Sachs created the ABACUS “synthetic collateralized debt obligation” or CDO, and invited its clients to invest in the CDO, which was based on 90 bonds derived from subprime mortgage loans made over the previous 18 months.
  • Goldman told investors the securities in Abacus had been chosen by vetted management firm with $15.7 billion assets in 22 CDOs.
  • However, the SEC claims that the underlying portfolio was actually put together by John Paulson, a hedge fund manager who strategically picked the worst assets, so he could bet against those bad assets by purchasing “credit default swaps,” which are insurance policies that pay out if borrowers default.
  • According to the SEC, Paulson paid Goldman $15 million to pitch and market the ABACUS CDO. And by 2008, Paulson had earned $1 billion off of defaulted investments while investors lost $1 billion.

Investments are usually not considered gambling if they are for economic utility, positive expected returns, and have an underlying value independent of the risk being undertaken. However, if Goldman Sachs and Paulson knew that those they were advising could not have ethically and legally expected profits, then the SEC’s investigation may reveal that their efforts were purely geared towards padding the bank accounts of their executives at the detriment of every one else.

Since the SEC’s investigation about Goldman Sachs’ profits skyrocketing while the global economy failed, Lloyd Blankfein, chairman and chief executive of Goldman Sachs has maintained a heavy defense that the firm did nothing wrong. At the crux of Goldman’s defense, they note that others should have done their homework.

Will the decision of this case ultimately decide the balance between justification and justice?

Posted by Melissa on May 14, 2010 at 1:07pm.

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