Goldman’s Lose-Lose Situation
First, I have horribly neglected my personal blog here. Ever since becoming a professional blogger, it’s a challenge to work up the will to write more during a night or weekend when I’ve already written a few thousands words that day. Planning a wedding doesn’t help either, as that’s taken up a lot of my free time. But I hope to start writing here more often, especially my opinions or on non-business stuff. So onward!
The SEC Goldman lawsuit is pretty big news. I already wrote a post on it today at Atlantic Business, and will post another tomorrow.
I have a few additional thoughts. First, this is likely an isolated situation. Even if the case succeeds, I wouldn’t expect there to be a big flood of cases involving investment banks getting prosecuted that sold CDOs or subprime MBS that went bad. In this particular situation, according to the SEC complaint, the bonds were created precisely to provide John Paulson’s hedge fund with a short. This kind of behavior only started towards the end of the housing boom. Most of the toxic securities sold during the bubble were created in good faith — even the banks thought they would hold up. That’s why they bought so much of the garbage.
I see this as a lose-lose situation for Goldman. If they lose the case, well that will be very bad. Then, Goldman will have been shown to have misled investors in a court of law. No matter the fine, it will result in a huge blemish on the firm’s name. Investors will suddenly be very skeptical about trusting the firm going forward.
If Goldman wins the case, however, it’s unclear that things will be much better. This will be a very public, high-profile trial. Goldman can’t simply try to slip by on some technicality. For investors to have confidence in the firm, it will have to completely dismantle the SEC’s case. It will have to provide some incredibly surprising information that makes the complaint look like pure gibberish. If it turns out that Goldman acted essentially as shady as the SEC complaint says, even if not technically fraud according to the court, investors will lose trust in the bank.
Frankly, I’ve never understood investors who buy complicated securities from bankers smarter than they are. If you don’t fully understand what you’re buying, then what are you doing putting your money on a hope and a prayer that some crafty bankers aren’t trying to mislead you? At the end of the day, a lot of trading is a zero sum game — and the house generally wins. That house is Wall Street, so unless you’re an investor with an unusual amount of genius, then you will probably lose.