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The SEC Joins the Goldman Sachs Pile-on

|Includes: Goldman Sachs Group Inc. (GS)

The SEC, still smarting significantly from its deligitimization following its evisceration by Harry Markopolis in the matter of Bernard Madoff, the fact that Chairman Chris Cox was portrayed as utterly ineffectual and marginalized in Andrew Ross Sorkin's Too Big to Fail, and the simple fact that it has manifestly underperformed in its mission of serving the interests of the investing public, has at last discovered a no-risk route to salvation:  attack someone even more widely reviled, everyone's bete noire Goldman Sachs.  As a bonus, the agency gets to draw in hedge fund Paulson & Co, a firm at once lauded for its smarts in profiting from shorting the sub-prime and housing market (which many were trying to figure out how to do in 2006-2007) and simultaneously regarded as a little suspect from doing the same.

The SEC this morning announced it was bringing charges against Goldman and one of its Vice Presidents (i.e. line workers) for failing to disclose to customers going long a particular CDO that Paulson, which intended to short the same CDO, had played a role in selecting the mortgages it would contain.  Not good.

Combined with the departure of Goldman director Rajat Gupta following the disclosure that he was under investigation in the insider trading scandal centered on hedge fund Galleon Group, regulators have landed a substantial 1-2 sequence of blows at everyone's favorite punching bag.
For some time many Wall Street whispered that any firm as profitable as Goldman Sachs (or a non-quantitative hedge fund like Steven Cohen's SAC) must be doing something unethical to do so well.  And indeed, any firm employing around 30,000 rather smart and hard-working, if money and prestige-oriented, people is bound to have something unethical going on within it.  Despite Goldman's truly substantial investment in internal audit and other control functions, the fact is that they are cost centers, and in any firm dedicated to making money, the most aggressive and best compensated people are not in cost centers, but in profit centers like trading, and talent follows the money.

It remains to be seen how this drama will play out.  Will some bad apples spoil a whole bunch of girls?  Are the girls in fact spoiled from the start?  What will the blowback be on not just James but also Henry Paulson, and by extension the US Treasury?  To what extent might the SEC be seeking to recapture prestige at Treasury's expense?  One thing's for sure.  The SEC is not at risk here.

Update:  The continuous stream of emails being released by the SEC look more and more damning for old GS.  The Thomas Montag quote about Timberworlf Ltd. being "one sh***y deal" just really doesn't look right.  Shades of Blodget and "lipstick on a pig" back in 2003.

This on top of the revelation that Gupta appears to have shared knowledge of Buffett's upcoming infusion of cash into The Firm back in September of 2008.  The momentum of evidence is flowing against Goldman.  I think they need to cut a deal fast.

Disclosure: None