Easy escape for Goldman

Goldman Sachs settled civil charges that it misled clients through selling mortgage securities designed by a hedge fund with SEC by paying $550M on Friday. Goldman admitted it made a mistake that they had not disclosed the hedge fund's role. This is the civil charges for Goldman. The criminal probe has not been concluded. Although the case has not been fully closed, it is an easy escape for Goldman.

Goldman's role in the 2008 crisis is far more than hedge fund designed mortgage. For example, its number two executive, Gary Cohn, was in a congress hearing to provide Goldman's role during the crisis. Only few still remember what the drama involving Bear Sterns and Lehman. Here are some snapshots.


Goldman was the first firm that novated Bear Sterns' trading partner in March 2008. The action triggered a series of rumors about Bear's situation. Novation is better explained by this example: Bear had a trade with a hedge fund Hayman. At the beginning Goldman wasn't involved. Then in March 2008, Hayman realized Bear's situation has deteriorated, so they asked Goldman to novate, that is, to take over their derivative trade, about $5M. When a novation is requested, usually that means the other side of the trade has liquidity problem. The request was escalated to Cohn. Besides political plays between Goldman and then Bear's executive, Goldman eventually didn't novate the request even though they sent an email to Hayman that they consented the novation. Goldman just delay the request and eventually killed the request. Later Goldman refused that they had agreed the novation.

Goldman was also the first firm disclosed publicly Bear's two hedge fund's liquidation problem mortgage back obligation. When one of Bear's hedge fund blew off in April 2007, Goldman marked (means they evaluated the fund's value) half compared to other firms. That was to say every one else marked the fund had 100 but Goldman only gave them 50. All the marks had to be averaged to tell what the current value of the fund was so that they could operate. This single mark down caused the previous great performed fund had a -19% drop. That is the start of Bear's problem because they decided to save the fund by putting $3.2B their own money. Cohn, again, was the one explained to the world why they marked down so much: Goldman's aggressive mark down was due to the detriment of the fund's income statement and those of some of their clients who would then have to account for Goldman's mark. He also protested that Goldman had profited a lot. He didn't say who the clients were. It turned out Goldman was right that the fund had liquidity problem. The bet of MBO's collapse is also right perfectly.

Although the settlement has been approved, the political conflict is not difficult to sense: a 3-2 vote on SEC with 2 Reps vote against the settlement (the Reps are against strong fraud charges). It reveals how powerful Goldman is, adding that Paulson was the Goldman CEO and then Secretary of Treasury, who ordered Lehman's bankruptcy. Goldman might face up to $1B charge. But now half of the price is really a steal. Goldman has bright future.