Goldman Sachs lesson: The house always wins

The bank sold toxic waste to pension funds while secretly betting against the subprime market. Was that illegal?

Published November 2, 2009 3:23PM (EST)

Goldman Sachs dismissed Matt Taibbi's "vampire squid" assault in Rolling Stone last August as a "witches' brew of conspiracy theories" and continued merrily going about its business of making insane amounts of money while everyone else was lining up at the soup kitchen. But the investment bank will have a harder time shrugging off the punches landed by McClatchy Newspapers' Greg Gordon in a major broadside delivered this morning: "How Goldman Secretly Bet on the U.S. Housing Crash."

Gordon's piece wraps up a grab bag of Goldman criticism into one package, but the key assertion is one that is likely to have Goldman lawyers on DefCon 1 high alert.

In 2006 and 2007, Goldman Sachs Group peddled more than $40 billion in securities backed by at least 200,000 risky home mortgages, but never told the buyers it was secretly betting that a sharp drop in U.S. housing prices would send the value of those securities plummeting.

At the very least, it looks very bad for an investment bank to be selling bonds to pensions funds that its executives knew were toxic waste -- to the point that the bank was actively placing bets that the subprime market in mortgage bonds was due for a crash. The key question is: Was Goldman's behavior illegal? Goldman spokesperson Michael DuVally -- a very, very busy guy these days -- says no.

DuVally told McClatchy that Goldman "had no obligation to disclose how it was managing its risk, nor would investors have expected us to do so ... other market participants had access to the same information we did."

But a host of securities experts say, well, maybe, citing the Securities Act of 1933, which "imposes a special disclosure burden on principal underwriters of securities, which was Goldman's role when it sold about $39 billion of its own risky mortgage-backed securities from March 2006 to February 2007."

Numerous lawsuits filed by pension funds and other institutional investors who were burned by Goldman are now making their way through the judicial system. It will be years before there is any closure on the issue of Goldman's guilt. It would be nice if there was a Elliot Spitzer-type still around who could add some political juice to the process (The People versus Goldman, coming soon to a federal court near you -- Andrew Cuomo, are you listening?) But maybe this is a mess that will be ultimately resolved "within the family," so to speak. Some of the biggest pension funds in the country bought into Goldman's junk. Unlike you or me, they can afford the type of legal counsel that Goldman has to pay attention to.

By Andrew Leonard

Andrew Leonard is a staff writer at Salon. On Twitter, @koxinga21.

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