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Goldman Sachs Settles

Malibook

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WASHINGTON (AP) -- Goldman Sachs & Co. has agreed to pay $550 million to settle civil fraud charges that the Wall Street giant misled buyers of mortgage-related investments.

The settlement was announced Thursday by the Securities and Exchange Commission hours after Congress gave final approval to the stiffest restrictions on banks and Wall Street since the Great Depression.

The deal calls for Goldman to pay a $535 million fine and $15 million in restitution of fees it collected. Of the total $550 million, $300 million will go to the government and $250 million goes to compensate two banks that lost money on their investments.

The penalty was the largest against a Wall Street firm in SEC history. But the settlement amounts to less than 5 percent of Goldman's 2009 net income of $12.2 billion after payment of dividends to preferred shareholders -- or a little more than two weeks of net income.

Word that Goldman had settled began leaking about a half-hour before stock markets closed and appeared to please investors. Goldman had been trading at about $140 a share. The stock rose to close at $145.22, up $6.16, and shot up to $153.60 in after-hours trading.

The settlement involves charges that Goldman sold mortgage investments without telling buyers that the securities had been crafted with input from a client that was betting on them to fail.

The securities cost investors close to $1 billion while helping Goldman client Paulson & Co. capitalize on the housing bust, the SEC said in the charges filed April 16.

The charges were the most significant legal action related to the mortgage meltdown that pushed the country into recession. They dealt a blow to the reputation of a Wall Street giant that had emerged relatively unscathed from the financial crisis.

Goldman acknowledged Thursday that its marketing materials for the deal at the center of the charges omitted key information for buyers.

But the firm did not admit legal wrongdoing.

In a statement, Goldman said "it was a mistake" for the marketing materials to leave out that a Goldman client helped craft the portfolio and that the client's financial interests ran counter to those of investors.

"We believe that this settlement is the right outcome for our firm, our shareholders and our clients," the firm's statement said.

Robert Khuzami, the SEC's enforcement director, called the settlement a "stark lesson to Wall Street firms that no product is too complex, and no investor too sophisticated, to avoid a heavy price if a firm violates the fundamental principles of honest treatment and fair dealing."

The SEC's wide-ranging investigation of Wall Street firms' mortgage securities dealings in the years running up to the financial crisis goes on, Khuzami said.

"We are looking at deals across a wide variety of institutions and a wide variety of circumstances," he said.

Though the fine won't make much of a dent in Goldman's finances, the settlement will have sweeping legal implications for future securities fraud cases, said John Coffee, a securities law professor at Columbia University.

"Even if the penalty was lower than the market expected, the fact that Goldman admitted that it made misleading and incomplete disclosures to its clients vindicates the SEC's legal theory for the future," Coffee said. "You have to understand that the defendant almost never makes such a concession in SEC settlements."

The settlement is subject to approval by a federal judge in New York's Southern District.

The SEC said its case continues against Fabrice Tourre, a Goldman vice president accused of shepherding the deal.

Tourre is still employed by Goldman and remains on paid administrative leave, according to a person familiar with his status who wasn't authorized to discuss the matter publicly. Goldman is paying Tourre's legal expenses, the source said.

The Justice Department opened a criminal inquiry of Goldman in the spring, following a criminal referral by the SEC, the Associated Press reported in April, citing a knowledgeable person who spoke on condition of anonymity because the inquiry was in a preliminary phase.

Goldman made no mention of a criminal case in its statement Thursday.

Of the $550 million Goldman agreed to pay, $250 million will go to the two big losers in the deal. German bank IKB Deutsche Industriebank AG will get $150 million. Royal Bank of Scotland, which bought ABN AMRO Bank, will receive $100 million.

Goldman will also pay back $15 million in fees it collected for managing the deal. The remaining $535 million is considered a civil penalty.

Paulson was not charged by the SEC.

The SEC filed the case after a series of embarrassing blunders -- most notably its failure to detect the Ponzi scheme run by Bernard Madoff and the alleged fraud by R. Allen Stanford. The Goldman case was a high-profile opportunity for the agency to prove it could be tough on Wall Street.

Jacob Frenkel, a former SEC enforcement attorney, said the SEC met that objective.

"This was a bet-the-agency case," Frenkel said. "They had a lot at stake here, and this did wonders to re-establish a strong enforcement image and presence."

Goldman dodged major risks as well. The company quieted a source of public criticism and can return to focusing on its business.

Goldman's legal troubles may not be over. Despite the settlement, investors who lost money on the transactions could still sue the firm for civil damages, Thomas Ajamie, a Houston-based defense lawyer who specializes in financial fraud cases.

"Nothing stops the investors from filing their own claims," Ajamie said.

The chairman of a Senate panel that interrogated Goldman officials after the SEC filed its charges, applauded the settlement.

"Goldman played fast and loose ... misled its clients, and got called on it today," Sen. Carl Levin, D-Mich., said Thursday. "A key factor in the settlement is that Goldman acknowledges wrongdoing, in addition to paying a fine and changing its practices."

AP Business Writers Christopher S. Rugaber and Alan Zibel in Washington and Stevenson Jacobs in New York contributed to this report.

http://finance.yahoo.com/news/Goldm...tml?x=0&sec=topStories&pos=main&asset=&ccode=
 

Malibook

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The Great American Bubble Machine
From tech stocks to high gas prices, Goldman Sachs has engineered every major market manipulation since the Great Depression — and they're about to do it again

The first thing you need to know about Goldman Sachs is that it's everywhere. The world's most powerful investment bank is a great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money. In fact, the history of the recent financial crisis, which doubles as a history of the rapid decline and fall of the suddenly swindled dry American empire, reads like a Who's Who of Goldman Sachs graduates.

By now, most of us know the major players. As George Bush's last Treasury secretary, former Goldman CEO Henry Paulson was the architect of the bailout, a suspiciously self-serving plan to funnel trillions of Your Dollars to a handful of his old friends on Wall Street. Robert Rubin, Bill Clinton's former Treasury secretary, spent 26 years at Goldman before becoming chairman of Citigroup — which in turn got a $300 billion taxpayer bailout from Paulson. There's John Thain, the asshole chief of Merrill Lynch who bought an $87,000 area rug for his office as his company was imploding; a former Goldman banker, Thain enjoyed a multi-billion-dollar handout from Paulson, who used billions in taxpayer funds to help Bank of America rescue Thain's sorry company. And Robert Steel, the former Goldmanite head of Wachovia, scored himself and his fellow executives $225 million in golden-parachute payments as his bank was self-destructing. There's Joshua Bolten, Bush's chief of staff during the bailout, and Mark Patterson, the current Treasury chief of staff, who was a Goldman lobbyist just a year ago, and Ed Liddy, the former Goldman director whom Paulson put in charge of bailed-out insurance giant AIG, which forked over $13 billion to Goldman after Liddy came on board. The heads of the Canadian and Italian national banks are Goldman alums, as is the head of the World Bank, the head of the New York Stock Exchange, the last two heads of the Federal Reserve Bank of New York — which, incidentally, is now in charge of overseeing Goldman — not to mention …

But then, any attempt to construct a narrative around all the former Goldmanites in influential positions quickly becomes an absurd and pointless exercise, like trying to make a list of everything. What you need to know is the big picture: If America is circling the drain, Goldman Sachs has found a way to be that drain — an extremely unfortunate loophole in the system of Western democratic capitalism, which never foresaw that in a society governed passively by free markets and free elections, organized greed always defeats disorganized democracy.

The bank's unprecedented reach and power have enabled it to turn all of America into a giant pump-and-dump scam, manipulating whole economic sectors for years at a time, moving the dice game as this or that market collapses, and all the time gorging itself on the unseen costs that are breaking families everywhere — high gas prices, rising consumer credit rates, half-eaten pension funds, mass layoffs, future taxes to pay off bailouts. All that money that you're losing, it's going somewhere, and in both a literal and a figurative sense, Goldman Sachs is where it's going: The bank is a huge, highly sophisticated engine for converting the useful, deployed wealth of society into the least useful, most wasteful and insoluble substance on Earth — pure profit for rich individuals.

They achieve this using the same playbook over and over again. The formula is relatively simple: Goldman positions itself in the middle of a speculative bubble, selling investments they know are crap. Then they hoover up vast sums from the middle and lower floors of society with the aid of a crippled and corrupt state that allows it to rewrite the rules in exchange for the relative pennies the bank throws at political patronage. Finally, when it all goes bust, leaving millions of ordinary citizens broke and starving, they begin the entire process over again, riding in to rescue us all by lending us back our own money at interest, selling themselves as men above greed, just a bunch of really smart guys keeping the wheels greased. They've been pulling this same stunt over and over since the 1920s — and now they're preparing to do it again, creating what may be the biggest and most audacious bubble yet.

If you want to understand how we got into this financial crisis, you have to first understand where all the money went — and in order to understand that, you need to understand what Goldman has already gotten away with. It is a history exactly five bubbles long — including last year's strange and seemingly inexplicable spike in the price of oil. There were a lot of losers in each of those bubbles, and in the bailout that followed. But Goldman wasn't one of them.

BUBBLE #1 The Great Depression

Goldman wasn't always a too-big-to-fail Wall Street behemoth, the ruthless face of kill-or-be-killed capitalism on steroids —just almost always. The bank was actually founded in 1869 by a German immigrant named Marcus Goldman, who built it up with his son-in-law Samuel Sachs. They were pioneers in the use of commercial paper, which is just a fancy way of saying they made money lending out short-term IOUs to smalltime vendors in downtown Manhattan.

You can probably guess the basic plotline of Goldman's first 100 years in business: plucky, immigrant-led investment bank beats the odds, pulls itself up by its bootstraps, makes shitloads of money. In that ancient history there's really only one episode that bears scrutiny now, in light of more recent events: Goldman’s disastrous foray into the speculative mania of pre-crash Wall Street in the late 1920s.

This great Hindenburg of financial history has a few features that might sound familiar. Back then, the main financial tool used to bilk investors was called an "investment trust." Similar to modern mutual funds, the trusts took the cash of investors large and small and (theoretically, at least) invested it in a smorgasbord of Wall Street securities, though the securities and amounts were often kept hidden from the public. So a regular guy could invest $10 or $100 in a trust and feel like he was a big player. Much as in the 1990s, when new vehicles like day trading and e-trading attracted reams of new suckers from the sticks who wanted to feel like big shots, investment trusts roped a new generation of regular-guy investors into the speculation game.

Beginning a pattern that would repeat itself over and over again, Goldman got into the investmenttrust game late, then jumped in with both feet and went hogwild. The first effort was the Goldman Sachs Trading Corporation; the bank issued a million shares at $100 apiece, bought all those shares with its own money and then sold 90 percent of them to the hungry public at $104. The trading corporation then relentlessly bought shares in itself, bidding the price up further and further. Eventually it dumped part of its holdings and sponsored a new trust, the Shenandoah Corporation, issuing millions more in shares in that fund — which in turn sponsored yet another trust called the Blue Ridge Corporation. In this way, each investment trust served as a front for an endless investment pyramid: Goldman hiding behind Goldman hiding behind Goldman. Of the 7,250,000 initial shares of Blue Ridge, 6,250,000 were actually owned by Shenandoah — which, of course, was in large part owned by Goldman Trading.

The end result (ask yourself if this sounds familiar) was a daisy chain of borrowed money, one exquisitely vulnerable to a decline in performance anywhere along the line. The basic idea isn't hard to follow. You take a dollar and borrow nine against it; then you take that $10 fund and borrow $90; then you take your $100 fund and, so long as the public is still lending, borrow and invest $900. If the last fund in the line starts to lose value, you no longer have the money to pay back your investors, and everyone gets massacred.

In a chapter from The Great Crash, 1929 titled "In Goldman Sachs We Trust," the famed economist John Kenneth Galbraith held up the Blue Ridge and Shenandoah trusts as classic examples of the insanity of leveragebased investment. The trusts, he wrote, were a major cause of the market's historic crash; in today's dollars, the losses the bank suffered totaled $475 billion. "It is difficult not to marvel at the imagination which was implicit in this gargantuan insanity," Galbraith observed, sounding like Keith Olbermann in an ascot. "If there must be madness, something may be said for having it on a heroic scale."

link to full article
http://www.rollingstone.com/politics/news/12697/64796
 

hinz

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Nov 27, 2006
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Goldman Sachs settles for $550million. A drop in the bucket for them.
Indeed, $500 million is 2x market cap for Smith & Wesson. :rolleyes:

A big booyah for GS shareholder, especially those who purchased on the dip months ago.

BTW, on 2nd thought, Goldman Sachs should invest identical seeds money to Xe Services LLC, just in case.
 
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