Daily Lessons from Life 17 April 2010 - Channel NewsAsia - Goldman fraud charges trigger prospect of wider crackdown - channelnewsasia.com

Channel NewsAsia - Goldman fraud charges trigger prospect of wider crackdown: "Posted: 17 April 2010

WASHINGTON : Top Wall Street bank Goldman Sachs has been charged with financial fraud in a move that raises the prospect of a wider crackdown on firms that bet on the collapse of the housing market.

The civil suit filed by the Securities and Exchange Commission Friday accused Goldman of 'defrauding investors by misstating and omitting key facts' about a financial product based on sub-prime mortgage-backed securities.

The SEC said Goldman failed to tell investors that a major hedge fund had helped put together the controversial financial product known as collateralized debt obligation (CDO) and was at the same time betting against it.

Paulson & Co, one of the world's largest hedge funds, paid Goldman Sachs to structure a transaction in which it could take speculative positions against mortgage securities chosen by the fund, the commission said in a statement. The deal, which took place during a massive mortgage meltdown in 2007 and as the country was about to fall into a brutal recession, was said to have cost investors around one billion dollars.

Goldman rejected the charges as "completely unfounded in law and fact." The firm said it would "vigorously contest them and defend the firm and its reputation.""

Well, I must confessed that I am bias on this piece of news. I am actually quite happy to learn that this august investment firm, the most profitable in the history of Wall Street is being sued by the SEC. If this case is successful against it, it will help the rest of the world fully appreciate how 'intelligent but 'greedy' people' can disregard their obligation to their paying investors a fair disclosure and allowed them a better chance, albeit not ALL investors are educated enough to qualify to really appreciate their risk/reward ratio, and 'set them up' for a fall!

Lessons for me are:

1. there is something not right with the situation. Everyone seems to know it or sensed it but no one is taking actions against it. That does not mean it is alright. It just that it takes courage and conviction to go up against a perennial winner and champion! The time has come as there will be people who simply will not sit and watch the continued slaughter of the innocents and the potential miscarriage of justice!;

2. the whole subprime saga and the subsequent bailout by the USA government with taxpayers money has been done as there is REALLY no choice unless it simply want to wipe the slates totally clean! The amount involved and the parties involved simply simply means there is a potentially total meltdown of the financial and banking system as we know it. Only those with CASH and GOLD and physical assets can say they have 'money'! It was too much to ask the world to bear for the concentrated deals and trades by a very small number of so-called BANKERS. I always want to call many of them who made big bucks - traders! It is this part of the bank activities that generate the most payoff!

The worst thing is that due to this massive and unprecedented bailout, someone FORGOT to tell the beneficiaries, and Goldman Sach is one of the BIGGEST, that the 'profit' generated from the 'bailout' is NOT really for distribution to their 'employees' who made the 'right bets'. There is 'NO right bet' if there is no bailout. Got it!!;

3. it is hoped that the responsible authorities, leave aside the political wrangling, do look into devising a system that will PREVENT similarly reckless 'gambling' behaviors from being rewarded and being committed again in the future. Many Republican lawmakers in the USA still believe in the 'free market' model for this part of the world when it shows clearly that recklessness is the order of the day when too much money is involved. The bankers at the start of the crisis clearly COULD not account for HOW much bets they have created around the world! How inadequate they were in covering their bets with their own capital! So, President Obama is right to insist that the 'derivative products' must be better regulated and limits be placed to allow the banks to bet against each other.

For me personally, those creative and innovative financial instruments that were invented by the 'experts' have no real impact on the world physical productivity but just some papers for people to 'bet against each others'. They should be banned and not allowed to be in existence at all.

But then, what do an ex-accountant knows about the complex financial market?

May Goldman Sach be proven guilty as charge so that the moneyed and powerful understand that they have to pay for their mistakes and greed too!