Wednesday, April 21, 2010

Goldman Sachs worse than Bear?

Regarding the SEC suit against Goldman Sachs, Yves Smith at Naked Capitalism writes: (emp add)
SEC Sues Goldman for Fraud

A number of journalists and commentators ... have taken issue with the fact that some dealers (most notably Goldman and DeutscheBank) had programs of heavily subprime synthetic collateralized debt obligations which they used to take short positions. Needless to say, the firms have been presumed to have designed these CDOs so that their short would pay off, meaning that they designed the CDOs to fail. The reason this is problematic is that most investors would assume that a dealer selling a product it had underwritte was acting as a middleman, intermediating between the views of short and long investors. Having the firm act to design the deal to serve its own interests doesn’t pass the smell test (one benchmark: Bear Stearns refused to sell synthetic CDOs on behalf of John Paulson, who similarly wanted to use them to establish a short position. How often does trading oriented firm turn down a potentially profitable trade because they don’t like the ethics?)
Bear Stearns wasn't particularly liked on Wall Street. From
... Bear Stearns's aggressiveness earned it an unsavory reputation. The firm was known to wage proxy battles against its own clients, as it did in 1982 against Global Natural Resources after deciding that Global's management had undervalued its assets and could realize greater profits. In 1986, Bear Stearns developed an option agreement that essentially allowed clients to buy stock under Bear Stearns's name, a tactic that facilitated corporate takeover attempts. (...)

Bear Stearns became the focus of negative attention in 1997, however, when it came under investigation by the SEC for its role as a clearing broker for a smaller brokerage named A.R. Baron, which had gone bankrupt in 1996 and defrauded its customers of $75 million. Traditionally, courts had not held clearing firms accountable for losses incurred by the customers of their client firms, but in this case Bear Stearns was accused of overstepping its bounds as a clearinghouse by continuing to process trades, loan money, and extend credit to Baron in the face of mounting evidence that the firm, then in serious financial jeopardy, was manipulating stock prices and conducting unauthorized trading while raiding the accounts of its customers.
So, Bear Stearns wouldn't deal with the John Paulson paper, but Goldman Sachs did. Bear eventually went down and got purchased by JPMorgan Chase. Goldman Sachs, on the other hand and with lots of AIG money, survived the 2008 bank crisis and thrives today.


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