Thursday, April 22, 2010

Enron On The Hudson: Goldman Circles The Wagons (part 2 of a series)

The Vampire Squid isn't dead yet.

After what many perceived to be an "opening error" in its
ill-timed response to the SEC action (an opinion I do not
share), The Squid has got its act together and is pressing
a vigorous defense on all fronts.

As expected, Goldman Sachs "vigorously denies" any
wrongdoing in any of its actions regarding the
Paulson- Abacus deal, claiming that the allegations
raised against it are "unfounded both in fact and law",
and that it fully expects to prevail in court. Moreover,
The Squid has been busy contacting its many alumni
at The Fed, The Treasury, the regulatory agencies and
on Congressional staffs, distributing "talking points",
and getting its side of the story told to those in positions
of influence.

And Goldman has also been very active in the media
(especially on CNBC), saying that this was a "normal"
CDO deal done by large, sophisticated investors who
were very experienced in these matters and knew full
well the risks involved.

In short, Goldman Sachs is doing what they do so
very well anytime they are subjected to scrutiny -
circle the wagons, take their opponents under fire,
and mount a huge media campaign to both demonize
and discredit their detractors.

And as of right now, the strategy appears to be working.
Goldman stock, after taking a 22-point beating on Friday,
appears to be recovering, closing up slightly today. The
Wall Street Journal, which under the ownership of
Rupert Murdoch has become an uncritical cheerleader
for much of what happens on Wall Street, has been
editorially questioning the "timing" and "appropriateness" of
the SEC action. This same theme has been picked up by
Congressional Republicans, who feel that Goldman Sachs
is being used by the Obama Administration to unfairly
strong-arm the Congress into approving a "flawed"
financial reform bill, in much the same manner that
they used the Health Insurance industry as an "ogre"
to pass the health care bill. And, as the SEC decided on a 3-2
party-line vote to prosecute Goldman in the first place,
the Republican minority on the Commission is preparing
to take the unprecedented step of going public with their

If you're going to take on The Vampire Squid,
you had better be prepared for a fight. And Goldman,
in response, has served notice that it intends to press
its case without pause or letup in the courts
of law and regulation, in the Halls of Congress, and
most importantly, in the court of public opinion.

And, judging by its win-loss rate thus far, The
Squid just might win this one. The court case will
hinge on narrow interpretations of securities law
applied to a complex and contradictory set of facts.
The divisions inside the SEC over whether or not
to prosecute will be fully explored in discovery.
Goldman has powerful allies in the financial media
and in corporate boardrooms around the world, and
rather than run away, many of these folks are speaking
out in Goldman's defense. And in Congress, where
many of the "gray areas" of Goldman's actions might
well be made illegal by financial reform, Goldman is
busy calling in its chits.

It will be, in the words of Winston Churchill, " a struggle
both grim and great, with neither mercy nor quarter
granted by either side". And in the final analysis, it will
depend on whether or not the SEC and the Administration
have the stomach for this kind of thing.

Judging by what I've seen so far, I'm hoping for the
best but I'm not optimistic.

In the next installment, we'll examine (from a
devil's advocate point of view), the merits of
the defenses Goldman is raising and the implications
for the rest of Wall Street and and the cause of
financial reform.

Stay tuned - it's about to get very interesting.

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