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Case against Goldman is 'very weak'

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Filed: Country: Philippines

Editor's note: Fareed Zakaria is an author and foreign affairs analyst who hosts "Fareed Zakaria GPS" on CNN U.S. on Sundays at 10 a.m. and 1 p.m. ET and CNN International at 2 and 10 p.m. Central European Time / 5 p.m. Abu Dhabi / 9 p.m. Hong Kong.

New York (CNN) -- Federal regulators have filed a "very weak" case against the Wall Street investment bank Goldman Sachs, relying on hindsight to bolster the charges at a politically sensitive time, says analyst Fareed Zakaria.

The complaint, filed last week, accuses Goldman of defrauding investors in a complex financial instrument that was designed to allow one of the firm's clients to bet against securities tied to mortgages for U.S. homes.

SEC officials, who denied any political motivation in bringing the case, filed the charges as Congress was debating new regulations to rein in Wall Street excesses. President Obama is speaking on the subject in New York on Thursday.

"I'm largely in favor of financial reform," Zakaria told CNN. "But I also believe in the rule of law, and I believe people should be innocent until proven guilty. And the government should not use the police power of the state to retroactively criminalize things that were considered fine when the market was going up.

"I just think that we have a tendency in this country -- every time there's a boom and bust -- we get embarrassed and ashamed and we feel guilty about the boom years and the people and institutions who we glorified and lionized, we then want to throw to the wolves, and we do that using courts and criminality. And I just think that that's not fair. And it also does have the effect of chilling business activity in a way that's not ultimately helpful for the economy."

Zakaria, author and host of CNN's "Fareed Zakaria GPS," spoke to CNN on Wednesday. Here is an edited transcript:

CNN: What's did we learn about Wall Street from the SEC's complaint against Goldman Sachs?

Fareed Zakaria: I think what we really learned is that very large institutions were as involved in the very esoteric world of derivatives trading as were the hedge funds. ... I think there was a tendency to believe that these products distributed risk all over the place and therefore you actually made the system more stable. ... while that may have been one effect, another effect was actually to concentrate risk in some places, to have some institutions like Lehman Brothers with enormous amounts of risk on their balance sheet, which of course meant if they failed they would drag the whole system down with them.

CNN: What about Goldman's own behavior?

Zakaria: I think when you read the SEC's case carefully, frankly the civil case against Goldman is very weak, because what Goldman Sachs did was act as a bookie between two people who wanted to make bets.

[John] Paulson's hedge fund wanted to bet that the American housing market was going to go down. He said if you can find me someone who's willing to take the other side of that bet, I'll make the bet with you guys.

So Goldman goes out to try to find someone on the other side of that bet. ... That's why they're often called an intermediary in these things. The SEC alleges that John Paulson was deliberately putting stuff in that basket of securities that he wanted to bet against that he thought was #######. Goldman says he didn't have the final say in it but he was consulted.

What I'm not clear about is that even if Paulson did select the securities he wanted to bet against, why is that illegal? That happens in markets every day. Somebody comes to a bank like Goldman Sachs and says, "Hey, I want to bet against oil futures. I want to bet that oil is going to go down in value. Here's the instrument I want to bet against. Find me someone who wants to take the other side of this bet" -- and they go out and find that person.

The argument that Paulson was deliberately putting in securities that he thought were valueless makes no sense because, of course, that's why he was betting against them.

Now the key here is that on the other side of that bet were highly sophisticated investors with much larger funds than John Paulson's. They had seen every single security that they were betting on. So the idea that they were somehow fooled doesn't make any sense.

CNN: What about the argument that Goldman wasn't correctly describing Paulson's role?

Zakaria: There's a specific allegation that Goldman mischaracterized Paulson's involvement by saying that he was actually betting that the market would go up rather than down. Goldman denies that and Paulson's fund has also denied it. That is a case of "he said, she said."

That we'll find out in the course of a trial, if that's true, obviously it changes matters. But that does not seem to me to be the crux of the argument. ...

John Paulson in 2007 was a nobody, a midlevel hedge fund manager who had been wrong about the housing industry for the last year. So the idea that some big bank would quiver and immediately abandon all their own analysis because they realized that John Paulson was on the other side of the bet seems highly implausible. It only makes sense today because we now know that Paulson turned out to be right.

Had the bet been made six months earlier, had the same contract been drawn up, Paulson would have lost a billion dollars and the other guys would have made it because the market had been going up for years and years and all the people like Paulson who thought it was overvalued had been wrong. So the idea that this was a kind of a foolish bet that Goldman must have known would unravel was only true in hindsight.

CNN: Is there a political context to the SEC filing charges at this time?

Zakaria: Well it certainly seems pretty strange. One has to take at face value what administration officials are saying about the independence of the SEC, but to have the financial reform legislation proposed, to have the Senate committee hearings, to have the SEC called before the Senate and in the context of that to have them all happening within days of each other, the SEC slaps these charges on Goldman after a 3-2 vote, a very rare situation for the SEC to pursue charges despite a very divided commission, the whole thing certainly seems as though it is politically motivated.

CNN: What do you think the impact is going to be on the financial regulation debate in Washington?

Zakaria: It may be a spur that allows it to move forward, which is fine. By and large I think that many of these products should be more tightly regulated, these derivatives should be traded in a much more open and transparent way, there should be greater capital requirements, which means if you're going to take bets you should have the money to cover the bets. ...

The irony here is Goldman Sachs managed its risk better than probably every other bank on Wall Street. That's why they're still around. The ones that really managed their risk badly and imposed huge systemic costs on the taxpayer were Lehman Brothers. and Bear Stearns and AIG. Goldman is one of the places that managed its risk pretty well, precisely because it succeeded and it came out of this crisis fastest, there is a certain degree of envy and resentment that these firms all benefited from government action. And I get all that. ...

CNN: What about the issue that probably concerns the American taxpayer most -- how can people be sure they won't have to bail out Wall Street again?

Zakaria: Honestly it's a very difficult question because the financial system has become so complex. But my own view is that we were all asleep at the switch, and that government most particularly was asleep at the switch.

Look, Canada did not have a single bank failure or bailout. Canada did not have any of these elaborate new regulations that we're trying to put into place. They just had a more conservative banking culture and a more aggressive regulatory culture where the regulators using the powers that they had, which is about what the American regulators have, went into the banks and said you can't engage in so much risky behavior.

We just didn't do that in the United States. The only way to really ensure that it doesn't happen again is to have a certain kind of vigilance, for regulators to take their job seriously ... and try to make sure that these institutions are not taking on excessive risk.

We didn't do that. Everyone was asleep at the switch.


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Filed: AOS (pnd) Country: Canada

Well duh.

This whole thing screams politics from the onset.

If the SEC was still a serious group like it's supposed to be, they would be doing a full scale investigation into the derivatives market and pulling in a lot more than the pennies that Goldman Sachs was involved in it. Now you look at the lawyer who's representing Goldman. Are you kidding me?

This is nothing more than a game to give the 'appearance' that someone is being 'taken care of' for the economic down turn... Something tells me that Goldman is in on this too...


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Filed: Timeline

Something tells me that Goldman is in on this too...


McClatchy Washington Bureau

Goldman's White House connections raise eyebrows

Greg Gordon | McClatchy Newspapers

last updated: April 21, 2010 08:04:06 PM

WASHINGTON — While Goldman Sachs' lawyers negotiated with the Securities and Exchange Commission over potentially explosive civil fraud charges, Goldman's chief executive visited the White House at least four times.

White House logs show that Chief Executive Lloyd Blankfein traveled to Washington for at least two events with President Barack Obama, whose 2008 presidential campaign received $994,795 in donations from Goldman's political action committee, its employees and their relatives. He also met twice with Obama's top economic adviser, Larry Summers.

No evidence has surfaced to suggest that Blankfein or any other Goldman executive raised the SEC case with the president or his aides. SEC Chairwoman Mary Schapiro said in a statement Wednesday that the SEC doesn't coordinate enforcement actions with the White House or other political bodies.

Meanwhile, however, Goldman is retaining former Obama White House counsel Gregory Craig as a member of its legal team. In addition, when he worked as an investment banker in Chicago a decade ago, White House Chief of Staff Rahm Emanuel advised one client who also retained Goldman as an adviser on the same $8.2 billion deal.

Goldman's connections to the White House and the Obama administration are raising eyebrows at a time when Washington and Wall Street are dueling over how to overhaul regulation of the financial world.

Lawrence Jacobs, a University of Minnesota political scientist, said that "almost everything that the White House has done has been haunted by the personnel and the money of Goldman . . . as well as the suspicion that the White House, particularly early on, was pulling its punches out of deference to Goldman and its war chest.

"There's now kind of a magnifying glass on the administration for any sign of interference or conversations with the regulators and the judiciary," Jacobs said.

The SEC investigation of Goldman's dealings lasted 18 months and culminated with the SEC filing civil fraud charges against the investment bank last week.

According to White House visitor logs, Blankfein was among the business leaders who attended an Obama speech on Feb. 13, 2009, and he also joined more than a dozen bank CEOs in a meeting with Obama on March 27, 2009.

Blankfein also was supposed be among the CEOs who met with Obama in December, but he and two others phoned in from New York, blaming inclement weather.

He and his wife, Laura, were listed on the logs among 438 presidential guests at the Kennedy Center Honors the previous week.

The logs also indicate that Blankfein met twice in 2009, on Feb. 4 and Sept. 30, with Summers, who was undersecretary of the Treasury Department during the Clinton administration when it was headed by Robert Rubin, a former Goldman CEO.

Asked whether Goldman executives had talked to administration officials about the SEC inquiry, Goldman spokesman Michael DuVally said that the firm doesn't discuss "what conversations we may or may not have had with government officials."

Schapiro's statement said that she's "disappointed" by Republican rhetoric suggesting that the SEC case against Goldman might have been timed to boost legislative prospects for a financial regulation overhaul bill, which Obama plans to pitch in a speech in New York Thursday.

"We do not coordinate our enforcement actions with the White House, Congress or political committees," Schapiro said. "We do not time our cases around political events or the legislative calendar . . . We will neither bring cases, nor refrain from bringing them, because of the political consequences."

Obama dismissed any such suggestion as "completely false" Wednesday, saying in a CNBC television interview that the SEC "never discussed with us anything with respect to the charges that would be brought."

While describing Craig, his former counsel, as "one of the top lawyers in the country," Obama also said that he'd imposed "the toughest ethics rules that any president's ever had."

"One thing he (Craig) knows is that he cannot talk to the White House," Obama said. "He cannot lobby the White House. He cannot in any way use his former position to have any influence on us."

Goldman's chief spokesman, Lucas van Praag, said the firm "wanted Craig . . . for his wisdom and insight."

Craig, now an attorney with the Washington law firm of Skadden, Arps, Slate, Meagre & Flom, said: "I am a lawyer, not a lobbyist. Goldman Sachs has hired me to provide legal advice and to assist in its legal representation."

Goldman's nearly $1 million in campaign contributions to Obama's presidential campaign were the most from any single employer except the University of California. Still, they represented only a fraction of the more than $700 million that the campaign raised.

"The vast majority of the money I got was from small donors all across the country," Obama told CNBC. "Moreover, anybody who gave me money during the course of my campaign knew that I was on record in 2007 and 2008 pushing very strongly that we needed to reform how Wall Street did business."

One White House insider who knows something about how Wall Street does business is chief of staff Emanuel, who earned millions of dollars in investment banking after he left the Clinton White House. His work for the Chicago-based financial services firm Wasserstein Perella & Co. intersected with Goldman in at least one deal.

In 1999, Emanuel was a key player representing Unicom Corp., the parent of Commonwealth Edison, in forging its merger with Peco Energy Co. to create utility giant Exelon Corp. Goldman was also advising Unicom.

The White House declined immediate comment on that connection.

Several former Goldman executives hold senior positions in the Obama administration, including Gary Gensler, the chairman of the Commodity Futures Trading Commission; Mark Patterson, a former Goldman lobbyist who is chief of staff to Treasury Secretary Timothy Geithner; and Robert Hormats, the undersecretary of state for economic, energy and agricultural affairs.

Jacobs of the University of Minnesota said that the administration now risks "kind of a feeding frenzy."

"The administration has to be very careful," he said, "because . . . they're seen as the ones who bailed out Wall Street. If there are indications that the administration was talking to regulators or to Justice Department people about when and how Goldman or other firms would be investigated, I think that's going to create almost a mob scene."


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