Gunning for Goldman

The announcement that ihe world's leading investment bank,
Goldman Sachs, had been charged in a US civil suit with a
securities fraud that caused SI bn in investor losses hit Wall Street
like a bombshell last week, said Patrick Jenkins in the II. At a
stroke, $!2bn was wiped off the bank's market value. Inside
Goldman's building in Manhattan, the vast trading floors fell intc
eerie silence. "I'm not sure I can talk,** said one shell-shocked
hanker. The accusation, said Dean Itaker in The Guardian, is thai
Goldman created a form of debt involving ultra-risky "sub-
prime" mortgages, then "found suckers to buy this huge piece of
junk". Allegedly, it created this so-called CDO (collatcriscd debt
obligation) in league with hedge fund manager John Paulson,
who selected the precarious mortgage-Kicked securities to go int<
the CDO and then made nearly $ 1 bn by betting they'd go belly
up, as they duly did. In short, Goldman was helping a favoured

client make huge tx'ts against the same dodgy CDOs it was selling to other clients.

Alas, this case is no longer about Goldman Sachs, said Jeremy Warner in The Daily Telegraph. The
bank is being made a scapegoat for the failings of bankers as a whole, and like a small-town
American posse, the public has already found it guilt)*, and won't be happy until "the men of Wall
Street are strung up from the nearest tree". The very timing of the announcement to prosecute looks
nakedly political: as Goldman executives point out, the probe into this CDO started two years ago,
yet only now, with mid-term elections pending and President Obama poised to introduce reform of
the financial system, has the SEC (the US regulator} made its move. Add to that Gordon Brown's
unseemly call for an investigation into the bank he once counted as his close City confidant, and you
get a real sense of "lynch-mob rule". It's a storm in a teacup, said The Wall Street Journal. Goldman
was just doing what investment banks are supposed to do: being the middleman between those (ie
Paulson) who bet that mortgages were on the verge of collapse - easy to predict in hindsight, but not
at the time - and those (ie the banks that bought the CDO) who still thought they were good
investments. Both sides involved were highly sophisticated operators who knew the risks. "Far from
being the smoking gun of the financial crisis, this case looks more like a water pistol."
But even if Goldman itself is exonerated, said Robert Peston on BBC News Online, the case is an
indictment of the system as a whole. Paulson was not alone. Hedge funds would routinely spur
investment banks into creating subprime-linked CDOs to sell on to other banks, then speculate on
these CDOs flopping. Such activity not only inflated America's housing bubble, it left the banks and
insurers on the other side of the hedge funds' bets (in the Paulson case. Royal Bank of Scotland) to
pick up the tab. "Those losses were a major contributor to the meltdown of the banking system that
led to a global recession and the biggest taxpayer bailout of banks that the world has ever seen."