Sunday, April 25, 2010

SEC's lawsuit against Goldman Sachs : What you need to know to understand subprime crisis and his effects (Updated 28 Apr)

Press of today dedicate a few pages to Goldman's lawsuit case everyday. But, we know what's happening?

Today post is a bit different of other day's entries. We're going to explain what's Goldman Sanchs Inc and what's going on.

What's Goldman Sachs?

Goldman Sachs Group Inc, is a business based in global investment banking and securities firm. They cover from investment banking to investment management, residential mortgage market, securities services and more financial services.

Founded in 1869, with his 'headquarters' at 200 West Street, in Lower Manhattan, NYC, provides advice in mergers and acquisitions, assets, etc and is the primary dealer in the United States Treasury security Market, and former employees served as United States Secretary of the Treasury

What's going on?

In 2010 Goldman Sachs was accused of the 2010 European sovereign deb crisis because between 1998-2009 helped the Greek government to hide their national true debt facts. In September 2009, Goldman and others created a special Credit Default Swap (CDS) index for the cover of high risk national debt of Greece, leading Greek interest-rates national bonds to a high level, sinking Greek economy to an almost bankruptcy in March 2010, when Greek government asked for an international aid, in form of a package of €45 bn. Also, SEC suit them at 16 April, 2010

What happened, step by step?

April 16:

On April 16, 2010, SEC alleged that Goldman misstated and omitted facts in disclosure documents for a synthetic CDO [A Financial security used to speculate and manage the risk that an obligation will not be paid] called Abacus 2007-AC1, where Goldman was paid approximately US$ 5 million for it's work. Securities and Exchange Commission (SEC) sued Goldman Sachs and one of it's employees, Fabrice Tourre because this . SEC based his allegation in that Goldman misrepresented that a third party, ACA, reviewed the mortgage package underlying the credit default obligations an Goldman failed to disclose to ACA that a hedge fund, Paulson & Co, that sought to short the package, had helped select underlying mortgages for the package against which it planned to bet. "Tourre also misled ACA into believing that Paulson invested $200 million in the equity of ABACUS 2007-ACI (Click here to view Abacus 2007-ACI structure) and that Paulson's interests in the collateral section preocess were aligned with ACA's when Paulson true interests were sharply conflicting", said SEC. Goldman, on the other hand, stated that the firm never represented to ACA that Paulson was to be a log investor, and that as normal business practice, market makers do not disclose the identities of a buyer to a seller and vice versa

Apparently, Paulson made a $1 billion profit from the short investments, while purchasers lost the same amount, specially their main investors, ABN Amro who lost $840,909,090 and IKB Deutsche Industriebank, $150,000,000 within months of the purchase.

After SEC announced the suit on April 16, 2010, Goldman's stock fell 13% on volume of over 102,000,000 shares, $10 billion in market value during the day session.

"The SEC’s charges are completely unfounded in law and fact and we will vigorously contest them and defend the firm and its reputation" responded Goldman at their Website

April 19:

Goldman issued a statement in a public meeting in response to the suit. This divided the opinion between some who called these statements misleading and not true, while others believe that either Goldman has a strong defense or that SEC has a weak case. You can read the comment at this PDF

April 20:

First rumours about SEC second intentions spread about political motivations. While, Goldman Sachs earnings double to $3.5 bn.

April 21:

Obama denies his influence in Goldman Case and SEC's Schapiro rejected GOP claims that Democrat's agenda spurred Goldman case

April 22:

Blackstone chief defends Goldman ethics

April 23:

Disgruntled bondholders round on Goldman

April 25:

Goldman emails reveal plans to capitalise on subprime crisis , said France 24, and Business Insider offer us The juiciest Goldman Email details.

April 26:

Goldman Sachs: Trust is key to survival, says chief.The chief executive of Goldman Sachs is to tell a US Senate hearing that the firm did not mislead clients and could not survive without their trust.

A shareholder filed a lawsuit against Goldman Sachs. It's the third known case of a shareholder suing the company .

Abril 27:

First US Senate hearing. Fabrice Tourre, the big loser

April 28:

The head of the Securities and Exchange Commission said Wednesday there was no connection between the timing of the agency's fraud charges against Goldman Sachs and efforts in the Senate to speed passage of sweeping legislation overhauling financial regulation.

We'll keep this posts alive, updating it daily while, of course, keep you informed of other news. If you missed something, comment us and your question will be solved as soon we can.

Related Articles:

Special: Goldman Sachs crisis Share

Economy Lesson: How the Price System Works, by Henry Hazlitt

The whole argument of this book may be summed up in the statement that in studying the effects of any given economic proposal we must trace not merely the immediate results but the results in the long run, not merely the primary consequences but the secondary consequences, and not merely the effects on some special group but the effects on everyone. It follows that it is foolish and misleading to concentrate our attention merely on some special point—to examine, for example, merely what happens in one industry without considering what happens in all. But it is precisely from the persistent and lazy habit of thinking only of some particular industry or process in isolation that the major fallacies of economics stem. These fallacies pervade not merely the arguments of the hired spokesmen of special interests, but the arguments even of some economists who pass as profound.

It is on the fallacy of isolation, at bottom, that the “production-for-use-and-not-for-profit” school is based, with its attack on the allegedly vicious “price system.” The problem of production, say the adherents of this school, is solved. (This resounding error, as we shall see, is also the starting point of most currency cranks and share-the-wealth charlatans.) The scientists, the efficiency experts, the engineers, the technicians, have solved it. They could turn out almost anything you cared to mention in huge and practically unlimited amounts. But, alas, the world is not ruled by the engineers, thinking only of production, but by the businessmen, thinking only of profit. The businessmen give their orders to the engineers, instead of vice versa. These businessmen will turn out any object as long as there is a profit in doing so, but the moment there is no longer a profit in making that article, the wicked businessmen will stop making it, though many people’s wants are unsatisfied, and the world is crying for more goods.

There are so many fallacies in this view that they cannot all be disentangled at once. But the central error, as we have hinted, comes from looking at only one industry, or even at several industries in turn, as if each of them existed in isolation. Each of them in fact exists in relation to all the others, and every important decision made in it is affected by and affects the decisions made in all the others.

We can understand this better if we understand the basic problem that business collectively has to solve. To simplify this as much as possible, let us consider the problem that confronts a Robinson Crusoe on his desert island. His wants at first seem endless. He is soaked with rain; he shivers from cold; he suffers from hunger and thirst. He needs everything: drinking water, food, a roof over his head, protection from animals, a fire, a soft place to lie down. It is impossible for him to satisfy all these needs at once; he has not the time, energy or resources. He must attend immediately to the most pressing need. He suffers most, say, from thirst. He hollows out a place in the sand to collect rain water, or builds some crude receptacle. When he has provided for only a small water supply, however, he must turn to finding food before he tries to improve this. He can try to fish; but to do this he needs either a hook and line, or a net, and he must set to work on these. But everything he does delays or prevents him from doing something else only a little less urgent. He is faced constantly by the problem of alternative applications of his time and labor.

A Swiss Family Robinson, perhaps, finds this problem a little easier to solve. It has more mouths to feed, but it also has more hands to work for them. It can practice division and specialization of labor. The father hunts; the mother prepares the food; the children collect firewood. But even the family cannot afford to have one member of it doing endlessly the same thing, regardless of the relative urgency of the common need he supplies and the urgency of other needs still unfilled. When the children have gathered a certain pile of firewood, they cannot be used simply to increase the pile. It is soon time for one of them to be sent, say, for more water. The family too has the constant problem of choosing among alternative applications of labor, and, if it is lucky enough to have acquired guns, fishing tackle, a boat, axes, saws and so on, of choosing among alternative applications of labor and capital. It would be considered unspeakably silly for the wood-gathering member of the family to complain that they could gather more firewood if his brother helped him all day, instead of getting the fish that were needed for the family dinner. It is recognized clearly in the case of an isolated individual or family that one occupation can expand only at the expense of all other occupations.

Elementary illustrations like this are sometimes ridiculed as “Crusoe economics.” Unfortunately, they are ridiculed most by those who most need them, who fail to understand the particular principle illustrated even in this simple form, or who lose track of that principle completely when they come to examine the bewildering complications of a great modern economic society.