Goldman Sachs’ Unforgivable Sin?

Goldman Sachs was the one big name that came out in relatively good shape as the financial crisis unfolded in late 2008. They didn’t have to take government money to weather the storm. They were in a good enough position to get it from private sources instead. Like Warren Buffett. So it looked like Goldman came out in relatively better shape through this carnage. Until now.

US regulators filed fraud charges against Goldman a couple of days back. But what’s new? Hasn’t Goldman been charged in the past? And come out unscathed? Don’t they have friends in the highest places? Former Goldman employees include former US Treasury Secretary, Henry Paulson and Governor of the Bank of Italy, Mario Draghi. Isn’t Goldman Sachs referred to as ‘Government Sachs’ because of its connections within the US government?

This time it could be different. In the past, the people who suffered due to Goldman’s actions were the general public or other players on Wall Street. As Bloomberg said, that’s something that Goldman’s shareholders and clients could live with, if not approve of! They made money; who cared if someone else got ripped off? This time though, it looks like Goldman ripped off several of its own clients.

Long story short, Goldman created a financial instrument called Abacus 2007-AC1. Created at the behest of a fund run by John Paulson, it consisted of risky assets that Paulson felt were over-rated. Paulson had a big say in picking which risky assets would be a part of Abacus 2007-AC1. Nothing illegal so far. After all, Paulson had every right to identify what he didn’t like and bet against it. What Goldman did next is what this lawsuit is all about. They sold this handpicked set of risky assets to their clients. Made it sound like it was a good investment. Never told their buyers that it was an instrument consisting solely of risky assets picked by another Goldman client (Paulson). In other words, Goldman was selling it both ways: as a “going down” instrument to Paulson and as a “going up” instrument to other clients like ABN Amro.

Now that could do huge long-term damage. Many of Goldman’s clients will wonder whether Goldman has or will set them up to lose money too. Goldman’s business could suffer if clients no longer trust them. Much of Wall Street’s business is based on trust. You lose that, you lose everything.

Goldman has possibly committed the one unforgivable sin of Wall Street: ripping off its own clients. And that could lead to its downfall. Even if it comes out unscathed from the lawsuit. Time will tell!

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