Goldman Sachs' Obscene Bonuses
Lloyd Blankfein—show me the money....54 million times
Separately, another councilmember from Brooklyn, Letitia James, said: “These $54 million bonuses are excessive. They greatly exceed the amounts paid to the lowest paid worker. It represents corporate greed at its worst. Compensation should be determined by an independent board. There must be a nexus between the highest paid worker and the lowest paid worker."
By Edward Manfredonia
March 1st, 2007
The Sarbanes-Oxley Act, also known as the Public Company Accounting Reform and Investor Protection Act, was designed to protect the American public from fraudulent accounting practices and insider trading in publicly listed stocks.
Sarbanes-Oxley was signed into law on July 31, 2002- in response to fraudulent accounting practices at ENRON, WorldCom, Adelphia, etc. It has received the name Sarbanes-Oxley after Senator Paul Sarbanes (D, Md.) and Representative Michael Oxley (R, Oh.). Both Senator Sarbanes and Representative Oxley retired in 2006.
The intent of Sarbanes-Oxley was to provide rigorous accounting standards and to ensure that the chief executives of these publicly held companies are held responsible for any violations of Sarbanes-Oxley by requiring that the chief executive officers sign the financial statements of these companies. Sarbanes-Oxley also strengthened civil and criminal penalties for violations of federal securities laws.
The question presented here is: Has Goldman Sachs violated the Sarbanes-Oxley Act by not properly accounting for the disastrous purchase of Spear Leeds and Kellogg?
This questionable accounting began in 2001, when Goldman Sachs began to suffer large losses in its specialist operations which had been acquired by Goldman Sachs when it purchased Spear Leeds and Kellogg on October 31, 2000. At the time of this questionable accounting Henry Paulson, currently Secretary of the Treasury, was Chairman of Goldman Sachs; and John Thain, currently Chairman of the New York Stock Exchange, was President of Goldman Sachs. Currently, both Secretary Paulson of the Treasury, and Chairman Thain of the New York Stock Exchange, are calling for a stripping down of the Sarbanes-Oxley Act. Are Paulson and Thain propounding this weakening of Sarbanes-Oxley to cover up Goldman Sachs’ violation of Sarbanes-Oxley?
Goldman Sachs acquired Spear Leeds and Kellogg against excellent advice, specifically my advice, that Spear Leeds and Kellogg had for many years violated the Securities and Exchange Act of 1934. At the time of the acquisition of Spear Leeds and Kellogg by Goldman Sachs, I had been portrayed as a whistle-blower in the press, most notably in the 26 April 1999 BusinessWeek cover story, Scandal On Wall Street, and in the 9 August 1999 BusinessWeek article, A Street Scandal That May Not Die.
In A Street Scandal That May Not Die, (BusinessWeek, 9 August 1999), William Killeen, Chairman of Oakford Securities, who pleaded guilty to illegal trading at the New York Stock Exchange, stated that several managing directors of Spear Leeds and Kellogg, including Randy Frankel, Robert Luckow, Harvey Silverman, and Gary Goldring, knew of and assisted the illegal trading of Oakford Securities at the NYSE. (An illegal trade occurs when a NYSE floor broker trades for an account. NYSE floor brokers can only execute orders; they cannot trade for an account. Oakford had in excess of 100 NYSE floor brokers illegally trading for illegal brokerage accounts at Spear Leeds and Kellogg).
In October 1999 I was informed by sources at Spear Leeds and Kellogg that Spear Leeds and Kellogg had been forced to postpone its discussed Initial Public Offering (IPO) because of the exposure of violations of federal securities laws by managing directors of Spear Leeds and Kellogg in two 1999 BusinessWeek articles, Scandal On Wall Street and A Street Scandal That May Not Die- for which I had supplied the information.
On 18 October 1999 I wrote a letter to John Thain, who was then President of Goldman Sachs. In this letter I stated: “I wish to state most emphatically that these articles merely scratch the surface and do not present even an outline of criminal activity,” referring to the Business Week articles.
“The involvement of managing directors of Spear Leeds and Kellogg at both the New York Stock Exchange and the American Stock Exchange is central to these three articles.” The, Scandal On Wall Street, had exposed the fact that Pat Schettino, a managing director of Spear Leeds and Kellogg, had illegally traded stocks for the account of Bullseye Securities, including stocks in which Spear Leeds and Kellogg had served as the specialist, at the American Stock Exchange.
Further along in the same letter to Thain, I stated: “Spear Leeds and Kellogg is currently marketing itself as an acquisition candidate. I request that if you are representing Spear Leeds and Kellogg or the acquiring company to please have your legal department and your mergers and acquisitions department speak to me.” I then closed the letter, thus: “I, therefore, request that you pursue due diligence and investigate all allegations of misconduct at Spear Leeds and Kellogg.” Sadly, I was never contacted by Thain or any of Goldman’s legal representatives.
In September 2000 Henry Paulson and John Thain announced that Goldman Sachs would acquire Spear Leeds and Kellogg. In a letter, dated 15 September 2000, which was addressed to Robert Katz, Secretary to the Board of Goldman Sachs, I provided specific instances of criminal activity by Spear Leeds and Kellogg and the involvement of several of the managing directors of Spear Leeds and Kellogg. (A copy of this letter can be found on my website, WallStreetScandals.com, Part II.) On 15 September 2000 copies of this letter were sent to Paulson and Thain at Goldman Sachs.
I also wrote a separate letter dated 15 September 2000, to Goldman’s Paulson, accompanied by a dire warning: “In my letter to Mr. Katz, I delineate some of the massive and endemic criminal activity at Spear Leeds and Kellogg.”
Having received no response from any executive at Goldman Sachs, I then sent a letter, dated 26 October 2000, to the Hon. Lawrence McKenna, who was the presiding judge of a legal action involving price fixing in options by specialist firms, including Spear Leeds and Kellogg, at the American Stock Exchange.
In this letter of 26 October 2000 I demonstrated price fixing in Exchange Traded Funds, including, SPY (which is the exchange traded fund for the S&P 500), an Exchange Traded Fund in which Spear Leeds and Kellogg was the specialist. Price fixing is a violation of federal securities laws- both criminal and civil. Copies of this letter to Judge McKenna were sent to Robert Katz in a letter, which was also dated 26 October 2000.
Goldman Sachs ignored my warnings and purchased Spear Leeds and Kellogg on October 31, 2000 for a sum in excess of $7 billion.
On 26 November 2000 I proceeded to write another letter to Federal District Judge McKenna. In this letter I once again demonstrated price fixing in Exchange Traded Funds (ETF), including the SPY in which ETF Spear Leeds and Kellogg, currently a division of Goldman Sachs, served as the specialist. A copy of this letter to Judge McKenna was once again sent to Robert Katz, Secretary to the Board of Goldman Sachs. Copies of the 26 October 2000 and the 26 November 2000 letters to Judge McKenna can be found on my website, WallStreetScandals.com Part II.
Spear Leeds and Kellogg continued price fixing in the SPY even after the Goldman acquisition. Thus, on 24 January 2001, I once again wrote to Judge McKenna and provided examples of price fixing in the SPY by Spear Leeds and Kellogg specialists.
The hoped for synergy between Goldman Sachs and Spear Leeds and Kellogg never materialized. By late 2002 practically all managing directors of Spear Leeds and Kellogg had been forced to leave Goldman Sachs.
On 12 May 2002 I sent a letter to James Schiro, Chief Executive Officer of Price Waterhouse Coopers, the public accounting firm, which audited the financial statements of Goldman Sachs. In this letter I stated: “Goldman Sachs is covering up a massive write-off of approximately $3 billion due to its purchase of Spear Leeds and Kellogg.” (Goldman should have written off $3 billion for the purchase price because the Spear Leeds and Kellogg specialist units and other divisions were not earning sufficient monies).
After this letter was written Goldman Sachs closed down its specialist operations at the American Stock Exchange, except for the Exchange Traded Funds on the American Stock Exchange, and its specialist unit at the Philadelphia Stock Exchange. No action was ever undertaken by Goldman Sachs. PriceWaterhouseCoopers did not respond to my letter.
On 22 May 2002 I also wrote to Eliot Spitzer, who was then Attorney General for the State of New York –now governor—and an avowed crusader for Wall Street reform, concerning the $3 billion write-off by Goldman Sachs. Spitzer took no action against Goldman Sachs.
Goldman Sachs did keep the Spear Leeds and Kellogg specialist unit for Exchange Traded Funds, including the SPY, and the Hull Specialist Unit for Exchange Traded Funds at the American Stock Exchange.
The value of the Spear Leeds and Kellogg specialist franchise at the New York Stock Exchange has declined dramatically. Robert Luckow, a former chief executive officer of the NYSE specialist unit of Goldman Sachs, has been banned by the NYSE (and has charged pending before the SEC), while another chief executive officer, Todd Christie, resigned from the NYSE. (An earlier version of this report stated incorrectly that he had been banned; he also has a SEC case pending).
To provide an example of the decline of the New York Stock Exchange specialist unit of Goldman Sachs, one has merely to compare the value of the NYSE specialist unit of Goldman Sachs with the stock price of LaBranche Securities from 1999, when Goldman Sachs purchased Spear Leeds and Kellogg, to the present. (LaBranche Securities is the largest specialist unit at the New York Stock Exchange and also has a large stock specialist unit at the American Stock Exchange.
It is a stock against which the value of the Goldman Sachs specialist unit, formerly the specialist unit of Spear Leeds and Kellogg, can be accurately measured.) LaBranche traded as high as approximately $50 and went as low as $6. Currently LaBranche (symbol: LAB) is trading at approximately $9.25. At $9.25 the market value of LaBranche is approximately $525 million. LaBranche is a specialist operation. It has made redundant in excess of 50% of its workforce. LaBranche was forced to suspend its dividend. And when the Securities and Exchange Commission fined LaBranche for illegal trading, LaBranche had extreme difficulty making the payment.
So, the New York Stock Exchange specialist unit of Spear Leeds and Kellogg, is currently valued at $600 million. The price paid by Goldman for the NYSE specialist unit of Spear Leeds and Kellogg included a premium.
Why you may ask did the NYSE specialist unit of Spear Leeds and Kellogg (Goldman Sachs) decline at a greater rate than the NYSE specialist unit of LaBranche? Simple: The illegal trading by SLK specialists caused Goldman to overpay when it purchased Spear Leeds and Kellogg. Goldman Sachs has refused to take a write-off with the knowledge that the Securities and Exchange Commission shall never force Goldman Sachs to acknowledge a $4 billion loss.
Generally Accepted Accounting Principles, which are followed by all businesses that file tax returns, generally require that a loss be shown on the purchase of a business if that loss exceeds 10% of net income. Thus, Goldman Sachs would have required a net income of $40 billion for Goldman not to be required to show its loss from the purchase of Spear Leeds and Kellogg as a separate item in Goldman’s financial statements. And it is important to note that a loss exceeding 10% of net income must be shown as a separate item in the financial statements.
Let us examine the rationale behind Goldman’s refusal to take a write off. A write off of $4 billion would first have to be deducted from the Balance Sheet of Goldman Sachs. Then an accounting entry must be made so that this $4 billion would be deducted from the Income Statement. A deduction of $4 billion from the Income Statement would mean that Goldman Sachs would earn $4 billion less. Net Income would be reduced by $4 billion. The stock price of Goldman Sachs would decline.
Thus, the bonuses of the management of Goldman Sachs would be greatly reduced. And questions would be raised concerning the purchase of Spear Leeds and Kellogg- with the real possibility of a shareholders lawsuit against the Goldman Sachs executives, such as Thain; Paulson, etc., and perhaps the Goldman’s several law firms, and the accounting firm of PriceWaterhouseCoopers. (Sullivan & Cromwell received copies of my correspondence to Goldman, including my 15 September 2000 letter to Robert Katz). Perhaps Goldman believed taking a write-off would have been the ultimate embarrassment to Goldman Sachs and destroyed the reputation of Goldman Sachs- as well as the earnings of senior executives.
Most importantly Lloyd Blankfein the new Chairman who replaced Paulson, and Goldman current co-presidents Gary Cohn and Jon Winkelried, might not have received their bonus of $54 million this year. On 13 November 2006 I wrote to Blankfein, Gregory Palm, and Esta Estecher concerning the refusal of Goldman Sachs to take the write off as a result of the rapid decline of the Spear Leeds assets. I also wrote to Samuel DiPiazza, Chief Executive Officer of PriceWaterhouseCoopers, and stated that Goldman Sachs must take a write- off. No one has responded to my letters.
Goldman Sachs did not respond to a phone call and a written request seeking comments or reaction. A spokesperson said the individual who could comment was traveling.
Some New York City politicians are outraged by these stupendous bonus payments at Goldman. “In a town where there is 42% poverty in the South Bronx, 30 % poverty in Harlem, 29% in Central Brooklyn; in a town where you still have homelessness and you have thousands of hungry children; for these greedy and profiteering businessmen to give themselves these kinds of unimaginable and unearned bonuses is a sin before God,” said New York City Councilman Charles Barron.
Rev. Herbert Daughtry, pastor of The House of Lords church in Brooklyn, who often works on campaigns with Barron declared that the payments “borders on criminality in light of the pervasive poverty in New York City.”
Separately, another councilmember from Brooklyn, Letitia James, said: “These $54 million bonuses are excessive. They greatly exceed the amounts paid to the lowest paid worker. It represents corporate greed at its worst. Compensation should be determined by an independent board. There must be a nexus between the highest paid worker and the lowest paid worker."
Henry Paulson and John Thain are vociferously advocating a stripping down of the standards of Sarbanes-Oxley. As John Thain stated on 17 November 2006 in a Wall Street Journal interview: “We need to move back from the attitude of which policeman can write the biggest ticket to a more of a let’s fix the problem and if there are individuals who break the law, let’s put them in jail.”
This is a prescient statement because criminal penalties are provided for those executive officers, who violate the provisions of the Sarbanes-Oxley Act. Where are the Chairman and Commissioners of the Securities and Exchange Commission and the United States Attorney for the Southern District of the State of New York of the Department of Justice?
Manfredonia is a former American Stock Exchange Market Maker, turned whistle-blower. He possesses both a BA and an MBA from Fordham University and an Advanced Professional Certificate in Finance from Baruch.
Goldman And Other Untouchables
Wall Street's other side
It’s as if Goldman Sachs were the Lindsay Lohan of the financial world. If you are white, rich and sexy, you are above the law.
By Edward Manfredonia
September 19th, 2007
[Wall Street Report]
At the height of the sub-prime collapse in August, Maria Bartiromo, a CNBC analyst, remarked: “Look at the price of Goldman Sachs. Do you think the government is going to let Goldman go out of business?” Goldman was trading at about $174.
True, while the United States will never allow a company like Goldman Sachs to go under; yet it did nothing when Daniels and Bell and other minority firms went out of business.
On January 30, 1995, the Milwaukee Sentinel reported that a federal grand jury was investigating Wisconsin State Senator Gary R. George, who is African-American. It is a matter of law that the subject of a grand jury is not to be named. The Milwaukee Sentinel also reported that two minority firms, W R Lazard and M R Beal & Co, were the subject of a grand jury investigation. Again, as noted, grand jury proceedings are supposedly secret.
Such disparate treatment of minority individuals and firms are commonplace. Have you ever read of a grand jury investigating Goldman Sachs?
The Securities Exchange Act of 1934 (SEA) was passed to curb the abuses on Wall Street. The SEA overhauled the entire gamut of securities laws- and in Section 32 set forth criminal penalties for violation of the Securities and Exchange Act of 1934.
Section 32 of the Securities and Exchange Act of 1934, provides that any person who willfully violates any provision of the Securities and Exchange Act of 1934 is punishable by a fine of not more than $10,000 and imprisonment of not more than two years for each violation of the Securities Exchange Act of 1934.
Let’s examine repeated violations of the Securities Exchange Act of 1934 by Goldman Sachs and Spear Leeds and Kellogg. And then we shall ask ourselves why there has been no investigation by the FBI.
Let’s start with the matter of illegal sale of short stock. Selling stock short means that you have sold stock which you do not own. This stock must be borrowed from your broker. Short stock is a liability on the balance sheet and eventually must be purchased.
Selling stock on a minus tick is defined as selling stock at a price that is lower than the last different price. Thus if a stock sells at $20 and then sells at $19, then that’s “selling stock on a minus tick.” If the stock sells at $19 again, that is defined as selling stock on a minus tick.
Selling stock short on a minus tick is simply selling stock, which an investor does not own, at a price lower than the last sale or the previous last sale. This was forbidden by the Securities Exchange Act of 1934, Section 10 and its subsections.
Sol Mandel was a small player; in 1966 Mandel was indicted and convicted for illegally selling 400 shares of Georgia Pacific stock short on a minus tick- a violation of Section 10(a)(2) of the Securities and Exchange Act (SEA). (United States of America v. Sol Mandel, 296 F.Supp. 1038)
Philip Peltz was indicted and convicted on several charges, including selling 700 shares of Georgia-Pacific stock short on a minus tick- a violation of Section 10-1(a)(2) of the SEA. (United States of America v. Philip Peltz, 433 F2d 48).
So we now see how small players have been treated for financial transgressions. Let’s now examine instances involving members of a stock exchange, who illegally sell stock short on a minus tick.
On March 19, 2003 the American Stock Exchange disciplined Peter Donohue, the Spear Leeds and Kellogg partner in charge of its American Stock Exchange specialist unit; Fabian Caceres, an AMEX specialist; and, Spear Leeds and Kellogg for selling stock short on a minus tick.
(Attempts to contact Donohue for this article were not successful. Caceres did not respond to a message relayed through a company spokesperson seeking comment. Goldman spokespersons did not return calls seeking comment.)
Two other specialists, who had sold stock short on a minus tick, were not even named, but were referred to as Specialist B and Specialist C.
This was not the first time that Spear Leeds and Kellogg had been disciplined at the American Stock Exchange for selling stock short on a minus tick. The decision read: “In 1997, SLK had been issued a summary disciplinary notice for repeated violations of the Short Sale Rule, and was fined $2,500 under the Exchange’s Minor Rule Violation Fine System, pursuant to Exchange Rule 590.”
There were other numerous violations of federal securities laws by Caceres and Donohue. What punishment did Donohue and Caceres receive for these and numerous other violations of federal securities laws?
Donohue was fined a mere $50,000, but was $10 million richer- which sum Donohue received for his partnership interest in SLK.
Fabian Caceres was fined $20,000. Yet, Caceres was promoted from specialist at the American Stock Exchange to specialist at the New York Stock Exchange for Kellogg Specialists LLC subsequently; Kellogg must have known about his transgression since the decision was published by the American Stock Exchange.
Caceres was so successful, notwithstanding his criminal violations of federal securities laws, that his wedding at the St. Regis Hotel rooftop ballroom was wedding of the week in the March 31, 2007 edition of the New York Post- a wedding, whose estimated cost was $500,000.
Spear Leeds and Kellogg, at the time of these infractions a subsidiary of Goldman Sachs, was fined $285,000.
On December 21, 2006 the New York Stock Exchange in a Disciplinary Action 06-224, fined Spear Leeds and Kellogg Specialists LLC (at that time a subsidiary of Goldman Sachs) $600,000 because among other violations:
“Spear Leeds and Kellogg Specialists violated Section 10(a) of Exchange Act and Rule 10-1(a) by executing short sale on minus or zero minus ticks.”
In a New York Stock Exchange Disciplinary Action, 07-33, dated March 13, 2007, the NYSE fined Goldman Sachs Execution & Clearing, formerly known as Spear Leeds & Kellogg L.P., $2,000,000 because Goldman Sachs had permitted its clearing customers to sell stock short on a minus tick in violation of Section 10(a) of the Securities Exchange Act of 1934 and Rule 10a-1(d).
Philip Peltz and Sol G. Mandel were indicted and convicted of selling stock short on a minus tick. No employee of Goldman Sachs was indicted for selling stock short on a minus tick.
It’s as if Goldman Sachs and other big players were the Lindsay Lohan of the financial world. If you are white, rich and sexy, you are above the law.
Manfredonia who worked on Wall Street for several years; he writes on economic and financial matters for The Black Star
Goldman's CMO Liabilities
No Bull! Goldman must be liable for CMOs, writer says
Goldman dumped its worthless CMOs, which Goldman held in its inventory, unto its customers, just as Goldman dumped the Commercial Paper of Penn Central before Penn Central defaulted.
By Edward Manfredonia
February 5th, 2008
[Wall Street: Finance]
In previous columns, I documented the fraudulent practices of major investment banks in the subprime mortgage collapse.
On August 22, 2007, The Black Star News article, “USA: Billionaires Welfare State,” exposed the fraudulent tactics of investment banks and their marketing of CDOs (Collateralized Debt Obligations) and the method by which unscrupulous investment firms cheated unsophisticated home buyers.
My Black Star News columns also showed how the Federal Reserve was intent on bailing out the Wall Street firms, which were responsible for the subprime collapse, by lowering the Fed Funds Rate, the rate at which the Federal Reserve lends money overnight.
On January 4, 2008 I published an online article, “Goldman’s Toxic CMOs” (Collateralized Mortgage Obligations), exposing the fraudulent manner in which Goldman Sachs not only sold its toxic CMOs, but the manner in which Goldman Sachs traded against these CMOs, which Goldman had sold to its customers.
On January 11, 2008, I wrote letters, calling for an investigation into Goldman Sachs’ sales of worthless CMOs to the company’s customers, and sent copies to Christopher Cox, Chairman of the Securities and Exchange Commission; to Anne Nazareth, Paul Atkins and Kathleen Casey, Commissioners of the SEC; to Michael Mukasey, Attorney General of the United States; and to Michael Garcia, United States Attorney for the Southern District of the State of New York. I concluded these letters with this paragraph:
“In the 1970’s Goldman Sachs signed a consent decree with the Securities and Exchange Commission concerning Goldman’s dumping of Penn Central commercial paper unto Goldman’s unknowing customers. Goldman’s dumping of toxic CMOs merits an SEC investigation and enforcement action. Goldman Sachs is responsible for the losses on the CMOs that Goldman Sachs dumped on its unwary customers.”
On January 11, 2008, I also wrote to Andrew Cuomo, Attorney General of the State of New York. In this letter I also called for an investigation of Goldman Sachs’s dumping of CMOs. I also referred to the SEC Enforcement Action and to other lawsuits, which were pursued against Goldman Sachs.
On January 29, 2008 Goldman Sachs stated in its annual report that regulators had subpoenaed Goldman Sachs for information related to sub prime mortgages and other residential mortgages (CMOs).
Today’s article is an explication of Goldman’s liability.
Not one media outlet has joined The Black Star News in commenting upon the liability of Goldman Sachs for peddling its toxic waste Collateralized Mortgage Obligations (CMOs). My column argues that Goldman is liable for the tens of billions of dollars of CMOs that Goldman dumped upon its customers. Moreover, there exists precedence for this liability- and it involves Goldman Sachs itself.
In 1970 Goldman Sachs was peddling the Commercial Paper of a company called Penn Central Transportation Company to its customers. Commercial Paper is a money market security issued by a bank or company with a maturity that cannot exceed 270 days. The Commercial Paper of Penn Central was rated “Prime,” by the National Credit Office (NCO), a wholly owned subsidiary of Dun & Bradstreet.
On February 5, 1970 Goldman Sachs learned that Brown Brothers, Harriman & Co. had removed Penn Central from its approved list of Commercial Paper- thus, lowering Brown Brothers’ credit rating of Penn Central Commercial Paper.
On February 6, 1970 Goldman Sachs informed Penn Central that it would only hold $5 million of the Commercial Paper of Penn Central in its inventory- and would reduce its inventory of the Commercial Paper of Penn Central from $15 million to $5 million.
On February 9, 1970 Penn Central repurchased $10 million of its Commercial Paper from Goldman Sachs. Yet, Goldman continued to inform its clients that Penn Central Commercial Paper was rated “Prime,” and continued to sell the Commercial Paper to its customers- stressing that the Commercial Paper of Penn Central was rated “Prime.”
On June 21, 1970 Penn Central with $7 billion in assets filed for Bankruptcy, which at that time was the largest bankruptcy ever.
The CMO crisis began to unfold in 2007. Did Goldman learn any lessons from the Penn Central disaster?
On December 14, 2006 David Viniar, Chief Financial Officer of Goldman Sachs, chaired a meeting of senior members of the trading desk, the risk department, the controller’s office and other senior employees of Goldman Sachs, according to a media report. Lloyd Blankfein, Chairman of Goldman Sachs; Jon Winkelried, Co-President of Goldman Sachs; and Gary Cohn, Co-President of Goldman Sachs, were informed of the proceedings of the meeting, the article reported.
Goldman Sachs determined that it was losing money on its positions in CMOs. It was decided that Goldman Sachs should reduce its inventory of CMOs by selling these CMOs to Goldman’s customers. Goldman Sachs has acknowledged to the press that Goldman had reduced the CMOs in its inventory to $400 million and had reduced the CDOs in its inventory to $1.2 billion. Goldman has refused to provide the dollar value of CMOs and CDOs, which beginning in the fourth quarter of 2006 the company had sold to its customers.
Recall that decades earlier during the Penn Central case, Goldman decided to reduce its inventory of Penn Central Commercial Paper and Penn Central repurchased its Commercial Paper from Goldman. Goldman continued to sell Penn Central Commercial Paper to its customers- but it did not dump the $5 million of Penn Central Commercial Paper, which it held in its inventory upon its customers.
In 2006 and 2007 Goldman was peddling CMOs with an AAA rating by Dun & Bradstreet among others- to Goldman’s customers. Note: Commercial Paper with a rating of “Prime” is comparable to CMOs with a rating of AAA, which is the highest rating that can be given.
But in 2006 and 2007 Goldman held billions of dollars of CMOs, which Goldman knew to be substandard and worthless, and Goldman dumped these CMOs upon its customers. To reduce its inventory of toxic CMOs, Goldman sold billions of dollars of valueless CMOs, which Goldman held in its proprietary account, to its customers. Goldman increased its profits at the expense of its customers.
Goldman then purchased credit-default swaps, which would become profitable only if the CMOs that Goldman had sold to its customers had drastically declined in value.
To understand the point, consider how the Penn Central Case was resolved.
In the Spring of 1970 Goldman Sachs sold $87 million of Commercial Paper of the Penn Central Transportation Company, including $600,000 of Penn Central Commercial Paper to the University Hill Foundation, insisting the rating was “Prime.” In June 1970 Penn Central filed for bankruptcy and the University Hill Foundation lost its investment.
The University Hill Foundation sued Goldman Sachs because Goldman knew of the deteriorating condition of Penn Central and because Goldman itself had reduced its holdings of Penn Central Commercial Paper.
In University Hill Foundation, Plaintiff, v. Goldman Sachs, Defendant, 422 F.Supp. 879, 34, 35, October 27, 1976) the Court held: “We find that Goldman Sachs impliedly represented that in its opinion, Penn Central was creditworthy. It represented that there was a reasonable basis for this opinion, i.e., that a reasonable credit investigation had been conducted. We further find that, in the circumstances of this transaction, Goldman Sachs represented the paper to be rated “Prime” by NCO.”
The court also said: “The materiality of the false representation that a reasonable credit investigation had been conducted… is apparent from the reliance so many investors placed on the identity of the dealer of a particular issue.”
Moreover, the court found: “For the reasons set above, the Foundation is entitled to rescind the purchase and recover the consideration for the notes plus interest from the date of the sale.”
Fast forward to the current situation involving CMOs, where Goldman Sachs did far worse than the Penn Central Case:
Goldman represented that the CMOs, which Goldman Sachs was peddling to its customers were rated AAA, the highest rating. Goldman Sachs knowingly sold toxic CMOs, which Goldman held in its proprietary account and which Goldman knew were not of investment grade quality, to Goldman’s customers.
Then Goldman, after assuring the market and its customers that the CMOs were of the highest investment grade, purchased billions of dollars of credit-default swaps that would have become valuable only if the market value of the CMOs, which Goldman was selling to its public customers collapsed.
Goldman had even endangered its own capital base, the amount of money that is required for Goldman to continue as a major investment firm and to cover its liabilities, because Goldman had risked so much of its own money by purchasing such enormous amounts of these credit-default swaps.
Goldman Sachs sold these CMOs in bad faith and with misrepresentation and the purchasers of these CMOs are entitled to receive the purchase price plus interest that has been foregone- as was the case when Goldman knowingly sold the “Prime” rated Commercial Paper of Penn Central, which Goldman knew was not of investment grade quality, to its customers.
In 1970 approximately 60 lawsuits were initiated against Goldman Sachs for its role in selling $87 million of Penn Central Commercial Paper. The damages sought were approximately $87 million- the value of the Penn Central Commercial Paper that Goldman Sachs had sold. Goldman’s capital was slightly greater than $50 million. Goldman lost several lawsuits and then quickly settled the other lawsuits. Goldman Sachs almost went out of business.
The Securities and Exchange Commission filed a Complaint against Goldman Sachs. On May 2, 1974 Goldman signed a consent decree (formally called a Stipulation of Settlement, No. 74-1916) with the Securities and Exchange Commission in which decree Goldman Sachs neither admitted nor denied guilt. “Goldman Sachs will conduct such investigation as may be required under the circumstances to give Goldman Sachs reasonable ground to believe that such issuer will have the ability to pay such commercial paper as it matures,” the decree stated.
Extrapolate this consent decree to the CMOs debacle. It is obvious that once Goldman Sachs discovered that the CMOs were grossly overvalued, Goldman continued to dump these CMOs unto its costumers and even took out credit-default swaps that would earn Goldman billions when the CMOs collapsed.
Goldman dumped its worthless CMOs, which Goldman held in its inventory, unto its customers, just as Goldman dumped the Commercial Paper of Penn Central before Penn Central defaulted.
When contacted by The Black Star News for a response regarding Goldman’s liabilities to customers with respect to the CMOs, the Office of the United States Attorney of the Southern District of New York stated: “It is the policy of the United States Attorney neither to confirm or deny the existence of an investigation.”
Likewise, a spokesperson for the Securities and Exchange Commission said:“The SEC cannot confirm or deny the existence or nonexistence of any kind of investigative activity.”
Goldman Sachs did not return a call seeking comments.
On January 29, 2008 the Federal Bureau of Investigation (FBI) disclosed that it, in cooperation with the Securities and Exchange Commission, had initiated investigations into 14 firms for sub prime mortgage fraud and insider trading.
Financial writer Manfredonia worked for years on The Street
