The first Goldman Sachs panel to line up before Senator Carl Levin’s subcommittee on April 27 consisted of Daniel Sparks, Joshua Birnbaum, Michael Swenson and Fabrice Tourre. Mr. Sparks headed the Mortgage Department and supervised the other three who worked in the Structured Product Group at the time the SEC has alleged the securities fraud occurred.Please find the entire article here. Ms. Martens worked on Wall Street for 21 years.
To hear these four tell it, their jobs included trading for Goldman’s benefit (proprietary trading), originating investment products, selling the products to customers once they were created (distribution), and, in Mr. Tourre’s case, even speaking with the rating agency that would transform these subprime bets into AAA derivatives. And how did they sum up all of this as a job description? They testified, under oath I might add, that they were “market-makers.” In a sane world, a market maker is an entity that matches buyers with sellers and profits from capturing a portion of the spread (bid and ask) on the buy and sell price of securities.
To a lay jury, this might fly as legitimate conduct; something akin to a short order cook who shops for the groceries, whips up the omelets, throws a little parsley garnish on the plates, serves the diners, and tallies up his P&L at the end of the day. If he overbought on ground beef, he might have to have three days of specials like Shepherd’s Pie, Hungarian Goulash, and Spaghetti with Meat Sauce to “flatten” his position and “get closer to home.” Nothing criminal going on here; just good ole American know-how and innovative workouts.
The major problem with this analogy, and most others in defense of Goldman, is that the short order cook wasn’t trying to pass off E. coli beef for prime rib. Another problem for Goldman is that embedded in the heart of every securities law is the principle that the customer must be treated honestly and fairly and any mechanism or device to deceive, manipulate or defraud is patently illegal. Remember, securities laws grew out of the ingrained Wall Street corruption exposed in two years of Senate hearings in 1932 and 1933.
It is difficult to see how one can be engaging in proprietary trading for the benefit of the firm at one moment, acting in an agent capacity for the benefit of the customer the next moment, and creating investment products designed to fail on a latte break. Sparks, Birnbaum and Swenson all had principal licenses to engage in investment banking activities like underwriting as well as the Series 7 license to trade securities. Mr. Tourre had only the Series 7 and Series 63 licenses to trade securities. He had no principal license according to his regulatory file available online. That could be a big legal issue for Goldman as a firm, for Mr. Sparks who supervised him, and for the controlled-demolition investment product he assisted in creating without a principal license. Failure to supervise is one of the first areas security lawyers review in assessing a firm’s liability.
Tuesday, May 11, 2010
Being Goldman Sachs
In her article "Why a Criminal Case Against Goldman Sachs Matters and Why Charges Could Stick" Pam Martens makes her case clearly. Here is a large portion of the article: