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Goldman case raises important questions

Now for a few words about Goldman Sachs and the Securities and Exchange Commission complaint. The SEC accuses the firm and one of its young guns of fraud for constructing a synthetic housing-market bond that was sure to fail, selling it to a valued customer who specifically didn't want that type of bond, conspiring with a short seller of bonds to create a vehicle for his firm to make money off the security, and tricking a rating firm into approving it.

If these allegations are true, and maybe they aren't, this is simply the worst behavior in finance by a large firm I have ever seen.

I taught securities law for six years. I wrote about financial fraud for Barron's and the New York Times for many years. I have never seen such a blatant disregard for ethics, and possibly the law, by a large Wall Street firm as is alleged in this case.

The story of how this "Abacus" deal happened raises some desperately important questions:

* Why didn't the SEC accuse the short seller, John Paulson, of wrongdoing as well? Is he a government witness? Is a disgruntled former Paulson aide a government witness? How many other deals allowed Paulson to pick and manage the contents of the bonds he shorted? If there was one, it is a little hard to believe there was only one.

* If there were other similar deals, how much did their flimsy construction and Paulson's ability to short them with credit default swaps spook the market and create the panic that led to the Wall Street meltdown of 2007 and 2008? How much did Paulson's and Goldman's alleged mischief contribute to the current recession? How much did crafty Goldman behavior contribute to the demise of Lehman Brothers?

* The complaint alleges that Goldman's management was kept apprised of what Fabrice Tourre was doing and approved of it. If this is so, why aren't these managers named in the SEC's complaint?

* Many have expressed amazement about Goldman's ability to post record profits during the current hard times. Are the price-fixing and game-rigging described in the SEC's complaint ways that Goldman Sachs rings up its huge "trading" profits? Drexel made stupendous profits by controlling the buyers and sellers of its bonds. Was Goldman doing something similar?

* Much is made in the firm's annual reports of "the Goldman Sachs culture" of duty to the client. Now we have a good idea of what that culture may have been in some cases. What, if any, training in ethics is done at Goldman Sachs to ensure that following the law and serving clients come before the firm's own profits?

* If Goldman can make money by creating a scam synthetic security, as the SEC's complaint alleges, and then make more money by cooperating with short sellers to demolish that security and consequently attack the industry around it — in this case, housing — is there anything Goldman can't do? Is there no limit to how anti-social and unpatriotic traders and underwriters can be? Or is it all about making the quick and immense buck?

That is, in a world in which young Americans are fighting terrorists in Iraq and Afghanistan, is there any limit to what financiers here at home can do? And if there aren't adequate limits, why don't we have them, and soon?

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