Monday, April 19, 2010

Vampire Squid, Meet Ravenous Piranhas

by Charles Hugh Smith

While odds favor Goldman Sachs escaping from the SEC's clutches with a political-theatre inspired wrist-slap, private litigation could shred the firm over time.

I am not an attorney, but being in business forces one to pick up a bit of the legal perspective. What is foremost in the American legal system? Justice? Perhaps for those fighting the good fight in criminal courts, but for the vast majority of those toiling away in the dark labyrinth of the U.S. judicial system, the key is always liability: who is liable, and what is their exposure?

With good reason, many see the SEC's tepid pinprick into the gargantuan body of the vampire squid as an effective bit of political theatre. After four long years of the blogosphere pounding on the implicit and explicit fraud at the heart of mortgage-backed securities and the derivatives written against them, and 1.25 years of their own humiliating derriere-kissing of Wall Street, the Democrats sorely need to establish some bonafides that they really, really, really are not beholden to Wall Street (even if they are). So some sort of simulacrum "crackdown" is needed lest their political power be eroded or even demolished in the November 2010 elections.

There is even a slight chance that the Democratic leadership prompted this precise timing to light a fire under reluctant Republican senators to pass some sort of gutted, weak, sure-to-be-unenforced "financial reform." Once again, for purposes of political theatre, it is important for the Democrats to pass a simulacrum "reform" of Wall Street to appease the frightfully hot public anger at the craven obedience of the political class to the whims and wishes of the big banks and Wall Street.

Meanwhile, as the Republicans claim to have their fingers on "the pulse of Middle America," their Wall Street-soiled fingers are actually clasped on the cold wrist of the corpse of their own credibility. Resisting bank/financial reform, even a watered-down version, will eviscerate what little credibility the Repubs have left after lording over the destruction of the U.S. economy and their despicable rewarding of Wall Street for eight dreadful years (2001-2008).

In other words, both parties desperately need some political theatre to mask their enslavement to Wall Street and the big banks. This SEC action fits the bill very nicely, along with calling a few incredibly wealthy former CEOs up to Congress for a public flaying.

Note to Congress: did any of you ever hear of the book Fiasco: The Inside Story of a Wall Street Trader which laid out in 1999 precisely how derivatives are gamed to defraud the buyers?

Claims of ignorance only make our elected officials even more pathetic, craven and hypocritical--if that is possible.

Let's establish a few things about the SEC action against Goldman Sachs.

1. After four years of doing nothing to enforce the rules already on the books and being derided as a toothless tool of lobbyists and bankers, would the SEC choose a case they might lose? No. They carefully selected the strongest case they have. They are laughingstocks, and the best of the public servants in the SEC will obviously be wanting to redeem the besmirched honor of their once-respected agency.

Let's also ask "cui bono" (to whose benefit?) of the SEC lead attorneys. Times are tough even in the legal profession, and anyone scoring a direct hit on the most hated and loathed institution in America, the vampire squid of Goldman Sachs, will see a nice boost in his/her career trajectory.

2. What liability will be established if the government wins its case? Goldman Sachs will base its defense on trying to gut any claims of willful intent to commit fraud, but I am guessing that somewhere in the statutes are a few regulations or laws which do not require proving willful intent to get a conviction or ruling of malfeasance, fraud, embezzlement, failure to disclose material facts, etc.

Any conviction for any financial crime, however modest it might appear, will open the squid to charges of malfeasance, fraud, embezzlement, failure to disclose material facts, etc., from everyone who was sold a securities or derivative by Goldman Sachs within the past seven years.

That's a lot of liability.

3. Can Goldman Sachs' protectors in the U.S. Treasury (Tim Geithner et al.) limit the lawsuits of private parties against Goldman? No, they can't.

4. Can Goldman's apologists in Congress openly limit the liability they face from private parties/investors without committing political seppuku /hara-kiri?

The Mainstream Media and Washington's politico toadies will be betting that the new TV season in September will distract the American populace from the whole issue, and by the November elections, voters will have forgotten Goldman Sachs and Wall Street, especially if those with substantial 401Ks see their accounts rising.

I think the toadies and MSM Elites have sorely misjudged the abiding hatred of the American public for Goldman Sachs, Wall Street, and the Federal government's bailout of "too big to fail" banks.

But let's grant them the benefit of the doubt and agree that the clueless, sedated, distracted, games-TV-entertainment-addicted American citizenry will forget about Goldman Sachs and boring financial reform by November.

The toadies and MSM Elites are forgetting that Goldman Sachs now faces a stupendous liability to all the private parties it defrauded.

Let's walk through this from the point of view of an agency, county, city, pension fund, etc. which has lost money from an MBS, CDO, credit default swap or other derivative underwritten by Goldman Sachs.

Filing a lawsuit against GS claiming malfeasance, fraud, embezzlement, failure to disclose material facts, etc. is a slam-dunk. These local governments and funds already have attorneys on staff; filing a lawsuit is cheap, and very importantly, it places the agency/fund/county etc. in the pool of entities which will receive a piece of any swag wrung from Goldman Sachs.

Let's also note that there are thousands of starving attorneys nowadays without jobs or prospects. Hundreds of lawsuits pending against Goldman Sachs and the other "too big to fail" Wall Street firms will provide much-needed work and much-desired opportunities to shine. As noted above, ramming a harpoon into the thrashing body of Goldman will advance a career most admirably and could result in huge payouts to the victorious legal firms.

The SEC case against Goldman Sachs may well be the match which lights a bonfire which will burn for years to come. If I were an attorney seeking a chunk of history and GS/Wall Street swag, I would locate the jurisdictions which have a history of ruling against Wall Street and then pare the list down to those in states with appellate/district courts which have backed up rulings against banks.

I would then locate cities, counties, funds, agencies and companies which bought some toxic paper, MBS, derivatives, etc. from Goldman Sachs, Citicorp, Bank of America, etc., and then I would file an exploratory lawsuit just to get in on any windfall down the road. A smart lawyer will very likely establish sufficient grounds to subpoena all the GS records relating to the derivative sold to their client, and then pull it apart, piece by piece, to build a case for malfeasance, fraud, embezzlement, failure to disclose material facts, etc.

In years past, Wall Street's toadies in Washington could have passed legislation to limit Goldman's liability to these charges. But the public's hatred of GS and its defenders has exceeded the understanding of Wall Street and Washington toadies alike. They both over-reached, and the consequences of over-reach are inevitably die-off.

There is simply no way Wall Street's toadies in Washington and their servants in the MSM can limit Goldman's liability to private party lawsuits and lawsuits filed by local government agencies, pension funds, etc.

It is common knowledge in legal circles that local courts don't like ruling against local government, on any issue. It is also a truism that local and state courts are politically influenced, despite the rubber-stamp claims to objectivity.

Even if the Federal courts and Congress actively seek to limit Goldman's liability, they will have a very difficult time restricting Goldman Sach's liability in state courts. If I were a D.A. (district attorney) in any state, I would be ordering my clerks to burn the midnight oil until they unearthed some state statutes which could be turned against GS and by extension, all the other Wall Street players and "too big to fail" banks.

Everybody loves a crusading D.A. who takes on Wall Street and wins a settlement, and thus the public will be cheering on the ravenous legal piranhas, hoping they chew the writhing vampire squid to extinction.

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