Monday, June 13, 2011

Goldman Sachs Demurs

Lloyd Blankfein, CEO of Goldman Sachs, testified before Congress in April 2010 regarding Goldman's role in the mortgage crisis, that Goldman Sachs had no moral or legal obligation to inform its clients it was betting against the products they were buying from Goldman Sachs because Goldman was not acting in a fiduciary role. Now a fiduciary is someone who has undertaken to act for and on behalf of another in a particular matter in circumstances that give rise to a relationship of trust and confidence. So Blankfein was saying, in effect, that its clients had no reason to believe that they could trust Goldman Sachs. That certainly turned out to be true, but was it true a priori?

Apparently the courts thought so, because in April 2010, Goldman Sachs was accused of securities fraud in a civil suit filed by the Securities and Exchange Commission that claimed the bank created and sold a mortgage investment that was secretly devised to fail. The move marked the first time that regulators have taken action against a Wall Street deal that helped investors capitalize on the collapse of the housing market. Goldman paid a settlement of $550 million in 2010 to settle accusations that it had misled investors who bought the Abacus mortgage security.

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