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Friday, April 23, 2010

Goldman Sachs: The $64,000 Question

My favorite hotel in Las Vegas is Steven Wynn’s Wynn Las Vegas and Encore. His Encore Macau opened on April 22. As revenue from Asia becomes a larger portion of Wynn Resorts Holdings, moving the headquarters from Las Vegas is being considered. If every American CEO demanded the responsibility for his or her company as does Mr. Wynn, American business would, instead of fearing the future of global completion, instead be relishing the sweet smell of opportunity. Lee Iacocca was that type of CEO at Chrysler. However, high stakes poker games, in high-roller card rooms on the strip, pales in comparison to the ultimate poker hand being played out between New York and Washington DC.

I have refrained from writing about the unexpected battle between Goldman Sachs (GS) and the United States of America. The outcome will determine the direction of the financial industry for the next generation. If I were a wagering man, I would not bet the fans’ favorite; the over-educated and overpaid Ṻbermensch investment bankers at 85 Broad St. versus the career civil servants. On the surface, Goldman has more money than God and a better rolodex. But I‘ve seen this movie before. If GS can contain this SEC civil complaint to its existing size and allow it to disappear, they can come back from this embarrassment. All will be forgotten about fraud charges.

It is a puzzlement why they chose instead to fight this civil complaint. Goldman Sachs has the financial and political wherewithal to make this disappear.

Lloyd C. Blankfein could potentially be reprising the role portrayed by Michael Milken 25 years ago. Then, Drexel Burnham Lambert occupied the role of Goldman Sachs. No one dared to even whisper a negative thing about Milken or Drexel in 1985, 1986 or 1987. That is, no one except Ivan bosky, an arbitrageur who plead guilty to securities fraud and implicated Michael Milken in several illegal securities transactions. Is there an Ivan Bosky orbiting John Paulson’s shop, or Abacus- 2007 AC1, that can be squeezed, either by Neil Barofsky, the special Inspector General for the TARP program, the SEC lead litigation counsel Richard E. Simpson, or Andrew Cuomo, New York State Attorney General?

Drexel invented the contemporary meme of masters of the universe. As the SEC civil complaint moved forward, a separate criminal probe was being developed by a little known United States Attorney from the Southern District of New York by the name of Rudy Giuliani. Long story short, after Bosky was convicted and implicated Milken in 1988, the SEC sued Drexel. The following year, Michael Milken was indicted on 98 counts of racketeering and fraud by a federal grand jury. To appreciate how important Milken and Drexel were at the time, their high yield “junk bond” financing deals accelerated the development of cable television, satellite communications, cellular telephony, resort casino gaming in Las Vegas and financed the beginning of the private equity firms. On April 24, 1990, Michael Milken pleaded guilty to charges of securities and tax violations.

Corporations can and do survive civil court convictions. Ask Bank of America (BAC) and Merrill. The kiss of death for a firm, however, is felony convictions. The US Government also has as much money as God; they also have subpoena power, a Justice Department, the FBI, the IRS, wiretaps, and the Racketeer Influenced and Corrupt Organizations Act (RICO). This current special poker game moreover features angry European countries, such as the UK and Germany, plus large angry pensions like CalPers.

Still, Goldman has to look over its shoulder for pissed-off former billionaires, the likes of Maurice “Hank” Greenberg from AIG (AIG) and Richard “Dick” Fuld, of Lehman Brothers – that may be amenable to some cosmic payback, or even singing recitals. The House of Sachs drew Judge Barbara S. Jones, whose career is steeped in racketeering and organized crime. If Goldman cannot get this case dismissed, and they are subsequently charged, prosecuted, and found guilty of felonies, the government will systematically put Goldman out of business, with the cold-blooded dispatch of Javier Bardem’s sociopathic killer, Anton Chigurh, in “No Country for Old Men.” Washington will view it as a necessary honor killing. It was Goldman’s decision to call and raise this pot when the possibility of extinction could have been removed from the equation.

So for me, the $64,000.00 question is this: It is both John Paulson and Goldman’s contention that ACA was aware, Paulson may be involved in selecting some of the mortgages for the CDO and ACA was never told that Paulson would be long. If Paulson had no greater assurance than 50% that Abacus – AC1 would fail, why would he take a position? Paulson admitted that wanted to make a killing. Why waste your time attempting to make a killing with a neutrally-structured vehicle? If he really believed the real estate market was about to crash he would want maximum exposure. Goldman would know this as well. Did Goldman not give equal advice to both clients in the same transaction? This is where their story falls apart.

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