*Goldman Sachs lied to its customers. The best summary I’ve seen about what Goldman Sachs did wrong comes from my friend Eric Fry. Here’s what he said in the Daily Reckoning, one of my favorite ezines:
“As one of America’s largest purveyors of toxic collateralized debt obligations (CDOs), Goldman played the role of financial cigarette salesman. Nothing wrong with that… so far. But this particular cigarette salesman took out insurance policies on its biggest customers. Okay, so maybe that’s a bit morally ambiguous, but it is still perfectly legal… as long as the cigarette salesman didn’t lie to his customers about the potential consequences of smoking cigarettes.
“But Goldman did lie. To continue our metaphor, Goldman not only ‘whited out’ the Surgeon General’s warning on every pack it sold, it also substituted its own warning that read something like: ‘These cigarettes are full of sugar and spice and everything nice, just like little girls.’
“Goldman informed its clients that John Paulson—the guy who secretly helped construct the Abacus CDO that is at the heart of the SEC’s complaint—was a large buyer of this security, when in fact he was a large short-seller of the security. That was a lie. Importantly therefore, Paulson did not utilize his legendary expertise of the CDO market to select the securities that would succeed, he used his expertise to select the securities that would fail.
“Goldman’s failure to disclose this very material fact was a fraud… big time. If Goldman had merely informed its customers that the "cigarettes" it sold were full of ‘frogs and snails and puppy dog tails’ and/or that the guy who helped select the securities comprising this particular CBO was selling it short, Goldman could have purchased life insurance on its customers all day long in full compliance with every applicable securities law.”