Video: SEC files civil lawsuit against Goldman Sachs

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    >>> the show starts right now.

    >>> well good afternoon. today in america , years of high, sky-high profits and billions of dollars in paid bonuses may finally be catching up to goldman sachs . the securities and exchange commission today filing a suit against goldman and one of its vice presidents , 31-year-old fabrice torrey, alleging that he created loans, knowing that the value and quality of the loans he was creating were not nearly as good as he was advertising them to be, to goldman 's customers. goldman then stands accused of selling those loans to customers, and then betting that they will fail. seeking to cash in when they did. here's the s.e.c. 's director of enforcement.

    >> the fact of the matter is the investors, certainly representations were made to the investors. and those representations were not accurate.

    >> so, put simply, here's how the s.e.c. , anyway, claims that it all went down. he want you to imagine for a second, that i'm the biggest car company in the country . and that a client of mine comes and says to me, i've got, or an idea for you, dylan , to design a car that will crash. so i say, i will make this bad car, on behalf of my client. and sell it to people like you, who are watching this tv show , but i'm not going to tell you what i did to the car. so i've got a shiny red ferrari right here. it looks lovely. i've designed it with my friend. here's the key thing -- in order for to you buy this, in order for me to know that it's going to blow up and bet on it, i have to reach into the back here real quick and hand-pick how it's constructed. so i'm going to take the engine part out here. there's another one here, that's fine. and i'm not going to actually tell you -- i'll just cover that up. i've got some friends in government . they won't mind. now i sell you what appears to be a perfectly good car. as i sell it to you, and i've manufactured the car, mind you -- i then bet that the car will crash. it does, because it has been screwed with, by me. when it hits the wall, i rake in the dough, not only from selling the car, but from the insurance bet i made that the car will crash at the time that i sold it to you. i, as the car salesman , get paid twice. once when i sell it, again when it crashes, on the insurance policy . goldman sachs , in their case, they get the money from selling the car, and then they bought the insurance -- you're going to love this -- they bought the insurance from aig . remember them? and aig didn't have the money to pay off the bets on all the cars that goldman was betting were go to crash. that's why you, the taxpayer , ponied up $173 billion to pay out the bets that aig was taking. 100 cents on the dollar. and timothy geithner , who is our treasury secretary, was the person who decided that payout was a good idea. and who refuses to this day, to show us the emails between goldman sachs and aig . even though we've provided them all the money to pay out on these bets. and you thought the politicians weren't working for snu goldman , of course , a poster child for a practice that they were very good at -- selling bonds instead of cars. but the case here is that they were deliberately creating and selling bad bonds . on purpose. sticking the consequences with foreign banks or most horrendously, selling those bonds to our teachers, police , judges and other state pension fund holders in this country . imagine selling toxic bonds to those people, knowingly and then going to aig and betting that they would collapse and then blackmailing the u.s. government into paying through aig into goldman sachs and out to the goldman client, in this case, john paulson . that will be the legacy of the bubble that burst for us as a generation. a cascade of underwater mortgages created by these bad bonds . busted pension funds . a bankrupt nation laden with debt and a massive wealth transfer , the largest we have ever seen, to the bank scammers, who have been perpetrating and are still to this day, perpetrating this con against us. reaction? pouring in from people who have been calling this a scam from the start. former new york governor, eliot spitzer , the so-called sheriff of wall street . saying this morning, this is a perfect example of why the big banks need to be broken up. because when you have banks playing so many sides, creating bonds , trading bonds , all this business -- inevitably they will be betting against their own clients. this, the governor says, is bound to happen. the suit against goldman may just be the tip of the iceberg in this practice. it will hopefully become a wide-ranging probe. that reveals to us what was going on between aig and goldman sac sachs, and how pension fund managers were being seduced with unusually high returns with faulty securities that were designed to explode after they had been sold. a probe that should stretch far beyond failure to disclose, to include the very corruption that helped to build those bad loans on purpose in the first place . as a scam to sell these exploding bonds . this, my friends , boils down to some very simple questions for every american and every politician. are you and are we, a country that is okay with deliberately designing faulty cars? and then betting that they will crash. are you okay with that? are you okay with deliberately creating and selling faulty loans and then betting they will collapse in the process, leaving taxpayers, future generations , teachers, police and pensioners, not to mention homeowners, on the hook with the banksters who control our politicians, with all the money . are you okay with that? joining us now, connecticut attorney general , richard blumenthal , along with naomi prinz, former managing director at goldman sachs , and author of

    "it takes a pillage: behind the bonuses, bailouts and backroom deals from washington to wall street ." attorney general blumenthal , aig is headquartered in your state and there is are many pensioners, who may be buyers of these exploding bonds . are you okay with a financial industry that makes exploding bonds and then bets they will collapse with aig , which is headquartered in your state , and then the u.s. taxpayer is blackmailed into paying out 100 cents on the dollar, are you okay with that?

    >> well, dylan , that is certainly a rhetorical question . because as you know, i have been extremely critical, to put it mildly, of aig , of wall street for these credit default swaps and the way they have been used. nontransparently, very opaquely. and what we have here is as you put well in your analogy, not only building a car or to use another analogy, a house that's doomed to fail and then profiting by betting against it. but also enabling paulsen, according to these allegations, to select the bonds that he wanted to bet against. and then failing to tell the abacus investors, the ones that invested in these bonds , that they were giving him that kind of inside deal in effect. so on behalf of the pensioners, the pension bonds and i'm sure other states will be interested as well. while we're reviewing what we can do and what we should do. as well as what we can do independently to investigate. because the good news here is that the s.e.c. is finally beginning a thorough searching, penetrating investigation, long overdue. but finally to hold wall street accountable.

    >> are you launching your own investigation in connecticut?

    >> we are reviewing what we can did and considering the investigation. we're not about to announce it at this point. but certainly, if our pension funds have been harmed, we will take appropriate action. and there may be other bases to investigate as well.

    >> naomi , you were managing director at goldman sachs . did you ever for a client, manufacture a deliberately-exploding bond, the way that goldman sachs is accused of manufacturing one for john paulson , where basically john paulson , the hedge fund manager, got to design which pieces of the car he would remove? goldman sachs , as the car dealer , went out and sold it and then paulson and goldman together bet against the future of this automobile. were you involved in this sort of thing?

    >> i did do research on the initial sites of cdo's, i am guilty on that. i think the level of deception and alleged fraud in this case has gotten so far beyond even the initial cdo's that were created out of junk bonds to begin with, out of high-yield securities that were already determined to be high-yield, so the of like subprime loans, but already known to be so much worse. and bringing paulson into the selection process and not only not disclosing that in the marketing materials, disclosing everybody else . it wasn't like the management selection process wasn't part of the deal. it was all there in the marketing documentation. he just wasn't in the marketing documentation. and that was a huge, huge omission. and it's not just in that deal. i am sure you know, as you mentioned before, that there's an investigation, which has taken three years. but there's further investigation into the largest cdo's, with the largest equity participants and the largest hedge fund buyers, and the largest pension buyers and everything else. that we're going to see a whole slew of all the frauds that come into play. because deception is what makes these things work. the whole idea of selling a bunch of junk that is comprised out of a bunch of junk by it's very nature is deceptive. and goldman , or any company , whether it's jp morgan who was involved in cdo's, or merrill lynch before it became bank of america . all of those companies involved in the creation of these cdo's play all sides. as former governor spitzer mentioned in the comment that you ran. and because they play both sides, there is ample room for deception. there's ample incentive for deception. there's been a huge transfer of wealth in this deception. everything that paulson made out of this particular charged abacus deal was lost by the pension funds and the municipalities and whoever else invested in it. it was a zero-sum gain. it was a direct transfer, cluesively and hiddenly, of wealth.

    >> at what point, richard blumenthal , do we see criminal charges ?

    >> i think that the claims of fraud here and those are the civil charges in this s.e.c. lawsuit, would entail probably at some point, consideration of criminal charges . but they will also lead, dylan , i think, to the united states congress adopting the kinds of reforms that are absolutely necessary, again long overdue, to make sure that these derivatives are sold in a way that the public knows about them. in this instance, what a classic illustration of how secrecy can breed fraud and deception. and so --

    >> but it's worse than that. and i'm sorry to interrupt you. if you look at what they were doing or what they stand accused of, manufacturing a deliberately-exploding bond or car, on purpose. john paulson in the room saying -- hey guys, let's design a really fancy red ferrari, a really high-yield aaa bond and let's sell it to the teachers' pension fund , because they're under water in their state so they'll buy anything with a yield. making that choice . and then screwing up the car where john paulson gets to pick which pieces of garbage to stick inside of it. so that it explodes. and then going to aig in your state and betting that this thing's going to blow up. then bringing the entire country to its knees in order to facilitate the payout and watching the american taxpayer pay completely, 100 cents on the dollar, all of aig 's bets, that were made with goldman sachs on behalf of john paulson and other clients? and we haven't seen a single criminal investigation and we're working two years on as we watch record profits come out of these banks ? is this simply, richard , because the money that comes to d.c. from the banks is so much? i mean i look at this, i'm just looking at the president. a million dollars to barack obama in 2008 from people identifying goldman as their employer. that is more than any president, any politician in the history of the world . $344 million going in lobbying this year. these people have a scam where they sell cars that explode, bet they're going to explode. get paid off by the taxpayer and then take the payoff and send it to politicians to make sure they are able to continue to do this. i believe it's why four out of five people aren't republican and two out of three people aren't democrat. because no one is dealing with this, mr. blumenthal . how bad does this have to get until we can address the realty of the scam that's being run against the american pensioner, homeowner and average taxpayer by bankers and politicians?

    >> well, the simple answer to your question is, that the facts as they've been alleged, could well give rise to criminal indictments. i say as a former federal prosecutor . as a state official, as you may know, we have been largely preempted in the securities area. which ought to change.

    >> so explain ha that is. explain -- there's all of these little legal changes that were made in d.c. that have castrated attorney generals like yourself across the country to do anything like this, much the way eliot spitzer was able to do ten years ago. what was the legal change made in the federal government to make it impossible for someone like you to do anything?

    >> well the legal change, and i would respectfully stay away from the word "castrated."

    >> understood.

    >> would be to deprive us of authority. and give it solely to federal agents. like the s.e.c. , on the theory that the federal law should be only enforced by those federal agencies , not by states . to create uniformity and a national approach. that argument is valid. to an extent. but not to the extent that state officials and prosecutors like myself and other attorneys general , have been completely deprived of authority in most states . and the point here is, dylan , that there should be a criminal investigation . no question about it. this deal was consummated in february of 2007 . the s.e.c. under the prior administration was completely awol. and now hopefully we will see a reinvigorated and re-energized securities prosecuting agency at the federal level . and more authority to the states as a result of the reforms now going through congress .

    >> i'm going to wrap this up. naomi thank you for the time. mr. blumenthal . thank you for the time. i want to offer the goldman comment, which i failed to do earlier. goldman saying that we're disappointed that the s.e.c. would bring this transaction in the face of an extensive record that establishes that the accusations are unfounded in law and fact. we want to emphasize the following four critical points and they go on to talk about how they lost money on the transaction. again, anybody's profit or loss on a given transaction, when you're selling faulty bonds , and betting they're going to explode, whether you're doing it for yourself or your customers, i feel like we got bigger fish to fry. and still , neither party wants to end too big to fail .

    >>> more on an exclusive interview

By Dylan Ratigan Host, 'The Dylan Ratigan Show,' 4 p.m. ET on msnbc
MSNBC
OPINION

Years of sky-high profits and billions of dollars in bonuses may finally be catching up to Goldman Sachs. The Securities and Exchange Commission today is filing suit against Goldman Sachs and one of its vice presidents, 31-year-old Fabrice Tourre. It's alleging that the Goldman executive secretly created loans in coordination with hedge fund John Paulson & Co., all the while knowing that the true value and quality of those loans were not nearly as good as Goldman was claiming to their customers.

Goldman then sold those bad loans and shortly thereafter made bets, with AIG, that those loans would fail and cashed in when they did. The taxpayer, of course, made good on all of AIG's obligations.

Put simply, here's how the SEC claims it all went down: Imagine you are the biggest car company in the country. Goldman in this example, and a client, Paulson, comes to you and asks you to design a car that will crash.

So you make that bad car "CDO," then sell it to people without telling them you cut the brake lines! Then when the car "CDO" hits a wall, you rake in the dough from the insurance you bought on the bad car before the crash. And you get paid twice! Once when you sell the car, and then again when it crashes and cash in your insurance policy!

Of course in Goldman's case, they bought the insurance from AIG, which didn't have the cash to back up its bets. Hence, thanks to the $180 billion taxpayer rescue, those bets paid Goldman Sachs back at 100-cents on the dollar.

Goldman is the poster child for a practice they were very good at — selling bonds. But the case here is that they may have been deliberately creating and then selling bad bonds, and sticking the consequences to customers like teacher and police pension funds.

And that will be the legacy of the bubble that burst — a cascade of underwater mortgages and broken pensions, a bankrupt nation and a massive wealth transfer to bank scammers. Reaction is pouring in from people who have been calling this scam from the start.

Former New York Gov. Eliot Spitzer, the so-called sheriff of Wall Street, says this is a perfect example of why the big banks need to be broken up because when you have banks playing so many sides and betting against their own clients, this is bound to happen.

The suit against Goldman may just be the tip of the iceberg in what will hopefully become a wide-ranging probe that stretches beyond failure to disclose to include the corruption that helped to build the bad cars in the first place.

This boils down to some simple questions.

  • Are we a country that is okay with deliberately designing faulty cars and betting that they will crash?
  • Are we a country that is okay with deliberately creating and selling faulty loans and then betting that they will collapse, leaving taxpayers, pensioners and homeowners on the hook and the banksters with all the money?
  • Will either political party be willing to give up the money train of bank political donations and do the right thing?

So far, we have seen only half-measures and excuses.

The Dylan Ratigan Show airs Monday through Friday from 4 p.m. ET to 5 p.m. ET on msnbc.

© 2013 msnbc.com

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