This blogger is sure that in the coming days and week, we’ll learn more about what Goldman Sachs did or didn’t do in relation to creating an exotic security that blew up on two sophisticated investors, resulting in Goldman being charged with fraud by the Securities and Exchange Commission last week.
But one thing is for certain – Goldman Sachs didn’t force ACA Financial, or IKB Industriebank, a German bank, to buy the securities. Presumably, they did some of their own research into the quality of the underlying securities that their collateralized debt security was tied to.
Or maybe not.
A couple of weeks ago we wrote about another case from the Securities and Exchange Commission and a group of state regulators filed against Morgan Keegan. What became evident from this case was that certain Morgan Keegan fund managers were buying bonds tied to subprime mortgages without bothering to find out what was really in these bonds. In that case, court papers show Morgan Keegan on several occasions asked for marketing materials that described the securities WELL AFTER it bought the securities and put them mutual funds owned by individual investors.
This blogger recalls many years ago interviewing fund managers for a story about QVC just before it was to go public. I came across at least one fund manager who told me he was going to buy the stock. When I began to ask detailed questions from the preliminary prospectus, he acknowledged that he hadn’t read the document. I don’t know if he actually bought the stock for his fund. But what he said was that he trusted the people selling it to him because he didn’t have the time to read all of the related documents.
That may very well be the case here. But that doesn’t make IKB or ACA less responsible. It would be one thing if Goldman knew that the underlying securities were in worse off shape and didn’t share that information with IKB or ACA. However, that’s not the allegation.
It’s been a rarity over the years for me to agree with an editorial in the WSJ. But I agree with the one today.