I have no idea whether the recent SEC lawsuit against Goldman Sachs will prevail in the courts. Goldman’s defense sounds pretty good to me: the investors were presumed to be sophisticated, and they should have been able to figure out what was going on.

What ought to collapse, though, is Goldman’s reputation for putting their clients first. In this case, they permitted a hedge fund manager to select the mortgage bundles which went into the CDO, and then sold the CDO to investors, Goldman’s clients, without telling them how the mortgages were selected. That would be fine except that the hedge fund manager was betting against the clients. I can’t see any way you can spin that into saying that Goldman was looking out for their clients.

Goldman’s first business principle says “Our clients’ interests always come first.” Not in this case they didn’t.

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