In the SEC's words...

Robert Khuzami, Director of the Division of Enforcement at the SEC sums up the case against Goldman best, since he is the one bringing the charges*:

"The product was new and complex but the deception and conflicts are old and simple," said Robert Khuzami, Director of the Division of Enforcement. "Goldman wrongly permitted a client that was betting against the mortgage market to heavily influence which mortgage securities to include in an investment portfolio, while telling other investors that the securities were selected by an independent, objective third party."

What pops out at me is "..wrongly permitted a client that was betting against the mortgage market to heavily influence which mortgage securities to include in an investment portfolio, while telling other investors that the securities were selected by an independent third party."

PROBLEM: THE THIRD PARTY WAS NOT INDEPENDENT. THEREFORE, GOLDMAN WAS LYING (what prosecutors call fraud) TO THE BUYER OF THE CDO's THEY WERE SELLING!

In addition:

According to the SEC's complaint, filed in U.S. District Court for the Southern District of New York, the marketing materials for the CDO known as ABACUS 2007-AC1 (ABACUS) all represented that the RMBS portfolio underlying the CDO was selected by ACA Management LLC (ACA), a third party with expertise in analyzing credit risk in RMBS. The SEC alleges that undisclosed in the marketing materials and unbeknownst to investors, the Paulson & Co. hedge fund, which was poised to benefit if the RMBS defaulted, played a significant role in selecting which RMBS should make up the portfolio.

I understand that Goldman is a "market maker" and that they were not acting as an "investment advisor" on this deal. Market makers are not obligated to disclose to buyers or sellers who is on the other side of a trade. A market, by definition requires a buyer and seller, each of whom have different perspectives, preferences and perhaps even different information. Goldman's clients understand this too. The PROBLEM is that Goldman LIED about the fact that the firm which selected the securities in the CDO was not only NOT independent; but short. According to the SEC, Goldman, in its own prospectus on the CDO it was selling, guaranteed that the party selecting the components of the CDO was INDEPENDENT. This was not true. It was the same party that was on the other side of the trade.

So, let's try to come up with a good analogy, because most of them out there are insufficient to explain the SEC's case.

My God...I can't come up with one. I love analogies, but I don't think there is one in this case. I bet if I read:

Section 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934, and Exchange Act Rule 10b-5

I would be able to come up with one. I will read it and get back to you on that. Did you see the date of the Act? 1933! I am sure it was written in reponse to activities later blamed for causing the crash of 1929 and the Great Depression.

I am sure the SEC code is probably as arcane and complex as...well...umm...perhaps a CDO! But I will still read that section.

My point is this: Goldman has been doing deals like this for years. Does this make them bad people? NO. Should they be demonized? Perhaps not. They, like all people who make mistakes, probably thought they were doing what was right. However, they probably do violate SEC rules...often. This time they got caught. This time they got caught breaking the rules of the game.

Are the rules of the game fair and just? I have no idea. Probably not. Is the entire financial system based on an incentive problems? Yes. To name a few: FDIC, too big to fail, and commercial banks being allowed to participate in proprietary trading.

Their are "bad guys" everywhere. The government, the over leveraged public, overleveraged firms, the big banks, the Wall Street firms, the relators, the ratings agencies...and more.

Some facts remain:

Goldman, and the other investment banks will never be the same. Financial reform is coming, like it or not. Goldman will probably settle. (I doubt this will go to trial.) But their stock is overvalued...along with most of the financials.

And if Lloyd Blankfein does not stop talking so much, public sentiment is going to turn even more harshly against Goldman. The average American is hurting. Nothing ticks them off more than hearing a guy who needed their tax dollars to save his firm talk about how Goldman is so successful because it pays its brilliant employees so well. If they are all so brilliant, why did they need the Government to save their asses? He is just WAY out of touch with the average person out there. People really do not want to hear him on Charlie Rose whining about how he didn't want to be a leader during this crisis because it was hard. Or how his poor people have been working 19 hour days. I mean...my God...who the hell cares? Did it reduce their effective hourly wage, say, from $2000 an hour, to $1000 an hour? I don't blanking care Blankenfein! Their are regular people all over the country who work at least that hard. All I know is Wall Street, and hence their livelihood, wouldn't exist without the average American Taxpayer. The free market would have destroyed their risk laden business model. And our stupid government should have let it.

When you need the government to bail you out, you follow their rules. Is this right, or just? Perhaps not. But it is a reality our financial institutions must face because of their greed and ignorance. It is what it is.

*The info and quotes I am using here come directly from the SEC itself.
http://www.sec.gov/news/press/2010/2010-59.htm