April 20, 2010 – What Does the Debacle at Goldman Sachs Mean for Stocks?

(SPECIAL BLACK SWAN ISSUE)

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2) What Does the Debacle at Goldman Sachs Mean for Stocks? I can tell you that the timing of the SEC's GS announcement absolutely reeks, coming on a Friday at a market top, just as the debate about financial regulation has become the business at hand in congress. The case demolishes any Wall Street/Republican efforts to limit regulation to a few limp, token gestures. Expect more teeth in any final bill, and a substantial clipping of the wings on risk taking by the major firms. Perhaps it was the failure of the government's case against two fund managers at Bear Stearns that limited this to a civil, instead of a criminal case, with its lower burden of proof. The real damage here is political and reputational, which has already been achieved with the Friday press announcement. The SEC can now rightfully claim that there's a new sheriff in town, and this time he is not just slapping  wrists. GS will ring fence the case, attribute it to the actions of a single rogue individual, the 'fabulous' Fabrice Tourre. Senior management will cry out that they are 'shocked, shocked' that these activities were going on, as Claude Raines said in the classic film, Casablanca, and disavow any knowledge or responsibility. Don't believe for a second that GS will be permanently damaged by the affair, which will set up a long term buy for the stock. Even if they lose the case, total financial losses of $1 billion would amount to only $1.2 /share. Yet the sell off vaporized $15 billion in GS market capitalization. And the government's case is weak, at best. The bigger threat to the industry, as a whole, is that this could become the new asbestos (check the ranking of CDO issuers below). There were thousands of deals similar to the Abacus deal that got GS into hot water, and new class action suits are probably being written as you read this. The Europeans will join in, where a large part of the CDO losses were suffered. Again, no big deal. Look at the back of the prospectus of any deep pocketed Wall Street firm and you will find dozens of pending law suits. These are already some of the most sued people on the planet. Litigation is just another cost of doing business. Spread it out over decades and adjust down for settlements, and this is little more than a nuisance. Massive trading profits can cover a multitude of sins. The bottom line is that if the stock market goes down, it will be for a multitude of other reasons, not because of GS.

CDO.png picture by madhedge

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