Both Sides Now

“The first one to state his case seems right, until another questions him.”

Until now we’ve only heard from the SEC on the Goldman case. The SEC’s contention is that Goldman designed and sold a bond based on sub-prime mortgages that was engineered to fail within weeks, and they lied about who was involved.

But many feel that the Government’s case is weak. The security is exotic, the investors are sophisticated institutions, and the disclosures were extensive. No one is surprised when some people lose money in Las Vegas. People shouldn’t be surprised when some complex bonds blow up. That’s partially why Goldman’s stock went up yesterday.

But there’s never just one cockroach. Never. There were thousands of deals like this one. Millions of investors will now be contacting their lawyers to see if they can recoup by litigation some of what they’ve lost in the market. We will see hundreds of cases, especially if Goldman settles. And the story’s timing is perfect for the financial-reform news cycle.

This flood of litigation will weigh on issuers and the market. And packaging loans for sale will get a little bit harder.

Douglas R. Tengdin, CFA
Chief Investment Officer
Hit reply if you have any questions—I read them all!

Follow me on Twitter @GlobalMarketUpd

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