So John Paulson and Goldman (Big Boy) made a killing off of a short position. I haven't read the entire complaint, and, perhaps, Goldman is guilty of fraud. But, on the other hand, we've seen ambitious public prosecutors before. So, I am going to keep an open mind, and am not going to knee-jerk convict Goldman for selling --- in a private placemnt, 144A offering, no less --- to a (supposedly) sophisticated investor (or, as the SEC put it in the complaint, "a third-party with experience analyzing credit risk in RMBS").
But, in the end, I care not if Goldman committed fraud. (I am not long the stock.) If so, let's punish the institution and the people responsible. But I do care about the fallout effects on the financial system. Brad Hintz, analyst at Bernstein, says Big Boy is on the hook for about $706.5m or $1.20 a share (and could see follow on suits, too). Hintz sums up the possible effects of the Goldman suit in a note issued this afternoon:
"While investors recognize that Goldman's 2010 earnings outlook is solid, longer term, there is growing concern about the viability of Goldman's present business model. Regulatory uncertainty about risk taking and new capital charges is threatening the economics for over half of Goldman's revenue base. There is rising public appetite for punishment of the guilty parties that caused the 2007-2009 credit crisis, and investment bankers are being blamed for everything from the Great Recession to the collapse of US auto industry. As the most powerful capital markets firm, Goldman Sachs is a convenient scapegoat for policy makers and the press. This maelstrom of negative media attention and the threat of onerous regulation has effectively frightened investors away from owning Goldman stock and pressured valuations to historical lows despite the expectation for strong earnings in the current year." (emphasis added)