Why Not RICO?

Everybody has now heard about the Security and Exchange Commission's charging Goldman-Sachs with securities fraud. But many people, including me, were surprised by the SEC's sudden move to prosecute, and many more have a hard time understanding the exact nature of the crimes the so-called "bank" is alleged to have committed.

What's surprising about the SEC's move is that it appears one part of the government's financial apparatus is taking on another. Goldman penetrated the Treasury Department years ago, and the last two Treasury Secretaries, Hank Paulson under Bush and Geithner under Obama, were formerly closely associated with the investment giant. Paulson was the company's CEO during most of the years of the housing bubble was inflating and giving the financial "industry" its golden opportunity to perpetrate mischief.

The details of the accusation are hard to comprehend because the transactions under scrutiny involved extremely complex, computer-generated "financial instruments" that frequently even the people who buy and sell them don't fully understand.

In a fairly short and easy-to-read essay at "Counterpunch," Dean Baker does a commendable job of explaining the details of the SEC's accusation in layman's terms:

(T)he big news is Goldman’s indictment for putting together a collaterized debt obligation (CDO) from mortgage-backed securities that were expected to fail and then marketing it to its clients as a good investment. The central allegation is that in early 2007, hedge fund manager John Paulson recognized that the housing bubble was starting to collapse.

This meant that many mortgages would go bad. The subprime mortgages, in which homeowners had little or no real collateral, and were facing resets to higher interest rates, were especially vulnerable. Paulson worked out a deal with Goldman in which he would pick the mortgage-backed securities that were put into the CDO. Paulson would then bet that the CDO would go bad, by taking out credit default swaps (CDS) on the CDO. A credit default swap is effectively an insurance policy where the issuer makes up a loss if an asset goes bad.

Goldman was left with the other side of Paulson’s deal, finding suckers to buy this huge piece of junk. It would have been hard to find buyers for this CDO if investors knew that Paulson had deliberately constructed it as a piece of junk to short. Therefore, according to the SEC charges, Goldman concealed Paulson’s role in constructing the CDO. Goldman allegedly told investors that the CDO was constructed by neutral parties, rather than letting them know that the assets were picked by a hedge fund manager who was taking a short position.

Writing yesterday on his weekly blog, Jim Kunstler asked why, instead of or in addition to the SEC's action, the Justice Department isn't prosecuting Goldman under the provisions of the anti-racketeering act, RICO, because the collateralized debt obligation designed by John Paulson was "designed to blow up."

The question that now begs to be answered is: why is this activity not being investigated and prosecuted under the federal RICO statutes against racketeering? The Racketeer Influenced and Corrupt Organizations Act was designed to punish exactly this kind of behavior, whether the defendant's name ended in a vowel or not. How is it not a racket to deliberately and systematically construct investments designed to fail so you can collect what amounts to insurance against them -- and then to sell those financial instruments to customers without telling them that these investments were engineered to blow up? At the very least it amounts to a failure to disclose material information, which is the basis for distinguishing illegality. More to the point, it almost certainly amounts to prosecutable criminal fraud and insider trading.

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So where is the DOJ's criminal division in all this? The Goldman Sachs racket has been publicly known, in one form or another, for several years. I wrote in this space several times at least as far back as 2007 that Goldman was essentially shorting it's own issued securities, and I'm neither a lawyer or a finance professional. Anyone could see this from just reading the news.

I couldn't agree more. Americans need to get used to the idea that gangsters don't always carry violin cases.

Photo: Edward G. Robinson as the gangster Rico Bandello in the 1930 gangster classic "Little Caesar." The role catapulted him to decades-long stardom.