Goldman Sachs Federal Subpoenas are expected soon as U.S. prosecutors seek more information about Goldman Sachs' securities mortgage-related business. The question for many investors is what took them so long?
Goldman Sacks Federal Subpoenas Probably Will Be Cheered By Public
Goldman was one of the Wall Street firms that jumped on the 2007-2008 gravy train and invented ways to transform junk subprime mortgages into AAA rated securities. Billions of dollars of these toxic mortgage securities were sold to Goldman Sachs' clients in every corner of the earth. Goldman pocketed hundreds of millions of fees and commissions while the orgy lasted.
Of course, the toxic mortgage securities feast was destined to end badly. The 2008 world financial crises was largely caused by the value of residential mortgages, which were magically collateralized into AAA rated paper, collapsing along with the housing market. Only a bailout led by the United States government prevented firms like Goldman Sachs and AIG from following Lehman Brothers as a failed firm.
The Concept of "Too Big To Fail" Firms May be Coming to an End
Too big to fail was a term used by Hank Paulson, who was Sec. of the Treasury at the time, as he spearheaded a financial bailout that very likely saved the day for Goldman Sachs where he formerly was a partner. Unfortunately, the bailout was not extended to private investors, many of whom suffered heavy losses in the subprime mortgage bust.
The behavior that made Goldman executives so hated by many investors is that they continued to pay themselves huge bonuses even after accepting bailout funds. Goldman Sachs Federal Subpoenas and the criminal indictments would make these investors extremely happy.
Federal subpoenas will attempt to unearth information at Goldman, and likely other firms such as J.P. Morgan, about who knew what and when they knew it. Federal prosecutors will be examining documents to see if there is evidence that Goldman knew how poor of an investment the subprime mortgages actually were yet proceeded to sell them to clients.
Federal subpoenas don't mean criminal charges against Goldman or individuals at the firm will be filed or that anyone will eventually go to jail. However, there are many investors who really hate Goldman for its role in securitizing subprime mortgages and who would be happy to see some prison sentences handed out. They feel that the firm failed to properly conduct due diligence and that the mortgages should have been examined more carefully before being sliced and diced into CEOs and other exotic financial instruments.
The danger for Goldman Sachs and executives at Goldman is that at some point federal prosecutors decide that the firm knew, or should have known, that the securities were terrible investments and yet sold them to clients as if they were AAA rated.
Goldman's stock closed today at $134.90 a share, down $4.44 on the day. Judging from recent stock market action, the shares were selling at about $170 just a few weeks ago, the belief that federal investigators may in the end seek criminal indictments is gaining some traction.