Was it Goldman’s fault that IKB, the German bank, lost $150m on the controversial Abacus deal, or should IKB take all the blame itself?
My column in today’s FT argues that Goldman had an ethical, even if not a legal, responsibility to warn IKB that it thought the subprime mortgage market was in trouble when it executed the CDO in early 2007. The SEC has accused Goldman of securities fraud.
The counter-argument has been nicely put by John Carney at The Daily Beast. He argues that IKB was an active and indeed eager participant in the synthetic CDO market and to paint the bank as an innocent vicitm of the events is wrong.
IKB was clearly not a widow or an orphan. There is lots of evidence, some cited by Carney, that it brought its fate on itself and its structuring of its Rhineland conduit – the fund that invested in the Goldman Abacus CDOs, was a complex piece of regulatory arbitrage.
None of this, however, absolves Goldman from its responsibilities. If it had told IKB, a longstanding client, of its view of the market and IKB had ignored it, that would have been fine. As it was, its disclosures to IKB were inadequate.
In other words, you don’t have to believe IKB was an innocent abroad to accept that Goldman ought to have done more.
Update: Michael Lewis puts all this as elegantly as ever in his Bloomberg column:
The social effects of the SEC’s action will almost certainly be greater than the narrow legal ones. Just as there was a time when people could smoke on airplanes, or drive drunk without guilt, there was a time when a Wall Street bond trader could work with a short seller to create a bond to fail, trick and bribe the ratings companies into blessing the bond, then sell the bond to a slow-witted German without having to worry if anyone would ever know, or care, what he’d just done.
That just changed.
