Best Financial Markets Analysis Article Financial news media is abuzz with analyses of Goldman Sachs's settlement with the SEC for $550 million in a case of alleged fraud regarding the packaging and selling of a CDO called Abacus. Goldman Sachs admitted to no wrong-doing. The settlement is less than Tiger Wood's potential $700 million divorce settlement--and Tiger didn't help bring the economy to its knees (he also publicly admitted his transgressions and expressed regret)--but it's a start.

The SEC might want to look into the deals that Goldman Sachs underwrote on which other banks bought protection from AIG as well as the deals upon which Goldman Sachs itself bought protection from AIG. If all of these banks buy the securities back at the original price of par (100 cents on the dollar less interim principal payments), the tens of billions of dollars of proceeds can be used to pay back AIG's public debt. Instead, taxpayers heavily subsidize Goldman Sachs.

The bigger story is that the former CEO of IKB, Stefan Ortseifen, was found guilty of market manipulation by a German court. Yesterday, the Wall Street Journal reported the story on the second page of its markets section (C section), and it deserved more prominent coverage:

At the heart of the case was a press release that IKB issued on July 20, 2007, as credit markets worsened, assuring investors that its exposure to the subprime fallout was limited and that it remained on track to meet its profit outlook.

Ortseifen was fined €100,000 (around $127,000) and given a 10 month suspended sentence. That strikes me as a pretty light sentence for fluffing the truth about the fact that at the time, IKB was actually being crushed by its losses. IKB eventually needed a bailout of over €10 billion (around $12.7 billion) in government-backed loans. The court's fine probably didn't even make a dent in Mr. Ortseifen's wallet, but it's a start.

In this post-Sarbanes Oxley world, U.S. CEOs and CFOs should also be held accountable for their rosy statements during this period, along with their SEC filings.

While the Goldman Sachs settlement is a victory of sorts for the SEC, it shouldn't distract us from the larger issues. Massive widespread malfeasance helped bring the global economy to its knees.

Sarbanes-Oxley was meant to hold CEOs and CFOs accountable for accounting fraud and public misstatements about the health of their financial institutions. One should expect felony indictments for accounting fraud and securities fraud. As I explained to CBS's Katie Couric on April 16, 2010, the Goldman Sachs case doesn't go far enough:

By Janet Tavakoli

web site: www.tavakolistructuredfinance.com

Janet Tavakoli is the president of Tavakoli Structured Finance, a Chicago-based firm that provides consulting to financial institutions and institutional investors. Ms. Tavakoli has more than 20 years of experience in senior investment banking positions, trading, structuring and marketing structured financial products. She is a former adjunct associate professor of derivatives at the University of Chicago's Graduate School of Business. Author of: Credit Derivatives & Synthetic Structures (1998, 2001), Collateralized Debt Obligations & Structured Finance (2003), Structured Finance & Collateralized Debt Obligations (John Wiley & Sons, September 2008). Tavakoli’s book on the causes of the global financial meltdown and how to fix it is: Dear Mr. Buffett: What an Investor Learns 1,269 Miles from Wall Street (Wiley, 2009).

© 2010 Copyright Janet Tavakoli- All Rights Reserved
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