Mad Money

The Truth Behind Goldman’s Alleged Fraud


Before people went too far in their attacks on Goldman Sachs, as today’s charge of fraud by the SEC will train even more proverbial guns on the Wall Street titan, Cramer felt the need to clarify the case. He wasn’t exactly defending the firm, but he wanted viewers to know exactly what happened.

First, full disclosure: Cramer got his start on Wall Street at Goldman , and he still has friends there. But he insisted that that was in no way the reason he was challenging the SEC. He said that while he wouldn’t want to be associated with the trade, that didn’t mean there was anything “illegal … immoral or even unethical about it when you pull it apart,” he said.

So here it is pulled apart:

The $90M Question

Goldman created a product, a collateralized debt obligation, for hedge fund Paulson & Co., which “at the time wasn’t known as a particularly smart client,” Cramer said, that allowed for a bet against the value of housing. To make sure the product was vetted ahead of its sale, Goldman hired an independent company, ACA Management, to do just that. And they released a report telling potential buyers exactly what was in there.

Now, Cramer would never have bought the CDO, but not everyone was as bearish on housing as he was in late 2006, which is when the product was put together. Though he could see how less informed clients may have found it attractive. But in the end, no one forced people to buy this CDO. And “a sucker was born the minute the trade was made,” he said, “and the loss booked soon after.”

So did Goldman do something illegal when it vetted the product, letting everyone know what was in it? Or was the buyer just plain stupid for wanting it in the first place?

“I think the latter,” Cramer said.

He likened the situation to the tech boom of the late ‘90s. If someone created a similar product to bet against these stocks, it would have been an entirely legal, but losing proposition until 2000. It was only after that run that the bet would have paid off. Well, housing was exactly like that, Cramer said, going into 2007. And the buyer of this CDO fully expected to continue making money, only to be shocked awake when the market collapsed. Now Paulson & Co. is known as a house of genius, while the people who went long on housing are the fools.

We learned today that Goldman sunk $90 million of its own money into the CDO. While Cramer’s not sure if that absolves the company, he does know one thing: The SEC is under tremendous pressure to bring cases against Wall Street right now. And he knows that Democrats in Washington are fighting for financial reform. So this is a great time to bring this case before the public and punish the firm perceived as the most arrogant and least reformed in the room.

But while arrogance may be a terrible personality trait, Cramer said, it isn’t illegal. And he’d be the first person to call out Goldman if the company were wrong. But he doesn’t think this is one of those cases. If anything, this was a case of “overzealous prosecution,” he said.

“That’s exactly what I think happened today against Goldman Sachs,” Cramer said. “And I think you’ll see it exactly as I do as time goes by.”

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