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Our Take: Sub-Prime CDO Fraud and Your Career

We interrupt this earnings season for a bulletin: Practices that were considered business as usual in the securitization market a few years ago can suddenly land you in a heap of trouble.

While other bloggers weigh the merits of the fraud case the SEC launched Friday against Goldman Sachs, eFinancialCareers News will tackle a different question: For how many, and for who in particular, does the case pose significant career management issues?

Concrete answers are elusive at this early stage. So what follows is pure speculation.

Legal and reputation risk probably extends well beyond Goldman. A large number of people who worked on structuring sub-prime deals for any number of institutions - even if they've since moved to other product areas - are potential targets. The resulting uncertainty will likely smother an incipient hiring pickup in structured credit, even though the specific types of securities that got Goldman in trouble are no longer being created by anyone.

Who Might Get Caught in the Net?

Most U.S. and European bulge-bracket institutions were involved in a big way in mortgage securitization, including sub-prime CDOs. It's unclear how many such deals were influenced by big clients whose primary goal was to place short bets against the same or similar securities. But there must have been quite a few. ProPublica's detailed expose of the so-called "Magnetar Trade," published just a week ago, named Deutsche Bank, JPMorgan, Merrill Lynch, Citigroup, UBS and State Street as having worked with the Magnetar hedge fund on some 30 CDOs, most of which ended up defaulting. Magnetar reportedly played an identical role in those deals as Paulson & Co. is alleged to have played in Goldman's Abacus CDOs.

So it's reasonable to assume the SEC (and other federal and state authorities too, perhaps) may have a pipeline of charges in the works against other institutions. That possibility may cause quaking among bank dealmakers who once assembled and/or peddled sub-prime CDOs.

Hedge fund managers who pushed banks to cobble together such deals in order to short them may feel jitters too. Although the SEC did not charge John Paulson or his firm (because they weren't required to disclose their role), getting named in such a context is hardly good news for one's career or reputation among investors.

Specialized asset management firms that run CDOs and other such pools are also at risk. CDO managers already suffered a black eye for helping spread sub-prime contagion. But being tied to specific portfolios that were largely selected by funds with an interest in maximzing defaults seems like a much bigger problem. It might even turn into a legal problem for some managers.

Career Boost For Lawyers, Crisis Consultants, PR Pros

A likely reaction is a scramble to retain legal counsel expert in securitization-related contract law, SEC disclosure requirements and fiduciary responsibilities. Even if affected parties first call upon outside law firms, that still pumps up demand for securities lawyers.

Other damage-control professionals, such as crisis consulting and PR and investor relations teams, look to benefit too. Because the issues are so technical in nature, the SEC case could accelerate a long-running trend toward adding "hard" financial experience to the skills required for media relations and investor relations professionals.

The SEC itself is on a hiring binge, as eFC News has noted on several recent occasions. Its latest initiative probably won't add to hiring plans already in place. But moving against Goldman could supply a much-needed prestige boost for an agency that was widely reviled for overlooking Madoff and other Ponzi schemes, as well as for bringing few cases against Wall Street's big names that most Americans blame for the financial crisis.

What Will Happen To Goldman?

Turning to Goldman Sachs itself, fraud charges levied by the SEC appear to be the most threatening of an escalating series of blows coming from lawmakers, regulators and the news media over the past year or so. In the worst case, clients might interpret Friday's action as a signal that the government is dead-set on bringing down Goldman by all available means, and will act accordingly. The bank's deal volume, share price and employer brand value would all suffer lasting damage. (Think Drexel Burnham Lambert.)

However, there is also an opposite theory out there: that the SEC has a weak legal case, and acted only to create an appearance the administration is belatedly getting tough on Wall Street. If the fraud charges don't stand up, then Friday's events could prove to be the reputational equivalent of a selling climax. In that case, the worst is already past for Goldman and the career prospects of its work force.

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AUTHORJon Jacobs Insider Comment
  • AK
    AK Tom
    28 July 2010

    nibrahim,
    Your lack of understanding of how these CDO ended up as the long side of the investment banks shorts by being steered into publicly managed money (401K, pensions, endowments, and charities) by conflicted/fraudulent AAA ratings and conflicted investment advisors is really obvious in your post. This was the Great Fiduciary Failure of 2008.

  • ni
    nibrahim
    1 June 2010

    Totally agree -some of these structures smelled like a rat even in the day ...folks who did not have the balls to say NO don`t belong in the industry

  • N_
    N_R
    19 April 2010

    To my mind, Goldman's tone deafness -- and practically tweaking its nose at the government, insisting they were somehow "different" from the other mortals conducting themselves in the financial crisis -- has made it a target. They simply haven't been able to stomach laying as low as they need to, for as long as they need to.

    I remember so vividly the couple of days before the Lehman closure and the rumors about who was going to be next to fall. Goldman was pretty high on that list. But they still seem to really cling to this narrative that their survival was more attributable to merit, rather than to not being in the wrong place at the wrong time.

    Goldman's risk management practices were legitimately much more rigorous than many of the other banks'. But they look like now they're going to be the poster boys for how accountability gets measured in a big bank, when one part of the organization has gone bearish on a certain business line, while another arm of the organization is still writing new business in that line. That's a tough question, but they should really lower their bravado if they don't want to wind up taking the fall for the "standard industry practice" descri

  • Re
    Realbanker AO
    17 April 2010

    As an ex-banker (now social services credit counselor), I see first-hand the damage that these "fabulous" idiots have done. My disgust is limitless.

    Let the perp walks begin and go on. With luck, they'll all wind up with a a "room-mate" named Bubba.

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