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Goldman’s Lucky Day

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In April I wrote on this blog that I didn't think much would come of the SEC's lawsuit against Goldman Sachs ("Crooks and Thieves"). As you'll remember, the SEC sued Goldman Sachs for fraud. Essentially, Goldman sold Collateralized Debt Obligations (CDOs) to clients like big banks and pension funds as assets. But at the same time they allowed a client, Paulson & Co., to bet against the CDOs—while letting Paulson & Co. pick the assets going into the CDOs they were betting against. I wrote that the incestuous relationship between Goldman and the US government wouldn't allow for any major disruptions of the bank or its business and that in the end the lawsuit would bring a small slap on the hand to the firm.

Last Thursday, July 15th, that exact thing happened. The SEC fined Goldman $550 million—on Goldman's condition that they didn't have to plead any wrongdoing—and dropped the lawsuit. In other words the SEC settled with Goldman. The fine, one of the largest in history, pales in comparison to the damage Goldman's reckless activities have caused in the global economy. And it's even sadder when you realize that $550 million, while a lot of money to you and me, is only three-days' income for Goldman.

As part of the settlement, the worst fraud charges were dropped and replaced with much milder charges, which is exactly what Goldman was angling for. According to The Wall Street Journal, "The strategy: Combining a settlement of the SEC suit with a resolution of related SEC probes could calm Goldman's restive clients and investors, while shielding the firm from information that could be used against Goldman in private litigation. Goldman's paramount concern was removing the more serious fraud charge rather than knocking down the size of the fine, say people familiar with the matter."

Riding the Wave

In April, when the SEC lawsuit was announced, Goldman lost billions in stock market value as their shares tumbled from the $180 range to the $130 range. On Thursday, when the settlement was announced, Goldman's stock shot up from the low-$130's to the high $140's, gaining close to 6 percent. As I've always said, wealth doesn't disappear; it just gets transferred. When Goldman's stock tumbled, that wealth was transferred elsewhere—and now that the SEC is off Goldman's back, wealth is starting to transfer back to Goldman shares.

One wonders who is benefiting from riding the Goldman wave. It's probably a good bet that Goldman executives weren't selling stock as it tumbled. And it's probably a good bet that they were buying it up when it was in the $130's. They know how the game is played, and they knew that nothing would come of the lawsuit. Understanding the New Rules of Money benefits them. As Dan Freed writes for, "Buybacks are likely, given that Goldman executives thought the company's shares were cheap enough to buy above the $170 mark in the first quarter, and they fell below $130 at the start of this month before rebounding last week on news of the settlement of civil fraud charges brought by the Securities and Exchange Commission."

Personally, I think that the Goldman lawsuit is a travesty. Goldman is getting away with fraud and getting a slap on the hand. But I can't fight the system. I can only recognize how it works—and make it work for me.

No Crystal Ball

When I predicted that nothing would come of the Goldman lawsuit, I wasn't looking through a crystal ball. I was simply using common sense and benefiting from my financial education. As I wrote in my book, Conspiracy of the Rich: The 8 New Rules of Money, Knowledge is the New Money. Because I understand the New Rules of Money, and because I'm continually educating myself about money and the markets, I see opportunity where others don't.

All who play by the New Rules of Money are this way. They understand that knowledge is the single most important component to creating wealth. Goldman Sachs executives know it. That's why it won't be surprising to see them doing stock buybacks and profiting off other investors who sold in a panic.

The good news is that you can also play by the New Rules of Money. You don't have to be a victim to big-bank, big-government power plays. You can educate yourself to see the opportunities out there and to react using the New Rules of Money. You just have to start looking at the world in a different way.

Change your mindset, and you'll change your fortunes.

Original publish date: July 20, 2010

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