This blog is written weekly by Dock David Treece, a registered investment advisor with Treece Investment Advisory Corp. It is meant to share insight of investment professionals, including Dock David and his father, Dock, and brother, Ben, with the public at large. The hope is that the knowledge shared will help individuals to better navigate the investment world.

Monday, April 19, 2010

Dollars & Cents: Somebody’s Listening…

It’s safe to say that someone out there is paying attention to this column. Last week we discussed ‘dishonest dealings’ in business, and before the week was out the accusations had been made against the world’s preeminent investment bank – Goldman Sachs (NYSE:GS) – and one of the world’s most influential investors, John Paulson, the President of hedge fund firm Paulson & Co. who made substantial bets against real estate several years ago and raked in billions when the floor finally fell through.

While Paulson has been lucky enough to escape charges [so far], Goldman Sachs has officially been charged by the SEC with securities fraud, a crime that could cripple the firm, or bring it down entirely.

Of course, Goldman Sachs has been the center of much criticism for several years as it has risen to prominence, often through means that would be considered less-than-honorable. It has also been popular among conspiracy theorists, who note that Goldman has been tied in with Treasury officials in every administration in the past several decades.

In fact, two Treasury Secretaries since Clinton have been former-heads of Goldman: Robert Rubin (Clinton) and Henry Paulson (George W. Bush). This fact frequently made headlines in 2008 when Henry Paulson (no relation to John) helped to engineer the Wall Street bailout that helped his ol’ banking buddies, including his former employer.

[Henry Paulson and his cohorts were covered in greater detail in “The Biggest Heist in History,” which was written in January and is available on the Toledo Free Press website.]

Now, with headlines made the world over, it is almost unnecessary for the SEC to prove the charges leveled against Goldman, who has already been convicted in the court of public opinion, as has John Paulson. Meanwhile, the worry has just begun for a good deal of Wall Street firms, who are likely to be the next focus for SEC investigators.

What remains to be seen is just how this is going to affect the general public. It’s important to understand that a good deal of pension funds and public retirement systems are plugged in with Goldman, if not Paulson, in one way or another. Many investors are now learning that when they all took losses in 2008, those losses were due in no small part to fraud on the part of some of the big investment houses.

As a firm, Goldman’s influence webs out across the globe, permeating nearly every aspect of the world economy, and more importantly the financial markets. With a market capitalization of nearly $100 billion, and net tangible assets numbering over $1 TRILLION, Goldman’s operations rival a good deal of the world’s governments.

The charges facing the firm and the difficulties Goldman will face in repairing its credibility and rebuilding its business, once the storm passes, are akin to Russia or Argentina defaulting on government debt, or the Iraqi invasion of Kuwait in 1990.

The impact of Goldman Sachs’ indictment and John Paulson’s apparent complicity in criminal behavior are just beginning to be felt around the world. Since the news was released late last week, Goldman Sachs stock has fallen nearly 15%.

Meanwhile, the hype surrounding Goldman’s illicit activity (read: dishonest dealings) is just what Washington needs to urge its next pet project to follow-up healthcare – financial reform. While the stories continue to come out on Goldman, Paulson, et al, don’t look for things to calm down on Wall Street – or Pennsylvania Avenue – anytime soon.

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