Not all scams are perpetrated by Nigerian email writers, Chinese hackers or Ponzi schemers like Bernie Madoff. Sometimes they are done by large corporations. The financial meltdown of the economy that happened in 2008 was largely caused by subprime mortgages issued by lenders such as Countrywide Financial which, in turn, sold these unsound mortgages to financial institutions such as Goldman Sachs, JP Morgan Chase, Citibank, Bank of America and Morgan Stanley, who, in turn rated these risky loans as secure investments bundled them into bonds and sold them to unwary investors who ended up losing trillions of dollars.
On Monday, it was announced that Goldman Sachs settled civil charges brought against it by the federal government and agreed, pursuant to the settlement to pay 5.1 billion dollars. This amount may seem large, but certainly far less than the 13.3 billion dollars paid by JP Morgan Chase to settle similar charges. However, as I always say, rarely is there anything “fine” in fine print and in the fine print of the settlement are various government incentives and tax breaks that can reduce the cost to Goldman Sachs by as much as a billion dollars.
Unlike previous settlements, where the companies were allowed to neither admit nor deny wrong doing, this settlement was accompanied by an agreed statement of facts in which Goldman Sachs specifically acknowledges that it knowingly made false and misleading representations to investors that induced them into purchasing these bonds which Goldman Sachs knew were highly questionable.
This settlement continues the pattern of not a single person from any financial institution charged criminally regarding the bundling and selling of these risky bonds, however, hopefully and significantly, the agreement preserves the right of the federal government to bring criminal charges against Goldman Sachs and its individual employees. Further, the agreement requires Goldman Sachs to cooperate in any such investigations. Only time will tell if this is truly significant or not.
The actions of Goldman Sachs seem even more appalling when you consider that they had the gall to take ten billion dollars in federal TARP bailout money.
Could a similar economic catastrophe triggered by greed, malfeasance, criminal actions and negligence of so many people happen again? Some economic reforms that happened as a result of the 2008 financial debacle have reduced that possibility, however, the question is by how much has that possibility been reduced? It is hard to say. For us, as individual investors we should always remember to never invest in anything unless you absolutely understand what you are investing in and when it comes to taking investment advice, you should investigate any conflicts of interest that may be present in the people and companies encouraging you to buy a particular investment. There is nothing you can do to guarantee that you will not be a victim of investment fraud, but these are things we all can do to reduce our risk.