Race and the Tea Party: An Exchange Worth Reading

Department of "Huh?!" Goldman-Sachs vs. SEC Edition

Megan McArdle:

Megan McArdle: So the vote on the SEC to bring charges against Goldman broke down by party lines.  Liberals, understandably, view this as evidence of malfeasance.  But of course, there's an alternative interpretation also consistent with these facts: that Democrats brought a weak charge that won't stand up in court because they thought it would help them push through their bank reform. One piece of evidence in favor of this: none of the people I know who are familiar with securities law think that the government has a strong case; the opinions range from "seriously pushing the envelope" to "give me a break"...

I'm going to blow the whistle and call an intellectual foul here. Nobody I have talked to says "give me a break." Everybody, however, says "pushing the envelope": this isn't a place that the SEC has gone very often. Where there is debate is over whether this is pushing the envelope in a good way or a bad way.

The question is: Is the fact that this security was designed to enable John Paulson to make a large short information-based bet on the subprime housing market a "material fact" that should have been disclosed to buyers?

The argument for "no" is that the SEC has power to demand disclosure of information about cash flows from securities--and who is in the marketplace for what securities is not information about cash flows, and is in any case hard to track down and an undue regulatory burden upon the system.

The argument for "yes" is that when securities are designed to fit the interests of specific traders then the fact of that designing becomes something that a buyer would very much like to know and incorporate into their decision-making process--and hence material. Stocks and bonds are not designed for individual speculators: everybody knows their characteristics, hence no question of the fit between their characteristics and the information set of the person on the other side of the trade arises. This ABACUS security was designed--hence in this case the fit is material information.

It's a question. But it's not a "give me a break" question. And anyone who says it is who is not being handsomely paid by Goldman Sachs to have that opinion is giving it away for free...