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April 21, 2010

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Steve Diamond

I have to say that after my initially positive reaction to the move by the SEC - finally what was once the crown jewel of the administrative state was kicking back - I am at a loss to see the harm done here.

Goldman did what it is supposed to do: act as a market maker and bring together sellers and buyers of securities. IKB and ACA clearly knew someone would be on the other side of this deal by virtue of the synthetic structure.

In fact, they were happy there were dumb shorts out there to take advantage of, as apparently IKB had done on several previous deals. They had full access to the underlying referenced securities and could, and apparently did, do their own due diligence.

The 3-2 vote of the Commission should be a troubling sign here. If the new team at the SEC cannot find targets for anti-fraud actions in this target rich crisis environment that secure unanimous Commission support then I think there is a deeper problem. Instead they seem to want to step in to protect a German state backed industrial bank that has been in business since 1924 - a bank that survived the Great Depression and WWII over seven decades surely should have understood the risks they were taking.

Kim Krawiec

Yes, I think I’m with you, Steve. As I’ve said from the start, I don’t think that this is an easy case for either side as a purely legal matter. Specifically, I’m not as persuaded by others that Paulson’s role is, by definition, immaterial – for reasons that I plan to talk about in my next post. But having said that, I think I’m very much with you on the larger question – this is the best the SEC could get out of the crisis? Presumably, the SEC, which as I understand it, combed through hundreds, if not thousands of deals, picked this case on purpose. And this is the best they could do? It’s one thing to push the contours of existing law on a case that has real meaning for investor protection, but increasingly, this one doesn’t seem to.

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