Insider Trading at Goldman? Very Unlikely

Did people named Paulson have all the best information about the mortgage crisis this summer? The Paulson Credit Opportunities fund was up 410% as of the end of August (that's John Paulson), while now the SEC is reportedly investigating possible linkages between the highly profitable Goldman Sachs mortgage-trading desk and The President's Working Group on Financial Markets (that's Hank Paulson).

I'm all in favor of the SEC investigating unusual profits at opaque investment banks, epecially when the rest of the Street seems to be losing money. But I'm pretty sure they'll find nothing untoward going on here.

John Crudele reports:

One person who discussed the matter with the SEC says the investigator seemed curious as to whether the investment banking side of Goldman's business could have tipped off the trading side of that brokerage firm to the extent of the problems that would soon be encountered by Bear and others.

The investment-banking side? Why would they know about problems at Bear Stearns hedge funds? I could understand this more if Goldman Sachs had a big prime-brokerage arm and had lent Bear lots of money, but it doesn't, and it didn't. Besides, you didn't need any inside information about Bear Stearns to go short the mortgage market – the Bear problems were an effect of the problems there, not a cause. And if John Paulson could make the big short-mortgages bet, there's no reason the Goldman prop desk couldn't as well.

Besides, as Crudele notes, even if investment bankers did tell traders about problems at the Bear Stearns funds, it's far from obvious that doing so would be illegal.

There are certainly question marks over Goldman's profits last quarter, but the big questions are whether those profits are real and monetizable, rather than whether they might have been arrived at by impure methods. Still, it's always good to see the SEC doing its job.