Simon Johnson on Paulson's Role

Simon Johnson of the Baseline Scenario comes out swinging in his commentary today – he states pretty plainly that the SEC will eventually be all over Paulson & Co.

From Baseline Scenario:

As for John Paulson, the issue will of course be the “paper trail” – including emails and phone conversations.  A great deal of pressure will be brought to bear on the people who have worked with him, many of whom now faced permanently broken careers in any case.

Here’s the legal theory to keep in mind.  Mr. Paulson only stood to gain on a massive scale (or at all) if the securities in question were mispriced, i.e., because their true nature (that they had been picked by Mr. Paulson) was not disclosed.  In other words, the Paulson transactions at this stage of the game only made sense if they involved fraud.  The principals involved (Paulson and top Goldman people) are all super smart, with unmatched practical experience in this area; they get this totally.

John Paulson was not the trigger man – it was Goldman and its executives who withheld adverse material information from their customers.  But if the entire scheme was Mr. Paulson’s idea – if he was in any legal sense the mastermind (obviously he was, but can you prove it beyond a reasonable doubt?) – then we are looking at potential conspiracy to commit fraud.  And if he had conversations of any kind and at any time during this period with top Goldman executives, this will become even more interesting – so of course all relevant phone records will now be subpoenaed.

Mr. Paulson should be banned from securities markets for life.  If that is not possible under current rules and regulations, those should be changed so they can apply.  If that change requires an Act of Congress, so be it.

I don’t know if this investigation will get to that point, Johnson seems fairly convinced that it will.

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