At this point,

everyone everywhere probably has a reasonable idea

what the suit entails, who is involved, and other basic

circumstances surrounding the legal problems that

Goldman now faces, and so we see no need to rehash

those particulars. We shall, however, comment upon

the longer term effects of what has happened here and

upon how we believe this shall further affect the

markets.

When asked over the weekend by a friend of ours who

works at Goldman Sachs what we thought the

implications were we noted the following:

Firstly, and foremost, as we have always said,”There

is never just one cockroach.” There has probably

never been a more apt statement about what shall

transpire about the future than this statement regarding

Goldman, for clearly there will be more revelation; and

clearly there will be more and larger legal problems for

Goldman to wade its way through. If the US

government is willing to take Goldman to court in a civil

suit, then it is but a matter of time until the French, the

German, the Canadian, the Australian, the British and

many other governments too shall take them to court in

the same fashion. The legal expenses alone shall be

material; the mental stress from one law suit after

another shall become worse. On Wall Street there is

never only one cockroach… Never.

Secondly, Goldman Sachs will survive this event, but

clearly it will be a much smaller entity when everything

is finished, and that will be years into the future, not

days or weeks or months. The impact upon morale

within the company shall be huge and it will not be

good. Initially, there will be an “Into the bunkers, us

vs. them” mentality that will ramp up the morale within

the firm, but eventually the grind of the law suits

involved will weigh heavily upon that moral and

heavily upon the company… but Goldman will survive,

diminished but still a viable entity.

Thirdly, the now infamous “Fabulous Fabrice” will

be tossed under the proverbial bus as quickly as

senior management can toss him, with the “buses”

already lined up to run him over. Other, higher-up

officials within the firm will also be tossed under the

bus, and before it is done the entire group assembled

YEN V. US$

May WTI Crude

to piece together exotic mortgage back securities will

be forced out and that department closed if the firm is

to retain any credibility at all. The process will be

slow… except in the case of Mr. Tourre.

Fourthly, we do find it of some mitigating value that

the actions taken by the government are civil and no

criminal. The Justice Department’s civil and criminal

people must talk one with the other and we suspect

that the criminal division approved the civil action in

lieu of a criminal proceeding, apparently believing that

a finding of criminal guilt would be impossible to bring

to fruition before a judge or jury, but that the lesser

level of proof required in a civil action was achievable.

Fifthly, we are still shocked at the responses by the

currency markets to this news, for although we do

indeed understand that this action is forcing “risk” to be

taken off the table globally, the fact that this action

originated in the US should mean that the risk of

holding US assets should be more serious than the risk

of holding European or other non-US dollar assets.

We can therefore understand why the Yen

strengthened, but we are still surprised by the overt

weakness in the Aussie and Canadian dollars. This

makes no sense to us whatsoever given the stronger

economies in both countries and the far sounder

banking systems in both.

Sixthly, just as we were and are surprised by the

weakness in the Aussie and Canadian dollars, we are

surprised too by the weakness in the gold market, for

we would have thought that a rush out of equities and

away from risk would be a rush to gold. Thus far that

assessment has proven to be uncommonly wrong.

Seventhly, the public will love this story and because

the public will love it it shall have “legs:’ that is, we can

expect that this story will linger on the front pages of

the US’ newspapers for months, with the very

obviously help by the Democrats to keep it there. The

Left shall see this as a means to push harder and

longer against Wall Street and the public will accept

that and urge the Obama Administration to press its

case fervently. This will be all the more ironic given

that Goldman Sachs was one of the largest donors to

and most open and consistent supporters of the

Democratic Party. Those donations and that support

will now prove for naught.

Eighthly, the Democrats will use this politically in

November to keep the gains by the Republicans that

might otherwise have occurred to much small losses,

winning seats that at the margin would have gone

Republican. It will make no difference to the man-inthe-

street that Goldman was an enormous supporter of

the Democrats, for the Left will paint this situation as

one of “Bankers vs. the Public” and that will play well to

the Democrat’s benefit and to the Republicans’

detriment.

Finally, the longer term implications for the US

economy in particular and the global economy in

general are small at worst. The global economic

advance is strong enough to pick itself up, dust itself

off and continue higher even in the aftermath of this

event. This will be disastrous for Goldman Sachs; it will

be merely a misfortunate blip along the way for the

economy generally.

There are clearly other implications that will evolve,

and perhaps some of ours will not happen or will

happen in s slightly different format than the one we

have drawn here, but we think these nine points cover

the situation rather well for the moment. We will add to

what we’ve written over the course of the next several

months, but all we are certain of at this time is that life

within Goldman Sachs shall not be fun for a very, very

long while, nor shall it ever be the same as it was only

a few days ago. The “game” for Goldman Sachs has

changed materially. It clients and its employees shall

have to come to grips with that fact. Goldman of the

future will not be the Goldman of the past. Of that

much we are certain: