J. Bradford DeLong, an economist at Berkeley, distills the Goldman Sachs allegations so thoroughly that it would be foolish for me to try to excerpt it. This is, maybe, a 5 minute read — if you’ve never cracked an economics textbook in your life.

UPDATE:

Here’s a half-hearted defense of Goldman Sachs, not surprisingly from the Wall Street Journal.

After 18 months of investigation, the best the government can come up with is an allegation that Goldman misled some of the world’s most sophisticated investors about a single 2007 “synthetic” collateralized debt obligation (CDO)? Far from being the smoking gun of the financial crisis, this case looks more like a water pistol.

The column suggests that the SEC overlooked, or is trying in its Complaint to ignore, “the difference between a cash CDO—which contains slices of mortgage-backed securities—and a synthetic CDO containing bets against these securities … The existence of a short bet wasn’t Goldman’s dark secret. It was the very premise of the transaction.”

Did Goldman have an obligation to tell everyone that Mr. Paulson was the one shorting subprime? Goldman insists it is “normal business practice” for a market maker like itself not to disclose the parties to a transaction, and one question is why it would have made any difference. Mr. Paulson has since become famous for this mortgage gamble, from which he made $1 billion. But at the time of the trade he was just another hedge-fund trader, and no long-side investor would have felt this was like betting against Warren Buffett.

Not that there are any innocent widows and orphans in this story. Goldman is being portrayed as Mr. Potter in “It’s a Wonderful Life,” exploiting the good people of Bedford Falls. But a more appropriate movie analogy is “Alien vs. Predator,” with Goldman serving as the referee. Mr. Paulson bet against German bank IKB and America’s ACA, neither of which fell off a turnip truck at the corner of Wall and Broad Streets.