Michael Lewis explains very clearly to the too-clever-by-half folks over at Goldman Sachs (an Audit funder) why what they did with Abacus was so wrong.

His thoughts on ACA, the CDO manager, are particularly worth reading. These guys are the linchpin of the case and we haven’t heard much of anything out of them or about them. Here’s Lewis’s conclusion:

Indeed, the social effects of the SEC’s action will almost certainly be greater than the narrow legal ones. Just as there was a time when people could smoke on airplanes, or drive drunk without guilt, there was a time when a Wall Street bond trader could work with a short seller to create a bond to fail, trick and bribe the ratings companies into blessing the bond, then sell the bond to a slow-witted German without having to worry if anyone would ever know, or care, what he’d just done.

That just changed.

I’m no so optimistic about that, but let’s hope Lewis is at least somewhat right.

The Washington Post’s Sebastian Mallaby comes down on Goldman’s side and says the SEC is acting in bad faith. Well, surprise, surprise!

An investor who wants to bet against a bundle of mortgages is entitled to suggest what should go into the bundle. The buyer is equally entitled to make counter-suggestions. As the SEC’s complaint states clearly, the lead buyer in this deal, a boutique called ACA that specialized in mortgage securities, did precisely that.

Notice the fudge there? “Lead buyer.” Nice trick, but even that doesn’t work. See Lewis above.

— Everybody ought to read Bill Black’s testimony to the Angelides Commission House Financial Services Committee on Lehman Brothers yesterday:

Lehman’s failure is a story in large part of fraud. And it is fraud that begins at the absolute latest in 2001, and that is with their subprime and liars’ loan operations.

Lehman was the leading purveyor of liars’ loans in the world. For most of this decade, studies of liars’ loans show incidence of fraud of 90%. Lehmans sold this to the world, with reps and warranties that there were no such frauds. If you want to know why we have a global crisis, in large part it is before you. But it hasn’t been discussed today, amazingly.

Ryan Chittum is a former Wall Street Journal reporter, and deputy editor of The Audit, CJR's business section. If you see notable business journalism, give him a heads-up at rc2538@columbia.edu.