SEC accuses Goldman Sachs of fraud in subprime mortgage meltdown

[Bikerdude]

It looks like the rating agencies had a hand in this also. I suspect Paulson knew the CDO package he put together would get favorable ratings because of Goldman's relationship with the rating agencies. Then he wrote insurance with AIG and stuck the taxpayer with the ultimate bill. Pretty slick eh?

[LOL!]

"The Big Short" is not friendly to the ratings agencies nor the people that work in them.

[DeborahB]

I own a GS corporate bond maturing in 1/2011. Wheeeee. Will they pay up? Should I sell it on Monday? Inquiring minds (mine) want to know. As of end of day Friday it was still trading above par.

[Gumby]

Quote:

Originally Posted by LOL! "The Big Short" is not friendly to the ratings agencies nor the people that work in them.

This is what the rating agencies were up to:

http://www.ct.gov/ag/lib/ag/antitrus...scomplaint.pdf

The first 102 paragraphs are interesting background. The heart of the matter starts at Paragraph 103.

[IndependentlyPoor]

Floyd Norris points out in his blog that Gretchen Morgenson and Louis Story had a piece in the Dec. 23 NYT that explains in detail what GS was doing. It's worth a read.
http://www.nytimes.com/2009/12/24/bu...ewanted=1&_r=2

[Bikerdude]

Quote:

Originally Posted by LOL! "The Big Short" is not friendly to the ratings agencies nor the people that work in them.

True, but even so...

SEC Accuses Goldman Sachs of Civil Fraud. When Do We See Criminal Charges? | Crooks and Liars

"And from the American Prospect:
One note of caution: These are hard cases to prove. Even if Goldman Sachs officials knew how crappy these financial instruments were, they also got solid ratings from the bond-ratings agencies, giving Goldman a real out. If the SEC brought this case, they must have a high level of confidence, but now they need to execute what will undoubtedly be one of the most high-profile financial fraud cases since Enron."

[Spanky]

Quote:

One note of caution: These are hard cases to prove. Even if Goldman Sachs officials knew how crappy these financial instruments were, they also got solid ratings from the bond-ratings agencies, giving Goldman a real out.

another strike of our legal system!!!!

[Gone4Good]

Quote:

Originally Posted by Bikerdude "And from the American Prospect: One note of caution: These are hard cases to prove. Even if Goldman Sachs officials knew how crappy these financial instruments were, they also got solid ratings from the bond-ratings agencies, giving Goldman a real out. If the SEC brought this case, they must have a high level of confidence, but now they need to execute what will undoubtedly be one of the most high-profile financial fraud cases since Enron."

Yup. And just because one investor, in this case Paulson, thought they were crappy, doesn't make it so. The fact is, synthetic CDO's are made 100% of stuff that someone else wanted to buy protection on. It's impossible to put together a synthetic CDO where that isn't true. So it's going to be hard for investors to argue that they didn't know the other side of the trade was a possible short . . . every CDS transaction has the other side going the opposite way.

This case will hinge on whether GS misrepresented how the portfolio was constructed, not whether Paulson was right that these were crappy investments.

[Gumby]

Quote:

Originally Posted by Gone4Good Yup. And just because one investor, in this case Paulson, thought they were crappy, doesn't make it so. The fact is, synthetic CDO's are made 100% of stuff that someone else wanted to buy protection on. It's impossible to put together a synthetic CDO where that isn't true. So it's going to be hard for investors to argue that they didn't know the other side of the trade was a possible short . . . every CDS transaction has the other side going the opposite way. This case will hinge on whether GS misrepresented how the portfolio was constructed, not whether Paulson was right that these were crappy investments.

Right you are. Anyone sophisticated enough to buy a synthetic CDO should know that there is a short on the other side. The question is whether they were reasonable in assuming that ACA selected the instruments comprising the CDO in the absence of disclosure of that fact by Goldman. If I knew the short side got to pick the instruments, I would be less inclined to go long the CDO.

[Nords]

Quote:

Originally Posted by Gumby The New York Times had a story on this back in December http://www.nytimes.com/2009/12/24/bu...1&ref=business That article undoubtedly got the SEC's attention, and the subsequent investigation uncovered the fact that Goldman hid the crucial information that Paulson was choosing the RMBS going into the CDO and was not taking the equity tranche. CDS is naturally leveraged. Think about a normal insurance policy. Your premiums come nowhere close to the amount of the potential loss, but rather approximate the loss times the probability of occurrence (plus a hefty profit for the insurer).

Thanks, another good link.

Quote:

In early 2005, a group of prominent traders met at Deutsche Bank’s office in New York and drew up a new system, called Pay as You Go. This meant the insurance for those betting against mortgages would pay out more quickly. The traders then went to the International Swaps and Derivatives Association, the group that governs trading in derivatives like C.D.O.’s. The new system was presented as a fait accompli, and adopted. Other changes also increased the likelihood that investors would suffer losses if the mortgage market tanked. Previously, investors took losses only in certain dire “credit events,” as when the mortgages associated with the C.D.O. defaulted or their issuers went bankrupt. But the new rules meant that C.D.O. holders would have to make payments to short sellers under less onerous outcomes, or “triggers,” like a ratings downgrade on a bond. This meant that anyone who bet against a C.D.O. could collect on the bet more easily. “In the early deals you see none of these triggers,” said one investor who asked for anonymity to preserve relationships. “These things were built in to provide the dealers with a big payoff when something bad happened.” Banks also set up ever more complex deals that favored those betting against C.D.O.’s. Morgan Stanley established a series of C.D.O.’s named after United States presidents (Buchanan and Jackson) with an unusual feature: short-sellers could lock in very cheap bets against mortgages, even beyond the life of the mortgage bonds. It was akin to allowing someone paying a low insurance premium for coverage on one automobile to pay the same on another one even if premiums over all had increased because of high accident rates. At Goldman, Mr. Egol structured some Abacus deals in a way that enabled those betting on a mortgage-market collapse to multiply the value of their bets, to as much as six or seven times the face value of those C.D.O.’s. When the mortgage market tumbled, this meant bigger profits for Goldman and other short sellers — and bigger losses for other investors.

I understand insurance, but the premiums are a bit more pricey if you live in an earthquake zone or a hurricane hits your neighborhood every week. I guess the market was tolerant of this pricing differential as long as the game of musical chairs was still in progress.

It'd be great if us little retail investors could've shorted the NASDAQ in this way in the 1990s, not having to pay dividends or answer margin calls.

I bet CDS rates got a lot more expensive by the end of 2007...

[Gone4Good]

Quote:

Originally Posted by Nords I understand insurance, but the premiums are a bit more pricey if you live in an earthquake zone or a hurricane hits your neighborhood every week. I guess the market was tolerant of this pricing differential as long as the game of musical chairs was still in progress.

That was all part of the credit boom. People couldn't borrow enough and lenders were eager to throw money at them. Everyone was chasing yield.

In the case of these CDOs, part of the "magic" was the Aaa rating. If you can convert a sub-prime mortgage into a "Aaa" security using fairly narrow slices of subordinated tranches, you can create a pretty yieldy Aaa bond. For a bank or an insurance company, these looked great because they paid more than BBB corporates but you didn't have to hold as much reserves against them because they were Aaa.

"Wave them in!"

[kcowan]

Vanity Fair has a good article on Michael Burry Betting on the Blind Side | Business | Vanity Fair who was the first one to buy CDS in order to effectively short the subprime market.

[REWahoo]

It keeps on keeping on...

Quote:

SAN FRANCISCO (MarketWatch) -- Goldman Sachs Group Inc. was warned nine months ago that Securities and Exchange Commission staff wanted to bring a civil case against it, but the investment bank didn't specifically disclose this to investors in regulatory filings... ...Companies typically disclose legal issues such as regulatory probes in their quarterly and annual financial reports. If companies get Wells notices from the SEC, they often specifically disclose this, too. However, Goldman wasn't required to disclose the Wells notice if it believed it wasn't a material event.

Hard to believe this wasn't a 'material event' - the company's market value declined more than $10 Billion the day the SEC went public.

MarketWatch.com

[Nords]

Quote:

Originally Posted by REWahoo Hard to believe this wasn't a 'material event' - the company's market value declined more than $10 Billion the day the SEC went public.

A billion here, a billion there...

[Bimmerbill]

What happened to buyer beware? Didn't the buyers have some part in this? Don't buy stuff you don't understand?

[audreyh1]

That's a huge part of the problem and why I still can't believe the rating agencies haven't gotten in a lot more trouble. They blanket "blessed" a lot of this stuff as AAA. And they were often being paid by the company whose securities they were "blessing". A massive conflict of interest, and extremely obvious when their ratings are compared to other security types which are much safer.

Audrey

[clifp]

Quote:

Originally Posted by audreyh1 But it is clear from GS email that Tourre himself knew (or was of the opinion that) what was being packaged and sold was "junk", and perhaps this is the way the SEC can get at GS for knowingly packaging and selling crap. From what CNBC reported, the main source was actually a higher up inside the Paulson and Co organization. Again - reinforces the notional that Wall Street is rigged against the little guy. Or in this case pension funds and foreign investors/foreign banks. I suspect more will come out about what GS thought about their own products. But it's hard to imagine anything more cynical than letting a big customer hedge fund pick what they think is the worst of the toxic stuff and then turning around and packaging it (as if it were not) to other customers. Audrey

I think GS missed an opportunity to avoid billions worth of lawsuit by simply coming up with more clever acronyms.

For instance if the had called the securities Collateralize Real estate Appreciation Properties aka CRAP. Than they could say, but your honor we told them it was "CRAP."

There is part of me that is rooting for Goldman, they are such a smart villain I hate to see them taken down by an inept organization like the SEC. Of course I always rooted for Darth Vader so maybe I am just a sick puppy.

[Texas Proud]

I was a trustee on CDOs way back.... when they were actually made up of real stuff..

Now, there were some synthetic stuff in there... one of them I fought that the trust would not buy because it was listed as a US treasury swap that actually had a Venezuelan bond underneath that would surface in case the one who sold the swap wanted it.... SOOO, if you did not read all the fine print, you thought you had a US swap when in fact you had a Venezuelan swap..


Now, you CAN make a traunche AAA with anything... you just give it all cash flow until it is paid off.. so, with $100 mill of assest... almost everybody will agree that $10 mill will be paid off... so, they should have an AAA rating...


To me... I think that GS got in trouble because of disclosure... if they were selling the CDOs as 'safe mortgages' or something, knowing they were not safe.. then they can be in trouble.

Also, where are all the SOX criminal cases You would think that with all the troubles, SOMEONE would have a SOX problem...

[Gumby]

Quote:

Originally Posted by audreyh1 That's a huge part of the problem and why I still can't believe the rating agencies haven't gotten in a lot more trouble. They blanket "blessed" a lot of this stuff as AAA. And they were often being paid by the company whose securities they were "blessing". A massive conflict of interest, and extremely obvious when their ratings are compared to other security types which are much safer. Audrey

The rating agencies role in all this has not gone unnoticed. Here is a complaint filed by Connecticut against Moodys. There is a similar one against S&P.

http://www.ct.gov/ag/lib/ag/antitrus...scomplaint.pdf

[FinanceDude]

Quote:

Originally Posted by Gumby The rating agencies role in all this has not gone unnoticed. Here is a complaint filed by Connecticut against Moodys. There is a similar one against S&P. http://www.ct.gov/ag/lib/ag/antitrus...scomplaint.pdf

So when is the US Govt going to sue the rating agencies for the inevitable lowering of our debt rating to less than AAA?