SEC accuses Goldman Sachs of fraud in subprime mortgage meltdown

[chinaco]

Looks like the the Investment Bankers are taking some heat.

IMO - They deserve all of the love the SEC and Justice Dept can give them. Wouldn't hurt if new regs broke them up or restricted their practices. They seem to be at the center of the meltdown.

SEC accuses Goldman Sachs of fraud in subprime mortgage meltdown - latimes.com

The SEC's lawsuit alleges that Goldman did not tell investors in the securities that they were based on a portfolio of mortgage bonds selected by a hedge fund. The investment bank subsequently helped the hedge fund, Paulson & Co., place bets against the same bond portfolio, the suit says.

Paulson, which made a number of such bets, made billions of dollars as the subprime home-loan market collapsed in a wave of borrower defaults.

 

[Brat]

Let the fun begin!!

 

[chinaco]

I wonder how big the bonuses were for being on both sides of the deal? Do you think the Bonus for the Loser deal was bigger than the Gainer deal?

 

[Gumby]

These guys did almost the same thing--

The Magnetar Trade: How One Hedge Fund Helped Keep the Bubble Going (Single Page) - ProPublica

It's a long article, but well written and informative.


By the way, here is the SEC's complaint against Goldman. Fun reading as well.

http://www.sec.gov/litigation/complaints/2010/comp-pr2010-59.pdf

 

[winger]

What a shock.

 

[FIREd]

I think we should give GS a break. After all they are doing "God's work".

 

[clifp]

I am just sorry, I was not smart enough and/or connected enough to figure these things out.

 

[Steve O]

Dow futures down -112... When the Asian markets open Sunday night it could be really ugly...

Earnings next week should be interesting...

How are the Banksters gonna justify their huge bonuses after huge earnings?

Blankfiend reportedly lost $50,000,000 today on his GS stock...

But a trusted third party probably shorted it for him

Washington is playing Chicago politics to get their agenda through...

Main street is gonna be out with pitchforks demanding justice...

I'll be licking my greedy chops looking for good buys

 

[Gumby]

I think that even if they lost and had to disgorge their entire fee on this deal, it would hardly be a blip on Goldman's balance sheet.

 

[Brat]

If there was any a problem that requires aggressive regulation and litigation this is it. Who needed Al Qaeda to bring down our financial system, Wall Street did it for them. I am not one of those who cheer plaintiffs lawyers but this has class action meat if there ever was. There may not be enough for a criminal conviction but on the civil side hit them financially as a corporation and individuals. Typically buying a bad actor transfers liability.

I caught bits of the WAMU Congressional report.. I hope auditor "Bubble Boy" is promoted to head of the agency.

 

[clifp]

Financially reporting is often pretty dry and dull (God knows I contribute to the problem).

That's why I loved last year's Rolling Stone Article about Goldman, it is never dull (but I am not sure it is that accurate. )

[SIZE=+1]T[/SIZE]he first thing you need to know about Goldman Sachs is that it's everywhere. The world's most powerful investment bank is a great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money. In fact, the history of the recent financial crisis, which doubles as a history of the rapid decline and fall of the suddenly swindled dry American empire, reads like a Who's Who of Goldman Sachs graduates....
..
But then, any attempt to construct a narrative around all the former Goldmanites in influential positions quickly becomes an absurd and pointless exercise, like trying to make a list of everything. What you need to know is the big picture: If America is circling the drain, Goldman Sachs has found a way to be that drain — an extremely unfortunate loophole in the system of Western democratic capitalism, which never foresaw that in a society governed passively by free markets and free elections, organized greed always defeats disorganized democracy.

The rest is here

 

[Nords]

These guys did almost the same thing--
The Magnetar Trade: How One Hedge Fund Helped Keep the Bubble Going (Single Page) - ProPublica
It's a long article, but well written and informative.
By the way, here is the SEC's complaint against Goldman. Fun reading as well.
http://www.sec.gov/litigation/complaints/2010/comp-pr2010-59.pdf

Financially reporting is often pretty dry and dull (God knows I contribute to the problem).
That's why I loved last year's Rolling Stone Article about Goldman, it is never dull (but I am not sure it is that accurate. )
The rest is here

Thanks for the links, guys. Fascinating.

Why did the SEC file this as civil rather than criminal? Is the thought that a criminal case has an unacceptably high burden of proof?

I understand how technically Paulson "did nothing wrong" (ethics is another issue), but surely he knew those CDOs were being sold to [-]suckers[/-] unsophisticated investors. Was Paulson obligated to warn off Tourre from attempting to sell the CDOs without disclosing Paulson's involvement? Was Paulson obligated to inform the SEC of his knowledge of a conflict of interest? Is he liable for any of his "inactions"?

Heck, how did the SEC find out about this in the first place? Who dropped the dime on Tourre?

This civil suit smacks of Buffett claiming to not know what Ferguson was doing at Gen Re with Greenberg's AIG reinsurance transaction. I guess the logic was that they were providing liquidity and if the recipient used it for illegal purposes then it wasn't their problem. Again technically not wrong, but not ethically right either.

How could the shorts get such a big asymmetric investment? It sounds like they were buying CDOs with dimes, buying CDSs with pennies, and collecting dollars when the CDOs collapsed to trigger the CDS payouts. Where's the market liquidity? Why didn't everyone pile in to drive up the prices of CDSs?

By the way, Clif, remember who was a major investor in Goldman Sachs as a partnership and profited mightily from their late-1990s IPO:
Honolulu Star-Bulletin Local News

 

[chinaco]

Why did the SEC file this as civil rather than criminal? Is the thought that a criminal case has an unacceptably high burden of proof?

..

I think the suit was timed (a little) to put focus on Wall Street malfeasance because of the pending financial reform regulation.

Plus the SEC has had a horrible track record in terms of regulating those banks. It make them look like they have a back bone.

--- My commentary on it---

The bottom line is that many of those Hedge Fund operators either worked for the banks (early in their careers and have friends) or have tight relationships through deals. Some insiders knew how to exploit it (and shared the info). Some outsiders (hedge funds) figured it out. Whether the approach was whispered in the ear (by a friend) or someone figured it out because they study those situations... it was gamed at the expense of ordinary investors and our economy.

I hope they break up those investment banks and limit their activity to a more narrow portion of the market. They have an insider advantage of knowing what the rest of us do not and (today) are allowed to exploit it for profit (at our expense).

Bottom line: Now that pensions are a thing of the past... they are having a field day feed off the naive public's 401ks, IRAs, Self Directed Accounts. Now that Americans have to fend for themselves in terms of retirement... the market is a wash with many weak (small) investors and they are able to siphon off profits.

Those investment banks need to get back to raising capital for American businesses that make things and provide services and out of the business of helping hedge funds and large investors (private equity) with inside information and slick techniques that make them huge profits (and thus getting rich off of obscene size bonuses).

 

[Gumby]

Financially reporting is often pretty dry and dull (God knows I contribute to the problem).

That's why I loved last year's Rolling Stone Article about Goldman, it is never dull (but I am not sure it is that accurate. )

The rest is here

That "vampire squid" has got to be one of the greatest metaphors of our time.

 

[Gone4Good]

Why did the SEC file this as civil rather than criminal? Is the thought that a criminal case has an unacceptably high burden of proof?

I think it is a burden of proof issue. This isn't a slam dunk case. It basically revolves around disclosure in the offering memo. Did Goldman make false claims or representations? Meanwhile the OM was vetted by lawyers and the deals were "independently" rated by the credit rating agencies. I think this is a heavy lift for the prosecution, even though it is clear as day that Goldman is scuzzy as heck.

How could the shorts get such a big asymmetric investment? It sounds like they were buying CDOs with dimes, buying CDSs with pennies, and collecting dollars when the CDOs collapsed to trigger the CDS payouts. Where's the market liquidity? Why didn't everyone pile in to drive up the prices of CDSs?

The CDO's were created to facilitate the "long-side" of the trade. In a synthetic CDO the investment pool is filled with CDS contracts of people who want to buy protection (go short). The buyers of the CDO bonds are taking the other side. Pauslon says to Goldman "I want to buy protection on XYZ." Goldman puts that contract into a CDO and sells it to investors as a bond, the broader CDS market isn't affected.

Basically the investment banks were going to hedge funds and asking them to short RMBS bonds so that they would have raw material for new synthetic CDOs. The whole arrangement is perverse.

 

[Gumby]

Why did the SEC file this as civil rather than criminal? Is the thought that a criminal case has an unacceptably high burden of proof?

I'm sure the burden of proof went into the SEC's thinking on this.

I understand how technically Paulson "did nothing wrong" (ethics is another issue), but surely he knew those CDOs were being sold to [-]suckers[/-] unsophisticated investors. Was Paulson obligated to warn off Tourre from attempting to sell the CDOs without disclosing Paulson's involvement? Was Paulson obligated to inform the SEC of his knowledge of a conflict of interest? Is he liable for any of his "inactions"?

It is an open question as to whether Paulson owed a legal duty to the buyers on the long side. The SEC is not required to join him in this suit. They could see how this plays out and go after him later (subject to statute of limitations concerns).

, how did the SEC find out about this in the first place? Who dropped the dime on Tourre?

The New York Times had a story on this back in December

http://www.nytimes.com/2009/12/24/business/24trading.html?_r=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.

How could the shorts get such a big asymmetric investment? It sounds like they were buying CDOs with dimes, buying CDSs with pennies, and collecting dollars when the CDOs collapsed to trigger the CDS payouts. Where's the market liquidity? Why didn't everyone pile in to drive up the prices of CDSs?

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).

 

[donheff]

The Magnetar deals are fascinating, sounds just like the creeps at Enron as the F over "granny" in California. It sounds like their "Tigris" deal that screwed the Japanese bank had to be as fraudulent as the Goldman deal the SEC is pursuing. Maybe GS is the tip of an Iceberg of litigation to come. It would be nice to see these guys lose there shirts or, better yet, go to jail.

 

[audreyh1]

Why did the SEC file this as civil rather than criminal? Is the thought that a criminal case has an unacceptably high burden of proof?

I believe that the SEC can only bring civil suits. A state attorney general or federal prosecutor type has to decide to bring criminal charges.

Audrey

 

[audreyh1]

I understand how technically Paulson "did nothing wrong" (ethics is another issue), but surely he knew those CDOs were being sold to [-]suckers[/-] unsophisticated investors. Was Paulson obligated to warn off Tourre from attempting to sell the CDOs without disclosing Paulson's involvement? Was Paulson obligated to inform the SEC of his knowledge of a conflict of interest? Is he liable for any of his "inactions"?

No, because Paulson and Co had no disclosure obligations. Only Goldman Sachs did.

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.

Heck, how did the SEC find out about this in the first place? Who dropped the dime on Tourre?

From what CNBC reported, the main source was actually a higher up inside the Paulson and Co organization.

This civil suit smacks of Buffett claiming to not know what Ferguson was doing at Gen Re with Greenberg's AIG reinsurance transaction. I guess the logic was that they were providing liquidity and if the recipient used it for illegal purposes then it wasn't their problem. Again technically not wrong, but not ethically right either.

How could the shorts get such a big asymmetric investment? It sounds like they were buying CDOs with dimes, buying CDSs with pennies, and collecting dollars when the CDOs collapsed to trigger the CDS payouts. Where's the market liquidity? Why didn't everyone pile in to drive up the prices of CDSs?

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

 

[LOL!]

"The Big Short" by Michael Lewis is all about hedge funds finding ways to short subprime mortgage bonds that were rated triple-A. They were packaged into CDOs. One could then buy insurance on the CDOs called CDSs (credit default swaps) that would pay off if the CDOs went bad. Goldman Sachs appeared to be on both sides of this.

The book is an easy and entertaining read which means that some government attorneys probably finally read it and understand why their tax dollars bailed out investment banks. I think that's why they are coming out of the woodwork now with prosecutions.

Most, if not all, of nords' questions are answered in the book.

 

[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]

"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/antitrust/moodyscomplaint.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/business/24trading.html?pagewanted=1&_r=2