1 Boring Old Man

SEC charges Goldman Sachs with civil fraud in subprime deal
McClatchy Newspapers
By Greg Gordon
April 16, 2010

WASHINGTON — The Securities and Exchange Commission Friday charged Goldman Sachs & Co. and one of its executives with fraud in a risky offshore deal backed by subprime mortgages that cost investors more than $1 billion. The SEC also contends that Goldman allowed a client, Wall Street hedge fund Paulson & Co., to help select the securities. Paulson in turn bought insurance against the deal and when the securities tanked, losing almost all their value, Paulson made a $1 billion profit. The civil fraud charges were the first to be filed against Goldman, the prestigious Wall Street investment-banking titan that’s at the center of multiple inquiries into the causes of the global financial meltdown.

Paulson has acknowledged that it reaped a $3.7 billion profit by betting against the housing market as it nose-dived in 2006 and 2007. The securities cited by the SEC were part of a series of offshore sales known as ABACUS. The Goldman executive, vice president Fabrice Tourre, 31, was principally responsible for structuring the ABACUS deal known as 2007-AC1, a so-called synthetic package in which investors didn’t buy any actual securities. Instead, they bet on the performance of a specified bundle of home loans to marginally qualified borrowers. The complaint, filed in U.S. District Court for the Southern District of New York, charges Tourre with making “materially misleading statements and omissions” to investors…

The complaint alleged that Paulson, one of the world’s largest hedge funds, paid Goldman to assemble a deal in which Paulson would select certain mortgage-backed securities and then take short positions, or bet against them. The marketing materials for the investment, known as a collateralized debt obligation, all represented that the mortgage-backed securities were selected by ACA Management LLC, a third party.

“The product was new and complex, but the deception and conflicts are old and simple,” Khuzami said in a statement. “Goldman wrongly permitted a client that was betting against the mortgage market to heavily influence which mortgage securities to include in an investment portfolio, while telling other investors that the securities were selected by an independent, objective third party.”

The deal, one of about two dozen similar bundles in the ABACUS series, closed on April 26, 2007. Paulson paid Goldman about $15 million for structuring and marketing the deal. Within six months, 83 percent of the mortgage-backed securities in the bundle had been downgraded and 27 percent were placed on negative watch by Wall Street ratings agencies, the complaint said. By the following Jan. 29, it said, 99 percent of the portfolio had been downgraded, costing investors more than $1 billion…

This story has the whole reason the Derivatives have to be regulated. Goldman Sachs puts together an investment instrument called ABACUS. What is it? It’s tied to a group of cdos [mortgage-backed securities]. These cdos were bundled mortgages from high risk borrowers. So the "securities" weren’t really in existence, their value hinged on the home owners paying off their mortgages. But Goldman Sachs wasn’t even selling these exotic cdos. They were selling bets on whether or not the cdos would tank or pay off.  Enter stage left, a hedge fund manager pays Glodman Sachs to let him pick the cdos to bet on. Then the hedge fund guy who has picked these losers himself bets against them. Best I can tell, that’s a derivative bet against a derivative bet on a bunch of derivatives. Nothing of actual worth is even involved, yet billions were lost and gained in a scam that used Goldman’s name to lure in the prey. That’s not "selling short." That’s fraud.

What reason could we possibly have for having such a market? What reason could we possibly have for allowing Banks to be involved in these markets? What reason is there not to regulate this market? They only benefit the players and the investors who control vast sums of other people’s money. The yield can be astronomical, but the losses can be steep. More to the point, it’s the other people who lose. When it’s all said and done, that money comes from somewhere, somebody’s pocket. Mine and yours.