A $1 billion fraud charge has been brought against Goldman Sachs by the U.S. Securities and Exchange Commission. Goldman has had $10 billion wiped off its market capitalization.

A discussion amongst editors and writers for The International Chronicles


A $1 billion fraud charge has been brought against Goldman Sachs by the US Securities and Exchange Commission. Lawyers are searching for investors who lost money on Goldman’s Abacus products to join a potential action against the bank. The SEC (Securities Exchange Commission) alleges that Goldman misrepresented investments in a CDO (Collateralized Debt Obligation) called Abacus 2007-AC1 to investors in order to enrich a key client — Paulson & Co., the hedge fund run by Henry Paulson, Jr., who served as the 74th United States Treasury Secretary and was previously the Chairman  and Chief Executive Officer of Goldman Sachs.
The investors allegedly lost more than $1 billion when the CDO dropped in value while Paulson & Co., which was betting that the CDO would fail, made about $1 billion. Goldman had $10 billion wiped off its market capitalization in the hours after the SEC’s charges were revealed, but has denied the accusations. The charges against Goldman come days before the U.S. Senate is expected to debate President Obama’s banking reforms. Among foreign governments affected by the Goldman/Abacus connection - and threatening legal action - are Scotland, Germany, England and Greece.

The Reactionary gathered several of its regular financial contributors - all experienced professionals in the world of International Finance - and managing editor Alexander Ackley for an uncensored round-table discussion on the subject.  

Galileo: Galileo is a Financial Insurance Executive in the U.S.

So here is my issue with all that is going down in steps:                       
  • A guy does fundamental research based on public information and forms a creative view, in fact one that runs counter to the majority of the market and economy.  
  • Based on above, he would like to be on the short side of a specific trade.
  • He expresses that in the form of a put option.
  • He asks a bank to sell him the put and for it to be indexed to a specific basket of securities in the form of a synthetic CDO.  
  • The bank creates that synthetic CDO in exchange for a structuring fee and finds another “sophisticated” investor to buy it (not a mom/pop and believe me, there were many of these institutional muppets gagging for this product) effectively flattening out their exposure on the trade   
  • Does the bank have an obligation to inform these investors that the only reason they were able to create this synth CDO was because they had a CDS buyer on the other side? I say no.  
  • If the bank informed investors that Paulson & Co was buying part of the CDO to entice them, is that deception/fraud? Clearly.  
  • If the u/l mortgage pools performed well (it was not a fait accompli that they would default) and the investors rec’d their coupons and principal back while Paulson paid his quarterly CDS premo to no result, would we be hearing about this at all? No.


Again, if there was misinfo given to deceive or entice, that’s one thing but the above process is not illegal or even immoral in my book…it’s just a trade between a smart investor who wanted to take a bet and a bunch of stupid investors who very much wanted the other side…no “predatory” selling, lending, etc. This is more driven by the outcome than the process as the latter is part and parcel of a two-sided functioning financial market. If this exact same process happened on a customized equity basket – call it the S&P 492 – to exactly the same result, would it be fraud or insider trading?

Delroi T. Pusser: Delroi T. Pusser is a Wall Street bigwig with 20 years in the financial services industry. 5 in commercial banking, 15 in equity market and distressed asset research.
The problem with Galileo's interpretation is that it ignores the fact that as a "fiduciary", Goldman's first responsibility is to protect the buyer. In the discharge of those duties, it must disclose all that it knows about the transaction's composition.  
No  one is arguing that the composition or the bet underlying the transaction was illegal (unethical yes, illegal no); no one should be arguing against the reality that IKG, RBS and AIG did a comically poor job of 'due diligence' on the performance of the underlying debt tranches (which were shown to be breaking down as of late 2005 to the few parties interested enough to do the proper leg work), and thus should never have underwritten the protection. The argument here is one of disclosure / transparency.  
Fully acknowledging that Paulson in early 2007 had not yet entered the pantheon of mega-hedge fund fame, but instead was simply considered one hedge fund doing business, the fulcrum issue here is that the pitch book for abacus should have explicitly stated that the CDO was constructed by Paulson/GS because they believed the debt entailed in the vehicle to be that which is most likely and most quickly to be impaired. If upon that disclosure, the IKG/RBS/AIG muppets still decided it wasn't worth studying the underlying more closely because they thought Paulson was chasing the wrong theme, then this case would have no merit.  
The case will turn on "disclosure" and "selection". I understand every transaction is a debate, a contest between someone who thinks the asset in question is worth more or less than the spot price, but it’s a very defining fact being omitted when the vehicle itself is expressly created out of what an informed party believes to be the worst quality possible. This in no way should exonerate the buying parties who are equally guilty of  incompetence. This isn't an argument to redeem IKG, RBS, or AIG ...ignorance is never an excuse. But it became a much larger socioeconomic issue when transactions precisely like this forced the taxpayer to be involuntarily enlisted to  rescue both buyer and seller. If GS had been allowed to  fail  like many of its less connected brethren, we wouldn't be debating this. Instead GS is allowed to argue that it has supreme risk management when its facile ("we hedged our AIG exposure, we were never in danger..."), and conversely that it has sub par risk management when it convenes also ("we lost money on abacus also..").

Alexander Ackley:  Managing Editor and Creative Director of The Reactionary
Excellent debate.  What Goldman Sachs has perpetrated is beyond mind-BENDING...and here in Europe the buzz is that Germany and England may go after GS...and hard.  This could finally be the straw that breaks the camel's back...Paulson and the Vampire Squid at Goldman might have pushed their luck too far. Unfortunately Delroi's moral stance is an anachronism and Galileo is right...in today's banking there is no such thing as a client...we are all just counterparties.
That fundamental shift is, in my relatively uninformed opinion, the nexus of all that has transpired...the very core of the change that has caused and created the world we live in today.

Sometime in the last 25 years banks (everywhere, including previously sacrosanct Switzerland) stopped looking at their customers as clients and began seeing them as counterparties...and at that  point all pretension to ethics or a moral compass in the industry were annihilated. It is every man for himself, devil take the hindmost, and all fiduciary responsibility for your customer base be damned. Welcome to 21st Century Finance.

Goldman's behavior might have been morally dubious. However, the securities they were peddling were only ever sold to sophisticated investors (eg. RBS and Rabo) who have access to exactly the same information and analytical resources as Goldman Sachs. The only difference is that they were seemingly too greedy, lazy or credulous to use those resources. The law suits should be by shareholders against investors, for neglect of fiduciary duty. Goldman can hardly be blamed for the fact that its clients couldn't be bothered doing basic due diligence on investments that they were spending hundreds of millions of dollars to acquire. 

Thomas H. Spartacus: Thomas Huckleberry Spartacus is a Private Portfolio Investment Manager in New Jersey, U.S.A.
While I appreciate Alexander Ackley wanting to be thoughtful, this is hardly an excellent debate, and I can't believe that Delroi T. Pusser and Galileo still miss the point; THE LARGER POINT ABOUT UN-REGULATED DERIVATIVES STILL BEING IN THE PUBLIC DOMAIN (yes we taxpayers guarantee these worthless pieces of Wall Street contrivance).
They were/are fraudulent sham transactions that serve No Economic Purpose, and were Never Adequately Reserved to meet the failure of a counterparty to deliver the perceived insurance they stated they were offering in the event of a claim. THIS IS WHY BUSH / PAULSON / BERNAKE / GEITHNER stepped in and honored all of those worthless AIG derivative contracts and bought up hundreds of billions of dollars of worthless bonds that were trading at 11 cents on the dollar and gave the thugs who tendered them to the Federal Reserve 100 cents on the dollar.

It is beyond Sickening what has transpired here, and then to have to suffer the smugness of someone like Blankfein &Co., who are nothing more than corrupt little actors starring in their own one-act play...it's enough to make one want to go out and prevent these scumbags from spawning. Think of it as a permanent Mass Sterilization Program!

AIG didn't have the reserves to pay the claims and because of the interlocking zero sum game that Wall Street Finance is, one domino triggers the entire house of cards - they should have let the Deck of Cards Collapse. These products need to be banned, by any Public Co. No Stockholder public company should be allowed to traffic in these products.

If a private partnership wants to put their Partners Capital up to underwrite and backstop this useless contrivances then so be it, and if they fail to pay a claim, then they go down. If this was in place these products would dry up and vanish into the night, they ONLY Work with the Publics' Money backstopping them. This is the ONLY viable reform to arresting and halting the lunacy that is Wall Street Gambling, backstopped by Governments and ultimately tax payers.
That is why the corrupt thugs Both Democrats and Republicans Refuse to address this in a serious manner. It is game over if they ever curb and regulate these assinine products which serve No Economic Purpose Except to Enrich Wall Street. I am highly skeptical than anything meaningful will be done to stem this flagrant, scum bucket slop. It is Where the Money Is, that is why Wall Street is fighting regulation and reform of derivatives with every last ounce of their naked Greed.

As For the Republicans, THEY ARE AN EMBARRASSMENT TO THE COUNTRY. They give not one rat's ass about the populace and country. In my opinion they are even more offensive than Obama, Summers, and Geithner, Do the Right Thing You Spineless Scum Bags or suffer the consequences.
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published this page in The Attic 2012-03-27 05:28:00 -0400