What angers me the most is that this suit is nothing more than political grandstanding evident through both the inappropriate procedural methods and the fact that this case has no legal merit. First off, the SEC has been investigating this issue since (at least) last summer. Traditionally, the SEC allows firms that are subject criminal/civil investigations to respond to any claims prior to any public indictment. In a very rare behavior, Goldman was not afforded this opportunity nor was it notified that a suit was forthcoming. Granted, this feature is not a “right” however, it appears that the SEC was more interested in repairing their flawed past, improving public perception and tilting the political debate rather than getting the facts straight. Additionally, criminal suits that are initiated towards a “firm” apparently require approval by an internal SEC board that consists of 2 republicans, 2 democrats and 1 independent that (you guessed it) has been personally appointed by the President. I wonder what the vote was… hah? The procedural behavior of the SEC will come back to bite them in the end and further harm their credibility. In my opinion, the SEC needs to completely overhaul itself… This case is baseless and its legal merits solely rely on hindsight. 1.) Any financial swap (equity, fx, credit, etc) has two sides and each side has the right to anonymity. Additionally, the identity of the counterparty has no material effect on the performance of the underlying assets. If I offered you an stock mutual fund and told you Warren Buffet was long or short, would that change the performance of the underlying stocks??? No… the underlying assets perform on their own merit. As an investor, it is up to you to have an opinion on future performance given the investment characteristics and act accordingly to realize profit. 2.) While Paulson’s selections made it into the structure, there is no evidence that Paulson nor Goldman collaborated with the 3rd party, ACA. Paulson initiated (or “applied for”) the swap agreement with securities that he wanted to short, ACA then reviewed the structure proposal from Goldman and independently made changes to the constituents. This is a typical, well-known, and fair practice. How else do swap constituents get selected??? Regardless, ACA’s role in the deal structure is mostly technical and by definition, a synthetic CDO has one side short and one side long. Whatever side initiated (or “applied for”) the structure is not nor should be a consideration of ACA. What if the long side initiated the swap? 3.) As a dealer, Goldman’s role was to facilitate the needs of both its customers. Just as Paulson had the view that these assets were overvalued, there were “so-called” sophisticated customers looking for exposure to credit derivatives linked to the sub-prime housing market. Goldman did not create the underlying securities, rather it brought two parties together with opposing views. The guys who bought these securities were incorrect in their analysis as they assumed that the sub-prime borrower default rate would not rise and/or home values would not fall. That was their conviction and they were wrong. These securities in no way masked the exposure to the weakest borrower. In hindsight, we know this is the dumbest investment known to man. But put yourself back in 2007 when this deal was structured, most of us knew that the housing market was bloated, but very few of us expected the forthcoming freefall. If we did, then our banks and government would have acted sooner to preempt the disaster. Also keep in mind that Paulson, although well regarded in smaller circles at the time, was not the investment guru that we know him as today. The guy was a contrarian, had great foresight, did his homework and should be rewarded for it. There were thousands of these deals done, why does the SEC choose the case with the most prominent dealer and investor??? Hindsight can be a useful weapon in fueling populism especially with a cast of popular characters. 4.) Disallowing hindsight also reclassifies the Goldman trader’s emails about the fall of the structured credit markets as merely opinion… not fact. As an equity guy, I thought the world was ending on March 6, 2009 when the S&P 500 hit 666. Honestly, that was my opinion at the time and I fully withdrew my personal savings from stocks. As a result, I missed one of the greatest stock market rallies known to man. The trader’s rhetoric is carelessly characterized as a fact just because he was right. Yes, he was closely tied with the underlying mechanics and trends in the structure credit markets… but so where others who were bullish. What special information did he have that the rest of us didn’t? 5.) The only potential illegality in this story is that the Goldman trader vaguely implied to ACA that Paulson was taking a long position in the equity tranche of the CDO. Whether a law was broken or not will be determined how a jury interprets this guy’s vague emails. Nonetheless, what the trader did in this instance was unethical. But as I stated in point #1, this information remains immaterial as to the merits of the investment and the deal. As a structure, why would ACA care who exactly owns what? They would have been solely concerned as to the insurability of the underlying securities. Only when taking on counterparty credit risk, investor to investor lending, should the counterparty identity be meaningful.
Your post was way too long and I didn’t read it. I don’t know the details of the deal (as neither do you) so I can’t comment on if GS committed fraud. SEC seems to have a long email trail though clearly indicating GS committed fraud by 1) misrepresenting who selected the securities into pool, 2) misrepresenting that the party who selected securities was independent and objective, and 3) ommitting the fact that John Paulson had influence on what securities were chosen and that he was shorting the same CDO. You can say whatever you want, but if one, two, or all three of the above did in fact happen, GS is guilty of fraud. Goldman’s defense that “we lost money on this trade” is completely irrelevant. First of all, details are emerging that GS had massive amounts of CDS from AIG against the Abascus pools which they profited massively from. Secondly, even if they did lose money, it’s irrelevant. Same way hedge fund managers are prosecuted for insider trading on trades they lost money on.
Source please ?
baseless - no. political grandstand - YES
Note this article names that GS had CDS’s against Abacus with AIG and this article was written 7 days ago (before lawsuit was announced): http://www.reuters.com/article/idUSTRE63B0GJ20100412 Buried in there are some of the email evidence quotes the SEC has released: http://leedsonfinance.com/2010/04/18/goldman-sachs-–-forever-tarnished/ This will never make it to court. This is probably the tip of the iceberg for the evidence. SEC would be idiots to show GS their entire case right now. As more comes to light, GS will settle.
Read the actual SEC write up: http://www.sec.gov/litigation/complaints/2010/comp-pr2010-59.pdf Paulson did meet with ACA and did influence the selection of the portfolio. GS misrepresented Paulson’s interest in Abacus, insinuating that Paulson was taking the equity position, which would align Paulson’s interest with ACA. But in fact, Paulson was taking the exact opposite position.
The media coverage was clearly one sided, and according to me somewhat incorrect. Where is the fraud exactly? All sides had exactly the same underlying info about the mortgage backed securities, they just took different views on the housing market. It is irrelevant how bad these securities were, they worsened after the fact, not before. At the time of this transaction, the vast majority of people were long the housing market and everyone was laughing out the few contrarian views. Well, you cannot alter fraud for incompetence!! And the whole Paulson participation and the influence was laughable. ACA selected the MBSs to take the long side. Paulson took the short side. Where is the fraud in that? Who was Paulson then? No one. I am sure they may be some illegal stuff at GS, but clearly it is not this one.
gino Wrote: ------------------------------------------------------- > The media coverage was clearly one sided, and > according to me somewhat incorrect. Where is the > fraud exactly? All sides had exactly the same > underlying info about the mortgage backed > securities, they just took different views on the > housing market. It is irrelevant how bad these > securities were, they worsened after the fact, not > before. At the time of this transaction, the vast > majority of people were long the housing market > and everyone was laughing out the few contrarian > views. Well, you cannot alter fraud for > incompetence!! > > And the whole Paulson participation and the > influence was laughable. ACA selected the MBSs to > take the long side. Paulson took the short side. > Where is the fraud in that? Who was Paulson then? > No one. > > I am sure they may be some illegal stuff at GS, > but clearly it is not this one. If anything ACA violated fiduciary duty by letting Paulson influence them in portfolio selection
Exactly, they have their own analysts and claim to be experienced in just that. If Paulson did in anyway influence them, then it just speaks they did not follow their fud. duties.
I think this was posted already, but its a good read. http://online.wsj.com/article/SB10001424052702303491304575188352960427106.html