Late last year, the NYT detailed Goldman’s role in the collapse of various GS constructed CDOs (Banks Bundled Bad Debt, Bet against It and Won). The article looked a numerous CDOs, including the Abacus 2007 that was the subject of the SEC complaint.
If you missed it during the last minute holiday shopping, I suggest you take a close look now.
Excerpt:
“Mr. Egol and Fabrice Tourre, a French trader at Goldman, were aggressive from the start in trying to make the assets in Abacus deals look better than they were, according to notes taken by a Wall Street investor during a phone call with Mr. Tourre and another Goldman employee in May 2005.
On the call, the two traders noted that they were trying to persuade analysts at Moody's Investors Service, a credit rating agency, to assign a higher rating to one part of an Abacus C.D.O. but were having trouble, according to the investor's notes, which were provided by a colleague who asked for anonymity because he was not authorized to release them. Goldman declined to discuss the selection of the assets in the C.D.O.'s, but a spokesman said investors could have rejected the C.D.O. if they did not like the assets.
Goldman's bets against the performances of the Abacus C.D.O.'s were not worth much in 2005 and 2006, but they soared in value in 2007 and 2008 when the mortgage market collapsed. The trades gave Mr. Egol a higher profile at the bank, and he was among a group promoted to managing director on Oct. 24, 2007.
"Egol and Fabrice were way ahead of their time," said one of the former Goldman workers. "They saw the writing on the wall in this market as early as 2005." By creating the Abacus C.D.O.'s, they helped protect Goldman against losses that others would suffer.
As early as the summer of 2006, Goldman's sales desk began marketing short bets using the ABX index to hedge funds like Paulson & Company, Magnetar and Soros Fund Management, which invests for the billionaire George Soros. John Paulson, the founder of Paulson & Company, also would later take some of the shorts from the Abacus deals, helping him profit when mortgage bonds collapsed. He declined to comment.”
To me, there is a line that separates what is acceptable behavior on Wall Street and what is not. Shorting stocks, betting against housing and mortgages is one thing. I have no issue with a directional bet, up or down.
Creating synthetic products that are designed to implode, sandbagging clients to invest in them, and then betting against them — that is highly problematic.
> click for larger graphic Graphic courtesy of NYT
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Source: Banks Bundled Bad Debt, Bet against It and Won GRETCHEN MORGENSON and LOUISE STORY NYT, December 23, 2009 http://www.nytimes.com/2009/12/24/business/24trading.html
You are uncharacteristically mincing words, BR. It’s not problematic, it’s fraudulent.
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BR: Read what I wrote yesterday and said on the Tech Ticker Interviews.
If every conversation about the subject is FRAUD FRAUD FRAUD it gets a little boring . . .
GS’s defence seems to be that “The folks who bought this sh*t are all sophisticated investors who could/should have checked the underlying assets but were chasing yield and didn’t either bother or care”
Legally, there is a very fine line there, which is probably why this is, so far, only a a civil case. But wasn’t there once a day when clients of major WS Institutions had a reasonable expectation not to be knowingly sold sh*t? What kind of a world do we now live in and where will it go next with this kind of moral and ethical bankruptcy? There’s a moral crisis in our society above all and it’s being driven by Wall Street.
Oh, by the way, we didn’t do anything “Illegal”.
It’s more than “highly problematic,” BR.
It’s fraud. Theft by deception. That many were involved in the deception (and there were few, if any, single actors involved in these scams), makes it conspiratorial on an institutional and industrial scale, which makes it an enterprise.
What happened was a continuing criminal enterprise, designed to defraud investors.
The RICO statutes should apply.
Under the RICO laws, racketeering activity can include (but is not limited to):
"¢ Any act of bribery, counterfeiting, theft, embezzlement, fraud, dealing in obscene matter, obstruction of justice, slavery, racketeering, gambling, money laundering, commission of murder-for-hire, and several other offenses covered under the Federal criminal code;
"¢ Bankruptcy fraud or securities fraud;
"¢ Money laundering and related offenses.
BR: Didn’t read your reply to tomtom before I commented.
I never get tired of hearing alarms, especially when there is something to be alarmed about. There is no story about the boy who didn’t cry, and keep crying,”Wolf!”
In this case, it was a whole pack of wolves, and they’re dressed as reputable businessmen and mingling with the townsfolk.
The worst thing about this whole episode is this: We know a priori that Goldman is going to waltz away from this with nothing more than a slap on the wrist. There won’t be criminal indictments, much less convictions.
And that’s infuriating.
philipat Says:
“GS's defence seems to be that "The folks who bought this sh*t are all sophisticated investors who could/should have checked the underlying assets but were chasing yield and didn't either bother or care" __________
Good point.
Why would any investor bother or care when they’re entitled (and the manufacturer and seller are under a fiduciary obligation), to accurately and honestly rate, describe, and disclose material facts regarding the product they made and/or are selling?
The defense put forth could be restated as: Only fools fall for fraud, so it’s not our fault if they’re stupid enough to trust us to do what we are obligated to do. They’ll probably find a Corporatist judge that will go for it.
Here’s my analogy. I think the comparison to arson as the NYT article does is too direct, no direct act like arson is needed, just build lots of shoddy houses that with a high probability many will fall down in a few years. Produce and sell (to big banks and other sophisticated buyers) and keep lots of insurance on the houses you built and now are owned by new owners. It’s a great deal for the builder and you as the insurance company…..
Here’s how it would work. You as a company build houses with very questionable techniques ( could be structural things like snow loading inadequacy or faulty cement or footers above the frost line for example) . You as a builder aren’t breaking any laws because there are no building codes/laws (thanks to the Derivatives Moderization Act????). You know with a very high probability, that within a few years most or many of these houses will fall down or whatever. You really don’t have to resort to arson, because you understand probability and the problems with the house and you are sure (with a high probability) that many of the houses will crash. And if you build enough of the houses over a few years a high percentage of the houses will crash , no arson needed just let probability do its’ thing.
Now again thanks to the Derivatives Modernization Act you can produce and sell insurance that the houses you built won’t burn down and you can produce and sell insurance that the house will burn down. You sell tons of insurance (to big banks in Germany and anyone else that is sophisticated) that the house will not crash but all the time you are also holding insurance that the house will fall down, and you sell the insurance to other good clients because the market demands this kind of product.
Now you didn’t break any building codes basically because there are no codes. You were just supplying the needs of people, building houses, DOING GOD”S WORK so to speak.
Isn’t a deregulated market wonderful it opens so many possibilities to make so much money for new innovative financial instruments.
“Blue horse shoe loves Anacot Steel.”
From a piece about playing in the street:
“Instead of maximizing the long-term value of their businesses, their goal has become the production of short-term profits (and the accompanying compensation) at any cost. The firms act as if there is an inexhaustible supply of gullible clients, and for too long investors (and citizens, given that "too big to fail" is still the way of the world) have proven them right.”
It’s intensely painful to agree with Cramer, but this is a weak case. The ABACUS deal was like dozens of others except for the involvement of a short, Paulson. His actual effect was the inclusion of about 10 issues in a pool of 90 or so. If Goldman had disclosed his name and position to the group choosing the pool and to the buyers, it’s unlikely they would have paid attention. At the time “everyone” knew that people like Paulson were cranks. (Please tell me where he went to crank school.) If there was no effect on anybody’s decision, it wasn’t material and the case should be dismissed.
BR’s point about creating products designed to implode is fine, but it depends on intent to defraud, and how do we prove a state of mind? Over the years, some derivatives went from being useful ways to redistribute risk to massive fraud sewers. There’s no way to draw the line and punish the bad guys, yet the fraud part is one of the largest con jobs in history.
What we have here is a failure of the system.
Roger
I totally disagree.
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