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People enter the Goldman Sachs headquarters in the Lower Manhattan area of New York, Friday, April 16, 2010. (Diane Bondareff / AP Photo) While Goldman and hedge-fund king John Paulson garner all the scrutiny, John Carney reveals how the shadiest player in the saga might be the alleged victim.
In Michael Lewis’ bestseller The Big Short, when Greg Lippman, one of the top traders dealing with the kind of derivatives that helped implode the world’s economy, was asked who was selling insurance on all the lousy subprime loans, he answered concisely: Dusseldorf. “Stupid Germans,” Lippman purportedly told wary hedge-fund investors, despite the fact that he worked at a Deutsche Bank. “They take the ratings agencies seriously. They believe in the rules.”
But the Germans selling the credit default swaps to Goldman Sachs—the very swaps at the heart of the SEC’s case against Goldman Sachs—weren’t stupid. In fact, they were wily and wealthy financial players. Nor did they necessarily play by the rules: Their dealings with Goldman seemed designed to evade regulatory and auditor supervision—something the SEC conveniently shoved down the memory hole in order to paint the Germans as just another victim of Goldman fraud.
In short order, Rhineland became one of the biggest buyers of the complex investment products puked out by the likes of Lippman at Deutsche Bank, JP Morgan Chase—and Goldman.
Rather than suckers, a thorough study of the case indicates that Dusseldorf-based IKB Deutsche Industriebank—which seems to eerily resemble the “stupid Germans” Lippman was referring to when seeking buyers for his eventually toxic collateralized debt obligations—was playing the same game that Goldman was.
In a nutshell, the SEC is alleging that hedge-fund titan John Paulson approached Goldman with a list of mortgage-backed securities he wanted to bet against and, since it's generally not possible to bet directly against a mortgage-backed security, Goldman agreed to provide credit protection, before pawning off the mirror image of Paulson’s basket, named Abacus, to unsuspecting customers, while pocketing a profit on both sides of the transaction.
• A Primer on the Goldman Sachs Scandal • Charlie Gasparino: Why Goldman Will Settle Enter Dusseldorf’s IKB. Beginning in 2001, CEO Stefan Ortseifen pursued a strategy to turn his modest operation that specialized in lending to small and midsize companies into an aggressive global player dealing in risky assets while, as detailed by financial reporter Nick Dunbar, getting around the prying eyes of his largest shareholder, a conservative, government-owned development bank. Specifically, he set up off-balance-sheet, offshore company called Rhineland Funding, The Wall Street Journal reported, that would buy risky securities, while escaping direct regulatory or auditor scrutiny. Since IKB controlled Rhineland, which was listed on the Irish stock exchange, and lent it money, it could siphon profits out via hefty management fees. Meanwhile, IKB remained at arm’s length, reducing its exposure by pawning off a portion of its dicey Rhineland loans to others.
It was a piece of regulatory arbitrage: In essence, IKB was investing in complex mortgage bonds without having to set aside regulatory capital or report the increase in risky assets to its regulators or auditors.
In short order, Rhineland became one of the biggest buyers of the complex investment products puked out by the likes of Lippman at Deutsche Bank, JP Morgan Chase—and Goldman. One banker told Euroweek that IKB—through Rhineland and similar tactics—had become one of the five or six largest investors in Europe. Thus, Goldman found them a willing buyer for the junk piled into Abacus.
The crucial question in the SEC’s case against Goldman is whether Rhineland should have been told that Paulson was ultimately the short-seller in this deal or that he had played an important role in selecting the securities that went into Abacus. While it’s not clear that in 2007 anyone would have been worried about a little-known hedge fund being short a deal if they weren’t already worried about Goldman being short, Rhineland certainly should have asked how the portfolio was constructed.
So why didn’t Rhineland—or the managers who controlled it from Dusseldorf—make these inquiries? Most likely, because IKB was playing the game even more aggressively.
View as Single Page 12 Back to Top April 21, 2010 | 11:55pm Facebook | Twitter | Digg | Share | Emails | print var OutbrainPermaLink=document.location.href.replace(document.location.search, '').replace(/\/\d+\/$/,'/').replace(document.location.host, 'thedailybeast.com'); var OB_Template = "The Daily Beast"; var OB_demoMode = false; var OBITm = "1255455386150"; var OB_langJS ='http://widgets.outbrain.com/lang_en.js'; if ( typeof(OB_Script)!='undefined' ) OutbrainStart(); else { var OB_Script = true; var str = ''; document.write(str); } Business, Wall Street, Sec Goldman, John Carnet, Calyon, Rhineland, Stefan Ortseifen, Ikb, Ikb Deutsche Industriebank, Greg Lippman, Abacus, John Paulson, Goldman, Goldman Sachs (–) Show Replies Collapse Replies Sort Up Sort Down sort by date: GPatton
This is mind numbingly complex and borders on the bizzare. Let's bring the situation into sharp focus. If these finacial wizzards want to play chicken with each other 24/7, 365 days a year, no problemo. But they have to use their own money to do it, and live with the consequences, win, lose or draw. They can't be bailed out by governments if things go against them. And they can't be allowed to put the entire global financial system at risk while playing their little zero sum games. George Patton
Flag It | Permalink | Reply 5:42 am, Apr 22, 2010 KAckermannUm, the SEC does not have jurisdiction over foreign banks conducting foreign business. How can you possibly fault the SEC for not bringing up some IKB transgression. The SEC also did not mention that Citi has committed so many crimes that in any normal or fair system, they would be judged habitual criminals against society and done away with. They also did not mention, in general, that the most crime-infested place on earth is Wall Street. All in all, I'm still delighted they brought the charges against the blood-sucking cephalopod.
Flag It | Permalink | Reply 6:40 am, Apr 22, 2010 DakLakWho said government bonds aren't a safer bet?
Flag It | Permalink | Reply | (–) Show Replies Collapse Replies 7:45 am, Apr 22, 2010 flyoverlanddepends on which government you mean. how many Greek bonds would you like?
Flag It | Permalink | Reply 11:08 am, Apr 22, 2010 mcmchugh99This is typical of Wall Street during Giled Age periods in which there is no legal oversight and control, and they peddle all calls of worthless "assets" all over the world. They were doing it in the First Gilded Age in the late-19th Century with watered railroad stock. Needless to say, the little people should not have their money invested with these sharks. Thank God we stopped them from getting their hands on people's Social Security money, although they still have all that pension money that they have been ripping off.
Flag It | Permalink | Reply 9:58 am, Apr 22, 2010 gardengirlwhat a clusterf**k. next up for the microscope: the bank-ruled ratings agencies.
Flag It | Permalink | Reply 10:03 am, Apr 22, 2010 mcmchugh99Goldman-Sachs has made $693,675 in political contributions so far this year--$476,375 to the Dems and $217,300 to the Republicans. So far in 2010, Citigroup has donated $633,675--$476,375 to the Dems and $217,350 to the Republicans American Bankers Association has donated $1,463,350 for 2010--$643,250 to the Dems and $820,100 to the Republicans JP Morgan Chase $592,414--$325,366 to the Dems and $266,578 to the Republicans Bank of America $822,382--$380,260 to the Dems and $442,123 to the Republicans Morgan Stanley $614,529---$317,492 to the Dems and $304,537 to the Repubs. Usually, Wall Street splits its donations about 50-50 or 60-40 between the two parties, although with a slight advantage for the Republicans in most cases. Source: Open Secrets.org http://www.opensecrets.org/orgs/list.php
Flag It | Permalink | Reply 10:32 am, Apr 22, 2010 fritzzHere we go again, blaming the poor Jews. except John Carney, he knows what side his breads buttered on.
Flag It | Permalink | Reply 10:43 am, Apr 22, 2010 PicachuThe Street is pushing back hard against regulation. Unfortunately there are actually regular folks - and by regular I mean people with normal incomes - who actually support them because they pledge allegiance to cowboy casino capitalism, and they actually believe we should allow this kind of scheming and fraud to continue. The only people who really benefit from it are these rat bastards who are sick with greed - they are not mentally healthy people who execute these schemes. These are the kind of folks who would drill a whole in a life boat in the middle of the ocean if they thought there was something in it for them. This is the behavior of sociopaths and their supporters are buffoons and idiots, or if not, they are riding the gravy train. These folks remind me of hieress Patty Hearst when she was kidnapped by the Symbionese Liberation Army. In captivity she snapped mentally and eventually identified herself as one of her captors. I think middle income Americans who support this kind of obscenity are suffering the same mental disorder as Patty Hearst did with the SLA. To the Wall Street Wizards who are fighting so hard against regulation I would say this. If you are really as talented as your obscene bonus checks would suggest, then your massive intellects and huge talents should be able to devise a way for you to make lots of money without putting the entire global economy at risk. After all, you're just that good, right? The truth is you have no such talents and abilities. You are scammers and con-men who got to run the casino. You can't make the obscene dollars you make in a legitimate enterprise because you are a bunch of amoral hacks who lack any sort of ethics or conscience. Not only do you not deserve your bonus checks, but you belong in prison with the rest of the criminals.
Flag It | Permalink | Reply 12:42 pm, Apr 22, 2010 SharkstaTell you what... since these big banks have shown time and time again they can't be trusted, let's take them down. As a reminder that we don't pull this kind of nonsense again, we should have a regulator team assigned to each bank, who looks at all transactions, making sure they are on the books, and that the transactions are legal. The banks should have to pay a fee to the government in the amount it costs to regulate them.
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