On The Goldman Sachs Fraud Charges

17 Apr

I’ve been painfully busy this week so I was only able to get out my thoughts in a few tweets and comments on other blogs, forgive me.  Felix Salmon, Kid Dynamite, Henry Blodget and others have all beat me to the punch, and largely, I share many of their thoughts, especially Dynamite’s most recent take (wherein he quotes Blodget).

I won’t rehash the charges as they’ve already been beaten to death by everyone else, however, I will say after reading the SEC’s complaint, the Abacus pitchbook, and Goldman’s defense, I’ve come to the following conclusions (I’m neither a lawyer or structured finance professional, so keep that in mind):

Not only do I not see how/why GS was under any obligation to disclose the party (parties) on the other side of the Abacus synthetic CDO transaction (see page 8 of the pitchbook), I can’t figure out how it’d matter if they had (more on this below).  I also haven’t seen anything yet that explicitly says whether Paulson & Co. did or did not buy into the equity tranche of the deal.  The SEC complaint seems to imply that they did not, however if that is, in fact, the case, I’m very curious why they danced around saying so clearly…

Also, as KD wrote (emphasis mine):

Note that no one is arguing the merits of GS’s disclosure (or lack thereof) here, but I am absolutely arguing that the disclosure shouldn’t have mattered IF ACA HAD DONE THEIR JOB. The underlying securities in the synthetic CDO are what they are, regardless of who put them on the list, or who takes the other side of the trade.  They need to be evaluated based on risk metrics, cash flows, etc.  The real issue is that ACA didn’t do this work to the level that they needed.

GS may be guilty of insufficient disclosure – let’s just pretend they are.  My point is that even given this failure to disclose, the buyers of the securities in question were grossly negligent in failing to properly assess the values and prospects of the synthetic CDOs, and they are trying to remedy their bad trade by diverting blame.

Again, while I’m not a lawyer, from what we’ve seen so far, it looks like the investors’ shareholders may have merits to file suit against the firm’s management for breach of fiduciary duty, since its seems pretty clear that both ACA and IKB (and/or others) didn’t come anywhere close to conducting the kind of diligence required prior to undertaking such a transaction.  They were given a list of all the underlying RMBS and could have easily done the same research Paulson & Co. apparently did, but it seems that either they did – and simply had a rosier outlook for MBS/over-reliance on Ratings – and/or didn’t, in which case they have no one else to blame but themselves.

At best, Goldman’s role(s) in this Abacus transaction teeter(s) on the edge of what most would call ethical business practices, however, I’m not sure the SEC – especially up against the all-star legal team GS is likely to bring – will be able to prove fraud on any meaningful scale.  Given the emails involving “Fab” Tourre the SEC complaint cites, I wouldn’t be surprised if he gets thrown under the bus here by his squid overlords to save their butts.  If that happens, I also wouldn’t be surprised if he tries to shift the blame onto one or two of his higher-ups, an action which GS senior management may deem necessary to protect the firm as a whole.  Ultimately, my guess at this point is that Goldman ends up paying a $50-$100 million fine -tops – after a year or two of courtroom haggling, while “neither admitting or denying any wrongdoing.”  My friend, The Reformed Broker explains what’ll likely come of this in it far better detail, here.

As far as the bigger picture goes, I’m glad the SEC looks like they may finally be getting their shit together.  Unfortunately, unless they have an ace up their sleeve, I doubt this case is the slam dunk they likely thought it was.

10 Responses to “On The Goldman Sachs Fraud Charges”

  1. Byrne April 17, 2010 at 2:26 pm #

    I wonder how this affects efforts to punish Moody’s, S&P, etc. Since Abacus was a rated product whose assets consisted entirely of rated products, you have to argue that it’s not enough to look at the ratings–but if that’s true, it’s hard to make the case that the rating agencies caused a lot of harm, since their ratings weren’t supposed to be relied upon in the first place.

    I have to wonder how the ACA guys feel. They basically sound like the world’s biggest patsies, since they are shocked–shocked!–that the guys on the other side of the trade expected to profit. I guess you can’t tell the difference between an ATM and a slot machine until you start to lose.

    • Anal_yst April 17, 2010 at 2:32 pm #

      Its a good question, and frankly, I have to wonder why the NRSRO’s have gone this far unscathed, perhaps the gov’t is loathe to piss off Buffett?

      David Merkel had some tweets yesterday that apparently the asset management team @ ACA has subsequently gone relatively MIA, so if there’s any truth in that, this should be pretty interesting to watch.

      I should have mentioned that while I expect GS will continue to exist largely in its same form, they’re likely to get raked over the coals over the next few months/years moreso than they already have been…

  2. Downtown Josh Brown April 17, 2010 at 5:20 pm #

    Thanks for the shoutout. Wish I could be less cynical and I hope that we are both wrong, but history suggests otherwise



  3. Purity April 17, 2010 at 8:15 pm #

    Very reasonable analysis. Do you think the political ramifications of the public image hit the sector is going to take may be a bigger concern than fines, etc.? The media is going to swarm this (many colorful personalities and large $ numbers) and the politicians (contemplating regulatory reform) will to find a demon to point at.

  4. JB April 18, 2010 at 10:57 am #

    Couple of random thoughts …

    The SEC “mole” is Paolo Pellegrini, Paulson’s former head trader. Pellegrini has a massive ego and did not feel he was getting enough credit. So he left last fall to start his own hedge fund. Pellegrini and Paulson had a big falling out and they do not talk anymore. Pellegrini is “Paulson” in this case. He is the guy that did everything’s for Paulson. If he’s talking, GS has a problem.

    Considering Pellegrini’s role makes Tourre is the safest GS employee on the planet. Cut him loose and he squeals to the SEC like Pellegrini. On Friday, they probably offered him a big “stay put” bonus to keep coming to work with a new job description … “do not talk to anyone about anything!”

    GS CANNOT settle. They HAVE TO beat this case. If they settle, without admitting or denying, it is tactic agreement that this is fraudulent activity. The problem is their were dozens and dozens deals like this at all firms. JP Morgan is crapping in their pants over their Bear Sterns exposure. BAC is crapping in their pants over Merrill and Countrywide exposure. UBS and Deuthsche Bank were more aggressive than Goldman in this area.

    If Goldman loses and a precedent is set, the entire street is screwed. The buyers of CDOs that took huge loses will suck them dry.

  5. Finnegan April 19, 2010 at 6:44 pm #

    Having nothing to do with the biz, even I can read the documents and come to the conclusion that the SEC has a really uphill battle. For one, as indicated in the comment above, they would have to present precedent that deals like this were uniformly structured with all parties having universal awareness (of other parties on the deal). That’s nonsense.

  6. greg April 24, 2010 at 11:52 pm #

    I am presently in litigation with Fremont Reorganizing, Goldman Sachs dba Litton Loan Servicing, et al., (2 different cases) for about 2 years now. The main issue with the complaint is a fraudulent loan originated by Fremont in June 2006. This in turn produced an array of other
    issues: unsigned deed of trust, over billing issues, lost payments, excessive balloon payment, back dated assignments, illegal non-judicial foreclosure documentation, missing documentation, illegally reporting to my credit, falsifying declarations, 6 week TRO’s, court procedures not followed, judges wait until the courtroom is cleared to rule against a TRO (both times); retired (78 year old) judge ruled against a seated judges TRO where the retired judge took 30 minutes to read a 300 page brief. The whole time they have been ignoring my request and failing to give me the required documentation so that I can rescind the loan. Goldman Sachs dba Litton Loan Servicing has been aggressively trying to foreclose on my property. I believe to cash out for insurance reasons. (It’s over a million dollar loan) I have invested over $400,000 into this property for the past 5 years and if I had known about this mortgage meltdown game played by Wall Street I would have never proceeded with this Real Estate transaction. The Media and the Government has not once addressed or helped the borrower, namely me, who also has been damaged by these defaulted CDO’s.

    A Time line of what’s going on with Goldman Sachs to show how they are scheming to pursue foreclosures for the insurance by acquiring distressed, shelled fraudulent companies which will eventually or haven’t already gone BK…

     Oct 26, 2005 Litton Loan Servicing Class Action – mishandling loans, servicing over 400,000 borrowers – case settled Feb 17, 2009 for $537 (limited due to class status)
     Feb 27, 2007 FDIC Cease and Desist – Fremont Reorganizing for illegal loan practices, et al., (largest predatory lenders who heavily solicited brokers for their schemes)
     Oct 16, 2007 Massachusetts Lawsuit vs Fremont and Goldman Sachs – Predatory Lending Practices – settled May 11, 2009 for $60 mil
     Dec 11, 2007 – Goldman Sachs Acquires Litton Loan Servicing
     June 2, 2008 Litton (Goldman Sachs) Acquires Fremont Reorganizing Servicing Rights
     June 19, 2008 Fremont Reorganizing files BK
     Apr 16, 2010 – SEC vs Goldman Sachs – Securities Fraud

    Here is the link to my blog http://bushnellcomplaint.blogspot.com/ if you want to download court documents pertaining to my case.

    Note: My wife is pursuing individuals who are interested in joining her in a class action lawsuit with regards to violation of her community property rights in a wrongful foreclosure. If you are in a community property state and a spouse is not on title you may have grounds for legal action.

  7. Gargoyles October 6, 2010 at 7:30 am #

    Good luck getting people behind this one. Though you make some VERY fascinating points, youre going to have to do more than bring up a few things that may be different than what weve already heard. What are trying to say here? What do you want us to think? It seems like you cant really get behind a unique thought. Anyway, thats just my opinion.

    • Anal_yst October 6, 2010 at 7:34 am #

      What the fuck are you trying to say? I’m just waking up and I can already tell that comment makes zero sense. I’m not trying to insult you just put a damn coherent thought together please.


  1. Saturday links: vampire squid edition Abnormal Returns - April 18, 2010

    […] The SEC’s case is no “slam dunk.”  (Stone Street Advisors) […]

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