bobbyw24
04-17-2010, 11:45 AM
April 17 (Bloomberg) -- As Wall Street bombshells go, the lawsuit that the Securities and Exchange Commission filed against Goldman Sachs Group Inc. is about as big as it gets.
Who knew the folks at the SEC still had it in them to accuse a major Wall Street bank of fraud? And who could have guessed that Goldman’s canned explanation for its behavior during the subprime mortgage bubble -- that it simply was serving clients’ needs -- could come so unglued so quickly?
To recap, the SEC’s complaint accuses Goldman and one of its vice presidents of selling subprime mortgage-backed securities to institutional investors, without disclosing that one of its clients, the giant hedge fund Paulson & Co., had paid Goldman to structure these securities so that they would be the world’s perfect short -- at least from Paulson’s point of view.
The securities, called Abacus 2007-AC1, became worthless within months, showing that Paulson had done its homework. The SEC said Paulson paid Goldman a $15 million fee.
The SEC said Goldman’s main infraction was telling investors who bought the securities that an independent company called ACA Management had chosen the assets that were backing them, when it was Paulson that played a major role in the process. The SEC said Goldman duped ACA into believing that Paulson was looking to take a bullish position, though the SEC’s complaint doesn’t try to explain why this somehow would excuse ACA’s decision to bow to Paulson’s influence.
Neither the fund, founded by John Paulson, nor its employees were named as defendants, because the SEC said it was Goldman that made the misstatements to investors.
Goldman Denial
The assets backing these securities, known as synthetic collateralized debt obligations, were themselves securities backed by subprime mortgages. Goldman issued a one-sentence statement denying the SEC’s allegations as “completely unfounded in law and fact.” Among the investors that the SEC says got suckered was a hapless Goldman client in Dusseldorf, Germany, called IKB Deutsche Industriebank AG.
It’s hard to imagine an allegation by the government that could be more damaging to Goldman’s reputation. This wasn’t the American public at large that Goldman supposedly ripped off, which might be forgivable or even praiseworthy from the view of Goldman’s shareholders. These were Goldman clients that Goldman allegedly ripped off, in an effort to please another Goldman client.
Throughout the aftermath of the financial crisis, Goldman and its chief executive officer, Lloyd Blankfein, have consistently stuck to the same story when asked why the bank had created and sold to its clients subprime mortgage-backed securities that quickly became worthless: The firm was merely giving those clients what they wanted.
What They Do
That’s what market makers do, Blankfein told the Financial Crisis Inquiry Commission last January. “What we did in that business was underwrite to, again, the most sophisticated investors who sought that exposure,” he testified.
That may have been true when it came to the Goldman client Paulson & Co., which made $1 billion shorting these allegedly custom-made CDOs by buying credit-default swaps on them. If we are to believe the SEC’s claims, though, it wasn’t true for the Goldman clients that lost $1 billion on the CDOs, including the chumps at IKB, which lost $150 million.
While those clients may have been seeking exposure to subprime mortgages, and may even have been unconscionably stupid for doing so, they surely weren’t seeking exposure to the other side of a cherry-picked trade created for the exclusive benefit of one of the world’s largest hedge funds. They probably aren’t happy, either, with Moody’s or Standard & Poor’s, which, you guessed it, slapped AAA ratings on the CDOs’ highest rungs.
http://www.bloomberg.com/apps/news?pid=20601039&sid=av_P6_Q5RuWw
Who knew the folks at the SEC still had it in them to accuse a major Wall Street bank of fraud? And who could have guessed that Goldman’s canned explanation for its behavior during the subprime mortgage bubble -- that it simply was serving clients’ needs -- could come so unglued so quickly?
To recap, the SEC’s complaint accuses Goldman and one of its vice presidents of selling subprime mortgage-backed securities to institutional investors, without disclosing that one of its clients, the giant hedge fund Paulson & Co., had paid Goldman to structure these securities so that they would be the world’s perfect short -- at least from Paulson’s point of view.
The securities, called Abacus 2007-AC1, became worthless within months, showing that Paulson had done its homework. The SEC said Paulson paid Goldman a $15 million fee.
The SEC said Goldman’s main infraction was telling investors who bought the securities that an independent company called ACA Management had chosen the assets that were backing them, when it was Paulson that played a major role in the process. The SEC said Goldman duped ACA into believing that Paulson was looking to take a bullish position, though the SEC’s complaint doesn’t try to explain why this somehow would excuse ACA’s decision to bow to Paulson’s influence.
Neither the fund, founded by John Paulson, nor its employees were named as defendants, because the SEC said it was Goldman that made the misstatements to investors.
Goldman Denial
The assets backing these securities, known as synthetic collateralized debt obligations, were themselves securities backed by subprime mortgages. Goldman issued a one-sentence statement denying the SEC’s allegations as “completely unfounded in law and fact.” Among the investors that the SEC says got suckered was a hapless Goldman client in Dusseldorf, Germany, called IKB Deutsche Industriebank AG.
It’s hard to imagine an allegation by the government that could be more damaging to Goldman’s reputation. This wasn’t the American public at large that Goldman supposedly ripped off, which might be forgivable or even praiseworthy from the view of Goldman’s shareholders. These were Goldman clients that Goldman allegedly ripped off, in an effort to please another Goldman client.
Throughout the aftermath of the financial crisis, Goldman and its chief executive officer, Lloyd Blankfein, have consistently stuck to the same story when asked why the bank had created and sold to its clients subprime mortgage-backed securities that quickly became worthless: The firm was merely giving those clients what they wanted.
What They Do
That’s what market makers do, Blankfein told the Financial Crisis Inquiry Commission last January. “What we did in that business was underwrite to, again, the most sophisticated investors who sought that exposure,” he testified.
That may have been true when it came to the Goldman client Paulson & Co., which made $1 billion shorting these allegedly custom-made CDOs by buying credit-default swaps on them. If we are to believe the SEC’s claims, though, it wasn’t true for the Goldman clients that lost $1 billion on the CDOs, including the chumps at IKB, which lost $150 million.
While those clients may have been seeking exposure to subprime mortgages, and may even have been unconscionably stupid for doing so, they surely weren’t seeking exposure to the other side of a cherry-picked trade created for the exclusive benefit of one of the world’s largest hedge funds. They probably aren’t happy, either, with Moody’s or Standard & Poor’s, which, you guessed it, slapped AAA ratings on the CDOs’ highest rungs.
http://www.bloomberg.com/apps/news?pid=20601039&sid=av_P6_Q5RuWw