Goldman Sued on Countrywide Underwriting « naked capitalism

Friday, January 25, 2008

Goldman Sued on Countrywide Underwriting

Don’t get too excited, this move by New York City and State to sue lead manager Goldman, 25 other underwriters and accounting firms over a Countrwide stock offering is routine securities fraud, in this case making misrepresentations about the company’s prospects. No one has yet to develop a legal theory to go after Goldman for the move that has many offended, being net short subprime related debt while continuing to sell them to investors. And the latter is unlikely to go anywhere (saver perhaps serving as fodder for Congressional investigations) because that action didn’t violate any securities laws.

However, the Countrywide deal raises an interesting question. Banks like Bank of America are going to the market and will of course put the best possible spin on the outlook for their business. Wonder if this will be the breeding ground for further litigation.

From Bloomberg:

Goldman Sachs Group Inc. and 25 other underwriters of Countrywide Financial Corp., the biggest U.S. mortgage lender, were named as defendants in a suit by New York state and city officials for allegedly making misleading statements about the company’s prospects.

New York City Comptroller William Thompson Jr. and state Comptroller Thomas DiNapoli added the 26 securities firms, two accounting companies and additional Countrywide officers and directors as plaintiffs in the investor securities-fraud lawsuit filed last year in federal court, according to a statement issued today by Thompson’s office.

The state and city pension funds’ combined losses due to Countrywide’s declining stock price were as much as $100 million, Thompson said on Nov. 30.

8 Comments:

v says:

January 25, 2008 at 8:18 pm

I understand this is far-fetched, but as a financial industry layman I’ll simply ask:

Could any of this be related to the “get together” the NY Insurance Dept would like to see regarding the monolines? I mean, if GS, C, JPM, et al decide to seriously come back to the table, perhaps the NYC and NYS Comptrollers will settle with them out of court (for peanuts or some substitute, i.e. cooperation) in the CFC suit. I’m just curious why it took the Comptrollers so long to name the underwriters/Big Finance (GS, C, JPM, MS, etc) in the CFC suit.

My guess is that the above is too far-fetched, but I’m curious for your thoughts. Especially after SocGen, lol. Mucho thanks in advance.

Carl says:

January 25, 2008 at 10:49 pm

Right targets. Hope they win but I think the odds are against them. The Feds got Al Capone for tax evasion though didn’t they? Justice sometimes happens even when the odds are bad.

doc friggn holiday says:

January 25, 2008 at 11:44 pm

I just pulled the following post (below) from your (naked) blog, and have no link, but I want to suggest that the underwriters that are one in the same with SIFMA, are Americas number 1 enemy, no doubt at all, these are the people , the organization that will destroy America as we know it, and I suggest people learn as much as possible about these scumbags that should be disbanded; if we had a new threat of a terrorist-like organization that was a cross between, Nazis and mafia with greater control, reach and desire, it is this group of people that need to be examined by every honest law agency in the world! I am 100% serious! These people are at the core of Pension problems, in the form of lobbying DOL to grant exemptions, to run The Fed and get instant rate cuts, to modify the mortgage industry, modify and US govt agency or GSE……think its crap, do your DD for a few months or years!

The American Securitization Forum wrote the rate freeze presented to the public by the President and the Treasury Secretary.
It can be found it at americansecuritization.com

The framework allows servicers to modify loans without borrower signatures.

Source: American Securitization Forum, Streamlined Foreclosure and Loss Avoidance Framework for Securitized Subprime Adjustable Rate Mortgage Loans, Executive Summary, December 6, 2007, page 13, third paragraph from bottom of page

Counseling and modification expenses are to be charged to securitized trust cash flows, so service providers, like Countrywide, which has a representative on the board of the American Securitization Forum, will profit from the process.

Source: American Securitization Forum, Streamlined Foreclosure and Loss Avoidance Framework for Securitized Subprime Adjustable Rate Mortgage Loans, Executive Summary, December 6, 2007, page 7, first full paragraph

Appraised value for modifications are based on the date of origination, even if the current value is much less.
Source: American Securitization Forum, Streamlined Foreclosure and Loss Avoidance Framework for Securitized Subprime Adjustable Rate Mortgage Loans, Executive Summary, December 6, 2007, page 2, second bullet

According to the American Securitization Forum’s Framework for the rate freeze, borrowers will not have to document current income to be eligible for refinancing, even if they received initial loans with embellished incomes

Source: American Securitization Forum, Streamlined Foreclosure and Loss Avoidance Framework for Securitized Subprime Adjustable Rate Mortgage Loans, Executive Summary, December 6, 2007, page 3, FICO test

Anonymous says:

January 26, 2008 at 12:01 am

On January 18, Ambac Financial Group, Inc. (“Ambac”) received a Subpoena Duces Tecum and Interrogatories (collectively, the “Subpoena”) from the Securities Division of the Commonwealth of Massachusetts dated January 18, 2008 (the “Securities Division”). The Subpoena seeks information regarding the “Massachusetts Public Issuer Bonds” (defined to include debt securities of the Commonwealth of Massachusetts and any political subdivision thereof, and quasi-governmental entity located in Massachusetts, and any city, town or county of Massachusetts and any political subdivision thereof) insured by Ambac from January 1, 2006 to the present, and requires production of related offering materials and written disclosures pertaining to Ambac and provided by Ambac to the underwriters or issuers of such Massachusetts Public Issuer Bonds.

Re: INTERROGATORIES
1. Provide a list of all Massachusetts Public Issuer Bonds issued during the Relevant Time Period for which AMBAC has insured the repayment of the principal or interest.

2. For each Massachusetts Public Issuer Bond listed in response to Interrogatory No. 1, provide the name of the issuer, the date of transaction, the principal amount of the bond, the rating the bond received from AMBAC, and all fees and other remuneration earned (directly or indirectly) by AMBAC in connection with the issuance of such bond.

3. For each Massachusetts Public Issuer Bond listed in response to Interrogatory No. 1, provide the names of all underwriters who were involved in the issuance of such bond.

DOCUMENTS TO BE PRODUCED
1. For each Massachusetts Public Issuer Bond listed in response to Interrogatory No. 1, provide copies of all offering or disclosure documents associated with said bonds.

2. For each Massachusetts Public Issuer bond listed in response to Interrogatory No. 1., provide copies of all written disclosures pertaining to AMBAC provided by AMBAC to the underwriters or issuers of such bonds.

HEREOF FAIL NOT, as you will answer under the powers and penalties of the law in that behalf made as provided. Dated this 18 th day of January, 2008.

Go Galvin!! Please help watch this story here yves!!!! Grwat post on Goldman! Boooo, financial scum!!!

chef holiday says:

January 26, 2008 at 12:44 am

At Davos, L’Affaire Kerviel Is the Topic du Jour
JANUARY 24, 2008, 6:13 PM

http://dealbook.blogs.nytimes.com/2008/01/24/laffaire-keviel-still-the-talk-of-the-town/

… even greater gasps of consternation and the odd frantic giggle among top executives here was 100,000 euros. That’s the annual salary-cum-bonus of the 31-year-old trader in question, who is now officially “on the run.”

This has the familiar odor of a aged French cheese.
Do the French think the rest of the world is stupid. When will the truth be told..
— Posted by p, cohen

Fun stuff but oui, what a friggn mess this financial entropy, which continues to expand like:

A soufflé is a light, fluffy, baked dish made with egg yolks and beaten egg whites combined with various other ingredients and served as a savory main dish or sweetened as a dessert. The word soufflé is the past participle of the French verb souffler which means “to blow up” or more loosely “puff up” — an apt description of what happens to this combination of custard and egg whites.

Erin Burnett’s slip? Anyone???

Anonymous says:

January 26, 2008 at 12:46 am

The New York Post’s Page Six reports, “Erin Burnett has a potty mouth. The CNBC hottie reported Wednesday that Apple shares were down, and noted, ‘It was the It Stock of ’07, and it is apparently the s–t stock of 2008.’”

Page Six reports, “CNBC flack Brian Steel later insisted: ‘It was a scripted play on words – not an expletive.’

doc holiday sifma sniffer says:

January 26, 2008 at 2:10 am

I wish I could type and hit these damn keys faster, but no time; thanks for the story on Ambac!!

On to more fun:

MOODY’S PLACES ITSELF ON NEGATIVE WATCH

Washington – Moody’s the ratings agency, has placed itself on negative watch, citing it’s horrendous track record at rating just about everything except t-bills.

“We suck. We couldn’t spot an investment-grade bond in a box of Confederacy Debentures or Continental Bank CD’s.” said one source at the agency…

http://bigpicture.typepad.com/

Now on to crime drama from SIFMA:

http://en.wikipedia.org/wiki/Repurchase_agreement

>>> ** See also:2.2 Tri-party repo *** < <<

The distinguishing feature of a tri-party repo is that a custodian bank or international clearing organization acts as an intermediary between the two parties to the repo. The tri-party agent is responsible for the administration of the transaction including collateral allocation, marking to market, and substitution of collateral.

***

Custodial Receipts. The Fund may invest in custodial receipts which are interests in separately traded interest and principal component parts of US government securities that are issued by banks or brokerage firms and are created by depositing US government securities into a special account at a custodian bank. The custodian holds the interest and principal payments for the benefit of the registered owners of the certificates or receipts. The custodian arranges for the issuance of the certificates or receipts evidencing ownership and maintains the register.

Crime in the making here!!

doc holiday says:

January 26, 2008 at 3:10 am

1. Substitution of collateral seems to be a criminal matter, {but tell that to SIFMA or offshore interests that can swap around derivatives (see Buffetts new bond deal this week which is using custodial derivatives)}:

“No Purchased Loan permits the release or substitution of collateral if such release or substitution (i) would create a “significant modification” of such Purchased Loan within the meaning of Treas. Reg. ss. 1.1001 3 or (ii) would cause such
Purchased Loan not to be a “qualified mortgage” within the meaning of Section
860G(a)(3) of the Code (without regard to clause (A)(i) or (A)(ii) thereof).

The subprime mess has forced many trust funds to swap out bad loans from pools, but in doing so, they need to swap similar characteristics and thus qualify the substitution. These types of modifications brought about by foreclosures and defaults trigger many complex events which are linked to securities that have been swaped, or where the counterparties are literally playing casino games with CDO entities that can fail, because they “were” engineered to be highly leveraged and to take on as much risk as was legally allowed, which IMHO, was and is criminall!

What if your pension money market was linked to a simple CD that ends up being a yield enhancement which is linked to a CDO that made a bad bet and then that was linked to a hedge fund that made a bad bet, but the hedge fund rented a balance sheet or was able to borrow securities from another pension fund to cover some bets and so and so on; what if the borrowed securities were called which triggered a margin call and the market tanked and your pension money ends up being used as collateral to save a bond insruance company’s credit rating….would that matter to anyone?

Lets say this all goes away and then business gets back to normal and your pension then gets used to enhance other deals, like:

The embedded derivative feature in our funds withheld treaties is similar to a fixed-rate
total return swap on the assets held by the ceding companies. The swap consists
of two parts. The first is the market value of the underlying asset portfolio
and the second is a hypothetical loan to the ceding company.

Then they link up to this: LENDING OF PORTFOLIO SECURITIES. Consistent with applicable regulatory  requirements, the Fund may lend its portfolio securities to brokers, dealers  and other financial institutions, provided that such loans are callable at  any time

Its a criminal game and worth being very, very parinoid, even if you dont follow the insanity of how The Department Of Labor grants underwriters exemptions for prohibited activities that allow pension funds to link with hedge funds and derivatives….and its a crime what happened eith Pension reform!

I feel better now!

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