Tom Adams Discusses SEC Fraud Suit Against Goldman on BNN Posted on April 16, 2010 by Yves Smith Enjoy! Watch the segment here. Post navigation ← Leaked Goldman Presentation on Abacus Trade Antidote du Jour (Updated with Links) → Subscribe to Post Comments 15 comments ndk April 16, 2010 at 10:35 pm Apparently BNN hired the same garage band from somewhere in the suburbs of Saskatoon to play their theme song that HNIC did. Yossarian April 17, 2010 at 12:10 am Wait is that the spin that the media is running with now- that Obama and the Dems have always been staunchly anti-bank while The Republicans are pro-bank? BNN states this as if it is fact- are we really that stupid to be falling back into this Dem vs. Rep game again? Can’t we see that both parties are total shills for the financial sector and the inflationary environment govt and academia so love? MindTheGAAP April 17, 2010 at 1:15 am “are we really that stupid to be falling back into this Dem vs. Rep game again?” Are you kidding? Go look at the other posts on this site today. And there’s no “again”–it’s more like “still”, except now that every President is his own brand, some people just say they’re reflexively “pro or anti-obama” or “pro or anti-bush” instead of identifying with the actual party either president represents. tom April 17, 2010 at 12:34 am I thought that was strange, too. Perhaps that’s how it looks in Canada… MyLessThanPrimeBeef April 17, 2010 at 1:34 am I don’t understand why, if you need FDA approval for a new drug, don’t you need some kind of government approval for a new financial innovation, with data from actual experiments involving first, animals, such as vampire squids, and then Homo Notd-So-Sapiens Not-So-Sapiens over some time periods to back up the application for approval? Similarly, if they had required communism be tested first before the theory was unleashed on the Russian workers, the world would have been spared a lot of trouble. jake chase April 17, 2010 at 1:12 pm Maybe if we required presidential candidates to have some actual experience running something besides their mouths or the Texas Rangers? anon April 17, 2010 at 3:01 am Peridot: That was quite an interesting press release issued by Goldman Sachs (GS) after the closing bell tonight. All day today investors concluded from the details of the SEC’s fraud charges that Goldman worked with Paulson and Co. to weaken the composition of the ABACUS transaction in some fashion, perhaps in an effort to boost the odds that Paulson would profit from taking the short side of the trade. The SEC seemed to indicate, judging by the fact that it charged the Goldman employee in charge of the deal for lying, that someone from Goldman told ACA Management that Paulson was actually making a $200 million long investment in ABACUS. Goldman’s latest press release seems to tell a much different story. The side that makes their case the best could potentially make the other side look a bit foolish here. What did Goldman claim tonight? First, they state that their firm lost $90 million on the transaction, as it had a net long position that soured when the CDO went bust. Next, Goldman denies that their employee ever told ACA that Paulson was taking a long position in ABACUS. That directly contradicts the SEC’s claim that ACA was told Paulson was going to be long alongside them, which if true, would seem to imply that ACA was fooled into thinking that collaborating with Paulson while structuring the CDO would not be problematic for them. Another Goldman claim in the release seems to be the most important, in my view, if it is accurate. Goldman says that the single largest long investor in ABACUS was, believe it or not, ACA Management (with an investment of $951 million). If ACA truly was the largest long investor in the CDO, they had every incentive to structure the deal correctly (and Goldman is quick to point this out). In such a scenario, why would ACA ever allow Goldman and/or Paulson to hand-select mortgage securities for the CDO that might jeopardize their investment? Now, it will take a lot of time to determine whether Goldman’s defense is true or not. However, their press release seems to make a bit more sense. If ACA was the firm that selected the portfolio, and also was the largest long investor in the CDO, the ABACUS deal goes from looking like a huge conflict of interest (as it did earlier today) to having interests aligned quite nicely. If you were the largest investor in a deal, it makes sense that you would want to be the firm that got to approve the mortgage securities that were included in it. Did ACA consult with Paulson and Co. as well as other firms while structuring the deal? The Goldman press release essentially admits this to be true. Should those discussions have been disclosed in the CDO’s marketing materials? Maybe. But as long as ACA had the final say, it really does not seem to be a big deal. After all, would it be considered fraud if a Wall Street analyst recommended clients buy stock in Company XYZ, but before doing so consulted numerous sources, including Company XYZ’s CEO? Would that single discussion with the CEO need to be disclosed in the analyst report in order to assure that investors knew that one of the analyst’s sources for the research was biased in their assessment of the company’s prospects? Of course not. Like I said, we cannot take Goldman at face value at this point, just as we cannot take the SEC at their word either. After all, the SEC recently brought insider trading charges against high-profile Dallas Mavericks owner and high-tech entrepreneur Mark Cuban — and lost. If most of what Goldman has said in this latest press release can be proven, it looks like the SEC’s case this time around might not be a slam dunk either.” DownSouth April 17, 2010 at 8:22 am anon, You are quite accomplished at setting up straw men and then knocking them over. ACA, contrary to your assertion, is not being cast as a co-conspirator by the SEC, but as a hapless victim. “A reputable company” and “poor ACA” are the exact words the BNN moderator used to describe ACA Management. The claim that “the single largest long investor in ABACUS was, believe it or not, ACA Management (with an investment of $951 million)”—-the same ACA Management who, according to the moderator, “is not around any longer”—-only goes to reinforce the SEC’s argument. And Goldman’s defense that it “lost $90 million on the transaction” seems a bit far-fetched. Maybe Goldman did indeed lose money on this specific transaction, but how much did Goldman win by shorting the bond products it created? We need to not lose sight of the forest for the trees. And as Tom Adams is quick to point out, the counterparty to many of Goldman’s shorts was AIG. AIG was not able to honor all these shorts, but thanks to Goldman’s ringers inside the US government, they were ultimately paid off by the American taxpayer. Robert Searle April 17, 2010 at 5:26 am Money is essentially electronic data transmitted from one bank account to another. This occurs in banks ofcourse. As such money/transactions can be tracked, and controlled (if necessary) in event of potential fraud.. My project on TRANSFINACIAL ECONOMICS may also be of interest too. See my p2pfoundation entry. craazyman April 17, 2010 at 5:33 am That announcer dude has one hell of an edgy shirt and tie combo. :) Here is the bottom line, that nobody will admit . . . Even if Goldman had disclosed on page 1 of the offering memorandum that Paulson was 300% leveraged on the short side of these bonds and had legally committed to quit his firm and pump gas for a living at the local Shell station if these bonds worked out . . . THE GERMANS STILL WOULD HAVE BOUGHT THEM!!!! Why would they still have bought them? Because they would have convinced themselves that they were going to be right and Paulson was going to be pumping gas!!!! They would have convinced themselves in both German and in English, separately and as a group, in their scrubbed office with the investment policy committee meeting around the big table with the contemporary art in the lobby, assuring each other in hushed and serious voices. And then they would have gone out to the local beer hall and had a few pitchers each, with some big fat German sausage in a toasted bun. This is how the addicted and deluded mind works. There is no logic. There is only the overwhelming force of imagination enflamed by the prospect of money. Yearning to Learn April 18, 2010 at 10:19 am Ah, I see. so it’s ok to lie so long as craazyman determines that consumers will buy a product anyway. Got it. [/snark] although I agree that it is highly likely that SOME of the Germans et al may have bought this dreck anyway, it does not excuse the fact that material misinformation was given, and that is illegal. a consumer has the right to correct information about their purchase. I would prefer to allow them to have that information upon purchase, as opposed to having you dictate what they “would” have done after the fact. I hope you use this criteria in your everyday life. For instance, if you try to buy organic food that has an organic label, and then find out it’s not organic. Or if you found out that the insulation in your home caused you to get cancer and the manufacturer knew it and hid it. Or if you found out that your multivitamin was contaminated by melamine and the manufacturer knew and hid it. right? you’d probably buy a house, food, and a vitamin anyway, right? Glen April 17, 2010 at 5:55 am Sure starting to look as if you would have to be a crook or a schnook to be doing business with GS no matter how this SEC business works out. DownSouth April 17, 2010 at 7:39 am The implications of this are stunning, perhaps not so much from a legal-criminal point of view as from a political point of view. Bankers have been telling us that homeowners were the sole culprits in the scourge of bad mortgage loans. These revelations, however, cast everything in a totally different light. Now we see how bankers stood to win by originating “kamikaze” loans and packaging them into “suicide” bond products—-products designed to fail. This will go a long way to shift the blame from the hapless homeowner (whose claim to haplessness is clearly much stronger than that of financial professionals like ACA or AIG) to the financial services industry. But far more important is that it pulls back the curtain on what is perhaps neoliberalism’s principle magic trick—-the conversion of private debt or obligations to public debt. Because when AIG couldn’t pay off on Goldman’s and Paulson’s shorts, Paulson and Goldman had to have their ringers inside the government—-Treasury Secretary Henry Paulson, Bernanke, Summers, Geithner, etc.—-to make sure that Paulson got paid his $1 billion in shorts, he along with other privileged elites. The message becomes quite clear: In this elaborate game of fraud and deceit, the US taxpayer is the ultimate bag holder. Casting a further pall over the entire scheme is John Paulson’s cozy relationship with Alan Greenspan: http://www.associatedcontent.com/article/543223/alan_greenspan_joins_john_paulsons.html It’s all just one big incestuous pit of vipers. tom April 17, 2010 at 7:38 pm I agree – it’s long been my belief that the screwed up incentives with CDOs and CDS and the games the banks and their (good) clients played were at the center of the financial crisis and the housing bubble. Paulson was paying people a premium to buy the worst mortgage loans, which of course led to the creation of more bad loans. This is why the community reinvestment act argument never worked for me as an explanation for the bubble. The push for really bad mortgages expanded very quickly because the lenders had a big financial incentive to make them and sell them to Goldman, so Paulson could short them. I had actually given up hope that the SEC or any other government agency would ever figure that out. Tom Crowl April 17, 2010 at 10:54 am Re the Alan Greenspan / Paulson connection… These people are so completely ethically lost in their own sophistry that they actually believe they’re performing legitimate market functions. I know it seems incredible. I have trouble believing it myself. But the capacity for self-delusion is an amazingly powerful force. And they drank the Ayn Rand “Objectivist” Kool-Aid with gusto. At least Alan Greenspan seems to dimly realize he might have missed a few aspects of human nature which have some bearing on how markets and finance actually work… especially ‘scaled’ markets and ‘connected’ companies. For an Anthropological approach to a large element of the problem with that see: Ayn Rand & Alan Greenspan: The Altruism Fly in the Objectivist Ointment http://culturalengineer.blogspot.com/2009/10/ayn-rand-alan-greenspan-altruism-fly-in.html It’s not that they’re not “nice” enough. Its that in failing to address the true nature and ‘limits’ of biological altruism and its relationship to proximity and natural human community size this kind of crap is going to go on forever. Just as it has since even before the birth of agriculture. Except with the birth of civilization it became much more problematic and much better organized. The reason this is an important recognition is that it leads to concrete approaches to remedy (in my opinion). Comments are closed. 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