Tom Adams: Some Suggestions to SIGTARP on Its BlackRock and Abacus Probes

By Tom Adams, an attorney and former monoline executive

The SEC’s complaint against Goldman Sachs on its Abacus 2007 AC1 transaction may have impact beyond just the facts in that particular deal. The case has touched off a firestorm of reaction across the globe now that a government enforcement agency has dared use words like “fraud” and “CDO” in the same sentence. Before Friday if the Obama administration was uncertain of what issues affecting the mood of the country, they certainly have a clearer picture now. One obvious conclusion is that many people, including local attorneys general and European regulators, believe this to be more than an isolated case.

While the SEC is generally perceived to give shallow coverage to a wide mandate, another agency has narrower scope but has been giving much deeper analysis and review to its subject. Neil Barofsky, the Inspector General for the Special Investigation of the TARP (SIGTARP), is charged with reviewing the administration of the Troubled Asset Relief Program. At first blush, the Abacus/ACA case might appear to be outside the scope of the SIGTARP’s mandate. However, we have argued in the past that the SIGTARP has plenty of worthwhile material still to consider which might overlap with the issues and concerns raised in the SEC’s case.

Yesterday the SIGTARP announced that he would be investigating whether fraud was committed on American taxpayers with respect to the Abacus transactions that were insured by AIG. Barofsky cited two areas of inquiry: whether deals Goldman sold to AIG, including 7 Abacus transactions, led to losses at AIG and fraud committed against the taxpayers, and an audit into the role of BlackRock in the TARP, which appears to have its tentacles throughout the program. With respect to BlackRock, he said: “We are considering doing a more overarching audit report on their role throughout the financial crisis.”

If the SIGTARP is looking for some guidance on what issues to consider, he could refer to some of our prior posts, which raised these concerns months ago. Back in February, in response to a horrid puff piece in Vanity Fair on Larry Fink, we noted our concerns about BlackRock’s close relationship with the government . We questioned BlackRock’s many apparent conflicts of interest as the designated manager for so many bailout programs, including the three Maiden Lane transactions, Fannie and Freddie, even while advising Citigroup, AIG, state pension funds and others on their options. BlackRock is also managing its own enormous and overlapping portfolio, which includes several ABS CDO transactions with a balance of at least $4 billion.

In addition, we have previously asked many questions about the Goldman Abacus transactions that were insured by AIG. Why were they excluded from Maiden Lane III? What is their current value and status? Who is managing and overseeing them and at what cost to the taxpayer? One of the Abacus transactions that remained behind with AIG, 2005-CB1, also had a third party manager in the form of C-Bass. Was C-Bass brought in to manage this program for a similar reason as ACA was on the deal that’s subject to the SEC complaint? According to the SEC complaint, ACA was hired as manager because the investors wanted third party oversight but instead got a transaction that was heavily influenced by a sponsor with a contrary position. Did Goldman learn this trick by doing it previously with the 2005 C-Bass deal?

By our count, AIG had six other ABS CDO transactions that were not transferred to Maiden Lane and instead remained on AIG’s balance sheet. As of earlier this year, the ratings on AIG’s exposures ranged from D to BB, so it’s unlikely they were kept because they AIG felt they performing well. The banks on the deals were Goldman, Merrill, Wachovia and UBS; institutions that had key roles in the CDO market prior to the crisis.

The SIGTARP could also consider the relationship among the banks and their counterparties, especially the French connection of Goldman Calyon and Soc Gen. As we have seen in the recent coverage of the Magnetar trades, Calyon played an important role in the Magnetar deals, acting as the bank for the first Magnetar deal and four more after that. Calyon was also a counterparty on $4 billion of AIG CDOs, most of which had Goldman as the banker.

Finally, the SIGTARP could consider the interaction among the CDO manager, the bank and the issuer of the mortgage securities, a question we were wrestling with last November. Much of the commentary and analysis of CDOs, depends on the assumption that, while much of the analysis of the deals was wrong, it was at least an arm’s length market driven by relatively normal supply and demand factors. However, the SEC complaint highlights a considerable lack of transparency in the market as parties such as Goldman and Paulson managed elements of the deal behind the scenes. Did this occur in other transactions? Were there other arrangements between the deal sponsors, the CDO managers and the banks of which investors and insurers were unaware but could reasonably be viewed as material? Considering the cozy relationship between some of the managers and the banks, such as TCW with Goldman, it might be worthwhile to explore who the sponsors were in the transactions and what role they played.

The reaction to the SEC complaint against Goldman has demonstrated that many people, government agencies and investors have a strong demand for more answers and a greater understanding of what happened in the financial crisis. We believe that the CDO market holds the key to many of these questions and that the surface has only begun to scraped with the SEC complaint. We hope that, given its strong reporting to date, the SIGTARP can begin to address some of the many questions suggested by the SEC complaint.

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  1. steelhead23

    Dear Tom et al., Great post, but I have watched Neil Barofsky and I suspect he’s ahead of you on this. But please humor me here. What you are talking about is racketeering, not simply one fraudulent player, but virtually an entire industry finagling a way to maximize profits by stealing from those that trust them. Dear God, there must be at least one prosecutor out there, willing to hire a good forensics accountant (Bill Black?), surround him/her with aggressive investigators, willing to put the time and effort into a massive RICO investigation and criminal indictments. Or, if there is someone out there in blogoland who knows why this hasn’t and isn’t happening to splain it to us mere mortals.

    We all saw Bill Black giving testimony before a House committee yesterday – and had to wonder how it can be that an individual, outside of the system, not privvy to all the information the SEC can obtain, without the authority of a search warrant to gather evidence, can sit and calmly indict an entire industry, yet those with all those powers and all that information simply do nothing. WTF? I note that this morning a letter from Marci Kaptur (D-Ohio) to Eric Holder basically encouraged him to do his job – it is clear that DOJ is where the action should be – and that action should be to not merely indict individuals and companies for fraud, but to charge them with racketeering under RICO and unravel the entire criminal enterprise. This is not appropriate for lawsuits and fines ala SEC, but screams for criminal prosecutions by DOJ under RICO and the ferreting out of every dime these gangsters lifted.

    Now, there is a bit of an issue with my perspective. The banksters have argued that this is “business as usual.” And you know what? I believe them. That is the bad apples sat in the barrel too long and half the barrel is rotten – and so is a sizable portion of the financial services industry. That should not stop Holder, but it might.

    1. VenusVictrix

      Steelhead, there’s many of us who totally believe this scheme amounts to racketeering – but do you really expect Holder to go after it?

      If in fact this is true, then how will the public react when folks learn that Fed and Treasury officials were involved in a cover-up of RICO violations? And why would both the Bush and Obama administrations persist in proclaiming the AIG/Goldman CDS agreements were “legally binding” and the AIG-FP “retention bonuses” (payoffs) were “valid contracts”?

      It’s one thing to really believe the world’s financial system is on the verge of collapse, and thus opt for immediate action to prevent such disaster – but it’s quite another to then refuse to investigate and find out WHY and HOW we arrived at the precipice of Economic Armageddon. It truly seems that the administration is set on continuing the cover-up, rather than punishing those responsible, and instituting safeguards to better protect the public.

    2. a

      “there must be at least one prosecutor out there, willing to hire a good forensics accountant (Bill Black?), surround him/her with aggressive investigators, willing to put the time and effort into a massive RICO investigation and criminal indictments.”

      This isn’t my area of expertise but I think that only the DOJ can bring a criminal action under RICO. Any RICO action (civil or criminal) brought by the feds must be approved by the Organized Crime and Racketeering Section (OCRS) of the Criminal Div. of the DOJ. And since (IIRC) (1) the forfeiture provisions are much better under civil RICO than criminal RICO, (2) RICO itself doesn’t provide for longer sentences than the underlying crimes that must be proven under RICO, and (3) bringing a criminal RICO action would entail more work than a civil RICO action (because of the higher standard of proof), there is not much incentive to bring a criminal RICO action unless you are going after someone who didn’t commit any crimes her/himself but was involved in the criminal enterprise.

      However, both the DOJ and various states’ attorneys general should bring civil RICO actions. I’m sure that many governmental pension funds or other state/local governmental funds were injured. Private citizens could bring them too.

    3. Yves Smith Post author


      I would not be so confident that SIGTARP is on top of this. We’ve had Congressional staffers tell SIGATARP they should talk to us, and Tom has separately volunteered his services, and we have gotten zippo interest (similar response from the FCIC, BTW). That strongly suggests this was not on their radar until recently.

  2. a

    Apparently Gail Kreitman, who is identified in the SEC Complaint as “a GS&Co sales representative” who communicated with ACA and Tourre (#48 – 50, pp 14-15) was married to Jeffrey Toll who co-founded C-BASS. r

    According to the Huffington Post, Frances “Fran” R. Bermanzohn, who is managing director and deputy general counsel at Goldman Sachs, is married to or living with Alan S. Rosenman who took over ACA Capital as president and CEO in 2004.

    ZeroHedge had a couple of stories about C-BASS, Kreitman, and the SEC.

  3. Anonymous

    Tim Geithner, Treasury Secretary (ex-President FRBNY)
    Gerry Corrigan, Goldman Sachs (ex-President FRBNY)
    Peter Fisher, Blackrock (ex-Treasury Undersecretary for domestic finance, and ex-Head of Open Market Operations and Foreign Exchange FRBNY)

    Small world.

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