Goldman Sachs charged with fraud

Discussion in 'Soap Box' started by Bob26003, Apr 16, 2010.

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  1. Bob26003

    Bob26003 Well-Known Member

    This would never happen if conservatives were in charge. :)

    How they did it


    Terms, Players in the Goldman Sachs Fraud Charges
    Published: April 16, 2010

    Filed at 6:02 p.m. ET

    The Securities and Exchange Commission's civil fraud charges against Goldman Sachs concern complex investments backed by mortgages that many blame for worsening the financial crisis as the U.S. housing market went into a nosedive. Goldman denies the charges. Here are definitions of some of the terms involved in the charges, and descriptions of some of the key players.


    -- Synthetic CDO, or Collateralized Debt Obligation. A complex investment vehicle whose performance is tied to a set of assets, in this case securities backed by subprime residential mortgages. The SEC says Goldman didn't disclose to investors that a major hedge fund, Paulson & Co., helped select the mortgages and subsequently bet that some of them would lose value.

    -- CDS, or Credit Default Swap. A transaction between two parties in which one side buys protection from the other that a loan or other obligation will stay in good standing. If it doesn't, the party that bought the protection must be paid. The SEC says Paulson made a $1 billion profit by using credit default swaps to bet against Goldman's CDO.

    -- Subprime mortgages. Loans made to borrowers with weak credit histories. They usually carry higher interest rates than conventional loans to compensate lenders for the additional risk.

    -- RMBS, or Residential Mortgage-Backed Securities. Any kind of security that is based on home mortgages. There are also CMBS, or Commercial Mortgage-Backed Securities.

    -- ABACUS 2007-AC1. The name of the collateralized debt obligation at the center of the SEC's allegations. The SEC says Goldman created and sold the CDO in early 2007, just as the U.S. housing market was starting to falter.


    -- Fabrice Tourre. A 31-year-old Goldman Sachs employee that the SEC accuses of committing fraud by marketing Goldman's CDO without disclosing Paulson & Co.'s role in helping create the CDO or the fact that Paulson had an incentive in choosing investments that would lose value. According to the SEC's complaint, Tourre rushed the CDO to market since investor appetite for mortgage-backed securities was waning, telling a friend in an email: ''The whole building is about to collapse anytime now.''

    -- Paulson & Co. A major hedge fund. Made a fortune betting that the U.S. housing market would collapse.

    -- ACA Management LLC. Financial consulting company that had experience building and managing collateralized debt obligations. The SEC says Goldman asked ACA to serve as the ''Portfolio Selection Agent'' for the CDO as a way to reassure investors about the CDO. The SEC says ACA wasn't aware that Paulson was planning to bet against the CDO. ACA's parent company, ACA Capital Holdings Inc., sold credit protection on part of the CDO.

    -- IKB Deutsche Industriebank AG. A German commercial bank and one of the investors in Goldman's CDO. IKB lost its entire $150 million investment. The bank ran into trouble with its
    investments in U.S. subprime mortgages and eventually had to be bailed out by German banks. It was later acquired by Lone
    Star Funds, a U.S.-based private equity firm.


    Update: SEC says Goldman defrauded investors of $1 billion

    By John Byrne
    Friday, April 16th, 2010 -- 11:00 am
    Stumble This!

    The Securities and Exchange Commission has charged investment banking titan Goldman Sachs with civil fraud over a pre-packaged mortgage instrument they say was designed to fail.

    Goldman Sachs created the derivative -- called Abacus 2007-AC1 -- in response to a request from a hedge fund manager who predicted that the housing market would collapse and wanted to bet against it. The trader, John Paulson, later earned $3.7 billion for his wager. Goldman's practices cost investors $1 billion, according to the filing.

    According to the New York Times, which first revealed details of the Abacus case, the instrument was among 25 Goldman created so that clients could bet against the housing market:

    As the Abacus deals plunged in value, Goldman and certain hedge funds made money on their negative bets, while the Goldman clients who bought the $10.9 billion in investments lost billions of dollars.

    Goldman let Mr. Paulson select mortgage bonds that he wanted to bet against — the ones he believed were most likely to lose value — and packaged those bonds into Abacus 2007-AC1, according to the S.E.C. complaint. Goldman then sold the Abacus deal to investors like foreign banks, pension funds, insurance companies and other hedge funds.
    Story continues below...

    But the deck was stacked against the Abacus investors, the complaint contends, because the investment was filled with bonds chosen by Mr. Paulson as likely to default. Goldman told investors in Abacus marketing materials reviewed by The Times that the bonds would be chosen by an independent manager.

    Apparently, they weren't.

    Fabrice Tourre, a vice president at Goldman who helped design and market Abacus, was also named in the SEC suit.

    84 percent of Abacus' mortgage bonds would be downgraded within five months of their sale. By the end of 2007, Paulson's credit hedge fund soared 590 percent, and Goldman's clients lost billions.

    Goldman reportedly targeted specific mortgage bonds at Paulson's request that Paulson felt were most likely to lose their golden credit ratings, which would trigger a payout for his firm.

    Goldman did not immediately comment on the suit. The company's shares fell more than 10 percent on the news.

    Shareholder recently sued firm for huge bonus payouts

    In January, a lawsuit filed against the investment bank by a shareholder alleged that the company spent more money on corporate bonuses than it earned in 2008.

    Shareholder Ken Brown's lawsuit is one of two suits filed against the company over its controversial decision to hand out billions of dollars in bonuses even after it was accused of playing a central role in the financial collapse of 2008 and receiving $10 billion in direct aid from the US government.

    In his lawsuit (PDF), Brown asserted that Goldman Sachs gave out $4.82 billion in bonuses in 2008, despite earnings of only $2.32 billion that year. The lawsuit alleges that the company spent 259 percent of its income in the first quarter of 2009 on compensation.

    Goldman Sachs handed out $16.7 billion in compensation in the first nine months of 2009, according to Bloomberg News, and that figure may reach $22 billion for the entire year. Brown's suit says the company typically sets aside 44 percent of its net revenue for employees.

    “Payment of this exorbitant amount of compensation, which has little to do with Goldman Sachs’s performance, and was financed in large part with government bailout and taxpayer money, is a waste of the company’s assets and a breach of duty and loyalty," Brown asserts in the suit.

    Goldman CEO Lloyd Blankfein earned $9 million in a non-cash bonus for 2009. In prior years, he'd earned more than $20 million.


    The SEC announced it was charging Goldman Sachs with fraud, and stocks fell big on Friday—Financials and Goldman itself were particularly hard hit. At issue are collateralized debt obligations (CDOs) based on subprime mortgage-backed securities Goldman structured and marketed. These were among the thinly traded securities banks were forced to mark-to-market that led to devastating rounds of write downs—and in chicken and egg fashion, caused and exacerbated a total freeze in credit markets in Fall 2008.

    Fair enough—but lots of investment banks were doing that. Why single out Goldman? Because in 2007, Goldman was paid by a hedge fund—Paulson & Co (headed not by former Treasury Secretary Hank Paulson, but by John A. Paulson, no relation)—to structure the CDOs in question. Paulson & Co. also hand-picked the underlying securities, all with the intention of shorting them—and Goldman knew. It was a massive bet that paid off, and Paulson & Co. made a killing. Interestingly, this bet against subprime mortgages also helped Goldman, nearly unique among its peers, weather the downturn relatively well.

    It is a serious charge, if true. The SEC alleges Goldman should have disclosed who was picking the underlying securities for the CDOs and that the party had economic incentive to pick securities likelier to default. We'll not prejudge and let the SEC investigation take its course. But there's not a whole lot much more sacred than the obligation to disclose, disclose, disclose. And when in doubt, err on the side of disclosing more. Too much disclosure has never proven to hurt anybody, but SEC investigations can definitely cast a pall on investor confidence.
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