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Saturday, April 17, 2010

Goldman Sachs...naughty! naughty!

Abacus 2007-AC 1...OMG!!!! What is it?

Let me say first off that I'm no fan of the big investment banks (those still with us and those that expired in past few years). I did business with all of them over the years, and from day one had my hand on my wallet. And every time ( which is often) another Goldman employee is appointed to a high position in the government, my blood pressure rises a few basis points.

Still, at this early juncture, I have to say the SEC charges look like the beginning of a witch hunt; and for that reason it is scary. The SEC has an incentive to clear up some of its lack of oversight and can do that by deflecting attention to the investment banks.

Let me give a similar situation. From the 1980s on, the investment bankers created collateralized mortgage obligations. They did this by selecting mortgage-backed securities. Which did they pick? They picked the ones that they expected to pay down fast or slow, depending on their particular view of rates. Investors understood this and did their due diligence accordingly. Sometimes the investment banks won; sometimes they didn't.

As I understand it, Paulson, in helping Goldman pick the underlying sub-prime portion of the CDO, did not know for certain that the debt would fail. In fact, as we learned this week from Washington Mutual's testimony, a lot depended on government actions. They said they believe they would have survived if some of the rescue efforts steps would have been taken sooner.

Maybe Abacus 2007 - AC 1 would have turned out differently if the Federal Reserve hadn't jerked interest rates all around.

A lot of people want to get a piece of Goldman, including AIG. It could get nasty.


  1. I don't know if the government can prove its case or not, but the charge itself achieved the purpose. Timing is everything, and this is clearly designed to help get public opinion behind the "financial reform" bill, and distract public attention from the SECs failures in the Sandford case. If the gov had a really strong case, they would have charged Goldman, ACA Management and Paulson with criminal fraud and collusion. At a minimum this casts the spotlight on the major ethical challenges of Wall Street, and the blind pursuit of profit at all costs. I expect a slew of lawsuits to follow this accusation, and since a German bank is party to this transaction don't be surprised if their government to come after Goldman also. If Goldman was truly selling a product to their customers and then betting against those customers, how can they be trusted? But then I'm not sure I trust the sub-prime mortgage enablers in Congress to reform themselves or this industry.

  2. You're right - it achieved its purpose.

    I guess the case is that Paulson selected mortgages that were pooled into CDOs that he actually shorted and that Goldman by law was required to report as material information to investors.

    I'm still not sure that Paulson did any thing unlawful.

  3. I'm not sure Goldman did anything illegal either. Unethical, definitely. The whole deal stinks from top to bottom. The details in the SEC complaint are shocking and just reek of a fix. But if I read the ABACUS disclosure correctly, it's pretty clear these are not top quality securities. So you have an unsophisticated group of buyers on the one hand who didn't do their due diligence properly and a security designed to fail. I don't know if this will be an Arthur Andersen type of revelation for Goldman or not, but it will certainly damage the company for years to come, and send a signal to the rest of Wall Street they better be squeaky clean.

    Every product I've ever looked from one of the investment banks as an individual investor has been a lousy deal for the investor and a great deal for the investment bank.

  4. I hate to harp so much on the same theme but these things happen in different guises when yields are low. Auction rate securities, speculating on credit default swaps, off balance sheet CDOs, and the list goes on. People are desperate for yield.
    Investment bankers are great sales people. Back in the day they took mortgages, pooled them into MBS ( a perfectly liquid product) then carved them up into collateralized mortgage obligations ) a highly illiquid product and charged investors more for the illiquid securities! I agree - most of what they offer are lousy deals.