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A Goldman Rebuttal

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The following includes questions and commentary for Goldman Sachs as the company defends itself against charges of fraud:

Dear Lucas,

Since I haven't been able to get you or anyone from Goldman Sachs to appear on my show in months, perhaps we can just try corresponding in writing. Thank you for your press release. I have submitted my follow-up questions in bold:

Press release:
Goldman Sachs Makes Further Comments on SEC Complaint
April 16, 2010

The Goldman Sachs Group, Inc. (NYSE: GS) said today: We are disappointed that the SEC would bring this action related to a single transaction in the face of an extensive record which establishes that the accusations are unfounded in law and fact. We want to emphasize the following four critical points which were missing from the SEC's complaint.

-- Goldman Sachs Lost Money On The Transaction. Goldman Sachs, itself, lost more than $90 million. Our fee was $15 million. We were subject to losses and we did not structure a portfolio that was designed to lose money.

But what about the other "transactions"... You know, the one where you may have potentially shorted this exact transaction with AIG for a lot more than $90 million? You remember AIG, right? It's where the taxpayers paid you 100 cents on the dollar for a company that you helped blow up.

-- Extensive Disclosure Was Provided. IKB, a large German Bank and sophisticated CDO market participant and ACA Capital Management, the two investors, were provided extensive information about the underlying mortgage securities. The risk associated with the securities was known to these investors, who were among the most sophisticated mortgage investors in the world. These investors also understood that a synthetic CDO transaction necessarily included both a long and short side.

There must be a big difference between "extensive disclosure" and "complete disclosure," because if you provided "complete disclosure," you probably would have mentioned to your customers that the entire product was funded and selected by someone who was betting on it to fail. You know, kind of like you did for your coworkers at Goldman Sachs, but forgot to do for your customers!

-- ACA, the Largest Investor, Selected The Portfolio. The portfolio of mortgage backed securities in this investment was selected by an independent and experienced portfolio selection agent after a series of discussions, including with Paulson & Co., which were entirely typical of these types of transactions. ACA had the largest exposure to the transaction, investing $951 million. It had an obligation and every incentive to select appropriate securities.

Not to mention their incentive to be Goldman and Paulson's unwitting patsy...

-- Goldman Sachs Never Represented to ACA That Paulson Was Going To Be A Long Investor. The SEC's complaint accuses the firm of fraud because it didn't disclose to one party of the transaction who was on the other side of that transaction. As normal business practice, market makers do not disclose the identities of a buyer to a seller and vice versa. Goldman Sachs never represented to ACA that Paulson was going to be a long investor.

True, but Goldman also never represented to ACA that Paulson was planning on shorting the same product that Paulson & Co. created in the first place!

Background: In 2006, Paulson & Co. indicated its interest in positioning itself for a decline in housing prices. The firm structured a synthetic CDO through which Paulson benefited from a decline in the value of the underlying securities. Those on the other side of the transaction, IKB and ACA Capital Management, the portfolio selection agent, would benefit from an increase in the value of the securities. ACA had a long established track record as a CDO manager, having 26 separate transactions before the transaction. Goldman Sachs retained a significant residual long risk position in the transaction.

IKB, ACA and Paulson all provided their input regarding the composition of the underlying securities. ACA ultimately and independently approved the selection of 90 Residential Mortgage Backed Securities, which it stood behind as the portfolio selection agent and the largest investor in the transaction.

The offering documents for the transaction included every underlying mortgage security. The offering documents for each of these RMBS in turn disclosed the various categories of information required by the SEC, including detailed information concerning the mortgages held by the trust that issued the RMBS.

Any investor losses result from the overall negative performance of the entire sector, not because of which particular securities ended in the reference portfolio or how they were selected.

The transaction was not created as a way for Goldman Sachs to short the subprime market. To the contrary, Goldman Sachs's substantial long position in the transaction lost money for the firm.

No, it was created as a way for Paulson & Co. (and maybe you), to short your customers... you know, the same customers that you apparently forgot to mention that little fact to...

The Goldman Sachs Group, Inc. is a leading global investment banking, securities and investment management firm that provides a wide range of financial services to a substantial and diversified client base that includes corporations, financial institutions, governments and high-net-worth individuals. Founded in 1869, the firm is headquartered in New York and maintains offices in London, Frankfurt, Tokyo, Hong Kong and other major financial centers around the world.

And you're welcome for that. Sincerely, the U.S. taxpayers.

Media Contact:
Lucas van Praag
Tel: 212-902-5400

Investor Contact:
Dane Holmes
Tel: 212-902-0300

Thanks Lucas, hope we can chat again soon. Maybe next time about exactly how a then-28-year-old Goldman Sachs junior executive did this with no apparent supervision?

Dylan

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