Press release here. Complaint here. The allegation is that Goldman failed to disclose the role that John Paulson's hedge fund played in selecting residential mortgage-backed securities that went into a CDO created by Goldman. Here's paragraph 3 of the complaint:
In sum, GS&Co arranged a transaction at Paulson's request in which Paulson heavily influenced the selection of the portfolio to suit its economic interests, but failed to disclose to investors, as part of the description of the portfolio selection process contained in the marketing materials used to promote the transaction, Paulson's role in the portfolio selection process or its adverse economic interests.
The problem is that the marketing documents claimed that the securities were selected by ACA Management, a third-party CDO manager, when in fact the selection decisions were influenced by Paulson's fund. Goldman had a duty to disclose that influence, especially since Paulson was simultaneously shorting the CDO. (According to paragraph 2 of the complain, he bought the credit default swaps from Goldman itself. I used to wonder about this; if he bought the CDS from another bank, then Goldman could claim it didn't know he was shorting the CDO, implausible as that claim might be. But in this case Goldman must have known.)
It seems like the key will be proving that Paulson influenced the selection of securities enough that it should have been in the marketing documents. Paragraphs 25-35 include quotations from emails showing that Paulson was effectively negotiating with ACA over the composition of the CDO, so it's pretty clear he had influence. The defense will presumably be that ACA had final signoff on the securities, and Paulson was just providing advice, so Paulson's role did not need to be disclosed. (I don't know what kind of standard will be applied here.)
The complaint also alleges that Goldman misled ACA into thinking that Paulson had a long position in the CDO via the equity tranche, while in fact Goldman knew all along that he would short the debt tranches. It seems pretty clear that that's what ACA believed. The implication is that had ACA realized that Paulson was shorting the CDO, they would not have gone along with the deal.
One of the things I say now and then that most annoys people is that the financial crisis was not caused by criminal behavior. (Note: The "Prayer for the Relief" at the end of the complaint only asks for civil penalties, but I suppose this does not preclude a criminal action -- someone who's a real lawyer could answer that.) My general line is that I'm sure there was some bad behavior that rose to the level of criminal liability -- like lying in disclosure documents -- but that it wasn't necessary for the crisis, and we could have had the crisis without any criminal activity at all. (For example, since most investors weren't even reading the disclosure documents, Goldman could have said that Paulson was involved in the security selection, and then everything would have been hunky-dory.)
And I don't think this action contradicts my general point. I would love it if the SEC could nail banks for some of the CDOs they created, but I'm still betting that the vast majority will not create legal liability for them.
The type of transaction involved -- in which a hedge fund makes a CDO as toxic as possible in order to then short it -- is similar to the Magnetar trade, which I discussed earlier. One thing we learn from paragraph 5 is that Paulson sure knew how to pick 'em:
The deal closed on April 26, 2007. Paulson paid GS&Co approximately $15 million for structuring and marketing ABACUS 2007-AC1. By October 24, 2007, 83% of the RMBS in the ABACUS 2007-AC1 portfolio had been downgraded and 17% were on negative watch. By January 29, 2008, 99% of the portfolio had been downgraded. As a result, investors in the ABACUS 2007-AC1 CDO lost over $1 billion. Paulson's opposite CDS positions yielded a profit of approximately $1 billion for Paulson.
And once again, no doubt to the annoyance of many, I don't blame Paulson. It's Goldman that had the duty to its investors, not Paulson.
Fabrice Tourre of Goldman, however, who is named as a defendant? Well, he will forever be identified by the email quoted in paragraph 18, whatever it means:
At the same time, GS&Co recognized that market conditions were presenting challenges to the successful marketing of CDO transactions backed by mortgage-related securities. For example, portions of an email in French and English sent by Tourre to a friend on January 23, 2007 stated, in English translation where applicable: 'More and more leverage in the system, The whole building is about to collapse anytime now...Only potential survivor, the fabulous Fab[rice Tourre]...standing in the middle of all these complex, highly leveraged, exotic trades he created without necessarily understanding all of the implications of those monstruosities!!!' Similarly, an email on February 11, 2007 to Tourre from the head of the GS&Co structured product correlation trading desk stated in part, 'the cdo biz is dead we don't have a lot of time left.'
Originally posted on the Baseline Scenario.
As soon as Goldman Sachs SHUTS DOWN like Enron, World Com, Lehman Bros., and countless others, there will be a sigh of relief around the world.
CNBS and all of these silly financial shows have duped mom-n-pop into playing along the game of suckers that Wall Street/City of London loves to use a as a vaccum to loot the public.
Many of my family and friends will pop champaigne bottles when we read "Goldman Sachs No More' and the world will join us in jubilation and celebration much like the 'fall-of-communism'.
I imagine even tears of joy will come accross the faces of people in every nation as justice is finally served.
His alleged answer
“Ham wa hier nich, hier bescheisst einer den anderen”
On request I will provide a translation’
That said - it was the absolute wrong move for the government to bail out any financial companies. They should have let the market take its course and the firms go bankrupt if necessary. Bankruptcy would have freed us of the compensation contracts with the big bonuses but more importantly would have freed the capital to better managers and sent a strong message that there is a price to failure.
Its like being on a very large boat and blowing a hole in it. most of the boat is good except the hole.
What we need to do is not patch the hole, but turn the boat into house. If the house has a big hole you can close the door and the rest of the house is still good.
The hedge fund managers, Goldman Sachs and everyone else who were involved in this criminal conspiracy need to be prosecuted to the full extent of the law. That is why we have RICO statures. Clearly we have here an organized conspiracy to commit securities fraud, grand theft, while the perpetrators get to award themselves obscene bonuses for their sopisticated business savvy. Now that Goldman Sachs is a person under the Constitution, it along with its CEO, CFO COO, and all the rest of this nest of econterrorists should be arrested for fraud and their assets forfeited. That would pay off the deficit handsomely. I would love to see Lloyd Blankenfeld's head literally explode when he arrives to work only to find the building padlocked and under the guard of U.S. marshalls, and then finds out there isn't anything he can do about it.
Perhaps a RICO (organized crime) claim or two would stir things up - American banksters are more powerful and control Washington much more than the scariest of gangsters ever did. Many of the individual CDS programs are difficult to prosecute, if only because the defense is going to be "the other guys did it too." Only by putting all the bad conduct together would it make sense, that the ENTIRE series of conduct was fraudulent, and SHOULD subject the banksters to both trebled damages and punitive damages.
To these financial crooks who care not a whiff about the American people, throwing them in jail is good, but taking away their money serves justice best.
DenverJJ
Do I smell a cover up????
On NPR yesterday I heard about how the door men on Park Avenue (who make on average $60k) are threatening to strike and were picketing specifically because the tenants in their buildings are making tens of millions in bonuses and they refuse to give them a pay raise.
Makes me think of Rome...and Marx. What happened to a capitalist system that is fair and open? Where merit and honestly actually leads to economic growth and increased prosperity for all? Our system is broken. The financial crisis didn't hurt the investment banks, it massively helped them. It reduced competition and proved these banks, which are really just massive hedge funds, can take huge risks without actually taking any risk at all because you and I are backstopping them.
However, I would point out that there never was a Capitalist system that was fair and open. Capitalism is not about merit or honesty either.
It is about making the rich richer and pushing ever more people into poverty, it is about the survival of the fittest (i.e. the already wealthy).
What you are looking for is some kind of 'regulated Capitalism', but regulation that makes Capitalism fair and open, introduces honesty and merit, in essence does away with Capitalism and you will move on to an other economic system.
I think the failure of so many people to realise the true nature of Capitalism is part of the problem.
If your assertion that it's about the rich getting richer and the poor getting poorer being a key to capitalism were true then the people of Venezuela would not be so poor now, would they? The poorest in the USA live better than the middle class in communist countries for a reason - capitalism improvesopportunities for all to improve their standard of living. Sadly you have this completely backwards.
Shazam!!!!!
Yup - THAT'S IT - All of the sex scandals have turned God away - how will they EVER get him back?????
Ronk’s Steven Wright Quote Du-Jour:
“If going to church makes you a Christian, then standing in a garage makes you a car”