The Goldman-Paulson fraud suit threatens to throw a spotlight on a realm of Wall Street that has escaped most scrutiny throughout the financial crisis: the hedge fund industry. Top hedge fund managers profit from Wall Street's business model of fraud and collusion more than any CEO at one of the big banks, but tend to evade accountability because of the opacity of their industry and their extraordinary power.
One such hedge fund manager is Richard Perry. Perry, a former Goldman Sachs trader, became known as one of the subprime winners in 2007 -- one of the hedge fund managers who saw the crisis coming, and placed profitable bets that the housing market would collapse. Perry reportedly shorted $3 billion in subprime-related securities, netting a $1 billion profit on the trade.
Around the same time, in late 2006 and 2007, Perry's hedge fund, Perry Corp, began buying up shares in a certain financial management company that had a close business relationship with Goldman Sachs. His stake grew from 5% to 8% (around $30 million in early 2007), to the point where Perry Corp was disclosed as a major shareholder in the company in the prospectus for one CDO put together by Goldman in August 2007.
That company: ACA Capital, the same firm wrapped up in the Goldman Sachs-John Paulson CDO deal that the SEC has deemed fraudulent.
Perry's winning billion-dollar subprime short, alongside his major investment in ACA, is all the more notable because of his ties to Goldman Sachs. He was a star trader at the bank under former Goldman Sachs head Robert Rubin, and has partnered with the bank on investments in recent years. Perry is extremely close to Rubin, outside of the professional context -- former babysitter to his children, teaching assistant, and advisory board member at Rubin's Hamilton Project. Despite being extremely close to someone who made $1 billion shorting the subprime market, Rubin has called the financial crisis a "perfect storm" that no one saw coming.
Perry is also the nephew of former Bear Stearns CEO Jimmy Cayne. Bear Stearns was the biggest shareholder of ACA before it went bust.
Which subprime securities did Perry short to score $1 billion? Were they Goldman Sachs CDOs? Was ACA involved?
These are all questions worthy of investigation. But what makes Perry's investment strategy even more suspicious is the fact that he has previously been investigated for a complex derivatives deal that played both ends of a trade.
In 2004, with the help of financial engineering by Bear Stearns and Goldman Sachs, Perry acquired a large voting stake in a pharmaceutical company (Mylan Laboratories) that was considering the takeover of a smaller company (King Pharmaceuticals). Perry owned a significant stake in King, and also hedged against a drop in Mylan's stock price.
As Mylan's biggest shareholder, Perry could vote through the merger, causing a drop in Mylan's stock price but reaping up to $28 million on the deal because of his investment in King and his Mylan hedges.
The SEC ultimately fined him $150,000 for failing to make the proper disclosures. Perry hired a former SEC official, William R McLucas, to argue his case. Even that probably wouldn't have happened if Perry had not gotten on the nerves of Carl Icahn, the next biggest shareholder of Mylan.
Were Wall Street investors like Perry, Goldman, and Paulson intentionally using corporate shells like ACA (and AIG) to dupe the marketplace and funnel profits back to them? And were they using their connections to the companies -- ownership stakes, personal ties, and so on -- to encourage them to participate in these risky deals?
At this point, only one thing is for certain: further investigations are needed.
Originally posted at LittleSis.org's blog, Eyes on the Ties.
Follow Kevin Connor on Twitter: www.twitter.com/kvnc
Prosecute and fine with extreme prejudice. Watch bank stocks (investment banks and commercial) plummet once again.........Attorney Generals will be charging ahead with fines. Let the bleeding cleanse the fraudulent. Let's jail mainstream the guilty with prison population. This last collapse could have been prevented. No balls (previously) at SEC. No experienced "I give a shot" attorneys working there. Staff standing in awe of the bright shining lie.
CDO’s were underlying assets in at least One TRILLION of bond fund investments, sold to the public by brokers and bankers as less risk and conservative investments.
Join the party; contact your state's attorney general for more justice. States residents who lost money are entitled to recover their loss.
That is to say, how much money was sucked out of potential investments in actual, wealth creating, job creating business on day one of this particular criminal enterprise?
A different issue than the billion he eventually scammed but a pretty important one, I think.
How many more jobs would there be in this country, how many more manufacturing firms, how much more applied research, if these masters of the universe were investing in actual businesses rather than these damn-the-client-I'm-getting-richer-than-freaking-rich schemes?
Hedge-funds are nothing buy gambing houses speculating on the 'physical economy' to the detriment of everyone in society.
WE DON'T NEED GAMBLERS - WE NEED MANUFACTURERS, SCIENTISTS ETC.
Why have they not charged the people in these deals with INSIDER TRADING, as well, since they had inside information which they utilized to place these bets and then they reaped huge profits from it?