Goldman Sachs and the Tourre de Toxic

06/19/2010 05:12 am ET | Updated May 25, 2011

Who hasn't seen the news? The SEC accused Goldman Sachs of fraud, alleging it misrepresented an Abacus CDO. Banks lost $1 billion on the trade. And John Paulson, one of the gods of Greenwich, pocketed that $1 billion through his fund.

Here's what I don't get:

  1. Goldman made $15 million packaging the deal. The bank claims, however, that it lost $90 million investing in Abacus 2007-AC1. There's got to be more to the story. Fabrice Tourre, the banker assembling this waste, had turned negative on the sub-prime sector as early as 2005. And by the fourth quarter of 2006, according to The New York Times, the top brass of Goldman agreed with his view. Something doesn't add up. Why did Goldman lose $75 million on this trade, when its negative bets on the housing sector yielded a $4 billion profit during 2007?
  2. Why did ACA representatives--who believed in the Abacus CDO--meet with John Paulson's hedge fund during the first quarter of 2007. This product was a zero-sum game. One side lost. One side won. Since when do combatants trade information about their strategies? And why would an intermediary, like Goldman Sachs, facilitate meetings where one party could ferret out information to crush the other side?
  3. What happened to old-fashioned banking? The SEC's charges focus on a synthetic CDO. One side was betting subprime loans were viable. The other side was betting they would go bust. Everybody in the transaction was sophisticated, and everybody understood the game. It was like going to the casino and deciding between red or black. And as we know, the Royal Bank of Scotland paid Goldman $840.9 million to unwind its position. Germany's IKB Deutsche Industriebank AG lost about $150 million. Excuse me. Don't bankers study balance sheets and free cash flows anymore?

I'm no apologist for Goldman Sachs. But everybody in this trade--the banks, Goldman Sachs, Paulson's hedge fund--was guilty of financial privateering in one form or another. And the real losers are taxpayers in the United States, the UK, and Germany. How long will it be before world governments grow a pair and eliminate credit default credit swaps--those Weapons of Money Destruction?

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