Goldman Sachs: Fraud

4/16/2010:

People used to stuff money into mattresses for a reason… it was safer!

SEC accuses Goldman Sachs of civil fraud

The government has accused Goldman Sachs & Co. of defrauding investors by failing to disclose conflicts of interest in mortgage investments it sold as the housing market was faltering.

The Securities and Exchange Commission announced Friday civil fraud charges against the Wall Street powerhouse and one of its vice presidents. The agency alleges Goldman failed to disclose that one of its clients helped create — and then bet against — subprime mortgage securities that Goldman sold to investors.

“But the deck was stacked…”

Investors in the mortgage securities are alleged to have lost more than $1 billion, the SEC noted.

The Goldman client implicated in the fraud is one of the world’s largest hedge funds, Paulson & Co., which paid Goldman roughly $15 million for structuring the deals in 2007.

Read more at the NY Times…

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16 Comments on "Goldman Sachs: Fraud"

HansBrix
Member
HansBrix

If anyone should be sued for malpractice it should be the folks who blindly bought into synthetic CDOs not knowing wtf they were buying. It isn’t the job of any investment bank to do the client’s due diligence.

Reminds me of that old WS saying: “The firm made money. The broker made money. Two out of three ain’t bad.”

Also reminds me how serial killers on death row get marriage proposals from starry-eyed women.

matt_72
Member
Here is the problem with your analogy, when you are talking about CDS you will ALWAYS have only 2 out of 3 make money. It is a binary outcome so either the buyer or seller always ends up the loser. The broker clips a fee and one side or the other makes money on the transaction. That is the nature of the beast. Anyone who can’t get that has no business investing in any such structure. It wouldn’t be malpractice if the seller lost money just like it isn’t malpractice if the buyer loses money. And the investors, your starry-eyed women, were other financial institutions the largest of which was a German bank. Sorry, I have no sympathy for a QIB that won’t spend a couple of days investigating a synthetic CDO before investing $150mm. It doesn’t take a rocket scientist to do a little credit work, it just takes work. They didn’t do it, it cost them a fortune and it is their fault. Maybe that German bank should be firing anyone involved with blindly investing $150mm while doing no real credit work. There is your malpractice, QIBs who did no due diligence. In response to HansBrix who said: If anyone should be sued for malpractice it should be the folks who blindly bought into synthetic CDOs not knowing wtf they were buying. It isn’t the job of any investment bank to do the client’s due diligence. Reminds me of that old WS saying: “The firm made money. The… Read more »
bmacqueens
Member
Matt, I think you’re mixing apples and oranges for the overall transaction. The credit default swap is not the only aspect in the lawsuit, at least not to my recollection. There is a bond composed of mortgages and a credit default swap written ancillary to the bond. The bond was sold to investors via an offering memorandum. There is also the credit default transaction, which I read to be nothing more than a side-bet, like a bucket shop, between Paulson (got rich) and the counter-party (got screwed). The bond itself apparently quickly went bad as well. Maybe I’m wrong, but it seemed to me that there were two simultaneous but not co-extensive aspects of this fact pattern. In response to matt_72 who said: Here is the problem with your analogy, when you are talking about CDS you will ALWAYS have only 2 out of 3 make money. It is a binary outcome so either the buyer or seller always ends up the loser. The broker clips a fee and one side or the other makes money on the transaction. That is the nature of the beast. Anyone who can’t get that has no business investing in any such structure. It wouldn’t be malpractice if the seller lost money just like it isn’t malpractice if the buyer loses money. And the investors, your starry-eyed women, were other financial institutions the largest of which was a German bank. Sorry, I have no sympathy for a QIB that won’t spend a couple of… Read more »
matt_72
Member
Read up on it again. There are no mortgages in the structure. This is a SYNTHETIC CDO. The reference securities for the various CDS contracts that Abacus held are real CDOs with mortgages in them. And it was those reference securities that went bad (correct). But Abacus itself didn’t own any mortgages or any CDOs. It was a securitization of CDS contracts and those contracts were on crappy CDOs that were rated AAA and those ratings weren’t worth their weight in goose crap. And you are right, the CDS contracts are one sided bets. Anyone who bought into Abacus was betting long but anyone who sold CDS to Abacus was betting short. In order for someone to go long in a CDS contract, someone else must be short. Anyone who bought into this deal should have known this and if they didn’t then they were idiots. Here – someone was nice enough to put up the flip book on sribd http://www.scribd.com/doc/30036962/Abacus-2007-Ac1-Flipbook-20070226 I personally wouldn’t have touched something like this w/ a 10 foot pole. I find the whole idea of investing in something w/ limited upside, massive downside in a situation where you have limited visibility to be very unappealing. But there were plenty of fools who wanted to buy this crap. In response to bmacqueens who said: Matt, I think you’re mixing apples and oranges for the overall transaction. The credit default swap is not the only aspect in the lawsuit, at least not to my recollection. There is… Read more »
YipYap
Member

15 April 2010

Mr. Lloyd Blankfein
CEO
Goldman Sachs
85 Broad St.
NY NY 10007

Dear Mr. Blankfein:

The next time I summon you to a meeting at the White House, I expect you will show up in person and on time.

In the meanwhile, please enjoy my small gift from the SEC.

Sincerely,

Barack Obama
President Of The United States

notnow
Member
notnow

I would normally give a financial institution the benefit of the doubt, but Goldman has gotten caught red handed here. I do not have an issue with a financial institution hedging against a particular investment, but this is not what happened here. They are viewed as a world financial leader. The public along with other professionals view Goldman in a high regard. No different than Apple Computer. They are both on top of their respective fields.

What they did would be the equivalent of Apple Computer having a private investor pick what they felt would be the worst performing products and bundle them together and represent that Apple selected these products as future prospective business products. Than apple takes a bet that these products would not only fail, but would implode any other devices that are connected to it.

The worst part of it all, is that our Government relied on Goldman Sachs to help select which particular Banks should survive and fail. We paid Goldman Sachs to help Mr. Paulson’s forecast to become a reality. “Not hard to get a full house when your holding all the cards.” Remember WAMU, Wachovia, Lehman Brothers, AIG,.etc… guess who profited from the failure and success of these companies????

HansBrix
Member
HansBrix

These kind of shenanigans are nothing new. Wall Street firms rake in the dough by “ripping (the client’s) face off.”

In 1994, Orange County, CA went BK after some slick Merrill derivatives salesman knowingly sold some financial time bombs to a doddering fool of a county Treasurer, and said bombs exploded. The county bond holders weren’t too pleased.

In the book F.I.A.S.C.O. author Frank Partnoy tells of how Morgan Stanley enriched itself by selling inappropriate (and financially lethal) investment products to public pension funds and small Midwestern insurance companies, among others.

homeworld
Member

Where are all of the defenders of giving billions of tax payer ‘bailout’ dollars to these banks, like KatieScarlett, now?

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