Google Groups no longer supports new Usenet posts or subscriptions. Historical content remains viewable.

Dismiss

[toeslist] Goldman Sachs' 'Fraud' Explained: How They Pulled Off The Alleged Scheme

4 views

Skip to first unread message

Riaz K Tayob

unread,

Apr 17, 2010, 9:12:39 AM4/17/10

Snip:

Fabrice Tourre, the Goldman executive who helped set up Abacus,
emailed a friend in January 2007:

More and more leverage in the system, The whole building is about
to collapse anytime nowOnly potential survivor, the fabulous
Fabstanding in the middle of all these complex, highly leveraged,
exotic trades he created without necessarily understanding all of
the implications of those monstruosities!!!

Arthur Delaney<http://www.huffingtonpost.com/arthur-delaney> Posted:
April 16, 2010 03:18 PM Goldman Sachs' 'Fraud' Explained: How They
Pulled Off The Alleged
Scheme<http://www.huffingtonpost.com/2010/04/16/goldman-sachs-fraud-expla_n_5
40938.html>

First Posted: 04-16-10 03:18 PM | Updated: 04-16-10 03:53 PM

digg
<http://digg.com/submit?phase=2&url=http://www.huffingtonpost.com/2010/04/16/
goldman-sachs-fraud-expla_n_540938.html&title=Arthur%20Delaney:%20Goldman%20S
achs%27%20%27Fraud%27%20Explained%3A%20How%20They%20Pulled%20Off%20The%20Alle
ged%20Scheme>
<http://www.facebook.com/sharer.php?u=http://www.huffingtonpost.com/2010/04/1
6/goldman-sachs-fraud-expla_n_540938.html&title=Arthur%20Delaney:%20Goldman%2
0Sachs%27%20%27Fraud%27%20Explained%3A%20How%20They%20Pulled%20Off%20The%20Al
leged%20Scheme>

Goldman Sachs defrauded investors by failing to disclose a conflict
of interest on mortgage investments it sold as the housing market
went sour, according to the civil complaint filed by the Securities
and Exchange Commission on Friday.

Goldman allegedly failed to disclose to investors that it was betting
against subprime mortgage investments it pushed on clients.
Essentially, according to the complaint, Goldman pushed a product
designed to fail.

How did Goldman do that? We broke down the case step-by-step. Check
it out:

Goldman Creates A CDO [cid:part1.09050...@gmail.com]

[cid:part2.00080...@gmail.com]

It was one of many.

Goldman invited its clients to invest in Abacus, explaining in
marketing
materials<http://blogs.reuters.com/reuters-dealzone/2010/04/16/read-goldman-s
achs-abacus-pitch-book/> that the $2 billion CDO was based on 90
bonds derived from subprime mortgage loans made over the previous
18 months.

If people whose mortgages make up the bonds in Abacus keep up with
their house payments, then folks who invest in Abacus -- typically
banks, insurance companies, and pension fund managers -- will make
money.

The financial industry jargon for those investors' position is that
they are "long." They're optimistic that the underlying borrowers
won't default

Who Picked The Stuff In That CDO?

Goldman told investors the securities in Abacus had been chosen by
ACA Management LLC, a firm managing 22 CDOs with assets of $15.7
billion.

The Securities and Exchange Commission says this is where Goldman
lied.

According to the SEC's complaint, the underlying portfolio was put
together by John Paulson, a hedge fund manager who hand-picked the
worst possible assets in hopes that they would default. He rightly
anticipated that the housing market would soon crash, and that
people put into mortgages they couldn't
afford<http://www.huffingtonpost.com/2009/11/04/this-loan-is-an-example-o_n_3
20388.html> would default when they lost the ability to simply
refinance based on rising home values.

But Paulson wasn't simply gambling. He analyzed the underlying
criteria of recent mortgage-backed bonds before making his picks.

"Paulsons selection criteria [for Abacus] favored [residential
mortgage-backed securities] that included a high percentage of
adjustable rate mortgages, relatively low borrower FICO scores, and
a high concentration of mortgages in states like Arizona, California,
Florida and Nevada that had recently experienced high rates of home
price appreciation," the complaint says. "Paulson informed [Goldman
Sachs] that it wanted the reference portfolio for the contemplated
transaction to include the RMBS it identified or bonds with similar
characteristics."

John Paulson picked those lousy underlying assets for the Abacus
CDO so that he could bet against them by purchasing "credit default
swaps" -- insurance policies that pay out if borrowers default.

Paulson's position is called "short." He set up a CDO that would
be perfect to short (short is both a noun and a verb).

Goldman Sachs also shorted the CDO, according to the SEC.

"[Goldman Sachs] arranged a transaction at Paulsons request in which
Paulson heavily influenced the selection of the portfolio to suit
its economic interests," the SEC's complaint says, "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, Paulsons role in the portfolio selection
process or its adverse economic interests."

Fabrice Tourre, the Goldman executive who helped set up Abacus,
emailed a friend in January 2007:

Hedge fund manager John Paulson paid Goldman Sachs $15 million in
April 2007 to set up and market the Abacus CDO, according to the
SEC.

Within a year, 99 percent of the underlying assets in Abacus had
been downgraded by ratings agencies, costing investors $1 billion
and earning Paulson $1 billion.

How does this affect the rest of us? Per the New York Times, the
"creation and sale of synthetic C.D.O.s helped make the financial
crisis worse than it might otherwise have been, effectively multiplying
losses by providing more securities to bet against."

When you buy protection against an event that you have a hand in
causing,"

said a structured finance expert, "you are buying fire insurance
on someone elses house and then committing arson.

Goldman denies the allegations: "The SECs charges are completely
unfounded in law and fact and we will vigorously contest them and
defend the firm and its reputation."

As HuffPost's Shahien Nasiripour points
out<http://www.huffingtonpost.com/2010/04/16/goldman-sachs-fraud-charg_n_5409
34.html>, the Goldman Scandal could be just the beginning. Phil
Angelides, the chairman of the Financial Crisis Inquiry Commission,
said the allegations are central to the "very trustworthiness of
the marketplace."

Janet Tavakoli, a derivatives expert (and HuffPost blogger) told
Nasiripour<http://www.huffingtonpost.com/2010/04/16/goldman-sachs-fraud-charg
_n_540934.html> that the scandal is "related to activity of aiding
and abetting fraudulent mortgage lending, creating phony securitizations
and mis-selling them. Massive damage came from the massive risk of
massively leveraging securities that could only go down in value,
because [banks] created those bad securities. It was malicious
mischief."

[demime 1.01d removed an attachment of type image/png which had a
name of navig-left.png]

[demime 1.01d removed an attachment of type image/gif which had a
name of loading.gif]

[demime 1.01d removed an attachment of type image/jpeg which had a
name of slide_5834_78789_small.jpg]

[demime 1.01d removed an attachment of type image/png which had a
name of view_slideshow.png]

[demime 1.01d removed an attachment of type image/jpeg which had a
name of slide_5755_77840_small.jpg]

[demime 1.01d removed an attachment of type image/jpeg which had a
name of slide_5896_79420_small.jpg]

[demime 1.01d removed an attachment of type image/jpeg which had a
name of slide_5672_76820_small.jpg]

[demime 1.01d removed an attachment of type image/jpeg which had a
name of slide_6146_81757_small.jpg]

[demime 1.01d removed an attachment of type image/jpeg which had a
name of slide_5952_79888_small.jpg]

0 new messages