When You Assume...

When you assume, you make an ass out of "u" and me.  I am reminded of this wisdom when reading Goldman's extended response to the SEC civil complaint against them, which includes this gem:

Goldman Sachs Never Represented to ACA That Paulson Was Going To Be A Long Investor.  The SEC’s complaint accuses the firm of fraud because it didn’t disclose to one party of the transaction who was on the other side of that transaction.  As normal business practice, market makers do not disclose the identities of a buyer to a seller and vice versa. Goldman Sachs never represented to ACA that Paulson was going to be a long investor.

Hmm.  Per the complaint, Goldman described Paulson as a "sponsor" of the transaction; per Felix Salmon, in normal usage that would mean a long investor, an impression Goldman further promoted by alluding to Paulson in the context of the residual equity tranche.  And then there is the email in which the Goldman dealmaker refers to the meeting amongst Paulson, Goldman, and the ACA dupes as "surreal". 

But to be fair, if the SEC had the smoking email or memo in which Goldman specifically presented Paulson as a long investor they would have included it.  And the trial should be fun (if we get that far), as the SEC attorneys try to get the ACA people to admit to being dupes and fools.

Still, if the Goldman defense is that their high priced smoke and fog generators worked, well, good luck with that.  The SEC is going to insist that disclosure means more than creating a mis-impression and then failing to correct it.

Salmon describes the ABC role as useful idiots here, and offers the Abacus pitch book as a prime example of non-disclosure.

Comments

[Clarice]

Seems to me GS' best hope is a jury trial of the normal nitwits who say they can sit thru a months' long trial.

[Danube of Thought]

Short version: The SEC complaint states a valid claim. Whether the forthcoming evidence outside the four corners of the complaint will support that claim, or disclose a defense to it, remains to be seen.

Sic semper placitum.

[sylvia]

Still not sure what to think about this without a lot more reading on it. I do think buyer has to beware.

What steps could the buyers have taken to figure out what they were getting, and did they do their due dilligence?

If some used car dealer tells me I am buying a gem and I drive the car off the lot and it falls apart, I have no legal recourse. It was my fault for not getting an inspection first, etc.

So could the buyers have asked for more information and more reports beforehand that put exactly what they were getting in writing? I have no doubt that Goldman tried to cheat, but business is cheating in general, and that's why the customer has to due their homework.

I think what's interesting about this is a company can buy billions of dollars of goods and do as much investigation like they are buying a pound of groceries.

[Melinda Romanoff]

Going through the informed commentary at Felix's site still leaves me with the impression that this is a political move, only.

The sideline suits that GS will be subject to will probably swamp them. In the meantime, the Admin gets a win with the Dodd bill, which is just rearranging the furniture with a bailout kicker.

[MarkO]

With this filing, the SEC has enlisted an army of lawyers who will bring claims against Goldman and do a great deal of the work for the SEC. In my experience, the SEC litigators would not readily match up against those Goldman could afford, but I do not know the current SEC personnel. I might be off on that.

The discovery in this will be mammoth. A law firm or two will be able to take on new associates.

[Rick Ballard]

"The sideline suits that GS will be subject to will probably swamp them."

Quite possibly. They exist today solely because of last year's bailout and their 100 cents on the dollar recovery from AIG. JPM is actually better connected through the Dimon/Citi Dem whorehouse. Vampire Squid GS dead while ZombieCiti still stalks the night is really rather amusing.

The fact that all of the "Big 5" would be rotting on a garbage heap were it not for the "mark to fantasy" change in FASB rules is somewhat less amusing.

[Ignatz]

Hope no one minds if I post a portion of what I posted on the other thread from a commentor at Business Insider. Seems to get to the crux of things here.

ACA's knowledge does not affect the SEC's case. Unlike a private plaintiff, the SEC is not required to prove reliance to prevail in an action for securities fraud under Rule 10b-5. The SEC has to show only that Goldman made (1) a materially misleading statement or omission (2) with scienter (i.e., knowingly) (3) in connection with the purchase or sale of a security. Whether ACA knew the truth is irrelevant.
So the law would like you to refrain from lying even if the person you're lying to already knows the truth. I know, I know, this is asking a lot of today's Wall Street professionals, but that's what the law says.

[Pops]

"""I know, I know, this is asking a lot of today's Wall Street professionals, but that's what the law says.""

Just imagine if we required one tenthnas much from our politicians.

[jimmyk]

I do not know the law, but this suit doesn't make a lot of sense to me. (So if there's a valid basis in law, the law makes no sense.) The buyers were financial pros who knew the seller was betting the other way. So GS is obliged to explain this to them? "By the way, the counterparty to this deal thinks he's going to profit at your expense." Well, duh.

I'm as happy as anyone to see GS go down on legit charges, but to me this sets a bad precedent, and smells like politics to get the Dodd piece of carp through.

[Ignatz]

--The buyers were financial pros who knew the seller was betting the other way. So GS is obliged to explain this to them? "By the way, the counterparty to this deal thinks he's going to profit at your expense."--

The allegations are contrary to that. It remains to be seen if the evidence supports the allegations.

[Patrick R. Sullivan]

We seem to be ignoring just what GS said in response, say:

• ACA, the Largest Investor, Selected The Portfolio. The portfolio of mortgage backed securities in this investment was selected by an independent and experienced portfolio selection agent after a series of discussions, including with Paulson & Co., which were entirely typical of these types of transactions. ACA had the largest exposure to the transaction, investing $951 million. It had an obligation and every incentive to select appropriate securities.

Salmon notes that, but completely fails to realize what it means. ACA screwed itself (actually screwed its parent company, but what's the diff). This SEC complaint gets more comical the more that comes out--IKD also consulted with ACA about which securities to include.

[Danube of Thought]

Unlike a private plaintiff, the SEC is not required to prove reliance to prevail in an action for securities fraud under Rule 10b-5.

My recollection is that a private plaintiff doesn't have to either. I defended a bunch of these, including some of Lerach's beauties, although it's been a while.

[jimmyk]

The allegations are contrary to that.

Anytime you buy an asset, someone else is selling it. If there had been information about the asset itself that was concealed, I could see the problem. But the fact that someone else was betting against it, not so much.

[Patrick R. Sullivan]

"By the way, the counterparty to this deal thinks he's going to profit at your expense." Well, duh.

Exactly.

[Danube of Thought]

Reliance pretty much got read out the 10b-5 requirements under the theory of a "fraud on the market." If the plaintiff shows that the fraudulent statement or omission affected the market in the securities in question, he doesn't have to show that he himself actually relied on it. This resulted in all those class action plaintiffs who, in deposition, would contentedly testify that no, they hadn't even read the prospectus or other document that they alleged had defrauded them.

This doctrine contributed to the class action securities lawsuit becoming what everyone involved knew was simply a racket, which ultimately led to Lerach's going to the pen. He had a stable of ready-made plaintiffs who would own a share or two of every conceivable stock--Silicon Valley tech stocks were the favorite--and any time the share price took a tumble, for whatever reason, Lerach would file the class action complaint with one of his stooges as the named plaintiff. In return for the use of their names, the stooges got some of the loot under the table.

[Danube of Thought]

Whether ACA knew the truth is irrelevant.

I think that's essentially correct--or at least it's correct that it need not be shown that ACA relied to its detriment on what it was told by GS. But ACA isn't the plaintiff, and presumably there were other, subsequent purchasers of the instrument who didn't know whatever it was that ACA knew.

[Rick Ballard]

The "everyone involved was too f'n stupid to know what was going on" may work better than "everyone involved was to f'n smart for anyone to be fooled".

GS - Look - I lost three fingers and the use of a thumb making this deal!

ACA - That's nothing - I cut off my right arm and nailed my left foot to the floor!!

IKD - Wow - I got off lucky, I only lost all my money.

Paulson - Hahahahahaha - gimme another, bartender.

Alternatively, GS is slime mold and ACA's "reputation" was every bit as undeserved as it appears. Or perhaps all three?

Anyone dumb enough to hire GS fully deserves to be "serviced to the hilt", precisely as GS promises.

[Patrick R. Sullivan]

This ABACUS deal closed in late April 2007. In early March of that year this article appeared in Business Week:

The hedge funds raking in fat profits from the meltdown in the subprime market have cleaned up by betting on a decline in the ABX subprime index, which measures the cost of insuring against defaults on subprime bonds. ....

One of the hedge funds said to be cleaning up on the ABX short trade is Paulson & Co., a $7 billion fund led by former Bear Stearns BSC investment banker John Paulson. Traders familiar with Paulson say the hedge fund made a massive, leveraged short bet on the ABX index dropping. The fund reportedly scored a paper profit of hundreds of millions of dollars when the ABX index crashed, according to people familiar with the fund. Stuart Merzer, Paulson's general counsel, declined to comment.

Yeah, Paulson was really making a big secret of his strategy, wasn't he.

[Danube of Thought]

Paulson was really making a big secret of his strategy, wasn't he.

That's not what is being alleged. The complaint alleges that the fact that his strategy concerning these particular instruments was not disclosed by GS.

The evidence may very well not bear out the allegations of the complaint, and may even contradict them. But at this stage of the litigation, the court is required to accept the allegations as true, and it will subsequently weigh a veritable ton of whatever evidence is admissible to determine whether that is actually the case.

[Rick Ballard]

PRS,

You're claim is that ABACUS was wholly fraudulent from initiation then? That all parties understood that it was produced to fail?

Or are you saying that it was a typical Wall Street circle jerk designed to generate fees and absolutely nothing else?

'Cause letting Paulson pick the "winners" for inclusion in ABACUS just doesn't seem like a way to maximize gains for the suckers dumb enough to actually have bought to hold.

[Patrick R. Sullivan]

No, Rick, clearly I'm not saying the transaction was rigged. You seem to have some emotional need to believe that is the only way investors act.

Consider this from the SEC complaint:

On January 9, 2007, GS&Co sent an email to ACA with the subject line, “Paulson Portfolio.” Attached to the email was a list of 123 2006 RMBS rated Baa2. On January 9, 2007, ACA performed an “overlap analysis” and determined that it previously had purchased 62 of the 123 RMBS on Paulson’s list at the same or lower ratings.

ACA eventaully accepted 55 of those 62, because they were already familiar with them. In fact, they'd PURCHASED them for themselves. Sounds like they thought they were sound investments to me. No?

[Patrick R. Sullivan]

But at this stage of the litigation, the court is required to accept the allegations as true...

And we are under no such obligation, and we'd be stupid to assume any such thing. Never seen an overstated complaint?

[Danube of Thought]

Sounds like they thought they were sound investments to me.

It sounds like you think that even if the facts alleged in the SEC complaint are true, no wrongdoing has occurred. Is that your position?

[Rick Ballard]

"You seem to have some emotional need to believe that is the only way investors act."

Not really. I have problems with lying whores passing themselves off as being fiercely dedicated to their clients interests. I guess I'm just a little unclear as to why the magnificent brains at GS took $15 million in fees from Paulson to allow him to pick losers for ACA and managed to forget to disclose the fact that an acknowledged short was picking the "winners" for the worthless crap they were about to peddle.

[Danube of Thought]

... we'd be stupid to assume any such thing. Never seen an overstated complaint?

Seen a thousand of them, but I know how and when the question of their overstatement is to be tested. And we'd be stupid to try to do that testing here and now, although we are surely under no obligation to refrain from doing so.

Still wondering whether you think the complaint sufficiently states a claim...

[Melinda Romanoff]

Keep in mind this particular security was a synthetic CDO.

Still doesn't make a hoot of difference to the case, Especially since the SEC has stated it doesn't expect to see criminal charges arise from this.

It's a show trial with a shakedown finale. Pay up front to settle, or pay after judgement.

I don't see this going to trial at all.

[Ignatz]

--to allow him to pick losers for ACA and managed to forget to disclose the fact that an acknowledged short was picking the "winners" for the worthless crap they were about to peddle--

The allegation appears to be that not only did they not disclose that fact to investors besides ACA, they misled ACA into the belief that Paulson was long these positions not shorting them.

[Patrick R. Sullivan]

The complaint is 'sufficient' in a technical sense for a civil action, but it is highly misleading and should be laughed out of a criminal court. The known facts make a laughingstock of their claims, but of course, the SEC didn't include them in their complaint.

What I think is going on here, is a political ploy to stir up emotions against Wall Street--and they sure succeeded with Rick Ballard--in order to help Democrats in congress pass some sort of financial sector regulation before November. I fully expect to see this settled out of court, with no admission of wrongdoing by Goldman.

Heck, the SEC is only asking for peanuts anyway:

C. Ordering GS&Co and Tourre to disgorge all illegal profits that they obtained as a result of their fraudulent misconduct, acts or courses of conduct described in this Complaint, and to pay prejudgment interest thereon; D. Imposing civil monetary penalties on GS&Co and Tourre pursuant to Section 20(d)(2) of the Securities Act [15 U.S.C. § 77t (d)(2)] and Section 21(d)(3) of the Exchange Act [15 U.S.C. § 78u(d)(3)]; and E. Granting such equitable relief as may be appropriate or necessary for the benefit of investors pursuant to Section 21(d)(5) of the Exchange Act [15 U.S.C. § 78u(d)(5)].

There are no profits to disgorge from Goldman, they lost about $75 million on their LONG POSITION in ABACUS. For that, they'd need to go after Paulson.

[Melinda Romanoff]

Eric Gerding makes some interesting points, as well as describing it as a "test" case.

It's worth a look, and for disclosure purposes, I grabbed the link at Prof. Bainbridge's site, via Prof. Reynolds.

[Patrick R. Sullivan]

I'm just a little unclear as to why the magnificent brains at GS took $15 million in fees from Paulson to allow him to pick losers...

Because, obviously, that's the business they're in. They sell both puts and calls, don't they, does that puzzle you too.

[MarkO]

I found a distillation at Volokh that seems to make some of this clear and raises questions about the timing of the collapse and the reasons:
________________________________________

"I’m not going to try to assess what I don’t know about, and that includes both securities law and the facts of any and every particular Wall Street case.

Here’s what I think I do know: it was possible on Wall Street to deliberately create bad mortgage-based investments, get them top credit ratings, sell them to a third party, leaving yourself free of risk derived from their bad quality, and then bet on them to fail using credit default swaps—insurance policies purchased with the assurance of failure that insider knowledge provided. Moreover, doing that offered the prospect of substantially greater profits compared to buying good mortgage-based investments and collecting the interest until they paid off.

The paragraph above describes a scheme that incentivizes moral fraud, whatever the law says. What gets incentivized is usually what happens. Therefore, I assume that if the facts are as they appear to be, fraud of that sort was probably practiced on Wall Street on a massive scale.

I assume further that many billions of taxpayer dollars paid to Wall Street in the name of bailouts went instead to guarantee that fraudulent bets of the sort described above would actually pay off—even though the the institutions that issued the CDSs had been bankrupted and couldn’t pay. I presume there was fraud involved in whatever representations led to the payment or risk of public money for that purpose.

No doubt there will be arguments about whether existing law specifically and minutely anticipated, or described, or prohibited, various aspects of these transactions. I don’t know anything about that, and I don’t think it ought to be necessary to consider it. I just assume that somewhere there must be a general law against taking money by deception and false pretenses. If so, that should be sufficient for prosecutions. Let juries decide if that is what happened."

[Danube of Thought]

"I just assume that somewhere there must be a general law against taking money by deception and false pretenses. If so, that should be sufficient for prosecutions. Let juries decide if that is what happened."

I agree, and there is such a law (it's known as Rule 10b-5, and it proscribes any "scene or artifice to defraud" in securities transactions).

[Danube of Thought]

"it is highly misleading and should be laughed out of a criminal court. The known facts make a laughingstock of their claims, but of course, the SEC didn't include them in their complaint."

It is not in a criminal court, and won't be. If the known facts are as you characterize them, the case is ripe for summary judgment, and I expect GS will present those facts to the court and seek to nip the case in the bud. For all I know at this point they will succeed.

If they don't, the case will surely be settled-- they just about never go to trial.

[Danube of Thought]

WSJ:

Goldman Sachs Group Inc. (GS) was warned nine months ago that Securities and Exchange Commission staff wanted to bring a civil case against it, but the investment bank didn't specifically disclose this to investors in regulatory filings, Bloomberg News reported Saturday, citing unidentified people it credited with direct knowledge of the communications.

Goldman Sachs responded to the so-called Wells notice from the SEC within months and met with agency officials in an effort to fend off the civil lawsuit, Bloomberg reported, citing its sources, who declined to be identified because the discussions weren't public.

The SEC sent Goldman the Wells notice in July 2009, and the company responded in September. In March 2010, the New York-based firm said in a regulatory filing that it was cooperating with regulators' "requests for information," Bloomberg noted.

Looks like the staff was in on the political intrigue back last summer. Must have been coordinating with Dodd...

[Patrick R. Sullivan]

Here’s what I think I do know: it was possible on Wall Street to deliberately create bad mortgage-based investments...

Which is not true. Whoever wrote that at Volokh is a simpleton.

Wall Street is NOT the villain. Had the underlying home loans been sound--as they had been for decades in the USA--we wouldn't be here talking about CDS, CDO, and other derivatives.

What most investors didn't realize was that the home lending markets had changed drastically, and were no longer a sure thing. That wasn't Wall Street's fault. It was a deliberate attack on home lending by the Federal govt, beginning in the early 90s that undermined that market. Wall Street merely transmitted it to investors.

In one sense, guys like John Paulson have done everyone a favor--if we'd stop whining about 'banksters' and look dispassionately at the facts.

[matt]

I hate to say it, as I hate G&S more than most. They shysters, but they are usually too smart for much of the rest of the Street.

I had a buddy who got fleeced as a daytrader, and pointed out that their computers are a lot more powerful than his. Wall Street is a sheep shearing station and pillar of the economy all in one.

It is simply too easy for GS to make money perfectly legally, which they have done better than anyone for many years.

When you have Mozillo and the Ditech crooks and the Wamu grifters walking the streets, and oh by the way the party line in the national propaganda machine suddenly breaks loose with a highly technical case against GS just as Dear Leader urges us all to come together for Wall Street reform for the good of the nation, I'm going to say it is one of the most brazen cases of propaganda ever attempted in this country.

Usually one would need huge volumes of records, timelines, and prior sworn statements.The evidence released to date seems pretty limited and not the mountain of data one would expect. The SEC needs a good horsewhipping, as far as I'm concerned and I suspect Cravath, Swain will give it to them.

[glasater]

Where were the ratings agencies in all of this?

Buffett is a big investor in GS and Moody's. He has got to be very upset with this whole situation.

[Danube of Thought]

Here's another guy at Volokh--one Kenneth Anderson--whose sentiments resonate with me:

One of the problems with trying to say much at this stage about the legal analysis is that it is so factually driven. If the facts are as the SEC alleges, well, then, bad, bad Goldman!! But on these allegations, there’s not a lot of room for legal nuance, although I am happy to be corrected on that in the comments, not being a securities litigator. So, here’s my question for the comments. Assume that the facts are as alleged. In that case, is there an important legal issue, or is it the application of straight securities fraud principles? Is there an alternative, plausible reading of the facts? And is there an alternative, plausible factual reading that creates an important legal question?

I'm not even as certain as he is that the complaint states a sufficient claim. I suppose Goldman will test it with a motion under procedural Rule 12.

[MarkO]

Apparently, Goldman's submission was unpersuasive. Now, that does not mean that the SEC has a lay down hand. Or, even if it did, that it could beat Goldman's lawyers. But, if don't think Goldman walks on the edge of the line, stay out of the market. Goldman likely has an opinion of counsel that its actions would be lawful.

I guess, my experience tells me that the full measure of the crisis, the players, the political timing, and the gazillions made on it is yet unknown.

But, as I think I may have said earlier, priviate cases will flood the courts and Goldman will have a you-bet-the-company litigation strategy. And, should someone lose a 12 b motion, there will be amendments. The only one who cannot afford to lose anything in any of these courts is Goldman.

[Danube of Thought]

Wall Street merely transmitted it to investors.

In doing so, it was under an obligation to make certain disclosures to those investors. They claim is that they didn't, and it has nothing to do with who was at fault for the housing collapse. Those who traffic in securities are by no means mere transmitters; take a look at the 1933 and 1934 Acts.

[MarkO]

There is a random "I guess" in there. Sorry.

[Rick Ballard]

Matt,

The government lost a reasonably technical fraud case fairly recently. They may be going with the simplest case possible precisely because GS is quite capable of generating a sufficient smoke screen big enough to hide the sun. There may also well be political ramifications to the timing, the SEC might be covering their ineptitude in the Stanford matter or this might be a rallying point for further regulation.

I don't really care too much. The CT AG is feeling an urge to pursue criminal charges and Germany may come in with a civil complaint as well. AFAIC - if this breaks Goldman, we're about 20% done. As Jim Rhodes has noted, every time one of these debacles hits it's the same crew of "connected" jackals. Thinning the pack is never a bad result.

[jean]

OT kind of can people who lost lots of money with Sanford sue the SEC.?The SEC seemed to know Sanford was a ponzi in 1997 and did nothing about it

[Buford Gooch says GS sucks]

Did Sylvia change her name from Emily Litella?

[Danube of Thought]

You can't sue the SEC--more's the pity.

I have no doubt that the private plaintiffs' bar will be all over this like cheap suit irrespective of what the SEC does. And they would do so (as they do most of the time) even if the SEC had not acted at all.

I feel that sublime tranquillity that comes from not caring a fig, nor having any illusions, about any of the players in this drama, although I have a strong sentimental attachment to the Goldman defense team. As a federal judge once told me in open court, the highest and best use a man can make of his money is the payment of a reasonable attorneys' fee.

[Melinda Romanoff]

PRS-

You ripped your veil on this one.

"Here’s what I think I do know: it was possible on Wall Street to deliberately create bad mortgage-based investments...

Which is not true. Whoever wrote that at Volokh is a simpleton."

That response, right there, shows your unbridled faith in the genius that is "Wall Street" fully armed with the lack of knowledge of what goes on at the "Corporate Origination Desk".

I agree with you that this is a sham suit, but our reasons are far, far different.

Here's a good example of why I think it's all for show. Do you know what FINRA is?

[Clarice]

Well, consider it a lawyers' relief act. Young lawyers have been hard hit these days and with the bank and market difficulties they are getting canned or having trouble getting hired. years of discovery on cases like this are a perfect fit for them.

The other alternative is they come to DC and dream up new regulatory schemes to bedevil the rest of us.

[Melinda Romanoff]

DoT-

Like Chaco pointed out, this is a right hand/left hand example. The right hand is suing GS civilly and have stated that NO criminal actions will arise from this suit.

Where's the left hand? Up Dodd's shirt?

[Pagar]

I suspect the SEC has known since long before 1997 that Social Security is a ponzi scheme and done nothing about it. Obamacare will be many times worse.

[Pasadena Phil]

Not that I'm a legal expert but I have a feeling that what Goldman Sachs did, as unethical as it may be, is not illegal. Were GS to lose this case, the fine would be the least of the damage they stand to suffer. Investment banks, and GS in particular, live on their reputation and on the trust of their clients.

We will see Monday whether other jilted investors file charges. I expect a flurry of lawsuits soon. Whether that happens will tell us how much trouble GS is in. The continuing headline damage alone could be enough to put them out of business.

[glasater]

GS has been around since 1869. I don't think they will go down--not without a tremendous battle.

I just wish during the course of events and how they unfold--Zero would would be taken out. Or shown the fraud that he is.

[They broke this story four months ago.]

The Morgenson and Story article in the 12/23/09 NYT is very interesting. Any chance someone bright here can make a nice link to it?

H/t ZH.
============

[I'm gonna add a little depleted uranium to my lead lined hat.]

Oh, Boy! Soros Fund Management was among the short sellers, along with Paulson.
==============

[glasater]

Is this the one you mean, Kim?

Banks Bundled Bad Debt, Bet Against It and Won

Yesterday when I was cruising through articles someone claimed that the SEC's complaint was verbatim from a couple of gal's writing for the NYT's--am hazy on that one...

[But why this and why now?]

Wunnerful, g; I was about to try to make a LUN out of it. That's an amazing article from my viewpoint. Tomorrow in Asia is going to be very interesting. Maybe we can get a few livebloggers.
===============

[Clarice]

Someone--I think Melinda--posted a link today to a blogger who had originally said that but was backing off it because the NYT article was written well after the SEC notified GS it was the target of this investigation.

The question I have is did someone at the SEC leak this to the NYT at that time?

[Rick Ballard]

Glasater,

Lehman was a little bit older. Would BAC, Citi or JPM set off that nice big CDS suicide vest for GS? I don't believe Turbo Timmy or Uncle Ben will be able to save GS should they be locked out as Lehman was. I'm not at all sure that they will be but I can't wait to see who the "prudent man" dumb enough to expose his company to investor lawsuits by doing a new deal with GS might be. What's his excuse if the deal goes sour? "Yeah, I heard about the fraud suit but GS was still the most honest thief I could find on Wall Street."

I hope the plunge protection team is suited up on Monday. Just in case.

[glasater]

Rick-

Have a lot of sympathy for your pov but the the government through the years has created situations to allow this to happen.

Fannie and Freddie come to mind. Plus, allowing outfits like ACORN to bring lawsuits for not lending to minorities ala Zero...

[matt]

what I am more concerned about is that Obama is once again unleashing his propaganda machine. Goldman may well be guilty, but there are bigger fish to fry.

This all started with the melt down in credibility of mortgages, once one of the most conservative of financial instruments.That and munis and gilts were as good as it gets. Now, all three are some of the highest risk instruments out there. Greek bonds are probable more sound now.

One thing is, we all know GS is a whore and proud of it. Whether she is an honest whore is the question.

No, the Obama Ministry of Propaganda has me deeply concerned.LUN.

[Pasadena Phil]

Glasater,

Bear Stearns, another very old firm, had over $70 billion in cash the day they folded. What took them down was the sudden cut off of overnight funding that all investment banks rely on. The hedge fund that took them down was a money market fund. Whodathunkit?

Venerable Goldman Sachs, as old as they might be and as wealthy and as well-connected cannot survive if clients and investment banks choose to stop doing business a marketing pariah.

I believe that they are in a fight for their survival. We'll know better in a few days.

[Melinda Romanoff]

Nice piece, matt.

kim- Gretchen gets fed her stories, ONLY fed, and this time, fed by the Feds.

[Pasadena Phil]

Glasater,

There are "bigger fish to fry" than Goldman?

((((((((((((((((((((gasp!)))))))))))))))))))))

Goldman controls the Treasury, the Fed and pretty much the entire US financial system and then some. What fish is bigger? It is absolutely critical for the salvation of the capitalist system that Goldman be made an example of if not put out of business completely. You'd be surprised how many new competitors step in to fill the void.

Re-introducing competition and shutting down that inside-trading criminal enterprise is every bit as important and Fannie/Freddie if not more.

[Melinda Romanoff]

A synthetic CDO is about the furthest edge of the realm of securities one can find. They are issue specific, and purposefully so.

This is NOT a securities suit. There exist completely different methods for these complaints, if valid for their accusations.

It. Is. A. Sham.

[glasater]

PP--are you looking at Matt @ 11:05?

[Melinda Romanoff]

pp-

The repo market is not one mutual fund, especially between midtown and Wall Street.

Life in New York is more complicated than that.

[Pasadena Phil]

Glasater, Melinda,

I AM in the investment business and have been intimately involved for twenty years. It has been my experience that no media can be trusted to cover this factually.

There are no good guys to side with and naturally, the other banks are going to say anything to keep this issue contained. They are next. Run your eyeballs through any investment publication or TV/radio program and see who pays their bills.

Wall Street is at war with Main Street and has been for years. No one has a deeper sense of entitlement that the crooks who insist that they are worth hundreds of millions in bonuses every year.

If you insist on arguing with me as if I am naive, you will be sadly disappointed. I am not looking at this politically. I am looking at it systemically. Don't let politics cloud your judgment into letting these bastards go. Take them down while you can. It's the law of the same jungle that insist on using against us and now the tables are turned.

[Melinda Romanoff]

No politics at all, pp.

My contact with the sausage factory that created these "gems" was with their actual creation. I know how they work, how they were made, how they were hedged, and how, and to whom, they were sold.

And it's why I wanted out.

And I did.

No politics, I just can't scrub hard enough.

Try again.

[glasater]

PP-

I think you confused me with Matt's comment at 11:05.

Didn't say "bigger fish to fry"....sorry.

And I do take your comments quite seriously.

[Do I?]

Something is happening here, but I don't know what it is.
======================

[Pasadena Phil]

Melinda,

Then I don't get your first point. If you were involved in the creation of this economically-destructive toxic waste, why are you defending these guys? It seems to me that we actually agree.

There is a reason why there is so much cash sitting on the sidelines, That cash is managed by some serious big investors who don't want to participate in the crooked casino that Goldman has created. It is absolutely essential for both the Treasury and the world's biggest hedge fund, the Fed, that they step so they can unload all of those toxic mortgages they bought. It's the greater fool theory of all successful pyramid schemes.

It looks to me like the greatest fools were the Treasury and the Fed and I also suspect that these unmentioned investors were involved in these charges.

And let's not forget that Mary Shapiro is persona non grata in Congress and in the White House and would be terminated under the super-duper new bureaucracy both parties have agreed to sponsor on behalf of the crooked banks.

[Melinda Romanoff]

glasater-

I'm fading. I don't have the stamina at present (new drug regimen) to play with pp tonight.

G'night all.

[Charlie (Colorado)]

Is there any chance we could, like, at least converge on what the facts as they am known would be?

If I'm getting this right -- and I'm way behind on this, feel free to correct me -- then the accusation is that Goldman acted as the investment bank between parties who wanted to collect a bunch of high risk mortgages into an instrument, and people who wanted to be short that instrument.

ASIDE
Now, I've seen at least one implication here that you can't make a highly-rated instrument out of risky mortgages, but that's just wrong. If you have a large enough pool, a high enough reserve against losses, and an otherwise reputable firm with substantial assets, there's no reason at all that the instrument couldn't have a good rating. The rating is just an aggregate measure of the risk of default, and while the evaluation of that risk is covered with coarse, rank, kinky hair (I'm thinking things like Monte Carlo integrations of big stiff systems of non-homogeneous differential equations), that's why the big firms have barns full of quants.

Also, having a high rating doesn't mean there's no chance of default or loss. It's a statement that the risk is small, and therefore the probability of failure is small. But "small" >> 0.
EDISA

The second part is that Goldman and the counterparty who wanted the short side negotiated what would be included in the instrument with Goldman and the people (was it Goldman again?) who owned the mortgages.

Then the third part is that Goldman let other investors -- from the sounds of it, "small" investors, but only in a relative sense, players who could buy in units that were in the mid six figures -- buy into the same instruments.

The theory of the civil suit is that Goldman's disclosure that the other party was helping select the mortgages included in the instrument was insufficient, because one of those parties was taking the short side of the deal.

Is this right so far?

[Chuckle.]

Sometimes, Melinda, you just make me laugh out loud. It's no wonder we could settle all the problems of the world if they'd just let us.
=================

[matt]

pp;

the systemic meltdown began with the elimination of redlining inner city neighborhoods. They simply were, as determined by the facts, bad investments, but Frank et al wanted to promote socially responsive investment. Note: not socially responsible.

If the fundamental underpinnings of our society are allowed to become politicized and devalued for those purposes, the foundations come unglued.

Yes, Goldman is important. No, they should not be the focus of reform the system until a later date.We have the issues of sovereign debt, mortgage dent, and municipal/state debt to deal with before we get to Wall Street.We must reestablish some integrity to debt.

Greece, Portugal, Italy, Belgium, Japan, GB, California, New Jersey, Michigan...take your pick. All of it is so underwater I just don't know how it will be repaid. We are really, truly talking a gazillion dollars.

60-70% of the short sale market now is made up of people who can continue to pay their mortgages, but who are underwater on home values. Shorts give them the ability to walk away. Do we prosecute them? They legally incurred a debt and can pay it. The government and the rules are tilted in their favor. 50 years ago it would not have happened. or 20.

Ever since that f*#cer Frank and his allies corrupted the system, the whole shooting match has been put at risk.

In the meantime we have a community organizer who is as corrupt as any Nigerian e mail scammer at the helm, and someone has read McLuhan and Goebbels. I am incensed that he will not put to rest the birther claims with a simple release of his birth records, or for that matter his college records or his travel records when in his 20's. What is he hiding is the only logical conclusion.

We hold our presidents to a high standard.
The press has held Obama to the lowest common denominator and he still doesn't measure up.

One of the concerns expressed to my African American friends during the election was that the current occupant of the White House simply would not measure up. He has fulfilled that expectation, unfortunately. In addition he is a corporatist/fascist in the classical sense.

As Melinda said, G'night all.

[Max Regor]

I have read a lot of the back and forth about the specifics, though most is in the end about the fundamentals. Here is Blankenfein about the crisis

http://www.marketwatch.com/story/story/print?guid=C6F573D0-DD4D-4DD1-95C4-2F396177405E

Unwittingly, toward the end he identifies the problem.

"Markets simply cannot thrive without confidence."

As many have pointed out this is really a case of buyer beware. IKB, ACC, ABN sophisticated investors, they all got taken. Goldman may be successful against the SEC charges. I do wonder if its clients will trust, or as Blankenfein says it will have confidence in Goldman Sachs again?

[Frau Autopanne]

Put Dodd into the picture, please.

[Max Regor]

This has nothing to do with Dodd. I think the SEC was acting as it should. The SEC did not take sides. All that it is required to do is to ensure honestly and, to use the words of Blankenfein, transparency in the markets it regulates. The fact that the CDO appears to have been synthetic as opposed to cash flow is irrelevant to the SEC, though it may have made a difference to those who bought the security. I do not have a clue about what is material or what is not. I do know this, IKB and ABN claimed they would not have invested had they known about Paulson's involvement in the selection of securities in the CDO that they bought. Let the trial begin!

[glasater]

Frau--I wonder if Dodd or Frank want these lawsuits to take place. All that "stuff" coming out in the open? I wouldn't think so.

All that money sitting on the sidelines are people afraid of what Zero will do--not GS.

Matt-very well stated in your blog and comment at 12:38 and expresses my concerns.
We have an aging population. Pension funds are terribly underfunded.
Folks who have worked hard and put money away for their personal retirement are what this president wants to take over. Or at least create another financial catastrophe to justify his actions.

It's like Willy Sutton--that's where the money is and Zero wants it.

[glasater]

Kim--there's got to be some correlation with this earthquake activity and volcanic eruptions with what is going on with the Sun don't you think?

[cathyf]

the systemic meltdown began with the elimination of redlining inner city neighborhoods. They simply were, as determined by the facts, bad investments, but Frank et al wanted to promote socially responsive investment. Note: not socially responsible.

Another bitter irony is that when a poor family ended up with a $100,000 zero-percent-down mortgage on a house never worth more than $30,000, this didn't do them any favors. When they could have easily afforded the market rent that the slumlord would have charged if the house's value had stayed at it's boring never-had-a-bubble $30,000 value.

Everybody acts like the people who walk out on their underwater mortgages are the ones getting something. Of course it was the people who sold out at the top of the bubble who really made off...

[The concatenations are contemplatable.]

Heh, big solar flare coming in a day or two, too.
=======================

[Extraneus]

Wall Street suspects Goldman charges 'not coincidental' to financial reform effort

[AL]

Ravaging idiocy of you, Americans, scares a shit out of me. Barely survived through two cardiac arrest of financial system when Lehman and Bear Sterns collapsed you light-heartedly discuss technicalities and morality of even bigger financial institution disaster.

A plague on both your houses.

[BR]

"Something is happening here, but I don't know what it is."

Could be the Serpent's Kiss, the Serpent devouring itself or the Serpent's Spawn deviating from the Master Plan.

The strange concatenation fits my plans though :)

[Rick Ballard]

Charlie,

I don't believe you have an accurate description going there. At bottom, a synthetic CDO does not have the value of the house supporting the mortgage. It's a "bet" on a steeplechase race regarding the probability of each horse reaching the finish line with the "bet" (CDS) changing in size every day depending on the horse's "health".

The "income stream" supporting the instrument consists of risk premia, not mortgage payments. The suggestion that the "players" had the requisite sophistication to understand that having Paulson pick the horses meant that, of course half were lame while the other half were dragged off the knackers truck works only if 'sophistication' means 'idiocy'. I'd certainly be willing to listen to that argument regarding the credentialed morons who believe that black box algorithms contain the philosopher's stone.

[Melinda Romanoff]

pp-

Cash is on the sidelines for preservation purposes. MOST of those Money Market Fund (MMF) managers are restricted,, by the by-laws of the fund, as to what assets they can own. Higher yields means higher risk carp on the books. You will NEVER see the stuff that goes on the books between the quarterly reporting periods by the slimier managers (very greedy).

I can separate what the Fed is doing and what the livelihood of Wall Streeters is doing to warp sensibilities out of smart people.

Capitol Hill mandarins need the system to stay intact, as currently structured, so as to maintain orderly campaign contribution flows. They are not smart enough (well, maybe Schumer is) to redesign their campaign structures to siphon the cash. The contributors contribute thinking this buys them breathing room. However, I think Bob Dole was the last "honest politician".

["Honest Politician"-def.,n., a political figure that stays bought, see Bob Dole, or ADM]

[bunkerbuster]

Maybe Goldman encouraged the civil suit. The worst case scenario is that they pay a fine, though it seems more likely to be settled before it comes to that, as it's a civil suit, not a regulatory case.

More likely, Goldman beats the rap. What then? People say the short-selling against their own investors will hurt Goldman's rep? No way. The people who put their money with Goldman do so for exactly that reason: They want someone who's smart enough, powerful enough and amoral enough to make it grow faster than anyone else. Goldman will come out of this more powerful than ever. If they win, they can point to their legal vindication, if they lose, it at least kills the notion that Goldman runs the government.

[Melinda Romanoff]

Rick-

Janet spells out synthetics more simply, and the wider implications of unfunded games, here.

She really does lay this stuff nicely because she was at the other end of the sausage factory from me. Lots of big letters after her name.

[Donald]

This being a civil suit and all, and nobodie's going to prison on the Florida panhandle and all, I can't help but think tha they'res a deal between the whores in the Obama generation with their johns at Goldman Sachs. There's seedy shit here see (Channelling Jimmy Cagney), so how's about GS pays up about $15,000,000.00 in fines, fire a bond trader and let's move on.

Elections are coming up, contributions are needed.

[Donald]

That's some pretty awsome spelling if I say so myself.

[Rick Ballard]

Here is the first subprime case taken to trial (and lost). I haven't found anything about a final disposition to the SEC civil suit regarding the matter.

I agree that the Goldman SEC case will probably not be tried. Reading the juror's comments in the Bear Stearns case provides a very clear rationale for keeping the matter from a jury.

[Melinda Romanoff]

Thanks for the Bear link (wrote BS, which didn't look too good at 2nd glance). I caught the headline at the time and, since it coincided with my thoughts on that particular case, didn't follow up on the details. I should have.

[Rick Ballard]

Mel,

That's a nice technical piece by Tavakoli but it would not be terribly useful in educating a jury regarding CDO/CDS. Your original description of CDS as a mixture of insurance and a bet works better but a jury has to understand that they, via the US Treasury, paid off the "bet" portion when AIG couldn't cover the Wall Street pimps action. Otherwise we'll be seeing more "I thought they tried real, real hard" reasoning by jurors who will be impressed by the fact that Goldman actually lost money on the deal.

[Clarice]

As I said, Rick, it'll be a very smart jury made up of the kind of hard drivers who wil assure the court they have no problem sitting there for a couple of months listening to all that evidence.

[Ignatz]

--but a jury has to understand that they, via the US Treasury, paid off the "bet" portion when AIG couldn't cover the Wall Street pimps action--

And there, regardless of the legal aspects, is why I hope GS gets it in the neck.
In a free market we'd have already laid a wreath marking the first anniversary of the passing of the venerable GS.

The stupid homeowners who made bad bets are properly foreclosed on and take the hit.
GS, Deutchebank etal, who made the same bad bets have Treasury step in and pay them off 100 cents on the dollar.

[Rick Ballard]

Brown Joins Merkel, Obama in Making Goldman-Sachs the Whipping Boy

I'd rather see 'em all whipped on a rotation basis. GS did absolutely nothing that JPM and Deutsche Bank didn't do.

[Danube of Thought]

Wall Street is at war with Main Street and has been for years.

Not helpful analysis.

[Frau Hut aus Aluminiumfolie]

Way out of my technical world here, but it's difficult for me to believe that the SEC is doing this independently of the WH. Rahm's been awfully quiet lately. Did he strain his gut laughing over a new crisis?

[rhymin' simon]

I think this a democratic replay of what Spitzer did while AG of New York. Slapped Citi and a coulpe of others for $250 million which was chump change for them on their Enron exploits. Spitzer comes out looking tough, Citi and their ilk pay a piddling for their highway robbery and NY times makes Spitzer Governor.
Hank Greenberg did not want to play Spitzer's game so he got burned at AIG while Warren Buffett dances as he is is AIG trading partner through Swiss Re.

Coule other major problem is that the synthetic CDOs created monopoloy money which was laughably to controol risk. How does Buffet get to monetize bets on J index ten years from now. a he or Berkshire Hathaway may not be around in ten years and B he can game the system as to who is in DJ index he same way that he gamed the rating agencies.

[Wheels within wheels.]

Story and Morgensen have another article in the NYT today.
======================