Singling out Goldman Sachs

Regular readers know that I have few nice things to say about Goldman Sachs lately.

Goldman fully deserves the attention that the SEC has brought to it, and the attention that the Department of Justice may soon bring to it. The conduct that the firm is trying to defend is inexcusable, and its unwillingness to acknowledge that even more so.

However, it is unlikely that bad conduct was limited only to Goldman. The fact that others were misbehaving is no defense. A high crime rate doesn’t make burglary okay. But I fear that Goldman Sachs may have become a shield and lightning rod, deflecting scrutiny from other firms also in need of disinfection.

Financial firms are fragile in at least three different ways. They are financially leveraged, so they are vulnerable to deteriorating asset values. They fund illiquid assets with short-term money, so they are vulnerable to runs. A less widely appreciated fragility has to do with the degree to which the boundaries of the state and financial institutions blur. A financial institution that is at odds with the state is a freakish, frightening thing. It may suffer a loss of confidence for reasons that can’t be fully explained in economic terms. Famously, “no major financial firm has survived criminal charges.

I think it entirely possible that Goldman could go the way of Arthur Anderson or Drexel. If so, the firm will have no one to blame but itself.

Nevertheless, there is a danger that we will make a ritual sacrifice of Goldman and pretend to have exorcised our demons, while other firms that have engaged in similar conduct continue undisturbed. It would be a sad irony if, in single-minded pursuit of Goldman Sachs, we not only let other perps escape unscathed, but also hand them the windfall of a less competitive industry. Rather than forcing traumatic self-appraisal and reform at surviving banks, Goldman’s fall might lead managers elsewhere to congratulate themselves for savvy positioning, for playing the system. Competitors would swallow the corpse of Goldman Sachs, thinking they had eaten what they’d killed.

I have no reason to think that the government’s focus on Goldman is motivated by anything other than having discovered particularly bad conduct there. Nevertheless, the cynic in me cannot help but notice that, according to media reports, Jamie Dimon and the Obama Administration have been very close at times. Dimon’s bank, JP Morgan Chase, has much to gain from Goldman’s misfortune. The more reasonable me is sure that there is no connection, that the mere suspicion is crank conspiracy theory. Still, less-than-exemplary conduct by investment banks during the bubble was widespread. It would be comforting to see evidence that the cops on the beat are walking the Street, and not just holing up in front of Goldman Sachs. Call it avoiding an appearance of impropriety.

Usually when people accuse law enforcement of a “fishing expedition”, they are asking the police to stand down. I do not want the police to stand down. The SEC and the Justice Department should treat Wall Street the way big city cops treat “open air drug markets”, with engaged and loving attention. But instead of a “fishing expedition” we need a “trawling expedition”. There are a swarm of piranha in the swimming pool, not just one vampire squid.

Goldman Sachs may die. If it does, I will shed a tear. My feelings about the firm are not unmixed. Nevertheless, if Goldman dies, it will be the fault of its own managers, and there will be some justice in it.

But let’s not imagine that Goldman’s passing somehow redeems JP Morgan, or Deutsche Bank, or Citi, of their sins.


51 Responses to “Singling out Goldman Sachs”

  1. Kid Dynamite writes:

    sins! forgive me Bernanke, for I have sinned. it’s been 90 days since my last mark to market.

  2. Steve Randy Waldman writes:

    KD —

    the dollar forgives my son. as penance, you must execute four Hail Marys with an extend and pretend. — BB

  3. Kid Dynamite writes:

    touche! i tried to write my own reply to the confession, but yours is perfect. well done

  4. glory writes:

    Confessions of a Wall St. Nihilist: Forget About Goldman Sachs, Our Entire Economy Is Built on Fraud (note: polemic! ;)

    also see…
    The Feds vs. Goldman

    cf. VF on ames & taibbi

    and btw…
    The Goldman Casino: Do investment banks do anything that helps America anymore? by Eliot Spitzer

    how about a fiduciary standard? this could have the potential to be transformative :P if as jeremy grantham sez, “clients can’t easily distinguish talent from luck or risk taking,” then having a law mandating that agents act in the best interest of their clients i think gets to the heart of the issue — agents would be made accountable; imagine that!

  5. glory writes:
  6. Claremont writes:

    “I have no reason to think that the government’s focus on Goldman is motivated by anything other than having discovered particularly bad conduct there.”

    There is every reason to think that the government’s claim of having discovered bad conduct is a result of them wanting to discover bad conduct at Goldman because of political incentives, not the genuine pursuit of misconduct or a wish of protecting market participants or consumers. The desire to charge a firm popularly viewed as “the bad guys” came first, then they went looking for something to charge them with.

  7. mattski writes:

    Demonstration effect?

  8. CBam writes:

    I think there is an anology here to Enron and MCI. Those companies failed. And, our collective takeaway was that rotten apples were running things. We punished a few of them harshly (Skilling is still in prison). But we allowed off balance sheet vehicles and mark to model accounting to thrive in the heart of the financial system… and it came back to bite us.

  9. […] Steve Randy Waldman, “I think it entirely possible that Goldman could go the way of Arthur Anderson or Drexel. If so, the firm will have no one to blame but itself.”  (Interfluidity) […]

  10. Indy writes:

    I doubt the regulators can do much more than one major investigation against one major financial institution at a time. This isn’t much different from the national security and intelligence side of our of government apparatus.

    The trick is to maintain feedback cycles, which turn each operation into the ability to learn more information which in turn creates more operations. The most effective way this happens in law enforcement is where you try to “flip” the current target into working for you, becoming a reliable informant, and by cutting him a deal to encourage him to rat out what dirt he knows about the other big fish.

    Sometimes the targets know this well enough that they make favoritism-based prosecutions impossible, because, if caught, they can always credibly publicly leak dirt on the favored entities – dis-incentivizing the “commandeering of official prosecution” tactic.

    The point is, you only have to start with one, be prepared to relieve liability for valuable tips, and then one by one all the rest fall down, feasting on themselves to escape the wrath of Uncle Sam. If you’re particularly clever, you don’t have to much more than sit back and watch the automatic universal cleaning machine at work.

    If you were going to choose your first target, you would want to pick the guy with the best chance of knowing the most dirt about every other player out there. And who might that be?

  11. Philip writes:

    Well said, Indy. It’s a bit like tossing an injured bull shark into a shiver of his colleagues in the midst feeding on “clients”. They soon turn and feast on the larger prey with the side-benefit of reducing the competition. There’s no professional courtesy observed in these waters.

  12. JLF writes:

    Steve – well said. Post financial meltdown GS stands as the proudest exemplar of the old buccanneering way of investment banking and in that respect it is probably important it is humbled. However, GS always stood out to me as having higher ethical standards than the average in the CDO space and given the weight of ‘declassified’ material I’m surprised there is so little explosive material discovered while it certainly reveals an active risk management process with senior management engagement. I have no doubt at all that digging at some of the more loosely managed organisations would unveil a lot worse.

    The whole CDO industry was constructed by smart, spreadsheet savvy young guys with little sense of any obligation to anything beyond desk P&L and so client management or responsibility normally extended to the next trade only.

    If GS does go down it will be galling to me given that the firms who were ethically worse and got the big risk management issues entirely wrong remain intact and largely unreformed.

  13. carping demon writes:

    “A less widely appreciated fragility has to do with the degree to which the boundaries of the state and financial institutions blur. A financial institution that is at odds with the state is a freakish, frightening thing.”

    I don’t get this part. Goldman isn’t at odds with the state. The only blurring of boundaries between the state and financial institutions I can see is being manufactured by Cowen in the linked post. I didn’t get the idea from J&K’s book that they were considering “political power” in any terms other than a means for the financial firms to further enrich themselves. There’s a hell of a lot more to political power than that. What’s to blur? The revolving door isn’t a blur, it’s just an avenue that opens up to the financials to get more power than they have now. And the only thing they want that power for is to get more money. They don’t want to run the country. They just want to skim it.

  14. […] Singling out Goldman Sachs Steve Waldman […]

  15. […] Singling out Goldman Sachs Steve Waldman […]

  16. steve writes:

    It’s pure madness to think there’s even a sliver of a chance that Goldman will fail.

    The U.S. govt. will fail before Goldman does.

  17. winterspeak writes:

    SRW: The line between financial firms and the Government may be blurier than you think. If the Government simply decided to direct investment itself, then you wouldn’t need a financial sector at all since payment settlement is a simple utility function that could be provided adequately by the state.

    Cowen, of course, has no idea how the financial system works and therefore produces the standard libertarian/contrarian column inches so beloved by editors on a deadline.

    Jamie Dimon is far more politically astute (and handsome!) than Blankein. If there’s a titan in the financial sector, it’s Jamie.

  18. No, they’re still on life support. They were converted to a bank holding company so they could have access to the Fed discount window, and the FDIC is insuring their bonds through programs such as the Temporary Liquidity Guarantee Program. If Fed discount window access were withdrawn and if the FDIC ceased insuring their bonds, their stock would probably drop to zero within a week.

  19. Very well written Steve.

    I’m a bit of a conspiracy-minded, and thus always had the odd feeling that they let Lehman collapse so that they could always point fingers and say “this all happened because we failed one big bank fail”. SEC probing into Goldman, and only Goldman, has the same vibe.

  20. ftyler writes:

    this is an interesting article on the demise of all fiat currencies because of the government continuing to print money, which benefits those like Goldman Sachs to the detriment of nearly everyone else:

  21. A recent investigative report on the collapse of the Icelandic banks ( in October 2008 shows clearly that the three main banks lent a small clique of the biggest shareholders and big clients astronomical amounts of money, far beyond any business sense, let alone common sense. Many of the loans were made in order to save these clients from margin calls made by foreign banks. The favoured clients weren’t meant to lose, no matter what. Less favoured investors, among them Icelandic pension funds, were allowed to lose i.a. on currency swaps.

    From the statements of the Goldman Sachs bankers testifying before the Senate Permanent Subcommittee on Investigations it was clear that some of GS clients were allowed to profit together with GS while others were allowed to lose on their own. It would be interesting to know how GS chose the losers and what made some merit the profits. Unlikely that it was just a random choice…

  22. Danny Black writes:

    Sigrun Davidsdottir, I would suggest that at the time of lending those people money the banks had made a bundle off them and later on stood to lose a larger bundle if these people defaulted. The Iceland banks in question probably thought it was a temporary liquidity problem and anyway if it wasn’t then they would be screwed whether they had lent more or not. I think it is probably safe to say that those clients and and shareholders did eventually lose and probably more than they would had they not been selected as “winners” by the Icelandic banks.

    As for choosing the losers? Pension funds losing on currency swaps? The optimist in me hopes they were hedging FX exposure. So they would lose on the swaps but make money elsewhere. However, the obvious way they would have lost money is if they were betting the ISK would stay high but the only legitimate reason for them to use a swap is to lock in the then high ISK rate against a USD income stream off US investments in which case they should be MAKING money on the currency swaps as the ISK collapsed.

    As for the hearings, it would depend on which bit of GS they were dealing with. If they were “selected to win with GS” with some of GSAM’s funds, I suspect they wish they had been selected to “lose”.

  23. Mujokan writes:

    I’ve read that from 2005 to 2007, Goldman Sachs had over 90% market share in underwriting subprime residential mortgage-backed securities and CDOs. Since disclosure requirements are higher for underwriting than for market-making, this would make Goldman Sachs the likely place to find a winnable case, wouldn’t it?

    The key here is that the market was manipulated using the synthetic CDO structure. Paulson got a better price by bundling up swaps and exploiting the ratings system (which Goldman also thought was flawed, as the Senate exhibits reveal); and crucially by then hiding his involvement as de facto selection agent by using ACA Management as a front. If you go through the documents, it’s very clear that they were looking for someone “easy to work with” who wouldn’t raise too many questions. IKB had turned down previous Goldman CDO offerings because they wanted an independent selection agent.

    To run this kind of case, the SEC has to find other instances where the price was affected by lack of disclosure. I don’t know that there are going to be too many of those around. Even rotten CDOs like Timberwolf disclosed that the agent might bet against the assets. But maybe there are other types of cases they could bring.

    It should be easy for the SEC to make the case that failure to disclose Paulson’s involvement in the Abacus documents affected the price, both for potential investors in Abacus and when ABN Amro backed up protection that Goldman bought on Abacus from ACA Capital. I imagine Goldman will settle, unless they think the SEC is going to lose on a technicality like they often seem to do.

  24. Danny Black writes:

    Mujokan, erm learn to read. The DARK blue is the market share GS has.

    Again how was the market being manipulated? He wasn’t de facto “selection agent”, ACA was the selection agent full stop. They had the responsibility to select the reference assets and in fact kicked out half of what Paulson wanted. At the very minimum we know Paulson told the people at ACA picking the portfolio he was shorting and that didn’t make the blindest bit of difference to ACA co-investing with IKB. IKB has a fiduciary trust to make sure it’s investments are sound, by all accounts it outsourced that trust to ACA relying on them having skin in the game to keep them honest. If they HAD wanted to do proper due diligence they had ALL the relevent information – ie the assets they were forming an economic view on.

    How would it be easy to show that Paulson’s view on the subprime market in 2007 as a non-player who uptil then lost money would have materially changed the price when balanced against the view of the experts in that field? We KNOW it didn’t affect ACA’s view of the price.

    It is not even going to be a case of technicality or not. The case has zero merit. The sole point will be to drip feed embarassing emails to the press until GS feels it has lost enough in share value and settles.

  25. Whether Goldman and other investment banks survive, who knows? The real problem is that the business model embraced by Goldman and others is fraught with potential conflicts of interest. The Lloyd Blankfein’s 2009 Shareholder Letter blatantly raises the prospects of these conflicts and views them as potential revenue generators. For further details, see my Blog,

  26. Mujokan writes:

    Oops, thanks Danny.

    I believe it was the parent company of ACA Management that bought $42 million of Abacus. In any case, ACA Management maintains they were told Paulson was going long the equity tranche of Abacus, not short. But here again we get into these arguments about who was sophisticated and who was dumb. That has nothing to do with legal requirements for disclosure.

    Yes, there is “always someone on the other side of a swap”, as people like Buffett say. In this case, it was Goldman who was short since they were underwriting the securities. Investors of course knew that they would likely sell off their short side. They didn’t know it was all going to Paulson through prearrangement, and that Paulson was short $900 million on the reference portfolio already.

    It does matter to pricing the motivations and disclosed intentions of the people picking the assets. This is why in Timberwolf, Goldman did disclose that Greywolf might go short. Paulson was finding it harder to get customers for bespoke CDOs with his name on it. Goldman too wanted to get as much business done as possible before the market woke up. They picked ACA Management as someone “easy to work with”. The goal was to hide Paulson’s involvement. (These are the impressions I’ve gotten from reading the Senate email exhibits.) If it is so ridiculous that this could affect pricing, why did they set up this scheme? Why not just nominate Paulson as selection agent?

    That ACA Capital had confidence in the deal does not affect in the slightest the legal requirements for disclosure. Anyone could have been an investor. You have to disclose everything material, and the selection agent being short is material. You can’t just say “go do your due diligence yourself”. You have certain responsibilities as an underwriter looking for investors.

    Now Paulson wasn’t the official selection agent, but that is the whole crux of the case. Their unofficial status is not a moot point that makes their involvement irrelevant. The question is whether the nature of their involvement was hidden in a bid to alter pricing.

  27. Danny Black writes:

    Mujokan, yeah it happens to all of us…. You can be sure I checked three or four times to make sure i wasn’t misreading but nobody has 90% of any even vaguely profitable market in finance for any length of time let alone 3 years. I would also point out that the graph clearly shows that rather than wanting “to get as much business done as possible before the market woke up” GS was doing – relatively as least – less business as time went on.

    There isn’t an equity tranch in this deal. Bit hard to be long something that doesn’t exist and Paulson is on record saying they informed ACA Management that they were shorting. Again as I keep saying you need to view this through early 2007 eyes. It most certainly was not clear the market was collapsing and in fact a brief look at the index shows after a dip it was flat/slightly rising during the period of this deal. It then went south and continued shortly after but we only KNOW that now.

    Again lets go back to 2007. Paulson had a one year track record in structured credit during which time he had lost money. ACA and IKB had made billions. If I came to you asking you to invest in a fund and gave you two options – one guy with a short track record made up of losing or someone who who had been doing this for over 5 years with stellar returns who are you going to invest with. It is THAT simple. Paulson had difficulty getting deals done because people thought he was a loser who would blow up – counterparty risk. GS apparently turned him down 5 times. The reason it SEEMS like Paulson’s involvement is relevent and would affect the price is because we KNOW the outcome. We KNOW Paulson would make billions, we know this particular bet by IKB and ACA would lose them alot of money. The SEC is clearly hoping that you will take that post-hoc information and let it colour your view of the transaction as it was in 2007. It is also hoping that selective release of a handful of emails out of some 20 million they trawled will poison the water for GS so they will settle. You never wonder why the SEC is not suing for all those deals where Paulson LOST money? Or maybe on Burry’s behalf during 2005-2006? Or Greg Lippman?

    Again Paulson was NOT the selection agent. ACA was and in case we think they were a patsy for Paulson we KNOW they threw out 50% of what Paulson pushed for. GS disclosed everything relevent, the CDO behaved EXACTLY as described. There was NOTHING that was a surprise to the investors, it is simply they didn’t expect it to happen and given their business model was buying EXACTLY these deals they were probably fervently hoping it wasn’t. IKB at least was told by two banks to sell their position out at a hefty loss and refused and so decided to ride the price down to zero.

    The contrast isn’t sophisticated vs dumb. As IKB showed you can be both. It is sophisticated vs unsophisticated. I show you that prospectus and the reference and you are going have a pretty good case you are not sophisticated or expert enough to make an informed decision which is why GS doesn’t sell to you. It is the difference between being a doctor and not being one. You can be a incompetent doctor and you can be a smart non-doctor but a doctor is expected to be able to make an expert and informed decision which a non-doctor cannot be.

  28. Mujokan writes:

    There wasn’t an equity tranche because no-one invested in it. If Paulson had bought in, as apparently they said they were going to, it would have existed.

    Paulson’s previous competence or otherwise doesn’t affect the legal requirements for disclosure. The reason it’s relevant is not because we now know the outcome. It affects price, because the $900 million short bet reflects an information gap.

    If all that mattered was the underlying assets, disclosure would be very simple. In fact, you wouldn’t need to disclose anything, because obviously everyone already knows what the reference portfolio is.

    But as an investor, you know that you can never know everything. So you look for indicators that the things you don’t know about need to be included in the price. That the person picking the stocks is going a billion dollars short is a very good indicator that there is something important about them you don’t know.

    This is different to a market-making situation where you bring a deal to Goldman, they charge you a fee, then they take their side and sell it off to whoever comes. The people on the other side might know more than you or they might not, but that is basically random. They will be very careful, knowing that someone brought this to Goldman out of the blue.

    This is an investment situation where an institutional investor (it’s not restricted to ACA Capital) comes to Goldman to buy and hold high-rated securities at low risk and low income. They have Goldman’s name on them as underwriter and ACA’s name as independent selection agent. So although you never can know everything, you can have confidence that it’s a well-balanced portfolio. As far as you know, you asked for high ratings, and these people have put their reputations on the line to do the best job they can to make them safe. You can very rationally put a low price on the risk of what you don’t know.

    But unknown to you, actually it is market-making, not for you but for Paulson, and this has been hidden by the off-books massive short and the use of ACA Management as a fig leaf. If you knew that, you would think there was more risk from unknown factors, and you’d demand a better price. That is also rational, and it’s covered by material disclosure. Paulson doesn’t have to have a title “official selection agent” to affect that. The fact that he picked half the assets and is long hundreds of millions of dollars on them is enough. Goldman was hiding risk indicators from potential investors by not disclosing it in the materials, and also altering ACB Amro’s risk pricing when they later looked at the Abacus CDO and decided whether to act as a backstop to the protection Goldman took out on it to cover Paulson’s short (unbeknownst to ACB).

  29. Danny Black writes:

    Mujokan, Paulson is quite clear that he told ACA he was going short not long. The lack of an equity tranche should be in the offer docs. If the offer docs in anyway shape or form even suggested there is an equity tranche and there is not then that is fraud.

    What “information gap”? Paulson had access to exactly the same information as the investors about what he was shorting and they were going long. EXACTLY THE SAME INFORMATION. Paulson just – in hindsight – analysed it better. Cannot state this more strongly, Paulson had NO SECRET INFORMATION about these bonds. He simply had a different view.

    Your third and fourth paragraph are pure, unadulterated BS. The value of those assets is ENTIRELY in their composition which is why when GS is not in investment advisor role it’s sole duty is to accurately describe the behaviour of the investment to the counterparties. If I sell you a put option but say it is a call option then that is fraud. If I went to an IDB and he went around telling people I was short X he would be in breach of his duty to me – and probably pretty soon out of a job. Remember IKB and ACA were meant to be investors, in particular buy and hold ones – the prospectus makes it clear that they should not expect to be able to sell out their position.

    As for you description of a market maker that is not accurate. Unless you are working in a seriously liquid market or doing a pissy tiny trade – and have probably been replaced by a laptop somewhere – or the guy who comes to you is lucky enough the be the other side of a trade you are doing then what actually happens is you come to your MM, he looks at his book, he looks at his hedge, if taking on your inventory is risky, he will tell you he’ll be back in a bit, will see what the appetite is for the other side and quote you. With a highly illiquid product like this portfolio bet, what GS did is perfectly normal. By the way, are you suggesting that there is a situation where an institutional investor is NOT allowed to “be very careful”?

    GS wasn’t underwriting this issue – am happy to have someone point out that I am wrong, it is more than possible – it is structuring a trade between different counterparties. Completely different.

    It is most certainly NOT an off-books short. For them to be able to go long someone has to go short. I sell you an index future I am short you are long. Ditto this transaction. You seem to be suggesting that thinking the short was GS – a long-term, successful and feared participent in the Mortgage market – would NOT have affected the price but somehow it was vital to know that Paulson – a nobody with a one year track record of LOSING money – was actually short.

    The point I am making is that the real villains of this piece are ACA and IKB. They are the ones clearly in breach of their legal obligations. They are also one of the reasons this crash happened and a very key one. Lazy incompetent investors. If the SEC had ANY interest in trying to stop this happening again they would be suing ACA and IKB and then you could be sure next time a bubble comes round that fund managers will be a bit more careful in scrutinising what they are investing in. However, we know that is not what this is all about, it is about politics, passing a pointless bill and some theatre in time for the elections later this year. Catch you after the next bubble.

  30. Mujokan writes:

    I won’t repeat myself on why I think concealing the nature of Paulson’s involvement constitutes failure to disclose information material to the price. We are going around in circles. If this goes to court, we’ll see who’s right. Otherwise it will remain unclear.

    A few points. First, Goldman, or more precisely the Abacus CDO entity, issued new securities. This is underwriting. Second, the “off the books” short was the protection that Paulson took with Goldman on the reference portfolio of Abacus before the deal closed. This was not part of Abacus. Potential investors had no way of knowing about it. After Abacus was done, Goldman then also took out protection on Abacus with ACA Capital through ABN Amro. This was how the $800 million or so made its way from RBS to Paulson. RBS paid Goldman, Goldman paid Paulson, in two separate settlements. In Abacus itself, the short side was initially Goldman as underwriter until they sold out to Paulson after the deal was done. Third, the lack of equity tranche was no big deal. The CDO was structured in a somewhat odd way that simulated a normal full CDO where the whole thing is sold from bottom to top. In this case, if someone had decided to invest in the equity tranche, that would have brought it into existence.

  31. Philip writes:

    You Goldman apologists have a right to your own opinions, but you do not have a right to your own facts. I’ll lay out some facts:

    Fact #1: Goldman anticipated problems finding a portfolio selection agent (PSA) willing to let Paulson do the actual selections and take the reputational risk in doing so.


    “Do you think [PSA 1] is easier to work with than [PSA 2]? They will never agree to the type of
    names Paulson wants to use. J don’t think [name redacted] will be willing to put [PSA l]’s name
    at risk for small economics on a weak quality portfolio whose bonds are distributed
    globally.” “There are more manager out there than just [PSAs 1 or 2]. The way I look at it, the
    easiest manager to work with should be used for our own axes.”
    Goldman Sachs email exchange with Fabrice Tourre. 12/20/06, as MBS-E-003246t45-46, Exhibit 107

    “As you know, a couple of weeks ago we had approached GSC to ask them to act as [PSA] for that
    Paulson-sponsored trade, and GSC had declined given their negative views on most of the credits
    that Paulson had selected.”
    Goldman Sachs email from FabriceToune. 1/29/07. GS MBS·E~003 248999 , Exhibit 112

    Now Goldman must find a CDO manager that will “agree to the type of names [of RMBS] Paulson
    want[s] to use” and is willing to put its “name at risk…on a weak quality portfolio.”
    SEC filing in Goldman case, p. 8

    Fact #2: Goldman knew that the final Abacus portfolio had to meet Paulson’s requirements or the deal would not proceed.

    “We need to be sensitive of the profitability of these trades vs. profitability of abacus – we
    should prioritize the higher profit margin businesses with Paulson.”
    Goldman Sachs email from Fabrice Tourre, 4/11/07, GS MBS-E-003634 13 I. Exhibit 122

    Fact #3: Goldman had Paulson vet and approve ACA Management as the CDO manager and nominal PSA prior to Goldman’s decision to select ACA-M.

    In response to an email from ACA-M summarizing 1/27/2007 meeting between ACA-M and Paulson,
    Tourre responds: “this is confirming my initial impression that [Paulson] wanted to proceed with
    you subject to agreement on portfolio and compensation structure.”
    SEC filing against Goldman, p. 10

    Fact #4: Paulson played the dominant role in selecting referenced mortgages for Abacus.

    Tourre describes ACA-M’s secondary role on 1/10/2007: “We wanted to summarize ACA’s proposed role
    as ‘Portfolio Selection Agent’ for the transaction that would be sponsored by Paulson
    (the ‘Transaction Sponsor’)”… The “[s]tarting portfolio would be ideally what the Transaction
    Sponsor [Paulson] shared, but there is flexibility around the names.
    SEC filing against Goldman, pp. 8-10

    “[D]id you hear something on my request to remove Fremont and New Cen[tu]ry serviced
    bonds?” “Paulson will likely not agree to this unless we tell them that nobody will buy these
    bonds if we don’t make that change.”
    Goldman Sachs email exchange including Fabrice Tourre, 3/12/07, GS MBS·E-002683134, Ex. 119

    Fact #5: ACA-M assumes that Paulson is taking the long side of Abacus, and Goldman avoids informing them otherwise.

    After a 1/8/2007 meeting among ACA-M, Paulson and Tourre, ACA exec Laura Schwartz writes Gail
    Kreitman, a Goldman employee, about the meeting: “I have no idea how it went – I wouldn’t say it
    went poorly, not at all, but I think it didn’t help that we didn’t know exactly how they
    [Paulson] want to participate in the space. Can you get us some feedback?”
    SEC filing against Goldman, p. 14

    On 1/12/2007, Tourre received this email from ACA-M: “I certainly hope I didn’t come across too
    antagonistic on the call with Fabrice [Tourre] last week but the structure looks difficult from a
    debt investor perspective. I can understand PAULSON’S EQUITY PERSPECTIVE but for us to put our
    name on something, we have to be sure it enhances our reputation.” With this statement, ACA-M
    demonstrates that they mistakenly believe Paulson is on the long side of Abacus and intends to
    stack Abacus with RMBSs to the detriment of short investors.
    SEC filing against Goldman, pp. 14-15

    ACA’s written memorandum approving ACA’s participation in Abacus makes clear ACA’s understanding
    that “the hedge fund equity investor [Paulson] wanted to invest in the 0- 9% tranche of a static
    mezzanine ABS CDO backed 100% by subprime residential mortgage securities.” Handwritten notes
    from the meeting reflect discussion of “portfolio selection work with the equity investor
    SEC case against Goldman, p. 15

    On 2/2/2007 Paulson and ACA-M jointly propose 82 RMBSs to include in Abacus. ACA proposes another
    21 RMBS independently of Paulson. On 2/5/2007, Paulson unilaterally rejects 8 of ACA-M’s RMBSs,
    and the final total of RMBSs included in Abacus is 92, all but 13 of which were chosen directly
    by Paulson.
    SEC filing against Goldman, p. 11

    Fact #6: It its marketing materials for Abacus, Goldman presents ACA-M as the portfolio selection agent and discloses nothing about Paulson’s role in selecting RMBS referenced in Abacus.

    Goldman’s reference portfolio for Abacus states that the portfolio was “selected by ACA”.
    “ACA – CDO Asset Management Organization Chart”, Abacus marketing presentation

    On 2/26/2007, Goldman finalizes a 178-page offering document for ABACUS. The front page says, ACA
    is “Portfolio Selection Agent.” A number of other references are made to ACA throughout the
    document. Paulson is not mentioned.
    SEC filing against Goldman, p. 12.

  32. Danny Black writes:

    Philip, can i suggest first of all you buy a dictionary and look up the difference between a fact and an assertion. Lets bear in mind that these emails were written in 2007, Paulson is not only not the guy who made the “greatest trade ever” but so far a failure in this space. ACA and IKB are the ones who made money. Lets also bear in mind that these are selective quotes from selective emails picked out of millions of emails so when we see how pathetically weak the SEC case is we need to remember this is the best possible case portrayed in the best possible light that the SEC could find.

    Lets look at your assertions:

    Assertion 1 – We KNOW that Paulson didn’t select all the credits because ACA-M threw half of them out. This actually is a fact. So not matter how “easy” ACA-M were they still had final say over the portfolio. This is also a fact. Look at the second email, why did the others reject this portfolio? Because their OPINION was the reference credits were not worth the risk. Why did ACA-M accept because AFTER modification of the list, their OPINION was that the reference credits WERE worth it. ACA-M also agreed to invest AFTER the FINAL reference portfolio was selected. We KNOW they knew by this time Paulson was short so we KNOW that for at least one of the investors Paulson’s involvement was not material.

    Assertion 2 – so what? ACA-M and IKB had to be happy too otherwise the trade would not happen.

    Assertion 3 – again so what? IKB also had to vet and approve ACA-M otherwise they would not have invested.

    Assertion 4 – again Paulson DIDN’T play a dominant role. ACA-M selected the portfolio full stop. Paulson PUSHED for a portfolio but as your second email clearly shows, ACA-M had final say. If ACA-M weren’t happy it wasn’t included. Full stop. End of argument. Nothing to see. Move on.

    Assertion 5 – I can only assume this is a timing issue because we also KNOW Paulson told ACA-M that they were going short. We also know from reading in the press AT THE TIME of this deal that Paulson was strongly bearish on subprime. We also know in the final ABACUS there was NO equity slice for any to be long or short. There is no way anyone could have thought when the deal closed that Paulson was long something that didn’t exist even if they somehow had avoided knowing reading about what Paulson view of subprime was – bearish would buy the MOST risky part????, would it not occur to you to ask? – and even if they somehow misinterpreted Paulson saying I am going short as meaning I want to be the first guy to lose money if this investment goes south. Note the emails are from Jan right in the beginning of the transaction. The transction closes 3 months later. Note that the addition protection on the supersenior part – the bit that makes him a billion rather than 192million – closes well after the ABACUS transaction and has nothing to do with IKB or ACA-M.

    Assertion 6 – Actually what happened is Paulson suggested 123, ACA-M kicks out just under half. They then go into a back and forth over another 30-ish over a period of a month. ACA-M picks 21, Paulson rejects 8 and ACA-M agrees to kicking them out but insists on the other 13. Again shows ACA-M had final say.

    Again remember that what you picked is the strongest possible spin that the SEC could put on its carefully selected emails after trawling through millions of mails and memoranda and it is still weak as shit. This is before we get into whether it even matters that Paulson was short or involved.

  33. R. M. Turdstile writes:

    ” Lets also bear in mind that these are selective quotes from selective emails picked out of millions of emails…”

    Let’s not bear those millions of irrelevant emails in mind. The onus is upon you to provide the relevant ones, which you have not done.

    “We KNOW that Paulson didn’t select all the credits because ACA-M threw half of them out. … So not matter how “easy” ACA-M were they still had final say over the portfolio.”

    ACA was amenable to a business arrangement whose purpose was to formalize the last word, while in practice ceding it–or enough of it–to Paulson. Fifty-fifty was more than enough to give Paulson and GS what they wanted.

    But the flat out misrepresentation was that Paulson was 200M long. An aggressively evasive defense attorney could cast a shade of doubt about the ACA arrangement, and attempt to keep the spotlight away from the central charge of misrepresentation. For a tiresome while.

  34. Danny Black writes:

    R. M. Turdstile, I don’t have access to those emails. The SEC do and we can be pretty sure they are the most incriminating bits of the most incriminating emails.

    ACA and Paulson spent months “formalising” the last word. Hardly rubber stamping and ACA had an opposite economic view to Paulson.

    Hard to see how ACA could have read the final prospectus and thought Paulson was long a slice that didn’t exist. What the emails MAY show is that in an EARLIER, irrelevent structure they thought Paulson was long a slice and Paulson is fairly adamant that they TOLD ACA they were short.

    Firstly, the final structure DIDN’T give GS what they wanted. They LOST 90million on the deal. They may not have expected to lose 90million but neither does anyone who makes an investment. Secondly, the investors had an exact description of the investment. They knew in all circumstances how that investment would perform. They had access to the same information Paulson had about the investments, Paulson and GS had no magical insider info about those assets. The difference was that info made Paulson bearish and GS not so bearish – they were willing to keep the 45-50 tranche – and ACA, IKB and ABN bullish.

    It takes a seriously evasive prosecution lawyer to push the idea that because we now know Paulson made billions that his view in 2007 would alter the value of the investment.

  35. R. M. Turdstile writes:

    The assertion “…I don’t have access to those emails” should not lead you to conclude that “…we can be pretty sure they are the most incriminating bits of the most incriminating emails.” It is consistent that the emails provide sufficient reason to proceed. They need constitute all of the most incriminating emails. There may be other equally or more incriminating emails and evidence. The epistemic state in which it is supposed to be common knowledge that the SEC chose “…the most incriminating bits of the most incriminating emails” is inconsistent with not having seen the rest.

    I’m sorry that Goldman was unable to shift the last remaining 90M of exposure somewhere else in time.

  36. Mujokan writes:

    Danny, that you are still bringing up Paulson’s track record before the crash in picking bonds to bet against, or that ACA Capital was happy to invest in a deal involving ACA Management, leads me to think that you just haven’t gotten your head around what material disclosure means in the legal sense.

  37. Mujokan writes:

    Also, just to be clear, the reason Goldman got dinged for that $90 million is because they only managed to buy protection on 50%/100%, when they’d sold Paulson protection on 45%/100%. Source

  38. Mujokan writes:

    One last point and then I’ll quit this argument, I swear. :)

    It’s impossible to know exactly what the selection procedure was for the Senate exhibits. However, I note that in their collection of emails relevant to shorting, they included a lot of discussion about covering shorts, which was detrimental to the argument that Goldman always went short. That would tend to indicate that they included everything relevant to each topic. Which would make sense, because otherwise Goldman would have said something about their being too selective in the hearings. But I won’t claim certainty either way.

  39. Danny Black writes:

    R. M. Turdstile, so you believe the SEC is deliberately making it’s case look pathetic so that it can pull a fast one later? They are somehow tricking GS into thinking the SEC’s case is beneath contempt so that they fight a case they lose? They have the email or memo where GS tells them something that is not true but they are keeping it just in case?

  40. Danny Black writes:

    Mujokan, my understanding of material disclosure is that the matter not being disclosed would have to be something that would cause a reasonable investor to act differently had they known that fact. The SEC case is that Paulson is one of the biggest hedge funds out there and Paulson is famous for making this bet. Surely if you are betting against a guy who made billions and surely if you are betting against one of the largest credit hedge funds that would give you pause for thought right? Thats the SEC’s case.

    As it keeps on being said, in 2007 WHEN this deal was done none of the above description is true. In fact, if IKB DID know they might have wanted to buy MORE of the deal not less as in 2007 they were the recognised winners in this space. Again we already KNOW ACA-M knew about Paulson being short before the deal closed.

    Again GS got dinged because they didn’t expect the market to collapse so quickly after the deal that they would be wiped out on the tranche they retained. Which again suggests GS also didn’t think that Paulson’s involvement made the product somehow destined to fail.

    So you think the senate hearing was about finding out useful information about how the market works? Levin was trying to educate himself on an important field? I guess I must be the only guy who thought the senile fool was grandstanding – in a number of cases making factually incorrect statements that he clearly knew were factually incorrect; aka lying and denying GS the ability to correct the false statements he made.

  41. R. M. Turdstile writes:

    More manipulative, partisan drivel. It does not follow that I believe the SEC has a “pathetic case” if I do not share your confidence about emails you have not seen. The GS motion to dismiss this “pathetic case” was denied.

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  43. Danny Black writes:

    “The GS motion to dismiss this “pathetic case” was denied” – really? When?

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  45. Many people will think they got what they deserved, others will think the measures haven’t gone far enough. Goldman haven’t shown themselves in glory recently.

  46. Mujokan writes:

    “The SEC case is that Paulson is one of the biggest hedge funds out there and Paulson is famous for making this bet. Surely if you are betting against a guy who made billions and surely if you are betting against one of the largest credit hedge funds that would give you pause for thought right? Thats the SEC’s case.”

    You should just read the complaint.

  47. Philip writes:

    Danny Black writes:

    “Again we already KNOW ACA-M knew about Paulson being short before the deal closed.”

    Really? How do we KNOW that?

    Danny Black writes:

    “Again GS got dinged because they didn’t expect the market to collapse so quickly after the deal that they would be wiped out on the tranche they retained. Which again suggests GS also didn’t think that Paulson’s involvement made the product somehow destined to fail.”

    Also wrong.

    If you and the other Goldman apologists on this site are going to make any sense, you need to fashion some arguments that at least appear to accommodate some of the known facts. To help you do this (and to make this discussion more interesting and enlightening), look over this description of a couple myths in the Goldman case and come back to us.

    Myth #1: ACA Management knew through informal channels that Paulson intended to take a short position on ABACUS-AC1 and chose to invest in it anyway.

    Goldman (including Blankfein in his Senate testimony) has sustained this myth by referring to ACA as “ACA Capital Management”. In fact, there is no such entity; there are two separate legal entities: ACA Management and ACA Capital. ACA-M was the PSA and CDO manager for ABACUS-AC1. ACA-C was the investor in ABACUS-AC1. Goldman’s disclosure obligations were to ACA-C, the investor, so it is irrelevant even IF Goldman employees informally communicated to ACA-M Paulson’s intent to short ABACUS-AC1.

    Moreover, disclosure obligations required Goldman to make formal, written communications to the appropriate risk management officer at ACA-C. They made no such communications to ACA-C (or ACA-M).

    Myth #2: Goldman must have been confident that Paulson’s short strategy would fail since they chose to invest on the long side of ABACUS-AC1.

    One theory for why Goldman made a $90 million investment in ABACUS-AC1 is that IKB and ACA-C required Goldman to have some “skin in the game” before finalizing their commitments.

    Another theory is that Goldman saw the window for ABACUS-AC1 closing because of rapid deterioration in the subprime market. They could not find a buyer for the remaining $90 million portion of ABACUS-AC1 and decided to take it themselves in order to close the deal quickly (which they did on 4/26/2007) then sell their piece later.

    Of course, the Goldman traders who were driving ABACUS-AC1 would earn generous bonuses by closing the deal and could rationalize the risk of Goldman taking a $90 million long position by assuming Goldman could sell its position later or hedge it. (In fact, we do not know whether Goldman subsequently hedged its position.) Even if Goldman’s long bet on ABACUS-AC1 were to fail, the traders knew Goldman’s portfolio was now strongly net short, and in any case, their bonuses were unlikely to be affected by what might happen to ABACUC-AC1 a year or more down the road.

    This theory is supported by documents confirming that, at the time ABACUS-AC1 was being finalized, Goldman did indeed see the opportunity for RMBS CDOs rapidly closing. (See February 11, 2007 email to Tourre from the head of Goldman’s structured product correlation trading desk stating in part “the cdo biz is dead we don’t have a lot of time left.”) Goldman is also reported to have attempted to sell its piece of ABACUS-AC1 but could not find a buyer.

  48. Philip writes:

    Danny Black, Goldman apologist, writes:

    “Lets also bear in mind that these are selective quotes from selective emails picked out of millions of emails so when we see how pathetically weak the SEC case is we need to remember this is the best possible case portrayed in the best possible light that the SEC could find.””

    Well, let’s also bear in mind that you offer NO quotes from ANY emails whatsoever. Which allows us to see how pathetically weak your Goldman apologia is since your best case seems to be no case at all.

    You also write:

    “I don’t have access to those emails. The SEC do [sic] and we can be pretty sure they are the most incriminating bits of the most incriminating emails.”

    Oh Danny, you don’t know much about case strategy, do you. Do you really think the SEC shot their entire wad in this initial filing? They’ve been talking to 7 current or former cooperating GS employees and none of that evidence shows up in this filing. And then there will be discovery; reams of new evidence. Then when Fab Fabrice realizes GS is about to throw him to the dogs, he’ll flip.

    BTW, your “understanding of material disclosure” is as simple-minded as your understanding of case strategy.

    Danny Black writes:

    “The SEC case is that Paulson is one of the biggest hedge funds out there and Paulson is famous for making this bet. Surely if you are betting against a guy who made billions and surely if you are betting against one of the largest credit hedge funds that would give you pause for thought right? Thats the SEC’s case.”

    Have you READ the SEC filing? If so, you have serious reading comprehension deficits. Unlike your other statements which are just simple-minded, this one is, well, delusional. Either that or someone is paying you to make stuff up and post it on websites read by thought leaders. Either way, what a waste.

    Danny, you provide me with, as they say, a target-rich environment, but there’s no fun in it, my lad. There’s just no challenge to it.

    Oh Danny boy, the pipes, the pipes are calling… It’s you, It’s you must go and I must bide.

  49. Danny Black writes:

    Phillip, I tried… I guess I am not as smart as you are to know how a sophisticated investor ended up believing Paulson was long a tranche that didn’t exist. I guess I don’t buy unicorns as often as your industry does.

    We KNOW Paulson told ACA because he has repeatedly said so. We also know he was bearish on the market before during and after because he repeatedly said so in the press.

    Have you actually read the flipbook – not it is not an accurate description of the final deal because the deal close two months later and has wells fargo in it which was kicked out. Maybe you should read the actual offer prospectus. Under that we’d see the number of notes issued in the equity slice is zero. You are the genius, exactly how the fuck does Paulson buy non-existent notes?

    You seem to be confused over the role ACA-C had. They were not an “ïnvestor” in ABACUS, after the deal closed they wrote protection on the SS tranche which happened a month after ABACUS closed. The investor is ACA-M, who as has repeatedly been pointed out to you were informed by Paulson that Paulson was short.

    The email about the CDO biz being dead is irrelevent – the deal closed over 2 months later – and if you bother to look at the performance of the reference bonds between that email and the closing date they were going up in value.

    We do know GS didn’t hedge that risk because they lost the whole lot.

    Actually my definition of material disclosure is the textbook one. I assume you are not a lawyer. Given your pedantic nature, you clear lack of understanding of the markets and general overestimation of the strength of you points I am going to guess IT.

    I hope GS doesn’t settle and we can see all these compelling emails that the SEC have been holding back to fool GS into thinking the SEC position is weak as fuck.

  50. Danny Black writes:

    Phillip, PS feel free to declare victory. I can’t be arsed to argue any more on the absolute basics with a guy who simply takes on faith what the government is saying and can’t be bothered to read the relevent docs – ie the out of date flipbook, which clearly show ACA-C and ACA-M both involved in collateral selection or the actual prospectus which shows no equity tranche being offered or the fact ACA-C via ABN wrote the CDS on the superseniors AFTER the ABACUS deal closed and it was a completely separate transaction.

  51. Philip writes:

    Jeeze, Danny, you’re an IB?? Work for GS? Ever work for GS? That would explain alot.

    Yes, the Fab definitely thought he was dealing with sophisticated investors. That’s why he called them “widows and orphans” in one of those embarrassing emails to his girlfriend. In another email he said GS should not expect to profit much with “sophisticated hedge funds” on these CDO deals because “(a) most of the time they will be on the same side of the trade as we will, and (b) they know exactly how things work. . . .” Of course, this implies that non-hedge funds investors are unsophisticated marks who would be on the long side of the deals. Poor schmucks.

    Then in another email the sophisticated Fab admits that Abacus is so complex even he didn’t understand “all the implications of those monstrosities” he put together.

    Danny: “We KNOW Paulson told ACA because he has repeatedly said so. We also know he was bearish on the market before during and after because he repeatedly said so in the press.”

    First, you have a nasty habit of making claims about this and that and not bothering to cite any support for it. A number of us on the other side go to considerable trouble to cite sources and provide quotes supporting our arguments. But you can’t be bothered with it.

    But for the sake of argument let’s assume Paulson actually said that he told ACA he was going short…

    * Was it ACA-M (the PSA) or ACA-C (the investor) he “told”?

    * WHO did he tell? The risk management officer, the janitor?

    * If you’re really an IB, you damn well know that “telling” someone something does not
    represent “disclosure”. Formal, written disclosure to the risk management officer is required.

    * And why is it even relevant what PAULSON did? He didn’t bear the disclosure obligation. Goldman did.

    And, finally, why would we believe Paulson anyway? IKB and ACA-C mean nothing to him. His relationship with Goldman, on the other hand… And if Paulson starts contradicting Goldman, what’s to prevent GS from turning on Paulson? I bet John is feeling pretty damn fortunate these days that he wasn’t named in the SEC case. But it’s by no means too late for the SEC or DOJ to rope him into this thing.

    Oh, yeah, we should believe Paulson because he’s an IB. Like you.