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Full Goldman 2009 Wells Defense Document To SEC Declassified
FT Alphaville has released the full September 2009 document that Goldman released in defense to the Wells Notice. Amusingly we note that Goldman requested a FOIA CONFIDENTIAL TREATMENT on the submission. That didn't work out too well. We are going through it now, although what is interesting is that Goldman, in defending its own practice with Abacus' (lack of) disclosure, inadvertently throws Merrill Lynch, and Magnetar, under the bus, claiming Merrill's Auriga CDO had comparable parallels to Abacus, which if the SEC finds strong enough in the GS case, it will certainly frown upon when perpetrated by ML-Magnetar. This has lead some to speculate that Bank Of America is likely next on the Wells Notice disclosure bandwagon.
From the response:
Auriga, unlike 2007-AC1, is an actively-managed CDO transaction without a static Reference Portfolio. (Auriga Offering Circular at 200.) Its collateral manager is 250 Capital LLC, a subsidiary of Merrill Lynch & Co., the underwriter of the transaction. (Id. at 197.) At our meeting, the Staff made no reference to particular disclosures used in the Auriga, Norma or Sorrento transactions. Our own examination of the Auriga Offering Circular has revealed no relevant disclosures, but we have excerpted three provisions that the Staff may have had in mind.
First, the Auriga Offering Circular discloses that an “Initial Preferred Securityholder” may take a position opposite that of the noteholders:
Initial Preferred Securityholder may enter into credit derivative transactions relating to Reference Obligations or Cash Collateral Debt Securities in the Issuer’s portfolio. On or after the Closing Date, the Initial Preferred Securityholder may enter into credit derivative transactions relating to Reference Obligations or Cash Collateral Debt Securities in the Issuer?s portfolio, under which it takes a short position (for example, by buying protection under a credit default swap relating to such obligation or security) or otherwise hedges certain of the risks to which the Issuer is exposed. The Issuer and Noteholders will not receive the benefit of these transactions by the Initial Preferred Securityholder and, as a result of these transactions, the interests of the Initial Preferred Securityholder may not be consistent with those of Noteholders.
Goldman Sachs understands that the Initial Preferred Securityholder was Magnetar Capital LLC (“Magnetar”), but this information is not disclosed in the offering circular. Goldman Sachs does not know the extent to which Magnetar played a role in the selection of the Auriga portfolio, and this too is not disclosed in the offering circular. In fact, other than listing 18 pages of “eligibility criteria” (id. at 143-161), which state in general terms what the portfolio may contain, the Auriga offering circular does not mention the contents of the portfolio at all.
Second, the Auriga Offering Circular discloses that the Credit Default Swap Counterparty, Merrill Lynch International (“MLI”), “is likely to seek to eliminate any credit exposure to the Reference Obligations by entering into back-to-back hedging transactions.” (Id. at 56.) This disclosure is materially similar to that stated in the 2007-AC1 Offering Circular. (See GS MBS 0000010105 (“The Protection Buyer is not required to have any credit exposure to any Reference Entity or any Reference Obligation.”); GS MBS 0000010127 (“[T]he Protection Buyer . . . may hold long or short positions with respect to Reference Obligations . . . and may enter into credit derivative or other derivative transactions with other parties pursuant to which it sells or buys credit protection with respect to one or more related Reference Entities and/or Reference Obligations. . . .”).)
Finally, the Auriga Offering Circular discloses that, in its capacity as Credit Default Swap Counterparty, MLI may have conflicts of interest because the terms of the transaction permit it to determine when defaults of the Reference Obligations – events that trigger payment to it under the Credit Default Swap – have occurred:
Conflicts of Interest of Credit Default Swap Counterparty. MLI will, in its role as Credit Default Swap Counterparty for all of the Credit Default Swaps, have the right to make determinations regarding the Reference Obligations (including a decision to give notice that a credit event or “floating amount event” has occurred and require the Issuer to make payments to it). In addition, MLI, as Credit Default Swap Counterparty to the Synthetic Securities, will have sole discretion to determine whether and when to declare a Credit Event and to deliver any notice that a Credit Event or a Floating Amount Event has occurred under a Synthetic Security.
(Auriga Offering Circular at 69.) This disclosure, however, relates not to the selection of the reference securities but to the determination that certain credit events have occurred with respect to them. Moreover, Auriga?s structure is so radically different from that of 2007-AC1 that any attempt to analogize the two transactions would be futile.
Similarly, Goldman discusses the Merrill Norma CDO, where Magnetar was also the initial purchaser and Paulson equity-tranche investment analogue.
Goldman goes on to defend ACA's portfolio selection status:
The record is equally clear that, regardless of who proposed or commented on any particular security, in the end, ACA carefully analyzed every security, and ACA alone selected the final portfolio and underscored its satisfaction by investing its own money. Only ACA had the authority to select and approve the Reference Portfolio; certainly Paulson had no such authority. If investors took any comfort from ACA?s role as Portfolio Selection Agent, they got precisely what they were expecting.
We are trying to reconcile how this jives with the internal email sent within ACA which discloses just how much selection capacity Paulson had:
“Looks good to me. Did [Paulson] give a reason why they kicked out all the Wells [Fargo] deals?”
"Wells Fargo was generally perceived as one of the higher-quality subprime loan originators" the SEC concludes.
And some more observations: Goldman tells the SEC in 2009 that ACA knew all along what Paulson's intention was, even despite his disclosed equity tranche investment:
The notion that ACA was misled into believing that Paulson was an equity investor is in all events difficult to reconcile with the Staff's theory that Paulson proposed weaker securities to ACA, a trend that would have caused a market participant with ACA's deep knowledge to question Paulson's true interest.
Goldman insinuates that ACA should have been smart enough to realize what Paulson's true intentions were from the very beginning as Paulson was actually adjusting the portfolio composition, something which Goldman earlier stated was only ACA's prerogative. Needless to say, this does not reconcile with what is the fundamental crux of the SEC's case:
On January 12, 2007, Tourre spoke by telephone with ACA about the proposed transaction. Following that conversation, on January 14, 2007, ACA sent an email to the GS&Co sales representative raising questions about the proposed transaction and referring to Paulson’s equity interest. The email, which had the subject line “Call with Fabrice [Tourre] on Friday,” read in pertinent part:
“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.”
On January 16, 2007, the GS&Co sales representative forwarded that email to Tourre. As of that date, Tourre knew, or was reckless in not knowing, that ACA had been misled into believing Paulson intended to invest in the equity of ABACUS 2007-AC1.
Based upon the January 10, 2007, “Transaction Summary” sent by Tourre, the January 12, 2007 telephone call with Tourre and continuing communications with Tourre and others at GS&Co, ACA continued to believe through the course of the transaction that Paulson would be an equity investor in ABACUS 2007-AC1.
Full filing:
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All GS had to do was get this whole thing buried as a matter of "national security".
If the contagion spreads much further, someone is likely to do exactly that.
The unintended consequences of launching an investigation they can't control...
As I have said a million times - the only reason why these deals got done was due to rating agency conflict of interest along with the reduction of risk capital requirements for these types of assets resulting from Basel II (by the way puched for big time by Geithner and non other than Rob Rubin). Without end bank demand (mostly european) and the stupid ratings, non of this would have happened
Basil i lasted ~15 yrs, Basil ii lasted ~2yrs, I predict 3 months for Basil iii -- and I propose the last 2 letters be changed from 'ii' to 'ou'.
Slick spot ahead in the road...better gun it so we can get by faster.
DJIA up 29.71
No smoking gun yet, but getting closer - may need to squeeze Touree's nads a touch or someone just down the chain of command. Obviously a criminal case would help with the squeezing.
Tyler -- you forgot to provide a link to FT Alphaville while nicking the Goldman doc. Also, you missed one of the docs - the first one.
tut
http://ftalphaville.ft.com/blog/?p=206316&preview=true&preview_id=206316...
PICK A CARD:
http://williambanzai7.blogspot.com/2010/04/pick-portfolio.html
anyone catch this diddy?? F'D UP is what this whole sh*t is.
"Senior Goldman Exec is Married to Former Head of ACA"
http://www.huffingtonpost.com/vicky-ward/senior-goldman-exec-is-ma_b_542154.html
It think this could all be sorted out if Rodgin Cohen of Sullivan & Cromwell would just look at himself in the mirror tomorrow morning and realise.... 'I don't want to be the chief legal lackey of the evil empire any more. I picked the wrong side, forgive me'..........
Rodgin me old mate, do you want to live your declining years full in the knowledge that all of your clients were slimy, greedy scuzzballs, and your talents helped to preserve (and enhance) their power?
Come to the light Rodg; You'll make more honest and honorable friends here.