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Goldman Promises, For Third Time, It Did Nothing Wrong
Here is the third sequential response from Goldman regarding the SEC allegations (courtesy of Deal Journal):
Overview:
On Friday, April 16, the US Securities and Exchange Commission
brought a civil action against Goldman Sachs in relation to a single
transaction in 2007 involving two professional institutional investors,
IKB and ACA Capital Management (ACA). We believe the SEC’s allegations
to be completely unfounded both in law and fact, and will vigorously
contest this action.
The core of the SEC’s case is based on the view that one of our
employees misled these two professional investors by failing to
disclose the role of another market participant in the transaction,
namely Paulson & Co., and that the employee thereby orchestrated
the creation of materially defective offering materials for which the
firm bears responsibility.
Goldman Sachs would never condone one of its employees misleading
anyone, certainly not investors, counterparties or clients. We take our
responsibilities as a financial intermediary very seriously and believe
that integrity is at the heart of everything that we do.
Were there ever to emerge credible evidence that such behavior
indeed occurred here, we would be the first to condemn it and to take
all appropriate actions.
This particular transaction has been the subject of SEC examination
and review for over eighteen months. Based on all that we have learned,
we believe that the firm’s actions were entirely appropriate, and will
take all steps necessary to defend the firm and its reputation by
making the true facts known.
The SEC does not contend that the two professional institutional
investors involved did not know what they were buying, or that the
securities included in this privately placed transaction were in any
way improper. These institutions were very experienced in the CDO
market.
In this private transaction, Goldman Sachs essentially acted as an
intermediary, helping to facilitate the investing objectives of two
clients. Extensive disclosures as to each of the securities in the
reference portfolio, similar to those required by the SEC in public
transactions, were contained in the offering documents which provided
all the information needed to understand and evaluate the portfolio.
In the process of selecting the reference portfolio, ACA Capital
Management, who was both the portfolio selection agent and the
overwhelmingly largest investor in the transaction ($951 million, with
the other professional investor’s exposure being $150 million),
evaluated every security in the reference portfolio using its own
proprietary models and methods of analysis. ACA rejected numerous
securities suggested by Paulson & Co., including more than half of
its initial suggestions, and was paid a fee for its role as portfolio
selection agent in analyzing and approving the underlying reference
portfolio.
In summary, the SEC’s complaint is an issue of disclosure on a
single transaction involving professional investors in a market in
which they had extensive experience. Critical points missing from the
SEC’s complaint include:
Goldman Sachs Lost Money on the Transaction. The
firm lost more than $90 million arising from this transaction. Our fee
was $15 million. We certainly did not wish to structure an investment
that was designed to lose money.
Objective Disclosure Was Provided. The transaction
at issue involved a static portfolio of securities, and was marketed
solely to sophisticated financial institutions. IKB, a large German
Bank and leading CDO market participant and ACA Capital Management, the
two investors, were provided extensive information about those
securities and knew the associated risks. Among the most sophisticated
mortgage investors in the world, they understood that a synthetic CDO
transaction requires a short interest for every corresponding long
position.
Goldman Sachs Never Represented to ACA That Paulson Was Going To Be A Long Investor. The
SEC’s complaint in part accuses the firm of potential fraud because it
didn’t disclose to one party of the transaction the identity of the
party on the other side. 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 to be a long
investor.
ACA, the Largest Investor, Selected and Approved the Portfolio.
The portfolio of mortgage backed securities was selected by an
independent and experienced portfolio selection agent after a series of
discussions, including with IKB and Paulson & Co. ACA had an
obligation and, as by far the largest investor, every incentive to
select appropriate securities.
In 2006, Paulson & Co. indicated its interest in positioning itself for a decline in housing prices.
The firm structured a synthetic CDO through which Paulson could benefit
from a decline in the value of the underlying reference securities.
Those on the other side of the transaction, IKB and ACA Capital
Management, the portfolio selection agent, could benefit from an
increase in the value of the securities. ACA had a long established
track record as a CDO manager. As of May 31, 2007, ACA was managing 26
outstanding CDOs with underlying portfolios consisting of $17.5 billion
of assets.
IKB, ACA and Paulson all provided their input regarding the composition of the underlying securities.
ACA ultimately and independently approved the selection of 90
Residential Mortgage Backed Securities (RMBS), which it stood behind as
the portfolio selection agent and the largest investor in the
transaction.
The offering documents for the transaction included every underlying reference mortgage security.
The offering documents for each of these RMBS in turn disclosed detailed information concerning the mortgages held by the trust that issued the RMBS.
Any investor losses resulted from the massive decline
of the broader subprime mortgage market, not because of which
particular securities ended up in the reference portfolio or how they
were selected.
The transaction was not created as a way for
Goldman Sachs to short the subprime market. To the contrary, Goldman
Sachs retained a substantial long position in the transaction and lost
money as a result.
Questions and Answers
Who were the investors in this transaction?
The investors in the transaction were ACA Capital Management, a
well-recognized collateral manager and investor in CDOs, and IKB, then
believed to be one of the most highly-sophisticated CDO investors in
the world.
What is a synthetic CDO?
A synthetic CDO has characteristics much like that of a futures
contract, requiring two counterparties to take different views on the
forward direction of a market or particular financial product, one
short and one long. A CDO is a debt security collateralized by debt
obligations, including mortgage-backed securities in many instances.
These securities are packaged and held by a special purpose vehicle
(SPV), which issues notes that entitle their holders to payments
derived from the underlying assets. In a synthetic CDO, the SPV does
not own the portfolio of actual fixed income assets that govern the
investors’ rights to payment, but rather enters into CDSs that
reference the performance of a portfolio. The SPV does hold some
separate collateral securities which it uses to meet its payment
obligations.
What are the implications of this SEC action for the overall CDO market?
The SEC complaint is related to a single transaction in 2007 and
involves a highly particularized set of alleged facts. It would not
appear to have broad ramifications for the CDO market generally.
Who selected the securities that ended up in this particular portfolio?
ACA had the sole right and responsibility to select the portfolio and
it in fact did so. As part of the process, ACA received input from
other transaction participants. ACA had served as portfolio selection
agent or collateral manager for numerous other transactions, and no
doubt was accustomed to an interactive selection process. ACA used its
own expertise and models in scrutinizing and approving the referenced
securities. ACA subjected the securities proposed for inclusion in the
portfolio to its own proprietary models and analysis.
What is the firm’s role in facilitating such transactions?
Goldman Sachs acts as a market intermediary through which its clients
can take long or short positions on the reference securities. Goldman
Sachs will often assume the opposite side of a client’s position to
complete a transaction. As fully disclosed to investors in the offering
materials in this transaction, the firm can then hold or sell that
position to increase, reduce or eliminate its own exposures.
Did investors have adequate disclosure?
Extensive, objective disclosures were contained in the offering
documents. Investors had all the information they needed to understand
and evaluate the reference securities.
What was the role of ABN Amro / RBS in this transaction?
ABN intermediated a $909 million credit default swap referencing the
portfolio between Goldman Sachs and ACA. ABN assumed the credit risk
that ACA might not be able to pay if its obligations under the credit
default swap came due. When the portfolio suffered writedowns, ACA
ultimately was not able to pay the amount due on the credit default
swap, and ABN made payment.
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Lloyd. head. sharp pole. now.
With everything starting to accelerate downhill for Goldman Sucks, it is not going to be too long before the American people start doing "God's work"...
+1
Cry baby cry, make your mother sigh, she's old enough to know better..
OT
For days now, the only advertisement that has appeared on Zero Hedge (on my computer) has been for cougarlife.com (and we're not talking an ad for a zoo)
What is worse is that the featured cougar bares a striking resemblance to the person who Henry Blodget refers to as the most famous financial reporter in the world. http://i44.tinypic.com/2qato2a.jpg Are others plagued with this ad?
Is there a way switch to something else? I would prefer for example ads for Gulfstream or Feadship.
i have been exclusively seeing the ads for "fxopen.com" on the top, left and right side of the frame.
I think its because you or someone using your computer likes visiting sites of older women.
I haven't been seeing any ads of late with the only exception being fxopen, like the commenter above. Though I do run AdBlock:
https://addons.mozilla.org/en-US/firefox/addon/1865
thanks for the link - the ad is now gone
The "Cougar" is none other than Marla Singer. She's a hottie.
They are very rattled.
would be interesting to get ACA's point of view and of course, GS was "zero-hedged" on its long position!!!
No, the basis of second is that you're all fcking crooks and thieves who work for mafia, u fcking sht heads
Either a) apparently they didn't have all the information or b) they were just stupid or c) both.
would be interesting to get ACA's point of view and of course, GS was "zero-hedged" on its long position!!!
Jonathan Weill's article in Bloomberg (in the Frontrunning section) puts the lie to this evasive piece of flackery. Paulson didn't allow ACA to select his garbage list for him. His 100% failure guaranteed wet dream was of his own devising. Goldman's role as "intermediary" was to find a patsy to take the long side of Paulson's bet. It sure as hell wasn't going to be Goldman. It defies belief to think the SEC could investigate this fraud for this long and not be aware of the absolute untruth of everything in this latest PR release.
Cash strapped States maybe having a good look if there is anything in this for them.
Now I get it. The SEC is investigating this particular transaction because Goldman Sachs lost money. That is suspicious.
These are the kind of things you say when you think you own the judge/jury, but come back to haunt you when you can't pay the rent/protection money on the judge/jury. As for the rest, I don't believe a word they write.
These are the kind of things you say when you think you own the judge/jury, but come back to haunt you when you can't pay the rent/protection money on the judge/jury.
Well said. They will also be haunted by saying things like they lost money on the deal, since the media will jump over the technical nature of that statement (which may work in a court oflaw, but not in a courtof public opinion).
I can't believe that Goldman--supposedly the smartest guys in the room--were stupid enough to not settle. This is going to get dragged out for weeks. And after that, there's going to be even more mud. And then even more.
These people/squids are fucked.
As other posters have posited, it could be a set up by an incompetent SEC to look tough, and then have their charges all fall apart.
However, I suspect that the smoke masks a fire in the case of GS, and likely others. Those investors now well trained to buy the dips will provide willing hands for distribution.
However, to repeat my earlier comment to a thread from the Simon Johnson interview on Bill Maher post, discussing whether the SEC charges were at best diversionary:
Dog and pony show - yes. But there is a distinct whiff of desperation. Despite all of the wonderfully staged and eloquent rhetorical moments, this is a White House that is still green. Not dumb, but green. Things are starting to spin out of their control. Most politicians' strongest instinct is that of survival. They will throw over anyone they need to to address that need. The President and Congress are looking for their scapegoats. As Ratigan's puppets and other approaches make the more accurate message of 2007-2008 accessible to a broader audience, I expect that we wil start to see real [political] blood-letting commence, as the pillars of crony capitalism turn on each other.
A more experienced team might have been able to keep this thing contained, but I don't think this one can. You know it's getting bad when former Pres. Clinton starts bad-mouthing Rubin and Summers in a cannibalistic attempt to save what shreds of his presidential legacy, and wife's political ambitions, remain. And he obviously agreed to play Brutus so that the Obama administration could keep its hands clean.
I keep repeating this over and over, but I'm gonna do it again; this is a huge signal.
"You know it's getting bad when former Pres. Clinton starts bad-mouthing Rubin and Summers in a cannibalistic attempt to save what shreds of his presidential legacy, and wife's political ambitions, remain. And he obviously agreed to play Brutus so that the Obama administration could keep its hands clean."
No Lk 22:34 quotes yet? I guess it doesn't quite fit since Peter was significantly less diabolical than the GS gang... >:-)
I am tired of bloggers having to lead the charge on Goldman. Time for Obama to tell the Justice Department to tear apart Goldman (ABACUS, AIG yadda, yadda) and hit them over the head with the RICO Statute. They are thumbing their nose at the world.
THE UNTRUSTABLES:
http://williambanzai7.blogspot.com/2010/04/untrustables.html
Depends on your definition, legal definition, of the word, "wrong" and in legal parlance there is no definition of the word, "wrong".
Wrong-doing, wrongful death----lots of qualifiers but as a stand alone word, wrong, is just not part of a law suit.
Their safe with the use of 'did nothing wrong'. 10-b de damned.
Message to GS & Co.
"Watch what we do, not what we say"
- John Mitchell -
Well said. What industry should be next? Accounting? Law? I'm sure both are ripe for serious reform. The fuckin media too. C'mon man let's get it on.
Methinks he doth protest too much.
"and will take all steps necessary to defend the firm and its reputation by making the true facts known".
As opposed to UNTRUE facts? There is no such thing as "untrue facts". Only facts that YOU don't like.
Rumsfeldism.
politicalhumor.about.com/cs/quotethis/a/rumsfeldquotes.htm
I AM NOT A CROOK!!
reminds me of somebody, about something watery...ishes... scandal...
can't put my finger on it...
Clients are probably pulling their money. Just an attempt to stop the hemorrhaging IMO.
Finance operates on the assumption that buyers and sellers have symmetric access to information about third parties, whose underlying value determines the price of a security. The issue of a “neutral” intermediary such as ACA goes to the heart of this issue.
Me thinks he protests too much until hes short enough! Sell Mortimer, sell! Enough? Okay, feed them a little snippet of mea culpa to get the trade working as it should....
DISINTERMEDIATING THE THIRD GOLDMAN RELEASE:
http://williambanzai7.blogspot.com/2010/04/disintermediating-third-goldm...
If GS is truly doing God's work, then the cock should crow after this third denial.
I guess Im evil for selling all my real estate in 2006 to people who should not have bought it. I knew it would end badly for the buyers, but I sure as hell didnt tell them that at the closing.
this is Prosecution 101 for the SEC - they need to kick the training wheels off and get serious
I'll get excited when they start laying criminal charges and investigating every other similar transaction
as for the echo coming from GS that they did nothing wrong and everything is OK - well, how many times have we heard bankers say that type of crap one day, only to be shut the next - oh if it were so...
good luck
If you have to say 3 times during your life that you are not gay - there's a good chance you are!