Goldman's Hudson Mezz CDO Is Now Focus Of Brand New SEC Probe

Tyler Durden's picture

Abacus, Timberwolf, and now Hudson, pretty soon there won't be a CDO underwritten by Goldman that is not the object of some civil or criminal legal battle. The FT is reports that the SEC has launched a brand new investigation into Goldman Sachs, this time into its $2 billion Hudson Mezzanine Funding CDO. According to the FT: "People familiar with the matter said that in recent weeks the SEC had been gathering information on Hudson Mezzanine, which featured prominently in an 11-hour grilling of Goldman’s executives in the US Senate in April. The SEC and Goldman declined to comment." It is unclear if Goldman has received a separate Wells Notice for this second probing iteration, but since as Goldman notified its shareholders, these things are immaterial, we won't hold our breath to find out. As was repeatedly hammered during the Congressional grilling of Blankfein and his henchmen two months ago, Hudson is precisely the "junk" deal that AIB was “too smart to buy"which in turn forced Tourre and the other salespeople to keep pushing Eastward to Taiwan and Korea (Marc Faber beware).

As disclosed earlier, Australia's Basis Yield Alpha sued Goldman today for failing to "disclose material information knowing that, by this omission, information that they did disclose was rendered misleading." That lawsuit opens the way for every single investor who ever bought a CDO from Goldman as a primary issuer (not in the secondary market). As we have pointed out previously, Goldman and BP will soon be competing over which firm has more active lawsuits against it. On the other hand, Goldman may offset some costs by IPOing the largest corporate litigation firms, as their partners will soon be rolling in the dough. While completely impossible, the mutual conflicts of interest in the risk factors of such a prospectus would make for a comic book all on its own.

As for Hudson, some more information from Goldman:

Goldman went “short” on Hudson Mezzanine, buying protection on the entire value of the CDO, according to internal documents. Less than 18 months later, as the US housing bubble burst, Hudson Mezzanine’s credit rating had plunged to junk status, causing losses for investors and enabling Goldman to collect on the insurance.

Legal experts said that inquiries into Hudson Mezzanine were likely to focus on whether Goldman provided investors with adequate disclosure. In a marketing document, Goldman stated its interests were “aligned” with investors because it would buy equity in the CDO.

In legal disclaimers, Goldman also said it would buy protection on the security, but it did not specify how much.

Carl Levin, the senator who chairs the sub-committee investigating Wall Street’s actions during the crisis, seized on the “junk” reference repeatedly during the hearing when questioning Lloyd Blankfein and other Goldman executives.

The oddest thing is that Goldman still staunchly opposes a settlement in any of these cases, which is reasonable, as any case which has an even remote claim will then rise up asking for at least partial remuneration, and Goldman will have to oblige. On the other hand, should Goldman end up losing even one criminal case, Lloyd Blankfein's duplex at 15 CPW will very promptly be on the market, with a Bernie Madoff-esque of cache. We hear $30 million buys a whole lot of cigarettes at any minimum security facility.