Guest Post: A Goldman Rebuttal
Submitted by Dylan Ratigan
The following includes questions and commentary for Goldman Sachs as the company defends itself against charges of fraud:
Since I haven't been able to get you or anyone from Goldman Sachs to
appear on my show in months, perhaps we can just try corresponding in
writing. Thank you for your press release. I have submitted my follow-up questions in bold:
Goldman Sachs Makes Further Comments on SEC Complaint
April 16, 2010
The Goldman Sachs Group, Inc. (NYSE: GS) said today: We are
disappointed that the SEC would bring this action related to a single
transaction in the face of an extensive record which establishes that
the accusations are unfounded in law and fact. We want to emphasize the
following four critical points which were missing from the SEC's
-- Goldman Sachs Lost Money On The Transaction.
Goldman Sachs, itself, lost more than $90 million. Our fee was $15
million. We were subject to losses and we did not structure a portfolio
that was designed to lose money.
But what about the other "transactions"...
You know, the one where you may have potentially shorted this exact
transaction with AIG for a lot more than $90 million? You remember AIG,
right? It's where the taxpayers paid you 100 cents on the dollar for a company that you helped blow up.
-- Extensive Disclosure Was Provided. IKB,
a large German Bank and sophisticated CDO market participant and ACA
Capital Management, the two investors, were provided extensive
information about the underlying mortgage securities. The risk
associated with the securities was known to these investors, who were
among the most sophisticated mortgage investors in the world. These
investors also understood that a synthetic CDO transaction necessarily
included both a long and short side.
There must be a big difference between "extensive
disclosure" and "complete disclosure," because if you provided
"complete disclosure," you probably would have mentioned to your
customers that the entire product was funded and selected by someone who was betting on it to fail. You know, kind of like you did for your coworkers at Goldman Sachs, but forgot to do for your customers!
-- 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.
Not to mention their incentive to be Goldman and Paulson's unwitting patsy...
-- 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
True, but Goldman also never represented to ACA that Paulson
was planning on shorting the same product that Paulson & Co.
created in the first place!
Background: 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 benefited from a
decline in the value of the underlying securities. Those on the other
side of the transaction, IKB and ACA Capital Management, the portfolio
selection agent, would benefit from an increase in the value of the
securities. ACA had a long established track record as a CDO manager,
having 26 separate transactions before the transaction. Goldman Sachs
retained a significant residual long risk position in the transaction.
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, 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
mortgage security. The offering documents for each of these RMBS in
turn disclosed the various categories of information required by the
SEC, including detailed information concerning the mortgages held by
the trust that issued the RMBS.
Any investor losses result from the overall negative performance of
the entire sector, not because of which particular securities ended 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's substantial long
position in the transaction lost money for the firm.
No, it was created as a way for Paulson & Co. (and maybe
you), to short your customers... you know, the same customers that you
apparently forgot to mention that little fact to...
The Goldman Sachs Group, Inc. is a leading global
investment banking, securities and investment management firm that
provides a wide range of financial services to a substantial and
diversified client base that includes corporations, financial
institutions, governments and high-net-worth individuals. Founded in
1869, the firm is headquartered in New York and maintains offices in
London, Frankfurt, Tokyo, Hong Kong and other major financial centers
around the world.
Lucas van Praag
Thanks Lucas, hope we can chat again soon. Maybe next time
about exactly how a then-28-year-old Goldman Sachs junior executive did
this with no apparent supervision?