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Guest Post: Hard Evidence Of Goldman's Corrupt Intent And The Myth Of The Sophisticated Investor
By David Fiderer
Hard Evidence of Goldman's Corrupt Intent and the Myth of the Sophisticated Investor
Many is the time I would review a write-up of a new deal and
scribble in the margins, "Get to the bleeping point!'' Unless you can
articulate, up front, exactly what assets we would be lending against,
and what circumstances would cause us to lose money (i.e. a
quick-and-dirty breakeven analysis), you don't really know what you're
talking about. And if you don't have a good grasp of that issue,
everything else you have to say is superfluous, a waste of time.
This lack of common sense is pervasive, extending far beyond the
financial services industry. (When, over the last seven years, have you
ever heard a journalist ask, "How many troops do we have to replace
those currently deployed in Iraq?") In certain markets, most notably,
CDOs, this lack of common sense was institutionalized. It's evident in
the deal book for Abacus 2007 AC-1, at the center of the S.E.C.'s case against Goldman.
What risks are investors assuming? The presentation doesn't say.
There's a reference portfolio of 90 subprime mortgage bonds, on pages
55 and 56, which ostensibly would be insured via credit default swaps
for the benefit of Goldman. But, as the small print says,
"Goldman Sachs neither represents nor provides any
assurances that the actual Reference Portfolio on the Closing Date or
any future date will have the same characteristics as represented
above."
According to my bias, everything else in the 66-page presentation is
superfluous. And the real reference portfolio for Abacus 2001 AC-1
remains, to my knowledge at this point in time, hidden from public view.
But if we assume that no one pulled a bait-and-switch, then the
evidence of Goldman's corrupt intent was always hiding in plain sight.
Eyeballing the list of 90 subprime reference obligations, I happened to
recognize a few that were notorious.
J.P. Morgan Mortgage Acquisition Corp. 2006-FRE1
(JPMAC 2006-FRE1) was a billion-dollar subprime bond that imploded
right away. About 13% of its loans were in foreclosure (either in the
foreclosure process or as real estate owned, known as REO) as of April
26, 2007, when Abacus 2007 AC-1 closed. Because JPMAC 2006-FRE1 had
such a high level of serious delinquencies at that time, no cash flow
could be could be applied to any principal repayment for 10 of the 11
tranches that were senior to the BBB tranche, which Goldman shorted. It
was obvious that BBB tranche, in the bottom 7% of the capital
structure, would default. Goldman wasn't assuming any kind of risk at
all. There was virtual certainty that it would collect on the credit
default swap.
The same certainty applied to Argent Securities Trust Series 2006-W1, which had a 10% foreclosure rate, to Morgan Stanley Abs Capital I Inc. Trust 2006-WMC2, which had an 8% foreclosure rate, and to Structured Asset Investment Loan Trust 2006-4,
which also had an 8% foreclosure rate. Each of those deals had already
tripped up the delinquency trigger in its respective cash flow
waterfall structure. In other words, there really wasn't any doubt that
Goldman would collect on its credit default swaps.
These are just a couple of high profile deals that I happened to
recognize. They may not be representative of the actual overall
portfolio. But common sense tells me all I need to know. This deal was
designed to provide a windfall to Goldman at the expense of some
unwitting suckers.
Goldman has asserted that the portfolio selection did not matter,
that all subprime bonds of that 2006 vintage performed badly. Exactly.
As explained here
previously, the real estate bubble concealed a multitude of sins. In
2005, people who could not afford their mortgages would still sell
their homes and recover some equity. Home flipping schemes were
profitable, and promptly paid off the loans. But when home appreciation
stopped in 2006, those same types of borrowers, who had lost their
equity, were walking away handing over the keys to lenders. Goldman and
John Paulson saw the spike in delinquencies and figured out what was
going on, which was why they were aggressively shorting those deals.
All this gets back to the myth of the sophisticated investor. The
reference portfolio of credit default swaps was static, with no
substitutions or reinvestments allowed. So after the deal closed, it
didn't matter whether the investment manager were a subsidiary of ABN
Amro or two guys with a Bloomberg terminal.
Pre-closing, the most important question was: How likely is it that
Goldman will collect on its swaps? The motivations of ACA Management,
the nominal Portfolio Selection Agent, were not all that relevant.
But the deal book clearly demonstrates Goldman's intent to distract
attention away from the underlying substance of the deal. In other
Goldman deals, notably Anderson Mezzanine Funding 2007, Abacus 2006-13 and Abacus 2006-17,
the opportunities for abusive self-dealing were conspicuous. Abacus
2007 AC-1 is clearly organized to seduce investors with an illusory
sense of comfort, that ACA Management, an independent third party and
subsidiary of a global bank, would offset Goldman's motivation to shaft
investors. The irony, of course, is that Goldman worked in tandem with
John Paulson to minimize any possibility that investors escape unharmed.
Still, from looking at ACA Management's organization chart and its
staff biographies, I never would have expected that they could not have
known, as of the CDO's closing date on April 26, 2007, that Goldman's
windfall was a sure thing. They must have reviewed the current
performance reports on 90 different bonds. How could they miss it?
Somebody at ACA was afflicted with a pretty big case of willful
blindness.
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How dare you criticize those that do the lords work.
Why not? Shareholders are...
(Reuters) - Goldman Sachs Group Inc (GS.N) Chief Executive Lloyd Blankfein and other bank officials have been sued by shareholders in two lawsuits related to fraud allegations brought by the federal government.
http://www.reuters.com/article/idUSTRE63M52I20100423
Jesus had a reasonable problem with the money-changers but he wasn't completely against the stuff. What global financial system would he approve of ?
It's perfectly clear that the honorable, ethical, and moral thing to do as a mensch and stand up for the Good of the Country's Capital Market system would have been to bust the MCO_MHP cabal lock on the system and make it real. This is not the Goldman of even 1986 when I met the Street, these sleeze balls could think of nothing else but hiding the salami of toxic waste in everyone's backyards like the Ndranghetta does for Europe's toxic waste by spewing it on Somalia's unpoliced shores so we can point to the pirates desperate to survive jacking ship traffic.
i really think these guys honestly believe that anything you have that is 'extra' enough to be invested, is fair game for them to take, using any means at their disposal.
which, if you believe in a thief's code, makes it not only their goal, but worse, their *duty* to collect anything 'extra'. and a good pirate, once established as such, gets kudos for his/her effectiveness at their trade.
aaaarg!
i couldn't care less about any of the deals screwing each other over BUT the investigation should go right to the TARP, et all to backfill AIG for all these BS games... let them bankrupt each other but just because you found a way to bust the casino it doesn't mean you can expect the taxpayers to make it whole on its payouts... that is the real crime
as molly bloom put it: yes, yes, yes.
these are not investments, they are bombs with fees attached. anyone assembling, marketing, selling, buying or recommending them should be precluded from FDIC protection.
One of the greatest oxymoron's of our age is the notion of the sophisticated investor.
There are no investors any more...only traders.
Some among us are merely debtors...
I've warned you before that the spring grass is no good for pups. Eat healthy!
Those little yellow dandelion thingies are so tasty, though, pops! :-P
And to CD's BFF comment below... bank failures in/around Chicago. Wonder how that happened!
It is a bank repo road show pup. For the next few weeks I suspect we will see this process repeated in various regions across the nation. Illinois is just replacing Georgia for the time being.
Goldman is a bucket shop.
Deceit and fraud are an integral part of their mandate.
Friday 04/23/2009 FDIC Bank Failure Friday
Looks like IL won the sweepstakes this week. Over $1 Billion hit to the Depoist Insurance Fund (DIF)
No one even pays attention to Bank Failure Friday anymore. It's old news.
Wheatland Bank, Naperville, IL
Peotone Bank and Trust Company, Peotone, IL
Lincoln Park Savings Bank, Chicago, IL
New Century Bank, Chicago, IL
Citizens Bank&Trust Company of Chicago, Chicago, IL
Broadway Bank, Chicago, IL
Amcore Bank, N.A., Rockford, IL
First time I have seen them all focused in one state. Step aside Georgia.
Actually your right, no one pays attention anymore. We are losing almost every week 5 to 7 banks and we are in a recovery. This is a stealth bank holiday/shutdown, they have known since last year which banks are in trouble so they have had plans set in order to take over or sell these banks to someone. How much do you wanna bet that many of these banks that are failing had to do with Commercial real estate.
http://www.nakedcapitalism.com/2008/08/this-weeks-bank-failure-surprisingly.html
For a lay man who has no idea what financial investing is all about the amateur financial advisor is a guru; for this guy in turn it's the professional financial advisor and so on.
Can the amateur financial advisor call the lay man a sophisticated investor?? If not neither can Goldman call the customers it screwed sophisticated investors.
I think sophisticated investor is a relative term and there is no fixed line beyond which one becomes a sophisticated investor. So for Goldman Pauslon could have been a sophisticated investor but definitely not the "relatively lay people" at firms like IKB.
What should matter is whether the transaction Goldman indulged in was in bad faith or not and there have to be rules and regulations to enforce this.
then this accounts for the 'idiot gold bugs' (myself included), who "know what we don't know", and therefore gravitate to what we *do* know:
gold plated tungsten...
And speaking of sophisticated investors, Fannie has a new option ARM program called HOMEPATH for you. They'll even roll in some cash for the upgrades.
Check out this beauty in Huntington Beach, CA. All 987 sq.ft. for $ 499k ( sold in 1998 for $ 199k ).
www.doctorhousingbubble.com
Goldman ranked 11th in Sub prime origination. Most of the stuff in these portfolios came from the likes of CountryWide. These mortgages existed. Yes they were crap. Just a question please. If Goldman had not packaged this stuff up and sold it off, who would those losses gone to?. The losses were not created by the trasaction. They were created by the incredibly stupid underwriting standards on the underlying mortgages. Probably US banks would have been stuck with it.
Abacus was not an AIG deal. But AIG was writing the CDS and setting the broad pricing for the period in question. We now know that AIG (and the others) mispriced the CDS.
What Pauson, and many others, saw was an arbitage of sorts. AIG was, in effect, selling a deep in the money call option at an out of the money price.
I am just going to crap in my pants laughing if we learn later on that either IKB or RBS had short action elsewhere in sub prime and they were just part of how our global capital markets reshuffle risk.
There is another possible answer. The investors could be complete fucking idiots who had no clue what they were doing.
"AIG was, in effect, selling a deep in the money call option at an out of the money price."
And GS, in order to make good on its riskless investment, had to get the GS members in government orchestrate an AIG bailout in order that GS could collect. Of all the multiple frauds which may be in place here, the greatest one has been the one committed on Joe and Jane Taxpayer.
Of that, there can be no doubt.
(Reuters) - Goldman Sachs Group Inc officials discussed making "serious money" in 2007 off the subprime crisis as mortgages were starting to falter in rapid numbers, according to a collection of e-mails released by a Senate panel on Saturday.
Bruce
Actually for this synthetic CDO, no physical settlement was necessary for Goldman to get paid for a credit event. This indicates that Goldman wasn't merely packaging stuff that existed, but creating new profits, or losses for naive investors, out of thin air. Also, the critical point was that these CDOs closed in April 2007, when the stuff had hit the fan, not in late 2005 the relevant timeframe for AIG's unfortunate deals.
The trivialization of the due diligence process, and the contempt for unfortunate suckers, are both reflections of the same trend, a culture of sociopathy.
In Apr 2007, there was still a good chance, that a lot of the BBB tranches in the CDO would actually pay back some principal. Clearly, investors totally misspriced the risk of losses and basically sold a digital option for next to nothing in premium.
All investment banks were doing exactly the same as GS (some more, some less successfully). And everyone knew the game, investors, hedge funds, portfolio managers... They just disagreed on the outcome.
Most people laughed at me in early 2007 when I conjectured that most, if not all, monolines would blow up. But how could the monlines survive if most CDOs would implode?
Conclusion: nothing special about this GS CDO. Just the usual irrational behaviour of market participants at that time.
Welcome to ZH, David. Nice to see you commenting as well as contributing.
Agreed Howard. David's voice and perspectives provide an important contribution.
The sociopathy is hitting an extreme and is the thing that disturbs me the most as it has become normal behavior in the fed circle I exist in....
AIG was just a tool of Goobermint Sucks.
Heh heh...I said "tool".
I think ABK has a suit against one of the Banks that claims that they switched or substituted some of the Mortgages in the CDO's after they were sold which changed the charistics of the CDO's they insured.
Who would know? Right.
Does the writing get smaller and smaller like this:
http://www.youtube.com/watch?v=5qVlnGIxpzU
Goldman’s Blankfein Sued by Investors Over SEC Claims
http://www.bloomberg.com/apps/news?pid=20601108&sid=acwVfK8iybLs
American International Group Inc. is the lead insurer of the Goldman Sachs board against shareholder suits, according to a person with knowledge of the policy. AIG may therefore have to pay the defense costs in the suit in addition to any verdict or settlement.
Since AIG is owned by the Government, the taxpayers end up paying for this.
Things will never change...
A FRAUD AND A HALF:
http://williambanzai7.blogspot.com/2010/04/ivan-boeskys-haul-of-fraud-ep...
THE ANNOTATED ABACUS SCAM (REPOST):
http://williambanzai7.blogspot.com/2010/04/annotated-abacus-scam.html
...Goldman and John Paulson saw the spike in delinquencies and figured out what was going on, which was why they were aggressively shorting those deals.
Sorry but in 2006 almost no one else was connecting these dots let alone connecting these dots and then betting serious money that they were right. That makes them (or at least Paulson) a sophisticated investor in my book. Doing more homework, betting against the herd and then making a killing isn't sophisticated enough for David Fiderer? What was Paulson supposed to do write a fucking opera about it? If this was all so damn obvious at the time why isn't Fiderer yachting around the globe right now instead of writing about someone else's three year old trade?
And how come Goldman is shown to have made a mint in some of these riviting re-enactment articles and in others they get shelacked by selling CDS to Paulson? Which is it?...or is that kind of thing beneath the notice of the sophisticated financial journalist?
This is getting booooooooooorrrrrringgggggggg !!
I'm guessing, because you are defending Goldman Sax & Paulson, that you probably are closely connected to either GS or Paulson?
Fraud is Fraud, whether or not it is recognized at the time it was perpetrated.
Yes, you're probably a psychopath, but you DO understand the meaning of Psychopath, don't you?
It's still criminal behavior, whether or not it is recognized at the the time it was perpetrated.
So you're bored.
Unfortunately, and way,way too late, even if we could line up every Bankster, Hedge Fund Speculator, (and lets not forget Politicians and YOU ) against the wall and gave them totally free of charge a few ounces of lead, its not going to change where we are going to end up.
Know this: IF I could I would, without hesitation.
So you're bored, are you?
I really, really would like to say that I see a solution, but unfortunately, unhappily, for millions and millions of us around the world, you and your banksters and politicians have totally, totally, totally fucked it up beyond any possible recovery and bad, bad times are facing us.
You have my contempt, Shithead. I couldn't stop you and your criminal associates and that is my failure, my shame. You are going to have the contempt of my children, and my grandchildren when they learn of your perfidy. You will have the contempt of most of the millions of decent people around the world when they learn of your actions.
History will record this as a bad, bad time. History, while unkind to you will treat you far, far better than I would.
If I could, You wouldn't be.
And that's not a pipe dream.
Well maybe you're children will be smart enough to recognize that I'm the one in the history book asking pointed questions and you're the one making threats and betraying ignorance.
You will be known in the history books as one of the fraudsters that brought down the financial system.
If you're buying when Goldman's selling, a cardboard box will be your dwelling.
Great post. I once debated on the need for higher capital, at issuance, to the AAA rated classes with a certain broker (sub or non prime deal, take a pick). I would've been right, but as it turns out Moodys, S&P could do wrong on varying stages.
Bad...worse...worser...f**king horrendous. That NRSRO biz model is truly an envious device to copy:
Earn Billions in revenue, rating MBS product that is A. not well vouched or proper due diligence at the loan level
B. take zero responsibility when that exact product doesn't just implode, but continues to implde.
well done on catching that willful blindness. In my opinion, there is no way SOMEONE at ACA didn't know. Which one I think is important and relevant to legal issues others may be looking into now.
BLANKFEIN'S MIDGET MOMENT:
http://williambanzai7.blogspot.com/2010/04/lloyd-blankfeins-midget-momen...
Excellent post with actual facts...
Nice work David Fiderer.
Jeff Neilson also makes some excellent points:
Goldman Sachs: Wall Street's #1 Fraud-FactoryLloyd B. God: “We are not a fiduciary.”
Jeff Nielson: "In other words, what Lloyd Blankfein is saying not only to these clients, but to every client of Goldman Sachs (and to the judge) is 'you can't trust us.' "
"This puts the other Wall Street banks in a “no-win” position. If they support Goldman Sachs, then the implicit message they are sending to all their clients is that none of them are “fiduciaries” - meaning none of their clients can trust any of these companies."
"When the “we are not fiduciaries” defense of Lloyd Blankfein and Goldman Sachs is summarily rejected, I can only assume that the next excuse out of the mouths of these various “bankers” will be “I was just following orders.”
Just Following Orders
Since the Wall Street banks were instrumental in the financing and rise of Hitler's Nazi regime... the Nazi Nuremberg defense does seem appropriate...
See: Wall Street and the Rise of Hitler by Antony Sutton
DOW chart threatening to break out.
MARKET UPDATES:
http://www.zerohedge.com/forum/latest-market-outlook-0
The "Sophisticated Investor" thing always got my Billy Goat.
Was part of the dot com scam in the late nineties, right in the thick of it in silicon valley. What a giant SCAM.
Anyways, at the time, I wanted in. Not just in my company but all the others I had close access to. All the double booking, sale-less head-count only shops that were re-herringing and getting acquired left, right and center.
Only thing is, I did not have a million dollars, so I was not considered a sophisticated investor (or what ever term they used to cut out the little guys). I thought it strange that a dumb duck who inherited a million from gramps could dive right in at 40 cents on the second round with a guaranteed payoff in 3-6 months, probably in many multiples.
But I, Mr. Smarts could not get in, not on the ground floor, not on the first, second or third.
I think I realized right there what a giant scam the whole thing was and that every law in the US was tilted towards the rich getting richer, didn't matter if they were smart, dumb or just plain lucky.
In short, the so-pissed-icated investor thing is just a sham. A sham baked into a scam.
Ugh! DOuble Ugh!! As in Ugh Ugh!
Of the 7 banks seized Friday one is tied to Obama.
http://blogs.reuters.com/rolfe-winkler/2010/04/24/bank-failure-friday-7-...
David, not sure if I'd call it corrupt intent, let's rephrase the question. If you can identify the fool in the marketplace, to what extent are you/should you be allowed to make money of him/her? Obviously, part of that is a legal question, but the core is in the fundamental analysis.
One way to slow the whole conversation to a crawl is to restrict it to people who have read the offering circular ( prospectus for old folks like me). Indeed, I'm embarrassed for 99% of the commentary I've read here and all else about this deal and all i te same genre...all of you are the "fools in marketplace" for those that actually do their homework, no matter how pure your philosophies...
But frankly, the offering circular should have been the stopper. Read it. Seriously, it won't kill you. Its a throwback in time, you'll hear the Twilight Zone soundtrack. You also won't see Mr Paulson's name mentioned, but you will see how competent ACA "looks'...
Speaking as a manager of fiduciary money, such deals never made it to my desk. Smart rep, they knew not to bother. Two reasons: there was never any clear claim to an asset, and second, as David correctly states, Goldman clearly positioned themselves in plain sight: if you're willing to do this deal, and it goes bad, it's your own damm fault.
Yeah, David, you're right...sophisticated investors?
Since i've only read the term sheet
a sophisticated glowing man about town, linen trousers, elegant shirt, made for leather Italian shoes, a touch of grey in the sideburns, with a light of invincibility. a brief smile of knowing the way of wall street ,
who would have known three years away from blinding cancer of the inner organs. The slow march to destinys end.
such is the cover for the march of mans folly, the race of ashes to ashes , the sands of time blowing forever into the dust bin of history.
The grave makes each a common cypher in a mad rush to beat the bank,
The stone marked here lies , a testament to the brief years of mans inhumanity to man.
Yet the portals of time mean little to the sophisticated investors decked out in the finery of today.