The joys of existence in and around Wall Street continue as before.
Madness reigns: Goldman, Sachs has issued a formal statement.
No one here at DKOS will be shocked. However the language, together with the assumptions, had me rolling off the couch laughing last night. This Statement is as funny as anything in Lewis's classic "Liar's Poker."
The GSers believe, way more than Bill Maher, that Americans are very, very stupid people.
MBTF :::
The Big Lie, in this, is the assertion that the client received securities.
In fact, ACA got nothing. Nothing but a paper bet. No bonds. No claims on mortgage payments. Nothing.
Here you go :::
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.
[Note: CDO means "collateralized debt obligation" where the collateral, defined as underlying the CDO asset, should have been houses/mortgages producing mortgage payments. With CDO bonds there is no need for bribes and oily middlemen.]
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.
********* My, my. ************
The Big Lie, in this, is the assertion that the client received securities.
Thus, "the transaction at issue involved a static portfolio of securities" -- implying that the verb "involved" implies some direct or indirect ownership.
No way.
This Statement avoids defining the term "synthetic." But that term is the core of the fraud.
The adjective "synthetic" has been applied for decades as a term of art on Wall Street. Originally this "synthetic" referred to using single-purpose shell corporations to hold portfolios of bonds for investors. Investors own parts of the shell corporations, instead of holding the bonds directly. Using shells is done purely as a matter of legal convenience.
Now, the new 2000-2010 "synthetic" is applied quite differently. Goldman, Sachs created mathematical formulas that referred to mortgage-payment performance -- "synthetic" bets, if you will. The term "synthetic," here, means that there are no bonds.
Truth of the matter is that IKB and ACA Capital Management received no interest in any assets, any portfolio, any legal shell company that held assets, or any tangible real-world object whatsoever.
IKB and ACA thought that they were buying securities.
They were buying nothing. Literally, nothing.
Instead of something, and contrary to listings and "Consumer Debt" titles, what IKB and ACA got were bets. These bets were tallied in a casino of Goldman, Sachs's creation. The bets only existed in mathematical relationships to the mortgage-payment performances of known, registered Residential Mortgage Based Securities.
Goldman, Sach's Statement would have the public ignore basic evidence.
Clearly, delivering bets instead of securities was only possible because privatization and proprietary databases concealed the nature of the specific mortgages. Investors could not map specific RMBS bonds back to the mortgages.
Thank Phil Gramm and the Bush non-regulators for that.
All Goldman, Sachs had to do was bribe the Fitch, Moody's and S&P people to counterfeit "AAA" ratings for the New Synthetic non-bonds and it was off to the races.
BTW: consider this part --
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.
Gee whiz. Goldman got stuck with $90-million of its own losers because it couldn't find enough suckers. Holding these bets internally was never the GS plan. It just happened.
Big Question: who got the bulk of the total $4-trillion, lost to these SYNTHETIC fraud schemes ???
We're using Patrick J. Fitzgerald to pickle Blogo.
What a waste.
UPDATE ::: as prescribed by my new copy editor, the full statmeent is HERE.
UPDATE 2: Organized Crime Strike Force OCSF is DoJ and FBI, plus a Federal Grand jury, a solid budget, and a charter to take down the targeted criminal enterprise(s.)