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Goldman: Where the customer is always right

April 18, 2010

On Friday the SEC charged Goldman Sachs with fraud in structuring and marketing of CDOs tied to sub prime mortgages. The SEC alleges that Goldman Sachs sold a CDO to investors (including pension funds) while failing to disclose vital information about the CDO – namely that Goldman knew the CDO was doomed as the mortgage securities to be included in the CDO were hand-picked by a Hedge fund to bet against them. Goldman sold the CDO to foreign banks and pension funds and informed them that the mortgage pools were chosen by an independent, objective third party (ACA management) with expertise in analyzing credit risk.

SEC – “Goldman structured the CDO (ABACUS 2007-AC1O), prepared the marketing materials, and communicated directly with investors. Goldman knew of Paulson & Co.’s short interest and role in the collateral selection process. Goldman convinced ACA management into believing that Paulson actually invested approximately $200 million in the equity of ABACUS, indicating that Paulson’s interests in the collateral selection process were closely aligned with ACA’s interests. In reality, however they were in direct opposition.”

So here is how I see this going down.

Paulson calls GS

Paulson:
Yo, yo check this out, the mortgage market is melting down yo, I wanna place a FAT bet against some of that stinkin sub prime garbage. Can you help me?

GS:
WORD son, the whole building is about to collapse. Goldman is betting against that shit too yo – but check this out – all we gotta do is find some chump who still thinks these mortgages are good and get them to take the other side of your bet. Hmm, I did get a call from some chumps in Europe who were looking for a good yield. They still think the US real estate market is hot. What?

Paulson:
Hot, like a hot pile a shit.

GS/Paulson:
ha ha ha ha ha ha ha

(Goldman then calls a few Foreign banks and pension funds)
Goldman:
Hello Mr Pension fund, I understand that you are looking for a bond with a good yield? First, I want to thank you for being a loyal GS client and as such, I am pleased to offer you the opportunity to get in on a fantastic investment opportunity. Hows about a Mortgage bond?

Investors:
Hmm, I want to be sure the underlying assets will perform.

Goldman:
I appreciate your concern. This is why we have hired ACA Management who will use every precaution in picking only the finest mortgage bonds on the market. They are top-notch at assessing credit risk I assure you!

Investors:
I trust you Goldman Sachs. You are the best investment house on the street. Thank you for doing God’s work.

Goldman to Paulson:
Yo yo yo check it, I got those chump ass euro chump banks to take the other side of your trade. I am The Fabulous Fab and you owe me big time.

Paulson:
But how are we going to get ACA on board?

Goldman
Sheet, thats a good question. How bout I tell them that you are hand picking the mortgages because you think they are great and are gonna buy them? Ha, those suckers at ACA will believe anything I tell them. I am Fabulous Fab!

Paulson:
Oh snap! Great job. I have wired you your commission. You will be pleased and I assure you I will be back to do more business in the future.

So, here is the question: When Goldman was selling the CDO’s, were they telling the buyers that these were great investments? Or telling them simply they were the investments that would provide them the exposures they were looking for? Did Goldman have any responsibility (fiduciary or otherwise) towards their clients?

“We are not a fiduciary” -LLoyd Blankfield

Chairman of the Financial Crisis Inquiry Commission
“Mr. Blankfein himself never admitted that there was any responsibility of Goldman Sachs to make sure the products themselves were good products,” That’s very troublesome. In the mind of regulators “good products” should never result in huge losses for their clients.

The bank packaged CDO’s, while also betting against the debt, because clients had the appetite for the debt. Was Goldman not responsible for advising their clients against making duff investments? Or, because these clients were “sophisticated” they should have known better?

On Goldman’s Web site it lists its “business principles” and the first one reads: “Our clients’ interests always come first. Our experience shows that if we serve our clients well, our own success will follow.”

“The whole building is about to collapse anytime now only potential survivor, the fabulous Fab standing in the middle of all these complex highly leveraged exotic trades he created without necessarily understanding all of the implications of those monstrosities” – Fabrice (FAB) Tourre – The man at Goldman who structured, marketed and sold the CDO which Paulson bet against.

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One Comment leave one →
  1. tiefighter25 permalink
    April 18, 2010 1:27 pm

    “Bankers who hire money hungry geniuses should not always express surprise and amazement when some of them turn around with brilliant, creative, and illegal means of making money.”
    Linda Davies

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