Too big not to fail?

April 16, 2010 8:50 AM

SEC sues Goldman Sachs for fraud. GS has already come under fire for "betting against" financial products it was marketing, a practice that apparently helped it prosper from the real estate bubble but come out relatively unscathed. The SEC now says that one such product was designed specifically so that a Goldman business partner, Paulson & Company, could take a short position on it. Investors were apparently not advised of this fact. Goldman's stock was off more than 10% in the half hour following the announcement.

Dealbook has a summary version of the story, and links to more material.

Investigatory story in the Times about the "Abacus" products.

posted by grobstein (48 comments total)

I had a bunch of posts about this in the Magnetar thread down below. My favorite excerpts from the complaint


Ze Tchermans are always the dumb ones (Wall Street Cliche btw)
GS&Co also knew that at least one significant potential investor, IKB Deutsche Industriebank AG (“IKB”), was unlikely to invest in the liabilities of a CDO that did not utilize a collateral manager to analyze and select the reference portfolio.

And the best quote from an email goes to....

"More and more leverage in the system, The whole building is about to collapse anytime now…Only potential survivor, the fabulous Fab[rice Tourre]…standing in the middle of all these complex, highly leveraged, exotic trades he created without necessarily understanding all of the implications of those monstruosities!!!" Similarly, an email on February 11, 2007 to Tourre from the head of the GS&Co structured product correlation trading desk stated in part, "the cdo biz is dead we don’t have a lot of time left."
posted by JPD at 8:53 AM on April 16, 2010

Too bad it's civil fraud, and not criminal fraud.
posted by Benny Andajetz at 9:09 AM on April 16, 2010 [6 favorites]

Goldman let Mr. Paulson select mortgage bonds that he wanted to bet against — the ones he believed were most likely to lose value — and packaged those bonds into Abacus 2007-AC1, according to the S.E.C. complaint. Goldman then sold the Abacus deal to investors like foreign banks, pension funds, insurance companies and other hedge funds.

But the deck was stacked against the Abacus investors, the complaint contends, because the investment was filled with bonds chosen by Mr. Paulson as likely to default. Goldman told investors in Abacus marketing materials reviewed by The Times that the bonds would be chosen by an independent manager.

Not good.
posted by caddis at 9:17 AM on April 16, 2010

Did you all see it was the guy at Paulson in charge of the CDS strategy who was later forced out for personal reason who was the source for the SEC?
posted by JPD at 9:20 AM on April 16, 2010

I'll take this opportunity to plug The Big Short, which I just finished reading. It covered Paulson, Goldman, and others extensively, while managing to explain the whole situation in a clear and entertaining way.
http://www.amazon.com/Big-Short-Inside-Doomsday-Machine/dp/0393072231
posted by Phredward at 9:27 AM on April 16, 2010

Ze Tchermans are always the dumb ones (Wall Street Cliche btw)

That's interesting. Is that cliche justified at all? What are they up to over there?
posted by I_pity_the_fool at 9:34 AM on April 16, 2010

Goldman will issue statements saying that these charges are unfounded. Fabrice Tourre will be canned. Goldman will pay a few hundred million dollars in a few months to the SEC with no admission of guilt, and will quietly settle with any number of individual plaintiffs. Tourre's career will be sidetracked until he gets a job at a below-the-radar prop shop or hedge fund as he clearly is a smart guy and knew what he was doing. Not much will change.
posted by jckll at 9:35 AM on April 16, 2010 [12 favorites]

Tourre's career will be sidetracked until he gets a job at a below-the-radar prop shop or hedge fund...

Fox News Senior Financial Correspondent.
posted by Evilspork at 9:39 AM on April 16, 2010 [2 favorites]

If this were a criminal rather than civil charge, would the SEC be able to recover money damages? Anybody know?
posted by saulgoodman at 9:44 AM on April 16, 2010

Nah Tourre's career over - he's the proverbial sacrifical lamb. Even wall street isn't that forgiving. Other than that jckll is right on. Except there is no evidence this guy was any smarter than your average guy. And he was a sales guy, not a trader.

That's interesting. Is that cliche justified at all? What are they up to over there?


Google "WestLB" and "Metallgesellschaft". The Landesbanks Investment Banking efforts especially have a history of being the last ones into a market, hiring the most marginal people to run the businesses and then imploding in spectacular fashion. And of course MG was one of the worst structured finance disasters of the 90's.
posted by JPD at 9:48 AM on April 16, 2010

Dow sees triple digit loss.

GS is down 12% or so today.

This is pretty awesome. I hope they go down, but probably they'll just end up paying some fine.
posted by delmoi at 9:51 AM on April 16, 2010

"Fabrice Tourree" I think I get SPAM from them.
posted by From Bklyn at 10:05 AM on April 16, 2010

This is where I pimp my idea that white-collar criminals - especially in epic financial fraud cases like this - be required to work for the government as part of their sentencing, perhaps in a chain-gang investment bank that's a part of the Treasury. They would do the same types of jobs that they were doing before.

But they don't get to keep any of the money. Instead, all their profits go to the Treasury. These are smart people, and their talents shouldn't be just wasted. We should all profit from them. For years.
posted by dammitjim at 10:16 AM on April 16, 2010 [8 favorites]

It's about damn time!

"Fabrice Tourree" I think I get SPAM from them.

He's really good at getting the smell of stale cigarettes and wet dog out of my couch.
posted by Pollomacho at 10:16 AM on April 16, 2010

Get 'em up against the wall.
posted by spirit72 at 10:16 AM on April 16, 2010

Matt Taibbi must be jammin it so hard right now
posted by Damn That Television at 10:16 AM on April 16, 2010 [6 favorites]

Link to the pitch book
posted by JPD at 10:23 AM on April 16, 2010 [2 favorites]

I've read a couple articles on this now, and I suspect that this is a lot of media (and arguably gov't) hype created out of a relatively narrow case. If the losses cited are only a couple billion dollars (yes, it hurts my head to type that), then this is NOT a grand charge against Goldman.

I worked briefly as a general office-monkey for a GS office a few years ago. This sort of thing does happen. It's not unlike a pro athlete dealing with a minor injury. The company has its ups and its downs.

I do not expect that this is the great battle for justice that we are all longing for. It'll just get touted as such for the sake of ratings & political capital.
posted by scaryblackdeath at 10:29 AM on April 16, 2010 [3 favorites]

well this is just one of the abacus CDO's - there were multiples and we know GS (and doubtless others) were involved in creating synthetic CDO's to write CDS against (actually all a synthetic CDO is are a bunch of written CDS + a treasury) for a bunch of HF's (Paulson, Soros, Magnetar are the ones in the public domain)

but yeah there is a good chance you are right be right - depends how sloppy the banks were and how aggressive the SEC wants to get.
posted by JPD at 10:33 AM on April 16, 2010

Let us see if the SEC bares any of its regulatory teeth. At least it looks to be a start of some sort of accountability with the Elite. Far better than the diffusion we have been receiving from the MSM, i.e. arguing over the amount of a bonus. We should be demanding jail time for their frauds and financial terrorism. My list of criminals include the bankers, regulators, congressmen, and members of the ratings agencies as a start.
posted by Hopoch at 10:35 AM on April 16, 2010 [1 favorite]

I'm just catching up to the Magnetar story and came across this excerpt in TAL Ep. 405, around the 17 minute mark:

"And generally, there's nothing wrong with shorting. In fact, many people argue, that shorting, which happens millions and millions times a day, every single day on Wall Street, is actually a good thing, because it prices more tethered to reality. It's harder for a mania to develop, if people who have a dim view of things, can bet on that view.

But the Magnetar trade was not shorting in the traditional sense - betting against something that already exists. The Magnetar trade was betting against something Magnetar itself helped create. Which is the exact opposite of what you want shorting to do. In traditional shorting, by betting that certain things are crappy and overvalued, you are helping to rid the world of those crappy and overvalued things.

But a lot of people thought that what Magnetar was doing was bringing crappy and overvalued things into the world, in order to bet against them."

I am little shocked Goldman Sachs would fuck over its own clients like this. Can someone explain to me what they have to gain by allowing Paulson to orchestrate this deal through their firm?
posted by phaedon at 11:06 AM on April 16, 2010 [1 favorite]

Great. So if the SEC wins a civil judgment the government might get back some of the money they funneled to GS through AIG? It's so wonderful we gave them the money in the first place or we might not be able to sue them!
posted by Justinian at 11:14 AM on April 16, 2010

It seems like Goldman was given a heads up by the SEC. I wonder if the GS prop desk took advantage of that information?
posted by ryoshu at 11:22 AM on April 16, 2010

I am little shocked Goldman Sachs would fuck over its own clients like this

You're kidding, right?
posted by larry_darrell at 11:35 AM on April 16, 2010 [1 favorite]

Too big to fail and too big to nail are despicable concepts. The former is a slap in the face to the smaller companies that go bankrupt every day. The latter is a slap in the face to all who respect and obey the rule of law.

If a big company gambles and loses, they should meet the same fate as a man in a casino who gambles and loses: bankruptcy.

If a big company commits fraud, they should meet the same fate as Charles Ponzi or Frank Abagnale: federal prison.

Sure there will be short-term damage to the economy... but it will be nothing compared to the long-term damage we suffer by perverting free market capitalism or distorting our collective sense of right and wrong.

If we bail big companies out and give them all "get out of jail free" cards (financial slaps on the wrist for crimes that would send a man to federal prison), we free them of all risk and responsibility. We teach them that we'll cover any losses and forgive any sins. If you think big companies are running roughshod over us now, just wait until that lesson sinks in.
posted by stringbean at 11:41 AM on April 16, 2010 [5 favorites]

delmoi wrote: "Dow sees triple digit loss.

GS is down 12% or so today.

This is pretty awesome. I hope they go down, but probably they'll just end up paying some fine."

I was just thinking yesterday how my 401(k) would have done a lot better over the last few months if I had gotten out of "safe mode" and moved some of the assets back into the market from treasuries and whatnot. Glad I decided there were more shoes to drop.

phaedon wrote: "Can someone explain to me what they have to gain by allowing Paulson to orchestrate this deal through their firm?"

Tens of millions in fees for creating the CDO.
posted by wierdo at 11:46 AM on April 16, 2010

Matt Taibbi must be jammin it so hard right now

He is pleased, and apparently he's working on something else about it.
posted by homunculus at 11:47 AM on April 16, 2010

Can someone explain to me what they have to gain by allowing Paulson to orchestrate this deal through their firm?

Typically GS would get a 2% fee for packaging the deal. On a billion dollar CDO, that comes to $20 million. Fabrice personally probably got a bonus of one or two million out of it. When there is that kind of easy money to be made, the temptation is irresistible.
posted by JackFlash at 12:23 PM on April 16, 2010

From a related CNN article:

Since the credit markets imploded a few years ago, many financial experts have argued that Wall Street firms were coddled by Washington and were being rewarded with bailouts instead of being punished for their role in the subprime mortgage crisis.

Even former Washington Mutual CEO Kerry Killinger, who appeared before Congress earlier this week to explain the collapse of WaMu, the largest bank failure in history, claimed that there was a clubby culture on Wall Street and Washington. His Seattle-based savings and loan apparently was not part of the financial sector's too-big-to-fail cool kids clique.

I have no sympathy for Killinger. His remarks are clearly of the sour grapes variety because he got pushed out of his job before WaMu ultimately was seized by the FDIC and sold on the cheap to JPMorgan Chase (JPM, Fortune 500) -- one of the members of Wall Street's popular crowd. Heck, you could argue that Jamie Dimon is the star quarterback on the varsity football team.

Have I ever mentioned how much I despise it when people say "sour grapes?" Especially when someone accuses someone else of having them when it's clear to everyone that the person's grapes are sour because someone pissed in them?
posted by wierdo at 12:36 PM on April 16, 2010 [1 favorite]

Typically GS would get a 2% fee for packaging the deal.

I guess I don't get it. I have no problem with GS betting big against residential mortgage backed securities. I have no problem with them making commission. But for a measly $20mil, they let their clients take a billion dollar hit? They purposefully assist in the creation of a super-toxic asset, obviously because they believe the market is about to burst? This isn't even really shorting in the traditional sense. It's throwing propane into the fire. It's taking money out of their clients' hands and putting it into Paulson's. Doesn't GS have a fiduciary duty to its CDO investors, or am I misunderstanding this relationship?
posted by phaedon at 12:37 PM on April 16, 2010 [1 favorite]

You are misunderstanding this relationship.

GS's client is Paulson. He runs a huge hedge fund and funneled tons of business through Goldman. Goldman is happy to stiff chump institutional investors who want to buy into a crap CDO if Paulson asks them to. GS does have a fiduciary duty to fully disclose any material information about the creation, contents, etc of the CDO, which is what the SEC is accusing them of breaching. Essentially (if you look in the pitchbook) they are using ACA's name (the manager of the CDO) to sell the CDO to unwitting institutional investors, when the truth is that Paulson was calling the shots as to what would go into the CDO.
posted by jckll at 1:06 PM on April 16, 2010 [1 favorite]

To be clear Goldman doesn't have a fiduciary relationship with Paulson either - all its agreed to do is arrange the trade (and may have guaranteed the counterparty on the CDS - though on something bespoke like this they may not have). At the time the thinking was "This is awesome I get a revenue stream on both sides of the coin + if I play my cards right I can probably pull a revenue stream out of the CDO itself". Goldman isn't making a judgement call on who they are stuffing - there were plenty of tier one clients that blew themselves up buying crap. They just care about fees and any unintentionally counterparty risk.
posted by JPD at 1:49 PM on April 16, 2010

This is why the only crime Goldman is guilty of according to the letter of the law was lying to ACA about Paulson's role and lying to CDO's buyers about ACA's role in managing the collateral. If they had told ACA Paulson's economic interest was the opposite of their own, and had they told the buyers that Paulson was effectively choosing the collateral (and they may not have even had to disclose what Paulson's trade was unless asked) then there would be nothing prosecutable. As it is this isn't the best case in the world given ACA actually did pick and choose from the list of original candidates supplied to them by Paulson via GS.
posted by JPD at 1:52 PM on April 16, 2010

Dick Wolf is ripping this headline as we speak...
posted by Alexandra Kitty at 3:40 PM on April 16, 2010 [1 favorite]

Phredward: "I'll take this opportunity to plug The Big Short, which I just finished reading. It covered Paulson, Goldman, and others extensively, while managing to explain the whole situation in a clear and entertaining way."

Me too! It was an engrossing, informative, infuriating read. I learned a lot, and couldn't figure out why no one at the big banks weren't be charged with any crimes. When I read about GS getting charged for just one of the thousands of deals today, I was a little relieved. This better be a trial balloon, though, with many more to come.
posted by julen at 4:53 PM on April 16, 2010

Listen I'm afraid this is all overshadowing Goldman's biggest problem - VP's in cubes
posted by JPD at 6:11 AM on April 17, 2010

I'd guess we need to fill at least one PMITA Federal prison with these jokers.
posted by RobotVoodooPower at 10:35 AM on April 17, 2010

Britain Joins Germany in Reviewing Legal Action Against Goldman
posted by homunculus at 6:19 PM on April 18, 2010

Allegations of similar behavior by Merrill Lynch.
posted by caddis at 12:47 PM on April 19, 2010

Goldman Sachs taps ex-White House counsel
posted by homunculus at 9:17 AM on April 20, 2010

First blood in banking reform goes ... to the GOP? Mitch McConnell launches an attack and the White House folds. Wall Street wins again
posted by homunculus at 2:13 PM on April 20, 2010

homunculus wrote: "First blood in banking reform goes ... to the GOP? Mitch McConnell launches an attack and the White House folds. Wall Street wins again"

That is some terrible analysis. The Administration's proposal is to change the fund from pre-funded to post-funded. It allows them to be seen as bipartisan without giving up anything of substance.

I'm still undecided on whether bipartisanship is even a worthy goal, but if you accept that it is, I see only brilliance in defusing the potential "bailout bill" label.
posted by wierdo at 2:36 PM on April 20, 2010

Lloyd Blankfein on Wednesday attacked the Securities & Exchange Commission’s fraud charges in telephone calls to clients as Goldman escalated its campaign to stem the damage to the bank’s reputation.

One person who received a call from the Goldman chief said he was told the regulator’s case against the bank was politically motivated and would ultimately “hurt America”….

“He was very aggressive,” said one person called by Mr Blankfein on Wednesday. “He feels that the government is out to kill them, that they are under attack and the whole thing is totally political.”

Heh.
posted by delmoi at 7:55 AM on April 22, 2010

Goldman Sachs Emails: Firm Had 'The Big Short' As Economy Fell
posted by homunculus at 2:29 PM on April 24, 2010

Matt Taibbi: Will Goldman Sachs prove greed is God? The investment bank's cult of self-interest is on trial against the whole idea of civilisation – the collective decision by all of us not to screw each other over even if we can
posted by homunculus at 2:30 PM on April 24, 2010

Feds open criminal probe of Goldman
posted by Fuzzy Monster at 6:09 AM on April 30, 2010

More Taibbi: The government's case against Goldman Sachs barely begins to target the depths of Wall Street's criminal sleaze
posted by homunculus at 8:41 AM on April 30, 2010

If more businesses operated like Goldman Sachs...
posted by homunculus at 9:56 PM on May 3, 2010