Just How Weak is the Case Against Goldman Sachs?

Goldman has very strong publicity people, who can exert lots of pressure on the media. You’ll be seeing this sort of nonsense every day, in an attempt to affect public opinion and the pre-trial settlement. It’s not an indictment of Goldman; it’s an indictment of the media hacks who go along with it.

The latest issue of Atlantic magazine contained an article exposing how the FBI pressured the media to torture Dr. Steven J. Hatfill, the innocent guy who was accused of sending anthrax through the mail. The media acquiesced because the FBI has lots of power, and anyhow, it was good for readership.

Never assume the media either are knowledgeable or occupy the moral high ground. They will do what they think is best for them. Don’t think Zakaria doesn’t get it. He gets it.

Rodger Malcolm Mitchell

The SEC complaint mischaracterizes the nature of the Abacus security as it was not a “cash” CDO which includes actual mortgage backed securities but rather a “synthetic” CDO which does not include actual securities but is a “bet” or deriviative against certain referenced securities. By nature, a “synthetic” security requires both a “long” and a “short” investor. The international banks that took the “long” position should have understood that they were going to receive premium payments so long as the underlying cash flows were not downgraded by third party rating agencies.

Paulson & Co.’s keen and contrarian bet that the residential real estate market was in immediate threat of collapsing was brilliant. The disclosure of Paulson & Co.’s participation in the selection of derived cash flows from weakening mortgage backed securities should have been fully disclosed to the international banks who invested “long” in the Abacus security. I don’t think Goldman Sachs strengthens its position by claiming that Abacus was a “private placement” and not an SEC registerred security and thus not requiring full disclosure. Such lame reasoning will not be appreciated by whomever adjudicates the SEC civil complaint.

However, the claim that Paulson & Co. was not disclosed as the “short” buyer in the Abacus deal is ingenuous as the nature of the security required that there be a “short”. Whether the “long” buyers lost their bet to Paulson or whomever else might have taken the “short” position in Abacus is beside the point.

In sum, Goldman Sachs was legally wrong in omitting Paulson & Co.’s role in selecting the “derived” cash flows and Goldman is wrong to hide behind the cover of a “private placement” argument. Goldman’s claim that it too lost money on the Abacus is misleading in that Goldman first sought to unload its own “long” position in the Abacus transaction but was unable to find a willing buyer. Moreover, Goldman’s claim of a $90 million loss is ingeneous as Goldman reportedly bought credit default swaps to “hedge” against its untenable “long” position in the Abacus deal. Reports are that Goldman received more from the credit default swaps than it lost on Abacus.

Smart guy from CNN – it is an oxymoron.

Nothing may be done against Goldman Sachs, as it is corruption everywhere:

http://docstoc.com/docs/34421820

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IMHO, one of the factors that causes some people to mistakenly defend Goldman Sachs is the magnitude of the market shift. That is, the “long” ABACUS investors would have taken a bath regardless of whether Paulson had selected the contents of the CDO or whether a genuinely independent entity had.

But, for the purposes of the complaint, the SEC is not required to prove that all of the losses that the “long” ABACUS investors suffered were caused by the Paulson-GS deceptions. The SEC only needs to show that the losses were greater and came faster. Or, in the alternative, had Paulson been wrong and the “long” investors correct about the subprime mortgage market, the long investors’ gains would have been less than they would have expected.

Remember, the whole reason that Paulson approached GS was specifically to create a supertoxic CDO. Had Paulson simply wanted to take the “short” position against the residential housing market generally, he could have easily have done so by taking the “short” side of a CDO that it wasn’t involved in creating. But, no, Paulson correctly reasoned that his gains would be larger and come sooner if he picked the securities himself.

I don’t know whether the the “long” investors in Abacus would have still invested had they known of Paulson’s involvement in picking the securities. They obviously can’t be trusted to give an honest answer at this point.

My sense is that the the answer to that question can be gleaned from the degree to which GS hid Paulson’s involvement from ACA — the only area of real factual dispute in this case. It will be interesting to see whether the SEC can prove that GS deceived ACA.

nice topic.

http://www.sharevaluegoods.com/

The best account of the case against Goldman that I have seen so far: http://www.ritholtz.com/blog/2010/04/10-things-you-dont-know-gs-case/

“But here’s the even bigger point that Zakaria doesn’t get. This wasn’t like two parties betting on the price of oil. This was like someone who secretly had bought up all of the barrels of oil in the world asking you to bet that the price of oil was going to go up. And then after you place the bet, that person dumps all of that oil in the ocean. The issue is not that Goldman got someone to place a bet with Paulson, but that that bet was rigged from the start.”

Actually, it’s your logic, not Zakaria’s that is terrible. Comparing Paulson picking out the securities that he wants to bet against to someone cornering the market in oil is absurd. Someone who corners a market in a commodity controls that market. Paulson not only had no control over the housing market, he wasn’t invested in it. He was betting against it! So what if he specifically bet against mortgages that he thought would fail? What should he have done, bet against mortgages that he didn’t believe have a high chance of default?

The big point that you and practically everyone else commenting on this subject doesn’t get is that Pauslon didn’t control anything in this deal. He decided that he wanted to bet against certain mortgages and he asked Goldman to find counterparties that would be willing to bet on those mortgages. He wasn’t event able to bet against exactly the ones that he wanted to bet against, but only a subset of them. The mortgages failed not because of anything that Paulson did, but because of the homeowners’ inability to pay. To say that the deal was rigged because Paulson made an accurate prediction of the housing market is absurd. The counterparties like IKB — which are highly sophisticated investment bank — knew exactly what was in the CDO and had the opportunity to judge whether those subprime mortgages were a good bet given their characteristics and the then prevalent economic conditions. They could have simply rejected the deal but they didn’t because they believed that housing prices would continue to rise and that the possibility of these homeowners with subprime mortgages defaulting was low. And not only did they believe this but so did Lehman and Bear Stearns and the vast majority of investment bankers at that time. To call this deal rigged just because it was initiated by someone who was able to make a smart prediction on the direction of the market is laughable.

The media – including Fareed are buying into to this idea that Goldman acted as a bookie. This is not true.
They manipulated the ratings agencies to be able to sell this stuff to Pension funds and other so-called conservative investment trustees of the pensions and
retirements of millions of Americans who – after it all shook down lost on average about a third of their wealth.
And THAT is what paid Goldman for their efforts.