On Goldman

http://www.fivethirtyeight.com/2010/04/on-goldman.html

by olefoo • 16 years ago

40 57 16 years ago

retube2• 16 years ago

The crux of the complaint is weather GS lied or not. But what are they supposed to have lied about? If they were selling this fund/instrument/collection of bonds to third parties, by definition there must be a short on the other side - someone has sold the instruments into the fund. So what?

blackswan• 16 years ago

I'm no expert on the matter but I believe the problem is that GS misrepresented one side of the trade. So having a short and a long side to the trade isn't an issue - the problem is that GS misrepresented Paulson's hedge fund as an independent recommender of the long side when that same fund was in fact shorting the securities (and GS clearly knew about this). If a truly independent party had recommended the long side of the trade then there wouldn't be a case.

bushido2• 16 years ago

The real issue as people have been summing up is: "The Abacus Fund bought risky mortgage loans and literally bet that they (and the homeowners who held them) would default to the detriment of investors and consumers."

The abacus fund was the name of the Fund that John Paulson setup.

Let me get the facts out of the way:

1) It is not possible to have a long and short position in the same instrument on the same account simultaneously. ... unless of course it was calls vs puts. but while they are both options they are separate instruments as you can go long/short/offset on calls or puts for a complete trade without using the other. i.e. sell call and buy them back to offset.

2) Of course they could have used another instrument to do this. that is going Long on the futures while buying puts. and that would be illegal. oh wait! thats called hedging. thats not illegal.

3) Of course again if the fund was hedging there is no fraud possible since the money would be with the fund, hence with the investors.

4) If the opposite position was in another account, another fund, or whatever that is also not illegal. Though NOW since these were not hedges they had to be naked shorts. But wait thats not possible, aren't there hundreds of articles that say Goldman, Paulson, Lehman, MS etc etc etc lost tons of money by buying into CDOs...

5) But that would mean, that these were in fact hedged trades!

6) Of course there is also the fact that banks, investment advisors, etc are obligated to tell all their clients what their other clients are doing, now in cases like this that would include internal propitiatory trading desks. OH WAIT! thats illegal too...

Whats the effing case again?

That they sold mortgages that the investors wanted to buy (unless they were forced to do so under pressure/on gun point... without a choice.... that would definitely be illegal)?

That they hedged?

That the investors who had the money and sensibility to invest in these risky exotic securities, did not know that they should have hedged against their trades?

That its common knowledge that every transaction needs to have a sound exit strategy, and factor in the worst case scenario (hence the hedge), in this case it would be that the investors and consumers could default?

Since, if this case has any base, can we expect Full disclosure of Speculation, Investment activities of citizens to get included with emails to the Patriot Act? Oh wait... where did I get that idea from!

Since banks can now be taken to court for not disclosing this information, can we add this requirement to lawyers too?

Ok back to the topic.. what I think of this case is:

For every vague law GS has been blamed to break there is at least one not at all vague law that clears them, the fact of the matter is that this case is not at all about lawful merits, but rather political gain by creating an emotional and moralizing case that will be won even without wining the real case. By using word like literally betting against homeowners etc.

enough said.

olefoo2• 16 years ago

The heart of the case is that they were selling a product as being composed of a high-quality mix of mortgages likely to produce positive returns while simultaneously working to engineer the actual content of the CDO to be almost exclusively bad debt unlikely to avoid default.

It's like a real estate agent knowingly selling you a house with a mold problem. Or maybe more like a developer selling houses that had been constructed with substandard materials.

retube2• 16 years ago

at the risk of soliciting downticks, caveat emptor surely? It's not like the underlying instruments were not known.

Edit: I can't believe Goldman really said - here's a basket of triple A's, when in fact they were junk. Expressing an opinion on whether they were likely to go up/down is a different matter. Of course a salesdesk is going to promote the investment in positive terms.

byrneseyeview4• 16 years ago

Have you read the sales documents? They list the reference portfolio--every single bond. So you're arguing that both sides knew that ratings agencies were going to incorrectly rate all this stuff BBB. The only missing datum is, allegedly, who constructed the portfolio. However, Paolo Pellegrini, the SEC's main source, says that he had a meeting specifically to disclose exactly that information.

The big news here is that ACA looks really pathetic. They're saying "We had all the fundamental information we needed to judge the merits of this transaction. We could investigate every bond in the reference portfolio, and even every underlying mortgage. Our quants could build a model that would tell you exactly what would happen for any given default rate, interest rate, home price fluctuation, war, natural disaster, or act of god. But we didn't know that some know-name merger arb who liked to dabble in real estate derivatives was on the other side of the trade. If we'd known that, we would have been terrified." I mean, come on.

yummyfajitas13• 16 years ago

A synthetic CDO is NOT a mortgage backed security, it is backed by credit default swaps. It is not a mix of mortgages at all, high quality or otherwise.

A synthetic CDO can not even exist unless some party believes the securities it is comprised of will go bad.

Your analogy to people selling consumption goods is ridiculous. A synthetic CDO is a bet and only has value for speculative and hedging purposes.

It's like me making a bet with my friend that the yankees will win. What a jerk! He took my bet, all the while thinking the yankees would lose!

jfager21• 16 years ago

In these kinds of instruments, though, the short isn't always clear. Paulson himself was never short on the instrument directly - it's not like a stock where you can borrow shares. To be short, he had to go and buy a CDS on it (and one of the quirks of this setup is that there can effectively be a lot more short money than long on the instrument - lots of people can buy the insurance, but the underlying instrument is only held once).

The direct shorts that everyone knew about were the people selling the underlying mortgages up the chain, and the reasons they were short were well understood by everyone involved (cash now vs. over 30 years, etc.).

yummyfajitas13• 16 years ago

In this case, the existence of the short side is completely clear. The only thing unknown is their identity.

ABACUS was a synthetic CDO. The short side wanted to buy CDS on a set of underlying bonds. The long side wanted to issue the CDS.

The only relation it has to bonds is that ACA structured the transaction to behave similarly to a set of bonds. The synthetic CDO could not have existed if someone was not explicitly trying to short the underlying bonds.

secretasiandan• 16 years ago

The issue is not whether the long side knew the short side existed, the issue is did GS mislead/lie about the composition of what the security contained?

Alternatively, did the people selling insurance know what kind of insurance they were selling? By saying that ACA was constructing the portfolio and omitting Paulson's role, GS implies some kind of standard for portfolio construction. Was that standard different than what Paulson helped construct? My assumption is absolutely. Paulson was not creating a diversified portfolio, Paulson was creating a concentrated portfolio. Does the average bank/institution ever want to have a concentrated portfolio? Probably not.

There's always somebody on the other side of the trade. Is that person misrepresenting what the goods are is the question.

cwp3• 16 years ago

That's Goldman's very argument. It may be true in a sense - the investors in Abacus should have been aware that somebody, somewhere would benefit, at least a little, if Abacus failed.

Nevertheless, the following are facts:

    - Paulson was involved in creating Abacus
    - Paulson would gain nothing if Abacus succeeded
    - Paulson would make a billion dollars if Abacus failed

If you're contemplating investing in Abacus, that's important information. Goldman neglected to mention it.

yummyfajitas13• 16 years ago

Nonsense. The following are facts that are known to every investor in any synthetic CDO (including ABACUS) who bothered to look up the definition of synthetic CDO:

    -- Anonymous counterparty was involved in creating Synthetic CDO.
    -- Anonymous counterparty gains nothing if the CDO succeeds.
    -- Anonymous counterparty makes money if it fails.

chmike• 16 years ago

Does a same law exist for lying about massive destruction arms ?

byrneseyeview4• 16 years ago

http://crookery.blogspot.com/2010/04/nasty-derivatives-tale....

This is an example of committing the same crime Goldman has allegedly committed. You'll notice that if you're an accredited investor, you can call your broker up right now and do this. In act, if you do much options trading, you may have already more or less done it.

jfager21• 16 years ago

At what point in that story did the bank lie about who specifically had assembled the reference portfolio? In other words, where's the parallel with Goldman using ACA as a marketing tool and shield?

gruseom• 16 years ago

Here's a point I haven't seen made elsewhere:

Sixth -- how will Goldman defend themselves? The standard defense when two parties to securities litigation are "sophisticated investors" is to argue the parties were essentially big boys and knew the risks. That defense isn't possible in this case, largely because of the statute employed. This case comes down to whether or not Goldman lied -- period. Either they did or didn't misrepresent facts. The financial standing of the purchaser of the security is irrelevant. Goldman's only defense is to somehow demonstrate they did not lie about the transaction. Given the complaint filed, I don't see how that argument is possible.

Since the "big boys" argument has been frequently cited -- it's basically the "caveat emptor" defense running through most threads about the case including this one -- it's worth noting that if this guy is right, it's irrelevant.

On Goldman

Related Stories