SEC Charges Goldman Sachs With Fraud in Structuring and Marketing of CDO Tied to Subprime Mortgages
FOR IMMEDIATE RELEASE
2010-59
Washington, D.C., April 16, 2010 — The Securities and Exchange Commission today charged Goldman, Sachs & Co. and one of its vice presidents for defrauding investors by misstating and omitting key facts about a financial product tied to subprime mortgages as the U.S. housing market was beginning to falter.
Additional Materials
Litigation Release No. 21489
SEC Complaint
The SEC alleges that Goldman Sachs structured and marketed a synthetic collateralized debt obligation (CDO) that hinged on the performance of subprime residential mortgage-backed securities (RMBS). Goldman Sachs failed to disclose to investors vital information about the CDO, in particular the role that a major hedge fund played in the portfolio selection process and the fact that the hedge fund had taken a short position against the CDO.
"The product was new and complex but the deception and conflicts are old and simple," said Robert Khuzami, Director of the Division of Enforcement. "Goldman wrongly permitted a client that was betting against the mortgage market to heavily influence which mortgage securities to include in an investment portfolio, while telling other investors that the securities were selected by an independent, objective third party."
Kenneth Lench, Chief of the SEC's Structured and New Products Unit, added, "The SEC continues to investigate the practices of investment banks and others involved in the securitization of complex financial products tied to the U.S. housing market as it was beginning to show signs of distress."
The SEC alleges that one of the world's largest hedge funds, Paulson & Co., paid Goldman Sachs to structure a transaction in which Paulson & Co. could take short positions against mortgage securities chosen by Paulson & Co. based on a belief that the securities would experience credit events.
According to the SEC's complaint, filed in U.S. District Court for the Southern District of New York, the marketing materials for the CDO known as ABACUS 2007-AC1 (ABACUS) all represented that the RMBS portfolio underlying the CDO was selected by ACA Management LLC (ACA), a third party with expertise in analyzing credit risk in RMBS. The SEC alleges that undisclosed in the marketing materials and unbeknownst to investors, the Paulson & Co. hedge fund, which was poised to benefit if the RMBS defaulted, played a significant role in selecting which RMBS should make up the portfolio.
The SEC's complaint alleges that after participating in the portfolio selection, Paulson & Co. effectively shorted the RMBS portfolio it helped select by entering into credit default swaps (CDS) with Goldman Sachs to buy protection on specific layers of the ABACUS capital structure. Given that financial short interest, Paulson & Co. had an economic incentive to select RMBS that it expected to experience credit events in the near future. Goldman Sachs did not disclose Paulson & Co.'s short position or its role in the collateral selection process in the term sheet, flip book, offering memorandum, or other marketing materials provided to investors.
The SEC alleges that Goldman Sachs Vice President Fabrice Tourre was principally responsible for ABACUS 2007-AC1. Tourre structured the transaction, prepared the marketing materials, and communicated directly with investors. Tourre allegedly knew of Paulson & Co.'s undisclosed short interest and role in the collateral selection process. In addition, he misled ACA into believing that Paulson & Co. invested approximately $200 million in the equity of ABACUS, indicating that Paulson & Co.'s interests in the collateral selection process were closely aligned with ACA's interests. In reality, however, their interests were sharply conflicting.
According to the SEC's complaint, the deal closed on April 26, 2007, and Paulson & Co. paid Goldman Sachs approximately $15 million for structuring and marketing ABACUS. By Oct. 24, 2007, 83 percent of the RMBS in the ABACUS portfolio had been downgraded and 17 percent were on negative watch. By Jan. 29, 2008, 99 percent of the portfolio had been downgraded.
Investors in the liabilities of ABACUS are alleged to have lost more than $1 billion.
The SEC's complaint charges Goldman Sachs and Tourre with violations of Section 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934, and Exchange Act Rule 10b-5. The Commission seeks injunctive relief, disgorgement of profits, prejudgment interest, and financial penalties.
# # #
For more information about this enforcement action, contact:
Lorin L. Reisner
Deputy Director, SEC Enforcement Division
(202) 551-4787
Kenneth R. Lench
Chief, Structured and New Products Unit, SEC Enforcement Division
(202) 551-4938
Reid A. Muoio
Deputy Chief, Structured and New Products Unit, SEC Enforcement Division
(202) 551-4488
http://www.sec.gov/news/press/2010/2010-59.htm
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Showing posts with label Auction Rate Securities. Show all posts
Showing posts with label Auction Rate Securities. Show all posts
Friday, April 16, 2010
Sunday, November 09, 2008
Slipping Into Darkness
From October 29, 2008
The Federal Reserve Board today, at 2:15 pm, announced their obligatory 50 basis point cut of the Federal Funds Rate, from 1.5 per cent to 1 per cent. This is the latest action taken to assuage investors’ fears about the hydra-bear market that has engulfed all capitalism. A triple digit rally was quickly vaporized with an erroneous General Electric rumor concerning the company’s 2009 earnings.
What are not mistaken rumors are the disastrous economic data that continues to flow. On Tuesday came the U.S. consumer confidence index, by the Conference Board, reporting an all time low of 38, down from 68 the previous month. That same day, the S&P Case-Shiller home price index fell 1 per cent, in August from July, and 16.6 per cent, from the previous year. The Census Bureau estimates for the 3rd quarter of 2008, of some 130 million housing units, nationwide, 18.6 million stand empty; 13.8 million year-round, 4 million for rent, and 2.2 million for sale.
On Wednesday, Durable Goods Orders were reported a curved up .8 per cent versus an expected decline of 1.8 per cent. For Thursday, the October 25th week Initial Jobless Claims are announced. Expect a drop of 3,000. Why, I’m not sure.
A General Motors -Chrysler shotgun merger is one step closer to happening, according to reports. If completed, it may add an additional 25,000 auto blue and white collar auto workers to the unemployment line of fixed income investment bankers recently cashiered.
Employment is rising, however, in villages and hamlets across the land as Investment Advisors and Money Managers are deploying their minions to hotel banquet rooms and restaurant’s private cubby holes, armed with clever four-color handouts, PowerPoint Presentations, and empty explanations, as to why their propriety indicators and models could not see the greatest bear market since the Great Depression, sneak up behind them.
I have a feeling that the traditional holiday feathered vertebra – turkey; will not be served this Thanksgiving. Instead, investors will be dining, if they can still afford a meal, on black swan; only recently very, very popular fowl of spenders of others-peoples-money. Of course, it’s too late to sale stocks with portfolios down 30 to over 50 per cent. But, if these Money managers are wrong again, keep some Gray Goose handy.
Monday, August 11, 2008
A Gold Medal for Last Week's Bull Rally
It was beautiful. It was wow. It was unbelievably exciting. It was indescribable. It was beyond superlatives, and no, we are not talking about the spectacular display at the Beijing National Stadium. It was the bull rally last week on Wall Street, riding the back of falling oil prices and the reversal of the dollar.
The opening ceremony of the Games of the XXIX Olympiad was magical. The collective life force of 1.3 billion people that poured into the "Bird's Nest" had one objective; to make the world's viewers speechless. Mission accomplished. A gold medal for people of China; their repressive government...
The European Central Bank and the Bank of England, facing acceleration in the decline of growth, at just .2 percent in the 2nd quarter, left interest rates unchanged on Thursday, earning silver medals; two days after the FOMC did likewise. This unanimous decision indicates an acknowledgment that inflation is no longer the sole concern of central banks in Europe. With less pressure on the dollar, now, the meme of possibly lower rates later this year fired the starter pistol for the equity Olympics.
The DJIA advanced 302.89 or 2.65 percent on Friday to 11,734.32. The S&P 500 moved higher 30.25 or 2.39 percent for the day at 1,296.32. NASDAQ climbed 58.37 or 2.48 percent Friday to close at 2,414.10 for the week, the Dow increased 3.60 percent, on two 300-plus point rallies, the S&P 500 up 2.86 percent, and NASDAQ rose for the week 4.46 percent.
The implications of a stronger dollar include companies with major overseas sales and earnings may experience softer numbers in the 3rd and 4th quarters. Exporters will notice headwinds as well and a firmer dollar will aid job losses. The tradeoff is lower oil and gold prices unless the military action by the Russians in Georgia threatens the flow of oil in the region. Speaking of which, the U.N. Security Consul held an emergency session to discuss this potentially grave regional/international matter.
This runs counterproductive to the impulse of the international Olympics. In theory, bringing together the various nations of the world to participate in athletic competition allows an exchange of communication and diplomacy that can forestall hatred, mistrust, and warring. If you don't buy this scenario, then you might want to check out gold medal Harvard historian Niall Ferguson's multi-part PBS series "War of the World". It's a fresh and sobering look at how the 20th century began and how several conflagrations converged into World War II. Hopefully, we will avoid global destruction this century.
Consumers added $14.3 billion to their credit cards in June, $8 billion more than expected, while personal income rose .1 percent and personal spending rose .6 percent. Initial jobless claims increased by 7k; a 23k drop in claims were expected.
Apparently there are still a few free lunches left on Wall Street. Bronze medals go to regulators who pressured Citigroup (C), Merrill Lynch (MER), and UBS (UBS) into buying back, from thousands of high net worth retail clients, Auction Rate Securities. This Dutch auction creature that paid above money market rates, for awhile to customers anyway, crashed and burned in the great liquidity squeeze of 2007/2008. Only a money market is as safe as a money market. Every chance I got, I attempted to talk customers out of chasing these minor differences in yield. The risk to reward wasn't there. But, if you are a hog, don't be surprised when you are slaughtered.
More silver medal analysts are glomming on to the idea that the current downturn will be deeper and will last longer than previously expected. Many, many more believe, however, that it is business as usual and that a soft landing will be engineered through Fed policy with some help from Treasury. If it were only that easy to manage the world's largest economy, no analysts would earn bronze medals. Mortgage rates are trending higher, underwriting standards are tightening, and, if residual real estate values drop another five to ten percent, that is a trillion dollars erased from household net worth.
Banks are beginning to freeze or reduce individual lines of credit. A gold medal goes to Oppenheimer & Co.'s Director of Equity Research, Meredith Whitney, who appeared on CNBC on August 4th, sharing a dismal overview of the banking industry and the economy for the balance of this year and next. Last year, 85 percent of mortgage liquidly came from securitization. Last year to date, that accounted for $900 billion in loans. In 2008, that number is $100 billion. Overall, there is $2 trillion less in liquidity in the marketplace. Also, she expects banks to reduce unused lines of credit to customers from $4.9 trillion by $2 trillion in 2009. Ouch.
The opening ceremony of the Games of the XXIX Olympiad was magical. The collective life force of 1.3 billion people that poured into the "Bird's Nest" had one objective; to make the world's viewers speechless. Mission accomplished. A gold medal for people of China; their repressive government...
The European Central Bank and the Bank of England, facing acceleration in the decline of growth, at just .2 percent in the 2nd quarter, left interest rates unchanged on Thursday, earning silver medals; two days after the FOMC did likewise. This unanimous decision indicates an acknowledgment that inflation is no longer the sole concern of central banks in Europe. With less pressure on the dollar, now, the meme of possibly lower rates later this year fired the starter pistol for the equity Olympics.
The DJIA advanced 302.89 or 2.65 percent on Friday to 11,734.32. The S&P 500 moved higher 30.25 or 2.39 percent for the day at 1,296.32. NASDAQ climbed 58.37 or 2.48 percent Friday to close at 2,414.10 for the week, the Dow increased 3.60 percent, on two 300-plus point rallies, the S&P 500 up 2.86 percent, and NASDAQ rose for the week 4.46 percent.
The implications of a stronger dollar include companies with major overseas sales and earnings may experience softer numbers in the 3rd and 4th quarters. Exporters will notice headwinds as well and a firmer dollar will aid job losses. The tradeoff is lower oil and gold prices unless the military action by the Russians in Georgia threatens the flow of oil in the region. Speaking of which, the U.N. Security Consul held an emergency session to discuss this potentially grave regional/international matter.
This runs counterproductive to the impulse of the international Olympics. In theory, bringing together the various nations of the world to participate in athletic competition allows an exchange of communication and diplomacy that can forestall hatred, mistrust, and warring. If you don't buy this scenario, then you might want to check out gold medal Harvard historian Niall Ferguson's multi-part PBS series "War of the World". It's a fresh and sobering look at how the 20th century began and how several conflagrations converged into World War II. Hopefully, we will avoid global destruction this century.
Consumers added $14.3 billion to their credit cards in June, $8 billion more than expected, while personal income rose .1 percent and personal spending rose .6 percent. Initial jobless claims increased by 7k; a 23k drop in claims were expected.
Apparently there are still a few free lunches left on Wall Street. Bronze medals go to regulators who pressured Citigroup (C), Merrill Lynch (MER), and UBS (UBS) into buying back, from thousands of high net worth retail clients, Auction Rate Securities. This Dutch auction creature that paid above money market rates, for awhile to customers anyway, crashed and burned in the great liquidity squeeze of 2007/2008. Only a money market is as safe as a money market. Every chance I got, I attempted to talk customers out of chasing these minor differences in yield. The risk to reward wasn't there. But, if you are a hog, don't be surprised when you are slaughtered.
More silver medal analysts are glomming on to the idea that the current downturn will be deeper and will last longer than previously expected. Many, many more believe, however, that it is business as usual and that a soft landing will be engineered through Fed policy with some help from Treasury. If it were only that easy to manage the world's largest economy, no analysts would earn bronze medals. Mortgage rates are trending higher, underwriting standards are tightening, and, if residual real estate values drop another five to ten percent, that is a trillion dollars erased from household net worth.
Banks are beginning to freeze or reduce individual lines of credit. A gold medal goes to Oppenheimer & Co.'s Director of Equity Research, Meredith Whitney, who appeared on CNBC on August 4th, sharing a dismal overview of the banking industry and the economy for the balance of this year and next. Last year, 85 percent of mortgage liquidly came from securitization. Last year to date, that accounted for $900 billion in loans. In 2008, that number is $100 billion. Overall, there is $2 trillion less in liquidity in the marketplace. Also, she expects banks to reduce unused lines of credit to customers from $4.9 trillion by $2 trillion in 2009. Ouch.
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