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If I read it correctly, it's not that they sold doomed products to stupid clients. It's that they represented the products as awesome, when they knew they were

If I read it correctly, it's not that they sold doomed products to stupid clients. It's that they represented the products as awesome, when they knew they were structured specifically to be doomed.

drunkpotato 17y ago
Correct.
jamiequint 17y ago
Its the job of Goldman's investment bank to broker product not take one side or the other. It didn't matter to Goldman if they were "doomed" or not (in fact when Goldman structured them Goldman may have even thought Paulson & Co were the fools) they were trying to find pairs of parties willing to take bets against each other and make a commission.
- dsplittgerber 17y ago
  In the process of structuring and pairing willing parties they just forgot to mention one party had privileged information about what the product actually was. That is not what a supposedly neutral broker does.
  - jamiequint 17y ago
    Sorry, you're wrong. Both parties had access to the mortgages in the pool. Paulson & Co. just had a more accurate analysis of what they were actually worth because they had done in depth macroeconomic research on the residential mortgage market.
    - dsplittgerber 17y ago
      Please read the complaint (relevant part starts on p.9). This has nothing to do with Paulson's superior research. This is Paulson telling ACA which RMBS to put into the portfolio, ACA signing off on it, and GS telling investors that ACA selected the portfolio, which it did not. GS structured this whole deal from the beginning because Paulson wanted to short specific RMBS portfolios; ACA was just engaged in order to have a "brand-name" signing off on it.
      - jamiequint 17y ago
        warfangle was talking about the representation of the products. Yes, they misrepresented who put them together, but they were completely up front about the underlying assets. In fact you can see in the pitch deck (http://www.scribd.com/doc/30036962/Abacus-2007-Ac1-Flipbook-20070226 http://www.scribd.com/doc/30036962/Abacus-2007-Ac1-Flipbook-...) on slides 56 and 57 a list of the assets the CDO was based off of.
        anigbrowl 17y ago
        This is true, but it must be balanced against: a) the ~32 slides (almost 50%) explaining why ACA was such a reliable and reputable sponsor of the issue, and b) the fact that ACA's participation was secured with the help of blatantly false statements from GS VP Fabrice Tourre about Paulson's intended positions in those assets (which were represented to ACA as long when they were actually short). ACA thought that Paulson & Co. were going to buy the equity (riskiest) tranche, and that they, ACA, were only taking on the risk of the mezzanine tranches. GS knew that not only did Paulson not intend to buy in, they intended to bet against the CDO.
    - jamiequint 17y ago
      @dsplittgerber (won't let me directly reply) I'm not sure that who picked the bonds necessarily qualifies as "privileged information". The underlying assets were the same so if they were analyzed properly why would it matter who picked them?
      - jamiequint 17y ago
        Actually showing how this comment is wrong (it's not) would be greatly appreciated instead of downvoting.
        wdewind 17y ago
        This has been happening to me a fair amount as well. It would be nice if downvoting required a reason.
      - dandelany 17y ago
        Analysis of mortgages, especially tranches of slices of portions of thousands of mortgages, just isn't that easy. That's the entire reason that companies like ACA, who Goldman claimed picked the mortgages, exist: to act as an impartial third party that can analyze and rate the risk of the underlying assets when there are too many for the investor to do it herself. If I sold you one diamond, and you were a shrewd buyer, you'd probably take it somewhere, perhaps to two people, to get it examined and ensure its authenticity. But if I offered to sell you a big ol' bag full of thousands of assorted gemstones, and claimed that everything in the bag was either pure diamond, ruby, emerald or opal, 25% each, you probably wouldn't have the time or money to go through each one and analyze its authenticity. Even if you did, my offer may have expired by the time you do. So instead, I say that the gems were all hand-picked and inspected by the American Gem Trade Association, and that they all checked out to be 100% authentic. If you trust me and the AGTA, you might buy the bag at this point. However, when you get home & find out that they're all rhinestones, I guarantee that you will consider my false assertion that they were picked by the AGTA to be both material and criminal.
    - billybob 17y ago
      I don't know this specific situation, but NPR's This American Life just did an episode about a hedge fund called Magnatar. IF the description was accurate (authorities will have to determine that), this was the scenario: Magnatar aggressively bought the crappiest traunches of CDOs so that banks would be convinced to create more CDOs. The banks could then sell them, saying "even the crappiest traunches are selling like hotcakes - you can confidently buy these less-risky traunches." But actually, even the least-risky traunches were VERY risky, and Magnatar was pushing to have riskier stuff included in the higher-level traunches, setting them up to fail. Meanwhile, Magnatar's inevitable losses on the crappy traunches were nothing compared to the bets (CDOs) they were taking against the CDO as a whole. They might invest $10 million in the crappy traunches and effectively put an $100 million insurance policy on the CDO as a whole. A good analogy would be if you bought houses next to a dam you thought would burst, thereby convincing developers to build more such houses, and you then took out large insurance policies on all the houses in the neighborhood. Except that you're not allowed to take out insurance on houses you don't own, which is sane, but you ARE allowed to buy credit default swaps on CDOs you don't own, which is a recipe for disaster. So to the CDO investors in THOSE deals, at least, what the brokers told them was "these investments are rated as super-safe and everybody is buying them - the magic of bundling takes away the risk of the underlying mortgages." When the reality was, the brokers KNEW that the CDOs were created with the help of someone who wanted them to fail, and the ratings agencies were being paid by the people who wanted the investments rated well. (Another insane situation - it would be like if the food safety inspectors were paid by McDonalds when they came out to check things. How can they be objective?) Yes, there were investors who saw the crisis coming. But the banks did completely omit the fact that the investments were created, in part, by people who WANTED them to fail. If they had been up front about that, nobody would have bought them. So they lied, and had ratings agencies to back their lies. Not exactly a situation where the investor has a reasonable chance to make informed decisions.
  - billybob 17y ago
    "Sure, sure, we'll take your horse bets. You think the horse will win, this guy thinks the horse will lose. Place your bets and we keep the fees. Oh, you lost? Too bad. Yeah, we forgot to tell you that the other guy knew your horse was poisoned. Yeah. He poisoned it himself. We saw him do it - we helped him, really. Oh well. Security guards? Oh, they work for the other guy. He pays 'em. Tough luck for ya, though, kid, real tough luck. You win some, you lose some, eh?"
    - cellis 17y ago
      Is that from a movie? Because if not , you really need to start being a screenwriter!
  - flipbrad 17y ago
    I'll bet the principle of 'buyer beware' wins out. This is about giving Goldman a PR hit, not a judicial one. It'll settle.
- jakarta 17y ago
  "The scandal here is not that Goldman was short the subprime market at the same time as marketing the Abacus deal. The scandal is that Goldman sold the contents of Abacus as being handpicked by managers at ACA when in fact it was handpicked by Paulson; and that it told Abacus that Paulson had a long position in the deal when in fact he was entirely short." http://blogs.reuters.com/felix-salmon/2010/04/16/goldmans-abacus-lies/ http://blogs.reuters.com/felix-salmon/2010/04/16/goldmans-ab...
  - ig1 17y ago
    This. I've undergone FSA mandated financial crime training while working for several financial institutions and lying about positions held in order to make a sale is the only thing that's clearly illegal here. There's a very thin line between what's legal and what's illegal, and the reason banks have compliance departments is to check over things which are borderline. In a lot of cases not only can the bank be fined but the individuals involved can also face jail time. But with borderline issues typically if they're done in good faith (full honestly, going through compliance departments) the regulatory bodies don't get too involved because they don't want to scare people away from the large number of legitimate activities which are beneficial to the system but are borderline. However in the case where someone lied outright (presumably without the knowledge of their compliance department) that's a much clearer cut-case for prosecution. It's deception for the purpose of making money, and saying "I didn't know it was illegal" doesn't wash, because it obviously is.
- dandelany 17y ago
  Incorrect. Goldman didn't just broker this product, they helped construct it. During this process, they allowed Paulson and Co. to add RMBS's to the product that they knew Paulson was short on. It is not their job to take one side or the other, but it is absolutely their job to represent the true nature of the product they are selling. And the fact that the product was constructed specifically so that its creators would profit hugely from its demise is incredibly important material information. > Goldman may have even thought Paulson & Co were the fools Wrong. The entire point of this case is that GS knew two facts: Paulson & Co. helped construct the fund, and they also held a short position. GS is smart enough to know that someone who shorts their own product is not a fool, they're a con man. Or as Goldman probably saw it, a shrewd businessman.
- prosa 17y ago
  If you actually read the complaint, you will find that Goldman Sachs was intent on using ACA's brand as a critical means through which to sell the CDOs to their clients, and kept ACA in the game by misrepresenting Paulson's position. Had ACA known, they would have been far less likely to be willing to enter into the deal. Goldman: “One thing that we need to make sure ACA understands is that we want their name on this transaction. This is a transaction for which they are acting as portfolio selection agent, this will be important that we can use ACA’s branding to help distribute the bonds.” ACA: “I certainly hope I didn’t come across too antagonistic on the call with Fabrice [Tourre] last week but the structure looks difficult from a debt investor perspective. I can understand Paulson’s equity perspective but for us to put our name on something, we have to be sure it enhances our reputation.”

If I read it correctly, it's not that they sold doomed products to stupid clients. It's that they represented the products as awesome, when they knew they were structured specifically to be doomed.

drunkpotato 17y ago

Correct.

jamiequint 17y ago

Its the job of Goldman's investment bank to broker product not take one side or the other. It didn't matter to Goldman if they were "doomed" or not (in fact when Goldman structured them Goldman may have even thought Paulson & Co were the fools) they were trying to find pairs of parties willing to take bets against each other and make a commission.

dsplittgerber 17y ago
In the process of structuring and pairing willing parties they just forgot to mention one party had privileged information about what the product actually was. That is not what a supposedly neutral broker does.
- jamiequint 17y ago
  Sorry, you're wrong. Both parties had access to the mortgages in the pool. Paulson & Co. just had a more accurate analysis of what they were actually worth because they had done in depth macroeconomic research on the residential mortgage market.
  - dsplittgerber 17y ago
    Please read the complaint (relevant part starts on p.9). This has nothing to do with Paulson's superior research. This is Paulson telling ACA which RMBS to put into the portfolio, ACA signing off on it, and GS telling investors that ACA selected the portfolio, which it did not. GS structured this whole deal from the beginning because Paulson wanted to short specific RMBS portfolios; ACA was just engaged in order to have a "brand-name" signing off on it.
    - jamiequint 17y ago
      warfangle was talking about the representation of the products. Yes, they misrepresented who put them together, but they were completely up front about the underlying assets. In fact you can see in the pitch deck (http://www.scribd.com/doc/30036962/Abacus-2007-Ac1-Flipbook-20070226 http://www.scribd.com/doc/30036962/Abacus-2007-Ac1-Flipbook-...) on slides 56 and 57 a list of the assets the CDO was based off of.
      - anigbrowl 17y ago
        This is true, but it must be balanced against: a) the ~32 slides (almost 50%) explaining why ACA was such a reliable and reputable sponsor of the issue, and b) the fact that ACA's participation was secured with the help of blatantly false statements from GS VP Fabrice Tourre about Paulson's intended positions in those assets (which were represented to ACA as long when they were actually short). ACA thought that Paulson & Co. were going to buy the equity (riskiest) tranche, and that they, ACA, were only taking on the risk of the mezzanine tranches. GS knew that not only did Paulson not intend to buy in, they intended to bet against the CDO.
  - jamiequint 17y ago
    @dsplittgerber (won't let me directly reply) I'm not sure that who picked the bonds necessarily qualifies as "privileged information". The underlying assets were the same so if they were analyzed properly why would it matter who picked them?
    - jamiequint 17y ago
      Actually showing how this comment is wrong (it's not) would be greatly appreciated instead of downvoting.
      - wdewind 17y ago
        This has been happening to me a fair amount as well. It would be nice if downvoting required a reason.
    - dandelany 17y ago
      Analysis of mortgages, especially tranches of slices of portions of thousands of mortgages, just isn't that easy. That's the entire reason that companies like ACA, who Goldman claimed picked the mortgages, exist: to act as an impartial third party that can analyze and rate the risk of the underlying assets when there are too many for the investor to do it herself. If I sold you one diamond, and you were a shrewd buyer, you'd probably take it somewhere, perhaps to two people, to get it examined and ensure its authenticity. But if I offered to sell you a big ol' bag full of thousands of assorted gemstones, and claimed that everything in the bag was either pure diamond, ruby, emerald or opal, 25% each, you probably wouldn't have the time or money to go through each one and analyze its authenticity. Even if you did, my offer may have expired by the time you do. So instead, I say that the gems were all hand-picked and inspected by the American Gem Trade Association, and that they all checked out to be 100% authentic. If you trust me and the AGTA, you might buy the bag at this point. However, when you get home & find out that they're all rhinestones, I guarantee that you will consider my false assertion that they were picked by the AGTA to be both material and criminal.
  - billybob 17y ago
    I don't know this specific situation, but NPR's This American Life just did an episode about a hedge fund called Magnatar. IF the description was accurate (authorities will have to determine that), this was the scenario: Magnatar aggressively bought the crappiest traunches of CDOs so that banks would be convinced to create more CDOs. The banks could then sell them, saying "even the crappiest traunches are selling like hotcakes - you can confidently buy these less-risky traunches." But actually, even the least-risky traunches were VERY risky, and Magnatar was pushing to have riskier stuff included in the higher-level traunches, setting them up to fail. Meanwhile, Magnatar's inevitable losses on the crappy traunches were nothing compared to the bets (CDOs) they were taking against the CDO as a whole. They might invest $10 million in the crappy traunches and effectively put an $100 million insurance policy on the CDO as a whole. A good analogy would be if you bought houses next to a dam you thought would burst, thereby convincing developers to build more such houses, and you then took out large insurance policies on all the houses in the neighborhood. Except that you're not allowed to take out insurance on houses you don't own, which is sane, but you ARE allowed to buy credit default swaps on CDOs you don't own, which is a recipe for disaster. So to the CDO investors in THOSE deals, at least, what the brokers told them was "these investments are rated as super-safe and everybody is buying them - the magic of bundling takes away the risk of the underlying mortgages." When the reality was, the brokers KNEW that the CDOs were created with the help of someone who wanted them to fail, and the ratings agencies were being paid by the people who wanted the investments rated well. (Another insane situation - it would be like if the food safety inspectors were paid by McDonalds when they came out to check things. How can they be objective?) Yes, there were investors who saw the crisis coming. But the banks did completely omit the fact that the investments were created, in part, by people who WANTED them to fail. If they had been up front about that, nobody would have bought them. So they lied, and had ratings agencies to back their lies. Not exactly a situation where the investor has a reasonable chance to make informed decisions.
- billybob 17y ago
  "Sure, sure, we'll take your horse bets. You think the horse will win, this guy thinks the horse will lose. Place your bets and we keep the fees. Oh, you lost? Too bad. Yeah, we forgot to tell you that the other guy knew your horse was poisoned. Yeah. He poisoned it himself. We saw him do it - we helped him, really. Oh well. Security guards? Oh, they work for the other guy. He pays 'em. Tough luck for ya, though, kid, real tough luck. You win some, you lose some, eh?"
  - cellis 17y ago
    Is that from a movie? Because if not , you really need to start being a screenwriter!
- flipbrad 17y ago
  I'll bet the principle of 'buyer beware' wins out. This is about giving Goldman a PR hit, not a judicial one. It'll settle.
jakarta 17y ago
"The scandal here is not that Goldman was short the subprime market at the same time as marketing the Abacus deal. The scandal is that Goldman sold the contents of Abacus as being handpicked by managers at ACA when in fact it was handpicked by Paulson; and that it told Abacus that Paulson had a long position in the deal when in fact he was entirely short." http://blogs.reuters.com/felix-salmon/2010/04/16/goldmans-abacus-lies/ http://blogs.reuters.com/felix-salmon/2010/04/16/goldmans-ab...
- ig1 17y ago
  This. I've undergone FSA mandated financial crime training while working for several financial institutions and lying about positions held in order to make a sale is the only thing that's clearly illegal here. There's a very thin line between what's legal and what's illegal, and the reason banks have compliance departments is to check over things which are borderline. In a lot of cases not only can the bank be fined but the individuals involved can also face jail time. But with borderline issues typically if they're done in good faith (full honestly, going through compliance departments) the regulatory bodies don't get too involved because they don't want to scare people away from the large number of legitimate activities which are beneficial to the system but are borderline. However in the case where someone lied outright (presumably without the knowledge of their compliance department) that's a much clearer cut-case for prosecution. It's deception for the purpose of making money, and saying "I didn't know it was illegal" doesn't wash, because it obviously is.
dandelany 17y ago
Incorrect. Goldman didn't just broker this product, they helped construct it. During this process, they allowed Paulson and Co. to add RMBS's to the product that they knew Paulson was short on. It is not their job to take one side or the other, but it is absolutely their job to represent the true nature of the product they are selling. And the fact that the product was constructed specifically so that its creators would profit hugely from its demise is incredibly important material information. > Goldman may have even thought Paulson & Co were the fools Wrong. The entire point of this case is that GS knew two facts: Paulson & Co. helped construct the fund, and they also held a short position. GS is smart enough to know that someone who shorts their own product is not a fool, they're a con man. Or as Goldman probably saw it, a shrewd businessman.
prosa 17y ago
If you actually read the complaint, you will find that Goldman Sachs was intent on using ACA's brand as a critical means through which to sell the CDOs to their clients, and kept ACA in the game by misrepresenting Paulson's position. Had ACA known, they would have been far less likely to be willing to enter into the deal. Goldman: “One thing that we need to make sure ACA understands is that we want their name on this transaction. This is a transaction for which they are acting as portfolio selection agent, this will be important that we can use ACA’s branding to help distribute the bonds.” ACA: “I certainly hope I didn’t come across too antagonistic on the call with Fabrice [Tourre] last week but the structure looks difficult from a debt investor perspective. I can understand Paulson’s equity perspective but for us to put our name on something, we have to be sure it enhances our reputation.”