5 ms·

On Goldman

40 points by olefoo 17y ago

retube 17y 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 17y 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.
  - bushido 17y 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.
    - jballanc 17y ago
      This is an excellent summary of what happened. This is also an excellent example of the Randian philosophy that is so rampant on Wall Street. To wit: "I'm smart, you're dumb, so I win, you loose." Matt Taibbi had a nice summary of this recently: http://www.guardian.co.uk/business/2010/apr/24/will-goldman-prove-greed-is-god http://www.guardian.co.uk/business/2010/apr/24/will-goldman-... Of course, the problem with this attitude is that it actively works against the establishment of a Pareto efficient system, and I think we're seeing the results of that with the most recent economic downturn. I don't know enough about the laws to say whether your assertion that no laws were broken is true or not. All I can say is that I hope some laws were broken. If not, then this does not speak well of the US's ability to regulate itself in such a way that benefits the nation, rather than benefitting a select few.
    - jfager 17y ago
      The 'effing case' is that Goldman told the long side investors that ACA independently assembled the reference portfolio when Paulson actually played a significant role in putting it together. How does that not constitute fraud?
      - fleitz 17y ago
        ACA did put it together independently. Paulson sent a list of suggestions which ACA was not required and did not include in the way Paulson wanted.
        jfager 17y ago
        Not true. ACA was being paid by Goldman to put this thing together, who in turn was being paid by Paulson. As long as Paulson wasn't satisfied with the portfolio, Abacus wasn't going anywhere. The fact that they didn't accept his first list without changes does not imply that he didn't directly influence and sign off on the final package.
      - bushido 17y ago
        You're correct. Paulson did suggest 123 bonds that he thought should be included in the CDO. And since Paulson was considered smart by ACA he did have an "expert" influence on the final offering. BUT. ACA as an independent portfolio selection agent only selected 55 of those. And only those 55 were used. But since the first 123 were selected by Paulson we should ignore this fact. Since we have already dismissed that ACA independently selected the portfolio, we shopuld also dismiss the fact that ACA's parent company invested $900 million in the CDO, because they believed in the validity of their choices. But then again how is that in any way saying that they approved of the contents of the CDO. Since we have established this,let me try and convince some law firms to start a class action against all colleges, universities, b-schools etc for giving students multiple choice questions, to try and influence their judgement that the answer can be something other than the right one. Not exactly the same case as Paulson, ACA and Goldman, but its soooo close!
- olefoo 17y 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.
  - retube 17y 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.
    - olefoo 17y ago
      That's why we have courts, in this case it seems pretty clear that Goldman Sachs did materially misrepresent the nature of the instrument they were selling to their customers and colluded with Paulson to engineer something that Paulson could bet against. Caveat Emptor is a fine thing and one should always be cautions when buying investment instruments,but outright fraud and deception through material omission strike at the credibility of the market itself.
      - byrneseyeview 17y ago
        Was any of the fundamental data in their presentation incorrect? They listed all the bonds in the reference portfolio. Were some of the bonds themselves deceptive? If so, why would Goldman just step into the middle of the transaction, instead of shorting them? You're acting as if Goldman, by virtue of being lucratively evil, had predicted the whole subprime mess. But they lost money initially, made it back on hedges, then lost other money elsewhere. If they were as well-informed as they should have been to commit this crime, they would have made far more money in 2007-9.
- jfager 17y 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.).
  - yummyfajitas 17y 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.
    - jfager 17y ago
      The existence of the short is always clear. Who that short is, and why they're short, is not. In this case, ACA worked with Paulson to pick the reference portfolio of RMBS under the belief that we was long the equity tranche.
      - yummyfajitas 17y ago
        In the case of a synthetic CDO, there are only two reasons for a short side to be short: they want to hedge or speculate. As for ACA working with Paulson, yet somehow not knowing they were short, I'm having a hard time believing it. If it is true, how come the SEC isn't charging Paulson with fraud? Regarding the mechanics of it, it also seems extremely unlikely. The purpose of their meeting is to negotiate with Paulson - to build the best CDO possible (to increase the changes of finding buyers) while still allowing Paulson to get the short they desire. I find it extremely unlikely that somehow, they didn't figure out that Paulson was short during this process.
- secretasiandan 17y 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.
- cwp 17y 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.
  - yummyfajitas 17y 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.
    - cwp 17y ago
      Nope. You first bullet does not follow from the definition of a synthetic CDO. Yes, somebody is taking the other side of the bet. The fact that he got to pick the portfolio isn't obvious. Goldman brought in ACA precisely because having an independent third party pick the portfolio would make it more attractive to investors. Goldman's lie was omitting the detail that ACA didn't actually operate independently.
      - deleted 17y ago
        [deleted]
      - yummyfajitas 17y ago
        Anonymous counterparty will not take the short side of just ANY synthetic CDO. Most likely, he wants a specific short. If he does not get that short, he will walk, and there will be no CDO. That's exactly what happened in this case. Paulson wanted to short a certain profile. They selected a set of securities meeting this profile, and ACA took the best possible longsides from that set of shorts.
chmike 17y ago
Does a same law exist for lying about massive destruction arms ?
byrneseyeview 17y ago
http://crookery.blogspot.com/2010/04/nasty-derivatives-tale.html 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.
- jfager 17y 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 17y 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.

40 points by olefoo 17y 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 17y 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.
- bushido 17y 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.
  - jballanc 17y ago
    This is an excellent summary of what happened. This is also an excellent example of the Randian philosophy that is so rampant on Wall Street. To wit: "I'm smart, you're dumb, so I win, you loose." Matt Taibbi had a nice summary of this recently: http://www.guardian.co.uk/business/2010/apr/24/will-goldman-prove-greed-is-god http://www.guardian.co.uk/business/2010/apr/24/will-goldman-... Of course, the problem with this attitude is that it actively works against the establishment of a Pareto efficient system, and I think we're seeing the results of that with the most recent economic downturn. I don't know enough about the laws to say whether your assertion that no laws were broken is true or not. All I can say is that I hope some laws were broken. If not, then this does not speak well of the US's ability to regulate itself in such a way that benefits the nation, rather than benefitting a select few.
  - jfager 17y ago
    The 'effing case' is that Goldman told the long side investors that ACA independently assembled the reference portfolio when Paulson actually played a significant role in putting it together. How does that not constitute fraud?
    - fleitz 17y ago
      ACA did put it together independently. Paulson sent a list of suggestions which ACA was not required and did not include in the way Paulson wanted.
      - jfager 17y ago
        Not true. ACA was being paid by Goldman to put this thing together, who in turn was being paid by Paulson. As long as Paulson wasn't satisfied with the portfolio, Abacus wasn't going anywhere. The fact that they didn't accept his first list without changes does not imply that he didn't directly influence and sign off on the final package.
    - bushido 17y ago
      You're correct. Paulson did suggest 123 bonds that he thought should be included in the CDO. And since Paulson was considered smart by ACA he did have an "expert" influence on the final offering. BUT. ACA as an independent portfolio selection agent only selected 55 of those. And only those 55 were used. But since the first 123 were selected by Paulson we should ignore this fact. Since we have already dismissed that ACA independently selected the portfolio, we shopuld also dismiss the fact that ACA's parent company invested $900 million in the CDO, because they believed in the validity of their choices. But then again how is that in any way saying that they approved of the contents of the CDO. Since we have established this,let me try and convince some law firms to start a class action against all colleges, universities, b-schools etc for giving students multiple choice questions, to try and influence their judgement that the answer can be something other than the right one. Not exactly the same case as Paulson, ACA and Goldman, but its soooo close!
olefoo 17y 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.
- retube 17y 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.
  - olefoo 17y ago
    That's why we have courts, in this case it seems pretty clear that Goldman Sachs did materially misrepresent the nature of the instrument they were selling to their customers and colluded with Paulson to engineer something that Paulson could bet against. Caveat Emptor is a fine thing and one should always be cautions when buying investment instruments,but outright fraud and deception through material omission strike at the credibility of the market itself.
    - byrneseyeview 17y ago
      Was any of the fundamental data in their presentation incorrect? They listed all the bonds in the reference portfolio. Were some of the bonds themselves deceptive? If so, why would Goldman just step into the middle of the transaction, instead of shorting them? You're acting as if Goldman, by virtue of being lucratively evil, had predicted the whole subprime mess. But they lost money initially, made it back on hedges, then lost other money elsewhere. If they were as well-informed as they should have been to commit this crime, they would have made far more money in 2007-9.
jfager 17y 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.).
- yummyfajitas 17y 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.
  - jfager 17y ago
    The existence of the short is always clear. Who that short is, and why they're short, is not. In this case, ACA worked with Paulson to pick the reference portfolio of RMBS under the belief that we was long the equity tranche.
    - yummyfajitas 17y ago
      In the case of a synthetic CDO, there are only two reasons for a short side to be short: they want to hedge or speculate. As for ACA working with Paulson, yet somehow not knowing they were short, I'm having a hard time believing it. If it is true, how come the SEC isn't charging Paulson with fraud? Regarding the mechanics of it, it also seems extremely unlikely. The purpose of their meeting is to negotiate with Paulson - to build the best CDO possible (to increase the changes of finding buyers) while still allowing Paulson to get the short they desire. I find it extremely unlikely that somehow, they didn't figure out that Paulson was short during this process.
secretasiandan 17y 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.
cwp 17y 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.
- yummyfajitas 17y 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.
  - cwp 17y ago
    Nope. You first bullet does not follow from the definition of a synthetic CDO. Yes, somebody is taking the other side of the bet. The fact that he got to pick the portfolio isn't obvious. Goldman brought in ACA precisely because having an independent third party pick the portfolio would make it more attractive to investors. Goldman's lie was omitting the detail that ACA didn't actually operate independently.
    - deleted 17y ago
      [deleted]
    - yummyfajitas 17y ago
      Anonymous counterparty will not take the short side of just ANY synthetic CDO. Most likely, he wants a specific short. If he does not get that short, he will walk, and there will be no CDO. That's exactly what happened in this case. Paulson wanted to short a certain profile. They selected a set of securities meeting this profile, and ACA took the best possible longsides from that set of shorts.

chmike 17y ago

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

byrneseyeview 17y ago

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

jfager 17y 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 17y 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.