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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 simultan

by 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.
    - deleted 17y ago
      [deleted]
    - jfager 17y ago
      Goldman stepped into the middle of the transaction because that's what they were paid (I think it was 15m?) to do. You're right that the buyer should have taken a closer look at the underlying mortgages themselves, but that's the other part of the story, that the ratings agencies that everyone trusted to do that work for them were either on the take, stupid, or both.
- jfager 17y ago
  Your incredulity aside, they absolutely did say that, or at least they convinced the ratings agencies to say that. That wasn't the lie, though - according to the (horribly broken) models, they were AAA (or whatever rating is in question). The lie was that the package of underlying mortgage bonds was selected solely and independently by a 3rd party who had an interest in putting together a quality instrument, when in fact Paulson played the major role in the selection.
  - fleitz 17y ago
    He played a role only to the degree ACA allowed him to and failed in it's fiduciary duty.
    - jfager 17y ago
      Okay, fine, ACA sucks. But Goldman still knowingly lied about who was involved in selecting the reference portfolio.
byrneseyeview 17y 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.
- jfager 17y ago
  I just don't understand why the fact that ACA and the longs are pathetic and should have known they were getting screwed materially influences the question of whether or not Goldman committed fraud. If they did (and it seems pretty clear that's the case), they should get off because they're an alpha dog?
  - byrneseyeview 17y ago
    It's only fraud if it is fraudulent not to tell ACA that some no-name hedge fund is on the other side of their trade. The ACA guys got paid big bucks to research their investments, not to make guesses based on how scary their counterparties were. It would be like a professional baseball team whose entire model for winning was that they'd only play games against Little League teams, but they'd sue the other team if they turned out to be good.
    - jfager 17y ago
      So your claim is that it's not fraudulent that Goldman lied to ACA saying Paulson was going to end up long on Abacus, or that Goldman lied to the real longs that ACA was solely responsible for selecting the reference portfolio?
yummyfajitas 17y 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!
- jfager 17y ago
  A synthetic CDO can not even exist unless some party believes the securities it is comprised of will go bad. Not true at all, you don't necessarily have to think it will go bad, you just have to be afraid enough that it might to pay an insurance premium.
  - yummyfajitas 17y ago
    In general, brokers are not required to disclose whether the other side of a trade is a hedger or a speculator. In fact, they are usually legally forbidden from doing this.
    - jfager 17y ago
      Why would the broker themselves even have to know? The point isn't that the shorter and their motives should be disclosed, it's that the long side has plenty of explanations for why the short side is short other than simply taking the other side of a risky bet. The Goldman case isn't about whether or not they should have disclosed that the short had speculative motives. It's that they actively lied about who put the reference portfolio together and why.

by olefoo 17y ago

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.
  - deleted 17y ago
    [deleted]
  - jfager 17y ago
    Goldman stepped into the middle of the transaction because that's what they were paid (I think it was 15m?) to do. You're right that the buyer should have taken a closer look at the underlying mortgages themselves, but that's the other part of the story, that the ratings agencies that everyone trusted to do that work for them were either on the take, stupid, or both.
jfager 17y ago
Your incredulity aside, they absolutely did say that, or at least they convinced the ratings agencies to say that. That wasn't the lie, though - according to the (horribly broken) models, they were AAA (or whatever rating is in question). The lie was that the package of underlying mortgage bonds was selected solely and independently by a 3rd party who had an interest in putting together a quality instrument, when in fact Paulson played the major role in the selection.
- fleitz 17y ago
  He played a role only to the degree ACA allowed him to and failed in it's fiduciary duty.
  - jfager 17y ago
    Okay, fine, ACA sucks. But Goldman still knowingly lied about who was involved in selecting the reference portfolio.

byrneseyeview 17y 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.

jfager 17y ago
I just don't understand why the fact that ACA and the longs are pathetic and should have known they were getting screwed materially influences the question of whether or not Goldman committed fraud. If they did (and it seems pretty clear that's the case), they should get off because they're an alpha dog?
- byrneseyeview 17y ago
  It's only fraud if it is fraudulent not to tell ACA that some no-name hedge fund is on the other side of their trade. The ACA guys got paid big bucks to research their investments, not to make guesses based on how scary their counterparties were. It would be like a professional baseball team whose entire model for winning was that they'd only play games against Little League teams, but they'd sue the other team if they turned out to be good.
  - jfager 17y ago
    So your claim is that it's not fraudulent that Goldman lied to ACA saying Paulson was going to end up long on Abacus, or that Goldman lied to the real longs that ACA was solely responsible for selecting the reference portfolio?

yummyfajitas 17y 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!

jfager 17y ago
A synthetic CDO can not even exist unless some party believes the securities it is comprised of will go bad. Not true at all, you don't necessarily have to think it will go bad, you just have to be afraid enough that it might to pay an insurance premium.
- yummyfajitas 17y ago
  In general, brokers are not required to disclose whether the other side of a trade is a hedger or a speculator. In fact, they are usually legally forbidden from doing this.
  - jfager 17y ago
    Why would the broker themselves even have to know? The point isn't that the shorter and their motives should be disclosed, it's that the long side has plenty of explanations for why the short side is short other than simply taking the other side of a risky bet. The Goldman case isn't about whether or not they should have disclosed that the short had speculative motives. It's that they actively lied about who put the reference portfolio together and why.