Borrower Bailout?: Goldman Sachs Conveyor Belt

 Via: Livinglies

Borrower Bailout?: Goldman Sachs Conveyor Belt

  • If you have a GSAMP securitized loan you might want to pay particular attention here. In fact, if you ever had a securitized loan of any kind you should be very interested.
  • Hudson Mezzanine: The use of the word “mezzanine” is like the use of the word “Trust.” There is no mezzanine and there is no trust in the legal sense. It is merely meant to convey the fact that a conduit was being used to front multiple transactions — any one of which could be later moved around because the reference to the conduit entity does not specifically incorporate the exhibits to the conduit.
  • The real legal issue here is who owns the profit from these deals? The profit is derived from insurance. The cost of insurance was funded from the securitized chain starting with the sale of securities to investors for money that was pooled.
  • That pool was used in part to fund mortgages and insurance bets that those mortgages would fail. 93% of the sub-prime mortgages rated Triple AAA got marked down to junk level even if they did not fail, and insurance paid off because of the markdown. That means money was paid based upon loans executed by borrowers, whether they were or are default or not.
  • If enough of the pool consisted of sub-prime mortgages, the the entire pool was marked down and insurance paid off. So whether you have a sub-prime mortgage or a conventional mortgage, whether you are up to date or in default, there is HIGH PROBABILITY that a payment has been made from insurance which should be allocated to your loan, whether foreclosed or not.
  • The rest of the proceeds of investments by investors went as fees and profits to middlemen. If you accept the notion that the entire securitization chain was a single transaction in which fraud was the principal ingredient on both ends (homeowners and ivnestors), then BOTH the homeowner borrowers and the investors have a claim to that money.
  • Homeowners have a claim for undisclosed compensation under the Truth in Lending Act and Investors have a claim under the Securities laws.  (That is where these investor lawsuits and settlements come from).
  • What nobody has done YET is file a claim for borrowers. The probable reason for this is that the securities transactions giving rise to these profits seem remote from the loan transaction. But if they arose BECAUSE of the execution of the loan documents by the borrower, then lending laws apply, along with REG Z from the Federal reserve. The payoff to borrowers is huge, potentially involving treble damages, interest, court costs and attorney fees.
  • Under common law fraud and just plain common sense, there is no legal basis for allowing the perpetrator of a fraud to keep the benefits arising out of the the fraud. So who gets the money?
April 26, 2010

Mortgage Deals Under Scrutiny as Goldman Faces Senators

By LOUISE STORY

WASHINGTON — The legal storm buffeting Goldman Sachs continued to rage Tuesday just ahead of what is expected to be a contentious Senate hearing at which bank executives plan to defend their actions during the housing crisis.

Senate investigators on Monday claimed that Goldman Sachs had devised not one but a series of complex deals to profit from the collapse of the home mortgage market. The claims suggested for the first time that the inquiries into Goldman were stretching beyond the sole mortgage deal singled out by the Securities and Exchange Commission. The S.E.C. has accused Goldman of defrauding investors in that single transaction, Abacus 2007-AC1, have thrust the bank into a legal whirlwind.

The stage for Tuesday’s hearing was set with a flurry of new documents from the panel, the Permanent Senate Subcommittee on Investigations. That was preceded by a press briefing in Washington, where the accusations against Goldman have transformed the politics of financial reform.

In the midst of this storm, Lloyd C. Blankfein, Goldman’s chairman and chief executive, plans to sound a conciliatory note on Tuesday.

In a statement prepared for the hearing and released on Monday, Mr. Blankfein said the news 10 days ago that the S.E.C. had filed a civil fraud suit against Goldman had shaken the bank’s employees.

“It was one of the worst days of my professional life, as I know it was for every person at our firm,” Mr. Blankfein said. “We have been a client-centered firm for 140 years, and if our clients believe that we don’t deserve their trust we cannot survive.”

Mr. Blankfein will also testify that Goldman did not have a substantial, consistent short position in the mortgage market.

But at the press briefing in Washington, Carl Levin, the Democrat of Michigan who heads the Senate committee, insisted that Goldman had bet against its clients repeatedly. He held up a binder the size of two breadboxes that he said contained copies of e-mail messages and other documents that showed Goldman had put its own interests first.

“The evidence shows that Goldman repeatedly put its own interests and profits ahead of the interests of its clients,” Mr. Levin said.

Mr. Levin’s investigative staff released a summary of those documents, which are to be released in full on Tuesday. The summary included information on Abacus as well as new details about other complex mortgage deals.

On a page titled “The Goldman Sachs Conveyor Belt,” the subcommittee described five other transactions beyond the Abacus investment.

One, called Hudson Mezzanine, was put together in the fall of 2006 expressly as a way to create more short positions for Goldman, the subcommittee claims. The $2 billion deal was one of the first for which Goldman sales staff began to face dubious clients, according to former Goldman employees.

“Here we are selling this, but we think the market is going the other way,” a former Goldman salesman told The New York Times in December.

Hudson, like Goldman’s 25 Abacus deals, was a synthetic collateralized debt obligation, which is a bundle of insurance contracts on mortgage bonds. Like other banks, Goldman turned to synthetic C.D.O.’s to allow it to complete deals faster than the sort of mortgage securities that required actual mortgage bonds. These deals also created a new avenue for Goldman and some of its hedge fund clients to make negative bets on housing.

Goldman also had an unusual and powerful role in the Hudson deal that the Senate committee did not highlight: According to Hudson marketing documents, which were reviewed on Monday by The Times, Goldman was also the liquidation agent in the deal, which is the party that took it apart when it hit trouble.

The Senate subcommittee also studied two deals from early 2007 called Anderson Mezzanine 2007-1 and Timberwolf I. In total, these two deals were worth $1.3 billion, and Goldman held about $380 million of the negative bets associated with the two deals.

The subcommittee pointed to these deals as examples of how Goldman put its own interests ahead of clients. Mr. Levin read from several Goldman documents on Monday to underscore the point, including one in October 2007 that said, “Real bad feeling across European sales about some of the trades we did with clients. The damage this has done to our franchise is very significant.”

As the mortgage market collapsed, Goldman turned its back on clients who came knocking with older Goldman-issued bonds they had bought. One example was a series of mortgage bonds known as Gsamp.

“I said ‘no’ to clients who demanded that GS should ‘support the Gsamp’ program as clients tried to gain leverage over us,” a mortgage trader, Michael Swenson, wrote in his self-evaluation at the end of 2007. “Those were unpopular decisions but they saved the firm hundreds of millions of dollars.”

The Gsamp program was also involved in a dispute in the summer of 2007 that Goldman had with a client, Peleton Partners, a hedge fund founded by former Goldman workers that has since collapsed because of mortgage losses.

According to court documents reviewed by The Times on Monday, in June 2007, Goldman refused to accept a Gsamp bond from Peleton in a dispute over the securities that backed up a mortgage security called Broadwick. A Peleton partner was pointed in his response after Goldman refused the Gsamp bond.

“We do appreciate the unintended irony,” wrote Peter Howard, a partner at Peleton, in an e-mail message about the Gsamp bond.

Bank of America ended up suing Goldman over the Broadwick deal. The parties are awaiting a written ruling in that suit. Broadwick was one of a dozen or so so-called hybrid C.D.O.’s that Goldman created in 2006 and 2007. Such investments were made up of both mortgage bonds and insurance contracts on mortgage bonds.

While such hybrids have received little attention, one mortgage researcher, Gary Kopff of Everest Management, has pointed to a dozen other Goldman C.D.O.’s, including Broadwick, that were mixes of mortgage bonds and insurance policies. Those deals — with names like Fortius I and Altius I — may have been another method for Goldman to obtain negative bets on housing.

“It was like an insurance policy that Goldman stuck in the middle of the sandwich with all the other subprime bonds,” Mr. Kopff said. “And it was an insurance policy designed to protect them.”

An earlier version of this article misidentified Senator Levin’s home state.

Relatated Stories:

Shareholders Sue Goldman, Blankfein Confirming Trusts Do NOT Own the Loans

Spitzer & Black: Questions from the Goldman Scandal

Spitzer & Black: Questions from the Goldman Scandal

Monday, 04/26/2010 – 6:37 am by Eliot Spitzer and William Black 

money-question-150Spitzer and Black argue that the Goldman revelations underscore the need for serious financial reform.

For those who have spent years investigating fraud, it was no surprise to hear that Goldman Sachs, the (self-described) jewel of Wall Street, is the latest firm to emerge from the financial crisis with tarnished reputation. According to a lawsuit brought by the Securities and Exchange Commission, Goldman misrepresented to its customers the quality of the toxic assets underlying a complex financial derivative known as a “synthetic collateralized debt obligation (CDO).”

As you may now have heard, the story involves a pair of Paulsons. As CEO of Goldman, Hank Paulson oversaw the buying of large amounts of CDOs backed by largely fraudulent “liar’s loans.” When he became U.S. Treasury Secretary, he went on to launch a successful war against securities and banking regulation. Hank Paulson’s successors at Goldman saw the writing on the wall and began to “short” CDOs. They realized that they had an unusual, brief window of opportunity to unload their losers on their customers. Being the very model of a modern investment banking firm, they thought that blowing up their customers would be fine sport.

John Paulson (unrelated), who controls a large hedge fund, also wanted to short CDOs and he, too, recognized that there was a narrow window for doing so. The reason there was a profit opportunity was that the “market” for toxic mortgages only appeared to be a functioning market. It was, in reality, a massive bubble in which ratings and “market” prices were grotesquely inflated. The inflated prices were continuing only because the huge players knew that the prices and races were fictional and were covering it up through the financial equivalent of “don’t ask; don’t tell.” According to the SEC complaint:

In January 2007, a Paulson employee explained the company’s view, saying that “rating agencies, CDO managers and underwriters have all the incentives to keep the game going, while ‘real money’ investors have neither the analytical tools nor the institutional framework to take action.”

We know from Bankruptcy Examiner Valukas’ report on Lehman that the Federal Reserve knew that the “market” prices were delusional and refused to require entities like Lehman to recognize their losses on “liar’s loans” for fear that it would expose the cover up of the losses. Valukas reports that Geithner explained to him when interviewed (p. 1502) that:

The challenge for the Government, and for troubled firms like Lehman, was to reduce risk exposure, and the act of reducing risk by selling assets could result in “collateral damage” by demonstrating weakness and exposing “air” in the marks.

Goldman and John Paulson worked together. One of the key things to understand about shorting is that it is extremely valuable if other major players short similar targets at the same time. By helping Paulson take advantage of Goldman’s customers (the ones that lacked “the analytical tools” to avoid being hosed), Goldman not only earned a substantial fee, but also aided its overall strategy of shorting the toxic paper.

Goldman created a deal in which John Paulson played a major role in selecting the toxic paper that would underlie the investment. He picked assets “most likely to fail – quickly” and studies show that he was particularly good at picking the losers. At this juncture, there is some dispute as to whether ACA was complicit with John Paulson and Goldman in picking losers (ACA initially invested in the synthetic CDO, but then transferred the risk of loss to German and English taxpayers).

What isn’t in dispute is that Goldman, ACA, and Paulson all failed to disclose to purchasers of the synthetic CDO that it was designed to be most likely to fail. The representation was the opposite: that the assets were picked by an independent entity with their interests at heart (ACA). Goldman claims it’s a victim because while it intended to sell its entire position in the synthetic CDO to its customers, it was unable to sell a chunk. One feels the firm’s pain. Goldman tried to blow up its customers to the tune of over $1 billion, but were unable to sell them the last $90 million in exposure.

The Goldman scandal raises several important questions: Did John Paulson and ACA know that Goldman was making these false disclosures to the CDO purchasers? Did they “aid and abet” what the SEC alleges was Goldman’s fraud? Why have there been no criminal charges? Why did the SEC only name a relatively low-level Goldman officer in its complaint? Where are the prosecutors?

In a December New York Times op ed, we, along with Frank Partnoy, asked for the public disclosure of AIG emails and key documents so that we can investigate the deceptive practices exposed by the Goldman case. Goldman used AIG to provide the CDS on most of these synthetic CDO deals (though not the particular one that is the subject of the SEC complaint), and Hank Paulson used tax payer money to secretly bail out Goldman when AIG’s deceptive practices drove it to failure.

The SEC’s Goldman fraud complaint points to fundamental problem in the financial sector that has been at the root of the financial crisis — one that still exists today. The market is not transparent. It has been fraudulently manipulated to enrich managers. Investors lack clear information to make decisions about what they are buying. A continuing absence of real consumer protections makes people like those trying to obtain mortgages before the crash understand that they were, in many cases, being ripped off. According to internal Goldman Sachs e-mails, the company vice president, 31-year old Fabrice Tourre, did not really understand the complex deals he was making. And yet we note that many of these Goldman-style deals were “insured” by AIG. Without transparency, regulators cannot properly see all these kinds of deals in the aggregate. So they can neither stop the fraud nor prevent catastrophic results.

We applaud the SEC lawsuit, but it will not solve the problem. Unless our financial system is reformed to put adequate protections and checks and balances in place, we can expect this kind of fraud to continue. Financial executives will continue to take risks they do not understand. Those who control the flow of capital will continue to churn out profits with socially disastrous consequences.

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Taibbi: Will Goldman Sachs Prove Greed Is God?

Jon Stewart on Goldman Sachs (Red Hot Energy and Gold – Global…, 4/20/10)

Taibbi: Will Goldman Sachs Prove Greed Is God?

Contributed by Philstockworld (Reporter)
// Sunday, April 25, 2010 7:59

Taibbi: Will Goldman Sachs Prove Greed Is God?

Gordon GeckoCourtesy of John Lounsbury

Matt Taibbi has a feature article in The Guardian which parodies the Gordon Gecko “Greed is good” statement from the film “Wall Street”. He carries the subject forward to develop a picture of Ayn Rand Objectivism taking over the world.

This is an article that will make some readers scream in disgust at the position Matt espouses and others scream in disgust at the Randian world he rants against. He concludes the article:

This debate is going to be crystallised in the Goldman case. Much of America is going to reflexively insist that Goldman’s only crime was being smarter and better at making money than IKB and ABN-Amro, and that the intrusive, meddling government (in the American narrative, always the bad guy!) should get off Goldman’s Armani-clad back. Another side is going to argue that Goldman winning this case would be a rebuke to the whole idea of civilisation – which, after all, is really just a collective decision by all of us not to screw each other over even when we can. It’s an important moment in the history of modern global capitalism: whether or not to move forward into a world of greed with out limits.

Taibbi’s conclusion is similar to my repeated belief that it is important for the SEC vs. Goldman Sachs case to go to trial so the convoluted financial processes involved can be presented and reviewed by both plaintiff and defendant. The nature of the machinations must be understood by the masses and the limits of current law must be defined in order to have a rational debate. We need a complete expose so we can make logical decisions about where the financial system should go from here.

Absent the trial or some other process of discovery we risk being doomed to divide into three camps:

  1. The Randians’ anything goes credo.
  2. Those who want to regulate everything to death.
  3. The vast majority who abandon hope of ever understanding enough to have an opinion.

We need a citizenry that understands what has happened to a sufficient extent to support some rational middle ground between the law of the jungle and all animals in zoo cages. 

More on this topic (What’s this?)

Jon Stewart on Goldman Sachs (Red Hot Energy and Gold – Global…, 4/20/10)

Read more on Goldman Sachs Group at Wikinvest


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Read the original story at Phil’s Stock World

MATT TAIBBI: Goldman Sachs “VAMPIRE SQUID”

The first thing you need to know about Goldman Sachs is that it’s everywhere. The world’s most powerful investment bank is a great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money.

TYX91101 Taibbi’s excellent articles alone are worth the price of the magazine. There have been several. He’s doing a commendable job of putting Wall Street monkey business into the public consciousness. You never get that kind of reporting on CNBC. Great work Matt! 6 hours ago
overseachininadoll Those who greatly benefited from the crash must hand back the money. (Paulson company) 14 hours ago
Relugus Alot more than the sycophantic financial journalists who kiss Wall Street’s ass. Wall Street has been screwing people, stealing taxpayers money, stealing wealth from the people, for decades. People are slowly waking up to what Wall Street is, a bunch of criminals and gangsters. 18 hours ago
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Wall Street’s Naked Swindle by: Matt Taibbi

Short-Selling Vs. Naked Short-Selling: An Explanation

In “Wall Street’s Naked Swindle,” Matt Taibbi examines how a scheme to flood the market with counterfeit stocks helped kill Bears Stearns and Lehman Brothers — and the feds have yet to bust the culprits. The scheme that helped do in two of the five major investment banks in the U.S. is known as naked short-selling — the sale of shares you don’t have or won’t deliver. Normal short-selling, however, is legal and good for the market: it lets investors bet against companies that they believe will decrease in value.

To help explain his story, Taibbi heads to the white board and breaks down the differences between the two: click above to watch him explain short-selling (our buyer: Wilford Brimley, broker: Count Chocula, short-seller: Hervé Villechaize), and below for a discussion of its evil twin, naked short-selling. — Rolling Stone

Wall Street’s Naked Swindle

A scheme to flood the market with counterfeit stocks helped kill Bear Stearns and Lehman Brothers — and the feds have yet to bust the culprits
MATT TAIBBI Posted Oct 14, 2009 9:30 AMPhoto

On Tuesday, March 11th, 2008, somebody — nobody knows who — made one of the craziest bets Wall Street has ever seen. The mystery figure spent $1.7 million on a series of options, gambling that shares in the venerable investment bank Bear Stearns would lose more than half their value in nine days or less. It was madness — “like buying 1.7 million lottery tickets,” according to one financial analyst.

But what’s even crazier is that the bet paid.

At the close of business that afternoon, Bear Stearns was trading at $62.97. At that point, whoever made the gamble owned the right to sell huge bundles of Bear stock, at $30 and $25, on or before March 20th. In order for the bet to pay, Bear would have to fall harder and faster than any Wall Street brokerage in history.

The very next day, March 12th, Bear went into free fall. By the end of the week, the firm had lost virtually all of its cash and was clinging to promises of state aid; by the weekend, it was being knocked to its knees by the Fed and the Treasury, and forced at the barrel of a shotgun to sell itself to JPMorgan Chase (which had been given $29 billion in public money to marry its hunchbacked new bride) at the humiliating price of … $2 a share. Whoever bought those options on March 11th woke up on the morning of March 17th having made 159 times his money, or roughly $270 million. This trader was either the luckiest guy in the world, the smartest son of a bitch ever or…

Or what? That this was a brazen case of insider manipulation was so obvious that even Sen. Chris Dodd, chairman of the pillow-soft-touch Senate Banking Committee, couldn’t help but remark on it a few weeks later, when questioning Christopher Cox, the then-chief of the Securities and Exchange Commission. “I would hope that you’re looking at this,” Dodd said. “This kind of spike must have triggered some sort of bells and whistles at the SEC. This goes beyond rumors.”

Cox nodded sternly and promised, yes, he would look into it. What actually happened is another matter. Although the SEC issued more than 50 subpoenas to Wall Street firms, it has yet to identify the mysterious trader who somehow seemed to know in advance that one of the five largest investment banks in America was going to completely tank in a matter of days. “I’ve seen the SEC send agents overseas in a simple insider-trading case to investigate profits of maybe $2,000,” says Brent Baker, a former senior counsel for the commission. “But they did nothing to stop this.”

The SEC’s halfhearted oversight didn’t go unnoticed by the market. Six months after Bear was eaten by predators, virtually the same scenario repeated itself in the case of Lehman Brothers — another top-five investment bank that in September 2008 was vaporized in an obvious case of market manipulation. From there, the financial crisis was on, and the global economy went into full-blown crater mode.

Like all the great merchants of the bubble economy, Bear and Lehman were leveraged to the hilt and vulnerable to collapse. Many of the methods that outsiders used to knock them over were mostly legal: Credit markers were pulled, rumors were spread through the media, and legitimate short-sellers pressured the stock price down. But when Bear and Lehman made their final leap off the cliff of history, both undeniably got a push — especially in the form of a flat-out counterfeiting scheme called naked short-selling.

Read this article HERE

See the movie “Stock Shock” on DVD to learn more about this. trailer at www.stockshockmovie.com

The Experts: “In NY they call us the plumbers. We’re the plumbers of Wall Street…and Nobody wants to hear what the plumber has to say until the SHIT backs up in the livingroom”

If you really get into all, you might want to visit DeepCapture by Patrick Byrne it was a mind-blowing experience and opened my eyes to a “whole new world”. He takes it to another level with names.

Here is another video of Matt Taibbi explaining how Goldman Sachs makes money.