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.

Related Stories:

Taibbi: Will Goldman Sachs Prove Greed Is God?

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

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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

Small Foreclosure Firm’s Big Bucks: Back Office Grossed $260M in 2009: ABAJOURNAL

Posted Apr 20, 2010 11:59 AM CDT
By Martha Neil

The Law Offices of David J. Stern has only about 15 attorneys, according to legal directories.

However, it’s the biggest filer of mortgage foreclosure suits in Florida, reports the Tampa Tribune. Aided by a back office that dwarfs the law firm, with a staff of nearly 1,000, the Miami area firm files some 5,800 foreclosure actions monthly.

The back-office operation, DJSP Enterprises, is publicly traded and hence must file financial reports with the Securities and Exchange Commission. It netted almost $45 million in 2009 on a little over $260 million in gross revenue that year. The mortgage meltdown of recent years apparently has been good to the company: In 2006, it earned a profit of $8.6 million on $40.4 million in revenue.

Stern, who is the company’s chairman and chief executive officer, could not be reached for comment, the newspaper says.

His law firm has been in the news lately, after one Florida judge dismissed a foreclosure case due to what he described as a “fraudulently backdated” mortgage document, and another said, in a hearing earlier this month concerning another of the Stern firm’s foreclosure cases, “I don’t have any confidence that any of the documents the court’s receiving on these mass foreclosures are valid.”

Earlier coverage:

ABAJournal.com: “Judge Dismisses Mortgage Foreclosure Over ‘Fraudulently Backdated’ Doc”

Close watch on the US…UK regulator begins Goldman Sachs probe

I think it is donzo for GS. They might try to get away with it here but UK…is another story. There is no White House.

Source: Associated Press

People enter Goldman Sachs headquarters, Monday, April 19, 2010, in New York. Stocks are falling on concerns about the fallout over Goldman Sachs being charged with civil fraud tied to its dealings in bonds backed by sub-prime mortgages. (AP Photo/Mark Lennihan)
Jane Wardell, AP Business Writer, On Tuesday April 20, 2010, 6:40 am EDT

LONDON (AP) — Britain’s financial regulator launched a full-blown investigation into Goldman Sachs International on Tuesday after U.S. authorities filed civil fraud charges against its parent bank.

The announcement from the Financial Services Authority follows pressure for the probe from Prime Minister Gordon Brown, who expressed shock over the weekend at Goldman’s “moral bankruptcy.”

The British regulator said it would liaise closely with the U.S. Securities and Exchange Commission, which alleges that the bank sold risky mortgage-based investments without telling buyers that the securities were crafted in part by a billionaire hedge fund manager who was betting on them to fail.

The London-headquartered Goldman Sachs International, a principal subsidiary of Goldman Sachs Group Inc., said that “the SEC’s charges are completely unfounded in law and fact.” It said it looks “forward to cooperating with the FSA.”

British interest in the case is likely to focus on the Royal Bank of Scotland, which paid $841 million to Goldman Sachs in 2007 to unwind its position in a fund acquired in the takeover of Dutch Bank ABN Amro, according to the complaint filed in the United States.

The possibility that RBS might be able to recoup some money from Goldman Sachs helped boost the government-controlled bank’s shares, which were up 2.8 percent at midday.

The government holds an 84 percent stake in the bank, which nearly collapsed in large part because of its leadership of the consortium which took over the Dutch bank.

Fabrice Tourre, the Goldman Sachs executive named in the SEC lawsuit filed on Friday was moved to the bank’s London office at the end of 2008.

Analysts warn that damage from the case could hit other big banks as well, as the Goldman lawsuit puts the spotlight on the sector’s activities in the wake of the financial crisis.

Brown’s anger was fueled by reports over the weekend that Goldman Sachs still intended to pay out 3.5 billion pounds ($5.4 billion) in bonuses.

The British leader, who is facing a tough general election on May 6, said that the activities of banks “are still an issue.”

“They are a risk to the economy,” he said. “We have got to make sure they behave in a proper way.”

The opposition Conservative and Liberal Democrat parties, meanwhile, called on Brown to suspend Goldman from government work until the investigations are completed.

AP reporter Robert Barr in London contributed to this statement.

WTF!!! DJSP Enterprises, Inc. Announces Agreement to Acquire Timios, Inc., Expand Presence Into 38 States

DJSP Enterprises, Inc. Announces Agreement to Acquire Timios, Inc., Expand Presence Into 38 States

Adds Established National Title Insurance Agency with Multiple Locations Across the US for Expansion of Cyclical Products and Services to the Real Estate and Mortgage Industries

By DJSP Enterprises, Inc.

PLANTATION, Fla., April 19 — /PRNewswire-FirstCall/ — DJSP Enterprises, Inc. (Nasdaq: DJSP, DJSPW, DJSPU), one of the largest providers of processing services for the mortgage and real estate industries in the United States, today announced it has signed a definitive agreement to acquire Timios, Inc., a national title insurance and settlement services company. Timios is a licensed title insurance and escrow agent operating in 38 States. Headquartered in Westlake Village, CA, with additional offices in Houston and Plano, Texas, Timios will provide DJSP Enterprises the capability to provide its customers a balanced portfolio of services including new loan origination, refinance and national REO closing and title.  Additionally, Timios handles national loss mitigation services and pre-foreclosure title products from its multiple locations strategically placed for time-zone sensitive fulfillment.

Management expects that Timios, which uses advanced technology to produce a paperless environment, will aid DJSP Enterprises in its commitment to provide its customers with enhanced customer service in all lines of its business as it expands nationally. Timios presently services purchase money, refinance, reverse mortgage, REO and Deed-In-Lieu transactions for some of the largest lenders and servicers nationwide.  Last year, Timios closed in excess of $500 million in residential real estate mortgage transactions, and as forecasted, is expected to more than double the volume in 2010.  In addition, Timios has the capability to complete title searches for DJSP Enterprises’ growing REO liquidation business and loss mitigation business outside of Florida.

DJSP Enterprises will maintain Timios’ three offices while consolidating operations and back-office functions to streamline and reduce expenses.

David J. Stern, Chairman and Chief Executive Officer of DJSP Enterprises commented, “This acquisition significantly expands our capacity to effectively handle national services for our current client base.  In addition it will support our cyclical expansion into other lines of the mortgage services business. In particular, our capacity to process national REO closings, refinance transactions, short-sale transactions, Deed in Lieu transactions, property reports, resale transactions, and multiple valuation products will be meaningfully expanded. Timios provides licenses for full settlement services in 38 states and we expect to obtain licenses in at least two additional states before the end of this year.

This acquisition further demonstrates our commitment to becoming the leading cyclical provider of products and services to the real estate and mortgage industries.”

“This transaction represents a great marriage of strengths and assets,” said Trevor Stoffer, president and CEO of Timios, Inc. “Our management teams could not ignore the obvious benefits to both organizations. DJSP Enterprises’ growth in the foreclosure space and our best in class technology and servicing of originations will create a very balanced portfolio. In addition, the financial support from DJSP Enterprises will allow Timios to grow from a boutique services company to a major player in settlement services with a complete offering for lenders.”

DJSP Enterprises will acquire Timios for $1.5 million in cash, 200,000 ordinary shares of DJSP Enterprises, and up to 100,000 ordinary shares of DJSP Enterprises to be earned upon achievement of defined performance metrics. Timios had revenue of $5.05 million for the last 12 months and DJSP Enterprises expects this acquisition to be accretive to earnings by the 3rd Quarter 2010.

The closing of the acquisition is subject to customary due diligence, closing conditions and regulatory approvals.

About DJSP Enterprises, Inc.

DJSP Enterprises is the largest provider of processing services for the mortgage and real estate industries in Florida and one of the largest in the United States. The Company provides a wide range of processing services in connection with mortgages, mortgage defaults, title searches and abstracts, REO (bank-owned) properties, loan modifications, title insurance, loss mitigation, bankruptcy, related litigation and other services. The Company’s principal customer is the Law Offices of David J. Stern, P.A. whose clients include all of the top 10 and 17 of the top 20 mortgage servicers in the United States, many of which have been customers for more than 10 years. The Company has approximately 1,000 employees and contractors and is headquartered in Plantation, Florida, with additional operations in Louisville, Kentucky and San Juan, Puerto Rico. The Company’s U.S. operations are supported by a scalable, low-cost back office operation in Manila, the Philippines that provides data entry and document preparation support for the U.S. operation.

Forward Looking Statements

This press release contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, about DJSP Enterprises, Inc. and Timios, Inc. Forward looking statements are statements that are not historical facts. Such forward-looking statements, based upon the current beliefs and expectations of the Company’s management, are subject to risks and uncertainties, which could cause actual results to differ from the forward looking statements. The following factors, among others, could cause actual results to differ from those set forth in the forward-looking statements: business conditions; changing interpretations of generally accepted accounting principles; outcomes of government or other regulatory reviews, particularly those relating to the regulation of the practice of law; the impact of inquiries, investigations, litigation or other legal proceedings involving the Company or its affiliates, which, because of the nature of the Company’s business, have happened in the past to the Company and the Law Offices of David J. Stern, P.A.; the impact and cost of continued compliance with government or state bar regulations or requirements; legislation or other changes in the regulatory environment, particularly those impacting the mortgage default industry; unexpected changes adversely affecting the businesses in which the Company is engaged; fluctuations in customer demand; the Company’s ability to manage rapid growth; intensity of competition from other providers in the industry; general economic conditions, including improvements in the economic environment that slows or reverses the growth in the number of mortgage defaults, particularly in the State of Florida; the ability to efficiently expand its operations to other states or to provide services not currently provided by the Company; the impact and cost of complying with applicable SEC rules and regulation, many of which the Company will have to comply with for the first time after the closing of the business combination; geopolitical events and changes, as well as other relevant risks detailed in the Company’s filings with the U.S. Securities and Exchange Commission, (the “SEC”), including its report on Form 20-F for the period ended December 31, 2009, in particular, those listed under “Item 3. Key Information – Risk Factors.” The information set forth herein should be read in light of such risks. The Company does not assume any obligation to update the information contained in this press release.

   
Company Contact:  
David J. Stern  
Chairman and CEO  
DJSP Enterprises, Inc.  
Phone: 954-233-8000, ext. 1113  
Email: dstern@dstern.com  
   
or  
   
Kumar Gursahaney  
Executive Vice President and CFO  
DJSP Enterprises, Inc.  
Phone: 954-233-8000, ext. 2024  
Email: kgursahaney@dstern.com  
   
Investor Contact:  
Hayden IR  
Cameron Donahue  
Phone: 651-653-1854  
Email: cameron@haydenir.com  
   
 

SOURCE DJSP Enterprises, Inc.

Read more: http://www.miamiherald.com/2010/04/19/v-fullstory/1586456/djsp-enterprises-inc-announces.html#ixzz0lbZw1okr

Goldman Sachs taps ex-W.H. counsel: SCAM THICKENS!

By EAMON JAVERS & MIKE ALLEN | 4/19/10 8:14 PM EDT
Updated: 4/19/10 10:03 PM by POLITICO

Goldman Sachs is launching an aggressive response to its political and legal challenges with an unlikely ally at its side — President Barack Obama’s former White House counsel, Gregory Craig.

The beleaguered Wall Street bank hired Craig — now in private practice at Skadden, Arps, Slate, Meagher & Flom — in recent weeks to help in navigate the halls of power in Washington, a source familiar with the firm told POLITICO.

“He is clearly an attorney of eminence and has a deep understanding of the legal process and the world of Washington,” the source said. “And those are important worlds for everybody in finance right now.”

They’re particularly important for Goldman.

On Friday, the SEC charged the firm with securities fraud in a convoluted subprime mortgage deal that took place before the collapse of the housing market. Next week, Goldman Sachs CEO Lloyd Blankfein will face questions from the Senate Permanent Subcommittee on Investigations, which is looking into the causes of the housing meltdown, the source said.

In Craig, Goldman Sachs will have help from a lawyer with deep connections in Democratic circles.

Craig served as White House counsel during the first year of Obama’s presidency, but is seen as having been pushed out for his role in advocating a strict timeline for the closing of the U.S. detention facility at Guantanamo Bay. His departure frustrated many liberal Obama supporters who saw Craig as a strong advocate for undoing some of what they saw as the worst excesses of the Bush era.

But the source familiar with Goldman’s operations said Craig wasn’t hired just because he’s well-connected.

“It’s about advice and process,” the source said. “People will always leap to the conclusion that it’s about somebody’s Rolodex.”

Skadden declined to comment on Craig’s role with Goldman.

“A former White House employee cannot appear before any unit of the Executive Office of the President on behalf of any client for 2 years—one year under federal law and another year under the pledge pursuant to the January 2009 ethics E0,” said a White House official.

The official also said that the White House had no contact with the SEC on the Goldman Sachs case. “The SEC by law is an independent agency that does not coordinate with the White House any part of their enforcement actions.”

Whatever the reason for his hiring, Craig will presumably be a key player in the intricate counterattack Goldman Sachs officials in Washington and Manhattan improvised during the weekend — a plan that took clearer shape Monday as Britain and Germany announced that they might conduct their own investigations of the firm.

For three weeks, Goldman had planned to hold a conference call Tuesday to unveil its first-quarter earnings for shareholders. Shifting into campaign mode after the SEC’s surprise fraud filing, Goldman has moved the call up from 11 a.m. to 8 a.m. to try to get ahead of the day’s buzz. In an unusual addition, the firm’s chief counsel will be on the line to answer questions about the case, and Goldman is inviting policymakers and clients to listen to the earnings call themselves rather than rely on news reports.

Industry officials said the conference call — which will include, as originally planned, Chief Financial Officer David Viniar — will amount to a public unveiling of Goldman’s crisis strategy.

But the linchpin of that plan is already clear: An attempt to discredit the Securities and Exchange Commission by painting the case as tainted by politics because it was announced just as President Barack Obama was ramping up his push for financial regulatory reform, including a planned trip to New York on Thursday.

“The charges were brought in a manner calculated to achieve maximum impact at point of penetration,” a Goldman executive said.

Among the points Greg Palm, co-general counsel, plans to emphasize on the call is “how out of the ordinary the process was with the SEC,” the executive said. The SEC usually gives firms a chance to settle such charges before they are made public. Goldman executives say they had no such chance,and learned about the filing while watching CNBC.

With a monstrous problem and mammoth resources, the iconic firm is paying for advice from a huge array of outside consultants, including such top Washington advisers as Ken Duberstein and Jack Martin, founder of Public Strategies.

The basic plan: Make a tough, factual case without coming off as arrogant or combative and without souring the firm’s image even further.

Partly because of the firm’s belief that it has become an easy target, no Goldman officials have appeared on television since the SEC announced its case.

The firm thinks it can be more effective if others make its case. On CNBC’s “Squawk Box” on Monday, Andrew Ross Sorkin of The New York Times, who gets special attention from Goldman spinners, raised questions about the substance of the SEC’s case. Shortly thereafter, Sen. Judd Gregg of New Hampshire, the top Republican on the Senate Budget Committee, said he is “a little interested in the timing” of the case.

Reflecting a high-stakes balance for the unpopular investment bank, Goldman plans to stop short of a frontal attack. Instead, it is raising questions and feeding ammunition to allies.

“We don’t want to come across as being arrogant and above it all,” said a Goldman executive who insisted on anonymity. “The SEC is the major regulator of several of our businesses. Being at war with them is not the goal.”

Therefore, an official said, a key Goldman message in the days ahead will be, “We’re not against regulation. We’re for regulation. We partner with regulators.”

Goldman said its most important audience is its client base, from CEOs all over the world to pension-fund managers to entrepreneurs who use the firm’s private wealth-management services. The firm sent its staff two pages of talking points giving basic facts — and the official line — about the SEC case: “Goldman Sachs Lost Money on the Transaction … Objective Disclosure Was Provided.”

The less official message, according to one executive: “Don’t believe everything you read in the complaint. Don’t believe everything you read in the press.”

The official said clients have been sympathetic.

Other audiences include the news media and governments around the world, with Goldman reaching out Tuesday to politicians in Europe, Japan, the U.S. and everywhere in between.

Goldman pays extraordinary attention to its alumni network because so many of its former officials are in visible, powerful positions. An official said the firm tries “to empower them with information,” so that when they’re put on the spot about the Goldman case, they can say, “I’m not there, but let me tell you a few things I’ve been told.”

Is the SEC Case Against Goldman Sachs Being Staged for Political Advantage?

by Bill Sardi

Recently by Bill Sardi: Preparations Being Made To Move Fort Knox Gold Into Your Bank Account

 

What just happened to Wall Street, with the announcement that the Securities Exchange Commission has filed fraud charges against Goldman Sachs Group, Inc., is so damning that its impact had to be blunted by its late Friday afternoon release. It’s what government does when it doesn’t want the stock market to plunge. But government DOES want to play up to the public’s infuriation over continuing revelations of greed and fraud on Wall Street.

A Monday morning release of this story might have sent the entire stock market into a crash (Goldman Sachs Group Inc, stock is down 23.57 points, erasing ~$12 billion of market capitalization), and that’s because there are likely more fraudulent billion-dollar investments to be revealed.

The American public needs to first grasp a broader view of this event. The Administration in Washington DC, heading for an election in November that will surely be fueled with voter outrage, has decided to strike a seeming blow to Wall Street to strengthen its hand in pushing for financial reform. Yet it is so odd that politicians were the ones who allowed all this to happen (more on this below). Does anyone have an explanation why the SEC has only now decided to file charges involving a 2007 billion-dollar investment? Or why the investor who most benefited financially and who assembled this mortgage-backed investment, John Paulson, has yet to be charged with any wrongdoing?

The smoking gun: an e-mail

 
John Paulson, the billionaire  
   

Another piece of the intrigue here is that the primary provider of evidence in the case is a star Goldman Sachs trader, a Frenchman by birth, who has suddenly left the U.S. for Europe as this story hits the news outlets. Fabrice Tourre, a GS vice president, wrote an email in 2007 that is the smoking gun in this case. Did he leave the U.S. in fear for his life?

Mr. Tourre’s 2007 email, which said “the whole building is about to collapse now,” shortly before the bonds were sold, and which said he would be the only potential survivor, provides foreknowledge of the billion-dollar investment that was sure to fail. Tourre was “principally responsible” for piecing together this novel and new type of investment at GS. He was the point man for Paulson.

When Tourre produced a 65-page “flip book” that contained details of the billion-dollar investment, to be provided to potential investors, this provided the evidence that SEC needed for its case.

 
  Fabrice Tourre, 31-year-old Goldman Sachs vice president, who is reported to have fled the country with the announcement that a 2007 email he wrote is the “smoking gun” in the SECs case against GS.
   

Don’t get the false impression that Mr. Tourre is a whistleblower here. The SEC alleges Mr. Tourre misled investors about Paulson’s role, saying Paulson had invested millions of dollars in hopes the packaged mortgage bonds would rise in value. Of course, Mr. Tourre is not the target of the SEC complaint, Goldman Sachs is. Its senior management had full knowledge of this deal. From 2004 to 2007, Goldman Sachs had arranged about two dozen similar deals.

Nor should anyone get the false notion that Paulson let others do all his bidding. He was actively raising funds and selling investment groups on this kind of instrument for some time, going back to 2006. Paulson wanted to invent the invincible wager.

An article in The Wall Street Journal documents that a senior banker at Bear Stearns Companies turned down this trade, questioning the propriety of selling deals to investors that a bearish client had assembled. (Bear market traders bet that an investment will fall in value, while bull-market traders bet than an investment will rise in value.) 

 

Throw the book at them

Believe it or not, an entire book was written of this now infamous investment before the SEC took action.

Of interest is Greg Zuckerman, The Wall Street Journal’s senior reporter in this case, who wrote The Greatest Trade Ever, about this trade and others like it, long before the SEC took action. The jacket on this book says: “The behind-the-scenes story of how John Paulson defied Wall Street and made financial history.” The book, published in November of 2009, hardly made ripples on Wall Street or in the financial news press. The SEC was sitting on all this information for over two years and did nothing. It was waiting for the right political moment to strike.

Zuckerman’s book outlines how John Paulson assembled risky mortgage investments with another party, Goldman Sachs, investments that were sure to fail, and then bet against them. Goldman Sachs used its reputation to promote the packaged mortgage investment to an overseas investor without revealing it was in cahoots with Paulson. In fact, the overseas bank involved specifically said it would not proceed if the packaged mortgages had been assembled by Paulson.

Paulson made a killing – a billion dollars, and Goldman Sachs made millions assembling the deal from both sides. Paulson’s defense is that he made no misrepresentations, only Goldman Sachs did, but what of the ethics of this deal?

 

Yves Smith, author of Naked Capitalism, and head of Aurora Advisors, a management consulting group, and the author of the new book, Econned: How Unenlightened Self Interest Undermined Democracy and Corrupted Capitalism, calls the investment that John Paulson sponsored a “Trojan horse for Mr. Paulson to take a short position, betting against the very same investment he was creating, but his intent was not disclosed…. at the expense of investors who had been kept in the dark and would almost certainly have turned down the deal if they had had the full picture.”

Goldman Sachs living up to its now infamous reputation

It’s obvious now that Goldman Sachs will be the pin cushion for the Administration’s attempt to regain public credibility before the November election. Goldman Sachs is the villain, and it is doing a good job of playing this role.

Just prior to the revelations about the alleged Paulson/Goldman Sachs scandal, the SEC launched other charges against a Goldman Sachs director. Various news sources reported that Rajat Gupta of GS is being investigated on suspicion that he provided inside information to the Galleon Group, a hedge fund founded by Raj Rajaratnam that has now become the biggest insider-trading probe in many years. So the SEC could mire Goldman Sachs with even more allegations in an effort to bring the billion-dollar company to its knees.

This publicly-staged legal action resembles that of President Bill Clinton’s 1995 assault against the tobacco companies, which was launched under the guise of a threat to public health, but really had a political agenda – that of taking away millions of dollars of campaign funds that the tobacco industry was donating to the Republican Party at the time.

If you are as confused as everyone else what the SEC is fussing about, you might click here to take a peek at a graphic created by The Wall Street Journal which visually displays how the deal between John Paulson and Goldman Sachs was prearranged and marketed.

Of course, GS sees nothing wrong with this trade, which should ignite even further public outrage. GS needs a good public relations man at the moment as it digs an even deeper hole every time it attempts to defend its own actions. (Recall GS’ CEO Lloyd Blankfein who recently said he’s “doing God’s work.”)

Congress opened the door

To return to the government’s culpability in this case, the Commodities Futures Modernization Act which Congress passed a decade ago, opened the door for trades like John Paulson’s. This legislation eliminated the long-standing rule that derivatives bets made outside regulated exchanges are legally enforceable only if one the parties involved in the bet were hedging against a pre-existing risk. Prior regulations said the only people who can bet against an investment actually have to own shares in it. Here is Paulson betting against an investment he had no ownership in.

 

The Commodities Futures Modernization Act is akin to allowing unscrupulous investors to buy fire insurance on other people’s houses, says Lynn A. Stout, Paul Hastings Professor of corporate and securities law at UCLA. A rise in arson would surely occur to collect on the investment.

Or like Rick Edelson, an online blogger speaking out in the New York Times, says: “Like the arsonist who buys insurance on another man’s house, Goldman and Paulson did everything they could to burn down the American economy, because it was only by destroying others’ wealth that they could maximize their own profit.”

Good God, do these men see in their greed they have scuttled the American economy, as well as faith in Wall Street investments that fund most pension plans?

When Paulson made billions, Wall Street was not quick to condemn. He got away with it, and that was to be applauded. Some investment bloggers said “well done.” Another said Paulson is “an investing stud. He is to be hailed for his moxie and superior forecasting.”

 

Other defenders of Wall Street claim Paulson didn’t create a real estate market with collapsing home values. But to package non-performing mortgages and then bet against them is like a rigged horse race.

Scripting for a thrilling end

For sure, the Administration in Washington DC will be portrayed in coming months as the hero, rescuing the public from the blood-suckers on Wall Street. Be it government to save us all from problems it created and then pin a badge of honor on itself. The current and former administrations in Washington DC are, and have been, so tightly controlled and managed by Wall Street, even with its ex-CEOs strategically implanted within the Executive Branch, as to call all alleged reforms and sanctions into question. These are just for show.

Goldman Sachs and its billions will face off against the might of US prosecutors with the President’s credibility on the line. Will a publicized trial be showcased on TV? It could become the high drama that the government wants to keep before the public’s eyes, all the way up to the November election.

Will Paulson squirm out of any legal consequences in the same manner as O.J. Simpson when he was asked to put an ill-fitting glove on his hand in a televised hearing? Will the President be able to control himself and not chime in like he did when he said Cambridge, Massachusetts police officers “acted stupidly” when they arrested a renowned black scholar at his home?

Goldman Sachs knows it has to make the President look good or there will be unending SEC prosecution. The public wants to know whose side is the President is on, the financial titans on Wall Street or the unemployed on Main Street? It will be scripted from the beginning.

And now a final question – will Goldman Sachs be the fall guy in exchange for future favors from the government? If fines are handed out and nobody goes to jail, you will know this was likely preplanned. Will Fabrice Tourre serve as the scapegoat? He’s sure to stay outside the country for his own good. Don’t be so naïve as to not believe much of what you see happening is being staged. That’s how politics works. It’s all about political advantage, not law and order, not right and wrong.

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April 19, 2010

Bill Sardi [send him mail] is a frequent writer on health and political topics. His health writings can be found at www.naturalhealthlibrarian.com. He is the author of You Don’t Have To Be Afraid Of Cancer Anymore. His latest book is Downsizing Your Body.

Copyright © 2010 Bill Sardi Word of Knowledge Agency, San Dimas, California. This article has been written exclusively for http://www.LewRockwell.com and other parties who wish to refer to it should link rather than post at other URLs. 

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