4/16/10

only potential survivor

On another note...

This SEC filing against Goldman Sachs is evidently getting big coverage. I would just point out the best laymen's explanation ever of this exact financial corruption was written by the Geronimo Manifesto.

Here's the story:


Washington, D.C., April 16, 2010 — The Securities and Exchange Commission today charged Goldman, Sachs & Co. and one of its vice presidents for defrauding investors by misstating and omitting key facts about a financial product tied to subprime mortgages as the U.S. housing market was beginning to falter.

The SEC alleges that Goldman Sachs structured and marketed a synthetic collateralized debt obligation (CDO) that hinged on the performance of subprime residential mortgage-backed securities (RMBS). Goldman Sachs failed to disclose to investors vital information about the CDO, in particular the role that a major hedge fund played in the portfolio selection process and the fact that the hedge fund had taken a short position against the CDO.

"The product was new and complex but the deception and conflicts are old and simple," said Robert Khuzami, Director of the Division of Enforcement. "Goldman wrongly permitted a client that was betting against the mortgage market to heavily influence which mortgage securities to include in an investment portfolio, while telling other investors that the securities were selected by an independent, objective third party."

...According to the SEC's complaint, filed in U.S. District Court for the Southern District of New York, the marketing materials for the CDO known as ABACUS 2007-AC1 (ABACUS) all represented that the RMBS portfolio underlying the CDO was selected by ACA Management LLC (ACA), a third party with expertise in analyzing credit risk in RMBS. The SEC alleges that undisclosed in the marketing materials and unbeknownst to investors, the Paulson & Co. hedge fund, which was poised to benefit if the RMBS defaulted, played a significant role in selecting which RMBS should make up the portfolio.

The SEC's complaint alleges that after participating in the portfolio selection, Paulson & Co. effectively shorted the RMBS portfolio it helped select by entering into credit default swaps (CDS) with Goldman Sachs to buy protection on specific layers of the ABACUS capital structure. Given that financial short interest, Paulson & Co. had an economic incentive to select RMBS that it expected to experience credit events in the near future. Goldman Sachs did not disclose Paulson & Co.'s short position or its role in the collateral selection process in the term sheet, flip book, offering memorandum, or other marketing materials provided to investors.

The SEC alleges that Goldman Sachs Vice President Fabrice Tourre was principally responsible for ABACUS 2007-AC1. Tourre structured the transaction, prepared the marketing materials, and communicated directly with investors. Tourre allegedly knew of Paulson & Co.'s undisclosed short interest and role in the collateral selection process. In addition, he misled ACA into believing that Paulson & Co. invested approximately $200 million in the equity of ABACUS, indicating that Paulson & Co.'s interests in the collateral selection process were closely aligned with ACA's interests. In reality, however, their interests were sharply conflicting.

According to the SEC's complaint, the deal closed on April 26, 2007, and Paulson & Co. paid Goldman Sachs approximately $15 million for structuring and marketing ABACUS. By Oct. 24, 2007, 83 percent of the RMBS in the ABACUS portfolio had been downgraded and 17 percent were on negative watch. By Jan. 29, 2008, 99 percent of the portfolio had been downgraded.

Investors in the liabilities of ABACUS are alleged to have lost more than $1 billion. (Paulson's end of the transaction gained $1 billion - ed.)

The SEC's complaint charges Goldman Sachs and Tourre with violations of Section 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934, and Exchange Act Rule 10b-5. The Commission seeks injunctive relief, disgorgement of profits, prejudgment interest, and financial penalties.

As the Geronimo Manifesto explains, the CDOs are vehicles to buy insurance on bad things happening, and then to help the bad things happen along. Shhh don't tell anyone except your trusted buds.

Start with a simple example. Assume I know the young son of the couple next door likes to crawl into closets and play with matches. I therefore see a reasonably good shot at "winning the disaster lottery" so to speak, by buying fire insurance on their $200,000 house.

In simple terms, I now have a financial interest is seeing that disaster occurs. If the house, for whatever mysterious reason, burns down an insurance company will pay me the insured value of the house - even though I suffered no loss, financial or otherwise. My neighbor's misfortune is thus magically transformed into my good fortune. A polite way of saying I was paid $200,000, the insured value of my next-door neighbor's house, after I paid the $400 insurance premium.

Being bright and suitably equipped with an MBA from a prestigious eastern university, I well and fully understand the desirable objective of maximizing my return on investment. I can accomplish this in one or both of two ways - increasing the return or decreasing the investment.
...Now change an assumption. Assume I tell 99 of my poker-playing gambler friends about the boy's strange and dangerous interest. Starting with my appraiser buddy, who's predatory income as a result of a mysterious fire will double, as a direct result of his appraisal.

Now assume the $400,000 house burns to the ground. One hundred or so insurance companies will collectively pay $40 million in claims on the loss of a single $400,000 house. The benefits of a $400,000 disaster are magically multiplied by a factor of 100 and transformed into a $40 million disaster - with one family suffering a loss and 100 families experiencing a gain.

That is what we are paying for. That is what we are bailing out with our hard-earned money. And everyone involved knows it. So somebody tell me, why hasn't anyone in power said this entire casino is contrary to public policy and therefore these contracts are Null and Void?

Again: Credit Default Swaps: The Insane Problem and the Radical but Sane Solution.

It describes exactly the style of corruption in the SEC case against Fabrice Tourre, 31, of Goldman Sachs.

In an email to a friend on January 23, 2007, the London-based trader called himself "The Fabulous Fab" and warned about the coming collapse in the subprime mortgage securities market, according to the SEC complaint. In the message, he also dramatically expresses his own lack of foresight about the consequences of his risky trading activity:
"More and more leverage in the system. The whole building is about to collapse anytime now... Only potential survivor, the fabulous Fab[rice Tourre]... standing in the middle of all these complex, highly leveraged exotic trades he created without necessarily understanding all of the implications of those monstrosities!!!"

Arrogant twit, much?

5 comments:

chuckyman said...

And so we see the coming scapegoat.

These fraudsters sold lots of fraudulent loans and were awarded lots of bonuses for doing so. The common denominator here is the word fraud.

Sweden dealt with a similar issue about 10 years ago. The same BS happened and they took over the banks, broke off the worthless assets and let the shareholders take a bath. Everyone else moved on and the functioning parts were allowed to keep the lending economy moving.

I am not a supporter of the current fiat/debt money system. It has reached its mathematical limits. It is impossible to keep the merry-go-round afloat.

What is required is a change to a global currency, a jolly good war to destroy all the consumables that everyone has collected and let’s start the wholesale looting again.

My arse

You think I’m joking? This IS the plan. Most people are paying off their debts and getting out from under. Where does that leave the Ponzi scheme called money? Completely up the creek. Modern debt/money requires sheep to want more crap/consumables and be willing to borrow money to pay for it.

As a wee illustration, after World War 2 thousands of working trucks, jeeps and all sorts of shit (even munitions) were scrapped or even dumped into the sea. That way they would not interfere with new sales.

I really need to invest in a good rope manufacturer.

C

A. Peasant said...

we are in agreement. this maroon is just one of many. but maybe if they throw him to the wolves they can make the problem go away. oh hip hip hooray for the SEC, finally doing their job oh phew we're saved now.

also re: new fiat money, yes. i agree that is the plan. but they have to control iran first. that's the trouble. that's what's driving the obsession with bombing lots of targets in iran -- to take that country out of the economic equation so they can introduce a new fiat money scheme without any competition. and the clock is ticking.

Dublin Mick said...
This comment has been removed by the author.
A. Peasant said...

dubs, i think belarus might have an angle in this polish air crash somehow. i was looking into that yesterday, will try to get a post together about it. i didn't know about the ruble issue.

awesome link about the meteor! i only caught a snip of it on teevee in passing.

We have satellites capable of seeing what color my drawers are as I sit in my recliner in my living room. When the little asteroid passed between the Earth and the moon a few weeks back, all 70 feet of it, we mapped every inch of it. I can find in depth descriptions of the origins of nearly every shooting star in the last 20 years. But a ball of blue flames falls right smack dab in the middle of Wisconsin, causing better than five minutes of sonic booms, and we’re just not sure?

and what does the tv guy say?
1. people think it's the end of the world.
2. wow look at that thing, and
3. it really got the conspiracy theorists going hahaha

so if a golf-ball size rock leaves a crater 12 feet across...

the size of a golf ball… it was noticeable, and even at that size, it left a small crater about a dozen feet across

what size crater does that thing in the video leave? so can they not find the crater and the thing inside it?

Dublin Mick said...

There was some dark humor there when the guy wondered "do I want to be the crazy bastard who reports a UFO?"

There is a lot of tax money going to NASA it is good that we are provided with all the good information. Don't trouble your little fluoride soaked brains with stuff that doesn't concern you.

By the way there is a town in Oregon that is finally had enough of the fluoride scam.

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