The Abacus prospectus states, GS might short your position.

I suspect the $90 MM Abacus loss Goldman (and Cramer) whines about in their response is from the equity or residual tranche which IIRC is usually held by the IB since no one will buy it and they expect it to be a loss.

So the Goldman/Cramer response on that issue may be extremely disingenuous to say the least and brings into question any other responses they might provide.

http://seekingalpha.com/article/199158-goldman-s-abacus-lies

Discovery is going to be a sausage grinder for Goldman.

 

I think a lot of ignorance swirls throughout this whole discussion. I cannot address all of the nonsense, but I'll just make a two points to clear the air a bit.

First, GS and ACA were constructing what was to be an illiquid CDO. In order to go through the trouble, GS needed to have some confidence that both buyers and sellers were on hand to take their positions on day 1. As such, it is standard practice to have a 'sponsor' like Paulson take part in the portfolio selection process, in order to ensure the party will participate in the CDO. Paulson's participation in the selection process was not sinister, in itself. It was standard practice, and rightfully so for these types of illiquid derivatives among sophisticated institutions.

Second, ACA had a responsibility to know as much or more about that portfolio than Paulson. ACA knew the exact composition of the RMBS portfolio that they ultimately designated for ABACUS. Nothing was withheld from them in that regard. ACA was experienced. It was a sophisticate in the RMBS/CDO market. Ask yourself this:

Is it a crime that Paulson did better due diligence on the portfolio, and better understood the ramifications, than ACA? ACA bet their reputation on that CDO. They also retained a US$900-mil long position. Certainly they had incentive to do their due diligence, no???

When ACA asks the question 'Is Paulson long or short?' I have two problems with this:

1. What ACA is effectively doing is trying to short-cut out of their responsibility to do their own due diligence. The thinking is that if Paulson is long, then he must be bullish following his own due diligence, and so ACA can piggyback on his decision. That is total BS in my view.

2. The CDO was effectively an ITM call option on a portfolio of RMBS. As standard practice, buyers and sellers do not have an implicit right to know who is on the opposite side of an option position. Now they may ask, or demand, due to concern re: counterparty risk. But that doesn't seem to be an issue with the transaction under discussion.

To be honest, I don't think the existing charges stick. The only way this works for the SEC is if more comes out of the discovery process, as others have already mentioned. It will be interesting to see how this unfolds.

 

Yes, but I'd like to add:
In this instance, goldman never sold securities. Goldman sold synthetic collateralized debt obligations to the banks. These essentially mirrored the performance of a portfolio of MBS supposedly selected by an impartial 3rd party. Paulson paid Goldman $15M to create this new asset class for a new way to bet on a collapse in value of the underlying bonds.

The bottom line is this. Say you are an investor and your broker is trying to get you to invest in a new investment product. Would you invest if you knew that any losses you suffered would go to line some unseen 3rd party's pocket? Its a lose-lose and a major conflict of interest for the broker.

 

What complete nonsense. God, I need to stop wasting my time on this board ...

1. Paulson didn't pay "Goldman $15M to create this new asset class ..."

a. Paulson bought part of one side of a two-sided transaction. Paulson paid a commission. It didn't explicitly pay for creation of the instrument per se. All traders pay commissions. There is no crime in paying commissions.
b. The asset class already existed.

2. Losses always line some unseen 3rd party's pocket. What is your f*cking point? Nevermind ...

 

Goldman, among others on Wall Street, has said since the collapse that it made big money by using the ABX to bet against the housing market. Worried about a housing bubble, top Goldman executives decided in December 2006 to change the firm’s overall stance on the mortgage market, from positive to negative, though it did not disclose that publicly.

Even before then, however, pockets of the investment bank had also started using C.D.O.’s to place bets against mortgage securities, in some cases to hedge the firm’s mortgage investments, as protection against a fall in housing prices and an increase in defaults.

Mr. Egol was a prime mover behind these securities. Beginning in 2004, with housing prices soaring and the mortgage mania in full swing, Mr. Egol began creating the deals known as Abacus. From 2004 to 2008, Goldman issued 25 Abacus deals, according to Bloomberg, with a total value of $10.9 billion.

Abacus allowed investors to bet for or against the mortgage securities that were linked to the deal. The C.D.O.’s didn’t contain actual mortgages. Instead, they consisted of credit-default swaps, a type of insurance that pays out when a borrower defaults. These swaps made it much easier to place large bets on mortgage failures.

Rather than persuading his customers to make negative bets on Abacus, Mr. Egol kept most of these wagers for his firm, said five former Goldman employees who spoke on the condition of anonymity.

On occasion, he allowed some hedge funds to take some of the short trades.

Mr. Egol and Fabrice Tourre, a French trader at Goldman, were aggressive from the start in trying to make the assets in Abacus deals look better than they were, according to notes taken by a Wall Street investor during a phone call with Mr. Tourre and another Goldman employee in May 2005.

On the call, the two traders noted that they were trying to persuade analysts at Moody’s Investors Service, a credit rating agency, to assign a higher rating to one part of an Abacus C.D.O. but were having trouble, according to the investor’s notes, which were provided by a colleague who asked for anonymity because he was not authorized to release them. Goldman declined to discuss the selection of the assets in the C.D.O.’s, but a spokesman said investors could have rejected the C.D.O. if they did not like the assets.

Goldman’s bets against the performances of the Abacus C.D.O.’s were not worth much in 2005 and 2006, but they soared in value in 2007 and 2008 when the mortgage market collapsed. The trades gave Mr. Egol a higher profile at the bank, and he was among a group promoted to managing director on Oct. 24, 2007.

“Egol and Fabrice were way ahead of their time,” said one of the former Goldman workers. “They saw the writing on the wall in this market as early as 2005.” By creating the Abacus C.D.O.’s, they helped protect Goldman against losses that others would suffer.

As early as the summer of 2006, Goldman’s sales desk began marketing short bets using the ABX index to hedge funds like Paulson & Company, Magnetar and Soros Fund Management, which invests for the billionaire George Soros. John Paulson, the founder of Paulson & Company, also would later take some of the shorts from the Abacus deals, helping him profit when mortgage bonds collapsed. He declined to comment.

The woeful performance of some C.D.O.’s issued by Goldman made them ideal for betting against. As of September 2007, for example, just five months after Goldman had sold a new Abacus C.D.O., the ratings on 84 percent of the mortgages underlying it had been downgraded, indicating growing concerns about borrowers’ ability to repay the loans, according to research from UBS, the big Swiss bank. Of more than 500 C.D.O.’s analyzed by UBS, only two were worse than the Abacus deal.

Goldman created other mortgage-linked C.D.O.’s that performed poorly, too. One, in October 2006, was a $800 million C.D.O. known as Hudson Mezzanine. It included credit insurance on mortgage and subprime mortgage bonds that were in the ABX index; Hudson buyers would make money if the housing market stayed healthy — but lose money if it collapsed. Goldman kept a significant amount of the financial bets against securities in Hudson, so it would profit if they failed, according to three of the former Goldman employees.

A Goldman salesman involved in Hudson said the deal was one of the earliest in which outside investors raised questions about Goldman’s incentives. “Here we are selling this, but we think the market is going the other way,” he said.

...

Tetsuya Ishikawa, a salesman on several Abacus and Hudson deals, left Goldman and later published a novel, “How I Caused the Credit Crunch.” In it, he wrote that bankers deserted their clients who had bought mortgage bonds when that market collapsed: “We had moved on to hurting others in our quest for self-preservation.” Mr. Ishikawa, who now works for another financial firm in London, declined to comment on his work at Goldman.

http://www.nytimes.com/2009/12/24/business/24trading.html?pagewanted=2&_r=3

Read the book by Mr. Ishikawa. Interesting reading...

 

Let me pull out a few independent clauses..

"Goldman Sachs does not make any representation regarding the accuracy of the information contained herein and accepts no responsibility or liability."

So.. WTF am I reading? This could be a complete work of fiction. Or not.

How do I know?

Well, if I have a billion dollars to invest, I'd better do my own damn investigation and figure out what I'm spending my money on.

 

This is a silly comment. Any appeals court will strike down a capricious jury ruling. US is not a banana republic, and if Goldman gets convicted and it stands up to inevitable appeal, it will be because they actually broke the law, not because some pitchforks were on the jury at the first trial.

 

You do realize that this is on a par with admitting you're a paedophile or a rapist of 80 year old women? You are basically admitting you piss on justice and the law, that you would deliberately corrupt the judicial system and send down an innocent person if you could, just to satisfy some childish emotion you have. You are the lowest of the low, you stand against every principle that the USA was founded on, you ought to leave this board and never show your face again in polite society.

 

I think this is questionable. In 2006-07, when the housing boom was still a religion, how on earth could someone say that a long bet on housing was "cherry picked" to fail? It was cherry picked to what Paulson *thought* would fail. But he could by no means be certain on his bet. Housing could have gone up another 5 years in a row, doubling in price, and he would have lost 100% of his investment and the counterparty would have raked in cash. So, without the benefit of hindsight, back when the contract was made, how could it be "cherry picked to fail"? All it was cherry picked for was for Paulson to be able to take on the position he wanted - but there were no guarantees that position would be profitable. A raging housing bull would *want* the most risky, and thus most high-return vehicle possible. It's like saying that George Soros cherry-picked the pound to fail, and thus his inter-bank dealer broke the law because they didn't tell the buyer "Hey mate, it's George Soros so you MUST be wrong to buy here - full disclosure!"

It's a specious argument IMO.

 

Are you a lawyer or did you get that from wikipedia?