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Goldman Email Describes ‘Frankenstein’ Derivatives; Tourre Brags about Selling Abacus to “widows and orphans”; SEC Confident; German Bank Drops Goldman

Goldman Email Describes ‘Frankenstein’ Derivatives; Tourre Brags about Selling Abacus to "widows and orphans"; SEC Confident; German Bank Drops Goldman

Boris Karloff (1887-1969)

Courtesy of Mish 

Goldman Sachs claims it it dis not mislead clients. Its defense will not be very convincing in the face of revealing emails with "fabulous Fab" bragging about dumping Abacus bonds on widows and orphans.

Please consider Goldman’s Tourre E-Mail Describes ‘Frankenstein’ Derivatives

Fabrice Tourre, a Goldman Sachs Group Inc. executive director facing a fraud lawsuit in the sale of a mortgage-linked investment, said an index that facilitated derivatives trading in the market was “like Frankenstein.”

The so-called ABX index is “the type of thing which you invent telling yourself: ‘Well, what if we created a ‘thing,’ which has no purpose, which is absolutely conceptual and highly theoretical and which nobody knows how to price?’” Tourre said in a Jan. 29, 2007, e-mail released yesterday by Goldman Sachs. Watching the index fall is “a little like Frankenstein turning against his own inventor.”

In a March 7, 2007, e-mail Tourre describes the U.S. subprime mortgage market as “not too brilliant” and says that “according to Sparks,” an apparent reference to Daniel Sparks who ran Goldman Sachs’s mortgage business at the time, “that business is totally dead, and the poor little subprime borrowers will not last too long!!!”

A few months later, a June 13, 2007, e-mail shows Tourre claiming, “I’ve managed to sell a few Abacus bonds to widows and orphans that I ran into at the airport, apparently these Belgians adore synthetic ABS CDO2,” using short-hand for asset- backed collateralized debt obligations squared, or CDOs made up of tranches of CDOs containing asset-backed securities.

Goldman Sachs Readies Forceful Defense

The Washington Post is reporting Goldman Sachs readies forceful response against claims it misled clients

Goldman Sachs is preparing its most detailed defense yet to allegations that it misled clients in its mortgage securities business, arguing that the firm was unsure whether housing prices would rise or fall and did not take any action at odds with the interests of its clients.

Goldman prepared the 11-page document to serve as the basis for testimony that chief executive Lloyd Blankfein is scheduled to deliver Tuesday before the Senate Permanent Subcommittee on Investigations.

The Goldman paper describes debates among top executives in 2006 and 2007 over whether the firm should make investment decisions based on the belief that the mortgage market would continue to prosper. The document details meetings and e-mails that ultimately resulted in a decision to reduce the company’s exposure to the mortgage market, especially subprime loans, by making new investments that would pay off if housing prices fell.

The document also reprises Goldman’s frequent explanation that it was not investing its own money in financial transactions to make a trading profit but to help investors who wanted to do a deal and could not easily find someone else to trade with. That role, commonly played by investment banks, is known as being a market maker.

"Our investigation has found that investment banks such as Goldman Sachs were not market makers helping clients," Sen. Carl M. Levin (D-Mich.), who heads the panel, said Friday. "They were self-interested promoters of risky and complicated financial schemes that were a major part of the 2008 crisis."

SEC Confident

Inquiring minds are reading SEC confident on IKB part of Goldman Sachs lawsuit

Inside the Securities and Exchange Commission, top investigators remained confident this week that a largely overlooked part of the agency’s fraud suit against Goldman Sachs would prove pivotal in court, even as potential flaws surfaced with other parts of the case.

SEC officials said the strongest part of its suit involves Goldman’s dealings with the Duesseldorf-based commercial bank IKB. In 2007, the German bank turned to Goldman to invest in an instrument that would allow it to bet that housing prices would rise. The SEC alleges that Goldman misled and defrauded IKB.

But it has not been the Goldman-IKB relationship that has drawn the most attention since the SEC filed its case against Goldman eight days ago. Most public discussion has focused on ACA Financial Guaranty Corp., a New York firm that helped Goldman assemble the investment and then bet that it would gain value.

Much of the criticism of the SEC case — and a significant part of Goldman’s defense — is that IKB and ACA were sophisticated investors who knew what they were doing. But government officials say that IKB came to Goldman for help explicitly because it wanted objective advice on what to invest in, and that Goldman did not tell the German bank that the product contained mortgages that Paulson believed would fail.

So, SEC officials say, it doesn’t matter whether IKB was a sophisticated investor or not because Goldman did not provide the objective investment advice the German bank was seeking.

"The fact that the portfolio had been selected by an independent third-party . . . was important to" IKB, the SEC says in its complaint. "IKB would not have invested in the transaction had it known that Paulson played a significant role in the collateral selection process while intending to take a short position."

Lawyers Suggest Goldman Should Cut Losses And Settle

A Bloomberg article reports the suit is highly unlikely to be thrown out of court and Goldman Should Cut Losses.

Goldman Sachs Group Inc. may be better off cutting its losses instead of fighting what it terms “unfounded” fraud claims, say professors of securities law who have examined the U.S. Securities and Exchange Commission’s lawsuit against the bank.

The most profitable firm in Wall Street history will probably lose what is typically the first hurdle in court, a motion to throw out the April 16 suit because it lacks legal merit, the professors said in interviews this week. After that, Goldman Sachs’s risks will mount and its negotiating position will weaken, they said.

“There’s a very low probability that Goldman could get the case dismissed,” said Thomas Hazen of the University of North Carolina at Chapel Hill, whose books include a two-volume treatise on broker-dealer law. “Every pretrial motion the SEC wins, Goldman gets one step closer to losing.”

Even if top managers are certain they’re right on the merits of the case, Goldman Sachs should probably settle, said senior executives at three of the firm’s rivals. The executives, speaking anonymously because they wouldn’t comment publicly on a competitor, said Goldman Sachs would be better off by deciding to settle the suit, cut its losses, and focus on repairing the damage to the firm’s reputation.

German bank severs Goldman ties, France eyes probe

European CEO is reporting German bank severs Goldman ties, France eyes probe

In the latest sign that the SEC’s allegations could hurt Goldman’s standing with some customers, the SEC complaint was cited by German public sector bank Landesbank Bayern LB as it cut business ties with Goldman.

Another German bank, IKB Deutsche Industriebank AG, was one of the main investors in the Abacus synthetic collateralised debt obligation deal that is the focus of the SEC complaint.

Goldman, which is being investigated by the SEC and Britain’s market watchdog, is also attracting attention in France.

Economy Minister Christine Lagarde said recently that the accusations also warranted a full probe by French regulators. Regulator AMF (Autorite des Marches Financiers) said in mid-April that it planned to co-operate with the SEC over the Goldman case if necessary.

Newly released official documents showed that Goldman aggressively increased political campaign donations and lobby spending in Congress in early 2010, as the financial reform debate gathered momentum.

In another sign that Goldman and its Wall Street allies are struggling to gain traction in Washington, a US Senate committee approved a bill aimed at reforming the derivatives market, moving the Senate one step closer to passing sweeping regulation over the $450trn derivatives market.

The fraud charges against Goldman have added "some fuel on the fire" as US Congress pushes toward a financial reform package, Republican Sen. Richard Shelby noted.

Goldman Sachs has its hands full. Damage to its reputation will last for years, as will lawsuits.

Mike "Mish" Shedlock 


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