Meanwhile, in Gotham City, the
Bankgirl sees the villain SEC but first laughs it off. Everyone knows that SEC wants to rule the world from its evil lair in Washington, DC, but that doesn't mean it should be taken seriously.
So the vote on the SEC to bring charges against Goldman broke down by party lines. Liberals, understandably, view this as evidence of malfeasance. But of course, there's an alternative interpretation also consistent with these facts: that Democrats brought a weak charge that won't stand up in court because they thought it would help them push through their bank reform.
Does the arch villain SEC slink away to fight another day when it sees Bankgirl? No, it does not. Foolish villains! Bankgirl approaches the madmen and accuses it of attacking the unpopular banks to polish its own rotted image.
So not political maneuvering, but agency butt-covering. This sounds suspiciously plausible. And even if the SEC didn't plan this, reporters would do well to counter this unfortunate accident of timing by resurrecting the story.
Meanwhile, the counter-leaks have begun, and as I thought they might, they make the SEC's case sound a bit weaker.
Bam!! But Bankgirl is just warming up! Next she hits them with the accusation that the Senate is just posturing instead of trying to foil the hated banks!
The statements from the Senators make it clear that they are not holding this hearing in order to find out what happened; that's the SEC's job. They're holding this hearing in order to be televised yelling at investment bankers. Claire McCaskill's rant was particularly irrelevant to the actual question at hand, but all of them are mostly trying to express outrage, not make any coherent assessment of the strengths of the SEC's case.
Pow!! The SEC is reeling from Bankgirl's blows but more villains are joining the gang! Bankgirl calls on reinforcements!
A lot of very smart people who know a lot about securities law seem to think that the SEC is pushing its luck on the law, if not the merits.
Kaboom!!! The law is on Bankgirl's side, and the SEC will fall before it knows what hit it! Bankgirl delivers the killing blow!
Carl Levin is asking the same silly question that I've heard over and over: shouldn't Goldman have told buyers that it was short?
The presumption is that Goldman has some sort of godlike knowledge that it was concealing from its customers. It's not Goldman's responsibility to tell its customers what they should want to buy (or at least, not on the trading/ABS side), or what Goldman wants to buy. It's Goldman's responsibility to make sure that its clients have all the relevant details about the securities. Clients buy stuff from Goldman all the time that some part of Goldman is short; differences of opinion are what make marriages and markets.
It is true that clients would like to know what Goldman is doing, but it's also true that the seller of the house I just bid on would like to know what my reservation price is. That doesn't mean that I have some obligation to disclose this information. These are large securities firms that are presumed to know how to evaluate a security; if they can't, they should turn in their charter and disband.
Goldman was making a bet. That bet could have gone wrong (not in this case, but in many similar). Other firms had different opinions of the market. Goldman was under no obligation to disabuse them of their opinions. They're not investment advisers; they're securities issuers.
Bankgirl dusts her hands off, adjusts her cowl and cape, and tosses off a little quip at the bodies left groaning on the floor, as superheroines are wont to do.
Now Levin is grilling a Goldman employee as to why they continued to sell a deal that the head of the division had described as "a shitty deal". The banker is trying to explain that he's a salesman, not a fiduciary, with little success. What I want to know is--didn't these guys learn a damn thing from the show trials of the last decade? These are the kinds of things that should never, ever be committed to any form that can be subpoena'd by a committee.
Look out, Bankgirl! One of the SEC villains is up and pulling out its Bank-Killing Reality Cannon! And it's pointed your way! Oh, no! You're about to be hit by the SEC complaint against Goldman, Sachs!
1.The Commission brings this securities fraud action against Goldman, Sachs & Co.(“GS&Co”) and a GS&Co employee, Fabrice Tourre (“Tourre”), for making materially misleading statements and omissions in connection with a synthetic collateralized debt obligation(“CDO”) GS&Co structured and marketed to investors. This synthetic CDO, ABACUS 2007-AC1, was tied to the performance of subprime residential mortgage-backed securities (“RMBS”)and was structured and marketed by GS&Co in early 2007 when the United States housing market and related securities were beginning to show signs of distress. Synthetic CDOs like ABACUS 2007-AC1 contributed to the recent financial crisis by magnifying losses associated with the downturn in the United States housing market.
2.GS&Co marketing materials for ABACUS 2007-AC1 – including the term sheet,flip book and offering memorandum for the CDO – all represented that the reference portfolio of RMBS underlying the CDO was selected by ACA Management LLC (“ACA”), a third-party with experience analyzing credit risk in RMBS. Undisclosed in the marketing materials and unbeknownst to investors, a large hedge fund, Paulson & Co. Inc. (“Paulson”), with economic interests directly adverse to investors in the ABACUS 2007-AC1 CDO, played a significant role in the portfolio selection process. After participating in the selection of the reference portfolio,Paulson effectively shorted the RMBS portfolio it helped select by entering into credit default swaps (“CDS”) with GS&Co to buy protection on specific layers of the ABACUS 2007-AC1capital structure. Given its financial short interest, Paulson had an economic incentive to choose RMBS that it expected to experience credit events in the near future. GS&Co did not disclose Paulson’s adverse economic interests or its role in the portfolio selection process in the term sheet, flip book, offering memorandum or other marketing materials provided to investors.
3.In sum, GS&Co arranged a transaction at Paulson’s request in which Paulson heavily influenced the selection of the portfolio to suit its economic interests, but failed to disclose to investors, as part of the description of the portfolio selection process contained in the marketing materials used to promote the transaction, Paulson’s role in the portfolio selection process or its adverse economic interests.
4.Tourre was principally responsible for ABACUS 2007-AC1. Tourre devised the transaction, prepared the marketing materials and communicated directly with investors. Tourre knew of Paulson’s undisclosed short interest and its role in the collateral selection process. Tourre also misled ACA into believing that Paulson invested approximately $200 million in the equity of ABACUS 2007-AC1 (a long position) and, accordingly, that Paulson’s interests in the collateral section process were aligned with ACA’s when in reality Paulson’s interests were sharply conflicting.
5.The deal closed on April 26, 2007. Paulson paid GS&Co approximately $15million for structuring and marketing ABACUS 2007-AC1. By October 24, 2007, 83% of the RMBS in the ABACUS 2007-AC1 portfolio had been downgraded and 17% were on negative watch. By January 29, 2008, 99% of the portfolio had been downgraded. As a result, investors in the ABACUS 2007-AC1 CDO lost over $1 billion. Paulson’s opposite CDS positions yielded a profit of approximately $1 billion for Paulson.6.By engaging in the misconduct described herein, GS&Co and Tourre directly or indirectly engaged in transactions, acts, practices and a course of business that violated Section17(a) of the Securities Act of 1933, 15 U.S.C. §77q(a) ("the Securities Act"), Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. §78j(b) ("the Exchange Act") and Exchange Act Rule 10b-5, 17 C.F.R. §240.10b-5. The Commission seeks injunctive relief, disgorgement of profits, prejudgment interest, civil penalties and other appropriate and necessary equitable relief from both defendants.
Poor Bankgirl! Tune in next week to see how she manages to save the banks from the accusation that they fraudulently mislead investors!
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Bankgirl picture replaced by better Bankgirl picture. Better Bankgirl picture replaced by best Bankgirl picture, many thanks to Botacchio for making the image.