SEC Charges Goldman Sachs With Fraud; May The Perp Walks Begin

From the SEC:












This is a very big deal.  Goldman is down 8% already. Given the charges, I can’t imagine that Magnetar will be able to escape the now emboldened SEC because the allegations against Magnetar’s cherry picking collateral for CDOs are identical to the cherry picking by Paulson described here. It seems the regulators have finally awakened from their slumber.

Get ready. The perp walks are finally coming.


Update: Here is the court filing below.

Goldman Paulson Abacus Complaint

  1. Jake says

    big difference legally between goldman and magnetar. magnetar did not sponsor the underwriting or market the long portion of the structure to clients…

    1. Edward Harrison says

      And that may be why they are going after Goldman. I say in another post that you would think that Paulson would be the target given it was Paulson’s actions which triggered the investigation. yet the Paulson firm has escaped without a complaint. Will the same occur with Magnetar? If so, will we see the CDO underwriter face charges there?

      1. Marshall Auerback says

        Goldman is a good target, but also politically convenient. They are probably the single most reviled Wall Street institution right now (which in itself is saying a lot), but they don’t have a significant deposit taking role and therefore the collateral damage to the real economy relative to, say, going after JP Morgan or BofA, is considerably less. Plus, to paraphrase Richard Nixon, the charges probably also have the benefit of being true. It’s a nice way to “decourager les autres” and mitigate GS’s impact as they seek to lobby against many of the provisions in the Finance Reform Bill, weakening an already weak bill. And of course, it’s politically cost-free to an Administration widely perceived to be too pro-Wall Street.

        1. Edward Harrison says

          Good points, Marshall. I will note that when I write later today in the NYTimes.

      2. Jake says

        only if those CDO underwriters sold the tranches under the guise that the underlying mortgages were independently selected

        1. Edward Harrison says

          which seems likely. Why would they have sold them under the guise that they were crookedly selected?

    2. Edward Harrison says

      Also, the WSJ has learned this is a part of a broader investigation. So I suspect we will see other charges in other cases.

  2. David Pearson says

    The politics of the Goldman charge are complicated. Yes, the Administration has an incentive to get Financial Reform passed. On the other hand, they steer the economy by the constellation of the S&P, and hardly have an interest in people losing faith in the market. After all, regardless of the observer’s politics, the corporatist bent of this Administration is its most salient feature. So, maybe they would like to give Goldman a “slap on the wrist”. If so, they picked a curious way of doing it, for the charges against the firm open it up to State Attorney’s General investigations and endless civil lawsuits, and they create vulnerability for other firms, as well as for the political sponsors (Rahm Emmanuel) of firms such as Magnetar. Finally, there is the role of populism in hijacking prosecutions, one which has been significant and unpredictable throughout history.

    No, if the Administration had planned this, you would have heard the announcement this morning of a 3-way settlement — including a record but insignificant (relative to GS profits) fine — between Cuomo, the SEC and Goldman, combined with some Goldman firings and a Mea Culpa press release from Blankfein. This would have been in keeping with the strictures of crony capitalism. Its just as likely that the SEC’s source — Paolo Pellegrini of Paulson & Co. — forced their hand in doing something that was really in no one’s perceived interest given its potential effect on TBTF institutions and confidence in financial markets.

    So what are the politics of this civil charge? Its too early to tell…

  3. stendahl says

    I’m a little lost here – Goldman has said ACA managed the CDO, Paulson has said ACA manged the CDO, and ACA will argue they managed the CDO or else open themselves up to liabilities. It appears the govt case hinges on arguing that ACA were patsies, not doing their job or both. If ACA were professionals with subject matter expertise and did proper due diligence, short of some sort of lying on the part of GS or Paulson, it isn’t clear how disclosing Paulson’s intentions is even relevant.

    Unless there is some smoking gun which has yet to be brought to light, I think the govt has chosen a difficult case to win.

    Too bad they didn’t accuse Fab of being an idiot – thats a case they would definitely have won.

    1. Edward Harrison says

      The SEC is alleging that Tourre misled ACA into believing Paulson was going to be long Abacus. ACA was unaware that Paulson wasn’t just participating in the equity tranche. They would have assumed that Paulson had a long position that allied their interest with other investors. But in fact Paulson was effectively massively short in the CDO market.

      1. stendahl says

        I’ve now had a chance to read the SEC document in full. The emails referenced in the charges appear to confirm that GS was looking for a patsy manager for the CDO (paragraph 21) and that GS acknowledged internally and to ACA that Paulson was the sponsor of the portfolio (paragraphs 27, 29, 30, 43, 47, 57, etc.) but did not disclose this to investors in or insurers of the CDO.

        Following the money seems to support the SEC’s case, though it requires some reading between the lines. It appears that GS created the CDO to give Paulson a way to short a target group of RMBS. Essentially GS would write CDS to Paulson and then lay the risk off on the investors in the CDO (paragraph 60). You get a sense that Paulson was looking high and low for ways of being short the RMBS market and when they ran out of CDS writers, they asked Goldman to help them go short against investors.

        It sounds like ACA sold CDS on the super senior tranche and that ABN Amro backed up ACA’s insurance (paragraph 61, 63, 66). It appears that GS sold those CDS to Paulson.

        It seems inevitable that IKB and other investors in the deal will sue Goldman (paragraph 60). Sounds like ACA/ABN Amro is also likely to sue (paragraph 63, 66). The document says that IKB lost $150 mln and ACA/ABN lost $841 mln. It would appear they have grounds to sue even if GS beats the SEC charges.

        The fact that GS created this vehicle to allow Paulson to go short sounds material, and its lack of disclosure sound like a violation of the Exchange Act.

        The unstated but implied guilt/incompetence of the ratings agencies in this transaction is nauseating.

        1. Marshall Auerback says

          Yes. But it’s not the arrest — it’s the conviction, on felony charges, of major cases (not a teller who embezzled $40K). You see how stark the contrast is.

          1. stendahl says

            Two other observations…

            The charges show a detailed understanding of the facts and mechanics involved in these transactions. This suggests the investigation must have been in the works for some time. Some of the details make one wonder whether their case benefitted from someone inside feeding them information – ACA? Paulson? Someone at Goldman? A ratings agency? A competitor?

            The fact that Paulson was willing to take the equity piece makes Goldman’s omission of Paulson’s involvement that much more glaring. Paulson’s willingness to purchase this piece shows that his conviction was so high, he was willing to lose 10% on the equity and the cost of the CDS to bet against these instruments.

            I suppose in the heady days of the mid-00s that might have even been a selling point for investors.

          2. Marshall Auerback says

            These bankers are like someone who finds a market for nuclear waste in Yuca Mountain, only to find out that the end buyer is a terrorist who constructs a dirty bomb with the materials. It’s like turkeys voting for Thanksgiving.

  4. George Kesarios says

    I think there are good chances that Goldman will turn into Drexel.

    Not only is this sub prime mess even worst than the Junk Bond scandal, but now everyone who ever lost money in these instruments will have their day in court!!

  5. greg says



     Dec 11, 2007 – Goldman Sachs Acquires Litton Loan Servicing
     June 19, 2008 Fremont Reorganizing files BK



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