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On October 16th 2009, the US Securities and Exchange Commission in a widely criticised move inducted 29 year old Adam Storch, Vice President of Goldman Sachs Business Intelligence group as the Chief Operating Officer of SEC. Coming in at a time when several cases against Wall Street Big Banks were under investigation, the signs of the administration’s willingness to let the accused play the cop was ominous.
Relatively inexperienced but apparently well connected Mr Storch was not even a licensed broker and has no market experience as a broker dealer operator, which is extremely important for such a key function. Besides he has only seven years experience under his belt after his MBA from Stern NY, of which only 4 years were in fraud detection, all at Goldman.
In less than six months time, SEC investigation into Goldman Sachs role, in undermining the housing mortgage market was diluted as a weak and perfunctory civil suit was filed in the Abacus deal, at a NY District Court. A criminal complaint with fraud and forgery charges for misleading clients, would have been more appropriate. For it involved divulging client proprietary information to short sellers, and making profit from both promoting and shorting of issued mortgages, considering the evidence at hand, against Goldman
The complaint, a civil suit filed in U.S. District Court for the Southern District of New York, charges Fabrice Tourres an VP with Goldman Sachs with making “materially misleading statements and omissions” to investors, which is a minor charge. Importantly it cannot cause any damage other than a impose a fine to the well connected super-rich Banker punter of the Wall Street.
Why was this not filed as a criminal case, and why did it not include the Goldman bosses, who must have authorised the deal?
Was this an isolated incident at Goldman, or did the firm engage in similar anomolous and sharp practices in many other deals?
It is common knowledge that over 40 other similar hedging and shorting deals, some of ACA investments , which was backing $ 26 billion of CDS housing mortgage securities, besides a dozen deals which were registered in the Cayman Islands, where investors don't have to pay U.S. federal taxes, are under investigation and scrutiny where action is pending.
The Abacus deal where the charge was filed by the SEC was one of about two dozen similar bundles in the ABACUS series, that closed on April 26, 2007, is not a particularly watertight case. Paulson the hedge front manager at the centre of the controversy has not been charged, because he did not do anything wrong, except that he completly denies that he chose the securities. If proven after he makes such a statement under oath, he could be charged with perjury.
Paulson paid Goldman about $15 million for structuring and marketing the deal. Goldman then sold the same to unsuspecting investors,including ACA investments, the German bank IKB who put in $150 million and Dutch bank ABN AMRO who invested $890 million in the Abacus AC-01 mortgages, without disclosing the fact that the bundle was created with an intent to bet against it by Paulson.
Specifically Goldman lied that Paulson had invested $200 million in the deal, when actually he had bet against it. As the Abacus deals plunged in value, Goldman along with several other hedge funds made money on their CDS cashing in on negative bets, while the Goldman clients including these European Banks who bought the $10.9 billion in investments, lost billions of dollars. Goldman however claims that it lost $ 90 million on the long positions, but does not divulge the money it made in the short positions, betting against each of those 90 securities in the mortagage bundle.
The suit charged that while Goldman told investors that the mortgage bonds pooled together in Abacus had been selected by an independent manager, they had really been chosen by John A Paulson. Paulson a prominent hedge fund manager, predicted that the overheated market was about to collapse and hence created a bunch of mortgages likely to default, to short, and sold the idea to Goldman. Paulson had earned an estimated $3.7 billion in 2007 by correctly wagering that the housing bubble would burst. Goldman let Mr. Paulson select mortgage bonds that he wanted to bet against — the ones he believed were most likely to lose value, and then individually advised clients like IKB and ABN Amro to buy them. ACA management was set up as a sucker, officially packaging the mortgages in the ABACUS fund that Pulson actually wanted to sell.
Within six months, 83 percent of the mortgage-backed securities in the bundle had been downgraded and 27 percent were placed on negative watch by Wall Street ratings agencies, the complaint said. By the following Jan. 29, it said, 99 percent of the portfolio had been downgraded, costing investors more than $1 billion.
But this was the tip of the iceberg, only one of the odd two dozen Abacus deals structured and shorted by Goldman and its fellow hedge operators.
The reason a civil suit was filed in only one of the cases, albeit a weak one by SEC , was to possibly test and create a market panic and a stock market slide. This would prove to the lawmakers, that if Goldman sneezes, the economy catches a cold. To add on pressure on the employment angle , Goldman promply announced cutting over 3000 jobs,in a widely publicised move, soon after the SEC charges were filed.
A major market panic, would effectively stop both SEC action as well as the Senate panel investigations that are on in several dozen cases against Goldman and other Wall Street Bankers for hedging and shorting to bring down the CDS market and cause the 2008 crash.
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