How deep did the Goldman fraud go? They are only scratching the surface

First, the good news.  Mortgage fraud is no longer only associated with overextended borrowers. 

Goldman Sachs is being accused in a civil case.  The key thing that you need to know is that the main issue is whether Goldman was being honest with investors about how it marketed a CDO (called Abacus) tied to mortgage securities in 2007.

I was on a mortgage trading desk in 2007 and worked deals with Goldman.  I don't know if my deals went to Paulson or not, but I wouldn't be surprised.  I'll go into the fraud that went on in another posting.  I'll just give you a heads up that in my opinion they are only scratching the surface and that the ratings agencies are going to go down in this thing as well.  If the case proves to have legs (which it might), look for some criminal investigations to follow, via WSJ:
Here’s a break down on some of what is being written in the newspapers and on the blogs about some of the key issues raised in the Goldman case.

Critics may find many aspects of the Abacus CDO distasteful, but what exactly was the alleged fraud? NY Times columnist Paul Krugman writes this morning that fraud allegations in the financial crisis have previously been focused on predatory lending and misrepresenting of risk. He argues that the Goldman case presents a “third form of fraud”:

“….the S.E.C. is charging that Goldman created and marketed securities that were deliberately designed to fail, so that an important client could make money off that failure. That’s what I would call looting.”

But in reality, the only fraud the SEC is charging Goldman with is that it failed to disclose to investors Paulson & Co.’s role in helping to select the mortgage collateral backing the CDO that the hedge fund intended to be against. Goldman has said it made full disclosure to investors.

In light of the all the brouhaha, The Wall Street Journal’s editorial board says the alleged disclosure violation seems a little thin:

“After 18 months of investigation, the best the government can come up with is an allegation that Goldman misled some of the world’s most sophisticated investors about a single 2007 “synthetic” collateralized debt obligation (CDO)? Far from being the smoking gun of the financial crisis, this case looks more like a water pistol.”

So far the only individual charged in the case is a Goldman senior vice president, Fabrice Tourre, who was involved in creating the CDO and whose boastful email was cited in the SEC complaint. The New York Times reports that there were several top Goldman executives, including Lloyd Blankfein, who oversaw and were intimately involved in the unit that created the CDO, citing unnamed sources. The article raises the specter of whether other Goldman executives could be implicated in the case. A Goldman spokesman told the Times that Blankfein and other brass weren’t involved in the creation of Abacus.

Has Paulson & Co. gotten off too easily? The SEC says the hedge fund wasn’t charged in the case because Goldman was responsible for making all of the appropriate disclosures about the make up of the CDO, a point reiterated by Paulson. But the Baseline Scenario blog writes:

“John Paulson was not the trigger man–it was Goldman and its executives who withheld adverse material information from their customers. But if the entire scheme was Mr. Paulson’s idea–if he was in any legal sense the mastermind (obviously he was, but can you prove it beyond a reasonable doubt?)–then we are looking at potential conspiracy to commit fraud.”

We all know that Wall Street is rife with cozy relationships, but here’s one that hits home in the Goldman case.

Vicky Ward, of Vanity Fair, reports that the former head of the now-defunct ACA Capital, the Abacus CDO manager that the SEC alleges was defrauded by Goldman in the deal, is Alan S. Rosenman. He is married to Frances “Fran” R. Bermanzohn, who is a managing director and deputy general counsel at Goldman.


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