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[Abacus] Markets Live transcript – Goldman/SEC special – 16 Apr 2010

Posted by Paul Murphy on Apr 16 16:07.

Markets Live chat transcript for the chat ending at 16:28 on 16 Apr 2010. Participants in this chat were: Paul Murphy Izabella Kaminska, FT Joseph Cotterill Tracy Alloway, FT Bryce Elder

Good morning from New York

Test

Hello

I cant get in

We are waiting to be put through to the Goldman SEC conference call

Paul you there?

Sorry, here now

Ive got music playing, what about you?

We are hear to discuss the SEC’s mvoe against Goldman Sachs

We are just logging in to the SEC conference call

bear with us a mo

Perhaps some quick background?

Go with it

The SEC has just charged GS with fraud tied to its subprime CDO Abacus

Shocking stuff

Here is the full link to the statement

http://www.sec.gov/litigation/complaints/2010/comp-pr2010-59.pdf

Tracy — come over this side

You know all abotu this, no?

I’m in!

Listening now

Don’t know who is talking

Hello! TRIAL OF THE CENTURY

Will other companies be brought into such lawsuits is teh question

Have you found any others doing such things

Sec says it won’t comment

Tracy — add this to your regular link: ?participant=true

ABC news asking – can you tell us about the folks who were long, who were the victims who lost?

IKB was a long side investor, and also ABN Amro

Why wasn’t Paulson & Co included in the charges?

SEC: We charge those who we feel apporpriate according to the law

Ah look – I’m here now

NY Post now

“Was this a one off rogue thing or more systemic?”

Q over whether this was systemic for Goldman’s practices

SEC say they are looking across the board for similar stuff

pursue aggressively

SEC: “we’re going to continue to look at products and practices implicated by the financial crisis, and we find similar deals like this one, or other that violate securities law we will pursue”

As for what it means for Goldman — investors in this ABACUS lost $1bn, Goldman’s market cap is $90bn

My note taking is very rough FYI

CNN asking — plain english — was this essentially a huge confllict of interest

PM – why don’t you transcribe answers, and i transcribe questions

Okay — let’s try

SEC: Goldman failed to make adequate disclosure

SEC: violation of anti-fraud provisions of securities laws

That’s a very interesting point re disclosure

Just to drill down in plain english – you’re charging fraud over here which involves not disclosing to the investors that paulson is betting against tehse mbs that your money is dependent on them?

Junior T — just GS at the mo

Because that was always Goldman’s defense

Go on Tracy

Shall I link to relevant bits from the filing, and Twitter reax so on as it becomes relevant?

Hi by the way

That banks were sophisticated investors

Go for it Josseph

Next going to PBS

and could see all the underlying assets in the CDOs

and make their own investment choices

Why go transaction by transcation, why not firm by firm in fraudulent behaviour?

SEC: enforcement authority — role to charge where we find the evidence

That’s what we’ve done i nthis case

Is that a different strategy?

There are cases where we charge multiple transaction — and single transactions

The individual you charged was high up the food chain?

The individual we charged was the person individually responsiible for structuring the deal

Woudl it be obvious to ho higher up?

As for what might come next , as ROTR been asking — SEC sent Goldman a Wells notice apparently some time ago

SEC: we charge those that we felt appropriate based on the evidence

Dow Jones

Two qs

Is fabric tourie man or woman

Is this about disclosures goldman made to investors?

Are there other type of violations you can look at?

This looks like where youw ere able to press charges

SEC: well securities laws largely premised on telling investors the truth

Is this why paulson is not named

Wells notice basically asks the firm if it wants to present evidence against making a charge. I do wonder who else might have Wells notices, and why charges have been made nonetheless in GS’s case

oops sorry quote

Where are you looking globally here?

SEC: Safe to assume we are looking at a wide range of products and transactions arising out o fthe credit crisis

SEC — look at our chrages on the mortgage origination side

Then look at charges re valuations of funds

SEC going through examples

ooooooooh – tremble wall street

Looks like SEC is going from issuers it’s previously pursued (eg. Countrywide) to brokers, now to dealers. Getting higher all the time

Moving across the entire spectrum

Who’s talking?

You sound different

Two mroe questions

National Radio

What was in it for goldman here? I can see how paulson benefited but how did GS?

I don’t get the motive

Motive not soemthing that has to be proven under securiteis laws

direct the question elsewhere

Why would someone do this on the goldman side?

Goldman got a fee of course

But doesn’t it get a fee anyway?

Is there any referral to dept of justice

No comment

what kind of penalties accompany these sorts of charges?

We can obtain disgorgement

disgorgement sounds ominous

Fees from the wrongful transaction — plus a penalty

Btw, GS is still tanking, as Markit reports

Bloomberg now

5 year CDS on GS is widening out following the SEC announcement: 117 bps vs a close of 90 bps. Stock is down close to 17%

Want to ask about other parties doing similar things, can you comment on how rampant the practice was in the industry?

Look i dont think appropriate to comment, except to say we are looking very closely at these products and transactions

If we see the same profile repeated elsewhere we would look v closely

Just quickly, are tehre issues of fiduciary duty a case like this raises?

Obviously part of the current reg reform, does it raise issues for that discussion or is this definable in more traditional securities fraud?

Debate not relevant here particularly

thank you

Wrapping up the conference call

Thanks and have a good day

Is what they said

hung up now

So, how significant is this?

where are the shares now?

it is obviously terrible PR for teh Squid

Lots of comment on the right about blame and contain though Paul

it also twists the blame game — puts the spotlight on Paulson and other shorters

It’s interesting that the charge relates to misleading investors

This idea that they somehow extended the bubble and made it worse

Yes – something we’ve seen lately with Magnetar and Michael Burry

Well, they’ve clearly got firm evidence in the form of investors notes from the Goldman sales calls

There will also be recordings of those

Increasingly negative PR for those that shorted subprime

Fitz – that link is very funny

Paul – have you got a live share quote btw?

dow is off 1%

FTSE is off 83 pts

another reader – they did know via the Wells notice. I find that really weird

168.17 Down 16.10 (8.74%) 11:06AM ET

having been pretty flat most of the day

Sorry — taht’s not live!

this is live ish 163.29 Down 20.98 (11.39%) 11:30AM ET

Markets Live-ish

That’s got to be an over reaction, I’d say

one would think

Adam P — re the timing

i mean presumably this is reputational

We suspect the NYT were on this story and ready to go

how big a fine can they get?

Caused the SEC to rush out the details

Yes – they appear to have done a big write-up very quickly

As a reminder, the NYT have been on this for a long time

A Reader — we don’t know when the notice was sent, but the SEC investigation started months ago according to the NYT story

Tracy — heroic

Yep – this bit in particular, from a December article

As early as the summer of 2006, Goldman’s sales desk began marketing short bets using the ABX index to hedge funds like Paulson & Company, Magnetar and Soros Fund Management, which invests for the billionaire George Soros. John Paulson, the founder of Paulson & Company, also would later take some of the shorts from the Abacus deals, helping him profit when mortgage bonds collapsed. He declined to comment.

makes ya think

Indeed

ON the Wells notice front

I though firms were under an obligation to notify the market when they receive one

PM ukprivateinvestor asking if fine could be as much as $1bn

Didn’t ICAP notify

Fine cant be anything like that, surely

There will be the fees — a few hundred dollars

in which case, it is all a reputational risk for the stock price

And then a penalty — ive no idea what, but it will be negotiated

I suppose the issue is whether investors start clawing back money

there is that too

Investors in this CDO lost $1bn, for context — I think

Which is something we’ve already seen in the case of mortgage servicers

and that’s had some effect on banks’ bottomlines already

Okay — good points

re money lost by investors

Simon Hobbs is banging on about this now on CNBC

taht does warrant a re think in terms of hit to GS

Says this is a huge story because it suggests that the government has changed its stance on banks

that it shows the administration has decided that banks have a ‘duty of care’ to clients

Paulson & Co have no comment apparently

GS stock not bouncing 163.00 Down 21.27 (11.54%) 11:38AM ET

Here’s a theoretical question for you…

Do you think knowing Paulson had a hand in structuring these CDOs

would have put investors off?

I mean, they could still see the underlying assets…

Really good point Tracy

Well, did they know he was shorting ?

Would they have known he was the one picking the securities?

And that that was creating the cash flow into the structure?

no – they wouldn’t

I dont think they understood what they were buying at all

Would be a v intersting court argument

definitely

They were too stupid to be defrauded

Vix is up 20 per cent apparently

shame i passed on karaoke with lawyer types this evening

I could be asking questions

Yeah, Tracy — waht time is it in Tokyo?

Ah, wait — look at this from the filing

GS&Co also misled ACA into believing that Paulson was investing in the equity of ABACUS 2007-AC1 and therefore shared a long interest with CDO investors. The equity tranche is at the bottom of the capital structure and the first to experience losses associated with deterioration in the performance of the underlying RMBS. Equity investors therefore have an economic interest in the successful performance of a reference RMBS portfolio. As of early 2007, ACA had participated in a number of CDO transactions involving hedge funds that invested in the equity tranche.

that’s quite strong

So allegedly misleading that Paulson was long on a critical point

that suggests not only did they not know

That’s v interesting

they were mislead on purpose

Not just that no one knew he was short

because GS always said they were the equity investors, i think

This is what they said in response to the NYT article

Synthetic CDOs require one party to be long the risk and the other to be short so without the short position, a transaction could not take place.

It is fully disclosed and well known to investors that banks that arranged synthetic CDOs took the initial short position and that these positions could either have been applied as hedges against other risk positions or covered via trades with other investors.

rather implies they were the equity investor

So what now?

Ah, but “initial” short

At the time of creation — thereafter sell the position to paulson

Goldman CDS is now at 125 bps, according to Markit

Here’s a bit of comment

From marc Ostwald at monument

Practically Portuguese, that

The issue here is not about what the outcome of these proceedings will turn out to be, but rather
that, like the first mooting of the ‘Volcker rule’ in late January, this is a leftfield event that
jolts financial markets out of their complacency on the macro backdrop, which in fact remains very
adverse, i.e. just because a given trend is no longer deteriorating, and may even be improving, does
not mean that it is de facto ‘positive’, and above all highlights that assumptions (quantitative
particularly, but also qualitative ones) need to be continually questioned. The ‘tick box’ culture of
recent decades has in effect just seen a rather large torpedo go through its hull, the question is
how large will the influx of proverbial “water” be?

CMA says: The 5y on Goldman Sachs had rocketed to 179.6bps from a close yesterday of 90.6

looks looks like the financial media will be kept busy over the weekend

Worth keeping an eye out on Yves Smith at Naked Capitalism

and Janet Tavakoli

Izzi — ouch. Interesting stuff from Marc

they’ve been some of the most oustpoken about GS and its CDOs

I hear Morgan Stanley shares are down too, is that right?

One thing we will have to look for is repurcussions up the chain at GS

Down 6.38% according to my delayed quote

Only flicked through the full SEC complaint

But there’s “management committee this”

“management committee that

Who knew what and when

It is jaw-dropping stuff, having to reread it

Fabrice Tourre, age 31, is a registered representative with GS&Co.

He’s only 31!!

@monkey – shhhhhhhh

Is bloomberg flashing quotes from this Tourre guy

Monkey — how ungentlemanly

@lorcan – my millions will have to wait

Trollope — nice one

Trollope — heh, read Goldman’s shareholder letter from a few days ago too

Bloomberg have some quotes from emails, apparently

This reminds me of what Jeremy Grant – our exchange correspondent was saying to me the other day

The primary remit of the SEC is to protect the investor

And make sure they are not misled

So there could well be implications for structured products

Across the board

Remember the SEC has even put out a moratorium on new ETFs using derivative structures

What will the banks have left?

OOo – Lorcan – can you send that to me? (Tracy.Alloway@ft.com)

Look at this email from Tourre

“More and more leverage in the system, The whole building is about to collapse anytime now…Only potential survivor, the fabulous Fab[rice Tourre]…standing in the middle of all these complex, highly leveraged, exotic trades he created without necessarily understanding all of the implications of those monstruosities!!!”

CMA has issued a correction on the CDS btw

129.6bps not 179.6bps

close yesterday of 90.6

Goldman’s released a statement

oooh

do share!

charges are “unfounded”

Mr. Van Praag?

Bloomberg reporting it…

(thanks Lorcan)

Bethany McLean of Enron fame speaking on Bloomberg now too

She’s a reporter at Vanity Fair – who recently covered GS too

Mr. B talking to Gillian

Sorry – just to add another voice, want the Goldman response?

Yes pleasae

NEW YORK — April 16, 2010

The Goldman Sachs Group, Inc. (NYSE: GS) responds to a complaint filed by the
SEC today.

The SEC’s charges are completely unfounded in law and fact and we will
vigorously contest them and defend the firm and its reputation.

The Goldman Sachs Group, Inc. is a leading global investment banking,
securities and investment management firm that provides a wide range of
financial services to a substantial and diversified client base that includes
corporations, financial institutions, governments and high-net-worth
individuals. Founded in 1869, the firm is headquartered in New York and
maintains offices in London, Frankfurt, Tokyo, Hong Kong and other major
financial centers around the world.

Contact:

The Goldman Sachs Group, Inc.
Media Contact:
Lucas van Praag, 212-902-5400

That’s it.

Cheers Bryce

That was to the point.

That makes the SEC sound like it’s a fantasist

completely unfounded in law

Poor Lucas

GS stock not getting better

159.93 Down 24.34 (13.21%) 11:56AM ET

Crikey

Dow off 146 pts too

Oooh, I just found something interesting

It’s a cached article from Live News (?)

Created in 2005 by two traders at Goldman Sachs, Jonathan Egoli (graduate of Princeton) and the French Centrale Fabrice Tourre, CDOs (Collaterized debt obligations) known as Abacus products were stars.At that time the housing market was booming. More than $ 108 billion of CDOs were sold to institutional investors, pension funds and insurance companies in the United States and Europe between 2005 and mid 2007, according to statistics from the company Dealogic.

… Substantial benefits for other

But the end of the housing bubble has left buyers of CDOs on the straw. Goldman Sachs was not the only one to make the right bet. According to Wall Street sources quoted by The New York Times, other banks, including Deutsche Bank and Morgan Stanley, and smaller investment companies as Tricadia also bet on falling subprime.And were able to recover sums from insurers.

That was a December 2009 article apparently

http://webcache.googleusercontent.com/search?q=cache:http://wtwoodsoncrew.org/category/events/

interesting

Put Fabrice Tourre into an anagram machine

Comes out with too many options

6156 to be precise

http://www.mbhs.edu/~bconnell/cgi-bin/anagram.cgi?cpw=1&phrase=Fabrice+Tourre

Oooh i’m 3rd stage linked with Tourre on Linked In

TB — yep

OK, I have the first counterargument to the SEC claims

From Alea on Twitter

Go with it

Alea is a great tweeter

OK, bear in mind Alea is not a lawyer though!

alea_ @jsphctrl i am NOT a lawyer, but remember we are not dealing with widows and orphans but “accredited investors”, people who by…

alea_ @jsphctrl …definition are expected to do their own due diligence…+

alea_ @jsphctrl ….I don’t expect ACA or anybody else to play the moron defense, it will laughed out of court

here’s a bit of stuff from Christopher Whalen

“Institutional Risk Analytics

1) The SEC move marks an escalation in the battle to expose conflicts of interest on Wall Street. The key issue was the duty of care firm had to buyers of securities vs. trading strategy/relationship with Paulson. Once upon a time, Wall Street firms protected clients and observed suitability, know your customer. This litigation exposes the cynical, savage culture of Wall Street that allows a dealer to commit fraud on one customer to benefit another.

2) The SEC move also implies a further assault on the OTC derivatives markets and specifically on the use of Rule 144 private placements for ABS and complex assets such as CDOs. I expect that as the year goes on, SEC is going to be holding hearings on this issue and issuing more regulations. Financial regulators will need to respond to the suitability/144A issue as well. It is time to compel dealers to go back to the old rule of putting the customer first and not taking advantage of one customer to advantage another.

When were customers put first?

http://www.amazon.com/Where-Customers-Yachts-Street-Marketplace/dp/0471119784

TB – yes, for me, allegedly misleading that Paulson was long on something — that sticks out still

Here’s some Strategas comment

1) The danger in this event is broadly whether the SEC treats this as a Goldman-specific issue, or widens its inquiry into many other firms.

2) Our Washington team wonders whether this has anything to do with Administration’s warning to financial institutions to stop lobbying on financial regulation “or else” – this could be the “or else.” One wonders whether the Administration has the votes to pursue more aggressive financial regulatory reform, especially on derivatives or some form of the Volcker rule. It would seem unlikely, in our view that the Administration would want to pursue a wholesale indictment of the financial industry, given the nascent recovery.

3) We believe it is unlikely this will have a big impact on economic growth, which is being driven by manufacturing currently. In the short term, the market as a whole could be at risk until investors figure out whether this is a Goldman specific issue, or an indictment on the financial industry.

Here’s a prior example from 1992 of how actions of this sort have played out – a key takeaway is that the fines can be quite substantial.

http://www.justice.gov/atr/public/press_releases/1992/211182.htm

That’s the Salomon case

T bills

Cos Salomon $290m

for rigging the T bill market

Room for some more Twitter pushback against the filing?

@Monkey – where do you find the time?

alea_ @jsphctrl well let’s see if ACA claims they were misled…MBIA did just that and case was thrown out of court (vs Merrill Lynch)

EconOfContempt @jsphctrl Well, ACA *was* independent. Paulson “recommended” 123 bonds; ACA flat rejected 68 of them. Proof of independence.

(Economics of Contempt is a top blogger AND a structured finance lawyer)

But compare this from Paul Kedrosky

Last Goldman comment: Strikes me that crux of case is allegation ACA was told Paulson was long CDO equity tranche. Everything else noise.

And one last bit from Econ of Contempt

EconOfContempt @jsphctrl Plus, from ACA email to GS during structuring:”for us to put our name on something, we have to be sure it enhances our reputation”

I have the transcript of the SEC comment

Kaufman Comments on Announcement that SEC has Charged Goldman Sachs with Fraud
“However long it takes, whatever resources the SEC needs, Congress needs to continue to back the SEC and the Justice Department in their efforts to uncover wrongdoing”
WASHINGTON, DC – In reaction to the filing of charges by the Securities and Exchange Commission against Goldman Sachs today, Senator Ted Kaufman (D-DE) issued the following statement:

“We can have only one justice system in this country for both the rich and powerful and those who are not. I’m not prejudging the merits of this action, but if we don’t treat Wall Street firms that have allegedly defrauded investors of millions of dollars with the same gravity as we treat all others, why would our citizens have faith in the rule of law?

“I applaud Robert Khuzami and his team at the Enforcement Division of the Securities and Exchange Commission. As he said to me at a December 9 hearing I chaired on the Fraud Enforcement and Recovery Act, these are complicated cases that take time to develop. However long it takes, whatever resources the SEC needs, Congress needs to continue to back the SEC and the Justice Department in their efforts to uncover wrongdoing.

“To restore the public’s faith in our financial markets and the rule of law, we must identify, prosecute, and punish with stiff fines or prison those who broke the law. Their fraudulent conduct has severely damaged our economy, caused devastating and sustained harm to countless hard-working Americans, and contributed to the widespread view that Wall Street does not play by the same rules as Main Street.”

Kaufman co-authored the Fraud Enforcement and Recovery Act with Senators Patrick Leahy (D-VT) and Charles Grassley (R-IA), which provided additional resources for law enforcement authorities to pursue financial fraud connected to the financial crisis.

hang on doh, that’s Kaufman’s comment

misread

that’s kjaufman

senator

yup, was cutting and pasting before reading (sorry)

fine up there

Dunno what else we can add here right now

158.88 Down 25.39 (13.78%) 12:19PM ET

Here’s some CDS context from Anousha Sakoui

GS wider than columbia, costa rica, and the central bank of tunisia- cma

Hahahahaha

How can you have CDS on the central bank of tunisia?

http://www.bct.gov.tn/bct/siteprod/english/index1_an.jsp

Cardshark — thanks, Gillian is belting something out right now from the looks of it.

The most substantial sovereign
placement in the region was made by the Central Bank of Tunisia (which raises
funds in foreign currencies on the state’s behalf) with €450 million in sevenyear
fixed rate paper, the country’s largest deal in euros to date.

From BIS

Hello – Ex Paulson fund manager Pellegrini cooperated with SEC in Goldman probe, according to Reuters

It’s true, they have debt that can be insured

thanks Izy

You did ask

Right, i am being asked to take part in an emergency session to discuss GS

But not near a computer

I’m going to bed…

Nearer liquidity access

Tracy — time there?

Thanks for joining

We should wrap this up now

it’s 1.30 am

Thanks everyone over on the right for joining us

that’s structured finance dedication for you

Yep, cheers everyone

Thanks to Tracy in Tokyo

and Izy and Joseph in London

Colourful statement from senator bernie sanders BTW

BURLINGTON, Vt. April 16 – Sen. Bernie Sanders (I-Vt.) issued the following statement after the Securities and Exchange Commission accused Goldman Sachs & Co. of fraud.

“While its action was slow in coming, I applaud the SEC for finally beginning to deal with the illegal behavior of major Wall Street firms which, in my view, knowingly sold junk products and as a result helped cause the worst recession since the 1930s.”

I will keep an eye on things here in NYC

@Monkey – I believe I am meeting up with some former colleagues

Mr. Brown is stuck in Dover

Okay — closing the session

Bye

Suere there wil lbe more on this later on AV

Other than that, come back fro regular ML on Monday

Bye everyone

Good weekend to all

Bye!

Home time in London

And Bryce !

IN London

Cheers Bryce

PM stays to work tho

Cheers.

ending session…

Article Series - Abacus

This entry was posted by Paul Murphy on Friday, April 16th, 2010 at 16:07 and is filed under Uncategorised. Edit this entry.

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[Abacus] Markets Live transcript – Goldman/SEC special – 16 Apr 2010

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