(UPDATE: Monday's NY Times has a related lede, "Top Goldman Leaders Said to Have Overseen Mortgage Unit," by Louise Story, which tells us that these fraudulent practices were managed from the very top of Goldman's hierarchy. [h/t to bink for reminding me in the comments of a story that was running on Zero Hedge, earlier today, which the NYT has since picked-up as tomorrow's lede.] Also, Paul Krugman weighs in, referring to Goldman exec's as, "Looters in Loafers.")
The WSJ is now coming right out and saying it: "The SEC's case against Goldman Friday has exposed an open secret on Wall Street..." Many, including the SEC, are calling it pervasive fraud. From ProPublica, also on Friday: "Other Major Banks Did Deals Similar to Goldman." From Monday's WSJ:
SEC Investigating Other Soured Deals
By CARRICK MOLLENKAMP, SERENA NG, SCOTT PATTERSON and GREGORY ZUCKERMAN
Wall Street Journal
April 19, 2010
The Securities and Exchange Commission, after having hit Goldman Sachs Group Inc. with a civil fraud charge, is investigating whether other mortgage deals arranged by some of Wall Street's biggest firms may have crossed the line into misleading investors.
The SEC's case against Goldman Friday has exposed an open secret on Wall Street: As the housing market began to wobble a few years back, some big financial firms designed products aimed at allowing key clients, such as hedge funds, to bet on a sharp housing downturn...
Bold type is diarist's emphasis.
Monday's WSJ confirms what Bloomberg and the NY Times vaguely described in their reports on Friday:
S.E.C. Inquiry May Widen, Khuzami Hints
April 16, 2010, 2:40 pm
NEW ORLEANS -- The Securities and Exchange Commission is looking closely at other mortgage security deals made in cooperation with investors betting against the housing market in the wake of its civil lawsuit against Goldman Sachs, the agency's enforcement director said Friday.
"We're looking at a wide range of products," the official, Robert Khuzami, said at a news conference here. "If we see securities with similar profiles, we'll look at them closely."
Mr. Khuzami, who was here to participate in a panel discussion at Tulane University's Corporate Law Institute, argued that Goldman violated securities laws by not disclosing to investors in a particular mortgage investment that the security was constructed in cooperation with Paulson & Company, a hedge fund with a financial interest in seeing the product fail.
The S.E.C.'s lawsuit contends that while Goldman told investors that the security, a collection of mortgage bonds known as Abacus 2007-AC1, was being managed by ACA Management, the investment bank had actually let Paulson select specific bonds that he wanted to bet against as part of the portfolio.
In many instances, while foreign purchases of US collateralized debt obligations (CDO's) were involved, ultimately, it was American communities that were the losing investors in those deals. Meanwhile we're learning that--under the auspices of multiple Wall Street firms--those investment vehicles were designed to fail by the hedge fund industry, as Wall Street simultaneously placed bets against the performance of those securities in the credit default swaps marketplace, without properly informing the purchasers of the underlying CDO's of their surreptitious actions.
Parsing various analogies I've heard throughout the blogosphere, it was like someone selling you a house, while they went out and bought fire insurance on behalf of the arsonist that was already planning upon burning it down.
Some still call that fraud.
Aside from the SEC charges against Goldman on Friday, few formal charges have been filed, to date. However, today's WSJ article (and many others related to it that have appeared in the MSM and the blogosphere in the past few days) indicates that Merrill Lynch, Bank of America, DeutscheBank, UBS, JPMorgan Chase, and numerous other Wall Street firms may now be in the crosshairs of the SEC, and other possible state and federal agencies' investigations.
Today's Journal article provides details on numerous investment vehicles/deals of interest, including more information on the now - highly - publicized, Goldman - Sachs - sponsored Abacus deals.
Among investors in Abacus, the Goldman-sponsored fund the SEC focused on, was an affiliate of Germany's IKB Deutsche Industriebank AG, which put in $150 million, according to the SEC complaint. The affiliate, Rhineland Funding Capital Corp., issued its own short-term IOUs, to investors such as King County in Washington State and a suburban Minneapolis school district.
Just months after Abacus closed, the investment by the IKB affiliate was nearly worthless and the affiliate couldn't renew maturing IOUs. That ultimately harmed U.S. towns and cities that had invested in debt sold by Rhineland.
Washington state's King County has sued IKB claiming that unknown to the county, an IKB affiliate was filled with "toxic, low-quality mortgage-backed securities." IKB is fighting the suit, pending in federal court in New York. An IKB spokeswoman declined to comment on the case.
But, unfortunately, this is only the latest in a string of now-public truths that all demonstrate that Wall Street doesn't think twice about systematically pillaging taxpayers and local U.S. governments.
From just over three weeks ago...
Breaking DoJ: 12+ Wall St. Firms Conspired In Muni Ripoffs
Fri Mar 26, 2010 at 05:04:45 AM EDT
This evening, the MSM brings us the latest--and, perhaps, one of the most egregious--in a growing list of Wall Street outrages perpetrated against Main Street in: "JPMorgan, Lehman, UBS Named as Conspirators in Muni Bid-Rigging."
In tonight's report, we're now learning of how more than 12 of the world's largest financial institutions have been named as "co-conspirators" in a scam to outright ripoff towns and cities across America via underpayments "...to U.S. state and local governments on investments, according to documents filed in a U.S. Justice Department criminal antitrust case."
The coverage of this matter reminds us of recently-publicized cases reported in municipalities spanning the globe -- from Jefferson County, Alabama to Milan, Italy -- all relating to Wall Street involvement in local kickback schemes and/or the conveyance of fraudulent/misrepresentative information by those firms to local government officials and investors.
I'll leave this post with the intro to my last (which is still open, so I can't "pimp" it):
"There is fraud at the heart of Wall Street, according to the Securities and Exchange Commission," Simon Johnson tells us in his Baseline Scenario post from Saturday morning.
Our Pecora Moment
By Simon Johnson
6:36 AM, April 17, 2010
We have waited long and patiently for our Ferdinand Pecora moment - a modern equivalent of the episode when a tough prosecutor from New York seized the imagination of the country in the early 1930s and, over a series of congressional hearings: laid bare the wrong-doings of Wall Street in simple and vivid terms that everyone could understand, and created the groundswell of public support necessary for comprehensive reregulation. On Friday, that moment finally arrived...
Is Johnson right or will the forces that virtually own our government's legislative branch prevail at the end of the day? As blogger George Washington (and Kossack Badabing, and many others) all but echoed a numb public's mass frustration last night (SEE: "Goldman Sacked?"), as well: Is this the Pecora moment? Or, is it kabuki?