It does not
take much reading between the lines of recent news stories--although, technically, this is still
just speculation--to come to a yet-to-be-confirmed conclusion that many executives from numerous Wall Street firms, including Goldman Sachs' past and present CEOs Hank Paulson and Lloyd Blankfein, respectively, may be in the cross-hairs of multiple fraud investigations by the Securities and Exchange Commission (SEC), the Financial Industry Regulatory Authority (FINRA), and Congress. (See Gretchen Morgenson's NY Times links, further down the page.)
Let me lay it all out for you...day-by-day over the past week...
Five days ago, I posted the following: "The AIG-Wall St. Bailout Corruption Story That Won't Go Away."
Do economist, University of Missouri-Kansas City professor and white collar crime investigator William Black, former NY Governor and Attorney General Eliot Spitzer and University of San Diego professor of law Frank Portnoy have their eyes on the prize: federal indictments of former Treasury Secretary Henry Paulson and Goldman CEO Lloyd Blankfein? Or, saying it more accurately, finding the smoking gun that's the difference between indicting or not indicting former Treasury Secretary Henry Paulson and his successor at Goldman Sachs, current CEO Lloyd Blankfein. What am I referencing you ask? That'd be the "potential" bailout fraud, corruption and malfeasance story about AIG (diarist's note: and Goldman Sachs) that just won't go away. More specifically, you may read all about it in a piece posted at Naked Capitalism, today; but, let's start with an Op Ed piece Spitzer, Black and Partnoy published this past Sunday in the NY Times: "Show Us the E-Mail."
From the NY Times (December 20, 2009 Op-Ed page):
Show Us the E-Mail
By ELIOT SPITZER, FRANK PARTNOY and WILLIAM BLACK
Published In Print: December 20, 2009
...A.I.G. was at the center of the web of bad business judgments, opaque financial derivatives, failed economics and questionable political relationships that set off the economic cataclysm of the past two years. When A.I.G.'s financial products division collapsed -- ultimately requiring a federal bailout of $180 billion -- those who had been prospering from A.I.G.'s schemes scurried for taxpayer cover. Yet, more than a year after the rescue began, crucial questions remain unanswered. Who knew what, and when? Who benefited, and by exactly how much? Would A.I.G.'s counterparties have failed without taxpayer support?
...we know where the answers are. They are in the trove of e-mail messages still backed up on A.I.G. servers, as well as in the key internal accounting documents and financial models generated by A.I.G. during the past decade...
...Once the documents are available for everyone to inspect, a thousand journalistic flowers can bloom, as reporters, victims and angry citizens have a chance to piece together the story.
Perhaps A.I.G.'s employees would also be judged not guilty. But we would like to see the record to find out. As fraud investigators, we would like to examine the trading patterns of A.I.G.'s financial products division, and its communications with Goldman Sachs and other bank counterparties who benefited from the bailout.
Congress wants answers, too. This month, during hearings on Ben Bernanke's nomination to a second term as chairman of the Federal Reserve, several senators fumed about being denied access to his A.I.G.-related documents...
More from my diary from five days ago...
Yves Smith, publisher of Naked Capitalism, was all over this story (before it even hit the newsstands) last Saturday evening, in: "Spitzer, Partnoy, Black Call for AIG Open Source Investigation (and Goldman Implications)."
Putting it simply, the question is: How could our government let the monoline insurance companies--the insurers of most "agency" paper and state and municipal bonds in this country--collapse while choosing to make an exception to this practice as they singled-out AIG for the largest corporate bailout, by far, in our country's history?
Spitzer, Partnoy, Black Call for AIG Open Source Investigation (and Goldman Implications)
December 20, 2009
...While the subprime deals and CDOs were obviously going bad, an argument was made by many people at the time that the aggressive mark downs by AIG acelerated the death spiral for the market. It is pretty clear, here and elsewhere, that Goldman was the one that initiated the mark downs of collateral value. It would be interesting to explore this all the way through. Though not discussed in this article, Goldman shorted subprime through the Abacus deals, and perhaps elsewhere. This gave them an incentive to force mark downs. the intermediation deals described in the article, combined with AIG's collateral posting, gave them another incentive to be agressive with mark downs. They were acting like they wanted to grab the money before anyone else could get their hands on it. This would have raised some issues in an AIGFP bankruptcy. (note - Hank Greenberg suggested that this was going on in his october 2008 testimony but there was a chorus of attacks on him for being a crook and unreliable, thanks to his problems with Spitzer.)
So here we have the pattern:
1. Goldman creates or sells $23 billion (or more) of CDOs and stuffs them into AIG.
2. Goldman proclaims to the world they have no exposure to CDOs and warns that banks and insurers with CDO exposure will get downgraded.
3. Goldman initiates the mark downs of CDOs with AIG and others, acelerating the market's downward spiral.
4. Huge mark to market losses lead insurer and bank credit to freeze, short term markets to lock up, ABCP to collapse.
5. AIG posts as much collateral as it has to Goldman, who has more aggressively marked down the exposure.
6. Bond insurers are downgraded, banks begin commutations with them.
7. AIG fails, Fed steps in, Goldman gets bailed out at par.
Yves here. This looks like no accident. I suspect it was no accident...
Well, Yves made one statement in her diary that we've since learned was incorrect: "And no one in authority wants to find out..."
You see, a lot of people have been reading follow-up coverage on this story from the likes of Thomas Adams, whom I quoted in my previous diary on this matter, and further down the page from something he just posted a few hours ago over at Naked Capitalism. And, many people read Janet Tavakoli's piece on HuffPo on December 22nd: "Janet Tavakoli: Treasury Cover-Up Of Goldman's Role In AIG Crisis."
Treasury Cover-Up of Goldman's Role in AIG Crisis?
President, Tavakoli Structured Finance, Inc.
Posted: December 22, 2009 07:20 AM
In November 2009, I wrote in the Huffington Post that Goldman Sachs Group nearly bankrupted AIG. In December, the Wall Street Journal explained to the general public that Goldman fueled AIG's gambling and played a much bigger role in the mortgage bets that nearly felled American Insurance Group (AIG) than the Treasury, the Fed, or Goldman itself publicly disclosed.
The TARP Inspector General's November 17 report missed the most damaging facts. Intentionally or otherwise, it was evasive action or just plain whitewash. The report failed to clarify Goldman's role in AIG's near collapse, and that of all the settlement deals, the U.S. taxpayers' was by far the worst.
Goldman originated or bought protection from AIG on about $33 billion of the problematic $80 billion of U.S. mortgage assets that AIG "insured" with credit derivatives, about twice as much as the next two largest banks involved.
Goldman acted as middle-man on $14 billion of that amount, after it took the risk of mortgage assets originated by other banks and insured all of it with AIG. Goldman may wish to claim it "was only following orders," but since Goldman also originated many of the mortgage assets ultimately protected by AIG, it should have been well aware of the risk posed to itself and to AIG. The risk was then Goldman's. If AIG failed, Goldman Sachs would have had to make good on those trades...
Apparently, Pulitzer Prize-winning business journalist Gretchen Morgenson read Tavakoli's piece, too. And, here's an example as to why Ms. Morgenson's been referred to by many as the best in the business here in the U.S.: "Banks Bundled Bad Debt, Bet Against It and Won."
The day after my diary appeared, in Morgenson's Christmas Eve Day piece, from this past Thursday, we learned that at least three major government and Wall Street entities (the SEC, FINRA and Congress, see detail in the opening paragraphs of this diary) are actively investigating these, and related issues.
(Diarist's Note: If you read only ONE linked story in this diary, it should be this one!)
Morgenson tells us of how Goldman trader Jonathan Egol rose to prominence in the firm by "...creating mortgage-related securities, named Abacus, that were at first intended to protect Goldman from investment losses if the housing market collapsed. As the market soured, Goldman created even more of these securities, enabling it to pocket huge profits."
As Morgenson explains it to us, within just a few months of their sale, these CDOs began imploding...
Banks Bundled Bad Debt, Bet Against It and Won
By GRETCHEN MORGENSON and LOUISE STORY
New York Times
Published In Print: December 24, 2009
...Pension funds and insurance companies lost billions of dollars on securities that they believed were solid investments, according to former Goldman employees with direct knowledge of the deals who asked not to be identified because they have confidentiality agreements with the firm.
Goldman was not the only firm that peddled these complex securities -- known as synthetic collateralized debt obligations, or C.D.O.'s -- and then made financial bets against them, called selling short in Wall Street parlance. Others that created similar securities and then bet they would fail, according to Wall Street traders, include Deutsche Bank and Morgan Stanley, as well as smaller firms like Tricadia Inc., an investment company whose parent firm was overseen by Lewis A. Sachs, who this year became a special counselor to Treasury Secretary Timothy F. Geithner.
How these disastrously performing securities were devised is now the subject of scrutiny by investigators in Congress, at the Securities and Exchange Commission and at the Financial Industry Regulatory Authority, Wall Street's self-regulatory organization, according to people briefed on the investigations. Those involved with the inquiries declined to comment.
While the investigations are in the early phases, authorities appear to be looking at whether securities laws or rules of fair dealing were violated by firms that created and sold these mortgage-linked debt instruments and then bet against the clients who purchased them, people briefed on the matter say.
One focus of the inquiry is whether the firms creating the securities purposely helped to select especially risky mortgage-linked assets that would be most likely to crater, setting their clients up to lose billions of dollars if the housing market imploded...
Morgenson continues on to reiterate how many of these investments soured, almost immediately, while explaining that Goldman and other firms placed "unusually large negative bets that were not mainly for hedging purposes, and investors and industry experts say that put the firms at odds with their own clients' interests."
"The simultaneous selling of securities to customers and shorting them because they believed they were going to default is the most cynical use of credit information that I have ever seen," said Sylvain R. Raynes, an expert in structured finance at R & R Consulting in New York. "When you buy protection against an event that you have a hand in causing, you are buying fire insurance on someone else's house and then committing arson."
You really should read Morgenson's entire piece. It's comprehensive and quite compelling, to say the least.
Meanwhile, Janet Tavakoli received a communication from Goldman concerning here piece (noted above), from earlier last week. Here's the link to her response: "Responding to Goldman Sachs."
Responding to Goldman Sachs
President, Tavakoli Structured Finance, Inc.
Posted: December 25, 2009 10:19 AM
The New York Times published a Christmas Eve expose of Goldman Sachs's so-called "Abacus" synthetic collateralized debt obligations (CDOs). They were created with credit derivatives instead of cash securities. Goldman used credit derivatives to create short bets that gain in value when CDOs lose value. Goldman did this for both protection and profit and marketed the idea to hedge funds.
Goldman responded to the New York Times saying many of these deals were the result of demand from investing clients seeking long exposure. In an earlier Huffington Post article, I wrote about Goldman's key role in the AIG crisis; it traded or originated $33 billion of AIG's $80 billion CDOs. AIG was long the majority of six of Goldman's Abacus deals. These value-destroying CDOs were stuffed with BBB-rated (the lowest "investment grade" rating) portions of other deals. These BBB-rated portions were overrated from the start. Many of them eventually exploded like firecrackers.
The answer is that they sold a lot of "hot air" disguised as valuable securities. Goldman claims this was prudent risk management. In reality, Goldman created products that it knew or should have known were overrated and overpriced.
Earlier, Goldman denied it could have known this was a problem, yet acknowledged I had warned about the grave risks at the time. If Goldman wants to stick to its story that it didn't know the gun was loaded, then it is not in the public interest to rely on Goldman's opinion about the greater risk it now poses to the global markets.
Goldman excuses its participation by saying its counterparties were sophisticated and had the resources to do their own research. This is a fair point if Goldman were defending itself in a lawsuit with a sophisticated investor trying to recover damages. It is not a valid point when discussing public funds that were used to bail out AIG, Goldman, and Goldman's "customers."
From Thomas Adams, very early this morning, over at Naked Capitalism: "Is Blaming AAA Investors Wall-Street Serving PR?"
Is Blaming AAA Investors Wall-Street Serving PR?
Monday, December 28, 2009
By Thomas Adams, at Paykin Krieg and Adams, LLP, and a former managing director at Ambac and FGIC.
In my view, Goldman, and a host of other clever bankers, are deliberately obscuring one of the most important points...(by telling us that) everyone is a grown up and should have known what he was buying.
But that conveniently obscures a critically important fact: for so-called ABS CDOs (the kind made from asset backed securities, meaning tranches of either residential or commercial mortgage bonds), 75% to 90% of the deal was rated AAA. And these ratings did not depend on the insurance provided by AIG or monolines; those ratings were issued on the CDO as concocted by the packager/underwriter.
Goldman Sachs and dozens of other banks and captured journalists want the story to be about the failure of the investors who were sophisticated and assumed the risk. They ignore the crucial fact that the bonds that blew up were AAA and were sold as virtually risk free...
The reason that is most frequently cited as why AAA CDO bonds collapsed in value is that they had extreme cliff risk, or tail risk. However, the notion of "cliff risk" should be incompatible with a AAA bond - by definition. Any model that obscures or ignores or adjusts this issue away, is a form of sophisticated lying, as it relates to AAA bonds.
From the very start, the market for AAA CDO bonds backed by ABS collateral was a fraud...
...there is ample reason to believe a lot of the CDO packagers and underwriters knew exactly what they were doing...
...the biggest responsibility lies with the sellers and the creators of the bonds - they were selling something that was supposed to be super safe but turned out to be worthless - and they knew this to be the case, one way or the other.
The title of this diary is: "Is This The Biggest Political Story of 2010?" Just a couple of months ago, perhaps without him realizing the details of it, Nate Silver told us that this may, in fact, be the case:
"The Issue That Could Fracture Both Right And Left."
At the end of the day, the ongoing investigations by the SEC, FINRA and Congress may make it so. After following this story all along, I would have to agree. It is ground zero (at least as far as it relates to everything that is distorted about our knowledge) of the mortgage meltdown, IMHO.
What are your thoughts?
# # #
Additional suggested reading: "Paulson's Calls to Goldman Tested Ethics," Gretchen Morgenson, New York Times (8/8/09)