Goldman Sachs

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Goldman pays largest ever SEC fine for subprime mortgage CDO

Firm Acknowledges CDO Marketing Materials Were Incomplete and Should Have Revealed Paulson's Role

The Securities and Exchange Commission today announced that Goldman, Sachs & Co. will pay $550 million and reform its business practices to settle SEC charges that Goldman misled investors in a subprime mortgage product just as the U.S. housing market was starting to collapse.

In agreeing to the SEC's largest-ever penalty paid by a Wall Street firm, Goldman also acknowledged that its marketing materials for the subprime product contained incomplete information.

Additional Materials

In its April 16 complaint, the SEC alleged that Goldman misstated and omitted key facts regarding a synthetic collateralized debt obligation (CDO) it marketed that hinged on the performance of subprime residential mortgage-backed securities. Goldman failed to disclose to investors vital information about the CDO, known as ABACUS 2007-AC1, particularly the role that hedge fund Paulson & Co. Inc. played in the portfolio selection process and the fact that Paulson had taken a short position against the CDO.

In settlement papers submitted to the U.S. District Court for the Southern District of New York, Goldman made the following acknowledgement:

Goldman acknowledges that the marketing materials for the ABACUS 2007-AC1 transaction contained incomplete information. In particular, it was a mistake for the Goldman marketing materials to state that the reference portfolio was "selected by" ACA Management LLC without disclosing the role of Paulson & Co. Inc. in the portfolio selection process and that Paulson's economic interests were adverse to CDO investors. Goldman regrets that the marketing materials did not contain that disclosure.

"Half a billion dollars is the largest penalty ever assessed against a financial services firm in the history of the SEC," said Robert Khuzami, Director of the SEC's Division of Enforcement. "This settlement is a stark lesson to Wall Street firms that no product is too complex, and no investor too sophisticated, to avoid a heavy price if a firm violates the fundamental principles of honest treatment and fair dealing."

Lorin L. Reisner, Deputy Director of the SEC's Division of Enforcement, added, "The unmistakable message of this lawsuit and today's settlement is that half-truths and deception cannot be tolerated and that the integrity of the securities markets depends on all market participants acting with uncompromising adherence to the requirements of truthfulness and honesty."

Goldman agreed to settle the SEC's charges without admitting or denying the allegations by consenting to the entry of a final judgment that provides for a permanent injunction from violations of the antifraud provisions of the Securities Act of 1933. Of the $550 million to be paid by Goldman in the settlement, $250 million would be returned to harmed investors through a Fair Fund distribution and $300 million would be paid to the U.S. Treasury.


Goldman threatened with audit

Goldman Sachs is facing a threat by the Financial Crisis Inquiry Commission to bring in outside accountants to comb through the bank’s systems for data on its derivatives business, the panel’s chairman has said.

The commission will not back down from demands for information Goldman’s executives have maintained they do not track, Phil Angelides told the Financial Times.

“We have a deep level of questioning about whether we’re getting the straight scoop here and whether Goldman is working with us on information that they surely have,” Mr Angelides, chairman of the US Congress-appointed commission.

His comments mark the latest episode in the dispute between Goldman and the commission, which has scolded the bank for its “abysmal” response to the inquiry. The frustration of FCIC members was evident several weeks ago when two of Goldman’s executives, Gary Cohn, president, and David Viniar, chief financial officer, told the panel the bank’s accounting systems did not break out trading revenue generated strictly from derivatives.

Senate hearing on Goldman's CDO business - April 27

  • The full Goldman hearing at C-Span.

Those asking questions were:

  • Carl Levin Chairman (D-MI)
  • Thomas R. Carper (D-DE)
  • Mark L. Pryor (D-AR)
  • Claire McCaskill (D-MO)
  • Jon Tester (D-MT)
  • Tom Coburn Ranking Member (R-OK)
  • Susan M. Collins (R-ME)
  • John McCain (R-AZ)
  • John Ensign (R-NV)

The witness panels were:

Panel 1

  • DANIEL L. SPARKS , Former Partner, Head of Mortgages Department , The Goldman Sachs Group, Inc.
  • JOSHUA S. BIRNBAUM , Former Managing Director, Structured Products Group Trading, The Goldman Sachs Group, Inc.
  • MICHAEL J. SWENSON, Managing Director, Structured Products Group Trading, The Goldman Sachs Group, Inc.
  • FABRICE P. TOURRE, Executive Director, Structured Products Group Trading, The Goldman Sachs Group, Inc.

Panel 2

  • DAVID A. VINIAR, Executive Vice President and Chief Financial Officer, The Goldman Sachs Group, Inc.
  • CRAIG W. BRODERICK, Chief Risk Officer, The Goldman Sachs Group, Inc.

Panel 3

  • LLOYD C. BLANKFEIN, Chairman and Chief Executive Officer, The Goldman Sachs Group, Inc (Testimony)


House Dems calling for criminal investigation of GS

A growing number of House Democrats are asking the Department of Justice to open a criminal investigation into Goldman Sachs.

Rep. Marcy Kaptur (D-Ohio) made the request Tuesday in a letter to Attorney General Eric Holder. Since then, almost 20 of her colleagues have signed on.

The Securities and Exchange Commission (SEC) has filed a fraud action against Goldman for allegedly promoting a package of investments that was designed to fail. But the SEC can only pursue civil actions. Kaptur wants the Justice Department (DOJ) to consider criminal charges as well.

"[I]f the DOJ is not currently looking into this particular case, we respectfully ask you to ensure that the U.S. Department of Justice immediately open a case on this matter and investigate it with the full authority and power that your agency holds," Kaptur wrote to Holder.


U.S. starts criminal probe into Goldman trading: report

U.S. federal prosecutors are conducting a criminal probe into whether Goldman Sachs Group Inc or its employees committed securities fraud in connection with its mortgage trading, the Wall Street Journal reported on its website on Thursday.

The investigation from the Manhattan U.S. Attorney's Office, which is at a preliminary stage, stemmed from a referral from the U.S. Securities and Exchange Commission, the WSJ said, citing people familiar with the probe.

The SEC already has filed a civil fraud lawsuit against Goldman, charging that it hid vital information from investors about a mortgage-related security.

A spokeswoman for the office of the Manhattan U.S. Attorney said she could "neither confirm nor deny" any Goldman investigation. Goldman was not available to comment.

In Washington, a spokeswoman said the Justice Department declined to comment.

Goldman Sachs business principles

  1. Our clients' interests always come first. Our experience shows that if we serve our clients well, our own success will follow.
  2. Our assets are our people, capital and reputation. If any of these is ever diminished, the last is the most difficult to restore. We are dedicated to complying fully with the letter and spirit of the laws, rules and ethical principles that govern us. Our continued success depends upon unswerving adherence to this standard.
  3. Our goal is to provide superior returns to our shareholders. Profitability is critical to achieving superior returns, building our capital and attracting and keeping our best people. Significant employee stock ownership aligns the interests of our employees and our shareholders.
  4. We take great pride in the professional quality of our work. We have an uncompromising determination to achieve excellence in everything we undertake. Though we may be involved in a wide variety and heavy volume of activity, we would, if it came to a choice, rather be best than biggest.
  5. We stress creativity and imagination in everything we do. While recognizing that the old way may still be the best way, we constantly strive to find a better solution to a client's problems. We pride ourselves on having pioneered many of the practices and techniques that have become standard in the industry.
  6. We make an unusual effort to identify and recruit the very best person for every job. Although our activities are measured in billions of dollars, we select our people one by one. In a service business, we know that without the best people, we cannot be the best firm.
  7. We offer our people the opportunity to move ahead more rapidly than is possible at most other firms. Advancement depends on merit, and we have yet to find the limits to the responsibility our best people are able to assume. For us to be successful, our men and women must reflect the diversity of the communities and cultures in which we operate. That means we must attract, retain and motivate people from many backgrounds and perspectives. Being diverse is not optional; it is what we must be.
  8. We stress teamwork in everything we do. While individual creativity is always encouraged, we have found that team effort often produces the best results. We have no room for those who put their personal interests ahead of the interests of the firm and its clients.
  9. The dedication of our people to the firm and the intense effort they give their jobs are greater than one finds in most other organizations. We think that this is an important part of our success.
  10. We consider our size an asset that we try hard to preserve. We want to be big enough to undertake the largest project that any of our clients could contemplate, yet small enough to maintain the loyalty, intimacy and the esprit de corps that we all treasure and that contribute greatly to our success.
  11. We constantly strive to anticipate the rapidly changing needs of our clients and to develop new services to meet those needs. We know that the world of finance will not stand still and that complacency can lead to extinction.
  12. We regularly receive confidential information as part of our normal client relationships. To breach a confidence or to use confidential information improperly or carelessly would be unthinkable.
  13. Our business is highly competitive, and we aggressively seek to expand our client relationships. However, we must always be fair competitors and must never denigrate other firms.
  14. Integrity and honesty are at the heart of our business. We expect our people to maintain high ethical standards in everything they do, both in their work for the firm and in their personal lives.

Goldman acknowledges conflicts with clients

A senior Goldman Sachs executive sent an e-mail message to clients on Tuesday disclosing that the firm’s Fundamental Strategies Group might have shared investment ideas with the firm’s proprietary trading group or some clients before sharing them with others.

The e-mail message, obtained by DealBook, demonstrates the various conflicts that Goldman and other firms face in balancing the interests of its various clients and its own trading operation. (Read it after the jump.)

“We may trade, and may have existing positions, based on trading ideas before we have discussed those trading ideas with you,” Thomas Mazarakis, head of Goldman’s Fundamental Strategies Group, wrote.

The message was meant to clarify the firm’s conflict-of-interest policy. Goldman and other firms have come under criticism for trading ahead of, or at odds, with its own clients. In one such situation, raised in my column on Tuesday, Goldman created and sold bundles of mortgages known as collateralized debt obligations while at the same time selling them short.

Lucas Van Praag, a Goldman spokesman, declined to comment.

Below is a copy of the e-mail message:

Dear client,

We may from time to time discuss with you Trading Ideas generated by our Fundamental Strategies Group. As part of our commitment to managing conflicts of interest appropriately, this message is to explain how the Fundamental Strategies Group interacts with other parts of our organisation and how that impacts on the Trading Ideas.

The Fundamental Strategies Group is a group of cross-capital structure desk analysts employed by our Securities Divisions to assist our traders. They develop Trading Ideas in conjunction with traders. We may trade, and may have existing positions, based on Trading Ideas before we have discussed those Trading Ideas with you. We may continue to act on Trading Ideas, and may trade out of any position, based on Trading Ideas, at any time after we have discussed them with you. We will also discuss Trading Ideas with other clients, both before and after we have discussed them with you.

You should not consider Trading Ideas as objective or independent research or as investment advice. When we discuss Trading Ideas with you, we will not be acting as your advisor (including, without limitation, in relation to investment, accounting, tax or legal matters) and the provision of Trading Ideas to you will not give rise to any fiduciary or equitable duties on our part. We will not be soliciting any action based on Trading Ideas and it is your responsibility to seek appropriate advice.

Any opinions that we express when we discuss Trading Ideas with you will be our present opinions only and we will not have any obligation to update you in the event of a change of circumstances or a change of our opinions. We prepare Trading Ideas based upon information that we believe to be reliable but we make no representation or warranty that such information is accurate, complete or up to date and accept no liability, other than for fraudulent misrepresentation, if it is not.

If you have any concerns about any of these matters, please do not hesitate to contact us. Kind Regards, Jane Lattin, Assistant to Thomas Mazarakis – Head of Fundamental Strategies

Goldman Sachs hands clients losses in ‘Top Trades’

Goldman Sachs Group Inc. racked up trading profits for itself every day last quarter. Clients who followed the firm’s investment advice fared far worse.

Seven of the investment bank’s nine “recommended top trades for 2010” have been money losers for investors who adopted the New York-based firm’s advice, according to data compiled by Bloomberg from a Goldman Sachs research note sent yesterday. Clients who used the tips lost 14 percent buying the Polish zloty versus the Japanese yen, 9.4 percent buying Chinese stocks in Hong Kong and 9.8 percent trading the British pound against the New Zealand dollar.

The struggles for analysts at Goldman Sachs, which is fighting a fraud lawsuit from U.S. regulators who accuse the company of misleading investors in a mortgage-linked security, show the difficulty of predicting market movements as widening budget deficits, a fragile global economic recovery and tighter financial regulations increase volatility. Stock and currency fluctuations rose to the highest in a year this month as Europe pledged about $1 trillion to stop a debt crisis in the region.

“This says that Goldman’s guys are only human,” said Axel Merk, who oversees $500 million as president and chief investment officer of Merk Investments LLC in Palo Alto, California. “No one is always right. There are a lot of cross currents in this market.”

Gia Moron, a spokeswoman for Goldman Sachs, declined to comment.

Goldman and White House connections coming into focus

While Goldman Sachs' lawyers negotiated with the Securities and Exchange Commission over potentially explosive civil fraud charges, Goldman's chief executive visited the White House at least four times.

White House logs show that Chief Executive Lloyd Blankfein traveled to Washington for at least two events with President Barack Obama, whose 2008 presidential campaign received $994,795 in donations from Goldman's political action committee, its employees and their relatives. He also met twice with Obama's top economic adviser, Larry Summers.

No evidence has surfaced to suggest that Blankfein or any other Goldman executive raised the SEC case with the president or his aides. SEC Chairwoman Mary Schapiro said in a statement Wednesday that the SEC doesn't coordinate enforcement actions with the White House or other political bodies.

Meanwhile, however, Goldman is retaining former Obama White House counsel Gregory Craig as a member of its legal team. In addition, when he worked as an investment banker in Chicago a decade ago, White House Chief of Staff Rahm Emanuel advised one client who also retained Goldman as an adviser on the same $8.2 billion deal.

Goldman's connections to the White House and the Obama administration are raising eyebrows at a time when Washington and Wall Street are dueling over how to overhaul regulation of the financial world.

Lawrence Jacobs, a University of Minnesota political scientist, said that "almost everything that the White House has done has been haunted by the personnel and the money of Goldman . . . as well as the suspicion that the White House, particularly early on, was pulling its punches out of deference to Goldman and its war chest.

"There's now kind of a magnifying glass on the administration for any sign of interference or conversations with the regulators and the judiciary," Jacobs said.

Goldman hires Washington "hired guns"

"...The investment bank began rebuilding its Washington operation in the middle of 2008. Early this month, with the Senate and SEC investigations heating up, Goldman Sachs brought in several new consultants with ties to the capital’s power brokers.

Leading the communications side is Mark Fabiani, a former special counsel to Clinton who advised the former president on political, media and legal responses to the Whitewater scandal. Another new consultant is Stephen Labaton, who covered the SEC as a reporter for the New York Times.

Greg Craig

The firm has turned to Obama’s former counsel Greg Craig to mastermind its legal defense for the subprime probe by the Senate Permanent Subcommittee on Investigations. A partner in the Washington office of the Skadden, Arps, Slate, Meagher & Flom law firm, Craig led the legal defense team for Clinton’s impeachment trial.

Craig and the other recent hires also face the challenge of helping Goldman Sachs navigate the Financial Crisis Inquiry Commission, the group set up by Congress to investigate the reasons for the economic collapse.

Banned

Overseeing the Goldman Sachs Washington office is Michael Paese, a former top staffer to House Financial Services Committee Chairman Barney Frank. Frank, in a move that underscores some of the bank’s challenges, took the unusual step last year of banning Paese from lobbying the panel on the regulatory-overhaul bill, even though he was allowed to under federal law.

Under Paese are Todd Malan, a Republican who was head of a trade association for U.S. subsidiaries of foreign companies, and Kenneth Connolly, who was staff director for the Senate Environment and Public Works Committee.

Other recent hires include: Michael Thompson, a former staff member for Wyoming Republican Senator Mike Enzi; Joyce Brayboy, who worked for Democratic Representative Mel Watt of North Carolina; Eric Edwards, Democrat and former aide to a House Financial Services subcommittee; and Joe Wall, a former aide to Vice President Dick Cheney.

Hired Guns

While Goldman Sachs uses about a dozen outside firms, its most prominent hired guns included former Democratic House Leader Richard Gephardt and Kenneth Duberstein, a Reagan chief of staff.

Gephardt’s former chief of staff, Steve Elmendorf, is another one of the bank’s primary lobbyists, as are former Democratic Representative Harold Ford Jr. of Tennessee and Richard Roberts, a former SEC commissioner and chief of staff to Richard Shelby, the top Republican on the Senate Banking Committee..."

SEC charges Goldman with fraud on CDOs

The Securities and Exchange Commission today charged Goldman, Sachs & Co. and one of its vice presidents for defrauding investors by misstating and omitting key facts about a financial product tied to subprime mortgages as the U.S. housing market was beginning to falter.

The SEC alleges that Goldman Sachs structured and marketed a synthetic collateralized debt obligation (CDO) that hinged on the performance of subprime residential mortgage-backed securities (RMBS). Goldman Sachs failed to disclose to investors vital information about the CDO, in particular the role that a major hedge fund played in the portfolio selection process and the fact that the hedge fund had taken a short position against the CDO.

"The product was new and complex but the deception and conflicts are old and simple," said Robert Khuzami, Director of the Division of Enforcement. "Goldman wrongly permitted a client that was betting against the mortgage market to heavily influence which mortgage securities to include in an investment portfolio, while telling other investors that the securities were selected by an independent, objective third party."

Kenneth Lench, Chief of the SEC's Structured and New Products Unit, added, "The SEC continues to investigate the practices of investment banks and others involved in the securitization of complex financial products tied to the U.S. housing market as it was beginning to show signs of distress."

The SEC alleges that one of the world's largest hedge funds, Paulson & Co., paid Goldman Sachs to structure a transaction in which Paulson & Co. could take short positions against mortgage securities chosen by Paulson & Co. based on a belief that the securities would experience credit events.

According to the SEC's complaint, filed in U.S. District Court for the Southern District of New York, the marketing materials for the CDO known as ABACUS 2007-AC1 (ABACUS) all represented that the RMBS portfolio underlying the CDO was selected by ACA Management LLC (ACA), a third party with expertise in analyzing credit risk in RMBS. The SEC alleges that undisclosed in the marketing materials and unbeknownst to investors, the Paulson & Co. hedge fund, which was poised to benefit if the RMBS defaulted, played a significant role in selecting which RMBS should make up the portfolio.

The SEC's complaint alleges that after participating in the portfolio selection, Paulson & Co. effectively shorted the RMBS portfolio it helped select by entering into credit default swaps (CDS) with Goldman Sachs to buy protection on specific layers of the ABACUS capital structure. Given that financial short interest, Paulson & Co. had an economic incentive to select RMBS that it expected to experience credit events in the near future. Goldman Sachs did not disclose Paulson & Co.'s short position or its role in the collateral selection process in the term sheet, flip book, offering memorandum, or other marketing materials provided to investors.

The SEC alleges that Goldman Sachs Vice President Fabrice Tourre was principally responsible for ABACUS 2007-AC1. Tourre structured the transaction, prepared the marketing materials, and communicated directly with investors. Tourre allegedly knew of Paulson & Co.'s undisclosed short interest and role in the collateral selection process. In addition, he misled ACA into believing that Paulson & Co. invested approximately $200 million in the equity of ABACUS, indicating that Paulson & Co.'s interests in the collateral selection process were closely aligned with ACA's interests. In reality, however, their interests were sharply conflicting.

According to the SEC's complaint, the deal closed on April 26, 2007, and Paulson & Co. paid Goldman Sachs approximately $15 million for structuring and marketing ABACUS. By Oct. 24, 2007, 83 percent of the RMBS in the ABACUS portfolio had been downgraded and 17 percent were on negative watch. By Jan. 29, 2008, 99 percent of the portfolio had been downgraded.

Investors in the liabilities of ABACUS are alleged to have lost more than $1 billion.

The SEC's complaint charges Goldman Sachs and Tourre with violations of Section 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934, and Exchange Act Rule 10b-5. The Commission seeks injunctive relief, disgorgement of profits, prejudgment interest, and financial penalties.


FSA fines Goldman Sachs for weakness in internal controls

The Financial Services Authority (FSA) has today fined London-based firm Goldman Sachs International (GSI) £17.5 million for breaching FSA Principles. The fine relates to GSI’s failure to ensure that it had in place adequate systems and controls to enable it to comply with its UK regulatory reporting obligations. This resulted in a failure to notify the FSA of matters relating to the United States Securities and Exchange Commission (SEC) investigation into the Abacus 2007-AC1 synthetic collateralised debt obligation (Abacus).

The Abacus product was structured by GSI’s US affiliate, Goldman Sachs & Co. (GSC), and marketed (in part) by GSI from the UK to institutional investors. Fabrice Tourre was, while at GSC, part of the team that structured Abacus. Later, Mr Tourre transferred to GSI in London and became an FSA approved person in November 2008.

GSI is part of the worldwide Goldman Sachs Group. As an FSA authorised firm, GSI has obligations to disclose relevant information to the FSA. GSI’s systems for compliance with those obligations were inadequate to ensure that other group members would bring to its attention relevant matters which might have an impact on GSI in the UK.

Specifically, in August 2008, the SEC began making enquiries of GSC regarding Abacus. Over the next year the SEC obtained documents and witness evidence about Abacus from GSC and from GSI London-based personnel. Despite the involvement of GSI in the marketing of Abacus and the involvement of UK approved people in the SEC investigation, no one at GSC or GSI considered the potential regulatory implications of the SEC investigation for GSI.

In breach of FSA Principles 2 and 3, GSI did not have effective systems and controls in place to ensure that relevant information about the SEC investigation was shared between GSC and the people within GSI who needed to know about it. In particular, GSI did not have effective procedures in place to ensure that its compliance department was made aware of the SEC investigation so that it could consider whether any notifications needed to be made to the FSA in compliance with GSI’s regulatory reporting obligations.

Following its investigation, the SEC issued Wells Notices* to GSC and Fabrice Tourre containing allegations of serious violations of US securities law relating to Abacus. In breach of FSA Principle 11, GSI did not tell the FSA that a Wells Notice had been issued to Mr Tourre in September 2009, although several senior managers at GSI were aware of the fact. As a consequence of GSI’s failure to notify, Mr Tourre remained approved in the UK and able to perform a controlled function for several months without further enquiry or challenge from the FSA.

GSI’s compliance department only became aware of the SEC investigation when, on 16 April 2010, the SEC announced that it had commenced enforcement proceedings in the US courts against GSC and Mr Tourre alleging that they had committed serious violations of US securities law by making misleading statements and omissions in connection with the Abacus transaction. On 15 July 2010, the SEC announced that it had reached a US$550 million settlement with GSC in relation to Abacus. Mr Tourre denies the allegations against him.

Margaret Cole, managing director of enforcement and financial crime, said:

"We have repeatedly stressed the importance of firms self-reporting regulatory issues to the FSA in a timely way. GSI did not set out to hide anything, but its defective systems and controls meant that the level and quality of its communications with the FSA fell far below what we expect of an authorised firm. The fact that senior business people at GSI in London knew about Mr Tourre’s Wells Notice, but did not consider the obvious regulatory implications for GSI is very disappointing. Had GSI complied with its UK obligations, the outcome for it would have been very different.

"This penalty should send a message – particularly to the senior management of large institutions – of the need to have their firm’s UK reporting obligations at the forefront of their minds."

The FSA investigation found that GSI did not deliberately withhold any information from the FSA. GSI co-operated fully and agreed to settle at an early stage. In doing so it qualified for a 30% discount. Without the discount the fine would have been £25 million.



UK's Brown attacks Goldman's 'moral bankruptcy'

"Gordon Brown has called for a "special investigation" into Goldman Sachs after reports that the bank is to pay £3.5bn in bonuses.

Speaking on the BBC's Andrew Marr Show the Prime Minister described the situation as one of "moral bankruptcy".

His criticism follows allegations by the Securities and Exchange Commission in US that Goldman defrauded investors during the sub-prime housing crisis.

Goldman strongly rejected the claims as wrong "in fact and law".

Mr Brown said that the UK Financial Services Authority should launch an immediate inquiry in co-operation with the US regulator, the Securities and Exchange Commission (SEC).

The Sunday Times reported that the bank was set to pay out £3.5bn in bonuses to its staff worldwide - including almost £600m to 5,500 London-based employees - for just three months work.

On Friday, the SEC issued civil charges against Goldman that it failed to disclose conflicts of interest during the marketing of sub-prime mortgages in which investors lost $1bn.

Mr Brown said that the issue underlined the need for further reform of the international banking system. "I am shocked at this moral bankruptcy. This is probably one of the worst cases that we have seen," he said.

"Hundreds of millions of pounds have been traded here and it looks as if people were misled about what happened. I want the Financial Services Authority to investigate it immediately."


AIG considers suit against Goldman on Abacus

AIG, the US government-controlled insurer, is considering pursuing Goldman Sachs over losses incurred on $6bn of insurance deals on mortgage-backed securities similar to the one that led to fraud charges against the US bank.

AIG’s move over the deals that caused it a loss of about $2bn is a sign that Friday’s decision by the Securities and Exchange Commission to file civil fraud charges against Goldman could spark actions from investors who lost money on mortgage-backed securities.

If AIG and others discover that their transactions had disclosure issues similar to those alleged in the SEC charges, they would be able to complain to the SEC, file a private lawsuit, or both, lawyers said.

People close to the situation said that AIG was reviewing deals to insure $6bn-worth of Goldman’s collateralised debt obligations in the run-up to the crisis. They added that AIG had yet to decide whether to take action. AIG and Goldman declined to comment.

Under a deal struck by AIG and Goldman last year, the bank agreed to cancel the insurance on some $3bn-worth of CDOs in exchange for keeping collateral worth about $2bn, according to people close to the situation. AIG is believed to have recorded a loss of about $2bn. The CDOs being reviewed by AIG are part of a family of securities known as Abacus. The SEC’s complaint is focusing on one of the Abacus deals that is not among the securities insured by AIG.

Goldman Sachs director in Galleon probe: report

Prosecutors are examining whether Goldman Sachs Group Inc director Rajat Gupta gave inside information about the bank to Galleon Group hedge fund founder Raj Rajaratnam, the Wall Street Journal reported on Thursday, citing people close to the situation.

"Mr. Gupta is unaware of any examination of any such issue and has done nothing wrong," a spokeswoman for Gupta said in a statement responding to the report.

Rajaratnam has pleaded not guilty to criminal insider trading charges. He faces a related civil lawsuit by the U.S. Securities and Exchange Commission.

In a March 22 letter made public last week, the government said it was examining trades by Rajaratnam and others in shares of several companies, as part of a wide-ranging insider trading probe.

Among these companies was Goldman, where trades between June 2008 and October 2008 were being examined. The bank's shares traded between $74 and $187 over that time.

Citing the people close to the situation, the Journal said the government was examining whether Gupta had shared inside information about Goldman, and whether he had given it to Rajaratnam during the height of the financial crisis.

It characterized Gupta, who used to run consultancy McKinsey & Co, as a close associate of Rajaratnam.

A McKinsey spokeswoman declined to comment, but said in a statement that McKinsey has "no knowledge of this alleged matter, which is unrelated to our firm."

Spokesmen for Goldman and Rajaratnam declined to comment.

Goldman said last month that Gupta was not standing for re-election to its board.

Bernanke says Fed reviewing Goldman Sachs-Greece contracts

Federal Reserve Chairman Ben S. Bernanke said the U.S. central bank is reviewing derivatives contracts arranged between Goldman Sachs Group Inc. and investment banks with Greece.

“We are looking into a number of questions related to Goldman Sachs and other companies and their derivatives arrangements with Greece,” Bernanke said yesterday in testimony before the Senate Banking Committee in Washington.

Bernanke was responding to a question from Senator Christopher Dodd, a Connecticut Democrat, who asked if there should be limits on the use of credit default swaps to prevent “runs against governments.” Greek bonds slid yesterday amid concern the country’s credit ratings may be cut.

The Fed’s review reflects determination among regulators to step up financial-market monitoring in the wake of the Greek crisis and the role investment banks like Goldman Sachs played in helping the country raise off-balance-sheet funding. Wall Street’s largest banks have been criticized by lawmakers for issues ranging from pay practices to their role in causing the financial crisis.

Federal Reserve officials are using new supervisory powers over firms such as Goldman Sachs and Morgan Stanley to gather information on financial system risks. Goldman Sachs and other investment banks wrote derivative contracts that helped Greece report smaller debt levels.

“Obviously, using these instruments in a way that intentionally destabilizes a company or a country is -- is counterproductive, and I’m sure the SEC will be looking into that,” Bernanke said. “We’ll certainly be evaluating what we can learn from the activities of the holding companies.”

Greece’s Swaps

Goldman Sachs helped Greek officials raise $1 billion of off-balance-sheet funding in 2002 through swaps, which European Union regulators said they knew nothing about until recent days.

Fed officials are gathering information on documentation, and terms and conditions. They are bringing in subject-matter experts and talking with counterparts in other countries. The Fed is also looking at the issue with its new financial system risk unit, which draws on economists, lawyers and bank examiners.

The Fed may ask officials from Goldman and other firms to show how the deals conducted with Greece complied with established risk-management standards and accounting rules. The SEC is probing disclosure issues related to the swap, according to an official familiar with the inquiry who declined to be identified because it isn’t public.

Possible Actions

“There are lots of enforcement actions that the Fed can take all the way up to something like cease and desist, but I think it is way, way premature to conclude anything like that would be even worth considering,” said former Minneapolis Fed President Gary Stern in an interview.

The Securities and Exchange Commission won’t confirm or deny it’s probing the swaps, spokesman John Nester said. The agency is “examining potential abuses and destabilizing effects related to the use of credit default swaps and other opaque financial products and practices,” he said in a statement.

German Chancellor Angela Merkel said on Feb. 18 it would be a “scandal” if banks helped Greece massage its budget. French Finance Minister Christine Lagarde, speaking on France Inter radio the same day, said that even if the swaps were legal, they probably contributed to instability.

“There is a good deal of concern in Europe, especially among the three or four countries particularly affected, that there is speculation going on in the market that is driving up their borrowing costs,” Stern said. “That just may be a reasonable response to what is obviously a lot of uncertainty about the fiscal position and borrowing ability of those countries.”

‘Nothing Inappropriate’

Goldman Sachs did “nothing inappropriate” when it arranged currency swaps for Greece that reduced the nation’s national debt by 2.37 billion euros ($3.2 billion), a top executive said.

“They did produce a rather small, but nevertheless not insignificant reduction, in Greece’s debt-to-GDP ratio,” Gerald Corrigan, chairman of Goldman Sachs’s regulated bank subsidiary, told a panel of U.K. lawmakers Feb. 22. The swaps were “in conformity with existing rules and procedures.”

“As a matter of policy, we don’t comment on legal or regulatory matters,” Michael DuVally, a Goldman Sachs spokesman, said.

U.S. stocks fell yesterday in part because Moody’s Investors Service said it may downgrade Greek debt. The Standard & Poor’s 500 Index was down 0.3 percent at 3:55 p.m. in New York. Yields on U.S. 2-year notes declined 0.03 percentage point to 0.828 percent.

Goldman Sachs, Greece didn’t disclose swap, investors ‘fooled’

Goldman Sachs Group Inc. managed $15 billion of bond sales for Greece after arranging a currency swap that allowed the government to hide the extent of its deficit.

No mention was made of the swap in sales documents for the securities in at least six of the 10 sales the bank arranged for Greece since the transaction, according to a review of the prospectuses by Bloomberg. The New York-based firm helped Greece raise $1 billion of off-balance-sheet funding in 2002 through the swap, which European Union regulators said they knew nothing about until recent days.

Failing to disclose the swap may have allowed Goldman, a co-lead manager on many of the sales, other underwriters and Greece to get a better price for the securities, said Bill Blain, co-head of fixed income at Matrix Corporate Capital LLP, a London-based broker and fund manager.

“The price of bonds should reflect the reality of Greece’s finances,” Blain said. “If a bank was selling them to investors on the basis of publicly available information, and they were aware that information was incorrect, then investors have been fooled.”

Michael DuVally, a spokesman at Goldman Sachs in New York, declined to comment.

Legal ‘At the Time’

Goldman Sachs, Wall Street’s most profitable securities firm, is being criticized by European politicians including Germany’s ruling Christian Democrats, who have questioned whether the firm helped Greece hide its deficit to comply with the currency’s membership criteria. Greece is also being faulted by fellow euro-region countries for failing to disclose the swaps to EU regulators.

The swaps used by Greece to manage debt were “at the time legal,” Greek Finance Minister George Papaconstantinou said on Feb. 15. The government doesn’t use the swaps now, he said.

Eurostat, the EU’s statistics office, this week ordered Greece to hand over information on the swaps transactions by the end of this week in an investigation that may extend to other EU countries.

Goldman Sachs earned about 735 million euros ($1 billion) underwriting Greek government bonds since 2002, data compiled by Bloomberg show. Goldman Sachs underwrote 10 bond sales. Prospectuses for six of them, obtained by Bloomberg, contain no mention of the swaps. The other four couldn’t be obtained.

‘Fear the Worst’

The yield on Greek 10-year government bonds jumped to as much as 7.2 percent on Jan. 28 amid the worst crisis in the euro’s 11-year history. The premium, or spread, investors demand to hold Greek 10-year notes instead of German bunds, Europe’s benchmark government securities, widened yesterday by 18 basis points to 323 basis points.

The spread reached 396 basis points last month, the most since the year before the euro’s debut in 1999, compared with an average of 57 basis points in the past decade. A basis point is 0.01 percentage point.

“When people start to fear that the numbers aren’t accurate, they fear the worst,” said Simon Johnson, a former International Monetary Fund chief economist who is now a professor at the Massachusetts Institute of Technology’s Sloan School of Management in Cambridge, Massachusetts.

No ‘Smoking Gun’

Goldman could face legal liability “if it could be established that they were knowingly hiding risk, and therefore knew or had reason to know that the bond disclosure documents were misleading,” said Thomas Hazen, a law professor at the University of North Carolina at Chapel Hill. “But that would be a tough hill to climb, in terms of burden of proof. There’d have to be some sort of smoking-gun memo.”

The swap enabled Greece to improve its budget and deficit and meet a target needed to remain within the region’s single currency. Knowledge of their existence may have changed investors’ perception of the risk associated with Greece, and the price they may have been willing to pay for the country’s securities.

“From what we know, this is an egregious example of a conflict of interest” for Goldman Sachs, MIT’s Johnson said. “Even if the deal had been authorized, it doesn’t let them off the hook.”

A Greek government inquiry this month identified a series of swaps agreements with securities firms that allowed the country to hide its mounting deficit. Greece used the swaps to defer interest payments, causing “long-term damage” to the Greek state, according to the Feb. 1 document, commissioned by the Finance Ministry.

Cross-Currency Swap

European Union officials said this week they only recently became aware of the transaction with Goldman. The swaps don’t necessarily break EU rules, European Commission spokesman Amadeu Altafaj told reporters in Brussels on Feb. 15.

The transaction with Goldman consisted of a cross-currency swap of about $10 billion of debt issued by Greece in dollars and yen, according to Christoforos Sardelis, head of Greece’s Public Debt Management Agency at the time.

That was swapped into euros using a historical exchange rate, a mechanism that implied a reduction in debt and generated about $1 billion in an up-front payment from Goldman to Greece, Sardelis said. He declined to give specifics on how the swap affected the country’s deficit or debt.

European politicians such as Luxembourg Treasury Minister Jean-Claude Juncker this week criticized Goldman Sachs for arranging the Greek swap and are pressing the firm and Greece for more disclosure. Chancellor Angela Merkel’s Christian Democrats aim to push for new rules that will force euro-region nations and banks to disclose bond swaps that have an impact on public finances, financial affairs spokesman Michael Meister said.

“Investment banks are guilty of being part of a wider collusion that fudged the numbers to make the euro look like a working currency union,” said Matrix’s Blain. “The bottom line is foreign exchange and bond investors bought something sellers knew not to be the case.”

"...The Wall Street Journal recently highlighted an article by Simon Johnson and Peter Boone, lamenting that the demands being foisted on Greece and other struggling Euronations would “massively curtail demand, lower wages and reduce the public sector workforce. The last time we saw this kind of precipitate fiscal austerity—when nations were tied to the gold standard—it contributed to the onset of the Great Depression in the 1930s”. Where we disagree with Johnson and Boone is the suggestion that the IMF be brought in to craft a solution. Any help from this organization will come with tight strings attached—indeed, with a noose around Greece’s neck. Germany and France would be crazy to commit their scarce euros to a bail-out of Greece since they face both internal threats from their own taxpayers and external threats from financial vampires who are looking for yet another nation to attack.

Here’s a more appropriate action: declare war on Goldman Sachs and other global financial firms that created this mess. Send the troops, the planes, the tanks, and the ships. Attack every outpost of the saboteurs on European soil. Blockade the airports and ports. Make Wall Street traders and CEOs fear for their lives, or at least for their freedom to travel. Build some Guantanamo-like facility to hold these enemy financial combatants until they can be tried, convicted, and properly punished.

Goldman must pay some hedge fund fraud losses

Goldman Sachs has been ordered to pay $20.58 million to creditors of a failed hedge fund to settle claims that the bank helped the fund perpetrate a Ponzi scheme.

The award represents the first time that a bank has been held accountable for a Ponzi scheme because of its role as a middleman.

Goldman cleared trades and lent money to the Bayou Group, a Connecticut hedge fund that collapsed in 2005, when state and federal investigators said the firm defrauded investors of hundreds of millions of dollars.

The Bayou fraud resurfaced in 2008 when its founder, Samuel Israel III, faked his own suicide after being sentenced to 20 years in prison for fraud. He later turned himself in and is now serving 22 years.

Bayou’s creditors filed a complaint against Goldman two years ago, saying the bank either knew or should have known of Bayou’s fraud. Goldman, the complaint said, had access to Bayou’s trading records, which showed losses, as well as its marketing materials, which showed profits.

The award, in a decision by an arbitration panel of the Financial Industry Regulatory Authority issued on Thursday, may put other banks on notice to better scrutinize their hedge fund clients’ activities.

“This case shows that you can’t just stick your head in the sand when a fraud is going on in your shop,” said Ross B. Intelisano, a lawyer at Rich & Intelisano, who brought the arbitration against Goldman. The bank “argued that you could, and the panel disagreed.”

A Goldman spokesman pointed to the bank’s filing in the case, which questioned whether the creditors could use bankruptcy laws to hold Goldman accountable for the $20.58 million of investor money that Bayou transferred among its Goldman accounts. The money was never actually conveyed to Goldman, the bank said, so it should not be considered a fraudulent transfer.

Goldman under Senate investigation for its securities dealings

"One of Congress' premier watchdog panels is investigating Goldman Sachs' role in the subprime mortgage meltdown, including how the firm sold securities backed by risky home loans while it simultaneously bet that those bonds would lose value, people familiar with the inquiry said Friday.

The investigation is part of a broader examination by the Senate Permanent Subcommittee on Investigations into the roots of the economic crisis and whether financial institutions behaved improperly, said the individuals, who insisted upon anonymity because the matter is sensitive.

Disclosure of the investigation comes amid a darkening mood at the White House, in Congress and among the American public over the long-term economic impact of the subprime crisis, prompting demands to hold the culprits accountable.

It marks at least the third federal inquiry touching on Goldman's dealings related to securities backed by risky home mortgages.

The separate, congressionally appointed Financial Crisis Inquiry Commission, which was created to investigate causes of the crisis, began holding hearings Jan. 13 and took sworn testimony from Goldman's top officer. In addition, the Securities and Exchange Commission, which polices Wall Street, is investigating Goldman's exotic bets against the housing market, using insurance-like contracts known as credit-default swaps, in offshore deals, knowledgeable people have told McClatchy.

Goldman Sachs and proprietary trading

Goldman has no days of trading loss in Q1

In the quarter ended March 31, Goldman made money on every single trading day. The firm did not record a loss of even $0.01 on even one day in the last quarter. That's 63 days profitable out of 63 trading days. The statistic probability of this event is itself statistically undefined. Goldman is now the market - or, in keeping with modern market reality, Goldman is the house, it controls the casino, and always wins. Congratulations America: you now have far, far better odds in Las Vegas that you have making money with your E-Trade account.

Top Goldman leaders said to have overseen mortgage unit

"...Mr. Tourre was the only person named in the S.E.C. suit. But according to interviews with eight former Goldman employees, senior bank executives played a pivotal role in overseeing the mortgage unit just as the housing market began to go south. These people spoke on the condition that they not be named so as not to jeopardize business relationships or to anger executives at Goldman, viewed as the most powerful bank on Wall Street.

According to these people, executives up to and including Lloyd C. Blankfein, the chairman and chief executive, took an active role in overseeing the mortgage unit as the tremors in the housing market began to reverberate through the nation’s economy. It was Goldman’s top leadership, these people say, that finally ended the dispute on the mortgage desk by siding with those who, like Mr. Fabrice and Mr. Egol, believed home prices would decline...

...Goldman’s top ranks changed its stance on housing in December 2006. In a meeting in a windowless conference room on the executive floor, Mr. Viniar, the chief financial officer, and Mr. Cohn, the president, gathered about 10 executives for a briefing. Mr. Sparks, the head of the mortgage unit, walked them through the numbers. The group was unanimous: Goldman had to reduce its exposure to the increasingly troubled mortgage market.

A few months later, in February 2007, senior executives began turning up on the trading floor. The message, one former employee said, was clear: management was watching.

“They basically said, ‘What does this department do? Tell us everything about mortgages,’ ” this person said.

The executives told Mr. Sparks to tell his traders to sell Goldman’s positive bets on housing. The traders’ short positions — that is, negative bets, mostly used to hedge other investments — were placed in a central trading account..."

The economics of Goldman spinning off prop trading

"...Goldman, which went public in 1999, wouldn't comment on various buyout scenarios posed by Crain's. There's also a huge caveat to any going-private speculation these days: Federal regulators probably would not allow Goldman to take on additional debt to pay for a leveraged buyout, which is how these deals are usually financed, meaning any transaction would have to be done entirely in cash.

Still, private equity experts say the numbers could work.

First, Goldman Shareholders would expect a premium to part with their equity, which is valued at $85 billion. Investors get 50% over market price historically in such deals, according to Baruch College finance professor Raj Nahata, yet premiums tend to be lower for blue-chip outfits like Goldman because their stock prices are high to begin with.

That suggests a take-private price for Goldman of $100 billion to $125 billion—or, more than twice as much as the largest such takeover on record.

Look closer, however, and the figures aren't so intimidating. Goldman is on pace to generate $30 billion in operating cash flow this year and already has $23 billion in its coffers. Additional funds could come from current and former partners ($20 billion has been set aside for 2009's payouts), institutions such as sovereign wealth funds, maybe even über-shareholder Warren Buffett.

While the firm has $200 billion in long-term debt, PE experts say bondholders wouldn't need to be bought out unless Goldman had already promised to do so in the event of a takeover. It isn't clear if such agreements exist. (Again, Goldman declined to comment.)

Two CEOs of firms that compete with Goldman say that a more likely buyout scenario is for Goldman to spin off its mighty trading division and take it private.

Trading unit is the nuclear core

The trading unit has become the firm's nuclear core, generating 80% of revenue this year, compared with about a quarter in 1998, Goldman's last full year as a partnership. One longtime reason that trading activity was kept in check in the old days: Goldman's partners weren't willing to risk much of their money on risky trades. The firm evidently had fewer qualms about playing with other people's money after it went public.

The trading division now also happens to be the source of most of Goldman's PR problems. It's where the huge profits are made and big bonuses get paid. It's also a point of tension with regulators who frown on outsize risks being taken with bank capital, something Goldman traders often do to boost returns.

End result: a less risky firm

“If i was them, I'd be desperately trying to figure out how to get that business out of the public eye,” says a senior officer at a firm that advises on takeovers and restructurings. “It would also be a much more affordable deal.”

Goldman's trading and principal investments division is on pace to generate $30 billion in revenue this year, but the highly volatile business produced less than a third of that in 2008. Knight Capital, the largest U.S. equities trader, fetches a price equal to 1.3 times its revenue, but Goldman's larger and more diverse trading business merits a higher multiple. So value it at twice its average revenue—$18 billion a year since 2002—and a take-private price of about $36 billion sounds right.

The division could lay claim to at least $15 billion of Goldman's cash, suggesting its employees would have to come up with another $21 billion to take control. A crucial unknown is how much of Goldman's debt it could inherit.

The end result of these machinations would be a less risky Goldman that focuses on mergers advice and asset management and has a more valuable stock. Firms that already do this, such as Greenhill and Evercore, have stocks that trade for more than 20 times earnings. That's more than double the current valuation of all of Goldman. Music to any M&A meister's ears."

GS trading should get no U.S. backstop, Volcker says

"Goldman Sachs Group Inc., which took $10 billion in U.S. bailout funds last year, shouldn’t get taxpayer support if the firm focuses on trading over banking, according to former Federal Reserve Chairman Paul Volcker.

The “safety net” provided by the U.S. government “should not be extended beyond the core commercial-banking business,” Volcker, 82, said in an interview yesterday at Deutsche Bank AG’s Berlin office, where he was attending a conference. “They can do trading and do anything they want, but then they shouldn’t have access to the safety net.”

Goldman Sachs, the most profitable investment bank in Wall Street history, has reaped more than 90 percent of its pretax earnings this year from trading and so-called principal investments, which include market bets on securities and stakes in companies. The other 10 percent came from advising clients on takeovers and capital-raising and from asset management, which includes managing hedge funds and buyout funds.

When the collapse of smaller rival Lehman Brothers Holdings Inc. triggered a crisis of investor confidence last year, regulators allowed Goldman Sachs and Morgan Stanley, another competitor, to convert into bank holding companies. That put the New York-based firms under the Fed’s purview and gave them access to cheap funding.

The two firms received federal guarantees on new debt issues, as did commercial banks and some companies with financing businesses, such as General Electric Co.

Must ‘Be Sorted Out’

Goldman Sachs does “a lot of proprietary trading” and General Electric “does a lot of kind of complicated financial services,” said Volcker, an economic adviser to President Barack Obama. “This is one of those kind of things that have to be sorted out.”

Since January, Volcker, who was Fed chairman from 1979 to 1987, has called for regulators to provide government support only to banks that provide essential services like deposit- taking and business payments. He has suggested prohibiting them from owning or sponsoring hedge funds, private-equity funds or from engaging in proprietary trading.

Goldman Sachs returned the $10 billion it received from the U.S. Treasury last year with interest. As of September, $20.85 billion of the firm’s $189.7 billion of unsecured long-term borrowing was guaranteed by the Federal Deposit Insurance Corp., according to a company filing.

Lucas van Praag, a spokesman for Goldman Sachs, said that the majority of the firm’s trading revenue comes from transactions with clients and not from proprietary trading, or bets with the firm’s own money.

Proprietary Trading

“Proprietary trading accounted for less than 10 percent of revenues and earnings this year,” van Praag said. “Since 2003, proprietary trading has accounted for just 12 percent of net revenues.”

Goldman Sachs generated $203 billion net revenue from 2003 through September, meaning that about $24 billion was proprietary trading.

David Viniar, Goldman Sachs’s chief financial officer, said in October that the firm doesn’t benefit from any implicit government guarantee.

“We operate as an independent financial institution that stands on our own two feet,” Viniar said in a conference call with reporters on Oct. 15.

Anne Eisele, a spokeswoman for Fairfield, Connecticut-based General Electric, declined to comment. By the end of 2009 about $59 billion of the debt of GE Capital, General Electric’s finance subsidiary, will still be guaranteed by the FDIC, according to a company presentation.

Volcker said there is a “temptation” at some banks to return to the risk-taking practices that enable them to pay large bonuses. “It’s natural, you like to return to normalcy, make some money and get on with it,” he said.

“I’m very interested in using this crisis as a way to avoid the next one,” Volcker said. “This isn’t any time to go back to business as usual.”

GS, private equity and the Volcker rule

"...The firm's private-equity exposure exceeds that of the world's largest buyout firms. Goldman has roughly $14 billion of corporate and real-estate private-equity holdings on its balance sheet, with more than three-quarters of that amount in illiquid, hard-to-sell assets, according to securities filings. By comparison, Blackstone Group and Kohlberg Kravis Roberts & Co. have $1.35 billion and $4.1 billion in private-equity investments on their balance sheets, respectively.

Goldman has raised more than $90 billion in the past 10 years across its private-equity funds and currently has roughly $35 billion in uninvested capital, according to Preqin, a London-based data provider. Those numbers also exceed those of the biggest buyout shops. Carlyle Group currently has $87.9 billion under management, with $30 billion of "dry powder."

Started in 1992 and overseen by Richard Friedman, the buyout business has broadened beyond its corporate and real-estate funds. The firm is investing a $13 billion fund that mostly invests in "mezzanine" debt that fills the gap between a borrower's equity and senior debt, as well as a $10 billion loan fund that invests in the senior part of companies' capital structures.

Most of the money in Goldman's private-equity vehicles comes from outside investors—pension plans, sovereign-wealth funds and wealthy families—who pay Goldman's asset-management unit rich fees to manage their money. But the firm and its employees account for a substantial percentage of those assets. Roughly $9 billion of Goldman's flagship $20.3 billion private-equity fund—Goldman Sachs Capital Partners VI, the second-largest buyout fund ever raised—comes from Goldman's balance sheet and its employees.

Under Mr. Obama's proposal, banks would likely be free to manage customer money earmarked for private-equity funds. But Goldman would have to divest its own holdings, a complicated task. One alternative would be to spin out its private-equity arm, according to people familiar with the firm. Goldman could also give up its bank-holding-company license to avoid spinning out the private-equity business, these people said.

The firm's $14 billion in private-equity holdings still represent less than 2% of the $849 billion in assets on its balance sheet as of the end of 2009. Nevertheless, the fear is that these types of illiquid, hard-to-sell investments don't belong on banks' books.

Goldman's private-equity holdings across its corporate and real-estate investments have seesawed in recent years. In 2009, it recorded a loss of $410 million; in 2008, losses of $3.48 billion; in 2007, it booked gains of $3.3 billion...

...A Goldman spokeswoman declined comment for this article, but in an earnings call last month Chief Financial Officer David Viniar defended the investing activities. "Our private-equity business is an important business for Goldman Sachs," Mr. Viniar said.

It "works," he added, noting that "a lot of our very important clients" are invested in it, and that "we invest alongside" them.

More than any other bank, Goldman has integrated its own private-equity work into its day-to-day business. Companies in Goldman's private-equity portfolio often become clients of Goldman's other businesses, such as mergers-and-acquisitions and underwriting initial public offerings. For instance, Goldman has earned more than $100 million in fees from Energy Future Holdings, according to people familiar with the company..."

Goldman Sachs' CDOs

AIG failure would have cost Goldman Sachs

Since the United States government stepped in to rescue the American International Group in the fall of 2008, Goldman Sachs has maintained that it would have faced few if any losses had the insurer failed. Though it was the insurer’s biggest trading partner, Goldman contended that it had bought credit insurance from financial institutions that would have protected it, but it declined to identify the institutions.

A Congressional document released late Friday lists those institutions and shows that Goldman was exposed to losses in an A.I.G. default because some of the investment bank’s trading partners, such as Citibank and Lehman Brothers, were financially unstable and might have been unable to make good on large claims from Goldman.

The document details every institution that had sold credit insurance on A.I.G. to Goldman as of Sept. 15, 2008, the day before the New York Fed arranged the insurer’s rescue with an $85 billion backstop. The document, supplied by Goldman Sachs, was released by Charles E. Grassley of Iowa, the ranking Republican on the Senate Finance Committee.

Goldman had purchased credit protection on A.I.G. worth $402 million from Citigroup and $175 million from Lehman Brothers, the document shows. As of the date of the document, Lehman had already filed for bankruptcy protection.

“This illustrates that the Goldman version of reality is not entirely accurate,” said Christopher Whalen, managing director at Institutional Risk Analytics. “They did have exposure to A.I.G., and that is what drove their behavior in the bailout.”

Goldman created 23 Abacus CDOs

"...Some of Goldman’s Abacus CDOs were “static,” meaning the portfolio of securities they referenced didn’t change over time, while others allowed for reinvestment into different investments as initial holdings paid down, with Goldman choosing the new securities.

That’s partly because investors including Dusseldorf, Germany-based IKB Deutsche Industriebank AG, a buyer of part the CDO the SEC is suing over, asked for the reinvestment because they would be given higher yields, a person familiar with the matter said earlier this year.

‘Inferior Quality’

A dispute over replacement collateral involving UBS landed in New York Supreme Court in 2008. Hamburg-based HSH Nordbank AG, the world’s biggest shipping financier, said in a complaint that UBS had been “deliberately selecting inferior quality” assets for a synthetic CDO called North Street 2002-4.

Goldman Sachs may have lost money on Abacus 2007-AC1 because in at least some Abacus deals, the bank used the cash raised from note sales, which would be owed to either the owners or itself, to buy securities including AAA-rated mortgage bonds and CDOs, according to Fitch Ratings and Moody's.

It then guaranteed that, in most cases, it would buy the escrow account securities at face value if needed to pay the owners of the Abacus notes, unless those escrow holdings defaulted, according to the rating firms’ reports. Declines in the value of the purchased securities could limit how much Goldman Sachs could pay itself."

"Bankers Said ‘Anything’ to Get High Rating"

Just past midnight on May 3, 2005, Standard & Poor’s analyst Chui Ng e-mailed co-workers to broker a solution to demands by Goldman Sachs Group Inc. bankers that he said violated two or more of the ratings company’s internal guidelines.

Goldman Sachs was adding $200 million in debt at the “last minute” to a $1.5 billion bond pool called Adirondack Ltd., Ng wrote. That meant the New York investment bank would originate 13 percent of the pool itself, two-and-a-half times the 5 percent limit set by S&P.

Goldman Sachs also balked at Ng’s request to pay in advance for an insurance policy known as a credit default swap, which was being used to create the additional debt obligation.

The e-mails from Ng, who negotiated a compromise on Goldman Sachs’s requests, provide a rare window into the back-and-forth between the bank and a rating company assessing the risks in a financial product linked to subprime mortgages. The exchange was among 581 pages of private communications released last week by Senate investigators.

Goldman CDOs done offshore in secret

Well, what a surprise. In the much-publicised fraud case involving a lawsuit filed by the Securities and Exchange Commission against Goldman Sachs, it is absolutely no surprise to us to find that this deal, known as Abacus 2007-AC1, involves:

Issuer: Abacus 2007-AC1, Ltd., Incorporated with limited liability in the Cayman Islands Co-Issuer: Abacus 2007-AC1, Ltd., Incorporated with limited liability in Delaware

The issuer of this $2bn CDO is a Cayman Islands Special Purpose Vehicle. You can see the structure of the thing on page 51. Note also an earlier story from McClatchy’s, the only one we’re aware of which focused strongly on the offshore aspect, and which notes that Goldman had 148 of these kinds of deals in the Cayman Islands.

“These Cayman Islands deals, which Goldman assembled through the British territory in the Caribbean, a haven from U.S. taxes and regulation, became key links in a chain of exotic insurance-like bets called credit-default swaps that worsened the global economic collapse by enabling major financial institutions to take bigger and bigger risks without counting them on their balance sheets. . . . In 2006 and 2007, as the housing market peaked, Goldman underwrote $51 billion of deals in what mushroomed into an under-the-radar, $500 billion offshore frenzy, according to data from the financial services firm Dealogic. At least 31 Goldman deals in that period involved mortgages and other consumer loans and are still sheltered by the Caymans’ opaque regulatory apparatus. . . . Taxpayers got hit for tens of billions of dollars in the Caymans deals because Goldman and others bought up to $80 billion in insurance from American International Group on the risky home mortgage securities underlying the deals.”

AIG, Goldman unwind soured trades

"The derivatives unit of American International Group Inc. has unwound most of its soured mortgage trades with Goldman Sachs Group Inc. still left after the insurer was bailed out by the U.S. government in 2008, according to people familiar with the matter.

The move by AIG Financial Products to terminate credit default swaps insuring about $3 billion of mortgage-asset pools arranged by Goldman caused AIG to realize a $1.5 billion to $2 billion loss last year, the people said. But the insurer is no longer exposed to declines in the value of these asset pools, called "Abacus," which could have forced AIG to make payouts upon defaults or triggered a costly collateral call.

Goldman Sachs, CDOs and credit default swaps

Goldman Sachs Group Inc. played a bigger role than has been publicly disclosed in fueling the mortgage bets that nearly felled American International Group Inc.

Goldman was one of 16 banks paid off when the U.S. government last year spent billions closing out soured trades that AIG made with the financial firms.

A Wall Street Journal analysis of AIG's trades, which were on pools of mortgage debt, shows that Goldman was a key player in many of them, even the ones involving other banks.

Goldman as Middleman

Goldman originated or bought protection from AIG on about $33 billion of the $80 billion of U.S. mortgage assets that AIG insured during the housing boom. That is roughly twice as much as Société Générale and Merrill Lynch, the banks with the biggest exposure to AIG after Goldman, according an analysis of ratings-firm reports and an internal AIG document that details several financial firms' roles in the transactions.

In Goldman's biggest deal, it acted as a middleman between AIG and banks, taking on the risk of as much as $14 billion of mortgage-related investments. Then Goldman insured that risk with one trading partner—AIG, according to the Journal's analysis and people familiar with the trades.

The trades yielded Goldman less than $50 million in profits, which were mostly booked from 2004 to 2006, according to a person familiar with the matter. But they piled risks onto AIG's books, which later came to haunt the insurer and Goldman. The trades also gave Goldman a unique window into AIG's exposure to losses on securities linked to mortgages.

When the federal government bailed out the insurer, Goldman avoided losses on its trades with AIG covering a total of $22 billion in assets.

A Goldman spokesman says that up until AIG was rescued by the government, the insurer "was viewed as one of the most sophisticated financial counterparties in the world. It wasn't until the government intervened in September 2008 that the full extent of AIG's problems became apparent."

"What is lost in the discussion is that AIG assumed billions of dollars in risk it was unable to manage," the Goldman spokesman added.

An AIG spokesman declined to comment on the firm's trades with Goldman.

More clarity has emerged recently over the roles that firms such as Goldman played, as complex deals carried out by banks are now being untangled in legal and regulatory inquiries. Last month a government audit of part of the AIG bailout described Goldman's middleman role.

One of Goldman's trades with AIG involved a financial vehicle called South Coast Funding VIII. South Coast was one of many pools of bonds backed by individual homeowners' mortgage payments that Wall Street turned into collateralized debt obligations or CDOs.

Merrill Lynch, now part of Bank of America Corp., underwrote the South Coast CDO in January 2006 by stuffing it with packages of home loans originated by firms such as Countrywide Financial Corp., the big California lender.

Once a CDO debt pool is assembled, it is sliced into layers based on risk and return. Merrill sold the safest, or top layer, of deals like South Coast to large banks, including in Europe and Canada.

An auction sign for a property is seen at the front garden of a foreclosed house in Miami Gardens, Fla., in September. The banks wanted protection in case the housing market tanked. Many turned to Goldman, which effectively insured the securities against losses. Then, to cover its own potential losses, Goldman bought protection from AIG, in the form of credit-default swaps.

Goldman charged more than AIG for the protection, so it was able to pocket the difference, making millions while moving the default risks to AIG, according to people familiar with the trades.

The banks eventually realized they didn't need to use Goldman as a middleman.

The trades seemed prudent at the time given AIG's strong credit rating and the fact that AIG agreed to make payments to Goldman, known as collateral, if the value of the CDOs declined. The trades were also low risk for Goldman as long as AIG stayed afloat.

Other banks also acted as middlemen, including Merrill Lynch, which did roughly $6 billion of these deals compared to $14 billion for Goldman, according to people familiar with the trades and the analysis of banks' exposures to AIG.

"It seems shocking to me that Goldman would become so exposed to AIG and kept doing deals with them and laying on the risk," says Tom Savage, a former chief executive of AIG's financial products unit who left in 2001 before the explosive growth of insuring mortgage-debt pools.

The middleman trades began to unravel in mid 2007 when the U.S. mortgage market started slumping. Goldman was the first of AIG's trading partners to notify AIG that the CDOs were losing value and demand collateral. Other banks including Société Générale and a unit of Credit Agricole that had bought insurance from AIG eventually did the same.

A Goldman spokesman said that between mid-2007 and early 2008, Goldman showed AIG "market price levels" at which trades could be undone, allowing AIG to decrease its risk, but "AIG refused to accept that the market was deteriorating."

When Goldman didn't get as much collateral as it wanted from AIG, in 2007 and 2008 it bought protection against a default of AIG itself from other banks.

AIG officials were skeptical of the prices Goldman presented, according to the minutes of a February 2008 AIG audit committee meeting, which noted that Goldman was "unwilling or unable to provide any sources for their determination of market prices."

Additional calls for collateral from Goldman and other banks eventually led to AIG's September 2008 bailout and led the New York Federal Reserve two months later to fully cover $62 billion of insurance contracts Goldman and 15 other banks had with the financial products unit of AIG.

Goldman's other big role in the CDO business that few of its competitors appreciated at the time was as an originator of CDOs that other banks invested in and that ended up being insured by AIG, a role recently highlighted by Chicago credit consultant Janet Tavakoli. Ms. Tavakoli reviewed an internal AIG document written in late 2007 listing the CDOs that AIG had insured, a document obtained earlier this year by CBS News.

The Journal analysis of that document in conjunction with ratings-firm reports shows that Goldman underwrote roughly $23 billion of the $80 billion in mortgage-linked CDOs that AIG agreed to insure.

One such deal was called Davis Square Funding VI. That CDO, assembled by Goldman in March 2006, contained mortgage securities underpinned by subprime home loans originated by firms such as Countrywide and New Century Mortgage Corp., one of the first subprime lenders to fail in 2007.

A big investor in Davis Square's top layer was Société Générale, which bought protection on it from AIG, according to the internal memo. The French bank was the largest beneficiary of the New York Fed's Nov. 2008 move to pay off banks in full on their AIG insurance contracts.

A company financed largely by the New York Fed ended up owning both the Davis Square and South Coast CDOs. Société Générale received payments from AIG and the New York Fed totaling $16.5 billion.

Goldman received $14 billion for its trades that were torn up, including $8.4 billion in collateral from AIG.

A representative of Société Générale declined to comment.

The special inspector general for the Troubled Asset Relief Program, which recently reviewed the New York Fed's effort to stanch collateral calls last year, said Goldman officials said the company believed it would have been fully protected had AIG been allowed to fail because of collateral it had amassed and the additional insurance it had bought against an AIG default.

The auditor, however, questioned that conclusion. The report said Goldman would have had a difficult time selling the collateral and that the firm might have been unable to actually collect on the additional insurance.

Goldman Sachs, CDOs and credit default swaps II

"Cast your mind back to that SigTarp report, published last month.

Readers will recall there’s been a persistent stink over whether the efforts of the Federal Reserve and the US Treasury to prop up AIG had the effect of bailing out Goldman Sachs — its largest trading partner. Goldman Sachs always denied that idea, saying its exposure to AIG was collateralised and hedged against the mega-insurers’ fall. Others, were not so sure.

Last week the Wall Street Journal continued that particular line of thought with an article titled “Goldman fueled AIG gambles“, which examined GS’s role in acting as a middleman between the insurer and other banks. In short, Goldman offered banks protection on some of their investments (for instance on CDOs of home loans), which it in turn hedged with AIG in the form of CDS.

The other issue with Goldman and CDOs was its position as originator.

From the article:

Goldman’s other big role in the CDO business that few of its competitors appreciated at the time was as an originator of CDOs that other banks invested in and that ended up being insured by AIG, a role recently highlighted by Chicago credit consultant Janet Tavakoli. Ms. Tavakoli reviewed an internal AIG document written in late 2007 listing the CDOs that AIG had insured, a document obtained earlier this year by CBS News.

The Journal analysis of that document in conjunction with ratings-firm reports shows that Goldman underwrote roughly $23 billion of the $80 billion in mortgage-linked CDOs that AIG agreed to insure.

One such deal was called Davis Square Funding VI. That CDO, assembled by Goldman in March 2006, contained mortgage securities underpinned by subprime home loans originated by firms such as Countrywide and New Century Mortgage Corp., one of the first subprime lenders to fail in 2007.

A big investor in Davis Square’s top layer was Société Générale, which bought protection on it from AIG, according to the internal memo. The French bank was the largest beneficiary of the New York Fed’s Nov. 2008 move to pay off banks in full on their AIG insurance contracts.

A company financed largely by the New York Fed ended up owning both the Davis Square and South Coast CDOs. Société Générale received payments from AIG and the New York Fed totaling $16.5 billion.

Goldman received $14 billion for its trades that were torn up, including $8.4 billion in collateral from AIG.

A representative of Société Générale declined to comment.

The special inspector general for the Troubled Asset Relief Program, which recently reviewed the New York Fed’s effort to stanch collateral calls last year, said Goldman officials said the company believed it would have been fully protected had AIG been allowed to fail because of collateral it had amassed and the additional insurance it had bought against an AIG default.

The auditor, however, questioned that conclusion. The report said Goldman would have had a difficult time selling the collateral and that the firm might have been unable to actually collect on the additional insurance. What the WSJ probably means is that Goldman would have had a difficult time collecting on the hedges it bought to protect itself against an AIG bankruptcy. That’s a fair point, given that the failure of AIG could easily have knocked out the counterparty to Goldman’s hedges, whoever it might have been.

And on the collateral issue — Janet Tavakoli notes in some recent commentary:

… if A.I.G. had gone bankrupt, a sensible liquidator would have clawed back collateral that A.I.G. had already given to Goldman due to the extraordinary circumstances. After it saved the day by extending the credit line, the FRBNY should never have settled for 100 cents on the dollar. In August 2008, one month prior to the FRBNY providing A.I.G. with an $85 billion credit line to pay collateral to its counterparties, Calyon, a French bank that bought protection from A.I.G. (including on some Goldman originated CDOs) settled a similar $1.875 billion financial guarantee with FGIC UK for only ten cents on the dollar.

And for a glimpse into the underlying collateral of those Goldman-underwritten CDOs, Ms Tavakoli has also provided us with this link. Click it and you can see the collateral breakdown of Abacus 2005-2, part of Goldman’s supposedly subprime-shorting CDO series, and Davis Square Funding IV — the one mentioned in the WSJ article.

They are full of goodies like Blackrock-managed Tourmaline CDO 2005-1, which won deal of the year in 2005, and then hit an event of default and went into acceleration in April 2008. There’s also tons of that Countrywide goodness mentioned in the WSJ article — the same Countrywide stuff that ended up as collateral of CDOs against which monoline insurers MBIA and Ambac sold protection.

Banks created CDOs, bet against then and won

"In late October 2007, as the financial markets were starting to come unglued, a Goldman Sachs trader, Jonathan M. Egol, received very good news. At 37, he was named a managing director at the firm.

Mr. Egol, a Princeton graduate, had risen to prominence inside the bank 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.

Goldman’s own clients who bought them, however, were less fortunate.

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.

Some securities packaged by Goldman and Tricadia ended up being so vulnerable that they soured within months of being created.

Goldman and other Wall Street firms maintain there is nothing improper about synthetic C.D.O.’s, saying that they typically employ many trading techniques to hedge investments and protect against losses. They add that many prudent investors often do the same. Goldman used these securities initially to offset any potential losses stemming from its positive bets on mortgage securities.

But Goldman and other firms eventually used the C.D.O.’s to place 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.”

Investment banks were not alone in reaping rich rewards by placing trades against synthetic C.D.O.’s. Some hedge funds also benefited, including Paulson & Company, according to former Goldman workers and people at other banks familiar with that firm’s trading.

Michael DuVally, a Goldman Sachs spokesman, declined to make Mr. Egol available for comment. But Mr. DuVally said many of the C.D.O.’s created by Wall Street were made to satisfy client demand for such products, which the clients thought would produce profits because they had an optimistic view of the housing market. In addition, he said that clients knew Goldman might be betting against mortgages linked to the securities, and that the buyers of synthetic mortgage C.D.O.’s were large, sophisticated investors, he said.

The creation and sale of synthetic C.D.O.’s helped make the financial crisis worse than it might otherwise have been, effectively multiplying losses by providing more securities to bet against. Some $8 billion in these securities remain on the books at American International Group, the giant insurer rescued by the government in September 2008.

From 2005 through 2007, at least $108 billion in these securities was issued, according to Dealogic, a financial data firm. And the actual volume was much higher because synthetic C.D.O.’s and other customized trades are unregulated and often not reported to any financial exchange or market.

Goldman Saw It Coming

Before the financial crisis, many investors — large American and European banks, pension funds, insurance companies and even some hedge funds — failed to recognize that overextended borrowers would default on their mortgages, and they kept increasing their investments in mortgage-related securities. As the mortgage market collapsed, they suffered steep losses..."

To read the rest of the article... Banks Bundled Bad Debt, Bet Against It and Won

Goldman said investors were fully informed of the risks

"When financial titan Goldman Sachs joined some of its Wall Street rivals in late 2005 in secretly packaging a new breed of offshore securities, it gave prospective investors little hint that many of the deals were so risky that they could end up losing hundreds of millions of dollars on them.

McClatchy Newspapers has obtained previously undisclosed documents that provide a closer look at the shadowy $US1.3 trillion ($A1.46 trillion) market since 2002 for complex offshore deals, which Chicago financial consultant and frequent Goldman critic Janet Tavakoli said at times met "every definition of a Ponzi scheme".

The documents include the offering circulars for 40 of Goldman's estimated 148 deals in the Cayman Islands over a seven-year period, including a dozen of its more exotic transactions tied to mortgages and consumer loans that it marketed in 2006 and 2007, at the crest of the booming market for subprime mortgages to marginally qualified borrowers.

In some of these transactions, investors not only bought shaky securities backed by residential mortgages but also took on the role of insurers by agreeing to pay Goldman and others massive sums if risky home loans nose-dived in value - as Goldman was effectively betting they would.

Some of the investors, including foreign banks and even Wall Street giant Merrill Lynch, may have been comforted by the high grades Wall Street ratings agencies had assigned to many of the securities. However, some of the buyers apparently agreed to insure Goldman well after the performance of many offshore deals weakened significantly beginning in June 2006.

Goldman said those investors were fully informed of the risks they were taking.

These Cayman Islands deals, which Goldman assembled through the British territory in the Caribbean, a haven from US taxes and regulation, became key links in a chain of exotic insurance-like bets called credit-default swaps that worsened the global economic collapse by enabling major financial institutions to take bigger and bigger risks without counting them on their balance sheets.

The full cost of the deals, some of which could still blow up on investors, may never be known.

Before the subprime crisis, the US financial system had used securities for 40 years to generate $US12 trillion ($A13.44 trillion) to help Americans finance their houses, cars and college educations, said Gary Kopff, a financial services consultant and the president of Everest Management Inc. in Washington. The offshore deals, he lamented, "became the biggest contributors to the trillions of dollars of losses" in 2008's global meltdown.

While Goldman wasn't alone in the offshore deal making, it was the only big Wall Street investment bank to exit the subprime mortgage market safely, and it played a pivotal role, hedging its bets earlier and with more parties than any of its rivals did.

McClatchy reported on Noveber 1 that in 2006 and 2007, Goldman peddled more than $US40 billion ($A44.8 billion) in US-registered securities backed by at least 200,000 risky home mortgages, but never told the buyers it was secretly betting that a sharp drop in US housing prices would send the value of those securities plummeting. Many of those bets were made in the Caymans deals.

At the time, Goldman's chief spokesman, Lucas van Praag, dismissed as "untrue" any suggestion that the firm had misled the pension funds, insurers, foreign banks and other investors that bought those bonds. Two weeks later, however, Chairman and Chief Executive Lloyd Blankfein publicly apologised - without elaborating - for Goldman's role in the subprime debacle.

Goldman's wagers against mortgage securities similar to those it was selling to its clients are now the subject of an inquiry by the Securities and Exchange Commission, according to two people familiar with the matter who declined to be identified because of its sensitivity. Spokesmen for Goldman and the SEC declined to comment on the inquiry.

Goldman's defenders argue that the legendary firm's relatively unscathed escape from the housing collapse is further evidence that it's smarter and quicker than its competitors. Its critics, however, say that the firm's behavior in recent years shows that it has slipped its ethical moorings; that Wall Street has degenerated into a casino in which the house constantly invents new games to ensure that its profits keep growing; and that it's high time for tougher federal regulations.

In 2006 and 2007, as the housing market peaked, Goldman underwrote $US51 billion ($A57.12 billion) of deals in what mushroomed into an under-the-radar, $US500 billion ($A559.97 billion) offshore frenzy, according to data from the financial services firm Dealogic.

At least 31 Goldman deals in that period involved mortgages and other consumer loans and are still sheltered by the Caymans' opaque regulatory apparatus.

Tavakoli, an expert in these types of securities, said it's time to start discussing "massive fraud in the financial markets" that she said stemmed from these offshore deals.

"I'm talking about hundreds of billions of dollars in securitisations," she said, without singling out Goldman or any other dealer. "... We nearly destroyed the global financial markets."

Ex-Goldman trader shorted subprime CDOs

"The Goldman-Paulson fraud suit threatens to throw a spotlight on a realm of Wall Street that has escaped most scrutiny throughout the financial crisis: the hedge fund industry. Top hedge fund managers profit from Wall Street’s business model of fraud and collusion more than any CEO at the big banks, but tend to evade accountability because of the opacity of their industry and their extraordinary power.

One such hedge fund manager is Richard Perry. Perry, a former Goldman Sachs trader, became known as one of the subprime winners in 2007 — one of the hedge fund managers who saw the crisis coming, and placed profitable bets that the housing market would collapse. Perry reportedly shorted $3 billion in subprime-related securities, netting a $1 billion profit on the trade.

Around the same time, in late 2006 and 2007, Perry’s hedge fund, Perry Corp, began buying up shares in a certain financial management company that had a close business relationship with Goldman Sachs. His stake grew from 5% to 8% (around $30 million in early 2007), to the point where Perry Corp was disclosed as a major shareholder in the company in the prospectus for one CDO put together by Goldman in August 2007.

That company: ACA Capital, the same firm wrapped up in the Goldman Sachs-John Paulson CDO deal that the SEC has deemed fraudulent.

Perry’s winning billion-dollar subprime short, alongside his major investment in ACA, is all the more notable because of his ties to Goldman Sachs. He was a star trader at the bank under former Goldman Sachs head Robert Rubin, and has partnered with the bank on investments in recent years. Perry is extremely close to Rubin, outside of the professional context — former babysitter to his children, teaching assistant, and advisory board member at Rubin’s Hamilton Project. Despite being extremely close to someone who made $1 billion shorting the subprime market, Rubin has called the financial crisis a “perfect storm” that no one saw coming..."

Secret AIG document shows GS minted most toxic CDOs

"...Tavakoli also says that the poor performance of the underlying securities (which are actually specific slices or tranches of CDOs) shows they were toxic in the first place and were probably replenished with bundles of mortgages that were particularly troubled. Managers who oversee CDOs after they are created have discretion in choosing the mortgage bonds used to replenish them.

The original CDO deals were bad enough,” Tavakoli says. “For some that allow reinvesting or substitution, any reasonable professional would ask why these assets were being traded into the portfolio. The Schedule A shows that we should be investigating these deals.”

Among the CDOs on Schedule A with notional values of more than $1 billion, the worst performer was a tranche identified as Davis Square Funding Ltd.’s DVSQ 2006-6A CP. It was held by Societe Generale, underwritten by Goldman Sachs and managed by TCW Group Inc., a Los Angeles-based unit of SocGen, according to Bloomberg data. It lost 77.7 percent of its value -- though it isn’t in default and continues to pay.

SocGen spokesman James Galvin and TCW spokeswoman Erin Freeman declined to comment..."

‘Fascination With AIG’

"... Goldman Sachs has also increased the size of the bets it’s making. Its value-at-risk -- an estimate of how much the trading desk could lose in a single day -- jumped to an average of $231 million in the first nine months of 2009, a record for the firm. At the end of September, the company estimated that a 10 percent drop in corporate equity held by its merchant-banking funds would cost it $1.04 billion, up from $987 million at the end of June.

Revenue generated by trading and investing, the most unpredictable part of Goldman Sachs’s business, accounted for 79 percent of the firm’s revenue in the first nine months of 2009, up from 28 percent in 1998. Early the next year, before Goldman Sachs’s initial public offering, executives, led by Paulson, told investors the company would try to decrease the percentage.

The government is acting schizophrenically by arguing that Goldman Sachs needs taxpayer support because it poses a risk to the financial system at the same time as it’s failing to do anything to curtail that risk, says Nobel Prize-winning economist Joseph Stiglitz, who teaches at Columbia University in New York.

“We say they’re too big to fail, but we refuse to do anything about their being too big to fail,” Stiglitz says. “We say that they represent systemic risk, but we don’t regulate them effectively.”

‘Biggest Single Gift’

Stiglitz also points to the Fed’s $182.3 billion AIG bailout as an example of how policy has been tilted to support Goldman Sachs.

“The biggest single gift was the AIG rescue,” he says. “No one has ever provided a good argument for why we did it other than we were bailing out Goldman Sachs.”

On Sept. 16, 2008, a day after Lehman filed the biggest bankruptcy in U.S. history, the Fed authorized Geithner, then president of the Federal Reserve Bank of New York, to lend $85 billion to help AIG avoid a similar fate by allowing it to continue to post collateral owed on contracts and to settle securities-lending agreements. Geithner later told a Congressional Oversight Panel that the government acted because “the entire system was at risk.”

$12.9 Billion

In November, the Fed created two entities: Maiden Lane II to repurchase securities that had been lent out in return for cash, and Maiden Lane III to purchase collateralized-debt obligations so AIG could cancel the credit-default swaps, similar to insurance policies, it had written on them. In the latter program, the Fed allowed the counterparties to settle contracts at 100 percent of their value.

Goldman Sachs was the biggest beneficiary, receiving a total of $12.9 billion in cash, consisting of $5.6 billion to cancel insurance on CDOs, $4.8 billion to repurchase securities and $2.5 billion of collateral.

If Goldman Sachs and AIG’s other counterparties hadn’t been paid off in full by the Fed, they might have taken losses on their contracts.

Other bond insurers had canceled agreements by paying less than par. Merrill Lynch accepted $500 million from Security Capital Assurance Ltd. in late July 2008 to tear up contracts guaranteeing $3.7 billion of CDOs. On Aug. 1, 2008, Citigroup agreed to accept $850 million from bond insurer Ambac Financial Group Inc. to cancel a guarantee on a $1.4 billion CDO.

Barofsky Report

In a Nov. 16 report on the AIG bailout, Neil Barofsky, special inspector general for TARP, said the Fed tried for two days to negotiate with counterparties, an effort that failed because the Fed felt obliged to make any discounts voluntary and because French counterparties said they couldn’t legally be required to comply. Goldman Sachs refused to negotiate because it felt it was hedged if AIG failed to pay, Barofsky wrote.

“Notwithstanding the additional credit protection it received in the market, Goldman Sachs (as well as the market as a whole) received a benefit from Maiden Lane III and the continued viability of AIG,” Barofsky wrote. Goldman Sachs would have been saddled with the risk of further declines in the market value of about $4.3 billion in CDOs as well as some $5.5 billion of CDSs, he added.

‘Fascination With AIG’

Viniar, who held a conference call in March to answer questions about the firm’s relationship with AIG, said Goldman Sachs didn’t need a bailout because the firm’s hedges meant it faced no significant losses if AIG failed.

“I am mystified by this fascination with AIG,” he said in an interview in April. “In the context of Goldman Sachs, they’re one of thousands and thousands of counterparties, and the results of any trading with AIG are completely immaterial to what we do. Always have been, and always will be.”

Suspicions that the fix was in for Goldman Sachs have been fanned by the firm’s political connections.

Paulson worked at the company for 32 years, the last eight of them as CEO, before becoming Treasury secretary in 2006. Geithner selected former Goldman Sachs lobbyist Mark Patterson to serve as his chief of staff at Treasury. Stephen Friedman, a former senior partner who serves on the company’s board, stepped down as chairman of the New York Fed in May amid controversy over his purchases of the firm’s shares in December 2008 and January 2009 after it became a bank holding company regulated by the Fed. Geithner and Lawrence Summers, President Barack Obama’s National Economic Council director, worked earlier in their careers under former Treasury Secretary Robert Rubin, who was once co-chairman of Goldman Sachs. Geithner’s successor as New York Fed president is William Dudley, a former chief U.S. economist at Goldman Sachs.

Political Contributions

Goldman Sachs and its employees have donated $31.4 million to U.S. political parties since 1989, more than any other financial institution and the fourth-highest amount of any organization, according to the Center for Responsive Politics, a Washington research group...."

Goldman CDOs receive scruntiny

Abacus, Timberwolf, and now Hudson, pretty soon there won't be a CDO underwritten by Goldman that is not the object of some civil or criminal legal battle. The FT reports that the SEC has launched a brand new investigation into Goldman Sachs, this time into its $2 billion Hudson Mezzanine Funding CDO. According to the FT: "People familiar with the matter said that in recent weeks the SEC had been gathering information on Hudson Mezzanine, which featured prominently in an 11-hour grilling of Goldman’s executives in the US Senate in April. The SEC and Goldman declined to comment." It is unclear if Goldman has received a separate Wells Notice for this second probing iteration, but since as Goldman notified its shareholders, these things are immaterial, we won't hold our breath to find out. As was repeatedly hammered during the Congressional grilling of Blankfein and his henchmen two months ago, Hudson is precisely the "junk" deal that AIB was “too smart to buy"which in turn forced Tourre and the other salespeople to keep pushing Eastward to Taiwan and Korea (Marc Faber beware).

As disclosed earlier, Australia's Basis Yield Alpha sued Goldman today for failing to "disclose material information knowing that, by this omission, information that they did disclose was rendered misleading." That lawsuit opens the way for every single investor who ever bought a CDO from Goldman as a primary issuer (not in the secondary market).

Greenberg alleges Goldman Sachs behind AIG's collapse

" Hank Greenberg, former chief executive officer at American International Group Inc., said Goldman Sachs Group Inc. is responsible for the collapse of the insurer during the economic crisis, the Wall Street Journal reported yesterday.

“It certainly wouldn’t be difficult to come to that conclusion,” Greenberg is quoted as telling the newspaper.

Greenberg blamed new standards for credit-default swaps - -pushed by Goldman or Deutsche Bank AG, he said -- and subprime, housing-backed derivatives sold and then shorted by Goldman as contributing to AIG’s collapse, the newspaper reported.

“Mr. Greenberg appears to base his views on news reports rather than facts,” Lucas van Praag, a Goldman spokesman, said in an e-mail to Bloomberg News. “It is interesting that he doesn’t mention the devastating conclusions about AIG reached by the company’s own auditors.”

To contact the reporters responsible for this story: Sylvia Wier at swier@bloomberg.net; Vivek Shankar at vshankar3@bloomberg.net

Greek probe uncovers ‘long-term damage’ from swaps agreements

A Greek government inquiry uncovered a series of swaps agreements with securities firms that may have allowed it to mask its growing debts.

Greece used the swaps to defer interest repayments by several years, according to a Feb. 1 report commissioned by the Finance Ministry in Athens. The document didn’t identify the securities firms Greece used. The government turned to Goldman Sachs Group Inc. in 2002 to obtain $1 billion through a swap agreement, Christoforos Sardelis, head of Greece’s Public Debt Management Agency between 1999 and 2004, said in an interview last week.

“While swaps should be strictly limited to those that lead to a permanent reduction in interest spending, some of these agreements have been made to move interest from the present year to the future, with long-term damage to the Greek state,” the Finance Ministry report said. The 106-page dossier is now being examined by lawmakers.

European Union leaders last week ordered Greece to get its deficit under control and vowed “determined” action to staunch the worst crisis in the euro’s 11-year history. Standard & Poor’s and Fitch Ratings are questioning Greece over its use of the swap agreements, said two people with direct knowledge of the situation, who declined to be identified because the talks are private.

“Greece used accounting tricks to hide its deficit and this is a huge problem,” Wolfgang Gerke, president of the Bavarian Center of Finance in Munich and Honorary Professor at the European Business School, said in an interview. “The rating agencies are doing the right thing, but it may be too little too late. The EU slept through this.”

Lucas van Praag, a spokesman for New York-based Goldman Sachs, the most profitable securities firm in Wall Street history, didn’t respond to e-mails seeking comment.

Greece, whose burgeoning budget deficit caused it to fail the criteria for joining the single European currency in 1999, joined the Euro in 2001. Member nations had to reduce their budget deficit to less than 3 percent of gross domestic product and trim national debt to less than 60 percent of GDP.

Greek Prime Minister George Papandreou, who came to power in October after defeating two-term incumbent Kostas Karamanlis, more than tripled the 2009 deficit estimate to 12.7 percent. Greek officials last month pledged to provide more reliable statistics after the EU complained of “severe irregularities” in the nation’s economic figures.

The Finance Ministry report blamed “political interference” for the collapse of credibility in Greece’s statistics. There were “serious weaknesses” in data collection, especially with spending figures, as information often came from second-hand sources, the report found.

The Goldman Sachs transaction consisted of a cross-currency swap of about $10 billion of debt issued by Greece in dollars and yen, Sardelis said. That was swapped into euros using a historical exchange rate, a mechanism that implied a reduction in debt and generated about $1 billion of funding for that year, he said. Eurostat, the EU’s Luxembourg-based statistics office, and the rating companies were both aware of the plan, he said.

Officials for Eurostat couldn’t be reached for comment. Officials for Fitch, Moody’s and Standard & Poor’s didn’t return calls seeking comment outside regular office hours yesterday.

Sardelis said the agreement was restructured “a couple” of times while he was still in office. He left in 2004 and joined Banca IMI, the investment-banking unit of Italy’s Intesa Sanpaolo SpA’s. He said the fees, or the spread that Goldman Sachs was paid on the contract, were “reasonable.” The New York-based firm made about $300 million from the agreement, the New York Times reported Feb. 14.

Goldman Sachs bankers including President Gary Cohn traveled to Athens in November to pitch a deal that would push debt from the country’s health-care services into the future, the newspaper reported, citing two people briefed on the meeting. Greece rejected the offer, the New York Times said.

Wall Street Journal, February 22, 2010

Goldman Sachs’ mega-deal for Greece

With the help of Goldman Sachs, Greece has been using giant swaps deals to ensure its national debt ratios meet EU targets. But these deals are likely to prove controversial.

Ever since the deficit and debt rules for eurozone member states were drawn up in the early 1990s, there have been persistent rumours and allegations that governments have used derivatives to get around them. For some time, economists have argued that the combination of strict external targets with considerable local autonomy in sovereign debt management almost inevitably leads high-deficit countries towards derivatives.

It is now widely known that since 1996, Italy’s Treasury has regularly used swaps transactions to optically reduce its publicly reported debt and deficit ratios. Such trades remain controversial, and were the subject of fierce debate in late 2001, when Italian academic Gustavo Piga published a paper accusing eurozone countries of ‘window dressing’ their public accounts using derivatives Risk January 2002, page 17).

Now, Italy has been joined by the Hellenic Republic of Greece, as evidence emerges of a remarkable deal between the public debt division of Greece’s finance ministry and the investment bank Goldman Sachs. The deal is not only likely to reopen an old debate on public accounting for derivatives, but also sheds light on the way banks charge clients for taking credit and market risk exposure. Intended to rein in fiscal profligacy among aspiring eurozone entrants, the Stability and Growth Pact (SGP) – established in 1996 – sets two important targets for member states: a debt/GDP ratio of less than 60% and a deficit/GDP ratio of less than 3%. Of the two, the second is considered more important. Countries that show persistent breaches of the 3% target are liable to pay heavy fines to Brussels of up to 0.5% of GDP under the so-called Excessive Deficit Programme (EDP). Performing the key regulatory role of determining whether the targets have been met is the European Statistical Office (Eurostat).

Greece, which joined the single currency in early 2001, resembles mid-1990s Italy in certain respects. Until recently it was a country of high deficits and high inflation, and for this reason did not bother joining the first wave of eurozone countries in 1998. In the run-up to joining the eurozone, Greek inflation and budget deficits fell sharply, and GDP grew as the incumbent socialist government pursued a policy of UK-style public-sector reform. However, like Italy, Greece’s debt/GDP ratio has remained high, at over 100%, and as a result its interest costs are the highest in the eurozone.

Public statement

In November 2001, the Greek finance ministry’s public debt division made a public statement about its debt management strategy. It acknowledged that its debt was a ‘critical macroeconomic parameter’, and pledged to reduce debt servicing costs by means that included ‘the extensive use of derivatives’. Apparently, this was not enough for Brussels. In February 2002, the European Commission pointed out future deficit forecasts by Greece relied ‘primarily’ on achieving reductions in interest costs. It called for Greece to reduce its ‘very high’ debt ratio, and to provide ‘more detailed information on financial operations’.

Although Greece’s public debt division points out that it uses 18 derivatives counterparties, there is no doubt that the division, which is headed by Christopher Sardelis, has a particularly close relationship with Goldman Sachs. Indeed, the account has been handled personally at Goldman Sachs by Antigone Loudiadis, the London-based European head of sales for the firm’s fixed-income, currencies and commodities unit. Highly respected by other dealers, Loudiadis has enjoyed a successful career at Goldman, joining the firm’s partnership committee and attaining her present position in 2000. According to sources, by early 2002, Loudiadis and her team put together a deal aimed at alleviating Greece’s problem of debt ratios and high interest costs.

The transactions agreed between the Greek public debt division and Goldman Sachs involved cross-currency swaps linked to Greece’s outstanding yen and dollar debt. Cross-currency swaps were among the earliest over-the-counter derivatives contracts to be traded, and have a perfectly routine purpose in debt management, namely to transform the currency of an obligation.

For example, an issuer with foreign fixed-rate debt might choose to lock in a favourable exchange rate move. To do this, it could swap a stream of fixed domestic currency payments for a stream of foreign currency ones, referenced to the notional of the debt using the prevailing spot foreign exchange rate, with an exchange of the two notionals at maturity. Because they are transacted at spot exchange rates, cross-currency swaps of this type have zero present value at inception, although the net value (and credit exposure of either counterparty) may subsequently fluctuate.

However, according to sources, the cross-currency swaps transacted by Goldman for Greece’s public debt division were ‘off-market’ – the spot exchange rate was not used for re-denominating the notional of the foreign currency debt. Instead, a weaker level of euro versus dollar or yen was used in the contracts, resulting in a mismatch between the domestic and foreign currency swap notionals. The effect of this was to create an upfront payment by Goldman to Greece at inception, and an increased stream of interest payments to Greece during the lifetime of the swap. Goldman would recoup these non-standard cashflows at maturity, receiving a large ‘balloon’ cash payment from Greece.

Since neither Goldman nor Greece will comment on the deal, much of the details remain vague. It is not clear which exchange rates were used in the actual contracts. Under the terms of a similar ‘off-market’ deal transacted by Italy in 1997, the exchange rates prevailing at the time of the underlying bond issue were used, which would have made sense in the case of Greece since the deal happened after a period of euro strengthening against the yen and dollar.

Although the overall deal is believed to have consisted of three or four individual transactions or tranches, according to sources, the total cross-currency swap notional was approximately $10 billion, with tenors ranging from 15 to 20 years. While the size of upfront payment to Greece’s public debt division is not clear, it seems the total credit risk incurred by Goldman Sachs was roughly $1 billion. Effectively, Goldman Sachs was extending a long-dated illiquid loan to its client.

Goldman Sachs is known for its conservative approach to credit risk, and chose to hedge its exposure to Greece by immediately placing the risk with a well-known investor in sovereign credit: Frankfurt-based Deutsche Pfandbriefe Bank (Depfa). According to sources, Depfa entered into a credit default swap with Goldman Sachs, selling $1 billion of protection on Greece for up to 20 years. Depfa declined to comment.

Total charge

Details have also emerged of the way Greece’s public debt division was charged for the transaction. According to market sources, the total charge was approximately $200 million. This charge can be broken down into several components. First, Greece was charged for the credit risk in the transaction. Long-dated Greek government bonds were trading at a spread of 30 basis points in 2002. A billion-dollar investment in such bonds, purchased in asset swap form and held for 20 years, would yield about $60 million. According to Risk’s sources, Depfa demanded a substantial premium for taking on what was in effect an illiquid, privately placed loan.

Second, Greece paid a principal risk charge to Goldman Sachs for its market risk exposure. Although standard euro/dollar and euro/yen cross-currency swaps are highly liquid instruments that trade at tight bid-offer spreads in the interbank market, such large, off-market transactions cannot be hedged in this market without significantly moving the price against the dealer. Goldman Sachs may have hedged some of the risk using futures, forwards and interest rate swaps, while retaining substantial cross-currency and interest rate basis risks in its portfolio. Of course, the ultimate profit and loss experienced by Goldman Sachs on the transactions remains unknown.

Equally murky is the exact effect of Goldman Sachs’ transactions on Greece’s publicly reported national accounts. Since the deficit was a comfortable 1.2% of GDP in 2002, it is more likely that the cashflows were either used to help lower the debt/GDP ratio from 107% in 2001, to 104.9% in 2002 (by funding buybacks) or to lower interest payments from 7.4% in 2001 to 6.4% in 2002. But why did the large negative market value of the swaps not appear on the liability side of Greece’s balance sheet?

The answer can be found in ESA95, a 243-page manual on government deficit and debt accounting, published by the European Commission and Eurostat in 2002. As revealed by Piga, the drafting of ESA95’s section on derivatives was the subject of fierce arguments between the government statisticians and debt managers of certain eurozone countries.

The statisticians wanted derivatives-related cashflows to be treated as financial transactions, with no effect on deficit or interest costs, and with the derivatives’ current market value stated as an asset or liability. The debt managers opposed this, insisting on having the freedom to use derivatives to adjust deficit ratios. The published version of ESA95 reflects the victory of the debt managers in this argument with a series of last-minute amendments.

In particular, ESA95 states in a page-long ‘clarification’ that ‘streams of interest payments under swaps agreements will continue… having an impact on general government net borrowing/net lending’. In other words, upfront swap payments – which Eurostat classifies as interest – can reduce debt, without the corresponding negative market value of the swap increasing it. According to ESA95, the clarification only covers ‘currency swaps based on existing liabilities’.

Legitimate transaction

There is no doubt that Goldman Sachs’ deal with Greece was a completely legitimate transaction under Eurostat rules. Moreover, both Goldman Sachs and Greece’s public debt division are following a path well trodden by other European sovereigns and derivatives dealers. However, like many accounting-driven derivatives transactions, such deals are bound to create discomfort among those who like accounts to reflect economic reality. For example, the Greece-Goldman deal may be of interest to credit rating agency Standard & Poor’s, which upgraded Greece’s long-term debt from A to A+ in June 2003.

Among other derivatives dealers, the deal is bound to create envy at Goldman Sachs’ skill in solving the risk management needs of such an important client. As long as the current Eurostat rules do not change, the use of derivatives in deficit and debt management by eurozone sovereigns is likely to flourish. The planned expansion of the eurozone to include 15 east European countries may lead to especially rich pickings for dealers able to seize such opportunities.

Goldman forces Japanese lender accelerated repayment

"... “This is significant in Japan’s credit-default swaps history,” said Junichi Shimizu, an analyst at Deutsche Bank AG in Tokyo. “It will be a precedent.”

The dispute over Aiful swaps helped expose flaws in Wall Street’s system for determining payments on derivatives linked to the debt of defaulted companies less than a year after securities firms changed practices to avoid overreaching regulation. Policy makers demanded more transparency after the meltdowns 15 months ago of Lehman Brothers Holdings Inc. and American International Group Inc., two of the largest traders, froze credit markets.

Goldman Demand

Aiful faced possible failure after Goldman Sachs Group Inc. this month demanded that its 3.7 billion yen in loans be repaid. The company offered to settle the borrowing at a discount to win the New York-based lender’s support for its restructuring proposal, two people familiar with the matter said on Dec. 11.

The company said last week it would delay payments on 280 billion yen ($3 billion) of debt until Sept. 30 next year and ISDA’s Japan committee ruled the delay constituted a so-called restructuring credit event..."

Goldman Sachs helps avert bankruptcy following Hoffa’s plea

"Goldman Sachs Group Inc. helped YRC Worldwide Inc. complete a debt swap to avert bankruptcy after the Teamsters union said the bank was trying to profit from a failure of the largest U.S. trucker by sales.

A group consisting of Goldman Sachs, Deutsche Bank AG, Aristeia Capital LLC, Silverback Asset Management and a Smith Management LLC unit, “got us over the goal line by going into the market, buying bonds and tendering them,” YRC Chief Executive Officer Bill Zollars said yesterday.

YRC extended the deadline for the bond exchange six times in December as it sought to overcome resistance from bondholders owning derivatives that would pay out if the company defaulted. YRC, which has posted $1.7 billion in losses in the past five quarters, needed to complete the exchange by Dec. 31 to avoid a bank payment that would have left the trucker in an “unsustainable” position, the Overland Park, Kansas-based company said in a regulatory filing two weeks ago.

International Brotherhood of Teamsters President James Hoffa said in letters last month to regulators and lawmakers that Goldman Sachs and Deutsche Bank were among banks that “have a history of making markets in these types of derivative financial products.”

Goldman Sachs spokesman Michael DuVally said Dec. 17 that the bank was “actively exploring ways to help” YRC.

Bondholders with 70 percent of YRC’s $150 million of 8.5 percent notes due in April offered to tender, meeting the required threshold, the company said yesterday in a statement. That’s an increase over the 59 percent that participated by Dec. 29. Holders of 88 percent of all of the company’s outstanding bonds, with a face value of $470 million, participated in the exchange, the company said.

Profit From Failure

YRC’s $150 million of 8.5 percent notes rose 4.8 cents to 65.1 cents on the dollar yesterday, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.

“The most difficult bondholders to deal with were investors with credit-default swaps that paid off if the company went bankrupt,” Zollars, 62, said in a telephone interview. “It doesn’t seem right that individual investors would make money against companies surviving, particularly in this economy.”..."

Goldman Sachs alters its bonus policy to quell uproar

"Moving to quell the uproar over the return of big paydays on Wall Street, Goldman Sachs announced on Thursday that its top executives would forgo cash bonuses this year and that it would give shareholders a say in determining compensation.

With a resurgent Goldman set to award billions of dollars in bonuses — a trove that could rival the record payouts of the bubble years — the bank said that its 30 most-senior executives would be paid in the form of a special stock, rather than in cash. Goldman said that it would also let its shareholders vote on its executives’ pay, although the decision would be nonbinding.

A year after Washington rescued the nation’s financial industry with billions of taxpayer dollars, Goldman is enjoying one of the most profitable years in its 140-year history. Its bonanza — fostered by its own government bailout, as well as the rescue of the broader financial system — has angered the many ordinary Americans who are still waiting for an economic recovery.

Much of the resentment has been directed at Goldman’s chief executive, Lloyd C. Blankfein, who after first staunchly defending the bank’s outsize profits and pay, and then bristling at calls for restraint, apologized for mistakes that led to the financial crisis.

Whether Goldman’s shareholders will contest its pay practices is uncertain. Goldman insists that it must pay its employees well to keep them from defecting to rivals. So far, it has set aside $16.7 billion to pay its workers this year, a figure that translates into roughly $700,000 an employee. Top producers will earn millions.

Goldman stockholders, who have been richly rewarded as the bank’s share price soared roughly 82 percent this year, may be reluctant to challenge the bank’s pay practices. Indeed, Goldman has reached out to big investors to make its case.

Mr. Blankfein, who declined a bonus last year, received a $53.4 million bonus in 2007, a Wall Street record. This year, he and other top executives will receive bonuses in the form of what Goldman called “shares at risk,” or stock that cannot be sold for five years and can be retracted if the executive does something reckless or risky that hurts the firm.

While Goldman will give shareholders a say on pay, the bank would not be required to bow to its investors wishes. Still, a vote against Goldman would be deeply embarrassing for the bank.

Thursday’s developments underscore Goldman’s quandary as Wall Street enters its annual bonus season and comes a day after the British chancellor of the Exchequer stunned London bankers with news that the government there would levy a windfall tax on bank bonuses. Other European leaders have also expressed support for taxing bonuses heavily.

While many big banks have recovered since the dark days of last autumn, Goldman has powered ahead in profitability. It earned $7.4 billion in the first nine months. But Goldman’s initial insistence that it did not require a government rescue — a position rejected by the Treasury secretary, Timothy F. Geithner — has set Goldman apart from many of its industry peers."

Remuneration after bumper year looks set to spark controversy

"Goldman Sachs will ignite a storm of controversy in the new year when it reveals that its bankers are on course to collect pay and bonuses worth $19bn (?11.4bn), despite 2009 being the worst year for the US economy in 30 years.

The news comes as banks in Britain find themselves in the firing line after it emerged that 5,000 bankers stand to collect more than ?1m each, sparking criticism from ministers who accused financiers of being out of touch as millions are thrown out of work amid recession.

City sources say that the pay and bonus pot at Goldman is based on projected figures from Thomson Financial, published on Friday, which show that the investment bank is expected to generate net income of around $45bn.

Analysts predict that 43% of that figure will be set aside for compensation to be distributed to the bank's 31,700 employees, 6,000 of whom are in London. Remuneration as a proportion of net income is expected to be lower than the average of 46.7% in the 10 years to 2008, partly as a sop to US public opinion.

Brad Hintz, investment banking analyst at Sanford Bernstein, says: "Everyone inside the firm is aware there is more than enough money available to make everyone happy."

Goldman has enjoyed a bumper year thanks to booming debt markets, a recovery in the oil price and a rise in the value of equities since January, with some indices up by 20%. The bank trades off its own account as well as on behalf of clients.

Goldman's three leading executives, chairman Lloyd Blankfein, president Gary Cohn and chief financial officer David Viniar, will receive multi-million dollar payouts after forgoing their bonuses last year when the bank made a loss in the fourth quarter. Average compensation for the rest of the workforce will come in at about $743,000. The bonus culture is under attack on both sides of the Atlantic as it is blamed for having encouraged bankers to make reckless decisions during the credit boom that contributed to the near collapse of the financial system in 2008.

Bonus payments are an especially sensitive issue as banks such as Goldman took government money during the height of the crisis. The move was designed to prevent another banking collapse following the demise of Lehman Brothers and Bear Stearns.

In June, Goldman repaid $10bn of Treasury funding in order to free itself from onerous pay caps being imposed by the Obama administration.

But, in a sign that Goldman is sensitive to a public backlash, the bank is prepared to pay staff largely in shares rather than cash.

In Britain, the Financial Services Authority is telling banks to adhere to the principles laid out at the recent G20 meeting that call for bonus payments to be deferred and subject to claw back in the event of failure two or three years down the line. The G20 also called for stock awards rather than cash.

Other investment banks, such as Barclays Capital, Credit Suisse and JP Morgan, are expected to pay huge bonuses to staff after a year in which their fortunes revived as the banking sector stabilised.

In London, the row rumbles on over planned bonuses worth ?1.5bn for staff at the investment banking arm of Royal Bank of Scotland where the state owns a 70% stake after a taxpayer bailout. Ministers have demanded a veto.

Geithner rejects Goldman Sachs assertion

"Treasury Secretary Timothy Geithner disputed claims by Goldman Sachs Group Inc. executives that the bank could have survived the financial crisis without government help and said it and other Wall Street firms should show some restraint in handing out bonuses this year...

...Goldman Sachs, Morgan Stanley and JPMorgan Chase & Co.’s investment bank are set to pay record combined bonuses this year, according to analysts’ estimates. Goldman set a Wall Street pay record in 2007 when its compensation totaled $20.2 billion, including $68.5 million for chairman and chief executive officer Lloyd Blankfein.

Blankfein told Vanity Fair magazine in an article published online this week that he thought the company could have survived the financial turmoil on its own without government help. Goldman’s president, Gary Cohn, was more definitive. “I think we would not have failed,” he told the magazine. “We had cash.”

Geithner, 48, took issue with that, saying that the entire financial system was at risk at the height of the crisis, including Wall Street’s big institutions.

‘Classic Bank Run’

“None of them would have survived” had the government stood aside and let the crisis run its course, he said. “The entire U.S. financial system and all the major firms in the country, and even small banks across the country, were at that moment at the middle of a classic run, a classic bank run.”

New York-based Goldman Sachs, the fifth-largest U.S. bank by assets, accepted $10 billion from the Treasury and other forms of government support last year. It has since returned the funds with interest, as have firms including Bank of America Corp., JPMorgan Chase and Morgan Stanley...

...Goldman spokesman Lucas van Praag said the firm recognized that it would have failed had the financial system broken down.

Government Action

“If the financial system collapsed, we would have collapsed too,” he said. “We believe that government action averted a major systemic problem.”

He added that Goldman acted on its own to raise capital amid the turmoil. “We had cash and funding that would have allowed us to survive for quite a long time,” he said..."

The great Goldman Sachs fire sale of 2008

"...Obama was of course simply repeating a bedrock principle of American capitalism that even the worst financial crisis since the Great Depression cannot dislodge. But one wonders if the president would be a bit more begrudging if he knew that at the height of the financial crisis, many of Goldman Sachs’s top deal-makers — although not Blankfein himself — moved quickly to unload their own stock in their firm. This happened both in March 2008, after Bear Stearns collapsed, and again that September, after the bankruptcy of Lehman Brothers and the near-unwinding of the rest of Wall Street.

If everything was really under control after Lehman collapsed, why were executives dumping their stock by the bushelfull?

The whole story is contained in little-noticed public records filed with the Securities and Exchange commission — see here and here — which make enjoyable reading after spending the last year listening to the gang at Goldman and other firms whine about the terms of the Tarp program and repeatedly insist that they weren’t really in all that much trouble. Because if these savvy Goldman guys were freaking out and selling large chunks of stock in the dark days of 2008, that makes it a safe bet things were plenty bad and getting worse.

Among those executives who sold chunks of Goldman stock after the Bear Stearns debacle was Jack Levy, the co-chairman of Goldman’s mergers and acquisitions department (disclosure: he was briefly my boss when I worked in M.&A. at Merrill Lynch in the 1990s). On March 19, 2008, two days after Bear’s collapse, Levy sold 30,000 Goldman shares, at $171.32 each, generating $5.14 million. Levy also “wrote” — or sold — 60,000 October 2008 calls on Goldman stock in the market to an investor, or investors, who bet Goldman’s stock would reach $230 per share by then. Levy pocketed the premium on the calls — and of course this was a smart bet, since Goldman’s stock was trading around $90 a share by October 2008.

Also among the big sellers in March 2008 was E. Gerald Corrigan, a Goldman managing director and former head of the New York Fed, who sold 15,000 shares of Goldman for $2.6 million; Jon Winkelried, Goldman’s co-president at the time, who sold 20,000 shares for nearly $3.5 million (he quit the firm a year later after asking it to buy an additional $19.7 million of his illiquid investments); and Masanori Mochida, the head of Goldman in Japan, who sold 100,000 shares for $17.6 million..."

Goldman Sachs alumni in the government

The role of Treasury Secretary Paulson in the crisis

Goldman hires former Obama chief counsel

Goldman Sachs is launching an aggressive response to its political and legal challenges with an unlikely ally at its side — President Barack Obama’s former White House counsel, Gregory Craig.

The beleaguered Wall Street bank hired Craig — now in private practice at Skadden, Arps, Slate, Meagher & Flom — in recent weeks to help in navigate the halls of power in Washington, a source familiar with the firm told POLITICO.

“He is clearly an attorney of eminence and has a deep understanding of the legal process and the world of Washington,” the source said. “And those are important worlds for everybody in finance right now.”

Former GSer leads debt issuance at the US Treasury

"Karthik Ramanathan, who has overseen the issuance of more than $8 trillion in U.S. debt over the past year, plans to leave the Treasury Department at the end of March.

Mr. Ramanathan has run the Treasury's office of debt management at a time of severe borrowing needs necessitated by the government's attempts to combat the financial crisis and economic downturn. Under his watch, the national debt has grown by nearly $4 trillion...

...Since joining the Treasury in 2006 from Goldman Sachs Group Inc., Mr. Ramanathan has kept a low profile, largely working behind the scenes to make sure the Treasury's debt auctions go off without a hitch.

"The goal of the debt managers at Treasury is always to be as close to invisible as possible," says Lou Crandall, chief economist at Wrightson ICAP."

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