Bud's Daily Diatribes

UPDATES - April 16, 2010

SEC Accuses Goldman Sachs of Fraud

Full Story Here:
http://www.fox11online.com/dpps/news/national/sec-accuses-goldman-sachs-of-fraud-_3316933

And Here:
http://www.nytimes.com/2010/04/17/business/17goldman.html

Paulson, Looking to Go Short on Mortgages, Found a Willing Partner

http://online.wsj.com/article/SB10001424052702304180804575188370390433034.html

Merrill Committed Same Fraud as SEC Claims Goldman Did

http://online.wsj.com/article/SB10001424052702303491304575189003501019776.html

Fed Advice to A.I.G. Scrutinized
(from earlier)

http://www.nytimes.com/2010/01/08/business/economy/08aig.html

END UPDATES - ORIGINAL POST BEGINS

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Goldman Sachs Fueled AIG Gambles

Goldman Sachs...the very company that got all that money in bailouts and TARP funds from the U.S. taxpayers?

Goldman Sachs...the very company that gave away "golden parachutes" and multi-million dollar bonuses to their employees?

December 12, 2009

By SERENA NG and CARRICK MOLLENKAMP

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.

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.

—Amir Efrati
contributed to this article.
Write to Serena Ng at serena.ng@wsj.com and Carrick Mollenkamp at carrick.mollenkamp@wsj.com

http://online.wsj.com/article/SB10001424052748704201404574590453176996032.html

Goldman Sachs stock price from the 2008 crash to today
Chart from Google Finance)

Goldman Sachs: Smarter Than the Average AIG

By Ed Leefeldt | Dec 13, 2009

The Wall Street Journal did an analysis of the mortgage-related trades that investment bank Goldman Sachs conducted with then giant insurer American International Group during the years leading up to its meltdown in early 2008. Undoubtedly the Journal wanted to show that Goldman did something nefarious. But the unexpected result: Goldman was just smarter.

Arguably, Goldman has the most sophisticated traders in the world. And under former CEO Hank Greenberg, AIG also thought it did. But at best it had the second smartest, and that wasn’t good enough. What AIG did have was one of the biggest balance sheets in the world, and AIG used it to take on huge exposure to what turned out to be toxic investments.

According to the Journal story, what Goldman apparently saw was just how toxic those investments could turn out to be. Sure they were triple A, but the agencies that rated them - Standard & Poor’s, Moody’s Investors Service and Fitch - didn’t seem to know mortgages from sausages.

The tip off could have been that potential home buyers in California were getting $400,000 mortgages with no money down and no credit history. The mortgages were then bundled and passed off to banks. But in most instances the banks hedged their bets by purchasing default swaps - basically a form of insurance in case the mortgages went sour. AIG became a big buyer of these default swaps because, after all, the mortgages were rated triple A. They had to be safe.

Goldman Sachs was the biggest of these banks. It bought $33 billion of the $80 billion of mortgage assets that AIG then insured during the housing boom, according to the Journal, more than twice as much as the next two biggest banks, Societe Generale and Merrill Lynch.

Eventually everyone, even AIG, realized that the housing market was overheated. AIG stopped selling this kind of protection and putting it on its balance sheet. But by then it was too late. Watching AIG totter, Goldman bought protection from other banks against the prospect that AIG itself would default. Goldman continued to engage in sharp trading with AIG, but demanded collateral from the insurer, thereby helping to insure its demise.

Brilliant? Yes. Unscrupulous? Arguably. Illegal, no. Just pure capitalism in the tradition of John D. Rockefeller, J.P. Morgan, and Jay Gould.

The Journal also notes one other asset Goldman had that AIG didn’t. When the crash came, Goldman avoided losses on its trades with AIG for as much as $22 billion in assets because the federal government stepped in and bailed out AIG. And who, you might ask, in “government” did that? None other than Treasury Secretary Henry Paulson and New York Federal Reserve Chairman Stephen Friedman, both former Goldman Sachs CEOs.

So while it helps to be smart, it’s even more helpful to have friends in high places.

http://industry.bnet.com/financial-services/10005482/goldman-sachs-smarter-than-the-average-aig/

CHICAGO (Reuters) - Goldman Sachs Group Inc played a bigger role in fueling the mortgage bets that crippled American Insurance Group Inc than has been publicly disclosed, the Wall Street Journal reported on Saturday.

An analysis by the paper of AIG's trades on pools of mortgage debt shows that Goldman was a key player in many, including those involving other banks, the Journal said.

Goldman was one of 16 banks the U.S. government rescued last year after closing out losing trades that AIG had made with the financial firms.

The bank originated or bought protection from AIG on roughly $33 billon of the $80 billion of U.S. mortgage assets that AIG insured during the housing boom.

That was about twice as much as Societe Generale and Merrill Lynch, the firms with the largest exposure to AIG after Goldman, according to an analysis of ratings-firm reports and an internal AIG document, the Journal said.

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

The trades, mostly booked from 2004 to 2006, yielded less than $50 million in profits for Goldman, the Journal said.

But the trades added risks onto AIG's books and 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 told the Journal that 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.

The Journal said an AIG spokesman declined to comment on the firm's trades with Goldman.

Recently more clarity has emerged 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, the Journal said.

The size of the government's bailout of Goldman and the other AIG counter-parties caused a firestorm of protest against the U.S. Treasury and Federal Reserve in Congress.

Henry Paulson, the U.S. Treasury secretary as the financial crisis boiled last year, was a former Goldman chief executive.

The U.S. House of Representatives on Friday passed a sweeping Wall Street reform bill that would rewrite rules for financial markets like mortgage-backed securities traded by AIG and Goldman and restrict the operations of such big firms in future. (Reporting by Christine Stebbins; editing by Mohammad Zargham)

http://www.reuters.com/article/idUSTRE5BB1P520091212

The Wall Street Journal's Fraud Blindness

By Eliot Spitzer
Posted Monday, Aug. 10, 2009, at 2:42 PM ET

I have tried not to say too much about former AIG CEO Hank Greenberg's efforts to dance his way through his $15 million settlement with the SEC. Greenberg's troubles largely derived from a case brought by the New York attorney general's office when I was attorney general. As has been widely reported, AIG settled the case with my office in 2006 by restating its financials, paying a fine of $1.6 billion—at the time, the largest in history—and separately, by removing Greenberg as CEO. Thereafter, five people were convicted in federal court of criminal charges, and the prosecutor in that case referred to Greenberg as an "unindicted co-conspirator."

Yet in a quite remarkable editorial on Friday, the Wall Street Journal editorial board, in another of its apologias for boardroom fraud, once again tried to clear Greenberg of all blame, asserting that I began the destruction of AIG by demanding Greenberg's removal as part of a misguided effort to ensure accuracy and integrity in AIG's financials.

While it's nothing new for the Wall Street Journal editorial page to make such a claim, one sentence in the editorial is rather startling, even for them: "AIG shareholders appear to have been hurt far more by the company's 2005 Spitzer-driven earnings restatement than by Mr. Greenberg's alleged failures. …"

Excuse me? Weren't Bernie Madoff's investors better off before he was forced to "restate" income as well? Of course they were! That is the nature of fraud that benefits investors! So is it better to leave the fraud undetected and unprosecuted? If one buys the Wall Street Journal's logic, integrity in the marketplace is merely a utilitarian calculus: If remedying the fraud costs shareholders more than the fraud generated in value, then the fraud was permissible and even desirable. The Journal's total lack of interest in the integrity of the market as a fundamental principle is finally but tellingly revealed.

The Journal's argument ought to be easily dismissed as merely the perspective of a remnant few who haven't recognized the harm caused by fraud in the market. But I have the troubling sense that now that we are back from the brink of the financial precipice, we are reverting to the status quo ante. When a major newspaper can print such an editorial, it makes one wonder whether we have learned anything at all.

http://www.slate.com/id/2224792/

Goldman Sachs to get USD 1 bn if CIT Group files for chapter 11 bankruptcy

By Janina EnergincloseAuthor: Janina Energin Name: Janina Energin
Email: janina.energin@ceoworld.biz

If CIT Group (CIT) files to reorganize under Chapter 11 of U.S. bankruptcy law, Goldman Sachs (NYSE:GS) (GS) could receive a $1 billion payment because of the structure of a $3 billion rescue financing that Goldman had arranged for the New York commercial lender, people familiar with the matter told the Financial Times.

U.S. taxpayers, on the other hand, stand to lose $2.3 billion, the value of the CIT preferred shares that the U.S. Treasury purchased, the newspaper reported on Monday. Such a loss for taxpayers would be the biggest so far from the government’s capital plan for the banks, the FT reported. CIT is working to avert a bankruptcy-law filing, aiming for a debt-swap offer that would leave equity holders with little value, the FT reported.

A failure of CIT, run obviously quite incompetently by CEO Jeffrey Peek, would be the biggest bank collapse since regulators seized WaMu, and put hundreds of manufacturing clients in risk of failure while creating a crisis for as many as 300,000 retailers.

The payment would cover fees from a 20-year agreement signed June 6, 2008, according to regulatory filings. Under the deal, CIT agreed to pay Goldman 2.85 percent of the maximum amount lent under the facility, or $85.5 million annually for the first decade and then a declining amount after that, the filings show.

http://ceoworld.biz/ceo/2009/10/05/goldman-sachs-to-get-usd-1-bn-if-cit-group-files-for-chapter-11-bankruptcy/

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