If the Securities Exchange Commission (SEC) had announced its filing of fraud charges against Wall Street titan Goldman Sachs this morning, the news would have sent the stock market into a downward spiral. But of course, the government doesn't want that to happen, so it announced the charges late last Friday afternoon, when the potential damage would be minimal.
The Obama administration does, however, want to play up to the populist anger over Wall Street "greed." Right? After all, there's an election coming up this November. The announcement also coincides with the start of Obama's "Wall Street Reform" campaign too. Coincidence?
Consider too, that the SEC's charges against Goldman Sachs involve a $2 billion investment that took place back in 2007 ... Can anyone explain to me why it took so long for the SEC to file these charges? Or why the investor who most benefited from this scheme, John Paulson, has yet to be charged with anything at all?
I mean, there's nothing new going on here. In fact, a book has been written about this very trade (and others like it), The Greatest Trade Ever: The Behind-the-Scenes Story of How John Paulson Defied Wall Street and Made Financial History.
Goldman Sachs Suit The Latest Crisis Not To Be Wasted
Call me a skeptic. But skepticism is warranted whenever this administration claims crisis, as in the phony "crisis" which led to the ramming through of the Stimulus Plan before anyone could read it, and the health care "crisis" which required repeated phony deadlines followed by extraordinary measures including payoffs to Senators and budget reconciliation.
Having created or found a crisis, the Obama administration is in full campaign mode to push sweeping financial regulation through Congress on another party-line vote, if it can pick off one Republican Senator. Hence, the push is on to ratchet up public pressure using Goldman Sachs as an excuse.
Yet, the story gets more interesting ...
The SEC's case against Goldman Sachs revolves around a 2007 email sent by Goldman Sachs trader Fabrice Tourre, a Frenchman who apparently left New York for the U.K., shortly after the story started to unfold.
British banker 'Fabulous Fab' - the high-flier at centre of huge Goldman ‘fraud’
Fabrice Tourre was known for his expensive tastes at Goldman Sachs, the investment bank where investigators allege he sold sub-prime mortgage bond products to customers, who are estimated to have lost more than £645million.
The broker, who earned £1.5million a year, moved to London in 2008 after several years with the firm in New York, where he rented a £3,000-a-month apartment and claimed to be from a prominent French family.
Tourre, 31, was known in the fashionable block of flats for throwing noisy parties.
‘He had one big blow-out party just before he moved out,’ the acqaintance said. ‘Some of the neighbours got very annoyed.’
In London, his office is in a luxurious building on Fleet Street. A Mail on Sunday reporter who called there yesterday was told by an employee that ‘Mr Tourre is not working’.
When he was contacted on his mobile phone, he hung up and his lawyer did not respond to a request for comment.
US watchdog the Securities and Exchange Commission said a formal request would be made for Tourre to return to the country to face charges.
Goldman Sachs Charged With Fraud
The SEC said Mr. Tourre was "principally responsible" for piecing together the bonds and touting them to investors. According to the SEC, Mr. Tourre wrote in an email shortly before the bonds were sold that "the whole building is about to collapse anytime now." He described himself in the email as the "Only potential survivor, the fabulous Fab … standing in the middle of all these complex, highly leveraged, exotic trades he created without necessarily understanding all of the implications of those monstruosities!!!"
But he was hardly alone, the SEC alleges: The deals were signed off by senior Goldman executives, though the SEC didn't specify how high up it believes the knowledge extended.
But it's not just the email ... About a month after Tourre's email, he also produced a 65-page "flip book" containing details of the investment to be provided to potential investors. So this "flip book," is the key evidence for the SEC's case.
Fabrice Tourre was Goldman's point man for New York based hedge fund Paulson & Co., and deliberately misled investors (like ACA Capital Ltd.) about Paulson's role in the deal, claiming Paulson had invested $200 million in hopes that the packaged mortgage bonds would increase in value. But in truth, Paulson was betting on a housing collapse, and Mr. Paulson took home $4 billion in 2007 alone, for betting against the market correctly.
Mr. Tourre however, is not the target of the SEC complaint, Goldman Sachs is, because they say its senior management had full knowledge of this deal. After all, Goldman Sachs had arranged a couple dozen similar deals between 2004 and 2007.
From 2004 to 2007, Goldman arranged about two dozen similarly named deals, according to rating-agency data. American International Group wrote credit protection on $6 billion of Abacus transactions before the insurer nearly collapsed in 2008, though not the deal detailed in the SEC's suit, according to documents reviewed by the Journal. Last year, AIG unwound most of its Abacus-related swaps with Goldman, losing $2 billion.
The lawsuit suggests "senior level management" at Goldman was aware of the Abacus transaction and Paulson's connection to the deal. "Goldman is effectively working an order for Paulson to buy protection on specific layers of" the deal's "capital structure," according to excerpts of a 2007 internal memo included with the suit. The Goldman committee that was sent the memo included senior-level management, the SEC said.
Make no mistake about it here ... Goldman's senior management was fully aware of what was going on, and Paulson was actively raising funds and selling investment groups on this kind of instrument going back to at least 2006.
Goldman allowed Paulson to sponsor a packaged mortgage-backed investment, which means Paulson influenced how the investment was constructed. This provided the aura that the sponsor (Paulson) would act accordingly to help the investors.
But in reality, these investments were designed so Paulson could take a large short position against them, betting against the "investment" he helped create.
Another interesting factoid of note, is that managing director and deputy general counsel at Goldman Sachs, Frances Bermanzohn, just happens to be the wife of Alan Rosenman, president and CEO of ACA Capital Ltd., and alleged "victim" of the investment scheme.
Senior Goldman Exec Is Married to Former Head of ACA
Now the SEC's complaint states that ACA had no idea that Paulson was shorting the stocks he'd been asked to select ...
Alan S. Rosenman took over ACA Capital as president and CEO in 2004 - because -- wait for it -- his predecessor Michael Satz had "personal income tax issues" -- (how murky is this story going to get you must be asking?)
According to a Business Week article dated April 3 by David Henry and Matthew Goldstein, Rosenman "immediately began to push ACA into CDO insurance, an area his predecessor, Satz, had only begun to explore."
Rosenman's wife, or at least partner -- they are listed as sharing a house together for which they paid $6.1 million in 2005 in New York -- is Frances "Fran" R. Bermanzohn, who is managing director and deputy general counsel at ... Goldman Sachs.
Hmmmn.
Summing up what we've gone through so far ...
- The lawsuit against Goldman Sachs is based on an investment that took place in 2007, yet the charges are only now being announced as President Obama begins his campaign for "Wall Street reform."
- President Obama has a powerful ally in his push for "Wall Street reform" too: Goldman Sachs.
- The charges were announced on a Friday afternoon, so it would have limited impact on the stock market.
- John Paulson has yet to be charged with anything.
- The SEC is relying on an email and 65-page "flip-book" produced by Goldman Sachs trader Fabrice Tourre, who moved from the New York offices to London shortly after the story started to unfold.
- A senior Goldman executive was married to the president and CEO of one of the investment schemes "victims."
It’s obvious that Goldman Sachs will be the Obama administration's primary "enemy" in his attempt to regain public support prior to the November elections. And let's face it, Goldman Sachs makes the perfect villain!
There's a lot more to this story of course, including Goldman Sachs cozy relationship with the U.S. Treasury Department, the role Congress played played in the housing bubble, who else the government go after, the Federal Reserve, and the political and economic impact of the charges.
We'll look at these in Part 2 of Goldman Sachs and the Wall Street Witch Hunt.
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