Exposure of MASSIVE foreclosure fraud continues, accelerates; Patterns of fraudulent mortgages emerge; Title insurance fraud ramifications balloon

This is a must-read article via Zero Hedge:

"The biggest fraud in the history of capital markets."

These days are looking more and more like August 2008, as this foreclosure/mortgage fraud crisis is getting more and more severe by the day. Bankster Report's favorite, Catherine Austin Fitts, has been saying since at least 1995 that many of the "houses" to which MBS are supposed to be value-linked don't exist, and never did. In 1995, she confronted a Clinton administration official with the fact that "the Administration was planning on issuing more mortgages than there were houses or residents," to which she was told "Shut up, this is none of your business."

It's our business now, and it's the business of at least 40 attorneys general and hundreds of fraud investigators.

The mortgage market, from the most fundamental perspective, is in fact based on fraud, because mortgages themselves in our financial system are based on non-existent money. But Ms Fitts (and me too) think that the fraud is much less "abstract," but literally involves not only non-existent money, but non-existant houses. This latest robo-signing debacle only more clearly exposes that no one--not regulators, not bankers, not the market, and not even market participants and the people buying this crap--are even concerned with the legitimacy of the documenting paperwork: this current, rapidly expanding foreclosure fraud crisis is the obvious result of the underlying mortgage fraud crisis. Investigators are finally working it backwards: when a good doctor sees certain symptons--that is, banks having using illegal practices during foreclosure proceedings--he can works it back to determine the specific disease causing these symptons--that is, the banks using illegal practices to get the mortgages in the first place!

The events of this last month, thanks to judges and lawyers courageous enough to challenge the banks as well as some whistleblowers from the banks themselves, are making it clear that the largest US banks have absolutely no qualms about submitting fraudulent documents, suborning their employees to commit perjury, and outright circumventing the law. As Bloomberg reports today, Wells Fargo, JPMorgan Chase, and Ally Bank (the post-TARP name of GMAC) have admitted submitting fraudulent documents in hundreds of thousands of court cases. Would it be such a big jump to simply fabricate some mortgages, securitize them, and submit some nice, new, shiny tranches of "AAA" MBS to the market? If the banks are committing such crimes today in this "new age of increased regulation," how much more would they have been tempted to do when regulation was "more lax"?

From the above Bloomberg article:

"In a lawsuit filed on behalf of Kentucky homeowners last week, plaintiffs claimed banks, MERS [the Virginia-based Mortgage Electronic Registration Systems, which handles mortgage transfers between member banks] and loan servicers filed mortgages with forged signatures, submitted foreclosure actions months before they acquired any legal interest in the properties and falsely claimed to own notes executed with mortgages."

If true, all of the above are serious cases of mortgage and foreclosure fraud, and perhaps more complexly, title fraud and title insurance fraud. For example: JPM forecloses on a house it claims to own because the current occupant is not making mortgage payments. JPM and the occupant go through the court proceeding, and despite the occupants protestations that JPM is not following the law, the occupant can't prove his claims and JPM doesn't admit to having done anything wrong, and so the judge grants JPM possession of the house. The occupant, who had purchased title insurance along with his now-doomed mortgage, loses the house. JPM resells the house to a new person and also sells that person a matching loan. The new occupant is current on payments, and himself has title insurance. The non-paying occupant has been removed, JPM was able to recover losses, and a new occupant is in the home: the system has "worked." Right?

He he he .... One year later (ie: today), JPM is sued by the attorney general of the State for fraud after the AG discovers patterns of document fraud and falsified court documents and gather testimony from JPM employee who state that they were told to robo-sign documents, which both the employees and supervisors knew was illegal, but did anyway. JPM admits that it "may" have used robo-signers for the documents, and perhaps even forged a few signatures, and is "having trouble" producing the title in some of the foreclosures cases in the AG's State. The original occupant sees this story about JPM--the bank that he claimed was up to something fishy during the foreclosure proceedings---and calls a lawyer. He asks a simple question: "Mr Lawyer, does my title insurance cover fraud?" The lawyer says, obviously, "Of course. Why?"

Meanwhile, the second occupant is still faithfully paying JPM for his loan, and hasn't missed a payment. Of course, he might be paying JPM, but JPM doesn't really own the title anymore, because JPM has pledged it as collateral for some other loans from another bank, and has also securitized the original loan into several tranches of "AAA" MBS and sold them. MERS is holding the title as the middleman between the banks. The lawyer for the first occupant of the house calls the AG to report his client's case. The AG adds the case to his successful fraud suit against JPM, and JPM is found guilty of filing fraudulent documents and falsifying court records.

Upon the conviction, the lawyer calls his client's (the original occupant) title insurance company. Like all insurance companies, ABC Title Co is just another financial institution, and the company has been not only watching the JPM cases closely, but has been suffering itself due to the rulings. As an insurer against fraud, ABC Title is now finding itself liable for thousands of payouts to the mortgage holders that JPM fraudulently foreclosed upon. ABC Title can't keep up, of course, and so ABC itself sues JPM. Meanwhile, the original occupant is also fighting to recover the title itself, which JPM has fronted as collateral and which is in the supposedly in the possession of the MERS middleman, and which another person entirely--the second occupant--has an seperate independent title insurance claim on. So, there are two individuals with two different insurance claims on the same title, a title that is pledged as collateral to a second bank, a third party title holder who has no idea who really owns the title, and a group of MBS holders expecting their money from JPM, which JPM is expecting from the second occupant! See what a mess fraud makes!

How does a judge settle this--and how do the title insurance companies survive (never mind the people)? They don't: there is not enough to go around. If JPM committed fraud, and the first occupant had title insurance for fraudulent claims against the property, then the title company owes the first occupant compensation. If JPM committed fraud that impacted the title company, then JPM owes the title company compensation, too. And then there's the guy who bought title insurance on a title that had a latent fraud claims against it and that happens to be the title for the house he's living in and financing. This is not even to mention anything about the second bank which is now legally entitled to the title as collateral if JPM itself starts missing payments to the second bank! This why analysts are calling the foreclosure fraud mess a "hydra": there are too many different faces on one single house, and one of the ugliest faces is the title insurance problem.

We know that we have people in houses paying mortgages to banks who claim to own the loan or the title, but cannot prove either. We also know that we have former loan-owners who are now home-owners because no mortgage company or creditor could produce the title in court. We also know that Bank of America has "foreclosed" on houses which the bank doesn't even own. The opposite of this--that side that I think will be exposed especially through title fraud/title insurance fraud--are the creditors with claims to houses that don't exist, and banks with "assets" on their balance sheets based on ghost houses that even a ghost could live in. We know that there is more debt than money on the planet, and more money than real assets, as the derivatives market is a $1.5 QUADRILLION "market" of promises and exposures, or...

$1,500,000,000,000,000 of promises that will never be fulfilled.

Fifteen thousand Trillion promises. We can't even imagine these numbers. How people can look at a number like that and claim that the global economy is "fixed" and what happened in September 2008 was a once-in-a-lifetime market crash is totally beyond me. Two years after being saved by the master heister Mr Paulson, we have banks admitting that they basically used taxpayer money to fund their massive mortgage fraud operations. Of course, we "conspiracy theorists" knew that there was incessant fraud all along which is exactly why Mr Paulson heisted America to save the banks in the first place. But now this is mainstream news, and attorneys general in 40 States are investigating banks, and the Wells Fargo, Ally (GMAC), JPM, and PNC have all suspended foreclosures until further notice. Its not a "conspiracy theory" anymore.

So, to recap: two years ago, the American taxpayer was heisted by a consortium of banksters, including master heister Mr Hank Goldman Sachs Paulson, which dropped the DJIA by 777 point in a single day, and threatened Congress with martial law lest it authorize a $700 Billion transfer of wealth from the people of the United States to the banksters' group of fraud-laced, immoral, corrupt banks that are themselves so incapable of operating responsibly that without such a transfer they would have gone bankrupt within weeks. The weak, corrupt Congress authorized the restriction-free transfer, and within two days of the bill becoming law, master hiester Paulson completely abandoned the "we must buy the toxic assets!" that lie he had previously concocted and vigorously repeated for the purposes of fear-mongering the entire planet into believing that an absolutely certain "complete global economic meltdown" would ensue if we didn't "buy the toxic assets." Once he had the money in hand, this mantra was abandoned, and suddenly Mr Paulson revealed an entirely new plan to, literally, deliver the money directly to the banks and hope they pay some of it back--the very banks that cannot even handle their own money responsibly nor that of their clients. Fast-forward two years, and these same banks are now admitting to massive and systemic foreclosure fraud, even to the point of forging signature, falsifying court documents, and intentionally and knowingly breaking the law.

But that's not all--because guess what? If these banks get financially hit because of this, the American taxpayer is going to be the one to pay. Not because of any new program that might be concocted to "save" them lest the Moon explode, but because of one that already exists: remember the FDIC's Temporary Liquidity Guarantee Program? Its the one were you get to back about half a TRILLION dollars in private bank paper? Yeah---what happens if JPM ($39.6 Billion in TLGP paper) and BofA ($44.5 Billion) get crimped for cash again due to their multi-year foreclosure fraud operation and the ramification? Who covers the payments to $95 Billion-worth of their creditors?

Who? We do, of course.

So--so much for that "crime doesn't pay" business, kids. Actually, crime really does pay, and pays really, really, really, really well if you do it in an Armani suit. I'm talking BILLIONS "well"---TRILLIONS "well." Plus, there's a great medical plan, solid benefits, and you might even get to visit the White House.

JPM's Jamie Dimond and Goldman's Lloyd Blankfein did!

PHOTO: Getty Images,
"Wall Street Backs Barack Obama's Toxic Asset Plan",
UK Telegraph. Editorial and news use.

And they will be back.

Goldman fraud case impacts Commodites, Gold

Last Friday's SEC fraud complaint issued against Goldman Sachs had a noticeable impact on the market: as would be expected, Goldman shares took hit after the news escaped mid-morning--a steep 13% hit by close. But the impact didn't settle with equities. Commodities--especially oil, copper, silver, and gold--took a good hit, as well: Gold lost 2%, copper lost 2.3%, oil lost 2.7%, and silver got hit the hardest by whopping -4.1%. Why did this happen, and is it related to the Goldman case?

Well, yes . . . sorta, but it seems everything is related to Goldman. One current and popular circulating explanation for the hit to commodities in general is that the SEC action stirred up that all-important "market uncertainty" which translates to "sell and move to dollars" for investors holding what might be considered risky positions on commodities. Of course, you know this also as "risk aversion." Traders quoted by the Wall Street Journal expressed the opinion that the moves in commodities were the results of investors simply "dumping" riskier assets and moving to the dollar. For short-term investors in gold, which had been performing well since the early February lows, and was up almost $100 off those lows by last Friday, the surprise of the SEC lawsuit might have served as, one trader put it, "an excuse to sell." The same could be said of silver and copper, and oil. Silver just about always exaggerates whatever happens in gold (up or down), so a double-impact on silver seems about normal compared to the move in gold. The fact that all this was matched with a move higher in Treasuries lends credence to the market-uncertainty-based-risk-aversion-quick-run-to-the-dollar hypothesis.

Additionally, there are at least two other factors worth mentioning in regards to the moves in commodities, and the first is Goldman Sachs' itself. Goldman is a major commodities player: the firm is involved internationally and heavily in oil, natural gas, precious metals, industrial metals, agriculturals, livestock, and, of course, energy trading and carbon (google J Aron & Company, and check out my super-long post on the "$10 Trillion carbon market"). Seeking Alpha reported that the Goldman's 2010 commodities outlook placed oil up 20%, copper up 15%, gold at $1350/oz and silver at $20/oz. The futures on commodities markets are fantastically skittish, and when some bullish players saw a fellow bullish player get slapped with a fraud suit, they became risk-averse and sold. Unfortunately, this demonstrates how fundamentally out-of-whack our so-called "commodities" markets have become that prices swings are more often prompted by press releases than supply/demand fundamentals, but we have all know that for some time. Thus, Goldman itself, ironically, is a factor in the hit on commodities. But considering that the firm knew full well of the investigation and intent to sue long in advance (though it didn't bother to tell shareholders), I'm sure Goldman had their Friday commodities positions very, very well hedged.

Another factor worth mentioning applies less to commodities generally, as the Goldman factor does, and more to gold, oil, and copper specifically. This is the fact that these commodities are heavily held by one of names dropped in the SEC complaint, the $32-Billion hedge fund Paulson & Co. Please note, Paulson & Co has not been indicted by the SEC and they are not the subject of the SEC complaint, nor are they accused of wrongdoing, but someone somewhere (Reuters) is speculating that if put under pressure by the SEC case, Paulson will have to sell some of its oil and gold interests. Exactly what "pressure" that might be, considering that the SEC has not charged Paulson with any offenses, has not been determined, evidently. Still, when investors think gold, they think Paulson, and so bad news on Paulson can impact the metal.

Paulson's gold position is large--very large. After making $20 billion off accurate bets against the housing bubble, including $1 Billion from the Goldman contracts indicated in the SEC complaint, the Paulson fund has since made moves that seemed to express robust confidence in the long-term prospects of gold. Paulson's position in gold or gold-related investments had increased notably by May 2009, when gold represented 30% of the long side of the Paulson portfolio. By November 2009, Paulson moved approximately 10% of its portfolio to gold and gold-related investments--including a stake in the SPDR Gold ETF of 31.5 Million shares. This move paid off fairly quickly, as gold hit the all-time high in USD at $1226 on December 3. Paulson is recognized as a major player in gold, and with those 31.5 Million shares, the fund is the largest single shareholder in the SPDR Gold Shares ETF.

As of today, Monday April 19, commodities moved lower slightly, and Goldman shares have recovered 1.6% after initially falling 3.6%. Many have speculated that this partial Goldman price recovery is due to leaked information that the SEC vote was a "party-line" 3-2 decision to proceed. The Bankster Report would like to state that "party-lines" in regard to the investigation and prosecution of fraud are totally unacceptable, and commends Chairwoman Shapiro for proceeding against Goldman Sachs in enforcing the law, even as two others on the SEC board objected.

And finally, one last interesting note: while today gold moved down slightly 0.14%, the metal actually hit yet another all-time high in both euro and UK pounds. Indeed, gold closed today at US $1136 ($91 off the December high), but across the pond it hit record levels at €865 and £754 . Hmm...gold almost acting like a currency, isn't it?

Goldman Sachs' "doing God's work" apparently includes FRAUD

(updated Sunday, April 18 with details on synthetic CDO due to questions from a reader)

Last year, in a statement that made me momentarily question my understanding of the English language while simultaneously wonder whether I had inhaled too many potent diesel fumes over the years, Goldman Sachs' CEO Lloyd Blankfein declared, in a detailed interview, to a reporter from the The Times (London) that he and Goldman were not only part of a "virtuous cycle" that serves a "social purpose, " but, in fact, that together with his holy $1 Trillion firm, he was actually "doing God's work" (pg 4 of article). Yes, you read that correctly.

It was, apparently, through "doing God's work" virtuously and with social purpose that Mr Blankfein and Goldman felt absolutely justified in taking $12.9 Billion from the American taxpayers during the AIG counterparty pay-out festival; through "doing God's work" that the former investment bank was miraculously converted to a bank-holding company by the FR in late 2008 so it could take $10 Billion more in taxpayer dough through TARP; and through "doing God's work" that it issued $1.1 Billion of taxpayer-backed debt through the FDIC program. That's $24,000,000,000 from the taxpayers--wow, "doing God's work" sure does pay, but who'd ever think it had $$$ in front of it!

And, who'd ever think that for Goldman, "doing God's work" includes screwing its own clients to the tune of $1 Billion and committing FRAUD? Indeed, that the market-shakingly big news that hit the fan yesterday (Friday, April 16). The long-speculated but heretofore unconfirmed SEC investigation into Goldman Sachs' sales of toxic CDO's to clients in 2007 has finally culminated in not only confirmation, but action: The SEC has officially alleged Goldman Sachs engaged in FRAUD.

Repeat: the SEC has filed a civil lawsuit against Goldman Sachs on behalf of investors who were, according to the SEC, defrauded of over $1 Billion by Goldman through what was really a complex double-crossing fraud operation. We've known about this for some time, thanks in huge part to the awesome McClatchy News multi-piece expose published last November, "How Goldman Secretly Bet on the US Housing Crash." And, of course, those $1 Billion worth of investors--including pension funds, labor unions, insurance companies, etc--have long suspected that they were defrauded by these banksters. But that's not important--what's important is whether or not the SEC agrees, and on Friday they demonstrated that indeed they do.

Actually, its hard for the SEC not to agree: the evidence is overwhelming. Please read the McClatchy piece from last year and then these current Bloomberg articles (first, second, third) the raw details, because my quick explanation is actually only a matchbook-cover overview. The SEC complaint is 22 pages long (pdf), but I'll try to boil it down a bit.

Basically, it's like this:

1.) GOOD TIMES: It's sometime between 2002 and 2006, and the housing bubble is booming: Goldman and everyone else begins purchasing securitized mortgages bundles--mortgage backed securities, or MBS--from underwriters who can't sell them fast enough. Goldman keeps the "assets" on their balance sheet, because in the good ole' days here in 2002 through 2006, these securities are performing very well and increasing in value. Everything is great, dude. Goldman sells some of the MBS to others at a profit, and keeps some for itself. This is so super--everyone has a house, and house prices can't possibly fall. Uh, oh--what do you mean you can't make your house payment? What do you mean no one will buy that 600sq-ft shack for the $400,000 you paid for it? Oh, great, here we go. Enter the crisis.

2.) CRISIS: By mid-2006, some of the underlying mortgages of the various MBS begin to default, and by 2007, vastly overinflated home prices being to really reverse. A crisis is coming or here: suddenly, Goldman's dandy MBS are not only failing to pay the coupon, but are seriously losing value. Goldman tries Plan A: the firm decides to sell some while it can, but the over-saturated market is full of others doing the exact same thing. Plan A fails. Goldman moves to plan B. Enter ABACUS.

3.) ABACUS: Goldman starts issuing collateralized debt obligations (CDO's) by selecting bundles of MBS (collateral), securitizing them, and then selling them as securities (or debt) to clients (obligations). There are two types of CDO's that Goldman issues: "plain vanilla" CDO's and synthetic CDO's. Its an important distinction: plain vanilla CDO's are created when Goldman takes a portfolio of cash-flow producing assets (like MBS), bundles them up, and slices them into different risk-based tranches that each pay investors a different coupon. The higher the tranche, the lower the risk, and thus the lower the coupon payment. Conversely, the lower the tranche--that is, the more exposed to subprime loans--the riskier the bond, and thus the higher coupon. Goldman sells billions in plain vanilla CDO's, and seeing both the need to hedge itself further as well as the potential to profit from falls in the market as the bubble deflates faster, Goldman starts issuing synthetic CDO's by the name ABACUS. Unlike regular CDO's, synthetic CDO's do not require anyone to own a portfolio of asset-backed securities, but are instead "linked" to the performance of ABS through what is basically a contract bet (more details on this soon). On top of the billions of regular CDO's its already sold, Goldman issues at least $7.8 Billion of these synthetic-CDO's under the name "ABACUS," but according to Bloomberg, the dollar-risk shuffled over to investors is actually "multiples higher" than $7.8 Billion. Like regular CDO's, the synthetic-CDO "investments" entitle the purchaser clients to payments from Goldman, but Goldman itself is able to vastly reduced its own exposure by getting some of the debt off its its balance sheet. Goldman, however, is still in the position to lose money, and so the firm needs to hedge. Enter the other side of ABACUS--CDS.

4.) CDS: Synthetic CDO's aren't based on the cash-flow from some underlying mortgages bundled into a security and divided into tranches like a regular CDO is--instead, they basically consist (and pay-out) of one each side betting against the other on the performance of an "associated" group of debt. Both the cash flow and the betting on the synthetic CDO is accomplished through credit default swaps, or CDS. In a synthetic CDO contract, the seller (Goldman) is effectively shorting the associated assets by purchasing a credit default swap from the buyer (investors, clients), meaning that Goldman has to make regular payments to the buyer of the CDO (who is now the seller of a CDS). This creates the cash flow that makes a synthetic CDO look like a regular CDO, as the investors are recieving payments for the CDS "policy" that are much like the coupon payments they'd be recieving in a regular CDO. However, in the synthetic CDO, if the associated/linked assets go bad, the buyer of the CDO (investors) who is also the seller of the CDS now has to pay the buyer of the CDS (Goldman) who is also the seller of the CDO--and they have to pay the entire face value of the debt, even if Goldman doesn't own it, which in all cases of ABACUS, they didn't. The CDS coverage on the synthetic CDO's therefore make it more profitable for Goldman that the synthetic CDO's its selling to its clients fail than it does for them to succeed. If they fail, the clients are on the hook for debt to pay Goldman. While this is bad, and probably unethical, and insanity that anyone would make this agreement with Goldman, its not actually fraud yet. At least at this point, Goldman itself was selecting the underlying assets from its own portfolio, and so was at least partially co-investing, even though it was still covering itself with the CDS "insurance" and pushing the risk to investors in a fashion "multiples higher" than to itself. Where it starts to move towards fraud is when, for the last ABACUS synthetic CDO set, Goldman turns to some third parties to pick the collateral and create the portfolios, which it then will sells with not only zero liability of its own, but that it takes a bet out on to fail. The fraud part has to do with the third parties and the Goldman executives who know it. Enter Fabrice Tourre.

4.) FABRICE TOURRE: While Goldman had already sold billions in CDO's and ABACUS synthetic CDO's that consisted of portfolios it had itself chosen, in 2007, the firm decides to issue synthetic CDO's selected by a third-party group, ACA Management. The debt, sold as "ABACUS-2007 AC1," is under the principle supervision of Goldman executive Fabrice Tourre. Tourre delivers a portfolio of picks made by the $30-million-dollar hedge fund, Paulson & Co, to ACA to consider for selection, and tells ACA that Paulson & Co plan to invest $200 million in the portfolio. ACA itself will eventually take the majority position on the CDO--fronting some $951 million--and so the group obviously has an interest to select collateral that will not fall in value. Goldman, meanwhile, is marketing the debt to clients, stating ACA's dual role as both majority holder and collateral selector as proof that the CDO will have a rock-solid base, and "leverag(ing) ACA's credibility and franchise" to sell the contracts (SEC complaint, pg 8). When ACA receives the Paulson picks from Goldman exec Tourre along with his assurance that the hedge fund will invest $200 Million, ACA is assuming that Paulson's interest must be in-line with their own, and so ACA accepts the Paulson picks. They assemble the ABACUS-2007 AC1 synthetic CDO, and Goldman starts selling with no exposure. By this time, Goldman is outright shorting the MBS market, and so the firm itself takes out more CDS on the ABACUS-2007 AC1 synthetic CDO's, even though they have no exposure: they aren't hedging by this time, they are betting. ACA, meanwhile, is still believing Tourre's statement to them that Paulson & Co plans to invest that $200 Million. The money never comes.

5.) PAULSON & CO: Not only is Mr Tourre's statement to ACA that Paulson & Co plans to invest $200 million in the portfolio totally untrue, it is actually the outright opposite of what the investment outlook of Paulson actually is. In truth, Paulson & Co has long since identified the housing market as an incredible bubble, and is shorting everywhere it can. Paulson & Co sees the new ABACUS synthetic CDO's, and, knowing it is very likely to fail--at least in part due to the fact that Paulson picked the underlying securities to which it was associated with the intent of those securities failing--the hedge fund piles up on CDS against the ABACUS 2007-AC1. What ACA, and all of the investors to whom Goldman was pitching and selling the ABACUS 2007-AC1, do not know is that Paulson & Co actually paid Goldman $15 Million to get ACA to somehow include the hedge fund's toxic picks into the ABACUS portfolio, and Mr Tourre with his made up stories, got the job done. Now, that, ladies and gentlemen, is fraud.

The rest--the implosion of the CDO and the pay-out of the CDS to Goldman and Paulson are now history, and the story is best summarized in the SEC complaint by this statement (pdf pg 3):

"The deal closed on April 26, 2007. Paulson paid GS&Co approximately $15 million for structuring and marketing ABACUS 2007-AC1. By October 24, 2007, 83% of the RMBS in the ABACUS 2007-AC1 portfolio had been downgraded and 17% were on negative watch. By January 29, 2008, 99% of the portfolio had been downgraded. As a result, investors in the ABACUS 2007-AC1 CDO lost over $1 billion. Paulson's opposite CDS positions yielded a profit of approximately $1 billion for Paulson."

"Our clients always come first."
And so, that is were we stand this weekend. The flesh of the SEC suit is that Goldman not only allowed Paulson & Co to hand-pick mortgages to create the most toxic CDO's possible for Goldman to sell, but that Paulson & Co paid Goldman $15 million for the privilege to do this--and Goldman didn't bother to disclose these facts to the clients, nor did it bother to mention it was itself betting against the very CDO's Paulson's picks yielded. Additionally, the investors who bought the synthetic CDO's have claimed to the SEC that Goldman also did not disclose that the values of the underlying mortgages themselves were based "on inflated appraisals and were bought from firms with poor lending practices, " despite the fact that Goldman knew this, as well.
On Goldman Sachs' site is a list of "Business Principles." The top one, in bold, states "Our clients' interests always come first." Obviously, Paulson & Co is very happy--a billion bucks worth of happy--that this core Goldman Sachs "business principle" is, apparently, only half-true.

Perhaps the words of one my favorite analysts, the hard-core researcher Christopher Whalen of Institutional Risk Analytics, summarize it best. Whalen stated yesterday that “this litigation exposes the cynical, savage culture of Wall Street that allows a dealer to commit fraud on one customer to benefit another.” Yep, that's why we call 'em banksters, Mr Whalen. You can't trust them as far as you throw them soaking wet--and honestly, I don't have much sympathy for those that do. In my opinion, when you're dealing with a group of folks whose entire livelihood rests on the "legalized" counterfeiting of the American currency, you ought to expect fraud. And the beneficiary of the fraud in this case was both Goldman and its privileged client, Paulson & Co.

The idea that Goldman would accept a list of picks for an MBS-associated synthetic CDO from a hedge fund that was actively and passionately shorting the entire subprime MBS market is bad enough, but to get paid $15 Million by that same hedge fund to "oh, please, please please" use their toxic picks--bloody hell, man, that is just so bad. Top it off with Goldman's own bets against the "investments" that it was selling, and you've got a real whopper there. In his Rolling Stone piece, "The Great American Bubble Machine," Matt Taibbi colorfully declared Goldman Sachs "a great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money." With my very visual mind, I laugh every time I read that great description, but like the "Business Principles," its only half true--and you'd know it if your "humanity" was with Paulson & Co. In that case you'd be thinking, "Oh, vampire squid are so cute!"

Paulson & Co.
Please note, the SEC has not charged Paulson & Co with any crimes, and likely will not, because as a private investment group, the hedge fund is under no legal obligation whatsoever to disclose anything, nonetheless to investors purchasing debt from another company. In response to the SEC complaint, Paulson & Co said the following in a released statement:

". . . we were not involved in the marketing of any ABACUS products to any third parties.
"ACA as collateral manager had sole authority over the selection of all collateral in the CDO, securities of which were subsequently rated AAA by both S&P and Moody's."

"Paulson did not sponsor or initiate Goldman's ABACUS program. . ."

Compare that to the following, from the SEC complaint itself (pg 2):

"GS&Co marketing materials for ABACUS 2007-AC1 -- including the term sheet, flip book and offering memorandum for the CDO - all represented that the reference portfolio of RMBS underlying the CDO was selected by ACA Management LLC ("ACA"), a third-party with experience analyzing credit risk in RMBS. Undisclosed in the marketing materials and unbeknownst to investors, a large hedge fund, Paulson & Co. Inc. ("Paulson"), with economic interests directly adverse to investors in the ABACUS 2007-AC1 CDO, played a significant role in the portfolio selection process. After participating in the selection of the reference portfolio, Paulson effectively shorted the RMBS portfolio it helped select by entering into credit default swaps ("CDS") with GS&Co to buy protection on specific layers of the ABACUS 2007-AC1 capital structure. Given its financial short interest, Paulson had an economic incentive to choose RMBS that it expected to experience credit events in the near future. GS&Co did not disclose Paulson's adverse economic interests or its role in the portfolio selection process in the term sheet, flip book, offering memorandum or other marketing materials provided to investors."

"In sum, GS&Co arranged a transaction at Paulson's request in which Paulson heavily influenced the selection of the portfolio to suit its economic interests, but failed to disclose to investors, as part of the description of the portfolio selection process contained in the marketing materials used to promote the transaction, Paulson's role in the portfolio selection process or its adverse economic interests."

Those are strong statements from the SEC that Paulson did "play a significate role in the portfolio selection process" for its own "economic interests," and Goldman, of course, didn't bother to mention that. ACA Management, meanwhile, has long since drowned in the wake of the crisis, and is now under the ownership of its former counterparties. As for Goldman Sachs: the firm will likely declare a $4,000,000,000 first quarter profit when it reports next week.

Hey--its all about "doing God's work," son.

More posts on this to come!

Goldman Sachs hid fraud investigation from shareholders

As covered in the last post, "Goldman Sachs' "doing God's work" apparently includes fraud" Goldman Sachs was sued yesterday by the SEC for fraud. The lawsuit itself--and more aptly, what Goldman knew about the investigation--is bringing to the surface even more questions, and this time they aren't coming from Goldman clients, but instead, Goldman shareholders. It appears that on top of the fraud detailed in the SEC complaint, Goldman Sachs might very well have even been breaking the law yet again.

What is the crime? Well, despite the fact that the firm was informed that it was under investigation and warned of such by the SEC last July, Goldman has yet to mention any of that its to shareholders or disclose it in its company reports! A slew of SEC regulations require that publicly-traded companies disclose pertinent information--and SEC investigations certainly qualify as pertinent. Goldman had some 9 months to disclose this important information to its shareholders, and simply did not. As a result, Goldman shareholders took a 13% hit on Friday as the stock dropped upon news of the lawsuit, reducing the firms value by $10 Billion. As you can imagine, Goldman shareholders were as surprised as anyone else: while Goldman and the entire group of Goldman executives were warned by the SEC of this investigation and intent to sue last year, they just, well, seemed to have forgotten to mention it. Wow, I'd never expect that some a firm accused of $1 Billion worth of fraud--just shocking behavior.

Actually, its more likely calculating behavior. I just did a quick google search using the phrase "discloses SEC investigation," and the very first page had headlines listing companies including Dell, SpongeTech, Bidz.com, Aetna, MicroStrageties, Terex, AETE and a number of others, each announcing the fact that they were under SEC investigation for various reasons--announcing this because it's required by law. Publicly-traded companies can get sued by shareholders or the SEC for failing to disclose pertinent information. Yet, as this Bloomberg article notes, Goldman Sachs received notice from the SEC last year, and made no mention whatsoever to its shareholders that the firm was under investigation by the SEC for fraud.

It would have been difficult for an investor to positively ascertain what Goldman already knew if that shareholder trusted the firm's SEC filings. As I mentioned in the first post, this lawsuit was speculated about for some time, but not confirmed until Friday. Shareholders inspecting Goldman's releases, statements, and report would have found no mention of it whatsoever. You can check out the firm's last SEC form 10-K (pdf, 411 pages) for yourself. The section most relevant to the current scandal is tukced under the section titled "Risk Factors", subsection "Item 3: Legal Proceedings," which starts on pg 40 of the document (which is pdf pg 42). More precisely, what is relevant is that information which isn't there.

Check it out: you'll see that, according to Goldman itself, the firm is listed as a defendant in no less than 22 specific cases, and several more where the firm simply states that it is listed either in a "variety of lawsuits" or a "number of lawsuits." The specific actions include cases going back to Enron, eToys, and Refco, and more recenlty include suits regarding Washington Mutual, Fannie Mae, IndyMac, Montana Power, and even the City of Cleveland, which is suing Goldman directly. No mention of any SEC investigations for fraud are made whatsoever. In fact, the only possible phrase in the last 10-K that could even remotely be interpreted as a disclosure of any kind comes in the following perfectly couched language, under the heading "Mortgage Related Matters" (pg 47/pdf pg 49):

“GS&Co. and certain of its affiliates, together with other financial services firms, have received requests for information from various governmental agencies and self-regulatory organizations relating to subprime mortgages, and securitizations, collateralized debt obligations and synthetic products related to subprime mortgages. GS&Co. and its affiliates are cooperating with the requests.”

Okay, let me carefully double check, here: GS&Co. and certain...blah, blah, blah...nope, I don't see "investigation," "SEC," or "fraud" anywhere in that statement! As former SEC lawyer/law professor Adam Pritchard states in the Bloomberg article, “The question is whether a general disclaimer like that is rendered misleading because you left out the specifics,” . . . “The prudent, conservative choice is to disclose more,” because omissions can lead to shareholder lawsuits, Pritchard said." Indeed, not to mention SEC lawsuits. The SEC will have its hands full with its current swing at Goldman, so a follow up by the SEC on these omissions will likely come much later, if it comes at all. If Goldman shares take more 13% single-day hits, its much more likely that shareholders will be first downtown to file suit.

And therein lies is a bit of irony: all things considered, Goldman shareholders are the beneficiaries of the often fraudulent and unethical "legalized" counterfeiting practices in which Goldman Sachs engages. They are the beneficiaries of the $24 Billion in bail-out dough Goldman received. They are the beneficiaries of the likely $4 Billion first-quarter profit to be announced soon. And as the saying goes, if you dance with the devil, except to get burned. I have no sympathy for Goldman shareholders because I would never in a million years support a group like that. I don't do dancing with the devil, thank you very much. But that's just my opinion, and that does notmmean that Goldman shareholders are not entitled to the same SEC-assured protections as everyone else is--because they are. Also, it certainly does not mean that Goldman can disregard the law--because it can't. Its just a little ironic, in my opinion. That's all. I'm just surprised that shareholders would expect a company like Goldman to be honest with them in the first place. Perhaps the SEC fraud case will bring some of those shareholders to the light, and they'll start to consider whether compromising themselves through Goldman Sachs is really worth it.

Okay, okay, you're right--FAT CHANCE.

More coverage on the Goldman fraud case to come!