Saturday, April 17, 2010

Goldman charged with fraud by SEC

US regulators, the SEC, has sued Goldman Sachs for fraud. The details of the case can be found in the Reuters article I attached below. The case relate to a deal known as ABACUS in which Goldman sold CDOs to European banks. The SEC has evidence that the Goldman vice-president, Fabrice Tourre, who arranged the deal knew that the structured product marketed was toxic [Link]. Also, the selection of securities for the product was done by hedge fund manager, John Paulson who structured the product so that he can take a huge billion dollar bet that the product will fail - this was not revealed to buyers of the product . If SEC can prove its case, at the minimum, this is a really bad case of conflict of interest and poor disclosure. Technically, the buyers 'knew' the actual securities they bought which was detailed in the contract so it will be a challenge for SEC to prove fraud - maybe misrepresentation or mis-selling is more appropriate.


This case reminds me of the minibond saga in Singapore in which many Singapore investors lost money in structured products. This is the advertising for Pinnacle Notes:


Click on the picture to see when the product was sold to Singaporeans - 29 October 2007. The ABACUS deal in the SEC case against Goldman was sealed in Jan 2007. One piece of evidence SEC has is an email by Fabrice Tourre showing that he knew the securities in ABACUS deal were toxic because the US housing market was about to collapse[Link to article about that email]. By Oct 2007, it is likely that it was common knowledge among American investment bankers that these products were highly toxic. That was when many of these products such as Pinnacle Notes were launched and sold in Singapore to ordinary Singaporeans who were unsophisticated investors by local financial institutions. The question is whether American investment banks sold these products in Asia knowing they were toxic. If that is the case, they probably came to Asia to be out of the clutches of the SEC and other American regulators. If they were caught in America like Goldman, it is almost certain they will be made to pay restitution to investors.

The selling ban for many local banks for structured products has just ended[Link]. I don't think many Singaporeans will start buying these products given the sad memories of Lehman minibonds are still quite fresh in their minds. But 5 or 10 years from today, the lessons will likely be forgotten by investors and new products will make their way here. After the minibond saga, most of the changes to the system came in the form of measures to ensure relationship managers are adequately trained and improvements to sale process of these products[Link].

This recent crisis shows the need for a strong proactive regulator with the expertise to detect and prevent dubious schemes and bad products from entering our market and harming our citizens. Even after the Lehman saga, the MAS still takes a hands-off approach leaving it to the banks to improve their internal selling process. If something goes wrong in the future, you can bet MAS will recite its "buyer beware" mantra - it is the 'do-nothing' approach passing the responsibility to ordinary Singaporeans who are most vulnerable. Proper regulation and better regulators are actually required for our financial hub to thrive because investors like to know before they put their money down, the products are regulated and when something goes wrong, the perpertrators will be caught and prosecuted.

In 2006 & 2007, the SGX courted Chinese companies to list in Singapore to boost trading volume - brokerages and SGX were main beneficiaries. A sizable number of these companies engaged in accounting fraud causing investors hundreds of millions. While accounting fraud cannot be completely prevented, the number of fraud cases among these Chinese companies known as s-chips was very high. When they occur, all that the authorities can do was to blacklist the perpertrators (read article: SGX names 'em and shames 'em) because we have no legal jurisdiction over these companies. Our authorities must be the only ones who think they can prevent fraud by 'naming and shaming' the fraudsters. These guys are probably enjoying their millions in posh KTVs and mansions somewhere in the middle kingdom while Singaporean investors are left holding the empty bag.....buyer beware?....Investors should be aware that nobody looks after your interests but yourself - hidden conflicts of interests possible in our systems, the lack of a proactive watchdog and lack of protection for investors. At the end of the day, many Singaporeans play it safe by over-simplifying their investments sticking to fixed deposits, insurance and property. Not that this is a bad thing for individuals but it does show a lack of trust for anything slightly more complex - if it goes wrong, you don't only lose your money, you may not even get justice...the idea of someone enjoying his life with money stolen from you is just too painful. Where are those Chinese crooks who sold Singaporeans those flaky s-chips with accounting problems?

------------------ ------

Factbox: How Goldman's ABACUS deal worked[Link to Reuters]
NEW YORK
Fri Apr 16, 2010 4:30pm EDT
NEW YORK (Reuters) - The U.S. Securities and Exchange Commission is accusing Goldman Sachs Group Inc of committing fraud in a complicated transaction involving securities known as collateralized debt obligations.


The particular deal that Goldman entered into with Paulson and others was called ABACUS 2007-AC1.


The particular deal that Goldman entered into with Paulson and others was called ABACUS 2007-AC1.


Here's how the deal worked, according to the SEC's complaint:

1) Hedge fund manager John Paulson tells Goldman Sachs in late 2006 he wants to bet against risky subprime mortgages using derivatives. The risky mortgage bonds that Paulson wanted to short were essentially subprime home loans that had been repackaged into bonds. The bonds were rated "BBB," meaning that as the home loans defaulted, these bonds would be among the first to feel the pain.

2) Goldman Sachs knows that German bank IKB would potentially buy the exposure that Paulson was looking to short. But IKB would only do so if the mortgage securities were selected by an outsider.

3) Goldman Sachs knows that not every asset manager would be willing to work with Paulson, according to the complaint. In January 2007, Goldman approaches ACA Management LLC, a unit of a bond insurer.

ACA agrees to be the manager in a deal, and to help select the securities for the deal with Paulson. In January and February 2007, Paulson and ACA work on the portfolio, coming to an agreement in late February.

Goldman never tells ACA or other investors that Paulson is shorting the securities, and ACA believes that Paulson in fact wanted to own some of the riskiest parts of the securities, according to the complaint.

4) Goldman puts together a deal known as a "synthetic collateralized debt obligation" designed to help IKB and Paulson get the exposure they want. IKB takes $150 million of the risk from subprime mortgage bonds in late April 2007. ABN Amro takes some $909 million of exposure as well, and buys protection on its exposure from ACA Management affiliate ACA Financial Guaranty Corp in May 2007.

Goldman's marketing materials for the deal never mention Paulson's having shorted more than $1 billion of securities. Goldman receives about $15 million in fees.

5) Months later, IKB loses almost all of its $150 million investment. In late 2007, ABN is acquired by a consortium of banks including Royal Bank of Scotland. In August 2008, RBS unwinds ABN's position in ABACUS by paying Goldman $840.1 million. Most of that money goes to Paulson, who made about $1 billion total.
(Reporting by Dan Wilchins and Karen Brettell; Editing by Richard Chang)

After reading this article, people also read:
Goldman Sachs charged with fraud by SEC




19 comments:

Anonymous said...

We got conned with our "eyes opened" -- the magic show made our money disappeared right in front of our eyes. So, it was my fault?!?

Anonymous said...

Complete failure and incompetence on the part of MAS and the PAP government.

QuestionThePower said...

Is it high time that the next elections, people should not vote for the PAP? These news are the reasons why they shouldn't be in power in the first place.

Anonymous said...

Waiting eagerly for the election to make my feelings known.

Anonymous said...

Aiya, even PAP so smart also lost big time in their investment in western banks what.

So what more ordinary peasants which they rule over?

The most important thing for PAP now is to make sure they continue to rule and rule 98% in Parliament.

I think this is still quite achievable as I believe 50% of the 98% seats will be compliments from the opposition.

Anonymous said...

Dear Lucky

SEC's chances of winning is really pretty slim.
But given the fact that GS bankrolled your messiah's presidency ... shocking risk to take. But thats the beauty of the american system. evil is played off against evil giving the little people a fighting chance.

multi-party politics rules.

Anonymous said...

Perhaps the only redress is for victims to resort to the law of the jungle - by giving a contract out for the crooks.

This will make potential crooks cause to think hard before trying it and also force the relevant authorities to behave more responsibly.

Only when you are no longer seen as push overs will respect be given, even if it is the triad sort of justice.

rookielim said...

Lucky,

The "lessons" has already been forgotten. I recently went to a bank to open a simple bank account to deposit some money. The bank officer tried to sell many financial products to me VERY AGGRESSIVELY and insisted that I would be much better off buying one of the products instead opening a simple saving account.

The products they tried to sell are very dubious. Only the principal amount is guaranteed. The "high" advertised interest is not. There is long lock down period (at least 5 years) and if you draw down before the period, you will have to pay a penalty.

If I did not ask the relevant questions, I would have assumed that those products are of much better yield and bought those products instead.

Unless there are some serious new bank regulations e.g., segregation of banking and investments units in the banks i.e., banking units ARE NOT ALLOWED to push products to customers unless the customers specifically ask to invest their money. Or better off, NOT ALLOW BANKS TO SELL INVESTMENT PRODUCTS, PERIOD. Else, the bank officers will always be hard selling the dubious products as it is in their interest to sell them.

From their disappointed face when I rejected their offers, it is very obvious that they would have earned a lot more money from me if I "invested" instead of saved with the banks... Clearly there is an inherent CONFLICT OF INTEREST here!

Anonymous said...

In investment and banking, the surest road to wealth is to sell crap to morons. It's one of the least regulated industries.

If you're in the pharmaceutical business and you sell sugar pills to cancer patients at $10,000 a pill by convincing them that taking one everyday will rid them of cancer, you'll be thrown behind bars.

In the finance industry, you'll be Hedge Fund Manager of the Year.

Anonymous said...

That's why top bankers, investment bank managers, hedge fund managers, insurance fellas can make tons of money. Because there is a pool of suckers out there.

So the only way to avoid their trap is to be smart. If you are a man, resist it even if the bank officer is a very pretty, young sexy and sweet talking lady.

Anonymous said...

The Cons today are true professionals in every sense of the Word.
And
they are known as talents, experts and leaders,
yes they are! In connings.
Friendly thugs with no qualm in fleecing close relatives and friends.

patriot

Anonymous said...

Decent looking people have no qualms to con their own relatives and you find a lot in ntuc. The insurance agents here are so dumb they swallow hooks lines and sinkers from their senior management becuase of their greed. They play into their hands.

Parka said...

Even more discussions here

http://news.ycombinator.com/item?id=1270775

Anonymous said...

Think you should have already also seen this, pretty interesting though

http://www.vanityfair.com/business/features/2010/04/wall-street-excerpt-201004?printable=true

"Michael Burry always saw the world differently—due, he believed, to the childhood loss of one eye. So when the 32-year-old investor spotted the huge bubble in the subprime-mortgage bond market, in 2004, then created a way to bet against it, he wasn’t surprised that no one understood what he was doing. In an excerpt from his new book, The Big Short, the author charts Burry’s oddball maneuvers, his almost comical dealings with Goldman Sachs and other banks as the market collapsed, and the true reason for his visionary obsession."

Alan Wong said...

When DBS Bank was promoting such financial instruments to its customers especially those with fixed deposit accounts, they never highlight to these customers to invest with their eyes wide open. In fact they didn't even bother differentiating whether the customer is a university graduate or an auntie with very little education. But they did give an assurance that such investment pays better interest than fixed deposits.

But when the financial instruments ended up toxic and faced with potential claims, suddenly the education level of the customer become an issue. I was told that many of those with tertiary education were either downright rejected or offered the least compensation. And all this happened because of one person who uttered the words "invest with their eyes wide open".

But they didn't utter these damn words in Hong Kong, you know.

Anonymous said...

Those bastards need to be stoned and lock in jail for good. White collar robbers !

MAS you have all the experts. Say something please.

Anonymous said...

Make Sure the Swindler DisapperAny investment is all about investor own choice. Don't blame it on MAS or government. However we can do something so that such swindler dissappear. Don't point at company but on big CEO or decision maker. Use IT/internet and highlight such people name and make sure this people could never be making that decision anymore in any government or any company. Make sure that where these people goes we don't invest in that company and company wouldn't dare to employ same person again.

Anonymous said...

We should highlight the name of CEO and big decision maker so that such swindler never get another chance to cause so much damage again. Advertise these people so that no company dare to employ them. If such company continue to employ such person, continue to highlight until all funds run away from those company where such people work

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