Thursday, April 22, 2010

Paolo Pelligrini 

Wanting to highlight a particular link that TigerHawk provided in his tab dump below, I think it is worth excerpting from the CNBC article regarding former Paulson employee Paolo Pelligrini, and his interactions with employees of ACA Management.
In one part of Pellegrini's testimony, a government official asked him: "Did you tell (Schwartz) that you were interested in taking a short position in Abacus?"

"Yes, that was the purpose of the meeting," Pellegrini responded.

"How did you explain that to her?" the government official said.

"That we wanted to buy protection on traunches of a synthetic RMBS portfolio." Pellegrini said.

The SEC does not mention this exchange in its complaint against Goldman.
Either the SEC will be able to successfully impeach Pelligrini's testimony, or it may have quasi-Nifonged itself in a political sense. Most of what I have read about this case that has been written by actual securities law experts indicates that it turns on the concept of "material disclosure." If there is testimony that a Paulson employee told an ACA employee, "yup, we wanna be short," then the SEC is left with a few low cards to play -- that Goldman's promotional material did not contain such a disclosure (possibly showing also that ACA did not informally share the information from Pellegrini with other buyers), and that Paulson's role in the selection of the underlying RMBSs was too much of a thumb on the scale, also not disclosed, notwithstanding that fact that ACA did have final say over the pool, and could have walked anytime it wanted, if it felt the synthetic security wasn't worthy of its stamp.

Again, I am not condoning or condemning what Goldman did or failed to do in this transaction. It is not a line of business I wish to be in, and I was invited to interview at the firm just over two decades ago. My primary point is that the SEC needed to lead with its best punch in its first major action relating to the financial crisis, and this barely constitutes a bitch slap.

UPDATE: Apologies to co-blogger Cardinalpark and frequent poster MTF for stepping on their comments in the thread below, having posted at almost exactly the same time today on this point. Here is the clip referenced by MTF:

I do not think it is the situation right now that the more we learn, the stronger the SEC's case seems. That could change, and proving fraud in a civil case is a lower threshold than in a criminal case, but if you are on the Sullivan & Cromwell team representing Goldman, you are probably eating and sleeping fine this week.


By Anonymous Anonymous, at Thu Apr 22, 05:52:00 PM:

Isn't it more a question of what got disclosed to the buyers of the CDO, not one person at ACA?  

By Blogger Escort81, at Thu Apr 22, 07:13:00 PM:

Anon 5:52 - agreed, noting that ACA was a major buyer of the synthetic security it had the key role in creating. If there is other testimony that ACA shared the Pellegrini information with the European buyers when the security was fully placed (which we do not know at this point), I think it will be much harder for the SEC to show that Goldman's failure to disclose was "material."

There is a case here (that is, the judge will likely not rule favorably on Goldman's inevitable request to dismiss it right away), I just don't think it is that strong, and it doesn't really get to the heart of what went wrong (from a securities aspect) on Wall Street during the motgage market boom and bust.  

By Blogger MTF, at Thu Apr 22, 07:15:00 PM:

Again with the split threads...This and more was discussed yesterday and today (in thread below). Even more recent news from this morning is in the CNBC video linked here.

The SEC is a royal mess, having missed Lehman, Hudson Funding, Bear, Stanford and various small potatoes billion dollar Ponzi schemes. Yet, here they file a baseless case against Goldman. This agency needs to be torn down and rebuilt from scratch.  

By Anonymous The Truth is Out There, at Thu Apr 22, 08:57:00 PM:

Repost from below:

We'll know more after Tuesday's Senate hearing. Below is the witness list, announced today. The Fabulous Fabrice will get quality face time with the Big Boss.

I've become Johnny One Note, I know ... but this witness list is consistent with my thesis that this hearing will be "Goldman on trial" ... Developing......

Panel 1
Former Partner, Head of Mortgages Department
The Goldman Sachs Group, Inc.
Managing Director, Structured Products Group Trading
The Goldman Sachs Group, Inc.
Former Managing Director, Structured Products Group Trading
The Goldman Sachs Group, Inc.
Executive Director, Structured Products Group Trading
The Goldman Sachs Group, Inc.

Panel 2
Executive Vice President and Chief Financial Officer
The Goldman Sachs Group, Inc.
Chief Risk Officer
The Goldman Sachs Group, Inc.

Panel 3
Chairman and Chief Executive Officer
The Goldman Sachs Group, Inc.  

By Anonymous Anonymous, at Fri Apr 23, 12:38:00 AM:

I'm the anon attorney from the other posts. I'll pipe in with my attorney hat on here. The article doesn't specify that the testimony was sworn testimony in a deposition, but I would assume it was.

The government attorney should have done a better job clarifying the questions and answers. Nevertheless, note that Pellegrini does not state that he explicitly told Schwartz that Paulson was going short in Abacus. Instead he said that "we wanted to buy protection on traunches of a synthetic RMBS portfolio." (The government attorney should have forced a straight, one-word, yes or no answer to the question).

From Felix Salmon's blog:

" Pellegrini likely did not know during his January 27th, 2007 meeting in Jackson Hole with ACA (paragraph 31 of complaint) that Goldman in its January 10, 2007 email to ACA (paragraph 47) had mislead ACA into reasonably believing that Paulson was taking the high-risk equity tranche of the synthetic CDO.

Thus Pellegrini’s statement to ACA that Paulson “wanted to buy protection on traunches of a synthetic RMBS portfolio” would have in his mind implied a short position, but to ACA – after the misrepresentation by Goldman – the statement would have suggested a hedge on Paulson’s supposedly intended high-risk equity position, not a naked short."

So much for the theory about Paulson, via Pelligrini, telling ACA that Paulson was shorting the portfolio. I think it is safe to consider this testimony already impeached. More accurately, it is unlikely that either Goldman or Paulson will rely on this testimony, which I suspect is why neither Goldman nor Paulson mentioned this tesimony thus far. It may be good spin, but from a legal perspective it is pretty useless. Pellegrini is going to have some uncomfortable time on the stand if he wants to make something of it.  

By Anonymous billy Bob Corncob, at Fri Apr 23, 02:15:00 AM:

Following on @Anon, I want to know why, if ACA really did understand that Paulson wanted to short the portfolio, it would have allowed any participation by the fund in selection of the portfolio.

This doesn't suggest to mean that the disclosure to ACA (if that's what it is) absolved Goldman [Paulson may be a different matter] but why ACA may not have aided and abetted Goldman's failure to disclose.

If someone has an explanation of why ACA would permit Paulson to participate in portfolio selection when it was going to short, I'd appreciate a cogent explanation.

Finally, the dog that doesn't bark

If Goldman had a compelling, slam dunk defense for failing to disclose the role of the short in selecting the portfolio, we would have heard it. They made a lengthy Wells submission. I have not heard of any simple, compelling defense.  

By Blogger Gary Rosen, at Fri Apr 23, 02:33:00 AM:

"If someone has an explanation of why ACA would permit Paulson to participate in portfolio selection when it was going to short, I'd appreciate a cogent explanation."

I don't have an explanation. But conversely, why would Paulson permit ACA to participate in portfolio selection (and there is no question they did) when it (ACA) was going long?  

By Anonymous The Truth is Out There, at Fri Apr 23, 06:29:00 AM:

I'm with Anon Attorney 12:38. Pellegrini's not much of a defense, including that whatever he said wasn't documented, and has nothing to do with the mix of information delivered to the European banks. The SEC charges are about a fraud on these buyers, not a fraud on ACA.

If SEC v Goldman were just about the one trade, it would have been handled very differently ... most likely just an announced settlement and a $5 to $10 million fine. But after the Wells submissions in Sep 2009, the SEC didn't even haggle with Goldman ... that's a tell.

The Democrats are pushing for a Senate vote on Financial Services Reform on Monday. To me, this is another tell. So I'm going all in:

The Democrats want the Republicans on record on Monday as NO so they can tie them to Blankfein and Goldman on Wednesday, after Blankfein and Goldman get totally hosed on Tuesday.

To Obama & Co, Financial Services Reform is about pushing through a new federal Consumer Protection Agency ... think ACORN redux, with enforcement powers.

The added bonus is tying the Republicans to evil Wall Street.  

By Blogger Cardinalpark, at Fri Apr 23, 08:46:00 AM:

In response to a couple of thoughts above:

1) no need to apologize. Paolo's testimony deserves a headline, not a buried comment.

2) ACA and Paulson were effectively negotiating the bet each was willing to make, with Goldman in the middle. Paulson proposed a bunch of RMBS; ACA countered. It's not that complicated.

With hindsight, of course ACA looks stupid and Paulson brilliant. On the other hand, the notion of shorting RMBS wasn't new, nor was the idea that there was a real estate bubble. Funds had been shorting RMBS for years, quite unprofitably. The negative carry on the RMBS short is AWFUL. In fact, Paulson and Pelligrini shit their pants (reportedly) at one point because they concluded that they had shorted vintages of RMBS that were too old (04s and 05s). They needed Abacus trades with more recent vintages to be sure.

Timing was critical here. Paulson's "genius" here wasn't unique, but his timing was exquisite and he went balls out on the trade once he got conviction. And his timing needed to be exquisite or the negative carry would have smoked him as it did many other RMBS shorts.

So we can shit on ACA's head and call them morons and envy Paulson's genius or say the Goldman role as aintermediary was immoral.

But frankly that's all a bunch of horseshit in my opinion.

And this case is a JOKE. I'm telling you, we should be writing about the SEC missing Madoff and Stanford - out and out FRAUDS that were under their noses that ripped off real people. We should be writing about the excessive creation of mortgage credit due to government subsidies inherent to Fannie and Freddie and in general cheap money.

What we should NOT be doing is picking on shorts. Frankly, if shorting had been more efficient and called attention more quickly to the excessive credit creation, perhaps the crisis would have been less bad. Shorts don't cause crises - they call attention to imbalances and help to correct them. Greenlight was RIGHT about Lehman. Paulson was RIGHT about CMBS. The crisis came about due to excessive and irrational credit creation; that's the CAUSE; the correction is its natural and inevitable effect.  

By Blogger Escort81, at Fri Apr 23, 03:54:00 PM:

Anon attorney - I infer you are making a distinction between a big short and a little short, which is a fair point.

If you are senior at the SEC right now, do you really want to lead with this civil case? Or do you want something that is criminal and you have the facts and the law heavily in your favor?  

By Anonymous Anonymous, at Fri Apr 23, 06:17:00 PM:


>> Anon attorney - I infer you are making a distinction between a big short and a little short, which is a fair point.

Actually that was a quote from Felix Salmon's blog. The point is that, contrary to the media spin, Pelligrini did NOT explicitly state that Paulson was shorting the portfolio. Rather, he made some cryptic comments that can have multiple interpretations. This testimony is pretty useless at trial. I predict you will see Pelligrini walk back the assertion that he informed ACA that Paulson intended to short the portfolio.

>> If you are senior at the SEC right now, do you really want to lead with this civil case? Or do you want something that is criminal and you have the facts and the law heavily in your favor?

I've already stated that based on the facts which are publicly available now this appears to me to be an open and shut case, and Goldman is going down.

I'm perfectly aware of the political dimension of this case. Proving they are the Stupid Party, it looks like Republicans are going to take the bait and side with Goldman on this one. I can already see the 2010 gains start to slip away as Democrats paint Republicans as the "Party of Goldman."

Following up on BillyBob's observation, I suspect that Goldman could have absolved itself of any liability by including the following two items in the prospectus
1. ACA selected the portfolio in combination with one or more third party investors.
2. The third party investors may take a short position with respect to one or more security in the portfolio.

Query: Why weren't these statements in the prospectus?

My best guess: Goldman's lawyers were unaware of these facts, probably because Fabrice Tourre did not tell them. This explains Fabrice's delisting and "indefinite paid holiday," which will soon become a termination.  

By Blogger Escort81, at Fri Apr 23, 09:42:00 PM:

Anon Attorney does us a service by referencing Felix Salmon's blog, which has extenstive discussions in the threads regarding highly technical aspects of the ABACUS synthetic (there are evidently a fair number of structured finance people out there with time on their hands). It is clear that Salmon is no fan of Goldman, but there are commenters on all sides and many perspectives.

As a point of clarification, the quote that Anon attorney uses in his first post above is actually not from Salmon himself but from a commenter named "Mustard." In that thread, Salmon, in the original post, writes:

But if Pellegrini’s testimony turns out to be reliable, it surely constitutes a simple disproof of the SEC statement.

Once again, we’re left desperately wanting to see the full testimony, rather than the little bit cherry-picked by Liesman, or his source. The SEC promises that we’ll see just that — “in court at the appropriate time”. Which could just be a way of dragging this whole thing out and keeping the pressure on Goldman to settle the case, or could be simple confidence that seen in context, Pellegrini’s testimony doesn’t really end up being all that powerful.

If this does go all the way to court, the room is going to be packed on the days when Schwartz and Pellegrini testify. But in the meantime, it would be great if an enterprising journalist somewhere could get one or other of them on the record. It might clear up a very great deal of confusion.

I understand your speculation regarding Tourre, but he was not among the most senior GS people listed in the pitchbook, so I am not sure it makes sense that it was solely up to him to inform the securities lawyers drafting the prospectus about Paulson's role.

You make a good point about the Republicans risking likely 2010 election gains by letting Dems paint them as being in bed with Goldman -- again, notwithstanding the fact that fully three-quarters of campaign contributions from Goldman employees went to Democrats during the 2008 cycle. I guess if you are a Republican politician, you say that you want the judicial process to play out.

You may be correct about "Goldman going down" in the sense that the firm may well settle for some dollar amount to make this go away -- or GS may feel it needs to go to trial to try for full vindication -- I have previously speculated on an eight digit settlement sometime this year. But, there would have to be much, much more in the way of prosecutable malfeasance in other cases beyond ABACUS to result in an existential threat to the firm, a la Drexel. I would not bet on that at this point.

As a point of interest, courtesy of commenter "KidDynamite" over at the Salmon blog, here is a link to a Bloomberg article dated 03/08/07 discussing Paulson's big short on the ABX, making it clear to everyone in the financial world what Paulson's view was (though, obviously, not specific to the ABACUS transaction).  

By Anonymous Anonymous, at Sat Apr 24, 02:27:00 AM:

Thanks, Escort. I should have explained the thinking about Tourre a bit more. If you read through the SEC's complaint it appears that Tourre mislead ACA regarding Paulson's position on the portfolio. It's not clear whether it was deliberate or there was a miscommunication. It seems pretty clear that Tourre understood that ACA had a misunderstanding about Paulson's intent. It looks like he just let it ride.

If you accept this as true then everything else falls into place, like a Copernican moment. There's no statement in the prospectus because Tourre did not tell anyone. Goldman has not asserted that ACA was notified that Paulson was short. Neither Paulson nor Goldman raised the Pellegrini statement in their defense because it has multiple connotations. Tourre is delisted and on leave. It all makes sense with that single supposition in place.

Zerohedge is reporting that Goldman's contributions have flipped to majority Republican for 2010. Right now it looks like in 2010 the Dems will get to run as the party that champions the working American and Republicans will be running as the champions of the insurance and investment banking industries. The Republicans should have left Goldman to twist in the wind on this one. They don't owe Goldman jack s**t, particularly after Goldman backed Obama in 2008.


By Anonymous The Truth is Out There, at Sat Apr 24, 08:53:00 AM:

Many here are still in denial. This isn't just about SEC v Goldman -- it's bigger than that. Goldman will likely survive as a firm, but it'll never get its old reputation back. It'll be the new Bear Stearns, on a good day. No senior guy out of Goldman will ever again hold a senior government position. You won't want your daughter to marry someone working there, sight unseen. They won't get an automatic pass from the Club Admissions Committee.

There's an article in yesterday's Washington Post

It suggests that the SEC is actually following the investigation trail broken by the Levin Committee -- e.g., the Committee was all over Fabulous Fab first. What, you thought the SEC could actually make a case? The SEC can only bayonet the wounded.

My "all-in" thesis is that the Tuesday hearing will focus on how Goldman made a boatload in 2007 by shorting the mortgage market, and then came hat in hand for a big bailout in 2008. The witness list includes the two Goldman traders who did the shorting -- Michael Swenson and Joshua Birnbaum. These were big macro bets and were done with lots of oversight by Lloyd and the CFO.

Can you say "conflicts"? You don't want your lawyer to be conflicted. If your banker has no conflicts, it means he has no market insight and isn't worth much. Traders are 100% confilcted -- but you should know that. Goldman has been seriously conflicted for a long time, but hasn't been called on it. Now they will.

The Establishment still has a blind spot on this. It will have political repercussions.

It's unclear how Financial Services Reform will affect Goldman. What I fear is that the net effect of FSR may actually be greater on Main Street banking, given other factors. Power keeps moving to DC, where our feckless leaders only have the crudest of levers -- on a good day.

Bigger picture, "Goldman" can give Obama a means to deflect all the anger out there onto someone else. My over/under for House gains had been +55. I thought a bad economy could take this higher. "Goldman" could take it lower.

If the Republicans can't take back the House in 2010, they cease to be a national party.  

By Anonymous The Truth is Out There, at Sat Apr 24, 12:40:00 PM:

The Senate Investigations Committee just went public with some stuff. You can find it here

Here are some excerpts:

“Investment banks such as Goldman Sachs were not simply market-makers, they were self-interested promoters of risky and complicated financial schemes that helped trigger the crisis,” said Sen. Levin.

"The 2009 Goldman Sachs annual report stated that the firm “did not generate enormous net revenues by betting against residential related products.” Levin said, “These e-mails show that, in fact, Goldman made a lot of money by betting against the mortgage market.” [GS's shorts made $4 billion in 2007 alone.]

“Sounds like we will make some serious money.” said one-mail.


What got released today are just previews of coming attractions. Expect the early witnesses on Tuesday to open up more lines of attack, before the coup de grace with Lloyd at the end. Expect the following line of questioning to be asked of Lloyd:

"You spoke to Hank Paulson with some regularity in 2007, didn't you?"

"Did you ever speak about declining conditions in the mortgage market?"
[Lloyd has no good answer -- whichever way he goes, leads to a bad end -- some are very bad ends.]

"Did you ever go public with your concerns in any way in 2007, say by writing an op-ed piece or giving a speech? Not even in 2008?"


Look, you can fly a pirate flag like John Paulson or you can be part of the plugged-in establishment -- with attendant responsibilities. You can't do both.

You can't underestimate the righteous wrath that will come from this. It will certainly hit Goldman. It may hit more broadly, and it won't always be "fair."

Hope those NYC gun permits came through for Goldman partner applicants. They're going to need them.

Lloyd should buy his own Caribbean island ... fast. He's not the most culpable Wall Street CEO -- Stan O'Neal and Franklin Raines were worse. Dick Fuld, maybe too. -- but Lloyd stayed at the table too long.
Lloyd will be the most hated man in America on Wednesday.

Still want to talk about the nuance of the SEC's charges?


For the record, I have no insider connections of any kind. Anything I've developed has been through public sources.  

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