Friday, May 07, 2010

Warren and Me 

A few days ago I offered a defense of Goldman in respect of the SEC allegations in the Abacus case and expressed my sense that Goldman had acquitted itself well in the Congressional hearings on their mortgage business. I even expressed pride as a former Goldman employee (a long time ago, admittedly). Fair to say I caught a little grief for that.

I've been out of the office for a few days attending to business, but upon my return had an opportunity to read this piece by Andrew Ross Sorkin in the New York Times, which summarized Buffett's position on the Abacus situation as communicated to his shareholders during his annual meeting. Please read the whole thing. Please.

I may have limited credibility, I understand, with readers who don't really know me but have formed certain impressions based upon what I say I do for a living, or where I worked, or how I seem to feel about certain political issues.

On the other hand, Buffett has great credibility and has built trust with a very broad range of people from various walks of life. He is not of Wall Street.

Now, Goldman antagonists will argue Buffett is merely talking his own book, since he is a significant investor in Goldman. This is undoubtedly true, but it is not a secret. Therefore Buffett has publicly put his reputation, earned over 50 years, on the table regarding Goldman. And for those younger readers, or those older ones who may have forgotten, Buffett many years ago had a sizeable investment in Salomon Brothers (a place I also worked, incidentally). When Salomon fell upon its trouble in the Treasury Bond scandal, Buffett did not hesitate to dismiss maangement and actually install himself as CEO in order to help Salomon through its life threatening moment. And in that case, again, he had a longstanding relationship with Salomon's CEO, John Gutfreund. Buffett did not defend him or his management in that case despite his investment. In the Goldman case, by contrast, he clearly has asserted a powerful Goldman defense and stood up for Lloyd Blankfein.

Goldman really needed that. Someone who had courage and credibility to take up their side in the court of public opinion. I know I would retain him as my expert witness in front of a jury.


By Blogger Escort81, at Fri May 07, 01:45:00 PM:

There is scuttlebut that settlement talks are ongoing, with a number in the $1-5 billion range (an order of magnitude greater than I guessed), or lower if Blankfein offers up his scalp.

Buffett's comments get to the heart of the issue of material disclosure (whether the identity of Paulson, or his role in selecting the MBS should have been mentioned in the offering documents). His comments in quote in the article:

“I don’t care if John Paulson is shorting these bonds. I’m going to have no worries that he has superior knowledge,” he said, adding: “It’s our job to assess the credit.” The assets are the assets. The math either works or it doesn’t.

The Ackman point of view -- that it would have been unethical to disclose Paulson's identity -- should get him a role as an expert witness for Goldman if the case ever goes to trial.

Sort of a minor point, but Sorkin repeats the information that ACA claims it didn't know that Paulson was on the other side of the transaction. Having read a fair amount about all of this, I do understand that there is ACA Management and ACA Capital, different parts of the same company. One part clearly knew who Paulson was, having communicated with Paulson repeatedly in the composition of the synthetic security. Has anyone read somewhere that it was ACA policy to not allow the Management people to talk to the Capital people?  

By Blogger Bomber Girl, at Fri May 07, 02:57:00 PM:

Evidently, the SEC is trying to keep Mr. Buffet busy elsewhere, according to the WSJ: "The Securities and Exchange Commission is looking into disclosures made by billionaire investor Warren E. Buffett’s Berkshire Hathaway as it sought to purchase Burlington Northern Santa Fe railroad, The Wall Street Journal reported, citing people familiar with the matter."

Another timing coincidence, unless one is paranoid of course.  

By Blogger Cardinalpark, at Fri May 07, 03:08:00 PM:

There's no case. And I can't believe GS will settle for anything remotely close to $1bn.

Pelligrini from Paulson is on the record that he told ACA his short position/intentions anyway. Buffett's point (buyer's are responsible to assess the assets, and the assets are clearly and well disclosed) and Ackman's point that Goldman's ethical requirement is NOT to disclose the opposite sides of the trade anyway all erode whatever case the SEC thinks they have.

And yes, it is remarkable that the SEC is taking a run at Buffett's 13D disclosure on his intentions regarding buying the railroad. I suspect at most he had a minor a technical mistake and quite possibly has an excellent argument that until he finalized a deal, his intentions hadn't changed and therefore a new, updated filing was not required.


By Blogger Escort81, at Fri May 07, 04:21:00 PM:

Heh, Bomber Girl, "just because you are paranoid doesn't mean they're not after you."

I think that quote is originally from Joseph Heller in Catch-22.

I can see Goldman settling this for something under 9 digits to just make it go away, but Gasparino's reported number of $5B seems way high, given the size of the syntheitc security to begin with. Of course, based on the comments at the Zero Hedge link I provided above, some believe such a figure is way too light, and represents a speeding ticket, given the size of the GS bonus pool last year (though I am not sure how that is relevant).

I can also see Goldman digging in its heels and letting it go to trial. There is the calculation of reputational damage, and opening the door for other litigation. I would guess the SEC would not settle for much below $100 mil.  

By Anonymous The Truth Is Out There, at Fri May 07, 05:44:00 PM:

Goldman has serious problems -- in part deserved, in part unlucky. We're not hearing much about Morgan Stanley right now, are we? -- there's reasons why-for.

People who think this is only about ABACUS are deluded. If you think the SEC charges over ABACUS are undeserved, you're "deluded squared". If you think the SEC will settle ABACUS anytime soon, you're "deluded cubed."

On a scale of "who's responsible?" for our current USA financial predicament, Goldman isn't top of my list ... actually they're way far down on my list. But they're on my list.

Lloyd wasn't the worst Wall Street CEO ... far from it. I actually kinda like the guy. But in the 2007 - 2008 timeframe Lloyd put Goldman Sach's interests before that of the USA ... and then ... when the World started melting down .... he asked Hank for a USA bailout and go it ... else Goldman would have been gone too.

I half believe the even worse conspiracy theories about Goldman's actions in recent years. Why? ... because Goldman today is all traders. It's no longer your Daddy's Goldman Sachs.

Can you put "Greece" and "Goldman" in the same sentence. A lot of people will want to.

Goldman hardly even trades real stuff anymore. Goldman could be orderly liquidated and the World wouldn't care. Why? ... because their current business model has little direct connection to the economy other than posing a systemic risk to the rest of us.

ABACUS wasn't just a one-off screw up ... to me to me it's endemic of Trader Mentality run amok.

There are root causes deeper than Wall Street for our current national financial predicament, but Goldman only played -- and profited -- off it.

Look, I'm just another asshole with an opinion. But tell me where I'm wrong on the foregoing. I'm a former "Wall Streeter" inclined to give the industry a break.

If my blue collar dad were still around, and knew what I knew, he'd want Goldman razed to the ground. He represents a sizeable voting demographic. Can you say "Reagan Democrat"? It's in play.

If I'm thinking this way .... you all Establishment Ruling Class have bigger problems. Developing ....  

By Anonymous The Truth is Out There, at Fri May 07, 07:01:00 PM:


"I know I would retain [Warren Buffet] as my expert witness in front of a jury."


In court -- on an issue like this -- given his past written criticisms of things like Credit Default Swaps and Wall Street in general -- even I could cross-examine Warren Buffet to the point of Michael Vick doggie inhumane ....

Buffet invested in Goldman and GE in similar fashion to why John Pierpont Morgan acted in 1907 -- he had to.  

By Blogger JPMcT, at Fri May 07, 07:28:00 PM:

The problem with all the hoopla on this and other blog sites is that everybody wants to overanalyze Goldman's position...possilbe is some weak way to justify the SEC witch hunt.

The RAW facts of the deal are clear...they WERE clear to all who partook...and there was no public remorse or complaint at the time.

The stand that the principals were not aware of Paulson's position is hard to believe...but, as Buffet so succinctly states...was irrelevent.

...other than to wonder why nobody at the SEC seems interested in what Paulson knew.  

By Anonymous The Truth is Out There, at Fri May 07, 10:30:00 PM:

"The RAW facts of the deal are clear...they WERE clear to all who partook"

No they weren't. In fact, the gist of the SEC's complaint is exactly the opposite.

You can keep denying so -- EVEN USE ALL CAPS TO DENY SO -- but it is what it is. If Goldman's conflict had been fully disclosed, the dumb German bank may still have bought what it thought was "BBB" -- but that's not the applicable legal standard.

PER THE FACTS OF THE SEC COMPLAINT ... GOLDMAN LOSES. NO JUDGE WILL GIVE GOLDMAN EARLY DISMISSAL. THUS, IT GOES TO A JURY OF BROOKLYN DOORMEN AND BRONX BUS DRIVERS, IN WHICH CASE GOLDMAN WILL GET HOSED. Even I could "kill" in front of said jury given target defendants who'd persist in wearing those funny white collared shirts with the French cuffs. (Better than sex, I'm now thinking ... !)

But going to a jury can't happen in 2010. The process just takes so long.

Rumors about a settlement are Goldman spin, I strongly suspect. A lot of key MSM editors have been treated to steak dinners and BJs recently, I strongly suspect. The bid/ask on settlement has to be too wide right now. The SEC needs a big win right now. I don't see Goldman offering up billions and Lloyd's scalp to the SEC on this little case -- and I can't see the SEC accepting less, right now. In a year or so, SEC v Goldman will be looked on as a sideshow and likely settled as such.

JPMcT -- and others here -- have a strong argument that the SEC's unwilligness to negotiate this case to a settlement months ago is politically motivated. But you can't say the SEC doesn't have Goldman by the balls on the facts. And it was a billion dollar deal. And there's a reason why Bear Stearns turned this deal down before Goldman did it (Paulson had worked at Bear).

I've suggested this in prior posts: whoever acted as Goldman's deal lawyer on ABACUS wasn't filled in on Paulson's involvement. If said lawyer had so known, said lawyer would already have hung out. Ergo, the Fabulous Fab kept said lawyer in the dark -- either naively or purposefully.

What happens when traders pretend to be bankers.

Reread that last sentence slowly.  

By Anonymous Anonymous, at Sat May 08, 01:39:00 AM:

>> Buffett's comments get to the heart of the issue of material disclosure (whether the identity of Paulson, or his role in selecting the MBS should have been mentioned in the offering documents).

Anon attorney here. I need to get a handle, but I'm a bit paranoid. You get a handle and it's not too damn hard for Google, Yahoo or FB to figure out your identity. The next thing you know every inane comment you write on the internet shows up on you FB page. That would suck.

In any event, Escort81, the issue is not Paulson's identity. His identity is immaterial. The material fact that was omitted was that one of the parties involved in selecting the securities that comprised the basket of securities in the Abacus transaction was shorting the securities, or at least a portion thereof.

From the perspective of an attorney who, admittedly, doesn't practice securities law this is a textbook case of securities fraud. It is undisputed that material facts known to Goldman were not disclosed to the buyers of the securities. This case is open and shut, which is precisely why Goldman is trying to negotiate a settlement.

TTOH, your writing is still cracking me up. It's funny 'cause it's true. If this case goes to trial Goldman will go down in flames in front of a jury full of unemployed and underemployed workers. Like I said in my first comment on this case, this is the sawdust in the transmission case.

And you have the politics of this down pat. A pro-Wall Street bias is the Achilles heel of the Republican party. I just don't get it, but then I grew up an Iowa farm boy.  

By Anonymous Anonymous, at Sat May 08, 01:52:00 AM:

Same anon attorney here. Realized I wanted to follow up on one more comment.

>> “I don’t care if John Paulson is shorting these bonds. I’m going to have no worries that he has superior knowledge,” he said, adding: “It’s our job to assess the credit.” The assets are the assets. The math either works or it doesn’t.

This is, in my opinion, precisely where CardinalPark, Escort81, and Buffet get it wrong. This statement is true in trading. But issuing securities is not trading; it brings the issuer within the purview of the '33 act and the '34 act, which impose affirmative disclosure obligations on the issuer. Goldman failed to meet those disclosure obligations.  

By Blogger JPMcT, at Sat May 08, 10:33:00 AM:

I suppose the lawyers in the discussion are correct. Much like medical malpractice and product liability cases, you can only win in front of a jury of dopes.

...of which we are in no short supply.

But that doesn't make it right...a sense lost long ago by the legal profession.

I merely summarize what I have posted before of the facts of the case...and you all please tell me why Goldman has an "open and shut" judgement pending.

If that is the law, then the law is an ass.

To wit:

The hypothetical securities in the fund probably would increase or decrease in value if the referenced residential real estate markets improved or declined. This was exactly the vehicle that investors wanted to exist. ACA itself selected the specific interests, accepting some suggested by Paulson, but rejecting many others proposed by him.

ACA’s parent company insured a senior portion of the same fund against default, and the SEC now says that ACA the parent did not know that ACA the subsidiary had any dealings with Paulson. (Except that presumably ACA the parent had complete control over ACA the subsidiary, so how could it not have known?).

So IKB and ACA Capital bought the new fund, as they intended, because they thought real estate was going up, and Paulson sold it short, as he intended, because he thought real estate was going down. Goldman Sachs also was “long” the portfolio, and lost $90 million on their investment, made with full knowledge that Paulson was intending to go short. If IKB and ACA Capital thought the RMB markets would decline, they could have shorted the portfolio.

The SEC now says that Paulson’s position was adverse to IKB and ACA Capital because Paulson was short the portfolio. But this is true only if the markets declined. If the markets had instead improved, as IKB and ACA Capital believed they would, then Paulson’s short position likely would have been “squeezed,” and in that event IKB and ACA Capital (and Goldman Sachs) would have profited significantly from their trades.

IKB and ACA Capital were wrong. Real estate markets continued to decline, part of the “subprime meltdown,” and therefore IKB and ACA Capital lost a lot of money, and Paulson made a lot of money. (GS, as noted above, lost $90 million on the deal, 5 times the amount of its commissions, since GS was also “long” in the deal. So if GS intended to mislead anyone and make lots of money, it didn’t quite get there . . .).

In any ordinary market and economic situation, that would be the end of that. Two very astute investors thought markets would go one way, and the markets went another way. The investors were told exactly, precisely what they were buying, exactly, precisely what the ratings and risks were, and they were told to do their own due diligence, which they either did do or didn’t do.

Now 3 years after the deal was done and the losses were realized and paid, neither IKB nor ACA has sued Goldman Sachs or anybody else in connection with their losses. They took a view on the markets. Their view was wrong. They lost. Next case.

I say again...WHERE'S THE BEEF???  

By Anonymous The Truth is Out There, at Sat May 08, 01:39:00 PM:


Goldman told the banks that the CDO assets had been picked by a neutral independent collateral manager. That was false and it was material. QED.

You keep pointing to other facts and ignore the ones that go to the heart of the SEC's complaint. Then you blame the SEC, lawyers and jurors, while you'd give Goldman a pass even though they f*cked some clients with Abacus.

Our federal securities laws are premised on full disclosure. It's a better approach than "merit review" which some state laws had. E.g., once upon a time you couldn't buy in the Apple IPO if you were a Massachusetts resident because the Massachusetts Secretary of State thought it too speculative.

But a disclosure-based system only works if the players abide by it -- and the SEC polices it on occasion.

Financial Services Reform might expand fiduciary duty requirements, which would be a bad thing.  

By Anonymous feeblemind, at Sat May 08, 06:36:00 PM:

CP, since you have mentioned Buffet's reputation and credibility, I am wondering about the post Tyler Durden has up. He says Moody's received a Wells Notice cease and desist letter from the SEC back in March that they are just now making public.

Buffet, a serious investor in Moody's has been selling his stake since about then. Coincidence?

Is that the action of a man with a sterling reputation or a nefarious insider?

I am asking out of curiosity as the workings of Wall St are a complete mystery to me.  

By Blogger JPMcT, at Sun May 09, 10:11:00 AM:

"You keep pointing to other facts and ignore the ones that go to the heart of the SEC's complaint...(etc.)..."

We'll have to agree to disagree. I think my facts are cogent.

Unlike you, I think that institutional investors in Structured Investment Vehicles that do their own research and live in the land of investments that are really high stakes wagers...do indeed know what they are getting into. They are not "widows and orphans".

They didn't get "f*cked"...they lost a bet. Period.

If they DID get "f*cked"...where is the lawsuit? Where is the outrage? Why did they just hand over the chips, pay up and move on to the next table in the casino?

I am not defending Goldman anymore than to say that what they did was business as usual.


1. Should this actually be "business as usual". The simple answer is no. However, let's not forget that federal directives in the mortgage industry thru legislation and "Community Investment" was what got this whole ball rolling. It was unsustainable... designed to fail, if you will. The smart people knew that and decided to set up a game to make some money on it. Had the US Congress kept it's idiotic ideas out of the markey, there would have been no crises.

So, "financial reform" should really begin within the house of those who are proposing it.

I doubt that will happen. Indeed, federal monkeying with the financial industry is likely to get worse.

2. Why, after three years and no lawsuits, is THIS PARTICULAR CASE getting so much press?

Perhaps because it is impossible to actually grasp the concepts. Even those of us on this blog who consider themselves savvy investors cannot completely agree on what the hell went on.

The general public can't "take sides" easily.

They will need direction to find out who the villain is.

Of course, the "villain" beneath the whhole debaucle is the US Congress.

What better case could they have brought to the public to beat the drum that it was actually "Wall Steet versus Main Street"?

They (and their approved Media) define the case. They control the timing (and, I am sure, the result).

They keep their rather stupid, incompetent control alive and well.

Case closed.  

By Anonymous The Truth is Out There, at Sun May 09, 11:35:00 AM:

The SEC couldn't investigate its way out of a wet paper bag. Can you say "Madoff"? In SEC v Goldman the SEC is actually piggy-backing on the investigative work of the Levin committee who were all over the Fabulous Fabrice last year.

But that doesn't mean that the SEC doesn't have good facts in the Goldman case. I conceded above that the SEC needs a big win and is taking it out on Goldman, but that doesn't mean Goldman isn't culpable on Abacus. ... "and it's not business as usual." If people like Fabrice purposefully kept details about Paulson's role away from their own deal lawyers, they could even get jail time. That'd be fraud with a capital "F".

"after three years and no lawsuits"

Actually, there are many, many lawsuits out there. Countrywide (Bank of America) just settled one for $600 million.

Goldman seems to have been tagged far less than the other big banks -- that's to their credit -- but they all have big exposures.

To me it'll be a miracle if Moody's and McGraw-Hill (S&P) don't get sued out of existence. So far judges have been buying their "First amendment" defense, but they're not close to half-way getting across the minefield. Moody's disclosure about the SEC Wells notice is actually a small item in the scheme of things -- it's a lazy case for the SEC.

So there's a reason Buffett has already cut his Moody's stake almost in half.

Lehman for example sold a bazillion dollars of preferred before it went under. Most of the other big banks were underwriters. The recently released Lehman bankruptcy exam report has already made the factual case for the plaintiff's lawyers. This one case alone could play like Worldcom and lead to an ultimate settlement of $ 3 to $ 5 billion.

I'm intrigued by the litigation over flawed mortgage securitizations. Every big bank has big exposure. Generally, judges have been cutting the banks a break by shrinking the suits on standing grounds and dismissing most of the claims. But plaintiffs can still win big casino if they can show that "professed mortgage underwriting guidelines weren't followed." Meanwhile financial guarantors like MBIA are trying to get out of their guaranties on these deals by also claiming that "professed mortgage underwriting guidelines weren't being followed." We all know that "professed mortgage underwriting guidelines weren't being followed", so this could get interesting -- a single MBS tranche can easily go $1 billion -- which is why the potential damages here are staggering.

Bigger picture, I don't know what replaces our MBS market. Collectively, we killed a good thing. The Fed can't just keep buying Fannie and Freddie paper forever.  

By Blogger Cardinalpark, at Sun May 09, 12:08:00 PM:

Truth -

on one point that seems to be central to your position, the selection agent for the reference securities in Abacus was ACA. It was not Paulson. That was by contract and pursuant to an engagement and was properly disclosed. Furthermore, ACA was a prodigious buyer of the ABACUS securities.

By definition, the Abacus trade required a long and a short aside. Paulson told ACA what it was prepared to short. ACA responded by selecting, by contract, what it was prepared to own. Period.

Furthermore, it is common convention, and the SEC has previously taken the position, that it is unethical for the intermediary to disclose the identity of the opposite sides of a trade.

Thus Goldman has excellent arguments about its disclosure - one, the reference securities were impeccably disclosed and behaved exactly as one would hav e predicted given the subsequent performance of the underlying mortgage securities; two, ACA, the selection agent went long in size, putting its $ where its mouth was; 3) so did goldman and 4) Goldman did not disclose the 2 sides of the trade, though they disclosed directly to one another.

If the question is will his be summarily dismissed, the answer is likely not. Almost no cases get chucked out this early. But I'd wager if it goes the distance, Goldman wins.  

By Anonymous The Truth is Out There, at Sun May 09, 01:56:00 PM:

"the selection agent for the reference securities in Abacus was ACA. It was not Paulson. That was by contract and pursuant to an engagement and was properly disclosed."

Au contraire... It's a key part of the SEC's case that the offering materials say that ACA was doing the picking, when Paulson had a hand in doing the picking -- no small thing actually. Paulson even knocked off eight names at the very end of the process, per the SEC complaint.

This was a billion dollar deal and the Offering Circular alone runs nearly 200 pages of the usual BS. There's an awful lot of disclosure. McKee Nelson -- which used to be a big securitization shop -- were the outside lawyers.

But I'd bet that McKee Nelson didn't know much about Paulson in the deal. It's not a good fact if McKee Nelson "asked for everything" but never knew that Paulson paid GS $15 million to initiate this deal and especially so if they were purposefully kept in the dark about Paulson helping pick the portfolio.

This wasn't the worst deal done in the last five years, but these kind of deals sucked from the get go. Goldman wasn't top of the league tables in doing these deals, if that's some consolation.
But DC and Wall Street lost their minds over mortgages.

One of the Goldman bankers involved in ABACUS has "disappeared." She's married to the founder of C-Bass, which was some kind of Merrill subprime mortgage conduit that blew up in 2008.

Many people think that we were collectively ripped off in the billions by criminal incestuous Wall Street insiders in 2007 - 2008. I half believe it too.

"But I'd wager if it goes the distance, Goldman wins."

SEC v Goldman will become a sideshow, unless more damning facts come out and it widens and connects to other actions. The SEC alone wouldn't worry me, but Goldman will lose this case.  

By Blogger JPMcT, at Sun May 09, 10:28:00 PM:

"Goldman will lose this case"

Most sheep tied to a post do, indeed, ultimately lose.

That's a no-brainer.

Think of that the next time you are inclined to make a business donation to the Democratic Party.

There seems to be an infinite amount of room under the Obama bus wheels.  

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