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Monday, April 19, 2010 10:47 PM


Senior Goldman Executives Approved the Paulson Deal; Goldman's Spin Dodges the Big Question; "Fabulous Fab" Not Feeling So Fabulous


Kiss goodbye any hope of containing the Goldman Sachs mess at a low level. Senior executives at Goldman Sachs approved the Paulson deal.

Inquiring minds are discovering what the Goldman Sachs Executive Committee Knew.

The 2007 mortgage deal that set off controversy at Goldman Sachs Group Inc. was quickly approved by a group of roughly a dozen senior executives in a routine meeting in a drab conference room, according to people familiar with the matter.

That group of senior-level executives—which included those helping to manage Goldman's mortgage, credit and legal operations—has surfaced as an important participant in the Securities and Exchange Commission's securities-fraud case against Goldman, which has rocked the firm and Wall Street.

The Goldman group that approved the deal was led by Daniel Sparks, Goldman's mortgage chief, according to people familiar with the matter. Mr. Sparks, who left the firm two years ago, referred questions about the case to the firm.

The SEC complaint doesn't name any of the members of the mortgage committee at the time. But it alleges that a memorandum by the committee the day it approved the deal shows it had full knowledge of Mr. Paulson's role in selecting the deal's investments. The March 12, 2007, memo by the committee said: "Goldman is effectively working an order for Paulson to buy protection on specific layers of the [deal's] capital structure."
Goldman claims it lost money on the deal. I am very skeptical of that claim given all Goldman's side bets with AIG and others. Besides, who can say where one deal ends and the next begins when one is hedging massive pools of garbage?

Regardless, whether Goldman lost money or not is irrelevant. The relevant factor are:

  • What was Goldman legally obliged to disclose?
  • What did Goldman actually disclose?
  • Were there any significant errors in the wording of the disclosure?
  • Who approved the deal?

We can now answer question number four.

This explains why Goldman openly defended Fabrice Tourre, the Goldman vice president accused of civil fraud by the SEC.

Please see Did the SEC Bait Goldman Sachs? Sam Antar, Criminal CFO of Crazy Eddie Makes the Case for an argument that it was a mistake for Goldman to "circle the wagons around Fabrice Tourre".

Goldman likely felt like it had no choice.

Fabrice Tourre on Leave of Absence

MarketWatch is reporting Goldman's staffer charged by SEC takes time off
Fabrice Tourre, a Goldman Sachs Group Inc. employee at the center of a government case against the bank over its sale of mortgage securities, is taking some time off but isn't suspended, the Fox Business Network reports Monday, citing Goldman Sachs.

Reuters also reported that Tourre remains with the firm. "He remains an employee of Goldman Sachs," and has taken a "personal decision to take a bit of time off," the news service quoted a Goldman Sachs spokesman as saying. The spokesman, who wasn't identified by name, also told Reuters that Goldman had found Tourre did "nothing wrong" during an internal investigation it conducted after the Securities and Exchange Commission first contacted the bank about the case.
Goldman's Spin Dodges the Big Question

Bloomberg writer Jonathan Weil reports Goldman’s Abacus Spin Dodges the Big Question.
Just how strong is the Securities and Exchange Commission’s lawsuit against Goldman Sachs and a 31-year-old vice president who nicknamed himself Fabulous Fab? It depends on what the meaning of the word “selected” is.

The critical misrepresentation Goldman made to investors in a deal called Abacus 2007-AC1 was that the mortgage-bond portfolio to which Abacus was tied was “selected by ACA Management LLC,” the SEC said in its complaint. Those are the words as they appeared in Goldman’s 2007 pitch book for the transaction and other sales materials.

The SEC alleged that statement was false and misleading, and amounted to fraud. Goldman didn’t tell investors that its client, the hedge fund Paulson & Co., played a significant role in ACA’s selection process. Nor did it say Paulson planned to take a short position on the debt securities Abacus issued, a bet that ultimately would make Paulson a $1 billion profit.

Does Paulson’s involvement mean it wasn’t entirely true that ACA selected the portfolio? What’s intriguing about the statements Goldman and Paulson released last week is that they gave very different responses.

In its April 16 statement, Goldman said flatly that ACA “selected the portfolio.” Note: Goldman didn’t say that Paulson didn’t select the portfolio -- only that ACA did. The bank tried to minimize Paulson’s role by saying ACA did so “after a series of discussions, including with Paulson & Co, which were entirely typical of these types of transactions.”

The fund, founded by John Paulson, said ACA “had sole authority over the selection of all collateral.” However, it didn’t say that ACA actually selected the collateral. Nor did it say anything about ACA’s independence.

The question of who selected what, and whether the answer may be different in substance than in form, would be one for a jury should the SEC’s lawsuit ever get to trial. It might be years before the case makes it that far.

One question for a jury would be whether it was materially misleading for Goldman to omit Paulson’s name from its sales materials. While ACA may have had the final say on paper, it needed Paulson’s approval. Goldman wouldn’t have done the Abacus offering if Paulson hadn’t gotten what it wanted, because Paulson wouldn’t have shorted it, meaning no fee for Goldman. (Goldman said it lost money on the transaction.)

The SEC claims Tourre and Goldman misled ACA into believing it was taking a long position on Abacus’s equity portion. Goldman said it never represented that to ACA.

All this leads me to another curiosity. If ACA was truly independent, as Goldman said, and if ACA was the one selecting the collateral, then what the heck was Paulson doing even being in the same room as ACA?

Surely there is an answer to that question. It just might not be a good one.
Jonathan Weil is always a good read. His article is worth a closer look for email exchanges between ACA, Paulson, and Tourre.

For the next year, everyone gets to debate the meaning of the word "selected", who was doing it, and whether or not the selection process was properly disclosed. One thing is for sure "Fabulous Fab" is not feeling so fabulous right now. Neither is Goldman.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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