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« Tim Geithner Is A Worthless Piece Of Maggot Sh**T (Shockingly Offensive Bailout Rant From WalStreetPro) | Main | WATCH LIVE (Embedded Video): Goldman Sachs' Day Of Reckoning -- Testimony From Blankfein, Fabulous Tourre, David Viniar »
Wednesday
Apr282010

Fresh From Goldman Success, SEC Looks For New Wall Street Targets (ProPublica)

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Do not miss this one.  It's starting to look as though the SEC has turned the corner and is gunning for more prosecutions.

By Marian Wang

From ProPublica

Goldman Sachs is going to be big in the news today, but it’s not the only one feeling the heat.

Two weeks ago, the Securities and Exchange Commission sued Goldman for not disclosing the involvement [1] of a hedge fund—Paulson & Co.—in selecting the assets that went into a particular CDO that Goldman then structured and sold to investors. Goldman had told investors that ACA, a third-party CDO manager, had selected the assets, neglecting to mention that Paulson was heavily involved and was also betting against the same CDO. (Goldman says [2] that its investors were “among the most sophisticated mortgage investors in the world,” mitigating its disclosure responsibilities, and that the company had not built its portfolio to fail.)

On Monday, The Atlantic detailed how Deutsche Bank also did CDO deals with Paulson & Co. [3] (The Wall Street Journal also cited the Deutsche-Paulson CDOs [4] last week.) Deutsche allowed the hedge fund to help select the assets that would go into the CDO, and then, like Goldman, it sold that CDO to investors, apparently without disclosing that Paulson was betting against the CDO. One of those investors was the German bank IKB—which also invested in the deal at the center of the SEC’s Goldman suit, as well as another doomed deal that we’ve reported [5] the hedge fund Magnetar helped build and bet against. (Magnetar denies [6] it was “net” betting against its own CDOs.)

Here’s a key line from The Atlantic:

Two Deutsche Bank traders who requested anonymity say that Paulson’s role, both in selecting a reference portfolio and in shorting it, was never disclosed to any customers taking the other side of the trade on CDO deals. In fact, they never told clients who was on the other side of a trade. The traders cited IKB as one of the customers who bought CDO trades for which Paulson & Co. helped select the reference portfolios.

Deutsche’s defense? Unlike Goldman, it didn’t use a CDO manager in this particular deal.

“No third-party collateral manager was utilized for these deals, which eliminated the potential for deception with respect to the role of such a manager,” Deutsche Bank’s head of communications told The Atlantic.

We’ve reported that many other major banks [7]—including Deutsche—worked with Magnetar [5] to create CDO deals that were similar to Goldman’s. Indeed, Merrill Lynch has been sued [8] over one such deal. 

In other Goldman news: a shareholder filed a lawsuit against the company on Monday [9]—the third lawsuit filed since news of the SEC’s fraud charges first broke, but the first centering on the company’s failure to disclose the letter it received last year from the SEC, which warned of potential charges. Three senior executives are also named as defendants, according to The Wall Street Journal. Goldman Sachs did not immediately return calls by either the Journal or ProPublica seeking comment on the lawsuit.

As we’ve noted, the SEC does not require companies [10] to disclose when they receive a formal notice, called a Wells notice, warning them of potential legal action. Still, some companies consider the information to be material and many do disclose when they receive Wells notices. Goldman did not.

The SEC has already said it will look into deals by similar banks, but lawmakers aren’t done with Goldman yet. On Monday, Roll Call reported that 60 House Democrats have signed on to a letter [11] calling on the regulator to investigate Goldman’s other 24 Abacus CDO deals.

Seven different Goldman Sachs executives are scheduled to testify [12] before the Senate investigations subcommittee today. Among them are Fabrice Tourre, one of the defendants in the SEC’s lawsuit, and CEO Lloyd Blankfein.

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Reader Comments (12)

Apr 28, 2010 at 1:26 AM | Registered CommenterDailyBail
According to Jim Bunning, the Republicans are blocking the Dem's bailout bill, not "reform" per se. Here's a touching video with Ratigan and Bunning that speaks to this. Crazy world folks.

http://www.msnbc.msn.com/id/31510813/ns/msnbc_tv-morning_meeting#36809207
Apr 28, 2010 at 2:08 AM | Unregistered CommenterJames H
i'll watch the clip...but as you know well...the entire republican strategy is to follow the frank luntz doctrine...i've written about Republican attempts to label it a bailout bill even though that's a very misleading label...again we can thank luntz for this strategy...
Apr 28, 2010 at 2:18 AM | Registered CommenterDailyBail
Wait a minute, you don't think the financial reform bill is a de facto bailout bill? What am I missing? I'm pretty sure Brad Sherman opposes it for that reason. I hate Frank Luntz as much as the next guys, but just because Luntz says something doesn't necessarily mean it's not true. Odds are, yes, but in this case?
Apr 28, 2010 at 2:32 AM | Unregistered CommenterJames H
james...i haven't seen anything from sherman on it so you might be right about his position...

this whole debate about whether it's really a bailout bill has been going on behind the scenes...with an open mind, i have been reading everything i can on it...call it a bailout bill and people will believe it is...

it's a well-orchestrated myth....wall street and luntz are winning because the label confuses people....i've actually been impressed for once by the DEMS fight for reform...

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http://www.huffingtonpost.com/2010/02/01/the-myth-of-the-permanent_n_444817.htm

The Myth Of The 'Permanent Bailout Fund'

Conservative message-maker Frank Luntz's latest memo, which lays out a rhetorical strategy for Republicans to defeat financial regulatory reform legislation, includes a dishonest talking point that's been around since before the bill came out of the House Financial Services Committee. It's the myth that the bill creates a "permanent bailout fund" to prop up failed banks.

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"Public outrage about the bailout of banks and Wall Street is a simmering time bomb set to go off on Election Day," Luntz wrote. "Frankly, the single best way to kill any legislation is to link it to the Big Bank Bailout."

http://dailybail.com/home/in-the-fight-for-meaningful-financial-reform-meet-public-ene.html

http://www.businessinsider.com/frank-luntz-guide-to-killing-financial-reform-2010-2
Apr 28, 2010 at 3:01 AM | Registered CommenterDailyBail
now...having said all of the above, and having provided the links, i am still open-minded...but the first link (huff po) is an excellent investigative piece and it seems to show that the republicans are lying...the current dodd bill has more than 100 pages devoted to letting firms fail and forcing bondholers to take a hit...
Apr 28, 2010 at 3:04 AM | Registered CommenterDailyBail
Steve Adamske, a spokesman for Rep. Barney Frank (D-Mass.), chairman of the banking committee, said the Luntz memo proves that the Republican strategy "is to lie through their teeth."

"In the House legislation, we set up a fund that is paid for by the industry that only is spent to stop the collateral damage to the financial system from a failing firm," Adamske wrote in an email to HuffPost. "But a systemically failing firm is given a death sentence by the House bill: shareholders are wiped out, management is fired, and creditors take a hit, and every employee that is not needed to wind down the company will get to spend much more time with their families."

http://www.huffingtonpost.com/2010/02/01/the-myth-of-the-permanent_n_444817.html
Apr 28, 2010 at 3:06 AM | Registered CommenterDailyBail
Frank Luntz, Barack Obama...I just can't keep all their lies straight anymore. I'll have to do more research on this. Accoding to Huffpo, the bill only gives the "bailout fund" the authority to borrow 150B from Treasury. Before, it was unlimited and no congressional approval was needed. Has this actually changed? In any case, is 150B in the FDIC-like fund really going to be enough to handle a failure of JPM, Citi, Bank of Amerika and Wells at the same time? I ask because if we weren't lying about asset values right now, that's what we'd be facing (or so some analysts have said). I'm not arguing, really, I'm just not tempted to believe any of these people. And I really haven't been following the "reform" process -- I pretty much checked out a few months ago when they weren't going to cover derivatives.
Apr 28, 2010 at 9:13 AM | Unregistered CommenterJames H
I pretty much checked out a few months ago when they weren't going to cover derivatives.

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well then good news because derivatives are back in the senate bill....i agree completely about the complexity of the issue...but everything i've seen shows me the REPUBS are playing fast and loose with the facts....until now, and still, treasury has the power to use unlimited resources to resolve any institution...this bill sets a limit, though you are correct to point out that it would be well short of the amount needed if they all failed at the same time...

and yes, i also agree that essentially MOST BANKS are still insolvent...all that happened was a FASB change in the MTM accounting rules...and voila everything is better...hmm...what about those pesky off-balance sheet issues...which in Citigroup's case amount to $1 trillion of ugliness...
Apr 28, 2010 at 12:37 PM | Registered CommenterDailyBail

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