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Goldman Sachs Sued by German Bank Over an AIG CDO Bailed Out by Taxpayers (Updated)

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By Janet Tavakoli

Landesbank Baden-Wuerttemberg, a German state-owned bank, is suing Goldman Sachs over a $37 million loss on its investment in its share (a tranche) of a CDO called Davis Square VI. TCW, the manager for all of Goldman Sach's Davis Square deals, is also being sued:

"Goldman knew at the highest levels of its organization that its representations to LBBW Luxemburg that the notes merited triple-A ratings and were high grade were blatantly false," the Stuttgart-based bank said. "Goldman committed fraud and, or, was negligent in marketing and selling the notes to LBBW Luxemburg."

"Goldman Sachs Sued Over German Bank's $37 Million Loss on CDO," by Edvard Petterson and Patricia Hurtado, Bloomberg News, October 4, 2010.

Separately, French Bank Societe Generale bought protection from AIG on two tranches of the Davis Square VI CDO, which Goldman Sachs created (structured) and underwrote. On November 10, 2009, I uncovered that information, and it was the first time this information was in the public domain. ("Goldman's Undisclosed Role in AIG's Distress," TSF, November 10, 2009)

The German bank makes an excellent point. The portfolio backing Davis Square VI before the September 2008 initial taxpayer bailout of AIG, can be found on my web site via this link: Davis Square VI.

In an earlier commentary, I discussed Davis Square IV, another one of the AIG deals: "Congress Exposes Potential Profiteering in AIG's Deals: Delay Enabled Further Cover Up," January 28, 2010.

Taxpayers might again ask why the Federal Reserve was so eager to bail out all of AIG's deals (credit default swaps) linked to problematic CDOs at 100 cents on the dollar. The largest beneficiary of that largesse was Goldman Sachs, whose former officers rose to influential positions in the U.S. Treasury and Federal Reserve Bank and were at Goldman's helm when these deals were created.

The taxpayer funded bailout of AIG very likely helped Goldman Sachs to avoid potential lawsuits, among other lucrative benefits. (See "Goldman Sachs: Bullies on the Block," September 13, 2010.)

Update: The complaint is Landesbank Baden Wuerttemberg v. Goldman, Sachs & Co. and TCW Asset Management Company,10-7549, U.S. District Court, Southern District of New York. 


Janet Tavakoli is the president of Tavakoli Structured Finance, a Chicago-based firm that provides consulting to financial institutions and institutional investors.  Ms. Tavakoli has more than 20 years of experience in senior investment banking positions, trading, structuring and marketing structured financial products. She is a former adjunct associate professor of derivatives at the University of Chicago's Graduate School of Business.  Author of: Credit Derivatives & Synthetic Structures (1998, 2001), Collateralized Debt Obligations & Structured Finance (2003), Structured Finance & Collateralized Debt Obligations (John Wiley & Sons, September 2008).  Tavakoli’s book on the causes of the global financial meltdown and how to fix it is: Dear Mr. Buffett: What an Investor Learns 1,269 Miles from Wall Street  (Wiley, 2009).




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Reader Comments (4)

Oct 7, 2010 at 5:11 PM | Registered CommenterDailyBail
Oct 7, 2010 at 5:12 PM | Registered CommenterDailyBail
Soros says banking system remains "too connected"

Oct 7, 2010 at 5:30 PM | Registered CommenterDailyBail

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