GS = Magnetar ….. nearly same M.O.

RA’s are not the only paid stooges in the CMO mills, so are the “CMO Managers” who presumably independently select the securities.

both Magnetar and GS ‘outsourced’ all fiduciary duties to hand-selected stooge CMO management firms

But unfortunately, SEC has a conflict of interests. It can not make the accusations it should because it would open the door for total annihilation of all financial institutions in U.S. whom are all guilty of participating in these MBS criminal activities and equity stripping. U.S. Government has just spent over 5 Trillion Dollar to prop up all these bankrupt financial institutions and there is no way it can allow SEC to take them down. This case is just a slap on the wrist to stop GS from raiding the cookie jar.

It will be settled in a very quick order to prevent conviction of GS. The Fraud conviction would make Goldman and other MBS players liable for $5+ trillion to foreign financial institutions and governments who were raped by Wall Street.

2. GS white lie (head fake) in the pitchbook – note slides on “diversification” of everything extraneous except for the fundamentals of the underlying mortgages themselves

The crux of the case is based on the following:

“On January 12, 2007, Tourre spoke by telephone with ACA about the proposed transaction. Following that conversation, on January 14, 2007, ACA sent an email to the GS&Co sales representative raising questions about the proposed transaction and referring to Paulson’s equity interest. The email, which had the subject line “Call with Fabrice [Tourre] on Friday,” read in pertinent part: “I certainly hope I didn’t come across too antagonistic on the call with Fabrice [Tourre] last week but the structure looks difficult from a debt investor perspective. I can understand Paulson’s equity perspective but for us to put our name on something, we have to be sure it enhances our reputation.”

And then:

“On January 16, 2007, the GS&Co sales representative forwarded that email to Tourre. As of that date, Tourre knew, or was reckless in not knowing, that ACA had been misled into believing Paulson intended to invest in the equity of ABACUS 2007-AC1.”

It’s really slim at best. Your interpretation of this is: “it told ACA that Paulson had a long position in the deal when in fact he was entirely short.”

I cannot read this myself, merely that ACA seemed to believe that Paulson was going long and that Tourre was aware of that possibility, not that he misrepresented amything pro-actively. Nuances matter.

Your arson/insurance scenario is flawed. Neither Paulson nor GS caused the defaults on the loans backing the securities issued by Abacus.

Your analogy would work if GS or Paulson somehow forced those homeowners into not making payments or lied about the composition of the collateral making up the CDO. All Paulson had was an idea that these sub prime mortgages would go under (based on public information)

The investors in those CDO tranches had full access to the collateral information and knew explictly (it is stated in the Abacus pitch book) that GS and its affiliates were purchasing CDS protection on those tranches.

Instead, unlike Paulson, investors buying the tranches relied on S&P and ACA.

1) “On January 27, 2007, ACA met with a Paulson representative in Jackson Hole, Wyoming, and they discussed the proposed transaction and reference portfolio.” (Goldman wasn’t even at the meeting)

2) “Had ACA been aware that Paulson was taking a short position against the CDO, ACA would have been reluctant to allow Paulson to occupy an influential role in the selection of the reference portfolio.” (hindsight is 20/20)

3) “In sum, GS&Co arranged a trasaction at Paulson’s request in which Paulson heavily influenced the selection of the portfolio to suit its economic interests.” (isn’t this why most clients come to Goldman?)

4) “Although the marketing materials for ABACUS 2007-AC1 made no mention of Paulson or its role in the transaction, internal GS&Co communications clearly identified Paulson, its economic interests, and its role in the transaction.” (Goldman generally doesn’t disclose the activities of one client to another client on the opposite side of a trade)

5) “According to an internal GS&Co memorandum ot the Goldman Sachs Mortgage Capital Committee (“MCC”) dated March 12, 2007. . .” (committees generally aren’t approving deals if they think that they’re going to end up defrauding clients)

5) “This synthetic CDO. . .was structured and marketed by GS&Co in early 2007 when the United States housing market and related securities were beginning to show signs of distress. Synthetic CDOs like ABACUS 2007-AC1 contributed to the recent financial crisis by magnifying losses associated with the downturn in the United States housing market.” (irrelevant, particularly since nobody knew this at the time)

I’d consider the scam to be the financial analog of arson. To understand what went wrong and what can be done to prevent it, go straight North from Wall Street. The reason arson is not as profitable as it used to be in New York City is that the city is effectively preventing people from over insuring buildings so that they profit if the buildings burn (many of those buildings burned).

Once upon a time, long long ago, CDSs were physical settlement CDSs — if one had the instrument in default and the CDS the CDS writer made you whole. If you had just the CDS, you had a piece of paper (OK a bytes on a hard disk — it wasn’t that long long ago).

Then people who bet that a firm would go bankrupt by buying naked CDSs discovered that the firms bonds were sellign for 100 cents on the dollar, because so many people owned naked CDSs. For some reason this was considered to be a problem and so now you can buy a CDS to insure against a loss on an instrument which you don’t own.

Oddly, some such instruments were designed to default. Who could have guessed ? If only physical settlement CDSs were allowed, this scam wouldn’t have worked.

So what is the useful social role of cash settlement CDSs ? Why is the rule for all other insurance contracts not applied to CDSs ?