Posted by Karl Denninger
From the wire:
The Goldman Sachs Group Inc SEC reportedly files fraud charges against company over structures of certain collateralized debt obligations related to subprime.
claims center around omission and mistatement of certain facts tied to subprime mortgages
Form the complaint:
“The product was new and complex but the deception and conflicts are old and simple,” said Robert Khuzami, Director of the Division of Enforcement. “Goldman wrongly permitted a client that was betting against the mortgage market to heavily influence which mortgage securities to include in an investment portfolio, while telling other investors that the securities were selected by an independent, objective third party.”
You mean creating CDOs specifically at the request of some hedge fund that wants to short subprime (that is, they believe the underlying reference paper is either worth far less – or actually worthless) without disclosing how that CDO came into existence when selling it on to “investors” presents a problem?
See, I told you so…..
Now let’s see the SEC actually press this thing and further, let’s see criminal charges and I’ll be impressed.
In other words Paulson combed through the data available on these subprime mortgage deals and picked out the crappiest of the garbage – the most-rotting of the dead fish, all of which allegedly were “AAA” at the time one would presume but which he was quite sure would soon be either downgraded – or default outright – and then asked Goldman to use those as the references against which it would write the swaps that Paulson wanted to buy.
But remember – Goldman didn’t buy the bonds to set up the CDO – they just issued a credit-default swap, which, it appears, Paulson’s hedge fund bought.
Goldman then went out and solicited people to buy the tranches of the CDOs, selling what was alleged to be a cash-flow stream that Mr. Hedgie had offered (out of the goodness of his heart, no doubt – ed: yes, that’s sarcasm) to fund!
Here’s the question:
Did Goldman disclose to the potential buyers in the offering circular that John Paulson had come to them with a laundry list of characteristics he wanted in the CDO and offered to fund the credit-default swaps which would only make him money if those reference bonds blew up, and that he would take large, material losses IF THE SECURITIES – AND THE CDO – PERFORMED AND ACTUALLY GENERATED THE CASH FLOWS PROMISED?
The SEC finally thinks this is important?
NOW LET’S SEE ALL THE OTHER ALLEGED FRAUDSTERS GET NAILED, LIKE THE GARBAGE THAT WAS RUN ON JEFFERSON COUNTY, ALABAMA!
If you’re a PENSION FUND or other investor who got nailed by this crap here is your opportunity to sue these jackasses to beyond the orbit of Mars.