Goldman’s Embarrassing Emails

Original Article from Fox Business EMac’s Stock Watch


The Securities and Exchange Commission is not just attacking Goldman Sachs–it’s attacking all of America and capitalism in the biggest government case to date leveled against Wall Street’s leading firm over its role in the subprime meltdown.

But the SEC does have numerous embarrassing internal emails and memos from Goldman that add to the strength of its securities fraud lawsuit against the firm and Goldman trader Fabrice Tourre, 31, over a mortgage-backed security deal dubbed Abacus which lost $1 billion.

At minimum, the emails from Goldman, known for its tight-lipped “Fortress Goldman mentality,” could push the firm into settling, neither admitting nor denying culpability, potentially even paying a fine, a drop in the bucket given its $13.4 billion in net profits last year.

The emails show that Tourre “was standing in the middle of these trades without necessarily understanding them,” says a top market official, and that Goldman knew the deal was rotten to begin with.

Goldman did not buy protection from AIG on the CDO that’s the subject of the SEC’s lawsuit; the firm had previously bought AIG protection on seven other related Abacus CDOs.

However, the SEC could also easily lose the case–we show how, see below, including that Goldman disclosed to investors in the deal documents that the firm itself could even short the deal.

Blankfein ” feels that the government is out to kill the firm,” that “the whole thing is totally political,” and that the SEC securities fraud lawsuit “hurts America,” according to one client quoted by the Financial Times.

Goldman, however, tells me that Blankfein did not initiate those client contacts and is merely responding to clients who have raised such concerns.

“Clients have raised the politics of this case with Mr. Blankfein, saying things such as, ‘gosh this case seems political, what does this mean for the capital markets in the future,’” a Goldman official tells me.

Blankfein–who once famously, tongue-in-cheek, referred to investment banking as doing “God’s work”–is launching his counterattack as President Barack Obama comes to New York City, shooting off pistols in the air to let Wall Street know a new sheriff is in town.

Blankfein’s PR counteroffensive came rapidly on the heels of the SEC’s securities fraud suit, which says Goldman and co-defendant Tourre materially deceived investors by not disclosing in deal documents that hedge fund manager John Paulson cherry picked bubble-era subprime junk assets for the synthetic collateralized debt obligation [CDO] so he could later short the deal.

Paulson’s fund earned $1 billion on its negative bets against the deal; German bank IKB, an investor in other Abacus deals, lost $150 million on this CDO and had to be bailed out; ACA Capital, which acted as agent and picked the securities, lost $900 million; and Goldman lost about $90 million.

Goldman and Tourre “lied” to investors, an SEC official tells me. At issue is an age-old conflict long in play on Wall Street that Goldman and Paulson had an inside track on the deal and could see the potholes in the deal, while other investors could not.

Tourre is a vice president on Goldman’s structured product correlation trading desk at its headquarters in New York City; he’s now on leave, but may testify along with Blankfein, among other Goldman executives, before the Senate’s Permanent Subcommittee on investigations next week.

Beginning in 2006, Paulson’s two funds, known as the Paulson Credit Opportunity Funds, had placed bearish bets on subprime mortgage loans by buying protection on various debt securities. Paulson paid Goldman $15 million to market the deal.

It’s a tight case, given new developments that ACA, the portfolio selection agent on the deal, and a poorly run bond insurer unsuccessful at managing CDOs, was reportedly told about the shorting by a Paulson executive.

More SEC cases could come, agency officials say.

“Wall Street banks created corrupt securities to fund a corrupt lending Blitzkrieg that rolled tanks through Main Street and damaged the entire U.S. economy,” says Janet Tavakoli, president, Tavakoli Structured Finance.

Tavakoli takes a dim view of the SEC’s performance, saying its response is akin to issuing “a traffic ticket to a financial teenager.”

Goldman’s Embarrassing Internal Emails

The SEC says a Paulson employee explained the investment opportunity to Goldman in January 2007 in an email:

“It is true that the market is not pricing the subprime RMBS [residential mortgage-backed securities] wipeout scenario.”

“In my opinion this situation is due to the fact that rating agencies, CDO managers and underwriters have all the incentives to keep the game going, while ‘real money’ investors have neither the analytical tools nor the institutional framework to take action before the losses that one could ‘anticipate based [on] the ‘news’ available everywhere are

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