Finance Matters

Archive for April 18th, 2010

One more interesting tidbit to come out of Goldman’s Abacus deal:

In contrast to what the firm just said in its Annual Report, Goldman DOES bet against its clients.

How do we know that?

In the Abacus deal, Paulson & Co. was a Goldman client.  Paulson went short the Abacus CDO (or the bonds within it). 

In its defense against the fraud charges the SEC just clobbered it with, Goldman pointed out that it had lost $90 million on the collapse of the Abacus CDO because it had retained a “substantial long position” in the transaction.

So that means…

Goldman was betting against Paulson & Co.

(Goldman’s defense against that particular charge might be that it only retained a $90 million long position in the CDO because it couldn’t find anyone stupid enough to buy it. But given that the SEC basically just accused Goldman of selling a crappy security designed to self-destruct, we don’t imagine Goldman will be making that defense publicly right now.)

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See Also:

• Cumberland’s David Kotok: The Goldman Charges Are Not A One-Off, And Will Mark A Real Market Correction
• Merrill Accused Of Same Fraud As Goldman Sachs
• Goldman Releases Its Real Defense: We Lost Money, And Everyone Knew Full Well What Was In the CDOs

Back to work!

First, let’s note that the S&P is down about 4 points in early futures trading. Of course there’s still nearly 15 hours before the market officially opens, so… a lot could happen before then.

The pound is really getting slammed, and it’s speculated that it’s the result of some combination of election polls and the investigation of Goldman Sachs (GS).

Meanwhile, the news is going to be dominated by two things: The volcano (still crippling European air travel) and Goldman Sachs.

Also note, Goldman earnings come Tuesday. That should be interesting.

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Put Cumberland Advisors’ David Kotok in the camp that feels it’s right to sell on the Goldman Sachs news.

Here’s part of a note just sent out.

In Cumberland’s view, the GS news is big and is not a one-off event.  Since the announcement of the SEC suit, we have been polling everyone we talk to about GS.  They are universally despised.  The alleged wrongdoings have intensified an already large anger.  GS arrogance has created a perception problem, and now GS has a reality problem.  It could quickly become a criminal action.  One lawyer said “just wait until we hear from Andrew Cuomo.”
 
Welcome to the modern post-crisis era.  In the case of GS, we have an actual allegation of fraud.  This is different than the Lehman repo 105 disclosures, although we expect fraud allegations to come there, too.  In Lehman we have a failed firm.  In GS we have an existing stock and a company that is the largest capital-market player on the US scene.
 
We expect that there are a lot more charges coming and they will impact GS and many other firms.  And we will soon see state attorneys general piling on. The plaintiff law firms are already preparing class-action suits.  Germany and the U.K. are launching their own investigations.  These types of allegations are not going to be confined to SEC vs. GOLDMAN SACHS & CO. and FABRICE TOURRE.  The allegations will not be limited to a single security series known as Abacus 2007.
 
At Cumberland we have raised some cash.  We exited the capital-market ETF quickly.  We expect this news will be the catalyst for some market correction.  It is long overdue.

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Starting at 6 PM ET: Bloomberg is airing a special on Goldman SEC charge featuring Louise Story, Gregory Zuckerman, and others.

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A lot of attention has been paid to the email where Goldman Sachs (GS) trader Fabrice Tourre talks about the roof caving in, and how only “Fabulous Fab” would survive the whole mess.

That email certainly makes him look like a jerk.

But that’s not the really bad email.

That would be this one:

What does he mean by surreal?

Presumably It means he can’t believe what he’s watching: A Paulson rep and an ACA rep discussing the CDO portfolio, and the ACA rep having no idea what Paulson’s true intentions are.

It’s not obvious that this is fraud, but it is obvious that Tourre was on the side of one client, as that client, apparently worked against the interest of another client. That’s the part that shows horrible faith, and it’s hard to imagine anyone feeling comfortable working with Tourre again.

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